July 12, 1955 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 Washington on Tuesday, July 12, 1955, at 10:45 a.m. PRESENT: Mr. Martin, Chairman Mr. Sproul, Vice Chairman Mr. Balderston Mr. Fulton Mr. Irons Mr. Leach Mr. Robertson Mr. Shepardson Mr. Vardaman Mr. Powell, Alternate for Mr. Earhart Messrs. Treiber and Johns, Alternate Members of the Federal Open Market Committee Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Vest, General Counsel Mr. Solomon, Assistant General Counsel Messrs. Daane, Hostetler, Rice, Wheeler, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Carpenter, Secretary, Board of Governors Mr. Sherman, Assistant Secretary, Board of Governors Mr. Koch, Assistant Director, Division of Research and Statistics, Board of Gov ernors Mr. Gaines, Securities Department, Federal Re serve Bank of New York Messrs. Williams and Bryan, Presidents of the Federal Reserve Banks of Philadelphia and Atlanta, re spectively There was presented for the approval of the Committee a revised Open Market Committee held of the meeting of the Federal draft of minutes
on Wednesday, June 22, 1955, copies of which had been distributed to the members of the Committee before this meeting. Mr. Robertson suggested that the last sentence of the first full paragraph on page 10* of the revised draft of minutes be changed to delete the word "should" and to insert in its place the words "be invited to" so that the sentence would be modified as follows: Mr. Robertson also suggested that the point mentioned by Mr. Leedy might be covered by providing specifically that all Presidents of the Federal Reserve Banks [DEL:should] BE INVITED TO be present at meetings of the Open Market Committee. Thereupon, upon motion duly made and seconded, and by unanimous vote, the min utes of the meeting of the Federal Open Market Committee held on June 22, 1955, revised to include the foregoing change, were approved. Before this meeting there had been sent to the members of the Committee a report of open market operations prepared at the Federal Reserve Bank of New York covering the period June 22 to July 6, 1955, inclusive, and at this meeting there was distributed a supplementary report covering commitments executed July 7-11, 1955, inclusive. Copies of both reports been placed in the files of the Federal Open Market Committee. have Upon motion duly made and seconded, vote, the open market and by unanimous during the period June 22 transactions inclusive, were approved, July 11, 1955, ratified, and confirmed. Chairman Martin referred to the discussion at the meeting on statements of certain suggestion for rewording June 22 of Mr. Robertson's should be typed copy, reference copy. In the * Refers to mimeographed made to page 11.
continuing operating policies of the Committee relating to support of Government securities, intervention in the Government securities market, operations in the short end of the market, operations during a period of a Treasury financing, and operations for the purpose of providing or absorbing reserves. The statements had been approved at the meeting of the Committee on March 2, 1955, and a memorandum had been sent to the members of the Committee by the Secretary under date of July 7, 1955, presenting Mr. Robertson's proposed rewording, as well as alternative language suggested by Mr. Sproul at the June 22 meeting. The statements as approved March 2, 1955 and as presently in ef fect read as follows: It is agreed that it is not now the policy of the Com mittee to support any pattern of prices and yields in the Gov ernment securities market, and intervention in the Government securities market is solely to effectuate the objectives of monetary and credit policy (including correction of disorderly markets). It is agreed that operations for the System account in the open market, other than repurchase agreements, be confined to short-term securities (except in the correction of disor derly markets) and that during a period of Treasury financing there be no purchases of (1) maturing issues for which an ex change is being offered, (2) when-issued securities, or (3) of comparable maturity to those being of outstanding issues exchange; and that these policies be followed until fered for or modified by further ac such time as they may be superseded tion of the Federal Open Market Committee. that transactions for the System account in It is agreed the open market shall be entered into solely for the purpose reserves (except in the correction of providing or absorbing markets), and shall not include offsetting pur of disorderly for the purpose of altering the chases and sales of securities
maturity pattern of the System's portfolio; such policy to be followed until such time as it may be superseded or modi fied by further action of the Federal Open Market Committee. Mr. Robertson's suggested revision read as follows: It is not now the policy of the Committee to support any specific pattern of prices and yields in the Government securities market, and transactions in the System Open Mar ket Account shall be undertaken solely for the purpose of influencing the volume of bank reserves and thereby the costs and availability of credit, in order to promote eco nomic growth and stability (including correction of disor derly markets). Transactions for the System account in the open market shall be confined (except in correction of disorderly markets) to short-term securities, preferably bills, and shall not in clude offsetting purchases and sales of securities of different maturities. During periods of Treasury financing there shall be no purchases for the System Open Market Account of (1) maturing issues for which an exchange is being offered, (2) when issued securities, or (3) outstanding issues of comparable maturity to those being offered for exchange. Mr. Sproul's proposed alternative language would change the first two paragraphs of Mr. Robertson's suggested revision as follows: It is not now the policy of the Committee to support any specific pattern of prices and yields in the Government securities market, and transactions in the open market shall be undertaken [DEL:solely] TO EFFECTUATE THE OBJECTIVES OF MONETARY AND CREDIT POLICY (INCLUDING CORRECTION OF DISORDERLY MAR KETS) BY {DEL:for the purpose of]influencing the volume of bank reserves and thereby the costs and availability of credit, in order to [DEL:promote] FOSTER economic growth and stability ([DEL:includ ing correction of disorderly markets]). Transactions for the System account in the open market shall be confined (except in correction of disorderly markets)
to short-term securities, preferably bills, and shall not include offsetting purchases or sales of securities of different maturities EXCEPT BILLS. Mr. Robertson stated that his proposal for rewording of these statements of continuing operating policies, which had first been adopted by the Committee in 1953, was for the purpose of clarifying the existing statements and eliminating language which may have caused misunderstand ing or misinterpretation of the intent of the statements in the past. He then commented briefly on the proposed language of the statements and on reasons why he preferred language he had suggested to that suggested by Mr. Sproul at the meeting on June 22. Mr. Sproul said that, as he had indicated three weeks ago, his suggestions were made in the interest of clarity, since he would have to vote "no" on the statements in anything like their present form. In ex planation of his specific suggestions, he saids 1. It is desirable to retain the positive or affirmative statement of intent included in the policy statement of March to place it in immediate opposition to the nega 2, 1955, and tive statement. It is also desirable to tie in the correc tion of disorderly markets with the objectives of monetary and credit policy. 2. We should not seem to deny, by use of the word "solely", a secondary responsibility to coordinate credit policy with debt management, a responsibility which we actually respect whenever it is possible to do so without running wholly counter to credit policy. of bills would facilitate the prac 3. The permissive swaps administration of the account, contribute to the func tical of the bill market, and not transgress the general tioning the majority of the Committee to prohibit principle which led swaps.
Several other suggestions for change in language were made by other members of the Committee and there followed a general discussion of the various suggestions made. Chairman Martin commented that there had been a great deal of discussion of the wording of the Committee's directive and of language of the continuing operating policies. As he had indicated before, he did not feel it was practicable to convert meetings of this size into "drafting sessions". In his view, the language changes being suggested did not make a great deal of difference and to a considerable extent represented only a shifting of words. Mr. Bryan stated that, as indicated by Mr. Sproul's comments, it would seem to be important to debate the substantive matter in the state ments of continuing operating policies rather than the language. If the Committee reached a decision that it wished to follow certain policies, Mr. Bryan felt that the matter of language could be taken care of fairly readily. Chairman Martin agreed with this point of view. He referred specif in the existing statements of policy against ically to the prohibition and asked Mr. Sproul under what circumstances he felt "swap" transactions this prohibition should not apply to bills. Mr. Sproul cited the example of the need of the System account, at bills which could be allowed to run off times, for January and February a situation in which a of the year, and he also cited after the turn
corporation might have a need for bills maturing on October 21 in order to meet cash needs that day, but which found that the market was bare of bills maturing October 21 although bills maturing October 28 were in good supply. He could not see how the System account in swapping such near money instruments would be interfering with arbitrage of the market and the relationships between Government securities of different maturities. To him, this would appear to be making the System portfolio contribute to the functioning of the bill market. In response to Chairman Martin's question as to how the System account would find out that the corporation needed the October 21 bills, Mr. Sproul stated that this information would come through dealers who were experiencing a demand for the October 21 bills. The System account would not be taking care of individual corpora tions; rather, the swaps would be for the purpose of improving the opera tion of the market. The transaction would, of course, be tied in with the operations of the System account under the credit policy in force. Chairman Martin said that if the Committee was trying to acquire bills with specific maturities that aided in carrying out policy and an offer to sell such bills came to it through dealers, swapping from one could be justified under some conditions. For example, maturity to another so that they could be permitted to run off if it wanted January maturities would need less reserves because of a return flow of currency when banks swaps might be all right. If, however, the and other seasonal factors, of the System account to result of an attempt on the part swapping was a
accommodate dealers or, through dealers, to accommodate individual cor porations in adjusting their portfolios, he felt such transactions would put the Committee on dangerous ground. The central bank should keep its transactions on an impersonal basis. It was necessary for the Committee to keep this point in mind all the time, Chairman Martin said, and the Committee should be very careful about any approach which a dealer or a corporation might make for the purpose of showing how a transaction would benefit the System account or the Committee's operations. As Mr. Sproul had said, swaps of bills seemed to be a very small matter from the stand point of affecting the rate relationships, but when it came to using the account to accommodate dealers the Committee would not be justified in risking the criticism that might result. In other words, the advantages of such transactions from the standpoint of monetary policy would be so slight that they might be much more than offset by the violation of the principle involved. It was Chairman Martin's thought that the discussion to Mr. Bryan's point that perhaps the Committee should have another got back substance of the principle involved in the full-dress debate on the entire prohibition against swaps. indicated earlier, his whole stated that, as he had Mr. Robertson these statements was to revision in the wording of purpose in suggesting a misunderstood or misconstrued which had been some of the language eliminate the substance of the statements. had not intended to change before, and he
If the revision as suggested or as modified in discussion did not achieve this purpose, he would be disposed to continue with the statements in the form in which they were approved at the meeting on March 2, 1955. Chairman Martin said that there was enough disagreement in emphasis and in words to indicate that the Committee should pass over the matter for today and, if it desired, take another look at the statements at a later meeting with a view to deciding whether it desired any change at all in the wording approved at the meeting last March. He suggested, further, that if any of the members of the Committee or other Reserve Bank Presidents wished to have a further discussion of the matter and wished to suggest language for the statements, such suggestions be submitted to the Secre in order that the language could be made available for tary in writing study prior to the meeting at which the matter was to be discussed. Chairman Martin's suggestion was indicated. No disagreement with to the suggestion that had been made Chairman Martin then referrred on June 22, 1955, that the Committee fix by Mr. Robertson at the meeting covering Government securities could a rate at which repurchase agreements which suggestion the Sec the Federal Reserve Banks, concerning be made by 1955, as a part of the agenda memorandum dated July 7, retary distributed a the executive committee He noted that prior to abolishing for this meeting. the executive committee had given to 1955, the full Committee on June 22, Banks to enter into the Federal Reserve authority for directing general
repurchase agreements and for fixing the rate or rate range on such agreements. The matter was on the agenda for today's meeting in order to determine the rate or rate range for such agreements and to consider a proposed revision in the language of "Conditions for Repurchase Agree ments." The proposed revision, which had been presented in the Secre tary's memorandum attached to the agenda, would eliminate reference to the executive committee and would make it clear that authority for direct ing the Federal Reserve Banks to enter into repurchase agreements and rates on such agreements was centered in the full Committee. for fixing Mr. Robertson stated that he had raised two questions regarding on June 22. One of these related to repurchase agreements at the meeting agreements should be made, which of the rate at which such the fixing Secretary's memorandum of July 7. The subject was referred to in the which he felt should be decided that he had raised and other question procedure to be had to do with the general to the fixing of a rate prior His suggestion as originally regarding repurchase agreements. followed at the meeting on 2, 1955, and as repeated at the meeting on March made agreements be continued, the use of repurchase 22, 1955, was that June technique in the regu not as a supplementary where considered advisable, dealers in Government the purpose of enabling of credit, but for lation felt that markets. Mr. Robertson broad and ready securities to maintain to rediscount in a manner similar could be utilized such agreements
operations--an open window for carrying dealers at rates preferably above but in no event below the discount rate--in order to assist them in sustaining a closer and more continuous market. Under this arrange ment, dealers should feel assurance that the facility was always avail able to them within reasonable limits, as the discount window is open to member banks. Mr. Robertson then moved that the Com mittee adopt a procedure for repurchase agreements along the lines he had indicated, under which an open window would be estab lished at the Federal Reserve Banks for use in financing dealers at rates preferably above but not lower than the discount rate, such procedure to supersede that now being followed. Chairman Martin said that he would vote against a proposal such as that made by Mr. Robertson. He felt the proposal would require more study than had been given to the question to date. The Chairman then asked for discussion of Mr. Robertson's proposal, but none of the members of the Committee indicated that they wished to comment. Mr. Robertson's motion was put by the Chair and lost, Messrs. Martin, Sproul, Bal derston, Fulton, Irons, Leach, Shepardson, Vardaman, and Powell voting "no" and Mr. Robertson voting "aye". In connection with the foregoing action, Mr. Robertson made a statement substantially as follows: I dissent from the action taken today because it is likely to encourage unnecessarily frequent and extensive use in order to affect the level of of repurchase agreements
short-term rates in the money market, and to do so by giv ing dealers differentially advantageous access to Federal Reserve credit at times when short rates in the money mar ket are below the discount rate. In such circumstances, if Federal Reserve credit is to be supplied at rates lower than the discount rate, it seems to me preferable that the supply be accomplished directly through purchases of bills rather than by "loans" to dealers. In recent months I have tried to clarify for myself the justification for, and benefits from, use of repurchase agreements generally. Up to the present, I have not re ceived what have seemed to me to be satisfactory answers to the inquiries I have made; consequently, I am inclined to assume that the basic positions developed in my memoranda of October 20 and December 9, 1954 are sound and no valid answers can be made. We are making frequent use of repurchase agreements with dealers in Government securities. Pending eventual clarification of the basic questions referred to, I do not object to a continuation of the use of repurchase arrange ments where considered advisable to further the objective, not of providing or absorbing reserves, but of enabling dealers to maintain broad and ready markets by protecting them at the discount rates or slightly above against the in accessibility of credit except at penalty rates. That is, I should raise no objection if this procedure were utilized and policed in a manner similar to rediscount operations -an open window for financing dealers at rates preferably above but not lower than the discount rate. Dealers should know that the facility is always available to them (within a speci fied range, e.g., a dollar or percentage figure), as the dis count window is open to member banks, subject to such policing necessary to avoid its abuse by any dealer or a use as may be of it which unduly interferes with our credit policy. he was not a member of the Committee Mr. Bryan stated that while to indicate that he concurred in the general approach taken he would like by Mr. Robertson. to repeat all that he had said that he did not want Mr. Sproul agreements at the last meeting of the Committee, said about repurchase
which was included in the minutes of that meeting. He did say, however, 1. That he does not believe that repurchase agreements should be used only as an aid to Government security dealers, at their initiative, and he does believe that repurchase agreements should be used as a supplementary means of making open market policy effective, at our initiative. 2. The arrangement suggested by Governor Robertson with respect to continuing dealer facilities, at their ini tiative, would seem to have a maximum potential for offset ting the intentions of open market policy. There would or dinarily be little inducement for dealers to use the facility. They would use it only when money market conditions, presum ably in line with System policy, became tight enough to bear down on them as they would bear down on the rest of the money market. This would mean that a sheltered corner had been created for Government security dealers, and that release of credit to them on repurchase agreement would to that ex tent, and perhaps to a greater extent, undermine general credit policy. 3. This is not to argue against making our open market operations as impersonal as possible. That is the aim of the administration of the present repurchase authority. But im personal dealing is only one objective, and cannot be pursued as an end in itself to the detriment of over-all policy. It must also be remembered that the Government securities market is a negotiated market, not a public auction market, and that there is an element of the personal in all transactions which take place within it. turned to the question of the rate to be Chairman Martin next established on repurchase agreements under the existing procedure, and upon Mr. Sproul for a suggestion as to the rate to be authorized he called by the full Committee. leave the existing range of rates Mr. Sproul stated that he would the Federal Reserve Banks to enter in effect, that is, he would authorize that in no event shall agreements with the understanding into repurchase
they be at a rate above the discount rate or below whichever is the lower of (1) the discount rate of the purchasing Federal Reserve Bank on eligible commercial paper, or (2) the average issuing rate on the most recent issue of three-month Treasury bills. Mr. Sproul said that the effect of Mr. Robertson's second proposal (that repurchase agreements be entered into only at a penalty rate equal to or above the discount rate) would be to limit the scope of effectiveness of this device as a supplement to other open market operations and to credit policy in gen eral. The Committee would then only be able to use this device when re purchase money could usefully be put into the market, on the Committee's initiative, at a rate equal to or above the discount rate. There have been situations in the past and will be in the future when a repurchase rate below the discount rate can make possible a desirable temporary release of credit to meet an unusual and concentrated need for immediate bank reserves. Mr. Sproul felt that a Federal Open Market Committee meeting every three weeks should be able to keep this operation under if the Committee denied itself this control. It would seem paradoxical agreements at rates below the discount privilege of making repurchase and sell Treasury bills out continued regularly to buy rate while it right at such rates. intended to retain in that his proposal was Mr. Robertson said change rates on repurchase the power to fix or the full Committee
agreements. In other words, he wished to have the Committee, rather than the individual Federal Reserve Bank, decide whether during a given period repurchase agreements should be made and whether they should be at rates below the discount rate. Chairman Martin noted that the proposal before the Committee was to fix for the next three weeks (pending the next meeting of the Commit tee) a rate or range of rates on repurchase agreements. Mr. Sproul repeated his suggestion that the existing range of rates be continued by the Committee as a range of rates at which repur chase agreements could be entered into by the Federal Reserve Banks be tween now and the date of the next meeting of the Committee. In response to a question from Chairman Martin, Mr. Vest stated that the existing authority for repurchase agreements, including the rates on such agreements, was currently outstanding as an authority of the full Committee, the setting of rates having been taken over as full Committee authority at the meeting on June 22, 1955, when the executive committee previously granted to the Federal Reserve was abolished and the authority became an authority of the full Committee. Banks by the executive committee that it be understood today that the Chairman Martin suggested Federal Reserve Banks by the execu authority previously granted to the the full Committee as to the authorization of tive committee, pursuant In its place, the full 2, 1955, had been revoked. renewed on March
Committee would now authorize the Federal Reserve Banks to enter into repurchase agreements in accordance with the general conditions pre viously specified by the full Committee, it being understood that here after the full Committee would specify at each meeting the rate or range of rates for such agreements and when and to what extent Reserve Banks should enter into them. The Chairman then read the proposed revision in language of the "Conditions for Repurchase Agreements" approved at the meeting on March 2, 1955, which revision would eliminate reference to the executive committee. Mr. Sproul said that his thought was that the full Committee should consider at each meeting what authority should be granted to the Federal Reserve Banks to enter into repurchase agreements and at what rates. Mr. Robertson said that this would meet his suggestion that the Committee, rather than the individual Federal Reserve Banks, determine the rate or rate ranges for repurchase agreements. He also inquired at the present time that there would whether there was any expectation agreements at rates below the be a need for entering into repurchase discount rate during the next three weeks. Mr. Sproul responded that he did not think the Committee could whether a situation might arise for even three weeks in advance forecast into the market, at its would wish to put funds where the Committee rates below the discount rate. initiative, at
Mr. Robertson said that he would not object to authorizing repurchase agreements at the range of rates previously specified for such agreements, if it was understood that a rate below the discount rate would be used only if such procedure seemed essential as a means of carrying out Committee policy. Mr. Sproul stated that this was the way in which the range had been used in the past. At this time, he did not know whether a need would arise within the next three weeks for repurchase agreements at a rate below the discount rate. Chairman Martin said that his sentiment was in accordance with that repurchase agreements be at a rate below Mr. Robertson's suggestion rate only in case that seemed essential for the purpose of the discount policy. This was the way in which he understood carrying out Committee used in the past, and he felt it should continue the authority had been However, his view was that a situa to operate that way in the future. weeks in which the Committee arise within the next three tion might well agreements at the market through repurchase wish to put funds into would a rate below the discount rate. not object to authorizing the Mr. Robertson replied that he would the sense of the meeting was understood to be rates proposed if it range of only in case of need, rate would be applied a rate below the discount that would be used repurchase authority that the was also understood and if it sparingly.
Mr. Bryan inquired what kind of a situation might be envisaged which would call for repurchase agreements at less than the discount rate. Mr. Rouse responded that the tightness during the last several days had been centered in New York City, and that there may be continued pressure on the central money market. Under these circumstances, it is possible that a degree of tightness more severe and more pervasive than the Committee contemplated might develop. Mr. Bryan stated that he interpreted this as meaning that a situation might develop where a sudden tightening in the market was indi cated which might bring about a rapid upward movement in the bill rate discount rate, which would have a tightening effect on the toward the entire money market. might, in addition, be psychological Mr. Rouse said that there affecting money and capital markets. pressures Mr. Bryan's mind of the substance raised the whole question in This raised by Mr. Robertson went beyond the questions of the procedure--it rate in relation to of the short-term the problem of the management and to the discount rate. agreements was question of repurchase stated that the Mr. Leach Open Market Com for the it was desirable question of whether tied to the and sales direct purchases frequently, making to be in the market mittee
of Government securities for the purpose of attaining credit policy objectives. Mr. Leach thought that repurchase agreements had a very useful purpose in keeping the Federal Reserve from having to make fre quent outright purchases and sales of securities. Such frequent pur chases and sales were undesirable, he said, because they had an effect upon the securities market itself and because they might confuse the public as to what the Committee was trying to attain. Mr. Leach felt that the Committee's basic policy should be agreed upon, and that ac tions should of course be taken to carry that policy out. He recalled that it had been suggested earlier during this meeting that the Committee might attempt to operate more precisely toward an objective of some amount of free reserves. In the absence of repurchase agreements, the only way to operate more precisely, Mr. Leach said, would be to make more frequent purchases and sales in the open market. For the reasons which he had indicated, this was not desirable, and it was his view that there was much to be said for authorizing repurchase agreements in a manner which would permit the Committee to carry out its policy ob jectives more effectively. There was a further discussion of the use of repurchase agree ments and of the rate at which such agreements might be authorized during that clause 1(d) of the statement of con which the suggestion was made had been approved on March 2, 1955 should be changed by ditions that
deleting the words "with care and discrimination" from the provision which formerly had provided that such agreements "Shall be used with care and discrimination as a means of providing the money market with sufficient Federal Reserve funds to avoid undue strain on a day-to-day basis." During this discussion, Chairman Martin stated that he agreed with much of the comment made regarding repurchase agreements, adding that he felt the Committee could well give further study to the use of the repurchase instrument. For the present, it was Chairman Martin's suggestion that the full Committee issue an authorization, in terms of the "Conditions for Repurchase Agreements" revised to eliminate reference to the executive committee and to delete from 1(d) the words "with care and discrimination." If this suggestion were approved, it would be with that (a) the authority would apply to the period be the understanding today and the next meeting of the Committee; (b) such agreements tween below whichever is the lower of (1) the would in no event be at a rate Reserve Bank on eligible commer rate of the purchasing Federal discount rate on the most recent issue of paper, or (2) the average issuing cial (c) the authority would be used sparingly three-month Treasury bills; and below the discount rate. into agreements at rates in entering Chairman Martin's suggestion was approved unanimously. Secretary's Note: The "Conditions as re for Repurchase Agreements," action, were vised by the foregoing as follows:
In lieu of all authority previously granted by the Fed eral Open Market Committee with respect to repurchase agree ments, each Federal Reserve Bank is hereby authorized to enter into repurchase agreements with nonbank dealers in United States Government securities at such times, in such amounts, and at such rates (or rate ranges) as the Committee shall prescribe, subject to the following conditions: 1. Such agreements (a) In no event shall be at a rate below which ever is the lower of (1) the discount rate of the purchasing Federal Reserve Bank on eligible commercial paper, or (2) the average issuing rate on the most recent issue of three-month Treasury bills; (b) Shall be for periods of not to exceed 15 calendar days; cover only Government securities ma (c) Shall turing within 15 months; and used as a means of providing the (d) Shall be sufficient Federal Reserve money market with to avoid undue strain on a day-to-day funds basis. shall be made to the Man 2. Reports of such transactions Market Account to be included ager of the System Open market operations which is in the weekly report of open Open Market Committee. members of the Federal sent to the covered by any such event Government securities 3. In the by the dealer pursuant agreement are not repurchased thereof, the securities agreement or a renewal to the Bank shall be sold by a Federal Reserve thus acquired System Open Market to the the market or transferred in Account. authorized all action just taken that the Robertson stated Mr. agreements but that, as Banks to enter into repurchase Federal Reserve
he understood it, the authority actually had been used recently only by the Federal Reserve Bank of New York. He suggested that a statement of the reasons why the authority should be extended to all Federal Reserve Banks, rather than to the New York Bank only, be prepared and that the Secretary distribute the statement to all members of the Committee for discussion at a later meeting. This suggestion was ap proved unanimously. Before this meeting there had been sent to the members of the Committee a memorandum from Mr. Riefler dated July 7, 1955 suggesting that in the future the daily telephone call between the New York Bank, the Board's offices, and one other Federal Reserve Bank relating to the it appeared at the opening include, on a rotating market situation as the New York Bank which Reserve Banks other than basis, the four Federal the Open Market Committee. This procedure were currently represented on since the call was originated in May 1954 would replace that followed New York, was included because Reserve Bank, other than when only one represented on the executive committee. one other Reserve Bank was only prepared in the Board's that the summary The memorandum also suggested call be sent by telegram the 11:00 a.m. telephone on the basis of offices Federal Reserve Banks, Presidents of all to the there was unani After discussion, procedure recom that the mous agreement memorandum be mended in Mr. Riefler's
adopted, effective immediately, with the understanding that the detailed ar rangementswould be worked out by the Secretary. At this point Mr. Shepardson withdrew from the meeting to keep another appointment. Chairman Martin called upon Mr. Young, who made a statement re garding the economic and credit situation with respect to which a staff memorandum had been distributed to the members of the Committee under date of July 8, 1955. The outstanding feature of the over-all economic situa tion, Mr. Young said, is underlying strength and further ad vance, domestically and abroad. While stability of average prices can be said to continue, markets for industrial ma terials and products and construction components are under pressure from high levels of demand and income. Markets for agricultural products on the other hand are under pressure from very large supplies. Business and financial expectations as to sales and profits are decidedly optimistic and confi dence in future prospects is pervasive. The Board's index of industrial production was probably about the same in June as in May--138. Manufacturers' orders are generally running ahead of sales. Unfilled orders are rising further, although they are still considerably under rose sharply in May at both 1953 highs. Business inventories manufacturer and distributor levels, after a period of relative stability since last fall. Despite this rise, inventories of business are substantially below the levels of early fall of peaks, ratios of inven at or above 1953 1953 and, with sales tories to sales appear conservative. Automobile sales (both new and used) continue impressively debt has been rising at the rate of high. Consumer instalment month recently. Credit terms for about a half billion dollars a to a point where 30 months new automobiles have been extended maturity in most areas and 36 appears to be the most common is very common in the is not an uncommon maturity--it months
Boston, New York, Philadelphia, and San Francisco Districts. Over-allowances on trade-ins with phantom delivered prices have been resulting in low actual down-payments on new auto mobiles. Credit terms on used automobiles do not seem to have been liberalized as much as on new cars. Construction activity appears to be stabilizing at peak levels, mainly reflecting a leveling out of residen tial building while business and other private construction continue to rise gradually. Nonfarm employment, seasonally adjusted, rose somewhat further in June and unemployment declined. Crop and pasture developments have been generally good: prospects are for crop output in 1955 about 3 per cent above last year's large total, and for large output of livestock products. United States exports have leveled off this spring following an upswing late last year and early in 1955, while imports have continued to advance. Industrial production in most industrial countries abroad is still on the rise, and world prices of many basic materials have recently advanced somewhat. Credit demand at city banks continues active, with loans further during June offset largely expanding substantially by sales of Government securities. Growth in the privately January has been at an average annual held money supply since cent whereas the annual rate of growth in rate of about 2 per was about 6 per cent. Deposit turnover the preceding 5 months financial centers has risen further at banks outside leading at a new postwar high. Reflecting the strong credit and is Federal Reserve policies, both short- and long demands and moderately in recent rates have moved upward term interest weeks. on the outlook for bank reserves, re Mr. Koch commented briefly of recent and projected a sheet showing a pattern particularly to ferring offices under date of July 11, reserve changes prepared in the Board's report of open in the supplemental figures contained and to similar 1955, Bank of New York and at the Federal Reserve operations prepared market the projections pre Mr. Koch noted that at today's meeting. distributed the same amounts indicated about Bank and the Board at the New York pared
of free reserves for weeks ending July 20 up through Labor Day. Dur ing the week ending July 20, a moderate amount of free reserves was anticipated, while during the week ending July 27 negative free re serves averaging around $100 million were projected and during the week ending August 3 average negative free reserves might run closer to $200 million. Thus, if the Committee wished to have free reserves of around zero level during the week of August 3, it might be necessary to put some funds into the market through repurchase agreements or other wise. The Committee might, however, feel that this would be an appro priate time to permit the development of average negative free reserves in moderate amounts, assuming Treasury refinancing operations permitted. Following a rise in free reserves during the weeks ending August 17 and 24, owing largely to the usual mid-month influences, there would be a substantial decline around Labor Day when holiday demands for currency and other factors would draw down reserves. Chairman Martin stated that the Committee appeared to have been reasonably successful in its operations during the past three weeks and that the projections of factors affecting free reserves presented at the meeting on June 22 had been borne out reasonably well. In his opinion, the economic situation required little comment other than to say that it was such as to call for thought on the part of the Federal Reserve regard ing the possibility of increasing the discount rate when the Treasury's financing operations would permit--perhaps during early August.
Mr. Sproul noted that the Treasury might soon announce an offering of securities to take care of its August 15 refinancing which would call for payment around August 1. In that event, it might not be desirable to experiment with a lower level of free reserves between now and August 1. He then made a statement substantially as follows: 1. The strength and breadth of the present upward movement in the economy, as reported to us today, suggests that whatever check to rate of growth may take place dur ing the present quarter will be less than might previously have been anticipated. The economy appears set to continue to expand at high levels of employment and production for the next few months. 2. Bank credit thus far has followed the course of business. There was a contra-seasonal advance in bank lend ing during the first half of the year, while bank invest ments in Government securities declined. Private demands for bank credit during the remainder of the year are ex pected to be substantial, and to these will be added a siz able Treasury demand. The money supply, which declined 3.1 per cent (from $134.5 billion to $130.3 billion) during the January-May period of seasonal decline, is estimated to in crease over the year as a whole by perhaps 5%. To prevent viewing this latter figure too seriously, however, it should be related to an estimated increase in the country's Gross National Product of more than 6% during the year. 3. The total amount of bank reserves needed to meet prospective private and public demands for bank credit during the second half of the year, without relaxing present credit restraint, is estimated to be between 1 3/4 and 2 billion. Our previous discussions have indicated that we would provide these reserves, and that we would do it through open market operations, supplemented by increased borrowing of member meet seasonal needs. The problem, of course, is to banks to of reserves to foster stable growth supply the right amount without encouraging speculative excesses which would endan ger such growth. than we have been since We are obviously nearer full utilization of plant, equipment, and man early 1953 to power; prices which have been stable, in the aggregate, for
two years may be about to get a push on the up-side due to pressure from costs and from anticipation of price rises by businessmen, purchasing agents, and consumers; and there is a prevailing feeling of optimism in the community about economic developments during the next six months which in some of its manifestations, as in the stock market, cannot help but cause concern. 5. On the other hand, we don't want to get scared by prosperity; our present record level of economic activity doesn't exceed the bounds of normal growth as compared with two or three years ago. We don't want to underestimate the power of the productive competitive forces in our economy to counteract some of the tendencies which may now be caus ing us concern. And we don't want to overlook the possi bility that a diminishing rate of growth during the third quarter may cool off some over-speculative tendencies. 6. On balance, it now looks to me to be a question of the timing and degree of pressure we may want to exert in order to deter possible speculative excesses which would jeopardize sustained growth, or would promote its continu ance only temporarily, and then at the cost of a depreciating dollar. 7. I see nothing in the immediate situation which de mands that we embarrass the Treasury in its management of the public debt by further restrictive credit moves during its July-August financings. We are not at a point where the dangers of inflationary developments clearly outweigh all other considerations. The danger signals of inventory accumu lation outrunning sales expansion, upward price movements, production, material and employment bottlenecks, and exces sive increases in bank credit and the money supply have not yet flashed red. Meanwhile, we shall not be standing still if we do nothing more during the next few weeks than maintain the pressure we have already applied. What we have already done will have a continuing and probably increasing effect. The general banking situation is now tight including the money centers. Bank liquidity is low as a result of a really massive liquidation of Government securities by the banks during the past six months; the banks are having to continue to sell securities (or to borrow) to make loans, and now they usually take a loss on the sales. Treasury bill rates are rising and presumably will continue to rise as the weekly in and the new Tax Anticipation Certificates crease in offerings
add to the supply of short-term securities. There is begin ning to be some tightness in the long-term market which ought to be increased somewhat by the Treasury's offering of 3% bonds. A substantial volume of flotations of state and municipal securities is in prospect and the market re cently has been backing up. 8. I would say that we should maintain open market policy as is for the rest of July and until our next meeting in August, which would mean free reserves ranging around zero, a continued higher average level of member bank borrow ing, and some further rise in Treasury bill rates. Some fur ther purchases of Treasury bills, during this three week period, will probably be necessary under such a policy di rective. I would hope that the Treasury would proceed with plans to get its August refunding out of the way by the end of July so that we would then have a clear field until late September in which to decide what to do next. As I see it now, if the business and credit situation during the first half of August suggests further action, our next move might increase in the discount rate. It could serve well be an signal while still permitting ready access as a cautionary to the reserves needed to support necessary private and pub lic demands for bank credit. on the general economic situ Martin called for comments Chairman credit policy that seemed to be merited. ation and on any changes in in general with the views ex Mr. Leach stated that he agreed on the economic situation and on credit policy. pressed by Mr. Sproul free reserves during the period question as to the target for He had a member banks were to rise that if borrowings of ahead, however, stating the average of around $400 million level compared with to, say, the $800 target would seem a change in the existed during June, million that had ranging around zero of free reserves since the significance necessary borrowings increased substantially. be different if member bank would
In other words, reserves supplied through borrowings by member banks did not have the same easing effects that might result from reserves supplied through open market operations because banks do not like to be in debt. It would not seem necessary to move the target for free re serves by as much as the change in member bank borrowings, but Mr. Leach was of the opinion that some change in the target would be in order if there was a large increase in borrowings. Chairman Martin said that he would agree with the view expressed by Mr. Leach, but he noted that the Treasury was still in the "middle of the stream" and that the Committee should be very careful about alter ing its course during the period of the Treasury's operations. by stating that he felt a change in the tar Mr. Leach responded be necessary as member bank borrowings in get for free reserves might the degree of pressure on banks, creased in order to keep from changing bank borrowings, zero free reserves since, with a larger volume of member different than it did a few weeks ago. meant something free reserves took on a agreed that the level of Mr. Robertson went on to say that, while as borrowings changed. He different meaning should not change the consensus that the Committee it appeared to be the was in the midst period when the Treasury restraint during the degree of the point where we were rapidly reaching he felt that of its financing, For example, he would be desirable. in the degree of restraint a change
felt that an increase in the discount rate should be considered at the earliest possible time. Mr. Balderston inquired as to the amount of change that might be made in the discount rate if one were made soon after the first of August. Such a change might be 1/4, 1/2, or 3/4 of one per cent, he said. While the Federal Reserve should try to hold a steady situation in the market so long as it was under obligation to the Treasury, he personally would favor an increase of at least 1/2 per cent in the dis count rate as early in August as the Treasury's position would permit. It was Mr. Balderston's view that the Committee should get in a posi tion to deal more effectively with the situation when a down-turn in activity developed. Mr. Sproul said that the amount of any change in the discount rate should be based on the situation as it existed when the action was taken, and not on how the situation appeared as of now. As of today, he felt this was not the time when the Federal Reserve should take dramatic action, such as increasing the discount rate by 1/2 or 3/4 per after a long period of 1/4 per cent changes, which would indicate cent of inflation were more serious than we actually that it thought signs As for "laying in nuts for the winter" by getting the think they are. that there would be room to lower rate up substantially now so discount the System would have ample means he expressed the opinion that it later,
through open market operations and discount operations to deal with a changed situation that might develop. Mr. Bryan said that he thought the economic situation in pro spect was such that it might need further restraint. At the same time, he would like to approach this position in stages. He could see no point in a further increase in the discount rate--certainly not in an increase by a dramatic amount--until the Committee had taken full advan tage of the possibility of permitting or forcing a movement in the short-term rate up toward the discount rate, and at that point, of per mitting or forcing a further increase in member bank borrowing. He also would dislike to see any massive additions to reserves until a further rise had taken place in the short-term rate. Chairman Martin said that he would like to return to Mr. Leach's point regarding the relationship between borrowings of member banks and the level of free reserves, and whether the amount of pressure on banks should be changed. It was the Chairman's understanding that none of the views expressed at this meeting indicated a desire to ease the situation at the present time. Rather, the objective appeared to be to continue the present policy of "mild restraint." Whatever action or emphasis was necessary to "keep the situation on an even keel" should be the goal of the Committee for the next three weeks. It was very difficult to measure degrees of tightness, Chairman Martin said, but the Committee should not be carried away with any particular level of free reserves as a goal.
He felt it important to know whether there was any disagreement with this approach. None of those present indicated disagreement with the approach Chairman Martin had indicated, that is, that the aim of the Committee until its next meeting should be a continuation of the present policy of "mild restraint" and of "keeping an even keel." Chairman Martin also asked if there were further comments regard ing his suggestion that consideration be given to an increase in the dis count rate when the Treasury's refinancing was out of the way, perhaps early in August. Mr. Robertson said that he would assume that, along with any increase in the discount rate that might later be decided on, correspond ing tightening actions would be taken by the System "across the board." that in his opinion there was more inflation in Mr. Fulton said the wind than the figures indicated. He cited instances of persons get the stock market as hedges against inflation and of their buy ting into having unattractive yields, not for investment but for specu ing stocks he would look with favor on a good-sized lation. Mr. Fulton said that least as a psychological influence. in the discount rate, at increase a dramatic action but would said that he would not favor Mr. Irons on the market as soon as in the degree of restraint favor an increase the situation did not In his opinion, situation permitted. the Treasury
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
Also: Record of Policy Actions