July 9, 1957 FOMC Minutes

FOMC minutes

those in New York take the lead in raising the prime rate. There was general discussion among the principal banks that as soon as it was decently possible after the Treasury financing, the rate should be raised. It was expected also that the discount rate would be increased by 1/2 of 1 per cent. This was gossip, Mr. Rouse noted, and was talked to customers as well as bankers. One other point Mr. Rouse mentioned had to do with a position he had taken. The Treasury and the market felt that the refunding announced in May was priced on the market. In trying to appraise the results of that offering, Mr. Rouse felt that almost everybody had been influenced by the record of the past fifteen years in that there had been support for Treasury issues by the Federal Reserve during and the pattern of rates could be played, so that there the war period any point in pricing securities under the market. It was not really type of thinking, Mr. Rouse to get away from this had been difficult the Treasury to take all of these said, and it was now necessary for increases in the prime rate including the possibility of factors, in pricing the forthcoming discount rate, into consideration and the this position fairly strongly Mr. Rouse said that he had taken issue. Treasury over the and others at the with Mr. Burgess in discussions must stand on their that the new issues two months, emphasizing past own feet. Mr. Rouse's statement of asked for clarification Mr. Robertson whatever the in feeling that were correct not think dealers that he did

Treasury issue might be, purchasers might be buying into a loss. Mr. Rouse responded that there had been occasions when that had happened in the past but that he did not think the fear was justified on the present occasion. Mr. Hayes commented that it was well to bear in mind that in a rising trend of interest rates, any financing was likely to be in danger of going to a discount shortly after it was announced. This had happened in many corporate issues and was considered not abnormal. Mr. Hayes then referred to the discussion of swaps, stating that all that Mr. Burgess had mentioned to him was the possibility of some kind of direct buying by the Federal Reserve of an issue of one year or longer maturity and selling of shorter-term securities in order to satisfy the liquidity needs of holders of rights. The general intent is to avoid a necessity for the Treasury offering a very short term security which might tend to cut off demand for the other new issues. Mr. Allen suggested that this would not be a swap as be understands swaps. not think the Committee would Chairman Martin said that he did shorter securities for longer securities, wish to exchange some of its indicated they would not favor such an and Messrs. Robertson and Allen inquired whether anyone present would arrangement. The Chairman then of any affirmative response, action and, in the absence favor such stated that the matter was thus disposed of.

Chairman Martin asked for other comments in connection with the renewal of the Committee's directive, in response to which Mr. Rouse stated that he had no suggestions for change in the amounts. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York until other wise directed by the Committee: (1) To make such purchases, sales, or exchanges (in cluding 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 sus tainable economic growth while recognizing uncertainties in the business outlook, the financial markets, and the inter national situation, and (c) to the practical administration of the account; provided that the aggregate amount of securi ties 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 certifi cates of indebtedness purchased from time to time for the accommodation of the Treasury, shall not be in temporary creased or decreased by more than $1 billion; direct from the Treasury for the (2) To purchase Reserve Bank of New York (with account of the Federal in cases where it seems desirable, to issue discretion, or more Federal Reserve Banks) such participations to one short-term certificates of indebtedness amounts of special from time to time for the temporary as may be necessary provided that the total of the Treasury; accommodation held at any one time by the amount of such certificates Reserve Banks shall not exceed in the aggregate Federal $500 million; from the System to the Treasury (3) To sell direct such amounts of Treasury account for gold certificates maturing within one year as may be necessary securities of the Treasury; time to time for the accommodation from

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. Mr. Rouse stated that net borrowed reserves had been running in excess of $700 million for about 10 days and that the market appeared very calm although he sensed some turbulence underneath the surface. He also sensed less unwillingness on the part of banks to borrow. Mr. Rouse also referred to a report this morning of another AAA rated thirty year utility bond issue that was being re-offered at 4.43 per cent, stating that that illustrated the rapidity with which the recent move ments in bond prices had taken place. He expressed the view that the decline a few weeks ago had been faster and had gone farther than was the recovery during the last few days reflected the warranted and that same situation. that the next meeting of the Committee would be It was agreed held at 10:00 a.m. on Tuesday, July 30, 1957. Thereupon the meeting adjourned. Secretary's note: Immediately following the Governor Robertson reviewed plans meeting, 1957, during which Mr. for Operation Alert Director, Division of Bank Opera Leonard, Mr. Allison, Special Consultant, tions, and entered the room. Secretary