May 3, 1949 FOMC Minutes

FOMC minutes

to future financing. There followed a discussion of the interim report, the issues that might be used in future financing, and the problems presented by the present policy of supporting both the short- and long-term rates. At the conclusion of the discussion, it was understood that the staff Committee would continue to work on the problem of a longer term refunding program so that when the time came to make a recommendation to the Treasury the Committee would be prepared to do so. Preliminary to a discussion of recommendations to be made to the Treasury with respect to refunding of the June maturities, Mr. Rouse commented on the suggestions contained in the memorandum on June refunding and Chairman McCabe presented the recommendation of the as agreed upon at the separate meet executive committee on this subject ing of that committee. discussion it was During the ensuing that, since a further agreed unanimously in the short-term rate does not increase at this time, the appear to be likely adopt the suggestion of Committee should committee and that, in their the executive representatives of the conversations with and Sproul should Messrs. McCabe Treasury, 1 certificate matur recommend that the June ity and the June 15 2 percent bond maturity into a new issue of Treasury be refunded be priced at or 5 years to due in 4 notes market and offered at par. the that if later there It was recognized in the short a further increase should be sell below par. the new issue might term rate that such a change However, it was suggested have such an enough to not come soon might

effect but that in any event notes and cer tificates had sold below par before and there would be no real objection to the new issue going below par. The new issue would reduce the total of certificate maturities and would have a maturity date beyond the period in which the greater part of the 2 per cent bonds matured. It was expected that it would be made clear to the Treasury that the recommenda tion that the note be issued would not carry with it any commitment to support the issue at par or above except during the period imedi ately following its issue. It was suggested, however, that it might be desirable for the July refunding also to be in the form of a 4 or 5 year note depending on what is done with the June maturities and sub sequent market developments and that in the discussion which Messrs. McCabe and Sproul would have with representatives of the Treas ury it might be desirable to recommend that at the same time the Treasury undertake to raise about $1 billion of new money to meet its cash requirements. It was felt, however, that this suggestion should not be urged to the point of jeopardizing the proposed June refund ing. Turning to the question of subsequent re funding, it was agreed unanimously to authorize the executive committee, pending another meet ing of the full Committee, to make such recom mendations with respect to the July, September, and October financing as might appear to the executive committee to be desirable in the light of the action to be recommended to the Treasury in connection with the June maturities. withdrew from the meeting to keep At this time Chairman McCabe another appointment. the use of war loan the question of Mr. Sproul then raised in the light of the situation and this subject was discussed balances cash requirements and bank presented in the memorandum on Treasury

reserves. It was agreed unanimously that the scope of discretion in the use of war loan balances to affect the money market was greatly limited by the disappearance of the cash surplus of the Treasury and that the present program of consultation with the Treasury, which contem plated the use of available balances at least to neutralize the effect of Treasury opera tions in the money market, should be continued. In a discussion of System bids for, and purchases and sales of, Treasury bills, Mr. Rouse stated that the objective had been generally to keep a neutral position and that, while for short periods recently it had been difficult to carry out that objective and rate policy simultaneously, he would suggest that it be continued fairly closely on a day to day basis with the idea, however, of putting no restraint on bank reserves, except in the event of a rate decline. It was agreed unanimously that Mr. suggestion should be carried out. Rouse's In a discussion of the authority to be given to the executive the System open market account, to direct transactions for committee meeting of the Committee might suggested that, since another Mr. Rouse and in view of in August or early September, not be held until late it would be desir during that period, market developments prospective to increase and de committee to have authority able for the executive by as much as $3 billion. crease the account duly made and Thereupon, upon motion to the following direction seconded, the committee was approved unani executive that the with the understanding mously,

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 securi ties, end letting maturities 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 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 aggregate 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 decreased by more than $3,000,000,000. The executive committee is further directed, until other wise 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 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. agreed that the next meeting of the Federal It was tentatively Open Market Committee would be held during the week beginning August 29, 1949. Thereupon, the meeting adjourned. Secretary. Approved: Chairman.