February 28, 1950 FOMC Minutes

FOMC minutes

sent to members of the Committee before this meeting, copies of which have been placed in the files of the Federal Open Market Committee: (a) Current Economic Trends and Prospects, prepared in the Division of Research and Statistics of the Board under date of February 24, 1950, (b) Outlook for bank reserves and Treasury cash requirements dated February 21, 1950, and (c) New Treasury Financing in 1950, prepared by an ad hoc research committee of the System Research Advisory Committee under date of February 23, 1950. Mr. Thomas stated that developments in 1949 had lessened the major fears of inflation and depression, that the principal postwar readjustments had been almost completed, that the economy was now closer to "normalcy" than at any time since prewar and probably since the 1920's, and that the prospects for 1950 were on the whole for continuation of economic activity at moderately high levels with and the likelihood of some decreases toward the some uncertainties end of the year. Mr. Thomas also referred to some of the problems perhaps in the latter part of 1950, when the that might develop, of business and consumers that were backlog of demands on the part including eventual termination now in the picture were satisfied, automobiles and housing and a smaller of the unusual demands for reduced or ended. Mr. Thomas when foreign aid was export balance Federal cash deficit would probably pointed out that the prospective calendar year 1950 and that nearly exceed $7 billion for the

$2 billion would be needed to cover cash redemptions of maturing marketable securities. About $2 billion might be met by drawing down the cash balance of the Treasury and over $2 billion might be raised from sale of savings bonds and notes in excess of redemptions. Additional new financing would need to be around $5 billion. Since new corporate security issues and the increase in mortgages would probably be somewhat less than in 1949 and the volume of lendable funds larger, nonbank investors should be able to absorb all of the additional borrowing by the Treasury. He also stated that demand for bank credit would probably increase somewhat, apart from any increase in holdings of Government securities by banks, with a resulting expansion in bank deposits. Mr. Thomas indicated that under the circumstances the would seem to be one of neutrality Federal Reserve policy appropriate with easy money definitely not needed as to the supply of reserves, measures probably unnecessary, but with and vigorous restrictive in interest rates. The the demands for credit reflected changes in policies, he stated, which called for debt management situation Treasury issues into inter continue to refund maturing would (a) supply of bills increasing the outstanding mediate issues, (b) avoid only bank funds and issues which would attract or other short-term Federal Reserve support, (c) particularly any that would require issues when necessary to toward higher rates on short-term move

discourage their sales to the Reserve System in connection with shifts to longer-term securities, and (d) raise new money needed by offering long-term nonmarketable issues attractive to nonbank investors. In response to a suggestion from Mr. Sproul, each of the Presidents of the Federal Reserve Banks commented on conditions in his district and, while there were variations in some districts, their comments on regional conditions largely corroborated Mr. Thomas' statement with respect to the national outlook. There followed a discussion of the question whether the present relatively high level of economic activity was being maintained largely because of deficit financing by the Federal Government and of what might be expected to sustain effective demand if unemployment increased further, agricultural prices and income declined further, and consumer credit ceased to expand. then called on Mr. John H. Williams for a state Mr. Sproul to the recent trip which he made to Europe at ment with respect of European Economic Cooperation the request of the Organization of the second interim report (OEEC) to assist in the preparation and which was one of the which had since been published of OEEC for the Economic for the request for appropriations bases fiscal year on which for the next Cooperation Administration A copy of Mr. Williams' held in the Congress. hearings were being

statement has been placed in the files of the Federal Open Market Committee. Following Mr. Williams' statement, there was a discussion of problems facing the United States between now and the end of the of which are expected to continue after ECA program in 1952, some that date. At the conclusion of the discussion, the meeting adjourned. Secretary. Approved: Chairman.