February 10, 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, February 10, 1959, at 10:00 a.m. PRESENT Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Fulton Mr. Irons Mr. Leach Mr. Mangels Mr. Robertson Mr. Shepardson Mr. Szymczak Messrs. Allen, Johns, and Deming, Alternate Members of the Federal Open Market Committee Messrs. Bopp and Leedy, Presidents of the Federal Reserve Banks of Philadelphia 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 Messrs. Daane, Marget, Walker, Wheeler, and Young, Associate Economists Assistant Secretary, Board of Mr. Kenyon, Governors Special Assistant to the Board Mr. Molony, of Governors Division of Koch, Associate Adviser, Mr. Board of Governors Research and Statistics, Government Finance Mr. Keir, Acting Chief, Section, Division of Research and Statistics, Board of Governors President, Federal Latham, First Vice Mr. Reserve Bank of Boston
Messrs. Roosa, Baughman, Jones, and Tow, Vice Presidents of the Federal Reserve Banks of New York, Chicago, St. Louis, and Kansas City, respectively Messrs. Larkin and Balles, Assistant Vice Presidents of the Federal Reserve Banks of New York and Cleveland, respectively 1/ 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 Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on January 27, 1959, were approved. 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 January 27 through February 4, 1959, and a supplemental report covering the period February 5 through February 9, 1959. Copies of both reports been placed in the files of the Federal Open Market Committee. have stated that developments since the last meeting Mr. Larkin by the Treasury refunding, in of the Committee had been dominated and necessitated billion) was substantial attrition ($2.1 which the tomorrow of $1.5 in the form of an issue emergency cash financing in September. In yesterday's anticipation bills due billion of tax the presentation of reports the meeting during 1/ Mr. Balles joined on district conditions.
Treasury bill auction the average rates on the three-month and six month bills were 2.81 per cent and 3.33 per cent, respectively, and the market was anticipating an average rate somewhere between 3-3/8 per cent and 3-1/2 per cent in the auction of tax anticipation bills tomorrow. Mr. Larkin also said that the Account Management had about completed the preparation of the annual report to the Committee and hoped to put it in the mail this week. The report, which would review the year 1958 in detail and spell out some of the problems encountered by the Account Management during the year, would not attempt to offer solutions for those problems. However, it would raise questions which, it was hoped, might stimulate thought and discussion and lead to solutions. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period January 27 through February ratified, and 9, 1959, were approved, confirmed. review at this meeting was The staff economic and financial presentation, participants including in the form of a visual-auditory of the text of the presenta and Marget. A copy Messrs. Thomas, Young, the Committee. In addition, placed in the file of tion has been members and meeting to the Committee sent following the copies were on the Committee. Presidents not currently and to the alternate members
A summary of portions of the presentation follows: A further rise of 2 points in industrial production to an index of l44 in January is now tentatively estimated, with increases widespread but small. Prices for some strategic industrial materials and products also have risen further. Unemployment rose in January about seasonally to an unadjusted total of 4.7 million, and the seasonally adjusted rate of unemployment at 6.0 per cent of the labor force was little changed from December. The level of unemployment does not reflect as much strength in demand for labor now as at the corresponding date of the 1953-54 cycle. In some major areas, unemployment rates are double the national average and are raising troublesome questions about structural, as well as cyclical, unemployment. Limited expansion in labor demand also is reflected in the January employment figures. There were further moderate gains in trade, Government, and similar activities but little change in manufacturing employ ment. Total nonfarm employment, seasonally adjusted, although firm, has shown only a small increase since last September and is still considerably below prerecession levels. Average industrial prices have increased only a little during the marked recovery in activity from last spring's low, but prices of some basic industrial materials have risen con siderably as business buying has surged upward, in part reflecting efforts to get ahead of possible work stoppages. Consumer prices, as well as wholesale prices, have shown little net change from their highs last spring. Expanding food supplies made an important contribution to recent stability in average consumer prices and this influence may continue for a time. Prices of services have continued upward. Wage rates have continued their persistent rise. With hours at overtime pay rates, the recent rise in earnings more has been more rapid than earlier last year. Output per man rapidly, however, and labor costs per hour also has increased unit of output in manufacturing have declined--a not unusual development at this stage of the cycle. with rapid gains in output and sales combined Expanding in sharply higher corporate have been reflected productivity are estimated to fourth quarter, profits profits. By the just prior to the onset to the levels prevailing have returned is likely in the first and some further rise of recession, half of this year. nearly all major categories been marked in Expansion has quarter is now estimated GNP in the present of demand. Total
at a $465 billion annual rate, or $39 billion above the recession low a year ago. Consumer spending, including greatly expanded outlays for residential construction, accounts for half of the increase. The remaining half includes a sharp turn-around in inventory buying and significant expansion in outlays by Federal and by State and local governments. Business outlays for fixed capital are down a little. Reflecting increased availability of mortgage funds, strong consumer financial positions, and widespread confidence, outlays for new housing have risen sharply. Private housing starts rose from an annual rate of con siderably less than 1 million units at the low in February 1958 to over 1.4 million in December. Public housing starts in 1958 were the largest since 1951. Whether consumer demands and availability of mortgage funds will support a continuation of the recent very high level of private starts is uncertain. A quicker test of general market strength probably will come from autos, Sales of new domestic autos rose in December to a seasonally adjusted annual rate of around of about 4 million in million, compared with a rate of 1958. January new car sales the first three quarters the December rate, but used car sales were a little below of the strength in new rose further. A clearer indication come in the next couple of auto markets this year should a sharp rise in auto instal months. Meanwhile, reflecting credit increased $300 million ment credit, total instalment monthly increase in two years. in December, the largest International Developments diminished in recent months, the While gold sales have further large net transfers balance of payments has produced world. In the fourth quarter, to the rest of the of dollars and there was little change in imports rose considerably, deficit will Whether the balance-of-payments total exports. this year will depend partly large gold sales again involve and dollars and are gainers of gold on which countries reserves as opposed how much goes into official partly on to private dollar holdings. advanced to a industrial production In Europe, total a year of little quarter of 1958 after high in the fourth new except France in all countries was reported change. Expansion reached a new industrial output In Germany, and Belgium. December. In Britain, was unchanged in in November and high the end to have marked output appears upturn in the November during which total consolidation period of a three-year
