June 28, 1949 FOMC Minutes

FOMC minutes

understanding that it would be the policy to maintain about $1,500 million of excess reserves in the market and that the way in which that would be done would depend on developments after the $800 mil lion of reserves was released at the end of June by expiration of the supplemental requirements. No disagreement with this suggestion was indicated by any of the members of the Committee. Chairman McCabe again invited the members of the Committee who were Presidents of Reserve Banks to express their informal views as to action that should be taken with respect to reserve re quirements in the light of the foregoing discussion, and each of them indicated that he would favor letting the supplemental authority expire without additional reductions at this time, Mr. McLarin adding that he was glad to know that consideration was being given to a possible further reduction, and, therefore, in view of the ap parent intention of taking prompt action when considered advisable he would not urge further reduction immediately. that although he felt there was some Mr. Sproul commented basis for reducing reserve requirements of central reserve city time, he felt such action could wait until it could banks at this reserves released to reserve and nonreserve be observed whether the city banks would flow quickly into the money market. and Smith dated Messrs. Young memorandum from this time a At for the fiscal to Treasury requirements 1949, with respect June 28, has been placed A copy of the memorandum year 1950 was distributed.

in the files of the Federal Open Market Committee. Question was raised as to whether, if the Treasury should need to obtain additional cash during July and August, the Com mittee would wish to make a recommendation as to the means for ob taining such funds. Mr. Rouse stated that the Treasury would probably contem plate the issuance of additional bills at least during July and August, that it might need to raise as much as $1 1/2 or $2 billion over the near-term future, and that he would like to see an issue of 4 to 5 year notes, maturing in March 1954. Several members of the Committee expressed the view that it would be desirable to recommend to the Treasury that it draw down its cash balance during the next few weeks while the effects of the changed policy were becoming apparent, and that when the Treasury needed new money it be obtained through the issuance of an intermediate term obligation, probably a 4 to 5 year note, at whatever rate was indicated by the market at the time it was issued. Mr. Clayton suggested that the full Committee make no formal recommendation to the Treasury at this time but that it authorize the executive committee to make such recommendation to the Treas developments over the next desirable in the light of ury as seemed few weeks and of the view of the full Committee that new money the issue of intermediate by the Treasury through should be raised

securities of the type referred to in the foregoing discussion. Mr. Clayton's suggestion was ap proved unanimously. During the discussion of the recommendation to be made on Treasury financing, question was raised as to the date for the next meeting of the Federal Open Market Committee which had been tenta tively set for August 29, 1949, at the meeting on May 3, 1949. Chairman McCabe suggested that the date be left subject to call, and this suggestion was approved. Consideration was then given to the direction to be issued to the executive committee to arrange for transactions in the Sys tem open market account and to the question whether any changes in the wording of the direction should be made because of the changed policy adopted at this meeting. Reference was made particularly to the part of the first sentence which directed the executive com mittee to arrange for transactions "for the maintenance of stable and orderly conditions in the Government security market," and Mr. Sproul suggested that the words "stable and" be deleted. He pointed out that, while the objective under the new policy was to maintain orderly conditions, there might well be some decline in rates under the new policy, and it was agreed that the change should be made. authority to be given the of the extent of In a discussion that the existing $3 billion committee, it was suggested executive and the $1.5 billion paragraph of the direction limit in the first limit in the second paragraph be continued.

Thereupon, upon motion duly made and seconded, the following direction to the executive commit tee was approved unanimously, with the understanding that the limita tions contained in the direction would include 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 changing economic conditions and the general credit situation of the country, for the practical administra tion of the account, for the maintenance of orderly con ditions 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 accomodation of the Treasury shall not be increased or decreased by more than $3,000,000,000. committee is further directed, until The executive otherwise directed by the Federal Open Market Committee, to arrange for the purchase for the System open market of such amounts of special account direct from the Treasury of indebtedness as may be necessary short-term certificates the temporary accommodation of the from time to time for amount of such certificates provided that the total Treasury; time shall not exceed account at any one held in the $1,500,000,000. Thereupon the meeting adjourned. Secretary. Approved: Chairman.