June 13–14, 1950 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D. C., on Tuesday, June 13, 1950, at 2:15 p.m. PRESENT: Mr. McCabe, Chairman Mr. Sproul, Vice Chairman Mr. Davis Mr. Draper Mr. Eccles Mr. Erickson Mr. Peyton Mr. Szymczak Mr. C. S. Young Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Thomas, Economist Messrs. Peterson, Stead, and John H. Williams, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Thurston, Assistant to the Board of Governors Mr. Riefler, Assistant to the Chairman, Board of Governors Mr. Sherman, Assistant Secretary Mr. Ralph Young, Director, Division of Research and Statistics, Board of Governors Mr. Youngdahl, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Arthur Willis, Special Assistant, Securities Department, Federal Reserve Bank of New York Messrs. Williams, Gidney, Gilbert, and Leedy, the Federal Open Market alternate members of Committee McLarin, and Earhart, Presidents Messrs. Leach, Reserve Banks of Richmond, of the Federal Atlanta, and San Francisco, respectively Vice President, Federal Mr. Wurts, Assistant Bank of New York Reserve
Upon motion duly made and sec onded and by unanimous vote, the minutes of the meetings of the Fed eral Open Market Committee held on February 28 and March 1, 1950, were approved. Upon motion duly made and sec onded and by unanimous vote, the actions of the executive committee of the Federal Open Market Committee as set forth in the minutes of the meetings of the executive committee held on March 1, April 12, and May 3, 1950, were approved, ratified, and confirmed. Before this meeting there had been sent to each member of the Committee a copy of a report of open market operations prepared at the Federal Reserve Bank of New York covering the period from March 1, 1950, to June 7, 1950, inclusive. Mr. Rouse commented briefly on this report and also on a supplemental report covering commitments executed for the System account during the period June 8 to June 12, 1950, inclusive. Copies of both reports have been placed in the files of the Federal Open Market Committee. Upon motion duly made and sec onded and by unanimous vote, the transactions in the System account for the period February 28, 1950, to June 12, 1950, inclusive, were approved, ratified, and confirmed. on developments since the McCabe reported briefly Chairman referring particularly to the letter last meeting of the Committee the Treasury, pursuant to action of the sent to the Secretary of
executive committee of the Federal Open Market Committee, under date of May 25, 1950, a copy of which had been sent to each member of the Committee. He stated that up to the present time no reply to that letter and no comment with respect to the recommendations contained in it had been received from the Treasury Department. There followed a discussion of the relationship of Treasury financing to System credit policy during which Mr. Sproul made a statement substantially as follows: System credit policy is restricted to a modest policy so far as money rates are concerned. The older method of substantial changes in rates is not practicable or necessary in this situation. Since our policy must be a modest one, it should be a timely and flexible one. We have tried to base policy in the past on the whole situation and not on one or a few indicators. There has been no change in our policy since we changed last fall from a policy of ease to one of neutrality. Meantime there has been a sub stantial change in the economic situation, in business sentiment, in private capital expenditures, in inventory accumulation, and in prices. On the other hand, bank credit has declined about seasonally during the spring, and the Federal Reserve Banks and commercial banks have moved about $3 billion of Government securities into nonbank hands. There is the question which was discussed the spring of whether, in order to maintain the during a sufficiently high level of production to economy at absorb the increasing labor force, we have to keep some element of stimulation in it. If we were convinced that we are experiencing a and nondurable goods we would balanced expansion in durable it. But I do not think we are need to do nothing about It is based too much on a having a balanced expansion. automobiles, aided in housing and high level of activity financing and consumer by too easy terms for mortgage contribution of a circumstances, the credit. In these try to restrain a too policy should be to modest credit economy is in better until the whole rapid increase
balance. That calls for a firming of short-term rates by 1/8 per cent as soon as the Treasury's July 1 financing is out of the way. There should be some further decline in prices of long-term Governments and if we come to a situation when we are faced with the decision whether to let long-term bonds go below par, I would let them go below par. The situation is very different from the one existing the last time we faced this question. The Treasury needs for new money have been reduced to about $1.8 billion for the fiscal year with only a small amount needed in the third quarter of this calendar year. In this situation there should be no embarrassment to the Treasury in such firming of interest rates as we are talking about. Such a policy would contemplate breaking a 1-1/4 per cent one-year rate early in July. It would be an indication of policy to the money market and would facilitate some downward movement of prices in the long-term market. It should be followed quickly by some increase in discount rates which would be a signal to the whole financial community and to the public that there has been a change in our policy in the light of the changed business and credit situation. We should continue to press for the Treasury getting additional money so far as possible from nonbank investors. In the circumstances, it makes no difference whether the money comes from a marketable or a nonmarketable bond but we should emphasize the desirability of it coming from nonbank sources. In the ensuing discussion Mr. C. S. Young raised the question whether an increase in margin requirements would be desirable in view of recent rises in prices of stocks and stock market activity. Chairman McCabe stated that the Board had considered this matter at a meeting this morning and that it had come to the con clusion that no change in margin requirements was desirable at this
time. At his request there were distributed copies of a confidential memorandum prepared in the Division of Research and Statistics of the Board of Governors under date of June 8, 1950, with respect to the question of margin requirement policy. There then followed a visual presentation of the economic situation by members of the staff of the Board's Division of Research and Statistics. Following the visual presentation, Mr. Thomas made a statement regarding what the analysis signified in terms of Federal Reserve policy. He stated that recent developments appeared to have many of the aspects of a boom, that a substantial volume of business capital expenditures had been taking place and some contraction might now be expected, that increased consumer buying of consumer durable goods and housing was proceeding at a rate which probably would not be sustained, and that rises in prices of an unexpected and most alarming character had taken place during the last four months. Credit expansion, he said, had taken place in real estate, consumer credit, and the stock market at a rate more rapid than at any other time in the postwar period, and if business credit should increase even at a seasonal pace the overall expansion would be almost unprecedented. Mr. Thomas also the policy of selling Government bonds from the said that, reflecting bank credit in U. S. Government securities had con System account, year, that that had had a stabilizing influence, tracted thus far this
but that if the trend should be reversed accompanying a continuation of the expansion of credit in other fields there would be cause for alarm. He added that the rise in prices of real estate and commodities of the type now occurring and under conditions now existing was a clear indication of an unhealthy situation, and the expansion in credit had been sufficiently broad to justify the use of general quantitative powers of credit restraint without emphasis on selective credit controls. After discussing existing limitations on Federal Reserve actions, Mr. Thomas suggested policies which might be considered by the Committee. These included the purchase of short-term securities more reluctantly with consequent rises in short-term rates after July 1, an increase in the discount rate of the Federal Reserve Banks, a recommendation to the Treasury that new money to finance the Government deficit be obtained through the issuance of a non securities maturing in September be marketable bond, and that refunded with an intermediate-term bond. He added that sales of bonds for the System account probably should be discontinued long-term a nonmarketable long-term bond and in the event the Treasury issued in bond prices the policy of the that in the event of a decline markets but avoid rigid support System should be to maintain orderly of prices. of the economic situation during There followed a discussion
which Mr. John H. Williams stated that he felt the present offered an almost unparalleled opportunity for the System to do something to follow up the statement issued by the Federal Open Market Committee on June 28, 1949, as there might never be a time when we could act with less embarrassment to the Treasury. For reasons which he outlined, he felt that nothing would be as well understood by the public or carry as much conviction as an increase in the discount rate. Mr. Stead suggested the possibility that the estimates of employment were on the optimistic side and that in the next few months we might experience some increase in unemployment. While this might not be serious in relation to total employment, it might result in pressures for steps to counteract that trend. A related subject, he said, was the indication of lower agricultural production resulting from insect infestation which would reduce farm income, and a third weakness was the rate of increase in consumer and mortgage credit which indicated that we are sustaining a high level of consumer and incomes by a rapid increase in consumer credit. expenditures These points made him more inclined to question whether the present upsurge could be sustained. whether there was sufficient optimism Mr. Peterson questioned sustain an accelerating boom for any length in the whole economy to was a feeling of caution among small of time. He suggested that there dampen the current inflationary boom. businessmen which would
Mr. Evans joined the meeting during the foregoing statements, having just arrived in Washington from the West. During consideration of the suggestions that had been made earlier in the meeting concerning credit policies that might be adopted, Mr. Sproul stated that in the light of all of the factors in the situation it seemed to him that as soon as the Treasury's July refunding was out of the way the System should follow a policy of bringing about a rise in short-term rates looking to an issuing rate of 1 3/8 per cent on one-year Treasury certificates in September. He felt that the increase in short-term rates would be a signal to the financial community of a change from the policy of neutrality adopted in the fall of 1949, that to make clear to the public the change in policy there should also be a prompt increase in the discount rate of the Federal Reserve Banks probably about mid-July, and that these actions should be accompanied by continuing to supply long-term bonds from the open market account although, as suggested by Mr. Thomas, be modified in the event the Treasury the release of securities might With respect to prices of long-term Treasury issued a long-term bond. was now faced with the Sproul did not think the Committee bonds, Mr. be allowed to fall below such securities should problem of whether if that question should arise during par but that he now felt that should not be supported at par. the next few weeks they thing to do was to that he felt the first Mr. Eccles stated the deficit and the Treasury to finance effort to induce make every
if possible to refund some of the maturing securities with funds obtained from nonbank investors, and that to that end the Committee should recommend to the Treasury that it issue as soon as possible a nonmarketable 15-year 2-1/2 per cent bond on a tap basis. As a part of the program, he felt that the Committee should do what it could to increase the short term rate so that the September and October refunding of the Treasury would be done on the basis of a 1 3/8 per cent one-year certificate rate. He recognized that to be most effective an increase in short term rates should be accompanied by a rise in the discount rate. How ever, he questioned whether the Federal Reserve Banks should increase the rate as soon as suggested by Mr. Sproul. Such action, he said, would increase the spread between the discount rate and the short-term securities which would discourage the use by member rate on Government banks of the discount facilities of the Reserve Banks to adjust their from week to week. While he did not anticipate that reserve position in the near future, he suggested bonds would decline to par long-term the Committee review its if prices declined to around 100-1/2 that policy before testing the market closer to par. at the moment that the that he did not think Mr. Evans said long-term securities problem of allowing was faced with the Committee arise there should that should that question decline below par and to be another meeting of the Committee. and of the of the Committee the other members Comments of
Presidents of the other Federal Reserve Banks indicated general agreement with the suggestion for an increase in short-term rates and continuance for the time being of the present policy of making long term bonds available from the System account. The meeting then recessed and reconvened on Wednesday, June 14, 1950, at 10:10 a.m. with the same attendance as at the close of the session on June 13 except that Mr. Thomas was not present. Chairman McCabe referred to the instructions to be issued to the executive committee with respect to sales of long-term bonds from the System account and to the understanding at the meeting on March 1, 1950, that, operating under the general direction issued by the Federal Open Market Committee to the executive committee, and within the limits imposed by the terms of Treasury financing and by the necessity of avoiding a loss of confidence in the long-term Government securities market, the executive committee would continue to sell long term securities from the System account unless and until there was a change in the business situation which made it undesirable to pursue He suggested that, in the light of the discussion at the that policy. executive committee be authorized to session yesterday afternoon, the continue to carry out that understanding until the price of the longest which time sales would be bond reached 100-1/2, at restricted Treasury continued weak, the executive committee discontinued and, if the market at declining prices as to purchase such securities would be authorized preserve orderly market conditions. might be necessary to
There was a further discussion of the timing of an increase in the discount rate at the Federal Reserve Banks and, while it was the consensus that the increase should not be made effective until the short-term market rate increased somewhat, there was no decision on the question what level in the short-term rate would call for discount rate action. Mr. Sproul thought the action could be taken about the middle of July. Turning to the question of current Treasury financing needs, suggested that he and Mr. Sproul be authorized to Chairman McCabe supplement the suggestion contained in the letter to the Secretary of urging that the Treasury issue Treasury dated May 25, 1950 by the of the series A type, and that the promptly a nonmarketable bond written communication to whether there should be a further question for determination by himself and Mr. Sproul the Treasury be left the meeting with the Secretary. following The foregoing suggestion was vote. by unanimous approved be issued to the direction to the general In considering be added to the suggested that there committee, it was executive provide that the authority a sentence which would second paragraph from the Treasury of securities directly to arrange for purchases of the Federal unless the authority on June 30, 1950, would terminate by the Congress. was extended effect such transactions Reserve Banks to
With respect to the limitations contained in the direction, Mr. Rouse stated that the present limitations appeared to be satisfactory. Thereupon, upon motion duly made and seconded, the following direction to the executive committee was ap proved unanimously with the under standing that the limitations con tained in the direction would include commitments for the System open mar ket account: The executive committee is directed, until other wise 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, re placement of maturing securities, and 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 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 amount of securities held in the that the aggregate the close of this date other than special account at 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 $2,000,000,000. is further directed, until The executive committee otherwise directed by the Federal Open Market Committee, purchase for the System open market to arrange for the from the Treasury of such amounts of account direct of indebtedness as may special short-term certificates from time to time for the temporary be necessary of the Treasury; provided that the total accommodation such certificates held in the account at any amount of $1,000,000,000. The direction one time shall not exceed on June 30, 1950, unless paragraph will terminate in this Reserve Banks to purchase the authority of the Federal Treasury is extended by securities directly from the the Congress.
The policy to be followed in the replacement of System maturing bill holdings was then discussed and it was agreed unanimously that no change should be made in the existing understanding that the executive committee would be guided 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. In connection with the ranges within which bills and certificates would be purchased by the Federal Reserve Bank of New York for the System account, it was suggested that the Federal Open Market Committee continue the existing authority to the executive committee to determine from time to time the ranges within which such purchases would be made, with the understanding, however, that after July 1, 1950, the upper limit of such ranges would be increased from 1.24 to 1.36 per the authority would continue to be exercised within the cent, and that the general credit policy of the Federal Open Market framework of Committee. Upon motion duly made and sec onded and by unanimous vote, this suggestion was approved. of a statement of policy A draft the executive committee in to guide in long-term relation to transactions designed to conform to the bonds, in the discussions of views expressed earlier in this meeting, the Committee and after discussion was presented, in the follow was approved unanimously ing form:
Operating under the general direction issued by the Federal Open Market Committee to the executive committee, the executive committee is authorized to continue to sell long-term securities from the System account unless and until there is a change in the business and credit situation, or the Treasury issues new securities to finance the deficit, which would make it undesirable to pursue the policy further. Should the price on the longest restricted issue decline to between 100-1/2 to 100-3/4 the executive committee would direct only such operations as were necessary to maintain orderly market conditions pending a meeting of the Federal Open Market Committee which would be called promptly to consider, in the light of the statement approved at the meeting on June 28, 1949, how far any further decline that would be brought about by market conditions would be permitted to go. It was understood that the next meeting of the Presidents' Conference would be held in Boston on September 21 and 22 and that the next meeting of the Federal Open Market Committee and the joint meeting of the Presidents and the Board would be held in Washington on September 27 and 28, 1950, unless developments made it necessary Open Market Committee before that to call a meeting of the Federal time. Thereupon the meeting adjourned. Secretary. Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, April 12, 1950·Minutes of the Executive Committee, May 3, 1950·Minutes of the Executive Committee, June 14, 1950