August 4, 1958 FOMC Minutes

FOMC minutes

of commercial bank credit to commerce and industry. When that point was reached, it would be necessary to have a reserve atmos phere that would accommodate those needs, with the greater part of an expanding volume of bank credit provided for by commercial banks from their recently increased holdings of United States Government securities. If that were done, and if the expansion of bank credit contained within reasonable limits, System policy would have permitted the divestment of such securities without creating a market so tight as to defeat its own purpose by in volving the commercial banks in heavy depreciation costs. The commercial banks must be in the forefront of System policy decisions formulated to avoid a market tightness that would handicap their operations. In addition, there were the approaching and continuing needs of the Treasury which the System has a first responsibility to accommodate. Mr. Shepardson said he was extremely gratified that the Desk had been able to recapture redundant reserves so promptly. This had been accomplished far more expeditiously than he had With regard to the directive, he felt that it thought possible. the situation, and he would prefer not was still adequate to meet The Committee seemed to be to change it at a telephone meeting. be in the direction of less that the trend should in agreement concerned that the movement prevailed, but he was ease than had

not be too precipitate. The differences in the reserve projections of the Board's staff and the New York Bank indicated uncertainty as to what level might eventuate. In the circumstances, he would leave considerable leeway and discretion in the hands of the Management of the Account with a view to maintaining a favorable market atmosphere, generally trending in the direction that the Committee had discussed. Mr. Balderston said that he too was gratified with the results that the Desk had been able to achieve in so short a time. Because of the differences in the reserve projections of the New York Bank and the Board's staff, he had the feeling that the Committee should leave discretion with the Desk, but he would hope that between now and August 19 the Desk could aim at some reduction of free reserves, using as a guide $200-$400 million. He noted that the projection of the Board's staff was $296 million during the week when the New York Bank estimated net borrowed reserves of $9 million. There fore, he felt that the Committee could not pinpoint a target for the Desk and merely must indicate a general direction. He hoped it would be possible so to conduct operations as to preserve a neutral attitude, which to him meant neither ease nor restraint until the Committee could see more clearly how business was going to be after Labor Day. which in about a he would like to see neutrality, Until that time should mean free reserves of zero. month

Chairman Martin said that he thought the main point was the matter of atmosphere and conditionn in the Government securi ties market. There was some question in his mind about Mr. Balderston's free reserve range of $200-$400 million, but in any event he did not think the level was as important as the nature of the market that resulted from it. He recalled that the Com mittee had experienced great difficulty from being more or less tied to a free reserve figure of $500 million. One should be careful, he said, about projecting anything. He said that he would like to have Mr. Rouse's feeling about trying to move in the direction of less ease, but doing so with a minimum of upset to the Government securities market. Rouse said that much depended on what expectations Mr. market. Last week average free reserves were generated in the and this week they would be more were at the level of $530 million would cause much dis he did not think that $400 million, but like playing by ear. He thought was really a matter of turbance. It members of the what the Management understood that the Account could get along mind and that the Management Committee had in In the sense at this time. in the directive any change without having redundant to keep from it up, Vardaman pointed that Mr. saw it, the As he a good directive. would be quite reserves the Committee and that understanding, with could function Desk

could get together quickly if necessary. Chairman Martin then asked Mr. Rouse if he felt sure that he had a sufficient understanding of what was in the minds of the Committee members in order to proceed, and Mr. Rouse replied in the affirmative. It would, he said, require a good deal of leeway. Chairman Martin then stated that he thought it was clear that the majority of the Committee did not want to tie the Manage ment of the Account to any precise free reserve figure. said that he would proceed accord In conclusion, Mr. Rouse ing to his understanding of the Committee's thinking. the meeting adjourned. Thereupon