July 22, 1958 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held on Tuesday, July 22, 1958, at 11:00 a.m. This was a telephone conference meeting and each individual was in Washington except as otherwise indicated in parentheses in the following list of those participating: PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman (New York) Mr. Balderston Mr. Fulton (Cleveland) r. Irons (Dallas) Mr. Leach (Richmond) Mangels (San Francisco) Mr. ills Mr. Robertson Mr. Shepardson Mr. Mr. Szymczak Vardaman Mr. Triber, Alternate Member of the Federal Open Market Committee (New York) Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Mr. Young, Associate Economist System Open Market Account Mr. Rouse, Manager, (New York) to the Board of Mr. Molony, Special Assistant Governors Secretary, Board of Mr. Kenyon, Assistant Governors Division of Re Koch, Associate Adviser, Mr. Board of Governors search and Statistics, Chief, Government Finance Mr. Keir, Acting Research and Statistics, Division of Section, Board of Governors Vice Presi and Marsh, Assistant Messrs. Larkin Bank of New York dents, Federal Reserve (New York) Securities Department, Mr. Stone, Manager, of New York (New York) Federal Reserve Bank
Reporting on the Government securities market, Mr. Larkin said there was a continuing availability of the rights and when issued securities. Because of the threat posed by this situation, the System Account continued to buy the when-issued securities in the market this morning. It started buying yesterday afternoon when the atmosphere got worse, and had bought today $78 million of the when-issued certificates. That was all that the Account had done thus far today. The prices paid ranged from par plus 1/64 to par plus 3/ 4. The rest of the market, Mr. Larkin said, was not too un satisfactory. The intermediate area was showing a modest amount of strength, which reflected the efforts of the holders of some of the maturing securities to do their own refunding. As a result the 2-5/8 per cent bonds had improved a little in price and currently were 98-3/8 bid. Long-term bonds were practically unchanged from last night's close, and the bill market was relatively steady. Mr. Larkin's further report on the market situation is summarized in a memorandum of today's date from Mr. Thomas, of which a copy has been placed in the files of the Committee. In terms of general approach for the day, Mr. Larkin said to avoid any security operations except that the Account intended orders for bills, such orders that if there were foreign purchase Account. As far as out of the System continue to be filled would
the rest of the market was concerned, the Account would continue to buy when-issued securities as it had so far, at not too great a rise in price. It was felt that the rights situation should not become too attractive in relation to bills. There had been a dis cussion about the question of the September rights, which on a current basis yielded more than Treasury bills, and consideration was being given to buying some of those rights in the market today. At least, the Management of the Account would be reviewing the matter to see if that might possibly help the situation. The intermediate area seemed to be taking care of itself, and the Account did not contemplate doing anything there, while the long end was steady. The tentative approach was to stay out of the market for the time depending on circumstances, to give it a touch if needed being but, to help the over-all atmosphere. Mr. Mills said the impression he received from the report the Committee might be sidetracking on market conditions was that that it was the System announced Last Friday, when the main issue. securities market, the sectors of the Government intervening in all this morning in the but reports response was satisfactory, initial as to whether raised doubt journals the financial and newspapers in the announcement. it took to the position living up System was the greatest help likely the that very to the thought brought him This now open in its offering give the Treasury System could that the
to subscription would be to take a more positive attitude toward the longer end of the market, particularly those longer issues that appeared to be drifting this morning. This would mean that the Desk would invite offers on selected issues and acquire, within limits of prudence, the longer issues as additions to the System Account, with the knowledge that this would be an experiment. However, if the experiment proved successful it would give a tone and depth to the longer end of the market which would rapidly com municate itself as announced System policy to the short end and thus reduce the problem of assisting the Treasury. As he had said, this would be an experiment and, in the event of a higher level of prices in the longer end, the Account might have to recede from its position. matter was the immediate problem of the However, to him the critical this hour the greatest support that the System Treasury, and as of be to take a positive position in the longer end could give would of the market. he thought this involved a Martin stated that Chairman 3-1/2s were below par last Friday, they matter of judgment. The be entitled to some yesterday, and they would went to nearly 101 The question was the market at all. without affecting reaction that had to be made. was a line of judgment how much, and that view of Mr. Mills concurred in the not say that he fully He could give tone to the issues would up the longer-term that marking
market because they were marked up fast on Friday after the System's announcement. Mr. Rouse said he thought Mr. Mills was probably correct in terms of the effect of operations such as he proposed. However, there was the problem of the price reaction to the announcement on Friday. Thereafter, and continuing through yesterday, there was a continuous and orderly market without System participation. Going on from here on any substantial basis would raise the very serious question of how to face the situation afterward, and that was a problem he had not resolved in his own mind. Mr. Mills was probably in saying that the biggest help to the Treasury would be across right the-board action in bonds, but he (Mr. Rouse) would be reluctant to undertake such a program because of the situation that could develop after the books on the Treasury offering were closed. that after listening to the comments of Mr. Hayes stated Martin, and Rouse, he leaned to the view that the Messrs. Mills, of this and that the big problem was the System was in the middle be a very serious failure. Within Treasury financing, which could a little along the lines reason, he would lean toward experimenting the essence. If some he noted, was of Mills suggested. Time, Mr. lines--and here he was not referring thing could be done along those would appeal to him. pushing prices up rapidly--that to a matter of judgment. stated that it was Martin again Chairman and do what he thought must make up his mind The Account Manager
would be helpful. Referring, however, to the current price level of the long-term bonds, for example, the 3-1/2s, the Chairman ob served that it would be hard to get down from that area if the Account got loaded up with bonds. The best thing for the Treasury, he said, might be to pick up attrition with a bill offering, rather than to make a market that might not hold. However, the Manager must decide. Chairman Martin also stated that he had told Under Secretary of the Treasury Baird that he would inform Mr. Rouse of the view Mr. Baird had expressed this morning that the System was not doing enough in the when-issued securities. The Chairman then said that he did not think it should be assumed that the market could be remade in a period of two or three said he agreed completely. Mr. Irons also days, and Mr. Robertson he questioned tampering with the expressed agreement, stating that market for a day or two. To do so, he felt, would only compound and Shepardson indicated Messrs. Robertson, Balderston, the problem. they concurred in Mr. Irons' comment. that then said that the attrition might be extremely Mr. Hayes which it was the System's was the extent to large. The question within reasonable limits. to keep the attrition responsibility would have a moral whether the System Mr. Irons inquired if it were to go into the long to maintain a price level obligation
market now as suggested by Mr. Mills. Mr. Rouse stated that he saw no moral obligation. By going in on a large scale the System might be accused of rigging the market for the Treasury. That was on the assumption that, following the System's withdrawal, the bond market might drop off somewhat. Mr. Rouse said that he would have no quarrel with going in if the market began to fall, that is, buying to steady the situation. However, before going in in a wholesale way he would like to have an expression from the Committee. Chairman Martin said that personally he thought it would be a mistake to go in wholesale, for the System could then legitimately be accused of rigging the market. The System went in to correct a disorderly condition, and he did not think there was justification in pushing the market up to create confidence. Marking up the market was a different matter from a steadying operation. Mr. Hayes said it seemed to him that in a way the Committee was not facing up to the real problem. The System went into the market because of a disorderly condition, there being an absence of and long-term bonds. At the same time bids for the intermediate disorderly tendencies could the Treasury refunding. The there was it was today, but there market stayed the way be corrected if the problem the and that was another extremely high attrition might be Committee must face. is always faced that the System Martin commented Chairman up attrition into picking not be panicked and should with that problem
in advance. On the other hand, if the market did not take the issue, the System must consider financing the Treasury by buying what was left over. That would be a problem confronting the System for a period of several months unless conditions should change. It would be difficult to find a middle ground, and the problem must be faced up to by the System. Mr. Rouse then stated that he was planning to go ahead as indicated and that he would do some touching up in the longer end of the market if that seemed advisable. Chairman Martin noted that the refunding might turn out a lot better than some people expected, and Mr. Rouse reported finding encouragement in the roll-over decision made by a large public utility. Mr. Robertson then commented that if touching up, as used by Mr. Rouse, meant steadying the market, that was fine. If it meant marking up prices, he was against it. Mr. Rouse replied that he thought his position was clear. was to make purchases in the longer-term market in a His intention to drift down but he would not push prices modest way if it began up. indicated that action along those Members of the Committee lines would be agreeable to them. In a concluding comment, Mr. Larkin stated that System pur now well over $100 million. securities today were chases of when-issued
meeting then adjourned. The