May 28, 1957 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, May 28, 1957, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Bryan Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Vardaman Mr. Williams Messrs. Fulton, Irons, Leach, and Mangels, Alternate Members of the Federal Open Market Committee Messrs. Erickson, Johns, and Deming, Presidents of the Federal Reserve Banks of Boston, St. Louis, and Minneapolis, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Sherman, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Atkinson, Bopp, Mitchell, Tow, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Carpenter, Secretary, Board of Governors Mr. Koch, Assistant Director, Division of Re search and Statistics, Board of Governors Mr. Roosa, Vice President, Federal Reserve Bank of New York Mr. Gaines, Manager, Securities Department, Federal Reserve Bank of New York Messrs. Hostetler and Wheeler, Vice Presidents, Federal Reserve Banks of Cleveland and San Francisco, respectively; Mr. Parsons, Di rector of Research, Federal Reserve Bank of Minneapolis; Messrs. Willis and Meigs,
Financial Economists, Federal Reserve Banks of Boston and St. Louis, re spectively; and Mr. Walker, Economic Adviser, Federal Reserve Bank of Dallas. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on May 7, 1957, were approved. Before this meeting there had been distributed to the members of the Committee a report prepared at the Federal Reserve Bank of New York covering open market operations during the period May 7 through May 22, 1957, as well as a supplementary report covering commitments executed May 23 through May 27, 1957. Copies of both reports have been placed in the files of the Federal Open Market Committee. Mr. Rouse stated that Mr. Erickson recently suggested that some elaboration of the report of open market operations at the meet ings of the Committee would be helpful. He went on to comment on the money market during the past three weeks, stating that in this period developments had worked out about as had been expected. The principal problem was the Treasury financing, which had been an unhappy experi had resulted in attrition of $1,167 million. ence for the Treasury and peak during the past week and had climbed to its usual monthly Float System account sales, but the effect had been only partly offset by released by float had been confined to day-to-daymoney of the reserves remained unchanged, and investors did market rates. Basic rates cent. Reinvestment of bill rate under 3 per not want to follow the the expected demand attrition did not generate the $1,167 million
for bills, Mr. Rouse said, and the bill rate yesterday had climbed back to 3-1/4 per cent. He added that the easier situation that had developed in the money market a few days earlier might not have been entirely the result of the rise in float but could have re flected the distribution of reserves in the banking system. For the first time in some period, the New York banks had found them selves in a somewhat easier position. Looking ahead for the next three weeks, Mr. Rouse said that the projections of reserves prepared at the New York Bank and by the Board's staff were substantially in line with each other. He did not anticipate any material change in the present situation until the tax period and the rise in float in June. Mr. Rouse also said that he had been asked about the sale of gold by the International Monetary Fund to the of $300 million Treasury, which transaction was taking place today. When he first transaction, he requested the Treasury to arrange that heard of this day on which the effect on member bank reserves it take place on the tax anticipation bills would take of the payment for the Treasury the System account could avoid the problem place. In this manner, a brief period and with of reserves for putting in a large amount of that the Treasury would make a few days later. He noted drawing them of F and G bonds next Monday. large payments for redemptions during the past week that the major problem Mr. Rouse stated but had been to the reserve situation not been directly related had
the fact that capital markets had been under extreme pressure. New financing issues had been in record volume in the first quarter of the year, and the calendar ahead was increasing so that the back log was being maintained. This had resulted in a rate situation in the market which had been attributable in part to delays by the Treasury in offering refunding securities to holders of F and G series savings bonds. Perhaps a more fundamental factor was the basic supply and demand situation. The 3 and 3-1/4 per cent Treasury bonds had remained where they had been for some time, while yields on new corporate offerings had risen to as much as 5-1/4 per cent. This suggested, Mr. Rouse said, that there would have to be a rather sub stantial adjustment in Treasury bond yields if they were to go along with the rest of the market. We were dealing with a very delicate situation, he said, one that would require the Trading Desk to be constantly alert. A serious situation could develop although Mr. Rouse said he thought it more : kely that the present situation would continue. However, if a large offering should be pressed by investors, there could be a sudden and for sale on the market marked effect. Mr. Vardaman entered the room during the course of Mr. Rouse's comments. Mr. Robertson said that he wished to compliment the Manage ment of the System Account on the way in which it had handled opera had a little doubt about past three weeks. He still tions during the
the tendency to offset such a matter as float on the tight side and not to do so when it tended to ease the market. Mr. Leach noted that the report of open market operations that had been prepared at the New York Bank comented on purchases and sales of Treasury bills during the past three weeks and made the statement that these purchases and sales were achieved without any overt intervention in the market. Mr. Leach expressed the view that any sale of securities by the System account would represent an overt action. Mr. Rouse responded that the securities were not sold ith any splash, that purchases were being made at substantially the same time, and that it appeared that the net effect of whatever was being done was substantially a wash operation. Upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period May 7 through May 27, 1957, were approved, ratified, and confirmed. A staff memorandum on recent economic and financial develop ments in the United Stater and abroad had been distributed to all the Committee under date of May 24, 1957. This memorandum members of stated that business indexes continued to show mixed tendencies, with edging up and others drifting down. The industrial some measures to be off another point in May but to production index seemed likely continue above a year ago. Inventory adjustments were continuing in
