August 20, 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, August 20, 1957, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Allen Mr. Balderston Mr. Bryan Mr. Leedy Mr. Mills Mr. Robertson Mr. Vardaman Mr. Williams Mr. Treiber, Alternate for Mr. Hayes Messrs. Fulton, Irons, 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. Hackley, General Counsel Messrs. Atkinson, Bopp, Marget, Mitchell, Roelse, Tow, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Carpenter, Secretary, Board of Governors Mr. Kenyon, Assistant Secretary, Board of Governors Mr. Miller, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Link, Economist, Research Department, Federal Reserve Bank of New York Messrs. Abbott and Wheeler, Vice Presidents of the Federal Reserve Banks of St. Louis and San Francisco, respectively; Mr. Balles, Assistant Vice President, Federal Reserve Bank of Cleveland; Mr. Parsons, Director of Research, Federal Reserve Bank of Minneapolis; and Messrs. Willis and Walker, Economic Federal Reserve Banks of Boston and Advisers, Dallas, respectively
Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Com mittee held on July 9 and July 30, 1957, were approved. Chairman Martin suggested that Mr. Link, Economist, Research Department, Federal Reserve Bank of New York, be invited into the meeting. There being no objection, Mr. Link entered the room. 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 July 30, 1957, through August 14, 1957, as well as a supplementary report covering commitments executed August 15 through August 19, 1957. Copies of both reports have been placed in the files of the Federal Open Market Committee. Mr. Rouse reported that firm pressure on reserve positions com bined with the effects of the special Treasury auction of $1-3/4 billion bills and the advances in the prime loan rate, acceptance of April 1958 combined to put the money market under rates and discount rates had A paradoxical situation had developed, moreover, in severe pressure. quoted at 4-1/4 per cent while the the new April bills were now which per cent and the issues trading at 3.93 - 3.88 certificates were April the recent refunding were at par or higher. offered in million over the two weeks reserves averaged $600 Net borrowed that seems to have been pretty August 7 and August 14, a level ended
severe for the special bill auction; underwriting proved to be rather reluctant. At the beginning of the statement week ending August 21 net borrowed reserves declined but were expected to return to about $500 million by the end of the week. Projections indicate a rise in the following statement week, that ending August 28, to $750-$800 million. The Account Management is at present planning to purchase Treasury bills on Wednesday, August 21, for regular delivery, in order to alleviate pressures arising from the deposits created as banks make payment on that day for the special April bills. Longer-term rates have not so far adjusted as much as have shorter rates. Partly this seems to be due to a rather moderate volume of new issues. Today, however, two large issues consisting of $100 million Atlantic Refining Company convertible debentures and $90 million Pacific Telephone and Telegraph debentures are being publicly offered. Beginning with these two issues the calendar be comes quite heavy. As a result, the upward movement in short rates may be expected to spread into longer maturities. With respect to Treasury financing, Mr. Rouse stated that the Treasury expects now that it will require $3-1/2 billion additional cash financing by mid-September. The offering will probably take place on September 16 for payment about September 26 and will probably involve a coupon, thus giving the market some leadership. Reserves will be needed in the weeks ahead to avoid excessive pressures that might arise from the regular seasonal borrowing of business and from the expected Treasury flotations.
Mr. Vardaman raised a question concerning the prospective level of net borrowed reserves during the coming week and Mr. Rouse stated that the average was expected to be between $750 million and $800 million. Mr. Mills asked whether a $600 million level of net borrowed reserves was correct for the present situation. He further asked if the market was conditioned to such a level and wanted to know what was the present goal for net borrowed reserves. Mr. Rouse replied that in his view net borrowed reserves were a symbol, not a target; it seemed to him that the view of the Committee at the last meeting had envisaged net borrowed reserves of $600-$700 million. He hoped that the Com mittee would view recent conditions in the money market, associated with a $600-700 million level of net borrowed reserves, as too tight. He was, however, still aiming at this symbolic figure, assuming that the position of the Committee was unchanged. However, he thought that a lower level of net borrowed reserves would still bring about the and recalled that in the second half of degree of restraint desired even though net borrowed reserve restraint had been maintained and were substantially below $500 million. levels had declined, Upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period July 30 through August 19, 1957, were approved, ratified, and confirmed. for a statement on the called upon Mr. Young Chairman Martin in the staff information presented situation, supplementing economic
memorandum distributed under date of August 16, 1957. Mr. Young's statement was as follows: In this country, over-all economic activity remains at high levels, with GNP in constant dollars still show ing a modest upward tilt. Abroad, output expansion also continues at a moderate rate, and in many countries in flationary pressures are dominant. In western Europe, disequilibria in investment-savings relationships and in currency values have reached a critical stage, with credit market conditions tightening markedly further and limited devaluation of the French franc working to aggravate rather than alleviate tensions. The important economic news domestically relates to a strengthening of consumer markets. Improvement in consumer demand since April and some liquidation of distributor stocks has been reflected in significant improvement of the output of consumer goods, especially durables. This has largely offset the influence of decreases in output in business equipment, ordnance, and crude petroleum, and stabilized the index of industrial production for June and July at 144, compared with 143 for April and May. Construction activity generally remains at record levels. Private housing starts in July, while below a year ago, held close to the May-June level. Construction costs, after some months of stability, have shown a rising tendency since May. Recent adjustments in maximum per missible interest rates and discounts on FHA home mortgages would appear to place these investments on an effective competitive basis with alternative capital market instru ments. continues strong, with employment at The labor market levels, unemployment low, and average hours of work record and hourly earnings showing little change. Wholesale prices have changed little since mid-July. products as well as farm products, price For industrial have been offsetting. The mid-August advances and declines available, but some further figure is not yet cost-of-living is indicated by advances of retail food prices, rise in the used car market and vegetables. Prices notably meats continue strong. according to most recent estimates, Crop production, of last year, a smaller cent below the record will be 3 per estimates. Basic price than indicated by earlier decline are expected to be off 11 per cent, but supported crops
sharp increases are expected for feed crops other than corn and fruit. Current ratios of meat animal prices to feed prices are high and are encouraging to expansion of livestock raising. The main thoughts I come back with from Europe can be summarized as follows. First, the problems we face here are common to all countries of western Europe, but they are more aggravated there. Second, there is a good deal of concern and apprehension about the situation in western Europe, and also a little bit of worry about economic developments in this country. Third, the basic problem in western Europe is that financial expansion continues apace while physical production has reached a point where it may be slowed down in the future by the availability of resources. That is, the rate may be slower than in the past. Governor Vardaman referred to the apparent tendency toward more liberal terms for the purchase of automobiles and inquired whether it appeared whether the strengthening of consumer demand mentioned by Mr. Young might simply represent taking advantage of extended credit terms on cars and other consumer durable goods. Mr. Young replied that from the relationship of the increase of instalment credit to the volume of total sales, say in the month of June, it would appear there was no particular increase in the volume of credit sales as opposed to cash sales. He said that sales of automobiles on credit were holding at about two-thirds of total sales. inquired of Mr. Young whether, on his Governor Balderston increase in the number of "soft from Europe, he sensed any return Young responded in terms that in the domestic economy. Mr. spots" a real appraisal, but that yet had an opportunity to make he had not information by the resurgence been struck in going over available he had
