April 14, 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, April 14, 1959, at 10:00 a.m. PRESENT: Mr. Hayes, Vice Chairman, presiding Mr. Balderston Mr. Deming Mr. Erickson Mr. King Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Bryan, Alternate for Mr. Johns Mr. Fulton, Alternate for Mr. Allen Messrs. Bopp 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. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Jones, Marget, Mitchell, Parsons, Roosa, Messrs. and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Special Assistant to the Board of Mr. Molony, Governors Koch, Associate Adviser, Division of Research Mr. and Statistics, Board of Governors Keir, Acting Chief, Government Finance Section Mr. Research and Statistics, Board Division of of Governors Vice President, Federal Mr. Freutel, First Reserve Bank of St. Louis
Messrs. Daane and Tow, Vice Presidents of the Federal Reserve Banks of Richmond and Kansas City, respectively Mr. Einzig, Assistant Vice President, Federal Reserve Bank of San Francisco Mr. Gaines, Manager, Securities Department, Federal Reserve Bank of New York Mr. Anderson, Economic Adviser, Federal Reserve Bank of Philadelphia Mr. Coldwell, Director of Research, Federal Reserve Bank of Dallas Mr. Brandt, Economist, Federal Reserve Bank of Atlanta Mr. King stated that he wished to refrain from voting on matters coming before the Committee for action at this meeting. It was noted that Mr. Freutel, First Vice President of the Fed eral Reserve Bank of St. Louis, was in the Board's building today in connection with a meeting of the Board and the Presidents of the Federal Reserve Banks, and he was invited to attend this meeting in the absence of Mr. Johns. Mr. Freutel then entered the room. Upon motion duly made and seconded, and by unanimous vote, the minutes of the of the Federal Open Market Com meetings mittee held on March 3 and March 24, 1959, were approved. to the members of there had been distributed Before this meeting covering the period of open market operations the Committee a report report covering the April 8, 1959, and a supplementary March 24 through both reports have 1959. Copies of through April 13, period April 9 Open Market Committee. files of the Federal placed in the been money market had been generally Mr. Rouse reported that the meeting, and particularly so the period since the last tight during
during the last two weeks of the period. Federal funds had been at 3 per cent on most days, while dealer loan rates moved up to 3-1/2 per cent for the first time since January of last year. The Account dealt with this situation mainly through repurchase agreements, since the tightness was expected to be only temporary and to disappear with the float expansion that should be getting under way tomorrow. As of last night, there were $245. million repurchase agreements outstanding, all of which were scheduled to mature on Thursday. Although the money market had remained on a generally even keel, Mr. Rouse pointed out that the situation in the Government securities During the past week or ten days there had market had not been good. but steady deterioration in market atmosphere. Nonbank been a slow securities had tapered off substantially, and buyers for demand for of the Treasury's latest issues continued commercial bank offerings marked prices of coupon issues had been hard to find. Dealers had to stimulate buying interest, rates on bills up, in an effort down, and there had been no resumption of the large but thus far, at least, occurred in the recent past. of securities that scale redistribution belief in the market performance was a growing Related to this poor in the business situation of the continued improvement that, in view ahead, interest rates of Treasury financing and the heavy schedule in the near future. likely to move higher were very that for two reasons such expectations, Mr. Rouse commented had special of market atmosphere, resulting deterioration and the
significance for the Treasury and the System at this time. First, the Treasury must decide by April 30 on the terms of the May refunding-recommendations to the Treasury would be based largely on next week's market--and it already appeared that the Treasury would not be able to go out beyond the one-year area. Secondly, holders of the 4 per cent notes of August 1961-the so-called 2 x 4's--would be making up their minds during the next two weeks whether they would turn them in on August 1 or hold them until maturity in 1961. The issue closed last night at par and 8/32 bid, equivalent to a yield of 3.11 per cent to August 1, 1959, which was about 4 basis points higher than the July 16 bills auctioned yester day at an average rate of about 3.07 per cent. There had already been reports that at least one large New York bank was purchasing the 2 x 4's as a short-term money market instrument, planning to have them stamped before May 1 and to redeem them on August 1. Apart from the already-existing incentive to use them as short-term money market obligations, a further incentive working toward a large cash-in of the 2 x 4's was the growing belief of higher interest A holder who anticipated that the one-year rate will rates ahead. 2 x 4's stamped on or 1 could have his be 4 per cent by August 1, and use the proceeds to buy before May 1, redeem them on August into which the Treasury would probably be rolling the certificate could thus shorten up by the 1-5/8's on that date. The holder over a year without loss of yield.
