November 12, 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, November 12, 1957, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Bryan Mr. Leedy Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Williams Messrs. Fulton, Irons, Leach, and Mangels, Alternate Members of the Federal Open Market Committee Messrs. Erickson, Johns, and Deming, Presi dents of the Federal Reserve Banks of Boston, St. Louis, and Minneapolis, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Sherman, Assistant Secretary Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Atkinson, Bopp, Roelse, 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. Gaines, Manager, Securities Department, Federal Reserve Bank of New York Messrs. Hostetler, Storrs, and Wheeler, Vice Presidents of the Federal Reserve Banks of Cleveland, Richmond, and San Francisco, respectively; Mr. Holland, Assistant Vice President, Federal Reserve Bank of Chicago; Parsons, Director of Research, Federal Mr.
Reserve Bank of Minneapolis; Messrs. Willis and Walker, Economic Advisers, Federal Reserve Banks of Boston and Dallas, respectively; and Mr. Hastings, Financial Economist, Federal Reserve Bank of St. Louis Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on October 22, 1957 were ap proved. 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 October 22 through November 4, 1957, and a supplementary report covering commit ments executed November 5 through November 8, 1957. Copies of both reports have been placed in the files of the Federal Open Market Com mittee. Mr. Rouse reported that open market operations had supplied reserves during the three weeks since the last meeting. Principal reliance was placed on repurchase agreements in view of projections showing net borrowed reserves falling to levels in the neighborhood of $100 to $200 million in the weeks of November 20 and November 27. By using repurchase agreements, Mr. Rouse said it was hoped that the run-off of these arrangements at the middle of the month would make it possible to avoid outright selling from the System Account while the Treasury was in the market. It was anticipated that the Treasury financing would be announced the latter part of this week and that
the books would be open early next week. Mr. Rouse went on to say that there were problems and uncertainties in the period ahead. The increase in required reserves resulting from the Treasury cash financ ing, in combination with the usual float decline and other seasonal influences, would call for about $500 million of reserves in the week ending December 4 and an additional $300 million would be needed in the week of December 11. It was difficult to draw detailed plans as to how these funds would be supplied in view of the Treasury's cash problem and the prospect that the Treasury in early December might draw down its Stabilization Fund balance and its operating balance with the Reserve Banks, and, in addition, might sell some of the free gold. To the extent that any of these actions supplied reserves, the need for System purchases of Treasury bills would be reduced. Reviewing current market conditions, Mr. Rouse pointed out that expectations with respect to the business situation were an important influence in the Government securities market, Prices of Treasury bonds had been improving, and there was some feeling in the market that the Treasury could select almost any maturities it ished in its financing this month, with excellent prospects of success. The im proved tone in the Government securities market had not extended to the corporate and municipal markets, however, where the large volume of new issues had tended to keep the market under pressure. The Desk in buying large amounts of Treasury bills for foreign was successful and international accounts two weeks ago, at a time when bills came
easily. More recently, large buying by industrial corporations and the reinvestment of the proceeds of a recent utility financing had sharply reduced the market's supply of short-term issues and driven rates lower. The Treasury bills sold on Friday vent at an average rate of 3.47 per cent, and it was not unlikely that the Treasury bill rate would move still further away from the discount rate on the down side. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period October 22 through Novem ber 8, 1957, were approved, ratified, and confirmed. Mr. Hayes referred to the visit to the Federal Reserve Bank of New York in October of members of the staff of Congressman Wright Patman, and he read the following letter that he had received from Mr. Patman under date of October 25: "Thank you for your October 18th letter. "Both Mr. William Johnson and Dr. Clifford Clark have reported to me on their visit to observe open market opera tions, and they commented especially on how helpful and gracious you and your staff were. "I deeply appreciate your courtesies to them and hope that I shall have opportunity to visit with you too when I am in New York." Mr. Hayes also stated that, as arranged by Chairman Martin, Senator Wallace Bennett visited the New York Bank on October 23, 1957 of observing operations and asking questions concern for the purpose market account, and he read a transactions for the System open ing
letter dated November 6 that he had received from the Senator "I want to acknowledge gratefully the receipt of the material which you sent me including the chart of the organization of the New York Bank and a number of speeches you and Mr. Sproul have made. "I have been in Utah since I was in New York and have just come back to my desk in Washington. I haven't had time yet to read the material but I will do so at the earliest opportunity. "Mr. Golembe and I enjoyed our visit to New York very much. We got about all we could absorb that one day but both of us hope we can come back again." A memorandum from the staff on "Recent Economic and Financial Developments in the United States and Abroad" had been sent to each member of the Committee on November 8, 1957. That memorandum, a copy of which has been placed in the Committee's files, stated that the economic climate domestically was in process of change, that expansive forces had eased, and that contractive forces had become more prominent. Industrial production declined further in October as did employment and department store sales, and unemployment claims had been running sharply above a year earlier. These changes followed significant weakening in business sentiment as evidenced by sharp declines in stock market prices, in prices of sensitive commodities, and in new orders. There also had number of professional forecasts of business decline. been a sizable The spreading view that business outlays for fixed capital are heading given recent support by the McGraw-Hill survey of downward had been 1958. The staff memorandum also pointed plans for capital spending in for bank credit eased considerably in October, out that private demands
while demands for long-term funds continued strong. Yields on Government securities had declined steadily although moderately in recent weeks. Stock prices had fluctuated within a fairly narrow range around a level about a sixth below the July peak. Despite the appearance of these recent signs of slackening, the memorandum called attention to the fact that the domestic economy still was operating at very high levels. Chairman Martin now requested that Mr. Young point up the current economic data, and Mr. Young made a statement as follows: In our presentation at the last meeting of the Com mittee, we reported that, more than at any time in recent months, the pattern of economic indicators pointed to possible decline in over-all economic activity, and we intimated further that actual decline might be in process. The most recently available data confirm that moderate downward adjustment has, in fact, been occurring. Indeed, the composite showing that cyclical downturn has now set in is fairly impressive: After five months of little change, output at factories and mines is expected to show a drop of as much as 2 index points from September to October. Declines in activity were widespread, although most conspicuous in durable goods lines. Both freight car loadings and electric power generation in October were off moderately further. The decline in car loadings ex tends a decline that began in April, and that for power generation a decline that commenced in August. While total new construction holds at a high level, industrial construction continued the decline which set in in May. Business inventory accumulation has slowed markedly in recent months. In manufacturing, with declines occurring in new orders and sales, the inventory-sales ratio in Septem ber was at levels considerably above the average of the past two years.
Business capital spending plans for the year ahead are off significantly, with a decline in expendi tures of a tenth or more from current levels in dicated over the next four quarters. Nonfarm employment receded further in October from the August peak. Reductions in both manufactur ing and nonmanufacturing lines, though small, were widespread. Only State and local govern ment employment registered an increase, although service and trade employment held about even. Unemployment in October, after allowance for sea sonal factors, rose to 4.6 per cent of the labor force, after holding at 4.2 per cent for three months, and initial claims for unemployment in surance averaged 5 per cent higher than in October of last year. The average length of the work week in manufacturing, after stability over recent months, declined half an hour to 39.5 hours; reductions in hours, though accentuated by the flu epidemic, were widespread, and operated to reduce weekly earnings, the average for which fell one dollar. sales, which declined nearly 1 per cent Total retail in September, fell further in October, possibly by Personal income was apparently also 2 per cent. October for the second consecutive month, down in the decline concentrated in wages and salaries. with in September to about 10 U. S. exports fell sharply under the average of the preceding three per cent months. or basic industrial materials Prices of sensitive recent weeks and are somewhat further in declined much above the 1954 recession low. now not at city banks have been Since July, business loans substantial growth in all stable, compared with 1954. The decline in other recent years except was sizable, was during October, which such loans the postwar period. October decline of the first recession tendencies have become fairly In Canada, activity by late clear. In Europe, industrial and through September had ceased expanding spring off moderately. With the exchange had tapered development economies of many inflationary position stemming from these world trade impulses tight, be contractive than more likely to economies seem sustaining or expansive.
