July 8, 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, July 8, 1958, at 10:00 am. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Fulton Mr. Irons Mr. Leach Mr. Mangels Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Vardaman 1/ Messrs. 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. Rouse, Manager, System Open Market Account Mr. Carpenter, Secretary, Board of Governors Mr. Kenyon, Assistant Secretary, Board of Governors Mr. Koch, Associate Adviser, Division of Re search and Statistics, Board of Governors Mr. Keir, Economist, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Stone, Manager, Securities Department, Reserve Bank of New York Federal in minutes. at point indicated from meeting 1/ Withdrew
Messrs. Mitchell, Jones, Strothman, and Tow, Vice Presidents of the Federal Reserve Banks of Chicago, St. Louis, Minneapolis, and Kansas City, re spectively; Mr. Coombs, Assistant Vice President, Federal Reserve Bank of New York; and Messrs. Anderson and Atkinson, Economic Advisers, Federal Reserve Banks of Philadelphia and Atlanta, respectively Chairman Martin stated that Mr. Deming, Alternate Member of the Committee,was on vacation and that in the absence of objection Vice President Strothman of the Federal Reserve Bank of Minneapolis would attend the meeting in Mr. Deming's place as an observer. There being no objection, Mr. Strothman joined the meeting. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on June 17, 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 June 17 through July 2, 1958, and a supplemental report covering commitments executed reports have been placed 7, 1958. Copies of both July 3 through July in the files of the Federal Open Market Committee. open market operations since the last meeting, Mr. Reporting on maintained, with free availability has been Rouse stated that reserve This figure is some $550 and $600 million. reserves averaging between three-week period, and reflects what higher than in the preceding
primarily the situation in the Government securities market. Bill purchases totaled $797 million during the past three weeks, but $184 million bills will run off next Thursday, July 10. The average issuing rate in yesterday's bill auction was .93 per cent and the stop-out was just under 1 per cent, Mr. Rouse reported that the Government securities market has been in a poor state in recent weeks, superficially because of the heavy volume of speculation in the new 2-5/8 per cent bonds of 1956, but more fundamentally because of the feeling of investors that economic conditions are improving and that recovery is in the making. While there has been a good deal of selling of the new 2-5/8s as well as of other issues during the past three weeks, there has been a notable lack of buying, except on the part of the Treasury (which is retiring a good part of the 2-5/8s that it purchased). Mr. Rouse said that the recent sharp declines in Government bond prices were triggered by the press story that appeared on June 19, stating that there had been a shift in System policy. He observed that the de clines would very likely have occurred in any event and would have been triggered by something else even if that story had not appeared. has difficult problems ahead and must make its decision The Treasury of the forthcoming refunding operation. next week as to the terms will have to borrow cash in indications are that the Treasury Since heavy calendar ahead there will be a particularly August and October,
unless it is decided to combine the refunding of the called September issues with the refunding of the August certificates or with the August cash operation. Mr. Mills observed that he had seen a good many comments concerning the purchases by the Treasury to cushion the decline in the bond market and noted that, since there had been no System purchases, the buying by the Treasury had been virtually the only source of support to the market. He wondered about the extent of the overhang of securities remaining in the market, and inquired if this overhang was of such size as to indicate that System pur some point be necessary to supplement those of the chases might at Treasury. back in May a New York money broker Mr. Rouse replied that quick profit to be made in participat many that there was a convinced He stated that only small margins ing in the June refunding operation. were purchased in May, but against the rights when they were required the exchange on June 16. margins were required after that larger almost a forced liquida occurred, in many cases, There has apparently forced liquidation, he be about completed; such tion which may now liquidation of part of the total probably a large pointed out, was Government securi Rouse noted that occurred. Mr. 2-5/8s that has the at the time $2.5 billion-- held large positions--around ties dealers now been reduced have that such positions meeting, but of the last
by somewhat over $1 billion and that a good part of the liquidation represents 5- to 10-year bonds. He stated that it was difficult to say how much speculation there was in the 2-5/8s. It had been ex pected that the exchange into that issue would be in the neighborhood of $3.5 to $4 billion, but actually the exchange turned out to be about $7.4 billion. Mr. Rouse added that during this period of sharp price declines in the bond market, there have been comments that conditions were at times disorderly. He said that he disagreed. Mr. Rouse concluded his remarks by noting that there have been wide differences between the reserve projections of the Board staff and those of the New York Bank. He reported that the staffs are working on the problem of developing explanations of such wide in projections, in the hope that the estimates will be differences more useful to the Committee. Thereupon, upon motion duly made and seconded, and by unanimous vote, open market transactions during the the period June 17 through July 7, ratified, and 1958, were approved, confirmed. distributed under of the staff memorandum In supplementation statement on the Young made the following of July 3, 1958, Mr. date economic situation: points to better economic intelligence Most recent period than observers economy in this for the performance
anticipated earlier. May and June together have shown a two-point rise in the index of industrial production and the present likelihood is that the final record will show a rise of three points. Total national product for the second quarter is currently estimated to be at least modestly higher than in the first quarter. Whether an abrupt turnabout of activity is taking place or whether evident improvement merely reflects a temporary rebound of production too far below consumption is yet to be determined. But barring some unexpected jolt to business and investor psychology, the odds would seem to favor a better than rebound movement. Probably the most important feature of the recent strengthening is that it is without dominance of improvement in one or two major areas. Rather, it represents a composite of small improvements over a wide range of activities. The important highlights may be briefly summarized: Substantial gains in industrial production over May and June were made by steel, autos, household durables, textiles, apparel, leather and rubber products, paper and paper products, coal and petroleum. For the first time in eleven months, manufacturers' sales in May were up modestly and the inflow of orders, although still below shipments, rose moderately. Sales from inventory continued, so that manufacturing inventory maintained at about the same high rate as liquidation was the preceding four months, bringing still closer the point when inventory buildup would be a stimulus. Construction activity in dollar volume in June also lift, the first such indication since December. showed commercial, and public (including highway) Residential, constituted the strong elements; industrial construction construction was off further. Contract awards for these strong areas were up sharply. industrial and construction demands Reflecting improved unemployment compensation have for labor, initial claims for declined. From May to and continued claims have stabilized from 4.9 to 5.4 million, entirely June, unemployment rose in summer workers seeking employ resulting from the increase rate fell from adjusted unemployment ment. The seasonally to mid-June manufacturing per cent. From mid-May 7.2 to 6.8 months and there were first gain in 15 showed its employment and local govern in services, State employment gains also per week in Hours worked trade, and construction. ment, and June, the average reaching rose both in May manufacturing
39.2 in June compared with 38.3 in April. The increase in hours worked was widely spread. Personal income in May rose further and, at $344 billion, was less than 1 per cent below its peak in August of last year. Personal income for June is expected to reach a new high. With improved personal income, retail sales in May rose slightly further, with all major lines of durable goods show ing some increase and nondurable sales holding at record levels. In these circumstances, retail inventories declined further, although at a slower rate than earlier in the year. June department store sales increased slightly further from May. New automobile sales in the first twenty days of June about matched the improved May rate, and used car sales were even better. With sales strength maintained, both new and used car stocks declined further. Continued liquidation of instalment debt for automobile purchases in May apparently reflected in part a fairly sharp decline in credit sales. Credit sales of new cars in that recent month apparently ran about 57 per cent compared with average credit sales of around 60 per cent for preceding months of this year. Activity in the housing market continued to pick up in May and June. Low and moderately priced new houses required less time to sell and existing houses also sold somewhat better, though with some shading of prices. In response to stronger demand conditions, and reflecting also the pressure of a grow ing supply of mortgage funds, mortgage lending by all lenders has increased. Mortgage rates are apparently still declining. Wholesale prices have receded a bit recently, mainly be cause of lower farm prices, particularly for livestock and vegetables. Wholesale prices of industrial products have been edging off, while prices of industrial materials have been relatively firm after strengthening in late May and early June. While the index of consumer prices rose slightly to mid May, recent indications for food prices, especially, would point to no change or slight decline to mid-June. One big uncertainty in the unfolding situation is the possibility of cyclical downturn in European business activity and a new surge of inflationary forces in Latin American and countries whose export earnings have been cut Far Eastern For more than a year, industrial cut back in recent months. European countries has shown leveling out and put in major some recent indications suggest the onset of recessionary drift. But with statistical data less adequate and timely than in this country, it is difficult to gauge the generality
