October 4, 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, October 4, 1955, at 10:00 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 Messrs. Erickson, C. S. Young, Johns, and Powell, Alternate Members of the Federal Open Market Committee Messrs. Williams, Bryan, and Leedy, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, respectively. Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Vest, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Daane, Hostetler, Rice, Roelse, Wheeler, and R. A. Young, Associate Economists Mr. Rouse, Manager, System Open Market Account 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 Reserve Bank of New York Upon motion duly made and seconded, and by unanimous vote, the minutes of the
meetings of the Federal Open Market Com mittee held on September 14 and 26, 1955, were approved. 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 June 22 September 28, 1955, inclusive, and at this meeting there was distributed a supplementary report covering commitments executed September 29 October 3, 1955. Copies of both reports have been placed in the files of the Federal Open Market Committee. Upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period since September 13, 1955 were approved, rati fied, and confirmed. Members of the Board's staff from the Divisions of Research and Statistics and International Finance then entered the room for the pur pose of presenting an economic review illustrated by chart slides. Following the meeting, a copy of the text of the review was sent to each member of the Committee. The review stated that by late September the economic situation to a point where financial developments had become a more had advanced of business trends. Consumer credit had critical factor in the shaping to new heights and so also had mortgage credit, sup been rising rapidly The buoyancy in stock active markets for autos and housing. porting very prices during late September had been especially striking, a buoyancy
that in recent months appears to have been mainly fostered by ebullient confidence rather than speculation on the basis of credit expansion, for the growth in stock market credit tapered off following the second in crease in margin requirements in April and by summer had virtually ceased. It was at this stage of economic development that announcement of Presi dent Eisenhower's illness came as a shock to confidence. While it is too early to assess the economic significance of that announcement, the immediate response was a sharp set back in stock prices accompanied by a sharp rise in trading. Events in the stock market often foreshadow activity and suggest at least the possibility of more changes in business of some postponements in business and con widespread hesitation and also sumer spending. elements of the economy, in some detail on various After commenting reserve needs regarding projected with a statement the review concluded that seasonal and normal This projection assumed for the balance of 1955. of this year would during the remainder in demand deposits long-run growth would show the currency in circulation billion and that be about $4-1/4 billion. The projec of a increase of about three-quarters usual seasonal Federal Reserve $1 billion of a little over a need for tion indicated and most of million in October year-about $500 rest of this credit for the needs large pre-holiday December when November and in late the remainder that the Federal review suggested The were expected. and money for credit bill purehases Treasury by outright needed the reserves could supply Reserve
or repurchase agreements, or it could refrain from open market action in which case member banks would need to increase their borrowing. A com bination of these means could, of course, be used. Despite uncertainties in the economic outlook, it was suggested that the situation still appeared to be one in which demands were expanding rapidly while supplies of industrial products were coming under capacity restraints. In this situation, a strong case could be made for limiting the volume of re serves made available through open market operations but such a policy to be pursued with caution in order to avoid the sudden would need in credit markets. Under such a emergence of undue restrictive tension might need to be raised further at a program, the discount rate level scrutiny of consumer and date. Critical qualitative relatively early strengthened. Finally, the be continued if not mortgage credits should than in most other periodsbe alert--perhaps more System would need to which might call general economic situation possible shifts in the to and credit policy. of current monetary for modification to what elements in the of Mr. Young as Mr. Sproul inquired and consumer credit, from mortgage credit situation, aside economic to be unsatisfactory. might be considered situation to add the agricultural said that he would Mr. Young taking the However, were not satisfactory. of elements which the list outlook was and the was very strong a whole, it situation as economic if would be desirable just what situation was The existing very good.
it did not present a danger of spiraling prices based on levels of demand running ahead of supply. Mr. Thomas felt it important that, as brought out in the economic review, there had been great expansion in the economy thus far and in dustry was now approaching capacity levels. Further expansion in demand could not continue without putting upward pressures on prices, In response to a question from Mr. Johns as to whether the re tardation in the rate of expansion reported prior to the President's illness was attributable solely to limitations of capacity of industry, Mr. Young said that while there were other elements, he felt that the approach of output to relatively full capacity was the most important factor. The members of the staff who had entered the room for the economic review then withdrew from the meeting. Mr. Sproul called for comments regarding open market operations to be pursued in the light of the review of economic and credit conditions. Mr. Balderston stated that until after the payment date for the current Treasury financing (October 11) he would attempt to maintain the in the market last week. After October degree of restraint that existed still greater restraint such as would be re 11, however, he would favor to 2.40 and negative free reserves of flected by a bill rate of 2.30 the psychological shock to million, more or less. Despite perhaps $500 caused by the illness of our Chief Executive, the business community
Mr. Balderston felt that the current and prospective momentum of recov ery must be appraised carefully by the Committee. Quality of credits being granted must be appraised; the approach of production to capacity in the steel, construction, and other industries must be observed; and the resultant danger of price and inventory increases must be watched carefully. Mr. Balderston's concern was that the existing business momentum was being accompanied by such changes in wages and labor costs and in raw materials costs as would bring about price rises detrimental to consumers generally and especially to farmers. He felt that the price increases now evident and in prospect would be conducive to in ventory growth that would ultimately cause trouble to the economy. Therefore, Mr. Balderston felt that in addition to greater restraint exercised through open market operations after October 11, an increase in the discount rate to 2-1/2 per cent prior to mid-November would be called for. This date was mentioned, he said, so that a condition of relative stability might be established prior to the Treasury financing to take place in December. Mr. Szymczak thought that the present situation was one which continuing the present policy of tightness without allowing called for a cause, or to be cited as a to become so severe as to be the tightness such a down turn developed. He of a down turn in the economy, if cause, of as much as $500 million think that negative free reserves did not more to a level of around $300 to would be desirable and was inclined
$350 million. He would also allow member banks to come to the Reserve Banks with discounts for additional funds that might be needed, but at this time he could not say whether he would favor a discount rate change later on since the need for such an increase at a later date could not be appraised at the present time. Mr. Szymczak also noted that the Treasury now had its books open. Developing trends should be observed over the next two or three weeks, he said, and in the meantime he would favor continuing the general policy of tightness discussed at meetings of the Open Market Committee during the past month although he would not have quite as much tightness as before the illness of the President. Mr. Erickson thought that open market policy had been handled very well recently. He would not go as far as Mr. Balderston in re straint during the present period. The President's illness had caused some weakening of confidence in the general economic picture and, while he would keep pressure on and would let it increase slightly over the next few weeks, he would not move to tighten the situation sharply. He hoped that the discount window would be used more and he would not raise the discount rate at the present time. Mr. Erickson said that he would favor taking another look at the situation toward the end of this month to see what the effect of developments had been during the month of October. He also noted that a very distinct tightening of mortgage money had become apparent in New England recently.
Mr. Irons said that he generally agreed with the position taken by the staff in its review. The economic situation is very strong. It seemed to him that this reflected the consequences of a full production, full employment situation. The economy was moving nearer capacity in many respects, and as this point approached less efficient means of pro duction would be utilized and prices would tend to rise. While it could not be known what uncertainties might arise as a result of the President's illness, it seemed to Mr. Irons that the Committee should continue to exert pressure on bank reserves, the bill rate should be in better rela tion to the discount rate, and if he were to use a figure of negative free reserves he would say something in the range of $300 to $350 mil lion rather than any substantially higher amount. He would not be prepared at present to recommend an increase in the discount rate and would wait for two or three weeks to consider such a change. In carrying out this program, he would resolve doubts on the side of restrictiveness rather than ease. He also felt that during the next two to four weeks the day-to-day situation might be such as to make it desirable to allow account considerable leeway so as to permit it to the management of the of the Committee's general policy of restrictive meet, within the limits ness, whatever conditions developed. his views were very close to what he Mr. Earhart stated that to be the views expressed by Messrs. Szymczak, Erickson, and understood suggested by Mr. Balderston. to the more vigorous policy Irons, rather than
Mr. Powell said that he would favor waiting a little longer than Mr. Balderston had suggested before making any further restrictive moves. The larger banks in the Ninth District were beginning to borrow quite heavily again, he said, indicating that the 2-1/4 per cent discount rate was not offensive to them. If this tendency to borrow were to develop much further he would feel inclined to recommend to his board of directors a further increase in the discount rate promptly. After commenting on economic conditions in the Ninth District as well as in the United States generally, Mr. Powell said that he was inclined to favor a "go slow" attitude for a period of two or three weeks with the thought that con sideration could be given to what further moves might be necessary when the next meeting of the Committee was held. Mr. Leedy recalled that for some time he had taken the position that the Committee should have applied more pressure than it had exerted. particular juncture, however, he felt the situation was sensitive At this should not attempt to increase the pressure it has and that the Committee recently. Developments over the next two or three weeks been applying appraise the situation much better than was would enable the Committee to necessary to increase the dis At that time it might seem possible today. of negative free reserves. For the present, count rate or the amount just about the the Committee should continue Mr. Leedy felt that however, it has been applying recently although if, from day to day same program could be made, he would some little increase in pressure it appeared that
favor that course. In other words, he would resolve doubts on the side of additional mild restraint. Mr. C. S. Young expressed the hope that no increase would be made in the discount rate for several weeks. There was much uneasiness under the surface, he felt, and he would hope that negative free reserves might run around the $300 million level during the immediate future, rather than closer to the $500 to $600 million level. Mr. Leach said there had been no fundamental change in the econ omy since the meeting on September 14. It looked as strong as before but the Committee could not be certain as to the effect the President's ill ness and the down turn in the stock market would have on business planning. Once the Treasury financing was behind, Mr. Leach felt that Committee policy for the next three weeks might be the same as before the telephone conference meeting on September 26. This would mean restora tion of the understanding that doubts in carrying out open market opera tions be resolved on the side of tightness rather than ease. Estimates of free reserves indicated a substantial negative position during the and in addition to use of repurchase several weeks, Mr. Leach said, next outright purchases of to take care of temporary situations agreements While he would not tie ex probably would be necessary. securities one or even two indicators in measuring tightness, he clusively to any a level of around $1 billion of member bank was thinking in terms of they are. This rates about where and short-term interest borrowings
presumably would mean negative free reserves around $400 million. Mr. Leach went on to say that there seemed to be some difference of opinion as to how the Committee's restrictive policy had affected banks. He was convinced, he said, that in the Fifth District the larger banks approved the policy and that they had become more selective and restrictive in making loans. While loans were increasing, this was to be expected at this season. Mr. Leach did not think the restrictive policy had directly affected the smaller banks a great deal except that most of them now have some depreciation in their security accounts. resumption of the degree of restraint that existed While he advocated the President's illness, he would not wish to intensify pressure before at this time by increasing the discount rate. all of the comments were moving Mr. Mills said he gathered that to the economic review which presented toward the same goal. He referred approaching a leveling off economy which might be a picture of an active exposed to psychological influences. and which might be unusually period the influence of credit the economy needed the same time, he felt At felt that the however, Mr. Mills applying credit restraint, restraint. In negative free reserves severe. For example, should not be too Committee level that had existed $300 to $350 million go much beyond the should not effects of the opera yet have felt the full The economy may not recently. reserves of a level of free system against commercial banking tions of the for a period favor experimenting that he would Mr. Mills said this scope.