Until 10 days ago, Mr. Rouse said, the whole market had been buoyed up by the substantial nonbank demand for shorter maturities. However, with the subsequent fading of this demand, the picture had become distinctly less favorable for the Treasury. Mr. Rouse noted that the projections for the next period indicated a tendency for natural factors to make reserves available. Despite the runoff of $100 million of bills in the auction yesterday, this change in direction of the natural factors might help relieve the feeling created by statistical pressure. However, this probably would not be material unless the present distribution of reserves changed and reserves flowed back to the central reserve cities. Mr. Robertson inquired as to the purpose of the purchase by the Account of about $75 million of Treasury bills last Friday, and Mr. Rouse replied that the thought was to try to help bring about as existed in the market prior to last week. the same atmosphere had tried to do this through the use of re The Account Management but thought that perhaps some outright buying purchase agreements the purchases were needed As it developed, however, would help. Friday worked out The position last the reserve standpoint. from reserves and there promised million of net borrowed to about $200 deficiencies over the accumulation of reserve to be a considerable Primarily, therefore, actually did develop, end, which in fact week same time the but at the to supply reserves, the purchases were
hope was to help recreate to some extent the atmosphere and feel in the market that the Open Market Committee had requested the Account Management to maintain during this period. Mr. Robertson then inquired what the feel was that the Desk was striving for, and Mr. Rouse replied that the thought was to run in the area of $175 million of net borrowed reserves. There was a good nonbank demand for bills and other short-term securities and the Desk was trying to maintain a condition whereby the redistribution of securities would continue. Mr. Rouse also verified that the purchases last Friday were not for the purpose of easing restraint and added that maintenance of the same feel in the market was directed at the last meeting of At that time, he said, the situation that the Open Market Committee. could be foreseen quite well, for there had been a had now developed of short-term securities in the banks, substantial accumulation was going to be called upon in Chicago, and the market particularly of such securities. Reference was to reabsorb a considerable amount the net borrowed reserve statistics then to the possibility that made facilitate the redistribution in order to have to be much lower might had prevailed up to that feel in the market that and maintain the after the last financing, coming so soon time. With the refunding and it of the securities, not been a full redistribution there had of the frequency of what might happen in view was hard to say
Treasury financing and the market's knowledge that the Treasury would have to come to the market again after the refunding and, apparently, borrow almost monthly during the balance of this year. Upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period March through April 13, 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 April 10, 1959, his comments being substantially as follows: Once more, recent economic data provide a record of general economic advance. Accordingly, our report today may be confined to highlights. (1) March industrial production rose two full index points from the revised February figure, bringing the index level to 147 of the 1947-49 average. This level, together with the January and February revisions, now assures a first quarter average of 145. (2) March gains in output were widespread, with demands for industrial and construction materials again mounting and activity in business equipment showing the beginnings of real strength. Output of consumer goods, already at record levels, apparently rose further. which have just become (3) Housing starts for March, available, are up again, to a seasonally adjusted annual rate of 1,426,000. Value of construction put in place in March, after little change in February, attained another peak volume, reaching a level 17 per cent above the May 1958 low. For the nineteenth successive month private industrial construction declined, but other major con struction components increased. Construction costs, which for several months have been showing creeping ad vance, are now two to three per cent above a year ago. (4) Fresh strengthening of the labor market has by greater than seasonal rise in manu been indicated facturing and other employment from mid-February to
mid-March, a decline in the seasonally adjusted unemploy ment rate over this interval, slightly longer hours of work per week in March, and increased hourly and weekly industrial earnings last month. In the textile industry, a general wage increase appears in the making, with the initiative in the rise coming from unorganized mills. (5) Accumulation of business inventories, which began in December, was extended through February according to the latest available figures. The very sharp rise in February in new orders at manufacturers, as well as the March increase in activity in durable goods industries, surely portend that business inventory accumulation will continue. In this connection, the latest McGraw-Hill survey of planned business plant and equipment outlaysresults of which are to be released next Monday--will show a projected increase for 1959 significantly larger than that shown by the recent Commerce-SEC Survey. (6) With activity and employment advancing further, personal income in March is estimated at $368 billion, up $3 billion from the final February figure, which was revised upward, on the basis of very recent reports, by $1 billion. income naturally gives impetus to (7) Rising personal retail buying. Retail sales in March exceeded moderately the substantial record of December. The advance in sales was general, with department stores doing especially well. March sales of new and used autos, which were close to the March car prices have con were patently strong. Used 1957 rate, tinued firm at levels considerably higher than a year ago. With strong markets for both diversified durables and autos, consumer instalment credit is showing rapid growth--at a billion annual rate according to January-February figures. $4 the Board's new experimental survey (8) Incidentally, of consumer buying plans and attitudes, conducted by the of Census as of mid-January, turned up with results Bureau about in line with those of the Survey of Consumer Finances conducted by the University of Michigan in January and attitudes appear optimistic, but durable February. Consumer moderately better than actual goods buying plans look only buying performance of last year. all sectors of demands in virtually (9) Strengthening in a creeping advance in the economy are being reflected commodities. Also, average average prices of industrial rose modestly this past month, mainly prices of farm products advances in livestock and grain prices. However, owing to have raised only slightly the these recent price advances average of all wholesale prices.
(10) With gains in activity so widespread as recent reports indicate, GNP estimators are revising their esti mates of first quarter advance. Earlier they were content to project a $10 billion rise from the fourth to the first quarter. Recently, however, they have upped their estimate to $12 or $13 billion-that is, to a $465 or $46 billion annual GNP rate. (11) Economic intelligence from abroad would indicate that industrial activity in several leading countries of Europe rose in February. This rise would seem to be a re sponse to stronger consumer demand for durable and nondurable goods and to increased construction activity. There is little evidence yet of pickup in European business equipment in dustries. U. S. exports continue to sag; the February total was the lowest since late 1955, reflecting declines in agricultural exports and to a lesser extent smaller shipments of equipment. Mr. Thomas made a statement substantially as follows with refer ence to the current financial situation: Recent financial developments, as well as those described by Mr. Young with respect to other phases of the economic situation, clearly indicate that Federal Reserve policy has not been unduly restrictive. Some question may be raised as to whether it has been adequately restrictive. Prices of industrial products are rising; elements continue to be powerful in the stock speculative market and may be appearing elsewhere; and some kinds of credit are showing expanding tendencies. In view, however, of the broad objective of promoting a growing economy, and in view of the current level of unemployment, existing productive capacity, and the moderate current volume of for expansion of plant and equipment, there expenditures no clear-cut need for vigorous restraint seems as yet to be on expansion. In the credit area, governments and consumers appear Long-term corporate borrowing to be the largest borrowers. in smaller volume than in in capital markets continues loans at banks Commercial and industrial several years. conformed closely to the customary seasonal pattern, have after allowance for borrowing by sales finance particularly instalment credit extensions, however, companies. Consumer demands continue high level. Mortgage have reached a new
