October 4, 1948 FOMC Minutes

FOMC minutes

At the conclusion of the individual statements, upon motion duly made and sec onded, and by unanimous vote, the program as recommended by the executive committee and discussed at this meeting was approved, with the understanding that Messrs. McCabe and Sproul would present the program to the Secretary of the Treasury at the earliest possible date. Secretary's note: Following the meeting, Chairman McCabe called the office of Secretary Snyder for an appointment for the afternoon of Wednesday, October 6, but learned that the Secretary was out of the city. An appointment was made for Messrs. McCabe and Sproul to see the Secretary on Wednes day, October 13, 1948, at which time the following letter, which had been approved by the members of the executive committee of the Federal Open Market Committee, was handed to the Secretary as a statement of the views of the Federal Open Market Committee: "In my letter of September 13, 1948, I stated that some time in the near future Mr. Sproul and I, in behalf of the Federal Open Market Committee, would like to discuss with you the two matters referred to in the letter and other mat ters relating to the credit and monetary situation. This letter has been prepared as a basis for a discussion of policies to be followed during the remainder of the current year. "It is believed that the period will be characterized by additional sales of bonds by nonbank holders which will have to be purchased by the Federal Reserve Banks in ac cordance with the present policy of supporting the 2-1/2 per cent long-term rate. It is possible that such pur the System will be in substantial amounts. These chases by transactions, together with a further gold inflow, will add at a time when there is a strong demand to bank reserves loans. In order to curb the inflationary effects for bank important that substantial pressure of this expansion, it is be kept on the reserve position of banks. To accomplish proposes that sub Federal Open Market Committee this the stantially the following program be undertaken promptly. "1. Short-term rates. a. Treasury bill policies. The rates on the Sys bids for exchanges of maturing bills will be tem's weekly

"adjusted so as to bring about reduction in the System's portfolio at the time of the exchange. This will absorb bank reserves and put the banks under some restraint. The policy with respect to bills will be designed to achieve, as suggested in my letter of August 11, 1948, a greater degree of flexibility in the bill rate and, it is expected, will result in higher rates on Treasury bills in relation to the current rate on certificates. "b. Certificates. The Federal Open Market Com mittee will also allow the market yields on certificates to increase. This increase will encourage banks to pur chase Government securities or to maintain their holdings and thereby discourage further loan expansion during the remainder of the period. Furthermore, it will permit the investment in short-term securities of corporate and other balances which would not be attracted by existing rates. This increased demand will enable the System to sell some of its holdings and thereby absorb bank re serves. Depending on market conditions, the rate might be permitted to go as high as 1-1/2 per cent. "c. Other short-term securities. The rates at supports other short-term securities will which the System to the higher certificate rate and be adjusted to conform the 2-1/2 per cent long-term rate. Debt retirement and Treasury refunding. "2. of its restrictive effect, it is desirable Because Treasury continue to draw upon its war loan that the held by the Federal Reserve balances to retire securities position permits. It rapidly as the Treasury's cash as could be retired at the present time that bills appears at for a number of weeks and of $100 million a week the rate could be used to available trust funds at the same time would re Such purchases marketable securities. purchase to purchase in sup the System would have duce the amount If it should per cent rate. 2-1/2 port of the long-term support was not period that System during the develop could purchase purpose, the Treasury for that necessary investment directly for trust account the issues needed from the System account. 13, it is in my letter of September "As suggested issue of bonds million dollar that the $571 recommended This issue 15 be refunded. on December to be redeemed and retire Federal Reserve outside the is held entirely market unnecessarily. funds into the cash would put ment in of the certificates as well as of the refunding The terms

"maturing on January 1, 1949, would be considered later in the light of developments with respect to the short term rate. "3. Treasury balances. Also as proposed in my letter of September 13, 1948, it would be desirable for the Treasury to time calls on war loan deposit accounts so as to exert some drain on bank reserves. In carrying out the transactions referred to above the Treasury could reduce its war loan balances as low as $500 million (they now amount to about $2.1 billion) and could also reduce its balances with the Federal Reserve below the present level of $1.7 billion. Large tax receipts in the first quarter of 1949 and cur rent income in the second quarter will provide adequate means for meeting all needs during the remainder of the fiscal year. "4. Other System actions. It is believed that as soon as the market rate on certificates has risen above the 1-1/4 per cent rate, the discount rate of the Federal Reserve Banks should be increased to 1-3/4 per cent. Such action would be an indication to the public of the System's views with respect to the need for restraint. Also the Board of Governors will continue to study the situation for the purpose of determining the action that should be taken during the period further to increase member bank re serve requirements." With respect to the authority to be granted to the execu tive committee to effect transactions in the System open market account, Mr. Rouse said that, on the assumption there would be a meeting of the full Committee in December, an authority of $2 bl lion would be adequate. Thereupon, upon motion duly made and seconded, the following direction to the executive committee was approved, with the understanding that the limitations contained the direction would include commitments in open market account: for the System

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 to the needs of com merce and business; provided that the aggregate amount of securities held in the account at the close of this date other than special short-term certificates of in debtedness 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. It was agreed unanimously that the Presidents would discuss informally the date for the next meeting of the Presidents' Conference and that during the joint meeting of the Board of Governors and the Presidents tomorrow a tentative date would be fixed for the next meeting of the Federal Open Market Committee. Thereupon the meeting adjourned. Secretary. Approved: Chairman.