September 30, 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 30, 1958, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Balderston Mr. Fulton Mr. Irons Mr. Mangels Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Erickson, Alternate for Mr. Leach Mr. Treiber, Alternate for Mr. Hayes Messrs. Allen, Johns, and Deming, Alternate Members of the Federal Open Market Committee Mr. Bopp, President of the Federal Reserve Bank of Philadelphia Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Daane, Hostetler, Marget, Wheeler, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Kenyon, Assistant Secretary, Board of Governors Assistant to the Board of Mr. Molony, Special Governors Mr. Koch, Associate Adviser, Division of Statistics, Board of Governors Research and Keir, Acting Chief, Government Finance Mr. Division of Research and Statistics, Section, Board of Governors Securities Department, Mr. Stone, Manager, Reserve Bank of New York Federal
Mr. Wayne, First Vice President, Federal Reserve Bank of Richmond; Messrs. Ellis, Roosa, Mitchell, Jones, Tow, and Rice, Vice Presidents of the Federal Reserve Banks of Boston, New York, Chicago, St. Louis, Kansas City, and Dallas, respectively; Mr. Anderson, Economic Adviser, Federal Re serve Bank of Philadelphia; and Mr. Parsons, Director of Research, Federal Reserve Bank of Minneapolis Chairman Martin stated that in the absence of objection Mr. Molony, Special Assistant to the Board of Governors, would attend the meeting. There being no objection, Mr. Molony entered the room. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on September 9, 1958, were approved. had been distributed to the members Before this meeting there Reserve Bank of New prepared at the Federal of the Committee a report during the period September 9 York covering open market operations report covering the 24, 1958, and a supplemental through September 29, 1958. Copies of both reports September 25 through September period Open Market Committee. the files of the Federal been placed in have the last meeting, Mr. market operations since Reporting on open in the money had been maintained that an even situation Rouse stated over $250 by somewhat of bills declined System's holdings market. The A tendency for was generally firm. the money market million, while has led to week the statement early in to occur some over-borrowing
temporary easing of the market in the middle of the week; on the whole this has been helpful. Mr. Rouse said that two weeks ago he was quite concerned about the state of the market on the eve of the Treasury's financing operation. For a time he began to think he was wrong, because some stability seemed to be developing a better atmosphere in the market. However, he then attended the meetings of the Treasury's advisory committees in connection with the financing. The ABA Committee had recommended to the Treasury that the 3-1/2 per cent notes of 1960 be reopened for $1 billion and that a special bill to mature next May be auctioned to raise $2.5 billion. Shortly thereafter the IBA Committee, consisting of dealers and the portfolio managers of large banks, met with the Treasury and the picture they painted was grim. of the Treasury no encouragement unless he They gave the Secretary rates on the offering. The first recommendation placed very generous of the IBA Committee was for a June tax bill in the amount of $3.5 The Secretary asked for the Com billion at a 3-1/4 per cent rate. concerning the possibility of reopening the 3-1/2's mittee's views would be at all think that this issue but the group did not of 1960, subscriptions would be asked what they thought well received. When about $1 billion. they replied per cent 1-year obligation, for a 3-1/2 would have to felt that the Treasury of the Committee The majority
place a rate of up to 3.25 per cent even on a June tax bill in order to have a successful sale, and a substantial number thought 3-3/8 - 3-1/2 per cent would be necessary. Mr. Rouse pointed out that there is wide representation of the underwriting community on the Committee of the IBA. In general, he said, the Committee reflected the attitude that underwriters are in no temper to take losses voluntarily. It was indicated that the Treasury would have to buy back their underwriting good will by placing very generous terms on the new issues if it was to look forward to successfully financing its needs later in the year. Mr. Rouse went on to say that the market's reaction to the new issues on Friday was satisfactory but that it deteriorated on Monday. Some transactions in the special bill by commercial banks had been reported while the books were open, despite the required at rates up to 3-1/2 per cent, and the bill was quoted certification, at 3.45 to 3.40 per cent; the new 3-1/2 per cent note this morning was quoted at a discount this morning. In the regular Treasury also was 2.92 per cent and the yesterday, the average rate bill auction price was slightly over 3 per cent. stopout estimates of required re noted a difference in Mr. Mills Bank and inquired whether Board and the New York serves between the as to the amount of different assumptions difference reflected this commercial banks. If so, that will be taken up by the new issues
he suggested that some effort should be made to reconcile the difference, for a knot might develop in the market on payment date for the new issues if the requirements of the banks are seriously underestimated. Mr. Thomas replied that the difference in estimates of required reserves mostly reflected differences in estimates of changes in other deposits, and not differences in estimates of the amount of the new issues to be purchased by com mercial banks. Mr. Rouse commented that there would soon be good data from the Treasury concerning commercial bank subscriptions. A complicating factor, however, is the rate at which the new issues will be distributed into private hands. Mr. Mills observed that because of these uncertainties the Manager of the Account must be latitude in operating the Account. Mr. Rouse pointed given adequate out that nonbank subscriptions might well be reduced because of arranged to sell the special bill to nonbank reports that banks have the banks' certification that investors at a discount, despite in their subscriptions. He have no beneficial interest customers some breakdown of ethics appeared to have been observed that there in this connection. Thereupon, upon motion duly made and by unanimous vote, and seconded, transactions during the the open market 9 through September 29, period September ratified, and con 1958, were approved, firmed.
The staff economic and financial review at this meeting was in the form of a visual-auditory presentation devoted to the consideration of questions regarding the nature of the current re covery. Participants included Messrs. Thomas, Young, Marget, an Koch along with Messrs. Garfield, Williams, and Brill of the Board's research staff. The introductory portion of the script of the economic pres entation was as follows: Monetary authorities are faced with policy questions at all times, not just at peaks or lows. the But most important questions relate to how soon and how much to influence credit and monetary conditions when there are basic changes in the course of business, as in the autumn of 1957 and the spring of 1958. In one view, easing of restraints on bank credit and. monetary expansion should be started immediately when it is determined that the crest of a boom has passed, while action looking toward restraints on expansion may be needed only time has elapsed for recovery to gather momentum. after some greater weight to the risk that in In another view, giving accentuate instability, the authori flationary forces may retain restraints until inflationary ties in booms should receded and in recoveries should pressures have clearly in order to avert early to reimpose restraints begin spiral that might intensify emergence of an inflationary boom and subsequent recession. ensuing expectations based contrary to In the postwar years, 1930's, the central continuing the experience of the on stemmed from excessive policy have problems of monetary up and to increase to push prices which have tended demands first, high levels At to levels not sustainable. activity of needs and to backlogs could be attributed of demand war. Later, the long, world-wide accumulated during funds the Korean and in particular the cold war, of developments product is A tenth of gross stimulated demands. episode, contrast to program, in in the defense being absorbed now
less than 1 per cent after the First World War. Meanwhile, in contrast with the late 'twenties and 'thirties, population has been increasing right along at a rapid rate. Technological advance has proceeded apace, making possible introduction of many new products, application of new processes that increase manhour productivity, and stimulation of demand for both con sumption and capital goods. Abroad since the war, economic advance has been substantial and fairly steady. In the past year, however, output in Western Europe has levelled off rather than rising as in 1953 54. In the United States, postwar recessions in activity have been moderate as compared with the 1920-21 recession after World War I or the devasting depression after 1929, but it can not be said that growth in activity has been steady. In all industrial countries of the free world, postwar price levels have moved irregularly higher. The most recent domestic decline in industrial production, amounting to 13 per cent, was greater than declines reported in 1949 and 19 4. Since April industrial production has risen sharply and in September, according to a preliminary estimate, it was only 4 per cent below the level of August 1957. Unemployment remains at a level close to the maximum reached during the recession, lagging as it often does in recovery. The rise in output has been achieved in part through increased employment but much more through increased hours of work and increased productivity. Wholesale prices of commodities and consumer prices of goods somewhat further during recent reces and services have risen But price developments have been more sion and recovery. selective than the broad indexes suggest. this year, prices of industrial com Last autumn and early a sharp decline in sensitive industrial modities eased, with total index of wholesale prices materials, and the rise in the in prices of farm products. mainly reflected advances then industrial material prices have been strengthening More recently, farm product prices have been declining. while through recent to advance values have continued Farm land rise in farm in accompanying a sharp and recovery, recession prices and the combination from higher livestock come resulting Through ear and price supports. crop yields of unprecedented values had generally advanced, postwar cycles, farm land lier reflecting in part growing incomes drifted downward, while of the war period sharp income increases that the confidence the First World War, when be held much more than after would values declined markedly. both incomes and land
In some financial markets, adjustment to revival in economic conditions has been anticipatory. Stock prices began to decline before the downturn in industrial pro duction and, from mid-July to year-end, dropped one-fifth. In January, they began to turn up and are now close to their all-time peak, while production and profits are still well below earlier highs. Stock market trading activity lately has been unusually heavy. Adjustments in bond markets have been later than stock prices in coming about, but have come sooner than in earlier cycles and have been very sharp. Bond yields remained at high levels through mid-November 1957, then dropped one seventh in two months. Long-term yields stabilized at this reduced level until early summer. Since then, reflecting in part a spreading acceptance in financial circles of the in evitability of creeping inflation and investors' need for an inflation premium in long-term interest rates, they have risen rapidly to levels close to the highs of 1957. Thus, with re-emergence of inflationary expectations, stock yields and bond yields have completed a swing of marked amplitude since the crest of 1955-57 boom. While recovery in most fields is by no means complete, the relationship of bond and stock yields is now similar to that of mid-1957 when creeping inflation psychology was also dominant in financial markets. positions eased last winter, banks were With bank reserve able to provide additional funds to the market on terms rela tively favorable to borrowers. Until very recently, business borrowing at banks has lagged as inventories declined, but other bank lending increased moderately and bank investments rose rapidly. As a result, the money supply--seasonally risen sharply this year. It is now about 2 per adjusted--has cent above a year ago. time deposits at commercial banks until recently Moreover, swollen by a recession shift of pre have risen sharply, partly a demand to a time de and speculative balances from cautionary deposits are currently 15 per cent above posit category. Time deposits outside New York is a year ago. Turnover of demand year but turnover in highs reached last about 2 per cent below New York is up considerably. In the light of these key facts, how is the currently be interpreted? Are we really economic situation to developing as unemployment figures might not emerging from recession, of a period of rapid this about the middle suggest? Or is might indicate? production figures as the industrial recovery, Or is this some unusual a normal type of recovery? Is this
combination of recovery-boom developments with half recovery in output accompanied in financial markets by so much discounting of possible inflationary developments as to impair chances of a flowering of recovery into vigorous economic advance? And what should be the posture of monetary policy in the face of an uncertain recovery outlook? Following analyses of business and financial developments during the recent recession and subsequent recovery which included references to business cycle theory and comparisons between recent developments and the pattern of earlier business cycles, the staff presentation con cluded with the following statement: Recovery from the April lows has been something of a surprise, challenging economic analysts to fresh study. Is this the middle of a normal recovery, with the usual problems of overexpansion in demand and rising prices in the period ahead? Will legacies of excess capacity from the preceding investment boom and of unused labor resources perhaps check price advances? Or, on the other hand, will faster than usual recovery perhaps lead to greater than usual inflationary pressures? In what ways can monetary in shaping a sustainable recovery? Specifically, policy assist what rate should the economy's holdings of cash balancesat the money supply--be permitted to increase? of decline in industrial production, After eight months business expectations were being in just at the time when a levelling-out period such as occurred fluenced by the idea of the economy was in rapid recovery in in 1948-49 and 1953-54, again it appears that the normal fact beginning. Thus, once cycle is a unique course. course of every evident that after the the war, it is Going back before but the pre also started promptly decline recovery 1937-38 greater and the background had been much ceding decline in major respects. were different circumstances unique cycle, why this cycle then as another Considering was it so sharp? Clearly so quickly and why did the rise come to domestic or international, no single event, there was general rise. the early, explain
One factor was an overshooting of the mark on the down side, creating a situation favorable to quick reversal. Thus, inventory liquidation was at a rate in some sense too fast, especially considering the maintenance of most types of con sumer expenditures and the revival of defense procurement. The rate of decline in capital outlays was also very fast. One element counteracting the rapid decline in domestic private investment and helping to sustain consumption was the large shift in Federal finance from surplus to deficit posi tion--reflecting a substantial rise in defense and other payments to the public. Furthermore, aggressive monetary actions were easing credit conditions and by early 1958 the money supply was increasing at a rapid rate. The active money supply rose at an annual rate of 7 per cent from January through July and, adding time deposits, the rate of increase was 10 per cent. In the past two months, however, changes in deposits have conformed to the usual seasonal pattern. One of the recurrent news items of the recession months last winter and spring was the announcement that, contrary to earlier expectations, consumer prices had again reached a new high. This certainly encouraged the view that values were not being undermined by the recession and that prices were bound to go up further over the longer term. The various developments just noted encouraged the irregular rise in stock prices before the advance in economic activity and this rise in turn was a factor in changing business attitudes. Now, what do the observations already made concerning of this recovery since April suggest with respect the nature of business and credit developments and of to the direction debt management policy? It seems appropriate monetary and of prices during the recession, evident that the behavior of the recovery, the pace of mone the speed and generality and the size of the Federal tary expansion since spring, brought new support to the proponents deficit in prospect have of creeping inflation. theory of the inevitability of the period, the central most of the postwar Once again, as in be those of unsustainable ahead may well of the years problems advances. Prices are already and widespread price demands products, including steel, being raised for some industrial yet to reach 70 per cent of capacity. whose output has and of the of the recession the price experience While that price levels the view have encouraged recent recovery
were bound to trend upward, it need not even now be taken as decisive. Prices did show some selectivity in movement during the recession, with sensitive industrial materials down sharply. Also the rise in consumer prices, in so far as it depended on the vagaries of the weather and the biology of the cattle cycle, was in part fortuitous. Furthermore, question may still be raised as to the possible effect of excess capacity in helping to check any broad price advance. The latest survey of plant and equip ment plans does suggest that present capacity is not so large as to prevent some recovery in capital equipment outlays later this year. Also, current sharp increases in profits may stimulate expansion in such outlays and provide some of the needed funds. But present capacity and other resource availability may, nevertheless, be large enough to cushion the effects of increasing demands on prices and facilitate effective operation of such credit restraints as may be needed. The totally different behavior of U. S. exports in the last two cycles raises the question of what effect changing foreign demands may have on domestic activity and prices. As noted earlier, the moderate export expansion this spring was mainly confined to agricultural products. Exports of machinery to nonindustrial countries were falling. While there has already been a considerable recovery in Canada, prospects for resumption of general expansion abroad depend partly on maintenance of world trade, and partly also on resumption of growth in investment expenditures. In Canada, a bottoming out of the decline in investment outlays is now expected. But in Britain some decline in capital expenditures is expected this year, after a rise that extended right into the first quarter of 1958. In Canada and also in Germany, growth of residential construction activity, stimulated by of mortgage funds, has been a strong force ample availability of cyclical upturn in expansion. But indications for general in Europe are still scanty and tentative. steel and textiles a period of sharp drains on the gold and foreign Following there have been renewed exchange reserves of some countries, countries and these have gains in reserves for most industrial credit policies of central banks in led to easing of the this easing has been done with Europe and Japan, although Fund has helped relieve The International Monetary caution. strains for many nonindustrial countries, foreign exchange influence for tighter internal and has exerted an important
policies in countries still suffering inflation. A con tinuing large outflow of private U. S. capital has helped to sustain foreign reserves and U. S. exports. Altogether, assuming that international political developments do not have major economic repercussions, it would appear that demand on the U. S. economy from abroad in the near future may continue near recent levels. In the domestic financial area, developments have been so rapid and so much influenced by actions to provide pro tection against inflation that financial markets, in some sense, may be out of touch with underlying forces. The current relationship between bond yields and stock yields, for example, may not be indefinitely sustainable. While total demands for financing are increasing and restraints have been placed on further bank credit expansion, the total supply of loanable funds in the economy is still very large. Further expansion in economic activity to earlier peaks is not likely to be seriously hampered by lack of funds, although it might be retarded by the recent sharp rise in interest rates, which appear to have been excessive in view of basic demand and supply factors in credit markets. Under these circumstances, considering the importance of curbing inflationary and speculative developments before they gain headway, the central policy issue would seem to be how much monetary restraint should be exercised at this time. Clearly, this issue should be resolved with reference to the System's responsibility for maintaining in a growing economy reasonable stability of the value of the dollar, as well as in employment. Taking into account the monetary expansion already experienced this year, the currently accentuated problem of Federal deficit financing, and the inflationary psychology pervading financial market; the appropriate course would seem to be along the following lines: To permit further expansion of credit and the money supply only on terms which would indicate the System's continuing awareness of potential inflationary risks in the present situation and its determina them from stimulating speculative excesses in tion to prevent the use of credit. conditions in bond mar In view of the current disturbed securities prices upon bank kets, the effect of declining seasonal credit demands and liquidity when they are facing large scale Treasury financing needs, and the slackening of two months, continuation of the credit expansion in the past of restraint may be appropriate. Yet the recent degree fever and inflationary psychosis, together prevalent speculative liquidity of the economy and the genuine with the underlying
stimulants to expansion call for the imposition of severe restraint on any tendencies toward undue expansion. Copies of the text of the economic presentation and reproduc tions of the accompanying charts have been placed in the files of the Federal Open Market Committee. Copies likewise were sent following the meeting to the members of the Committee and to the Reserve Bank Presidents not currently serving on the Committee. Mr. Rouse reported having learned that total subscriptions received in New York for the new Treasury issues, including those received yesterday, now amounted to $1.6 billion for the bills and $846 million for the notes. The market seemed to be reasonably stable after an unsteady opening, and the System Account had purchased $44 million of Treasury bills this morning. The reported subscription figures, Mr. Rouse said, indicated that the Treasury financing would at least be covered. Mr. Treiber then made a statement substantially as follows The economic recovery has been proceeding nicely. Further improvement may be expected during the fourth quarter, but probably not at the rapid rate of recent months. The most important item pressing upward is the prospect of increased Government spending. Consumer spending is high but is conservative in relation to consumer income. While residential construction has reached the highest level in three years, recent gains have been modest, and anticipatory figures such as FHA appraisals and VA applications do not suggest further increases. of mortgages in relation to The less favorable position other alternative investments is raising questions as to building beyond the current the prospect for residential
year. The decline in plant and equipment expenditures seems to be over, but there is no basis for expecting a strong upturn soon. While in June all the major component series in the index of industrial production were rising from the preceding month, the rise was not so general in August. Unemployment is still high; in fact it rose slightly in August to 7.6 per cent. Unemployment of long duration also rose. Certainly, near-term profit expectations don't justify the recent rise in the prices of stocks to record levels. No doubt the desire to own equities rather than debt obliga tions has been an important factor in the behavior of the stock market. As for prices other than of stocks, spot and future prices of basic commodities continue to decline. The whole sale price index declined in August after showing little change for several months. The consumers' price index ap pears to have entered a period of stability. To summarize our views on the economy: Recovery is likely to continue at a reduced pace, without generating bottlenecks and unusual demand pressures. Rising productivity is likely to reduce labor requirements generated by a growing physical output, so that unemployment may continue to be large. The rapid expansion of bank credit of earlier months has been checked. Holdings of Government securities by the reporting member banks have declined to the lowest levels since early June, suggesting that Treasury deficit financing does not necessarily involve rapid expansion of credit. The yields on long-term securities--U. S. Government, corporate and municipal--have risen with extraordinary rapidity recent months. The yield on Treasury bonds due or callable in or more is now higher than the October 1957 peak. in 10 years close to their 1957 high, while Aaa corporate bonds are very November 1957 levels. Thus in Aaa municipal bonds are back to we find long-term interest rates at an early stage of recovery at the peak of the boom. This the same level they were about the current amount of especially in view of is disturbing, unemployment. also have risen very rapidly in Short-term interest rates rates on bankers acceptances months. Indeed the the last two 1/4 per cent this paper have risen another and commercial in the rise would be It seems to us that a pause morning. at this stage of the business recovery. beneficial subscription two offered for cash Treasury has just The $3-1/2 billion. Attractive issues totaling short-term per cent on fixed by the Treasury--3-1/ rates were interest
