May 9, 1956 FOMC Minutes

FOMC minutes

wish to engage in that type of transaction. Chairman Martin stated that it would seem to him desirable to avoid sales of the August notes. After further discussion, he stated that Mr. Thomas' questions pointed up clearly some of the problems in connection with these two proposals. Mr. Robertson said that he seriously doubted the need for sales of securities other than bills or for swaps. He thought the likelihood of having to make sales from the System account within the next two weeks was not very great and that after that period the System would be finding it necessary to buy securities. While he would have no reluctance to authorizing a move from bills into the next longer issue of short-term securities, he felt that any such transactions should take place only when the System found them to be necessary, and not in advance. He did not think it necessary to start dealing in securities other than bills today and in fact would wait to do so until present holdings of bills were exhausted. Mr. Rouse responded that he did not think there was any dis the view expressed by Mr. Robertson and what he had agreement between He noted that the Committee met at three-week intervals, in mind. it might be necessary to effect transactions, and that in the interim is such that he is free to engage in that the existing authorization securities other than bills. He said that transactions in short-term Committee the situation he to the attention of the he wished to bring

had described because he would not wish to effect such transactions without having discussed the matter with the Committee. Mr. Robertson referred then to the sixth suggestion regard ing swaps, stating that he thought it would be very unwise if the Committee authorized that sort of transaction in the absence of a clear advance notice to everyone in the market as to what the Com mittee was doing. Mr. Sproul said that he did not know what harm could result from the proposed transactions. The amounts would be so small that they would not have any effect on the market's knowledge of open market policy. If the Committee were to deal in other areas of the market, there might be a question whether it would be interfering with arbitrage. But when it was dealing only within a 90-day period, he did not think that the volume of such transactions within a weekly period could possibly cause any danger of a misunderstanding statement as to credit policy. In response to a further question from Mr. Robertson as to from informing dealers that in the course whether harm might result action such as that proposed, of the next month the System contemplated in such a course was that the System Mr. Sproul said that the danger position of trying to explain account would get into the impossible it took or contemplated taking. each action Mr. Robertson suggested of further discussion, In the course held over until the swap transactions be the question regarding that

next meeting inasmuch as he would like to have an opportunity to study the matter further. Mr. Mills suggested that, until Mr. Rouse had experimented some, he would not know what his final process would be. It would be necessary for the Manager of the Account to use his judgment in carrying out any authorization. Mr. Sproul said he thought this was somewhat like the question of dealing in short-term securities other than bills. When the hold ings of bills in the System account got down to existing levels, the Manager of the System Account should raise the question. As between today and two weeks hence, Mr. Sproul said that he did not think the matter was of importance. Mr. Shepardson suggested that it might be desirable to authorize some experimentation during this period so that when the Committee con sidered it two weeks hence it would have the benefit of the experience that might be gained. Mr. Szymczak stated that as long as the Committee was dealing in bills, it should have a supply of bills of the various maturities on hand. Therefore, the question was whether the Committee should en gage in swaps in order to provide such a distribution of maturities. Chairman Martin said he thought this was a very minor matter. So far as the objectives were concerned, he would not have any ques tion about approving the proposal today. This was a matter of judgment of opinion on the part of the on which there would be differences members of the Committee as to whether the action proposed was necessary.

The management of the account was quire correct in bringing this to the attention of the Committee for its judgment. As far as he per sonally was concerned, Chairman Martin said that he did not like swaps. He then inquired of Mr. Rouse how important he thought the problem would be during the next week or two. Mr. Rouse said that he did not think it a vital matter to settle today and probably not a vital matter at the next meeting. He thought it a desirable operation and he would like to get a better balance in the System account. Chairman Martin suggested that, since a question had been raised as to the proposal for swaps and in view of Mr. Rouse's comments that it was not a vital matter for the next two weeks, action be postponed with regard to the sixth proposal Mr. Sproul had made. He also suggested that the Committee indicate its approval of transactions in other short term securities than bills. He noted that this would be within the Com mittee's existing instruction to the New York Bank which provided that transactions for the System account be in the short end of the market, preferably bills. with Chairman Martin s suggestions was indicated. No disagreement Chairman Martin then noted that the next meeting of the Open Mar Wednesday, May 23, 1956, and he again ex ket Committee would be held on the hope that Mr. Sproul would be able to attend that meeting, pressed the meeting adjourned. Thereupon Secretary.