May 27, 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 27, 1958, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Pulton Mr. Irons Mr. Leach Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Vardaman 1/ Deming, Alternate for Mr. Mangels Messrs. Frickson, Allen, and Johns, Alternate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and Leedy, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Daane, Hostetler, Marget, Walker, Wheeler, and Young, Associate Economists Mr. Kenyon, Assistant Secretary, Board of Governors Associate Adviser, Division of Mr. Koch, and Statistics, Board of Governors Research Chief, Consumer Credit and Finances Mr. Jones, of Research and Statistics, Section, Division Board of Governors Government Finance Section, Mr. Keir, Economist, and Statistics, Board Division of Research of Governors Mr. Stone, Manager, Securities Department, Reserve Bank of New York Federal indicated in minutes meeting at point 1/ Entered
Messrs. Roosa, Mitchell, and Tow, Vice Presidents of the Federal Reserve Banks of New York, Chicago, and Kansas City, respectively; Mr. Larkin, Assistant Vice President, Federal Re serve Bank of New York; Messrs. Willis, Anderson, and Atkinson, Economic Advisers, Federal Reserve Banks of Boston, Philadelphia, and Atlanta, respectively; and Mr. Lapkin, 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 Com mittee held on May 6, 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 May 6 through May 21, 1958, and a supplemental report covering commitments executed May 22 through May 26, 1958. Copies of both reports have been placed in the files of the Federal Open Market Committee. Mr. Larkin said he had nothing to add to the written reports except to emphasize that the money market had been consistently easy. funds had been available at minimum rates and the Treasury Federal along with other short-term rates. bill rate had declined sharply, was 0.63 per cent, and the issue bill rate in yesterday's auction The level. Dealers had been this morning at that started out in trading in yesterday's auction. amounts of bills awarded substantial Mr. Larkin stated that the $91 In response to a question, estimate of required of the Board staff's upward revision million
reserves at country banks on the basis of final data for the last half of April was, as the New York Bank's report had indicated, much larger than usual, the revision ordinarily being in the magni tude of $20 to $30 million. In response to another question, Mr. Larkin said that there had been a continuing wave of speculation in the Government securi ties market since the change in credit policy last fall. With the approach of the forthcoming Treasury refunding operation, there had now been a wholesale speculative movement into Treasury rights maturing in June. Some estimates placed the magnitude of this speculation in the vicinity of one-half billion dollars, but yester day, Mr. Larkin said, he heard a figure mentioned in the area of $1 billion. If the refunding went smoothly, this would not cause trouble. However, if the terms were not acceptable to the specula tors and if they unloaded at one time when the subscription books were opened, there could be trouble in the market place. In was a substantial speculative interest in the essence, there of $1 billion was correct, Treasury issues; if the estimate maturing issues of $9-1/2 billion. out of total maturing that meant $1 billion Thereupon, upon motion duly made and seconded, and by unanimous vote, the transactions during the open market 6 through May 26, 1958, were period May ratified, and confirmed. approved, at this point. joined the meeting Mr. Vardaman
In supplementation of the staff memorandum distributed under date of May 23, 1958, Mr. Young made the following state ment on the economic situation: A bottom to decline in economic activity appears to be in the making. At least, the composite of indi cations is fairly suggestive of this. To identify the main indices: Decline in industrial production has apparently been checked in May. This reflects turn around in steel output and modest strengthening of auto output, about offsetting further declines in producers' equipment and nonferrous metal output. Other areas of output recently have been showing little change. Thanks to rising transfer payments--unemployment compensation, old age benefits, and a recent special life insurance dividend to veterans, personal income has been leveling out. Reflecting improvement in personal income, retail markets have developed noteworthy strength. Non durable goods buying has been particularly buoyant. In new car and used car markets, combined sales and price trends, if not pointing to betterment, certainly suggest cessation of weakening. Construction awards in nonresidential areas, while still declining, show somewhat less decline than expected. A rise in commercial awards and public works in April served as a partial offset to declines in other non residential areas. On a revised seasonal adjustment basis, private housing starts show an evener level for the year to date than on the older seasonal adjustment basis and reports from builders confirm an improved tone to housing markets. With unsold inventories low, and mortgage money readily available on construction liberal terms, and mortgage interest rates showing more home builders state that they are declining tendencies, (not too high to be sure) for the raising their sights year. in durable goods industries have been New orders at successively reduced rates and, abstracting declining a sharp rise in new aircraft industry which enjoyed the confidential informa in March, the latest defense orders for April. Defense suggests a modest increase tion
contracts generally have recently been showing marked rise, with secondary impacts on subcontractors. Inventory liquidation has probably been continuing over all, but some key material markets -- steel, copper, lumber, textiles, and fuels--suggest lessening, if not turnabout, in inventory liquidation. Another straw in the inventory wind is the recent rise in freight traffic figures covering manu factured shipments. Still another straw is that inventory liquidation halted in April at department stores, least at temporarily; the seasonally adjusted index in fact rose 2 points. Initial and continued claims for unemployment compensa tion have shown a more favorable trend this month. Numbers of workers submitting claims are still large, but even modest declines in claims are indicative of change in the labor market climate. March figures for exports were up from February while imports continued to hold up well at the moderately reduced level of January and February. Agricultural income has risen this spring, and with crop, livestock, and farm price prospects relatively favorable for most areas, the agricultural income outlook is modestly bullish. Capital market activity has been well sustained, indica tive of resistance to further contraction in real capital formation as well as of a strengthening of liquidity positions by strategically important sectors of the economy. Banking developments have also been in the direction of a marked strengthening of business and individual liquidity positions. As to prices, a degree of flexibility in the area of industrial commodities seems to be emerging gradually, at the wholesale level but to a degree also at especially At wholesale, there is alleged to be a widening retail. the statistical level of semi spread developing between goods prices and the actual trans finished and finished actions level. The Federal budget is moving steadily into compensatory is for the deficit to rise position, and the prospect deficit in the months ahead. more rapidly further business sentiment can reasonably Finally, investor and about the cautious optimism manifesting on balance be read as future economic outlook. qualification, indeed of these points needs specific Each presents a of them together of it, but the listing quite a bit recession may be of indication that impressive array fairly that from the conclusion is a long jump out. But it bottoming conclusion that recovery out to the recession may be bottoming
is shortly to begin. There are a number of factors in the situation that raise questions about imminent recovery: Surplus of manpower and industrial capacity remains a general condition. That wage rate advance and escalation is still a problem at the bargaining table of major unionized industry is con firmed by the recent aircraft plant settlement. In consumer durable goods markets, instalment credit liquidation continues to be a major drag, proceeding in recent months at an annual rate of contraction not far short of its rate of expansion just a year ago. Price adjustment so far accomplished is hardly to be judged very stimulative. As recession is prolonged, financial strains are cumula tive. For one thing, as income declines, individuals endeavor to maintain living standards; thus, absorption of financial surpluses of many consumers is gaining as a retarding factor in consumer markets. For another thing, second quarter earnings for many companies and key industries at prevailing levels of activity are not likely to bring cheer to many equity investors and, in the railroad area, to bondholders. In Europe, French political crisis comes at a time of increasing indications of inventory liquidation, which could economic scales downward. Adverse European tip European financial weakness on the part of developments, together with various underdeveloped and raw material supplying countries, could spell new reaction in American foreign trade. it seems best to view the period which the On balance, as one of test of recession bottom. economy is now entering cyclical patterns, the period could On the basis of past the test proves out, there may be last several months. If and enterprise forces to give the gathering of financial redirection that recovery is sufficient impetus to resource a good stage for prejudging this set in motion. This is not course is wait for clearer The more prudent possibility. out and that a pattern that recession has bottomed evidence recovery forces has taken shape. of concerning financial the following statement Mr. Thomas made developments: economic situa the current has characterized Someone It is truly a selective "inflationary recession." tion as an in a few sectors--durable declines concentrated one, with the are showing re other sectors goods and inventories--while are: characteristics The inflationary markable strength.
