September 14, 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 Wash ington on Wednesday, September l4, 1955, at 10:45 a.m. PRESENT: Mr. Sproul, Vice Chairman Mr. Balderston Mr. Earhart Mr. Fulton Mr. Irons Mr. Leach Mr. Mills Mr. Robertson Mr. Shepardson Mr, Szymczak Mr. Vardaman Mr. Powell, Alternate Member of the Federal Open Market Committee Mr. Williams, President, Federal Reserve Bank of Philadelphia Mr. Riefler, Secretary Mr. Rouse, Manager, System Open Market Account Messrs. Daane, Rice, Roelse, Wheeler, and Young, Associate Economists Mr. Sherman, Assistant Secretary, Board of Governors Mr. Koch, Assistant Director, Division of Research and Statistics, Board of Governors Mr. Miller, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Gaines, Securities Department, Federal Re serve Bank of New York Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings Federal Open Market Committee held on of the 2 and August 23, 1955, were approved. August
Before this meeting there had been sent to the members of the Committee copies of a report prepared at the Federal Reserve Bank of New York covering open market operations during the period August September 7, 1955, and at this meeting there was distributed a supple mental report covering commitments executed September 8-13, 1955. Copies of both reports have been placed in the files of the Federal Open Market Committee. In commenting on the reports, Mr. Rouse stated that most of the activity in open market operations since the preceding meeting had taken place during the past few days. The high-light of the period, he said, was that the account had gotten through the Labor Day period with the use of only repurchase agreements, this period having turned out to be much easier than had been contemplated. The problem during the past few days had been one of a tendency for reserves to appear with the result tha sales of securities had been made from the System account, both through runoff of maturing bills and outright sales in the market and to fill foreign orders, in the aggregate amount of $186,300,000. In addition, repurchase agreements made last Thursday would mature today. While there would be a substantial pull against reserves and reserve positions of banks today and tomorrow, there would be outward payments by the Treasury and that free reserves might return to around the zero level Mr. Rouse thought However, a sharp reversal was anticipated the first of for a day or two. as a whole, Mr. Rouse since the last meeting week. Taking the period next felt that operations had been reasonably successful in accomplishing the objectives indicated by the Committee.
In response to a question from Mr. Vardaman as to the tone of the market, Mr. Rouse made the further statement that the general attitude seemed to be that the market was becoming accustomed to negative free re serves. Very little "growling" had been reported to the account management. Thereupon, upon motion duly made and seconded, and by unanimous vote, the transactions in the System open market account during the period August 23-September 13, 1955, inclu sive, were approved, ratified, and confirmed. Mr. Young then made a statement on the current economic situation concerning which a staff memorandum had been sent to the members of the Committee under date of September 9, 1955. Mr. Young's statement was sub stantially as follows: Currently available data suggest the possibility that the economy has entered a phase of decelerating advance. More irregularity in output trends is beginning to be evident, pro ductivity gains in manufacturing and mining some months ago ceased to be a general phenomenon, manufacturing employment in has for several months been maintained on an over durable lines time basis, output in several important industries is close to capacity potentials, the labor market has reached a fairly gen state of tightness, and restrictive monetary developments, eral higher interest rates, have been operating with mounting with pressure to brake credit expansion. Despite the prevailing high level of aggregate supply at a condition of demand pressure is still close to full employment, products. The considerable of markets for industrial a feature with much talk of a more wide of price advances occurring, number a scene perhaps best lifting to come, is presenting spread price The over-all stability of described as "prosperity inflation." having, has reflected the such as we have been wholesale prices, Lower farm and farm prices. movement of industrial offsetting likely this fall, extending for meats, seem prices, especially for average wholesale prices. this appearance of stability production of the situation--industrial As to the specifics show only a small rise from July. for August is estimated to
Automobile output, seasonally adjusted, was steady, and output of other consumer durables was up. Steel, machinery and equip ment production, and output of construction materials all rose. Flood damage in New England reduced output of fabricated copper. In nondurable goods lines, output of apparel, rubber, and leather products was off, Mining output showed little change over July. The order backlog in manufacturing has continued gradually to work upward through July and, from trade reports, apparently also in August. Business inventories, as estimated from data much less ade quate than one would wish for, showed a further moderate increase in July, the latest month for which information is available, At the end of July, inventories stood 3 per cent above the low reached at the end of last year. Meanwhile, sales had risen 6 per cent. Since industrial prices rose 3 per cent over this period, some part of the inventory rise has been a value rather than physical increase. A volatile aspect of the present inventory position is that with all of the talk of price increases going around, indus trial buyers are tempted to stretch their discretionary ordering latitude to the limit. Automobile sales in August strengthened from July on both the new and used car side. Stocks of new cars were reduced over the month and further reduction is expected this month. Used car stocks showed little change. Other consumer hard goods markets were strong in August, although less strong than in July. Output of household durables ran more than a fifth above a year ago, With continuing high retail sales of automobiles and other consumer durables, further instalment credit expansion at close to the $500 million July rate may be assumed to have reenforced consumer demand based on income. Retail sales as a whole for August, including sales of both nondurables and durables, are estimated to have held at advanced July rate, about 9 per cent over a year earlier. Activity in construction markets in August was about at the July level, just under spring levels. Contract awards continued starts in August were con run well above a year ago. Housing to traseasonally higher and at 123 thousand units again reached a of 1.3 million units. The rate seasonally adjusted annual rate million units. This revival in for August of last year was 1.2 from builders that the stock housing starts confirms information houses has been running low. In the mortgage market, of unsold money is reported to continue tight but a close-to commitment mortgages is still being written under outstand record volume of ing commitments. product demands and the consider Reflecting high and rising prevailing, the business plant able tax and labor cost incentives reported manifest a plans most recently and equipment expenditure
decidedly optimistic tone. Third quarter expenditures, ac cording to reports, should equal the 1953 peak level and fourth quarter expenditures should exceed that level. In vestment plans of business generally seem in process of up ward revision, so that fall columns of business news will feature the announcement of new expansion programs by many companies. In commodity markets, demands for industrial and con struction materials are very strong and supplies, particularly of metals, on the tight side. Price trends in these markets look upward. With higher material and wage costs, prices of many industrial products have been advanced. Farm prices, after fresh declines through much of the summer, leveled off about mid-August. Reflecting late season drought in the corn belt, corn prices have firmed a bit and prices of eggs and dairy products have risen seasonally. Total employment has now reached record levels. Employ ment in nonagricultural establishments, after seasonal allow ance, remains about stable at the high July level, somewhat short of the mid-1953 peak. The work week at factories aver aged 40.8 hours in August. With average hourly earnings about steady over July, weekly earnings reached a new peak. In the capital markets, partly reflecting tightening credit conditions and interest level adjustments, new flotations have been in reduced volume. Common stock prices have moved into new high ground, mainly on a cash investment basis. The preliminary report from the Stock Exchange indicates a small decline in cus tomers' debit balances at member firms for the month of August. Security loans to customers at city banks to carry other than U. S. Governments also declined. Business loans, consumer loans, and mortgage loans at banks have continued to increase, the former sharply. Security loans and agricultural loans have declined. Banks met their need for loan funds by liquidating U. S. Governments, in fact, liquida tions were more than enough. Altogether banking developments point to a slight decline, on a seasonally adjusted basis, in and demand deposit holdings of individuals and the currency demand deposits at centers outside New business. Turnover of York has continued at the high level of recent months. advance in market interest rates was The recently effected current market levels approximate those reached in rapid, and the early spring of 1953. In the early spring of 1953, the market interest rates contributed to market uncer advance in tainty. Reflecting a better understanding of flexible monetary confidence in the strength of under policy as well as greater advance in rate levels has lying economic forces, the recent effect on market psychology, had little unsettling
Abroad, production has continued to rise in industrial countries. Resource utilization in Western Europe has reached an intensive degree, with aggregate demand pressing fairly hard against available supply, thus giving rise to various inflation ary symptoms. Inflationary pressures have been most acute and persistent in Britain and weakness in the sterling position has continued. There are signs, but by no means clear signs, that the Government's financial measures of correction are gradually taking hold. Following a brief discussion of Mr. Young's report, Mr. Sproul called for comments with respect to open market operations. Mr. Leach noted that the report furnished by the Federal Reserve Bank of New York projected free reserves during the week ending September 21 averaging about $58 million negative, whereas projections prepared at the Board's offices indicated negative free reserves of about $259 million for the period, and Mr. Rouse commented briefly on the reasons for the difference. Mr. Leach went on to say that he felt policy should continue to be one of gradually increasing restraint. He recalled that at the pre ceding meeting he expressed the hope that a large part of the needs for reserves in coming weeks would be met through the discount window. This discounts for the System had risen to around one billion had happened and dollars. This amount seemed about right under existing conditions but he if discounts should increase by another $100 million would not be unhappy or so. If additional reserves were needed late in September and during October, as estimates indicated, they should be provided through open that he would not favor another increase market purchases. Mr. Leach said but he thought further gradual rate at the present time in the discount was desirable and would result from increase in the degree of restraint actions already taken by the System.
Mr. Earhart said that the effects of a tight market were evident on the Pacific Coast. There was solicitation from the New York area of participation by Pacific Coast banks in longer-term loans as well as so licitation for Federal funds and call loans. There had also been some indication that banks which formerly held Commodity Credit Corporation paper did not care to continue to hold it since the discount rate had been at 2-1/4 per cent, which was the net yield to the banks on Commodity Credit paper. Banks indicated that they were screening loans more care fully than earlier. Mr. Earhart felt that the Committee should at least maintain and preferably increase slightly the pressure it had been exer cising through open market operations. Mr. Irons said that increasing pressure was noticeable among re serve city banks in the Dallas District, but that country banks were not under pressure. As to the economic picture, conditions in the Dallas area were strong. Mr. Irons felt that the situation called for maintenance of steady and gradually increasing pressure and at this stage he thought this preferably through market pressure rather than through a fur should come ther increase in the discount rate. that the present policy should be continued. Mr. Szymczak felt free reserves, it might be basis of the projections of However, on the use repurchase agreements and the end of September to necessary toward to make moderate outright purchase of bills. perhaps with the fact that that he had been impressed Mr. Balderston said which he had visited recently were watching the central banks in Europe
the moves of the Federal Reserve System in connection with monetary policy with great care. With respect to present policy, Mr. Balderston suggested that the Committee should maintain a steady situation during the immediate future. He would like to see a target or goal expressed in terms of a bill rate of from 2.10 to 2.15 combined with negative free reserves ranging from $300 to $400 million. Mr. Powell said that in the Minneapolis area the results of the agricultural price declines were being felt more than he judged to be the case in other areas and he described the various measures which reflected that situation. He also noted that while borrowings by city banks in the Ninth District had been reduced recently, borrowings by country banks were somewhat higher. His view was that national credit policy should go along putting pressure on the economy. However, he did not about as at present, credit situation in the Ninth District was contributing much feel that the a rather passive frame of mind on credit to the boom and he presently was in policy. changes in bank credit figures for Mr. Williams commented on recent of the directors of He said that the attitude the Philadelphia District. a further increase in the discount Reserve Bank was that the Philadelphia of concern as to any action reflecting some feeling rate should be deferred, level of money rates. disturbance to the that might cause further the Cleveland District conditions in described economic Mr. Fulton expansion projected. plant and equipment as active with further generally of banks had been liquidity position active but the for loans was Demand
impaired and, while banks did not feel they could decline to make loans for proper purposes to established customers, there was evident a feel ing of tightness. On the other hand, Mr. Fulton said that there was an inflationary spirit throughout the entire district, including agricul tural areas, and his view was that the Committee should lean toward tightness rather than to compromise its present policy or to relax any thing now being done. If anything, a little more tightness would seem to be called for. Mr. Shepardson said that the situation called for continuing firm pressure. He liked the proposal Mr. Balderston had made as to a and free reserves. He was inclined to target which included both rates or so the degree of tightness in the market think that in the last week Committee had had in mind at its meeting on had not been as great as the firm pressure during the next 23, and he would favor continuing August few weeks. the Committee had the degree of restraint Robertson said that Mr. the Committee had but that he felt had been wholesome been maintaining had been exercised The recent restraint little too late". been doing "too was exercised, that is, earlier policy of ease the same basis that the on rather than tightness. the side of ease being made on the errors were all and not of free reserves to the volume was being given Too much attention provide an effective opinion, would which, in his to money rates enough that he Robertson said Mr. objectives. of the Committee's indication
favored increasing the degree of restraint, that we were in a boom economy, that he felt the ebullience was greater than had been brought out in the economic review and in other comments this morning, and that he would like to see Committee policy point toward a bill rate above the 2.15 figure mentioned by Mr. Balderston--at least up to and perhaps above the discount rate. He would hope that the System might be in a position to raise the discount rate further although he doubted this could be done prior to the Treasury's October financing. In sum, he hoped the Committee today would adopt a policy of greater restraint than was indicated at the of the Committee and that it would look for evidence of preceding meeting this increase in restraint in the money rate structure. the general tone of the views ex Mr. Mills said that he shared policy should be toward restraint that the direction of System pressed He had a question, however, growing out and rising pressure of restraint. the Committee might be too statement, as to whether of Mr. Rouse's opening already taken a series of actions in some of its actions. It had aggressive reducing the liquidity of banks. reserves from the market and withdrawing abrupt depletion in now to result in an operations were If the Treasury's market. If a "kink" develop in the a "kink" could the supply of reserves, would be he hoped the Committee in the situation, from stringency resulted might seem appro with whatever assistance to meet the situation prepared referred to the Treasury's circumstances. He under the particular priate reserves some additional stating that for October, financing operations were to be financing costs if the that period during would be necessary
kept within reason. As to "moving too fast" and then having to correct the situation just as sharply, Mr. Mills felt that it would be prefer able for the Comittee to shade its operations so that it would not move too aggressively toward reducing reserves with the consequence of having to correct that situation sharply. He recalled that during the fall of 1954 there was a release in November of pentup emotion that expressed it self immediately in the stock market and this was followed by a change in the general business climate. Mr. Mills felt that there was the possibility of a similar recurrence growing out of the Labor Day holiday period. There had been rising activity in the stock market during the last few days which might gain momentum, and, if this developed, it might be reflected in in creased credit use and might also be reflected in further enthusiasm and lack of caution in planning by the business community. If the Committee with such a situation, he would agree with the proposal were confronted by Mr. Robertson although for a slightly for greater restraint expressed should not rule out a further in different reason. He felt the System be as much a signal of rate--such an increase would crease in the discount of money to the busi reflection of a rising cost to the public as a caution with the Treasury financ hand, he agreed that, community. On the other ness discount rate during the an increase in the operation coming in October, ing be confusing. Mr. Mills went on to say that period immediately ahead would was to be reflected at this meeting thus far of the discussion if the tone would be a month, there of this the remainder action during in positive increase in and an supply of reserves in the distinct reduction further
money rates. Such an increase in money rates might produce a very diffi cult pricing problem for the Treasury in connection with its October financ ing. Mr. Rouse commented that presumably the Treasury would make its offering for new money around October 3 or 4, which would be about the time of the next meeting of the Committee, and that payment would be called for around October Mr, Vardaman was of the opinion that there had been considerable leveling off in the situation and said that he did not observe the exu berance that he thought he felt a few weeks ago. The continuing pressure which the System had been exercising had been producing good results. He would not like to see additional tightening during the next two weeks, not Treasury's financing but because the System should per only because of the already taken to have their effect. It might be that the first mit actions would indicate it was time to increase the discount rate meeting in October which would prevent too much exuberance to again or to take other actions unfilled orders had not built up as had ward the end of the year. However, inventory situation had not developed as might have been anticipated and the continue about as at felt credit policy should been feared. Mr. Vardaman but that the Committee should not be increased, present, that pressure as Mr. Mills re if a stringency such standby position and should be in a a special meeting to be prepared to call should occur, it should ferred to take care of the situation. as follows a statement substantially Sproul then made Mr.
1. The Committee's usual able review of recent developments in the business and credit situation has underlined the great strength in the general economy and the further evidence of up ward pressures on prices as the economy presses closer to the full utilization of its productive resources, while pointing out some deceleration in the rate of expansion. At the same time there does not appear to me to be sufficient evidence of imminent and severe inflation, and speculative excesses, to justify further and more vigorous action in the field of credit policy. The con tinued advance in production and employment has been based largely on strong consumer demand and high levels of capital investment. The dangers of a price-cost spiral developing, accompanied by in ventory speculation, must be balanced against the attractive goal of continued and orderly growth in the economy at high levels of production and employment. And the dangers of excesses in consumer credit, or mortgage credit, must be balanced against our own ability to reach these areas effectively, by general credit controls, with out running equal or greater risks of restricting credit unduly in other areas. 2. The ideal role of bank credit is to meet the real needs of this economy of high level production and employment, without con tributing to inflationary developments as competing demands for raw materials and finished products tend to press against available sup plies. By and large, bank credit has been filling this role. While business loans of reporting member banks have continued their upward movement during the past several weeks, the total volume of loans and investments has been little changed--as loans have increased the banks have sold investments to nonbank investors. This has been the pattern pretty much throughout the year. As a consequence the money the country declined in absolute amount during the first supply of seven months of the year about in line with the experience of recent preceding years, and an increase in the velocity of use of money has been necessary to keep the money factor roughly in line with expand ing economic activity. policy, I think the too much for credit 3. Without claiming are impressive evidence of the constructive in banking statistics of Federal Reserve actions during this period of expansion. fluence emphasized by increases lessening of reserve availability, A gradual credit more or less in line of reserves, has kept bank in the cost business growth and without economic needs, without throttling with has been true even into disorder. This the capital markets throwing allowing seasonal de in recent weeks, we stepped up the pressure as by member banks up in increased borrowing for credit to snow mands twice within a short raising discount rates Reserve Banks, and at the relaxing but not is now time for a breather--not I think it period. evidence of the probable we have more intensifying restraint--until
course of the economy during the last quarter of the year and of the consequences of actions we have already taken. 4. Fortunately, if that is the right word, this period of stabilization would coincide with a period of Treasury fi nancing when, in any case, our secondary responsibility for the success of debt management would suggest a period of sta bility. During the period September 15 to October 15 the Treasury will be in the process of preparing for, offering, and receiving payment for about $2.5 billion of new money securi ties. Again fortunately, however, the borrowing will be of a character--short term tax anticipation obligations--which does not require much sustained conditioning of the market before or after sale. The period during which our freedom of action will be somewhat curtailed should be relatively short. 5. During this period, and I would expect following it also, our sights should be shifted from free reserve targets to member bank borrowing and the entire structure of interest rates. Member bank borrowing has reached as high as $1 billion recently and borrowing of this general magnitude, for the present, would maintain the pressure we have put on the banks allowing for the usual intra-monthly variations due to movements of float and other more or less ordinary market factors. The capital markets have behaved well so far, avoiding those exaggerated expectations of a restrictive credit policy which can set off a spiralling and disorderly movement of yields and prices. This is the reward, I think, of gradual rather than aggressive pressure. Aggressive pressure is usually only justified in the face of more serious in than we have yet encountered and should flationary developments be reserved for meeting such developments. 6. The open market policy which this brief analysis suggests is to try to continue the present degree of actual pressure, which should further permeate the banking system and the money and capi is maintained, while allowing the Treas tal markets the longer it financing problem in as favorable a ury to work out its immediate In the light of present forecasts of the re climate as possible. suggests that, between now and our next serve situation it further we may have to use repurchase agreements and outright pur meeting, intensification of pressure, but that chases to prevent an unwanted banking system reluctantly rather we should provide reserves to the than readily. not wish to seem to said that while he did Continuing, Mr. Sproul had discussed the situation of the Committee, he speak for another member left for Turkey and that he Martin just before the latter with Chairman
believed the views he had just expressed concerning the near-term course of open market policy were substantially the same views that Chairman Martin held. Mr. Sproul said that from the discussions it appeared that during the period of the Treasury's financing in October, the Committee would be doing its best job if it maintained pressure, neither relaxing nor intensifying the existing general level of pressure. This might be characterized as continuing the present policy with the understanding that if errors were to be made in carrying out the policy they might be on the side of restraint, although the Committee would not seek to make errors on that side. said that he could not go along with such a program. Mr. Robertston Shepardson said that operations in the recent past impressed Mr. what the Committee indicated as its goal at its him as not having attained the Committee's goal would un on August 23. Errors in attaining meeting tended to be mostly on the side of be made but these errors had doubtedly might at least be compensating errors ease, and his view was that there indicated by the Committee. more nearly the objective which would approach view. He felt the would concur in this said that he Mr. Earhart would be that if and his suggestion pressure should be maintained existing the side of greater they be on in carrying out operations, errors were made restraint. Leach concurred in this view. Mr. that the general it was agreed brief discussion, After further of the Committee and the next meeting between now for the period policy
should be to continue the general program of restraint indicated at the meeting on August 23, with the understanding that operations in the open market should be handled in a manner which would result in errors being on the side of greater restraint rather than ease. Mr. Robertson disagreed with this conclusion for the reason that he felt a policy of increasing restraint should be pursued, Mr. Earhart referred to a situation in the Twelfth District in which some commercial banks had indicated that in view of the recent state ment issued by the Chairman of the Federal Home Loan Bank Board with respect to borrowing by savings and loan associations from the Home Loan Banks, com mercial banks were being approached by savings and loan associations with requests to borrow funds to enable them to take up commitments they had made on real estate mortgages. He wondered whether other Districtshad experienced the same situation, that he understood the general situation was under Mr. Sproul stated between the Home Loan Bank Board and the Treasury and he also discussion watching developments to see whether steps understood that the Board was to clear up the intent of the Home Loan Bank Board regarding were needed borrowings in this field. an inquiry from represen stated that he had received Mr. Robertson connection with proposed legis Credit Administration in tatives of the Farm to make advances to member Federal Reserve Banks lation which would permit at the discount rate, the Federal Land Banks by obligations of banks secured on at least one had been made this proposal, which was his hope that It would again be dropped. occasion in the past,
Mr. Sproul referred to the authority given by the Committee to the Federal Reserve Bank of New York at its meeting on August 23 for repurchase agreements and inquired whether there was any suggestion for change in the authority approved at that meeting. There was unanimous agreement that the Federal Reserve Bank of New York be authorized to enter into repurchase agreements with non bank dealers in United States Government secu rities, subject to the conditions for such agree ments prescribed by the Committee at its meeting on August 23, Mr. Rouse referred to the existing authorization under which the Federal Reserve Bank of New York is authorized to acquire bankers' accept ances to an amount not in excess of $25 million at any one time. (See minutes of June 22, 1955 meeting of Committee at which authorizations there tofore granted by the executive committee and still in effect on June 22, previously given by by the Committee; and authorization 1955 were adopted executive committee at its meeting on March 29, 1955.) Mr. Rouse suggested, which he indicated, that this figure be increased to $50 million. for reasons whether an increase in the amount of Mr. Mills raised the question Reserve System was desirable purchased by the Federal bankers' acceptances an increase at the particularly whether such under present circumstances, Federal Reserve System was becoming a present time might indicate that the the acceptance dealers." of last resort to "banker of Mr. Rouse's suggestion during There followed a brief discussion prepare a memo requested to the staff be suggested that wnich Mr. Sproul of the Committee at the next meeting matter for consideration randum on the
This suggestion was approved unanimously. Mr. Rouse stated in response to a question from Mr. Sproul that he had no suggestion for change in the general directive to be issued to the Federal Reserve Bank of New York at this meeting. 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 Com mittee: (1) To make such purchases, sales, or exchanges (including 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 prospective economic conditions and the gen eral 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 restraining inflationary developments in the interest of sustainable economic growth, 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 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 shall not be increased or decreased accommodation of the Treasury, by more than $1 billion; from the Treasury for the account of (2) To purchase direct the Federal Reserve Bank of New York (with discretion, in cases to issue participations to one or more where it seems desirable, Banks) such amounts of special short-term certifi Federal Reserve as may be necessary from time to time for cates of indebtedness of the Treasury; provided that the the temporary accommodation total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million; the System account the Treasury from sell direct to (3) To of Treasury securities matur gold certificates such amounts for from time to time for the within one year as may be necessary ing the total amount of Treasury; provided that accommodation of the shall not exceed in the aggregate $500 such securities so sold such sales shall be made as nearly as million face amount, and currently quoted in the open may be practicable at the prices market.
Mr. Szymczak said that last Friday Senator Douglas called him on the telephone and referred to a discussion he had had with Mr. Sproul and himself several years ago in which the Senator mentioned that he would like to learn more about open market operations. The Senator suggested that he now pay a visit to the New York Bank for the purpose of observing operations on the security desk and otherwise with a view to becoming more familiar with the open market procedures, indicating that this might be done between October 20 and November 1, He also suggested that he would like to take a qualified economist with him to assist him in observing and analyzing the details of the operations. said that Mr. Szymczak had discussed this matter with Mr. Sproul he felt the Committee would wish to reply to Senator Douglas him and that have him observe the operations of the Committee that it would be glad to York. The response should indicate, Federal Reserve Bank of New at the of the Committee and details as that information as to the policy however, the appropriate committees in could only be furnished to to its operations procedure. In the meantime, accordance with established the Congress in could or would not think that the Committee said that he did Mr. Sproul Douglas. However, he as that made by Senator to deny such a request wish members of against individual would wish to guard thought the Committee information which as a means of obtaining using such visits the Congress well es manner already in a official channels to them through should come tablished. should welcome that the Committee that he agreed Vardaman said Mr. of his bringing the propriety that he questioned visit but the Senator's
with him an economist. Rather, Mr, Vardaman thought, it might be suggested that the System designate one of its economists to assist Senator Douglas during his visit in whatever way he wanted so as to avoid any question of having an individual other than the Senator himself observing the open market operations. Mr. Ralph Young stated that he had received a call from Mr. Ensley, Chief of Staff on the Joint Committee on the Economic Report, which might be related to Senator Douglas' call, Mr. Ensley had asked that he (Mr. Young) meet with Senator Douglas, Mr. Ensley, and Mr. Wallace, Director of Staff of the Senate Banking and Currency Committee, to discuss monetary and banking statistics. It was Mr. Young's thought that this invitation, which had accepted, might be related to the other proposal of which he had not he previously known. of Senator Douglas' request and it was There was further discussion Mr. Szymczak would talk further with the Senator, assuring him agreed that Bank would be glad to have him observe that the Committee and the New York Mr. Szymczak would also present the the operations. In the discussion, desirable under all the Douglas felt it would be question whether Senator an economist from the Committee's he be accompanied by circumstances that economist adequate for his purpose. whether he might find a System staff or his conversation to the Mr. Szymczak would report It was understood that Committee. been authorized at the meeting noted Chairman Martin had Mr. Sproul for carrying out to review plans 1955 to appoint a subcommittee on July 12,
the operations of the Federal Open Market Committee in the event of an emergency. He noted that Mr. Robertson had a special interest in this subject in connection with the reviews being made of Federal Reserve plans for emergency operations, and he stated that in the absence of appointment of a subcommittee he hoped that Governor Robertson could do some work on existing plans with the view of expediting Committee consideration and action, Mr. Sproul stated that he had one other matter that he would like to discuss concerning both the procedure for getting matters before the Committee for its consideration and the substance of the discussion regard ing discount rate policy at the meeting on August 23, 1955. He then made a statement substantially as follows: 1. I would like to make same tentative comments on the sug gestions with respect to discount rate policy which were made at the last meeting of the Committee, first as to matters of form and then as to substance. 2. As to form or procedure it has always seemed to me that, if at all possible, statements such as those presented by Mr. Riefler and Mr. Young should be distributed to members of the Committee--and to the other Presidents--sufficiently in advance of a meeting so that they would have time to consider the com plex problems involved and thus be better able to contribute to their discussion. Otherwise the record is likely to have a lop sided appearance, perhaps adequately presenting only those views writers of the papers. In this case the Board members held by the as suggested by Governor had time to study the memoranda, may have had to rely on immediate re statement, but the Presidents Mills' actions to an oral presentation. Advance distribution of such papers, in addition to contribut also mitigate the dilemma as to how widely ing to discussion, would So long as they were not part such papers should be distributed. of the Federal Open Market Committee, but merely of the records problem, the confidential dealing with a System provocative papers Market Committee would of the Federal Open of the records character so in the appear to be particularly This would not be in question. with the discount rate. having to do so largely case of documents
3. As to substance, I have several observations which may need to be considered or reconsidered after further study, but which I feel I should mention now. There is no real question, it seems to me, about the desirability of exploring new or dif ferent methods of using our weapons of credit policy, in the light of present day conditions in the banking system and the money market, if we remember that our experiments are not of the laboratory but are experiments with the economic blood stream. 4. Now to some of the specific questions with which I have difficulty. (a) It is said that "the basic tradition of central banking is that the discount rate in boom times ought to be a penalty rate." In my opinion this is not the basic tradition of central banking in the United States as it has evolved since 1914. It is the basic tradition of central banking in the United Kingdom on which we tried to pattern ourselves without complete success because of differences in the banking system and the discount mecha nism. The discount mechanism in the United States serves a purpose which is almost absent in the United Kingdom in that it supplements reserve averaging so as to enable a large number of relatively small individual banks to ad just their reserve positions to their individual and This is quite apart from differences often temporary needs. in the discount mechanism which have been found essential to maintain the penalty rate apparatus in the United Kingdom and which do not exist in the United States. with the argument that (b) Second, I have difficulty between "then" and "now" makes the the vast difference rate" tradition more acceptable now than it was "penalty and that this is largely because there is in the twenties, strategic or dominant rate in the now one single pivotal or namely, the Treasury bill rate. short-term money market, It seems to me that in recent months and years, the Treas less a part of the money market ury bill rate has become of reserve funds at structure, reflecting the availability more a reflection of the availability of the banks, and short-term funds. So long corporate and state or municipal large nonbank investors continues to include as the economy holdings of liquid assets, who acquire and require increasing demand deposits is of interest on so long as the payment and special influence in there will be an increasing prohibited, rate will often and the bill for Treasury bills, the market to other rates in the sensitive money move out of relation than we were to hav if we are much closer markets. I doubt against which a penalty market rate ing a single short-term rate could be uniformly set, discount
(c) In fact I have difficulty with the whole "penalty rate" concept under our conditions. What is to be penalized? It is suggested that we penalize any bank that attempts to borrow from us and use the funds to buy highly liquid paper at a profit, and to remove any incentive for member banks to adjust reserve deficiencies through discounting rather than through disposal of securities in the market. I have diffi culty in seeing how that kind of penalty can be enforced by relating the discount rate to the bill rate. In the broadest sense it is still true that the basic reason for member bank borrowing is to obtain reserves to meet heavy demands for loans, which are made at rates well above the discount rate. In a narrower sense, even if the so-called penalty rate were designed to affect bank investments, it would have to be re lated to the rates on Government securities stretching out well beyond the 90 day bill. (d) I have difficulty also with the actual role of open market operations under the policy suggested. As I understand it open market operations would be used to maintain a volume of negative free reserves sufficient to make market rates of interest highly responsive to the discount rate, but not in such large volume as to raise the bill rate above the dis count rate. Does this mean that the System should maintain a formal penalty rate situation by easing up on reserve pres sure whenever the bill rate tends to rise above the discount rate, or does it mean that the discount rate should be raised again and again, say in a period of increased seasonal demand for credit, to keep it in the proper position with respect to the bill rate? If the first course is followed we are likely to lose rather than gain control of the credit situation and if the second course is followed we would seem to have acquired a built in device for shoving the discount rate up, during periods of credit restraint, with real risk of creating dis orderly conditions in the capital markets. The only time in recent years when the bill rate went substantially above the discount rate was in the spring of 1953. Such increases in at that time might have created conditions the discount rate which would have brought the capital markets to more of a standstill than was actually the case. (e) This leads me to another difficulty. The discount rate has been above the bill rate most of the time during the existing relationship is now the past two years, and been suggested as the appropriate one. We about what has to achieve this a timeless or rigid formula have not needed result. It may be said that it has come about in the wrong has followed open market opera way, that the discount rate think that is more a matter of leading, but I tions instead
of terms and definitions than of unchanging fact. We have had a situation in which bank borrowing has increased but in which most banks are still swayed by their reluctance to borrow over long periods, and we have had a situation in which there has been large scale adjustment of individual bank portfolios as they sold Government securities to ac commodate loans. That, I would say, is what we wanted, If more severe "penalty rates" than have obtained during this period are now envisaged and, if we want to get the discount rate up faster and higher in order to force the banks to sell whatever Government securities they have of whatever maturities, we are really talking about discount rate action and discount rates which could have a demoralis ing effect on all capital markets. (f) I also have some difficulty with a formula which implies that the discount rate should be set uniformly by all Federal Reserve Banks, even though in the past I have been doubtful whether this could be avoided. It may be that recent experience suggests certain tactical advantages, at times, in staggered increases in discount rates. It unfortunate, in any case, unless the grounds were would seem very clear, to adopt a "penalty rate" formula which would further reduce the role of the directors of the individual banks in setting discount rates. 