December 12, 1941 FOMC Minutes

FOMC minutes

be put out to tap savings funds. Mr. Williams suggested that the problem should also be con sidered in the light of the effect of the pattern of rates on the excess reserve position and that the higher the level of rates the easier it would be to maintain a low level of excess reserves. Mr. Sproul raised the question as to what would be best for the market and suggested that the market reaction would be better if the 67-72s were allowed to go below par and future new long-term issues carried a correspondingly shorter maturity. At the conclusion of the discussion Chairman Eccles suggested that the Treasury be advised that it was felt by the Federal Open Market Committee that there were two alternatives that might be adopted, the first of which would contemplate that the 67-72s would be held at par which would make it necessary that future long-term issues have a maturity somewhere in the neighborhood of 20-25 years in order to provide the premium necessary to sell the securities in the market, in which case the Committee would feel that a program should be adopted which would permit of financing with more specialized issues such as short-term securities designed for banks and a tap issue de signed to reach savings funds. Under the second alternative, Chairman Eccles said, the 67-72s would be allowed to go below par to a point, probably not less than 98, where future issues of 2-1/2 per cent bonds a maturity of 15-20 years, the market would be depended would carry

on generally to take these issues, and less emphasis would be placed or. the specialized issues suggested in the first alternative. During the discussion of Chairman Eccles' suggestion there was unanimous agreement that, regardless of the basis finally adopted, before a pattern of rates could be agreed upon it would be necessary for the Treasury to decide upon a general program to be followed in connection with future Treasury financing. It was agreed unanimously that Chair man Eccles would advise Mr. Bell that the executive committee of the Federal Open Market Comrittee would like to have a meet ing with him sometime next week for the purpose of discussing problems relating to Treasury financing and the Government securi ties market which were considered by the Federal Open Market Committee at its meet ing today. Mr. Sproul suggested that, in view of the continued uncer tainty in the market and the possibility that the System might be called upon to buy further substantial amc.mts of Government securi ties, it would be desirable to increase to $500,000,000 the limit in the resolution of authority to the executive committee to direct the purchase or sale of securities in the System account, with the under standing that if it should appear that authority was needed beyond that amount another meeting of the Federal Open Market Committee would be called. upon motion duly made and Thereupon, seconded, and by unanimous vote, the fol lowing resolution was adopted:

That the executive committee be directed until otherwise directed by the Federal Open Market Committee to arrange for such trans actions for the System open market account (including purchases, sales, exchanges, re placement of maturing securities, and letting maturities run off without replacement) as in its judgment from time to time may be advis able in the light of existing conditions; provided that the aggregate amount of securi ties held in the account at the close of this date shall not be increased or decreased by more than $500,000,000. In connection with the adoption of the above resolution, Chairman Eccles stated that the Treasury had advised that it stood ready to resell the securi ties which had been purchased this week for its account whenever the market was ready to take them, and the action of the Committee in adopting the resolu tion was taken with the unanimous under standing that, when the market recovered and conditions justified, the System would participate equally with the Treas ury in the resale of the bonds purchased during the current week and that the System's holdings of bills would also be disposed of. Mr. McKee referred to the meeting of Treasury and Federal Re serve representatives which had been called by the Secretary of the Treasury in Chicago on Tuesday, December 16, 1941, for the purpose of considering methods that might be adopted to increase the sale of de fense bonds and stated that arrangements were being made to have Mr. Bethea, the Board's liaison officer with the Treasury in connection with the defense bond campaign, attend that meeting. Mr. Sproul said as Chairman of the Defense Savings Bond Committee of the Presidents' that,

Conference, he had asked Mr. Young, President of the Federal Reserve Bank of Chicago, to attend the meeting as a representative of the Presidents' Conference and suggested that Mr. Peyton, because of the special experience which he had had with the campaign in his district, might also be present. Mr. Peyton said that he would be glad to at tend. Thereupon the meeting adjourned. Secretary Approved: Chairman.