June 5, 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, June 5, 1956, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Balderston Mr. Erickson Mr. Johns Mr. Mills Mr. Shepardson Mr. Szymczak (Latter part of meeting) Mr. Vardaman Mr. Fulton, Alternate Mr. Leedy, Alternate Mr. Treiber, Alternate Messrs. Bryan 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. 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 Mr. Molony, Special Assistant, Board of Governors (First part of meeting) Before this meeting there had been distributed to the members of report covering open market operations during the period the Committee a May 23, 1956 through May 30, 1956, and at this meeting a supplementary
report covering commitments executed May 31 through June 4, 1956, in clusive, 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 23 through June 4, 1956, inclusive, were approved, ratified, and confirmed. At Chairman Martin's request, Mr. Young made a statement at this point on the economic situation, supplementing the staff memorandum distributed under date of June 1, 1956. Mr. Young's statement was sub stantially as follows: Latest data continue to confirm a sidewise movement for activity, some observers would say with a good bit of side to-side roll. Downward adjustments in output of a few con spicuous lines, in prices of metals and rubber, and in common stock prices have commanded special press comment, as has also some evident lowering of business sights as to general eco nomic prospects for the short-run. But output in many areas has been maintained and in some sectors has increased further. Moreover, price mark-ups of fabricated items continue to be fairly numerous over a month's period and the recovery of farm product prices has been ex tended. Over-all, employment and output are about unchanged with credit demands generally continuing vigorous. Activity in important industrial countries abroad remains generally strong, with inflationary symptoms in some countries rather marked. of the situations As to specifics of industrial production for May (1) The Board's index 141, down one index point from April. is being estimated at industries was off further output and output of supplying Auto of light trucks was under expectations; farm and production levels; steel was down continued at reduced machinery output of strike-affected Alabama mills; because of the closings as a result of competitive was cut back appliance production operations were somewhat and textile mill developments; Elsewhere, production the synthetic side. lower, mainly on or rose further. at earlier levels generally held
(2) Automobile sales in May were generally disappoint ing to the industry, but with sharp cutbacks in production, dealer stocks began to decline a little. Used car markets remained strong, with stocks continuing moderately downward and prices of late model used cars, after allowance for depreciation, moderately upward. (3) Household durable sales were at a very high level in April--about 8 per cent above a year ago levels. At department stores in May, close to April levels for sales of these goods were maintained. (4) Last meeting's report stated that preliminary figures on retail sales, seasonally adjusted, showed an over all decline of 2-1/2 per cent in April. The Department of Commerce will release corrected figures this week reducing this decline to 1-1/2 per cent. Considering that these figures are based on samples of varying adequacy and that seasonal adjustment methods yield only approximations, this corrected figure can be interpreted as showing little or no change. In May, department store sales are estimated to have risen one index point to 123, department store sales have fluctuated around 122 since late last summer. instalment credit in April rose about (5) Consumer $250 million, with most of the rise in other than auto motive lines. The proportion of new cars sold on credit was about 69 per cent compared with 57 per cent a year ago. of manufacturers' inventories was up (6) Book value half a billion dollars in April, about the average of pre ceding three months, with much of the rise in expanding durable goods lines. Distributors' inventories--wholesale and retail--showed only a modest $100 million rise, with most of rise in nondurables at wholesale. Altogether avail able current inventory information is adding up to some de celeration of accumulation this quarter. manufacturers' new orders (7) The decline in durable which had proceeded for four months halted in April, being succeeded by a small rise to a level about equal to current shipments. in May, despite lay-offs (8) Total nonfarm employment and related industries, was about at earlier in automobile unemployment was probably unchanged. Recently, levels and in electrical appliance, rubber, new scattered lay-offs lumber, and southern textiles have been reported. In May as having a sub 23 labor markets classified there were stantial labor surplus, compared with 19 in March and 35 in April. 4 per cent prices averaged In late May, wholesale (9) 2 per cent below the record peak above a year ago and only
