February 6–8, 1951 FOMC Minutes

FOMC minutes

2/6-8/51 Mr. Thurston stated that the question might be asked by the press whether there had been a reply to the letter from the President to Chair man McCabe, There was a discussion of what might be said in that situation and it was agreed unanimously that if such an inquiry should be made, Mr. Thurston would be authorized to say in response to the in quiry if made that a reply had been sent to the White House. There was also a discussion of the procedure that should be fol lowed in the event the Treasury did not accept any part of the program out lined in the letter to the Secretary. Mr. Szymczak pointed out that there was the immediate problem of what should be done with respect to the price at which long-term restricted bonds would be bought for the System account and Mr. Sproul stated that when the Treasury discontinued its purchases of the longest-term restricted issue, the New York Bank, acting under in structions from the executive committee, should begin to drop the price rapidly in an orderly market to slightly above par. Mr. Rouse stated that there should be some clarification of the manner in which the price should be permitted to decline--whether it should be by steps of 1/32 or 2/32 at a time or whether the decline should be a rapid drop to slightly above par. Mr. Sproul suggested that in terms of an orderly market the decline should not be more rapid than 4 to 8/32 a day. It was stated that as long as the Treasury continued to purchase restricted bonds at par and 22/32, the market price on the December 67-72

2/6-8/51 the June 67-72 issue would not decline very far and Chairman McCabe ex pressed the opinion that until the Treasury discontinued its purchases there would be no point in lowering the System's support price on the June 67-72 issue. During the discussion, Mr. Vardaman withdrew from the meeting to keep another appointment and at the conclusion of the discussion it was decided that pending further discussion with the Treasury no action should be taken to permit the market price of long-term restricted bonds to decline. Mr. Sproul stated that a decision on System policy should not be long delayed and that if no word was received from the Secretary of the Treasury early next week the matter should be taken up with him again. It was agreed unanimously that the pro gram which the Committee would like to see put into effect was set forth in the letter to the Secretary of the Treasury dated Febru ary 7, 1951, and that it should be left to the executive committee to carry the program into effect so far as open market operations were concerned, if an agreement could be reached with the Treasury. In reaching this Chairman McCabe emphasized the agreement, necessity for exercising extreme care to assure that in carrying out the policies of no grounds be given for a the full Committee or anyone else of bad charge by the Treasury faith on the part of the Committee. In the light of the above discussion, it was agreed that a meeting be held in Washington at 2:30 p.m. on of the executive committee should Wednesday, February 14, 1951. reviewed briefly the substance the discussion, Mr. Sproul During

2/6-8/51 of the discussion which he and Chairman McCabe had this morning with Senator O'Mahoney, Chairman of the Joint Committee on the Economic Report. Mr. Sproul suggested that the general direction of the full Com mittee to the executive committee to arrange for transactions in the System account be renewed without change. Thereupon, upon motion duly made and seconded, the following direction to the executive committee was approved unani mously with the understanding that the limitation contained in the direction 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 trans actions 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 maturi ties run off without replacement), as may be necessary, in the light of current and prospective economic conditions and the gen eral 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 busi ness, and to the practical administration of the account; pro vided that the aggregate amount of securities held in the account at the close of this date other than special short-term certifi cates of indebtedness purchased from time to time for the tempo rary accommodation of the Treasury shall not be increased or de creased by more than $2,000,000,000. is further directed, until otherwise The executive committee Open Market Committee, to arrange for the directed by the Federal open market account direct from the purchase for the System such amounts of special short-term certificates of Treasury of be necessary from time to time for the indebtedness as may provided that the total temporary accommodation of the Treasury; held in the account at any one time amount of such certificates shall not exceed $1,000,000,000). given by the Federal then referred to the authorization Mr. Rouse to the Federal Reserve Banks on March 1, 1950, to Open Market Committee

2/6-8/51 enter into repurchase agreements with nonbank dealers in United States Gov ernment securities who are qualified to transact business with the System open market account under certain conditions and to the provision in the authorization that such agreements would be at least 1/8 per cent above the average issuing rate of United States Treasury bills. Mr. Rouse went on to say that the average issuing rate on Treasury bills had increased to a point where if the foregoing provision was observed literally the rate would be 1.52 per cent, that it had been customary to move the rate on the repurchase agreements in steps of 1/8 of one per cent which would mean a rate of 1-5/8 per cent, and that it would be his recommendation that the New York Bank be authorized to enter into such agreements at a differential of less than 1/8 per cent so that the agreements could be made at 1-1/2 per cent. At that rate, he said, dealers would take positions in bills which they could resell readily in the present market and it would not be neces sary for the System account to purchase them. It was agreed unanimously that, pend ing further action by the Committee, the authorization referred to by Mr. Rouse would be modified in accordance with his suggestion. It was tentatively agreed that the next meeting of the Federal Open Market Committee would be held on March 9, 1951. Secretary. Thereupon the meeting adjourned.