December 30, 1938 FOMC Minutes

FOMC minutes

securities in the account maturing within two years be maintained at not less than $1,000,000,000; (b) that the amount of bonds in the account having maturities in excess of five years be maintained at not less than $500,000,000 nor more than $900,000,000; and (c) that, if Treasury bills in the account are allowed to mature without re placement, the total amount of securities in the account be not decreased by more than $200,000,000. 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, tele phonic or telegraphic approval of a majority of the mem bers of the Federal Open Market Committee, to arrange for the purchase or sale (which would include authority to allow maturities to run off without replacement) of Gov ernment securities in the open market from time to time for system open market account to such extent as the executive committee shall find to be necessary for the purpose of exercising an influence toward maintaining orderly market conditions, provided (1) that the total amount of securities in the account be not increased by more than $200,000,000 nor decreased by more than $200,000,000 including such decreases as may result from allowing Treasury bills in the account to mature without replacement, and (2) that the amount of bonds in the ac count having maturities over five years be maintained at not less than $500,000,000 nor more than $900,000,000. Mr. Sinclair's motion having been duly seconded, was put by the chair and carried, Messrs. Harrison, Szymczak, McKee, Davis, Sinclair, Schaller, Peyton and Leach voting "Aye", and Messrs. Eccles, Ransom and Draper voting "No". Eccles voted "No" for the fol Chairman lowing reasons: as a part of the Government's program Last spring, recovery, the Board of encouragement of business for the for member banks reduced reserve requirements Governors voted for this action for by $750,000,000. The Chairman in its with the Government purpose of cooperating the The Chairman's view program of last spring. recovery

was that this addition to excess reserves at a time when deflation and credit contraction were in progress could not have an adverse effect and might possibly have a de sirable psychological effect. The Government's recovery program is now being carried out and the business situa tion and prospects are not such as to require a change in policy. Since a failure to replace maturing bills in the System's portfolio would reduce reserves, it might be interpreted as a reversal of policy, which would not be justified under present business conditions, and would be inconsistent with the action taken last spring to in crease reserves. The Chairman thought it particularly inadvisable at this time to fail to replace maturing bills for technical operating reasons, unless an effort had first been made to replace them with bonds or long term notes to the extent that it proved impossible to do so with bills or short-dated notes except by paying a pre mium above a no-yield basis. He also thought that if the effort were made to replace with longer term notes or bonds, it would tend to ease the demand for bills and short-dated notes and thus tend to make them more readily available without paying a premium above a no-yield basis. In voting against the adoption of the resolutions Mr. Ransom stated that, without reviewing all of the considerations that influenced his vote, he felt that it was preferable under existing circumstances to make the portfolio. A reduction should be no reduction in to be used at such time as a reversal of pol reserved icy is intended, or at such other time as conditions or reasons other than those now before the Committee would, in his opinion, require a reduction in the port If the portfolio were now reduced without in folio. tending a change of policy, an explanatory statement would be necessary. If later a change of policy were with a reduction in the portfolio, intended in connection to issue a further ex it would then appear necessary seemed to him that the Commit planatory statement. It to speak for more upon its actions tee should rely the use of statements to give themselves and less upon effect of the actions themselves, effect to or limit the and explain rather should support and that statements than controvert action. Vice President Matteson, Assistant that Mr. Harrison stated Mr.

of the Federal Reserve Bank of New York, had just advised Mr. Sproul over the telephone that because of the reduced demand for bills for year-end statement purposes it appeared that it might be possible to replace next week's maturities of bills with other bills that would be available in the market, Mr. McKee moved that the proposed state ment for the press be approved subject to such changes of form as might be thought necessary by Messrs. Sproul and Thurston. Mr. McKee's motion, having been duly seconded, was put by the chair and carried, Messrs. Eccles, Harrison, Szymczak, McKee, Davis, Sinclair, Schaller, Peyton and Leach voting "Aye", and Mr. Ransom not voting. (Secretary's note. It had been necessary for Mr. Draper to leave the meeting before the foregoing vote was taken and he advised the the Secretary subsequently that, in view of the earlier action of the Committee, he wished to be recorded as approving the statement.) The statement as released to the press was as follows: "The Federal Open Market Committee announced, following a meeting today, that weekly statements of the total hold ings in the Federal Reserve System's Open Market Account may at times show some fluctuation depending upon condi tions in the market affecting the committee's ability to replace maturing Treasury bills held in its portfolio. The volume of Treasury bills available on the market has de clined materially during the year and, owing to the large and increasing demand, such bills are already selling either on a no yield basis or at a premium above a no yield basis. It has, therefore, become difficult and in some weeks impossible for the System to find sufficient bills on the market to replace those that mature. Short term notes are also selling on a no yield basis and longer term notes have at times been difficult to obtain. In it may be necessary from time to time these circumstances,

"to permit bills held in the portfolio to mature without replacement, not because of any change in Federal Reserve policy but solely because of the technical situation in the market. Because no change in Federal Reserve policy is contemplated at this time, maturing bills will be replaced to the extent that market conditions warrant." Thereupon the meeting adjourned. Secretary. Approved: Chairman.