February 27, 1948 FOMC Minutes

FOMC minutes

undesirable effects upon the attitude of the public towards com mercial banks. He added that the most effective, efficient, and economical method for channeling short-term Government securities into the banks would be by the special reserve plan. This method would enable the Government to finance its short-term securities at a rate of interest fair to the banks and the tax payers. The alternative plan of constantly increasing the short-term rate is a weak, inefficient, and costly process for accomplishing the de sired result. Chairman Eccles stated that an increase in the rate to 1-1/4 per cent would not be for the purpose of increasing bank earnings but to narrow the spread between short- and long-term that when banks had excess reserves after the first quar rates so would be less likelihood of their buying ter of the year there higher yield, thereby putting securities because of the long-term as was done last year. on the long-term rate pressure full Committee au then suggested that the Chairman Eccles to the Treasury recom committee to submit thorize the executive by Mr. Sproul. four points proposed mendations on the motion duly made and seconded, Upon approved with proposal was Mr. Sproul's executive com that the the understanding such further rec would also make mittee to Treasury fi with respect ommendations as appeared and debt management nancing another meeting desirable pending to be

of the full Committee. Mr. Evans voted "no" on the portion of the above action that contemplated a further increase in the short-term rate. In connection with the foregoing discussion, Chairman Eccles said that one of the most inflationary factors in the expansion of bank credit for some time had been the growth in mortgage credit, that the Board was on record with Congress as feeling that Govern ment insurance and guarantee provisions with respect to housing credit should be tightened, that the program contained in the Presi dent's special message to Congress last week went beyond what was already being done, and that if such a program was enacted it would have seriously adverse effects on the problem of inflation and cred Eccles also said that the Board would send a it control. Chairman the Presidents of all the Federal Reserve summary of this bill to have available an analysis of the proposed Banks so that they would legislation. copies of a memorandum prepared There was then distributed Statistics under date of Division of Research and in the Board's prepared at were attached schedules 25, 1948, to which February on a proposed new of New York of yields Federal Reserve Bank the to meet the conditions savings notes intended series of Treasury rate. Ref per cent certificate cent and a 1-1/4 of a 1-1/8 per meeting of the reached at the made to the conclusion erence was

executive committee on January 20, 1948, that no recommendation should be made to the Treasury with respect to a new series of savings notes until a decision had been made on an increase in the short-term rate to 1-1/4 per cent. The matter was discussed and the members of the Committee indicated that they continued to be of that opinion. After a brief discussion of possible terms of the new series of savings notes, upon motion duly made and seconded, and by unanimous vote, the executive commit tee was authorized, after a decision had been reached by the Treasury whether the short-term rate would be increased, to formulate and submit a recommendation to the Treasury with respect to the issuance of a new series of savings notes, if in the judgment of the executive committee such action was desirable. recent statements by the Secretary of Reference was made to which appeared to commit the the Treasury at a press conference to the support of all issues and the Federal Reserve System Treasury he felt that, inasmuch Mr. Sproul stated that of securities at par. had avoided such a commitment of the United States as the President the Federal Open Market to Congress, and as in his Economic Report maintenance of only the policy provided for the Committee's present Treasury should of the rate, the Secretary 2-1/2 per cent long-term avoid making such statements. Eccles suggested that, discussed and Chairman The matter was

at the appropriate time, when other matters were being considered with the Secretary of the Treasury, the statement be made to him that the question of the nature of the commitment of the System with respect to support of the Government security market had been raised with the members of the Committee as it undoubtedly had been with representatives of the Treasury, that the only commitment that the System had made was, under existing and prospective conditions, the 2-1/2 per cent long-term rate and not that it would to maintain at par, and that it was all issues of Government securities support should be taken to avoid any of the Committee that care the feeling that any other commitments might give the impression statement which had been made. Upon motion duly made and seconded, Chairman Eccles' by unanimous vote, and suggestion was approved. the meeting adjourned. Thereupon Secretary. Approved: Chairman.