January 10, 1956 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington on Tuesday, January 10, 1956, at 10:45 a.m. PRESENT: Mr. Martin, Chairman Mr. Balderston Mr. Earhart Mr. Fulton Irons Mr. Leach Mr. Mills Mr. Robertson Mr, Mr. Shepardson Mr. Szymczak Mr. Treiber, Alternate for Mr. Sproul Messrs. Erickson, Johns, Powell, and Young Alternate Members of the Federal Open Market Committee Messrs. Williams, Bryan, and Leedy, Presidents, Fed eral 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 Research Mr. Koch, Assistant and Statistics, Board of Governors Mr. Miller, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Gaines, Special Assistant, Research Department Mr, Federal Reserve Bank of New York Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Committee held on November 30, Federal Open Market 13, 1955, were approved, December 8, and December
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 December 13, 1955, through January 4, 1956, and at this meeting there was distributed a supplementary report covering commitments executed January 5 through January 9, 1956, inclusive, Copies of both reports have been placed in the files of the Federal Open Market Committee. Upon motion duly made and seconded, and by unanimous vote, the transactions for the System account during the period December 13, 1955 January 9, 1956, inclusive, were approved, ratified, and confirmed. Chairman Martin then called upon Mr, Ralph Young for a state ment on recent economic developments, and Mr. Young summarized the situation substantially as follows: With indexes both of industrial activity and of industrial prices penetrating new high ground, with demands in many lines pressing against capacity, and with open season for forecasting at hand, many observers seem to be regarding a downturn in 1956 as more than a possibility, indeed, even a likelihood. With this view expressed by some observers of recognized competence, magnifying glasses, too frequently out of focus, are being put to use in watching economic indicators typed as leading. read the current data, there is no visible con As we juncture of developments at this time that would spell general or near-term future. Economic downturn in the foreseeable activity in this country is still advancing, but limitations on the pace of further advance in output are plainly in evidence. expansion, pressures on demands still undergoing With aggregate supplies are finding further expression in rising prices for industrial output. most recent data show that Abroad in industrial countries, has been extended, and with intensive advance in activity resources, pressures toward of manpower and capital utilization Foreign trade has conadvance have also been manifest, price
tinued to advance over-all, especially for industrial products, and further large gains have been registered for foreign hold ings of gold and dollars. The drain on British reserves has apparently been brought to a halt. Taken as a whole, the domestic and international situation may be characterized as still showing, at least on the industrial side, an inflationary color. As to specifics of the situation: GNP for the final quarter of 1955 is estimated at $397 billion, up $40 billion from mid-1954. Personal income rose further, especially the wages and salaries component. Weekly earnings in manufacturing at the year end were about 8 per cent over a year earlier. The labor market continues farily [sic] tight, so that some bidding up of wages as well as increases now scheduled by contract and the change in the minimum wage law will operate in the months ahead to increase wage rates and incomes further, Industrial production registered a further index point gain in December to 145, about 5 per cent above midyear and 12 per cent over a year ago. Production at year end was being maintained or expanded, with output in a number of lines as high as capacity or materials supplies would permit. In the auto industry, cutback in schedules was in process; output of other consumers durables also was off some, but mainly reflecting work stoppage in TV and appliance lines. In non durable lines, where capacity margins obtained, output was rising in response to heavy consumer buying during the autumn. In equipment industries, where capacity was being pressed, backlog orders were piling up, Much talk has gone on about a weakening in auto markets, but considering this is the second year of the forward look and also the off season, sales levels for both new and used cars seem well maintained, Sales competition for new cars is keen, however, and prices of the three lower priced makes are about at last summer's levels for cash deals. Sales of house hold durables held through the fourth quarter at close to high October levels. In the auto as well as diversified consumer durable lines, output and sales at the year end seemed in tenable balance, increased about $350 million in Instalment outstandings November and probably more than this in December, Terms compe tition appears to have stabilized, but forces again to intensify it appear strong, Value of new construction in December was slightly off from mainly a reduced volume of resi high spring levels, reflecting residential construction contract building. The value of dential
awards for November and December was up. The System's survey of residential real estate markets, just completed, failed to disclose a surplus housing condition in any major market. It did bring to light, however, that housing demand is less urgent than earlier; that new house and used house price trends are seemingly diverging--the former up, the latter down; that builders still confront difficulties in obtaining new commitment money; and that builders are hesitant not only because of financing problems but because of demand. In recent weeks, prices of industrial materials have been showing renewed strength. Steel scrap, nonferrous metals, lumber, cement, paper, cotton textiles, fuels, and hides and leather have all registered new advances. An early steel price rise is reportedly in the making. With demands for finished goods strong and materials and other costs rising, upward price pressure on finished products continues and various prices have been raised recently. Over all prices of industrial commodities are up about 5 per cent over midyear, Farm prices declined further in November and early Decem further decreases in meat prices. With pressure ber, reflecting abating, meat prices have strengthened some of heavy slaughter recently. in consumer markets commenced to be evident Price advances They have been increasingly numerous in recent about midyear. result that, despite lower meat prices this months, with the fall, the consumer price average has been edging up, sales at manufacturer and distributor levels rising With ratios at low levels, pressures further, and with stock-sales continue. A larger rate of inventory gain to add to inventory compared with earlier in the for the fourth quarter is expected a considerable price ele year, though it will partly reflect were up in November in durables manufacturing ment. New orders were not as large as in August and from October, though they orders for producers equipment, September. The rise in new orders for durables large. Unfilled however, was especially above the low up $7 billion exceeded $50 billion, for November of a year earlier. point recent credit and made a statement concerning Mr. Thomas then that made by Mr. statement, like Mr. Thomas' financial developments, the information pre summarized and supplemented Young, to some extent of which 1956, copies 6, dated January staff memorandum in the sented
were distributed before this meeting, Mr. Thomas noted that there had been somewhat conflicting developments in the credit picture in recent weeks. The reluctance of banks to grant credit seemed to be increasing and money market pressures appeared to be growing, with interest rates continuing high, even though from a statistical standpoint it appeared that there had been less pressure on reserves than a few weeks earlier. Deposits and currency showed a greater than seasonal increase in December, bringing the total growth for the year up to nearly 3 per cent--close to the 1954 rate of growth. Business loans at weekly reporting member banks con tinued to increase in December and the total increase during the last half of 1955, Mr. Thomas said, was over $3 billion compared with increases of about a quarter billion dollars each in the corresponding periods of 1953 and 1954 and an increase of $2-1/2 billion in 1952. The reporting member banks also increased their investments during December, reflecting purchases of Treasury tax anticipation certifi month. This increase was in contrast with the downward cates in that holdings of Government securities by reporting member banks tendency in of 1955. Mr, Thomas also noted the large volume of new during most November and December, followed by some slacken securities offered during ing in recent weeks, of the unusual factors that had Mr. Thomas pointed out some 1955, and suggested that bank reserves during December affected member sources of reserves-the unusual nature of some of the the temporary
large float and low Treasury balance--might account for the failure of money markets to ease, Other factors were the distribution of the reserves mostly outside of New York and the effect of the higher dis count rate on banks' willingness to borrow. He referred to a sheet that was distributed at this meeting showing a pattern of projected changes in reserves. These projections indicated that (in the absence of System action) net borrowed reserves of weekly reporting member banks during the week ending January 11 might be around $150 million. With a run-off in System bill holdings now scheduled for January 12, an increase in net borrowed reserves was anticipated during the follow ing weeks. With respect to the outlook, Mr. Thomas said that if there were no further action on the part of the System other than repayment repurchase agreements, net borrowed reserves could be of existing to be in the $300 to $500 million range for several weeks. expected the Committee faced was whether this amount of net The question per cent discount rate would result in borrowed reserves with a 2-1/2 was the case last fall when the more pressure on the market than said that, in view of 2-1/4 per cent. Mr. Thomas discount rate was to increase and for wages and prices general world-wide tendency the no indication of a appeared to be for expansion, there pressures time than existed during the for less restraint at the present need Committee needed stronger was whether the fall of 1955. The question might be reached present. The answer existed at the restriction than
through watching the behavior of the money market and the credit situation, Chairman Martin stated that Mr. Thomas had pointed up very well the problems facing the Committee. It became more and more apparent, he said, that psychology played a great part in determining the tone of the market, Chairman Martin went on to say that Vice Chairman Sproul was unable to be present today, and he called upon Mr. Treiber as alternate for Mr. Sproul for comments with respect to the economic situation as observed in the New York District and to open market operations. Mr. Treiber made a statement substantially as follows 1. The year 1955 marked a great economic expansion with gradually increasing credit restraint. 2. Our policy of credit restraint, as expressed in open market operations, caused or permitted borrowings of member banks to increase from nominal figures in January 1955 to about $1 billion in November, while so-called free reserves declined from about plus $350 million to about minus $500 million. The discount rate was advanced in four steps from 1-1/2 to 2-1/2 per cent. Interest rates in the market, particularly at short term, responded to these changes in the availability and cost of bank reserves and, presumably, the use of bank credit was also affected by increases in its cost and by greater difficulty in obtaining access to it. Although bank loans increased greatly as economic growth gained momentum during the year, this increase was accompanied by a substantial liquidation of bank investments. The increase in the money was significantly less than the increase in economic supply activity. clear course of our policy was dimmed but not 3. The abandoned during December, when the needs of Treasury borrowings and refundings, and the special seasonal and year-end strains and stresses, caused us to permit some statistical easing of the reserve position during the latter half of the month, This by the market for what it was, however, and credit was recognized
did not really become easy. In fact, the market was in such a state of uncertainty, at times, as to create a danger that anticipation of shortages of funds might outrun the immediate aims of credit policy. 4. As we enter 1956 our problem becomes more difficult. The economic outlook is cloudier. It is apparent that economic expansion will not continue at the same rapid rate and that demands for bank credit will be less intense. The need for in creased credit restraint may now be less than it has been because the boom is further along toward a crest; signs of slow ing down have already appeared in some key areas, such as auto mobile production and residential housing, and consumer expend itures appear to have leveled off. 5. On the other hand, employment and personal income are hign, and plant and equipment expenditures are expected to establish volume records. Foreign demand for U. S. industrial products is strong. Prices of industrial materials have con tinued to rise and it looks as if inventories will be accumu lated during the months ahead at a more rapid rate than they were in 1955. Large supplies of farm products at lower prices have reduced the advances that otherwise would have been re corded in commodity prices and living costs. 6. If credit is too readily available before we adjust to out of the rate of economic growth, we could have a flattening an upward spiralling of prices based on increased costs and some continuing shortages of materials. We don't want to encourage such a development. Cn the other hand, we don't want to increase credit restraint unnecessarily; we don't want to jeopardize adjustment of the economy to a slower rate of growth which otherwise might be successful. the first half of 1956 will 7. Treasury operations during be anti-inflationary. Even though there may be various pro tax relief and for increased spending, any proposals posals for may be adopted will have little effect on actual receipts that and disbursements during the first half of 1956. immediate task of credit policy is to guard against 8. The pressures in the economy while the still potent inflationary restraint that might in a taut avoiding the excesses of credit off necessary credit. money market cut counsels our seeking to regain, 9. Attainment of this aim of credit restraint the position open market operations, through special needs of before the had achieved in November that we should do no more for but that we altered our course, December to do that of our intention The demonstration the present. to continued credit a test of market reaction will give us much in the rate of slowing down a time of a prospective restraint at
economic growth, and the way may then be clearer for our next move, whether toward more or less restraint of the continuance of the status quo, 10. Repurchase agreements now on the books (about $120 million) are scheduled to run off this calendar week. Treasury bills maturing Thursday, January 12, held in System account and amounting to about $202 million, will run off, reducing member bank reserves by that amount. If our projections are approxi mately correct, net borrowed reserves for the next statement week should average something over $400 million. This will bring us back, so far as negative free reserves are concerned, to near where we were at the end of November. 11, Between now and the next meeting of the Committee, modest sales of Treasury bills from the System portfolio may be in order from time to time to maintain the desired degree of restraint. Unless the projections go awry, and of course they can easily do so--as Mr. Thomas has pointed out this morning large System transactions in the market will not be called for. Mr. Johns said that he hoped he was not too much affected in his views by the developments which he saw or thought he saw in the St. Louis District. He had no desire to differ with the broad aspects of the appraisals of the situation that had been given this morning, but in the Eighth District there were some signs of weakness which he thought should not be overlooked. Agricultural income in that District did not decline during the past year as it had nationally and as had been expected in the Eighth District, This was because of the large cotton crop, however, and the agricultural outlook for the St. Louis District is not good-a decline in farm income is now contemplated for this year, Mr. Johns also cited soft spots in the District, Indiana, where several important industrial mentioning Evansville, down or had operations sharply curtailed plants have been closed making allowances for these factors, however, recently. After
Mr, Johns said that he agreed that the outlook was for continued ex pansion although probably at a slower rate. He referred to the under standing of the Committee four weeks ago that it should attempt to regain the degree of credit restraint that had existed in November, recognizing that it might not be able to do so very quickly. It had not been able to do so yet, he said, and he was inclined to the view that perhaps the Committee should not attempt at this time to regain quite the degree of restraint that had been attained in November. Not much different, he said, but he would not be disappointed if during the next two weeks the Committee still failed to regain the November degree of restraint. Mr. Bryan said that in the Sixth District the general picture of conditions continued to be one of economic boom and, in some spots, rather an economic expansion at a rate that may be un sustainable, This, of course, had to be related to the agricultural situation which was roughly the same as that described by Mr. Johns Eighth District. While there were no visible signs of general for the softening, Mr. Bryan suggested that some pervasive effects economic might come about by reason of the increased rate of re on the economy volume of consumer instalment debt now outstand payments on the large might shortly equal and then exceed new ing, so that repayments He supposed this would have a rather consumer debt commitments. months, of "taking the bloom effect, probably within a few general with persons around He sensed from his conversations off the boom."
Atlanta that there was a tendency for persons to become more careful shoppers, and he cited both automobiles and housing as items for which potential buyers probably were less ready to make commitments than had been the case a few months ago. Mr. Bryan said that he had some doubts whether the boom was going to go much further. Until the picture was clearer, he would not take additional measures of restraint in the way of an increased discount rate or otherwise, although he would like to recapture more of the November degree of restraint than had existed in the past few weeks. If, in the next two or three weeks, the situation should show too much easing in terms of money rates, he would like to see the System account take active steps to counteract that tendency, realizing that with the Committee meeting at short intervals it could shift readily if necessary, Mr. Williams said that in the Third District there was a general expectation of a good year during 1956 but not one of easy gains, Conditions were spotty; some areas were having boom, while conditions in others were not good. Mr. Williams referred to the comment by Mr. Young in the economic review to the effect that the situation was highly competitive but that it appeared that sales would hold up. He stated that the Philadelphia Bank had made surveys of the sales outlook in automobiles, both by telephone and personal interview, and after summarizing some of the information developed in the surveys stated his conclusion to the effect that automobile dealers were
1/10/6 -12 anxious to sell new cars for immediate delivery at substantial dis counts from list prices, and to apply such "discounts" as the down payment. It was Mr. Williams' view that a large part of the so-called "profit margin" of automobile dealers was represented by the discounts to which he referred. Thus, while automobile dealers might maintain sales, they might not be making much money. The used car market is distinctly better than the new car market, Mr, Williams said, but it too is much more competitive than formerly. Essentially the same picture exists in the real estate market in the Philadelphia District, Mr. Williams added: there is an increased supply of houses but it is not alarming. As Mr. Bryan had indicated for the Atlanta District, potential buyers were shopping around much more carefully than previ ously and the situation was becoming more competitive. There is no long run pessimism apparent in the Philadelphia District, however, and in some parts of the District such as southern New Jersey and is distinct optimism. Mr. Williams expressed the view Delaware there were to move upward in the degree of pressure that if the Committee move downward: he would follow a exerted, it should be ready to being the next few weeks until the Committee policy of watchful waiting during could see ahead more clearly, District continued to be one of The situation in the Cleveland Company strike was hav The Westinghouse Electric boom, Mr. Fulton said. was still a shortage of in several cities, but there ing repercussions and back orders were heavy, labor. Metal prices were increasing skilled
and the situation in the District as a whole continued to be one of sus tained high economic activity. Even though business was going to be highly competitive during the coming year, Mr. Fulton felt that it would be a mistake to relax credit restraint since such a program would only add to the inflationary potential. On the basis of the economic picture as currently observed in the Cleveland District, his view was that it would be desirable to try to regain the degree of restraint that existed toward the end of November. Mr. Shepardson said it seemed to him that, even with the variations in conditions in different segments of the economy brought out this morn ing, there was still evidence of a good deal of pressure resulting from price increases. Some further increases seemed almost inevitable, Under these conditions it would seem highly desirable to hold at least a stable preceding meeting there had been agreement line for the present. At the the degree of restraint that it would be desirable to try to recover that that had not been done, an effort still should had existed earlier. While made to get back to the November level. be the bloom was off the boom. Mr. Robertson said he did not believe splurge, but he let-down after the Christmas possibly had been a There there was suf not continue, However, if the boom did would be surprised reluctant to take much the moment to make him uncertainty at ficient open market operations, his the other. In terms of action one way or would do well to two weeks the Committee that for the next feeling was but he should be no relaxation, carefully. There watch the situation
would be reluctant to move strongly on the side of restraint, Mr. Mills said that he generally shared the views expressed by Mr, Robertson, Starting with the postulate that a degree of credit restraint should be continued, for which there are sound reasons, it would seem that the Committee should move in a framework that would determine what the availability of credit should be. As a guide, Mr. Mills suggested that the Committee should follow with even more attention than usual the shifts in loan volume at reporting member banks, particularly in central reserve cities. There is an under current of doubt which may not be clarified for a month or two. Additional credit may be necessitated by involuntary inventory accumulations or it may come out of legitimate demands that have not been satisfied previously and which will press most heavily on central reserve city or reserve city banks at a time when they are already under the pressure of a heavy loan volume. With their lessened ability to shift readily out of Government securities to provide a source of it may be justifiable to assist banks in meeting these loanable funds, said, he believed that in looking at the needs. Therefore, Mr. Mills total volume of credit the Committee should not be overly concerned if contraction in the first weeks of it failed to see as sharp a credit At this juncture, the Com year as might ordinarily be expected. this an unseasonal loan demand as mittee should be wary about considering character. To bring these dangerous symptoms of an inflationary having Committee should move would mean that the factors into its vision
cautiously toward regaining the position of restraint that existed in November, and that it should be very alert to the movements in the volume of loans and to the resultant pressures on the money market as reflected in prices of United States Government securities. If it found a burden of necessitous credit moving toward the larger banks and if they had no choice but to dispose of United States Government securities in substantial amounts to meet this demand, the Committee might find the Government securities market adversely affected, to the detriment of its own policies. Mr. Mills said that his feeling was that the Committee should move cautiously and, if at in moving to a higher level of net borrowed reserves, give all possible of the direction and pur indication through its actions some public should be given well in of System policy. These indications poses come to the market for refunding of the Treasury's having to advance needs in March and April. in the Ninth District that it was midwinter Mr. Powell noted by snow and cold trade were affected materially and that industry and the basic economic to analyze closely made it difficult weather, which poor in the District, December was quite Retail trade in developments. were not yet available, year-end inventory figures he said, and while a heavy volume with quite were left that retailers had the impression he volume of do with the to had something This probably of inventories. particular purpose could see no Mr. Powell being used currently. credit these inventories to unload for retailers it more difficult in making
by putting pressure on them through higher interest rates. On the other hand, agriculture--the principal industry of the Ninth Districthas been spending beyond its means, and this has resulted in higher loans at agricultural banks, This increase in credit had been accom panied by some deterioration in its quality. Good farmers are making money but total farm income is slightly down from a year ago and this means that the marginal farmer is going to have to reduce his expend itures eventually. An increase in interest rates would be a help in dealing with conditions in this field, Mr. Powell felt, Looking ahead into 1956, Mr. Powell said he was somewhat concerned about inventory accumulations. He had not been concerned on this point last fall because at that time increasing sales justi fied the higher inventories. If sales were to taper off nationally in 1956, however, Mr. Powell thought there was real danger that inventories would be getting out of line. From that standpoint, it necessary not only to make sales from the open market might become account but a higher discount rate might be needed before the year This is the season of the year when plans are being was far along. concerns were to be cautioned Mr. Powell noted, and if business made, Federal Reserve should set too extravagant plans, the against making He was inclined to favor an early the stage in the credit field. to continue pressure on the discount rate and meanwhile, increase in market operations as a means of getting the money market through open thought would be needed. with the tone the Committee the year started
Mr. Leach said that for some time he had thought the economic outlook for 1956 was strong, despite prospective weaknesses in the residential construction and automobile industries. On the basis of recent surveys, he was inclined to think that the decline in residen tial starts in 1956 would not be as great as had been anticipated and, consequently, construction as a whole should move up from the present level. Because of this the general outlook now seemed slightly stronger to him than it did before. On credit policy, the question as he saw it was whether the Committee should continue the same degree of re straint it had last November or whether it should increase that re straint, We are still rather close to the uncertainties that existed in the Government securities market in December, Mr, Leach said, and it is too early to know what will happen to loans in January. At the moment, he would prefer to postpone any decision as to moving toward and to consider the question further at the next greater restraint meeting. Net borrowed reserves around the $350 to $400 million level seemed to him to be about right, and he thought shown in the projections not need to do much through the open market that the Committee would the next meeting to be held late in January account between now and bills run off, Mr. Leach said that he other than to let some maturing the discount rate at this not favor an increase in definitely would time. Mr. Young said that the Chicago Judging by employment figures, per cent of the Less than 3 a period of boom. was still in District
total labor force was unemployed in December. Residential awards have been less than they were but nonresidential contracts have been up by around 20 per cent, more than offsetting the decline in residen tial activity. Mr. Young commented on a number of panel discussions held recently with business leaders, including the heads of steel, oil, mail order, and other companies as well as bank loan officers. Without exception, he said, these individuals were extremely optimistic. The farm situation had its problems, particularly the livestock pro ducers, and farmers were increasing debt by incurring unsecured obli gations and increasing open end mortgages. However, the steel industry had plans for substantial expansion in capacity, and the over-all sit uation was very good despite some uncertainties, such as in the auto mobile industry which now talks in terms of a 10 to 20 per cent reduction in the number of cars to be produced this year. Mr. Young would have about the same views on credit actions as said that he indicated by Mr. Robertson, that is, the Committee should move very slowly, looking at the situation from day to day but not moving in either direction until the picture was a little clearer, that there was fairly general agreement Mr. Leedy recalled the degree of pressure the was adopted as to when the present policy the conditions in the economy that Committee wanted to apply and as to evidence that in certain While there was some justified that action. of upward pressures, there was some lessening segments of the economy to justify any change evidence was not yet sufficient he thought the
either in the direction or the extent of the pressure to be applied in the credit field. His view was that the Committee should attempt to regain the position it was in before the Treasury's December financing. However, it should move in this direction very cautiously. Mr. Leedy thought there had been plenty of latitude given to the management of the account under the existing policy to permit it to feel its way along. He would not wish to have operations conducted in a way to let the market feel that it had a signal that there was any change in the views held by the Open Market Committee, Mr. Earhart indicated that his views were similar to those expressed by Mr. Leedy. California had been suffering from floods and it was not yet possible to assess accurately the final measure of the damage to the economy. It was clear that lumber production had been seriously affected and this was a very important industry in the Twelfth District, Mr. Earhart said that it was difficult to see anything tangible that would change the opinion that the economy was faced with conditions of very high activity and high employment. From the psycho logical viewpoint, however, one could not help but sense that people have changed their views and, while still optimistic, many are express In other words, there has been a little change in what ing caution. called the general public psychology and this is apparent might be one talks with a businessman or with the man in the street. whether reserves, Mr. Earhart said he would be disposed In terms of net borrowed the next two weeks at the $300-400 million level, to run along for
maintaining substantially the position that now exists. He agreed with Mr. Leedy's comment that it would be undesirable to give a signal which might indicate a change either way in the Committee's policy. His thought was that it would be desirable to have a situa tion for the next two weeks where, if any psychological factors arose which called for it, some relaxation could be adopted or, if the action of Treasury bill prices so indicated, the Committee could step up the pressure. In the Dallas area, Mr. Irons said, conditions at the end of 1955 were similar to those described for the United States--strong, but with some reservations because of uncertainties as to the outlook for residential building and the automobile industry. An agricultural problem existed and it had been aggravated recently by drought, but not a problem on which open market policy could help much. this was it was difficult to know just what was happening in the Mr. Irons said he felt sure that cars were being sold automobile market, although not seem to have been received as competitively. Current models do other recent models. On the other hand, industry and trade well as and the economic situation seemed to be generally were at peak levels Under these condi with some elements of uncertainty, strong, a boom into a more restrictive credit policy tions, Mr. Irons would not launch comparable to that ex a degree of restraint about but would maintain December, This should financing in early prior to the Treasury's pected
be not only in terms of the volume of free reserves, but also in terms of money rates and the entire credit picture. Mr. Irons said that he would not favor raising the discount rate now. Mr. Erickson commented on conditions in various industries in New England, including electrical machinery, machine tools, paper and pulp, jewelry, shoes, and textiles. His remarks indicated that current activity was generally at good levels, with forward orders in some industries at new highs. Agriculture in the First District, heavily weighted by dairy and poultry, was higher in 1955 then in 1954. Mr. Erickson said that the Boston Bank had made a check of conditions in the automobile market and found the situation similar to that which Mr. Williams had described for the Third District, In purchasing cars for its own use, the Bank found that substantial discounts from actual list prices were readily available. Mr. Erickson remarked that "some of the steam has gone out of the engine" and a leveling off might come earlier than some economists had expected. He thought the Committee should be regaining the degree of restraint that it had early in December, proceeding cautiously in that direction, but that for the present no change should be made in the discount rate. Mr. Szymczak said that nothing in the economic situation had occurred to call for a change in the policy being pursued by the see. However, the present was the time Committee, so far as he could absorb some of the reserves seasonally the System could of year when not be quite as cautious in December, and he would that it had supplied
as others had indicated in proceeding in that direction, including perhaps sales from the System account as well as runoff of maturing bill holdings, Mr. Szymczak said he doubted that this was the time to increase the discount rate although it was possible that later on the System would feel that that should be done. Mr. Balderston said that it might be assumed that a 2-1/2 per cent discount rate was appropriate for the time being in view of the topping off that may be in the making, even though upward price and wage pressures continued. The Committee should not forget that demands upon metal producers and metal working plants are very heavy and demands for scrap are world-wide. He could see little chance that the price of steel and other metals would not rise this spring, Mr. Balderston said he was concerned that the wage adjustments other than those that would come automatically might be more liberal than price increases during the spring. He is prudent because of general keep in mind the fact that on top also suggested that the Committee accretions to which Mr. Mills had referred, of the involuntary inventory materials for stock, provided come a temptation to pile there may move higher and they are in believe prices are going to manufacturers In view of these factors--the position otherwise to stockpile. a pressures--Mr. Balderston price and wage off and the upward topping where it is. Assuming discount rate just he would keep the said that keeping the bill he would also favor an appropriate rate, that it is with such a level discount rate of the the general neighborhood rate in
of net borrowed reserves as would accomplish that end. What this level might be he did not know. However, he would use rates as the principal indicator, together with such "feel" of the market as the trading desk is able to get. He would certainly not want the Open Market Committee to indicate any change in policy during this period of watchful waiting. Chairman Martin said that, as he had commented regarding other recent meetings of the Committee, there was a surprising degree of unanimity indicated by the comments made this morning as to what the situation called for in the way of credit policy. He judged that the consensus was to maintain the policy the Committee had been pursuing. Some favored a little move in one direction, others would move a little in the other direction, but on the whole the view was to continue about what was being done. Chairman Martin said that he was in agreement with this view. At least two of the comments had included the phrase "watch too, seemed appropriate, Chairman Martin said. He ful waiting," This, comment that the public would be watching more care wished to add the some time the way the Federal Reserve handled the return fully than for As he had stated at the meeting a month ago, flow of currency this year. it was possible to regain the degree Chairman Martin said he did not think was not possible now to be existed in November. It of tightness that had should be carried on. However, in determining just how operations precise operations the Com carrying on its the view that in he would emphasize given which would indicate any signal to be not wish to permit mittee would that it was ready for any easing until it was satisfied that it had in mind
a move in that direction. It was the Chairman's judgment that it would not be possible to change back from such a view, if it once were given, Chairman Martin suggested, and there was no indication of a different view, that policy be continued until the next meeting in the general posture he had described. At this point Chairman Martin noted that it was contemplated that the next meeting of the Committee would be held on Tuesday, January 24,195 , at 10:00 a.m. Chairman Martin then asked that Mr. Rouse comment on his statement of policy and whether there was need for some clarification. Mr. Rouse agreed with the view expressed by Chairman Martin that the market will watch closely what is done with respect to the System account during the next few weeks. The market understands that repurchase agreements will not be available after Thursday of this week, and dealers are somewhat unhappy that they will have to pay 3-1/2 per bills which were purchased at 2-1/2 per cent. Mr. Rouse cent to carry a good likelihood that there could be a runoff in thought there was of currency this month. He also bills against the return flow Treasury being shown in distribution of stock of the referred tothe interest that all of the current offering Ford Motor Company and to the prospect Some of the funds which the by the public at once. would be absorbed in short-term securities receive would be placed Ford Foundation would Mr. Rouse said that, as have an effect in the market. which would in float and the Treasury had pointed out, fluctuations Mr. Thomas
balance have made it very difficult to increase net borrowed reserves as rapidly as he had hoped. The System account had been taking advantage of every opportunity to get back the degree of restraint that existed last November, but this had proved to be almost impossible. Mr. Rouse noted that there had been some discussion in the press of the date for this meeting of the Committee and said that there was a tendency for the market to be conscious of the meeting day. He wondered whether it was necessary for the date of the meeting to be given out. There was some discussion of this question during which Mr. Thurston, in response to Chairman Martin's question, stated that so far as he knew there had been no definite policy with respect to giving information on dates of meetings of the Open Market Committee. However, he rarely received an inquiry as to the meeting days. His inclination, he said, would be not to conceal the date for a meeting if he were asked unless there seemed to be some definite reason for doing so. Mr. Irons recalled that the announcement that appeared in the Federal Reserve Bulletin for July 1955 concerning the discontinuance of the executive committee of the Federal Open Market Committee indicated the full Committee thereafter would meet at frequent intervals, that than on a quarterly basis, rather The discussion of this point closed with a comment by Chairman that if inquiries arose, it might be as well to Martin to the effect
answer them in general terms, indicating that the Committee met at frequent intervals. Chairman Martin then inquired of Mr. Rouse whether he would suggest any change in the directive to be issued to the Federal Reserve Bank of New York, and Mr. Rouse said that his suggestion would be that the directive be renewed in its present form. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (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 com merce and business, (b) to restraining inflationary developments in the interest of sustainable economic growth, and (c) to the practical administration of the account provided that the aggre gate 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 accomodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short term certificates of indebtedness as may be necessary from time for the temporary accomodation of the Treasury; provided to time that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million; from the System account sell direct to the Treasury (3) To for gold certificates such amounts of Treasury securities maturing
within one year as may be necessary from time to time for the accomodation 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 brought up the authorization for re purchase agreements. Neither the Manager of the Account nor any member of the Committee suggested any change in that authority. Thereupon, the following authorization was approved by unanimous vote The Federal Reserve Bank of New York is hereby authorized to enter into repurchase agreements with nonbank dealers in United States Government securities subject to the following conditions: 1. Such agreements (a) In no event shall be at a rate below whichever is the lower of (1) the discount rate of the Federal Reserve Bank on eligible commercial paper, or (2) the average issuing rate on the most recent issue of three-month Treas ury bills; (b) Shall be for periods of not to exceed 15 calendar days; (c) Shall cover only Government securities matur ing within 15 months; and (d) Shall be used as a means of providing the money market with sufficient Federal Reserve funds to avoid undue strain on a day-to-day basis, of such transactions shall be included in the 2, Reports of open market operations which is sent weekly report to the members of the Federal Open Market Committee, covered by any such Government securities 3. In the event repurchased by the dealer pursuant agreement are not or a renewal thereof, the securities to the agreement Reserve Bank of New York thus acquired by the Federal shall be sold in the market or transferred to the System open market account, that there had been distributed imme Chairman Martin noted 9, 1956, from the meeting a report dated January diately before this
1/10/6 -28 Subcommittee on Defense Planning (Messrs. Shepardson, Sproul, and Robertson), and he called upon Mr. Robertson, as Chairman of that committee, for comment on the report. Mr. Robertson stated that the report of the Subcommittee on Defense Planning was based upon his memorandum dated September 29, 1955, which had been distributed to the members of the Committee in October. The program now submitted by the committee prescribed the ways and means for carrying out a plan essentially as proposed in the memorandum referred to, as supplemented by suggestions made by Mr, Sproul and recorded in the minutes of the meeting held on October 25, 1955. This involved the means for rebuilding the Com mittee in the event of an emergency, the authorization for purchases of Government securities by individual Federal Reserve Banks under certain conditions, a proposal that the Open Market Committee provide guides for the Reserve Banks in the exercise of their discretion re garding purchases of Government securities, and a training program so the Federal Reserve System would be that a number of persons within in the event of an emer to carry on open market operations available gency, noted that one of the proposals in the subcom Mr. Earhart Reserve Bank of New York adopt mittee's report was that the Federal centers of each weekly to the relocation the practice of sending accounts and daily advices of pertinent open market Reserve Bank copies of the be accompanied by discontinuance (This would of transactions.
maintenance of duplicate records as now done by the Federal Reserve Bank of Chicago.) He noted that in at least the Twelfth District there was more than one relocation center and that the records center might not necessarily be at a relocation center. He raised the question whether it might be possible to send the proposed reports of accounts and transactions to the records center as a preferable means of assuring that they would be available in the event of an emergency. Mr. Robertson responded that the intention was to have such reports at the place where records would be available to the relocation center, and he suggested that it be understood that any problems of distribution by the New York Bank of the reports mentioned be handled individually by the Reserve Bank concerned in consultation with the Secretary of the Committee. Chairman Martin stated that in a telephone conversation with this morning, the latter had indicated that he was prepared Mr. Sproul on the program proposed in the subcommittee's to have the Committee act Chairman Martin inquired whether any other report at its meeting today, or suggestions concerning the of the Committee had questions members of comment, he suggest in the report. In the absence program proposed by the Defense the program as submitted the Committee approve ed that Planning Subcommittee, last paragraph of the report Mr. Treiber noted that the for adoption by the of appropriate resolutions suggested that drafts
Open Market Committee and drafts of the guides referred to for pur chases of Government securities by individual Federal Reserve Banks and for the use of personnel who might assume responsibility for leadership in reactivation of a Government securities market, be prepared by a group to be appointed by the Open Market Committee from members of its staff having to do with open market operations. He inquired whether it was contemplated that this committee be appoint ed at the present meeting. Mr, Robertson stated that he contemplated that this would be until the Secretary of the Committee had had an opportunity deferred be followed in implementing the subcom to consider the procedures to mittee's report. Thereupon, upon motion duly made and and by unanimous vote, the report seconded, of the Subcommittee on Defense Planning was with the understanding that the approved necessary steps would be taken to carry out the program outlined. Thereupon the meeting adjourned. Secretary.
Also: Record of Policy Actions