March 4, 1958

March 4, 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, March 4, 1958, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Fulton Mr. Irons Mr. Leach Mr. Mangels Mr. Mills Mr. Shepardson Mr. Szymczak Mr. Vardaman Messrs. Erickson, Allen, Johns, and Deming, Alternate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and and Leedy, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, 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. Daane, Hostetler, Marget, Roelse, Walker, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Carpenter, Secretary, Board of Governors Mr. Kenyon, Assistant Secretary, Board of Governors Mr. Miller, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Gaines, Manager, Securities Department, Federal Reserve Bank of New York Swan, First Vice President, Federal Reserve Mr, Bank of San Francisco; Messrs. AbbottEllis, Mitchell, and Tow, Vice Presidents of the Federal Reserve Banks of St. Louis, Boston,

Chicago, and Kansas City, respectively; Mr. Parsons, Director of Research, Fed eral Reserve Bank of Minneapolis; Messrs. Anderson and Atkinson, Economic Advisers, Federal Reserve Banks of Philadelphia and Atlanta, respectively Mr. Riefler reported that advices of the election by the Fed eral Reserve Banks for a period of one year commencing March 1, 1958, of members and alternate members of the Federal Open Market Committee had been received and that each newly elected member and alternate member had executed the required oath of office. The members and alternate members were as follows: Alfred Hayes, President of the Federal Reserve Bank of New York, with William F. Treiber, First Vice President of the Federal Reserve Bank of New York, as alternate member; Hugh Leach, President of the Federal Reserve Bank of Richmond, with J. A. Erickson, President of the Fed eral Reserve Bank of Boston, as alternate member; Wilbur D. Fulton, President of the Federal Reserve Bank of Cleveland, with Carl E. Allen, President of the Federal Reserve Bank of Chicago, as alternate member; President of the Federal Reserve Bank Watrous H. Irons, of Dallas, with D. C. Johns, President of the Federal Reserve Bank of St. Louis, as alternate member; Federal Reserve Bank of President of the H. N. Mangels, L. Deming, President of San Francisco, with Frederick of Minneapolis, as alternate the Federal Reserve Bank member. motion duly made and seconded, Upon and by unanimous votes, the following of the Federal Open Market Com officers elected to serve until the mittee were successors at the first election of their meeting of the Committee after February 28,

1959, with the understanding that in the event of the discontinuance of their official connection with the Board of Governors or with a Federal Reserve Bank, as the case might be, they would cease to have any official connection with the Federal Open Market Committee: Wm. McC. Martin, Jr. Chairman Alfred Hayes Vice Chairman Winfield W. Riefler Secretary Elliott Thurston Assistant Secretary Merritt Sherman Assistant Secretary Howard H. Hackley General Counsel Frederic Solomon Assistant General Counsel Woodlief Thomas Economist J. Dewey Daane, L. Merle Hostetler, Associate Economists Arthur W. Marget, Harold V. Roelse, Charls E. Walker, Oliver P. Wheeler, and Ralph A. Young Upon motion duly made and seconded, and by unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market until the adjournment of the first Account meeting of the Committee after February 28, Board of Directors of the Federal Mr. Hayes stated that the Rouse as Manager of the York had selected Mr. Reserve Bank of New the selection of the Federal Account, subject to System Open Market Committee as the the Federal Open Market Bank of New York by Reserve Account and his approval for the System to execute transactions Bank Federal Open Market Committee. by the at this point. entered the room Mr. Leedy

Chairman Martin said that in order to make certain there was no misunderstanding as to his position regarding the selection of the Manager of the System Account, he would read from the minutes of the meeting of the Committee held on March 6, 1956 the statement he made at that time in connection with the approval of Mr. Rouse as Manager. This statement was: "Chairman Martin stated that he was voting for approval of Mr. Rouse as Manager of the System Open Market Account although he disapproved of the procedure now followed by the Committee under which the board of directors of the agent Federal Reserve Bank selects the manager. There were no personalities involved in this feeling, the.Chairman said, but he referred to the action of the Committee in authoriz ing appointment of a special committee at the meeting on March 2, 1955, to study and bring back to the Committee concrete proposals for perfecting the structural and operat ing organization that would best implement the policies of the Federal Open Market Committee. This committee, he said, had met with the Board of Directors of the New York Bank last November but he, as Chairman of the committee, had not called a meeting since that time partly, at least, be cause of pressure of other problems. Chairman Martin said that he intended to continue the committee appointed pur suant to that authorization until it had a report to submit to the full Committee, and in this connection he stated that he proposed to have a meeting of the committee on the day on which the next meeting of the Federal Open Market Committee (probably to be held on Tuesday, March 27, 1956) took place." to say that the Committee that had Chairman Martin went on York Bank in November 1955 had not met with the Directors of the New continue in existence and he would propose that it met recently but this problem during the coming year. that an effort be made to resolve was to reserve the matter at this time in mentioning the His purpose

position he had expressed two years ago and to say that in his opinion a more desirable and proper procedure would be for the Federal Open Market Committee to select the Manager of the System Open Market Account with the understanding that the Agent Bank would accept or reject that selection by the Committee. With this comment, he suggested that the Committee approve the selection of Mr. Rouse as Manager of the System Open Market Account. Following a discussion, upon motion duly made and seconded, and by unanimous vote, the selection of Mr. Rouse as Manager of the System Open Market Account was approved. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Committee held on January 28 and Feb ruary 11, 1958, were approved. Upon motion duly made and seconded, and by unanimous vote, the action taken by the members of the Federal Open Mar ket Committee under date of February 25, the target for free that 1958,authorizing reserves be increased from $200-$300 as established at the February 11 million, meeting, to between $400 and $500 million during the period from February 25 to the next meeting of the Committee, subject to the usual qualifications, was approved, ratified, and confirmed. that had been dis Martin referred to a memorandum Chairman relating to the procedure of February 28, 1958, tributed under date in addition to on March 2, 1955,whereby, at the meeting authorized

members and officers of the Committee and Reserve Bank Presidents not currently members of the Committee, minutes and other records could be made available to any other employee of the Board of Governors or of a Federal Reserve Bank with the approval of a member of the Committee or other Reserve Bank President, with notice to the Secretary. At the Chairman's request, the Secretary commented briefly on the procedure, indicating that the list of authorizations would be reviewed with the members of the Committee and the Reserve Bank Presidents in order to make certain that it was current. Thereupon, the procedure was re affirmed without change. The Chairman next referred to the resolution adopted by the on November 20, 1936 authorizing each Federal Open Market Committee and sell, at home and abroad, cable trans Reserve Bank to purchase bankers' acceptances payable in fers and bills of exchange and extent that such purchases and sales may foreign currencies to the in connection with the to be necessary or advisable be deemed increase, reduction, or maintenance, operation, establishment, Reserve Banks in foreign of accounts of Federal discontinuance countries. unanimously that no It was agreed at this time to should be taken action terminate the resolution of amend or November 20, 1936.

Before this meeting there had been sent to the members of the Committee a memorandum dated February 7, 1958,from Mr. Rouse and Mr. Leonard, Director of the Board's Division of Bank Operations, with respect to allocation of securities in the Open Market Account under the procedure that became effective September 1, 1953, pur suant to the action taken by the Committee at the meeting on June 11, 1953. There had also been distributed a tabulation containing a pro forma reallocation based on the ratios of each Reserve Bank's average total assets to the total for all Reserve Banks for the period March 1, 1957-February 28, 1958. It was agreed unanimously that no action should be taken at this time to amend or terminate the procedure for allocation of securities in the System Open Market Account, as adopted pursuant to the action of the Committee on June 11, 1953. Unanimous approval was given to the distribution of the weekly report of open operations prepared at the Federal market of New York as follows: Reserve Bank The members of the Board of Governors 12 Federal Reserve Banks 2. The Presidents of the Open Market Committee of the Federal 3. Officers Secretary of the Treasury 4. The of the Treasury The Under Secretary working on debt of the Treasury The Assistant Secretary management problems of the Treasury Assistant Secretary 7. The Fiscal Operations of the of the Division of Bank 8. The Chief Board of Governors at each of the Federal in charge of research 9. The officer President on the by its Banks not represented Reserve Open Market Committee Federal

10. The alternate member of the Federal Open Market Committee from the Federal Reserve Bank of New York; the two Assistant Vice Presidents of the Federal Reserve Bank of New York working under the Manager of the System Account; the Managers of the Securities Department of the New York Bank; the Vice President, the Assistant Vice President and the Manager of the Research Depart ment cf the New York Bank; and the confidential files of the New York Bank pertaining to Federal Open Market Committee matters. 11. With the approval of a member of the Federal Open Market Committee or any other President of a Fed eral Reserve Bank, with notice to the Secretary, any other employee of the Board of Governors or of a Federal Reserve Bank. Unanimous approval was given to the continuation of the authorization given by the Committee at its meeting on March the Manager of the System 5, 1957 to Account to engage in transactions on a cash as well as a regular delivery basis. to the authorization to the Chairman Martin next referred Federal Reserve Bank of New York to purchase bankers' acceptances agreements therefor, last approved at and to enter into repurchase on March 5, 1957. The present authoriza the meeting of the Committee by the New York Bank with acceptance tion provided for transactions suggested in a System Account had the Manager of the dealers, and 1958 that this authoriza dated February 27, letter to the Secretary the New York Bank to it would also permit be amended so that tion acceptances direct from and to foreign purchase and sell bankers' of that Bank. accounts

