October 4, 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 Washington on Thursday, October 4, 1951, at 10:05 a.m. PRESENT: Mr. Martin, Chairman Mr. Sproul, Vice Chairman Mr. Gidney Mr. Gilbert Mr. Leedy Mr. Norton Mr. Powell Mr. Szymczak Mr. A. H. Williams Mr. Carpenter, Secretary Mr. Sherman, Assistant Secretary Mr. Thomas, Economist Messrs. Bopp, Irons, Thompson, Tow, and John H. Williams, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Thurston, Assistant to the Board of Governors Mr. Riefler, Assistant to the Chairman, Board of Governors Mr. Ralph A. Young, Director, Division of Research and Statistics, Board of Governors Mr. Solomon, Assistant General Counsel, Board of Governors Mr. Youngdahl, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Ralph F. Leach, Economist, Division of Research and Statistics, Board of Governors Mr. Arthur Willis, pecial Assistant, Securities Department, Federal Reserve Bank of New York Messrs. Hugh Leach, C. S. Young, Bryan, and Earhart, alternate members of the Federal Open Market Committee Messrs. Erickson, Johns, and Peyton, Presidents of the Federal Reserve Banks of Boston, St. Louis, and Minneapolis, respectively. Solicitor, Board of Governors Mr. Townsend, Mr. J. Marvin Peterson, Director of Research, Federal Reserve Bank of Minneapolis
Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on May 17, 1951, were approved. Upon motion duly made and seconded, and by unanimous vote, the actions of the execu tive committee of the Federal Open Market Com mittee as set forth in the minutes of the meetings of the executive committee held on May 7, May 17, June 27, August 8, and August 27, 1951, were approved, ratified, and confirmed. Before this meeting there had been sent to the members of the Committee a report of open market operations prepared at the Federal Re serve Bank of New York covering the period May 17 to September 27, 1951, inclusive. Mr. Rouse commented briefly on this report and on a supple mentary report covering commitments executed September 28 October to 3, 1951, inclusive, copies of which also were distributed to the members of the Committee. 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 May 17 to October approved, ratified, and 3, 1951, inclusive, were confirmed. Members of the staff of the Division of Research and Statistics of the Board of Governors then presented a report, illustrated by charts, Following this report, Mr. Thomas made covering the economic situation. policy in the current economic on the implications for credit a statement the first four months of the new outlook in which he said that during that either the policy was policy developments indicated Federal Reserve
effective in restraining further credit inflation or that the abatement of inflationary pressures for other reasons was so great as not to subject the monetary policy to a rigorous test. Mr. Thomas went on to say that there was evidence that credit restraints played some part in curbing inflation, especially in the mortgage market, and that it was likely that had the change in policy not occurred investment institutions would have continued to sell bonds to the Federal Reserve with the result that re serves thus created would have moved into the banks and inducement for credit restraint would have been weakened. Mr. Thomas also said that in this period the money market functioned on its own, that there was little or no increase in total Reserve Bank credit, total bank loans and invest ments, or total deposits, although the private money supply expanded some what because of a reduction in Treasury balances. Within the past three weeks, Mr. Thomas said, the picture had changed drastically and the System had found it necessary to add nearly a billion dollars to its portfolio, factors such as tax payments, the desire of the banks reflecting temporary date, and a lack of enthusiasm for the to avoid borrowing on a statement refunding issues. The increase also reflected seasonal new Treasury continue during the rest of this and currency demands, which would loan by the Treasury, as well as the imminence of new cash borrowing year, and felt that Federal Reserve issues, Mr. Thomas prospective large corporate reliance on rather than forcing at this time, Open Market purchases rates to and permitting interest meet reserve needs by banks to borrowing were of of the demands that some on the grounds could be justified rise,
a temporary nature and that strong inflationary tendencies were absent at this time. As for the immediate future, Mr. Thomas said that the large volume of excess reserves now outstanding (about $1 billion) and the low level of borrowing at the Reserve Banks (less than $70 million), together with a seasonal expansion in Reserve Bank float, should make it possible that all reserve needs could be met during the remainder of 1951 without any further purchases of securities by the System unless purchases were needed to assure success of new financing offers by the Treasury. Mr. Thomas felt that the large increase in the private money supply that had already occurred and that would continue, together with growing defense expenditures, might result in a resumption of inflationary pressures; if this occurred, the System might wish to adopt more positive measures of restraint. The most promising approach for dealing with the situation would be for the Treasury to offer securities of a type that would compete with other demands and attract the available nonbank funds. would be even more essential the latter part of 1952 when Such measures would be tremendous, and unless those Treasury borrowing needs probably the banking system, Mr. Thomas felt needed funds could be obtained outside and would present a the money supply would result further sharp growth in strong inflationary threat. continuing the reports given by members a brief discussion of There followed of which Mr. Townsend at the close staff and Mr. Thomas, of the Research from the meeting. withdrew
