January 7, 1958 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, January 7, 1958, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Bryan Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Williams Messrs. Fulton, Irons, Leach, and Mangels, Alternate Members of the Federal Open Market Committee Messrs. Johns and Deming, Presisents of the Federal Reserve Banks of St. Louis and Minneapolis, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Sherman, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Atkinson, Bopp, Marget, Mitchell, Roelse, Tow, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Secretary, Board of Governors Mr. Carpenter, Mr. Miller, Chief, Government Finance Section, Research and Statistics, Board Division of of Governors Gaines, Manager, Securities Department, Mr. Federal Reserve Bank of New York Vice Presidents of Messrs. Daane and Walker, Banks of Richmond and the Federal Reserve Messrs. Balles and Dallas, respectively; Presidents of the Einzig, Assistant Vice of Cleveland and Reserve Banks Federal respectively; Mr. Parsons, San Francisco,
Director of Research, Federal Reserve Bank of Minneapolis; and Mr. Bowsher, Economist, Federal Reserve Bank of St. Louis. Chairman Martin referred to the revised drafts of minutes of the meetings held on December 3 and December 17, 1957, stating that since these drafts were distributed Mr. Fulton had asked that an addi tional revision be made on page 28 of the minutes for December 17, to change the word "retail" to "department store" in the second full sen tence on that page, and that in the absence of objection the minutes for the two meetings would be approved incorporating the additional change requested by Mr. Fulton. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Com mittee held on December 3 and December 17, 1957, were approved. Before this meeting there had been distributed to the members of the Committee a report prepared at the Federal Reserve Bank of New York covering open market operations during the period December 17, and a supplemental report covering commit 1957 through January 1, 1958, ments executed January 1 through January 6, 1958. Copies of both reports have been placed in the files of the Federal Open Market Committee. Mr. Rouse reported that open market operations and the state of the market had been covered thoroughly in the preliminary and supple to the members of the Committee mentary reports that had been delivered he had little to add. He did wish to call the Committee's and that reference should be copy. In typed copy, * Refers to mimeographed to page 33, fifth full sentence.
attention to the fact that dealers' positions in Government securities recently had been running about $1 billion higher than before the dis count rate change in November. This suggested that there were about $1 billion of securities in the market to be distributed, over and above any other supplies. Mr. Rouse went on to say that he was grate ful to the Reserve Banks for accelerating the daily wire reports on bank reserves and float that were approved at the last meeting of the Committee. There had been a few problems, but the wires were now giving an accurate picture of the previous day's reserve balance. With respect to Treasury financing, Mr. Rouse reported that the Federal National Mortgage Association planned to announce the terms of its $750 million financing later today or tomorrow. Meanwhile, to continue offering an additional $100 million in the Treasury planned each of the four bills auctions in January, and toward the end of the Treasury planned to announce the terms on its February re month the Rouse said that he knew of no plans for a major cash funding. Mr. Government agency financing operations were financing, but a good many Treasury estimated that the net cash to scheduled for this month. The the money from the additional the Fanny Mae financing plus be raised in February. It might be be sufficient to carry them through bills would gold, but if this some of its free Treasury to sell necessary for the the Stabilization Fund, transfer the funds to done, it planned to were or open market operations. not affect bank reserves which would
Mr. Leach asked if the present level of dealer inventories, with bill rates down to 2-3/ per cent, did not suggest that dealers are carrying this thing a bit too far. Mr. Rouse pointed out that bill rates backed up to 2.85 per cent in the auction yesterday, and dealers acquired another $00 million bills in the auction. At the same time, demand for bills was good and dealers reported that they were selling about $150 million a day. At this rate, they might be able to work off their positions without difficulty. In Mr. Rouse's opinion, a bill rate 1/8 per cent below the discount rate was all right; but as Mr. Leach had suggested, a rate 1/ per cent below the far in view of the supply of bills in discount rate was going a bit he added, the drop to 2-3/4 per cent occurred the market. Of course, that Chicago banks would be on one day, when the dealers guessed all bills. Mr. Allen remarked, and Mr. Rouse bidding heavily for the new not bid for or obtain an the Chicago banks actually did agreed, that amount of those bills. unusual upon motion duly made Thereupon, seconded, and by unanimous vote, the and during the period open market transactions January 6, 1958, December 17, 1957, through ratified, and confirmed. were approved, Congressman Wright to the letter from Martin referred Chairman before this been distributed that had 23, 1957 dated December Patman to trans the data relating requested that Mr. Patman in which meeting March 1951 during the period Market Account the System Open actions in
to the end of 1956, sent to Mr. Patman on November 12, 1957,be placed on punch cards and tabulated so as to produce various sum mary totals of figures by days and months and to compute average prices for the respective periods at which purchases or sales of securities were effected. Chairman Martin suggested that a letter be written to Mr. Patman informing him of the time-consuming nature of this task and of the expense that would be involved, that the Committee was prepared to go forward with such a job upon the request of the full Committee on Banking and Currency of the House, but that in the absence of a request from the full Committee it would seem inappropriate for the System to undertake such a large job of pre paring data for an individual member of the Congress. Mr. Hayes stated that this request had been discussed at some length at the New York Bank and that he was concerned about it for His main concern was that the tabulations of data several reasons. request at hand did not seem likely to provide use specified in the expense angle, Mr. Hayes said that ful information. Apart from the requests which seemed to about the handling of such he was disturbed that could not together, in a manner apples, and oranges put eggs, whether it would not His question was significant results. produce of the Banking and perhaps to the Chairman be preferable to offer, Committee in finding out to cooperate with the Currency Committee, trying to help arrive to know and in was seeking what the Committee results. producing meaningful at a basis for
Chairman Martin stated that he thought this point was well taken and that it should be a part of the letter he had in mind. His main point, however, was that a request of this nature should be from the full Committee on Banking and Currency and that if that committee wished to pursue this type of inquiry the Federal Reserve would cooperate. It was his impression from Chairman Spence that the full Committee on Banking and Currency might not wish to support a continuation of the types of requests that had been received from Mr. Patman upon numerous occasions in recent months. Mr. Hayes said that he agreed completely with this approach make clear that unnecessary labor that went and his thought was to data produced no benefit either for the into preparing meaningless Committee or the Federal Reserve. Banking and Currency on the handling of called for other comments Chairman Martin were made. He then sug and no additional suggestions this letter, with the Manager of the Committee undertake, gested that the Secretary to Mr. Patman along prepare a draft of reply the System Account, to of when the let that with the understanding of the discussion the lines also be sent a copy would form for dispatch was in satisfactory ter would be that this procedure It was understood Chairman Spence. to followed. letter to Mr. to a draft of next referred Chairman Martin for further 1957 asking 26, of November to his letter in reply Patman
information relating to operations of the System Open Market Account and of dealers in United States Government securities. The draft of reply, prepared in accordance with the discussion at the meeting of the Committee on December 3, 1957, had been distributed by the Secre tary on December 27, and at this meeting a memorandum containing two suggestions for editorial revisions in the letter were presented and discussed. Following the discussion, the letter to Mr. Patman was approved unanimously in the following form, with the ,nderstanding that a copy would also be sent to Chairman Spence of the House Banking and Currency Committee. Your letter of November 26, 1957 asking for further in formation relating to operations of the System Open Market Account and of dealers in United States Government securities has been discussed at meetings of the Federal Open Market Committee. Some of the information you request is not re ported to the Federal Reserve and hence cannot be furnished by us. Some is given to the System Account on a purely voluntary and strictly confidential basis and hence it is not within our discretion to transmit it. Some is available to the Federal Reserve System because it is fiscal agent of the United States, and the Treasury, rather than the System, should be approached for such data. Finally, one major portion of the data you request could be made available in the detail you wish only with immense effort. In this case we suggest an alternative which may serve your purpose equally well. To the extent practicable from the stand point of the amount of work involved, and with proper con sideration for the confidential nature of some of the data, desires, of course, that you be furnished with the Committee information that will be useful in your analysis of System Your several requests are discussed in Account operations. letter presented them. the order in which your of the record of the 1. Your request for copies of Treasury bills and the amounts of purchases and sales
prices bid or offered by each dealer for each security on which the System Account solicited quotations on each day of trading over the past three years would require an im mense amount of work, especially since it would be neces sary to accompany such a record with memoranda explaining the background of the operations and the reasons for the actions taken, if you were to obtain an understanding of the situation reflected by the data. It would appear, however, that your purpose might be served by having the information (with the accompanying explanatory memoranda) for selected dates, rather than for the entire three-year period. If this strikes you as practicable and you wish to select a number of days for each of the three yearssay a dozen days a year--preceding December 31, 1956, we would have the material prepared for you as promptly as possible. You now have the photostatic copies of the sheets showing transactions, so that you would be in a position to select days when the Account was active. 2. Your second request refers to the tabulations transmitted with my letter of November 12, 1957, showing each transaction of the System Open Market Account with each dealer in Government securities from the period of the Treasury-Federal Reserve Accord in March 1951 to the end of 1956. You now ask for similar records of each transaction of the System Account for the period from the end of 1956 through June 30, 1957. Each year, pursuant to the requirements of the last paragraph of section 10 of the Federal Reserve Act, a record of policy actions taken by the Board of Governors of the Fed Reserve System and by the Federal Open Market Committee, eral underlying those actions and the together with the reasons made public in the Board's in each instance, is votes taken Until that record is made Annual Report to the Congress. Annual Report, which is published in the public in the policy directives of the Federal spring of each year, the are regarded as current and are Open Market Committee in the strictest confidence. It is true that weekly handled Reserve Banks of the Federal showing the condition statistics or lesser degree indi and that to a greater are published reports as to on the basis of those viduals make justments My letter of taken by the Committee. the policy actions Open Market Committee stated that the Federal September 10 to divulge information not be proper that it would felt operations for decisions and Committee policy regarding to be the year. It continues current calendar the that disclosure of its policy judgment of the Committee has been followed manner that come in the should decisions
