May 26, 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, May 26, 1959, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Deming Mr. Erickson Mr. King Mr. Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Bryan, Alternate for Mr. Johns Messrs. Bopp, Fulton, and Leedy, Alternate Mem bers 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, and Young, Associate Economists Roosa, Mr. Rouse, Manager, System Open Market Account Assistant to the Board of Mr. Molony, Special Governors Associate Adviser, Division of Mr. Koch, Research and Statistics, Board of Governors Chief, Government Finance Mr. Keir, Acting Section, Division of Research and Statistics, Board of Governors First Vice President, Federal Mr. Freutel, Reserve Bank of St. Louis
Messrs. Ellis, Hostetler, Daane, Tow, Rice, and Wheeler, Vice Presidents of the Federal Reserve Banks of Boston, Cleveland, Richmond, Kansas City, Dallas, and San Francisco, respectively Mr. Stone, 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 It having been noted that Mr. Freutel, First Vice President of the Federal Reserve Bank of St. Louis, was in the Board's building today, he was invited to attend this meeting in the absence of Mr. Johns. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on May 5, 1959, were approved. had been distributed to the members Before this meeting there market operations covering the of the Committee a report of open report cover 20, 1959, and a supplementary May 5 through May period 1959. Copies of both reports May 21 through May 25, ing the period in the files of the Committee. have been placed market was steadily tight stated that the money Mr. Rouse the last meeting, then part of the period since during the first again. The few days tightened over the past easier, and turned reflected excess which essentially temporary easing, reasons for the
borrowing around May 15, were spelled out in reports sent to the Committee last week. The Account purchased Treasury bills and made some repurchase agreements in the early part of the period in an effort to temper the tightness in the market during the period of Treasury financing, but the direction of operations was subsequently reversed and bills were sold to foreign accounts, while all outstanding repurchase agreements were allowed to run off without replacement. The System Account remained on the side lines during the past few days, and the market tightened itself. Over the period as a whole, outright holdings of bills were up by $181 million, while repurchase agreements were down by $163 million. Average net borrowed reserves had been running between $200 and $300 million, and reserve projections as of last night indicated an average of somewhat over $300 million net borrowed reserves for the week ending tomorrow. on to say that the Treasury's auction of Mr. Rouse went The volume of bank out to be quite successful. April bills turned because the banks needed the tax tenders was fairly large, partly order to avoid a depletion of such and loan account deposits in the April bill as a 15. Also, some banks regarded deposits on May Generally, the issue had performed good piece of paper to hold. been able to make good to sell the bills had well and banks wishing The bidding on the December bill, progress in distributing them.
however, was unexpectedly light and a large part of the issue ended up in the hands of dealers and banks which had not expected to acquire so many bills at the rates they tendered. Dealer awards were over $850 million, but no serious problems were created since the dealers were confident that they could carry the bills without loss until such time as they could be distributed, and in fact a substantial distribution of the issue had now been made. The attrition on the 1-1/4 per cent certificates that matured on May 15 was somewhat high at 30 per cent but was no higher than the market had come to expect. The small new 4 per cent certificate issue had performed well in the market and closed yesterday at 100-1/8 bid. Mr. Rouse also stated that short-term bills had remained in short supply; a fairly well sustained storm cellar demand had kept rates on these issues at presently low levels. In the intermediate and long-term sectors of the Government securities market, prices to move slightly higher in the past few days on light had tended While the market generally anticipated an early increase volume. discount rate, it was felt by many that of 1/2 per cent in the already discounted an increase and long-term rates had intermediate such rates might hold at around present levels, of that size and that the short run at least. The market apparently felt, however, over in terms of the underlying realities, that bill rates were too low with an increase in expected to move upward and such rates were the discount rate.
Mr. Rouse said that the short-term market had absorbed a large volume of Federal Agency securities during the past three weeks. Total agency financing in this period amounted to $525 million, of which $300 million represented new money. All of this financing was at nine months or less, and rates ranged between 4-1/4 per cent for six months and 4-1/2 per cent for nine months. Mr. Rouse observed that over the past few weeks an increase had occurred in the amount of six-month Treasury bills tendered for by foreign accounts. In yesterday's auction foreign accounts tendered through the New York Bank for about $100 million of the six-month bills--almost one-quarter of the issue. They were acquiring the six-month bills with the proceeds of sales and redemptions of shorter bills and by switches out of time deposits. Mr. Rouse also commented that this would be an active week in the capital markets. Outstanding in size and importance were the $104.8 million issue of New Housing Authority tax-exempt bonds and the $75 million issue of Consolidated Edison mortgage bonds being There would be offered tomorrow an $80 million mort offered today. gage bond issue of National Steel and a $30 million bond issue of cent reoffering yield was Yesterday, a 5 per the City of Chicago. issue for the first time since on a double-A rated utility placed slowly, had no which initially moved 1957. The issue, August the holder from an early call. special provision protecting
Mr. Rouse called attention to the fact that the appendix to the weekly report to the Committee had grown very substantially and usually ran between 20 and 25 pages in length. It was proposed to make some deletions and consolidations in the appendix, and either this week or next an abbreviated version would be sent along with the regular appendix material. He would like to be informed if it was believed that anything useful had been left out of the abbrevi ated version. Upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period May 5 through May 25, 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 May 22, 1959, substantially as follows: Domestically, productive activity has been spurting ahead and the economic climate has become more palpably inflationary. In virtually every sector, expectations are optimistic; indeed, about the most pessimistic busi ness comment one encounters is that "it may not be as good as the figures show" or "we now expect the figures to level off some." The lag in United States exports persists, and participants in international financial transactions report a deepening concern in foreign circles about United States balance of payments trends. In industrial countries abroad, the onset of general economic recovery as now better than well-confirmed and there is every reason to expect such recovery soon to burgeon into a full-fledged expansion movement, as it has already in Canada and Japan. The European economic climate appears less inflationary than our own, but this merely the early stage of recovery there. may reflect
Whatever the actuality, it is clear that reattainment of European industrial expansion will do much to relieve the adverse balance of payments pressures that materials supplying areas have been suffering. One may also hope that renewed European expansion will help a great deal in alleviating the United States international payments deficit which continues to rival that of last year. As to specifics: April expansion in industrial production, which carried the Board's index up two points for the third consecutive month, reflected mainly gains in output in durable goods industries, producer as well as consumer lines. The weekly output data so far available for May indicate another brisk advance in total industrial output, possibly again up two index points. New orders at manufacturers, which showed a sharp step-up in March, took another sizeable upward step in April. Forward commitments for machinery purchase have been a conspicuous feature of new order developments. Since December, unfilled orders at durable manufacturers have been rising, in recent months most impressively. For several months now, personal income has been climb ing at a rate of better than $3 billion a month, principally because of higher wage and salary payments. This pace of increase is rivalling, if not beating, that for the com parable months of the 1955-57 period of inflationary expansion. For seven months now, total unemployment payments have shown decline. Reflecting rapidly rising personal income, April retail sales exceeded slightly the very large March volume and were some 12 per cent higher than the cycle low of March 1958, An advance estimate of department store sales for May puts sales almost 4 per cent higher than April, a degree of rise that may be partly statistical illusion. However, sales of new autos in early May were running 9 per cent higher than in early April, nearly 50 per cent higher than a year ago, per cent higher than in early May 1957. In used and 15 continue very strong and prices, at a car markets, sales higher than a year ago, appear firm. level some 15 per cent late 1958, a robust expansion in consumer Since supported rising sales of autos and instalment credit has of household durables. The first quarter high level sales the largest since the first increase in auto credit was quarter of 1956, and the credit rise for diversified since the last quarter durables was the largest consumer
of 1956. Liberalization of credit terms in late model used car financing was apparently a factor of some importance in the rise in auto credit. Collections on instalment paper have shown steady improvement since last fall and now compare with prerecession standards. Strength of housing markets was attested by the April starts figure approximating 1.4 million units, seasonally adjusted. Starts for the first four months of 1959 were the highest on record. Mortgage markets, as indexed by mortgage yields and by FNMA activities, give further signs of hardening. This is scarcely surprising if the staff's estimate of first quarter increase for real estate mortgage debt is correct; the rise was nearly $4.2 billion, a handsome first quarter performance by postwar criteria. The new Dodge seasonally adjusted monthly index of the dollar value of total construction contracts has just been published. It shows an 8 per cent increase in contract awards during April to the highest level on record, 31 per cent above a year earlier. Covering 48 States, the index includes residential and nonresidential building as well as heavy engineering. It is based on a 1947-49 monthly average equal to 100, and it is available solely for total awards and not their components. Relative to the 1947-49 base, the April index was 299. With markets for products exhibiting perceptible vigor, strength should and does characterize the labor all-round Unemployment compensation claims continue to markets. At mid-May, the Department of Labor reclassified decline. unemployment status as compared with major labor markets by 149 markets experienced some reduction in mid-March. All rates and the number with rates of 6 per cent unemployment 60. Michigan markets con more was lowered from 74 to or the high rate classification; other markets tinue to fall in coal or durable goods as a in this category have either production base. a 40-hour week as a standard, manufacturing Accepting industry in April attained an average overtime basis of .3 and some nondurable hour. In most metal-working of an was one hour. Reflecting a industries, average overtime increase in hourly earnings, workweek and a further lengthened rose again in of factory workers average weekly earnings April by 60 cents to $89.87. appear less favorable crop prospects In agriculture, But, reflecting last year's prosperity, than last year.
farmers have been adding substantially to their debts, or at least did in the first quarter. Also, they have continued to bid up land values. Farm land values as of March 1 were up on average some 3 per cent from November 1 of last year and up 8 per cent from a year ago. Industrial prices rose further in April and additional advance has occurred in May. At mid-May, the level was up 2.5 per cent from a year ago and 2 per cent above the pre recession high reached late in 1957. Sensitive materials prices have advanced more and this has provided a base for lifting the prices of finished products made from these materials. With average prices of farm products showing little change, recent price advances in the industrial sector have been raising the average of all prices. Consumer prices rose slightly in April. Food prices changed little but prices of other goods, services, and some taxes increased. With these price trends persisting in consumer markets, a further modest rise in the May index is projected. At an earlier meeting this spring, we observed that, from a cyclical standpoint, upward price pressures typically powerful force only after economic activity has breached gain the highs of the prerecession period. Such a breaching, obvious ebullience, is now a matter of accomplished with of the breaching phase has been an ab history. A feature normally high rate of bank credit and monetary expansion, regarding which Mr. Thomas will comment on in detail. One whether, despite System plans and hopes to may well wonder financial forces fostering another avoid such a contingency, whirl have not gotten well ahead of System policy. inflationary evidence to this effect is The accumulating body of factual quite impressive. financial developments substanti Thomas made a statement on Mr. ally as follows: the month of May has been In financial markets, heavy credit demands and characterized by unseasonably rates to new high levels. increases in interest further except yields on 90-day all interest rates rose Nearly move within the lower continued to Treasury bills, which 3 per cent range that has generally part of the 2-3/ to since late February. The six-month bills, prevailed rose back to around drop in late April, following a little longer bills have level. Yields on the 3-1/3 per cent
been as high as 4 per cent for the new April issue. The spread of one per cent or more between the yield on three-month bills and that on issues maturing in around one year is the largest on record. It unquestionably reflects the desire on the part of investors for maintenance of liquid positions in view of the possibility of further interest rate increases. At the same time, the rate is attractive enough to draw in funds that might otherwise be held as bank balances. Announcement of the increase in the lending rate on prime customers' loans by large city banks from 4 to 4-1/2 per cent on May 15 was followed by only a mild reaction in the Government securities markets. Long-term rates con tinued to rise somewhat, but short-term rates have steadied. The firmness in short rates probably reflected some temporary ease in bank reserve positions as well as investment of the proceeds of the redemption of maturing Treasury issues. Yields on long-term Treasury bonds and on both new and seasoned corporate issues rose last week to new high records. Offerings of new issues of securities were in moderate volume last week, but are scheduled to be larger this week. Although the higher yields have met better reception than the lower yields on last month's offerings, there have, nevertheless, been some deferments of new offerings because of market conditions. The calendar for future issues by State and local governments continues large. Prospects for corporate borrowing are uncertain, particularly in view of the large cash flow being derived from depreciation allowances, retained earnings, and accrued tax liabilities. For the year to date new issues by corporations and by State governments have been in somewhat smaller volume and local than they were last year, but aggregate demands on credit markets have continued large, reflecting needs of the and increased mortgage borrowing, as Federal Government well as a larger volume of bank loans to businesses and consumers. prices have again risen to peak levels. The rise Stock in prices has kept pace with increases in dividends, so current yields continue low, compared with their past record with bond yields. Stock market credit has increased and and customers have drawn upon their credit somewhat further balances at brokers. to show a relatively favorable The Treasury continues the large redemption of cash position, notwithstanding It appears likely that no maturing issues in mid-May. additional borrowing will be needed until early July, with announcement of terms near the end of June. About $3.5
billion of cash will be needed then, but the exact amount will depend upon the extent to which appropriated, but yet unexpended, funds are used before the end of the fiscal year. Additional financing operations for refunding and for new cash will be in process from late July until around mid August with no further needs until early October. Borrowing needs for both cash and refunding will be large in the fourth quarter and will probably require frequent offerings in all months and also possibly in January. On balance, net cash borrowings in the next 8 months, though still very large, will be nearly $4 billion less than in the same months last year and they will be followed by substantial debt retirement instead of continued borrowing. Following an exceptionally large increase in bank loans at all commercial banks in April, city banks showed a further expansion in loans during the first three weeks of May. In the same weeks of the two previous years loans at city banks declined, and increases in 1955 and 1956 were not as large as this year's additions. The increase has been particularly in business loans, but real estate and consumer loans large continued to show marked increases, and loans on have also securities have stayed up. have continued to liquidate holdings of City banks on balance, notwithstanding acquisition Government securities financing operations. Substantial of new issues at times of in holdings of bonds, notes, and reductions have occurred long-term issues and relatively Banks have fewer certificates. issues than they had a year ago. more medium and short-term securities are less total holdings of Government At city banks than they were a year ago. to total loans and investments The ratio of total loans year, has risen again declined moderately last of banks, which In view of the reached in 1957. close to the high level to some question may be high loan ratios at banks, relatively substantial further ex ability to meet a raised as to their their liquidity positions. in loans without impairing pansion banks may be in prices of securities, Because of declines loan demands through inclined to meet additional somewhat more of securi further liquidation rather than through borrowing ties. more in declined somewhat at city banks Private deposits weeks of other in the same of May than first three weeks the seasonally adjusted that on a It would appear recent years. of the money supply may demand deposit component basis, the in the first three any further growth little if have shown
weeks of May, following marked increases in the three preced ing months. U. S. Government deposits have increased more than usual, and some shift from Treasury deposits to private deposits may occur in the next few weeks. Currency in circu lation appears to have shown a greater than seasonalincrease in May to date, following a less than seasonal decline in April. It is evident that the money supply in the aggregate has shown a marked increase in recent months, after adjust ment for seasonal variations. The growth has been at an annual rate of 4 per cent or more. In addition to the increase in the volume of money, the turnover of bank deposits has also increased in recent months. In other words, economic activity has expanded somewhat faster than the volume of money. There is evidence that much of the cyclical variation in economic activity may be reflected in turnover of money rather than in changes in the volume of money. It may be said that the reserve base for the expanded money supply--or the less than seasonal decline--has been obtained from an increase in member bank borrowing. Although the System has increased its open market portfolio in recent months, contrary to usual seasonal tendencies, the additions only sufficient to cover unusual drains on reserves have been from other factors. These include particularly the contra seasonal increase in currency in circulation and in recent weeks the resumed outflow of gold. Since the end of January, have declined by some $300 million less than required reserves projection, reflecting a less than seasonal de the seasonal cline of about $1.5 billion in demand deposits adjusted and Treasury deposits. In the same an increase of $700 million in have also increased by about period, net borrowed reserves with different figures, Somewhat similar results, $300 million. be shown for the past two months. may by happenstance or by design, it is appropriate, Whether advance and of credit of the strength of the economic in view necessary to borrow the that banks should find it demands, excess of normal seasonal cover deposits in reserves needed to that if banks have been It is nevertheless true amounts. for this purpose, they may be willing to willing to borrow demands. It is evident more to meet further credit borrow rate increase is restraint of a discount that the added further rise view of the recent particularly in appropriate, in market interest rates. as to whether borrowings Question may also be raised even to cover custom to increase further, might be permitted the restraint on in order to strengthen ary seasonal needs, seasonal needs, together indicate that banks. Projections
with a continued gold outflow projected at $25 million a week, may bring net borrowed reserves close to $500 mil lion during the next month, with a rise to around $800 in late June and early July. Perhaps if the discount rates are raised, net borrowed reserves of around $300 million would be appropriate, if monetary expansion keeps within the seasonal pattern. If, however, banks increase their loans and investments sufficiently to produce a greater than seasonal growth in the money supply, then the additional reserves might be supplied through the discount window rather than by open market operations. Mr. Balderston referred to comments by Mr. Thomas concerning the money supply and inquired as to the recent trend in time deposits. In response, Mr. Thomas stated that in the first four months of this year time deposits at commercial banks increased $1.3 billion com pared with an increase of $3.8 billion in the same period last year. For the twelve months ending April 30, 1959, the increase was $4.6 billion compared with an increase of $6.9 billion during the twelve months ending April 30, 1958. Thus the rate of increase had slowed down but was still not insignificant. In the first three weeks of May, however, there was practically no increase in time deposits. of the Chairman, Mr. Marget made substantially At the request statement with respect to the balance of payments the following situation: facts with respect to our balance of The simple payments are these: Last year we ran an over-all deficit of $3.4 bil billion took the form of gold lion, of which $2.3 outflow. been running an over Thus far this year we have at about the same rate. all balance-of-payments deficit it has taken the form proportion of This year a smaller
of gold outflow. But even if it were safe to count on this continuing to be so, that would only mask the fact that we were running a very sizeable deficit. It would not mean that we had brought our international accounts into balance. The outflow of gold and dollars as a result of an over-all balance-of-payments deficit of the United States is in itself nothing new. In the four years 1953 to 1956, for example, we ran over-all deficits which resulted in the transfer, on the average, of around $1.5 billion in gold and dollars to foreigners each year. What, then, is new about our balance-of-payments position? What is new, in the first place, is the size of the deficit, by comparison with previous deficits. What matters most about our balance of payments deficit is the direction in which it is going, and after all $3 billion is twice as much as $1.5 billion. But what is also new is the competitive setting in which we have to work our problem out. The annual deficits of $1.5 billion in the years 1953-56, and the transfer of they resulted, could be regarded gold and dollars in which as part of our contribution to world recovery. It helped our trading partners build up monetary reserves while they continued to gather strength and approach the degree of competitiveness with us that is needed for international balance. But it is quite obvious now that our principal partners have in fact become competitive, and that the establishing balance be one of from now on, should goal, in our international accounts. There are only two ways of establishing balance. or we balance upwards. Either we balance downwards balance downwards, by restricting We don't want to aid programs beyond all reason, imports, or by slashing of private capital. obstacles to outflow or by interposing if for no other reason, want to do it this way, We don't "adjustment" would in all probability because the downward which is the downward movement, turn into a cumulative the world that we want. last thing in of our of an adjustment think in terms So we must basically, an upwards and this means, balance of payments to a level such that they will expansion of our exports bill, plus such our total import to cover be sufficient we wish to outflow as private capital programs and aid meet a considerable having to of our support, instead and dollars. of gold by the transfer of this total part
And an expansion of our exports means two things, basically. It means, first of all, the use of the influence of our Government, in every appropriate inter national forum, to secure the removal of such discrimina tory restrictions as continue to exist against our exports. But it means, much more importantly, that we dare not flag in our pursuit of those policies which we must follow if we are to keep our exports competitive. Quite obviously, it will not be monetary policy alone that will decide whether our exports will remain competitive. But, just as obviously, monetary policy certainly has its contribution to make toward that end, and, so far as our balance-of payments position is concerned, there can hardly be any question as to the direction in which that contribution ought to be. Mr. Hayes then made a statement of his views on the business outlook and credit policy substantially as follows: It seems to me clear that, now that the Treasury's financing is out of the way and there is in prospect a "free" period of about a month before the next Treasury operation, it behooves us to give a very careful look at current monetary policy to see whether it is appropriate to the current state of the economy and is doing all that it can to promote sustainable growth and to prevent an inflationary upsurge. There has been an accumulation of evidence in the past three weeks pointing to broadening and strengthening of the business expansion, which now appears to have sufficient momentum to carry it at least through this calendar year. Heretofore we have faced an appreciable risk that firm credit restriction might put a real crimp in the upward movement of the economy--but now this risk appears much less serious than at any time since the recovery began. document the strength of the current I shall not try to expansion, as Mr. Young has already done that admirably, but marked by great vigor of personal consumption, it has been activity, growing inventory a high level of construction as yet quite moderate, toward accumulation, and a tendency, business expenditures on an upward revision of planned and equipment. Inventory-sales ratios are still close plant suggesting scope for considerable to their lowest levels, thus expansion.
