April 24, 1957 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held on Wednesday, April 24, 1957, at 10:00 a.m. This was a telephone con ference meeting and the location of each individual is indicated in parenthesis after his name in the following list of those in attendance: PRESENT: Mr. Martin, Chairman (Washington) Mr. Hayes, Vice Chairman (New York) Mr. Allen (Chicago) Mr. Balderston (Washington) Mr. Leedy (Kansas City) Mr. Shepardson (Washington) Mr. Szymczak (Washington) Mr. Williams (Philadelphia) Mr. Irons, Alternate for Mr. Bryan (Dallas) Mr. Treiber, Alternate Member (New York) Mr. Riefler, Secretary (Dallas) Mr. Thurston, Assistant Secretary (Washington) Mr. Hackley, General Counsel (Washington) Mr. Solomon, Assistant General Counsel (Washington) Messrs. Marget and Young, Associate Economists, (Washington) Mr. Roelse, Associate Economist (New York) Mr. Rouse, Manager, System Open Market Account (New York) Mr. Carpenter, Secretary, Board of Governors (Washington) Mr. Sherman, Assistant Secretary, Board of Governors (Washington) Mr. Miller, Chief, Government Finance Section, of Research and Statistics, Board Division of Governors (Dallas) Assistant Vice President, Federal Mr. Larkin, Reserve Bank of New York (New York) Economist, Federal Reserve Mr. Anderson, Financial Bank of Philadelphia (Philadelphia) not in any sense a crisis meet Chairman Martin said that this was to bring the members of the meeting. It was a meeting ing or an emergency to date, brought about by the fact that during the past Committee up Secretary of the Treasury Burgess had been expressing considerable week Under
alarm about the state of the Government securities market in connection with the Treasury financing just ahead. The Chairman said he thought it desirable to have an informal discussion at this time so that the Manager of the Account, who was not present at the April 16 meeting of the Committee but who was ably represented by Mr. Larkin, would have clearly in mind the sense of that meeting. Chairman Martin then read a portion of the statement that he had made at the meeting on April 16, as recorded on pages 28 and 29 of the minutes of that meeting.* He concluded his statement with the comment that the only suggestions at the April 16 meeting as to maintaining a specific level of net borrowed reserves were those contained in comments by Messrs. Mangels, Deming, and Szymczak, who mentioned figures of $400 and $500 million. The Chairman said that the statement he had just read summed up the problem Mr. Rouse was dealing with, The Treasury had a difficult pricing problem, and the System account had a difficult problem of not misleading the Treasury. Chairman Martin stated that the Committee should not let panic develop in the market if there was any way to maintain an even keel and to continue the type of credit operation that seemed to be called for. Mr. Hayes said that he felt it desirable to have this meeting because there were new developments since the April 16 meeting that for the Account Management, problems raised rather difficult questions going back to the Committee. difficult to resolve without that were reference should be made copy. In typed copy, *Refers to mimeographed to pages 33, 34, and 35.
Specifically, while a net borrowed reserve figure was not set as a target at last week's meeting, the consensus generally was to keep approximately the degree of restraint that had existed during the preceding three-week period. Since April 16, developments had made the Treasury financing seem to be more of a problem than was then visualized, and at the same time there had been factors that had reduced the visible measures of restraint. Mr. Hayes then asked that Mr. Rouse comment on the situation. Mr. Rouse stated that when he returned to New York on Monday of this week after an absence of about ten days he found the situation quite different from that which existed at the time he left New York. He also felt that the current situation was different from that pre sented to the Committee at the April 16 meeting. His understanding of the Committee's decision at that meeting was that it endorsed of the preceding three weeks and desired that it fully the atmosphere for the next three weeks. The remainder of Mr. Rouse's be continued statement was substantially as follows: specific guides were established, it was of Although no mind that net borrowed reserves and mem course in everyone's been relatively high--averaging over ber bank borrowings had over $1 billion, respectively. The projec $600 million and period were for a continuation of tions for the succeeding levels; little attention was focused on the Treasury's the same immediate problem. aside from a had on Monday morning, The first talk I Mr. Larkin, was with Mr. William preliminary talk with that because of the Treasury who indicated Heffelfinger of conditions in relation concern over market the Treasury's he had been instructed refunding operation, to its impending
by Mr. Burgess to reduce the balances which the Treasury carries at the Reserve Banks by $150-200 million, and that presumably Mr. Burgess, himself, would speak to me about it later in the day when the Under Secretary would be in New York. Mr. Hayes and I saw the Under Secretary Monday afternoon and he confirmed his intention of reducing the Treasury's balances with the Reserve Banks. In his view a part of the increase in net borrowed reserves had been due to a rebuilding of these balances after the middle of March. He said that it was his opinion that the Treasury could not have a successful refunding when a considerable portion of the securities to be refunded were held by commercial banks if these banks were heavily in debt and under pressure by the System to get out of debt. The Treasury people understood that it might be unwise for the System to take overt action to reduce net borrowed reserves but that if the Treasury balances were reduced it would be taken in stride and that net borrowed reserves of around $400 million and member bank borrowings of under $1 billion, in his opinion, would not scuttle monetary policy but would facilitate his refunding problem. I made it clear both to Mr. Heffelfinger and Mr. Burgess that I thought that the Treasury should not en gage in such an open market operation. There are certain other matters I should mentions On Monday there crystallized a loss of confidence in bond values particularly in municipal and govern ment securities which probably had been in the making for several days. It then developed that there had been an extra ordinary expansion of float on Thursday that reduced net borrowed reserves to less than $300 million which carried over the week end. of this development, the railway express On top airport strike affecting a number of important financial centers suggested a further substantial how much I don't know, but it increase in float--by could run an additional $200 million. market that the Treasury's ex It is the conclusion of the a failure even though the Treasury puts change offering will be on a one-year security or a six a reasonably attractive coupon of at least 25 per cent is expected month security. Attrition in the market are expected now. Prices of other securities as of down to meet the rate on the new offering. to move attitude, the dealers of the market's In partial explanation not validate the Treas that the System did reflect the attitude the necessary reserves through ury's cash offering and provide necessarily have to Market opinion doesn't outright purchases.
make sense or be consistent with past positions. It is just current opinion but as such, influential. It also says that the number of available underwriters, i.e., dealers and banks, is steadily dwindling. I share the Committee's concern as to misleading the mar ket and shall do my best to avoid that result. However, there is one further matter that I should mention. The Treasury now feels that, as a result of System policy, it must confine the maturity of its refunding to under six months, thus adding to our problems in the autumn; furthermore, if the Treasury suffers a very heavy attrition, it will mean cash financing sooner than expected representing a further compounding of our problems. In the light of what I understand to have been the position taken by the Committee a week ago and the present statistical position of the banking system, i.e., average net borrowed re serves this week of under $00 million, perhaps we should sell Treasury bills to offset the Treasury's action. I think we should not do so in the face of the Treasury's impending fi nancing. On the contrary, it might be wise to extend some repurchase agreements to dealers today. All outstanding re purchase agreements ran off yesterday. Unless we do something today, our statement for the current statement week will show a decline in our holdings. Chairman Martin referred to the possibility of a failure of the stating that he did not understand that Mr. Rouse Treasury's financing, was suggesting that the System should make the issue a success by buying it. Mr. Rouse stated that he did not intend to imply that the System buy the issue but that his statement did imply that the Treasury should He had no thought of the come to the market again soon. might have to or doing anything of that sort. System's buying rights the statement that he believed Hayes summarized his view with Mr. to the Manager of the give revised instructions the Committee should the general tone agreed that, unless It should be well System Account.
of the market improved, the Manager would not sell securities at this time to offset the action of the Treasury in putting reserves into the market and the fortuitous developments in float. The Manager of the System Account should feel free to let the net borrowed reserves figure be what it may within reason, and he should not feel that he had to take offsetting action in the way of selling securities. Similarly, a little after the Treasury's announcement was made, if it would help the financing to be a success the System Account should be able to make re purchase agreements available to dealers, even though at the time the net borrowed reserves figure was fairly small statistically. This was on the assumption, of course, that the tone of the market had not improved by that time. Speaking in more general terms, Mr. Hayes said that what was needed was a considerable degree of leeway to the Manager of the System be guided by the behavior and the feel of the market. Account who should had often been given in the past and in this Similar authorizations to Mr. Hayes desirable that the Committee particular case it seemed to such authorization because of the condi give specific consideration could not have been foreseen at the tions that were developing and that a failure of its offer should have 16 meeting. If the Treasury April had mentioned (25 per cent attrition of the magnitude that Mr. Rouse ing Committee policy of restraint. mean a scuttling of the or more) that could Account should have the Manager of the System Hayes suggested that Mr.
leeway to the extent necessary to try to help the Treasury's financing within the reasonable limits of the policy of credit restraint. Chairman Martin commented that, in his opinion, that degree of latitude was implied in the directive agreed upon April 16. However, he understood fully Mr. Rouse's desire to have this point clarified so as to eliminate the element of judgment as to whether he was exceeding the policy directive. The Chairman said that he believed the Committee would have to give maximum discretion to the Manager of the System Ac count, but it did not wish to lose the credit policy for the sake of helping the Treasury, even if the Treasury should have a failure. Mr. Hayes concurred fully in this statement, adding that the Committee must adhere to its basic policy. However, he believed there was considerable leeway within that policy that would permit the Com so as to avoid greater difficulties later on. mittee to operate Martin agreed with this view, adding that the Committee Chairman swayed too much by the Treasury's difficulty and the cater should not be wauling of some of the syndicates that were in difficulty. the substance of the comments of Chairman Mr. Allen said that as to pursuing the operating policies the Committee Martin and Mr. Hayes important. The results of the Treas had had for several years was most years had been bad. It was Mr. financing operations in recent ury's wanted now was to have the central view that what the Treasury Allen's were to do this it He felt that if the System bank "bail it out."
would be at the expense of the country and this, of course, would not be the right thing for the System to do. Mr. Allen suggested that the Treasury was "control minded" but he hoped that the Com mittee was "market minded" rather than "control minded." Speaking specifically, Mr. Allen agreed with what Mr. Rouse had said to the effect that we should not be concerned that net borrowed reserves at the moment were less than any target mentioned at the meeting last week. This was a temporary situation and did not call for precipitate action to cure it. The Treasury was independent just as was the Federal Reserve; some of the things the Treasury did made the System's job more difficult. Mr. Allen did not propose to com plain about Treasury action however difficult it might make things for the Committee, just as he did not think the Treasury should com plain of Committee action in pursuing Committee objectives. agreed with Mr. Rouse's suggestion for taking Mr. Balderston the market on an even keel without losing such measures as would keep the restraint that the Committee was trying to preserve for sight of Treasury's problem was secondary to the the long run. To him, the Nevertheless, it was something Committee's primary responsibility. The responsibility for a Treasury that should not be minimized. by the Committee, Mr. Balderston would certainly be shared failure by the Account that action were taken if any overt said, especially the securities market. crisis in precipitate a psychological would juncture the that at this particular Consequently, he believed
Trading Desk should have leeway to do the things that were indicated. He would not attempt to compensate for the temporary float situation. At this point Mr. Hayes reported on a bulletin concerning the securities market this morning, and Chairman Martin commented that on the whole the market seemed to be a pretty orderly one. Mr. Shepardson stated that he realized the difficulty of side line coaching and he would not attempt to say in detail what the Manager of the Account should do. His general thought was that it was highly important that the Committee not lose sight of the basic credit objectives. He realized the Committee's responsibility to provide as stable a situation as possible for the Treasury but did not think this extended to bailing them out of a situation. Mr. Shepardson referred to the comment Mr. Rouse had made that the number of dealers or under He suggested that this might reflect the situa writers was dwindling. had developed upon a number of occasions in the past when, tion that a favorable market situation for the Treasury, after helping to make to its credit policy and found that the Committee tried to get back a decline in the price of the new it created a situation that caused the Committee should recognize Mr. Shepardson thought that security. should maintain as from float, but it unexpected ease resulting the of restraint discussed at the meeting nearly as possible the degree no less optimistic today than The economy generally was last week. putting the Committee's said, and he would favor at that time, he
credit policy strongly on the line, doing what might be necessary to avoid unforeseen tightening, but not taking steps to help ease the Treasury situation. Mr. Szymczak thought that the Committee was faced with the practical problem of ease that had been created by the float situa tion. How long the ease would continue depended on the strike of express company employees. None of us could tell how long the strike would continue, and the Treasury must proceed to make its plans for the refunding. On the one hand, Mr. Szymczak said that he did not feel that we should deviate from the policy adopted at the meeting last week. On the other hand, he did not feel we should be selling securities in the light of the present practical situation. We should make repurchase agreements available, but we should not add to reserves by buying because that might create a more difficult situation for the Treasury; nor should we sell in the market. Mr. Szymczak said that he would play by ear, depending on the judgment of the Manager of the Account to deal with the situation in the light of the policy adopted at last week's meeting. Mr. Williams said that he was concerned about the Treasury's lead the market, but in its actions The Committee should not problem. of heavy attrition on the Treasury should bear in mind the possibility Williams that the Manager of the Account issue. It seemed to Mr. and he felt repurchase agreements, latitude in making should have from the general Committee be given without departing this could
policy. If the Committee permitted conditions to get too tight at this stage it might build up trouble for itself later in the year. Mr. Irons said that the Committee's primary responsibility was appropriate credit policy from the standpoint of the economic situation. He saw nothing in that picture that would change his view of policy from that discussed at the meeting week last which called for a degree of restraint. In fact, Mr. Irons felt that the economic picture was showing improvement or gradually increasing strength rather than a tendency toward increasing weakness. We were dealing with an inflationary danger that might get away if there were definite easing. Mr. Irons said that he was not concerned with the net borrowed reserve figures and he had stopped using them. He was concerned with the tightness in the market as measured by the behavior and feel degree of of the market. A decline in net borrowed reserves of $100 or $150 of a rise in float would not concern him and he would million because for a day or two. He was con interfere to offset that position not problem implied by the Treasury's actions cerned by the nature of the of open market operations. He doubted if in opening up another arm by sales of securities from time to oppose that action this was the this was something to be discussed System account, but he felt the position, Mr. Irons Committee. As for the Treasury's fully by the the refunding the Com to the announcement of did not feel that prior a necessary and de what it regarded as should deviate from mittee that was tending to for an economic situation sirable credit policy
be inflationary. If the Treasury offered a security priced in line with the market and if the Committee's credit policy was appropriate, then it might have a responsibility to "see the Treasury through." This, however, was not the present situation. Summing up, Mr. Irons said that the comments Chairman Martin had read from the minutes of last week's meeting would reflect his judgment. The Committee should maintain a degree of tightness. He understood that the Manager of the Account must be given some leeway to operate on the basis of feel or behavior of the market and not as reflected by some figure of net borrowed reserves. He was not concerned about the net borrowed re serves figure going to $400 million instead of $700 million. Mr. Leedy said that the comments of Mr. Irons represented his views. He thought the decision at last week's meeting would permit the kind of approach that Mr. Rouse had outlined. Mr. Leedy would not be too much concerned about the statistical ease appearing as a result of float, nor would he offset what the Treasury had done in the way of reducing its balances at the Reserve Banks. Repurchase agreements might serve a purpose, but Mr. Leedy said that he would favor staying completely out of the market as far as purchases and sales were concerned for the moment. There should be no departure from the basic policy of restraint. Martin said that he felt this discussion had been Chairman views of the members of the Com helpful in bringing out the quite then called upon Mr. Rouse. mittee. He
Mr. Rouse commented that perhaps we had seen the worst of the situation on Monday of this week. This meeting had served the purpose of indicating that he would not be violating the Committee's policy by not offsetting the Treasury's operations. The net result of the discussion this morning gave him the discretion needed to do what had to be done, Mr. Rouse said, although he indicated that this would be a difficult period. He would try to keep the market as in the circumstances, and he gathered that this was tight as possible what the members of the Committee wished. Chairman Martin said that he thought this was correct. Mr. Hayes noted that one or two members of the Committee had spoken about the Treasury having created its problem, indicating that it was not the Committee's responsibility to help the Treasury out of into. Mr. Hayes said that there was a situation that it had gotten but at the moment the Treasury was not something to this comment, the rate; it was talking about the difficulty of making talking about success regardless of the rate because of any refunding operation a the market. Mr. Hayes said that to him the degree of tightness in should hold to its general policy this meant that while the Committee question, there might have to be some shading. of restraint without any the thinking he was said that this reflected Mr. Williams a few moments earlier. to express in his comments trying felt the Committee's posture Chairman Martin said that he do everything it could that it wished to be clear at all times should
to help the Treasury in its problem short of sacrificing credit policy responsibility. He felt that the problem had been well summarized at this discussion and stated that we would have to rely on the good judgment of the Management of the Account, Mr. Allen referred to his earlier comments on the Treasury's attitude and to Mr. Rouse's comments on what he referred to as the Treasury's "open market operations." Mr. Allen went on to say that he would not be disposed to criticize the Treasury for these opera tions. The Committee had its responsibility and the Treasury had its responsibility. said that he thought this subject was one that Chairman Martin should be discussed at another meeting of the Committee. Mr. Hayes stated that this discussion had been very helpful and that the New York Bank was prepared to give its attention to carry ing out the Committee s wishes. SecretaryThereupon the meeting adjourned.