industrial output moved within narrow limits, rising 3 per cent early in 1957 and declining 3 per cent in the 1957-58 recession. Plant and equipment outlays in Britain continued rising into early 1958 and then declined moderately. Sub stantial additions to British plant capacity in recent years have provided a basis for renewed growth of total output in In Japan, a vigorous upswing in activity began last spring. In Canada, recovery has been slow and irregular. Monetary and fiscal policy in Britain and many other industrial countries is being directed now toward expansion. With greatly strengthened international reserve positions, these countries now have interest rates considerably lower than in the autumn of 1957. Adjustment of the U. S. balance of payments is likely to be slow. Provided U. S. exporters--and the Government itself, in the field of agricultural products--pay attention to competi tive conditions, expansion of activity abroad will favor renewed growth of our exports. Shifts in interest rates may help shift international demand for credit and loans to potential lenders in Europe. Domestic Financial Developments The sharp rebound in corporate internal funds has been a major factor affecting money and credit markets in the United States in recent months. Profits recovered rapidly after mid 1958 and depreciation allowances also increased, although less rapidly last year than earlier. Business demands for both short- and long-term financing moderated in the latter part of the year. While there was some firming of business loan demands from banks in the fall, it reflected in large part seasonal influences and was followed by moderate repayments in January. Corporate long-term financing, which had been especially large early in 1958, declined late in the year as did bond flotations by State and local governments. Rapid expansion of mortgage debt, however, about offset the contraction in other private demands for long-term funds. Thus far in 1959, corporate security issues have continued in reduced volume, by State and local governments have increased but bond issues sharply. The rise in municipal financing reflects in part the large backlog of authorized but unissued bonds. Net borrowing by the Federal Government was large in net retirement of debt in January, in contrast with usual in Federal debt over the that month, and the net increase larger than in the same of 1959 will be somewhat first half
period last year. Moreover, even with a balanced budget for fiscal 1960 as a whole, the Treasury will need to raise almost as much new money in the July-December period of 1959 as it raised a year earlier. With private, as well as governmental, demands for long-term credit sustained at high levels and investors anticipating increased demands for funds as recovery con tinues, long-term interest rates have turned up recently following a moderate decline from the peaks reached last fall. Yields on outstanding high-grade corporate bonds have risen to postwar peaks and are seven-eights of a percentage point above the yields on common stock. Stock prices have declined recently in less active trading and are little changed on balance from the year-end. The level of stock prices, however, is still currently almost two-fifths higher than a year ago, and stock market credit has expanded by one-fourth. As the economy pushes into new high ground in 1959 we will become increasingly concerned with problems of sustain able growth. A key question for Federal Reserve policy now is what rate of monetary growth would contribute most to sustainable economic expansion without inflation. The rate of monetary expansion last year was exceptionally rapid from February through July, and it then slackened. For the year as a whole, it amounted to 6-1/2 per cent for all deposits and about 3-1/2 per cent for the active money supply. Currently, the active money supply is about 2-1/2 per cent above its prerecession peak in the third quarter of 1957--about the same rate of increase as for GNP in real terms. It thus appears that economic expansion may have about caught up with the monetary basis that had been previously established. Forces outside the banking area, however, are likely to determine the course of events. This situation reflects the fact that the bulk of the lending to finance consumption comes from sources other than investment and savings appear to be con bank credit and that financial While the creation of money through tinuing at a high level. the expansion of bank credit can at times, by stimulating bring about economic expansion, it spending and investment, in "real" terms or substitute for saving should not be a for extended periods. of business borrowing, prospective large With resumption demands for mortgage and consumer loans, and the financing needs of governments, total demands on credit and capital as economic activity expands. markets are likely to increase
While expansion is not likely to be hampered by lack of funds, saving will need to be encouraged to cover the bulk of the financing demands if pressures on bank credit creation are to be kept within limits consistent with sustainable growth. In such a situation economic pressures are likely to maintain a relatively high level of interest rates. Over-all demand pressure for funds in 1959 on the avail able supply of loanable funds will be heavily influenced by Treasury borrowing. Since the turn of the year, developments in money and security markets have reflected largely the pres sures and anticipations rising from Treasury debt operations in process and in prospect. Treasury bill rates rose early in January in contrast with their usual decline, and recently the 90-day bills have declined somewhat, reflecting in part shifts of funds from maturing obligations. Yields on longer bills and other short-term issues are considerably above those for short bills. Bond yields advanced to new highs. The $2.1 billion cash attrition on the recent large Treas ury refunding has necessitated an immediate new cash financing of $1.5 billion of September tax bills which are to be sold on February 11. Payment is called for on February 16 in order to attract funds that will be made available from cash redemptions of the recent refunding before they are invested elsewhere. After this financing operation, the Treasury does not expect to be in the market for funds until early April. Total loans and investments at city banks declined during the first five weeks of 1959, reflecting substantial, largely seasonal, reduction in bank loans. As a result of Treasury financing, bank holdings of Government securities increased in January, in contrast to the usual decline. As a consequence, Government deposits at banks did not decline as they usually do in January. The private money supply appears to have declined about the customary seasonal amount. This record shows no evidence of a particularly strong private demand for bank credit; rather, it is a record of maintenance of total credit and the money supply on about an "even keel." to policy matters, economic and financial condi Turning tions generally still suggest that any bank credit and monetary ahead should be held to a moderate rate. expansion in the weeks actions may need to be more delicately attuned to Yet, policy in order to avoid placing undue restraint the course of events for proper growth and at the supplying of monetary needs on the same time not to stimulate unsustainable uses of credit. of restraint on expansion can Perhaps the appropriate degree it necessary for reserve demands in be exerted by making
excess of normal seasonal and some merely temporary needs to be covered by member bank borrowing. Presumably an early increase in discount rates will be in order. During February required reserves should decline con siderably in consequence of the scheduled drawing down of Treasury tax and loan accounts and a further seasonal decline in private demand deposits. The reserves due to be released should be absorbed by open market sales of perhaps as much as $300 million during the next two weeks, if restraint is to be maintained on credit expansion. If deposits decline as much as projected, restraint should not be any greater than that which has recently prevailed. If they should show a greater decline, then member bank borrowing should also be permitted to decrease, but in view of the current trend of economic forces such a development is unlikely. Mr. Hayes made the following statement of his views on the business outlook and credit policy: The business recovery is continuing at a moderate pace, with no upsurge in plant and equipment spending, no general accumulation of inventories (steel being a special situation), and no increase in unfilled orders of manufacturers. Recent figures on automobile output and sales, while better than last year, show no sign of a vigorous surge. Unemployment is still significantly high, and a good deal of public attention is being given of appropriate long-run rates of growth. to the problem The price picture is essentially unchanged since the and exhibits a considerable degree of last meeting In the Second District the business outlook stability. is virtually as favorable as for the nation as a whole, one of the most buoyant factors. with construction market over the past two The behavior of the stock more cautious market appraisal weeks suggests a somewhat encouraging to note some increase of the outlook. It is of new equity securities, while the backlog in issuance the present, well below bond issues is, for of corporate the level of a year ago. resulting from these However, any satisfaction with concern over the developments must be tempered Besides the current for Treasury financing. prospect Treasury will probably have special bill offering, the
