February 27, 1948 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington on Friday, February 27, 1948, at 10:15 a.m. PRESENT: Mr. Eccles, Chairman Mr. Sproul, Vice Chairman Mr. Clayton Mr. Davis Mr. Draper Mr. Evans Mr. Gidney Mr. Peyton Mr. Szymczak Mr. Whittemore Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Vest, General Counsel Mr. Thomas, Economist Messrs. Neal, Stead, Thompson, and John H. Williams, Associate Economists Mr. Rouse, Manager of the System Open Market Account Mr. Thurston, Assistant to the Board of Gov ernors Mr. Sherman, Assistant Secretary, Board of Governors Mr. Smith, Economist, Government Finance Section, Division of Research and Sta tistics, Board of Governors Mr. Arthur Willis, Special Assistant, Securi ties Department, Federal Reserve Bank of New York Messrs. Alfred H. Williams, Young, Gilbert, and Leedy, alternate members of the Federal Open Market Committee and Earhart, Presidents Messrs. Leach, McLarin, of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Messrs. Bopp and Irons, Vice Presidents of the Federal Reserve Banks of Philadelphia and Dallas, respectively, Messrs. McCracken and Robb, Directors of Research of the Federal Reserve Banks of Minneapolis and Kansas City, respectively, and Mr. Ralph A. Young, Associate Director of the Division of Re search and Statistics, Board of Governors Mr. McCabe, Chairman designate, Board of Gov ernors Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on December 9, 1947, were approved. Upon motion duly made and seconded, and by unanimous vote, the actions of the executive committee of the Federal Open Market Committee as set forth in the minutes of the meetings of the exec utive committee held on December 9, 1947, and January 20, 1948, were approved, ratified, and confirmed. Chairman Eccles stated that at the meeting of the executive committee on January 20, 1948, there had been distributed copies of a report prepared by Messrs. Rouse and Smead pursuant to the action taken at the last meeting of the Federal Open Market Committee with securities in the System open market respect to the allocation of account, and that the procedure was approved unanimously by the executive committee at that meeting with the understanding that recommendation for its rat it would be submitted with a favorable of the Federal Open Market Committee. ification at the next meeting
Upon motion duly made and seconded, and by unanimous vote, the procedure for the allocation of securities in the System open market account, as set forth in the minutes of the meeting of the executive committee on January 20, 1948, was ap proved, ratified, and confirmed. Mr. Rouse presented and discussed a report of open market operations covering the period from December 9, 1947, to February 20, 1948, inclusive, together with a supplemental report covering commitments made on February 24, 25, and 26, 1948, and there fol lowed a brief discussion of the transactions that had taken place and the conditions that had prevailed in the market during the period covered by the reports. Copies of the report first men tioned were distributed during the meeting and copies of both reports have been placed in the files of the Federal Open Market Committee. Upon motion duly made and seconded, and by unanimous vote, the transactions in the System account for the period December 9, 1947, to February 26, 1948, inclusive, were approved, ratified, and confirmed. Mr. Thomas then presented a report on economic prospects stating that inflationary forces and their financial implications, factor in the United States to be the dominant economic continued sharp decline in world, that the recent throughout most of the and somewhat, for the time commodities had weakened prices of several
being at least, upward pressures on the general price level, but that in view of special circumstances bearing upon these selective price declines it should not be concluded that the underlying in flationary spiral of costs, prices, and incomes which characterized 1947 had ceased to operate. He also said that an analysis of eco nomic prospects led to the conclusion that there would continue to be a demand for bank loans in 1948 that might result in a credit expansion exceeding that of 1947, that such a development would mean a continued large volume of expenditures at high and perhaps advancing prices supported by expanding bank credit, that if such developments occurred the economic situation would become increas ingly vulnerable, that continuing inflationary developments along the risk of a serious deflationary set these lines would heighten and that the policy determining authorities of back at some stage, need to face the question whether the Federal Reserve System would of the System should continue to be used to support the resources A copy of Mr. Thomas' statement such a course of developments. Open Market Committee. the files of the Federal has been placed in of a survey of business reported the results Mr. Bopp then business leaders by a meeting of Philadelphia sentiment as measured on February 18, Reserve Bank of Philadelphia held at the Federal from the meet impression gained that the outstanding 1948, stating future with view the early tendency to there was no ing was that
