February 11, 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, February 11, 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, Alter nate Members of the Federal Open Market Com mittee 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, Economist Messrs. Atkinson, Bopp, Marget, Mitchell, Tow, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Carpenter, Secretary, Board of Governors Mr. Koch, Associate Adviser, Division of Re search and Statistics, Board of Governors Mr. Miller, Chief, Government Finance Section, and Statistics, Board Division of Research of Governors Messrs. Gaines and Stone, Managers, Securities Reserve Bank of New York Department, Federal Messrs. Roosa, Daane, Abbott, Strothman, and Vice Presidents of the Federal Wheeler, of New York, Richmond, St. Reserve Banks Louis, Minneapolis, and San Francisco,
respectively; Mr. Balles, Assistant Vice President, Federal Reserve Bank of Cleveland; Mr. Coldwell, Director of Research, Federal Reserve Bank of Dallas; and Mr. Willis, Economic Ad viser, Federal Reserve Bank of Boston Before this meeting there had been distributed to the mem bers of the Committee a report prepared at the Federal Reserve Bank of New York covering open market operations during the period January 28 through February 5, 1958, and a supplementary report covering commitments executed February 6 through February 10, 1958. Copies of both reports have been placed in the files of the Federal Open Market Committee. Reporting on the management of the System Open Market Account since the last meeting, Mr. Rouse said that it had been possible to maintain an even keel in the market during the period of the Treasury financing with minimum open market activity. The New York banks have been in a relatively tight reserve position for the past few days, principally as a result of loans to dealers to carry maturing securi ties that have been exchanged for the new issues. The new issues will be delivered on February 14, and the New York situation should unwind itself at that time. the Treasury refunding was successful, Mr. Rouse On the whole, per cent certificates, the most important said. Attrition on the 3-3/8 Special circumstances with exchange was only 5 per cent. issue in the
respect to interest adjustments and other factors led to somewhat larger attrition in the case of other "rights." Both the market and the Treasury were well pleased at the outcome of the opera tion. Mr. Rouse said he was surprised that subscriptions for the long-term 3-1/2 per cent bonds had not been larger; he had expected an amount above $2 billion rather than the $1.7 billion subscribed for. There was some speculation in this issue at first, but that soon quieted down. Trading since the books closed reflects good investor interest. The problems confronting open market operations in the near future are related to Treasury operations. Mr. Rouse reported that the Treasury had just sold $100 million of gold and had transferred the proceeds into its balances to avoid reducing these balances be working level, and another $100 million might be trans low a minimum balance from the sale of gold today in order to meet ferred into the problem, related to the Treasury financing, expenditures. Another to investor of the $500-$700 million of new will be the distribution However, the dealers had been success issues taken by the dealers. for the refunding, so their positions in preparation ful in reducing large even with the positions are not dangerously that their total reported that the Finally, Mr. Rouse of the new issues. addition again to raise new to be in the market will soon have Treasury another $1 bil the Treasury will need It now appears that money. Since the earliest the middle of March. to see it through lion
action by the Senate that can be expected on the increase in the debt ceiling is February 19, it might be assumed that the Treasury will not be in the market to raise this additional cash before late February or early March. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period January 28 through February 10, 1958, were approved, ratified, and confirmed. At Chairman Martin's request, Mr. Young made a statement on the economic situation supplementary to the staff memorandum that had been distributed under date of February 7, 1958. Mr. Young's comments were substantially as followss Up to this point, recession in general activity has continued: (1) The index of industrial production for January is given a preliminary estimate of 133, down 3 index December. January declines were again gen points from eral, but greatest in durable goods and durable goods related industries. December showed a new orders for (2) Manufacturers and were down 7-1/2 per per cent drop from November The drop in new orders for durables cent for the year. ran a fifth below a especially sharp. Such orders was year ago. stocks rose some lines where Except for retail (3) continued in December. business inventory liquidation what, took place at wholesale levels, but Some liquidation in durable goods was mainly concentrated liquidation again failed these lines, liquidation manufacturing. In so that the stock decline in sales keep pace with the to level in a decade. further to the highest sales ratio rose at close in January continued activity (I) Construction private activity, except with declines in to record levels by increases in public construction, public utilities, offset especially highways.
(5) The length of the workweek in January declined to 38.7 hours, the lowest level of the postwar period, and unemployment from mid-December to mid-January rose by 1.1 million to 4.5 million, or close to the postwar peak of 4.7 million in February 1950. Further declines in employ ment were general, but especially marked in durable goods lines. The rise in unemployment among younger men has been very sharp, and for women only moderate. Initial unemploy ment claims, by the latest reports, are still at very high levels. Insured unemployment is at a record level. (6) In January, deliveries of new cars were over a fifth under both December and a year ago. Dealer stocks rose 40,000 further to 822,000. Used car sales were up from December, but ran about 4 per cent under last January. Used car stocks were little changed at an eighth higher than last year. At the beginning of the year, used car prices, after adjustment for depreciation, were about 12 per cent under midsummer levels and 9 per cent under a year ago. Used car prices firmed moderately in January. (7) Total retail sales over-all for December are now estimated 2 per cent higher than in November, or double the increase estimated earlier. In January, department store sales declined about 4 per cent from December. Despite information showing lower department store sales for January and also very low January sales for new automobiles, the preliminary Bureau of the Census estimate of total retail sales for January arrives at a 1 per cent gain in retail sales over December. Commodity price levels have not yet shown downturn. (8) At wholesale, industrial prices continue about a half per cent higher than in the first half of 1957. Prices of in materials have been relatively stable since the dustrial autumn declines, with changes in individual prices off of processed and fabricated items, which setting. Prices rising in the autumn, have since been fairly were still cutbacks in selected prices of fabricated stable. A few and reports of off-list con goods have occurred recently becoming more numerous in the cessions on other goods are foods and foodstuffs have risen trade press. Prices of and are 3 per cent above a year ago. again this winter of last summer and are close to the high Livestock prices year at this time. The about a fifth higher than last expected to show little for January is consumer price index change from December. first quarter GNP per estimates of (9) Preliminary suggest a further made, and these are now being formance
decline of to 5 billion dollars, annual rate, putting total output back to the 429 billion level of the first quarter of last year. (10) December exports were down sharply after two months of stability to a level 15 per cent under last year's first quarter peak average, but imports apparently held close to levels of preceding months. While economic developments in Latin America and Asia are on the weak side, those in Europe continue to manifest steadines. In addi tion to steadiness of economic activity, there are other encouraging developments for Europe--definite signs of monetary stabilization for France and reconstitution of monetary reserves of countries under serious strain in the summer and early autumn, including Britain. At the outset, we said that up to this point recession has continued. In conclusion, on the basis of the latest economic data and also on the basis of past experience with contraction periods, we can say that recession is continuing. Downward adjustment has gained in momentum and signs of level ing out, or saucering out, are not yet at hand. That point may not be far off, however. Past recessions of moderate severity have involved declines in production averaging about the decline from August to date has been 8 per 10 per cent; cent. In the past, the phase of decline has typically been less than a year, and the pattern of decline has been at first rapid and then gradual. After five months of rapid the economy should be nearing the phase of gradual decline, cyclical patterns suggest that the upturn phase ness. Past decisively identifiable as of a when it sets in will not be be a phase lasting, at least, particular month, but will longer. We may, of course, be several months and possibly the suddenness, speed, and other characteristics surprised at once a bottom has been of revival in economic tendency established. principal financial developments Thomas next summarized the Mr. in recent weeks as follows: were liquidated in loans at city banks 1. Business A decrease of amount during January. a record-breaking $1 billion larger Christmas was nearly $1.7 billion since Last year the post-Christmas than the December increase.