heavy. State and local government borrowing in capital markets remains close to the record level of last year and now exceeds corporate capital issues in dollar aggregates. The Federal Treasury completed its $4 billion cash financing operation on April 1 with a substantial assist from the banks through direct purchases and loans to dealers. The current task is for the banks and dealers to distribute a large portion of their acquisitions to the investing public as the Treasury expends the funds it obtained. So far this year, the bank underwriting and distributing operation has been successfully accomplished. From the end of last June to the end of March, the total public debt increased by nearly $6 billion while commercial bank holdings of U. S. securities declined by over $1 billion. In the first three months of this year, when total public debt decreased by less than $1 billion, com mercial bank holdings declined by over $3 billion. These figures do not include the effect of the April 1 financing. Nevertheless, the net result of all bank credit opera tions in recent months has been an increase in the private money supply, after adjustment for usual seasonal variations. the four weeks ending March 25 was over $1 The increase in billion, following a smaller increase in February. Care should be exercised, however, in drawing conclusions from single-day figures for deposits; daily average figures for banks seem to indicate only a moderate rate of growth member during the past four or five months. in the money supply has not equalled the in Expansion product. Preliminary estimates crease in the gross national of this year the ratio of that in the first quarter indicate to the gross national product declined to the money supply than the low point reached 30 per cent-or slightly less below in the summer of 1957. The at the peak of economic activity this comparison is dubious, however, in view significance of deposits and in the public's the marked increase in time of year and a half. bills during the past holdings of Treasury the money supply, notwithstanding The continued growth in securities and disposing of Government of banks in the success indicate that the loan demands, would moderateness of the expansionary effect through deficit is having some Treasury expansion, together credit. This monetary the use of bank assets, can provide of other liquid with the accumulation in total spending. for further expansion the basis policy, as suggested standpoint of monetary From the not been too severe. Money restraints have evidently earlier,
markets were not particularly tight during March notwith standing heavy seasonal credit demands at the time. An average of around $500 million of member bank borrowing has generally not been restrictive in the past. This is especially true in March when Chicago banks more or less willingly borrow to hold Treasury bills in anticipation of customers' demands on the April 1 tax date. Since the beginning of April, however, there are indications of increased strains on the money market. Government securities markets have been weak. Rates on 90 day Treasury bills have risen this week above 3 per cent. Yields in the longer-term issues are clustering around or slightly above the 4 per cent level. These rate rises probably reflect at least in part the efforts of banks and dealers to reduce their holdings of recently acquired securities. Unless these holdings can be reduced as the Treasury expends its balances, the private money supply will expand further. The Treasury still has a considerable amount of borrowing ahead, although not as much as in the same period last year. A moderate amount of cash will be needed in May, with some debt retirement in June, presumably followed by substantial borrowing in July. For the four months, May to August, the net increase in the debt will be about $1.6 billion, or approximately the same as in the corresponding period last year. In the last four months of the year the cash deficit promises to be considerably less than last year, when the Treasury borrowed heavily and also drew its cash balance down to a low level. In the first half of 1960 there should be a substantial net debt retirement in contrast to a slight increase in the same period this year. There is a likelihood that corporations may continue to be moderate purchasers of Government securities through the rest of this year. It will continue to be necessary, however, the Treasury borrowing to be underwritten by the for much of should be continued in order banks, and pressure on reserves as the Treasury draws to force banks to sell the securities down its deposit balances. Committee is to what question facing this The immediate pressures upon the relieve the effect of current extent to market in view of the difficult problems Government securities Treasury financing operation. that surround the forthcoming indicate that seasonal reserve needs during Our projections There seems to be little the next few weeks will be slight. for buying or selling for reserve purposes. Any reason
temporary variations in reserve needs could presumably be met through repurchase arrangements. If bill rates remain above 3 per cent and credit demands should tend to mount, then consideration will need to be given to a further rise in the Reserve Bank discount rates, as soon as the exigencies of Treasury finance permit. Mr. Hayes made the following statement of his views on the busi ness outlook and credit policy: As various business statistics for March have become available, they have suggested that expansion is proceeding somewhat more vigorously than had seemed probable a month or two ago. The stimulus provided by the expectation of a steel strike appears to be only a partial explanation. Some of the enlarged steel output is supporting a rising volume of production in metal-using industries, and a modest start has been made toward inventory accumulation in other industries besides those using steel. Automobile sales were unexpectedly strong in March. Retail sales in general have been highly satisfactory, abetted by a considerable rise in consumer credit. There is some evidence of increasing capital expenditures, although it is still too fragmentary to warrant prediction of a late 1959 level much above the SEC estimates published some weeks ago. It is encouraging to note the greater-than-seasonal rise in total employment in March and the greater-than seasonal decline in unemployment. In the Second District the unemployment situation likewise improved, with the notable exception of areas where the aircraft industry is heavily involved. The price picture is still generally stable. In the next few months the consumer price index may feel some upward pressure from the usual seasonal rise in food prices. other hand the continued abundance of most world On the well for stability in the wholesale index. commodities augurs possibility of excessive wage increases in the While the steel industry carries with it a serious threat of upward there are hopeful indications of a salutary price pressure, this problem and its implica public concern over widespread tions, both national and international. nor the volume of new or Neither the price situation, unfilled orders, nor recent loan statistics suggest a change attitude on the part of yet from a generally cautious as
business to a speculative building of inventories. We should welcome the outlook for further increases in economic activity, which are needed to absorb the still large volume of unemploy ment, as long as they can continue gradually and without serious inflationary pressures. We should obviously remain on the alert, but signs of a boom are still lacking, except in the stock market. The March figures on bank loans show rather greater strength in the business loan category than in January and February--although improved corporate liquidity and lower tax payments made for lower tax borrowing than in 1956 or 1957. Consumer loans also rose substantially last month. As for investments, a comparison of Government security holdings of all commercial banks on March 11, the latest available date, with those for late June 1958 discloses that nonbanks absorbed virtually all of the $12.5 billion increase in marketable government debt which occurred during that period. This was unquestionably a favorable development, even though we cannot overlook the fact that over-all liquidity outside of the banks increased greatly as corporations and others added to their holdings of governments, principally of short maturity. The growth of this pool of potential spending power, over and above the money supply proper, will bear watching; but it can hardly be regarded as undesirable as long as sizeable unused real resources exist in the economy. Of course, with Treasury cash financing remaining a major problem through the rest of 1959, it is very difficult to forecast how long the nonbank absorption of new issues will continue and to what extent the money supply, which has behaved moderately to date, may expand unduly if it proves necessary to lean heavily on the banks. Fortunately, business spending policies suggest that the current cautious transition, if it occurs, should be gradual rather than abrupt. our problem at present is to In terms of credit policy, maintain a reasonably firm rein on credit expansion and a rate structure, without pushing these reasonably firm interest to the point where we inhibit further desirable tendencies It seems to me that the recent degree of tightness expansion. appropriate, and, in the light of the latest business has been and credit statistics, I see no reason to intensify this In fact, I believe we over the next three weeks. restraint if we were to intensify the present might be inviting dangers degree of restraint. During the past week or two there has in nonbank demand for securities, been a significant decline in the absence of any divestment and this decline itself--even had the effect of by the nonbank sector--has of securities time, the heavy calendar At the same tightening the market.
