April 29, 1938 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington on Friday, April 29, 1938, at 10:40 a.m. PRESENT: Mr. Eccles, Chairman Mr. Harrison, Vice Chairman Mr. Szymczak Mr. McKee Mr. Ransom Mr. Davis Mr. Draper Mr. Sinclair Mr. Newton Mr. Peyton Mr. Martin (alternate for Mr. Schaller) Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Wyatt, General Counsel Mr. Dreibelbis, Assistant General Counsel Mr. Burgess, Manager of the System Open Market Account Mr. Thurston, Special Assistant to the Chairman of the Board of Governors of the Federal Reserve System Mr. Thomas, Assistant Director of the Division of Research and Statistics of the Board of Governors Mr. Piser, Senior Economist in the Divi sion of Research and Statistics of the Board of Governors Mr. Burgess submitted copies of a report prepared by the Fed eral Reserve Bank of New York for this meeting, covering operations in the system open market account for the period from April 17 to 27, 1938, inclusive, and reviewed briefly the transactions covered by the there was a discussion of the In connection with the report report. large volume of bills held in the account which mature during relatively trend of yields on Gov and of the possible future the next two months ernment securities.
Upon motion duly made and seconded, and by unanimous vote, the transactions in the system open market account for the period from April 22, to April 28, 1938, inclusive, were approved, ratified and confirmed. Chairman Eccles stated that, in accordance with the understand ing at the meeting of the Federal Open Market Committee on April 21 and 22, he and Mr. Davis had a further discussion with the Secretary of the Treasury on Tuesday, April 26, of the problems which were before the Federal Open Market Committee as a result of the action of the Treasury in discontinuing the inactive gold account and of the Board of Governors in reducing reserve requirements and particularly the problem created by the proposed retirement by the Treasury of a por tion of the maturing Treasury bills. Chairman Eccles said that the of the difficulties faced by had a very clear understanding Secretary cooperate with the Com that he desired to Committee and had stated the problem was very closely he realized that its in every way as mittee had in that the Secretary Eccles said his own. Chairman related to that the system with the position he was in agreement dicated that as it is possible as long not be reduced account should open market over a a premium paying without securities replacement to purchase account might in the any reduction since basis, particularly no-yield of policy. as a reversal be regarded while clear that, it was that further stated Eccles Chairman the re by created the difficulties fully understood the Administration that such was essential that it it felt bills, of maturing tirement
action be taken as a means of completing its announced program and getting into the banks promptly as excess reserves the proceeds of the desterilized gold. The Secretary stated during the conference, Chairman Eccles said, that the Reconstruction Finance Corporation would very likely require additional funds in the near future with which to make loans under the authority recently granted to it and that, if it appeared desirable to do so, the Reconstruction Finance Corporation might offer within the next two weeks $500,000,000 of Reconstruction Finance Corporation debentures with possibly a five-year maturity, on a book credit basis, which would tend to reduce the demand for the shorter term Government securities. There was further discussion of the question whether, in view of the intention of the Treasury to retire maturing bills, the Federal Reserve System had any responsibility with respect to the maintenance of orderly conditions in the Government securities market. Eccles stated that, following the conference with Chairman and in preparing for this meeting, he the Secretary of the Treasury to submit for consid which he desired had drafted two resolutions had discussion of the au in connection with its eration by the Committee to effect transactions executive committee granted to the thority to be system open market account. in the read as follows: draft of resolution The first until other be directed, executive committee "That the to arrange Open Market Committee, by the Federal wise directed
"for the replacement of maturing securities in the system open market account with other Government securities and for such shifts in maturities as may be necessary in the proper administration of the account, provided (1) that maturing Treasury bills shall be replaced only with Trea sury bills or notes maturing within two years to the ex tent that they can be purchased without paying a premium over a no-yield basis; (2) that, subject to the foregoing limitation, the amount of securities in the account matur ing within two years be maintained at not less than $1,000,000,000; and (3) that the amount of bonds in the account having maturities in excess of five years be main tained at not less than $500,000,000 nor more than $850,000,000." The second resolution (with changes made during the discussion) read as follows: "That, in addition to such authority as may be con tained in other resolutions of the Federal Open Market Committee and until otherwise directed by the Committee, the executive committee be authorized, upon written, telephonic or telegraphic approval of a majority of the members of the Federal Open Market Committee, to arrange purchase or sale (which would include authority for the to allow maturities to run off without replacement) of securities in the open market from time to time Government to such extent as the system open market account for the committee shall find to be necessary for the executive purpose of exercising an influence toward maintaining provided (1) that the total orderly market conditions, account be not increased or amount of securities in the and (2) that the by more than $125,000,000, decreased having maturities over five amount of bonds in the account $500,000,000 nor more at not less than years be maintained than $850,000,000." was stated that the resolution it with the first In connection within two notes maturing bills and bills with of maturing replacement paying a premium purchased without could be that they to the extent years of all the price to increase only tend would not basis over a no-yield
such securities up to two years to a no-yield basis, but would very likely result in higher prices for notes of all maturities. Mr. Harrison said that he felt that the executive committee should be given authority to reduce the account within certain limita tions, as suggested in the resolution offered by him at the last meet ing of the Federal Open Market Committee. He pointed out that, follow ing the recent decrease in reserve requirements of member banks, coupled with the desterilization of approximately $1,400,000,000 of gold, ex cess reserves of member banks already had been largely increased and would likely reach $3,800,000,000 before the end of the year, and that this increase had already resulted in a rapid and substantial rise in Government security prices. Looking ahead, he said, it might become increasingly difficult for the System, by means of shifts in maturities in its account, to exercise an influence toward orderly conditions in the market; many of the shorter maturities were selling on a no-yield further shifts into such maturities or forced replacement basis; and securities with short maturities would accentuate the pres of maturing and long term rates. of both short ent abnormalities should con opinion, the Committee that, in his He also stated exercise its possible, to when its responsibility, tinue to recognize in the market, not only maintaining orderly conditions influence toward was im that the latter as well; on the up-side down-side but on the rise or extensive a too rapid to avoid if we were this time at portant
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.
Also: Record of Policy Actions·Minutes of the Executive Committee, April 29, 1938