March 24, 1959 FOMC Minutes

FOMC minutes

replied that he thought so, although a somewhat lower level of net borrowed reserves might be required to do the job in the period following April 1. In a further question, Mr. Balderston asked Mr. Rouse whether he felt as a practical matter that Mr. Mills' suggestion was appli cable; in other words, whether there was likely to be enough variation in reserves so that people would not get in the habit of reading policy by looking at the figure of net borrowed reserves. Mr. Rouse replied that he hesitated to attempt to answer the question. Mr. Balderston then referred to the comments by Messrs. Treiber and Rouse earlier in the meeting concerning the fact that holders of the 4 per cent Treasury notes of August 1, 1961, would have until May first to decide whether to redeem them on August first or hold them until maturity. He was not sure as to what, if anything, the Com might do to help the Treasury in this regard. The Treasury mittee that System policy between now and the first of May had the feeling his own feeling that the expectations be determining, but it was might to the course of rates between now and of holders of the notes as any event, the amount involved would be determining. In August 1961 concern and he felt certain great enough to give the Treasury was if the System could do anything the Treasury would be grateful that that would be of help.

Mr. Balderston then said he gathered it was the consensus to leave the directive unchanged and to continue the same degree of restraint during the next three weeks. At this point Mr. Szymczak addressed certain further questions to Mr. Mills regarding the suggestions on policy that the latter had made, stating that he found them appealing. In response, Mr. Mills commented that a policy calling for maintenance of a constant level of negative free reserves meant that banks under pressure would liquidate or refrain from making loans in order to reestablish their reserve position and produce a margin of If the System proceeded to extinguish these reserves, excess reserves. be a constant downward pressure. If the Committee could there would and reach a point where member banks avoid that kind of development liquidate securities, beyond as heavy pressure to were no longer under them to expand their loans, he could foresee a modest amount to permit in a level of in market that would be reflected a stability in the consistent with the speaking, would be rates which, generally terest announcement. Other before the Treasury that existed just pattern meet the market securities would just how those he did not know wise, downward pressure be. If the growing the reception would and what expand their credit allowed to member banks were removed and were the market effect did not believe he reasonable limitations, within move from a position might though the reserve be extreme, even would toward zero. negative point

Mr. Deming said that he also was sympathetic toward such an approach. He inquired of Mr. Mills what guide he would use if there seemed to be some upward pressure on bill rates. Would this, he asked, be a kind of a signal? Mr. Mills responded that possibly it would, or that one could take the reserve projections placed before the Committee at this meet ing. With the April 1 payment date for the new Treasury securities, it might be necessary to support the reserve positions of the banks in order to maintain their tax and loan accounts, and it was his feeling that the Committee could afford to err on the side of ease as to the amount of reserves supplied at that time. Having done so, he would not hurry to withdraw those reserves. Instead, he would let them be absorbed in the market for a period of time to see what reaction that would have on interest rates. Then, if the expansion of bank credit over the next few months should pace the improvement in economic activity, such improvement of activity would exert a tightening in fluence that would gradually absorb any excess of reserves supplied whether the amount supplied had to the market. Experience would show been more than necessary or desirable. Rouse whether he considered the Mr. Balderston then asked Mr. Mr. Rouse replied in the affirmative. directive satisfactory, and policy Thereupon, upon motion duly made the Committee voted and seconded, unanimously to direct the Federal

Reserve Bank of New York until otherwise directed by the Com mittee: (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 certifi cates of indebtedness purchased from time to time for the of the Treasury, shall not be temporary accommodation increased or decreased by more than $1 billion; direct from the Treasury for the (2) To purchase of the Federal Reserve Bank of New York (with account where it seems desirable, to issue discretion, in cases to one or more Federal Reserve Banks) participations of special short-term certificates of such amounts as may be necessary from time to time for indebtedness of the Treasury; provided the temporary accommodation of such certificates held at any that the total amount Reserve Banks shall not exceed one time by the Federal in the aggregate $500 million. of the Federal Open Market agreed that the next meeting It was 1959, at 10:00 a.m. Tuesday, April 14, would be held on Committee The meeting then adjourned. Secretary.