May 6, 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, May 6, 1958, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Balderston Mr. Fulton Mr. Irons Mr. Leach Mr. Mangels Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Vardaman Mr. Treiber, Alternate for Mr. Hayes Messrs. Erickson, Allen, Johns, and Deming, Alternate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and Leedy, Presidents of the Reserve Banks of Philadelphia, Atlanta, Federal and Kansas City, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Marget, Roelse, Walker, Wheeler, Messrs. Daane, and Young, Associate Economists Board of Governors Carpenter, Secretary, Mr. Secretary, Board of Mr. Kenyon, Assistant Governors Adviser, Division of Mr. Koch, Associate Board of Governors Research and Statistics, Government Finance Section, Mr. Miller, Chief, Statistics, Board of Research and Division of Governors Securities Department, Mr. Stone, Manager, Bank of New York Federal Reserve Reserve Bank President, Federal Mr. Tow, Vice Messrs. Larkin, Balles, of Kansas City;
and Baughman, Assistant Vice Presidents of the Federal Reserve Banks of New York, Cleveland, and Chicago, respectively; Mr. Parsons, Director of Research, Federal Reserve Bank of Minneapolis; Messrs. Willis, Anderson, and Atkinson, Economic Advisers, Federal Reserve Banks of Boston, Philadelphia, and Atlanta, respectively; and Mr. Bowsher, Economist, Federal Reserve Bank of St. Louis Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on April 15, 1958, were approved. 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 April 15 through April 30, 1958, and a supplemental report covering commit ments executed May 1 through May 4, 1958. Copies of both reports have been placed in the files of the Federal Open Market Committee. In reviewing open market operations since the last Committee meeting, Mr. Larkin stated that reserve availability had been main tained, but that there had been a generally uneven distribution of a heavy concentration in country banks. aggregate reserves, with banks had shown a marked tendency to invest and lend The New York to them, if not before. As when reserves become available rapidly market had been generally characterized a result, the central money by some tightness during the period. Treasury bill rates had moved Mr. Larkin pointed out that Shortly after that meeting, since the last meeting. like a pendulum
5/6/58 -3, when the Board announced the further reduction in reserve require ments and discount rates, the rate on the longest Treasury bill moved down to the 1 per cent level, where it met considerable re sistance as the market tended to dry up. The rate subsequently rose to about 1-3/8 per cent under the influence of fairly heavy selling and the accumulation of large inventories of bills in dealers' hands. The re-emergence of demand at that level, however, contributed to another downward movement in bill rates. The rate in yesterday's auction was down to 1.19 per cent and this morning that issue was trading close to 1-1/8 per cent. The capital market had shown considerable hesitation under the leadership of recent declines in the prices of Treasury bonds. Prices of corporate and municipal securities resisted the declines registered in Treasury a time, but subsequently they also moved down. The issues for hesitation that characterized the capital undertone of weakness and other things, a shaking out of earlier market reflected, among the market's awareness of the speculative excesses, and also a long-term bond in the the Treasury might issue possibility that seemed to be time, the market At the present June refunding. concerning the Treasury's until more definite information marking time became available. intentions noted that a Mr. Leach Larkin's statement, Following Mr. the money market appeared in that had for the pressures major reason
was the fact the New York banks had increased their investments substantially and were heavy buyers of Federal funds in order to maintain their reserve positions. Mr. Larkin affirmed Mr. Leach's observation and stated that this tendency on the part of the New York banks to invest quickly was something to which attention must be paid. As a result, the banks had been in the Federal funds market and this had indeed been a most important factor in keeping the rate for Federal funds up. Thus, the usefulness of the Federal funds rate as a measure of the degree of ease or tightness in the market tended to be impaired. In response to a question by Mr. Vardaman, Mr. Larkin said that the banks had been investing in Government securities primarily, and that they also had expanded their loans to securities dealers. In their quest for earnings the banks had displayed some tendency to sell Treasury bills and obtain higher-yielding securities. Mr. Treiber commented that by last October the New York banks' average ratio of loans to deposits stood at 65 per cent. The average ratio was now down to 61 per cent but this was still a high figure, and quite high when compared with the same stage of By increasing their holdings of Government the 1953-54 recession. liquidity and would be in the banks were improving their securities loan demand, to move forward position, in a time of business better If the banks had greater liquidity, he said, and meet that demand. with greater readiness. approach further lending they would
Mr. Roelse pointed out that the New York banks continued to be subject to very wide swings in their reserve positions. Last Thursday, for example, they lost a couple hundred million dollars, and they were likely to be hit again from time to time. Mr. Balderston said that he considered the point raised by Mr. Leach one of the most timely questions before the Committee. He had had some concern about the matter also, and had intended to refer to it later in the meeting. It seemed to him that the fairly obvious answer was that the System should not shoot off all of its ammunition this spring. The Treasury was going to have to do a lot of cash borrowing this fall, which was likely to cause both the commercial banks and the Treasury to call for increasing the supply of reserves. The System, he supposed, might then feel under some obligation to add to liquidity to assure the success of the Treasury that a part of the reserves which the offerings. To him it appeared had been misused, for they had been going System had been supplying longer maturity than would securities of somewhat into Government of rebuilding liquidity. There seem desirable from the standpoint the System to be somewhat it, the answer was for fore, as he saw reserves that it supplied. in the amount of reluctant this spring had talked had used to whom he Bopp said that bankers Mr. Reserve Banks and debt to the Federal in part to repay reserves part to obtain Government and in some excess reserves, build up
securities. They did not feel at all liquid in the sense of wanting to expand. The immediate problem was, in his opinion, that the banks at this point did not feel sufficiently liquid to go out and solicit loans. In terms of System policy, this would mean that the System should feed out reserves to produce a greater feeling of liquidity. Mr. Allen stated that the banks in the Seventh District seemed to have sufficient liquidity but that the economic situation was an important factor in their thinking. The discussion concluded with a comment by Chairman Martin that the problem was one which probably would be with the Committee for some time. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period April 15 through May 4, ratified, and 1958, were approved, confirmed. on the economic situation, in Mr. Young then made a statement which was distributed under of the staff memorandum supplementation were substantially as follows: date of May 2, 1958. His comments cent decline from a year ago in Despite a 40 per 400 of America's large manu first quarter earnings of investors in the stock market facturing corporations, their actions that recession is bottoming are saying by will soon set in. that inflationary recovery out, and on the other hand, recent economic information, The most and that a is still deepening, that recession is saying is yet to be established. bottom
At the same time, statistical evidence of slowing of decline is little by little accumulating and a few "straws in the wind" are suggestive of leveling out and formation of a recovery pattern. Certainly, the responsiveness of bank credit expansion and capital flotations to easier monetary policies is not to be minimized as a counter recessionary development, though it is much too soon to conclude that it is a harbinger of early recovery. The index of industrial production dropped another two points in April, bringing the decline to 19 points, or 13 per cent. Declines were fairly widespread among industrial lines but again greater in metals, industrial and transportation equipment, and minerals. Output of lumber, cement, aircraft, and farm machinery, as well as of household durables, either held steady or improved a bit. Manufacturers' sales and new orders were off again for March, about the same as in February, with the further decline concentrated in durable goods lines. For the past two months, the declines in new orders have been modest, however, in comparison with those of the preceding four months. In March, new orders for primary metals were virtually unchanged from February. Business inventory liquidation in March amounted to a further $700 or $800 million, suggesting an annual rate of liquidation for the first quarter of possibly $9 billion instead of the $7.5 billion earlier reported for GNP estimates. Estimates of new construction outlays, which had been at record levels reached last fall, have showing stability Revised estimates show a steady recently been revised. in April from the $48.5 billion decline to $47 billion public construction about estimate for October. With was caused by lower private expendi maintained, the decline and commercial con with residential expenditures tures, about year-ago levels and industrial struction down to to a fourth below last year. construction down sharply first quarter were a tenth Contract awards through the continued at this reduced a year ago, and apparently under figures portend further declines level through April. These in private construction. at a low level in starts, which were Private housing with interest for are being awaited February and March, are both and VA appraisals While FHA applications April.
