March 25, 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 25, 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. Robertson Mr. Shepardson Mr. Szymczak Mr. Vardaman Messrs. Erickson, Allen, and Deming, Alternate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and Leedy, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Daane, Hostetler, Marget, Walker, and Messrs. Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Carpenter, Secretary, Board of Governors Assistant Secretary, Board of Mr. Kenyon, Governors Chief, Government Finance Section, Mr. Miller, and Statistics, Board Division of Research of Governors Stone, Manager, Securities Department, Mr. Bank of New York Federal Reserve Vice President, Federal Mr. Freutel, First Bank of St. Louis; Messrs. Ellis, Reserve Mitchell, Strothman, and Tow, Roosa,
Vice Presidents of the Federal Reserve Banks of Boston, New York, Chicago, Minneapolis, and Kansas City, respectively; Mr. Einzig, Assistant Vice President, Fed eral Reserve Bark of San Francisco; and Mr. Anderson, Economic Adviser, Federal Reserve Bank of San Francisco Chairman Martin stated that Mr. Johns, Alternate Member of the Federal Open Market Committee, was unable to attend this meeting because of illness and that, in the absence of objection, Mr. Freutel, First Vice President of the Federal Reserve Bank of St. Louis, would attend the meeting at the suggestion of Mr. Johns as an observer. no objection, Mr. Freutel joined the meeting. There being Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on March 4, 1958, were approved. there had been distributed to the members Before this meeting at the Federal Reserve Bank of New of the Committee a report prepared operations during the period March 4 through York covering open market covering commitments exe and a supplemental report March 19, 1958, of both reports have March 24, 1958. Copies cuted March 20 through Open Market Committee. files of the Federal been placed in the Mr. Rouse the last meeting, operations since Reporting on free reserves on the high had been necessary to maintain said that it Committee in order suggested by the that had been side of the range much of the intended. During ease that was the degree of to achieve
period since the last meeting, the New York and Chicago banks had been under moderate pressure. The Chicago situation reflected in part the stockpiling of bills by banks in anticipation of the April 1 personal property tax date in Cook County, while some part of the tightness in New York reflected continued purchases by banks of Government securities and the extension of sizable loans to dealers. Also, an underlying influence affecting reserve positions in the money centers was that the aggregate volume of free reserves had generally continued to be heavily concentrated in country banks. Mr. Rouse noted that rates on short-term debt instruments moved lower toward the close of the period. The average issuing rate in the bill auction on Monday, March 24, was 1.19 per cent, compared week, and the rate on bankers' ac to 1.34 per cent the previous reduced by an additional 1/ of 1 per cent after the ceptances was for longer-term Government securities close on March 24. The market but a restraining influence improvement during the period, showed some of large scale financing to had been exerted by recent announcements near future. Almost $750 mil by private firms in the be undertaken during the past two weeks. financing had been announced lion of such it could hardly be ex this large volume of offerings, In view of in long-term in much, if any, decline that there would be pected terest rates. to the New York special certificates The Treasury issued in order to avoid since the last meeting Bank on two occasions
overdrafts. Based on the estimates at the New York Bank, the Treasury's use of the special certificates reflected not so much a dearth of available cash balances, although they were low, but rather a desire to use the device at least once before the legisla tive authority to obtain such accommodation expires next June Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period March 4 through March 24, 1958, were approved, ratified, and confirmed. Chairman Martin referred to the preliminary draft of record of policy actions taken by the Federal Open Market Committee during the year 1957 which had been distributed with a memorandum from the Secretary dated March 14, 1958, in order to obtain comments and sug gestions prior to action by the Board of Governors on the final form of record to be included in the Board's Annual Report pursuant to the requirement contained in the last paragraph of section 10 of the Federal Reserve Act. He said that a number of comments had been re ceived and that the matter had been placed on the agenda for this meeting to provide an opportunity for any additional comments. upon the Secretary, who stated that The Chairman then called comments had been received from most of the Presidents, that they that in almost all cases the suggestions had been constructive, and in the draft. In a few cases, however, it had been incorporated
was not possible to fit in the suggestions with the minutes of the Committee on which the policy record was based. Two general problems were the subject of comment, Mr. Riefler said, the first having to do with how to treat discussions relating to the discount rate. One suggestion was to eliminate reference to all such discussions, but this did not seem proper because discussion of the discount rate represents an important part of the record. Therefore, an effort had been made to handle the matter by making it clear in the policy record that the rate was discussed in objective fashion as something within the responsi bility of the directors of the Federal Reserve Banks. The second general comment, made by two or three parties, was in substance to the effect that the record for the first six months of 1957 showed considerable filling back and forth and therefore did not seem to justify the policy of restraint actually adopted. An attempt had made to take account of these comments by certain minor modifi been cations, but in general the draft of policy record reflected the way the minutes actually ran. by saying that a revised draft of the Mr. Riefler concluded promptly and that the would be sent to the Presidents policy record Board for final approval record before the was to place the intention the Presidents had any strong fashion. However, if any of in that would be appreciated if they the revised draft, it feeling about touch with the Secretary. would get in
Mr. Hayes raised a procedural question, asking whether it had not been suggested at a meeting of the Committee last year that drafts of entries for the policy record be prepared and distributed after each meeting so that the drafts could be considered while there was still a feel of the respective meetings. Mr. Riefler responded by explaining the practical problems that had prevented this practice from being followed last year. He said that beginning with this meeting an effort would be made to follow the suggested practice consistently, with the understanding that the entries for the meetings held previously this year would be prepared as soon as practicable. Mr. Hayes then referred to a suggestion he had made, and the reason therefor, relating to a change in the draft of policy record for the meeting of the Committee on March 5, 1957, and the Chairman replied that the change would be reflected in the revised draft. staff entered the room at this point Members of the Board's and Marget in the presentation of to assist Messrs. Young, Thomas, by chart slides. Mr. and credit review, illustrated an economic Bank of Richmond, also of the Federal Reserve Storrs, Vice President the script of the A copy of room for this presentation. entered the following the meeting. each member of the Committee review was sent to since the similar the period that during The review indicated of the Committee at the meeting situation given of the economic review
on January 28, 1958, activity and employment in this country had declined considerably further. Industrial production during Feb ruary was down to 130 per cent of the 197-49 average, as compared with 135 in December and 145 last August, and March appeared to be lower. Thus, in the six months from August to February, industrial production declined a little more rapidly than in the corresponding periods of 1948-49 and 1953-54. Employment had continued to decline in manufacturing and also in nonmanufacturing lines, with the declines particularly marked in durable goods industries. Unemployment rose sharply to 5.2 million in February, the number of workers on part time had increased further, and the number working overtime had con tinued to decline. In March, new claims for unemployment compensation remained at a high level. Meanwhile, as in the 1953-54 recession, prices generally had not declined. Consumer prices in February were appreciably higher than in December, reflecting higher food prices and higher charges for services, and a further rise in wholesale prices resulted from advances in livestock and products and also in fresh fruits and vegetables, whose supply has been curtailed by unusually severe The broad average of industrial prices had changed winter weather. last summer and sensitive industrial material prices, little since in early autumn, showed late last summer and which declined sharply further decline in recent months. little of common stocks had moved up In security markets, prices the low reached 8 per cent above and were now about irregularly,
late in 1957, while stock market credit increased in February for the first time since last June. Prices of high-grade corporate bonds had declined slightly since late January, following earlier sharp advances. The recent declines in economic activity and in business inventory holdings had been accompanied by a more than seasonal reduction in bank loans. Banks, however, had been increasing their investments since late last fall, and total bank credit outstanding had increased at a season when a decrease is usual. Also, despite spending for plant and equipment, corporations had reduced business of new capital in security markets sought and obtained large amounts United States Treasury and its agencies had and new borrowing by the been large. both long- and short-term of funds in Increased availability than earlier had favorable to borrowers on terms much more markets developments tending part broad economic reflected in considerable Also, Federal and to limit demands. the supply of funds to increase conditions, through to easier credit policy had contributed Reserve cost of bank re and lower the increase the availability actions to serves. degree of been a fair there had external developments, As to had had a off in activity the leveling activity abroad, stability in but the major from this country, impact on exports disproportionate to have already exports appeared in downward adjustment part of the
been completed. On the other hand, the recession in the United States had thus far had only a limited impact on other countries. The review also pointed out that the 1957-58 recession in activity had now extended as far as the recessions of 1948- 9 and 1953-54, and that there was as yet little indication that the leveling off which came at about this stage in those earlier periods was an immediate prospect. Consequently, many people were concerned over the possibility that declines in activity, income, and trade might become cumulative--despite easing of credit conditions--and that this recession might be of considerably more serious proportions than the other two postwar recessions. At the same time, adjustments in prices to changed demand conditions had been few, except for sensitive materials. Thus, it seemed possible that action intended to stem the decline in activity and employment might not succeed until more realistic adjustments had been made in policies with re spect to prices and costs. The shift from inventory accumulation to liquidation at a substantial rate apparently had about run its course, might suggest a leveling out in the economy near the present which rate. Producer outlays for capital goods, however, were continuing point was in sight, with scheduled downward and as yet no turning of the first half. The the second half well below those outlays in that leveling off in cycles, however, indicated record of earlier await a turnaround recovery need not necessarily activity and even in capital goods.
Government outlays were rising at both the national and local levels, but at this point the course of consumer outlays, whose rapid advance was a key element in the 1954-55 recovery, seemed rather uncertain. Consumer prices had continued upward notwithstanding declines in consumer incomes, and the current de cline in private capital goods spending might have a greater dampening effect on consumer confidence than the declines in Government expenditures in the 1953-54 recession. How far resi dential building might be stimulated by easier credit conditions was yet to be determined. Wnile the decline in activity appeared to be carrying further than in either of the other postwar recessions, there were strong reasons for believing that it would not go to any such length as in 1929, and that it would not be as sharp as in the years following and financial situation, both at 1937-38. The current business comparable with the situation after 1929 home and abroad, was hardly favorable than conditions prevailing in and many elements were more restraint in effect that policies of credit To the extent financial com speculation and unwise from 1955 to 1957 discouraged extent of the current helped to limit the they had no doubt mitments, likelihood of recovery without prolonged decline and to increase the and the shift to a policy or basic loss of confidence, unemployment
of credit ease in recent months represented an important development whose effects should be felt increasingly as necessary adjustments were made in various sectors of the economy. Projections based on usual seasonal trends, together with Treasury financing needs, indi cated prospects for free reserves generally averaging well above half a billion dollars during the next three months without any further Federal Reserve action. Should banks put available reserves to use and maintain credit above usual seasonal trends, then free reserves would be lower. How long maintenance of bank credit and further recession in economic activity could continue simultaneously raised an interesting question as to the future. Following the review, Mr. Hayes made a statement on business activity and credit policy substantially as follows: Unfavorable developments have dominated business news in the past three weeks and will probably continue to do so in the coming weeks. Recent figures on industrial produc tion, unemployment and actual and projected capital expendi tures were fully as bad as, or worse than expected. It is true that several economic series seem to be leveling offnotably new orders for machinery, paperboard, plywood and steel production, prices for industrial raw other products, materials (including the very sensitive index for scrap and materials), and ocean freightrates. But no reliable waste be drawn from these scattered signs, and on inference can the whole business activity in March will very probably fall improvement normally to be expected. short of the seasonal continues at a rather rapid paceInventory liquidation $5 billion--but this will at an annual rate of about perhaps set the stage for a rapid business recovery not necessarily downward trend of plant and equip in view of the pronounced While consumer buying has been remarkably ment expenditures. figures on retail sales so far, the February well sustained
were below a year ago for the first time and the shortfall may increase in March in view of the cumulative effect of unemployment and shorter hours on consumer expectations and consumer buying, aggravated by poor weather and perhaps by expectations of future excise tax cuts. Whether and when higher Government spending will become an important favorable force is still problematical. The prospective increase in the actual level of defense expenditures in the coming months seems scarcely large enough to provide a major offset to down ward economic influences. On the other hand, as a result of current widespread discussion of important new Government spending programs or a tax cut, or both, important new stimulating forces may be injected into the economy within a few months. Meanwhile the public, both here and abroad, seems to exhibit an encouragingly calm attitude toward the recession as it has developed to date. In the area of bank credit, the last few weeks have wit nessed a very sharp rise in holdings of Government securities as compared with a small drop a year earlier. Although tax considerably behind last year, the rise in borrowing has run total loans and investments has far exceeded that of last we compare early March with mid-November figures, year. If we find that total loans and investments in weekly reporting $2.5 billion, of which a large banks increased by nearly was in New York. Money supply figures are less proportion of continuing growth of time satisfactory, mainly because a bulge in Government deposits. The latter, deposits and be temporary, bringing a corresponding of course, may prove to the money supply in March, and in any case the trend rise in in February than in the two of the money supply was better bank reserves declined months. Required member preceding mid-November to early million in the period from about $270 for the first cut of 1/2 March, but after making allowance we may say that total cent in reserve requirements, per larger money supply) rose (the base for a required reserves we should certainly trend which by about $200 million--a were also rising since free reserves regard as encouraging, at the same time. receipts and expenditures of the Treasury's Estimates to a need for perhaps fiscal year point the rest of the over part of this and a good of cash financing, $3 to $4 billion next week or two. within the may be undertaken policy of ease. calls for a outlook clearly The business policy playing as all like to see monetary I think we would phase of during this it can, particularly a role as effective
recession when so much is expected of it by the country in general. While the statistical record of free reserves and short-term interest rates since the last meeting suggests that the degree of ease desired by the Committee has been achieved, I have been somewhat disturbed by the recurring tendency for a feeling of relative tightness to develop in the money centers, with unused reserves accumulating in the country banks. There is no assurance that the big city banks will always be able to find and use those accumulated reserves. We should, in my view, seek ample availability of bank credit and the creation of an atmosphere where banks are actively seeking loans rather than looking with equanimity on their re payment. In a sense, just as excessive bank liquidity made it difficult to apply effective restraint two or three years ago, so the sharply reduced level of liquidity achieved in the later stages of the boom is having a dulling effect on our efforts to stimulate lending. For example, the New York banks still feel that their loan-deposit ratios are rather high, in spite of the sizable acquisition of Government securities already mentioned, and we see little evidence yet of an aggressive search for good loan opportunities. I believe that open market policy should seek to maintain at least the present degree of ease and preferably to achieve a greater feeling of ease in the money centers. While I would the free reserve target, I would expect that a de-emphasize $500 million of free reserves would prove necessary minimum of result, and I would have no qualms about to achieve the desired if this did not cause an atmos going as high as $750 million While the latest reduction in re phere of market sloppiness. of the necessary job for the serve requirements has done much moderate purchases may be needed. coming three weeks, some tendency toward in view of the recurring Incidentally, in the money centers, I was a little undesirable tightness cut did not include that the latest reserve requirement sorry among the various narrowing the differentials some start toward respect to the central reserve of banks, especially with classes the New York Bank's di At last week's meeting, city banks. the view that it would be helpful rectors unanimously expressed if the Board of of credit promoting greater availability in practicable to eliminate move as promptly as Governors would reserve city and reserve city the differential between central requirements. I feel some concern at the last meeting, As I mentioned and the rather capital issues backlog of new over the heavy responding only markets, which are tone in the capital heavy by Federal Reserve to the ease engendered very sluggishly I might say in the short-term market. policy action
parenthetically at this point that a lot of these new issues are designed to repay bank loans, which I think is a highly desirable objective in the present circum stances. There have recently been a number of comments in the market as well as from economists and the press to the effect that the System is open to criticism for failing to take direct action in the longer-term marketthat the process of arbitrage has been operating too erratically to provide the timely and vigorous encourage ment for investment which current economic conditions call for. Our own analysis does not indicate a need for releas ing reserve funds directly into the long-term market at present. I am hopeful that the passage of time may bring substantial improvement, as longer-term expectations become clarified, so that I would certainly think it premature to suggest direct System action at this time. Nevertheless, I think the Committee should be fully aware of this possible obstacle to a maximum contribution by monetary policy to the forces of recovery and should keep this matter under study. I can see no need for considering at this meeting a either in the discount rate or in the directive. change stated that the picture in the Sixth District seemed Mr. Bryan There were a num a slow but steady deterioration. to show, over all, directions but it seemed statistics going in different ber of district general economic picture indicator of the him that the most reliable to although a little was steadily growing unemployment, which was insured States in the dis There were two the national picture. better than unemployed, while the insured workers 10 per cent of having over trict the rate of in in Florida where situation was only really good the bank loans per cent. Commercial only about 3 was sured unemployment than for the more rapid rate at a rather going down recently had been country as a whole. said he shared Mr. Bryan national outlook, regard to the With a very considerable there was that been expressed which had the view
problem regarding use of the commercial banking system as a dynamic instrument in fostering recovery. He did not believe the commercial banking system would be brought in as a dynamic, active factor until it had substantially greater liquidity than at present. The situation differed from 1953 because the move toward recovery would have to start from a much higher level of "illiquidity." Consequently, he would favor a substantially greater easing of the monetary situation in an effort to induce the commercial banks actively to seek out good borrowers, and to him it seemed immaterial whether that was done by open market operations or by further reductions in member bank reserve require ments. Mr. Bopp said that there was as yet little evidence of even a seasonal upturn in business activity in the Third District. Pre data for eight labor-market areas in eastern Pennsylvania, liminary indicated that factory employment in Feb including Philadelphia, below January, and 6-1/2 per cent below ruary was 1-1/2 per cent had declined in each of the labor-market February 1957. Employment had only a small increase. Although areas except Harrisburg, which declined in claims in Pennsylvania new unemployment compensation continued claims leveled ending March 13 and each of the three weeks March, both new and in the first week of after dropping slightly off the levels prevailing during claims were still about double continued had shown some store sales last year. Department the same period
iprovement in the past three weeks. Sales in early March were substantially above a year ago, but volume in the latest week was unchanged from last year. The good showing in early March reflected comparison with a low level of sales in the same weeks last year and the fact that Easter is earlier this year than last. For the four weeks ending March 15 and for the year to date, sales were 2 per cent below last year. Sales of new automobiles were slow, and in ventories were reported to be burdensome. New car registrations in eastern Pennsylvania for February were about 25 per cent below January and nearly 30 per cent below February last year. Registra tions in Philadelphia in the first three weeks of March were 10 per cent above the preceding three weeks, but still nearly one-third ago. The consumer price index for Philadelphia was up below a year as compared to an increase of two one-tenth per cent in February tenths nationally. to say that business loans of district Mr. Bopp went on each week so far this year, banks, after having declined reporting for the two weeks ending March upward in March, the increase turned The rise was accounted (less than 2 per cent). 19 being $46 million utilities, and probably finance companies and for mostly by sales In both 1957 and 1956 to meet tax payments. reflected borrowing loans beginning in expansion in business there was a seasonal until only minor interruptions, continuing, with February and shown little change estate loans had Consumer and real midyear.
this year, the former being slightly above and the latter slightly below the levels of last year. Weekly reporting banks had been adding to their investments, the increase being fairly well dis tributed among Treasury bills, certificates, and bonds, and other securities. Private demand deposits and time deposits were also up substantially. Member bank borrowing from the Reserve Bank, reflecting the easier credit policy, continued at a very low level. During the three weeks ending March 19, the daily average was $7 million as compared to $67 million last year. Purchases of Federal funds were also at a low level. As to monetary policy, Mr. Bopp expressed the view that a further reduction of one-half per cent in the discount rate seemed warranted by the deterioration in the business situation, the easing of reserve positions, and the current rate on Treasury bills. As to open market operations, he would favor maintaining an easy tone in the money market. In part because of the reduction in reserve require ments that would become effective for country member banks on April 1, he would not pay much attention to the level of free reserves and would not be disturbed to see the level significantly higher than would otherwise be needed to maintain an easy tone. As a more measure of ease at this time, he would prefer to see appropriate the Federal funds rate below the discount rate. In the broader by the contrasting developments area of credit, he was disturbed in the money market on markets on the one hand and in the capital
the other, as reflected in the report of open market operations distributed prior to this meeting. The yield on Aaa corporate bonds had been rising recently--only very slightly but still rising, not falling. The reoffering yields on new public utility bonds, though down a bit in the past weeks, were significantly above those of two months ago, and there had been periodic congestion in the bond market. What disturbed him in these developments, Mr. Bopp said, was that the increasing ease created and permitted to develop in the money market had not been transmitted effectively enough to the capital market. This transmission might come eventually, but he wondered how much time there was. When he read some of the proposals that were not only being brought forward but were receiv ing considerable support, he doubted whether there was very much It seemed to him that an easier and cheaper capital market time. a significant contribution to recovery, for it would would make issues that would bolster a sector of the economy now encourage new connection, a compilation by one of the giving concern. In this use of the proceeds of public Reserve Bank's directors regarding issue) in the last three issues (other than the A.T.&T. utility $730 million of new offerings, only $40 months showed that out of was to repay bank loans refunding; $246 million million was for was for new money. and $443 million
Mr. Bopp said that he was aware of some of the dangers and disadvantages, as well as the technical and operating diffi culties, that arise when a central bank exhibits a direct interest in the capital market. On the other hand, he was disturbed by some of the proposals being pushed and gaining support to promote recovery and that, on balance, seemed to him to be less desirable. Therefore, he wondered whether the System could or should do anything in this area in the light of current developments and their possible short and long-run consequences. In reviewing conditions in the Fourth District, Mr. Fulton said he could not add any sunshine to the comments made thus far. The steel industry was steady, but at a low level of operations, with one company at the lowest rate since 1939. In essence, the situation was one reflecting poor demand. However, a little firmness seemed to be coming from the structural end of the steel production picture and steel men were looking to that as a part of the industry to in crease in the months ahead. The lake shipping season was about to ore boats were going to be put into open but only a portion of the commission. The comment had been made that if two-thirds as much as last, they would be satisfied, but, ore was carried this year too good a movement was the current stockpiles, not in view of at a price representing almost a four-year expected. Scrap was in basic steel seemed of a price increase low. The possibility go up again in in the steel industry imminent after wages quite
July. The machine-tool industry had had a pickup in orders, but this was not of too much substance because in December orders hit the lowest point in many years and they were still at a very low rate for the industry. Shipments were running at double the rate of sales so that backlogs would soon be used up. The glass in dustry was going along in fair shape although automobile glass was very slow. The comment had been made that if one million new houses were built this year, there would not be too much impact because manufacturing capacity is large. The coal industry was going along with the steel industry and no pickup seemed imminent. As to in ventories, some companies seemed to have reduced inventories below working requirements. Several manufacturers reported that they had received so-called "expedited orders," and when the manufacturer up the order he found that he too was short of material. began to make Therefore, there was a feeling among businessmen that any pickup, when quickly down the line of manufacture be it came, would be manifested were at such a low level. Companies having a cause inventories to the automotive industry were faring smaller portion of their sales substantial portion of their companies which make a better than those in unemployment was below industry. The net increase sales to that that some employers were rehiring new claims filed, indicating been added to the One new area had previously laid off. employees store sales Department labor surplus classification. substantial basis and year on a year-to-year cent below last were about 5 per
this was not too good for the period before Easter. Building was a bright spot in the picture, but not too bright; permits were higher than last year but business plans were being stretched out over a longer period and some plans were being postponed temporarily. Mr. Fulton had received verification that companies were resorting to the capital market to pay off bank loans, which tended to indicate that the banks would have adequate funds to make loans if they wished. However, because of the thought in the minds of some bankers that loans were high, he did not believe that anything the System could do would encourage the banks to make loans as long of loans to deposits was as high as had been the case as the ratio year or so. He sensed a reaching for liquidity that for the past probably make the bankers hesitate to increase their would very factor, and he did not believe loans regardless of the repayment making of loans where the policy could foster the that monetary against increasing the loan of the individual bank dictated policy portfolio. Fulton said that he monetary policy, Mr. With reference to at least to 2 per see the discount rate reduced still would like to had suggested, a reduction of 1/2 cent, with possibly, as Mr. Bopp It was his opinion 2-1/4 per cent rate. cent from the present per million; in other a minimum of $500 should be at that free reserves a floor. He appropriate as seem to him figure would words, that a posture of supplying Committee should have believed that the
reserves willingly and in sufficient volume. Some restraint, he said, would come from the attitude of bankers and the market itself. Therefore, the System should supply reserves freely. Mr. Shepardson said that although he did not see anything particularly bright in the economic picture, the dark spot to him was the failure during the current period to get many of the adjust ments that he had hoped for, particularly in respect to the price situation. However, some of the reports in the press with regard to wage negotiations and similar matters did indicate the possibility that the labor interests were going to temper their requests somewhat. He considered it important not to try to stimulate and change too quickly until the adjustments which he mentioned had been obtained, and for that reason he would not like to see any further easing of time. Except possibly for the money market monetary policy at this of the country seemed to have plenty of funds, and banks, the banks favor raising the target for free in the circumstances he would not of its relationship to other money reserves. From the standpoint adjusted, but there discount rate might be further market rates, the funds at the present a sufficiency of available to him to be appeared time. basis of the facts presented, said that on the Mr. Robertson Committee at fixed by the from the goal reason to deviate he saw no that the was firmly convinced since he meeting. However, its last
economy was tending to bottom out and would do so soon, he would favor taking every opportunity to reduce both reserve requirements and the discount rate in order to be in a better position to move fast and in big jumps when the upward movement in the economy started. He hoped that the System would have the wisdom and courage to act quickly to sop up reserves when the time was appropriate. Mr. Mills commented that his position was contrary to the general tone of recommendations expressed up to this point at the meeting. He believed everyone would recall that when an aggressive policy of credit restraint was being followed last year, both here and abroad, the point was made in some quarters that a heavier burden had been placed on monetary policy than could be reconciled with its an economic corrective. In his opinion, the same potentialities as again, but this time on the easy point could justifiably be raised piling new reserves on of credit policy which, by constantly side interest rates down to a was in that process forcing new reserves, rather than help the Federal Reserve System level that would hinder and stability. To illus to foster economic growth in its efforts in retrospect the tentative point, Mr. Mills said that trate his set by the Committee free reserves million of positive goal of $500 liberal than called to have been more meeting may prove at its last a period that As this was of System policy. for by the necessities of Federal in market influences to the unsettling had been subject for the and preparation Treasury financing, come tax collections,
Illinois personal property tax date, Mr. Mills felt that there was little significance to the fact that some signs of tightness had occasionally appeared, especially in the central reserve city bank area. On the contrary, he believed that the true facts reflecting the supply of reserves available to the commercial banking system had been revealed by the 1.18 per cent Treasury bill yield produced at yesterday's auction, another reduction in the interest rate for bankers' acceptances, and a 1/2 of 1 per cent rate for Federal funds. It seemed to him that if reserves had been supplied less aggressively, the response in interest rates would have been more consistent with the System's general policy objectives. Consideration of the facility with which commercial paper and bankers' acceptances were being marketed at constantly lower interest rates suggested to him that the rates of interest acceptable to the more distant credit markets were presently a more reliable indicator of over-all credit market condi tions than the gyrating rates currently applicable to Federal funds and Treasury bill credit transactions in the New York money market, and hence System policy actions should be guided accordingly. Mr. Mills went on to say that he had been impressed by Mr. analysis of the commercial banking system and the Bryan's able to the high level of bank loans as liquidity considerations related years. However, his own thinking diverged very compared to past it would be desirable to Mr. Bryan's suggestion that strongly from lending and investment banks into more aggressive drive the commercial
policies by freely supplying them with new reserves. As Mr. Mills saw it, such a policy would merely serve to lay another layer of reserve fat over a framework of bank loans that may stand to be weakened by the deterioration in economic conditions. Under such circumstances, to supply additional reserves to a point that would substantially soften the interest rate structure could tend to draw the commercial banks into making unwise investments and weak loans as a means of maintaining their earning positions. In the light of the reasoning which he had expressed, it was Mr. Mills' opinion that the Committee should proceed cautiously in supplying reserves and should allow a reasonable period for test ing the effects of previous reserve actions before taking new ones. He thought that a level of $400 million of positive free reserves, or even lower, would be adequate to exert the kind of economic in fluence sought for by System policy. He also called attention to the Treasury's approaching financing operation and the problem that would arise as to what reserve support it should be given. In his would be preferable for such support to come as far as opinion, it from the reserves already available at the time of the possible any additional reserves. financing and without supplying Treasury's kind of difficulties that a last point illustrating the As of monetary policy, Mr. Mills arise from overloading the mechanism agreements that problem in handling repurchase contended that the could be traced Rouse's recent memorandum subject of Mr. was the
directly to System policy actions in supplying reserves that had had the undesirable effect of forcing a wide divergence between short-term interest rates and the Federal Reserve Bank discount rate. All things considered, he felt that it would be a mistake for the System to be stampeded into a policy too aggressively on the side of credit ease. Mr. Vardaman said that in order to save time and avoid repetition, and primarily because in this instance he agreed so completely with Mr. Bryan, he would ask Mr. Bryan's permission to join in his thesis. He found himself in disagreement with part of Mr. Mills' remarks, although he appreciated what Mr. Mills had said and would like to see his comments in writing. He concurred in the hope expressed by Mr. Hayes that $$00 million of free reserves would set as a base, with leeway above that figure up to the point of a be theory expressed by Mr. Shepardson market. He disagreed with the sloppy to lay another layer of reserve fat and felt that the System would have to get out and make loans aggres on the banks before they were going deterrent right now to people since he felt that the principal sively, attitude of alleged unfortunate and unnecessary doing business was the In his opinion, this part of the commercial banks. conservatism on the reserves and to give the banks could do was that all the System meant to use them. they wished the banks whether it was up to that to decline activity continued stated that economic Mr. Leach showing the sharpest coal mining currently District, with in the Fifth
change. Output of coal in the four weeks ended March 1 was 12 per cent smaller than in the preceding month and 26 per cent less than a year ago, reflecting weakness in both domestic and foreign demand. Furniture manufacturers continued to cut back their operations and the only textile division showing improvement was hosiery, which had been in a depressed state for several years. Two special surveys last week cast current light on the district construction picture. Home builders stated that mortgage money was readily available on improving terms and they were confidently planning expanded opera tions in 1958. The most common rate on conventional loans was now 5-1/2 per cent but some loans were being made at 5 and 5-1/4 per cent. The number of points discount asked by lenders on FHA loans had recently declined from 3 per cent to 1-1/2 to 2. Contractors in the heavy construction area expected a high level of work this year, primarily for State and local governments and nonprofit and they reported that competition was extremely organizations, on each project had been increasing and keen. The number of bids substantially lower than advance bids recently submitted had been include little profit to the estimates. Some bids were said to contractors or subcontractors. developments, Mr. Leach light of current economic In the to do all that it could incumbent upon the System thought it was a recovery. As a policy to promote in the field of monetary and as in reserve requirements the recent reduction corollary to
continued reassurance to the market, he believed that it would be desirable to establish more ease through a higher level of free reserves. He was thinking currently of $600 million of free re serves as a benchmark, with the usual qualification as to the value of this single indicator. This would allow a sizable part of the reserves released by the recent reduction in reserve requirements to be reflected in additional liquidity of the banking system if not in new loans. This further step to increase reserve availability and add to the liquidity of the banking system represented, in his judgment, the proper role of the System under current conditions. Admittedly, as was demonstrated in 1954, actions which increase the liquidity of the banking system during a recession automatically future in terms of delaying the impact of create problems for the This is inherent in monetary policy subsequent tightening actions. offset, as he saw a recession. The only possible actions to combat and effective action when greater emphasis on prompt it, was to place aware that in a recession reappeared. He was the need for tightening ease has no beneficial point beyond which further there is always some somewhat beyond that point The System may have gone economic effect. more ease at leeway for there was some but in his judgment in 1954, with the remarks by While he agreed in principle the present time. did not think the Mills in that he differed with Mr. Mr. Mills, he down to an were being driven where rates had yet been reached point low level. unnecessarily
Mr. Leedy, who had been away from the Kansas City District most of the time since the last Committee meeting, said that his re view of developments following his return to Kansas City late last week indicated some signs that were less pessimistic than those in dicated for the nation in general. Like the country generally, the district had experienced a very substantial increase in unemployment, and that had continued since the first of the year through the date of the last release of such figures, but there was an indication that the volume of unemployment was leveling off. The rate of increase in unemployment had been generally less than during January and the early weeks of February. Department store sales through the middle of March were about 2 per cent below the volume of a year ago, while automobile registrations in January were only slightly less than a year ago in five of the States in the district and were, in fact, a little higher than last year in the State of Colorado. This compared with a de crease of about 13 per cent for the country as a whole. Total con struction contracts in January were off considerably but, contrary to the situation nationally, residential construction was up, the 4 per cent. Crop and pasture conditions remained figure being about rain, and the wheat crop had progressed virtually ideal, with adequate were certainly one of the the winter. Livestock prices well in As to banking conditions, business brightest things in the district. in about the same volume as by banks had continued to decline loans increased sharply since the by country banks had last year but loans first of the year.
As to policy, Mr. Leedy thought that the accomplishment of the Desk in bringing about pretty much the degree of ease contem plated at the last Committee meeting was certainly most commendable. He had some question, however, whether very much additional ease at this time was either required or advisable. To some extent, he wished to associate himself with the views of Mr. Mills, as he under stood them, except that he would not favor reducing the current degree of ease. As for himself, he would not greatly increase that degree of ease as he would question whether very much more ease would be appro priate at present. As Mr. Mills had pointed out, the level of short term rates should be a matter of concern to the Committee. In view of the rate at which Treasury bills went this week and in view of the level of short-term rates generally, it seemed to him that a rate structure might be developing that was not in the best interests of the ultimate objectives that the Committee had in mind. He recognized the problem of the forthcoming Treasury financing and felt that the Federal Reserve should see that reserves were provided and the fi nancing accomplished successfully. The Committee should ascertain to which the commercial banks were using the reserves the extent as he did not feel that just adding additional being made available justified unless some use was being made of them. Unless reserves was to be used, he doubted whether the supplying of more they were going was in the interest of the accomplish any purpose that reserves would changing the discount he would not favor For the time being, System.
rate or taking any other action. He would favor waiting for a while to see what adjustments occurred because of what had already been done. Up to now, the System had made some very valuable contribu tions and he felt that it should not overdo a good thing. Mr. Allen stated that the economic situation had been so well covered that he would be brief. With respect to the unemployment situation, the deterioration had continued in all Seventh District States except Iowa and the situation was less favorable than the national showing. In Michigan, where unemployment was now the greatest, an advance estimate for March placed unemployment at 14 cent of the labor force. There were two bright spots, however. 15 per In Kenosha, where the Rambler automobile is produced, the unemploy ment figure was quite low and unchanged from a year ago, and in the Davenport-Moline area where farm machinery so-called Quad-Cities--the more, but not a great deal more, unemployment is important--there was Mr. Allen then commented informally regarding cer than a year ago. trend of economic conditions which had tain observations about the Bank's Board of Directors at the meeting of the Reserve been made of the Detroit Branch di and at yesterday's meeting last Thursday with comments on the forthcoming He concluded his resume rectors. the automobile industry. negotiations in wage winds were still that although recession Allen then said Mr. strong as they had seem to be quite as they did not blowing heavily, force, he did with great start up again they would been. Whether
not know. While he agreed with much of what Mr. Mills had said, it seemed to him that the posture resulting from two reserve require ment reductions called for a higher level of free reserves than the goal set by the Committee at the last meeting, which was $400-$500 million with a leaning toward the higher figure. In view of that posture, if for no other reason, he felt that $500 million should be the low figure for the next few weeks, and he would favor a range of $500-$600 million. He would not favor changing the discount rate at this time. Mr. Deming referred to a remark he had heard recently to the effect that economic distress signals were not flying as strongly in the Ninth District as in other places. In other words, conditions were better than for the nation as a whole, although in some spots they did not look very good. One good area was in the Dakotas where bank debits were up 10-15 per cent, Generally speaking, agriculture of distress were centered in lumber was doing well and the elements Also, there was some difficulty in the Twin Cities ing and mining. and the employment situation in Minnesota in terms of employment, was giving rise to some concern. At present, unemploy generally the State was estimated at 130,000 compared with 90,000 ment in figure of 9.7 in contrast represented a percentage last year. This were up roughly 50 per of 1957. Unemployment claims to 6.8 in March was stated that in the mining from 4OO,000 to 60,000 and it cent running about 25 per unemployment was region in northern Minnesota
cent of the labor force. On the banking side, commercial bank loans were holding up in total although business loans were off. Savings deposits generally were up; in January and February there was a very substantial rise in share accounts at savings and loan associations as well as in savings deposits at the one large savings bank and in time deposits at commercial banks. This might have some bearing on the question of consumer buying to the degree that spend ing was being held back by resistance to price, quality, and kind of product. There seemed to be a little more competition for loans but mostly from the insurance companies, savings and loan associations, and savings banks trying to make mortgage loans. The commercial banks still seemed to feel somewhat tight and were not pursuing loans. With regard to the comments about bank liquidity, this same problem obtained in Minneapolis, although perhaps not to the same degree as New York and Chicago. In the circumstances, he believed that the in the banking system with another layer of re System should overlay have reserves at a higher level than at present. He serve fat and though perhaps for a somewhat different agreed with Mr. Robertson, should make every effort to bring reserve reason, that the System as it went along. As Mr. and the discount rate down requirements there was a next timeHayes had said, the next time--assuming the requirements for central requirements were reduced, that reserve than for the rest reduced a little more banks might be reserve city that banks still the view concluded by expressing the country. He of
did not feel liquid enough and that they must be encouraged to make more loans. Mr. Mangels said that the latest available information indicated that the business situation in the Twelfth District de clines a little more in February, although at a somewhat lesser rate than for the nation as a whole. In Arizona, information indi cated that the employment situation had remained stable, while in the State of Washington there had been some gain and in California about a 1 per cent decline, primarily in manufacturing and construc tion, the latter perhaps due somewhat to inclement weather. Aircraft employment in California was down only about 800 persons from January to February and this was offset by an increase at the Boeing plant in Seattle. He was rather interested in Mr. Leach's comments about the construction picture, for the Twelfth District had somewhat the same situation. The comment was made recently that on a $7 million project in San Francisco, the bids were about 10 per cent lower than they would have been a year ago. The cost of materials had gone up but had been made by the Reserve Bank labor was producing more. A check and a varying picture was found. in the branch cities of the district higher, with no were about 2 per cent Angeles, building costs In Los in Salt Lake City there efficiency of labor, while increase in the in building cost figures. of about 2 to 3 per cent was a decrease the year would be good City people anticipated that The Salt Lake decrease of 5 to there was a building. In Seattle, for commercial
10 per cent in building costs, and construction in the first two months of 1958 was 40 per cent higher than in 1957. In Portland, contractors had been bidding for some time past on a basis which included only recovery of overhead, but now there had been some increase in building projects and prices were up about 15 per cent. It was expected that in 90 days contractors in that city would use more construction labor than at any time in Portland in the past. The lumber market generally was still not strong. However, in response to an increase in new orders for plywood.which arose from earlier price reductions, plywood prices had recently been increased from $64 to the former levels of $68 and $72 per thousand. Some buyers, however, were reluctant to place any large orders because of the frequent price fluctuations. In Washington, the apple situa tion was not too good, with top-grade apples bringing only $3 a box, which was 60 cents below the cost of getting the apples to market. A substantial number of people in Washington had exhausted unemploy ment insurance benefits and were now receiving surplus foods. In the district as a whole, unemployment was up more than seasonally the first three weeks of February, mostly in California. However, the Reserve Bank director from Idaho reported that the economy there scale than for some time past. While was progressing on a much better condition and a large aluminum industry was in rather poor the mining with respect to agriculture and plant had closed down, the situation
cattle was excellent and there was a good feeling in the entire State. On the financial side, total loans for the three weeks ending March 12 dropped slightly less than in 1957, but in the commercial and industrial loan category the decrease was three times as great as in 1957. The rate of increase in time deposits had continued and was substantially ahead of a year ago. There was practically no borrowing from the Federal Reserve Bank. An analysis of the seven largest banks in the district's reserve cities showed that from March 14, 1957, to March 14, 1958, the ratio of total loans to total deposits had dropped from 56.5 to actually total loans ratios were down, cent. While these 53.3 per deposits had increased 9 per cent. had increased by 3 per cent, but to time deposits had declined from The ratio of real estate loans loans actually decreased cent. Real estate cent to 3.6 per 52.1 per 16.2 per cent in the but time deposits increased only 2.7 per cent, loans aggressively and larger banks were soliciting period. The They had had a loans to pay taxes. applications for were inviting loan field particularly, runoff, in the consumer very substantial new loans. Retail an increase in been offset by which had not sales, and in as were automobile were down, in the district sales as had not as optimistic outlook was perhaps field the the housing spending, and needed, and more investment was thought. More been spending or cut would increase whether a tax was a question there been no There had go into savings. part would a large whether
general reduction in lending rates although there were some instances where rates had been cut, particularly in the conventional mortgage field. There was some discussion of a possible cut in the prime rate and there was more and more talk about the possibility, or even the need, of a reduction in the rate of interest on savings deposits. This might occur on the first of July. The Reserve Bank's directors were still concerned about the failure of prices to recede. With respect to policy, Mr. Mangels said it must be recog nized that the Treasury was coming into the market and he would have in mind a goal for free reserves of between $600 and $700 million. He did not favor any further change in reserve requirements or in the discount rate. Rather, he felt that it would be advisable to wait a little while in order to observe the results of the actions already taken. Mr. Irons reported that, in general terms, the slight down ward trend in the Eleventh District was continuing. Probably the outstanding problem in the district--one which was getting no better was the oil situation. Production had been cut back to an eight-day allowable basis for April and that obviously had marked effects of the oil industry was found. In substance, wherever the influence industry and associated industries were conditions in the oil for some years, and it seemed worse than they had been probably very much improvement over they were going to show doubtful whether said, he had been past week, Mr. Irons months. For the the next few
on the road talking with bankers and businessmen, and he had not found much optimism among the oil group. Basically, the problem was tied into the import problem and was not primarily a problem of the recession, although the recession aggravated it. It was essentially the problem of a high-cost producer trying to compete with the low-cost producer of a virtually identical product. Thus, the problem was long run for Texas, and it would be necessary to reappraise the position of Texas oil in the world framework. The situation of course had serious effects on State financing, for the State practically finances itself through oil. It was now estimated that at the end of this year the deficit in State finances million, and the State probably would have to would be about $100 some other revenue measure. The oil situation adopt a sales tax or found in different parts of the was reflected also in the attitudes were quite optimistic, there was State. The people in San Antonio Houston the people had begun recession in El Paso, but in no talk of because the economy about depressed conditions to get apprehensive there has more to do with oil. conditions in the district Irons said that agricultural Mr. strong, and retail situation was very good, the cattle were basically two weeks in weather. The first much with the trade gyrated pretty bad. The construction third week was good but the March were fairly of a year ago, but housing starts ahead was quite good, with picture about 12 per decline being a year ago, the were down from auto sales
cent in four major cities. The aircraft industry was strong, with one company reporting the largest backlog in its history. The picture as to bank loans was more favorable than a year ago, Mr. Irons continued. The major banks were not sitting back and letting any loans go by them, they were looking aggressively for business, and they reported loan demand strong. The banks were resisting a fall in rates and were hopeful that there would not be a reduction in the prime rate. Talking in a rather casual way, the bankers were expressing the wish that they could get the rate down on savings deposits, especially in those cases where they had gone to a 3 per cent rate. The banks were liquid and were not borrowing from the Federal Reserve Bank. In summary, Mr. Irons said, employment was down a bit, retail trade also was down a bit, there was much un certainty in the district, and most of the pessimism was either one or two steps removed, from an oil man. direct, or that he agreed with Mr. Mills' As to policy, Mr. Irons said in the discount rate like to see any change He would not statement. Committee's policy directive. or in the sunshine in the that there was little Mr. Erickson reported the weather or the standpoint of either States from the New England about the same in unemployment was situation. Insured business seemed to be leveling off. January, and initial claims February as in behind the average was considerably the moving As to construction, year, while of the previous same three months average for the
department store sales were running 3 per cent behind last year and this year's Easter business would not match that of last year. Weather had been a factor. The February poll of New England pur chasing agents showed less pessimism than the January poll. Bank loans for the two weeks ending March 19 were only one-half of what they were a year ago, savings bank deposits were up 5 per cent over last year, and withdrawals were almost 8 per cent below last year. Mr. Erickson went on to say that a meeting of the Boston Bank's Board of Directors was held yesterday, that there was a longer discussion than customary, and that there was much more pessimism than at any other meeting. The directors expressed the hope that there would be further ease in open market operations and, if condi tions should worsen in April, a further reduction in the discount possibly in reserve requirements. They would much prefer rate and used to combat the recession than built-in to see monetary policy as a "temporary" tax cut which might machines of inflation, such construction which might be permanent and too much in highway become staff felt the same way. said that he and his wasteful. Mr. Erickson favor no change in the the next three weeks, he would On policy for he wished to associate himself or in the discount rate, and directive of $500 million of free reserves, who suggested a minimum with those there was not a as long as figure as necessary going above that sloppy market.
-4l Mr. Szymczak said he felt, like Mr. Robertson, that the economy was leveling off. In his opinion it would continue to level off during the first half of the next quarter and then start upward, so that at the end of the second quarter the System's con cern would be about inflation. He agreed with Mr. Mills that the Committee ought to be careful about adding reserves to the banking system. Mr. Szymczak went on to say that he thought the Board should give careful consideration, at a time appropriate in relation to the forthcoming Treasury financing, to a change in the reserve requirements applicable to banks in central reserve cities. He would not pay too much attention to the exact figure of free reserves, that is, whether it was $500 million or $600 million, but he would relate that to the reduction in reserve requirements of which he had spoken. if such action were taken, it would be necessary to absorb Perhaps, open market operations. He had the definite some reserves through going down, and he felt that a certain feeling that prices were not by a reduction in might, in fact, be created amount of uncertainty they would go down would wait to see whether prices, for people have an effect con a price decline might somewhat further. Thus, thought that the System must get trary to what was hoped for. He be able to do what in order to that was realistic into a position up. He would not started moving when the economy it could as and foreseeable future. now or in the discount rate changing the favor
Mr. Balderston said that what impressed him in the current situation were the influences not reflected in the charts we usually watch. For example, the stock market was strong in the face of the recession, which might signify not only the large short interest but a feeling that Government stimuli might be overdone and cause further inflation. Also, another twist of the price spiral may develop from the revolt in the auto union to which Mr. Allen had alluded. These skilled trades are determined that they should have a 30 cents per hour increase, and their applications for separate bargaining rights to the National Labor Relations Board cast uncertainty over the negotiations and might postpone a settlement. On the favorable side, detected forces that ought to be taken into account, among he also that there might be more downward revision of whole them the fact consumer prices than had been reflected thus far in the sale and indices. This appeared to be taking place through modifications of terms of sale, bargain prices forced upon other retailers by the substitutions--like chicken for beef--which discount houses, and in prices than the nominal brought about more softening may have appeared to have been Also, cost reduction prices would indicate. manufacturing plants. progressing apace among might be closer the cyclical valley the bottom of Because because one indicate and signs would than the superficial at hand many doctors would which of the at the moment could not foresee
succeed in injecting his particular brand of stimulant into the economy, Mr. Balderston felt that it would be advisable for the Federal Reserve to await more enlightenment. He would favor a target of $500-$600 million of free reserves, which would, he believed, provide the banking system with slightly more reserves than the country banks customarily keep. In this connection, he had been informed by Mr. Rouse that the excess reserves of the country banks fluctuate within each month within a range of $100 to $600 million. He would favor giving the banking system just enough more reserves so that the money supply would expand no faster than the economy could put the funds to constructive use. Since the end of last November, making allowance for seasonal influences, loans and investments had gone up about $4 billion, had gone into securities and security loans. the bulk of which rate of increase of about $12 billion. That represented an annual to keep the present posture and Consequently, be would prefer observe for a little while. he did not want to sound Martin said that although Chairman as pleased with current wanted to express himself complacent, he mean that he con course, did not policy. This, of Federal Reserve 130 days in the making The policy had been about sidered it perfect. period of in that amount of territory covered a tremendous and it had members were the Committee believe that he did not In general, time. much easier it is Concededly, thinking. in their general far apart
to go down than up, and that was something all ought to bear in mind in terms of monetary policy. Mr. Mills, he said, had per formed a real service in pointing out that the movement might be going too fast. That might be possible, but he did not think that it could be regulated. The posture at present was one of ease and it should continue to be such. The System should not continue to inject reserves indefinitely into the market but should bear in mind what happened in 1954 and not be carried away with the preservation of ease. Logic would call for a reduction of the discount rate, but it was not possible to be entirely logical in all of these things and he would hope there would not until after the Treasury financing. In about be a rate reduction per cent to 2-l/4 per cent the rate had gone from 3-1/2 130 days a rate of 1-3/4 per cent if viewed and, while logic might call for down to 1/2 of 1 per cent. that rate might go against the bill rate, rate at the moment that a change in the discount It was his view incite speculative operations do little except to actually would since a rate financing. Therefore, eve of the Treasury on the to him that influence, it seemed would have no practical change was needed logical adjustment to make whatever proper time the rather than just the Treasury financing be some time after would a point, he was not too important Also, while this preceding it. pages all the on the front Federal Reserve to see the did not like meant something. actions really unless such policy actions time with
If there was another discount rate reduction, that would be on the front pages, without anything having been done except to arouse speculation in the market. Chairman Martin continued that he would like to associate himself with those who favored free reserves of $500 million or slightly higher, without a specific top figure. Free reserves of $600 million would not alarm him, but he would be alarmed if they were much in excess of that figure. That was the fine line that he thought ought to be maintained, On the subject of bank lending, the Chairman said his own thinking on the matter was that the banks that had become "illiquid" and now wanted to get more liquidity probably were the chief offenders in the period of tight money. He doubted the desirability of forcing loans upon marginal borrowers at a time like this on the theory that it was going to promote recovery and then have them in so deep that they could not get out and would face bankruptcy as the result of having overborrowed. It was well, of course, for the banks to seek good loans, but not to have them become so aggressive due to having reserves as to persuade marginal borrowers to accept loans on the correct a recession which actually had come theory that it would excesses and would be corrected about from previous inflationary The economy now was in a only after a period of convalescence. convalescence, he said, and he had no idea how long it period of that recovery might come faster if people would last, but he felt
did not do so much tinkering. They were trying to avoid any period of convalescence, and he did not think that was possible in the world in which we are living. Chairman Martin then said that it seemed to him that there was a fairly clear majority in favor of maintaining the present directive, postponing any change in the discount rate for the time being, and maintaining a degree of ease signified by free reserves of $500 million to slightly more than that. There were some dif ferences of opinion but he thought that this reflected the majority view. Therefore, he would propose that the Committee accept the present directive as the consensus of the meeting, with the minutes showing whatever deviations there were around the table. He then asked whether there were any objections, and none were heard. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bark of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic condi tions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to contributing further by monetary ease to resumption of stable growth of the economy, and (c) to the of the Account; provided that practical administration the aggregate amount of securities held in the System commitments for the purchase or Account (including for the Account) at the close of sale of securities special short-term certificates this date, other than time to time for the purchased from of indebtedness
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 indebted ness as may be necessary from time to time for the tem porary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million, Chairman Martin then referred to a memorandum from Mr. Rouse dated March 20, 1958, which had been distributed to the members of the Committee and the Presidents not presently serving on the Com mittee, concerning administrative problems which had arisen in con nection with the use of the discount rate as the rate applicable to repurchase agreements. The memorandum stated that although these problems had not as yet been serious nor had they interfered with Manager's ability to maintain reserve availability con the Account objectives, the spread between the sistent with the Committee's especially Treasury bills, and market rate on short-term securities, as to impair the use of repurchase the discount rate was so wide of reserve adjustment. most part as an instrument agreements for the resort to the Management was considering Therefore, the Account rate, at least in a rate below the discount latitude to establish agreements were that repurchase the occasion suggested part, when Although present problem. to meet a particular the best technique agreements a rate on repurchase permits from the Committee authority
not lower than (a) the discount rate or (b) the average issuing rate on the most recent issue of three-month Treasury bills, the Account Management had previously been operating under the under standing that a rate below the discount rate should be used only sparingly, and in practice a rate different from the discount rate had not been used since November 1955 when the repurchase agree ment rate was 1/8 of 1 per cent above the discount rate of 2-1/2 per cent. The memorandum also mentioned, as a matter of somewhat lesser importance, the limitation placed on Government securities eligible for repurchase agreements, namely, securities maturing within 15 months. The Account Management was not recommending any particular limitation but saw no serious objection to extending the limit from 15 months to two years and suggested that the Committee consider the question. A memorandum from Mr. Rouse transmitting the March 20 memorandum indicated that the rate problem on repurchase agreements as it had been before the most recent reduction was not as immediate might not be long before it reserve requirements, but that it in again developed. it seemed better sometimes to meet Mr. Rouse said that agreements and that by the use of repurchase temporary problems along with a rate would go whether the Committee the question was but above the rate on Treasury below the discount rate, somewhat might be used agreement mechanism so that the repurchase bills,
more in lieu of buying and selling bills outright in the market. Currently, the dealers were able to finance their securities for the most part at rates in the neighborhood of 1 - 2 per cent, but occasionally they had had to come to the New York banks to get overnight loans at 2-1/4 per cent or higher. The first break ap parently came this morning when one commercial bank quoted a 2 per cent rate. The Account Management, he went on to say, had been fortunate on two or three occasions in being able to put out money on repurchase agreements just over the week end. If there was a material difference of opinion within the Committee, however, this problem was not a vital matter. Mr. Rouse went on to say that an extension of the 15-month maturity limitation on securities eligible for repurchase agreements also would be helpful, but again it was not a vital matter. However, he would like to see the proposal approved by the Committee. If the consensus should be to allow using a rate at a time when efforts were being made to below the discount rate keep banks out of debt, it would not disturb him. Martin then said that under present conditions it Chairman quite an appropriate use of the re seemed to him that this would be mechanism. However, he said, the matter was open purchase agreement for discussion by the Committee. propose approval of the rate plan Mr. Mills said that he would to consider whether to accept suggest taking a longer time but would
the proposal that Government securities having a maturity beyond 15 months be made eligible as collateral for repurchase agreements. While the Committee obviously had every desire to facilitate the Government securities market in achieving breadth, depth, and resiliency, which in a sense might be done by extending the maturity limitation from 15 to 4 months, there was a possibility that such an extension could restrict the initiative and control of the Account Management over the acceptance and denial of repurchase agreements. If a broader list of securities was madeeligible, the dealers would have a greater incentive to position themselves in anticipation of a greater access to repurchase agreements and, by the same token, they might put the Desk under pressure to enter into repurchase agreements more freely than the Desk would otherwise choose to do. A broader problem that also deserved study was the relationship of to the "bills only" policy that the Committee had this question an indirect reflection of that policy seemed to him adopted, since to restrict, within reasonable limitations, to be found in the decision eligible as collateral to repurchase the maturity of the securities moved away from cash, even The further that the Account agreements. would be the chance of of collateral, the greater though in terms gradually weakening the "bills only" policy. to go below be a bit reluctant said that he would Mr. Irons only at the discount banks can borrow rate since member the discount be regarded as agreements might rate on repurchase rate and a lower
discriminatory. Aside from this question, it seemed to him a little unusual to fix a rate at 1/4 of 1 per cent below the discount rate for special short-term certificates purchased from the Treasury, and then perhaps to accommodate nonbank dealers at a lower rate. For these reasons, he would be inclined to continue the current policy although he recognized the problems in the market. In this connection, he would not be disturbed about buying and selling bills for short term; he thought some of that might not hurt. If loans to dealers were made at less than the discount rate, it might increase that business to an extent which would be beyond emergency or necessary levels. Mr. Allen concurred in the views of Mr. Irons. He thought that it was better not to lower the rate when it was not vital, for this might give ammunition to critics of the System who would claim that dealers were being favored as against the member banks. Governor Robertson said he felt strongly that it would be a very bad move to start making loans to dealers at less than the dis reason stated by Mr. Allen, and he saw no need to count rate for the type of operation on a large scale in the near future. engage in that basis had now been developed and that Furthermore, the cash-sale that the change would be He agreed with Mr. Irons could be used. suggest that the He would, therefore, harmful than helpful. more and that all concerned study Committee take no action at the moment the matter carefully.
Chairman Martin said that, with the bill rate at its present level and the discount rate at 2-1/4 per cent, the effect would beif the repurchase agreement mechanism was used at all--to penalize dealers if they wanted to use this instrument. There might be a question whether to use repurchase agreements at all, which would involve a different study, but in terms of logic he would go along with the comments of Mr. Rouse. However, since there was a difference of opinion within the Committee, he would suggest that the matter be carried over until the next meeting. Mr. Rouse made the further comment that some of the remarks a very strong inference of favoritism toward the dealers had left think was valid. He then said that the making of which he did not an open market operation conducted under repurchase agreements is Reserve Act; while repurchase agreements section 14 of the Federal the dealers, from the stand from the standpoint of might be loans they are security transactions. point of open market operations the Committee's policy. they are operations to facilitate Primarily, to go into and out confusing to the market He thought it was more and he noted sales and purchases, market through outright of the the Account Management Committee had wanted in the past the that The rate suggestion, as much as possible. stay out of the market to no other source. said, arose from he taken at a vote had been that, if Leach commented After Mr. rate proposal, Mr. in favor of the he would have voted this time,
Thomas remarked that free reserves fluctuate widely from week to week and that it is very convenient to use the repurchase agree ment in order to take care of those temporary fluctuations, for example, around the end of the week. The arrangement, he said, actually tends to benefit the banks because it relieves them of the necessity of borrowing. He considered the repurchase agree ment ideally suited for that purpose and felt that the rate should be related realistically to current conditions in the money market. With respect to the current maturity limitation, it was his recol lection that the Committee at first thought that the limitation should be within one year but that the 15-month limit was fixed because the Treasury at some times issues certain securities with a 13- or 14-month maturity. Later, the Comptroller of the Currency made a ruling which stipulated 18 months as the maximum maturity securities eligible for repurchase agreements by for Government member banks without the usual limit on loans to one borrower. that the Committee might want to consider Accordingly, he suggested maximum maturity as fixed by the Comptroller. fixing the same Mr. Hayes stated that he had a great deal of sympathy with He was rather puzzled, he and Mr. Thomas had said. what Mr. Rouse feel this was a seemed to the Committee members that some of said, authority for a lower because the or undesirable thing, dubious in effect for a long time. rate had actually been
Chairman Martin concluded the discussion by stating that in view of the differences of opinion around the table it would seem advisable for everyone to think about the matter further and then to consider it again at the next meeting of the Committee. It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, April 15, 1958, at 10:00 a.m. Martin said he had been asked In this connection, Chairman Committee meetings for the balance the tentative schedule of about it seemed to him that for the year. Looking at the calendar, of order to think in terms of it would be quite in planning purposes of the year. At this every three weeks for the remainder a meeting the appropriateness of would seem to be point, the only question a meeting on the 23d of December. Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions