December 2, 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, December 2, 1958, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr . Hayes, Vice Chairman Mr. Fulton Mr. Irons Mr. Leach Mr. Mangels Mr. Mills Mr. Robertson Mr. Shepardson Szymczak Mr. Messrs. Erickson, Allen, Johns, and Deming, Alternate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and Leedy, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, respectively Mr. Thurston, Assistant Secretary Mr. Sherman, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messre. Daane, Wheeler, 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 Keir, Acting Chief, Government Finance Mr. Division of Research and Statistics, Section, Board of Governors Roosa, Mitchell, Jones, Tow, and Messrs. Ellis, of the Federal Reserve Rice, Vice Presidents of Boston, New York, Chicago, St. Louis, Banks City, and Dallas, respectively Kansas
Mr. Stone, 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 Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on November 10, 1958, were approved. Upon motion duly made and seconded, and by unanimous vote, the action of the Federal Open Market Committee on November 20, 1958, in approving the recommendation of the Manager of the System Account that System holdings of $7,857 million of Treasury certificates of indebtedness due December 1, 1958 be oxhanged into $5 billion of the 3-3/8 per cent Treasury certificates of indebtedness to mature November 15, 1959 and $2,857 million of the 2-5/8 per cent Treasury notes to mature in May 1961, these securities having been offered for exchange in the Treasury refunding announced November 18, 1958, was ratified. Upon motion duly made and seconded, vote, the sending of a and by unanimous letter to Congressman Patman on November 26, 1958, in reply to his inquiry of purchases and October 1, 1958 concerning of Government securities for foreign sales Treasury investment accounts, accounts, and other accounts was and member bank The letter, which was signed ratified. Martin, reads as follows: by Chairman the photo 1, 1958, concerning letter of October In your showing transactions in the System Open static ledger pages you refer to and earlier years, during 1957 Market Account as agent for the account acting and sales of "the purchases
foreign banks," and you inquire whether the photostatic pages omit "those instances where the Open Market Account made the transaction with a dealer or with some other account." You also ask that we advise you whether the photostatic pages "are incomplete, and......in what respects they are incomplete, if any." The ledger pages are a complete record of every trans action in United States Government securities in which the System Open Market Account was a party between March 1951 and December 1957. The System Open Market Account does not act in the capacity of agent in any transactions in Govern ment securities, and the transactions for other accounts consequently are not included in the ledger records of System Open Market Account operations unless the transactions are directly with the System Account. Purchases and sales of Government securities for foreign accounts and for Treasury investment accounts are made by the Federal Reserve Bank of New York as agent for those accounts. In addition, the other Federal Reserve Banks act as agent on occasion in acquiring securities for their member banks. You will recall that my letter dated November 11, 1957 responding to your letter of August 27, 1957, transmitted a complete list of all transactions in United States Government securities executed by the Federal Reserve Banks during the year 1956 for foreign accounts, Treasury accounts, and member bank and The listing shows the date of each trans other accounts. its size, the particular issue bought or sold, and action, price at which the transaction was completed. the The Federal Reserve Banks are being asked to compile similar information for the calendar year 1957. As you know, material represents a large amount of the preparation of this will be several weeks before the task is com work and it of the transactions will be pleted. However, the listings as soon as they are available. furnished been distributed to the members this meeting there had Before Federal Reserve Bank of New a report prepared at the of the Committee November 8 during the period open market operations York covering 1958, and a supplemental report covering the through November 25, 26 through December 1, 1958. Copies of both reports period November Open Market Committee. files of the Federal been placed in the have
12/2/58 -h Reporting on open market operations since the preceding meeting, Mr. Rouse stated that the Treasury refunding operation had been completed with less attrition than expected--$hlL million. The new issues had continued to retain premiums over issue price despite the general decline in Government securities prices that began last Wednesday. The average rate in yesterday's Treasury bill auction was 2.806 per cent, and the new bill was trading at 2-3/ per cent, somewhat higher than at the time of the last meeting. This rise in bill rates reflected a seasonal buildap in the supply of the new six-month bills. Mr. Rouse commented that the System had supplied about $190 million net in reserves since the last meeting. The past three weeks had been difficult, with airline strikes and wide movements in re quired reserves, currency in circulation, and the Treasury balance rendering reserve estimates highly uncertain. Free reserves averaged heavy purchases of However, despite over the period& $36 million bills over the past two or three days, it now appeared that there might be average net borrowed reserves for the current statement week. Reserve Banks exceeded $1 billion last Member bank borrowing from the despite the absence of any great tightness in the market. Wednesday net borrowed reserves, in the Mr. Rouse noted that average for the current statement $40 million, were projected amount of about week. Some repurchase agreements had been written yesterday and
perhaps some would be written today, although this was questionable in view of the comfortable position of the money market. Mr. Robertson inquired of Mr. Rouse why he would think it desirable to raise the level of reserves this week, and Mr. Rouse stated that if average net borrowed reserves should be published it might well be taken by the market as a change in the direction of policy. He felt that this would be unfortunate in view of the fact that the distribution of the Treasury's new issues was still in process and also in view of the advent next week of the new six month bills. Mr. Robertson then stated that he had misunderstood Mr. Rouse and had thought that the latter mentioned average free reserves of $10 million for the current week r ather than average net borrowed reserves in that amount. Mr. Rouse informed the Committee that the Irving Trust Company had decided to begin operations as a broker in Federal funds and that the bank would try to keep its Federal funds operations separate from the management of its own money position. He added of Irving Trust in the Federal funds market that participation would be in addition to the participation of Garvin, Bantel and also of Mabon and Company, which recently entered the field. He stated that Irving Trust Company, with its wide network of contacts, constructive to the Federal funds market. should add something
Mr. Rouse also stated that the new six-month bills would be auctioned for the first time next Monday. He said that he had been thinking of these bills as additions to the securities in whicb open market operations could be conducted but that he planned to stay out of the market for the new bills for a while in order to permit a market to develop independently of System influence. On the basis of the desirability of permitting the market for the six-month bills to stand on its own feet, he had advised the Treasury against per mitting commercial banks to pay for their awards of such bills by credit to Tax and Loan Accounts. Mr. Thomas stated that the market was interested in knowing whether the System would or would not deal in the new six-month bills. To stay out of the market altogether for the next few weeks might mislead the market into thinking that the System was not interested in buying or selling the new bills. Therefore, he said, it might be well for the System to deal in the new bills in a small way to let the market know that it was prepared to conduct transactions in not contemplate operations on a scale that would tend them. He did the developing market for the six-month bills. to dominate a memorandum on this subject could Mr. Rouse suggested that sent to the members of the Com at the New York Bank and be prepared meeting if that were desired. for discussion at the next mittee might be useful if each suggested that it Chairman Martin the question of a six-month would comment on member of the Committee
bill during the usual "go-around" today. He thought Mr. Thomas had a point on whether during the course of the next couple of weeks the Federal Reserve would want to let the market get the idea that the Account had stayed out of the market for these bills. Personally, he thought it would be unfortunate to have an argument on the "bills only" matter start if that could be avoided. Mr. Rouse, in response to a question by Mr. Allen, stated that the new bills would begin trading on a when-issued basis next Tuesday. The System Account would probably be purchasing bills for reserve purposes next week and question would arise whether to buy the six-month bills. Mr. Robertson inquired as to the minimum amount of six-month bills that could be purchased to show the System's interest, and Mr. Rouse replied that it was difficult to say what the minimum would be; depending on how the offerings came in, he would guess that $15 or $20 million might be the right figure. Mr. Robertson then inquired whether the System might get into an embarrassing position by specify ing a limit as to the amount of six-month bills to be purchased, and Mr. Rouse replied that he did not think so. The important point, he seek an answer as to whether the said, was that if the market should bill, he should be in a interested in the new six-month System was an affirmative answer. to give the market position he did not think the amount was Chairman Martin said that mere dealing in the an affirmative answer; if it came to important,
new bills was the important thing. He then inquired whether the Committee wished to pursue the discussion at this time or whether each member would like to comment on the subject during the "go around.e Mr. Hayes replied that he would favor the latter procedure, and it was understood that it would be followed. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period November 8 through Decem ber 1, 1958, were approved, ratified, and confirmed. In supplementation of the staff memorandum distributed under date of November 28, 1958, Mr. Young made the following statement on the economic situation: Recovery in domestic economic activity--a broadly based recovery--is continuing. While some observers have been read ing recent business data as suggestive of hesitation or slowing of pace in activity, the weight of statistical evidence is on the side of fairly well sustained momentum in upward climb. Business expectations, as expressed in the November Dun and Bradstreet survey, were more optimistic with regard to near-term sales and profits gains than at any time since early 1955. Equity investor expectations, as reflected in the recent sharp run-up in stock prices following a fairly sharp break in prices, apparently embrace faith that future corporate earnings will validate current high levels of stock prices. With model changeover and labor trouble out of the way in the automobile industry, the November index of industrial pro duction is almost certain to reach 10O and possibly Ibl. While steel mill operations were unchanged from October, production of nonferrous metals rose further. Also there were gains in business equipment lines and crude oil production. Electric power production rose further in November, but freight car loadings were about stable.
Construction activity in November at least remained at peak levels from current trade reports, and the forward look, according to a recent joint Commerce-Labor Department survey, is for further climb in new construction work. The heavy current demand for mortgage money, particularly resi dential mortgages, has been reflected in some further rise in mortgage yields. Reflecting the general rise in industrial and construc tion activity, new orders for machine tools, electrical equipment, construction machinery, and other durable goods in October rose significantly further--a full 5 per cent. Also, liquidation of manufacturers' inventories apparently ended in that month. The labor market has shown additional improvement. Of the lh9 major labor market areas, the number classified as substantial surplus areas fell from October to November from 89 to 83. While both initial and continued claims for un employment compensation have risen in November, the rise has apparently been no more, and perhaps a little less, than con sistent with seasonal trends. Personal income in October held about even with September, reflecting a decline in payrolls in industries subject to strike shutdown approximately offsetting a rise in proprietors' income, and in payrolls of transportation, service, and Government activities. With work stoppages less of a factor in November, fresh advance in personal income is to be expected. After declining from August to September, retail sales again advanced in October. Durable goods sales showed improve ment from September and nondurable goods sales were close to the August record. In November, department store sales only averaged about the reduced September-October level, but sales at automotive outlets apparently rose sharply. For the mid November reporting period, new auto sales were up nearly three fifths from the same period in October, and the indications are that sales for the full month will from industry sources exceed those of November last year. Used car sales were also up sharply, about 5 per cent higher than mid-October. Industry forecasts of sales for the 1959 models are being lifted some of consumer response to the new models. what on the basis Consumer instalment credit, on the basis of preliminary in October. Automobile credit declined estimates, began to rise but this decline was more than offset by a rise in credit further durable goods and in personal credit. Some 60 on other consumer per cent of new car credits are currently on a 36-month basis, pressure for a break-through to L2-month suggesting mounting
financing. Lenders generally deny that they will accede to these longer terms. Wholesale prices of industrial commodities have been rising much more and on a wider front than was earlier thought. The comprehensive mid-October average recently released shows average industrial prices up 1. index points since June, and the November weekly index shows a .2 per cent further rise--to a level exceeding by 1.7 per cent the prerecession high. The importance of such a rise in GNP figures is important to under stand. A change of .5 per cent in industrial prices is the equivalent of $700 million, annual rate, in terms of gross national product spending. And it is to be remembered here that prices of services and construction costs are also tend ing to rise. The rise in industrial commodity prices since June has thus far been offset by declines in prices of agricultural products. Hence, the index of wholesale prices of all com modities has held approximately stable. The consumer price average in October showed stability for the third consecutive month. The main changes from the Septem ber index were a half per cent decline in food prices offset largely by a rise in auto prices. Fall declines in food prices, it may be noted, have been smaller than anticipated on the basis of supply forecasts. The sum of all of these domestic indicators is for the attainment this fourth quarter of a GNP annual rate of around the third quarter. This would billion, up $11 billion from $W50 be a new high measured in current dollars; in phyaical volume GNP would still be 1 per cent or so lower than the record volume of the summer a year ago. Domestic recovery has now gone far enough to be on the verge of a new expansion period, with the potential of a significant penetration into new high ground. In the 195,-55 upswing at this stage, our rate of capacity utilization in manufacturing was 85 to 87 per cent and our unemployment rate, seasonally adjusted, was L.5 per cent. This time our rate of industrial capacity utilization appears to be substantially lower--roughly 10 percentage points lower, and our unemploy ment rate for a largcr labor force is 7.1 per cent. Thus, we have the resource potential of a longer and bigger in the last cycle--if only we can expansion period than condition of over-all financial equilibrium. maintain a Abroad, recent indications point to little change on In Europe, further liquidation average in levels of activity.
of steel inventory has taken place, and recession continues to characterize textiles. In Germany, the October index of industrial production, seasonally adjusted, jumped up by 3 per cent, mainly reflecting increased construction and out put of consumer durables and machinery. In France, there is evidence of a new weakening in the external position; at least, speculation against the franc is again on the rise. In recognition of a current state of doldrums generally in European industry and trade, the British and Dutch discount rates were recently lowered further. In Canada, industrial output this fall has not yet reattained the recovery high of last spring; automobile market developments and heavy industry work stoppages, however, have mainly accounted for the setback in recovery. Mr. Thomas then made the following statement on financial de velopments$ Except for gyrations in the stock market, develop ments in the financial area have shown no particularly striking features during the past month. They may be briefly summarized. 1. Stock prices, after rising &barply in the first half of November to new high levels, declined sharply for three days and then recovered much of the loss. Currently, averages are higher than they were a month ago. Trading activity has con tinued at a high level of close to L million shares daily. Yields on high grade stocks, on the basis of dividends paid in the past year, are below 3-1/2 per cent. Dividends have covered a larger portion of profits than at any time in many years, so that, notwithstanding greatly improved prospects for corporate profits, it seems unlikely that dividends will be increased much, if any, during the next several months or year. Stock market credit expanded further in October. Margin requirements were increased to 90 per cent the middle of the month. held relatively firm through October and 2. Bond yields November, and in fact declined somewhat from the high levels reached early in October. This decline in yields, meaning a or less coincided with rising stock rise in bond prices, more but in the past week daily movements in prices of bonds prices, to those of stocks. The volume of have tended to be opposite new capital issues has been somewhat lighter in this quarter than in earlier quarters of this year.
12/2/5 3. In contrast to the decline in bond yields, short term money rates have tended to rise since early November. They have been influenced by usual seasonal factors, as well as by the sizable actual and prospective additions to the supply of short-term issues from Treasury offerings of tax and regular bills. Moderate, almost imperceptible, tighten ing in the reserve positions of banks may also have had some effect on short-term rates. On the basis of past standards, however, the level of market rates continues high relative to the Federal Reserve discount rate and to the current volume of member bank borrowing. Federal Reserve policy, therefore, has probably not been an important factor in current credit and money market developments, except that System operations have moderated the effect of seasonal and other temporary factors. h. Needed Treasury financing has been successfully accomplished in this period of improved market tone. The Treasury cash balance, which declinad in the first half of November, increased sharply in the latter half. Attrition on the exchange operation is somewhat less than had been estimated. If additional bills at the rate of $200 million a week, or something equivalent, are sold in connection with the issuance of the new series of 26-week bills, additional cash needs in January will be relatively light--less than A heavy refunding operation will be necessary $2 billion. in February, and additional cash will have to be obtained in April, following retirement of tax bills in March. will continue at a high level and Government expenditures is little likelihood of obtaining any substantial there in the deficit until receipts increase in the reduction next fiscal year. 5. Commercial bank credit showed no striking changes their loans but reduced their in November. Banks increased in the first three weeks of Government securities holdings was more than off This reduction, however, of the month. week, amounting to about increase in the last set by a sharp additions of new at city banks, reflecting $1.2 billion the early October offer At the time of Treasury tax bills. banks showed an increase of bills, city ing of $2.7 billion million in their bill holdings. During of only about $600 declined sub of other securities the past month holdings reflecting retirement at city banks, probably stantially Government issue. of some large local increased in November at city banks Business loans but this year's in November 1957, with a decrease compared
increase was less than in most other years. Real estate loans and other loans at banks showed marked increases. Loans on securities also increased somewhat, particularly in the last week. The first of the midmonth reports for all member banks showed that at country banks there were increases both in loans and in other securities in the first two weeks of November, with no change in holdings of Government securities. Country banks also added to their reserves and their balances with other banks. Because of the absence of data for other years it cannot be known whether these changes were in any degree seasonal. 6. Demand deposits adjusted, after showing a much greater than seasonal increase in October, which largely offset the August and September declines, increased somewhat further in the first half of November. Decreases in New York and Chicago were more than offset by increases elsewhere, particularly at country banks. Again, it cannot be determined to what extent this may be a customary change for the period. In the latter half of November, demand deposits at city banks increased further. Currency in circulation increased a little more than is usual for November. On balance, it appears that the money supply held close to the high level reached in October. Time deposits at city banks declined further in November, reflecting in part seasonal withdrawals customary at this time, as well as some further drawing down of time balances other than savings in New York. the seasonally adjusted increase in de 7. Along with mand deposits in October, the rate of deposit turnover con tinued at close to the level maintained since June. This rate is about 2 per cent below the third quarter 1957 peak and above that for the fourth quarter of last year. The relationship may also be expressed as a ratio of the money to the gross national product. The GNP is estimated supply at about S50 million for the fourth quarter of this year--or 1 per cent above the peak quarter of 1957. The present money supply at $138 billion, seasonally adjusted, is about 30.7 per cent of that volume. This represents a decline from 31.5 per in the second quarter of at the bottom of the recession cent a little above the 30.3 per cent this year, but is still last year. That was the lowest figurt for the third quarter ratio since 1931, but a substantially lower level was customary in the 1920's.
It may be concluded that by recent standards the present money supply is closely in line with economic activity. Further monetary growth may be appropriate as activity increases, but policy actions permitting additions should be determined on the basis of the tenor of the prevailing psychology attitudes and expectations and by the quality and vigor of credit demands--not by any mechanical quantitative guides. History shows that the forces which cause relatively small variations in the turnover of money can be the strategic determinants of the course of events. 8. Bank reserve needs recently have fluctuated widely as a consequence of Treasury financing and seasonal market factors, and System operations have been adjusted accordingly. The seasonal growth in cur rency and an increase in required reserves, caused largely by additions to Treasury deposits last week, exeeted a net drain of about $900 million on reserves in November. System holdings of securities showed a net increase of almost the same amount. Loss of reserves due to inter national movements slackened, as a continued moderate gold outflow was largely counterbalanced by withdrawals from foreign balances at the Reserve Banks. Member bank generally declined during November, but have borrowings considerably during the past week. Borrowings, increased averaged less than $500 million, while however, have have been slightly higher, leaving free excess reserves $50 million during most weeks. reserves of less than reserve drains may aggregate as Further seasonal dollars by the last week of the much as half a billion return flow by a roughly corresponding year, followed in the early weeks of 1959. expansionary forces in the Conclusion.--Although credit area have not been vigorous during recent weeks, for a stimulus to renewed expansion the underlying basis exist in the broadening economic recovery continues to the continuing Government deficit. Further tightening and seem necessary at this time, but of restraints does not should be permitted to press any tendency toward expansion this occurs, a further availability. If against reserve appropriate to rate would be in the discount increase and augment the line with market rates bring it into restraint of borrowing.
The Chairman then turned to Mr. Hayes, who presented the following statement of his views on the business outlook and credit policy: Evidence of a slower pace of recovery has appeared in the last three weeks. While the termination of major work stoppages in the automobile industry may be expected to give a new lift to the index of industrial production, there have been more signs of a leveling off in other lines than at any time since the recovery began. In my view this does not constitute cause for alarm. Rather the outlook seems to be for a continuation of moderate gains in production and in come without significant inflationary overtones--but the possibility of a sidewise movement cannot be ruled out, especially if some shock should occur to business confidence. Evidence of the recovery' s loss of momentum may be found perhaps most clearly in the more restrained tone of business comment, and also in the leveling off in the steel industry, in figures on unemployment and average hours worked, and in personal income and consumer spending statistics. Transitory influences such as strikes apparently have ac counted for only a part of this tendency. Elements of strength in the business picture include the prospect of continuing high levels of Government spending, the favorable construction outlook and some improvement in new orders, especially for machinery. The automobile industry express confidence in the prospect for a sub continues to stantial increase in sales, but the response of the public to the new models is still unclear. the over-all outlook for stability remains As for prices, prices have resumed their downward trend, after a good. Farm and record crops seem likely to exert continued brief upturn, pressure in this sector. A temporary phase of downward price pressure on non-ferrous metals has been reversed. upward most recalcitrant element in Even the prices of services--the the whole price picture--are not, for the time being, rising anything like the speed of recent years. at developments is likewise at recent bank credit A look Declines in bank holdings of Government securi reassuring. ties in recent weeks have been responsible for a drop in banks. The trend and investments of reporting total loans of business loans, while stronger than in 1957 or 1954, is
much less buoyant than in 1955 or 1956. Bank liquidity has dropped considerably since the summer peak and although still well above the level of the fall of 1957, is also much lower than in 195b. As we compare the period since mid-1958 with the first half of the year, there is a sharp contrast with respect to total loans and investment of all commercial banks, which rose only $1.5 billion in the four months ending with October, as against nearly $10 billion in the first half. Our estimate for the money supply as of the end of 1958 has been revised downward and now indicates a gain of less than 2 per cent for the calendar year--a gain which seems rather low, if arthing, for a period when we have been trying to promote recovery. While there has been some comment to the effect that nonbank investors will be unable to finance so large a part of the Federal deficit in the coming months as they have in the recent past, I can see some reason, notably in the favorable trend of retained earnings and the absence of buoyant spending plans for plant or inventory, to expect the favorable nonbank market for Governments to continue for some time. All of this points to the wisdom of avoiding any change in our present basic credit policy. At recent meetings there has been some discussion as to whether, once the need of main taining an even keel for the Treasury was past, it might be advisable to tighten credit somewhat further. Granted that of Treasury financing will give us a freer hand the absence weeks, I think that it would be a serious mis in the coming to adopt any more restrictive policy than is now in force. take to need the very modest degree of Basically the economy appears by current monetary policy. Maintenance of a support provided position has not led to any excessive expan small free reserve sion of bank loans during the recovery to date. Moreover, of a surge in demand for there seems to be little likelihood immediate horizon, and the inflation goods and services on the generally to have diminished, with some psychosis seems temporary, decline in the stock assistance from a sharp, though market. weeks should be on maintain in the next few Our emphasis by the feel of the of ease as indicated the present degree ing market. However, while I see no need of a specific target to note that I am a little disturbed figure for free reserves, may result in our projections this week wide errors in the for the first reserves, on average, reporting net borrowed of this a risk that a development year. There is time this when in fact a change in policy interpreted as kind may be clear that no to my mind it is no change is intended--and
change is desirable. Hence I would hope that free reserves would be kept sufficiently high to avoid the risk of their dropping below zero into net borrowed reserves, on average, for any reporting period. For similar reasons I would urge that the discount rate and the directive remain unchanged. On the matter of the six-month bills, I find that I am in sympathy with both Mr. Thomas and Mr. Rouse. I think I like the idea of regarding these bills as a normal means of investment for the Account. Perhaps it would be well to show our face a little bit, but not to the extent of interfering with a normal development of the market for these bills. I think we should give the Manager of the Account discretion to proceed accordingly. Mr. Johns said he saw no substantial evidence that the pace of recovery had been interfered with or that there had been hesitation, except such as may have been caused by management-labor disputes. He was not inclined to feel any real doubt about the progress of recovery in the immediate future and perhaps in the somewhat longer run. With reference to the analysis of price behavior presented by Mr. Young, for some time he had been dissatisfied with explanations indicating a degree of price stability, because industrial commodity prices fair were up and were being offset for the time being only by the price decline in agricultural products. He believed, therefore, that behavior were rather hard about current price reasons for complacency considerations, he continued a result of these and other to find. As to hold the view, which he expressed at the last Committee meeting, to be on the side Federal Reserve policy be in order for that it would not dramatic tightening. In his opinion, the of a gradual although any possibility of creating the System should be on guard against
impression that monetary policy had hesitated or been relaxed. Of course, there were questions of timing involved, for there had just been a period of Treasury financing and there would be others, and he did not see a time for several months in the future when it might not be possible to argue that under an even-keel policy the Federal Reserve was prevented from doing anything. However, he was not satisfied with the idea that the System should be locked in for any such period of time. In summary, while he did not wish to make a specific recommendation he was considerably disturbed about the of an even-keel policy and the System's monetary policy integration of conditions as seen at the present time. in the light With regard to the 26-week bills, Mr. Johns thought it would impression developed that the System had a policy be unfortunate if an it was his view that the Desk against dealing in them. In general, like other Treasury bills and to treat the 26-week bills much ought bills were offered at accordingly. If the longer-term govern itself hesitate to buy them, and satisfactory, he would not a price that was that could be held in limitation on the amount he would not put any Open Market Account portfolio. the to report from nothing of importance said he had Mr. Bryan behaving about series were where the statistical the Sixth District, continuing, except perhaps in nationally. Recovery was the same as but a whole had happened nothing dramatic one State--Louisiana--where
series of small things caused the unemployment figures not to look as good as in the rest of the district. Turning to System policy, Mr. Bryan said he could see at the moment no argument at all for easing. Neither could he see much of an argument for pursuing a policy materially different from the one that the System had recently been following. It seemed to him that the situation was one in which the System should continue to maintain a policy posture about as at present. With regard to the 26-week bills, he would be rather strongly in favor of making such purchases as in the eyes of the Manager of the Account would convey to the market an indication that the System would trade in those bills and would regard them as a proper instrument for effecting open market policy. Mr. Bopp said that developments in the Third District were not greatly different from those in the country as a whole except that recovery was proceeding at a somewhat slower pace. The rate of unemployment, for example, continued to be higher than the national rate. With regard to the immediate prospects of inflation, he was struck by the fact that the individual going into equities in an attempt, presumably, to protect himself against inflation often purchased securities of a compar whose management did not appear to behave the same way. Consumers were not going heavily into durable goods, and management was not going heavily into the building
of inventories. He was impressed by the data presented by Mr. Young about excess capacity both industrially and as related to the labor force. As to monetary policy, Mr. Bopp said that he thought there should be no change in the present position on the availability of reserves, in the discount rate, or in the directive. As to the week bills, he agreed with the views of Mr. Bryan, which he understood to be essentially the same as those of Mr. Johns. Mr. Fulton stated that in the Fourth District progress from the recession was still on the slow side. Steel production was below the national average and the industry seemed to see nothing that would in crease the rate precipitately, although it hoped that the automotive industry would get into substantial production and order more heavily. At present, that industry was buying only for current production. While projections were on the basis of about 5.5 million cars this year, in that field had indicated informally that 5.2 mil one man prominent In a further comment on the steel lion would be an excellent year. a considerable volume of steel products situation, Mr. Fulton said that from abroad. For example, steel pipe was coming was now being imported evidence that manufacturers While there was no into Texas from Germany. were inventorying steel, there was some prospect of accumulation early present seemed inevitable. strike which at of a next year in anticipation orders in October pickup in a substantial industry, In the machine-tool
appeared to have been attributable to a prospective increase in prices in November. District department store sales were still running below a year ago, and Christmas season buying activity was not as much as merchants had been hoping for. While employment had risen and unemployment was diminishing, the progress was very gradual. All in all, recovery had not been as rapid in the Fourth District as nationally. Mr. Fulton erpressed the view that monetary policy should be extended from the degree of restraint that had prevailed in the past few weeks. Free reserves in the zero to $50 million range were in line with his thinking, and it would not be advisable to change either rate or the directive at this time. As to the 182-day the discount bills, he suggested that the Account take them into position in the same manner as other Treasury bills. opinion that the present gradual Mr. Shepardson expressed the good because the latent feeling in so rate of recovery was all to the made it desirable not to have areas about the threat of inflation many Like Mr. Johns, he was much con too explosive or rapid a movement. continuing upward crawl in prices. He noted that cerned about the and overlook the look at the general average one might easily prices that had been masking the divergent trend of agricultural all other categories. The System, he felt, trend in practically by whatever means might to restrain that trend should be endeavoring be available.
Turning to the situation with respect to reserves, V-. Shepardson said that he regarded recent developments as desirable. At this point, he felt, the Committee should consider further restraining action of a moderate type such as Mr. Johns had suggested. What he had in mind was a constant pressure that would leave the System in a position to prevent an explosive inflationary development, for it was better to have the situation in hand than to try to recover later. For these reasons, he hoped that there might be a trend toward a somewhat lower level of reserve availability in the period ahead, and that one might expect a further increase in the discount rate in the not too distant future. On the 26-week bills, it seemed appro priate to take the matter in stride, taking some of the bills into position without any specified limit. Mr. Robertson said that his views were similar to those of Mr. Shepardson and that he shared the fears expressed by Mr. Johns. It was only a couple of years ago, he recalled, that we were complacent about price changes that were covered up in the averages, and he hoped this time. He was rather glad that that there would be no complacency reserve position had gotten into the area of net by accident the would hope that the level of reserves did borrowed reserves, and he actions taken in an effort too fast because of System not bounce back place was simply an accident. movement that had taken to prove that the by accident, because had come about net borrowed reserves Certainly
they were not in accord with the target mentioned at the last Com mittee meeting, but he would prefer to explain the situation on that basis, if necessary, and move on further into negative free reserves since he considered it necessary to take advantage of every period when the System was free, from the standpoint of Treasury operations, to establish as much of a firm rein as possible. While he would do nothing drastic, he wanted to make it clear that the System was main taining a posture of restraint and not ease. On the 26-week bills, Mr. Robertson said that he did not with to take any position at this time because he had not thought the matter through to his own satisfaction and did not Know the answer. He hoped that the Manager of the Account would not be called upon to make ary purchases at all during the few days that the new bills would be avail able before the next Committee meeting, and that the matter could then again. However, he was willing to abide by the majority be discussed view. he thought the discussion of economic condi Mr. Mills said that tions this morning indicated the desirability of continuing a policy of bank credit. With over the expansion of commercial moderate restraint he suggested that natural of such a policy, regard to the implementation the System instead of taking posi allowed to do the work for forces be was reasonable to weeks of this year it actions. In the remaining tive anticipate a natural tightening in the market and a strengthening of unless the by System action not be offset rates which need interest
-2h degree of tightening should indicate that remedial attention was necessary. What he had in mind, Mr. Mills said, essentially cor roborated the reasoning of Mr. Thomas and was that the System should be the one voice to speak quietly in all of the clamor of loose talk ing and loose thinking affecting the financial markets. The most constructive way for the System to act without ostentatious display would be to let the interplay of natural forces bearing on monetary policy, market psychology, and market conditions develop with a minimum of interference. Mr. Mills said he would join with those who would operate in the new 26-week bills in the same manner as the Account operates in conventional bills. Mr. Leach reported that while recovery apparently had continued at a moderate rate in most Fifth District industries, a significant improvement had occurred in recent weeks in textiles, the district's largest industry. This developing textile strength was across the board--cotton gray goods for both apparel and industrial uses, finished fabrics, and synthetics. Knitting mills in general were operating at the best levels this year and producers of women's seamless hosiery and knitted tights were encountering delivery problems despite full It remained to be seen whether the improved capacity operations. allowed to progress, so far as the mills market for textiles would be were concerned, or whether it would be smothered by sharply stepped-up employment had occurred in production. Increases in nonagricultural businesses but the gains were both manufacturing and nonmanufacturing
extremely thin. Production of bituminous coal in the four weeks ending November 8 was down slightly from the comparable period a month earlier as foreign shipments continued their downward trends and seasonally adjusted department store sales for the first three weeks of November were below October levels. Business loans at weekly reporting member banks had risen more than seasonally in each of the past four weeks; the over-all increase far exceeded gains in comparable periods of the previous three years and had taken place on a broad base. About 75 per cent of reporting banks had experienced heavier loan demands in the last four weeks. Gains were reported for eleven of the twelve categories of business loans. Mr. Leach said he could see no developments in the continuing moderate expansion of production and consumption that would warrant a change in System policy, but that one could not avoid concern over inflationary dangers. Substantial additional reserves would be needed between now and the end of the year to enable member banks to meet seasonal and other credit needs. While he did not favor any material change in policy, he thought that member banks should obtain some through temporary borrowing from the Reserve Banks. needed reserves a month for borrowing, he also felt Since December is traditionally on the side of net borrowed a good time to go over this would be reserves to a modest extent. This would mean that repurchase agree the bulk but not be used to supply direct purchases would ments and
all of the needed reserves, that borrowings from the Reserve Banks would rise above recent levels, and that net borrowed reserves would again appear in the weekly statements. In other words, the System would not make any great effort to avoid them. In view of the under lying strength of the widespread upward expansion now occurring, he did not think a moderate increase in borrowing would deter further desirable recovery. He would not favor an increase in the discount rate at this time. On the 26-week bills, Mr. Leach expressed the opinion that the System should at least indicate a willingness to buy, and even buy a small amount. He would not treat them Just like other bills in the beginning because he saw something to the argument that the new bills should find their own level ir The market. Mr. Leedy reported beneficial rains and snows in the Tenth District recently that were needed for surface conditions. This had brought improvement in the outlook for winter wheat and other fall seeded crops. Cash receipts from farm marketings for the first nine for the country generally increased 11 per cent months of this year year, but in the Tenth District the increase was 32 per cent. from last any satisfaction from the commented that he could not derive Mr. Leedy prices was at the expense of fact that the stability in commodity agricultural commodities. Based on incomplete estimates for October, had been better than the employment in the district gains in nonfarm
customary seasonal gains but the level of nonfarm employment remained below that of a year ago. Department store sales increased sharply over November a year ago, and the general expectation was for a record Christmas season. Loans in all categories at weekly reporting member banks were above a year ago with commercial and industrial loans show ing a particularly marked increase. The Kansas City Bank had been having more than its normal share of member bank borrowing, but the picture was distorted by the November 30 tax assessment date in Oklahoma which involves substantial deposit withdrawals and causes the larger banks in Tulsa and Ok)ahoma City to borrow from the Reserve Bank heavily. Mr. Leedy said that the general economic situation would seem to require the System at least to continue the policy of restraint that it Some seasonal factors would exert restraint on the had been following. reserve position of the banks, and he would subscribe to the view that to offset them fully. He found it the System should not undertake of a nominal net borrowed reserve difficult to believe that publication as a real change in System policy. In this figure would be interpreted be difficult after the first of he pointed out that it would connection, Accordingly, he had the even the present position. the year to maintain operating in the direction of getting that the Desk ought to be feeling to a net borrowed reserve position, allowing as quickly as possible of the securities recently sold by the some time for redistribution that the Desk had the feeling bills, he On the 182-day Treasury. it should not purchase. While reluctance to not indicate any should