up sharply and pressures of mortgage funds are now widely reported to be depressing mortgage interest rates, there is still the question of buyer interest in new home pur chases. Builders are generally said to be holding back on starts pending more test of market demand at current prices. A sharp reduction in the marriage rate since a year ago, some rise in residential vacancies, and an appreciable rise in VA delinquencies since last summer are developments of uncertainty receiving attention by both builders and mortgage lenders. New car sales continue to run over a fourth below last year, but with auto assemblies sharply down, dealer stocks were reduced about 60,000 units last month to around 800,000 cars, or 5 per cent over a year ago. Used car sales continue to run about an eighth under last season, with used car prices about steady, a little under year-ago levels. Sales of furniture and household durables at department and specialty stores continue to hold moderately under year ago levels. Reflecting the reduced levels of consumer durable goods sales, especially of automobiles, consumer instalment credit extensions have declined sharply relative to repayments, resulting in a decline in outstandings at the significant annual rate of $1.5 to $2 billion. Repossession information, though limited in scope, continues to show the highest re possession rates since the mid-thirties. Unemployment in April declined less than seasonally, so that the seasonally adjusted rate rose from 7 to 7-1/2 per cent. Initial claims for unemployment benefits still run at quite high levels, and the number of continued claims of those unemployed 15 weeks is now double that recorded in earlier postwar recessions. prices have changed little since late March. Wholesale Livestock and dairy prices have edged down, but farm and prices are still 8 per cent above a year ago. food product industrial commodities have shown little Wholesale prices of change for over a year, although prices of some industrial lower and have declined further since materials are sharply late March. Recently,a few industrial material prices subject to earlier declines--copper, synthetic and cotton shown intermittent strength. On textiles, and lumber have hand, price concessions are being increasingly the other area. Actual bids on in the finished equipment reported the first quarter showed construction during Federal highway decline since 1953--2 per cent. the first
Consumer prices experienced the largest monthly in crease since mid-1956 in March. The rise was accounted for by further increases in prices of meats, fresh vegetables, services, and drug items. Prices of appliances, carpets, new and used autos, and fuel oils declined. With prices of meats and fresh vegetables rising further from March to April, the April consumer price index is expected to show a further rise. Strength in consumer demand outside the durable goods area is reflected in April department store sales. Such sales were apparently up 2 or 3 per cent from March and from April of last year, although down 6 or 7 per cent from last August. U. S. exports in February, the last month for which data are available, were down 25 per cent, or by $5 billion annual rate, from the first quarter level of last year. There were further declines in exports of steel, other metals, coal, and agricultural products, but also declines in groups that had earlier been moving well--automobiles, trucks, textiles, chemicals, machinery and equipment, and various other materials and finished products. Along with a spreading of declines among product groups, there was also a geographical spreading of decline, especially to less industrialized areas. Despite declines in exports, imports seem to maintain a level close to that of last year. European industrial activity advanced a little during the year and held up well in March. There first two months of the of inventory liquidation in are, however, some indications financial situation is in a state of Europe, and the French Canadian activity, which began to decline rapid deterioration. U. S., has shown some recent signs of before activity in the construction, which has been actively recovery. Residential loans, has been a factor of subsidized by direct government In Japan, a leveling out special strength in the situation. appears to have occurred. after downward adjustment in activity American development economies, In various Asian and Latin imbalances and internal inflationary international payments tendencies continue dominant. with refer the following statement Thomas made substantially Mr. financial developments: ence to month have been during the past Financial developments to the avail substantial additions by the further influenced the activity of and have reflected of bank reserves ability to use. At available funds to put their banks in endeavoring have continued heavy. on capital markets the same time, demands
Renewed sharp declines in interest rates--both shortand long-term--that began in the latter part of March seem to have culminated shortly after the mid-April actions by the System further to ease the credit situation. Common stock prices have risen in recent weeks to the highest level for this year, notwithstanding corporate earnings reports indi cating a sharp reduction in profits of manufacturing corporations during the first quarter from the same period last year. The upturn in yields on Government securities following System easing action may be attributed to a number of factors. To begin with, payment for the new Treasury note issue through tax and loan accounts and addition of much of the issue to bank portfolios absorbed the bulk of the reserves released by the reduction in requirements. One factor was the large volume of commitments of a speculative or temporary nature in both long- and short-term Government securities by dealers, banks, and others. With the rise in prices there has been some profit taking. Another factor is the continued large volume of new issues of corporate and municipal securities and the heavy inventories of these held by underwriters and other dealers. The uneven distribution of excess reserves, with central re serve city banks holding few notwithstanding the larger decrease in their reserve requirements, has been attributed as another influence in the apparent tightness of the money market. It would probably be more correct to say that the city banks have been so active in putting available funds to use and were already so committed in Federal funds borrowing that they retained none of the reserves released. New issues of securities by corporations in April, amount ing to nearly $1.1 billion, exceeded those of the same month The May total is estimated at $775 million, or about last year. the same as last May. The five-month total for corporate issues billion is only L per cent below the record volume at about $$ same months of 1957. Issues by State and local issued in the continue large and the total for the five months governments will exceed that for the same period last year at $3.75 billion by about a fifth. expenditures have been running below estimates, Treasury maintained at close to the estimated while receipts have been the cash deficit for the fiscal It appears likely that level. instead of the $3 billion will be little over $2 billion, year anticipated, unless expenditures increase sharply. previously has often resulted in keeping The apparent lag in expenditures at a higher level at the Reserve Banks the Treasury balance
than anticipated and thus in some unintended drain on bank reserves of a temporary nature. In the five weeks ending April 30, banks in leading cities showed a further increase of over $2.5 billion in total loans and investments--about $1 billion more than the rather large increase shown in the same period last year. It appears that for the five months since the end of November, total loans and investments of all commercial banks may have increased by $7 billion or more--a larger expansion in a season in which little growth usually occurs than has been shown in any recent twelve-month period. The April increase reflected almost wholly additions to holdings of U. S. Government securities--particularly the new 5-year notes. Holdings of other securities also increased, and additions to loans on securities largely offset a further decline of over $800 million in commercial loans. Demand deposits adjusted at city banks increased in the five weeks by nearly $1.5 billion, compared with a growth of half a billion at these banks in the same period last year. Demand deposits are now almost as large as they were a year ago and on a seasonally adjusted basis are at the highest level since last summer. Time deposits have continued to increase at a faster pace than a year ago. With reference to previous discussion of the point raised by Mr. Leach, it is interesting to note that the bulk of the deposit increase in April occurred at cities outside New York. New York City banks, however, continued to add to their invest ments and their security loans, showing relatively larger in than other city banks. Since mid-April, New York banks creases have reduced their borrowings of Federal funds. Figures for all commercial banks, now available for the that most of the credit expansion since end of March, indicate banks--both in New York and in November has occurred at city other cities. showed a small increase in total loans and Country banks offset by a decline in cash assets, with investments which was assets or deposits, but these little net increase in total marked declines--largely seasonal--in changes compare with in the same period of deposits of country banks assets and other recent years. 30, the reduction in In the four weeks ending April $575 million of reserves, requirements released about reserve at country banks of the April 1 reduction including the effect a decline of currency in into this period, and carried over