section 10 of out the provisions years in carrying for many Report to in the Annual Act, namely, Federal Reserve of the For this recently ended. the year most Congress covering the to furnish not be desirable that it would reason, it believes the System Account operations of regarding the information any part of issued during the policy directives pursuant to issued. If, however, the directives were the year in which tabulations of undertake to prepare request, we will you so of 1957 but for the first half not only for the transactions be submitted at substantially calendar year, to the entire Report is published. the Board's Annual the time central banks the names of foreign You note that with my letter tabulations transmitted deleted from the were of such banks with you ask why the names of November 12, and in the past should be Account has traded which the System and Currency Committee. from the House Banking withheld with respect to the be certain that the situation To my November 12 letter sent with odd pages of tabulations to emphasize that there were correctly understood, I wish is and that all of the from those sheets very few deletions were names of dealers in appearing on those schedules names securities. In some instances, United States Government commercial banks. However, dealers are also domestic those retaining names was a between deleting and the distinction securities and dealers in between investors in distinction and there was no intention of distinguishing securities, and domestic banks per se. between foreign between the System Account and dealers are Transactions category from transactions between the System in a different the Federal Reserve Bank of New York, acting on Account and instructions from its depositors. In behalf of and under the first place, many central banks and international insti tutions maintain accounts with the Federal Reserve Bank of New York. Such central bank accounts are operated by the Bank of New York on behalf of all of the Federal Reserve Reserve Banks. Transactions for these accounts have traditionally been held in strict confidence for substan tially the same reasons that, as a matter of policy, banks in general hold in strict confidence transactions on behalf of any of their depositors. This confidential relationship between bankers and depositors has been considered to be especially necessary with respect to operations of foreign central banks, whose deposits with the Federal Reserve Banks largely represent monetary reserves of their countries. Disclosure of such operations would be of interest to many persons who follow political and economic developments in
foreign countries, but such disclosure might well have serious repercussions and imperil the confidence that foreign countries place in the Reserve Banks. Secondly, you state that you understand that "it is no secret that the System Open Market Account trades with foreign central banks, acting at times as agent for such banks." Actually, this is not strictly correct, and the relationship to which you refer is not between the System Account and the foreign banks. The Federal Reserve Bank of New York acts only upon instructions, specific or standing, from its foreign depositors in handling their accounts. Orders to buy and sell securities are given by the depositors to the Foreign Department of the New York Reserve Bank, which in turn transmits them to the Securi ties Department of that Bank for execution. Such orders usually are executed by the Reserve Bank in the open mar ket, but the foreign customers have been notified that they may be executed with the System Account at the discre tion of the Manager. They are carried out with the System Open Market Account only when the Manager of the Account so directs for the purpose of coordinating the foreign transactions with current open market operations that are being executed pursuant to the directives of the Federal Open Market Committee. The initiative in executing trans actions with the System Account rather than in the market in no manner lies with the foreign correspondent. L. With respect to your request for data from the daily reports of operations received from United States Government securities dealers, these reports are furnished on a purely voluntary basis and in the by the dealers would not be within the discretion strictest confidence. It Committee or the Federal Reserve of the Federal Open Market information in connection with Bank of New York to disclose these reports. tabulation of dealer borrowings You also request a sources of credit, terms, and with a breakdown by types, Management of the available to the Such data are not rate. System Account. is the same--we your next request The answer to their own customers financing of showing dealer have no data By way of comment, I might to carry Government securities. dealers do finance doubtful that it seems highly say that extent although to any significant customer holdings their kind. The of that transaction be an occasional there might their own enough in financing have difficulties dealers added without assuming securities of Government portfolios customer holdings. burdens in financing
7. Finally, you request information concerning dealer tenders for Treasury bills in the weekly auctions. In handling tenders in the bill auctions, each Federal Reserve Bank acts as fiscal agent for the Treasury Depart ment. A request for data relating to the tenders should, therefore, be directed to the Treasury Department. Mr. Fulton, whose train had been delayed in reaching Washington, entered the room at this point accompanied by Mr. Balles, Assistant Vice President of the Federal Reserve Bank of Cleveland. At Chairman Martin's request, Mr. Young presented a summary statement on the current economic situation, as more fully reviewed in a staff memorandum dated January 3, 1958, on Recent Economic and Financial Developments in the United States and Abroad. A copy of the staff memorandum, which had been distributed before this meeting, has been placed in the files of the Committee. Domestically, economic activity continues to be charac terized by general cyclical recession, comparable in pace of output contraction to that experienced in the 1948-49 and 1953-54 recessions. More is known now about the over-all decline in GNP after Both the dollar and physical volume of the third quarter. billion, annual rate. Most of total product were off about $6 decline was associated with inventory the fourth quarter's purchases of product receded only liquidation, since final moderately. a dominant feature of the past With inventory liquidation industry were to be sales of manufacturing quarter, declining were down 2-1/2 per cent from October, expected. November sales among both durable and nondurable with declines widespread outpaced inventory reduction; hence, lines. Sales declines New orders on significantly further. ratios rose stock-sales were about the same manufacturers in November durable goods well below the but they were two months, as in the preceding were cut back so that order backlogs volume of shipments, further. on a seasonally ad production for December, Industrial of 137. Declines preliminary estimate is given a justed basis,
were again widespread, with automobile assemblies this month working on the downside. The automobile market generally has been disappointing to producers, with new car sales off significantly and used car sales off moderately from a year ago. Recently, used car prices have slipped back some. Repossessions on instal ment sales have reached historically high ground and seem still to be edging upward. Other sales at retail, after a slow start in early Decem ber, apparently picked up sharply in the latter half of the month. Sales at department stores, seasonally adjusted, reached a new high, about 1-1/2 per cent above December of last year and 4 per cent ahead of November. Construction activity in December continued at about record levels, with increases in residential construction again offsetting declines in industrial construction. While the price situation for newly constructed houses appears to be fairly firm, recent field reports indicate that prices on used houses continue to drift downward and also that selling time on new and used houses has slowed perceptibly. Vacancy rates, however, continue low and shortages of rental housing are reported. Although the secondary mortgage market appears to have bottomed out, no general loosening in the availability of residential construction or mortgage money has apparently set in as yet. Unemployment at mid-December is reported at 3.4 million, up 200,000 from mid-November. A continuing high level of new claims filed for unemploy indicates further substantial unemployment rise ment benefits since midmonth. For the third week of December, over 550,000 December figure for the new claims were filed, the highest the month end, some 2 million workers, postwar period. Toward than last year, were receiving unemployment or 60 per cent more compensation benefits. in December were generally Wholesale commodity markets level prevailing since holding about the stable, the average are expected to show prices for December midyear. Consumer in prices of further advances further rise, reflecting some in retail meat prices. services and recent increases trade indicate that data on international Available Whether the decline occurred in November. further decline for October activity reported European industrial in Western Information has only is not yet clear. continued in November that country activity Germany and for available for become October and November. was up in both
With regard to the economic outlook, an increasing number of observers seem to be taking the sanguine view that recession will be mild and its duration not much longer than midyear. This optimistic viewpoint places great weight on the following factors; (a) adjustments in output, inventory, material prices, and manpower utilization that have already taken place; (b) the re vived strength of residential construction; (c) the con tinuing growth of State and local government expenditure; (d) the prospect for higher armament expenditures; (e) the strength of consumer demand in the face of declining per sonal income; and (f) the resistance of European industrial activity to recessionary tendencies in world trade and in the U. S. economy. While this view of the outlook may prove to be a correct one, it would seem premature to accept it now. More testing of price levels, inventory holdings, excess margins of industrial capacity, consumption and housing demands, and international trends would seem to be called for, as well as a more definite consensus on a revised national security program, before too firm a commit ment to any future pattern of economic development is made. Chairman Martin next called upon Mr. Thomas who made a statement financial developments substantially as follows: on recent the economic situation portrayed by Mr. The picture of of restraints on credit has Young shows that a lessening the financial area the response to been appropriate. In Reserve Bank discount rates has the reduction in Federal been followed by two striking fi been remarkable. It has first is the sharp decline in nancial developments. The a substantial increase in rates and the second is interest extent interrelated, but credit. The two are to some bank could hardly happen con are conflicting. Both in a sense an easing of monetary unless there were temporaneously attributed to the policy Hence, they can be largely policy. would tend to make of response that and are the types change adjustments and mitigating effective in "cushioning the policy tendencies in the economy." recessionary which is probably the in interest rates, The decline period, has been widespread for so short a sharpest on record yields on securities for money, i.e.,in the open markets in in what yet been reflected but has not market paper, and open loans to customers rates--bank called the administered may be
and mortgages. Yields on outstanding long-term bonds are back to approximately the lowest levels of last February but still generally above levels prevailing before mid 1956. Thus it difficult is to say that rates are low by any postwar standards, though they were not high relative to the 1920s. The sharpest declines have occurred in yields of those issues that had previously risen most--particularly medium term U. S. Treasury securities and State and local Government issues. There was some hesitation in the declining tendency during the mid-December period of heavy liquidity needs, but only bill rates showed any increase and that was short-lived. These changes in prices and yields of securities have been due more largely to anticipations rather than to any actual change in basic demand and supply factors. In this sense they may be speculative. To some extent savings held idle awaiting investment have been put to use in recognition of the view that interest yields had reached a peak and would fall. To a large degree the buying of securities has been based on bank credit. Since mid-November city banks have increased their holdings of Government securities by about 1.5 billion, of other securities by $300 million, and their loans on securities by nearly $700 million. Much of the increase in security loans has been to dealers in Government securities, which have also borrowed from other sources, in million in repurchase contracts at the Federal cluding $600 Reserve Bank. Outright purchases in the System Account also increased by over $l00 million. a result of the increases in holdings of securities As on securities, accompanied by a substantial and in loans commercial loans, total loans and invest seasonal rise in increased by over $2.9 bil ments of banks in leading cities ending December 31, using partial lion in the five weeks This is twice the increase figures for the latest week. period of each of the two pre shown in the corresponding the increase may be attributed years. While much of vious from the contra the marked turnaround to seasonal factors, October and November is striking. seasonal declines shown in to a changed climate no doubt to be attributed Much of it is in bank hold portion of the increase viewpoint. A large of has been in in dealer positions and also ings of securities to meet the seasonal which have helped Treasury bills, other issues, which the growth in demands, while liquidity has been much less though be considered as speculative, may substantial. in fairly substantial securities continued Issues of new was light during although the calendar volume during December,
the holiday period. A heavy volume of issues is scheduled for January. Many of the funds supplied by the increase in bank credit have gone to build up Treasury balances and it appears likely that the private money supply failed to show the usual seasonal growth in December. It is difficult, however, to draw definite conclusions as to money supply figures around the end of the year because of the wide variations that can result from dif ferences in reporting days. Figures for the four weeks ending December 25, for example, show a much smaller increase in de mand deposits adjusted at city banks than for the period end ing December 26 last year, but preliminary figures for the five weeks ending January 1 show a much larger increase than in last year's period ending January 2. Deposits are generally drawn down before Christmas, increase sharply in the subsequent week, and are drawn down again in the early days of January. It seems most likely that the money supply will have shown a net decline for the year 1957. Yet the build-up of Treasury deposits in December, which is not usual for that month, may supply the basis for a shift of funds to other deposits in the next few weeks when the Treasury balance will be sharply re however, may be used to reduce loans duced. Some of the funds, at banks. If banks have adequate reserves, they will probably endeavor to maintain the total of their loans and investments. In brief, recent policies have established the basis for main money supply, even though the re taining the privately-owned sult has not yet been attained. the total cash balance of In the first half of January be reduced from about $3.6 billion the Treasury will probably continued new borrowing of to $1.5 billion, notwithstanding on Treasury bills and the obtaining of $100 million a week from the new FNMA issue. Add. nearly $200 million of cash the use of the Treasury's free tional borrowing and perhaps the middle of Februaryto keep the gold will be needed around $1.5 billion level. Be falling much below the balance from limitations, not much borrowing will cause of debt ceiling then about $1 bil the middle of February, be possible until the line until to hold may be sufficient lion of new borrowing early part of at times in the of March, although the end on special occasional borrowing and again in March February be needed. The Reserve may from the Federal certificates by the use could be reduced such special borrowing amount of to let its of the Treasury gold or the willingness of free decline further. balance 1, the System supplied six weeks ending January In the open market operations, of reserves through over $1 billion
including $600 million of repurchase contracts. Reserve needs due to the seasonal currency expansion were fully as large as, if not a little in excess of, seasonal esti mates, and the increase in required reserves was larger than had been projected. Net borrowed reserves were reduced during the course of December to negligible amounts in the last two weeks. Member bank borrowings remained close to $700 million, while excess reserves increased to that level. It may be said that the System supplied abundant reserves and that they were put to use through credit expansion. Estimates of member bank needs for the next few weeks based on an assumption of the changes in Treasury balances that have been indicated and on normal seasonal changes in money in circulation, private deposits, and other factors, show the abundant availability of reserves usual for the early weeks of the year. Some of these will be absorbed by maturities of out standing repurchase contracts of about $400 million this week and next. Beginning in the third week of January banks would have free reserves of $100 million or more, unless absorbed by reductions in System holdings of bills through sales or runoffs at maturity. Free reserves would rise to well over $700 million in February and March, if the Treasury borrows from the System on special certificates in the amounts indicated or permits its balance at the Reserve Banks to decline below $500 million. Bills held in the System account now amount to about $900 million. Sales of $100 million will be needed this month to reduce free reserves to around zero. Additional sales would be required to reestablish net borrowed reserves and particu larly to offset any special borrowing by the Treasury in March. It appears that sales of half a billion February and at times can be made without exerting restraint on and more the credit situation. recent attempts by banks to maintain credit If the and bank credit should decline volumes should come to an end more than seasonally, then excess reserves should be per Treasury bill rate, and other mitted to accumulate. The In that event, in rates, would decline further. money reserve ad to make any temporary to encourage banks order than through credit borrowing rather justments through rate would in the discount a further reduction liquidation, be appropriate. the time of year that we were approaching Chairman Martin noted review of its several making the annual would be when the Committee
continuing operating policies and techniques. He felt it would be appropriate to report this morning on the progress that had been made by the Special Committee appointed to study Mr. Mills' sug gestion at the meeting on January 8, 1957, that the increment in the System Open Market Account during the year 1956 be converted into longer-term securities. As recorded in the minutes of the meeting on March 5, 1957, the Special Committee (Messrs. Martin, Hayes, Allen, Balderston, Erickson, and Szymczak) had been authorized to broaden its study to include a review of all of the operating pro cedures that had been presented in the report of the Ad Hoc Subcom mittee as discussed at the meeting on March 4 and 5, 1953, with the exception of the matters relating to the housekeeping aspects of that report. In so far as the Special Committee was concerned, Chair man Martin said that thus far it had made very little progress. It was hoped, however, that when it met again on January 28, 1958, it would come to grips with the problems it had been studying. In any event, it was the Chairman's view that there should be a complete discussion of the problems the Special Committee had been studying the meeting in March when the new members of the at the time of by the Federal Reserve Banks Open Market Committee elected Federal assumed their duties. In year beginning March 1, 1958, for the that it now be under Chairman Martin suggested of that, anticipation Committee would be the Federal Open Market that a meeting of stood
held on Tuesday, January 28, 1958, that the meeting following that would be scheduled for Tuesday, February 11, 1958, and that the meeting at which the members of the Committee would be changed be scheduled for Tuesday, March 4, 1958, with the understanding that the afternoon of that day and as much of Wednesday, March 5, 1958, as might be necessary be devoted to meetings of the full Committee for the purpose of discussing the matters contained in the Ad Hoc Subcommittee report and the current operating procedures and techniques for the System Open Market Account. Mr. Leedy said that if a Federal Open Market Committee meeting was held on February 11, a meeting of the Conference of Presidents would be held on February 10, 1958. Chairman Martin also referred to the report that had been received by the Federal Reserve Bank of New York from the New York Clearing House Association (the so-called Temple Report) dated 1957, copies of which had been distributed to members October 22, by Mr. Hayes under date of of the Federal Open Market Committee noted, was an indirect outgrowth 15, 1957. This report, he November contained in the Ad Hoc Subcommittee's report, of the recommendations Rouse, and Roelse be Messrs. Riefler, Thomas, and he suggested that York Clearing House Associa the report of the New requested to review of its contents a preliminary discussion a view to having tion with to be held on Open Market Committee of the Federal at the meeting
Tuesday, January 28, 1958. The Chairman noted that in discussing this with Mr. Hayes, the latter had suggested the possibility of including a representative of the Treasury Department on this staff committee but that he (Chairman Martin), after discussing the matter with Secretary of the Treasury Anderson, felt that it would be wiser for the Open Market Committee to come to grips with the problem dis cussed in the Clearing House report before bringing in a Treasury representative. After the Open Market Committee had reached some tentative basis for its views as a Committee, the report might be taken up with the Treasury and after that, if it seemed desirable, there could also be meetings with the dealers in Government securi of both the Treasury and the Federal ties at which representatives Reserve would be present. for suggesting that the Treasury Mr. Hayes said that his reason Report at this stage was analysis of the Temple be brought into the with the subject of report dealt largely that he understood this securities by the in United States Government financing of dealers as having grown out of the Temple Report He had not thought banks. that it was the report but understood of the Ad Hoc Subcommittee of the Treasury Humphrey, by former Secretary result of a request at which Mr. Humphrey meeting in New York occasion of a made on the doing their part the banks were he did not think indicated that had strongly on he did not feel Mr. Hayes said financing dealers. in
the question, but he had been inclined to think it would be desirable to have Treasury representatives participate in the discussion of the Temple Report. Chairman Martin said that, to clarify the point as to the origin of the Temple Report, Secretary Humphrey's suggestion at a meeting of the Clearing House Association in New York was a direct result of a conversation that he (Chairman Martin) had had with the Secretary on the report of the Ad Hoc Subcommittee. He had cleared this point with Mr. Humphrey recently. Mr. Humphrey subsequently talked with Mr. Sproul and the suggestion that resulted in the forma tion of the Temple Committee later was made at a Clearing House dinner which the Secretary attended. Mr. Hayes said that he had not been aware that the background included the Ad Hoc Subcommittee report; in any event, he said he the entire Open Market Committee to agreed it would be desirable for Returning to the Chairman's the details of the Temple Report. go into 28 meeting of the Special Committee, earlier reference to the January whether the full report by the Mr. Hayes said there was some question facts of the experience been studying the committee that had staff by January 28, would be available operating procedures with present completion of that to expedite the Roelse was trying although Mr. at the meeting which was appointed (This staff committee, report. to a 1956, pursuant on May 23, Market Committee Federal Open of the May 9, 1956, consisted the meeting on Mr. Sproul at made by suggestion
of Mr. Harold V. Roelse, Chairman; Mr. Tilford C. Gaines, Secretary Mr. J. Dewey Daane; Mr. Robert Holland; and Mr. Donald C. Miller, with Mr. Riefler as Secretary of the Federal Open Market Committee expected, ex officio, to keep in touch with the committee's work.) Chairman Martin said that, while this was a point to be con sidered, his suggestion was that the whole subject be moved out from the Special Committee that had been considering it to the full Open Market Committee by the time of the meeting in March when the new members would assume their duties. He felt that the report of the staff committee on experiences with operating procedures could be sufficiently summarized by January 28 to permit at least a preliminary discussion of the subject at that time. After further brief discussion, it was understood that the program suggested by Chairman Martin would be followed and that at the meeting of the Federal Open Market Committee on January 28 there would be a preliminary discussion of the report submitted by the New York Clearing House Association, while at the time of the meeting to the members of the Committee and the Presi be held on March 4, 1958, Banks who were not members of the Com dents of the Federal Reserve mittee would plan to be in Washington on both March 4 and March 5 matters that had been discussion of the order to permit a full in pursuant to Mr. Mills' Committee appointed study by the Special under suggestion at the meeting on January 8, 1957.
Chairman Martin then turned to the discussion of the cur rent economic situation and credit policy, and Mr. Hayes made a statement of his views substantially as follows: It is now clear that the current recession is at tributable largely to a decline in business plant and equipment expenditures, aggravated by an inventory cycle. What is not clear, however, is whether these influences are likely to spread to consumer spending and thus to produce a cumulative recession. There is uncertainty as to the probable speed of inventory adjustment, particularly by manufacturers. There is also much uncertainty as to the amount and timing of the expected increase in defense spending--although it does not seem probable that this will be a significant factor for several months at least. We should recognize the wide range of possible ways in which the recession may develop, and we would doubtless be prudent to assume that the next upturn may be a fairly long way off--to be preceded either by a continuing gradual decline or perhaps by a sideways movement after the current decline has run its course. I shall not try to enumerate the various statistical developments on which these conclusions are based. Most of the recent data have been discouraging, but consumer spend season was well sustained and showed a ing in the Christmas less adverse reaction of consumers to bad news than might have been feared. Apparently one of the so-called "built in stabilizers"--the tendency of transfer payments to off of greater unemployment and shorter set much of the effect a significant sustaining influence. hours--has been month or two have been Price developments in the last the upward trend has reasserted it disappointing, in that months of relative stability and in self after several general slackening in business activity. spite of the in the last three has expanded more rapidly Bank credit thus reversing, at least weeks than a year ago, or four months. For one typical pattern of recent temporarily, the loans was almost as large as thing, the growth in business periods of seasonal because during last year--possibly year-end, the present tax dates and the pressure, such as forces a relatively heavy low level of corporate liquidity recent periods in whereas during other borrowing program, disbursements to have had no unusual which corporations activity and prospects the lower level of business make, is also a There has been controlling. than a year ago
possibility that expectations of a further decline in long term rates may have induced some corporations to shift back to bank borrowing temporarily in the hope of obtaining still lower rates later on, and that this shift may have been facilitated by some easing in bank lending policies. Another factor making for additional bank loans has been the very high level of dealer inventories of Government securities, with greater recourse to banks, especially in New York, and less to non-banking corporations for financing the additions to these inventories. Bank holdings of Government securities have recently increased much more sharply than last year. Nevertheless, the total money supply at the year-end was probably about 1% less than at the end of We are again approaching a time when our policies will have to take account of the Treasury's financing activities. Apart from the FNMA issue to be offered this week, I have in mind the very large refunding to be announced probably a few days after our next meeting--with the possibility of an announcement of a new cash financing. Our forecasts of Treasury receipts and expenditures make it seem more than ever essential that the debt limit be raised by several bil lion dollars at the earliest opportunity. As for monetary policy, the System is faced with diffi cult decisions as to how fast it should push the easing of credit and as to the most appropriate sequence of use of the various instruments of policy. Clearly the present recession calls for a general policy directed toward assuring an ade quate volume of credit for all potential borrowers with economically sound credit needs. This policy would be con sistent with the evidence that business recession exists and that it may become more severe during 1958. To the extent that the quest for liquidity by banks and others affects the supply of and demand for credit, it might be necessary for the System to lean somewhat more heavily on the side of easier money than would otherwise be the case to achieve any effect on the economy. On the other hand, we should given of injecting so much liquidity into the economy stop short hard to recapture restraint if inflation that it would be as the major problem--and we should should emerge again avoid creating a sloppy money market or a needlessly also rates that would have adverse low structure of interest and on investment returns. longer-run effects on savings our policy should be directed toward I think that of restraint on bank reserves and the further relaxation operations should be market and that open market money be appropriate to think of used to this end. It might reserves as an initial benchmark, with zero net borrowed
free reserves of perhaps 100 or 200 million later in the month, especially if our actions to absorb excess reserves result in tight conditions in the money market. We should, I believe, from this time forward avoid any weekly averages showing net borrowed reserves, although daily deviations in that direction need not be avoided. As long as the weekly averages show net borrowed reserves, our policy can be interpreted as one of still maintaining a restrictive credit policy in some degree. This could be accomplished simply by failing to push outright bill sales as aggressively later in January as would be necessary to fully offset market factors making for greater reserve availability. Present projections suggest that after the run-off of repurchase agreements modest outright sales should suffice. As for the discount rate, I recognize that if any change is to be made within the next few weeks, it should be done fairly promptly to avoid confusion in connection with the ex pected Treasury financing program. However, I feel strongly that the recent reduction in the discount rate has already led to a downward adjustment of market rates that, if any thing, has proceeded too rapidly, and I can see no benefit from our taking aggressive action at this juncture to drive them down further. I think there is no cause for concern if the Treasury bill rate should stay well below the discount rate, especially during January when seasonal factors are acting as a strong depressant of the bill rate. In my judgment it would be best to leave the discount rate un changed at this time. If economic conditions should continue and should later justify a lower rate, a reduction to worsen in February or March after the Treasury is could be effected out of the market. occasion recently to review in the New York We have had whether margin requirements under Regula Bank the question be reduced. It is our tions T and U might appropriately the present 70% requirement is abnormally high opinion that 50% would be justified both a prompt reduction to and that performance and the use of in terms of recent stock market terms of general credit policy. stock market credit, and in of the view that re I think there is wide acceptance high and that some reduction are unduly serve requirements time as it would be consistent would be in order at such A suitable opportunity general monetary policy. with our of funds to the the return flow itself after may present run its course. I in the year has banking system early give consideration the Board of Governors suggest that would are then recessionary tendencies that at that time--assuming
still dominant--to a reduction in reserve requirements, including some reduction in the present geographical dif ferences in requirements, especially between central re serve city and reserve city banks. While some such move would seem desirable per se, I would also hope that progress might soon be made in reaching general agreement on a new and more equitable over-all system of reserve requirements. Mr. Johns said there was little for him to report from the Eighth District that differed materially from the national picture ex cept for the deterioration in cash farm income in certain portions of the district, particularly parts of Missouri and Arkansas. He described this deterioration, which had resulted largely from a decline in income from the cotton crop, as of intense local interest and as having little national significance, though it does have some. It had affected the which were not receiving pay-offs of last year's loans. local banks, With respect to Committee policy, Mr. Johns said that he was with the views expressed by Mr. Hayes. While in substantial agreement recommendations in terms to be reluctant to make policy he continued these figures did have Mr. Johns said that of net borrowed reserves, had suggested would target such as Mr. Hayes value and that a some he would be importantly, however, to him. More seem appropriate trend and from their downward rates react to see interest reluctant operations be that open market he would recommend upward, and move not wish to give He would to prevent that happening. conducted so as but he was even a little, was tightening that policy any impression significantly easier, policy should be to say that not now prepared of the next meeting view at the have a different he might although
Committee. For the present, he would like to hold about where we are and if this meant zero or some positive free reserves this would be satisfactory. He would not wish to have interest rates move up. Mr. Bryan said that since the preceding meeting of the Com mittee there had been a further rise in insured unemployment in the Sixth District. The agricultural situation seemed to be worsening with the arrival of new figures showing cash receipts from farm marketings down 34 per cent as against the same time a year ago. Deposits at agricultural banks in rural areas in the district cur rently were well below last year and the year to year comparisons were becoming increasingly unfavorable. Agricultural banks in the Sixth District would have a heavy farm loan carryover, Mr. Bryan said, with further increases in loans collateralled by real estate. and financial developments, however, do District production, trade, a rapid acceleration of the present recessionary movement not suggest in the nonfarm economy. Mr. Bryan said that the ab With respect to national policy, clear, further economic deterioration would hardly appear sence of stops" at this time. Ac of "pulling all the to justify any policy revision of the any further downward he would not favor cordingly, be alert System should believed the although he rate; and, discount he could not reserve requirements, to reduce to every opportunity factors now operating. light of the seasonal a policy in the urge such
After commenting that no further change in the Committee's directive seemed needed at this time, Mr. Bryan continued his statement sub stantially as follows: At the same time, I believe that the reserve position of the banking system needs to be eased through Open Market policy. We end the year with total reserves actually less than or negligibly different from what they were at the same time last year. The meaning of this situation is that the American banking system is less or at best no more able to support a deteriorated economy than it was at the end of 1957, when we were faced with the boom. If allowance be made, as I believe it must be made, for a growth factor in the economy, then the reserve situation is in my judgment quite unsatisfactory. Accordingly, it would seem to me to be wise policy not to attempt an entire offset of seasonal factors tending to ease bank reserve positions. On the contrary, I would like to see the Open Market instrument operated in such fashion as would give us positive total-reserve comparisons when measured against year-ago dates. Such a policy would mean that we would not be primarily concerned with security market yields--certainly not be frightened by "sloppy money"- and pay little or no attention to free reserves. I would like to see the situation allowed naturally to ease itself, even for a figure, the bill rate drifted to 2.50 or below. if, just At such a figure, I would be inclined to make sales and to review, in another few weeks, what our total reserve position figures may prove to be in the light of on the year-to-year our actions. such an objective and method of action, I In advocating that it has certain advantages in avoiding dangers: believe to a basis of action compatible (a) It brings us back of Operating Policy, which with our Continuing Statements must shortly be reviewed again; grave danger that what I consider the (b) It avoids not because the credit reserves may occur, an increase in free economic situation has but because the situation has bettered worsened; based on estimated hazard of sales It avoids the (c) from our usual difficulties at a time when, aside magnitudes of market factors meaning and extent of estimation, the bank reserves are both especially seasonally affecting elusive;
(d) It will avoid what I regard as the greatest of all dangers, namely, that we will underestimate the effects of the present illiquid position of the American banking system and thus cause us ourselves to be satisfied with a policy inadequate to the task of making the banking system a dynamic factor in economic recovery. In closing this statement I would like to say that our policy in the month of December seems to me to have been correct in trending the free reserve position downward towards zero. But I note that it has been inadequate in making any measurable impact on member bank borrowing, only a moderate impact on bank liquidity as measured by excess reserves, and I am disturbed by the fact that most of our policy in December has been effected by repurchase agreements. I doubt that repurchase agreements, while a useful in strument, have any important function as an expression of monetary policy in combatting economic recession. At the moment, about the only beneficial effect that I can see in RP's is in permitting dealers to carry inventories, and it is arguable that that permission, when carried to the extent have used it, actually conceals from us the tightness that we entices us into thinking that of the monetary situation and we have done more to ease than we actually have. sentence summary of his report Mr. Williams said that a single slow down. Contrary to this activity continued to was that business weeks of December were sales during the four summary, department store for the first eleven a year earlier, and per cent higher than five increase of one per cent. the total showed an months of the year in the trend. Unemployment continued a downward Factory employment in part a seasonal rising reflecting had been State of Pennsylvania to change before early not expecting this trend trend. Employers were year. In below last were running Automobile registrations spring. rose in the three and deposits earning assets banking and finance, in this period loans were up 25 and business ending December weeks finance companies for by sales increase accounted most of the with
and utilities. Borrowings from the Reserve Bank were about the same as a year ago. The continuing slowdown in business activity indicated to Mr. Williams that some further easing of open market policy would be desirable. He would view as an appropriate target for policy during the next three weeks a program that would keep the long-term bill rate at about 2.8 per cent with member bank borrowings in the $400-$500 million area and net free reserves perhaps around $100 million. Any tightening, even temporarily, should be avoided. There should be no change in the discount rate at this time. Mr. Fulton said that there was a pronounced feeling of disappointment in the heavy industries of the Cleveland District at this time regarding orders and production. The steel industry was operating at about 50 per cent of capacity, which was uneconomic. Orders for pipe which had been sold out into 1960 had practically disappeared through cancellations. Oil companies were not buying because of restricted production and they were also waiting for cheaper money. Warehouse inventories of steel were high at present, whereas users of steel generally No upturn, either in the steel industry or in the had low inventories. looked for in the immediate future, and it machine tool industry, was of 1958 before such upturn deprobably would be the fourth quarter higher, but department store Unemployment was noticeably veloped. very good. Loan demand was the Christmas season were sales during diminution in their now anticipate a gradual up although banks holding
loan totals during the next several months. Collections were being well maintained except in the case of wholesale loans to automobile dealers. There was talk of real estate money becoming more available, but portfolios were quite full. Contracts on new automobiles for thirty-six months or longer were a substantially smaller percentage of the total than had been the case earlier. Pessimism seemed to be outrunning business at this time. Mr. Fulton said, the same as optimism earlier had outrun the statistics. His conclusions as to policy were that the discount rate should not be changed, that the Open Market Committee should maintain as near zero free reserves as possible, and that it should err on the side of ease. Some positive free reserves would be appropriate. Mr. rate a little under the disalso like to see the bill Fulton would count rate. Mr. Shepardson said that Mr. Fulton had covered a good deal were many indications of some further of his opinion. Certainly there On the other hand, we were still at a reladown drift in business. expected that year after year we high level. It could not be tively Mr. Shepardson said, and he to make higher records, would continue There was a good deal at some little down drift. was not disturbed program and other spending of uncertainty as to the Government's unwise to make other it would be with that uncertainty, programs and, Noting that Mr. easing of credit. indicate a further moves that would of changes in the effects a statement regarding Hayes had made
interest rates on future savings, Mr. Shepardson said that he would not wish to see interest rates drop to a point that would retard improvement in the volume of savings. In view of the situation as he observed it and at the risk of seeming to be a "stick-in-the-mud," Mr. Shepardson said that he would not wish to see the Committee ease the situation materially further. He thought the target that had been mentioned of free reserves around the zero level should be adequate. There had already been a material drop. This would mean, Mr. Shepardson said, that he would not favor a change in discount rate at this time or any material further increase in free reserves. The zero target would seem appropriate. Mr. Robertson then made a statement substantially as follows: Since our last meeting, when I cautioned the Committee against easing too fast--believing that there exists a danger of exaggerating adjustments at a high level of economic activity into a major recession--we have seen a continuation of downward movements in some areas. The index of industrial production has moved down two points to 137, gross national product dropped by a $6 billion annual rate figure below the third quarter level (though in fairness, one must point out, as did the staff in its memorandum to the Open Market Committee, that this drop from $439 billion to $433 billion is largely attributable to a shift from a moderate rate of inventory accumulation in the two preceding quarters to a modest liquidation (the word "modest" is my own), and unemployment has increased. At the same time we have witnessed increases (1) of department store sales in December (to a new high), (2) of consumer prices (.45%), (3) in bank credit (exceeding that last year), (4) in residential construction of December to the level of late '56), (5) in consumer installment (close rents, and (7) in outlays for construction. credit, (6) in
In addition, both demand deposits and time deposits increased in commercial banks during the year--e.g., time deposits increased $5.5 billion in '57 as compared with $2.2 billion in '56. This does not add up to an entirely one-sided picture, but rather one of adjustments with recessionary tendencies. None of us wants a recession, let alone a depression-- not even to purge us of our past sins of inflation. No one wants to see people unemployed. We should cushion economic adjustments and mitigate recessionary tendencies in the economy in order to avoid undue unemployment, among other things. But we should do so with an eye to the future--a future which, in my opinion, will present for us inflationary problems of a magnitude greater than those of the last decade. Any action we take should be so contrived as to preclude (if possible) (1) the feeling on the part of industry that we will provide all the money necessary to enable it to pass on to the consumer the amount of additional costs resulting from wage negotiations (as has been the case in the past), and (2) a feeling on the part of the people as a whole that we (the Federal Reserve) are so fearful of a recession that we will panic at the first sight of one and yet go to any length to put a floor under each succeeding inflationary rise, irrespective of the cause. No one will admit that that is what we are doing or what we have done in the past. Certainly we did not have that intention. But we should be aware and try to avoid that result. Put another way, in dealing with a business recession of questionable magnitude and duration, we should not take our eyes completely off the long-term problem of inflation. We must remember that today there are in the economy many built-in stabilizers which will tend to mitigate the severity and consequences of economic slide-offs. For example, there even at present levels would was a time when unemployment meant much more economically than it does today; witness have the fact that two million of the unemployed are receiving unemployment benefits in dollars. In walking the tight rope between inflation and depresnot have too strict a monetary authority must sion the criterion of success. A very few months ago we were "fighting inflation." If there has been some pause in the necessity rather than we should feel gratified the fight, possibly for the conditions we were steps to bring back frantically taking so recently fighting. This Committee needs to guard against being unduly inin the public press. statements of economists fluenced by
These people feel impelled to say something whether they have anything to say at all and are subject to mob hysteria. They are particularly dangerous at this time of year when they feel especially impelled to say something about the forthcoming calendar year. It may be important to keep our eyes on the current facts rather than on forecasts which have a very poor historical record. If rising prices be looked upon as an indicator of excessive total demand and falling prices as an indicator of inadequate demand, we see as yet no indication of a need for change in monetary policy. Neither wholesale prices as a whole nor consumer prices have declined. In the light of the foregoing, plus my personal belief that the present recession is not nearly as serious as many economists and many writers portray it, and that the economy will turn around more rapidly than many seem to think, my counsel would be to maintain an even keel position, neither to increase nor to diminish the degree of tightness or ease which is presently being maintained with respect to bank reserves. we take a backward step--one can I am not urging that done--but merely that we do not move never undo what has been of ease until and unless we are more further in the direction than I am that the increased availability of money certain be used for the positive purpose of resulting therefrom will rather than merely for the cushioning recessionary tendencies in government bonds, the purpose of facilitating speculation affected by our previous price of which has been drastically actions. exposition that his opinion the admirable Mills said that in Mr. the level of Federal the movement of reserves, Mr. Thomas had given of the composition of commercial and the changes in Reserve Bank discounts, as a proper guide for near-run System policy. bank assets could be taken reserves had been negative free pointed out that connection, he In that to where there last September of $464 million from an average reduced evidence that This was concrete reserves at present. were positive free adequate quantiavailable in had made credit Reserve System the Federal supporting climate developed a and had also economy's needs ties for the
to the November reduction in the discount rate. It could be important in policy formulation, Mr. Mills suggested, to bear in mind the System's experience that there is a very definite lag from the time reserves are made more freely available until the time that their effects begin to work through the structure of commercial bank lending and investment activities and on through the general economy. On that thesis, and emphasizing that the month of December always produced marked temporary fluctuations in the demand for bank credit that cloud the credit picture, the System's earlier actions might not be reflected fully before probably the latter part of this month. It could then become apparent that the previous actions had produced a greater degree effect of the System's ease and maneuverability for the comercial banking system of credit the actual reserve figures before us might themselves indicate. than cited the over-all willingness of commercial banks Mr. Mills in the face of a rather high to retain U. S. Government securities at the Federal Reserve Banks as a development level of borrowings be the ultimately sustaining effects that gave promise of what should If bank loans should on the money supply. of the System's actions be in order to it would then rapidly in January, run off rather banks to expand their to encourage commercial reserves so as supply to nourish the and hence Government securities in U. S. investments money supply. that if Mr. Mills felt with his reasoning, In accordance would be level, they around the zero were held at free reserves
adequate to maintain the money supply and to permit reasonable freedom in commercial bank loan and investment activities. On that basis, he also thought that the interaction of the supply of reserves on interest rates might positively confirm an interest rate structure by the end of the month that had not been colored by the speculative factors that have influenced interest rate movements in recent weeks. If it was then reasonable to believe that the general interest rate structure had stabilized at a level below the present 3 per cent discount rate, a further quarter per cent reduction in the discount rate might be considered. Mr. Leach said that the Fifth District economy continued in a recessionary movement. Production of textiles was curtailed in December, with shutdowns at Christmas of as much as a week. Prices in the hosiery industry continued on the weak side, and it was apparent that further elimination of production facilities must occur industry would be on a solid footing. Bituminous coal before the district for the four weeks ended mid-December was production in the 8 per cent under the previous four weeks and 12 per cent under a year ago. Declining employment and hours worked and increased unemployof weakness in individual industries. ment claims corroborated signs in the behavior of business was to be found Further corroboration member banks which had increased $20 loans of district reporting with $50 milof 1957, compared last four weeks during the million period a year earlier. lion in the corresponding
Mr. Leach went on to say that in such a recessionary period as Mr. Young had described there should be no doubt as to the System's posture. He favored a flexible credit policy and he felt we had one. Such a flexible policy should find expression in easier credit conditions. Interest rates have declined sharply, Mr. Leach noted, and if they were the sole indicator of credit conditions one might say that the System had eased sufficiently. The decline in rates had clearly outrun reserve availability, however, and some further easing in reserve positions seemed appropriate. He did not know how long the recession would last or how severe it would become, but he had the definite impression that more easing would be required and he saw some advantages in increasing reserve availability at this time rather than later. Mr. Leach said that he was not talking about much more but as a bench mark he suggested $150 million of free reserves, ease, and he would favor moving to this position well in advance of the While he advocated a little more forthcoming Treasury financing. banks, Mr. Leach said that the reserve position of member easing in not want the System to be to make it clear that he would he wished the problems of the future easy and thus to compound excessively pressures. He could again be combatting inflationary when we would this time, and he directive at to change the Committee's see no need discount rate now. reduction in the not favor a would the Tenth District in a few developments Leedy said that Mr. trend. Tenth District cash r eceipts were contrary to the national
from farm marketings were up slightly this year over 1956, in contrast to the small decline in the nation. The explanation for the rise in the Tenth District was to be found in cattle marketings: increased cash receipts from livestock marketings had more than offset a decline in returns from crops. There had been a marked reduction this year in the Soil Bark Program and winter wheat acreage seeded was 26 per cent higher than a year ago with a preliminary crop estimate 49 per cent higher. In banking developments district business loans continued to rise in the last few weeks of 1957. The reserve position of banks improved materially and borrowings from the Reserve Bank were reduced. Unemployment in the Tenth District had continued to rise but the rate seemed to be significantly lower than the national rate. Department during the Christmas season was higher than in 1956. store trade policy, Mr. Leedy felt that a program of ease As for System ahead although the System Account be continued in the period should of reserves that would result from should offset the accumulation developments this month. The aim should be for something the seasonal and should continue on the plus better than a zero reserve position not contribute to any further sharp side, but the System should of Government securiThe large holdings in interest rates. decrease in anticipation of some speculative activity ties dealers indicated that before too Mr. Leedy felt in interest rates. a further decline
long it might become necessary to reduce the discount rate, but he would not suggest a change at this time. Mr. Allen said that the development most worthy of mention at this time was in the retail trade field. Preliminary data indicated an upsurge in buying in the last few weeks before Christmas which carried sales for December well above the same month in 1956. This was true not only in major Seventh District cities but in the United States as a whole. While these preliminary figures covered only one economic area, they indicated a change in direction for the first time in four months and showed that the American people at this point were not frightened to the extent of curtailing expenditures. figures in the automobile inMr. Allen noted that leading reducing their 1958 production estimates downward in dustry were public utterances, and he said that the downward reductions their they were speaking privately. One leading were even greater when last week that before the figure in the industry said privately cut production as General Motors would undoubtedly winter was over individual had expressed had done. This and Chrysler already Ford by the end of business could improve belief that the automobile the Reserve and Walter Reuther would relax, and the year if the Federal said that Seventh relax. Mr. Allen Mr. Reuther to did not expect he from the situation credit differed on automobile District information
found by Mr. Fulton, with reports from Seventh District bank lenders indicating a further softening in terms during November. The proportion of long-term contracts was continuing to increase, and available data on collections suggested a further rise in delinquents. After pointing out that for the country as a whole business loans of weekly reporting member banks had risen 3.4 per cent in 1957 compared with 18.1 per cent in 1956, Mr. Allen said that in the Seventh District, the increase was 4.6 per cent in 1957 compared with 20.6 per cent in 1956. While business loan growth had been slow, investments in Governments and other securities and loans on securities had taken up the slack, at least at the large banks. In December, total credit growth at weekly reporting banks for the entire country amounted to $2.4 billion, $700 million more than a year ago, while in the Seventh District the net increase was only slightly above December 1956. While on the subject of banks, Mr. Allen stated that from time past year several of the Reserve Bank Presidents had to time during the of their discount windows had been made more diftold him that policing on the part of their larger banks that one of the ficult by complaints Mr. Allen said that if Chicago banks was a continuous borrower. large likely that bank did not borrow or buy Federal funds today as appeared periods it would that for four consecutive it would mean or tomorrow, but on the other hand Federal funds, borrowed or purchased not have in substantial amounts. sold Federal funds had
Turning to the question of Committee policy, Mr. Allen said he was still much concerned about the increase in consumer prices. He did not think this Committee or its actions had caused that rise and he did not think the Committee could take actions which would eliminate the other factors that had caused it, but he considered this rise so much more important than anything else that he would not like to see the Committee take any action that would contribute to a further rise in consumer prices. He would go along with the comments of several others in that he would dislike any further easing of the situation. At the preceding meeting, the Committee had decided on a target of zero negative free reserves and he would like to continue with that target. Mr. Deming said that a lazy downward drift continued to characterize the Ninth District economy. There was no evidence that this downtrend had quickened in the past few weeks. Banking developthe general economic situation. Credit had become ments reflected savings bank in the district had reduced somewhat easier. The largest its rate on conventional mortgages and in general mortgage money was more available. farm picture was Deming said that the As to prospects, Mr. and the outlook for the conditions had been good bright: winter indicated a Present estimates wheat crop was excellent. winter in Montana 31 per cent larger than in 1957. Mr. Deming wheat crop worthy of note. which he thought two other developments also reported
First, one major manufacturing concern which had furloughed its workers called a substantial number back earlier than had been expected at the time the furlough began. Another major concern now contemplated something less in the way of layoffs than had been expected. The second factor that he thought worthy of note was that the largest bank in the district, which was organized along divisional lines, had just finished its divisional roundup on loan prospects, and the conclusion was that the total loan increase in the first part of 1958 would be as great as in the first part of 1957. Mr. Deming added the comment that this bank's management suspected the total result even though it did not particularly question the divisional estimates. On the policy side, Mr. Deming said he also felt that the interest rate movement had gone a little too far a little too fast. Consequently he would not follow a policy at this immediate time aimed at or resulting in an even lower rate structure. He would not like an immediate change in the discount rate. However, he believed that open market operations should be conducted so as to leave a small positive free reserve level. If the downturn in thus far represented more adjustment than rates that we had seen been expected as a result of credit action, a would normally have with no would not be inconsistent free reserve position positive decline in rates. further District was the Twelfth said that basically Mr. Mangels other areas. The indicated for some pessimistic as reports not as
district had been experiencing a continuation of activity on the down side, but there was some indication of modification in the downward movement although no firming was yet apparent. The downtrend may have been overemphasized, he said, noting that in general the level of activity was still high even in some of the weaker areas. As to unfavorable factors, Mr. Mangels noted reductions in nonagricultural employment because of layoffs in the aircraft and related defense industries, adding that probably there would be further reductions. This had been mainly from natural attrition and lack of replacement of workers rather than from wholesale layoffs. Steel operations in the district were at 79 per cent of capacity. Mining companies had reduced production, some by lowering hours worked and others by in the number of persons employed. In November, building reductions from October and were below a year earlier. On the permits declined that between October and November side, Mr. Mangels reported favorable in the district. For the first there was no change in unemployment not been a seasonal increase in prices time in four years there had plywood manufacturer had just Douglas fir lumber and one large of in prices. On the whole, Mr. a $2.00 a thousand reduction announced lumber industry in the Northwest was considerably Mangels said that the ago about the next it had been a year at present than more optimistic were at the sales in December Department store year's outlook. sales were holding up fairly well, December 1956 level. Automobile prices were down very good shape although was in and agriculture
somewhat. The shipbuilding industry in both the Pacific Northwest and in southern California had shown considerable improvement. With respect to banking, Mr. Mangels noted that a year ago bankers did not know too well what their borrowers' requirements would be and were conservative in their attitudes. Now they feel they have adequate loanable funds and are in position to take care of their customers in meeting expected demands during the next 30 to 60 to 90 days. One large San Francisco bank was now planning to expand its real estate mortgage portfolio by $15 to $20 million in the coming year. Pressure for loans was not nearly as great as a year ago according to some reports, Mr. Mangels said, although banks will stay fairly close to the expect that the total outstandings was some talk of a reduction in the prime existing level. There and large corporations were currently rate within the next 30 days a hand-to-mouth basis, hoping to take advantage of any operating on that might come. reduction that there might be a little Although there were indications the problem seemed to him Mr. Mangels said that further slowdown, constructive in the overcredit ease would be to be whether further of more funds would merely or whether the injection all situation System should be was that the His feeling generate speculation. would keep the free reserves; he in supplying additional cautious amounts of negative would prefer small around zero but reserve level He would free reserves. to have positive rather than free reserves
make no change in the discount rate at this time, and he thought the Committee's directive was satisfactory in its present form. Mr. Irons' appraisal of the national situation was that there had been further tapering off. This had been reasonably moderate in amount and the picture was not showing signs of cumulating. It was more in the nature of a rolling adjustment. He could see no disturbing dangers of an accumulating movement as of the moment. As for the Eleventh District, the confidence quotient was not on the pessimistic side. A substantial majority of businessmen with whom this had been discussed in the past few days anticipated that 1958 would be a better year than 1957. A minority of perhaps 25 to satisfactory year. Most businessmen 30 per cent anticipated a less a cautious optimism for the coming year. Those who were reflected quite pessimistic were usually ones who were suffering substantial Mr. Irons noted, or ones who paper losses in the stock market, east of the Mississippi River. recently had traveled District department store sales in 1957 were 2 per Eleventh above a year ago and in December was ahead of 1956. Employment cent was not as much as it had been a year above November but the increase to increase someunemployed had continued The number of insured ago. at a high level activity had been maintained what. Construction ahead of November. was 25 per cent 1957 and in December throughout would be more felt that funds optimistic and bankers were Mortgage than they had been in the past year. available in the next year
Residential builders were particularly optimistic as to the outlook for $10,000-$12,000 houses. The oil industry felt that there might be improvement in 1958. Agriculture was in reasonably good shape. In summary, Mr. Irons found the outlook good or better in most areas. Banks were in a strong position and expecting strong loan demand. Deposits were up as of the most recent call date except in Dallas where a decline was shown because banks did not do so much windowdressing this time. Mr. Irons went on to say he did not mean to be painting a picture of another boom in the offing, but his was not a pessimistic report as had been indicated for some other parts of the country. Recent changes in the defense program were beginning to be orders having been received by Dallas District firms felt with new within the last ten days. said he would not advocate pressing ease or shiftMr. Irons ease at this time. Neither would he ing further in the direction of the discount rate or in reserve requirements like to see a change in it might be a diffifuture, although he recognized in the immediate had been satisfied with the or four week period. He cult three three weeks, and he would restraint achieved in the past degree of that about the three weeks, hoping hand for the next hold a steady The Desk should for the present. could be continued same degree would like to possible, he market. If the feel of the operate on around the rate structure somewhere the short-term interest see
discount rate. He agreed with the statements of Messrs. Robertson and Mills on that point. Mr. Szymczak said that he felt the Federal Reserve had been pursuing the correct policy and that it should continue to pursue that policy, leading to zero free reserves and, as required, to a small amount of positive reserves. He did not think there should be a change in reserve requirements at this time. He did not think the Open Market Committee should move too fast because it would be disturbing to the interest rate structure and to the market, but it should not tighten up on the policy that it had been pursuing recently. With requirements, Mr. Szymczak thought it would be derespect to margin undertake a discussion of that for the Board of Governors to sirable with the view to finding out whether this subject at an early date mentioned by Mr. Hayes. Mr. a time for any change as had been was the discount rate should said that he thought eventually Szymczak also any such move for several were foreclosed from be changed but that we weeks. Mr. Balderston would like to see the money For the long-run, growth. This to fostering economic again as an aid supply increasing turnover deimportant as deposit to become more seemed to him goal actions to timing of in the however, centered The problem, clined. achieve this objective. the System should prewas that on the one hand The dilemma or from feeding on of recession from accumulating vent the forces
each other, especially in view of our adverse position in the cold war. On the other hand, Mr. Balderston felt that the economy could scarcely have purged itself of the wastes that had emerged from 1955- 1956. This would be true even if the current recession were just an inventory recession. It was his belief, however, that the causes of the present difficulties extended beyond inventory imbalance and included excess capacity, compounded by foreign difficulties. In addition, wage negotiations in the coming months should be conducted in a noninflationary atmosphere without the illusion on either side as to the possibility of wage increases being passed on as price inchange in interest rates may have creases. Moreover, the sudden the System would not wish to foster. brought on expectations that of discount rates and a zero Balderston favored no change Mr. the immediate future. He supnegative free reserves for target for the free reserves would be that as in January of 1957 posed, however, of funds, whatever the the January return flow substantial during tried to do. Account Management had posed the he thought the go-around Chairman Martin said were dealing in small very clearly. We problems for the Committee gotten into the that we had regretted again The Chairman degrees. figures. We talked about zero, $50, use of net borrowed reserve present conditions he thought $150 million, but under $100, and Mr. Szymczak agreed with He quite meaningless. figures were these
that the Committee had been pursuing the correct policy, and he certainly did not want any additional ease at the moment, but he also did not want to see the policy we had been following vitiated. That would confuse the public by making them think that the System might be returning to a tighter policy than had been followed in recent weeks. Mr. Balderston had pointed up this problem. Mr. Leach had expressed the feeling that we probably would get to an easier position. Chairman Martin said he would not put it in figures, but if we were pursuing a correct policy his personal preference would be to err on the side of ease rather than tightness, and he thought that would be consistent with the present position. The Chairman suggested that the Committee should also bear in mind the projections with respect to the Treasury. While we could not forecast what the future would hold, there seemed to have been a resurgence of confidence around the end of the year. When he came through a resurgence of confidence--even an imNew York last week he observed boom--because deficit financing of the pression that there might be a become a factor soon. Some of the stock Federal Government might around, although the Chairman had turned their sights market operators thought they were wrong. said that he personally that all of those Martin suggested connection, Chairman In this reports of the British should study the with the Committee connected Events were leak very carefully. on the alleged Bank Rate Tribunal to sudden could be subjected and the System moving very rapidly
pressure to reduce the discount rate when the Treasury was about to go to the market. The only consistent position for the Committee, he felt, was to try to maintain a reasonably even keel during a period of a Treasury financing. The Federal Reserve must be very careful to do what it could to protect the bankers who were on the boards of directors of the Reserve Banks from being in a position of having inside information that could be used in this type of a market. This applied to margin requirements also. We must realize that speculators can profit or appear to profit if a leak or a charge of a leak gets out. He believed the best way to handle this situation would be to think of this in terms of an even keel for the System, even though there might be violent forces of gloom or the reverse, in the period of the Treasury financing which was not too far off. The Chairman's reason for highlighting this point was that a this morning had projected policy forward. It number of the comments have been better not to have changed the could be argued that it would November meeting of the Committee before the last directive at the financing and to have tried to maintain about the same money Treasury financing as before. Howduring the period of the market conditions what seemed necessary, and what he was saying now ever, we had done Treasury's problem in to bear in mind the was that it was necessary felt it very fortunate at that time. He of what had ensued the light have a British bank rate leak, considering the people that we did not not think we time. He did at that around Washington who were roaming
could approach the Treasury financing without realizing that these movements come very sharply and quickly. With further reference to Committee credit policy, Chairman Martin said he recalled no one suggesting a change in the directive at this time. In implementing policy, he would be disposed to follow what he took to be the views of Messrs. Hayes, Leach, and Bryan, although he did not wish to pinpoint a figure. He thought there should be positive free reserves because this seemed to be the only consistent position. However, he would not want free reserves to be so positive as to indicate that the Committee was actively pursuing a more easy policy than it had been pursuing to date. The Chairman said that he recognized this was a difficult order to give to the Manager of the System Account in the light of the magnitude of funds floating around. He then asked for other suggestions as to the matter of degree and how to clarify the Committee's views, calling specifically on Mr. Rouse for his comments on operations. Mr. Rouse said that both the Board's projections and those of the New York Bank indicate that this period should not be as difficult as last year. As of now, it looked as though the reduction in the System Account would have to be in the range of 1/4 to 1/2 billion dollars, largely through runs-offs rather than through sales, in order to maintain about the current position. The projection of average free reserves for this statement week was shown as plus $30 million, $300 million to range might be from negative but during the week the
as much as positive $330 million. Mr. Rouse said he thought the Desk could operate along the lines the Committee desired. Mr. Allen noted that the Chairman had made the point that we should maintain an "even keel" during the Treasury financing. He inquired whether this indicated that, since we had eased up a little for some time, we should continue to ease. Chairman Martin said this was not quite what he had in mind. What he was trying to say was that if there was to be additional ease, it had to come in the next couple of weeks on the positive side rather than waiting until after the Treasury financing was announced, or perhaps until the meeting to be held on January 28. Things are moving very quickly, he noted, and it might be that by January 28 a majority want to change the directive. He did not think of the Committee would at that time in view of the Treasury financing. we could make a change he would operate with a little If he were carrying on the operation, couple of weeks but thereafter he more positive reserves in the next keel" right straight through the would be moving toward an "even Treasury financing. and he inquired as to said that he did not disagree, Mr. Allen for this period of the Treasury long the Chairman had in mind how thought it would be responded that he Chairman Martin financing. the Treasury's anfrom the time of to consider the period necessary payment for the several days after the refunding to nouncement of for his views. asked Mr. Rouse and he securities,
Mr. Rouse said that he thought it would be necessary to allow a week or 10 days after the payment date. There was a certain amount of underwriting that would have to be done, and this should be the minimum period to allow for distribution of these securities to be completed. He went on to say that he thought the Treasury announcement on the refunding might come about February 1 and the new financing announcement might be simultaneous with the refunding. Mr. Hayes commented that he thought the Committee had a pretty free rein for the next couple of weeks. Chairman Martin said he might be overly sensitive, but since he might be up on the Hill at any time during the next couple of months he to be in a position of having taken dethought it very important not the future. In view of the speculacisions on actions to be taken in it was not only very important to avoid any tive nature of this period, but also situations subject to leak. leaks that, in effect, we were fixing policy for Mr. Leach remarked Martin replied that it amounted next five weeks, and Chairman the much to that. pretty with making free reserves that he would go along Mr. Allen said the next two weeks, conthe plus $100 million area during available in whether at However, he questioned he had said earlier. trary to what neither add that it will wished to determine time the Committee this following our next meeting. from reserves in the period to nor subtract
Mr. Hayes suggested that the "even keel" of January 28 would be to stay where we were at that time. Mr. Shepardson said that this was not the way he had understood the Chairman' s statement. His impression was that the Chairman had in mind a line or a direction for continuing ease. Chairman Martin stated that this was not what he intended. This could not be measured precisely, he said, but he did not think that during the Treasury financing the Committee should be either increasing or decreasing the degree of ease. Mr. Shepardson inquired whether the Chairman felt that between now and the Treasury financing announcement there should be some further easing and, if so, whether it was correct that he would rather do it now than two or three weeks later. Martin stated that this was correct. He would rather, Chairman the policy we were now pursuing by having in a moderate way, continue wish to cite a figure, but he positive reserves. He did not moderate quo period. The return flow of currency did not think this was a status and he thought that we were dealing too many eddies in the stream started with a rushing torrent. directive and instructo the Committee's Turning specifically was clear that all said that it Chairman Martin tions to the Account, this time. He the directive at be a change in there should not agreed be given some Account could of the System that the Manager thought and he in this periods to operations with respect further guidance
suggested that the majority appeared to be on the side of slight positive reserves. This was not a very firm majority, however, and if the question were put to a vote it might be by a majority of only one or two. He questioned whether this was the type of thing that the Committee should be voting on but he had no desire to keep anybody from putting anything into the record to express his views. He noted that the minutes would show the statements that the individuals had made during the meeting. Mr. Hayes stated that he thought the System Account could operate along the lines of the Chairman's comments. Mr. Robertson said that he would like the record to show that he was in complete agreement with respect to maintaining an "even keel" during the Treasury's financing operations. The comments he had made heretofore would go to the immediate future; he would not ease off in the next two weeks. he thought that this had been a Chairman Martin stated that and that if there were no further comments the directive good go-around would be approved in its present form. motion duly made and Thereupon, upon seconded, the Committee voted unanimously Federal Reserve Bank of New to direct the otherwise directed by the ComYork until mittee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System in the case of open market or, account in the open market 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 cushioning adjustments and mitigating recessionary tendencies in the economy, and (c) to the practical administration of the account; provided that the aggregate amount of securities held in the System account (including commitments for the purchase or sale of securities for the account) at the close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million; direct to the Treasury from the System ac(3) To sell count 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 made as nearly as may be practicable at the prices shall be currently quoted in the open market. meeting of the Committee would noted that the next The Chairman be held on Tuesday, January 28, to be followed by a meeting on Tuesday, would meet at the time the 11. On March 4, the Committee February newly-elected members assumed their duties and would plan to stay over on March meeting adjourned. Thereupon the Secretary
Also: Record of Policy Actions