continued rises in prices of many commodities, notably foods and services, together with maintenance of prices of many other processed goods, further increases in wages, rising stock prices, the enlarging Governmental deficits, and, most strikingly, the rapid rate of credit expansion. The last two of these represents deliberate measures adopted to combat recessionary tendencies. The increase in prices and wages may be attributed to structural causes largely outside the influence of credit and fiscal measures. The stock market strength probably reflects credit develop ments at least in part. The expected Federal Government deficit is slow in developing. Expenditures have continued below prior esti mates and, although commitments have been made for additional expenditures, it is difficult to predict when the larger cash outlays will eventuate. Receipts, however, are falling some what below earlier estimates. If expenditures pick up sharply in the next few weeks, the cash deficit for this fiscal year may be close to $2 billion. The Treasury's cash balance has continued at a comfortable level--above earlier projections and above the level of last year. The generally higher level of Treasury deposits at banks as compared with last year has absorbed some of the funds made available by bank credit expansion, as well as some of the available bank reserves. Although the Treasury balance will decline sharply in the next three weeks, June tax receipts, together with the absence of a maturing issue of tax securi ties this year, will bring about a large increase in the Treasury balance in the latter part of June. This should be carry the Treasury into August before new sufficient to financing will be needed. financing by corporations, and by State and New security local governments has continued in large volume. Corporate million in May, are running less issues, totaling nearly $800 the large volumes in March and April, but approximate than Indications are that new total for May of last year. the on private placements may total public issues and payments State and local issues have to $1 billion in June. close exceeding those of previous close to $800 million, remained to a decline in June. present calendar points years. The have been influenced and security markets Money markets and by public security issues, volume of new by the large as well as the Treasury refunding, of plans for discussion Short-term interest of the economy. by the growing liquidity close to those of mid to new low levels, rates have declined April, but rose somewhat in rates declined 1954. Long-term of new issues keeps May. The large volume slightly in early
this market under steady pressure. Uncertainty about Treasury financing has also been a factor in keeping long-term rates from declining. The spread between yields on 3-month bills and the Treasury bond with the highest yield, at about 2-1/2 per cent, is the widest differential since the early 1930's. It compares with a spread of less than 2 per cent in 1954. Total loans and investments of all commercial banks increased by over $4 billion in April--a larger growth than had been previously estimated--bringing the total increase since the end of November to above $8 billion. Marked increases occurred during April in both loans and investments at country banks, and in holdings of investments at city banks. The latter showed little change in their total loans, as declines in business loans were offset by increases in loans on securities. In the first three weeks of May, according to partial figures for May 21, total loans and investments at banks in leading cities declined, reflecting to some seasonal influences, but the decrease was less extent same period last year. Loans declined some than in the what more than a year ago, but investments increased in contrast to a considerable decline somewhat this year last May. Loans to brokers and dealers in securities in the past three weeks, have been substantially reduced have declined somewhat further, re and business loans in part usual seasonal influences. flecting and currency outside banks Demand deposits adjusted of $1 billion in seasonally adjusted increase showed a increases in March and February. April, following similar the end of April is the of $135 billion at The total there was a peak of $136 since last July, when largest as the figure reported is at the same level billion, and other than interbank, last year. Time deposits, for April larger than a are about $7 billion at commercial banks and U. S. Government interbank deposits year ago, and than a year ago. been at higher levels deposits have also May, demand deposits three weeks of In the first by about $1 billion--or at city banks declined adjusted period last as in the corresponding the same amount about and in U. S. Government small declines There were year. Time deposits than last year. but less interbank deposits, continued to increase. deposits in volume of growth in the to the In addition of demand deposits rate of turnover months, the recent
increased in April, contrary to the usual seasonal trend, and was about the same as in April 1957. Although changes in bank credit during the past three or four weeks have resulted in a net decline of about the usual seasonal proportions in the volume of required re serves, there have been substantial drains on reserves from other factors. The continued gold outflow has amounted to about 4OO million and an increase in currency in circula tion to nearly $300 million. The latter increase was about $200 million larger than seasonal. System open market operations have supplied over 400 million of reserves and other factors have supplied some. Free reserves have held close to $500 million. New York City and Chicago banks have maintained rather well balanced reserve positions and during the past week or so have frequently been net sellers of Federal funds rather than large net buyers as in April. Banks in these two cities accounted for much of the decline in total loans and investments at banks in leading cities during the first three weeks of May. These tendencies have been reflected in the easing of money market tensions. Reserve needs will be rather large in June and the first half of July. In the next two weeks, the gold outflow and the holiday currency demand will absorb substantial amounts of reserves. In the latter half of June, required reserves may increase as a result of the sudden buildup of Treasury deposits and probable borrowing by taxpayers from banks. These projections are especially uncertain. It that in the absence of System action free reserves appears might generally average less than $300 million, except the middle week of June when float is temporarily during ending July 2 and 9, there are likely high. In the weeks to be heavy borrowing needs, producing net borrowed re serves of over $200 million. the following statement of his views re Mr. Hayes presented the business outlook and credit policy: garding that the recession has is still no clear evidence There course, even though there are signs that the adjust run its in certain segments approaching its end process may be ment as a whole is losing momentum. the decline in the economy and recent weeks is the reassuring element in Perhaps the most tendencies in any cumulative recessionary virtual absence of
the area of consumer spending. But there is little the in picture to suggest a rapid and vigorous recovery. No im mediate stimulating force of major magnitude is evident, especially in view of the apparently increasing unlikelihood of a general tax reduction. Inventory liquidation is still going on, and with widely used inventory-to-sales ratios at peak levels, the end of this adjustment is not in sight. The rate of liquidation, however, is probably lower than in the first quarter, so that gross national product in the current quarter may receive some upward impetus from this factor, although it may well be more than offset by declines in final demand for goods, in cluding business expenditures on plant and equipment. Retail sales did fairly well in March and April, but fragmentary reports for May look less promising. Transfer payments of various types have been a major factor in maintaining aggre gate personal income at a very satisfactory level, The considerable growth of personal savings since the beginning of the year augurs well for ultimate consumer spending, and long-run business confidence continues strong. On the other hand, there is an ever-present risk that the recession may have increasingly adverse effects abroad. It seems likely that unemployment will remain a serious problem for a good many months. The immediate outlook is dominated by the prospective inflow of about two million high school graduates and students into the labor force employment only. But even after most of them seeking temporary adjustment total unemployment may well increase. seasonal discouraging, though we may take Price behavior is still apparent further spread of discounts some comfort from the pressures become more ef list prices, as competitive below Even the indexes are in today's buyers' markets. fective out. There does not, on the other showing signs of leveling immediate danger that our sustained hand, seem to be any an early resumption of of ease will itself produce policy from a longer-range price increases. Incidentally, general fair trade bill of enactment of a national point of view, House could make more being urged in the the kind now inflationary tendencies. our problem of combating difficult have been similar in bank earning assets Recent trends with business loans months in the year, to those of earlier sharply than a year ago, to fall off much more continuing investments offsetting this and with growing security basis, the money supply On a seasonally adjusted decline. end of October, but higher than at the is now only a shade $2 billion. The risen by more than January it has since