circulation added another $120 million. The gold outflow drained $330 million, and most of the remainder was largely absorbed by the effect of deposit growth on required reserves. This increase was about $120 million larger than had been expected, indicating the extent of bank credit expansion in excess of usual seasonal trends. System open market opera tions were light in this period, covering mostly temporary fluctuations in reserve needs, and resulted in practically no net change in Federal Reserve holdings of securities. Member bank borrowings and excess reserves also showed negligible changes on the average, and free reserves generally exceeded $$00 million. Assuming usual seasonal variations in deposits, which would result in some decline in required reserves until mid June, followed by a sharp increase in the latter part of June, and assuming also customary seasonal variations in currency and float and continuation of a gold outflow until mid-June, projections of the Board's staff for the coming weeks indi cate continuation of weekly average free reserves of well over the week ending June 4. If banks continue $500 million until to expand credit in an endeavor to utilize all available re serves, they may bring about a contraseasonal increase in the money supply. Then the volume of free reserves would be lower, unless maintained by System operations. come when consideration should be Perhaps the time has further credit expansion at the rate and of given to whether in the recent past should con the type which has taken place to be encouraged. Will commitments be made that might tinue easy money has done all future difficulties? Perhaps lead to and promoting recovery until it can in mitigating recession other essential adjustments are made. statement of his views re presented the following Mr. Treiber garding the business outlook and credit policy: with the general continues weak, The business picture There is some evidence still declining. level of activity movement in some down in the recessionary of a slowing of a general bottom is no clear evidence areas but there community and consumers the business ing out. Nevertheless, confidence in the to have considerable in general continue longer run outlook. of a is some evidence there As for inventories, but the of inventory liquidation, off in the rate tapering high. Continued sales are still to ratios of inventories
liquidation for some months longer appears likely. Plant and equipment expenditures may be expected to decline further, probably into 1959. Such expenditures frequently work toward lower levels even after economic activity as a whole begins to expand again. On the other hand, retail sales on the whole continue to hold up well, even though personal income has been declining. While consumer spending remains a critical area in the business outlook, its maintenance at a high level, except for durable goods, and especially automobiles, is most helpful. State and municipal spending continues to be a strong element, but the expected growth in Federal expenditures has been slow in materializing. In the production area the steel and automobile industries continue at about the same depressed level. The construction picture has been somewhat disappointing. While further declines in business construction are to be expected, the outlook for residential and public construction now appears to be mildly encouraging. The employment situation continues to be dis turbing. The slight improvement in total employment figures falls considerably short of seasonal expectations. Unemploy ment seems likely to continue at a relatively high level for some months. Although the consumer price index rose again in March, there is a good chance that the index will turn downward. Not only should seasonal factors bring down food prices, but there is considerable evidence that actual transactions in finished goods at both wholesale and retail levels are occurring with increased frequency at below-list prices. As for bank credit, business loans have shown further con traction in recent weeks, but bank investments have continued to expand rapidly. Since the end of October, total loans and investments at the weekly reporting banks have risen $6 billion. The New York City banks have been most aggressive in utilizing have shown a 12 per cent increase, while available funds and the other reporting banks have shown a 5 per cent increase. have enabled banks to improve their Easier credit conditions liquidity and reduce their loan ratios. The New York City reduced their average loan deposit ratios to 61 per banks have per cent in October. Other compared with 65 cent in mid-April from 55 per cent to reduced their ratios reporting banks have the ratios are considerably higher 52 per cent. Nevertheless same stage of the 1953-54 recession; in April 1954 than in the the ratios were 49 per cent and 42 per cent, respectively. are needed to combat the our opinion further measures In already exceeded in recession, which has recession. In this it must be apparent that intensity the last two recessions, expected to do the should not, be policy cannot, and monetary that a more active fiscal policy is whole job. It seems to us
needed. While the System does not have responsibility for determining fiscal policy, and there are varying views as to the desirability of different types of Governmental action, it seems to us tnat a tax reduction could be more quickly effective and more easily reversible than an equiva lent expansion in Government expenditures. At the last meeting of our directors there was a good deal of discussion of pos sible Government action, and our directors were strongly of the opinion that tax reduction is called for. Permission to speed up the rate of depreciation on new investments would probably constitute the most important contribution to prompt increases in business spending. I would favor not only such a provision but some reduction in the income taxes of all taxpayers--individual and corporate--and in some excise taxes. I think, however, that there should be a terminal date for at least some of the reductions in view of the prospect for substantially increased Government expenditures later on. With a view to making the contribution of monetary policy as great as possible, we would favor somewhat higher free re serves. Recognizing the dangers inherent in concentrating on statistical measurements and that it is important that the "feel of the market" clearly be that of ease, it seems to us that free reserves up to about $3/4 billion would not be out of order. We were glad to see the reduction in the prime rate from 4 per cent to 3-1/2 per cent, but developments in the long-term market have been less satisfactory. We would hope that lower rates would stimulate residential construction and municipal public works, and help to promote further improvement in corporate liquidity which will subsequently facilitate corporate spending. Uncertainty regarding the Treasury re a long bond will be offered have funding and expectation that up. A large offering of longer probably tended to hold rates would be undesirable in present maturities by the Treasury From our preliminary consideration of the circumstances. would seem that there should be no serious matter, however, it moderate step of debt extension pro objection to a further the Treasury limits the amount. vided a further reduction in the discount We see no reason for favor another reduction in rate at this time, but we would as practicable. Early in June reserve requirements as soon such action. The projections an appropriate time for might be in free reserves at that time. Perhaps indicate a sharp drop appropriate. A further of May would be equally the latter part the banks of different differentials between narrowing of the reduction for banks advisable. A greater classes would seem desirable in view cities seems especially in central reserve
of their higher loan deposit ratios, their traditionally aggressive lending policies, and their practice of making full use of available reserves. We believe that the directive by the Committee to the New York Bank might well be revised to take account explicitly of the System's efforts to combat recession. Clause (b) of the directive calls for open market opera tions with a view "to contributing further by monetary ease to resumption of stable growth of the economy." Since that clause was adopted on March 4, 1958, the economy has moved downward further. Would it not be desirable to state clearly that we are fighting a reces sion? Perhaps the clause might be revised to call for open market operations with a view "to continuing to combat the recession by contributing further through monetary ease to the resumption of stable economic growth." Mr. Johns said he found little in the way of developments in the Eighth District that seemed to merit comment. Business loans of banks in the district continued to decline while loans against securi with investments, about in line with the ties continued to rise along In the most productive cotton area, namely the national pattern. bleak due to weather conditions. The Delta, the outlook was rather only another two weeks and even if planting season was said to last to get all of would not appear possible raining now it it stopped would produce distress This situation, of course, the crop planted. of the Delta area. in certain parts on vacation most of the time Johns said that he had been Mr. he made no at during which time last Committee meeting, since the However, since returning with open market affairs. tempt to keep up that in the He hoped and apply hindsight. to look back he had tried
next three weeks, or the period until the next Committee meeting, the Desk would be a little less diligent about preventing free reserves from rising to somewhat higher levels. He would rather take $500 million as a sort of absolute minimum below which the Desk would be diligent to keep free reserves from falling, and he would be not at all concerned about the days when free reserves rose to a figure of around $800 million, or even $1 billion. Exactly how this would be accomplished he did not know, but he would suggest a somewhat broader range of free reserves as a target. As long as there appeared to be tightness in the money market in the face of a presumably adequate supply of reserves throughout the country as a whole, he would attempt to avoid that tightness and supply reserves without reluctance. He realized that this placed him somewhat in disagreement with the opinion expressed by Mr. Balderston but that was the way he saw the matter. on to say that he would like to support the Mr. Johns went by Mr. Treiber that the first opportunity be availed of suggestion to accomplish a further reduction in reserve requirements. In his view it would be desirable to take some action next time--perhaps own policy but for other reasons of monetary and credit not for reasons reserve requirements of important--to adjust the he considered reduce reserve requirements were found to banks. If reasons country banks more than the would affect country time deposits, that against
other banks and there would be this collateral benefit. For the time being he would not do anything further about the discount rate. Although he had not come to the meeting prepared to argue for a change in the policy directive, he was somewhat attracted by the language suggested by Mr. Treiber. Mr. Bryan said that developments in the Sixth District con formed largely to the national pattern. While there were some dif ferences they were not too significant. On the basis of reports district which were made at the last directors' from all over the appeared that the only places in the district where meeting, it were the State of Florida and some there was a sense of optimism in the district continued coastalresort areas. Unemployment of the reports of large and there were no further to go up, although of workers. However, involving large numbers dramatic layoffs seemed to represent tightening of layoffs which there were dribbles of employment expenditure and elimination of managerial practices eliminated all along. could have been items that perhaps picture as the national he had reviewed Bryan said that Mr. see no evidence he could and that personally as he could carefully to be some there did appear While recovery. quick or immediate of a little disturbed he became rate of decline, down of the slowing in the way of would be necessary calculate what he tried to when and at labor market into the workers coming absorb new to recovery He wished levels. to acceptable reduce unemployment the same time
to align himself with the point made earlier in the meeting by Mr. Bopp to the effect that the banks did not have sufficient liquidity to be a very dynamic factor in recovery, except for making investments which enabled them to obtain same income without materially reducing their liquidity. Accordingly, he rather believed that the time might be close at hand when a further reduction of reserve requirements would be in order. If such a step were taken, he would like to see some reduction in the requirements against savings and other time deposits. While he could make that argument on two or three counts, he wished to mention only one; namely, that the typical bank tends to regard its savings deposits as less volatile and more available as a basis for longer-term credit than is true in the case of most of its demand deposits. Accordingly, there being some concern with he believed that a reduction the problem of longer-term investments, in the reserve requirements against time deposits would have a to change the discount rate at favorable effect. He saw no reason have no objection to a change in the directive the moment but he would If errors were to be made in the operation along the lines suggested. be on the side of ease that the errors should of the Account, he felt rather than tightness. in the Third District that business activity Mr. Bopp reported the decline was evidence that with no significant continued downward,
flattening out. Department store sales improved somewhat in the week ending April 26, but sales for the past four weeks and the year to date were two and three per cent, respectively, below last year. Automobile sales in March were 22 per cent below last year. Preliminary data indicated an upturn in April, however, with registrations in Philadelphia 18 per cent above March, the April spurt in sales reflecting the "You-Auto-Buy-Now" campaign conducted in Philadelphia from April 19 to May 3. The campaign was reported to have been a success and many dealers reported "healthy" sales increases, especially in suburban areas. Some that the result was to borrow sales from May believed, however, district's fourteen labor market and June. Unemployment in the to 9.6 per cent of the labor areas rose in March and amounted in those fourteen areas with the percentage unemployed force, Eight of the areas, a low of 5.8 to a high of 21.2. ranging from centers, had and heavy-goods manufacturing mostly the coal-mining unemployed. The rise of their labor force more than 10 per cent decline in manufactur mainly a continued in unemployment reflected claims, although New unemployment compensation ing employment. at a very high level. peak, were still below the usual quarterly for Pennsylvania remained at about 350,000 Continued claims of both 1956 and 1957. with 150,000 in April compared
Mr. Bopp continued by saying that a recent re-check of manufacturers' capital expenditure plans for 1958 showed that manufacturers had revised their plans downward by 6.5 per cent since last fall. All of the decline was in durables, the plans of nondurable manufacturers remaining the same. In the Philadelphia metropolitan area, which accounted for the major part of the survey total, the downward revision was 3 per cent. While manufacturers of transportation equipment, printing and publishing, paper, rubber, and stone, clay, and glass reported significant upward revisions in their spending plans, according to the revised estimates total capital expenditures in 1958 would be 20 per cent below actual Construction, although showing some improve expenditures in 1957. considerably below last year. Total ment recently, was running were above February, but still 13 per cent contract awards in March and utilities were slightly Awards for public works below last year. and nonresidential con year, but those for residential above last about one-fifth below year-ago levels. struction were turning to a discussion of Mr. Bopp then said that before inventories. An a few comments about would like to make policy he point of view of gross situation from the approach to the inventory at an annual indicate that liquidation tended to national product long. On the sustained very could not be $8 or $9 billion rate of terms a liquidation in actual dollar such a rate meant other hand,
per quarter of something like S2-1/4 billion. If this figure were compared with total inventories of around $90 billion, it seemed possible that inventory liquidation could continue at this rate for a very considerable period of time. This approach, therefore, suggested caution with regard to the prospect of a quick turn around in the inventory situation. It might be mentioned, however, that at the last meeting of the Philadelphia Bank's directors there were reports that orders coming in were increasingly being marked "rush." As to the policy directive, Mr. Bopp said that a change along the lines suggested would be agreeable to him. On the other hand, he thought about the same thing might be accomplished by substituting the word "recovery" for the words "resumption of stable growth," so that the directive would provide for "contributing further by monetary ease to recovery of the economy." He would not suggest any change in the discount rate at this time but he would favor a somewhat larger volume of free reserves. In connection with reserve requirements, he had one comment of a technical nature. This concerned the possibility that if the Board should be authorized to allow banks to count vault cash in their required reserves, it reasons which he outlined, whether might want to consider, for be computed on the basis of deposits reserve requirements should the business day. This matter would require as of the close of to bear in mind. study but it might be something
Mr. Fulton referred to a recent tabulation in the American Banker which indicated that in the first quarter of this year the decline in bank debits in the Fourth District, as compared with last year, far outstripped the decline in any other district. He said that this tabulation seemed to point up rather well the facts of life in the Fourth District. The steel industry had expected a spring upturn but it did not materialize, and new orders from the automobile industry were simply not coming in. It was not expected now that they would come in until the latter part of July or in August, since the new models would probably be introduced late in September or in October. The operating rate was low in practically all of the mills and there was no immediate prospect for improvement. One mill in the Cleveland area closed down for repairs and then stated that it would not reopen until orders picked up and that would be filled from other mills. There were, meanwhile orders for large transmission pipe, as however, some orders being placed pressure to expand their facilities. companies apparently were feeling had softened due to a for structural steel and plates The demand of expansion plans. Actually, considerable extent to postponement although the small the only bright spot, tin plate mills were the by reason of some ordering for had picked up a bit pipe situation Inventories in structures. and nonmanufacturing home construction reduced by users would be substantially hands of some steel the indicated that However, it was should be replenished. July and
