January 28, 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 28, 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. Erickson, Johns, and Deming, Presidents of the Federal Reserve Banks of Boston, St. Louis, and Minneapolis, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Sherman, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas Messrs. Atkinson, Bopp, Marget, Mitchell, Roelse, Tow, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Carpenter, Secretary, Board of Governors Mr. Koch, Associate Adviser, Division of Research and Statistics, Board of Governors Mr. Miller, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Gaines, Manager, Securities Department, Federal Reserve Bank of New York Messrs. Ellis, Hostetler, Daane, Rice, and Vice Presidents of the Federal Wheeler, Reserve Banks of Boston, Cleveland, Richmond, Dallas, and San Francisco, Mr. Litterer, Business respectively; Federal Reserve Bank of Economist,
Minneapolis; and Mr. Lapkin, Economist, Federal Reserve Bank of St. Louis Mr. Abbott, Vice President, Federal Reserve Bank of St. Louis (present through economic presentation Upon motion duly made and seconded, the minutes of the meeting of the Federal Open Market Committee held on January 7, 1958, 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 January 7 through January 22, 1958, and a supplemental report covering commit ments executed January 23 through January 27, 1958. Copies of both reports have been placed in the files of the Federal Open Market Com mittee. Mr. Rouse noted that the supplementary report distributed this morning neglected to mention that the System Account had rolled over January 30 Treasury bills. New Treasury bills were its $136 million of awarded in yesterday's auction at an average rate of 2.20 per cent, and that the longest outstanding Treasury bills were quoted Mr. Rouse said this morning at 2.17-2.12 per cent. Noting that there had been some comments that open market opera supplied enough reserves to ease credit and that the System tions had not change the discount rate, Mr. Rouse had done nothing significant except of U. S. Government securities that the figures on bank holdings said
certainly did not support this contention. Reporting member banks increased their holdings of Government securities by almost $1.2 billion between November 13, 1957 and January 15, 1958, including $600 million of Treasury bills. Such an increase in bank holdings of Governments could occur only when banks had the reserves to make such investments possible. Mr. Rouse said that the tendency for prices of intermediate and longer-term Government issues to back off a bit in recent sessions had helped quiet the speculative fever in the market and had provided a good base for the Treasury's financing. Also, the reduction in dis count rates had had the effect of quieting speculation on System action. Turning to the reserve projections, Mr. Rouse called attention between the New York estimates, contained in the supple to differences by the Board staff. He said mentary report, and the estimates prepared assumed the Treasury balance that the New York estimates implicitly it was considered unlikely that would be held at $500 million, although this level. The Treasury would be able to achieve the Treasury actually estimated during the next few weeks, balance probably would be lower than closer to the Board expected to average reserves might be and free in the supplementary report. than to those shown staff's estimates money market during be available in the ample funds should Therefore, repurchase agreements a demand for financing, although the Treasury Mr. Rouse said should happen, arise. If that "rights" might against
he assumed the Committee would agree that repurchase agreements should, if necessary, be made during the refunding. In view of the ease indicated by the projections, Mr. Rouse doubted that there would be much demand for repurchase agreements. Mr. Leach asked if there were any special factors at work influencing Treasury bill rates, and Mr. Rouse replied that he was not aware of any. Demand for Treasury bills from commercial banks, nonbank corporations, and others had been strong. Some holders of "rights" with near-term needs for funds had been selling "rights" and shifting into Treasury bills, but there had not been enough of this type of buying to account for the present level of Treasury bill rates. added the comment that one source of supply of Treas Mr. Hayes by foreign central banks that were shifting ury bills had been selling funds into time deposits. Thereupon, upon motion duly made and seconded, and by unanimous vote, open market transactions during the January 7 through January the period ratified, and 27, 1958, were approved, confirmed. a draft of had been distributed this meeting there Before in accordance with the Wright Patman prepared letter to Congressman response to his request on January 7 as a at the meeting discussion of punch cards and summary 23, 1957 for preparation dated December during the period Account transactions of data of System tabulations
March 1951 to December 1956. The draft read as follows: Your letter of December 23, 1957 requesting that we prepare punch cards from the data sent to you with my letter of November 12 was discussed at the meeting of the Open Market Committee held on January 7, 1958, and again at the meeting on January 28. The data sent to you earlier gave the details of each individual transaction for the System Open Market Account from March 1951 to the end of 1956. Your request also asked that after the punch cards had been prepared the data be summarized to give daily and monthly totals of transactions by classes and that we compute, for each day and each month, the average prices at which the transactions were effected. The members of the Open Market Committee had had your request before them for several days prior to the first meeting at which it was discussed, together with an estimate of the cost and time that would be required for our tabula tion facilities to prepare the material for which you ask. They are really concerned about this request, not only be cause of its cost and the time involved but also because it does not seem to promise to yield meaningful statistics. Frankly, our research people who have studied the request have not been able to determine any significant conclusions that could be derived from these tabulations. The Committee expressed the view that it would not be appropriate for us to undertake a task of this extent until there had been a technical review to determine whether the tabulations requested would in fact produce information of value. It also felt that a task of this magnitude should not be under taken solely on the basis of a request from an individual member of the Congress, as distinguished from a request by the full Committee on Banking and currency. We are wondering whether it would be desirable for members of your staff and ours or, if you wish, members of the Banking and Currency Committee and the Open Market Com mittee to get together for a preliminary discussion of how we might be most helpful in preparing data that would yield significant results both for the Committee and for the Fed I shall be happy to hear from you further as eral Reserve. to your thoughts along this line. The letter was approved unanimously the understanding that a copy would with be sent to Chairman Spence of the House Banking and Currency Committee.
