May 17, 1951 FOMC Minutes

FOMC minutes

Turning to a discussion of the suggestion for more aggressive op erations in the System account, Chairman Martin said that the Government securities market had suffered a distinct shock since the Treasury-Federal Reserve accord was announced on March 4, that there was a feeling in some quarters that the market for Government securities was deteriorating be cause of pressures from more sources than institutional investors who were liquidating securities to meet previous commitments, and that he would like to see the Committee authorize the use of, say, $250 million to carry on a more aggressive operation with a view to probing the extent of the underly ing demand for Government securities. This, he said, would mean that instead of waiting for dealers to offer securities to the System when they were under pressure there would be times when the System might have aggres sive bids in the market. The general purpose of such a probing operation bring out buying which could result in a stronger and more would be to refunding issues that would be market for the large volume of Treasury certain coming on the market. feel the Committee had been entirely Mr. Sproul stated that he did not in exactly the manner suggested it had not been aggressive passive although a shock to the Government that there had been Martin. He agreed by Chairman think there was deteriora but he did not in recent weeks securities market that the market had was true, and that quite the reverse tion in the market, which reflected a psychology and was not one shown stability and steadiness that could lead of a feeling there was no indication He added that of fear.

to failure of Treasury refunding issues over the next six months. He went on to say that if the full Committee wished to direct the executive committee, and the executive committee to direct the New York Bank and Manager of the account, to operate in a more aggressive fashion, it could do so without any special authorization of a specific amount to be used for that purpose. Mr. Sproul added that it should be remembered that the Government securities market is sui generis, that it is the market in which most adjustments of cash positions are now made, that our operations in the market are conducted in a "gold fish bowl" with weekly publication of our purchases and sales, and that when we buy or sell we use a special kind of money, namely, reserve funds. For these reasons, he said, the Government securities market and operations in it are quite dissimilar to the stabilizing operations of pri vate interests in other security markets. During a comment on Chairman Martin's suggestions, Mr. Eccles stated that he felt it would be worth while undertaking such an operation with a relatively small volume of funds, even though it involved the risk indicated Sproul of adding to reserve funds in the market. by Mr. Other members of the Committee expressed themselves as favoring an along the lines suggested by Chairman Martin, and it experimental operation the Federal Reserve Bank of New that, in issuing instructions to was agreed executive committee should the System account, the for transactions in York of the foregoing discussion. do so in the light Before leaving the meet Secretary's note: Vardaman stated to the Secretary that ing Mr.

he would favor whatever recommendations were made by Chairman Martin as to actions to be taken by the Committee. Thereupon, upon motion duly made and seconded, the following direction to the executive 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 di rected by the Federal Open Market Committee, to arrange for such transactions for the ,ystem 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 exercis ing 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 administration of the account; provided that the aggregate amount of securities held in the close of this date other than special short-term account at the purchased from time to time for the certificates of indebtedness the Treasury shall not be increased temporary accommodation of or decreased by more than $2,000,000,000. is further directed, until otherwise The executive committee Committee, to arrange for the directed by the Federal Open Market direct from the Treas open market account purchase for the System short-term certificates of indebted ury of such amounts of special from time to time for the temporary ness as nay be necessary the total amount of Treasury; provided that accommodation of the any one time shall not in the account at certificates held such exceed $1,000,000,000. was tentatively set the next meeting of the Committee The date for of the Presidents' that a meeting with the understanding 3, 1951, for October in that week. be held earlier would Conference

Thereupon the meeting adjourned. Secretary.