inventory liquidation would go on for some time in the case of those manufacturers having fairly good inventories. The steel men were optimistic about the fourth quarter, maybe too much for their hopes to be realized. They seemed surprised that there was not some anticipatory buying due to the fact that steel prices might go up in July following the contract wage adjustment. However, it appeared that consumers were just not ordering even in the face of that anticipation. It might be that the consumers were in a sense daring the steel companies to raise their prices. Mr. Fulton said that in the machine tool industry orders were still far below last year's level, despite the improvement that took place in February and March. In the last couple of months there were several orders for large machines but by and large the machine tool industry was eating up its backlog and expected to restrict production a little later in the year. Unemployment in the district was still going up, although not at quite the earlier rate, and more had been added to the surplus labor area classification. areas showed some signs of increasing and the anticipations Housing starts they had been; they now intended to of builders were better than next three months than of houses within the start a greater number time ago. Mortgage money was they had expected to start a short were both quite cautious. but builders and lenders becoming available about 5 per cent automobiles, was down trade, other than in Retail had been somewhat food lines, which ago. In the retail from a year
insulated from the recession, there was an indication in cities of substantial labor surplus that the situation was beginning to be felt in declining sales and also in differences in the selection of goods. All in all, there was no indication in the district that the recession had bottomed out or that there would be better days in the immediate future. Mr. Fulton said that, like Mr. Johns, he felt that the Desk had possibly been a little too precise in trying to achieve free of around $500 million. He would like to see a wider reserves and if float and certain other temporary factors pro fluctuation, not act to offset those factors. He vided more reserves he would a volume of free reserves around $600 million, would like to see of money meant that the decline in the velocity believing that reserves in order to a larger volume of free there was a need for of reserve require would favor a reduction that decline. He offset this would be helpful and felt that ments against time deposits most of the free banks, even though to the country particularly might induce the banks, for it lodged with those reserves were now at the longer-term their loan portfolios banks to expand country loaned up in mortgages banks were well Many of the country end. now trying to encourage. policy was of thing that credit and the type the lines change along felt that some he policy directive, As to the that is, for at this time, might be desirable Mr. Bopp had mentioned
the Committee to express itself as being in favor of recovery. In other words, the Committee would be positive in the fact that it was trying to create recovery rather than to promote resumption of stable growth. He would not favor any further change in the discount rate at this time. Mr. Shepardson said that although he could not see any bright rays of sunlight in the picture at present he would like to raise a question as to what should be done about the situation. He then referred to the experience over a period of many years in trying to correct the agricultural problem by setting up artificial situations that were not in conformance with reality. This had resulted in building up surplus upon surplus and had created dis tortions in the agricultural picture that only gradually were beginning to work themselves out in some areas. He went on to say that the country was now suffering from a period of excesses. For example, the concern expressed about the lack of continued expan sion of plant and investment raised a question as to why one would expect a lot of additional expansion in the face of existing excess capacity and what inducement there would be for someone to expand conditions. Favorable depreciation further in the face of present measures might be provided in an effort rates, tax relief, or other for which there was to spend money for things to encourage people logic in such actions. could not see the demand, but he no present
In the past, for instance, people had acquired household durable goods a piece at a time when they had the resources available, but in recent years most new home purchases had included package deals including a complete assortment of such items and people were not going to be in the market again for a while. As far as living expenses were concerned, the consumer generally seemed to have money available, outside of the heavy unemployment areas. The thing that concerned him most, Mr. Shepardson said, was the continued talk about artificial moves of one kind or another designed to stimulate overindulgence at a time when there was a need for adjustment, for in his opinion the country had not gone through the adjustments that must take place unless there was going to be a bigger binge in the future. Consequently, while he would not pretend to say that the sun was shining brightly, he felt that it would not help to follow a policy of endeavoring aggressively to produce addi tional spending and investment on the part of people and business for things that were not needed. In summary, he felt that the System could afford to go along with its present policy for the time being go through the natural process and let some of the existing conditions painful as that might be. of adjustment, would accept Mr. Shepardson's said that he Mr. Robertson the conclusion, since he agreed almost verbatim except for statement There were some which must take place. that there were adjustments himself, and it might were not gloomy, including people, he said, who
be well to accent some of the positive things that were admitted, even by those who were the gloomiest. For example, there was the good agricultural picture along with some rise in residential and nonresidential construction and an optimistic feeling in those fields. Retail sales were holding up and State and local govern ment spending was doing well, which would offset some of the declines. Furthermore, there were optimistic features of the inventory situation, some of which had even slipped into the comments at this meeting, for it appeared that inventories might be getting down to minimum working levels. While the economy was in the bottoming-out process, which he despite some denials, he would favor thought was now taking place by means of monetary policy to aid the doing everything possible agree with those who had commented of recovery. He would process down the level of of the Desk in holding about the undue diligence to move up, with a target and he would be inclined free reserves, to the present levels. instead of holding perhaps $800 million, of banks by in liquidity of the commercial would increase the This might be to and one result of funds, creasing the availability an incentive for the expan rates down and create pull longer-term by other banks but eventually not only by city of bank credit, sion banks as well. seemed to him the policy directive language of The present adopted. He when it was now than and more appropriate very clear
said the Committee is attempting to contribute through monetary ease to the resumption of stable economic growth and the directive as now worded represents a clear statement of that objective. He saw no need for a change in the discount rate and he would wait to comment on reserve requirement changes, if any, until the appropriate time. Mr. Mills said that Mr. Balderston had stated his own views with regard to policy and that the statement by Mr. Thomas had high lighted the same line of reasoning. It seemed to him that the System already had accomplished a very important objective in stemming a decline and in laying the basis for new growth in the money supply. To inject additional reserves aggressively into the commercial bank ing system, as he saw it, could work toward reducing, rather than increasing, commercial bank liquidity if they were employed to acquire long-term securities. For the present, he felt that it would be advisable for the System to concentrate on its fundamental responsibility to provide adequate credit availability to the com mercial banking system. It appeared to him that a level of positive free reserves in the range of $500 million would allow the commercial banks ample latitude to meet such an additional loan demand as might within reasonable limits. He and to expand their investments occur permit the movement of was also a range that would felt that level reserves between central reserve city, reserve city and country
banks without in the process producing a money market tightness that could not be corrected promptly by modest direct Treasury bill purchases or the use of repurchase agreements. Looking at the U. S. Government securities market in recent weeks, he was conscious of an impending problem in regard to the Treasury bill sector of the market. Where in recent years the Treasury had properly increased the amounts of its weekly bill offerings, the market might now be losing its previous capacity for their absorption, due to two reasons: the first reason has to do with the outflow of gold, the dollar amount of which had formerly been invested in Treasury bills which were now coming back onto the market. The second reason has to do with the resistance of corpora bills when their yield falls to around tion purchasers of Treasury of that situation may find corporations one per cent. A side issue for time deposit privileges at interest pressuring their depository banks and the banks covering such above the yield on Treasury bills rates issues of U. S. Government securi by acquiring higher yielding demands in the Treasury bill market order to prevent the heaviness ties. In the Desk might flexibly to result from these conditions, that stands bills to the end of jockey the yield on Treasury operate so as to to those corporations their investment attractiveness maintaining away from that sector would otherwise shy other investors who and In Mr. Mills' belief, securities market. of the U. S. Government
adoption of this policy would not lift the level of Treasury bill yields high enough to handicap long-term financing at economically favorable interest rates. Mr. Mills also expressed the view that by refraining from further forcible injections of reserves into the commercial banking system, a reasonable pressure would be placed on the reserve posi tions of commercial banks that would have the effect of encouraging a redistribution of the longer-term U. S. Government securities that they had acquired on the occasions of recent Treasury financing operations. In that event, the previous procedure of resorting to the commercial banking system as the initial underwriter of new U. S. Treasury security offerings would have been reactivated and a step taken toward broadening the market for the Treasury's recent offer ings at the same time that the commercial banks would have been incentive to readjust the composition of their investment given an portfolios for liquidity considerations. Mr. Mills did not feel that there should be another reduction the near future, that the policy directive in reserve requirements in need to consider a further or that there was any should be changed, in the discount rate at this time. reduction he might make any detailed statement said that Mr. Vardaman the situation described by Mr. be in effect a repetition of would Robertson. In particular, reached by Mr. and the conclusion Shepardson
he would try to raise the level of free reserves to around $700 million or perhaps $800 million and keep free reserves at a level from there on up. He would not favor reducing reserve requirements further at this time and he could not see any circumstances under which a reduction would be appropriate unless things became much more serious than he felt they would. However, that matter could be discussed at the proper time. He went on to say that he had spent most of the month of April away from Washington talking almost exclusively to nonbanking groups, both large and small, and that personally he did not agree with the statement that an atmosphere of gloom was prevalent. It seemed to him that the country was in better shape than at any time in the past six months, not in terms of economic conditions but in the sense that the seemed to realize now what confronted them. The American people the country had been teetering at the feeling of panic on which to have been replaced by an attitude first of the year appeared now had come to grips with known condi of calculation and the country panic at present in the places He did not find any sense of tions. toward moderate buying and he had been, but rather a determination He did with present circumstances. spending in accordance moderate few bankers who perhaps a to cover except find anybody running not that was the rule. The sentiment rather than were the exception had stated alone, as Mr. Shepardson was to be let most pronounced
so well. It appeared that the American people would not welcome a broad tax cut program or broad incentives to corporations to in crease already excessive capacity. The people just wanted to be left alone to work their problems out for themselves, provided the System made ample money available. If any pressures should develop with regard to the availability of reserves, he would be inclined to reduce reserve requirements further but right now there were at least two layers of reserve fat in the case of the country banks. There was also at least one layer at the city banks if they did not abuse the situation. Accordingly, he would not move on reserve requirements at this time. In summary, he would favor letting things go along more or less as at present for another three weeks. Mr. Leach stated that although the decline in economic activity in the Fifth District continued, recent weeks had brought some--mostly seasonal--favorable developments. New orders for pine lumber in the first three weeks of April exceeded southern and shipments, a slight but spotty improvement occurred production man-hours, and construction contract in March in manufacturing estimates of department store awards rose sharply in March. Early sizable pickup in April over adjusted, showed a sales, seasonally reports and signs of improve Also, there were once again March. While these were not strong ment in making the textile industry. not conclusive, there and were certainly or clearly discernible,
had been a gradual expansion in demand for cotton print cloth for spot and nearby delivery, and mills had been receiving an increas ing number of inquiries about third and fourth quarter coverage. In addition, there had been sizable forward buying of synthetic goods for the first time this year. The most unfavorable district development was a further decline from already low levels in the production of bituminous coal. Largely because of this, West Virginia had one of the highest rates of insured unemployment in the country. Business loan demand had been relatively strong, Mr. Leach reporting member banks in the Fifth District had said, and weekly to increase their investments only 6 per cent since the been able with 14 per cent for all weekly first of the year as compared strong loan demand had member banks. This relatively reporting of member banks to factor in the reluctance been an important on the prime rate list. borrowers not reduce rates to business of 1/4 to 1/2 per but not many, reductions There had been some, to such customers. cent business and financial on to say that Mr. Leach went greatly worried seem to be did not the Fifth District leaders in they did even though of the recession a further deepening about talk considerable was, however, There early recovery. not expect price in the consumers' rise and the unexpected about inflation, and more people causing more recession was period of index in a
to wonder whether inflation was inevitable. This growing feeling gives him concern even though as yet it seemed to have had little practical effect, except possibly on the stock market. In regard to policy, Mr. Leach expressed the view that the System had gone as far as it should go under existing conditions to promote recovery from the recession. Monetary policy bad made its contribution and, in his judgment, further easing would not be constructive. He would continue to use repurchase agreements, to the extent practicable, to meet temporary needs for reserves and would reduce reserve requirements in preference to making open market purchases if substantial amounts of reserves should be needed for longer periods. It was his recommendation that the be renewed without change, with the understanding that directive of the Account would aim at the same degree of ease the Manager Committee had been trying to attain during the last three that the the wording of the directive unless weeks. He would not change was going to change policy, and he did not favor the Committee any change in policy. that his report from the Tenth District Mr. Leedy stated a continuation of what he had be for the most part just would situation in the district reported. The agricultural heretofore had reported in the that which Mr. Johns quite different from was to the fact that considerable extent due to a Eighth District,
winter wheat is the Tenth District's predominant crop. There had been some late planting of spring crops due to moisture conditions but the crops were now pretty well in and planting had not been so late as seriously to affect the prospect for good crops in all areas. Reports for the first three months of the year indicated that agricultural cash receipts measured very well against the similar period last year. There had been some weakening of cattle prices due to increasing marketing of cattle, but the price of feeder cattle had been well maintained because of excellent pastures in the district and the good supply of feed. The employment picture had followed the national pattern; after a contraseasonal downturn between February and March, employment had continued to edge down ward, the loss having been in factory jobs. Those losses had more than offset increases in nonmanufacturing employment. In the Tenth District that meant for the most part reductions in employment at automobile assembly plants, at aircraft plants, and in the petroleum industry. Construction awards during the first three months of the year had been little different from the first quarter of 1957, but building awards were the only major type of construc nonresidential were higher than last year. Depart tion activity in which awards year, which meant that were about the same as last ment store sales than the national average. Contrary the district was doing better recent strength in there had been some to the national pattern, were close to the loans to farmers business loans. Nonguaranteed
peak of the past several years, due in large part to the cattle feeding operations that were being carried on. Mr. Leedy said that he would make no change in policy although he would favor a change in the execution of that policy. Having just gotten through reducing reserve requirements and the discount rate, he felt that it would be untimely to take further action in these areas and he could see nothing to justify such action. At the last Committee meeting, as he understood it, the consensus favored a range of free reserves between $500-$750 mil lion, but reports showed operations to have been decidedly at the lower end of that range. The fact that the New York banks had been employing fully the reserves made available to them did not indicate to him conclusively that they had been in quest of earnings altogether for there had been two unusual situations. First, there was the Treasury financing in this period in which the banks partici pated very substantially and, second, there had been a large amount of financing of securities dealers. On the latter point, it occurred to him that the System may have contributed something to the situa tion by limiting the making of repurchase agreements to a rate equal to the discount rate. In any event, it seemed to him that the be justified in feeding out further reserves, running System would beyond $600 million, and reaching, the level of free reserves up of the range which he understood to the upper part if necessary, upon at the last meeting. Aside from that, Mr. had been agreed
Leedy said, it was his feeling that the Committee should no nothing, for what had already been done tended to put the System in the proper posture. As he saw it, no change should be made in the directive at this time. Mr. Allen said that in the Seventh District the month of April produced little news of a favorable nature except for the usual seasonal movements in construction and outdoor work. Of course the downward trend in steel and automobiles had slackened and might be over, but the current level of operations was low. Relatively good times were being experienced in Iowa and other agricultural areas, and it now appeared that Midwest farm income was more likely to show an improve ment in 1958 than could have been anticipated at the beginning of the year. Prospects hinged primarily on meat animal prices, which were also the most uncertain element. Prices, of course, should decline but on the demand side, consumer buying of as supplies increased, had been encouraging. Checkbook spending in the district's meats metropolitan areas in March was 4-1/2 per cent below March 1957. month in which bank debits fell below This was the third consecutive and the margin had been increasing. a year ago, had been a slowing down in the matter of savings, there In account in March was relatively activity. Inflow to bank savings were still lower, so than a year ago, but withdrawals smaller of the reserve ease in the past continued upward. Most balances
few weeks had been concentrated at country banks. The Chicago central reserve banks had been showing a basic reserve deficit, but this was attributable to the operations of one bank which had been carrying a heavy dealer position in Governments. That bank had been covering its deficit by purchasing Federal funds rather than by borrowing. Over the past week end, Mr. Allen said, he attended a National Industrial Conference Board meeting in which approximately 50 businessmen participated. The feeling over-all was decidedly optimistic--or perhaps complacent would be a better word. The president of the company which is the world's largest manufacturer of small engines said that they shipped more engines in the first quarter than in any first quarter in their history, and that May would be a good month--much better than expected. There were a number of other reports which, while not as good, were surprisingly However, no steel or automobile people were present. satisfactory. went on to say that although automobile sales Mr. Allen the last 10 days of April would not be out until to figures for would show no improvement over it was understood that they morrow, when the daily average was 14,125. The national the second 10 days, was probably a little lower on April 20 was 835,000, inventory, which production was 20,000. Second quarter but not by more than on May 1, April 316,000 (actual), May at 962,000 cars as follows: estimated happen to nothing could appeared that 321,000. It 325,000, June
increase that projection, while a decline in sales would reduce it. Sources in Detroit were talking about production of 500,000 cars in the third quarter and 1,200,000 in the fourth quarter, which would mean a 3,900,000 car year. It seemed definite that new model intro duction--Ford and Chevrolet at least--was planned for October 1 this year as against November 1 last year. As to policy, Mr. Allen felt that the System should stay just about where it was. Like Mr. Leedy, he understood at the last Com mittee meeting that the agreement was on a range of free reserves from $500 to $750 million, and the results of open market operations therefore showed figures lower than he had expected. He would favor a continuation of that range, with the expectation that probably in the next three-week period the Desk would find it possible and practicable to achieve a little higher level of free reserves than had prevailed recently. With regard to the policy directive, he would prefer not to include the word "recession," among other reasons for the unimportant one that once that word was in the directive he felt that there would be differences of opinion as to the timing of thought it would be just as well to its removal. Consequently, he in its present form. leave the directive there had not been much change in Mr. Deming reported that District although, as elsewhere, basic conditions in the Ninth With reference to the to have improved somewhat. sentiment seemed Railroad said of the Great Northern situation, the magazine farm
that in the area there had probably never been a spring as en couraging as this one. In all, the farming side of the picture seemed pretty good. In nonagricultural lines seasonal expansion was taking place, but the expansion was not as strong as usual nor was it expected to be. Employment layoffs had continued and in some areas the situation probably would continue through the summer. Banking presented a considerable contrast to last year, the seasonal deposit loss being just about 60 per cent of last year. The loan decline at city banks was being offset by expansion elsewhere, with the result that loans in total were even with the end of last year. While there was some recent expansion at city banks, it apparently was not as strong as last year. Some city banks seemed more ag gressive in making loans, that is, more eager to make loans, and there was advertising for loans in contrast with last year. Deming expressed agreement with those who were inclined Mr. policy had done its job thus far and that it to feel that monetary about the right position. However, he felt that the was in just free reserves than ap somewhat higher level of Desk might seek a While he recognized the it had been able to achieve. parently position at the present in getting to that statistical difficulty be pursued a little more that the objective could time, he felt for, as Mr. to change the directive He saw no reason strongly. more pertinent now than the language seemed Robertson had said, when it was written.
5/6/58 -4l Mr. Mangels stated that the West Coast had not experienced the increase in activity that had been expected. Production of automobiles, machinery, and metals, was still somewhat unfavorable while there had been some improvement in construction and lumbering along with gains in aircraft and shipbuilding. In March, public construction was somewhat above the previous month, and also a year ago, as was residential construction, and there were indications that the Veterans Administration had had quite a substantial increase in appraisal requests. Department store sales did not show much change, being down about 1 per cent in April from a year ago, while automobile sales were down 16 per cent from last year. There had been delays in getting in the spring crops due to adverse weather conditions, but it developed that farm income in the first two of the year was higher than the level of any comparable months five years. At the last meeting of the Salt period in the last director who is in the farm equipment Lake City directors, the and that of his competitors indicated that his business business tne Idaho economy, as previously along very well, and was going At the last directors' be in quite good shape. reported, seemed to plant was now that the Boeing it was mentioned meeting in Seattle more than estimated some 2,000 thousand workers, about 62 employing would be sustained that this level ago, and it appeared a few months orders for B-52a expected to have or two. Boeing for the next year
aggregating $500 million, the Government had ordered some new ships in the Seattle area, and a $75 million missile base was to be con structed near Spokane. A director representing the lumber industry said that sales were better than last year in the Washington area. The lumber people were somewhat optimistic about an increase in residential construction and Government orders for shipments to Korea. The Chairman of the head office directors found among busi ness sources a somewhat more optimistic attitude, and he himself was somewhat more optimistic although he could not quite explain the reasons. Bank loans in all six categories showed an increase in the three weeks ending April 23, and both time and demand deposits in creased more than the normal Twelfth District proportion of the figures. Borrowings from the Federal Reserve Bank were national nominal. The banks continued to feel that they had adequate funds loan demands, and they were not concerned about to meet foreseeable their liquidity position. said that the San Francisco directors joined in Mr. Mangels without enthusiasm, in fact with the recent discount rate reduction not recommend a on to say that he would some reluctance. He went although he felt sure that reduction in reserve requirements further savings funds would large amounts of in the district with the banks savings deposits. requirements against reduction in the welcome a System had done about he felt that the of policy actions, In terms
what it should do and he would be content to coast along on the basis of those actions for the present. Mr. Irons reported that there had not been much change of significance in the Eleventh District, except possibly with regard to weather conditions. He said that the Reserve Bank tried to maintain fairly good contact with businessmen and other parties in the district, and that it did not find an attitude of pessimism but rather an attitude of confidence. Businessmen--and not only the large ones--realized that they had to be cautious and sound and could that they did a couple of years ago. How not do some of the things concern about high and found more comment and underlying ever, he big Government deficits, prices, inflationary possibilities, rising or declining business spending than about unemployment and deficit the sample might not be oil industry. Also, while or gloom in the enthusiasm, even among had not found any great conclusive, the Bank of reserve re the second reduction city banks, about the reserve mean to paint a rosy while he did not quirements. In summary, the price situa and talk about he found more conversation picture, about the problems inflation than of more tion and the possibility of the recession. up, with contract had turned said that construction Mr. Irons Both residential a year ago. per cent above about 28 awards in April ahead of last year. awards were running nonresidential construction and
In this connection, the Reserve Bank had invited bids on a remodeling and expansion of the head office building and four of the ten firms invited to bid immediately rejected the invitation, stating that they were already too fully occupied to take on another job. The agri cultural situation had been slowed down due to rains, particularly in central and northern Texas, but in other parts of the district the agricultural outlook was very good, and in all probability the farmers would get in their crops. In the "valley" the agricultural interests were very happy with the weather and the state of the world. From the standpoint of money in pocket, farm cash receipts for January and February were 30 per cent above a year ago. The rate on mortgage money had apparently declined by about 1/4 per cent on conventional loans and was now 5-1/4 to 5-3/4 per cent, with money available. Insurance companies, savings banks, and others were saying that they had money for mortgage loans. The seemed to look a little better at the moment. Pro oil situation still running on an eight-day allowable basis but it duction was certain that the rate would not go lower. In fact, appeared quite a little in June. There had possible that it would go up it seemed price situation was somewhat decline in stocks and the been some months ago. In the oil three or four better than that prevailing similar to that with regard industry there was a feeling--somewhat nothing was going to happen to the general economic situation--that current bottoming-out process, the industry out of the to skyrocket more or less gradual. recovery would be but that
Mr. Irons said that the banks in the district were in a much more liquid position than they had been and that there was no borrowing from the Reserve Bank except by a few country banks. In the last week or two, there had been a decline in commercial bank loans, largely due to a decline in loans for oil drilling and sales finance. There had been some increase in employment but less than seasonal. Unemployment was running 5 to 5-1/2 per cent, with some of the cities running about 4-1/2 per cent and Houston higher. On policy, Mr. Irons said that the System had taken a position of ease and that he questioned whether there should be any further easing in any way. While he would not place too much importance on free reserve statistics, he would like to see free reserves remain in the $500-$600 million range and he would not try to push beyond that, especially with central reserve city banks utilizing all available funds. He would dislike to see free reserves move up to $700-$750 million, for he felt that the all that it could through easy money and he could System had done not see that the answer to some of the economic problems, for the automobile and steel industries, would come from example, in else was wrong in the automobile still easier money. Something of money. In addition just a lack of availability industry than would observe interest as a statistic he to observing free reserves funds rate as a guide, bill rate, and the Federal rates, the Treasury
along with the money supply and the extent of credit expansion. The trend in the money supply he considered quite important. There seemed to be a strong demand in the capital markets and some concern that the rates on longer-term funds had not been driven down enough, but he questioned whether they should be driven down any lower. He would not be disturbed about the current level of longer-term rates in view of the current demand in the capital markets. Obviously, he would not favor a change in the directive of the kind suggested, but he had been something less than happy about the language of the directive in the past few weeks. If he were recommending any change, he would like to see the word "further" deleted because that seemed to put the Committee in the position of committing itself at every meeting to further ease and he thought that was not a good thing ever to the directive. He did not favor any further reduction get into requirements and he would like to hold policy about in reserve the bill rate around 1-1/ per cent and where it was now, with funds rate in some kind of touch with the discount the Federal would watch credit expansion, the in rate. As he had said, he factors of that sort and the money supply, and other crease in action that the System taking any further easing be sure before accomplish other than to stimulate see what further ease would could of Government securities. drive up the price speculation and
Mr. Erickson stated that the downtrend still continued in the First District, but that there were some hopeful signs. Non agricultural employment continued to move down, with the unemploy ment ccncentrated in manufacturing. Nonmanufacturing employment in March, for the first time during this recession, dropped slightly below a year ago. In March, employment was down 4 per cent compared with the national average of 3. per cent. All manufacturing indices also showed declines. However, construction contract awards were up 15 per cent in March, so that awards in the first quarter were even with the corresponding period last year. The increase in March was attributable to public works and utilities. For the past 10 con secutive weeks, electric power output had shown a more favorable comparison to a year ago than U. S. output. Easter department store disappointing, but after Easter sales improved and thus sales were were 3 per cent behind last year compared with a 2 per far this year cent decline nationally. on to say that the Boston Bank had completed Mr. Erickson went in March they showed the savings banks and that a survey of 79 mutual 1953, while real in deposits since November largest monthly increase the first decline since balances in March reflected estate loan savings banks reduced time ago the larger 1954. A short September per cent and loans to 4-3/4 conventional mortgage their rate on Even in Providence, Rhode Island, other banks were following suit.
which is the worst labor area in the Northeast, one of the larger commercial banks stated that their savings deposits were increasing at the rate of $200-$300 thousand a week. As to policy, Mr. Erickson said that he would make no change in the discount rate or in the policy directive, which he felt covered the situation adequately. Neither would he favor a change in reserve requirements at this time. In open market operations, he would like to have a target of $500-$700 million for free reserves, with errors on the side of ease with less reluctance. Mr. Szymczak said it was his feeling that current policy should be continued but that reserve requirements should be reduced further if and when an opportunity appeared. Whether anything was done in regard to time deposits should, in his opinion, depend on the situation prevailing at the particular time. He had a feeling should be done in that regard, but that was simply that something his feeling as of the moment. More important, as he saw it, was in requirements of central reserve and the question of adjustment Mr. Mills that there was a city banks. He agreed with reserve position which may have to created by the excess reserve problem in case reserve requirements taken up by open market operations be direction as that the with Mr. Robertson reduced. He agreed are than the situation the present situation more to written related point in Mr. Irons' There was a when it was adopted. prevailing
comment about the word "further," but he did not think that the directive should be changed at this time. He would do nothing on discount rates but he would watch the situation as to fiscal policy, as recommended by Mr. Treiber, because the System no doubt would be expected to take a position on taxes. Whether the System should recommend that the present tax levels be held would again, he felt, depend on the situation as it was seen at the particular time. However, the System ought to be prepared to take a position in connection with the tax rates--excise and corporate--that terminate in June. disenchantment with both the Mr. Balderston said that automobiles, the stickiness of design and price of this year's American products had been the indication that some prices, and seem to call for some very out of foreign markets would priced of business itself which might fundamental remedies on the part long pull, the most disconcerting some time. For the require spending and the were imprudent Government current happenings industry might perpetuate that the automobile possibility he had favored contracts. Although in its wage escalator clauses he was now apprehensive some time ago, quick tax adjustment a flow from apparently would deficits that the large Federal about a large tax increased by taken. If actions already spending deficits might created by those basis the inflationary reduction,
be beyond the power of monetary policy to control. As to open market policy, the staff had made clear that there was no tangible evidence that the capital goods recession was bottoming out. Hence, a continuation of present policy would seem to be indicated, with a target for free reserves of perhaps $600 million and no further change in the discount rate. Since he felt that the directive should be changed only when there was actually a change in policy, he would leave the directive unchanged for the moment. Chairman Martin said that in his own view the present open market policy was about right, and that he felt this statement largely reflected the general thinking. There were shades of opinion, however, and he found it difficult to express the consensus on free reserves. not sure whether, as had been suggested here, the Committee He was agreed on a range of $500-$700 million at the last meeting. actually $500-$600 million and there were different He himself had said some being on the high side, some observations around the table, member favoring a somewhat quo, and at least one favoring the status Martin said, was that own thinking, Chairman position. His lower and that it ought not pursuing a policy of ease the Committee was develop in that policy. have any knots which was first changing the directive With regard to that a Martin suggested 4 meeting, Chairman at the March adopted leave the Treiber might by Mr. lines suggested along the change it was aware of whether to the question open a little Committee
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
Also: Record of Policy Actions