April 15, 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, April 15, 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. Robertson Mr. Shepardson Mr. Szymczak Messrs. Erickson, Allen, Johns, and Deming, Alter nate Members of the Federal Open Market Committee Messrs. Bopp and Leedy, Presidents of the Federal Reserve Banks of Philadelphia and Kansas City, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Daane, Hostetler, Marget, 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. Koch, Associate Adviser, Division of Research and Statistics, Board of Governors Mr. Miller, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Stone, Manager, Securities Department, Fed eral Reserve Bank of New York Messrs. Mitchell, Strothman, and Tow, Vice Federal Reserve Banks of Chicago, Presidents, Minneapolis, and Kansas City, respectively; Mr. Coombs, Assistant Vice President, Fed Bank of New York; Messrs. Willis eral Reserve Economic Advisers, Federal and Anderson,
Reserve Banks of Boston and Philadelphia, respectively; Mr. Meigs, Economist, Fed eral Reserve Bank of St. Louis; and Mr. Levin, Financial Economist, Federal Re serve Bank of Dallas 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 25, 1958, were ap proved. Before this meeting there had been distributed to the members of the Committee a report prepared at the Federal Reserve Bank of New York covering open market operations during the period March 25 through April 9, 1958, and a supplemental report covering commitments executed April 10 through April 14, 1958. Copies of both reports have been placed in the files of the Federal Open Market Committee. Reporting on operations since the last meeting, Mr. Rouse said had been maintained and that average free that reserve availability period amounted to around $535 million, slightly reserves over the preceding three-week period. He higher than the average of the of the period since the last meeting, stated that during the first part but that some pressures had emerged the money market had been very easy investing operations by the part. Heavy lending and during the latter the pressures that factors in producing York banks were important New free reserves of over-all substantial concentration and the emerged, accelerated rate of gold the problem. An in country banks aggravated to such pressures banks also contributed by foreign central purchases regards the securities market. As in the money as had developed 2-5/8 per cent new issue of that the Mr. Rouse stated markets,
Treasury notes had been well received. Further, there had occurred an improvement in the market for longer-term obligations and the atmosphere in the capital market was better than it had been three weeks ago. He stated that in his view there was continued specula tion in the bond market, and he noted that dealers appeared to be carrying relatively heavy positions. Mr. Rouse recalled that at the Committee meeting on February 11, 1958, there had been discussed a Staff Committee report on the recommenda tions contained in a report by the New York Clearing House Association on Interrelations of the Money Market and the Government Securities Market, He noted that the latter report contained two minor suggestions, and that it had been recommended in the subcommittee report that these suggestions be adopted. One of them had to do with the establishment of a standing money market committee composed of representatives from the Federal Reserve Bank of New York and the Clearing House banks to study, on a more or less continuous basis, technical problems of the money market. The other suggestion concerned the daily publication of figures on reserves and borrowings of the New York Clearing House banks. Mr. Rouse indicated that the Federal Reserve Bank of New York was completing plans to implement these suggestions, which he under stood to have been approved in principle at the Federal Open Market on February 11. With respect to the recommendation Committee meeting committee, he stated that after careful con for establishment of a representatives of other it had been decided to include sideration
sectors of the New York financial community, including the Govern ment security dealers, insurance companies, savings banks and stock exchanges, besides the Clearing House banks. With respect to the recommendation of the Clearing House concerning the reserve data, Mr. Rouse indicated that in the view of the New York Bank it would be desirable to include in the published data net purchases or sales of Federal funds by the Clearing House banks, and that the New York Bank would communicate this view to the Clearing House. The plan would be to give the data not only to the Clearing House banks but to make the figures more generally available by giving the informa tion to the "broad tape" for the benefit of others who may be in terested. With reference to the plans outlined by Mr. Rouse, Chairman Martin suggested the desirability of keeping the Open Market Committee with regard to every step taken in a matter of this kind fully informed of market relationships. He expressed the because of the importance be given a full opportunity to comment view that the Committee should were actually put into operation. matters before any plans on such the purpose of his report, stated that this was Mr. Rouse of planning actions far was in the nature had been done thus that what be a good time to seemed to and that this, therefore, to be taken, considered. He steps that were being Committee of the advise the the implementation by his understanding that also said that it was of these suggestions New York of both Bank of the Federal Reserve
4/l5/58 -5 was approved at the meeting of the Open Market Committee on February 11. Chairman Martin then stated that he would personally have no objection but that he was just raising a point of order. He thought it was very important for the Open Market Committee to be informed concerning what was going on in the Account at every step. In other words, every member of the Committee should know what the Account was doing vis-a-vis the public. In connection with the report of the New York Clearing House Association, he suggested that perhaps the Committee itself ought to meet with the Clearing House Association for an exchange of views. The report was un satisfactory and it seemed to him that no progress was being made in dealing with the problem of the money market. This was some thing for which the Committee had a real responsibility and which it should follow up at every opportunity. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period March 25 through April 14, 1958, were approved, ratified, and confirmed. Mr. Young made a statement At Chairman Martin's request, to the staff memorandum economic situation supplementary on the comments were sub 11, 1958. His under date of April distributed stantially as follows: The anomaly of recession in output, employment,and price levels has even still advancing trade at high and
continued to be one of the striking features of the economic panorama. Most recent data on recession are suggestive of some slowing down in the pace of decline for total output and employment, some leveling out in trade, and some develop ments of an expansive character in finance. With construction activity being maintained, the over-all picture domestically appears as one of more diversity or crosscurrent than earlier in the year. At the same time, the over-all drift is still plainly downward. Indeed, current figures offer only slight basis for hope that the saucering-out phase of recession is at hand, and very little, if any, encouragement for hope that revival will be setting in within a score of weeks. When a more optimistic data showing becomes crystal clear, we will report it with emphasis. As for highlight developments: (1) Prices at wholesale and in consumer markets rose further to late March, putting the indexes a whole one per cent ahead of December's level. Higher prices for farm and food products account for the rise at wholesale, and at retail there was further rise in service prices as well. List prices for fabricated items at wholesale have continued to show little change, but market reports indicate growing concessions from list. Basic materials prices have declined further in recent weeks, following or two three months of little change. Recently, metal prices have been quite weak. (2) The Board's index of industrial production for March was placed down 2 points further, bringing contraction in this sector of output to 12 per cent. Curtailments during the month were largest in petroleum, steel, autos, and in dustrial equipment. Output of nondurable goods was down only moderately. Preliminary April information is indicating further output curtailment, much along the lines of the March pattern but with the possibility of further slowing. is estimated at activity in March (3) Construction close to record levels in value terms. Contract holding awards for all nonresidential building, however, were down from a year ago. Also, housing starts failed to 18 per cent in March from the sharp February contraction. show any recovery But VA appraisal requests and FHA applications were both up last month, which possibly augurs for revival sharply further in housing starts in coming months, especially considering the in the mortgage market. general improvement was off another seasonally adjusted, (4) Retail trade, one per cent in March. It was off 2 per cent from a year ago, high. Sales of household from the late summer and 6 per cent
durables were little changed from February, and down l4 per cent for the year. Auto sales were above February by 4 per cent but 32 per cent under a year ago. April sales of domestic new cars are showing no improvement, but sales of foreign cars continue strong. Used car sales have been active in recent weeks, with the March sales rate up 9 per cent from February. Late model used car prices have strengthened appreciably in this period. (5) Manufacturers' sales and orders have continued to show declines, with the fall-off much sharper in durable goods than nondurable goods lines. (6) Business inventory liquidation in January and Feb ruary, especially in durable manufacturing, was very sharp, and is believed to have continued in March, though it is hard to imagine that the rate of liquidation could have increased further. (7) The labor market, after allowances for seasonal in fluences, has continued to show further weakening. With un employment failing to recede seasonally, the unemployment rate rose to a high for this recession of 7 per cent. The increase in unemployed was again marked for men in the younger age bracket. Female unemployment, in contrast, declined more than seasonally. Manufacturing employment is now reduced to the lowest level since August 1950, with the declines largest in heavy manufacturing. Employment in nonmanufacturing lines, which leveled off or showed only modest reduction in the two preceding postwar recessions, has shown significant reduction over recent months. Construction employment, despite esti mates of the value of construction activity continuing close to record levels, is off a quarter of a million or 9 per cent from a year ago. result of the unusually high unemployment rate (8) One for male workers at younger age levels is a sharp decline in the marriage rate. The number of marriages has declined 44 a year ago, with an accompanying marked decline per cent from rate per 1,000 population. This is the lowest in the marriage marriage rate since in March were little (9) Weekly hours in manufacturing which may reflect technical adjustments changed from February, in production schedules rather than in average hours worked per weekly earnings were about 2 per week over the month. Average a year earlier but adjusted for the lower purchasing cent under were off 5 per cent from that power of the consumer dollar, time. of business plant and spring McGraw-Hill survey (10) The in March, is due for release expenditure plans, made equipment
later this week. It will show a projected cutback of 12 per cent for 1958 vs. 1957, compared with a 13 per cent cutback between the two years shown by the earlier Commerce-SEC survey. Since the McGraw-Hill survey is more heavily weighted with re ports from large companies, this result may be interpreted as roughly the same as the Commerce-SEC survey. The McGraw-Hill survey obtains a preliminary projection of expenditure plans for 1959. These come out at 20 per cent under the 1957 level, or approximately the level that is indicated by these surveys to be reached by the fourth quarter. (11) GNP for the first quarter is now estimated within Government to have been at an annual rate of $424 billion, down $8-1/2 billion from the fourth quarter and $16 billion from the third quarter. This makes a percentage decline since early fall of 3-1/2 per cent in value terms, but with prices higher the decline in physical terms is more nearly 4-1/2 per cent. In order of importance, the major factors in the con traction have been inventory liquidation, lower plant and equipment spending by business, reduced consumption, and re duced purchases of U. S. exports by foreigners. (12) Exports for February, the latest month for which data are available, experienced a further sharp drop. The was again concentrated in steel, coal, and agricul decline tural products and continued the earlier declines in exports to Western Europe. in industrial production Europe, stability (13) In Western feature, but recent move has continued to be the outstanding European indexes show mixed tendencies. In Japan, ments of the been extended. In Canada, however, recession in output has about since December and edged up industrial output has turned slightly. the unemployment figure, A closing observation about (l4) as a business cycle been receiving much attention which has while coincident in movement The unemployment volume, index. on the downside is a sluggish with general economic activity on the one in. This is attributable, mover as revival sets to the labor supply that are constantly hand, to accretions the increases in labor the other hand, to occurring and, on in recession periods particularly marked that are productivity during the re tend to be sustained which, once gained, and vival. cash requirements for Treasury on the outlook A staff memorandum Committee under members of the sent to the had been and bank reserves
date of April 11, 1958. With further reference to financial develop ments, Mr. Thomas made the following statement: In the financial area, during recent weeks, total credit has apparently continued to expand, but in a manner that in dicates enhanced liquidity of the economy. Savings of con sumers held in financial form seem to be increasing, while consumer debt has been decreasing or not increasing as rapidly as in the past. Business loans at banks have increased less than at this time in other recent years, but corporate issues for new capital have continued at a high level, as have new issues of State and local governments. The Federal Government, which generally reduces debt in the early months of the year, has become a small net borrower with payment for the April financing today. Demand deposits of business and individuals have turned up, on a seasonally adjusted basis, and time de posits have continued to increase. Existence of crosscurrents and adjustments within the structure of credit markets is indicated by variations in interest rates and by reserve shifts among banks. Short- and medium-term rates have generally declined further to the lowest levels since early 1955, while long-term rates have remained firm since January at levels above those prevailing prior to September 1956. The more sensitive short-term rates--for Treasury bills and Federal funds--have tended to fluctuate considerably. These rate differences have reflected the varying impacts of market forces. When the margin between short-term market rates and Reserve Bank discount rates becomes wide, the market rates are likely to fluctuate more erratically in response to changes in market forces. Short-term rates normally respond more sensitively to temporary changes in market factors and swings move faster and farther than long-term on the longer factors causing a continued wide rates. Important recent been the marked reduction in short-term borrowing margin have and the continued strong demands on capital markets. from banks new capital issues in April may total somewhat less Although months, they are by no means small. Some than in other recent of outstanding short-term issues of reductions in the volume to medium and longer-term Government and additions the Federal on the rate structure. also had some effect obligations have of securities dealers in financing needs Wide variations of reserves among member banks and shifts in the distribution rates. Posi the sensitive open-market have also influenced dealers have fluctuated and borrowings of securities tions to record high levels. times have risen widely and at various
Dealers have often been unable to obtain financing from usual sources at rates which permit them to carry their positions on favorable terms. They have frequently had to borrow from New York banks at penalty rates. While the net amount of free reserves for all member banks has remained generally stable for a number of weeks at close to or above $500 million--a level ordinarily denoting an easy situation, banks in New York City and Chicago and probably in some other cities have shown wide changes in their reserve positions. Shifts in reserves have been greater than indi cated by reserve balances and borrowings at Federal Reserve Banks, because frequently city banks have maintained their reserve positions by borrowing from other banks that had ex cess reserves. It may be said that to some extent the interest rate variations help to bring into use existing reserves that might otherwise remain idle. On the other hand, it is possible that some of the funds loaned might have found other uses were outlets through the Federal funds markets unavailable. The borrowing banks would have had to resort to the Reserve Banks for needed reserves or to liquidate assets. Any such pressures would tend to bring the bill rate close to the discount rate. In the past week or ten days there are indications of some rise in bill rates above the very low levels reached around the turn of the month. At the same time rates on long-term U. S. securities have shown some tendency to decline. If present indications of a lower level of corporate borrowing in capital markets are borne out, a more general decline in long-term rates might be expected. Treasury borrowing needs for new money seem to have been covered until around the middle of July unless there is a sudden burst of expenditures before that time. Treasury refunding in June, however, might be expected to in clude a long-term option. Analysis of bank credit developments since the latter part of February indicates that demand deposits, other than inter bank, have increased at New York City banks while they declined at banks in other cities. In the same period last year these deposits showed a general decline. Time deposits have increased somewhat more outside New York, and interbank deposits have in at outside banks while showing little change in New creased York; this appears to be a usual seasonal development. The net shows that, after adjustment for the decreases in require result required reserves have increased fairly sub ment percentages, at New York banks and to a smaller extent at reserve stantially decreases at Chicago and at city banks, while showing slight York City banks have had to increase their country banks. New to cover their reserve needs. borrowings from other banks loans and investments at city banks have continued Total a somewhat faster rate than February 26 to increase at since
they did in the same periods of 1957 and 1956. Although the dollar amount of the increase was smaller in New York than in other leading cities, relative both to February levels and to increases in the same period of the two pre vious years, the recent growth in New York has been more rapid. This is due largely to the increase in loans to securities dealers by New York City banks. Nearly $1 billion of reserves have been released by the reductions in reserve requirements since February 26, and an additional $250 million have been supplied through System open market operations through April 9. These addi tions to the reserve supply have been absorbed roughly as follows: Required reserves have increased by about $200 million as a result of a growth in deposits at a time when a seasonal decline is customary. Currency in circulation has increased by $200 million--also a greater than seasonal increase. Foreign operations--principally gold withdrawalshave accounted for a drain of over $00 million on reserves, and some $200 million have been absorbed by float and other factors. Finally, free reserves have increased by $230 mil lion from $330 million to $560 million. It appears likely that the gold drain, which is again close to $100 million in the current week, will continue at the rate of $100 million or more a month for the next two months, if not longer. Payment for the new Treasury issue through tax and loan accounts today will result in a sharp increase in required reserves, which will be gradually re duced, however, in the next two months as the tax and loan accounts are drawn down. Other demand deposits would ordinarily show only a moderate increase during the next two or three months, but under present circumstances a greater than seasonal growth would be desirable. On balance, to maintain a condition of ease conducive to further credit and monetary expansion, which would prob ably require keeping free reserves at $500 million or more, some $300 million of additional reserves may need to be supplied in the next three weeks. Additional amounts might needed at the end of May or early in June. Variations be market pressures and in sensitive interest rates in money be somewhat less erratic if discount rates would probably repurchase rates were lowered to nearer the or at least Pressures on central money markets could market rates. be relieved by a reduction in reserve requirements at city be well supplied with reserves Country banks seem to banks.
