November 13, 1956 FOMC Minutes

FOMC minutes

in recent weeks. Neither would he recommend any further tightening during the next two weeks. Mr. Szymczak said that while there are some weaknesses develop ing in the economy they are not serious. It will not be possible to judge how serious they might become until after the first of the year or perhaps in February of next year. In the meantime, he felt that the international situation would be expansionary in its net effect; also during the next two weeks there would be the important problem of Treasury refunding as well as the new money bills of almost two billion dollars. For these reasons he would not alter in any way the policy or practice that had been pursued in the last few weeks. He felt that when the Committee meets again on November 27 it should take a look at the discount rate because the over-all economic situation appears to be inflationary. Mr. Balderston expressed the view that there was no question that the Committee should maintain existing open market policy between now and the middle of December because to do otherwise would not be "playing fair" with those responsible for Treasury financing. However, a mixture of developments that confused him. he was concerned about may be another increase in steel one hand he sensed that there On the rates. An increase in as a demand for higher freight prices as well in the spot where inflationary pressures prices would increase steel products. Since the metals and metal been the worst, i.e., they have of industrial commodities have climbed 23 per Second World War, prices

cent; metals and metal products have gone up twice that amount. Mr. Balderston felt that if prices were raised further that action would accentuate the cost-price squeeze that is being disclosed in the third quarter reports. The other factor in the national situation that puzzled him was his feeling that expansion of plant by the use of capital already raised might mean excess capacity even next year. If that appeared, it would bear down on prices and perhaps bring about some liquidation of inventories. Consequently, he felt that the im mediate problem is to watch for inventory accumulations in the weeks immediately ahead. The current policy should be continued for the present, but the Committee should watch these divergent influences be cause they may present problems later on. Chairman Martin stated that as he understood the discussion it was the consensus that there should be no change in the existing directive to the Federal Reserve Bank of New York or in the discount rate, although there was some indication that the Committee might be alert to a change in the rate later. He suggested that the members of the Committee ap November 27 meeting with an open mind on the entire economic proach the of the Committee concurred in Chairman picture. The other members Martin's statement. 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: sales, or exchanges (in (1) To make such purchases, of maturing securities, and allowing cluding replacement

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, 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 securities for the account) at the close of this date, other than special short term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account Reserve Bank of New York (with discretion, in of the Federal seems desirable, to issue participations to cases where it Reserve Banks) such amounts of special one or more Federal of indebtedness as may be necessary short-term certificates to time for the temporary accommodation of the from time the total amount of such certificates Treasury; provided that Reserve Banks shall not any one time by the Federal held at exceed in the aggregate $500 million; the System ac the Treasury from sell direct to (3) To such amounts of Treasury securi count for gold certificates may be necessary from time within one year as ties maturing provided that of the Treasury; to time for the accommodation sold shall not exceed securities so amount of such the total face amount, and such sales the aggregate $500 million in practicable at the prices as nearly as may be shall be made quoted in the open market, currently raised by Mr. Rouse was made to the question Further reference in the limit on to an increase meeting with respect earlier in this be acquired by the acceptances that may total amount of bankers' the one time. Chairman and held at any Bank of New York Federal Reserve the Federal Reserve prepared by that the memorandum Martin suggested of bankers' acceptances respect to purchases of New York with Bank to all of the banks be circulated foreign central account of for the

Presidents so that the matter raised by Mr. Rouse could be taken up at a later meeting. Mr. Rouse stated that an addition to the memo randum could be prepared and sent to the Board of Governors and the Presidents which would comment on the purchase by the Federal Reserve Bank of New York of acceptances for its own account. There was unanimous agreement that this course should be followed. At the request of Mr. Hayes, Chairman Martin commented briefly on his observations during his recent trip to Europe. Mr. Leedy inquired whether there would be any objection on the part of the Presidents to postponing the December meeting of the Presi dents' Conference with the understanding that it would be held in con nection with one of the meetings of the Federal Open Market Committee in January. After a discussion, the suggested postponement was agreed to by all of the Presidents. reported that the Emergency Training Program approved Mr. Rouse on January 10, 1956 was now in operation at the meeting of the Committee trainees were at the Federal Reserve Bank of New York. and the first two Thereupon the meeting adjourned. Assistant Secretary