March 1, 1949 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 Tuesday, March 1, 1949, at 10:00 a.m. PRESENT: Mr. McCabe, Chairman Mr. Sproul, Vice Chairman Mr. Clayton Mr. Draper Mr. Earhart Mr. Eccles Mr. Gidney Mr. Leach Mr. McLarin Mr. Szymczak Mr. Vardaman Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Vest, General Counsel Mr. Thomas, Economist Mr. John H. Williams, Associate Economist Mr. Rouse, Manager of the System Open Market Account Mr. Thurston, Assistant to the Board of Governors Mr. Riefler, Assistant to the Chairman, Board of Governors Mr. Sherman, Assistant Secretary, Board of Governors Mr. Smith, Economist, Government Finance Sec tion, Division of Research and Statistics, Board of Governors Mr. Arthur Willis, Special Assistant, Securi ties Department, Federal Reserve Bank of New York alternate member of the Federal Open Mr. Young, Market Committee Leedy and Gilbert, Presidents of the Fed Messrs. Banks of Kansas City and Dallas, eral Reserve respectively President of the Federal Reserve Mr. Irons, Vice Dallas, and Mr. Raisty, Economist of Bank of the Federal Reserve Bank of Atlanta
The Secretary reported that advices of the election for a period of one year commencing March 1, 1949, of members and alternate members of the Federal Open Market Committee representing the Federal Reserve Bnks had been received, that each newly elected member and alternate member had executed the required oath of office, and that it was the opinion of the Committee's counsel, on the basis of advices received, that the following members and alternate members were legally qualified to serve: Allan Sproul, President of the Federal Reserve Bank of New York, with L. R. Rounds, First Vice President of the Federal Reserve Bank of New York, as alternate member; Hugh Leach, President of the Federal Reserve Bank of Rich mond, with Joseph A. Erickson, President of the Federal Reserve Bank of Boston, as alternate member; Ray M. Gidney, President of the Federal Reserve Bank of Cleveland, with C. S. Young, President of the Federal Reserve Bank of Chicago, as alternate member; W. S. McLarin, Jr., President of the Federal Reserve Bank of Atlanta, with Chester C. Davis, President of the Federal Reserve Bank of St. Louis, as alternate member; C. E. Earhart, President of the Federal Reserve Bank of San Francisco, with J. N. Peyton, President of the Fed eral Reserve Bank of Minneapolis, as alternate member. Upon motions duly made and seconded, and by unanimous votes, the following officers of the Federal Open Market Com mittee were elected to serve until the election of their successors at the first meeting of the Committee after February 28, the understanding that in the 1950, with event of the discontinuance of their with the Board of Gov official connection Reserve Bank, as the ernors or a Federal would cease to have any case might be, they
official connection with the Federal Open Mar ket Committee. In connection with the elec tion of Mr. Morrill, it was agreed unanimously that the by-laws of the Federal Open Market Committee, which provide that the Secretary of the Board of Governors shall be Secretary of the Committee, should not be changed but that Mr. Morrill should continue to serve as Secre tary notwithstanding the applicable provision of the by-laws: Thomas B. McCabe, Chairman Allan Sproul, Vice Chairman Chester Morrill, Secretary S. R. Carpenter, Assistant Secretary George B. Vest, General Counsel Woodlief Thomas, Economist John H. Williams, Charles W. Williams*, Donald S. Thompson, Earl L. Rauber, and Oliver P. Wheeler, Associate Economists as of the date upon which he assumes *Effective his duties as economist at the Federal Reserve Bank of Richmond. Upon motion duly made and seconded, unanimous vote, the Federal Reserve and by of New York was selected to execute Bank for the System open market transactions of the first account until the adjournment meeting of the Committee after February 28,1950. directors of the Federal Re stated that the board of Mr. Sproul as Manager of the System York had selected Mr. Rouse serve Bank of New of the Federal Reserve subject to the selection Open Market Account, as the Bank to Market Committee the Federal Open of New York by Bank approval by the account and his for the System execute transactions Open Market Committee. Federal and and seconded, duly made Upon motion of Mr. Rouse the selection vote, by unanimous Market Account System Open of the as Manager was approved.