consumer durable goods industries and in some other industries such as steel. Wholesale prices had been showing little change while retail prices advanced somewhat further in April. Consumer buying appeared fairly strong, particularly for nondurable goods and services. Private housing starts rose in April from the re duced rate in March. Labor market demands and supplies seemed in reasonable balance, with no strong uptrend or downtrend in employ ment and with fluctuations in unemployment reflecting mainly seasonal changes. Demand for credit continued heavy and interest rates had The review indicated that concern about a risen again recently. cyclical decline in business apparently had diminished, and stock been advancing. Abroad, demand pressures remained market prices had measures had been an generally dominant and new anti-inflationary nounced this month in several important countries. Young at this point, and Mr. Chairman Martin called upon Mr. a chart presentation at this stated that the staff would make Young recent Federal Reserve policy giving background material on meeting prepared, Mr. Young said, with This presentation had been problems. to the in furnishing information it might be used the thought that Senate Finance Committee in its forthcoming inquiry into monetary then entered the Members of the staff and other matters, policy which they withdrew. the presentation, after room to assist in for two years, since pointed out that The presentation activity in of 1953-54, economic from the minor recession recovery
the United States had been at record levels with resources generally being used intensively. Thus, the recent economic policy problems of Government had been the problems of a period of high production and employment, not those of a period of curtailed production and widespread unemployment. Widespread price increases over a considerable period of time had been disturbing. Greatly increased demands for short-term credit and also for long-term credit had been reflected in an increase during the past two years of $18 billion, or about one-fourth, in the volume of loans outstanding at commercial banks. Banks had obtained more than half the funds needed to increase their loans by reducing holdings of Government securities, however, and the growth in total bank credit had thus been much less than the growth in loans. Savings as well as demands for funds had increased over the past two years, but even with some growth in total bank credit demands for funds had been so strong relative to the amount avail able that interest rates had risen substantially. Even with this rise, the level of rates now prevailing was not high by substantial historical standards or by comparison with rates prevailing in other countries. The review also pointed out that gross national product from an annual rate of $387 billion in the second quarter had risen billion in the first quarter of 1957. of 1955 to a rate of $427 cent represented a rise in half of this increase of 10 per About a rise in volume of output. In concluding this prices and half
presentation, it was stated that one of the possibilities in the period ahead was a situation characterized by growing capacity and high production, with credit expansion restrained and price changes held within relatively narrow limits. A period of "rolling readjustments," with fairly stable prices, could be expected to last much longer than a speculative boom based in any substantial part on hope of gain from perpetually rising values. A copy of the script of the foregoing presentation was sent to each member of the Committee following the meeting, and a copy has been placed in the files of the Federal Open Market Committee. Chairman Martin stated that since the preceding meeting of the Committee, Senator Byrd had called him on the telephone and out lined to him the course of the proposed hearings before the Senate Finance Committee on Governmental financial and monetary policies. It was contemplated that, if Senator Bryd agreed, the presentation that had been made by the staff this morning would be used at the hearing. The current plan, Chairman Martin said, was that Secretary of the Treasury Humphrey would appear as a witness at the hearings in mid-June, that Under Secretary of the Treasury Burgess would ap pear after the Secretary, and that he (Chairman Martin) would appear following testimony by the Secretary and Under Secretary. Chairman Martin noted that the Committee had been trying to with the Treasury in the find a better procedure for communication each understood the problems of the hope of being more certain that
other. Along this line, he and Mr. Balderston met with Secretary Humphrey, Under Secretary Burgess, and Mr. Wren, Assistant to the Secretary, last Thursday, May 23, to discuss problems of mutual interest. The Treasury representatives were anxious that the Fed eral Open Market Committee understand the nature of their problems. They recognized that they would have to pay the market rate for any financing that the Treasury might do, but at the same time they emphasized the difficulty of their position and the delicate problems that were being caused by the higher interest rates, including the increase in rates on series E and H savings bonds. They pointed out that the Treasury had secured the maximum increase in the savings bond rate that could be gotten from the Congress at this time, and it was out of the question as a practical matter to secure any further increase in that area. This meant that, with a large volume of series F and G savings bonds outstanding in the form of demand obligations, the Treasury officials were apprehensive regarding possible developments. They desired that the Committee be fully aware of these problems and of their apprehensions. Chairman Martin his feeling that the Committee had a delicate problem with expressed of the Government securities market respect to the underpinning generally. Mr. Balderston added the comment that Secretary Humphrey had of businessmen as a in this discussion to the expectations referred some of the current difficulties confronting the factor creating country.
Chairman Martin then called upon Mr. Hayes for a state ment on the economic situation and open market policy, in response to which Mr. Hayes made a statement substantially as follows: The economic situation continues fundamentally strong and essentially unchanged since the last meeting. Business optimism seems to have increased perceptibly, even though most current indices of physical production and distribution indicate a sidewise movement at best, and perhaps a slight downward tilt. Instead of enumerating all the major elements of strength and weakness, which are well known to all of you, I should like to stress a few rather confusing elements in the picture. For example, it is difficult to reconcile the failure of retail sales (seasonally adjusted) to record any progress since November with the rising trend of consumer income and of the consumers expenditure component of gross national product. Another surprising development has been the upward revision in estimated corporate profits for the last quarter of 1956 to an annual rate of 46.7 billion dollars and the maintenance of about this level in the first quarter of 1957. Apparently the widely held view that busi ness generally has been subjected to a profits squeeze is not based on a firm statistical foundation, although such a may yet develop, and some industries have no doubt squeeze trend