December 16, 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 in Washington on Tuesday, December 16, 1958, at 10:00 a.m. PRESENT: Mr. Martin, Chairman 1/ Mr. Hayes, Vice Chairman 2/ Mr. Fulton Mr. Irons Mr. Leach Mr . Mangels Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Messrs. Erickson, Allen, Johns, and Deming, Alter nate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and Leedy, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Sherman, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Daane, Hostetler, Marget, and Young, Messrs. Associate Economists Open Market Account Manager, System Mr. Rouse, Assistant Secretary, Board of Mr. Kenyon, Governors to the Board of Molony, Special Assistant Mr. Governors Division of Koch, Associate Adviser, Mr. Statistics, Board of Governors Research and Chief, Government Finance Section, Mr. Keir, Acting Statistics, Board of Division of Research and Governors and Rice, Vice Presidents Ellis, Jones, Tow, Messrs. Reserve Banks of Boston, St. of the Federal and Dallas, respectively Louis, Kansas City, indicated in minutes. meeting at point 1/ Entered first part of meeting. 2/ Presided during
Messrs. Coombs, Baughman, and Einzig, Assistant Vice Presidents of the Federal Reserve Banks of New York, Chicago, and San Francisco, respectively Mr. Gaines, Manager, Securities Department, Federal Reserve Bank of New York Messrs. Anderson and Atkinson, Economic Advisers, Federal Reserve Banks of Philadelphia and Atlanta, respectively Mr. Parsons, Director of Research, Federal Reserve Bank of Minneapolis Before this meeting there had been distributed to the members of the Committee a report prepared at the Federal Reserve Bank of New York covering open market operations during the period December 2 through December 10, 1958, and a supplemental report covering the period December 11 through December 15, 1958. Copies of both reports have been placed in the files of the Federal Open Market Committee. Mr. Rouse reported that the usual seasonal liquidation by corpora tions had resulted in some pressure on Treasury bills, with the result that bill rates in the auction on Monday, December 15, were up 10 basis points from the previous week on the three-month bills and one basis point on the six-month bills. He added that the new six-month bills ap peared to have been well accepted on the basis of the first two auctions. The first auction required a fair amount of underwriting by dealers, but the preliminary statistics for the second auction suggested that this underwriting had been reduced. the period since the last meeting had been In the money market, by corporate preparations for dividend and tax payments. characterized
The flow of money into New York prior to the December 10 dividend rate created easy money market conditions for a few days, but since December 10 the money market had been quite tight. The principal difficulty with the reserve projections in the past two weeks had been in the management of the Treasury's balance, which had tended to run lower than expected. Large calls had been made on the "C" depositary banks; however, it had sometimes not been feasible to call enough money from these banks to bring the balance up to customary levels. Mr. Rouse con cluded, with respect to the money market, that there probably had been somewhat less pressure this year than during most previous years at this season. Mr. Rouse said that additional reserves would have to be provided during the balance of 1958 to offset seasonal currency withdrawals and other influences on reserves, but that in his judgment it should be possible to do most of this job through repurchase agreements. However, he planned to intersperse one outright operation in Treasury bills and to purchase some of the new six-month bills. The to use this occasion market generally understood that the System Account would buy and sell in them would help to confirm this these bills, but an actual operation understanding. to Treasury financing, Mr. Rouse reported that the With respect the terms of its cash offering on Treasury was planning to announce on January 12. He added that with subscription books opened January 8,
he had no further details on what the Treasury planned to offer but that he had mentioned the timing since this might be a matter that would influence discussion during this meeting. At the conclusion of Mr. Rouse's report, Mr. Shepardson said that although he had no criticism of the conduct of open market opera tions, he had thought that reserve positions would be tighter than they actually turned out to be. He asked whether the projections had gone astray. Mr. Rouse replied that there had been sizable errors in the projections. In fact, however, he had given principal attention to market atmosphere rather than reserve figures, and the atmosphere in the money market on most days had been about as tight as the Committee would have wished. The principal reason for the easier than expected reserve figures was the tendency for the Treasury balance to fall below estimates; the Treasury hesitated to call enough money from the "C" depositary banks to pull its balance up. the Treasury's balance on the previous Mr. Thomas noted that million, considerably higher than expected, day had risen to above $4OO statement week would be figures for the current so that the reserve Also, required reserves in the New York projections. lower than shown influence on the that would have an upward, and had been revised reserve figures.
Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period December 2 through December 15, 1958, were approved, ratified, and confirmed. In supplementation of the staff memorandum distributed under date of December 12, 1958, Mr. Young made the following statement on the economic situations If one takes a cyclical frame of reference for evaluat ing the economy's performance since the low of last April, the conclusion reached is that the performance has been remarkably good. Gross national product, personal income, retail trade, residential construction activity, manufacturers' new orders, industrial production, freight carloadings, and various other economic indicators have increased about as much in the past seven months as in corresponding seven-month periods of cyclical recoveries following earlier postwar contractions. Recent recession was somewhat deeper than in the preceding two declines. On the other hand, for brevity and the speed of turn-around to recovery, performance this time has been front rank both as compared with postwar and with prewar cycles. While peak levels of activity have not been reattained, they are now so close at hand that one can view the approaching period as likely to be characterized by resumed economic expansion. To highlight the current cyclical position: 1. In the present quarter, gross national product in current dollars is estimated to reach a new record annual rate of $452 billion. The physical volume of goods and services output is probably within less than one per cent of the earlier high. The increase in GNP from the spring low of about $27 billion, or about 6 per cent, reflects widespread strength. Consumer spending has moved up on a broad front; combined Government outlays for all purposes have increased to a new postwar high; and the sharpest inventory liquidation of the postwar period has about reached an end. 2. By midyear, business fixed investment had stabilized, a pronounced cyclical decline, and has risen following experience suggests that renewal modestly since. Past cyclical investment expansion will tend to gather momentum of business
slowly. Such outlays typically lag behind recovery else where, but after a period they join the upswing. Already output in business equipment lines is a tenth above its low and last month private industrial construction rose for the first time in 15 months. Other fixed investment, as reflected in new construction, is now up over an eighth from the recession low reached in May. This is a little better than in preceding postwar cycles, for the decline in this cycle was greater. Incidentally, private housing starts for November, at 1.3 million units annual rate, were up two-fifths from the spring low, with the pattern of upswing closely paralleling the 1949-50 and 1954-55 recoveries. 3. Early resumption of advance in consumer spending, after only a slight hesitation, has been associated with prompt recovery in personal income. Near stability of personal in come during recession has been a notable feature of the three postwar cycles--a feature contrasting strikingly with the pattern of consumer income fluctuation in prewar cycles. This year, income payments under Government unemployment and other special security programs were considerably increased, con tributing to upturn in personal income in March ahead of other major economic indicators. In response to the maintenance of consumer income, retail buying has risen in this cycle about 5 per cent. This is about par 7 per cent, after declining performance for postwar cycles. Large-scale production of 1959 model autos is finally and recovery in industrial production in November under way, the speed of the first few months and December is showing nearly April low. The industrial production index in Novem after the December figure is expected to be ber was put at l4l and the The rise since April in one or two index points higher. production is close to the experience of earlier industrial a larger decline in this cyclical postwar cycles, despite the earlier ones. Nondurable goods recession than in both of showing in this recovery period. have made an especially good the rate of capacity utilization the other hand, output and On corresponding points in lower now than at the for metals are for metal products and postwar cycles. New orders earlier shown as strong a rise goods, however, have other durable and 1949-50 recovery periods. October as in the 1954-55 through contributed to industries have About as many major in this recovery period nonagricultural employment the rise in over-all gain in cycles, but the in the earlier postwar as Manufacturing employment has been somewhat smaller. employment because of an relative to output, more this time has lagged
