July 29, 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 29, 1958, at 10:00 a.m. 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. Vardaman Messrs. Erickson, Treiber, Allen, Johns, and Deming, 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. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Daane, Hostetler, Marget, Roelse, Walker, Wheeler, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Assistant Secretary, Board of Mr. Kenyon, Governors Associate Adviser, Division of Mr. Koch, Statistics, Board of Research and Governors Chief, Government Finance Mr. Keir, Acting Section, Division of Research and Statistics, Board of Governors Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York
Messrs. Ellis, Jones, and Tow, Vice Presidents of the Federal Reserve Banks of Boston, St. Louis, and Kansas City, respectively; Mr. Baughman, Assistant Vice President, Federal Reserve Bank of Chicago; Messrs. Anderson and Atkinson, Economic Advisers, Federal Reserve Banks of Philadelphia and Atlanta, respectively; and Mr. Litterer, Business Economist, Federal Reserve Bank of Minneapolis Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on July 8, 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 July 8 through supplemental report covering commitments executed July 23, 1958, and a Copies of both reports have been July 24 through July 28, 1958. placed in the files of the Federal Open Market Committee. on open market operations, Mr. Rouse stated that Reporting everyone present had followed market developments with particular The three-week period since the last meetinterest in recent weeks. a short-lived rally following the Treasury's ing had opened with million of the 2-5/8 per cent that it had purchased $589 announcement be retired. This was million of which would bonds of 1965, $5 of the Middle East crisis however, by the news quickly followed, of improvement in business together with further evidence which, by liquidadeclines heightened substantial price led to conditions, that since the Mr. Rouse reported speculative positions. tion of
last meeting total System purchases of Government securities other than bills amounted to $1,265 million on a commitment basis. This included $1,090 million new 1-5/8 per cent certificates on a whenissued basis and $175 million notes and bonds, of which $110 million were September rights. The System purchased $74.5 million bills in the market while an additional $30 million were taken into the Account on a swap with a foreign account. On the other hand, the System Account made commitments for the redemption or sale of $704 million bills during the three-week period. Mr. Rouse wont on to say that the money market had been generally easy, although there were one or two days earlier in the period when the Federal funds rate reached 1-5/8 per cent. He the amplified volume of free reserves in the banking stated that not seem to make any perceptible difference in market system did The early reception of the 1-1/2 per atmosphere during the period. satisfactory. There was some tax anticipation certificates was cent the rate might be on the low side, feeling at the New York Bank that that the terms were satisfactory. people seemed to think but market the Government securities went on to say that Mr. Rouse some issues off as much as 1-1 1/4 market had a bad day yesterday, with in size, were largely from specuThe offerings, mostly small points. The market absence of buying. there was a virtual sources, but lative Mr. Rouse reported trading yesterday. further in moonlight declined
that the average issuing rate in yesterday's bill auction was .98 per cent, with the stop-out running to slightly above 1 per cent. At the request of the Chairman, the Secretary reviewed the telephone meetings of the Committee held during the period from July 15 through July 25, 1958, the minutes of some of which had not yet been distributed. He referred particularly to the action taken on July 18 authorizing the Manager of the System Account to buy for the Account in the open market, without limitation, Government securities in addition to short-term securities, and to the action taken on July 24 terminating that authority. In view of the latter action, he said, the Management of the Account was now operating under the directive issued by the Committee at the meeting on July 8, inquired whether there was any question about Chairman Martin by the Secretary, and no of the July 24 action, as stated the effect questions were raised. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during July 8 through July 28, the period 1958, were approved, ratified, and confirmed. distributed under of the staff memorandum In supplementation the following statement Mr. Young presented of July 25, 1958, date on the economic situationt
Domestically, springback of economic activity has been impressive, so much so that it now looks as if April will mark the recession trough and May the first month of revival. In industrial countries abroad, the situation looks stronger than earlier reported, with possibility that depressed industries such as steel and textiles now may be a bit on the upgrade. While Middle East war threats have not resulted in scare inventory buying, according to district reports, shift towards inventory accumulation because of stronger final demands must surely be part of the explanation of recent pickup in output and improvement in the labor market. For some months, the equity market has reflected investor expectations of inflationary revival. Recent stock price and trading behavior would seem to indicate that latest information on financial factors--the very high current rates of time deposit and monetary expansion, the continued ease of bank reserve positions, the general state of abundant liquidity through the economy, and the Treasury's large deficit--is being interpreted as confirmatory of inflationary expectations. Any other interpretation of recent stock market action is hard to make rational. Second quarter earnings reports for the 214 manufacturing companies so far reporting show combined earnings 38 per cent below the second quarter of 1957 and up only 2 per cent from the first quarter of this year. As to details: The preliminary GNP estimate for the second quarter shows modest rise from the first quarter, with about the same rate of inventory liquidation for the two quarters. The estimate of inventory liquidation, in the light of other evidence, looks high so that later downward revision of the inventory liquidation estimate would not be surprising. Evidence accumulating on industrial production for May broad range of increased output reported and June confirms the at the last meeting. Even equipment and ordnance industries, which had been declining for more than a year, experienced Output in consumer lines was at a rate only 5 modest rise. of materials and parts was under a year ago. Output per cent output rose. New orders also up sharply, and farm machinery have edged up in the past sixty days. for machine tools that steel activity and automobile It now appears only a seasonal decline. in July will experience assemblies output in many other continuing to feature With strength one point rise possible that a further industries, it seems
in the index of industrial production will be recorded for July. Latest data on the labor market in May and June also confirm broad strengthening of employment demand. The June rise in unemployment was about seasonal and was mainly accounted for by the addition of students and graduates to the labor force. June unemployment among workers 25 years or more of age stabilized, and long-duration unemployment declined. In July, initial claims for unemployment have declined further--to about a third ahead of a year ago compared with three-fifths ahead of last year in May and June. Incidentally, the longer hours worked per week in May and June raised sharply average weekly earnings in manufacturing. At $83.10, June weekly earnings averaged $2.30 above April and were higher than any month last year. Construction activity in July is currently estimated to be rising further, with residential up sharply, public construction up some, and industrial construction again down. Contract awards just reported for June show the highest volume recorded for any single month on record--an eighth higher than in May and almost a fifth higher than June a year ago. In June, one out of three housing starts was governmentally underwritten, compared with one out of six such starts in the first quarter. Requests for FHA and VA appraisals are still rising in July. Mortgage funds now are reported to be generally available for FHA financing and available in about half of the metropolitan areas for VA financing. Downdrift in mortgage rates has apparently halted temporarily, but the wider gap between bond and mortgage yields established early in the year still prevails, making mortgages very attractive to lenders. Personal income, which at $352 billion in June was about back to the level of last August, is confidently estimated to be rising further in July. This July rise is reflecting the pay raise for Federal employees, with full impact of the retroactive increase, plus additional benefits to unemployed workers under the Temporary Unemployment Compensation Act, wage payments generally for more hours worked plus higher and more employed workers. adjusted, hit their store sales, seasonally Department Subsequently, they have risen recession low in February. steeply. The preliminary level estimated for July puts department store sales about one per cent higher than a year ago. Automobile sales in the first twenty days of July were clearly improved from the first twenty days of June, running
a fifth under last year compared with over a fourth less in the first six months. With dealer stocks further reduced about 20,000 units, manufacturers have raised somewhat their production schedules for July. Consumer instalment credit, from preliminary indications, continued to liquidate in June, though at a somewhat slower rate, again mainly due to a reduced origination of new car paper in automobile financing. Repossession and delinquency rates, though higher than a year ago, have shown persistent downdrift in recent months. The decline in foreign demand for American exports has apparently leveled off, and perhaps demand has revived moderately. Figures for May, the latest month for which a report is at hand, show fairly consistent marks of pickup. Meanwhile, American import demands apparently continue to hold steady. Crop prospects continue to indicate a harvest equal to peak years. Net farm income for the first six months was the highest since 1953 and over a fifth ahead of the first half of last year. Average wholesale prices have risen half a per cent since mid-June, wiping out the decline from the March peak. Especially important in the recent rise has been the advance in prices of industrial materials. Price increases have occurred for scrap metals, copper, tin, rubber, wool and cotton textiles, hides, plywood, coal, and fuel oils. The average of finished goods prices has apparently held stable; one noteworthy price advance, however, was a 3 per cent increase for automobile tires. Farm prices since mid-June have experienced some decline but less than in the preceding month. The decline this past month has reflected lower prices for livestock and some further decline in fresh fruit and vegetable prices, offset by a modest advance in grain prices. consumer prices rose fractionally again in June. Average for entirely by a moderate The further rise was accounted The July index of advance in price for services. further prices is expected to show little change from June. consumer there has evidently been some Abroad, in Western Europe, activity from the first to the second decline in industrial liquidation of steel and textile quarter, mainly reflecting up, there is now other demands holding inventories. With over the balance of with respect to activity more optimism in recent months Canada and Japan, activity the year. In the situation is moderate rise. Elsewhere has been showing
not apparently worsening, except financially; inflationary problems of many development and material areas continue to be acute. Mr. Thomas made the following statement with regard to financial developments: During the past two weeks System operations have been largely concerned with techniques of market manipulation at the sacrifice of the objective aims of adjusting monetary availability to current economic needs. Whether and how these operations might have been avoided present questions of judgment and opinion to which there are no precise answers. The important problem now is how to return to operations directed toward the major objectives of System policy. The principal reasons for the weakness in Treasury bond prices, which occasioned the support action, are varied but fairly clear. They include: the technical position of the market resulting from the large build-up of speculative positions in bonds by temporary holders led on by expectations of continued declines in interest rates, the large volume of Treasury borrowing in prospect for coming months, the growing feeling that incipient economic recovery will be accompanied by rising interest rates; and finally the uncertainties arising from mid-East difficulties. The middle two of these factors--economic recovery and heavy Treasury borrowing--are likely to be continuing influences for many months ahead. Their conjuncture presents problems for Federal Reserve policies. The task before this Committee is to adjust its policies to deal with these forces. They will presumably bring about expansion in credit demands. Unless these demands are met from current savings or existing liquidity, there will be pressure for increased bank credit and also for rising interest rates. Any attempt to keep interest rates from rising would hamper the allocation processes of credit markets and interfere with the use of existing savings to meet credit demands. It would also cause an expansion in bank credit and in the money supply sooner or later become inflationary. Interest that would rates should be permitted to adjust to market forces, with in bank reserves than is needed for susno more expansion tained economic growth without inflation.