suggests greater gains in experienced it. The profit than had been generally expected. It may ac productivity part for the growing business optimism and for the count in of capital spending programs at very high levels maintenance despite the loss of momentum in consumption. area of prices we also find rather mixed trends. In the pressures on prices may have subsided On balance the upward material prices again tending somewhat, with some basic Wholesale prices in after a period of hesitation. downward than a month ago, but consumer the aggregate are no higher probably increase further rose again in April and will prices with the recent trend of basic in May. In sharp contrast increase in steel prices is the widely expected material could have pervasive effects in the prices in July which wage pressures also are still certainly economy, and upward of provisions for automatic in part as a result in evidence, in existing contracts. increases embodied be found in the latest of comfort is to A good deal place, the growth in bank credit. In the first figures on through May 15 was much loans in the four weeks business
less than a year ago, and there was an actual decline in total loans as compared with a sizable increase in 1956. Even with a substantial allowance for June tax borrowing it seems likely that the rise in bank loans for the second quarter may be only about half as great as last year. Secondly, the last four weeks have witnessed a sharp drop in bank holdings of Government securities, following the large gain occasioned by the bank underwriting of the cash offering late in March. As a result, whereas privately held demand deposits had expanded by some $1.2 billion in the four weeks ended April 24, this rise was more than wiped out by a drop of $1.6 billion in the following three weeks. Thus it would appear that maintenance of steady pressure on bank reserves has succeeded in preventing any lasting addition to the money supply in connection with the recent bank underwriting of the new Treasury issues. This is particularly gratifying in view of the fact that Treasury cash borrowing has been so much larger in 1957 to date than in any spring period of recent years. In contrast with this modest easing of demand for bank credit, the demand for long-term capital remains extremely high and apparently well in excess of available savings. Personal savings are reported to have turned downward in the first quarter, reversing the trend of the preceding year, although these statistics are admittedly none too reliable. There is some circumstantial evidence to confirm this result, however, in the reduced rate of deposit expansion at mutual savings banks in the first quarter. If the rate of savings has actually fallen, this is still another confusing element in view of the failure of retail sales to expand as personal incomes have risen. Even after the past month's substantial upward adjustment of yields on new corporate and municipal issues, there are still signs of indigestion in this area, and the feel ing of uncertainty in the capital markets is enhanced by the prospect of a new Treasury cash offering of $3 to $ billion within the next month or two, together with the large refunding required in connection with the Treasury's August maturities. The very fact that the economic indicators are some what mixed and confusing suggests that it should not be too difficult to determine sound credit policy at this juncture. Until the business outlook is further clarified, I would think it unwise to make any overt change in policy, and I would therefore favor maintenance of about the same degree of pressure on the money market as has obtained for
the past several weeks, with no change in the discount rate or in the directive. Additional justification for a policy of cautious steadiness in applying restraint may be found in the recurrent waves ofuneasiness that have characterized the capital markets, as each new rate plateau has proved too low for a sustained equilibrium between supply and demand. The demand pressures will soon produce even greater stresses as repeated Treasury refunding operations are interspersed with cash borrow ing of $8 to $9 billion over the summer and autumn, while the usual seasonal demands of business will be crowding upon the banks. Indeed, expectations of that coincidence of heavy demands may already be exerting new unstabilizing influences in the capital markets. Subject to the usual reservations as to our trying to set any specific statis tical target, I would think that net borrowed reserves of somewhere around $500 million and member bank borrowings around $1 billion, would be entirely reasonable. If our present projections for the next three weeks turn out to be at all accurate, this would mean that a minimum of open market operations would be required to accomplish objectives, although it is conceivable that a moderate our of repurchase agreements and outright bill purchases volume might be called for during the coming week, especially if the atmosphere in the capital markets should show any further deterioration. last three weeks there had Erickson said that during the Mr. in the economy of New England. Employ been no significant changes of purchasing agents indicated was still high. April 30 figures ment strong as they were earlier forces were not now as that expansionary that expenditures for present. It was expected but they were still greater in 1957 than would be 20 per cent research and development as of the end of mutual savings banks in 1956. Figures covering that Mr. Hayes had reported, namely April indicated the same tendency at such banks. of growth of deposits in the rate a continuing decline no change in the discount that he would recommend Mr. Erickson said
rate or in the Open Market Committee's directive at this time. He would suggest a continuation of the same policies and operations that had been followed during the past three weeks. Referring to the comments that Mr. Rouse had made concerning recent open market operations, Mr. Erickson stated that he suggested such a report by Mr. Rouse with the thought that it would be helpful to the Committee in reaching its judgments to have a brief oral resume of salient factors at the beginning of each open market meeting. This would be in addition to the excellent written reports that each mem ber of the Committee received from the New York Bank each week and before each meeting. Mr. Erickson also referred to the daily wire that was sent to each member of the Committee and each Reserve Bank President before lunch, immediately following the morning telephone conference. He suggested that if, after reading the wire, any of the members of the Committee had questions as to what the desk should do, they discuss them with the Trading Desk at the New York Bank to see if the situa tion could be clarified. They should also talk with the Chairman of the Committee and in that way attempt to have a continuous understand ing of what was going on. Chairman Martin said that these were excellent suggestions, adding that having Mr. Rouse comment on the general situation at the beginning of each meeting would be helpful to all of those present. He then called upon Mr. Irons.
