September 25, 1952 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, September 25, 1952, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Sproul, Vice Chairman Mr. Bryan Mr. Earhart Mr. Evans Mr. Hugh Leach Mr. Robertson Mr. Vardaman Mr. C. S. Young Mr. Riefler, Secretary Mr. Vest, General Counsel Mr. Thomas, Economist Messrs. Mitchell, Rauber, Roelse, Wheeler, C. W. Williams, and R. A. Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Sherman, Assistant Secretary, Board of Governors Mr. Youngdahl, Assistant Director, Division of Research and Statistics, Board of Governors Mr. R. F. Leach, Acting Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Willis, Assistant Secretary, Federal Reserve Bank of New York Gidney, Johns, and Powell, Messrs. Erickson, alternate members of the Federal Open Market Committee Leedy, and Gilbert, Presidents Messrs. A. H. Williams, Federal Reserve Banks of Philadelphia, of the Kansas City, and Dallas, respectively Federal Reserve Director of Research, Mr. Peterson, 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 June 19, 1952, 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 June 6, June 19, July 22, and August 29, 1952, were approved, ratified, and confirmed. Upon motion duly made and seconded, and by unanimous vote, the action of the members of the Committee on July 22, 1952, revising the conditions under which the Federal Reserve Banks are authorized to enter into repurchase agreements with non-bank dealers in United States Government securities, was approved, ratified, and confirmed. Before this meeting there had been sent to all members of the report of open market operations prepared at the Federal Reserve Committee a the period June 19 to September 19, 1952, inclu Bank of New York covering and commented briefly on a At this meeting, Mr. Rouse presented sive. supplementary report covering commitments executed on September 22, 23, have been placed in the files of the and 24, 1952. Copies of both reports Federal Open Market Committee. and seconded, and Upon motion duly made the transactions in the by unanimous vote, the period June 19 to Sep System account for inclusive, were approved, tember 24, 1952, ratified, and confirmed. credit outlook, including situation and A review of the economic 1953, was then and income through gross national product a projection of
presented by members of the staff of the Board of Governors of the Federal Reserve System. A memorandum prepared in the Board's Division of Research and Statistics unde. date of September 23, 1952 on the projection of gross national product and income was distributed before the meeting, and a copy of the script used in the visual presentation has been sent to each member of the Committee. Following the review of the economic situation, Chairman Martin reported on developments since the meeting of the Committee on June 19, stating that the general policy of neutrality which resulted in placing some restraint on credit expansion had been interpreted by the executive committee as meaning that only such reserves should be supplied to the mar ket as were consonant with normal growth in the economy and which would maintain the money flow so that the defense effort and the business commun ity were not unduly hampered. In carrying out this policy, the Chairman done everything that it could to assist said, the executive committee had in its financing, consistent with a minimum growth in bank the Treasury he had asked that members of this connection, he stated that credit. In of a paper read by Mr. Riefler at Committee be furnished with a copy the on September 4, Western Economic Association meeting of the the annual Controls", which Policy, and Monetary Management, Fiscal 1952 on "Debt Reserve Bank operations the effects of flexible in some detail discussed members of the that the with the thought August this year, during July and covered in Mr. the points to comment regarding might wish Committee
Riefler's paper at or before the next meeting. Chairman Martin also sug gested that during the next few months the members of the Committee give special thought to its responsibility in connection with underwriting Treasury financing, adding that sooner or later the Committee would have to reach a decision as to whether it should give up the underwriting of Treas ury offerings or whether it should proceed in more or less the manner that has been followed in the past. With specific reference to the October 1 financing, for which the Treasury had offered a 2-1/8 per cent 14-month note in exchange for $10,861 million maturing 1-7/8 per cent certificates of indebtedness, the Chairman noted that, except for purchases of the maturing issue during the four-day period the books were open, the System's open market operations had supplied only a negligible additional amount of reserves to the market since the end the Committee's operations during this three-month of June. He felt that been reasonably successful in keeping an even flow of money period had without having had funds "swishing over the banks" or through the economy continued to borrow in fact that member banks had contracting unduly. The during most of this from the Reserve Banks of $1 billion the neighborhood to the possibility of an might be given period suggested that consideration credit expansion be if further restraint on in the discount rate increase at this time the however, that The Chairman suggested, came necessary. neutrality, which in present policy of was whether the Committee's problem practice meant a situation having modest restraint upon credit expansion,
