April 29, 1938 FOMC Minutes

FOMC minutes

in bond prices which might make the market more vulnerable to later reactions; and that, to meet this responsibility most effectively under conditions such as exist now, the Committee should have authority to reduce the account, either by sales of securities or by allowing maturities to run off without replacement. He added that a reduction in the account at this time, especially if it resulted merely from a failure to replace maturities, would probably run little of the risk previously feared that a decrease in the account might precipitate disorderly liquidation by banks, and that a reduction now, effected for the purpose of exercising the System's influence toward the main tenance of orderly market conditions, could not fairly be interpreted as in conflict with or as counteracting the Government's recent program to increase excess reserves, as the amounts involved would be rela small as compared with the total amount of excess reserves tively too now outstanding to warrant such an interpretation. that any action to re Eccles expressed the opinion Chairman be purchased without as replacements could duce the account so long as in would be interpreted a no-yield basis a premium over paying that, as a member He stated Government's program. with the consistent executive committee not want the he would executive committee, of the and that, while the account, of reducing take the responsibility to he felt that second resolution, vote for the willing to he would be another the account in for a reduction which called arose if conditions

meeting of the full Committee should be called. There was a discussion of what action the executive committee would be expected to take under clause (1) of the first resolution and Chairman Eccles stated that it was intended to instruct the execu tive committee to replace maturing bills so long as such replacements could be made by the purchase of bills or notes, with maturities not to exceed two years without paying a premium over a no-yield basis and that, to the extent that such replacements could not be made, maturi ties would be allowed to run off without replacement. The discussion also made clear that the authority proposed in the second resolution, if given, would be construed to be independent of any authority or action under the first resolution. Further consideration was given to the possibility of acquir ing for the system account securities, other than direct obligations of the Government, that are eligible for purchase by the Federal re and it was stated that, since these securities were serve banks, available only from time to time in small blocks, substantial pur chases thereof would be difficult to make and might substantially would not be de therefore, such purchases prices, and that, increase that, in view It was also stated from a market standpoint. sirable during the in the system account volume of maturities of the large were unless replacements possible that it was quite next two months, might be necessary years it high as five running as with notes made

to allow a substantial amount of securities in the account to mature without replacement. At the conclusion of the discussion Mr. Newton moved that the two resolutions set forth above be adopted. Mr. Newton's motion was duly seconded. Mr. Harrison moved as a substitute for Mr. Newton's motion that the following res olution be adopted for the reasons which he had outlined earlier in this meeting: "That until otherwise authorized or directed by the Federal Open Market Committee the executive committee be authorized (a) to make such shifts in maturities in the system open market account as may be necessary in the proper administration of the account and (b) to permit fluctuations in the total amount of the account in order more effectively with the means available and in the light of current conditions to exert its influence toward main taining orderly conditions in the market, provided (1) that the amount of securities in the account matur ing within two years be maintained at not less than (2) that the amount of bonds in the account $1,000,000,000, in excess of five years be maintained at having maturities not less than $500,000,000 nor more than $850,000,000, and of the account be not increased (3) that the total amount decreased by more than $200,000,000 from the present or level of the account." Mr. Harrison's motion, having been was put by the chair and duly seconded, members voting as follows: lost, the Mr. Ecles Mr. Harrison Mr. Szymczak Mr. McKee Mr. Ransom Mr. Sinclair Mr. Davis Mr. Draper Mr. Newton Mr. Peyton Mr. Martin

Mr. Newton's original motion was put by the chair and carried unanimously. Thereupon the meeting adjourned. Secretary. Approved: Chairman.