5. What this may all boil down to is the question in my mind we should contemplate tying ourselves down to mind as to whether of action with respect to the discount rate at all times one course is not necessarily the same thing as ex of credit restraint. This possible methods of making the discount rate ploring and using all of conditions. There are times and circum effective under a variety lead more than it has, but in when the discount rate should stances judgment we have to beware of to substitute a formula for attempting abandoning responsibility. which have occurred to me, 6. These are some of the thoughts put forward at the last meet they suggest that the proposals I think before we can weigh them further study and clarification ing need these tentative comments why I wished to make properly, and that is today. of the Federal Mr. Bopp, Vice President Williams stated that Mr. with respect to dis had prepared a statement Reserve Bank of Philadelphia, by Mr. Sproul, and related to the subject discussed count rate policy which the statement as follows: he then read
"MONEY MARKET IMPLICATIONS OF NEGATIVE FREE RESERVES "I. The discount rate, market rates, free reserves and member bank borrowing "Since free reserves are defined as excess reserves minus member bank borrowings from the Federal Reserve Banks, they can be negative only if borrowings exceed excess reserves. Further more, since excess reserves rarely fall below $1/2 billion, free reserves do not reach a negative level until borrowing exceeds that figure. In other words, negative free reserves mean that the money market is dependent directly on the Reserve Banks to a con siderable degree. "Attempts of member banks to reduce this dependence, either because of tradition possibly reenforced by moral suasion or be cause it is made more expensive, will tend to tighten the money market in terms of both availability and cost of credit. "But these attempts to reduce dependence will be frustrated if a specified level of negative free reserves continues to be the goal. A primary effect will be a further rise in market rates. If the discount rate is to continue to be a penalty rate or to lead the market, it will have to be increased again. "We may begin with member bank borrowing of, say, $700-800 million and negative free reserves of $100-200 million. The dis count rate is raised to lead the market--or to make it a penalty rate. But this penalty rate will not reduce borrowing so long as open market operations are designed to maintain negative free re serves at the original level. Market rates, however, may be ex pected to rise because credit has become more expensive at one of its important sources (Federal Reserve Bank discount windows). If the new discount rate is to be kept above market rates, it will have to be increased again. "The point is that the periodic upward adjustments of rates rapid. Too rapid an upward adjustment could create could be very a liquidity crisis. purpose of tightening the market is, of course, "An ultimate question of policy is the speed with which to curb demand, but the the brakes should be applied. Although the central bank operates market, its ultimate purpose is to influence the flow in the money If the existing tone of the of purchases throughout the economy. appropriate to the state of theeconomy, money market is judged to be be changed for the purpose of assuring the discount rate should not "lead" rather than to "follow" market rates. that it will continue to "II. Anticipations and the rate structure the time structure of interest "Although many factors influence as to rates is the market's expectations a pervasive influence rates, rise, the slope will expects rates to future. If the market in the will be lower than (rates on short maturities tend to be positive is that borrowers will The basic reason those on longer maturities). rise takes place, and long terms before the expected wish to issue
the lenders will hesitate to invest in long issues until after the expected rise has taken place. In other words, the expecta tion tends to increase the demand for and to reduce the supply of long-term funds. At the same time, lenders, not wishing to keep funds idle, will tend to invest in short terms, whereas borrowers will borrow on short term only if they secure a rate concession. The expectation of a rise tends to increase the supply of and reduce the demand for short-term funds. "If the market expects rates to rise, it may be difficult to force up short-term rates without "drying up" the long-term capital market to a greater extent than may appear desirable." In the ensuing discussion Mr. Vardaman requested that copies of the statements presented by Messrs. Sproul and Williams be made available to the Committee along with the statements by Messrs. Young and Riefler on August 23. that he assumed that further comments by others could be in Mr. Riefler said that the papers referred to should be made available cluded and it was agreed for further study and discussion by the Committee. his remarks to be critical that he did not intend Mr. Sproul stated in presenting the comments Young but that his purpose of Mr. Riefler or Mr. regarding discount rate was to stimulate thought he had made this morning there could be a discussion at a subsequent meeting in the hope that policy the broadest possible basis. its various aspects on of the problem and Committee would be held the next meeting of the It was agreed that of Presidents of the Conference which time a meeting 4, 1955, at on October also be held in Washington. Reserve Banks would of the Federal meeting adjourned. the Thereupon Secretary
Also: Record of Policy Actions