of these signs. Certainly there is not yet enough evi dence to warrant inference that European recession is likely to become a force affecting adversely U. S. and world trade developments. At the same time, there is this hazard and European market developments will need close watching in the months ahead. A memorandum on the outlook for Treasury cash requirements and bank reserves, prepared by the Board's staff, had been distributed under date of July 3, 1958. With further reference to financial developments, Mr. Thomas made the following statements Since the last meeting of the Committee, the most striking financial development has been the severe pres sure on the Treasury bond market. This rather spectacular episode and its causes have been described in written reports submitted to the Committee by the staff and by the Manager of the Account. These events contain lessons not only for speculators and for the Treasury, but also for Federal Reserve policy. It is evident that the underlying factors were the very large commitments in Treasury bonds made by temporary holders, many for pure speculation, induced by expectation of further declines in interest rates, and the attempt to commitments at a time when the money market close out these was under severe pressure because of exceptionally heavy liquidity demands. These liquidity demands were seasonal because of the absence of a maturing larger than usual security, together with the Treasury tax anticipation cash raised by the Treasury through a long additional term bond issue. deposit balances increased to over The Treasury's Funds to make payments to the Treasury were $9 billion. by the sale of Treasury securities raised largely the new 2-5/8 per cent bonds--or by calling particularly to carry large amounts had been made to dealers loans that earlier as rights. The securities they had purchased of Bank loans to on bank credit was phenomenal. effect only moderately but their holdings businesses increased on securities showed exceptionally of securities and loans at banks also increased Total deposits sharp increases. their required reserves. sharply, as did
In the three weeks ending June 18, total loans and investments at banks in leading cities increased by $3.9 billion, of which $2.5 billion came in the third of these weeks. In the next week there was a smaller decline than usual. Altogether in the four weeks ending June 25 the net increase was over $3.7 billion, many times more than in the corresponding period of other recent years. The pressure of these exceptionally heavy credit demands came mostly through the U. S. Government securities market. Business loans increased by little over a half a billion dol lars--much less than in other recent years. Holdings of Government securities by these banks increased by $1.5 bil lion, holdings of other securities by nearly $500 million, and loans on securities by about $1.0 billion; these items have generally declined or shown little change in June of other recent years. Most of these funds went to enlarge Treasury balances, which increased by $3.8 billion in four weeks at these city banks, and by $4 billion at all banks to the exceptional total of over $9 billion. In the corresponding weeks of the three previous years, U. S. Treasury deposits had fluctuated widely but showed little net change for the period as a whole. Time deposits at banks continued to increase at a fast pace--about half a billion dollars at weekly reporting banks alone. Demand deposits of businesses and individuals rose sharply in the first three weeks of June but subsequently declined equally sharply, reflecting the large tax payments in cash in the absence of a maturing tax anticipation security, as well as cash payments for nonbank purchases of the new Treasury bonds. The total for all banks in June probably showed a contraseasonal decline estimated at half a billion dollars. exceptional credit demands has called for Meeting these of Federal Reserve credit. In the five exceptional amounts 2, System open market operations have sup weeks ending July $l. billion of reserve funds. About half of plied about of $350 million and a covered currency demands this amount of $300 million. Most of the remainder--over gold outflow to member bank required reserves. $660 million--was added monthly increases in been one of the largest This has on record. Free reserves of member banks, required reserves in the latter half of from over $550 million which declined in the first half of June, to less than $50 million May close to $600 million in the past increased to a level of the current week. three weeks, including
Notwithstanding this large addition to the reserve supply, interest rates rose under the pressures of the vigorous credit demands. The Treasury bill rate in creased somewhat from the low level of around 5/8 per cent reached at the end of May to about one per cent in the third week of June. After declining somewhat, the rate has again approached one per cent in the last few days. The Treasury bond market was notably weak under the influence of the closing out of speculative commitments, and yields rose by nearly l/4 of a percentage point. Yields on corporate and municipal bonds showed somewhat more moderate increases, while new issues moved slowly. Yet the market continued to absorb a substantial volume of new issues, particularly when the long-term Treasury bond is included. This episode raises many questions about recent System policies and more particularly about appropriate policies for the near future. In the first place, it needs to be kept in mind that System policies have made possible the provision of very large amounts of credit to the economy during the past five to seven months. Total loans and investments of commercial banks increased by probably as much as $12 billion from the end of January to the end of June--much more than ordinarily occurs within a whole year--even though this period has been one in which there is usually little or no seasonal growth. To be sure, one third of this growth occurred in June and is presumably largely temporary. This temporary aspect is an important con future policy to be discussed later. sideration for has resulted in a growth in This credit expansion required reserves of nearly $1.2 billion, which, together a billion and a gold out a currency drain of half with called for exceptionally large flow of $1.4 billion, to reserve availability. Reserves were suppliod additions aggregating $1.5 billion by reserve requirement reductions operations of $2 billion. and by System open market character of the large In addition to the temporary qualification of the June increase, another important has been pointed out by some recent bank credit growth it reflects a is that the bulk of commentators. That from U. S, Government funds and savings shifting of liquid deposits at assets to time and perhaps other securities deposits in contrast rates paid on such attracted by banks,
to the lower market yields on securities. From January to May commercial bank and Federal Reserve holdings of U. S. securities increased by about $6 billion, while holdings of other investors declined by about $5 billion. In this same period time deposits at commercial banks increased by $5 billion, and those at mutual savings banks increased by nearly $1 billion. It cannot be assumed, however, that all of these changes, though similar in amount, reflected a direct shift from Governments to time deposits. Some of the funds obtained from the sale of Government securities went into other uses, and some of those that moved into time deposits no doubt came from demand deposits, thus slowing down the growth in demand deposits. Even if only one-tenth represented the latter shift, the amount is not an insignificant addition to demand deposits. A substantial part of the growth in bank credit also has gone into deposits of the United States Government, as already pointed out, and has not been added to available funds of business and individuals. The growth amounted to the end of May and another to $3 billion from January billion was added in June. Most of this is temporary. $4 Demand deposits adjusted have declined by nearly $2 billion since January, but the normal seasonal decline be about $4.5 billion. Hence, not for this period would the large growth in time and U. S. Government withstanding adjusted have increased by close deposits, demand deposits an annual rate of growth to $2.5 billion in five months, were made for a 6 per cent. If some allowance of nearly the effective increase in active shift to time deposits, In any event the would be even greater. demand deposits an inconsiderable growth in increase shown is by no means a period of declining economic activity. the significant point For purposes of System policy, of liquidity has been supplied is that a very large amount adjusted show no more If demand deposits to the economy. for the rest of the year, the usual seasonal expansion than be over 2-1/2 per cent, for the year would the net growth into time deposits. for any shifting even without allowance in many respects time said, moreover, that It may be of Government securi more liquid than holdings deposits are and would not at face value they are payable ties in that through market offerings be converted into cash have to a changed monetary policy. be made difficult by that might