should be reaffirmed, modified in the direction of greater restraint, or changed to bring about easier credit conditions during coming months. Mr. Earhart stated that he felt the existing policy should be reaffirmed but that he had been somewhat disturbed by the amount of Gov ernment securities purchased at a premium by the System open market account in connection with the October 1 Treasury financing, whereas in the August 15 financing, the Federal Reserve was not willing to pay a premium on the maturing issue and acquired only a small volume. In response to Mr. Earhart's comment, Chairman Martin made a statement substantially as follows: I think a discussion of that point would be very useful. It touches directly on the underwriting problem we have in front of us to which I have just referred. The executive committee at the time of the August refinancing decided not to do anything with respect to purchases of "rights" at a premium. In discuss ing the October 1 financing at our meeting on September 15, the executive committee decided to make purchases of "rights" at a premium of 3/64. The question Mr. Earhart raises is first whether we put in more money in connection with the October financing than our projection of the demand for credit this fall would call for, and second, if we did whether we can secure the position in connection with the approaching sale of Treasury tax anticipation increase the demand for reserves. I think this bills, which will is extremely difficult, particularly while we are mov operation to a free one. During this period there ing from a pegged market is bound to be a certain amount of misunderstanding in the market of what our policy is. At the last meet and misinterpretation had quite a debate as to whether the executive committee we ing of "rights" at a premium of 1/32 or 1/64 or 2/32 we would buy the a compromise. The area else. The 3/64 represented or something of attrition we took on ourselves of difference in the amount of the total maturing issue and is somewhere between 97 per cent the circumstances, that does per cent. In view of all 91-1/2 I was sorry we had to buy at seem to me to be a great amount. not If we had bought the not seem too much. all but it still does
"rights" at a premium of 1/64 we might have bought less. I think that by and large we ought to err, if we are to err, on the side of being sympathetic with the Treasury's problem since we have, perhaps wrongly, assumed some underwriting responsibility in the past year or so for their issues. Whether we should proceed more cautiously and minimize Federal Reserve takings of the maturing issue is a very real problem. I would think you could make a pretty good argument on either side as to the handling of the Treasury's October 1 offering, but my feeling is that the way we did it was on the right side. The question whether our pur chases, if any, should be at par and 1/32 or 1/64 or 3/64 is something that can only be determined over a period of time. In the executive committee meetings we have been discussing very frankly the area of necessary discretion that lies between decisions in policy matters and decisions on operations. I think we are feeling our way between the problems of debt management and of monetary policy from day to day. I would also like to have Mr. Sproul give his views on this. Mr. Sproul then made a statement substantially as follows: how we should proceed, I think it was and is a question As to based on experience during this period of transition of judgment from a pegged market to a free market. The results of the August October 1 financing are perhaps significant: financing and of the par and the attrition on the we bought "rights" only at In August 17-1/2 per cent and on us 7-1/2 per cent. In the Treasury was "rights" at par and 3/64, the October 1 financing when we bought on the Treasury was 8 per cent and on us 17-1/2 per attrition of restraint on credit avail In other words, at a time cent. ability and rising interest rates or anticipation of rising expect that attrition on these Treasury interest rates, we must should no longer think in to be substantial. We issues is going or 10 per cent attrition over-all. terms of 5 we or the Treasury question of whether As to the general think we should want, in to take the attrition, I should ought take the to let the Treasury of credit restriction, a period reserve funds. wish to avoid supplying since we would attrition with increased offset the attrition be able to The Treasury would anticipation bills. It Treasury bills or tax issues of weekly should not be unduly embarrassed.
In this last operation, we put more credit into the market than any of us would have preferred at that particular time. How ever, over the next few weeks we have the natural factors of decreasing float, building up of Treasury balances, and seasonal increases in required reserves working in our favor to reduce the amount of reserves available in the market. If we hold back now so that the banks are again brought into the position of substan tial borrowing, I think we can retrieve what we lost in the October 1 financing. Several other members of the Committee commented on reactions in their areas to the results of the October 1 financing and there followed a brief discussion of factors which might affect the demand for Government securities during the first part of 1953. During this discussion, Mr. Evans commented that while he did not think anyone could say how great the credit needs would be during the next month or two, he felt that the policy should be one of constant re straint, so that the amount of money put into the market would be held to a minimum. None of the members of the Committee indicated that there should general policy of neutrality, which means re be any change in the current on undue credit expansion, and at the conclusion of the discussion straint agreement with Chairman Martin's suggestion that the there was unanimous present policy be reaffirmed. the view that the policies of the Chairman Martin then expressed their maximum effect if Market Committee would be having Federal Open they were borrowing from the Fed banks were in a position where member of $1 billion. He felt somewhere in the neighborhood eral Reserve Banks
that if borrowings increased to $1-1/2 or $2 billion or more, the restric tive effects might decrease. The point, he said, was that as the volume of borrowings increased bankers became more accustomed to being in debt to the Federal Reserve. He also felt that too heavy a load of borrowing might have undesirable repercussions in the mobility of the money markets. Some of the members of the Committee felt that banks have a gen eral reluctance to borrow and that while, to some degree, they might become reconciled to discounting, there would be accumulative restraining effects if the situation developed to the point where further larger borrowings at the Federal Reserve Banks were necessary. In reponse to a question from Chairman Martin as to the use of repurchase agreements, Mr. Rouse stated that the present authority contin ued to be useful but that it was not a major tool and had not been used to any great extent during the past few months. With respect to the Chair man's comment that member bank borrowing ranging upwards from $1 billion might become progressively less effective, Mr. Rouse agreed in general got much over $1 billion it meant that the money market that when borrowing was tight, that dealers were less likely to make a market under such condi the flexibility was thus taken out of the market. tions, and that some of reply to the question possible to give a categorical He felt it was not if borrowing rose above would become less restrictive whether the situation that figure although he expressed doubt that it would.
In a discussion of Treasury needs for additional funds during coming months, Mr. Thomas stated that it appeared that somewhere between $4 and $5 billion would be needed between now and the end of the year and that this probably would be met by the issue of tax anticipation bills announced by the Treasury in the amount of $2-1/2 billion this week and by a further additional issue of tax anticipation bills within the next month or two for about the same amount. While there would be a small refunding totaling approximately $1 billion around December 1, 1952, Mr. Thomas felt that no conclusion could be reached at this time as to the best means of handling that refunding. Reference was then made to a memorandum dated September 23, 1952, from Mr. Leonard, Director of the Division of Bank Operations of the Board of Governors, concerning open market participation in special Treasury The memorandum, copies of which had been certificates of indebtedness. sent to each member of the Committee before this meeting, pointed out that indebtedness (which are carried such Treasury certificates of at present only for a few days at a time) occasions during the year and only on a few with resulting participation by all are carried in the open market account the procedure whereby these It also stated that Federal Reserve Banks. Reserve Banks involves to the several Federal are allocated certificates telegrams between the exchange of bookkeeping and considerable considerable Reserve Banks and and the individual the open market account manager of carried over Saturdays certificates are when results in complications also
and holidays, when some Reserve Banks are open and others are closed and the Treasury wishes to make payments on the certificates. The memorandum suggested that consideration be given to having the special certificates carried by the Federal Reserve Bank of New York for its own account instead of being held in the open market account, noting that the System's earnings on such certificates are relatively small ($4,000 in 1951 and $49,000 dur ing 1952 up to September 22) and that the proposed procedure should not affect significantly the earnings position of any Reserve Bank. Chairman Martin stated that he felt the procedure suggested in the memorandum would be desirable and, in response to the Chairman's request, for the proposed change in procedure. Sev Mr. Sproul reviewed the reasons members of the Committee who also were Reserve Bank Presidents eral of the the New York Bank handle the special Treas stated they would favor having ury certificates. stated that adoption of the proposed change would prob Mr. Rouse meeting of the full approved at the unnecessary the authorization ably make over week of special certificates 19 concerning purchases Committee on June are open. He are closed but others Federal Reserve Banks ends when some it possible for approved to make had been that that authorization observed on any day amount of the special certificates to pay down the the Treasury open, but that branches were Banks or of the Reserve when only a portion interest was saving in that the possible to him had indicated the Treasury a recent occasion procedure on use of the to justify the not sufficient
when most of the Federal Reserve offices were not open. Thereupon, upon motion duly made and seconded, and by unanimous vote, the Com mittee authorized the adoption of a proce dure whereby the Federal Reserve Bank of New York would purchase direct from the Treasury, for its own account, such amounts of special short-term certificates of in debtedness as may be necessary from time to time for the temporary accommodation of the Treasury within the limit authorized by the executive committee. In taking this action it was understood that (1) in cases where it seemed desirable, the New York Bank was au thorized to issue participations to one or more Federal Reserve Banks, and (2) the exe cutive committee was authorized to issue such detailed instructions to the New York Bank as were needed to carry out the action of the full Committee. to the discussion at the meeting of the execu Mr. Rouse referred on April 4, 1952 at which time the executive committee agreed tive committee the remaining $713 million of 2-3/4 recommend to the full Committee that to in the System account be con non-marketable bonds of 1975-80 held per cent marketable Treasury notes to be dated verted into 5-year 1-1/2 per cent October 1, 1952. agreed unanimously that It was remainder of the non-marketable the 1975-80 should be exchanged bonds of 1-1/2 per cent marketable for 5-year Treasury notes to be dated October 1, with the recommen 1952, in accordance executive committee at dation of the its meeting on April 4, 1952. be issued by the direction to of the general During a discussion mentioned that Chairman Martin executive committee, Committee to the full
some minor changes in wording would be necessary as a result of the Commit tee's approval earlier during this meeting of the proposal that special Treasury certificates of indebtedness be carried by the Federal Reserve Bank of New York rather than in the System open market account, and he suggested that the existing direction, revised to include such changes in wording as Mr. Vest felt were necessary to carry out that decision, be approved. The Chairman also mentioned that the June 19, 1952 direction included a clause to the effect that the authority to purchase securities direct from the Treasury would terminate on June 30, 1952 if the authority contained in section 14(b) of that Reserve Act were not extended beyond that date, and that since Congress had extended this authority for an additional two years, the clause was no longer needed. Mr. Rouse suggested that the existing limitations in the direction be renewed at this time. Thereupon, upon motion duly made and seconded, the following direction to the executive committee was approved unanimously. 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, ex changes, 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 inflationary developments, to maintaining orderly conditions in the Government security market, to relating the supply of funds of commerce and business, and to the in the market to the needs practical administration of the account; provided that the aggre gate amount of securities held in the System account (including for the purchase or sale of securities for the account) commitments than special short-term certifi at the close of this date, other of indebtedness purchased from time to time for the temporary cates
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 direct from the Treasury for the account of the Federal Reserve Bank of New York (which Bank shall have discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) of such amounts of special short-term certi ficates 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 at any one time by the Fed eral Reserve Banks shall not exceed in the aggregate $2,000,000,000. unanimously that the next meeting of the Federal Open It was agreed Market Committee would be held during the week beginning December 8, 1952. Thereupon, the meeting adjourned. Secretary
Also: Record of Policy Actions·Minutes of the Executive Committee, July 22, 1952·Minutes of the Executive Committee, August 29, 1952·Minutes of the Executive Committee, September 15, 1952·Minutes of the Executive Committee, September 25, 1952