May 23, 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 Wednesday, May 23, 1956, at 10:45 a.m. PRESENT: Mr. Martin, Chairman Mr. Balderston Mr. Erickson Mr. Johns Mr. Mills Mr. Powell Mr. Shepardson Mr. Szymczak Mr. Fulton, Alternate Mr. Treiber, Alternate Messrs. 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. Thurston, Assistant Secretary Mr. Vest, 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 by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on May 9, 1956, were approved. to the members of there had been distributed Before this meeting covering open market operations during the period the Committee a report
May 9 through May 18, 1956, and at this meeting a supplementary report covering commitments executed May 21-22, inclusive, was distributed. Copies of both reports have been placed in the files of the Committee. Upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period May 9, 1956 through May 22, 1956, inclusive, were approved, ratified, and confirmed. Chairman Martin called upon Mr. Young for a statement on recent economic developments. Mr. Young's statement, which supplemented the staff report distributed under date of May 18, 1956, was substantially as follows: Economic activity has been extending its sidewise move ment on a high plateau. Divergent tendencies in production, employment and trade have become more noteworthy than earlier, but credit demands have remained very strong and average wholesale prices have been holding about at their high for this past year's rise of 5 per cent. Abroad, economic condi tions continue generally strong. For several months now, retail markets have reflected a slackened growth of consumer demand. On the other hand, busi ness capital expenditures have shown impressive strength. Recently, expenditures for inventory build-up have decelerated, with accompanying corrective cutbacks in output. Although un certainty about the strength of the economy for the near term future is now being expressed with greater frequency at decision making levels, the market and output adjustments and testing cur rently taking place in individual sectors are essential to the sustainability of growth for the economy as a whole. Mixed business tendencies at this stage would hardly seem to sum up to a conjuncture of weakness such as would foreshadow general economic recession. tendencies merit highlight key business Recent data which brief summary: (1) Results of the McGraw-Hill survey of business capital expenditures show remarkable strength of investment programs business confidence in potential for longer and also remarkable term economic growth. The gross figure for expenditure plans to put it on a a $2 billion cutback of $39 billion needs
basis comparable with Department of Commerce business in vestment estimates, but a $37 billion total for the whole year 1956 still implies a very large rise in domestic busi ness investment from the second to the third quarter of the year. (2) There is, of course, question about how firm these investment plan figures are. They are being confirmed, how ever, by most recent production figures for producers' equip ment and by trade reports of output prospects for equipment lines. Construction contract award figures for commercial and industrial building have been showing very large gains over a year ago, and early May data indicate that the high March and April levels are being maintained. Confidential data on nonresidential construction plans (other than for manufacturing) reaching architects' drafting boards during the first quarter of the year were likewise larger by an ap preciable amount than a year ago. Architects drafting board activity seems to lead contract awards by 9 to 15 months. On the other hand, new orders for durable goods have been drifting downward in most lines since the end of the year, and in March were about equal to sales. Orders for machinery and transportation equipment showed the least decline. The back log of durable goods orders at the end of March stood at $54 billion, equal to about four months' sales. sales were off some from March, and (3) April retail April and March sales together averaged 1 per cent below the last four months of 1955. Department store sales for the first three weeks of May suggest that the May seasonally adjusted store figure will hold at the March level of 122, department with possibilities that it may reach 123. Hard goods sales seem to be holding up well at department stores in May. Sales and appliance stores in April reached a new high. of furniture sales are the big weak spot at the (4) New automobile Advice from one manufacturer received yester consumer level. day states that daily sales thus far in May are averaging 10 per cent under the April rate. This is worse than the first 10 days' indication for the industry. Dealer new car stocks close to the 900,000 unit level and output, which continue had been reduced to 110,000 units per week in early May, is process of further cutback. Representatives reported to be in visited the Board's office in the of two manufacturers have to report the concern of their managements past two weeks the availability of credit over market conditions, including to purchasers. sour, sales indeed been market has the new car (5) While last month and about well ahead of of used cars are running with a decline of 29 per per cent under a year ago compared reduced 14 per cent Stocks have been for new car sales. cent
under year ago levels and stock-sales ratios are more favorable than a year ago. Prices of late model used cars after allowance for depreciation have risen further and are now above spring levels of the past two years. (6) Consumer instalment credit slowed further in April with the increase for the month down to about $100 million on a seasonally adjusted basis, compared with a monthly average of $275 million for the first quarter. Extensions of automobile credit declined considerably but are only moderately under a year ago levels. About 65 per cent of all new cars were purchased on credit in the first quarter compared with 55 per cent a year ago. Indi cations, incomplete to be sure, point to an increase in longer-term automobile instalment contracts this year. (7) Industrial production for May is expected to hold at the April level of 142, though 141 index figure is pos sible. Output of consumers durables, steel, and crude oil will be off for the month; equipment production and mining will be up; and nondurables output will likely hold its reduced March level. (8) Total construction expenditures on a seasonally adjusted basis were up somewhat in April, with residential outlays showing a small rise and nonresidential a larger increase. Housing starts rose seasonally in April and on a seasonally adjusted basis totaled 1.1 million units, lower than a year ago but higher than in April of the two preceding years. Residential contract awards thus far in May are holding close to the high levels of March and April and above year ago levels. VA appraisal requests and loan applications were both up in April but FHA applications were off some. (9) Demand for nonfarm labor has continued active, with manufacturing employment little changed in April and nonmanu facturing employment at a new peak. Unemployment fell to 2.6 million. The manufacturing work week was little changed, as were also weekly earnings. In June, several wage increases go into effect and in steel, present wage agreements expire as of the end of the month. figures on inventories (10) The most recent comprehensive are for March and show a relatively small over-all increase from February. Retail stocks were down but manufacturers' At manufacturers, the increase was again in final stocks up. Preliminary information indi product and goods in process. for April will show a rise department store stocks cates that an index level of 135 in March to a level of 137. again from one of 124 for April a year ago. The 137 index compares with