bulk of the increase in loans and investments since October has been matched by a sharp rise in time deposits and Government deposits. It is gratifying to see required re serves (adjusted for changes in required reserve ratios) running about $600 million ahead of last year in recent weeks, as against about $300 million in March and April. Another tangible reflection of our policy of ease may be seen in the banks' loan-deposit ratios. For New York banks the average ratio in early May was 59 per cent as against 66 per cent in early October, but it was still far above the 1953 peak of 54 per cent. For weekly reporting banks outside New York the average in early May was 51 per cent as compared with 55 per cent in early October, and 3 per cent at the peak in 1953. For the next few weeks the Treasury's refunding problems will be requiring our careful attention, but no cash financ ing is likely to be called for until early August. Uncertainty as to the possible inclusion of a long-term issue in the refunding has been a somewhat upsetting influence in the capital markets, despite the considerable ease in the money market. The business outlook clearly indicates that we should adhere to our present policy of monetary ease. If present projections prove to be correct, involving the large rise associated with the Memorial Day in currency circulation with continuing gold outflows, substantial holiday, together will be necessary to prevent the level of free System action reserves from dropping sharply to the neighborhood of $200 in June. I believe that we should aim to keep million early the $500-$600 million range, but that free reserves around side of ease and should have should resolve doubts on the we seeing free reserves rise occasionally to no hesitancy about after due this seems desirable or more if $750 million of the money and capital markets consideration of the "feel" of key liquidity indicators. and the behavior decline that has already view of the very sharp In there would be a real interest rates, occurred in short-term needed in the next few in providing the reserves advantage especially bill short-term rates, without depressing weeks also be advan levels. It would low rates, to unreasonably of bank funds into a diversified flow tageous to encourage especially in the the credit market, sectors of various the capital markets. atmosphere of light of the uncertain for a cut in reasons these are persuasive To my mind date. A cut the earliest possible requirements at reserve
would be a helpful step toward the System's long-range objective of achieving a generally lower level of require ments, and by making added reserves available to a wider range of users than would be the case if these reserves were injected solely through open-market operations, it would increase the likelihood that at least some of the funds would be almost immediately devoted to longer-term uses. A reduction in time deposit reserve requirements might be especially effective in encouraging a flow of funds into longer-term markets, including the mortgage market. Further narrowing of the differentials between demand deposit requirements for central reserve city banks and other categories of banks would also seem appropriate. Just by way of example, I might point out that a 1/2 per cent cut in time deposit requirements would free about $250 million of reserves, and an additional $250 million would be released by a 1 per cent reduction in the central reserve city required ratio for demand deposits. If the reserves needed in the immediate future are not provided through a reduction in percentage requirements, I believe it may be quite difficult to provide them through open market operations without resorting to the purchase of other than Treasury bills, in view of short-term securities supply of bills. Presumably, therefore, it the low market the Manager might purchase other should be understood that market supply of bills is in short-term securities if the adequate to satisfy reserve needs. to the forthcoming Treasury refunding, I With respect a really long-term issue in the feel that the inclusion of in the present situation. would not be desirable offering range of 10 - 12 an offering in the maturity But I think substantial bank sub might presumably attract years, which and would achieve would be quite appropriate scriptions, structure than would of improving the debt more in the way could not be very sizeable range offering which a long effects in the capital risking serious adverse without market. this time to consider no need at There is, I believe, rates. Perhaps it is enough a further change in discount of the three chief to have one in present circumstances the center of the stage of credit control hold instruments clear that this seems to me quite time, and it at any one requirements to occasion for reserve is an appropriate play the leading role.
Mr. Erickson stated that in the First District signs of "bottoming out" were still elusive, although some indices hinted at a slower rate of decline and others hinted at some improvement. Declines still predominated in manufacturing and employment. The April to April figures on nonagricultural employment made a poorer showing than the March to March figures, and the declines were particularly severe in textiles, nonelectrical machinery, and primary metals, Nonmanufacturing employment continued to fare better than manufacturing. Insured unemployment attained a tem porary peak in the week ending April 12 and now appeared to be declining both in total claims and as a percentage of a year ago. While the Dodge figures for construction in April were not yet construction contracts tabulated by available, engineering Record were considerably lower in April than a Engineering News year ago. at the last meeting of the Committee, As he reported consecutive weeks shown an power output had for ten electric showing than the national 1957 and made a better improvement over Mr. Erickson said; in now add three more weeks, figures. He could it been below a year January 25 had in only one week since fact, had taken a further store sales other hand, department ago. On the In its April behind last year. now four per cent decline and were found that there the Reserve Bank savings banks survey of mutual
was a greater increase in deposits, a decrease in withdrawals, and an increase in interest credits, so that in April the deposits showed an increase of $15 million as compared with a $2 million decrease in April of 1957. The twelve months' net gain was 5.6 per cent. Ordinary life insurance sales for the first four months of this year in New England were 15 per cent ahead of last year, indicating that there was still a disposition to save. As to credit policy for the next three weeks, Mr. Erickson said that he would make no change in the directive or in the discount rate. He hoped that the same degree of ease that had prevailed during the past few weeks could be maintained. If this meant going over $600 million of free reserves, he would not be concerned. Looking at the projection of reserves for the next few months, he felt that Mr. Hayes had made a very persuasive case for a reduction in reserve requirements. Mr. Irons said that as he saw it the national situation was encouraging. A bottoming-out period might be approaching and, if it were, he would rather expect things to continue in a trough for some time. He did not see any great signs of developments that would bring about a rapid and dynamic upsurge in the economy, but he recalled that this does not tend to occur in a business cycle Rather, he felt that there would movement except when war strikes. be a testing of the bottom and that gradually elements of strength
would begin to appear. Significant factors in the national picture were, or were tending to, bottom out, it seemed to him, and there was no evidence that the recession was feeding upon itself. The financial condition was strong and liquid. It was factors such as this that pointed to encouragement. Turning to the Eleventh District, Mr. Irons said that condi tions were good, with the agricultural situation very favorable. In the first quarter of the year farm cash income was up 30 per cent, crops 4O per cent, and livestock 20 per cent. It had been many years since he had heard the people west of Fort Worth as optimistic about the agricultural situation as at the present time. There had been plenty of rain and good weather and, although agriculture is a hazardous vocation, at the moment the situation was very favorable in practically all areas of agriculture, including cotton, wheat, and livestock. The oil situation, Mr. Irons said, showed some was still holding at an 8-day allowable basis improvement. Production there in July, but there was a growing feeling and possibly would hold in the industry that, barring the more responsible elements among be an increase in allowables development, there would some unforeseen this year the allowables at the end of went by and that as the months Department store or twelve days. get up to eleven would probably to a year ago, with currently about equal in the district were sales up seasonally and Employment was in some of the durables. strength
claims for unemployment insurance were tending downward. The banks were liquid, loans were increasing along with investments in the last three weeks, reserve positions were easy, and there was little borrowing from the Federal Reserve Bank. Business confidence was good and more was heard about the possibility of inflation than about the recession. A number of people had been talking to him about monetary policy from the standpoint of whether it was getting too easy and how easy the Federal Reserve was going to make credit. In summary, conditions in the Eleventh District were quite good. Although this was not the top of a boom, condi tions in the district were not too far from that point. As to policy, Mr. Irons expressed the view that concentration on maintaining free reserves in the range of $500-$600 million had led to an aggressive policy of ease, one which he thought was overly had contributed to driving down the bill rate and aggressive. It other short-term rates, to increasing bank liquidity, and to en some speculation. In contrast to the view that the current couraging he would hope that the Federal degree of ease should be continued, bit on the degree of ease. He would like Reserve could edge off a given to free reserves the amount of consideration to deemphasize free reserves within a certain a determination to keep and felt that to the ease that had developed. been a contributing factor pattern had with the statement of $500-$600 million, been made of a range Much had
also made that it should not be a matter of concern if free reserves rose to $600 or $700 million. While he would not want to argue that point strongly and, in fact, did not put much faith in free reserves in any event, he did not feel that it should be a matter of concern if the level of free reserves dropped to $300 or $400 million as long as the money market was generally easy. The Committee, he suggested, should not be governed in its actions by trying to maintain a statistic which has a lot of tricks in it. Short-term rates, the Federal funds rate, the bill rate, and the movement of bank credit seemed to him more expressive at this time than the level of free reserves. He also thought it would be well not to place too much emphasis on tying reserve projections into decisions on free reserves, because moving on the basis of such projections might, if the projections did not work out, draw the System into excesses one way or the other. He saw no objection to operating in other parts of the short-term market than Treasury bills if that should seem the right thing to do. Mr. Irons said that he would not favor changing the discount or the policy directive. As he had said rate, reserve requirements, at the last meeting, he would like to delete the word "further" from clause (b) of the directive, but he would not want to press that as when there was some other except on an occasion a recommendation for a change in the directive. suggestion
Mr. Deming said that the Ninth District economy continued to show mixed trends. It seemed that the disparity between the factors of strength and those of weakness was widening, which meant that the weak areas, mainly the mining sections, were grow ing in weakness. However, the effects did not seem to be spreading beyond those areas. It also meant that those areas were expected to remain weak throughout 1958, for such seasonal expansion as had taken place had been far short of the normal pattern. Mining employment in Minnesota in March was 13 per cent smaller than a year earlier, in April it was 19 per cent smaller than in April appeared to be widening further. Upper 1957, and in May the gap Peninsula unemployment in March reached the highest level since May 199 and had grown since then. As of last Friday, eighteen banks were borrowing from the Federal Reserve Bank and the important point was that ten were in the mining areas of Minnesota, Wisconsin, and Michigan. Half of them had not borrowed at all in 1957. Mr. Deming went on to say that manufacturing employment, all of which is in Minnesota, slipped further behind year-ago almost had been in February and March. In levels in April and May than it to be a very strong factor, with contrast, agriculture continued 4 per cent ahead of last year and prospects cash income running about strong, with the number was quite Residential construction good. four months of in the first by permit units authorized of dwelling
this year around a fourth larger than in the same period last year. Mortgage money was available and a further decline in interest rates was expected in the near future. Prospects were extremely bright in the resort business, while lumber activity was moving back close to normal levels. Therefore, except for mining, conditions in the district were quite good. Banking developments continued to reflect deposit gains relative to a year earlier along with improved liquidity. With regard to policy, Mr. Deming said that be would go along with those who suggested maintaining about the same degree of ease as in the past three weeks. He did not see any particular reason for a change in the discount rate but he agreed with Mr. Erickson that Mr. Hayes had made a good case for injecting, via a reduction in reserve requirements, at whatever time seemed feasible, such additional reserves as might be needed on a more or less permanent basis. Mr. Allen reported that increased confidence that the second least a temporary leveling in general business quarter was bringing at of business .economists held had been expressed at the meeting activity on May 11. Among the points Federal Reserve Bank of Chicago at the were that (1) oil product inventories made by individuals present sales had shown modest into line, (2) Sears Roebuck had been brought and production were and (3) steel orders since February, improvement second quarter continued production for the moving up. Automobile
to be estimated at 1,000,000, or 35 per cent below the corresponding Quarter of 1957, while production in the third quarter was estimated at 500,000 - 600,000. Parties in Detroit believed inventories, which were 809,000 on April 30, would be reduced by October 1 to 465,000 or less, and that approximately half of the October 1 inventory would be 1959 models. The manufacturers expressed determination to hold down fourth quarter schedules until sales demonstrated the need for additional production. Mr. Allen said that on April 15 there were 465,000 unemployed in Michigan, or 15.9 per cent of the work force, and that the com parable figures in Detroit were 275,000, or 18 per cent. The Michigan Unemployment Security Commission, whose comparable records started with 1949, indicated that this was probably the largest un employed total since 1938. They expected unemployment to increase in the coming months and reach a maximum in August of more than 500,000 in the State of Michigan and 330,000 in Detroit. Business loans at major Seventh District banks continued to decline, Mr. Allen said, and the larger banks seemed to think there would be a further decline as borrowers took advantage of the op in capital markets at more attractive portunity to fund term loans the bankers, who pointed out This did not appear to disturb rates. totals were high by any standards except that their present loan of one year ago. To give one comparison, the outstanding those
loans of the six largest Chicago banks were 31.3 per cent above the figure at a corresponding date four years ago, whereas total deposits had increased only 2.8 per cent. Mr. Allen also said that he had recently spent some time in the industrialized parts of Michigan, that unemployment was running about 15 per cent in those areas, but that savings con tinued to increase, which indicated that people were just being more cautious. What struck him most was that manufacturers were using this period to get some of the foolishness out of their In the matter of such adjustments they were really operations. now than in 1953-54, and they would be in good doing much better shape when things turned up. that he would be inclined to keep free Mr. Allen stated range. Mr. Irons had expressed in the $500-$600 million reserves mind and, like Mr. Irons, he had had on his own certain things which went somewhat below the be disturbed if free reserves he would not something which groping for He had been million level. $500-$600 but he felt that the than free reserves would be a better benchmark he had not found any a posture of ease and System should maintain through free reserves. that posture than better way to exhibit meeting as to the report at this Mr. Leedy said that one that the the most optimistic affairs was certainly economic he felt more some time. Personally, had heard for Committee
encouraged than for a number of months. Through its agriculture, he said, the Tenth District was doing quite well. Moisture condi tions were said to be more favorable throughout the entire area for this time of year than for any similar period on record, and prospects for crops of all kinds continued to be good. Winter wheat in the district, which is particularly important, was now estimated to be well above the 1957 level from the standpoint of the size of the crop--around 23 per cent above the recent ten-year average. Cash receipts from farm marketings were 25 per cent higher in March than a year ago, compared with an increase of 12 per cent nationally, and first-quarter cash receipts averaged 21 per cent above the corresponding period of 1957, compared with an 8 per cent increase for the nation as a whole. Nonfarm employment had ex deterioration but not to the extent that it had deteriorated perienced District the reduction had been due nationally. In the Tenth in the number of factory jobs, but there again primarily to a drop than 5 per cent compared with the national the decline had been less sectors had ex of around 9 per cent. Nonmanufacturing figure but not enough to offset some small gains in employment perienced store sales for areas. Department losses in the manufacturing the as in the first ran about the same months of the year the first four cent. For the about 1-1/2 per being down only months of 1957, four to those of the been about equal in May, sales had first three weeks reported to the Committee, last year. As he previously same period
business loans had been edging forward contrary to the national pattern. That trend had continued, whereas in the same period last year business loans were declining. Reporting member banks showed a striking development with regard to interbank balances, which totaled $958 million in mid-May, about $85 million higher than a year ago. A very sweeping increase occurred during the most recent two or three-week period, which reflected the large volume of farm cash receipts from marketings. Mr. Leedy concurred in the view that the System should maintain about the same degree of ease as in the past three weeks. He was not too happy about using the free reserve position as a benchmark but in the absence of something better it seemed to him that it must continue to be used, at least for the time being. In view of the imminence of the Treasury refinancing, he would not want to deviate very much from the current level of free reserves and certainly would not want to see any lower level. As to the possi bility of a reduction in reserve requirements, he felt that this problem had to take into account the Treasury refinancing. If, however, a reduction could be accomplished without jeopardizing the very sizeable job of financing, it was his feeling that this should be done. To maintain over the longer period ahead the System had been aiming at, he felt that degree of ease that the the more desirable and requirements route was by far the reserve
practicable one. The fact that the short-term rate had gone as low as it had, and so quickly, seemed to him to require particular caution in order to be sure that the System's operations in the market did not accentuate that development. It was his feeling that a reduction in reserve requirements, if it could be made, might overshoot the mark a little bit and provide more reserves than the System would want to provide, which would require some mopping up of the excess by sales of bills in the market. Except as he had otherwise indicated, it was his feeling that nothing further needed to be done or should be done. Mr. Leach stated that recent weeks had brought no evidence of further economic deterioration in the Fifth District except in West Virginia. Contrary to the trend in other States of the dis trict and the United States as a whole, unemployment in West Virginia had increased as coal production continued to decline despite a in exports. The rate of bituminous coal production in leveling off 36 per cent below a year ago and the rate the Fifth District was now of insured unemployment in West Virginia had passed 14 per cent. district were beginning to show a mixed The other States in the picture rather than widespread declines. In the textile industry, for print cloth and slight improve there had been a better demand rayon and acetate gray goods, but sheetings and heavy ment in in a depressed condition. cotton fabrics continued industrial
According to industry contacts, production of cigarettes was currently increasing. Building permits in 37 cities had risen substantially after seasonal correction and a pickup was re ported by lumber mills. Two weeks of good weather had been of material assistance to farmers but planting still lagged somewhat. Mr. Leach said he still believed that monetary policy had made its appropriate contribution toward promoting recovery and that efforts to obtain further ease would interfere with market processes without benefiting the economy. The reserves made available since October had supported substantial increases in of commercial banks and of the economy generally. the liquidity now well able to meet the credit demands made upon Banks were reserves would largely go to the purchase them, and additional excess reserves of country banks. of Treasury bills or lie idle as low levels; indeed, at rates were now at extremely Short-term lost their attraction to many current yields Treasury bills had bank remarked to him official of a large member investors. An banks but also not only of customer that this was true recently had begun to both of which groups of the smaller corporations, carry larger deposit balances. liquidity had been that sufficient In summary, believing to drive short no useful purpose it would serve achieved and that request the Mr. Leach would current levels, term rates below
Manager of the Account to maintain the present degree of ease, giving less emphasis to the free reserves benchmark and more emphasis to other indicators such as short-term interest rates. As he said at the last Committee meeting, if and when a need developed to supply additional reserves over a period of time, he felt that this should be done by reducing reserve requirements rather than by buying bills. But he would do that only to furnish reserves needed for ordinary purposes and not just to establish additional ease. Mr. Vardaman said that unless there should be some inter of such gravity as to warrant a special meet national development that present policy might be Committee, he would hope ing of the weeks. He would not favor any change continued for the next few time. In substance, he would reserve requirements at this in along just about as at present. prefer to go to see the traces that he was pleased Mr. Robertson stated had been made at this of the comments which of optimism in some accomplished about that the System had It seemed to him meeting. that there was plenty monetary policy, and that it could with all the recovery of the available to finance of money and credit System did not harmful if the it could be In his opinion economy. rest on that position, time being and keel for the maintain an even were to adopt if the System would be a mistake he felt that it and
the position that credit policy could force recovery. Therefore, he would maintain the present position. At the same time, he would not be the least concerned if free reserves dropped a little, because there were signs of an upward movement in the economy. He felt that the System should be careful during the next month not to jump in and bail out the speculators, and he would not be too con cerned if they got hurt a little bit. In summary, he would attempt to maintain as even a position as possible for the next three-week period. Mr. Shepardson said that he could not add anything of sub stance to the discussion, for his own views had well been expressed by Mr. Irons and others on around the table. He was particularly in Mr. Allen's comment about the interested, Mr. Shepardson said, on in some businesses, for such adjustments were adjustments going have them. These adjustments, he wholesome and the country must to be made only if there was some inducement said, would continue the economy with funds In his opinion, flooding to make them. and would be the worst thing might impede that kind of adjustment he wished to In the present circumstances, that could happen. had expressed them the others who with Mr. Irons and align himself and who had easing of credit opposed to further selves as being of free reserves if the level would not be disturbed said that they a little at any time. were to fall off
Mr. Fulton said that the Fourth District seemed to be the "low man on the totem pole" at the present time. Debits to commercial accounts so far this year were 7 per cent under last year, and the Chicago District, where debits were 4 per cent under last year, made the next poorest showing in that respect. This afforded evidence of the severity of the in dustrial decline in the Fourth District. Although steel pro duction edged up very slightly this past month, in the opinion of the steel men there was nothing in the picture that would give a strong boost to the industry. Tin plates, galvanized sheets, and structural plates were the only items showing any firmness at this time. The machine tool industry had a slight upturn in orders in March but fell out of bed again last month, so that the backlogs were further diminished and were now at the lowest point since 199. Unemployment was still high; there had been a little slackening in new claims in the Cincinnati area but area claims were higher recently. Construction in the Cleveland but in the past month upward for two months, seemed to be turning things seemed to be scraping shown a decline. In all, had again among businessmen that there the bottom, with the consensus along upturn until the fourth prospect of any perceptible was no as to how much considerable doubt In fact, there was quarter. the probabilities were that things upturn would develop then, and
would go on into next year before anything substantial was seen on the better side. The automobile industry was not contemplating heavy production of year 1959 models, and intended to await public acceptance of those models before ordering from the steel companies. Mr. Fulton said that he was in agreement with Mr. Irons and others who had expressed themselves about the effectiveness of monetary policy so far. It seemed to him that maintenance of a set structure of free reserves resulted, so to speak, in the System chasing its own tail, for the reserves tended to disappear as soon as they became available whenever there was some way to put them to work. As a consequence, the feeling in the market had gotten quite soft. Therefore, he felt that the System would do well to stand where it was and let the market firm somewhat. Monetary policy had not had too much effect on long-term rates, because of the volume of issues coming into the market, but it had affected the short-term end to a point where rates were very much lower than would seem desirable, even under a policy intended to produce a feeling of ease or maintain any set level of the market. Rather than to pinpoint in the market would seem to Mr. Fulton said, the feel of free reserves, System had made available appropriate guide. The represent a more would complicate its sum of reserves which probably an enormous could give a considerable turned up, for they work when conditions such a time. inflation at impetus to
Mr. Fulton concluded by saying that he would like to see an appropriate degree of ease in the market and that he would not be concerned too much if rates firmed a bit at the short-term end, including the Federal funds rate and the Treasury bill rate. Mr. Bopp stated that less discouragement, possibly even some encouragement, could be derived from the latest dta on business activity in the Third District. Unemployment in the Philadelphia area declined nearly 2 per cent in April, the first decrease in seven months, reflecting a seasonal rise in employment, primarily in construction and the service industries. Manufacturing employment in the area was unchanged, with a rise in nondurables offsetting a further drop in durables, and total factory employment in ten of the district's 14 labor market areas was also unchanged in April. An important contributing factor was settlement of the textile strike which resulted in substantial employment gains in WilkesBarre and Scranton. Factory employment in April, however, was still 7.7 per cent below a year ago. New unemployment claims in Pennsylvania had declined in recent weeks, the latest week representing a low thus far in 1958. New claims in the Philadelphia area had declined every week except one since mid-April and were while continued claims had the lowest level of the year, now at also been declining. In the opinion of the Philadelphia office, had been a more important in the employment situation improvement
