October 21, 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, October 21, 1958, at 10:00 a.m. PRESENT: Mr. Balderston, Chairman pro tem. Mr. Fulton Mr. Irons Mr. Leach Mr. Mangels Mr. Mills Mr. Shepardson Mr. Szymczak Mr. Treiber, Alternate for Mr. Hayes Messrs. Erickson, Allen, Johns, and Deming, Alter nate Members of the Federal Open Market Committee Messrs. Bopp and Bryan, Presidents of the Federal Reserve Banks of Philadelphia and Atlanta, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Sherman, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Daane, Hostetler, Marget, Roelse, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Kenyon, Assistant Secretary, Board of Governors Mr. Molony, Special Assistant to the Board of Governors Mr. Koch, Associate Adviser, Division of Research and Statistics, Board of Governors Mr. Keir, Acting Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Messrs. Ellis, Mitchell, Jones, Tow, and Rice, Presidents of the Federal Reserve Banks Vice of Boston, Chicago, St. Louis, Kansas City, and Dallas, respectively
Mr. Einzig, Assistant Vice President, Federal Reserve Bank of San Francisco Mr. Gaines, Manager, Securities Department, Federal Reserve Bank of New York Messrs. Anderson and Atkinson, Economic Advisers, Federal Reserve Banks of Philadelphia and Atlanta, respectively Mr. Parsons, Director of Research, Federal Reserve Bank of Minneapolis The Secretary stated that since neither the Chairman nor the Vice Chairman of the Committee was able to be present at this meeting, it would be necessary to elect a Chairman pro tem. Upon motion duly made and seconded, and by unanimous vote, Mr. Balderston was elected to act as Chairman at this meet ing in the absence of the Chairman and Vice Chairman of the Committee. motion duly made and seconded, Upon and by unanimous vote, the minutes of the of the Federal Open Market Com meeting 30, 1958, were mittee held on September approved. to the members had been distributed this meeting there Before Reserve Bank of New prepared at the Federal the Committee a report of the period September 30 market operations during York covering open covering the period supplemental report 1958, and a October 15, through have been of both reports 20, 1958. Copies 16 through October October Market Committee. Federal Open files of the placed in the short-term reserve averages, in terms of reported that Mr. Rouse atmosphere, the money market and the general rates of interest, market during the instructions out the Committee's able to carry Desk had been
past three weeks. Because of an unexpectedly large volume of float, the period closed with free reserves on average above intended levels, but this was temporary and had not bad an adverse effect. The most important development in the United States Government securities market had been the market acceptance of the new Treasury issues, Mr. Rouse said, both of which were now trading at substantial premiums after opening at a discount. Commercial bank underwriters had had the opportunity to get out of their allotments with a profit, and many had done so. Some banks had sold other short-term securities to adjust reserves and kept the high-yielding new issues in portfolio. Mr. Rouse added that the intermediate- and long-term markets were sick. Trading volume was small, but press comments on the likelihood of in creased Federal Reserve restraint and of a new offering of Treasury bonds had helped to depress the market. Recent speeches by Treasury officials implying the use of moral suasion in selling Government debt had not been in the market; many people failed to understand an important well received point in these speeches, namely, that the Treasury planned to rely upon The real root of the problem in liberal pricing to sell its securities. was the current Treasury deficit and the Government securities market subsequent years as well. of large deficits in the prospect Mr. Rouse reported that the new issue of January 22 Treasury cent, and the new rate of 2.80 per at an average bills was auctioned Most references to at 2.65 per cent. trading this morning bills were
"the bill rate" referred to the rate on three-month Treasury bills, Mr. Rouse noted, but at present there were actually three Treasury bill markets: bills within one month of maturity were in general trading at 1 1/2-1 3/ per cent; two-month bills around 2 per cent; and January bills at 2 1/2 to 2 5/8 per cent. The four issues of shorter-term Treasury bills actually had been trading at yields well below the Federal funds rate. In concluding his remarks, Mr. Rouse commented that projections indicated a steady loss of reserves for the next several weeks, sug gesting that the System Account would be a net purchaser of Treasury bills during the three weeks before the next Committee meeting. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period September 30 through October 20, 1958, were ratified, and confirmed. approved, referred to a memorandum from Messrs. Hackley and The Chairman date of October 16, 1958, regarding Reserve Solomon distributed under and asked that Mr. Riefler in Treasury refundings Bank participation comment on the subject. the Treasury had been stated that for some time Mr. Riefler in the procedure for refunding the possibility of a change discussing securities and to attrition on the maturing so as to avoid securities value in the market. a "rights" issue from acquiring keep the maturing and Solomon, Under from Messrs. Hackley in the memorandum As stated
Secretary of the Treasury Baird transmitted with a letter to Chairman Martin, dated October 1, 1958, a memorandum containing a proposal for consideration in connection with the Treasury's December 1958 refund ing concerning which he asked "whether there are any legal or other reasons which would preclude the System's participation." The proposal, which was further set forth in draft circulars transmitted by the Fiscal Assistant Secretary of the Treasury under date of October 9, referred to the $9.8 billion issue of 3-3/4 per cent certificates of indebted ness dated December 1, 1957, maturing December 1, 1958, of which the Federal Reserve held approximately $7.8 billion and the public about $2 billion. Proposal "A" was that these be refunded by offering $2 billion of new securities to the general public for which either cash or the maturing securities would be accepted in payment but with no allotment privilege being extended. There would be an additional offering of the same securities to the Reserve Banks for exchange and that exchange subscription would be allotted in full. An alternative referred to as "B" would differ from "A" to the extent that the $2 bil lion offering to the public would be with the condition that subscrip tions accompanied by tenders of maturing certificates in payment would be allotted in full, thus placing the terms for the public and the Reserve Banks on the same basis. The memorandum from Messrs. Hackley and Solomon took the posi Reserve Banks could acquire the that under either alternative the tion to the $5 billion their being subject securities without refunding
limitation in section 14(b) of the Federal Reserve Act on purchases of securities by Reserve Banks directly from the Treasury. Specifically, the memorandum stated: While it probably would be somewhat easier to justify acquisitions under Alternative "B" as being exempt from the $5 billion limit, it is believed that, all things con sidered, acquisitions under Alternative "A" might also reasonably be considered to be exempt from the $5 billion limit. This would be on the ground that the security is not only acquired as an exchange or refunding but also (1) the security acquired by the Reserve Banks is clearly a security which meets the test of the open market, and (2) any differences between the treatment given the general public and that given the Reserve Banks is in favor of, rather than adverse to, the Reserve Banks. In other words, the acquisition is not only an exchange or refunding, but, in addition, there do not seem to be any aspects of any effort to have the Reserve Banks acquire securities from the Treasury on terms or conditions more favorable to the Treasury than those available in the open market. With the memorandum there was presented for the consideration of letter to Under Secretary Baird which would of the Committee a draft Banks of securities under either state that acquisitions by the Reserve to the $5 billion limitation alternatives would not be subject of the relating to monetary and that, subject to usual considerations and terms eventually set for the refunding securities, credit policy and the some or all of their be prepared to refund the Reserve Banks would alternatives. In either of the proposed certificates under maturing call for comments, Mr. Bryan to Acting Chairman Balderston's response attrition and which might avoid other alternatives inquired whether explored. To this, securities had been values on the maturing rights
Mr. Riefler responded that these were the two alternatives on which the Treasury had now requested the comments of the Committee. Mr. Allen noted that the memorandum from Messrs. Hackley and Solomon had not been accompanied by copies of the letters, memoranda, and circulars from the Treasury. While he did not argue the legal point, he felt that the Federal Reserve Act intended to make a clear distinction between open market purchases and transactions directly with the Treasury. He thought it important from the standpoint of the future that any securities purchases outside the $5 billion limitation provided in section l4(b) of the Act should be clearly open market securities in all respects. The Federal Reserve Banks should be treated and should seek to be treated exactly like any other purchaser. Mr. Treiber said that he concurred in the conclusion of Messrs. Hackley and Solomon that acquisition by the Reserve Banks of new Govern ment securities pursuant to alternative A or alternative B would not be subject to the $5 billion limit stated in section 14(b) of the Federal He felt, however, that there was a question of policy as Reserve Act. to whether the Federal Reserve should concur in a proposal calling for Reserve Banks as compared with other holders special treatment for the comments by Mr. Treiber maturing securities. Additional of the same were substantially as follows: on this point in the United States we are very fortunate As a people discipline of the itself to the our Treasury submits that debt. Only in special of the public market in the management of time to ease the money circumstances for short periods
market problems that arise at tax payment dates are special arrangements made between the Treasury and the Federal Re serve. We think it has been important to be able to say that, in connection with Treasury financing, the Reserve Banks have the same status as any other person--as any other security holder. Once there is special treatment for the Federal Re serve, it might be more easily argued that the Treasury should pay the Reserve Banks a lower interest rate or that the Treas ury should receive more favorable treatment in some other way in dealing with the Federal Reserve. Because we believe that it is important to continue to be able to say, without further qualification or explanation, that the Reserve Banks have the same status as any other per son in the market, we think that it would be unwise for Alternative A to be used. Accordingly we would suggest that a period be inserted after the words "Federal Reserve Act" in the last paragraph of the proposed letter to Mr. Baird, and that in lieu of the remainder of that paragraph there be inserted a new sentence expressing the view that it would be unwise for the Reserve Banks to receive special treatment in connection with Treas ury financing, and suggesting that Alternative A not be adopted. that followed, Mr. Bryan again mentioned that In the discussion the results the Treasury sought. He other alternatives might accomplish Treasury's objectives would be important felt that any step toward the that various alternatives should be considered. and suggested that the issues were first, whether the pro Mr. Mills answered in the affirmative, and was legal, to which Counsel had posal Open Market Com was one that the Federal second, whether the procedure he said that it had always wished to adopt. On the latter, mittee should be looked of the System Account that the portfolio seemed to him of the commercial banking the base reserve supply upon essentially as
system over a period of years. If this were the case, the composition of the portfolio beyond holdings of Treasury bills became a matter of indifference. It would not do violence to his conscience to accede to the Treasury's request. In fact, to do otherwise would clothe the System with a degree of chastity that he did not think pertained. Mr. Leach said there was a real danger in offerings of securi ties which would have the effect of giving the Federal Reserve special treatment. Mr. Szymczak added the comment that this was the course by which some other central banks had found that they gradually slipped into the position of being the means for financing the public debt rather than having their Government go to the market for its funds. While he thought the System might be willing to take securities such as the Treasury's proposal contemplated, he doubted that it was wise for the Committee to include a statement in its reply to Under Secretary Baird which would amount to a commitment as to what it might do policy whether the Treasury would wish wise in the future. He also questioned at this time in view of the market to use the suggested procedure situation. that there was a said that it was obvious Chairman Balderston Treasury's proposal, even though of opinion regarding the difference that the Reserve of the view of Counsel seemed to be acceptance there under such a proposal. securities issued could acquire Banks legally but he questioned he said, was required, to the Treasury A response
whether it was sufficient to give the Treasury the results of a vote on the issue without also giving it the benefit of the different views expressed at the meeting. The type of reply that might be given to the Treasury was dis cussed at some length and a number of suggestions for change in the last paragraph of the draft letter were considered. In the course of the discussion, Mr. Mills stated that he would be willing to move that a letter be sent to the Treasury in the form of the draft submitted, adding that he would be agreeable to placing a period after the word "Act" in the last paragraph and deleting the rest of the sentence. Mr. Treiber said that he would be willing to second a motion such as that proposed by Mr. Mills. There then developed a discussion of how such a letter would be interpreted by the Treasury, especially in view of its question whether there were legal or other reasons which would preclude as to participation in a refunding of the type proposed. In the System's while a letter such as he proposed clarification, Mr. Mills stated that of the proposal, his motion would would only comment on the legality on the Treasury at the time that a deputation would call contemplate in essence the Committee and would state that the letter was delivered a deputation also would give the Treasury's proposal. Such acceded to of the discussion at this meeting. the Treasury the substance way to get a clear expres suggested that the only The Chairman to vote on the two issues, to the Treasury was sion of views to send
that is, whether its proposal was legal and, if so, whether as a matter of policy the Committee felt that the System would wish to participate in a refunding pursuant thereto. Mr. Mills said that the Committee had an obligation to give the Treasury a clear reply and that if the vote was unfavorable on either issue the Treasury would be at liberty to renew its plea to the Committee. Thereupon, Mr. Mills moved that the Committee approve the letter to Under Secretary of the Treasury Baird in the form of the draft submitted with the memo randum by Messrs. Hackley and Solomon dated October 16, 1958. In the absence of a second, the Chairman declared Mr. Mills' motion lost. WM. Szymczak then moved that the last paragraph of the draft of letter be amended by placing a period after the word "Act" and deleting the rest of the sentence, and that the letter as changed in this manner be sent to Under Secretary Baird with the understand ing that the Chairman, or whoever might be designated by the Chairman, would present to representatives of the Treasury the substance of the views expressed at this meeting. Mr. Szymczak's motion was seconded by Mr. Leach. put by the Chair and The motion was carried, Messrs. Balderston, Fulton, Irons, Leach, Mangels, Shepardson, Szymczak, and voting for the motion, and Mr. Mills Treiber voting "no." for an ex then called The Chairman of views by the alternate members pression
of the Committee and the Reserve Bank Presidents who had not voted on Mr. Szymczak's motion, and the following views were expressed: Favorable to the motion, Messrs. Erickson, Allen, Johns, Dening, Bopp, and Bryan. Mr. Shepardson next moved that as a matter of policy the Committee record the view that action by the Treasury to use Alternative "A" as set forth in the letter to Under Secretary Baird in refunding securities would be unwise. This motion was duly seconded and carried, Messrs. Fulton, Irons, Leach, Mangels, Shepardson, Szymczak, and Treiber voting to approve, while Messrs. Balderston and Mills voted "no." In response to the Chairman's request for an expression of views by the alternate members of the Committee and the Reserve Bank Presidents who had not voted on Mr. Shepardson's motion, Messrs. Erickson, Allen, Bopp, and Bryan indicated that they would favor the motion, while Messrs. Deming and Johns indicated that they would not favor such motion. Secretary's note: The letter to Under Secretary of the Treasury Baird was trans mitted under date of October 21, 1958 in the following form: This refers to your letter of October 1, 1958 and Mr. letter of October 9, 1958 regarding certain Heffelfinger's securities which the Treasury might issue in refunding about $9.8 billion of certificates that mature December 1, 1958. You refer to the possibility of the Reserve Banks acquiring refunding securities in replacement of the the proposed maturing certificates held by them, and you ask, in effect, refunding securities so acquired would be whether these billion limit stated in section l4(b) of subject to the $5 the Federal Reserve Act on purchases of securities by the Reserve Banks directly from the Treasury.
