April 17, 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, April 17, 1956, at 10:45 a.m. PRESENT: Mr. Martin, Chairman Mr. Sproul, Vice Chairman Mr. Balderston Mr. Erickson Mr. Johns Mr. Mills Mr. Powell Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Vardaman Mr. Fulton, Alternate Messrs. Bryan, Leedy, and Williams, Alternate Members, Federal Open Market Committee Messrs. Leach, Irons, and Mangels,, Presidents of the Federal Reserve Banks of Richmond, Dallas, and San Francisco, respectively Mr. Riefler, Secretary Mr. Vest, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Abbott, Parsons, Roelse, Willis, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Carpenter, Secretary, Board of Governors Mr. Sherman, Assistant Secretary, Board of Governors Mr. Miller, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Gaines,, Manager,. Securities Department, Federal Reserve Bank of New York Upon motion duly made and seconded, and vote, the minutes of the meeting by unanimous of the Federal Open Market Committee held on March 27, 1956, were approved.
Before this meeting there had been distributed to the members of the Committee a report covering open market operations during the period March 27, 1956 through April 11, 1956, and at this meeting a supplementary report covering commitments executed April 12-16, in clusive, was distributed. Copies of both reports have been placed in the files of the Committee. Mr. Rouse called attention to a paragraph on the second page of the supplementary report in which it was noted that at present market rates of interest, it is advantageous to the Treasury to invest money available in the trust funds and investment accounts in out standing Treasury bonds, and thus, so far as the market effect is con cerned, to "retire" the securities purchased. Mr. Rouse noted that a Treasury surplus may be anticipated this year and suggested that deci sions of the Treasury as to the particular securities that might be withdrawn from the market through retirement of outstanding debt and the methods through which such retirements would be effected would exert direct effects upon credit conditions. This suggested the de sirability of having the Federal Open Market Committee and its staff implications for credit policy of alternative debt study the possible management procedures. Upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period March 27 through April 16, 1956, inclusive, were approved, ratified, and confirmed.
A staff memorandum on recent economic and financial develop ments was distributed to members of the Committee under date of April 13, 1956. At Chairman Martin's request, Mr. Young made a state ment at this meeting on the economic situation substantially as fol lows: Economic activity continues to move sidewise on the high plateau maintained since late last fall. While the over-all picture is mixed, signs are present that pressures growing out of advancing private investment are beginning to tilt activity upward. Recently, evidence of private invest ment pressures has been most conspicuous in credit and capital market developments, but evidence continues to be marked in such data as construction contract awards, unfilled equipment orders, output levels for industries producing primary materials, and industrial prices. Over the past few weeks, auto and housing markets have stabilized, while other consumer markets, after allowance for usual seasonal and un usual weather factors, have been on the firm-to-rising side. Demand for labor has remained active, with wage rates showing further rise. Business and investor psychology continues very optimistic. Abroad in industrial countries, activity maintains the appearance of general strength. Data for Great Britain sug gest progress, at least modest progress, towards restoration of balance in the British economy. Key developments in specific areas merit brief summary: (1) Industrial production for March is being estimated at 142, down a point from the level of preceding months. The decline reflects mainly reduced auto output. Other consumer durables output was off some but this was compensated by ris ing equipment production. Late data indicate that demand is being maintained in major industrial lines so that April pro is expected to hold at least to the March level. duction (2) Auto production is now running about a fourth of last fall's rate, and is below dealer sales and export rates. moderately in March and are expected Dealers' stocks declined a larger decline this month. The used car market to show prices has been showing better than seasonal both in sales and durable goods in March regained strength. Sales of other after a slipback in February. Con their high fall plateau, stores were also up in March. De sumer sales at nondurable however, showed little change from partment store sales, February.
activity over-all showed a slightly (3) Construction better than seasonal performance in March, reflecting higher expenditures for business construction with stability for housing construction. While housing starts were at 1.1 mil lion unit rate in March, residential contract awards were at an all time high, excepting only May of 1951 when special awards for housing at atomic energy installations made for a swollen total. The mortgage market through March showed an easing trend. (4) Employment and unemployment data have continued to reflect mainly seasonal changes. Average hours of work have declined further, but average hourly earnings, after three months of stability, have risen to a new high, offsetting the further decline in hours of work and raising weekly earnings again close to the peak reached late last year. (5) The annual rate of inventory accumulation for the first quarter of 1956 is estimated at $4 billion compared with $5 billion in the fourth quarter of last year. These rates are adjusted, of course, for inventory valuation change. It is significant that finished goods were a sizable proportion of the inventory increment this past quarter. With inventory to sales ratios now closer to longer-turn averages, inventory trends will bear close watching in the period ahead. A special fact of interest is that the steel industry is currently estimating that from 8 to 9 per cent of shipments is moving into inventory. (6) With high levels of activity resulting in demand pressure on basic industrial materials and products, average industrial prices have continued to creep upward. At mid-April, the average was 5 per cent above the average for the first half of last year. With some recovery in agricultural prices since early this year, the average of all wholesale prices is up 3 per cent over the first half of last year. Markets for metals and many other materials continue strong, but markets for textile fibres have been quite mixed, with syn textiles and showing marked weakness, woolens strength, and cottons thetics By mid-April, farm prices had risen 6 per cent in between. 5 per cent under the average from December, but were still for the first half of 1955. countries abroad at very ith activity in industrial (7) in these countries re levels, pressures on resources advanced in industrial countries The picture generally main strong. boom. While both ex business investment is one of continuing Britain appear en developments for Great ternal and internal still on the infla demand pressures are couraging, cost and in Canada have been paralleling tionary side. Developments United States im States fairly closely. those in the United as do also United States maintain their up-trend, ports seem to nonagricultural exports.
A summary of a statement next made by Mr. Thomas with respect to the credit situation follows: In the past three weeks, credit markets have been adjusting to the impact of corporate tax payments and the Treasury refunding operation which came together in March, to heavy loan demand in capital markets and at banks, and now to the rise in discount rates. Some contraction followed record expansion in bank credit during the first three weeks of March. Preliminary estimates for the week ending April 11 based on figures for nine districts indicate a decrease of nearly $1 billion in holdings of U. S. Governments during the past three weeks, following an increase of $400 million in the previous three weeks. All types of issues of Govern ments have been liquidated by reporting member banks during the most recent three-week period. The net decrease of over a half billion dollars over the six-week period is about the same as the decrease over the comparable six-week period last year. Business loans showed little change in the three weeks, following a sharp rise, and are still about $1.4 billion greater than at the end of February. This compares with an increase of only $300 million in the corresponding six weeks of last year. Loans on securities decreased in the past three weeks by nearly the amount of the preceding increase, reflect ing liquidation of borrowings related to the Treasury financ ing and other capital market developments. Demand deposits adjusted declined by half a billion dur ing the most recent three-week period, slightly more than in the corresponding period last year, but over the six-week period the decrease was negligible whereas a substantial de period. For the year to date money cline is usual for this close to those expected seasonally. supply changes have been Treasury deposits declined about $1.5 billion in the last three-week period, approximately the amount of the increase In summary, the recent credit in the preceding three weeks. has not offset the preced contraction, although noteworthy, indicate continued strong ing record expansion and reports demands and pressures on the market. credit the Treasury cash balance to Large tax receipts built March - an important factor $6 billion at the end of nearly been considerable de squeeze. While there has in the credit March, the Treasury balance the latter part of crease since year to date than a year ago, has averaged much larger for the through June. As Mr. to stay fairly high and is expected billion of tax addition to retiring $4.5 Rouse indicated, in
certificates in June, the Treasury might use some of its cash surplus to retire special issues for Government trust and agency accounts and replace them with other securities bought in the market, which is the same as retiring long term debt. The cash surplus for this fiscal year is now estimated close to $5 billion, and it may be $6 billion for this calendar year. Large corporate capital spending has been reflected in the securities markets. Offerings of corporate securities have been heavy and, although prospects are for lighter of ferings in tne near future, the April total will be above that of last year. The four-month total is above either of the last two years. Volume of State and local issues for the year to date is below 1955 but the calendar for the future is still large. A tendency to postpone some of these issues re flects difficulties in floating them, and some have been sold at lower prices than initial offerings. Common stock prices have declined somewhat in the past week from the highs reached early in April but generally continue fairly firm. On the whole, stock market credit has been stable for some time. There has been a very marked adjustment in the interest rate structure in the past three weeks with the sharpest rises that have taken place since 1953. Medium-term Governments are selling on a yield basis of around 3-1/4 per cent or more, which is above the level reached in 1953. Prices of long-term bonds have not declined as much as intermediates and their yields are still below the 1953 highs. Corporate and municipal bond yields are now the highest since the fall of 1953 but still are not up to the high of the spring of that year. Treas ury bill rates, which were kept down somewhat in February and March by special seasonal demands, have risen sharply the past three weeks. They rose above 2-1/2 per cent even before the discount rate increase and are now close to 2-3/4 per cent. This week's auction average was 2.77, the highest since 1933. of the money market is no longer sharply out of The short end yield pattern, as was the case in line with the rest of the February. needs have been dominated recently by changes Bank reserve reflect wide variations in Government in required reserves that sharply in the first Required reserves increased deposits. in the next three weeks, and three weeks of March, decreased The current level is little change this week. are showing early in March and million larger than projected about $300 These reserve needs $100 million larger. currency demand was than expected increase in float, were met earlier by a larger member bank and by increased open market purchases, by System
borrowing at the Reserve Banks. Subsequently, float decreased and the System reduced its portfolio. Net borrowed reserves have been close to the $450 million level, with borrowings of member banks generally above $1 billion and so far this week about $1-1/3 billion. Announcement late on April 12 of the discount rate rise was preceded by heavy anticipatory bor rowing and banks met their needs for this entire week. This accounts for the ease in the Federal funds market yesterday. As will be seen from the table of projected reserve changes, the pattern would call for only moderate net changes in reserve needs during the next six weeks, but in June seasonal demands will increase pressures substantially. Wide week-to-week variations may be expected and the projections indicate that net borrowed reserves will vary from as low as $130 million to as high as $540 million. The average level appears to be lower than would be appropriate for a restrictive credit policy and might call for further sales from the System portfolio. Needs for further System action will have to be judged by reactions of lenders and borrowers to current restrictive policies. Reflecting possible alternative developments, we may ask: (1) Will credit expansion be curtailed to the point needed to maintain balance without critical results and without further restrictive action? (2) Will banks want to increase further their borrowings from the Reserve Banks to meet further undue credit expansion? (3) Will pressures of credit demands as to cause further rises in interest rates remain so strong and weak security markets that will eventually bring about a market crisis and a serious downturn in the economy? money of events will be following should be indicated Which course the pressures on capital markets and commodity markets, by should be reflected in interest rates and prices. and an inquiry from Mr. Vardaman, Mr. Young said In response to "gray market" activity in steel that reports indicated considerable and that during the first quarter at the warehousing level recently, appeared to have been fairly year such gray market activity of this the United States. widespread throughout the statement by Mr. Thomas regarding Mr. Sproul referred to of estimates of pros and to Mr. Young's review the capital markets whether there may He inquired private capital expenditures. pective
have been some over-emphasis on proposed capital expenditures in terms of their future effects on the economy; that is, whether their ef fects may already have been largely felt. Mr. Thomas stated that this was a possibility and that if it developed that the actual rate of expenditures was not as large as might be anticipated by the present pressure for borrowing in the capital markets, this would be a desirable development. On the other hand, if corporations spend at the rate at which they have been at tempting to obtain funds in the capital markets the effect would be to create great pressure on the resources of the country. Mr. Young stated that while the figures of prospective capital expenditures did not extend over a sufficiently long period to provide data for a thorough analysis of their behavior, the tendency had been for corporations in periods of expansion to under-estimate the amounts they actually would spend in future periods, particularly in. the second half of the year. During further discussion of this subject and comparisons with the 1937-38 period, Mr. Williams reported a comment by two utility directors of the Philadelphia Bank that further disturbances in the bond market would lead to increased demand by the utility long-term Expansion plans by utilities on banks for short-term funds. industry are not subject to much years ahead and made for periods of several are postponement.
Mr. Leedy stated that he had the impression that a considerable part of the anticipated capital investment programs reflected plans based on long-term growth factors, particularly growth in population extending to, say, 1965, and that in these cases the failure of anticipated growth to develop as rapidly as forecast would not be of too great importance over short periods of time. In opening the discussion of credit policy, Chairman Martin said that since the System's action increasing the discount rate effective April 13, 1956, he had received a number of comments sug gesting that the System might precipitate another situation such as that which existed in the spring of 1953 when there was apprehension about a sudden concerted closing of the discount window. The Chair that we bear in mind that we don't want continuous man suggested borrowing, but also we don't want to make money "unavailable." The in reviewing the Committee's directive, Chairman also suggested that discount window, it take into account all the discount rate, and the that might bear on the situation. factors substantially as follows: Sproul then made a statement Mr. a slight decline production index showing 1. With the than seasonal improve showing no more for March, employment and inventories in work week declining, ment, the average situation, in which a potentially unstable creasing, we have the part of the overoptimism on appears to be what now change to a more perhaps quickly community might business however, it For the present, of the future. sober appraisal staying nigh, and incomes are that consumer is significant basis is the fundamental up, which sales are holding retail and employment. for nigh production
2. In these circumstances, and in the light of the strong demand for credit and capital and the likelihood of upward pressures on prices from the cost side, I think we are right in maintaining pressure on bank reserve positions and probing into the structure of interest rates by increas ing the cost of reserve funds. 3. I would emphasize that it should be a probing opera tion, however, not a major operation since we do not know for certain what is wrong with the patient nor how drastic the reaction might be if we vigorously tried to redress the ex isting balance of forces. 4. This suggests to me that we watch the reaction to our recent increase in discount rates, and try to maintain about the position of reserve availability which we had at tained earlier this month, but that we should not press our policy too harshly nor too far while we are still operating more on feel than on facts. Mr. Johns said that he was in substantial agreement with Mr. Sproul's statement. He noted that three weeks ago he had sug gested that the construction outlook and employment in the St. Louis District might be lagging somewhat behind the national picture. It now appeared that this was not the case as to construction, and at this time conditions in the Eighth District do not appear to differ significantly from the national picture described by Mr. Young. Mr. Johns said that for the time being he would not wish to increase the pressure in the market but would try to observe the effects of the recent change in discount rates; he would hold the line until the future became a little clearer. Mr. Bryan reported discussions at recent meetings of the of the Atlanta Bank and the board of directors executive committee discount rate. He said that the regard to the increase in the with was compelled to act in believing the System directors were unanimous
in a restraining way. They felt that the increase in the rate would have a needed sobering effect. As to policy for the next few weeks, Mr. Bryan said that his position was indicated by the suggestions made by Messrs. Sproul and Johns, that is, that the Committee pursue a watchful waiting attitude while observing developments. He would like to have the discount rate effective; he would not allow the bill rate in any spasmodic movement to go much above the discount rate, but he would not allow it to back away from the 2-3/4 rate by any large amount. Mr. Williams said that recent comments of directors of the Philadelphia Bank indicated considerable accumulation of steel in ventories, as Mr. Young reported. This was in anticipation of price increases and sustained demand for consumer durable goods. He re company executive had said that the growing dis ported that an oil in the prices of crude oil was not meeting a cussion of increases the East Coast, in part because of the pos favorable response on imports. If domestic crude prices are increased, sible effect on to increase imports and this ultimately there will be a temptation control over imports. Mr. result in demands for restrictive might that utilities companies his earlier comment Williams reiterated funds for capital expansion, alternative sources of might be seeking loan demands at banks. through adding to might cause difficulty which was that it was to in the discount rate response to the increase The question as to how and there was some Mr. Williams said, be expected,
