October 6–7, 1947 FOMC Minutes

FOMC minutes

Chairman Eccles said that the Federal Advisory Council had stated that it understood that the Federal Reserve Bank of New York had requested banks of its district not to purchase and sell Federal funds outside the district, and that the Council was opposed to any action which implied a policy that borrowing by member banks should be confined to Federal Reserve Banks. He added that the Board had informed the Council that the matter was one of System interest because any action in that direction would affect open market and discount policy as well as the reserve position of member banks, and that if action were desirable it should be taken on a System basis and not by one of the Federal Reserve Banks acting alone. He suggested that such action might be con sidered as an additional point in the anti-inflationary program outlined by the Committee, but he questioned whether it would have much influence. Mr. Sproul said that the New York Bank had not regarded one involving System credit policy but as a ques this matter as banks. He said that the prac tion of unsecured loans by member or a Federal Reserve funds within a city tice of lending Federal would know the condi the lending bank presumably district when one, but that inter bank was a useful tion of the borrowing and that, since involve some risks, transactions might district

such transactions were carried on over the Federal Reserve leased wires, failure of the Reserve Bank to take a position with respect to them would, in effect, give them the Bank's blessing. Mr. Sproul went on to say that the policy of the New York Bank had not been one of prohibiting interdistrict transfers but rather, whenever the question was raised by a member bank or the Reserve Bank noticed large transactions going over the leased wires, to call attention to the possible risks involved in making unsecured loans. He added that some banks in New York were making such transfers and others were not. There was a brief discussion of the matter and it was the consensus that it did not call for action by the Committee. There was a discussion of the authority to be given to the executive committee to direct transactions for the System Open Market account. Mr. Sproul suggested that it would be de sirable to revise the existing direction to indicate that opera tions were carried on for the purpose, among others, of maintain ing a supply of funds in the market that would be related to the needs of commerce and business. After a discussion of this suggestion, upon motion duly made and seconded, and by unanimous vote, the following direction to committee was approved, with the executive the understanding that the limitations con direction would include commit tained in the the System open market account: ments for

The executive committee is 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 with out replacement), as may be necessary, in the light of the general credit situation of the country, for the practical administration of the account, for the main tenance of stable and orderly conditions in the Govern ment security market, and for the purpose of relating the supply of funds in the market more closely to the needs of commerce and business; provided that the ag gregate amount of securities held in the account at the close of this date other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury shall not be increased or decreased by more than $2,000,000,000. The executive committee is further directed, until otherwise directed by the Federal Open Market Committee, to arrange for the purchase for the System open market account direct from the Treasury of such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accom modation of the Treasury; provided that the total amount of such certificates held in the account at any one time shall not exceed $1,500,000,000. Mr. Sproul presented a memorandum addressed to him by Mr. Rouse under date of September 30, 1947, in which the latter suggested the reestablishment of the authority given by the Fed eral Open Market Committee to the Federal Reserve Banks in 1936 and terminated in 1945 to make temporary purchases of Government securities under resale agreements for periods of not to exceed 15 days. The reasons for the suggestion were outlined in the memorandum and were discussed at this meeting. Some of the

members of the Committee questioned whether the authority should be granted and suggested that action be deferred to afford an opportu nity for further discussion. Upon motion duly made and seconded and by unanimous vote, it was agreed that the executive committee should study the matter and submit a recommendation at the next meet ing of the full Committee. It was tentatively agreed that the Presidents would be in Washington on December 8 and 9, 1947, and that meetings of the Federal Open Market Committee and the Presidents' Conference would be held at that time. Thereupon the meeting adjourned. Approved: Secretary Chairman.