September 11, 1956 FOMC Minutes

FOMC minutes

In summary, Mr. Rouse said that if it were necessary to employ the go-around technique in doing a swap, the resulting dis turbance to the market and distortion of rates would probably off set the modest operating advantages that swaps are intended to achieve. On the other hand, if the management were allowed to react to swap propositions coming to it from the market, it should be possible to work toward an orderly attainment of particular maturity distribution objectives while at the same time facilitating the functioning of the market by providing maturities that dealers need to complete trans actions. In the latter case the Trading Desk would simply react to situations as they develop and there would be no forcing of the market to promote System portfolio objectives. In closing, Mr. Rouse said that although he would prefer that most swaps originate in the marketwith final initiative resting, of course, with the Trading Desk-he would like to leave open the possibility that swaps might occasionally originate with the System. Even in the latter case, however, it would be better business practice for the Trading Desk to direct swap in quiries to dealers known to hold the maturity the System account wanted, rather than to direct them into the market on a full "go-around". In be contemplated, however, that no swap would be all cases it would the price involved were in line with quotations cur executed unless Desk, and unless several dealers being reported to the Trading rently were specifically canvassed for bids and offers on the maturity in actually executed on a "best price" basis. volved, with transactions

Mr. Robertson responded by stating that on the basis of the comments Mr. Rouse had made, he would be completely opposed to authorizing swaps on the grounds that they really would prevent a free market. Chairman Martin noted that under Mr. Rouse's proposal, the initiative for swaps would be in the market. Mr. Rouse concurred, stating, however, that the fact that a dealer might initiate a proposal for a swap did not mean that the System account would follow the market. Mr. Hayes stated that this was a very cogent point. It seemed to him that it was necessary to clarify what was meant by "initiative." The opening move might be by a dealer but the Account Management would have every right, and would certainly use it, to refuse a given trans action if it felt that should be done. Mr. Hayes did not think the Committee would be giving up its initiative because a given transaction market. The entire proposal before the Committee was originated in the he said, to be used as an operating tool, and if an operating matter, were to implement the idea, if the idea had merit, the the Committee out largely by those who were on the details of it should be worked the tool. He still felt that and who would have to apply firing line be handled sensibly with desirable and that it would the proposal was that the way in which the any damage to the market. He believed out the lines Mr. Rouse had in mind, be used probably was along tool should

rather than with the restrictions that Mr. Robertson had proposed. Mr. Robertson said that he would not attempt to force on the Management of the Account the proposal he had made because if it appeared that swaps would distort the market, the Committee should not deviate at all from principle. Mr. Hayes said that he was not arguing the question on the basis of general principle but was thinking of the proposal entirely as a useful tool to be considered on its merits. Chairman Martin suggested that copies of Mr. Robertson's pro posed resolution be made available to the Committee for further study and that the matter be taken up again at the next meeting, and there was agreement with this suggestion. Chairman Martin said that he wished to bring to the attention of the members of the Committee a letter dated August 28, 1956, that he had received from Congressman Wright Patman, Chairman of the Sub committee on Economic Stabilization of the Joint Economic Committee, in which Mr. Patman recalled the hearing held in December 1954 on recent and current experience with monetary policy at which members of the Board of Governors and Presidents of the Reserve Banks met with the committee. Chairman Martin said that Mr. Patman's letter was for the purpose of informing him that he proposed to arrange a similar meeting next December at a time that would fit in with a meeting of Presidents in Washington and that he hoped the mem the Reserve Bank bers of the Board and the Presidents could meet with his committee at

that time. Chairman Martin also said that Senator Robertson and members of the staff of the Senate Banking and Currency Committee meet with the members of the Board tomorrow in connection with the proposed hearings on banking legislation. Mr. Young noted that it was customary for members of the staff to give an economic review in the form of a chart-slide presentation at meetings of the Federal Open Market Committee held in conjunction with meetings of the Conference of Presidents of the Federal Reserve Banks four times a year. This would call for such a presentation at the meeting to be held on September 25, and Mr. Young inquired whether it would be satisfactory to defer such a presentation until October. None of the members of the Committee indicated any objection to post ponement of the review as suggested. It was understood that the next meeting of the Committee would be held at 10:00 a.m. on September 25, 1956. Thereupon the meeting adjourned. Secretary.