(11) From last June to April, the rise in prices of industrial commodities averaged .5 per cent a month. Since mid-April, average prices of industrial commodities have about leveled off. There have been declines in copper, metal scrap, and rubber in recent weeks, but over these same weeks there have been further price increases for metal products, building materials, and paper products. With re gard to the recent price declines of copper, steel scrap and rubber, these materials had earlier shown very sharp price increases; the recent declines in these material prices would seem mainly to reflect specific market situations. (12) Prices of farm products have recovered about 5 per cent from the December low, with grains, oil crops and meat animals accounting for the rise. Recently hog prices have risen further and dairy product prices have advanced. Farm land values have risen further, according to the March 1 survey of farm land values, to a level about 4 per cent above a year ago. The latest rise in land values was concentrated in the Eastern cornbelt, the Southeast, California, and Florida. continuing gains up to U. S. foreign trade showed (13) March, but imports, mainly because of lower coffee purchases, in April, and nonagricultural exports were off more were down Total exports were up 18 per cent over a than seasonally. year ago, the total export gain for the month reflecting a shipments which for several months pre bulge in agricultural viously had declined. economic advance countries abroad, (14) In industrial a slackened pace. In a few though evidently at continues, further production gain this countries, there has been little on monetary expansion of varying year. Central banking curbs sternness generally continue in effect. be said that with diversity of In conclusion, it should than in other recent in business trends more marked tendency to be watched closely and the situation will need reports, A prospect of ac immediately ahead. carefully in the weeks pessimistic business with an increasingly cumulating weakness out, of course, but cannot be ruled and investor psychology correction of of relatively rapid neither can a prospect of expansive momentum. and a resumption present imbalances in orders plans actually materialize If business spending surely be some lifting there will and construction contracts, consumer incomes and a resulting or multiplier effect on April data on personal spending. The stimulus to consumer up nearly $5 bil a record rate of $317 billion, income show from a year ago. quarter and $18 billion lion from the fourth
Mr. Thomas next made a statement with respect to financial developments as follows: The principal financial developments in the past two or three weeks have resulted in a continuation of a fairly tight reserve position of banks--tighter than expected. There has been some rise in Treasury bill yields in reflec tion of the reserve situation, but this has been accompanied by unexpected strength in the bond market with declining yields. At first, there was an improved tone in the new issues market, but that has been followed by some softness as a large volume of offerings came to the market. Stock prices have declined sharply to the lowest level since early March, the decline from the peak reached on May 4 having been about 5 per cent or roughly the same as the decline last January. Total loans and investments of city banks have declined somewhat, reflecting a continuing increase in business and other loans, more than offset by a further de crease in holdings of both Government and other securities. Demand deposits at city banks declined $1.9 billion, in the past three weeks, compared with $700 million last year. Since the end of February, there has been a net decline in demand deposits of these banks of more than $1.2 billion, whereas no change was recorded during the corresponding period last year. Demand deposits adjusted at banks in leading cities on May 16 were more than $1 billion smaller than a year earlier. Declines of over $800 million at central reserve city banks in New York and of $150 million at central re serve city banks at Chicago accounted for most of this decrease, and the banks in New York also showed decreases in U. S. Government and in time deposits. As of May 9, demand deposits were also somewhat below year-ago levels at city banks in the Philadelphia, St. Louis, Kansas City, and Dallas Districts, while increases had occurred in the Boston, Cleveland, Atlanta, and San Francisco Districts. during the last half of At country banks, demand deposits April were larger than a year ago in all Districts except Kansas City, although the increases in the Minneapolis negligible. Time deposits were and Dallas Districts were somewhat larger in all Districts. deposits adjusted decline in demand The uncustomary responsible for some reduc the past two weeks was during tion in estimated required reserves of member banks during
that period. On the other hand, a larger than expected in crease in currency and the maintenance of Treasury balances at a higher level than projected, together with a reduction in Federal Reserve holdings of Government securities, served to keep net borrowed reserves close to $600 million for the last three statement weeks, but they will probably average about $400 million for this statement week. The recent tightness in reserves has appeared at reserve city and country banks but has been moderated a little at New York and Chicago compared with the preceding month. Unless there are offsetting System operations, net bor rowed reserves may again rise to around $600 million next week and may continue well above that level during June and July, as indicated on the sheet distributed showing a pattern of pro jected reserve changes until August 1. These projections allow for a substantial increase in credit demands--reflected in re quired reserves--around the June tax debt period. The allowance is somewhat smaller than the increase that actually occurred in March but is in excess of the rather substantial increase around mid-June of last year. In summary, the credit picture, like that of the business situation in general, is by no means clear-cut, and contains many cross currents. Loan demands continue strong and banks feel the reserve pressures. Likewise current and prospective new capital issues remain large. Money pressures are reflected in higher rates for Treasury bills, but the bond market is strong. Likewise price pressures in commodity markets continue strong, notwithstanding the weakness in automobile sales and some concern about top-heavy inventories, which are reflected in the declining stock prices. The situation may be likened to that we believed we might be facing early in the year, when it was thought that the anticipated decline in automobile sales would release resources for capital expenditures. The decline in autos was delayed, but has finally arrived in greater amount but the planned expansion in capital expenditures than expected, anticipated. Credit demands were even is much larger than was unquestionaly called for re larger than had been expected and a period of heavy seasonal demand straint. We are now entering is how much re and the question for consideration for credit while these demands are being met. straint should be maintained staff was prepared to question whether the Mr. Johns raised the have to be supplied to the mar the amounts of reserves that would discuss and Mr. Thomas commented of the current year, now and the end ket between
briefly on tentative estimates prepared earlier this year which indi cated that somewhere in the neighborhood of $1.6 billion of added re serves would be needed during the second half of 1956. Mr. Thomas also noted that the staff usually prepared projections of these needs for presentation at a meeting of the Committee in June. At Chairman Martin's suggestion, it was understood that the staff would prepare a statement with respect to reserve funds that would be needed by the market during the remainder of this year for presentation at a meeting of the Committee during June. In response to a question from Mr. Erickson regarding Treasury plans regarding the use of surplus funds, Chairman Martin stated that there had been general discussions of this subject but he knew of no specific indications as to what the Treasury plans were. Mr. Rouse stated that Treasury cash requirements during the second half of this year were expected to total around $5.5 billion and that he understood the Treasury expected to begin coming to the market in mid-August. Mr. Thomas noted that the main reduction in debt could be ex pected to take place during the second half of the 1956-57 fiscal year the autumn of 1956. Mr. Rouse also said that he under rather than in stood that the Treasury probably would make an exchange offering about mid-July covering Treasury 2 per cent notes maturing August 15, 1956, somewhat in excess of $12.5 billion. in an amount substantially as follows: Martin made a statement Chairman