effective it would be in restraining credit expansion. He reported conversations with major sources of borrowing at the Reserve Bank which he felt indicated that the concern banks were showing regarding credit expansion was genuine. Mr. Williams also reported a statement by the President of the Pennsylvania Bankers Association recently suggesting that bankers should look to their responsibilities for seeing that the situation did not get out of hand, and appealing to them to exercise self-discipline. Mr. Williams said he assumed there was no need for any change of policy at this time in the light of developments of the last three weeks. Mr. Fulton said that the Cleveland District continued to re flect a high rate of activity. The steel inventory situation might differ from that suggested by other comments, in that the only ac cumulations reported were in the industries allied with the automobile industry. Other customers were cutting up about all the steel they could get. Expenditures for capital improvements are going forward, Mr. Fulton said, and the increase in cost of money was not expected to deter carrying out these plans. The only deterrent which he noted currently was inability to get steel for construction. Projections the need for the products they make were made by manufacturers as to Summing up, Mr. Fulton felt that paramount in their minds at present. and this situation would there was an abundant economy at present that he thought no relaxation as could be seen. He said continue as far
should creep into Federal Reserve policy at this time and that at least the existing degree of firmness should be continued. Mr. Shepardson said that he felt the Committee was in a posi tion where it needed to hold steady for a period. Mr. Robertson stated that he saw nothing in the picture that would warrant a decline in pressure or an increase, and he thought it too early to determine what the reactions would be to last week's discount rate increase. Consequently, this was one of the times when the Committee's agent should have real latitude in carrying on opera tions depending on what the reaction to the increase in the discount rate turned out to be. If real stringencies were to develop, the management should be in a position to ease the situation. On the other hand, if the rate increase had no effect on the market, Mr. Robertson said that he would wish to hold steady until the next meet ing of the Committee. Mr. Mills said that his sentiments followed the thoughts thus the desirability of waiting for a period to far expressed, especially of and reactions to the change in the discount observe the effects there was always a delayed reaction We knew from experience that rate. said, and a waiting period System policy, Mr. Mills to any shift in time in order to allow important at the present might be particularly Government securities to adjust. the market for U. S. similar to those ex that his feelings were Mr. Vardaman said rate with considerable acted on the discount except that, having pressed
force, the personnel of the System should now adopt the "golden standard" of silence, and that the Board and Bank personnel both should forego at least for awhile any further discussion of restric tions in the field of money and credit. Otherwise, he said a fear psychosis might be developed, which could result in a buyers' strike. On a broad geographical basis, he found a real fear not as to the cost of money but as to its availability. There was a fear that the discount window was not going to be open. It seemed to him extremely important, Mr. Vardaman said, that this fear be eliminated as soon as possible. Mr. Vardaman also expressed the view that there was an inequitable distribution of loanable funds across the country which was causing complaints, particularly in agricultural areas. This would adjust itself if the System would now "sit tight" and observe the situation closely for the next few weeks. Mr. Vardaman also said that he had been unable to find evidence as to where the gray market in steel was putting inventories unless it be in the housing industry. Mr. Leach made a statement substantially as follows: Two key factors in the current situation directly related to our recent changes in the discount rate are the prevalence price pressures and the strength of loan demands. of upward Directors' meeting last week one of the Directors At our tool manufacturing concern commented who is with an electric he had experienced about a 5 per cent increase across that of materials entering into his prod the board in the price he was anticipating another 5 per cent in ucts and that he had notified his weeks. As a result, crease in coming cent increase in prices of his sales people that a 10 per from now. This seems in prospect two months products was is happening to prices. to be typical of what
A week's visit to eighteen banks in the Carolinas and interviews with other bankers gave me the impression that the strong demand for loans is getting stronger, particularly at the larger banks. Many bankers are worrying about their liquidity positions. They are largely out of short-term se curities, and bonds which are not pledged to secure deposits can be sold only at substantial losses. We have received in quiries in regard to borrowing on eligible paper and are bringing our forms and procedures up to date. One of the largest banks in our district with $400 million deposits is planning to send us this week a bundle of eligible paper to be used in case of need. This bank expects to borrow inter mittently for three months in varying amounts ranging up to $25 million. A number of bankers in whom I have confidence tell me they are screening loans closely. Several have eliminated or re duced lines to finance companies. I heard a South Carolina banker turn down an application for a $75,000 loan to a good business customer to be secured by listed stocks. The banker had learned that the purpose of the loan was to repay a loan to his customer's brother which had been called by his New York bank. The South Carolina banker told his customer he would lend him any reasonable amount if needed for his own business but he would not let a security loan be transferred from New York to his bank. His lending capacity would be saved, he said, for the expanding business needs in South Carolina. Loan expansion is occurring in practically all areas. Much of it comes from business enterprises which are expand buying new machines. The larger corporations can ing plant or issue securities or place loans directly with insurance companies, but insurance companies want loans that will run for at least ten years and have little or no interest in loans that can be paid out in monthly installments over one to three years. Consequently, such prospective borrowers turn to their banks. we should maintain but not increase pressure In my opinion in the immediate future. said that the matter of borrowing on eligible paper Mr. Leedy had already been experienced in the to which Mr. Leach had referred country member bank. He was District in one case with a Kansas City from a non-member bank about an inquiry the other day more disturbed by
borrowing on direct obligations of the U. S. Government. This in quiry caused him to feel that perhaps the Bank should take a second look to see whether the rate was at a level that would discourage such borrowings by a non-member bank. As to the Committee's policy, Mr. Leedy said that he did not differ from the suggestions made thus far. The management of the account had done a remarkable job since the preceding meeting in applying pressure, he said, and for the period ahead, he would surmise that even more skill might be required in managing the System account. Mr. Leedy said that there was a question how far the Committee could go in maintaining the pressure that seemed to be called for in the light of its present policy with out creating disturbances in the short end of the market beyond what the Committee desired. He also felt that the fact that the stock market had taken the increase in the discount rate in stride was dis feeling that the existing optimism is turbing; this confirmed the justified. If this feeling prevails generally in the business com munity, Mr. Leedy said, there is not likely to be any cessation in the for credit and a problem is thus presented for the Committee. demand in the period intervening between now and the next meeting, However, to apply pressure about as has been done during the he would attempt past few weeks. in the Ninth District as bet Mr. Powell summarized conditions board. The fact that current a year ago right across the ter than reflected the large crops was holding above a year ago farm income
harvested last fall. All indications were that business was doing very well and much better in some cases than previously had been ex pected. In one respect the Ninth District differed from the rest of the country in its banking statistics and that was the higher borrowings from the Federal Reserve Banks as a percentage of required reserves. Mr. Powell said that the substantial increase in the dis count rate made at the Minneapolis Bank from 2-1/2 to 3 per cent was necessary to avoid getting the borrowing situation farther out of line without closing the discount window. Restraint still seemed to be in order so far as the Ninth District was concerned, he said, and as long as it also seemed desirable for the national picture, that seemed to the Committee to pursue during the next three weeks. be the policy for be cautious about increasing pressure during However, Mr. Powell would this period. to the views expressed said that he subscribed Mr. Mangels for the next three weeks. The as to the policy that should be followed District is much the same as that over-all economy of the Twelfth Mangels said. Loans by banks the country as a whole, Mr. described for few weeks and are substantially during the past have been increasing on an analysis of ago. Mr. Mangels commented above those of a year stating that the banks of the district, of 29 of the large loans and that this 51.9 per cent to deposits was of their loans average to a low of large bank for one very of 60.3 per cent from a high ranged
18.8 per cent for a bank in Salt Lake City. Real estate loans averaged 48 per cent of time deposits of the banks, ranging from a high of 64 per cent at one bank to a low of 14 per cent at another bank which is not inclined to make real estate loans. Mr. Mangels stated that visits which he and Governor Balderston made to banks in cities of the Pacific Northwest during the past two weeks gave the impression that the banks expect loan demand to increase in the future and, even though they will screen these applications, the volume of loans will rise. He reported that sales of new automobiles during March in creased somewhat less than seasonally. Sales of used cars have been quite strong, and stocks of used cars have declined to a point where dealers are expressing some concern. New car inventories have de creased somewhat recently, partly because of the pick-up in sales, partly because manufacturers have reduced output, and partly because dealers have been more willing to refuse to take as many new cars from manufacturers as previously had been the case. Construction activity is holding up well in the Twelfth District, partly reflecting added construction being undertaken for automobile assembly, aircraft, Mr. Mangels also commented on an application for and other plants. an industrial loan for $2-1/2 million received by the San Francisco Bank recently, which, while containing provisions which would normally by the directors of the Bank in the make it acceptable, was declined of the fact that the applicant System credit policy and light of current somewhat smaller loan. company for a from an insurance had a commitment
Mr. Mangels also referred to the action of the Board in ap proving an increase in the discount rate at the San Francisco Bank from 2-1/2 to 3 per cent, effective April 13, and to the announcement of the Board's approval which was received in San Francisco shortly after noon on April 12. A number of bankers indicated their approval of the increase in the rate to the 3 per cent level. One result of this announcement prior to the close of banking hours was that seven banks borrowed a total of $130 million at the San Francisco Bank that day. Four of those borrowings were from four to six days. It is the policy of the Bank to limit the period of borrowings under such conditions to the end of the current reserve computation period, banks might seek credit for a longer period of time. even though some of the recent increase in the discount Mr. Mangels felt that in view it would be desirable for the System to observe developments rate a few weeks before taking further action. for been no significant changes in the Mr. Irons said there had District since he reported three economic situation in the Dallas a very high level in most that activity continued at weeks ago and factor for agri of rainfall is an unfavorable areas, although lack in cities of the Dallas continues very strong culture. Loan demand the pressure of those banks are feeling Mr. Irons said, and District, reserves and are are carrying excess Most country banks tightness. borrowed from the banks have Only three country loaned up. not heavily
Dallas Bank for a long time and those borrowings have been essen tially seasonal in character. A number of large city banks have sent eligible paper to the Reserve Bank for processing so as to have it "on tap" in case of need. These banks can not see a decline in loan demand in prospect. The response to the increase in the dis count rates last week was favorable, Mr. Irons said, although there seemed to be some question whether it would stop the pressure on banks for loan expansion. Mr. Irons stated that he felt this was a time when the System should observe the situation carefully. The management of the System open market account should be given great leeway in order to meet whatever situation may arise. Mr. Erickson said that business in New England is about as outlined in the economic review for the country as a whole. Construc tion awards are still running well ahead of last year, particularly in the case of residential contracts. The textile industry has not shared in the high level of activity to the extent that the boot and shoe, paper, and a number of other industries have. Mr. Erickson said that there was no anticipatory borrowing at the Boston Bank in connec announcement of the discount rate increase last week. tion with the view that for the present the Com He expressed concurrence with tne situation carefully without changing its mittee should observe the existing policy or operations. the Committee should continue Szymczak stated that he felt Mr. careful not to add that it should be situation and about the existing
to pressures on the reserve situation during the next three weeks. Mr. Balderston said he had no recommendation to make but that he wished to raise a question stemming from the high loan-deposit ratio reported by many banks and from the existence of a "hard core" of continuous borrowers at the discount window. He felt that net borrowed reserve figures of $400 to $500 million might prove to be deceptive if the twelve Reserve Banks should simultaneously bring pressure upon continuous borrowers to correct that situation. Mr, Balderston suggested that the volume of so-called continuous borrow ing might amount to as much as $600 million, and if action were taken to induce large banks to clear up their individual situations this might precipitate the indiscriminate sale of intermediate Government securities and thus bring about an unwanted over-tightening in the though net borrowed reserve figures remained unchanged. situation even question was, he said, in how many of the twelve districts The critical likely to be taking action to are the so-called continuous borrowers situations during the next three weeks. correct their problem might not be one of Mr. Williams suggested that the borrowing but rather of avoiding an reducing the amount of continuous demands ahead, and Chairman it in the light of prospective increase in of pressures that a good point in terms that this was Martin commented might exist. the basis of the discussion then stated that on Chairman Martin agreement that no change clear that there was this morning it seemed
should be made in the Committee's policy at this time, and that this would mean that no change was called for in the wording of the direc tive to be issued to the Federal Reserve Bank of New York. He in quired of Mr. Rouse as to whether this was his understanding, and Mr. Rouse indicated that it was, and that no change in the limitations in the directive was called for. 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 (in cluding 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 commerce and business, (b) to restraining inflationary developments in the interest of sustainable economic growth, and (c) to the practical admin istration of the account; provided that the aggregate amount of securities held in the System account (including commit ments 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 accommodation of the Treasury, shall not be increased 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 dis in cases where it seems desirable, to issue par cretion, ticipations 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 Re Banks shall not exceed in the aggregate $500 million; serve
(3) To sell direct to the Treasury from the System ac count for gold certificates such amounts of Treasury securi ties 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 suggested that the next meeting of the Com mittee be set for Wednesday, May 9, 1956, and there was agreement with this suggestion. Chairman Martin next brought up the question of the authority for repurchase agreements. He noted a suggestion that, instead of considering the authority for the Federal Reserve Bank of New York to enter into repurchase agreements with nonbank dealers in Government securities at each meeting of the Committee it might be sufficient to raise this question at less frequent intervals, and he inquired whether any of the members of the Committee would object to that procedure. Mr. Vardaman stated that he could see no reason for bringing the question up at each meeting of the Committee, and Chairman Martin suggested that it would seem sufficient to bring it up at the annual meeting of the Committee to be held next March unless some occasion it again prior to that time. arose for discussing being no indication of dis There agreement with Chairman Martin's sug gestion, the authority for repurchase agreements was renewed in the following form with the understanding that it
would continue in effect until the annual organization meeting of the Committee to be held in March 1957, unless a condition developed prior to that time which would make it desirable for the Committee to consider it earlier: 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 which ever 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 Treasury 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. 2. Reports of such transactions shall be included in the weekly report of open market operations which is sent to the members of the Federal Open Market Committee. 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 transferred to the System open market account. the Committee was scheduled to Chairman Martin noted that April 18, 1956, for the purpose of discussing meet tomorrow, Wednesday, continuing operating policies of questions raised regarding certain distributed by Mr. Sproul referred to in a memorandum the Committee, that the members of the March 21, 1956. He suggested under date of
Committee and the Reserve Bank Presidents not currently serving as members of the Committee meet in executive session at 9:30 a.m. on April 18, 1956, for the purpose of discussing this subject, and there was agreement with this suggestion. Thereupon the meeting adjourned. Secretary's note: In connection with the discussion of certain continuing operating policies to be held on April 18, 1956, Chairman Martin distributed under date of April 17, 1956, a memorandum intended to make clear his personal position on the basic points raised in Mr. Sproul's memorandum of March 21, 1956, concerning this subject. Subsequent to the executive session on April 18, the Chairman reported to the Secretary that the subject had been discussed and that the discussion had not re sulted in a decision to change the existing statements Secretary.of policy.
Also: Record of Policy Actions