December 8, 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 Monday, December 8, 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. Thurston, Assistant Secretary Mr. Vest, General Counsel Mr. Thomas, Economist Messrs. Mitchell, 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. Willis, Assistant Secretary, Federal Reserve Bank of New York Messrs. Erickson, Gidney, Johns, and Powell, alternate members of the Federal Open Market Committee Messrs. A. H. Williams, Leedy, and Gilbert, Presidents of the Federal Reserve Banks Kansas City, and Dallas, of Philadelphia, respectively. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of Open Market Committee held on Sep the Federal tember 25, 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 September 15, September 25, October 8, October 22, November 5, and November 25, 1952, were approved, ratified, and confirmed. Before this meeting there had been brought to the attention of each member of the Committee a report of examination of the System open market account as of October 17, 1952, made in connection with the regular examination of the Federal Reserve Bank of New York and submitted by the examiner in charge for the Board of Governors. The report took no exception to the handling of the account and stated that the accounting procedures, records, system of internal control, and degree of care exercised by the Federal Reserve Bank of New York in connection with the System open market account were reviewed and continued to be regarded as satisfactory. Upon motion duly made and seconded, and by unanimous vote, the report was received and ordered filed. A report of open market operations prepared at the Federal Re serve Bank of New York covering the period September 25 to December 3, had been sent to all members of the Committee before this 1952, inclusive, a supplementary report covering meeting and at this time there was presented commitments executed on December 4 and 5, 1952. Mr. Rouse commented briefly in the files of the of which have been placed on both reports, copies
Federal Open Market Committee. Upon motion duly made and seconded, and by unanimous vote, the transactions in the System account for the period September 25 to December 7, 1952, inclusive, were approved, ratified, and confirmed. At this point, members of the staff of the Board of Governors entered the room to assist Messrs. Thomas and Ralph Young in presenting a review of the economic situation and credit outlook. The review pointed out that high level economic stability had continued during the autumn with activity and employment advancing to higher levels than last spring and with prices not advancing. There was some evidence that the peak of the defense program in terms of requirements for materials and manpower is that the rise in public expenditures in the next six close at hand, and months would be much less than expected earlier. On the other hand, if elsewhere should become more serious than heretofore, problems in Korea or a rapid rise. In either case, continua military expenditures might resume have the result of encourag uncertainties may tion of acute international larger inventories and more standby capacity ing many businesses to hold on stock piling and production otherwise. Government policies than uncertainties of the to reflect the goals will also continue capacity for other reasons, uncertainties and Because of these foreign situation. to do Federal Government on the be heavy pressure will probably there economic activity. decline in avoid any marked possible to everything stated that total the review the credit situation, respect to With
credit demand had been at record peacetime levels this year reflecting particularly Federal deficit financing during the last half of the year and that the recent accelerated bank credit expansion was a matter of concern in view of the economy's present intensive use of its physical resources and the large volume of credit already outstanding. While monetary expansion, partly because of a greatly enlarged savings supply, had been held to moderate limits this year, the economic outlook beyond the next few months was by no means clear. Accordingly, the review stated that credit and monetary policy would need to be kept alert to realignments in underlying forces that might affect long-term growth and stability so that it could be adjusted promptly and effectively to changing condition as they develop. It was felt that the progress made during the past two years in redeveloping a pattern of Federal Reserve operations based on traditional procedures, adapted to a market in which Government securities play a prominent role, provides a and monetary policies geared to the needs workable basis for future credit of a dynamic economy. regarding the presentation, Mr. Ralph During the discussion current information on a question, stated that, while Young, in response to rather sketchy, avail and distributors was inventories of manufacturers development of inventory had been some further data indicated there able the increase re He added that month of November. during the accumulation desired to many concerns probably from the fact that to some extent sulted against possible time as a safeguard at this carry larger inventories
shortages that might develop if the international situation worsened, but that the inventory accumulation also reflected expanding private demands for final products. Chairman Martin then referred to a memorandum prepared in the offices of the Board of Governors under date of December 8, 1952 on the outlook for Treasury cash requirements and bank reserves, copies of which were distributed before this meeting. In response to the Chairman's request, Mr. Youngdahl commented upon this memorandum, stating that although it referred to an estimated Treasury cash deficit for the fiscal year ending June 30, 1953 of about $3.5 billion, there was now some feeling among informed persons in Washington that the actual cash deficit might be below this figure. The situation had changed primarily, Mr. Youngdahl said, as a result of lower-than-anticipated expenditures for security purposes. In response to the Chairman's request, Mr. Thomas commented that in recent weeks the demand for credit and particularly for currency had been greater than amounts projected earlier this fall as representing moderate seasonal demands. The net result had been that Reserve Bank credit other $1-1/4 billion in the September-November period than float had risen about million. The difference had the earlier estimate of $800 compared with to over $1-1/2 bil of member bank borrowing reflected in an increase been said, was to take care few weeks, Mr. Thomas The task for the next lion. any money market strain. smoothing out year-end demands, of holiday and
He thought that strain probably had reached a peak during the past week, and that, if the expected increase in Federal Reserve float took place between now and Christmas, borrowings from the Reserve Banks could be reduced somewhat. There would be a temporary strain in the market at the year-end, after which the return flow of currency would make for easier conditions in the money market, but reduction in the large volume of member bank borrowing and of repurchase contracts outstanding would absorb a substantial amount of the reserve funds that would become available. The question then, Mr. Thomas felt, would be the extent to which the System would wish to maintain a tight rein on the situation by permitting bills to run off, and perhaps by selling certificates if there were an opportunity. Additional restraint could be imposed upon future demands by increasing the discount rate. Martin referred to the statement by Mr. Sproul contained Chairman in the minutes of the meeting of the executive committee for November 25, 1952 with respect to the possible desirability of a change in the discount discussion of that question at and suggested that there be a further rate as related to the immediate situ of the full Committee both this meeting the situation that would exist after the turn of the year. ation and at the year-end in 1951 Leach stated that the situation Mr. Hugh year borrowings from the difficulty, that this had presented considerable if the discount ago, and that than a year were much higher Reserve Banks it would increase of the year now and the first raised between rate were necessary for the System and would make it in the money market problems
to purchase additional securities which was something to be avoided. He felt the System should wait until January to see what changes in prices took place, what inventory developments were indicated, and whether the expected seasonal liquidation of credit occurred before deciding whether an increase in the discount rate were necessary. Mr. Powell raised the question whether the quality of credits of member banks may have deteriorated with declines in prices for products collateraling such credits. He cited instances of increases in farm mortgage debt recently for the purpose of securing farm loans that were undercollateraled because of declines in livestock prices, and of the concern on the part of some bankers because underfinanced companies were building up inventories and borrowing on receivables. Mr. Powell felt that this situation might be considered in a discussion whether the discount rate should be increased, adding that a small increase in the rate would not upset the market and might be a warning that the Federal Reserve System on loans ought to be watched. He also suggested that thought collections rather than waiting until after the first such a warning might be given now of the year. on conditions he had observed in the Middle Mr. Evans commented that on the basis of his observa the past two weeks, stating West during tions, Mr. Powell's description of conditions in that area was, if anything, he had talked some of the bankers situation; that of the an understatement 100 per cent paper now represented good deal of livestock stated that a with
loans based on present prices. Mr. Evans felt the Committee had been a little too lax in permitting credit to expand as much as had taken place during the past six to eight months. He thought it a question, however, whether the Committee should now tighten credit very much in view of the conditions prevailing in the Midwest as a result of the drought, declines in cattle and other farm products prices, and accumulating inventories of dealers and manufacturers of farm equipment. Mr. C. S. Young stated that while he agreed with Mr. Powell as to the need for studying the quality of credits, he felt the redeeming factor was that member banks were aware of this situation, that they were doing a remarkable job of weeding out poor loans and of securing additional collateral; on the whole, he felt the banks were in good condition although the quality of some loans had deteriorated. Mr. Leedy stated that the drought was a serious factor in the Kansas City District and, although conditions had been improved somewhat by moisture during the past two weeks, the winter wheat crop for next year would be small. With respect to cattle loans, most such paper being offered Reserve Bank for discount indicated there was still a the Kansas City satisfactory margin of collateral. on the Pacific Coast appeared to Mr. Earhart said that activity level at this time reflecting a a little ahead of the national be running inflow of population plus the inflow of funds resulting from transfers continued by the Federal Government for aircraft, of funds of individuals and payments
the aggregate of which exceeded the outflow of funds from the Twelfth District. Building was very active, particularly in the southern part of the district, and while one of the largest banks felt the outlook for the entire year 1953 was good another bank which had been making large volumes of real estate loans was beginning to feel that there were real dangers ahead, particularly in the real estate market. Mr. Earhart said that he would go along with the view that there should be no change in the discount rate now but that he felt it was too low, that it should have been increased before this, and that after the turn of the year there might be reasons which would make it seem about as untimely to in crease the rate as the present. Mr. Gidney commented on the discussion recorded in the minutes of the November 25 meeting of the executive committee, stating that in his judgment the reasons for an increase in the discount rate, as summarized by Mr. Sproul, were much more convincing than the reasons presented for not increasing the discount rate promptly. The high level of bank loans, the fact that Federal Reserve credit in use had gone up recently while was operating on a policy of "neutrality", and the Committee apparently (other than the modest change in wholesale recent economic developments of an immediate increase in prices) pointed clearly to the desirability the present offered a better opportunity discount rate. He added that the such an increase without for some time for making is likely to occur than the turn of the year reasons market unduly, while after disturbing the
against making a change quite probably would develop or be advanced, in cluding those related to interference with Treasury refunding operations. Chairman Martin stated that he seriously questioned the desirability of an increase in the discount rate at this time. The period over the year end would be difficult in any event because of disturbed conditions in the money market and uncertainties as to the credit outlook; to take action at present would only add to the upset condition in the market and probably would achieve little in the way of affecting the differential between the discount rate and the bill rate. If, following January 1, conditions did not bring about liquidation of the credit that had been extended this fall, it would be desirable to give consideration to an increase in the discount rate at that time. Mr. Bryan said that while he had no argument to present for a change in the discount rate at this time, it seemed somewhat absurd for the central a discount rate of 1-3/4 per cent at a time when plant and labor bank to have the country were being utilized virtually at capacity. He felt supplies of had been in a self-congratulatory mood over the past year that the Committee at a high level. country was having stability the view that the in taking felt this could not per and Mr. Bryan now was negligible, But unemployment therefore, whether the Committee's a rise in prices. He wondered, sist without been sufficiently restrictive. policy had price level had reflected a relatively Mr. Sproul felt that the of the System, whatand that the policy situation up to now stable economic
ever its influence, had been consistent with a stable price level and a high level of economic activity. Unless it was felt that credit restraint should have been used to bring about an actual decline in prices, he did not see how the "high level stability" during the period under discussion could be considered a criticism of the policy pursued. Looking ahead, Mr. Sproul felt that two points of view, perhaps paradoxical, had been raised: first, there was the view that the general outlook was for a high level of income and production over the next three to six months with no immediate evidence of price inflation although there was some evidence of inventory accumulation. This view suggested that the Committee should remain on the alert, but it did not call for action at this time. The other point of view, Mr. Sproul said, was that there were some elements in the situa tion which suggested disintegration in the area of bank credit such as loans which were becoming undercollateraled because of agricultural production difficulties and prospective or present declines in the agricultural outlook and prices. This might suggest a relaxation instead of a tightening of credit policy. To some extent, Mr. Sproul said, the System was a prisoner it was just working back into the use of the discount rate of the fact that in that rate. It had laid great emphasis on the meaning and flexibility move now might be regarded as symbolic in the discount rate, and a of a change rather than a technical read the general economic situation of a change in increase of one-fourth or one-half Mr. Sproul doubted whether an justment. suggest at this assumed anyone would was all that he of one per cent--which
time--would accomplish anything in the next two or three weeks except to complicate adjustments in the year-end money market. Mr. A. H. Williams stated that in the Philadelphia district the most general view was that a change in the discount rate should not be made until there had been an opportunity to observe developments after the turn of the year so as to be more certain whether a change was needed. Mr. Gilbert said he would not be in favor of an increase in the discount rate at this time, that he would much rather wait until after the end of the year to observe whether the normal repayment of borrowings that had developed this fall took place; if the seasonal liquidation in loans did not take place, he thought consideration then should be given to an increase in the rate. Mr. Erickson agreed with this view. Mr. Bryan reiterated the comment that while he did not advocate an increase in the discount rate at this time, he thought it an extra ordinary event in terms of central banking that the rate remained at 1-3/4 economy was operating with virtually full em per cent at a time when the only in terms of the record and that such a rate was defensible ployment, Market Committee over a period of several years. of the Open Chairman Martin commented that it was also important to remember of circumstances evident present rate had existed in a conjunction that the in Government securities. He went on to say in the return to a freer market
that, as he had indicated at the meeting of the executive committee on November 25, the Federal Reserve System was in a constant dilemma with respect to the effect of its actions on Treasury financing. At some point it would be necessary to meet this issue head-on; this, he said, should preferably be done in conjunction with the Secretary of the Treasury. He felt that the System should not make a move to increase the discount rate until it was convinced that such an increase was appropriate, but that it should then act even though at that time the System might be faced with the immediate question of the effect of the increase on the Treasury's financing program. The System may have "missed the boat" in not having raised the discount rate some time ago, the Chairman said, but if that were true it still did not warrant taking corrective action at this particular time simply because it might be more difficult to face up to appropriate monetary policy when Treasury financing vas the problem of early next year. Chairman Martin added that under active consideration these periods of anxiety, that it had the System had been going through that Mr. Bryan had made an some progress in its monetary policy, made not be too ready to suggesting that the Committee excellent point in out a view which it that Mr. Gidney had brought congratulate itself, and Martin said, the Nevertheless, Chairman desirable to discuss. was very with its present Committee should proceed indicated that the discussion to have another become necessary that it might having in mind policy, of the year. the first soon after of the Committee meeting
There was no indication of disagreement with Chairman Martin's suggestion for continuation of the existing policy of the Committee. Mr. Sproul noted that speculation regarding a possible change in the discount rate caused disturbance in the money market and suggested that, in so far as possible, discussion of such a possibility not be carried on outside. Chairman Martin agreed with this suggestion, adding that while it was necessary for the directors of the Reserve Banks to discuss the matter, it would also be desirable for the Reserve Bank Presidents to caution them against discussion of the subject outside the meetings of the directors. 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 transactions for the System open market account, either in the open market or directly with the Treasury (in cluding purchases, sales, exchanges, replacement of maturing securities, and letting maturities run off without replace ment), as may be necessary, in the light of current and economic conditions and the general credit prospective situation of the country, with a view to exercising restraint upon inflationary developments, to maintaining orderly con the Government security market, to relating the ditions in supply of funds in the market to the needs of commerce and administration of the account; business, and to the practical of securities held in the that the aggregate amount provided (including commitments for the purchase or sale System account close of this date, other for the account) at the of securities of indebtedness purchased than special short-term certificates for the temporary accommodation of the Treasury, from time to time decreased by more than $2,000,000,000. shall not be increased or
The executive committee is further directed, until other wise 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 certificates 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 Federal Reserve Banks shall not exceed in the aggregate $2,000,000,000. In a discussion of a date for the next meeting of the full Com mittee, reference was made to a memorandum prepared by Mr. Vest dated Decem ber 2, 1952, stating that inasmuch as March 1, 1953, will fall on a Sunday, it would seem to be desirable, if otherwise practicable, for the meeting of the new Committee to be held during the first week of March 1953. In commenting on this, Mr. Vest stated that the organization meeting of the new Committee usually had been held on March 1 of each year and that it meeting of the old Committee also to be held late in was customary for a February in order to ratify actions taken up to that time. He said there is necessary, the new Committee could not was no reason why, if ratification and that he did not think taken by the previous Committee, ratify actions the old Committee meet in late February. Following a dis it essential that of the full Committee should it was agreed that the next meeting cussion, be held during the week beginning March 2, 1953. Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions·Minutes of the Executive Committee, October 8, 1952·Minutes of the Executive Committee, October 22, 1952·Minutes of the Executive Committee, November 5, 1952·Minutes of the Executive Committee, November 25, 1952·Minutes of the Executive Committee, December 8, 1952