in early 1951. Prices of farm products have now recovered to year ago levels. Prices of processed industrial com modities have continued to advance at a slackened rate, but this has been offset by pronounced weakness in some basic materials such as steel scrap, copper, and rubber and less promounced weakness in others. Markets for many industrial materials, however, have continued strong. (10) Consumer prices rose slightly from mid-March to mid-April and market reports would suggest a further and some what larger rise to mid-May. (11) In Western Europe, activity in major countries con tinues to press against capacity, with inflationary pressures manifest and apparently reflecting mainly heavy capital invest ment demand, in France supplemented by swollen military expendi tures. Activity in Great Britain seems held down by capacity limits but credit restraints would also appear to be exerting some progressive restrictive pressure. The past year's gains for Japan have been striking, with demand pressures very strong and wholesale prices under considerable upward pressure. A word in conclusion about the near-term outlook because two confidential pieces of information have come at hand bear ing on it. First, very confidential information from the auto mobile industry indicates an industry target for dealer stocks at the end of August of 200 to 250,000 units, implying a liquida tion before new model introductions in September of 600 to 650,000 units now in dealer inventories. This points to a sharp reduction in auto output in the period ahead, especially during July and August. If the industry adheres to this goal, as seems possible, a downward drag upon the Board's index of industrial production will result, caused by direct and indirect effects of auto output cutbacks. The index will likely fall about an index point a month in June and July, leveling out in August as auto parts manufacture then picks up for new models. Third quarter earnings of automobile manufacturers and parts suppliers will be adversely affected by these production developments, of course, and this has a chance of being reflected in equity values as the third quarter unfolds. The other item of information relates to business capital expenditure plans. It is strictly confidential until released to the public late this week. The Department of Commerce--SEC survey of business plant and equipment expenditures will show a further rise in the annual rate of expenditures of about $2 of rise reported for the past two billion-- about the same pace quarters. The release will show expenditure plans up for every show expenditures at a group. All groups will industry area, which slid off this record level except the commercial and will apparently not retrieve second quarter from the first
the first quarter level. No figures will be released at this time pertaining to spending plans for the fourth quarter, but a further rise in that quarter is suggested by this survey's results. We can offset these two items of intelligence with the following results. Activity will continue to be supported over the months immediately ahead by the business investment boom while drastic readjustment is in process in the automo bile industry. If the auto industry's "new look" takes hold in the fall, consumer durable goods buying and business in vestment will combine to provide, other things favorable, a strong expansive and perhaps inflationary stimulus to economic activity as a whole. In response to a question from Mr. Vardaman, Mr. Young said that there was some indication that change-over to new model automobile pro duction in late summer or early fall might be accomplished with little further rise in unemployment in automobile producing centers. Producers, he said, wished to avoid additional losses of workers to other areas or to make such adjustments as activities and may be expected, therefore, are necessary through reductions in hours of work rather than layoffs. Mr. Young stated, in response to a question from Mr. Williams, in the market for used autothat there had been impressive improvement view of the efforts of the industry to reduce dealer mobiles and, in cars sharply prior to introduction of new models, it inventories of new would be in a position to get good could be anticipated that dealers they were introduced. This, Mr. for new model automobiles when prices a hope on the part of the automobile industry Young felt, indicated prices and other costs. pass on rises in steel would be able to that it considerable comment there had been Martin noted that Chairman of Studebakerfinancial difficulties about the the press recently in
Packard Corporation. At his request, Mr. Mills reviewed discussions that had taken place recently looking to the possible merger of that company with Curtiss-Wright Corporation and to the possible request of Studebaker-Packard Corporation for a loan under section 13b of the Federal Reserve Act to assist it in the interim. Mr. Treiber also commented briefly on preliminary work being done in connection with a possible application for such a loan, which would be filed with the Federal Reserve Bank of New York if the loan is formally requested. Mr. Molony withdrew from the meeting at this point. Chairman Martin next called upon Mr. Thomas, who said that it now appeared possible that the Treasury cash surplus for fiscal 1956 would exceed $6 billion and for calendar 1956, $9 billion. A cash balance at the end of the current month of more than $6 billion would cover the next six months' deficit with only $2 billion of borrowings that there had been some increase in de in October. Mr. Thomas said during the last two weeks, following a sharp decline in mand deposits an unusually low level. Some loan con the preceding three weeks to at weekly reporting member banks took place in the last week traction of May and commercial loans have declined for two weeks. In the past net change in commercial loans, and five weeks, there has been little and consumer loan expansion has been less than last year. real estate not been reduced as much as a year ago. Investment holdings have in the market for new issues of There has been a better tone offerings in May and a large with a substantial volume of securities,
amount scheduled for June. Interest rates have been fairly steady after a marked decline in long-term rates early in May. Bank re serve positions were eased by Federal Reserve operations during the past two weeks with purchases of nearly $300 million, in addition to repurchase contracts. Net borrowed reserves have been around $400 million and bank positions have eased in New York and in reserve cities although tightness has increased at country banks. Looking ahead, net borrowed reserves may average less than $300 million this week and next; a very large increase in required reserves may be expected during the week of June 20 in connection with a sharp increase in deposits, but this should be fully covered by an increase in Federal Reserve float. Mr. Thomas said that it did not appear that there would be any great strain on the market until the end of June or early July, at which time the System would be called upon to give assistance. Mr. Thomas went on to say that in accordance with the request at the meeting two weeks ago the staff had prepared some longer-run projections of reserve needs. He then presented charts showing member bank reserves and related items and commented on technical features of these charts on which projections of reserves were based. The net results of the projections, Mr. Thomas said, were that if normal trends occurred during the remainder of 1956, the System seasonal to supply about $1.8 billion of Federal Reserve credit would need remainder of the year. This assumed than float) during the (other reserves at around $400 million. Most continuation of net borrowed
of the additional reserves would be needed after August except for temporary increases that would be called for late in June and early in July. In response to Chairman Martin's request for comments, Mr. Treiber noted that the projections Mr. Thomas had presented assumed a straight line increase in the money supply. Another approach might be taken, he noted, basing the projections of reserve needs on a pro jection of the business outlook and the demand for credit that would thus result. Mr. Treiber stated that the New York Bank had worked out some figures on that basis and had come out with a somewhat lower estimate of reserve needs although it was not substantially at variance with the figure Mr. Thomas had given. stated that he had come to the conclusion that Mr. Thomas interest was primarily in the money supply and the the Committee's of a supply that would not permit inflation. He felt it projection to assume the money supply, rather than to try to estimate preferable be on the basis of possible demand for what the money supply would credit. that the projections could be prepared Chairman Martin stated to have them prepared on either basis and he thought it desirable on the approach mentioned by Mr. approaches. In a sense, however, both of the factors that the Federal Open Treiber involved a consideration consider at every meeting. Market Committee must than two weeks had elapsed Martin noted that less Chairman
since the preceding meeting of the Committee and that only ten days would elapse between now and the June 15 tax date. He felt it im portant to integrate the Committee's operations with the Treasury's operations, and he stated that yesterday Under Secretary Burgess brought up for discussion the question of the prospective Treasury surplus. This subject might be discussed in the course of this meet ing, Chairman Martin said; he added that he was asking Mr. Rouse to make arrangements to discuss the matter with Treasury representatives after the meeting. Chairman Martin noted that the Committee had not yet approved the minutes for the meeting held on May 23 and he read from the draft of those minutes the statement of the policy agreed upon at that meet ing which, in addition to a modification of clause (b) of paragraph (1) of the Committee's directive, indicated that between the May 23 meeting and today's meeting operations should be carried on with a view to bringing about a downward trend in the volume of net borrowed reserves. It was his feeling, the Chairman said, that the account management had well during this period and that the results were handled the situation working in the direction the Committee had in mind. upon Mr. Treiber who made a state Chairman Martin then called ment substantially as follows: continues. The economy An atmosphere of uncertainty divergent trends aggregate, with steady in the continues
in individual areas. The forces of inflation seem reduced. More questions are being raised as to business expectations, especially for the third quarter. The stock market has de clined. Employment is high and important labor negotiations are now going on. People are questioning whether there will be enough self-restraint on the part of labor in pressing its demands, and on the part of management in raising prices, to avoid another turn in the cost-price spiral. With almost full employment, consumer spending has con tinued high, although the demand for durable goods has dimin ished. The expansion of consumer credit is not adding to the demand in the rapid way it did last year. Capital expenditures are high, and are expected to be higher. Nevertheless, the recent McGraw-Hill survey showing substantially increased spending for capital purposes has not stimulated the ebullience which earlier estimates invoked. While housing starts are still high, there is little sign of further stimulation. Business construction is at record levels. The trend of prices has been mixed. Sensitive commodity prices have drifted downward during May, mainly because of de clines in certain industrial raw materials, e.g., steel scrap, copper scrap, and rubber. Prices of industrial finished goods, on the other hand, have advanced. Farm prices have advanced so that, on average, they are now back to the levels of a year ago. There is considerable evidence pointing toward reduced business activity in the third quarter of 1956, followed by in creased activity in the fourth quarter. The capital markets are still seeking to find a trading they can operate. The number of potential new base at which offerings is substantial. Yields on new capital issues are increase somewhat if dealers want to dispose of the likely to issues promptly. continues high. The demand in Demand for bank credit June may equal the high demand in March. On the other hand, half of 1956 is likely to be con the demand in the second siderably less intense than in the second half of 1955. Treasury's financial position new estimate of the Each deposit balance at the a greater anticipated Treasury shows reported this morning are end of June. The Board's estimates On the basis of the of the New York Bank. greater than those have to borrow will probably the Treasury New York estimates, to borrow at that will probably want in August. It for cash needs for the second estimated cash about half of its time borrowing may amount this basis the August half of 1956; on of which must be financed billion dollars, part to a couple of through bank credit.
The money market has been under less pressure in the last two weeks. We should continue to make it clear that needed credit will be available. Net borrowed reserves for the last two statement weeks have averaged $400 million. The outright purchase of $161 million of securities for System Account during those two weeks, plus repurchase agreements by the New York bank, have been direct evidence of the System's willingness of make needed credit available. Additional out right purchases of $131 million in the current statement week and a continuation of repurchase agreements have been further evidence of such willingness. Borrowing by member banks from the Federal Reserve Banks averaged about three quarters of a billion dollars in the last statement week, compared with about $1 billion in previous weeks. This is further evidence of lessening pressure. While credit policy should remain re strictive, the pressure upon credit availability should con tinue to be reduced to reflect the current balance between inflationary and deflationary pressures in the economy. Tight ness or ease in the market is, of course, reflected in a number of areas such as interest rates, volume of member bank borrowing, and the attitudes of men. There is likely to be a good deal of churning around in the money market in the middle of June. There will be heavy tax payments and heavy demands by corporations for bank credit. The Federal Reserve System might appropriately supply additional reserves as tangible evidence that the credit authorities do not intend to allow the demands for credit to generate a squeeze. Because of the large money market adjustments that must be made, a fairly liberal supplying of reserves would be helpful without signaling a policy of ease. Giving effect to the substantial Federal Reserve transactions already made this statement week, average net borrowed reserves for the week will probably fall in the $350 - $400 million range. Projections for the follow ing weeks of June indicate less net borrowed reserves. Recog nizing that net borrowed reserves are but one of many factors indicating the extent of the tightness of the money market, we should be alert to make additional purchases to prevent net borrowed reserves from exceeding the $200 - .300 million range. The officers of the Federal Reserve Bank of New York be be no change at this time in the Bank's lieve that there should discount rate. in the Boston District remained Mr. Erickson said that conditions was ahead of March Employment in April except for the weather. favorable Except for textiles, New England of this year and of April of last year.
industries were doing well. Construction awards in New England during the first two weeks of May were ahead of a year ago by 15 per cent. Nonresidential contracts were up 25 per cent, and residential building was up 14 per cent. During the past two weeks there has been more ac tive use of the discount window, Mr. Erickson said, adding that on one day 82 banks borrowed from the Boston Reserve Bank, more than at any time since the banking holiday in 1933. In a survey of automobile dealers, the first four dealers interviewed blamed the automobile manufacturers for their present predicament. One of those dealers criticized Federal Reserve policy but this was because it was costing him more money. Mr. Erickson said that he felt the discount rate should remain where it is--the Boston Bank's directors took that action yester day by renewing the existing 2-3/4 per cent rate. For the next two weeks, Mr. Erickson suggested that the Committee supply reserves to the market even if net borrowed reserves dropped below $300 million. Mr. Irons said that conditions in the Dallas District continued He could see no evidence of real weakness or of any tendency strong. in the automobile industry to cumulate. He for the adjustment going on movement. Less active use situation as a strong side-wise described the at the Dallas Bank during the past been made of the discount window has and borrowings have dropped from the $45-50 two weeks, Mr. Irons said, continue to be by to $25-30 million. These borrowings million range out of 590 country banks, few banks, Mr. Irons said: relatively window and those borrowings or 5 were using the discount probably 4
were largely for seasonal needs associated with agriculture. The bulk of borrowing is coming from 4 or 5 or 6 of the larger banks in the larger cities, but that also has lessened within the past two weeks. Mr. Irons said that in his judgment the situation was still much as described in the economic review. He would not recommend a change in the discount rate at this time. The Committee should pro vide reserves needed for seasonal and related factors, he said, but he would not be inclined to have the situation become easier than it has been during the past two weeks. The Committee should continue to have a real element of pressure on the reserve position of banks rather than a sharp movement toward ease. He would not wish to set any specific figure of negative borrowed reserves to be attained, but his comments might suggest negative free reserves more in the $350 400 million range than in the $250-300 million area. Mr. Mangels said that the last two weeks have given no evidence the Twelfth District's situation. Department store sales of change in are holding up well, employment has been increasing, and automobile sales in April in California were only 13 per cent lower than a year sales early in May indi Preliminary figures of automobile earlier. much greater than that in April. cated a decrease from a year ago not District is still relatively good The general situation in the Twelfth something of a problem. lumbering is having in the northwest where except reporting member banks during in bank loans at Twelfth District Increases
the past few weeks have accounted for about a third of the national increase; the increase in real estate loans in the Twelfth District made up half of the national total. Mr. Mangels referred to a business outlook meeting held at the San Francisco Bank last Friday and attended by representatives of finance and of the utility, steel, oil, lumber, and building in dustries. A steel company representative indicated that the West Coast inventory of steel was probably no greater now than a year ago and that a larger inventory might be healthy. This representative felt that the industry would operate at 85 per cent capacity in the third quarter and would be back to 91 per cent in the fourth quarter. Representatives of the petroleum and utilities industries were looking ahead to substantially increased needs for capacity in the next few industry anticipates further price declines and years. The lumber there is some concern that substitute materials may affect the demand for lumber for residential and other construction. A pessimistic note by the former president of the National Home Builders was expressed housing in California this year would be 30 to 40 who estimated that new construction in 1955. For the country as a whole, per cent below more than one million units housing starts would total not he thought not as a result of a lack Sales of new houses are lagging, this year. because the effective demand is for homes selling of mortgage money but building industry can not price class, whereas the in the $9,000-$10,000
now build houses to sell below $12,000-$12,500. In other words, the industry for various reasons has priced itself out of its current market. Gross farm income in California in 1955 was above 1954, Mr. Mangels said. Some increase in farm debt has taken place, but net worth of farmers has increased. The view was expressed that the Fed eral Reserve System would need to supply about $1-1/2 billion addi tional reserves this year, and some expressed the hope that this would be in the form of a reduction in reserve requirements. Mr. Mangels presented figures indicating that banks on the West Coast are not too tightly pressed. Three bank presidents who visited him recently felt that the discount rate should not be reduced and others have indicated satisfaction with the present rate. Mr. Mangels felt that the Com mittee's operations in the past two weeks had helped the general situa tion, including psychology. He suggested that the Committee continue about what it has been doing, furnishing reserves on a moderate basis and perhaps reducing net borrowed reserves further but not too sub stantially. Mr. Mangels noted that he still did not expect to recom mend a change in the discount rate when the directors of the San Francisco Bank meet on June 13. Mr. Leedy said that he had no significant changes to report in the Tenth District, and that he agreed with regarding conditions the national economic situation. the views expressed thus far regarding account had given an excellent the management of the System He felt In view of the uncertainties since the last meeting. account of itself
in the picture and the tax date coming up shortly and because of the situation in the automobile industry, he felt that between now and the next meeting the Committee should make certain that needed re serves are supplied to the market. He would not go so far as to indi cate a condition of ease, but reserves might be supplied a little on the liberal side. He would suggest no change in discount rates at this time. Mr. Leach said that since the last meeting the Fifth District had shown small economic gains and losses with little net change. Loan demand continues strong and there is evidence that the feeling of tight ness has spread to the smaller banks. He said that he had gotten this impression both from visits to banks and from the experience at the discount window of the Richmond Bank. Over Memorial Day holiday, 55 member banks were borrowing from the Richmond Bank, the largest number in the postwar period. Of the 114 banks that have borrowed this year, before and 8 had not borrowed since 1934. During 2 had never borrowed three weeks, Mr. Leach said that he felt the System's actions the next doubts as to our readiness to meet should continue to dispel any tax date requirements. There should seasonal reserve needs including and a lower level of of Treasury bills be further outright purchases million. Special pains around $200 net borrowed reserves--perhaps reserves do not get higher should be taken to see that net borrowed This would represent has in mind. level the Committee than the general
an extension of the shift in emphasis adopted at the May 23 meeting of the Committee, but it would not require a change in the directive. Mr. Leach said that he did not expect to recommend to the directors of the Richmond Bank any change in the discount rate at this time. Mr. Vardaman said that he had just returned from an auto mobile trip through the Midwest, the South, and the southeastern States on which he found almost universal support for current System policy and no criticism of the soundness of what the Committee was now doing. He said that he, too, had noted that tightness was spreading to smaller banks, and he expressed the opinion that an unfortunate maldistribution of credit facilities continues in some areas. This is not a Federal Reserve problem, Mr. Vardaman said, but he hoped that something could be done to bring about a more equitable distribu tion of loanable funds throughout the economy. Mr. Vardaman said that he hoped the System could assure the public including the banks that it would supply the needed funds during the next few weeks or months. kept open and the banks should be welcomed The discount window should be He hoped that the rediscount rate rather than frowned on for borrowing. especially approved the present situa would remain where it is and he rate while the others a 3 per cent discount with two banks having tion he thought this was Vardaman said that per cent rate. Mr. had a 2-3/ He felt that policy moves. factors in recent of the most healthy one set out to ac extent what it to a large System had accomplished the dangers of inflation. economy to the awakened the it had complish:
Now the System could afford to coast along and not make conditions any tighter. Mr. Mills called attention to the business situation at home and abroad and to the availability of credit, stating that these two factors argued for the injection of additional reserves and for taking advantage of natural forces that would reduce the level of negative free reserves to around $200 million. There were indications that business expectations and actual business performances were wavering, he said, and to the extent that that is true the Committee should guard against being misguided by the past momentum of the economy when actual conditions might be developing that would make future prospects less bright. He noted that Messrs. Erickson and Leach had brought out the fact that country banks in their districts were resorting to greater use of the discount windows and that excess reserves at country banks were drying up. Mr. Mills said that the reserves supplied during the past two weeks had relieved the situation and improved the tone of the Government securities market but that it would take time for those re serves, and such new reserves as are supplied, to spread out to country banks. He felt that the Committee should not be disturbed even though this time might temporarily produce further additions to reserves at be welcome, due to the of ease than might otherwise a greater sense widely distributed, the initial until they have become more fact that money market. Accord reserves falls on the of a supply of new impact additional reserves a policy of supplying argue for ingly, he would
either through direct purchases of Treasury bills or through natural factors that would bring negative free reserves down to around $200 million. Mr. Shepardson said that he felt much the same as Mr. Mills had just indicated. Committee activities up to the present time have been getting the results the Committee has had in mind, he said, and there has been a healthy change in the atmosphere. We have reached the point where perhaps some easing of the pressure is indicated. The level of negative free reserves should be lowered possibly to the $200 250 million level. Mr. Shepardson said he was not sure about any particu lar figure but the level should come down from where it is. He thought the discount rate was serving a good purpose where it is and would not favor a change at this time. Mr. Fulton said that the Cleveland District's economy was affected materially by the automotive situation and the weather had psychological factor, but there were many factors been an unfavorable still present. He would not like to see net borrowed re of strength as to indicate that the System had surrendered to serves so reduced the current steel wage negotiations were some extent to inflation; be a bellwether for other in that the settlement would most important $300 million level would reserves around the industries. Net borrowed said, and would indicate the present time, Mr. Fulton be helpful at demands for to meet all appropriate of the System the willingness
credit, but would not give an indication that the System had completely changed policy or that it intended to supply reserves in such quantities as to let wages react to that stimulus. Mr. Williams commented on business developments in the Philadelphia area to the effect that no important changes in the general situation had taken place since the preceding meeting. He cited a special report of automobile sales in the district, stating that all but 4 of 4 counties for which data were available showed an increase in sales during April as compared with a year ago. Nothing in the Philadelphia District business picture would warrant a change in policy at this time, Mr. Williams said, although real questions may arise in July and August. For the present, he favored maintaining existing discount rates, continuing the Committee's existing directive, and giving whatever assistance was necessary through supplying reserves in the open market. He thought free re serves should be held around the negative $200 million level. Mr. Bryan said that in the Sixth District, there appeared to be a little softening in economic activity but not much, and that softening as could be observed was attributable almost entirely such to the strikebound Birmingham steel situation. to textile shut downs and he felt the situation confusing. The problem, he said, was Nationally, taking place were of the to judge whether the massive readjustments economy getting into balance type that precede an "rolling adjustment"
for another upsurge, or whether they indicated some sort of cyclical down turn. He did not think the evidence conclusive one way or the other at present and any judgment must be tentative. His view was that we must for the time being confine ourselves to the conclusion that the economy is moving sidewise and that the previous massive up surge has been at least mmentarily checked. When the economy is moving sidewise in this way, credit policy should not become more re strictive. The System should meet the seasonal demand for funds. At the same time the System should do nothing dramatic toward softening policy, such as reducing discount rates or reducing reserve requirements until evidence of an actual or impending downward trend in the economy is clearer. Mr. Bryan said he had a further question in his mind should supply reserves sufficient not merely to whether the System but also to restore some growth factor in the meet the seasonal needs inclination was that the Committee total reserve supply. His present supplying reserves for seasonal somewhat further than merely should go would be justified for a temporary and tax date requirements: it that would restore some in supplying reserves in a quantity period Treasury bill rate to a in a move in the growth. If this resulted he would be the discount rate, out of touch with where it was point Bryan added the comment rate. Mr. to reduce the discount disposed about the volume of borrowings not been greatly concerned that he had on the wheels "put the grease that these had Reserve Banks, at the they needed it." at the time needed the grease that
Mr. Szymczak entered the meeting during Mr. Bryan's state ment. Mr. Johns said that department store sales in the Eighth District were running stronger than in the nation as a whole but other than that he had nothing to report that differed from the staff review. He recalled that two weeks ago he had complained mildly that the reserve position of banks had been somewhat tighter since the preceding meeting than the Committee had wanted it to be. He now wished to say that he had been very much pleased by the performance of the desk during the past two weeks. Mr. Johns said that there appeared to be a little uncertainty regarding the economy at the present time although he was unable to place his finger exactly on signs of weakness. An opinion had been expressed to him within the past few hours by an informed and careful observer that the System's operations during the past two weeks had reassured bankers as to the availability of reserves and credit but that such assurance had not yet been divined by the business community other than banks. This observer suggested the desirability of the System communicating such assurance to the business community and indicated he would welcome a reduction in discount rate or perhaps a reduction in margin requirements. Mr. Johns said that he was not sure that he he hoped the Committee would exer agreed with this observer but that cise care between now and its next meeting not to permit the reserve He would prefer that negative borrowed situation to tighten.
reserves drift slowly downward rather than that they rise. For the moment he did not contemplate recommending a reduction in the dis count rate of the St. Louis Bank, although as Mr. Bryan had suggested he would watch short-term interest rates carefully, Treasury bill rates particularly, and if they declined much he would begin thinking about recommending a reduction in the discount rate. Once past the June tax date, Mr. Johns said, if the bill rate continued to drift downward he would begin to think quickly about reducing the discount rate. Mr. Szymczak said that he thought the policy the Committee had been pursuing during the past two weeks had been about right. The dramatic thing industry seemed to expect was a reduction in the dis but he did not think the System was ready to take that count rate, he said, action. He did feel, however, that the Committee should supply re the market to meet seasonal needs and that it should watch serves to carefully. If the bill rate declined to a level out of the situation rate, he would be disposed to act on the dis relation to the discount count rate. since the previous meet Balderston said that developments Mr. action in changing the confirmed the soundness of the Committee's ing of credit more available. weeks ago to make the supply directive two but is still in an appro that the bill rate had declined He noted total had and that the discount the discount rate relation to priate many weeks. While first time in $1 billion for the dropped below
net borrowed reserve figures could not be used with precision, Mr. Balderston said that he felt these figures should be brought down at least to $250 million, with a target range of zero to $200 mil lion. He commented on evidence of readjustments taking place in economic activity and of deterioration in business confidence, which led to his belief that the Committee's operations for the near-term should be designed to offset fears and uncertainties that might re sult this summer from necessary readjustments in the auto, steel, and other industries. In the longer-run, Mr. Balderston said, the need to encourage expansion of productive capacity and continuing improvements in plant efficiency made it desirable for the System to give attention to increasing the money supply to the extent needed to provide for jobs and a constantly rising standard of living. Such increase should take place when it can be accomplished without the risk of inducing inflationary price advances. Chairman Martin stated that the views expressed at this meeting were much closer together than those at the meeting two weeks ago. His view, he stated, was much the same as that expressed by Mr. Mills this Chairman said that he felt the Committee had made sub morning. The may be a valley and what easily could become stantial progress in what had been a valley in February, he said, a triple top movement. There valley this summer. He was are going to have a little and we probably in the economy today--he slightest alarmed about anything not the
wished he were more alarmed perhaps. The Chairman said that he agreed with Mr. Bryan that prudence is desirable but that he be lieved developments had taken a natural course. If the Committee applied itself, recognizing that money and credit is only one element in this situation no matter how much its importance may be put out of focus by commentators or others, the Committee could handle the situa tion surprisingly well. Chairman Martin said that his feeling had not changed since the meeting two weeks ago and that he felt we should be moving toward zero free reserves. He recognized the qualifications that should be any figures of free reserves and he wished that the Committee put on had never gotten into using these figures. However, they had come in time he would favor negative free reserves in the to use, and at this rather than a higher figure. All aspects of $250-million-zero range, consideration, however, not only the the market must be taken into reserves. The Committee must not be misled by talk figures of free that might appear in of "holding the line" or by misinterpretations the Committee might take. Chair the press or in letters as to actions moving picture and that there have emphasized that this is a man Martin since discount rates were in changes in the situation been substantial There has been a real advantage in the split creased eight weeks ago. the rest at 2-3/4 he said. at 3 per cent and rate, with two banks to have one the System an opportunity may have given This advantage
foot on third base and the other on home plate. However, in any change of the rate, if there were to be a change, it would be preferable if action came first from the banks now having the 3 per cent rate rather than from those having the 2-3/4 per cent rate. He noted that the Board would have a responsibility to try to coordinate a change in rates, and he expressed the hope that we would not get into a position where one bank was holding at the 3 per cent level while other banks were moving to a 2-1/2 per cent level. He made this comment, he said, because of the possible implications of the comments on the discount rates in the discussion this morning. Chairman Martin reiterated that the views expressed at this meeting by Mr. Mills were very close to those he (Chairman Martin) held. There is a momentum in the economy. If the situation today were to be measured against that in 1954, the economy now is roaring. However, two years have elapsed since 1954, and the Committee should not ignore the ebb and flow of the economy. There are indications at present of some decline in economic activity. We may have summer doldrums. The Chairman said he hoped the System could adjust mone tary policy so that it would not be too far out in front in either direction. The Committee should not feel bad about rolling a little with the picture during the next three weeks. If operations moved in the direction of negative free reserves of $250 million or less, this would be construed as an overt sign of ease he did not think period coming up and the general economic background. in view of the tax
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
Also: Record of Policy Actions