Mr. Irons said that there had been no new developments of significance in the Dallas District during the past three weeks. The district was moving along at a high level of activity with tendencies similar to those in the national picture. The outlook and confidence were strong. Department store sales had not come up to expectations, and petroleum production was down a little, although it was still high. These were about the only indicators showing declines in the area at the present time. Employment was up; construction was up. Residential awards had been larger during the first quarter of this year than a year ago while nonresidential construction was very strong. New automobile sales during the first four months of 1957 were 10 per cent above the comparable period last year. The agricultural situation had been favored with ample moisture but the rains had delayed planting of some crops. Reserve city banks were in a moderately comfortable reserve position and country banks had excess reserves. Borrowings had not been heavy although there were three or four continuous borrowers with whom the Dallas Bank was keeping in touch. Mr. Irons said that Mr. Hayes had expressed his view as to the next three weeks about policy: to try to maintain during credit maintained recently. This was of restraint that had been the degree called for by the economic situation, but at the same time the very that the details of the capital markets meant delicate situation in the Management of the to the judgment of operation must be left the
System Account. Mr. Irons would not favor a discount rate change at this time or any overt action to alter conditions in the money market. Mr. Mangels said that West Coast conditions paralleled closely those described thus far. There had been a little improve ment from the situation reported at the preceding meeting. Non agricultural employment had increased slightly. Contrary to the pattern of the past two years, residential building permits were higher in April than in March, and they were also higher than in April of either 1956 or 1955. Requests for VA and FHA appraisals had risen, indicating that building conditions might improve in future months. Steel furnaces of the district were operating at of capacity, and finished steel was being produced 100 per cent rates somewhat better than the national at 95 per cent of capacity, Automobile sales during the first quarter of 1957 were figures. 1956, improved sales in the first quarter of 5 per cent above having more than offset slower sales in Arizona and California Twelfth District bank loans increased other parts of the district. period by more than the national in during the latest four-week Bank were nominal, and Twelfth crease. Borrowings at the Reserve were still net sellers of Federal funds. District banks Mr. Mangels said that he would go along with As to policy, that the Committee should what had been said thus far, believing that it had had in recent weeks. continue about the same policy
There should be no change in the discount rate. Mr. Mangels said that he would have no objection to modification of clause (b) of the Committee's directive so as to eliminate the reference to the international situation; he did not believe that a change was neces sary at this time although the Committee might wish to consider a change in the directive soon. Mr. Deming said that the situation in the Minneapolis District was about the same as in the districts for which comments had been made. Agricultural prospects were better than in the past two or three years, with producers of both crops and livestock feeling that the outlook was very good. Farmers generally were optimistic. Iron ore shipments had risen in April. Credit demand continued strong. With respect to the national picture, Mr. Deming said that he would not disagree with the comments made at this meeting. There should be no overt action taken at this time to change policy and there should be no change in the degree of restraint. reported that Seventh District business sentiment Mr. Allen of greater optimism. The further swing in the direction had made a level stability. Retail was still one of high over-all situation demand, with department aggressive consumer sales revealed reasonably the four weeks ending of 5 per cent in a sales gain stores reporting gain for the and a 4 per cent with a year earlier, May 18 compared higher than last year Total employment was slightly year to date. wage payments were up 5 or centers. Salaries and in most district
6 per cent as in the nation and were expected to show further gains. Mr. Allen said that residential construction in the Seventh District was slow and gave no evidence of a pickup. However, employment in construction was higher than last year in all large Seventh District cities and in many smaller commnities. Hiring plans in most cities of the district were fairly optimistic, with shortages of engineers, machinists, draftsmen, clerical workers, stenographers, and typists continuing. The Chicago Reserve Bank currently had 250 unfilled requisitions. Commercial banks reported a continued strong demand for loans. The smaller rise in business loans thus far in 1957 than in correspond ing months of 1956 had been caused primarily by a larger volume of re payments. The volume of new loans had been either higher or virtually the same as last year for all industries except construction. Auto mobile credit terms had been easing, Mr. Allen said, and the proportion of loans on new cars written for more than 30 months to maturity had recent months. In April, 29 per cent of such loans in been rising in Indiana were for more than 30 months maturity; in Southwest Michigan 19 per cent, and in other areas 43 per cent. Farm the proportion was had been gaining, Mr. Allen stated, income in the Seventh District were 8.6 per cent ahead of a year earlier, and cash receipts in March the country as a whole. It a gain of 4.5 per cent for compared with of gain would continue for the was not expected that this margin that enlarged Government 1957, but it was expected entire year of
payments would more than offset any decline in income from marketings, with the result that total cash farm income and net farm income as well would show modest gains over 1956. Farm spending apparently had increased in recent months, with gains at country stores greater than at city stores. Farm machinery manufacturers reported improved sales. Another evidence of optimism on the part of farmers was provided by the continued advance in farm real estate prices, Mr. Allen said. There was a very strong demand for farm land to be added to existing farms, very little land was being offered for sale, and country bankers reported a substantial amount of funds awaiting opportunity for investment in farm land. Mr. Allen summed up the Seventh District farm situation by stating that agriculture had shifted position from that where it provided some drag on the over-all level of economic activity to one where it was now providing a mild expansionary force. Mr. Allen stated that he was in agreement with what had been suggested by others regarding monetary policies to be followed during the next few weeks. Mr. Leedy said that the Tenth District had had continuing improvement in moisture conditions since the preceding meeting. Sur face moisture was more than adequate in some sections and there had been a very material improvement in subsoil moisture. Rains had delayed planting of corn in parts of the district. Excessive moisture in some areas and cool weather had affected the wheat crop, but it was estimated that yield per acre would be up from last year even though
the total crop would be down because of a 20 per cent reduction in the acreage planted in the district. Mr. Leedy referred to the recent severe tornado in Kansas City which had destroyed about 750 small houses. It was expected that these would be rebuilt by workers who had been on strike, but who were returning to work to help in alleviating the situation in the stricken area. Employment, which usually increased in the spring, had not shown a rise this year, reflecting to some extent cutbacks in automobile assemblies. There also had been some lessening in production of oil. Retail trade in the past three weeks showed that the Tenth District was doing less well than the balance of the country. Borrowings from the Reserve Bank had increased sharply in the past several weeks. Mr. Leedy said that the rise had come from city banks which had experienced a drain from interbank deposits. Country banks were expanding their loans seasonally, and correspondent banks were coming to the Reserve Bank to help meet the added demands. Mr. Leedy said that he concurred in the comments already ex pressed as to credit policy. He believed that the Committee should about the same pressure as had been exerted in the continue to apply past three weeks. concluded his remarks by referring to the delicate Mr. Leedy was faced. If we were moving toward situation with which the Treasury suggested that the so-called new higher level of interest rates, he a whether the Treasury Department had plateau might raise the question
made a mistake in attempting through the savings bond device to encourage the public to place their savings in that form. In view of the large volume of savings bonds outstanding, further indications of a higher level of interest rates might make it necessary for the Treasury to consider whether this whole program should be revised. Mr. Leach said that divergent trends continued in the Fifth District economy. Shipbuilding, aircraft manufacturing, and non residential construction were strong. On the weak side were auto mobile sales and residential building. Businessmen and bankers in the Baltimore area were optimistic, but sentiment in the tobacco growing districts of eastern North and South Carolina were slightly pessimistic. In reviewing industries in more detail, Mr. Leach said that textile mills were still maintaining curtailed schedules of operations, although there had been recent indications of a more favorable out look. There had been selected improvements in orders and firming of some prices. Production of bituminous coal was above a year ago, foreign shipments from January 1 to May 4 of reflecting particularly this year, which had been 37 per cent above the same period in 1956. that industry were somewhat less promising than earlier, Prospects for foreign orders had mill requirements were lower, partly because steel April price increase was not sticking. receded, and the recent change in the that the most striking Mr. Leach said
Fifth District was in the outlook for the furniture industry. The Southern Furniture Market was disappointing; attendance was poor, business written was small and the influx of orders usually received after the market did not materialize. Industry expectations were that the situation would get worse before it gets better. Member bank borrowing at the Richmond Bank had averaged $43 million thus far this month, Mr. Leach said. Approximately half of this amount was concentrated in a few large North Carolina banks which had been forced to absorb the impact of a gradual withdrawal from banks throughout the State of $90 million in State funds. In view of the continued crosscurrents in the Fifth District and in the country as a whole, Mr. Leach said that he would favor continuing as the Committee goal the same degree of tightness that it had been attempting to achieve. As far as he could see now, this would be reflected in net borrowed reserves of around $500 million. he thought the New York Bank was Mr. Leach added the comment that in not offsetting the temporary ease during the last statement right in float. He would not recommend which was caused by an increase week a change in the discount rate at this time. in the circumstances, he would make no Mr. Vardaman said that change in the present policy of the Committee. substantially as follows: Mr. Mills next made a statement in my judgment that confronts The most pressing problem is the condition of the Reserve System today the Federal
capital markets where financial developments have brought the capital markets almost out of contact with the markets for bank credit. This is a situation which might deserve radical and bold Federal Reserve System action by way of bringing our influence to bear on the capital markets so as to hasten adjustments that appear to be in the making and to be imminent. Obviously what I refer to would be an increase in the discount rate by the Federal Reserve Banks, the thought being that the adjustment of the capital markets to an increase in the discount rate would clear the general atmosphere in the capital markets and in doing so also facilitate the Treasury's financing operations. In theory, an increase in the discount rate through the in terest-cost factor, should tend to ration the supply of in vestment funds only to those prospective borrowers who are able and willing to pay the going market rate of interest. In that process, less credit-worthy borrowers or borrowers who could postpone their claims for the time being would fall out of line and some degree-of pressure on the capital market would be relieved. Under such circumstances, the Treasury might then be in a position to come to the market with a long-term offer ing at an interest rate conforming to whatever structural interest rate adjustment had been reflected by the higher discount rate. This kind of policy would be a departure from general Federal Reserve System thinking and action, in that we would direct our influence to the capital mar kets and recognize a responsibility in that area as well as our fundamental responsibility for assuring the commercial and banking community that credit will be available in adequate supply for legitimate needs. Along with an in crease in the discount rate, it would of course be neces sary for the System also to determine its policy in the general area of the availability of bank credit. In that connection, we know that an increase in the demand for bank the middle-June tax period and credit is in prospect over some uncertainty has already been voiced as to whether that provide the reserves to carry that situation the System will over without undue restrictiveness. far around the table have reached The discussions thus the general scheme of policy that has the conclusion that in effect over the last three weeks should be continued. been we should press our can be raised whether The question same degree that has been credit policy to the restrictive interest rate adjustment effect recently if a structural in
in the capital markets is imminent and, especially, if the adjustment should be induced by a Federal Reserve discount rate action. In the light of the last two weeks, I would judge that a level of negative free reserves of around $400 million and a level of Federal Reserve Bank discounts ranging from $700-800 million had effected about the right degree of pressure. If so, a level of discounts of a billion dollars and of negative free reserves of $500 million could subject the market to heavier pressures than would be desirable at the present time, Again, I would feel that the Manager of the Account and the Desk should have very wide latitude in their operations and in the feel of the market to prevent kinks and unnecessary pressures. In concluding his remarks, Mr. Mills said the subject he had presented was very broad. If the type of policy he had suggested could be rationalized, it not only would forward the objectives of the Treasury but would also be conducive to the appropriate objectives of credit restraint on the part of the Federal Reserve System. Mr. Robertson said that he was concerned with the inflationary pressures that existed, and he thought similar concern was implied in the remarks of those who had preceded him this morning. He was more concerned for the long run than for the short run but felt that the pressures were very real now. Mr. Robertson asserted that the Com mittee had not taken into account sufficiently the increased velocity of money in adjusting the volume of money; if he could do it over, he would be in favor of reducing the volume. In that connection, he stated that he too had been thinking of the discount rate, principally because it seemed to him that the only feasible time for an early in crease would be in June; if action were not taken them, the next be in August. Mr. Robertson said that he had come opportunity would
to the conclusion that such action in June would probably be too much of a jolt. He hoped that the System would continue to think about the discount rate and be in a position to act when feasible and desirable. In the meantime, he hoped the Committee would strive toward a degree of tightness no less than had been achieved at the moment. He wished to think of the suggested $500 million of net borrowed reserves for the next few weeks not as the top but as the bottom, on an average basis. Mr. Robertson said he hoped the Com mittee and the Manager of the Account would be no more concerned about offsetting temporary tightness than about offsetting excessive ease that might arise, for example, through float. If we are to take offsetting action on one side, we should act on the other side as well. He hoped that the tightness to be achieved over the next three weeks would be as restrictive as that achieved up to now and, if any thing, he would prefer to be on the tighter side. Mr. Shepardson said that he was in substantial agreement with the comments made thus far to the effect that the economy was generally in a sidewise movement. He was in accord with Messrs. Mills and Robertson in feeling concern about the latent pressures that might break out with the change to a greater feeling of optimism on the part of the public that had been reported this morning. Even though the economy might be static, it seemed to him that at the moment there was considerable danger of an outbreak of further upward pressures. The question in Mr. Shepardson's mind was when the
System should move to do something about such pressures. He realized that, with the Treasury activities in prospect during the next few months, the Committee might be more or less precluded from taking action at certain times. However, he felt that the System should be thinking very definitely of the possibility that additional upward pressures might develop and it should be consider ing when it could best move to check them. Mr. Shepardson said that he was not certain that now was the time for a discount rate change, but some little time might be required to get ready for such a change and in his opinion the present was not too early to begin this process. Mr. Shepardson said that he would not favor any easing in the situation and if there were any deviation from the present situa tion, it should be toward tightness rather than toward ease. Mr. Fulton described Cleveland District employment as high with a diminishing number of unemployed. The steel operating rate was down but the industry expected that inventories would be worked off and that the operating rate would improve rather shortly. Mr. there was no doubt that steel prices would rise. There Fulton felt in manufacture of appliances. The wage cost had been some reduction facing industry but profits were quite substantial. The problem was There was a consensus that infla business community was optimistic. with us and that it must be controlled. tion was actively Mr. Fulton said that he had come to the conclusion that there now despite the reduced for easing the reserve situation was no reason
steel rate. Rather, the System should maintain the posture it now had. New capital offerings in June were expected to be large and demand for credit was growing. He would go along with the comments of Messrs. Mills and Robertson regarding the possibility of an in crease in the discount rate in the somewhat near future, Mr. Fulton said, adding that if the System did not take action prior to the Treasury's refunding it would be hemmed in again as it had been on other occasions. He felt that we could not live indefinitely with a constantly increasing short-term interest rate, with the bill rate constantly above the discount rate. If the market was thus reflect ing a demand for funds, the System should recognize it through the discount rate. Mr. Fulton expressed the feeling that at least by July closer consideration should be given to an increase in the dis count rate. Mr. Williams said that business activity in the Third District continued to move sidewise. Department store sales were just about equal to a year ago. Automobile sales were slow. New housing starts were running well below last year. The Third District situation was comparable to that outlined by others. Loans and investments of reporting member banks increased in the three weeks ending in mid May but by a smaller amount than last year. Business loans were up somewhat less than a year ago. Total deposits were off about $75 million in the three-week period. Banks met this drain of deposits
by liquidation of Government securities, substantial net purchases of Federal funds, and borrowings from the Federal Reserve Bank. Preliminary approaches to the persistent borrowers from the Reserve Bank had been made and they had indicated that demands on them would be quite heavy in the period ahead. Mr. Williams remarked that several months ago the statistics were outrunning sentiment, whereas now the attitude of the business public was outrunning the statistics. As to credit policy, Mr. Williams said that he would suggest no change in either the objectives or the procedures being followed. The Philadelphia Bank had not taken into consideration the suggestion made by Mr. Mills of a possible change of the discount rate in anticipation of developments in the capital market. Personally, Mr. Williams said,he felt that the System would need more evidence on this suggestion before it was ready to move on the rate. Mr. Bryan said that Sixth District employment was staying steady or moving slightly upward. In the financial field, there had been a rather sharp drop in deposits at some of the larger banks with the result that borrowing had increased. The district seemed to be again in a movement in which it was losing funds to other parts of the country. Mr. Bryan noted that Mr. Allen had commented on farm land very substantial speculative fever prices. He said that he sensed a
in all States of the Sixth District with regard to land and property transfers. On the national picture, Mr. Bryan stated that he had come to this meeting with a greater sense of alarm than had been generally expressed. The country had had another increase in the price level. The persistent and large increases that had been occurring for a good many months had been exceeded in amount in recent years only by the increases during the Korean period. Mr. Bryan felt that the Committee must face certain facts. One was that the depreciation of 4 per cent in the value of the dollar during the past year, if not a galloping inflation, was certainly more than a creeping inflation. Secondly, Mr. Bryan felt that we were still confronted with a rip-roaring capital goods boom, and see no reason for this boom stopping either in the immediate he could The System was confronted with the future or in the fairly long run. the near term and the longer run problem of what to do about both that it would fight it out with the prospects. It could decide or it could try to exercise further restraint present level of rates, on the situation. he was belatedly convinced that the Mr. Bryan said that to exercise further restraint in System had a moral responsibility the year the volume of bank In the second half of this situation. also be a period of to go up. This would credit was almost certain Bryan said that it seemed a foregone a major Treasury problem. Mr.
conclusion that the System would supply reserves in the second half of the year, and in considerable amount. The sole question that the System had to decide was whether it was to supply these reserves at the present level of interest rates or at a higher level. Mr. Bryan felt that the Committee would do better to supply the reserves at a higher level of interest rates. The present level had not stopped the inflation, and he did not believe that we had yet reached an equilibrium in the demand and supply of money savings for the economy. He believed, therefore, that the System should increase the discount rate, and he followed the line of reasoning that had been set forth by Mr. Mills. This increase should be made fairly promptly. If we were to go far into the second half of the year without doing some thing, the System would be frozen with the present rate. Mr. Bryan the thinking that Mr. Robertson had said he shared to some extent in the rate might be a shock to the market expressed that an increase to come suddenly. He had the idea that the System might if it were as it had another time inadvertently, approach this problem advertently rate and thus warning the one Bank raising its discount namely with concerned with this problem that the System was fundamentally market level of discount rates. not committed to the existing and that it was asked his staff to examine Bryan said that he had To that end, Mr. order to determine the validity in the Sixth District in the situation Bank might be indicated that the Atlanta some of the signs that of higher discount rate. at this time a differentially justified in having
Mr. Johns said that he was not ready to take a position with respect to the matter that had been raised by Mr. Mills. He had come to this meeting believing that inevitably the System was going to supply some reserves in the coming months and that perhaps it would have to take into account in that process the desirability of maintaining the structure of interest rates at about the present level, believing that to be a good level and where the System wanted to keep it. That would have implications for open market policy in coming weeks. Mr. Johns said that he still had some slight fear that for the System to tolerate or even encourage an increase in the level of interest rates might entail more restriction than it wanted, He was not so sure of that as to argue vigorously for it, however. He had come here prepared to say that he thought the System should main tain about the degree of restraint it had recently had. That would have involved supplying reserves in such quantities and at such times as needed. Mr. Szymczak said that normally he would favor an increase in the discount rate, perhaps now or sooner than now. Under the circum stances, however, he was afraid that any increase in discount rate would hurt the very markets we were talking about, that is, the capital market and the market for Government securities. One could interpreted, but Mr. Szymczak said not tell how such action would be market would interpret it to mean that he had the feeling that the as it had been intended to be as restrictive the System not only that
but more restrictive. An announcement of an increase in discount rate by one Bank or by twelve of the Reserve Banks could be con strued to mean that the System felt that the rate generally should be higher and that the System would not make available reserves. Mr. Szymczak felt that the System would have to provide some reserves, perhaps beginning early in the second half of the year. Therefore, he would favor negative free reserves between $400 and $500 million and borrowings by member banks below $1 billion. He would also give the Manager of the System Account as much latitude as required to meet the situation that might arise. Mr. Szymczak commented that the Treasury's problem was our problem because it must go to the market and the capital market is a part of our problem. Whatever happens to either affects the reactions of the public and of members of the Congress to System actions regarding monetary policy. Mr. Balderston then made a statement substantially as follows: I share much of the concern that Mr. Szymczak has ex pressed about the need for not unsettling the capital mar kets right now. On the other hand, I have a continuing concern about what is happening not only in this country, but throughout the world. We had the news last week of certain wage contracts in California that will run for of 18 cents per hour each year five years and give a raise construction industry. Such develop to laborers in the for people to want to buy now ments increase the tendency wage price spiral is about to re rather than later. The escalator clauses. As a ceive another twist of built-in will apparently increase, and perhaps result, steel prices and freight rates well. I mention steel freight rates as because they are such pervasive influences. governmental units will have to Utilities and local increasing extent. The capital market to an come to the
margin between the present discount rate and the rate on Government securities seems to me likely to widen. Already it is wide enough to present some technical difficulties. This means that I now regret our dis count rate was not raised earlier this year. In cidentally, our rate is the second lowest among the developed nations of the world, the Swiss alone having a lower one at 2-1/2 per cent. The French have a per cent rate and the British 5 per cent. Ours remains at 3 per cent. In the face of the world-wide inflationary tendency, I am not too comfortable with this rate. But if and when we do move up our discount rate, the timing would require very careful attention so that the market could be gotten into a steady state before the Treasury's August refinanc ing. That will be a difficult financing: $8 billion out side of the Federal Reserve System, of which only $3 bil lion is in the banks and $5 billion in the hands of nonbank holders. We not only have the big August financing ahead, but we also have the real risk that too much turbu lence in the capital markets may cause the more rapid redemption of F and G bonds. If these are redeemed at a faster rate, enough of these are outstanding to accentuate the Treasury's problem. In short, I think that discount rate action may need to be taken even at this late date; but any action taken ought to be so timed as not to make the Treasury's financ ing problem more difficult. That means that unless taken right away, it would have to wait until fall. Mr. Bryan commented that one of the difficulties that was be ginning to appear and that would continue to be present in the capital markets arose from the fact that, as short-term interest rates moved well above the discount rate, there was speculation as to the future rate; and in consequence of this many persons would of the discount because they believed that the present level of not make commitments rates had no stability. Thus, the System would either have to adjust to the market that it would not the discount rate or give assurance
increase the rate. Mr. Bryan said that his preference would be to adjust the discount rate. Chairman Martin said that he was alarmed about the picture; and "alarmed" was the correct word to use. At the same time, he did not know the answer. He had been mulling the situation over for the last couple of weeks and still did not see the answer clearly. The Committee had been dealing with some psychological aspects of the situation for a couple of years and it might well be that there had been miscalculations. It might have been wiser if the System had raised the discount rate earlier. The Committee had been uncertain as to what the business situation would be earlier this year. As Mr. Williams had said, the statistics were then outrunning sentiment, whereas now sentiment seemed to be outrunning the statistics. The Chairman said that he was inclined to think that the System must supply reserves and supply them quite actively during the second half of this year. Regardless of Mr. Robertson's point that the System may have miscalculated as to the velocity of money, it had restrained volume of credit and the velocity had been taken into consideration. the economy, additional reserves would be In terms of the growth of the of this year. As he had actively in the second half needed and needed must have a posture of re in this situation the System said before, Mr. Hayes had said savings. If what spending and increasing ducing in the first quarter of rate of growth in savings about the reduced
this year was correct, this made the picture even more alarming. The Chairman said that the only thing he knew of that was seriously short in supply was savings. After errors have been made, he said, it becomes very easy in retrospect to see them. Without stating that errors had been made, Chairman Martin said that all of us would have done many things differently if we had been able to know how the situation would develop. Chairman Martin went on to say that the System had a very real obligation to consider the Treasury's problem, as Mr. Szymczak had pointed out. While he would not go as far as Mr. Johns bad indicated in saying that the System would have to supply the reserves to maintain the interest rate structure, the Chairman said that he had not changed the judgment that he held when he came to the meeting this morning. Perhaps we should consider an increase in the discount action immediately would, in his opinion, rate, but to take such compound the System's and the Treasury's difficulties. It was diffi cult to gauge what were legitimate fears and apprehensions, and what was just idle speculation. However, anyone looking at the capital and seeing the volume of issues and the sort of situa markets today during the meeting this morning with new issues selling tion mentioned observing that situation must as high as 5-1/4 per cent yield--anyone realize that we were faced with a delicate operation. The Treasury of demand debt in the form a problem with the large volume too had of savings bonds.
Chairman Martin said that we were talking in this room and that we must be extremely careful about comments on the subject. However, we were dealing with what could amount to a run on a bank. Runs on banks can start for no good reason, he noted, adding that the Treasury could be faced with that sort of a problem because of the large volume of savings bonds outstanding. While he was not suggesting that this would happen or that this was the Committee's controlling obligation, nevertheless, if the Treasury should have a "run on the bank" the System would be faced with a very difficult problem. In order to achieve the maximum pressure against credit expansion, it was necessary for the System to handle its market operations very carefully. Chairman Martin said that he would lean in the direction that Mr. Mills had suggested because he believed that if the System could raise the discount rate and supply the reserves that it was going to have to supply at a little higher level of interest rates, be the most effective action that the System could take. this would was inclined to think that the present would be a little However, he raise the discount rate in view of the psychology that too early to for an increase in the rate was was swinging around. The suggestion very carefully in terms those present should study something all of the action were misinterpreted, it of the most effective timing. If could result in widespread misunderstanding throughout the country. was convinced that in may small and large, the Chairman said he By
communities the discount rate change was a major item. Many of the E and H savings bonds were held in areas where that attitude existed. The Chairman expressed the view that this was a most critical juncture in the battle against inflation and that anyone who minimized the alarm he had indicated as to the possibility of an ultimate flight from the dollar was making a serious mistake. On the other hand, if there were anything that tended toward a run on the Treasury, such a development could become one of the elements in a flight from the dollar. Chairman Martin did not see how we could fail to recognize the elements in the picture. His own feeling was that the Committee should maintain the present degree of restraint, taking overt action and letting the Manager of the Account have the in neither direction, latitude to feel his way in this market. All of the members maximum in mind the problem of reserves and of of the Committee should bear of a change in the dis of interest rates and the possibility levels near future. We should also bear in count rate at some time in the Treasury may have taken the problem of the Treasury: the mind the the fact was that at Leedy had suggested, but wrong course, as Mr. had $55 billion of demand obligations the present time the Treasury Considering the entire form of savings bonds. outstanding in the came out at the point that Martin said that he picture, Chairman change. He did directive without maintain the Committee should the had been situation change in the international feel that the not
such as to warrant deleting the reference to it in clause (b) of the directive. The aim of the Committee during the next few weeks should be to maintain as even a keel as possible and to let this psychology work itself out. Perhaps the advertent method which Mr. Bryan had suggested could be used, but at the present juncture Chairman Martin said that he would not wish to take a positive posi tion as to that suggestion. Mr. Shepardson inquired whether the Chairman's comments implied that June might be a month when the System could put reserves into the market and at the same time increase the discount rate with out undesirable consequences. The Chairman responded that this could be the case but that he was not taking a position at the moment. Mr. Hayes commented that he understood on the strength of the projections that float would probably take care of most of the addi tional reserve needs in June. Thus the System would not be in the position of having to put reserves into the market at that time. On the larger question, Mr. Hayes said that if there were to be an increase in the discount rate the System should be very clear as to why the increase was being made. He noted that two reasons had was not sure that the two were for such an increase, and he been given reason that there were of these was the obvious consistent. One should increase the and that the System inflationary threats serious he felt, was the essence these threats. This, discount rate to combat
of the statement made by Messrs. Robertson and Shepardson. The other was the suggestion he understood to be implied in Mr. Mills' comment, that is, a rise in the discount rate would provide greater settlement and stability in the capital markets on the theory that the existing uncertainty as to rates was a drawback in the capital markets and that perhaps elimination of that uncertainty would help provide a better equilibrium. With respect to the second objective, Mr. Hayes said that he had very grave misgivings as to whether an increase in the discount rate now would produce an equilibrium, be cause of the whole atmosphere in the securities market. It was very much open to question, he said, whether dealing with such a delicate problem ratewise might not have an effect just the opposite of that desired. Personally, Mr. Hayes said that he had misgivings as to whether such a move was needed strictly as a monetary measure. He had not reached a conclusion that the inflationary forces were very definitely and strongly in the ascendency. He stressed the confused and mixed character of the picture, as he and some of his colleagues saw it. It was true that sentiment had improved, Mr. Hayes said, but he was impressed by the statement Mr. Williams had made that sentiment has improved but statistics have worsened. He thought it whether this was a desirable time to make an overt very questionable greater restraint. He did not believe such action was move toward called for, with the business picture looking the way it does, There was wide room for judgment on that, of course.
Mr. Erickson said that it seemed to him that business sentiment in the spring of each year following a good year was always tending down early in the year, and later on it improved. He would like to be sure that we did not overemphasize such de velopments this year. Mr. Vardaman said that he was wholly in agreement with the comments Mr. Hayes had made. Without meaning to be presumptuous, he noted that there were some forty persons in the room, and he suggested that if word of this discussion got outside the room it would have almost as disturbing an effect on the market as though the discount rate were raised. Chairman Martin said that he had already commented on the latter point and that he was glad that Mr. Vardaman had reiterated the need for not commenting about discussions in this room On the other hand, it was essential that the Committee discuss these prob lems, and it must rely on the intelligence and discretion of the persons attending the meetings. the Chairman said that he would gather that As to policy, the consensus was that the Committee should maintain the status quo to study the problems that had been and that it should continue discussed at this meeting. he had no objection to that state Mr. Shepardson said that ment. However, the comment Mr. Hayes had just made regarding the
difficulty of judging the business situation was one that always faced us; the Committee would always be behind the figures, and it was part of the Committee's job to reach a judgment before the figures reached it. Chairman Martin inquired of Mr. Rouse whether he had any sug gestions regarding the directive, and he responded that he had none. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York until otherwise directed by the Committee (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allow ing 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 wi;h 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; pro vided 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 in debtedness 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 certificates of indebtedness amounts of special short-term 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 accommoda tion 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. It was agreed that the next meeting of the Committee would be held at 10:00 a.m. on Tuesday, June 18, 1957. Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions