November 27, 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 Monday, November 27, 1950, at 10:10 a.m. PRESENT: Mr. McCabe, Chairman Mr. Sproul, Vice Chairman Mr. Eccles Mr. Erickson Mr. Evans Mr. Peyton Mr. Powell Mr. Szymczak Mr. Vardaman Mr. C. S. Young Mr. Gilbert (alternate for Mr. Davis) Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Vest, General Counsel Mr. Thomas, Economist Mr. J. M. Peterson, Associate Economist Mr. Thurston, Assistant to the Board of Governors Mr. Riefler, Assistant to the Chairman, Board of Governors Mr. Sherman, Assistant Secretary, Board of Governors Mr. Ralph A. Young, Director, Division of Research and Statistics, Board of Governors Mr. Wurts, Assistant Vice President, Federal Reserve Bank of New York Mr. Youngdahl, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. R. F. Leach, Economist, Board of Governors Mr. Arthur Willis, Special Assistant, Securities Department, Federal Reserve Bank of New York Messrs. Williams and Leedy, alternate members of the Federal Open Market Committee Messrs. Leach, McLarin, and Earhart, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Committee held on September 28 and October 11 and 30, 1950, were approved, Upon motion duly made and seconded, 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 September 27 and 28 and October 5 and 11, 1950, were approved, ratified, and confirmed. Mr. Wurts presented and commented upon a report of open market operations prepared at the Federal Reserve Bank of New York covering the period from October 11 to November 21, 1950, inclusive, and a supplementary report covering commitments executed during the period November 22 to 26, 1950, inclusive. Copies of both reports were distributed to the members of the Committee and have been placed in the files of the Federal Open Market Committee. Upon motion duly made and seconded, and by unanimous vote, the transactions in the System account for the period October 10 to November 26, 1950, in clusive, were approved, ratified, and confirmed. the most important action taken Chairman McCabe stated that the Presidents were in the meeting when all of by the Committee since attendance was the decision at the meeting on October 30, 1950, to Snyder in which the Secretary of the Treasury send a letter to agreement that under present that it was in complete Committee stated
conditions it was necessary to protect the 2-1/2 per cent rate (par) on the longest term Treasury bonds now outstanding and stated that for the present the Committee would endeavor to maintain an orderly and flexible market with a maximum of 1-1/2 per cent per annum for any securities maturing within one year. He went on to say that at a meeting of the executive committee on November 17, 1950, approval was given to a letter to the Secretary of the Treasury, in response to a request from him, giving the views of the executive committee on the December and January refunding operations of the Treasury, and that the letter had been included in the draft of minutes of that meeting a copy of which had been sent to the Presidents of all of the Federal Reserve Banks. Chairman McCabe also said that he delivered the letter to Secretary of the Treasury Snyder at noon on Monday, November 20, the suggestions of the committee for 1950, at which time he discussed refunding securities maturing in December and January along the lines stated in the letter. Continuing, Chairman McCabe said that he received a telephone November 22, at which time call from Secretary Snyder on Wednesday, the Secretary stated that he had in mind offering a five-year 1-3/4 proposal, to which he the reaction to that note and asked for per cent like to check the matter again McCabe) responded that he would (Chairman with Mr. Sproul and Mr. Thomas, Chairman and call back. After talking Secretary Snyder's office and left word (the McCabe said, he called that he felt the proposed refunding Secretary not being available)
was very satisfactory. The Treasury subsequently announced a refunding issue of five-year 1-3/4 per cent notes. Chairman McCabe then called upon Mr. Thomas who stated that recent economic developments and prospects had been in line with previous expectations, that there was still no evidence of a general abatement of inflationary pressures, that production was being maintained at levels close to capacity, that consumer demands were continuing at a high level, and that it was apparent that demand for goods must be reduced when production of consumer goods is curtailed in the near future. He also said that defense expenditures were be ginning to increase and that bank credit expansion has also continued, although there has been some slackening in expansion of consumer and real estate credit. Real estate and consumer credit loans directly and indirectly accounted for approximately half the increase of $6.5 billion in bank credit since June, and the remainder was mostly in the business loans. Continued substantial expansion in business form of part to cover fabricators' needs for material, credit has been in large activity. Mr. Thomas then some of which represented speculative made through the Federal Reserve the results of a spot check presented of the Board of Governors on November 14, Banks pursuant to a request increase in loans to striking result was the stating that the most of agricultural commodities, which aggregated dealers and processors increase covered by the per cent of the total $1,233 million or 60
survey, and from which it was concluded that speculative motives were an important factor in the loan expansion which, in turn, contributed to price rise. ost of the remaining increase was in loans to retailers and wholesalers and to finance companies. Mr. Thomas stated that the price rise had been resumed in nearly all groups of commodities after some slackening during October in prices of farm products and foods. Wages were also gradually rising, average weekly hours of work had increased slightly, and, in general, the labor market was tight with military and defense demands strong. It was still a question, he felt, whether consumer buying would slacken more rapidly than defense demands would increase, but whatever slackening in consumer buying took place would probably be relatively slight and short-lived. In sum, prospective consumer demand appeared likely to exceed probable supplies during the next year, Government expenditures would increase, and Mr. Thomas expected that deficits would begin to show in the second quarter of 1951, although the surplus of during the first quarter would more than offset the probable receipts deficit during the second quarter of the year, and new Treasury was unlikely until midsummer of 1951. borrowing the Federal Reserve, Mr. Thomas The most important problem for on credit expansion. the question of restraint continued to be said, a definite sign of an continued, it would be If credit expansion pattern would call The ordinary seasonal demand for credit. excessive during the first least $1.5 billion bank loans of at a decline in for
two months of 1951. Possible measures of restraint included voluntary action by lenders, which, however, Mr. Thomas felt was unlikely to have much effect in holding down credit expansion in view of competitive pressures. The higher interest rates recently established had had some effect and might be expected to have more effect in restraining some lenders and borrowers, although such effects would be limited if rates had to be rigidly pegged at their present level. If further credit expansion continued it might become necessary for the Committee to face the issue of a further rise in the short-term rate. Meanwhile, fluctuation in rates might be encouraged and a wider spread between System buying and selling rates on short-term issues might be desirable. Bank liquidity had been reduced somewhat by the recent increase in loans and sale of short-term securities by banks, Mr. Thomas said, and would be reduced further by the new Treasury refunding. An in could be used to make another cut in crease in reserve requirements that a decrease in the liquidity of bank liquidity. Mr. Thomas felt direction in terms of monetary policy banks was a step in the right at this time. Government securities by nonbank With respect to demand for whole purchases of securities Thomas felt that on the investors, Mr. have recently been substantial, by corporations, which from the banks on bank credit expansion. in exerting restraint a helpful influence were bonds to in sales of savings be desirable to promote It would also savings become and business as large personal dividuals, particularly
available during the next year. The question was, he said, to what extent such savings could be attracted into Government securities in view of the outlook for inflationary pressures. Mr. Gidney, President of the Federal Reserve Bank of Cleveland, joined the meeting at the conclusion of Mr. Thomas' report. There ensued a general discussion of the further actions that might be taken by the System in the period of continuing inflationary pressures that would exist in the months ahead, including the initiation of voluntary agreements by financing institutions to limit nonessential credit, a further increase in the short-term rate, an increase in member bank reserve requirements, and recommendations that might be made to the Congress as to additional powers in a period when the opportunities of the System to use the traditional methods of credit control were limited by its decision for the time being to support the long-term Government securities market. There was also a discussion of why action was not taken by the Board last October or earlier in November to increase reserve requirements, and the opinion was expressed that reason why consideration should not again be given to there was no the short-term rate and in reserve requirements a further increase in operation was out of the after the current refunding of member banks way. Sproul made a statement in which During the discussion, Mr. the factors in was only one of the view that credit he expressed the rise in prices were that while credit and the rise of prices and
certainly interrelated, the one could not be said to be definitely and mechanically the cause of the other. A sound fiscal policy is also required, he said, and if wages and other costs rise without relation to increased productivity, credit policy and fiscal policy together, will not be enough. While it was necessary to go ahead with credit measures, he said, the System should not lose sight of the other factors and thus acquire or create a false sense of what could be accomplished by credit restrictions. As to the effectiveness of credit measures, Mr. Sproul felt there was a real chance through making bank reserves less readily available, which means continued flexibility in the short-term interest rate, to restore some of the effectiveness of the central bank in the market. He said that after the present Treasury refunding was out of the way consideration should be given to some further rise in the short-term rate. that not only had the supply of credit Mr. Eccles responded but also its velocity had moved upward in recent months, increased the short-term interest rate to that he had favored permitting increase but felt that by itself it was very unimportant in curbing Federal Reserve funds had been made readily credit expansion since bond market, that reserve support of the long-term available through increased within the banks should have been requirements of member of the Board, and that the System limits of the present authority and the public attention of Congress to call the should be prepared
to the fact that the System had used all its powers short of letting the long-term bonds to go below par and that, since it was unable to use the traditional methods for restricting credit so long as it supported long-term bonds at par, it was necessary that additional authority be provided in the form of the special reserve plan or something along that line if the System was to carry out its responsibilities in the credit field. Mr. Sproul stated that he had less regard for changes in reserve requirements than was indicated by Mr. Eccles, and more regard for the effectiveness of small changes in interest rates, an effective ness which he said could not be measured statistically but lies within the realm of judgment and opinion. He agreed that we must look toward unfreezing the long end of the rate pattern as well as the short end; the hope and expectation here must be that the outstanding 2-1/2 per cent restricted bonds, which are now only 17 years to call date, will soon take care of themselves. Be added that the moves thus far made toward greater flexibility represented a major accomplishment the credit situation warranted. The and should be pursued whenever System should continue to make use of general credit controls, he as Regulation W such selective credit controls said, supplemented by moves would be the time System had exhausted such and X, and after the Mr. Sproul also said in reserve requirements. to consider an increase would not retain existing Treasury savings bonds he thought the present
holders and attract new holders and he said that the requirements of a long range rearmament program, under present conditions, demands a new product and an invigorated sales organization. Chairman McCabe stated that the Treasury had taken a very adamant position against any increase in reserve requirements at this time, that for reasons which he stated he felt the System had gone about as far as it could go at present in taking independent action in permitting the short-term rate to rise to 1-1/2 per cent, that after the present Treasury refunding was out of the way there was the possibility of a further increase in the short-term rate without letting the restricted bonds go below par, and that he did not feel that the delay in increasing reserve requirements obviated the question being taken up in January. Mr. Eccles agreed with Chairman McCabe as to the difficulties of the situation but said that he did not believe inflation was going to be controlled by actions that had been or were likely to be taken in to direct controls, and that he credit field, that this would lead the controls would be a mistake because they would not prevent felt such He reiterated the view that but would only delay its effect. inflation the matter to Congress and should be prepared to present the System was to use the tra whether the System Congress should decide that the the accompanying effects credit with ditional methods of restricting as an alternative securities, whether long-term Government on prices of
it should be given additional authority over reserves of member banks, or whether inflation should be permitted to continue unrestrained. During the discussion, Chairman McCabe referred to the possibility of action in the field of voluntary agreements by financing institutions to limit the growth of credit, and he re viewed the discussions with Attorney-General McGrath and with the Federal Advisory Council on the subject. There followed a brief discussion of recommendations that might be made to the Treasury with respect to its 1951 financing program and there was agreement with Chairman McCabe's suggestion that it would be premature to discuss this matter with the Treasury at the present time. In connection with a possible program for refunding maturing savings bonds, Mr. Thomas stated that a memorandum being prepared by the staff would be completed shortly. There was a discussion of the problem of refunding such securities, of the recommendation made by Borrowing of the American Bankers the Committee on Government of the procedure which might be followed in pre Association, and Open Market Committee to the recommendations of the Federal senting that the memorandum referred to by the Treasury. It was understood of the Committee as distributed to the members Mr. Thomas would be would be given further after which the matter soon as it was available Open Market Committee. by the Federal consideration
Reference was also made to a memorandum on suggested policy on Treasury savings notes prepared in the Board's offices prior to the meeting of the executive committee on November 17 and distributed to members of the Federal Open Market Committee under date of November 24, 1950. The memorandum, a copy of which has been placed in the files of the Federal Open Market Committee, concluded, for the reasons outlined, that the present series of Treasury savings notes should be continued for at least the next six to nine months unless net cash redemptions of present issues should become excessive or cash needs of the Treasury should change sharply from what the present military program suggested. There was general agreement among the members of the Committee with this conclusion. Mr. Sproul suggested that the general direction of the full to the executive committee to arrange for transactions Committee changed by reducing the limitation in the in the System account be $4 billion to $3 billion. first paragraph from Thereupon, upon motion duly made and seconded, the following direction the executive committee was approved to the understanding that unanimously with in the direction the limitation contained include commitments for the System would market account: open until otherwise committee is directed, The executive Mrket Committee, to arrange directed by the Federal Open System open market account, such transactions for the for or directly with the Treasury either in the open market replacement of purchases, sales, exchanges, (including run off without and letting maturities maturing securities,
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 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 ad ministration 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 $3,000,000,000. The executive committee is further directed, until otherwise 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 of indebtedness as may be necessary from time to time for the 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. Following a discussion of the rates at which short-term securities should be purchased and sold for the System account, there was unanimous agreement that the understanding reached at the meet ing of the Committee on October 11 on this point would continue in effect with the further understanding that, in accordance with the letter sent to the Treasury following the meeting on October 30, would not permit the time being committee for 1950, the executive maturing within one year to rise above the rate on any securities 1-1/2 per cent. copies of a memorandum from Mr. There were then distributed
Thomas dated November 24, 1950, transmitting two memoranda on the "Cost of Raising Reserve Funds Through Bill Operations", one prepared in the offices of the Board of Governors and one prepared at the Federal Reserve Bank of New York. Mr. Thomas stated that the two memoranda were in general agreement that substantial fluctuations should be permitted to develop in the bill rate in accordance with changing market circumstances as a means of reinforcing restrictive credit measures. In a discussion of the memoranda, Mr. Sproul suggested that the full Committee indicate to the executive committee its general approval of the idea of a wider spread between the buying and selling rates on Treasury bills, leaving it to the executive committee to fix the effective buying and selling rates. Mr. Sproul's suggestion was approved unanimously. It was unanimously understood that the understanding with respect to the replacement of maturing Treasury bill holdings should that the executive committee should be guided be continued unchanged and the light of current conditions in the by what would be required in credit policy of the Federal market to carry out the general money Open Market Committee. at the meeting of the was made to the discussion Reference and the understanding reached committee on November 17, 1950, executive under which the price of the longestat that time of the circumstances
term restricted bonds should be permitted to decline to slightly above par. In the light of that discussion, it was agreed unanimously that the present understanding with respect to transactions in long term securities for the System account should be continued, i.e., that the longest-term restricted bond would not be allowed to decline beyond a point slightly above par, and that an orderly market would be maintained. It was agreed that the next meeting of the Committee would be subject to call by the Chairman. Thereupon the meeting adjourned. Secretary.
Also: Record of Policy Actions·Minutes of the Executive Committee, November 17, 1950·Minutes of the Executive Committee, November 27, 1950