July 29, 1958 FOMC Minutes

FOMC minutes

his comments meant that he would favor entering the market at the 3-3/4 per cent level, Mr. Balderston said that he would put his answer in terms that he would not want to see "the cat's tail cut off inch by inch." Mr. Vardaman then stated reasons why he felt that the ultimate level of rates might be higher than suggested by Mr. Balderston. For these reasons, he said, he would want to think a long time before stepping into the market at the 3-3/4 per cent level and offering encouragement that the market would stick at that level. Mr. Balderston commented that a 4 per cent yield for the mean a price of 90, and that he thought a drop to 3-1/2s would such a price would mean a more disorderly market than could be tolerated. Chairman Martin raised certain questions about the likeli selling at present market levels and about hood of institutional of a situation of panic developing. the rumored possibility that he did not think it was the level Mr. Hayes commented that was disturbing to as much as the lack of a market of prices portfolio of a bank or If he were managing the public psychology. would be slower in going into company, Mr. Hayes said, he insurance agreement with Martin expressed next time, and Chairman the market that comment.

In further discussion of the questions raised by the Chairman, Mr. Vardaman said that he could not imagine holders dumping securities, for the tax-saving stage was now past. A more likely prospect was a virtual suspension of trading, follow ing which trading might be renewed on a more realistic basis. Mr. Hayes said he saw a big difference between where rates might go under inflationary psychology and where they might go in the event of a shooting war. It was quite clear to him that in the latter event yields could go up to a per 4 cent basis, but he was not sure whether that would be the right rate. At present, he noted, yields were already in the upper part of the range established over a 50-year period. Additional comments were to the effect that at a certain level it would be hoped that a self-correcting movement would occur in the market. Mr. Allen agreed with Mr. Vardaman in thinking that present holders of bonds would not be apt to get panicky and that they would tend to sit tight, knowing that they had good bonds. That, he felt, would be true in the case of banks holding the 2-5/8 per cent bonds, at least until a strong loan demand developed. Mr. Bryan returned to the possibility of a failure of today's issue and use of the direct borrowing authority, if neces Treasury embarrassment. He asked whether such sary, in order to avoid acute a course would not be less shocking to the market than for the

System to bail out the Treasury with unlimited funds. During a discussion of that point, Mr. Hayes commented that one could not look with any sort of equanimity on the failure of a Treasury financing, and Chairman Martin expressed agreement. Mr. Hayes also made the comment that every dollar the System put into the market last week had saved more than a dollar in the way of at trition. When some doubt was expressed by Messrs. Vardaman and Robertson, he said that without question the System operations had caused a number of people to exchange. At this point Mr. Rouse, who had left the room to talk with the Trading Desk, returned and said that although there was not too much selling of securities, buyers continued to be missing from the market. However, the market had not gotten any worse; in fact, it A dealer's survey indicated that the might be a little better. the survey were subscribing to a little large banks included in anticipation certificates. 1-1/2 per cent tax $3 billion of the over of the New York the Treasury, a representative At the request of City banks informally some of the New York Bank was approaching situation there line on the and some on their plans for information the next hour. in might be available fore telephone meeting that another then stated Chairman Martin a.m. to at 10:45 morning held tomorrow would be of the Committee

appraise early developments in the market. The meeting then adjourned. Secretary