alarm although a note of caution had been introduced into the out look by the recent sharp declines in commodity markets, that there was general agreement that some price adjustments would have to be made over the relatively near future in view of the better balance between supply and demand, and that none of those at the meeting looked forward to any serious recession of economic activities as a near-term prospect. Mr. Bopp also said that the problems of meeting greatly increased capital requirements and the difficulty of attracting venture capital were brought up repeatedly, and that the discussion indicated that business expected to go to banks to an increasing degree during 1948 for new capital funds. He added, however, that it was the general view that postwar investment plans were running out and, except in special instances such as in the utilities and oil industries, the rate of investment in later years than during the immediate postwar years. would be substantially lower John H. Williams made a Mr. Bopp's remarks, Mr. Following has been placed in the files of the Fed statement, a copy of which to the foreign situation Market Committee, with respect eral Open in Europe had pro that economic recovery in which he commented had reached a generally realized and more rapidly than was ceeded than in the countries was larger output in several point where recovery Western European coun period, that despite this prewar postponed from the inflationary forces were confronted with tries
war, and that they faced a difficult problem in meeting their bal ances of payments over the next several years. He also said that the impact of European conditions had been a major influence upon the United States economy throughout the postwar period and espe cially in 1947, during the second half of which the need for fur nishing food to Europe had been a major spearhead of our inflation. He felt that there was need for continued help by the United States to Europe along the lines of the European Recovery Program, that an important question was the means by which the Program should be fi nanced in view of the domestic anti-inflationary policy, that the recent drop in domestic food and farm commodity prices introduced uncertainty as to whether the inflationary pressures might have and that if this proved to be the case he felt run their course, European Recovery Program should be ob that funds to finance the nonbank sources. As to the future tained in part by borrowing from European Recovery Program on the domestic economy, impact of the probably would be more helpful Mr. Williams felt that the effects must be to maintain a harmful, since our general objective than in the United States production and employment large volume of or reduce prices. possible to stabilize while doing everything measures were that, while monetary connection he stated In this with the inflation prob should be used in dealing important and uncertain circumstances might the chief danger in the present lem, be in pursuing a too severe rather than a too mild policy.
Copies of a memorandum prepared in the Board's Division of Research and Statistics with respect to Treasury financing and bank credit were then distributed. The memorandum, a copy of which has been placed in the Federal Open Market Committee files, stated that during the remaining six weeks of the first quarter of 1948 an ex cess of Treasury tax and other receipts over current expenditures would enable the Treasury to build up large deposits with Federal Reserve Banks and thus withdraw funds from commercial banks, that such a drain would make it necessary for commercial banks to liq uidate some of their assets, that such liquidation presumably would take the form of sales of Government securities most of which would be purchased by the Federal Reserve System, that this need for liquidation should put some pressure on banks and dis courage them from making loans, and that it appeared that banks might need to sell almost $2 billion of securities to the Federal Reserve during this period if reserves were to remain substantially at their present level. The memorandum also discussed probable developments during 31 to June 30, 1948, stating that tentative es the period March the Federal Reserve might find it necessary to timates indicated as $1 billion of Government securities during that sell as much in reserves available to banks for period to prevent an increase presented the outline of a possible credit expansion, and it
program of debt retirement and new financing during the rest of the first quarter of the year and the period from March 31 to June 30. With respect to the estimate of the growth in reserves of banks during the second quarter of the year, Mr. Thomas said that at the meeting of the executive committee yesterday it was pointed out es timates made by the Federal Reserve Bank of New York arrived at a conclusion that the easing of pressure on banks would be much less (perhaps as much as $2 billion) than was indicated by the estimates prepared at the Board. Chairman Eccles stated that it seemed clear that the situa tion for the rest of this quarter would be one of substantial pres sure on bank reserves as a result of which he felt it would be de sirable to permit war loan deposits to accumulate in commercial said he felt no change should be made in the pres banks. He also of retiring a portion of weekly issues of maturing Treas ent policy ury bills. With respect to the second quarter, Chairman Eccles easing in the reserve position of banks said that if the expected tendency for banks to seek there would probably be a took place, either by expanding loans or by purchasing additional investments were in the form that if these investments additional securities, less argument for increas there would be of short-term securities banks from resuming the rate, and that to keep ing the short-term
purchase of longer term Government securities it might be desirable to narrow the spread between yields on short-term and long-term Gov ernment securities, which indicated a recommendation to the Treasury that certificates maturing April 1, 1948, be refunded with an 11 month issue of 1-1/8 per cent certificates. He went on to say that such an issue would indicate to the market a probable rise to 1-1/4 per cent in the rate to be paid on certificates maturing June 1, but that it would not necessarily commit the Treasury at this time to the adoption of such a rate if the entire outlook changed sub stantially in the meantime. He also said that if the Treasury was not now willing to consider the possibility of advancing the rate on certificates to 1-1/4 per cent on June 1, it would be undesirable to issue an 11-month 1-1/8 per cent certificate on April 1. Mr. Sproul stated that the Committee was faced with the need for making important decisions when the available statisti cal information on which to base those decisions was not as help ful as the members of the Committee would like, that the unknown factors in the situation were very important and many important a large element of psychology, and that the factors involved billion in the estimates of the staff of the difference of $2 York and the estimates made by the Federal Reserve Bank of New because it might mean staff was of extreme importance Board's
that if the latter estimates were correct the Treasury would be putting about $1 billion into the market and if the New York fig ures were correct the Treasury would take $1 billion out of the market in the second quarter. In these circumstances, he said, the Committee had to make its decisions at this meeting more largely on the basis of judgment than had been the case at times in the past. Mr. Sproul felt that the most important question now was whether the recent break in commodity markets (a) was the begin ning of a major readjustment of the distortions and strains in our economy which might involve a business recession of serious proportions; (b) was a correction of an unbalanced situation which would contribute to the maintenance of a generally strong position, although leaving us with some inflationary pressures still at work; (c) was a minor interlude in a continuing postwar inflationary boom. He added that, if it was the first, monetary and debt pol icies should be reversed so as to avoid contribution to what might become a drastic deflation; if it was the second, existing pol as at present until the outlook be continued about icies should was the third, the System defined; and if it was more clearly to do so. He ex if it had the means intensify pressure should pressed the view that policies should be conducted according to calls should be made and that no further the second possibility,
on war loan accounts during this quarter. He also discussed the conditions which would influence debt management decisions in the second quarter and would form the basis for a recommendation that the April 1 maturity of Treasury certificates be refunded with an 11-month 1-1/8 per cent certificate as suggested by Chairman Eccles. He felt that such an issue would be a threat of higher rates to come without definitely and finally committing the Treasury to an increase in the certificate rate in connection with the June 1 re funding, that for the present no further increase of reserve re quirements of central reserve city banks should be made, and that the suggested program should be subject to reversal within the rest of the current half-year if conditions changed to warrant such a reversal. Mr. Sproul suggested that the immediate recommendations to the Treasury should be (1) that no further calls be made on war loan accounts during the first quarter, (2) that withheld taxes through war loan accounts as soon as that change in be channeled can be made effective, and (3) that an 11-month 1-1/8 procedure in exchange for the April 1 matu per cent certificate be offered that a 1-1/4 per cent rate rity, which would be an indication connection with the June refunding if would be established in desirable and that the that time made such action conditions at in the discount rate. might be followed by an increase action
It was his view that these recommendations would meet the immediate situation and that early in the second quarter, when trends could be more clearly defined, recommendations could be made with respect to further actions that might be taken. There was a general discussion of the current monetary and credit situation and the possible effects of actions available to the System and the Treasury under existing conditions, as well as of the possible effect of a grant to the System of additional au thority to regulate the expansion of bank credit while at the same time carrying out its policy of supporting the Government securi ties market. Toward the end of the discussion Mr. Sproul again suggested that the three actions previously mentioned by him be recommended to the Treasury with the understanding that the retirement of Sys tem bill holdings would be continued at the rate of at least $100 million a week through April and perhaps beyond that time. his view that the short-term rate should Mr. Evans repeated that an increase in the rate to 1-1/4 per not be increased further, not be effective as an anti-inflationary measure, that cent would high with the result that short-term rates were too the existing taxes of about before income net current earnings 1947 banks had in and that this might have very 11 per cent on their invested capital,
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.
Also: Minutes of the Executive Committee, January 20, 1948·Minutes of the Executive Committee, February 26, 1948