January 24, 1956 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offfices of the Board of Governors of the Federal Reserve System in Washington on Tuesday, January 24, 1956, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Sproul, Vice Chairman Mr. Balderston Mr. Earhart Mr. Fulton Mr. Irons Mr. Leach Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Vardaman Messrs. Erickson, Powell, Johns, and Young, Alternate Members of the Federal Open Market Committee Messrs. Williams, Bryan, and Leedy, Presidents, Federal Reserve Banks of Philadelphia, At lanta, 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 Mr. Koch, Assistant Director, Division of Re search and Statistics, Board of Governors Mr. Miller, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Marsh, Manager, Securities Department, Federal Reserve Bank of New York
Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on January 10, 1956, were approved. Before this meeting there had been distributed to the members of the Committee a report prepared at the Federal Reserve Bank of New York covering open market operations during the period January 10 through January 18, 1956, and at this meeting there was distributed a supplementary report covering commitments executed January 19 through January 23, 1956, inclusive. Copies of both reports have been placed in the files of the Federal Open Market Committee. In commenting on the supplementary report, Mr. Rouse stated that in the auction for Treasury bills yesterday the average rate was just under 2-1/4 per cent, compared with an average of just under 2-1/2 preceding week. Among the influences in the market lead per cent in the decline in the bill rate was the investment of proceeds of ing to the from the sale of some $600 million of stock in the Ford funds received Motor Company and the sale of some $400 million of revenue bonds of the Illinois State Toll Highway Commission. Mr. Rouse stated that he would anticipate that by the end of next week the special conditions which had recently might have been completed and been influencing the bill rate situation in the money market might relationship of that rate to the the have become more normal. Upon motion duly made and seconded, vote, the transactions and by unanimous
for the System account during the period January 10 through January 23, 1956, in clusive, were approved, ratified, and confirmed. Members of the Board's staff entered the room for the purpose of assisting in the presentation of a review of the economic and credit situation, illustrated by chart slides. The script of the review was mailed to the members of the Committee following the meeting, and a copy has been placed in the Committee files. The review brought out that during 1955 the problems facing mone tary and fiscal authority the world over were those of restraining infla tionary forces rather than stimulating growth of demand. The current year has begun with activity and employment sharply above a year ago and in many countries close to capacity limits. In the United States, one of the big factors distinguishing the economic position in January 1956 from that in January 1955 is a 98 per cent capacity level for steel operations rather than an 80 per cent level. When operations in a number of impor have already risen to near-capacity levels, further in tant industries creases in output can be achieved only slowly. Relatively small increases upward pressure on prices. A rise of 4 in demand then may bring heavy came largely after the prices during the year per cent in industrial levels. Some ob activity reached very advanced spring months, when of farm prices and uncertainties current reduced levels servers, noting pressures on believe that upward and automobile markets, in housing will be in the present situation otherwise inherent industrial prices lines. They would in these and other in demand eased by reductions
expect such easing as a result of credit restraints now in effect or for other reasons. Other observers go further, saying that the economy, after a year and a half of expansion, is nearing a cyclical peak and that a reaction may be in prospect before long. A third possible view is that no important downward adjustments from present levels will occur or that such adjustments as do occur will not be adequate to off set potential increases in spending and investment throughout the world. In that event, inflationary pressures would continue or even become stronger. While there begin to be evidences of slackening in some of the areas that have shown particularly rapid rates of increase during the past year and a half, evidences of strength in other areas are still too strong to call for relaxation of credit restraints at this time. On the no need for further tightening. The impact other hand, there is clearly the credit situation has increase in discount rates upon of the latest factors operating in by the many special so far been largely cushioned projections, which end of November. Present money market since the the net borrowed reserves growth, indicate that for moderate credit allow and March unless million in February above $400 may be substantially restrictive effect securities. The purchases of prevented by System and a borrowed reserves of net $400 million of about of a continuation of exist upon the allocation per cent around 2-1/2 rate of Treasury bill current market although to be excessive, might prove credit resources ing for care one that calls situation is The indicates otherwise. behavior attitude of to the prevailing adjustment and sensitive ful watching
expectations as indicated by behavior of all markets. At Chairman Martin's request, Mr. Sproul then made a statement on the economic situation and credit policy substantially as follows: 1. To paraphrase remarks recently attributed to the Secretary of State, the art of central banking is to approach the brink of inflation without falling in or being pushed in. 2. It is our job to try to see to it that, so far as the money supply and the availability of credit are concerned, the economy is in a position to work, to produce, and to consume, at near capacity levels. 3. Unfortunately, the brink of inflation is not always clearly discernible, because the boundaries of near capacity, full capacity, and over capacity are indistinct, and possible at near capacity, probably at full capacity and certainly at over capacity, too much money and too easy credit will lead to increases in prices, but not to increased real income. 4. We are in a position now in which the economy in the aggregate and with allowance for seasonal variations, seems to be working near capacity, but could move over the brink or back from the brink. Some of the strongest stimulants of the past year - e.g., automobile production, residential building, and foreign demand - may stay relatively high but are unlikely to be pushing upward. Other stimulants - e.g., private capital expenditures, state and local expenditures, and wage increases seem likely to continue the upward push and some increase in inventory accumulation might be a contributing factor. The major continuing soft spot is the agricultural situation. The resultant of all such forces, in terms of consumer expenditures, which are the biggest factor in the whole economic complex, is not precisely determinable. Aggregate incomes are likely to be higher during coming months, which would suggest some increase in consumer spending, but incomes may not be so readily inflated with large doses of consumer credit on progressively easier terms, or of mortgage credit, and savings may be larger. might be said to be feeling our way 5. At the moment we the right place with reference to the brink, along at about seasonal contraction in credit taking place. This with some a steady hand on the monetary controls, which neither suggests its grip. This would mean no change in tightens nor relaxes mean open market operations guided discount rates, and it would net borrowed reserves, interest rates, the by bank borrowing, tone and feel of the market and market expectations general which would seek to maintain, for the and anticipations, which we have now reached. about the degree of pressure present, projections this could mean putting On the basis of present during the next two weeks, but that some funds into the market day to day, in the light of all the should be determined from and indications of tendencies or trends. available facts
Mr. Johns stated that two weeks ago he had said with some timidity that he would not be disappointed if the Committee failed to regain quite the same degree of restraint that existed last Novem ber. He was not aware of any reasons which would lead him to change that opinion at this time. He wished to make it clear that he was not talking about a change in direction of policy and was not indicat ing that there should be much change in the degree of restraint under present policy. He would not change the discount rate at this time. Mr. Bryan said that activity in the Atlanta District continued at an extremely high level. There were soft spots as in agriculture, but they were not as serious as might have been expected. Employment and productivity were still expanding, although the lead of the Atlanta District against national activity had declined somewhat. On the national picture, Mr. Bryan recalled that two weeks ago he expressed the view that perhaps "the bloom was off the boom." However, he now found very little evidence of any general let-down or slackening of consequence, although there might be some reduction from the extremes of optimism that prevailed last summer and fall. As to policy, Mr. Bryan said that his view would differ a little from that expressed by Mr. Johns in the sense that, while he would not want to see any such dramatic action as an increase in the discount rate at the moment or the System should be very careful a change in reserve requirements, not to permit an impression of "ease" to be created by permitting the rate. He would maintain back away from the discount short-term rate to
the short-term rate structure in close proximity to the discount rate. We have gotten over the shock, if any, of the latest increase in the discount rate and at present the effective cutting edge of monetary policy does not lie in the field of psychology but in the field of rates. Accordingly, Mr. Bryan said that he would advocate a policy for the next few weeks of making certain that the Committee kept the discount rate effective by open market operations designed not to permit the bill rate to go much under, and not much above, the dis count rate. Mr. Williams said that there had been no substantial changes in the economic situation in the Philadelphia District since the meet ing two weeks ago. He commented on various degrees of optimism in different parts of the district and on the expectation that the Philadelphia Reserve Bank soon would approach some member banks on their use of the discount window. Mr. Williams said that he felt the Committee should not allow a feeling of ease to develop, but neither should it move in the other direction at the present time District as in the Cleveland described conditions Mr. Fulton any great down No one anticipated a period of boom. still being in these conditions, he talk of caution. Under turn although there was be a de should there rate nor in the discount no decrease suggested said that Mr. Fulton borrowed reserves. amount of net crease in the restraint that the level of move back toward desirable to he felt it noticeable, that any relaxation became November. If existed last
could be interpreted as an indication that the Federal Reserve System saw a down turn in activity, and such a reaction could have a profound effect in the thinking of businessmen, the stock market, and other aspects of the economy. Mr. Fulton said that he did not feel relaxation was in order at this time. Mr. Shepardson said the economic situation impressed him as being fairly well balanced with some downward indications being offset by upward factors. Along with that, the psychological factors and the political aspects of this period made it more important than ever that the Committee hold a line that would not give way to inflationary pressures. He would prefer to see net borrowed reserves maintained at a level that would bring the short-term rate back closer to the dis count rate, and he would certainly not favor an easing in the situation. Mr. Robertson said that the views thus far expressed fairly well A short time ago, when we had a very easy coincided with his thinking. the levels of interest rates and yields were firm, reserve situation, recently the interest rate positions have tightened more but as reserve be construed as a move toward declined. This decline might level has Market Committee. Mr. Robertson the part of the Federal Open ease on the Committee should in the immediate future said that he felt that in the market, such a some of the special factors attempt to offset an influence on rates, in funds which had been having the vast nonbank He would no, go unfortunate construction. order to avoid if possible that the Com make it very clear but would far in that direction too He would not change still one of firm restraint. mittee's policy is
the discount rate at this time and would not in any other way indicate any relaxation, Mr. Mills said that his reasoning followed the channel that had been opened up in the discussion thus far. The Committee should maintain a firm hand on reserve positions of banks and on the money market in order to prevent any hint of relaxation. Mr. Mills recalled that at the meeting two weeks ago the Chairman brought out the fact that the System's operations were under a much closer scrutiny from the investment and business fraternity than usual, and that there was a temptation on the part of analysts to read into any actions of the Committee possibly more than the Committee intended. This was a warning, for if the Committee were now to relax it might be charged with being or it might have its actions read as moved by political influences, confirming some of the doubts about the economic future that are being from time to time. How the Committee can maintain the neces expressed of firmness may be a problem. Net borrowed reserves running sary degree be an appropriate target on which to from $200 to $400 millions might tie policy. is running at 2-1/2 per cent, The Federal funds rate, which in the market than of pressure and firmness a greater degree suggests in Treasury bill rates. from the recent movement has been indicated not to be misled by the the case, care must be exercised That being bill rates out of have brought Treasury influences that extraneous Robertson that with Mr. he would disagree Mills said that line. Mr.
the Committee should move in the direction of offsetting the reduction in Treasury bill rates. The market seems to be analyzing and inter preting the figures in accordance with their significance, and the Committee should rely on market analysts to reach the conclusion that the direction of System policy is firmness at the present time. It should be made clear that the Committee's actions can be taken as a guide to its policy, so that when the Treasury comes to the market some weeks hence it can make its announcement against a background of a clearly defined System policy. It would be extremely difficult to indicate what System policy should be toward withdrawing or supplying reserves over the next few weeks, Mr. Mills said, and the Manager of the Account presumably would have to be in a position to use his judg ment to meet promptly any situation that might develop either toward undue ease or tightness in reserve positions. the views expressed by Mr. Sproul as Mr. Vardaman concurred in situation, and he said that he approved of Mr. to the present economic angle into the discussion of what the Mills' injection of the political operations should be this year. He would regret any evi Committee's Committee's position of firm or weakening of the dence of a loosening that the Committee he felt it imperative On the other hand, ness. develop in the eye to whatever might wheel" with a sharp "stand by the indication of a psychological that, at the slightest next 60 days, adding the future, the part of the public regarding being built up on the fear might be called take whatever action not hesitate to Committee should
for at that time. It should be prepared to loosen the reins if it appeared from developments that such a move was necessary. Mr. Leach said that the economy of the Fifth District con tinued strong. Consumption of cigarettes increased 3 per cent in 1955 over 1954 and man hours in the industry are nearly at the highest level since 1953. First quarter production in textiles has been com pletely sold out. Commitments are fairly high in the second quarter. Furniture manufacturers are very optimistic and expect to continue production at high levels. For the country as a whole, Mr. Leach could see little change in the economic factors since the meeting two weeks ago other than that the cutback in automobile production, which all of us had expected, has actually begun. Over-all indicators still seem to point to a strong economy in 1956. On the other hand, Mr. Leach said that he sensed a change in the attitudes of some businessmen. Less optimism is expressed than was the case last November. This tendency to be somewhat cautious seems to characterize January. In January last year, he noted there were general doubts as to the ability of the economy to sustain recovery. The question now is whether the uncertainty con cerning the outlook is temporary or whether it will actually carry over into the real economic processes in terms of business and consumer spend ing. Mr. Leach emphasized that doubts about the outlook still generally the year. Since the Committee's primary apply to the third quarter of concern is with the immediate developments, he thought it would be a mistake to move toward a policy of ease because of the psychological move in this direction by the Committee would developments. In fact, a
probably accentuate reactions. On the other hand, he saw no justifica tion for intensifying the present policy of restraint. In brief, he would not relax restraint and would not want it to appear that the Committee was relaxing at this time. Mr. C. S. Young reviewed conditions in the Chicago District, stating that the optimistic statements of a month ago were still being repeated by business leaders in the area. They indicated a little worry following their earlier optimistic statements and some, as in the auto mobile industry, had toned down their comments but they still felt quite optimistic. Mr. Young felt the Committee should not relax now. As a day proposition it should not move very far either in the direc day to restraint. A move toward relaxation would tion of relaxation or greater community that business is not as good as give notice to the investment also said that he would not increase we have been thinking. Mr. Young the discount rate at this time. said there seemed to have been no change yet in the Mr. Leedy would justify a change in the Committee's general economic picture that It should continue the effort that approved two weeks ago. program from aiming at on bank re pressure it had been about the degree of to apply had done a very good job felt the management of the account serves. He assumed that with the passage circumstances. Mr. Leedy under difficult in the Treas resulted in a reduction which had the special conditions of Committee's general of the would be a reflection bill rate, there ury rate. He closer to the discount of the bill rate policy in a movement
would feel the Committee should continue doing about what it has been doing recently. Mr. Powell said that agriculture in the Ninth District was doing quite well this winter. On a recent visit to Montana he found cattlemen reasonably satisfied with conditions, and it looked as though the water supply for the western part of the Ninth District would be adequate this spring, which would practically assure fairly good crops during the coming year. Retail trade had been rather unsatisfactory in December and figures which had become available since the meeting two weeks ago confirmed the belief which he then expressed that there had been considerable accumulation of stocks. Turning to the national picture, Mr. Powell thought that the building boom may have passed its peak and he felt quite sure that the automobile industry has passed its peak for some time to come. There might be a conjunction of a number of weak spots in the economy this year that would cause considerable difficulty. For the moment, however, he did not see a need for antici pating a down turn in business and he would favor a continuation of about the present level of restraint. Mr. Earhart said there had been some moderation in the very high developed last fall, but there was nothing degree of optimism that had to cause a change in Committee policy from that agreed tangible enough operations could be conducted ago. He hoped open market upon two weeks had made no change in its public would feel the Committee so that the in the discount rate suggest no change present. He would policy for the at this time.
Mr. Irons favored continuation of the general policy agreed upon two weeks ago, which he felt had been very effective in keeping pressure on the market but avoiding any tendency toward ease or further restriction. Mr. Erickson said that in the First District the plusses were wider than the minuses. Experience in automobile sales recently has not been good, registrations of new cars in Massachusetts the last two weeks of December having been 40 per cent and 80 per cent below those of a year ago even though weather conditions this winter have not been bad. On the other hand, construction contracts are well ahead of a year ago. Mr. Erickson agreed with most of the comments on Committee policy and would keep the same degree of restraint for the present with no change in discount rate. He noted that one of the factors which caused difficulty in making Committee policy effective was the variation in float, and he suggested that additional study of this factor might be desirable. Mr. Szymczak said that there seemed to be agreement that there change in the situation to call for a change in had been no sufficient The Committee should continue the open market policy at this time. he said, but should watch of restraint it has been following, degree developments in the indicators carefully, particularly the economic in position to act so as to be construction industries, automobile and might be called for. in whatever direction substantially as follows: then made a statement Mr. Balderston with precision of communicating the difficulties Despite indicate my beliefs will attempt to to policy, I ideas relating
as to what the policy objective should be and why. My present position is slightly different from that of two weeks ago when I felt that the bill rate target should be the discount rate, plus or minus. Now I would prefer as a target the discount rate minus. This suggests a modification of the objectives of our policy from that of restraining inflation, to that which Mr. Sproul discussed with great clarity. I would now prefer an objective that stressed the maintenance of stable equilibrium just beneath capacity. I do not mean we should actually shift our policy at present to any obvious relaxation of the rigors of restraint. I do mean, however, that our future problem is likely to be one of perpetuating a high level of production and employment just beneath capacity--just far enough beneath it to minimize upward price pressure. This shift of policy objective might well be reflected in today's directive to the New York Bank. My reason for urging this shift of objective is that the momentum which the economy carried over into the new year seems to be lessening. Or if not, the rate of acceleration seems to be decelerating. Despite the continued strength of metal prices here and abroad; despite a strong continued demand for com mercial and industrial loans; and despite a tendency to accuma late inventories, one notes a tendency toward "topping off" in the reduction of housing starts and the increased difficulty of selling automobiles and consumer durables. One also notes other factors that may have a bearing on our problems some months hence. Prices of shares in the London market have been softening for some months. In the New York market, we also have a softening of stock prices recently. In the capital market, the schedule of offerings is small. I am concerned that the high rate of expansion that we anticipate this year in corporate construction may be followed by a dearth of such expansion and growth, which we will need if capacity is to keep pace with future population. Therefore, I favor an inconspicuous shift of policy ob jective designed to maintain the current high level of em ployment and production without so pressing on capacity as to push industrial prices higher. I would like to see a shift kept carefully within this Committee. This last obser vation seems to me especially important at the moment because the Committee should be free to take whatever action seems to be needed to counteract the gyrations in business psychology that will follow the President's announcement, whatever it suffer very turbulent times in the may be. The economy may the President's announcement of weeks and months following whether he will or will not be a candidate. We may have ebullience and speculative fever or we may have a psychologi cal let down. I would, therefore, like to see us keep prepared
1/24/56 -16-16- to act decisively in either direction and at the right time. Chairman Martin next made a statement substantially as follows: From my point of view, this is not quite as easy as the last few meetings. For some time, I have been able to say that I agreed with the consensus, and there was no problem of agreeing on what our policy would be. I do not mean that I disagree very much now, but I would like to make some general observations on what my thinking is. First, the Committee should be extremely careful in deter mining policy not to let it be weighted by apprehensions as to what the political implications of our decisions may be, and not to get into a frame of mind in which we say that we should not move one way or the other because it might be interpreted by the public in terms of politics. We should be objective about economic developments and about determining our policy for the good of the economy. Also, I have the strong feeling that none of us can gauge the economy very accurately. When we deal in fine degrees, we are falling into the error that Mr. Sproul has pointed out many times of giving a little credence to the idea that monetary policy can do more than it can, and that we can turn on the faucet or turn off the faucet and can achieve a precise objec tive. I don't think you can rely too much on analogies but some times I think they illustrate an idea. My sixth sense has made me believe that in recent weeks the machine has been going for ward, but it has reached a plateau and it is wobbling and the road before us has some rough spots. If we can use the analogy of using the brakes on a machine, it may help to illustrate what I have in mind. When you are driving a machine and when you reach a plateau and you are wobbling a little bit, the pressure that you put on the brakes has quite a degree of little influence on whether the wobbling continues or not. I intend to imply that I favor relaxation don't for one moment time, nor do I quarrel too actively of credit restraint at this I merely call atten sentiment of the group. with the majority personally think we should be watching for. tion to what I If I were doing it over again, I would say that perhaps we ease a little too long and we let followed a policy of active position of a strait jacket, of letting ourselves get into a status quo, rather than of having the "even keel" become the policy. I do not think we desire in monetary the flexibility of "even keel." In the intended that in his use Mr. Sproul factors, and we there are many psychological period we face
will have to operate on the basis of what we feel and of the projections that will be before us, without really knowing what loan demand will be. To take part of the statement that Mr. Johns made, I would favor two weeks later than he did (he suggested it at our meeting two weeks ago) that, within the imprecise pro jections we have to work with, I would be trending in the direction of zero free reserves--not in a target sense, be cause of the imprecise tools we have to work with, but I would be trending in that direction. If this turns out to be a plateau and not a valley, we will still be in a strong position to raise the discount rate or to take whatever ac tion we believe is needed. I want to reiterate that flexible monetary and credit policy require that we not get into the position where people can say, "The Federal Reserve just held blindly to one par ticular course and then all of a sudden turned around." We did not do that in 1953 when we altered our course, and we do not know whether we want to do that today. I may tend to minimize the forces that are at work in the economy, all of us may tend to minimize them, but nevertheless they can be quite real and the effects can come quickly when they do come. We as a Committee ought to be in the position of putting our foot on the brake pedal but not pressing on the brakes. I think that is what all of us have had in mind in one way or another in what we have said this morning. It is a matter of emphasis. This is one of those extremely difficult periods where I personally would be in favor of an "even keel" if we could get an even keel, but I do not believe that we can get keel under current conditions. I do not believe that an even Mr. Rouse, if he were the ablest manager in the world--and I am not implying he is not the ablest manager in the world-I don't believe that the forces we are dealing with here make it pos sible to say that $300 or $400 million of negative free re serves is precisely what is needed, or that the tone of the money market calls for any precise amount of reserves. We may maintain the pressure we now have in the say that we should I do not believe we or the public knows what the market but degree of pressure is that we are maintaining. I feel we ought to con I am driving at is that The point at the directive we now have had for almost six sider looking make a modest adjustment in that months, and perhaps we should flexibility, if we wish. In this directive to permit more to have the management of general picture, I would be inclined pressing on the brakes the direction of not Account trend in the but of not releasing the brakes. political side of this. my comment on the I want to reiterate that to deal with all this spring. I know We are going to have
that I find myself inclined to say that we ought to make it plain that we are not being influenced by political considerations and that we are following a course which is clearly not a political course. But that is just digging the System's grave so far as effective monetary policy is concerned. I am not talking about a political grave, I am talking about our objectives and fulfilling the functions the System is supposed to have in view in a flexible monetary and credit policy. I have talked this over with Mr. Riefler and, in con nection with the wording of the directive, he has suggested some language which would change clause (b) so as to make it plain that we are following flexible monetary policy. It seems to me that a little difference in emphasis is called for at this time. We should remember that this policy di rective is a public record and if we feel that a little shift in emphasis is called for, it is desirable that we show that in the public record. There followed a discussion of Chairman Martin's suggestion for a change in the wording of clause (b) of the directive to be issued to the Federal Reserve Bank of New York. In the course of this discussion, Mr. Johns said that when he spoke earlier in the meeting he did not re fer to the language of the directive, assuming that there would be an opportunity to discuss that question when the directive was presented for approval. However, at a meeting with some of the staff of the St. Louis Bank yesterday, there had been considerable discussion of the word ing of the directive at which time he had taken the position that the time had come for the Committee to eliminate sole emphasis on "restraint" in the wording of the directive and to substitute something more like the language of the directive issued at the meeting last June. He personally and wording along the lines strongly in favor of some such change, was and implied in Mr. Balderston's comments suggested by Chairman Martin would seem suitable. assumed that a Mr. Johns, had said that he, like Mr. Sproul
discussion of the directive would come up later in this meeting al though he felt it logically fitted in with this discussion of policy. He thought there was a danger when the Committee met every three weeks that changes in the economic situation between meetings might be almost imperceptible and that therefore it might seem that no change was called for in the wording of the directive. However, he sensed that the Com mittee does not feel that no change has occurred in the situation in recent weeks. There has been a change in the economic situation, Mr. Sproul said: certainly the rate of growth has decreased and there are ruts in the road which were not there before. He did not feel that the Committee could apply a policy with sole regard to restraining in flationary forces any longer. It had to take account of the possibility of a move in the other direction, and in Mr. Sproul's opinion, the Com consider whether the time had come for a change in the mittee should actions of the Committee are a public record, directive. The policy the Committee is constantly being charged with having Mr. Sproul said; bias, and it was his view that since the Committee felt a deflationary for a change in policy or policy emphasis, that that a time had arrived which would be part of the change should be reflected in the directive might know the Committee's in order that the public published record views had changed. some of Mr. Sproul repeated Balderston's suggestion, At Mr. He felt that the made earlier in the meeting. the comments he had the economy to work, to credit available to permit concept of making
produce, and to consume at near capacity levels suggested a change in the directive at this time. While determination of the exact wording was difficult, he said that one of the points to be considered was that the wording should be not only a reflection of what the Committee's thinking and judgment was; it also should be in language to enable the public to understand what the Committee had in mind when it changed the directive. Mr. Mills raised the question whether it would be preferable to make a change in the directive at this time or to defer doing so until the next meeting, by which time the Committee might be firmly convinced that the time had approached when a change should be made. He was fear ful that a change at this time, particularly with language which he found difficult to understand, would be regarded in the future as an escape than as a decision based on a firm conclusion as to what clause rather direction policy should take. the same view as that just indicated Mr. Bryan expressed somewhat that he had no strong conviction that the by Mr. Mills, adding, however, should not be changed at this time. directive he was not as sure Robertson said that the discussion, Mr. During not be watching in that the Committee should as the others had indicated surprised, he said, if they He would be very much flationary aspects. At the same time, the next three months. not still present during were movement and he of some deflationary did not deny the possibility he along the lines sug changing the directive no objection to would have members of the Committee. by several of the gested
After further discussion and consideration of several sug gestions of possible wording for a modification of clause (b) of the first paragraph of the directive to be issued to the Federal Re serve Bank of New York, the Committee agreed unanimously that clause (b) should be changed by adding after the word "growth" the phrase "while taking into account any deflationary tendencies in the economy" so that this clause would read "(b) to restraining inflationary developments in the interest of sustainable economic growth, while taking into account any deflationary tendencies in the economy," In response to Chairman Martin's question, Mr. Rouse stated that he had no suggestion for change in the limitation contained in the existing directive: 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 Com mittee: (1) To make such purchases, sales, or exchanges (includ ing 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 securi ties, 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 while taking into account any deflationary tendencies in the economy, and (c) to the practical administration of the account; provided that the amount of securities held in the System account (in aggregate cluding commitments for the purchase or sale of securities for at the close of this date, other than special short the account) purchased from time to time for term certificates of indebtedness accommodation of the Treasury, shall not be in the temporary creased or decreased by more than $1 billion;
(2) To purchase direct from the Treasury for the ac count of the Federal Reserve Bank of New York (with discre tion, in cases where it seems desirable, to issue participa tions to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided 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; (3) To sell direct to the Treasury from the System account for gold certificates such amounts of Treasury securities maturing within one year as may be necessary from time to time for the accommodation of the Treasury; provided that the total amount of such securities so sold shall not exceed in the aggregate $500 million face amount, and such sales shall be made as nearly as may be practicable at the prices currently quoted in the open market. Chairman Martin inquired whether there were any suggestions for change in the repurchase authority, and no such suggestions for change were indicated. Thereupon, the following authoriza tion was approved by unanimous vote Bank of New York is hereby author The Federal Reserve to enter into repurchase agreements with nonbank dealers ized States Government securities subject to the follow in United ing conditions: 1. Such agreements shall be at a rate below which (a) In no event ever is the lower of (1) the discount rate of the Federal Reserve Bank on eligible com mercial paper, or (2) the average issuing rate on the most recent issue of three-month Treasury bills; be for periods of not to exceed 15 (b) Shall calendar days; securities matur cover only Government (c) Shall 15 months; and ing within as a means of providing the (d) Shall be used sufficient Federal Reserve money market with funds to avoid undue strain on a day-to-day basis. be included in the transactions shall 2. Reports of such which is sent of open market operations weekly report Open Market Committee. members of the Federal to the
3. In the event Government securities covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, the securities thus acquired by the Federal Reserve Bank of New York shall be sold in the market or trans ferred to the System open market account. Chairman Martin stated that he had contemplated having a discus sion at this meeting of the Committee's policy that during a period of Treasury financing it would not authorize the purchase of "when-issued" securities, and whether the deviation from that policy authorized in connection with the Treasury financing at the meeting November 30, 1955, was simply an exception to it. He stated that he thought it important that the Committee have a discussion of this question and reach an under standing prior to the next Treasury financing as to whether this con tinued to be the Committee's policy. However, in view of the lateness of the hour he raised the question whether it would be preferable to carry over discussion of this subject until the next meeting of the Com mittee. It was understood that discussion of this topic would be de ferred until the next meeting. Martin referred to his appearance before the Senate Chairman Banking and Currency on Friday, January 20, 1956, in con Committee on nection with his renomination as a member of the Board of Governors, requested the vote on an that at that time Senator Douglas stating Market Committee last December authorizing action of the Federal Open in connection with the Treasury the purchase of when-issued securities Senator Douglas how he say that he had told He went on to financing. action on revealed that the Committee's and that he had also voted
this matter was decided by a split vote 9 to 3, but that he felt he should not reveal how the individual members voted without clearing with the Committee, even though a statement of the action and the individual votes would be made public later in the Annual Report of the Board of Governors covering the year 1955. Chairman Martin in quired whether any of the individual memoers of the Committee or the Committee as a whole would object to his furnishing the Chairman of the Senate Committee on Banking and Currency with the information which Senator Douglas had requested prior to the date this informa tion was made public in the Board's Annual Report. Upon motion by Mr. Earhart, duly seconded, Chairman Martin was author ized by unanimous vote to furnish the Chairman of the Senate Banking and Currency Committee with the names of the individual members of the Committee voting for and against the action in question. Secretary's note: Pursuant to the fore going authorization, Chairman Martin sent a letter to the Honorable J. William Fulbright, Chairman, Committee on Banking and Currency, United States Senate, under date of January 21, 1956, reading as follows: "In the course of the questioning when I was before your Committee last Friday, Senator Douglas requested the vote on of the Federal Open Market Committee last December an action was 9 to 3. Senator Douglas asked and I stated that the vote voted in the negative and I demurred that I me to state who would be preferable to await the annual report thought it and would contain in a couple of months since it would be out discussion of the matter. a full fact that Congress, as you know, has "I had in mind the as the regular method for reporting established that procedure
"to the Congress the actions and policies of the Federal Open Market Committee with the votes and reasons therefor. However, I said I was perfectly willing to say that I voted for the action but that I hesitated to give the names of my absent associates before I had had an opportunity to consult with them. I have now done so and since no objec tions have been raised, I wish to report that those voting against the action were Governors Mills, Robertson, and Vardaman. Those voting for the action were, besides my self, Messrs. Sproul, Balderston, Earhart, Fulton, Irons, Leach, Shepardson, and Szymczak. "I trust that this is the information Senator Douglas wishes to have." At Chairman Martin's request, Mr. Thurston commented upon in quiries being made regarding the dates of meetings of the Federal Open Market Committee, which subject had been discussed briefly at the meet 10. Mr. Thurston said that he felt no special signifi ing on January be attached to a meeting date and that it would be prefer cance should on this question by stating that Committee able to respond to inquiries frequently. He added, in response to meetings were held regularly and he would not hesitate to state that inquiry from Mr. Robertson, that an tentatively scheduled for or next meeting of the Committee was the date unless the Chairman of the Committee would be held on a specified decided to depart from that day. or some members of the Committee suggested by Mr. Thurston that the procedure It was understood the dates of meet of inquiries regarding followed in the event would be ings of the Committee. up the problem of press reports Chairman Martin then brought and actions regarding discussions to give information which presumed He asked that Market Committee. the Federal Open meetings of taken at
Mr. Thurston also comment on this problem. Mr. Thurston referred to the report in the January 14, 1956 issue of Business Week which purported to give the substance of dis cussion at the meeting of the Committee held on January 10. He stated that he understood that a reporter for Business Week had been making calls to the Presidents of the various Federal Reserve Banks a day or so before meetings of the Committee and, while he was not suggesting the Presidents should not talk with reporters under such circumstances, it occurred to him that some might unintentionally provide information which the reporters would use in preparing stories purporting to tell what went on at the meeting. Mr. Williams stated that a representative of Business Week Magazine had called him before the meeting of the Open Market Com mittee held on January 10 and that he had talked with him regarding the business situation. However, Mr. Williams felt that the reporter should not have inferred in his story that what Mr. Williams talked with him about prior to the meeting was a portion of the discussion at the meeting. Mr. Williams expressed doubt as to whether it was desirable to talk with reporters in such circumstances. Chairman Martin stated that he thought there could not be a single rule which would apply to inquiries from the press but that he thought this was a problem which all of those attending Open Market Committee meetings should bear in mind. Riefler commented on the Martin's request, Mr. At Chairman the report of the Subcommittee on Defense procedure for implementing
1/24/5 -27 Planning for the Federal Open Market Committee, approved at the meet ing on January 10, 1956. Mr. Riefler stated that, to carry out the last paragraph of the Subcommittee's report, he would suggest that Mr. Vest be requested to prepare drafts of resolutions to be adopted either by the Committee or by the Board of Governors to carry out certain of the recommendations of the Subcommittee; that Messrs. Rouse and Thomas be requested to prepare guides for open market transactions by the individual Federal Reserve Banks and for training of personnel as sug gested in the Subcommittee report, with the understanding that they would consult with Mr. Leonard, Director of the Board's Division of Bank Operations, who had been working on defense planning matters for the Board and the System; both of these requests being with the under standing that he (Mr. Riefler) as Secretary would work with Messrs. material to be brought Thomas, and Leonard in preparing Vest, Rouse, before the Committee. suggestions were approved These unanimously. It was tentatively agreed that the next meeting of the Committee be held on Tuesday, February 14, 1956. would Subsequently, further Secretary's note: checking resulted in setting Wednesday, at 10:45 a.m. as the February 15,1956, time for the next meeting of the date and Committee. meeting adjourned. the Thereupon Secretary
Also: Record of Policy Actions