Chairman Martin then referred to a letter from Congressman Abraham J. Multer dated January 17, 1958 in which he again requested that he be furnished with the daily reports of dealers' operations by days from November 11 through November 15, 1957. A copy of that letter and of a draft reply had been distributed before this meeting. In response to Chairman Martin's request for comments, Mr. Hayes said that it had occurred to him that it might be desirable to add a sentence to the letter that would indicate to the Congressman that the Committee should not be expected to violate normal business ethics of the same general character as those applicable to any confidential relationship between a banker and his customer or a lawyer and his client. Mr. Hayes added that he had no strong feeling on this point and that he was mentioning it with the thought that those who had drafted the letter might give consideration to such an addition. It was agreed that further considera tion would be given to the inclusion of a sentence such as Mr. Hayes had suggested and that when the letter was in form satisfactory to the Chairman, it would be sent to Mr. Multer. Secretary's note: The letter pre pared for Chairman Martin' s signature was sent to Mr. Multer in the following form under date of January 28, 1958, with a copy to Chairman Spence of the House Bank ing and Currency Committee: Your letter of January 17, 1958, acknowledging mine the names of dealers in January 15 in which I furnished of
Government securities with whom the System Open Market Ac count transacts business, refers again to your November 22 request for daily reports of dealers' operations for Novem ber 11 through 15, 1957. You state that after further con sideration you believe we should furnish you with the individual daily reports that most of the dealers have submitted voluntarily, in the strictest confidence. I am sure you understand that the furnishing of these daily reports by dealers is really voluntary and is in no sense a condition to their doing business with the System Account. In my letter of December 17, I stated that it would not be within the discretion of either the Federal Open Market Committee or the Federal Reserve Bank of New York to disclose information contained in these reports of dealers. That letter also suggested that, if you wished to do so you could, of course, direct your request for informa tion on dealers' operations to the individual dealers concerned, and their names were given in the letter sent to you on January 15. The Open Market Committee continues in the view that the nature of the daily reports of individual dealer positions, as well as the confidential basis on which such reports are Reserve Bank, leaves no discretion as received by the Federal their contents. I can only reiterate my to our revealing that you might go directly to the dealers earlier suggestion on their operations on the with your request for information days you specify. Board's staff presented a review At this point, members of the illustrated by chart slides. Copies of the current economic situation as of the charts were dis of the presentation as well of the script been placed in the and a copy has following the meeting, tributed Committee files. of developments during a review and analysis After presenting 1957, the review during the year years and particularly the past few the following statement: concluded with recent months the economy during activity in Declining in the capital goods primarily to an adjustment may be traced
area. Installation of much new capacity eased the supply situation enough so that buyers for some time have not needed to protect themselves by accumulating inventories and recently have been able to reduce inventories. In some lines, with final demands as well as inventory demands off, current capacity is proving greater than is needed at this time and there is much discussion of widespread overcapacity as a result of a capital goods boom. Only time will tell how transient or long-lived this phase may be. It may be noted, however, that capacity is built to meet demand at seasonal and cyclical peaks with some margin to spare and that operation well below 100 per cent of capacity is usual in most lines of activity. While readjustment in the capital goods area may take considerable time, readjustment of inventories often occurs fairly quickly. Both types of readjustment are to be found in the present situation. The timing of any shift from the recent downward movement depends partly on how important changes may be in other demands, including consumer demands, State and local government demands, defense demands, and foreign demands. In some fields, easing of credit restraints in effect during the period of high activity and rising prices will tend to maintain and possibly to strengthen demands. Various built-in stabilizers will cushion declines in income and tend to maintain consumption. But business policies will need to be adjusted to chang ing demands in order to keep markets for their products and maintain output. It cannot be assumed that the necessary adjustments will be made quickly or will meet immediate response. It needs to be remembered that economic decline has acquired a definite momentum and that further decline in production, employment, and activity is in prospect. It appears likely that the production index for January will 2 or 3 points from December and about 8 per cent be down Unemployment claims have continued to from a year ago. increase. Also the price structure is getting under supply such pressures may increase at various points, and pressure before they relax. difficult to judge, seem Demands for bank credit, while partly reflecting liquida be showing a slackening drift, to securities financed dealers' positions in Government tion of as a larger than seasonal in December, as well with bank credit position that has loans. The free reserve decline in business credit position has banks with easing been attained by member expansion has not moderate size and monetary thus far been of
yet been resumed. Prospects are that in the absence of offsetting actions by the System, free reserves will ex pand further in coming weeks in part from a further seasonal decline in deposits and in part because the squeeze on Treasury cash balances will release reserves. Some of these may be absorbed by System operations as money markets become easier. But continuation of at least the present degree of reserve availability would seem appropriate until there are indications of monetary expansion. At the conclusion of the review, Mr. Abbott and the members of the Board's staff who had entered the room to assist in the presen tation withdrew, Mr. Hayes next made the following statement on the economic situation and credit policy. The underlying movement of the economy seems more un favorable now than at the time of our last meeting. Thus, while it is still true that there is a wide variety of possible ways in which the recession might develop, the most realistic evaluation of these possibilities suggests some further aggravation of the downward movement before contracyclical influences and policies have had time to take effect. In determining policy, we should probably give major attention to the unfavorable realities of the present rather than to possible resumption of an infla tionary threat in the future. The recent steep declines in production, employment and average hours worked, reflects primarily a turnabout in inventories from accumulation to liquidation--and the latest available inventory-sales ratios were fact that the still near their peak indicates that this recessionary influence may continue for some time. Private outlays on just commenced a decline which is plant and equipment have farther--although many of the effects likely to carry much of the prospective drop have already been felt in the way number of reports of permanent reduced new orders. A of plant shut-downs are suggestive of a real cyclical adjust inventory adjustment. rather than of a mere ment process of weakening of consumer there is some evidence However,
confidence. This is a factor which could of course repre sent the key to the future intensity and duration of the recession. Residential construction seems less likely now than we had previously thought to give strong support in the coming months. For what it may be worth, it is interest ing to note that industrial production is now at about the same level as at the bottom of the 1953-54 recession, if allowance is made for a long-term upward trend of perhaps 3 per cent per annum. We are at the threshold of rising Federal expenditures and deficits--with a cash deficit of $4.5 billion or more in view for calendar 1958. The Treasury's revenue estimates in the Budget message appear to be much too optimistic. It is clear that Federal spending and tax policies will exert an increasingly strong influence on the course of the recession. But we can't count on this as a near-term remedy for the worsening business situation. Bank credit has contracted more rapidly in the last four weeks than a year ago (when the shrinkage was very substantial). The New York banks generally speak of loan demand as well sus tained, but this may be a local or temporary phenomenon, reflecting some involuntary inventory accumulation as well as corporate efforts to improve liquidity--and perhaps some re course to bank borrowing in anticipation of a further decline in long-term rates. In view of the likelihood of a Treasury cash offering coming on top of the large refunding scheduled for early February, we shall probably have to give close attention to in connection with our own policies, until the Treasury, about the end of February. situation clearly points to a need The general economic availability. I think the need for further easing of credit economic conditions in several is accentuated by the fact that countries are showing less strength and are major foreign to any major deterioration in business increasingly vulnerable Furthermore it is desirable in the United States. conditions that the Federal Reserve System as a matter of public policy every effort toward resisting should appear to be bending The recent discount rate reduction by cumulative recession. be of some value in providing nine of the Reserve Banks should are moving in the direction to the public that we another signal even though I had considerable ease. I say this of greater rate cut, in the sense procedural aspects of the qualms over the Open Market Com to see the Federal I would have preferred that discussion of the for thorough mittee have an opportunity in view of the near action was finalized, subject before on the desirability of deferring unanimity at our last meeting action until a later date. discount rate
I believe we should now move forcefully in the area of open market operations to assure that the pressures on credit, money, and liquidity appropriate to the previous period of restraint are completely eliminated. Recently we have sought and achieved modest free reserves ranging from zero to around $200 million. This has been only minimally adequate. It has not been enough to remove the general feeling of tightness in the banks, particularly in the principal money centers. To the extent that we continue to look on net free reserves as a suitable target, I think we should set a range of perhaps $200 million to $400 million. We should always keep in mind, though, that this kind of measure involves a sort of circular reasoning, and that we might find ourselves successfully maintaining this target while total reserves and the total money supply were still shrinking. Therefore I would urge emphatically that, as suggested by Malcolm Bryan at the last meeting, we try to devise a new type of guide for open market policy under present condi tions that will focus attention on the total reserve base and the money supply rather than on the amount of free reserves. The System's actions to date have not gone far enough to pro vide for a year-to-year increase in the money supply, and it is probably true that the illiquidity and pressure on money and credit consciously engendered by the System when policy was are still restraining elements in the economy. Our restrictive directed at supplying sufficient reserves in policy should be to establish a clear upward trend in coming weeks and months base and the money supply on the basis of year-ago the reserve targets would be of secondary comparisons. Net free reserve the achievement of this primary objective. interest in policy, steps should be agrees on such a If the Committee way of moderate out promptly in the taken in this direction tomorrow, prior to the Treasury bill purchases today and right the policy could be After the announcement, announcement. of repurchase agreements through liberal extension implemented agreements could be Later, these repurchase against "rights". if necessary to maturity with outright purchases replaced at suggested above. of bank reserves the growth pattern establish release of re occasion for the an appropriate Alternatively, requirements may be a reduction in reserve serves through an increase in is enabled through if the Treasury provided do major cash financing. debt ceiling to the is called for in the directive that no change I believe at this time.
Mr. Erickson said that conditions in the Boston District followed the national trend but in some categories the First District seemed to be worse off. Manufacturing employment continued to decline and insured unemployment, which had been increasing steadily since Thanksgiving, was 59 per cent greater at the week end of January 4 than a year earlier. Initial claims for unemployment benefits for the week of January 11 were 42 per cent ahead of last year. While December figures for construction contracts were not available some other indications indicated that they were up from a year ago. November shoe employment was down 11 per cent and the district's percentage of national output had gone from 33.8 to 31.8. The pre Christmas pickup in department store sales was continuing and the 18 was the sixth in a row to show a gain over the week of January Sales in the four weeks ending January 18 were up previous year. 12 per cent. New automobile registrations in November were 5 per cent ahead of a year earlier but for the eleven months were 4 per mutual savings banks were At the year-end, deposits of cent behind. reports indicated that they cent ahead of last year and almost 5 per increasing since January 1. had been Bank had reduced its dis noted that the Boston Mr. Erickson yesterday. He had been giving some count rate to 2-3/4 per cent that clause (b) directive and suggested thought to the Committee's adjustments and mitigating changed to read "to cushioning might be
recessionary tendencies in the economy, by maintaining ease in the money markets." The purpose of this change would be to have some reference to ease in the directive. As far as open market operations were concerned, Mr. Erickson said that he agreed with Mr. Hayes and would hope that free reserves would get up to $300 million before the Treasury financing. Mr. Irons reported very little change in Eleventh District business activity which continued at a high level. There was some evidence of adjustments but they had not been marked. The agricultural situation was more promising than for some time because of favorable moisture conditions. The petroleum industry continued to have supply problems which were not entirely domestic but which involved to a considerable extent imports. Little change in the confidence factor was apparent during the past three weeks, Mr. Irons said, but business men, bankers, and others with whom he talked for the most part seemed to feel that there was a somewhat better tone than three to five months ago. noted that the Dallas Bank respect to policy, Mr. Irons With had not yet reduced its discount rate below 3 was one of three that would be done, he said, al It was inevitable that this per cent. directors he thought it would discussion with some of the though from he disagreed with the Mr. Irons said that be with some reluctance. that he thought a wholly adequate indicated by Mr. Hayes in position been achieved during the past availability of reserves had degree of
three weeks. The Committee should not point aggressively toward further ease, but with the Treasury financing in the offing should maintain the status quo. There had been a great deal written and said to the effect that the System had not increased availability of reserves commensurate with the discount rate changes, but Mr. Irons felt that if rates meant anything they would not be where they are if the System had not done so. On the money supply question, Mr. Irons said he was inclined to think that its failure to increase during 1957 resulted partly from a matter of definition. There had been a very large increase in time and savings deposits and part of this was a shift out of demand deposits. To the extent that occurred, it might be significant in explaining the failure of the statistics of the money supply to in crease as much as might actually have been the case. said he hoped that the Committee would not move Mr. Irons toward further ease at this time, that it would hold about where it in view of the Treasury financing in is. This would be necessary the offing, He would not favor any further definite moves, certainly To the extent that free reserve during the next two-week period. not see them move up to the he would not wish to figures might be cited, was on the the System Account range. He realized $300-$400 million be some leeway given to the Manage firing line and that there must of the feel of operate in the light Account to try to ment of the
the market, but personally he hoped the Account would hold the situa tion as it now prevailed. Mr. Mangels said that the San Francisco Bank's analysis of the money supply situation led to the same conclusion indicated by Mr. Irons, namely, that the conversion of demand deposits into time deposits had been instrumental in holding down the statistics of expansion in the money supply during the past year. Business activity in the Twelfth District continued somewhat on the down side, Mr. Mangels said, although the rate of decline had slowed. Spokane and Portland had been classed as substantial labor surplus areas and 12 other cities were classed as slight surplus labor areas. Preliminary employment figures for December showed no change from November and there had been no more than usual seasonal increase in unemployment. Automobile registrations were up slightly from a year ago and some dealers anticipated a fairly good spring pickup. Department store sales and construction showed slight declines. Steel production was down from November and 16 per cent below December a year 1957 showed a 5-1/2 per cent increase compared ago, although the year was mixed and while situation in the Northwest with 1956. The lumber optimism, there were also factors suggesting there was a degree of since July 1 and another 500 small mills had closed pessimism. Some being of the marginal type. expected to close, all of those LOO were were showing a profit. larger lumber producers Most
Bank loans declined in the past three weeks by the same amount as a year ago with declines in all categories excepting brokers' loans. Banks report that they are giving closer attention to loan portfolios but there was no evidence of collection difficulties on outstanding loans. There had been some talk of a reduction in the rate paid by banks on savings deposits because of the decline in profits. There had also been considerable speculation in the press and on the part of bankers regarding the level of reserve requirements, Mr. Mangels said, and he had been asked to express the hope that requirements would be reduced. Mr. Mangels went on to say that if any such action were taken it would be his hope that it might be tied to an expansion in the deferred availability schedule to three days rather than the present two-day maximum which he believed to be unrealistic. The consumer price indexes for San Francisco and Los Angeles moved to a record high in December and this was a factor that had been considered by the directors in not acting to reduce the discount rate a week ago. Mr. Mangels said that he would go along with the views ex pressed by Mr. Irons and maintain the existing level of restraint. attitude on the side of ease would not stimulate An overly aggressive it was questionable how much it had stimulated Federal spending and spending. Lower interest expenditures or consumer plant and equipment and local government expenditures. would increase State rates probably an impression of distress more ease might create On the other hand,
and panic. His view would be to maintain a firm hold on the present situation, proceed slowly, and if free reserves ran around $200 to $300 million that would be about right. Chairman Martin said that the comments by Messrs. Irons and Mangels on the money supply were valuable and he suggested that Mr. Thomas highlight this topic. Mr. Thomas said that the preliminary monthly figures on the money supply to be published soon would show a substantial decrease for the year 1957 that for fortuitous statistical reasons would not be representative of the actual change for the whole year. The reason was that the figures relate to the last Wednesday of the month, which in 1957 fell on December 25 and thus required the use of December 24 data, on which date deposits were considerably smaller than on Decem will ultimately be published. For this ber 31, for which figures not be used as a measure of the results of reason the figures should policy. He agreed with Mr. Irons credit developments and monetary also be made for the shift to and Mr. Mangels that allowance should time deposits. little change in the that there had been Mr. Deming said Conditions had the past three weeks. situation during Ninth District side reflecting as a little on the industrial continued to ease off had been a gradual There inventory liquidation. much as anything currently was fractionally and the total falling off in employment
