March 3, 1954 FOMC Minutes

FOMC minutes

3/3/5 rate, and the banks are facing increased competition from the commercial paper market. The days of the present prime loan rate are already numbered. 5. Treasury borrowing during the remainder of this fiscal year, particularly if it is done in two or three bites as seems likely, is not of sufficient magnitude to force our hands on reserve requirements. I see no need to supply a large additional amount of reserves to the banks in advance of current borrowing by the Treasury. It may be that later in the year large Treasury bor rowings and seasonal needs of private borrowers will again afford an opportunity to reduce reserve requirements. 6. I doubt if secondary reserves of the banks need to be bolstered by a reduction in reserve requirements, accompanied by open market sales of Government securities to prevent a sloppy situation. The evidence for some time has been that the banks are already tending to extend their maturities and to seek new loans, and are not yet deterred by a too delicate regard for their secondary reserve posi tion. There is also the possibility that such a two-way operation, by increasing the banks' earning assets painlessly and safely might even lessen their incentives to seek new loans or longer term investments to maintain earnings. situation has not yet declared My own view is that the economic itself in terms of further and cumulative decline, in a way to war rant use of the over-all weapon of a reduction in reserve require ments. The tight spots in credit of all kinds appear to have been business-mortgage-consumer. I would hold additional eliminated, conditions more clearly indicate the need for fire until economic or until private demand and further action in the monetary sector on the reserve position. Meanwhile Treasury borrowing put pressure carry too much of a load try to make monetary action I wouldn't fiscal policy, if more vigorous which should also be carried by action is needed. in Mr. Sproul's statement. Mr. Robertson concurred particularly with Mr. stated that he was impressed Mr. Williams did not feel that rates. Mr. Williams regarding interest Sproul's comments pressures on to add to downward for the System was the time the present money rates. for a reduction see no occasion that he could Erickson stated Mr. Sproul's analysis with Mr. He agreed at present. in reserve requirements

but would put more emphasis on the point that, if commercial banks ob tained additional earning assets through sales of securities from the System open market account, the incentive for them to seek other loans might well be reduced. Chairman Martin and Mr. Mills emphasized that there had been no disposition on the part of the Board of Governors to reduce reserve re quirements, that this discussion was purely exploratory, and that in raising the question there was no implication of any intention to reduce reserve requirements. Chairman Martin referred to the directive to be issued by the Com mittee to the executive committee. He stated that without intending in any way to indicate an intention on the part of the Board to change re serve requirements, there had been prepared a possible paragraph to be in cluded in the directive which would authorize the executive committee, in the event the Board should decide to reduce reserve requirements before the next meeting of the Committee, to give authority to the New York Bank to sell from the System account securities having a maturity at the time of not more than one year, in an amount not in excess of the estimated bank reserves released by such reduction in reserve re amount of member quirements. The draft paragraph would also include the understanding that shall not be included in the limitation re the amount of any such sales garding increases or decreases in the amount of securities held in the Sys and, if the executive committee so instructed, such sales might tem account date prior to the sale. prices determined as of a selected be made at

Chairman Martin went on to say that he had no feeling as to whether the paragraph should be included in the Committee's directive, that he merely wanted to point out that the Committee should have in mind that some de finite instructions would be needed if a decision were reached to follow the suggestion that offsetting sales of securities be made from the System account in the event the Board of Governors reduced reserve requirements. There was a brief discussion of the draft paragraph at the conclu sion of which it was agreed unanimously that no action should be taken to incorporate it in the directive at this time. Mr. Rouse stated in response to Chairman Martin's question that he had no suggestions for change in the directive. Thereupon, upon motion duly made and seconded, the following directive 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 trans actions 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 maturi ties 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 (a) to relating the supply of funds in the market to the needs of com merce and business, (b) to promoting growth and stability in the economy by actively maintaining a condition of ease in the money market, (c) to correcting a disorderly situation in the Govern ment securities market, and (d) to the practical administration of the account; provided that the aggregate amount of securities held in the System account (including commitments for the pur chase or sale of securities for the account) at the close of this than special short-term certificates of indebtedness date, other purchased from time to time for the temporary accommodation of be increased or decreased by more than the Treasury, shall not $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 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 Fed eral Reserve Banks shall not exceed in the aggregate $2,000,000,000. It was agreed that the next meeting of the Committee would be held during the week beginning June 21, 1954, it being noted that if necessary could be called to convene before that a special meeting of the Committee time. Thereupon the meeting adjourned. Secretary