Under pressures that have already developed, bond yields have risen sharply since mid-June. Long-term Government bonds rose from an average of 3.14 per cent to 3.40 per cent, and Treasury issues maturing in three to five years rose from 2.1 per cent to over 2.50 per cent. Outstanding high-grade corporate bonds rose more moderately from 3.56 to 3.70 per cent. Offering yields on new issues have had to be raised. Bond yields are higher than at any time this year and are generally above yields that prevailed prior to late 1956. Short-term rates have fluctuated somewhat but those on Treasury bills have continued at a low level as investors have sought liquidity. Coupon rates on recent new short-term Treasury issues have been higher than the 1-1/4 per cent rate on the June offering. Current estimates of Treasury borrowing needs, after allowance for market support operations and actual and prospective attrition, indicate borrowing of $9 billion or more by the end of December. These can be covered by the $3.5 billion tax certificates now being offered, by an additional $3 billion of borrowing around mid-October, by an increase of $100 million each in ten of the weekly bill issues at some time during the autumn, and possibly by another cash offering of some $2 billion in December. This volume of borrowing, together with a reduction of about $4.5 billion in the Treasury's cash balance, would cover a half-year cash deficit of $10 billion and cash redemption of outstanding debt of About $4 billion (including some agency issues). It is estimated that even with an economic recovery equalling that of 1954-55, the Treasury's cash deficit for this fiscal year as a whole would be around $9 billion, but a higher figure is likely. To cover debt retirement that will occur in the last half of the fiscal year substantial additional cash borrowing would be necessary in period. Assuming a reduction of about $5 billion that in the exceptionally large cash balance of the Treasury of the fiscal year, the net increase in at the beginning debt both for the first half and for the fiscal the public year as a whole would be about $5 billion. The absorption by investors should not be an of this amount of securities insurmountable obstacle, although the flotation of perhaps new issues in the course of the as much as $18 billion of year presents formidable problems. year has been the of this The striking development market by business on the capital large demands continued
corporations, as well as by State and local governments. New corporate issues in July, swelled by the U. S. Steel Corporation $300 million offering, amounted to about $1,150 million, an amount exceeded in only three months of the past two years. Offerings by State and local governments, at $575 million, were larger than had been expected, although less than in several earlier months of the year. These various issues have been successfully floated notwithstanding unsettlement in the Government securities markets, but yields have been higher than earlier in the year. Calendars of new issues for August are light, as is generally the case in that month. With capital expenditures continuing to decline in the months ahead, corporate borrowing should decline, and corporations might also be able to rebuild their liquidity. Common stock prices have risen to new high levels for the year and are only moderately below the peak of a year ago, with trading volume heavy, despite reports of declining corporate earnings. There has been a moderate increase in stock market credit. Total loans and investments at city banks declined by nearly $2 billion in the four weeks ending July 23, following an increase of $3.7 billion in the preceding four weeks. The substantial net increase for the eight weeks compares with no net change in the same period last year. In July of this year banks showed declines in their loans on securities and their holdings of securities, which had increased even more sharply in June. The July decline in business loans exceeded the moderate June increase, in contrast to last year when the July decline was much less than the sharp expansion in June. U. S. Government deposits at city banks declined in the four weeks ending July 23 by nearly $4 billion, slightly exceeding the increase of the preceding four weeks. At least half of the funds thus distributed were apparently used for reduction of bank credit and some went into the build-up of other deposits. Demand deposits adjusted, which had shown little change in June, increased by over $1.1 billion in the past four weeks, in contrast to a small decline in the same period last year. Last year in July there was a much greater than seasonal increase in demand deposits, but most of it occurred at banks outside leading cities. Presumably the increase for all banks in July this year will exceed that of last year. This would raise the seasonally-adjusted figure of the money supply above the peak reached a year ago.
Interbank deposits at city banks have increased somewhat more so far in July than they did in the same period last year, indicating some accumulation of funds by nonreporting banks. The recent growth in time deposits practically ended in July. Member bank reserve needs declined in July as a result of a $360 million decrease in required reserves and a small decline in currency in circulation. Both of these decreases were somewhat less than had been projected on the basis of the usual seasonal pattern, reflecting the previously mentioned seasonally adjusted increase in the money supply. Reserves were absorbed by a reduction of close to $400 million in the System portfolio and by a further gold outflow of a little over $100 million. The gold outflow has slackened compared with previous months, while foreigners have increased somewhat their dollar assets. Weekly average free reserves moved within a range of $450 million to $700 million. They are expected to average about $500 million in the current statement week. Next week, reserves will be supplied by System payment for the new certificates and released by a decrease in required reserves resulting from a continued drop in Treasury tax and loan balances. Allowing for a runoff in System holdings of this week's bill maturities (not included in estimates shown in the table) and other factors absorbing reserves, free reserves may average close to $1.2 billion, in the absence of further System operations. They will be reduced next week by over $200 million as a result of a required reserve rise resulting from the Treasury cash financing, partly offset by other factors. If System holdreduced, free reserves might decline to ings of bills are about $800 million. Assuming usual seasonal changes in demands without expansion, a further moderate outmonetary flow of gold, and some further Treasury cash financing, to continue close to or above free reserves would be likely $700 million until late in October. In order to avoid an undue expansion of bank credit, than that would presumably be required. greater restraint million level would reserves below the $500 To reduce free million of bills in addition for sales of about $300 call maturities this week System holdings of regular to redeeming and next. With the level of reserves prevailing and the large volume of cash redemptions of recent maturing Treasury
securities, funds should be available in the money market to absorb such a reduction in the System's portfolio, as well as to take on the new Treasury offer of tax anticipation certificates. The delicate question is what might be the effect of such operations upon a bond market that is in the process of adjusting to an expected and probably inevitable higher level of interest rates. It is possible that any attempt to retard this adjustment by support operations may only make it more severe in the end. Chairman Martin noted that the next regular meeting of the Committee was scheduled for Tuesday, August 19. In looking back, he thought it was a good thing that the policy directive was not changed at the meeting three weeks ago. However, he hoped that each person in his remarks today would direct attention to clause (b) of the directive. The Treasury offering would be over tonight, and the Treasury then would be out of the market for about two months. Therefore, it seemed advisable in the discussion today to consider what should be done to meet the situation. For clause (b) of the directive, the Secretary had suggested "to recapturing redundant reserves," had in mind "to absorbing reserves whenwhile he (Chairman Martin) he did not feel that market." While with an orderly ever consistent the words "to change in the directive, should be any dramatic there further by monetary ease" seemed to him to be inapprocontributing priate at this time. presented the Mr. Hayes, who then turned to The Chairman and credit outlook on the business of his views statement following policy:
Both current statistical data and the recent improvement in business sentiment suggest that an uptrend in economic activity may now be under way. Considerable doubt remains, however, as to whether expansionary forces will gather much momentum before autumn and whether the recovery will be vigorous enough to result in a satisfactory rate of utilization of labor and plant capacity by the year-end or even in early The crisis in the Middle East has injected major new uncertainties into the outlook, and we cannot ignore the possibility that it may trigger a strongly inflationary trend. So far, however, there is fortunately no convincing indication of such a development. The initial speculative flurry in the commodity markets accompanying the outbreak of the crisis appears to have lost most of its steam, and informal inquiries we have made provide no evidence at all of a rush toward precuationary buying on the part of either business firms or consumers. We discussed this point at last week's directors meeting, and the above view was confirmed unanimously. I might add, just as a matter of interest, that our directors expressed the hope that direct price and wage controls would be initiated immediately if our forces should become involved in actual fighting in the Middle East, in order to avoid the movement which we experienced in the Korea kind of price crisis. likely that at a minimum the heightened It does seem tensions will lead to widespread reconsiderainternational both because of greater emphasis tion of inventory policies supplies in the event of a sudden on the need for ample emergency and because of greater expectation that price now be effected more readily than had preincreases may with the Middle East crisis been considered likely, viously in the rate In my view, slackening serving as a catalyst. liquidation has probably already been a major of inventory together with business to date, the upturn in cause of in final demand, and this trend may be some improvement expected to continue. product, industrial gross national gains in The recent are enhours worked and average employment production, in housing starts, the pronounced upswing couraging, as are and the demonstrated defense orders, in the increase to should continue which spending, of consumer stability rising personal of the influence under a good showing make attitudes. consumer more optimistic and somewhat income may have corporate profits decline in that the Reports
been slowed or even reversed in the second quarter may have encouraging longer-run implications with respect to plant and equipment spending programs. On the other hand, I still feel some concern over the probability that even a rather substantial advance in over-all business activity during the remainder of the year could still leave a relatively high level of unemployment if "latent" productivity gains built into the economy as a result of the recent investment boom are translated into actual gains as the rate of plant utilization rises. There is also a possibility that, in the absence of any sharp forward push in major areas of final demand, the upswing might lose its momentum after a few months and thus fail to maintain sound recovery. The current cash financing of the Treasury is somewhat larger than had been expected before it became clear that an abnormally high attrition in the recent refunding was inevitable. I must confess that I have some qualms as to the rate which has been set for the new tax certificates, as it seems to be uncomfortably close to the market, whereas some leeway would have seemed desirable in view of the experience with the refunding. At least it is a satisfaction to know that the Treasury should now be out of the market until October. It is also good to know that the Treasury is moving now to obtain a more realistic debt ceiling which should prevent a recurrence of last fall's artificial Treasury financing problems. credit, the four weeks to July 16 In the area of bank witnessed a sharp reduction in loans and investments-- to something less than half of the increase of equivalent According to our estimates, the the preceding four weeks. seasonally adjusted money supply at the end of June, an annual rate of increase of 2.7 per although showing figure, was still $1 billion below cent over the December But, with the prospect that the the peak of last summer. to finance the major portion of banks will be called on deficit in the second half of the year, the Treasury's for seasonal loan expansion, the and after allowing adjusted money supply may increase rapidly seasonally year. However, if we view during the latter half of the this in longer perspective, the growth in money supply years 1955-58, even with an increase of, say, for the four average a little over 2 per 6 per cent this year, would does not appear unreasonable. cent per annum, which
As for policy, the growing evidence of business improvement, together with the possibility that the degree of ease prevailing in recent months might produce a very rapid expansion in bank credit and the money supply, raises the question whether we should consider some modification of this degree of ease. My view, however, is that there will be time to consider such a move after an additional month or two of observation, which might permit a better appraisal both of the vigor of the recovery and of the danger of a crisisinduced inflationary trend. In the meantime, we should probably be content to restore free reserves to about the level of $500 million prevailing up to the time of the recent Treasury refunding. (Parenthetically, I might say that while the figures are distorted and we are prospectively running way above that this week, I do not think that in terms of actual atmosphere there has been any material change from the degree of ease prevailing before the recent upset market.) This will undoubtedly call for some outright sales in addition to bill runoffs, and besides bills it may prove useful to sell some of the System Account's certificates to meet this need without unduly depleting our bill holdings. help At the same time we cannot overlook the fact that the Government securities market is understandably still in a very good part on fears of a change in uneasy state, based in monetary policy, and that we may conceivably be faced with a conditions in the coming weeks. recurrence of disorderly the thought that the rise Furthermore, I am troubled by have carried far enough to in bond yields may conceivably process. It seems to me constitute a threat to the recovery should resist any further deterioration in the capital that we and do what we can to promote stability and eventual markets Admittedly I am puzzled as strengthening of these markets. to how this can best be done. and especially in view of Under these circumstances, I would prefer at this time today's Treasury cash offering, eliminating the word "further" to alter the directive by not by monetary ease to "contributing further from the phrase economy"--although it of stable growth of the resumption other change in wording do so or to make some may be well to I would therefore feel at an early subsequent meeting. has been proposed by to adopt the wording that inclined not should avoid at as I do that we Secretary. Believing the contemplate a that we may even any suggestion this time to a change in I would be opposed change in basic policy, in stock market the recent growth rates. Although discount keep this area be well to that it would credit suggests been of such growth has not the under close surveillance,
magnitude as to provide justification at this point for considering higher stock margin requirements. Finally, in view of the continued unsettled conditions in the U. S. Government securities market and the delicate international situation, I think it would be unwise to make any public statement indicating termination of the instructions, publicly announced on July 18, by the Committee to the Manager of the Account to purchase Government securities in addition to short-term Government securities. Mr. Johns said that although there appeared to be evidence, perhaps convincing evidence, that some improvement in business had occurred, was occurring, and might continue to occur, he had not yet been able to reach the conclusion that the time to indicate a change change in policy--had arrived. Although in policy--at least a radical were much higher than would it would appear that reserve projections the case except for the events of the last ten days-- have been would like them to be-- he had the perhaps higher than the Committee reserves--assuming that rapid steps to absorb redundant feeling that be misconstrued. It was anyone knew how many were redundant--might the toleration of some that, at least for a while, his feeling he would be not be harmful, and therefore reserves might redundant move cautiously rather than precipitately. inclined to he had not come to this meeting prepared Mr. Johns said that for reasons which and that, in the directive argue for a change to he felt unsatisfied with the sughe was not able to state clearly, (b) that operations say in clause Committee merely that the gestion absorbing redundant with a view toward to be conducted were going