Mr. Heffelfinger's letter enclosed tentative drafts of two circulars which might be used, alternatively, to carry out the refunding. Under Alternative "A" about $2 billion of the new securities would be offered to the general public, with either cash or the maturing certificates being accepted in payment for the new securities, but with no allotment privilege being extended to the maturing certificates. There would be an additional offering of the same new security to the Reserve Banks in an additional amount in exchange for their holdings of the maturing certificates, with that ex change subscription being allotted in full. Alternative "BM would be substantially the same as Alternative "A", except that with respect to the $2 billion offering to the general public, subscriptions accompanied by a tender of maturing certificates in payment would be allotted in full. Upon careful consideration of both the alternatives, the Federal Open Market Committee has concluded that acquisitions by the Reserve Banks pursuant to either such type of refunding would not be subject to the $5 billion limit stated in section l4(b) of the Federal Reserve Act. During the foregoing discussion, Mr. Keir withdrew from the meeting. In supplementation of the staff memorandum distributed under date of October 17, 1958, Mr. Young presented the following statement on the economic situation: Two words--continuing recovery--well sum up the composite of most recent news about domestic economic activity. Third quarter GNP is now estimated at $440 billion, up $11 billion from the second quarter. Main factors in the rise liquidation and increased Government were reduced inventory and consumer expenditures. is rising further and production this month Industrial emanating from labor settlement broadly, with extra stimulus and new-model output in the automobile industry. sales and new orders months, pickup in Over the summer about even, but in generally ran manufacturing industries in For durable goods indus new orders moved ahead. September been a bit ahead of sales since tries only, new orders have month has shown a June also, each successive June. Since of manufacturers' inventories. slow-down in liquidation
New construction activity in September at $50 plus billion, annual rate, was close to record levels. Housing starts at a rate of 1.3 million units were at a three-year high and for the year as a whole through September were 10 per cent ahead of the first nine months of 1957. August construction contracts exceeded those of a year ago by nearly one-fourth. With industrial and construction activity rising further, labor markets are strengthening. Unemployment in September declined about twice the seasonal amount, and unemployment claims for October are indicating further unemployment de clines. Recent unemployment declines have favored especially male workers and long-term unemployed. September gains in employment were most marked in durable goods manufacture, in finance, and in Government activities. With more employment, hours worked per week up slightly, and hourly earnings a bit higher, rising wage payments are helping to raise personal income. In September, personal in come at $358 billion was 3 per cent higher than the February low. Though 1.5 per cent higher in current dollars than the August peak of last year, income was off about 1 per cent in constant purchasing power. While personal income rose further in September, retail sales slipped off 2 per cent from high July-August levels. Declines were most marked in durable goods lines which in pre ceding months had shown the greatest advance. With forward-look model introductions in process, the market is being closely watched. While work automobile have slowed manufacturers' shipments and '58-model stoppages to lag, dealer deliveries have been sales have continued further into dealer stocks, bring enough to cut significantly last year at this time. Used car ing them to a fourth below car stocks have also now been prices remain firm and used fourth under last year's October level. reduced to about a farm harvest prospect is for record crops, especially The improved range conditions and price-supported crops. With and maintenance of supplies, buildup of herds bulging feed is limiting cattle slaughter. Hog slaughter feeder stocks levels, but output of has been about at seasonal recently meat has been up significantly. poultry prices have been several months, wholesale For the past of farm prices offsetting strengthening stable, with easing prices and price markups in industrial material tendencies in industrial material items. Strength for some fabricated prices of a few pronounced in metals; has been most prices
materials such as petroleum products, lumber, and wool have eased or declined. Among fabricated products, the number of price advances, while growing slowly, is growing. The necessity of covering higher costs in prices is again a featured subject of discussion in trade periodicals. The consumer price index, which showed a slight decline in August because of lower food prices, may show a further decline for September. But a phase is now starting when recent price advances of autos and some other durables will begin to register an influence on the index. These increases and further rises in prices of services may change the index drift before the year end. Abroad, in major industrial countries the news is mixed. In Canada, recovery has slowed, with labor strife and auto model changeover contributing factors. In Britain, mild recession appears to have been extended. In France, some recession evidence is reported. In Germany, activity over-all continues high, but with steel, coal, and textiles still showing weakness. The level of U. S. exports has not changed significantly since April. With many important nonindustrial countries still suffering serious internal inflation difficulties, and with prices of various materials which they supply at lower levels than last year, pickup in their purchases from indus trial countries, including the U. S., is hardly to be expected yet. There had been distributed copies of staff memoranda dated October reserve positions and the outlook for member bank 17, 1958, concerning the With further reference to finan outlook for Treasury cash requirements. made the following statements cial developments, Mr. Thomas Bank credit developments during the past two months or a pattern that might be con more have conformed closely to sidered as satisfactory under existing circumstances. in contrast, have not been Developments in capital markets, the shift from fixed return assets to satisfactory in that Although bond markets seems to be continuing. equities first half of October, they some improvement in the showed during the past week. have weakened again seasonal loan banks have met moderate Since July, have underwritten Treasury cash offerings of demands and
securities, but have been able to sell large amounts of securities to nonbank investors. As a result demand de posits have increased less than seasonally and time deposits have recently declined. The Treasury deficit has been financed through offerings of short-term securities without causing an inflationary expansion in the money supply. Bank loan expansion has in recent weeks been larger than in the corresponding period of 1957, but less than in some other years. Bank acquisitions of the Treasury bills and note issued this month were remarkably small. This result has been obtained with, at the most, only moderately restrictive monetary policies. Net free reserves of member banks, which were reduced in August, have remained close to $100 million since the beginning of September and the discount rate has continued well below short-term open market rates. To some extent, the slackened monetary expansion along with Treasudy deficit financing and general economic recovery has been possible because of previously accumulated liquidity. Demand deposits, after adjustment for seasonal variations, increased by over 2 per cent in July, following an increase of two per cent in the first half of the year. Time deposits increased at a rate of over 1 per cent a month from December until July. Further monetary expansion, other than seasonal, has not been needed to finance economic recovery. The higher level of interest rates has helped to attract some of these available funds into other uses, such as short-term Government securities. Turnover of demand deposits, seasonally adjusted, has increased slightly in recent months but continued less than a year ago. Yields on Government securities rose in the latter part of September after announcement of the Treasury financing, but declined somewhat after the beginning of October. The market was given reassurance by the favorable reception of the new Treasury issues and the large share absorbed by nonbank in vestors. Yields on short-term securities have continued higher reflecting in part the than they were prior to mid-September, influence of the increased supply of bills and short notes re sulting from recent Treasury financing, as well as anticipation of further growth in credit demands. The three-month Treasury is well below rates prevail yield at around 2-5/8 per cent bill 1957. Rates on open-market ing in late 1956 and throughout paper have been raised to 3-1/ per cent compared commercial of 1-1/2 per cent in July and a high of 6-1/8 per with a low paper and bankers' on finance company ago, and rates cent a year have also been raised. acceptances