Chairman Martin then referred to a memorandum prepared in the Board's offices under date of October 3, 1951, on "Treasury Cash Requirements and Financing, October-December 1951" and to new financing alternatives presented in that memorandum, copies of which were distributed among the members of the Committee prior to this meeting and a copy of which has been placed in the Federal Open Market Committee files. In response to a request from Chairman Martin, Mr. Rouse made a statement concerning prospective Treasury financing needs during the next few months in which he said that the bill market was congested and was not in a condition to take additional weekly offerings of regular bills, that there was no outside demand for long-term Government securities at the present price level, and that the source of nonbank funds appeared to lie in the tax liabilities of corporations. He felt, therefore, that the Treasury might avail itself of the situation in the short-term money market and sell would be purchased ultimately by corporations for use in securities which of 1952, when the Treasury could tax liabilities in the spring paying repay such borrowings. called upon Mr. Thomas who summarized informal Chairman Martin then with representatives of the members of the staff had had discussions that said that, while the discussions were explora Treasury staff. Mr. Thomas $2.5 billion would have to be was generally agreed that around tory, it attrition in refunding of to cover the deficit and raised by the Treasury this could rather general agreement that there was issues this fall, market of the funds available and that most by long-term issues, not be raised
were funds held by corporations in anticipation of tax payments they would have to make during 1952. One of the proposals under consideration, Mr. Thomas said, was the offering of tax-date bills maturing about March 15 and June 15, 1952; such bills might mature within a few days after these tax payment dates but would be acceptable in payment of taxes on March 15 and June 15. Mr. Thomas also commented upon alternative methods of issuing such securities, stating that some individuals felt they should be issued at one time while others preferred a series of issues coming out over a period of several weeks. There followed a discussion of the suggestions made in the staff memorandum dated October 3, 1951, and of the comments of Messrs. Rouse and Thomas, including discussion of the terms on which the tax anticipation bills might be issued, at the conclusion of which Chairman Martin suggested that the executive committee be authorized to submit recommendations to the Treasury concerning both refunding and new financing needs, in the light of the discussion at this meeting. This suggestion was approved unanimously. Chairman Martin also referred to a report prepared by the System Research Committee on Government Finance under date of September 28, 1951, copies of which had Bond Program Can Be Strengthened", on "How the Defense this meeting. He suggested of the Committee before been sent to the members with a view to executive committee be reviewed by the that the report full Committee. He also a recommendation to the having that committee submit
suggested that Mr. Norton be asked to serve with the members of the executive committee in making this review of the savings bond program in view of his interest in and tentative suggestions concerning a more effective program for merchandising bonds. In connection with a discussion of the time for a meeting of the Federal Open Market Committee at which consideration might be given to matters which should be taken up with the Secretary of the Treasury before the end of this year, including the savings bond program, Chairman Martin suggested that there be a meeting of the full Committee at which Federal Reserve Bank Presidents who were not now members of the Committee would also be present sometime during November 1951. He added that he had dis cussed the question of possible changes in the savings bond program with Secretary of the Treasury Snyder and that he was under the impression that any recommendations which the Committee might wish to make should be sub mitted by the latter part of November. Following a discussion, it was agreed unanimously that a study of the savings bond program should proceed as suggested by Chair man Martin, and that the next meeting of the Open Market Committee, at which the Federal Presidents of the Federal Reserve Banks who were not now members of the Committee would also be present, would be held on Wednesday, November 14, expressed the policy, Mr. Powell of open market In a discussion was stating the case in a variety of ways, that the money market, view if the Treasury was going definitely risen and that interest rates had to reduce the years in order a term of refundings over to spread its it would have to pay the higher the annual roll-over of debt, size of
rates that others were willing to pay. Mr. Powell went on to say that this was the inevitable result of inflationary pressures and the System's attempt to control them with money market instruments, and, after comment ing on the factors evidencing upward pressure on the level of rates, he sug gested that consideration be given to the question whether it would not be necessary to permit interest rates on Treasury borrowings to rise, if Treasury financing was to be fitted into a situation in which the Open Market Committee continued to exert pressure against inflation through the use of open market instruments. Chairman Martin stated that Mr. Powell had raised a very pertinent question, that there was a real problem of how effective the System could be in a period of deficit financing in attempting to restrain inflation through open market instruments. After comments by several Reserve Bank Presidents concerning the of long-term Treasury securities to the average saver at attractiveness Chairman Martin called upon Mr. John H. Williams who existing rates, stated that he shared Mr. Powell's views, that he felt the only way in which inflation was through raising interest rates and the System could overcome the Treasury could copete for savings. He thus providing a means by which that it looked as exert monetary pressure, this was the way to felt that road as far as tax to the end of the the country was getting though sales tax, and that perhaps for a general concerned except increases were as whether the military pro confronted with such questions the country was a longer period out over should be stretched whether it was too large, gram
of time than was now contemplated, whether it should be financed through use of savings of the country, or whether it would have to be financed by resorting to bank credit. Mr. Bopp stated that he did not feel the question was one of a deliberate raising of interest rates so much as one of letting the demand for funds force rates up, rather than taking action to prevent a rise. Mr. Thompson agreed with the comment made by Mr. Bopp, adding that he felt it was unfortunate that the System was too often identified with the proposition of raising interest rates whereas the proposition was basically one of restricting the supply of funds so that those who wanted credit would have to compete for it, which might mean an increase in rates. in interest rates should be a re Mr. Tow said that any increase than a deliberate raising of rates, that sult of monetary policy rather was one that would have to be to permit rates to rise the question whether at a given time, and that of all factors in the situation faced in terms such a change was permitted to particularly significant whether it was not or at some other time. savings bond sales campaign occur just after a prevent rates from should not said that the System Mr. Irons an increase. He to bring about the market tended the forces in rising if those paid on savings present rates, certainly doubt that the expressed securities, and savings into Government sufficient to attract bonds, were that it should to the extent should be affirmative that the System he felt rates from rising. not prevent
Mr. Peterson felt that it would be a mistake to concentrate on the savings bond rate as such and leave longer-term securities out of consideration. Mr. Bryan stated that he would like to associate himself strongly with the general line of thought initiated by Mr. Powell and that he did not disagree with most of the comments made subsequently. He added that it seemed to him that in a considerable part of the postwar world, central banks had proceeded on an impression that there would be a savings surplus, whereas, in fact, we had come into a situation where there was a savings deficit. He commented that he did not see any way by which it was going to be possible to avoid further inflation unless, in consort with the Treas ury, the central banking system could reach a full recognition of the circum stances in the market and permit an adjustment in the level of rates that would meet the demand. Of the various choices available, Mr. Bryan felt that the best was to face the rate question over a longer term since this problem, rather than the technicalities as to how short-term was the basic financing should be accomplished. There was a further discussion at the conclusion of which Chair of finding out how to attract that the problem was one man Martin stated securities in the period ahead. new money into Government authority given to all then referred to the Chairman Martin 1, 1950, which was modified on February Federal Reserve Banks on March to repurchase agreements 8, 1951, with respect renewed on March 8, 1951, and dealers in United obligations with nonbank short-term Treasury covering
States Government securities qualified to transact business with the System open market account. He stated that question had been raised as to whether the present authority which gave additional leeway to the New York Bank for executing repurchase agreements should be extended to all Federal Reserve Banks. In the discussion that followed, it was stated that the present authority included the requirement that the rate on such agreements be at least 1/8 per cent above the average issuing rate on the most recent issue of United States Treasury bills, except that the Federal Reserve Bank of New York was authorized by the actions of February 8 and March 8, 1951, to enter into such agreements at a differential of less than 1/8 per cent above the average issuing rate on United States Treasury bills. The view was expressed that while this authority would continue to be used primarily if not exclusively by the Federal Reserve Bank of New York, it should be granted to each of the Federal Reserve Banks so that it could be used in the interest of orderly conditions in the Government securities Reserve Banks other than New York should have market, and that Federal of an emergency necessitating the transfer of the the authority in case operations to another Federal Reserve Bank. execution of open market a discussion, upon motion Following duly made and seconded, it was voted unani mously to authorize each Federal Reserve in lieu of all similar previous Bank, authorizations, to enter into repurchase nonbank dealers in United agreements with securities who are qualified States Government with the System open to transact business under the following conditions: market account,
1. Such agreements a. Are at a rate which will be fixed in fractions of 1/8 per cent and which ordinarily will be not less than the nearest fraction above the average issuing rate on the most recent issue of 3-month Treasury bills but which at times may be below the average issuing rate on bills but not more than 1/8 per cent below; (for example, when the issuing rate on Treasury bills temporarily may have risen slightly above the existing repurchase rate); b. Are for periods of not to exceed 15 calendar days; c. Cover only short-term Government securities selling at a yield of not more than the issuing rate for 1-year Treasury obligations; and d. Are used with care and discrimination as a means of providing the money market with sufficient Federal Reserve funds as to avoid undue strain on a day-to day basis. of such transactions are made to the Manager of the 2. Reports Market Account to be inluded in the weekly re System Open market operations which is sent to the members port of open of the Federal Open Market Committee. covered by any such agree In the event Government securities not repurchased by the dealer pursuant to the agree ment are the securities thus acquired by ment or a renewal thereof, Bank are sold in the market or transferred the Federal Reserve to the System Open Market Account. this action it was under In taking a letter would be sent to all stood that Banks advising them of Federal Reserve the above understanding. reached at the meeting of Reference was made to the decision conversion of 2-3/4 per 17, 1951, with respect to the Committee on May into 5 year 1-1/2 per held in the System account cent nonmarketable bonds out that action stated that following notes. Mr. Rouse cent marketable
it would now be appropriate for the System to convert $500 million of the 2-3/4 per cent bonds into the 1-1/2 per cent notes and that an additional $500 million should be converted on a similar basis in April 1952 at which time consideration would also be given to the program for conversion of the remaining $700 million held in the System account. Mr. Rouse went on to say that before carrying out the exchange of $500 million at this time, it seemed desirable to raise the question whether the Committee wished to make any change in the earlier understanding. He also said that so far as he was concerned in the management of the system account, it would not matter whether the present understanding was carried out or whether the conversion was made in some other manner. that unless there was good reason for Mr. Szymczak suggested at the meeting on May 17, it would seem changing the decision reached on the basis of that action. desirable to proceed This suggestion was approved unanimously. the executive committee should be author It was agreed that general direction to be within the limits of the ized to determine, to the executive committee, meeting by the full Committee issued at this conducted for the System would be upon which transactions the basis was also agreed that securities. It bills and other short-term account in that operations existing understanding be made in the no change should a view to maintaining be conducted with securities should in longer-term to be general direction light of the in the market conditions, orderly
issued to the executive committee at this meeting. 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 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 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 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 $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 open market account direct from the Treas ury of such amounts of special short-term certificates of indebted ness 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. stated that he had been advised that the examiners The Secretary of Governors of the Federal Reserve System, in connection of the Board with the regular examination of the Federal Reserve Bank of New York, had open market account and that they had completed an audit of the System added that the the account. He the handling of to raise to no objections
customary report of the audit would be distributed among the members of the Committee in the usual manner. Thereupon the meeting adjourned, Secretary.
Also: Record of Policy Actions·Minutes of the Executive Committee, June 27, 1951·Minutes of the Executive Committee, August 8, 1951·Minutes of the Executive Committee, August 27, 1951·Minutes of the Executive Committee, September 25, 1951·Minutes of the Executive Committee, October 4, 1951