of Treasury financing ahead and the continued improvement in the business outlook--especially the March employment figures--have led to the emergence of a belief that interest rates will almost inevitably move higher. This in turn has brought into sharp focus the question of the Treasury's forthcoming refunding and cash financing, and particularly the question of the disposition of the 4 per cent notes of August 1961-the so-called 2 by 4's--by holders of that issue. If it should turn out that the market tightens itself because of continued slow nonbank demand for securities-or possibly because of nonbank divestment of securities, which could begin at any time--particularly with a reactivating of capital expenditure--then any move toward further restraint by the System could be a serious mistake, since it would be super imposed upon increased tightness generated by the market itself. I would therefore make no overt move toward further restraint at this time, but would continue to have day-to-day operations conducted largely in terms of the feel of the market, with the Manager of the Account instructed to maintain about the degree of restraint we have had in recent weeks. This might imply a considerable range within which reserve statistics would fall. In my view the directive may be left unchanged. appropriately in the First District was Mr. Erickson stated that the picture but at a more modest pace. When compari one of continuing recovery, there was distinct improvement; in sons were made with a year ago, improvement was mch harder range, however, the degree of the short through April 4, department the first of this year to measure. From of the corresponding period a year store sales were 4 per cent ahead 8 per cent. In the nationally of about with an increase ago, compared .7 per cent below the correspond weeks prior to Easter they were four least in part to have been due at year, but that may ing period last expenditures for 1959, now conditions. A survey of capital weather rise of only 1.6 per cent, indicated tentatively a being completed,
compared with an estimated increase nationally of 7 per cent, and in February nonagricultural employment was down .2 per cent from January. On the other hand, a poll of New England purchasing agents showed an increasingly greater percentage reporting increased pro duction in each of the past three months, and F. W. Dodge figures for February showed a 38 per cent increase in construction contract awards over February of last year, although this was due primarily to one large award for an oil refinery. The past two weeks had seen greater use of the Reserve Bank's discount window and borrowings yesterday totaled almost $80 million. Apparently some Boston banks could not get Federal funds at 3 per cent and came to the Reserve Bank. the view that for the next three Mr. Erickson expressed change in policy. He would favor weeks there should be no overt in the discount rate, and the Committee's directive or no change in This would be a the degree of restraint. he would not increase would leave it to the Manager of the difficult period, and he to judge the feel of the market. Account of the national situation said that his impression Mr. Irons statement. There by Mr. Young's along the lines indicated was much major areas of in virtually all to be growing strength appeared was one of a strongly and the over-all picture economic activity, picture was much District, the In the Eleventh expanding economy.
the same and could be summed up as generally favorable at very high levels of activity. Retail trade in the major cities had advanced substantially from a year ago and also in comparison with preceding months. The employment and unemployment picture was good and improving in the major centers, with Houston the only city where unemployment, at 5.8 or 5.9 per cent, was a high percentage of the labor force. While there had been some layoffs in the aircraft industry around Dallas, offsetting factors apparently had prevented the percentage of unemployment from rising appreciably. May of those laid off were understood to have moved to other areas of the country and obtained employment. Personal income was up, and the situation in the petroleum industry had improved. The oil people did not particularly like the mandatory import controls but believed that they could operate satisfactorily with them. The agricultural situation had improved considerably during the past week due to snow and rain. On the banking side, Mr. Irons said he had been told by bankers, especially city bankers, that loan demand was very strong. In the loan totals did not decline very much a year ago and Eleventh District, the banks came into this year with a rather high level of loans, so a the bankers to feel that loan demand slight increase now was leading Although borrowing from the Reserve Bank had not was quite strong. country banks had been borrow total amount and very few been large in been an increasing tendency on the part of large city ing, there had
banks to come in for a day or two. As to attitudes, Mr. Irons said that recently he had more than the usual number of contacts with business executives and others in the district and found them quite optimistic almost with out exception. Their principal worries were about the wage-cost problem and the Government deficit. As to policy, Mr. Irons said that he was rather satisfied with developments during the past few weeks. While he was inclined to agree with Mr. Thomas that perhaps monetary policy had not been unduly restrictive, in his judgment it had been satisfactory. He would favor continuing about the same degree of restraint, relying heavily on the discretion of the Account Management with regard to open market operations. If the economy should continue to move ahead as strongly as at present, policy might have to be changed quite soon, but at present, with the Treasury problem in the picture, it would be appropriate to maintain the status quo. He saw no reason the policy directive or the discount rate at this time. to change a continuing rising trend in Twelfth Mr. Mangels reported was up in March and insured District economic activity. Employment larger than in any March for was down, with the decline unemployment sales were at record Department store Easter the past four years. steel production had sales were up, breaking levels. Automobile for copper and aluminum. was an improved demand and there increased,
Western pine lumber production was up 10 per cent from March 1958 and plywood demand was holding well, but key grades of Douglas fir had been cut in price because of a slight decline in orders. In agriculture, cotton planting was expected to increase 12 per cent over 1958, for the largest planting since 1954; plantings of spring wheat and rice also were up, with declines in potatoes and hay. For the three weeks ended April 1, all categories of bank loans increased as did holdings of Government securities, while demand and time deposits both declined. Twelfth District banks were net buyers of Federal funds last week and were expected to be net buyers again this week. Borrowing from the Reserve Bank had remained intermittent and nominal, but there were some indications that the banking situation was getting tighter and reports were heard that loan demand was likely to increase. Accord ingly, some banks were expecting to sell Government securities. Mr. Mangels said that he would favor continuing to maintain the present degree of pressure. He agreed with Mr. Hayes that this pressure should not be accentuated, for he would want to give the banks a little time to make an orderly distribution of Government securities to permanent holders. Mr. Mangels expressed some concern that the threat of strikes might be inflating statistics on production, new orders, and inventories, and that the last half of the year might strong a picture of advance. He felt that it would not show as therefore be well to wait a little before increasing pressure and that there would be time to do so in the next few months if necessary.
After expressing the view that net borrowed reserves should be kept within a range from $125 to $150 million, Mr. Mangels said that he would make no change in the discount rate at this time and that he felt the directive was satisfactory. Mr. Deming reported serious early spring drought in the Ninth District. Except for some local areas in southern Minnesota and the Upper Red River Valley, both topsoil and subsoil moisture supplies were low, and high winds and dust storms over much of the area during the past week caused a further deterioration in 1959 crop prospects. It appeared that about a fourth of the planted acreage of winter wheat in South Dakota might be abandoned. Only very favorable rain fall and growing conditions for the next few weeks could offset the early drought for the district as a whole. Livestock were in good condition, thanks to plentiful supplies of relatively cheap feed, but water supply was a problem in some areas in the west, with stock ponds either dry or only partially filled. In contrast, the general business picture looked quite good. Farmers' income was still running activity was showing a strong seasonal ahead of last year, construction upturn, both in residential and other types of building, and there was a heavy backlog of contracts and new building permits. Mortgage credit appeared ample at the moment and for the immediate future, and employment was improving as construction and mining activity during the past few weeks to mine boomed. There had been a big push
and move iron ore from the iron ranges to the lower lake ports; some ore had been shipped by rail from the ranges rather than wait for boat shipment when the lakes were cleared of ice. Expansion in ore demand was putting new vigor in the depressed iron ore mining regions of the district. As to the district barking situation, Mr. Deming said there had been a sharp increase in loans during the last part of the first quarter, particularly in business loans. Reserve city bankers in Minneapolis and St. Paul expected a particularly heavy demand for business loans this summer and next fall, with such demand pretty much across the board. More country banks had borrowed at the Reserve Bank in the last half of March than in any half-month period 1957. In summary, there was a stronger than normal since June seasonal increase in business activity in the district this spring, with the demand for credit growing rather sharply. expressed agreement with the policy suggestions Mr. Deming this meeting. He was satisfied with what had been made thus far at several weeks, and he would favor continuing done during the past about the same degree of pressure. Mr. Mitchell reported on In the absence of Mr. Allen, District. Among other things, he developments in the Seventh in the producers' durable goods referred to surprising strength the construction machinery industry as area and characterized
being in almost a boom period. Farm machinery sales were excellent last year, it appeared that this year might be even better, and reports on lines such as electrical equipment and oil pipeline equipment also were encouraging. On the other hand, the employment situation did not appear to be quite as good as reported generally. In Chicago, this might be due partly to the fact that packing houses were moving out of the city, thus cutting down the demand for labor of a type that had difficulty in finding alternate employment. In eastern Michigan and the Detroit area the unemployment situation continued to be bad; in view of current levels of automobile and truck output, it did not appear that much more recovery would come from the automotive industry in the near future. Hence, it appeared that unemployment would continue rather large in that area in the absence of some rather spectacular development. As usual, the Chicago banks lost a substantial amount of private demand and time the period between March 25 and April 1, most of deposits during of banks outside the area and by a which was replaced by deposits The Chicago banks also increase in Government deposits. large extent from the Reserve Bank, mostly earlier in borrowed to some in the process of They were now the week, and sold securities. getting the private deposits back to Chicago. District agricultural conditions Mr. Leedy stated that Tenth would not be the wheat crop probably favorable. Although continued
as large as last year, a good crop still was in prospect. Some areas had been hit by drought, particularly in Oklahoma where only about 50 per cent of the wheat crop was in good condition. Slaughter cattle prices had continued to strengthen and were currently above year-ago levels, with larger numbers of cattle being marketed. Feeder cattle prices also continued to advance and currently were at higher levels than at any time in 1958. Prospects were favorable for range and pasture conditions, feed supplies were abundant and these were factors in the strong demand for feeder stock. The unemployment situation had improved, with agricultural employment contributing substantially to the improvement. Department store sales in the district through April 4 showed an increase of 11 per over a year ago. Demand for credit remained quite strong, cent and this was being reflected at the particularly at country banks, number of country banks were borrowing discount window, where a large city banks. Interbank deposits were major borrowings by and there at city banks were off sharply. the Treasury financing he felt Leedy said that except for Mr. to the question of be giving serious thought the System might now As he understood it, pressure on bank reserves. applying additional ago, which was a cent above a year supply was now 4 per the money except for this juncture. Therefore, than desirable at higher level moving in the direction would like to be situation, he the Treasury
of a higher level of net borrowed reserves. With the strength evident in the economy, he felt that the Committee should direct its attention toward moving further in the direction of restraint at the first possible opportunity. During the period immediately ahead he hoped float would not be permitted to create more ease than had existed. Perhaps the market had already discounted to some extent System action in the direction of further restraint, and if so he felt that the System might have more freedom of action. In summary, while he recognized the difficulty as far as the Treasury was concerned and the complication caused by the 4 per cent notes of August 1961, he felt that the System ought to avail itself of any opportunity to increase slightly the degree of current pressure. Mr. Leach reported that economic gains had continued in the with the exception of coal mining areas in West Fifth District indicated that employment gains were Virginia. The latest information widespread and the man-hours had increased in most manufacturing strength included textiles, furniture manufacturing, industries. Areas of and residential building. Bituminous cigarette production, lumbering, for the sixth consecutive month, coal production declined in March in West Virginia. adverse effects on unemployment with continuing behavior of member Leach said the borrowing Continuing, Mr. was having a more monetary policy to indicate that banks seemed than generally realized country member banks effect on widespread
