June 5, 1956 FOMC Minutes

FOMC minutes

Rather, the Committee would be in sound position for whatever later action might develop on discount rates. It is too early for such a move, but when discount rates are changed the movement ought to be orderly. Chairman Martin said that unless a different view was ex pressed, he would interpret the consensus of this meeting to be that no change should be made in the directive to be issued to the New York Bank. As to the level of free reserves, net borrowed reserves, or whatever you want to call them, Chairman Martin said that no purpose served by voting on whether they should be in the $200-250 would be range. He suggested that emphasis be placed on a trend down million ward from the present position. This, he thought, would be doing Committee favored, although he noted about what the majority of the favor a somewhat higher level Irons had indicated he would that Mr. others indicated. To this, Mr. Irons re of borrowed reserves than sponded that there was no magic figure. to comment on the situa Martin then asked Mr. Rouse Chairman tion. the consensus of the Com said that he agreed with Mr. Rouse of the decline represented there should be a continuation mittee that volume of payments to reserve figures. The by the negative borrowed that there be weeks would require the next three effected during be reserves available. additional

Mr. Rouse then commented on probable Treasury expenditures and estimates of Treasury cash position and of the Treasury balance during the next several weeks. He said he planned to meet that after noon with Treasury representatives to discuss the use of the antici pated Treasury surplus, adding that he would be glad to have any sug gestions that those present cared to offer. In response to a question from Chairman Martin as to whether he was reasonably clear on the policy to be followed during the next three weeks, Mr. Rouse stated that he was. However, he referred to the comments made during this meeting on the bill rate and the dis count rate to the effect that if the bill rate moved down perhaps the discount rate should be reduced. Mr. Rouse said that he did not believe this conclusion followed. The bill rate is not the guiding rate in this respect, he said, but rather the Federal funds rate. He was not concerned about the bill rate getting out of hand im mediately, since corporation selling of Treasury bills in connection with the June tax date would exert upward pressure on bill rates for the next two weeks. If, however, the System account purchased bills toward the end of June to several hundred million of Treasury might then be a marked de losses at that time, there offset reserve result of the open market This would be a cline in the bill rate. he said he did not think Mr. Rouse noted, and policy being followed, carrying out the Committee's of action taken in that the results the Reserve Banks something to force looked upon as should be policy their discount rates. to lower

Chairman Martin commented that this was a very pertinent point. He inquired of Mr. Rouse whether he had any changes to sug gest in the directive to be issued to the New York Bank, and Mr. Rouse responded that he had none. Chairman Martin then stated that in renewing the directive it would be understood that operations would be carried on as indi cated earlier in the discussion, that is, with a downward trend in negative free reserves. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York until other wise 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 aggregate amount of securities held in the System account (including commitments for the purchase or sale of securi ties for the account) at the close of this date, other than short-term certificates of indebtedness purchased special from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; Treasury for the ac purchase direct from the (2) To Federal Reserve Bank of New York (with discre count of the tion, in cases where it seems desirable, to issue participa more Federal Reserve Banks) such anounts of tions to one or

special short-term certificates of indebtedness as may be necessary from time to time for the temporary accom modation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million; (3) To sell direct to the Treasury from the System account for gold certificates such amounts of Treasury securities maturing within one year as may be necessary from time to time for the accommodation of the Treasury; provided that the total amount of such securities so sold shall not exceed in the aggregate $500 million face amount, and such sales shall be made as nearly as may be practicable at the prices currently quoted in the open market. Chairman Martin suggested that the proposal to authorize swaps in Treasury bills, listed as Topic 3.c. on the agenda for this meeting, be carried over to the next meeting, which he suggested be held on He also suggested that the question whether to make available June 26. prepared at the New York Bank under date to the Treasury the memorandum "Notes on Debt Management,, be carried over to of September 29, 1955, that there would be a full the next meeting with the understanding matters at that meeting. There was agree discussion of both of these of Chairman Martin, including his sugges ment with these suggestions held on Tuesday, June 26, of the Committee be tion that the next meeting meeting adjourned. the Thereupon Secretary