September 28, 1950 FOMC Minutes

FOMC minutes

Mr. Davis stated that the picture had not been changed by the introduction of any new factors since the meeting of the Committee on August 18, 1950, that in his judgment the Committee should go ahead with the policy adopted at that time, and that this called for a fur ther increase no in the short-term interest rate and, when in the judgment of the Board of Governors it was timely, an increase in re serve requirements of member banks. He thought that the Committee ought to state its position and give the executive committee authority to act. He felt there could still be a short delay in carrying out the action, but that there was no reason why the Committee should re cede from the policy adopted August 18. Mr. Davis moved that, in accordance with the pol icy announced by the Federal Open Market Committee and the Board of Governors on August 18, 1950, it be under stood that (after the conference which Chairman McCabe and Mr. Sproul are to have with the Secretary of the Treasury early next week at which they will advise the Secretary of the views as expressed at this meet ing, and in the absence of the submission of any new information by the Secretary of the Treasury which in the judgment of the executive committee would call for further consideration by the members of the full Committee) (1) the executive committee, acting under the general direction issued at this meeting, will take such action as may be necessary over such period as may be desirable to allow the market yields for Treasury securities on a one year basis to move up to the highest point, not exceeding the Federal Re serve Bank discount rate of 1-3/4 per cent, which result in such pressure on the longest term ill not as would cause continuing purchases restricted bond in substantial amounts of such bonds for the System (2) the longest term restricted bond would account, not be allowed to decline beyond a point slightly par, and (3) an orderly market would be maintained; above

That it be further understood that the fore going motion is predicated on the understanding that as promptly as practicable in the discretion of the Board of Governors after short-term rates were increased in accordance with number (1) above (but not necessarily waiting until such increase reached the highest authorized point) the Board would announce an increase in reserve requirements of all member banks by two percentage points on denand de posits to be effective at such times as the Board determined to be advisable; and That it be further understood that (1) a state ment would be prepared setting forth fully the rea sons for the Committee's views in a form satisfactory to the executive committee and the Board of Gover nors and suitable for the policy record, which could be furnished to the Secretary of the Treasury follow ing the conference with him next week, and (2) a meet ing of the executive committee would be held early next week. Mr. Davis' motion was put by the Chair and carried unanimously, Reference was then made to the general direction to be issued to the executive committee to arrange for transactions in the System account and it was suggested that the direction be in the same terms and amounts as 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 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 (in cluding purchases, sales, exchanges, replacement of maturing run off without replace securities, and letting maturities ment), 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 re straint 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 adminis tration 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 $4,000,000,000. The executive committee is further directed, until oth erwise directed by the Federal Open Market Committee, to ar range 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 accommodation of the Treas that the total amount of such certificates ury; provided held in the account at any one time shall not exceed $1,000,000,000. In a discussion of the policy to be followed in the replacement holdings, it was understood that the executive of System maturing bill what would be required in the light of committee should be guided by in the money market to carry out the general credit current conditions policy of the Federal Open Market Committee. acting under the general direc It was also understood that, out the understanding referred tion of the full Committee in carrying paragraph of Mr. Davis' motion, i.e., to in clause (2) of the first term restricted bond would not be allowed to decline that the longest a point slightly above par, the executive in an orderly market beyond to permit the market price of the long committee would be authorized between 4/32 and 8/32 above par. term restricted bond to decline to est

The time of the next meeting of the Federal Open Market Com mittee was tentatively set for November 27, 1950. Thereupon the meeting adjourned. Secretary. Approved: Chairman.