May 6, 1958 FOMC Minutes

FOMC minutes

on March 4 that a recession was under way, whereas actually no one around the table had any doubt on that score at the time. Therefore, to make the suggested change might have the effect of producing a record that would be confusing. Accordingly, in his own view it would probably be better not to tamper with the directive, although he did not think that any great problem was involved. Chairman Martin then said he took it to be the majority view that there should be no change in the directive. When no one questioned that statement, he returned to the subject of free reserves and said again that he was not sure quite how to state the consensus of the meeting in the light of the different views that had been expressed. Mr. Thomas commented that it seemed to him At this point free reserves of $700-$800 million that the idea of a target for of around $500 million had prevailed was a delusion. A level an expansion of bank credit same time there had been and at the expansion had not taken $7 billion. If this to the extent of about of $1 billion, or perhaps would now be free reserves place, there level of free reserves to him that the It did not appear more. the present attitude as long as at $700-$800 million could be kept that they would put that is, the attitude of the banks continued, reserves. The country funds and keep no excess to use all available

banks were not likely to keep more than about $500-$600 million of excess reserves so that any free reserves in excess of that amount would be absorbed by further credit expansion. A sub stantially higher level, he suggested, could be achieved only if the Treasury bill yield were pushed down so low that banks would hold idle cash rather than buy bills. Chairman Martin said that these comments pointed up the problem of using free reserve target figures at all. However, they had to be used as an indication, for that was the framework within which the Account Management had to work. As he saw it, the majority would favor a slight easing of the recent free reserve level, and that, he said, was about the best he could do to state the matter. In comments which ensued, Mr. Shepardson said he wished to align himself with the view of Mr. Irons that free reserves ought to be kept in the $500-$600 million range, while Mr. Treiber said he would feel that if free reserves went up to $700 million there were times when this should not be disturbing at all. Mr. Johns should go up for a few days he would not stated that if the level to bring it down, and Mr. Robertson indicated that act too quickly agreed completely with Mr. Johns. he Chairman Martin said conclusion of the discussion, At the a reasonable meeting of the minds, if that there appeared to be

one were to accept the $500-$600 million range that had been sug gested within the framework of the general discussion, and that this was probably sufficient guidance for the Desk. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (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 ad ministration of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; direct from the Treasury for the ac (2) To purchase count of the Federal Reserve Bank of New York (with discretion, it seems desirable, to issue participations to in cases where Banks) such amounts of special one or more Federal Reserve certificates of indebtedness as may be necessary short-term temporary accommodation of the from time to time for the the total amount of such certificates Treasury; provided that Reserve Banks shall not at any one time by the Federal held aggregate $500 million. exceed in the rate applicable to re to the question of the With reference that further considera Chairman Martin suggested purchase agreements, was regarded as unless the problem of the matter be deferred tion

urgent. When Mr. Larkin stated that the problem was not at all urgent, it was agreed to carry the matter over until the next meeting of the Committee. It was then agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, May 27, 1958, at 10:00 a.m. Thereupon the meeting adjourned. Secretary