September 22, 1954 FOMC Minutes

FOMC minutes

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 (including purchases, sales, exchanges, replacement of ma turing 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 (a) to relating the supply of funds in the market to the needs of commerce 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 Government 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 purchase or sale of securities for 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 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 par ticipations 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 accommo dation of the Treasury, provided that the total amount of held at any one time by the Federal Reserve such certificates Banks shall not exceed in the aggregate $2,000,000,000. Chairman Martin referred to memoranda on bankers' acceptances which had been distributed during the spring of this year and which had been included on the agenda for consideration at this meeting. He sug gested that, for reasons he stated, consideration of these memoranda be deferred until the next meeting of the full Committee. Mr. Szymczak suggested that it would be of assistance to the Federal Open Market Committee if the Special Committee on Foreign

Operations of American Banks (Mr. Alfred E. Neal, First Vice President of the Federal Reserve Bank of Boston, Chairman) be asked to look into the question of bankers' acceptances and the suggestions made in the several memoranda prepared by members of the staff, and there was agree ment that Mr. Neal be asked to have his committee study the matter, and that the subject be placed on the agenda for the next meeting of the full Committee. Mr. Sproul stated that in view of the fact that a situation might arise early in October in connection with the Treasury's financing when the System would wish to put funds into the market on a temporary basis, he contemplated proposing at the meeting of the executive committee to be held immediately following this meeting that that committee authorize the Federal Reserve Banks to enter into repurchase agreements at a range of rates of 1-1/4 to 1-1/2 per cent for a temporary period. This action, he felt, would support open market policy and would not do damage to the dis count facility. The discount facility, he noted, was one under which banks could obtain a relatively unlimited amount of reserves at a price (with reluctance on the part of borrowers to remain continuously in debt a limiting factor); whereas the open market window, including the repurchase facility, represented a means by which the banking system obtained the amount of reserves the Committee wanted to give it, for as long as the Committee saw fit, at going market rates. Mr. Sproul could see no incon sistency, when policy is one of credit ease, in providing these reserves, either through open market purchases, or infrequently and temporarily through

repurchase agreements, at a rate below the discount rate; and he felt that such a relationship might be desirable in the course of the next two weeks. Mr. Robertson stated that he did not agree with this position, and it was understood that the matter would be considered at the meeting of the executive committee to be held later today, inasmuch as the executive com mittee was authorized by the action of the full Committee at its meeting on June 23, 1954 to direct the Federal Reserve Banks to enter into repurchase agreements at such rates or rate ranges as the executive committee might prescribe, subject to certain conditions established by the Committee. Reference was made to a draft of letter which had been prepared at the Federal Reserve Bank of New York relating to the procedure to be fol lowed for securing Federal Reserve notes by the pledge of participations in obligations held in the System Open Market Account, in the event a Federal Reserve Bank other than New York were appointed to operate the System Open Market Account in an emergency. Copies of the letter from Mr. Tiebout, Vice President and General Counsel of the Federal Reserve Bank of New York, and of a draft of letter which might be sent by the Board of Governors to the individual Federal Reserve Banks had been distributed before this meeting. In response to a question from Mr. Leedy, Mr. Riefler stated that the draft of letter had been distributed for information only and that it was a matter to be considered by the Board of Governors and, if the Board so agreed, to be sent to the individual Federal Reserve Banks for their consideration. In a discussion of the time for the next meeting of the Federal Open Market Committee, it was tentatively agreed that such meeting would be

held during the period December 6-8, 1954, subject to change if it seemed desirable to change the meeting to another date. Mr. Sproul stated that at the next meeting of the Committee he would like to call up for discussion the actions taken in December 1953 and in March of this year when it was voted that transactions of the System Open Market Account shall be entered into solely for the purpose of providing (except for disorderly markets). Mr. Sproul said he or absorbing reserves much too narrow a view of central banking, was mis thought this represented to the public, and should have the Committee's early consideration. leading operations could be entered into without He did not believe that open market costs and availability of credit. This was well stated, he concern for the memorandum on the discount mechanism which said, in a recent stimulating and sales were made in the full knowledge said that open market "purchases (of the Open Market Committee) that they would have noticeable effects upon (a) the volume of member bank borrowing, (b) the level of rates in the money market, and (c) on the margin between those rates and the discount rate." Mr. Bryan suggested that Mr. Sproul circulate a memorandum on the subject between now and the next meeting of the full Committee, and Chairman Martin stated that the members of the Committee would be glad to receive such a memorandum if Mr. Sproul wished to distribute it. Thereupon the meeting adjourned. Secretary