decline of $1.1 billion was about $200 million larger than the pre-Christmas increase. Nearly all groups of borrowers showed decreases, with the sales finance companies showing the largest decline relative both to other groups and to previous years. 2. Bank loans on securities fluctuated widely. After increasing about $600 million in December, they declined by almost as much in January, but then increased again last week by over $500 million. These movements reflected principally loans to dealers in connection with Treasury financing operations. 3. Banks have also increased their own holdings of securities on balance since the end of November--both Govern ments and others. Following a substantial increase in December of about $1.5 billion, city banks reduced their holdings of Governments by about $500 million in the first three weeks of January, but in the past two weeks have again added to their holdings. The net gain for the past ten weeks amounts to about $1.5 billion, for total investments, com pared with a small decrease last year. 4. Total loans and investments increased more in Decem ber and have decreased less since the turn of the year than they did last year or the year before. The net result for the 10 weeks has been an increase of about $1 billion this year compared with a decrease of over $1 billion last year. On balance this year's increase is largely accounted for by holdings of securities and loans on securities at New York City banks. at banks increased seasonally in 5. Demand deposits declined seasonally in January. Including the December and February, which showed a sharp drop last year, first week in change in 10 weeks appears to have differed little the net period last year. United States from that for the same deposits have declined less this year than they Government did last year. deposits at city banks, which increased by $700 6. Time year, when higher in and January last million in December even more sharply this rates were announced, advanced terest Much of this of over $1 billion. showing a growth year, New York City banks. foreigners at in deposits of growth was have included by the Treasury Financing operations of $100 mil smoothly by an increase some new money obtained at an end--and the large weekly bill issue--now lion in each The latter, as operation now in process. scale refunding
pointed out, has involved a large amount of switching of issues, with dealers and banks increasing their positions and with bank credit brought in to finance dealers. Attrition in the maturing issues was normal for the February maturity, but fairly large for April maturities, particularly the special bill. This indicated the diffi culty of obtaining maximum exchanges on issues considerably prior to maturity at reduced interest rates. Savings bond redemptions were smaller in January than they have been. Treasury cash balances, however, have been kept at lower levels than in many years. The refunding operation will result in removing over $5 billion of short-term issues and increasing the medium and long-term issues outstanding by a similar amount. About $.5 billion more of short-term issues will be retired in the next two months, but the Treasury will also have to obtain about $4 billion of additional cash through borrowing in the same period. 8. New security issues by State and local governments are proceeding at record-breaking volume. Some issues deferred last year are now being brought out. Corporate issues have been about 25 per cent less than in the same period last year. Total capital issues in January and February are about a tenth less than last year's record figures. Interest in home mortgages is reviving rapidly and interest rates on mortgages are declining. 9. Short-term interest rates have declined to the lowest levels since early 1955, while long-term rates have been somewhat firmer in the past two or three weeks. The rate structure has been affected by the shift in maturities of outstanding debt resulting from the Treasury refunding Some recent purchases of the new securities are offering. being carried by dealers and will need to be paid for by buyers next week. Consequently an appreciable volume the remain to be made in the market before the of adjustments can be viewed as reasonably settled. interest rate structure bill rates may not remain at their It is possible that or other rates will decline further. present low levels, Reserves to cover credit demands have been abundantly or System operations. either through market factors supplied member bank required reserves Since the last week of November million, whereas some decline have increased by about $100 grounds. At the same been expected on seasonal might have drop in float than was expected. time there has been a larger supplied, on the other hand, by a larger Reserves have been return and recently by seasonal post-Christmas currency than
a temporary reduction in Treasury balances at the Reserve Banks. Additions to System holdings of Government securi ties were much larger in December than usual, while the January decline was smaller than usual with a small net increase for the 10 weeks, whereas last year there was a net decrease of nearly $800 million. Some of last year's reduction was to offset reserve additions resulting from the $300 million sale of gold to the Treasury by the I.M.F. Member banks' net reserve positions have shifted from net borrowed reserves of over $300 million in the last week of November to free reserves of over $200 million in the past two weeks, whereas last year net borrowed reserves increased. 11. Projections for the next few weeks, assuming a normal seasonal pattern for deposits and currency but a further reduction in Treasury balances and the use of some of its free gold, indicate that free reserves may fluctuate around $300 million during February and increase sharply, though temporarily, to about $700 million in the first half of March, unless offset by System operations. A Treasury financing operation to raise new cash and build up its balances at any time during this period would lower these estimates of free reserve averages. Mr. Hayes then made the following statement of his views with respect to the business outlook and credit policy: in the last two weeks to change our Nothing has happened estimate of the business outlook. There is, as yet, no sign that the recession is nearing an end, and as I stated at the give major attention in de last meeting, we should probably to the unfavorable realities of the present termining policy we may be again confronted, in the situation, granted that with a resumption of the inflationary not too distant future, the last two or three years. problems faced in that the process of inventory There are no indications or that capital expenditures has run its course liquidation level. On the en to stabilize at the present are about has been sufficiently well side, consumer spending couraging we may be able to avoid the maintained to suggest that a cumulative recession. effect of spiraling appears to the price situation often the case, As is movement of generally sideways confused. The be decidedly to give ade indexes may fail consumer price wholesale and and markdowns all of the discounts to quate recognition
actually available to consumers as well as to purchasers of producers' goods. On the other hand, if the price indices are taken at face value, we find disturbing evidence of price rigidity at a time when decreasing business activity should tend to produce some price declines. In the area of bank credit, the last few weeks have witnessed a very rapid drop in business loans, while holdings of investments showed little change, in con trast with the sizeable growth in investment holdings during preceding weeks. The Treasury's successful financ ing program, involving some curtailment of the available supply of short-term investments, contributed to the very sharp reduction in short-term market interest rates, while at the same time subscriptions for about $1.7 bil lion of the new long-term 3 1/2s will mean a significant reduction in the supply of long-term funds available in the capital markets. It is still uncertain whether, and to what extent, the Treasury will attempt to raise new cash during the next few weeks. Until this prospect is clarified, possibly through action next week by the Senate on the debt ceiling, we will not know how long it will be necessary to maintain the "even keel" policy adopted at the last meeting. Turning to policy, with reference first to the dis count rate, I do not think we need be concerned over the wide disparity which now exists between the discount rate and the rates on Treasury bills and other market instru ments. With borrowing by member banks at a low figure, in keeping with our current policies, the discount rate is of limited effect. Even though in general it is desirable to have the rate maintain reasonably close touch with the realities of the market, there is no need for any from week to week, especially when the close correlation banks are not making active use of the discount window. Quite apart from the possibility of our having to keep keel" policy, I would be inclined to leave the our "even discount rate where it is for the time being. operations, I believe that economic As for open market conditions call for continuation of at least the same degree during the past two weeks, during which of ease existing have been around the $200 million period net free reserves mind that we should avoid It seems well to bear in level. measure of ease or free reserves as a over-emphasis of of this kind of measure tightness, since the reliability a period like the present than during may be even less in
severe credit restraint. During the past two weeks, at least until the last few days, there have been ample funds available in the money market, and Federal funds have held below the discount rate much of the time. Furthermore, commercial banks in New York and other parts of the country have added to their holdings of short-term Government secu rities since credit policy eased, indicating that they have had more than enough funds to take care of customer loan demand--and any additional funds we might supply might result mainly in further buying of short-term Governments by the commercial banks, rather than in a materially higher level of free reserves. Parenthetically, I might point out that improvements in bank liquidity through the accumulation of short-term Government holdings are part of the pre conditioning which the banks need, if they are to be actively seeking new business credits--but we should not wish to push this "liquefaction" too far too fast. The lessons that banks and others have learned in the past few years with respect to keeping their funds very fully employed may have created a situation in which smaller free reserve figures can achieve a given degree of real than would have been possible in earlier years. credit ease other hand, we should also not overlook the possi On the that a steady figure for net free reserves might bility a steady shrinkage of bank credit under certain well conceal conditions. to the desirability of our giving All of this points at the last meeting, to the more attention, as I suggested the money supply as important of total reserves and trends policy. While recognizing the pit criteria for monetary mechanical way, it does these criteria in any falls in using total member bank reserves, me encouraging to note that seem to level during most of at or below last year's which were year during much of small gains over last January, have shown this trend would I would hope that past two-week period. the over last year's widening excess with a gradually continue, figures. it may be unneces suggest that current projections The operations over way of open market do much in the sary to to some extent may have to offset few weeks. We the next in the week ending February bulge in reserves expected the with Re Treasury balances of very low 19th, as a result it is in float. However, and an increase serve Banks factors will be working as well that market probably just of bills in sufficient ease. The sale direction of in the
volume to retain the present $200 million level of free reserves might, at least temporarily, affect the distribution of reserves and create unwanted pressures in the central money market. My recommenda tion would be, therefore, that we view $200 million of free reserves as a rough minimum figure during the next few weeks, but that the Manager be given leeway to offset only as much of the expected reserve bulge as is necessary to avoid significantly easier money market conditions, while stopping short of a volume of selling that might tighten the market. Movements in New York reserve positions and in short-term market rates of interest would also be used by the Manager as important guides in maintaining a steadily easy tone in the money market. For the time being, I think the directive may be left unchanged, although at some point I would hope that we might give official recognition to a wish to encourage growth in the money supply as an offset to economic recession. Mr. Johns said that Eighth District banks seemed to be well supplied with reserves. Except at the Memphis Branch, where an thrown upon the banks demands for loans unusual cotton situation had time of year, there was almost no which are not customary at this Louis Bark. For the first time in a con discounting at the St. mood to welcome applications for siderable period banks are in a seeking loans. If it were not and soon may aggressively be loans Committee adopted two weeks ago for the even keel policy which the Mr. Johns said that believed should be continued, and which he more generous in supplying reserves, perhaps he would be somewhat to consider another the Bank should begin might think that and he the even keel However, he assumed in discount rate. reduction at the present time, such action inappropriate policy would make
and he thus favored continuing about the present position. Mr. Bryan said that he had not receded from the view that, while recent Committee policy had been in the right direction, it had been inadequate. From mid-November to February 5 the net change in total reserves in the banking system amounted to only $34 million on a daily average basis. In Mr. Bryan's opinion, this had been seriously inadequate in a period of recession. Mr. Williams reported that recession continued in the Philadelphia District. Manufacturing employment continued to decline and there was a substantial labor surplus. Department store sales were holding up well, but automobile registrations were off in January following an increase in December as compared with a year earlier. Construction awards in December were about 12 per cent below a year ago. Business loans were down 4 per cent from last year, when they were relatively low. Member bank borrow ings presently were only a fifth of the year-ago level. Mr. Williams said that recession at the national level, suggested consideration of a both in magnitude and pervasiveness, discount rate in the near future if this further change in the should continue. At present, his view was that free movement at about the existing level. reserves should be continued businessman had that a Fourth District Mr. Fulton said situation with the comment that it characterized the present
seemed to be stabilizing on a low plateau. Unemployment appeared to be leveling off. Claims for benefits continued to rise but at a lesser rate than for some time. Liquidation of inventories con tinued. Steel operations in the Pittsburgh area were up slightly during the past week but in the Cleveland section had declined to cent of capacity reflecting lowered operations at pipe mills 34 per which had suffered severe cancellations for steel for gas pipe lines. Heavy construction was holding up fairly well, but residential con struction had declined largely for seasonal reasons. Although department store sales were down from the strong December level, sales during the past four weeks had approximated last year's performance. Business loans at banks had been reduced 50 per cent more this year than last. Banks were in an easier reserve position loans again. Mr. Fulton said that in view and were looking for term the decline, he felt the discount rate should of the leveling off of and that the reserve position of banks should be stay where it is has been during the past two weeks. The maintained about where it should be given latitude to meet any Manager of the System Account situation that might arise. Mr. Young's report indicated clearly Mr. Shepardson said that recession yet. He the bottom of the the economy had not reached that should play in bringing to what part the System was concerned as at the preceding meeting upturn. Recalling the comments about an
regarding the lack of growth in the money supply and Mr. Irons' suggestion that in 1957 the shift from demand to time deposits affected the statistics, Mr. Shepardson said that the change in velocity of money over the past year also was of significance. At his request, the staff had prepared some figures which indicated that, while demand deposits adjusted had risen by only .5 per cent in 1957, the product of deposits times turnover had risen consist ently over the past several years. In 1957, this increase amounted to 7 per cent compared to a range of 6.4 per cent to 8.6 per cent in the previous five years. Mr. Shepardson said that it did not seem to him in light of these figures that the slowdown in growth of demand deposits had necessarily resulted in an inadequate growth in the effective money supply essential to supporting normal growth in the economy. He wondered what would be accomplished by a f urther relaxation of credit at this time, adding that in his view there was considerable doubt that such a move would be desirable in terms objectives of growth and stability. In elaborating of the long-run Mr. Shepardson made a statememt substantially as on this comment, follows little evidence of inability to obtain First, there is of business. On the con credit to meet legitimate needs evidence that banks and other trary, there is increasing are in a position to meet such needs lending institutions and are anxious to do so. to identify desirable types Second, it is difficult might be stimulated by increased of expenditure which
credit availability or lower credit cost at this juncture. Encouragement by easier credit for further business plant and equipment expenditure at this time, even if it were possible, would be highly questionable in the light of the current relationship between capacity and final takings. Furthermore, this is one of the areas where costs have increased at a comparatively rapid rate and are still at high levels. For example, wholesale prices of machinery and motive products, as measured by the B.L.S. index are still at about 150 per cent of the 1947-9 average--an all time high. While there may be isolated instances of needed State or local expenditure programs that are still being post poned in the hope of more favorable financing, I am doubtful that further credit ease at this juncture would bring forth any substantial increase in this type of expenditure. I see no reason to suppose that further easing of credit conditions generally would bring about a constructive increase in the availability of credit to consumers for durable goods purchases and thus stimulate consumer expendi tures in this area. Current evidence indicates that such credit is readily available on as liberal terms as prudent lending policy would permit. The one area where further credit ease might provide stimulus is in construction--especially in the an important residential sector. Activity here is already being stimu lated by an increased availability of funds from savings insurance companies. Further easing of the banks and situation would undoubtedly increase the general credit and of commercial banks and interest of these institutions, in both completed mortgages savings and loan associations, to take mortgages generated in the coming and commitments building season. While building activity arising from and lowered credit cost might increased credit availability months ahead, I am impressed an added cushion in the provide that over-building, at this juncture, by the possibility priced beyond the excess supply of houses might result in an of the bulk of potential buyers. means their all time highs and, costs are still near Building out from time to time before as the Chairman has pointed have risen more rapidly in Congressional committees, they In the same period than most other costs. the postwar period to the and expectations geared their operations builders have and a large backlog of high rate of family formation very availability of mortgage this climate, the ready demand. In
funds at low rates--perhaps even low enough to activate a last spurt in the VA program--could encourage builders to start more houses than could be sold at the high prices present costs dictate. All this seems to me to argue strongly in favor of a cautious and moderate policy so far as the Federal Reserve is concerned. This is certainly not a time when the bank ing system should be squeezed for liquidity and I want it to be perfectly clear that I am not urging any reversal of the present policy, which has permitted a considerable increase in liquidity, both at banks and other financial institutions. I also recognize that to some extent the current ease in credit markets may be due to seasonal in fluences and that some action on the part of the Manage ment of the Account may be necessary to maintain the present degree of ease in the weeks ahead. I have no objection to such action, but I do not feel that addi tional ease--beyond that which has prevailed in the last two weeks--is necessary or desirable at this time. Mr. Shepardson said that he would not favor a change in the rate at the present time and that, with the usual leeway discount being given to the Manager of the System Account, he would suggest about the present level of reserves that we should aim at holding the next three weeks. during view we should retain the Robertson stated that in his Mr. the immediate future at least, in our credit policy for status quo be in accord with the majority in his opinion this would and since the record the follow to insert in the privilege view, he requested together with his conclusion, to substantiate ing comments prepared the majority view in the event re-enter the discussion the right to having been granted, therewith. This privilege was not in accordance is set forth below: his statement
Let me say at the outset that my remarks today should not be interpreted as a criticism of past policy or action, even though I have not agreed with all recent aspects of such policy and action as it has developed. Rather, my remarks today assume our current position and are addressed to the most appropriate next steps forward. To state my conclusion before my arguments, it is for the retention of the status quo in our credit policy, for the immediate future at least, rather than for an intensifi cation of our already rapid easing actions. I reach this conclusion for the following reasons: In the first place, we have already achieved, or are in the process of achieving, through actions already taken, the lion's share of the contribution that credit easing action can make in a recession. This has been clearly indicated by such developments as the very dramatic de clines in market interest rates, the greater availability of all types of capital as well as credit, the re-emergence of many previously postponed security issues of business corporations and State and local governments, and the reduction in mortgage discount rates. Moreover, it is generally recognized that credit easing actions take time before they achieve their full effective ness, that is, before they achieve their maximum impact on spending and investing decisions. Why not give our previous time to take effect before rushing into actions a little further rapidly easing actions? regarding further rapidly easing actions stem My fears action not only would not add from a feeling that such recovery, but also that it materially further in assisting to credit maladjustments and over might very well lead the development of a that would actually delay commitments sustainable recovery. Unduly sharp and rapid healthy and and capital values produce changes in interest rates rather than settle developments that disturb speculative than promote economic and distort rather financial markets now could so to my mind, overeasing In fact, development. that it would financial decisions contribute to misguided having to go through the likelihood of the economy enhance and structural of severe liquidation a protracted period before it recovers. realignment degree of credit of the existing My plea for retention view that our also on the firm ease is based and monetary with us. I still very much problem is longer-run inflation the price ad we are not getting concerned that am greatly a healthy recovery so necessary before justments that are
can set in. And I feel very strongly that the economic situation this spring should be such as to insure sound and sustainable wage contracts rather than one that en courages business management to accede to wage demands that are in excess of gains in productivity. It seems to me that we would all do well to examine carefully the economic road that England is taking today. She seems to be facing her all important wage problems and the longer-run adjustment of demands to resources in a much more direct and potentially effective manner than we are. To conclude, I would strongly urge that we continue to maintain a free reserve position of banks at approxi mately the recent level and that no further action on discount rates be taken. Although discount rates are for the moment out of line with Treasury bill and other short term market rates of interest, I regret the very rapid decline in such short-term market rates that has occurred recently and that we have facilitated by our open market operations. If we maintain our present credit posture, however, I feel that rates will re-attain an alignment which to my mind would be more consistent with our aim of contributing to monetary and credit developments in a way that will maximize the possibility of achieving a firm and vigorous recovery once needed readjustments have occurred. There are no important basic reasons why the discount rate should be moved immediately in line with existing lower market rates. For the time being the 2-3/4 per cent harm. As long as money seems to be rate will do no great relatively easy in the market, as it has been in recent reserves available to the banking system weeks, with free funds generally quoted at much below 2-3/4 per and Federal the 2-3/ per cent discount rate is not an effective cent, the market and the banking community. In rate in terms of the discount rate generally the 1953-54 easy money period, Treasury bill rate and the spread between lagged behind the was much wider than during the following these two rates The availability of funds during tighter money period. consideration than the periods is a more important such an additional dis key rate. Furthermore, level of this moment might cause unwarranted count rate drop at the condition of the nation. concern over the economic are reasons why serious the other hand, there On the discount rate be given to moving consideration should
down in the not too distant future so as to be more in line with market rates. If the economy turnsaround and begins to boom again later in the present year, there is something to be said for having the discount rate at that time in close proximity with existing market rates so that upward adjustments could be made not only rapidly but, if necessary, in quite large jumps so as to be effective in resisting inflationary pressures. Mr. Mills said that between now and the next meeting of the Committee, development of Systtm policy would have to be shaped against two almost conflicting factors. On the one hand, there was evidence of accelerating momentum to the deflationary tendencies in evidence, while on the other hand it is known from experience that the first quarter of each year is always a period of low economic vitality and obscure visibility. There is a possibility that as spring opens up economic activity will revive. As of today, how ever, the acceleration of deflationary tendencies is the overriding problem and it is necessary to shape System policy against that background. To do so requires the Committee to look on public attitude and psychology as an economic factor rather than as a influence and to be alert to the fact that in the general outside has lagged in providing reserves and thereby public view, the System that derives from making addi in giving the kind of encouragement banking system. On available to the commercial tional reserves his thought that the said it would be reasoning, Mr. Mills that themselves over factors to assert should allow natural Committee free reserves the supply of positive weeks and permit the next three
to range around the $300 million level. However, before moving to that position it would be advisable to wait until after Feb ruary l4 or 15 to see if the windup of the Treasury's financing operation had resulted in a marked easing of the reserve positions of central reserve city banks and an easy tone in the money market. If so, a further increase in the supply of positive free reserves could be deferred. Mr. Mills said he shared the concern suggested in Mr. Hayes' comments that a too free supply of reserves, although initially de sirable to encourage the commercial banks to strengthen their liquidity positions, could ultimately force a reduction in the level of interest rates to a point that would cause the banks to extend the maturities of their security holdings in order to main tain their earnings, and in doing so to impair rather than improve Problems from such a development could arise at their liquidity. as the System found it necessary to reverse its such later date and the comercial banking system was then caught credit policy of its holdings of U. S. Govern with a depreciation in the value same time that a deterioration other securities at the ment and portion of its loans had left a substantial in economic conditions those potential frozen position. Notwithstanding in a relatively situa that the psychological said, he felt Mr. Mills difficulties, policy formu in the Committee's taken into account tion should be should be free reserves level of positive and that the lation
permitted to rise above the $200 million figure. Mr. Leach said there was little additional information on economic conditions in the Fifth District since the preceding meeting, but the most recent data on unemployment, employment, and production indicated no diminution in the downward tread of economic activity. Mr. Leach went on to say that he felt very stronglyperhaps as strongly as one can feel about such things--that inflation is our long-run problem and that we may be fighting it again in the not too distant future. However, inflation is not our immediate problem. There has been a definite recessionary movement in the economy for some time and the end is not in sight. Under a flexible monetary policy, Mr. Leach said, the Committee's posture should be consistent with the state of the economy. To that reserve availability should be increased him, this meant soon as this could be accomplished without somewhat further as Such ease as we had in with the Treasury financing. interfering million and the from $600 to $800 free reserves ranged 1954 when cent would be far more around 3/ of 1 per bill rate fluctuated for and would create grave the current situation called ease than in terms of time, he was thinking future. At this risks for the reserves in the $300-$350 consistent with free a degree of ease such a range under existing range. To advance beyond million
circumstances might merely drive down short-term interest rates without real benefit to the economy. The Committee now had an even keel policy during Treasury financings, and this policy would prevent the Committee from adding to reserves for the time being. However, he wished that free reserves were a little higher than at present, and in carrying on operations he would be as easy as we could be without upsetting the principle of an even keel during the Treasury financing. Any action should be in the form of an easing of reserve availability rather than use of the discount rate at this time. Mr. Leedy said that there had been no change of significance in the Tenth District since the preceding meeting. On the assumption that operations during the next three weeks should not differ much from what they had been during the past few weeks, Mr. Leedy said he would favor letting the natural forces that were operating to ease reserve positions have fairly full play with free reserves in the $200-$300 million range. He would watch yields on short-term obligations feeling that largely they should be permitted to find their own adjustment. He would not favor a program of providing much additional ease if it would indicate that the Committee might be contributing to a substantial further lowering of yields on it could be done in However, as soon as short-term obligations. he would permit the natural light of the Treasury's operations, the moving toward the upper end of the $200- forces to have free play
$300 million free reserve range. He would make no change in the discount rate for the present. Mr. Allen said that business in the Seventh District had declined further in the past few weeks although the pace of decline may have slackened in some sectors. The level of unemployment con tinued below the U. S. average in all Seventh District States excepting Michigan. District department store sales after showing up relatively well in preceding weeks slumped sharply in the week ended January 25. Although steel production continued at a depressed level, Mr. Allen said that some observers felt that the firming of the price for steel-making scrap might indicate that the bottom had been reached in steel output. However, he did not had reached the point where feel sure that inventory liquidation be required to maintain the current increased production would soon rate of steel consumption. Mr. Allen reported that sales With respect to automobiles, during the last ten days of January. did not show the usual pick-up in the first 10 days of January was 14, 57, Average daily sales rate during the last 10 days 14, 7 , during the second 10 days l4,653, or 22 per cent below January the month as a whole l4,661 and for sales and it looked well ahead of Production continued of 1957. schedule of from the to be a cutback would have as though there dealers' hands of new cars in a week. Inventories 112,000 cars a month with 726,000 822,000 compared 31 totaled on January
earlier. Dividing the inventories on January 31 by average daily sales during January indicated a 56-day supply of cars in dealers' hands. Declines in loans at Seventh District banks in recent weeks more than offset deposit declines, Mr. Allen said, even to the point of permitting some increase in security holdings. None of the large district banks had been using the discount window and only one was now a regular buyer of Federal funds. The others were regular sellers. The situation suggested continued ready availability of bank reserves, Mr. Allen said, and this left him where he was two weeks ago when he expressed the view that we should not move further in the direction of ease unless and until we felt that the economy was in a downward spiral which would continue for some time. He in such a spiral and would prefer that did not feel that we were tread water to judge better the impact of the current the Committee further moves in that direction. He degree of ease before making among other reasons because that position defensible considered which had occurred over decline in market rates of the substantial was that for the next period. Thus, his conclusion such a short where we now are. weeks we should stay three in employment and produc said that a mild slide Mr. Deming had not been an but that there in the Ninth District tion continued in the However, crosscurrents of the downturn. acceleration
national economic picture bothered him more than usual. With prices staying where they were and with retail trade holding at a high level, he did not have much concern about a progressive downward spiral. On the other hand, he found it more difficult to be complacent about 1-1/2 million of unemployed. Mr. Deming went on to say that it seemed to him the banks had been using the funds generously supplied in the market to reach for a degree of liquidity that he had not realized they would reach for. He had underestimated how tight they felt last fall. It ap peared that they had been using the reserves coming to them to provide more liquidity and that the reserves had not made them much to new loans. They seemed comfortable facing the more responsive that had taken place thus far, and there was no dispo loan decline look for more real estate loans or more sition on their part to This indicated that while the banks had consumer credit loans. amount had not been adequate to received additional reserves the the Committee would not Perhaps in the long run loosen loaning. he was convinced that but in the short run wish to increase ease, been. He found himself easier than it had it should be somewhat Bryan, and Mills of Messrs. Hayes, closer to the positions somewhat although he recognized expressed by others, than to the positions However, he greater ease at present. the danger of providing level of free reserves well to let the that it might be would think by not trying to as Mr. Mills suggested somewhat, perhaps advance
offset the natural forces. Free reserves of $300 million plus would not bother him at all. Mr. Mangels said that no important statistics had become available since the preceding meeting to change the picture given at that time. He had then reported that Twelfth District employ ment appeared to have shown only the seasonal changes in December, but final data becoming available indicated a slight decline during that month with total employment at the end of December 3/l0ths of 1 per cent lower than a year earlier. It appeared that most of the worst of the adjustments in the aircraft industry had now been made. This also seemed to be true in the lumber industry and there was some slight indication of an uptrend, particularly if building improved during the spring. Steel production had declined during January and was 7-1/2 per cent lower than a year ago. Aluminum had been cut back because of a lack of demand. Depart production January were down 3 per cent from December. ment store sales in registrations in December were up from November but Automobile Both demand and time deposits figures were below December 1956. since the beginning of the year had increased recently but loans much as in January 1957. The largest had declined by four times as borrowings were reported in business loans. Nominal decline came net sellers of banks were still Bank and local at the Reserve the investment departments some feeling in funds. There was Federal
of banks that the bill rate would not go to over 2 per cent in the near future. On the whole, the economy was still operating at a high level, Mr. Mangels said, with adjustments having taken place and more adjustments to come. These, however, seemed to be of a beneficial character and there had been an increase in productivity with a reduction in waste and inefficiency. Mr. Mangels thought that it might well be that we were not far from an upward surge in the growth pattern, and if too much ease were indicated by the System some of the adjustments taking place might be discouraged with the result that subsequently there might be a decline more precipitous than if the adjustments were now continued. Mr. Mangels said he had been happy with the recent rise in the bill rate and, looking ahead, he would assume that free reserves in the $200 mil lion range would be about right. There should be no change in the directive and he had no comment to make on the discount Committee's rate. said there had been little change in the picture Mr. Irons With respect to policy, he felt he had reported two weeks ago. that like to see no further easing. did at that time. He would about as he quite adequate and of reserves had been He believed the availability the market. He structure in in the rate this was reflected that that the Com the same policy of about would suggest continuation and he to three weeks, the past two following in had been mittee
would certainly not wish to move in the direction of further easing. It was obvious that there should be no move in the op posite direction. He would have no suggestion of a change from the 2-3/4 per cent discount rates prevailing at most Reserve Banks. Net free reserves in the $200 million range would seem to be all right. He would not favor any aggressive action either by the Open Market Committee or by means of a change in reserve require ments to provide additional reserves to the market. He was pleased with the comments Mr. Mills had made about letting market factors have their influence, but he would not wish to see that carried to the point that would result in additional ease beyond that which now existed. Mr. Irons also commented that while there had been reference to an even keel during the Treasury financing, his position would be the same even if the Treasury were not in the picture. He would still come to the conclusion that he had expressed, namely, that there should be no further easing at this time. Mr. Erickson said that the recession in business in the First District continued without any particular evidence of either acceleration or lessening. Last week one of the Boston Bank's reported that he had been told that four machine tool outside men men, while one was reducing the number manufacturers were re-hiring Erickson said that the Boston Bank had checked of work hours. Mr. two of the larger firms. One reported that orders for machinery with and November and down from October in December were substantially
that January was no better, but that the industry as a whole might show some improvement. The other concern reported that the slow down of new orders for defense products up until the first of December had been reversed. Department store sales in the first five weeks of 1958 were 3 per cent ahead of last year. In the survey of consumer credit, the data from 177 lenders made up of banks, finance companies, and credit unions, showed a drop in outstandings in December of $1.8 million despite a 7.9 per cent rise in extensions between November and December. This was the first time that outstandings had dropped since the series was started in 1956. Mr. Erickson said that for the next three weeks he felt that there should be no change in discount rates and that free reserves might be continued in the $200-$300 million range. Mr. Szymczak said that he still felt as he had two weeks downturn would come to an end during the second quarter ago that the show a leveling off or a slight upturn in of the year and would the decline should continue, that would add to the midyear. If We could not disregard four to five million problems of the System. he would continue about what unemployed. On policy, for the present allow the market to add to free the System has been doing, but he would little bit more. He was $300 million level or a reserves up to the at this time. He rate could not be reduced sorry that the discount to 2-1/2 per cent but this hoping that it could be reduced had been would continue the Therefore he impossible at present. seemed
policy the Committee had been following, allowing the market to provide reserves. Mr. Balderston said that it now seemed clear to him that the depression involved more than an inventory adjustment. There was consumer debt that inhibited buying, excess capacity, and a profit squeeze and cost-price maladjustment. One could hope that no new increase in wages and price rises of pervasive type would occur this spring although that might be a vain hope. Whether managements and union officials would exhibit the needful restraint was yet to be seen, he said. One could not yet be certain that the upward creep of prices and wages had been halted. The dilemma of substantial unemployment was already here and its future extent could not now be determined. Mr. Balderston's guess and duration decisions of 1955 and 1956 and the would be that the imprudent and inefficiency would take considerable time to resultant waste would last until inventory shrink overcome and that the depression taken care of some and sales programs had age, price adjustments, we must contemplate a excess capacity. If, therefore, of the the question was what length and severity, depression of unknown should be done. the use of tax reduction preference was for Mr. Balderston's the hands of indi amount in funds of specific to place substantial hoped would be controlled basis that he but on a one-shot viduals
as to amount. He was speaking of action to be taken by the Congress in terms of payroll deductions. This he would do not next year but right now. This action would permit monetary policy to be held back for a more propitious time. In the interim, monetary policy would be used only to facilitate the adjustments but not to force so much reserves on the banks as to induce speculation and to bid up bond prices unduly. However, corporate and bank liquidity needed to be rebuilt. Free reserves of about 1/4 to 1/3 of a billion dollars would be conducive to this, Mr. Balderston thought, and would help to soften the harshness of the downward adjustment. The current discount rates seemed to him for the moment, and he would not change the Committee's appropriate directive or the level of reserves at the present time. Chairman Martin said he was not going to discuss tax policy on the time when the recession would end, but or make a prediction fact that the Ides of March were approaching it considering the surprisingly optimistic. He thought seemed to him that the group was of year a great deal of well expect at this time that we might some of the comments of being indicated by pessimism. This was to distinguish between It was difficult members of the Congress. but this did not minimize and the real situation, pure politics unemployed persons. 5 million of 4-1/2 to of having the importance the Chairman said expressed this morning, As to the views the comments made. agreement in to be a surprising that there seemed
His own view was that the policy the Committee had been following was about right and that the results had been about as much as could have been anticipated in putting the posture of the System where it should be. The people who had been thinking that the System was wrong on the tight money policy now were spending their time saying that the System had lagged in easing too little or too late. He did not think these commentators were entitled to too much consideration in taking such an approach. It might be neces sary at a later time, if there were clear indications that the recession was spiraling, to do something more drastic than had been done to date, but it did not seem to him at the moment that case. He questioned some of the comments on the that was the not mean too much at the rate, stating that it really did discount had been two downward adjustments recently present time. There lag. If one wanted to be completely and borrowings continued to to have gone to a it would have been desirable technical, perhaps than to 2-3/4 per cent, cent discount rate rather 2-1/ or 2-1/2 per careful at System should be extremely his view that the but it was by taking too making greater difficulties the present time about aside from the Treasury's not effective. Quite many actions that were the moment it to be changed at rate were if the discount problem, might be construed was worse; it that the situation might indicate System and it the part of the desperation on of panic and as a sign should be results. This any constructive would not achieve probably
borne in mind in using any of the instruments of System policy. The problem of reserve requirements which would be discussed later today at the joint meeting of the Presidents and the Board was one which must be considered carefully. If the System re quested legislation in this field, that would be construed as a move toward reducing reserve requirements. Chairman Martin said that during the next three weeks he would favor doing just about what the Committee has been doing during the past three weeks. He liked the views Mr. Leach had expressed in indicating that we might follow an "even keel policy tipped on the side of ease." He did not believe we could measure closely and he recognized that the Manager of the degree of ease use his judgment. He would not the System Account would have to in reserves develop but would wish to have any sizable increase range that had been mentioned that the $200-$300 million think at the moment would be about close to where we were and which was could come to a consensus about as close as we right and would be today. He also gathered given in the go-around of the comments directive. In re desired in the Committee's that no change was whether any of the question as to to Chairman Martin's sponse statement, no comments with this Committee differed members of the Committee reaffirm that the suggested, therefore, made, and he were with the without change, New York Bank to the the directive
understanding that operations would be carried on along the lines of the foregoing comments. Mr. Rouse stated in response to the Chairman's question that he understood that policy would be continued with the same objective toward which the System Account had been aiming its operations during the past two weeks. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to cushioning adjustments and mitigating recessionary tendencies in the economy, and (c) to the practical administration of the account; provided that the aggregate amount of held in the System Account (including commit securities purchase or sale of securities for the ments for the at the close of this date, other than special Account) of indebtedness purchased from short-term certificates for the temporary accommodation of the time to time be increased or decreased by more Treasury, shall not than $1 billion; from the Treasury for the (2) To purchase direct Bank of New York (with account of the Federal Reserve it seems desirable, to issue discretion, in cases where or more Federal Reserve Banks) participations to one
such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million; (3) To sell direct to the Treasury from the System Account for gold certificates such amounts of Treasury securities maturing within one year as may be necessary from time to time for the accomooda tion of the Treasury; provided that the total amount of such securities so sold shall not exceed in the aggregate $500 million face amount, and such sales shall be made as nearly as may be practicable at the prices currently quoted in the open market. At this point Mr. Leonard, Director of the Board's Division of Bank Operations, entered the room. Chairman Martin referred to the report submitted by the System Committee for the Study of Float dated December 16, 1957, and to the regarding that report made by Mr. Robertson at preliminary comments December 17, and he requested that Mr. Robertson now the meeting on review the recommendations contained in that report. the reports of the System Committee Mr. Robertson stated that dated May 31, 1957,and December 16, 1957, and the April 19, 1957, four basic questions or recom of its Subcommittee, submitted report mendations. These were: float fluctuations affect open market 1. How should operations? is before the Open Market This question Committee today. Federal Reserve Banks should be the role of the 2. What in the check collection process?
2/11/8 This is a major policy question for the Re serve Banks and the Board. The Presidents' Conference should be asked for a recommenda tion on this. 3. Change in time schedules to provide a maximum of 3 day instead of 2-day deferment. This is an important question because, for one thing, any such change would absorb approxi mately $100 million reserves. Here again, the Presidents' Conference should be asked for a recommendation. 4. A review of operating practices, with a view to action leading to reduction of float and greater uniformity of operating practices within the System. While some of the findings and conclusions in this area might depend upon the decision as to the role of the Federal Reserve in the check collection process, the Subcommittee on Col lections might start promptly to formulate some tentative conclusions. There should be no delay in making this review, which could lead to improved practices, in creased efficiency, and a more realistic collection system. The review also might demonstrate, of course, that there is no possibility of improvement in these respects. Mr. Robertson went on to comment in detail on these basic was substantially as follows: points. His statement On the question of how should float fluctuations operations, the Committee's report affect open market recommended that the Open Market of December 16, 1957 the following policy questions raised Committee determine in the Committee's report of May 31: sufficiently large and 1. Are float fluctuations to seriously and adversely affect frequent policy and open market administration of credit operations? 2. Could float fluctuations be disregarded except changes, such as periods of major seasonal in Decem er-January?
3. Apart from fluctuations as such, should the Federal Reserve System nevertheless take action to reduce the ever-increasing average level of float? Why? If so, what action should the System take to offset the resulting loss in member bank reserves? 4. To what extent does the trading desk attempt to offset fluctuations in float? 5. To what extent is the desk expected by the Open Market Committee to offset fluctuations in float? The December 16 report stated that there would seem to be three possible basic approaches: 1. Ignore float as a special factor, base operations on the general reserve position, and treat changes in reserves due to float the same as changes due to other factors. 2. Treat float as a rather special factor, make allowance for the temporary nature of the swings in reserves due to fluctuations in float, and at tempt to offset fluctuations in float or not depending on the circumstances. 3. Generally ignore changes due to float (except possibly for such major swings as in December January) and endeavor to make it understood that fluctuations in free reserves (or any other aspect of the reserve position) due to fluctuations in float have no significance with respect to Federal Reserve policy. To further such understanding, the System might release daily figures as to the amount of float. Another possibility would be a combination of 2. and 3., that is, 4. Plan to offset only unusual fluctuations in float or those covering longer than usual periods, and endeavor to make it understood that fluctuations in free reserves (or any other aspect of the re serve position) due to fluctuations in float have with respect to Federal Reserve no significance policy. To further such understanding the System daily figures as to the amount of might release float. The second basic question that was presented was, what the Federal Reserve Banks in the check should be the role of collection process? What has been the System's role historically? What is it now? What should it be? Should the System, for steps to reduce the proportion example, take positive is collected through the of total check volume that
System's facilities? A number of the Subcommittee's specific recom mendations, if followed, would tend in the latter direction: For example, sponsorship and organiza tion of regional clearing facilities; a program designed to channel items payable in other Federal Reserve cities (interdistrict items) from first collecting banks directly to correspondent banks in those cities. The Reserve Banks, of course, should provide rapid and efficient check collection service. How ever, in certain situations, better or at least equally good service can be provided through other channels. In such circumstances, the Reserve Banks might well welcome the use of such other means. A clear-cut answer to this question as to the proper role of the Reserve Banks would provide an important guide to those who may be assigned to study the specific recommendations of the Subcommittee on Float and to formulate plans for carrying out those that appear to be desirable. Pending a definite answer to this broad policy question, the Presidents' Conference might well direct its Committee on Collections and Accounting to begin studying this question. The third basic question was whether there should be a change in time schedules to provide a maximum of 3-day in stead of 2-day deferment. This raises an important policy and bank relations question: After having been on a 2-day maximum defer ment schedule for several years, should the System now alter that policy? It also raises some practical operation problems: Whether intra-district but inter-zone items should have 2-day maximum deferment; and what, if continue to can or should be done about the relatively anything, intra-zone items that can not be col large volume of lected in less than 3 days. Any such change would absorb approximately $400 million reserves (page 10 in the Subcommittee report). effect on the reserve could have an important The change the larger banks positions of some banks, particularly a change is to be in big volume. If such that deposit along with any other major made, it might be considered amount of reserve balances affecting either the moves of required reserves. or the amount the grounds that urged by some on This change is If the time schedule is "unrealistic." the present
2/11/58 -4O. change is to be made on that basis, the Reserve Banks might also logically change some of their time schedules and practices which are equally "unrealistic,' such as immediate credit for New Orleans items when, because of clearing house rules, they can not be col lected until the following day, and the practice at New York, where immediate credit is given for drafts drawn on certain nonbanking corporations although the Bank receives payment for them in clearing house funds which are not collected until the following day. The fourth basic question or recommendation was that there be a review of operating practices, with a view to action lead ing to reduction of float and greater uniformity of operating practices within the System. The Subcommittee's recommendations with respect to matters coming under this heading are summarized princi pally on pages 5-8 of the System Committee's report of May 31. The Subcommittee's report shows (Chart VI following page 13) that for the 3-month period covered in the survey 62 per cent of float was due to items forwarded for collection (transit float), whereas 38 per cent of the float was incident to operations at the Reserve Banks. Most of this latter category--about 85 per centwas due to holdover. On page 8 of the program suggested by the System in its report of May 31, the Committee endorsed Committee of the Subcommittee, summarized strongly the suggestions in the following paragraph: that the Subcommittee on The Subcommittee suggests other group as may be deemed Collections (or such charged with the assignment of appropriate) be collection and other operating studying check and procedures in the various Federal Re policies view to (a) drawing up a serve offices with a of principles and reasonably precise statement be accepted on a System objectives which would recommendations as to wide basis, and (b) making or procedures in specific operating policies which lead to the absorption particular offices of float. of views of the Subcommittee The following expression seems pertinent: feeling that there has the general The Subcommittee offices as to uniformity among Reserve should be more collection and other approach to check their basic It has no wish to see leading to float. operations
prescribed rigid and uniform operating practices, but it does believe that a statement of principles and objectives could be framed on a System-wide basis. Further, it believes that were this done, some of the variation in operating practices and procedures would disappear. Finally, it believes that a close appraisal of certain of these local practices by a System com mittee would lead to the elimination of such practices and to a consequent reduction in float. (Page 7.) In this connection, it might be well to ask some one like John Davis to work with a System committee in the proposed review and to be responsible for the follow-through. The System committees and subcommittees are made up of men with full-time responsibilities. The assistance, therefore, of someone like John Davis, who could devote a substantial part of his time to the work and who could bring to it the viewpoint of one who is thoroughly familiar with the System but is no longer an active part of it, could expedite the review and its translation into action. Committee's report of May 31 contained the fol The System lowing paragraphs: Committee suggests that the designated The System committees, and subcommittees make System authorities, of the suggested program and formulate careful studies to carry it out. If, however, studies specific steps it would not be advisable or clearly indicate that to carry out some particular part of the feasible course, no need to attempt to program, there is, of do so, but there should be a clear formulate steps to why that part of the cut statement of the reasons should not or can not be carried out. program the studies called for in the Upon receipt of Committee will proceed memorandum, the System attached then submit its report. The to analyze them and the various reports re Committee trusts that System by the end of this coming quested may be received September. 16 concluded report of December The System Committee's with the following paragraph: made a Study of Float on the The Subcommittee material, and accumulated much thorough study, report. That report, produced a most worth-while raises a number you have received, a copy of which System Committee The questions. of challenging
believes that the benefits of the work already done should not be lost and that the time is ripe for the System to make a thoroughgoing review of its check collection functions and operations. As a basis for such study, the Committee submits this report, its report of May 31, and the report of its Subcommittee. Returning to the question before the Committee of how float fluctuations should affect open market operations, Mr. Robertson said that his personal feeling was that it would be desirable to combine the second and third possible basic approaches that had been outlined in the December 16 report. This would be along the lines of having the Open Market Committee plan to offset only unusual fluctuations in float or those covering longer than usual periods. There should also be an effort to bring about an understanding that reserves (or any other aspect of the reserve fluctuations in free float have no significance with position) due to fluctuations in policy. To further such understanding, respect to Federal Reserve as to the amount of float. might release daily figures the System decided upon by the hoped that, whatever the approach Mr. Robertson water on the need for it would not throw cold Open Market Committee, System problem and which was an important study of float further decision was to of whether the dealt with. Regardless should be market operations, the in float through open offset fluctuations studies that would a basis for further done provided work already the float as possible. as much of look toward eliminating
Mr. Erickson stated that Mr. Robertson had given an excellent summary of the reports submitted by the System Com mittee for the Study of Float, and by its Subcommittee. On the question before the Open Market Committee today, he found himself in the same position as that indicated by Mr. Robertson, that is, of the three possible basic approaches that the Committee might take with respect to float, it would seem preferable to combine the second and third alternatives that had been outlined in the December 16 report. This would mean we would try to offset only unusual fluctuations in float, and there would be an attempt to that fluctuations in free reserves because of make it understood as far as Federal Reserve policy was float had no significance suggested that Mr. Rouse might also com concerned. Mr. Erickson agreed upon at the December 17 ment as to whether the procedure at the end of December for reporting meeting and made effective telegram to help the New of daily figures by by the Reserve Banks had improved the estimates of reserves York Bank in preparing situation. a letter on February 7 said that he had addressed Mr. Rouse that the said, in effect, Banks which individual Reserve to the over those pre were much improved currently being obtained figures by Mr. Leach replied to a question Mr. Rouse also viously available. made by Mr. result if the recommendations to what changes would as of the two that a combination adopted, stating Robertson were
alternatives that Messrs. Robertson and Erickson had said they favored might present problems in making decisions and it would seem necessary to allow a fair amount of discretion to the System Account for dealing with these problems. However, he said he would like an opportunity to study the problem before expressing firm judgments on how operations might be affected. Mr. Robertson said that his suggestion was not meant to bring about immediate changes in procedure but would require experi mentation which might take a good many months in order to determine how operations could be improved. Mr. Johns said that as the third member of the Committee that had studied float, he shared the feeling Mr. Rouse had expressed re garding the difficulty of combining the two alternatives that Messrs. Robertson and Erickson felt could be followed in dealing with float. At the time the float study was started, it appeared that fluctua tions in float were interfering substantially with execution of open market policy, Mr. Johns said, and it then seemed to him that the after which it would decide what it System needed to get some facts the factors affecting reserve do. Float was only one of wished to he noted, and he had and causing short-run fluctuations, positions come to the conclusion, which was still tentative, that in the past of evening out short-run much in the way attempted to do too we had whether the He doubted seriously in reserve positions. changes
fluctuations, which the commercial banks might not be able to identify as to source but which they recognized as temporary, caused commercial banks to make basic decisions in lending and investment policies. In fact, it now appeared that this was not the case. In questioning the purpose of the System's attempts to iron out the short-run positions in reserves, Mr. Johns said his tentative opinion was that there was not as much to be concerned about as had been assumed at the time the study of float was started. Turning to the question of the deferred availability schedule, Mr. Johns said that he would like to see this changed back to a three-day maximum deferment schedule because he questioned seriously whether as an incidence to the check collection system the should be supplying reserves in the manner caused by Federal Reserve deferment schedule. He then reiterated his the two-day maximum the System was trying to do too much with the general view that the projections of reserves had open market tool. Even though improved as a result of the new procedure for submitting been errors, and attempts to offset figures, there were still daily from float and other factors by fluctuations in reserves resulting in New York and Chicago might conducting open market operations not needed or place when they were at a time and put in reserves Mr. Johns had great were needed. In sum, them out when they take in float these aberrations trying to offset about reservations open market operations. through
Mr. Hayes said he was in almost complete agreement with Mr. Robertson on studies to be made. He agreed that the suggested studies should be made with a view to the possibility of reducing float fluctuations. He would put greatest stress on changing the deferred availability time schedule which he considered to be the key operating question. He leaned not so much to a rigid three-day time schedule as to abandonment of the rigid two-day schedule, The Presidents' Conference Committee on Collections might well pursue this study. With respect to the role of check collection operations, Mr. Hayes said he would like to see a committee at work on that subject and he would like to see something in the way of specific suggestions to implement the report of the Joint Committee on Check Collection study that had been gathering dust because of the unwill ingness of commercial banks to take it up; he thought it might be desirable to consider whether the System should adopt some of the recommendations of that study, even without the endorsement of the commercial banks. Mr. Hayes suggested that if the group present at felt these studies should be made, it could now be this meeting understood that the appropriate committees of the Presidents' were directed to proceed with the studies. Conference With respect to the effects of float on open market operations, him that these fluctuations were Hayes said that it was clear to Mr. try to minimize them. He and that the Committee should important
leaned more toward the second alternative approach by the Committee than the third. While he sympathized in some ways with the views expressed by Mr. Johns, he still believed that the swings resulting from normal float fluctuations could mislead the market. Perhaps the Committee should continue to try to offset the major fluctua tions in float. Mr. Leedy commented that as far as the procedural aspects were concerned, the appropriate committees of the Presidents' Con ference could proceed with the proposed studies whenever a decision was reached on whether they should be made. There ensued a discussion of the alternative approaches that the Open Market Committee might adopt toward float fluctuations and of the suggested studies of operating matters by committees of the course of this discussion, Mr. Hayes Presidents' Conference. In the of the float study would have been suggested that a major purpose that float fluctuations were im accomplished if it was concluded attention, and that it it was necessary to give them portant, that float as much as feasible. the amount of be desirable to reduce would it should be Committee policy as to whether or not On the question said he did not think in float, Mr. Hayes to offset fluctuations a conclusion and information to reach yet had enough the Committee should be made. further studies that had been progress that considerable Martin agreed Chairman he said, the Committee far. At one time, the studies thus made in
thought that float fluctuations were wrecking open market policy, but it now could tentatively conclude that that was doubtful. At the same time, it could conclude that the volume and fluctuations in float were important and that further study might enable the System to do something about the problem . Mr. Robertson suggested that an appropriate action at this time would be for the Federal Open Market Committee to ask the Manager of the System Open Market Account to consider ways and means of increasing understanding of fluctuations in float by releasing daily figures and other information that could properly be given out. He also suggested that as a part of the immediate program the System might go on record today as agreeing that studies be continued with recommendations on the three basic questions as a view to developing the role of the Federal Reserve Banks in to operating matters, i.e., time schedules, and a review of check collection process, the the in float and a greater practices looking toward reduction operating practices in the System. uniformity in operating whether anyone present disagreed Chairman Martin inquired just made as a program that Mr. Robertson had with the suggestions indicated disagreement. none of those present moving ahead, and for would be considered that these suggestions Martin then stated Chairman this time on at Market Committee of the Open as the action as adopted that the Presidents' also be understood It would of float. the study that it would and this procedure with was in agreement Conference
arrange to have the appropriate committees proceed with the operat ing studies suggested. Mr. Leonard withdrew from the meeting at this point. Chairman Martin next referred to the report of the New York Clearing House Association distributed with Mr. Hayes' letter of October 22, 1957, and to a memorandum prepared by Messrs. Roelse, Rouse, Thomas, and Riefler and distributed under date of February 6, 195 on the Clearing House Study of Interrelations of the Money Market and the Government Securities Market. At Chairman Martin's request, Mr. Riefler commented on the report substantially as follows: The Clearing House Committee did not come to any con structive suggestions unless we accept the basic proposition that corporate financing of dealers through the negotiation of repurchase agreements by dealers with corporations repre sents a revision of the banking laws. The Clearing House study attacks this practice as illegal in that it in effect results in the creation of money by nonbanking institutions, that it provides a figure for payment of interest on demand deposits and that it represents a practice that is dangerous to the money system of this country. All of the study's constructive suggestions turn around acceptance of that proposition, a proposition which the Staff Committee was not to accept. The staff suggests to the Open Market willing the charges are so important and Committee, however, that a pre-eminent body that they should not be come from such It believes, therefore, that the Open dismissed offhand. may wish to commission the staff to make Market Committee the charges and to report back to an exhaustive study of the Committee at a later date. Staff Committee makes that suggestion, the Aside from two general observations on the Clearing House Study. market and the dealer it appears that the money First, is no crisis to along and that there mechanism is getting Second, there are two minor sug require overt action. which the staff Clearing House report made in the gestions
believes might be accepted, namely, (a) the establishment of a standing money market committee composed of representatives from the Federal Reserve Bank of New York and the Clearing House banks to meet two or three times a year to discuss technical problems and market practices against the broad background of public policy, and (b) the release of daily figures covering aggregate reserves, reserve requirements, and borrowings of New York Clearing House banks. In response to Chairman Martin's request, Mr. Rouse stated that Mr. Riefler had covered the matters in the report as he saw them. He and Mr. Hayes had discussed the question of having a committee such as the Clearing House report suggested and on the suggestion that daily figures be released he felt as did the other members of the Staff Committee that this could be done without any harm. Mr. Allen commented that he had some sympathy with the view of the Clearing House banks that it was not desirable for business corporations to be making funds available under repurchase agreements although his view was based on reasons other than those given in the Clearing House report. conclusion of a brief discussion of the report, ChairAt the man Martin suggested that the report of the Staff Committee be acmoment With the thought that further concepted and tabled for the sideration would be given later to what additional study should be made. as to whether this to Mr. Riefler's question In response included authority for the staff to make a study of the Clearing
House report, Chairman Martin stated after some discussion that he could see no harm in having the staff study the report further. Martin noted that the next meeting of the Federal Chairman Open Market Committee would be held at 10:00 a.m. on Tuesday, the meeting would conthe understanding that March 4, 1958, with on Wednesday, March 5. afternoon of that day and tinue during the the meeting adjourned. Thereupon Secretary
Also: Record of Policy Actions