Mr. Mills made a statement in which he expressed the view that the proposed broadening of the authority would run counter to what he understood to be the policy of the Committee to broaden the market for bankers' acceptances. After noting that the System portfolio now was just short of $42 million and that there was a strong demand for bankers' acceptances, Mr. Mills expressed the view that a broader market would be developed by the release of some portion of the acceptances now held by the System. He also said that it had been his thought that System holdings of bankers' acceptances represented a cushion to pick up the floating supply and that it would not be regarded, as would holdings of Treasury bills, primarily as a vehicle for the conduct of credit policy. Mr. Mills said that he would argue against adoption of the recommenda tion for broadening the authority and would prefer that the New York Bank deal solely in the established market for bankers' acceptances. Mr. Hayes said that the suggested change would permit the to effect transactions when the market was not in a New York Bank position to have orders from foreign accounts completed conveniently if a foreign holder gave a sizable for the market. For example, dealers at that time had a heavy inventory sell order and acceptance acceptances, it would be interested in buying the and were not order. Mr. Hayes stated carry out the foreign bank's difficult to the Bank would, of course, go to that if dealers were receptive

-l0 them and that use of the broadened authority would be a means of carrying through a transaction when the market was not receptive. There followed a general discussion of the points raised by Mr. Mills and of the views expressed by Mr. Hayes, during which most of the comments indicated a favorable disposition toward changing the authorization to permit transactions with foreign accounts of the New York Bank as well as with acceptance dealers. Chairman Martin stated that he doubted whether an important element of credit policy was involved, that he had been favorable in the bankers' acceptance market primarily on the to participation friendly to the market and because he thought it basis of being to develop foreign trade, and that it seemed to him that important the additional authority requested. it would be proper to permit of the Committee wished to have more time If, however, any member it could be held over until a later meeting. to study the question Committee indicated that they would A number of the members of the the question at the present time. prefer to act on motion duly made and Thereupon, upon the authorization for transac seconded, acceptances was approved tions in bankers' form, including authority in the following Reserve Bank of New York for the Federal sell to foreign accounts to buy from and of that Bank. action: Messrs. Votes for this Chairman, Hayes, Vice Chairman, Martin, Irons, Leach, Mangels, Balderston, Fulton, Szymczak, and Vardaman. Vote Shepardson, this action: Mr. Mills. against

The Federal Open Market Committee hereby authorizes the Federal Reserve Bank of New York for its own account to buy from and sell to acceptance dealers and foreign accounts maintained at the Federal Reserve Bank of New York, at market rates of discount, prime bankers' accept ances of the kinds designated in the regulations of the Federal Open Market Committee, at such times and in such amounts as may be advisable and consistent with the general credit policies and instructions of the Federal Open Market Committee, provided that the aggregate amount of such bankers, acceptances held at any one time by the Federal Reserve Bank of New York shall not exceed $50 million and provided further, that such holdings shall not be more than 10 per cent of the total of bankers' acceptances outstanding as shown in the most recent acceptance survey conducted by the Federal Re serve Bank of New York. The Federal Open Market Committee further authorizes the Federal Reserve Bank of New York to enter into repurchase agreements with nonbank dealers in bankers' acceptances covering prime bankers' acceptances of the kinds designated in the regulations of the Federal Open Market Committee, subject to the same conditions on which the Federal Reserve Bank of New York is now or may hereafter be authorized from time to time by the Federal Open Market Committee to enter into repurchase agreements covering United States Govern ment securities, except that the maturities of such bankers' acceptances at the time of entering into such repurchase agreements shall not exceed six months, and except that in the event of the failure of the seller to repurchase, such acceptances shall continue to be held by the Federal Reserve Bank or shall be sold in the open market. Such repurchase agreements shall be at the same rate as that applicable, at the time of entering into such agreements, to repurchase agreements covering United States Government securities. The Committee approved by unanimous vote a renewal of the following authoriza tion to the Federal Reserve Bank of New York to enter into repurchase agreements with nonbank dealers in Government securi ties: 1. Such agreements no event shall be at a rate below whichever (a) In of (1) the discount rate of the is the lower

Federal Reserve Bank on eligible commercial paper, or (2) the average issuing rate on the most recent issue of three-month Treasury bills; (b) Shall be for periods of not to exceed 15 calendar days; (c) Shall cover only Government securities matur ing within 15 months; and (d) Shall be used as a means of providing the money market with sufficient Federal Reserve funds to avoid undue strain on a day-to-day basis. 2. Reports of such transactions shall be included in the weekly report of open market operations which is sent to the members of the Federal Open Market Committee. 3. In the event Government securities covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, the securities thus acquired by the Federal Reserve Bank of New York shall be sold in the market or transferred to the System Open Market Account. At the meeting on December 3, 1957, the Committee approved a recommendation from the Manager of the System Open Market Account and the Committee that the rate charged on special short the Secretary of of indebtedness purchased direct from the Treasury term certificates (2) of the Committee's directive to the Federal pursuant to paragraph of 1 per cent below the of New York be fixed at 1/ Reserve Bank of New York at the time of of the Federal Reserve Bank discount rate such purchase. was taken to amend or No action terminate this authorization for fixing short-term certifi the rate on special of indebtedness purchased direct cates from the Treasury. in March of each and at the annual meeting On March 1, 1951, to appoint a the Chairman had authorized since, the Committee year

Federal Reserve Bank as agent to operate the System Account temporarily in case the Federal Reserve Bank of New York was unable to function. The report of the Subcommittee on Defense Planning dated January 9, 1956, which was approved by the Federal Open Market Committee on January 10, 1956, included a recommenda tion that this authorization be reaffirmed, and such action was taken on March 6, 1956, and March 5, Mr. Vardaman suggested that it would be desirable to have the authorization reviewed for the purpose of ascertaining whether any change was needed to make clear that it extended to the Acting the event the Chairman was not avail Chairman of the Committee in able. Thereupon, the authority to the Chairman to appoint a Federal Reserve Bank as agent to operate the System temporarily in case the Fed Account Reserve Bank of New York was eral unable to function was reaffirmed, with the understanding that Mr. Vardaman's suggestion would be followed. resolution to pro The following for the continued operation of vide the Federal Open Market Committee was then re during an emergency unanimous vote: affirmed by if the or defense emergency event of war In the the Federal Open Secretary of Secretary or Assistant (or in the event of the unavailability Market Committee Secretary of Secretary or Acting both of them, the of Reserve System) of the Federal Board of Governors the

certifies that as a result of the emergency the available numoer of regular members and regular alternates of the Federal Open Market Committee is less than seven, all powers and functions of the said Committee shall be per formed and exercised by, and authority to exercise such powers and functions is hereby delegated to, an Interim Committee, subject to the following terms and conditions. Such Interim Committee shall consist of seven members, comprising each regular member and regular alternate of the Federal Open Market Committee then available, together with an additional number, sufficient to make a total of seven, which shall be made up in the following order of priority from those available: (1) each alternate at large (as defined below); (2) each President of a Federal Reserve Bank not then either a regular member or an alternate; of a Federal Reserve Bank; (3) each First Vice President provided that (a) within each of the groups referred to in clauses (1), (2), and (3) priority of selection shall be in numerical order according to the numbers of the Federal Reserve Districts, (b) the President and the First Federal Reserve Bank shall not Vice President of the same at the same time as members of the Interim Committee, serve member or regular alternate of and (c) whenever a regular Open Market Committee or a person having a the Federal as indicated in clauses (1), (2), and (3) higher priority become a member of the Interim becomes available he shall the person then on the Interim Committee in the place of The Interim Com having the lowest priority. Committee authorized to take action by majority mittee is hereby or more members thereof present whenever one vote of those vote for the that an affirmative are present, provided least one regular member, taken is cast by at action a Federal Reserve Bank. or President of regular alternate, procedures set forth of authority and other The delegation period or periods only during such above shall be effective a total of seven regular are available less than as there Open Market of the Federal and regular alternates members Committee. refers to a "regular member" the term As used herein duly appointed Market Committee the Federal Open member of law; the term with existing elected in accordance or of the Committee to an alternate refers "regular alternate" law and serving accordance with existing duly elected in whom he was elected; member for of the regular in the absence to any other duly at large" refers and the term "alternate when the member at a time of the Committee elected alternate serve is available. elected to he was in whose absence

Unanimous approval was also given to a renewal of the resolution set forth below authorizing certain actions by the Federal Reserve Banks during an emergency. The Federal Open Market Committee hereby authorizes each Federal Reserve Bank to take any or all of the actions set forth below during war or defense emergency when such Federal Reserve Bank finds itself unable after reasonable efforts to be in communication with the Federal Open Market Committee (or with the Interim Committee acting in lieu of the Federal Open Market Committee) or when the Federal Open Market Com mittee (or such Interim Committee) is unable to function. (1) Whenever it deems it necessary in the light of economic conditions and the general credit situation then prevailing (after taking into account the possibility of providing necessary credit through advances secured by direct obligations of the United States under the last paragraph of section 13 of the Federal Reserve Act), such Federal Reserve Bank may purchase and sell obligations of the United States for its own account, either outright or under repurchase agreement, from and to banks, dealers, or other holders of such obligations. (2) In case any prospective seller of obligations of the United States to a Federal Reserve Bank is unable to tender the actual securities representing such obligations because of conditions resulting from the emergency, such Federal Reserve Bank may, in its direction and subject to such safeguards as it deems necessary, accept from such seller, in lieu of the actual securities, a "due bill" executed by the seller in form acceptable to such Federal in substantial effect that the seller Reserve Bank stating is the owner of the obligations which are the subject of the purchase, that ownership of such obligations is thereby transferred to the Federal Reserve Bank, and that the obliga be delivered to the Federal Reserve tions themselves will Bank as soon as possible. may in its discretion Reserve Bank (3) Such Federal certificates of indebtedness directly from purchase special may be needed to cover in such amounts as the United States of the Treasurer of the in the general account overdrafts on the books of such Bank or for the temporary United States Bank shall take all the Treasury, but such accommodation of as far as possible at the time to insure steps practicable directly from the of obligations acquired that the amount

United States and held by it, together with the amount of such obligations so acquired and held by all other Federal Reserve Banks, does not exceed $5 billion at any one time. Authority to take the actions above set forth shall be effective only until such time as the Federal Reserve Bank is able again to establish communications with the Federal Open Market Committee (or the Interim Committee), and such Committee is then functioning. Before this meeting there had been distributed to the members of the Committee a report of open market operations covering commit ments executed February 11, 1958,through February 26, 1958, and a supplementary report covering commitments executed February 27 through March 3, 1958. Copies of both reports have been placed in the files of the Federal Open Market Committee. reported that there had been remarkable fluctuations Mr. Rouse 11 meeting. The bills auctioned on in bill rates since the February rate of 1.73 per cent, but the rate February 17 went at an average per cent in the following week and then rose to 1.35 dropped to 1.20 a long tail in the auction yesterday, cent on March 3. There was per sharp drop in the rate at 1.4O per cent. The with the stop-out price a large demand for bills due to expectations of on February 24 was and from commercial the telephone company, State funds, from from some in reserve require by the reduction reserves released banks employing expected volume, and materialize in the This buying did not ments. foreign accounts, the into the market from bills instead had come reported that the Mr. Rouse also and State funds. System Account,

market was now entering the period when corporate tax selling would pick up and, as a result, there had been a build-up in dealers' bill positions. Positions totaled $750 million on February 28, and dealers were awarded $550 million new bills yesterday. Bank dealers held most of this supply of bills, and nonbank dealers' holdings ap peared to be firmly placed, Mr. Rouse said, so there was no reason for real concern in spite of the large supply. One factor in the market at the present was that Chicago banks were stockpiling bills, apparently for the April 1 personal property tax assessment date. In Mr. Rouse's judgment, the recent backup in bill rates was a healthy development. Turning to the recent Treasury financing, Mr. Rouse said that the cash offering was a success, with large subscriptions by both bank and nonbank purchasers. The allotment was expected to be less than 25 per cent. On bond markets generally, Mr. Rouse reported that there change in prices of seasoned bonds, but reoffering had not been much rise in recent days. As he had on new issues had tended to rates a good deal of speculation meetings, there was reported at earlier rates in November. reduction in discount following the in bonds new issue rates demand had driven of this speculative The momentum utility issues by range on Aaa corporate the 3.60 per cent down to few days to in the last utility was reoffered January; a Aaa late "Aa" new that rate. slowly at had moved cent and 3.94 per yield

issue rates had moved well above 4 per cent and A rates were 4.25 per cent. A similar situation had developed in the municipal mar ket, where dealers' inventories had climbed to a record high. Short-term municipal obligations had sold well, particularly to banks, but long maturities had moved slowly. Mr. Rouse said that exceptional factors had caused bond prices to move higher than could be supported by the supply of investment funds available to buy them, and the present consolidation and upward movement of necessary to establish balance in the market. Sharply rates was at improving the capital markets by easier credit policy aimed to do too much good. would not promise supplying bank reserves report, Mr. Allen reported the conclusion of Mr. Rouse's At in bonds that sup instances of speculation that he had encountered what Mr. Rouse had said. ported duly made and seconded, Upon motion vote, the transactions and by unanimous during the period the System Account for through March 3, 1958, February 11, 1958, and confirmed. approved, ratified, were statement on made a Mr. Young Martin's request, At Chairman dis the staff memorandum to situation supplementary the economic comments were Mr. Young's 28, 1958. date of February tributed under as follows: substantially to recede, February continued activity through Economic the decline. accentuating weather conditions with adverse

The February decline in industrial production was evidently about 2 index points, and possibly larger, carrying the Board's index at least to 131, or 10 per cent under last summer's high. The further decline was distributed among durable and nondurable manufacturing lines and mining and petroleum. Output curtailment in the automobile industry was a special feature of the month. Reflecting increased demands for heating associated with the unusually cold weather, output of electricity and gas picked up considerably. Construction activity, after seasonal adjustment, continued close to fall levels, with commercial construc tion down further, public utility construction up further, and residential and public construction little changed. Highway work was off more than allowed for in the existing seasonal adjustment and this accounted for an apparent moderate falloff in total construction activity. Housing starts in January continued at just over a million units, the level sustained since the middle of last year. Employment has continued to decline and unemployment to rise. Initial unemployment benefit claims in the week ending February 22 were close to half a million, or double the number a year earlier. Continued claims reached million--a record level. The mid-February unemployment estimate has just been made available to the Committee on a confidential basis, prior to public release by a week or more. It shows a figure of 5.2 million, up 670,000 from January and 2 million from a year ago. The normal seasonal movement for January to February is little changed, and a 5.2 million unemployed figure is a postwar high. Related to the labor force on a seasonally adjusted basis, the unemployment percentage comes out at 6.7 per cent, about as high a rate as reached in 1949. Also, preliminary Commerce Department estimates of in were made available to change and orders for January ventory us yesterday on a confidential basis. They show a January of $600 million, mostly in durable inventory liquidation January decline compares with goods lines. The estimated million in December, $232 million in declines of $350 and $37 million in September. November, $63 million in October, New orders and unfilled orders both declined in January. orders--$1.5 billion--was of decline for unfilled The amount to the average of recent months. close are now being lowered sales estimates for January Retail earlier estimate of a level, in place of the to the December According to department store significant gain over December. retail trade has worsened sharply. sales figures in February,

While unfavorable shopping weather was a factor in much of the country, declines were also marked in areas in which weather conditions were not severely adverse. Automobile sales dropped particularly sharply. In the first ten days of February deliveries were off 15 per cent from January and 29 per cent from a year ago. Deliveries in the second ten days--the period of the most adverse weatherwere off appreciably further. Dealer stocks of domestic cars rose to 886,000 on February 20, a fourth above a year ago. A responsible industry source called yesterday and reported con fidentially that daily sales of new cars in the last ten days of February had shown no improvement from the second ten days. Used car sales were also off sharply in February, ruming about 8 per cent under January and 18 per cent under last Feb ruary. Cash sales of automobiles have apparently fallen off much more than instalment sales. Preliminary figures on instalment credit show a January rise of about $100 million on a seasonally corrected basis. New car repossessions have evidently reached a very high level, attaining a rate of one in 10 for one large national finance company. This is the highest rate for this company since the early thirties. The housing market appears to hold fairly strong. Markets for existing houses remain active and the number of unsold new houses has held fairly steady at a moderate figure. Easier credit conditions have been reflected in some increase in mort gage market activity. Offerings to FNMA for immediate purchase have continued to decline and recently the volume of mortgages sold by FNMA has increased markedly. Applications to FHA for insurance on new houses rose appreciably in January and the rate was two-thirds above a year earlier. Wholesale prices have risen recently, reaching a new high at the end of February, about one per cent above the average of the fourth quarter. With price averages for industrial commodities little changed, the increase mainly reflects higher farm products and foods, notably livestock, meats, prices for and fruits. Price movements of industrial vegetables, and the average has been have been quite selective materials The most recent purchasing agents' showing little change. that lower materials prices are beginning roundup indicates and that discounts from through to fabricated items to work list prices are increasingly encountered. prices but also some reflecting higher food Mainly in prices of services, the consumer price further advances of .6 per cent. With wage index for January showed a rise further, this increase salary incomes declining and

accentuated the falloff in consumers' real income. In March, approximately 1.3 million industrial workers will receive a 2-to-3 cent an hour wage increase to compensate for this cost of-living advance. Most observers agree that the extent and duration of the present recession is heavily dependent on the course of busi ness capital expenditures. Two items of advance release in formation have become available indicative of the course of these expenditures. The first relates to the Newsweek-NICB survey of capital appropriations by large manufacturing corporations for the fourth quarter. These appropriations were reported to be one third smaller than a year earlier. Cancellations of previously approved appropriations were substantial, and the backlog of appropriations declined more than a fifth. The second item relates to the Commerce-SEC plant and equipment expenditure survey for the second quarter and calendar year. This survey is not completely tabulated, but preliminary indications point to a decline in expenditures for the year of as much as 10 per cent. The McGraw-Hill survey of last fall indicated a year-to-year decline of 7 per cent. This preliminary information about the indications of these two surveys should be held confidential until public re lease. Economic news from abroad has both encouraging and dis couraging aspects. In Western Europe, economic activity appears to continue at high levels, with no clear signs of deterioration, except financially for France. In Canada, recent data suggest a leveling out of recession. In Japan, financial adjustment seems in process of being effected without serious cutback in produc tive activity. In various other countries in Latin America and the Far East, internal inflationary pressures are very strong and balance of payments problems are becoming still more acute. United States exports continued to decline through December, but imports have remained close to the level of the past two years. conclusion to today's economic summary, one can By way of a report of little cheer. The most recent facts say that it is clearly suggest that the 1957-58 recession has a better than moderate in extent and duration than even chance of being less or the 1953-54 recession. either the 1948-49 recession financial developments as follows: Mr. Thomas summarized recent has been showing definite indica While business activity deepening recession, bank credit has been expanding tions of

and borrowing in general was held up at a high level. This contrast may be directly attributable to the Federal Reserve policy of maintaining a generous supply of bank reserves. Business borrowing at banks, it is true, has been sharply reduced, but banks supplied with ample reserves, have expanded other types of credit by amounts that far exceeded the business loan liquidation while reducing their borrowings at the Reserve Bank to a negligible volume. Total deposits at banks have in creased in a period when they usually decline seasonally. It would seem likely that deposit turnover declined in February, but the January figures, the latest available, held at close to the fourth quarter average. To appraise the net effect in credit markets of the de cline in business and the shift in monetary policy, comparisons need to be made with the latter part of November, in order to balance out the large offsetting seasonal movements in December and January. From November 27 to February 26, banks in leading cities increased their total loans and investments by about $1.1 billion, compared with decreases of about the same amount in the two previous December-February periods. Commercial loans and consumer loans both declined, showing a combined de of over $l-l/4 billion, compared with decreases aggregat crease ing less than a quarter billion in the same period a year ago and increases totaling over half a billion two years ago. Holdings of securities and loans on securities increased by billion this year, compared with decreases of well over $2-1/4 over half a billion last year and about $1.7 billion two years of this year's increases occurred ago. Substantial portions in February. showed greater than seasonal de Demand deposits adjusted but partial data for February creases in December and January rise that partly offset the indicate a seasonally adjusted three months United States declines. In the past previous compared with decreases deposits have increased, Government years. Time de months of the two previous in corresponding of nearly $2 billion showed a spectacular increase posits sharp expansion that fol year--over twice last year's this lowed the interest rate rise. has been in time accounts, the growth in deposits Since total required reserves these changes on net result of the in required re the lack of change negligible, but has been million in the of over $500 with declines serves compares $250 million two year ago and nearly period a corresponding the usual seasonal funds from Banks have obtained years ago. offset by other market of currency, partly return flow borrowings. This been able to reduce and have thus factors,

year, in contrast to other years, these additions to the reserve supply from market factors have not been offset by a reduction in Federal Reserve open market accounts. Last year those accounts showed a net drop in the three months of over $1.3 billion and two years ago a decline of nearly $600 million. Free reserves this year increased by nearly $600 million; in the same period last year they declined by $200 million. It is evident from these facts that banks have been supplied with ample reserves and have used them not only to get out of debt but to expand credit contrary to usual seasonal trends. In the face of a liquidation of business loans, banks have found other uses for funds in securities and loans on securities. One result of the easier reserve position has been the sharp decline in short-term interest rates. The rate on Treasury bills, which responds sensitively to changes in the supply of free reserves or when banks are in debt fluctuates around the discount rate, is now close to 1-1/4 per cent, This is at the average level that prevailed early in 1955 when free reserves were around $300 million. Treasury bill rates have almost reached the level at which nonbank buyers may be inclined to hold deposits rather than bills, as was the case in 1954. The low bill rate has induced substantial shifting of liquid balances into time deposits and led to a reduction in rates paid on such deposits by several leading banks. Rates on bankers' acceptances and commercial paper have also been reduced to the lowest levels since early 1955. Rates on acceptances are now at a level relative to the prime loan rate that gives borrowers a substantial advantage to obtain funds through acceptances. Generally in the postwar period the advantage has been in favor of borrowers at the prime rate, when minimum balance requirements are ignored. Long-term rates have also declined sharply, but not as much as medium and short-term rates, and they are still above levels generally prevailing prior to the autumn of 1956. Long-term rates do not as a rule respond as sensitively or as short rates to changes in availability of as promptly credit, but they have also been held up recently by the of borrowing in the capital markets. continued heavy volume issues of securities by corporations and particularly New have been so large that by State and local governments markets. Recent offer has developed in capital congestion long and medium-term securities by the Treasury and ings of some available funds agencies have absorbed by Government of the market. In view of the existing in this sector in the pattern of yields, it exceptionally wide spread

seems likely that in the course of time either short term rates will rise or medium and long-term rates will decline further. Figures of free reserves in February have been raised by $50 to $90 million above original estimates because re quired reserves at country banks were below preliminary estimates. The revised figures averaged a little over $300 million for the month. The average for this week is expected to exceed $450 million. After that the weekly average may be less than $400 million if usual seasonal trends are shown in the money supply and in other factors influencing the supply and use of reserve funds. To maintain a higher level will require System purchases of securities. It will be diffi cult to supply reserves through repurchase contracts as long as the repurchase rate is so far above market rates. With the present levels of free reserves and of short term interest rates, current Reserve Bank discount rates have no great significance. If member banks do find oc casion to borrow, however, little is gained and something may be lost by making them pay current discount rates. If discount rates at or near this level should be appropriate at some later time, when a turn has occurred in business, to raise rates at that time would probably have the ability some advantage. discussion of the comments by Mr. Thomas, Mr. After a brief of his views with respect to Hayes presented the following statement the business outlook and credit policy: confirm the continued business Recent statistical data is no sign yet of any combination of decline, and there to reserve this trend. factors sufficiently strong favorable of activity in many basic industries, Besides the lower level indications of declines in there have recently been some as well. Unemployment probably nondurable goods output in February--and personal the 5,000,000 level approached excluding the effect diminishing, after income is apparently dividend income in dip in seasonally adjusted of a sharp December. stock market have businessmen and the While consumers, so far in the face of discouraging shown notable restraint is always a possibility that business developments, there if the ad develop quite unfavorably mass psychology will few weeks should for in the next news that we look verse

be considered by the public as unexpected and startling. I have in mind such items as the February unemployment figures, S.E.C.-Commerce survey data on plant and equip ment expenditures for 1958, and estimates of corporate profits for the fourth quarter of 1957, which may be sharply lower than the year before. Even allowing for the effect of bad weather in recent weeks, there are some signs that retail sales are beginning to reflect the in creased unemployment, shorter hours, and lower actual and expected personal income. On the other hand, psychology is being buoyed to some extent by expectations of heavier defense outlays and, in some quarters, by hopes of the usual spring pick-up. Furthermore, it is also widely ex pected that if no clear signs of improvement appear within the next month or so, some major government remedial action will be forthcoming in the form of a tax cut or substantial public works expenditures or both. The price picture remains paradoxical, with both whole sale and consumer indices showing some increase in spite of economic recession. It may be that the abandonment of fair trade price practices by General Electric and some of its major competitors may become an important influence in re storing greater price flexibility at the retail level. I have been disturbed by the evident rigidity of a large part of the price structure, which seems likely to delay materially the economic adjustments needed to permit resumption of eco nomic growth. There is also ample ground to fear a resurgence of inflationary pressures in the longer run--but this clearly our failing to give primary attention now would not justify recession of unknown depth and dura to efforts to counter a tion, which seems likely to exceed in severity that of 1953 have already accomplished a good deal in the I think we of bank credit and improved bank way of easier availability corporate) liquidity through the various measures (and perhaps last fall. Bank credit continues to show little taken since for Government security holdings, and the expansion except policy appear to have of the change in monetary main effects and, to some extent, in in the capital issues market been of which, however, has so far the mortgage market, neither We should see to it that monetary shown sustained strength. contributing as much as it can to the recovery policy is process. of the market until Treasury should be out Fortunately the we can plan the time in many weeks that for the first April, so of Federal Reserve credit policy use of the various instruments on economic grounds alone.

With respect to open market operations, the pro jections suggest that a minimum of transactions will be needed in the next three weeks if, as I hope, the Com mittee is willing to retain the degree of ease represented by the target of approximately $400-$500 million of free reserves adopted last week to avoid large sales of bills which would have been inconsistent with the Board's action in lowering reserve requirements. It is hard to predict what level of free reserves will suffice, in view of the present fluidity of the national money market and short term securities market, to provide adequate ease without creating a needlessly sloppy situation. With this in mind, I would be inclined to give the Manager wide leeway with respect to free reserves, with $500 million being looked upon as an upper limit in the absence of new and unexpected developments. I have been glad to note an in crease in total reserves during February over last February's level, and our efforts should be directed toward widening this year-to-year growth in reserves (adjusted for changes in percentage requirements) and promoting growth in the money supply. Turning to the matter of interest rates, I would first like to point to the steep yield curve which has been estab lished in the last few weeks. Short-term market interest rates have been driven sharply lower by easy availability of bank reserves and by the reduction in supply of short term Treasury securities resulting from the recent refund ing. At the same time, the steadily large supply of new corporate and municipal issues, coupled with Treasury re and cash operations in the intermediate and long funding markets, have caused longer-term rates to reverse term and move higher. Although it is to be expected themselves funds will gradually be drawn from the that eventually out through the maturity structure, I am shorter market of restraint currently being rather concerned by the degree capital markets and the the congestion in the applied by of interest rates to would in the downward trend reversal capital--a degree of restraint be borrowers of long-term consistent with current economic which seems scarcely conditions or our own policies. The spread that has developed between the 2-3/ per rate and short-term market rates naturally cent discount further action is the question whether gives rise to additional cut would discount rate. An called for on the market and reserve with recent open perhaps be consistent might have the effect of trigger requirement policies and rates, which to in bank lending ing a further reduction

date have responded only slowly and grudgingly to the change in System policy and are far out of line with short market rates. On the other hand, it can be argued that, with member bank borrowing already at a low level, it is doubtful whether a lower discount rate would induce banks to reduce lending rates and aggressively seek new loans. The last cut is only a little over a month old, and the reduction in reserve requirements scarcely a week old. There may be disadvantages in nibbling away at the discount rate with frequent small cuts so that if a major move should be considered necessary at some later date to cope with more critical economic circumstances, it would bring the discount rate down to a figure lower than would be consistent with an interest rate level conducive to adequate saving. To put it another way, there is something to be said in these circumstances for deliberately making the discount rate a relatively sluggish rate which will not necessarily reflect fully the more extreme swings in short-term market rates. All things considered, I would think that the next re duction should not exceed 1/4 per cent and might well be deferred a bit longer, although it should probably occur before our next meeting. Finally, as to the directive: I believe the time has come for the directive to give more explicit recognition fact of the business recession and the of the established to a direct effort to provide an switch in credit policy of money and credit that would help to counter availability Clause (b) in the directive might act recessionary forces. as follows: "to combating economic be amended to read recession." situation was bad in Erickson said that the unemployment Mr. the district was not quite as badly off the First District, although comparison for January. average in the year-to-year as the national first five weeks good during the which were store sales, Department about 4 per cent and were now turned down in February of the year, ran 5 per cent for 1957 Automobile registrations last year. behind above 1956. average was slightly whereas the national behind 1956, ahead of January 1957. about 4 per cent Construction was running

One bright spot was that the ski resorts had been booming, with January business well ahead of the previous year. February also was a good month and March and April likewise were expected to be good. Advance registrations for boys' and girls' camps were 6 per cent higher than the good level of January a year ago. Loans at banks had been declining at about the same rate as last year, while the Reserve Bank discount window was being used only by the smaller banks. Mr. Erickson said that he would favor a change in the Com mittee's directive and felt that it might contain some reference to monetary ease, a phrase that had been used at times in the past. Thus, clause (b) in paragraph (1) might have added to it "by con tinuing to maintain ease in the money market." He doubted that be done about the discount rate until the Treasury anything should the way, but he would like to see the rate financing was out of cent during March. As to open market reduced another quarter per the Manager of the Account a he would favor giving operations, He would hold free reserves in the $350 certain amount of leeway. that we should prevent agreed with Mr. Hayes million range and $500 situation in the market. a sloppy conditions continued that Eleventh District Mr. Irons stated was in the oil in The major exception to trend downward slightly. badly and production had deteriorated where the situation dustry, production of meant that basis. This nine-day allowable was on a

3/58 -29 crude in March would be at a daily average rate of 2-1/2 million barrels, compared with a daily average of about 3.7 million barrels at the time of the Suez crisis and a plateau or "normal" of about 3.4 million excluding that period. The situation, which reflected imports from the Middle East and elsewhere, was having an effect not only on the oil and associated industries but also on State finances. Retail trade, which ran ahead of last year in January, was bad during the first two weeks of February and then increased in the third week with the result that the first seven or eight weeks of the year ran around 4 per cent below a year ago. Depart ment stores gave various reasons for the decline, including bad weather and psychology, and there were indications that prices might be a factor because it had been found that whenever price-reduction sales were held, the response was excellent. Collections were not presenting a difficult problem. Employment in the district was down a bit further. The aircraft industry, which experienced a latter part of 1957 and was using up a backlog of decline in the seemed to look forward to some improvement, and construction orders, In general terms and excluding the oil was holding up fairly well. that the extent of the decline in the dis industry, one could say below a year ago. The decline from 2 to 5 per cent trict would range appreciably less than a year ago, Mr. in bank loans this year was $28 million against $67 mil said, the comparison being about Irons the city banks were not borrowing significantly; lion. Member banks

had not been borrowing for some time, and the only borrowing at the Reserve Bank was by country banks for seasonal reasons. At the moment, banks had substantial aggregate free reserves. Heavy rains, particularly in the southern part of the district, produced a problem of getting people into the fields. Citrus prospects were very favorable, and on the whole the agricultural outlook was promising. As to policy, Mr. Irons said that in view of the reduction in reserve requirements, it would be consistent to maintain free reserves at around the $400 million level, with a certain leeway given to the Manager of the Account. He was disturbed about the disparity between the discount rate and short-term market rates. If open market policy was correct and the reduction of reserve requirements was correct, one might question whether the discount rate policy was correct. He was not sure whether he would favor a a quarter or a half per cent at this time, but a re reduction of of the rate would move in the direction of being realistic. duction consideration might well be given to getting On balance, he felt that in line with the market. He hoped that any the discount rate better to stir up further specula such an amount as not change would be in short-term rates to pull which might cause tion and anticipation, not object to a further. He would discount rate even away from the to indicate a shift in policy. change in the directive was a District situation that the Twelfth Mangels said Mr. Preliminary employment in some other areas. different from that little

data for December showed only a slight decline other than seasonal, decreases in manufacturing and mining employment being offset by gains in construction and trade. The decline in aircraft employ ment in January was only about 20-25 per cent of the average monthly decline from July through December. In Oregon, lumber employment had picked up somewhat. Although orders for plywood were up, prices had been reduced again to $64 per thousand feet, compared with $90 two years ago. The Oregon unemployment trust fund was now below the 3 per cent level and all experience rating credits had been cancelled. Therefore, for the first time since 1941, employers would be charged 2.7 per cent of covered wages until the fund was built up. Insured unemployment in January was unchanged from Decem ber, the third month of stability after four months of sharp decline. Department store and auto sales were down somewhat, and steel mills were operating at 65 per cent of capacity. Residential construction permits were up in January from January 1957. Demand for California citrus fruits was strong and orange and grapefruit prices were up. The cotton crop was excellent and domestic mills were paying higher prices than export customers. For the three weeks ending February in bank loans was double that of a year ago, Mr. 19, the decline take care of all foreseeable loan Mangels said. Banks had funds to but demand had moderated somewhat. demands, it appeared that a period was approach Mr. Mangels said that of both business test of the flexibility would afford a good ing which

and labor to adjust to changing consumer demands. He believed that price cuts would be necessary to stimulate consumption, and while present excess capacity should bring about price declines, the latest consumer price index showed a further advance. Mr. Mangels suggested that existing policy should not be changed. Free reserves in the $4OO-$500 million range would be about right for the next two weeks, he said, and he would have no objection to a change in the Committee's directive as suggested. Mr. Deming said that the economic slide continued in the Ninth District during February. Unemployment was still rising during that month although it would normally level off in late February and remain stationary in March. This might not happen this year. If the movement of iron ore proved to be less than last year, unemployment would be greater this spring than for some time, adding that the taconite plants in Minnesota were Mr. Deming said, at 80 per cent of capacity this season now planning to produce cent last year. This reflected a severe lack compared with 100 per industry. Although the rise in unemploy of demand in the iron ore last, there were almost as had been more severe than ment this year this time as a of Minnesota at employed in the State many persons continued to be spots in the district ago. The two bright year in 1957 was about 3 per where cash income found in agriculture, where the number 1956, and in home building, cent higher than in higher than in 1958 was a third issued in January of permits

January 1957. Bank loans were about the same as last year, a decline in business loans having been mostly offset by an increase in loans of other types. Mr. Deming said that he agreed with Mr. Hayes that the Committee should deal with the situation as it saw it today, rather than on the basis of a possible resumption of inflationary pressures. He had been impressed with the 4-1/2 million of unemployed at the time of the preceding meeting and he was more impressed with the 5 million unemployed reported by Mr. Young this morning. He would move toward the $500 million of free reserves cited as an upper range by Mr. Hayes. Mr. Deming said that he would favor a reduc tion of 1/2 per cent in the discount rate as soon as feasible. As a matter of fact, he would like to see a greater reduction in order to bring the rate better in line with the bill rate, but a greater reduction might be misinterpreted by the public. Mr. Deming agreed should be changed and, while he did that the Committee's directive not see a way of achieving it immediately, he would like to see reserve requirements further reduced. Mr. Allen said that in the last few weeks business activity a little more than appeared to have declined in the Seventh District the automotive and industrial the nation as a whole, because in dominate the district situation. continued to machinery industries poor record of automobile Young's report on the Supplementing Mr. of 887,000 on said that new car inventories sales, Mr. Allen

February 20 represented 73 days supply, based on sales in the second days of the month of 12,149 per day. This was an industry figure, and at least some of the makes were in greater than days supply. Optimistic straws noted by Mr. Allen included a slight improvement in orders for steel, improved demand for certain industrial goods such as welding rod, and some rehirings of a seasonal nature in the farm machinery industry. But the continued declines in automotive and industrial machinery production were dominating. Claims for unemployment insurance were being filed at a faster rate, relative to a year ago, in the Seventh District than in the nation. However, as of February 8 the proportion of covered workers receiving unemployment insurance was somewhat less than the Iowa, and Wisconsin. It was higher national average in Illinois, than the national average in Michigan and Indiana. Department store results thus far available made it seem February would maintain the rather good January rate unlikely that adding that big ticket house of consumer buying, Mr. Allen said, weak. On the other hand, consumers hold items had been especially resistance to high meat prices, showing less than expected were were moving well. The luxury goods such as cameras and certain involving large outlays, particularly public seemed wary of purchases areas favorable farm although in the rural if credit was involved, to be supporting relatively income trends were reported prices and machinery. Steel goods and farm of sales of retail good levels

firms reported some improvement in orders and their rate of produc tion seemed to have stabilized. In January, however, ingot output was 4O per cent below last year, whereas metal fabricating was off only 11 per cent, which suggested a rapid liquidation of inventories. The size of the gap between use and production of steel indicated that steel output could rise moderately despite a continued decline in over-all industrial production. Bank debit figures for January from 32 metropolitan reporting areas were off 1 per cent from a year ago, but 19 of the 32 areas reported gains, with the largest gains in Iowa cities. Mr. Allen reported that figures indicated savings were being well maintained, inflows to time accounts at commercial banks during January approximately matching January of 1957, while withdrawals were below a year ago. Little use of the discount window was being made by the larger district banks, in fact none of them borrowed One of the largest banks had been a consistent buyer last week. that bank now had a large portfolio of Treasury of Federal funds, but Doubtless there would for the April 1 tax date. bills in preparation March and other banks would be buy be more bill accumulation during in recent years the district's borrowing or both, but ing funds or from their former practice of buying banks had been getting away April. Rather, they pick January and carrying them until bills in through repurchase cover their problem in March or they up bills arrangement s.

With regard to the directive, Mr. Allen said he had come to the meeting with the idea that the instruction for "mitigating recessionary tendencies" was not realistic, and he still felt that way. He had had in mind language such as Mr. Hayes suggested but perhaps a more positive phrase such as "promoting economic recovery" woulu be better. As to the discount rate, the Chairman of the Chicago Bank had commented yesterday that he did not think he would want to do anything until the first week in April, when the results of the Easter business were known. Mr. Allen expressed the view that the discount rate had lost much of its significance, except perhaps psychologically, and that the more it was used the less effect it had. Subject to further discussion at this meeting, he would be inclined to favor holding free reserves in the $400-$500 million range. Mr. Leedy reported that the Tenth District was seeing evidence effects of recession. Employment was down but not of the cumulative generally, apparently because the dis as sharply as for the country than most others. Department store trict was less industrialized Agricultural conditions con failed to match last year. sales had was up from a year ago, and tinued good. Livestock in the district Business loans had de meat animals were favorable. the prices for of the year than they did last year, creased less since the first volume as last year. stayed at about the same while deposits the target for to Mr. Leedy that to policy, it seemed As what it had been much in line with should be pretty free reserves

since the reduction of reserve requirements. The action taken in reducing reserve requirements produced publicity to the effect that $500 million of reserves were being released and, therefore, it should not appear that the level of free reserves was being reduced. Conditions reported at this meeting would seem to justify working toward the upper edge of that range of free reserves. As to the discount rate, Mr. Leedy felt that a reduction of not less than a half per cent should be made as quickly as feasible. Anything less and undermine the psychological value of would cause disappointment followed short-term market rates up a reduction. The System had there was the same reason to follow when they were increasing and to a level of rates with the matter of getting them down, along the directive, Mr. purposes. As to with the System's consistent by Mr. Allen. The present with the views expressed Leedy agreed action and that would indicated a rear guard wording of clause (b) Hayes. In his suggested by Mr. to the wording be his objection the System was taking indicate that the directive should opinion, had suggested would such as Mr. Allen and wording the offensive, stimulate recovery would be "to His own suggestion seem appropriate. in the economy." District economy in the Fifth said that weaknesses Mr. Leach February, with further during and spread to have deepened appeared District pro off in the decline. as yet of a leveling no evidence in early February, dropped sharply bituminous coal duction of

continuing its decline over the past several months, and the most recent figures confirmed earlier reports of further cutbacks in textile operations. Insured unemployment continued to increase, and somewhat more rapidly than in the country as a whole. Average weekly hours in manufacturing industries in both durable and non durable goods had dropped, cigarette manufacturing being a fairly important exception. Changes in business loans at district report ing member banks confirmed other evidences of weakness. For some time, Mr. Leach said, he had been favoring some what greater reserve availability, but the recent reduction in re serve requirements created more than he had advocated. He had concurred in a $400 to $500 million free reserves range after the reserve requirement reduction because free reserves had been averaging around $250 million and it seemed to him that if the reserve requirement have economic significance the System would have to reduction were to of the reserves made avail a reasonable proportion leave outstanding to $500 million range still seemed able by the reduction. The $400 Leach went on to desired ease. Mr. as a benchmark of appropriate monetary policy requires declining economy flexible say that, in a to that situation. ease appropriate to provide reserve the System may be, should as they dangers, serious future inflationary Fears of but rather present obligations from fulfilling the System not deter and foresight to tighten will have the wisdom us hope that we make for this degree end to the need there is an as soon as adequately

of ease. He saw no reason to tighten at this time, and recent rates in the short-term market made it clear that further ease would serve no useful purpose. The discount rate was not very significant at the moment but it was out of line with short-term market rates and with policy actions recently taken by the System. He thought that a reduction had been discounted and would have little effect on market rates, but it might have some effect on bank rates and it would give more room to increase later. He would much prefer a half per cent reduction to a quarter and felt that the reduction should be made around the middle of this month. He also felt that recent changes in the economy called for a change in the directive. Use of the expression "combatting economic recession" in clause (b) might be desirable. Mr. Vardaman directed attention to the psychological aspect He sensed a spirit of apprehension in of the current situation. quarters which seemed to be spreading rapidly. Some many banking their customers from the normal bankers appeared to be discouraging there was a disturbing parallel between the amount of borrowing, and the early 1930's. He suggested that attitude of bankers now and in to point out to bankers of the Reserve Banks endeavor the Presidents no basic change in the that there was their respective districts in a whole and that consideration be given soundness of the economy as bank examination function. lines through the along the same to working

3/58 -40 On the basis of the psychological factors, Mr. Vardaman expressed the view that a reduction in the discount rate might be interpreted as fear on the part of the System. If change a were made, he would much rather nibble at the rate and reduce it by only 1/4 of one per cent. At some time soon a further reduction of one per cent in reserve requirements might be considered, but for the moment the Reserve Banks and the member banks ought to emphasize the availability of loanable funds. As to the range of free reserves, probably the Committee ought to continue to set a goal in the area of $400-$500 million. On the directive, Mr. Hayes' suggestion would be acceptable. Instead of using the word "recovery" it might be better to use something like "restoring the economy to its normal level of activity." He doubted whether we had reached the point where use of "recovery" was necessary. Mr. Mills suggested that in setting near-term System policy, it would be advisable to think back over observations Mr. Rouse made earlier in the meeting regarding the subject of plentiful reserves the commercial banks as contrasted to congestion in in the hands of Mr. Mills said further that this situation the capital markets. cannot serve as a substitute for made it clear to him that reserves that are essential for financing the capital savings of the kind a sloppy market would be that, therefore, the risk of markets and any attempt to re too liberally in if reserves were supplied run such a risk could In his opinion capital market congestion. lieve

be incurred if the System should supply reserves so aggressively as to bring them rapidly up to a positive $500 million free reserve level. He noted that on the basis of projections for the next three weeks or so and following the March 10 payment date for the Treasury's current offering, positive free reserves might range in the $375 million area, which range, as he saw it, would be acceptable as offering the commercial banks a freedom of maneuver in loaning and investment without the hindrance of a sloppy market. Subsequently, when long-term interest rates in the capital market sectors had adjusted to the Treasury offering and it was clear that additional reserves would be helpful to the economy, it might then be desirable to bring the supply of positive free reserves up to the $500 million level. However, Mr. Mills said that he would hesitate to supply new reserves in quantity until a long look could be taken at the impact of the Treasury's financing on the capital market. He thought that time, which might be ten days or two weeks hence, a discount by that rate reduction of 1/2 of 1 per cent would be in order to bring the with market rates. He would favor discount rate into better alignment the wording of the directive with a preference for a change in language of the kind suggested by Mr. Hayes. that he regarded as significant the Mr. Shepardson said effect that continuing liquidation made by Mr. Young to the statement stocks to a level from which must inevitably bring of inventories by a pickup in orders. tend to build up, accompanied they would again

As to prices, there were indications that whenever an adjustment of prices took place, there was a response on the part of consumers, thus indicating that there was still a need for price adjustment. We were facing wage negotiations that Mr. Shepardson felt should take place in a framework of continuing restraint on price advances. There was no indication of any lack of funds to meet loan demands, he said, and it seemed to him that the present target of free re serves was ample. He would prefer to lean a little toward the low side of the range rather than to the high side, but the range itself appeared to be adequate. The discount rate seemed to be out of line but he did not see any purpose in making a quick change. The System had made a number of policy changes in fairly rapid succession, and he hoped that action on the discount rate might be deferred for some little time. At such time as a change was made, he saw merit in a shift of 1/2 of 1 per cent because he doubted the advisability of changing the rate too frequently in the current economic framework. He would have no objection to a change in the directive, but at this would not like to shift to wording which indicated too stage he strongly aggressive upward action. Fulton said that the Fourth District, a highly industrial Mr. of the current recession feeling the impact ized area, was probably was at a low rate--one other areas. Steel production more than most Automobile and lowest since 1938. operations the company reported

appliance concerns were cutting back deliveries because of lack of sales, and no improvement was in sight. Oil companies simply were not buying and were shifting the supply of pipe back and forth among themselves. However, customers' inventories were generally in good shape except for automobiles and pipe. Steel warehouses were not overstocked and there was a fairly good mixture of inventories. The ore situation mentioned by Mr. Deming was definitely going to affect operations this year, for a great amount of ore had been brought down last year and stockpiles were ample throughout the Fourth District. One slight gleam of hope in the picture was the fact that representa tives of machine tool manufacturers recently reported orders stronger and a large foundry reported a surprising number of than last year, for the fourth quarter of 1958 and the inquiries about quotations in February were about Department store sales first quarter of 1959. automobile sales were down about 25 10 per cent under last year and in January and was up more than seasonally per cent. Unemployment had expressed the consensus in February. Mr. Young up still further Fulton said, in suggesting Fourth District, Mr. of businessmen in the being deeper and possibility of recession had the that the current other recent recessions. longer-lasting than at or near 2 discount rate were felt that if the Mr. Fulton move in either position to be in a better System would per cent the as soon as pos to that area should be reduced The rate direction. cent would be 1/4 of one per reduction of said, and a sible, he

niggardly in the face of existing market rates. A banker had remarked to him that the present congestion in the long-term market might be caused to some extent by comments that the reces sion was a very temporary thing; therefore, investors were not willing to put out money for long-term securities at existing rates, believing they could get higher returns if they waited. This banker claimed that the amount of savings was adequate for the supply of capital issues but that these issues were going begging because of anticipation of a revival. Mr. Fulton regarded $400-$500 million as an acceptable level of free reserves, preferring $500 million. In concluding, he expressed the view that the current recession was of great significance and not a temporary thing. He would change the directive in a way to indicate that the Committee was actively taking action to combat the recession. Mr. Bopp reported that economic conditions in the Third District continued to deteriorate. Although data for the entire could be interpreted to mean that it had a well-balanced district chronic unemployment for years, economy, there had been areas of hard coal areas, like Scranton, Wilkes-Barre, and including the the old railroad repair area of to a lesser extent, Pottsville; vacation areas like Atlantic City. Altoona; and on a seasonal basis, all of these areas except Altoona a year ago, unemployment in Even It now exceeded 15 per per cent of the labor force. exceeded 10

cent in all except Altoona and had passed 20 per cent in Atlantic City. In January, unemployment in the fourteen principal labor markets of the district, seasonally adjusted, was 8.5 per cent of the labor force, compared with 6.7 per cent for the country as a whole. Only four areas were below the national average and none was as low as 5 per cent. The classification of three areas had been lowered and the district had seven areas of substantial labor surplus. Both new and continued claims for unemployment benefits, despite temporary aberrations, continued far above the levels of a year ago. In another major area of System concern, namely, prices, Mr. Bopp reported that the cost of living in Philadelphia rose .1 of 1 per cent in January, compared with a rise of .6 per cent nationally. There seemed to be little if any upward thrust to consumer prices from strong demand. Some declines should be in prospect, coming in pricing policies of some durable con encouraged by the change In retail trade, new car registrations sumer goods manufacturers. below those of a year ago in Eastern in January were 16 per cent during the first three in Philadelphia, registrations Pennsylvania; below a year ago. Department were 25 per cent weeks of February of the bad weather and disrupted sales collapsed as a result store cent below a they were 7 per the year to date For transportation. 22, they were 12 per four weeks ending February year ago; for the below. There 39 per cent last single week and for the cent below;

had been little change in bank credit during the past three weeks. Business loans continued to be repaid and were now about 5 per cent below a year ago. The only optimistic note was a report on the expectations of the 4OO largest industrial customers of the Pennsylvania Power and Light Company, the consensus being summarized in the phrases: "The downturn is about over, the upturn will come by summer." Mr. Bopp expressed the view that these developments called for a policy of continued and possibly greater ease. As to the dis count rate, it seemedto him the question was not whether it should be reduced, but when and by how much. As to timing, he felt it should be as soon as an "even keel" policy was no longer required Treasury financing. In the light of the recent re for the current requirements and the structure of market rates, duction in reserve this would be another move toward greater ease, he thought and since would be shorter than usual or than if we were moving that period tightness. He would, however, accept the judgment toward greater As to amount, he thought the market specialist as to timing. of the 1/2 per cent but between 1/2 not between 1/ per cent and choice was light of market rates, one some larger amount. In the per cent and a level of 2 per centof 3/ per cent to might justify a reduction when the boom was short time in 1955, prevailing for a the rate that only once On the other hand, he appreciated gaining momentum. than 1/2 per cent and that the rate by more had the System reduced this reason, he crash of 1929. For the stock market was just after

would favor a reduction of 1/2 per cent at this time. In this connection he noted that the Philadelphia Bank's board of directors would meet this Thursday and that the next scheduled meeting would be two weeks from that date. As to the directive, Mr. Bopp said he would like to see it changed to convey the general idea that the Committee's purpose was to promote recovery by maintaining ease in the money market. Mr. Bryan said he would like to report that the Sixth District was prosperous and doing well but that he could not make such a state ment since the district's scorecard was continuing to show declines in practically all lines of activity. Private advices indicated addi tional plant layoffs and plant closings. District banks seemed to be responding in general fairly wel1 to the current situation with regard to funds, and loans were up slightly over the same period sensed, like Mr. Vardaman, that the banks last year. However, he more carefully now than when the were policing their loans rather loans strictly during a period of up System wanted them to police felt that there might develop downturn continued, he turn. As the more liquidity so that the banking system toward a tendency in a good deal higher than requirements could go psychological reserve legal requirements. pleased with the himself as Mr. Bryan expressed On policy, seemed to him because it of reserve requirements recent reduction If he interpreted on all grounds. action was necessary that such

the statistics correctly, this meant that if the $500 million of reserves released by this action were kept available for the rest of this half of the year there would be a growth of total reserves slightly in excess of 3 per cent. He felt that the System should avoid doing anything through open market operations to offset that growth factor in a period of recession. Putting this in terms of free reserves, he would agree with a range of $400-$500 million, with the qualification that any error should be toward the top of that range or above it rather than toward the low side. Technically, a reduction in the discount rate was called for, but there was also the psychological problem which he found it difficult to appraise. A reduction of 1/4 of one per cent would give the impression of nibbling at the rate and he doubted whether this was an advisable posture for the System to take. As to the directive, he thought that it should be changed. Mr. Johns said that some of his colleagues thought they saw indications that the rate of recession in the Eighth District was not as rapid as it had been. However, in his own judgment, the points leading to that view were not conclusive and other develop that the situation in the district gave ments caused him to believe of the St. Joseph Lead For example, operations no cause for cheer. although there had been shut down for 30 days; Company had been to appliance plants, there evidence of recalling employees recent

had now been an announcement of a closedown of the General Electric Appliance Park in Louisville. Lumbering was not doing well, rail roads simply were not buying,and last year's cotton crop was of deplorable quality. As to policy, Mr. Johns said that he found himself in agree ment with Mr. Leedy. He would not only urge working toward the upper end of a $400-$500 million range of free reserves, but he would favor setting $500 million as the operating minimum and not worry if the figure went somewhat higher. He agreed that the discount rate ought to be reduced, and as promptly as possible, whatever that might mean in view of the current Treasury financing. In his opinion the rate should not be higher than 2 per cent. Historically, this would be strong medicine but he felt that the patient needed strong medicine and he would not hesitate to administer it. In this connection, he that it would be a good time for the System to exhibit suggested with respect to discount rate action. The sone appearance of unity Banks were to meet the second Thursday directors of a number of the that as many Banks as possible and it would be his hope of the month The effective date of the rate at that time. would act to reduce regarded this as following be deferred if the Board the change could to the directive, he Treasury financing. As too closely upon the about mitigating recessionary it was time to stop talking felt that Mr. Allen, that the wording and he would suggest, like tendencies than negative terms. in positive rather directive be of the

In a further comment, Mr. Johns said that he was becoming progressively more concerned about statements both within and out side the System to the effect that the discount rate was not very important or significant and that a change in the rate therefore was not significant. Even if the rate were reduced as much as one per cent there might not be a flood of discounting, Mr. Johns said, but this did not mean that a rate change was not important or with out significance. To say that the discount rate was not an important or effective instrument of monetary policy was, in his opinion, to do the country a long-run disservice. It seemed important to him not to say by way of the rate that the degree of ease which had been achieved might not be here to stay, and he thought that this was the message that the System was conveying when the rate was not in line market rates. Mr. Johns recalled that a few years with short-term discount rate mechanism which was a thorough study of the ago there A, Advances and Discounts by resulted in a revision of Regulation was stated that this would Banks. At that time it Federal Reserve rate policy but the second up by a study of discount be followed that no time was more appro never been made. He thought study had in order to decide to launch that study, than the present priate worth and how it should of monetary policy was what this implement be used. by the tone of that he was impressed Mr. Szymczak said to as realism--which it should be referred pessimism--perhaps

dominated the comments at this meeting. He believed that the discount rate should be reduced to 2 per cent and that open market operations should be conducted with a view to having a level of free reserves of $500 million or a little more. He would favor a change in the directive along the lines suggested by Mr. Hayes. Mr. Balderston said that he was somewhat concerned about the situation in the capital markets referred to by Mr. Mills, especially in the light of the profit squeeze that seemed to be affecting business planning. However, the immediate problem was the one to which Mr. Deming had referred, namely, rising unemploy ment. This meant that the System continued to be confronted with the dilemma of rising unemployment while prices remained sticky. The price situation was encouraging buyer resistance and prolonging price-cost maladjustments that needed to be removed if the economy was to regain its health. In the face of that dilemma, Mr. Balderston said he would favor a target of $00-$500 million of free reserves, and he would suggest a change in the directive using the positive mentioned by Mr. Allen. He would like some wording which approach back into the directive the word "ease" and specifically would bring (b) provide that operations for the would like to suggest that clause toward "encouraging sound recovery and System Account be directed As to the discount rate, Mr. employment by a policy of ease. of 1 per cent when of at least 1/2 would favor a change Balderston were not for apprehension If it financing was completed. the Treasury

about the psychological reaction, he would favor a move to 2 per cent, but he noted that of the 27 downward adjustments in the rate since 1920 all but one of them had been in the amount of 1/2 of 1 per cent or less. In the event of a greater reduction, he was appre hensive that the press would carry the news in terms of this being the greatest reduction since 1929. Chairman Martin said he thought the question of the amount of change that might be appropriate in the discount rate was one that was open to debate. He would not want to take a strong position himself. A 2 per cent rate was justified in terms of money market but certainly the psychological point was a very real relationships, could be misinterpreted. He agreed that it one and the reduction not to have a sloppy operation, and he would be desirable to try particular situation to might not be helpful in this added that it Banks at different levels. discount rates of the various have the he thought it the Committee's directive, With respect to changing and he had no or negative approach was a question of a positive no objection to the point. He would have strong views on that recession and establishing such as "combatting use of language presented different The Chairman then for recovery." conditions the directive, including the wording of suggestions for changing state that (b) which would for clause suggested language one that other things, "to with a view, among policy would be open market of stable ease to resumption by monetary further contributing of the economy." growth

The other members of the Committee indicated that they would favor such language. Chairman Martin then said that the consensus of the meeting appeared to favor a range of $400-$500 million as a target for free reserves, with a leaning toward the higher end of that range rather than to the lower end. There followed a general discussion of the discount rate level and procedure in the light of the views expressed at this meeting, at the conclusion of which Chairman Martin suggested that the matter be allowed to take its course at the respective Federal Reserve Banks. In view of current circumstances, including the action taken by the Congress to increase the national debt limit from $275 to $280 billion, Mr. Rouse suggested eliminating from the directive the sale direct to the Treasury from the paragraph (3) authorizing of such amounts of Account for gold certificates System Open Market within one year as might be necessary Treasury securities maturing accommodation of the Treasury up to an from time to time for the million face amount. aggregate of $500 Thereupon, upon motion duly made the Committee voted unan and seconded, direct the Federal Reserve imously to Bank of New York until otherwise di rected by the Committee: sales, or exchanges To make such purchases, (1) securities, and replacement of maturing (including off without replacement) maturities to run allowing

for the System Open Market Account in the open market or, in the case of maturing securities, by direct ex change 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 contributing further by monetary ease to resumption of stable growth of the economy, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including commit ments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of in debtedness as may be necessary from time to time for temporary accommodation of the Treasury; provided the amount of such certificates held at any that the total Reserve Banks shall not exceed one time by the Federal in the aggregate $500 million. at this point and reconvened at 2:00 p.m. The meeting recessed the following in attendance: with PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Fulton Mr. Irons Mr. Leach Mr. Mangels Mr. Mills Mr. Shepardson Mr. Szymczak Mr. Vardaman Johns, Alter and Deming, Erickson, Messrs. Allen, Market Committee Federal Open of the nate Members

Messrs. Bopp, Bryan, and Leedy, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, respectively Mr. Riefler, Secretary Mr. Thomas, Economist Mr. Roelse, Associate Economist Mr. Rouse, Manager, System Open Market Account At this session there was a discussion of the study that had been made by the Special Committee appointed at the meeting on January 28, 1957 consisting of Messrs. Martin, Hayes, Allen, Balderston, Erickson, and Szymczak. In accordance with the agreement at the meet ing on March 5, 1957, this Special Committee had been reviewing all of the operating procedures that had been presented in the report of the Ad Hoc Subcommittee as discussed at the meeting on March 4 and 5, 1953, with the exception of the matters relating to the housekeeping aspects of that Subcommittee's report. In the course of the discus sion, there was presented for the approval of the Committee the follow ing continuing operating policy that had last been reaffirmed at the meeting on March 5, 1957: a. It is not now the policy of the Committee to any pattern of prices and yields in the Govern support market, and intervention in the Govern ment securities ment securities market is solely to effectuate the objectives of monetary and credit policy (including correction of disorderly markets). Upon motion duly made and seconded, and by unanimous vote, the foregoing of policy was reaffirmed. statement of the Com presented for the consideration There was also which, by unanimous operating policy the following continuing mittee

action, was reaffirmed at the meeting of the Committee on March 5, 1957, pending completion and submission of a report by a Special Committee appointed at the meeting on January 28, 1957. b. Operations for the System Account in the open market, other than repurchase agreements, shall be confined to short term securities (except in the correction of disorderly markets), and during a period of Treasury financing there shall be no purchases of (1) maturing issues for which an exchange is being offered, (2) when-issued securities, or (3) outstanding issues of comparable maturities to those being offered for exchange; these policies to be followed until such time as they may be superseded or modified by further action of the Federal Open Market Committee. During a discussion of this statement of policy, Mr. Hayes said that, in an effort to promote general agreement, he would vote to approve the statement if it included the qualifying phrase, "as a general rule," after the word "shall" in the second line and after the word "shall" in the fourth line. A motion to reaffirm the statement in its existing form was approved, Messrs. Martin, Balderston, Fulton, Irons, Leach, Mangels, Mills, Shepardson, Szymczak, and Vardaman voting "yes," and Mr. Hayes voting "no." Messrs. Allen, Bopp, Bryan, Deming, Leedy, and Johns stated that, Erickson, had they been members of the Committee, they would have voted to reaffirm the foregoing statement of policy. policy was then presented following continuing operating The for the consideration of the Committee: for the System Account in the open c. Transactions the purpose of into solely for market shall be entered

providing or absorbing reserves (except in the cor rection of disorderly markets), and shall not include offsetting purchases and sales of securities for the purpose of altering the maturity pattern of the System's portfolio; such policy to be followed until such time as it may be superseded or modified by further action of the Federal Open Market Committee. Mr. Hayes stated that he would vote to reaffirm this statement of policy if the statement were amended to read as follows: Transactions for the System Account in the open market shall be entered into solely PRIMARILY for the purpose of providing or absorbing reserves (except in the correction of disorderly markets), and shall, AS A GENERAL RULE, not include offsetting purchases and sales of securities for the purpose of altering the maturity pattern of the System's portfolio; such policy to be followed until such time as it may be superseded action of the Federal Open Mar or modified by further ket Committee. Chair put a motion to reaffirm The statement in its existing form with the out the changes suggested by Mr. Hayes, this motion was carried, Messrs. and Martin, Balderston, Fulton, Irons, Leach, Mangels, Mills, Spehardson, Szymczak, and Vardaman voting to approve, and Mr. Hayes voting "no." Allen, Bryan, Deming, Erickson, Messrs. Leedy indicated that, had they Johns, and of the Committee, they would been members voted to reaffirm the existing state have ment of policy. that, had he been a Mr. Bopp stated the Committee, he would not have member of reaffirm the existing statement voted to have voted to but that he would of policy that was changed to approve a statement read as follows: in the open market the System Account for "Transactions offsetting purchases rule, not include shall, as a general

and sales of securities for the purpose of altering the maturity pattern of the System's portfolio; such policy to be followed until such time as it may be superseded or modified by further action of the Federal Open Market Committee." Mr. Hayes stated that he would be willing to vote for a statement such as Mr. Bopp had indicated he would approve. that the next meeting of the Federal Open Mar It was agreed 25, 1958, at 10:00 a.m. be held on Tuesday, March ket Committee would Thereupon the meeting adjourned. Secretary

Source

Also: Record of Policy Actions