May 7, 1957 FOMC Minutes

FOMC minutes

overcapacity or overproduction of some products. Mr. Young had presented the Committee with a paper on the basic economic problem. The Chairman said that he might not be able to name products that were now in short supply, but monetary policy could not be used to restore a price level that had been lost through inflationary processes. The country was now operating at an inflated price level and adjustments were taking place. The difficulty of passing higher costs on to the consumer had increased, Chairman Martin said, and we were at the juncture where pressures would become increasingly great for creating demand by simply pumping up credit. This was the basic problem in the struggle against inflation. The Committee could expect a good deal of questioning on this problem by Senator Byrd's in its forthcoming study. None of us beSenate Finance Committee money and credit policy can do the whole job of restrainlieve that Chairman said, but a posture of ing inflationary developments, the policy that was set to counter such developments monetary and credit in present circumstances than at any was infinitely more important posture of the Committee was right, the other time. If the general Committee would then be discharging its responsibility. then referred to the directive, stating that Chairman Martin consensus was to maintain essentially the it seemed clear that the overtly to ease or overtly to status quo. There was no intention would have to The Manager of the Account tighten the situation. was partly an institutional Since this exercise his judgment.

problem, the Committee should bear in mind that if the Treasury should run, say, $2 billion of attrition on its current refunding, the Treasury would have to obtain additional money somewhere. While he was not forecasting such a development, he felt it important that the Committee see both sides of the problem. Chairman Martin then inquired whether there was any disagreement with the consensus as he had stated it. Mr. Vardaman asked whether the Chairman's remark that he knew of no products now in short supply suggested that demand for these goods would be increased if policy were relaxed and negative free reserves were permitted to go to par. Chairman Martin responded that he didn't know but in his judgment such action would increase the inflationary pressures. Mr. Rouse said, in response to the Chairman's inquiry, that he (the Chairman) had stated clearly the consensus as indicated at He would interpret this as giving him clearance to this meeting. continue to assist dealers in the refunding through repurchase be a need for such assistance. However, agreements, if there should not buying "rights" in volume and he he added that dealers were for repurchase agreements to would not expect a substantial need that there had been several suggestions emerge. Mr. Rouse noted While the System account did not as to the Treasury bill rate. to influence the rate, Mr. Rouse felt now have enough Treasury bills a reflection of of bill rates was principally that the present level

the desire for liquidity at the present time. It also reflected System policy. He would not expect to attempt to influence the bill rate, but he would attempt to maintain the current level of pressure until the next meeting of the Committee. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales or exchanges (including replacement of maturing securities, and 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 recognizing uncertainties in the business outlook, the financial markets, and the international situation, 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;

(3) To sell direct to the Treasury from the System 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; provided that the total amount of such securities so sold shall not exceed in the aggregate $500 million face amount, and such sales shall be made as nearly as may be practicable at the prices currently quoted in the open market. The Chairman then referred to items 4b and 4c on the agenda, 4b relating to guides for open market operations to carry out Committee policy, and 4c relating to the responsibilities of the Treasury and the Committee in the area of open market operations. He suggested that the general discussion of these matters that had already taken place might be sufficient for this meeting, and there was no disagreement with this suggestion. Mr. Robertson stated that the Committee on Float (Messrs. Erickson, Johns, and Robertson, Chairman) had received from the subcommittee a report dealing with the subject. He suggested that copies of the report be distributed to each Reserve Bank President and to each Board Member, and it was understood that this procedure would be followed. that the next meeting of the Committee would It was agreed be held at 10:00 a.m. on Tuesday, May 28, 1957. Thereupon the meeting adjourned. Secretary