under the year-ago level. Unemployment was up quite strongly. The Minnesota employment bureau now estimated the peak of unemployment would come in March. Mr. Deming said there had been some comment recently with respect to a steady deterioration in the situation in western Montana. He had visited the section a week ago and said it was not expected to show further deterioration. The copper industry had been weak for a long time and he saw no new factor in that picture. Lumber people were a little more optimistic than earlier but not much more so. The lack of acceleration in the down trend of the Ninth District was ac counted for by the strong agricultural situation. The directors of the Minneapolis Bank in making no change in the discount rate at that Bank at their most recent meeting thought might be desirable to signal that the Ninth District picture that it black as in the rest of the United States. Demand did not seem as Minneapolis banks reduced the for credit continued quite strong. of competitive reasons, not because prime rate yesterday because demand. As to open market policy, Mr. they felt a decrease in credit to go along with the views expressed Deming said he would be inclined two weeks and to have and Mangels for the ensuing by Messrs. Irons about where it is the level of free reserves the System Account hold namely, around $200 million. at present, District economic activity ap Mr. Allen said that Seventh in some other areas. Unemploy not declined as much as parently had benefits had who were receiving covered by compensation ed workers
risen to 6.8 per cent in the nation but the figure was below the national average in four of the five States of the Seventh District. In the fifth State, Michigan, the figure was 10.2 per cent, where unemployment in mid-January was estimated at 320,000 persons, the highest since 199. Department store sales continued to be a bright spot and in the two weeks ending January 18 showed a 3 per cent gain over the comparable 1957 week. Automobile manufacturers were now anticipating sales of 5.1 to 5.3 million cars in 1958. Mr. Allen went on to say that he had attempted to get a measure of the steel inventory situation in the automobile industry and was told that the industry had 475,000 tons of steel over and above normal inventory, enough to make 250,000 cars at 3,800 per car. This represented two weeks steel above normal requirements which he did not feel was a large amount. Nationally, there were 17 million hand compared with normal inventory of 16 tons of finished steel on million tons maximum. In other words, million tons minimum and 24 near the normal minimum. Current psychology the present inventory was the figure to drop below the normal minimum to 12 or 13 might cause million tons. Mr. Allen said that they were continuing Referring to savings, because of falling income. Seasonally but that the rate might be slowing to November in the three declined from October adjusted inflows were still above September. media, but they personal savings
Chicago central reserve city banks had an average basic net surplus position in the period ending January 22, the first such situation in many months. This resulted from a decline in loans and from liquidation of Government securities, not from deposit gains. There had been almost no use of the discount window recently by large district banks and the number of country banks borrowing had also declined. Mr. Allen then turned to monetary policy, stating that he doubted that between now and February 11 there would be a change in any discount rate. He then made a statement substantially as follows: It will not be news to anyone here when I say that the reduction to 2-3/ per cent, in Chicago as well as elsewhere, was not what would have happened had I had the sole decision. I will repeat that price stability is still number one with me and I do not feel that the Committee's actions of the past several months have made the contribution which they might have made in that di rection. Of course that is a minority opinion and I respect the judgment of the majority. Further, I recog nize that monetary policy has a delayed reaction and that at least some believe that, although two years of restraint failed to halt price inflation in 1956 and 1957, major are in the offing. I hope that they are price adjustments right. But I would feel that we had a better chance of winning out against inflation if our easing policy were not proceeding so rapidly today. I was not here in 1953 but I know that some who were here have suggested that this Com mittee moved too fast and did not allow sufficient time for fundamental economic adjustments to take place. In my judgment we are at a critical point, and if we believe that monetary policy can be used to fight the wage-price spiral this is the time to use it. My idea of the way to use it is to slow up in our movement to an easier policy. I am fearful that we are not only validating recent price words of a year ago which increases (to use Mr. Young's
many of us applauded), but that we may also be contributing to a climate which will bring further price increases in the not too distant future. I realize that the recession can and may develop to the point where every vehicle of easier monetary policy should be utilized. But in my judg ment inflation is still the major problem at this time. Mr. Allen then reported on a visit to Detroit yesterday, stating that the members of the Detroit Branch Board did not seem pessimistic. He also spent part of the afternoon with an official of a large auto mobile company and he was pessimistic. After giving figures of produc estimates and of dealer stocks, Mr. Allen said that the tion and sales production estimate of 1,500,000 cars seemed doubtful. first quarter Also, used car prices were not holding up well; for the first time in on new cars were not being reflected in used many years price increases margins are lower and are discouraging. car prices. Further, dealers' Mr. Allen said that it automotive production for 1958, In evaluating production will be less that (1) from here on should be remembered after the labor contracts are sales or at least will be lower than more cars than we export. (2) this year we will import settled, and 1958 with lower stocks wished to end that the industry He reported start of the year. of dealers than at the in the hands said that the situation trucks, Mr. Allen reference to With in the first Truck production than with automobiles. was worse year. The inventory per cent below last 1958 will be 10 quarter of but the case of automobiles, bad as in the is not as situation of trucks this year both sale and production estimates that industry year since 1946. than in any will be lower
Mr. Allen also referred to facility expenditures by the automobile industry, stating that about $840 million would be spent during 1958 representing completion of 1955 and 1956 programs. While this amount is well below 1957 and 1956 expenditures and somewhat below 1955, it exceeds 195 and earlier years. Present estimates are that facility expenditures in 1959 will be below $500 million and in 1960 below $350 million. Mr. Leedy said that Tenth District conditions were similar to those reported for the Ninth and Eleventh Districts-a little more favorable than for the country generally. The crop situation continued favorable to ideal. Unemployment was up less than nationally and ap peared to be following the seasonal pattern, but at a level slightly in excess of last year. Department store sales continued up during January. Loan repayments since the year-end had been slightly greater than last year. There had been a sharp increase in deposits but, contrary to report, banks did not appear to have employed their funds Mr. Rouse's in buying Government securities but had kept them in the Federal funds market. With respect to policy, Mr. .eedy said he continued to feel immediately ahead should be to the System program for the period that in the money market. He had no criticism of the provide further ease but considered it unfortunate that Management of the System Account meeting there had been the three weeks since the preceding in two of position. The report presented this morning a small minus reserve