That conversion has already been made. Finally the large volume of U. S. Government deposits will be drawn down and the funds become available to the public for additions to deposits or payment of debt. Bank credit has already been provided to build up those balances; it does not have to be provided again. Projections of reserve needs for coming months, pre sented by the Board's staff, are based on the assumption that as the Treasury reduces its deposits the funds will be used, in effect, partly to reduce bank credit and partly to make additions to the money supply of no more than usual seasonal amounts. On this basis total deposits at banks and correspondingly total loans and investments should decline substantially in the next two months. Increases in September and October would be less than the previous decline. These figures allow for additional Treasury cash financing in August and October, but on balance over an extended period Treasury borrowing should add only temporarily to the cash needs or cash supply of the economy. Other factors, including possibly a moderate further gold outflow, are expected to exert some drain on reserves. When allowance is made for them, as well as for normal monetary needs, these projections imply that to avoid further increases of more than normal seasonal amounts to the liquidity of the economy, System holdings of Government securities should be reduced by more than $600 million in July. If this were done, moderate increases at the end of August and in October, at times of Treasury cash financing, would be appropriate. In two months of the year substantial operations would the last be needed for seasonal purposes. It should not be assumed that these indicated operations in the credit developments projected. The would result strength of credit demands and the desires of the public for will also be determinant factors. If credit cash holdings if banks should be more active in demands are stronger or to use, expansion could be greater. If free putting funds at a high enough level, such might reserves were maintained On the other hand, reserves might be sup be the result. For these reasons, the ulti but not be put to use. plied level of free reserves of policy is not the mate test as reflected in credit develop provided, but the response ments. Reserve Bank of presented by the Federal Projections in another facing the Committee pose the problem New York
and highly significant manner. If I understand correctly, they are based on the assumption that the maintenance of free reserves at the current level will be a stimulus to credit expansion, which in turn will require additional reserves. These estimates predicate a growth in total deposits of all member banks of $6.6 billion in the next 18 weeks--on top of the expansion that has already occurred in June. Some $5 billion of this increase would be in demand deposits, and the projected increase in required reserves exceeds $800 million. If Treasury tax and loan accounts are reduced, as they presumably will be, by over $4 billion, the resulting growth in other demand deposits would be close to $9 billion. The normal seasonal growth for this period is about $2.5 billion. To make possible this result and maintain free reserves at $500 million, the System would have to add about $1 bil lion to its portfolio in the next 18 weeks--much of it in August. The Board's staff projection, which may be said to indicate minimum requirements, would call for little net change in System holdings for the period as a whole. It is useful to have a projection of this sort as a warning as to where policies might lead. Two questions need to be considered: (1) Is it reasonable to expect that the public's monetary desires will be so large or that banks will want to expand their loans and investments by any such amount if free reserves are maintained at above $500 million; (2) Does the System want to follow a policy that will en courage or make possible such a result? The experience of June is an example of the pitfalls be encountered in following a path of forcing down that may rates and stimulating credit commitments regardless interest of current needs. Resulting speculative excesses may lead to crises that in turn raise demands for relief measures. aided by such false and temporary move Is economic recovery liquidity of the economy already ments? Finally, isn't the recovery for a long time ahead? more than adequate to support of his views on the presented the following statement Mr. Hayes and credit policy: business outlook during the second half of June sug Business activity While the downtrend mixture of diverse movements. gests a time being at least, there are has been arrested for the
no convincing indications of an incipient recovery. The immediate outlook is for a summer in which economic indi cators will move in both directions, perhaps showing as many losses as gains, and expansionary tendencies may not show their force until the fourth quarter at the earliest, A good many of the encouraging elements in the last few weeks have been connected with Government activity. Thus the record level of construction awards for May was in large part attributable to gains in the public sector; manufacturers' orders improved primarily in the area of defense contracts; and personal income was sustained to a considerable extent by higher transfer payments. Higher Government salaries and other payments will be increasingly helpful in June and July, especially in the latter month when retroactive salary payments and extension of unemploy ment insurance will accentuate this tendency. Finally, much of the price strength for certain metals in recent weeks reflects Government policies with respect to tariffs and stockpiling. Contrary to earlier expectations, inventory liquidation by manufacturers in May apparently proceeded at the same high rate as earlier in the year. On the other hand, consumer spending has continued to hold at a very satisfactory level, with June retail sales apparently almost as good as those of May. Consumer credit in May did not continue the decline of the preceding months, as noninstalment credit rose more than instalment credit diminished. developments in recent weeks, especially In general, price have reflected the improvement in in industrial raw materials, although no predominant trend has been business sentiment, continued their downward tendency established. Farm prices have two, with the result that the over-all of the last month or be lower than for index for June will probably wholesale price index has apparently stabilized. May. The consumer price as are available for the Such corporate profits data and cast renewed doubt on first quarter make poor reading With dividends well of the stock market. the performance earnings helps to ex the shrinkage of retained sustained, corporate demand for long-term plain the continuing heavy and equipment expenditures at a time when plant financing are declining. few weeks, we should for the next considering policy In outlook but also only the general business have in mind not operations and, Treasury financing the important prospective these factors, the degree interrelated with both of closely
of restoration of liquidity which has been already ac complished and that which should be our goal in the next few months. With respect to the Treasury, terms of the major August refunding are due to be announced next week, and the exchange will have been effected by the time of our next meeting. In the present disturbed atmosphere of the Government bond market, there is some danger that the capital market in general might not be as encouraging to new investment as we would like to see it over the coming weeks. In addition to the refunding, our calculations suggest that the Treasury will have to raise some $2.5 billion of cash by early September at the latest, and possibly by early August. Over the last six months of 1958 cash financing may total about $8 billion, with the commercial banks doubtless taking a major proportion of this amount. As for bank and nonbank liquidity, June witnessed an important further increase in bank holdings of securities and continued growth in nonbank holdings of liquid assets. Loans and investments of all commercial banks rose by $4 billion in the four weeks through June 25, with securities and security loans accounting for most of the rise. By the month-end, security holdings of all commercial banks were roughly $10 billion above the level of last October, while loans had increased only slightly. Since mid-May ratios of New York banks have averaged around loan-deposit cent early last October, with per cent as against 66 per the comparable ratio for banks outside New York dropping to 51 per cent. Yet it is worth noting from 55 per cent still at a higher level than in any that these ratios are are ten percentage points period prior to 1956 and recent While the increase in money or more above the 1954 lows. months, the present in the last few supply has been rapid year ago. If we compare equal to that of a level is about deposits and other highly of the money supply, time the sum we find a rise national product, with gross liquid holdings between the third about 5 per cent liquidity of in nonbank of 1958, and this the first quarter of 1957 and quarter Total re the second quarter. continued in trend probably changes in required adjusting for reserves (after quired $1 billion ahead close to are now running reserve ratios) taken together suggest year. All of these measures of last improvement in liquidity, achieved a gratifying that we have they also to a period of recession--but wholly appropriate
suggest that we might begin to think about future moves to damp down this growth of liquidity, especially if business should fare reasonably well in the coming months. Turning to specific credit policy, I would hope that we could achieve a de-emphasis of the free reserve figure as an objective of monetary policy. We have often talked about this in the past, and we have not had much success in getting away from this measure--but I believe we should give increasing attention ourselves to the underlying statistics on money supply and other liquidity measures, and we should try to get the market and the public to give them increasing attention. Substantial free reserves should be maintained as a stimulus to recovery, at least until we see a more imminent risk than is now visible of excessive liquidity developing in the economy--but this does not rule out the desirability of some cautious probing toward slightly lower levels of free reserves than we have seen recently, provided we can do so without causing too much disturbance in the capital markets. I am troubled over the basic dilemma of trying to stimulate recovery through additional investment while avoiding the creation of too much liquidity. at the same time I would hope that we could keep free reserves at $500 million in the next three weeks, subject to the usual reserva or less distribution of reserves and the feel of the tions as to the the same time it is highly desirable that we market. At that would be likely to set off a trend avoid any action higher long-term interest rates or to create a public toward change in credit policy. Admittedly impression of a basic problem for the Management of the this poses a delicate Account for the next three weeks. this time for a change in discount I can see no need at rates or in the directive. that the national picture, as Mr. Irons said it seemed to him and was en to indicate improvement Mr. Young, continued presented by were pointing to that more and more factors couraging. It appeared of small movements was an accumulation and that there the up side the economy. In of strength in of a gradual development indicative about as continued said, conditions Mr. Irons Eleventh District, the
