August 18, 1950 FOMC Minutes

FOMC minutes

would be satisfactory to Messrs. McCabe, Sproul, and Eccles, and with the understanding that it would also be approved by the Board of Governors, Secretary's Note: The statement, as perfected by Messrs. McCabe, Sproul, and Eccles, and thereupon approved by the Board of Governors, was released to the press at 6:10 p.m. on Friday, August 18, 1950, in the following form: "The Board of Governors of the Federal Reserve System today approved an increase in the discount rate of the Fed eral Reserve Bank of New York from 1-1/2 per cent to 1-3/4 per cent effective at the opening of business Monday, August "Within the past six weeks loans and holdings of cor porate and municipal securities have expanded by $1-1/2 billion at banks in leading cities alone. Such an expansion under present conditions is clearly excessive. In view of this development and to support the Government's decision to rely in major degree for the immediate future upon fiscal and credit measures to curb inflation, the Board of Governors of the Federal Reserve System and the Federal Open Market Committee are prepared to use all the means at their command to restrain further expansion of bank credit consistent with the policy of maintaining orderly conditions in the Government securities market. "The Board is also prepared to request the Congress for additional authority should that prove necessary. "Effective restraint of inflation must depend ultimately on the willingness of the American people to tax themselves adequately to meet the Government's needs on a pay-as-you-go basis. Taxation alone, however, will not do the job. Parallel and prompt restraint in the area of monetary and credit policy is essential." In order to carry out the change in policy adopted at this meeting by the Committee, the wording of the first sentence of the gen eral direction of the Committee to the executive committee to arrange for transactions in the System account was changed to provide that such transactions should be in the light of current and prospective

economic conditions and the general credit situation of the country, with a view to exercising restraint upon inflationary developments, to maintaining orderly conditions in the Government security market, to relating the supply of funds in the market to the needs of commerce and business, and to the practical administration of the account. Mr. Rouse stated that he would not now recommend a change in the limits contained in the existing direction. 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 direc tion would include commitments for the System open market account: The executive committee is directed, until otherwise di rected 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 without replacement), as may be necessary, in the light of current and prospective economic conditions and the general credit situation of the country, with a view to exercising restraint upon inflationary develop ments, to maintaining orderly conditions in the Government security market, to relating the supply of funds in the market to the needs of commerce and business, and to the practical administration of the account; 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 Treasury shall not be increased or decreased by more than $2,000,000,000. The executive committee is further directed, until other wise 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 from time to time for the of indebtedness as may be necessary

temporary accommodation of the Treasury; provided that the total amount of such certificates held in the account at any one time shall not exceed $1,000,000,000. Reference was then made to the ranges within which bills and certificates would be purchased and sold by the Federal Reserve Bank of New York for the System account and 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 and sales would be made with an upper limit of 1.36 per cent for both bills and certificates and a lower limit in the case of bills of 1.16 per cent and in the case of certificates of 1.20 per cent, the authority to be exercised within the framework of the general credit policy of the Federal Open Market Committee. Upon motion duly made and seconded, the foregoing suggestion was approved unanimously. In connection with transactions in long-term securities, it was agreed unanimously that the executive committee should continue to arrange for such transactions with a view to maintaining orderly market conditions and that, should the price of the longest restricted issue decline to between 100-1/2 and 100-3/4, the executive committee would direct only such operations as were necessary to maintain orderly market conditions pending a meeting of the full Committee which would to consider how far any further decline that would be called promptly be brought about by market conditions would be permitted to go.

It was also agreed that the existing understanding with respect to the replacement of System maturing bill holdings should that the executive committee would be guided by be continued and be required in the light of current conditions in the money what would out the general credit policy of the Federal Open market to carry Market Committee. the next meeting of the Federal Open Market It was agreed that should be subject to call by the Chairman. Committee Thereupon the meeting adjourned. Secretary. Approved: Chairman.