December 13, 1939 FOMC Minutes

FOMC minutes

recommending that the volume of sales from the System open market account be promptly expanded in an orderly manner. The recommendation was discussed and Mr. Harrison moved that it be re ceived and placed on file and that the Secretary address a letter to the Secre tary of the Federal Advisory Council stating that the resolution had been presented at a meeting of the Federal Open Market Committee and would be given consideration in the determination of the policy to be followed in connection with transactions in the System open market account. Mr. Harrison's motion, having been duly seconded, was put by the chair and carried unanimously. Mr. Goldenweiser discussed the present business situation and reviewed some of the problems with respect to System open mar ket policy which were created by the large gold imports during re cent years. A copy of Mr. Goldenweiser's statement has been placed in the files of the Federal Open Market Committee. After a discussion of some of the points covered in Mr. Goldenweiser's statement and their relation to the open market pol icy of the System, Mr. Harrison stated that there appeared to be no reason for a change in the existing authority of the executive com effect transactions in the System open market account and mittee to be his recommendation that the resolution adopted at that it would Federal Open Market Committee be renewed. the last meeting of the he was in agreement with Chairman Eccles said that, while the existing authority of the executive committee the suggestion that

be renewed, he desired to make a statement with respect to his con ception of the present open market policy so that if there were any questions as to the action to be taken under the resolution granting authority to the executive committee they could be discussed at this time. Chairman Eccles then made a statement substantially as follows: Open market operations during recent months were not directed toward changing or influencing money rates. The large volume of ex cess reserves has removed the System so far from contact with the money market that the System's purchases and sales of securities have had little effect on the market and practically no effect on the aggregate volume of available funds. In these circumstances, transactions for the System open market account should continue to be in the direction of maintaining stability in the Government se curities market, which in turn reflects itself in the entire capital market. This does not mean that we should sell for the purpose of from going down nor does it mean that we preventing interest rates to hold interest rates at any purchase securities in order should that if there were sub level. It does mean, however, particular of a small amount of which were the result stantial fluctuations or vice versa in the market there was no selling at a time when buying which did not reflect of other conditions which were the result or the market and might go into the System market trends fundamental market by of the toward stability an influence to exercise attempt

counteracting such conditions. The System would buy or sell on a slid ing scale rather than at a fixed price so that the market would not rise too rapidly when there were few or no selling orders in the market and would not fall too rapidly when there was little or no buying interest present. It is essential that the System use the open market portfolio in such manner as to make it as effective as possible and at the same time give consideration to the income requirements of the System. It should be recognized also that the System cannot and should not attempt to peg the market on either the up or down side, and that under present conditions, with excess reserves more than twice as large as the entire System portfolio, our responsibility is one of attempting to maintain orderly market conditions rather than of attempting to influence market rat es. Mr. Harrison said that, in his opinion, the Chairman's com ments were an accurate statement of the present policy of the Federal Open Market Committee. Thereupon Mr. Harrison moved that the following resolution be adopted: the executive committee be directed until other "That Committee to ar the Federal Open Market wise directed by the System open market transactions for range for such exchanges, replacement purchases, sales, account (including maturities run off securities, and letting of maturing from time to time as in its judgment without replacement) an influence purpose of exercising for the may be necessary provided market conditions; orderly toward maintaining in the ac held of securities amount the aggregate that not be increased date shall of this the close count at more than $500,000,000." by nor decreased

Mr. Harrison's motion was put by the chair and carried unanimously. Mr. McKee referred to the fact that the System open market account contained $161,705,000 of March 15, 1940 Treasury notes, for which issue the Treasury is now offering to exchange 2-1/4% year bonds and 1% 4-3/4 year notes. Mr. McKee suggested that the Com mittee consider the question of the amounts of the new securities that should be taken in exchange for the System's holdings of the old notes. The matter was considered in the light of desirable maturity distribu tions in the System open market account and it was the unanimous opinion that the System's holdings of the March 15, 1940, notes should be ex changed for $100,000,000 of the new bonds and $61,705,000 of the new notes. the meeting adjourned. Thereupon Secretary.