and that problems of discount administration were already present. In the first quarter of 1959, 122 banks borrowed from the Federal Reserve Bank of Richmond, which represented 27 per cent of all member banks in the district, an impressive figure considering that 46 per cent of the member banks had not borrowed during the last twenty years. Seven of the banks that borrowed during the quarter had not borrowed in the previous five years, and three of the seven had been out of debt to the Reserve Bank for 22 years or longer. In comparison, only 87 banks borrowed during the first quarter of 1957, when credit restraint was presumed to have been considerably greater than now. There was little difference in the dollar amount of borrowing during the two periods. Twenty-eight member banks were indebted to the Richmond Bank for more than one-third of the days in the first quarter of 1959, and for many of them the season of greatest demand lay ahead. Of those 28 banks, 22 now had higher--many credit much higher--loan-deposit ratios than in the first quarter of 1957. or certificates, and it was assumed A few of the 28 had no bills had depreciation in their security accounts. that nearly all Leach said, both the as a whole, Mr. For the United States and the amount of their country member banks borrowing number of the first five semimonthly periods in 1959 borrowings during each of periods of 1957. The than during the corresponding were larger of country banks borrowing in the first half of March 1959, number
the latest period for which information was available, was 626 as compared with 472 in the first half of March 1957, and average daily borrowings were $198 million as compared with $171 million. Borrow ings of reserve city banks, however, were $43 million lower in the first half of March 1959 than in the first half of March 1957, and borrowings of central reserve city banks were $211 million lower. From these statistics, Mr. Leach concluded that recent policy might have had greater tightening effects on country banks than aggregate reserve statistics would indicate. This, together with the fact that the Treasury was faced with particularly critical problems in the near future, pointed up the need for care in the intensification of credit restraint. On the other hand, recent in the staff report and in the economic developments as described to call for greater re Mr. Young and Mr. Thomas seemed comments of of the Government securi If it were not for the condition straint. he would favor somewhat problems ahead, market and the Treasury ties factors must be con However, those at this time. greater restraint policy did not into a more restrictive the case for going sidered and he would On balance, therefore, to outweigh them. seem great enough on the avail degree of restraint about the same favor maintaining with no change immediately ahead, in the period ability of reserves discount rate. in the alter the position no cause to that he found Mills said Mr. last two of the in the minutes as recorded taken previously, he had
Committee meetings, which was in effect that the System should guard against allowing the cumulative pressure on reserves inherent in its present policy from developing to a point that would convert a mone tary policy of restraint into one of restriction. Mr. Leach's remarks have illustrated some of the pressures present in current System policy. Country banks have gradually been moving toward a freezing in their positions, aggravated by massive purchases of U. S. Govern ment securities last year on which they now have a heavy depreciation. When considering the borrowing position of the member banks, Mr. Mills said, one should look both at the total borrowing picture and the composition of that total. By this he meant that in reviewing the total of member bank indebtedness, attention should be paid borrowings other than those at the Federal Reserve Banks; namely, borrowings by way of Federal funds and repurchase agreements. It was total of borrowings that in a real sense reflected the the grand on the heavy side when reductions pressure of System policy registered with an increase in Federal funds takings occur simultaneously in where a marked discounts. Under circumstances Federal Reserve Bank Reserve Banks was occurring at increase in discounts at the Federal there was more Federal funds advances, a reduction in the expense of than would be of member banks on the position reserve pressure severe by itself. A development level of discounts taken indicated by the importance when moving be a matter of especial of this kind would the market for must come into which the Treasury a period in into
funds because it heralded the possibility that a policy such as the System has been following, when reflected in a rising volume of Federal Reserve Bank discounts, might become a serious handicap to the Treasury's financing operations which it is an obligation of the System to foster within appropriate limitations. Fundamentally, however, what puzzled him, and surely raised similar questions in the minds of members of the Committee, was how to draw an economic dividing line between prosperity and desirable growth in the economy and the kind of situation that could burst out into an inflationary disturbance. He was apprehensive as to the ability of any group to read the future so accurately as to be able successfully to impose a monetary and credit policy capable of influencing future credit embryonic stage and might or might not developments that were in an eventually emerge from their chrysalis. said that his views coincided with those ex Mr. Robertson Leach, and he agreed with the suggestion pressed by Messrs. Leedy and Reserve policy had not been too Mr. Thomas' statement that Federal in to be nothing that the System There appeared to him restrictive. period, because of or for the next three-week could do at the moment, by the picture presented However, as indicated the Treasury's problem. boom proportions and he economy was reaching toward today, the whole if it failed to adopt was apt to lose control feared that the System While that at the first opportunity. restrictive policy a more
opportunity was not yet here and he would hold still for the present, he would not take any action to support the market. In open market operations, he would attempt to achieve an even keel position on the basis of providing or absorbing reserves to the extent necessary. Mr. Shepardson said that he could only echo what had already been said. As he saw it, the existing situation could easily explode into a very undesirable one. It was regrettable that the Treasury situation was such as to preclude more definite action at present, for in the background was an expansion of the money supply that could be a source of trouble in the not too distant future. In his opinion, current figures showed that the System had not been quite as re strictive in the past month or so as had been envisaged. Although accepting the situation as it stood and recognizing that not much done at the moment, he felt that the System should be alert could be developments that seemed to him to be near the and on guard against surface. did not wish to comment at this Mr. King stated that he meeting. that the steel industry was operating near Mr. Fulton said been the result of antici of the current activity had capacity; much The steel companies had offered a one-year pation of a steel strike. union had refused that contract and the of the present extension that the union would request Steel men were apprehensive immediately.