Perhaps the most encouraging single development of the last few weeks has been the marked improvement in the em ployment situation reported for April. Although unemploy ment remains somewhat higher than at a similar stage of other postwar recovery periods, the recent trend suggests that, apart from certain pockets of "structural" unemploy ment, the unemployment problem, with all of its economic and political implications, should fade in importance as the year progresses. At the same time price stability is threatened more seriously than at any time in the past year, chiefly in the area of manufactured and semimanufactured products. While more abundant meat supplies should bring lower average food prices in the summer months, and raw material prices as a whole are showing no clear upward trend, numerous producers of manufactured goods are reported to be eager to raise their prices in view of the improved demand situation and to be only waiting for the expected rise in steel prices, following the current wage negotia tions, before announcing increases for their own products. Thus the steel negotiations take on even more than usual significance in terms of probable widespread repercussions throughout the economy. Recent credit developments also support this view of an increasingly dangerous inflation potential. I am think ing of the recent emergence of vigorous and pervasive loan demand all over the country in almost all major categories business loans, security loans, consumer loans, and real estate loans. The money supply itself has not grown unduly, particularly in relation to the rapid expansion of gross national product since last year. On the other hand, nonbank liquidity as a whole, including short-term Government holdings and other money substitutes, has increased much more rapidly--in fact somewhat faster than gross national product. Another disturbing factor is, of course, the continued exuberance of the stock market, together with the persistent upward trend of total credit used for purchasing or carrying stocks. how to meet these problems, we cannot In considering lose sight of the Treasury's remaining financing program the rest of 1959, which will involve cash offerings over billion, and perhaps several billion dollars of at least $12 sizeable refundings. We must have more, besides a number of need for preventing the cash offerings from in mind the money supply, as well as the influence adding unduly to the of interest rate changes on the ease or difficulty of financing. Incidentally, it seems carrying through this
probable that growing business needs, together with these steady Treasury demands, may make it increasingly diffi cult to place most of the new Treasury issues outside of the banks--although the high level of corporate profits and corporate liquidity argue for a gradual rather than a sudden change in this respect. When to these factors is added consideration of new developments relating to the United States' balance of international payments and the vital need of maintaining our costs and prices on a competitive basis with those of the other leading industrial countries, the present situation stands out as a clearly crucial one. Mr. Marget's statement has presented the issues in excellent clarity, and I agree fully with all he has said. The major question before us, as a nation, is whether we can restrain inflationary tendencies and enjoy a considerable period of sound and sustainable growth or whether we shall soon dissipate the benefits of the recovery through a resurgence of infla tionary forces. In the light of these threats to our economy, I am convinced that the time has come for a decisive signal of the Federal Reserve System's determination to do its part to check inflationary trends. The discount rate is of course the most obvious instrument for giving such a signal. In a sense it is unfortunate that the commercial banks "stole our thunder" by raising the prime rate by 1/2 per cent ten days ago, for it is now generally assumed that the Federal Reserve will follow promptly with a 1/2 per cent rise in the discount rate. A 1/2 per cent rise will therefore be a relatively weak signal for the more observers, although it may seem more dramatic sophisticated to the general public. It seems to me that a prompt in per cent is the minimum action called for. crease of 1/2 In my judgment our directors would be willing to vote such an increase this week. I believe a very good case can be made for a larger increase if we are to give a really clear signal. Also, I have in mind the fact that we shall not have many for further moves later this year (a period opportunities of about a month, from mid-August to mid-September, appears occasion). In view of the to be the only other promising rate and the gravity of the current level of the discount issues involved, I would be reluctant to see changes of one per cent. If a change of measured in quarters is appropriate, the desirable more than 1/2 per cent seem to be 1 per cent. A amount of increase would
decisively higher rate might conceivably encourage a prompt upward adjustment in market interest rates to a plateau that could be maintained and that would encourage a growing be lief that rates were about as high as they were going to go for some time. This could of course stimulate the flow of investment funds into fixed income obligations and could prove very helpful to the Treasury's program. On the other hand, I confess I have serious misgivings about the wisdom of a 1 per cent increase if we are to make the move without the enthusiastic endorsement of other arms of the Government whose cooperation is essential in any effective attack on inflationary threats. A 1 per cent increase would be highly unusual and dramatic, suggesting to the public the existence of an extremely urgent problemand if, in spite of such a move, a clearly inflationary settlement should be made in the steel industry, our action might appear capricious and futile as an anti-inflationary move and might at the same time subject us to severe criticism for causing the Treasury unnecessary hardships, particularly if the Treasury had indicated any lack of enthusiasm on the change. Thus there would be a real risk of our being discredited in the public eye, with an intensi fication of the political risks to which the System is always subject. We must also face the additional risk that a sharp increase in the discount rate might cause market rates of interest to advance to levels that could prove to be inappro priately high in relation to the present stage of the business cycle. For my own part, I would like very much to see explored the possibility of our obtaining the active backing of the at the very least, for a decisive rate increase, Treasury, the issuance of a public statement of the and preferably determination to work within its area of responsi Treasury's a balanced budget but a budget bility to achieve not merely fiscal year. Our own move would be surplus in the coming to warrant, at the same time, a public sufficiently decisive And finally, I would statement of intent by the Chairman. re-affirmation by hope that there could be a simultaneous of the vital need for non-inflationary the White House Perhaps this is too all pending wage issues. settlement of general subject well worth expect, but I think the much to of moving on this broader If there is a chance exploring. to holding up my recommendation front, I would be agreeable June, in order to the first week in our directors until to effort. I would for a full-scale provide ample opportunity possible to do everything though, that it might prove hope,
this week, and that all Reserve Banks which wish to take action on the rate could do so as nearly as feasible on the same day, in order to get the maximum impact from any System move. As for open market policy, it would be my suggestion that we move moderately, but not intensively, in the direction of greater restraint, being guided somewhat by the impact of the discount rate move itself. I think it unnecessary to define the objective in terms of a figure for net borrowed reserves, but would merely instruct the Manager to pursue tactics which would assure an atmosphere of firm restraint. I believe the time has come to recognize in our directive the very substantial improvement in the economy and the growth of inflationary tendencies since adoption of the present wording. Our suggestion for clause (b), which has already been submitted in writing to the Secretary, is as follows: "to restricting the expansion of money and credit with a view to restraining infla tionary tendencies and thereby promoting sustainable growth." Mr. Erickson said that business in the First District con tinued to improve. Although, as he had reported before, the pace that area was not as rapid as for the nation as a of recovery in employment were up in April and the most whole, production and New England purchasing agents showed a rise in recent survey of production. In the four States the percentage expecting increased available, there had been a greater for which April statistics were with construction and trade than seasonal improvement in employment, labor areas had now shown improve important factors. Three the most there were no labor areas classification; at present ment in their areas with 9 to 12 cent or above, four of 12 per with unemployment 6 to 9 per cent eight areas with unemployment, and per cent
unemployment. Of the twelve areas having 6 per cent or more unemployment, four were textile centers that had been areas of labor distress for a number of years. The April survey of mutual savings banks revealed for the first time in some period a smaller percentage increase in deposits than reported for the previous month. As to the discount rate, Mr. Erickson said that he had given consideration to the possibility of an increase of more than 1/2 per cent. However, after weighing all factors, he was inclined to feel that a 1/2 per cent adjustment would be appropriate. The directive should be changed, and his suggestion was among those listed in the memorandum distributed by the Secretary of the Committee under date of May 25, 1959. Any directive, he felt, should contain the word as well as a reference to sustainable economic growth. "inflationary" further restraint. While he Open market policy should provide figure of net borrowed reserves, hesitated to suggest any particular the measure of restraint that if $250 million denoted he would say of $300-$350 million was about what to date, an increase to a range should be accomplished. he was intrigued by the sugges Mr. Erickson commented that tions of Mr. Hayes regarding the possibility of arranging for the Government in conjunction by various parties within statements the things mentioned increase. If all discount rate with a decisive
by Mr. Hayes could be worked out, the net result might be salutary. However, if those things were not done, he could see the possibility of danger to the Treasury's position. Mr. Irons stated that the Eleventh District was following the national pattern of a strengthening, rising level of activity, and broad recovery. Production, distribution, and employment all moved upward during April and thus far into May, and a stronger confidence had developed among businessmen and the public generally that the country was now in a period of prosperity. The principal question at this point concerned the level to which activity might move up. A month or two ago businessmen had some reservations about such factors as the level of unemployment, the possibility of a steel strike, and the level of oil output, but such reservations had now been overbalanced by confidence and optimism in the level and trend of current economic activity. Turning to financial developments, Mr. Irons said that loan demand was strong, especially in business, consumer, and real estate loans, and the strength of demand was increasing week by week. However, borrowings from the Reserve Bank thus far had not been too May 15 week end. Whenever Federal funds were large except over the discount rate, district banks at a rate comparable to the available possibly building their prefer to purchase such funds, appeared to were not available. A the day when Federal funds record against
check of free reserves of country banks for the months of January and April showed a daily average of $47 million in January and $45 million in April, and in no day during the latter month did country banks show less than substantial free reserves. In contrast, the situation was getting to be quite firm in the reserve cities. Mr. Irons expressed the opinion that a discount rate of 3-1/2 per cent would be in order, although some arguments could be made for moving to a higher rate. If the latter alternative were decided upon, however, he felt it might be desirable to proceed along the lines Mr. Hayes had suggested, including consultation with the Treasury. In support of the 3-1/2 per cent level he stated that in July and August there might be some evidence of the usual summer doldrums, and also there was the uncertainty with regard to a possible steel strike. For these reasons he was inclined to feel that a discount rate of 3-1/2 per cent would be appropriate at this time, thus leaving the System in a position to consider a further increase in the early fall. The next regular meeting of the Dallas not scheduled until June 11, so that earlier action directors was on the discount rate would require a special meeting. noted that his suggestion for As to the directive, Mr. Irons (b), included on the memorandum distributed by the Secretary, clause suggested by the New York Bank. was similar to that market operations, Mr. Irons said he With regard to open upon the availability of there should be further restraint felt should be on clearly and certainly and that any deviations credit
the side of tightening. He would like to see a degree of restraint such as to assure a short-term rate structure in which Federal funds and Treasury bills would, so far as possible, press firmly on the discount rate, whatever that rate might be. Mr. Mangels reported that Twelfth District business conditions continued to reflect an increase in activity, although the rate of increase in April and the early part of May was not as rapid as in March. This was due in part to weather conditions in the Pacific Northwest, which exerted an effect on lumbering and construction. Recent information, however, showed lumber orders and production up, with inventories down. While there had been some cutback in employ ment at aircraft factories in the Northwest, this was offset by increases in employment at electronic and ordnance firms. Unemploy ment in the Pacific Coast States stood at 4.5 per cent in April compared with 4.6 per cent in March and 7 per cent in April 1958. Mr. Mangels said that retail sales, including auto sales, continued to show improvement although dealers reportedly were being loaded up with new cars. It appeared that the 1959 fruit crop would be heavy, especially in California, and the canning industry was expecting a large pack. Mr. Mangels stated that district On the financial side, demand for loans, with some loans banks were experiencing a strong the accumulation of steel in apparently being made to finance be a demand from small also reported to There was ventories.
business firms for loans ranging from $100,000 to $1 million which were in essence capital loans on a long-term basis. Borrowings from the Reserve Bank were rather spotty, ranging in the past couple of weeks from a high of around $150 million to a low of $15 million. The large district banks continued to be net purchasers of Federal funds and it was estimated that net purchases might be around $800 to $900 million this week. Deposits were beginning to show the normal seasonal decline but savings deposits were up $98 million over the past three weeks, about the same rate of increase as for the corresponding period in 1958. Mr. Mangels suggested that the recent increase in the prime loan rate and the general stiffening of other interest rates should provide a modest degree of restraint in the market, while the improvement in business conditions and the outlook for Treasury demands should also result in some tightening. However, he felt that the System should exercise a little more restraint than it had to date. He had in mind net borrowed reserves in a range from $250 to $300 million, with the thought that the figure might go higher upon conditions in the market. In essence, the System depending should put on the brakes but not so tightly as to prevent all further increase in activity. he would favor an increase of Mr. Mangels indicated that rate at this time. The San Francisco 1/2 per cent in the discount it probably would follow rather than Bank was in a position where
lead, because the next meeting of directors was not scheduled until the tenth of June. Therefore, while there would be an executive committee meeting tomorrow, the Bank probably would be close to the end of the line unless a special meeting was called. With regard to clause (b) of the directive, Mr. Mangels noted that he had suggested to the Secretary "to fostering conditions in the money market conducive to sustainable economic growth, recognizing the necessity, toward this end, of avoiding excessive credit expansion." On second thought, he said, he would like to change the word "fostering" to "maintaining" and the word "avoiding" to "discouraging." In further comments, Mr. Mangels summarized the results of a questionnaire distributed by a Coast West newspaper among members of the California Bankers Association. The replies indicated, among other things, a preponderance of opinion that new records would be set in gross national product and industrial output during the fourth quarter of 1959 and that the trend of consumer prices in the next twelve months would be higher. Mr. Deming stated that Ninth District economic activity was expanding at a rate roughly parallel to, but a shade lower in level for the nation as a whole. The outlook was somewhat than, that clouded because of uncertain crop prospects and the current lower drift of farm prices. The district-wide drought had been broken by widespread, but not adequate, rains. The soil moisture situation
thus remained spotty, with topsoil moisture good but subsoil moisture inadequate. Lake Superior ports shipped 3 million tons of iron ore in April compared with less than 100,000 tons last April. While this marked a sharp improvement over last year, it was not particularly favorable relative to previous periods of high activity, reflecting some basic shifts in iron ore procure ment. Mining employment was up about 15 per cent from a year ago. Turning to System policy, Mr. Deming said that certain points impressed him. A number of financial measuring sticks--the money supply, the volume of bank borrowing, the three-month bill rate, and the growth in bank lending--seemed to indicate that credit policy had not been unduly restrictive. Yet, as some had pointed out, several measures of bank liquidity might indicate the possibility of cumulative tightening and point to a banking situation that could be quite sensitive to further restrictive action. In the Ninth District, loan-deposit ratios in April were exactly the same as in April 1957 and had been rising this year more steadily and rapidly than they did two years ago. Ratios of Government securities to deposits as two years ago, but ratios of short se also were about the same lower and those of long terms to deposits curities to deposits were examined in February and March were significantly higher. Banks depreciation equivalent to 10 per cent this year showed bond account against 7 per cent at a comparable group of of capital accounts, might be seen in evidence of some tightness banks in 1957. Other
the rise in the velocity rate, in the volume and number of country bank borrowings, in interest rates other than on three-month bills, and in the ratio of the money supply to gross national product. Mr. Deming said he found it difficult to argue for any appreciable increase in restrictiveness via open market operations at this time, a feeling compounded by the long-run Treasury financing problem. At the same time he felt that the discount rate might be advanced, not so much as a directly restrictive move as a signal that the System did not propose to acquiesce meekly in a further erosion of the dollar, a move to bring the rate into better alignment with most short-term money market rates, and a matter of timing now that the System had a free period. He had not thought in terms of as much as 1 per cent; rather he had thought that a change of 1/2 or 3/ per cent would do the job. He saw no need to hurry the action by calling special meetings of directors, and the Minneapolis Bank would not want to take the lead in this movement. However, it would be possible to act in Minneapolis this Thursday, next Thursday, or the following Friday. As to the directive, Mr. Deming said he would favor an amendment of Mr. Allen's suggestion (shown in the Secretary's memorandum of May 25) by inserting "restraining inflationary "maintaining conditions in the financial tendencies and" before sustainable economic growth and stability." markets conducive to
Mr. Allen said that although he had been back in the United States only a few days, it was quite apparent that the Seventh District was sharing in the rapid improvement in business conditions noted throughout the country. There was a growing expectation that sales of domestically produced autos might reach 6.5 million units in 1959, including 500,000 of exports, while truck production and sales might reach 1.2 million. In both cases these figures would be the largest since 1955. Employment in durable goods manufacturing had continued to rise; increases over last year in March were 4 per cent for the United States, 2 per cent for Illinois, 4 per cent for Wisconsin, 8 per cent for Iowa, 10 per cent for Indiana, and 11 per cent for Michigan. As a result, mid-May figures on labor classifications released last week showed that four district cities, including Chicago, had been classified upward. While housing starts were about 40 per cent higher for the United States in the first four months of this year, permits for residential construction issued in Chicago and Detroit were up about 50 per cent for this period, although this reflected in part the greater reduc tions noted in these areas last year. Farm real estate prices appeared to be rising less rapidly in the central Corn Belt than in doubt, the lower prices for hogs and the nation, reflecting, no decline. Farm loans, both real estate and prospects for a further in the Seventh District. It nonreal estate, continued to increase corn acreage even more appeared that farmers would increase now
than the 12 per cent indicated in the March survey of planting intentions. Business loans, Mr. Allen said, now appeared to be gaining strength steadily. District weekly reporting banks accounted for $66 million of the $350 million growth in the nationwide weekly reporting member bank total in the first two weeks of May. This was the largest two-week growth, except during tax periods, that district banks had experienced since early in 1956, and in Chicago another increase, though only $5 million, was reported in the week just ended. Most of the gains reflected increased borrowing by manufacturing concerns and sales finance companies. Savings deposits at commercial banks in 32 metropolitan areas in the Seventh District increased by $63 million in the first quarter of 1958, but declined by $10 million in the first quarter of 1959, while accounts at savings and loan associations in five metropolitan areas, which of $168 million for the first quarter of 1958, showed an increase first quarter of 1959. Reflecting the increased $176 million in the and increases on the rates paid on savings pick-up in employment increased substantially in Michigan cities; accounts, savings had in Illinois and Wisconsin this, savings declined somewhat offsetting cities. Chicago directors, who meet Mr. Allen stated that the scheduled to meet this coming regularly every two weeks, were
Thursday. Last week there was some feeling on the part of one director that a special meeting should be held to consider the discount rate, and there seemed to be no doubt that the directors were ready to move on the rate. Mr. Allen said he found Mr. Hayes' comments most interesting, and persuasive to a degree. On balance, however, he still felt that a rate of 3-1/2 per cent would be sufficient at this time. He would like to see more restraint achieved through open market operations. To the extent that the use of net borrowed reserve figures was indicative, he would be inclined to agree with Mr. Erickson that a range of $300 to $350 million would be appropriate. Mr. Leedy reported that Tenth District conditions largely followed the national pattern. Prospects for agriculture were not quite as favorable this year as last year, but there seemed to be no abatement in the enthusiasm for farm machinery, with reports indicating that purchases thus far this year were higher than during a year ago. Unemployment continued to recede; there the same period employment increases, and there were had been some substantial in the area around Kansas City due further prospective increases, plants and in one additions in the auto assembly to labor force Retail sales were doing defense work. of the principal plants a level about 11 per cent over a year ago. running at demand for credit, which went on to say that the Mr. Leedy since the first of the year, was now increasing, had been strong
with the pressure felt in most loan categories, including consumer, real estate, and business loans. This demand was being reflected at the discount window. As he had reported before, borrowings at the Kansas City Bank were out of proportion to System totals, and during the past three weeks they had been running as high as 16 per cent of the total. With respect to System policy, Mr. Leedy said it seemed to him that except for the Treasury situation the course would be clear; that is, to move progressively further in the way of attempting to to associate himself completely with apply restraint. He wished what Mr. Hayes had said with respect to policy. Personally, he had questioned whether it would be feasible to increase the discount rate by a full percentage point, but he noted that on eight different occasions in the past an increase of 1 per cent or more had been made. it, anything less than 3/4 per cent would amount to doing As he saw at all as far as any signal from the System was concerned, nothing increase had been completely discounted. The for a 1/2 per cent that the increase of like amount in the market reaction suggested also had been discounted. Therefore, if the Treasury prime rate thinking should not be go along, he felt that the was willing to per cent. He would sub of less than 3/4 in terms of an increase per cent increase in the of exploring a 1 scribe to the thought
hope that such an adjustment might in the longer run be more effective from the standpoint of both the System and the Treasury. As to the directive, he rather liked the New York suggestion although he would go along with the suggestions submitted by Mr. Irons or Mr. Leach. They all referred to restraint of inflationary pressures, which he thought should be included in the wording of any directive that might be adopted. As to open market operations, Mr. Leedy said he would be inclined to move further in the direction of restraint. He noted that the action taken on the discount rate might have some influence on how far open market operations should go. As to timing, if the discount rate was only 1/2 per cent, some delay would not move on the appear to be of great consequence for the move had been generally However, he hoped that the Banks might expected and discounted. at least 3/ per cent, and he felt move in concert to the extent of it would be desirable to explore that, as Mr. Hayes had suggested, increase of 1 per cent. an brought new evidence of a Leach reported that each month Mr. activity in the Fifth expansion of economic strong and continuing rose in April to adjusted nonfarm employment District. Seasonally year-long rise and manufacturing a virtually uninterrupted continue In the textile another healthy increase. rang up yet man-hours production had increased, continued to improve, industries, markets were down. and mill inventories had expanded, order backlogs
Statistics now confirmed the earlier reports of a good spring furniture market. Bituminous coal output showed a modest gain, and the inventory situation gave promise of further increases. One of the Richmond Bank's directors, in reporting last week on improved conditions in nonresidential construction, commented that architects were now writing letters to contractors to invite their bids on projects, whereas a short time ago contractors were seeking out the jobs. Fewer contractors were now bidding on each job and current bids were higher relative to costs. Since the first of May, Mr. Leach said, borrowings from the Federal Reserve Bank of Richmond had averaged $62 million a day and the daily average number of banks borrowing was 43. Both figures were substantially larger than those of any other month in the last use of discount facilities recently was discussed six years. The been borrowing rather con member banks that had with 15 country or intended to sell securities and two tinuously. Some had sold loans, while many said they were experiencing an un had sold Available statistical information strong loan demand. expectedly for loans. Since March 4, pointed to an unusual demand likewise the Fifth District had reporting banks in total loans of weekly than in the a much higher percentage increased 6 per cent, four years. Over half of any of the preceding comparable period but there were also was in business loans, of the recent increase estate loans. The in consumer and real substantial increases
member bank with the largest correspondent business in the district reported increased pressure to participate in loans, while another large member bank had instructed the officers of its State-wide branch network to hold down loans and seek larger deposit balances from borrowers. Other bankers reported that present and prospective pressures had caused them to become more selective in making loans and to request larger balances from loan applicants. Comments of this kind, heavy borrowings from the Reserve Bank, and depreciation in securities portfolios all led Mr. Leach to think that reserve pressures were increasingly affecting the lending attitudes of officers of member banks. Nevertheless, he felt that inflationary dangers called for further restraint. He had been thinking in terms of an increase in the discount rate to that was probably what ought to 3-1/2 per cent and still thought be done, even though such an increase certainly had been discounted extent. A 1 per cent increase would be a little extreme, to a large whether the Treasury would welcome it. In any event, and he doubted believed the discount rate should be increased before however, he Bank, it would be rather dif the middle of June. At the Richmond action before June 11, which was also the ficult to arrange for the directors of several meeting date of next regularly scheduled on reserves should In his opinion, pressure of the Reserve Banks. some of the be forced to borrow and banks should be increased this comment even need. He made they would additional reserves
though Fifth District banks were already under pressure and the distribution of reserves was such that to speak of $250 or $300 million of net borrowed reserves was equivalent in some respects to speaking of $500 or $600 million in 1957. If the distribution of reserves should stay the same as at present, any large increase in net borrowed reserves would result in a substantial increase in pressure on banks outside of New York and Chicago. The directive should certainly be changed at this meeting, and he would like to include the word "inflation." Aside from that, any of one several of the suggested wordings would be satisfactory to him. Mr. Mills made substantially the following comments: My forebodings have not diminished with respect to the delayed and violent financial and economic reactions that I believe are in the offing when the cumulative pressures inherent in the Federal Reserve System's present monetary and credit policy have their full effect. I take no comfort from the sense of today's discussion, which leans toward a further intensification of the pressure on reserves. As my views on current policy matters have been presented on earlier occasions, they won't be repeated today, but I hope that future economic historians will not have to look back on this period as one in which the Federal Reserve System took alarm and panicked about anticipated events wnich had not as yet come into palpable and clear perspective. Mr. Robertson presented a statement substantially as follows: We are often unhappy when reports on the economic situation are "mixed." Such reports give us no clear guidance as to policy, and leave us uncertain as to of ease or restraint we are following at whether the policy the time is just right--too much or too little. We do not have that problem today. I can think of very few occasions when reports on the economic situation and outlook have all pointed so strongly in one direction.