It should be emphasized that downward adjustment in the domestic economy thus far has been very moderate and that average wholesale and consumer prices have held relatively stable. But with industrial and other capacity substantially enlarged and with aggregate demand no longer expanding, the price structure would appear to confront supply pressure. At a time like the present, perspective is highly impor tant. A good deal of adjustment in the economy has taken place during the past two years, first, in autos and housing, second, in materials-producing industries, and, most recently, in selected defense industries, especially military aircraft. It is possible that auto and housing markets, reflecting in creased credit availability as that develops with demands slackening elsewhere, will show special strength, and that resumption of military ordering will soon set in--indeed, as an aftermath of Sputnik, will increase. These developments, should they occur, could have a considerable effect on an economic situation that has already absorbed various important rolling adjustments, particularly in turning around the general business climate. On the other hand, turn abouts in the economic climate do take time, and the most likely prospect for the immediate future would seem to be for further moderate downdrift of activity. Chairman Martin next called upon Mr. Thomas, who made a statement regarding recent financial developments substantially as follows: Recent financial developments have reflected the indica tions of slackening in economic activity discussed by Mr. Young. They help to corroborate the likelihood of abatement in inflationary pressures. The details of these developments described in the memorandum prepared for the Com have been aspects have been the sharp decline in mittee. Significant loans by banks, the recent firming of the market for business Treasury securities, the reduced level of share prices, and growth in the money supply this fall. the less than seasonal securities issued by corporations and At the same time, new by State and local governments continue in large volume, and has been larger than in other recent years. Treasury borrowing at commercial banks has growth in time deposits The continued expansion. This raises banks with funds for credit provided to be placed on the questions as to the interpretation in the money supply growth. slackening in commercial loans at banks in leading The decline cities during the five weeks ending October 30, amounting first decline shown for that $600 million, was the to over
month in the postwar period. Although $400 million of the decrease represents repayments by finance companies, which is usual in that month, the remaining decline of over $200 million compares with increases of about $500 million, after excluding finance companies, in each of the two preceding Octobers. For the period since the end of July, eliminating from consideration the decline in July after the large tax borrow ing in June, there have been declines or less than seasonal increases in loans to nearly all groups of borrowers. In recent years business loans have generally increased con siderably during November and December, particularly in the latter month. Some increase should occur this year, espe cially since corporate tax payments in December will be larger than in the two previous years. Corporate borrowing in capital markets has continued at the same high level that has been maintained for the past 12 months but is showing no further increase. No doubt some of these receipts have recently been used to reduce bank loans. In view of the reduced borrowing from banks and the indicated curtailment in business capital expanditures some reduction in corporate offerings of new securities might be expected during the months ahead. State and local government borrowing, however, is likely to continue in large volume. Treasury borrowing in the market, including that by to raise cash for the Treasury, has been Government agencies since mid-year than in the same period of other recent larger years. Much of this borrowing has been effected initially the banks, and bank holdings of such securities have through in contrast to declines in the same increased moderately recent years. Yet a substantial amount of period of other has been absorbed by nonbank holders. Government securities has continued to increase at a rate Home mortgage credit total outstanding--a rate 8 per cent a year for the of over less than in previous years, can hardly be which, though demands for housing are such small. It appears that called even faster if funds were avail that mortgages might increase could be marketed. Consumer at rates at which FHA loans able also increased this year at a pace instalment credit has that which could be rather than below which may be above the increase in September sustainable, although indefinitely was somewhat slower. banks have shown investments of commercial Total loans and in holdings of midsummer, as the increase little change since loan decline. offset the unseasonal securities has approximately supplied since midsummer bank credit has been In the aggregate, period of other than in the same smaller amount in a somewhat recent years.
Demands for bank reserves have been notably lighter this fall than in the same period of the two previous years. To a small extent this has reflected reserves made available by gold and foreign transactions and by advance payments by the Reserve Banks to the Treasury, but principally it has been due to less than seasonal increases in currencyand in required reserves. Until the past week there has been no easing in the money market from this development, because a reduction in Federal Reserve holdings of securities at a time when in creases are usual kept member bank borrowing at a fairly high level. Until two or three weeks ago net borrowed re serves averaged close to $500 million. This, together with the higher discount rate, the generally low liquidity position of banks, and the frequent Treasury borrowing operations, served to keep the money market under pressure. System policy has thus been quite restrictive in a period when credit demands have been slackening. To a degree slacken ing in credit growth was the aim of the restrictive policy. System operations, however, have absorbed not only additional reserves made available by the so-called operating factors, but they also have offset the effect of reduced monetary demands, thus keeping banks heavily in debt at the higher discount rate established in August. Estimates based on the projected seasonal pattern for the remainder of this year, shown in the chart, indicate that after the next two weeks, during which reserves will be made available by the mid-month float increase, reserve needs will mount rapidly. Approximately $700 million of additional reserve funds would be needed to keep net borrowed reserves around the current level of about $350 million. To that the Treasury makes use of its free gold, the the extent need for System purchases would be reduced. recalled that in November and December of It will be and also in December 1955 reserves were made freely last year net borrowed reserves were negligible. Even so available and reflecting the pressures of interest rates rose sharply, In fact the weakness in the Govern strong credit demands. with international tensions, ment securities markets, together on reserves. Be the basis for relaxing restraint provided requirements of business of large temporary liquidity cause rates on Treasury bills generally rise and banks in December, easy money. Funds even in periods of relatively in that month urgent temporary needs. at the time to meet are needed in yields on Government securities, The current decline higher level of net notwithstanding the both short and long, probably reflect the than a year ago, borrowed reserves
slackening of credit demands in contrast to the vigorous demands of last year. The pressure of usual seasonal needs, however, together with Treasury borrowing demands, may soon reverse the current decline, at least temporarily, unless reserves are made readily available. The Treasury will need to borrow at least $1.5 billion of cash in December, in addition to a refunding operation, and some more in January. The timing of this borrowing is complicated by debt-limit considerations. The nature of these immediate borrowing operations, and of other debt management in the near future, will need to take into con sideration the current change in the tone of the Government securities market and also the possibility of increased Government expenditures later. Prompt advantage should be taken of any opportunity to issue long-term securities. Evidences of abatement of inflationary pressures present an occasion for a reconsideration of the general direction of System policy. To some degree the slackening may reflect the intended and desirable consequences of the restrictive credit policy in limiting the use of bank credit to meet investment demands not covered by savings. To a large extent, however, the slowing down may be viewed as an inevitable reaction to unsustainable elements in the previous expansion. For example, one of the main reasons for the prospective decline in business capital expenditures is that productive capacity in so many lines is now in excess of sales. In addition, consumer resist ance to higher prices may be an influence in retarding expan sion of sales. Monetary policy could have prevented these developments only by exerting more restraint on expansion. An easier policy would have stimulated overexpansion, speculation, and rising prices, and thus made the inevitable reaction more severe than it might otherwise be. Monetary policies need not be changed with a view to bolstering those sectors that are reacting from overexpansion or in an attempt to validate the higher prices which consumers are resisting. Nevertheless, if these corrective forces have reduced the pressure of demands for excessive bank credit expansion, there is less need for restraint on bank credit. When there appears to be a slackening in over-all demands for long-run objective of fostering sustainable bank credit, the economic growth does not call for forcing contraction by keeping member banks heavily in debt at a relatively high discount rate. It is possible that demand pressure from accelerated expansion in State and local government borrowing, in home
mortgages, in consumer credit, and even in Federal Govern ment expenditures, might more than offset lessened borrow ing by business. Because of the continuing strong demands in many sectors, the situation evidently does not call for flooding the banks with excess reserves or removing the need for all borrowing. Yet, if sustainable growth is to be fostered, any slackening in total credit demands should be permitted to bring about some relaxation of credit restraints. Chairman Martin said that the vacation from which he returned last week had been better than any he had had in five years and that he felt his perspective had been refreshed. He had picked a good time to be away, he added, stating that he had not seen the article that ap peared in the New York Times on October 24 by Edward Dale until after he returned. He could see how this article justifiably had caused concern to members of the Committee. Chairman Martin went on to say that he did not think the Committee could let newspaper articles and newspaper irritations, which were going to be with us always, blunt the Committee's perspective in either direction. An article such as the one that appeared in the New York Times calls attention to the great responsibility of each of us with respect to what goes on in open market meetings, he said, and this applies to the members of the staff as well as to the members of the Board and the Reserve Bank Presidents. In reading the Dale article, it was not difficult to think something that gave an inkling of what that someone may have said Articles of this type could not transpired in one of these meetings. and it would be most unfortunate if the Committee per be prevented, mitted this clearing house for System policy discussions in any way
to be lessened in scope and purpose. It was necessary to get all the views and thoughts possible, the Chairman said, and this was the only clearing house in a large System that provided an opportunity for such exchanges. As he had commented before, no one should feel bound by the views he initially expressed in open market meetings, and we should recognize that these were a step in the process of policy decision. Chairman Martin went on to say that he thought it perfectly obvious that there had been a major change in psychology. He could see it clearly while he was away; he did not see it quite as clearly now that he had gotten back. Last Friday the members of the Board had had an economic go-around which made it clear that there was no longer a question of forecasting a change in the economy; it was a question of recognizing what was on us. In the Chairman's opinion, the Com these developments. There were a mittee would be blind if it ignored the Committee could recognize the changed number of ways in which through the open market. The situation. It could put in reserves Banks could be changed. The discount rates of the Federal Reserve One of the advantages of Committee's directive could be modified. that should express views that it had a top staff the System was with those views. agreed or disagreed whether the Committee freely, he would ask Mr. Chairman Martin said prelude to this meeting, As a and who also had closely on these matters who worked with him Riefler thoughts on the situation. vacation to give his just returned from cards on the table. of getting all the be done as a means This would
The final conclusions of the Committee would, of course, result from decisions made after members of the staff and members of the Committee and other Reserve Bank Presidents had expressed their thoughts. Mr. Riefler said that he was quite surprised when he came back from vacation to find how definitely the psychology had changed. It seemed to him that this presented for the System a problem of posture and policy. This had been a long capital boom with strong inflationary tendencies going on all over the world. It had gradually and finally built up excess capacity to a point where that was now taking over. Mr. Riefler did not know how long that sort of thing would go on, but his own feeling was that the tendencies the other way had a very good chance of being persistent since it would take time to absorb over capacity. This time, however, there was the great ace of rapid popula tion growth to help. On the other hand, the expansion in capacity had been world wide. At this time the correct policy seemed obscure, Mr. Riefler said. For example, there was the suggestion of Business Week for reducing reserve requirements of central reserve city banks. That, of the bond market would have the it seemed to him, in the climate speculation in bonds. There was con effect of shoving banks into when the Federal Reserve shifted policy siderable expectation that and, even though there was be a boom market in bonds there would was a speculative danger. to that view, he felt there something inclined toward a decrease did not feel much Personally, Mr. Riefler
ll/12/57 in reserve requirements or for a policy of flooding banks with re serves at this time. He did not think this a period at all like 1953 when there was a genuine knot and when putting excess reserves into the market in quantity had delayed effects in relieving the knot. On the other hand, the System had the problem of posture. It needed to take a correct posture in terms of the changed outlook if it hoped to retain the understanding and support of the people. The present posture of the System, Mr. Riefler said, is one of having gone up a full one-half per cent in discount rates in August at a time when the business situation was level and at a time when the System's policy was under quite heavy criticism in Congress, That was a posture that made it clear to the world without any doubt that the Federal Reserve was not going to finance inflation. The action had done its job. Usually, the System feels its way in the open market before it moves on the discount rate, Mr. Riefler noted. It would seem to him in this particular situation, however, that the most appropriate thing to do would be to reduce the discount rate to 3 per cent very shortly. That would be an unmistakable sign to everybody of a changed posture and of a recognition of a generally changed situation. Ac companying that move, Mr. Riefler said, he would go towards somewhat but he certainly would not flood the market with easier bank reserves reserve requirements reduction at reserves and would not go into any felt the investment market should work out of its this time. He in an orderly manner. situation
The most serious financial problem looming up was in the area of the structure of the Federal debt, Mr. Riefler suggested. It seemed to him as though the debt ceiling was gone in any event, with the existing public attitude toward Sputnik and the strong demand that money must be spent for defense purposes. Thus, the debt ceiling was gone on two counts: (1) a decline in revenues, and (2) a prospective increase in expenditures for defense. So far as the availability of resources was concerned, this defense spending program would come on at a time when there was a decline in spending from private capital sources. This was manageable, Mr. Riefler said. In fact, he could not think of a better time for diversion of resources to defense than on a declining picture. However, on the financial aide, the prospect looked somewhat disastrous. At present the structure of the large floating Federal debt was as unbalanced as it ever had been. An increase in total debt under the circumstances could present an appalling problem. On the other hand, there was, of course, a rather general expectation in the market that there would be a boom market in bonds. Advantage should be taken of this. On the financial front, would be to use the next four months he felt that the best procedure reducing the floating debt as was practicable, for as rapid a program of an exchange of unmaturing issues for longer Perhaps there should be debt instruments. Mr. Hayes then presented his views on business activity and substantially as follows: his comments being credit policy,
There is no longer much doubt that at least a mild down turn in business activity is under way, and there is widespread belief that it will probably continue well into 1958. Evidence pointing in this direction is available in many segments of the economy and in virtually all sections of the country. I have in mind particularly the further decline in industrial production and retail sales in October; the significant rise in unemployment to nearly 5 per cent of the labor force; the prospect of some reduction in inventories which, at the manufacturers' level, have become rather high in relation to sales and new orders; the development of excess capacity in a growing number of industries; the confirmation of somewhat reduced capital spending plans for 1958 as compared with this year; the depressing effect of recent Defense Department economy moves on business activity and senti ment; and the probable reduced demand of foreign countries for American goods. On the favorable side, residential building seems to have stabilized and has shown some signs of renewed strength, while public construction continues to expand. With respect to unemployment, it seems likely that further increases will occur in coming months even if the level of output should remain unchanged, both because the labor force is growing and because of the prospect of more pronounced gains in productivity than in the last year. Price developments in the last few weeks have been in keep ing with the general slowing down in the economy already out lined. The decline in wholesale prices noted in September appears to have carried somewhat further in October. While the October consumer price index is not yet available, there is some hope that it will show little if any gain over September and that seasonal in food prices may hold the index pretty steady for the declines rest of the year. Although the sharp deterioration in business sentiment of may be viewed as in part a psychological phenomenon, recent weeks considerable stimulus from the persistent weakness of receiving it is now clear that it rests in part on a the stock market, weakening of underlying business statistics. The major definite question now seems to be not whether a further business decline long and in what degree. The views of will occur, but for how economists are reassuring, involving projections most business national product, in dollar terms, of a mild downturn, with gross though slight ad unchanged and with a continued remaining about a moderate drop in production consumer prices, but with vance in On the other increase in unemployment. and some significant is "ripe" for a argue that the economy hand, a few economists believe possible. In jolt than most observers much more severe on the extended loan position view, attention is centered this and high consumer corporate liquidity of the banks, reduced
indebtedness, and also on the possibility that recent surveys of business capital spending, while correctly indicating the direction of future outlays, may seriously understate the magnitude of the declines involved. Such understatement could result from future modifications in spending plans in the light of the recent deterioration in business psychology or because of further downward revisions in expectations as to consumer spending. I am inclined to take the more optimistic of these two views, first because many of the capital spending program covered in recent surveys seem reasonably firm, and second because news with respect to defense spending will on balance probably have a stimulating effect on business sentiment in coming months. The already announced relaxation in previous military expenditure ceilings, together with public pressure for quick action to intensify missile development, may soon lead to markedly higher rates of orders, even though actual defense outlays may not expand materially for some time to come. Statistics on bank credit changes in the past four weeks clearly confirm a pronounced slackening in pressure as compared with 1956. This is true of business loans, and particularly of short-term seasonal borrowings. It is also true of total loans, and of loans and investments. We have made very rough estimates suggesting that the money supply at the end of 1957 may be about 1 per cent lower than a year earlier. The tendency toward re duced pressure is scarcely visible as yet in the corporate bond markets, because of a still heavy calendar of new offeringsbut the recent action of the Government security market points clearly to widespread expectations of diminished pressure in coming months, even though the Treasury will be faced with sizable refunding and cash-financing problems. We must, of course, take account of the prospect that the Treasury will probably be borrowing something like $1.5 billion for payment partly in late November and partly in early December, in addition to the substantial December 1 refunding. Coming to the question of credit policy, I feel that it is not necessary for us to attempt to judge at this point the prospective business decline will be mild or severe, whether The important point is that the and of short or long duration. evidence now available clearly suggests that we can safely go we have in relaxing credit restraint without adding further than Prompt action in this to the threat of inflation. significantly in view of the possibility, however direction seems desirable business adjustment may be more than a mild dip. remote, that the why we cannot move gradually and cautiously But I see no reason
in the first instance, being prepared to reverse our actions if the business news improves substantially, or to adopt a more aggressive program if the outlook deteriorates further. I agree with Mr. Thomas' view as expressed in his recent memorandum that we should allow the lessened demand for bank credit to be reflected in an easier tone in the money market; and to my mind, this easier tone might well produce a some what lower level of market interest rates. While I like to think of our instructions to the Manager as being expressed in rather general terms, i.e., to pursue a somewhat easier policy than that of recent weeks, if we are to use some kind of benchmark in terms of net borrowed reserves, I would pro pose a figure of roughly a quarter of a billion dollars, perhaps with fluctuations of plus or minus 100 million dollars, around that figure--all subject to the usual proviso that the Manager should have ample leeway to adjust for the "feel of the market" and to the further proviso that doubts should be resolved on the side of ease, especially in view of the expected in the next few weeks. Some sales Treasury financing in the coming week; but I would hesitate to might be required this score, preferring to leave the Manager be very definite on it would seem appropriate to in ample leeway. Incidentally, of bankers' acceptances in con crease the System's holdings market purchases of Government securities junction with any open required in the next few weeks. of Governors might appropriately continue I think the Board serious consideration to a reduction in reserve require to give banks. This would be one way ments at the central reserve city needs of the banking system. of meeting the seasonal reserve do not yet support the need for Perhaps the economic statistics would be interpreted as an overt this action, which probably policy, but new evidence during the move toward easier credit occasion for the action. few weeks might provide appropriate next be made, the first week in December might If such a move is to would obviate the when reserves so released be a suitable time, otherwise probably be market purchases which will need for open review within the next Board may also wish to required. The reduction in margin require the matter of a possible few weeks ments under Regulations T and U. opinion, to reduce discount has not come, in my The time York Bank concur in this view, rates. The directors of the New of the opinion at the same time emphatically although they are time toward diminished a start at this we should be making that It may well be that open market operations. restraint, through easier tone in the credit--and the demand for bank the lessened develop as a result-- be allowed to market that should money
might lead to somewhat lower interest rates on Treasury bills and other short-term instruments. This in turn might provide the setting for a subsequent reduction in discount rates. The directive should be amended, if the Committee agrees that some such policy as that outlined above should be adopted. To the extent that policy in the period ahead will be guided by a willingness to provide for prospective seasonal credit expansion, the directive might well reflect this intention. I would suggest the following wording for clause (b) in the directives "to foster sustainable economic growth by supplying reserves to provide for prospec tive seasonal needs while remaining alert to continued though lessened inflationary pressures. Mr. Erickson said that conditions in the First District followed pretty much the national picture. Business sentiment appeared to be weaker and this weakness appeared to be outrunning the weakness in busi ness performance. As in the national picture, there were plusses and minuses. Employment was still good, especially in the service produc ing industries, but manufacturing employment was continuing its down ward trend. Shoe production for the country as a whole may match the 1956 total. For the first nine months last year New England had 3 per cent of that production. This year it was 33 per cent. Textile per formance was still very disappointing. Mill margins were down as were inventories. Some mill managers believe there is only one way the go and that is up. Readjustment in paper industries was industry can continuing, due to increased productive capacity. The electronics a mixed picture. TV inventories were in better industry presented good for some types of computors. The position and prospects were
Government contract picture was said to be very confused. Machine tool orders continued a downward trend. Ordinarily at this time of year the machine tool people would be getting orders in connection with the 1959 cars. No orders have appeared as yet, and they are of the opinion that there will be no radical changes in the 1959 auto mobile. Electric power distribution was showing a declining rate of expansion. Construction contract awards for the first nine months of this year were 5 per cent better than last year and residential build ing was up 4 per cent. Department store sales for the first nine and a half months were one per cent behind last year. Mr. Erickson then reported on a follow-up survey of capital ex penditures of some 150 companies made last month. Those companies now in 1957 they will spend almost 4 per cent more than they estimate that This, however, would not be as high as estimated did last year. companies also were asked what their ex earlier in the year. These be. Only 95 replied, 48 stating for 1958 expenditures might pectations to spend more and than in 1957, while 27 planned they would spend less 20 no change. Mr. Erickson said he thought a change As to credit policy, no change in the dis He would make be made in the directive. should the next meeting or preferring to wait until count rate at this time, concerned, he felt market operations were month. As far as open next that net borrowed to the extent should be lessened that the restraint
reserves might fluctuate between $200 and $300 million, and if errors were made they should be on the lower side. Mr. Irons said that the economic factors in the national picture were turning moderately downward. On the whole, the weakening had been quite slight with the possibility of offsetting factors coming into the picture. In the Eleventh District, there had not been much change in recent weeks. The confidence quotient was one of caution, recognizing that there had been less than seasonal growth in some areas and some actual declines. The petroleum industry had not changed much since the preceding meeting and Mr. Irons thought that it would take some time for correction of the situation in that industry. The aircraft industry had been affected by defense moves and there had been some layoffs of workers. There had been a little damage to the cotton crop in the last couple of weeks because of an early frost. Evidences of strength in the Eeventh District included an increase in total employment, construction contract awards running a little above last year, and recently quite strong demand for bank loans in contrast with the decline in the country as a whole. Some leading bankers reported by national corporations out of New York and a shift of borrowings move. On balance, Mr. Irons Chicago to Dallas, perhaps a temporary activity in the Eleventh District was at a high level. felt that only in terms of a three-week On credit policy, thinking must take into consideration Irons thought the Committee period, Mr. to appear in that were beginning deflationary forces the developing
the past month or two. However, he would not shift as much toward ease as he understood Messrs. Hayes and Erickson to have suggested, but would attempt to maintain approximately the degree of restraint achieved during the past few weeks. With respect to basic policy, Mr. Irons did not think this was the time to change discount rates or reserve requirements, or to take away other basic steps of that nature, although he recognised it was certainly not a time for further restraint. Assuming that discount rates were not to be reduced, he would hope that market rates, including the bill rate, would conform fairly closely to the discount rate. He doubted that policy should contribute to an easing that would bring about a reduction in rates at this time. Member bank might be in the $600-$700 million range during this period borrowing have much regard for the net borrowed reserve and, while he did not in the neighborhood of $300-$400 million figure as a guide, something Pressure during the past four weeks had been would be sufficient. did not think the System had in Mr. Irons' opinion and he appropriate that had appeared. In the slight declining tendency accentuated to six weeks the desirability of a more definite step another three that he was not ignoring Mr. Irons said, adding might become apparent, that a need for change was yet factors but he did not think recent to maintain a preconceived should not act clear. The System crystal meet requirements as they borrowed reserves but should level of net of market rates to the movement giving consideration develop, while
relative to the discount rate. The Committee's directive might be changed, Mr. Irons said, but he would hesitate to put into it what he understood Mr. Hayes suggested in the way of a statement that the Committee intended to supply seasonal needs. The Committee would always be expected to meet seasonal needs. If the directive were lacking anything--and Mr. Irons did not think the present wording was bad--it might be lacking the thought of a mixture of factors, some inflationary and some developing deflationary factors. If a change in clause (b) of the first paragraph of the directive were to be made, Mr. Irons would think of something along lines that would call for "sustainable economic growth under conditions characterized by both inflationary and deflationary forces". Mr. Mangels said that not much new statistical material had become available on Twelfth District conditions since the preceding meeting but such figures as had been reported confirmed the recent pessimism in business sentiment. The production trend was slightly down and employment in manufacturing, mining, transportation, public utilities, and Government had dropped. In the aircraft industry declined 2 per cent for the second month and employment in September affected by cutbacks. Insured defense industries were being related a year ago, the largest in was 63 per cent higher than unemployment because of the number in the Pacific Northwest crease appearing types of construction--residential, nonresidential, situation. All
public works, utilities--declined 18 per cent in September from a year ago but for the first nine months of 1957 totalled slightly more than in 1956. Department store sales during the last four weeks were down 2 per cent but for the first ten months of this year shoved a 1 per cent increase over a year ago, September auto mobile registrations in California were 8 per cent above August and 30 per cent ahead of September last year. Bank loans during the past three weeks shoved a decline compared with a year ago. Demand deposits were about the same as a year ago. Twelfth District banks recently had become net buyers of Federal funds and in the week ending November 6 a larger number of banks were borrowing at the Federal Reserve than in the recent past although the aggregate amount of borrowings remained nominal. Mr. Mangels said that it looked as On the over-all picture, equipment expansion had reached a crest. With the though plant and capacity could produce suf completion of many projects, expanded on a competitive basis. There had ficiently to put consumer goods back further upward pressures. Mr. been enough restraint to hold on so much restraint as think the System should put Mangels did not He noted that September down too far too fast. to force activity and that a further alight prices had declined slightly wholesale Bank loans were down although in October might be expected. decline securities were still high. of corporate and other public issues System should consider new cash and the would require The Treasury
those needs seriously. Mr. Mangels thought that perhaps serious inflation was no longer a threat and that the economy may have reached a turning point with greater weight beginning to shift to the deflationary side, although when this would occur was uncertain. Until there was more positive evidence in the form of more serious unemployment, for example, or more serious price declines, Mr. Mangels thought that policy should continue a moderate degree of restraint. He had in mind net borrowed reserves in the $200-$400 million range, perhaps more in the lower area. The Manager of the System Account should have full leeway in operations. Mr. Mangels did not think the discount rate should be changed now although this might be neces sary in the near future. At a meeting of the directors of the San Francisco Bank tomorrow this question would undoubtedly be discussed, some directors having indicated their feeling that the rate might well be reduced. As to the directive, Mr. Mangels thought that clause (b) might well be changed to shift the emphasis along the lines suggested at the preceding meeting so that the clause would by Mr. Balderston economic growth, restraining infla read "to fostering sustainable in the business out recognizing uncertainties tionary developments, in the international situation." the financial markets, and look, Ninth District the situation Deming said that in the Mr. in the nation as a whole, although seemed to be a little stronger than than had been or more weakness signs of less strength there were in the district reflected more favorable situation anticipated. The
the position of farmers and some strength in residential building. Employment was still higher than last year although unemployment had crept up. Taking out Montana, there had not been much change in the district as a whole in recent weeks. Hours worked had declined slightly. For what it was worth, Mr. Deming stated that forecasts by the unemploy ment agency for Minnesota indicated that the number of unemployed by next Friday would be about 4,000 higher than last February in the State of Minnesota, reflecting the situation in mining. Without question, Mr. Deming stated, business sentiment in the Ninth District had deteriorated over the past three weeks. Even such developments as would ordinarily be regarded favorably were being looked upon unfavorably in some quarters. For example, the clean-up of 1957 model automobiles which had been very good was now being interpreted by some dealers as borrowing sales from As to policy, Mr. Deming said he would associate himself pretty much with the views expressed by Mr. Hayes excepting his feeling on Mr. Deming thought this was not the time for any reserve requirements. a change in Federal Reserve policy. He would dramatic move to signal that would be reflected in net borrowed go along with some easing reserves around the $250 million level. meetings of Seventh District business Mr. Allen referred to two ten days, stating that for been held during the past economists that had majority of opinion now time in four years a considerable the first activity. The Ann Arbor decline in business pointed to a continuing
business outlook conference held on November 4 and 5 reflected similar sentiments. With about 100 economists in attendance representing firms in finance and industry in the East and Midwest, most expected the industrial production index to be lower next year. The majority opinion was that price inflation had ended or at least had slowed markedly. The expected drop in capital expenditures of business was emphasized at both these meetings, Mr. Allen said. Many of the economists in the Seventh District area believed that the de cline in capital outlays in 1958 would be 10 per cent rather than the by the McGraw-Hill survey of business plans. 7 per cent indicated This would be especially important in the Seventh District, Mr. Allen noted, since that district accounts for approximately one-third the nation's production of machinery of all types. On the other hand, some of the district's capital goods industries look to improvement in output and sales, namely farm equipment, road building equipment, and electric generating apparatus. Mr. Allen said office equipment, that as far as he was concerned the prospective decline in capital event. After all, it would be a decline expenditures was a welcome from an excessive level and the lower level would still be large by to a report that had appeared in historical standards. He referred would exceed year over-all construction Chicago paper that next a increased home and per cent, and that total by about 5 this year's estimated 7 per cent than offset the building would more public by the McGraw-Hill survey. capital expenditures reported decline in
The strong trend in retail trade noted earlier this fall had not been maintained, Mr. Allen said. General merchandise stores were operating at about the same level as a year ago despite price increases. Sales of these stores were considered disappointing in each of the past two years but the Christmas upturn made the fourth quarter appear favorable. Mr. Allen then commented on the automobile industry, stating that the report in last Friday's Wall Street Journal covered the situa tion well although there was an error in the figure for unsold new cars in dealers' hands on November 1, that is, the Journal reported a 500,000 figure whereas the correct figure was 560,000 of which 250,000 were 1957 models. The industry seemed to be well satisfied with the clean-up of those models. As usual, production was expected to con tinue at a high rate until early 1958 when dealers' show rooms should be stocked and sales would become a factor bearing on production. In Detroit it was felt that wage contract negotiations in the coming spring would influence manufacturers to push for high production and sizable inventories in the intervening months, whereas labor stoppages would be a counteracting influence in the opposite direction. The labor Mr. Allen noted, referring to a strike difficulties have already begun, in a General Motors transmission plant. Allen said that he thought the As for monetary policy, Mr. the Vice Chairman of the Board of statements by the Chairman and last week were very good. The changes Governors in their speeches
in the business situation, such as they are, seemed to him necessary adjustments. He referred to the expression Mr. Thomas had used describing the effects of monetary policy thus far as "intended and desirable" results of what the Committee had been trying to bring about. Mr. Allen felt his views were closer to those expressed by Mr. Irons than others who had spoken thus far. If the Committee were concerned about the situation and felt that there should be some easing, he doubted that the level of net borrowed reserves would matter very much, and he would keep this figure around $350 million, about where it now is. Mr. Allen said he was interested in Mr. Riefler's comments, and when the Committee felt that the time for a change was desirable his view was that the discount rate would be the place where a move should be made. He was not ready to make that move now. Mr. Hayes had commented that the directors of the New York Bank were unanimously against a move in discount rate right now, Mr. Allen noted, and he expressed the view that some of the directors of the Chicago Bank would be opposed to a change, although he believed they would favor a change in the discount rate as the first move when action in that direction was taken. On the directive, Mr. Allen said that Mr. Hayes' suggestion seemed satisfactory although he would leave out the words "though lessened" in referring to inflationary pressures, wage settlements coming up next year the time believing that with the to recognize lessened inflationary pressures. had not yet come expressed at a meeting o the di Mr. Leedy said that views week, with respect both to conditions of the Kansas City Bank last rectors
in the Tenth District and to sentiment generally, were anything but bearish. Member bank borrowings had increased sharply since the meeting three weeks ago, apparently a result of a lower level of interbank balances at city correspondents and of lower Treasury balances. In addition, the annual tax assessment made in Oklahoma, under which intangibles held as of November 30 were taxable, was causing some shifting of bank balances out of the district temporarily. It seemed to Mr. Leedy that the signs were so clear with re spect to the decline in economic activity that the Committee could not fail to heed them and do something about them. However, any precipitate action might contribute to further deterioration in market and business sentiment. His view was that such action was not yet required, Mr. Leedy said, but for the immediate future he thought the Committee should be operating with a considerably lower level of net borrowed reserves, perhaps in the $100- $250 million area. On the discount rate, the latest move in August had been to bring that rate into conformity with the level of market rates. He did not think a downward adjustment in the rate could be made on that basis. He felt that a lower level of should first be signaled. Perhaps the discount net borrowed reserves rate should then lead the market. Mr. Leedy would make no change in reserve requirements of central reserve city banks for much the same think a precipitate move in the discount rate reasons that he did not should be taken at this time. He would favor some change in wording of clause (b) of the Committee's directive to the effect that policy
should be with the view to "maintaining restraint on the expansion of credit in the interest of sustainable growth, while taking account of contractive elements in the economy," and continuing the phraseology with respect to uncertainties now in the directive. He felt it im portant that the directive set out that the Committee was taking account of contractive elements. Mr. Leach said there was evidence that the areas of weakness in the Fifth District economy had spread somewhat during the past few weeks. However, there were no indications of an appreciable accelera tion in the slide-off in the principal industries. There had been a small decrease in hours worked in the textile industry, and a number of the larger cotton mills were planning longer-than-usual shutdowns at Thanksgiving and Christmas. Declining sales recently had been reported by department stores, furniture stores, and household ap stores, and by a majority of reporting automobile dealers. pliance nonagricultural employment in September The increase in aggregate was less than is usually experienced. Mr. Leach said he thought the Com With respect to policy, enough tightness to prevent the mittee should attempt to maintain but not enough tightness to resurgence of inflationary pressures economy. This would pre over-all downturn in the accelerate the continue. In view of now under way to sumably permit adjustments all economic indicators, including the downward trend in virtually loans, he thought the degree movement of business the contraseasonal
of restraint maintained in recent weeks could be modified without running much risk as to the resurgence of inflationary pressures. He was not thinking of a shift so substantial as to be interpreted as a shift from restraint to ease, or one that would require abrupt action if renewed evidences of inflation should appear. In terms of net borrowed reserves perhaps $200 million would be a suitable benchmark. Mr. Leach added the comment that the discussion this morning made him feel more strongly than before that the net borrowed reserves figure had some use as a benchmark but not as a goal. That is, the figures do serve as indicators of the degree of tightness, and if the Committee were going to make any change in the degree of tightness these figures would have to get down around $150 or $200 million in order to indicate a change from the present. Mr. Leach went on to say that he was inclined to feel that such dramatic action as lowering of the discount rate would be a mistake at this time, although he had a strong feeling that the Committee's directive must be changed. The record should not show that the Committee failed to recognize a change in the economic outlook from what it was some months ago when the present wording of the directive was adopted. For some time the Committee had been developments, and Mr. Leach endeavoring to restrain inflationary However, he thought the Committee said he thought it had succeeded.
would not wish to continue saying in its directive that it was trying to restrain: rather, it would now seem better to say in substance that it wished to prevent the resurgence of inflationary developments. A change in the directive clearly was needed, Mr. Leach said, and he felt it should provide for less restraint but not for ease. He would not care particularly to put in a reference to meeting seasonal needs. His suggested wording of clause (b) of the first paragraph of the directive would read "to preventing the resurgence of inflationary pressures in the interest of sustainable economic growth, while recognizing increasing uncertainties in the business outlook, the financial markets, and the international situation." We should proceed gradually rather than abruptly, he said, because we could not be sure at this time that it might not become necessary to reverse what we were doing. Referring again to the discount rate, Mr. Leach said he would happy to see a lowering of the rate now and an not be particularly later, although he would like to use the discount increase a little rate some time as a lead action, rather than always as a catch-up to use the discount rate as a action. Nevertheless, he hesitated such a change might indicate that the lead action at this time since Federal Reserve was anticipating more of a downturn than was actually the case. and none of none of the statements said that Mr. Robertson of pessimism. Public him with a feeling presented today left the facts
psychology, which he felt should be weighed more heavily than any other factor, was at a low point in the East but seemed to be quite high in the western three-quarters of the country. Consequently, he would align himself completely with the views of Messrs. Irons and Allen. The Committee should not close its eyes to the fact that there has been a downturn, but it should not be panicked by it; it merely indicated to Mr. Robertson that the policy the Committee had been following was actually working. The policy should not be pressed harder, Mr. Robertson said, but he would not change the discount rate at the present time and would not reduce the volume of net borrowed reserves. He would be flexible and prepared to move whenever that was called for. Although he did not think a sharp move was called for at this time, Mr. Robertson said he agreed with the suggestion that the directive should be changed to get away from the idea that the Committee was directing policy completely toward fighting inflation. If the directive recognized that there were signs of developing deflationary trends, that would be a sufficient indication of a flexible policy, Mr. Robertson said. If, three weeks hence, conditions indicated a further downward trend in economic activity, it might be time to consider a reduction in reserve requirements as well as in rates. For the present, the Committee should move sidewise, discount holding its place and always remaining as flexible as possible, but does not involve jumping back and he emphasized that flexibility sum, Mr. Robertson would not the sake of jumping. In forth just for
change the policy of restraint at the present time, would not change the discount rate, would not change the level of net borrowed reserves, but would modify the directive. Mr. Shepardson said that his feelings were much the same as those expressed by Mr. Robertson. All of us recognized that there had been some changes in the situation. Mr. Shepardson felt these changes had been desirable and in the direction that the Committee had been aiming for some time past in trying to bring the inflationary forces under control. There was still a strong possibility of a resurgence of upward pressures from expansion to come in defense expenditures and other factors, and any overt move toward ease, any positive change in direction of policy, would seem to him to be a mistake at this time. Under present conditions, there was an opportunity to bring about some material gains in efficiency. If the current restraint continued for a time, many persons might do some pruning of inefficiencies that had come into the econonomy. This would be all to the good. The Committee should have in mind the possibility of the coming wage negotiations and should maintain as far as possible the kind of climate that would hold some restraint against wage moves such as had been witnessed in the past. At the same time, the Comthe slackening of inflationary pressures, and mittee should recognize increased in any way. Mr. Shepardson's restraint should not be hold just about the degree of restraint of preference would be to the past three weeks, not taking positive steps to ease but being
careful not to increase pressure. He agreed that there should be a change in the wording of the directive and he liked the suggestion Mr. Leach had made. Mr. Fulton aligned himself completely with the views Mr. Shepardson had expressed. There are evidences of greater than adequate capacity in the heavy goods industries that resulted from the considerable expansion of plants and this added capacity is just not being fully used. Businessmen and consumers are going through a psychological reversal from conditions prevailing over the past year. There has been a jolt because of the earth satellites launched by the not now feel there is a chance of an upturn Russians. Business does after a sidewise movement, there might be a moderate this year and, next year. Mr. Fulton thought this would be of downward movement some of the "fluff" would be taken out. benefit to industry in that shape that an upturn in conwere believed to be in such Inventories back promptly to basic manufacturers. The sumer demand would come open up very rapidly. Mr. Fulton comwhole economic system could days ago attended by 23 economists on a meeting in Cleveland a few mented of the industrial prostating that their projections from industry, duction index indicated a slight decline in the first quarter of 1958, a rise in the third quarter, but in the second some further let-down unemployment would were that year. Their conclusions quarter of the not be excessive. should not reduce Federal Reserve he felt the Fulton said Mr. would be too sharp a change in discount rate at this time. This the
posture and in direction. Perhaps net borrowed reserves should be reduced to the $250-300 million area, but nothing dramatic should be done at this time. Any dramatic move could easily upset the economy. The Committee's directive might well be modified to recognise the change that had taken place in the economy, but nothing should be done that would be abrupt in the direction of ease. Mr. Williams said that in the past several months there had been indications that sentiment on the pessimistic side had been outrunning statistics. Now the statistics were beginning to confirm the sentiment. This could be observed in loans of large city banks. In the past six weeks loans for business purposes had fallen off persistently in the Philadelphia District. Without exception, the lowest point in those loans was in the latest figures. Final figures on capital expenditures in the Philadelphia District showed that plans for 1958 were almost universally on the pessimistic side, with all manufacturing showing a decline of 13 per cent, durables a decline of 10.5 per cent, and nondurables a decline of 15.5 per cent. The directors of the Philadelphia Reserve Bank had become vocal on the question of the business outlook and credit policy, Mr. to a discussion on the matter at last week's Williams said, referring conclusion of which the Chairman of meeting of the directors at the to the Board of Governors directed to send a letter the Board was market operations. After a change in policy through open calling for
reading the letter that the Chairman of the Philadelphia Bank had sent to the Board of Governors, Mr. Williams stated that he felt the objective for net borrowed reserves should be lowered to the $100-$250 million range. The Committee's directive should be changed, but Mr. Williams would turn the job of detailed wording over to someone else. He felt it evident that we were beyond a position of uncertainty and that the Federal Reserve could assume a posture not by changing the discount rate, but by easing operations through the System Open Market Account. Mr. Bryan said that, with the possible exception of Florida, the Sixth District was showing changes in a downward direction--not dramatic, but a series of small changes. He was greatly impressed with the shift in business sentiment and statistics in recent weeks. At the meeting of the directors of the Atlanta Bank last Friday, a full discussion of the situation showed a remarkable shift in the and exuberance that had existed. Mr. Bryan felt sense of ebullience was confronted with a difficult problem in policy. that the System showed deterioration in the situation, and if the The statistics merely with the question of a short-run deterioraSystem were dealing of monetary policy at this favor a considerable easing tion, he would more difficult because of a difference time. However, the problem was The longer run conand longer-run outlook, between the short-run fairly high rate of might require a Mr. Bryan felt, siderations, need over the longer pull to encourage savings interest in view of the
to take care of the population growth, and because, as Mr. Riefler had mentioned, the Federal debt ceiling and budget limitation were gone as a result of missile developments. Under the circumstances, Mr. Bryan said that he leaned a little more toward easing the situation, perhaps not by immediate and overt action, than he did toward maintaining the present degree of restraint. He had reached this conclusion believing there was an inherent danger in the present situation. Just as the strength and duration of booms tends to be underestimated, so the extent of read justments, particularly after a long-continued boom such as we have had, tends to be underestimated. The lack of liquidity in the economy could provide a terrific drag if recession got underway. At the last meeting of the Committee it see d to him desirable that the bill rate should be kept in the neighborhood of the discount rate. He felt now that the bill rate might be moved a little below the discount rate. If the situation eased naturally and substantially by virtue of the failure of loans to go up, he would not put any brakes on that easing. He would let net borrowed reserves fall where they will since they could be influenced by many factors, and he doubted that the Committee should put on pressure because of a preof net borrowed reserves. He would buy the long bills conceived figure very freely if they had a tendency to go above the discount rate, and if they tended to move below the discount rate, he would let them go. begin to consider re-establishment of In addition, the System might factor in the total factor of reserves. Growth some moderate growth
had been so negligible recently as to be nonobservable and by the end of the year may prove to have been a negative figure. The economy was trying to grow, and unless we allowed the reserves to get out to permit growth, the Federal Reserve would eventually be a party to producing economic convulsions. Mr. Bryan said that if any overt action were to be taken, he would like to see it done at this time by reducing reserve requirements on savings deposits. He also would like to see the Committee's directive changed. Mr. Johns said that he, too, had returned from vacation, but being under the necessity of remaining at home he had been exposed to a variety of reading, including the Dale article in the New York Times, and perhaps his perspective had not been improved during his vacation. In preparing for this meeting, he reached conclusions agreeing with the statements that had been made by Mr. Young to the effect that a moderate downward adjustment in the econonomy had been occurring, that the evidences of psychological change were fairly impressive, and that further moderate downward drift might be likely. The Eighth District seemed to be contributing its share at least to that kind of performance. Manufacturing activity was down, employment was not strong, department store sales were down, bank loans were about as in the country generally, and bank debits in October behaving certainly evidenced no great strength in economic activity. Eighth except for the recent tracked with the nation District agriculture
impairment of the cotton crop both as to quality and quantity. In only one factor was there evidence of strength--construction--and even that strength was because of two major public housing projects connected with Armed Forces installations. Mr. Johns' conclusions on the basis of his appraisal of the situation were that (1) a reduction of the discount rate was indicated and that should take place very soon; (2) through open market operations restrictions upon bank reserves should be moderated; and (3) the Committee's directive should be changed promptly. Mr. Johns went on to say that perhaps there had been signs some time ago of the change that might seem to have occurred recently. He was inclined to think that the statistics were just now catching up with the evidences which perhaps were not clearly seen but which were perhaps divined as early as last August when the Federal Reserve was assuming a rather strong posture with respect to restraint of inflation. He felt that the adjustment of the discount rate in August had greater significance than bringing it into line with the market structure; he was inclined to agree with Mr. Riefler that that action was a clear indication that the Federal Reserve did not intend to finance inflation. At this time, Mr. Johns thought the System should acquire a new posture as Mr. Riefler had suggested. He doubted, however, that the System should move too quickly to reduce the discount rate by 1/2 per cent. We have had a very long and very well advertised period of tight
money, he noted, which has engendered some apprehensiveness in the minds of reasonable people. Possibly a clearly announced but moderate change in policy in the direction of less restraint would have a salutary effect on public opinion and attitude. Assurance that the tight money policy would not overstay its welcome might be a very healthy thing. Therefore, Mr. Johns would lean in the direction of a rather prompt reduction in the discount rate of 1/4 per cent. He noted that the directors of the St. Louis Bank met on Thursday of this week, adding that he would not be able to argue strongly against such a reduction. With respect to open market operations, Mr. Johns said that he believed that there should be observable moderation of restriction on bank reserves. Also, there should be a change in the Committee's directive. He did not believe the directive should continue to proclaim as its central purpose the restraint of inflationary forces. In commenting on this point, Mr. Johns suggested the desirability of having the directive state in more specific terms than it has in the past what the Committee expected in the way of operations in the open market from the Manager of the System Open Market Account. Specifically, at this time he thought that the directive should tell the Manager quite clearly that he should moderate the restrictiveness through operations to increase the availability of bank reserves. comment that the directive was Chairman Martin interjected the policy actions submitted to for the record of open market the basis
the Congress. It was not written only for the Manager of the System Account, but it was a public document. The directive had a heritage that had been built up over a period of many years. This heritage and the purposes served by the directive should not be confused with the more detailed comments given in the minutes of the meetings to help guide operations during the intervals between meetings. The Chairman pointed out that the nature of the directive must be considered in thinking of the relations between the Chairman and other members of the Committee and the Congress. While he did not believe there was any major disagreement between the views he was expressing and the thoughts Mr. Johns had in mind, he thought we should bear in mind not only the drafting problem but the nature of the directive that had been issued by the Committee in the past and which the Committee would be dealing with in the future. Mr. Szymczak said that the problems of monetary policy were similar to the problems of fiscal policy in that both were very difficult. Monetary policy was much more flexible and therefore could meet its situations much more readily than fiscal policy. Even there, was not always easy to adjust monetary policy to statistics however, it that became available late. Mr. Szymczak agreed with Mr. Bryan that situation to consider, but there was there was not only the present the likelihood of another and different situation that might develop deficit financing. At the run and take us into over the longer Comittee should decrease Mr. Szymczak felt that the present time,
to some extent the net borrowed reserves by supplying reserves through the open market. A move in this direction would be indicated by net borrowed reserves in the $200-$250 million area. He also felt that the wording of the Committee's directive should be changed so as to recognize the reduced inflationary pressures and the increased uncertainties in the business situation, but he would also have something in the directive to suggest that it still might be necessary to fight inflation. On the discount rate, if the Committee were to supply reserves it would become necessary to reduce the discount rate because of the effect additional reserves would have on market rates. His own view was that discount rates should be reduced as soon as possible and not by 1/4 per cent, but by 1/2 per cent. Mr. Balderston said that, as he had remarked at the preceding meeting, the economy seemed to him to have reached and probably to have passed the peak of the boom. This appeared to be the case not only in this country but in Canada and in Western Continental Europe. In attempting to avoid confusion in his mind between the psychological and the real situation, he was basing his conclusions on indices of production in foreign countries and in the United States, the fact that electrical power consumption was dropping below its trend line, the falling off in freight car loadings, and the decline in manhours Labor had been making some studies worked per week. The Department of as to probable changes next year in unemployment, he noted, that
indicated a doubling of unemployment in 1958. Mr. Balderston said he would differ from Mr. Hayes, not as to the diagnosis of the situation, but as to the remedy to be applied. He would not favor a change in reserve requirements or in margin requirements because he thought the interpretation that would be placed on such moves by the country would be that the System was favoring Wall Street and forgetting Main Street. Moreover, either of these moves might prove premature. To dissipate any impression that the Federal Reserve System was adamant and doctrinaire, Mr. Balderston said that he would favor an immediate reduction in the discount rate, the sooner the better, and he would make the reduction 1/2 of 1 per cent. A suitable target for net borrowed reserves would be around $250 million. He would change the directive with a simplified statement of clause (b) that would call for operations with a view "to fostering economic growth that is sustainable." If some qualification seemed necessary, this could be supplemented with a statement such as "and continuing to watch potential inflationary threats." Chairman Martin said that he thought we had had another good go-around. He certainly was not gloomy. Excellent extremely in the System's public relations and in progress had been made both its policy. In his judgment, we had not yet licked the business cycle. cycle was out mes that the business we may have had at Any idea that to the present situation How to relate that the picture was mistaken. Chairman Martin said that he was not trying to was another question.
forecast the future, but as he saw the factors shaping up, and as he tried to recognize forces as they were developing, private capital formation had slowed up. This was not the inventory problem that we had in 1953 and 1954. At this particular stage of the cycle, the slowing of private capital formation could have more dangerous repercussions over a period of time than the country faced in 1953-54. Turning to posture of the System, the Chairman recalled that he had repeatedly pointed out that the System did not want a recession. There might be differences of opinion on the emphasis to be placed on this, but when inflation gets ahead of us, the unraveling process becomes an extremely difficult one. We in the System cannot assume that our policies have been sound enough for people to take the position that we in no way contributed to the inflation by our policies. We could not say that our policies had been sound enough and accurate enough so that we had been completely on top of the situation. All of us know that the Federal Reserve cannot do more than minimize the are created by distortions such as we have had. Chairman problems that of an incident that he had observed recently where a child Martin told when the doctor came, he reminded the had gotten a bad burn, and not the time to rebuke or be the burned child that this was father of need was to apply all the remedies with the child: the immediate angry there were to heal the burn. the Chairman stressed incident to the System, In relating this developments, the important at this stage of economic his belief that
thing was that the Federal Reserve have the correct posture. Over a period of time, he had felt that it would have been better if the System had put the discount rate up long before it did. However, when we came to last August, there was no alternative but to move the discount rate up as a recognition of a technical situation. The System should not now go off half-cocked, but even if it became necessary to reverse itself it should try to retain flexibility. It would be most unfortunate if the posture of the System at this time was one that could give any credence to the view that the System now had an "I-told-you-so" attitude. The System should not claim credit at this time for the decline that has occurred. It should not be saying that this was a result of our policy and that we were glad this had come about. The Chairman said that he did not wish the foregoing remarks to be misunderstood. He believed that the adjustments now taking place would prove to be salutary, and if the inflationary movement had gone farther, the unraveling process would have been much more difficult. He was directing these remarks to the public posture of the System. It was important that the Committee bear in mind the System's posture in terms of the public psychology and the political undertones and overtones. Although he had felt that the discount rate should have gone up sooner than it did, he was glad that none of us could make these decisions alone. All parts of the System should pull together,
and there should be a synthesis of the various points of view until they gradually were welded into a System view. The tendency, however, was too much toward the status quo at times. As to present policy, Chairman Martin said that he would not argue whether there should be a change immediately, but if the discount rate were to be changed, the System must recognize that the Treasury planned to make a financing announcement later this week. It was also important that within the System there not be shilly-shallying with posture. The Chairman thought the present situation could be distinguished from that of 1953-54, and he doubted that there would now be a resurgence of inflationary pressures such as we got at that time. There was a tendency for all of us to like to fight a new war in the same way as the last one, but in this case he thought the readjustments now taking place in the economy were likely to go on regardless of moves on the monetary front. There might be some speculative movements if certain actions were taken by the System, but in the Chairman's judgment we would be disappointed if we expected a repetition of the 1953-54 experience. Noting that he had been a stock market speculator most of his life until he got out of that business, Chairman Martin said that while think the stock market was an accurate reflector of business he did not trends, he did believe it reflected the vagaries of the situation. The confidence factor had been permitted to get out of hand on the up side and the expectation that nothing would in the expectation of inflation,
be done about it had almost carried us over the dam on that side. The problem became more difficult when dealing with pessimism. Chairman Martin said that without placing any definite timing on the action, he hoped that within the next six weeks the Federal Reserve would take an overt action that would recognize the situation. He would favor action on the discount rate. As Mr. Johns had pointed out, the move in August from 3 per cent to 3-1/2 per cent came at the tail end of an upward move in business. That increase in the discount rate marked the posture of the Federal Reserve in terms of psychology. Since then, there had been some sharp changes. Business loans had declined during a five-week period by $650 million, the first decline in such loans during October in the postwar period. In each of the past two years, these loans had increased sharply in that month. This was a sharp swing in a very short time and it needed to be watched. There had been a suggestion that the Committee supply reserves to the market, but there was a problem in putting reserves into the money market when reserves were being released by a decrease in loans. Even though the psychology of the public has changed completely, the System does not want a sloppy money market at a time of Treasury financing. It should be very sloppy condition in the flow of funds. cautious about getting a up the System's problem discussion had pointed This morning's with the comments He aligned himself Chairman Martin said. very clearly,
of those favoring a moderate easing of pressures on reserves through open market operations. He, too, hesitated to put out any specific figure of net borrowed reserves, but the figures mentioned by Mr. Hayes, $100-$250 million, seemed as good as any, remembering that the feel of the market had to be considered. The point was that a moderate easing seemed appropriate, and all of us should be considering other actions and their timing as the days go on. Chairman Martin said that the more he thought of these problems, the clearer it became that no one of us could be certain he was right. He liked the way the System goes about reaching policy decisions of this type. Sometimes the process was a lot slower than he liked, but sometimes we find out later that we are glad that it was slow. At this particular time, he felt the System should not minimize the public relations problem or the psychological problem of the public. We should be careful not to let anyone get the idea, if the adjustments begin to snowball, that the System is proud of Federal Reserve policies having brought any such development about. Neither should we permit anyone to get the idea that the System was not going to do everything within its power--and we recognize its powers are limited--to "bind up and heal our wounds." Chairman Martin then turned to the Committee's directive to be Reserve Bank of New York, stating that it appeared issued to the Federal that the majority view was that the directive should be changed along been a number of suggestions for the the lines discussed. There had
wording. He reiterated his comment that the directive was a heritage of the past, also stating that he did not care particularly about the precise wording, so long as it indicated the Committee's posture and was recognized as the basis for the record of policy actions. There followed considerable discussion of the wording of clause (b) of the first paragraph of the directive, in the course of which numerous suggestions were made and considered. During this discussion, Mr. Shepardson reverted to Chairman Martin's illustration of the child with a burned hand and the need for applying all the remedies there were to heal the burn. Mr. Shepardson said he had in mind a different analogy. There had been a wave of "flu" over the country. In some of these serious epidemics, the great danger was in getting up too quickly and risking a relapse. In this case, Mr. Shepardson felt that we had reduced the fever but he questioned whether we were quite ready to let the patient get on his feet and start running again. Chairman Martin responded that this was a very well takem comment and that this was where the element of judgment was involved. At the conclusion of the discussion, it was agreed (Mr. Robertson dissenting) that clause (b) should be changed by deleting the provision that had been carried in the directive since the meeting on March 5, 1957, which called for open market operations with a view, among other things, "to restraining inflationary developments in the economic growth while recognizing uncertaininterest of sustainable business outlook, the financial markets, and the ties in the
international situation," and that this should be replaced by a clause which called for operations with a view, among other things, "to fostering sustainable growth in the economy without inflation, by moderating the pressures on bank reserves." In response to Chairman Martin's request for comments, Mr. Rouse stated that he thought the discussion had clearly indicated the desires of the Committee and what was meant by the suggested new wording of clause (b) of the directive. Mr. Rouse also commented briefly on the outlook for bank reserves during the next few weeks. Thereupon, upon motion duly made and seconded, the Committee voted to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System open market account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to growth in the economy without inflafostering sustainable tion, by moderating the pressures on bank reserves, and (c) to the practical administration of the account; provided that the aggregate amount of securities held in the (including commitments for the purchase or System account for the account) at the close of this sale of securities short-term certificates of indate, other than special debtedness purchased from time to time for the temporary shall not be increased or accommodation of the Treasury, decreased by more than $1 billion; from the Treasury for the (2) To purchase direct the Federal Reserve Bank of New York (with account of it seems desirable, to issue discretion, in cases where
participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million; (3) To sell direct to the Treasury from the System account for gold certificates such amounts of Treasury securities maturing within one year as may be necessary from time to time for the accommodation of the Treasury; provided that the total amount of such securities so sold shall not exceed in the aggregate $500 million face amount, and such sales shall be made as nearly as may be practicable at the prices currently quoted in the open market. Votes for this action: Messrs. Martin, Chairman, Hayes, Vice Chairman, Allen, Balderston, Bryan, Leedy, Shepardson, Szymczak, and Williams. Vote against this action: Mr. Robertson. Mr. Robertson dissented from the foregoing action with regard to the insertion in paragraph (1) (b) of the clause, "by moderating the pressures on bank reserves." His action was based on the belief that the prevailing condition of the economy was not such as to call for a lessening of restraint, that inflationary potentials were still strong, and that continued restraint was essential to its containment. Mr. Johns stated that he was not clear as to what, if any conregarding action on the discount rate. sensus there had been he doubted there had been a conChairman Martin stated that of a change in the was that whenever an announcement sensus. His view of in relation to the must be carefully thought rate was made, it we should be in the He did not think Treasury financing. forthcoming
position of having the Treasury open its books on a new offering and, in the midst of that, having the System make a change in the discount rate. This was a problem that had to be worked out. Mr. Hayes said that in suggesting consideration of a change in reserve requirements at central reserve cities, he did not mean to indicate that a reduction should be made immediately. He felt that it should, however, continue to have serious consideration. Chairman Martin agreed that this was a subject that appropriately should be raised for consideration. He reiterated that each of us should feel perfectly free to present suggestions or ideas having to do with any aspect of monetary policy. This was not a matter of Board prerogative, or bank prerogative, or Committee prerogative, and these meetings should be looked upon as a clearing house for System policy discussion. In concluding the meeting, the Chairman commented that every person in the room should remember that he had a special responsibility to see that what had transpired here was not permitted to get into the press. the next meeting of the Committee should be It was agreed that for 10:00 a.m. on Tuesday, December 3, 1957, and attention scheduled that because of the holiday season it was likely was called to the fact that the following meeting of the Committee might be held on Tuesday, December 17, with the meeting after that to be held three weeks later,
on Tuesday, January 7, Thereupon the meeting adjourned.
Also: Record of Policy Actions