August 4, 1958 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held on Monday, August 4, 1958, at 3:00 p.m. This was a telephone conference meeting and each individual was in Washington except as otherwise indicated in parentheses in the following list of those participating PRESENT: Mr. Martin, Chairman Mr. Balderston Mr. Irons (Dallas) Mr. Leach (Richmond) Mr. Mangels Mr. Mills Mr. Shepardson Mr. Vardaman Mr. Treiber, Alternate for Mr. Hayes (New York) Mr. Allen, Alternate for Mr. Fulton (Chicago) Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Young, Associate Economist Mr. Rouse, Manager, System Open Market Account (New York) Mr. Kenyon, Assistant Secretary, Board of Governors Mr. Keir, Acting Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Chairman Martin asked Mr. Rouse to review for the Committee conditions in the Government securities market, the color, feel, and in the System Account. and his plans for operations tone of the market, replied that, to put the matter briefly, he might Mr. Rouse out of a directive had run the Account Management that in a sense say For had been recaptured. reserves for redundant from the Committee, active and been very had not the market he said, four day the past
movements pricewise had been of a rather minor character, although today' price movements were probably a little wider than during the last three days of last week. There was some activity in Treasury bills at a definitely higher bill rate. The market began to feel a little sluggish last Friday due to a lesser availability of funds, largely stemming from a redistribution of deposits from the city to the country banks, and the market today reflected this same degree of relative tightness. The Treasury bill market had points, and in today's auction the average moved up 18 to 20 basis above 1.15, with a stop-out at rate apparently would be a little of the New York Bank's said that on the basis Mr. Rouse current statement week free reserves for the projections average following week the average $381 million, but for the would be about increase in required reflecting an be about zero, primarily would tax and loan account the increased Treasury because of reserves certificates. of the tax anticipation from sale balances resulting million for being $565 were higher, Board's staff of the Estimates million for the $300 week and approximately the current statement in esti to differences principally week, attributable following noted that he this connection, In reserves. of required mates to be had developed staff of the Board's the estimates recently the more accurate. somewhat
Looking ahead, Mr. Rouse saw no real tightness in the money market. It appeared that funds were available below the discount rate. Chairman Martin stated to Mr. Rouse that he thought the latter had handled the situation very well over the past few days, and Mr. Rouse commented in terms that the actions taken to re capture redundant reserves had reflected the views expressed by the members of the Open Market Committee. Chairman Martin then said that the situation appeared to contain some elements of danger from the standpoint that System Account operations might overshoot their mark. When the figures came out, they might constitute something of a shock and the Manager of the Account therefore should be given considerable latitude, for he might want to buy for the Account in the next few days. Lower reserve levels should be sought, but in as orderly a way as possible and without undue disturbance to the Government securities market. It was possible that there might be another difficult period of open market activity, Mr. Rouse stated that there was always that possibility, realized in the discussions toward the end of as the Committee Nevertheless, the Committee had felt that the Account last week. as it could last week, and then, as should sell as many bills Martin had suggested, do what was necessary. Chairman
Chairman Martin then stated that when it came to a possible change in the policy directive there was some question in his mind about taking such action at a telephone meeting. There would be differences among the members of the Committee with regard to what certain words actually meant. Therefore, it seemed to him that it would be preferable to give the Manager of the Account maximum leeway within the framework of the existing directive and leave the directive unchanged until the meeting of the Committee on Tuesday, August 19. Reference was made by Mr. Rouse to the comments made by the Committee members at the meeting on July 29, following which speaking for himself, he would want to the Chairman said that, he needed to move in the di give the Manager whatever authority at that meeting without that the Committee was discussing rection the market than necessary. The any more disturbance in causing of the minds as was to have a meeting thing, he said, important to be conducted rather the Account were going to how operations in last meeting. The was said at the worry about exactly what than to members of the from the other then asked for expressions Chairman would supersede that the comments with the understanding Committee, 29 Committee meeting. said at the July what was with the general he was in agreement said that Mr. Treiber with which System of the difficulties by Chairman Martin appraisal
open market activities might be confronted. The international situation was still delicate, adjustment was still going on in the market, weak holdings of securities were still overhanging the market, and some holders of the 1-5/8 per cent certificates were seeking to dispose of them. The commercial banks would be gradually completing the underwriting process on the tax anticipa tion certificates by selling as demand developed. While he believed that there should be less ease than had prevailed, say a month ago, on the other hand he would want to avoid tightness that would cause any kind of unsettlement. He was delighted at the economic upturn that had become evident during the last couple of months and would like to see it continue at a stable rate. There had been adjustments of rates throughout the markets and he would not want to see them It seemed desirable to have a pushed too far by monetary action. continuation of free reserves at about the current level, say $300 million, without creating a feeling of tightness and while, to $00 of course, being alert to market developments. what the Account had done in the Mr. Irons said he felt that with the directive and the in past few days was entirely in line In his opinion the Account had struction given by the Committee. the reserves that the Committee done an excellent job in recapturing the task quickly and regarded as redundant. It had accomplished far. He agreed with consequences thus without untoward apparently
Chairman Martin that it was undesirable to move too fast and that one could not ignore the possibility of problems developing in the market as the figures unfolded. The important thing was the longer run objective, even though it might be necessary to deviate from it from time to time, and judgment with regard to any such deviations should rest with the Manager of the Account. He should have a very considerable leeway to meet short-run spot situations as they ap peared to be developing in the market, even though for a short period he was deviating from the major objective on which all of the members of the Committee appeared to be in substantial agreement. Mr. Irons said that he did not have any figure for free reserves in mind. The direction in which the Desk had been moving was desirable and in line with the major objective. Mr. Mangels recalled that at the Committee meeting on July 29 that he was hopeful of free reserves getting down to about he had said something not too far from that might $500 million. In other words, He had not been thinking in terms as low as $300 be satisfactory. between $400 and $500 mil $400 million, and he felt that somewhere Chairman had expressed the thought that lion might be better. The too fast, and the same might have gone a little System operations He would consider it desirable thought had been in his own mind. $500 million, with what between $00 and to aim for free reserves needed by the Desk. ever latitude was
Mr. Allen stated that the Desk had been more successful than he had thought possible in getting rid of redundant reserves. However, just because it had gotten rid of them he did not think that a change in the directive until the next Committee meeting was necessary. He would leave the directive alone. He felt that the Manager of the Account should have considerable latitude with respect to free reserves, going between $300 and $600 million in the light of market conditions. Mr. Leach expressed the view that what had been done by the Desk was fine and that it was fortunate that the Desk had found it possible to get rid of redundant reserves so quickly. General policy, he felt, ought to be one of less ease. He thought that the estimated $381 million free reserve level was all right and that next week there would not be too much of a for this week, should not be allowed to get down problem, although free reserves in favor of a lower level of free reserves, to zero. While he was there too rapidly, for he would not want he would not want to get an understanding that the Com the market. If there was to upset free reserves, and if toward lower levels of mittee was working benchmark for the Manager was kept in mind as a general some figure as good a directive his opinion was about Account, that in of the directive, he felt As to the policy could give. as the Committee over the telephone. to agree on language it would be difficult that
His thought would be to suggest $400 million of free reserves just as a benchmark, with plenty of leeway to vary from that level. As he had said, he would not want free reserves to get down to the zero level. Mr. Vardaman said that the primary objective of the Desk, as expressed in the last Committee directive, was to eliminate redundant reserves. That having been accomplished, there was the problem of establishing an interim policy to last until further notice or until the meeting of the Committee on August 19. He would dislike to change the policy directive at a telephone meeting, and it seemed to him that the best that could be done was for all of the Committee members to express their thoughts. For his own the objective of the Desk from now on should part, he would say that reserves did not return and to maintain free be to see that redundant between $400, or perhaps $300, million reserves in a range somewhere that the Desk had to have million, with the understanding and $600 in operating the Account. the very broadest leeway very much in agreement with Mr. Mills said that he was as he understood it, con reasoning which would, Chairman Martin's bearing in mind reserves but always down on free template tapering too tight a doing so would produce were involved if the risks that that a was the probability his own mind in market. Especially an expansion point involve would at some it took hold, if recovery,
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
Also: Record of Policy Actions