reserves. Instead of language along these lines, he would prefer to leave the directive about as it stood. He would be a little more inclined than Mr. Hayes to argue for a change in margin requirements. Although some might say that the increase in stock market credit outstanding was not unduly large, it was continuing and had been going on for some time. In the circumstances it might be that the Board could appropriately conclude that it should attempt to slow down the utilization of credit for that purpose. Mr. Bryan made substantially the following statement: Economic statistics in the Sixth District give an increasingly clear picture of economic recovery. It is our judgment that national economic statistics also give the same increasingly clear picture. The matter of overshadowing importance at this time, however, seems to be the extremely grave problem of managing monetary policy and Government finance. It is my own judgment that it would be only the slightest exaggeration to say that we face in monetary policy and national finance a situation of approaching crisis. This situation is comnumber of elements, all of them tending to be pounded of a cumulative rather than self-cancelling. recovery is obviously in process. The 1. Economic process will be stimulated in the next several months as Government spending from deficit finance is piled on top economic recovery and the Government deficits of a natural deposits available for expenditure. The appear as private process of economic recovery, in the light of recent of an upward adjustment in history, creates the expectation interest rates. interest rates upward is The natural adjustment of confidence in the future by a genuine loss of compounded of value. There has been of the dollar as a store integrity and increasingly convincing propaganda continuous, pervasive, is inevitable. That propaganda to the effect that inflation conviction. Such an almost now carries almost universal that the increase of yields on universal conviction means to be greater than would income obligations is destined fixed
be likely as an uncomplicated response to economic recovery. 3. The problem of yields on fixed income obligations is increased by the fact that the banking system has intended to use its increased security holdings and security loans, on some timely occasion, to provide the cash requisite to the acquisition of higher yielding loans. The same is true in varying degree of other investors and investing institutions. This means that we are likely to face a continuing, though probably irregular, attempted liquidation of Government securities from these sources in the next several months. 4. The normal liquidation for the purpose of using fixed income securities as a source of cash has been increased by the revulsion in Government security prices. The revulsion itself has created in both the banking and nonbanking groups a large number of unwilling holders of Government and other fixed income securities. 5. The perversity of markets being what it is, the prospective increase in yields is likely to have the effect of hastening and of increasing fixed income offerings as borrowers endeavor to advantage themselves by getting ahead of anticipated increases in yields. 6. The sophisticated investment public has been shocked by an ill-considered Treasury support operation in the 2-5/8s. The sophisticated investing community has been even more shocked by the System's operation that began on the presumption of correcting disorder but that turned promptly into one of the most massive support operations ever undertaken. The shock has been the greater because the support operation has been so resounding a failure and because it seems to forecast the use of the Federal as a complaisant medium of inflation. We will be well advised in such a situation, I think, not to be deceived by the possibility of temporary rallies or the assurances of bond dealers or possibly institutional investors. The wound to confidence in my opinion goes too deep for simple reassurance or for cure by exhortation. We will do better to listen to the investor who says, "I intend to get out of bonds on the first rally but think I am foolish. I'd probably better dump my bonds now.".. to the investment house that says, "Bonds are out the window who wants to keep his money"....to the banker for anyone who says, "I used to think there was some hope of stopping I guess there really isn't a chance...." inflation. Now,
These are just overheard by chance in a single minor town, Atlanta. What I am trying to say in listing the foregoing points is that, in my judgment, we are facing a very real deterioration of confidence, approaching crisis proportions within the foreseeable future. Under such circumstances, the fundamental problem, both for the System and the Treasury, is the restoration of confidence in the future of the dollar. This will not be easily accomplished, but all other monetary and economic problems pale into insignificance. In approaching the solution to the problem a recognition must be had of certain points: a) We face the real possibility of a radical adjustment of interest rates upward, the more particularly in the longer sectors of the market, and more or less despite anything that the System can do about it. If this be considered an alarmist possibility, we should ask ourselves, "Who wants a long bond, or even an intermediate obligation, if he is convinced that inflation is a continuing certainty?" If it be believed that we can stop the adjustment by supplying unlimited reserves to the banking system, then we should recall that the investment community and a considerable segment of the public at large is now sufficiently sophisticated to realize that our action simply makes inflation the more certain, so that, by an unsupply of reserves in an effort to prevent the upward limited of yields, we confront ourselves with the probadjustment perverse effect, our very action increasing the ability of a apparently in the making. severity of the adjustment that if we stand in the way b) We should also recognize on the theory of nudging or probing or of the market, whether of some preconceived yield, or in an effort, on the basis to do the Treasury a favor, we are sincere though mistaken, a considerable fraction of likely to wind up by monetizing making the revulsion against the public debt and, as said, now a probability, practically a fixed income obligations, certainty. the necessity of getting the c) The Treasury is under deficit of insignificant pronational finances in order. A portions, when related to the gross national product and, an encouragement to economic even desirable as indeed, of disaster when considered now contains the seeds recovery, would call a rapidly developing conin the light of what I fidence crisis. can be done. I think question of what Now we have the that we will not to take is to resolve that the first step
stand in the way of yield readjustments. The faster those come the better. We should assist them by getting free reserves below $500 million and getting them there promptly. Also, at some opportune time the public should be reassured that the System is not going to be an engine of inflation. I do not quite know how you give that assurance except to increase the discount rate at the first opportunity. These steps all entail risks, risks that none of us would have imagined three weeks ago but which must be accepted in order to avoid greater risks. That we are compelled to accept them is the consequence of recent events and recent policy. I am in favor of changing the directive. Mr. Bopp made substantially the following statement: In general, business developments in the Third District continue to show some improvement. There has been a marked change to a more optimistic attitude toward the business otlook. Businessmen report that inventory liquidation has been mostly completed and that employment prospects are improving slowly. The Mideast crisis is reported to have had practically no effect as yet. Businessmen indicate no moves to restock, and there is no evidence of anticipatory spending by consumers. There are reports that labor unions, with contracts coming up would like to delay such negotiations until for renegotiation, the foreign situation clarifies. Several problems confront the System in the realm of problem is to work down the monetary policy. The immediate level of free reserves, now projected at nearly $1.2 billion for the week ending August 6, to a more appropriate level. either liquidation of earning assets or an inThis requires crease in nonreserve liabilities. of bills should be pursued even Substantial liquidation yields might rise to, say, 1-1/4 per cent so long though the money and capital markets unas this does not unsettle the it would seem appropriate to attempt duly. At the same time an increase in its balance at to negotiate with the Treasury for a temporary period Banks to absorb reserves the Reserve of this move is reinforced by as needed. The inherent merit created in support of the excess reserves were the fact that the Treasury financing. An even more difficult problem, though not perhaps as the short-term market operations outside urgent, is whether to purchases and thus become a one-way should be limited
street. If so, over time we will tie up more and more of our resources and thus reduce our ability to restrict. The portfolio of short securities sets the limit to the amount of reserves that can be absorbed through their liquidation. Although the System is not near that limit at the moment, it might be well to consider the possibilities of liquidating other than the shortest issues on appropriate occasions, as in periods of restraint, rather than defer such liquidation until the portfolio of bills has been exhausted. With regard to the directive, I would be in favor of a change of the general type mentioned by Chairman Martin, that is, to absorb reserves consistent with an orderly market. Mr. Fulton reported that in the Fourth District there seemed to be a change in sentiment, a feeling that the last quarter of the year would be materially better than the present level of activity. The steel industry, he said, was reporting a better July than it had at first anticipated, with some orders coming in for August and September delivery, particularly in the automotive field. It was reported that all segments of users were buying some steel, mostly as the result of over-liquidation of inventories. However, unemployment was not being relieved to the extent that the increase in activity would seem to warrant. It would seem that there had been some additions to productivity and, as Mr. Hayes had said, the unemployment figures might be something to conjure with for some time. Capital take the same number of were not going to investments, it seemed, men as heretofore. open market operation in said he agreed that the Mr. Fulton which the System had just participated was a saving one--or designed
to be to some extent a saving one--for the Treasury. To retain in the System Account indefinitely the securities which had been purchased would deprive the System of a flexibility that it needed. Therefore, he would favor running off those issues, or other issues in the short-term sector, and he felt that those in the market would understand such an operation. Inasmuch as the Committee had announced that the System was going into the market for a definite purpose, there should be no one-way street and the System should have the right to come out again. Mr. Fulton said he concurred in the feeling that the increase in stock market credit had been very substantial and that an upward requirements might be appropriate. It would have revision in margin of the stock market and it would a sobering effect on the gyrations long-term end of the bond market. have a salutary effect on the the System should absorb the Mr. Fulton went on to say that as rapidly as possible reserves in the banks accumulation of large be dormant at present market. They might without upsetting the but they would they were created, with which of the rapidity because should be therefore System operations very long and stay that way not reducing them very materially. aimed at appropriate to change it would be Fulton said he thought Mr. of the diof some the lines along possibly policy directive, the past which in the at times had issued the Committee that rectives
indicated a desire to sustain growth in the economy without encouraging inflationary influences. Mr. Shepardson said that Mr. Bryan had stated eloquently his own feeling about the present situation. As far as the general economy was concerned, he thought that there had been clear evidence of some change in direction. While one could not yet say that developments were reaching an explosive point on the upside, the evidence of a change in the offing had exerted an effect on the total market situation. With respect to the exercise that the System had gone through during the past several days, he did not understand at the time, and he still did not see, to what extent the System had helped. However, regardless of the effect of the operation had put the System in a position Treasury financing the itself as promptly as possible. from which it must extricate said that he saw a great deal in Mr. Bryan's Mr. Shepardson economy moved into a downconfidence. When the thesis of a loss of turn, the System had moved aggressively to make possible a recovery, time it must that at the appropriate frequent statements but with side. The on the other with equal vigor to move have the courage to move made it necessary he said, the last week, of developments the redundant reserves, to absorb some of at this time vigorously to itself limit not necessarily should the Account so doing and in As be taken. that could action any appropriate but use bills
quickly as possible, the Committee should try to recapture the position that it had lost in this recent period. Mr. Shepardson said that he would favor a change in the policy directive along the lines that Chairman Martin had indicated. Mr. Robertson made the following statement: I have spent some time trying to ferret out the good aspects of such a miserable bit of monetary-policy backsliding as has been witnessed over the past ten days, and have found some in the form of lessons: 1. Not only must we be on our guard against panicky reactions in such circumstances--all of us, I suppose, are now only too alert to that danger--but we must also beware of being so wary of that hazard that we do not act with sufficient speed and decisiveness when the situation really demands it. We responded too readily to the cry of "Wolf!" on this occasion, and we may do so again; but such experiences must not cause us to disregard the warning signs and remain passive and complacent when the situation actually calls for vigorous measures. 2. The experience indicates the need for being more to the Manager of the Account so explicit in our directions that we cannot be so easily maneuvered from an action "to one designed to "support a a disorderly market" to correct Treasury issue." the futility of "support" The experience indicates reserve supply at a time when we actions. We add to the by such action we do not be reducing it and still should amounts, which, of course, prevent attrition in substantial action. At the same time reason for the is the motivating the wrong time we to the money supply at exactly by adding monetary policy an efdifficulties of making multiply the a proper economic instrument in maintaining fective equilibrium. 4. The experience also shows how easy it is to slip-- gone off the wagon--and do things which you once you have which at the time seemed try to justify but later hate to We should not of course, to "swaps." worth doing--I refer, engage in swap transactions even when, as in this case, it to do so. to be to our advantage seemed past ten days behind experience of this We must put the out on the basis of the lessons with energy us and strike the straight and narrow path, and rectitude to get back on
the path of monetary righteousness--a path which permits monetary policy to be most effective in keeping the money supply in proper relationship to economic conditions, without being warped out of shape and effectiveness by being used for such purposes as underwriting Treasury issues and altering interest yields and prices in various segments of the Government bond market in accordance with some preconceived pattern which does not seem to jibe with the forces of the market place. If we believe in a free market--as I trust we do--we must permit it to function even when its results seem to veer from our own concept of a proper pattern and even when it seems to be creating difficulties for the Treasury in its financing program. Mr. Robertson said he would take it for granted from the reports of Mr. Young, Mr. Thomas, and others around the table that were on the upswing and that the economic conditions unquestionably ease, as indicated in the current Committee's policy of monetary directive, was no longer appropriate. As to operations, policy a tightening to the fullest extent possible by there should be securities. Perand other short-term and sales of bills runoffs in reserve requirements by changes should be augmented haps this view would indithe longer-run However, and margin requirements. might be now; they not be appropriate actions might that those cate for vigorous call pressures when inflationary later on needed moves. countering a had advocated those who agreed with said he Mr. Robertson "to suggest and would directive the policy (b) of in clause change with an orderly extent consistent to the fullest absorb reserves need for on the put emphasis would kind of that Language market."
for absorbing reserves but would provide also for maintaining a consistent position. Mr. Mills said that the month of July 1958 was going to be recorded in the history of the Federal Reserve System as a turning point. None could argue that this was not a period that would take hard thinking and require hard decisions. Mr. Mills said that he shared all of Mr. Bryan's concern about the deterioration of confidence in the financial community. However, his own approach to the correction of that kind of a situation was exactly opposite, and he would like to make the case for intervening to support the Government securities market. Mr. Mills then made the following statement: Open Market Committee is faced with the The Federal difficult decision of whether to prices on U. S. Government securities to (1) allow a new trading level unassisted by Federal find Reserve System action; or support the U. S. Government securi(2) vigorously ties market. alone, the U. S. Government is argued that if let It to a new low level of market will settle down securities will resume actively. In prices at which two-way trading out of the marReserve System of keeping the Federal favor drop that has argued that the drastic ket, it is further bonds reflects of U. S. Government place in the prices taken rates to a of long-term interest a realistic alignment international emergency and protracted period of possibly policy of credit Reserve System to a Federal to a return that pressures inflationary control incipient restraint to rising business along with their appearance are making favor a hands-off those who Fundamentally, activity. System policy action place approach to Federal Reserve of a growing threat of the ahead considerations economic financial emergency.
In the light of the present situation and especially because of yesterday's further substantial drop in the prices of U. S. Government securities, there are cogent reasons for attacking the financial emergency in advance of developing Federal Reserve System credit policy solely for economic considerations. In my belief, the Federal Reserve System would err in allowing prices for U. S. Government securities to suffer further serious reductions or to temporize with such a situation by half-hearted support actions undertaken at succeedingly lower stages in the prices of U. S. Government securities. Such a policy would tend to force U. S. Government bond prices steadily lower, increase the volume of offerings, and threaten a market panic, all of which would make the Federal Reserve System's problem of correcting a badly disordered market condition most difficult. Moreover, to delay action in supporting the U. S. Government securities market will stand to aggravate the difficulty of handling the substantial volume of reserves that would presumably have to be injected into the commercial banking system at some future date when System action to support the market could no longer be put off. As a practical matter, the Federal Reserve System's already been complicated by the fact that problems have banks have extended the maturities of so many commercial S. Government securities and may their investments in U. such positions by the market deprecianow be frozen into which depreciation would grow tion in their holdings, U. S. Government securias the prices of further as long The financing problems of ties should continue to fall. are involved in this situation the United States Treasury banks have become the extent that commercial in that to in U. S. Government investment positions frozen into their themselves from such their power to free securities, or either as underwriters order to engage in investments is Government securities of U. S. in new issues investors Federal Reserve as the except eliminated, correspondingly undesirable and follow the economically System should the comsupplying of constantly alternative inflationary in order to with new reserves banking system mercial in U. S. Treasury financing support their participation operations. System action Reserve Federal considered, Everything securities U. S. Government the support to vigorously at this time. called for market is
Mr. Vardaman said that he agreed with Mr. Bryan in his excellent photographic exposure of the situation with reference to the paramount need for restoration of confidence, and assurance that the System will not become an operational aid to inflationary pressures. He also agreed with Mr. Bryan's analysis of the effects of our recent operations in the Open Market Account; and he believed strongly that the Federal Open Market Committee should allow the pattern of interest rates to reach, in as orderly manner as possible, a logical level, in view of the economic recovery apparent, and in view of the international situation. Mr. Vardaman said, in passing, that he would like to express his opinion that telephone meetings were generally unsatisfactory, and even dangerous, and should be avoided except under real emergency conditions, and stated that he did not think that a temporarily disorderly market would ordinarily be a sufficient cause for such a meeting. He pointed out that, in his opinion, these telephone conferences had a potentially panic aspect which was not fair to the participants, since the participants were denied the advantage of meeting face to face with their other members and allowing a full discussion of the grave problems. In substance, he felt that any problem which was serious enough to warrant a telephone meeting important that the situation should be dealt made it all the more gathering of the members of the Committee. with by a personal
As to the directive, Mr. Vardaman stated that he felt the words "further" and "ease" should be eliminated, and suggested that a proper wording might be something like "to contributing by appropriate monetary policy to sustainable growth of the economy." He would not make any reference in the directive to orderly market conditions or to absorbing redundant reserves. Mr. Leach said that favorable economic signs were widespread in the Fifth District. The cotton textile industry had ad encouraging market developments in recent weeks which portended a better second half, bituminous coal was facing an improved demand situation, and cigarette production continued to do well. In fact, manufacturing man-hours figures for June showed gains in virtually every line, as did employment in nonmanufacturing industries. Despite smaller acreages, the outlook for 1958 farm production was considerably improved over 1957's record. Department store sales for July were now esticent above June for the best monthly total this year, mated at 5 per due partly, but not entirely, to increased trade in the District of The supply of funds the Federal pay increase. Columbia following sufficient to exert downmortgage loans continued for residential rate on conventional loans on rates. The most common ward pressure Reserve Bank's concent but some of the to be 5-1/2 per appeared cent on prime loans. as low as 4-3/4 per tacts reported rates said, with respect to policy, that he was worried, Mr. Leach increases in the meeting, about further at the July 8 as he had been
liquidity of the banking system and the economy if the System continued net free reserves at the $500-$600 million level. Moreover, there was stronger evidence now than three weeks ago that there had been a definite change in economic conditions and prospects since the current directive was adopted on March 4. In early March the economy was in a rapid decline which had persisted for several months, with no reversal in sight. Accordingly, a policy that was appropriate then seemed clearly inappropriate now, when economic developments were increasingly favorable. He would not like the record to indicate that the Committee had seen no change in economic conditions between March and the present time. that in his judgment the System had Mr. Leach went on to say The financial stage had been set already supplied ample liquidity. and in his opinion recovery was under way. for economic recovery would be highly dangerous because it Providing redundant liquidity the future, and he would inflationary pressures in would aggravate a shift to less ease. Admittedly, such a change therefore favor because of immediate future implement in the be difficult to would would be made payment that and the large Treasury financing current the System Account purnew certificates that on August 1 for the would be that there it now appeared week. However, chased last and he confinancing next Treasury before the an interlude quite as practicable. as soon less ease move toward to it imperative sidered
This implied net free reserves below the $500-$600 million level that had been maintained up until now, and it made a change in the directive highly desirable. In considering such a change the Committee might want to look at the outstanding directive and see what about that directive it did not like. For example, it now appeared that resumption of economic growth started in April or May. Also, consideration might be given to whether the word "ease" should be continued in the directive; personally, he thought that it should be continued because the upturn was still very small and there was still a long way to go before achieving complete recovery. One way in which clause (b) of the directive might be worded to reflect a change in emphasis toward less ease would be the following: "to contributing by monetary ease to recovery of the economy without creating redundant liquidity." In making these comments, he was assuming that the System would endeavor to recapture as soon as reserves that would become available on August 1. possible the situation seemed to stated that the economic Mr. Leedy which policy should be of the direction in provide clear evidence tended to obscure the picture today elements in but that other moving he referred to the In particular, the economic considerations. by the situafed in part that was rampant, psychology inflationary for the balance needs to the Treasury's East, and in the Middle tion of the support to reconcile it was difficult To him, of this year.
Government securities market with the System's responsibility to provide only the requirements of the economy as far as the money supply is concerned. It seemed to him that the Committee would have to face up to that problem and make a very positive decision. He was not going to make any judgments from hindsight as to what had been done recently, but it seemed to him that from this point forward, with the Treasury having announced that it would be out of the market until October, the System should move as quickly as it could to get back into the position that prevailed before the market operations took place. In saying this, he recent open difficulty due to the unthat there might be great recognized the feeling that continued the market, but he had certainties in by way of support operathe System in the market participation by intended. In other opposite to that might have an effect tions contributing to inflationary might actually be words, the System psychology. directive must that the policy the view Leedy expressed Mr. what was intended reflect accurately going to if it was be changed The operation August 19. meeting on the Committee now and between of the of some absorption mean orderly mind would had in that he circumstances In these possible. the extent to reserves redundant "with the following: (b) for clause as a possibility had drafted he of those in excess funds of reserve absorption the orderly view to a
required to provide monetary ease for the resumption or promotion of stable growth of the economy." He expressed the view that as soon as possible, consistent with the market situation, an announcement should be made to the effect that the directive authorizing the Manager of the Account to operate in all sectors of the market had been withdrawn. Such a statement, of course, would have to be carefully worded. It should point out that Committee policy continued to be one of operating in other than short-term securities if necessary for the correction of a disorderly market. It seemed to him that the very fact that public notice had originally been given might cause some uncertainty in the market and that in fairness to those dealing in the market word should be given that the directive announced on July 18 was no longer in effect. Perhaps, Mr. Leedy said, the time was approaching when there ease than there had been. For the next three weeks, should be less back to the point before the if it were possible to cut however, he felt that that would operations took place, recent open market appropriate to take it might be well. Afterward, be doing extremely lesser degree of ease should be the policy. a look to see whether a District businessof Seventh that a survey Allen reported Mr. East had as in the Middle that the situation bankers indicated men and There or conditions. plans on business any, effect little, if yet had should end liquidation that inventory he said, to be agreement, seemed
soon, because it had proceeded for so long without a corresponding drop in gross national product and because the Middle East situation and the prospects for further inflation would bring about at least a review of inventory situations, and possibly actions. Local producers of steel and copper products reported that the pickup in orders which was reported in May and June was continuing. A price boost for steel of $5 or $6 per ton was still generally expected, probably in August. Opinions expressed at a meeting of Chicago area housing economists on July 23 confirmed improvement in that sector. New mortgage lending by savings and loan associations was running well below 1957 earlier in the year but was now somewhat higher. Employment trends appeared to be moderately upward in all States in the district except Michigan, although it was doubtful that any State other than Iowa was witnessing better performance than the nation. One encouraging sign was the call back of 1,000 workers by Caterpillar. Sales of road-building machinery had begun to improve several months ago but inventories were so heavy that there had been no need to increase production. number of local firms had told the Mr. Allen said that a a substantial improvement in Reserve Bank that they were enjoying to be putting forth a greater per worker. Employees seemed output be more selective on had been able to effort, personnel managers very sharply. For had been reduced new hirings, and absenteeism
some firms the increase in output per worker, both white collar and blue, appeared to be in the order of 4 or 5 per cent over the past six months to a year. All of this suggested that unemployment might remain fairly high even if over-all activity improved significantly from now to the end of the year. In Detroit, for instance, where unemployment was expected to run between 315,000 and 335,000 in late a result of the model changeover shutdowns, unemployment August as of 200,000 was expected even after the new models were in production. Michigan Employment Commission stated that eight years' seniority The would be the minimum requirement when rehiring began, and outworkers would doubtless occur. migration of low seniority to say that, as he had reported at recent Mr. Allen went on of the district were for the most meetings, the agricultural areas favorable across the shape. Crop conditions continued part in good Harvester reported that Allis-Chalmers and International corn belt. above 1957 frr the first and equipment were sales of farm machinery half of the year. loans at the district's Allen said that business Continuing, Mr. as had been the case continued to decline, member banks had reporting the Reserve Bank's little use of there was so nation. Because in the as he would otherwise not as fully informed window, he was discount in member banks, portfolio situations be regarding the investment banks overinvested--speculated two of the largest did know that but he per cent issue. the 2-5/8 was the word--in
As to open market policy, Mr. Allen said he was sad and unhappy about what had happened in the last few weeks. Because it bore out what someone had said this morning, he wished to read his comments at a telephone meeting on April 24, 1957, when the Treasury was urging the System to enter the market to support what it feared would be an unsuccessful financing operation. Mr. Allen then read the following comments: The Treasury in its past financing has taken political action with bad economic results. Characteristically, as happens in every country, they want the Central Bank to bail them out. They don't want or dare to admit their mistakes--for political reasons. If we bail them out it is at the expense of the country--which is not the right thing to do--and furthermore, way to our own ruin. Once we assist by bailing it is the are responsible--and we should confine our out--then we to our own field--in this and any other adresponsibility ministration. Burgess in particular--are controlThe Treasury--and should not be--we should be market-minded. If minded--we shoes he would help the Treasury because Burgess were in our We must keep ourselves and the Desk-- he is control-minded. market and not control-minded. that those comments did not Allen said it might be argued Mr. However, he thought that they apapply to the same extent at present. time, he recalled, the international large measure. Even at that plied in Treasury as an argument. was advanced by the situation he hoped the Committee Mr. Allen said, that It was obvious, pledge again." Last wagon and take the "get back on the would did decide to go back on the wagon Thursday the Committee apparently as soon as possible. would be advised he hoped that the public and
Mr. Allen said it seemed obvious that the directive should be changed. Of the suggestions that had been made, the wording proposed by Chairman Martin would suit him best at this time. Mr. Deming stated that the economic picture in the Ninth District, based on a review yesterday, tended to support the feeling expressed at this meeting that an economic upturn had occurred in the country. Within the district, however, there was weakness in the mining areas of Minnesota, Wisconsin, and Michigan, and the Reserve Bank had taken a hard look at the mining sections through field investigation. There were now about 25,000 people unemployed in those areas, 2-1/2 times the number unemployed last year, and it appeared would continue through the balance of the year. that this situation Lake Superior ore shipments were down 60 per cent So far this year, Copper was off only 6 per cent but 1957 was 6 per from a year ago. was good, it was not as 1956. While the tourist business cent below it was not enough to offset all of good as had been hoped for and People were running out of regular unemploythe adverse factors. although all three of the States ment compensation benefits and, loan funds to extend to utilize Federal had passed legislation payments, those payments also would run out before the mining of weakness in was the major area were restored. That regions otherwise everything was quite good. the district, and
Mr. Deming said that, having been on vacation for three weeks, he had formed his impressions of open market developments from reading about what had transpired. He shared some but not all of the concern expressed about the return to inflationary psychology. While he was sorry that the System had had to go into the market last week, it was an action taken in the light of the circumstances. Now, however, the System should get back as quickly as possible to a lower and more realistic level of free reserves although, in view of the present state of the market, he would not favor operating on the selling side except in the shortest securities. Mr. Deming said he was not sure that the System had contributed so completely as had been suggested to an excessive liquidity position of the banking system. Statistics compiled recently in the Ninth District showed that the country banks had gone very strongly into long-term securities to meet earnings problems, and to a more limited extent the same thing also was true of the city banks. rate structure the banks with the change in the interest Therefore, in quite as liquid a position as might have been thought, were not and the presumed upward adjustment in rates would act as something of a brake. serious mistake to take that it would be a Mr. Deming felt the point that the at this time to underline any dramatic action
System feared inflation. The System's record, he thought, was quite good. He would not favor a discount rate change at this time for he believed that the hazards of an upward adjustment would far outweigh the gains. If it were decided to make a change in the policy directive, he would want the directive to reflect the economic change that the Committee saw in process as well as the unique temporary intervention in the market. He would suggest "to contributing to the continuance of economic growth while absorbing redundant reserves." Mr. Mangels stated that further economic improvement was evident on the West Coast as in other parts of the country, although the degree of improvement was rather moderate. Business firms seemed to have resumed buying to restore inventories for current needs but there was no evidence of undue and unnecessary inventory accumulation. In the course of a recent informal survey it was indicated that this would not be worthwhile for business for in the event of a national emergency prior precautionary inventory increases would be taken into consideration in subsequent allocation of materials. Therefore, they were just continuing to take care of items in short supply. There was some evidence, Mr. Mangels said, of a little more strength in defense supporting expenditures. Increases were noted in employand the airplane factories were ment at Government ordnance plants, maintaining steady employment. While retail sales were holding up
well, there were indications that July might be somewhat lower than June. Housing starts had improved materially; the Federal Housing Administration had advised the Reserve Bank that requests for inspections and appraisals in the second quarter were double those in the second quarter of 1957. Also, there was some demand for twenty-five year, 10 per cent down-payment mortgages. Auto sales in June were down somewhat from May but this probably reflected a seasonal pattern. Industrial plant construction had not shown a great deal of improvement, either in terms of actual construction or planning, but in the second quarter heavy engineering contract awards exceeded the same period in 1957 by 11 per cent. Although employment was up 1/2 per cent in June, there had not been any totals. Insured unemployment dropped moderation in unemployment June and it appeared that unemployment for less than seasonally in the national average, due primarily July would be slightly above supply on the West Coast. In material increase in the labor to compensation year started and Washington the new unemployment Oregon in claims because unresult in quite a rise July 1, which would benefits would be reinstated. who had exhausted their employed persons Mr. Mangels said that, although real estate loans were up $17 total bank loans were up $14 million, agricultural loans million and July 16 were down $47 million, most for the three weeks which ended securities dealers. loans to Government having been in of the decline
The rather substantial increase of $355 million in demand deposits was four times the increase last year, and for the three-week period the increase was almost as large as for all banks in the United States. Time deposits continued to increase. Bank borrowings were virtually nil and Federal funds sales exceeded purchases slightly in moderate volume. Turning to the national picture, Mr. Mangels said that there were rather clear signs of a bottoming-out of the recession. There were some signs that a pickup was being generated, but no conclusive evidence that this pickup would be permanent. Instead, it might be on a somewhat temporary basis. With regard to the international situation and its effect on Federal Government expenditures, Mr. Mangels said that unless the Government expanded its position in the Middle East or was drawn into other ventures, there might not be any great increase in Federal expenditures. Nevertheless, there would be a heavy calendar of Government financing and refinancing for the remainder of this year, and it would probably be necessary to supply additional bank reserves in the next few months. There churning in the market because of probably would be considerable large amounts of securities who large number of holders with the maturities to mature. The new did not exchange and allowed the some of those funds. offering might absorb Treasury cash in the policy directive felt that a change Mr. Mangels along the lines suggested by Chairman Martin would be quite
appropriate for the next three-week period. Because the present volume of free reserves was above the range of the normal thinking of the Committee, the objective should be try to get back to a more normal basis--somewhere around $500 million or perhaps a little less. Mr. Mangels went on to say that he saw no reason to change the discount rate at the present time. He felt that it probably would be in order to make some announcement of the Committee's return to a "bills only" policy but that it might be advisable to wait a little while until the situation settled. Then, it might be announced that as of a particular date the special authority System had not intervened in the market was terminated and the since that time. Mr. Irons stated that he would not dwell on the specifics situation in the Eleventh District. In general of the economic developments both in the nation terms, however, recent economic the district convinced him that the worst of the recession and the country was moving into a period of had been seen and that System policy should now be recovery. In the circumstances, recovery,and the degree of potential related to the rate of economic rather than to the recession apparent in that development, inflation out of it. In view of his various problems that might arise and situation and because of his feeling that appraisal of the economic pattern and not governed by the economic action should be System he felt that the Committee by the Treasury's problems, predominantly
should move away from ease. Accordingly, he would like to see the words "contribute further through monetary ease" taken out of the directive. While he would not want to shift to a policy of real restraint, he would move away from ease and, feeling that a change in policy of that sort would be beneficial, he would not be disturbed if the market recognized it. Some of the trouble in the Government securities market, he said, had been the result of bad appraisals on the part of the market, and he would not be concerned about taking action that could be regarded as an indication of a change in policy. To recapture or absorb a large part of the reserves that had been put into the market, he would take advantage of every runoff possibility. He would favor selling bills whenever possible and he would not be opposed to selling other short issues if the Account was "out of merchandise in bills." The problem that the System must face arose out of the economic situation on the one hand and the Treasury's deficit financing problems on the other hand. If the System followed the economic approach in its policy, it seemed almost inevitable that there would be rising rates, while the danger of the other course was inflation. interest would be one of not preventing a rise As for himself, the choice rates rather than to continue monetizing the public in interest debt and permit inflation. In line with his appraisal of policy action, he would expect to see rising shortand appropriate System like to see the present market, and he would term rates in the
discount rate level become more realistic in relation to such rates. While he would not favor a change in the discount rate at the moment, possibly that might be appropriate in a comparatively short period, especially if some of the present degree of ease were removed so as to permit market rates to move up. He favored proceeding through open market operations to absorb this ease and reach toward less artificial conditions in the market. Mr. Irons also said that he would favor a change in margin requirements for there had been a considerable increase in the amount of credit outstanding in the stock market. There were inflationary undercurrents in the market and he questioned whether the Board should permit them to be supported by additional injections of credit. It was his estimate that between January and the present time the amount of credit in the market had increased about 20 per cent. Mr. Irons felt that the directive should be changed now. As previously indicated, he would like to take out not only the word "further" but also "monetary ease." He concurred in the suggestion of Chairman Martin, but he would not favor the suggestion of the Secretary because it would tie the Committee too specifically Another possibility would be correcting a particular development. to "to foster sustainable economic recovery and growth in the economy economic requirements and reserves consistent with by providing commented that one could not market conditions." Mr. Irons orderly
discard from consideration the matter of orderly market conditions. There is a difference, he noted, between operations to correct disorder in the market, when it appears, and operations to support a Treasury offering. The concept of orderly market conditions appeared to belong in the directive, and he questioned restricting the directive to absorbing redundant reserves. Mr. Erickson stated that a review of conditions in the First District following his return from vacation indicated that the worst of the recession had probably ended. The New England manufacturing index went up in May for the first time in seven months and went up again in June. Employment likewise was up in May and again in June, with 4 ,000 more workers employed in June. Also, for the first time in several months manufacturing employment exceeded the previous month. May of last year was an all-time peak in construction, and May of this year was also a good month. While department store sales in June were disappointing, first and second week figures in July were to the fact that Boston stores were appreciably better, probably due of years and weather first time in a number on Saturdays for the open shopping. In June, as in May, the conditions were conducive to vacation business declined, the price index retail Massachusetts Reserve Bank's and the meeting expectations, not to be appeared growth continued that deposit banks showed mutual savings survey of the Reserve to date, In July, last year. rate than at a higher than daily average on a used less had been window discount Bank's
in any other month since January Turning to policy, Mr. Erickson said that he did not favor any change in the discount rate but believed that the directive should be changed. Of all the suggestions made thus far, he preferred the suggestion of Chairman Martin. As rapidly as possible, the Account Management should work toward getting the level of free reserves down to the $400 million level. He would sell bills first, but if the objective could not be accomplished with bills he would use other short-term securities. Mr. Erickson hoped that the bill rate would move up, and also the Federal funds rate. With reference to System operations during the last ten days, Mr. Erickson noted that continuing Committee policy calls for the System to go into the market in the event of a disorderly situation. While he was surprised that the operations had to be so massive, that may have been necessary. He would not favor an announcement of the termination of the special authority given to the Manager of the Account since under present conditions there might still be a disorderly market. Therefore, he would not make any announcement until the market was clearly out of that situation. He would favor allowing interest rates to seek their true level, but in the event of a clearly disorderly condition the System would have to go into the market. stated that although he would subscribe to Mr. Balderston directive which had been for clause (b) of the policy the wording
suggested by Mr. Irons, his own point of view would be emphasized by the phrase "to absorbing redundant reserves and eliminating free reserves as rapidly as possible without creating a disorderly market." The System having taken unusual and emergency action last week, he believed that the directive should be pointed toward escaping from the situation that had resulted. In his view, Mr. Balderston said, reserves had in fact been redundant since early June. While the recession might not have bottomed out permanently, the decline certainly had ceased for the moment and business psychology had again turned ebullient. He went on to say that the excess of bank reserves that he thought was present even before the Lebanon incident might have stemmed from adhering too long to a fixed level of free perhaps the Committee had been deceived by the appearance reserves and in New York City, caused by heavy of market tightness, especially put it another way, the Committee investments. To bank securities depth of the water in the irrigation have tended to watch the might the water in the fields being cultivated. ditch rather than the use of use of the free reserve said he believed in the Mr. Balderston available for indicating a target or goal. figure as the best language level of free reserves a $500 or $600 million adherence to However, banking system in such reserves into the week after week pressed banking system unduly liquid. his judgment to make the fashion as in surprised itself unpleasantly now found the Committee Accordingly,
by having that credit used in places where it was not constructive, such as in the stock market at the present time. The emergency action of last week therefore accentuated a problem which was already serious from the economic point of view, because the credit that the System had supplied was tending to be misused. The question, then, was what to do about so serious a situation. Mr. Balderston believed that sufficient bills and other short-term issues should be sold to more than reverse the recent emergency action. Rather than return to free reserves of $500 million, he was thinking of the elimination of free reserves as steadily, consistently, and rapidly as possible right up to the point of disorderliness in the market because he felt that the price of bonds would have to drop four or were eliminated--and he hoped that five points. If free reserves accomplished prior to Labor Day--he would favor raising could be 1/4 of a percentage point, and then 1/2 of a the discount rate in order not to repeat the "pitty pat" policy percentage point, to the question of publicizing the followed in 1956. With regard that he would favor no only" policy, he said return to a "bills he would merely stay out of the market. announcement. Rather, that it his remarks by commenting Martin began Chairman between now and to "change the world" would not be possible of the Federal scheduled meeting date of the next August 19, the that had been of the statements In view Market Committee. Open
made around the table, he thought that he should say something by way of observation on the matter of principle and the Treasury. It was terribly important, he said, for all to realize that the Committee was dealing with the most difficult problem in political science in the whole world. In order to maintain perspective it that the Federal Reserve System, like others, must also be realized mistakes; one should not blame the other can occasionally make a vacuum. Furthermore, it is all of the time and sit in fellow one's own mistakes before looking at the necessary to look at as were Mr. Bryan's comments of others. As persuasive mistakes not too long ago, he recalled, loss of confidence, it was about in reserve requirements was advocating a reduction that Mr. Bryan recovery. The Chairman, the promotion of economic as essential to one can claim to be great deal, and no had been in error a too, up the need for time. This pointed 100 per cent of the correct occasions, "steel remarked on other and, as he had flexibility breaks." On several than iron which bends is much stronger which get into the had let itself that the System he felt occasions iron that breaks. position of the that he must say said that he also felt Chairman Martin and the Federal for the Treasury of the Treasury, a word on behalf might be that It common objective. toward a are working Reserve
both of them could be completely right but that neither would attain the objective. At present there was a very fortunate situation at the Treasury because both Secretary Anderson and Under Secretary Baird were just as anxious as anyone to correct the current situation. Of this, there was no question at all in his mind. They were dealing with a very difficult problem that the System had compounded for them, for if the System had not been as intent on following an easy money policy there could not have been the speculative fever that developed and finally culminated in the speculation in the 2-5/8 per cent bonds. The Treasury probably had made some technical errors, but those errors were easy to make when the Treasury had to consider that the Federal Reserve was following a policy of further ease. The Chairman then commented on the extent to which he believed in maintaining operating procedures or principles. On the he said, the Committee should not throw up its hands other hand, time circumstances developed which made the Committee the first flexibility was required. He recalled, and realize that some said he was delighted by the fact, that the special authority given at the second afternoon meeting on July 18 was granted by unanimous vote of the Committee. He went on to say that the cry at the time However, bad in retrospect. always looks of "wolf"
the action was taken no one knew what would happen over the week end which preceded the Treasury financing. It might have been perfectly right to say "just step aside and the market may not collapse," but if fighting had actually occurred in the Middle East the Committee probably would now be glad that it took action in the way that it did. Also, regardless of theories, when certain things are involved the public will not sit by and let the situation go unheeded. He might be in error in that opinion, but it was certainly something that the Committee must bear in mind at all times. The market, he said, is a free market but one in which the Federal Reserve System does participate. Many times he had expressed with that participation, and work must be his own dissatisfaction done continually on the System's relationships with the market. where the Treasury is a situation should develop However, unless forcing the System and the System knows that the deliberately to proceed on a "give and is wrong, it will be necessary Treasury take basis." Mr. Anderson and Mr. reiterated that both Chairman Martin to correct the as the Federal Reserve Baird were just as anxious way. He also repeated in the most effective current situation real share in the problem Federal Reserve had a that he believed the because the per cent bonds, with the 2-5/8 the Treasury faced that to the permitted speculation that it pursued of easy money policy that had occurred. extent
Continuing, Chairman Martin said that it was well to have different views within the System. He was glad that Mr. Mills had presented a statement on behalf of the position that the System should support the Government securities market even though he did not agree with that point of view. The Chairman went on to say that he rather got the impression from the comments around the table that perhaps the System was taking itself a little too seriously, and perhaps he was falling into the same error. However, he again pointed out that the Committee was now addressing itself to a three-week period. At the moment it seemed fairly clear that, without risking a market collapse, the Committee probably could not do a whole lot to mop up excess reserves in that period of time. Assuming the success of the Treasury's offering today, on August 19 the Committee would have a clear field for whatever it wanted to do with respect to monetary policy. The System, he felt, had an obligation to pick up all of the reserves that it could, and he thought it was clear that the majority of the Committee wanted to do that in order to reestablish a position which had been completely of the last two weeks. However, the element distorted by the events involved in what could be described by Mr. Bryan was of confidence done during this period. Personally, he would not want to give up the fight against inflation or assume that the recovery now develophands. What the throw up its the Federal Reserve ing should make
Committee was faced with over the next three weeks was to try to recover as far as possible its position and poise, and in conversations with those outside the System not give way to defeatism. The view that must be presented to the public was that the System was not licked but would continue the fight. Also, the Committee must do everything possible to aid the Manager of the Account in a period like this. Naturally, members of the Committee might disagree with some of the things that he did, but the Manager was under pressure. It must be borne in mind, the Chairman said, that the struggle in which the System was now engaged is a never-ending one. In his opinion, the System had made remarkable progress within the limitations of its powers. For example, there was a large Federal budget had not moved in the way that it did there might and if the System well have been a substantial tax cut in addition to the larger budget. think that the System had lost The Chairman said he did not in the recent operations. The real any of its basic principles in the 1960s, so it was inflation probably was coming battle with his feet on the ground. person to try to keep important for each that it was a not just say made, one should When mistakes were were and benefits and failures to see what the mistake but try then move forward.
Today, Chairman Martin said, the Committee seemed to be in agreement to a surprising extent. The question was principally the wording of the policy directive, and there could be a lot of views on that question. When he considered it in the light of the three-week period ahead, he was inclined to think that perhaps Mr. Riefler had a point. At this time it was difficult to appraise the situation and spell out a directive in precise terms, and language that would achieve the Committee's short-run purpose therefore would seem desirable. Then, at the meeting on August 19, the Committee could spell out a more effective directive, perhaps along the lines mentioned by Mr. Deming, Mr. Irons, or others. There were expressions of agreement around the table with Chairman Martin's suggestion. that, although he had always questioned Mr. Hayes stated whether the directive should get into detail rather than basic there was no question in his mind about the repolicy changes, reserves. He said that he was a little capturing of redundant redundant reserves were recaptured however, that if the concerned, period the Management of the Account within the ensuing three-week effect, be left without any directive. would, in that the stressed the unlikelihood on this point Comments three weeks. Mr. absorbed in the next reserves could be redundant recaptured before the August 19 Rouse observed that if they were
meeting it would be possible to call a meeting of the Committee by telephone and consider the need for a new directive. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Reserve Bank of New York, until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to recapturing redundant reserves, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the the Federal Reserve Bank of New York (with account of in cases where it seems desirable, to issue discretion, to one or more Federal Reserve Banks) such participations amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary of the Treasury; provided that the total accommodation amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. the Committee consideration was given At the last meeting* of to $75 million the from $50 million suggestion for increasing to a outright holdings of bankers' acceptances by the limitation on on July 8, 1958. Refers to meeting *
Federal Reserve Bank of New York. However, in view of differing opinions which were expressed, a decision on the matter was deferred. Subsequently, under date of July 25, 1958, there were distributed to the members of the Committee copies of a memorandum from Mr. Rouse discussing, on the basis of the minutes of the Federal Open Market Committee and its executive committee, the apparent objectives of the authorized acceptance operations. The memorandum suggested that the authorizations of the Committee appeared to contemplate coordinating acceptance operations with Government securities operations and that such coordination was not contrary to the System's objective of fostering interest in the acceptance market merely because, on certain occasions, the New York Bank had been from filling orders received from foreign central bank prevented correspondents. In supplementation of Mr. Rouse's memorandum, Mr. Hayes made the following comments: 1. The record seems to me pretty clear that the Committee, besides undertaking to encourage the developmarket, has adopted a policy of ment of the acceptance transactions consistent with our making our acceptance general credit policies. of these transactions is 2. Although the size admittedly minute by comparison with our Government security operations, acceptances do have characteristics a convenient money market instrument for which make them open market operations. effecting
3. The New York Bank has felt that consistency with Government security operations would be accomplished most effectively if week-to-week changes in acceptance holdings were always in the same direction as changes in Government security holdings. Perhaps this concept has been a little too rigid. 4. Our principal interest being to develop a larger and more active acceptance market, it is logical that our aim should be mainly in the direction of a greater domestic interest in the market, in which foreign buying already plays a disproportionately active role. We believe that the very fact of the Federal Reserve Bank's being consistently in the market is one of the best means of stimulating this domestic interest. 5. At the same time, our interest in providing a wellrounded service to the foreign central banks justifies our making considerable efforts to satisfy those banks' needs, provided that in so doing we are not being inconsistent with our general credit policies. I think there is room here perhaps for a somewhat more flexible approach to the matter of week-to-week changes in holdings. That is, I would see no harm in our reducing our acceptance holdings by a modest for a week while we were adding to Government amount or vice versa--provided we were showing security holdings, the acceptance market by having a consistent interest in and reasonably stable portfolio. at all times a substantial a season when acceptance 6. Since we are entering to expand, and in view of the upward financing is expected acceptances over a period of years, trend in outstanding close to the our present holdings uncomfortably and with to raise highly desirable it would seem million limit, $50 that limit to $75 million. a paper on the subthat he had prepared Robertson stated Mr. memorandum. However, after reading ject before receiving Mr. Rouse's at all. He his own paper not want to change he would the memorandum following statement: then read the of the development briefly to outline I am going bank acin the System participation Federal Reserve This little past four years. over the ceptance market us is the now before the proposal of which history, it is for how necessary episode, demonstrates latest
this Committee to be ever vigilant, in order to avoid finding itself in a position it never intended to assume. Early in 1954 it was suggested that we take the initiative in purchasing some $20 or $30 million of acceptances in order to "free demand generally from administered rate constriction and to make market rates responsive to changes in the demand for and supply of acceptances." I discussed this proposal in my memorandum of June 1, 94, in which I expressed doubts and presented four questions that I felt should be clarified before the Committee acted on the proposal. The proponents of the proposal did not attempt to answer the questions presented in my memorandum, but the proposal nevertheless was reactivated some months later. In March 1955 the subject was again presented to the Committee, although the original objective--to "free demand generally from administered rate constriction"-- was no longer presented as a basis for action. The Committee authorized System purchases of bank acceptances in an amount not to exceed $25 million; the Chairman stated that the System "should avoid any 'finagling' in the market but should participate in a very modest way in order to show the interest of the central banking organization." This limited objective made our action relatively innocuous, in my opinion, although I felt that the acceptance market would receive more convincing assurance of Federal Reserve interest if we resumed the "back-stopping" procedure that worked quite well in the 1920's. the fact that the System intended, in In view of to maintain a token portfolio of bank effect, simply acceptances to show its interest in that market, the that transactions in bank Committee expressly provided be entered into only when consistent acceptances "would general credit policies of the Federal Open with the words, our general credit Committee." In other Market be paramount, and the necessarily were to policies of showing interest subordinate objective Committee's market would not justify purin the bank acceptance circumstances where of acceptances in chases or sales with current credit action would be inconsistent such policies. approval of March 1955 meeting, At the Committee's on this subject was form of the resolution the actual
delegated to the executive committee. The resolution approved by the executive committee did not provide that acceptance transactions should be entered into "only when consistent with the general credit policies," but provided instead that such transactions were authorized, "at such times and in such amounts as the executive committee may deem advisable and consistent with the general credit policies." The change in emphasis may seem insignificant, but later events reveal that such a change in emphasis can be the first step in the unintentional development of a policy quite different from that originally intended. At our meeting in March 1956 we renewed the authorization to the New York Reserve Bank to hold up to $25 million of acceptances. However, our published explanation was that the action was taken "on the grounds that the System should assist in the further development of an acceptance market in the United States...." Literally this was not inconsistent with the original purpose of "showing the interest of the central bank organization in this market," but the new language hinted at a more aggressive participation. The attitude of the Trading Desk on this subject was perhaps reflected in the following statement in a July 1956 publication of the New York Reserve Bank on "Federal Reserve Operations in the Money and Government Securities Markets": "...expressing a general intention to vary the size of this holding [i.e., of bank acceptances] in a manner that would parallel other Federal Reserve action in the money market (the available supply of acceptances permitting), the Committee on March 29, 1955 authorized the Manager of the System Open Market Account to begin purchases.... "...the scale of operations in the acceptance market has not reached magnitudes that could be considered significant in supplementing operations undertaken in the Government securities market to influence the money market and general credit conditions." (page 88; underlining added) never expressed an far as I am aware, this Committee As bank acceptances should that the holdings of intention "parallel other Federal Reserve action in the money market," existed at the Trading Desk. but this idea apparently the maximum limit was November 27, 1956 meeting At the million, and this increased $25 million to $50 raised from authorization was renewed without change in March 1957.
The memorandum attached to Mr. Riefler's covering memorandum of July 7, 1958 recommends that the maximum limit now be raised to $75 million. The camel's head and neck are now following his nose into the tent, but even more important is the explanation of the proposal, which opens the way for the entire animal to move in-- in fact, it hints that he is already in possession. The memorandum reveals that our acceptance holdings have been increased recently in order "to be consistent with increases in System holdings of United States Government securities." Referring to the existing $50 million limit, the memorandum further states that "...if we were to continue to coordinate acceptance activities with other market operations, our acceptance holdings could quickly reach the limit." This language cannot reasonably be interpreted otherwise than as meaning that the Trading Desk regards its transactions in bank acceptances as paralleling, as far as possible, the operations in Government securities. This Committee never has authorized dealings in acceptances as a supplementary means of effectuating our general credit policies--a sort of small-scale "me too" operation, along with Government securities transactions. If bank acceptance transactions have been entered into for these purposes, such action goes beyond the scope of the existing authorization. To sum up, the Committee in 1955 decided to hold a modest portfolio of bank acceptances "as a means of showing the interest of the central banking organization." By 1956 the explanation of our operations was that "the System should assist in the further development of an acceptance market." Later that year the maximum was increased to $50 Now it is suggested that the ceiling be raised million. but far more important is the first casual to $75 million, acceptance transactions should be used intimation that bank already are being used) as one of our (and apparently mechanisms for implementing general credit policy. It is conceivable, although very unlikely in my opinion, for effectuating our credit that there are sound reasons as well as in operations in acceptances policies through is so, however, the recomsecurities. If this Government mendation should be openly presented, and supported, on that ground, so that the Committee will have an opportunity
to reach an informed judgment and to make a deliberate decision on the matter. If the Committee were to take the recommended action on the basis outlined in the memorandum referred to, it might later find that it had been jockeyed into adopting bank acceptance operations as a regular tool of general credit policy without ever having realized that it was doing so. Mr. Hayes said that he was at a loss to understand what Mr. Robertson feared. If, in operating in acceptances, the New York to be paralleling open market operations, he could Bank happened not see what harm was being done. It was clear to every member of the Committee that acceptance holdings were being changed week by week and there was no thought, he said, of having any concealed between encouraging the objective. He saw nothing irreconcilable bankers' acceptance as an instrument acceptance market and using the of open market policy. The matter had that he did not agree. Mr. Robertson said acceptance would be on the basis that the never been put forward it had been instrument; instead, open market used as an additional acceptance market. an interest in the in terms of showing put forward market tool as an open use the acceptance of that and To go outside that the Federal with the position opinion inconsistent was in his like the idea of taking taken. He did not Market Committee had Open more and gradually getting on one basis, given an authorization taking control. and finally the market, more into
Mr. Hayes replied that he disagreed with Mr. Robertson's view of the importance of the New York Bank's share of the acceptance market. He pointed out that when the acceptance authority was first granted, $25 million was just as big a share of the market, proportionately, as $50 million is today, for the size of the market has increased markedly. In response to a question, he observed that acceptance holdings are also limited to 10 per cent of total acceptances outstanding as shown by the most recent bankers' acceptance survey and that at present $75 million would represent 5 per cent of total acceptances outstanding. After further discussion relating to the view of the New York Bank regarding the authorization if the total volume of bankers' should increase substantially further, Mr. Balderston acceptances that he had never heard a reasoned argument for participation said in this area as a means of fostering foreign trade. He thought, however, that such an argument probably could be advanced. Therefore, on the suggestion made reached a final decision before the Committee he would like he had some sympathy, York Bank, with which by the New staff advise the Committee what national advantage they to have the Mr. open market instrument. as an in using acceptances could see service in warning the said, had performed a useful Robertson, he it was doing, but without knowing what not to proceed Committee
he (Mr. Balderston) was concerned with the leadership of the United States in foreign trade and he would not wish to have a decision made by the Committee that would prevent participation in something that might be to the national advantage. After Mr. Robertson said that he thought such a staff presentation would be appropriate, Mr. Hayes said he had thought it was a foregone conclusion that the acceptance market was one that the Committee wanted to encourage. He did not think that this was a point at issue today, but he would have no objection to a study such as suggested. Martin commented that he thought the position had Chairman always been his own position--that the been clear--at least it had to help the acceptance market. wanted to do what it could Committee related to how the the differences of opinion As he understood it, two sides to that help, and there were System could be of most question. Mr. Hayes said a question by Mr. Shepardson, In response to New York Bank that approach of the it had been the that, in general, difference in not make a large activities did of its own the extent were getting. Foreign that foreign buyers the amount of acceptances demand side on the in the picture already so predominant buyers were market the New the acceptance of developing from the standpoint that about to be so solicitous that it had did not feel Reserve Bank York
them. Therefore, the Reserve Bank had not felt that it was hurting the acceptance market if on occasion its own activities were the cause of foreign buyers not being able to obtain quite as many acceptances as they desired. Mr. Allen noted that there are relatively few banks operating in acceptance credits to any large extent. The New York banks, of course, do what is to their best advantage; if they are loaned up otherwise and want to handle an operation by means of an acceptance, they will do it. If they wish to handle a transaction by means of a clean note, they will do it that way. Mr. Allen said that few people he talked with--people who regularly invest for a short term--had ever heard of acceptances. Therefore, he was rather inclined to feel that being friendly to the acceptance market meant encouraging the dealers to get out and sell acceptances, with some small participation, if necessary, to take pressure off the dealer. Mr. Hayes said he rather liked the idea of actively considering the merit of the acceptance as an instrument from the open market standpoint. He went on to say that the New York Bank had received some good comments in the past from the Board's staff regarding the usefulness of the acceptance as a money market instrument. If the study previously suggested was to be made, perhaps like to have an opinion on how good an the Committee would also acceptance is for open market operations. instrument the
After some discussion of the points that had been raised by Messrs. Balderston and Hayes, Messrs. Thomas and Marget were requested to submit a paper for the Committee's consideration relevant to those points. At the same time it was agreed to table for further discussion the suggestion of the New York Reserve Bank for an increase in the limitation on bankers' acceptance holdings. It was agreed that the next regular meeting of the Committee would be held on Tuesday, August 19, 1958, at 10:00 a.m. Thereupon the meeting adjourned.
A meeting of the Federal Open Market Committee was held in the office of the Board of Governors of the Federal Reserve System in Washington on Tuesday, July 29, 1958, at 2:45 p.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Fulton Mr. Irons Mr. Mills Mr. Robertson Mr. Shepardson Mr. Vardaman 1/ Mr. Deming, Alternate for Mr. Mangels Messrs. Allen and Treiber, 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. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Hostetler, Walker, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Kenyon, Assistant Secretary, Board of Governors Mr. Keir, Acting Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York Mr. Tow, Vice President, Federal Reserve Bank of Kansas City; and Messrs. Anderson and Atkinson, Economic Advisers, Federal Re serve Banks of Philadelphia and Atlanta, respectively at point indicated in minutes. 1/ Entered the meeting
Mr. Rouse, at whose request this meeting had been called, noted that in his remarks at this morning's meeting he had referred to the condition of the Government securities market in yesterday's light trading. The members of the Committee had subsequently re ceived a summary of conditions in the market at 11:00 a.m. today. Following the Committee meeting, he had talked with the Trading Desk and had found that another wave of selling was developing. This was in accord with the pattern that the market had been follow ing; it would steady for a time and then another wave of selling would develop. That seemed to be the course of events again today. was down in a number of cases in terms of The market yesterday similar amounts today. The 3-1/2 thirty-seconds, and it was down in of 1990 were now down to 98. per cent bonds Mr. Rouse said, there were no bids and no Much of the time, out some swaps but had not dealer had been able to work buyers. One The outstanding Treasury certifi been able to do outright business. cases, and the new ones were off a thirty-second in some cates were volume. The whole picture and were available in quoted below par from dealers were market, and reports of gloom and a fading was one in the market was element of speculation effect that the to the termed the market One dealer anyone had visualized. greater than while another were no bids, sense that there in the disorderly the disorderly range." the market was "in the view that expressed
An insurance company spokesman was of the opinion that the market had been disorderly for days. In response to an inquiry from Chairman Martin, Mr. Rouse summarized available information on subscriptions for the new Treasury 1-1/2 per cent tax anticipation certificate. In the course of his summary he said that a private survey of 25 large banks by a securities dealer indicated subscriptions by those banks amounting to $2.7 billion, which led the dealer to estimate that the allotment would be around 50 per cent. However, the picture was not yet clear enough to make accurate predictions about the fate of the issue. Continuing, Mr. Rouse said it seemed to him that the amount of potential selling in the Government bond market was not known. After a price decline which had by now certainly reached the four or five points mentioned by Mr. Balderston at this morning's meeting, one might expect that there would be an unwillingness to take the losses entailed in those prices and that selling would tend to dry speculative holders who had delayed selling, in the up. However, prices would get a little better and that the System thought that would step in, might now feel that it was better to get out. that the sooner such elements Chairman Martin commented of the market the better it would be from the standpoint got out of the System. the System un went on to say that Rouse agreed. He Mr. a disorderly market if this was really doubtedly would be criticized
and the System had not appeared in it for the last two or three days. Turning to available alternatives, he said that one possibility would be for the Federal Reserve Banks to do a little "arm-twisting" as far as the subscriptions to the Treasury certificates were concerned, in an effort to assure that the financing did not "fall out of bed." As to possible System intervention in the market, Mr. Rouse expressed the view that it would be unwise to try to do more than insert a few bids through brokers in a nameless way in the hope of having a modest amount of transactions at levels as the market went down. To go direct to the market and start to buy would invite an avalanche of offers, and that, of course, was something to avoid. Furthermore, if the Federal Reserve acted to support the market, the speculators would be apt to stay in. Mr. Rouse stated that he was inclined to recommend staying out of the market, or at most doing something through brokers in a attempting some arm-twisting with respect to the nameless way and certificate subscriptions. it was not too late in the Chairman Martin asked whether that would substantially affect day for the System to do anything Rouse replied that he thought a the subscriptions, to which Mr. would get around to some Of course, the word little could be done. of the market is only nominal and the official closing time extent prevailing market conditions. under
The Chairman then stated that the Committee seemed to be right up against the wall and that it seemed best to stand or fall right here. Personally, he would be disposed to stay out but watch carefully. He then called upon the other members of the Committee for comment. Mr. Mills said that he could not add anything to the state ment which he made at this morning's meeting. He strongly believed that the System Account should intervene aggressively and support the market. If the Committee was not disposed to do that, he would be fearful of making bids on a declining basis through brokers with out revealing the source. There is general public knowledge that the Open Market Committee meets at three-week intervals, so he presumed there was an understanding that a meeting had been held today. The market therefore would be looking for an indication of at the opening of the market to System policy today, or certainly and if support was not forthcoming the market could reasonably morrow, Committee had refused to declare a reach the conclusion that the the market. Under those condition and had abandoned disorderly be complete disorder. there could circumstances, It was an unfortunate circumstance, Mr. Mills said, that new issue of to the were open for subscription today the books in the market System intervened for if the certificates, Treasury least a or at its primary, drawn that would be the inference than to rather the Treasury to assist had been purpose secondary, market. a disorderly correct
In response to a question from Mr. Rouse, Mr. Mills verified that even so he would advocate going into the market, with full knowledge of the risks involved. Intervention on the part of the System might inspire a greater volume of sales rather than stem sales. However, in almost all cases sales made at the present levels would involve losses, and it was difficult for him to reason that people would willingly take those losses if there was an indication that the market would be stabilized by the institution that had the ability and armament to provide stability. At this point Mr. Vardaman joined the meeting and Mr. Rouse reviewed for him the market situation that had resulted in this meeting being called. Mr. Hayes said that he favored going into the market last time but that he was troubled by the thought of going in on a very the Treasury financing primarily in temporary basis, really with mind, and then almost immediately pulling out. If he were doing but only on the condition be glad to go in, it himself, he would a while and cushion to stay in for quite the System was going that on the in that direction he saw no disposition market. Since the the Committee, he would not want to go part of the majority of into the market now. expressed agree Leedy, and Vardaman Irons, Allen, Messrs. of the market stay out System should that the the view ment with
today and see what happened. In response to an inquiry by Mr. Vardaman regarding the inference to be drawn from the use of the word "today" in these comments, Chairman Martin said he did not think it was fair to ask the Manager of the Account to take the responsibility. It was fortunate, he said, that the Manager was here today and that this meeting could be held. The remaining members of the Committee, except Mr. Mills, then expressed concurrence in the view that the System should stay out of the market today, as did the other Reserve Bank Presidents who were present. In response to a question raised by Mr. Balderston, Mr. Keir said that the 3-1/2s of 1990 would have to fall to 95-13/32 to sell on a 3-3/4 per cent yield basis. Mr. Balderston said he because he felt that if and when the System had asked the question to intervene in the market again, it should be when the price level could make its intervention stick, and so was such that the System would come in to assist and that other market forces convincingly "pick up the ball" from that point. as to possibilities if the Treasury Mr. Bryan inquired commented that the to fail, and Mr. Thomas offering today were to operate for a time, for had plenty of money on which Treasury from today's offering. If it would, of course, get something the weekly bill would be to increase necessary, one possibility auction.
Mr. Bryan then inquired about the possibility of using the direct borrowing authority on a short-term basis while the Treasury was regrouping its forces, as opposed to System assistance to the market on a scale that could not be foreseen. He agreed with a comment by the Chairman that one could hardly expect a re grouping of the market within a period of a few days. After some discussion of the question raised by Mr. Bryan, Mr. Robertson suggested that in any event there was not much that the System could do between 3:10 (the present time) and 3:30 to affect the outcome of the Treasury offering. Mr. Rouse said that he did not concur completely. He felt that the System could do something; that System action would have a little effect on the success of the Treasury issue. In a restatement of his position, Mr. Hayes said that he majority, but reluctantly. If he had had aligned himself with the the majority would go as far as he personally wanted to felt that cushioning of the market, he would to, that is, to have a sustained by Mr. Vardaman, he said In reply to an inquiry favor that course. might be at descending, but slowly descending, that the cushioning prices. about the significance that he was puzzled Mr. Rouse commented as against the by Mr. Balderston per cent rate mentioned of the 3-3/4 in price to of 1990 had moved that the 3-1/2s rate. He noted present
where they were close to a 3.60 yield basis. If Mr. Balderston was thinking in terms of the possibility of a shooting war, it was his (Mr. Rouse's) thought that the present rate might be as satisfactory as a 3-3/4 per cent rate at which to hold, for other wise the level of rates on business credit might be extremely high. A 3-3/4 per cent rate to the Government would mean about a rate on AAA bonds, about 4.75 on AA bonds, and perhaps 5-1/2 per cent on bonds rated BAA. Thus, there would not be much room for flexibility, for the rates would almost be up against the ceiling. Mr. Balderston replied that the Canadians evidently con cluded that for them a 4-1/2 per cent rate would be appropriate for 25-year bonds. He asked what rate was reached under free at the height of the 1955-57 boom. market conditions response that if the Treasury had had Mr. Rouse commented in a 4 per cent bond would have been re to do any long-term financing, quired. per cent rate was on the said that his 3-3/4 Mr. Balderston would be indicated in the of the range that he thought lower side a combination of an ex war. More likely was event of a shooting in the civilian sector expansionary conditions pensive cold war and borrowing under of private and public economy. A combination of the up so that a 4 per push the price of money such circumstances would Vardaman whether Asked by Mr. as any other. level was as likely cent
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
Also: Record of Policy Actions