November 16, 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 Wednesday, November 16, 1955, at 10:45 a.m. PRESENT: Mr. Martin, Chairman Mr. Sproul, Vice Chairman Mr. Balderston Mr. Earhart Mr. Fulton Mr. Irons Mr. Leach Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Vardaman Messrs. Erickson, C. S. Young, and Johns, Alternate Members of the Federal Open Market Committee Messrs. Williams, Bryan, and Leedy, Presidents, 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. Carpenter, Secretary, Board of Governors Mr. Sherman, Assistant Secretary, Board of Governors Director, Division of Mr. Koch, Assistant and Statistics, Board of Governors Research Mr. Miller, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Securities Department, Federal Mr. Gaines, Reserve Bank of New York Federal Reserve Mitchell, Vice President, Mr. Bank of Chicago
Secretary's note: Mr. Powell, alternate member of the Committee, planned to attend this meeting but was unable to be present because his plane was grounded. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on October 25, 1955, were approved. Before this meeting there had been distributed to the members of the Committee a report prepared at the Federal Reserve Bank of New York covering open market operations during the period October 25 to November 9, 1955, inclusive, as well as a supplementary report cover ing commitments executed November 10-15, 1955, inclusive. Copies of both reports have been placed in the files of the Federal Open Market Committee. Mr. Sproul noted that Mr. Rouse had been delayed in reaching the meeting, and it was understood that discussion of the report would be deferred until he arrived. Chairman Martin called upon Mr. Ralph Young for a statement on situation concerning which a staff memorandum had been dis the economic 10, 1955. Mr. Young reviewed the situa tributed under date of November substantially as follows: form, making a statement tion in summary of bulging, even in. the economy is at a stage Currently, advance still features prosperity. Broad flationary, industrial advance is slower than though the pace of industrial output, in more and more is being approached as capacity output earlier commodities are very strong, with lines. Markets for industrial rise in business in in a quite slow demand pressures manifested orders, and climbing backlog of manufacturers' ventories, in a The labor market price increases. a spreading of industrial in tightening. Also, business, shows every evidence of further are once again confidence and optimism financial, and consumer is less prosperous While agriculture ebullient side. on the
than last year, it is still relatively well off. Furthermore, with the peak of livestock marketings almost passed, the de cline in farm prices would seem to have largely run its course, Continued over-all price stability on the basis of offsetting movements of farm and industrial prices is thus a less likely prospect. With further substantial expansion in business capi tal investment now indicated, demand pressures on the industrial side are such as to point to some lifting of the average commod ity price level. As to the specifics of the situation: The Board's index of industrial production is now put at 142 for September and about the same for October. At this early point, the November index is expected to reach 143. The further rise in industrial output reflects additional advance in production of metals and fabricated durable goods and a new high for the output of nondurables. With automobile model changeovers now complete, automobile production is proceeding at earlier advanced rates. New model reception is reported as favorable and, although dealers are shaving prices to buyers, dealer margins are stated by trade sources to be profitable on reasonable volume basis. In October, new car stocks showed little change, as output approximated sales. With used car sales holding one-fourth above a year ago, dealer stocks of used cars showed an appreciable decline. Downward used car price adjustments recently, except for older cars, seem to be about consistent with new model introductions. retail sales of household durables have generally Output and been maintained at advanced levels. proceeds apace, with credit Instalment credit expansion the downpayment side--showing some tendency terms--at least on to stabilize. slightly in October, re over-all, were off Retail sales, However, they were lower sales by auto dealers. flecting mainly a year ago. Department store sales still about an eighth above recently, when adverse September levels until have held at high sales in some areas. weather conditions have reduced a little under the in September, while Manufacturer sales year ago with increases larger than a level, ran a fifth August ahead of sales again, New orders ran the year quite general. for or 10 per cent orders to $53 billion, the backlog of bringing year at this time. over last been exceptionally moderate, inventory growth has Business price in and recently of the upswing, the momentum considering value rise. in the inventory a greater part creases have played was only 4 per cent of stocks for September The month-end value over a year ago.
Value of new construction in October at just under $42 billion was off slightly from record spring and summer levels. Construction for business purposes continued to rise. New housing starts continued at a 1.2 million unit rate. But value of contract awards were off from the high September volume, re flecting mainly reductions in public works and utility awards. The McGraw-Hill compilation of plans for next year' s busi ness plant and equipment expenditures clearly reflect the per vasive optimism of businessmen, even though some window dressing element may be present in the figures. The plans would indicate a 10 per cent increase from the fourth quarter of this year to the fourth quarter of next year, assuming an even time spread of the expenditure pick-up. This percentage increase is no greater than for this past year, but the economic situation which is called upon to absorb the increase is altogether dif ferent than a year ago. Labor market figures show a further rise in total employ manufacturing employment, hours of work, and earnings, ment, greater tightness of supply in relation to all spelling still demand. prices have declined further, In agriculture, livestock and steers. Grain prices have declines affecting both hogs but recently cotton has firmed adjusted to support prices, to above the support level. some are continuing about 4 returns from farm marketing Cash expenses not changing year, and, with farm per cent under last Farm debt in these is down even more. much, farm net income rise--up 10 per cent showing a fairly substantial conditions is over last year. and debt developments price, income, Despite the indicated confirm a continuing, confidential reports for agriculture, in farm land values. general rise though gradual, 1 per cent a month been rising about prices have Industrial prospective increases indicated and mid-year and already since in months immedi this rate of advance likely to sustain appear again; also prices have advanced Crude rubber ately ahead. At some producers, futures for copper. scrap, and London copper have been marked textile prices and some cotton carpet prices include crude of note price advances Other recent up recently. tires and new model autos, tin cans, cement, oil, newsprint, of a further items. Expectations of other and a variety tubes, rise are widespread. steel price change, although showing little prices have been Consumer have been and of services than foods other of commodities prices the average of have stated that Roebuck & Co. up, Sears, edging be up 2 per catalogue will company's forthcoming prices in the mid-year edition. from the cent
Abroad, trade and industrial development seem best charac terized as showing some further advance but with greater uneven ness of trend. In some cases, as in Britain, capacity operations offer obstacles to further advance. Wholesale prices in a number of countries have been registering some advance. Among the more important items of foreign news are the indications of a gradual lifting of adverse financial clouds over Britain. Mr. Thomas stated that the situation presented in the economic review was reflected in financial developments and in the money market. It was becoming clearer that the economy was operating very close to capacity and that the possibility of further growth was much more limited than a year ago. Hence, some slowing of credit growth would be needed if consumption and production demands were to be kept in line with pro ductive capacity. The pressures of demand on limited supplies were beginning to appear in rising prices of industrial materials and prod ucts, Mr. Thomas said, and the ebullient economy was showing signs of inflation. meeting on October 25 there had Mr. Thomas noted that since the market. To some extent this had been appeared some ease in the money an easier credit policy. However, to rumors of a shift to attributed his view was that the appearance of ease could be partly explained by to purchase securities. available money supply active use of the a more be expected in a money is a result to use of available Such increased the past few said. Within rates, Mr. Thomas of high interest period more in accord money market in the been some tightening there had days bank reserve position. with the restricted ance out; consumer Mr. Thomas pointed continue heavy, Credit demands demand continues rate; mortgage at an unprecedented has expanded credit
very large, and there are complaints of difficulties in obtaining funds. New capital issues were exceptionally large in October and quite sub stantial in November, and the calendar for the period ahead is also heavy. Business loans at banks continue to increase, compared with declines in the same period last year. Mr. Thomas reviewed changes in bank condition figures, noting that within the past year commercial banks had increased loans by nearly $12 billion but reduced holdings of Government securities by over $7 billion. Thus, there had been a decline in the liquidity of the bank on the other hand there had been an increase in the ing system, but economy which had expanded holdings of both cash and liquidity of the securities. Individuals, businesses, and institutional in Government funds to purchase Government and other securities vestors had used liquid assets. Apparently, about which they considered to represent absorbed by public and securities had been $$ billion of Government and individuals had trust funds, and corporations private pension and In addition, nonbank $1 billion to their holdings. each added about other securities and amounts of had acquired substantial investors mortgages. increased dur money supply had noted that the Mr. Thomas also the three pre rate than during at a slower past year, although ing the at a seasonally ad the growth had been years. Since January, ceding rate of turnover but the per cent, of barely 1-1/2 annual rate justed activity in security had been greater There deposits had increased. of high level. to the previous had risen stock prices and common markets
Net borrowed reserves recently have been running around $600 million to $700 million and, while there would be some reduction in borrowed reserves during the next few days, the level was expected to average above $500 million for the current reserve week. In the ab sence of open market operations it was anticipated that net borrowed reserves would be somewhat lower in the next statement week and then would increase to around the billion dollar level in December. Pur chases or repurchases of Government securities by the System of around 1/2 billion dollars would maintain something like the present pressure on the market. Pressure could be increased by forcing banks to borrow more of their needs. Mr. Rouse entered the room while Mr. Thomas was presenting his statement. In response to Chairman Martin's question, Mr. Rouse said that to make on the reports of open market operations he had no comments York Bank and distributed prior to this meeting, prepared at the New Committee raised any questions in con and none of the members of the nection with the reports. Thereupon, upon motion duly made and by unanimous vote, and seconded, the open market transactions during the period October 25-November 15, 1955, approved, ratified, and inclusive, were confirmed. with discussion that before proceeding Martin stated Chairman he had on a telegram wished to comment he market operations, of open under date of Reserve Bank of each Federal sent to the President
November 9, 1955 suggesting that, without implying that action should be taken on the matter, there be a full review of the discount rate by the directors of the Reserve Bank at their next meeting. That wire, Chairman Martin said, was sent out in accordance with the general thought that the Federal Open Market Committee should be the focal point of discussions of all aspects of System credit policy. The wire should not be construed as indicating that any position had been taken by the Board regarding a possible change in the discount rate; it was sent with the thought that it would be desirable if all of the Presidents could be adequately prepared to discuss the problem of the discount rate at today's meeting. Chairman Martin then called upon Mr. Sproul who made a statement in which he brought out the following points: 1. There seems to be little question about it--businessmen and consumers have thrown off, for the present, doubts about the economic situation which may have been created by the President's illness. 2. Consumer spending and borrowing continues in high gear, the savings ratio is down to the lowest level of recent years, demand for business loans is still high, and plans for busi ness spending for plant and equipment during 1956 are sub stantially, even dramatically, higher than in 1955. the same time we are obviously nearer to current ceil 3. At ings on production and employment than we have been for some time past. optimistic attitude about the 4. Combined with a generally outlook, as reflected, for example, in the stock market which has recovered most if not all of its September-October losses, increased costs are still working their and with the fact that way through the economy, this is a situation which might well be headed for higher prices and the possibility of speculative excesses. of the recent past don't make 5. To be sure, the statistics an ironclad case for further anti-inflationary measures. The it was. Clear evi is slower than pace of physical expansion an upward wage-price spiral or of widespread dence of either
material or employment bottlenecks is still lacking, although there are some evidence of both. While inventories are in creasing, they are increasing less than sales (this may be involuntary) and at a slower rate than earlier in the year ($2.5 billion annual rate in the third quarter, compared with $4.5 billion in the second quarter). It might indeed still be argued that, except for the agricultural situation, we are enjoying an almost ideal state of production, employment, in come, and prices. But part of our job is to try to help keep it that way, and recent pressures suggest the possibility of an outbreak on the upside, which we could help to prevent be coming a movement of prices rather than of production. 6. We have, of course, been allowing the seasonal demand for bank credit to press against available reserves during recent weeks, and member bank borrowings are higher, net borrowed re serves are higher, the money market has been tighter, and the tendency of most short-term rates of interest has been upward. In other words, a policy of credit restraint has been maintained and even increased, but it has not worked through as effectively desired, either in terms of the supply of bank credit as might be or in the capital markets. Particularly in the municipal and corporate bond market, during most of the past several weeks, there has been more buoyancy than two or three months ago, with some issues which were then withdrawn because of unsatisfactory at equally favorable or more favorable bids coming to the market rates. effectiveness of exist has worked against the 7. One thing that ing credit policy has been the widespread opinion, following the that credit restraint had reached its peak President's illness, as 1956 approaches. The relaxation was in the offing and that open market operations have begun to dispel published figures of but until the last few days they seemed this belief, I think, in the discount rate might taking hold. Another increase slow in and help ward off possible the continuance of restraint confirm likely than they did which now appear more speculative excesses to make policy but, at ago. We can't allow rumors a few weeks which policy is made. the climate in do become part of times, they to become a complicating are again about 8. Treasury operations refund a $12 bil in the market to will be factor. The Treasury month or early in at the end of this lion December 15 maturity up with up have to follow that and it will probably December, middle of December. before the cash borrowing to a $1 billion during the period of Treasury of an unsettled market Avoidance much from aside, pretty have to stand means we shall financing for this factor, I If it were not mid-November to mid-December. until we have action further restrictive favor postponing would of what we have observe the results more time to had a little have begun to take hold during done, which appears to already the past week.
9. In all the circumstances, however, it seems to me to be the part of prudence and wisdom to increase the discount rate to 2 1/2 per cent now, putting a little more cutting edge on the relatively high level of borrowing which I assume we shall expect to maintain, for the present, through open market opera tions. If such an increase in the discount rate has too great an adverse effect, particularly in the capital markets, of course, we may have to give temporary relief through open market opera tions. The way for an increase in the discount rate has been somewhat prepared, however, by the increase in our repurchase rate from 2 1/4 to 2 3/8 per cent on November 10, and the "shock" of an increase in the discount rate should not be so great, given the prevailing broad optimism about the economic future. 10. Gradual consistent pressure, when further expansion of bank credit may go into increased prices rather than into increased production (as it has already been doing, for example, in the building industry) seems to me to be the way to try to have a boom that doesn't "bust". Mr. Szymczak inquired whether Mr. Sproul's statement to the increase in discount rate should not be made between effect that an and mid-December because of the forthcoming Treasury mid-November that he did not favor an increase in the rate at financing indicated to indicate that the rate or whether it should be taken this time, be increased immediately. should should be increased he felt the rate responded that Mr. Sproul this week, it probably the increase were made at once since, unless after the Treasury financing. have to wait until would in the discount favored an increase said that he Mr. Szymczak closely until the situation then observe He would at this time. rate result of seasonal as a see what happened of 1956 to the first part economy. Also, might affect the developments that changes and political had been market than in the open policy even tighter pursue an he would
followed recently, although he felt the open market account should be in a position to furnish additional reserves to the money market for a temporary period if an increase in the discount rate resulted in too much tightness. Mr. Erickson commented on conditions in the Boston district, stating that activity there did not seem to be "boiling" as much as in other districts. In speaking of consumer instalment debt, Mr. Erickson noted that the percentage of the United States total of such debt held in New England was larger than the percentage of the country's consumer income in that region. Consumer debt at member banks in New England had increased by 19.2 per cent since December 1954, compared with an increase of 15.1 per cent for the United States as a whole. Mr. Erickson cited an instance of a mutual savings bank which had asked a Boston cor respondent for a written confirmed line of credit for a period of one year for which it was willing to pay a commitment fee, in order to be sure that it would have funds available to meet its needs for mortgage advances during that period. He went on to say that, considering the of businessmen and the general economic situation and the psychology of Directors of the Boston to recommend to the Board public, he proposed it increase the discount held next Monday that its meeting to be Bank at the Open Market Com he also believed that Mr. Erickson said that rate. it has been fol policy than a somewhat tighter might well follow mittee lowing.
Mr. Earhart said that he favored an increase in the discount rate to 2-1/2 per cent and would so recommend to his directors. He also said that the members of the research staff at the San Francisco Bank were opposed to an increase of the discount rate at the present time. His reasons for favoring the increase had been well stated by others this morning, Mr. Earhart said, and in addition, banks in the Twelfth District seemed to be going ahead fairly freely in meeting credit demands and some of their use of the discount facilities had reached the stage where the borrowing was for more than temporary con tingencies. This raised the question whether the Reserve Bank should "close the discount window" just a little by cautioning banks with re spect to the programs they were following. Mr. Earhart recalled the difficulties which arose as a result of admonishments against extended use of the discount facilities in the spring of 1953 and stated that in were created that the Reserve Banks were his opinion if the impression a little, that might create a tighter situa closing the discount window tion than would be caused by an increase in the discount rate. His the rate rather than to resist was to have an increase in preference Bank. While he would of banks at the Reserve too strongly the borrowing the actions al or two to see whether able to wait a week prefer to be effect in the short-term were having enough taken by the System ready in view of the he felt that the capital market, market and in money the discount rate action in raising Treasury's financing, timing of the for at this time. was called
Mr. Irons said that conditions in the Dallas District were booming. There had been a resurgence of confidence among businessmen during the past few weeks. A survey that the Dallas Bank had made in 82 counties and parishes of the District during the past two weeks showed almost without exception that the picture was one of very strong con fidence. Bankers, businessmen, and farmers anticipated stronger business this year-end than a year ago and were highly confident about the first six months of 1956. Agriculture was in fairly good condition, although many farmers in the Dallas District were discontented and disgruntled. This feeling seems to be associated with the belief that the farmer is not sharing in the boom to the same extent as industry; in addition, the farmer is unhappy about the price developments for farm products. From the standpoint of income, many farmers are better off than last year and banks were expecting farmers to pay off loans which had been carried from earlier years. Demand for credit in the Dallas District than at any earlier time although banks, which currently is stronger considerable pressure, are resisting these demands and are are under described the discussion of the discount culling their loans. Mr. Irons meeting of the Dallas directors last Thursday in the light rate at the he recommended re Chairman Martin. While telegram received from of the establishment of the rate but without any attempt to press the matter, against an would have voted most of the directors he said, he thought had developed an unusually at that time unless he increase in the rate that he felt Mr. Irons stated of an increase. case in support strong
an increase in discount rate at this time would have its greatest impact initially in the capital markets and that it would seem more appropriate under these circumstances if such an increase originated in New York. Some of the Dallas directors had indicated that if the New York Bank in creased its discount rate, they would be willing to follow promptly with an increase at the Dallas Bank. Mr. Irons stated that he would be pre pared to call a special meeting of his Board and recommend an increase in the discount rate, assuming that action were taken promptly by other Banks, including New York. Mr. Leedy said that Mr. Sproul had "covered the water front" and that he agreed one hundred per cent with his analysis of the situa tion and his suggestion for moving further in applying restraints. The to be Mr. Sproul's position was only variation from what he understood from consideration of the Treasury's financing needs, that, quite aside was called for the discount rate an increase in Leedy) felt that he (Mr. at this time. the Chicago area his contacts with leading Mr. Young said that in be prepared to recom days caused him to the past few businessmen during that the discount tomorrow morning at their meeting to his directors mend vote, he felt a unanimous did not anticipate While he rate be increased. would be approved. the increase 25, he was on October at the meeting that Leach recalled Mr. policy except general of the Committee's with the results quite satisfied He thought securities. Government prices of long-term increase in for the
that increase would be temporary. The Richmond Bank's directors met last week and at that time considered the discount rate, after receiving Chairman Martin's telegram. They voted unanimously to renew the exist ing rate of 2-1/4 per cent. After describing the consideration which led to this decision, which was in accordance with the recommendation he had made at that time, Mr. Leach said that he was impressed with the change that has taken place very recently in the psychology of the public and businessmen at a time when we were approaching capacity. There had been a notable change in psychology during the past week or two. In view of the fact that this was probably the last chance for the System to in crease the discount rate before the end of the year, Mr. Leach said that he now expected to recommend to the directors an increase of 1/4 per cent in the rate. As to open market operations, Mr. Leach said that several hundred million dollars of reserves would be needed before the end of the year and he thought these should be largely supplied through the discount window and through repurchase agreements. Outright purchases should be used only if the situation became quite tight. He referred to Mr. Earhart' s comments regarding "tightening up" at the discount window, deal of consideration to this that his bank had given a great stating the past few weeks. However, he was hesitant to give possibility over time that the discount window was impression among banks at this the might have more feeling that such a development being "closed" somewhat, could do to bring on a sudden tight effect than anything else the System until the end of the season he expected to wait ening. For these reasons,
when some of the banks which had been borrowing continuously were paying off their loans, at which time the situation would be discussed with them. Mr. Vardaman said that he would not comment on whether the dis count rate should be increased until all of the Reserve Bank presidents had expressed their views. He wished to emphasize what Messrs. Earhart and Leach had said about the discount window: if there were to be fur ther tightening, it should be done by direct means, such as an increase in the discount rate and in open market operations, and not by partly closing down the discount window. Mr. Mills said that he concurred in the desirability of moving promptly to a 2-1/2 per cent discount rate and maintaining, and if possible increasing, the pressure on bank reserves. This must be done with a very open-minded attitude and with careful consideration of the liquidity posi tion of commercial banks and of their reaction to such changes. As in dicated by the discussion this morning, the acquisition of Treasury bills by corporations and institutional investors has been at the expense of bank deposits, and central reserve cities have felt the brunt of that be a "psychology of uncer severely. There may possibly situation most tainty" that might change to fear if the System were to act too aggres objectives of such action. of the desirability of the sively, regardless and Chicago Reserve Banks that the New York Further, on the assumption the Committee must rate tomorrow, 2-1/2 per cent discount will move to a sales of $37 million that yesterday's moderate be conscious of the fact
of Treasury bills gave evidence of this sensitivity of the market through an immediate downward price pressure on the market. Mr. Mills suggested that in this situation perhaps the Manager of the Open Market Account could comment on the way in which open market operations during the reserve week starting tomorrow should be correlated with an increase in the discount rate. As natural forces in the reserve picture are going to ease the market tomorrow and during the rest of the current week, if the discount rate were increased Thursday, this might be a very happy circumstance. It might be desirable to suspend any Treasury bill sales for Thursday and Friday with the thought that natural forces could be allowed to reassert themselves next Monday in order to obtain the de gree of tightness that might be desired. This would allow two days of fleeting ease for the market to adjust to the change in discount rate and would avoid implying that the change in discount rate was being ac companied by very agressive open market sales of Treasury bills. commented on the prospective easing in the reserve Mr. Rouse situation during the rest of this week, noting that the picture was ex pected to shift back next Monday to net borrowed reserves of around $600 million to $650 million. Mr. Rouse said that his thought would be per haps to continue some sales of bills today for delivery tomorrow, and if the rumors of a discount rate change were persisting today, this mind the extremes contemplated sufficient having in probably would be reserves would He estimated net borrowed in net borrowed reserves. November 23 and $700 million for the week ending average around $300
million for the week ending November 30. Mr. Rouse thought the slightly easier situation suggested by Mr. Mills between now and the end of this week would not be undesirable, if a change in the discount rate were announced tomorrow. He would be inclined to do nothing beyond what is done in the market today. Mr. Robertson stated that he agreed with the views expressed at this meeting and he presented a memorandum expressing his views, read ing as follows: At the last meeting, I advocated a policy more restric tive than the one theretofore followed. At that time it was my judgment that the key financial and economic facts called for an increase in the discount rate rather than a higher level of negative free reserves. The events since then have tended to confirm my judgment that an inflationary situation was threatening and that anything short of a rise in the dis count rate would be an inadequate gesture to curb such a threat. In the two weeks ending November 9, free reserves dropped from a negative level of $303 million to $44 million and then million. On Wednesday, November 9, negative free re to $577 serves were over $900 million, and on November 10, repurchase agreements were entered into at 2-3/8%, 1/8% above the discount rate. Despite these restrictive Open Market developments, credit and capital market conditions had not until this week tightened materially. The Treasury bill rates at first did not rise, but actually declined further to almost 2%. Only this week have they regained a level around the discount rate, and then only by virtue of a volume of negative free reserves in excess of what was contemplated by the Committee at the time of the last meeting. Intermediate and long-term Government bond yields have moderately, and corporate and municipal yields have risen only The feeling continues wide remained relatively unchanged. markets and in the business community in spread in financial restraints will not be tightened any further. general that credit This feeling has not only affected money rates and bond yields, but has also affected investment and spending as well. October saw the largest monthly volume of municipal and corpo all major types of bank for many months, and rate financing
loans also continued to increase rapidly. New financing in November is continuing very high. Such new financing at at tractive rates has meant additional funds available for spend ing by business, consumers, and state and local governments. It is at least questionable whether the recent rates of increase in consumer credit, real estate credit, and business loans can be maintained. If they cannot, the impact on future levels of business activity will be serious. Although there has been some rise in Treasury bill rates this week as a result, in part, of the higher volume of nega tive free reserves, it is questionable whether even the present degree of restrictiveness can be maintained by continuation of this level of negative free reserves. The market becomes ac customed to any given level of reserves and the pressure result ing therefrom tends to diminish with time. This is particularly true at this season of the year. I am aware that discount rates, as such, are not within the province of the Open Market Committee, but the Open Market policy of this Committee must be geared to action on the discount rate. I still feel that the System's policy of restraint should be greater rather than lesser, and that the best means of achieving this end is through an increase in the discount rate. It seems to me that a rise in the discount rate is necessary to convince the public that the Federal Reserve is going to exer cise restraint when such restraint is called for by the over-all economic situation. Failure to raise the discount rate could, in the existing situation, contribute to an inflation that is very likely al for the agricultural area, price rises ready in process--except are already widespread and are becoming more so. Such a failure the adjustment in money rates and bond returns will not prevent that is bound to come if business is as strong as our economists it, probably to a time when the mal portray, but it may postpone adjustments would be even more acute than now and when an adjust more disrupting than now. ment would be even increase in the discount rate On the other hand, a moderate tend to restore flexi of one per cent) would (e.g., a quarter It would now have a in the use of this instrument. bility should be an attribute of significance, which psychological which will be largely lost in the discount rate, but movements if we wait until after a rise in the rate is past due and partly I think this is one There are times, and or wholly discounted. discount rate than to lead with the them, when it is better of to follow.
There is very little time remaining in this year within which action on the discount rate can be taken without seriously interfering with Treasury financing activities. It would seem to me that failure to act in the next few days will mean that there can be no action at least until after the end of the year. If the discount rate is raised, it is possible that a sharp rise in money rates and bond yields would ensue, but this is less likely now in view of the increase in the level of the bill rate during the past three days and the present level of member bank borrowing from Federal Reserve Banks. Furthermore, if the general business situation is as strong as our economists picture it, the chance that such a rise would lead to undue financial stress is very slim. Even in the remote chance that it would, we have the means to combat such a development. If general business is, in fact, on the brink of a downturn, an increase in the discount rate at this time might precipitate the turn. But no facts before us today warrant any such eco nomic prognosis. If the recent McGraw-Hill survey, which fore casts business plant and equipment expenditures for 1956 at ago, is anywhere near the mark, some 13% above those a year thing will have to give, in an economy already operating at capacity. Consequently, I feel that there are inflationary pressures present which should be checked now by a firmer monetary policyone firm enough to curtail spending and thus dampen price pres to use at the moment is the discount sures. The best instrument be raised. The risks involved in rate policy. The rate should than those involved in failing to act. raising the rate are less raised, then it seems to me If the discount rate is not should be geared to achieve somewhat that Open Market policy over the next few weeks than that prevailing greater restraint the fact that, in the past few days, notwithstanding even in for free reserves during the next two view of the projection be difficult to achieve. this is likely to weeks, in accord with the that he was thoroughly Shepardson said Mr. by Mr. Leedy. He had with those given views expressed, particularly regardless of rate was desirable, in the discount an increase thought on to say that Shepardson went financing. Mr. the pending Treasury far as he but as somewhat recently had stabilized prices agricultural general agricultural in of improvement was no prospect see there could
prices as long as heavy, burdensome surpluses were overhanging the market. The best help the System could give agriculture, he felt, was to try to prevent further increases in the prices of things the farmer has to buy. Mr. Fulton said that the Cleveland Bank directors discussed the discount rate at their meeting last week reaching a consensus that it should be raised but did not act to increase it feeling that they did not wish totake the lead in such action at this time. The Cleveland District is on an "overtime" basis, Mr. Fulton said, even in the formerly depressed coal mining industry, and large plant expansion programs are under way. Mr. Williams said that a recent survey of conditions in the Philadelphia District confirmed the need for an increase in the discount rate at this time. Mr. Bryan described the discussion of the discount rate at the meeting of the Atlanta Bank's directors last week, following receipt of Chairman Martin's telegram. The directors were inclined toward an in crease in the rate, he said, and much of their discussion was whether 1/4 of 1 per cent or more. One of the questions the increase should be Reserve System does not act never answered was, if the Federal asked but that now exist, under what restraint under the conditions for further the directors felt that action would it act? It was clear that conditions and they were prepared to act promptly should be taken, Mr. Bryan said,
to increase the discount rate, provided other Reserve Banks took similar action. Mr. Bryan also suggested that, in terms of the longer run picture, the System might consider whether we have not now passed an all-time low in the monetary returns on savings. He suggested that this subject might be profitably discussed in terms of the shift of income distribution in the United States, the tendency of population figures to increase, and the volume of savings that would be necessary in order to produce a capital endowment for the next generation that would be equivalent to that available for this generation. Mr. Johns commented on a discussion of the discount rate at a meeting of the directors of the St. Louis Bank last Thursday, at which time Chairman Martin's telegram of November 9 was brought to their at tention. The directors re-established the existing rate at that time. Mr. Johns said that at the time of the directors' meeting, he had just returned from a vacation and he made no recommendation for a change in the rate, partly because he wished to have the benefit of a discussion at this meeting and partly because he wished to review and analyze the become available to him on the situation upon his return. data that had He had now reached substantially the position indicated by the views and he planned to recommend to his directors expressed at this meeting, that the discount rate of the St. Louis Bank be increased to 2-1/2 per cent.
Mr. Balderston concurred in the general views expressed during the meeting. Chairman Martin said that he concurred in the view that the dis count rate should be increased. However, he stated that it would be most unfortunate to have anything in the way of a panic develop among banks during this period and, while it was desirable to increase the discount rate, that did not mean that the supply of money also should be decreased during this period. He felt that an increase in the cost of money and a decrease in the supply of reserves did not have to take place at the same time. This was a problem to be considered by the Manager of the Open Market Account, Chairman Martin said, and he re iterated the view there should be nothing in the way of a panic, and nothing should be done that would risk developing a feeling of panic their ability to use the discount window. on the part of banks regarding System was giving up any principles regarding This did not mean that the do what it could to restrain window. The System should the discount pressure on the sup but it should not put undue excesses at this time, market and banks in which the money during the period ply of reserves rate just preceding the to an increase in the discount were adjusting of November or at the end would be announced financing that Treasury discount rate that if the also said Chairman Martin early in December. that a change he seriously doubted at this time, were not increased turn of the year. time after the made until some could be
Mr. Balderston said that he was concerned that the System go into the Treasury financing period able to discharge its secondary obligation to the Treasury by keeping an even keel during the period of the Treasury's financing. However, it should go into this period with as much tightness as the System could contrive to exert without deceiving the market. He noted that there had been a rise of 3-1/2 per cent in the industrial component of the wholesale price index since June of this year and that this meant that the rise has been at an average rate of 7/10 per cent each month. While it was true that the rise between July and September immediately after the big wage settlements was at double the rate of October and November, the fact was that heavy individual demand was being enlarged by consumer credit of doubtful quality, and this was being superimposed upon heavy corporate demand. The suspicion that businessmen might be altering their expansion plans for plant and equipment has been answered by of next year's expectations. For these McGraw-Hill and other surveys System's secondary obligation to the Treasury reasons and because the shortly, Mr. Balderston said that would inhibit its freedom of action once to increase the dis System should proceed at he believed that the to 2-1/2 per cent. count rate think it possible to pinpoint Martin said he did not Chairman in the discount market to an increase reaction in the precisely the be between such the market would in say what the adjustments rate or to financing. The point of its the Treasury announcement an increase and
he wished to make was that this is clearly a situation where the System does not want to have both an increase in the discount rate and simul taneous appearance of a strong reduction in the supply of money. He did not object to considerably increased restriction, but it seemed to him that if both the increase in the rate and a reduction in the supply of money took place at this particular time it could compound the situa tion in a way that the Committee did not wish. We have a limited period before the Treasury financing. Whereas he would normally be in favor of open market operations to reinforce another credit action, in the present situation he would favor giving the desk some latitude in deciding how far to go in this period of adjustment. Mr. Sproul said that he would like to emphasize two points that had come up in the discussion. First, it would be quite undesirable and a great mistake in his opinion to have any indication of a "shut down" at the discount window at this time. Secondly, Mr. Sproul thought the Committee would have to continue its open market operations in the in the discount rate might be of what the reaction to an increase light net borrowed reserves should be. any preconceived idea as to what without by the implication some of that he had been a little disturbed He said of aiming for even had given this morning the members of the Committee did not think the Com operations. He in open market greater tightness policy until it had to an even tighter now commit itself mittee should to a change in reaction of the market to observe the had an opportunity to a question said in response Mr. Sproul rate. His concept, the discount
from Mr. Robertson, was that the Committee should maintain about the situation that has developed during the past three weeks, but it should not say that there should be a particular figure of net borrowed reserves at the time of a change in the discount rate, particularly since the capi tal markets within the past few days have begun to react to what the Com mittee already has done through its open market operations. Mr. Robertson said that he would agree that it was not desirable to set a level or even a range of net borrowed reserves, because it was not possible to see what the pressure would be at any given level. He thought, however, that the Committee should maintain at least the degree of tightness that had existed during the past few days. In other words, maintain an even keel in relation to the last few days. it should agreed with Mr. Mills' suggestion that Mr. Sproul said that he carrying out monetary policy, to might be appropriate, in terms of it week as a means of during the rest of this have a little less tightness of the increase after announcement to iron out the adjustments helping in the discount rate. with this view also, said that he agreed completely Mr. Robertson desire to maintain an weeks as a whole, the that for the next three but be what had happened the measure should did not mean that "even keel" the last three days. weeks, but rather over the last three he would differ only place where said that the Chairman Martin one of emphasis might be only the difference with Mr. Robertson--and Market Account of the Open giving the Management emphasis on would be his
latitude in carrying on operations during this period of adjusting to the rate increase. He would not be concerned if the operation did not achieve the recent degree of tightness in the period between the increase and the Treasury financing. What he was suggesting, he said, was trying to move in the direction of maintaining tightness, but avoiding having the two forces of an increase in cost of money and a decrease in supply of reserves present at the same time the Treasury was getting ready to announce its financing. This was a very difficult situation, he said, and the Committee should not minimize the difficulties that would be presented to the Management of the Account in this period. not disagree--that he was in full ac Mr. Robertson said he did latitude along the lines the Management of the Account cord with giving suggested by the Chairman. at the meeting on Shepardson referred to the understanding Mr. maintain the degree of restraint Committee desired to October 4, that "the doubts should be .. . and that . .. been trying to maintain that it had of ease." He suggested tightness rather than on the side of resolved except for omission might be the same, the current understanding that the side of tightness be resolved on "doubts should provision that of the than of ease." rather be put in the could that this suggestion Martin said Chairman and there to be adopted, think it needed he did not but that minutes, the inquired whether He then this comment. with was no disagreement
directive to be issued to the Federal Reserve Bank of New York needed any change. Mr. Rouse stated that the wording of the directive seemed appro priate to the objectives of the Committee as discussed at this meeting and that he had no suggestion for change in any of the existing limita tions in the directive. Thereupon, upon motion duly made and seconded, the Committee voted unani mously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (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 general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to restraining inflationary devel opments 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; Treasury for the ac purchase direct from the (2) To count of the Federal Reserve Bank of New York (with discretion, desirable, to issue participations to in cases where it seems Reserve Banks) such amounts of special one or more Federal short-term certificates of indebtedness as may be necessary the temporary accommodation of the from time to time for total amount of such certificates Treasury; provided that the Reserve Banks shall not at any one time by the Federal held exceed in the aggregate $500 million;
(3) To sell direct to the Treasury from the System account for gold certificates such amounts of Treasury securities maturing within one year as may be necessary from time to time for the accommodation of the Treasury; provided that the total amount of such securities so sold shall not exceed in the aggregate $500 million face amount, and such sales shall be made as nearly as may be practicable at the prices currently quoted in the open market. Chairman Martin next inquired whether there was a suggestion for a change in the instruction to be issued in connection with repur chase agreements, particularly whether any change was needed in the provision that the rates on such agreements should be not less than (a) the discount rate of the Federal Reserve Bank on eligible commercial on the most recent issue of three paper, or (b) the average issuing rate month bills. provisions with respect to the Mr. Rouse felt that the existing that might be used be for repurchase agreements rate were satisfactory tween now and the next meeting of the Committee. Thereupon, the following authoriza by unanimous vote: tion was approved York is hereby authorized Reserve Bank of New The Federal nonbank dealers in agreements with to enter into repurchase subject to the following Government securities United States conditions: 1. Such agreements below whichever be at a rate no event shall (a) In rate of the of (1) the discount is the lower eligible commercial Bank on Federal Reserve rate on the average issuing or (2) the paper, Treasury bills; recent issue of three-month most exceed 15 calen of not to be for periods (b) Shall dar days; securities maturing cover only Government (c) Shall 15 months; and within the money means of providing used as a Shall be (d) funds to Federal Reserve with sufficient market basis. on a day-to-day undue strain avoid
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 Committee. 3. In the event Government securities covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, the securities thus acquired by the Federal Reserve Bank of New York shall be sold in the market or transferred to the System open market account. Chairman Martin suggested that it might be desirable to set the date for the next meeting of the Federal Open Market Committee on Tuesday, December 13, 1955, with a view to having a full scale review of the eco nomic and credit situation at that time and with the further thought that the following meeting of the Committee might be held after the turn of the year. There was unanimous agreement with this suggestion. Chairman Martin said that, without implying criticism of anyone, there was one other matter which he would like to mention at this time. An article on the Committee's policy had appeared in the magazine "Business Week" shortly after the meeting held on October 25, 1955, and contained comments reflecting so closely the substance of the article it could have been written without that he did not see how the meeting what went on at that meeting having some person who was familiar with He reiterated that he was not implying that any discussed the matter. had complete confidence he said that he the meeting and one had discussed of the members of the Committee and the others who participated in all him and he felt it article had impressed However, the in the meetings. the meetings be extremely who participated in that all those necessary on in any such meetings. about what went about their discussions careful
Chairman Martin then called attention to a copy of a letter from Congressman Brent Spence, Chairman of the House Banking and Currency Committee, dated October 25, 1955, requesting comments by the Board of Governors on a bill, H. R. 569, introduced in the House of Representatives on January 5, 1955, by Mr. Patman, which proposed to increase to 12 the number of members of the Board of Governors of the Federal Reserve System and to provide that their terms of office shall be six years, and to abolish the Federal Open Market Committee and transfer its functions to such Board. Chairman Martin said that copies of Congressman Spence's letter and the bill had been distributed at this meeting and that he would appreciate suggestions or comments which might be of assistance to the Board in preparing a response which, he hoped, could be submitted to Mr. Spence not later than the first part of January. He also noted that Mr. Balderston had suggested that comments be sent in in time to be considered at the meeting of the Committee on December 13, 1955. Mr. Sproul referred to the request made by Senator Douglas, first discussed at the meeting of the Committee on September 14, 1955, regarding a visit which the Senator proposed to make to the Federal Reserve Bank of New York, probably between October 20 and November 1, the purpose of observing the handling of open market operations. for He stated that Senator Douglas, accompanied by Dr. Achinstein, had 27, and 28, in response to the invita visited the Bank on October 26, which he as Vice Chairman of of the Federal Open Market Committee, tion the Committee had sent to the Senator by letter dated October 6, 1955.
Mr. Sproul then described the visit in substantially the following terms: Each morning Senator Douglas and Dr. Achinstein came to the bank at about 9:30 and had a preliminary talk with Mr. Rouse and me. At the first such meeting, I spoke to them of the possible adverse effects of publicity concerning their visit, which might be played up as a Senate investigation of open market operations with possible unfortunate repercussions in the Government securities market. I pointed out that if they attended the dealer conferences, or listened in on market telephone conversations which would necessitate disclosure of their being "on the line," there might be a flood of rumors. Senator Douglas said he wished to avoid anything of the sort and, so far as I know, no publicity attended the visit. At 10 o'clock or shortly thereafter each day, they went to the trading room and stayed there the rest of the morning. After lunch at the bank, we usually went over any questions that had come up, and they would leave in the early afternoon. The Senator' s chief interest appeared to be how policy directives are translated into action, how operations are actually carried out in the market, and how the System is kept advised of open market operations. We showed them the forms and data we regularly use in analyzing the position of the banks and the money market each day, except the reports of individual dealer's position and volume. They also sat in on the eleven o'clock telephone calls to the Board and Federal Reserve Bank of Dallas (the latter was the other Reserve Bank being included in the call during that week), and were informed of conversations with the Treasury on its position, of our regular routine surveys of the market, of transactions which are carried out for System Account, the Bank's account, Treasury account and foreign or member bank account, and of the information which we supply regularly to the Federal Open Market Committee and to all of the Federal Reserve Banks. to be well satisfied with his visit The Senator appeared to report on it to his Committee. He and said he intended own views as to policy formulation gave no indication of his Market Committee or the method and means by the Federal Open asked what questions or its operations. When of conducting our performance, he evaded the criticisms he might have about sat by and let the Senator Dr. Achinstein largely question. His role seemed to be talking and ask the questions. do the and to pull together the information obtained, pre to observe visit, and to before each day's to brief the Senator sumably report for the Senator. help prepare a
Chairman Martin stated that he was glad to have this report of Senator Douglas' visit and that he felt the Committee was indebted to Mr. Sproul and to the New York Bank for the manner in which they had handled Senator Douglas' request and visit. Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions