December 8, 1955 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held on Thursday, December 8, 1955, at 10:20 a.m., E.S.T. This was a telephone conference meeting and the location of each individual is indicated in parentheses after his name in the following list of those in attendances PRESENT: Mr. Martin, Chairman (Washington) Mr. Sproul, Vice Chairman (New York) Mr. Balderston (Washington) Earhart (San Francisco) Mr. Fulton (Cleveland) Mr, Mr. Irons (Dallas) Leach (Richmond) Mr. Mills (Washington) Mr, Robertson (Washington) Mr, Shepardson (Dallas) Mr. Szymczak (Washington) Mr. Mr. Vardaman (Washington) Alternate Member, Federal Open Mr. Treiber, Market Committee (New York) Mr. Riefler, Secretary (Washington) Mr, Thurston, Assistant Secretary (Washington) Mr. Thomas, Economist (Washington) Mr, Vest, General Counsel (Washington) Solomon, Assistant General Counsel Mr. (Washington) Mr, R. A. Young, Associate Economist (Washington) Rouse, Manager, System Open Market Mr, Account (New York) Secretary, Board of Mr, Carpenter, Governors (Washington) Assistant Secretary, Board Mr. Sherman, of Governors (Washington) Director, Division of Mr. Koch, Assistant Research and Statistics, Board of Governors (Washington) Chief, Government Finance Mr. Miller, Division of Research and Section, Board of Governors (Washington) Statistics, Mr. Roosa, Assistant Vice President, Reserve Bank of New York (New York) Federal
Chairman Martin asked that Mr. Rouse review the situation in the market this morning, Mr. Rouse said that this meeting arose out of developments yesterday afternoon. In late trading, there was a psychological dete rioration in the market in the last three-quarters of an hour which apparently was feeding upon itself. The three groups--dealers, country banks and city banks, and nonfinancial corporations--may have been "kidding" each other, but the story got around that country banks were not interested in bidding in the Treasury's bill auction tomorrow. The city banks thought their corporate customers were not interested, and the underwriting banks became less interested themselves. In terms of auction price for the new bills was estimated at about rates, the the talk was in terms of 2-1/2 per 2.35 per cent on Tuesday; yesterday late yesterday there was talk cent; and in the "moonlight" discussions or even 2-7/8 per cent. The money of the possibility of 2-3/4 per cent, Net borrowed reserves in the of banks has not been adverse. position past week were running a little over first four statement days of the net borrowed reserves three days, while and in the past $300 million, market has been relatively comfortable been over $500 million, the have does, however, reflect excesses. The situation because of accumulated that the market is unsatisfactory experience in part the relatively exchange, with no buying going having on the recent Treasury financing a bid just under par quoted at par with on and with the new securities
and some trading under par. These developments, as reported by the senior traders at the principal security houses, were such as to suggest an incipient disorder in the market and it was believed desirable to alert the Committee to that possibility, In response to Chairman Martin's inquiry as to his program, Mr. Rouse said that the situation in the market for Government securities was related to the general situation in the capital market, Municipal inventories of dealers were very heavy, probably in excess of $400 million. Also, recent issues of corporate securities have not been successful and dealers' inventories are building up. There is an atmosphere of gloom and uncertainty. Purchases of bills totalling $85-1/2 million were made for the System account yesterday and the account was now in the process of asking for tenders of bills by dealers-it was anticipated that the account would purchase in the neighborhood of $125 million for cash today. That concluded Mr. Rouse's report. Chairman Martin asked what in the way of authority Mr. Rouse be needed during the course of the day, and Mr, Rouse said thought might he thought the existing amount of authority was satisfactory. The account did not think buying bills would necessar is still able to buy bills. He disorder appeared to be answer to the situation if ily prove to be the Rouse said he did not anticipate such a development developing, but Mr. suggestion was that it a possibility. His only although there was still
would be desirable to have the Committee available in case more authority were needed. Mr. Rouse also stated that the authority given by the Com mittee on November 30 for purchases on a when-issued basis of the new one-year 2-5/8 per cent Treasury certificates had been used to the extent of purchasing $167 million. This authority lapsed yesterday since today the securities became outstanding rather than when-issued securities. Mr. Rouse added the comment that the new securities presumably are in the short-term area encompassed by the Committee's instruction approved at the meeting on March 2, 1955, and their purchase technically would be justifiable if it appeared desirable that such purchases be made, Chairman Martin suggested that the Committee stay alerted to developments in the market today. His hope would be that repurchase agreements, use of the discount window, and outright purchases of bills would handle the situation. Mr. Rouse said that in addition to buying bills outright, he was making clear to dealers that there was no reason to think that the repurchase window would not continue to be open through the end of the year as it has been in previous years. Mr. Mills stated that there had been a precedent in the past on occasions where there has been a "stickiness" in a Treasury financing offering where the Federal Reserve Banks had communicated with the more to encourage participation in member banks in their districts important case, where the central reserve offering. In the present a particular
city banks were feeling the pinch of tight money more than the out-of town banks, there could be good reason for the Federal Reserve Banks, depending on developments during the day, to contact the out-of-town banks by way of suggesting reasonable participation in the tax antic ipation bill offering and stating that where the discount window is used to support that participation, it would not under present circumstances be regarded as a violation of the general understanding against contin uous borrowing. Mr. Sproul said that he was getting in touch with the banks in New York and reminding them of their responsibility as underwriters in connection with a Treasury tax anticipation offering such as this, and he felt this would be taken as an indication that the discount window will be open in connection with borrowings for reserves needed to perform that function. Mr. Mills commented on a point raised by Mr. Fulton that member banks might need encouragement to understand that if they were not in a position to redistribute satisfactorily the securities they acquired within the ten to fifteen day period that is estimated in some quarters as the life of their tax and loan accounts, they would have the facilities of the discount window to carry them for a somewhat longer time until a desirable redistribution might be effected, Chairman Martin stated that this meeting had been for informa tional purposes only and that no additional authority was being asked at
the present time. He expressed the hope that the System account would not have to go into purchases of the new 2-5/8 per cent certificates any further than it already had done, if that could be avoided. He added, however, that the judgment on such purchases had to be related to develop. ments in the market and that the Committee would stay alerted for any call. Mr. Sproul referred to t he recent performance of the market in the Treasury offering and said that the market might give connection with weight to that factor out of proportion to its real importance, He thought it might be helpful if the System account were to buy some of the 2-5/8 certificates, which would fall within the Committee's instruction per cent to short-term Treasury securities, although that operations be confined the clause indicating a preference such purchases would not fall within would keep the Committee informed However, the New York Bank for bills. certificates would be of the 2-5/8 per cent and if it thought purchases members of the Committee know promptly, desirable it would let the his part he would be guided by Chairman Martin stated that for and others on the desk. Sproul and of Mr. Rouse the judgment of Mr. Thereupon the meeting adjourned at 10:37 a.m. Secretary.