March 24, 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, March 24, 1959, at 10:00 a.m. PRESENT: Mr. Balderston, Chairman pro tem Mr. Allen Mr. Deming Mr. Erickson Mr. Mills Mr. Robertson Shepardson Mr. Szymczak Mr. Mr. Bryan, Alternate for Mr. Johns Mr. Treiber, Alternate for Mr. Hayes Messrs. Bopp, Fulton, and Leedy, Alternate Members of the Federal Open Market Committee Messrs. Leach, Irons, and Mangels, Presidents of the Federal Reserve Banks of Richmond, Dallas, and San Francisco, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Jones, Marget, Mitchell, Parsons, Roosa, Willis, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Special Assistant to the Board of Governors Mr. Koch, Associate Adviser, Division of Re search and Statistics, Board of Governors Acting Chief, Government Finance Mr. Keir, Division of Research and Statistics, Section, Board of Governors First Vice President, Federal Mr. Freutel, Reserve Bank of St. Louis
Messrs. Daane, Hostetler, Tow, Walker, and Wheeler, Vice Presidents of the Federal Reserve Banks of Richmond, Cleveland, Kansas City, Dallas, and San Francisco, respectively Mr. Gaines, Manager, Securities Department, Federal Reserve Bank of New York Mr. Anderson, Economic Adviser, Federal Re serve Bank of Philadelphia Mr. Brandt, Economist, Federal Reserve Bank of Atlanta The members and alternate members of the Committee and the Presidents of the Federal Reserve Banks not currently members of the Committee met in executive session at ten o'clock with Messrs. Riefler, Sherman, and Rouse of the staff present. The Secretary stated that, the Chairman nor the Vice Chairman of the Committee was since neither meeting, it would be necessary to elect a able to be present at this chairman pro tem. Upon motion duly made and seconded, vote, Mr. Balderston was and by unanimous act as Chairman at this meeting elected to of the Chairman and Vice in the absence Chairman of the Committee. procedure for invit discussion of the followed a brief There Committee when a President at meetings of the observers to be present ing members or their Bank (including Committee of a Federal Reserve it was understood At its conclusion, could not be present. alternates) subject at a future be given to this would that further consideration in the afternoon attendance discussed questions of when the meeting were taken up again. on March 3, 1959, of the meeting held session
It was noted that Mr. Freutel, First Vice President of the Federal Reserve Bank of St. Louis, was in the Board's building today in connection with his attendance at the meeting of the Conference of Presidents, and he was invited to attend this meeting in Mr. Johns' absence. Mr. Freutel and the remainder of the staff then entered the room. Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period March 3 through March 18 and a supplementary report covering the period March 19 through March 23, 1959. Copies of both reports have been placed in the files of the Federal Open Market Committee, Mr. Rouse reported that the money market had been tight almost steadily in the past three weeks, with the brief exception of the last in the March 11 statement week. At that time, a large re three days end by the New York banks and heavy serve excess carried over the week city banks in districts that before the week end by reserve borrowing discount rate created, temporarily, still at the 2-1/2 per cent were Generally, however, net borrowed an easier tone in the money market. $200 million and the of $150 to had held in the neighborhood reserves rate. The close to the discount Federal funds had remained rate on performance in the face had put on a remarkable Treasury bill market increase, and an the discount rate a tight reserve situation, of
offering by the Treasury of $2 billion of special bills. While rates on three-month and six-month bills climbed from 2-3/4 and 3 per cent, respectively, to 3 and 3-3/8 per cent immediately after the discount rate action, they immediately turned down again and currently were close to the levels prevailing before the discount rate increase. The strength in the bill market was attributable to continuing demand from nonbank corporations and, in part, to buying by Chicago banks in preparation for the April 1 assessment date on the Cook County personal property tax. Mr. Rouse reported that the Treasury's cash offering of an additional $500 million of the 4 per cent bonds of 1969, $1-1/2 bil lion of 4 per cent notes due May 15, 1963, and $2 billion of special bills to mature January 15, 1960, had been well received. The bonds were likely to be heavily oversubscribed, while the notes, which the market considered rather thinly priced, were expected to be adequately but not heavily oversubscribed. Guessing on allotments for the notes started at 35 per cent early on Monday, but by the end of the day 65 to 70 per cent; Mr. Rouse thought the some dealers were guessing of 50-60 per cent. One ratio might be in the neighborhood allotment for the notes was that the relatively small subscription reason for subscribe for the new an opportunity to banks would have on Thursday credit, and in this auction for tax and loan account "special" bills amount they would receive. able to control the they would be better
The Treasury had established this timing in order to let investors know their allotments on the notes and bonds before they bid for the bills, but the effect on subscriptions for the notes suggested that the Treasury might wish to rearrange the order of the offerings if it made a similar offer in the future. Mr. Rouse went on to say that except for the outstanding 4s of 1969, which were marked down by more than a point when the issue was reopened, the market had been generally steady to only slightly lower. Market reaction had been good to the Treasury's announcement that it was taking another step toward regularizing its short-term debt through quarterly issues of one-year obligations, to mature in January, April, July, and October, which were to be regularly refunded issues. Mr. Rouse noted that the nucleus at auction into new one-year the short-term debt originated with of this idea for regularizing by Mr. Riefler and Mr. Gaines which the Federal Open Market memoranda Committee had supplied to the Treasury. also commented on the request, Mr. Rouse At Mr. Balderston's of August 1, 1961. The holders by the 4 per cent notes problem created of this year to decide whether would have until May 1 of these notes 1 or hold them to maturity. Therefore, to redeem them this August 1961 area in its current financing wished to avoid the the Treasury redemptions. The option drive rates higher and encourage so as not to factor to be taken notes was also a the holders of the available to
into account in considering Federal Reserve policy during the next month. With respect to the period ahead, Mr. Rouse noted that the 1-1/2 per cent tax certificates would mature today and that the nearly $2 billion of this issue to be presented for cash should create some additional demand for short-term investments during the next week. After April 1, however, when payment was made for the new Treasury issues and the Chicago situation unwound, pressures should build up as the market absorbed a sizable volume of short-term investments. Upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period March 3 through March 23, 1959, were approved, ratified, and confirmed. Mr. Young made a statement on the economic situation supple mentary to the staff memorandum distributed under date of March 20, being substantially as follows: 1959, his comments From the perspective of national statistics, domestic economic activity is extending its upward swing. Late figures for January industrial production obliged some downward adjustment in the index figure, though the index still rounded at 143 of 1947-9 average. Further ad through February was about 1-1/2 points, which rounded vance off at 144. The additional rise reflected gains in most durable and nondurable lines as well as in mining. With output in March at new high levels, with durable goods steel output advancing further, and with demands for industrial materials generally continuing strong, industrial output this month is expected to rise one to two more points. March auto output is again back to the January level, domestic cars continue at about a and dealer deliveries of
5.1 million annual rate. Stocks at dealers are still rising, but are 8 per cent under the exceptional high of last year, which the industry hopes to avoid repeating. Used car markets appear strong, with sales and prices about a tenth higher than last year. Since December, and after several months of irregular and modest increase, new orders at durable goods manufacturers have shown marked rise. From April 1958, however, the total rise has been about comparable with that for the corresponding period following the recession low in 1954. Nondurable goods lines have reported successive gains in orders and sales during each month of this ten-month period. In January, book value of manufacturers' inventories rose for the first time since August 1957. The increase was con centrated in metals and metal fabricating lines. The GNP ex perts are estimating a $3 to $3-1/2 billion annual rate of inventory accumulation this quarter. In February, construction activity remained at about the very high levels reached in January. Housing starts edged down further, but at 1.3 million plus units were at the highest February level in four years. Continuing high levels of FHA applications and VA appraisal requests are believed by the industry to portend continuing high levels of starts. Non industrial work on architects' drafting boards, which had declined sharply in the first three quarters of last year, has recently been rising strongly, though the total remains quite far below the peak reached in late 1957. and unemployment were little changed in Both employment hours worked per week, although 1-1/2 hours February. Average than a year ago, were off slightly from January; since greater September, weekly hours worked have fluctuated close to 40. third successive month, hourly earnings in manufactur For the at $2.19; weekly earnings declined ing during February remained slightly. Personal income in February reached a new high of $365 billion, up $1.5 billion from January and $17 billion, or 5 per above the recession low. In dollars of constant purchasing cent, low point of the reces 4 per cent from the power, income was up high. The recent cent from the prerecession sion and 1 per rise in wage and salary reflected mainly a further advance survivors' benefit payments but higher old-age and payments, in causing the rise. were also of importance sales in further, retail income advancing With personal December level. close to the record were strong and February and appliance off at furniture sales were durable goods, As to
stores but up at automotive outlets and at lumber dealers. Sales at nondurable goods outlets were also higher. At department stores, sales in the first half of March remained close to January-February levels despite bad shopping weather in the midwest and northeast. In wholesale markets, the average of industrial prices rose further in February, with higher prices posted in textiles, hides, fuels, lumber, copper and brass mill products, non metallic minerals, and machinery. Prices of industrial materials have risen further in March. February increases in industrial prices were offset by declines in prices of agricultural com modities, so that the average of all prices at wholesale remained about unchanged. In recent weeks, prices of grains and of livestock have strengthened somewhat. However, with supply conditions as they are in agriculture, this is expected to prove temporary. Concerning prices, a further note may be added regarding industrial material prices. It is useful to divide these be tween price-sensitive materials and others. Average prices for sensitive materials (including textiles, lumber, plywood, wastepaper, and some feeds) have now risen 7 per cent since the low last spring; since late fall, the rise has been about 1 per cent a month. On the other hand, average prices of other materials (steel mill products, paper, chemicals, and building other than lumber) have shown little change since the materials This latter group of prices changed little summer of 1957. period, and then rose over the 1953-55 recession-recovery the next two years when output was sharply by 12 per cent over generally straining the limits of capacity. future domestic activity, the most important Concerning Commerce-SEC survey of busi news is the release of the item of and equipment spending. The new data ness plans for plant set in last quarter and that a rise in such spending confirm the year. The pickup in spending a 4 per cent rise over project goods producers and transportation plans was sharpest for durable goods lines. Past patterns also marked in nondurable but was once business capital spending of these surveys show that, survey for a period reports to advance, each successive begins of earlier projections. expenditures in excess actual trade data. While yet indicated by in exports is No pickup December, the average were up slightly from exports in January of last spring and summer. was below the level of the two months 2 per cent above averaged only exports Total nonagricultural continued at on the other hand, low. Imports, last summer's close to record levels.
In Europe, industrial production appears to have leveled out in December and January, though in Canada advance was re sumed and in Japan it was continued. European steel prices have strengthened recently, partly reflecting U. S. demands, and steel output has increased a little. European textile output, in contrast, shows no recovery impulse, although recently demands in the wool sector appear to have improved. One concluding comment is in order. A Washington Post story on Sunday carried charts of industrial production and GNP purporting to show that recovery this time has lagged the performance of two preceding postwar cyclical recoveries. This result is a matter of the dating of cyclical troughs. The article's dating of the 1949-50 cyclical trough, for example, hits a quarter of steel strike and also permits inclusion of the first post-Korean quarter in the comparison with later cycles. The more our staff restudies the dating of business cycle turning points, the more dissatisfied we are with those commonly accepted. One of our important current projects is a reassessment of this whole body of "established" historical fact. Mr. Thomas made a statement substantially as follows with reference to credit developments: Since the last meeting of the Committee, financial markets have absorbed with remarkably little disturbance the effects of the discount rate increase, some tightening of bank reserve positions, the demands of the corporate tax and dividend payment period, and the announcement of a Treasury cash financing operation. Interest rates and bond yields generally have been fairly steady around or slightly below high levels that had been reached earlier. Explanation of this relative calmness in money markets during a period of special pressures would seem to rest partly in the moderateness of current credit demands, but more largely in the general state of liquidity of the economy. The Federal Government has continued and will continue for to be a heavy borrower, but no further several months acceleration in borrowing lies ahead, and the debt manage be taking an orderly shape with less ment program seems to uncertainty as to the volume and nature of financing governments also are persistent State and local operations. borrowers on a relatively substantial scale, but no higher instalment credit has expanded than a year ago. Consumer on a seasonally adjusted basis. somewhat in recent months,
Home mortgage financing no doubt continues large but pressures in this market are not increasing. Forward commitments of life insurance companies for residential mortgages declined somewhat in December and January, along with decreases in commitments for business financing. To what extent this may reflect a falling off in demands or to what extent a lessening in the funds available for investment is not yet clear. The moderating of credit demands has been most evident in the business sector, where there has also been an increase in liquidity. New corporate capital issues have been much smaller than at this time of other recent years, and, as stated, insurance company commitments for business financing have declined. Even though business capital expenditures in the future should turn out to be larger than present ex pressed intentions indicate, currently demands are relatively light. Business borrowing at banks, though larger than last year, has generally been somewhat less than in other years. Follow ing a greater than seasonal decline in the first two months in business loans at all commercial banks, such loans at city banks during the first three weeks of March showed a larger increase than in 1958 but a smaller one than in 1957 and on securities increased much less than last year. 1956. Loans Not only has bank loan expansion been moderate, but by banks have decreased somewhat in recent weeks. investments of securities contrasts with a sub The decline in holdings usual in the first three weeks of March. stantial increase deposits have shown no striking departure On balance, bank patterns. The turnover of demand deposits from usual seasonal the level reached at the peak of has increased to around economic activity in the summer of 1957. of credit demands might be To some extent, the moderation mild restraint and to the to System policies of attributed reached by interest rateseffects of higher levels restraining considered appropriate for the above levels that might be Most likely some of of Federal Reserve policy. current posture that has been built up in the it is due to the liquidity by business corporations. is still being accumulated economy and internal funds or from has been available either from Financing other nonbank sources. and the end of the continuation of recovery With the may be raised as credit demands, question decline in seasonal to credit needs. Projections lies ahead with respect to what the feasibility of assumptions indicate based on reasonable output this year to a gross a 6 per cent increase in real final quarter of billion by the of about $485 national product
the year. This rise envisages moderate accumulation of inventories, a larger increase in business spending for plant and equipment than is shown by the latest survey, and a continued high level of housing starts at least until midyear, as well as large governmental expenditures. Exploring the consequences for financial markets of such a pattern of economic expansion, a continued high level of demands for credit is implied, and--even more striking--a further substantial increase in availability of nonbank funds to meet the economy's financing needs seems to be possible. Principally, these funds would be made available by corporate business. If profits are as high as they could be under the projected pattern and over-all investment programs do not pick up steam until late in the year, corporations should be in position to add substantially to their already much improved liquidity positions. While their borrowings from banks are likely to increase, in contrast to net repayments in 1958, the rise should be quite moderate, and security financing would likely be down, Consumer borrowing through both mortgages and through short- and intermediate-term credit would likely expand sharply. Under the assumed growth conditions, external financing by State and local governments is likely to continue at close to the peak rates of 1958. If Federal Government expenditures are kept at or close to budget estimates and incomes reach the levels indicated earlier, Federal needs for cash financing would be about as large in calendar 1959 as they were in calendar 1958--about $7-1/2 billion. If corporations prove able and willing to meet the major share of the Treasury's needs for external funds, the banking system and other financial institutions would be able to accommodate consumer and other sector financing requirements with only a moderate expansion in bank credit. On this assumption, expansion of the active money supply might be only about half of what it was last year-or less than 2 per cent. This assumes, however, a concatenation of many favorable events--and an avoidance of unfavorable events. If assumes no extraordinary inventory accumulation, increases in capital goods spending but not of boom proportions, Federal expenditures within the limits prescribed by the budget, some drop-off in housing activity after midyear, no repetition of the 1955 boom in auto sales, stock price movements that neither unduly depress nor exhilarate spending attitudes. In particular it depends
upon the ability of corporations to maintain a high level of profits in the face of wage pressures and price competition and also their willingness to invest their surplus funds in Treasury offerings. In addition it assumes the adequacy of an increase of less than 2 per cent in the money supply while the gross national product increases by 6 per cent, This assumption is not unreasonable in view of liquidity already outstanding. To the extent that these conditions are not met, Treasury debt management problems--and those of the monetary authori ties--would be made more difficult. At some time in the next year or so, as profits level off, corporations might well become net sellers rather than net accumulators of liquid assets. Moreover, sustained high levels of consumer spending would suggest that the flow of personal savings may not be adequate to provide much of a market for Government securities. The public may want to hold larger cash balances than are indicated. At some stage pressure on the commercial banking system will begin to mount. Perhaps some expansion in bank credit should be permitted, but the pressures are likely to enough to require restraints to avoid undue expansion. be strong For the immediate future, to cover seasonal credit de Federal Reserve credit will evidently mands, some additional absence of System open market purchases, be needed. In the may increase to as much as $300 million net borrowed reserves million in the first week of next week and to around $500 Treasury offerings will cause when payment for the new April, This would call for System increase in required reserves. an order to avoid an increase some $300 million in purchases of a continued gold outflow After that, assuming in restraint. month (which might not occur), the of about $100 million a result in no marked in reserve needs will usual variations change until late May. in the light of of Mr. Thomas whether, Mr. Balderston inquired companies would have to carry, additional tax burden that insurance the and would be funds in mortgages desirous of placing might be less they money in tax-exempt securities. tempted to place more that this trend was already replied to the effect Mr. Thomas additional burden not think the he did cases. However, evident in some
would be enough to make a great deal of difference. A spokesman for the insurance industry had indicated that the companies would have less funds available for investment next year, but the spokesman also foresaw a declining demand pressure. Mr. Treiber then made the following statement of his views on the business outlook and credit policy: Business activity continues on a moderate upward slope. There is no indication of an abrupt turn, either up or down. Consumer demand, which has been the mainstay of the recovery, continues strong, assisted by a rising volume of consumer credit. Employment and unemployment data show little change. Although inventories have begun to increase, much of the increase seems to be a precautionary accumulation in expecta strikes in the metal industry. Any sustaining further tion of force from inventory accumulation will probably be deferred until the latter part of the year. Prices remain fairly stable. Fortunately, public opinion is expressing increasing the forces making for higher prices. The concern regarding situation of supply and demand in the private sector general does not yet suggest the prospect of a re of the economy surgence of inflationary forces. Any renewed inflationary are likely to be initiated by the large Treasury pressures deficit. U. S. Government security holdings of all commercial by $2 billion, reducing total banks declined in February by almost that amount. Thus, the loans and investments than offset the purchase by the banks reduction much more Treasury notes in January. $1 billion of new of almost securities are now bank holdings of Government Commercial than at any time since last September. lower deficit of the Treasury for Our projection of the cash virtually unchanged at nearly the calendar year continues the remainder of borrowing during billion. New money $12 placement of large. The will be very the calendar year rise in bank credit issues without a substantial Treasury the months ahead. challenge in is a major do not call for and credit conditions Current business has just offered policy. The Treasury change in credit any $4 billion, to three issues totaling for cash subscription financial operations week. The Treasury's paid for next be
call for market stability, not only through the payment date but for a reasonable period thereafter. Thus, business and credit conditions and Treasury operations call for the continuation of an "even keel" policy. As pointed out by Mr. Rouse, we must bear in mind that by giving notice to the Treasury before May first, holders of the $2-1/2 billion of 4 per cent Treasury notes due in August 1961 may obtain payment of their holdings on August 1, In continuing the same credit policy, we should give primary attention to the behavior of the money market and the rates of interest in the market. High corporate liquidity and the resulting availability of nonbank funds in the market resulted in less pressure over the tax date than had been expected. This factor in combination with the concentration of borrowed reserves in Chicago and the demand for short-term Government securities, in preparation for the April 1 Cook County tax, have reduced somewhat the need for bank credit and have justified a higher level of net borrowed reserves. The combination of factors leading to the absorption of Treasury issues may lose its strength just at the time the supply of Treasury issues increases, perhaps causing interest rates to rise. Too great a rise could lead to expectations of a further increase in the discount rate and other restrictive Federal Reserve measures; such expectations could stimulate a rapid further rise in a result we would consider unfortunate. We would rates, interest rates fluctuating around hope to see short-term rate, without being a great amount above the discount great amount below the discount rate for any prolonged or a rates behaving in this fashion, period. With short-term of net borrowed reserves is not of great the exact amount significance. favor (a) no change in the formal In summary, we would (b) no change in the discount rate; and (c) the directive; operations so as to continue to conduct of open market degree of restraint without maintain about the present the amount of net borrowed too much emphasis on placing reserves. of several long strikes said that the settlement Mr. Freutel Memphis was the major develop area, Louisville, and in the St. Louis Reserve District in February interest in the Eighth Federal ment of
and March. A strike of glass workers near St. Louis had interrupted auto production in Evansville, as well as in areas outside the district. Most district cities reported moderate improvement in employment conditions as manufacturing activity picked up, but unemployment re mained at about 6 per cent. Construction activity was expected to grow rapidly with better weather as there appeared to be a large backlog of work already contracted for. Production of pine and hardwoods had risen lately and producers expected an improving market. Aluminum production had been increased, and production of coal and petroleum was running well above year-earlier rates. Department store sales in all the reporting centers of the district had been considerably higher for the year to date than in the same period of 1958. Loans at district weekly reporting member banks rose over one per cent in the five weeks ended March 18, compared with little change at this time normally. Real estate loans continued to rise and there was an increase in loans to business firms. On the other hand, these banks reduced their holdings of securities. Mr. Bryan said that the employment situation in the Sixth to be improving slowly and that there did not seem District seemed substantial differences between trends in that district to be any himself as well satisfied with and national trends. He expressed advocate no change in it. and said that he would open market policy Mr. Bopp said that he had little to report from the Third of a rather substantial level of District except continuation
unemployment. While new and continued claims for unemployment benefits in Pennsylvania were lower than a year ago, they were still above 1957, and complete data for January showed 9.5 per cent of the district's labor force unemployed compared with 7 per cent for the country as a whole. Business loan demand to meet March 15 tax payments was light. Pressure on the reserve positions of the large Philadelphia banks had moderated somewhat in recent weeks, and those banks continued to rely primarily on the Federal funds market to secure reserves not secured from the sale of securi ties. As to policy, Mr. Bopp said that he would favor no change in the directive and no further change in the discount rate. In his opinion, approximately the same degree of restraint that had recently in open market operations should be continued. prevailed reported that steel operations in the Fourth Mr. Fulton continuing at a high rate. For the district as a District were 93.5 per cent of capacity, and in whole, operations were at about building up at the mills. Inventory spite of this backlogs were stimulating factors. Depart was one of the principal accumulation now running at about the level in the district were ment store sales had been strong. How and construction activity of two years ago, that he builder indicated fairly large residential ever, one of this year to be starts in the last half expected new housing first part of the of the rate for the about 50 per cent at only
year. Unemployment was dropping slowly but there were still quite a number of people who were running out of employment benefits and had not yet found employment. In summary, it might be said that activity in the Fourth District was at quite a high level. Mr. Fulton expressed the view that the Desk had done a good job recently in conducting open market operations. He would not favor any change in the discount rate or in the policy directive, and he would want to maintain about the same feel in the market as during the past three weeks. Mr. Shepardson said he had nothing to add to the views already expressed other than to comment that the picture presented by Messrs. Young and Thomas seemed to be a favorable one. He would advocate the of present open market policy for the next three weeks. continuation Mr. Robertson agreed, stating that because of the Treasury financing program there was nothing to be done for the present except to continue the current policy. As he understood it, however, the was to maintain an even keel at the last Committee meeting consensus and it was his impres resolved on the side of restraint, with doubts side of restraint. For had not been on the sion that the tendency even a keel as possible. he would maintain as the next three weeks near-term System policy Mr. Mills said that in his judgment on the need on reserves focused a degree of pressure should maintain Treasury's new security redistribution of the for effecting a
offerings into permanent hands. He believed that the time had come for the Open Market Committee to take a new look at the problem involved in a continuation of the type of policy followed over the past three weeks. From the comments of Mr. Thomas, there appeared to be cause to feel that there was not going to be an excessive demand for bank credit, at least to an extent that would require its being curbed through an unduly restraining monetary and credit policy. Such being the case, he felt that the Committee should be careful not to exaggerate the liquidity in corporations and else where as a force that could release demands and work toward un desirable price pressures. On the contrary, a good case could be made to the effect that the degree of liquidity might work in conjunction with a System policy seeking to contain an unwise expansion of credit. The liquidity would in due course be used to take care of corporate demands for reinventorying or to carry addi tional investment in accounts receivable, and it would provide the ability to do so without drawing on any marginal expansion of bank credit. At such time as there was a divestment of the excessive liquidity, the masses of Government securities that moved into the market would of themselves exert a restraining influence by bear ing down on the price level of such securities. Therefore, he returned to the thesis he submitted at the last Committee meeting a constant level of a policy which contemplated continuing that compel a contraction of free reserves would in reality negative
credit by imposing a vice-like pressure on the banks. Accordingly, it was his feeling that while moderate pressure was required in order to effect a redistribution of the Treasury offerings, the System should be cautious. In open market operations, he felt that doubt should very definitely be resolved on the side of ease. Asked by Mr. Szymczak whether this meant that he would favor letting the level of negative free reserves vary substantially, Mr. Mills replied in the affirmative and said that he would favor per mitting a variance up to the level of positive free reserves if natural forces produced such a situation temporarily. In reply to a question regarding the effect on the Treasury bill rate, Mr. Mills said that the Committee was dealing essentially of credit and, in dealing with that, could not with the availability responsible for fluctuations in the rates on Treasury make itself bills or other short-term securities. Mr. Leach said it appeared from the latest information that, the exception of West Virginia, the economy of the Fifth District with move forward. In the textile industry, production was continuing to of many cotton gray goods and synthetic fabrics had been heavily sold the third. Demand for seamless the second quarter and into through in general sold out with factory output hosiery continued strong, for Southern pine lumber had held at high levels, until May. Orders substantially. Seasonally and shipments had increased and production stores rose 6 per cent in February from adjusted sales by furniture
the preceding month and were up 26 per cent from a year ago. Department store sales, on the other hand, had declined. Mr. Leach went on to say that West Virginia continued to lag the other States of the Fifth District. Nine of that State's sixteen classified labor market areas were areas of "substantial labor surplus" when the recession began, and all sixteen had been so reported since May 1958. Employment in mining, seasonally adjusted, declined 20.3 per cent from July 1957 to May 1958, and had remained practically unchanged since that time. The decline in bituminous coal production continued last month, with overseas shipments down sharply. Average weekly hours in coal mining dropped from 34.8 in January to 32.8 in February. With respect to policy, Mr. Leach expressed the view that the current Treasury financing clearly called for System actions directed toward maintaining an "even keel." He was glad that the System had entered the even keel period with a discount rate of 3 of substantial net borrowed reserves over a per cent and a record period of several weeks. Recent experience had again shown that no single statistical indicator could be relied upon in judging the of the market, and he knew of no better instruction that tightness Manager of the System Open Market Account could be given to the market in attempting to maintain than to go by the feel of the substantially the same degree of pressure.
Mr. Leedy said that the national trends reported at this meeting prevailed generally in the Tenth District. The value of construction contracts awarded in the district in January was one fourth greater than in the same month a year ago, and department store sales were up sharply. While the difference could be accounted for to some extent by the earlier Easter date this year, for the week ended March 14 department store sales exceeded the year-ago level by 19 per cent. For the first two and one-half months of the year, such sales were up 12 per cent. Nonfarm employment in mid-January sur passed the year-earlier level by a small margin. This was the first 1958 that district employment figures showed an time since January month of the preceding year. Unemployment increase over the same figures were down, but only slightly. Mr. Leedy said there had Turning to banking developments, four weeks in most major strength during the past been considerable particularly strong from of borrowing, with demands categories companies, and manufacturers utilities, sales finance retailers, public repayments by seasonal products. Over this period of metals and metal farm loans were last year. Nonguaranteed had been below borrowers stood at record levels. since 1952 and now than at any time higher deposits had led contraction of loans and a seasonal The growth of of reporting banks. investment portfolios in the to major adjustments reduced by roughly period had been during this Total investments
$100 million, with about $60 million of the reduction occurring in the past two weeks. Mr. Leedy expressed the view that continuation of the policy followed in recent weeks would be appropriate. From the figures furnished, it seemed evident that it would be necessary to supply some additional reserves. Until the payment date for the new Treasury issues had passed, he felt the Desk must be careful that the reserve positions of banks did not tighten too greatly, After that date, however, it was his feeling that doubts should once more be resolved on the side of restraint. Mr. Allen reported that Seventh District department store excellent, although some slight allowance must be sales had been made because Easter was early this year. In the four-week period 14, district sales were up 13 per cent compared with ended March for the nation. Within the district, all of the 11 per cent large increases during this period, but principal cities showed Detroit, with a plus 29 per cent, had by far the largest gain. in a broad variety of business lines, Employment was improving had produced layoffs. Buick although certain special situations other automobile plants were furloughed a number of workers, had inventories were approaching the expected to do the same now that had followed decisions layoffs in other industries 800,000 level, and lines. Protective buying factories or to drop unprofitable to move
of steel against a possible strike was now in full swing and order books were closed for the second quarter. It was believed that a four or five week strike would not affect total steel output for the year as a whole because a slump in the third quarter was now certain, strike or no strike. Of the Chicago purchasing agents who buy steel, 44 per cent indicated that they were trying to build up a 6-day supply by June 30, while 56 per cent were aiming for a 90-day supply. With regard to the automobile situation, Mr. Allen said that people in Detroit expected the daily sales rate for the month of March to average 18,500, although it was only 1 ,645 for the first eight selling days. On March 10, dealers' inventory of new cars was 795,000 and, with the industry reluctant to let the figure go cutbacks appear imminent. The much beyond 800,000, production manufacturers' current aims were production of 590,000 cars in in April, 520,000 in May, and 535,000 in June. March, 580,000 banks had been rising over Business loans of Seventh District felt could be attributed date, which Mr. Allen the March tax payment in steel, as to tax building, principally as much to inventory loans, and because increase in business Because of the borrowing. bills and accumulating Treasury banks were currently the Chicago their April 1 tax anticipation of deposits in temporarily losing a substantial basic banks were showing the larger Chicago date,
reserve dificit[sic]. This was expected to be eliminated soon after the first of April. As to policy, Mr. Allen commented that what Mr. Leach had said was precisely what he himself had in mind. Mr. Deming reported that nonfarm employment in the Ninth District apparently reached its usual seasonal low point in February and that a moderately strong improvement in the employment picture was currently under way. For several months, construction contract awards and the valuation of new building permits had been running substantially ahead of year-ago figures, so an unusual amount of construction activity was in prospect. New car sales had been particularly good in recent weeks, along with farm machinery sales. Dealers in farm equipment and machinery expected sales over the next few months to continue good in view of the farmer's relatively strong financial position and the fact that livestock and grain inventories After about midyear, however, 1959 crop prospects would were high. be a determining factor in farm spending. Bank debits, running 7 to 10 per cent above a year ago, were another indication of rather strong activity, and there had been a fairly strong improve current business This increase was general the demand for bank loans. ment recently in special like inventory build-up and did not seem to reflect anything mining industries was being Activity in district or tax borrowing. in the important iron was of particular significance expanded, which Minnesota and upper Michigan, producing areas of northeastern ore
hard hit by the unemployment because of the 1957-58 recession. Current estimates were that 75 million tons of ore would go down the Lakes this season as against 53 million tons in 1958. In 1957, however, 85 million tons were shipped. Montana copper production was strong and Anaconda's smelters at Anaconda and Great Falls were operating almost at capacity in so far as copper was concerned. Total Anaconda employment in Montana, however, was 9,000 as against 13,000 two years ago, indicating very strong productivity gains. Offsetting somewhat the improvement in mining and manufacturing was the current unfavorable trend and outlook for prices of most farm products. A much smaller winter wheat crop was now definitely in prospect for 1959 in South Dakota and Montana. summarized by saying that as the first quarter Mr. Deming close, over-all economic advance was continuing in the neared its were fairly optimistic about the Ninth District and businessmen immediate future. expressed himself as satisfied with the current Mr. Deming that he would favor no change in course of credit policy and said the next three weeks. there had been no major change in Mr. Mangels said that to be good and to which continued Twelfth District conditions, the spurt in construc been noticed that However, it had expand. seemed to be a number of months for activity experienced tion
moderating. In California, construction industry employment was down somewhat in February, while other areas of activity showed substantial increases in employment, particularly organizations having to do with defense contracts. In the southern California area, aircraft firms had increased employment to a moderate degree, which more than offset a decline in the aircraft industry in the northwest. Unemployment in California had dropped to 4.5 per cent, but in the State of Washington stood at 5.7 per cent. The demand for lumber continued strong, orders were in excess of production, and prices were better, with the result that rather substantial profits were anticipated. Steel production in the district was running at 87 per cent of capacity, and capacity was about 25 per cent higher than a year ago. Department store trade and automobile sales continued to show improvement. side, Mr. Mangels said that in the three On the financial loans increased, with the bulk of the weeks ended March 12 bank some increase also noted in real increase in business loans and deposits were up about consumer credit loans. Demand estate and $3 million compared with but time deposits declined $100 million, corresponding period a year ago, an increase of $130 million in the of people on in the savings habits a major change thus indicating Reserve Bank continued at the Federal West Coast. Borrowings the District banks in amount. Twelfth and nominal to be scattered
were net sellers of Federal funds last week, and it was predicted that in the coming week they would again be net sellers. Bank debits for the first two months of this year showed an increase of 11 per cent over the first two months of 1958, and for February were 15 per cent higher than in the same month of 1958. Mr. Mangels expressed agreement with those who had felt that no change in policy was necessary. He believed that the Desk should have leeway to consider the feel of the market and he would want to maintain an even keel in the light of the Treasury situation. Mr. Mangels concluded with the observation that the San Francisco di rectors had been unanimous in following the lead of the other Federal Reserve Banks in increasing the discount rate, although earlier there had been indications that some of them might not favor a change. Mr. Irons said that there were no developments of significance District. During the past three weeks, to report from the Eleventh with activity at a high level. conditions had been satisfactory, he was satisfied with open market Mr. Irons also said that and that a status quo position over the past three weeks policy Treasury in the market. indicated with the seemed quite obviously for change in the that there was no need agreed with Mr. Treiber He restraint. He would or the degree of the discount rate, directive, maintain approximately the tendency toward ease and would avoid any past three weeks. existed in the that had degree of restraint same
Mr. Erickson reported that business continued to improve in the First District, although not spectacularly. In some items the district was running slightly above the national figures, while in others it was below them. Mr. Erickson said he had nothing to add to what others had stated with regard to policy for the next three weeks. He would favor no change in the directive or in the discount rate, and he felt that the degree of restraint that had existed recently should be continued. He would leave it to the Management of the Account to judge the feel of the market. Mr. Szymczak observed that normally the second three months might be expected to show more of a seasonal improvement than the first three months of the year. With the Treasury in the market, he would not want to disturb the market during the forthcoming period and therefore would leave things about as they were. However, he was impressed by what Mr. Mills had said in connection with the securities and allowing the reserve redistribution of Government in order to make such securities more attractive. position to change know how this could be done without affecting the While he did not to the discount rate, anything that bill rate and its relationship at this time would Government securities would aid in redistributing be helpful to the over-all situation. proposed amendments to Szymczak then referred to the Mr. in the Federal by the Board U, recently published T and Regulations
Register for comment, and said that anything the Presidents could contribute would be helpful, not only from the standpoint of re straining credit in the stock market sector but also from the standpoint of making the regulations more workable. The Board's objective, he noted, was to obtain as many suggestions as possible with a view to making the regulations work well over a period of time. Summarizing, Mr. Szymczak said he subscribed to the sugges tions made by Mr. Mills in that he felt the System ought to try to do whatever it could through adjustment of the reserve position and through open market operations that would be helpful in redistributing Government securities. He felt that it would be desirable to pursue to the extent possible, to obtain suggestions on Mr. Mills' point the country, and to make it T and U from all parts of Regulations the Treasury to go into its present financing and its possible for projected financing without undue disturbance. whether the tightness in the Mr. Balderston asked Mr. Rouse been about the same as during the past three weeks had market during reserves had though net borrowed three weeks even the preceding his opinion it had replied that in higher, and Mr. Rouse averaged then inquired whether, the same. Mr. Balderston been substantially this would probably restraint were continued present degree of if the Mr. Rouse net borrowed reserves. same level of mean about the
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.
Also: Record of Policy Actions