to come to the market for new money not only in April and May but also in most months of the second half of the calendar year, when the total to be raised will exceed that of any half-year period in recent years. As for bank credit developments, there does not seem to be anything to worry about yet in the expansion of business loans. The decline in January at weekly reporting member banks was sharper than in any of the last four years except 1958. Recent changes in bank investments have been less reassuring, reflecting as they do the underwriting of the Treasury's January cash financing. It seems to me clear that the business situation calls for no change in the present degree of credit restraint. Yet the large and almost continuous schedule of Treasury borrowing shows every likelihood of bringing the capital markets in creasingly under pressure, thus tightening credit conditions even without any aggressive System effort at restraint. I as troubled by the prospect that the upward trend of interest rates caused by this Treasury borrowing--even without further restrictive action by the System--may be sharper than will be appropriate for the general state of business activity. If we were to attempt to compensate fully for the inadequacies of fiscal policy with a policy of intensified credit restraint, it would be all the more inappropriate. I think we must guard against presenting too restrictive a "posture" to fit the economic facts. All of this points to the wisdom of using open market operations to preserve a steady but not increasing degree of restraint as measured by the feel of the market. I see no need to alter the directive. The discount rate presents a more difficult question. I am aware that several of the Banks have spoken for some time of an increase being "overdue", and most of us would probably have moved before this if there had been no Treasury financing problem. Although I would regret further action on our part I suspect we will have to raise to produce greater restraint, it into closer alignment with the the rate in order to get in effect and likely to persist as degree of pressure now in the weeks and months operations continue Treasury borrowing the Board and most of the Banks still ahead. Assuming that few weeks (after completion increase within the next favor an be inclined to financing), I would therefore of the Treasury Bank. Two factors in increase at the New York recommend an are the desirability of favor of such a recommendation the fact that as possible and as uniform a front presenting in prospect this year this will be one of the few periods standpoint of an to act from the we will be "free" when Treasury's operations. policy for the even-keel
It is essential, I think, that the increase be regarded as a technical adjustment to reflect an increase which has already occurred in market rates, and not as a signal that we intend to move aggressively toward further restraint. In any case a discount rate rise may invite blame for an upward trend of interest rates which is likely to come for reasons quite apart from monetary policy. I believe we should be very reluctant to "lead" the rise. The decline in Treasury bill rates of the last two weeks would, if sustained, have made it difficult to explain a discount rate rise to 3 per cent as a technical adjustment. In the last two days, however, the unexpected return of the Treasury to the market for $1-1/2 billion of new money and the re sulting rise in bill rates have made it a little easier to justify a 3 per cent rate, although the case is as yet by no means clear. It may be clearer by the time we are actually prepared to move. Of course, one factor arguing for an increase this time of 1/2 per cent rather than 1/4 per cent is the prospective scarcity of opportunities when we will have some freedom of action. Our directors discussed this issue in general terms at last week. They showed considerable reluctance their meeting to increase the rate in the face of the continued high level of unemployment and the uncertain pace of the recovery, the that the System might invite criticism for possibility the interest rate rise, and the likelihood that accelerating criticism would be accentuated if, as seems possible, this raised almost immediately after a the prime rate were to be discount rate increase. wisdom of an increase, there is If we do agree on the decide upon. To my mind, the still the matter of timing to completion of the current for a decent interval after need the move should not be made financing suggests that Treasury or the first week of the last week of February earlier than one advantage in that period would have March. The latter chance to canvass the situation it would give us another before making the move. together stated that in the last two weeks he possibly had Mr. Johns the direction of policy change in his zeal for a lost a little of rather than on or strategic reasons perhaps for tactical tightening, St. Louis Bank regarding estimates by the grounds. Recent economic
growth of the money supply indicated that during the four-month period ended January 31, 1959, the active money supply and the total money supply might have increased by about 4.8 per cent and 4.5 per cent, respectively, whereas statistics for the four-month period which ended January 31, 1955, suggested increases of and 4.2 per cent, respectively. As he read the policy record of the Open Market Committee for the earlier period, there appeared to have been two months of active ease, one month of ease, and a fourth month when policy was more or less neutral, which tended to cast some doubt upon a conclusion that recent open market policy had been very restrictive. More important, it seemed to him, was the thought that the Committee ought to begin now--in fact should have begun sooner--to pay more attention to what was happening to the money supply and less to what was happening day-by-day and week-by-week in terms of a reserve target of some particular figure. Mr. Johns recalled that at the Committee meeting on August 19, 1958, Chairman Martin referred to a suggestion by Mr. of the policy directive be in terms of Young that the wording of the money supply, which would tempering the rate of expansion have the advantage of being directed specifically to what the Open meeting Mr. Balderston also does. At the same Market Committee like to see the stating that he would a similar concept, suggested money supply to the of adjusting the phrased along lines directive
constructive needs of the economy, which he felt was especially important at that time. By and large, however, those suggestions fell on deaf ears, including his own. The suggestion of Mr. Young drew from one person present a comment that it seemed to contemplate some continued expansion of the money supply, which in the view of that person would be undesirable. Mr. Johns said that he was not sure exactly how this thought might be carried through to an ultimate conclusion as far as policy directives and open market operations were concerned. However, it seemed to him that the idea was worthy of serious consideration and study with a view to concentrating the attention of the Committee upon its ultimate objective and diverting attention from other targets and methods of operation which in his opinion were not very obviously and closely related to the Committee's objectives. In fact, they sometimes tended to operate in perverse fashion. The argument, of course, might be made that this would not give the any specific instruction under which to operate. Assuming, Desk however, that the Committee knew what concept of the money supply and recognizing that there would be some lag in it wanted to use, he envisaged that procedure of the kind he had mentioned, statistics best job possible in involve doing the such a directive might under if necessary. In any event, period and then adjusting the transition as a guide to open market opera he would feel that the money supply of sustainable economic than the concept tions was no more general
growth and stability now stated in the Committee's directive. Mr. Bopp said that, except for an upsurge in steel pro duction, there had been no notable business and financial develop ments in the Third District in the past two weeks. Department store sales continued to show gains over a year ago, automobile sales were somewhat below last year, employment in December was steady, and loans and deposits of district reporting banks had declined. Borrowing from the Reserve Bank in the past two state ment weeks was at a daily average of $15 million, reflecting primarily borrowing by country banks. The large Philadelphia banks obtaining practically all of their funds in the Federal had been averaging somewhat more than $20 funds market, with purchases a total of $63 million from the million daily, but they borrowed the first time all six reserve Reserve Bank last Friday, Federal June 1957. All such at one time since city banks had borrowed were repaid yesterday. borrowings economists from that a meeting of Mr. Bopp then reported from varied week, with representation area last the Philadelphia somewhat restrained moderate but revealed types of businesses, types of most of the 1959. For prospects for as to optimism to be were expected and sales production represented, business of the economists year. Most above last 10 per cent from 5 to good year. to be a really expected 1960
Mr. Bopp also commented on a telephone survey of consumer intentions by one of the Reserve Bank's economists in which a random sample of 400 families in the Philadelphia metropolitan area responded to the question: "If you received $2,000 that you had not expected, how would you use it?" Even though the responses reflected "off the cuff" rather than considered judgment, the re sults were interesting in that over one-half of the respondents stated they would save the money or use it to pay bills, another 21 per cent would divide the amount between spending and saving, and only 16 per cent would spend the entire amount. As to the form of saving, about 70 per cent of those who would save said they would put the money in a commercial bank, savings bank, or savings and loan association, about 20 per cent would buy stocks, per cent would buy bonds or build up their cash reserves. and 10 about 25 per cent would make home repairs, Of those who would spend, 10 per cent would make a down 18 per cent would buy furniture, would take a vacation, 6.8 per payment on a new home, 8 per cent per cent would buy major automobile, and only 3.6 cent would buy an appliances. saw no need for a change in the policy Mr. Bopp said that he approximately the He would favor continuing directive at this time. he was open to sug on the market, and degree of pressure present regard to with rate, particularly the discount gestion regarding the timing of any change.
Mr. Fulton reported that steel mills in the Fourth District were receiving heavy orders. Some users of steel who anticipated a strike in the industry this summer had come in earlier with their orders, and those who delayed making a decision were now trying to get orders placed on the books. Although the mills were operating at high rates, products such as galvanized sheets and electro-plated tinned strip were in tight supply. It might be said that at the moment the industry was living in a fool's paradise. It was endeavoring to get customers to agree that, in the event of a strike of short dura tion, they would take only 20 per cent of their steel needs from and would buy at 80 per cent of the normal rate their inventories until excess inventories were worked off in order to assure the mills some continued operation. orders for machine tools had increased After stating that that in a recent survey the Reserve rather sharply, Mr. Fulton said asked a number of industrial firms Bank's Research Department their capital investment this they were going to increase whether with the emphasis half responded affirmatively, year and more than one steel mill plant. In this connection, rather than on equipment increased from about its employees had that the number of reported to about 60,000 at present, at the low point of the recession 40,000 that it did not about 70,000, but peak figure of compared with a
anticipate going back to the peak figure. Other industries also advised that modernization of equipment and capital investment was permitting a smaller group of employees to produce more goods than a larger number of employees produced some time ago. This seemed to suggest a rather chronic condition of unemployment, for employees of this type could not easily transfer into service industries. Mr. Fulton said that department store sales in the Fourth District were down somewhat since December and were now running about 3 per cent under a year ago, but automobile sales had in creased. People in the automobile industry appeared to have dropped their estimate of 1959 sales potential from 6 million to 5.8 million cars, exclusive of imports of foreign cars. As to policy, Mr. Fulton said he felt that he would like to kept on the availability of funds, although he see a firmer hand that float resulting from weather conditions had made appreciated for the Desk to engage in day-to-day operations such it difficult degree of pressure. The fact that as to maintain the contemplated after slackening off was indication of a the bill rate had moved up desirable. He would be greater pressure, which seemed little the discount rate as early of 1/2 per cent in agreeable to a change and he believed that some time early in March probably as possible, He would not appropriate opportunity. be about the first would directive at this time. favor a change in the
Mr. Shepardson said that the increasing productivity of industry was certainly all to the good as far as long-run develop ments were concerned. The unemployment situation apparently would be a problem for some time due to the difficulty in bringing about a reallocation of labor in any short period. The prospect of a high level of consumer income should encourage expansion of new outlets for increased consumer spending, and there might be a need to provide for reasonable continued growth. On the other hand, study of the picture as to reserves and money market rates seemed to indicate that there had not been the degree of firmness con templated at the last two meetings of the Committee. While the picture was confused by differences between the reserve projections of the New York Bank and the Board's staff, he was inclined to agree with Mr. Fulton that the Desk had not quite maintained the degree of pressure sought by the Committee. The projections seemed at some point in the period just ahead to indicate a need for action reserves that would appear in the ab to absorb some of the excess sence of such action. he thought Mr. Johns had touched Mr. Shepardson said that and should not be lost sight of on a point that was of importance not get trapped in a situation The Committee should this spring. up a target of free last year, when by setting such as prevailed added at a faster rate to the money supply reserves it continually Therefore, he would hope was realized at the time. than perhaps
that a little more pressure might be exerted on the market than seemed to have been accomplished recently. Such a degree of restraint probably would have a desirable reaction on the bill rate and result in its returning to the levels of the earlier part of last month. In line with such a change, it would seem entirely appropriate, after a suitable lapse of time following the present Treasury financing, to look forward to an increase of 1/2 per cent in the discount rate. Mr. Robertson suggested that this was a most difficult period from the standpoint of knowing what to do, because the economy seemed to be going down a road on which one could not see the turns ahead. While he was inclined to think that the next turn was going to be upward and that it would be desirable to slow the speed a little in more restrictive, he could not bring the meantime by being slightly policy should be a great deal more himself to feel that System than at present. Mr. Johns, he said, deserved credit restrictive for bringing to the Committee's attention the possibility of changing the Committee had arrived at for he was not at all sure its targets, targets or issuing directives. intelligent way of providing the most moment exactly how the money supply While he could not see at this free reserves, the matter as a target instead of might be used deserved careful study. noted that the System rate, Mr. Robertson As to the discount to act. It could weeks in which only about six would have probably
not act this week and it should not act next week. This left a period of possibly five weeks, after which the Committee in a sense might just as well take a vacation through April and most of May. Consequently, it seemed important to act in the most intelligent way when the opportunity was available, especially since it seemed unlikely that there would be more than one action on the discount rate. In all the circumstances, he hoped that action might be deferred until it was possible to see as clearly as possible what amount of increase would be appropriate. At this moment, his inclination would be to suggest an increase of 1/2 per cent, but he was not sure this was right and a better judgment might be possible by the first week of March. Certainly, discount rate action should be taken to put the System in a proper posture to meet whatever was ahead, which in his opinion would be a movement upward, perhaps quite sharply. Mr. Leach stated that data on the Fifth District economy the last Committee meeting were a which had become available since Nonagricultural employment, seasonally little disappointing. December, and seasonally adjusted adjusted, declined slightly during in most manufacturing industries. were down that month man-hours contract awards dropped in December, continuing a Construction coal production in last August, and bituminous decline that began was down from recent levels, due the first three weeks of January
principally to the fall-off in foreign demand. Although business loans of weekly reporting member banks rose during the past two weeks, there was a net decline of 5 per cent for the month of January-more than in the corresponding period of any of the past four years. Notwithstanding these adverse indications, however, he believed that business activity in the district was still gradually expanding. One of the more significant developments in the district, Mr. Leach said, was the increase in wage rates now spreading through the textile industry. The general pattern seemed to be an increase in the minimum wage to $1.25 an hour and a raise of around ten cents an hour for workers already above the new minimum. The immediate wage increase, coupled with lower support prices for effect of this because of price in trading activity cotton, was a decrease uncertainty. view that prevailing economic condi Mr. Leach expressed the call for an immediate marked change in credit policy. tions did not rates had advanced again in the Similarly, although Treasury bill his opinion, require a hurried or two, this did not, in last day increase in the discount rate. In the absence of a pressing need to continue for a it seemed essential for a changed posture, of the date of completion February 16--the time after reasonable now being maintained. even-keel policy Treasury financing--the current
This would rean attempting to continue until the next meeting of the Committee the same degree of pressure that the Committee had been aiming at, with the discount rate unchanged. He would like to see any change in the rate made at a time when the Treasury bill rate was such that the change would be interpreted as an alignment rather than a signal of greatly increased intensity. The main con the timing of a rate change was the Treasury sideration regarding to play unfair with those who along with a desire not financing, had just purchased new Treasury securities in the refunding, for that would make the difficult task of the Treasury even more difficult. For those reasons, he would prefer to postpone a change in the discount rate until after the March 3 meeting. After commenting that he had no developments of significance District, Mr. Leedy expressed the view that to report from the Tenth with which the System had to deal at the the most important thing psychology pointed up by the moment was the rampant inflationary indicated to him that of the Treasury, which recent experience had been done thus far. The more needed to be done than something as stability, but if wanted growth as well System, of course, between growth and arresting there had to be a choice temporarily course. The fact would favor the latter psychology he inflationary a firm intent to evidence of not given greater the System had that opinion, made in Mr. Leedy's problem might have, grapple with the In the short interval to what had occurred. some contribution
available, he felt that the System should show an intent to play its role in undertaking to dissipate the feeling that inflation was inevitable. To him that meant that as soon as the Treasury financing was out of the way the System ought to apply some noticeable additional pressure on bank reserves and also increase the discount rate. While the rate need not be adjusted before the third week in February or even the first week in March, the idea of regarding the increase as merely a technical adjustment was rather distressing to Mr. Leedy; it would be preferable if such a change were regarded as a move further in the direction of combating what he considered the System's principal problem. What could be done in this area was quite limited, but to the extent possible the System should be giving notice that it was not going to be a party to continuing inflation in this country. stated that evidence from the Seventh District Mr. Allen further increases in the meeting two weeks ago indicated since sales of Sears Roebuck, far and away business activity. January were up about seller of general merchandise, the nation's largest results a year ago and although the from January 1958, 15 per cent was very strong on its poor the current performance were relatively in the week ended January 31 District department store sales own. about the slow and deepite concern cent over last year, were 6 per markets were that labor ample evidence there was rise in employment by the Bureau of Employment A recent report gradually tightening.
Security indicated that three district cities had been upgraded and since July 1958, the worst month, ten cities had been upgraded. Three Chicago area steel producers had recently announced plans to increase capacity. Such announcements, coming from an industry said to be plagued with excess capacity, could herald a fairly general rise in capital spending. Mr. Allen said that commercial and industrial loans of district reporting banks in the two weeks ended January 28 were off only $16 million, compared with declines of $121 million in 1958 and $42 million in 1957, and Chicago banks reported no net change in ended February 4. These figures indicated business loans in the week loan demand in the district than in the nation generally, a stronger by the fact that borrowing by producers of doubtless accounted for important in that area. Reserve and metal products was so metals considerably over the district banks had eased pressures on large Reserve Bank's discount borrowing at the weeks, and past three that prevailed from than half the level had dropped to less window December to mid-January. early Allen said that situation, Mr. to the automobile Turning the rate of January were at days of the last ten selling sales in selling days of 16,951 in the eight day, compared with 16,820 per for a pattern calls the usual period. While January 11-20 the time since was the first month and this through the steady rise been seen, the rate had declining intramonthly 1958 that a August
decline was slight and some industry analysts blamed inclement weather. Furthermore, total January sales exceeded those of a year ago by 12.3 per cent. As to policy, Mr. Allen said he would like to see the prevailing degree of restraint continued for the next three weeks, with any doubts resolved on the side of further restraint. While the question of a change in the discount rate in the near future perhaps had not been discussed as fully with the Chicago directors as with the boards of directors of some of the other Banks, he felt that the Chicago directors would be agreeable to moving the rate up one-half per cent at any time provided other Banks also moved. It was his present feeling that he would recommend a discount rate at either the February 19 or March 5 directors' meeting, increase March 5 might be the better date. and apparently Mr. Deming said that Ninth District conditions were not appreciably different from those reported previously. Like Mr. he did not quite understand the major differences Shepardson, of the New York Bank and the Board's between the reserve projections on the tone of the market it ap staff. However, from the report just about what he of pressure had been peared that the degree discount rate ought to be While he believed that the would like. at the last Committee about timing he had been uncertain increased, On balance, he would less certain now. and he was even meeting
prefer to wait until after the next Committee meeting before moving. At this point, he would be inclined to an increase of one-half per cent, and he leaned toward the position that the move should be regarded more as a technical adjustment than an outright restrictive action. Mr. Mangels reported that Twelfth District business condi tions continued on the up side. Final December employment figures were better than the estimate he reported at the last meeting. Los Angeles had been reclassified from a substantial surplus labor area to one of slight surplus. Boeing Aircraft, the largest employer in the Northwest, was now operating with some 73,700 employees, an all-time peak, and that company had military orders alone somewhat in excess of $2 billion in hand or anticipated for 1959. Construction in December was about 6 per cent above November, the increase re flecting mostly residential construction, and about 66 per cent than a year earlier. Mortgage funds were still available, higher bank that was quite active in the although one large San Francisco that it was rapidly approaching the mortgage field had indicated real estate credit. Interest where it would have to restrict point 6 per cent, compared with mortgages were now rates on conventional was at the in January Steel output last October. 5.85 per cent lumber industry continued mid-1957, while the highest levels since some price increases. orders along with improvement in to show
Mr. Mangels said that reporting banks showed a decline in both demand and time deposits in the two weeks ended January 28, while loans were down in all categories except real estate and consumer credit loans. Holdings of United States Government securi ties increased during the same period and purchases and sales of Federal funds ran about even. Borrowing at the Reserve Bank was rather scattered and intermittent. Mr. Mangels said that the System should not increase restraint much in the period immediately ahead and he would continue to use as an objective what the Committee had had in mind recently. One Twelfth District bank had expressed informally the opinion that some thing should be done to restore confidence in the Government securities market such as permitting free reserves in the range of zero to $100 million. He did not endorse such a view, however, and felt that the negative side at somewhat below the free reserves should stay on $100 million level. rate, Mr. Mangels felt it would be desirable As to the discount a change. He saw no pressing need to wait until March before making effect since prices had at this time for psychological for change high, business was unemployment continued been reasonably stable, continued to be excess pro no particular boom, there exhibiting modest. He was quite inventory accumulation capacity, and ductive to restrain member raise the rate necessary to consider it did not $567 million averaged only in January for borrowing bank borrowing,
and in the week ended February 4 only $390 million. The market was still in a period of digesting Treasury issues and he felt that such issues should be permitted to get into firmer hands before action was taken on the discount rate. Mr. Mangels said that he considered the policy directive satisfactory. Mr. Irons said that Eleventh District conditions continued to show modest strengthening, with some segments of broad economic activity showing clear improvement. On the less favorable side, weather had been bad for the past month, which gave a slightly unfavorable tinge to agricultural developments. The crude oil industry was not quite as optimistic as it had been, with imports rather substantial and some decline in prices, which appeared to have been reflected in some fall-off in drilling. Employment and unemployment figures had about tracked the usual seasonal movement. about the employment situation nationally He was not too disturbed or in the Eleventh District. that the Eleventh District was in On banking, Mr. Irons said movement. Demand for loans continued general experiencing a seasonal banks rather fully loaned in with some larger reserve city strong, terms of loan-deposit ratios. January is always a rather into consideration that Taking involved in seasonal along with the complications uncertain month, he felt that the general weather, and some strikes, factors, the
situation was favorable and that the district was continuing to show gradual improvement and strength. As to policy, Mr. Irons said that he too had been confused by the differences between the reserve projections of the Board's staff and the New York Bank. If, as the Board's staff suggested, there would be free reserves ranging up to $293 million during the next three weeks, some selling by the Open Market Account would be indicated. On the other hand, if the latest New York projections showing net borrowed reserves up to $236 million were correct, some funds possibly should be put into the market to lessen the pressure. At this point, Chairman Martin called upon Mr. Thomas for comment regarding the reserve projections. that for the current statement week it now Mr. Thomas said be a lower level of net borrowed reserves appeared that there would primarily to unpredictable variations than had been expected, due and the Treasury balance. Float had held higher and in float anticipated. That was one balances had stayed lower than Treasury not do anything about in of error that one could of those margins any particular week. for the statement that even Shepardson observed After Mr. with the considerable variation, tomorrow there was week ending $24 million reserves averaging net borrowed staff estimating Board's Mr. Thomas said of $102 million, estimating an average and New York
that the revised New York figures would be available within a few minutes and probably would be lower than $102 million in view of what had happened yesterday. However, the differences between the projec tions for the forthcoming weeks were fundamental and of substance. As he had said, float was remaining at a higher level recently than one might have expected on the basis of the normal pattern, and the Board's staff had made the assumption that it would stay at a higher level. However, the longer-run and more fundamental difference was in the estimate of required reserves. The Board's staff was assuming that the Treasury balance, now very large, would decline and that at the same time there would be the normal seasonal decline in private deposits. On the other hand, New York apparently had assumed that the decline in Treasury deposits would be more or less offset by an increase in other deposits. That would be contrary to normal seasonal variations and would indicate a seasonally adjusted expan sion in the money supply. then turned to Mr. Larkin, who expressed Chairman Martin said. He added that this with what Mr. Thomas had general agreement encountered last year and that of the problem areas the Desk was one the annual report to the Com on it would be included in comments reserves or net borrowed the problem of free as well as on mittee to by Mr. Johns earlier in the meeting. reserves as targets, alluded considered the execution of policy Mr. Irons then stated that he with appropriate to have been satisfactory, the past two weeks during
restraint on the availability of reserves throughout that period. He hoped that in the next three weeks it would be possible to maintain about the same degree of restrictiveness, although any deviations should be on the side of further restraint. He would not deliberately try to achieve further restraint but would resolve any errors on that side. That would not be out of line with economic conditions as they were developing. The main thing was to avoid errors on the side of ease in the present situation. As to the discount rate, Mr. Irons said he was not sure what to recommend, but he felt that what the System was doing was not exactly right. The Committee was constantly talking about maintain ing an even-keel policy, but the Treasury did not have huge success with its recent financing, although in the absence of an even-keel policy things might have been worse. He suggested that deferring a discount rate change would not "fool" anyone since informed people after the Treasury was out of the market were even now assuming that and whether the change was made on the rate would be increased, 19, or March 3 would not make a fundamental February 12, February that the term "technical change" difference. He then suggested for a discount rate change was something implied that the need the Committee had been influencing the market had created, whereas was all part of a right along. This availability of reserves the doing was to make the System had been package, for what credit the market for to prepare market operations use of open traditional
a subsequent rate change. Mr. Irons said he would not like to give the impression that a discount rate change really did not mean much, or that it was only a technical adjustment for which the System should not take responsibility. Furthermore, he did not like to hear it said in February that the System could do nothing in April or May, for that seemed to represent almost an abdication of policy determination. So far as he was concerned, it would be as well to change the discount rate on February 12 instead of waiting until March when another set of circumstances would appear. Whether the Chairman and the Secretary of the Treasury ought to work out some different approach, he did not know, but he did not think the necessary job was getting done, as results of the latest Treasury offering. He was in reflected by the with r. Leedy that sooner or later the System must take clined to agree with the Treasury, and let the market a firm stand, work the matter out know what it intended to do. he was hopeful at the preceding meeting that Mr. Szymczak said all the economic factors a clearer picture of the Committee would have a position to recommend and thus be in date of this meeting, by the still mixed as the picture was rate. However, action on the discount not conducive trends and, therefore, factors and to all the economic whether to was simply rate. The question on the discount to action policy where it is, of restraint to leave monetary add to the degree that the To him, the policy in the banks. to add to the reserves or
Committee has been pursuing is correct in the circumstances and in view of the total economic picture. In spite of seasonal factors, one could not disregard the unemployment statistics, for whatever the cause--seasonal, frictional, or structural, or a combination of these and other causes-there still are more than 4 million, almost 5 million, persons unemployed, and that is a major consideration in the formulation of economic policy anywhere in the world. The System has been doing the best it could do in all these circumstances, adding some reserves to allow for economic growth with consideration of the unemployment figure and the difficulties in Treasury financing but not pursuing a policy of ease at a time when inflationary expectations are dominant. It is leaning in the direction of restraint, but only to the extent that it can because monetary policy cannot operate in a vacuum, and monetary policy is based on art as well as science. As to the discount rate, Mr. Szymczak said that he did not think that the System was prepared at this point to tighten monetary policy and a change in the rate at this time would be so construed. policy should be left in its present Rather, he felt that monetary on the negative side and that on posture with bank reserves somewhat to the discount rate. look could be given March 3 another said he agreed with the remarks of Messrs. Mr. Balderston rate. He would be inclined concerning the discount Hayes and Robertson
to wait until after the March 3 meeting and then increase the rate by one-half per cent. If it were humanly possible, he hoped that all connected with the System would refrain from making remarks that could be quoted in the press. While rumors cannot be prevented, those in the System should endeavor to keep from feeding them. As to open market operations, Mr. Balderston said that the kind of policy followed in the immediate past seemed to him quite appropriate, for the steadiness that the System had been maintaining probably would be helpful in achieving the sustainable growth that everyone desired. He was much concerned about the long-run problem, however, for the reasons Mr. Johns had outlined. It was his feeling that the concept of a balanced economy--however arrived at--ought to be kept in mind by the Committee, particularly because of the enormous expansion of plant capital since World War II. Industries had so improved their equipment and techniques as to be able to get along with a smaller number of employees, leaving the country with heavy industrial unemployment. The problem was how to achieve a balanced scale of living to rise and at the same economy that would cause the number of job opportunities. He could see time provide an acceptable said, but he saw no answer. the problem, Mr. Balderston by suggesting that the Martin began his observations Chairman to be perfectly logical. at any given time could not expect Committee and it would continue was one of timing, big problem at present The
as long as there was the problem of Treasury financing, which had been out of focus now for a period longer than ten years. What happened this past week had changed his own views slightly as to emphasis, but he liked to look at the present period in relation to others--for example, early 1957. Without question the discount rate should have been moved up earlier than August of that year, but be cause of the persistent Treasury problem the System did not have an opportunity. Hence, there was now a continuing argument as to whether the System knew what was happening in the economy when it finally did move on the rate. While it did little good to go back and talk about what may have been past mistakes, one ought not try to justify policy for the wrong reasons. It was quite interesting, the Chairman remarked, that at the recent hearing before the Joint Economic Committee on the President's Economic Report Senator Douglas of Illinois asked for a paper--which it was agreed would be written--on why the System should not give up discount rate and just proceed through open market operations. the not be an easy question to eliminate if all concerned were This would say that under all circumstances the going to sit around the table and time had no relationship to other rate pattern because of a lapse of that had taken place in short-term factors. Actually, the adjustment of Federal Reserve influence in the market. rates was the result
Chairman Martin then said that at this juncture he was in clined to favor maintaining an even keel. In that, he disagreed with Mr. Irons: having followed a general policy of even keel during Treasury operations, he did not think that at this point the System should discard that policy. It was important, he said, to have some framework in which to operate. The System was under no particular pressure at the moment, although it should not get into a position of easing the market to a point that would make it difficult to adjust the discount rate at a later stage. The Chairman suggested re-reading the minutes of January and February meetings of the Open Market Committee over a period of several years, for they would show that at an early point in the year there always seemed to be a flood of bad news of one sort or another that could not be evaluated. In fact, he would be quite upset under present conditions if, as February came along, some items of the kind to which Mr. Leach had referred did not appear. One must avoid getting carried away by little downswings into making out on the basis of them a justification for a situation that had arisen primarily because of Treasury financing. He could see no harm in relating to the Treasury in fact, he had discussed at some the observations made by Mr. Irons; the possibility of a discount rate change length with the Treasury financing. It was necessary to considerably before the last Treasury minimize overt actions and also to the Treasury's problem bear in mind
that would not be explainable, particularly at a time when speculation and investment had gotten out of hand. The real problem was that the saving-investment process was now impaired in this country as far as its usefulness for building plant and equipment was concerned. As Secretary Anderson said in recent testimony, if the time should come when the public thought it wise to speculate but foolish to invest, the country would really be in trouble. While such a stage had not been reached, the fact that there had been a movement in that direction was something that must be borne in mind. If the attrition on the financing had been lower and the Treasury had not been forced to go back to the market for $1.5 billion, he would have favored increasing the discount rate at the earliest opportunity, which in his judgment would have been about February 19. However, since the Treasury financing was construed by the public as a failure-even though it whether the financing actually was a serious seemed questionable careful about doing anything to create failure--the System ought to be unalert, or unsympathetic to the the appearance that it was unaware, he would be inclined to delay on plight of the Treasury. Therefore, and that seemed to be the sense the discount rate a little longer, was going to continue Assuming that the Committee of the meeting. was no ease in the market degree of pressure and there about the same rate timing in the light logical and correct discount in the interim, February 19 or 26 forgetting about factors would suggest of existing the rate around March 5. and moving on
The Chairman commented that Mr. Balderston had made a very real point in cautioning about leaks. The Committee had been dis cussing for the last two meetings what was going to be done in the future instead of in the present, and this created an unusual burden in talking with outside contacts. While the Treasury's problem and the circumstances of the present period warranted this kind of Com mittee discussion, he hoped that the Committee soon would be able to get back to the point of considering the steps to be taken in the reasonably near future. Chairman Martin observed that the majority comments today indicated no change in the policy directive. If present policy were continued, if no ease developed in the market, if no additional pressure were created by overt actions, and if the Desk kept a posture of restraint within the framework of present Committee policy, it would be almost a requirement by the time of the next Committee meeting to recognize the market by raising the discount rate one-half per cent. An increase of one-quarter per cent would be a mistake in the present picture, he suggested, for the System would not want to lag the market when it had already been lagging for quite a period. believed that a discount rate change should be held over While he he hoped such a move would until the next meeting of the Committee, that present policy could be handled not be sidetracked on the theory need be paid to the market operations and no attention through open
discount rate--a position that would play into the hands of those who argued there was no need for the discount rate because a change in rate would react psychologically on the market. Chairman Martin then inquired whether there was agreement with his summary that the consensus favored no change in the policy directive at this time, and that it favored maintaining the same degree of pres sure that had been exerted thus far during the period of even keel for some reasonable period after the books on the Treasury financing were closed. Such period might not have to extend until the first week in March, but in view of the results of the Treasury financing it probably wise to give the market that long a period of adjustment. would be Mr. Shepardson inquired whether "the same degree of pressure" earlier contemplated by the Com referred to the degree of restraint being exerted at present, the degree of pressure actually mittee or which he felt was not very strong. that this was a good point. He went Chairman Martin commented for the Committee to that it had been customary on to say, however, authority based on the of the Account discretionary give the Manager Mr. Shepardson had suggested and feel of the market. color, tone, had not quite been attained, intended by the Committee that what was Desk felt that its opera was quite certain the but he (the Chairman) He then enunciated policy. with the been in conformity tions had Mr. Larkin for comment. called upon
Mr. Larkin suggested the necessity of looking beyond mere figures. The Account Management, he pointed out, had been charged with maintaining an even keel during the period of Treasury financing. Therefore, while the Desk wished to maintain pressure on reserves, it did not want to take any overt action that would be disturbing to the market. With reference to the general feel of the market, he noted that Federal funds had been traded at the discount rate quite con sistently during the last two weeks. There had been a temporary drop in bill rates, related primarily to the flow of money out of maturing Treasury issues, but other short-term rates did not go down. This period had also seen a 3-3/4 per cent rate on one-year certificates offered by the Treasury not generally accepted by the public. The market seemed to him one of rather considerable general posture of the by a number of indicators. It was necessary, pressure, as measured figure of net borrowed reserves to look beyond the actual therefore, the true degree of ease or tightness. to ascertain that Mr. Larkin's remarks brought Chairman Martin commented go into the execution of open of judgment that must out the element aware of that factor. said he was policy, and Mr. Shepardson market Thereupon, upon motion duly made the Committee voted and seconded, to direct the Federal Re unanimously of New York until otherwise serve Bank by the Committee: directed
(1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct 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 aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. At Chairman Martin's request, there were distributed to the members and alternate members of the Committee and to the other Presi dents copies of an outline prepared by the Board's staff for a Treasury Reserve study of the Government securities market, the broad Federal be to develop information and suggestions objective of which would in the mechanism and functioning of the pertinent to (a) improvement excesses that are possible from market, (b) prevention of speculative
time to time, and (c) attainment of market conditions continuously adapted to orderly debt management and monetary operations. The Chairman indicated that the outline was being distributed as a matter of information and also to elicit the assistance of all of the Presidents. Its preparation had come about as a result of the speculation in the Government securities market last summer and the work done on that problem to date, including the work done by the New York Reserve Bank through the Technical Committee of the New York The members of the Committee, he noted, had now received Money Market. of the Technical Committee on December 10, the minutes of the meeting that had been raised, insight into the problems 1958, which provided the Treasury Baird had expressed appreciation and Under Secretary of from the Desk and from assistance that he had received of the close the System in this matter. the questions raised by the Martin noted that among Chairman an association of Govern Committee was whether work of the Technical involve a problem should develop, might dealers, if it ment securities laws. In all the circumstances, the standpoint of the antitrust from proceed in co be desirable to that it would Board had concluded the Martin) had had meetings Treasury, and he (Chairman operation with the He officials. Treasury Department and other Secretary Anderson with slightest intention was not the clear that there to make it very wished of this subject, Bank in the study of the New York minimize the role to
and that it was the intent to bring the Bank into the study to the fullest extent. Rather, the thought was that this should be a joint study of the Federal Reserve System and the Treasury, and he con sidered it extremely important that the study be a System operation. It had been agreed that the Secretary of the Treasury would get in touch with the Attorney General and that he (Chairman Martin) would be in touch with the Securities and Exchange Commission in order to be sure that those parties were alerted. While it would not be de sirable to spread the word of this project unduly, it was the desire to make a careful and intelligent study not only from the standpoint of minimizing speculation but also from the standpoint of effecting in the functioning of the Government securities market. improvements commented that the rough study outline Chairman Martin also morning and that the Board members them had just been finished this selves had not yet had an opportunity to review it. who said it was the called upon Mr. Young The Chairman then of the Treasury staff staff, with which members thought of the Board's down into three parts. the study could be broken agreed generally, that fill the gaps in in operation to part would be a fact-gathering One part would consist of while a second formation currently available, to obtain factual in the market, partly with individuals consultation ways and means of suggestions for partly to elicit information and preventing developments the market and and improving strengthening
such as occurred last year. The third part would consist of evaluating the various issues, such as the possibility of establish ing an organized exchange type of market instead of an over-the counter market, legal limitations on the use of repurchase agreements, the possibility of establishing margin requirements against Government securities, and the possibility of a dealer organization. The study would have to be carried out rather expeditiously and it would be helpful to be able to call upon the Reserve Banks for personnel to the extent necessary. Also, it was contemplated that inquiries made of banks and nonfinancial organizations would go through the Federal Reserve Banks and be handled on a personal basis so as to minimize the number of questions that might arise. Chairman Martin then commented that this was something of major importance to the work of the Federal Reserve System. He sug gested that any views on the study be transmitted direct to Mr. Young. Mr. Hayes commented that this was a highly constructive ap proach to a needed move. It was a matter that had been given much Reserve Bank of New York, and that Bank was thought at the Federal happy to cooperate. concluded the discussion by saying that he The Chairman of the New York Money Market would not hoped the Technical Committee there would be reason to call upon the Technical Com disband, for mittee for assistance.
meeting of the Federal Open It was agreed that the next Tuesday, March 3, 1959, at would be held on Market Committee 10:00 a.m. the meeting adjourned. Thereupon Secretary
Also: Record of Policy Actions