indicated sharper rise in output per manhour. Moreover, nonmanufacturing employment has shown somewhat slower recovery. In past cycles, the increase in employment and the decline in unemployment has gained momentum as the period of output recovery shaded into the later, expansionary phase of the cycle. 6. In the 1948-9 recession, industrial commodity prices declined fairly sharply, but in the two following recessions were modest. Increases in average industrial prices for seven months following the troughs have been roughly equivalent, with most of the rise being accounted for by recovery in material prices. In all three recoveries, reports of markups on fabricated goods prices were appearing with increasing frequency after seven months. 7. Cyclical developments are usually anticipated by the stock market, and this time the rise is about par compared with the two preceding cycles. Of course, the percentage rise is a wholly mechanical basis of analysis. This time the beginning level for the rise was high relatively, for yields on stocks were only slightly lower than yields on bonds of the same companies. Now, stock yields are well below bond yields, a condition not reached in the first postwar cycle and only reached late in the second cycle. 8. Economic recovery has been aided by a pronounced the money supply this year, at a somewhat faster growth in rate than in the last cycle. Comparison here with the 1949-50 period is inappropriate since flexible monetary policy recovery in this cycle. Since January of this year, was not operative sums up to a 4 per cent annual rate. the amount of expansion 3 per cent above last year at The money supply is now about this time. recessions and recoveries, United 9. In preceding postwar downturn and revival, while exports showed only modest States In this cycle, United States imports were about maintained. prior to recession, declined which had been receding exports, were again maintained. Recently, more sharply, though imports scattered indications in leading exports continue to lag, but markets may be abroad suggest that strengthening countries imports have risen significantly. Meanwhile, United States ahead. one may ask what might a concluding point of diagnosis, As over cyclical developments the basis of normal be expected on of performance might words, what kind ahead. In other the year broad contours of with the experience if conformity the economy to work out? patterns continues past cyclical
Without endeavoring a forecast or a projection, at least this specific an answer can be offered on historical cycle grounds. By midyear, industrial production might reach an index level of 150, and by year-end it might attain 155. By year-end, GNP in constant dollars might reach $485 billion, up 7 per cent from present levels. These figures abstract from inflationary potentials, which have been much stressed in recent staff reports to the Committee. From a purely cyclical standpoint, if the economy has overshot the mark in inventory liquidation, in business investment contraction, and in export sales, a condition of cyclical inflationary pressures can quickly be generated. Domestic and foreign purchasing agents coming to market in a catching-up mood can afford to bid actively against one another while suppliers can afford to become more and more reluctant in offerings. Inflationary psychology, already generated in financial markets, can spread to commodity and service markets at wholesale and thence to retail markets. It cannot be said that this will happen, but it is enough of a potential to constitue a problem for the Committee in its moulding of a financial climate for the period of economic expansion in prospect. If it does happen, there could well result a decided lag in expansion of real output and employment and a higher rate of unemployment than would otherwise be expected to occur. Mr. Thomas made the following statement with respect to the credit situation: Money and credit markets have operated with surprising smoothness in the past month in the face of the vigorous progress of economic recovery, the rather heavy financing operations of the Treasury, the liquidity demands customary of the year, and a moderate tightening of at this season bank reserve positions. Interest rates have fluctuated or below the high levels reached earlier. moderately, close to three weeks rates have firmed somewhat, In the past two or far increases have not been as great as customarily but so occur in December. bills have so far been Additional offers of Treasury severe pressures. City banks taken by the market without reduced their holdings of bills in the past have actually businesses continue to have two weeks. It appears that needs with only moderate to meet their adequate liquidity at banks and have even been able to acquire Treasury borrowing bills.
In the first two weeks of December, preliminary and partial figures for city banks indicate that loans increased somewhat less than in the corresponding weeks of the two previous years and that holdings of Government securities were considerably reduced. As a result total loans and in vestments declined somewhat in contrast to increases in December 1957 and 1956. In capital markets, the volume of new issues has been somewhat smaller in the fourth quarter than in previous quarters. Offerings of corporate issues have been larger in December than in November, but less than a year ago. Flota tions of State and local governments remain at a relatively low level. The slackening of these demands may have ac counted for the absence of more severe pressures in the market. Home mortgage markets, however, continue to tighten. The stock market has continued strong with active trading. of severe pressures on the money market Does the absence cyclical and seasonal adjustments are being met with mean that smoothness through the processes of the market without unusual undue expansion or contraction? Or is it that demand and supply factors have not yet caught up with the sharp rise in rates earlier in part on the basis of anticipations? that developed the market, had the current develop That is, in the jargon of Or has the current posture of ments already been discounted? permit these adjustments to policy been so easy as to monetary be made without strain? recently that market interest It has often been noted existing level of high in relation to the rates are unusually rates are close discount rate. Long-term free reserves and the of the 1957 period of strong or above the highest levels to borrowing generally less With member bank capital demands. are as high as when short-term rates than $500 million, In fact they are higher were close to $1 billion. borrowings relative to the discount rate. expand credit even if find it profitable to Banks would or has there bank credit not expanded had to borrow. Has they supplied by System open an expansion based on reserves been not need to increase so that banks did market operations, borrowings? when reserves were freely the first half of the year, In banks ex of member loans and investments available, total was at city banks. bulk of the increase sharply. The panded showed only a for seasonal reasons, Country banks, partly banks. Since midyear, increase, as did nonmember moderate has been more restricted, availability of reserves when the
until the end of November, New York City banks showed a sub stantial decline in their total loans and investments, and those of reserve city banks increased only slightly. In contrast, country banks expanded by much larger amounts than in the same period of the two previous years. As a result total bank credit has shown a further expan sion of a greater than seasonal amount. Most of the increase occurred in holdings of U. S. Government securities at country banks. Total loans showed little change compared with a small decrease in the same period last year and a substantial in crease in 1956. Country bank loans have increased this year while those at city banks decreased, due principally to a decline in security loans from the high June level. The increase in loans was mostly at city banks. Figures that have just become available for November again show that country banks account for a substantial portion of the increase in bank loans and investments in that month, although city banks also showed some increase. The net result of all these changes on bank deposits is of significance from the standpoint of monetary policy. Since June, the money supply seasonally adjusted has increased by over $3 billion, which is at an annual rate of over 5 per cent. Two thirds of this increase occurred in July, followed by partially offsetting decreases in August and September and renewed expan sion in October and November. On almost any basis of comparison the rate of growth has exceeded 3 per cent a year. The time deposit growth, which was so rapid in the first half of the year, has slackened in recent months and there were declines in Novem ber at all classes of banks. In the first two weeks of December demand deposits adjusted at city banks increased by about $1-1/4 billion. A sharp in crease is usual in that period, as deposits are built up for payments of taxes and dividends and for other purposes, and this year's increase is not any larger than usual. By classes of banks, it would appear that privately-owned demand deposits have increased substantially at reserve city banks and at country banks since midyear, with little growth at central reserve city banks. U. S. Government deposits, which were ex ceptionally large at city banks at the end of June, have accounted for the decline in total deposits at city banks. This analysis would seem to indicate that the increased stock of money built the year, largely through expansion of up in the first half of at city banks, has become more Government security holdings distributed around the country, partly through Government widely of its borrowings. Further expansion spending of the proceeds half-year on the basis of greater has occurred in the second than seasonal credit growth at country banks.
Reserves to provide the basis for this credit have been largely supplied through System open market operations since August, as free reserves have shown little change since that time. Free reserves declined sharply in August, stayed close to $100 million from early September to mid-November, and have declined a little since then. Since the bulk of the expansion has been at country banks, reserve needs have not been as great as they would have been had the growth been at city banks. It also means that, for operating purposes, cur rent estimates of required reserves have tended to understate the growth. Current estimates of bank reserve positions are now being revised again on the basis of country bank figures for the last half of November that have just been received. Required re serves are about $40 million larger than had been previously estimated. This means that member banks have had a net borrowed reserve position during most of the past four weeks. They are likely to show moderate net borrowed reserves this week and next. A sharp increase in borrowings will occur in the last week of the month, unless System operations supply about $500 million of reserves. These needs may be met largely, if not entirely, through repurchase contracts. After the turn of the year, reserves will need to be absorbed at a rapid rate--perhaps as much as $1 billion in January. These estimates allow for a large return flow of currency in January to offset the greater than seasonal expansion that has occurred in recent weeks. They also allow for usual in deposits and required reserves, and like seasonal changes wise in float. A continued gold outflow at an average of $25 No special allowance is made for million a week is assumed. through the increase in the weekly bill Treasury financing as it is assumed that these funds will be promptly offering, and enter into the general flow of expended by the Treasury build-up of deposits greater This would require no funds. be needed. On a seasonal basis, deposits than would otherwise reserves should decline considerably in January and required and February. of his views on the made the following statement Mr. Hayes then business outlook and credit policy: appropriate time for us to me that this is an It seems of what the System's general to take very careful stock "posture", if you will--should be at this stage approach--or all agreed on our I think we are of the business cycle. which might be described as facilitating general objective,
orderly progress toward fuller utilization of our productive capacity and manpower and the renewed growth of the economy at a sustainable rate. During the past several months, I think that our policies have helped the economy to move towards that objective. But I left the last meeting of the Committee somewhat disturbed by references to the need for a policy of further restraint. In my opinion, such a move would be pre mature at this stage of recovery. I am particularly disturbed by the possibility that a downward drift of free reserves sub stantially into the negative range, or a discount rate increase, might suggest to the public a policy of progressive tightening and set off an exaggerated market reaction. I would like to direct my remarks to two aspects of the situation: (1) whether a policy of further credit restraint would be consistent with our current directive; and (2) whether such a policy would be well attuned to the actualities of present business and credit conditions. First, as to the directive: We describe our goal in the directive as "balanced economic recovery." The "balanced" of course implies among other things that recovery should be free from price distortions, although that is not stated explicitly. But the explicit word "recovery" seems to me to indicate to any reader that our first concern is with the achievement of fuller nation's resources. If we feel that we should be at use of the or possibly even more concerned, with least equally concerned, threat of inflation and should make a major effort a developing we should, I think, make the to prevent it by credit restraint, record clear on this point. whether a restrictive credit Second, we have the question be well attuned to current economic conditions. policy would when it became evident that recovery I think we can agree that, from a policy of active ease under way, a shift away was well then concerned the timing The main question was appropriate. of the highly disturbed of the shift, in view and rapidity prevailed in the summer. But traditionally market conditions that been applied only when there monetary policy has a restrictive that called for in the credit situation were developments restraint. long-term inflationary bias we believe that there is a If business is prospering or the economy regardless of whether in not conclude either that monetary ailing, I submit that we should it should be focused this problem or that alone can solve policy risks of itself as to run serious on this problem so strongly use of resources. preventing adequate period to review used the past two-week our Bank, we have In and trends in to current forces thinking as carefully our very
the economy. It is, of course, entirely possible that the recovery may gain such momentum as to encourage speculative inventory policies and excessive credit expansion or other distortions. We can, however, see nothing at present to suggest such an acceleration of activity and a renewal of inflationary demand pressures. Consumer demand is good but not ebullient, prospects of a strong upsurge are remote, and businessmen are conservative in their ordering and in ventory policies, as well as in their spending for fixed capital. Business investment in fixed plant and equipment was lower than expected in the third quarter, and only a very modest rise is in prospect after the turn of the year. The meaning of recent data indicating a considerable drop in unemployment is somewhat obscured by the apparent de parture of a sizeable number of workers from the labor force and seasonal adjustment problems. The biggest question mark in the business outlook relates to the automobile industry, and it will be six weeks or more before we can really appraise reception of the new models. The current high production rate, designed partly to replenish inventories, and the rise in sales that accompanied the buildup in dealer stocks, still give no clear indication of the sales outlook. As for prices, the evidence of some continued balance during this phase of the recovery is reflected in free market prices during the last two weeks. The very sensitive index of scrap prices has turned down, and raw materials in waste and sensitive commodity price index have now followed the daily for farm products. While finished goods prices the downturn upward pressures, the latter are less pro continue to reflect months, and approximate over-all price nounced than in recent to be in prospect for some months stability still appears ahead. in the credit and capital markets likewise Conditions capital markets continue for restraint. The yield no argument pressure and the stock market operate without any undue to temporarily at least. have lost some of its ebullience seems to smaller than it has bond issues is somewhat The backlog of new equity financing has increased in recent months, whereas been credit area, the most valid cause for appre somewhat. In the possibility that too much liquidity hension would seem to be the in 1958. Yet I am injected into the economy may have been of the banks is well fact that the liquidity impressed by the below the 1954 levelpeak and even further below the summer's the year as a whole in money supply for and that the increase be watchful to prevent While we must not appear excessive. does
the banks from feeling too free to add to their investments, we must also be careful to see that they remain well able to take care of all legitimate business requirements. The very real effort now being made to achieve something approaching a balanced Federal budget for the next fiscal year is ground for hope of much reduced pressure from this quarter for excessive credit expansion. As we consider immediate policy questions, we should bear in mind that the year-end period is normally one of rising pressures in the short-term money markets. Thus short-term interest rates may be expected to rise for a time even with no change in System policy. The markets will most likely take such rate increases in stride, as a matter of seasonal routine, unless there should appear to be some change in System policy during this normal period of stress. Wholly inavertent factors prevented our reporting net borrowed reserves last week, on average, although the Desk had been aiming in this direction in accordance with the consensus of our last meeting. (This was written before I had seen the latest figures.) I think this turn of events may prove to have been fortunate for the System, in view of the possible effects of general recognition, at this time, of a change of policy. The System is in an unusually good position this year to indicate the temporary nature of the reserves supplied to meet year-end pressures, remaining needs being of a magnitude which can be provided in large part through repurchase agreements. Aside from general economic considerations, another reason for continuing present credit policy unchanged is the Treasury's need to borrow about $2 billion sometime during January and to borrow additional cash through the new cycle of six-month bills. The January Treasury offering appears to be the best opportunity, for some time to come, for including a long-term issue, in view of recent market stability and the traditional availability of after the turn of the year. I believe success investment funds ful issuance of a long-term Treasury obligation at this time in a moderate amount could have useful effects in the way of dampen still lingers in some areas. the inflation psychology which ing It would seem unwise to jeopardize this chance with disturbing of the System in the next few weeks. policy changes on the part conclusively for maintain of these factors argue To me, all policy (year-end reserve needs ing the status quo in open market change in the present degree of pressure). being provided without should be no change in the For the same reasons I think there of course, to the discount rate nor in the directive--subject, and to my earlier comments decided upon by the Committee policy on the latter point.
Mr. Erickson stated that First District conditions were good but did not seem to have the vigor indicated nationally by the staff memorandum. In November, the New England index of manufacturing pro duction failed to rise above the October level due to a slower rate of recovery in durable goods industries, while the most recent poll of purchasing agents showed, for the first time since June, a smaller percentage of respondents expecting increase an in production beyond the previous month. Construction contracts were at high levels in August and September, but in October they were only one per cent ahead of last year, with no large contract awards. Residential construction was up in October, but by a much smaller percentage than nationally. Nonagricultural employment was down .2 per cent in October from Septem ber, due primarily to seasonal trends in some of the nonmanufacturing industries. Electric power output, which each week since the middle of the year had exceeded the corresponding week of the preceding year, first week of December, which the year-ago figure in the again exceeded was doing better than the nation that in this respect the district meant store sales were week of December, department as a whole. In the first last year, the second time since than in the corresponding week lower this had happened. Last year's good the middle of the year that in the last week to sales volume business was attributable Christmas have to do even better the district would Christmas; this year before were lower to date the figures year because exceed the previous to
than for 1957. In October, new car registrations in most of the States of the district were still running 25 per cent less than last year. A survey of 168 lending institutions, covering all types of lenders, indicated that extensions of credit in October were 9.6 per cent less than a year earlier. Turning to policy for the next three weeks, Mr. Erickson said that in view of the pressures of the year end and the indication of a Treasury financing announcement shortly after the beginning of next year, he would favor no change in the discount rate or in the policy directive. He would like to see the same degree of restraint main tained as in the past few days, with modest negative free reserves. He hoped that any necessary reserves could be put into the market through the use of repurchase agreements. Mr. Irons said that his appraisal of the economic situation pointed toward continuing strength, and development of further strength, both in the nation and in the Eleventh District. As he saw it, the being reflected in a large number of areas strength was broadly based, retail trade, and the inventory situation. including production, sales, near at hand, where one could the point was here, or at least Perhaps cease to use the word "recovery." Mr. Irons said. conditions were strong, Eleventh District had been affected somewhat by low Although department store sales and the pick up by Christmas, that they would he felt temperatures, activity continued optimism. Construction was one of tone generally to be good.
On the financial side, Mr. Irons observed that there had been an increase in bank credit and a further increase in the money supply, together with what appeared to him to be comparatively comfortable reserve availability conditions. A strong credit growth was noted outside the major cities. Both bank credit and bank deposits had shown increases in the Eleventh District, and for reasons not entirely clear to him there had been a substantial and steady increase in cur rency in circulation for the past couple of months, with the totals moving up to record highs. The Dallas Bank, Mr. Irons noted, was the only Reserve Bank whose Federal Reserve note circulation was less than its member bank reserve deposits. The reserve position of Eleventh District banks, as reflected by borrowing at the Reserve Bank, appeared to be fairly comfortable, with no appreciable discounting by either city or country banks. Irons saw a number of problems in the picture, As to policy, Mr. financing early in January and the refunding including the Treasury He would like to see reserve availability scheduled for early February. for in his opinion negative negative side and stay there, move to the circumstances in which the would be appropriate under the free reserves not thinking of a substantial operating. He was Reserve was now Federal terms of zero to minus but more in negative free reserves, amount of within that period. Fluctuations during the ensuing $100 million on the positive side. more appropriate than range seemed to him negative
Also, he thought the Manager of the Account during the next period should rely more on the feel of the market than on reserve projections; that is, to be sensitive to the feel of the market. If that should cause the reserve figures to go awry for a day or so, this could be offset by operations on a cash basis. In substance, he would hold a more continuous and firm restraint on the side of negative free re serves, with short-term rates permitted to remain at about current levels. It would not disturb him if the bill rate were to rise. He doubted whether the discount rate was actually as much out of line as the figures would seem to indicate. Other things being equal, con sideration might be given to the discount rate level at some time in the quite near future. As to the directive, he felt this might be the point, or nearly so, when a change in wording would be in order so as to move a little away from the concept of recovery and recognize the existence of other problems. Mr. Mangels reported that there had not been major changes in in the past two weeks. Contrary to the situation the Twelfth District retail stores were quite enthusiastic reported in the First District, which was running six per cent the volume of Christmas trade, about industries showed a of 1957. Employment in defense-related ahead trend, while un reflecting a continuing small increase in November, rise for this time the usual seasonal was showing less than employment with mills improved somewhat, production had the year. Steel of
operating at 75 to 80 per cent of capacity, the highest rates for the year. Production of copper and aluminum also was up, while lumber was down a little. Freight carloadings for the first quarter of 1959 were expected to increase around 12 per cent over the first quarter of 1958, Member bank borrowings from the Reserve Bank were nominal, but purchases in the Federal funds market had been greatly in excess of sales. Mr. Mangels said it seemed evident that recovery was progres sing at a moderate pace, with indications that it would continue to progress moderately without too much immediate inflationary pressure, at least until such time as productive capacity and the labor force were utilized more fully. Prices had been reasonably steady and any increase was likely to result from sources other than changes in the money supply. While the System should not furnish fuel for the fire, he would not want to exert such a degree of restraint as to discourage the progress of recovery. In the ensuing period, free reserves around the zero level might be appropriate--perhaps a little more or a little the Manager of the Account authorized to use his discretion less--with of the feel of the market. Mr. Mangels said that he on the basis would not favor changing the discount rate at present, at least during period, and he saw no occasion to change the the next three-week directive. Mr. Deming said that the Ninth District was presently going contraction in activity but that the general through a sharp seasonal
