March 8, 1951 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 Wash ington on Thursday, March 8, 1951, at 2:30 p.m. PRESENT: Mr. McCabe, Chairman Mr. Sproul, Vice Chairman Mr. Eccles Mr. Evans Mr. Gidney Mr. Gilbert Mr. Leedy Norton Mr. Powell Mr. Mr. Szymczak Mr. Vardaman Mr. A. H. Williams Mr. Carpenter, Secretary Sherman, Assistant Secretary Mr. Mr. Vest, General Counsel Mr. Thomas, Economist Bopp, Irons, Tow, and J. H. Williams, Messrs. Associate Economists to the Board of Mr. Thurston, Assistant Governors Assistant to the Chairman, Mr. Riefler, Board of Governors Division of Research Mr. R. A. Young, Director, and Statistics, Board of Governors Government Finance Youngdahl, Chief, Mr. Division of Research and Statistics, Section, Board of Governors S. Young, Leach, and Earhart, Messrs. C. of the Federal Open alternate members Market Committee Johns, and Peyton, Messrs. Erickson, of the Federal Reserve Presidents Boston, St. Louis, and Banks of Minneapolis, respectively President, Federal Clark, First Vice Mr. Bank of Atlanta Reserve
Chairman McCabe reviewed briefly the developments since the last meeting of the Federal Open Market Committee, commenting particularly upon developments in the open market since the announcement on March 4, that the Federal Reserve and the Treasury had reached full accord with re spect to debt-management and monetary policies to be pursued in furthering their common purpose to assure the successful financing of the Government's requirements and, at the same time, to minimize monetization of the public debt. In connection with his review, Chairman McCabe called upon Mr. Sproul who made a statement concerning developments in the market today, which was the first day in more than ten years on which the market for Government se curities had been entirely without support from System open market operations. The Chairman also stated that the decision to allow the market to stand en tirely on its own today was reached after a discussion with Messrs. Martin, Assistant Secretary of the Treasury, and Bartelt, Fiscal Assistant Secretary that he felt it was a very wise decision, and of the Treasury, yesterday, that he was hopeful that there had been established a new and better working the Treasury and the Federal Reserve as a result of the relationship between He added that Messrs. Martin recent negotiations and joint announcement. at 3:30 this afternoon for further were coming over to see him and Bartelt concerning market developments. discussions a report prepared at and commented upon Mr. Sproul then presented in the System open market of New York of operations Reserve Bank the Federal to March 1, 1951, inclusive, period January 31, 1951 account covering the
and on a supplementary report covering commitments executed from March to March 7, 1951, inclusive. Copies of both reports 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 January 31, 1951 to March 7, 1951, in clusive, were approved, ratified, and confirmed. Reference was made to the resolution adopted by the Federal Open Market Committee on November 20, 1936, authorizing each Federal Re serve Bank to purchase and sell, at home and abroad, cable transfers and bills of exchange and bankers' acceptances payable in foreign currencies, to the extent that such purchases and sales may be deemed to be necessary in connection with the establishment, maintenance, operation, or advisable of accounts of Federal Reserve increase, reduction, or discontinuance that accounts were now countries. Mr. Sproul stated Banks in foreign ($13,070), the Bank of England ($10,468), maintained with the Bank of Canada was maintained for the ($42.79), that the latter and the Bank of France that the others were used moderately, of keeping the account alive, purpose which had been discussed at pre reasons which he stated and and that for contained within that the authority he would recommend vious meetings, 1936 resolution be continued. the terms of the motion duly made and seconded, Upon was agreed that vote, it and by unanimous at this time to should be taken no action of November the resolution amend or terminate 20, 1936.
Mr. Gidney then referred to the action of the Committee on November 30, 1937, by which it agreed that, since securities acquired by the Federal Reserve Banks in settlement of claims against closed banks would be in such small amounts as to be unimportant from the standpoint of credit control, the Federal Open Market Committee would interpose no objection to a Federal Reserve Bank holding such securities or to their sale whenever such sale was deemed advisable by the holding bank. He stated that with the expanded loan activities of banks there may be greater need for this authority than in recent years and that he would recommend its continuance. Upon motion duly made and seconded, and by unanimous vote, it was agreed that no action should be taken at this time to amend or terminate the authority granted at the meeting of November 30, the authority granted to the Federal Mr. Sproul then referred to Open Market Committee on March 1, 1950, with Reserve Banks by the Federal covering short-term Treasury obligations respect to repurchase agreements States Government securities qualified to with nonbank dealers in United stating that the System open market account, business with the transact the spirit and letter of infrequently and within authority had been used as a supplementary market that it was useful the Committee authorization, a period such as that of greater use in that it might be instrument, and immediately ahead. action of the Comwas made to the this connection, reference In
mittee at the meeting on February 8, 1951 under which the Federal Reserve Bank of New York was authorized, notwithstanding the provision in (1)(a) of the authorization approved March 1, 1950, to enter into repurchase agreements at a differential of less than 1/8 per cent from the average issuing rate on United States Treasury bills, so that the agreements could be made at 1-1/2 per cent with a view to encouraging dealers to take posi tions in bills which they could resell readily in the present market and which it would not be necessary for the System account to purchase. Mr. Thomas commented that the authority might be very useful in helping to develop a freer market, particularly if a situation developed where the money market was tight and dealers had to take in bills. Following a discussion, upon motion duly made and seconded, it was agreed unanimously that no change should be made in the authorization approved at the meet ing on March 1, 1950, except that the Federal Reserve Bank of New York would continue to be authorized, until otherwise instructed by the Committee, to enter into repurchase agreements at a differential of than 1/8 per cent in accordance with less the authorization approved at the meeting of the Committee on February 8, 1951. procedure for the allocation Sproul referred to the existing Mr. approved at the meeting System open market account of securities in the further at the 9, 1947, and discussed Committee on December of the full 1948, which was continued on January 20, of the executive committee meeting stated that the 1950. Mr. Sproul on March 1, at the meeting unchanged
requirement in the second paragraph of the procedure authorized on December 9, 1947, that there be a periodic readjustment in the alloca tion of the System account in order to maintain a 35 per cent minimum reserve ratio at each Reserve Bank, was resulting in considerable book keeping because the ratios of several Reserve Banks were fluctuating around the 33 per cent figure, and he suggested that this figure be lowered to 30 per cent. Following a discussion, upon motion duly made and seconded, and by unanimous vote, approval was given to a telegram to all Federal Reserve Banks in the following form: At meeting of Federal Open Market Committee March 8, 1951, it was voted unanimously to continue the present method of in the System Open Market Account except allocating securities that the minimum reserve ratio to be maintained, as specified in paragraph two of the allocation procedure set forth on of the minutes of the meeting of the Federal pages 15 and 16 Committee held on December 9, 1947, and as ampli Open Market the memorandum approved at the executive committee fied in meeting of January 20, 1948, was reduced from 35 per cent to 30 per cent. terms on which the of the published There was a discussion business with qualified dealers Reserve Bank of New York transacts Federal System open market account. securities for the in United States Government dealers had questioned from time to time non-qualified Mr. Sproul stated that when the only during periods questions arose that these the arrangement, the principal purchaser the market and was was actively supporting System problem should that this of securities, issue or issues of a particular
tend to disappear with the freer market now anticipated, and that since the existing terms had worked well in the past he felt it would be desirable to continue them. Chairman McCabe suggested the desirability of having a formal re port submitted to the Federal Open Market Committee on this matter inasmuch as the most recent study submitted had been made in 1948, and Mr. Sproul responded that he felt it would be appropriate to ask the Federal Reserve Bank of New York to make such a report to the executive committee at an early meeting of that committee. Upon motion duly made and seconded, and by unanimous vote, it was agreed that no change in the statement of terms would be made at this time, with the understanding that the Federal Reserve Bank of New York would submit a report with re spect to the arrangement for consideration at an early meeting of the executive committee. Following a brief discussion, upon motion made and seconded, and by unanimous vote, duly of the weekly report of open the distribution operations prepared by the Federal Reserve market of New York was approved as follows: Bank of the Board of Governors. 1. The members of the 12 Federal Reserve 2. The Presidents Banks. and the the Economist, 3. The Secretary, Economists of the Federal Open Associate Market Committee. 4. The Secretary of the Treasury. Under Secretary of the Treasury. 5. The of the Treas Assistant Secretary 6. The Fiscal ury. of Bank Operations of the Division 7. The Chief of the Board of Governors.
8. The officer in charge of research at each of the Federal Reserve Banks which is not rep resented by its President on the Federal Open Market Committee. 9. Mr. Rounds, alternate member of the Federal Open Market Committee; the Assistant Vice President of the Federal Reserve Bank of New York working under the Manager of the System Account; the Manager of the Securities Department of the New York Bank; the Vice President in charge, and the Manager, of the Research Department of the New York Bank; and the confidential files of the New York Bank as agent for the Federal Open Market Committee. In a discussion of the general direction to be issued to the exec utive committee, it was suggested that the authorization in the first para graph be reduced from $3 billion to $2 billion. Thereupon, upon motion duly made and seconded, the following direction to the exec utive committee was approved unanimously, 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 transac tions 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 inflation ary developments, to maintaining orderly conditions in the Govern ment 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 secur ities held in the account at the close of this date other than spe cial 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 otherwise directed by the Federal Open Market Committee, to arrange for the purchase for the System oen market account direct from the Treas ury of such amounts of special short-term certificates of indebt edness 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. At Chairman McCabe's request, the Secretary read a revised draft of the memorandum prepared by Mr. Martin, Assistant Secretary of the Treasury, containg revisions made by Mr. Riefler which had been concurred in by Mr. Martin, covering the staff discussions which had taken place during the period February 20-23, 1951. The memorandum is set out on pages 6-10 of the minutes of the meeting of the Federal Open Market Committee held on March 1-2, 1951. The Secretary, also at Chairman McCabe's request, read the statement of the principal points of the understanding with the Treasury, approved by the Committee on March 2, 1951, and set forth on pages 30-31 of the minutes of that meeting. with a discussion of market developments this week, In connection statement being released today by the Life Insur Mr. Riefler read a draft of of America and the American Life Convention, which had ance Association by Mr. O'Leary, Director telephone earlier today read to him over the been Association of America. The state Investment Research, Life Insurance of ment read as follows: Committee on of the Joint Monday a subcommittee "Last Association of America of the Life Insurance Inflation Control opportunity for a Convention had the the American Life and Treasury and Federal officials of the talk with top long
"Reserve System meeting jointly. This subcommittee consisted of Carrol M. Shanks, President, The Prudential Insurance Company of America, Newark, New Jersey; George L. Harrison, Chairman of the Board, New York Life Insurance Company; and Frazar B. Wilde, President, Connecticut General Life Insurance Company, Hartford. "The Joint Committee believes that the recent accord reached by the Treasury and the Federal Reserve System is a most heartening and important development in the fight against in flation. The Treasury and Federal Reserve System deserve high commendation for the realistic step they have taken. The com plete terms with respect to the exchange offering of 2-3/4 per cent Treasury bonds have now been announced by the Treasury. "The Joint Committee strongly urges all life insurance companies to support the exchange offering to the maximum possible extent. The Joint Committee believes that the new Treasury program is a significant step in the right direction in the fight against inflation and thinks that it will prove but the first measure, growing out of the accord, in a con tinued vigorous program by Treasury and Federal Reserve authorities to prevent a further expansion of the money supply." Chairman McCabe said that representatives of several life insurance companies met with him and Messrs. Martin and Bartelt on Monday of this week, that representatives of the investment bankers met with him yesterday, and that both groups indicated their views as to the terms that should apply on the Treasury note that would be available for exchange for the new 2-3/4 per cent nonmarketable bonds to be offered for conversion from the 1967-72 restricted Treasury bonds. He went on to say that some of the representatives felt that a 1-1/2 per cent 5-year note would be the most desirable offering, that this would be the final decision of the Treasury. and that he felt Chairman McCabe then suggested that it be understood that, operat at this meeting, the executive the general direction issued earlier ing under
committee continue to carry out the program agreed upon at the meeting of the Federal Open Market Committee on March 1-2, This suggestion was approved unanimously. The meeting then recessed and, following a meeting of the executive committee, reconvened at 3:35 p.m. with the same attendance as at the close of the earlier session except that Messrs. McCabe, Sproul, Vardaman, Thomas, and Riefler were not present. Members of the staff of the Division of Research and Statistics of the Board of Governors then gave a visual presentation of recent economic developments. In this connection there were distributed a memo randum prepared in the Board's offices under date of March 6, 1951, on the Outlook for Treasury Cash Requirements, a memorandum on gross national product and income, dated March 7, 1951, and two memoranda prepared in the Board's offices under date of March 8, 1951, presenting information with respect to (1) action to check inflation and (2) the supply of funds offerings of Government securities. Copies available absorbing new money of these memoranda have been placed in the files of the Federal Open Market Committee. for the next meeting of the Committee was set tentatively The time for the week beginning May 14, 1951. Thereupon the meeting adjourned. Secretary.
Also: Record of Policy Actions·Minutes of the Executive Committee, March 3, 1951·Minutes of the Executive Committee, March 8, 1951