Yields on long-term Government securities, after rising in September to above the peak levels of 1957, also declined somewhat after the beginning of October to around the levels prevailing before the financing announcement. They have risen again, however, during the past week to only slightly below their earlier highs. Although bond markets generally strengthened somewhat in the first half of October, they are still influenced by the tendency of investors to shift into equities. Notwithstanding occasional setbacks, stock prices have risen to new high levels. Yields on high-grade stocks have declined further below those on high-grade bonds. New issues of corporate securities, which were in relatively large volume during September, have been much lighter in October. Issues by State and local governments in October are expected to remain close to the average for the year to date, if a large New York State Power Authority issue is offered this month. The trend of economic events and the prospective borrowing needs of the Federal Government indicate the likelihood of grow ing credit demands in the near future. To what extent these may be supplied from accumulated and current savings and to what extent growing demands for bank credit develop remain to be seen. Seasonal monetary needs call for a further growth of over $4 billion in total bank credit by the end of the year. The Treas ury will need to borrow additional cash of about $4 billion in the period and nearly as much more in January. For the remainder of the fiscal year after January, occasional Treasury borrowing needs will be more than offset by retirements of debt. In addition to seasonal needs for currency and required reserves, the outflow of gold seems likely to persist. This current payments and receipts for trade and services country's are approximately in balance, while our with other countries and aid supply funds to foreigners who foreign investments their dollar claims. Some of these claims continue to add to balances--deposits or short-term securitiesare kept in dollar increasing recently, and some are holdings of which have been taken in gold. on bank reserves resulting from foreign gold The drain in foreign balances at the Reserve acquisitions and changes dollars in the about half a billion has amounted to Banks Some drain is likely to continue, although past three months. to predict. This is largely the the magnitude is difficult international economic forces in our result of fundamental the operation of can be changed only through position, that While the effects of and competitive factors. market forces
the drain on bank reserves may be offset by System open market operations, this situation is one that calls for a generally restrictive credit policy in this country. More effective correctives, however, would be moves to reduce the budgetary deficit and the checking of price rises due to wage and other cost increases. The situation would also seem to call for removal of some of the obstacles to foreign trade and capital movements in many other countries. Customary seasonal currency and deposit growth, together with an allowance for a further gold drain at the rate of about $100 million a month, indicate a need for about $1.3 billion of additional reserves between mid-October and the end of December. Except for about $300 million of temporary needs in the next two weeks, most of these will develop after the middle of November. The task of supplying reserve needs through open market operations is relatively clear and simple. The more difficult problem facing the System as a whole is the question of the discount rate. That rate is out of line with market rates. Yet there is no indication that member banks have been increas ing their borrowing to obtain reserves for undue credit expan sion. As long as this situation continues there is no strong need for a higher rate. An increase at this time might be disturbing to an already shaky bond market. There are, however, strong reasons for raising the rate time. With economic activity fast moving to higher at this levels and with a large Government deficit to be financed, to increase. Undue expansion might credit demands are likely growing economy requires a develop in some sectors. A easily and saving and a level and structure high rate of investment keep these elements in balance. interest rates which will of the tendency to shift from fixed The fear of inflation and pressure for rising rates. to equities also exert return assets increased in order need to be rate will eventually The discount borrowed reserves from being bank credit based on to prevent of this nature. financing dangerous developments drawn into is available or is an adequate flow of money As long as to finance a sound open market operations supplied through not need to increase needs, banks should recovery and seasonal a higher discount Under such circumstances their borrowings. influence. Ex restrictive not be a particularly rate would it would of an increase, effect for the psychological cept the desired expanded beyond only as credit become restrictive and more effec be less disturbing It would probably limits. after such a before rather than to make the change tive Treasury financing The schedule of situation developed. the timing in determining is also a consideration operations rate action. of discount
Mr. Treiber next made a statement substantially as follows Over-all business activity continues to expand, but the expansion now appears to be proceeding less rapidly than in earlier months. There are still a number of uncertaintiesfor example, the reception of the new model automobiles and the effects of the sharp rise in interest rates, especially in the construction field. Recent data suggest that the econoy may encounter more difficulty in pushing to new high ground than had appeared earlier, when most observers were impressed with the shortness of the recession and the vigor of the recovery. It may prove difficult to make much headway in reducing the present un desirable high level of unemployment. Bank credit is not expanding rapidly. This is true as regards holdings of Government securities as well as business loans. The commercial banks bought substantial amounts of the recent Treasury issues but they have also sold a substantial amount of Government securities. The underwriting job appears to have been effective. In general, prices have continued to be stable. The stock market, of course, has been an exception. We were glad to see the Board's action increasing margin requirements, thereby minimizing the extent to which further extensions of credit might contribute to the upward pressures in the stock market. of the year we do not see any major in For the remainder flationary pressures that are monetary in nature. of Treasury financing are difficult but not The problems It looks as if the Treasury may be announcing unmanageable. cash offering in the first week of the terms of a $3 billion After that it will have the problem of refunding November. on December 1 and December billion of securities maturing $12 again have to the Treasury will in the new year 15. Early market with a cash offering. come to the rapid rise this summer concerned over the We have been had much to do of course, interest rates. Expectations, in rise. In our opinion, the the speed and height of that with demands for bank and the prospective of the economy state on our part to encourage not call for any steps credit do this time. The System in interest rates at further increases to promote stability the last several weeks, has sought, over market. Government securities and in the the money market in reasonably successful. effort has been The next meeting of the period until the In our opinion, in seek to promote continue to System should the the Committee,
stability in the money market and the U. S. Government securi ties market. We should seek to avoid any action that might cause a deterioration in market atmosphere. Such a policy would include: (a) no change in the directive; and (b) probably the maintenance of free reserves at about the level of recent weeks. The discount rate poses a difficult problem. The present rate is substantially out of line with short-term money market rates and there are good arguments for raising the discount rate for technical reasons. But to bring the discount rate fully into its historical relationship with short-term market rates would require an increase to something like 2-3/4 per cent, and an increase of that size would almost certainly be regarded as a vigorous move toward further credit restraint. It would be likely to set off a new round of interest rate advances. On the other hand, another increase of 1/4 per cent would obviously fall short of restoring a more usual relation ship of the discount rate to market rates. An increase of 1/2 per cent would come closer to establishing a more normal relationship, but might be construed as a further step toward a more restrictive credit policy, even if it were announced as merely a technical adjustment. Every Thursday in recent weeks at the Federal Reserve Bank of New York we have had an extensive discussion of the discount rate, including the possibility of increasing the rate at some appropriate time following the completion of the Treasury's recent financing efforts. Our directors feel strongly that the rise in interest rates generally has been much too rapid and has gone too far for the present state of business recovery. They are impressed by the continued high level of unemployment and the continued uncertainties in the outlook for further recovery--some, in fact, stemming from the sharp rise in interest rates. Consequently, they would strongly oppose action that could be construed as validating the rise in market rates which they regard as excessive. action might cause further advances in They fear that such interest rates and renewed unsettlement in the capital markets, block in the way of further recovery. and put a new road Indeed some of our directors would prefer that through open existing degree of restraint be reduced, market operations, the market rates and in this a reduction in money thus encouraging way narrowing the gap between the discount rate and money market rates. by the case for a officers of the Bank are impressed The in the level of the discount rate, and technical correction
have so informed the directors. But we, in turn, have been impressed by the directors' conclusion that any step toward more restraint would be unwise and by their conviction that a rise in the discount rate now would be interpreted as such a step. We believe that this is a situation calling for the best collective judgment and appraisals of the System as a whole and hope that it may be furthered by today's discussion. We are impressed with the important part now played by market expectations. Last fall there was a rapid and sub stantial reduction in interest rates even though the easing action of the Federal Reserve at that time was relatively modest in extent. This summer, as evidence of an upturn in business became clear, the market turned around in anticipa tion of a shift in Federal Reserve policy and the turn was accentuated b the collapse of speculation in Government securities and by spreading discussion of the outlook for a persistent inflationary bias in the economy, which encouraged investment in equities rather than fixed-interest securities. In these circumstances, the financial community was unusually sensitive to Federal Reserve policy actions. Each step taken in the direction of reducing credit ease was interpreted as to other moves. The combined result of all these the prelude influences was a rise in market rates of extraordinary rapidity, and a correspondingly sharp fall in bond prices. The prices of Government securities have fluctuated so greatly in the last twelve months that public confidence in has been severely shaken. We think that Government securities in recent weeks has been of greater market stability the period the System should use its best efforts highly desirable and that period of stability, not only in the in to promote a further financing but even more in the terest of successful Treasury of further business recovery. interest and rapidity of eco that evidence of the strength Mr. Johns said observable now significantly more mounting and was expansion was nomic full impact of when the The time was approaching a few weeks ago. than to expect that it seemed reasonable would be felt, the Federal deficit and busi income increased, would rise as disposable consumer expenditures been in the than they had about the future more confident nessmen appeared
recent past. Private domestic investment appeared likely to be higher in the fourth quarter than in the third, primarily because of expected larger outlays for inventories, and it seemed reasonable to anticipate further growth in outlays by State and local govern ments. All things considered, Mr. Johns said, it was his view that the current degree of monetary restraint was inadequate. Federal and private borrowing should be financed in a noninflationary way and the Federal Reserve System should create conditions conducive to that end. At its present level the discount rate had remained significantly below short-term money market rates for about two months, which could reasonably be taken by observers to mean that the System considered present money market rates too high and intended to cause or permit those rates to decline. In Mr. Johns' opinion, the Reserve Banks the discount window in a fashion conducive should not now administer he had concluded that the borrowing by member banks. Therefore, to at least to 2-1/2 per cent and discount rate should be increased of the Treasury's needs and 2-3/ per cent. In view possibly to discussed at the September 30 taking into account the even-keel policy before and period of stability should be a reasonable meeting, there it seemed to him operations. Accordingly, Treasury financing after not later than the should take place discount rate increase that a of the of the directors a special meeting If so, first of November.
St. Louis Bank would be necessary. He was prepared to request the Chairman to convene such a meeting, with a view to considering a discount rate increase, at whatever time seemed most appropriate in the light of plans of the other Reserve Banks--if in fact there were such plans--to take action between now and the first of November. As to open market operations, Mr. Johns said that he would favor working toward a somewhat tighter situation than had prevailed during the past few weeks. He would not seek to impede an adjustment in interest rates--in this case an upward adjustment--which would tend to make Government securities more attractive to nonbank investors. Mr. Johns pointed out that the period was approaching in which it would to supply some reserves because market factors would tend be necessary suggested that these be supplied according to a time to tighten. He determined by the Open Market Committee so as to minimise schedule in the market, thereby enabling the market to System intervention and not be confused by frequent discern the System's intentions out short-run fluctuations in for the purpose of ironing operations said he was pleased to read in a market advisory reserves. Mr. Johns not be surprised if the a warning that readers should letter yesterday position to fluctuate to permit the reserve Federal Reserve were to net borrowed reshort period, from free even within a somewhat, if the Federal Reserve did not attempt to serves, nor to be surprised that the Therefore, he suggested such as float. offset factors
Committee schedule injections of reserves, at least for the next three weeks, in some regular time sequence. He felt that the reserves injected in the next three weeks should be in the range of $50-100 million per week, and that float and Treasury balances should be allowed to fluctuate without being offset. Mr. Bryan said that recovery in the Sixth District was apparently broad and general, and this also seemed true nationally. There had been an astonishing revival of borrowings from the Atlanta Bank, quite general throughout the district. With 5 per cent of the nation's reserves, Sixth District borrowings from the Reserve Bank were now running about 14 per cent of the nation's total. Deposits had gone up rapidly and loans of commercial banks were showing a good trend. With regard to policy, Mr. Bryan's inclination was to make an adjustment in the discount rate. The System now seemed to be telling the investing public two different things: the open market instrument discount instrument another. It was his was saying one thing and the should tell the same story. If this was view that the two instruments true, the System's choice at this point was either by open market operarates to a level more conto bring down the level of short-term tions bring up the discount rate. the discount rate, or to sonant with While this was indicated the latter. economic circumstances Present whether the directors he was not sure Mr. Bryan said that his view, take the same view. Atlanta Bank would of the
Mr. Bopp reported that a recently completed survey by the Philadelphia Bank of capital expenditure plans of firms accounting for 60 per cent of manufacturing employment in metropolitan Philadelphia indicated 1959 capital expenditures 14 per cent less than in 1958, employment in March 1959 about the same as in September 1958, and operations in the second quarter of 1959 at 78 per cent of capacity compared with 73 per cent in the third quarter of this year. Little change was expected in inventories. Smaller capital outlays in 1959 than this year were planned by both durable and nondurable goods manufacturers. The decrease for durables was a little over 2 per cent and for nondurables 23 per cent, the latter mostly in the chemical and petroleum industries. Manufacturers in Lehigh, Trenton, and Wilmington had plans to spend about the same for capital improvements next year, an increase in nondurables offsetting a decrease in durables. to monetary policy, Mr. Bopp noted two principal Turning and most important was whether recent objectives problems. The first of ease or restraint appeared appropriate with respect to the degree was evidence that national recovery for the next few weeks. There was continuing, though at a somewhat slower pace. September data, retail sales while decrease in showed a small seasonally adjusted, income rose less than in any of industrial production and personal were down in new orders months. Manufacturers' preceding four the
August following three successive increases. Inventory liquidation continued, even though at a reduced rate. Business firms planned to spend less for plant and equipment in 1959 than in 1958, and public acceptance of the 1959 automobiles was still uncertain. Furthermore, it appeared that actions taken had been successful in instilling widespread confidence that the Federal Reserve was resolved to deal firmly with the threat of inflation. For these reasons, Mr. Bopp believed that the System should try to maintain about the same availability of credit as in recent weeks. The second problem, Mr. Bopp said, was a technical one; namely, that the discount rate was far out of line with short-term market rates. The present spread was creating some confusion and uncertainty as to System intentions but, on the other hand, it would be unfortunate if an increase in the discount rate should be interpreted as a decisive move toward a more restrictive policy under present circumstances. of the forthcoming Treasury financing, including the probable In view new borrowing in November and refunding of certificates maturing 1 and of the bond issue maturing December 15, the alternatives December discount rate in the next few weeks or to wait until were to raise the Particularly after reading the minutes around the first of the year. he believed that an inmeeting, Mr. Bopp said of the last Committee weeks was the preferable the next two or three of 1/2 per cent in crease Banks could raise fortunate if some Reserve He felt it would be course.
the rate this week, in view of the expected rise in free reserves to about $250 million. At the Philadelphia Bank, an executive committee meeting was scheduled for this Thursday, but Mr. Bopp said that he would be happy to call a meeting of the full board of directors and recommend an increase in the discount rate of 1/2 per cent if some of the other Reserve Banks deemed it feasible to move this week. Mr. Bopp added that in view of the considerably slower pace of recovery in the Third District than nationally, he thought it was understandable that the Federal Reserve Bank of Philadelphia would not want to be the first or the only Reserve Bank to recommend an increase in the discount rate. Even though the market probably had largely discounted a rate increase, he thought it desirable to explain the increase as primarily a technical adjustment to bring the discount rate into better alignment with the short-term market rates. Mr. Fulton said that the steel industry was undergoing a rapid increase, and operations were better in everything but oil casing pipe had not shown up yet in automobile and structural steel. The increase of strikes, but expansion there was expected. Despite steel because was still high and throughout the district this upturn, unemployment from the substantial labor surplus category. no areas had been removed running about 9 per cent above last year Construction activity was of a rise in heavy construction. Banks had been borrowing because the Reserve Banks. borrowers at were no continuous but there
Mr. Fulton stated that he would like to propose an increase in the discount rate to his directors, but at their joint meeting earlier this month there had been a consensus that the rate should not be increased at that time. He did not know what the board would do if it met next week. On open market operations, Mr. Fulton thought the Committee could be tending toward a zero reserve position. The posture of the System should be to announce and maintain a degree of restraint. Mr. Shepardson commented that the country was experiencing a healthy, stable recovery, and he thought it desirable for the System to lend support to that type of recovery rather than to try to push things too fast. The level of unemployment was a matter of concern, but it seemed to be a natural corollary of the increase in productivity and this situation could not be expected to improve rapidly. In his opinion it was important that the System keep "ahead of the game," as pressure of the Federal was in prospect the inflationary long as there pronounced in the which would become more the effects of deficit, The situation would certainly not seem to call for any months ahead. open market policy a restraint; in fact, he preferred lessening of reserves this In terms of it had been. than more restrictive little the up side." than on side rather on the down mean "thinking might that it noted Mr. Shepardson rate, to the discount Turning that rate between the disparity there was First, two problems. posed
and short-term open market rates. He felt that the discount rate should be brought into better alignment with market rates as promptly as possible, particularly in view of Treasury activities in the next few months. This appeared to involve increasing the rate fairly promptly or being boxed in for perhaps three months. Thus, he favored action at this time to increase the rate by 1/2 per cent and, as he had said, he also would favor a little more restriction on reserves if the System could clear the atmosphere as to the discount rate promptly. This course seemed preferable to the uncertainty that would exist as long as the disparity between the discount rate and short-term market rates continued. He would not favor as an alternative freeing of reserves to bring the bill rate down more in line with the discount rate. In summary, he would like to maintain the relative recently and yet leave no doubt as to the stability that had prevailed in meeting the longer-range problem of Federal posture of the System deficit financing. views that he had expressed in Mr. Mills said that the policy on the financial factors rather meetings had focused largely recent bearing on System policy and had brought than the economic factors that would be should avoid pressure belief that the System out his States Government securities already unhealthy United damaging to an shifted to a reasoning had however, his Of recent days, market. following a more restrictive policy belief that the System should be reason that was for the earlier. This thought necessary than he had
as he viewed developments through the summer and fall, the Federal Reserve had fallen captive to problems that had arisen out of its earlier policy actions so that it now was faced with the unenviable choice of directing its efforts to succor within limits the Government securities market or else to accept as an objective the more immediate necessity of contending with an inflationary psychology, especially as it had expressed itself in stock market speculation. Mr. Mills said he sensed a slightly more temperate view on inflation than in recent weeks, but notwithstanding that fact the System had an obligation to direct policy on the side of restraint on the expansion of bank credit as being a possibly contributory influence to inflation and the closely related problem of speculation. This policy would that the System would wait to provide new reserves until comprehend needed by the commercial banking system in order to they were clearly that were imposed upon it. the legitimate demands for credit meet instead of leading with the provision of reserves, the System That is, would only follow a clearly expressed demand. discount rate, Mr. Mills problem to a change in Relating that in the rate. An be no precipitate increase said that there should the commercial bankenough to permit be delayed long increase should more restrictive adjust to a moderately the market to ing system and policy penetrated of a more restrictive As the effects credit policy. addito anticipate it might be reasonable the banking system through those demands felt that and Mr. Mills for discounts, tional demands
might be freely met, as a means of providing a marginal supply of reserves at the initiative of the banks, until the adjustments in the market had been completed. He hoped these adjustments could be completed in advance of the Treasury's next approach to the market. If by that time the movement of rates in the market indicated a discount rate considerably out of line with the structure of market rates, then the discount rates should be raised. In response to a question from the Chairman, Mr. Mills said this adjustment conceivably might work itself out before the next meeting of the Committee. Mr. Leach reported continued economic gains in the Fifth District. Employment had shown steady growth and unemployment had steadily declined. After commenting on several specific fields of district activity, Mr. Leach said that he thought the shift in System credit to less ease prior to the recent Treasury financing was appropolicy priate to the expansion of business that had occurred. However, the not call for reducing reserve availcontinuing growth in activity did of bringing about net borrowed reserves. ability to the extent rate action, Mr. Leach had some misWith respect to discount on the market but effect of an increase givings as to the possible as there might not take the risk now be better to thought it would Also, he assumed that in the near future. a more favorable time be
a rate increase had been fairly well discounted. Accordingly, he favored a 1/2 per cent increase sometime between now and the first of November, primarily to bring the rate more in line with the changed economic situation and with short-term interest rates. He would seek public understanding that such rate increase was not for the purpose of increasing restraint materially. While it was true that member banks had not abused the low rate, it appeared that the System would be frozen in for the next three or four months and it was not possible to know what would happen during that period. Taking all things into account and realizing the discount rate must go up sometime, it seemed to him that there might not be a better time to act than between October 23 and October 30. Whatever restraint would result from an increase in the discount rate plus maintaining free reserves close to the zero mark would be as much as he considered necessary now. The still seemed to Mr. Leach to be Committee's current policy directive even though there had been substantial economic recovery appropriate, since it was adopted. Mr. Tow commented to the Chairman Balderston's request, At effect that economic conditions in the Tenth District were continuing on the favorable side. Developments in agriculture showed a striking District position compared with the country improvement in the Tenth improvement in showing sharp contracts were a whole. Construction as had changed little recently, but recent weeks. Nonfarm employment
this picture might accelerate as automobile employment picked up. With respect to commercial banking, Mr. Tow reported a marked increase in agricultural loans. Banks had taken steps to improve their liquidity by reducing holdings of Treasury notes and bonds. Time deposits at reporting member banks had shown evidence of shifting to other investments with more attractive rates of return. At country banks, however, time deposits were still going up although at a less rapid rate than earlier. Mr. Allen stated that although the rapid rise in some measures of recovery may have slowed in September, most people in the Seventh District who follow economic trends were expecting a continuance of the general rise in activity for some time to come. Improvement in district employment was evidenced by the fact that in September the Labor Department had raised the classification of Peoria, Kenosha, and present no localities in the nation were classified Cedar Rapids. At category while the only two classified in the "B" category-- in the "A" 1.5 to 3 per cent unemployment--were Cedar Rapids and Washington, D.C. and grain sorghums had been crops of wheat, soybeans, barley, Record added to the list. The corn some time, and corn was now expected for would not be the Iowa and "soft" corn especially good in crop was it was last year for the early frost did little damage. problem evidence was seen of a pickup in loan demand, As yet, little and industrial loans following Allen said. A drop in commercial Mr.
the September tax borrowing offset 4O per cent of the early September gains, approximately the national experience. Continuing inventory liquidation by industry was undoubtedly a factor. In the first half of September, 14 per cent of the new business credit reported by Seventh District banks was for maturities in excess of one year, compared with 10 per cent last year. Reserve pressures on the large district banks increased sharply in the past two weeks as they acquired Treasury securities. Borrowing at the Chicago Bank remained relatively small but some larger banks had been net buyers of Federal funds. Mr. Allen suggested that more of those banks should take advantage of the current market to dispose of recently acquired Government securities and thus put themselves in a better position to serve the Treasury again in the near future as underwriters. Mr. Allen continued by saying that although he was rather impressed by the discount rate views presented by Mr. Treiber, he leaned more to the view expressed first by Mr. Thomas and then by others that in the near future the rate should be increased by 1/2 per cent as a means of coordinating the instruments of monetary policy. The next meeting of the Chicago directors was scheduled for October 30. the Committee should lean on the side of As to reserves, he agreed that restraint but not too much. He would like to see reserves kept at the next three weeks, with emphasis the recent levels for approximately on the lower side.
Mr. Deming reported no striking changes in the Ninth District economy, and recovery was proceeding about as elsewhere. Consumer buying had been slower than seemed natural but had picked up in the past week or two. Financial markets suggested a widespread inflationary psychology but there was no run to get into goods. In fact, there was widespread feeling that in the short run the forces of inflation were under reasonable control, and such fear as existed related mainly to the long run. Mr. Deming thought the System must recognize the signals in the financial markets. The present posture of mild restraint was appropriate. The point about mildness was important, he said, and reflected the facts of continued high unemployment, the quite natural slowing down in the rate of recovery highlighted by the pause in consumer buying, and the capacity-productivity factors. He would not wish to foster higher interest rates at this time. Unless private credit demand showed a greater than moderate seasonal increase he would hope that the general rate pattern would hold for the immediate future. of restraint was about right for This implied that the present level the immediate future. to the discount rate, Mr. Deming said a rise was With respect hoped this could take a technical matter. He for primarily as called an increase would be weeks. Because such within the next two place that the System move it seemed to him important primarily technical,
together and extremely important that the New York Bank move among the leading Banks because of its location in the financial center. Mr. Mangels reported continued improvement in the West Coast economy but at a somewhat slower pace than in recent months. Employment had increased in several categories and a truckers' strike, which affected over-all employment in September, had now been settled. However, for the district as a whole unemployment was higher in September than in August, a rise in California more than offsetting a decrease in the Pacific Northwest. Heavy construction awards, which in August were 11 per cent below a year earlier, bounced back in September. Steel production increased 12 per cent over August and aluminum production also increased. Prices for copper, lead, and zinc were up. Although fir lumber prices had dropped again, plywood prices were firm at $80, a peak figure for 1958, and lumber producers were still optimistic remainder of 1958. Vacancies in multiple unit dwellings were about the to appear in Oregon and other parts of the district, continuing southern California, where rates as high as 10 to 25 per particularly Interest rates on construction loans cent were reported in some areas. up and banks were beginning to shy away from to contractors were going purchase mortgages. The wheat and cotton crops long-term commitments to but production of citrus cent higher than in 1957, were about 8 per of farmers in August were about 7-1/2 fruits was down. Cash receipts were off about 1 store sales 1957. Department cent below August per October 11. period ended cent in the four-week per
After commenting in some detail on business and banking figures for the Twelfth District, Mr. Mangels said that while activity still continued to increase at a reduced rate, demand for bank credit was not heavy--no more than seasonal--and auto sales thus far did not indicate that they would spark a business upsurge in the near future. Plant and equipment expenditures were not booming. The only real exuberance was in the stock market, but this did not signify a rapid and sustained upsurge in business. Long-term interest rates were as high as during the boom and the Treasury would be coming for new money. Nonbank investors into the market again in December issues on even a short-term basis. seemed hesitant to buy Treasury felt that the System should things considered, Mr. Mangels All free reserves around He favored maintaining not tighten any further. directive seemed satisfactory. million, and the policy $100 Mangels pointed to discount rate, Mr. reference to the With a rate increase had to the public that the difficulty of explaining would be to withhold reasons. His inclination been made for technical mean having to wait not think this would this time. He did action at he was speaking for made it clear that as four months. He as long about the directors felt know how his he did not and that himself matter. continued highly favorable, Mr. Eleventh District conditions on the upsurge recently, been an had not While there Irons said.
other hand that district had not had a very sharp decline in activity earlier. Some improvement had appeared in the petroleum industry, and most other nonagricultural measures on which he commented indicated favorable developments. Nothing in the district differed materially from national developments so far as he could see. On policy, Mr. Irons agreed that the discount rate should be changed. A 2-1/2 per cent rate seemed consistent with the level of market rates. No steps should be taken through open market operations to bring about a lower level of market rates. Therefore, it was appropriate to move on the discount rate. By moving, the System might dispel some of the uncertainty that Mr. Treiber had mentioned. Timing was Treasury activities. The next meeting important in view of prospective Board of Directors was scheduled for November 13, of the Dallas Bank executive committee would be held Irons said, but a meeting of the Mr. be willing to try to convert that Thursday of this week and he would on of directors at which he committee meeting into a meeting executive rate to 2-1/2 per cent. an increase in the discount would recommend would quiet speculation this week he thought in the rate An increase time. He felt open market operaon the discount rate for some little a much more would not urge and he mildly restrictive tions had been if free not be disturbed but he would in this area, level restrictive or $50-75 million. the zero level ranged around reserves
Mr. Erickson reported continuing recovery in the First District. Over 15 successive weeks ending October 11, electrical output had been higher than in the comparable period last year. In each week of a 14- week period ending October 11, department store sales exceeded last year; in the last few weeks the increases exceeded the national average. Shoe production had been running 2 per cent behind last year but the present outlook was favorable, with forward buying at the shoe show the largest in five years. Insured unemployment declined for 11 weeks through September 27 but remained substantially higher than a year ago. Use of the discount window since the first of this month had been much smaller than in recent months. Last week participants in the Regional Outlook Conference gave forecasts of gross national product during the second quarter of 1959 ranging from $440 to $475 billion, with a median of production index ranged from 138 $4 . Forecasts for the industrial a median of 145. Participants seemed much more optimistic to 151 with than at the preceding Conference but there was quite a bit of apprestandpoint of both the Government about financing--from the hension of inflationary diffiwell as about the prospect and the markets--as over the next six months. culties Mr. Erickson saw no reason to change the Committee's policy of the last the degree of restraint He favored continuing directive. around $100 million. with free reserves three weeks,
After considering all aspects of a discount rate change, Mr. Erickson said he felt the rate should be increased to 2-1/2 per cent. He did not know whether the Boston Bank directors would reach the same conclusion, noting that Boston was the last Reserve Bank to move to the present 2 per cent level. Nevertheless, Mr. Erickson said he intended to recommend a 2-1/2 per cent rate at the next meeting of the directors. Mr. Szymczak said he was impressed with the fact that the Government had a deficit and would continue for some time to have a deficit. This was the heart of the problem before the Committee because the market interpreted this fact to mean that the System would have to provide more reserves. There was a trend toward inflation which seemed irresistible and this being the case the policy the Committee had been pursuing and would have to pursue was bound to be Committee should continue its Mr. Szymczak felt that the unpopular. present policy despite some unemployment. Similarly, the discount The fact was, he said, that a rate increase rate must be changed. should be as much on a discounted. An increase had already been as possible and should be made basis through the System uniform that the change represented While a statement as soon as possible. Mr. Szymczak commented might be desirable, a technical adjustment sure how the market would interpret the change. that we could not be have to provide the System would Mr. Mills that He agreed with
additional reserves during coming weeks, including consideration for the needs of the Treasury. He would lean in the direction of some free reserves during this period. Mr. Szymczak said he thought no change in the Committee's directive was needed at this time, that the policy it had been pursuing was correct, and that, while additional restraint on inflationary forces would be desirable, he did not think it feasible to increase the general level of credit restraint at this time. Acting Chairman Balderston said that the consensus seemed to call for no change in the Committee's directive and for a free reserve target about the same as during the past few weeks, but perhaps with some inclination toward more restraint. Mr. Treiber said that if an adjustment in the discount rate were to be made merely for technical reasons, not accompanied by another turn in the program of restraint through open market operations, the possibility of adverse effects would be small. Nevertheless, the New York Bank's directors had been fearful of another turn in restraint that might lead to adverse market developments. He did not know what the directors might do with respect to the discount rate at their meetweek, but he agreed with Mr. Deming that when a technical ing this adjustment in the discount rate was made there was great merit in having the New York Bank among the first group of Reserve Banks making desirable that several Banks and he also thought it such an increase, in the initial action. participate
In a discussion of meetings of directors of Reserve Banks, it appeared that five or six of the Banks might have meetings this week at which a change in the discount rate would be considered. The Chairman stated that it would be desirable to have the System move as a unit, but if a group of the Banks acted to increase the rate on Thursday of this week, that action would indicate to the market the nature of System policy and changes by other Reserve Banks could follow along a few days later. Mr. Deming reiterated his view that an adjustment at this time would be for technical reasons and that, because of this, he considered that the Reserve Bank in the country's principal it especially important first group of Banks to move. If this could money center be among the would be to delay action a few not be the case, his personal preference days. that if action were taken by several Reserve Mr. Bryan commented was included in the group--which he Banks and particularly if New York System's posture would be clearly agreed would be highly desirable--the the other Banks followed not matter much when indicated and it would along. directive and reverted to the Committee's The Chairman then comments as to policy. policy, calling for additional open market as Mr. ills had indicated, the Mr. Szymczak stated that, market for seasonal into the to put reserves would be having System other factors. and
Mr. Leach said that he was not sure there was a consensus for greater tightness through open market operations, in fact, he would have thought the comments indicated little change in the degree of tightness to be sought through open market operations. Mr. Treiber said that he thought it highly desirable that there be about the same target for open market operations, that he believed that in present circumstances it would be undesirable to aim toward greater restraint at the same time that an increase in discount rates was being made. Acting Chairman Balderston said that he personally agreed with this view and that unless there were objections it would be understood that the Committee was agreed on a range of free reserves between now and the next meeting about the same as during the past three weeks. No disagreement with this suggestion was indicated. The Chairman then inquired whether any change in the directive or in its limits was considered desirable, and no suggestion for change was made. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System in the case of open market or, Account in the Open Market maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to 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 shortterm 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. of the Committee would be agreed that the next meeting It was held at 10:00 a.m. on Monday, November 10, 1958. Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions