November 30, 1948 FOMC Minutes

FOMC minutes

1l/30/48 -6. in Treasury bills and that, therefore, it was allowing the rate to rise gradually in relation to the 1-1/4 per cent certificate rate, with the result that the System's holdings of Treasury bills had declined to about 40 per cent of the total outstanding. Chairman McCabe referred to the present policy of support ing the longest term restricted issues at 8/32 above par and the longest term bank eligible issue at 1 point above par. He re viewed the discussion at the meeting of the executive committee of the suggestion that these premiums be eliminated, at which time it was understood that there would be further discussion of the problem at this meeting of the full Committee. There was a discussion of the suggestion, in the course of which members of the Committee and the Presidents of the Fed eral Reserve Banks who were not members of the Committee expressed their views as to the policy that should be followed. It was the majority view that, for substantially the reasons stated at the meeting of the executive committee, the present policy should be continued for the time being. It was suggested in this connection, however, that it might be understood that in a period of pressure on the support price Mr. Rouse might let the support price on the bank eligibles of September 1967-1972 drop somewhat below 101 on the ground that, since the policy was to support a long-term rate of 2-1/2 per cent, that issue should not be supported at a premium.

With that understanding, Mr. Rouse said, the issue might decline to a premium of 8/32, at which the longest term restricted issues were being supported. The members of the Committee concurred in this understanding. In a short discussion of the use of balances in war loan accounts, Chairman McCabe referred again to the recommendation made to the Treasury that it use funds available in its balances to purchase securities from the System account as a means of con tinuing pressure on member bank reserves. Instead of adopting this suggestion, he said, the Treasury was following a policy of retiring $100 million of bills each week, a large part of which were held outside the Federal Reserve Banks. Turning to a discussion of a possible further increase in the short-term interest rate, it was stated that this question had been settled for the December and January financing, but that it should be considered again in January in connection with the re funding of February and March maturities. In this connection it the executive committee might be was suggested that a meeting of of the new year to consider recommenda held around the beginning made to the Treasury at that time. tions that might be suggested that the discussion, Mr. Clayton During this committee to renew the recom authorize the executive Committee last two meetings of the to the Treasury at the mendations made

Committee if, in the judgment of the executive committee, such action seemed desirable before another meeting of the full Committee. Upon motion duly made and seconded, and by unanimous vote, Mr. Clayton's suggestion was approved. Reference was then made to the direction to be issued to the executive committee for effecting transactions in the System open market account and it was suggested that the direction issued at the meeting on October 4, 1948, be renewed. Thereupon, upon motion duly made and seconded, the following direction to the executive committee was approved, with the understanding that the limitations contained in the direction would include commitments for the System open market account: The executive committee is directed, until otherwise di rected 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 secu rities, and letting maturities run off without 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 maintenance of stable and orderly conditions in the Government security market, and for the purpose of relating the supply of funds in the market 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 de creased by more than $2,000,000,000. The executive committee is further directed, until other wise directed by the Federal Open Market Committee, to ar range 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 accommodation 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 tentatively agreed that, in the absence of unforeseen developments, the next meetings of the Committee would be held on February 28 and March 1, 1949. Thereupon the meeting adjourned. Secretary. Approved: Chairman.