for the present. Any reduction in reserve requirements of half a billion dollars or more would probably need to be offset in part by System sales of securities in order to prevent unduly easy money market conditions. Mr. Hayes presented the following statement of his views with respect to the business outlook and credit policy: With the release of various significant statistical data for March, it seems clear that the usual seasonal upturn in business activity has not yet occurred. The best that can be said of these figures as a whole is that there has been some slowing down in the recent rapid deterioration--but the economy is still headed downward, and even though there may be some signs warranting hope that business will level off within a few months, never theless there is little on the horizon to point toward a rapid or dynamic recovery. On the unfavorable side may be mentioned the continuing poor performance of the steel and automobile industries, re newed pressure on metal prices (which may induce further in ventory reduction), and slippage rather than strength in construction--besides additional evidence that economic expansion in Europe has virtually ceased. Among the few favorable developments has been some improvement in orders, especially in the producers' goods sector. the recession continues, the greater is the The longer that layoffs, short hours, exhaustion of unemployment threat cuts for higher-paid personnel and adverse benefits, salary in general may cause a serious set psychological factors So far the latter has held up back in consumer spending. inventory and fixed capital pretty well, in ccntrast with sales figures declined slightly from investment, but retail on consumer credit to March. February statistics February in several years, there that, for the first time indicate of such credit outstanding. was a drop in the amount tc affect current business Public policies continue of a possible tax cut or developments through expectations in Federal expenditures large-scale increases possible changes of significance. any recent actual rather than through to have an im bill are unlikely housing act and highway the outlays or on the effect on construction portant short-run total Federal and in the meantime of consumer income, flow growth. Pressure showing any material spending is not cash
for prompt action by the Government in the fiscal area seems likely to increase in the absence of convincing signs that the recession--or at least its declining phase--has about run its course. Despite a few recent price reductions by manufacturers designed to stimulate higher volume, there has been no wide spread move as yet along these lines. There is, however, some ground for hope that a halt in the rise in the indexes of consumer and wholesale prices may be imminent. In the consumer index this would probably reflect primarily an ex pected more-than-seasonal drop in meat prices. With the Treasury's highly successful cash financing out of the way, the prospect is for no further major Treasury operation until the refunding program scheduled for early June. For the time being the debt ceiling is of course ample, but perhaps it is not too early to have in mind the probable inadequacy of the ceiling to meet prospective cash needs in the July-December period. It is certainly to be hoped that we can avoid a repetition this year of last autumn's trouble some and embarrassing debt ceiling complications with respect to Treasury financing activities. Comparisons of trends in total bank credit in the last four weeks with a year ago are rendered difficult by last year's sizeable Treasury financing operations. In the area of business loans, however, tax-period borrowing apparently fell short of last year's experience by about a third. It is interesting to note that the money supply at the end of March was still below the end-of-October level, on a season ally adjusted basis, despite an increase of some $3 billion in total loans and investments of weekly reporting banks. The explanation lies principally in the rapid growth of time deposits, and the increase in combined money supply plus time points to an encouraging improvement in over-all deposits nonbank liquidity. The seasonally adjusted money supply has been growing in the last two months. It is also encouraging that the excess of total reserves and required reserves over earlier (after adjustment for changes in required a year reserve ratios) has widened from month to month during the first quarter. that the prospect of a continued decline in I think with unemployment probably continuing business activity, some months at socially unacceptable levels, suggests for antirecession measures going beyond those already that needed. In the area of monetary policy this adopted are maintenance of at least the degree of ease prevailing means of course do our meeting. While we should since the last
share in meeting the problem, I am somewhat apprehensive over the tendency to place too much of the antirecession burden on credit policy as compared with fiscal and other measures. Perhaps the coming Congressional hearings will give System representatives a suitable occasion to point out publicly that the country does not seem to be suf ficiently aware of the limitations of credit policy. The last meeting's discussion brought out interesting differences of opinion as to the danger, on the one hand, of permitting too much illiquidity in the banking structure to inhibit lending activities which would be helpful to recovery, and the danger, on the other hand, of forcing interest rates to artifically low levels, inducing the banks to extend unsound credits, and creating excess liquidity which will be hard to cope with when inflationary pressures revive. While I think we must tread cautiously between these risks, my own judgment is that we have not moved too far or too fast, especially as there is little likelihood that the recovery process will be so rapid as to make it difficult to cope with excessive liquidity. I believe that our first thought should still be for the encouraging of greater readiness to lend on the part of the banks. In terms of free reserves I would think that we should maintain a minimum target of $500 million, and I would not be at all concerned if the figure should rise at times to if this seemed necessary to pre as much as $750 million, vent a tightening in the position of banks in the money centers, or to maintain an easy "feel" in the money market, or to induce a continued gradual widening in the spread of required reserves over last year's level. Cur adjusted that this may be accomplished in rent projections suggest weeks with a minimum of open market operations the next two may be necessary early but that fairly sizeable purchases in May. hope that the requirements, I would As for reserve of any period when of Governors might take advantage Board are needed to carry out a substantial additional reserves requirements, in accordance further reduction in reserve a more equitable objective of attaining with the longer-run opportunity may occur reserves. Such an level of required a reduction in requirements or early June, when in late May to the Treasury in connection be of immediate help would obviate the need for open refunding and would with the June to develop at that which now seems likely market purchases next cut in requirements hope that the I would also time.
would result in narrowing the spread between require ments at central reserve and reserve city banks. With the Treasury financing out of the way, the question naturally arises whether a further cut in the discount rate is appropriate. While we speak a good deal of the wide discrepancy between the 2-1/4 per cent rate and market rates, this is much more pronounced in the case of the Treasury bill rate than as applied to other market rates. One argument for a reduction is that it might put additional pressure on the prime rate. On the other hand, it has been argued that the banks have already resisted such pressure and that another discount rate reduction would make little difference. As a matter of interest, the head of one of the largest New York banks expressed the view last week that if the prime rate were cut, it would be primarily because of the pressure induced by lower yields recently prevailing in the corporate bond market. My own inclination would be to recommend a reduction in the discount rate by 1/4 per cent to 2 per cent, but to try to hold the discount rate at that level, in the absence of further serious economic deterioration, in the interest of providing a benchmark for long-range encouragement of saving and investment. said that business in the First District still Mr. Erickson At the end of February nonagricultural continued to move downward. than in February a year was more than 3 per cent lower employment durables about 10 per cent, were down 15 per cent and ago; textiles largely to nonelectrical decline in durables attributable with the The figure for and fabricated metals. primary metals, machinery, cent higher than the on March 22 was 4O per insured unemployment than the peak in 199. but 30 per cent lower peak reached in 1954 1949 and 1954 that when comparing out in this connection He pointed in textiles more people employed that there were it must be realized months of this year for the first two Construction awards in 199.
