January 6, 1959 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, January 6, 1959, at 10:00 a.m, PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Fulton Mr. Irons Mr. Leach Mr. Mills Mr. Robertson Mr. Szymczak Mr. Deming, Alternate for Mr. Mangels Messrs. Erickson, Allen, and Johns, 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. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Daane, Hostetler, Marget, Roelse, Walker, Wheeler, and Young, Associate Economists Manager, System Open Market Account Mr. Rouse, Mr. Kenyon, Assistant Secretary, Board of Governors Special Assistant to the Board of Mr. Molony, Governors Adviser, Division of Research Mr. Koch, Associate and Statistics, Board of Governors Chief, Government Finance Section, Mr. Keir, Acting and Statistics, Board of Division of Research Governors Mitchell, Jones, and Tow, Vice Messrs. Ellis, Banks of the Federal Reserve Presidents of St. Louis, and Kansas City, Boston, Chicago, respectively
Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York Mr. Anderson, Economic Adviser, Federal Reserve Bank of Philadelphia Mr. Parsons, Director of Research, Federal Reserve Bank of Minneapolis Mr. Brandt, Economist, Federal Reserve Bank of Atlanta Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Com mittee held on December 2 and December 16, 1968, were approved. Under date of December 29, 1958, there had been sent to each member and alternate member of the Federal Open Market Committee, and to each President not currently a member of the Committee, a copy of the report of audit of the System Open Market Account made by the Division of Examinations of the Board of Governors as at the close of business November 7, 1958. The report, which has been placed in the files, was submitted to the Secretary of the Committee Committee's 1958, in accordance with the action of the under date of December 16, Federal Open Market Committee at its meeting on June 21, 1939. any of the members of the Martin inquired whether Chairman and there was no indication comment on the report, Committee wished to to such effect. Accordingly, the audit report without objection. noted and accepted was to the members had been distributed meeting there Before this Bank of New Federal Reserve at the a report prepared of the Committee
York covering open market operations during the period December 16 through December 30, 1958, and a supplemental report covering the period December 31, 1958, through January 5, 1959. Copies of both reports have been placed in the files of the Federal Open Market Committee. In his comments on recent open market developments, Mr. Rouse stated that the money market had functioned more smoothly this Decem ber than in other year-end periods. The market had been somewhat tighter than in recent weeks, but there had been little impact on short-term rates of interest. Treasury bill rates reached a peak on December 16 but since then had moved downward. The tightness in the money market toward the end of the year was relieved by a substantial country banks to the money centers, a movement that flow of funds from had since been reversed. went on to say that the prices of intermediate and Mr. Rouse by as much as four points since late long-term bonds had declined continuing discussion of the possibility November, reflecting primarily Treasury this month. The announce offering of long bonds by the of an was expected toward the of the Treasury's offering ment of the terms bonds had drifted of corporate and municipal of this week. Prices end of bank reserve positions quiet trading. Projections lower in seasonally over the next would supply reserves that seasonal factors indicated Treasury bills amounts of had ample the System Account few weeks, but
that could be redeemed or sold to offset those reserve effects. The Account bid in yesterday's auction to run off about half of its $259 million holdings of bills maturing January 8. Mr. Rouse pointed out that the supplementary report on open market operations distributed to the members of the Committee this morning contained reserve projections only for the current statement week and the three succeeding weeks, whereas in the past, projections for a period of sixteen weeks ahead had been shown. From the stand point of operations, he said, only the shorter-range projections were useful. The Research Department of the New York Bank was preparing to make a study of the basis of the longer-range projections, and if as a result of this study it became possible to improve them, the practice of including the longer-term projections in the supplementary report would be resumed. Until that time, however, it was planned to show the shorter-range estimates in the report. only Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period December 16, 1958 through 5, 1959, were approved, January ratified, and confirmed. at this meeting was and financial review The staff economic participants including of a visual-auditory presentation, in the form Mr. Brill of the and Koch, along with Thomas, Young, Marget, Messrs. Burr of the Committee, Miss of the staff. By permission Board' s
Board's staff and Mr. Storrs of the Richmond Reserve Bank joined the meeting for this presentation. A copy of the text of the presentation has been placed in the Committee files. Following the meeting, copies also were sent to the Committee members and alternate members and to the Presidents not currently on the Committee. A summary of portions of the presenta tion follows: The current picture of the economy is one of maturing recovery. Output is back, or nearly back, to prerecession levels. This means that problems of sustainable growth have now replaced problems of recession. Among these new problems the threat of resumed inflationary tendencies is clearly forecast from a financial point of view. The behavior of commodity prices during the recession, the speed and generality of the economic recovery, the persistent rise in common stock prices, the pace of monetary expansion early last year, and the size of the current Federal deficit have encouraged expectations of further creeping inflation and strengthened views that continuing inflation is inevitable. A key question for Federal Reserve policy now is what rate of monetary expansion would contribute best to the sustainability, without inflation, of prospective economic expansion. While the present ratio of money supply to GNP is significantly lower than after the recovery period 1954 ratio of the 1920'sthan the average it is still higher 55, there may remain some margin for by some 10 per cent. Hence, further increase in the rate of money-use, but it is probably than at the beginning of the last expansion period. smaller in the money supply for the years Perhaps the rate of growth could be somewhat greater than in the comparable ahead of the 1954-57 recover-expansion, without inflationary period supply always needs to but growth in the money consequences, of tendencies in velocity of be determined in the light the quality of credit. developments affecting money and of
With resumption of business borrowing, prospective large demands for mortgage loans, and the financing needs of govern ments--particularly State and local--total demands on the capital markets will increase along with further expansion in economic activity. While the total supply of loanable funds in the economy is still very large and economic expansion to a new high level is not likely to be seriously hampered by lack of funds, saving will need to be encouraged so as to cover the bulk of financing demands and to keep the demand pressures on bank credit creation within tolerable limits. In a situation of this type, economic pressures may be expected to sustain a relatively high level of interest rates. As to current System policy, the vigor of the upsurge in activity generally, the strengthening of private credit demands, and the persistence of inflationary psychology--particularly in financial markets--suggest that monetary expansion should be temporarily held to a moderate rate. Banks should be under pressure to borrow reserves needed to cover credit extensions in excess of seasonal needs, and, to maintain the discipline of the discount window, System discount rates should be kept closely in line with market rates. Such a policy points to an early lifting of these rates. Pursuit of a policy of limiting monetary expansion to a noninflationary volume is facilitated, at this time, by the bank reserve positions were allowed to contract some fact that last December and early January. On the other hand, what during to some extent by the imminence of more cash it is handicapped financing by the Treasury. Even to keep bank reserve positions the System will need to absorb a half bil relatively steady, dollars or more of reserves that will be made available lion in the immediate future as a result of a to member banks and seasonal decline in de return flow of holiday currency the circumstances, it is and required reserves. Under posits be absorbed promptly--perhaps a important that these reserves availability to member banks--in little in advance of their speculative and other their commitment to order to prevent undesirable uses. his views on the busi following statement of Mr. Hayes made the ness outlook and credit policy: our last meeting economic news since The most striking external convertibility for been the announcement of has the French European currencies, and other major sterling developments in Europe. and related financial devaluation,
While it is very hard to estimate the ultimate detailed effects on domestic business conditions, the chances are that there will be little near-term effect one way or the other. In general, the changes are distinctly constructive, indicating important progress toward a more viable world economy, which should bring significant benefits to the United States in the long run. The outlook for continued recovery has firmed up since our last meeting. It is encouraging to note that almost all branches of activity shared in the recent advance and that consumer buying in the Christmas season was apparently some what better than expected. Price developments have shown contradictory tendencies, with continued declines in spot and future prices of raw materials, as well as food products (and in sensitive whole sale prices), whereas the consumer price index and industrial wholesale prices have exhibited some slight upward pressure. At the same time prices of equities have soared to new peaks. Looking ahead, we find that the view is very widely held among informed economists that the prospect is for a continued moderate recovery during 1959. Unfortunately there is also a predominant view that reasonably full employment will continue to elude us for many months ahead and that prices will show some upward tilt, although probably very moderate in degree. One key question is whether the current and prospective strength of consumer buying will cause an upward revision in business spending for plant and equipment, besides a significant inventory accumulation. There are also major uncertainties in the automobile outlook and in the future course of the stock market, with related psychological influences on business expectations and plans. to draw a clean-cut line, either concep It is never easy or statistically, between recovery and long-term tually expansion. In a sense recovery will certainly remain incom as long as the rise in output and income is not suffi plete workers who became unemployed during the cient to absorb economy can take place under recession. Yet growth of the enter the labor force or become conditions when workers who other improvements in because of automation or unemployed We can, I think, agree efficiency fail to find employment. remains a problem, economic that as long as unemployment provided additional employment policy must aim at expansion, an inflationary situation by pressing does not produce and inelastic supplies limited capacity of facilities against of materials. at this time with two aspects We must concern ourselves timing of the cash the Treasury's activities--first, of the
financing scheduled for announcement this week, and of the large refunding due two or three weeks later; second, the serious question whether the Administration's highly laudable goal of a balanced budget will actually be attained in fiscal Recent credit statistics have shown greater expansion than we realized a month or two ago, I am thinking especially of the larger-than-expected growth in loans and investments in country banks, bringing the increase in loans and investments of all commercial banks to around $13 billion for the first eleven months of 1958. We now look for a full year increase in the money supply of around 3 per cent, higher than earlier forecasts but still not disturbing in view of the fact that the money supply was virtually unchanged from the end of 1955 to the end of 1957. As for credit policy, we should certainly recognize that recovery is proceeding on a broad base and is likely to con tinue. We must not overlook either the persistence of large unemployment or the continued evidence of speculative fever in the stock market. It seems to me worth noting that recovery, or the existence of prosperous business conditions, does not per se require a policy of restraint, and that we should move toward restraint only as and when we see real evidence of price pressures or financial excesses. For the present it is, I believe, appropriate to continue a moderately firm rein to prevent the accumulation of exces sive liquidity. The modest tightening which has recently occurred in reserve positions should not be intensified, but neither should it be relaxed. To this end we should act promptly to absorb the return flow of currency and to prevent the expansion of the reserve base that would otherwise occur. While the desirable degree of restraint may be symbolized by net borrowed reserves of about $100 million, I think the Manager should seek to maintain the present degree of tight ness as indicated by the feel of the market. This flexibility is especially appropriate now inasmuch as seasonal factors lead to a greater feeling of ease than the in January could might suggest. On the other hand, with the figures alone possibility of a long-term Treasury offering in January, may find our monetary policy assisted by debt management we policies in providing a degree of pressure in the money and capital markets. discount rate, there are serious With respect to the to a change from the standpoint of Treasury and drawbacks