be aggressive with regard to transactions in those bills, neither should it give lip service only. It should make purchases when offers seemed appropriate, with the objective of creating a feeling in the market that the System considered those bills in the same light as the ordinary 91-day bills. Mr. Al3en stated that in the Seventh District there was a tendency to be impressed by the part of work stoppages in slowing down the rate of increase in general activity and less inclination to feel that the slowing down indicated any basic weakness in the business recovery. This was because the district had had such a big share of strike trouble--notably in the automobile and farm machinery industries. All of the important strikes had been in durable goods lines where demand had been strong or improving, or where, as in autos, new models were being introduced. reported considerable disagreement in Detroit with Mr. Allen 1959 automobile sales forecasts and said that those who regard to the million car year were now less confident a month ago predicted a 5-1/2 the second 10 days of November were at a of that estimate. Sales in a rate of 11,600 in the first 10 daily rate of 16,196 compared with an 18,000 daily rate in the even if expectations of days. Therefore, up with total deliveries November would wind last 10 days were realized, November 1957. Pro 15 per cent behind of 383,000, or approximately units, and in December was estimated at 533,000 duction in November production of over months of 1959 in the first four at 591,000, while
500,000 cars per month was currently scheduled. If the production figures for the next three months were realized and if sales were at a daily rate of 18,500, the inventory at March 1 would be 687,000 cars compared with 881,000 on March 1, 1958. If sales were at a daily rate of only 17,000, the inventory at March 1 would still be less than a year ago. This seemed to add up to the probability that production would be substantial and steady at least through February. Mr. Allen said that in recent weeks steel production in the Chicago area had been at 88 per cent of capacity and in Detroit at 90 per cent of capacity, while the national average rate in November was about 75 per cent of capacity. In the four weeks ending Novem ber 22, department store sales were about even with last year in the district, which represented improvement, but the district was still behind the national figures. The corn referendum had been of great interest in the area and the net resLlt seemed likely to be an in crease in the acreage of corn in 1959. Major banks in the district reported that business loans in only three categories were running noticeably above a year ago. As to reserves, the larger Chicago surplus position, although smaller banks continued to maintain a net about its normal share window was doing before. The discount than figures remained small. lending, but the aggregate of total System November than in the first half of borrowed in More country banks any period since last March.
Turning to policy for the next two weeks, Mr. Allen expressed the view that the System should try to stay about where it had been for the last two weeks but be poised for more restrictive action, which it appeared to him might be called for before too long. He would not be disturbed by net borrowed reserve figures if they should appear. As to the 26-week bills, he felt that the System should show a disposi tion or willingness at the first opportunity to use them as a medium for effecting monetary policy. At first, however, the Account should buy as few as possible. Mr. Deming reported that one of the few areas of weakness in the Ninth District--copper production--was being reduced. In Montana, Anaconda was reported to be at about full-scale operations and if the price level should hold or improve it appeared that even the marginal producers in the Upper Peninsula might expand production somewhat. With regard to Mr. Young's comment about excess capacity from the stand point of the labor force, Mr. Deming noted that the Minnesota employment authorities were currently estimating that unemployment in the State remain higher than normal until next fall despite the reclassifica would tion of the Twin City area to one with only moderate labor surplus. Putting it another way, it was not expected that nonagricultural employ ment would reach previous peak levels until about next September. City expansion in business same amount of seasonal showing about the banks were 1956 and 1957. Business more than in in 1955, somewhat loans as prevailed
loans at such banks were now about 7 per cent higher than at this time last year. At the discount window, more country banks were borrowing but the total amount was not large. Mr. Deming said that Mr. Thomas' views expressed his own feeling with regard to policy; namely, to let the credit expansion press on reserve availability and to be poised to move on the discount rate. He saw no reason to treat the 26-week bills appreciably dif ferent from ordinary bills. Mr. Mangels said that Twelfth District business activity con tinued to expand but at the moderated rate that he reported at the last Committee meeting. Residential and heavy construction were now reflecting only seasonal changes, contrasted with some rather sharp increases during the past summer. Lumber and agriculture were somewhat on the favorable side although neither was in an expansionary area. Farm cash income in the district for the first nine months of this year was about 5 per cent over 1957, approximately one-half the gain ex perienced nationally. Retail trade picked up somewhat in late October sales were still down, with dealers and early November but automobile unemployment situation showed the handicapped by lack of stock. The first majar improvement in October since the first of this year, the with 7.5 per cent in September. dropping to 7 per cent compared rate The employment situation continued strong in all manufacturing to defense production. activities related in the three weeks Mangels said that his review, Mr. Continuing the district was double in bank loans in November 19 the increase ending
the increase for the same period in 1957. While commercial and industrial loans were beginning to show the expected seasonal upturn, the heaviest increase was in real estate loans, and banks had indicated tlat such loans probably would continue to increase through April or May of next year. It was also reported that insurance companies and some pension funds were again beginning to show an interest in purchasing real estate mortgages. Some bankers expected an increase in loans due to inventory buildup, while others did not. Demand deposits showed an increase but time deposits dropped for the reasons mentioned by Mr. Thomas and also because of the paying out of Christmas funds. On November 26, ten banks were borrowing from the Reserve Bank, all but two of them reserve city banks, but the aggregate of borrowing was nominal. Banks in the district were net borrowers of Federal funds, contrary to past experience, with purchases about double sales. the view that System policy could best Mr. Mangels expressed and that free reserves should for the next two-week period mark time to $50 million. He would not be in continue in the range of zero net borrowed reserves. The directive clined to move too rapidly to not favor changing the discount satisfactory and he would was still to the 26-week bills, he would favor purchasing rate at this time. As the Manager of the the judgment of according to them in modest amounts Open Market Account. business continued that Eleventh District Mr. Irons reported that there had been further improvement in the employ to expand and and in industrial activity, situation, in ment and unemployment
department store trade. Agricultural conditions continued very favorable. It was expected that the district cotton crop would be about 1 per cent above last year and in the State of Texas about 17 per cent higher. The crude oil situation was better, with production now on a 12-day allowable basis. During the first three weeks of November department store sales were up, and there was optimism about the seasonal business ahead. Borrowing from the Reserve Bank was less than might be regarded as the Dallas Bank's normal proportion of the System total. A few country banks were coming to the discount window, and some city banks were in for a day or two. Bank loans continued to move up in the past three-week period, with strength in consumer credit and real estate loans, a moderate increase in business loans, and quite a wide variation among types of business loans. Turning to the national picture, Mr. Irons said that the recovery appeared to be continuing and broadly based. He had no qualms about its gradual pace, and the tone of his own thinking had been stated by Mr. Johns. It seemed to him that most of the moderate be attributed to strike situations. New nature of the recovery could housing starts were very high along with other types of construction, situation was improving, and inventory liquidation the unemployment In many areas there appeared to be some had about come to an end. tendency toward inventory accumulation and businessmen were referring
-3L to the possibility of shortages more than previously. It now appeared that the industrial production index would be up two or possibly three points in November. He had no apprehension about the business situation and did not think that the movement of the price structure was such as to generate complacency. Mr. Irons subscribed largely to the view that this was a period when increased credit demand might be expected and the System should permit some of the pressure to be felt. If market developments should tend to produce net borrowed reserves, he would not take off setting action just because of a desire to have free reserve figures perpetuated. While he was not unhappy about the operation of the Account during the past few weeks in the light of the even-keel policy, he would be willing, in fact, would like to see, a move toward a little more firmness in preference to so-called moderate restraint, which might be interpreted as almost a minor degree of ease. On the 26-day bills, the System ought to let it be known by its actions that he felt that those bills were an eligible instrument in which the Account would deal should be no limitation on trans if it seemed appropriate, and there felt it desirable to buy them. actions in the bills if the Management which the Account would as an instrument in They should be treated according to the dictates of judgment. operate statistics in the the latest available Erickson said that Mr. slower pace. There recovery but at a indicated further First District
was continued strength in electric power output and department store sales and there were spurts in construction activity, but automobile sales were lagging. There was a continued disposition to save, as evidenced by the fact that in October total life insurance sales ran 11 per cent over last year. In the past two weeks there had been more activity at the discount window than at ar time in the recent past, most of the borrowing being by banks in the larger cities. As to policy, Mr. Erickson suggested that the System should continue to maintain a posture of restraint. He saw no need for change at this time in the directive or in the discount rate. After expressing the opinion that the Desk had handled itself well in the last three weeks, he said that he would favor keeping free reserves within the range of zero to $50 million. However, if they fell into the area of reserves in a modest way, he would nct be inclined to take net borrowed positive action to change the situation. As to the 26-week bills, he Account to indicate that the bills would leave it to the Manager of the in which the System Account would deal. were an in Arument said he had the feeling that the Desk should try Mr. Szymczak to maintain a free reserve position, unless it were found during the to hold the position money in the market two weeks that placing next would add too much to the money supply. In that event, he above zero words, he would below. In other go to zero or would let reserves measures to not take extreme position but would prefer a free reserve
maintain it if the strength of the demand for credit should be such as to cause net borrowed reserves. If possible, he would let market forces determine the situation. Mr. Szymczak expressed the opinion that the 26-week bills should be treated the same as any other bills. As soon as possible and if convenient to do so, he would buy some of those bills without waiting to have to answer questions about whether the System would buy and to what extent. He would let the purchases speak for themselves. Chairman Martin said it appeared from the discussion that there was again fairly close agreement around the table. Personally, he sub scribed to the view of those who would favor some increase in the degree of restraint, with the proviso that due consideration must be given to the problems of the Treasury. He liked Mr. Mills' point about letting market forces operate. saw grave danger in becoming complacent about the The Chairman price situation and said he believed the System ought to be poised, as to take effective action whenever and wherever the far as possible, out of hand, for otherwise it situation seemed likely to get price be very effective. At the too late for the System to might become that the Treasury was about to issue same time, it must be remembered a new type of bill. It would be unfortunate to have articles appearing in the press purporting to give intimate information regarding policy discussions and decisions, he said, noting that the System was being
charged with being a sieve of information. With a meeting of this size, one could see how those charges arose, but the System must not let its critics consume it with that kind of charge. Whatever the disadvantages of meetings as large as this, it was necessary to have these discussions in order to get all views in the System and he was convinced that the advantages outweighed the disadvantages. Chairman Martin again expressed the view that the System could not afford to become complacent about price trends, nor could it afford tc let anyone get the impression that its attitude was just neutral. Market forces, he noted, would make for a tightening at this time of the year, and all the System had to do was to let the market forces play. He would hope that, without aggravating the problem of the floating the new bills, the System might try to let the Treasury in forces of the market play as far as possible in the direction that he indicated by a majority of the Committee. understood had been clearly change of policy; it would amount This would not represent a conscious to let the forces of the advantage of a year-end opportunity to taking as anticipated, there If they did not develop market frame themselves. meeting on December at the next Committee could be further discussion between now would frame themselves feeling that they but it was his repeated, not to important, he year. It was very and the end of the anyone get the had by letting the System whatever influence lessen restraint. He a policy of to temper that it was disposed impression that there was no inflationary himself unimpressed by statements found
impact in the economy at the moment. Such a thing builds up, he said, and he felt that it was building up at this time. He anticipated another difficult period ahead and expressed the hope that the situa tion would not be complicated by having the System's actions interpreted in the press and elsewhere in such a way as to create more difficulties for the System and the Treasury. He urged, therefore, that care be exercised in making any comments to the press or others concerning the course the System was following. The Chairman then noted that there had been no suggestion for a change in the directive. Nor had a specific target for free reserves been indicated, although the majority appeared to favor letting market forces move in the direction of negative free reserves. Mr. Hayes said there were certain things that puzzled him about some of the expressions of opinion. He found it hard to reconcile what moderate restraint, and what Mr. Mr. Mills had said about maintaining Leach had said about making no change in policy, with the idea of letting the seasonal increase in credit demand have the effect of tightening the in the past the System had followed It was his impression that market. demands through open market a policy of meeting seasonal quite steadily operations. had been to no that his reference Mr. Leach commented After a failure to said he felt that policy, Mr. Hayes change in "material" would be open market operations demands through meet seasonal
interpreted by the market as a real change in policy, one which, if decided upon, should be entered into knowingly and with open eyes. He would also be troubled about the wording of clause (b) of the policy directive--to fostering conditions in the money market conducive to balanced economic recovery--for, if inflation was regarded as the main problem, it seemed to him that this wording in the directive was perhaps misleading. While he did not think himself that inflation was the main problem at this particular time, he had the feeling that a number of those around the table did. He found it hard to see how the Committee could tighten its policy in the face of factors such as excess capacity, the unemployment picture, and doubts about the auto mobile outlook. Mr. Shepardson suggested that the phrase'balanced recoverye was the key to the directive. While there was some excess capacity and unemployment, there was also the price crawl. As he saw it, the objective was to foster a balanced and continuing long-term recovery rather than too precipitate a recovery. asked whether the System could afford to con Mr. Hayes then centrate its attention on one factor, for there were three or four objectives that he considered about equal in importance, to which Mr. Shepardson responded that he did not think the System could afford to concentrate on the price factor. not Martin commented that he too was anxious to get the Chairman judgment a balanced recovery would unemployed back to work, but in his
not come about if price pressures in the economy were ignored or if they were strengthened through following an easy money policy. On the latter point Mr. Hayes stated that he was advocating a policy of "staying where we are" and not easy money. &r. Szymczak inquired whether a matter of degree was not in volved. He would agree that the System should supply some reserves, but not to the same extent as heretofore. He suggested that the establishment of a target for reserves tended to set up an artificial goal. While he felt that there would be a seasonal demand for credit and while he would favor supplying some reserves through open market operations, he would not try to force the reserve figures to hold above zero continually and indefinitely--to do so would get into a box like the one last spring when a target of $500 million of free reserves was used. Mr. Rouse commented that yesterday the Account Management took no action to buy in the bill market in the face of projected net borrowed reserves. On the basis of the reserve figures distributed this morning, it turned out that the market was the important thing the figures. However, he thought that the sense of the rather than meeting favored a tighter feel. risk of going too far in observed that there was a Mr. Thomas because they were not divided quantitative seasonal factors, offsetting while others were not. banks--some were under pressure, evenly among
12/2/58 -bl Market rates should be permitted to have some effect so as to draw money to where it was needed from where it exists. If the System were to supply money automatically to everyone desiring funds for temporary purposes, this might result in a lot of money running around trying to find use. He wondered if there was not a tendency to go a little too far in trying to base an even-keel operation on a given figure of net borrowed or free reserves and whether the figures should not be permitted to fluctuate a little. Chairman Martin said he thought this point was well taken. Mtx. Johns stated that inasmuch as the Committee was going to meet again in two weeks, he wondered if it might not be appropriate simply to instruct the Desk to stay out of the market for the next two weeks. If the projections were reasonably accurate, this would mean that the reserve figures would bounce around somewhat from day to day, but he was not sure whether attempts at daily adjustment were necessary or entirely effective. In response, Chairman Martin expressed the view that the Com mittee must always leave discretion with the Manager of the Account to a certain degree and not say hands off despite whatever situation might develop. Mr. Szymczak agreed, as did Mr. Robertson who said the Chairman's earlier summary of views that he also agreed with at this meetirg. expressed to his concern about not Chairman then referred again The which would complicate of System actions giving a false impression
-L2 the Treasury's problem with respect to the new bills. If it were not for this concern, he said, he would favor an even more positive course. In further comments, Mr. Szymczak referred to the limitations on the role of monetary policy and Mr. Hayes said that this pointed up the risk he saw in tightening policy at this time. No one, he said, could expect monetary policy alone to deal with the price threat. Chairman Martin then called for further comments and, receiving none, stated that there appeared to be generalagreement on the course to be followed in the next two weeks. Mr. Shepardson inquired whether this contemplated letting market forces tend to increase restraint, to which the Chairman responded in the affirmative, with the understanding that this would leave latitude for the exercise of discretion by the Manager of the Open Market Account. to a question from Mr. Szymczak, Mr. Rouse stated In response the sense of the meeting, that he had that he thought he understood had said, and that the Treasury's financing in mind what Mr. Shepardson was involved. Thereupon, upon motion duly made seconded, the Committee voted unan and the Federal Reserve imously to direct Bank of New York until otherwise di rected by the Committees (1) To make such purchases, sales, or exchanges replacement of maturing securities, and (including to run off without replacement) for allowing maturities Account in the open market or, in the System Open Market
the case of 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 Ac count (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 ac count of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. Mr. Robertson referred to efforts made by the supervisory agencies to combat the "window-dressing" of condition statements by some commercial banks. While much progress had been made, he said, it was sometimes charged that the Federal Reserve System aided and abetted year end through the use of repurchase agreements. "window-dressing" at now and the next meeting of the It was his suggestion that between to ways and means of off the Account Manager give thought Committee to be a justifiable one. There that criticism if it seemed setting consideration of the matter be an opportunity for further would then before the end of the year if necessary.
-hb In accordance with discussion at the meetings of the Committee on July 8 and 29, 1958, there had been distributed under date of Novem ber 19 a memorandum dated November 17 from Messrs. Thomas and Marget discussing reasons for Federal Reserve open market operations in bankers' acceptances and guides for such operations. A copy of the memorandum has been placed in the Committee's files. Cormenting on the memorandum Mr. Thomas referred to the ac ceptance market as an important sector of the money market, one close to monetary policy both now and historically. The relationship had been diminished by the growth in use of Treasury bills but it still was close enough to suggest that monetary policy should use the acceptance as one of its instruments. The System should not, in his opinion, discriminate against acceptances by refusing to operate in them on the basis that the acceptance market was now sufficiently on its own feet. Furthermore, it appeared that the System could operate in acceptances fully as much as it had been without the danger of domination that occurred in the 1920s. In fact, some additional operations in the acceptance market might be appropriate, particularly at the time of credit demands. Generally speaking, variations year marked by seasonal to seasonal variations in the demand in acceptances outstanding conform to its holdings in the latter so the System could add for bank reserves those holdings in the early part of the next part of the year, reduce policy and the needs of the acceptance year, and conform to both monetary market.
12/2/58 -h5 Mr. Hayes expressed the opinion that Messrs. Thomas and Marget had done a splendid job in clarifying the historical back ground and the present position of the acceptance market. As he read it, the memorandum pointed to the desirability of operating in the acceptance market in somewhat larger volume. Hle would suggest that the Manager of the Account be authorized to purchase and hold acceptances at any time up to 10 per cent of the total amount of acceptances outstanding as revealed by the latest report at his disposal. This would be with the understanding that if reasons should appear to suggest going beyond that limitation, the Manager could come to the Committee, state the reasons, and ask permission to exceed the limitation. At present, 10 per cent of acceptances outstanding would be about $120 million, and he would not expect the Manager would go immediately to the 10 per cent. However, such a limitation would provide more leeway to use acceptances when seasonal forces were strong and when their use was generally in keeping with open market policy. After Mr. Thomas stated that in his view the present 050 mil lion limitation was too low relative to the existing volume of acceptances, Mr. Allen made the following statements 1. Acceptances have been and still are useful instruments in financing foreign trade, even though the amount of scceptances outstanding is much smaller relative to the total dollar volume of foreign trade than it was in the 1920's. 2. Because acceptances are useful in financing foreign trade, the System should be interested in promoting their
usage. Such promotion involves holdings of acceptances by the System, but if promotion of the acceptance is our primary object, System holdings must be adjusted (bought and sold) according to the condition of the market and not to effectuate monetary policy. 3. There is nothing wrong with System holdings of accep tances as an instrument of monetary policy provided we adopt that as our purpose. However, if we buy and sell to effectuate monetary aims we cannot at the same time treat promotion of acceptances as our primary object. L. Since we cannot deal in acceptances with both friend ship to the acceptance market and effectuation of monetary policy as equally important objects, we must make one of them our first choice. So long as we make a choice, I do not think it is terribly important which we choose. However, my own choice is friendship to the acceptance market because in the matter of monetary policy we have Treasury bills available in such substantial amounts and with such a wide range of maturi ties. 5. If my choice is adopted, our holdings of acceptances will never be large. We will be slow to buy, always keeping pressure on the market to develop new customers, and we will the market will take what we have in portfolio. sell whenever if my choice is accepted the current 6. Obviously, to the Desk to buy acceptances would not be authorization increased. Mr. Robertson then made the following statements July 1958 was to raise presented to us in The proposal the maximum amount of bankers' from $50 million to $75 million to be held in the System account. This was a acceptances the course of discussion it proposal, but in quantitative change also was contemplated by transpired that a qualitative should participate in the that we the proponents--namely, an instrument of monetary policy. acceptance market as of our staff of some members some ways the attitude In acceptance market activity in the Federal Reserve regarding knife. Originally he wanted me of a boy with a new reminds learn how to throw it. He was given the knife so that he could he must not use it in that way knife with the warning that the A few days later and to whittle. to sharpen pencils but only of bark from valuable huge chunks discovered carving he is posterity. When his initials for in order to leave shade trees not what a that is he asks whether his father remonstrates, did not want to him if they they gave it for, and why knife is to use it? him
-h7- I have reviewed our actions in this field, and the relevant documents and discussions, since the original proposal almost five years ago. The latest discussion is that in the November 17, 1958 memorandum prepared by members of the staff. The reason originally advanced for our partici pation in the acceptance market--to "free demand generally from administered rate constriction"--has long since been abandoned, and, as the November 17 memorandum concedes, the magnitude and flexibility of the acceptance market have gotten along very well on their own. But the proponents continued to press their proposal for new reasons, and in 1955 the Committee agreed to "participate in a very modest way in order to show the interest of the central banking organization." A beachhead having been established, the next steps were to spread out and bring in more fire power. The "interest of the central banking organization" certainly could be displayed "in a very modest way", as we intended, with a portfolio of $25 million. But after a while we were persuaded to raise the limit to $50 million. and now an inc ease to $75 million is being sought. Even more important, in my judgment, is the change that apparontly has occurred in the nature of our participation in the acceptance market, which is now presented to us for semiformal recognition. When we authorized the hold ing of acceptances for the purpose I mentioned, the Chairman explicitly stated that the System "should avoid any 'finagling' in the market". But now, as disclosed by the November 17 memorandum, our acceptance activities are sought to be justified on the ground that they may lead to changes in acceptance rates, which in turn may "affect the prime loan rate of leading banks speed the response of that rather sluggish rate to and thereby many market changes." Keeping fundanentals in mind, let us be mindful of the fact operations are designed to affect credit that our open-market or lowering the level of bank reserves. conditions by raising the short-term Government securi Under present-day conditions, an ideal vehicle for these operations. ties market provides There has been nothing presented to this Committee to support operations would be more that our open market any contention Treasury bills and $190 million of because we bought effective $200 million of bills. rather than $10 million of acceptances, November 17 memo readings of the I confess that several the usefulness of me as to either have not enlightened randum our participation in the acceptance market from the viewpoint would contribute or how our participation of monetary policy,
to a more flexible acceptance market. There is some sug gestion, as I mentioned before, that increased~System activity might indirectly affect the prime loan rate. With respect to that, I can only say that it seems to me that this result would be inprobable and--more importa-t--that if it did occur it would be undesirable; that would be the very thing--the "finagling"--that we intended to avoid when we decided to hold a modest portfolio of acceptances simply as a token of the central bank's interest in the acceptance market. The November 17 memorandum seems to state also (page 2) that the System's chief concern should be "with the develop ment of a broad and flexible market". This shifts the ground to the third question to which the memorandum is addressednamely, the "Need for Federal Reserve Participation". But on that point, the memorandum concedes that the acceptance market, on its own, has developed very well during the last decade and that rates on acceptances have become quite flexible without Federal Reserve interferences. If, as the memorandum states, a broad and flexible market for acceptances is the nub of our interest, it is difficult to see any justification for the central bank's tinkering with a machine that is running very efficiently on the basis of the incentives and the judgment of an independent market. We are all subject to the temptation to exercise our powers broadly and forcefully. This is a temptation that an organization like the Conmittee must resist with particular strength. In many areas, we have made great efforts to en courage the developmcnts of markets that could stand on their own feet without ou:- support. Here we have a market that has developed and grown inderendently in a very healthy manner. It is impossible for -, -o see how the natural strength and flexibility of that narket could be improved by "more active Federal Reserve particpation' to use the currently popular euphemism. This point--the "need for Federal Reserve participation" is dealt with in pages 7 to 11 of the November 17 memorandum, and I should be grateful to 'have pointed out to me any argument therein that tends to establish that expanded Federal Reserve participation in the acceptance market is desirable as a means of promoting the developmert of that market. The memorandum to the benefits of "a moderate position in bankers' refers acceptances on the part of the Federal Reserve". However, of our present portfolio of that already exists by virtue the instant question is whether we should hold a acceptances; still larger amount and whether we should abandon the original
purpose of showing, in a very modest way, the interest of the central bank. It is my sincere belief that no sound justification can be advanced for either the quantitative increase or the qualitative change, and that by adopting these proposals, we would be gaining nothing but an opportunity to prove our virtuosity in the art of central banking by playing upon still another instrument, and that the proposed change in policy could easily lead to a situa tion in which a healthy, broad, flexible, and--above allindependent financial market could lose these attributes, which we have been so eager to develop in other markets. To me, this is a striking example of a situation in which we should exercise self-restraint and resist the impulsein ourselves or in our staff--to become a more important participant in a healthy self-reliant market, on the paradoxical theory that its independent depth, breadth and resiliency can be enhanced by increased governmental inter ference. I have discussed not only the substantive question now before us but also its genesis, because it seems to exemplify a danger against which we should be constantly vigilant not only with respect to acceptance activities but in all our fields of action. But to recapitulate the situation with respect solely to the substantive merits of the instant pro posal, it must be borne in mind that the Federal Reserve Act requires our open-market operations to be governed (1) "with a view to accommodating cor'.merce and business", and (2) "with regard to their bearing upon the general credit situation". As far as the general credit situation is concerned, our objectives can be carried out quite as effectively, and more simply, in the Government securities market. As far as the accommodation of commerce and business is concerned, that means, in this case, the scope and flexibility of the acceptance market. But the acceptance market is flexible, self-reliant, and growing without our "support", and in creased Federal Reserve participation, particularly if designed directly to affect rates, is likely to diminish rather than enhance the strength of that market. In other words, if the proposal before us were adopted, we would be disregarding the statutory mandate as to the proper objectives of our open-market operations. Mr. Thomas said Mr. Riefler had made the comment that, although not brought out clearly in the memorandum, increased System participa tion in the acceptance market had come at a time when it probably helped to expand that market.
After some discussion of the compatibility of that comment with information contained in the memorandum, !r. Mills said that the experience of the System 'n operating in the acceptance market had ouite definitely modified his earlier position, which opposed any wide and firm participation in that market. While he had found the memorandum from Messrs. Thomas and Marget quite persuasive, he questioned the desirability of removing the limitation entirely; in other words, allowing an unlimited area of discretion for operating in the acceptance market. Therefore, he would favor a ceiling of either $50 or $75 million as representing a limitation within which the System could operate to encourage the development of acceptance limitations, to influence open market rates financing and also, within This would mean that opera through the acceptance market. reflected would not be an instrument of monetary policy; tions in acceptances There would be to monetary policy. they would be incidental rather for its acceptance when System acquisitions occasions, for example, rate with the general to harmonize the acceptance portfolio would tend acceptances but contemplate buying rates. He would structure of money tightening influence by them and exerting any desired not selling If the System were run off at maturity. acceptance holdings letting could exert a that it kind, he believed policy of that to follow a to bolster the that would tend on money rates secondary influence policy attitudes. trend of System general
What had not been discussed, Mr. Mills said, was the authority of the Account Manager to operate in repurchase agreements in bankers' acceptances, an authority which in a sense was an expansion joint that permitted the System to relieve any unusual tightness threatening to handicap the development of the acceptance market. Judicious use of the repurchase agreement mechanism could help to allow the acceptance market to expand or contract in accordance with the general tone of market conditions developed by the System through the broad direction of monetary policy. Mr. Rouse said that he thought the memorandum pretty well covered the whole problem and that he did not have much to add to it. He felt sure that Federal Reserve participation in the acceptance market a wider influence than the figures themselves might indicate. had exerted to the market in periods of strain when It had been particularly helpful came into play and had exerted a marked influence repurchase agreements in bringing about a more flexible market. Prior to the System's entry but it had been possible to rates did not move freely, into the market, through willingness to meet any given encourage the movement of rates Rouse said he was persuaded than to resist it. Mr. situation rather Mr. Hayes would be mentioned by the 10 per cent limitation that dealings were he noted that acceptance desirable. In concluding, System operations. the light of total when viewed in small indicated that he was rather impressed by Mr. Chairman Martin market was in the acceptance His own interest Allen's presentation.
to develop and promote it because of its importance to United States foreign trade activities. The question whether System participation promoted that market or not was a somewhat different one and he was not sure of the answer. Mr. Rouse said it had been his observation that System participa tion was a helpful factor in the development of the market, and Chairman Martin stated that this would be his guess also. In this connection, Mr. Hayes referred to certain portions of the memorandum (pages 7 and 8) bearing on that question. He said he found it difficult to accept the argument that one must choose between the two objectives Mr. Allen had mentioned, for he considered it possible to marry them effectively by operating on a little larger scale than heretofore. The acceptance very materially in the last four years, which suggested market had grown appropriate in 1955 had little merit at the that a dollar limitation Mills that there should be some present time. He agreed with Mr. that should be put in his only question was whether limitation and might want to come were, the New York Bank of dollars. If it terms grow further. If the acceptance market to the Committee should back total market, there a percentage of the were in terms of the limitation However, he did if the market changed. need to come back would be less of great importance. point as regard this not in the use of that the growth he was convinced Mr. Allen said from trends in money last few years resulted credits in the acceptance and the prime rate low, that when money was easy rates. He recalled
the management of the larger commercial banks favored other forms of credit as against acceptance credits. When money was tight, however, there was pressure to make more use of acceptance credits. In sub stance, he felt that the use of acceptances was influenced in an important way by the policies of the larger banks, as formulated in the light of money rates. Mr. Hayes cited the growth in the total volume of acceptances since 1950 and observed that the dollar volume based on foreign trans actions had gone up considerably and still represented the largest part of the acceptance market. Mr. Thomas stated that Mr. Allen's comments tended to support the view that acceptances were an important and part of the money system, adding that it was a desirable thing flexible the type of interplay that Mr. Allen brought out. Mr. Allen if they had commented that his remarks had so indicated. the feasibility of the Chairman Martin said that he questioned mentioned by Mr. Hayes, for it was his feeling that marriage operation dropped if there was an attempt to juggle one ball or the other would be operations were of a residual He also noted that acceptance both of them. inquired whether the of the System. He then nature from the standpoint by which the limitation through a compromise might be resolved problem $50 million to $75 million, with would be increased from the present to the Com would come back New York Bank that the the understanding mittee if necessary.
12/2/58 -5h There followed a discussion during which Mr. Robertson raised questions with respect to the soundness of those portions of the memorandum previously cited by Mr. Hayes, with regard to the need for and results of Federal Reserve participation in the acceptance market. Mr. Hayes commented that a commercial bank, knowing the Federal Reserve was in the market, tended to feel that the market had an element of strength which would not be present if reliance were placed entirely on a small dealer operation. Mr. Robertson expressed doubt whether Federal Reserve participation beyond a figure such as $10 or $25 million was necessary to accomplish such a purpose. He also referred to daily unfilled demands for acceptances. At this point Chairman Martin again suggested the solution to which he had referred earlier, namely, an increase to $75 million in the limitation on the amount of acceptances that might be held by the Federal Reserve Bank of New York at any one time. Mr. Shepardson commented, with reference to Mr. Hayes' state that if the limitation were raised to ment about the need for leeway, that there would not be an immediate $75 million it should be understood to take care of if it were to provide latitude increase to the ceiling fluctuations. that the $50 million Mr. Rouse mentioned In this connection, that it was not until for some time and had been in effect limitation the matter was occurred that acceptance volume increase in a rapid
brought back to the Committee. Mr. Hayes commented that it had been the general policy to leave some leeway within the outstanding limita tion. A vote was then called for on the proposal to increase the limitation on bankers' acceptances that the New York Bank may purchase and hold at any one time from $50 million to $75 million, with the understanding that the matter would be brought back to the Committee if the Manager of the Account so desired should the limitation be approached. Upon motion duly made and seconded, this proposal was approved. On this action, Messrs. Martin, Hayes, Fulton, Irons, Leach, angels, Mills, and Szymczak voted to approve, while Mr. Robertson voted "no". Mr. Shepardson did not vote. Mr. Allen indicated that, if he were a member of the Committee , for the reasons he had indica ted he would have voted against the increase during the discussion. In this connection, Mr. Robertson stated that he was thoroughl y market and that his vote of promoting the bankers' acceptance in favor should not be construed otherwise. of the Federal Open Market that the next meeting It was agreed on December 16, 1958, at 10:00 a.m. Committee would be held The meeting then adjourned. Secretary
Also: Record of Policy Actions