May 20, 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 Sys tem in Washington on Thursday, May 20, 1948, at 10:30 a.m. PRESENT: Mr. McCabe, Chairman Mr. Sproul, Vice Chairman Mr. Clayton Mr. Draper Mr. Eccles Mr. Evans Mr. Gilbert Mr. Leedy Mr. Szymczak Mr. Williams Mr. Young Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Vest, General Counsel Mr. Townsend, Assistant General Counsel Mr. Thomas, Economist Messrs. Bopp, Irons, Langum, Robb, and John H. Williams, Associate Economists Mr. Rouse, Manager of the System Open Market Account Mr. Thurston, Assistant to the Board of Governors Mr. Riefler, Assistant to the Chairman of the Board of Governors Mr. Sherman, Assistant Secretary, Board of Governors Mr. Smith, Economist, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Arthur Willis, Special Assistant, Securities Department, Federal Re serve Bank of New York and Earhart, alter Leach, Gidney, McLarin, Messrs. Open Market Committee of the Federal nate members and Peyton, Presidents Davis, Messrs. Whittemore, the Federal Reserve Banks of Boston, St. of Louis, and Minneapolis, respectively.
Messrs. Thompson and Johns, Vice Presidents of the Federal Reserve Banks of Cleveland and Kansas City, respectively. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meet ings of the Federal Open Market Committee held on February 27 and March 1, 1948, were approved. Upon motion duly made and seconded, and by unanimous vote, the actions of the ex ecutive committee of the Federal Open Mar ket Committee as set forth in the minutes of the meetings of the executive committee held on February 26, March 1, and April 21, 1948, were approved, ratified, and confirmed. A report of open market operations covering the period from March 1, 1948 to May 17, 1948, inclusive, was then read and dis cussed by Mr. Rouse. He also presented a supplemental report cov ering commitments made on May 18 and 19, 1948. Copies of the report first mentioned were distributed during the meeting and copies of both reports have been placed in the files of the Fed eral Open Market Committee. Upon motion duly made and seconded, and by unanimous vote, the transactions in the System account for the period February 27, 1948 to May 19, 1948, inclusive, were ap proved, ratified, and confirmed. of examination of the System open market account A report 20, 1948, made in connection with the regular ex as of February amination of the Federal Reserve Bank of New York and submitted by the examiner in charge for the Board of Governors, had been each member of the Committee before brought to the attention of
this meeting. The report noted three exceptions to the policy of restricting transactions in United States Government securities for the System open market account to brokers and dealers who, in the opinion of the Federal Reserve Bank of New York, met the qualifications outlined by the executive committee of the Fed eral Open Market Committee. These exceptions consisted of: 1. The purchase of Treasury bills in the amount of $3,300,000 from an unqualified dealer; 2. The direct sale of $4,040,000 Treasury Bills to a member bank; and 3. The purchase of $300,000 Treasury Bonds from an unqualified dealer. The examiner's report also noted that the exceptions were reported by the Federal Reserve Bank of New York to the executive committee of the Federal Open Market Committee in the reports of System open market account transactions with qualified dealers for the months of August, October, and December 1947, respectively. In commenting on the exceptions, Mr. Rouse stated in con nection with the first that the Federal Reserve Bank of New York bills awarded to the unqualified dealer had previously purchased rate, and that the firm at the "pegged" 3/8 per cent on tenders a market rate changed the that the reversion to did not realize it appeared to the Reserve situation. Under the circumstances transaction was justified and that Bank, Mr. Rouse said, that the advising the dealer that the be used as the occasion for it could
Federal Reserve Bank could not deal with the dealer in this respect unless he should become qualified. Mr. Rouse also said that the second transaction was for the purpose of completing a $5 million order received from a member bank under market conditions and for reasons which appeared to make the transaction a proper one, but that no further purchases or sales would be arranged with the Sys tem account on member bank orders. The third transaction, Mr. Rouse added, was simply an oversight under pressure of work. Following Mr. Rouse's comments, upon motion duly made and seconded, and by unanimous vote, the report was received and ordered filed. Reference was then made to the recommendation made by the executive committee of the Federal Open Market Committee as recorded in the minutes of its meeting on April 21, 1948, that no change be made at the present time in the statement of terms established by the Federal Open Market Committee in 1944 upon which the Federal Reserve Bank of New York, as agent for the System account, trans acts business with brokers and dealers in United States Government securities. Mr. Carpenter stated that a report had been prepared by the Federal Reserve Bank of New York pursuant to the action at the meet ing of the Federal Open Market Committee on March 1, 1948, that been considered at the meeting of the executive committee it had 21, 1948, and that the executive committee voted unanimously on April
to concur in the conclusion reached in the report made by the Fed eral Reserve Bank of New York and to recommend to the full Com mittee that no change be made at this time in the statement of terms or their interpretation. Mr. Rouse stated that there had been very little complaint by unqualified dealers that they were at a disadvantage in effect ing transactions in Government securities during the past few months and that there appeared to be no problem such as might have existed at the time the question was raised by some of the smaller dealers around the end of 1947. Upon motion duly made and seconded, and by unanimous vote, it was agreed that no change should be made in the form or interpretation of the statement of terms upon which the Federal Reserve Bank of New York, as agent for the Sys tem account, transacts business with brokers and dealers in United States Government securities. Chairman McCabe then called for the reports of the economists. with a procedure suggested by Mr. Thomas, Mr. In accordance a statement outlining the factors which had contributed Langum made the "active money supply" and in bank reserves in to changes in 1946 when the public debt was the period since the end of February at its highest point. Langum's remarks, Mr. Thomas gave a report Following Mr. other factors, the which he cited, among economic outlook in on the and the need for additional continuing inflationary pressures
authority to limit credit growth in future months as a means of avoiding still further additions to the money supply. In connec tion with his remarks, Mr. Thomas referred to a memorandum pre pared in the Division of Research and Statistics under date of May 19, 1948, on the Outlook for Treasury Cash Position, and copies of the memorandum were distributed. Mr. John H. Williams then discussed the economic outlook, concluding that, while there was still an inflation potential in the money supply especially if velocity increased, a considerable part of the inflationary pressures had already been soaked up by the increases in prices that had occurred and that the economy might be well on the road toward an adjustment. Copies of the statements of the three economists and of the Outlook for Treasury Cash Position have been placed in the files of the Federal Open Market Committee. During a discussion of the situation, Mr. John H. Williams stated that it seemed clear to him that the present situation called for continuing the monetary policies that had been in ef fect unless it should develop that these policies would have posi tive deflationary effects. He went on to say that present interest rate levels, not only short-term but long-term, were abnormally low, that rates such as these had never before existed, that short-term rates had always been important instruments of monetary control, was important to increase such rates and and that he thought it
he would be willing to see longer term rates go up in order to be able to exercise a greater influence in the money market. Mr. Alfred H. Williams asked for the views of the other economists. Mr. Bopp stated that he felt inflationary pressures in the economy were still great and that, in fact, they were getting stronger. Mr. Thompson said that he felt that the most significant recent development in that connection was the survey of consumer finances which showed that demand was outrunning the supply, that more consumers expected to buy heavy durable goods in 1948 than in 1947, and that as long as there was little prospect of reduc ing demand inflationary pressures would continue severe. Mr. Irons felt that there were continuing inflationary pres sures, but he agreed with the statement Mr. John H. Williams had made, and stated that a continuation of monetary policies that recently would be adequate for dealing with have been followed the situation. expressed the opinion that, on balance, the infla Mr. Robb increasing, that the public generally had tionary pressures were present prices were more or less per come to the conclusion that were resuming buying more manent, and that individuals therefore aggressively.
Mr. Langum felt that the country was in for a continuing period of inflationary pressures and that a further increase in bank loans would be very inflationary in effect. Mr. Thomas stated that at a meeting in Atlanta earlier this month, prior to the recent increase in stock market activity, it was the consensus of the Current Business Developments Commit tee, composed of economists from the twelve Federal Reserve Banks, that the hesitation and uncertainty which slowed or interrupted the upward movement of the principal dollar measures of business activity in the first quarter did not signal a downturn in pro duction and employment, that the underlying sustaining forces now appeared to be strong enough to absorb the shocks likely to be generated either by foreign or domestic developments in the per iod under review, and that the basic sustaining factors would be reinforced by some expansionary influences, the most notable of which were the disappearance of the Treasury cash surplus, in creasing Government expenditures, and some further expansion of credit. He went on to say that the Committee concluded that businessmen and consumers alike since the end of the war had weathered a succession of shocks and signals pointing toward a downturn, each of which had been followed by the resumption of inflationary developments, that they were now likely to be strongly implications of current events like impressed by the inflationary of the cash surplus, the tax cut, defense spending, the evaporation
and the limited power of the monetary authorities to restrain credit expansion, and that in consequence the Committee expected that through the end of October 1948 production and employment would continue at high levels and that wholesale prices and living costs would advance beyond previous peaks. At Chairman McCabe's request, Mr. Sproul reported on devel opments since the last meeting of the Committee, stating that, in the conversation which Chairman McCabe and he had with Secretary of the Treasury Snyder and Under Secretary Wiggins on April 28, the views of the Committee were presented as set forth in the let ter sent to Secretary Snyder under date of April 26, transmitting the recommendations with respect to debt management as agreed upon at the meeting of the executive committee on April 21. He said that they presented the proposals in that letter in as strong a manner as possible and found the Treasury representatives question ing but indicating some degree of receptiveness of the ideas ad vanced. Treasury representatives, Mr. Sproul said, raised questions concerning the recommendations, however, including inquiries as to why, when the situation was quiet as it was at present and war loan further to maintain pressure on the mar accounts could be drawn on be taken; what would happen next ket, any further steps should difficult) if all our am the situation might be more fall (when rate; and what why increase the short-term munition were used now; some downward pressure on longwould be the objection to having
term rates. (Mr. Sproul thought the latter was an exploratory ques tion and that the Treasury representatives were not interested in permitting such pressure to develop.) There was the further ques tion what effect changes in the short-term rate would have as an anti-inflation instrument, and Mr. Sproul said that he and Chairman McCabe agreed that an increase in the short-term interest rate was a minor anti-inflationary measure, but that the Committee felt it would work in the right direction and that it was worthwhile to use it. Mr. Sproul went on to say that subsequent to the April 28 meeting he wrote a letter to Secretary Snyder under date of May 3, a copy of which has been placed in the files of the Federal Open Market Committee, and which summarized the situation as follows "To sum up, it appears to me that the additional need for credit to finance defense contracts during this calendar year will be relatively small and can be satisfactorily and readily met, in most cases, out of available sources of bank credit; that there is nothing in the situation yet to warrant a relaxation of general pressure, now or in the remaining months of 1948, in order to make certain that these few specialized needs are adequately met. In fact, unless we wish to contem plate a situation in which 'nonessential' demands for credit will compete with the requirements of national defense and our foreign aid program, we must act now to hold the gains we have made thus far this year -to renewed expansion of the volume of credit prevent a and of the money supply. That is the reason and pur the program of the executive pose, as I see it, of Open Market Committee which committee of the Federal And, as we said at our we have discussed with you. is such that the sooner meeting, the market situation we act the better."
Mr. Sproul said that he and Chairman McCabe met again with Secretary Snyder last Wednesday (May 12), prior to the announcement of the June financing on May 13, 1948. He added that they went over much the same ground as in the earlier discussion, but that the new element in the picture was that Secretary Snyder during the inter vening period had talked with a number of bankers from various parts of the country, in whose opinion he had confidence, and that a ma jority of them had told him the best thing to do was to make no change in the short-term interest rate at this time. They felt that the situation was not serious and would not likely get out of hand and that an increase in the rate might be delayed at least until next autumn. Mr. Sproul added that, although the Federal Ad visory Council had advised the Board of Governors that the Council was in agreement that the short-term rate should be increased, two members of the Council, who were also members of the American Bankers Association Committee on Government Borrowing, advised the Secretary that the rate should not be increased and that it was probable that the bankers had swung the decision away from the such advice from recommendation of the Federal Open Market Committee. Although he the views of the Com McCabe again strongly presented and Chairman the letter of April 26, Mr. Sproul said, mittee as set forth in and left the meeting resistance to the recommendations they found rates would be that an increase in short-term with little feeling
announced. Mr. Sproul also reported that on the following day Sec retary Snyder called Chairman McCabe on the telephone and said that he had come to a decision to refund the June and July maturities of Treasury securities with one year 1-1/8 per cent certificates, adding that it was the most difficult decision he had had to make as Secretary of the Treasury because of the strong recommendations of the Federal Open Market Committee for an increase in the rate. Chairman McCabe said that, although the decision of the Treasury was a grave disappointment, he felt the Committee should follow up with further policy recommendations in an effort to se cure agreement of the Treasury along the lines previously recommended. Thereupon the meeting recessed and reconvened at 2:15 p.m. with the same attendance as at the morning session except that Mr. John H. Williams was not present. Turning to the question of policy with respect to support of the Government securities market, Mr. Rouse said that the ef fect of the Treasury announcement of the 1-1/8 per cent certificate last Thursday was instantaneous in the market and that prices of Government bonds advanced sharply. He expressed the opinion that there was an opportunity for the prices had risen to a point where of bonds acquired since November. System to reduce its holdings He felt that the System should take advantage of that opportunity, in prices but rather to to stopping any advance not with a view demand. He thought that partially meeting the temper the rise by
the demand would not be large but that there would be a relatively limited supply which would have an effect on prices unless the System supplied bonds from the System account. He added the comment that the immediate problem was one of giving full support to the Treasury's June and July refunding program. After that, he said, the next ma turity would be on September 15, and whatever policy was proposed by the Committee should be gotten under way sometime between June 25 and August 1, In a discussion of policy with respect to selling bonds from the System account, Mr. Clayton suggested that it would be logical to sell as many bonds as we could without upsetting the market. Chairman McCabe suggested that the present policy with re spect to bills and certificates would have to be continued until the July financing was completed, that there should be a decision on the question of sales of bonds from the System account, and that the policy with respect to bills and certificates after July 1 should He felt that the second question was the one be also be considered. fore the Committee at the moment. In response to a question from Chairman McCabe, Mr. Rouse said that, as proposed by Mr. Clayton, he would suggest a policy of do so to withdraw re whenever the System could selling securities meet the demand without the market and to partially serves from price decline. If a bringing about a off" the market and "topping operation was over, after the July refunding situation should arise,
in which the bond market dropped back to existing support levels Mr. Rouse would favor lowering these prices and not buying the five- to seven-year maturities as freely as had been done in the recent past. On the long maturities, he said, he could conceive of a situation in which the System could go along for possibly six months without hav ing substantial amounts of long-terms offered to the System but that if bank loans increased materially the situation might be different. Mr. Sproul expressed the opinion that the policy should be to tip the balance toward taking funds out of the market rather than supporting the market at any particular level. That would mean, he said, that the System could sell securities from the System account during the period immediately ahead without interfering with the June and July financing. Mr. Eccles stated that he might be a somewhat more reluctant seller than had been indicated by Messrs. Rouse and Sproul and that perhaps his point was a question of emphasis rather than difference of approach. He said the System had favored an increase in the short-term rate in order to protect the long-term 2-1/2 per cent rate, that the long-term rate could be maintained by narrowing the spread between the long and short rate or by selling securities from the System account and Treasury trust accounts, but that if the latter were done it would tend to keep a wide spread between the long and short rate, would take the pressure off the short rate, and would that the short-term rate be raised. make it appear less necessary
Therefore, he was inclined to let the market for the long bonds re flect the demand, based on the continuation of the short-term rate, until such time as agreement could be reached to raise the short term rate. During the ensuing discussion Mr. Rouse outlined what had been done during the last few days with respect to offering for sale securities from the System account and Treasury trust accounts. The discussion resulted in an agreement that, if the bond market continued to be strong, the Federal Reserve Bank of New York, acting under the direction to be issued by the executive committee of the Federal Open Market Committee following this meeting, would sell bonds from the System account in such amounts as to resist a rise in prices, it being understood that selling would be accelerated as prices went up without at any time stopping the rise and that if the movement were reversed and the rise were later resumed, selling would be resumed at the lower point and would again follow the rise upward. With respect to the policy to be followed after July 1, 1948, Mr. Szymczak suggested that the full Committee determine what its po committee would be able to would be so that the executive sition It was his view that the full discuss the matter with the Treasury. that, if inflationary pressures should take the position Committee to rise in the should be permitted the short-term rate continued,
market so that when the September refunding was undertaken it would be at a 1-1/4 per cent rate. In a discussion of Mr. Szymczak's suggestion, it was made clear that the question of an increase in the market rate would be discussed with representatives of the Treasury, and that, if the Treasury raised objection, and the inflationary situation continued to justify an increase in the short-term rate, another meeting of the full Committee would be called to consider what the Committee's re sponsibilities were and what action should be taken in the circumstances. At the conclusion of the discussion, upon motion duly made and seconded, it was agreed unanimously that the procedure outlined by Mr. Szymczak and during the ensuing discussion should be followed. In response to an inquiry from Mr. Szymczak as to what fur ther action should be taken by the Committee with respect to a new issue of savings notes, Chairman McCabe suggested that the Committee continue to urge such an offering. duly made and seconded the Upon motion staff was requested to prepare a draft of the Treasury, to be sent with letter to the approval of the members of the execu renewing the suggestion tive committee, issue of savings notes be of that a new fered and that the annual limit of F and G savings bonds for pension fund invest ment be increased from $100,000 to $200,000 or $250,000. be issued to the ex the instructions to In connection with in view of financing operations it was suggested that, ecutive committee
and other factors that would affect the market during the next few months, the existing limitation on the authority to make changes in holdings of the System account was larger than would be needed and that the amount could be reduced to $1.5 billion. Thereupon, upon motion duly made and seconded, and by unanimous vote, the following direction to the execu tive committee was approved, with the understanding that the limitations contained in the direction would in clude commitments for the System open market account: 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 situation of the country, for the the general credit practical administration of the account, for the main tenance of stable and orderly conditions in the Govern security market, and for the purpose of relating ment market to the needs of com the supply of funds in the provided that the aggregate amount merce and business; held in the account at the close of this of securities than special short-term certificates of in date other to time for the temporary purchased from time debtedness shall not be increased or accommodation of the Treasury decreased by more than $1,500,000,000. is further directed, until The executive committee Federal Open Market Committee, directed by the otherwise the System open market for the purchase for to arrange of such amounts of from the Treasury account direct of indebtedness as may special short-term certificates temporary accom to time for the from time be necessary the total amount provided that of the Treasury; modation account at any one time held in the of such certificates not exceed $1,500,000,000. shall
It was agreed that the next meeting of the Federal Open Market Committee should be set tentatively for the week of October 4, Thereupon the meeting adjourned, Secretary. Approved: Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, April 21, 1948·Minutes of the Executive Committee, May 20, 1948