international considerations, and fortunately economic conditions do not require an immediate change. The even keel policy clearly points to the desirability of an unchanged rate for several weeks. Furthermore, I have some fear that a discount rate rise at this particular time might be construed abroad as an un cooperative and unnecessary defensive response to the European move to convertibility, which after all is much more indicative of European economic strength than of dollar weakness. Mr. Johns said that as he interpreted the discussion at the last Committee meeting, there was a rather strong consensus, almost approaching unanimity, to the effect that the System's posture should be one of growing monetary restraint. This was a somewhat stronger position than previously, he thought, but it was not dissimilar as to direction from the consensuses at the last couple of meetings or even before that. As he viewed the situation, it was extremely doubtful whether there had actually been restraint, either during the past three eeks or somewhat further back into the last quarter of 1958. he felt that the System had not been restrictive, As a matter of fact, or at least not restrictive enough. From preliminary estimates, it seasonally adjusted, rose that the active money supply, appeared in the fourth quarter of rate of about 6 per cent at an annual the money supply had been relatively last year, while the use of still at about the rates generally were high and rising. Interest activity and levels of business despite rising October levels early for credit, and loans at weekly greater than seasonal demands the four weeks during than seasonally rose more banks reporting
ended December 4, the increase having been 2.3 per cent compared with the seasonal growth of about 1.7 per cent. Also, total member bank reserves rose about $1.3 billion in the fourth quarter through Decem ber 26, whereas in the like periods of 1955, 1956, and 1957 the average increase was about $.7 billion. In only one statistic that he desired to mention did it appear that there had been any compliance, or gesture of compliance, with the decisions of the Open Market Com mittee in the direction of greater restraint. In the last three weeks free reserves of member banks had drifted lower, but they were pre vented from falling further by net System Account purchases of about billion of Treasury bills during the fourth quarter through $1.5 December 26. This compared with net purchases during the corresponding in 1957 of about $1 billion and purchases averaging $1.1 billion period periods of 1955 and 1956. Accordingly, it was his view in the like decisions had not been fulfilled. In that the Committee's expressed making this statement, he did not intend nor did he wish to imply any Account, for in his view the Management of the Open Market criticism of kind and manner of itself due to the lay with the Committee the fault the Account. He did to the Manager of that had been given instructions future time he pro today but at some to go into that further not wish to a greater extent. to discuss the matter posed Johns said he few weeks, Mr. for the next to policy Turning the chart show by Mr. Thomas during suggestion made agreed with the
to the effect that absorption of currency returning from circulation and of reserves resulting from other factors should proceed somewhat in anticipation of the economic impact of those developments. In short, he would seek to be tighter by open market operations, for in his opinion the time had come to make restraint a reality. He would hope that during the next three weeks there might be no purchases of securities by the Account and no attempt to offset short-term wiggles in the reserve position. He had expressed the opinion at the last Committee meeting that an adjustment of the discount rate should be made promptly, and he continued to feel that a rate adjustment was overdue. However, he did not know what that feeling implied in terms of timing in view of the Treasury's forthcoming trips to the market for refunding. If this meant that the Reserve for new cash and then a discount rate change until the Banks were prevented from making felt that it would be regrettable February or thereafter, he middle of would want to have the As to timing, however, he and unfortunate. benefit of the discussion at this meeting. that the statistics for the Sixth District Mr. Bryan said and that the to the national figures to conform in general seemed With regard solidly-based and continuing. appeared to be recovery by certain factors that he was alarmed policy, he said to national economic side. By this strictly speaking, on the that were not, very real possibility he considered the referred to what comment, he
that in the forthcoming extraordinarily crucial session of Congress, policies might be decided upon that would make inflation a certainty for many years to come. Mr. Bryan went on to say that his own thinking as to System policy was rather negative in the sense that he felt that policy at this immediate juncture should not become easier. In fact, he tended to agree with Mr. Johns that, if anything, it should become more restraining. He had some apprehension that, in view of the seasonal factors now involved, the System could very easily get itself into a situation where its absorption of reserves would not be on a sufficiently massive scale and a position of ease would inadvertently develop. This, he felt, would be a very grave blunder. Therefore, he had been thinking in terms of an open market operation that would take as its principal guide to policy in this immediate period not the net borrowed reserves but the actual be figures of free reserves or in the market, his idea being that it would havior of short-term rates the face of rising corporate liquidity, and be a very real mistake in demand for short-term instruments, a considerable corporate apparently recent levels and to back away from the permit short-term rates to believed that a Mr. Johns, he rate. Like go below the discount perhaps he did not see how a change rate was overdue, but change in the discount at the moment. could be accomplished business sentiment the New Year, that, going into Mr. Bopp said general expectation The cautiously optimistic. District was in the Third
was that business activity would continue to improve but that absorption of the unemployed would be slow. There was as yet no boom psychology. In view of the forthcoming Treasury financing, he felt that the principal problem for monetary policy was to try to maintain an even keel despite the seasonal return flow of cur rency and other factors tending to supply reserves to the market. Fortunately, the System's holdings of bills maturing in January appeared ample to absorb reserves created by the return flow of currency and other factors. Therefore, he favored maintaining about the same degree of pressure on reserves as during the past three weeks, and he would emphasize the importance of the feel of than the statistics as a guide to day-to-day the market rather favor a change in the directive or in operations. He would not the discount rate at this time. that the Fourth District was participating Mr. Fulton reported the recovery movement, and in this with the rest of the country in of the recession in that he noted that the low point connection the country. The steel about the lowest in district may have been more orders than been receiving considerably industry had recently of a strike later possibly in expectation the past few months, in mills that it had informed some automotive industry this year. The within the next six months, months' supply of steel would buy eight
and orders were coming in for steel inventory from various other users. Accordingly, the steel manufacturers felt that they would have an operating rate of perhaps about 78 per cent in the first quarter of this year and 86 per cent in the second quarter. No matter what happened after that, however, they felt that the rate would go down to 45 or 50 per cent for a period of weeks during the third quarter. If there should be a strike, the rate would be down and if there should be no strike, inventories would take care of the needs of users. For the year as a whole, it appeared that steel operations would probably average a rate of around 75 per cent. In the automotive industry, there had for some time been projections of possibly 5.2 to 5.5 million cars this year, but the thinking now was between 5.5 and 6 million, the upward revision reflecting the fact that the new-model automobiles seemed to be experiencing better acceptance by the public than was the case earlier. Certain types and the mills producing them were of steel were now rather tight operations for the first quarter. scheduling a high rate of saying that department store sales Mr. Fulton continued by good during the Christmas district had been surprisingly in the 2 or 3 per cent as a whole ran sales for the year season but that to an extent was not being alleviated behind 1957. Unemployment and there continued industrial production, to the rise in comparable All in all, it substantial unemploument. of spots of to be a number
might be said that the Fourth District was experiencing a gradual rise in activity. As to policy, Mr. Fulton expressed the view that absorption of redundant reserves should be undertaken promptly, and in a volume that would permit no ease whatsoever to get into the banking system. Like Mr. Bryan, he felt that the present structure of short-term rates should be maintained and not allowed to drift downward. Because of increased business and economies effected during the recession, corporations had become considerably more liquid, and he believed there was a considerable amount of funds available from that source. In his opinion, the Desk should keep a weather eye on the structure of rates rather than any particular amount of net borrowed reserves, and member banks should be required to come to the discount window to obtain any needed reserves. He would not favor a change in the discount rate at this time. In a concluding comment, he suggested that there was more ebullience in the stock market than anywhere else at this time, and that whatever could be done to dampen the ardor in that sector would be of substantial benefit. Mr. Robertson said he concurred with Messrs. Johns and Bryan that economic conditions were such, and had been such for quite a little time, as to call for an increase in the discount rate. He considered it regrettable that an adjustment of the rate had not been in the view of Mr. Johns that open market made. He also concurred
operations in the past three weeks had not achieved the degree of restraint that he personally had thought desirable or even the lesser degree of restraint which appeared to be contemplated at the last meeting of the Open Market Committee. He regretted the "feather touch" that had been followed. However, it seemed obvious, in view of the Treasury financing announcement later this week, that the Committee had no alternative except to maintain an even keel throughout the financing period and perhaps even into the refunding period. This, he said, connoted action to offset easing factors that were bound to appear during this period. He saw no need for any change in the directive or for any change in policy, since it seemed necessary to degree of restraint as existed at the moment. He maintain the same the view that the guide to open market operations should concurred in reserves but the rate structure in not be the amount of net borrowed the short-term area. there would be general agree Mr. Mills said he was confident should be on the side direction of System policy ment that the broad differences, those that there were To the extent of credit restraint. of restraint was as to what degree reflected judgments obviously or without interfering securities markets without disrupting attainable off the recovery by choking movement of economic with a legitimate of restraint the degree he believed credit. Personally, of availability had been Market Committee of the Open the last meeting exerted since
appropriate and had accomplished the purposes that were intended by the majority of the Committee. It was inevitable, he said, that the discussion today should focus on the discount rate and the propriety of an increase in that rate. In his view, the System should by all means avoid a dramatic rate change which in essence would be an action taken in a vacuum. In other words, at a time such as this there were more than normal reasons for changing the discount rate only in order to bring it into alignment with the movement of the market rates in a free market. In that connection, he brought out, it was necessary to decide in what sector of the market the System wished to produce an alignment. The long-term sector essentially has to do with the move ment of investment and capital funds, and in his reasoning the short term sector, particularly as symbolized by the yield on Treasury bills, was the sector of alignment toward which the System should point its policy. The yield on Treasury bills, he observed, had not at this time moved far out of alignment with the discount rate. In fact, if one looked at the "ask" side--the yield on bills obtainable by purchasers there was no lack of alignment. For that reason, he suggested that when consideration was given to an increase in the discount rate, the thinking be realistic and the action taken in accord with whatever alignment might be necessary at the time. direction of interest rates, Mr. Mills As to the movement and seasonal withdrawal of reserves a period when there was a said that
accompanying a return flow of currency from circulation could, of course, be capitalized on by the System to bring pressure on interest rates and perhaps to bring short-term rates to a level that within a reasonable time, and consistent with Treasury problems, would justify an increase in the discount rate. As that time approached, and if advantage were taken of it, the thought occurred to him that System considerations would be concentrated very largely on its domestic responsibilities. As Mr. Hayes had brought out, however, the Federal Reserve likewise has international financial responsibilities. An increase in the discount rate following a rise in the yield on Treasury bills might be regarded by the domestic and international financial as an action on the part of the System to recognize the communities outflow of gold during the past year or eighteen months, and through tacitly that the System proposed to subject such recognition to state that is implicit in a gold out the domestic economy to the discipline policy of acquiring U. S. Government securities flow by terminating a Hayes, he noted, was concerned about to offset gold withdrawals. Mr. States market being inter of actions in the United the possibility supporting the steps taken by foreign preted abroad as contrary to and bring them toward convertibility. countries to firm their currencies question had been raised possible that where other hand, it was On the an action taken on the disciplinary about the stability of the dollar, rather than discredit would bring credit System monetary policy side of
on System intentions. If nothing else, it was quite likely that an upward movement of Treasury bill yields in the United States to equality with, or above, the yield on Treasury bills in the United Kingdom would tend to stem the outflow of gold from the United States. Moreover, it might draw gold back to this country because of the more attractive investment opportunities offered in the U. S. Government securities market. Mr. Leach said that in the Fifth District the year 1958 closed with continuing evidence of gradual economic expansion. The textile industry continued to enjoy a better market but had not yet returned to industrywide six-day operations. Cigarette manufacturers closed out a year of operations well above the 1957 level, and 1958 was a banner crop year for Fifth District farmers. After a rapid rise in November, business loans of weekly reporting member banks rose slowly in December to produce an over-all increase of about seasonal propor tions. Mr. Leach expressed the opinion that in view of the imminent Treasury financing an even keel policy was clearly appropriate for the ahead. This suggested a moderate amount of net period immediately bench mark, and the latest projections borrowed reserves as the desired be required to by the System would only moderate action indicated that should take the form of such a level. That action presumably maintain expressing the view that prompt of Treasury bills. After a runoff
absorption of any redundant reserves was very important, Mr. Leach said that, as he saw it, the Desk had maintained just about the degree of tightness that he sensed the Committee as a whole intended at the last meeting. He felt that this degree of tightness should continue, with the Manager of the Account guided by the general feel of the market and not solely by free reserve or net borrowed reserve figures. Obviously, no change should be made in the discount rate while following an even keel policy, and he saw no reason to change the directive at this time. Mr. Leedy said he was one of those who felt that it would have been well to have had more restraint in the periods between the last two Committee meetings, particularly the more recent period. He said this without any criticism of the Desk, for the Desk had had a very difficult problem, but in his own thinking he would have than had actually been accomplished. If a preferred more restraint change could be made in the discount rate, he would favor that course, for he did not share the apprehension of Mr. Hayes about possible mis involved in such a move. With the understanding of the purposes however, he did not see immediately ahead, Treasury cash financing the discount rate. For the present, he an opportunity to adjust what it had been doing in could do little more than felt the System could move somewhat that the System past, but he hoped the recent direction of restraint. further in the
Mr. Allen referred to the annual meetings of economic and statistical associations held in Chicago last week and said there was a remarkable degree of unanimity on the business outlook, to the effect that the uptrend in activity would continue for the next several months at least. The very high level of Christmas retail trade seemed to him to be the biggest business news in recent months, with the statistical increase over a year ago particularly noteworthy because Christmas trade was considered strong last year. He was to note that department store sales in the Seventh District pleased in the nation as a whole during the Christmas were as good as those in the year. He went a poorer performance earlier period, following Seventh District States had risen in all on to say that employment last year and un employment was below months and, while in recent compensation during new claims for unemployment employment higher, year in all below the previous December were and early November markets, wages and Despite easier job States of the district. For example, a survey to rise during 1958. salaries had continued in the average pay indicated a rise 42 large Chicago employers of six months from cent in the of 2-1/2 per workers of white-collar higher interest as yet that was seen No evidence May to November. in the Seventh activity rise in construction the were hampering rates 10 per cent higher November were awards in Total contract District. as a for the nation per cent higher with 9 year, compared than last whole.
Mr. Allen reported that the atmosphere in Detroit was one of optimism, a characteristic of this time of year. Sales in the first part of December averaged 18,100 cars daily and it was under stood that sales in the final 10 days of December were a little better. Because Chrysler was in effect out of the picture due to lack of stock, the showing for the last 10 days was more optimistically regarded than would otherwise be the case. Production schedules for January were projected for 580,000 to 590,000 cars, and for the entire first quarter 1,500,000 or even a little more, while January inventory totals of 600,000 were almost 200,000 below the figure of a year ago. That inventory, incidentally, did not include approximately 80,000 imported cars. As a reflection of the current optimistic atmosphere, in Detroit were talking of 1959 sales the professional forecasters of not less than 5.5 million domestic cars and 500,000 in terms was expected to continue large in imported cars. Unemployment manufacturers were using over however, because automobile Michigan, in force later on. order to avoid sharp reductions time in Mr. Allen said that year-end to the financial picture, Turning from corporate tax pay District banks resulting pressures on Seventh to have been somewhat lighter credit needs appeared ments and seasonal loans to business by ended December 24, usual. In the four weeks than with $9 $67 million, compared banks rose weekly reporting district $72 million increased loans on securities year, while million last volume since the midyear million--the highest to a level of $500
Treasury financing. This doubtless was related to unusually large dealer positions in Government securities. The year-end pressure on reserves had been strongest at the large banks of the district; in recent weeks, Chicago central reserve city banks had shown a deficit position after being in a surplus position for the better part of several months. In the statement week ended December 31, borrowing at the Reserve Bank's discount window and purchases of Federal funds exceeded excess reserves by $70 million, a somewhat smaller deficit than for the same period a year ago but considerably larger than at any time since last April. Two of the largest banks had indicated that they expected their positions to ease by reason of substantial loan liquidation in the month of January. In a concluding comment on the economic situation in the district, Mr. Allen said that some users of steel had indicated that they expected within the next month or so to place orders for the third as well as the second quarter. Turning to policy, Mr. Allen said that economic considerations not actually require, more restraint and an would suggest, if they did to maintain what Mr. Thomas had referred increase in the discount rate to as discipline of the discount window. However, any discussion of a He agreed with those who at this time seemed academic. rate change out that the System must give consideration to the Treasury had pointed the next few weeks the should try to maintain in financing and that it
degree of restraint that now existed. He was not inclined to be critical of the Desk, for in the periods between the last two Com mittee meetings he felt that it had done what the Committee requested. For the ensuing period, he would try to stay about as at present, and he considered it important to mop up excess reserves as fast as pos sible. He would not favor action on the discount rate until after the next meeting of the Committee at least. Mr. Deming said that at the end of 1958 most business indi cators in the Ninth District, as in the nation, pointed to further recovery in economic activity. In the Ninth District, however, the trend had been obscured by the sharp contraction normal for this time of year. For example, both manufacturing and nonmanufacturing employment in the Twin Cities was lower today than it was two months other hand, the drop in manufacturing employment was ago. On the only one-third as large as last year and in nonmanufacturingrecession--the drop was about equal to virtually untouched by the for good years and the developments were normal last year. These Minnesota remained about the only real iron ranges of Michigan and soft spots in the district. that Ninth District banking pre Mr. Deming went on to say nation. As of from that of the different picture sented a somewhat $145 million higher bank loans were approximately mid-December, member increase coming at two-thirds of the earlier, with about than a year
country banks. Both Government and other security holdings were substantially higher, this being in keeping with national performance. Despite the loan growth, both city and country bank loan-deposit ratios on December 10, 1958, were almost exactly the same as a year earlier, with city bank ratios fractionally higher and country bank ratios fractionally lower. As to policy, Mr. Deming said that an even keel seemed to be indicated during the next three weeks. To him, that meant prompt absorption of redundant reserves but continuation of about the same level of restraint as had been maintained recently. He agreed with Messrs. Leach and Allen that the Desk had maintained about the degree in the light of Committee instructions, and of restraint appropriate the degree of restraint appropriate at in his view this was about this time. to him that economic conditions were Mr. Irons said it seemed nationally and in the Eleventh strong and strengthening, both clearly experienced in the district in Further growth had been District. the volume of In the period since Thanksgiving virtually all areas. strong, and the petroleum industry retail business had averaged very Cutbacks on situation than earlier. in a somewhat better was now a large aircraft manufacturer contracts had caused missile and related in relation to total the holidays, but employees just before to release been that the and it may have was not damaging, employment this
consequences were more emotional than real. District construction activity was holding up well. As to the banking picture, the demand for loans was up, according to latest statistics, and the year-end call report showed substantial increases in virtually all items over a year ago, not only for banks in the large cities but for banks in all cities. It would not appear that banks were pressed for reserves, for there had been virtually no borrowing at the discount window. In his judgment, the recovery was now a thing of the past and the System should be looking toward fostering sustainable growth rather than promoting recovery. As to policy, Mr. Irons said he felt that the System should certainly avoid anything that would give the appearance of, or permit, any introduction of ease into the reserve position. At the same time, he was rather satisfied with open market operations over the past three weeks. All of those around the table were of course interested in maintaining restraint and the differences were only in judgment as to developments and the problem of degree. After allowance for year-end had introduced some degree of end-of-year strains, the Desk meeting the operations could be regarded restraint and in his judgment greater as successful. While the bill rate had moved down to some extent, on the part of corporations to a more liquid position this was due At this time itself rather quickly. situation might reverse and the would come into the market, forces tending toward ease of year, natural
and he suggested that the System be alert to offset them in every way possible. Fortunately, the System held a substantial amount of bills which could be run off to absorb reserves as they came into the market, and he felt that the Desk should certainly follow that course. Any errors, he said, should be made on the side of restraint and clearly so. On the other hand, he would not want to be strongly or dramatically tighter than during the past three or four weeks. Continuing, Mr. Irons said that the discount rate did not bother him from the standpoint of its being out of line, even though it was currently under the Treasury bill rate. He hoped, however, that some further restraint, as it became possible, would produce a rate situation in the market such that adjustment of the discount rate would be more or less automatic. In any event, discussion of a rate change at this time seemed academic. With the Treasury discount scheduled for this Thursday, it seemed important financing announcement for the next couple of days to allow no evidence to appear that any in other words, the System should ease was creeping into the picture; a position as possible pending the Treasury try to maintain as firm announcement. was happy about open market Mr. Irons said he In summary, They had achieved some during the past few weeks. operations could continue without he hoped that this restraint, and additional
being dramatic or sensational. He would leave it to the Manager of the Account, through his contacts with the market, operational estimates, and similar guides to try to press gradually toward more restraint without any upsetting factors. Mr. Erickson said that in the First District recovery was continuing in some areas at a slower pace than nationally and in other areas at a pace ahead of the national figures. In November, nonagricultural employment was down slightly although manufacturing employment was up due to improvement in durable goods industries. The New England industrial production index was up from 108 to 110 in November, while electric power output during the last six months of For the first eleven months of 1958 was 6 per cent ahead of 1957. construction contracts were 8 per cent ahead of the previous the year, and utilities. Over the same period, resi year due to public works was down 4 per cent from 1957, and nonresidential dential construction Department store sales were excel was down 9 per cent. construction sales in the last four weeks of the lent for the Christmas season, in the similar period of been 8 per cent higher than season having registrations were the other hand, automobile previous year. On the levels. A survey of savings a good deal behind year-ago still running time during 1958 a showed for the first banks at the end of November month, and the for the previous less than of deposit increase rate savings and loan survey of Federal true in a situation held same he did was of significance, that development Whether associations. not know.
As to policy, Mr. Erickson said that Mr. Irons had covered his own position. He expressed satisfaction with the operations of the Desk during the past three weeks and, in view of the Treasury financing date, said that he would make no change in the directive or in the discount rate at this time. He would favor continuing to maintain the existing degree of restraint and would make sure that no ease appeared. Mr. Szymczak said that for the next three weeks System policy quite obviously would have to stay put. While excess reserves coming into the market should be absorbed through open market operations, the System was stymied for the time being on the discount rate. He would like to study at greater length the question of when it would be pos sible to raise the discount rate with the Treasury due to come to the market first for new money and then for refunding. This raised the question whether a rate change would be feasible for a month or even a month and a half. In this connection, he noted the System's responsi bility as an arm of the Government to work in harmony with the Treasury in obtaining the amount of money that the Treasury would have to raise. like to study the cause of the present Also, Mr. Szymczak said, he would volume of unemployment, for his readings indicated the possibility of some length of time. This seemed relatively large unemployment for continuation of unemployment to the to him to be important because a long period of time meant of around 4 million people over extent the System must be take actions for which the Congress might that
prepared. The System, he suggested, should know what could be done about unemployment other than to spend large sums of Government money. Analysis of the causes of unemployment should be on an area basis and should determine to the extent possible how long substantial unemploy ment might be expected to continue. Monetary policy should now become tighter, Mr. Szymczak said, from the standpoint that all economic indicators were on the upward side. As he had indicated, the System was stymied frequently by Treasury financing operations, and it might be stymied by Congressional action in the light of the unemployment statistics. He suggested, for the next three weeks, absorbing redundant reserves coming into the market, and in a concluding comment he expressed the view that the Desk had done a good job over the last three weeks. Mr. Balderston said that although he recognized that history may be looked upon as a pageant and that one cannot count on history been thinking a great deal about comparisons repeating itself, he had current recovery and recovery from the preceding recession. between the help of Messrs. Young, Eckert, and Trueblood Accordingly, with the he had endeavored to answer three questions: of the Board's staff, compare with its predecessor; (2) (1) how does the current recovery to the two situations compared; have the Federal Reserve responses how with respect to current if any, may be derived and (3) what lessons, policy.
As to the first question, Mr. Balderston said that he need not comment because the subject had been dealt with admirably in the visual-auditory presentation. Therefore, he would merely remark that, aside from the lag in automobile and steel output, he saw no significant difference between the two rates of recovery. On the second question, it must be noted that the stimulation by monetary policy this time was matched by that of a record-breaking peacetime Government deficit. Last year, short-term rates declined more sharply and from a higher level to approximately the same low points reached in 1954, while long-term rates continued higher than at any time prior to the fall of 1956. Interest rates had risen more rapidly and to higher levels, both in absolute amounts and relative to free reserves and the discount rate. In both recoveries, the shift of reserves away from active ease occurred in the fourth month after the upturn. In the subsequent five weeks last year, free reserves dropped from to $86 million by early September, a tightening equivalent $530 million to that which took four months in the preceding recovery. Moreover, the current reserve position tightening started from a lower level, million in August 1954. Prior million, as compared with $725 say $500 reserves had been permitted for the April 1958 turnaround, free to only three months, whereas prior to the August 1954 turnaround they had prevailed for eleven consecutive months. In this recovery, cent to 2-1/2 per cent from 1-3/4 per rates were increased discount month and the second beginning in the fourth two rounds, the first in
beginning in the sixth month, while in the preceding recovery the rate was raised once from 1-1/2 to 1-3/4 per cent, principally in the eighth month after the turnaround. Mr. Balderston went on to point out that commercial banks entered the current recovery in a more fully loaned position and with less secondary reserves than they entered the previous recovery. They might be expected, therefore, to be more responsive to central bank restraint this time. During the first seven months of this recovery, the loan-deposit ratio had changed but little, whereas it had risen nearly three points in the 1954-55 recovery. Expansion of total loans at commercial banks had been less than 3 per cent this time, compared with 8 per cent in the previous recovery. for current policy, Mr. Balderston said that he As to lessons was far from sure as to the answers. However, he started with the the 1954-55 recovery Federal Reserve restraint could belief that in and too late." He attributed as having been "too little be described there was more water in the two things, first, the fact that that to banks to be unresponsive caused the commercial brakes last time, which and second, a solicitude period, perhaps six months, for a considerable Committee with respect of the Open Market on the part of some members to move that is, disinclination and budding recovery; to the young might be starved. the infant recovery of a fear that vigorously because if he was correct memory. However, solely on his he was drawing Here seemed to him 1954-55, it policy in of open market in his criticism
that there were cogent reasons for making the restraint this time more stiff than before. In the first place, price increases for nonagricultural production had been pyramided on top of an already high price level, and as a collateral point many industries had lost some of their ability to compete, both at home and abroad. Second, policy this time suffered from the fact of deficit spending; monetary policy had lost an ally on the fiscal side. Furthermore, expectations as to unwillingness to raise the revenues that the Congress seemed inclined to spend contrived to make the outflow of gold and the rise of stock prices danger signals of real moment. Thus, the current situation was different from the previous situation in these several respects. Mr. Balderston said he had come to the conclusion, as to policy, that nothing could be done in the next three weeks in the nature of overt action. However, the System could make plans so that, when the opportunity did come, it could get the short-term 3 per cent and take appropriate discount rate action. rate above it should move as a system and not present to the In this respect, the spectacle of indecisive, ill-timed world at home and abroad of February the System would He hoped that by the middle action. in concert as a system. be prepared to act nothing to add to the said that he had Chairman Martin and that the course of System of policy this morning discussion
policy was clear for the moment. However, he would like to make a general comment on the problem facing the Treasury, which in a sense was the problem with which the System also was faced. In his thinking, he said, inflation was a process going on over a period of years, and the current problem was a heritage of the war. Whether inflation could be contained, he did not know, and there were differences of opinion on that. He suggested that diligent study of money and credit tends to make one humble, for knowledge of how money and credit acts in the economy is really fairly limited and there is a great deal to learn. Of course, the total problem was bigger than money and credit, but he felt that 1959 would perhaps be a crucial year in the battle against inflation because the Government was now forced to come to grips with the saving-investment process, and the Treasury was faced with a very serious problem in attracting bona fide savings into Government securities. After noting that the Treasury was limited by law to a 4-1/4 per cent rate of interest on its issues, he said that within such limit the present that he could state unequivocally management of the Treasury, at least so far as his contacts indicated, might be required to obtain money. was willing to pay whatever rate was doing its best in approaching this The management of the Treasury to give them more that he had been able and he only wished problem could be handled. All of ideas as to how the problem help by way on the said, should be concentrating the table, he those around
problem of saving and investment. In this connection, he suggested looking at what had happened to the man who bought United States Savings Bonds as compared with the person who bought common stock. One source had indicated to him recently that in the case of a large trust company handling nothing but investment funds, the amount of money put into fixed investments had declined something like 25 per cent in the last six months. While this was not important in itself, it afforded an indication of a trend. Continuing, the Chairman pointed out that this problem was one that could not be corrected by a single change in the discount rate or by any one move, for it involved a continuous process, but he suggested that in 1959 all should be seriously concerned with the problem. Referring to the chart show presented earlier during this meeting, he called attention to the disparity illustrated by the charts between the rates of return on equities and fixed investments. That situation would not last forever, but in the meantime the Treasury had to live with the market and devise means of attracting bona fide savings into Government securities. He did not pretend to know the answer, but no one could afford to be complacent about Treasury was facing. He did not think there was the problem the anything the Federal Reserve could do directly, although this was the System's problem. However, as mentioned by Governor partially the System decided upon must be Balderston, whatever actions the Treasury's problem when actions, for it complicated decisive
the System was split within itself on what it was going to do. The System should endeavor to have a clear position which would make things easier. Summarizing the meeting, Chairman Martin said that with the Treasury financing imminent, it seemed clear that all who had spoken wanted to maintain an even keel. He agreed with Mr. Irons, however, in feeling that any mistakes should be on the side of restraint rather than on the side of ease under present conditions, recognizing the burden that this placed upon the Management of the Open Market Account. He then went on to say that an even keel policy, as debated from time to time at Committee meetings, seemed to mean many different things to different people. However, he was talking about the feel of the market generally, and he felt there was a reasonable the Committee intended to do. There was meeting of the minds on what discount rate at this time, while no sentiment for a change in the the same degree of restraint be a continuation of about there would in order to give the Treasury as that had been maintained recently free an operation as possible. that the Treasury would Martin said he was hopeful Chairman be complementary to security which would come out with a long-term monetary policy. that he felt Martin repeated comments, Chairman In concluding the battle against one in to be a crucial 1959 was going the year
inflation. He hoped that inflation would not get out of hand to such an extent that a very serious price would have to be paid for its correction, that instead it could be contained at least within reasonable limits. Mr. Szymczak again referred to his concern about the possibility of Congressional actions in the light of the unemploy ment problem and the extent to which the Government in such circum stances would permit the Federal Reserve System to follow the monetary policy it should be pursuing from the standpoint of the inflationary problem and long-range needs of the economy. Chairman Martin inquired whether there was any disagreement of the meeting, and there were no indications to with his summary asked Mr. Rouse whether he had any comments, such effect. He then and the latter replied in the negative. Thereupon, upon motion duly made seconded, the Committee voted and unanimously to direct the Federal Re serve Bank of New York until otherwise directed by the Committee: purchases, sales, or exchanges (1) To make such securities, and allow replacement of maturing (including replacement) for the to run off without ing maturities market or, in the Account in the open System Open Market exchange with the by direct case of maturing securities, the light of current be necessary in Treasury, as may and the general economic conditions and prospective a view (a) to of the country, with credit situation to the needs in the market supply of funds relating the
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 aggregate amount of securi ties held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certifi cates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness may be necessary from time to time for the temporary as of the Treasury; provided that the total accommodation such certificates held at any one time by the amount of Reserve Banks shall not exceed in the aggregate Federal $500 million. the Committee would be that the next meeting of It was agreed January 27, 1959, at 10:00 a.m. held on Tuesday, Thereupon the meeting adjourned. Assistant Secretary
Also: Record of Policy Actions