recovery trend seemed to be continuing at a moderate rate. The employment authorities were estimating the seasonal decline in employment to mid-January to be smaller than usual, reflecting a pickup in durable goods manufacturing. At the same time, initial unemployment claims in late November and early December were running about one per cent ahead of last year. The Minneapolis Reserve Bank, Mr. Deming said, had just com pleted a study based on bank debits which showed that on a seasonally adjusted basis total debits this year had run about 5 per cent ahead of last year, with the gain slightly larger in the later months than in the earlier months of the year. Debits for 1958 had averaged just about the same as the mid-year peak level (seasonally adjusted) for 1957. The picture was much stronger in the farming centers, where second half debits were running well ahead of the first half of 1958, and those in turn were above the 1957 peak levels. As to policy, Mr. Deming said he thought the System should lean a little more heavily on reserve availability. He was not sure what he would like to see done about the discount rate, but he supposed the question was academic, at least for the immediate future. He thought, however, that a rate change probably should be in the cards He had not thought out what timing could for the rather near future. Treasury financing, especially since be arranged to fit in with the announcement as early as Mr. Rouse he had not anticipated a Treasury
had indicated, and in any event he would not favor a rate change in the next three weeks. Perhaps wording of the directive should be changed to speak in terms of sustainable growth rather than balanced economic recovery. Mr. Deming concluded by saying that he would be a little tighter during the next three weeks but would not favor a dramatic move on the discount rate. Mr. Allen stated that information that had become available since the preceding Committee meeting indicated that the uptrend in business activity remained vigorous. Preliminary reports for retail sales in November showed that a new record, nationally, was achieved, and the fact that sales of household appliances were finally picking up was encouraging. There had been reports to such effect from Sears Roebuck, from Norge, and from department stores in the Seventh further regard to department store sales, those in District. In gain over a year ago in the week Detroit showed a three per cent not particularly depressed at ended December 6, and Detroit was that the business uptrend year. A second indication this time last in November in employment. remained vigorous was the improvement on the basis of that were reclassified upward Nationally, 18 centers District. A those were in the Seventh and seven of improvement, hit a low in and equipment expenditures factor was that plant third year and the first quarter of this quarter; the fourth the third basis of reports from businessmen, of 1959 should, on the quarter residential construction the Chicago area, gains. In show appreciable
was booming, with building permits issued in November for 55 per cent more units than in the same 1957 month. Mr. Allen went on to say that earning assets and deposits of Seventh District banks declined somewhat in the past two weeks as sales of securities exceeded loan growth, while credit demands on the whole had been moderate for this time of the year. Manufacturers of metals and metal products--an important element in the district--had steadily repaid borrowings during the past two months. Some district bankers apparently felt that the moderateness in the amount of borrow ing could be attributed in large part to the continued decline in inventories. Since that decline may have stopped and an increase started, they suspected that the drop in loans which usually comes in the early months of a new year might be less this time than heretofore. Mr. Allen recalled that at the last meeting of the Committee he had suggested doing about what had been done in the last two weeks, but Committee should be poised to take action on the restrictive that the come to this meeting with the idea of suggesting for the side. He had more restrictiveness than the reserve next three weeks a little the discount rate be but doing nothing about figures would suggest, announcement later in anticipated a Treasury financing cause he had that the Committee meeting on January. Thus, he had anticipated for discussion of the subject. January 6 would present an opportunity appear that action however, it would of Mr. Rouse's statement, In view
on the discount rate, if any were to be taken, must be taken prior to the January 6 meeting. Personally, he felt that the recovery had proceeded so far, and the inflationary bias was such, that some thing should be done on the rate. However, he considered unity of action in the System desirable always, and particularly so at this time, and he would be persuaded by the thinking of the majority. Thus far, the comments indicated that everyone thought there should be no action until after the period of Treasury financing. This might mean a long wait, and he was concerned about that. He would favor changing the directive along the lines Mr. Deming had suggested. Mr. Leedy said that from the staff review of the economic situation and from personal observations, there could be no doubt but that the recovery was progressing, and in many respects in a surprising way. He considered that moving down to a negative free reserve position was called for; if the figure moved down a little more, it would seem to him to be in line with what the Committee should be doing. In view of the prospective budget deficit, the increase in the money supply, and the other indicators very substantial referred to at this meeting, he felt that it was going to be necessary in its actions than it had been in for the System to be more vigorous would like to see action at this recent past. If possible, he the but he did not rate and on the directive, time both on the discount because of the action would be possible that discount rate feel end of the year and the between now and the seasonal factors
forthcoming Treasury financing. The directive, he thought, should be changed for he saw no reason to refer further to promoting of recovery. In the past the Committee generally had undertaken to change the directive on the occasion of a change in policy and he did not think that some further slight tightening of reserve avail ability would actually represent a change in policy. Therefore, in the interim between now and the next Committee meeting it was his feeling that the extent to which the System should go would be to allow negative free reserves to edge down a little more. Also, he would subscribe to the suggestion that the Manager of the System guided more by the feel of the market than by reserve Account be projections. reported very little change during the past two Mr. Leach in the Fifth District. Wage in general economic conditions weeks textile industry--one large had been discussed in the increases an increase for Januaryconcern had in fact announced knitting for in the bituminous wage rise had been contracted and a $2 per day being paid $22.25 per eight where workers were now coal industry, for it came of particular significance This seemed to him hour day. and a poor outlook shrinkage in production face of a recent in the been losing in had for some years Bituminous coal for the future. year saw a and this past competing fuels, relative to importance the decline in measure to due in no small sharp drop, further firm. Overseas prices held prices as coal fuel oil residual
shipments fell by a third in 1958, and European restrictions on coal imports pointed to a further drop this year. While improved steel operations and higher levels of industrial activity called for more coal, the market was scarcely favorable for the price increases that some producers now expected to make. West Virginia, which produces about one-third of the country's total bituminous coal output, had had severe unemployment problems over the past year, and he thought that one could look for little help for this situation from the higher wages now to be paid. Continuing, Mr. Leach recalled that prior to 1955 average borrowings of member banks generally rose steadily toward the end of the year to a peak in early December several hundred million dollars higher than September-October levels. This was true regard less of whether the System was following a policy of active ease, ease, or neutrality, and the temporary rise in borrowings was not considered to be inconsistent with System policy. As the Open Market Committee's emphasis in policy guidance became more and more centered borrowed reserve figures, however, this pattern on free reserve or net There now seemed to be a reluctance to permit an no longer appeared. occur despite the seasonal pressures in this increase in borrowings to unfortunate to him, for he saw merit in meeting direction. This seemed of the seasonal needs through borrowings, which are automatically some repaid.
Mr. Leach commented that during the first ten days of December member bank borrowings averaged only $376 million, which was $200 million less than during the corresponding period last December and about $100 million less than the average for November of this year. He still thought that seasonal needs should be allowed to run borrowings up a little. To him, this would not mean a signifi cant change in policy even though it would presumably produce a small amount of net borrowed reserves. The appearance of net borrowed reserve figures for more than one week might have some adverse effect on the Government securities market, but he believed this was a risk that should be taken. As to reserve availability, Mr. Leach noted that he had wanted to see the System get over the "hurdle of zero" and the importance it seemed to have to the market. With regard to the degree of tightness, he felt that the Manager of the Account should be guided by the feel of the market, and he would like to see modest net borrowed reserve figures. This would represent no real change in policy, just being than before. He would not favor a change in the slightly tighter discount rate but he would remove the word "recovery" from the directive, with appropriate changes in wording. During Mr. Leach's comments, Chairman Martin joined the meeting. the view that the trend of economic develop Mr. Mills expressed expectations in both evidence of optimistic ments and the multiplying justified a System policy of the financial and business communities
firm restraint over the volume of bank credit. Put in technical terms, such a policy would contemplate negative free reserves in modest amounts. In that connection, he felt that he should comment on the subject of the money supply. Although an increase in the money supply over the past year of approximately 3 per cent might be considered to be consistent with the concept of cyclical long term and fundamental economic growth, it was questionable whether additions to the money supply that had derived so largely from previous System actions did not reflect in some degree a failure to force the kind of redistribution of U. S. Government securities out of commercial bank portfolios that would have been desirable in order to limit the expansion of commercial bank credit to the basis of the reserves that the System had supplied in recent months to support Treasury financing operations. As brought out in discus sion at earlier Committee meetings, a case can be made for compelling the use of reserves supplied by the System under such conditions to double duty of first supporting the Treasury in its financing do the seasonal expansion of then subsequently financing the legitimate and credit, all through the process of exerting System commercial bank banks to reduce their investments to force the commercial pressure reserves thus freed to and to use the U. S. Government securities in doubted that the customers. He demands of their sustain the loan extent that it had purpose and to the accomplished that System had should be continued of firm restraint a System policy failed to do so,
if the undesirable consequences of financing the Treasury's require ments through the commercial banking system were to be avoided. By a policy of restraint, he did not contemplate that the Manager of the Account would be foreclosed from supplying new reserves if, in his discretion, that action would be necessary to avoid kinks in the market during the remainder of the year. Working on the side of System policy would be the fact that the liquidity requirements of corporations and banks until the year-end should add to the supply of Treasury bills and other short-term U. S. Government securities that should come on the market and thereby develop a firmness in short-term interest rates that would of itself exert a restraining influence over the expansion of bank credit. This kind of develop ment could occur even though the actual volume of reserves supplied to relieve undue market tightness seemingly might be contrary to any upward movement in Treasury bill rates that might appear. Inasmuch kind of situation would reverse itself automatically after as that its appearance would not have implied any change in the year-end, for the possibility that some market participants System policy, except that seemed to be confused by a level of reserves might have been on short-term U. S. with the interest rate technically out of line Government securities. felt that it was not conditions, Mr. Mills Under present After the the discount rate. an increase in to consider appropriate
end of the year when the supply and demand status for U. S. Government securities had settled down, a clearer and more logical view could be obtained as to what level of interest rates had become pertinent to the new year situation in the securities markets. Mr. Robertson said it would seem from the economic report given by Mr. Young, the comments of Mr. Thomas, and most of the remarks around the table this morning that the country was moving out of a period of recovery. He felt that it was time to change the directive so as to get away from reference to economic recovery and refer instead to conditions conducive to sustainable economic growth and stability. Under present conditions, it appeared to him that maintenance of a would be appropriate, and he did not feel policy of firm restraint moment. The upward movement on that policy was firm enough at the the country was not spotty but broadly the part of business throughout firm restraint might serve said, and a policy of less than based, he wages. Prices, he believed, to labor to seek higher as an encouragement line, although this development moving higher along the were already field which made it lower prices in the agricultural was covered up by System ought to be doing a price movement that the easy to fail to see should be he said, the Committee stop. For the moment, its part to of reserves. Also, increased negative availability moving toward an for the rest of the year Leach that seasonal needs he agreed with Mr. member bank borrowing, extent possible through be supplied to the should
even in preference to the use of repurchase agreements. He would have no objection to rate increases coming about, because he did not believe that the System should be operating on the basis of maintaining any particular rate structure. It seemed extremely important to him to take advantage of the period between now and the Treasury announcement in January to put the System in a position where it could live during the next month or two. The System should not hold steady during the intervening period, let the financing take place, and then find itself in a position of having to come and in destroy the market. It should let rates increase, if necessary, avoid taking up any more of the slack than absolutely necessary, and maintain a tighter position than it had to date. In other words, he was arguing for a movement of reserve availability downward to a tighter position than maintained up to the present time, and he regarded this as very in view of the fact that the Treasury would be announcing important January. Serious consideration should its new cash offering early in in the discount rate before the January 6 be given to an increase not be possible to take for it probably would Committee meeting, announcement. If date and before the Treasury action after that it might not be before the announcement, the rate were not increased which he felt would well into the spring, to move on it until possible be very unfortunate. were similar to those said that his views Mr. Shepardson other available report from the staff, Mr. Robertson. The expressed by
reports, and his own contacts in the field all supported the view that recovery had been largely achieved, that there was a high degree of confidence regarding the period ahead, and that the System should achieve a much firmer policy position than had prevailed. He thoroughly agreed with working toward lower reserve availability, possibly toward the level of $100 million of negative free reserves that Mr. Irons had mentioned. He also agreed that there should be a change in the directive and that it would be desirable to have a discount rate change while it was possible to move, rather than to have the System find itself boxed in, as it had on occasions in the past, and thereby fall behind the parade. Mr. Fulton indicated that on the basis of developments in the Fourth District he was not optimistic about the situation to the extent such as Mr. Robertson had suggested. Steel of favoring "drastic" action were still at rates below the national average operations in the district that those operations would and there was no high degree of anticipation the latter part of the first quarter precipitately, although in turn up be some inventory build quarter there would probably and in the second far, the users of steel strike. Thus the prospect of a ing against could use in production. Also, steel had been buying only what they been slow and this the decline had had declined, while unemployment There had been some upturn to be the continuing trend. was expected the machine tool industry, manufacturers but not in in orders placed with had been rather activity doldrums. Construction still in the which was
high, both residential and heavy engineering, and this had given a fillip to the figures in the district. For the year to date, however, department store sales were still three per cent behind last year, while auto sales were still about 30 per cent below last year despit some pickup recently. All in all, the recovery in the district was heartening, but it was not rapid by any means. Mr. Fulton expressed the view that no precipitate move toward tightness should be made. He noted that the increase in bank loans had been largely in loans on securities and in real estate loans rather than in loans to business; the figures did not show any great demand for credit from the businessman. As to reserves, he believed that a range from zero to $50 million of net borrowed reserves might be appro priate, which would be similar to what had prevailed this week and last feel that the discount rate should be changed at the week. He did not On the directive, it would perhaps be appropriate to present time. recognize the recovery that had taken place, make a change in wording to be an indication of any substantial change but the revision should not in the System's position. in the Third the most important development Mr. Bopp said that strength in con weeks had been the continued in the past two District to improve, sales sales had continued Department store sumer buying. above a year ago--when been 19 per cent latest week having for the ago for the past per cent above a year a snow storm--and 9 there was
four weeks. The volume of Christmas buying was reported to be good and most store executives thought that more shoppers" were buying this year than last. However, the demand for major appliances, which improved considerably in the fall, had waned since October, consumers were reported to be price conscious, and competition was keen. Sales of new automobiles were still at a low level, new car registrations in Philadelphia in November having been about one-fourth below last year and registrations in eastern Pennsylvania in October about one-third below October 1957. Final data showed a small decline in district factory employment in October, primarily because of a decrease in fabricated metals, and average hours worked and average weekly earnings also had decreased. Total factory employment in October was six per cent below last year, with employment in durables off 10 per cent and in nondurables off two per cent. There had been little change in steel production in the Philadelphia area in recent weeks; in the latest week, operations were scheduled at 70.5 per cent of capacity as compared with nearly 75 per cent nationally. Total loans of district weekly reporting banks declined in each of the past two weeks following small to moderate increases in each of the preceding Business loans, which rose sharply in early November, had four weeks. two weeks was some the decrease in the past been declining, and also in the corresponding period last year. Weekly reporting what more than the new tax progress in redistributing to have made good banks seemed $37 million in the securities rose holdings of Government bills. Their
week ending November 26, presumably reflecting allotments of the new bill, and then dropped $48 million in the following week. The large Philadelphia banks had had substantial basic reserve deficiencies in recent weeks. These deficiencies had been met mainly by purchasing Federal funds but in the last week of November the banks borrowed substantial amounts from the Reserve Bank. Only one of them, however, borrowed in the latest reserve week, and its daily average was only $3 million. Total member bank borrowing from the Reserve Bank in the latest two statement weeks averaged $27 million and $16 million, respectively. Turning to policy, Mr. Bopp expressed the view that in line with national and regional developments, any move toward restraint at this time should be moderate. He would not favor a change in the discount rate or, at this point, in the directive, which he would when there was a change in the discount rate. like to see changed the Sixth District continued to move Mr. Bryan stated that not to say rapid, pace. Among other ahead at a very satisfactory, store sales, demand deposits, nonfarm employment, department things, payrolls were up, insured contracts, and manufacturing construction were going beyond the and many of the indices unemployment was down, district was concerned, the figures. As far as the national average recovery was vigorous. more than an in his view Bryan said that to policy, Mr. As He felt that present time. indicated at the policy was even-keel
there should be increasing restraint, and he agreed with those who had suggested that unless a move were made on the discount rate fairly soon the System was likely to find itself boxed in for a far longer period than would be indicated by prospective economic and financial developments. Mr. Johns said that nothing pertaining to the economy of the Eighth District required comment, while his thoughts regarding the behavior of the national economy would be indicated by the views he would express about the use of policy instruments and about the directive. He went on to say that he wished to align himself with those, beginning with Mr. Irons, who had taken the position that the greater restraint. He would favor System should be moving toward moving in that direction somewhat more vigorously and aggressively he agreed with the view stated than in recent weeks. As to timing, the directive, he felt that With respect to first by Mr. Robertson. to the exclusion of the emphasis on recovery it was time to eliminate was re the primary objective to say that else and begin everything He would be glad to an unsustainable rate. upon expansion at straint by Mr. Robertson. such as suggested adopt wording he would favor increasing by saying that Mr. Johns continued care to suggest any that he would not on bank reserves, the pressure increase the he would simply but that reserve target, net borrowed respect to so far. With been the case than had more rapidly pressure
the discount rate, he had come to this meeting under the misapprehension that the Treasury would not be in the market until the third week of January. Having now learned that the Treasury planned to come in as early as the eighth of January, it was his view that the rate should be adjusted promptly, and in advance of the Treasury financing. He was aware of the quirks of the year-end period and the stresses and strains generally prevalent at that time of the year, but he balanced against those considerations the view, to which reference had already been made, that if the even-keel policy meant what it had often been said to mean at Committee meetings the arguments in favor of increasing the rate before the Treasury case to the market were strong, especially if it were true, as many seemed to believe, that the Treasury might offer a long-term instrument. Accordingly, he would prefer to cast his lot on the side of moving before the Treasury financing rather than after ward. Although he would be reluctant to call a special meeting of the St. Louis directors at this season, he would prefer that to being for a longer period than he would like to contemplate. With boxed in change, at the moment he magnitude of a discount rate respect to the although that might be an increase of 1/4 per cent, would contemplate debatable. to protest mildly against said that he would like Mr. Johns for he did position as drastic, of Mr. Robertson's characterization rates being as they were, an not think that it was. Short-term
adjustment of the discount rate would not be, in his opinion, a drastic policy move. As a matter of fact, it might be long overdue. To summarize, he would favor changing the discount rate promptly and he would favor revising the directive at this meeting. Mr. Szymczak said that he would favor maintaining a negative free reserve position to the extent possible during the current period of seasonal demand. He did not think that it mattered too much one way or the other whether the directive was changed, and it seemed questionable whether the discount rate could be increased at this time without undue effect on the rate structure generally, which might hamper some areas of the econony. Chairman Martin said that after making his own comments, he would ask Mr. Hayes to summarize the meeting. The Chairman then commented that in his own thinking he saw some hazards in the situation that perhaps were not real. He would favor more pressure on the market, and he agreed with Mr. Szymczak in that it did not make too much difference whether the directive feeling mentioning that the index of industrial was changed at this time. After stood at 141 in November against last year's high of 145, production at which the trend of the a question about the point he said there was However, he would than a recovery movement. constituted more economy time on the basis the directive at this no objection to changing have on the basis should be careful--and which one of forecasting--about
of "where we are, relative to where we were." Chairman Martin remarked that this had been a difficult year in the money market, and he then expressed the view that at present it was more important to get the level of reserves down than to in crease the discount rate. Referring to current seasonal pressures in the market, he said that the System should be endeavoring not to supply all of the needs and the banks should be encouraged to come to the discount window if they needed reserves. At the same time, the System should try to prevent knots from developing in the money market. It did not seem to him necessary to rush up on the Treasury just because it had set a financing date, and a discount rate change would attract quite a bit of attention. The Chairman went on to say that his thinking was colored somewhat by the efforts being made currently to balance the budget. Beyond that, however, he did not think that a discount rate change effective. If he were doing it on his own, he would be terribly this juncture regardless of the fact would not change the rate at might be frozen in for a while. Furthermore, he that the System be frozen in if more the System would necessarily did not think the money market. Following the Treasury pressure were put on be changed, but at that probably have to the rate would financing, the discount rate If come as confirmation. the change would time be to increase should view that the would be his changed, it were per cent.
In essence, Chairman Martin said, he felt that the System was in another difficult period. This was the end of a trying year and, although conditions admittedly had been difficult, he did not feel that the System had handled things too well. There was a question in his mind about the desirability of going into the Christmas maelstrom just to beat the Treasury to the punch on the financing. To change the rate might create a more difficult situation for the Desk, and it was going to be difficult for the Desk anyhow. In conclusion, the Chairman said that he would favor putting pressure on the market, consistent with supplying some but not all of the seasonal needs, in the direction of a larger volume of negative free reserves. Summarizing the meeting, Mr. Hayes said it appeared that in of open market operations there was quite a clear consensus the area tighter restraint, but a very moderate favoring a move toward somewhat move. The figures mentioned were mostly in the zero to minus $100 range, although some mentioned a range of zero to $50 million. million they would favor less emphasis on Several persons had indicated that market, and he judged those and more on the feel of the figures feel than had prevailed. see a somewhat tighter would like to persons the negative free about being in to be no inhibitions There appeared to be regarded as desirable it seemed to be area; in fact, reserve favor going a little were a few who would in that area. There others in that regard. further than
On the discount rate, Mr. Hayes said, his count indicated that a slight majority favored leaving the rate unchanged, although quite a number spoke in favor of changing the rate before the Treasury financing. The only comments with regard to the magnitude of a rate change were those made by Mr. Johns and Chairman Martin. There were some who saw a need to prepare the way for the Treasury, while others felt that the System should wait until the Treasury financing was completed. Continuing his summary, Mr. Hayes said it appeared that the majority would like to see some change made in the wording of the policy directive, with the word "recovery" either deleted completely or modified and emphasis put on the objective of preventing expansion at an unsustainable rate. Chairman Martin inquired how many felt that a change in the directive was important, and several so indicated. He then inquired how many would favor language in clause (b) referring to sustainable economic growth and stability in place of balanced economic recovery, and a large majority gave affirmative indications. The discussion turned at this point toward interpretation of favoring a trend toward further negative free the apparent consensus and Mr. Hayes noted that no one had mentioned a figure reserves, Mr. Leach suggested that the majority favoring no 1/ Somewhat later, rate at this time may have been more than change in the discount and Mr. Hayes agreed. "slight,"
greater than $100 million. Chairman Martin said that he thought the situation would have to be measured by the Desk in terms of knots in the market and the feel of the market, and Mr. Szymczak indicated that he agreed with the Chairman's statement. Mr. Hayes commented that certainly the consensus was for a moderate change, and Chairman Martin put the matter in terms that "moderate further negative free reserves were desirable." Mr. Shepardson said he thought that was right, that the con sensus was for a moderate move. However, he had in mind that over or five weeks, including this one, the the period of the last four of net borrowed reserves. A would be close to $40 million average trending somewhat below that figure. further move would mean Mr. Rouse whether the con Martin then inquired of Chairman replied that he understood him, and the latter sensus was clear to "tighter but not too tight." the consensus to be Martin noted rate, Chairman to the discount With respect would be included around the table comments of individuals that the in the minutes. Committee felt member of the whether any Chairman asked The in the di against a change to be recorded enough to want strongly that he Hayes replied and Mr. been suggested, such as had rective Leedy noted Mr. such a change. against to be recorded would like
that he was not a member of the Committee and therefore had no vote. However, as he had said earlier, it was his view that the directive ought not to be changed except at the time of a real change in policy. Mr. Szymczak said that although actions were more important than the wording of the directive, he was somewhat concerned about deleting the word "recovery" when it appeared from the reports today that some sections of the country still had a way to go before achieving full recovery. Mr. Shepardson commented that he would not want to argue too strongly the point made by Mr. Szymczak. Even conceding that point, however, the momentum was such as to direct attention to what the System was planning from this point. While the goal of recovery might not yet have been reached completely, it was so close as to permit attention to be focused on another spot. Chairman Martin stated that that was why he would have no to changing the directive, and Mr. Fulton said that he objection by Mr. Shepardson. Mr. Irons would go along with the comment made meeting would be held on January 6 noted that the next Committee apparently would Treasury's financing announcement and that the impression that the Committee thereafter. It was his follow shortly change the directive just prior to a Treasury had been reluctant to point had been very much Martin said that this financing. Chairman should change that the Committee He did not believe in his mind. and this Treasury financing, eve of a on the policy directive the
would argue for a change now rather than at the January 6 meeting. With reference to the comment about no real change in policy, Mr. Rouse suggested that the Committee was sliding gradually into a definite change. He said he thought the Committee should know that this was not yet realized by the market, where people were still thinking in terms of moderate free reserves. Thereupon, upon motion duly made and seconded and with Mr. Hayes voting "no", it was voted to direct the Fed eral Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (in cluding replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct 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 sustainable economic growth and stability, and (c) to the practical administration of the Account; provided that the of securities held in the System Account aggregate amount for the purchase or sale of securi (including commitments the Account) at the close of this date, other ties for special short-term certificates of indebtedness than time to time for the temporary accommodation purchased from be increased or decreased by of the Treasury, shall not more than $1 billion; purchase direct from the Treasury for the (2) To Reserve Bank of New York (with account of the Federal it seems desirable, to issue discretion, in cases where or more Federal Reserve Banks) such participations to one certificates of indebtedness of special short-term amounts time to time for the temporary as may be necessary from that the total the Treasury; provided accommodation of
amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. Mr. Riefler stated that in connection with the emergency planning program, System personnel were to be assigned to High Point on a rotating basis beginning in the near future. Prior authorization was needed for disclosure of Federal Open Market Committee emergency resolutions to the persons so assigned, and it was his suggestion that the Committee give a general authorization to make available to such persons the emergency resolutions, last approved at the meeting on March 4, 1958. This suggestion was approved unani mously. Mr. Rouse reported that the second meeting of the Technical Committee of the New York Money Market was held on December 10, 1958, and that the Committee was continuing its work on plans designed to avoid speculation in the Government securities market and ensuing disturbances of the kind that developed earlier this year. Among the suggestions that the Committee was considering were the following: of education be undertaken to 1. That a program and nonbank, the dangers of show lenders, both bank on little or no margin to ultimate borrowers lending who may or may not be known to them. be instituted a new statistical 2. That there important lenders would system under which reporting on the amount rate, term, collateral, report data or repurchase agreement of their loans and purposes
transactions against Government securities, and also that discussions be held with the National Association of Securities Dealers looking toward the provision by member firms of data similar to the data now reported to the New York Stock Exchange by its member firms. 3. That further exploration concerning the possi bility of a dealer organization be pursued. 5. That the feasibility of developing a system of regulation of the terms (especially margins) of loans against Government securities be explored. (The group felt that regulation would be necessary but hoped that this could be worked out within the framework of existing legislation. The Technical Committee also believed that recognition of dealers as a separate group was indis pensable to an effective regulatory system.) 5. That the Federal Reserve consider using its influence to achieve wider and more regular participation of the banking community in financing dealers. Mr. Rouse said that the job immediately ahead was to explore ways of implementing the Committee's suggestions. He added that he was planning to send a summary of the minutes of the December 10 each member of the Open Market Committee or that, if any meeting to a complete set of the minutes would be provided. member desired, On Chairman Martin's suggestion, it was decided that complete the Committee and to each sent to each member of minutes should be serving on the Committee. Bank President not currently Reserve for a dealer organiza commented that the suggestion Mr. Rouse damaging from the because it would be should be kept confidential tion out of the Technical if word got anything done of getting standpoint Committee. Secretary of the that Under Martin commented Chairman problem of on the active in working had been very Treasury Baird
speculation in Government securities and in due course would have reports from savings and loan and savings bank groups. Mr. Robertson recalled that at the last meeting of the Committee he had requested that Mr. Rouse give consideration to the problem of window-dressing of year-end bank condition state ments from the standpoint of the use of repurchase agreements. Mr. Rouse said that the officers of the Securities Depart ment of the New York Bank had been discussing the matter, that they thought it was necessary to deal with the market as it exists, and that an attempt to shut down on repurchase agreements beyond the general policy adopted by the Open Market Committee might have an effect on the market that Committee policy did not contemplate. It appeared that the place to deal with the problem was where the attempt to deal with it took place rather than to window-dressing through the market. that the problem was a difficult one. Mr. Robertson agreed years the volume of repurchase however, that in past He noted, day of the year and borrowings had jumped up on the last agreements debt and that the banks paid off appeared that the went down. It for repurchase agree Federal Reserve Bank then went to the dealers he felt offer any solution, prepared to he was not ments. While borne in mind. should be that the problem would be further consideration indicated that Mr. Rouse given to the matter.
It was agreed that the next meeting of the Committee would be held on January 6, 1959, at 10:00 a.m. Thereupon the meeting adjourned.
Also: Record of Policy Actions