August 5, 1949 FOMC Minutes

FOMC minutes

It was the consensus that the issuance of an intermediate security for the September refunding would still be desirable although there was considerable doubt whether the Treasury would be willing to follow that course. It was understood that the executive committee would consider the matter further and make its recommendations to the Treasury in the light of the comments at this meeting. Mr. Sproul stated that it was too early to reach any de dision [sic] at this time with respect to the refunding of the October and December maturities. Reference was then made to the study being made by members of the staff of the program of long-term debt management and copies of a further memorandum prepared by Messrs. Rouse, Thomas, and Riefler on this subject under date of August 4, 1949, were distributed. Mr. Riefler reviewed the memorandum and the reasons the for recommendations contained therein (1) that the Federal Open Market Committee, in its discussions with the Treasury on future financing, take the position that fully marketable issues be confined to maturties of ten years or less, and (2) that the executive committee be authorized to explore with the Treasury and outside the feasibility of a long-term tap issue ineligible for ownership by banks, such an to be shiftable but with limited marketability and either instrument of the G type or of the instalment retirement type now under analysis by the staff committee.

In the discussion of the first recommendation Mr. Eccles stated that bank eligible securities should have a maturity of less than ten years and Mr. Riefler stated that the recommendation contemplated that ten years would be an absolute maximum. After a brief discussion, upon motion duly made and seconded, the recommendations contained in the memorandum were approved unanimously with the understanding that the Open Market Committee was not making any commitment with respect to the securi ties contemplated in the second recom mendation but was approving the recom mendation as a basis for discussion. In accordance with the action at a previous meeting of the Committee there were on the agenda for further consideration at this meeting the questions (1) whether savings bonds, particularly series E bonds, should be made eligible as collateral for bank loans, and (2) whether further inducements should be provided to holders of E bonds to reinvest in savings bonds. Because of the it was agreed that these subjects should be con pressure of time tinued on the agenda for a later meeting. revised memorandum on the was made to the Further reference operations under peacetime conditions, framework for System credit by Mr. Thomas that the memo and approval was given to a suggestion to be held of System economists discussed at a meeting randum be and that comments be prepared during the latter part of September, at this meeting which would made of the memorandum on the criticisms

be sent to the members of the Committee and other Presidents of the Federal Reserve Banks with the understanding that the memorandum would be considered at the next meeting of the full Committee. It was understood that in the meantime if any of the members of the Committee had any suggestions or comments with respect to the memorandum they would send them in. Mr. Rouse stated that, in view of the proposed action by the Board of Governors to reduce reserve requirements of member banks by approximately $1.8 billion, the direction issued by the Committee to the executive committee covering operations in the System account should renew the authority of the executive committee to reduce the securities in the account by $3 billion pending another meeting of the Committee. Thereupon, upon motion duly made and seconded, the following direction to the executive committee was approved unanimously 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 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 held in amount of securities that the aggregate

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 Trea sury shall not be increased or decreased by more than $3,000,000,000. 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. There was unanimous agreement that the next meeting of the should be subject to call of the Chairman, it being under Committee might be desirable to have another meeting before the stood that it meeting of the Presidents of the Federal Reserve Banks which is to during the early part of November. take place in San Francisco Thereupon the meeting adjourned. Secretary. Approved: Chairman.