at least a 40 cent an hour increase in wages and fringe benefits, which they felt would be completely out of the question, and they were saying that a long strike would be preferable to giving in to such a demand. They stated that steel workers were now getting 30 cents an hour more than automobile workers and 63 cents an hour more than the average of all industrial workers. From present indications, Mr. Fulton said that it appeared that a strike of about six weeks' duration might be possible despite the existence of substantial unemployment. Those in the industry had been amazed at the record of profits during a period when, in many instances, operations were only at about 50 per cent of capacity. With operations having reached 93-1/2 per cent of capacity nationally and 95 per cent in the Fourth District, the steel companies were certainly making money and the union would be endeavoring to get a part of it. In the industry and many other users were current situation, the automobile trying to lay in a 90-day inventory. industry indicated that sales Reports from the automobile and one source had stated that the industry were doing rather well, better year than 1959, in fact almost expected 1960 to be a much also in progress in the rubber 1955. Wage negotiations were another at a high level of production which had been operating industry, strike. In rubber and also in aluminum, because of the anticipated place in August, there was were due to take where negotiations
stockpiling of inventories. This factor of stockpiling led some businessmen to believe that the current high level of activity represented something of an artificial situation, and there was caution and hesitation in a number of industries. Machine tool orders had increased somewhat and the backlog had extended to around 3-1/2 months, but much of this was explained by orders for large machines that take a long time to build. This industry, like the steel industry, was feeling the effects of foreign competition, and if the wage-price push should continue it feared not only a loss of foreign markets but strong competition in domestic markets from foreign-made commodities. Fourth District unemployment had been declining and only half of the major areas were now classified as areas of substantial unemployment, as against almost 90 per cent a ago. The work-week was now averaging 40.5 hours against short time of overtime suggested that a year ago, and the appearance 37.3 hours people to work. Prices were employers would tend to put additional brink of further increases. Some foundries and poised on the to raise prices if it were not for the machine tool firms would like was on the low side. District fact that the level of their operations to date were about 5 per cent department store sales for the year ahead of last year. concern about the possibility that Mr. Fulton expressed to the extent that would increase on Government securities yields
the optional 4 per cent notes of 1961 might be redeemed in large volume. He felt that the System could not ignore the situation of the Treasury, with the requirements for new money and the possibility of a large redemption of the 4 per cent notes, and he would take no further restrictive measures at this time. If the System were to stabilize the market at the feel of a couple of weeks ago, he thought that it might save itself from more serious trouble a little later on. It was his opinion that net borrowed reserves around $100 million, with the feel in the market commensurate, would place the System in a better position without doing violence to the posture of restraint than if it continued to let the market deteriorate. Another thing in the minds of bankers was that the prime rate should go up shortly, In 1953, he recalled, the result was rather disastrous when a change in the prime rate came at the time of a Treasury offering. If there was any possibility of that an increase in the prime rate suggesting to the large banks future time, the Treasury would be could well be held off for some that would be profitable. The whole afforded a breathing spell would trigger such an increase the market was the thing that level of some influence in that regard. and the System, of course, did have he would not favor any change Mr. Fulton concluded by saying that or the directive at this time. in the discount rate
Mr. Bopp said that unemployment remained the major problem in the Third District, and it was not easy to convince some people that Federal Reserve policy was appropriate to the present circum stances. While not all parts of the district were as depressed as the hard coal areas, the labor classification of major areas in March was unchanged from January and only three such areas had less than 6 per cent unemployment. On the other hand, in South Jersey rapid development was taking place with more applications for new plants than at any time in the history of the area. This led him to conclude that monetary policy could not do very much about depressed localities and that local leadership had a great deal to do with developments in a particular community. In other words, he policy was not an appropriate instrument for felt that monetary of unemployment and that in many cases dealing with local pockets was more a lack of leadership than loss of resources. the problem went on to say that a re-check made in the middle Mr. Bopp upward revision in capital expenditure plans of last month showed an in the Philadelphia metropolitan area, of manufacturing firms covered nearly 500 manufacturing firms, According to the survey, which goods industries: per cent in nondurable durables and 56 44 per cent in expenditures currently planned for 1959 totaled $345 (1) capital amount estimated in 29 per cent above the increase of million--an 1959 totaled about estimates for 1958; (2) the revised mid-September
10 per cent more than actual expenditures in 1958; (3) a relatively large number of firms had raised their estimates; (4) most of the dollar increase in durables was accounted for by fabricated metals, electrical and nonelectrical machinery; in nondurables by petroleum and coal products, chemicals, printing and publishing, and paper; and (5) estimates of capital expenditures in 1960 as compared to 1959 showed that 24 per cent expected them to be larger, 21 per cent smaller, and 55 per cent about the same. Another survey showed that prospects for housing in the district were considered good. Builders, lenders, and realtors revealed considerable optimism, tempered of course with caution, housing outlook. Demand for new and existing houses about the 1959 and inventories of new homes were had increased in recent weeks, not so plentiful as last year, was small. Mortgage money, although for all current needs. The prevailing rate reported to be sufficient with a one-third down payment, mortgages on new homes, for conventional available at par or discounts cent. FHA mortgages were was 5-1/4 per were selling at dis points, while VA mortgages of only one or two money available. The to eight points, with little counts of six the reluctance of lenders money reflected in part scarcity of VA on pending bills to until Congress acted to take these mortgages confident about the most builders seemed the VA rate. Although raise their inventory of being careful to keep market, they were housing
unsold homes at a low level. Usually they built one or more sample homes and then geared their construction to actual sales. Mr. Bopp said he would favor continuation of present policy with respect to the discount rate, the directive, and the tone of the market. Mr. Bryan stated that Sixth District statistics were showing much the same trends as the national figures, although in many in stances the rate of improvement had been slightly higher than for the country as a whole. After citing a number of favorable compari sons with year-ago and month-ago levels, he said that insured unemployment was, practically speaking, the only item showing an unfavorable comparison, and that even so the unemployment situation was not serious in the district. With respect to policy, Mr. Bryan said he was in agreement with Mr. Robertson and with others who had expressed similar views. think that monetary policy had been particularly tight. He did not 8, market factors caused a reduction In the three weeks ended April but Federal Reserve credit supplied of $122 million of reserves total of reserves increased the so that the System $394 million, there had been about a year-to-year basis reserves. On and excess adjusted to take total effective reserves, increase in a 4 per cent in reserve requirements. In his opinion, into account the difference to finance a first-rate figure was sufficient the money supply
inflation and it would easily be possible to get into trouble. One important factor was the situation in which the Federal Govern ment now found itself by virtue of imprudent fiscal policies over a period of years. If the System tried to ease the Treasury's problem by means of monetary policy, it could be in a position for months of supplying reserves to the market in grossly excessive amounts and thereby simply make inflation certain. Therefore, he believed that the Desk should use every opportunity to effect sales of securities in the market. Certainly, it should not exert much effort to prevent the market from tightening in the face of developments. He would not be dissatisfied if the bill rate went 1/4 per cent above the discount rate. Mr. Freutel reported that evidence of improvement in Eighth District business continued to accumulate. Construction, in particular, had picked up sharply with dry weather, and the outlook for building was very good. The value of construction in the next few months larger in the first two months of contract awards was about 9 per cent of last year. There also was an this year than in the same months for in the latter half of large volume of work contracted unusually conditions progress. Employment was still in much of which 1958, areas, St. Louis, better in the major metropolitan had been getting All of these areas and Little Rock. Memphis, Evansville, Louisville, also had experienced and they the rise in construction, were sharing in
marked rises in manufacturing activity. Improvement in consumer demand for durable goods had been especially beneficial to Louisville and Evansville, where a large part of total manufacturing employment is in household appliances and automobiles. St. Louis was feeling a general improvement in manufacturing output, with steel especially strong, while outside the major metropolitan areas there had been gains in the lumber and paper industries. Output of pine and hardwoods had been picking up with better weather and had recently been considerably above average rates of the last three years. Production of bauxite and aluminum increased in March, but lead out put in Missouri was still depressed. Department store sales had been strong in the district, as elsewhere. Increased plantings were for all but a few major crops, with the greatest increase expected expected in cotton. said that one could make quite an argument for Mr. Szymczak upward not only with the economy trending a more restrictive policy, over all and with the potentiality of further price seasonally but down were in the agricultural the only prices moving increases. About The Treasury had a was in the market. However, the Treasury sector. of a disorderly market and there was the possibility severe problem In the of market conditions. System took cognizance unless the to continue to be no choice except appeared to there circumstances, the period just past. had been followed during pursue the policy that
Mr. Balderston expressed himself as perplexed by the dilemma described at this meeting. Clearly, the business cycle had pushed into higher ground and the reports made at this meeting were among the most rosy in his recollection. Additional points that had not been stressed included the improvement in profits and the cash flow, and to him these were striking developments relevant to the discussion. Neither had the comments at this meeting stressed the improvement in European countries. He saw the makings of great inflationary pressure in the future because the corporate and bank liquidity of the moment was bound to intro duce water into such brakes as the System could apply. In this connection, he recalled that in the early part of 1955 the System's measures of restraint were ineffectual during a period when the banks were in a position to sell securities as rapidly as they loaned. The current liquidity, combined with the potential rise in velocity of deposits, was again likely to result in a lag in the impact of restraining actions. Despite his concern, however, he found himself unable to recommend a tightening of policy until after the impending Treasury financing, for the Treasury problem seemed to him extremely grave, particularly in view of public of the strong improvement in practically all segments awareness and the expectation that Congress would continue to of business excess of revenues. Therefore, his conclusion, authorize spending in
with which he was quite unhappy, was that present policy should be continued during the next three weeks, with the hope that after the Treasury financing the System might be able to apply more restraint. Mr. Hayes said that the consensus in terms of policy for the next three weeks seemed clear and called for maintenance of about the same degree of restraint as had existed during the past three weeks. In reaching this conclusion, however, it was also clear that the views of those who had spoken covered a wide spectrum of opinion. While all were concerned about the Treasury's problem, there was a wide variation in views. There were those who felt that the Treasury problem was an additional reason for moving cautiously and that a certain degree of caution might in any case be warranted by the lack of definite inflationary threats at the present time. There were also those who concluded with only the greatest reluctance that the System should refrain from further tightening because of the Treasury. Between those extremes, many seemed to believe that perhaps the System might be moving soon in the direction of further restraint, although obviously the Treasury's situation precluded such action for the end of the spectrum were a few who would time being. At the other now in spite of the Treasury's position. even do a little probing clear that maintenance of the present degree of restraint It seemed of the feel of the market rather was defined pretty much in terms than any specific net borrowed reserve figure, for specific figures
had been mentioned only by a small number of those present. Mr. Hayes said he took it that it was the intention of the Committee to rely fairly heavily on the discretion of the Manager of the Account in maintaining the tone of the market about as it had been. Mr. Hayes commented that some interesting points had been brought out in the discussion. On the one hand, there was the dilemma the Committee now faced, with the obvious possibility of serious inflationary difficulties in the future. Much had been said concerning the better than expected progress of business, the rather ample money supply, and the degree of liquidity outside the money supply. If tightening should become clearly desirable, possibly this might make such action a little more difficult. On some had expressed the view that there was danger the other hand, inflation at a time when all of the evidence was in moving against was also a view that recent statistics perhaps not yet in. There the Reserve Banks might not reserves and borrowings at on borrowed under which the a picture of the pressures have given as adequate as one might wish to have. had been operating recently banking system spectrum, seemed to him to while covering a wide These comments, maintaining the status in favor of quite clearly a consensus indicate the directive might be changed heard no suggestion that quo. He had change in the discount be given to any or that near-term consideration rate. inquired whether there were any differing Mr. Hayes then
views with respect to his summation of the policy views at this meeting, and none were heard. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York until otherwise directed by the Committee: 1/ (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allow ing 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, short-term certificates of indebtedness other than special from time to time for the temporary accommodation purchased of the Treasury, shall not be increased or decreased by more than $1 billion; Treasury for the direct from the (2) To purchase of the Federal Reserve Bank of New York (with account where it seems desirable, to issue discretion, in cases or more Federal Reserve Banks) such participations to one short-term certificates of indebtedness amounts of special to time for the temporary be necessary from time as may Treasury; provided that the total accommodation of the held at any one time by the amount of such certificates shall not exceed in the aggregate Federal Reserve Banks $500 million. the Federal Open Market the next meeting of It was agreed that at 10:00 a.m. May 5, 1959, be held on Tuesday, Committee would had stated Mr. King these minutes, 2 of on page As set forth 1/ coming before on matters from voting to refrain he wished that did not participate meeting. He at this for action the Committee vote on the directive. in the
The meeting then adjourned. Secretary
Also: Record of Policy Actions