The first thing I want to note today is that this is our first meeting without the services of Mr. Sproul. I know all of us regret this deeply. I had hoped to prevail upon him to be with us today, but he is so overwhelmed with his various activities at this time that he could not be here. We are very fortunate in having Mr. Treiber with us and I will be glad to call on him within a few moments. This marks a mile stone. I did not want to let it go by without saying how much we regret not having Mr. Sproul's stimulating remarks. Last night, I reviewed the minutes of our meetings from the first of this year. It is difficult in a period such as we are in, when everybody and his brother becomes a monetary expert in the public press, to isolate ourselves and to see ourselves in the correct perspective. I was trying last night to place myself on a desert island to see what would be the proper approach if we were able to look at the current situa tion from a distance. It seems to me that one of our biggest problems is psychological. We must not be influenced in our judgments because some commentators may interpret the situa tion one way or the other, and we should not avoid taking action that in our judgment should be taken just because some of them are urging that we act. In my own thinking, I am quite clear that there has been a real change in business sentiment. I think monetary policy is getting more credit in sentiment than it deserves, but it is so for that change real that some of the people who were saying that monetary have no effect whatsoever are now claiming that policy could effect than it really has. We ought to keep it has more that in mind. I believe in double tops Being a stock market operator, upon occasion. Not as anything conclusive, and double bottoms have been having that. If you look but just as guides. We that there were items of took the position in January back, I and that we should not keep a change coming into the picture we should recognize them indefinitely, but that firm position the January 24 meeting that we they did come. It was at when the words "while taking into changed our directive by adding in the economy" so that account any deflationary tendencies restraining inflationary develop clause (b) would read "to growth, while of sustainable economic ments in the interest tendencies in the into account any deflationary taking a period of watchful waiting, That was followed by economy." the System took to the action that we worked up and gradually 13, increasing the on April 12, effective April six weeks ago discount rate. good. I say our record is surprisingly In my opinion, but it is a to say that, one ought never knowing that that
very intelligent, readable record all through. I think we ought to consider whether we wish to change our directive today so that it would show that we are recognizing a change in emphasis at this time. There have been deflationary implications in the net borrowed reserve figures recently and in their implications for management. There has been a real change in sentiment and we ought to recognize it. We should keep alert when the spotlight is on us, and in taking our vacations we ought to be certain that there is a Com mittee available to vote on these questions at any time we may need to. I would hope that we would set the next meeting of the Committee for June 12, which would mean that this next period would take us through the Decoration Day holiday. In today's discussion, we can think of developments over the three-week period before we will act again. If need be, we can make the next meeting earlier, but that is my present thinking. It is obvious from what I am saying--I don't want to take any position until we have all spoken on this--that I am inclined to the view that some change in the directive might be appropriate and that a shift in emphasis might be desirable in our operations. I question very much whether there ought to be any change in discount rates, but that also is a problem. We recognized the problem of momentum in our discussion at the last meeting, and we should consider that monetary policy requires us to keep alive again. Flexible to these changes. of anybody, but I have been This is not a criticism alarmed by the tendency of net borrowed reserves to creep up on us. That has been offset by things like the President's statement since the last meeting, which unquestionably created a strong bond market. But we ought to remember that the dis count window is being watched. Many bankers have become severe in their attitude and they now may be overly severe should consider whether we want to on credit requests. We to somewhat the same approach that we had shift our emphasis the time of the meeting on January 24, when it in mind at seemed to me that we would have been going along pretty maintained our position without con blindly if we had just the variety of factors that were then appearing. sideration of We can not tell what way things will go and these forces may we are inclined to direction from what move in the opposite I am talking about at this time is a change in think. What and not a major change in emphasis and general direction remarks, I would like Having made those preliminary policy. of others and and get the comments go around the table to what we should do. to a consideration of then come back
Chairman Martin then called upon Mr. Treiber, who made a statement substantially as follows: Our analysis of the business and credit situation is similar to that presented by Messrs. Young and Thomas this morning. We are still in an area of uncertainty as far as the forces of expansion and of contraction are concerned. In the aggregate, the economy moves sidewise. But the aggregate conceals divergent trends. Employment in April was at an all-time record. Capital expenditures are heavy and each new estimate shows larger expected capital outlays. There is some ques tion as to whether capital goods producers can expand out put fast enough to meet the projected demand. While consumer demand in the aggregate continues high, the demand for durables has slackened. Inventories of automobiles are high and auto production has been cut back greatly, with further reductions in prospect for the third quarter. Demand for steel continues high but unbalanced inventories are building up. Housing starts, while still high, have declined some what and will probably not reach levels expected earlier in the year. Mortgage market conditions have tightened again, and are a deterrent to expansion of building activity. Out lays for nonresidential construction have advanced to record levels, and the prospects are for continued high activity. While price changes, as evidenced by the aggregates, have been small, the aggregates have concealed individual price movements. Prices of manufactured goods have risen for a year. Price increases are generally expected in the steel industry and in metal-using industries. The capital markets have adjusted from the low prices and high yields of a few weeks ago and may be finding a trading base at which they can operate. Will the weaknesses in the auto industry and certain other areas spread their contractive influences to other economy? Since expectations in the minds of parts of the what effect will there be on business men are so important, confidence? Demands for bank credit, particularly business loans, easily be explained by the current continue larger than can situation which, in the aggregate, is needs of a business moving sidewise. The great bulge in business loans during March has not since been reduced. It looks as if there may loans in June. It is be similar high demand for bank be ginning to look as if the demand for bank credit of many
businesses and industries, in considerable part, has grown out of an over-all squeeze on corporate liquidity, accompany ing the growth of inventories and receivables, larger capital expenditures, and the temporary use of tax accruals for work ing capital purposes. As for the Treasury, it will need to refund an issue of $12-1/2 billion of notes maturing August 15; $5 billion of the issue are held outside the Federal Reserve and Treasury. In the second half of the year the Treasury will also need to borrow about $5-1/2 billion for cash. Half of this might be raised before Labor Day on tax anticipation certificates due in March 1957. Such financing will call for some bank under writing, and some Federal Reserve credit will be needed in connection with the cash borrowing. In recent weeks we have heard businessmen expressing fear as to whether credit for needed purposes will be avail able. So far as we can ascertain, needed credit for business purposes has been available, but at increased cost. All this would seem to indicate that our restrictive credit policy has been working reasonably well. We must be on guard, however, lest the pendulum swing too far. The Chairman, of course, made strong effort at the recent meeting of the Pennsylvania to make it clear that needed credit would Bankers Association be available--that the pendulum would not swing too far. Net borrowed reserves in the last two weeks were higher expected. The actual statistics had a way of turning than out to be considerably more severe than the projections in a $45 million correction increas dicated. Added to this was reserves in the first half of May by that amount. ing required It would seem desirable to maintain about the present market, avoiding any appearance degree of pressure in the money and avoiding any reason for the public of increasing pressure essential credit will not be available. to infer that rate at the Federal Reserve No change in the discount be clear that the called for. It should Bank of New York is subject, of course, to appropriate window is always open discount to avoid abuse in its use. scrutiny for the remainder of of member bank reserves Projections some open market purchases. June show a need for May and for amounts will be in much larger June, System purchases After probably needed. that "net ahead, recognizing In the period immediately of many factors measuring are only one borrowed reserves" might be allowed net borrowed reserves money market tightness, range. This to the $400 million somewhat, perhaps to decline which credit the wind against signal that could be a minor as hard as it appeared is not blowing quite policy is leaning to be a short time ago.
We, too, have reviewed the form of the general di rective by the Committee to the New York Bank, considering whether a change in the directive is in order. Since March 27, 1956 the Committee has directed open market transactions with a view "to restraining inflationary developments in the interest of sustainable growth." In the two preceding months the directive had been qualified by the addition of the clause: "while taking into account any deflationary tendencies in the economy." In our de liberations today we should consider the desirability of restoring this additional clause. Mr. Johns said that the St. Louis Bank had been spending a good deal of time recently in trying to evaluate the situation. He noted that when you have,on the one hand, continuing strength in business expenditures for plant and equipment and, on the other hand, some doubt as to the future of consumer demand, there are those who argue that weakness in the consumer sector is a forerunner of weakness in the busi ness expenditure sector, while others argue that business expenditures at the levels existing and expected generate personal incomes which consumers will spend. In the latter view no weakness in business ex penditures is considered predictible. These considerations partly lay psychology. Mr. Johns said that he was inclined to aside matters of business expenditures sector should be the view that strength in the importance than doubts about the attitudes appraised as of greater that personal incomes would of consumers. He doubted and expectations business spending, and he was sag much in the presence of the expected is a shift in the pattern that perhaps what we have inclined to think decision by consumers rather than a fundamental of consumer spending concerned about the slump in not to spend. He was not too greatly
automobile sales, although he did not mean to imply that it is un important. Some weakness might be appearing in business psychology, and he reported comments from bankers yesterday to the effect that there might not be quite so much confidence and bullishness now as earlier. If this change in attitude were to grow, weakness might appear in what is now the strong sector of the economy. Mr. Johns said that he would not favor any dramatic change in policy between now and the next meeting. However, he would be quite pleased if the net borrowed reserve figure could be kept somewhat lower than the recent $600 million level; and he mentioned $$00 million or a little below that figure. Mr. Johns said he would not propose any change rate at the St. Louis Bank at the present time. in the discount that there was no change either statistically Mr. Williams said activity in the Phila to be reported for business or psychologically in the manufacture of plant There is great strength delphia District. this field continue to go for and equipment, and plans in machinery areas is related to the little softening in some ward. Evidence of a in steel--but a resump example, the cutback automobile industry--for Production of steel in the third quarter. of activity is expected tion continues strong. Some and industrial construction goods for general growing out of has appeared, perhaps in the apparel industry weakness which had a very to for that industry, two-year cycle referred the in employment. In been a small drop year. There has good year last Mr. Williams economy is indicated, change in the no great the over-all,
said. In discussions with bankers, especially those borrowing from the Reserve Bank, reports indicate no diminution in the demand for credit. Businessmen talk about the restraint and their attitudes are mixed, some being critical and others regarding the current re strictive policy with approval. As to the general public, it is aware of the problem and is interested in the controversial aspects of current credit policy. The "informed public" reflects the views expressed at the Business Advisory Council meeting last weekend, Mr. Williams said, where there was an attitude of concern, lest confidence weaken. Mr. Williams referred to the meeting of the Delaware Bankers Association which he attended recently where he found a great deal of support for the System's approach to current problems and some criticism of com ments which were looked upon as attempts to generate a psychology put pressure on the System. At that meeting, he said, which would indicating that the origin of current problems views were expressed industry was of its own making. Mr. Williams ques in the automobile System should move in anticipation of changes or tioned whether the that it might be preferable to on the basis of rumors, suggesting that a move was necessary. wait until it had some evidence with Mr. Young's com Mr. Fulton said he agreed substantially District steel opera situation. In the Cleveland ments on the business depends on whether level, but the outlook continued at a high tions operations are expected there is not a strike, is a strike. If there part of the third during the first per cent of capacity to drop to 85
5/23/6 -16 quarter, although some increase would take place when new model auto mobile production was being started. If there is a strike, it may be of considerable duration. Mr. Fulton said that while there were excess inventories of steel throughout the country, this was not considered a particularly bad factor and most of it was allied with the automobile industry. Structural steel continues very tight. The machine tool industry is working at capacity. Road building machinery is also very active. Foundries allied with the automobile industry have reduced output sharply, but foundries producing products for other industries are working full time. Mr. Fulton commented on the building situation to the effect that it was very active in the Cleveland District and that some criticism was being made in connection with the failure of insurance companies to take up commitments readily. Capital expendi tures for which plans were laid a year or two ago are going ahead re gardless of the restrictive monetary policy, but some pause is being given where plans are not yet formulated. Mr. Fulton said he had been disturbed about the size of net borrowed reserves recently, thinking they were higher than the Committee had anticipated they would be, factors. He thought there might be less intensity due to mechanical borrowed reserves perhaps around the $500 million of pressure, with net change in the Committee's directive instead of $600 million. A level not favor any change in the dis be appropriate, but he would might rate at this time. count that it was evident there were conflict Mr. Shepardson said He thought this segments of the market. ing pressures in different
indicated that the System had been achieving the aims it had in mind a short time back. He recalled earlier comments that it would be difficult to meet the continued consumer demand and at the same time to take care of the capital expansion to provide increased resources. The allocation of resources then considered necessary had been taking place, and Mr. Shepardson said he thought this had been wholesome. Despite some of the softness now appearing, he did not think conditions had reached a point indicating a retreat from the Committee's present policy. Savings to meet both building and capital investment demand could come from some turn down of consumer expenditures, such as ap peared to be taking place in the automobile industry. Mr. Shepardson said that he did not know what the level of net borrowed reserves should be. Perhaps a lower figure than that we had had recently would the Committee should be in the position of be proper. But he thought the needed reserves without providing them in sufficient providing reduction in the pressures against amounts to permit any appreciable Shepardson referred to the Committee's unsound credit expansion. Mr. given some thought to suggesting a directive, stating that he had so that it would provide (b) of the first paragraph change in clause economic growth." He a climate of sustainable for "maintaining if it provided the be in sound position the Committee would thought with some lessen be needed, together that would additional reserves net borrowed reserves. of the volume of ing as follows: statement substantially Mills made a Mr.
Considering the tangible factors that are bearing on economic developments and the intangible influences that are coloring the psychological climate of the busi ness community, it would seem that the System should supply additional reserves on a gradual basis that would aim to bring the level of negative free reserves down to around $400 million. In the process, the Committee would observe events, and if the additional reserves had too great an impact on the market and on the interest rate structure, we should take a second look. It would seem important at this time to supply additional reserves on a lead basis so that the commercial banks, in looking for ward to the credit demand that they anticipate over the June 15 tax payment period, can be prepared with reason able confidence to satisfy those demands. In supplying additional reserves, I would doubt that we would call into being any inflationary risks. When you pause to think that the banks are in a decidedly tight position and that their liquidity is at a low point, you might reasonably expect their first move, as new reserves are acquired, would be to improve their liquidity and not ag gressively to expand their loans except for the constructive and necessitous requirements of their customers. Banks will move to improve their liquidity by building up their holdings of Treasury bills, and in their doing so we should look for pressure on Treasury bill yields which, however, should not disturb us at the present time, especially as our primary responsibility hinges on the question of adequate avail ability of credit. Any doubts about supplying additional reserves and the possibility for their having inflationary consequences can be resolved by the knowledge that the leverage of the System's actions works much more quickly in a tight position, as is now the case, when the banks are than when they are in an easier position. Therefore, as bank reserve positions are eased, we should anticipate results, and by the same token, earlier reserve prompt promptly restored, if deemed necessary, positions can be by subsequently withdrawing reserves. Treasury bill purchases are It would seem that direct for supplying new reserves. Repurchase the best means purposes. The com might not serve the desired agreements the policy actions of the Fed mercial banks, in following for a continuity of direc are going to look eral Reserve, where reserves are provided tion that is not as perceptible ephemeral basis as in the case of re on a temporary and purchase agreements. Therefore, if reserves are supplied picture, a case changes in the economic in correlation with
can be made for providing them through direct Treasury bill purchases. Any resulting change in the interest rate struc ture should be considered of secondary importance to the need of making credit more available. I also have some doubts about whether making repurchase agreements for only overnight is appropriate. It might be better to make them for longer periods and to allow the dealers to use their own judgment and initiative in picking them up before maturity, as they presumably can and will if there is a marked upward movement of Treasury bill prices. It would seem appropriate to modify the directive to the Manager of the System Open Market Account. It would not seem that the present situation calls for any change in the discount rate; but as and if additions to the supply of reserves react toward lower yields on the list of U.S. Government securities, and where the pressure on yields on short-term securities presumably will be accentuated over the next six weeks as outside investors come into the mar ket and as Treasury tax anticipation certificates are retired, a softening of interest rates is likely. In that event it would be a logical time to reduce the discount rate in order to be consistent with the over-all change taking place in the interest rate structure. Mr. Leach said that Fifth District business in recent weeks has shown a slight weakening. Tobacco manufacturing and bituminous coal production are holding at good levels, but furniture manufacturing has slowed down and price concessions have been necessary to get orders, in the cheaper lines. Output of textiles has continued to particularly operating at only about 50 per cent of decline, and hosiery mills are in April from the record Department store sales declined capacity. is definitely less exuberance are still high. There level of March, but now than a month or two ago. down to $22 million last the Richmond Bank were Borrowings at a lack of this did not reflect the System, but the smallest in Friday,
loan demand at member banks. Loan demand continues very strong, especially at larger banks. Aside from increased demand from com mercial customers, correspondent banks report heavy demands from their bank customers both for outright loans and for carrying excess lines. It seems apparent that a substantial amount of bank credit is going into plant expansion: small and medium-size concerns have no other place to go. Mr. Leach said that he thought the policy the Committee has been following recently has been about right and he believed it would be a mistake to ease perceptibly at present. He would continue almost the same degree of tightness, taking pains to assure that needed re serves are provided in sufficient amounts in ample time to avoid a tax squeeze in June. Mr. Leach said he hoped there would be no change in discount rates in the immediate future but that it would seem ap propriate to make a slight change in wording of the directive by adding to clause (b) a statement to the effect that any deflationary tendencies in the economy should be taken into account. Mr. Leedy said that there had been no substantial change in activity recently. The District has not been enjoying Tenth District that exists in most other districts. the same degree of prosperity production and to cutbacks in defense unemployment due There is some been very severely affected Agriculture has in automobile assemblies. drought, perhaps more so than in other predominantly this year by the
agricultural districts. Mr. Leedy felt that nationally business was moving sidewise, the one exception being the indicated strength in capital expenditures, now bolstered by the latest McGraw-Hill survey. It seemed apparent there had been some deterioration in optimism on the part of businessmen. There had been some marked change in the public psychology, reflected in the stock market. Great inflationary pressures do not seem to be present across the board, Mr. Leedy said, even though some may exist in the case of capital expenditures. In view of some deflationary trends reported, he felt that the Committee's directive should be changed to restore the wording that was used in clause (b) of the first paragraph from January 24 to March 27 of this He also thought that additional reserves should be supplied, year. in the $400 million to $450 million stating that net borrowed reserves the level he had in mind. It would be a mistake range would be about time. In summing up, there should to change the discount rate at this Mr. Leedy said, but a lessening of the tight be no change in policy, policy the Committee has been applying. all business indicators in Mr. Powell said that practically unemployment con good increases, and District were showing the Ninth Borrowings from the Bankers are very optimistic. tinues very low. noted that Minneapolis feeling, and Mr. Powell Bank reflect this Reserve about 24 per have been borrowing city banks recently District reserve in any other district. reserves, more than cent of their required
Many banks have increased the rate they pay on time and savings de posits to 2 or 2-1/2 per cent. Mr. Powell referred to a city bank which presented some paper as collateral for borrowing at the Reserve Bank yesterday which included notes of finance companies. Mr. Powell said that he felt there was every reason to retain the 3 per cent dis count rate at the Minneapolis Bank at this time, although this did not blind him to the fact that there may be shoft[sic]spots developing in the economy generally. In fact, he thought the economy was developing more and more weak spots and that at some point it would be necessary for the System to reduce the discount rate in order to maintain the high level of economic activity that was desired nationally. This might be necessary rather soon. Mr. Powell felt that this would call for open market operations and he thought there was not much reason to let the level of net borrowed reserves get any higher than it is at present. Mr. Mangels said that Twelfth District activity seemed to be at a relatively higher rate than was shown for the national continuing applied particularly to the employment situation, where picture. This decrease in unemployment than was indicated there had been a further April were better in the Twelfth Department store sales in nationally. ending May 9, Twelfth During the three weeks District than nationally. of the rise for for 30 per cent extentions accounted District credit output of and lumber, Except for automobiles as a whole. the country
most industries continued to expand. Residential building declined in April, and this had had an effect on the lumber industry. There had also been a further weakening in the plywood section of the lumber industry, Mr. Mangels said, since he reported two weeks ago; and ply wood is now selling below the lowest point last year. There has been some easing in prices of Douglas fir, although that easing has not been reflected in actual quoted price reductions. The lumber industry is not pessimistic and expects this to be a good year. Mr. Mangels said that there was less tightness at country banks than at city banks in the Twelfth District and that borrowings at the Reserve Bank had continued at a very modest level. One of the Bank's directors recently reported a slackening of business and some development of pessimism in the inter-mountain district, but that was the only area in which there of more optimism. Mr. Mangels expected the dis has not been evidence count rate to be discussed at the June meeting of the directors but, in his opinion, it was now preferable to hold the 3 per cent rate. Mr. there seemed to be some change in psychology. He would be Mangels said in policy until this was more clearly indi inclined to make no change in wording of the Committee's di cated, but he would favor a change Mr. Mangels then com lines suggested by others. rective along the recently at the of a questionnaire distributed mented on the results to which responses indi California Bankers Association meeting of the to continue at business activity predominantly expected cated bankers
a high level during the rest of this year and in which they also indi cated widespread approval of the discount rate in effect at San Francisco. Mr. Irons said that the economic trend in the Dallas District was about what it has been for the past three to six weeks--pretty much a sidewise movement. There had been a further decline in unemployment and the labor situation is tight. Department store sales declined slightly in April but have been very strong thus far in May, However, petroleum refining activity is up, and crude oil production is very high although it has declined seasonally lately. Construction is main taining record levels and gains in residential construction are adding to the strength in nonresidential. Contract awards are running ahead of last year. It is difficult to find areas of weakness. With respect to the confidence factor, Mr. Irons said that businessmen and bankers generally were confident as to the outlook for business in the Dallas three months ago as one of "unbridled District. He described the feeling confidence" to such an extent that some businessmen were concerned as to whereas now the concern has disappeared and a more what might happen, exists. There is no pessimism in the Dallas cautious type of confidence said. Loans have con he has observed, Mr. Irons District so far as tinued to increase in the past several weeks, and bankers report very exists at a few re The greatest pressure strong demand for credit. ratio in Dallas is 67 for example, the loan-deposit serve city banks; in some other cities 58 per cent; but in one other city per cent, and banks have excess reserves, to 30 per cent. Country it is around 27
and their loan-deposit ratios are not high. This situation is reflected in borrowings of member banks, most of the demand at the Reserve Bank coming from a few large city banks. Credit policy is being effective in causing bankers to scrutinize loans and to be more selective in their credit extensions, Mr. Irons said. In the overall, the strength of factors on the side of business expansion, rising personal income, record employment, and low unemployment impressed him more than the healthy readjustment taking place in the automobile industry. He would not wish to see any change in policy at this time and would not be pre pared to recommend a change in discount rate. He would like a measure of restrictiveness maintained. Bank reserves may have been a little snugger in the market in recent weeks than was necessary, and he would to see policy any tighter. Perhaps net borrowed reserves not wish should be $500 million or under, rather than on the over side. There should be a willingness to provide funds to the market when needed. Mr. Irons said he thought the Committee's directive might be changed wording of clause (b) of the first paragraph that was to restore to the adopted at the January 24 meeting or in some other way to take into ac this morning, but the change should count the other factors mentioned that the Committee had changed its policy. not be strong enough to imply been no marked change in busi said that there had Mr. Erickson was evidence that business District except that there ness in the Boston had reported at the previous quite as optimistic as he sentiment was not survey of plant and equipment expan meeting. Our recent Massachusetts year. Greater use of of 21 per cent over last sion shows an increase
the discount window has been made in the past few weeks, and Mr. Erickson stated that within the past few days three banks which had never before borrowed from the Boston Bank had come in for funds while five others that had not borrowed since 1953 had come in. Mr. Erickson referred particularly to the third paragraph of the staff's review of economic developments dated May 18, 1956, which described the recent economic situation as one "in which expansion forces have about been balanced by forces of deceleration of advance and of cor rection of various imbalances which have accumulated," and which he stated expressed his present views. Under these circumstances, Mr. Erickson felt the directive should be changed by inserting the words in clause (b) of paragraph 1 that had been taken out at the meeting on March 27. He would make no change in discount rate at this time and would prefer to see net borrowed reserves a little less tight been; for example, in the range of $450 to $550 million, than they have tending on the low side of that range. he would prefer to wait until a later meeting Mr. Szymczak said directive, although he did not think for a change in the wording of the there ought to be any change in was important. He did not think this borrowed reserves should be brought discount rate at this time, and net idea of watching develop million level with the down to about the $500 what else is needed. to see ments carefully as follows: a statement substantially Balderston made Mr.
Our difficult task is to pick a proper course among the cross currents that are now evident. Like Mr. Erickson, I picked up the third paragraph of the staff review as re flecting the current situation. It seems to me an accurate portrayal of what we face today. My solution would be to break free from the inertia of the status quo and take action which seems to me imperative if we are to act in time. On this I have to struggle with myself because I am addicted to the philosophy of gradualness. But there are turns in the road that you cannot get around by a slight turn of the wheel. I gather we may be at such a point now. Although I am content with existing discount rates that may inhibit some marginal debt or plant expansion, the availability of credit should be increased, and substantially. My reason for urging this change in posture, which is an extension of my thinking of two weeks ago, is that we seem to have arrived at a cessation of demand for automobiles. The policies of the automobile industry last year have helped to create a dearth now of buyers. The number of suppliers to the automobile industry is very great, perhaps as many as 20,000, and the effects of the reduction in production and employment in the automobile plants are extremely pervasive and will injure a considerable number of plants in many localities. The number two consideration is the apparent end, even if temporary, in the long forward advance of common stock prices. A 40 point reduction in the Dow Jones industrial price index seems to presage market weakness that, added to the weakness in the automobile industry, may have considerable psychological impact. It may have an effect out of proportion to its real importance, especially when these factors strike the public consciousness at the same time as the summer doldrums. Third is the sharp drop in bank deposits, especially in May. It has been of great concern to me these last few days. It was quite understandable some time ago that investors should withdraw deposits to invest in Government bonds, but the May 9 reporting member bank report shows a sharp drop of $379 million of demand deposits, compared with an increase of $253 million a year ago. action is imperative is indicated by the That remedial of cash are so inadequate to meet fact that corporate holdings cause heavy demands on banks just the June tax payments as to It would seem imperative to meet before and after that time. putting substantial funds into the market, that tax demand by Mills and President Leach that we and I agree with Governor cannot wait. My preference is to return to the wording of
the directive adopted last January 24, to maintain present discount rates, but to increase sharply the availability of credit. Unless we take action on those portions of the economy that are slumping, our remedial action may be too late. If there should occur a fresh upsurge of consumer demand, which is quite possible, our philosophy of flexi bility means we would take whatever action may be appro priate then. I would suggest net borrowed reserves of around $250 million. If our staff forecasts of reserve needs are correct, we may have to buy $400 to $500 million of bills. We should not temporize with a situation which seems to me to call for real action. I think we should act and act now. Chairman Martin then made a statement substantially as follows: As far as the consensus is concerned, there is an over whelming majority in favor of altering the directive, and un less I hear a dissent we will change the directive by tacking on the last phrase to clause (b) of the first paragraph so that it will read "to restraining inflationary developments in the interest of sustainable economic growth while taking into account any deflationary tendencies in the economy." Perhaps we could have better language but there may be some merit to sticking to the language that we have used in the past. Now I would like to make my own comments. I have listened very intently to the discussion and I lean even further than Governor Balderston does to the other side. I deliberately figure of net borrowed reserves in my own re avoided using any marks. To me, the capital survey McGraw-Hill has just released for the policy we have pursued. Also, is adequate justification I think perhaps we were late in our tightening moves and that we ought to recognize the fact that we got in here in a diffi cult period; there has been a backwash that has carried negative along with the increase in the discount free reserves higher, rate, than we expected. That is not intended as a criticism of factors have worked that way. the account, but supply and demand $600 or $700 million as We have gotten accustomed to accepting normal, whereas earlier we were more or less a figure that is $00 or $500 million. We are talking about getting to around tax situation which is upon into Decoration Day and the coming wind. I realize how discern straws in the us. I think I and Mr. Williams think that is. Governor Szymczak dangerous before we act. Never wait and see the statistics we ought to to borrow who have never we see banks coming in theless, we know that is Erickson said, and before, as Mr. borrowed
going on all around the country. There are delayed reactions in all of this and the psychological factors may have gotten ahead of us, We have had marvelous acceptance of our policies. Bankers are almost 100 per cent behind us. You have to differentiate between the banker and the borrower, however, and there are the other components of the economy. I have had at least twelve directors of substantial corporations not connected with the automobile industry talk to me recently in entirely different terms than they talked to me a few weeks ago. That will not appear in the statistics for another four to six weeks, but it is enough of a consideration in my thinking to say, as I did in January, that we ought to be trending in a direction so as to make it plain that we are following a flexible monetary policy. We cannot do this tomorrow. We could not start to morrow and go to "X" reserves unless we just completely shocked the market. But I think we ought to be trending towards zero reserves. This could easily be a double bottom, and there may well be another upsurge; we may find later that we want to put the discount rate higher than it is now. But I think we are in grave danger of being put in the position of not recognizing the interpretations that will be put on these developments. In the Pennsylvania Bankers Association, I tried my address before to provide some reassurance. I think we should be trending towards zero free reserves. $250 million. I would not worry about Governor Balderston says a charge that we were "selling out" because of pressures that put on us. That is one of the things you have to have been from the commentators. But if we had been successful anticipate reserves in this period, we would in keeping lower net borrowed pressures that we now have. I really not have had built up the be recorded on this, that we have made feel, and I would like to on figures. We have debated this a great mistake in our emphasis again. I have been one of the offenders in wanting to again and as we could to saying what we wanted get our discussions as close of our policy. But we talk about and of having an understanding get put in a framework in which others these figures, and they as a measure of what we are doing. There think of the figures who are looking at the many people around Washington are far too We have helped produce that figures of net borrowed reserves. be trending to zero free When I say we ought to psychology. We cannot afford trend I am talking about. reserves, it is the we are not trending in the direc to let the market think that will be needed under these the reserves that tion of supplying is not particularly important, How that is done conditions. get to $250 million by saying that the desk could and I am not were running it on Committee, but if I next meeting of the the trend was in that be certain that the own I would want to my and not a shift in emphasis what I mean by That is direction. a change in policy.
Mr. Szymczak inquired as to how long it would be, under such a program as that suggested by Chairman Martin, before the discount rate would have to be adjusted also. Chairman Martin reiterated that he was not talking about getting to zero free reserves tomorrow but about trending in that direction. It was necessary to talk about that trend or we would find that the backwash was working in the other direction. Mr. Balderston said that originally he had put down a target of zero to $250 million free reserves, and when he got the supplemental re port from New York this morning he noticed that net borrowed reserves had averaged $253 million during December, January, and February. It seemed to him that the Committee should be aiming at a figure at least as low as $250 million if it readopted the wording of the January 24 directive. Mr. Williams suggested that perhaps it had been almost a con scious program of the Committee to get to its present position of re straint as a means of bringing attention to its policy. Only when the public became thoroughly aroused and when the pressure had been put on had real restriction resulted. Mr. Williams also raised by the System follow the suggestion the Chairman made before the question whether to would amount to having the general statistical evidence became available public tell the Committee how to run the shop. make on this was the point he would Martin said that Chairman public. It is an not ignore the general the Committee should that that the Committee succumbs to factor. That does not mean important
the pressures of the general public. He felt that a flexible mone tary policy required an adaptation to the views of the public. The Committee had been getting more and more into the position where people who ought not to be alarmed about credit were alarmed about credit, and he did not know how to eliminate that feeling so as to avoid knots such as we had in the spring of 1953. He thought that the Committee should make clear the direction in which it was going. On Mr. Szymczak's point as to how long the Committee could go in this direction without the discount rate coming down, this was a matter of watching develop ments, Mr. Szymczak said that the rate could not be separated from factors in the credit situation. If there was a demand for the supply reserves were not there to supply it, the rate would, credit and if the go up. If enough reserves were supplied to the market of course, abruptly, it meant that rates would come down. Mr. Johns said that he had difficulty with the idea of trending reserves, and he raised the question whether such a toward zero free Account might be setting a policy directive to the Manager of the System the Committee, if we were not beyond the next meeting of that would carry level by the date of that meeting. get down to the zero free reserve to policy that far ahead at this time? Was it necessary to set the shift in thought was that said that his Chairman Martin believe it but that he did not proposed was necessary emphasis he had at the present time. a shift in emphasis necessary to go beyond was
Mr. Leach said that he agreed net borrowed reserves should be brought down from where they have been. It bothered him some what, however, to say that they should be brought to zero and to say that this was not a change in policy. Chairman Martin said that he may have overstated the situa tion but that he had been discouraged as he listened to the comments around the table this morning. It had not seemed to him that we were alert enough to the implications in the situation. The Committee is pretty well insulated from the operation, he said. Flexibility of policy is not just a catch phrase that has come into the picture. He thought it was three years ago, but today things have moved beyond that stage. He was not asking for any set figure of net borrowed re serves. He had suggested zero free reserves because he wanted to make clear his own position. He thought it would be a very serious mistake if by accident the Committee permitted the trend to appear other than that. As to the discount rate, Chairman Martin said that his feeling was that the rate and the supply of reserves could not be separated; he had hoped that the increase in the rate could be eased by greater availability of reserves, but the supply and demand factors that had come into the picture had operated against this. The committee should be aware of storm signals and should not ignore them. Mr. Leedy said that he had felt that net borrowed reserves, million mark, in being dropped $100 or having been around the $550 such substantial additions to reserves, $150 million would require
5/23/6 according to current projections, that the size of those additions, aside from the level of net borrowed reserves, would indicate the policy being pursued. Mr. Mills suggested that it might be preferable to set the next meeting for June 5 instead of June 12 with the thought that the Manager of the Account could be given another directive within a short period of time. Chairman Martin said this was agreeable to him and, after brief discussion, it was agreed that the next meeting of the Committee would be held on Tuesday, June 5, 1956. Chairman Martin went on to say that on the basis of the discus sion there appeared to be a consensus that operations should be con tinued so as to have a downward trend in the amount of net borrowed re serves without any statement as to the amount of reserves. Mr. Thomas commented that he did not think the public looked at the volume of net borrowed reserves as much as at the direction of System operations. He noted that during the next two weeks there would have to be substantial operations in order to keep the pressures from to say that at the present time net increasing. It was not correct Committee had intended at its reserves were higher than the borrowed had been last week, Mr. Thomas said, but meeting two weeks ago; they time they were around $400 mil was not true now. At the present that of credit and not net to look at was the growth lion. The figure to take care of From now on, in order reserves, he said. borrowed credit the Committee would have to inject seasonal demands for
substantial volumes of reserves. Mr. Thomas said that he had been concerned before this meeting that the injection of these needed re serves to meet seasonal demands might be looked upon as more drastic than the Committee intended, but if as indicated at this meeting the Committee wished to change the emphasis of its policy, perhaps the supplying of the volume of reserves that would be needed to take care of seasonal credit demands would not be misinterpreted. Mr. Rouse said he appreciated the statement Mr. Thomas had made and that he also wished to call attention to the fact that the System account was purchasing about $80 million of bills today and that it intended to make an additional purchase tomorrow. Net borrowed reserves for the week might be $400 million or less, although they would be higher than that on Wednesday. However, when the state ment was issued on Friday, it would be in the light of the market's knowledge that the System account had been in the market both today and tomorrow. Chairman Martin inquired whether there was agreement with that the directive of the Committee be modified so his suggestion in clause (b) of paragraph 1 the additional words he as to include the meeting which would provide that had suggested earlier during any deflationary tendencies. would take into account the Committee that the Committee's opera inquired whether it was agreed He also meeting with a now and the next be carried on between tions should
view to. bringing about a downward trend in the volume of net borrowed reserves. In response to Mr. Johns' question, Chairman Martin re-read clause (b) of the Committee's directive of January 24, 1956. There being no indication of dis agreement with Chairman Martin's statement of the policy to be followed by the Committee between now and the next meeting, upon motion duly made and seconded and by unanimous vote, the Federal Reserve Bank of New York was directed until otherwise directed by the Committee: (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 while taking into account any deflationary tendencies in the economy, and (c) to the practical administration of the account; provided that the of securities held in the System account aggregate amount (including commitments for the purchase or sale of securi account) at the close of this date, other than ties for the special short-term certificates of indebtedness purchased time for the temporary accommodation of the from time to not be increased or decreased by more than Treasury, shall $1 billion; for the ac from the Treasury To purchase direct (2) Bank of New York (with discre count of the Federal Reserve it seems desirable, to issue participa tion, in cases where Reserve Banks) such amounts of tions to one or more Federal special short-term certificates of indebtedness as may be time for the temporary accommodation necessary from time to the total amount of such Treasury; provided that of the by the Federal Reserve held at any one time certificates shall not exceed in the aggregate $500 million; Banks
(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 noted that the agenda included as a topic for consideration Mr. Sproul's proposal that the System account be authorized to engage in swapping of Treasury bills, along the lines discussed at the meeting on May 9. He suggested that because of the lateness of the hour this topic be carried over until the next meeting of the Committee, and there was agreement with this suggestion. Chairman Martin then referred to the Committee action at its May 9 meeting at which it decided to set up a staff committee to study the facts of the experience with present operating procedures along the lines suggested by Mr. Sproul. This would be a "spade work" study. Chairman Martin went on to say that he had consulted with Mr. Sproul to participation from the staff of the Federal Reserve with respect a result would suggest that the committee con Bank of New York and as Chairman; Mr. Tilford C. Gaines, Secretary; sist of Mr. Harold V. Roelse, Donald C. Miller. Mr. Robert Holland; and Mr. Mr. J. Dewey Daane; Mr. would be Open Market Committee, of the Federal Riefler, as Secretary committee's work. in touch with the ex officio, to keep expected, that Mr. Rouse Mr. Sproul had suggested also said that Chairman Martin that he would be as such but to serve on the committee not be asked
available for counsel and information. His suggestion would be that when the committee is organized it present the Federal Open Market Committee with a report indicating the nature and scope of the material it would undertake to gather. There was no indication of disagreement with Chairman Martin's suggestion for the membership of the staff committee or of the procedure to be followed by the committee in proceeding with the study suggested. Mr. Mangels withdrew from the meeting at this point. Chairman Martin said that he was forwarding to the Treasury, as authorized by the Committee at its meeting on May 9, copies of Mr. Riefler's memorandum "Experience Since the Accord with Short-Dated Fed eral Debt" distributed to members of the Committee under date of April 10, 1956. After the Treasury representatives had had an opportunity the memorandum he would plan, in accordance with the under to study at the May 9 meeting, to discuss with them possible approaches standing the problems of coordination of debt management and credit to studying policy. Mr. Sproul had suggested that it Chairman Martin stated that Treasury also a copy of the memorandum be appropriate to send the might Reserve Bank of New York under date of Septem prepared at the Federal Management--Structure of the Debt ber 29, 1955, entitled "Notes on Debt that between now and the next meeting and Credit Policy." He suggested to refresh their review this memorandum Committee the members of the
minds with respect to its contents, with a view to deciding at that time whether to send the New York Bank's memorandum also to the Treasury. There was no disagreement with Chairman Martin's suggestion. Chairman Martin next referred to the proposal by Mr. Sproul at the meeting on May 9 that there be a study of the Federal Funds market, the first phase of which would be the development of factual information by a subcommittee operating under the Committee on Re search and Statistics of the Presidents' Conference. The Chairman said that he understood that Mr. Leedy was taking steps to appoint this subcommittee of the Presidents' Conference. Mr. Leedy said that he had referred this matter to the System Advisory Committee on Research and Statistics. Chairman Martin noted that the next meeting of the Committee would be held on Tuesday, June 5, 1956. Thereupon the meeting adjourned at 1:28 p.m. Secretary.
Also: Record of Policy Actions