We can be sure that much the same information is being presented to--and considered by--boards of directors, presi dents, and senior partners across the length and breadth of the land, but with one difference. Most of the economic presentations made to others include, as an important element, an estimate of what we--the Federal Reserve System--are likely to do in the circumstances. These estimates may vary in detail, but I venture they all sound pretty much the samethat the Federal Reserve will increase restraint as the situation continues to strengthen, and that interest rates will continue to move upward over the weeks and months ahead. In order for monetary policy to be effective there must be uncertainty in the market place as to the future trend of interest rates. When people are unanimous in expecting interest rates to rise (as they are today), they will hesitate to put funds into interest-bearing securities, and funds will flow excessively into the stock market or into other hedges against inflation. When the general expectation is for rates to move down, the flow will be reversed, resulting in exces sive and even speculative demand for fixed-interest securities and a drying up of the flow into equities. The aim of the Federal Reserve, therefore, should be to foster such a level of interest rates that there can be no certainty whether, over the foreseeable future, interest levels will trend up, trend down, or remain relatively stationary. Such desirable uncertainty does not exist today. The nearly universal expectation is that rates will move upward from their present levels as the boom progresses. Nor will there be uncertainty if we pursue a cautious policy of tightening reserve positions gradually and follow the upward trend of short-term rates with modest changes in the discount rate. This will confirm everyone's short-term expectations, and reinforce their longer-term expectation of rising rates. There is only one thing we can do to introduce into the money market the uncertainty that is essential to the effective functioning of a market economy. We must move quickly and to a rate which is sufficiently high to leave unhesitatingly reasonable men uncertain as to whether the future course of rates will be up or down. need to remind you that such a course of action I do not has been pursued by central banks in the past with salutary resently by the Bank of England. My own judg results--most at least a 1 per cent increase would be that it would take ment would raise it to the highest level in the discount rate--this in 30 years--to put us "on top" of the situation. Of course,
this increase should be accompanied by an appropriate policy of more stringent restraint with respect to reserve availability. Decisive action at this time may temporarily in convenience the Treasury in its financing operations, but in the long run it would ease its problem by enlarging the volume of funds flowing into Government securities. A forthright policy designed to place the world on notice that the Federal Reserve stands adamantly opposed to inflation, which will result in a cheapening of the dollar, will inevitably facilitate the financing of the Government and lower the long-run cost of servicing the national debt. In further comments, Mr. Robertson said that his view regard ing what should be done in the way of open market operations would depend to some extent on whether decisive action was taken on the discount rate. If the action was to increase the rate by only 1/2 market policy should be moving restrictively to be per cent, open of net borrowed reserves. If, on the tween $400 and $500 million were taken on the discount rate, an other hand, decisive action in net borrowed reserves to between $300 and $350 million, increase would appear to be as much as necessary. or perhaps $400 million, said he could do no better than As to the directive, Mr. Robertson by Mr. Allen, as amended by Mr. Deming, accept the language suggested Mr. Bopp as presented in the Secretary's or the wording suggested by were pretty much in of the suggestions submitted memorandum. All but personally he to choose among them, line and it was difficult the two he had mentioned. prefer one of would Mr. Hayes, Mr. Robertson comments made by respect to the With seek to have the the System to be unwise for felt that it would
executive branch of the Government "hold its hand." He was firmly opposed to an open-mouth policy either on the part of the System or the executive branch, for in the long run he believed it did little good. The System should not complain about what others did unless it had done everything within its power to meet the issues at hand. Therefore, while he would consult with the Treasury, he would not want System action to depend on action taken by the President or the Treasury. Instead, it was incumbent upon the System to take firm action. Mr. Shepardson stated that during the last three weeks he had attended meetings in New Orleans, St. Louis, and Chicago where he had an opportunity to discuss the agricultural situation with quite a range of people. The comment was made rather frequently were not quite as bright as last year, and there that prospects was some feeling of uncertainty in a number of places. However, it is often said that "the crop is lost three times before making the prospect was for a large cotton a record harvest." Actually, it would not be as large as last crop, and the wheat crop, while to the wheat surplus. Herds of year, nevertheless would still add prices were up. The still being expanded and calf cattle were heading for severe trouble but cattle situation appeared to be were still a couple of good years cattlemen apparently hoped there prices were reported to be rising, ahead. In 46 States, farm land
and the level was now 8 per cent higher than a year ago, which was hard to reconcile with talk of an agricultural depression and the pressure was placed on farmers. As a matter of fact, commercial farms were not losing money at present. Mr. Shepardson expressed agreement with what Mr. Robertson had said, adding that he did not recall any time since he became a member of the Board of Governors when such a generally favorable outlook for business expansion existed. He was also much impressed by the comments of Mr. Marget. The balance-of-payments situation was a matter that had been of concern to him for some time, and the current figures seemed to offer clear support for what many people had feared with respect to the position of the United States in trade. All of these things, Mr. Shepardson said, international definite and positive action at this time. pointed to the need for himself in similar vein at the last Committee While he had expressed do much at that time because of the meeting, it was not possible to Now, however, he felt that the System should Treasury's financing. rate, it seemed desirable to take definite action. On the discount the position of the System; of a move clearly to indicate make enough lag as they did in 1956. Therefore, he System actions should not increase of 1 per cent. He favor a discount rate would definitely on reserves, and he some increase in restraint would also favor rate action would that a less decisive agreed with Mr. Robertson
call for more vigorous restraint through open market operations. Personally, he would favor giving a clear signal through the dis count rate and then making a moderate move in the direction of further restraint on reserves. As to the directive, Mr. Shepardson said that he liked Mr. Bopp's suggestion for clause (b) with one modification. Instead of referring to "inflationary developments," he would prefer "inflationary credit expansion" as indicating more particularly the System's sphere of responsibility. He would like to include the phrase suggested by Mr. Bopp with respect to expanding employ ment opportunities because it seemed appropriate for the System to show its interest in that area. Thus the directive would read: "to restraining inflationary credit expansion in order to foster sustainable economic growth and expanding employment opportunities." Mr. King made substantially the following comments: There are increasing signs that the present monetary and credit policy is having a restrictive effect on the economy. Present signs of tightness in the mortgage money market suggest that the current level of activity in con struction will diminish during the last half of the year. Recent postponement of issuance of some securities-as an example, the $50 million New York Turnpike Bonds-because of interest rates indicates that the credit and monetary policy of the last several months is having a retarding on expansion along this line. effect These indications do raise the possibility that the cumulative effect of the present policy might ultimately constitute more restriction than has been obvious up to However, there are so many other factors this time. rate increase is appropriate that indicating a discount
I would vote to approve an increase of 1/2 per cent if requested by a majority of the Reserve Banks. Concerning open market operations, I would agree to additional restraint but would leave the amount and the words of the directive to the other members of the Committee. I agree with Messrs. Robertson and Shepardson that if only a 1/2 per cent discount rate increase is effected, somewhat greater restraint in open market operations would be desirable. Mr. Fulton reported that Fourth District steel mills were working practically at capacity, with increased orders from certain customers indicating that the inventories those customers had hoped to accumulate in anticipation of a possible steel strike were being cut into quite rapidly. At the same time, with the opening of the St. Lawrence Seaway quite a volume of foreign steel was being un loaded at the docks in Cleveland. It was announced recently, however, that one Fourth District steel company intended to spend around $300 million in an expansion program over the next several years. The foundries, in bad shape a relatively short time ago, now were working practically full time, and there were demands that deliveries be advanced. The railroads were now buying rather extensively for the first time in some period, and more orders were coming into the machine tool industry. While the orders were not in great volume, machines that would take a long time some of them were for expensive manufacturing process there was to turn out. Thus, in the whole a sustained upturn. By the same token, quite an upturn, seemingly cities had been been going down and additional unemployment had
removed from the excessive unemployment category. The remaining cities were largely in heavy industry or coal regions. Mr. Fulton said that district department store sales were up from a year ago but that the agricultural outlook was not particularly good. The wheat crop apparently would be the worst since 1930 and this would have its effect upon farm banks. Some of those banks had loans carried over from last year, and in view of the poor wheat and hay prospects they apparently would have to carry over more this year. Therefore, they appeared likely to come to the discount window. Thus far, however, district banks had not been borrowing heavily, which might be due in part to the fact that the Reserve Bank had held conversations with some of the more frequent customers. Business loan demand was fairly strong but not excessive, while in mortgage loans there had been a rather heavy demand. However, it continued to be the expectation that in of the year there would be a substantial decline in the second half housing to be built and consequently the financing of the amount of it. rate, r. Fulton said he had With respect to the discount a rate change but as as to the desirability of mixed feelings, not of it. One of the reasons for his uncertainty was to the timing if it occurred and con of a steel strike which, the probability situation in the would affect the employment tinued for some time,
Fourth District and production outside the steel industry. He was inclined to feel that a decisive rate change at this time might prejudge the effect of the steel settlement, and at present there was no definite indication whether the settlement would or would not be inflationary. Accordingly, his preference would be to wait until a clearer indication was available and then, if it seemed appropriate, to make a change in the discount rate that would be more than merely an adjustment to the market. This would constitute the System' s signal that there had been an inflationary wage increase and that the System intended to do whatever it could by way of offset. It would be a clear and definite signal of System intentions, both from the standpoint of timing and the extent of the increase. Mr. Fulton noted that his suggested language for the directive was set forth in the memorandum from the Secretary. He would be will ing to go along with the language suggested by Mr. Bopp, modified in the manner suggested by Mr. Shepardson. Mr. Bopp reported that Third District developments were similar to those described for the nation as a whole except that, as usual, the pace of the district was a little slower. Even in details, however, of district developments was close to the national picture. the pattern Mr. Bopp said that although he could see some virtue in a cent, his conclusion was that an discount rate increase of 1 per He added that he 1/2 per cent would be appropriate. increase of directors would be whether the Philadelphia doubted seriously
inclined to go along with a full 1 per cent adjustment. The next regular directors' meeting was scheduled for June 4 and it might be difficult to assemble the directors for a meeting this Thursday. In any event, those who did come probably would hesitate to move on the discount rate in the absence of the other directors. Mr. Bopp felt it was of some importance that the directive recognize the interest of the System in expanding employment opportunities, although his thoughts along this line might reflect to some extent conditions in the Third District. With that proviso, he would consider any of the suggestions listed in the Secretary's memorandum appropriate. In his opinion, open market operations should be somewhat more restrictive, with the extent of restrictive ness depending on the effect of a change in the discount rate. Mr. Bryan commented that he had heretofore reported on the strength of the economy of the Sixth District and the extent of change. Statistics available since the preceding Committee meeting all pointed to developments of the kind Mr. Young had outlined in presenting the national picture. District insured unemployment figures were down dramatically as compared with 1958 and apparently level of 1957. With reference to a comment would soon drop below the Mr. Shepardson, Mr. Bryan said he could see no explanation made by in land prices in the Sixth except speculation for the increase to Florida and was not making reference Furthermore, he District. obviously a vast where there was resort areas, the other coastal
speculation in land, but to other essentially farming areas. As to the discount rate, Mr. Bryan said he had not given particular consideration prior to this meeting to a 1 per cent increase but felt that the comments made by Messrs. Hayes and Robertson deserved a great deal of thought. Should there be an increase of 1 per cent, he agreed with Mr. Robertson that it should be possible to be less restraining by way of open market operations than the Committee would have to be if the discount rate increase were only 1/2 per cent. The directive undoubtedly should be changed, and several of the suggestions with respect to clause (b) would be agreeable to him. On the whole, he would prefer the language suggested by Mr. Bopp with the modification suggested by Mr. Shepardson. As an alternative, he would favor the suggestion of addition of Mr. Bopp's phrase about expanding Mr. Irons with the a reference that he thought it would be employment opportunities, well to include in the directive at this time. In response to a question from the Chair, Mr. Freutel said that he had no comment. said that he felt the language for the directive Mr. Szymczak change suggested by Mr. Shepardson, by Mr. Bopp, with the submitted of Committee policy at this time. would constitute a proper expression favor a change now and felt on As to the discount rate, he would the rate by 1/2 per cent it would be better to increase balance that
at this time and take another look later. In open market operations, he would move in the direction of net borrowed reserves in a range between $300 and $350 million. At Mr. Balderston's request, there were distributed copies of a chart prepared by Mr. Keir showing the actual timing of Treasury financings thus far in 1959 and the probable timing of such financings during the remainder of the calendar year. This chart also showed periods in which it might be assumed that the Committee would be maintaining an even keel, the presumption being that the even keel periods would run from one week prior to the announcement of a Treasury financing to one week following the payment or settlement date. Mr. Balderston stated that, as indicated by the chart, the System was now entering one of the few periods during the remainder of the year when it could take vigorous action without creating added difficulties for the Treasury. However, it must be borne in mind that in the forthcoming period the Treasury would probably have some delicate negotiations regarding the debt limit, which would involve discussions in the Congress regarding interest rates and their impact upon the economy and social problems. went on to say that his greatest concern had Mr. Balderston what he felt to be an excessive increase in the money to do with increase in the active money supply of supply since January 28. The rapid growth in loan expansion had stemmed from a over $2.5 billion
and had been accompanied, at least until the past three weeks, by an increase in time deposits. In a period of ebullience like the present it was his feeling that money substitutes could not be dis regarded and must be taken into account in the Committee's delibera tions. He also noted that deposit turnover outside New York City had risen 8 per cent from a year ago and was now at a rate of 24.5 annually. Further, the ratio of commercial bank loans to deposits was now nearly 51 per cent, and this was only 13 months after the turnaround of the economy in April 1958. This compared with a ratio at the comparable period in 1955 of only 44 per cent. The inference he drew was that the banks were not only likely to attempt to borrow money heavily at the discount window but might develop to complacent about such borrowings. He made that be increasingly of loans to deposits was high for this comment because the ratio because he suspected the banks had made stage of the recovery and point where they now had less head term loans or commitments to a loan demand for the accumulation of inventories or for room to meet mean trouble ahead in the administra seasonal purposes. This would from the standpoint of maintaining a tion of the discount window on the use of the between sufficient restraint delicate balance that credit was not resort and avoidance of rumors bank of last available. said that he directive, Mr. Balderston With respect to the by Mr. Shepardson's language as modified favor Mr. Bopp's would
suggestion. On the discount rate, he would prefer an increase of 1/2 per cent, but he could agree to an increase of 3/4 per cent. In any event, he differed from some of those who had spoken in that he would increase the level of net borrowed reserves to approximately $500 million with all deliberate haste. He would let natural forces in the market operate to produce such a result. More specifically, he would propose to move to $350 to $500 million of net borrowed reserves in a week and to $500 million in two weeks. If the discount rate were not increased a full percentage point, he felt that any net borrowed reserve target of less than $500 million would cause a repetition of the mistakes of early 1956. In short, he did not believe that the System had its foot on the brake hard enough. As between a discount rate change of dramatic force and one less dramatic, which would perhaps create less trouble for the Treasury in its negotiations and would appear more on the financial pages than the he thought that he would favor the second of those front page, juncture. He would move in accordance with alternatives at this the degree of restraint just as rapidly normal practices and tighten to indicate fear be so dramatic as attempting to as possible without the System knew something the the future or to indicate that of that the money supply know. The country was aware country did not to redress the expect the System and would expanded rapidly had markets would that the had the feeling summary, he In balance. free reserves negative System increased if the unduly not be shocked
as fast as possible in such a manner as not to incite fear. Chairman Martin said that, in his opinion and, he believed, in the opinion of the majority, the manner in which things had been moving clearly indicated that the System had not been as restrictive as it desired to be. However, that was hindsight and now it was necessary to move with the ball. In his view, the uncertainty that would be desirable in the markets should not be injected by Govern ment agencies; it should come from natural forces and normal business questions rather than activities of the Federal Reserve or the Treasury. In his opinion, the System should not be too concerned about the fact that the prime rate went up ahead of the discount rate or that every one now expected an increase in the discount rate. The current situation did not appear to him comparable to the British situation in 1957 at the time the Bank Rate was raised from 5 per cent to 7 per cent, and he did not think that the System would want to go to the President or to the Treasury to invoke their solicitude at this time, for that would be over-dramatizing a situation that seemed not yet out of hand. In substance, he felt that market conditions should be set up that would produce a higher discount rate and that there had not yet been those conditions. Neither would he want to give foreigners who were enjoying the plight of Americans at the present time any feeling that there was a chance of panic in the United was going all out to preserve the States or that the Government the thing to do at the present time was to move dollar. Instead, in a perfectly normal way.
The Chairman commented that a good many around the table would have liked to move faster at an earlier stage, but in fact this had not been done. At this time the perfectly normal thing, and the thing the market expected, was a change in the discount rate to 3-1/2 per cent. The market, however, apparently did not expect too much tightening of the reserve position. That tightening, he felt, should come before an increase in the discount rate to 4 per cent or 4-1/2 per cent. Open market policy should have some bite in it, and it did not have that bite today. While some might disagree with the money supply figures, by and large it could be said that the money supply had been more than adequate for some time. Now that velocity as well as quantity was beginning to pick up, it seemed perfectly right that pressure should develop through open market operations. He was not sure that he would want to be as drastic as Mr. Balderston and move necessarily to $500 million of net borrowed reserves by a fixed date, but the matter of pro gression was important. In substance, his thinking ran along the line that the Reserve Banks should move as rapidly as possible to a 3-1/2 per cent discount rate and that at the same time pressure should be exerted on the money market through open market operations. That was the move that seemed to be called for. Before making a that the System must be in a much worse dramatic move, he felt Furthermore, when everyone was as position than it was at present. optimistic as around the table today, he began to worry. By the
same token, when comments were as uniformly pessimistic as they had been on a few occasions, he would have liked to buy a few stocks. On neither occasion was the situation probably as open and shut as might appear. Chairman Martin commented that he had no doubt about the trend of the economy or the current position of strength. The problem of the United States today was one of competition in markets abroad, which was essentially a pricing problem. He had thought a great deal about the possibility of a dramatic move of a signal nature on the part of the System, but he was convinced that the position of the Federal Reserve was clearly known throughout the world. The need was not for a signal but for action. A move to a 4 per cent discount rate at this time without accompanying open market operations would in his judgment accomplish very little and, although he had not discussed the specific point with the Treasury, he was inclined to feel that it would complicate the Treasury's problem greatly. It appeared that by and large the battle on balancing the Federal budget had been won, and the thing that would come under serious and critical scrutiny was the role of interest the economy. A large increase in the discount rate would rates in not help the Treasury's case if it went to the Congress for a change interest rate ceiling for its bonds. in the permissible that in view of Chairman Martin interjected At this point each person in the room of the discussion at this meeting the nature
had a responsibility, which he realized it was unnecessary to emphasize to this group, to be very cautious in not revealing the comments at this meeting or what action might or might not be taken. The Chairman then said it was the net of his thinking that as rapidly as possible the discount rate should be increased to the level where he thought it ought to be; namely, 3-1/2 per cent. Then, as fast as possible in an orderly way, the Committee should make it clear that it was going to increase the pressure on reserves. He did not know what the actual figure of net should be, for the color, tone, and feel of the borrowed reserves but there should be no uncertainty that the market was involved, moving in the direction of, to use Mr. Balderston's Committee was was difficult to make comparisons million. While it phrase, $500 of the differences involved, and while with past periods because figure at which to aim, it was difficult to find a satisfactory on the reserve position of should put more pressure the System the commercial banks. that the course he had outlined The Chairman repeated To move along a course the orderly way to proceed. seemed to him would require considerable Mr. Hayes had mentioned such as and he questioned weeks of preparation, and several discussion for at the present time. Instead, it whether that was called
seemed preferable to him to proceed in the normal way by moving the discount rate to 3-1/2 per cent and putting more pressure on reserves for the next couple of months. There was likely to be increasing discussion of interest rates and the cost to the Treasury of carrying the public debt. By proceeding in the manner he had suggested, conditions would be established such as to aid the Treasury in obtaining an increase in the ceiling on the rates for its securities, and he was not sure that this could be completely validated today. The Treasury was being validated by the course of events, but perhaps not in terms of the economic position at the present time. The Chairman reiterated that he had thought a great deal of moving the discount rate to 3-3/4 or to about the possibility Treasury in the position under the 4 per cent. However, with the to service its obligations within a statutory present law of having want to do anything more than cent limit, he would not 4-1/4 per necessary to complicate the Treasury's problem. (b) of the directive, Chairman With respect to clause that all of the suggestions listed Martin expressed the opinion Secretary of the Committee were good. in the memorandum from the suggestion, as amended to favor Mr. Bopp's The majority seemed Therefore, unless someone by the suggestion of Mr. Shepardson. that the Committee he would suggest to the contrary felt strongly
agree on "to restraining inflationary credit expansion in order to foster sustainable economic growth and expanding employment opportunities . The Chairman then inquired whether there were any objections to the use of such wording for the directive, and no comments were heard. Turning to the discount rate, Chairman Martin said he would hope that the majority today clearly felt that it would be desirable to move the rate promptly to 3-1/2 per cent. He inquired whether there was anyone who would oppose such a move, and Mr. Mills responded that he would not favor it. On the question of moving the discount rate to 3-3/4 per cent or 4 per cent, Chairman Martin said he believed that such a proposal represented a minority position around the table, and were no comments in response to that statement. there The question of open market operations, the Chairman said, be the difficult one. He had stated his own position. seemed to would want to specify a target of $500 He did not know whether he at any particular time, but he million of net borrowed reserves exert additional pressure as rapidly would want to have operations an untenable market condition. could be done without creating as that net borrowed reserves in a Mr. Szymczak inquired whether restraint than had would represent more range of $300 to $350
prevailed up to this point, and Mr. Rouse replied in the affirmative. He added, however, that much would depend upon the distribution of reserves. Mr. Hayes then inquired whether, speaking in terms of the next three weeks, it would satisfy the consensus to instruct the Manager of the Account to move clearly toward a firmer tone and leave the amount of net borrowed reserves somewhat indefinite. Chairman Martin responded that he would be willing not to set a figure, but that the Committee should have in mind what it was driving at in terms of restraint. The country bank situation had changed in relation to the city bank situation, and there were many other differences, so it was difficult to make a comparison with any previous period. noted that net borrowed reserves had averaged Mr. Hayes recent weeks, which was higher than most around $250 million in However, that range seemed have said five weeks ago. people would harm. Similarly, it might be and it had not done any appropriate or $500 million without hurting possible to go to $400 million to have some specific target fixed anything. He would not like it was possible to go further. if it developed that given much thought to the said that he had Mr. Shepardson rate or emphasis on the discount namely, emphasis two approaches; seemed to him that market. It had pressure in the on further
possibly there would be some advantage in placing the major emphasis on the discount rate at this point, with a movement in the market to validate the increased rate. At the same time he recognized the value of going the other way; that is, building up the pressure clearly to indicate the necessity of a higher discount rate. He was impressed by Chairman Martin's statement about the Treasury's position. If the procedure was to be along lines such as the Chairman had suggested, he felt the Committee should definitely contemplate a sufficient increase in pressure to exert a real bite without necessarily fixing a specific target. It seemed to him that $500 million of net borrowed reserves might be an appropriate direction and that a range of $300 million to to carry out the to accomplish enough million would fail $350 suggestion of putting the bite in the market rather Chairman's than the discount rate. the tightening would have to be Mr. Rouse noted that in the next two weeks, for the accomplished, to a large extent, during the last week would be decided upon next Treasury financing of the preceding week there Furthermore, in the middle of June. he thought the stage ought expansion of float. Hence, would be an middle of June. Tightening operations actually to be set by the function in the natural factors carried out by letting could be things seemed to be getting or a little more. If next two weeks
too extreme, the matter could be considered, but if the distribution worked out it might be possible to get by all right by doing nothing in the next two weeks. Chairman Martin commented that if the projections were cor rect, that would take net borrowed reserves toward $500 million. The course mentioned by Mr. Rouse seemed to him a very desirable way to proceed. Mr. Thomas commented that there might be quite a lot of pressure around Memorial Day. This year, however, the pressure might be less than usual because the holiday would fall on Saturday. If necessary, the situation could be taken care of by repurchase agreements. Mr. Rouse agreed that repurchase agreements over the week end should be sufficient. Mr. Balderston commented that he liked Mr. Rouse's suggestion of allowing natural forces to help the System as much as possible. A move to $300 million or $350 million of net borrowed reserves did not seem to him to be the answer to the problem, and Mr. Rouse' s solution seemed an excellent one. Chairman Martin inquired whether this would meet the con as a target for the next few weeks, and there were no comments sensus to the contrary. some discussion of the dates on which the There followed Banks might meet for consideration of the respective Reserve directors
of the discount rate, and it appeared from the comments that as many as four or five of the Banks would be in a position to hold directors' meetings this week. Mr. Allen then referred to the estimating of the money supply and said he gathered there was quite a bit of feeling that the information now being obtained was not as up-to-date or as reliable as it should be. He suggested that improvement might be effected if country banks, instead of rendering reserve reports every half month, were to report on an every-other-Wednesday basis, which would mean 26 reports a year rather than 24. The Chicago Reserve Bank, he said, was preparing to approach certain larger country banks and ask them to furnish daily figures on reserves on an experimental basis, which would provide information comparable to that now available for central reserve and reserve city banks. Also, it was planned to seek a sample of the smaller country banks. Mr. Allen said it would be his suggestion that as many as possible try to do something along the lines that Reserve Banks proposed, unless there was some feeling on the the Chicago Bank computation period ought to be part of the Board that the reserve an early date. He went on to say that a number of changed at to be getting restive about Federal Reserve country banks appeared and that he rather doubted the advisability of a change membership computation period at this time. in the reserve
After some discussion in the light of Mr. Allen's comments, Mr. Thomas referred to the technical problems involved in getting current statistics and also in regard to the reserve period that should be used. He noted that the System Research Advisory Com mittee was meeting this afternoon and said that if the Open Market Committee so desired it would be possible to prepare a memorandum setting forth the problem and perhaps making some suggestions. It was agreed that it would be desirable for the System Committee to discuss the subject at its meeting Research Advisory this afternoon, and Chairman Martin asked that recommendations be Governors with a view to considering how presented to the Board of further to proceed. the current study of the Government In connection with stated that one of the task groups securities market, Mr. Young to certain factual material contained would like to have access procedures which with present operating in the report on experience by the Federal Open the staff committee appointed was submitted by noted that the reports May 23, 1956. He Market Committee on study would come securities market from the Government resulting well as the Treasury. Committee, as to the Open Market back that the it was understood being no objection, There to the task group would be made available material in question referred to by Mr. Young.
With reference to the record of policy actions of the Federal Open Market Committee for 1958, a draft of which had been distributed for comment to the members of the Committee and the Presidents not presently serving on the Committee, Mr. Robertson said it concerned him that the record seemed to indicate almost complete unanimity of views around the table at the respective Committee meetings. Also, he felt that one reading the policy record might wonder what sort of directions were given to the Manager of the System Account. He suggested, therefore, that it might be desirable to have a prefatory note to the policy record which would indicate that there were differing views all through the period covered by the record. Such a preface might also bring that the Manager of the Account sits with the Open Market out Committee and has the benefit of discussion around the table, for it is not essential to pinpoint specific instructions which reason to the Manager. were certain dangers in a Szymczak commented that there Mr. suggested and that it might be procedure such as Mr. Robertson had of prefatory note and staff to prepare a draft desirable for the submit it to the Committee. that he was interested merely Mr. Robertson agreed, adding meetings was a out of the respective that what came in indicating which there might have been varying general agreement, underlying viewpoints.
The Chairman then stated that the staff would prepare a draft of prefatory note along the lines Mr. Robertson had suggested and distribute it for comment. At this point Chairman Martin inquired of Mr. Mills whether he wished to be recorded as opposed to the issuance of a policy directive to the New York Bank in the form he (Chairman Martin) had mentioned earlier during this meeting. Mr. Mills responded in terms that he took as strong a view as Mr. Robertson regarding the policy record. The policy record showed for every meeting a record vote on the directive to the New York Bank, whereas his view was that instructions given for open market operations reflected a consensus. Chairman Martin commented that Mr. Mills had raised a real point. He went on to say that whenever any member of the Committee wished to have his views recorded, that should certainly be done. Mr. Hayes then stated that this discussion suggested the desirability of preparing the policy record entries on a more current basis, and there was general agreement with this comment. Thereupon, upon motion duly made and seconded, and with Mr. Mills voting it was voted to direct the Federal "no", Reserve Bank of New York until otherwise directed by the Committee: sales, or exchanges (1) To make such purchases, (including replacement of maturing securities, and to run off without replacement) for allowing maturities
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 restraining inflationary credit expansion in order to foster sustainable economic growth and expanding employment opportunities, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including com mitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness from time to time for the temporary accom purchased Treasury, shall not be increased or modation of the decreased by more than $1 billion; the Treasury for the purchase direct from (2) To Reserve Bank of New York (with account of the Federal it seems desirable, to issue discretion, in cases where one or more Federal Reserve Banks) participations to short-term certificates of such amounts of special be necessary from time to time for indebtedness as may of the Treasury; provided the temporary accommodation total amount of such certificates held at any that the Banks shall not exceed time by the Federal Reserve one in the aggregate $500 million. of the Federal Open Market agreed that the next meeting It was June 16, 1959, at 10:00 a.m. would be held on Tuesday, Committee The meeting then adjourned. Secretary
Also: Record of Policy Actions