they had been, with activity at quite a high and stable level. The petroleum situation was gradually showing improvement, with the stock situation better and prices a little firmer as the stock situation improved. Allowables had been moved up to nine days in June and possibly there would be further gradual increases. There was some feeling that allowables might move up to eleven or twelve days by the latter part of the year, which would represent a marked improvement. Mr. Irons said that the agricultural situation in the dis trict continued to be very favorable, with rains at the right time and the crop outlook good. Retail trade was holding up well; in June it was just a shade under the very high level of June a year ago. In the banking picture, recent call report data showed an in crease somewhat in excess of $650 million from the roughly comparable date of a year ago in total deposits of weekly reporting banks, and more than half of this increase was in time deposits. There had been reports of a shifting out of Treasury bills into time deposits and others, and apparently there was quite a strong by corporations the part of holders of funds to get into time deposits demand on led him to believe the time a favorable interest rate. This at to be watched carefully for it might deposit movement was something could prove to amount of funds which contain a fairly substantial district was good, Mr. Irons Loan demand in the be "hot money." over a year ago. said, with loans up
As to policy, Mr. Irons said it seemed to him from a study of the available figures that the problem over the next few weeks would be one of avoiding too great an availability of reserves. The projections, he noted, indicated fairly easy reserve positions. Also, it appeared that the expansion in the money supply might be substantial, with a shifting of funds into private hands from the Treasury, so that the problem was likely to be one of guarding against too great expansion and too much liquidity rather than the reverse. The Treasury would be in the market almost continually, or at least several times in any event, over the next few months and it might be necessary to make a decision between the tighter credit policy required by the unfolding economic situation and of the Treasury. Mr. Irons felt that it would be a mistake support that could not be sustained as condi to permit an ease to develop next month or so, and he did not feel tions moved ahead over the gained by such a course. Altogether, the that anything would be of the Account was that the Management circumstances indicated use of judgment and a feel have a difficult time. The going to trying to restrain further would be required in of the market checkrein to the extent possible. of reserves and hold a availability not favor a saying that he would concluded by Mr. Irons such as the dis of System policy in any of the implements change felt, had been That point, he or reserve requirements. count rate
passed for the time being. Mr. Mangels said that the Twelfth District had experienced about the same degree of improvement as reported nationally. Lumber reports indicated a little better than seasonal inprovement, both in new orders and production, in May and early June, and there had been an increased demand for plywood, accompanied by a price advance. Residential construction was holding up very well; in May it was reported that residential construction contracts were at the highest point since 1956. However, nonresidential construction awards had declined slightly from April and early May figures. Steel produc tion, which was up early in June, declined by the end of the month and the decline was expected to continue in July because there had been forward buying in anticipation of a price increase. Removal of the freight tax at the end of July had resulted in efforts to defer shipments. Agriculture in the district was progressing favorably, Mr. and vegetable canning industry looking Mangels said, with the fruit forward to good prospects. The inventory carryover was not as large improvement in profit margins was ex as in 1956 or 1957 and some had been rising, and the slight in pected this year. Employment crease in manufacturing employment was significant because previously for the past ten or twelve been uninterrupted declines there had hand, unemployment had increased slightly. months. On the other
There continued to be cutbacks in aircraft employment in Southern California but this was offset to some extent by gains in other areas. At the Boeing plant in Seattle, employment in May was around 63,000, a figure 2,500 higher than a year ago. While automobile sales in May were below the 1957 level, in California they were up somewhat in April. In other States from which reports were available, it was indicated that May sales were about the same as those for April, whereas normally a little decline might be expected. Department store sales showed little change in May from the preceding month. Mr. Mangels continued by saying that for the three-week period which ended June 26, loans at banks in the Twelfth District were up increase of $30 million in real estate $174 million, which included an continued to rise, the increase of $1 million loans. Time deposits the decline of $156 million in demand deposits. more than offsetting last meeting of the Committee he had Mr. Mangels recalled that at the in the rate of interest of a possible reduction reported indications the end of June approached, however, the on savings deposits. As were not going to that savings and loan associations banks found reluctantly, not to so they decided, rather reduce the dividend rate rate. With one or two exceptions, the savings deposit interest change to keep the rate until that they were going the banks had announced from the no borrowing There was practically end of this year. the
Reserve Bank by member banks, and Federal funds transactions were running at somewhat lower than normal levels, with purchases slightly exceeding sales. In terms of the over-all situation, Mr. Mangels said that the principal question seemed to be whether the present indications of encouraging developments in business were going to persist and bring about actual recovery. Even if the most optimistic expectations were realized, however, he felt that rather substantial unemployment must still be expected at the end of the year. As far as monetary policy was concerned, Mr. Mangels ex pressed the view that the Management of the Account had done an excellent job under trying conditions. He agreed with Messrs. Hayes and Irons that the System ought not to liberalize its attitude and pro ease. As to free reserves, he had in mind a level some vide more would have no objection if the where around $500 million, and he below that figure. The System, he felt, level were to drop somewhat extending its position of not be influenced too much toward should ahead, but the Account Manage ease because of the Treasury financing of discretion in its operations to have some degree ment must continue which would not be easy. three-week period ahead for there was another meeting of the referred to the Mr. Mangels In conclusion, and said he was quite directors to be held tomorrow San Francisco inclined to make any change directors would not be sure that the in the discount rate.
Mr. Allen said that the Seventh District continued to provide a contrast between the farm and industrial sectors. Crop conditions remained favorable over most of the district, with pasture conditions in Michigan and Wisconsin having been improved by rains and moisture very good in the corn belt. Hog prices had continued to increase and were nearly 20 per cent above a year ago, but farmers reported plans for substantially increased production which, if accomplished, should bring about a sharp drop in hog prices next spring. In the industrial sector, the district con tinued to run behind the nation in most respects. In the matter of employment, for example, the larger centers continued to register less satisfactorily than the country as a whole, and Chicago and Flint had been reclassified by the Labor Department to reflect worsening conditions. District experience in construction and housing starts likewise was running behind that of the nation, and builders and lenders in the residential field in both the and Detroit areas expected a second half generally resembling Chicago store sales for the district for the four weeks the first. Department ending June 21 were 6 per cent below a year ago compared with a drop of about 2 per cent nationally. that the practice of scheduling vacation Mr. Allen observed for model changeovers in July and Augustshutdowns and interruptions automobile business and growing in other a practice common in the
industries--added to the difficulty of estimating whether or not this was a period of recovery from recession. It was understood that the automobile people planned unusually low production for the third quarter--680,000 cars--but their sales were better in June. While official figures were not available, informed sources estimated that 00,000 cars were retailed during the month of June, which meant that this was the best month so far this year, although 27 per cent below June 1957. Unofficial estimates placed the June at around 695,000, while the figure 30 inventory of unsold new cars and with the low that inventory figure was 735,000. With last year quarter, it would not take much of production program for the third inventories to quite a modest level a sales performance to reduce that date was 400,000 and The target for by the first of October. of 12,500 through the by a daily sales rate it could be achieved were that of June--16,000--the the daily rate quarter. If third on October 1 would be down to 143,000. inventory been in an easy Allen said, had Chicago banks, Mr. The large positions the Chicago to improved reserve While moving position. to enlarge their had continued those in Detroit, banks, and also held by those of bills and the volume bills of Treasury holdings At the same four weeks. in the last than doubled had more banks as relatively had not increased against securities time, loans as a whole. in the country as of the district in the banks much
Turning to policy, Mr. Allen said he agreed with those who had already spoken at this meeting. He felt that System policy had amply accommodated commerce and industry and that "hewing to the line" was indicated. While he disliked to use free reserves as a gauge, those who had spoken thus far had mentioned a level around $500 million. With this he agreed, even if it meant sales out of the System portfolio in the next few weeks. In his opinion, the System should stick to its trade and not worry too much about the Treasury. The Treasury, he felt, would be very fortunate if it could borrow longer-term at anything like the rates which it had been paying. With most people feeling that this is an inflationary age, and with the record of inflation over the past ten years, it would be remarkable if the Treasury could stay near those rates. Mr. Leedy said that the Tenth District continued to do better than the nation generally. The winter wheat crop had worked out about as forecast and the district would have a near record crop. Last week was the peak of the harvest and conditions were ideal. With something like 2,000 cars on the track, there had been a short strike of workers at the terminal elevators in Kansas the strike was quickly settled. Wheat yields City, but fortunately and the quality of the wheat reported to be quite high per acre were
was satisfactory, although the protein content was a little lower than that of last year's crop. Other crops in the district like wise were reported to be in excellent condition and the same kind of report was prevalent as to pastures and ranges. The favorable situation with regard to farm income in the district, which he had previously reported to the Committee, continued to show up as additional monthly figures became available. Cash farm receipts for the first four months of the year were 19 per cent higher than for the first four months of last year, compared with an increase of 7 per cent nationally. Department store sales for June were slightly higher than in June of last year and for the first half of the year sales were virtually unchanged from the same period of Mr. Leedy went on to say that nonfarm employment continued to improve in the district in May. While data were not yet complete, it appeared that further seasonal gains in nonmanufacturing activities were widespread. Also, manufacturing employment in most of the States of the district had increased slightly. Although employment levels below last year's figures, insured un were running substantially in response to the seasonal upturn in employment continued to fall mid-June it was about 15 per cent lower nonfarm jobs so that in earlier. By States, the range had been from 4.9 per than a month to around 3 per cent in the other cent in Missouri and Oklahoma
States, which compared with the national figure of around 6.4 per cent. Construction contractsawarded in the district in May were one-fifth higher than a year ago, with substantial gains in all major types of construction; for the first five months of the year the total of construction awards was about 8 per cent above the similar period for last year. The banking picture in the district conformed generally to that which had been reported for the country. There had been an increase in all major categories of loans over the last three weeks, with tax borrowing the principal reason for the expansion in business loans. Deposits were up, reserve positions easy, and the reserve city banks had been supplying some funds to the Federal funds market. As to policy, Mr. Leedy said he subscribed to what had been said previously at this meeting. As he understood the views ex pressed, they were quite uniform. He felt that the System had gone far enough in providing ease in bank reserve positions and, as Mr. Hayes had suggested, there might be some probing for a lower level He also subscribed to what had been said about of free reserves. course which should be pursued in the event of a conflict the and those which would best serve between the System's objectives necessitate a choice, he would follow the Treasury. Should conflict that would give precedence to effective monetary policy. a course
Mr. Leach said that in recent weeks some of the major Fifth District economic indicators had remained unchanged but many had shown improvement. The recently announced pay increase of 10 per cent for Federal employees retroactive to January was expected to provide a substantial stimulus to consumer spending because military installations and the presence of the Nation's Capital combine to give the district nearly one-fifth of total Federal civilian employment within the United States. While there had been little change in the textile industry, construction con tract awards in May showed a substantial increase over April, as well as over May a year ago, to provide the most optimistic note. There were others, however. Bituminous coal production improved noticeably in May and June; cigarette production was up; lumber production was at a good level; department store sales were doing well; employment had stabilized or shown gains in most areas; and insured unemployment rates had fallen, though the rate for West Virginia was still above 13 per cent. Turning to credit policy, Mr. Leach expressed the view that despite the continuing signs of improvement in economic conditions it would clearly be premature to think in terms of abandoning the present policy of ease at this juncture. He believed, however, emphasis. Further additions to there should be a change in that and the economy should be liquidity of the banking system the
avoided as far as practicable because they would serve no useful economic purpose and would make the future task more difficult. While the System must, of course, supply the reserves needed for the Treasury's deficit financing, this inevitably would add sub stantially to liquidity in the months ahead and made it all the more important to avoid unnecessary additions in so far as pos sible. This, he felt, should be the Committee's objective under current economic conditions. Although he realized that such an objective would be extremely difficult to attain in view of Treasury financing, the unsettled condition of the Government securities market, and the importance which the market and the public now attach to changes in the level of free reserves, current conditions might continue for some time without substantial economic the System should gradually back down change and he thought that free reserves as market condi $500-$600 million level of from the tions and Treasury financing permitted. he could not tell what banks Mr. Leach said that although bankers are paid to invest do with additional reserves, would would let reserves lie not imagine that they money and he could would use additional re it appeared that they idle. Therefore, present. He felt that was lower than at until the bill rate serves as too important from free reserves should get away the Committee get away from the present policy and that it must an indicator of
level of free reserves. Perhaps, however, it could not do better than $500 million until the next Treasury financing, and any shift should be made gradually without attracting too much attention. While the Committee could continue to use the same policy directive, Mr. Leach noted that there had been quite a change in conditions and prospects since that directive was adopted on March 5. He suggested, therefore, that the following language might be considered for clause (b): "to contributing by monetary ease to resumption of stable growth of the economy without creating excessive liquidity." It was dangerous, he felt, to keep allowing liquidity to increase. Mr. Vardaman said that national psychology was such, and as reported here too unsteady and uneven to the national economy any change in Federal Reserve tolerate without undue disturbance Therefore, the System should continue policy to the tight side. million free reserves--and hope to de about as is--around $500 free reserves at some future date. emphasize any fixed amount of the money market should be avoided if Excessive liquidity in to a pattern of tighten not at the risk of a change possible, but (b) of the policy directive would not change clause ing money. He at this time. Mr. Thomas of the the explanation by Mr. Mills said that raised in his policy in past weeks results of System mechanical
mind the thought that the Committee had allowed itself to work on a treadmill when, by attempting to reach some set level of free reserves, an expansion in bank loans and investments was generated that had produced the dangers and the difficulties seen by Mr. Thomas in overliquidity. He shared the concern that he sensed was felt by Mr. Thomas, and also by Messrs. Leach and Irons, which suggested that temporarily the development of System policy should be concerned predominantly with financial rather than economic factors. In so doing, an attempt should be made to reduce the System's portfolio of Treasury bills, However, in setting that objective--and without doubt it should be a System objective--there was also the quite different question of what could be realistically accomplished. This involved whether it would be possible for the System to educate and condition the investment fraternity to a policy that would not contemplate continuing injections of reserves and whether it would be possible to accustom the market to some reduction in reserves. Because the be sought would entail difficult problems, a great objectives to deal of latitude would have to be vested in the Manager of the the market so that in seeking a more Account t judge the feel of of reserves he would not in the moderate policy in the provision in the market or unduly impair the Treasury process create alarm must have very first consideration financing problems, which in its in the development of System policy.
Mr. Robertson said that he shared the views expressed at this meeting with regard to excessive liquidity. By vigorously trying to establish ease, he felt that the System had gotten into a situation from which it could not easily extricate itself. In his opinion, the System should start moving toward tightness faster than indicated by the comments around the table--as fast as possible without unduly upsetting the market--and it should pay more attention to the formulation of monetary policy in line with the economic situation than to the objectives of the Treasury or any special interests. For the next three weeks, Mr. Robertson said, the Committee ought to avoid pushing ease, in fact should restrict it, and in the absence of any better criterion he would use free reserves as a target and try to move toward $400 million. This would not be an ironclad target but one with flexibility on either side depending that prevailed during the period. He would work with on conditions vigor toward reducing the ease which had created excessive as much shown in bringing about a condition of ease. liquidity as had been on to say that he was favorably inclined Mr. Robertson went suggestion for amendment of the directive. He thought toward the not be misunderstood. Instead, that a change in the directive would for the Manager of signal, a little flag would be a very slight it during the next three-week in carrying on activities the Account period.
Mr. Shepardson said that his views were very much like those expressed by Mr. Robertson. It was his impression that the Committee had been aiming at free reserves on the lower side of $500 million rather than the upper side, and consequently he was a little disturbed when the level of free reserves got as high as it did. In his opinion, System policy should be moving back toward a little less ease. Mr. Shepardson said he was rather concerned about some of the comments one heard and read regarding the lack of investment in plant and equipment for he did not see what was gained in trying to push additional investment of that kind at a time when there was a surplus of plant capacity. He also questioned the advisability of efforts to encourage increased demand for goods and services by means of easier consumer credit terms which might further impede needed price adjustments. Adjustments now going on in many businesses seemed to be increasing efficiency and cutting out some excesses. There were also some indications of price adjustments, and those things were all to the good. This meant to him, Mr. Shepardson said, that the System should not be in the position of trying to push too fast on recovery adjustments should be allowed to take place and and that necessary the directive and felt that work through. While he had reviewed he had not developed any specific perhaps it should be amended,
wording. It appeared to him that the language suggested by Mr. Leach might not be inappropriate. In summarizing, Mr. Shepardson said that he would like to see monetary policy a little less easy than it had been. This suggested that it might be time for a change in the directive, particularly to eliminate the word "further" in clause (b), as mentioned by Mr. Irons at recent meetings of the Committee. Mr. Fulton said he could only describe conditions in the Fourth District by saying that the economy was quite soggy. At present there were no developments of such a nature as especially to engender a hope that the fourth quarter would be better than now. On the agricultural side, crops and prices were good and farmers were buying cautiously, but in the industrial sector there were further layoffs of workers, particularly in the machine tool and heavy electrical industries. Steel had experienced a little upswing during the past month but that had now subsided and nothing much was looked for until August when the automobile companies would on some sheet steel. There was apprehension about take delivery public and it was understood of the new models by the acceptance to inventory much in people were not going that the automobile of acceptance had been steel or parts until the extent the line of not go over well, there would determined. If the new models did allied with the auto downturn in all industries be a substantial the Fourth District was not up industry. Construction in motive
as in some of the other districts; residential construction had a slight revival but then a relapse. Over all, therefore, there was nothing to forecast a sharp upturn, at least from present indications in the Fourth District. Mr. Fulton said he subscribed to the thinking that the System had gone a little far in supplying reserves and that free reserves were on the high side at a level of $600 million. What he envisaged at the last meeting, he said, was a top of around $500 million. Despite the relatively slow state of conditions in the Fourth District, he felt that more firmness could be brought into the picture rather than to keep reserves as high as at present and thus contribute to a basis for inflation. He would like to see the word "further" eliminated from clause (b) of the directive because the directive would then state more clearly the current attitude of the Committee, at least to judge from the expressions at this meeting, but he had no convictions about around the table the rest of the language. that he interpreted the national data a little Mr. Bopp said of the others at this meeting and bit less optimistically than most only in part by developments his interpretation was influenced that on the gloomy side. which were rather in the Third District, following statement: substantially the Mr. Bopp then made of the Account has done an outstanding The Manager in a period marked by job under trying circumstances
extraordinary complexity and unanticipated develop ments. One important complicating factor was that the market saw signals the System did not intend to give. This raises the age old question of whether we can give clearer signals--particularly to correct a market misinterpretation. My own view is that direct opera tions in the longer sector of the market at such strategic times would be the most effective way for the System to signal its intentions. If we move to the short sector, relatively wide spreads between the discount rate and short-term rates in the open market are likely to lead to periodic mis interpretation. Persistence of a wide spread may be interpreted as indicating that the System believes market rates are too low or that it will not resist some tightening in the market. Under these circum stances, a rise in short-term market rates, especially if accompanied by a reduction in the net free reserve position of member banks, may be interpreted as a move ment away from an easy money policy. Since it is so difficult to estimate the magnitude of necessary "defensive" operations, which comprise the largest volume of purchases and sales, open market opera tions are not well adapted to give unmistakable signals to the market. At the present time, to give a clear signal to the market that the policy of ease is being maintained, I would recommend a reduction of 1/2 per discount rate. An ancillary but not un cent in the important advantage of this move is that it would put us in better position to give a clearer and earlier signal when a change in the direction of policy is intended. wish to report that we had extensive discussion I of economic and financial developments at the meeting on Thursday. There was agree of our Board of Directors in a recession and that the ment that we are still of a sharp snapback by August or September probabilities of the economic and small. In terms are extremely the directors were dis financial merits of the case, the rate, but in the light to vote a reduction in posed Open Market Committee meeting of the Federal of this early parenthetically was and of my own recommendation--which last meeting of this the decisions at the influenced by
Committee--they were willing to renew the existing rates on Thursday--but with a divided vote. It is possible that they may take the initiative to establish a lower rate at the next meeting of the Board. In concluding his comments, Mr. Bopp said he realised that his views on the discount rate placed him distinctly in the minority around the table. Mr. Bryan said that the Sixth District was experiencing almost exactly the same trends and changes in figures as the nation. On the basis of the year-to-year comparisons, the district had shown lesser declines than the country as a whole, but rather curiously month-to-month comparisons were more favorable for the nation recent than for the Sixth District. Some of this apparently could be ex plained by the recent improvement in durable goods of the kind not manufactured in the Sixth District. the national economic picture, Mr. Bryan said Turning to changed his views in the last three that he had almost completely being accumulated a good seemed to him that there was weeks. It was going through this recession of evidence that the country deal that had taken place same sort of rolling adjustment with much the little evidence of ac period, and there was before the postwar He had only one reservation, recessionary tendencies. cumulating not yet in a vigorous the country was said; namely, that Mr. Bryan the economy might a possibility that and there was still recovery of a false bottom. sort be experiencing
As to policy, Mr. Bryan recalled that earlier he had been an advocate of further ease but said that he had now reversed him self. Looking at the total picture on a year-to-year basis, and making adjustments for the difference in reserve requirements, he now concluded that the System had done an ample job of providing ease. Even the money supply figures, however taken, suited him a good deal better than they did earlier. Therefore, he could not find a basis for advocating further ease and he was rather sympathetic to the idea that the System should avoid further ease. Nevertheless, there were one or two things that the Committee might keep in mind. First, there was evidence of considerable congestion in the capital a variety of reasons, not all of them due to the false markets for or to the speculation in Govern of a change in System policy signal going to be a heavy calendar in July. ment securities, and there was point must come in for cash. Accordingly, Also, the Treasury at some might very well be con to the conclusion that there he had come markets unless the System tightening in the capital siderable he meant continuing just fair degree of ease. By this maintained a a level of free been doing and maintaining the System had about what for the next three-week of $500 million in the neighborhood reserves period. change at the discount rate say that a went on to Mr. Bryan it would contain mistake, for to be a seem to him time would present
the grave danger of conveying to the public a message precisely opposite to that which the System wanted to convey. In other words, it might be interpreted as meaning that the System had no confidence in the current more toward recovery. As to the directive, he would be inclined to support striking the word "further" from clause (b). Mr. Johns recalled that he had been among the small minority who argued for further ease at recent Committee meetings but said that he did not desire to make those arguments again because his position had changed somewhat. At this juncture he was inclined to agree that the System should not actively pursue a policy of further ease. Mr. Hayes had suggested that it might be appropriate to do some cautious probing of a lower free reserve level, if and when that could be done without repercussions, and Mr. Johns said that he was inclined to agree, although he had reservations as to whether this could be done without repercussions. He felt that the System should not signal any change of policy at this time and that certainly it should not encourage a trend toward higher long-term rates. While he had been on vacation since the last Committee meeting, he had re viewed open market operations from the reports of the New York Bank, to conclude that operations in the Account and this review led him weeks had been thoroughly satisfactory. While, during the last three at this time to felt that it would be premature as he had said, he
signal any change in policy, on the other hand be did not wish to repeat the arguments he made at the last two meetings regarding a reduction in the discount rate since he agreed with Mr. Bryan that a change in the rate might be misinterpreted. Turning to the policy directive, Mr. Johns said he would not object to eliminating the word "further", but that he had reserva tions about using the word "excessive* in the clause suggested by Mr. Leach because the Committee ought not to give the impression that it or its Agent Bank or the Manager of the Account were given to excesses. In substance, Mr. Johns said, he would like to continue about as at present for the next three weeks. Mr. Szymczak said that he has favored a reduction of the level of free reserves. However, he was fully aware of the fact that the Treasury would be in the market for a considerable period he was concerned also about the situation with respect of time, and corporate, and municipal. Furthermore, to all issues, Government, some signs of an upswing in the although he hoped there would be summer months were ahead. the doldrums of the fourth quarter, Mr. Szymczak said explanation of his views, In a further reserves--perhaps too many--up the System, having provided that position of the banks, try to vary the reserve to this point, should had developed but liquidity that of the excessive not only because
also because the market gets accustomed to having a certain volume of free reserves available. He was mindful of what Mr. Mills had pointed out, however, and he would adopt a realistic point of view with the Treasury coming into the market. As to the directive, Mr. Szymczak said that although he would not recommend a change, on the other hand he would not object. Mr. Balderston inquired of Mr. Rouse whether, if the Treasury went into the market shortly, its needs could be reconciled with a reduction of $600 million in the System Account portfolio. Mr. Rouse replied that as of the moment it did not appear likely that this could be done. However, the projections refine themselves from week to week and the Account might not be faced with the same problem that appeared to exist today. In this con nection, he observed that $184 million of bills would run off this $150 million would mature next week, and a similar week, another amount the week after that. At present the Account was faced with prices had dropped noticeably this a nasty situation in the market, of atmosphere it was not possible for him morning, and in that kind to Mr. Balderston's question. The to give a categorical answer did not seem to have any relation situation this morning, he said, the same thing had been true the last ship at all to reserves, and reserves seemed to the availability of weeks. In other words, two which bad In the kind of a situation have no effect marketwise.
prevailed, he just did not know the answer to the question of reducing the System portfolio. Mr. Balderston then said that he had asked this question because of the dilemma pointed out by Mr. Mills and because of hia own view that Mr. Irons had correctly described the policy that the Committee should be following. As he saw it, the conflict between those two positions might make policy decisions very difficult indeed. There were evidences of speculative responses both to the System's monetary policy and to the Governmental spending and stock in short, the economic field that should have been piling programs; carefully in the last two or three months seemed to him irrigated flooded. Looking back, he felt that excessive to have become the System's policy of monetary explained the failure of liquidity in 1955 and he viewed any to become effective early restraint On the other hand, situation with great concern. repetition of that free reserves were that no matter whether had been pointed out it be regarded as the level might or below $500 million, kept above the System's intentions. community of signal to the financial a System must be, in to him how careful the All of this indicated the bond not to disturb financing ahead, view of the Treasury take no overt the System should appeared that unduly. It market might be desirable Hayes, it by Mr. that, as indicated action but permitted. as the opportunity of free reserves a lower level for
Mr. Balderston said he would not favor a reduction in the discount rate. He had had the feeling in 1955 that the discount rate level at that time was too low, and that mistake should not be repeated. Neither would he favor a change in reserve require ments. If the directive were changed, he would not only eliminate the word "further" but also try to develop some new wording in place of "stable economic growth" because to him that phrase was lacking in definition. Chairman Martin said that he found it difficult to express his thoughts on this type of a situation. In general, however, it was his feeling that the System ought not to push either in the direction of easing or tightening at this time. However commendable it might be in theory to talk about probing, the changes in funda mentals that occur whenever there is a turning point may make that impossible. At such times forces are at work that are bigger than the System or the Treasury, and if one tries to play with them he is apt to get into serious difficulty. Continuing, Chairman Martin said he had found it difficult of balance recently. The week end after to keep his own sense June 19 was one of the worst that he had spent since coming into who were stirred up about rumors of the System, with many persons him with various kinds of stories. a change in System policy calling
Such stories, he observed, are always symptoms of a turning point. Of course, he did not know for certain whether there actually had been a turning point but many elements were making for it. Per sonally, he was inclined to be optimistic, recognizing that one should not be prematurely optimistic. One should recognize the Treasury's problem at this kind of juncture and keep in mind that movements in rates never come gradually, much as that might be desired. He noted that one person at this meeting still thought that the discount rate ought to be reduced, so there was not yet a unanimity of belief that a clear turning point had developed. Chairman Martin then commented that in the realm of speculation in which the System and the Treasury must deal there are many factors to be taken into consideration. If it had not been for the story in the press on June 19 which suggested that there had been a change in Federal Reserve policy, he felt that there would have been some other story or comment. He noted from the comments at the Committee meetings over the past three months that the views had shifted back and forth in both directions. putting their money on the line, he When it comes to the public System must deal with the actual situation as it exists. said, the the story of the man killed must try to be right, but The System who was "dead right" seemed the street on the green light crossing which the System was now dealing. to apply to the situation with
The Chairman said he thought that, if the System was going to change policy, some thought should be given to what happened in the November 1957 period and the System ought to do something that would really be clear-cut. This did not mean necessarily that there could not be any probing, and actually probing had been done in the market over the last ten days or two weeks. The whole situation, he reiterated, should be viewed in the light of a fundamental change. Also, the System ought not to do anything to create more difficulty for the Treasury than necessary unless it thought that it was really right, for the Treasury had real problems and should not be asked to perform a miracle. If the System were certain of the basic situation, that would be one thing. However, as Mr. Robertson had said, the System probably had contributed to the difficulties of the Treasury overboard in the direction of easy money, if a turning by going point was really here. comments Chairman Martin again said that the In further its balance at this time. It seemed System ought to try to keep wide latitude to the Manager of the wise, he suggested, to give in which to operate. He had had a difficult period Account, who "further" out of to taking the word not be strongly opposed would on the eve of a he recalled that directive, but clause (b) of the November and policy last Committee changed financing the Treasury
the change caused about as much trouble as anything that could have happened. It must be remembered that the problem of the Treasury in a period of uncertainty might become impossible if it appeared that the System was contemplating a change in direction of policy. While it might be, therefore, that a change in the directive ought to be made, by and large he felt that it would be better not to have it appear in the next three-week period for that would needlessly create problems. While perhaps he did not reflect the view of the majority in saying that, it appeared that the majority was in favor of only a moderate change in the directive, if any. Most of those around the table had talked about $500 mil lion in free reserves and he felt that such a target was all right. the Manager of the Account was up against the feel, color, However, market and little shifts were going to be very and tone of the difficult to gauge. Chairman Martin again stated that the Committee ought to be the difficult position of the Treasury. When extremely cognizant of policy change that was one thing, the time came to make a definite playing around with fire. around with the market was but to play problem already with the 2-5/8 The Treasury had had a difficult nearly the whole issue, might be saddled with per cent bonds and a matter of judgment. although that was he felt that Martin whether asked Chairman Mr. Vardaman directive was in the the word "further" of having the difficulty
serious enough to warrant a change, and the Chairman replied that he did not think it was a very big point. In his view, it would be better on balance not to change the directive at all. Mr. Shepardson commented that although he recognized the problem involved in the forthcoming Treasury financing, there would be a series of Treasury operations throughout the rest of the year. He inquired, therefore, whether it was the Chairman's view that System policy would be frozen during all of those periods. Chairman Martin responded that until the System was certain what its policy ought to be, there would be a difficult period. It was the problem of financing a deficit; namely, whether the money was going to be printed to finance it. He hoped not, but some money probably would have to be printed, depending on the size of the deficit. commented that he had raised this question Mr. Shepardson ready to take the position of wanting less ease, because he was Leach said that in his view the System ought to stop adding and Mr. to liquidity. Mr. Leach's position suggested that in a sense Mr. Mills of error on the part of the System would represent a confession
which it could be undesirable to incorporate in the policy di rective. If excessive ease had been created, he said, the System had been responsible for it. In responding, Mr. Leach referred to the language of the directive adopted by the Committee in January 1955 and said it had never occurred to him that the language carried the implication suggested by Mr. Mills. He went on to say that he did not want to emphasize unduly a change in the directive since he was primarily concerned with actions. If, however, the present wording of the directive is interpreted in the future, as it has been in the past, as requiring free reserves in the $500-$600 million range, he did System could escape from furnishing additional re not know how the would lead to additions to deposits and short serves, which in turn of banks. He would like to see no further un term investments necessary additions to liquidity. glad that the Chairman had stressed Mr. Hayes said he was Under such conditions he difficulties of the ensuing period. the avoid signaling any overt it advisable that the System considered desirability of not he agreed with the in policy. Much as change be better not to change ease, he felt that it would having further directive at this point. the spoken at this meeting that he had not Mr. Irons recalled (b) of the from clause of the word "further" favor of deletion in the possible a reason; namely, he had had said that and directive
damage to the Government securities market on the eve of a Treasury financing. He thought that the System was wrong in shifting policy last November just before a Treasury financing and that it would be wrong in making any change now. The matter could be deferred until there was a little more solid situation in the Government securities market and a more solid feeling in people's minds. Mr. Mangels indicated that he agreed with Mr. Irons, but Mr. Allen stated that he would favor eliminating the word "further" from the directive on the basis that the directive would then reflect better the attitude of the Committee today. There ensued further discussion of the directive and of policy in the period immediately ahead, following which it developed from a show of hands that the majority of those around the table make any change in the directive at this time. would prefer not to Consideration then was given to the target that should be and the difficulties involved in the use of set for free reserves figure were again pointed out. any specific that the objective might be stated as Mr. Hayes suggested he meant that the or less. By this of free reserves $500 million to go below the $500 million the Account would try Management of operations in it, but that in conducting figure rather than above all of the implications would recognize Account the Management the going below $500 million. of
Chairman Martin then said that there appeared to be agree ment on the part of all that the feel, color, and tone of the market must be an element. In terms of the level of free reserves, he sug gested that "around $$00 million" was probably as well as the matter could be stated. In further discussion, Mr. Irons raised the question whether it would be possible to avoid entirely the use of a target figure for free reserves. If a figure is mentioned, he said, there is an in clination to maintain that figure. What was wanted, he felt, was the concept of maintaining an availability of reserves that would not contribute to excessive liquidity or to a deficiency of funds, rather than the maintenance of a free reserve figure per se. He suggested that considerable leeway must be given to the Manager of might be put in terms of leaving Account and that the objective the concept of maintaining an avail it to the Manager to carry out the not be disruptive to the market. ability of reserves which would would not disagree except to point Mr. Hayes said that he to looking at the level of the public has grown accustomed out that the kind of situation to bring about reserves. If an attempt free in a smaller should result like to see prevail Committee would the inviting a very difficult the System might be volume of free reserves, of public reaction to its policy. situation from the standpoint that the Account this was an element Irons agreed that Mr. take into consideration. would have to Management
Mr. Rouse commented that the System was in a box which it would have to get out of at some time by a decisive move. At present he had no suggestion for resolving the problem, but the Account could try to bring down the free reserve level of the last couple of weeks. Pointing out how certain possible actions could just lead to more complicated situations, he noted a that reduction of reserve requirements might disabuse the market of its idea about a shift in policy and that sopping up the reserves simultaneously would possibly "get us off the hook." On the other hand, it might develop to be the secondary thinking that the sopping the essence of the action and that the market had been right up was the first time. concluded with a statement by Chairman Martin The discussion could do any better than to that he doubted whether the Committee "around $500 million" and to give leave the free reserve target at of the Account at a time like maximum discretion to the Management the present. Thereupon, upon motion duly made the Committee voted and seconded, unanimously to direct the Federal Re serve Bank of New York until otherwise directed by the Committee: sales, or exchanges (1) To make such purchases, securities, and replacement of maturing (including run off without replacement) maturities to allowing in the open market Open Market Account for the System by direct maturing securities, in the case of or,
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 administration of the Account; provided that the aggregate amount of securi ties 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 certifi cates 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. Mr. Vardaman withdrew from the meeting at this point. of Mr. Rouse there had been distributed to At the request memorandum suggesting an increase of the Committee a the members in the limitation on outright $50 million to $75 million from Federal Reserve Bank of bankers' acceptances by the holdings of increased to the 1956, this limit was On November 27, New York. of total acceptances outstanding, of $50 million or 10 per cent lesser survey, and since bankers' acceptance by the most recent as shown a minimum of about $15.5 the New York Bank had held that time million on maximum of $45.7 1957, and a October 28, million on $44,79 ,000. 30, 1958, were as of June 17, 1958. Holdings June
The memorandum explained that in recent weeks the New York Bank had gradually increased its holdings of acceptances by $1 million or more a week, to be consistent with increases in System holdings of United States Government securities. As long as open market policy remained one of maintaining a posture of ease, acceptance holdings therefore could quickly reach the limit if the New York Bank were to continue to coordinate acceptance activities with other market operations. Following supplemental comments by Mr. Rouse concerning the matters referred to in the memorandum, Mr. Allen commented that according to his recollection the reason for granting the present authority was to show friendliness to the acceptance that, although he was not at the time a market. He recalled of the Committee, he questioned increasing the purchase member him that the way to build up the authority because it seemed to get people accustomed to buying acceptances. If market was to that holdings of acceptances ought the Committee should conclude to System holdings of Government to be increased proportionately paragraph of Mr. Rouse's suggested in the second securities, as nothing further to say. If, however, memorandum, he would have of the Committee was discussions the purpose as indicated in past he would not agree that increasing to promote the acceptance market, would work toward that end. the present limitation
Mr. Mills said that he agreed completely with Mr. Allen's reasoning. He sensed that the Committee might drift into another position from which extrication might be difficult due to the New York Bank's having built up a portfolio of acceptances for open market purposes rather than to foster the acceptance market as such. Reports submitted by the New York Bank had indicated repeated in ability to fill orders from foreign accounts for bankers' acceptances, which puzzled him as to why a portfolio or acceptances was being developed in the face of an investor demand for their acquisition. However, market conditions are now unsettled, and as bankers' acceptances are a vehicle for open market conduct that works on the edge of the total securities market, the System must be prepared, if needed, to render assistance to the acceptance market. Such being the case, he felt that the limit for acceptance purchases should be temporarily raised to $75 million as an emergency measure. Mr. Allen said that he had no quarrel with Mr. Mills' state ment. However, he hoped that the New York Bank would meet requests for acceptances because that seemed necessary to build up the ac ceptance market. Mr. Hayes commented that the New York Bank could get out of He stated that there was very easily within a few weeks. acceptances objectives of fostering a between the two nothing irreconcilable operations in a and conducting acceptance wider acceptance market Open Market Account. in the System with activity manner consistent
-4b On the point of helping the acceptance market, he suggested that it was of assistance over a period of time for the New York Bank to be in that market, and that the Bank was properly using the acceptance authority as a money market instrument. The fact that customers occasionally were unable to obtain all the acceptances they wanted did not mean to him that the Reserve Bank should get out of the market. If it was going to be in the market, it should be a more or less reliable factor. Sometimes, he pointed out, foreign correspondents want to sell acceptances but the New York Bank should not be prepared necessarily to take them; rather, it should be a steady and encouraging factor in the market. said he was inclined to feel, as he had Mr. Robertson business in this field at all. before, that the System had no he understood that the purpose When the matter came up previously, interest in this area would be to show an of purchasing acceptances acceptance market actively in the and to participate of financing, This, he said, was different thing. to him to be an entirely seemed the New York that what any indication he had seen first time the holdings consistent increase acceptance to do was to Bank was trying could see and he securities, of Government holdings with increased He sug of holdings. two types between the at all no relationship might to $75 million of the limitation moving up that a gested and he market, the acceptance of control in substantial result
saw no merit in it. The trend, he said, should have been in the other direction, using $50 million not as a target but as a ceiling. It was his view that holdings of the New York Bank should be reduced and that competitive factors should be allowed to determine the extent of acceptance financing. Mr. Hayes said he differed strongly from the view that holdings of 5 per cent represented control of the market. Holdings of $50 million, he pointed out, represented a much larger share of the acceptance market when the existing authority was given than it represented now. Chairman Martin said he had not changed his own view that the System should be friendly to the acceptance market. He would like to see that market promoted and developed in any way possible. In view of the differing opinions expressed during this discussion, over for another meeting of the he suggested that the topic be held and there was agreement with this suggestion. Committee, at the beginning of this meeting There had been distributed Martin by Congressman to Chairman of a letter addressed copies Mr. Patman referred 1958, in which of July 2, under date Wright Patman in the each transaction him showing furnished the record previously to 1951 to the from March the period Account during Open Market System covering record be furnished that a similar 1956 and requested end of noted that Mr. Patman year the calendar during transactions
in a letter dated January 7, 1958, Chairman Martin had stated that the Open Market Committee felt that it should withhold such informa tion until after the Board's Annual Report for the year 1957 had been issued, but offered to supply the data thereafter. Following a brief discussion, it was agreed that the informa tion should be prepared and transmitted to Congressman Patman pursuant to his request. At the suggestion of Chairman Martin, Mr. Riefler, who had recently returned from England, commented informally on the new liquidity control system announced in the House of Commons last week. Under this relaxation of the British Government's credit control policy, banks would not have to restrict the total level of their advances to any given figure after the end of this month. However, of total advances would be retained by normal monetary control arrangement under which the Bank of measures, reinforced by a new the liquidity ratio of the would, if necessary, restrict England banking system by calling for special deposits. meeting of the Federal Open It was agreed that the next 1958, at 1000 a.m. on Tuesday, July 29, would be held Market Committee Thereupon, the meeting adjourned. Secretary
Also: Record of Policy Actions