factor in the drop in continued claims than exhaustion of benefits. Mr. Bopp went on to say that steel mill operations rose to 61 per cent of capacity in the latest week, after having been steady at about 56 per cent for several weeks. Freight carloadings in the Philadelphia area had also shown some improvement in the past few weeks but were still considerably below last year. The consumer price index for Philadelphia eased slightly in April--down two-tenths of a point--but was 2.7 per cent above a year ago. Department store sales, on the other hand, declined, the dollar volume in the past three weeks being 5 per cent below a year ago. Sales were down in all reporting cities except one, and for the year to date sales were last year. Automobile sales continued to lag 3 per cent below registrations in eastern Pennsylvania in April being badly, new car a year ago, and registrations in Philadelphia in 22 per cent below the first three weeks of May indicated a further decline instead of of weekly reporting banks dropped nearly a pickup. Business loans part of May 21, a substantial the three weeks ending $50 million in utility which used a accounted for by a public the decrease being of a recent security offering to repay bank part of the proceeds for by sales finance was accounted Most of the remainder loans. funds to purchase to use excess banks continued companies. District and notes--rose bills of Governments--Treasury holdings securities; Total investments $24 million. and other securities $13 million,
were nearly $270 million above a year ago. Demand deposits, other than U. S. Government, dropped sharply, but time deposits were up nearly $50 million. Reserve positions of district member banks continued easy, Mr. Bopp said. Reserve city banks had not borrowed from the Federal Reserve Bank in the past three weeks, and borrowings of other member banks had been quite small. Daily average purchases of Federal funds in the first two weeks of May were less than $2 million but rose to $16 million in the latest week, reflecting mainly the borrowing of one large Philadelphia bank. As to policy for the near future, although banks and probably businesses had been restoring their liquidity more rapidly than in the two previous recessions, Mr. Bopp pointed out that they started from far lower levels and suggested that more needed to be done. This could be done, he said, by continuing the degree of ease that had prevailed recently. He would not change the directive or the discount rate and, since maintenance of relatively the same degree seem to call for injections of additional reserves of ease would over a considerable period, he would inject those reserves through preferably against time deposits. reduction of reserve requirements, out in the Sixth District said that he could point Mr. Bryan By taking certain signs and bad signs. aggregate of good the usual on department store sales, agriculture, and steel employfigures he could make out a case that there were good ment, for example,
signs, but by making an equally careful selection of other figures, he could make a case that there were bad signs. However, in dealing with the good signs he was compelled to add that he would have to utilize certain statistical tricks like shifting the base in order to make a strong case. In general, the district was not showing any further rapid deterioration, and some rather good things were happening. For example, the State of Florida and most of the coastal areas were making a good recovery. With respect to the national picture, it seemed to him that a case could be made that there was an incipient bottoming-out of the recession. He was impressed by the fact that in this situation there had not developed the characteristic sign of deep and harassing depressions; namely, a frantic rush for liquidity. Having said all the feeling that there might be some tendency around that, he had morning to deliver the recovery baby a little prethe table this it was an incubator infant and would have to maturely. Certainly, be dealt with skillfully if it was to develop into maturity and To put it another way, he felt that the recovery was strength. the mercy of forthcoming events. quite hazardous and was at still he certainly did not believe As to policy, Mr. Bryan said to develop. When it System should allow any tightening that the seemed to him that the policy instruments, it came to particular instrument in connection with had to use the open market System
the matters that were going to be troublesome in the near future. However, the problem of the discount rate puzzled him a great deal. He was tempted to say that there was no point in changing the rate at this time, yet it had been used in recent years to do a variety of things and it had performed the function of announcing policy to the public. Therefore, if the rate were allowed to remain too far out of line with the short-term market, he was puzzled about what the System would be saying to the people of the United States. Would it in fact be saying that the short-term rates were erratic and invalid? He was also puzzled as to what the System's position would be in a real recovery when it wished to signal a shift in policy and was confronted with the necessity of letting rates tighten substantially in the market before it signaled such a shift. Accordingly, while he had not come to any real conclusion about the discount rate, he believed that an argument could be made--perhaps a valid argument--for bringing it more into line with the present facts of the market place. recalled that the question had been posed on a Mr. Bryan as to whether monetary policy had done all that number of occasions it could to further recovery. It seemed to him that monetary policy take effect and was beginning to be successful. was now beginning to He was delighted by a fact to which Mr. Hayes had referred; namely, that, adjusting for changes in the level of reserve requirements,
against a year ago there was a substantial increase in required reserves both percentagewise and figurewise. Coming, however, to the question of the money supply, it could be seen that as compared with the end of April a year ago, when the System was fighting a boom rather than a recession, the money supply, defined as demand deposits adjusted and currency, was still fractionally down. (This figure has since been revised to equal the year ago level.) If adjustment were made for the change in velocity, the money supply would probably be down from the peak last summer. In all the circumstances, it seemed to him that the banking system had performed magnificently with regard to not panicking, making loans, and particularly expanding investments. However, despite the figures cited with regard to the increase in investments, in the light of the money supply there appeared to him to be a grave question whether those figures were great enough, even as great as they were. Personally, he would reduce reserve requirements, cutting them in the category of requirements against savings deposits, for a real difference in the way banks feel about he felt that there is deposit money as against demand deposit money. committing savings a move would have a good and pervasive effect He believed that such the banks confidence, and he putting in reserves that would give by freed would go where the the reserves which were believed that at the present time. to go in the economy System wanted them
Mr. Robertson inquired at this point whether the rate of turnover of deposits at country banks was not equal to the rate a year ago and whether the rate was not higher in New York. The reply given was that in banks in cities outside of the six or seven leading financial centers the rate of turnover increased in April and was fully as high as a year ago. In New York the rate of turnover was higher, and in the six or seven leading financial centers it was about as high as in April 1957. In the month of March the rate of turnover outside New York had been slightly lower than a year ago. Mr. Johns said that some of his views were quite similar to those expressed by Mr. Bryan. It was pleasing to him, he said, to have the appraisal which he had made of the present state of the econony supported and validated by the presentation given by Mr. Young. He believed that there were signs that the recession might be bottoming out, but he liked the emphasis which had been placed upon the point that these signs must not be translated immediately into certainty of recovery. Recovery might not yet be on its way, and if it were it might not come for a while. said that in the Eighth District he found little Mr. Johns the national picture. Of comment on which was different from to steel rate in the district was interest was the fact that the local rate for the last four national rate; the average better than the
weeks was 77 per cent, and for the most recent week it was 7 .4 per cent. In this connection, it should be noted that the mills in the area produce relatively little for the automobile industry and relatively more for construction purposes. As he had reported to the Committee before, the cotton crop had experienced the first of its three annual losses. Now, however, there had been some sunshine and so it was estimated that perhaps 90 per cent of the crop in the Delta had been planted. Although some of that had been planted in a wet seed bed, it did appear that the Delta would have a cotton crop. Business loans at banks in the district were still contracting, Mr. Johns said. In the three weeks which ended May 14, per cent, whereas on a seasonal basis a they declined about 23 might have been expected. However, at decline of about 10 per cent loans in the last four months were up $20 million, rural banks total period those banks had reduced their investments. and during this earlier by Mr. Larkin, a conto a statement made With reference June Treasury issues was interest in the siderable speculative banks in the area. at least one of the large being financed by about some although he had reservations Mr. Johns said that an indicator of monetary policy, of using free reserves as aspects the position taken by Mr. Hayes. he wished to align himself with about the absolute reserves as million of free consider $500 He would somewhat on the the target range prefer to broaden minimum and would
upper side. He would not be sorry if there were some days or short periods when free reserves ran to $700, $800, or even $900 million, especially when that bulge was the result of float. In the coming weeks an opportunity to release additional reserves by a reduction in reserve requirements seemed likely, and he felt that such an opportunity should be used. He liked the emphasis which had been placed on the desirability of a reduction in reserve requirements against time deposits. As to the discount rate, he thought that a case could be made for a reduction in the rate, subject, of course, to determination of an appropriate time in relation to the forthrefunding operation. That would seem to mean coming Treasury rate at least beyond the Treasury anpostponing a change of the that the books were opened. When the books nouncement and the time be appropriate very shortly thereafter were closed, however, it might not argue for a change in the directive to make a change. He would he did not care particularly for the present at this time, although wording. thought the President's statement Mr. Szymczak said that he uncertainty which had prevery helpful because of the on taxes was whether taxes, both the fact that many had been wondering vailed and at the end of June. going to be reduced and excise, were corporate where the President to know for business he thought, It was helpful, Administration stood. and the
Continuing, Mr. Szymczak said that he felt monetary policy can achieve only so much, and that other things have to happen in the economy before the full extent of utilization is derived from the policy followed. He also felt that there had been a tendency to overstress the level of free reserves, not only in the minds of persons within the System but in the minds of a great many people in the market who adjusted themselves accordingly. According to this thesis, if available reserves were used the System would just put in a little more, and if that policy were changed it might make in the minds of people in the market. for an abrupt change Szymczak said that he felt there should be a further Mr. He would favor reducing requirereduction of reserve requirements. against demand deposits for against time deposits, and perhaps ments banks for the purpose of adjustment. central reserve and reserve city some of the reserves made he would sell bills to absorb However, and at the same time would help the bill rate available, for this Whether this for the Treasury refunding. to keep an even keel help refunding was another before the Treasury could be accomplished whether a reduction want to consider further and he would question, the market. He was out of or after the Treasury should be made now he felt that the rate, and changing the discount would not favor so that the be watched carefully, structure should interest rate reserves rather of varying free into a position could get System
than to keep them at a certain level and have everyone become accustomed to that level. Chairman Martin said that in his own view monetary policy was performing just about as it should at the moment. He had considered the matter of reserve requirements very carefully during the last few days and had come to the conclusion they should not be changed at the present time. Neither would he reduce the discount rate nor make any abrupt change in either direction from the present level of free reserves. In the latter connection, he agreed heartily with Mr. Irons' comments about the "statistic." There was a lot of talk about the feel of the market, but there was frequently a tendency to give up the feel and go to the statistics. It seemed to him, Chairman Martin said, that it was not possible to force monetary policy and that the System should not try to do so. Nor should the System rush in to help the Treasury, but rather maintain an even-keel policy such as prevailed now. Consideration should be given to whether the reserve projections were accurate enough to warrant taking any drastic action that might overdramatise He himself was a little bit surprised by the prothe statistics. admittedly he did not have too much confidence in them. jections, but not work out to be quite as own opinion, the reserves would In his low as indicated by the projections. that the job of the System is Chairman Martin went on to say which is a difficult task. to regulate the money supply, primarily
If one looked at the production indices and then thought of the fact that the System had gotten the money supply gradually moving upward, that would seem to be just the way it should be. In substance, he said, he would argue very strongly for maintaining the status quo at this time, particularly through the period of the Treasury refinancing, which would be a difficult one. The refinancing had been discussed a great deal in terms of the possibility of a longterm bond, and this was a matter on which people had taken violent positions on one side or the other. In doing so, they had gotten the matter out of focus. Chairman Martin said, he sided with what he thought Therefore, position in that he would not want to change the direcwas the majority requirements at the moment. This, tive or the discount rate or reserve which might develop at had nothing to do with the situation of course, meeting. In terms of approach, this the time of the next Committee was not going to be that the Account Management position contemplated take account of the feel but would try to bound by the "statistic" operation. The posture to maintain an even-keel of the market in order continue to be such. That, was one of ease and it should of the System Everything he had the majority position. understood it, was as he view, and he himself to confirm that the table tended heard around in it. concurred discussion conthere ensued a of Mr. Hayes, At the instance reserve requirements during view with respect to cerning the majority
which some of the members of the Committee who had expressed themselves in favor of a reduction in reserve requirements clarified the fact that they had been speaking in terms of preferring to make additional reserves available through a reduction of reserve requirements at such time as it might become necessary to provide additional reserves on a more or less permanent basis. At the same time, Chairman Martin clarified the fact that his own position did not go beyond the period of the next three weeks. It was his judgment, Chairman Martin said, that to cut reserve requirements at the moment might produce a situation that would require offsetting sales out of the Account. This would be an impossible situation to present to the general market. Even if the reserve projections were accurate, he would question cutting reserve requirements on the eve of a Treasury financing due to the situation that such an action would produce in the market. Mr. Hayes stated that he had been During the discussion in reserve requirements as a means of speaking of a reduction degree of ease in substitution for maintaining about the current open market purchases which otherwise would have to be made, and were about right. In a made soon, if the reserve projections that the action could expressed the view comment Mr. Hayes further then turned to Mr. the market. He taken now without upsetting be be a rather critical next week or two would who said that the Larkin,
period, for the projections suggested a need for reserves at the same time as the Treasury refunding. He took it to be the sense of the meeting to place less emphasis on free reserves as a statistic and more on the feeling of ease in the market. Assuming that the reserve projections worked out, it was conceivable that in conducting open market operations about the same degree of ease could be maintained by buying a minimum amount of securities. However, that might mean a smaller aggregate of free reserves. Chairman Martin said that, as he understood it, that would be consistent with the majority view, following which Mr. Larkin said that if this meant a modest rise in the bill rate he understood an increase would be acceptable to the Committee. that such whether anyone would like to Chairman Martin then inquired directive, the discount rate, dissent from continuing the present ease, and no dissents were heard. or the general posture of credit Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges replacement of maturing securities, and (including to run off without replacement) allowing maturities Account in the open market for the System Open Market securities, by direct or, in the case of maturing may be necessary in the with the Treasury, as exchange economic conditions of current and prospective light of the country, with and the general credit situation of funds in the market relating the supply a view (a) to
to the needs of commerce and business, (b) to contributing further by monetary ease to resumption of stable growth of the economy, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including 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; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. With reference to the question which had been raised at a recent meeting of the Committee concerning the use of a rate on reagreements lower than the discount rate, Mr. Robertson stated purchase he had decided not to submit a memorandum on the subject because that time or in the foreseeable future, any reason he did not see, at this He noted that if such an occasion going below the discount rate. for Manager of the Open Market Account had authority to did develop the with the admonition that it lower than the discount rate, use a rate should be used sparingly. like to think the Account stated that he would Mr. Larkin use a lower rate if circumstances had the authority to Management there could be warrant its use. Conceivably, were such as to agreements would accomplish where the use of repurchase situations
System policy more effectively than outright purchase and sale transactions. The Account Management, he said, would use the existing authority sparingly and would make sure that the reasons were sufficient. Mr. Robertson inquired whether this accommodation would be made available to bank dealers, to which Mr. Larkin replied in the negative, stating that the existing authority would have to be broadened. Mr. Robertson said that in all the circumstances he would prefer to wait until the authority was used and then express his views, following which Mr. Hayes commented that as long as the matter was on the agenda the Management of the Account felt pretty much precluded from using the authority even though the Manager's judgment might indicate its use. In response, Chairman Martin made a statement, in which Mr. Robertson concurred, that the authority stood now as it had stood before the question of the rate on repurchase agreements was placed on the agenda recently. Consideration then was given to the question raised by Mr. Johns in a letter dated May 12, 1958, copies of which had been distributed to the members of the Committee, concerning the policy that should appropriately be followed in making available, on a continuous basis, to persons who had participated in the System
Open Market Account training program such information and documents concerning the work of the Federal Open Market Committee as would keep such persons current and preserve the benefits of the training program. In his letter Mr. Johns pointed out that the staff members in question were concerned primarily with technical and accounting aspects of System Account operations as distinguished from policy aspects, but that in the training program they appeared to have been exposed quite substantially to current policy considerations. Chairman Martin began the discussion by saying that he favored developing all of the talent available within the System and extending the use of information to anyone who could really benefit from it. The only reservation that he had was with regard to the Committee minutes, and that was because of the scope of the minutes as presently written. It might be, he suggested, that the end could be achieved just as effectively by furnishing the parties in question reports of the New York Bank on open market operations and similar material rather than by widening too broadly the area of access to the minutes. which ensued, the suggestion was made that the In comments indicated by Mr. Johns might be achieved by granting access purposes access to drafts of entries minutes or by providing to noncurrent of the Federal Open Market Committee. for the policy record importance of discreet he recognized the Mr. Hayes said that emphasize the positive he would tend to the minutes, but that use of
rather than the negative factors. He referred to the records made available to persons who attend the meetings of the Committee and pointed out that many of the people participating in the System Open Market Account training program occupy positions at their respective Banks equal in importance to those held by the persons attending the Committee meetings. He suggested that it would be greatly to the advantage of the System if those men who had shown an interest in keeping current following the training program were permitted to do so. He would not have any hesitancy, said, about a policy under which the President of each Mr. Hayes could decide whether a particular Reserve Bank in his discretion access to open market who would benefit by having person was one on a continuous basis. records there are two Open Market Johns then commented that Mr. level and the other one at the policy Account training programs, the St. Louis Bank, he accounting level. In at the technical and the policy level training people thus far sent to said, the only minutes and access to Committee those already having program were letter had particimentioned in his The officers other materials. but it did training program, and accounting pated in the technical was made to keep in New York no attempt that when they were appear might be quite appropriate, the policy level. That them away from but he thought men in his Bank, confidence in the and he had full
that a Committee decision was desirable before increasing substantially the number of persons throughout the System who would be getting minutes and similar materials. It appeared to him that a man on the technical or accounting side could be kept reasonably current if he were given reports of open market operations. Mr. Allen indicated that he hoped any permission given would be on a permissive rather than on a mandatory basis, to which Chairman Martin replied that he felt that any decision should be of a permissive nature and that there should not be any hard and fast rule on any matter of this sort. Personally, he would want to give everyone whatever tools were reasonably necessary. As a precaution, however, he felt that the Committee's files should contain a record of the persons given access to the records, as prescribed under current procedures. Committee's There ensued comments by Mr. Larkin concerning the extent policy matters given to participants in the Open of exposure to technical and accounting level, Market training program at the which it appeared that the exposure was of a minimum degree. from interest in policy matters minimum exposure and Reaction to this on the individual concerned. depended somewhat Mr. Hayes then inquired whether it would be agreeable, if should be felt that an exception of a Reserve Bank the President
made because a man had distinct qualifications or potentialities for the future and it would be useful to further the individual's training, for the President to request specifically that the individual be added to the list of persons granted access to Open Market Committee records. Chairman Martin commented that this would be in line with present procedure. In concluding remarks, Chairman Martin said it appeared on the basis of the discussion to be the consensus that the existing procedure should be retained and that any President wanting to increase the number of persons granted access to Open Market Committee records should follow the rule presently in effect. This contemplated, however, that the general problem of access to Open Market Committee records would continue to be discussed from time to time in order to determine what basis appeared most appropriate. Chairman Martin reported that Professor Lester Chandler, in his biography of former Governor Benjamin Strong which preparing was now in manuscript form, had been given access to open market had called attention to the minutes prior to 1929. Dr. Chandler certain excerpts from those minutes fact that he intended to include the question whether there would be in the biography and had raised he had told Dr. Chandler that Chairman Martin said any objection. that the whole Committee However, he felt he saw no objection. should be advised.
The members of the Committee indicated that they concurred in the position taken by Chairman Martin. Chairman Martin then called upon Mr. Hayes for a statement with respect to the proposal, previously discussed at the meeting of the Open Market Committee on April 15, 1958, to establish a standing money market committee composed of representatives from the New York Reserve Bank and the New York Clearing House Association banks to study, on a more or less continuous basis, technical problems of the money market. This would be in implementation of one of the minor suggestions contained in the report by the Clearing of the money market and the House Association on interrelationships securities market. Government further reference to certain this connection, and with In Chairman Martin stated that made at the April 15 meeting, comments of the Committee and he had checked the records since that meeting of New York had authority Federal Reserve Bank had confirmed that the suggestion in the steps to implement the the Committee to take from House report. Clearing had been asked to names of those who Hayes then read the Mr. that this would afford committee and noted serve on the technical banks but also from the Clearing House not only from representation He said that all financial community. of the New York other sectors and that it had accepted on the committee invited to serve of those and move forward. the committee to organize therefore proposed was
He was hopeful that the committee could make a useful contribution to the thinking on some of the problems of the money market. In answer to a question by Mr. Robertson, Mr. Hayes said that the exact role to be played by the committee was still somewhat nebulous, but that it was thought that this should be the kind of group that could meet with Mr. Rouse perhaps twice a year and discuss any phases of the money and securities markets on which the New York Bank felt that the committee could supply helpful information, advice, or comment. Conceivably, the Committee might also undertake certain studies if it seemed desirable. Mr. Robertson then inquired whether he was correct in thinking that the technical committee would have nothing to do with what the Open Market Committee's program was or might be, and Mr. Hayes stated that that was correct. In further discussion, it was made clear that the technical committee was being established by the Federal Reserve Bank of New York and that Mr. Rouse would be representing the New York Bank in dealing with the committee. stated that Mr. Riefler had been authorized Chairman Martin by the Board of Governors to go to London next month to testify Committee on the Working of the the Radcliffe Committee (the before of the invitation to System). He added that acceptance Monetary
testify had been cleared with the State and Treasury Departments. It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, June 17, 1958, at 10:00 a.m. Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions