October 30, 1950 FOMC Minutes

FOMC minutes

reconvened at 2:15 p.m. further changes were made. At the conclusion of the discussion, upon motion duly made and seconded, and by unanimous vote, the letter was approved as follows, with the understanding that it would be sent by messenger to Secretary Snyder this afternoon. "Since our meeting on Thursday, October 26, a meeting of the Federal Open Market Committee has been held. The Committee has been and is in complete agreement that under present con ditions it is necessary to protect the 2-1/2 per cent rate (par) on the longest term Treasury bonds no. outstanding. The Com mittee's policies have been determined in accordance with that conclusion. "For the reasons outlined in my letter of October 16, 1950, the Committee is convinced that continued flexibility in the short-term money market is essential to carrying out an effec tive credit policy. It believes, however, that for the present the market yield on Government securities on a one-year basis (now about 1-1/2 per cent) may have worked as high as is neces sary in the light of present economic conditions and as high as it can without having such an impact on the market for the longest term Government securities as might interfere with our policy of credit restraint. Accordingly, for the present, the Committee will endeavor to maintain an orderly and flexible market within a maximum of 1-1/2 per cent per annum for any securities maturing within one year. "If further inflationary or market forces should develop at make it necessary for the time in the future which would any Committee to reconsider these decisions, we would, of course, desirable and compelling to seek your counsel. In the feel it we should like to consult with you freely concerning meantime, of market developments and the our mutual problems in the light general credit situation. any change should be raised the question whether Chairman McCabe at in the last meeting of the full made in the understanding arrived at which Government securities with respect to the prices Committee purchased for the System open market account. The matter would be last meeting of the the statement at the in the light of was discussed

executive committee that the main purpose of System policy was to avoid putting funds into the market, that purchases of bonds should be for the purpose of supporting that objection, and that the timing and volume of bond purchases would depend on market conditions and if fe:.er funds would be put into the market by permitting a gradual de cline in prices of the long-terms that course should be followed, but that if after the short-term rate were increased or for any other rea son offerings of bonds were heavy it would be desirable to let the prices decline rapidly to between 4/32 and 8/32 above par, Mr. Rouse outlined the reasons why he felt that no change should be made in the present understanding and why the actions taken by the New York Bank since the last meeting of the executive committee were in accordance with that understanding. Chairman McCabe inquired whether anything would be gained by bringing about some slight movement up and down in the market prices of long-term Government bonds, and Mr. Rouse said that, while such a procedure might have some advantages, it might also result in the Sys tem taking more bonds than otherwise would be the case. Mr. Sproul added that, .ith the amount of institutional selling that was over hanging the market because of prior commitment of funds and not because of price factors, it might be unwise to lower current market prices substantially, thus running the risk of causing a large volume of addi tional sales by other holders who might become alarmed. While he thought it might be feasible to bring about some slight movement up

and down in the prices of long-terms he was not sure what the result would be. At the conclusion of the discussion of this point, it was agreed that no change should be made in the existing understanding or the procedure being followed in connection with it. Mr. Rouse commented that the Treasury would soon be faced with the task of refunding $2.6 billion of bonds maturing on Decem ber 15, 1950, and $5.4 billion of certificates maturing on January 1, the Treasury might wish to refund 1951, that it was possible that these maturities in one operation, and that it was important that there be stability in market prices for a period of some three weeks before the books were closed in order to insure the success of the new offering. of whether the full Committee should meet to In a discussion discuss the recommendations to be made to the Treasury with respect financing, it was suggested that since the American Bankers to the Borrowing was to meet with the Association Committee on Government Treasury on November 14 and 15, it would be desir Secretary of the able for the executive committee to meet shortly thereafter for the considering the recommendations to be made to the Treasury purpose of with the understanding that, if neces with respect to the refunding could be checked with the the views of the executive committee sary, members of the full Committee by telephone.

It was agreed unanimously that the ex ecutive committee should meet upon call of the Chairman for the purpose referred to. It was also agreed unanimously that no action should be taken at this meeting to change the direction issued at the meeting of the Committee on October 11, 1950, nor the understandings reached at that meeting as to the carrying out of this direction. Thereupon the meeting adjourned. Secretary.