November 30, 1955 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held on November 30, 1955, at 9:30 a.m. This was a telephone Wednesday, the location of each individual is indicated conference meeting and following list of those in parentheses after his name in the in attendance: PRESENT: Mr. Martin, Chairman (Washington) Mr. Sproul, Vice Chairman (New York) Mr. Balderston (Washington) Mr. Earhart (San Francisco) Mr. Fulton (Cleveland) Mr. Irons (Dallas) Mr. Leach (Richmond) Mr. Mills (Washington) Mr. Robertson (Washington) Mr. Shepardson (Washington) Mr. Szymczak (Washington) Mr. Vardaman (Washington) Member, Federal Open Mr. Treiber, Alternate Market Committee (New York) Riefler, Secretary (Washington) Mr. Secretary (Washington) Thurston, Assistant Mr. General Counsel (Washington) Mr. Vest, Thomas, Economist (Washington Mr. Young, Associate Economist Mr. Ralph A. (Washington) System Open Market Mr. Rouse, Manager, Account (New York) Roosa, Assistant Vice President Mr. (New York) Board of Governors Carpenter, Secretary, Mr. (Washington) Board of Assistant Secretary Mr. Sherman Governors (Washington) Division of Assistant Director, Mr. Koch, Board of and Statistics, Research Governors (Washington) Chief, Government Finance Section, Mr. Miller, and Statistics Division of Research of Governors (Washington) Board
In response to Chairman Martin's request, Mr. Rouse reviewed the market situation. He stated that the $12 billion Treasury exchange offering of 2-5/8 per cent certificates or 2-7/8 per cent 2-1/2 year notes was extremely well received when it was announced on Friday, November 25. There was a steady offering of "rights," however, and by Monday, November 28, it was clear that a number of large holders of the maturing issues who needed funds for tax payments, dividends, or other year-end purposes would not exchange their holdings into the new securities. Mr. Rouse said that there were also some bank holders of the maturing securities who decided not to exchange into the new issues. Repurchase agreements had been made freely available on Friday and Monday, he said, and, although the money market yesterday was relatively easy, it appeared that a substantial additional amount of reserves would be needed and the System account made outright purchases of bills totaling $131 million, At the same time, it executed orders for Treasury and foreign accounts for substantial amounts of Treasury securities, including securities of the new offering on a when-issued basis. At the close last night, the amount of securities overhanging the market seemed to be somewhat lighter, but it still looked as though there would be substantial attrition on the holders other than the System account were Treasury's refunding as far as concerned. Mr. Rouse reiterated that there was no disagreement anywhere as far as he could determine as to the attractiveness of the issue in terms of price or maturity of the securities,
Chairman Martin stated that he would next call upon Mr. Sproul for an expression of his views but that before doing so, he wanted each member of the Committee to know that the Treasury had made a formal re quest of the Committee for assistance in connection with the current refunding. Secretary's note: The request to which Chairman Martin referred had been made by Acting Secretary of the Treasury Burgess; during this meeting, a note was delivered to the Chairman stating that Mr. Burgess had called him on the telephone to say that he (Mr. Burgess) had talked with Secretary of the Treasury Humphrey, who "confirmed the request with emphasis." Mr. Sproul then made a statement substantially as follows: It looks as though we will need to put into the market during the next week upwards of $400 million of reserves in order to maintain an even keel. We have here a Treasury issue which was by all counts properly priced on the market and if the Committee should take action it would not be in the posi tion of trying to peg what would seem to be a wrongly-priced issue. The purchase of when-issued securities would put funds into the market on December 8, which is the date of payment for the exchange offering, and which would be getting toward the peak of the need for reserve funds, on the basis of the projections made for the Committee. It seems to me that this is a situation in which credit policy and debt management can aid one another. If we, as possibilities suggested last night by Mr. Rouse, among the should lengthen the term of repurchase agreements to 35 days over the year end, which is a period of uncer to carry them if we should have authority to buy when-issued tainty, and which would put reserve funds into the market about securities basis of our projections, we they will be needed on the when be helping a faltering Treasury issue which is only would maturing issue need cash because the holders of the faltering the availability of reserves are uncertain as to and buyers over the next few weeks, A high and the course of the market
attrition on the Treasury offering would only mean a larger cash issue when they come to do their cash financing later in December, Nobody in the market would be fooled by the Com mittee's stepping in and keeping the attrition down, but it would moderate the Treasury's problem on the cash financing in December, which might cause difficulty for them and for us if it was made say a billion larger than has been indicated. If the System, as a result of extending repurchase agreements to 35 days and of buying when-issued securities, should find that the market was getting too easy in December we would have the possibility of letting bills run off over the next three weeks or of selling securities. I cannot say the results will be disastrous if we do not step in and do what I am now sug gesting, But I do think it would be helpful and appropriate in the circumstances from the standpoint of credit policy and debt management. Chairman Martin inquired of Mr, Sproul whether, in order to do what he was suggesting, he agreed that it would require authorization by the basis of a formal vote, on the grounds that the full Committee on be a deviation from a policy that had been agreed upon such action would in March 193 and last renewed in March by the Committee at its meeting of this year. he agreed that such action would be Mr. Sproul stated that which he had made. in order to follow the suggestion necessary statement substantially as follows: Chairman Martin then made a situation. We ought to We have gotten into a difficult than we have on the soundness to sell the Treasury better try since 1953. This whole policy we have been following of the of the Open Market be taken up at a meeting question should when we would have a thorough review of the policy, Committee going back to 1952 if to be charged with because we are going If we do make Sproul has made. the suggestion Mr. we follow make it clear policy, we should to our general an exception we should reverse exception; otherwise, is only an that it unwise for the Treasury It would be very our entire policy. on an issue the it gets into trouble that at any time to think bail it out. Reserve will Federal
Mr, Mills next made a statement substantially as follows: Chairman Martin and Mr. Sproul have just stated what to me is the case for not adopting a policy of purchasing when-issued securities or "rights." In other words, if we were to accept that policy we would be abandoning a position that was taken after very mature consideration and without, in my own opinion, being confronted with an issue of a seriousness that would justify such deviation. As Mr. Sproul pointed out, there is a difficult problem but not an emergency. As Chairman Martin pointed out, we have a problem but presumably not a problem that is a serious emergency. There are no indications of what the amount of attrition would be if we stayed aside from purchasing when-issued securities. If there is substantial attrition, as Mr. Sproul pointed out, that attrition can be within a matter of some days when the Treasury come corrected back for new money and the System can then, in an orthodox and manner, provide the reserve base for the tax conventional certificates that presumably will be offered. anticipation There is a reasonable possibility, it would seem to me, that moved promptly to make direct purchases of bills if the System reserves so supplied would encourage banks today in volume, the and dealers to enter the market both for "rights" and when in doing so reduce the attrition to issued securities, and be a matter of real concern. If there limits that would not again in my opinion, it be a deviation from policy, should should not go beyond extending would seem to me that deviation over a 35-day period. The dealers' repurchase agreements was on a firm pointed out, yesterday market, as Mr. Rouse for the refunding are believed basis; the securities offered we are faced with priced; the only problem to be attractively of heavy attrition. is a possibility the Treasury had asked only for Mr. Leach inquired whether that the Committee had specifically requested or whether it assistance, to the new securities. purchase "rights" Treasury had asked that responded that the Chairman Martin thought that it operation. He assist in the refunding the Committee and he was maturing "rights" Committee purchase like to see the would at the moment. would be of importance anything else not sure whether
Chairman Martin went on to say that he agreed with every. thing Mr. Mills had just stated from the standpoint of a general posi tion, However, the Committee's relations with the Treasury are impor tant. Chairman Martin said that he felt quite badly that he had not been more successful in selling the Treasury on the Committee's policy in a manner in which the Treasury would pick up the attrition on this issue as Mr. Mills had suggested. However, this was not the case and the problem was something that the Committee should discuss fully in the near future. It would be unwise, Chairman Martin thought, for the Committee to ignore the position in which it had been placed by the request that had been made on the part of the Treasury for assistance. Mr. Earhart said that he had been one of those who has not felt that the Committee should be wed inseparably to a policy which in general is a good policy. At some time there might be circumstances develop in which the Committee would wish to make an exception to the general rule it had adopted. Up to date he felt there had been good cooperation from the Treasury since the policy was adopted, but to him cooperation was a two-way street. He would certainly hope that the Committee would not let an exception to its rule become an accepted practice or have the market feel that it had become an accepted practice. However, it seemed to him that if the Committee were to be helpful in the present situation it should be buying those secu supply, such as the "rights" or the rities that currently are in over
when-issued securities. It might thus have to furnish a smaller amount of reserves than would be necessary if it tried to help the Treasury indirectly entirely through purchases of bills, and there would be less doubt as to the effectiveness of the assistance. For those reasons, Mr. Earhart said, he would be in favor of making an exception to the Committee's policy under present circumstances. Mr. Leach stated that he agreed substantially with the views expressed by Mr. Earhart. To him, it was important that the Treasury had tried to price the issue correctly. Now that the Treasury had gotten into difficulty, he would dislike anything which made it appear that the System was "running out" on the Treasury, if there were any way in which it could take care of the situation. Mr. Leach said that doubtful about the general policy which the Com he had been somewhat mittee had been following but he did not think it would wish to try to The help that the Committee might give change that at this time. should be an exception to the general policy. Mr. Szymczak said this was an unfortunate position to be in. in ten minutes. He thought this problem should be The market opened Open Market Committee but in the discussed at the next meeting of the to be considered. His sugges meantime there was the practical situation exception to its policy against be that the Committee make an tion would the period for that it extend securities and of when-issued purchases it should tell the Treasury At the same time, repurchase agreements.
that this was a matter that had to be thoroughly discussed within the Committee and by the Committee with the Treasury in terms of what the future relationships might be in situations such as this. Mr. Robertson said that in his view the policy which the Com mittee adopted in 1953 was not adopted lightly. He thought it should be adhered to. He could see no basis from the standpoint of either credit policy or debt management for departing from that policy. If it turned out that there was a large amount of attrition on the Treasury's current refunding offering, that could be taken care of by an additional issue of bills by the Treasury. Mr. Robertson said that he did not believe the Committee should be putting reserves into the market at a time when they were unnecessary by deviating from the policy that had been adopted, and he did not believe at the moment that the circumstances were such as to warrant an exception to the general policy against purchasing when issued securities. Mr. Vardaman said he agreed in substance with what Mr. Robertson had just said. He would much prefer that the Committee take the direct method of permitting attrition to develop openly in the Treasury's current the Treasury issue bills to take care of its financing and of having the System account could buy bills to the needs for new cash. Then He felt that any purchases of "rights" or when-issued extent necessary. mean that the Committee was engaging in camouflaging securities would believe such action would be situation. He did not the actual market
effective and could not see what would be accomplished by departing from policy at this time. By permitting attrition to develop, the Com mittee would know exactly what it was doing and it could then proceed to purchase bills in an orderly way to the extent that seemed necessary. Mr, Balderston made a statement substantially as follows: My own view of the situation is similar to that described by the Chairman, I have the feeling that our primary obligation is to put reserves in the market, in the right amount, at the right time. Our secondary obligation is to help the Treasury, Since these two obligations--our primary one and the secondary one--seem to coincide at this time I would depart from our established principle on this occasion only, and would purchase up to $400 million of 2-5/8 per cent when-issued certificates. It so happens, as Mr, Sproul has stated, that that purchase would fit precisely into our expected need to put reserves into the market on or about December 8. As to Mr. Sproul's other suggestion for extending to 35 days the period for repurchase I am of the opinion that it might create an undesir agreements, the dealers to lean on us unduly in able precedent and cause future financings. The reason I am willing to depart from our purchase of the 2-5/8 per cent certificates is principle in the of the general problem with that I believe thorough discussion of a similar crisis in the the Treasury might avoid a recurrence I would depart from principle and buy the future. In this case, 2-5/8 per cent certificates. Mr. Irons statement was substantially as follows: position that Mr. Balderston I am inclined to agree with the make an exception from the stated. I am reluctant to has just uncertain basis since and somewhat policy on a spur-of-the-moment be. That does not the attrition will do not know just what we accord with the policy as have been completely in mean that I I also feel our first responsibility such, but it is policy, and there is a in the market place the needed reserves is to This issue to assist the Treasury, secondary responsibility price that is and it is not the have been well priced seems to somewhere in to put in reserves We do need causing difficulty. willing to depart I would be of $400 million, the neighborhood per cent certifi buying the 2-5/8 the extent of policy to from amount as a step that basis within that cates on a when-issued
would be in the direction of desirable credit policy and which would also assist the Treasury, I am reluctant to extend to 35 days the period for repurchase agreements. I would be less inclined to do that than to purchase the when-issued securities. The extension of the repurchase period would seem to me to be more of a step toward assisting the dealers, I would think we could let it be known there would be repurchase funds available as needed over the year-end period, rather than to extend the period for repurchase agreements, Mr, Fulton said that he agreed with Mr. Balderston's view that the Committee has an obligation to the Treasury and that the proposed action would not negate the general monetary policy being pursued by the Committee, Under the circumstances, where the Treasury's issue was priced with the market and with the understanding that the Committee was not committing itself indefinitely to "bail the Treasury out" when its financing did not go just right, Mr. Fulton said that the Committee was justified in taking the proposed step-that he felt the when-issued securities under the particular circum is, of buying stances that have developed at this time. Mr, Shepardson said he disliked very much to see the Com depart on short notice, and upon the first signs of difficulty mittee issue, from an established policy. On the other hand, with a Treasury on which there had not been to him that this was a policy it seemed and further "selling" it called for further consideration full agreement; out. It would appear possible that by as Chairman Martin had pointed Balderston the Com Sproul and suggested by Messrs, taking the action discussion of the climate for further might create a better mittee
problem and perhaps have a more effective chance for establishing the validity of the principles the Committee has been following in recent years. For that reason, Mr. Shepardson said, he would be inclined to go along with Mr. Balderston's suggestion for purchasing when-issued securities but not for extending the term for repurchase agreements. Chairman Martin called for further comments on the situation and none of the members of the Committee expressed additional views at this point. The Chairman then said that there was before the Committee a suggestion that it should make an exception to its policy against purchase of when-issued securities but that the discussion indicated there was no intention to move in the direction of permitting such purchases of securities as a matter of policy. Specifically, the before the Committee was that it authorize the purchase suggestion in the open market, on a when for the System open market account of 2-5/8 per cent Treasury certif issued basis, of up to $400 million icates to be dated December 1, 1955 maturing December 1, 1956. that he would ask for a vote on the proposal, Chairman Martin stated the Committee wished to it, unless some member of as he had stated amend the proposal. proposal as stated by Chairman Mr. Sproul said that the securities and not the purchase of when-issued applied only to Martin for repurchase agreements. extension of the period to the suggested
He went on to say that he felt the purchase of the when-issued securities was more important than the extension of the period for repurchase agree ments, With respect to the latter, the idea was to aid the dealers in aiding us. He felt that if this extension were made the Committee might have to purchase less securities than otherwise but, as indicated, the purchase of the when-issued securities up to $400 million was more impor tant. Mr. Sproul said that he would also like to comment regarding the market in view of the statement that yesterday it seemed to be on a firm basis. It was true, he said, that quotations for the new securities have been just under par, but in reality the market has been in a state of suspended animation in which holders were not able to sell all that they wished to sell. Chairman Martin stated that if there were no other comments on his statement of the proposal before the Committee, he would ask for a vote on the motion. Thereupon, the Chair put the motion that the Federal Reserve Bank of New York be authorized to purchase for the System open market account in the open market, on a when-issued basis, up to $400 million of Treasury 2-5/8 per cent certificates to be dated December 1, 1955, maturing December 1, 1956. The motion was approved, Messrs. Martin, Sproul, Earhart, Fulton, Irons, Leach, Shepardson, Balderston, voting "yes", and Messrs, Mills, Robertson, and Szymczak and Vardaman voting "no". now ask for a vote on Mr. Martin stated that he would Chairman authority for the Federal suggestion that the existing Sproul's second
Reserve Bank of New York to enter into repurchase agreements be amended to extend the maximum period for such agreements from 15 days to 35 days. The Chairman went on to say that while he thought this was a minor element, he would be inclined personally to avoid taking that step at this time. Mr. Sproul said that in view of the sentiment expressed during the preceding discussion, and the authorization to purchase when-issued securities, he also would now suggest that no change be made in the exist ing authorization for repurchase agreements. Chairman Martin said that under these circumstances it appeared clear that the Committee would not wish to change the existing authority for repurchase agreements, and there was no disagreement with this state ment. In response to Chairman Martin's invitation for other comments, Mr. Mills stated that as he understood the action just taken to authorize the purchase of 2-5/8 per cent certificates on a when-issued basis, the not put funds into the market until December 8, the pay operation would ment date for the new securities. In the meantime, there might be a market and it would seem that the Committee should rapidly tightening as to the quantity of reserves that should reach a judgment at this time reserves should be made avail the market and just how those be put into able. he thought this probably could be handled Mr, Sproul said that the period for such agreements agreements even though through repurchase could indicate to since the account management was not to be lengthened,
the market that repurchase agreements on the usual basis would be readily available from the present time through the year-end period. He concurred in a comment which Chairman Martin made that the existing authority for repurchase agreements, plus the understanding that they would be made available over the year-end period, would be sufficient to handle this immediate situation. Mr. Mills commented further to the effect that there might be a need for direct purchases of securities within reasonable limits, to be combined with the repurchase agreements. Further, he gathered from the discussion that repurchase agreements might be made not only against bills but also on "rights" on the new securities, and he raised the question whether this would be a further technical deviation from the Committee's general policy. Mr. Sproul stated that the System account had been engaging right along and that he did not understand in this type of transaction policy since the Committee specifically had it to be a deviation from from the policy of not exclusion of repurchase agreements approved the financing, (1) maturing issues during a period of Treasury purchasing, (2) when-issued securities, and for which an exchange is being offered, for exchange. Mr. for those being offered (3) comparable maturities to Chairman Martin's question, by stating, in response Sproul continued period, and he during this rule out direct purchases that he would not He also stated $131 million. such purchases totalled noted that yesterday
that the System account in its operations would take into consideration Mr. Mills' suggestion that outright purchases of securities might be necessary during the period immediately ahead. Chairman Martin inquired of Mr, Rouse whether any change in the Committee's general directive to the New York Bank was required. Mr. Rouse responded that, as he understood it, the Committee's action this morning authorized the special and additional purchase of the limitation contained in the directive $400 million of securities beyond on November 16. Under these circumstances, he felt issued at the meeting no change in the directive issued at the meeting on November 16, 1955, was needed. Thereupon, the meeting adjourned at 10:11 a.m. Secretary.
Also: Record of Policy Actions