July 12, 1955 FOMC Minutes

FOMC minutes

call for an increase of 1/2 or 3/4 per cent in the discount rate, which would be a startling change. A gradual increase in the discount rate as short-term rates moved up, along the lines Mr. Bryan had indicated, would serve to increase restraint. Chairman Martin said that he would not wish to take a position on these points at the present time. He thought the System should feel its way. However, it was his view that insofar as the Committee may have erred in attaining its objectives in recent months, the error had been on the easy side rather than on the too-tight side. He commented further that, when explosive factors occur in the credit situation, they move just as fast as they do in the stock market. It was the Chairman's thought that there might be more "explosive tinder" lying around at this juncture than any of us realize. We would all know when it had exploded, the Committee was struggling with was to project the past but the problem into the future. inquired as to the effect of the slowing down in auto Mr. Powell predicted for the next few weeks. Would such mobile production that was sufficently to slow down the infla slowing down affect business volumes tendencies that have been discussed at this meeting? tionary that he had heard well-informed persons Chairman Martin stated that changes in automobile the question, some feeling argue both sides of took the view that effect while others would have a slowing output

momentum in other parts of the economy would increase. For himself, he had no firm view. Mr. Fulton said that he had heard the view expressed in steel circles that the anticipated slowing down in automobile output during the next few weeks would help the steel situation because of the loss in steel output that had taken place during the recent short-lived strike. Chairman Martin inquired whether there were other views or fac tors bearing on the policy of the Committee for the next three weeks that should be considered at this time, and none of the members of the Committee indicated additional factors should be considered in determining policy for the immediate future. Chairman Martin then called upon Mr. Rouse for suggestions as to the directive to be issued to the New York Bank, and Mr. Rouse pro posed that the limitation in the first paragraph of the directive be reduced from $1 billion to $750 million. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: sales, or exchanges (in (1) To make such purchases, securities, and allowing cluding replacement of maturing for the System to run off without replacement) maturities or, in the case of in the open market Open Market Account direct exchange with the Treasury, maturing securities, by the light of current and prospective as may be necessary in situation of the and the general credit economic conditions supply of funds in (a) to relating the country, with a view and business, (b) to to the needs of commerce the market

fostering growth and stability in the economy by maintain ing 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 ac count (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 indebted ness purchased from time to time for the temporary accom modation of the Treasury, shall not be increased or de creased by more than $750 million; (2) To purchase direct from the Treasury for the ac count of the Federal Reserve Bank of New York (with dis cretion, in cases where it seems desirable, to issue partic ipations 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 accommoda tion of the Treasury; provided that total the amount of such certificates held at any one time by the Federal Re serve Banks shall not exceed in the aggregate $500 million; direct to the Treasury from the System ac (3) To sell count for gold certificates such amounts of Treasury securi ties maturing within one year as may be necessary from time to time for the accommodation of the Treasury; provided that the total amount of such securities so sold shall not exceed in the aggregate $500 million face amount, and such sales shall be made as nearly as may be practicable at the prices currently quoted in the open market. Mr. Sproul stated that the Federal Reserve Banks have been ex amining their programs for operations in the event of an emergency. He suggested that it might be desirable for the Federal Open Market Commit tee also to review its program for emergency operations, which is now that if the Federal Reserve Bank of New largely based on the supposition to operate another Federal Reserve Bank would be desig York were unable the System Open Market Account. Mr. nated to carry on operations for and desirable for that it would be appropriate Sproul went on to suggest

the Chairman to be authorized to appoint a subcommittee to study the problem and to suggest any revisions that should be made in the present plan. Thereupon, by motion by Mr. Sproul Chairman Martin was authorized to appoint a subcommittee to reappraise the emergency plans for open market operations. It was agreed that the next meeting of the Federal Open Market Committee would be held at 10:45 a.m. on August 2, 1955. Thereupon the meeting adjourned. Secretary