June 20, 1945 FOMC Minutes

FOMC minutes

committee had decided to recommend to the Federal Open Market Committee that it be agreed (1) that pursuant to the provisions of paragraph 2(a) of the allocation procedure now in effect and pending further action by the Federal Open Market Committee, beginning July 1, 1945, Treasury bills would not be allocated to any Federal Reserve Bank in an amount which would reduce its reserve ratio below 35 per cent and (2) that the second sentence of paragraph 2(b) of the statement of procedure be changed to read as follows: "If, between the weekly and month-end adjustments a Bank's re serve ratio approaches the legal minimum, the Bank may sell to the Bank or Banks having the highest reserve ratio or ratios, a participation or participations in Treasury bills held in its option account for a period of days to expire on the following Wednesday or month end, whichever is earlier, except that such adjustments will be made in the System account in the event that a Bank does not hold sufficient bills in its option account." In connection with the first point, Chairman Eccles stated that consideration had been given to the question whether the reserve ratio of an individual Federal Reserve Bank should be allowed to decline immediately to 35 per cent, as would be the case with some of the Banks percentage were fixed at that figure, or whether it would if the agreed be better if the reduction were made gradually, that while there was the latter course might be the preferable one to some feeling that that the increased earnings that would accrue to follow it was agreed low reserve ratios if the agreed percentage were fixed the Banks with a higher reserve ratio and that cent were more important than at 35 per of public reaction or objection from the standpoint there would be no the Banks to drop to that the reserve ratio of otherwise to allowing

point immediately rather than to decline more gradually. On the second point it was stated that the second sentence of paragraph 2(b) of the allocation procedure, in its present form and in its suggested amended form, placed no limit on the point to which the reserve ratio of a Reserve Bank might be increased between weekly state ment dates, but that the executive committee felt that inasmuch as the sentence contemplated the sale of bills only for the purpose of removing the danger of a deficiency in required reserves and, since for such pur pose it would not be necessary to increase the Bank's reserve ratio above 35 per cent, it would not be expected that any Bank would use the authority granted by the amended provision to increase its reserve ratio above that agreed upon by the Federal Open Market Committee pursuant to the provisions of paragraph 2(a) of the allocation procedure. After a brief discussion of these points, upon motion duly made and seconded, the recom mendations of the executive committee were ap proved unanimously. as to the amount of additional funds In response to an inquiry supplied to the market during the interim before that would have to be Open Market Committee, Mr. Rouse stated another meeting of the Federal been estimated at the Federal Reserve Bank of New York that that it had of $2,750,000,000 would have to funds aggregating in the neighborhood and discounts before the next be supplied through open market operations needed reserves, maintaining the drive for the purpose of furnishing currency in circulation and rates and offsetting increased pattern of Market Committee were held meeting of the Federal Open that if the next funds would be needed. of new approximately $2,000,000,000 in October

In view of that situation it was Mr. Rouse's suggestion that the Federal Open Market Committee give the executive committee a greater authority to increase the amount of securities held in the System account than was granted at the last meeting of the full Committee, with the understand ing that the executive committee would grant to the Bank the usual lim ited authority to be increased from time to time as conditions might require. There was no disagreement with the esti mated need for funds as outlined by Mr. Rouse, and upon motion duly made and seconded and by unanimous vote, the following direction to the executive committee was approved, with the understanding that the limitations contained in the direction would include commitments for purchases and sales of securities for the System account: That the executive committee be directed, until otherwise directed by the Federal Open Market Committee, to arrange for such transactions for the System open market account, either in the open market or directly with the Treasury (including purchases, sales, exchanges, replacement of maturing securities, and letting maturities run off without replacement), as may be necessary in the practical administration of the account, or for the purpose of maintaining about the present general level of prices and yields of Government securities, or for the pur maintaining an adequate supply of funds in the market; pose of that the aggregate amount of securities held in the provided account at the close of this date [other than (1) bills pur the market on a discount basis at the rate of chased outright in at maturity and (2) annum and bills redeemed 3/8 per cent per certificates of indebtedness purchased from special short-term the temporary accommodation of the Treasury] time to time for increased or decreased by more than $2,000,000,000. shall not be committee be further directed, until That the executive Federal Open Market Committee, to otherwise directed by the for the System open market account di arrange for the purchase such amounts of special short-term rect from the Treasury of be necessary from time to of indebtedness as may certificates of the Treasury; provided time for the temporary accommodation held in the account at any the amount of such certificates that one time shall not exceed $1,500,000,000.

The suggestion was made that the next meeting of the Presidents' Conference might be held on October 1 and 2 and that the meeting of the Federal Open Market Committee might be held on the following two days. There was unanimous agreement that October 3 and 4, 1945, should be set dates for the next meeting of the full Committee. as the tentative Thereupon the meeting adjourned. . Secretary. Approved: Chairman.