November 27, 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, November 27, 1956, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Erickson Mr. Fulton Mr. Johns Mr. Mills Mr. Powell Mr. Robertson Mr. Szymczak Mr. Vardaman Messrs. Allen, Bryan, Leedy, and Williams, Alternate Members of the 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. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Abbott, Hostetler, 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 November 13, 1956, were approved. meeting there had been distributed to the members of Before this the Federal Reserve Bank of New York the Committee a report prepared at
covering open market operations during the period November 9, 1956 through November 20, 1956, and at this meeting a supplementary report covering commitments executed November 21 through November 26, 1956, was distributed. Copies of both reports have been placed in the files of the Committee. Mr. Rouse said that the past two weeks had presented a difficult period. It was largely a psychological situation but there has been a substantial number of transactions in dealers' hands to be worked out, and there had been an occasional urgent sale, In addition, press stories suggesting the likelihood of an increase in the discount rate had in creased the difficulties. The Government securities market had declined quite sharply during this period with some of the aspects of the 1953 developments but so far there had been no "snowballing." In response to a question from Mr. Balderston as to whether there had been evidence of foreign selling, Mr. Rouse responded in the affirmative, stating selling of Treasury securities from countries that there had been steady that it had not been limited to bills. in Western Europe and motion duly made and seconded, Upon vote, the open market and by unanimous the period November transactions during November 26, 1956, were ap 9 through proved, ratified, and confirmed. developments in statement on recent business Mr. Young made a in the staff information given the and supplemented which he summarized report was 1956. His November 23, date of under distributed memorandum as follows: substantially
Despite the shortness of time since the last meeting, late information does add a little to that reported then. For instance, it is now clearer that the economic effects of the Middle East crisis are very serious and will not soon be overcome. Domestically, momentum of business ad vance is further confirmed. At the same time, some data "straws in the wind" are suggestive of possible slackening of economic advance later. As to specifics: In Western Europe, petroleum shortages have already led to consumption cutbacks; a 20 per cent reduction in oil consumption for a six-month period is in prospect; some scare buying has developed in consumer markets in several countries; and balance of payments strains for both Britain and France have intensified. International shipping rates have risen sharply further. In this country, industrial prices have continued to show an upward tendency. The price advance for fabricated items has been extended and prices of basic industrial materials have also risen, in part because of Middle East crisis. For industrial products, the price rise from mid October to mid-November, was 1/2 per cent or about the same as in the preceding month. The average of wholesale prices continued stable, reflecting the effect of offsetting de clines in farm prices. Lower farm prices resulted mainly from seasonal reductions in prices of livestock. Consumer prices to mid-October showed about the same rise as mid-August to mid-September, and will possibly show as much again to mid-November. This will mean that over a million workers or more will get a 2 to 3 cent an hour cost of-living advance the first pay period of December. Another million approximately will become eligible for a 3-cent cost of-living wage increase in January. Some 3-1/2 to 4 million workers are now covered by cost-of-living clauses in union wage agreements. Current data on industrial output point to a further gain in the Board's index for November of 1 or 2 index points, pushing the index into new high ground. Durable goods activity accounts for most of this up push, but nondurable goods output, especially in textile lines, is also showing further rise this month. New automobile sales have shown strengthening this month in response to new model introductions, and used car sales have about held stable. Advertised prices of used cars, after allowance for depreciation, remain at about last month's levels, indicating considerable strength in the used car mar ket. Used car prices typically recede when new models are introduced.
Department store sales have finally shown strong upward rebound, and with sales of auto dealers on the uptrend, Novem ber retail sales should show an appreciable rise over a year ago. In October, they were barely 2 per cent ahead of October a year ago. October reports from FHA, VA, and FNMA field offices have just become available. While construction and mortgage money conditions are reported still tighter and builders plans are said to continue downward, some other factors are on the stronger side. Residential construction costs held steady for the second consecutive month as did also new home selling time; sales of existing houses are reported to have improved. Preliminary estimates of total national product for the fourth quarter are placing the figure at $422 billion, up about $8 billion from the third quarter and $20 billion or 5 per cent from a year ago. About half of the GNP rise over the year, of course, represents price rise. Among the informational "straws in the wind, the following are the main items The value of contract awards was off significantly in October. Awards for residential construction were off most but awards for industrial and public utility construction were also off considerably. This showing of contract awards may merely reflect a shifting seasonal pattern, for the awards series, as is well known, is highly variable. Informal and highly preliminary reports on the McGraw-Hill plant and equipment expenditure survey suggest that the final to only a small percentage rise in expenditures report will point in 1957 from present levels. Indications in last fall's survey these expenditures might be expected to show an appre were that ciable further rise in 1957. attention was called to the present In last meeting's report, stage of inventory development. Data on business inventory posi are far from satisfactory for current appraisal purposes, tions of complexity of measurement. On a value basis, in part because relative to sales are now con it seems clear that inventories a year ago and about the same as in the siderably higher than are, of course, quite different first part of 1953. Conditions thing because national the two periods, for one as between cut back in early 1953 while expenditures were being security a little. At the same time, in currently they are expanding of full momentum with intensive abundance at a stage ventory trends need close suggests that inventory resource utilization, watching. to be found in the renewed "straw in the wind" is Another Number of failures from failures in October, rise of business
May to September ran about a fifth higher than earlier and failure liabilities also averaged about this same percentage higher but showed more month to month change. In September, failures in number and liabilities fell sharply. In October, they have risen again to a new postwar high. This level, however, is still a little under that of the late thirties. Finally, the number of corporate earnings reports reflect ing a cost-profit squeeze continues to increase, Of a sample of 388 large manufacturing companies whose earnings reports are followed by the Board's staff, more than two-fifths re ported lower third quarter earnings than last year. Against these informational "straws in the wind," one must keep in mind the uncertain potentialities of the Middle East crisis. In the existing state of nonwar, outbreak of hostili ties is a possibility constantly to be reckoned with. For war prevention objectives, some step-up in the Government's military ex penditures may be unavoidable over the months ahead. Such a step-up would work to sustain or even increase demand pressures in the economy. Following a brief discussion of the decrease in profits of many corporations in the third quarter of this year and of the rise in busi ness failures during October, Chairman Martin asked Mr. Thomas for a summary of credit developments and prospects, and he made the following statement: The most striking recent financial development has been the sharp decline in Treasury bond prices during the last few days. This has been accompanied by a rise in Treasury bill rates to a new high level, which has occurred despite a relatively easy reserve position for member banks as a group. As pointed out by one market commentator and suggested by others, the Federal Reserve does not have to impose additional restraints--the existing ones are severe enough. The bond market is once again going through the process a new level and this process is always an ordeal of dropping to until a level is reached at which transactions are resumed. The current decline in Treasury bond prices was preceded by prices of corporate and of State and sharp decreases in bonds, and by higher offering yields on new issues. municipal In contrast to earlier periods of declining bond prices, stock prices have also been weak. market behavior can be found Explanation for this largely in the analysis of the economic situation already
presented to you. The weight of the evidence indicates that demands for goods and services are likely to continue press ing against the limits of supply. This means that the demands for credit will continue to be equally pressing. At the same time, credit availability is probably more restricted than it has been previously. Banks are somewhat less willing to borrow to expand their loans; they have largely run out of liquid assets to sell; and to sell longer-term securities would in volve severe losses. Other financial institutions are also having difficulty in selling Government securities to acquire other loans and investments that are available. Nonfinancial corporations are not buying bills and other short-term securi ties to the same extent as they were a year ago, because they have other uses for their funds and are having difficulty in borrowing in the market for capital expenditures. It is possible that some would-be borrowers are appre hensive of even tighter credit conditions and are anticipating needs, thus helping to bring on the situation they fear. If this were occurring, however, the excess funds might come back into the short-term market and there is as yet no evidence of such a movement. Banks and other investors, in fear of higher rates and in order to take losses for tax purposes, interest to liquidate bonds regardless of price and may be attempting that characterize tax swaps. without the offsetting purchases of money market pressure has been the con Another element of New York and Chicago banks, tinued tight reserve positions for member banks as a the easier situation notwithstanding group. have continued strong through Business financial pressures are relatively low in year. While income tax payments out the be made for the heavy tax advance provision must this period, the first half of next year. that will be required in payments through accounts receivable financing of customers Moreover time of the year, Short increases sharply at this usually and early fall, as needs slackened in summer term financing but plant and was reduced, of inventory accumulation the rate have continued to rise. equipment expenditures kept pace with these of funds have not Internal sources half have been in the second Profits financing requirements. below those in the year and first half of than in the lower dividend payments while increased half of 1955, the second retained deprecia growth in the further largely offset have asset balances and Reductions in liquid tion allowances. year had reduced earlier in the short-term borrowing increased point in the to the lowest by mid-1956 corporate liquidity liquidity and to the need to restore postwar period, and further financing payments has limited for future tax provide
from these sources. Business needs for external financing, particularly for long-term funds, have therefore remained strong since midyear, and flotations of securities have been in record volume. Treasury cash financing and refunding operations that have been hanging over the market have been completed for this year. Perhaps the market has felt that there may have been some nursing of it which can be ended now that Treasury needs are met. Views as to the prospects for a budget sur plus have been undergoing some scrutiny recently. In view of higher income estimates, it seems likely that, barring a tax cut, budget receipts will exceed the estimates of the midyear Budget Review for fiscal 1957, and will increase further in fiscal 1958. There has been some discussion, however, of a tax cut for small corporations that might carry with it other cuts. Prospects for expenditures are still uncertain. There are intimations of some increase over previous estimates in spending for defense purposes, and additional expenditures are in prospect for the new highway program and for old-age benefit payments. Interest costs are rising and agricultural programs are still an uncertain element. Present indications are that there will be some surplus if taxes are not reduced and it may even be big enough to undermine objections to a tax cut. Hence the balancing ef fect of a budget surplus and further public debt retirement upon expansion in other sectors for the coming year is still not assured. Results of recent Treasury financing operations provide June maturity of only $1.3 billion of tax certificates, a funds available for debt retirement in that month whereas as $4 or $5 billion. Hence the refinancing may be as much and February can include some addi scheduled for January tional June maturities. of city banks have in Total loans and investments four weeks, largely because of creased somewhat in the past special bill issue in the latest bank purchases of the new a largely seasonal expansion week. Eliminating that change, offset by a reduction in in business loans was approximately The commercial loan increase of about $650 investments. in the same period last was little less than that million loans showed little change but the other types of year, increases a year ago this year in contrast to substantial the increase in loans. Hence estate and consumer in real year ago. Bank sales less than a loans has continued total the recent bill securities (eliminating of Government
purchase) have also been smaller than they were at this time last year. Bank deposit growth in recent weeks has apparently not been up to usual seasonal amounts. Currency in cir culation, however, after lagging somewhat in October, has subsequently shown a greater than seasonal increase. Turn over of bank deposits continued at a high level in October. Net borrowed reserves of member banks have been at a relatively low level during the past two or three weeks, notwithstanding a substantial increase in required reserves in connection with sales of the special Treasury bill around the middle of November. Float generally has continued at a relatively high level. System purchases of bills, including those acquired under repurchase contracts, have increased by million since the end of October. $470 In order to cover usual heavy needs for reserves in December and keep net borrowed reserves below $200 million, the System will need to acquire an additional $$00 million of bills during the next two weeks. Some of these may be supplied through additional repurchase contracts, which are profitable for dealers when the bill rate is above the Federal Reserve repurchase rate. In view of the delicate state of the market and the special needs for considerable liquidity, at this time of the year, it would seem appro priate to keep net borrowed reserves at $200 million or even lower through December. In response to a question from Chairman Martin, Mr. Thomas said the increase in the money supply during calendar that it appeared that per cent if current projections were year 1956 would approximate 1-1/2 realized. to discussion of open market policy Chairman Martin next turned on the situation and Hayes expressed his views at his request Mr. and was as follows: Mr. Hayes' statement he would recommend. the policy that to report in little that's new seems to be 1. There since our meet and credit situation the general business activity the econ branches of weeks ago. In most ing two housing is an important expanding, although omy is still crisis are still of the Suez Full consequences exception. of oil shipments the likelihood clear. However, none too downtrend of oil prices, has reversed the previous to Europe
the probability of a new tanker program may add to the demand for steel over an extended period, and defense expenditures are likely to increase in fiscal 1958 and perhaps toward the end of fiscal 1957. The Middle East situation undoubtedly still contains explosive possi bilities calling for a watchful attitude on our part. 2. Residential construction prospects continue to deteriorate. October housing awards were off 16% from a year ago, and gains in nonresidential awards were insuf ficient to prevent a decline of 8% in total construction awards. Most forecasts point to some further declines in housing activity next year. 3. Retail trade, while admittedly at a high level, has been less buoyant than might be expected under present conditions of high output, employment, and income. Depart ment store sales in New York, after showing a sharp rise in the week ended November 17, turned down again last week, and for the last 4 weeks were 1 per cent below a year ago. Domestic auto sales for 1957 are now estimated at about 6.5 million units--10% more than in 1956--but this can hardly be considered better than an informed guess at this early stage of the season. 4. While optimism is certainly dominant in the views by most business economists, it is interesting expressed the median figure for the Federal Reserve Board to note that index of industrial production recently forecast by a group of the System's own business economists was 148 for the of 1957-representing a gain over the present second quarter be scarcely in line with long term normal figure which would growth. for capital expenditures, a number of national 5. As surveys point to a gain of about 10% in 1957 and regional gain over current levels. but this would imply no over 1956, is accumulating evidence previously noted, there As we have may be cresting out in the boom in capital investment that there has been further sub 6. Since the last meeting decline in business loans of the reversal in the stantiation most of October. It seems which had prevailed through witnessed in recent of such loans that the expansion probable rest of the fourth quarter, continue through the weeks will for all member banks gain for the quarter but the total than in the fourth be somewhat smaller likely to appears a banks have experienced In recent weeks quarter of 1955. of U. S. Government through sales loss of liquidity further bills have holdings of Treasury although their securities, latest special issue. somewhat by the now been increased
The banks in the central money markets are still in an extremely tight position. On a national basis our projections now point to net borrowed reserves of $48 million in the current statement week, $07 million in the week of December 5th, and $713 million in the week of December 12th. 7. With the recent refunding out of the way, we hope that the Treasury's financial requirements will no longer need to be a major consideration in the determination of monetary policy, as they have been during most of the last two months. On the other hand, the capital markets are in a highly sensitive state, with a sizable calendar of offer ings still overhanging the market and with unusually diffi cult marketing conditions causing confusion in the municipal, and to some extent in the corporate, market. Moreover, there are some indications that U. S. Government bond yields are still out of line with those obtainable on corporate and municipal bonds. These sensitive conditions are accentuated by doubts as to whether current Treasury bill rates point to the likelihood of a further discount advance. Those doubts were intensified, and not diminished, by a purported System statement on the Dow-Jones ticker on Friday, Novem ber 23, which has been interpreted as confirmation that the System has up to now regarded a further rise as necessary, and is only postponing that action temporarily. Pressure on prices of both bills and the new certificates seems to result chiefly from lack of sizable investor demand rather than from any heavy selling, although selling is currently up in intermediate and longer term areas, contribut picking downward price movements in that part of ing to the further the market. restraint seems now to be taking hold more 8. Credit severely than at any time in the past two years. We can no justification for any increase in the recent degree see in view of the uncertainties both in the of restraint international outlook. We would domestic economy and in the of the discount rate at this time, be opposed to any increase of an increase should be we feel that any suggestion and of the money and securities avoided as potentially disruptive of open market operations, the System markets. In the area in the next three bills quite liberally should buy Treasury generating greater seasonal needs from weeks to prevent it would be desirable exists. We think restraint than now these purchases day by day for the System account to make operation so that amounts on each in relatively moderate a buyer, In fact, we market frequently as it may enter the
would not hesitate to buy amounts in excess of those needed to offset seasonal factors, in an effort to keep the disturbed conditions now prevailing in the security markets from developing into a disorderly situation. In order to emphasize the importance of preventing an inten sification of present pressures because of seasonal in fluences, we would suggest that the directive might be changed by amending part (b) of the first paragraph to read "to restraining inflationary developments in the interest of sustainable economic growth, while avoiding further pressures in the money, credit, and securities markets resulting from seasonal factors." Mr. Johns said that he would continue to characterize the economy as one of full employment at or approaching capacity in many picture that should be taken as There were elements in the respects. in any attempt to strengthen the Committee's counseling moderation Parts of the economic review presented restrictive policy, however. might develop in the economy suggested that soft spots by Mr. Young had been confidently forecast The upward movement that in the future. had not yet become evident. as a post-election development by many in the outlook. also created uncertainties international situation The he would be inclined Mr. Johns said, uncertain circumstances, In these approaching a difficult in policy. We were make no overt changes to should not accentuate actions by the Committee situation and year-end over the to supply reserves would have The Committee these problems. volume of absorb a considerable have to which it would year-end after the present Hayes that with Mr. He agreed Johns noted. Mr. reserves, deeper than they were perhaps biting restrictive policy effects of the quite easily were becoming cumulative effects and that their had been
observable. The impaired liquidity of banks and the failure of bank credit to expand seasonally this fall indicated that the re strictive policy had taken firm hold. Mr. Johns said that a change in discount rate should not be undertaken at this time and that the reserves that would be needed toward the year-end should be supplied without reluctance. Mr. Bryan reported no marked developments in the Sixth Dis trict; the economy was continuing to expand but at a slackening pace with an evident tightening of credit. On the national picture, the situation was complex. We were having one of the wildest capital goods booms that had ever been seen, superimposed on a consumer spend ing boom which in turn was superimposed on a demand for more leisure on the part of the American public. It was difficult to know what the Committee's policy should be, Mr. Bryan said; the short-term situation was almost certainly inflationary with price rises and cost rises occurring across the board. However, the long-run situation complicated the Committee's problem immensely and raised a question as to what the Committee now should do. The economy was rather clearly developing excess capacities in many lines attributable to the present capital goods boom. There was excess capacity in textiles, farm implement, and other industries including probably the automobile probably would be excess capacity in the build industry. Shortly there ing materials industry. This poses the classical problem as to what the short-run and long-run problems policy should be when monetary
give possibly different indications. This problem is similar to that of knowing how to use monetary policy when a boom is caused by a segmented expansion in one sector of the economy or by a geographically localized situation. Mr. Bryan's conclusion was that the Committee should not now ease its present restrictive policy. He doubted whether overt action should be taken in the form of a change in discount rates at the moment since such action would signal a shift toward a tighter policy, but he would not wish to preclude the idea that the System might be compelled to further discount rate action before we were through with the capital goods boom. Mr. Bryan felt that open market operations should be directed toward maintaining at least the present degree of restraint and certainly not easing it. As to guideposts that should be used in open market operations in order to maintain that degree of restraint, he would take into account the behavior of the capital markets at the present time and would not supply reserves in amounts that would cause these capital markets to rise or that would prevent was a very constructive and necessary readjustment as what he felt rates. The Committee obviously between short- and long-term interest appearance of disorder in take action to prevent the would wish to the capital markets. in the Philadelphia Dis Mr. Williams summarized developments among bankers and other the basis of field surveys trict as reported on
businessmen. Their attitude seemed to be that "we have tight money; probably we need it; let's live with it." Mr. Williams also suggested that it was somewhat surprising that there was no great opposition to current credit policy in Philadelphia since the restraint seemed to be more effective among city than among country banks. There was, however, some evidence of apprehension in academic circles as to the dilemma the central bank might find itself in in trying to maintain full employment on the one hand and stable prices on the other. Mr. Williams went on to say that the crucial question was whether additional restraint seemed appropriate in view of recent developments. The rise in the bill rate above the discount rate was not in itself sufficient reason for an increase at this time, he said, bill rate were to continue above the discount rate for but if the the case for an increase in discount rate would become some time the present weakness in the capital markets stronger. In view of the position of the bill rate above the and the possibility that as a result of the recent Treasury discount rate was only temporary account the pressure that would develop financing, and taking into Mr. Williams felt it desirable during the next few weeks, on reserves any action toward addi closely before taking to watch developments timing was always important He also commented that tional restraint. that money markets always tighten policy actions and he observed in reason and be year. For this the end of the toward up seasonally during the next could be expected that of other developments cause
few weeks, his view was that reasons for changes in monetary policy should be more compelling at the present time than ordinarily. Thus, we might find that conditions after the turn of the year (but before the February 15 Treasury financing operation) would offer a more "normal" environment for considering a change in policy. Mr. Williams concluded that open market operations should be conducted with a view to seasonal developments, that the Committee should be especially sensitive to the possibility of developments that might take place in and that the System should not at this time make the capital markets, a change in discount rates. in the Cleveland District was Mr. Fulton said that activity commented on conditions in a continuing at a very high rate. He that there was no widespread industries, stating number of individual Inventories were of a downturn among businessmen. indication of fear for various industries if somewhat but this was necessary increasing deliveries of their in a position to make reasonable they were to be continued at a very high products. Plant and equipment expenditures in some industries. bring about overcapacity rate and this might said, but he noted high, Mr. Fulton for bank loans continued Demand of mortgages that resuming the purchase companies were that insurance felt it would be completely to them. Mr. Fulton had been committed rate at this time. change in discount to make any inappropriate above the discount at a level slightly of the bill rate Existence it was influenced by the not disturbing to him feeling rate was
Treasury's recent financing. He felt there should be no apparent relaxation of pressure on the market but funds needed for the year end should be supplied willingly. While the Committee should make no change of policy, it should be alert to the needs of the financial community. Mr. Robertson agreed that this was a very difficult period and he also agreed that the restrictive policy which the Committee had been following was probably biting harder now than at any time thus far. He felt, however, that the state of business activity was such that the Committee should not show any evidence of easing its policy. It should provide for seasonal needs as had been suggested but in doing so should maintain the same degree of restrictiveness that had been applied during the recent period. Mr. Robertson also said that now was not the appro priate time for a change in the discount rate, although that might be come desirable shortly. If this approach were to be followed, he could see no need for changing the directive at this meeting. Mr. Mills said that in his opinion the difficult position of the United States Government securities market had a first claim on In terms of policy action this would mean the Committee's attention. that second place should be given to consideration of setting any or positive free reserves. In elaborating particular level of negative Mills made a statement as follows on these views, Mr. U. S. Government securities extreme weakness in the The market can be attributed to
11/27/6 1. Cumulative seasonal pressures which have acted to remove buying interest both for Treasury bills and longer term U. S. Government securities. 2. Congestion in the market for new securities where available investment funds are insufficient to clear the actual and potential supply of securities. This is the type of situation that can lead to a crisis of confidence and a disorderly market unless the Federal Re serve System intervenes aggressively. This intervention should be in the form of stepped-up purchases of Treasury bills calculated to supply new reserves to a point in volume that will 1. Bring the yield on Treasury bills down to the dis count rate, or below, and thereby signal that the System has no early intention of raising the discount rate. 2. Provide the commercial banks with a margin of re serves that will serve to assist in the retention of their present holdings of U. S. Government and other securities and thereby remove market concern as to the possibility of a further commercial bank divestment of securities with a resultant market pressure. A margin of new reserves in the hands of commercial banks would also permit them to extend a modest amount of new credit to security dealers undertaking the issuance and distribution of new security offerings. In combination, the provision of reserves that will permit the commercial banks to retain their present holdings of securi ties and to participate moderately in the distribution of new offerings of securities should communicate strength to the prices of longer term securities and tend to restore market confidence. the liquidity of the commercial banks. 3. Strengthen Although the actions recommended will inject new reserves into the commercial banks, the existence of high loan-to-de will act as a sufficient restraint to prevent any posit ratios unwise expansion of bank credit and, in any event, the first step that commercial banks can be expected to take before their loans will be to improve their considering expanding Under these circumstances it is, as indicated, liquidity. acquisition of new reserves will stimulate unlikely that the of bank credit at this time. an undesirable expansion result, the effect of the System policy actions In net given general support to should be that of having proposed Government securities market in order to relieve the U. S. pressures and to permit the commercial banks seasonal adequate reserve leeway with which to clear up the tight and credit markets. There should spots in the securities of the year for the System to be ample time after the turn this time if it should proposed at reverse the actions
develop that a greater volume of reserves had been provided than was necessary to accomplish the objectives sought after. Mr. Vardaman concurred in the remarks that had been made by the several Presidents who had spoken this morning and specifically stated that he was whole-heartedly in agreement with the statement made by Mr. Hayes. Also, he was in agreement with what he understood to be the implications of Mr. Mills' statement. Mr. Leach said that the Fifth District economy was showing a little less price pressure than was found in some other areas. Cost increases were occurring in soft goods industries but at a slower rate than in heavy goods industries of other districts, where both negotiated and automatic wage increases have had greater effects. Even the smaller Fifth District increase could not, in the case of cotton textiles, be passed on in the form of higher prices, Mr. Leach said, although bi tuminous coal producers were able to pass on their higher wage costs to consumers. On the national level, Mr. Leach felt that the only workable for the Committee's purpose was that the Middle East situa assumption tion would continue to create uncertainties for some months. These some increase in expansionary pressures, but avail might well produce data reveal no significant change in the phase of business able activity in recent weeks. not think that the prospective developments Mr. Leach did at this time, and conditions a change in credit policy warranted such that any added restraint and money markets were in the capital
now might add to difficulties. Consequently, he did not favor an increase in restraint. Neither would he wish to see any decrease in restraint. This would mean that there should be neither a change in the discount rate, nor should there be a change in the feel of the market. We know that announced capital issues have been post poned, he said, and it seems probable that many unannounced issues have also been postponed or cancelled. At the moment, it was Mr. Leach's feeling that monetary policy was accomplishing all that could reasonably be expected from it and that the possible gain from an attempt to increase tightness would be more than offset by the risk of undesirable developments in the securities markets. Mr. Leedy said that he had no new information to report with respect to economic activity in the Tenth District. He noted, how ever, that in Oklahoma there would be some shifting of deposits at the month connected with the ad valorem tax assessment, the end of that this had already been reflected in a rise in borrowings and from the Federal Reserve Bank of Kansas City. policy, Mr. Leedy said the domestic With respect to credit additional pressure. Rate of situation gave no basis for applying including the credit field, had growth in almost every segment, the picture but foreign situation complicated slowed down. The He would not rule call for additional restraint. did not seem to stay above the discount the bill rate may possibility that out the amounts of indicated large Projections rate only temporarily.
reserves would be needed between now and the end of the year to prevent an increase in restraint, and Mr. Leedy said that he could see no objection to the course proposed by Mr. Hayes for open mar ket operations during the immediate future. He felt that the manage ment of the account should be given ample latitude during this period so that the System would not contribute to any further demoralization in the Government securities market. Mr. Allen stated that expectations of a large harvest in the Seventh District were being realized and that industrial production was at a high level, reflecting in part the Detroit automobile situa tion. He noted that the industry now expected automobile production of 6-1/2 million passenger cars during the forthcoming model year, and that it was estimated that this might result in a rise of about 2 to 2-1/2 billion in automobile credit outstanding. After commenting on other factors in the Seventh District business and financial pic ture, Mr. Allen said that he would not favor a more restrictive credit policy at this time, and he certainly would not favor any easing of agreed with Mr. Hayes' recommendations for open market policy. He operations during the next two weeks. commenting on the Ninth District business and financial After December was a month in Mr. Powell noted that nationally picture, restraints other than monetary re which the Committee could permit restraining influence that seemed straint to have a major part in the press on prices in would begin to Retail inventories to be necessary.
certain areas and this would produce a degree of the restraint that was needed. He agreed with Mr. Mills that the Open Market Committee had a major responsibility to keep the Government securities market from becoming disorderly, stating that it would be desirable for the System account to purchase Treasury bills rather liberally at the present time, buying them somewhat in advance of the seasonal needs that were going to develop between now and the year end. Mr. Powell would not wish to see the discount rate increased at this time, adding that the Committee should aim at keeping the business situation on an even keel. Mr. Mangels said that the Twelfth District economy continued at the same high level he had reported at other recent meetings. He agreed with the suggestion Mr. Hayes had made on the policy that should be followed during the next two weeks. He also concurred with the views expressed by a number of those present that the System should not increase the degree of restraint at this time but should supply reserves freely and willingly during the period immediately ahead. On the discount rate, Mr. Mangels said that his opinion was should be no change now. The executive committee of the that there would meet tomorrow, he said, and he felt sure San Francisco Bank there would be no action to change the rate at that time. However, of the San Francisco Bank was scheduled a meeting of the directors was some indication that some of the di for December 13 and there What the outcome of that then suggest an increase. rectors might
discussion would be, he, of course, could not know at this time, Mr. Mangels said, and his recommendations would depend on developments between now and mid-December. Mr. Mangels concurred in the suggested change in wording of clause (b) of the directive as proposed by Mr. Hayes, stating, however, that he did not think it was particularly essential to make such a change. Mr. Irons said that there had been little change in the situa tion in the Dallas District during the last month or two and that activities were continuing at a high level. He could see no change in the national picture that called for a modification of credit policy at this time. An element of strength in the outlook for 1957 was the expectation of continued large capital expenditures. While there ap peared to be no reason for easing policy at this time, Mr. Irons felt that the Committee should give the management of the account substantial leeway to act during the next several weeks. Tone and feel of the mar ket would be most important during this period, Mr. Irons said, and he could see no objection to putting $400 or $500 million into the market between now and the year end on the basis of the projections that had He would not favor a change in discount rate now nor been prepared. overt action to indicate a shift in credit would he favor any other policy. Mr, Erickson said he had no additional information to report He referred to views ex in the Boston District. concerning activity which forecast a rise in gross at an economic roundup recently pressed
national production and in the Board's production index during the first half of 1957, as well as an increase in the level of wholesale prices. He also told of discussions with an insurance company execu tive last week who reported a rise in the volume of policy loans, and he suggested that this indicated an increasing effect of restrictive monetary policy which was causing some persons to borrow for payment of taxes and others to borrow on life insurance policies because the banks were tightening up on their loans to individuals. In addition, the insurance company executive stated that they had reviewed their policy on forward commitments as had some other insurance companies, and were taking a more realistic position at present, which Mr. Erickson understood meant they were not committing themselves so far in the future as they had in the past. As for credit policy, Mr. Erickson said, he would favor no change in the directive at this time he change the discount rate now. He agreed with the course nor would operations for the next two by Mr. Hayes for open market suggested weeks. the two points made by Messrs. Hayes Mr. Szymczak said that he felt that if the consideration. First, and Mills merited serious done about a month that should have been was to be changed directive seasonal and Treasury supply reserves to meet ago, when we began to it now or should change the Committee but whether requirements, during December to wait for developments it would be better whether a question . Mr. Hayes' in January was the matter again and consider
suggested change would apparently call for nothing different from what the Committee was now doing. His own inclination was to lean toward the use of the broad language in the present directive so as to avoid the necessity for changing it too frequently to meet temporary situations. He felt that changes in the language of the directive should be used to indicate a more fundamental change in policy than was called for at this time. The second point had to do with the Government securities market. Mr. Szymczak commented that this was one of the Committee's problems that had been with it ever since the Committee came into existence. He felt we had to take it into account realistically but it was a question of the extent to which the Committee should help the Government securities market and of the extent to which it should of monetary policy. He referred do only what was required in terms directives to operate with a to earlier wording in the Committee's market and stated that it had view to an orderly Government security to get away from that consideration been difficult for the System with time became major. which Szymczak said that to some extent As to the discount rate, Mr. 1/ of a per cent in an increase of had already discounted the market at this time. not recommend an increase However, he did the rate. further by an not disturb the markets System, he said, should The that would confirm a dramatic step looked upon as that would be action was needed additional restraint the System felt the view that to some
Mr. Szymczak said that he would favor a program under which the Com mittee would not go as far as Mr. Mills seemed to suggest but which would move in the direction in which the Committee has been moving for several weeks, that is, a program that would continue bill pur chases between now and the end of the year. Mr. Balderston said that Mr. Bryan had set forth the problem that had been concerning him. This certainly was not an appropriate moment for overt changes in monetary policy. Consequently, until the next meeting he would continue the present degree of restraint aiming at net borrowed reserves of around $200 million without a change in either the Committee's directive or in the discount rate. Mr. Balderston went on to say that he thought the Committee should be prepared for an emergency meeting or for a telephone hookup in the securities market. If such a market should event of a disorderly he felt it important that the Committee not act prematurely. develop, As to the long run, Mr. Balderston said that he felt sure change in the foreign and domestic outlook. there was a fundamental economy was not yet clear impact of the change on the domestic The much of what Mr. Bryan had indi but it seemed to him probable that increase the strains If so, this would would come to pass. cated and metal produc in the metals economy, especially in the domestic be increased in pressure would The inflationary tion industries. economy was being starved at the very time the European this country
for oil and some raw materials. Abroad, he foresaw a downturn of productivity as inevitable, a downturn that would most certainly be accompanied by cost and price rises, by a possible devaluation of currencies, and by pleas to the United States for financial and material assistance. These pleas, plus a step-up in military appro priations in this country, would cause Governmental expenditures to rise substantially during the next year. Mr. Balderston expressed concern that the nation was entering this situation loaded with debt and other commitments. Both inflationary and deflationary aspects are likely to occur simultaneously, and he did not think that general monetary controls alone would prove adequate. They would need to be strongly supported by fiscal policy. Mr. Balderston suggested that it was none too soon for the Treasury to plan steps that would cause the budget surplus to increase next year. Only if fiscal policy served monetary policy would it be possible to minimize as a full partner of he could see nothing that this the inflation. Mr. Balderston said for what he felt was an inevitable Committee could do today to prepare too early to prompt the Treasury abroad, but it seemed none sickness prevent the disappearance of the budget surplus. to make plans to request, re-read his at Chairman Martin's After Mr. Hayes, directive, the in clause (b) of the Committee's suggested change the matter of great importance, while he did not think Chairman said that wording of the that the He felt it desirable favored the change. he shades of there had been and he believed not get frozen, directive
change in what the Committee had been doing. He had vacillated back and forth a number of times in the past few weeks as to what was called for. He agreed with Mr. Bryan that short-term and long-term problems presented a dilemma as to the role of monetary policy. Chairman Martin said he also agreed with Mr. Mills that at the end of the year the capital and securities markets would become of major importance in the atmosphere in which the Committee was operating. To recognize this did not mean that the Committee wished to move toward a peg in the Government securities market. The Committee might have to put double the amount of reserves in the market, how ever, if it permitted a situation to develop too far before providing some additional reserves. His views were still colored, Chairman Martin said, by what happened at the end of 1951. He hoped the Com mittee would not let the market get away from it at this point. that we needed to make overt changes in However, this did not mean there was any specific level of net policy and he did not think guidepost to bring about the de borrowed reserves that offered a pointed out, the Committee should sired situation. As Mr. Irons had to be alert to the amount managing the System account be prepared in between now and the needed in the market that would be of reserves end of the year. not try to fore Committee need said that the Chairman Martin should come to felt that it advance but he too far in cast business
some conclusion as to the outlook. Since his return from Europe early this month he had been trying to reach a conclusion on this point and on the relationship of developments in the Middle East to our domestic situation. He believed it too early to say that the boom had ended in Europe. However, factors might be developing which would bring about a decline in business and the Committee should bear that in mind. He was not weakening in his conviction that the elements for growth in our economy were still with us, but a minor cyclical movement might be developing. Turning to current policy, Chairman Martin said that while there seemed to be minor differences of opinion at this meeting, in general the consensus was surprisingly good. For his part he would favor a change in the wording of the directive along the lines Mr. Hayes had suggested. Mr. Hayes again read his proposed change, which would supple inflationary developments in ment the existing words, "to restraining of sustainable economic growth," by adding "while avoid the interest credit, and securities markets pressures in the money, ing further resulting from seasonal factors." Mr. Hayes had suggested that he felt the change Mr. Mills said expressing in the as a means of would be desirable in the directive alert to the kind of that the Committee was record an indication of the directive end. Such wording each year that developed pressures a way that would proceeding in Committee was that the would indicate
modify these year-end developments. Mr. Vardaman concurred in the views expressed by Chairman Martin and Mr. Mills, stating that it seemed to him important that the record show that the Committee recognized recent developments and their possible effect on the economy. There followed a general discussion of the change that Mr. Hayes had proposed in the wording of clause (b) of the directive during which the consensus of comments indicated that some modifica tion of the existing wording would be desirable. After considering various suggestions, there was agreement that clause (b) of the first paragraph of the Committee's directive should be changed to indicate that operations for the System account should be with a view among developments in the interest other things "to restraining inflationary growth, while recognizing additional pressures of sustainable economic markets resulting from seasonal in the money, credit, and capital factors and international conditions." Chairman Martin's question, stated, in response to Mr. Rouse in the Committee's direc for other changes that he had no suggestions tive. Thereupon, upon motion duly made and seconded, and by unanimous vote, directive to the Federal the following New York, with the Reserve Bank of in clause (b) set forth modification above, was approved: sales, or exchanges (1) To make such purchases, replacement of maturing securities, and (including
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 recogniz ing additional pressures in the money, credit, and capital markets resulting from seasonal factors and international conditions, 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 of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation 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; the Treasury from the System (3) To sell direct to 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; amount of such securities so sold provided that the total shall not exceed in the aggregate $500 million face amount, nearly as may be practicable shall be made as and such sales prices currently quoted in the open market. at the a statement with re upon Mr. Mills for Chairman Martin called 13, 1956, that at the meeting on November to the proposal made spect New York to Bank of Federal Reserve of the on the authority the limit from Mr. Rouse A memorandum be increased. bankers' acceptances purchase of the Committee to the members had been distributed on this subject
under date of November 16, 1956. Mr. Mills noted that the proposal made by Mr. Rouse was that the limit on the authority for direct purchases of bankers' acceptances by the New York Bank for its own account, as given by the Federal Open Market Committee at the meeting on March 2, 1955 and as renewed at the meeting on March 6, 1956, be increased from $25 million to $50 million. Reasons for the proposed increase, Mr. Mills said, were that the tight credit market and the withdrawal to a degree from the bankers' acceptance market of some foreign central banks had overloaded the market beyond its capacity to absorb the volume of acceptances offered, at least at the ruling rates that were in effect at the time of the meeting on Novem ber 13. For these reasons the Committee might wish to increase the limit on purchases as a safety valve since holdings of the New York Bank were rising toward the $25-million level. A disadvantage to the proposal was that the System, by giving support to the bankers' market, might narrow that market and reduce the incentive acceptance exploit and expand the market beyond its present limits. for dealers to that in view of the unsettled inter Mr. Mills went on to say, however, of foreign banks to and in view of the importance national situation be his opinion that the limit acceptance market, it would the bankers' of bankers' acceptances should be increased as suggested, on purchases tend to be a reluctant that the System would but with the understanding additional bankers' acceptances. than a free purchaser of purchaser rather acceptance market view of the bankers' time, when a clearer At a later
could be revealed, the Committee should review the matter further to determine whether the limit should remain at $50 million or be reduced to the previous $25-million level. Mr. Hayes stated that the New York Bank was suggesting that another limit be placed on the amount that might be purchased, namely, that it could not exceed either $50 million or 10 per cent of the total volume of prime bankers' acceptances outstanding at the end of the pre ceding month. It would be understood, he said, that the New York Bank would continue to deal only at the market and would not allow itself to become the residual buyer for bankers' acceptances. In addition to the value of acceptance purchases in giving assistance to dealers, Mr. Hayes felt that the acceptance should be a regular means of carrying on open market operations, being used as a money market instrument. He also stated that the Committee should feel free to review the authorization and to change it at any time. Mr. Robertson said that he would oppose the suggested increase in authority to purchase bankers' acceptances. He felt that the argu increase were exactly the same as those made when the ments for the agreed to go along with the proposal first came up, when the Committee be desirable for the central bank to idea on the basis that it would but not for the purpose of interest in the acceptance market show an It was his view that the current pro carrying out monetary policy. interest on the part of the purpose of showing an posal was not for
the central bank; rather, the central bank was becoming a residual buyer for acceptances and would be taking the excess supply off the market, at the going rate, at a time when regular buyers were not willing to do so. Mr. Robertson said that he felt it would be wiser if the Committee were to avoid subsidizing the acceptance dealers. If it wished to support the acceptance market it would be preferable to do so on the basis that had been followed years ago of standing ready to be a residual buyer of acceptances, but at a rate which would not provide dealers with a profit. Mr. Allen said that he had questioned the desirability of this proposal on somewhat the same grounds that Mr. Robertson mentioned, He had reviewed all of the memoranda that had been supplied on this subject since 1954, he said, and on the basis of his knowledge and experience in dealing with this market he did not feel that System purchases of bankers' acceptances within the present $25 million limit were of any importance in supporting the market. He questioned who the limit, stating that purchase of would be assisted by increasing an additional $25 million would simply place more money with the only those few banks would profit banks that needed it today and that view that this was a good time to permit from the action. It was his in the market to go out acceptance dealers and others interested the and find a new market for the acceptance. of commercial bankers in Hayes commented that a number Mr. for some time been trying to build up the New York and elsewhere had
market for acceptances, and recently there had been some evidence of a broadening of the market. Mr. Rouse said that as far as the New York Bank's operation was concerned, the volume of acceptances had fluctuated seasonally within the existing limit since the authority was given early in 1955, and in general it would continue to do that. He added that the Bank had not been a residual buyer at any time in this period and would not contemplate getting into that position. Mr. Vardaman said that the decision should not be based on whether the authority would help the dealers. It was a question of the value of the authority in stimulating the use of the acceptance as an instrument in foreign or domestic trade. If the banks benefited was all right with him, Mr. Vardaman said, and if the instrument that was worth-while, which he believed it was, it was desirable to encourage of a market for its use. the development favored developing the bankers' Saymczak stated that he too Mr. he would favor the in mechanism and that as a money market acceptance in authority as proposed. crease convenient was a particularly that the acceptance Mr. Thomas said banks to create in that it enabled Reserve policy for Federal instrument It was a particu seasonal purposes. reserves for to obtain instruments saw that If the banks foreign trade. for instrument larly convenient million of acceptances, buy, say, $50 was willing to the Federal Reserve
there would be more of an incentive to increase their use, and banks might move in the direction of reducing their commission on these instruments. It was Mr. Thomas' view that there would be a great ad vantage in having the System indicate an increased interest in this particular market. Mr. Johns stated similar views, and he described the increased use of the bankers' acceptance that had developed among Memphis banks in financing cotton transactions. Mr. Johns said that he would favor wider use of the instrument. Chairman Martin said that this was the basic point in the discus sion, that is, whether the Committee believed that the acceptance was an instrument that should be encouraged. He noted that there was a dif ference of opinion, stating that Mr. Robertson had eloquently discussed the matter at a number of meetings of the Committee. There was a ques tion whether we would achieve our purpose, but Chairman Martin stated that his judgment was that a showing of System interest in the market to develop it. He did not object to the Reserve Banks being would help of acceptances. However, he did not feel the proposed residual buyers he would favor in of major importance although increase was a matter creasing the limit. would have the in his view such action Robertson said that Mr. market. The more of an acceptance effect on the development opposite dealers of the it deprived the the more System bought acceptances, the and develop a market. incentive to go out
Mr. Mills said that he was impressed by the atmosphere of emergency and crisis that we faced in the money market. Whether the System dealt in Treasury bills as being the instrument nearest to money or in bankers' acceptances was just one step removed. When New York banks were experiencing unusually tight conditions the bankers' acceptance offered a means for adjusting their reserve posi tion rather than going to the discount window. This was a flexible instrument which would provide reserves at a time when they were needed. Messrs. Williams, Erickson, and Leach expressed themselves as favoring the development of a greater market for bankers' acceptances, and Mr. Balderston also indicated that he would favor approval of the limit on the authority for the New York Bank. increased reiterated that he, too, would favor the sug Chairman Martin Mills had presented for increasing the authorization from gestion Mr. on an experimental basis. $25 to $50 million upon motion duly made Thereupon, seconded, the Committee authorized and Bank of New York to the Federal Reserve buy and sell for its own account prime in accordance with bankers' acceptances authorization given in March of 1955 the on March 6, 1956, provided and renewed amount of such acceptances that the total by the Bank should at any one time held million and provided not exceed $50 holdings should not further, that such of the total of than 10 per cent be more
bankers' acceptances outstanding as shown in the most recent acceptance survey con ducted by the Federal Reserve Bank of New York. On this action Mr. Robertson voted "no." Mr. Allen, although not a member of the Committee, indicated that he would not favor the foregoing action. Secretary's note: The resolution ap proved at the meeting on March 6, 1956, as changed by the foregoing action, reads as follows: The Federal Open Market Committee hereby authorizes the Federal Reserve Bank of New York for its own account to buy from and sell to acceptance dealers, at market rates of dis count, prime bankers' acceptances of the kinds designated in the regulations of the Federal Open Market Committee, at such times and in such amounts as may be advisable and consistent with the general credit policies and instructions of the Federal Open Market Committee, provided that the aggregate amount of such bankers' acceptances held at any one time by the Federal Reserve Bank of New York shall not exceed $50 million and provided further, that such holdings shall not be more than 10 per cent of the total of bankers' acceptances outstanding as shown in the most recent acceptance survey conducted by the Federal Reserve Bank of New York. The Federal Open Market Committee further authorizes the Federal Reserve Bank of New York to enter into repurchase with nonbank dealers in bankers' acceptances cover agreements bankers' acceptances of the kinds designated in the ing prime regulations of the Federal Open Market Committee, subject to the same conditions on which the Federal Reserve Bank of New may hereafter be authorized from time to time York is now or the Federal Open Market Committee to enter into repurchase by United States Government securities, agreements covering bankers' acceptances at that the maturities of such except such repurchase agreements shall the time of entering into and except that in the event of the not exceed six months,
failure of the seller to repurchase, such acceptances shall continue to be held by the Federal Reserve Bank or shall be sold in the open market. Such repurchase agreements shall be at the same rate as that applicable, at the time of entering into such agreements, to re purchase agreements covering United States Government securities. Chairman Martin noted that the next meeting of the Committee was scheduled for 10:00 a.m. on Monday, December 10, 1956. Chairman Martin stated that the members of the Board of Governors would like to have the Presidents of the Federal Reserve Banks comment concerning the maximum permissible rates of interest payable on time and savings deposits, as fixed by the Board of Governors in Regulation of Interest on Deposits. He noted that this matter had been Q, Payment discussed on a number of occasions over a period of time and stated that, requests being received for a change in the limit, it would in view of assist the Board if each of the Presidents would express his view con be permitted under the regulation. A cerning the rates that should summary of their conclusions follows: in its recommendation to the Mr. Hayes said that of Governors, the New York Bank had initially Board to 2-3/4 per cent on time deposits recommended going of 90 days or more and had recommended with a maturity on the rate for savings deposits. The no change a differential of 1/4 per assumption had been that deposit rate and the savings cent between the time not be particularly significant. deposit rate would said that he had con however, Mr. Hayes Subsequently, market rates of interest that in view of rising cluded on both savings deposits prefer that the rates he would to 3 per cent, time deposits be increased and longer-term of shorter-term time some related modification with
deposit rates. In his opinion such action would be justified in the light of current market rates of in terest and in view of the fact that these rates had not been changed in 20 years. Mr. Johns stated that he would support the views expressed by Mr. Hayes. Mr. Bryan said that he was strongly in favor of going to 3 per cent as a permissive maximum rate on both time and savings deposits. Mr. Williams noted that there was strong opposition in the Third District, especially in the outlying areas, to an increase in the maximum permissive rate. His personal posi tion was that he was sensitive to the problem that had been presented by the New York banks and he indicated that some increase in the maximum rates might be called for. Mr. Fulton was opposed to any increase in the maximum permissible rate on either time or savings deposits, feel ing that it would encourage banks to reach for high-yield investments with possibly catastrophic results. Mr. Leach stated that, while he previously had been opposed to an increase in the maximum permissible rate under Regulation Q and while most bankers would be opposed to an increase, if he were a member of the Board of Governors he would vote to increase the rate above the present 2-1/2 per cent ceiling on both time and savings deposits. Mr. Leedy said that while an increase in the maximum would be unpopular with banks he could not see that the bankers' attitude should be controlling. Basically, he felt the Board should not be in the business of attempt ing to regulate rates on time deposits and he said it that they be regulated in was particularly undesirable the law and Regulation Q. He could the detail required by however, for continuing the not see any justification, maximum rate of 2-1/2 per cent that had been fixed in the whole structure of interest rates was 1936 when completely different from what it is now. Mr. Allen said that the bankers in the Seventh Dis were opposed to an increase in the maximum permissible trict
rate, that the directors of the Detroit Branch of the Chicago Bank yesterday adopted a resolution opposing an increase in the rate, and that he personally would not favor an upward movement in the rate until more banks had gotten closer to the existing 2-1/2 per cent maximum permitted and had shown that they could live with the expense implied by such a rate. Mr. Powell said he would not be opposed to increasing the maximum permissible rate on time and savings deposits to 3 per cent, believing that to be a natural rate and the sort of rate that people feel that they should receive on long-term savings. Banks were making good profits and all other interest rates had risen to what he felt was a more normal level than had existed for many years. Since the banks could afford to pay more on savings, he would support 3 per cent rate at this time. a Mr. Mangels said that the bankers in the Twelfth District would not favor an increase in the maximum rate. His personal view would support an increase in the maximum rate permitted on time deposits up to six months' maturity along the lines suggested in the question presented to the Presidents' Con ference in September, but he would not favor an increase in the over-all ceilings under Regulation Q. Mr. Irons would support an increase in the maximum rate deposits. He would on both time and savings to 3 per cent of an increase in the rate on time deposits not be in favor without a corresponding increase in the rate on savings deposits. Erickson stated that he would now favor an increase Mr. maximum permissible rate on both time and savings in the deposits. the meeting adjourned. Thereupon Secretary
Also: Record of Policy Actions