Upon motions duly made and seconded, and by unanimous votes, the following were selected to serve with the Chairman of the Federal Open Market Committee (who under the provisions of the by-laws is also Chairman of the executive committee) as members and alternate members of the executive committee until the selection of their successors at the first meeting of the Federal Open Market Committee after February 28, 1950: Members Alternate Members Marriner S. Eccles Ernest G. Draper James K. Vardaman, Jr. R. M. Evans Lawrence Clayton (to serve in the order named as alternates for Messrs. McCabe, Eccles, and Vardaman) Allan Sproul Ray M. Gidney Hugh Leach W. S. McLarin, Jr. (to serve in the order named for Messrs. Sproul and Leach) Reference was made to the resolution adopted by the Federal Open Market Committee on November 20, 1936, relating to the purchase and sale of cable transfers and bills of exchange and bankers acceptances pay able in foreign currencies. Mr. Sproul stated that, for reasons dis cussed at previous meetings when the resolution was reviewed, it was desirable that the authority remain in effect. was unanimous agreement that There be taken at this time no action should to amend or terminate the resolution of November 20, 1936. of the Committee on the minutes of the meeting An excerpt from to in which it was stated that, November 30, 1937, was then referred
since securities acquired by Federal Reserve Banks in settlement of claims account closed banks would be in such small amounts as to be unimportant from the standpoint of credit control, the Committee would interpose no objection to Federal Reserve Banks holding such securities or to the sale of such securities whenever deemed advis able by the holding bank. Mr. Gidney expressed the view that, although authority for such transactions had not been used recently, it was desirable to continue it in effect. It was agreed unanimously that no action should be taken at this time to amend or terminate the authority granted at the meeting of the Federal Open Market Committee on November 30, Attention was then called to the authority granted to Federal Reserve Banks by the executive committee of the Federal Open Market Committee at its meeting on January 20, 1948, pursuant to action taken by the Federal Open Market Committee at its meeting on December 9, covering short-term Treas with respect to repurchase agreements 1947, with dealers in United States Government securities ury obligations transact business with the System open market account. qualified to There was a brief discussion, follow which it was agreed unanimously that ing should be taken at this time to no action amend or terminate the authority. since the last meeting of the During a review of developments to the letter sent by the executive Committee, Chairman McCabe referred date of February 4, of the Treasury Snyder under committee to Secretary
1949, and at his request Mr. Carpenter read portions of Secretary Snyder's reply of February 9, 1949, which was as follows: "Reference is made to your letter of February 4, 1949, summarizing the views of the Executive Committee of the Fed eral Open Market Committee with respect to the problems of credit policy and debt management developed during discus sions of the Committee on January 26, 1949. "I have given careful consideration to the views of the Committee suggesting the desirability of refunding the cer tificates maturing March 1 into a 1-3/8% one-year certificate or a 13-month 1-3/8% note. In the light of conditions exist ing at this time I find myself unable to agree that the cer tificate maturing on March 1 should be refunded into a 1-3/8% security, and I feel that it is too early to decide what should be done in the refinancing of the certificate maturing April 1. "It is noted that the Committee suggests that the pre sent System policy with respect to bids for bills and purchases and sales of bills be continued. As you know, I have had some apprehension concerning the gradual rise in the bill rate, but understand that it will be the policy of the Federal Reserve to exercise a high degree of caution so as to enable the Treas ury to continue the refinancing of the floating debt at the current one-year rate of 1-1/4% until such time as a different rate can be mutually agreed upon. "With respect to a program for the redemption of maturing Treasury bills during the latter part of March and early April, I am in general agreement that Treasury bills be redeemed as the Treasury balance and market conditions permit, but I would prefer to continue the present policy of considering Treasury basis and making our decisions accord bills on a week-to-week ingly. "It seems to me we should permit more development in the present factors affecting debt management before making any substantial changes in our refunding operations or to move to higher levels for the one-year-rate. The April 1 maturity of certificates amounts to only $1 billion, or thereabouts, and maturity until June 1. In a few months there is no further judge the course of events with particular ref we can better which might be enacted, in erence to the legislative program the action which the Congress may take in connection cluding for increased taxes. We with the President's recommendation upon which to plan our have a much better base will then June through the balance covering the period from operations of the year.
"In line with these views, I am reluctant at the pre sent time to use the cash balance to retire any of the Sys tem's holdings of certificates maturing on March 1, and would prefer to have the System exchange its holdings of this maturity." Mr. Sproul expressed the view that the last sentence of the third paragraph of Secretary Snyder's letter was not correct in that there was no commitment on the part of the System to maintain the 1-1/4 per cent rate until a different rate was agreed upon, and that, while the Committee would not undertake to change the market rate without full discussion with the Treasury, that point should be made clear to Secretary Snyder. It was agreed unanimously that this matter should be discussed with Secretary Snyder the next time Messrs. McCabe and Sproul met with him. issues from the Sys of the sale of long-term In a discussion previous meeting of the Committee, Mr. Rouse tem account since the the discussion at the meeting of the execu referred particularly to 26, 1949, and expressed the view that prices tive committee on January too rapidly in recent perhaps had risen a little of restricted issues larger sales from the well have been somewhat weeks, that there might had been somewhat to demand, that there account in relation System absence of ob and that in the the last two weeks, larger sales during prices from in order to keep would be continued jection such sales of long-term System holdings of the small rapidly. Because rising too to try to have it would be necessary issues, he said, bank eligible take care of itself. of the market that segment
It was the view of the members of the Committee that the procedure of selling securities as followed in recent weeks should be continued and that it would be desirable if the yield on the long-term ineligible issues could be kept from declining below 2.40 per cent. Mr. Rouse discussed the probable effects of Treasury pay ments into the market and withdrawals of funds from the market during the next few weeks, and there was a review of the policy followed in the past of using war loan balances in such a manner as to keep some pressure on member bank reserve accounts. He also reported his discussions with Mr. Bartelt, Fiscal Assistant Secre tary of the Treasury, with respect to the use of war loan balances and stated that a program had been agreed upon for the next few weeks which would largely neutralize Treasury operations in the money market. there were distributed copies of a In this connection, Messrs. Thomas and Smith prepared under date of memorandum from to the Treasury cash position and February 24, 1949, with respect to System policies. A copy of the refunding program in relation Federal Open Market Committee has been placed in the the memorandum files. retirement of the program for Rouse also discussed Mr. several weeks, stat during the next Treasury securities maturing of $400 million had agreed to the retirement ing that the Treasury
of the System's holdings of March 1 certificates and $600 million of market held bills in the last half of March and early April, and that these retirements would about exhaust the funds available for debt retirement during the calendar year. Mr. Sproul said that at the meeting of the executive com mittee yesterday morning reference was made to the discussion at the meeting on November 30, 1948, of a possible program for the conversion of long-term Treasury debt into issues which would be so held that System support would not be necessary. He outlined the reasons why representatives of the Federal Open Market Commit tee and the Treasury had not met to consider the matter as con templated at the earlier meeting of the Committee and stated that probably the matter should be taken up directly with Secretary Snyder. He also said that the executive committee agreed to rec ommend to the full Committee that members of the staff prepare a this matter which could be considered by the executive study of to the full Committee, after which, de committee and recommended reached, it could be taken up with the pending on the conclusions if at such time it seemed desirable. Treasury at top policy level discussion, it was Following a brief that the recommendation agreed unanimously should be car the executive committee of ried out. made at the meeting made to the proposal Reference was then of the advisability of 1948, that a study be made on October 4, securities held by some of the long-term the Treasury refunding
the System account with special short-term issues at a lower in terest rate, which was also discussed at the meeting on January 4, 1949. It was stated that the committee appointed for the purpose would complete its study of the question if it seemed desirable to do so, but that the executive committee at its meeting on January 4 had agreed that the matter should be presented to the full Com mittee for discussion of the question whether further action should be taken. It was the consensus of the mem bers present that there was no need for further study of the matter at this time. In this connection, Mr. Rouse stated that Mr. Bartelt, Fiscal Assistant Secretary, called him a month or six weeks ago to inquire whether, if the Treasury should so desire, the System would be willing to sell approximately $500 million of long-term bonds from the System account, and if so at what price. His re sponse, he said, was that he did not think the System would be willing to make such sales except at current market prices and that, if Mr. Bartelt felt the proposal should be pursued further, to the executive committee or the full Com it should be presented further had been heard from Mr. mittee. He added that nothing Bartelt on the matter. that con Mr. Eccles suggested the ensuing discussion, In System account at to selling from the might be given sideration of the securities sold. the average cost
3/l/49 Turning to a discussion of open market policy and rec ommendations to be made to the Treasury, Chairman McCabe called on the Presidents of the Federal Reserve Banks who were in atten dance for their comments. Some of the Presidents expressed the view that the Committee should continue to press for an increase in the short-term rate while others felt that, in view of the fact that the Treasury was not likely to act favorably at this time on such a recommendation and in view of the uncertainties in the business outlook and the possible misinterpretation of such action, it would be preferable not to increase the rate at the present time. One of the Presidents would not recommend such an increase in connection with the April refunding, but would do so June financing. Another suggested that in connection with the should be permitted to reinvest holders of maturing savings bonds new savings bonds bearing a higher the proceeds of such bonds in rate of interest. Mr. Sproul said that the Com Following these comments the framework of the market policy in should consider open mittee and in the light of changing policy of the System general credit three possibilities He outlined and credit conditions. business the present situation trend, (1) to the economic with respect pressures being with inflationary a temporary hesitation might be healthy readjustment, or (3) in the spring, (2) a resumed later While his own spiral of deflation. of a downward the beginning he recogthe most likely, possibility was that the second view was
nized that a condition of balance could not be maintained for a long time; however, he felt that open market policy should attempt to sus tain that balance as long as possible. He added that for the past period the policy of open market operations and Treasury debt manage ment had been to exercise some restraint on credit expansion and that now consideration should be given to a change from a policy of re straint and mild pressure on the market to a policy of as near neu trality in the money market as it would be possible to achieve. In stead of trying to get a large redemption of bills each week, he said, and thereby force sales of bills to the System account, the System should try to achieve a greater exchange of bills so that banks would not be forced to sell bills. In the past it had been thought that if the Treasury were willing to move the rate on one year cer tificates of indebtedness to 1-3/8 or 1-1/2 per cent, the discount rate of the Federal Reserve Banks should be increased to 1-3/4 per cent. He now felt that if the Treasury should move the rate to 1-3/8 or 1-1/2 per cent, the discount rate should not be increased. He added that the objective of an increase in the short-term rate on now be to combat inflation, but to Treasury obligations would not so as to facilitate later Treas improve the interest rate structure the appearance of more of less per ury refundings, and to avoid rate pattern. On the other rates at both ends of the manently pegged rate, because it is more increase in the discount hand, a further be interpreted as an indication a symbol, he said, would a sign or
/l/ of an anti-inflationary policy which would be difficult to justify. Consideration should also be given, he said,, to what should be done in the field of consumer instalment credit and margin require ments and the entire credit policy of the System should be con sistent. He went on to say that a policy of neutrality in the mone tary and credit field would leave the System free to move in either tirection depending upon developments. With respect to a change in the certificate rate he felt that the Committee should take the position that it would be de sirable to increase the short-term rate in connection with the April refunding to 1-3/8 per cent. While he saw some justification for the position that the increase should not be made in April but should be deferred until the June refunding, he thought the Committee should make a firm recommendation that the rate be increased at the earlier date. Mr. Eccles questioned whether an increase in the short-term rate would be interpreted as being consistent with a policy of neutrality and thought that it would be regarded by the market and the Treasury as indicating a policy of continued restraint. He also said that it would have been very helpful if the rate could have been increased further before the downturn occurred in the economy and that it was probably too late now to get an increase. He agreed,, however, that it would be desirable to put the increase into effect if the Treasury were willing to do so.
This point was discussed, and Mr. Sproul suggested that this might be the last chance for an increase in the short-term rate and if so the System should urge it. He thought that, as long as credit was still available at low rates and there was no increase in the dis count rate, it would be possible to explain an increase in the Treas ury borrowing rate in terms of debt management policy and preparation for the refunding of the large maturities of Government securities in the next four years. During the discussion, Mr. Thomas suggested that the Committee might follow a policy of maintaining the bill rate at about the pre sent level which would shift more bills into the market from the Sys tem account and would make bills more flexible and responsive to mar ket conditions. that it would be a mistake to Mr. Riefler was of the opinion as it would be interpreted as the short-term rate at this time increase a policy of encouraging the sale an anti-inflationary step. He favored and of bills from the account to of certificates to the System account in the short-term area said, would permit policy the market. This, he moves in bills rather than to be effected by small minor of the market in the form of an in regarded as a major move by what had come to be crease of 1/8 per cent in the certificate rate. with the views expressed H. Williams was in agreement Mr. John by Mr. Sproul. agreement with Mr. of the Committee expressed Several members Sproul's position.
Mr. Clayton stated that, while a good case could be made for an increase in the short-term rate from the standpoint of monetary and credit policy, he was convinced that, in view of the cessation of credit expansion and the growing opinion that the economy might be facing a depression, there would be no favorable response to a pro posal to increase the short-term rate. Mr. Eccles stated that in connection with the June refunding consideration might be given to an offering at rates which would per mit the new issues to be sold at a premium so that they would not de cline below par if, at a subsequent date, the short-term rate were in creased. suggested that, when he and Mr. Sproul met with Chairman McCabe they take the position that had been taken once Secretary Snyder again, would not urge an increase in the or twice before that the Committee other times in the past, but as strongly as it had at short-term rate facing the Treasury over the that in view of the refunding problem effective debt management gen years and in the interest of next four in the short-term rate would was believed that an increase erally it expressed in the recent past. be advisable for the reasons Mr. Rouse suggested the refunding program, In commenting on as to the types of keep an open mind members of the Committee that the for the reason in the June financing that might be offered securities the decision on that happen to change number of things might that a have to be made. that decision would date arrived when point before the advised that in the Treasury be suggested that Mr. Clayton
the past the Committee had urged an increase in the short-term rate on the grounds that it would be an anti-inflationary meas ure, that it would assist in refunding the public debt, and that it would help in bringing about a more natural interest rate struc ture, and that, while the first reason was not now applicable, it would be of real assistance to the Treasury in its refunding pro gram if a better interest rate structure could be brought about. After some further discussion, the suggestions made by Chairman McCabe and Mr. Clayton were approved unanimously. In taking this action, it was also agreed unanimously that the suggestion made by Mr. Sproul with respect to Sys tem bids for, and purchases and sales of, Treasury bills would be carried out under the authority of the general di rections issued by the Federal Open Market Committee and its executive com mittee. During a discussion of the direction to be issued to the executive committee to arrange for transactions for the System open market account, Mr. Rouse suggested that, while the policies of the Committee as discussed at this meeting could be carried out under the existing direction, consideration be given to changing the direction so as to make it clear that present policies are be out in the light of changing economic conditions. It ing carried change should be made, and that the amended was agreed that the for the same limitations on transactions direction should provide in the direction issued at the in the account as were contained
meeting on November 30, 1949. Thereupon, upon motion duly made and seconded, the following direction to the executive committee was approved, with the understanding that the limitations con tained in the direction would include com mitments for the System open market account: The executive committee is directed, until other wise 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, re placement of maturing securities, and letting maturi ties run off without replacement), as may be necessary, in the light of changing economic conditions and the general credit situation of the country, for the prac tical administration of the account, for the mainte nance 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 tempor ary accommodation of the Treasury shall not be increased or decreased by more than $2,000,000,000. The executive committee is further directed, un til otherwise directed by the Federal Open Market Com mittee, to arrange for the purchase for the System open account direct from the Treasury of such amounts market of special short-term certificates of indebtedness as necessary from time to time for the temporary may be Treasury; provided that the total accommodation of the held in the account at any amount of such certificates one time shall not exceed $1,500,000,000. meeting of the Fed agreed that the next It was tentatively the week of May 2, would be held during eral Open Market Committee the meeting adjourned. Thereupon
Secretary. Approved: Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, March 1, 1949