a seven-month fixed-price bill and 3-1/2 per cent on a thirteen-month note, but the market has adjusted quite fully to these rates so that at present no premiums on the new issues are indicated. Since the subscription books closed only last night, it is too early to know the amount of subscriptions. We are not quite six months from the bottom of the recession and the Treasury can borrow only with great difficulty at high rates. In the last quarter of 1958 not only will the Treasury have to refund $12 billion of securities but it will have to borrow about $2-1/2 to $3 billion for cash in addition to the $700 million it ex pects to raise through increasing the weekly Treasury bill issues to $1.8 billion. The Treasury will have to raise further substantial sums in cash during the first half of 1959, beginning in January; this will be quite different from previous years when the first six months of the calen dar year were marked by surpluses. The difficult financial operations confronting the Treasury raise again the question of the responsibilities of the Federal Reserve in connection with Treasury financing. The policies of the Federal Government with respect to in come and spending are determined by the Congress. The Treasury is bound by these policies. The Government must be financed. There is, of course, some latitude in the details of financing, and the Treasury has the primary Government responsibility for determining those details. It seems to me that our administration of credit policy must pay securities market and regard to the Government appropriate of the Treasury, within the to the financing requirements limits set by essential monetary policy. coordination between the must be a maximum of There and the Treasury consistent with the primary System Treasury should price its of each. The responsibilities market rates, and it adequately in relation to securities The Treasury having in its current financing. has done so discipline of the itself to the done so--having submitted to avoid action System has a responsibility market--the financing or future may jeopardize the current that financing. the commercial banks of the new issues As underwriters supplied to enable should be buyers. Reserves will be large
the banks to acquire the securities in the first instance, and the reserves should be there for a reasonable period to facilitate the completion of the underwriting. As the securities are sold to nonbank investors the reserves re leased thereby will be available to meet seasonal business needs. Experience in the current underwriting will be an important factor in the willingness of the banks to perform the underwriting function in connection with future reasury T issues. The extent of the recovery to date and the prospective rate of continuing recovery do not call, in our opinion, for further restrictive action at this time. The Treasury's financial operations call for market stability not only through the dates for payment of the new issues but for a reasonable period thereafter, say to November first. In our opinion the System should seek to maintain an even keel at least through the period until the next meeting of the Committee. Such a policy would involve avoiding, by act or word, anything that might cause a deterioration of market atmosphere. Such a public policy would include: (a) no change in discount rates; no change in the directive; and (b) the maintenance of free (c) probably reserves at something like the present level. should consider offering resistance to further Perhaps we if expectations by the in short-term rates, particularly rises on our part continue and seem to market of further tightness in the deterioration of the market. be the major force at this time undertake to decide or predict We should not at the end of the "even keel" what action should be taken the time comes in that decision when but should make period, conditions at that time. of economic and credit the light to be evidence of re that there continued Mr. Erickson reported respects the cur District. In some First Federal Reserve covery in the the nation as a faster than for seemed to be pace in the district rent lagging. The seemed to be the district in other respects whole while from June but not move up in July did for New England index manufacturing In States for to metals. due primarily up 4 points, August it moved in
which reports were available, the employment trend from July to August was stronger than in 1957, although weakness was still seen in durables. The States of Connecticut and Rhode Island had their first gains in manufacturing employment for many months. Construction contract awards in August were 33 per cent ahead of August 1957, due primarily to public utilities. On the other hand, there was still weakness in residential construction which was running far below the national average. Electric energy output, department store sales, and savings bank deposits were still moving up. Turning to policy, Mr. Erickson said he thought there was a great deal in what Mr. Treiber had said. He felt that the System should maintain as even a keel as possible; that it should continue the degree of restraint which had been maintained during the last three weeks. In his opinion the present situation called for no change in the directive or in the discount rate, and to the extent reserves should be held between $400 and $200 million. possible free that there was nothing new to discuss in Mr. Irons said in the Eleventh District. Conditions were regard to developments situation was generally favorable. With regard to good and the during the past three weeks it seemed to him that credit policy, successful in maintaining an even the Account had been reasonably in maintaining a sort of static position in regard keel, that is, this time, he felt that there probably to reserve availability. At
should be no significant change in monetary policy. There should not be a lessening of restraint; rather the System should attempt to main tain about the degree of restraint already achieved. Under the prevailing circumstances, this would mean giving considerable leeway to the Management of the Account to take care of day-to-day situations that might come up and had not been anticipated. As to the discount rate, he had nothing particular in mind but he felt sure that a change in the rate should not be long deferred. The Treasury in its offering and its rate, and the market in its reaction to the rates, have pretty well taken the action for the System if the rates on bills and other short-term securities are any indication. With the bill rate in the neighborhood of 2.80 or 2.90, with the discount rate at 2 per cent, and with the market having responded to the Treasury issues, some thought might well be given to the matter of a discount rate change. However, Mr. Irons said, he was not pressing for a change at any time. Furthermore, he doubted whether it would be desirable particular change to be made by any one Bank in isolation. for a rate recognized that it was necessary to Mr. Irons said he fully as the present issues were con to the Treasury as far give support be reasonable about the that the System should cerned, This meant and that it should not tighten appreciably, availability of reserves the reasons for the However, one of at all right now. perhaps not appeared to be a very was to be found in what Treasury's situation
strong inflationary fear or psychosis. Until that fear had been dispelled by one means or another he did not believe that the market would be ready to go into Treasury securities, at least until the market believed that the threat of inflation was going to be combated. If there could be no real confidence in the continuity and soundness in policy, Mr. Irons said, there were not many people who were likely to become heavy buyers of Government securities. If the fear of inflation was an important factor in the market, this meant that sooner or later the market had to be convinced that it was not a factor, and until such time it was hard to blame people for going into equities. The problem was certainly a difficult one but sooner or later--whether now or a month from now or two months from now--the decision would have to be faced up to by the System. Mr. Mangels reported that from preliminary figures the West Coast continued to show an expansionary trend in early September. However, it was noticed that two areas--agriculture and constructionwhich earlier were principal factors in.the expansion were now beginning to level off. While farm returns continued to exceed those of 1957, Thus, while Twelfth District gains were the margin was narrowing. greater than the national average in the first part of 1958, in the were only 7 per cent above months farm returns in the district past two of 11 per cent nationally. In a year ago as compared with an increase awards for the first heavy engineering contract the construction field,
eight months of the year were six per cent above the similar 1957 period but August figures showed a rather sharp drop. Similarly, awards for public construction, particularly public buildings, were lower in August than in any month since January and February of this year. In addition, there were indications that some large institutional investors who put funds into West Coast mortgages had now withdrawn from the market. However, most residential builders felt that they were well equipped with commitments for mortgage funds to carry to the end of the year. through programs resume, Mr. Mangels said that lumber orders for Continuing his better than for August and for a year the first half of September were the volume of orders received and ago. Lumber production was below with producers working down inventories. the volume of shipments made, strike by signing new contracts producers had avoided a The lumber of 7-1/2 cents per hour. calling for an increase with the labor unions partly a lumber prices, reflecting time they had reduced At the same of the industry that but primarily the feeling seasonal adjustment market conditions. too rapidly for current had gone up prices 80 per cent at about were operating in the district Steel mills to good business during were looking forward of capacity and producers to move up and employment continued of 1958. Nonfarm the remainder There had been 1957 peak. below the April 1 per cent was now only employment but and ordnance aircraft, machinery, increases in further
word had been received that the aircraft firms anticipated some decline in employment between now and the end of the year. Un employment declined less than seasonally in August. Mr. Mangels said that bank loans in the district were up slightly in the three weeks which ended September 17 due to a $34 million increase in real estate loans. On the other hand, business loans were down $17 million for the period as compared with a $98 million increase during the similar period a year ago. This drop might be noteworthy because business loans usually expand at this time of the year. Two or three San Francisco banks indicated a slight pickup in loan demand but it was not pronounced as yet, and some banks reported that deposits had not increased to the extent anticipated. While demand deposits were up $178 million, time deposits declined for a second straight period, this time by $40 million. There had been some increase in member bank borrowing from the Reserve Bank, with banks in each of the reserve cities of the district except Portland having been in and out during the past were substantial buyers of The banks of the district three weeks. suppliers, and it was they are net Federal funds whereas usually be in the market for Federal would continue to anticipated that they funds. did appear to be while the recovery Mr. Mangels said that, some question as there might be considerable vigor, proceeding with
to how long the rapid pace of that recovery would continue. There had been some rumblings about a slowing down in residential construc tion activity, attributed partly to a tightening of monetary policy. Plant and equipment expenditures did not indicate immediate pickup and the future of automobile sales was not particularly certain. Demand for bank credit was not heavy but in some instances banks had already become a little more restrictive in making credit available. Also, the Treasury would have some major problems in connection with its future financing. Mr. Mangels noted that average free reserves for September had been about $150 million, ranging up to $221 million and down to $120 million. He agreed with those who had suggested that a range of free reserves between $100 and $200 million would be a proper objective; not favor going down to a zero level. He regarded the policy he would and he would not favor a change in the dis directive as satisfactory count rate just at this time. new to report from the said that there was little Mr. Deming continued to recover the district economy In general, Ninth District. picture remained favor low. The farm its rather mild recession from and total nonfarm to be weak, situation continued able, the mining Perhaps the last year's levels. still running below employment was city banks. The loans at was in business noteworthy development most 24th of the month was through the such loans in September gain in
broadly based and was substantially larger than in any comparable period during 1957 or 1958. In the first quarter of this year business loans at city banks dropped slightly in contrast to a small gain in the like period of 1957, while in the second quarter they gained about the same amount as in the second quarter of 1957. However, in the third quarter the gains had been stronger than a year earlier. Whether those gains would continue was problematical, since bankers seemed to feel that no more than a normal seasonal increase was in prospect for the rest of the year. Mr. Deming said that on the national scene he was impressed by three things. The first was the continued high level of unemployment and the probability that it would continue for some time, the second was the apparently strong prospect of higher productivity and perhaps even of increasing gains in that area, and the third was the very sharp increase in debt security yields and the contrasting decline The first two of these developments would seem to in equity yields. of further expansion without very much price point to the probability indicate in part a rather substantial pressure; the third seemed to strong belief in future economic tightness, in part a increase in money inflation. At the last part some fear of future expansion, and in Thomas spoke of the Deming recalled, Mr. meeting, Mr. Committee at putting sufficient which would aim following a policy possibility of of seasonal needs and letting the market to take care reserves into
the market tighten or ease in reflection of more or less than normal seasonal demands. Leaving aside the question of just what represents normal seasonal needs, he found this broad approach most appealing. It would mean a very careful appraisal of seasonal needs, reasonably close timing of reserve injections, and almost complete abandonment of free reserves or net borrowed reserves as a guide. Assuming a reasonably accurate appraisal of needs and good timing, and assuming a normal seasonal increase in needs, it would also mean that the present state of conditions in the money market should be preservedno greater ease and no greater tightness-with interest rates becoming the chief measure of such conditions. Mr. Deming said he believed that the discount rate should be advanced as quickly as possible by one-half per cent, primarily as a technical move rather than a restrictive move. It might well be that would be desirable in the latter part of the year, a further advance If demand did not increase as but that would depend on developments. be no need to move further; if it grew more anticipated, there would rate increases might be in order. Mr. Deming than expected, further change the directive at that he saw no reason to concluded by saying this time. District, Mr. Allen said that perhaps Reporting on the Seventh the evidence that in development was most significant economic the expenditures had trend in capital too, the downward this district, fact, an important factory soon be reversed. In been halted and might
locating service in Chicago indicated that their current work-load was the greatest in their history. To mention scattered reports, two new steel expansion programs had been announced for the Chicago area and a well-known food processor Was understood to be reactivating a program for replacement of all old facilities. Virtually all Seventh District centers which furnish employment information were reporting either the beginning of a rise, after adjustment for seasonal trends, or an ending of the deterioration. There had been no change in the prospects for crops, which continued very favorable. Loans of district reporting banks had increased substantially since the month of August, with most of the expansion in business loans, while investments had de clined. Although the rise in business loan figures at district banks in the past six weeks exceeded that of the nation, the decline in the October 1957 through July 1958 was considerably greater district from of the nation. The large Chicago banks, after being net than that an extended period, last week were net sellers of Federal funds for borrowing at the discount window. purchasers, but they still were not not only been net buyers of hand, Detroit banks had On the other amounts at the had been borrowing in substantial Federal funds but the time of year when their largely because this is Detroit Branch, making substantial automobile companies--are largest depositors--the relatively little income. outlays with Allen said it was business, Mr. of the automobile Speaking this year the model sales data because to interpret current difficult
clean-up period was earlier by the calendar than last year. The daily rate of sales for the period September 11-20 was only half of the rate a year ago but last year the sales dip did not come until October. Dealers' stocks of new cars on September 20 were 417,000-around 332,000 1958 models and 85,000 [] models--so it appeared certain that the goal of 400,000 new cars on the first of October would be attained. In fact, current labor difficulties might result in a lower figure. Meanwhile, used car inventories were at the lowest absolute levels since 1952. An acute shortage of one- and two-year old cars was attributed to the low new car sales in the last year and the resulting drop in used car trade-ins. Used car prices firmed several months ago and were still rising, and with the shortage of later model used cars more upward pressure on This could be a stimulus to new prices could probably be expected. was widespread but cautious optimism car sales. In Detroit there Most forecasts for 1959 sales reception of the 1959 models. about the produced cars and 5 to 5-1/2 million for domestically were around be close to 25 per cent above for imports, which would around 400,000 in September had Automobile production estimated for 1958. the level and because of numerous the changeover shutdowns low because of been Ford contract, the On the to labor negotiations. walkouts incidental 12 and 16 estimated at between the package was cost of first-year with the contract However, even on an annual basis. cents per hour
signed many thousands of Ford hourly workers had not yet returned to work because of dissatisfaction with the provisions, and conditions at General Motors and Chrysler were even worse. With regard to policy, Mr. Allen said that despite all of the crosscurrents and difficulties encountered in determining direction, the course for at least the next three-week period seemed quite clear. The pause to which Mr. Treiber had referred actually appeared to have begun three weeks ago and he (Mr. Allen) felt that it should continue. If the Committee were to aim at maintaining the current level of free reserves, that would mean that it was providing what the banks would require to take on the new Government securities. Of course, the Committee did not yet know how many of those securities the banks would take or how long it would require for the banks to market them. In the circumstances, for the next three weeks he would aim at main of free reserves, which would in effect mean taining the current level the end of that three-week even keel. However, before maintaining an want to hold a telephone meet Open Market Committee might period the Mr. Allen concluded by saying ing if developments seemed to warrant. discount rate at present. not favor changing the that he would continued to follow that the Fifth District Mr. Wayne stated for the past several it had been following the same course that about but the in the district and not illusory upturn was real weeks. The
pace was not as rapid as indicated by the national figures. There were one or two spots in the district that were causing a bit of concern. The textile industry, which is the largest manufacturing employer in the district, continued to operate on a fairly full basis but inventories at mill level were rising slightly. Orders had not been keeping pace for the last couple of weeks and efforts were being made in the cotton sector of textiles to extend the usual Thanksgiving and Christmas holiday periods in order to work off some inventory at mill level. There was, however, no expectation of any shutdown and the real problem of the industry related to profits; in output and employment the industry was running at a fairly even rate not far off bottom, which was where it had been for the last year or so. Another somewhat disturbing note was that contacts in the southern bituminous coal areas expressed the conviction that a wage agreement had already been reached between the United Mine Workers and the northern bi tuminous coal industry, the natural consequence of which would be a demand upon the southern producers. This would result in increases in coal prices of from 4O to 60 cents per ton and the ultimate effect might be to destroy the important utilities market. The concern was the district, particularly in the with the long-range effect on Virginia which were running at their customary depressed areas of West economy seemed to be the rest of the district's low level. However, the rest of the for agriculture over up well. The outlook holding
year was encouraging and on the whole economic activity in the district was definitely moving up. Mr. Wayne reported a consensus at the Richmond Bank that the degree of restraint the System had been applying in the last three weeks was appropriate to the circumstances. The district's reserve city banks were apparently feeling some effects of this restraint on their reserve positions and some erratic upsurge in borrowing at the reserve city level had been observed. This, no doubt, would continue since financing needs would affect the reserve positions. There was an unwillingness to take security losses if they could be avoided and the lack of availability of Federal funds was likely to send the banks to the discount window. Mr. Wayne expressed the view that the present degree of re straint should be maintained, certainly for the next three weeks. He change the discount rate at this time but would not be inclined to in the rate might be appropriate in the felt that an upward movement not too distant future. had found the staff economic presentation Mr. Mills said that he illuminating, particularly from the standpoint of its historical per movements as raised regarding economic the questions it spective and he said, would His own remarks, in the near future. they might develop must grapple with that the System the financial factors be confined to following statement: then made the Mr. Mills the near future. in
A monetary and credit policy dedicated to maintaining an appropriate availability of credit must be followed. Credit availability in this sense means the provision of an adequate supply of reserves in support of legitimate demands for commercial bank credit. Even though some over flow of expenditures may occur as the result of rising Federal disbursements, concern over this possibility should not be permitted to cause Federal Reserve policy-making to overallow for such expenditures by an offset in the way of an unnecessarily severe restriction on the expansion of commercial bank credit. The diversified effects from the use of commercial bank credit are essential to economic recovery and stability and cannot properly be curtailed on the premise that the more limited economic coverage of Federal expenditures can be a substitute. Consequently, Federal Reserve System policy should lean on the side of supplying reserves in a quantity that will support all visible demands for the legitimate use of com mercial bank credit. A by-product of this policy contention is reiterated--namely, that a parsimonious policy of supplying reserves, by damaging the market for U. S. Government securi ties may subsequently compel the Federal Reserve System to a greater quantity of reserves in support of Treasury supply financing programs than would otherwise be the case. An approach toward bringing about a continuous condition of free reserves should be very cautious and exploratory negative as to effects. In that connection, I am relieved to see that be no disposition to press the supply of re there seems to strongly in that direction. Along the same line, serves too should be paid to the fact that the demonstrable attention securities market has produced thinness of the U. S. Government interest rate structure that of artificiality in the an element inspired increase in the appearance of a supply-demand gives did not occur in reality. On term interest rates that longer trading in U. S. Government contrary, the lack of two-way the on interest yields has by putting upward pressure securities borrowers of long-term other public and private compelled with funds to provide themselves hurry to the market funds to order to compete with interest rates in at constantly higher U. S. Government bonds. yields forced upon increasing interest for market developments absence of orderly in the Therefore, well be that economic securities it may U. S. Government discover an abrupt upward of tnis period will historians not been the consequence rates that had distortion in interest
of movements in an appropriately free securities market, but had been caused in part by the restricted market activity of the commercial banks, the depreciation in whose bond accounts prevented their trading except as necessitous sellers, which transactions acted as an additional market depressant. Mr. Mills said that according to his concept of Federal Reserve System policy the System should stand ready under present conditions to supply reserves to serve as an equilibrating factor between the demand for long-term capital funds and the demand that is even now in evidence for term loans from the commercial banks. The latter could produce an unwanted expansion of bank credit. An appropriate well-gauged pro conceivably bring these two kinds of demands vision of reserves might and, by fostering some measure of for funds into reasonable balance an unnecessary demand for in the capital markets, prevent stability upon the commercial banks. term loans from being pressed care to propose any change said that he would not Mr. Mills he would hope that to the discount rate, directive. As in the policy some part changed. However, developments--in would not have to be it in the discount force an increase own making-- might of the System's hoped the rate rates. He with market it more closely rate to align to allow the was a disposition unless there not be changed would Reserve Banks at the Federal more liberally banks to borrow member in earning to obtain the differential permitting them as a means of to them on the rate available rate and the discount power between only conceivable The of investment. other areas and in bills
advantage of such a development would, of course, be to provide reserves at the initiative of the member banks as an element for working toward stability in the Government securities market and the capital markets. On the other hand, a movement of that sort would involve policing problems from the standpoint of the appro priate use of Federal Reserve Bank credit and that could prove extremely difficult. Mr. Robertson stated that the big problem today was to con tinue to combat--and to dispel if possible--the widespread expectation of inflation. In his opinion, monetary policy could do that best in present circumstances by exerting a continued pressure. By this, he mean additional pressure but the continuation of pressure did not during the past few weeks. This would such as had been maintained of the Account because of the mean a difficult job for the Manager when banks paid for the tightness that would be created additional It would also mean a diffi securities that they purchased. Treasury of the money obtained by following weeks when more cult job in the Nevertheless, he would hope went back into the economy. the Treasury the same maintain approximately Management could that the Account past few weeks. during the as had been maintained degree of pressure the System the raising to consider within Although it was appropriate of making that he could not see any possibility of the discount rate, was his opinion hand, it On the other next few weeks. move in the
that the rate should be changed at the earliest possible time. He would not favor a change in the policy directive at present. Mr. Shepardson said that he found no need to comment further on the general economic picture that had been presented. His think ing on policy, he said, was much in line with the thinking of Mr. Robertson and also that of Mr. Irons. The problem of the Treasury in the months ahead would be affected materially by the psychological atmosphere and some way must be found as expeditiously as possible to minimize the fear of inflation. Like Mr. Treiber, he felt that in order to obtain the participation of the commercial banks in under writing the Treasury flotations there should be a period of reasonable stability until the present offering was digested. This would contemplate that the Account Management should try to maintain the present degree of restraint--not increase it in any way--in order to take care of the digestive period. However, the nature of the job to be faced at the end of that period should be kept in mind. It should also be remem bered that it would be a relatively short time before the Treasury Plans, therefore, should be laid in would be in the market again. of restraint and adjustment of the the direction of a greater degree the System might make its full contribu discount rate in order that inflation. He would not be in to allaying the fear of pending tion directive at this moment. any change in the clined to make
Reporting from the Fourth District, Mr. Fulton said that there was an aura of optimism in the business community. The manu facturers had felt for some time that the liquidation of inventories was overdone, and the buying now taking place was sound and necessary rather than speculative. In steel, the rate of production had in creased in the district more than in the nation as a whole and orders were up about 10 to 15 per cent in the last month. They were not particularly heavy from the automotive industry; instead they came from a broad segment of users, including the appliance industry. were now at about 64 per cent of capacity in the Steel operations district against April production of around 4O per cent. A dis was the belief in the industry that steel turbing note, however, early 1959. The steel contract going to go up again in prices were is feared that a large package expire next June and it is scheduled to evidence of the apprehension, by the union. As is being prepared delivery in 1959 at now taking orders for steel fabricators were $3 to $5 per ton. prices ranging from increased showed a modest Mr. Fulton said, tool industry, The machine had Unemployment were diminishing. orders but backlogs increase in by the strikes picture was affected slightly but the been reduced industry. In general, in the automobile and the model changeover upward movement was no and there still substantial was unemployment place in that had taken with the upturn commensurate in employment
production. Department store sales were up somewhat but for the year to date were down 4 per cent from last year, while auto sales were very low--30 per cent below a year ago. Agricultural income in the district had been hurt rather badly by incessant rains; the hay crop spoiled to a large extent and it appeared likely that in many cases the grain crop would be left in the fields. From an agricultural standpoint, therefore, the Fourth District would not do very well this year. Mr. Fulton said that bank loans rose in September, this being the first gain since June. Banks reported an increasing number of inquiries about term-loan credit, with borrowers apparently trying to work the capital markets against the bank loan rates. Banks had been borrowing at the discount window without hesitation and discounts this month were 13 to 17 per cent of the national total. The discount window was in frequent use and the discounts were of good size. Turning from district developments to policy considerations, Mr. Fulton said that the System had to face up to the threat of in flation and the problem of increasing prices all along the line. He would not like to see any backing up from the pressure that the System Although the System might have a had been exerting in the market. he felt that it should stand difficult time trying to prove itself, such as to give an adequate keep a pressure on the market fast and that inflation should was firmly of the belief signal that the System rate should be raised that the discount He also believed not prevail.
by 1/2 per cent as soon as feasible so as to bring it into better alignment with money market rates. He saw no reason for changing the directive at this time. Mr. Bopp said that the Third District was showing some modest improvement. Continued claims for unemployment compensation were down somewhat in recent weeks, although they continued to be significantly above year-ago levels. Loans of weekly reporting banks were up during the past few weeks but, on the other hand, were down from correspond ing periods last year. In this connection, he noted that year-to-year comparisons from now on would be likely to become more favorable be the trends that began to develop about this time last year. cause of to System policy, Mr. Bopp said that in his With regard the Treasury were such as to dictate opinion the problems confronting three-week period. He would an even keel during the next maintaining this time, or in the dis in the directive at not favor any change count rate. was going to the gins that the cotton crop Mr. Johns reported parts of week through the southern During a trip last late this year. expressed by good deal of apprehension he heard a the Eighth District out. There had from here on the weather parties concerning informed caused weather conditions far, and if moisture thus been excessive Mr. Johns be down substantially. crop might the cotton further delays were up less in the district loans at banks that business also reported
than seasonally in the last four or five weeks, principally attributable to the volume of loans to commodity dealers. In most recent weeks there had actually been a contra-seasonal decline in loans because of less borrowing by finance companies. Mr. Johns said he was rather impressed by the results of a survey made recently among real estate mortgage bankers in the St. Louis area. From this survey it would appear that there had been a rapid and substantial turnaround in the availability and cost of mortgage funds; respondents had spoken with astonishment about the suddenness and rapidity of this change. A number of smaller insurance companies and other purchasers of real estate mortgages are reported to have disappeared or withdrawn from the market. Although the larger ones customarily do not withdraw completely but continue some activity, though at lower levels, in order to maintain mortgage banker correspondent relationships, the are making available to such correspondents have been amounts they a further reduction of as much as 50 per cent is ex reduced and was some opinion that for a time, and to pected next year. There savings and loan money might pick up some of the slack, some extent, to offset the insurance that this could continue but it did not appear To what extent and long period of time. decrease for a very company in reduced housing starts would be reflected when these developments remained to be seen.
In further comments Mr. Johns said that conversations with representatives of the larger banks in the district indicated that they did not feel that their banks were in a very liquid or easy position. They had no bills to speak of, they have substantial losses in their Government bond portfolios, and there is a sharpened reluctance to dispose of bonds at current prices, especially in a number of banks which took capital gains in the early part of the year. The banks, he said, foresaw no very strong loan demand this fall. Mr. Johns stated that he agreed with the view expressed several times at this meeting that there should be no increase in the existing policy of restraint, at least for the time being. However, he said, there was considerable opinion within the group with whom he consults in the St. Louis Reserve Bank that at the first appropriate time--whenever that might be--the discount rate should be adjusted to bring it into better alignment with present short-term market rates; also, that an increase of 1/2 per cent was the least that should be considered under circumstances now existing. The next directors' meeting at the St. Louis Bank, Mr. Johns said, would come in the midst of Treasury payment dates and he was not inclined to think that adjustment of the rate at that time would be appropriate. Mr. Szymczak expressed the view that one of the strongest fears in the market at the present time reflected the large
Government deficit and the resultant need of the Treasury to go to the market to borrow new money. What happened in the Govern ment securities market in July and early August, he said, was not due to a policy of restraint on the part of the System; in fact, any criticism leveled at monetary policy during that period would have to be on the grounds that it was too easy. Instead, it was an expectation on the part of purchasers that security prices would rise that caused the speculation. Now the Treasury had a large Government deficit to finance, and in view of the large number of unemployed the market appeared to feel that money must continue to be supplied, whether that was inflationary or not. It seemed to be the general conclusion that inflation was in the offing, as stock market prices. The frozen portfolios reflected by the trend of the situation difficult for them, of the commercial banks made a long period of time and because they were liquid for particularly suddenly became lliquid. that much of the uncertainty Szymczak went on to say Mr. to lack of clarity of appeared to be due regarding the future essential that seemed to him Therefore, it Reserve policy. Federal He felt that and steady. be clear, continuous, System policy be met be, should they might credit, whatever demands for seasonal that the he felt Mr. Mills, Like market operations. through open just to market securities allow the Government could not System
keep on faltering because sooner or later the System would have to come to its support and perhaps provide more reserves than would otherwise need to be provided. In his opinion, free reserves should not go down to the zero level. While he did not like to mention any specific figure, he noted that operations in the market in recent days had been substantially along the lines of keeping free reserves above zero and maintaining an even keel. That, he felt, was about where things should stand. Mr. Balderston, after commending the Desk for achieving the maintained in the past three weeks, degree of stability that had been on the part of some he was concerned about the misunderstanding said saw it, the change in had moved up. As he people as to why rates or nothing to rate had little and the discount margin requirements mentioned by Mr. the basic considerations do with it. Instead, of rates, short as naturally a stiffening had caused quite Szymczak to a long period must look forward that one as long. It appeared well the private sector be competing with Government would when the Federal would make it and the competition for capital funds, of the economy and the and local governments, State for corporations, difficult desired at prices the funds they itself to acquire Federal Government to see that task was System's immediate to pay. The would like they of the bank underwriting make the current helped to monetary policy the bankers' order to overcome a success in issues Treasury
disenchantment with the underwriting role. The Treasury, he noted, had priced these issues in accordance with what those responsible for monetary policy would wish. In fact, the pricing was so much on the liberal side that any lack of success of the issues would be an indication of a greatly disturbed market. These particular issues, he said, had to make the bankers feel that the next time they would be willing to do the necessary underwriting. Therefore, an even keel in monetary policy seemed called for during the period until the next meeting of the Open Market Committee. In other words, he would like to see open market operations conducted during the next three weeks in a manner as similar as possible to the past three weeks. It was important, Mr. Balderston suggested, to avoid rumors during the ensuing period and there should be no discussion of a discount rate change at the Federal Reserve Banks. If such discussions confusion would certainly be the and rumors were to reach the market, circumstances would seem When the System did move, however, result. been customary at times decisively than had to dictate moving more available for action because the intervals in the past, particularly a System, neither its move as System made Unless the would be short. the situa would understand nor the Congress the market, the public, the time when In summary, critical. be properly they would tion and in the market, avoid confusion that, to would hope move he came to would move the System and instead out, be strung would not the move as a System.
In an introductory comment, Chairman Martin said that it was encouraging to note the degree of unanimity around the table this morning. He expressed wholehearted agreement with Mr. Irons' analysis of the overriding problem with which the System was con fronted and of the Treasury's longer-range problem. At the last meeting, he said, he was rather discouraged about the role of the Federal Reserve System. Personally, he had not anticipated that recovery would be as rapid or as full as had turned out to be the case. While the Treasury had not been perfect in its analysis of the situation, within the System family emphasis should be placed on the System's own faults first, rather than what on other people do. In his opinion, the System had not acted definitely, clearly, or sharply enough during the past two months to make possible the securities market that he regarded as necessary type of Government and essential. At the last meeting, Chairman Martin recalled, he had expressed that if he had been doing it on his own he would himself to the effect to 2-1/4 per cent. No one, of course, can have moved the discount rate must be recalled that after the difficult do it on his own. However, it was free to act so two months when it the System had about July period The problem, of course, was Treasury financing was concerned. far as scheduling of directors' meetings, complicated by the irregular there were now In any event, the vacation period. especially during
two problems--the economic problem and the financial problem--and a sympathetic critic of the System had said to him several times in recent weeks that the System appeared to be much more proficient in economics than finance. Chairman Martin expressed the view that action today should be dirrected toward the three-week period ahead. Nevertheless, he agreed that at the first feasible time a move should be made toward better alignment of the discount rate and the bill rate. In talking about an even keel, he said, one must remember that there is a flowing reserve picture, which means that in order to maintain a given degree of restraint, substantial reserves may have to be supplied due to seasonal factors. Another way to think about it would be to say that in maintaining an even keel one must try to maintain about the level that there is in the stream. Also, it must be recognized that it is Treasury some period of stability both before necessary to give the and after it goes to the market. It would be most unfortunate at to pull the rug from under the Treasury the present time for the System current financing. Most press commentators, immediately following the the discount rate and an increase in noted, would be anticipating he was the logic of the of credit because that a further tightening situation. differences within commented that Chairman Martin Continuing, the good, but when are all to within every organization the System and
an organization can not resolve them effectively it is not functioning properly. The System, in his opinion, did not have too good a record in the last discount rate experience. In saying this he was not blaming anyone, just trying to put the matter in terms of the future and the situation that he could see developing. Within the System there had been real differences of opinion, based mostly on economics rather than finance. At the same time, the market was very much upset because it thought at one point that the System was going to ease further, and later because delays by various Reserve Banks in coming into line on the discount rate caused people to think that the move was going to be to 2-1/4 per cent. In going through the journals he that the New York Bank would not move its did not find any expectation citing the New York Bank as an examplerate. Rather--and he was just to go to 2 per cent or that the debate concerned whether the theory was market and confusing to was unsettling to the to 2-1/4 per cent. That looking at the market. the logicians Chairman Martin forthcoming period, approached the As the System do. While it or would not what it would should not foreshadow said, it of a downturn always the possibility there was not seem likely, did Committee. However, meeting of the of the next now and the time between that no Re would hope he trend continued, current upward even if the next Committee to the rate prior on the discount would move serve Bank review the to opportunity be another there would which time at meeting,
situation. If it appeared at that time as though some action should be taken, he would hope that it might be possible for at least three or four Banks to act so that the action would be sharp and decisive. Furthermore, it was his opinion that if conditions appeared to call for an upward adjustment, that adjustment should be 1/2 per cent so that there would be no misunderstanding of System policy. To stick a knife in the wound, he observed, is only to prolong the misery. In short, Chairman Martin said, there had been some uncertainty in the market and the System had participated in the creation of that uncertainty. He was not saying necessarily that one point of view was right and the other wrong, but as an institution the Federal Reserve its differences and move. From here on, the System would must resolve time periods in which to make its moves because of have only limited the Treasury situation. observation he had made at other Chairman Martin repeated the was very fortunate from the of the Committee that the System meetings by the Treasury during this of the cooperation exhibited standpoint Anderson and Under Secretary He had found both Secretary period. of the System's problems. rare degree of understanding Baird to have a they were fully as agree with the System, they did not always While in the Federal Reserve. inflation as those anxious to defeat its responsi that in approaching went on to say The Chairman needs of the Treasury bear in mind the the System should bilities
without, of course, making them overriding. In other words, the System should realize that this was a joint endeavor. There was a sick Government securities market, and while he had not tried to analyze all of the causes, the Federal Reserve System could not be held entirely blameless for the sickness of the market. Sumarizing the views expressed at this meeting, Chairman Martin said that it seemed very clearly the desire of the Committee to try to maintain an even keel in the market, and that no change in the policy directive appeared to be contemplated. It also seemed clearly to be the desire of the Committee to give the Desk latitude to take into account the color, feel, and tone of the market. No one appeared to favor a further increase in the degree of restraint that had been exerted; nor, on the other hand, was there a desire to ease the market. The prevailing view would be to endeavor to keep the general level of free reserves within about the same range as had prevailed during the past three weeks. Chairman Martin went on to say that if some situation should the date of the next regular Committee meeting which develop before indicated a need for a telephone meeting it would, of course, be have one. However, it was his view that telephone meetings proper to if possible. Barring unforeseen developments, it should be avoided that from now to October 21 would be too long a did not seem to him At the October 21 an even-keel policy. in which to pursue period
meeting there could be another full discussion, and then it would not be possible for the System to continue indecisively; it must decide one way or the other, and any action should be clear and decisive. Thereafter, there should be again a period of stability before and after the Treasury went into the market. Chairman Martin then asked whether there was any question about the directive or about his summation of the meeting, and no questions were raised. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York, until otherwise directed by the Committee: To make such purchases, sales, or exchanges (1) (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct ex change with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) in the market to the needs the supply of funds to relating and business, (b) to fostering conditions in of commerce money market conducive to balanced economic recovery, the and (c) to the practical administration of the Account; amount of securities held in provided that the aggregate commitments for the purchase the System Account (including Account) at the close of sale of securities for the or certificates of other than special short-term this date, from time to time for the temporary indebtedness purchased not be increased or of the Treasury, shall accommodation by more than $1 billion; decreased Treasury for the direct from the (2) To purchase Reserve Bank of New York (with account of the Federal
discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certifi cates 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. It was noted that if meetings of the Federal Open Market Committee were maintained on a three-week schedule a meeting would fall on Tuesday, November 11, which is a legal holiday in Washington and other parts of the country. After discussion of alternatives, a general preference was expressed for Monday, November 10, and it was understood that a meeting on that date would be contemplated. Some of the Reserve Bank Presidents then reported figures that had reached them during the meeting from their respective Banks concerning subscriptions to the issues involved in the current Treasury financing. It appeared from these reports that the sub scriptions were running rather favorably. Pursuant to the understanding at the Committee meeting on Mr. Rouse had distributed to members of the Open Market September 9, and the Presidents not currently serving on the Committee Committee on speculation in the of September 11, 1958, a memorandum under date the New York Bank for the market prepared at Government securities York Money Market. Under Committee of the New use of the Technical
date of September 22, Mr. Rouse also had distributed a summary of the first meeting of the Technical Committee, which was held at the New York Reserve Bank on September 15, 1958. Mr. Rouse commented that his secretary had received from Under Secretary Baird's office a request for additional copies of the two memoranda, since the supply sent originally by the New York Reserve Bank to the Treasury had been exhausted; a copy of the memorandum had gone to the President, and Secretary Anderson had asked that a copy of the summary be sent to the Secretary of Commerce. Chairman Martin stated that Mr. Mills had been designated by of Governors to head up the Board's study of speculation the Board market. He said that arrangements had in the Government securities Exchange for a representative of been made with the New York Stock Mills and members of the Board's to confer with Mr. the Exchange staff. meeting of the Federal agreed that the next regular It was Committee would be held on Tuesday, October 21, 1958, Open Market at 10:00 a.m. the meeting adjourned. Thereupon Secretary
Also: Record of Policy Actions