indicated free reserves would be around $230 million next week. Mr. Leedy said that, as Mr. Hayes indicated, the System Account should see to it that reserves were further supplied to the market. Published figures from now through the period of the Treasury financ ing should not show net free reserves less than the projection of around $225 million. Mr. Leedy said he also shared Mr. Hayes' feeling as to pro cedural aspects of recent rate changes. He felt the change was proper and he was gratified that there had been opportunity for the Reserve Banks to consider their discount rates in advance of action by the Board of Governors on the Philadelphia Bank's rate. However, he thought the procedure followed indicated we were not acting as a System and that it would have been better if other Reserve Banks could have been a party to the action. to Mr. Mangel's suggestion on reserve require With respect Leedy said he assumed nothing of that sort would be seriously ments, Mr. after the Treasury financing was completed. If the considered until the actions could contribute attempted to do too much too quickly System One of the directors of the deterioration of public psychology. to in commenting on the reduction had indicated as much Kansas City Bank the reduction in margin requirements. the discount rate so soon after in on the directive, Mr. Leedy As to Mr. Erickson's suggestion the ease that Mr. wording really implied thought that the present
Erickson thought might be spelled out. As a general proposition he preferred not to specify in the directive the exact method of attain ing an objective. Summing up, Mr. Leedy said that he would do more than had been done in the recent past toward bringing case and he certainly would not do less. with all the difficulties of attempting to estimate the level of reserves, he would make certain that the errors were on the side of ease rather than of creating any tightness. Mr. Leach said that the Fifth District economy was operating at a lower level than he reported three weeks ago, but there had been no material change in the rate of decline. The long Christmas shut down of cotton mills apparently did not suffice to adjust mill inven tories to current demand and further curtailment of production might be necessary. Mills were being ground by the rising costs of good quality raw cotton and inability to raise mill prices. Furniture manufacturers' sales were expected to be off sharply during the first quarter of 1958 from the high first quarter of 1957. Furniture dealers reported some easing of terms to stimulate retail sales. Price cutting had been noted in the district's coal market, and premium prices for export coal had disappeared. Cigarette manufacturing and shipbuilding said, noting that about 80 per cent of had continued strong, Mr. Leach in this country were made in the Fifth District all cigarettes produced of the district's most stable. Despite and that the industry was one had had record sales scare, cigarette producers revival of the cancer
last year, and the outlook for production and profits this year was quite satisfactory. Shipbuilding companies reported that some new orders had been canceled and repair business had declined, but busi ness on hand currently is greater than was handled in 1957. Agricultural income must be considered a factor of considerable weakness, Mr. Leach said. Fifth District tobacco farmers, who produce two-thirds of the tobacco raised in America, were in the worst position they had been in for many years. Cotton growers received one-third less for their 1957 crop than their 1956 crop. Fifteen to twenty per cent of the 1957 peanut crop was still stacked because of excessive moisture with damage increasing daily. Other crops also had been damaged because of weather. Livestock growers had held their own. Mr. Leach said that most, if not all, of the larger banks in District had reduced the prime rate. Many bankers report the Fifth strong and they expect not only to make that loan demand is still reluctance but also to attempt to rate reductions down the line with rate. Aside from entitled to the prime the number of customers reduce in the reluctance of another important factor strong loan demand, profits squeeze. worry about a prospective reduce rates is banks to on time and savings of interest paid point out that rates Bankers salaries. Business months as have in recent have increased deposits as a year ago. about the same rate during January at loans declined in availability of a noticeable increase lenders indicate Mortgage of rates. and a softening mortgage funds
In view of economic and credit developments, Mr. Leach said that he thought the easing of reserve availability during the past three weeks was clearly appropriate. The reduction of the discount rate at Philadelphia was unexpected at the Richmond Bank and was an important factor in the decision of that Bank to reduce its rate. Recalling that at the January 7 meeting he had spoken in behalf of more reserve availability, Mr. Leach said he was glad that an average of $170 million of free reserves was achieved during the week ended last Wednesday and that the figure for this week would probably be around $200 million. He would prefer a somewhat higher average but thought the Committee should maintain an even keel because of the forthcoming Treasury financing. Doubts should be resolved on the side of ease. For the information of the Board, Mr. Leach said that since the American Bankers Association put on a program for reducing reserve requirements, his Bank was receiving more and more requests for modifi cation of the method of computing required reserves and particularly for lowering requirements. interested in Mr. Hayes' bold Mr. Mills said he was especially adding to the supply of reserves. persuasive proposal for aggressively and others taking that position differ from Mr. Hayes and However, he would the fact that action not taken account of they apparently had in that major impact and an un would have a vigorous as that suggested as that could undo the the interest rate structure settling effect on
advantages sought for. All told, Mr. Mills said, his policy reasoning was closely in line with the views expressed by Mr. Irons and other presidents who had taken that same general position. Mr. Mills suggested that System policy actions in the near future might profitably be guided by the composition of what could be called the supply of "floating reserves," that is, the supply of re serves provided through private initiative and represented by the combination of Federal funds and the reserves supplied by discounts at the Federal Reserve Banks. Previously, it might be said, the major part of the supply of "floating reserves" had originated from Federal Reserve Bank discounts with Federal funds providing the marginal part of the total supply. That situation has now been reversed and Federal funds are the major source of the supply of Policy based on those changed circumstances "floating reserves." that variations in the volume of Federal Reserve would contemplate the volume of Federal funds would be Bank discounts as related to the System Open Market Ac factor for the Management of the critical whether reserves should be supplied count to follow as a guide as to If policy actions were presently in greater or lesser quantity. Mills' guess that a supply a proposition, it was Mr. adapted to such million would be million to $200 reserves from $150 of positive free to the lag in obtaining pointed out that due for. However, he called what the eventual early to know was still too results, it policy free reserves ranging to a supply of positive reaction had been market
around $100 million. It was also important, in his reasoning, that the supply of positive free reserves moving about within the System should be sufficient to act as a cushion against the disturbing ef fects of whatever regional shifting in bank deposits might occur be cause of changing economic conditions in the respective Federal Reserve districts. If about the existing supply of reserves was allowed to carry through the present period of Treasury financing, Mr. Mills felt that it should be possible by the time the Committee next meets to get a clearer and more definitive picture of the effects of past policy actions from which a fresh start could be taken. Mr. Robertson said that he was not as pessimistic as some of the comments of others indicated. His views had been expressed well by Messrs. Allen, Irons, Mangels, and Deming. In his opinion, the System had moved too fast in easing and the results had shown up in psychological attitudes. Mr. Robertson's fear was that the effect would be so great that before too long he would be joining with the majority of the Committee in really easing by reducing reserve require ments. He hoped this would not be true but was afraid of it. Mr. Robertson said that it seemed to him clearly wrong to ease further at He would do what he thought was agreed upon at the pre this time. meeting, that is, hold an even keel through the Treasury ceding financing, and he would not ease before that was completed. As to not make a change to indicate directive, he would the Committee's
that the Committee was maintaining ease in the money market because such a change at this time would indicate that it had not been the case heretofore. Mr. Shepardson said that, as several others had indicated, he felt strongly that we should maintain the position we are now in. He was very much concerned about the price situation. He did not think the Committee had explored fully the effects that monetary policy could have in bringing about corrections and adjustments in prices. His view was that the Committee had moved fully as far as was desirable, and perhaps too far, in adjusting to the Treasury financing, and this was a time to maintain an even keel. There should be no further indication of change in position either in the Committee's directive or in the level of free reserves. Mr. Fulton said that he could not subscribe to some of the optimism as to the short-run nature of the decline. In the Cleveland District, it was felt that the downturn was more severe than had yet and that it would continue for some time. That been recognized deterioration than in some other districts district had had a greater heavy industry complex. The steel industry was at 55 because of its area down to 43 per cent. of capacity, with the Cleveland per cent ago. Carloadings were 16 per cent below a year Coal production was in warehouses and inventories of steel down. There were substantial not ordering to the and those firms were in the automotive industry,
extent they were cutting up steel. Machine tool manufacturers had the lowest dollar amount of new orders in 1957 that had been recorded for many years and their backlogs were disappearing. The only bright spots in the Cleveland District, Mr. Fulton said, were the strong department store trade and the faily strong construction industry. Employment was not good, with 7 additional cities having been added to the substantial labor surplus category in December and January. Eighteen district cities were now in that group, and 7 others were classed as moderate labor surplus areas. Unemployment was very wide spread because of the letdown in heavy industry. In the opinion of there was no immediate outlook for an upturn in industries businessmen, that might be using steel or ordering machine tools. recently and were in at the dis District banks had lost funds Mr. Hayes that re said. He concurred with count window, Mr. Fulton million area, increased to the $200-$400 should be serve availability system to allow funds in the banking prefer to see sufficient He would There should be the discount rate. rate to go below the Federal funds Committee had been that the Fulton said, feeling easing, Mr. further a too firm hand. keeping read into the record he would like to said that Mr. Williams of the minutes covering meeting a draft the Open Market Committee of Federal Reserve of the Board of Directors taken by the the action the discount voted to decrease the time they at Bank of Philadelphia
rate of that Bank on January 16, 1958. He then read the following: Mr. Bopp read the Board's "National Summary of Busi ness Conditions" and concluded that, by itself, it indicated that, except for consumer prices, the downward drift in the economy was continuing and might be accelerating. These economic developments would suggest a reduction in the dis count rate were it not for the situation which confronts the Treasury in refunding forthcoming maturities. A break down of the maturities of Government bonds and their ownership was presented wherein the total was expressed as $16.75 billion, of which the Federal Reserve Banks hold $5.8 billion, commercial banks $5 billion, and others $6 billion. While Treasury action is conjectural, it was pointed out that it is desirable that the Federal Reserve have an adequate sense of consideration of the problems involved. It was stated that the banking system as a whole had net free reserves and that borrowings from the local Federal Reserve Bank had declined to $22 million. These observations were supplemented by exchange of information among the Directors which confirmed the judg ment that the economy was weakening. Growing unemployment and declining personal incomes also were considered. It was pointed out that the problem of excess capacity presented a structural problem which might persist beyond 1958. The view was expressed that the Third Federal Reserve District had been particularly hard hit, that unemployment was in creasing, and that definitely there was no boom. The background problem of inflation was reviewed and it was agreed that it would not seem to be a critical factor in a present reduction of the bank rate. The relationship be and other interest rates was discussed. It tween bank rate was pointed out that the dramatic decline in rates following the reduction of Reserve Bank rates in November occurred change came as a surprise to the market. At because that hand, the market has been the present time, on the other rate and probably has al anticipating a reduction in bank discounted it to a large degree. ready on the prime rate were discussed. Possible effects as to the possible impact was considerable discussion There of the reduction on particular sectors of the economy. It state and local government that it would stimulate was felt and particularly that it might financing, possibly housing, ultimately lead to a considerable amount of refunding of outstanding issues. President Williams of the discussion, During the course Committee whether of the Discount the officer members asked
any felt that it would be inappropriate to reduce the rate. None did. Considerable sentiment was expressed for the coordinated use of the several tools at the command of the System to re tard what was characterized as a growing recession. There fore, it was felt that the primary concern should be for making some reduction in the rate effective at an early date and that there was still time for the market to adjust before any Treas ury announcement of terms on its new issues. In this connec tion, the timing of our local Board meetings was discussed. Consideration was given to the effect of postponement of action at this time on freedom and timing of action in the month of February. Judgments were evenly divided on whether the decrease in the rate should be one-quarter of one per cent or one-half of one per cent. However, after extended discussion, members of unanimously voted to recommend the smaller decrease. the Board conditions in the Philadelphia District, Mr. As to business continued to indicate a decline in Williams said that available data running below a year ago. New Department store sales were activity. rising as factory em and unemployment was sales were slow, automobile had been a sharp drop in earning continued to slide. There ployment banks since the close weekly reporting member and deposits at assets below a year ago. was considerably Member bank borrowing of 1957. his view the business to say that in went on Mr. Williams pointed toward District and nationally both in the Philadelphia picture in the discount The recent reduction monetary policy. a somewhat easier in this direc was one step Reserve Banks of the Federal rate by several the next three policy in for open market targets tion. Appropriate member bank million, of $100-$200 be free reserves seem to weeks would 2-1/2 per rate of around and a bill $350-$500 million, borrowing of
cent or less. Mr. Williams felt that no change was required in the Committee's directive at this time. After commenting on the consideration given by the Atlanta Bank's Directors to the recent decrease in the discount rate of that Bank, Mr. Bryan said that there seemed to be a genuine difference of philosophy in the views that had been expressed at this meeting. In the Sixth District, it seemed clear that the downturn in economic ac tivity was continuing. The movement was not of great magnitude but there was some evidence of acceleration. As to the different views expressed this morning, Mr. Bryan would associate himself almost entirely with those of Mr. Hayes. The System had done much in the past three weeks in the way of increasing reserve availability, Mr. Bryan said, and after reviewing the basis for this statement, he added that he did not think the rate situation further supplies of reserves. Total re would be made disorderly by 22 were 7/l0ths of 1 per cent below serves during the week of January we were confronted with a deterio of a year ago. Thus, although those banking system was now less able to sup rating economic situation, the was in contrast with it was a year ago. This port the economy than was running reserves last year when the System the policy followed at a time when the of the previous year, substantially in excess economy but no deterio difficulties in the was showing minor situation were down about 1.4 adjusted and currency ration. Demand deposits on the shift Mr. Irons' comment account of and even taking per cent
to time deposits, the increase would be around 1-1/2 per cent. On this point, Mr. Bryan said that he was confident not all of the time deposits should be included in computing the money supply although there might be a case for adding some of them in. Taking all this into consideration, Mr. Bryan said he would conclude there was about a zero change in the money supply. In the face of the discouraging economic situation and considering the efforts of the economy to grow, he believed there must be a growth in reserves. Even though no precise figure on the growth of reserves necessary to permit a sustainable growth rate in the economy can be arrived at, Mr. Bryan indicated it might be useful for the Committee to bear in mind that we would need additional reserves of about $200 million to achieve a 1 per cent growth in reserves, as measured against a year ago; and if we wanted to talk in terms of a 2 per cent growth factor, the figure would be about $400 million. Mr. Bryan reiterated his earlier statement that he concurred in the policy views expressed by Mr. Hayes. Mr. Johns said that a majority of the directors of the St. requested him at their latest meeting to say to the Louis Bank opinion the Federal Reserve System had Committee that in their system as it should have done supplied reserves to the banking not discount rates. It was their the November reductions in since that pressure should one director was most outspoken, opinion, and use of open market a greater extent through been relieved to have
operations or a reduction in reserve requirements or both. One director expressed the thought that the System had been negligent in failing to do so, which Mr. Johns said he interpreted to mean the director disagreed with the Committee's policy. Mr. Johns made it clear that in the foregoing remarks he was performing a reporting function. Mr. Johns went on to say that in going about the Eighth District during the past few weeks he frequently had been asked about the proposal to include vault cash in computing required reserves. It had been suggested that it would be most fortunate and appropriate to get Congressional authority for such action. Mr. Johns said that in making this statement he was again report ing comments of others but that he shared this view. Turning to business conditions, Mr. Johns said he was not able to give an optimistic report as to the Eighth District econony. and bankers had a pessimistic tinge. Reports Views of businessmen areas caused him to wonder whether the Eighth District from some be contributing more to the decline than he had thought. might Within ten days of the January 7 meeting of the Committee, he began at at that meeting had been whether the decisions arrived to question changed. It made no difference they needed to be correct or whether the situation or whether a misappraisal of whether there had been he came rapidly to Mr. Johns said, but situation had changed, the and that it should was called for that further easing the conclusion
not await the January 28 meeting. Therefore, when confidential advice of rate action at the Philadelphia Reserve Bank was re ceived, the opportunity was promptly and unanimously employed by the directors of the St. Louis bank to reduce the discount rate. Mr. Johns said that while he agreed with the expressions of regret that a change of this kind came up in the interim between meetings where the action taken differed substantially from an understanding reached at the preceding meeting, he would be most reluctant to feel that a changed situation should not be recognized and appro priate action taken. With respect to policy for the next two weeks, Mr. Johns associated himself completely with the statement by Mr. Hayes. He was not convinced that the time had come to insert in the Committee's directive an express reference to ease because he done could be done within the present thought what had to be directive. during the next two weeks the System Mr. Szymczak said that than through making repurchase could not take action other Account recommend that these be used available, but he would agreements Treasury financing. He now and the close of the freely between Mr. Hayes' recom could move toward not see how the Committee did free reserves over million target for mendation for a $200-$400 the next two weeks. he was making that suggestion that in Mr. Hayes commented the next couple of days. of moving within thinking
Mr. Szymczak said he agreed with the general idea of a $200 $500 million free reserve target, but he would leave the interpreta tion of the figure to the Chairman of the Open Market Committee. This was really the problem that came up when a change in the discount rate was being considered, he said, because of the consensus of views expressed around this table on January 7. In Mr. Szymczak's opinion, a change in policy of the Committee at the time the Philadelphia Bank rate was being considered would have been more effective than a change in the rate, since a reduction of 1/4 of 1 per cent did not have much effect. He would favor the $200-$500 million range but reiterated that he would leave the interpretation of the use of this range to the Chairman of the Committee so that he and the Vice Chairman and the Manager of the System Account could consult on just how far the account should go at any given time. He felt this to be a better to call a special meeting or to have a telephone procedure than meeting. also agreed with Mr. Bryan that reserves Mr. Szymczak said he market. A change in reserve requirements had to be supplied to the and it would be neces that could even be considered was not anything on open market operations. System Account to concentrate sary for the way we might be was out of the as the Treasury financing As soon rate. Mr. Szymczak in the discount with another reduction faced agree with his this Committee would the consensus of said he hoped
suggestion that leeway on reserves on the positive side be left to the Chairman of the Committee in consultation with the Vice Chairman. Mr. Balderston inquired of Mr. Hayes whether, if it were decided to act to put reserves into the market within the next few days, that would be known throughout the market in time for the market to adjust to the Treasury's financing announcement. Mr. Hayes said that he thought it would, since it would be indicated by the weekly report as of the close tomorrow and would become public information before the books were opened. Mr. Rouse said that there had been an acceleration in the date of the Treasury's program so that at the moment Treasury officials were trying to make a tentative decision with the thought of reaching a final decision on their offering tomorrow. Action taken by the System Account today or tomorrow would not be in time to affect that decision. Mr. Balderston said that he had a strong desire to see the long-term bond the Treasury contemplated offering succeed. It him that the only appropriate procedure for the Open seemed to maintain an even keel between now and its Market Committee was to in erring on one side or the next meeting. He did not believe should maintain an even keel. other--the Committee differences of there were honest Martin said that Chairman for what had He made no apology in the views expressed. opinion
happened since the January 7 meeting. He had tried at that time to line up the program in accordance with the situation as it had developed. He thought there should be no complaints against the Philadelphia Bank for its action on the discount rate. That action was taken early in relation to the Treasury financing. Whether there could have been another Open Market meeting was a System problem, the Chairman said, pointing out that it was difficult to call meetings of a group as large as this on short notice. Turning to operations, Chairman Martin said that unless the Committee wished to abandon the policy it had been pursuing for several years, it would have to face up to the fact that it should not be supplying additional reserves to the market during a period but should be trying to maintain an even keel. of a Treasury financing principle, it would find itself in If it started tampering with that difficulty. the next meeting of the Committee Chairman Martin noted that while we might have additional be held on February 11 and, would Treasury would be it likely the that time, he thought information at there was a Thus, although market shortly thereafter. going to the wished to change unless the Committee of opinion today, difference been used for a number which had operating procedures the present will make an fact that the Treasury accept the of years it should day, that the or the next refunding tomorrow of its announcement
books will be open on February 3, 4, and 5, and that payment will be made the following week. Under these circumstances, the Committee should not be in the market unduly during that period. The Chairman stated that he would like to have comments on this point because he believed it basic to the approach that had been taken by the Open Market Committee during the last few years, and he would like to know whether there was any disagreement with this view. None of the members of the Committee commented on or indicated disagreement with the statement by the Chairman. He then said that if it was the consensus that this was the procedure to be followed, it would also seem to him wiser not to change the directive at this time. That was the thing that had gotten us into difficulty last he said, when the directive had been changed and we knew that November, would be published and that a change in the wording would it ultimately a change in the Committee's policy. Therefore, un be interpreted as doing so, Chairman Martin said there was some drastic reason for less should be no change in the directive at it seemed to him that there of the variety of views expressed However, in the light this meeting. it would seem appropriate to discuss the wording of around the table at the meeting on February 11. the directive the Committee could not raised the question whether Mr. Hayes reserves into the market today. do a little to put additional discussion that this was the same Martin said that Chairman for his comments. upon Mr. Rouse and he called we had had previously,
Mr. Rouse said that the Treasury's decision on the financing would have been made in the light of the current situation and he did not think that action today could influence that decision. As to repurchase agreements, Mr, Rouse said that he assumed it was generally understood that their use would add to free reserves. The figures that would be published as of tomorrow could be expected to show around $200 million of free reserves. If the Treasury's announce ment was made on Thursday or Friday, the Management of the Account might well be asked for repurchase money. On the other hand, Federal funds today were selling at 2-1/4 per cent and if they turned out to be available at that rate in volume, the System might not be called on for repurchase agreements in any volume. Chairman Martin said he would not anticipate that there should for making repurchase agree be any change in the normal procedure directive and with the consonant with the present ments available, level of reserves during the thought of keeping about the present The period of this financing was period of the Treasury financing. now here. was that repurchase said that his understanding Mr. Robertson meeting needs that the purpose of be used only for agreements would of free re of making a figure not for the purpose might arise and each made com and Allen Szymczak, Shepardson, serves, and Messrs. should be in repurchase agreements that use of to the effect ments making a particular purpose of not for the manner but the usual reserve position.
In response to a question by Chairman Martin, Mr. Riefler commented that if this turned out to be a huge financing by the Treasury, it might well come about that the facilities for financ ing dealers would be deficient and would require making repurchase agreements available. If this should happen the Committee should recognize that free reserves might be larger than intended. Chairman Martin said he thought it was understood by everybody that it was not contemplated that there would be any change in the normal approach to a Treasury financing and that operations would be in accordance with the procedures the Committee had been following for the past several years. He suggested that it also be understood that the System Account would do its best to maintain an even keel during the Treasury financing. He thought all were in agreement on those points, in which event it was clear that there should be no today. He inquired whether anyone questioned change in the directive that procedure. he would like to report that the directors Mr. Hayes said that their feeling that the York Bank wished him to express of the New open market operations or done enough in the way of System had not Mr. Hayes noted that he was simply otherwise. In making this comment, reporting the directors' views. welcomed and should said that the Committee Chairman Martin views of the directors through all times the benefit of the have at to protect these also wished However, the Committee out the System.
directors against a situation such as that which developed recently at the Bank of England. We should all realize that this could be a very real problem. We should never get into the record that the directors of a Reserve Bank were recommend ing a change in reserve requirements since many directors are also bankers. Chairman Martin said that this had come up on the Hill a number of times and that it raised a very real ques tion. He was defending all of the Committee members and the Presidents against the charge of being dominated by the bankers. The Committee wished to have the views and judgments of each of the Reserve Bank Presidents, but these should be their own. Mr. Hayes said that he agreed that we should not indicate to the directors in any way knowledge that the Committee members or the Presidents might have of the likelihood of any change in System policy. However, he said he had thought that the directors should be allowed to cover all phases of Federal Reserve policy in their discussion and in making suggestions. that each President should handle Chairman Martin responded fit. The Presidents should feel this problem in the way he saw of System policy in any way they free to discuss every aspect us should protect the di point was that each of wished. His where their motives could from initiating recommendations rectors reserve requirements for determining be questioned. Responsibility
was specifically placed in the hands of the Board of Governors, according to statements made to him by several Senators, because the Congress did not want that authority in the hands of the boards of directors of the Federal Reserve Banks. He reiterated the views he had expressed before that he thought these Open Market meetings should be just as free as possible and we should not hesitate to discuss any of the System problems whether they be margin requirements, or reserve requirements, or something else. At the same time all of us should remember that changes in the System might come about in the next three or four years and that director recommendations about reserve requirements might be the sort of thing that the Congress would criticize Committee was careful to see that the perspective in unless the were reported was correct. He did not intend by this which views to preclude any director from giving the Committee his views. He the Committee members recognize that was simply trying to have there was a problem in this area. if there were no further com Chairman Martin then stated that form with the renewed in its present directive would be ments the further at the meeting to that it would be discussed understanding the System Account operations for 11 and that held on February be of the fore along the lines be carried on meantime would in the going discussion.
Thereupon, upon motion duly made and seconded, the Committee voted unani mously to direct the Federal Reserve Bank of New York until otherwise di rected by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic condi tions 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 aggre gate 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 indebted ness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; direct from the Treasury for the (2) To purchase account of the Federal Reserve Bank of New York (with in cases where it seems desirable, to issue discretion, one or more Federal Reserve Banks) participations to of special short-term certificates of such amounts necessary from time to time for indebtedness as may be of the Treasury; provided the temporary accommodation certificates held at any that the total amount of such Reserve Banks shall not exceed one time by the Federal in the aggregate $500 million; from the System to the Treasury (3) To sell direct such amounts of Treasury Account for gold certificates within one year as may be necessary securities maturing time to time for the accommodation of the Treasury; from of such securities so that the total amount provided $500 million face exceed in the aggregate sold shall not be made as nearly as may and such sales shall amount, quoted in the at the prices currently be practicable open market.
Chairman Martin stated that discussion of the New York Clearing House Report dated October 22, 1957, would be carried over until the next meeting of the Committee to be held on Tuesday, February 11, 1958. Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions