January 28, 1957 FOMC Minutes

FOMC minutes

Mr. Robertson asked that the staff members comment on reasons why such a procedure would not be desirable. Mr. Thomas pointed out that if the System was not dealing in longer-term securities, it would not make a great deal of difference what it held other than bills. However, if the System held a sub stantial volume of the longer-term securities and if it was believed that it might deal in them, that fact might be a hindrance to the market rather than a help. Mr. Riefler said that a central bank enjoyed public confidence in its operations to the extent to which it had a liquid portfolio. This suggestion of the Treasury would be a small departure from liquidity. It seemed to him that the question was one of psychology. He did not think there was much case for doing what the Treasury asked on the grounds of bringing about better distribution; the case for doing it was that it would indicate some approval on the part of the Federal Reserve of the case against doing it was that appre of the securities. The pricing that the securities might be sold by the System hension might be raised and thus come back to load the market. account the longer-term securities offered Mr. Hayes said that taking whether the System account would would have no bearing on in an exchange could be argued that other hand, it the future. On the deal in them in of to have some distribution to the System was some advantage there wished to deal in securities if the System ever in its portfolio maturities System a little would give the Treasury's proposal than bills. The other more diversification.

Mr. Robertson suggested that the Treasury must feel strongly about the matter or it would not have made the request. He inquired whether this feeling was based on the grounds that it would help give better distribution to the securities and improve the confidence in the market. Mr. Rouse noted that unless the exchange of some of the System securities into the three-year obligations were to be made public while the offering was open, it could have no effect on this refunding. Chairman Martin stated that there was no indication that the System's acquisition of such securities would be made public until after the exchange had been completed, and it was his feeling that the procedure would have an effect on the public only to the extent that it might have a bearing on future issues. Mr. Vardaman said that this would represent a break in the policy that the Committee had been following for some time, and the market would wonder when the next step would be taken. From the psychological standpoint, he felt the proposal undesirable on the grounds that if acceptance by the System of the longer-term securities were to be taken as now indicating its approval of the rate, a failure by the System to take such securities in a later offering might well by the market as indicating an unfavorable view of that be interpreted offering. in this view. He felt the present Mr. Robertson concurred consequences might be troublesomewas not large, but the future problem

more so to the Treasury than to the Federal Reserve. Mr. Allen said that some members of the Committee had raised a point which seemed important to him, namely, that if the System were to take the suggested three-year Treasury obligations, the public might be led to believe that the System had assisted the Treasury and would do so again, and such a public belief would not be desirable. Mr. Allen said that the word "assist," which he had heard here today, was disturbing to him. Mr. Szymczak said that he could not get concerned about the question one way or the other. Chairman Martin said that he did not feel this was a big problem for the System in any event. To the extent it was a problem, it was one for the Treasury. His feeling was that if the Treasury really wished to have the System take the longer securities as a matter of helping in the financing, it was the type of thing on which the System should not be inflexible. He suggested, therefore, that he discuss the matter further with Treasury officials with a view of indicating that there was some difference of opinion among members of the Committee concerning the proposal. the it was understood that After some further discussion, discuss the matter along the lines indicated, Chairman Martin would desired the System to take longer-maturity and if the Treasury then

securities in an optional offering, he would communicate further with the members of the Committee. Thereupon the meeting adjourned. Secretary