followed the national average. Through April 5, retail sales for the year were even with last year but in the four weeks preceding Easter they were 6 per cent below last year as compared with the national average of 4 per cent. The collection ratio in February was slightly better than February a year ago. New car registra tions for the first two months were 28 per cent below last year. The March poll of New England purchasing agents reflected the rather optimistic tone of the February poll and was quite optimistic in comparison with the polls in December and January. Outstanding business loans at reporting banks were down on April 9 by $8-1/2 million, this being the first decline for six weeks. The winter resort business was still very good. Mr. Erickson stated that the Reserve Bank had conducted for three years a survey of plans for plant expenditures in Massachusetts and that this year the survey was expanded to in clude the other New England States, with respondents reflecting 40 per cent of manufacturing employment. The 1958 survey, which been completed, indicated a reduction this year of 24 per had just with a reduction of 17 per cent indicated cent below 1957 compared survey. However, in Massachusetts plant by the Commerce-SEC per cent as compared with a last year expanded 16 expenditures probably presented a 7 per cent, so that 1957 national average of for comparative purposes. rather high base
Mr. Erickson went on to say that participants in the Reserve Bank's recent semiannual business roundup, including economists from banks, insurance companies, industry, and trade, estimated that gross national product in the last quarter of 1958 would be $7 billion higher than in the first quarter, that the index of industrial production would move down further but would stand at 133 in December, and that the unemployment figure in December would be about 4.5 million. At the Reserve Bank's annual professor-banker seminar held last week, the participants were asked when they thought an upturn in business would come and about one half said they thought it would develop in the last quarter of this year. A few said the third quarter, and the remainder said that an upturn would not occur until the first or second quarter of next year. policy, Mr. Erickson said that, with the economy still As to drifting downward, he would make no change in the directive. He to favor a reduction in the discount rate to 2 per would be inclined million minimum of free reserves he would like to see a $600 cent and it would not prejudice the bill on rather than $500 million. If in Congress at the Board's recently introduced reserve requirements views of Mr. Hayes regarding a he would go along with the request, reduction in reserve requirements. further considering the fact that the country Mr. Irons said that, the most recent develop it seemed to him that was in a recession, signs that the He did not see been mildly encouraging. ments had
downward movement was feeding upon itself or accelerating; in fact, it might be slowing down a bit. This was reflected in conditions in the Eleventh District and in the state of mind and thinking of the people in the district. Of course, as he had reported pre viously, oil production was being cut back and a decision was being made this week on the number of days allowable for the next month. However, it seemed reasonably safe to say that the situation had about hit bottom, and he could not imagine that a decision would be made to go below an eight-day allowable basis. The agricultural outlook was quite favorable and available reports indicated that the people in agriculture were quite optimistic. There had been too much rain up to two or three weeks ago but in the last few weeks the weather had been very good and agriculture made much progress. Construction was holding up very well with quite a bit of major construction going on, including several major projects in the Dallas area. The Texas Highway Commission had issued a report stating that it planned $250 million in highway construction this year, a sub stantial increase over last year. Retail trade in the last two weeks was very good. Although the reports through April 5 needed some adjustment, they indicated that department store sales in three of the five major cities in the district were above a year ago. They was the ill spot in the district if were down in Houston, which there was really any such spot. As to the banking picture, loan with loans running ahead of comparable demand continued strong,
periods last year. The banks apparently were liquid and interest rates were holding well. Some bankers had indicated that they saw no need to reduce rates as long as the volume continued strong and rates could be held. The only borrowing from the Reserve Bank was by a few country banks for seasonal needs. Summarizing, Mr. Irons said that the situation, while not booming and not moving up, seemed to be moving along at quite high levels. In general, the lack of pessimism was noticeable. At a joint directors' meeting held in Houston last week, the reports were quite optimistic and favorable. Excluding those affiliated with the oil industry, there was an absence of pessimism though a recognition that it would take a little time to work out of the present situation. Mr. Irons said that he would like to As to credit policy, as nearly as possible, without further see the status quo maintained appeared to be adequate, a con The availability of reserves ease. degree of liquidity had been achieved, and the money supply siderable created by the recent Treasury was increasing. After the deposits that they would show through the banks, he supposed issue had gone with another sub a time in private deposits, within not too long up in the money supply as a result. Accordingly, he stantial increase with the present degree the situation move along would prefer to let level. He would at their current and with free reserves of ease
prefer not to see any further action at this time on the discount rate or a reduction of reserve requirements. He would not favor any change in the directive at this time. Mr. Mangels said that there was not a great deal to report in the way of changes in the economy of the Twelfth District. Final February employment data indicated moderate declines in California and Oregon but the other States reported relatively stable employment. In Southern California, auto assembly plants reduced workers by some 24OO in late March, and a Ford plant in the Bay area was planning to reduce employment by 4OO later in April. At the beginning of April, unemployment in Oregon decreased by over 8,000 persons, with employ ment increases in lumber, construction, and agriculture due to favorable weather conditions, and farmers in the Northwest were in a good mental state. At the meeting of the Portland Branch directors last Thursday, the directors seemed somewhat more optimistic than they had been for some time. It was expected that conditions would improve definitely by mid-year and the sentiment of major retailers, while not optimistic, was reported to be far from pessimistic. Continuing rains in California had delayed the planting of early mean missing the first markets and premium field crops, which would also been delayed, so that when a prices. Cotton planting had in large units would farmers who do not operate dry spell came the and for the limited supply of rentable heavy be clamoring for labor was up 5 per cent from production in March farm equipment. Steel
February, with the mills running at an average rate of about per cent, but in early April the rate was down to about 61 per cent due to a shutdown of some units for relocation of plant facilities. Some West Coast paper container manufacturers had cut prices as much as 10 per cent in the hope of stimulating sales. Department store sales for the week ended April 5 showed no change from a year ago because of certain large sales held in Portland during the comparable week last year. If Portland were disregarded, sales this year would have been up about 8 per cent for the week throughout the district. In the three weeks ending April 2, com mercial and industrial loans were up $67 million, this being about a 13 per cent increase over the same period a year ago and contrary to the national pattern for the period. Demand deposits were down about $109 million while time deposits were up $111 million, an increase about 2-1/2 times that of a year ago. Borrowing from the Federal Reserve Bank was negligible and the Federal funds market was relatively quiet. In summary, Mr. Mangels said that according to present upturn probably was not the expected March seasonal indications data were in, they would be somewhat realized. When all the there was no evidence at all of a seasonal disappointing, for the data probably would be interpretation of upturn. However, Mr. Mangels did the unseasonal weather. a little by complicated
not see any particular evidence of positive strength in the economy, except possibly in the field of residential construction. When March and April data became available, they probably would not show much more than a slowing down of the rate of decline. On the basis of the factual situation, Mr. Mangels felt that a continued policy of ease was in order. This would be particularly pertinent if taxes were not going to be cut, for in that event mone tary policy would have an even greater responsibility to be as helpful as possible. He would favor a range of $600-$700 million for free reserves, going a little higher if necessary, and he also would favor some reduction in the discount rate. At last week's directors' meeting the 2-1/4 per cent rate was continued, but with the understanding that next week there would be, if necessary, another meeting of the full board of directors to consider a change in the rate. Mr. Mangels felt that the present policy directive was entirely in order and that it was too soon to reduce reserve requirements again. However, in May or June a reduction probably would be appropriate. Mr. Deming said that economic activity in the Ninth District some seasonal pickup, but not as much as was hoped for was showing nor as much as is usual. The district, however, continued to be less affected by economic downturn than the nation as a whole. The farm sections of the district were getting along fine; agri cultural prices, particularly meat animal prices, were substantially
higher than a year ago and farm income was holding up very well. The winter had been exceptionally open and mild, moisture generally was adequate for spring planting, early prospects indicated a big increase in wheat acreage, and the general crop outlook, as of now, was excellent. As against a year ago, March bank deposits in country banks were up 7 per cent, bank debits and department store sales in farm areas both were up 8 per cent, and farm machinery sales were particularly good. A local newspaper recently had a headline reading "dealers report spring sales running strong" and went on to say that "there's no recession this spring in the Upper Midwest farm machinery business." The current business recession was neither "farm led" nor "farm fed"; in fact, the favorable farm picture gave a strong underpinning to the entire district economy. Residential building also continued to be a strong factor in the district--stronger than in the nation. As compared with a year ago, the number of dwelling units authorized by permits in the Ninth District was up 40 per cent in January and 45 per cent in February, information indicated that the number authorized and preliminary City builders were optimistic for the in March also was up. Twin the building season. first half of in the Ninth District, Mr. Deming said, con The downturn weakness in mining and manu tinued to reflect almost exclusively in the copper country of and thus its impact was mainly facturing Minnesota, Wisconsin, and and the iron ranges of Northern Montana
Michigan, plus some impact in the Twin Cities. Virtually all of the above-normal employment was in these sections. Lumber activity seemed to be picking up a little, thus offsetting some--or at least not leading to more--unemployment in the areas where both mining and lumbering are important. Preliminary March figures on employ ment in Minnesota and Montana indicated that nonfarm employment continued to slide off in that month. In February, in Minnesota and in Montana, it was 4,500 and 5,700, respectively, under last year; in March the figures were 11,244 and 7,000, respectively, below a year earlier. The mining areas also posed the biggest questions about unemployment for the balance of 1958. Much of the current unemployment there was seasonal--perhaps two-thirds of it, but with expectations that iron ore shipments this season would not run more than 65 per cent of last year, the seasonal pickup in mine employment would be far weaker than usual and high unemployment was expected to continue in the iron country throughout the summer. In addition to unemployment, there was now, and probably would continue underemployment in iron mining. Copper, on the to be, considerable other hand, was not expected to get any weaker and hence copper unemployment should not grow. mining Mr. Deming discussed public reaction to In further comments, Like the rest of the country, the Ninth District economic conditions. "buy now" campaigns, without any con was going through "think up" and concessions, and real selling campaigns, spicuous success. Sales, price
however, gave some indications that consumer buying could be maintained and increased if a real effort was made, particularly along price-cutting lines. Savings continued to grow, apparently at a faster rate than last year, and purchasing power seemed to be maintained reasonably well. Even in the iron country, unemployment compensation plus company payments plus part-time work was holding up purchasing power pretty well--from 50 to 65 per cent of normal. Mr. Deming then summarized the results of a State-wide public opinion poll on business conditions which was taken by a Minneapolis newspaper in the last week in March. In general, the poll indicated considerable optimism about the state of business for the balance change in personal financial conditions of 1958, little anticipated expectation of the same or higher prices. over the next 12 months, and appeared not to be affected percentage of the respondents A large directly by the recession. Mr. Deming said that he With reference to credit policy, with the position taken by to associate himself completely wished operations and reserve requirements. Hayes regarding open market Mr. in regard to his thinking with Mr. Hayes, however, He would differ Directors met last Board of rate. The Minneapolis on the discount after a rather rate was not changed while the existing week and, would like to that the directors he felt sure thorough discussion, thus putting the per cent very quickly, the rate by 1/2 reduce Although one the bill market. touch with rate in closer discount
cannot be completely logical on the matter of relationships, the directors were of the opinion that a rate of 1-3/ per cent would be more logical than 2 per cent and far more logical than 2-1/ per cent. Mr. Allen stated that where comparable data were available, it appeared that in March and thus far in April Seventh District States, Iowa excepted, continued to experience greater declines proportionately than the nation as a whole. That situation was, of course, directly related to the emphasis upon machinery and automobiles in the district. The impact of rising defense contracts in the area was not yet of importance, inventory reductions and capital cutbacks continued to dominate the picture, and retail trade was significantly slower in February and March. Amidst the general atmosphere of deterioration, however, there were reports from indi vidual firms that new models meeting with customer approval were doing well and were "on allocation" in some instances. Examples were to be found in the appliances and in camera and office machinery lines. The most encouraging spot in the general picture was evidence that inventories in some lines were on a hand-to-mouth basis, and that sales were being lost as a result of restrictive inventory for example, were said to be policies. Sears, Roebuck officials, receiving complaints from local outlets that stocks of certain goods that the ratio of total stocks were inadequate. It seemed apparent
to total sales did not tell the whole story. Mr. Allen went on to say that total construction awards in the district, as tabulated by F. W. Dodge, trailed 1957 by 10 per cent in the United States and 32 per cent in the Midwest during the first two months of the year. Contract awards in the area had been less favorable than for the nation in all major categories. Public works projects, particularly road building, which had helped maintain contract awards totals in the United States as a whole, had been the weakest link in the Midwest. Reports on potential home building activity in the area were mixed, both pessimistic and optimistic reports having been received. The true picture appeared to be that builders and lenders were proceed ing cautiously, awaiting the acceptance of new models. It was apparent in the Chicago area that builder emphasis had shifted to lower-priced brackets as compared with other recent years. Reports credit lenders indicated that delinquencies and re from consumer consumer credit contracts were rising signifi possession rates on there was some evidence that instalment credit cantly; meanwhile, from one sales finance further in February. Reports terms eased February in the proportion showed an increase during corporation downpayments on farm equip paper acquired with low percentage of lenders reporting automobile Although Midwest bank ment and trucks. downpayments in no reduction in generally showed credit activity
February, most of them did report an increased proportion of con tracts with maturities of over 30 months. For the entire district the proportion of loans at more than 30-month maturity rose from 22 to 24 per cent between January and February. In Chicago, where no loans of over 30 months were reported as recently as last October, the rise was from 7 to 10 per cent. Business borrowing from major Midwest banks in the two March tax borrowing weeks rose 77 million, about 35 per cent of last year's increase during this period, but by April 2 net repayments had offset half of this growth. Loan demand appeared to be much lighter relatively in the Seventh District than for the United States as a whole. In the four weeks ended April 2, Seventh District banks accounted for only about 7 per cent of the national business loan growth, compared with roughly 20 per cent in the same period last year. Mr. Allen said that according to the quarterly interest rate made by large district banks during survey, covering business loans interest rate on loans with the first half of March, the average cent, compared with an maturity was 4.42 per less than one-year This decline, of course, of 4.84 per cent last December. average 4-1/2 to 4 per cent the prime rate from the reduction of reflected was greatest on the largest The decline in the rate in January. On loans under at the prime rate. commonly are made loans, which basis points--from 5.88 rate dropped only 28 $10,000, the average
to 5.60 per cent. The effects of the April 1 Cook County tax situation had been pretty well washed out by now. The reserve drain on the leading Chicago banks due to the decline in deposits over April 1 was about the same as last year--close to $500 million on a reserve week average basis. That drain, however, was more than offset by declines in required reserves and earning assets, and an inflow of correspondent balances. Bill holdings and borrow ings reached a peak on March 26, but a smaller increase in indebted ness accompanied the buildup of bill inventories this year than in 1957, and most of the borrowed funds were obtained in the Federal funds market. It appeared that in the current circumstances the banks were not liquidating their bill portfolios as rapidly as they did a year ago. After commenting on the wage negotiations in the automobile industry, Mr. Allen turned to System policy and expressed the view that the situation called for further action. As far as free re concerned, he agreed with Mr. Irons that it would be serves were the range of $500-$600 million. On the dis suitable to maintain to agree with the views expressed by count rate, he was inclined would favor a reduction to 2 Hayes and Mr. Erickson, and he Mr. District seemed to that bankers in the Seventh per cent. He said fact, a good many loans the prime rate was tottering--in agree that was pleased to see prime rate. He at less than the were being made and felt that the to time deposits with respect the developments
rate structure undoubtedly was having an effect in that respect, but that might also be tottering. At any rate, he would be in clined to recommend a discount rate of 2 per cent at the next meeting of the Bank's directors. Mr. Leedy stated that the situation in the Tenth District showed little change since his report at the last meeting of the Committee. There had been some delay in planting due to a back ward spring and an excess of moisture, but things were now going ahead. With reference to previous comments about farm machinery, there had been some discussion at the directors' meeting last week based on observations at the last meeting of the Omaha Branch directors. It appeared that as far as used farm machinery was dealers' stocks were practically depleted, but that concerned, to new farm machinery was not quite the picture with regard a few additional minus notes in the dis comparable. There were oil production being one. Also, trict, further curtailment of shutdowns in automobile assembly there had been some temporary the employment situation. However, the plants which affected and livestock prices affected strength generally of agriculture the economy of the district. to a very significant extent a reduction in reserve said that to him both Mr. Leedy rate were called for, a reduction of the discount requirements and of timing. To take about the question but that he was troubled
both of these actions virtually simultaneously seemed to him to involve some risk from the standpoint of public psychology. How ever, as Mr. Thomas had said, the System would have to supply $300 million of additional reserves in the next three weeks to maintain approximately the level of free reserves that had prevailed over the past three weeks, and he subscribed to not reducing the present level of free reserves. If anything, he would favor increasing that level moderately, and he felt that a range of $500-$700 million would not be inappropriate. To handle the operation through the System Account would tend to reduce further the limited supply of short-term obligations. Therefore, if it could be done, his preference would be to have first a reduction of reserve require ments, followed a little later by a reduction in the discount rate. As to the reduction in reserve requirements, he suggested that the Governors might now be in a better position than previously Board of central reserve city banks for several to do something for the It was in the central reserve cities reasons which he mentioned. to be most needed, and it seemed to that added reserves appeared for doing something now for the Board could make a case him that in view of the change that in those cities, particularly the banks of central reserve the years in the position had occurred over of bank deposits. On the cities as centers for the concentration less than a reduction his view that anything rate, it was discount
of 1/2 per cent might be regarded as an indication that the System was not moving as rapidly as it should in the light of the current economic situation. Therefore, as he saw it, reductions in reserve requirements and in the discount rate were quite important and both actions should be taken as quickly as possible. However, as he had said before, the timing of these actions was the element that was disturbing to him. Mr. Leach stated that the principal industries of the Fifth District continued to show downward changes. In the textile industry many weaving mills were on a 4-day week, some were on a 3-day week, and fewer and fewer were operating 6 days a week. Furniture factories showed further cutbacks in operations as orders ran substantially under the first part of 1957, and there was still no sign of the improve ment in the lumber market which traditionally comes in the spring. The output of bituminous coal was currently running about 25 per cent behind the corresponding period last year, and insured unemploy ment in West Virginia had reached 12.4 per cent, a level exceeded by only three other States. With respect to prices, there seemed to be resulting in part from cost rigidities and in continued rigidities that had developed in periods of expanded part from mental rigidities for one of the big three aluminum companies markets. A spokesman stated in Richmond recently that under the "new economics" price of no importance compared to within an industry is competition to new uses. Other companies and adaptation of product research
seemed to hold similar views. Nevertheless, there had been a scattered weakening of prices--some apparent, some hidden. Like other producers, Reynolds Metals Company of Richmond had reduced the price of aluminum two cents a pound. A spokesman for the coal producers in West Virginia said that prices remained firm, but a survey of large consumers and sales organizations in the Richmond area revealed price concessions ranging from ten to forty cents a ton. A Baltimore manufacturer had reduced prices on portable electric tools and fertilizer manufacturers reported reductions in prices of about $1.50 a ton. Reports from Southern Virginia and the eastern part of the Carolinas, regions in which there was a tremendous decline last year in cash receipts from crops, indi cated that the impact on the farmers themselves was softened con siderably by soil bank payments and lower production expenses. There lower expenses were a depressing influence, however, since they represented smaller payments to labor and merchants in areas, particularly those selling fertilizer and agricultural other farm supplies. respect to System policy, Mr. Leach said he believed With under current conditions had that the degree of ease appropriate While it was a difficult matter to judge, he thought been achieved. further additions to liquidity point had been reached where the economic effect. There little, if any, beneficial would have
appeared to be little reason for putting additional downward pressure on short-term rates. He recommended, therefore, that the directive be renewed without change and that the Manager of the Account be requested to maintain substantially the same degree of ease that had prevailed during most of the past three weeks. He would not care to see net free reserves average above $600 million. Another reduction in reserve requirements would be de sirable at this time when substantial amounts of additional reserves are needed. Mr. Robertson said he had a very definite feeling that the economy was getting ready to start upward. The change in weather would bring about a big psychological change and it appeared that price cutting was going on at the moment, which would help to stimulate buying. Consequently, he was firmly convinced that this would be about the last clear opportunity to move downward policywise be in a position to start back up again. Therefore, it was and thus ought to consider reducing reserve require his view that the Board reserve requirements at his opinion it should reduce ments. In and requirements for re city banks by 1 per cent central reserve making available additional by 1/2 per cent, thus serve city banks $450 million. The country to the extent of about free reserves at the moment and he would, to have ample reserves banks appeared to them at this requirements applicable not reduce the therefore,
time. The action on reserve requirements would offset the gold drain which Mr. Thomas had mentioned and, if necessary, partially offsetting actions could be taken. At the same time it would be possible to operate within a range of free reserves between $500 and $700 million. On the mechanics of the change in reserve re quirements, he would favor first a 1/2 percentage point reduction for central reserve city banks and then in a week a 1/2 percentage point reduction for both central reserve and reserve city banks. He would hope that the discount rate could then be reduced from 2-1/ per cent to 1-3/4 per cent as soon as possible. Mr. Robertson suggested that these actions would be appro priate no matter what developments might occur in the economy. If the downward trend continued they would be suitable, while if condi tions turned upward they would likewise be appropriate for the he had mentioned. He saw no reason to change the Committee's reasons and would favor continuing the present policy directive at this time language. Mr. Robertson to the he would agree with Mr. Shepardson said would have some effect. that the weather inevitably extent of feeling a hard winter season and the prospects The country had been through to have some e ffect psychologically. spring weather were bound of good a turn in the to agree that not quite ready hand, he was On the other seemed to think. as Mr. Robertson was as imminent economic situation
Neither, however, was he inclined to be as pessimistic in his thinking as some of the expressions that were heard. He felt that the System was in a good position to wait and observe develop ments for the present. With reference to a comment by Mr. Hayes, Mr. Shepardson said he had a little different idea about the future trend in meat prices in that he would expect not to see as much as the usual price change. In any event, he felt that meat prices would stay relatively high for some time. The effect on food prices resulting from damage to the fruit and vegetable crops due to weather condi tions appeared to him to be something that would work out reasonably soon, with the result that there would be some change in food prices to help the general price index. With regard to policy, Mr. Shepardson expressed the view that a range of $500-$600 million of net free reserves was reason able and appropriate, for he thought that there was now the desired market. He was inclined to agree with Mr. degree of ease in the rate would be appropriate and Hayes that a 2 per cent discount a savings rate that still needed to would maintain some base for what should not prepared to say specifically be encouraged. He was he thought that a further reserve requirements although be done on as a means of meeting the pending reduction might be appropriate need for additional reserves.
Mr. Fulton said that in the Fourth District unemployment was continuing to edge up, although at not quite as high a rate of increase as in the latter part of last year and the early part of this year. In all, 22 areas in the district were now designated as substantial labor surplus areas and 8 were considered major labor surplus areas. The steel industry was working at only about 4O per cent of the rate that prevailed last year and there was nothing in the offing to turn that around. The industry was hopeful for an upturn in the fourth quarter but even that would depend somewhat on develop ments in the automobile industry. Unless there was some change in the acceptance of new models, estimates of the use of steel in auto mobiles would have to be revised. Since nonresidential building and residential construction contracts were down 20 per cent and 32 per cent, respectively, it was the consensus of the builders to proceed carefully, and the bankers were proceeding just as carefully with them. Retail trade was lower at present than it had been for a number of years throughout the whole district. The only bright spot was in Lexington, Kentucky, where a joint directors' meeting was held last week. In this predominantly agricultural section, cent above last year and the area was not retail sales were 3 per Directors of the Bank feeling much of the current recession. observation about prices and aluminum made the representing steel heard of reductions and under-the-counter that although they had
concessions being made, as basic producers of these commodities they felt strongly that price reductions would have a depressing effect on the economy because people would wait until further con cessions were given. The industry also would inaugurate new retrenchment moves which would have an undesirable effect on the economy. The steel wage contract was to come up in July and it appeared that there would be an increase of about 20 cents an hour. In those circumstances, it was the feeling that a price increase was inevitable and in fact quite appropriate. How well this price philosophy would be held in the face of declining orders was another Fulton said. He then reported inquiries from some of matter, Mr. about the possibility of a reduction in the the smaller banks on savings accounts, but he permissible rate of interest maximum little comfort on that score. that he had given the inquirers said the view that the System As to policy, Mr. Fulton expressed that it was doing everything and have it known must take a posture for a turnaround in to establish the basis possible and reasonable reserves of about $600 that a level of free the economy. He felt Anything less than $500 million. would be more appropriate million rate would in his cent in the discount of 1/2 per than a reduction felt that the and he with the situation, be temporizing opinion reported it possible. He as quickly as should be made reduction with the Treasury directors that, of the Bank's to be the consensus
financing out of the way, the discount rate change could be made quite quickly. As to reserve requirements, it was his opinion that they should be reduced in order to supply through that means the reserves that quite obviously were going to be necessary. He did not agree with Mr. Leedy that a series of System policy actions in quick succession might have a bad effect psychologically. People were looking for moves from the central bank in this kind of a situation and nothing that the System could do on the side of assisting business by making credit available would create appre hension. In fact, in his opinion such moves would be of comfort to the people and the more quickly they were accomplished the better would be the System's position. Mr. Bopp reported that developments in the Third District were quite similar to those reported for the nation as a whole. Unemployment was rising in the district a little more rapidly and continued unemployment claims had risen to a new high for 1958. dealers revealed a continuation survey of 50 automobile A special of the gloom permeating that industry. Mr. Bopp said that he had been experiencing some difficulty that roughly three indices. He gathered the price in interpreting by food and increase was represented fourths of the cost-of-living was factual; that whether that part and he was wondering services, changed to reflect changes "marKet basket" had been is, whether the
in the quality of goods and services included in the index. As examples, he pointed out that the repair of an automobile, the operation of a doctor's office, and the repair of a television set involve services of a different and more complicated nature than in years past. Therefore, he wondered whether what had happened to the price index was more apparent than real; in other words, whether the increase in the price index was greater than the realities that had taken place. Unfortunately, he said, escalator clauses are written in terms of the index. He went on to say that a director had commented at the last meeting of the Bank's board that although a manufacturer may not quote a lower price it is not always impossible to use methods such as changing the specifications a little, which meant that in fact prices might be a little weaker than they appeared to be in the index. In a number of people had mentioned that they were able construction, lower prices than they had to make contracts at significantly men wished to keep their anticipated, in part because construction not be done many times, the crews together. While this could some were able to get real seemed to be a time when present With all of these developments, in the building area. bargains exactly what was to be sure said, it was difficult Mr. Bopp happening in the area of prices. to the comparative Mr. Bopp referred regard to policy, With expressed the view of action and in different courses risks involved
that the risks being faced by the System were quite unequal at this point. He would favor reducing the discount rate by 1/2 per cent because a lesser reduction would, as Mr. Fulton had said, seem to be temporizing with the situation. He saw no need for a change in the directive, he would avoid any semblance of tightness in the money market, and he would be favorably inclined toward a reduction of the differential between reserve requirements for central reserve and reserve city banks. Mr. Johns said that there was little in the economic situation in the Eighth District which differed sufficiently from the national picture to merit much comment. As noted by others, there had been a retarded spring season. In the northern parts of the district the moisture was much better than it had been for years, while in the of the district farmers were plagued by problems of southern part excess moisture which damaged the cotton crop so much last year. was concerned, he wished to associate As far as policy with those who had said that the discount rate himself completely At the meeting of the promptly by 1/2 per cent. should be reduced there was extensive discussion of Bank's directors last Thursday, that a reduction of 1/2 per this matter and it was the consensus The action was deferred as promptly as possible. cent should be made to change the would not be prudent a feeling that it only because of which was then financing operation of the Treasury rate in the midst
in progress. In view of this consensus there would be no dis appointment on the part of any of the directors if, despite the Bank's general policy that action to change the discount rate shall be taken only at a meeting of the full Board of Directors, the executive committee at its meeting next week should propose lowering the rate to 1-3/ per cent. On the matter of free reserves, Mr. Johns said that he would be diligent not to go below $500 million and that he would be in favor of broadening the range to an upper limit of $700 or $750 million and letting free reserves go to that point either on a daily or weekly average basis. He would be glad to see a further reduction in reserve requirements, but as to timing and the effect of such a reduction on the proposed reserve require ment legislation he would, of course, defer to the judgment of the Board of Governors. said he still felt that the System had done all Mr. Szymczak policy but that it should continue to that it could through monetary at the present time. Open market operations do what was being done market indicating ease and to provide a tone in the should continue of $400, $500, or $600 million whether this meant free reserves in the market. He thought that part would depend on the situation through a reduction in reserves could be supplied of the necessary market operations, with and part through open reserve requirements action taken on the timing of the depending on the relationship
reserve requirements. It would be his suggestion that any change in reserve requirements take into account adjustment of the reserve positions of central reserve and reserve city banks. A change in the discount rate seemed evident, but whether that should precede or follow a change in reserve requirements would depend on the situation in the money market at the time. If a change in the discount rate were effected, he felt that it should be not less than 1/2 per cent. Mr. Balderston said that he favored the suggestion of Mr. Robertson but for different reasons. He saw no evidence yet of a bottoming out of the economic decline, but there undoubtedly were changes below the surface which were not visible in the indices. He would favor immediate reduction of the discount rate by 1/2 per cent and he would favor a change in reserve requirements so timed as to take care of the necessity for furnishing reserves to the Mr. Robertson, he would favor changing reserve market. Unlike in one move rather than two, for he felt that the requirements be somewhat confusing to the public. latter procedure might he was much more optimistic than Chairman Martin said that no specific reason for this although he could assign he had been, conditions. After the change in weather feeling except perhaps policy, he was inclined thought to System having given considerable was going to move that if the System with those who felt to agree possible, to move it should try, if of monetary policy in the area
in such a way as to wind up what monetary policy could do at this juncture and thus dispose of it as an issue. This appeared to him to be an appropriate time to make those moves although, as Mr. Bopp had suggested, there were risks on both sides. No one could say for certain whether an upturn was taking place, or whether it would, but personally he was inclined to think that there would be a spring upturn at least. The real test for monetary policy would in his opinion come later and not at the present time. He could not say that he subscribed entirely to Mr. Robertson's philosophy, and he did not subscribe to the view that the discount rate should be set in terms of its being a savings rate. However meritorious the reasoning on that point, he felt that the difficultios of such a course would outweigh the advantages derived. Instead, the System should look at the market and the reactions. Chairman Martin went on to say that he saw no great harm at the present time in a split discount rate. This matter, he noted, had not been discussed by the Board of Governors, and no one at bound by anything that was said in terms this meeting should feel his own thinking the rate decisions. However, in of making final Some types of had become largely academic. question at the moment he realized, would indicate that it was currently important, reasoning, bit tortured. He did of reasoning was a in his opinion that line but per cent rate under present conditions, not see much logic in a 2-1/4
and he was not particularly enthusiastic about going into the market at this point to buy bills to provide reserves. He recognized the limitations of monetary policy but he thought posture was terribly important. If he were deciding policy on his own, therefore, he would favor a consolidated action to put monetary policy in the posture of doing everything possible to assist the recovery of the economy. At this juncture he did not think that one was in too good a position to worry about the development of a sloppy market which would make more difficult the System's problems at a later stage. In the circumstancesreasons than those held by others--be aligned and perhaps for different would be desirable to take the two himself with the philosophy that it time being at least, the question now and eliminate, for the actions felt, was the proper posture policy stood. That, he of where monetary for the System. it, there was no that, as he understood The Chairman said be a split of opinion There seemed to to change the directive. desire and also a difference or 2 per cent, rate of 1-3/ between a discount that free some general thinking There was as to timing. of opinion up, with a disposition, $500 million and to be kept at reserves ought to as low a margin to hold the gap Irons at least, the part of Mr. on $700 or go to would Mr. Hayes, with starting Others, as possible. taken in should be if action be. Actually, if need $750 million discount rate, and the reserve requirements future on both the near
there would be no need to worry too much about whether the level of free reserves was $500 million or $600 million, as long as the reserve position did not tighten so drastically that it would appear as though the System was reversing direction. Accordingly, the question of the level of free reserves would also become somewhat academic if these other actions should be taken. Chairman Martin continued by saying that System policy deci sions would have a real test once a recovery was really under way and money was being put to use in a way that would impair the purchasing power of the dollar--a development which might take place rapidly. Then it would be important for the System to have the courage and fortitude to take action, and very difficult judgments would be in volved. He thought, however, that the general tenor of this meeting that in the minds of the great majority of those would indicate was being pursued at this time. In essence, present the right policy of implementing that policy in the most effective it was a matter in taking a bold course, the advantages way. While there were hazards the hazards, provided one kept in of taking it seemed to outweigh prepared to reverse the policy the System would have to be mind that easy money position and stay point and not get into a really at some in a position of is always to stay tendency, he noted, there. The status quo. there was no Martin said meeting, Chairman Summarizing the reserves, no as to free change in the directive; contention for a
one would want to see a drastic reduction; a reduction of the discount rate to either 1-3/ or 2 per cent was favored; and a reduction in reserve requirements was seen as a possibility to take the place of supplying the $300 or $400 million of reserves that would otherwise have to be supplied by open market operations in order to maintain the present level of free reserves over the period of the next three or four weeks. At the instance of the Chairman, there followed a discus sion of the reserve position of central reserve city banks in relation to the position of other banks and the reasons which might be given for taking action to reduce the differential in reserve requirements between central reserve and reserve city banks. It was pointed out that, when vault cash holdings are added to present reserve requirements, the differentials are not as wide as the percentages of requirements taken alone indicated; the average central reserve city and reserve city banks is spread between point and that between reserve city and about one percentage is less than 4 points. Thus, reductions of 1 point country banks for reserve city banks city banks and 1/2 point for central reserve these two classes of differential between would leave an effective only 1/2 point. attention was drawn conclusion of the discussion, At the at this meeting nature of the items discussed to the fact that the any leak of informa to guard against particularly important made it tion.
Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York until otherwise directed by the Committees (1) To make such purchases, sales, or exchanges (in cluding replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to contributing further by monetary ease to resumption of stable growth of the economy, and (c) to the practical administra tion of the Account; provided that the aggregate amount of 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 ac count of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the the total amount of such certificates Treasury; provided that one time by the Federal Reserve Banks shall not held at any exceed in the aggregate $500 million. referred to a memorandum from Mr. Roelse Chairman Martin then copies of which had been distributed Rouse dated April 11, 1958, to Mr. Committee, commenting further on certain aspects to the members of the on which a deci on repurchase agreements, problem of the rate of the discussion at the last meeting of sion had been deferred following the Committee.
The Chairman called for the views of the Committee and Mr. Robertson said that he had hoped to make available to the Committee a memorandum summarizing arguments against making re purchase agreements at a rate less than the discount rate but that he had not been able to complete it for this meeting. If the matter was urgent, he felt that the Committee should go ahe.d and make a decision, but if it was not considered urgent he would request that the matter be held over until the next meeting. In view of the comments by Mr. Robertson, Chairman Martin called upon Mr. Rouse, who said that if reserves were put into the market, in line with the position of ease the Committee had taken, dealers would be finding money available at less than the discount rate, in which event there would be little occasion to put money in through repurchase agreements. However, if it were necessary put money into the market, it would have to be on a permanent to basis unless the Board should act to reduce reserve requirements. on the part of the Board might, however, put more Such action the market than the Committee would want to see kept reserves into the position of having to sell in, and the Account might be in Mr. Rouse also said that some of the reserves. bills to withdraw agreements today and could be made of repurchase appropriate use tomorrow. usefulness of admitting the then said that, Mr. Robertson was whether the mechanism, the question the repurchase agreement
matter was sufficiently important to deviate from what he considered a sound position on the rate. While the Account Management had authority to go to a rate less than the discount rate, this authority had been given with the understanding that it would be used only sparingly. The Chairman stated that in line with this discussion, perhaps the general question could be carried over until the next meeting. However, if the situation became so severe that the Account Manage ment thought something ought to be done, he did not think that there would be any feeling that the existing authority should not be exer cised. at this point that although he did Mr. Robertson commented problem relating to the thinking about the over-all not concur in rate, he thought that the rate less than the discount the use of a by the Chairman was appropriate. course suggested conditions in the a discussion of anticipated There ensued it was suggested that few days during which market in the next of a lower rate helpful as to make the use might be such conditions but not vital. about his feeling con then asked Mr. Robertson Mr. Hayes this occasion, stating rate authority on the use of the lower cerning repurchase agree helpful to utilize it would be very that he thought the would prejudice whether this question was and that the ments longer-run decision.
Mr. Robertson replied that he thought use of a rate equal to the discount rate at this time would be sufficient, that he would go slow, that he thought it was the wrong time, but that the Committee would have to make the decision. If the situation was deemed urgent, the Account Management had the authority. Mr. Rouse commented that if money could be put out at 2-1/4 per cent there was no problem, and that this would depend on move ments of float and on developments in the market for Federal funds. It might be that a 2-1/ per cent repurchase rate would get some money out over the next two days. Reference then was made to a memorandum from Mr. Hackley dated April 3, 1958, with regard to a question raised at the Com mittee meeting on March 4, 1958, concerning whether the authority of the Chairman of the Committee to appoint a Federal Reserve Bank to operate the System Account in the event the New York Reserve to function extended to an Acting Chairman. The Bank was unable distributed to the members of the Com memorandum, which had been whether the resolution provid mittee, also dealt with the question continued operation of the Committee during an emergency ing for selection of a provision for the contain any specific should first question, the Regarding the or Acting Chairman. Chairman would Vice Chairman that the in the memorandum was taken position appoint a Chairman, to of the in the absence have authority,
Federal Reserve Bank to operate the Account and that, if both the Chairman and Vice Chairman should be unavailable, the Committee would have authority under its by-laws to fill the vacancies at any meeting of the Committee. With regard to the other question, that the Interim Committee authorized by the Open it was suggested Market Committee resolution would have the same authority to elect a Vice Chairman and to fill vacancies that the a Chairman and its by-laws. Accordingly, no necessity regular Committee has under resolution to provide for a Chairman was seen for a change in the or Acting Chairman. being no question raised, the There from Mr. Hackley was accepted memorandum by the Committee. President of the Marsh, Assistant Vice At this point Mr. to join the meeting New York, was invited Reserve Bank of Federal emergency planning. of a problem of for discussion planning for at this point emergency Mr. Marsh said that entirely on the was focused almost open market operations System that was indicated if to supply liquidity, of the System ability on the responsibility emergency, and policy in an as a national the Government in reactivating take the leadership System to of the objective. and Treasury both a System which was market, securities as it related as far been internal had of the planning far, all Thus done about including little had been operations and to open market to prepare planning except in the dealers securities the Government
a list of dealers' offices and a list of key personnel. It had been recognized from the start that something more would have to be done with the dealers and that they would have to do more on their own account to fit into System planning and the over-all planning for the financial community. This planning, it was felt, should provide particularly for the System to obtain dealer aid in achieving the liquidity which the System presumably would be trying to bring about, and to get it as soon as possible after the emergency. This would apply also to getting the dealers' help in reactivating the Government securities market and completing unfinished business. The American Bankers Association had taken the leadership in developing an approach to planning for the com so it seemed important at this time to consider what mercial banks extending the System's efforts and planning should be done about particularly in view of the fact in the direction of the dealers, Defense Mobilization had issued a directive that the Office of in the field of money and the System broad responsibility giving time what plans the dealers It was not certain at this credit. arranged to keep duplicate made, but a few may have might have outside the city. records thought was to Mr. Marsh said, the In the circumstances, and probably representatives of nonbank dealers, call a meeting in order to banks also, of commercial the dealer departments of
have a unified approach. At such a meeting an effort would be made to try to get a good reception for the idea of planning in general and to get the dealers to appoint a committee which would work with the System in developing a coordinated planning approach. While there would be other possible approaches, this was the one that appeared best; it was thought preferable to an approach under which the System would do all the planning. Mr. Marsh suggested that it would also be desirable to advise the Treasury what was in mind in general terms, ask for any suggestions, and inquire whether the Treasury wished to participate. Following a discussion of the plan outlined by Mr. Marsh, the Committee authorized proceeding along the lines indicated, with the understanding that Chairman Martin would discuss the matter with the Treasury. It was also understood that Mr. Allison, Special Consultant to the Board, would be invited to participate in the program as it developed and that Mr. Robertson would keep closely in touch with develop ments. Martin then inquired whether anyone had suggestions Chairman other than in con in open market operating procedures for changes agreements, which of the rate on repurchase nection with the question no suggestions were at this meeting, and had been discussed earlier heard.
It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, May 6, 1958, at 10:00 am Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions