September 9, 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, September 9, 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. Szymczak Vardaman Mr. Messrs. Erickson, 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. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Daane, Marget, Walker, Wheeler, and Young, Associate Economists Rouse, Manager, System Open Market Account Mr. Secretary, Board of Mr. Kenyon, Assistant Governors Division of Koch, Associate Adviser, Mr. Board of Governors Research and Statistics, Government Finance Keir, Acting Chief, Mr. of Research and Statistics, Section, Division Board of Governors Securities Department, Mr. Stone, Manager, Bank of New York Federal Reserve and Tow, Vice Messrs. Ellis, Roosa, Mitchell, Banks of the Federal Reserve Presidents of and Kansas City, New York, Chicago, Boston, Assistant Vice Mr. Balles, respectively;
President, Federal Reserve Bank of Cleveland; Messrs. Anderson and Atkinson, Economic Advisers, Federal Reserve Banks of Philadelphia and Atlanta, respectively; Mr. Parsons, Director of Research, Federal Reserve Bank of Minneapolis; and Mr. Meigs, Economist, Federal Reserve Bank of St. Louis Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Com mittee held on July 29 (two meetings) and August 19, 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 June 17 through September 3, 1958, with emphasis on the August 19-September 3 period, and a supplemental report covering commitments executed September through September 8, 1958. Copies of both reports have been placed in the files of the Federal Open Market Committee. Reporting on operations since the last meeting, Mr. Rouse stated that reserve availability has been about what the Committee hoped it would be. Free reserve levels have been worked down steadily with a minimum of market disturbances. During the last few days the market has been more calm than at any time since last June, despite the reduction in reserve availability and the developing tensions in has also developed in the markets for the Far East. A better tone The Standard Oil of California issue corporate and municipal bonds.
sold well at a reoffering yield of 4.40 per cent--which compares with the 3.75 or 3.80 rate at which the issue could have been brought out in June, as originally planned. The Sears Roebuck $350 million issue is being offered at par to yield .,75 per cent and is expected to be an initial success. Mr. Rouse stated that looking ahead, the Treasury is planning to begin consultations on its next cash offering on September 22 and the announcement of the terms of the offering is expected to be made on September 25. Between now and then a major problem confronting the Account Management is how to deal with float, which is expected reserve levels sharply over the next two or three weeks. to raise free free reserves of $182 million for Current projections indicate average for the September 17 week, September 10, $492 million the week ending added that the figure 24 week. Mr. Rouse and $561 for the September to be lower than 10 had been expected week ending September for the supplementary report), attachment to the (shown on the the $182 million on in the projections "miss" had occurred that a substantial but more reserves were considerably out that there and it turned Friday Mr. Rouse been anticipated. than had week end over the available ahead, his that lies bulge the float-induced that as regards stated in reserves this rise is to offset policy, on existing plan, based that he feels the Committee unless if possible, entirely, almost do otherwise. should
Mr. Mills observed that since the initial benefit of float appears largely in country banks, and since corrective action would involve taking money out of the central money market, he wondered whether the attempt to offset float might cause a severe tightening of the money market just before the Treasury is ready to come in for cash. Mr. Rouse replied that the market will be looking closely at the statistics on free reserves, and unless float is offset, the feeling might develop that the money market was being adjusted to help the forthcoming Treasury offering. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period August 19 through September 8, 1958, were approved, ratified, and confirmed. In supplementation of the staff memorandum distributed under date of September 5, 1958, Mr. Young presented the following state ment on the economic situation: Sparked by a marked rise in financial liquidity of businesses and consumers, a liberal dosage of Government spending and subsidy, and an inflationary psychology in equity markets, domestic recovery in output, income, and consumption has been vigorous indeed. At this point, recovery certainly holds promise of continuing vigorous over the period ahead. Current information indicates that the August index of industrial production will be marked up two more index points to 135 relative to the and further that the rise in third 1947-49 average, quarter GNP will amount to at least $10 billion, bringing the total to $439 annual rate. These figures mean that half of the decline in industrial production and over half of the decline in the dollar value of GNP from the year has now been recovered. third quarter of last
Gains in industrial production have continued to be widespread and to extend through durable goods and non durable goods lines, to be sure with some uneveness. Fuel and minerals output has also risen further, as have rail freight loadings and electric power output, the latter to new high ground. New orders at durable manufacturers rose again in July. Though small, the rise was the third in a row and unfilled orders edged up slightly for the second consecutive month. At all manufacturers, the July sales rise, amounting to per cent, was the third significant monthly increase in succession. Manufacturers in July continued to liquidate inventories, but at the lowest rate of liquidation since December. Reduc tion of finished goods inventories was again a feature of the liquidation, but as in the past two months liquidation also included materials supplies and goods in process. In the area of industrial production, the big uncertainty for the near-term future relates to automobiles. Here retail sales are lagging, but with model changeovers in process dealer stocks are being worked off and market forces point towards a fairly tight new and used car supply situation by this month's end. Meanwhile, though the threat of labor work stoppage continues to be an industry hazard, output of parts for new model cars is proceeding apace. Construction activity in August rose again and reached a total value, annual rate, of $49.5 billion, up 5 per cent from May and about 2 per cent under the peak in December. Con tract awards have continued very high, with residential awards more particularly strong. Prices of building materials once and construction costs have resumed an upward drift. Pertinent to the rise in activity in durable goods pro construction is the latest information on plant duction and plans. Whereas earlier reported and equipment expenditure plans of business indicated decline extend capital investment ing through the fourth quarter, though at a rate sharply three quarters, the most recent reduced from the preceding shows a leveling off in this Commerce-SEC survey just released and a modest rise in such investment in the fourth quarter quarter. industry, transportation, power, and With activity in showing marked upward tilt, some further construction all well be expected. Such in labor markets might strengthening however, has been moderate. improvement as has occurred, changes in employment, unemployment, Over the past month, though some contra have been largely seasonal, and workweek in manufacturing, trade, and seasonal rise seems identifiable Government employment.
At the consumer level, retail sales, which had held the March-April gain of 2-1/2 per cent through May and June, rose again by 1 per cent in July. August department store sales, which climbed 5 per cent ahead of July and 3 per cent over August of last year, suggest another strong month at retail outlets. Retail inventories, which had shown modest accumulation in June, showed modest liquidation in July. Since early August, average prices at wholesale have declined slightly, reflecting declines of about 3 per cent in average wholesale prices of farm and food products with average prices of industrial commodities--materials and finished goods--about stable. Consumer prices, which rose slightly further in July, have probably declined slightly in August, reflecting the influence of lower prices for meats and vegetables. In industrial countries abroad, the indications are of either revival, as in Canada, or of stability at moderately reduced levels, as in most European countries and in Japan. Contractive tendencies in steel and textiles in Europe seem to have largely run their course. In raw material countries of South America and Asia, balance of payments problems, stemming in part from lower export prices, remain acute with various country situations critically inflationary. Taken as a whole, however, markets for U. S. exports seem stronger and our export volume appears to have been showing gradual re covery from its low reached last February. By latest indica tions, which relate to June, U. S. imports appear to hold at the high level of preceding months. Mr. Thomas made the following statement with regard to financial developments: The most striking financial developments of recent with the adjustment of weeks have been those associated and medium-term rates con interest rates. Long-term the rise that began in June; short tinued during August procession and rose most sharply in term rates joined the securities are now close to August. Yields on long-term the highs of 1957, with U. S. Government bonds near 3-3/4 corporate seasoned bonds at 4 per per cent, high-grade of a point higher. Yields on cent, and new issues 3/8 up to the level of U. S. issues are almost medium-term they were at last year's rates but lower than long-term
peaks. Rates on various types of short-term paper have risen from the neighborhood of 1 to 1-1/2 per cent to near the range of 2 to 2-1/2 per cent, but are still well below the range of 3-1/2 to 4 per cent that existed approximately a year ago. It is as yet difficult to judge to what extent these changes in interest rate levels reflect a basic shift in credit demands relative to the supply of savings; to what extent they reflect speculative forces that may have moved too far first in one direction and then in the other; or to what extent they reflect the shift in System policy as to availability of reserves. Each of these elements has exerted an influence. The steadier tone of the market during the past week may indicate that the rise has halted until fundamental trends can be reappraised. Somewhat higher interest rates than those which pre vailed in the early summer are clearly justified by basic factors in the credit markets. The clear indications of economic recovery presage growing credit needs from the private economy. The prospective Treasury deficit designed to offset declining private expenditures--will probably coincide with an increase in such expenditures and probably in private borrowing. The aggregate amount of credit that has been supplied this year has been very large. Expansion of total loans and investments of com mercial banks has already been larger than that for any other recent year taken as a whole and the season of greatest increase is still ahead. New security issues have continued at a high level. Mortgage lending activity has increased. It is likely that the speculative and professional forces that operated so dramatically to depress bond prices have abated. Many of the weak holders have been sold out. Investors, such as banks, that might be inclined to sell in anticipation of declines have been restrained by the the decline and the unwillingness to take losses. rapidity of Dealers in securities, who build up positions to very high reduced their commitments to manageable levels in June, have negligible amounts. Dealers in Government and in many cases securities, for example, who had positions of about $2.5 double normal holdings, now billion in June, approximately net amounts with short positions in many hold negligible to be buyers than sellers in issues. They are more likely the future.
The volume of credit demands during the remainder of this year is difficult to predict. It is clear that the Treasury will be a heavy borrower. Something like $7.5 billion may need to be borrowed before the end of the year. A similar amount of new borrowing may be needed in the first half of 1959, but that will be offset by redemption of maturing debt. A major uncertainty is whether the Treasury deficit, by providing funds to the economy, will reduce private borrow ing demands, or whether economic recovery, stimulated in part by the Government deficit, will induce increased private borrowing. Coincident increases in both, following the bank credit expansion that has already occurred, could result in much greater credit and monetary growth than is needed or desirable for sustained economic recovery. Most of the bank credit growth that has occurred this year has been in holdings of Government securities, and other borrowing at banks has been moderate. The funds sup plied by the banks through buying Government securities, however, have gone indirectly into other uses. This trend might continue. There should be no objection to financing Treasury needs through the banks, if other types of bank are limited and total credit expansion is kept within credit moderate limits. To achieve this result, however, in a may require some restraint on period of business recovery resulting increases in interest rates. credit growth with policy question to be decided is how much monetary The in the next few months. There are expansion should there be guides, because of variations in the no specific quantitative of money substitutes. The active use of existing money and by demand deposits and currency, money supply, as measured in August from the somewhat more than seasonally declined basis, reached after a high, on a seasonally adjusted record adjustedin July. The total--seasonally very rapid growth 1-1/2 per cent larger is $2 billion or at $136.8 billion, deposits have increased In addition, time than a year ago. deposits by $1.5 billion, billion and U. S. Government by $10 billion, or nearly 6 per a total growth of over $13 making the past year. The and currency over cent, in all deposits over 4 per cent, is product, after dropping gross national peak quarter of per cent below the probably about 2 by now supply plus normal seasonal The existing money last year. a rise of adequate to support be more than expansion should the end of the year. its previous peak by GNP to above from the in demand deposits seasonal growth The usual be about $6 billion of December would to the end end of August
at all commercial banks, with $5 billion at member banks, requiring additional reserves of nearly $800 million allowing for certain changes in the Treasury tax and loan accounts. The usual currency growth would be nearly $1 billion. After allowance for float and other factors, to meet these needs would call for open market purchases or additional member bank borrowing of nearly $1.5 billion by the end of the year. The bulk of these operations would come in November and December and would need to be reversed in January to provide for the seasonal increase in money and then to offset the post-holiday decline. Timing of operations would need to take into consideration temporary variations, the impact of Treasury financing, and the degree of restraint to be exercised. The projections pre sented allow for supplying reserves at the time of Treasury cash financing, but their subsequent absorption as Treasury tax and loan balances are reduced. In view of the possibility that banks may be willing to increase their borrowings to meet credit demands rather than liquidate Government securities at prevailing prices, if the pressure of total credit demands should exceed the seasonal pattern, then net borrowed reserves should be allowed to increase accordingly. To absorb existing free reserves, other than a moderate amount during the mid tax week, there probably should be further open September market sales of $200 million or more in the next two weeks depending on how much float is absorbed. Purchases to meet seasonal needs would not need to begin until late October. conform in amounts and timing to the pattern If purchases than seasonal credit growth would projected, then any greater by member banks. If, on the bring about higher borrowings growth should fall below the projected other hand, credit then free reserves would increase. In seasonal pattern, permitted to occur; no these results should be either case, reserves should be level of free or net borrowed particular be to provide a The policy guide should rigidly maintained. addition to the reserve supply. certain window and of the discount Stricter administration be appropriate if bank rate increases may further discount than seems desirable to expand more rapidly credit tends and borrowings increase accordingly. of his views on the following statement Mr. Hayes presented outlook and credit policy: the business which I had absence, during from a month's On returning developments, I as to national monetary some uneasy feelings
was struck especially by the dramatic upsurge in interest rates, both short-term and long-term, which had occurred during August. I was afraid this upsurge might be a sympton of a state of intensifying tightness in the money and credit markets--tightness that might not, in my judgment at any rate, be appropriate in the present early stage of the recession-recovery cycle. My concern mounted when I found not only a bill rate almost 1-1/2 per cent higher than at the end of July and long-term yields within striking distance of the 1957 boom peaks, but also that a number of bond issues had been postponed and that the availability of mortgage funds was being adversely affected. I feel apprehensive especially over the fact that the Federal Reserve System, far from acting to damp down this extreme movement, has abetted it by effecting a substantial tightening of monetary policy. The rise in margin require ments early in August could be properly attributed to an overexuberant speculative surge in the stock market. But the subsequent speed with which free reserves have been reduced from the $500 million level to around $100 million, coupled with discount rate increases which may partly have been induced by these open market pressures, has pointed clearly to a sharper change in reserve policy than I believe has been warranted by actual business developments. Expectations of better business and fears of resumption of strongly inflationary trends are doubtless at the root of the rise in interest rates. (Involved here is a public assumption, I believe an erroneous one, that the prospective Federal deficit for fiscal 1959 makes near-term inflation inevitable.) But these basic causes have been reinforced and exaggerated by a widespread belief that Federal Reserve policy has been getting tighter and is likely to get a good deal more so from now on. Undoubtedly business recovery is proceeding more rapidly and on a broader front than most of us had expected a few months ago. This is cause for rejoicing. The major uncertainty in the business outlook lies in the future course of consumer buying. So far, in spite of a sharp pickup in personal income, retail sales seem to have done little better than hold even. whether the 1959 automobile models will It remains to be seen appeal to spark a strong revival in buying. have sufficient upward revisions of plans for While there is some evidence of plant and equipment expenditures, these are not yet business by the fact that unemploy very substantial. I am impressed about the same level as in the ment in July was still at of the recession, despite the recovery in April trough
industrial production. As has been true for many months, the situation is still characterized by surplus capacity, surplus labor, and surplus inventory. In the absence of unforeseen diplomatic and military developments abroad, it is hard to discern any near-term danger of excessive pressures on available real resources. The same general conclusion appears to be supported by a review of recent price trends. Both wholesale and retail indexes have been leveling off, and the prospect of lower food prices over the coming months is a distinctly favorable element in the over-all price outlook. Raw material prices are not behaving as if traders expected a strong upsurge in demand. General price stability seems to be a reasonable expectation for some months to come. If neither the state of business activity nor price conditions seem to convey a threat of imminent inflation, it still behooves us to examine carefully the potential inflationary influence inherent in any excessive increase in the money supply or in liquidity in general. Our studies of this situation do not support the conclusion that liquidity is dangerously high, either in or outside of the banks. Gains in the money supply to date (and in prospect for the rest of 1958), when viewed in reasonable perspective over the last few years, appear consistent with the economy's long-term growth. It has been pointed out that the seasonally adjusted money supply rose at the rate of 8 per cent per annum from the end of January to the end of July--but this came on top of a very sharp decline from July 1957 to January 1958, so that the gain for the whole year ending July is around 1.2 per cent. For the calendar year 1958 the gain is unlikely to exceed 2.5 per cent to 3 per cent (and I believe will probably be less than 2.5 per cent) and the average for the eight years 1951-1958 is likely to per cent. There is danger, I believe, in be about 2.5 overemphasizing possible errors in our policies in 1954 between that period and 1955 and drawing a close parallel virtually all measures show substantially the present one, when liquidity now than at that time. less System to stand guard against Essential as it is for the I think we would be doing the public the dangers of inflation, stress on this danger, at a if we put too much a disservice not seem imminent. For our exces time when the danger does could lead the public to concentration on the subject sive disposal suggest an explosive that the data at our believe be the last to deny that infla of inflation. I would threat primarily because of the tion is a serious long-term problem,
tendency of wage increases in key industries, in good times and bad, to exceed a reasonable share of national productivity gains. But I cannot see any justification for combating this long-term threat by means of a rapid shift in monetary policy, at a time when inflationary forces are not dominant and when, in my view, a gradual shift away from ease would be appropriate. Because the events of the past summer have already brought many rates to high levels, there is danger that the further steps required, if the present business improvement should be come a boom, could lead to interest-rate levels so high as to be harmful to the economy and so high as to place the System in political jeopardy. Just what is the right remedy for this long-term wage-push inflationary threat, I am not sure. It may be some form of concerted Government effort to discourage or prevent wage increases in excess of a reasonable share of national over-all productivity gains. The Federal Reserve System might well devote considerable attention to this ques tion even though responsibility for any ultimate action along these lines would doubtless rest with the Executive Branch of the Government. We must of course bear in mind that the Treasury faces a difficult cash financing problem early in October. Treasury problems and Federal Reserve credit policy are interrelated. We can never be unmindful of those problems. It seems to me that it is important that there be a period of stability in the money and securities markets. This should help not only the Treasury but the entire economy. I believe that the Fed eral Reserve should promote that stability; that we should make clear, through open market operations, that the move away from active ease is a mild and gradual one, not a sharp change of policy. I think we should always be guided by the market effects of our actions, and if the market has overreacted, as indicated by the course of interest rates, we might well let free reserves rise above the current $100 million level, up to $300 million, in the hope that this perhaps ranging would encourage the reestablishment of a better feeling of equilibrium in the capital market, perhaps evidenced by some modest decline in interest rates. We should make clear, I reserves readily both for believe, that we intend to provide and to permit the banks to underwrite the seasonal needs coming Treasury offering. very careful consideration to the dis Our Bank has given count rate for the past several weeks, and at last Thursday's that the rate be re of our Directors, I recommended meeting without change. The Directors voted unanimously established was made that if the recommendation to do so, and the comment I would have had a very hard fight on my had been otherwise
hands. In fact I had no inclination to recommend otherwise. It seemed to our Directors, and to me, that an increase in the rate would be undesirable if it were to be regarded as a signal (as it doubtless would be) tending to confirm a substantial tightening of Federal Reserve policy. As I have outlined above, we felt that the tightening effect had gone too far already, and that the appropriate policy at this juncture is to try to damp down this tendency, not to en courage it. We did not believe that there was any serious danger of abuse of the discount window, for the time being at least, and hence an increase did not seem to be required for such a technical reason. While the argument has been made that a move to 2 per cent might have "cleared the air," removing fears that our Bank might be contemplating a 1/2 per cent rise, and thus tending to stabilize market conditions well in advance of the Treasury offering, I cannot accept this argument. It seems to me that if we had raised the rate, the market would still be wondering two or three weeks from now whether a second rate increase was in prospect, if not before, then immediately after, the Treasury financing. I respect the views of those Reserve Banks which have seen fit to increase the rate, but this is a very delicate juncture in Federal Reserve policy when it is perhaps especially desirable to give scope to regional differences of opinion. I that our Directors, who were unanimous in their views, might add me to convey to the Committee their opinion that monetary wished in the last few weeks and that policy has been too restrictive modification of this tightening process is greatly needed some to avoid serious economic and political consequences. if we are that the present directive provides a It seems to me within which to operate over the next three suitable framework weeks. fact that the directors of the Johns stated that due to the Mr. hold their regular September Reserve Bank of St. Louis would Federal there would, of course, be con this Thursday, at which time meeting uppermost in his mind at discount rate, the matter sideration of the obligation to make a recom would discharge his this moment was how he the Committee was the rate. As the directors concerning mendation to
-l4 aware, he had been one of a minority who believed that perhaps the rather rapid and substantial rise in interest rates, and more recently the greater restrictions upon the availability of reserves, had proceeded a little faster than they should have. It might turn out, of course, that this was absolutely right; it could even turn out that it was not enough. Nevertheless, whatever his own views about those developments might be, he had to accept the fact that these changes had occurred--that the Federal Reserve System had either permitted or caused them to occur. He was not inclined to believe that the actions taken and the results achieved could be reversed irrespective of whether they had gone too far or had pro ceeded too fast. Neither did he wish to magnify out of proportion the importance of the St. Louis discount rate at this time. In all the circumstances, his present inclination was to conform to what very rapidly was coming to be national policy regarding the discount rate--and which perhaps ought to be national policy without too much further delay. Therefore, he expected on Thursday to recommend to that the St. Louis discount rate be increased to 2 per his directors he proposed to make such a recommendation, he could cent. Although what the directors would do. At the meeting on not forecast were present, the action to 28, at which six of the directors August unanimous vote, and con rate was taken by reestablish the existing who could not be present at that versations with two other directors they would have they had been present indicated that if meeting
voted the same way. He was not sure that the directors' views had changed or could be changed so as to bring about the action that he expected to recommend. Mr. Johns said he had a feeling that Federal Reserve action in the next three weeks--and he supposed he did not have to look too much further ahead at this time--should not accelerate the tightening which had already occurred. He said this without regard to the needs of the Treasury which would be quite great. At this juncture he thought that the Committee might pause--that is, keep things as they are for at least another three weeks--and then take another look at the situation. Mr. Johns recalled that he one was who suggested a few weeks ago that it might be appropriate to look at margin requirements. Although he had no recent figures--in fact did not know whether they were available or not--he still had some question in his mind as to whether margin requirements were as high as might be appropriate. He had no suggestions with respect to the policy directive. Mr. Bryan stated that the latest figures available for the Sixth District seemed to indicate as a continuing matter a rather broad and vigorous recovery. Nonfarm employment had improved and manufacturing employment was up sharply. Department store sales which were rather dramatic, about 10 per cent over showed increases and other indicators were telling about the same story. a year ago,
There had been a sharp increase in manufacturing payrolls and in average hours worked per week. Weekly reporting bank business loans were increasing and the increase in the past four weeks was larger than that occurring in four of the last five years. The picture in the Sixth District seemed to him eminently to justify the recent increase in the Atlanta Bank's discount rate. In general, Mr. Bryan said, he did not believe that System policy had proceeded too fast or had gone too far. If the market had over-reacted, that was an indication of the fact that a two-way market was operating at the present time. He believed it was very necessary to get a two-way market operating in the Government securi ties field where there had not been such a market for a considerable period. Mr. Bopp said that he found this a very difficult period on which to comment. From the standpoint of the nation as a whole, quite clearly there had been a significant and general recovery, especially in the past three months, so that conditions in the money and capital markets which were appropriate at an earlier date were no longer appropriate. In his opinion, however, conditions had radically in these markets than called for by business changed more would not wish to increase pressure at this time conditions. He would favor some slight moderation in the implementation and, in fact, of policy.
9/9/8 -17 Turning to the Third District, Mr. Bopp said that recovery continued to lag behind the country as a whole, especially in the critical area of employment. In July 1957, when the national level of unemployment was 4.3 per cent,the percentage in the Third District was 5.8. This July, when the national level was 7.5 per cent, the rate in the Third District was 9.4 per cent. Since mid-July new claims for unemployment compensation in the district had been down irregularly but not as much as might have been expected on a seasonal basis. Therefore, it appeared to him that a split discount rate might be appropriate and that the Philadelphia Bank perhaps should be at the tail end of the rate change. Meanwhile, the Bank was watchi closely the level of member bank borrowing and the details of such borrowing. For the last three weeks city banks had been coming in to the discount window over the week ends but last night they had all repaid their borrowings. These borrowings have been running at a rate equal to 5 per cent of the national total. Mr. Bopp repeated that if there was any time when a split discount rate would be appropriate this would appear to be the time. However, if member bank borrowings should go up substantially and window became difficult, it would be administration of the discount the Philadelphia Bank to continue operating quite inappropriate for rate. Under such circumstances he would recommend to at a lower move along with the other the Philadelphia Bank his directors that
Banks on the discount rate, even though it might feel that the national policy was not quite appropriate. Mr. Bopp concluded by saying that he would favor leaving the policy directive unchanged. Mr. Fulton said that the rays of dawn had begun to appear in the Fourth District but that they were not as bright as everyone would like to see them. The district steel industry had had a con siderable rise in the proportion of capacity being used, the present figure being about 56.5 per cent against the April low of 3 per cent. He pointed out, however, that 56.5 per cent is not very high for the industry. The foundries were working at a very limited percentage of capacity and in the machine tool industry orders had fallen off in July after a spurt in June. Employment did not go down as much in July as might have been indicated on a seasonal basis, so there was a little improvement in that respect. The model change-over in the automobile industry, of course, always sends unemployment up at the time of the year when it occurs, and the change-over was taking place now. All in all, while there had been some improvement from a rather low level of activity, total activity in the Fourth District the low side. The automobile industry was not ordering was still on last couple of days--the extent and until very recently--the to any steel mills had received no orders from the oil industry for large In some quarters business was being pipe or similar materials.
characterized as having improved to a plateau--a somewhat low plateau--and it was reported that no improvement had been shown in the last couple of weeks. Therefore, a little discouragement was being voiced, the question being whether business activity was going to stay at the present level. Nevertheless, it was believed generally that if an agreement was reached with the auto unions, ordering of steel and components would take place and there would be a noticeable improvement in the latter part of the year. Continuing, Mr. Fulton said that construction activity in the Fourth District was rather strong in terms of heavy engineering projects and residential construction, but the picture as to non residential construction was not very good. Retail trade continued below the year-ago level, being down about 6 per cent, and although department store sales rose quite substantially last week they were still down 4 per cent for the year to date. In summary, the situa tion was hopeful but no strong upsurge had appeared as yet. A disturbing factor was the continuous price increases and the anticipa tion of price increases in a broad segment of industry. Steel, aluminum, and rubber had all increased their prices. The National Cash Register Company had just announced a 5 per cent price increase and many others were anticipating increases as the result of labor contracts being signed which provided for a 3.5 to 4 per cent in crease in wages despite unemployment in the fields of activity concerned.
Mr. Fulton reported that member banks had been coming to the discount window very substantially during the recent period but a check did not disclose that they were borrowing at a preferential rate and selling Federal funds to banks in other districts at a profit. Instead, it appeared that the banks needed the money that they were borrowing. Mr. Fulton expressed agreement with the comments of Mr. Johns about a national policy with respect to the discount rate level. Therefore, he said, he intended to recommend an increase in the discount rate of the Cleveland Bank on the basis of national policy at the directors' meeting this Thursday. However, he was not sure whether the directors would go along with that recommenda tion. At the meeting of the executive committee two weeks ago, the directors in attendance voiced strongly the feeling that the Fourth District was not in such a condition as to warrant an increase in the rate at that time. Mr. Fulton concluded his comments by saying that he saw no reason to suggest a change in the policy directive. Mr. Shepardson said it seemed to him that all of the reports, other economic information indicated that the national statistics, and to be one of strong recovery. Admittedly, there picture continued not moved back as fast as others, but for were some areas that had seemed to be a vigorous movement toward the country as a whole there at the prospects for the recovery. However one looked a strong
next few weeks, it seemed certain that there would be expansion in the fall, along with a serious Treasury problem beginning with the financing in the next two or three weeks and continuing on through the rest of the year. Mr. Shepardson then referred to Mr. Rouse's earlier comment to the effect that he thought System operations had about succeeded in meeting the Committee's target as to reserve availability and said that this was not his (Mr. Shepardson's) understanding. At its last meeting, he recalled, the Committee first talked about getting down to approximately a zero level of reserves by Labor Day but later the idea seemed to be more one of getting down to that level by the date of this meeting. Apparently there was still some of opinion. His own feeling was that free reserves should difference down close to zero by this time so that member banks have gotten discount window under the pressure of would have had to come to the demands for credit this fall. He said that he was somewhat further projections presented at this meeting. disturbed by the reserve average free reserves the New York Bank's projections, According to be $182 million and the average for the current statement week would for the next state of $400 million in excess would be substantially if free reserves short time remaining There was a very ment week. they should and in his opinion down further, going to be gotten were some period of stability that there could be be gotten down so
before the Treasury financing later this month. It would be his hope that the Account Management could get free reserves down below the figures presently projected. In his opinion, the trend should still be toward the zero level that some of the members of the Committee had had in mind. Mr. Shepardson said that this was no time to be in a position of indicating any vacillation in policy. If free reserves were to turn back up, that would create more uncertainty and leave the System in a more vulnerable position later on. He felt that it would be most desirable if the discount rate situation could be straightened out promptly. There may have been reasons why some Banks did not move at the beginning but that period was now past. Therefore, he believed that the Reserve Banks should reach a uniform basis without delay. Mr. Robertson, who had been on vacation during August, said that upon reviewing monetary policy following his return he found that he approved wholeheartedly everything that had been done during the time that he was away from his office. He then made the follow ing statement: The specific problem which this Committee now faces is how many bank reserve dollars should be provided in the next few months to meet the credit and monetary needs of general economic recovery to a higher level of activity, as well as those customary at this season of the year, and
at the same time not encourage unsustainable expansion based on commitments of a speculative nature. The out standing money supply, which increased while economic activity was declining, is presumably already adequate to support a level of output and consumption higher than the peak reached last year. Thus no more than the usual seasonal increase should be needed. The huge Treasury deficit, which seems inevitable for this fiscal year at least, makes the problem an exceptionally formidable one. If private credit demands should increase, along with Treasury borrowing, the total expansion of credit could be excessive. It is not in evitable, nor is it necessary, that this should occur. Treasury borrowing and spending will supply a large portion of the funds needed for recovery; other borrowing could be correspondingly smaller than it would otherwise be. The danger is that the government deficit will be a stimulus to a too rapid acceleration in private borrowing and spending, instead of an offset to a decline in private activities, as it was designed to be. It is very important that total credit expansion be kept within reasonable bounds, that the Treasury compete in the market for the funds it needs, and that private borrowing be tailored accordingly. If we supply the volume of reserves that we believe to be appropriate for the situation, and private credit demands are moderate, task of Treasury financing should not be too difficult, the although interest rates might stay at present levels or attract savings, as well as bank rise a little in order to securities. If private credit demands credit, into Treasury with Treasury borrowing, there may well be expand along pressures on interest rates. System strengthening upward to prevent rates from rising. policies should not be designed To do so would require pumping more money into the economy than will be needed for sound recovery. likelihood is that such pressures will develop, Since the permitted to occur before the some rise in rates should be October. Consequently, I Treasury comes to the market in in discount rates to 2-1/4 or would welcome further advances 2-1/2 per cent immediately. operations seem to that should govern our The principles the proper amount The mechanics of providing me to be clear. determine. That task means be easy to reserves will by no of and judgment by the Manage have to be handled with skill will guides as the Committee may of the Account with such ment the light of developments. time to time in decide upon from of a broad and are in the midst when we But at this juncture,
vigorous recovery, we should avoid the appearance of being afraid of our shadow. We should show by our actions that we are firmly resolved to resist inflationary pressures. In conclusion, Mr. Robertson said that he would not favor changing the policy directive for he did not feel that any change was necessary. In his opinion, existing open market policy should be continued. He agreed with Mr. Shepardson that this was a time to be more restrictive rather than the opposite. After stating that his appraisal of System policy considera tions followed quite closely the views expressed by Mr. Hayes, Mr. Mills made the following statement: In reading the minutes of this Committee's last meet ing, I was impressed with Mr. Bopp's remarks, which I took to mean that the Federal Reserve System would be ill-advised to be so overwhelmingly concerned with the problem of infla tion as to become oblivious to other pressing problems and responsibilities. My own thinking follows his and leads me to the conclusion that too severe a policy attack on antici pated inflation can defeat its own purpose. This spring's experience again demonstrated the lag between initiating a System policy and getting its effects and that impatience in obtaining results can produce too strong policy actions which, on this occasion, were reflected in excessive credit ease and speculation in the market for U. S. Government securities. A policy of severe credit restraint can now produce undesirable consequences of a reverse order that will show up in a further thinning of an already thin U. S. Government securities market and specula tion on the short side of the market that will tend to accentuate the downward trend of securities prices. In turn, the congestion in the new issues market for corporate and public obligations will worsen as prospective borrowers hasten to assert their claims in anticipation of still higher interest rates. This is the kind of a situation that relates itself to a restrictive monetary policy whose effects cannot be
measured by the available supply of reserves, which technically does not denote severe credit restraint, but by the impact on the commercial banking system of a relative reduction in the supply of reserves from that which the System's policy of earlier this year had accustomed it to. When it is considered that the rapid fall in the prices of U. S. Government securities has produced a major depreciation in the investment accounts of the commercial banks at a time when the level of their loans is high and their holdings of U. S. Government securities very substantial, their ability, under a policy of credit restraint, to shift their assets to make room for seasonal loans and investments in new issues of U. S. Government securities is greatly handi capped. Hence it is that if a System policy or credit restraint is pushed too vigorously, the System may be confronted with the need of supplying reserves in quantity in order to foster commercial bank subscription to new Treasury offerings and, in so doing, an undesirable inflationary impetus will have been created. Moreover, a too aggressive policy of credit restraint by hampering bank financing of new underwritings of securities commercial can retard the kind of investment programs that are con ducive to a sound economic recovery. of the above preaches the thought that the Federal All responsibility to the U. S. Government Reserve System's re-study. Policy actions of recent securities market needs foster the kind of market breadth, date cannot be said to been lauded in the past but, and resiliency that has depth results. Inasmuch as the instead, have produced opposite must accept a large share of the promoted an illusory excessive responsibility for having speculation in U. S. in past months and a major liquidity be given as to whether thought must Government securities, market should have been U. S. Government securities the out its own adjustments or left entirely free to work had, and has, a the Federal Reserve System whether these adjustments in to ease the path of responsibility the much vaunted market breadth, ways that will restore been a policy objective. that has depth, and resiliency the view that free reserves, Mr. Mills concluded by expressing $200-300 million. the range of be in at least, should temporarily
Mr. Vardaman said that when he found himself in disagreement with Mr. Mills and Mr. Hayes it caused him to think very seriously. He agreed with Mr. Hayes in the latter's analysis of the factual situation but he reached somewhat different conclusions as to what the System should do in the circumstances. As to the views expressed by Mr. Mills, he did not think that in times like this, or in fact at any other time, the System could build a monetary policy around the Government securities market. Mr. Vardaman went on to say that if one should look back a couple of years from now it seemed likely that he would regard the San Francisco Bank discount rate action as one of the most commendable and farsighted moves that the System had made. He did not think that this was a time to retreat from the policy thus initiated. He con sidered it fortunate that there had been initial disagreement as to the discount rate level and that there had been a split rate. At present, however, he would like very much to see the other Reserve Banks seriously consider going along up to the present level and being poised to go still higher. As he said at the last Committee meeting, he felt reasonably sure that shock treatment would be necessary later this fall, and the shock treatment would be lessened a bit if there could be a uniform discount rate at 2 per cent or not feel that he and Mr. Hayes were in dis even higher. He did agreement as to whether there was going to be inflation, the
difference of opinion being principally as to the imminence of inflation. Personally, he felt that inflation was inevitable unless restrictive action was taken at the proper time, and that time, in his opinion, was already here. He believed that the public was ahead of the statistics. With the landing of troops in Lebanon the Government established a frame of mind on the part of the buying public which would cause them, and also borrowers, to seek to obtain their requirements at the earliest possible time in anticipation of a price rise that was bound to come with United States military operations being carried on in various parts of the effect of those operations was bound to world. The psychological to have money rates at a the public. He would like sting and spur would be indulged in, and point where only necessitous borrowing buying would take place. a point where only necessitous prices at retreat from its present System should not The Federal Reserve at the level of zero to and it should maintain reserves policy to rig a market should not attempt minus. The System slightly when it was very apparent, benefit of the Treasury just for the This was that the was going to happen. to his view, what at least must be serious and that there to have inflation was going country shock treatment. to attempt it would be impractical Vardaman felt that Mr. be greater there would that, in fact, and wage pressures to control
pressures. Therefore, he felt that the Committee ought to go on as at present, facing the fact that it was confronted with inflationary pressures not only now but increasingly so with the passage of time. In the light of that prospect, the System should act accordingly. Mr. Leach said that the recession in the Fifth District was marked by a severe decline in the coal mining areas of West Virginia and a lesser but still substantial decline in the heavy industries of Maryland. Declines in Virginia and the Carolinas were much less pronounced. Textile and tobacco manufacturing are important in dustries in the latter three States, and textiles had declined before the general recession had started while tobacco manufacturing is to a considerable extent depression resistant. In recent months there had been continuing and widespread recovery in the Fifth District but bituminous coal mining had not yet recovered to a satisfactory level. Current production in this industry was-running about 20 per cent under its year-ago volume. There had been significant gains reported in a variety of other industries including construction, furniture, lumber, and hosiery and there had also been signs of improvement in some parts of the long-depressed textile industry. had been a marked improvement in practically all All told, there evidence was seen, however, that areas of the Fifth District. No of expansion had been too rapid. the rate to policy, Mr. Leach said he thought the System With respect less ease fairly early in the recovery was correct in shifting to
phase. Indeed, the System's actions may have already had some slight effect in dampening inflationary sentiment. Certainly, the System had made it clear that its policy had shifted toward less ease. It was true that there was now substantial depreciation in the investment portfolios of commercial banks which might limit their liquidation of longer issues. But holdings of bills and certificates by weekly reporting member banks are now $3.7 billion above last November and nearly $1 billion above their level at the end of 195. This might seem to be a cause for further tightening now but he was impressed by the rapidity with which the System had moved in this direction in the last several weeks. It did not now have much room left to move as far as the availability of reserves was concerned before the reserve data would indicate a posture of restraint. He thought it would be unfortunate to take such a posture at this time when further recovery was desirable. Specifically, while he realized that time was running out on this period of relative freedom of action before the next Treasury financing, he favor at this time of open market operations that would not be in net borrowed reserves. In his opinion, the System would produce and had moved fast enough for the time being. had gone far enough tightening move should Leach said, the next Logically, Mr. in the discount rate above 2 per cent, take the form of an increase had already occurred tightening that in view of the substantial but
he thought that this should wait. Under present conditions it would be extremely difficult for the Government securities market to stabilize if the System should continue to follow one tightening move with another. The forthcoming Treasury operation would be difficult in any event and he did not think that the System should intensify the difficulty without a clear case for further action. At present, he saw no clear case. Mr. Leach said that he expected to recommend an increase to 2 per cent in the discount rate of the Richmond Bank at the regular monthly meeting of the board of directors to be held the day after tomorrow. A discount rate of 2 per cent would be quite a bit below the bill rate at the moment but thus far a 1-3/4 per cent rate had not led to any administrative problems at the discount window. Two weeks ago the full Richmond Board of Directors was unanimously of the opinion that action on the discount rate at that time would be premature and he could not say what the directors would do this week. The policy directive, he felt, was satisfactory as presently written. In this connection, he suggested that if the System should move over into a policy of restraint, or even to a tighter policy than at present, it might be that the Committee would not be following the directive, which calls for operations with a view to fostering recovery. stated that the trends in the Tenth District con Mr. Leedy tinued to be very much the same as he reported at the last meeting
and at previous meetings. It seemed to him that the question whether the System had gone too far and too fast as far as reserves were concerned was now a moot question, for the System had arrived at a certain point and it seemed to him that it could not retrace its steps. While he would not advocate at this time going any further, on the other hand he would certainly advocate that the System not attempt in any wise to move in any opposite direction. The next question, it seemed to him, was whether the level of discount rates on which the System had embarked was high enough. If time permitted before the next Treasury financing and if any further policy move was to be made, it seemed to him that perhaps a rise above 2 per cent would be the logical move. Mr. Leedy went on to say that he could not escape the feeling that what appeared to be a babble of voices within the System was not serving the System's best interest. To him, the movement that had taken place with regard to reserves was not at have been done by this time with all consistent with what should rate. In order to be effective he thought respect to the discount with more unison than had that the System ought to be speaking meeting. The present situa case since the last Committee been the as to undermine to some be creating a condition such tion might was attempting to accomplish. the things that the System extent to the Kansas City did not have in mind suggesting At present he
Board of Directors that a further move be made on the discount rate but he noted that at the last directors' meeting there was some feeling within the board that perhaps even then the establishment of a 2 per cent rate was not going far enough. Mr. Leedy went on to say that he subscribed to a great deal of what Mr. Vardaman had said. From all of the available signs, the System should not postpone the matter of looking at the possibility of inflation ahead of it. There were signs of recovery on every hand, and if the System should wait until there was recovery beyond any shadow of a doubt it seemed to him that the System would have lost its opportunity to do the kind of a job that it was supposed to be doing. Mr. Allen commented that his report on the Seventh District of what he had said three weeks ago. would be largely a repetition at a less rapid pace than the Business improvement continued but Iowa showed up very well experience. On the one hand, national be in the throes other extreme would Michigan at the indeed, whereas awards showed Construction through September. of model change-overs the sharp increase nothing like district but in the improvement strong in were very store sales Department reported nationally. but cities, as nationally, Seventh District many of the August in improved employment Although were laggards. and Milwaukee Detroit the practically it remained and July, June as between the nation in
same in Illinois, Indiana, and Iowa and worsened somewhat in Michigan and Wisconsin. After a two-week rise as a result of the Lebanon crisis, prices of agricultural commodities continued a normal seasonal decline, and the record crops expected this year would keep prices under heavy downward pressure. Growing conditions have been excellent throughout the Seventh District except where drought conditions existed in parts of Michigan, central Wisconsin, and northwestern Iowa. It was anticipated that increased marketings, especially crop marketings, would largely offset the price declines during the last half of this year, with the result that on the whole farm income in 1958 would be the best since 1954. Mr. Allen went on to say that improving business activity and reduced reserve availability were beginning to be reflected in the operations of Seventh District member banks. Those banks apbe expanding their lending to business somewhat faster peared to national pace. However, reserve pressures in the district than the considerably less than in New York, and Chicago banks had been continued to be net suppliers of funds to other areas. Nevertheless, been supporting their positions by liquidating these banks had Treasury bills, which had declined by $157 million, or about 40 per August 6. Since the increase in discount rates by the cent, since there had been a noticeable Dallas Reserve Banks, San Francisco and banks in those funds going to of Federal in the proportion increase
areas. In the month of July, for example, 14 per cent of sales by Seventh District banks went to banks in the San Francisco and Dallas districts. In the first ten days of the rate differential, the proportion rose to 27 per cent. Mr. Allen said that there had been two directors' meetings in Chicago since the San Francisco Bank raised its discount rate to 2 per cent. At the first of those meetings, held on August 21, he recommended, and the directors decided, to take no action on the rate in recognition of the business situation in the Seventh District. At the second meeting, held on September , he recommended, and the board of directors decided, that the recovery nationally should be recognized, in a token way to be sure, by raising the rate to 2 per cent. In the light of the figures presented by Mr. Young and in the light of other factors, including the serious inflation of the past twenty years, the hugh Government deficit now in the offing, and the requirements of flexible monetary policy, he found it hard to 1-3/4 per cent rate at this time--in Chicago or elsewhere. reconcile a Chairman Martin, he recalled, had said that flexible steel is stronger than iron that breaks--but true flexibility means bending both ways. very fast and direction of ease went in the Certainly, the System very far, and the current situation seemed to him to call very clearly the action which had been taken by this Committee but by not only for movement in the discount rate. The increase to 2 per a coordinating
cent was not fully coordinating but at least it went part way. The Chicago directors, he commented, were not unanimous on the discount rate change but the reluctance on the part of those directors who did not wish to raise the rate reflected a feeling that New York is the main money market. Therefore, those directors would have preferred for the discount rate action in Chicago to be coordinated with or to have followed discount rate action in New York. The reluctance was not based on business conditions in the Seventh District. As far as the next few weeks were concerned, Mr. Allen said views were similar to those of Mr. Shepardson. As he saw that his probably must be accomplished in the it, any movement on reserves financing imminent, for an even keel next week with the Treasury about ten days. He would like to see policy ought to begin in $100 million. However, if in the range of zero to free reserves days from now, he felt that not be achieved by ten that range could that was achieved by that try to stay at the level the System should of the Treasury financing. time through the period continued to District picture said that the Ninth Mr. Deming strength and general pick-up in be one of above national average In the this picture. debits highlighted Figures in bank activity. 2.6 per cent district were debits in the of this year first quarter in the second quarter the gain the like period in 1957 and ahead of
was 4. per cent over a year earlier. July 1958 was 5.4 per cent ahead of 1957 and the August-to-August comparison should be even better. Only one or two recent district developments were worthy of particular note. Against the background of an excellent farm picture in general, cool wet weather had retarded corn and soy bean maturity. Without some warm weather or a later than normal fall frost, there was likely to be another soft corn crop. Even so, however, farm income would be high this year, and if corn and soy beans could mature normally a record cash farm income was probable. crop probably would contribute to the prospective holdA soft corn back of feeder cattle for higher prices. Feed supplies in general were excellent and cattle producers were in a basically strong for the coming fall and winter. position in the first seven months of Continuing, Mr. Deming said that banks increased 3.5 per cent 1958 total loans of all district member in the same period of 1957. Most as against a rise of 2.7 per cent banks where loans were up 6 per of the loan increase was at country cent gain at city banks. as against a 1 per relative to year end cent as yet. In the first borrowing was seen no inventory Incidentally, investments were up 4.3 per of 1958 district member bank seven months cent last year, with the gain a decline of 3.2 per cent as against longer-term securities. This kind of investment behavior, mostly in position. Rather, it did not indicate a strong liquidity he noted,
argued for caution in applying restrictive action. Referring to the discount rate action taken last week by the Minneapolis Board of Directors, Mr. Deming said that the increase was made without great enthusiasm but without opposition. He also said that for the immediate future he would be content to coast along about as at present with free reserves in the neighborhood of $100 million. He would prefer not to see further restrictive action taken at this point. Mr. Mangels reported that on the West Coast business conditions continued to follow a trend of moderate recovery with strength in construction, including residential, nonresidential, and public, and Government spending becoming more of a factor. In both July and seasonally with a rise in output increased more than August factory increase in employment stemmed particuaverage work-week hours. An ordnance, electronic equipment from construction, aircraft, larly payrolls. Insured unemployment and State and local government plants, in July, but in the of the district dropped in six of the States the new benefits year it increased because State of Washington restored themselves number of old claimants July 6 and a started taken place, unimprovement that had rolls. Despite the on the labor force cent of the 5.8 per to about still amounted employment was about 9 the figure Oregon and Washington and in in California the labor the West Coast that on the fact This reflects per cent.
force is increasing more rapidly than the number of jobs. Department store sales were 3 per cent better in August than in August a year ago but automobile sales were down, while agricultural conditions continued to be quite good in all categories except that outof-State shipments of California deciduous fruits were down 24 per cent from a year ago. This was particularly noticeable with respect to peaches where Georgia so far this year had shipped more than California, as opposed to last year when its shipments were only about one-fifth of those from the State of California. Out-ofState shipments of Washington apples also showed a decline because of increasing production in eastern areas. Mr. Mangels said that for the three-week period ending August 27 business loans were up $109 million with borrowers now applying for credit in anticipation of an increase in the prime estate loans were up $37 million, which was the largest rate. Real for any three-week period so far this year. Demand deposits increase reversed their course and were were up slightly but time deposits practically no member bank borrowing down $4 million. There was the Federal Reserve Bank during this period. at there were several Mr. Mangels said, the over-all picture, In not too sure that First, he was caused some concern. questions which continue to show and September would for August business indicators that was indicated in July. He wondered whether, the rate of gain
if there were strikes or if international tensions became greater, such developments might not have an effect on public psychology and shake public confidence so as to result in some adjustment in the rate of business improvement. There was also the question whether interest rates had risen more than justified by the improvement in business. It might be that the rise in the rate structure was an indication of less liquidity in the banking system than some had thought. Also, the bond market was still in not too good shape. The Treasury would need about $7.5 billion before the end of the calendar year and one would have to be rather naive to assume that the banks were not going to have to take a substantial portion of the new offerings. If there was more than a seasonal demand for credit and free reserves were at the zero level, there probably would be considerably more use of the discount window. Mr. Mangels that the member banks on the West Coast would not felt quite sure want to come to the discount window; they would do this only as a and somewhat reluctantly. However, if they were forced last resort on credit and have the effect of into do so, this might be a drag Therefore, it seemed to him that creasing interest rates further. present level, that is, stayed pretty much at the if free reserves $100-$200 million range, the System would be easing things in the coming offering and would be going along for the Treasury in the way in which he That was the on an even keel. the time being for
felt the Committee should approach the next three weeks. Mr. Irons stated that as he saw it the recovery showed continued strength nationally, with evidences very clear on that point. In the Eleventh District a high level of economic activity continued to prevail, with further improvement in the oil industry. The agricultural crops were virtually made at this time and he was told by agriculturists that crops would be better than a year ago in all the major areas, so agricultural income would be up substantially. Construction was strong and retail trade good, while hours in manufacturing were now around 40.8 per week against 39.8 situation did not show much change. some time ago. The unemployment (Houston) the district had not been With the exception of one city figure was about 7.0 per In Houston the plagued by unemployment. only running about 4.5 principal cities it was cent but in other problem in that respect. there was not too much per cent so said that the picture, Mr. Irons Turning to the banking with business loans continued to show improvement, demand for credit to the extent of period a year ago compared with the same up as high and demand strong. Loan figures were about 6 per cent. corporations continued partnerships, and Deposits of individuals, from a Bank were averaging from the Reserve to rise. Discounts Thus, on the $1 million. dollars to around hundred thousand few
whole conditions in the district were very good and people were looking forward to a strong fourth quarter. Mr. Irons went on to say that at a special meeting of the Board of Directors of the Dallas Bank which was called promptly after the San Francisco Bank had acted on the discount rate, the directors unanimously and enthusiastically voted to change the rate. In fact, there was some minority support for a rate of 2-1/4 per cent, although no actual motion to that effect was presented. These sentiments, Mr. Irons said, were put in the form of comments to him which indicated that, although those directors making the comments agreed with the action that had been taken, they felt that it might have been a mistake not to go to 2-1/4 per cent. The action on the discount rate was not taken solely on the basis of regional indicators but rather on the basis of the overall situation as the directors saw it. Mr. Irons said that he was rather satisfied with open market policy in the past two or three weeks. Disregarding the volume of but watching rate movements, particularly rates in free reserves the short-term market, he felt that the results of open market operawith what the Committee had were not too much out of line tions meeting, he recalled, he had spoken against anticipated. At the last trying to pinpoint agreement on a zero level of reserves. However,
open market policy definitely had moved away from ease, although perhaps not far enough. His own feeling was that the System should not relax the movement toward restraint that it had initiated, and that the System had not gone too far. He would like to see the System continue in the direction of the movement that had been initiated. There was not too much time remaining before the Treasury financing when policy would have to get on an even keel, and in his opinion it would be a mistake to permit a condition of ease in the market sometime around, or prior to, the Treasury financing period and then move away from ease as soon as the financing was over. Certain of the Dallas directors, he noted, had spoken very clearly along that line. If the System was going in the direction of restraint it should do so honestly and without rigging the market so as not to have banks come in at a comparatively and then find the System exerting restraint. Mr. favorable rate if float or some other aberration agreed with Mr. Rouse that Irons market to ease the Management of should cause conditions in the offsetting action so as not to go into the Account should attempt ease. He would on a basis of unsustainable the even keel period into net borrowed reserves the reserve position move like to see how rapidly and steadily the he would have no qualms about and a position where bring banks into Thus, he would System moved. window. Mr. Irons concluded by saying they would use the discount
that he saw no need for a change in the policy directive at this time. Mr. Erickson said that economic conditions in the First District were not as buoyant as in the nation as a whole. The New England manufacturing index for July showed no change from June; while textiles and leather were up slightly, primary metals were down. Construction contract awards in July were up 6 per cent over a year ago but this increase was less than the increase nationally and the main strength was in public works. Residential construction was 1 per cent less than a year ago. For July, the seasonal drop in nonagricultural employment was less than a year ago, while the average hourly work week in factories was the same in July as in June. Department store sales for eight consecutive weeks ending August 30 were ahead of similar weeks last year. The index was up 15 points and this was the highest point in a year. Deposits of banks were up slightly but loans in July were off slightly and were still behind a year ago. The Reserve Bank's savings banks in July showed that deposit balances survey of mutual were up more than 6 per cent with deposits up and withdrawals down. Real estate loan balances were up 8 per cent over last year. meeting which was Erickson said that at the directors' Mr. an increase in the that there be it was recommended held yesterday
discount rate but the directors did not see fit to follow that recommendation. There was a feeling that conditions in the First District did not warrant a move at this time. He did not know whether it would have made any difference if he had been at the meeting himself. The matter probably would be brought up again at the meeting on September 22. Mr. Erickson said he was inclined to agree with Mr. Rouse that the System ought to try to absorb any excess reserves that He assumed that the System would only might be created by float. entering an even keel policy on have a week or ten days before and he would hope that it might account of the Treasury financing, to a level around $100 milpossible to get free reserves down be change in the policy directive at lion. He saw no reason for a this time. had been one of the most Szymczak said that this Mr. attended for the discussion meetings he had ever educational recession had developed according the way in which the reflected had not been a were aware, this areas. As all to geographical nation. He throughout the of uniform proportions recession during the had been similar discussions recalled that there The latest was being reduced. discount rate when the period earlier than in the econony showed improvement he noted, figures, figures but to see these It was satisfying been expected. had
there was still the problem of geographical upturn and the problem of a lagging behind in the durable goods area, steel, automobiles, and plant and equipment expenditures. It is always inevitable during an upturn, he said, that the timing of policy has to coincide with when the upturn starts in order to make that policy effective because of the liquidity that has been provided to the banking system. Thus, the System is always bound to get all kinds of protests. Mr. Szymczak said he agreed with the policy that had been followed, However, he did not think that it would be possible to get down to a zero level of reserves during the ensuing period. He would keep reserves around $100 million or a little higher but not above $200 million. In other words, he would keep them about as at present to the extent that it was possible to do so. Experience, he said, had shown that the discount rate is a national rate, for a the rate has repercussions all over the country. In other change in on a national basis. Originally, it words, the effects are visible been the intent of Congress that there should be appeared to have rates in the different Federal Reserve districts different discount would be more or less available according to local so that discounts not happen and any discount over the years that did conditions, but rate change reflects itself in the market generally. Therefore, in discount rate should whether the academic to discuss a sense it seemed the rate is now Banks, for at the remaining not be changed of should
2 per cent as far as the market is concerned. Whether to go further on the discount rate would depend on improvement in the economy. In his opinion, that improvement would not develop as fast over the balance of the year as the figures would seem to indicate that it had proceeded since this spring. However, he felt that there would continue to be improvement. Mr. Szymczak said he would continue the open market policy that had been initiated and followed. He would keep free reserves in the million range until it was known what the Treasury was going $100-$200 things that must be taken into account. to do, for that was one of the had found this meeting a most Mr. Balderston said that he heard so much with which he partly because he had intriguing session, of his colleagues with the comments of some agreed and partly because to one's complacency. To him which he disagreed were useful nudges and unified System that called for prompt calendar posed a crisis the in the structure of the always been a strong believer action. He had nature of its operations, System and the decentralized Federal Reserve a weakness. The that structure is times of crisis when but there are side, there was On the one was such a crisis. time, he felt, present activity as measured upsurge. Economic basis for an inflationary the back to the boom was half way production the index of industrial by that the money figures might indicate although some peak. Also, since last year, actually only 1-1/2 per cent supply had increased
he felt sure that the increase had been greater, for the 1-1/2 per cent figure did not take into account near-money equivalents. Some figure such as the one quoted by Mr. Young at the last Committee meeting seemed more realistic; if time deposits were taken into account, the rate of increase of the money supply since the beginning of the year would be found to have been over 12 per cent. Furthermore, the Congress had authorized spending in excess of income to the extent of $11 or $12 billion for the fiscal year and this has an impact on the economy even before actual Government spending expands substantially. It seemed to him that what the Congress did before it went home increased significantly the problem of monetary control the very expectation of Government business and subcontracts because in such a way as to planning activity and borrowing stimulates Then, one must think also of the auto union aggravate the problem. during this meeting. If wages negotiations referred to previously expect higher automobile prices as a result were to go up, one might beginning of a new wage pattern. and the Mr. Balderston comanalysis of the situation, Continuing his how to seek new by September 25 decide the Treasury must mented that by uncertainty, an uncertainty in a capital market disturbed funds had conof its own functions in the discharge to which the System by all means available should be reduced This uncertainty tributed. now and September 25. to the System between
All this led to the question, Mr. Balderson said, of how the current crisis should be handled. Although for the last two months he had desired zero free reserves as a target because he felt that the free reserve figure was incompatible with the needs of the situation, he now found himself in the position of desiring a compromise simply because time was of the essence. He believed the use of the free reserve figure is the best language available to the Committee, although he deplored reliance upon that one figure by the market. Therefore, the anticipated rise in free reserves to an average of $182 million for this statement week caused him much concern. Mr. Balderston suggested that the Desk be asked, if possible, to reduce the $182 million figure by action today and tomorrow to such extent as might be feasible. His suggestion contemplated a level of perhaps around $100-$150 million which would announce to the capital market that the System was going to hold a steady hand for a while, at least through the next Treasury financing. Of course, the Committee could not say that in words, but if the Desk million and hold that for two could establish a figure of $100-$150 what the market needed to it would tell the market or three weeks, know. In Mr. Balderston's opinion the time had come for the System to have a unified position regarding the discount rate, even though
three weeks ago, or thereabouts, there might have been some virtue in a split rate. Now, however, a split rate was something that could not be defended before the court of public opinion. It gave the appearance that the decentralized Federal Reserve System could not get itself together to reach a decision in a time of crisis. If unity were not achieved within the relatively near future, the Treasury would be left with an impossible climate for its financing and the Federal Reserve System would be responsible for that. By failing to achieve a uniform rate policy the System would neither be fighting inflation nor helping to see that the Treasury got the money it must have. This week, Mr. Balderston said, was the time for decision. Martin, in expressing his views as to the System's Chairman this was a time when what position and problems, said he believed Committee meeting was again pertinent. There he had said at the last of opinion and difcourse, always be honest differences would, of thing in a system such which is a very proper ferences in judgments, it was his conviction that Reserve System. However, as the Federal of inflation in a was facing today was that the problem the System during his own lifethat had been faced bigger way than anything market, the summer the Government securities With respect to time. and underhad great sympathy one and he been a very difficult had by the Secretary of the Treasury for the problems faced standing
and the Under Secretary. As he had stated to the Committee on previous occasions, if the Treasury had not had men of the caliber, understanding, and insight of Messrs. Anderson and Baird, the System would have been in even greater difficulty. Chairman Martin said that if he were doing it on his own he would fix a 2-1/4 per cent discount rate at the present time. The problem was one of dealing with human nature and people always tend to prefer disagreeable facts whose effects will be felt in the future to a disagreeable remedy in the present. The remedy for the inflation which had gotten ahead of the country over a period of twenty years was bound to be disagreeable but the problem required t aking a stand. Certainly, the Federal Reserve System could not handle the fiscal, debt management, or budget policies of the Government, but as to its own posture there should be no misunderstanding. He was glad that the System's posture was fairly clear but wished that it was more clear. Referring to the question of an adjustment of 1/4 per cent in the discount rate, he said no thinking man could really believe that an increase of that size could brake or destroy the recovery process if it was really under way. Nobody could really know what was going to happen with regard to the current negotiations in the automobile industry but if wages should get even further ahead of now he did not know at what point it productivity than they were In some respects he saw be possible to retrace steps. would certain similarities to 1929.
The Chairman emphasized that he had always been a vigorous advocate of flexible monetary policy. He had favored moving down when it became clear that the economy was declining, although he did not think that the Federal Reserve System caused the decline. As to the political front, he said it was constantly being thrown up to him that the System was in jeopardy because its actions might be so unpalatable that the System would be destroyed. Many times this summer he had been told that if the System did not move in certain ways it would lose its independence, to which his stock answer had been: "Then let's get it over with. Make the System of the Treasury and stop worrying about its independence." an arm to be nonentities, if who are in the System were If those of us judgment but were here just they were not to play a role involving under whatever conditions might serve to finance the Treasury to certainly the purely operating arise, nationally or internationally, simpler. It would be a situaof the System would be much problems Reserve worked side by side the Treasury and the Federal tion where distinctions as to authority. with no clear said he was somewhat the Chairman In further comments, taking the position Reserve Bank directors about a few disturbed System was wrong. Of course, the open market policy of the that policy is determined but open market to their views they were entitled ever reach the If it should Market Committee. the Federal Open by
point where open market policy was being determined by individual directors per se, and this became known, there would eventually be some revamping of the System setup. Prior to enactment of the Banking Acts of 1933 and 1935 there was unlimited discussion of this particular point and that discussion brought out the desire, without impugning anyone's integrity, to remove bankers and businessmen from control of the supply of money. That was the whole intent and purpose of the relevant sections of those two statutes. It was important, the Chairman said, to face up to the fact that the Federal Reserve System could preserve its independence ad infinitum if those in it chose to be complete nonentities and just did the bidding of others. However, he for one would not care to participate in that type of operation. The System, he felt, had an obligation to adopt a posture which would make it clear that the System was pursuing a firm line and was willing to stand up and be again expressed the view that it was important that counted. He for System policies should not let their judgment those responsible fear of the System losing its independence. be warped by Chairman Martin commented that during the Continuing, some people had charged that of the easy money policy discussions had always taken the However, he was not always consistent. he appropriate to declining it was when business was position that up also to was moving and when business easing adjustments, make
make firming adjustments. Likewise, he had intended to make it clear that he did not believe monetary policy was the controlling factor on either side. He recalled that, toward the end of last year and in January when business was moving down and other things besides monetary policy were needed to create recovery, he made the comment that during all the time he had been in the Federal Reserve System the real problem came when the situation called for moving up. Sometimes it is hard to make a start moving down, but when the start is made it is possible to go down almost to zero. When you are moving up, however, resistance is encountered all along the line. He could go back over his seven years in the System and see how this factor had come into the picture time and again. Periods when System policy had been moving upward were times of struggle against charges that the proposed actions would result in collapse. Naturally, of course, the System had to assume a risk, for it would always be blamed if things went wrong. All he was saying and hoping for the System was that it would stand up and be counted, and would not dilly-dally unduly about the risks and particularly about political jeopardy. If the System should lose its independence in the process of fighting for sound money, that would indeed be a great feather in its cap and ultimately its He happened to believe that the American success would be great. people want sound money and that they would support the System
when they saw what was really involved. Certainly, it could not be said that there was sound money when the credit of the United States Government was endangered as it had been in the last few months, but he did not believe that Federal Reserve action had been responsible for that. The Government securities market, he said, ought to be better organized, for it is not properly put together today. It is not properly regulated and it does not have the depth, breadth, and resiliency it should have. Accepting all of those things, the real factor of unsettlement that the Government securities market had been faced with in the last six months went far deeper than Federal Reserve policy. It had been faced with the first intimations of the beginning of a flight from the dollar. If this should continue, it would change the whole structure of the money market. Ultimately the Treasury would not be able to sell securities and would be on a perpetual treadmill. The Federal Reserve System might not be able to stop those developments but it should do everything it could in the battle to try to stop them. Chairman Martin said that, as he understood the feeling of policy was about right. The trend should the majority, open market be in the direction of a zero level of reserves. that in the discussion around the table Mr. Shepardson noted the phrase "where we are" had been stated several times. Pointing million, he asked whether were close to $200 out that free reserves
that was a temporary aberration. Mr. Rouse said he would interpret "where we are" as being better signified by the average of free reserves for the last statement week, which was $128 million. Aberrations in the Treasury balance, primarily, had thrown free reserves off somewhat and the figure was liable to fluctuate. Chairman Martin observed that for the last several meetings it had been agreed that the free reserve figure itself is not too good a benchmark. However, it had been the consensus of the Committee that the Account Management should be trending toward zero. Some had been "higher on the totem pole" than others but the trend was clearly in that direction. Only one or two persons around the table today had suggested going below the zero level. Therefore, it appeared that open market operations could be based on trending toward zero as reflecting the majority position. Mr. Hayes raised a question, stating that as he understood it the majority position would favor "staying about where we are." After Chairman Martin commented that he had been endeavoring opinion in terms of a trend, he said he to express the majority assumed there was no disagreement with the thought that the System through the period of the should maintain an even keel operation was expressed with Treasury financing. No disagreement forthcoming that statement.
In the discussion that ensued Mr. Thomas observed that it would be difficult to get to the zero level next week because of the usual mid-month bulge in float and a probable sharp drop in Treasury balances at the Reserve Banks for two or three days, and Mr. Vardaman suggested that the matter might be put in terms of "from where we are trending toward zero." Mr. Riefler suggested putting the matter in terms of "an even keel" which would signify endeavoring to maintain free reserves in the neighborhood of $128 million through the Treasury financing, and Mr. Thomas commented that such a course could be in fact quite restrictive in a tax week, when a high degree of liquidity is desired. Actually, that would be "trending toward zero." Chairman Martin then commented that the System did not have much time left before the Treasury financing and that thinking in terms of "an even keel" was perhaps the best way to look at it, bearing in mind that the Committee would not like to see an even keel projected into an upsurge of reserves. said that he would still be in favor of Mr. Shepardson "trending toward zero," as originally suggested, and Mr. Robertson agreed but added the words "if possible." Mr. Rouse stated that there might be an opportunity to get rid of a good part of the bulge in reserves through sales to foreign run off, as well as by and through letting bill maturities accounts
selling bills to dealers. It would be possible to do a good job, he thought, and the Account Management would do the best it could. Nevertheless, operations might result in higher reserve figures. He felt sure that he understood what the majority of the Committee desired, that is, what it was trying to bring about, and he felt that this could be accomplished. However, as Mr. Thomas had pointed out, it was quite doubtful whether it would be possible to get free reserves too much lower in the ensuing period. Chairman Martin stated to Mr. Rouse that the Committee would have to rely on his judgment from the standpoint of the stability of the market. Mr. Rouse then stated that he would think of the matter in terms of trending toward zero, with the qualification of avoiding a serious upset in the market. Mr. Robertson said that, despite the difficulties with respect he felt that there was actually general agreement withto terminology, the term "trending toward zero" did not mean in the Committee. Use of possible to get there. The Account necessarily that it would be developments might work do the best it could, but Management would out in the other direction. to feel that the that he continued Mr. Hayes then commented in terms of atmosphere. where we are" wanted to keep "about majority Mr. Robertson Mr. Hayes' comment, based on In discussion if this was not downward but that should be that the trend stated
possible in the light of market conditions the Account Management, of course, could not do it. The Chairman referred again to the maintenance of an even keel, and Mr. Shepardson inquired whether continuing to exert some pressure would still be contemplated. Mr. Hayes responded that an even keel meant an even keel to his way of thinking; he did not think one could say "even keel" and keep exerting greater pressure. Mr. Szymczak commented that an effort to keep free reserves around $125 million would mean, according to the projections, that the Desk would have a problem of absorbing considerable reserves. Mr. Hayes then commented that if the Management of the Account tried to get the free reserve figure below $128 million it would have to put a considerable and increasing pressure on the market. Mr. Shepardson said he would accept that statement and that it would be agreeable to him just to continue the degree of pressure now being exerted. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Reserve Bank of New Ycrk 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, case of maturing securities, by direct or, in the may be necessary in the with the Treasury, as exchange prospective economic conditions light of current and credit situation of the country, with and the general
a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to fostering conditions in the money market conducive to balanced economic recovery, 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 account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. the speculative situation in the GovernMr. Rouse referred to the summer and said that a meeting of ment securities market during New York Money Market, the appointment Technical Committee of the the to the Committee, had been had previously been reported of which the Committee that been suggested to Monday. It had called for next question of the possifor study would be the an appropriate subject of the conditions which brought bility of avoiding a recurrence anything would the market. Whether fever in about the speculative was on notice. but the committee an open question, of it was come out on a memorandum was preparing of New York Reserve Bank The Federal and of the committee for the use nature of a factual the matter Market Committee. Open to the Federal be furnished copies would
It was agreed that the next regular meeting of the Federal Open Market Committee would be held on Tuesday, September 30, 1958, at 10:00 a.m. No objection was interposed to Vice President Tow of the Federal Reserve Bank of Kansas City attending the next two meetings of the Federal Open Market Committee as an observer in the absence of Mr. Leedy, or to First Vice President Wayne of the Federal Reserve Bank of Richmond attending as an observer in the absence of W. Leach. Thereupon the meeting adjourned. ecre ,