of strength in the consumer markets. When he left for Europe, he said, consumer markets seemed to be just "bouncing around," but now consumer demand appeared to have strengthened a great deal. In the absence of Mr. Thomas, Chairman Martin called upon Mr. Miller for a statement on recent credit and financial developments, and Mr. Miller's statement was as follows: The summer doldrums which often characterize financial markets in August have been replaced this year by unusual activity and many important developments. Money and security markets, which experienced some relaxation in July, have again tightened. A basic development has been the frequent appearance of both private and public borrowers in the market for new funds: the Treasury auctioned a special April bill for $1.75 billion of new money; simultaneously it sought money through sale of CCC cotton; and both the State and local government and the corporate new issue calendars snowballed to record size. A flurry of administered rate increases appeared, led by an increase in the prime rate to 4-1/2 per cent. Commercial paper rates rose 1/8 per cent and bankers' acceptances rates, reflecting the financing of CCC cotton sales, rose 5/8 per cent in three separate jumps. By mid-August the discount rate had been increased from 3 to 3-1/2 per cent at nine Federal Reserve Banks. Only activity in the stock market followed the typical August pattern as trading slumped from previous weeks in a declining market which carried prices about 8 per cent below their July highs. Yesterday's sharp break carried the averages down to near the February lows. need for new money The Treasury's greater-than-expected in the new fiscal year has been occasioned by heavier so far spending, due mostly to major national than-anticipated strenuous efforts to cut back defense security outlays despite defense outlays were at an annual rate expenditures. In July billion higher than a year ago and $1.5 $5 billion higher than savings bonds are double net redemptions of in June. Also, in August, these trends making for last year's rate. So far continuing, and last Thursday the a heavy cash drain are dropped to $1.4 billion. Treasury's cash balance due tomorrow should bills with payment The sale of special a comfortable level until the Treasury's balance at maintain
October although a low point probably near last week's low will be reached in mid-September just prior to receipt of quarterly income tax instalments. Around $4 billion of new cash borrowing for payment in early October probably will be required. A cash surplus estimated at around $5 billion next June will make it possible to offer a June tax anticipa tion issue to cover at least a part of these needs. In creases in regular weekly Treasury bill offerings could be used to meet any marginal October needs as well as additional cash needs at the end of calendar 1957. This kind of a borrowing program, however, indicates that the permanent debt ceiling of $275 billion would be exceeded in the fourth quarter, assuming a normal cash balance. These actual and prospective undertakings by the Treasury along with the other aforementioned developments in the financial markets have subjected the Government securities market to a series of pressures which resulted in some sharp run-ups in yields of shorter Treasury issues. The average issuing rate in last week's auction at 3.50 per cent was an all-time high except for an auction during the bank holidays. In yesterday's auction, the average issuing rate dropped to special bill, auctioned at an 3.35 per cent. The April average rate of 4.17 per cent and a stopout of 4.25 per cent, was in sharp contrast with the 3.49 per cent average on last June's auction of the March tax bill. On the other hand, long and intermediate Treasury issues, led by the newly offered August refunding issues, have performed remarkably well over this period with some issues improving in price following the August refunding. Although yields have recently increased again, most issues are below their earlier highs. Yields on corporate and State and local government securities, however, have moved to new highs. Rates on both outstanding and new issues have increased markedly in August. Yields on outstanding AAA-rated corporate bonds have reached a new high of 4.09 per cent and a newly-offered utility first mortgage bond was reoffered to yield electric above that for a comparable 35 basis points 5 per cent--some in mid-July. These developments reflect in issue offered expanding corporate new issue calendar. part a continually offerings this month are expected to total New corporate a little below July and the largest about $900 million--only period. Since July issues for any August in the postwar this indicates a record to more than $1 billion, amounted are for an even much heavier third quarter total. Prospects calendar after Labor Day.
Prospective new State and local government issues for August are also much above normal, and yields have shot upward some 15 basis points on outstanding issues. On a new offering, Los Angeles paid some 80 basis points more last week than on a similar offering in April, Bank loans in leading cities continued to decline in August; in the four weeks ending August 7, business loans were down over $400 million. Last year in the comparable period, business loans increased slightly but in most other recent years such loans rose markedly. This decline con tinues to reflect the heavy repayment of business loans following record tax borrowing in June. It is interesting to note, however, that the volume of loans granted con tinues to rise and that the decline in total business loans reflects the trend that developed in the first half of the year of increased repayments relative to the growth of new loans. Thus, new lending in the last month increased but repayments--again reflecting the June bulge--were up even more. Bank holdings of Government securities, which increased sharply in early July because of bank takings of the March tax anticipation bills, have declined substantially as banks have sold this issue. Thus total loans and investments at have dropped $1.6 billion during the recent four city banks week period. Demand deposits and currency increased by the usual amount in July and at the end of July the money seasonal cent above a year ago less than one per supply was slightly deposit growth continues and at commercial banks the Time has amounted to $3.8 billion so far this year. expansion financial centers rose of demand deposits outside Turnover further in July. positions tightened sharply in the Member bank reserve contrast to late July. Net borrowed past two weeks in marked million during the past two weeks reserves averaged $600 million in the last two weeks of July. In compared to $150 have been absorbed by past two statement weeks, reserves the float, increases in a decline in an outflow of currency, and a sizable drop in System other Federal Reserve accounts, the most part the reflecting for security holdings Government against issues involved of repurchase agreements termination in the August refunding. to average around $400 reserves are expected Net borrowed week and then move sharply for the current statement million in excess of three weeks and average higher in the following
$900 million in the first two weeks of September. After some ease following the mid-September rise in float, the average is expected to climb to over $1 billion in the early weeks of October. Averages in October will be in fluenced by the amount and timing of Treasury cash financ ing. Looking ahead to the end of the year, net borrowed reserves in the last week of November are projected at $1.2 billion and in the last week of December at $1.8 bil lion. These projections indicate that System action to provide seasonal reserve needs will be required in coming months. Probably both repurchase agreements and outright purchases will be called for. The terms under which the System should be willing to make these additional reserves available, how ever, will depend in part upon the additional reactions of the financial community to the recent round of tightening moves. Financial markets will need to be watched unusually closely because of the shifts in borrowing by business con cerns from commercial banks and insurance companies into the capital markets. Money and security markets have taken the many recent financial developments in stride, but the many rate increases and the sharp snap-back in net borrowed reserve positions have not been without important impact. It should be remembered that the restrictive impact of the net borrowed reserve position has been increased as the rate at nine of the twelve Reserve raising of the discount the incentive to borrow and has increased Banks has decreased of a given volume of net borrowed reserves. the effectiveness as follows on the business and Mr. Treiber then made a statement credit situation and credit policy: developments in the area of credit The most important of the Federal Open Market policy since the last meeting from 4 per cent to 4-1/2 Committee have been the increase from 3 per cent prime rate, the increase per cent in the of nine of the discount rates per cent in the to 3-1/2 increases in other Banks, and substantial Federal Reserve money market rates. Reserve Banks of the several the directors Apparently the discount rate of an increase in the idea approached degrees of enthusiasm and with varying with varying judgments for an increase. directors of the Thursdays the of the last three On each extended discussion York had an Bank of New Federal Reserve
of the discount rate and the question of increasing it. They were unanimously of the view that economic conditions did not call for an increase; and each week they re established the 3 per cent rate. In advising the Board of Governors of such action on August 8, and in advising Chairman Martin informally on August 15, we reported that the directors felt strongly that there have been no significant changes in business and credit conditions that would justify a change in the disccunt rate at the New York Bank; they believed that the outlook was less buoyant. They were impressed with the way in which the System's continued policy of restraint has seemed to be achieving its objectives, and they did not believe there should be any action by the New York Bank which might be interpreted by the public as an indication that we are apprehensive of new inflationary developments in the busi ness and credit situation. With the increase in the discount rates of other Reserve Banks and the further increase in market rates in the last fortnight, our directors will, of course, have other factors than just the business situation and business prospects to consider at their meeting this Thursday. It is difficult to predict what action they will take. As for the economic situation, business conditions are substantially unchanged since the last meeting of the Fed eral Open Market Committee. The sideways movement in physical production continues, with no convincing evidence major breakout on either the upside or the to suggest a in the near future. At the same time price indices downside are holding at peak levels or are advancing further. The policy of credit restraint should be continued. The demand for bank credit is strong, as is the demand funds. The strong demand is likely to continue for capital remainder of the year, although the demand for during the is not expected to be as intense as last year. bank credit have declined with little inter The prices of stocks have now lost nearly two-thirds for the past month and ruption appraisals of to July rise. Less optimistic of the February be the major factor, but the business prospects appear to and the uncertain international rise in interest rates renewed contributing influences in the situation probably have been recently accelerated decline. places there is a nervous foreign field, in many In the exchange parities. Measures taken, uneasiness about future foreign countries may have to be taken, by some and likely goods for export from the demand for the effect of reducing Unites States. the
In the atmosphere of severe credit restraint which has existed for some time, short-term market rates of interest have been almost constantly under upward pressure. The action of the commercial bankers in increasing their prime loan rate, followed by the increase in Federal Reserve dis count rates has touched off a major realignment of prices and yields in the money and securities markets. Open market operations should be conducted so as to avoid an intensifica tion of pressures while this realignment is still in process. The latest issue of $1-3/4 billion of 237-day Treasury bills maturing April 15, 1958, which are now selling at a yield of about 4-1/4 per cent are to be paid for tomorrow. During the remaining months of 1957, the Treasury will have to borrow again for cash, at least once and probably twice, and will have one refunding issue. In certain respects the Treasury is at the end of the line in seeking to raise money for cash. Because of the high demand of other borrowers, the Treasury's problems are most difficult. We cannot be un mindful of them. The Treasury could no have sold its current issue without bank underwriting and, of course, the banks need additional reserves to do the underwriting. We may expect the banks to seek to sell most of the bills within a reasonable time. In the meantime the Federal Reserve Banks will have to take this factor into account in their administration of the discount window. In the two statement weeks ended last Wednesday, member bank borrowings averaged about $1,100 million ($1,060 and reserves averaged $600 million), while net borrowed $1,156 ($580 and $620 million). So far this week net borrowed million been temporarily reduced by an increase in float reserves have a small reduction in Treasury balances. Our projections and indicate slightly less than $400 million this week. Our pro the next few weeks indicate substantially higher jections for net borrowed reserves. We should continue to make reserves available to meet and of the Treasury. Whether the seasonal needs of business spending programs or of the or not we approve of Government so much for cash in the second Treasury's having to borrow the year, the Treasury must be financed. Especially half of the discount rates recent increases in in the light of the that is continuing to take adjustment in market rates and the it be clear to the important that place, it is particularly for necessary purposes that reserves will be available public in 1957.
In view of the current adjustment in rates still going on, the cumulative effect of credit restraint on the markets, the difficult international situation, the need of the banks for additional reserves this week to support the new deposits growing out of the current Treasury financing and the con tinuing need of the banks during the remainder of the year for additional reserves to support the legitimate seasonal needs of business, we believe that the release of reserves through open market purchases should be made promptly as the need for them develops. While we don't want to make errors, if there are errors it would seem better that they be a little on the liberal side rather than run the risk of creating fears that seasonal needs and Treasury requirements will create an intense credit squeeze as the fall season progresses. It is important not to increase at this time the degree of restraint as reflected by the course of rates and the feel of the market; indeed, a modest relaxation of the intensity of the restraint of recent weeks may be in order. Recognizing the dangers inherent in concentrating on statistical measurements, it seems to us that net borrowed reserves of $.5 billion would be an appropriate symbol of the desired degree of tightness. Mr. Erickson said that conditions in the First District continued to follow pretty much the national pattern. While nonagricultural employ by about 43,000 from May to June, the rise was not as ment rose seasonally In fact, June was the first month to fall be great as it was last year. February of 1955. The weakness on a year hind the year ago level since lag on nondurable goods manu basis comes from the continued to-year textiles) and from the newly developing lag in facturing (particularly factory workweek lengthened manufacturing. The average some durable goods factory weekly earnings rose; from May to June and the average seasonally 93 per cent in June. per cent in May to index rose from 91.5 the man-hour June, the rise rose from May to index also district's manufacturing The For the first various industries. between the pretty widespread being
six months total construction contracts lagged 10 per cent behind the first six months of last year, with a 16 per cent gain in non residential building offset by declines in residential and heavy construction. New England performance in construction led the national average in April and May but was behind in June. New car sales continued to be disappointing, the six months' cumulative total being 8-1/2 per cent less than a year ago. New England con tinued to trail the national average. A sample of 14 banks disclosed a continuing trend towards a liberalization of credit terms on instal ment purchases of new cars. The banks reported 40 per cent of their direct loans written for more than 30 months in June as compared with in June 1956; also in June 1.9 per cent were for more than 20 per cent month since this series started in 1955. 36 months which is the highest to be relatively more that New England terms continued It would seem department store sales had the national average. While liberal than they have been down in recent weeks. been up for the year to date last ten days, which of a newspaper strike for the There had been store sales. As reported have its effect on department course would were materially reduced discount window activities at the last meeting, August there was Early in the second quarter. as compared with in July by the banks in larger of the window, mostly more active use again and New Haven, but Providence, Worcester, Springfield, cities, such as they were in the been as heavy as had not the last week borrowings in
early part of the month. Two so-called problem cases had paid off their loans and had told the Reserve Bank they will be out of debt for some time. As regards credit policy for the next period, Mr. Erickson said that he would recommend no change in the directive and believed that the same degree of restraint as had prevailed in the last few weeks should be continued, recognizing that we were approaching a period when we would have to put reserves into the market. He hesitated to pin-point any figure for net borrowed reserves, but if he had to, he would say from $500 to $600 million net borrowed reserves. Mr. Irons said that conditions in the Eleventh District had not shown much change recently and that seasonal movements of no more than the usual extent were anticipated. In general, the picture was one of strength and all important indices had shown gains this year. Depart ment store sales were running well and employment was high. New car sales in the major cities reflected an intensely competitive situation, but apparently sales were ahead of last year by about 10 per cent. Prices appeared to be holding up quite well, and bargains were not as real as might be gathered from advertisements. A similar situation prevailed in the used car market. The cutback in defense expenditures not hit the district appreciably; in Dallas and Fort for aircraft had been relatively small thus far. The petroleum Worth the cutbacks had situation was unchanged, with production in Texas still running on a
13-day basis. The agricultural situation appeared to be quite good and recent estimates indicated an increase in the cotton crop, making the yield very high. As to banking, the country banks generally con tinued liquid with free reserves, but the reserve city banks were well loaned up. Loans at banks in major cities were running about 55-65 per cent of deposits, with rather moderate negative reserve positions. Thus far there had not been any heavy increase in member bank borrowing from the Federal Reserve Bank. It had been thought that this might develop about the middle of the month, but the demand did not materialize. On the whole, the pressure on bank reserves did not appear to be ex cessive. In reviewing the discount rate changes from a distance, it seemed to him that they had been made without shock to the economy and that the discount rate was now in better relationship to other market rates. There appeared to be less uncertainty and a better understanding of System policy with respect to direction and degree. present degree of restraint would be maintained, He hoped that the area of $500-$600 million and borrow with net borrowed reserves in the average. If that situation prevailed, ings above $1 billion on the the 3-1/2 per cent discount be expected to be near the bill rate might they would not be made be made, he hoped that If errors had to rate. would be main firm degree of restraint and that a on the easy side into the mar to put funds of course, It might be necessary, tained. would be available. assure that funds and to seasonal purposes ket for
Mr. Mangels said that the production and employment picture in the Twelfth District seemed to be maintaining itself at generally satisfactory levels, although there were some areas of cloudiness. In the State of Oregon, the employment situation continued to be rather poor and delinquencies in the repayment of loans were beginning to appear. One lender reported 1,800 delinquencies out of 10,000 accounts in August, and 60-day delinquencies appeared to be increasing somewhat. Oregon expected the next six months to be rather slow and difficult, with some further decline in lumber prices. In Washington, the Boeing aircraft plant anticipated releasing between 6,000 and 8,000 workers before the end of the year. Releases of aircraft workers in southern California also were continuing, and at the last directors' meeting one director reported having been told that the over-all release of aircraft workers would probably aggregate about 100,000. In California, manufacturing employment declined somewhat in July, due to declines in the automotive and aircraft industries in the machinist and building trades. The machinist and strikes settled. Except for the strike situa strike, however, had now been and Washington had been employment in California, Utah, tion, nonfarm In June, steel production at close to the June levels. maintained at about 97 per cent of capacity, compared West Coast plants ran but in July production of 85-1/2 per cent nationally, with a rate Construction awards in June were up was lower than in May or June. the value of half of 1957, May. In the first 8 per cent from
residential construction ran about 4 per cent under the first half of 1956, but nonresidential was up about 2 per cent and public works and utilities construction was up about 60 per cent. Department store sales maintained a fairly even keel, while new car registrations for the first six months of 1957 were about one per cent below 1956. In four States new car registrations were down, while in three States they showed an increase. Twelfth District bank loans declined $38 million for the three weeks ended August 7, demand deposits were up $19 million, and time deposits were down $3 million. Member bank borrowing from the Reserve Bank on August 15 aggregated only $6-1/2 Federal funds, banks in the district reverted to the million. As to in the last reporting period, with purchases position of net lenders million. An analysis of the June 6 totaling $49 million and sales $141 loans to total deposits was showed that the ratio of total call reports The ratio of cent a year ago. with 52.1 per per cent, compared was 58.8 per cent estate loans to demand deposits total loans less real estate loans to time and the ratio of real with 53.4 per cent, compared with 50.2 per cent. 47.9 per cent compared deposits was Mangels said, provoked discount rate, Mr. increase in the The or from the press banks in the district, comment from the no particular was based Francisco directors of the San The action or the public. had gone up general rate structure the fact that the primarily on It was Twelfth District. in the economic conditions than on rather
his view that the System should continue to maintain about the same degree of pressure on reserves, and he had in mind that a level of about $500 million of net borrowed reserves would be appropriate. However, he felt that the Manager of the System Open Market Account should be permitted some degree of discretion in the light of circum stances as they might develop from day to day. It was his opinion that the current directive from the Committee need not be changed. Mr. Deming reported that the expected good year for agriculture in the Ninth District was now virtually confirmed, and that district farm income this year would be 4 or 5 per cent ahead of 1956. Other district indicators pointed to continuation of about the same trends that had been evident in recent weeks. He saw nothing in particular to comment on with respect to the national economic developments, he felt that the present course in credit policy was about right, and he saw no reason to change the direction of that policy. He recognized that it would be necessary to put reserves into the market to meet seasonal needs during much of the remainder of the year. It seemed a broad target of $.5 billion net borrowed reserves for to him that weeks would produce about the degree of restraint that the next three System had been attempting to obtain. the Mr. Allen said that recent reports indicated that business was stronger in the May, June, July period than the major activity revealed at the time. Gross national product, economic indicators
the industrial production index, nonfarm employment, and retail trade had all been revised upward from the preliminary estimates, and a most significant development was the renewed uptrend in retail sales. After six months of little variation, the figure increased in May, again in June, and still further in July. Department store sales provided the only basis for comparison on a regional basis with national developments, and sales by stores in Midwest centers compared favorably with national figures. For both the four weeks ended August 10 and the thirty-two weeks ended August 10, sales in stores in the Seventh District increased more than the stores throughout the nation. As had been said, in July employment in non farm establishments throughout the country again set a high for the month, and unemployment was calculated to be only 3 million, or 100,000 below last year. Except for Michigan, the States in the Seventh District compared favorably with the nation on the numbers of insured unemployed. The construction picture, Mr. Allen said, offered no basis for pessimism. For the first half of 1957 the in place was 3 per cent more than last volume of construction put on contract awards reported by F. W. Dodge year, and recent figures total awards were 10 per cent continued strength. In June, indicated for the year to date. a gain of 5 per cent 1956 compared with above by public works boom was being carried Increasingly, the construction and public utilities.
Mr. Allen went on to say that over all the outlook for credit demand was still strong despite a substantial decline in business loans in July. The amount of money being raised and expected to be raised in the capital markets was huge. Although there was a substantial decline in business loans in July, such loans at Seventh District banks, in contrast to the national trend, increased $140 million since the end of May, 40 per cent over the increase of a year earlier. Loans by banks in the district to metals firms had continued downward, but loans to other businesses, particularly public utilities and retail trade, more than offset this decline. Business loans should now begin to show signs of seasonal demands, and the larger banks in the Seventh District had told the Reserve Bank that they expected the current heavy demand for loans to continue and, in fact, to increase in the months immediately ahead. The recent renewed pressures on money center banks appeared to have been heavier in New York than in Chicago, the basic reserve deficit of the four larger Chicago banks having increased only moderately from $26 million for the week of July 31 Two of those banks were the week of August 14. to $45 million for while a third bank, which had not borrowing at the discount window, buying and selling Federal in recent weeks, had been been borrowing the differential between day, taking advantage of funds on the same was a net seller rates. That bank per cent discount the 3 and 3-1/2 sides of the market. it operated on both on the days when
Mr. Allen reported that crop prospects in the Seventh District had improved in July and August, but that indicated production of the major cash crops, that is volume produced, remained below the excep tionally large 1956 production. Nevertheless, prices over all had improved, particularly in livestock and livestock products which represent by far the most important source of the district's farm in come, and district farm income would, in the Reserve Bank's judgment, continue to exceed the year-ago level through the remainder of 1957 and possibly the early months of 1958. So far this year it was running between 5 per cent and 6 per cent ahead of last year. With respect to automobile production, he recalled having reported some weeks ago that the industry expected to turn out 500,000 cars in July, 500,000 in August, and 300,000 in September. The July goal was attained, and thus far in August production had been at a 500,000 monthly rate. Sales in the first ten days of August averaged 16,319 daily, which was dis appointing, and it compared with a daily rate of 17,500 for the month of July. However, a ten-day period is not always significant. On of finished cars was estimated at August 10 the industry's inventory had been planned so is high; however, a big inventory 798,000, which run out of cars in between seasons. Three that the dealers would not only 1958 models, namely Rambler, makers of cars were now producing scheduled for public introduction and of course the new Edsel, Lincoln, September 4. on at this time, or at said that it was possible Mr. Allen then as large and find in an economy that matter, to any time for almost
diverse as that of the United States mixed trends in business developments which produce a basis for somewhat different judgments on the business outlook and the monetary policy appropriate to the period ahead--different judgments, too, as to the timing for changes in monetary policy. To him, the evidence pointed to a real possibility of intensification in inflationary pressures, sparked by the upturn in consumer spending. But even if that possibility were no more than an outside chance, he would continue the System's present policy be cause it seemed to him that the measures needed to halt, let alone reverse, the trend in prices and the psychology of the business and financial community had yet to demonstrate their effectiveness. The situation, he said, was one which had intractable aspects and which would not yield, as one writer had expressed it, to "hopeful noises about 'restraint' and 'responsibility'." It was becoming increasingly apparent that the adjustments needed will come only by hard necessity. That was a principal reason why he had recommended that the Chicago Bank's Board of Directors vote for a higher discount rate and it was the Open Market Committee should at this the reason why he felt that credit restraint. From what he had said, time continue its policy of that he was in agreement it must appear obvious Mr. Allen commented, in that he would prefer not Irons and not with Mr. Treiber, with Mr. agreement with both However, he was in on the liberal side. to err of setting a figure, he in that, recognizing the difficulty of them be held if possible reserves should that net borrowed would suggest million range. in the $500-$600
Mr. Leedy stated that most of the signs in the Tenth Dis trict indicated economic strength. Nonfarm employment was running slightly higher than a year ago in all of the States in the district except Oklahoma and Nebraska. The construction pattern was contrary to that reported for the New England States. The total value of construction awards topped last year's figure by 6 per cent, slightly better than the national average. Both nonresidential and residential construction were continuing at levels slightly above the national average, but public works and utility construction were lower than the national levels. Department store trade for July had been roughly 8 per cent higher than during the same period last year. For the year as a whole, however, sales were only about one per cent higher, and when the price increase was taken into account this would indicate were slightly down. Business loans had risen in that physical sales weeks contrary to the national picture and were now running recent the volume a year ago. Demand deposits were significantly ahead of in interbank deposits was noted. The picture up and a sharp increase was similar to that reported in the Dallas, Minneapolis, in agriculture much improved. Cash farm Districts, with soil conditions and Chicago from the soil bank higher, as payments income should be substantially to make the farm picture prices for livestock contrived and improved than it had been running. better said that he future, Mr. Leedy for the immediate As to policy, in so far degree of restraint, of the same to a continuation subscribed
as it could be accomplished, that had been exerted during the period since the last meeting of the Open Market Committee. He went on to say that personally he would not want to attempt to set a benchmark for net borrowed reserves. If he understood correctly, Mr. Rouse had said that there had been greater restraint at times with lower levels of net borrowed reserves than had prevailed at other times with con siderably higher levels. He would attempt to continue the degree of pressure that the Committee had attempted to obtain, and had pretty well accomplished, over the recent period, with no relaxation. While he agreed with Mr. Treiber that there should be no intensification of pressure, he would be opposed to any relaxation of pressure. These views indicated, of course, that he would favor no change in the Committee's directive. Mr. Vardaman said it seemed to him that psychologically, so far as the public was concerned, and politically, so far as the Congress was concerned, commercial banks and the Federal Reserve System had made serious mistakes in raising at this time the prime commercial rate and the Reserve Banks' discount rates. In terms of economic effects, he might be opposite from what was desired. As he felt that the results Committee, he thought that the said at the last meeting of the had of the System's policy of restraint was becoming cumulative influence that there should have and it was his opinion more and more effective, as in recent months in the same degree credit restraint been continued banks or part of the commercial rate changes on the without any
Reserve Banks. These last rate increases, he said, may prove to be more frightening than otherwise, both to the purchasing and borrowing sides of the economy. He went on to say that he would like to adopt as his own remarks those made by Mr. Treiber, except that if the psychological effect of the rate changes should result in an actual precipitous rise in business operations it might become necessary for the System to lead the market by a definite snubbing action such as a major raise in the discount rate accompanied by appropriate open market operations, to achieve an actual brake on the inflationary tendencies. He thought it was particularly unfortunate that the Reserve Banks had seen fit to confirm the action of the commercial banks on the prime rate with such alacrity by an increase in the discount rate. Although, as he had said at the last meeting, he recognized that the discount rate was out of line on the low side, he did not favor follow rate so quickly for he felt that this tended ing the action on the prime that "the rise was going out of the roof," to confirm the public fear had lost control of the situation to the and that the Reserve System commercial banks. members of the Board to had voted with the other While he he had done so with great in the discount rate, approve the increases a united front the purpose of presenting and primarily for reluctance which he had explanatory memorandum As stated in an by the Board. felt that the rate at the time, he the Board's minutes placed in that member bank only on the basis could be justified increase
borrowing had increased greatly during the previous week. He felt that even this was a slim reason because it was generally believed then that such borrowing would shortly return to previous recent averages. Mr. Mills said that where the broad objective of System credit policy was to exert restraint on the expansion of credit and where in his opinion there was general public acceptance of the System's intentions and purposes, it seemed important to him that the symbols of System policy be as consistent as possible with those stated and recognized objectives. For that reason, he would be fearful if the level of negative free reserves, through design or circumstances, should drop substantially below the $500 $600 million level that was re-established two reserve weeks ago. His thinking, he said, followed very closely the ideas expressed by Mr. Irons as to developments in the economy and the appropriate ness of System credit policy. If there should be a relaxation in date, that could create an unfortunate mis policy at a very early analysts of System policy as to what the conception on the part of were. For those reasons an argument intentions of System policy cautious about the injection of additional could be made for being out that it was now a date. After pointing reserves at too early its substantial out Labor Day period, with two weeks until the only that at the same time the System flow of currency, Mr. Mills said
could probably anticipate a further momentum in the seasonal demand for bank credit. In the interest of consistency with the declared intentions of System credit policy, he felt that it could prove desirable to delay any substantial injection of new reserves, beyond those that would be necessary to support the Wednesday payment date for the last special Treasury bill issue, until the Labor Day period, when the action would be fully understood by the market, would be related to seasonal conditions, and would not be interpreted as a change in policy. Mr. Robertson, who had just returned from vacation yesterday, commented that one of the advantages of a vacation is that it enables one to come back and take a fresh look at the picture. He said that he had been trying to do exactly that, and while he probably did not have all of the information that he should have, he was led to believe that the economy had been strong and that inflationary pressures continued to be very evident notwithstanding the fact that this was the summer season. He expressed himself as delighted by the discount rate action and said that if he had been present he would have joined in approving the increase in the rate to 3-1/2 per cent. If he had any complaint about the past, it would be that the restrictive action too late, and he saw nothing in the picture had been too little and current degree of restrictiveness. Now that to suggest reducing the this degree of restraint had been achieved and was having some effect, to do anything to alleviate it and he felt that it would be wrong
thereby give a false impression of future actions. He said he agreed almost completely with Messrs. Irons, Allen, Leedy, and Mills that this was not the time to reduce the degree of restrictiveness. While he thought that the Manager of the Account should have some degree of latitude to work in during this period, it was his view that the System should endeavor to maintain the kind of restraint that would reduce inflationary pressure and he would favor reaching that end without attempting to fix any specific goal in terms of a volume of net borrowed reserves. He felt that the System should carefully avoid creating any impression that it was trying to reduce the effectiveness of what it had been endeavoring to accomplish. Mr. Fulton, who had also just returned from vacation, said that although a degree of concern was expressed in the Cleveland District about some of the industries that were now in the doldrums, there was a very high degree of optimism about prospects for the fourth quarter of and other consumer activities should the year. If sales of automobiles themselves strongly in the fourth quarter, however, fail to manifest could change rapidly. Steel production in the the present psychology weeks of August had increased in the Wheeling, Cleveland, first three in demand from automotive and Lorain areas, indicating an upswing and which had been very dull during July. also appliance manufacturers, had been nominal because of the district the increase In other areas Coal production in at a higher rate. areas had been operating those that fuel was than a year ago, indicating was 16 per cent higher July
being taken in anticipation, and capital expenditures were still holding at a very high level. There seemed to be no recent can cellations of any such expenditures and businessmen were going ahead with their plans. This afforded an indication that regardless of fears expressed about a downturn, those apprehensions had not yet "touched the pocketbook." There was anticipation of further wage increases and although some businessmen had talked in terms that they might have to absorb part of the higher costs, this apparently was not going to deter them from raising prices. As to employment, three areas in the district had been declared surplus labor areas for reasons peculiar to the respective communities, but on the other hand one city had come out of the surplus labor category and manufacturing had picked up in that area. Following six weeks of decline, business during the past week. It was reported that many of loans increased the national concerns having lines of credit with banks in the district to the banks for long-term credit, seemingly to escape were coming This was reported to be discipline of the capital market. the had already been made. to the bankers but the commitments embarrassing June and July--at more than borrowing was very heavy in Member bank last year. In August the corresponding periods twice the rate for increased again last although it of borrowing diminished, the rate year and he did not under that of last The rate was somewhat week. interpret the situation. know just how to had not yet raised the Cleveland Bank then noted that Mr. Fulton would be discussion said that there 3 per cent and rate from its discount
of the matter at the directors' meeting this Thursday. It was his personal view that the Cleveland rate should have gone up along with the others and that the increase was fully warranted in the light of the action of the capital market, short-term rates, and the increase in the commercial bank prime rate. With regard to open market policy, he said that he would regret it very much if any relaxation should creep into the System's firm hold on the money market. While he felt that the Manager of the Account must be given some flexibility, it was his view that the degree of re straint that had been achieved was about right and he would not like to see it reduced, particularly if this were interpreted as a change in policy. He was of the opinion that a level of net borrowed reserves of from $500 to $600 million would be appropriate, with a shading toward $600 million preferable. Mr. Robertson then supplemented his previous comments by saying that he thought a great deal of the inflationary pressure was fostered and given momentum by public psychology, and that there had grown up a feeling that inflationary pressures were here to stay. in the country the opinion that the recent Congressional hearings had He expressed indicate that the System stood firmly against inflation done much to taken by the System were carrying out such a and that the actions represented one more reason why nothing policy. This, he thought, to reduce the current degree of restraint, should be done at this time the benefits that had been should take advantage of for the System in terms of public psychology. derived from the hearings
Mr. Williams reported that there had been several interesting banking developments in the Third District recently. All of the large Philadelphia banks have raised the prime rate. Most of them also will raise the interest rate on savings deposits from 2 to 2-1/2 per cent; the mutual savings banks in Philadelphia are going to raise their rate from 2-3/ to 3 per cent on October 1. Total loans of reporting banks had declined $34 million in the three weeks ending August 7, and re payments percentagewise were somewhat greater than for all weekly reporting banks. Nevertheless, Philadelphia banks were under considerable pressure for funds. Total deposits were down, and the drain had been met by marketing nearly $30 million of securities. Member bank borrowing dropped sharply in the latest statement week (August 14). After the discount rate increase there was an incentive to buy Federal funds in preference to borrowing from the Federal Reserve Bank and some banks stepped up their purchases substantially. Mr. Williams said there was little of significance to report in the way of business developments. Department store sales dropped below a year ago in early August but had now come back. Factory employment was holding quite stable at a rate slightly below a year ago. open market policy, Mr. Williams was of the view With regard to made available for seasonal needs as those that while reserves should be side should be avoided. appear, errors on the liberal needs might said that there were no recent developments of great Mr. Bryan Employment and payrolls to report from the Sixth District. significance
continued at record levels, consumer spending was up, and the volume of construction was higher than last year. The district was gaining funds; total bank credit was up by virtue of increases in loans and Government security holdings. However, there was a difference between the smaller country banks and the city banks. The city banks had recently not gone up. The most interesting and dynamic development in the district is not new but is one that has been continuous over a period of years. It is the rapid shift of population within the district. As to policy, Mr. Bryan expressed agreement with the statements that had been made that the System would not want to reverse its situa tion by liberalizing the supply of reserves. Unfortunately, however, he did not know quite what he meant in saying that he agreed with these statements. There was some point to Mr. Treiber's remarks--a very real point--that with the terrific capital demand, the probable seasonal demand for loans, and the Treasury's problems, the System could get situation where it might become a great deal more restrictive into a This presented the problem of trying to give in than was intended. point he was fearful of giving an struction to the desk, and at this because, with the dis in terms of net borrowed reserves instruction restraint at a level of $500-$600 rate change, the degree of count ago or at some time than a few weeks might be very different million inclined to tell the he would be past. In the circumstances, in the market and, if it seemed of rates in the to watch the behavior desk
desirable to increase significantly the supply of reserves to the market, to do so in a manner that would hold them steady. In response to a request by Mr. Vardaman for further comment on the shifts in population in the Atlanta District, Mr. Bryan said that in the district there are 448 counties, of which 207 lost popula tion between 1950 and 1955. The movement had been from the rural agricultural counties into the areas where industrial plants are locating. It was his net impression that the district was being strengthened by these shifts, because if the people had remained on the farms they would not have been as economically productive as they are in their new locations. However, in villages in the areas that had been losing population the local merchants at times were very disheartened. Mr. Johns said that he would forego the opportunity to talk about developments in the Eighth District, although with some reluc tance because there were on his mind two recent reports--one a local a study by a Government agency in Washington--which survey and one view about the St. Louis area. In general, took a less than optimistic in a state of economic stagnation. area was characterized as being the of view, however, he felt that these studies From the long-run point directing attention to the criticisms have a wholesome effect by might which the area was subjected. to Board of Governors was stated that, as the Mr. Johns then Louis Reserve Bank of the St. yesterday, the directors advised late
had established a discount rate of 3-1/2 per cent subject to review and determination by the Board of Governors, thus becoming the tenth Reserve Bank to establish that rate. He said that this action was taken by a 6-1 vote, with a considerable degree of expressed reluctance on the part of the directors who voted favorably. This reluctance was based on the view that no intensification of inflationary pressures was discernible at this time or in the recent past, and the need for a toughening of monetary restraint therefore was not apparent to the directors. Mr. Johns said that he did not find himself in disagreement with that view. In any event, however, a clear majority of the Reserve Banks had indicated a different view and desire with regard to monetary policy and the St. Louis Bank decided to conform. With this action taken, Mr. Johns said that he found himself confronted with the question of what the change in the discount rate meant in terms of open market policy. He said he was unable to accept the view which had been expressed in some quarters that the rate in crease signaled no change in policy. As he looked back over the actions contained in the annual reports of the Board record of policy and particularly the explanation of the discount rate of Governors, made in recent years, he noted that it was changes which had been or down, did signal a such changes, whether up always claimed that of that kind. and had considerable significance change in policy of taking a step the future, he doubted the desirability Looking to
in the direction of establishing a principle that discount rate changes do not signal a change in Federal Reserve policy; in the long run he believed the System would find it desirable in its own interest--which also meant the public interest--to continue to claim that the discount rate was a significant instrument of policy and that its use meant something more than merely conforming to market rates established by others. Holding that view, he found himself unable to agree that following an increase of 1/2 per cent in the discount rate there should be any relaxation of policy or pressure on bank reserves. He wished to make it clear, he said, that the view held at the St. Louis Bank with respect to the lack of need for intensification of restraint should not be mistaken for a view that inflationary pressures had diminished or subsided, or that there was less need for monetary restraint than there had been. Nobody in the St. Louis Bank, he said, would argue for relaxation. In the circumstances, he believed that the least that should be done with the open market instrument was to continue the degree of restraint that had prevailed in the recent past; in fact, it would not take much him that there should be some intensification of argument to convince with the action taken in in order to be consistent that pressure directive to Turning to the Committee's the discount rate. changing attention to the of New York, he called Federal Reserve Bank the "recognizing uncertainties (b) with regard to language of clause
in the business outlook, the financial markets, and the international situation" and recalled that he had dissented mildly when this language was first included because of a feeling that it should be understood that these uncertainties would be taken into account at all times along with other relevant matters. He assumed that when this language was written into the directive, the Committee intended to put special emphasis on the uncertainties and to say almost that this was a "teetering decision." Now, having signaled in his opinion a change in policy by increasing the discount rate, he wondered whether it was desirable to place such emphasis upon the uncertainties which the Com mittee saw in the picture several months ago. Balderston observed that Mr. Miller, in his report Governor the discount rate might have suggested that the change in today, had of restraint represented by a given amount an influence upon the degree and that this same point had been made by of net borrowed reserves, that for the five months ending Mr. Bryan and others. He also noted was about $430 million. the average of net borrowed reserves in July to meet the desire he said, was how that perplexed him, The question a policy of restraint at this meeting to maintain expressed by so many action and yet take the discount rate be consistent with that would He thought that perhaps needs this fall. of seasonal and Treasury care the Labor Day period suggesting that an answer by Mr. Mills had given in a fashion that supply some reserves an opportunity to would provide
might be described as "imperceptible." Seasonal needs would, of course, have to be taken care of and the Treasury's problem seemed likely to grow worse, not only because of the high rate of redemptions but because of the heavy calendar of capital issues this fall. There fore, as he had said, the problem was one of how to maintain a con sistent policy for the sake of public understanding of the System's objectives and yet meet the fall requirements of business and the Treasury. He felt that perhaps this problem might be resolved by using a level of net borrowed reserves of from $500 to $600 million as a goal for the moment, and then using the Labor Day period to begin to inject the increased reserves that must be supplied. In clarification of his earlier remarks, Mr. Treiber said that he did not mean to suggest a change in policy or to suggest open market operations that would appear to indicate a change in policy. He had wanted to emphasize the important difficulties in a period of readjust ment, the importance of avoiding open market operations that might ap pear to indicate a further intensification of restraint, and the need for flexibility. Chairman Martin expressed the view that the most difficult problem at present was a psychological one. In terms of the over-all inflation, which was by no means won, he felt that struggle against past few weeks through the Congressional System had gained during the the he referred to quotations in the press hearings. In this connection, there were of course some remarks from his testimony and said that
that he wished in retrospect he could have phrased a little differently, He did not think that anyone here today had any doubt about the diffi culty or nature of the inflationary problem, but he believed that in flation could be stopped, that the real question was how best to proceed in the fight against inflation, and that the answer had not yet been obtained by any means. As a preface to his next coments, Chairman Martin said that they should not be understood to reflect criticism of the Management of the System Open Market Account and that he just wanted to lay his thoughts on the table. He said that when there is a movement in net borrowed reserves from a level of $150 million to a level of $600 million, there are bound to be problems of interpretation and this creates a problem for the Treasury. In the last week the level of net borrowed reserves had been a little higher than he would have interpreted the intent at the last meeting of the Committee, although on the basis of the record of the meeting the management of the account was proper. It was his feeling that the situation may have been a little tighter just prior to the new Treasury special bill intended, but admittedly this was a offering than the Committee had Also, the situation seemed to matter of conjecture and judgment. several weeks ago than was intended. him to have been a little easier had been in effect all the time, The same directive from the Committee should be a change in the wording he pointed out, and whether there
was a different matter. He went on to say that the Manager of the Account has an almost impossible task in gauging the market. It was his view that the Manager had done surprisingly well, consider ing all of the conflicting cross currents in the economy, when one looked at the record for the last nine months. With regard to the comments by Mr. Johns, he observed that the economic situation was a "bundle of inconsistencies," that this was the nature of the operation in which the System was engaged, and that one could never hope to have complete consistency. For the last nine months the bill rate had been substantially higher than the discount rate, primarily because of the plight of the Treasury. However, he thought that the Treasury had been acting well recently and that this fact ought to be recognized, and he said this against a background of having disagreed with almost every move that the Treasury had made over a period of several months. In thinking on the matter, he said, he had tried to place himself in the position of those responsible for debt management during the last 30 days. With reference to the discount rate, Chairman Martin said that when one realized--as he did in the course of the recent Congressional 11 years from 1937 to 1948 the discount rate hearings--that during the was at or below one per cent, that there had been a pegged market, and been made during the last two seven changes in the rate now had that that had been done by the amount of thinking years, one could see
businessmen, bankers, and the public regarding the use of the rate. Critics at the hearings had raised many questions regarding the role of each Federal Reserve policy instrument at any given time and he had found it somewhat difficult to explain all of the System's actions, but it seemed clear that the System had been moving in the direction of a more flexible policy. He regarded the last discount rate change as primarily a technical move. The preceding hesitancy in moving the rate in line with the bill rate had put the System in a position where in his opinion it would have been just as difficult to explain why the discount rate did not go up after the change in the prime rate as to explain why the rate was increased. The commercial banks, he said, have to gauge their loan demand, and if they were willing to increase the prime rate the question for the System to decide was whether it was proper to have a spread of 1-1/2 per cent between the prime rate rate. One might contend that the System could police and the discount borrowing by administration of the discount window, but member bank be one of why the System should not have a the question then would rate of one per cent. Unless rates very low discount rate, say a that the System would be defeating were to operate effectively, he felt was his view that one must approach to the problem. It itself in its at times, and that the present these technical considerations recognize to the problem of terms of broad approach was one where, in period gained considerably. In Federal Reserve System had inflation, the a long way to go in there was still operations, however, technical
the matter of Treasury relationships, and he felt that this was the fundamental problem faced by the System in that area. The Committee, he noted, was now going to study that area and it would be desirable to work with the Treasury soon to see whether it would be possible to come up to financing operations without having the Treasury "behind the eight-ball" every time. Chairman Martin then said that he did not perceive any basic disagreement this morning with respect to policy. Personally, he would be inclined to go along with Mr. Treiber, and be in the minority, to the extent that with the seasonal demand coming on he would tend toward a $500-$400 million level of net borrowed reserves rather than risk getting up to $600 million or higher. He doubted whether that degree of tightness was needed, and he thought that the phrase had been used roughly. While he might be wrong in his judgment, he be lieved that the move back from net borrowed reserves of $150 million to $600 million had bit harder than necessary. The discussion today made it clear in his opinion that there should be no change in the Committee's directive and no change in policy, and he subscribed to that point of view completely. On the technical side, however, he would favor a level closer to $400 million of net borrowed reserves in so far as any benchmark was worth anything. As to the timing of any conditioning of the market, he would not care particularly whether that was done now or closer to the Labor Day period and he felt that the timing must be weighed by the Manager of the Account. But he would like to see any such conditioning substantially accomplished
before the Treasury came to the market rather than to have the kind of swings that had taken place in the last 45 days. Mr. Rouse said he also understood it to be the sense of this meeting that there should be no change in policy. However, there was a change in the sense that the Committee was endorsing some flexibility in the management of the account which he did not feel was there follow ing the last meeting of the Committee. At that time, he did not feel that he had much room. The Committee had been aware of the Treasury financing and he thought that the operations in the account had been in accord with the sense of the meeting. But with the sense of leeway that he discerned at this meeting, with no change in policy, he felt that it would be workable. As to between now and Labor Day, looking at the calendar he noted that it would be necessary to act tomorrow to put some reserves in for Thursday and then again in the following statement week because the demand for currency for the long holiday week-end would come before Friday. This would carry right into Labor Day with practically no interval as far as reserve requirements were concerned, so there would be no serious difference of views there. Chairman Martin then repeated that the consensus of this meeting seemed to favor no change in policy and no change in the di rective, with the understanding that the Manager of the Account should for flexibility. In making this statement he be given latitude the shades of difference in the views expressed by indi recognized vidual members 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 Com mittee: (1) To make such purchases, sales, or exchanges (includ ing 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 securi ties, 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 develop ments in the interest of sustainable economic growth while recognizing uncertainties in the business outlook, the financial market, 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 de creased 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; from the System account To sell direct to the Treasury (3) certificates such amounts of Treasury securities matur for gold may be necessary from time to time for ing within one year as of the Treasury; provided that the total the accommodation amount of such securities so sold shall not exceed in the ag gregate $500 million face amount, and such sales shall be made at the prices currently quoted as nearly as may be practicable in the open market. which Mr. Riefler had then was made to a memorandum Reference Reserve Bank Presidents and the other members of the Committee sent to the
under date of August 12, 1957, transmitting a list of questions re lating to open market operations which had been submitted to Chairman Martin by Congressman Patman in connection with the former's recent testimony before the House Banking and Currency Committee concerning the proposed Financial Institutions Act. In commenting on the matter at the request of the Chairman, Mr. Riefler referred to the amount of work that would be necessary to prepare the answers and pointed out that it would be necessary for the Federal Open Market Committee to authorize submission of the requested information. He also referred to two letters from Mr. Patman, both dated August 14, 1957, in which other questions were asked, including some having to do with open market matters. Copies of these letters were then distributed. Chairman Martin said that all were aware of the problem that at the present time and that his general approach was being encountered was that the System had absolutely nothing to hide at any time. If that the sooner it was found out the better. anything was wrong, he felt in both Houses of Congress a group He went on to say that there existed on the Federal Re to be seeking information of members who were going that as much information and he thought serve System continually, To put it another reasonably be supplied. furnished as could should be as a public body to the System had an obligation way, he felt that not be the data should and that requested information supply the involved. He work that was basis of the simply on the refused
recognized that there might be a difference when it came to submitting information on current open market transactions but r ecalled that a response to a request by Senator Gore for current data already had been made. In an ensuing discussion, question was raised about the response that should be made to certain questions asked by Mr. Patman involving information that would have to be obtained from dealers in Government securities. Chairman Martin expressed the view that, when this was the case, the information should be obtained by the Congress direct from the dealers or the dealer community. He did not feel that it would be proper to supply information which had been given to the System on a confidential basis. Question also was raised as to whether the amount of time necessary to compile the responses should be pointed out in some in furnishing the information and Chairman Martin expressed manner the view that there would be no objection to bringing this out in way. Governor Vardaman suggested that this could some appropriate seem to be an undue delay in pointed out in explaining what might be compiling the information. with a question by Mr. Rouse concerning whether In connection on an overtime basis, Chairman information should be compiled the not be "stepped on" at all, that the System should Martin indicated System should not be unduly dilatory but that on the other hand the the data. in furnishing
Governor Vardaman expressed the view that the very furnishing of the information sooner or later would be an asset to the System. Governor Robertson said that in going over the questions it occurred to him that one could not determine, just by reading them, what information could properly be given and what could not be given. He suggested that it might be necessary to set up a committee to make those decisions in the first instance and then come back to the full Committee. Chairman Martin then said that he had had in mind suggesting that the Committee give a blanket authorization for the furnishing of such noncurrent information as appeared feasible and proper, that it authorize Messrs. Riefler and Rouse to confer with respect to the matter, and that if they felt that it was not feasible or proper to furnish certain information they bring the matter back to the full Committee for discussion at a meeting of the Committee. He also sug authorization apply to the questions raised in the gested that this as the original list of questions, and also August 14 letters as well inquiries of the same general nature. to any subsequent Secretary's note: On Friday, August 23, Secretary talked to all of the members the Market Committee who of the Federal Open present at the meeting on August 20 were Mills and Williams, who except Messrs. about whether the were not available, names of parties with whom the Account specific transactions fell with conducted category. It was in the confidential agreed that they did not, and unanimously that the names should be furnished.
Mr. Riefler said that, as he understood it, the line of distinction would be that when the information which was requested had come to the System on a confidential basis from an outside party, should be obtained by the Congress from such party. the information the procedure suggested by Chairman Martin was ap Thereupon, Riefler and Rouse were authorized to proved unanimously and Messrs. proceed on the basis indicated. next meeting of the Committee would be It was agreed that the held at 10:00 a.m. on Tuesday, September 10, 1957. Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions