December 13, 1955 FOMC Minutes

FOMC minutes

difficulties and he would wish to see a draft of statement before he could feel that it would be desirable to issue one. His feeling was that any statement that might be issued would simply incite more comment rather than less. Mr. Sproul then made a statement substantially as follows: First, I would like to say that I think it is desirable that there be further study and discussion of the relation be tween credit policy and debt management, not on the narrow basis of the recent Treasury financing and our purchase of when-issued securities in connection with that financing, but taking account of the whole area of this relationship. This is a matter which has had some discussion in the Federal Open Market Committee, and which it was understood would be the subject of further study by the members. In pursuance of this objective, the Federal Reserve Bank of New York has recently prepared and distributed one memoran dum on the subject and I would hope others would be moved to consider it further so that we may develop a basis for conversations with the Treasury on the broadest possible grounds. So far as our recent purchase of when-issued securities is concerned, I have detected in some of the comments which have been made a seeming reversion to the idea that the directives which the Committee has adopted from time to time are a form of Mosiac law, rather than an experiment, as they were described by the Chairman at the hearings of the Flanders subcommittee of the Joint Committee on the Economic Report. But by the terms of Committee action they are only valid until superseded by other action of the Committee, which was done in this case under circumstances which recommended such action to a majority of the Committee. I do not think, my self, that this will mislead the market. One of my concerns has been that the longer we went without deviation from the general principle adopted by the Committee, the more likely it would be that when we did have to deviate it would be taken as a sign that a situation had developed which was more dangerous and critical than actually was the case, and that this would mislead the market. What has hapnened, as I see it, is that the principle adopted by the Committee, until superseded, was put to a real

test when question arose as to the success of an appro priately priced Treasury refunding, plus cash financing, at a time when a restrictive credit policy was being fol lowed. It was decided that it would be consistent with our primary responsibility for credit policy to take ac count of our secondary responsibility for coordination of that policy with debt management, in so far as possible. This is not at all a commitment or precedent for "bailing out" the Treasury every time it comes to the market and on whatever terms. I continue to hold the view, of course, that under conditions of credit restriction when the Treas ury has to come to market for large refundings, and when it is also faced with the necessity of some cash borrowing, it is unlikely that the market will always be able to make the massive readjustments which are necessary within the short period of the Treasury's offering; some form of underwriting of part of the transaction is likely to be necessary. On the question of whether a statement should be issued about our recent purchase of when-issued securities, I am of two minds. Fundamentally, I am of the opinion that we must allow our actions to speak for themselves, particu larly in view of the difficulty of phrasing a brief official statement which will adequately represent the views of all members of the Committee, each one of whom may have arrived at a decision by a different route, and because of the likeli hood of misinterpretation of such statements no matter how carefully they may be worded. I have noted, however, that what we do here often seems to reach the press and the Government Bond services by one route or another, and I think that the pressure for information concerning these be very great. In the circumstances, I raise purchases may as to whether it would not be better to agree the question official explanation to be added to our public condition on an to which all questions could be referred, statements this week, understanding that no one here would comment on the with the purchases in any other way. So that you might consider this out a possible explanatory note. alternative, I have written this week indicates purchases of "The statement of indebtedness for System $167 million certificates it has for some time Market Account. Although Open Open Market Committee the policy of the Federal been of when-issued securities during a to avoid purchases decided, in this financing, the Committee Treasury consistent with its that such purchases were instance, aim of providing reserves to the banking overriding the objectives of credit system in accordance with policy."

Mr. Mills said that with all respect to Mr. Sproul, he thought that a statement such as he had read would open the Com mittee to the challenge that if the 2-5/8 per cent certificates of indebtedness were purchased to provide reserves, the Committee could quite as easily have provided such reserves through purchases of Treasury bills rather than the certificates, Mr. Sproul responded that his thought was only that the statement would say that the purchases that had been made were con sistent with the overriding aim of the Committee to provide reserves to the banking system under its current credit policy. He recognized the difficulty of phrasing a suitable statement and he agreed strongly with the benefits of saying nothing, but he doubted that "nothing" would be said in connection with the present case. There followed a further discussion of the possible desira bility of issuing a statement commenting on the purchases of when issued securities and of the question whether issuance of any state ment on the matter could be avoided. In the course of the discussion, one suggestion was that the Chairman or Vice Chairman of the Committee be designated as the individual to respond to any inquiries regarding the purchases made last week. It became clear during the discussion the members of the Committee desired a statement if its that none of would be difficult to phrase a could be avoided, and that it issuance acceptable to the Committee. The discussion statement that would be but with a consensus that no without a definite decision concluded statement be issued.

Chairman Martin brought up the question of the date for the next meeting of the Committee and, after a brief discussion, that the next regular meeting should be it was agreed unanimously scheduled for Tuesday, January 10, 1956. Thereupon the meeting adjourned. Secretary