December 13, 1949 FOMC Minutes

FOMC minutes

equities and place it on a basis which would be in harmony with present day conditions, and that tax rates in the revised structure should be at levels which in times like the present would permit of a balanced budget or produce a surplus for debt retirement. While he realized that such a program would be a difficult one in an election year, he felt it was important that the Federal Reserve should urge its adoption at every opportunity. He also said that in connection with the preparation of the President's messages to the Congress, he (Chairman McCabe) undoubtedly would be questioned on these points and that if the Presidents of the Federal Reserve Banks had any other views he would like to have them before the Presidents left Washington. In the ensuing discussion no different views were expressed and it was understood that the Presidents and the Board would give some thought to the subject and be prepared to discuss it at the joint meeting of the Presidents and the Board tomorrow. Consideration was then given to the policy to be followed in the interim before the next meeting of the executive committee with respect to the replacement of maturing Treasury bills. Mr. Sproul referred to the understanding at the meeting of the executive committee on November 18, 1949, that the Federal Reserve Bank of New York should be guided in the redemption or replacement of System bill holdings by what would be required in the light of current conditions in the money market to carry out the general credit policy of the Federal Open Market Committee. After a discussion, at his suggestion, no change was made in this under-

standing. In a discussion of the policy to be followed by the Committee, there was agreement that the policy of mild restraint should be con tinued within the limits imposed by the necessity of supporting a 1 1/8 per cent one-year rate in connection with the January refunding operation. It was also agreed that, as soon as the refunding was out of the way, the executive committee should consider whether the situation was then such as to call for some further increase in the short-term rate, and, if so, the matter should be discussed with the Treasury with a view to permitting the rate to increase prior to the February refunding. In line with the decision to prevent the rates on bills and certificates from rising above 1 1/8 per cent until after the January refunding was out of the way, there was also agreement that the upper limits of the ranges at which Treasury bills and certificates would be purchased and sold for the System account should be fixed for the time being at 1.12. Subject to the foregoing limitation, the executive committee was authorized to determine from time to time the exact ranges at which bills and certificates would be purchased by the Federal Reserve Bank of New York for the System open market account. In taking this action it was understood that if, following the January financing, there should be agree ment among the members of the executive committee, after consultation with the Treasury, that the short-term rate should be increased to 1 1/4 per cent on one year obligations, the upper limits of on bills and certificates could the ranges be increased to not to exceed 1.24.

In connection with the general direction to be issued to the executive committee with respect to the execution of transactions for the System account, it was suggested that no change be made in the wording of the direction, but that the limitation contained in the first paragraph be set at $2 billion and in the second paragraph at $1 billion. 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 sit uation of the country, for the practical administration of the account, for the maintenance of 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 not be increased or decreased by more than Treasury shall $2,000,000,000. is further directed, until other The executive committee Federal Open Market Committee, to arrange wise directed by the the System open market account direct for the purchase for of special short-term cer from the Treasury of such amounts as may be necessary from time to tificates of indebtedness for the temporary accommodation of the Treasury; provided time of such certificates held in the account that the total amount at any one time shall not exceed $1,000,000,000.

It was agreed that the next meetings of the Committee would be held on Tuesday, February 28, and Wednesday, March 1, 1950, with the understanding that actions at the meeting on February 28 would be confined to routine matters, including the ratification of previous actions and transactions for the System account and that discussions would be deferred until the meeting on March 1. of questions of policy Thereupon the meeting adjourned. Secretary. Approved: Chairman.