June 22, 1955 FOMC Minutes

FOMC minutes

Mr. Sproul said that he did not think the Committee should look upon the provision of reserves during the next few weeks as "pouring gasoline on the fire". They were to maintain the existing measure of restraint as nearly as possible in view of prospective over-all needs. If the situation continued to need restraint, as now seemed likely, an increase in the discount rate could again be considered when the Treasury financing was out of the way. With respect to Mr. Bryan's comment about not putting reserves into the market until the short-term rate had moved up, Mr. Sproul felt that in the light of the Treasury financing and the attitude existing in the market, it would not be wise to try so precisely and with such a high degree of refinement to say when the System account to put in reserves. If the full Committee were to attempt should begin to do this, it would run a real risk of causing a misunderstanding of of having the Treasury financing turn out to be a fail System policy and result that the whole policy the Committee was pursuing ure, with the be consistent with policy to have the short might be lost. It might well said that as he saw it that did not mean term rate go up, but Mr. Sproul next two weeks; it could be expected that the rate should go up within the the increased seasonal demands, with the growth demands, to go up with anticipated during the period imme and with the other factors that may be diately ahead. Robertson as to whether this response to a question from Mr. In in the discount rate, Mr. Thomas the time to consider an increase was

said that this raised the question of rate relationships. It was a ques tion of a reasonable relationship between the rate at which the System would buy bills, the rate at which it would make repurchase agreements on bills, and the discount rate. The discount rate is a penalty rate and the general approach was that banks should try to make their adjust ments in reserve position through the bill market before borrowing at the Reserve Bank as a general rule. Also, if a policy of not making re purchase agreements below the discount rate were to be adopted one might raise the question in terms of rate relationships why the System would purchase any bills below the discount rate. Mr. Bryan said that he was not suggesting a precise relationship between rates but that he questioned whether the System, on its own initiative, should make massive additions to reserves in advance of a rise in the short-term rate. He felt that it would be desirable if the System account were a little reluctant about large infusions of reserves at this time. Mr. Thomas stated that the projections indicated it would be neces sary for the System account to purchase at least a half billion dollars ten days to cover usual seasonal needs and the restoration within the next at the Reserve Banks to a more normal level. of the Treasury balance Chairman Martin inquired whether After further brief discussion, to be issued by the full objection to approval of the directive there was presented by Mr. Vest earlier to the New York Bank in the form Committee

in the meeting with a limit of $1 billion for the first paragraph. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Reserve Bank of New York until other wise directed by the Committee: 1. To make such purchases, sales, or exchanges (in cluding replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospec tive 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 fostering growth and stability in the economy by maintaining conditions in the money market that would avoid the development of unsustainable expansion, and (c) 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 securi ties 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 $1,000,000,000; 2. To purchase direct from the Treasury for the ac count of the Federal Reserve Bank of New York (with discre tion, in cases where it seems desirable, to issue participa tions to one or more Federal Reserve Banks) 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 held at any one time by the Federal Reserve certificates Banks shall not exceed in the aggregate $500 million; from the System ac sell direct to the Treasury 3. To such amounts of Treasury securi count for gold certificates one year as may be necessary from time ties maturing within of the Treasury; provided that to time for the accommodation amount of such securities so sold shall not exceed the total face amount, and such sales in the aggregate $500 million may be practicable at the prices shall be made as nearly as currently quoted in the open market.

Chairman Martin stated that with the abolishment of the executive committee he had in mind that meetings of the full Committee hereafter would be scheduled at intervals of three weeks. He suggested that the next meeting be set for 10:45 a.m. on July 12, 1955, and that it tenta tively be understood that meetings also would be held on Tuesdays, August 2, August 23, and September 13, 1955. Mr. Leach suggested that the practice which had been followed in connection with meetings of the executive committee in the past of distributing to the members of the Committee a staff report on the eco nomic and credit situation be continued for meetings of the full Commit tee in the future. He felt the report was of more value if it could be of the meeting so that the Reserve Bank Presidents received in advance the report of the Board's staff and compare bad an opportunity to review districts before the meet available in the individual it with information ing. stated that this procedure would be continued Chairman Martin in the future. Thereupon the meeting adjourned. Secretary