with the program the Committee had already pursued so that it could be sure it was not shutting down on the availability of credit in a way that would be harmful to the economy rather than helpful. Until after October 11 when the Treasury financing payment date would have passed, the Committee would not wish to move more aggressively by altering the pattern now being followed. The next positive step to be taken by the System, he felt, would probably be an increase in the discount rate to 2-1/2 per cent. For the immediate period, however, and considering the reserve requirements for the remainder of this year which would call for additional reserves of a magnitude around $1 billion, he felt that a combination of repurchase agreements, additional discounting at the Re serve Banks, and direct purchases of securities for the open market account was called for. then made a statement substantially as follows: Mr. Robertson degree of restrictiveness of monetary policy has been 1. The the past six months. We have been too inadequate during light of the upsurge of economic forces slow to act in the tendencies. Today it is wholly inade with inflationary of negative free reserves today quate. A given volume of a much smaller volume a lacks the restrictive weight few weeks ago. illness our action was In the week before the President's time of the last meeting of wholly inadequate. At the the New York Bank's on September 14th, this Committee of free reserves for the estimate of the average level was -60 million dollars. Yet week ending September 21st taken to tighten re no action was despite that estimate, week turned out to be actual figure for the serves. The participants misinter dollars. Some market -116 million swing toward ease, particularly development as a preted this so prompt and precise that we had been view of the fact in
to keep negative free reserves around a level of -250 mil lion for several weeks preceding. It would seem probable that if the projection had shown negative free reserves as much above the target as -60 million was below, credit easing action would have been taken by the account promptly. 3. The action of the Committee on September 26th to take the "strings" off the Manager (i.e., relieve him of the obliga tion to resolve doubts on the restrictive side) in order to enable him to move to offset unexpected and indeterminable public psychological reactions to the President's illness was a sound and correct action. It did not intend, I feel sure, to seek a back-up in the absence of unexpected tightening beyond levels contemplated at the last meeting, although the activity on September 27th and 28th and 29th would indicate that perhaps that was the understanding of the Manager of the Account. 4. The purchases during the first few days of last week can be justified both on the basis of the sharp decline in stock prices that occurred a week ago yesterday and the sub stantial decline in reserve positions. However, I can find no justification for the repurchase agreements entered into last Thursday, particularly of the magnitude involved almost a hundred million dollars. They came a day after the account itself had predicted that average free reserves would decline from a level of about -350 million dollars to -330 million and despite the fact that the degree of tight ness has been consistently overestimated in these projec tions from week to week in the past. 5. This behavior of the account's operations over the past three weeks strikes me as crystal clear evidence that we must find ways and means of more clearly delineating our judgments and more specifically fixing targets if our directives are to be properly implemented. 6. The rebound in the stock market on September 27th and its behavior since then is evidence that the break of Monday, September 26th, may have been simply a short-lived jittery reaction to a calamity, based in large part on sentiment, indicative of any over-all weakness in the and was not Certainly this morning's presentation of the economy. economic outlook evidences the continued upward trend of important economic indicators. that the Federal Re take it for granted 7. Today many people serve cannot move, and as a result it is disregarded as a potent force to stop the upward trend. It is being dis that it is now too late to act and regarded on the theory that we are frozen into position--as we are to some extent,
at least. Only a shock could restore the restraint called for by the economy in order to prevent damage in the way of unwarranted expansion, and during the next ten days we can hardly administer a shock and still maintain an "even keel" during the government financing period. This is so even though this particular financing is not one that can be affected adversely by restrictive monetary policy to the same degree as ordinarily would apply, because of the volume of available funds in the market and the character of the offering. 8. Bank loans are continuously moving up, and despite cries of tightness, the banks seem able both to meet advance com mitments and expand loans generally without reserve difficulties. It is possible that between operations in the Federal funds market and borrowing from the Federal Re serve Banks, some banks are continuous borrowers and some even could be characterized as complacent rather than "reluctant" borrowers. Certainly there has been small liquidation recently of government securities in order to meet needs for reserves on which to base credit expansion. to me that now (during the last two of the 9. Hence, it seems period) is the time to be putting on the next three-week brakes a little harder. I suggest aiming toward between 450 and a. Therefore, free reserves during 500 million dollars negative the three-week period, provided that portion of that aiming at such a target will lead to a short rate of near 2-1/4 per cent, a term government between one billion and one volume of borrowing billion dollars, and a reasonable and one-half curtailment of member bank lending. from moving too fast in adding b. We should refrain outright purchases or re reserves through either should be made in purchase agreements--movements the light of the results achieved through aiming at the suggested target. be given to an grave thought should c. In addition, as soon after October in discount rates increase will be Treasury financing possible. The 15th as even keel will by then. A fairly out of the way through the government have been maintained will not be Such an increase financing period. a concern with but will evidence wholly unexpected and can be followed maintenance of stability the policy at the open market by a more restrictive then warrant. meeting if conditions next
Mr. Sproul asked that Mr. Rouse comment on two questions that Mr. Robertson had raised about the operation of the System account: (a) whether a decline in negative free reserves during the week ending September 21 might not have been offset by operations for the System account so that the average level of negative free reserves might have been considerably higher; and (b) whether it was appropriate to enter into repurchase agreements on Thursday, September 29. Mr. Rouse noted that projections of average negative free reserves during the week of September 21 differed, the projection prepared at the Board indicating a substantially larger volume than the one prepared at the New York Bank. While the projections indicated a reduction in nega tive free reserves on Thursday and Friday of that week, there was also an indication that there would be a very high deficiency the following The System account management did something about the Monday-Wednesday. said, through arranging with the Treasury for a situation, Mr. Rouse its balance up and thus reduce the volume special call which would bring that an average free reserve It was because of this action of reserves. week ending September 21 was minus $120 million for the position of that if an attempt had he also had in mind Mr. Rouse said that attained. reduce the volume of free from the account to been made to sell securities it would have become and Friday in question, reserves on the Thursday because of the the following Monday that operation on necessary to reverse he had in-and-out operations, situation. Such expected very tight
understood, were generally not desired by the Committee. Mr. Rouse also stated that during the week in question when free reserves averaged negative $120 million, there was no dimunition in the feeling of tightness that existed in the market. Mr. Rouse then referred to the repurchase agreements executed on September 29. He was not at the New York Bank that day but there was a question whether the System account should facilitate the dealers' opera tions by picking up some of their bills. Dealer positions were large as a result of their allotments of new bills on that day and the selling by corporations and by banks preparing for their September 30 statements. Also, since the quarterly statement date fell on a Friday, bank borrowing was large on Thursday to average out against repayment the following day. As a result of these conditions, there seemed to be a degree of tightness developing which resulted in the decision to make the repurchase agree ments. As it turned out, the judgment appeared to have been right, Mr. Rouse said, in that average negative free reserves that day turned out to be minus $335 million which was about $36 million higher than on the pre free reserves has con Approximately that volume of negative ceding day. tinued up to the present time. said that he thought Mr. Rouse was overestimating Mr. Robertson he (Mr. Robertson) did to be put on in-and-out transactions; the criticism "in-and-out" trans opposed to to be clearly understand the Committee not to the market. they were not confusing account if for the System actions
Nothing in his statement was designed as criticism of the management of the account, he said, but rather of the Committee for failing to be more specific in its directives. Mr. Shepardson said that there still seemed to be a strong move ment upward in the economy with considerable indication of further wage and price pressures. The situation in agriculture did not give promise of immediate improvement, he said, and with other segments of the economy moving in the direction in which they appeared to be moving, a further disparity was developing between agriculture and the rest of the economy. He felt the System was fully justified in continuing a strong and in creasing pressure on the credit structure. During the past week an unusual situation was presented because of the element of uncertainty and the Committee should continue to watch this closely. On the other hand, Mr. Shepardson felt that the first shock of the President's illness was pretty well behind us and that the Committee should continue to exert the pressure contemplated prior to the meeting on September 26. He would to a continuing degree of tightness with some increase in favor going back reserves and with the understanding that, in carrying out negative free should be resolved on the side for the System account, doubts operations expressed the view that for a consid of tightness. Mr. Shepardson also had been carried on with doubts having erable period of time operations not wish to suggest a of ease. While he did been resolved on the side should increase somewhat. that negative free reserves precise limit, he felt
He would not suggest an increase in the discount rate at this time. The System should be looking toward the probability that such an increase would be advisable when the Treasury's current financing was completed, but he felt it unwise to make any commitment on this point at present. Mr. Shepardson went on to say that he gathered from discussions of this subject that reluctance to engage in "in-and-out" operations in the past had arisen partly because of the tendency of some elements in the market to look at changes in the open market account rather than at the resulting free reserve situation. He suggested that if the amount of free reserves was a significant index of the degree of tightness, it might try to get the financial community generally to look at be desirable to as an index and thus to interpret buying the level of free reserves such in those terms. This, he felt, would and selling for the System account in using the open market instrument. give the System more freedom did not think the Committee Mr. Sproul said that he personally of whether it should be free reserves as the index should take negative not think the market should the market, and he did tightening or easing assumed that negative that the Committee brought around to believing be the Committee was relying the index or that free reserves represented depended on the place, a good deal index. In the first solely on that in reserve cities they were concentrated reserves, whether distribution of also, on whether out over the country; cities or spread or central reserve effects on the reserves was having negative free volume of the existing
market which were in accordance with or contrary to the policy the Com mittee was trying to pursue. The condition of the money market is not always a direct resultant of any fixed level of free reserves, Mr. Sproul said, and different levels of reserves could show up in different move ments of interest rates, in the condition of the dealers in the market, or in the operations and attitudes of member banks including their willingness to borrow from the Federal Reserve System. Mr. Sproul did not feel that it would be fruitful to use negative free reserves as a single indicator of the direction either of System credit policy or of conditions in the money market. Mr. Fulton thought that the uncertainty the country was supposed to be in was more a matter of conversation than actuality. Businessmen in the Cleveland District indicate that they have not changed plans for iota, he said, and the man in the street is satisfied with expansion one administration and feels that if a change his welfare under the present there might be some inflation which would in administration comes along more dollars. With this background, Mr. Fulton result in his receiving in making commitments had been did not feel that actions of individuals One problem, he said, of the President's illness. affected by the incident in obtaining fairly skilled industry was experiencing was the difficulty and this was an element machines already available to operate the workers still free reserves There were to seem to "top-off." causing production Fulton felt that the System District as a whole. Mr. in the Cleveland
should be on the tighter side, that it should resolve doubts in its opera tions on the side of tightness, and that the discount rate should not be moved until the Committee could see more clearly whether the economy would level off in the next couple of weeks. Also, he felt the discount rate should not be advanced again until market rates had been brought up con sonant with it. Mr. Bryan said that he was less certain as to which way the economy was going than was indicated by some of the other comments. Bank loans were still going up but marginal borrowers in the Atlanta District were having difficulty in finding credit. He felt the System's restric tive policy had been having an effect during the last 60 days and there was unmistakable evidence that the mortgage market in the Sixth District had tightened rapidly during the past 30 days. Mr. Bryan was inclined to attach more significance to the behavior of the equity market than others had indicated. The situation in the equity market, he thought, was not fundamentally produced by the President's illness but by a level of prices, particularly for high quality equities, which was high and had been predicated on a continuing advance in the economy and in profits. Such a level of equity prices could not be justified even on the assumption that the economy would continue stable. Mr. Bryan felt that monetary policy may a basic cause and effect relationship to developments in the equity have had from the stock market decline and, in turn, there might be effects market declines) which might well induce a the possibility of further rapid (and
more cautious approach to expenditures and capital commitments. Neverthe less, information showed a booming economy and one that could increase price levels sharply with the result that serious capital distortions in the economy might develop--something that the System would not desire. Mr. Bryan's inclination was to go along with the general theory that the System should not relax pressure and he noted the suggestion for using a combination of methods to pursue an appropriate degree of tightness: some reserves to be supplied through open market operations but not the entire seasonal requirement; some reserves to be supplied through re purchase agreements, and part of the seasonal requirement to be met dur ing the fall months at the discount window. He would agree with this general approach although he thought that the System might find there would be a sufficient additional tightening if member banks were brought further into debt at the Federal Reserve Banks. Such a development would be desirable as a means of offering an opportunity to talk directly with the member banks on a lender-borrower basis. Mr. Bryan also said that he to agree with Mr. Balderston regarding the level of the was inclined short-term rate. Mr. Balderston had suggested a level of 2.30 to 2.40, an experimental approach to Bryan) would agree with as which he (Mr. reserves, Mr. Bryan felt that the As to negative free further restraint. the short-term rate rather would do better if it would watch Committee He also felt that Governor of negative free reserves. than the volume be necessary for the thinking that it would was correct in Robertson
Committee to state more precisely than it has in the past just what it wishes to have the Manager of the System Account do to carry out the Committee's policy. Mr. Williams said that his judgment was that the Committee should exercise restraint but he would not do it in the clear cut and forceful manner that Mr. Robertson had indicated. Such a program would be too heavy-handed during the next two to four weeks. Mr. Williams felt that the reaction stemming from the President's illness was largely emotional but it could become more important and could extend throughout not only the international picture. His view was the domestic economy but into there was already a tendency to discount the effects that in this country District were be reaction. Banks in the Philadelphia of this emotional and on the whole he felt that more selective in credit extensions coming result from this emotional adjustments that would full effects of the the were yet to be seen. reaction to those expressed by his views were similar Mr. Johns said that sooner or later agree that he would not This did not mean Mr. Szymczak. of greater re along the lines by Mr. Balderston with the views expressed position. He also to agree with that he was not yet ready straint, but as which he interpreted economic review in the to the comments referred might have economic expansion the rate of in that slackening indicating taken with from actions rather than to capacity from an approach resulted doubts about Mr. Johns expressed and credit policy. respect to monetary
the desirability of supplying at the discount window too large a propor tion of the reserves which would be needed during the remainder of this year. In the St. Louis District banks had not made preparation for their fall needs. Some of them were warehousing mortgages and were obtaining funds through the Federal funds market to help in carrying these credits. Also, some banks were extending credit to finance companies heavily. If the System were niggardly about supplying reserves through the open market, banks would be forced into the discount window. These banks would more and more find it impossible to get funds they needed in the Federal funds market and would tend to become continuous borrowers at the discount window. If this developed and if the discount function were to be admin istered in accordance with what seemed to have been recent decisions, it would mean that the Reserve Banks later this year would be applying much more pressure than the System intended through the discount window. Mr. Johns' preference, therefore, was to rely a little more on open market operations, and a little less on the discount window than some of the others had indicated. Mr. Sproul then made a statement substantially as follows: 1. The President's illness suggests an analogy with our pres ent economic situation. There has been an unforeseen event, the ultimate consequences of which cannot be foretold. The immediate repercussions were sharp in a sensitive nerve center, but so far we cannot know whether this was wholly an emotional and psychological reaction or whether it also has a deeper significance. We can be pretty sure, however, that the event will leave some scars, and we are now con cerned with the question of how an otherwise vigorous
economic organism will function despite the scar tissue. 2. What we can observe at the moment is an economy which seems to be levelling off at a high level of production, but in which increasing upward pressure on prices and the demand for credit may be accumulating. The index of industrial production, which had increased about five points on the average in each of the previous three quarters, rose only two points in the past quarter and some of the more sensi tive indicators of economic activity have turned down. On the other side of the shield, there are still strong foreign and domestic demands for raw materials and for our products and services, much of the pressure of increased costs on prices is probably still to be felt, personal savings are at a lower rate than in recent years, and demands on the capital and mortgage markets have been exceeding the accumulation of savings, bringing in increased participation by commercial banks. 3. The situation is clearly not one that calls for the use of the oxygen tent of easy money, It does suggest to me, how ever, that we should not now step up the pressure of credit restraint as we might previously have contemplated. And I am fortified in this view by the fact that the strongly competitive character of the business situation, with its reflection in buyer's markets at retail for many consumer goods and in the failure of undue inventory accumulation to appear, indicates that we have not pressed to the limits of productive capacity. 4. I continue to believe, therefore, that our best policy for is the continuance of the measure of the immediate future credit restraint which we have been trying to maintain for the effectiveness of credit re the past two months. Since is greatly influenced by opinions about the future, straint the future may be undergoing some and since opinions about a policy of maintained but not revision, I think such intensified pressure will be most conducive affirmatively contributing to the highest possible to our objective of without inflation, in this levels of economic activity weeks, of course, such a And for the next three period. the fact that it is a suggested by prescription is further date on a Treasury financ period which brackets a payment reserve funds beyond ing, which will call for additional of business and agriculture. the seasonal needs such a policy might figures can be our guide, 5. In so far as $1 billion, negative bank borrowings of around mean member
free reserves around $300 million plus or minus, and money market rates grouped reasonably closely around our present discount rate, with the Treasury bill rate perhaps above the discount rate at times. And we shall have to keep a sharp watch also on the effect of our policy in the capital markets, which are going to have heavy demands made upon them during the coming quarter and whose continued active functioning is necessary to keep our economy going at high levels. 6. On the basis of the present forecasts of reserve positions, a policy of this sort will mean some increase in member bank borrowing, substantial outright purchases for System Open Market Account, as well as timely use of repurchase agreements during coming weeks. We shall have to be guided not only by figures but by feel; by whether or not the seasonal demand for credit seems to be adding significantly to tightness in the money market, and by whether signs appear of gray markets, inventory hoarding, overtime work and other evidences of increased inflationary pressures. In summing up his view, Mr. Sproul said that he would share the views expressed that the Committee should adopt the same general instruc tion with respect to open market operations that it adopted at the meet ing on September 14, 1955. From the comments made at this meeting it seemed that while there were perhaps differences of opinion and various the general view expressed by the majority was that shades of opinion, the Committee desired at this time to maintain the degree of credit re trying to maintain on the basis of the instruc straint that it had been this meant it wished to reestablish given on September 14 and that tion in carrying out open market given at that meeting that, the instruction side of tightness rather than doubts should be resolved on the operations, was agreement with Mr. Sproul's statement of the majority of ease. There
views expressed at this meeting. Mr. Sproul then referred to the suggestion made by Mr. Rouse at the meeting on September 14 that the Committee increase the authorization for purchases of bankers acceptances from $25 million to $50 million, and to the memorandum sent to the members of the Committee by Mr. Rouse under date of September 26 commenting on this recommendation. Mr. Rouse stated that, as indicated in his memorandum, he felt it would be desirable to increase the limitation on purchases of bankers acceptances but that this suggestion did not contemplate any change in the original concept of the Committee in authorizing such purchases. In sum, he felt that it would be desirable to spread some of the System's outright purchases into the acceptance market as a means of further indi use is intended for this means of providing reserves cating that some real directly through this channel of business financing. that he had raised a question regarding Mr. Mr. Mills stated on September 14 and that while he Rouse's recommendation at the meeting vital importance one way or the other, did not think it was a matter of an increase in the the desirability of authorizing he still questioned substantially as follows: He then made a statement limitation. interest in bankers' accept The Federal Reserve System's financing that will use of a form of is to foster the ances States as an international enlarge the United strengthen and from $25 million that an increase It is doubtful money market. that can bankers' acceptances amount of in the to $50 million go far to serve Account will Open Market in the System be held that purpose.
Financing accessibility at competitive international inter est rates is the first requisite to a greater use of bankers' acceptances in the United States. New York, on a rate basis, is now competitive with London and Continental money markets. As interest rate is not presently a barrier, it is fair to look upon the lack of widespread currency convertibility as a principal hindrance to the development of bankers' acceptance financing on an international scale in the United States. A greater willingness on the part of our domestic commercial banks to encourage bankers' acceptance financing at a cost at least comparable to the cost of the prime interest rate is also neces sary to the expanded use of this financing vehicle. A second requisite to the wider use of bankers' acceptances is the development of a broader investment market for these instruments. The Federal Reserve System's present policy of purchasing bankers' acceptances in modest amounts can be helpful in providing dealers a stopgap market for their offerings pend ing final distribution to permanent investors. Repurchase agreements are especially useful in this regard. Direct pur chases, however, are open to question, particularly if their effect is to push down the market rate on bankers' acceptances to an artificially low level, in which event the investment attractiveness of this instrument is diminished. Obviously, to raise the System Open Market Account's purchase ceiling to $50 million would aggravate this difficulty, and the more so in that dealers would have a less salable security to offer and, there fore, less incentive to press its sale. In other words, ex cessive System support to the bankers' acceptance market can, in part, defeat the very purpose for which it is intended. Instead of raising the System Open Market Account's ceiling for purchasing bankers' acceptances, a more appropriate policy would be to retain the present ceiling and in so doing operate more flexibly as to the total amount held. Implementation of such a policy would contemplate a wider use of repurchase agree ments to tide dealers over the short periods necessary to distribute their holdings, and a lesser use of direct purchases. Under this program direct purchases would not be made to main tain a relatively constant holding of bankers' acceptances, but the total holding would fluctuate in amount with market conditions and the ease or difficulty with which these instru ments found investor homes. By these means the System would continue to exhibit its solicitude for bankers' acceptance financing but without an interest depressive influence or giv ing the appearance of coddling the market. By the same token,
the interest return on bankers' acceptances would better find its level in the structure of interest yields on high quality in vestments which would tend to broaden their market and thereby add zest to dealer incentives for their handling. Under present conditions a broad and free market for bankers' acceptances offers the most constructive target at which System policy in this field of finance can aim. Mr. Robertson then made a statement as follows: I will not take up the time of the Committee to repeat my views on this matter, which I expressed in dissenting from the Committee's March 1955 decision to purchase bank acceptances up to $25 million. In 1954 I resisted this proposal vigorously because I was concerned about its feasibility and the wisdom of its purpose to "free demand generally from administered rate constriction . ." Later, however, this objective apparently was dropped, and when the Committee decided to enter the bank acceptance market in March 1955 the Chairman expressed the view of the majority that the Federal Reserve System should avoid any "finagling" in the market but should participate in a very modest way in order to show the interest of the central banking organization. It seemed to me that this limited objective made the proposal relatively innocuous, although I felt that the acceptance market would receive more convincing assurance of Federal Reserve interest if we resumed the "backstopping" pro cedure that worked quite well in the 1920's. In any event, I am unable to see any valid reason for now raising the permissible maximum from $25 million to $50 million. As the Chairman said, it was intended that our participation in the bank acceptance market should be a very modest one. Our present modest holdings clearly display our interest in the development of American bank acceptances. To the extent that the Federal Reserve increases its holdings, the participation of others is necessarily limited, and the acceptance market is thereby deprived of the participation of a certain number of financial and industrial organizations that otherwise would be holding the additional acceptances taken by us. The more we the smaller is the number of participants in the market take, and the more limited are its breadth, depth, and resiliency. To sum up, I believe we could better strengthen the ready to purchase at a rate acceptance market by standing market, rather than by making modest slightly above the current rate. However, if the Committee wishes purchases at the market
to continue the present practice, an increase in our holdings offers negligible benefits and would tend to narrow rather than broaden the self-sufficient market we wish to see developed. During the discussion that followed, Mr. Szymczak stated that he favored increasing the authorization to $50 million as recommended by Mr. Rouse but that he thought that the increase should be used gradually and that the System account should also make repurchase agreements cover ing bankers' acceptances. The reason for favoring this procedure was that he felt this would provide the System with an additional instrument to be used in furnishing reserves to the market. Mr. Earhart then moved that the present authorization for bankers' acceptances be continued with retention of the limitation of $25 million, and Mr. Earhart's motion was seconded by Mr. Mills. Mr. Earhart's motion was put by the Chair and carried, Messrs. Balderston, Earhart, Fulton, Leach, Mills, and Shepard son voting "aye" and Messrs. Sproul, Irons, and Szymczak voting "no". On this action, Mr. Robertson did not vote, stating that he would not vote to increase the authorization nor would he vote to continue the existing authorization for the reasons indicated in the statement he had made at this meeting. In response to a question from Mr. Sproul, Mr. Rouse stated that he had no suggestions to make with respect to a change in the authority for repurchase agreements with nonbank dealers in Government securities. Thereupon, upon motion duly made and seconded and by unanimous vote, the Com mittee approved a renewal of the authoriza tion for repurchase agreements as follows:
The Federal Reserve Bank of New York is hereby authorized to enter into repurchase agreements with nonbank dealers in United States Government securities subject to the following conditions: 1. Such agreements (a) In no event shall be at a rate below whichever is the lower of (1) the discount rate of the 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; (c) Shall cover only Government securities matur ing within 15 months; and (d) Shall be used as a means of providing the money market with sufficient Federal Reserve funds to avoid undue strain on a day-to-day basis. 2. Reports of such transactions shall be included in the weekly report of open market operations which is sent to the members of the Federal Open Market Com mittee. securities covered by any 3. In the event Government such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, the thus acquired by the Federal Reserve Bank securities of New York shall be sold in the market or trans ferred to the System open market account. to a question from Mr. Sproul that he Mr. Rouse stated in response to be issued to the Fed suggest in the general directive had no changes to eral Reserve Bank of New York. motion duly made and Thereupon, upon seconded, the Committee voted unanimously
to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (includ ing 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 securi ties, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of com merce and business, (b) to restraining inflationary develop ments 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 accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; pro vided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million; from the System direct to the Treasury (3) To sell account 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 face amount, and such sales shall the aggregate $500 million may be practicable at the prices currently be made as nearly as quoted in the open market. of the Committee should be It was agreed that the next meeting this connection, Mr. Earhart October 25, 1955. In scheduled for Tuesday, the meeting should be at 10:45 question whether the hour for raised the
a.m. or 10 o'clock, and after brief discussion it was agreed that the meeting to be held on October 25 should be scheduled for 10 a.m. Mr. Sproul then referred to the discussion at the meeting on September 14 regarding a visit which Senator Douglas proposed to make to the Federal Reserve Bank of New York, probably between October 20 and November 1, 1955, accompanied by a member of his staff, for the purpose of observing the handling of open market operations. Mr. Szymczak reviewed a conversation he had had with Senator Douglas pursuant to the understanding at the meeting on September 14 dur ing which he stated that Senator Douglas proposed that Mr. Asher Achinstein, a member of the regular staff of the Library of Congress, accompany him on the proposed visit to assist in his discussions of the matters that he observed. There followed a discussion of the proposed visit at the conclu was agreed that Mr. Sproul, in his capacity as Vice sion of which it Chairman of the Committee, would communicate with Senator Douglas, stating to visit the New York Bank and to that he understood the Senator wished that he (Mr. Sproul) would be Mr. Achinstein with him and indicating bring convenient date. It was for such a visit on a mutually glad to arrange be glad to assist the while the New York Bank would understood that the operations of the securities and Mr. Achinstein in observing Senator Open Market Committee or the policy of the desk, information concerning continue to be made Market Committee would for the Open transactions
available only through the channels which have been established previously for formal transmission of information to Committees of Congress. Mr. Balderston stated that in a letter dated September 22, 1955, addressed to him as Vice Chairman of the Board of Governors, Congressman Wright Patman expressed the point of view that the Open Market Committee's operations should be removed from New York and located in Washington. The Board's reply of September 29, signed by Vice Chairman Balderston, indi cated that Mr. Patman' s point of view would be presented to the membership of the Open Market Committee. By this time, he said, each member of the Committee had doubtless received a copy of Congressman Patman's letter. Mr. Balderston said that he wished to record the fact that the request of Congressman Patman had also been presented to the Committee in formal session. Although he did not share Congressman Patman's view, because of the practical difficulties of conducting the desk at a distance from the New York financial center, he expressed the belief that Congressman Patman's suggestion should have careful consideration. Mr. Balderston then moved that Congressman Patman's proposal be the subcommittee that has referred to been studying the housekeeping arrange ments for the Open Market Account, pursuant to the action taken by the Committee at its meeting on March 2, This motion was put by the Chair and carried unanimously. Mr. Balderston stated a question from Mr. Robertson, In response to
that the intent of his motion was to refer Congressman Patman's letter to the subcommittee for its consideration with the understanding that in the normal course the subcommittee would report back to the full Committee on the matters which it had been requested to consider. Mr. Robertson recalled that at the meeting of the Committee held on September 14 it was noted that a subcommittee had not been appointed for the purpose of reconsidering defense planning for the Federal Open Market Committee. (This subject had been discussed at the meeting on July 12, 1955, with the result that Chairman Martin was then authorized to appoint a subcommittee for the purpose of making such a review.) Mr. Robertson went on to say that at the meeting on September 14, Mr. Sproul had suggested that he (Mr. Robertson) might do some advance thinking on the problem in order to facilitate the work of the Committee. In accord ance with this suggestion, he said, he had prepared a memorandum regarding defense planning for the Federal Open Market Committee, and he suggested that copies be distributed to all members of the Committee and to other Reserve Bank Presidents following this meeting with the thought that any the Committee members or other Presidents might wish to comments which to the Chairman of the Committee prior to the meeting make be transmitted on October 25. It was his further hope that it would be pos to be held subject matter at the meeting on October 25, in sible to consider the to appoint a subcommittee for event it might not be necessary which further work on this matter.
This suggestion was approved unani mously with the understanding that the Secretary would distribute copies of Mr. Robertson's memorandum following this meeting. Thereupon the meeting adjourned. Secretary.
Also: Record of Policy Actions