July 7, 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, July 7, 1959, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Deming Mr. Johns Mr. King Mr. Mills Mr. Shepardson Mr. Szymczak Mr. Mr. Erickson Bopp, Alternate for Messrs. Bryan, Fulton, and Leedy, Alternate Members of the Federal Open Market Comittee 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 Solomon, Assistant General Counsel Mr. Mr. Thomas, Economist Marget, Parsons, Roosa, and Messrs. Jones, Young, Associate Economists Assistant to the Board Mr. Molony, Special of Governors Mr. Koch, Associate Adviser, Division of and Statistics, Board of Research Governors Government Finance Section, Mr. Keir, Chief, Division of Research and Statistics, Board of Governors Mr. Latham, First Vice President, Federal Bank of Boston Reserve Tow, and Rice, Vice Messrs. Daane, Baughman, of the Federal Reserve Banks Presidents Kansas City, and of Richmond, Chicago, Dallas, respectively
Messrs. Marsh and Einzig, Assistant Vice Presidents of the Federal Reserve Banks of New York and San Francisco, respectively Mr. Anderson, Economic Adviser, Federal Reserve Bank of Philadelphia Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York The Chairman noted that Mr. Erickson was absent but that Mr. Latham was in the building today to attend a meeting of the Presidents' Conference. There being no objection, Mr. Latham was invited to attend the meeting and entered the room. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on June 16, 1959, were approved. Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period June 16 through July 1, 1959, and a supplementary report cover ing the period July 2 through July 6, 1959. Copies of both reports have been placed in the files of the Committee. Mr. Marsh stated that operations to maintain an even keel in the money market within an atmosphere of over-all restraint had been generally successful. The money market remained generally tight, with the effective rate on Federal funds at 3-1/2 per cent, except for three days when the New York money market eased, reflecting an excess of funds and the effects of proceeds of redemptions accumulated bills which ended up in New York. The of tax-anticipation Treasury money market had been particularly tight during the past few days,
primarily because of tighter reserve positions of New York City banks that lost reserves to other parts of the country after the end of the month. Open market operations had supplied $338 million of reserves net on a commitment basis since the date of the last Committee meet ing. Outright holdings of Treasury bills in the System Open Market Account were up by $311 million, while repurchase agreements out standing increased by $27 million net; new agreements were put on during the period but were almost matched by maturities and withdrawals. Looking ahead, additional reserves would have to be supplied to cover the increase in reserve requirements on Thursday, July 9, and the following Thursday, July 16, as a result of payment for the new issues of Treasury bills. The amount of reserves needed was uncertain and would depend on the amount of the new issues that moved out of bank into nonbank hands by the payment dates, a development which was very difficult to measure. Interest in the Government securities market, Mr. Marsh said, Treasury financing. The total of $5 billion focussed on the new than had been expected by the mar Treasury bills offered was larger in the first auction last ket, producing considerable caution July 1. Initial rate ideas for the March tax ill Wednesday, 4 per cent but moved higher as auctioned on that day were below result was an average rate of 4.07 the auction approached, and the banks were 4.14 per cent. Commercial the stop-out at per cent with
willing to take the March bill against tax and loan account credit but only on a wide scale of prices since they were doubtful as to how long they could hold the bills. There was fairly active secondary trading in the new March bills at rates around per cent. Dealers expected a good continuing interest in that issue but the market was cautious and pessimistic about the auction of July bills tomorrow. Banks were even more uncertain of their ability to hold the July bill and feared that corporations would not be buying those bills as rapidly as the March bills. Some banks were consider ing tendering at a high rate with the idea of holding the bills and selling other securities to meet tax and loan account calls. Early auction ideas ranged out to 4-1/2 per cent on the tail and as low as the average. The poor prospect for the auction 4-1/4 per cent for by the results of yesterday's auction of July bills was aggravated for both long and short bills regular Treasury bills. Interest for average rate of 3.26 per cent for 91-day was light, resulting in an bills, with a long tail on both bills and 3.96 per cent for 182-day bills, or a total of $402 million 91-day and awards to dealers issues another upward probably would produce million. This result of $587 for tomorrow's auction. higher rate ideas in bill rates and adjustment of these say that the significance Marsh went on to Mr. bottom of the barrel serious, since the for the Treasury was events auction for the reached. If the Wednesday appeared to have been
July bills should result in an average rate between 4.30 and 4.40 per cent, it would mean a secondary market well over 4-1/2 per cent. This latter rate, in turn, if converted to a true yield basis, would mean 4-3/4 per cent for a one-year interest-bearing certificate. This rate, of course, related to the Treasury's August refunding and to the cash borrowing that the Treasury would undoubtedly have to undertake in mid-August to pick up attrition on the refunding. The Treasury probably would have to come back to the market early in October for additional cash, leaving only a small open period between operations. Mr. Marsh pointed out that the problems he had described were mainly in the short-term market--the area in which the Treasury was forced to borrow--and that the balance of the market had acted reasonably well. There had been gradual upward adjustments in longer-term rates but no drastic price declines, despite the probability that commercial banks would have to sell more inter mediate issues over the balance of the year as loans increased. For the record, Mr. Marsh noted that legislation raising the public debt ceiling had been passed by Congress and signed by the President, but with a limit less than the Treasury expected, and that no bill to eliminate the interest rate ceiling on Treasury bonds had yet been reported out by the Ways and Means Committee. clear, he said, that the System Account would have It seemed bills in the next day or so to provide reserves to buy Treasury
needed on Thursday, July 9, as a result of the Treasury's financing operation. The chances were that the Desk would decide to buy those bills sooner rather than later in view of the unsatisfactory state of the Treasury bill market and the imminence of the Treasury's next financing operation, that is, the auction tomorrow. Upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period June 16 through July 6, 1959, were approved, ratified, and confirmed. Supplementing the staff memorandum distributed under date of July 2, 1959, Mr. Young made a statement substantially as follows with respect to recent economic developments: Economic activity domestically continues its vigorous expansion. Industrial production for June has apparently advanced further; as a preliminary guess, to 154 per cent of the 1947-49 average. GNP estimators are much more certain than earlier that the second quarter GNP will be up $10 billion from the first quarter in both current dollar and constant dollar terms. Consumer demands are evidently still expanding, par ticularly for durable goods. Sales of new cars, domestically produced and imported, are estimated at close to 600,000 units for June, or a seasonally adjusted annual rate of 6.6 million. Sales of household durables, which in May had leveled off, again expanded in June. For the second quarter as a whole, sales of these goods are expected to be 3 per of the first quarter and 9 per cent higher than a cent ahead of all goods at department stores are year earlier. Sales running slightly ahead of May sales, and second apparently are estimated to have reached new record quarter sales ahead of last year's second quarter. levels, some 8 per cent demand has been fed in recent months Expanding consumer consumer instalment credit. The by rapid expansion of
April-May increase represented an annual rate in excess of $5 billion. While outstanding automobile credit has been expanding rapidly in recent months, it has not yet re attained the rapid expansion rate set in Seasonally adjusted new orders at durable goods manufacturers fell off by 4 per cent in May after rising 40 per cent from February 1958 to April of this year. Over half of the decline represented a drop in orders for primary metals; the balance was concentrated in electrical machinery and aircraft. Thus, the decline was accounted for by lines in which new orders had undergone a rapid run-up earlier this year. Manufacturers' inventories continue to build up at a rapid pace. The May increase was $ 00 million, compared with $600 million each in the two preceding months and a $500 million pace of build-up earlier. Altogether, manufacturers' inventories have now regained half of the recession liquidation. Construction activity again eased off in June from earlier higher and record levels. For the past three months, the value of new construction has declined about 2/3 per cent a month. Public construction and private residential construction both fell off in June; private industrial and commercial construction, however, rose further, the latter to a new high. Some increases in urban vacancy rates have been reported recently, both for rental housing projects and for office buildings. Labor market developments have continued to show strength, but June gains in employment were probably smaller than in April or May. Also, the seasonal influx of students, summer workers, and graduates has been operating to lift the number of job seekers. The seasonally adjusted unemployment rate is expected to show little, if any, change. Continued unemploy ment claims are still running higher than in comparable months 1957; new claims, although close to 1957 levels, of 1956 and remain somewhat above levels of 1956. A matter of some social interest is the large number of currently unemployed persons without previous work experience--about 1/6 of the unemployed work force and substantially more than in the comparable 1950 and 1955 recovery months. This large fraction reflects in rehiring of previously laid-off workers. emphasis or strike remains a The question of a steel settlement for the period immediately ahead. major industrial uncertainty negotiations has been re little progress in the steel While union is now prepared to scale ported, it is rumored that the
down its demands to an increase of about 3 or 4 per cent, or roughly 10 to 12 cents an hour. This is about in line with the recent settlement in the paper industry which provided a 3 per cent general wage increase for next year and a 4 per cent increase for the following year. The average of all wholesale prices has changed little in recent months. Averages of both industrial commodities and farm products have been stable at levels reached earlier, with industrial commodities up 2-1/2 per cent and farm products down 5 per cent from the spring of 1958. Upward pressures on prices have recently become fairly pronounced, it is reported, for some processed industrial materials and for such finished products as furniture, carpets, and apparel. The consumer price index, which edged up slightly in April and May, is expected to show a further slight rise for June. United States exports rose moderately in April and again in May. The April increase reflected some rise in machinery shipments but the May increase was accounted for entirely by larger agricultural exports. Imports also increased in May, with the increase quite sharp. The annual rate of both exports and imports was about even-close to $16 billion. the balance of payments was Continuing deterioration in in further large net transfers of gold and dollars, reflected amounting to from 00 to $500 million in rounded figures, $4 transfers to the International Monetary Fund. excluding abroad, expansion in economic In industrial countries more widespread and has gathered momentum. activity has become of industrial revival abroad is clearly This extension countries, and thus is working benefiting materials-supplying to strengthen markets for indirectly as well as directly On the other hand, grievous financial United States products. American markets con several important Latin instability in to improvements in work as a partial obstruction tinues to States shipments southward. United ahead, domestic economic With respect to prospects some slowdown is to be now reached a point where advance has expansive influences have probably expected. Three major construction, passed their maximum strength--residential now and gains in industrial productivity. inventory accumulation, to enlarge and business capital Consumer spending continues now gather momentum. These will undoubtedly expansion may but at a advance proceeding, to keep the economic suffice worth noting that the margin rate of gain. It is slackening for producing industrial industrial capacity of unused significantly wider finished goods is probably materials and
than it was at a comparable point in the preceding economic cycle. This implies both more margin for further cyclical expansion of output and more supply restraint on upward price pressures than experienced in the last economic cycle. In any case, we may hope so. Mr. Thomas presented a statement on financial developments as follows: At the last meeting of this Committee, the general consensus as to System operations was expressed as "feeling that the prevailing policy of restraint should be continued" and that the System should follow a firm and steadfast course and give no evidence of easing. The record of credit developments during June indicates that the policies followed were appropriate and perhaps also effective in accomplishing desired objectives. Money markets have been under pressure because of continued vigorous credit demands. Loans at city banks during the past five weeks increased more than in the same period of any other year. At the same time bank deposits declined or failed to show any more than the usual seasonal increase. The restricted availability of bank reserves made it necessary for banks to reduce their holdings of securities by unusually large amounts in order to obtain funds to make loans. Banks also maintained a high level of borrowings throughout the period, which kept them under restraint. On the basis of preliminary estimates, it appears that the money supply, seasonally adjusted, showed no increase in June, following only a small increase in May. For the first half of the year the growth was at an annual rate of about 2 per cent, and for the past twelve months it was 4 per cent. For member banks alone, the semimonthly daily average figures of demand deposits adjusted, after allowance for seasonal variations, declined in the first half of June, and tentative estimates for the second half indicate a further decrease to around the level of the early weeks of this year. Credit expansion during June was fairly general. It was pronounced in business loans at banks, particularly to sales finance companies, in capital market borrowing and local governments, in mortgages (at banks as by State at other lending institutions), and in consumer well as credit (also substantial at banks). Bank loans on
securities showed only a small increase. The Treasury, on balance, was a supplier of funds to the economy in June. The surplus, resulting from June tax receipts, was exceeded by retirement of debt, including tax bills used to cover income tax payments. In July, however, new borrowings of $5 billion will exceed the cash deficit and net retirements of savings bonds. Credit demand pressures, together with limitations on the availability of reserves, have resulted in further interest rate increases. Long-term interest rates have shown little further change since mid-June, except for a pronounced rise in yields on municipal bonds reflecting the large volume of recent new issues in this area. The sharpest increases have been in yields on issues maturing in from six months to about five or six years, reflecting in part additional Treasury offers of bills in the 6- to 12-month area. On the basis of actual effective yield to purchasers of the new bills, it may be said that the one-year rate is now about 4-1/2 per cent. Issues in the 4- to 6-year area are selling at higher yields. At the same time yields on 90-day bills have actually declined, as a result of the desire of to maintain liquidity, together with a reduction purchasers the current supply of issues in this area through redemption in of tax bills in June. increases in interest rates, to The further pronounced out of the money supply, might raise gether with the leveling as to whether current credit policies are unduly some question at least induce complacency as to the restrictive, or might policies in restraining expansion. effectiveness of these are accepted, however, the situation Before any such views needs further analysis. already pointed out, demands for In the first place, as are so great that any increased credit from the private sector be quickly transmitted into availability of reserves would the money supply. Funds and an increase in additional credit banks now meet are obtained by selling for such demands as other supplies of and thus absorbing Government securities rise in interest rates new money. The funds without creating pressures. Any attempt to is an evidence of these demand in further credit and rising rates would result prevent monetary expansion. slackening or halt in the money Another reason why the or relaxation reason for complacency expansion is no supply in general remains very restraints is that the economy of assets other than of the growth in liquid liquid because various forms of and currency, i.e.,in demand deposits deposits at growth in time Although the money substitutes.
commercial and mutual savings banks has slackened in the past year, it is still at least normal and the total amount outstanding is quite large. Shares in savings and loan associations have recently shown an accelerated increase. In addition, savings and loan associations are borrowing from the Home Loan Banks to expand mortgage loans even more rapidly than their savings shares, and the funds for the purpose are being raised by the Home Loan Banks in the short-term market. Of prime importance as a medium of liquidity has been the increase in holdings of short-term Government securities by nonbank investors. The increase in the public debt in the past year, and also in the past two and three years, has been in issues maturing in less than five years, with a large part in the one-year maturity area. Although bank holdings of Government securities have declined sharply in recent months and are now only a little larger than in 1957 and 1956, it cannot yet be said that the financing of the deficit has been entirely noninflationary. Many of the securities are held as liquid assets--as money substitutes not as the investment of savings. The bulk of the increase in the debt has been absorbed by corporations and by miscellaneous investors, which probably view their holdings as liquid assets. Although business holdings of liquid assets have increased, more recently their less liquid assets such as receivables and inventories have also been rising, as have their current liabilities, and their liquidity ratios are now declining. Businesses may soon need to draw upon their liquid assets in order to finance further expansion. The task of getting the large liquid holdings of securities absorbed into the savings structure still lies ahead. It will continue to be a major problem of refunding, even after the total outstanding debt ceases to expand. It remains to be seen what level of interest rates will be required to accomplish the desired funding of this large debt. In any event the rate must be established floating by the market as effort is made to accomplish a refunding and not be predetermined on arbitrary standards. This country now faces a problem that has created serious difficulties in many other countries in handling a large floating debt. In the meantime, the existence of these money substi tutes which can be shifted more or less readily in the lessens the needs for the creation of additional market in the narrower sense of demand deposits and currency. money Such shifts facilitate increases in the activity of existing
money. The task of the System is to guard against the creation of additional money that will provide an undue stimulus to the economy. Until there is evidence of inadequate growth in output and employment or of a broad weakening in commodity prices, restraint on expansion of bank credit will be in order. The degree of restraint that has prevailed during the past month would seem to be about the right amount; it probably does not need to be tightened under the circumstances, nor should it be lessened. The immediate task ahead is to provide first the reserves temporarily needed for bank underwriting of the new Treasury bill issues being sold this month. A large part of these needs has been met by System operations in the past week, but some further purchases will evidently be appropriate during the next week. After that, opera tions may be relatively small or negligible until late August, when another Treasury financing is scheduled, and in September when holiday currency needs and seasonal credit demands will have to be accommodated. At the request of the Chairman, Mr. Marget commented substantially as follows with respect to the balance of payments situation: I would only emphasize a few of the conclusions to be drawn from some of the figures presented by Mr. Young. The main one is that although gold outflow continues to be less than it was at this time last year (in June, markedly countries bought only about half as for example, foreign June 1958), the figures for gold much gold as they did in and dollar outflow-over a billion dollars in the second that our balance of payments performance quarter--suggest very disappointing. This is confirmed by our is still figures for exports and imports. In May, for example, direct greater than of our exports was not significantly the value month, in other words, of our imports. In that the value in one sense of the term, virtually our "export surplus," it would mean that most If this were to continue, vanished. our aid programs would capital export and of our private and dollars. One outflow of gold result in an equivalent but the truth not in fact continue; that this will hopes balance of payments improvement in our over-all is that the not yet put in an we have been hoping has for which appearance.
Mr. Hayes presented a statement of his views on the busi ness outlook and credit policy substantially as follows: The current business picture continues decidedly strong, but there is as yet no evidence of a run-away boom. The mild spottiness which has shown up here and there in recent statistics-notably a decline in new orders and a levelling off of construction awards, housing starts, and inventory accumulation--is to be expected after many months of rapid advance. While the steel strike threat represents a major uncertainty, there is little likelihood that it could cause more than temporary hesitation in the upward business movement. Current estimates of steel inven tories suggest that the accumulation in the first half of this year has not been as large as the steel-using industries had sought to achieve and that inventories are significantly below those of mid-1956. Thus a prolonged shutdown would presumably pinch more severely than in 1956, and the poststrike rebound could be even sharper than in that year. Retail sales are running about 10 per cent ahead of a year ago, whereas personal income is about 7 per cent ahead. The sharper gain in consumption appears to be mainly an outgrowth of more active use of consumer credit rather than any fall-off in savings in terms of liquid assets. On a seasonally adjusted basis, the May increase in total consumer credit was at an annual rate of $6.5 billion, just about equal to the rise for the full year 1955. It seems to me that the trend of consumer credit from here on will bear very close watching. Export figures for May showed some improvement, possibly reflecting economic gains abroad-but with imports also up, there was no appreciable change in the of gold sales and additions to foreign dollar aggregate holdings. The price indices are still encouragingly steady, is no ignoring the possibility that stronger but there may be building up in various industries either pressure demand nearing capacity limits or because of because of diminishing productivity gains and a consequent growing push. Fortunately there are powerful offsetting cost influences, including monetary and fiscal restraint, some continuing progress in productivity, the discipline and keener public awareness of of foreign competition,
the need to curb inflationary pressures. The steel settlement can of course have a crucial influence on general price trends. Turning to bank credit developments, we find bank loans continuing to expand vigorously in May and June. The increase in total loans at all commercial banks in May was again a postwar record for the month. Again the gains were spread among business, consumer, and real estate loans. With the banks continuing to liquidate holdings of Government securities rapidly in the past two months, the gain in the money supply has been held to modest proportions--an annual rate of about 2-1/2 per cent in May and in the first 5 months of Growing bank illiquidity contrasts with improving liquidity of corporations and possibly even of consumers, despite the sharp upward trend of consumer credit. A full schedule of Treasury financing will complicate our policy decisions over the coming months. It is now expected that some $2 billion of cash must be borrowed before mid-August, in addition to the sizable August re funding to be announced later this month. Thus it will be at least 5 or 6 weeks before we are faced with a so called "free period" for credit policy. It seems to me that the healthy tone of the economy and the ebullience of credit demands provide ample justification for the present degree of credit restraint. However, I would not like to see any intensification of the restraint in view of the major steel uncertainty as well as the Treasury situation. For the next three weeks, therefore, I think we should pursue our present policy, with the usual leeway for the Manager to be guided by the feel of the market. By the same token there should be no change in the discount rate or in the directive. Over the longer term, I can see the possibility of policy problems arising, for example, if corpora serious be unable to keep on absorbing the continuing tions should flow of additional short-term Treasury offerings, and if they should begin to liquidate Government particularly on balance. Moreover, the Treasury's financing securities adjustments of progressive upward operations are forcing This trend may lead to market interest rates. short-term of the prime rate, especially if the yield a further rise 4-1/2 per cent rises above the Treasury bills on long make a discount rate change mark, and may also eventually action on our period" for if the "free imperative even long as we should like. That, however, part is not as for consideration at some future meeting. is a problem
Mr. Irons said that the Eleventh District economic situation continued strong, the only problem area being in the petroleum in dustry. Allowables in Texas had been cut back to nine days for July, and he did not anticipate a substantial or quick increase. Stocks were still large, particularly some product stocks, and it appeared that the oil industry was likely to continue to have problems for some time. While there had been a slight tapering off in residential building, construction was still high. The current declines were moderate and might be temporary. In all other areas, including employment and retail trade, the advance in activity had continued, and at a rather substantial rate. Loan demand, Mr. Irons said, was extremely strong and had been developing at a time when bank loan ratios were already high. An increasing amount of borrowing from the Reserve Bank was being noted. Until about two weeks ago, the Dallas Bank's share of total member bank borrowings had been around 3 to 3-1/2 per cent, but more had increased to about 7 per cent of the System total, recently it steady and increasing borrowing on the part of the with rather had been rising a little. Another larger city banks. Deposits district banks was the recent increase development of concern to the by savings and loan the rate of dividends paid to 4 per cent in Some bankers felt that in the circumstances they associations. should be permitted to pay more than 3 per cent on time and savings As yet, it was not care to pay more. while others would deposits,
possible to gauge the effect of the action by the savings and loan associations. An indication of tightness in the position of the banks was the fact that there was already some borrowing at the Reserve Bank by West Texas banks in connection with the financing of the cotton crop. Usually, those banks would begin to borrow around the end of July or the first of August, and then continue to borrow steadily or intermittently until about the first of October. In summary, the banks in the Eleventh District were not very liquid at the present time, whereas nonbanking corporations seemed to have a high degree of liquidity. Among businessmen there was general optimism as to the advance of economic activity, with perhaps a tinge of concern that the situation might get beyond control. As to policy, Mr. Irons said that the period just ahead seemed likely to be a difficult one, as did the longer-run period. Continuation of the present degree of restraint seemed appropriate the economic situation, and he did not see how greater in terms of at present in view of Treasury operations restraint would be feasible could not justify relaxation on prospect. On the other hand, one in ease would quickly find the basis, for any tendency to an economic to effective use in further expansion reserves made available put desirable to continue the present policy of credit. It seemed the Manager of the Account, who considerable leeway given to with
should try to avoid an appreciable change in the degree of restraint. Mr. Irons agreed with Mr. Hayes that there might be substantial problems over the next few months due to the Treasury situation and heavy credit demands. Mr. Mangels said that, although there were variations between industries, most recent Twelfth District figures reflected a continua tion of advance in over-all economic activity. At the end of May, unemployment in California stood at 4.2 per cent; while the percent ages were somewhat higher in Oregon and Washington, 5.4 and 6.8 respectively, improvement was noted in both States. Retail trade continued to increase and automobile sales continued at high levels. For the past three weeks, Mr. Mangels said, Twelfth District $160 million, spread over all categories of bank loans increased security holdings were down $112 million. loans, while Government and was expected to continue strong Loan demand was very strong remainder of this year. Considerably more emphasis was through the of banks in instructions to their being placed by the management selective with respect to applications, loan officers to be more volume of real estate bank indicated that the although one large Demand deposits showed virtually had about reached a peak. loans savings deposits were three weeks, while during the past no change the June increase in savings large bank reported that up. One at the Reserve history. Borrowing largest in its was the accounts
Bank had been rather consistent and at times quite heavy, although borrowings fell to a total of $44 million last Thursday. District banks were substantial net purchasers of Federal funds last week, and it was estimated that net purchases this week might be around $500 million. Some bankers had commented recently to the Reserve Bank that they must sell more Government securities, although they did not like to sell because of the losses involved. Mr. Mangels indicated that he concurred in the views expressed by Messrs. Hayes and Irons with respect to open market operations during the coming three weeks. Mr. Deming reported that the upswing in economic activity in the Ninth District continued strong. Employment continued to improve, with the June level estimated to have passed the prerecession unemployment, because of labor force growth, remained high, although 1957 figures. Retail sales, including automobiles, had well above been strong in recent weeks, electric power consumption was up were running about 5 per cent ahead of sharply, farm cash receipts year, and the general business tone was one of optimism. last seemed to have grown much Actually, the optimism among businessmen in the past couple of weeks. There was some evidence, stronger however, that the rate of economic growth in the district might quarter, with agricultural income becoming slacken in the third ago and the pace in mining and favorable relative to a year less
construction activity settling down a little. There was evidence, too, that Federal Government expenditures in the district might lessen somewhat as present large contracts were fulfilled. Drought over much of the district this spring had practically insured that crops would be smaller than last year; rainfall and temperatures from now on would have to be better than average to insure a normal crop in 1959. General rain across the district in late June came just in time to check serious soil moisture deficiencies in much of the area. Mr. Deming said that Ninth District member banks, both city and country, continued to lose liquidity during May, apparently with more rapidity than had been the case nationally. In June, the ratio of loans to deposits continued to rise at city banks. A more rapid increase of loans than of deposits had raised the ratio proportionate country banks a decline of deposits at the city banks, while at the loans caused the ratio to rise. coupled with additional commented that he had no difference of opinion Mr. Deming for policy stated by those who had spoken thus with the prescription far. stated that Seventh District businessmen continued Mr. Allen by a large district bank A recent roundup of views quite optimistic. even more optimistic in most lines were that expectations indicated being petroleum, for than last December, the exception at midyear Employment in from "good" to "fair." appraisal was revised which the
the Chicago area continued to strengthen, one evidence being the amount of advertising for "help wanted." The lineage of such ads in four major newspapers in June showed an increase for the sixth consecutive month and was 131 per cent above the recession low in April 1958. This situation was reflected in the increasing difficulty being experienced by the Reserve Bank in recruiting acceptable employees for clerical jobs. One large steel company estimated production for the country at 4 million tons during the first half of 1959, and at 51 to 53 million tons during the second half if there was no strike. The estimated total for the year of about 116 million tons would compare with 85 million tons in 1958 and 112 million tons in 1957. Consumer credit, Mr. Allen said, was playing an important role in the retail trade picture, as indicated in the memorandum from the Board's staff. The personal "overdraft" credit lines offered by an increasing number of banks appeared to be popular, one large Chicago bank reporting that it had $500,000 outstanding three weeks after inauguration of the plan. The average line of credit granted was close to $2,000, while the average amount borrowed was around $700. Residential construction activity varied greatly in the Seventh District. Building permits issued in the months were up 54 per cent over Chicago area during the first five early 1958, but Milwaukee's gain for the same period was only 5 per showed a 33 per cent the first four months, Detroit cent. For increase.
Mr. Allen went on to say that recent district banking data reflected strengthening demands for credit by businesses and indi viduals, with a continued tendency for the impact to fall somewhat more heavily on banks outside the central money markets. There was still no evidence of sustained reserve pressure at the large money market banks. The basic reserve deficit of the Chicago central reserve city banks had not been unusually large and had improved in the past two weeks. Last week, sales of Federal funds exceeded purchases. Borrowing at the Chicago Reserve Bank by reserve city and country banks had varied little over the past few months, but two large Chicago banks indicated recently that their own accommoda tions to country banks had reached the point where they were telling country member banks that they should do their borrowing at the Reserve Bank. This, of course, had happened before when money was tight. When it was easy, the large city banks in the district urged the country banks to borrow from them on attractive terms. Mr. Allen said he was glad that Mr. Thomas had set forth the reasons why System policy should not be considered unduly restrictive and that he found himself in agreement. All things considered, how degree of restrictiveness had been sufficient. ever, he felt that the that it should be had already spoken, he believed Like those who continued at about the same level. that Tenth District conditions continued Mr. Leedy reported wheat harvest was nearing completion, to be favorable. The district
with an estimated yield 23 per cent less than last year, when the crop was unusually large. This meant that this year's crop would be about 25 per cent greater than the average of the past 10 years. Pasture and range conditions remained satisfactory except in a small area west of the Continental Divide. Cattle slaughter was below last year's levels, indicating a continuation of the rapid build-up of cattle numbers that was now becoming the subject of some comment within the livestock industry. The unemployment picture showed further improvement, all States in the district except Missouri registering levels of insured unemployment as of June 13 below those recorded three weeks earlier. The rates of insured unemploy ment in all of the States were below the national average. In May, construction contract awards were 27 per cent above last year, but of the year contract awards reflected for the first five months as for the nation as a whole. exactly the same percentage of increase 27, and for the year to date, During the four weeks ended June above year-ago levels; during store sales were 10 per cent department the Seventh and Twelfth of this year only since the first the period of that in the equal to or in excess showed increases Districts Tenth District. banks continued that Tenth District went on to say Mr. Leedy in the credit, largely demand for extremely heavy experience an to considerable strength but with loan categories business and consumer true both at weekly This had been real estate loans. also in
reporting banks and at country member banks, with strong demand also for agricultural loans at the country banks. There had been some liquidation of investments, including Government securities, but analysis of the principal borrowers at the Reserve Bank indicated a reluctance to liquidate Government securities on account of price declines. Average daily borrowings at the Reserve Bank continued high and were slightly over $124 million during the three weeks ended July 1, compared with $118 million in the three weeks ended June 10. Mr. Leedy said that he had no variation to suggest from the views already expressed as to policy. Because of the Treasury situation, it appeared that the System was pretty well boxed in. Furthermore, the economic picture seemed to indicate that the policy had been following was the proper one for the period the System immediately ahead. Leedy' s comments, Chairman Martin During the course of Mr. was called from the room. broad advance of business activity Mr. Leach stated that the gains in Further over-all in the Fifth District. was continuing were achieved man-hours and manufacturing employment nonagricultural where insured in West Virginia, slight declines in May despite rest of In the in the nation. the highest was already unemployment the board. across almost occurred job openings increased the district, for a shorter industry, the textile of shutdown vacation The annual with substantial mills found two years, the last than in period
backlogs of unfilled orders, low inventories, and firm or rising cloth prices. Substantially increased appropriations for textile plant and equipment reflected the improved situation and prospects in the industry. New orders received by district furniture makers rose sharply in May, and reports of the June furniture market indicated continued improvement. Bituminous coal production rose to a peak for the year in the first three weeks of June and was slightly higher than a year earlier, although well under the comparable period of 1957. Bank loan demand, which had been strong in recent months, was as strong or stronger in June. Daily average borrowings from the Richmond Reserve Bank continued to increase in June and were at the highest level of any month since December 1952. Mr. Leach said that he saw no reason for an immediate move toward further restraint and that he felt the Treasury financing clearly called for an even keel policy. This meant that continuation of the present degree of restraint was in order. Mr. Mills said that, as he viewed it, there were two con of interpreting the economic material submitted by trasting ways The first way was to regard the pause that had taken the staff. of some economic factors as a natural place in the upward movement stemming out of the earlier expansive push upward. development as the result of cumulative to regard that pause The second way was by System policy actions had been initiated earlier pressures that some modification of unless there was and would tend to accelerate
policy. Personally, he leaned toward the second interpretation. He was of the opinion that at this juncture, when the Treasury had already been to the market and would come to the market again to morrow, and those operations demanded the injection of reserves in support of commercial bank tax and loan accounts, an opportunity was afforded to modify unobtrusively the penetration of System policy and the pressure that had been applied to restrict credit. In other words, the reserves that must now be supplied might very well be left at the disposal of the commercial banking system for a longer period than had been permitted heretofore as a means of granting some relief from the pressures that System policy actions had generated. Along those lines, Mr. Mills said, he was concerned by the fact that the marginal increment in the total volume of Federal Re serve credit outstanding, as compared with a year ago, could be in borrowings at Federal Reserve Banks. accounted for by an increase that that was an entirely healthy situation, He could not believe there appeared to be a growing trend toward con particularly when raised the point that if Regulation A, tinuous borrowing. This Reserve Banks, was to be adhered Advances and Discounts by Federal Banks and the commercial banks, to as a guide by both the Reserve point to police the borrowings of it would be necessary at some past. Where reliance was being more strictly than in the the banks at the Reserve through borrowings the reserves obtained placed on
Banks as the basis for such expansion of Federal Reserve credit as had been permitted, the question that arose in his mind was whether the time had not come when some portion of the reserves provided through the discount window should be provided, in substitution, by the provision of reserves through open market operations. Unless such a course was followed, there was a possibility that the commercial banks would be compelled to divest themselves of Government securities even more rapidly, which would be to the detriment of the stability of the Government securities market. Therefore, as he had indicated, it was a matter of concern to him that reliance was being placed on the discount window as the source of such reserves as had been supplied up to this point. Mr. Mills said that this raised one further theoretical question in his mind, which had to do with the discussion of administered prices in the industrial, commercial, and commodity fields. Where supply and demand were the two factors that in their interaction expressed the over-all level of interest rates, in mind that in controlling the supply of credit, it must be borne availability of credit, the System was in a sense that is, the administering a price for credit. The System has the last voice, Mr. Mills pointed out, in interest that conditions all credit opera influencing the rate of the entire economy. That was a factor the System tions throughout
must face up to at the present time. The pressure of System policy and a continuing divestment of Government securities out of com mercial bank portfolios would tend toward further deterioration of the Government securities market and would deter investment on a larger scale on the part of investors who, he was convinced, would come into that market if there was a semblance of stability in the price of Government securities and in the trend of interest rates. At this point Chairman Martin returned to the room. In further comments, Mr. Mills said that the type of System policy pronounced through the Desk at the present time would, as he saw it, compel a further divestment of Government securities out of commercial bank portfolios in order to provide funds with which the banks might meet the loan demands they were now facing. As Mr. Hayes and others had pointed out, a period was now being entered when there would be a pronounced seasonal demand for credit, a legitimate demand that the System had historically satisfied through the pro vision of reserves. It was his firm belief that this seasonal demand for credit must and should be met through supplying reserves by way a fortunate opportunity had open market operations, and that of of the Treasury financing operations, to presented itself, because that there had been creating the impression supply reserves without in the direction of System policy. This policy any major change restraint expressed in be one of restraint, but should continue to in the past several weeks. degree than had been true a less pronounced
Mr. Shepardson said there was a basis, of course, for the point of view Mr. Mills had expressed. His own feeling, however, was to the contrary and was in line with the views expressed thus far by others who had spoken. The economic situation as presented this morning seemed quite clear, being one that reflected the continuing pressures of expansive growth. In view of those pressures and the problem of Treasury financing, it appeared that there was nothing to be done at the moment other than maintain the current degree of restraint. While he agreed with Mr. Hayes that there might be a changed situation within the next few months, at the moment he would suggest no change in the present degree of restraint. Mr. King said it was his opinion that the moderation at the present time in certain of the forces of economic activity that had been increasing reflected the restrictiveness of monetary policy. In his opinion, the restrictiveness applied up to the present time desirable and in an appropriate amount. On the other hand, had been restraint would be appropriate at he did not believe that greater policy, with net borrowed reserves at a this time. An even keel seemed to him the best policy to follow level of about $500 million, He had the feeling that too many changes for the immediate future. and the Board of part of the Open Market Committee in policy on the the standpoint of the undesirable from Governors were generally changes with some felt tended to view frequent public, which he continue it as to fix a policy and was his view that alarm. It more than frequent changes, contributed to stability long as possible
and with that in mind he would approach a change in policy with more concern than some others might approach it. From personal contacts and observation, it was his opinion that the economy was now under considerable, and he felt desirable, pressure. The fact that the increase in the money supply since last December had been limited to about 2 per cent offered an indication that System policy was having the desired effect. With the growth in the money supply having been limited to that extent, it appeared to him appropriate to continue the present policy. Mr. Fulton reviewed developments in connection with the wage negotiations in the steel industry and referred to the principal issues at stake. He noted that, despite some wildcat strikes and work stoppages, operations currently were at about 83 per cent of capacity. In the rubber industry, notice had been given by the union that the current contract would be opened up for negotiation first of August, and negotiations in the aluminum industry on the were scheduled for August. With regard to steel inventories, also the auto industry was carrying its inventory it had been said that new cars. In the event of a in the form of approximately 900,000 likely that the automobile in the steel industry, it appeared strike close up rather quickly for the model change manufacturers would was at a rate about 8 Construction in the district over period. decrease accounted for levels, with the per cent below year-ago contracts. Also, a lot of things largely in heavy engineering
that were in progress last year and early this year, such as road construction, had now been completed. Residential construction had leveled off, although still at quite a high rate. Unemployment was gradually moving downward, although there were still a few areas, including the coal regions, with substantial unemployment. Retail trade was at a level about 8 per cent above last year and autos were selling quite well, about 30 to 35 per cent above last year. A tendency was noted toward lengthening of terms. Mr. Fulton went on to say that total deposits at weekly reporting banks in the district were almost 5 per cent under last year. This, together with the intensive demand for loans, had placed considerable strain on the banks. The Reserve Bank had talked with member banks that were getting into a continuous borrowing position, and the rate of borrowing at the Reserve Bank had tapered off recently. Borrowings were presently only about 7 per cent of the System total, whereas earlier they had been running from 12 to 14 per cent of the total. Mr. Fulton regarded the present degree of restraint as felt that it should be continued. However, he appropriate and look should be taken to see where the Federal Reserve thought a would want to be when fall came; that is, to see whether it might the discount rate, a move to consider an increase in be appropriate been made in the months of August and which he noted had sometimes
September in past years. For the present, he believed it would be appropriate to maintain the present degree of pressure and to leave leeway for interpretation with the Desk. Mr. Bopp said that developments in the Third District were similar to those reported for the nation as a whole. Although unemployment continued at a omewhat higher level than nationally, recent developments as to employment and unemployment were favorable, reflecting widespread improvement among durable and nondurable goods industries and also from a geographical standpoint. Every area in the district had shown some improvement, although in some cases the improvement was from a position of considerable weakness. Total construction contracts were down a bit, the decline being almost exclusively in nonresidential construction and in utilities. The market for new homes continued to be good but appeared to be weakening somewhat. The typical rate on conventional mortgages had now advanced mortgages written under per cent and high grade VA-guaranteed to 5-3/4 the terms of the new legislation permitting higher rates were ex a 3 point discount. While there was a pected to sell at about demand for credit, reserve city banks were under less pressure strong than last week. said that he also would favor con As to policy, Mr. Bopp present degree of restraint. He would favor no change tinuing the or in the policy directive. in the discount rate
Mr. Bryan said there appeared to be nothing in the Sixth District that needed to be commented upon at this time, for developments were similar to those reported from other parts of the country. The demand for credit at commercial banks and at the discount window was heavy. Continuing, Mr. Bryan said he found himself convinced that System policy had been exerting a considerable effect. He gathered as much from comments of bankers and from some of those who had endeavored to borrow. In talking recently with a reserve city bank that had been a rather large and persistent borrower at the discount window, he was told that the bank's executive committee had met that morning and turned down all of the 14 loan applications presented to it. Upon inquiry, it was indicated to him that if the bank had been in better supply of funds, probably about half of the applications would have been approved. Accordingly, he shared with Mr. Mills the general feeling that perhaps some of the barely visible slowdown in the result of System policy, and rate of economic growth had been the to him that the System must be alert against overdoing it seemed at the moment did not the evidences of slowdown restraint. While relaxation of restraint, he seem to him to warrant any notable very well keep the money supply believed that the System could 2-1/2 per cent. He modest rate, perhaps around growing at some circumstances any that under present agreed with Mr. Thomas pari passu into an promptly be converted reserves would additional
increase in the money supply, but he felt that the System must be careful not to contribute to a crisis in Government finance. Mr. Johns commented that he had reviewed developments in the Eighth District rather infrequently at Committee meetings, not because the district was colorless but because it seemed to present almost a scale representation of the behavior of the national economy. With respect to policy, Mr. Johns said he found himself in agreement with the view that existing policy should be continued for the next three weeks. If he correctly understood Mr. Thomas, he would agree with him that maintenance of existing policy should not be taken to mean that the forces of demand now at work in the economy should be prevented from bringing about or resulting in some further rise in interest rates. If that situation occurred, he was inclined to think that the rise in rates should be permitted. He would agree with Mr. Hayes and others who, although recognizing that a discount rate change would be premature, nevertheless felt that it would be at this time to be alert to the fact that the time might not be too distant prudent to take a look at the discount rate. when it would be necessary stated that the general picture in the First Mr. Latham in business had canceled a good District looked good. The pickup some segments had now expanded losses and in part of the recession contracts were Nonresidential building prerecession levels. beyond contracts up 46 per a year ago and residential 4 per cent above recovery trend in continued its employment cent. Nonagricultural
May, with manufacturing employment recording its best April-May gain since 1950. In all six Northeastern states, the average factory work week in May exceeded 40 hours, with weekly earnings at record levels except in Maine, and electric output continued to expand. Department store sales in May registered a 5 per cent gain over a year ago but were still behind the 1956 and 1957 rate. Inventories at department stores reflected a modest rise, credit transactions had been on the increase, and collection ratios were off slightly. Consumer instalment credit was up, with 175 reporting lenders showing a 19 per cent increase in new credit in May over a year ago. Commercial and industrial loans outstanding on July 1 were 10 per cent above a year ago and slightly larger than in 1957. Nondurable goods manufacturers were making a good showing. Shoe manufacturers were having an excellent year, with retail inventories at low levels, and even the textile mills were by an order volume which would limit to some extent the surprised vacation shutdowns this year. and more bankers were expressing Mr. Latham reported that more to meet increasing credit demands. about their continued ability concern to a reluctance to this concern was attributable In most cases, there was substantial depreciation. liquidate securities on which areas, was the delay in particularly in the vacation Another factor, of an extremely wet spring. Although deposit buildup as the result three to four times was running approximately member bank borrowing not as heavy as in 1957, than a year ago, it was greater
Mr. Szymczak commented that he had little to add to what had already been said at this meeting. A slowup in certain sectors might tend to stabilize the economy and prevent an inflationary trend. However, two things were particularly important, as mentioned by Mr. Mills. First, the Government securities market apparently would go through a most difficult period in July and August. Second, there was the matter of borrowing by member banks. As he saw the picture, the System would have to provide some reserves in the period ahead in order to continue its present policy. He would favor maintaining policy about as at present, but he would keep looking at the over all picture, including the Government securities market and discounting at the Federal Reserve Banks. Mr. Balderston said that to the extent System measures of the money supply were accurate, some comfort might be derived from the fact that since last December the increase in the money supply had been at the annual rate of about 2 per cent and not as apparently estimated earlier by certain financial writers. large as The most worrisome of our problems relate to Treasury financing and the state of the bond market, Mr. Balderston said. seemed to be no period when now and next January there Between Treasury financing operations policy would not affect monetary Treasury would have it appeared that the directly. In that period would have to borrow net, and that it at least $7 billion to borrow would cause short-term the market. This the short end of chiefly in
interest rates to continue to rise, which in turn would create an inducement for corporation treasurers and others to pull down demand deposits because the opportunities for short-term investment would be so attractive. Thus, the System was likely to be under severe pressure during the next six months due to a combination of seasonal demand for credit from private industry and the need for funds on the part of the Federal Government. As to the next three weeks, Mr. Balderston said that he would favor continuing the present degree of restraint. Chairman Martin said that this would appear to be an easy meeting from the standpoint of the Chair because obviously there was no desire to change the directive or System policy. While he could just let it go at that, he desired to express himself in terms of the broader problem. From the minutes of the preceding Committee meeting, which unable to attend, he noted that comments had been made he had been to the effect that any errors should be on the by several persons of restraint rather than ease. Errors this time, he suggested, side ought to be on the side of ease rather than restraint, although he at all. He felt that he would not want to see policy changed would he indicated to the unless be discharging his responsibility not market was in a the Government securities Committee that he felt but about the talking about ghosts Here he was not critical state.
actual situation, a situation complicated by the fact that every move on the part of the System was being watched closely at the present time. The last thing he would want to suggest, the Chairman said, would be to ease System policy simply to obtain legislation to eliminate the interest rate ceiling on Treasury bonds and to increase the rates on savings bonds. He had been under personal pressure recently to indicate that the Federal Reserve might ease its policy but he had not given an inch. However, looking at the pressures over which no one has control, he felt it necessary to be careful that the System did not conduct itself in a way that might look like a deliberate action to nettle people. Interest rates were now a major issue politically. They might be made a national issue in 1960 or during the next few months, and at the moment he was not sure whether it would be possible to get a bill on the interest through Congress. Again he emphasized that he was not rate ceiling suggesting an easing of policy, but he thought the System must be careful not to overdo the matter of restraint at a time when the bite in it. The dealers, he noted, obtained money market had a real bills in the auction yesterday, so around $580 million of Treasury as far as the next bill was would be almost out of commission they now talking in terms of Some people in the market were concerned. which had been hoping for a a rate of 5 per cent and the Treasury, 4-3/4 or perhaps even the rate would be of 4-5/8, now knew rate
4-7/8. This situation was something to give one pause, and develop ments were taking place in an explosive way. That was the way that these movements always seemed to come. In view of current short-term market rates, the discount rate was way out of line and the System was not in a position to change it at this time. Thus, it seemed the better part of prudence and wisdom for the System not to overplay its hand on the side of tightness and for the Desk to be careful, in maintaining an even keel, to supply reserves in such a way that the System could not be accused of being niggardly. In substance, he felt that the current period was more critical than many people realized. Referring again to the matter of interest rates, Chairman Martin repeated that this was a big issue, as was the manner in which the Federal Reserve conducted itself. Personally, he was proud of the way the System had been conducting itself, and he did not intend in the way of making commitments regarding an easing to give an inch want the System to be in a position of policy. However, he did not gave it an inch it would take an where people might say that if you was in the midst of a struggle to ell. At the moment the System the law, and if there was some big prevent a writing of policy into bulge in rates the System would be in danger of being accused, having influenced the market. perhaps falsely, of although he had used on to the saying Martin then referred Chairman as strong as the which breaks is not that the iron other occasions
steel which bends. In the present situation, neither the Desk nor any other party could appraise precisely the pressures in the market; therefore, the Desk should be careful not to get in the position of forcing the market unduly in order to maintain a given position during a period that was acute and serious. The consensus of the meeting, the Chairman noted, was clearly for no change in policy and for no change in the directive. With that consensus he concurred. As to the technical operations of the Account, however, he felt that extreme care should be exercised to see that the System was supplying reserves during this period in a way that would not subject the System to the criticism that it was trying to make things more difficult than necessary for the Treasury. In a manner of speaking, it was a case of wanting to win the war, and the System would not wish to put itself in the position of gaining one small point at the risk of losing the war. If one could clearly determine degree of tightness or ease might be, that was one what the precise thing, but certainly no one around this table could gauge the situation quite that accurately. Summarizing, the Chairman said he merely wished to present the matter to the meeting on the basis that he would not like to see any change in the directive or in System policy, but that he would like, to have any errors made on the side of for want of a better phrase, ease during the period of Treasury financing. to agree very easily with the Mr. Hayes said that he was able had a most perplexing problem point of view. The Treasury Chairman's
and must have the System's sympathetic attitude. The Chairman's suggestion, he said, was helpful in that connection. Mr. Hayes then called upon Mr. Marsh for a statement with regard to latest market developments, and the latter reported having been advised that the market had reacted sharply to yesterday's bill auction. For the auction tomorrow, the market was now talking of an average issuing rate between 4.50 and 4.75 per cent. This could put the rate for a one year certificate as high as 5 per cent, allowing for the difference between the discount rate on bills and true yield. Mr. Marsh said this was something of a shock to him for he had not thought that the market would take it quite that hard. Possibly the reaction represented somewhat of a swing in the direction of over compensating, and the views expressed might be somewhat extreme. they were such as to warrant definitely making any errors However, of judgment on the side of ease. Chairman Martin again injected a plea for that type of opera last night with several people who tion, adding that he had talked that there had been a real with the market and were well acquainted it appeared that the auction. In short, in yesterday's Treasury shock it was not possible period, one where was in another critical System away. While he was would simply go to say that the situation in favor of a reasonable easy money, he was not in favor of certainly the period of Treasury market operations during latitude in open financing.
Mr. Szymczak said that he agreed wholeheartedly. As he understood it, Mr. Mills had stated the case just about the same way, although Mr. Mills had added also the factor of seasonal demands for credit. Mr. Shepardson commented that he was one who at recent Committee meetings had suggested that doubts be resolved on the side of tightness. However, in view of the situation that existed today, he felt that a degree of caution on the other side was justified and he would take no exception to the type of operation suggested by the Chairman. Chairman Martin then stated that, unless there was objection, the policy directive would be issued to the New York Bank in its no change in policy, he proposed that the Committee present form. With on the side of ease during the agree that errors would be resolved period of Treasury financing. in response to this statement by No objections were heard the Chairman. upon motion duly made Thereupon, and seconded, the Committee voted to direct the Federal Re unanimously Bank of New York, until otherwise serve directed by the Committee: sales, or exchanges (1) To make such purchases, securities, and allow replacement of maturing (including replacement) for the to run off without ing maturities market or, in the in the open Open Market Account System
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 commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. At the request of the Chairman, Mr. Young commented on the Reserve study of the Government status of the Treasury-Federal that the material that had been distributed securities market. He noted the Presidents not currently serving to the members of the Committee and the first segment of the study; that on the Committee would constitute had been held and a technical of the consultations that is, the results an auction market in of a dealer market versus study of the advantages in response to study was directly securities. This latter Government of the Joint Economic by Senator Douglas at hearings questions raised he noted, was interested year. The Treasury, earlier this Committee
in having this pair of papers published in advance of the hearings by the Joint Economic Committee dealing with the subject of the Government securities market which were to be held later this month. To carry out such a schedule, it would be necessary to send the documents to the printer Friday evening of this week, which meant that any suggestions would have to be received not later than Thursday afternoon or Friday morning. Chairman Martin then stated that any comments should be sent direct to Mr. Young. It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, July 28, 1959, at 10:00 a.m.
At this point (12:00 noon) the Chairman called for a session of the Committee at which attendance would be limited to the following: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Deming Mr. Johns Mr. King Mr. Mills Mr. Shepardson Mr. Szymczak Mr. Bopp, Alternate for Mr. Erickson Messrs. Bryan, Fulton, and Leedy, Alternate Members of the Federal Open Market Committee Messrs. Leach, Irons, and Mangels, Presidents of the Federal Reserve Banks of Richmond, Dallas, and San Francisco, respectively Mr. Riefler, Secretary Mr. Sherman, Assistant Secretary Mr. Latham, First Vice President, Federal Reserve Bank of Boston Mr. Marsh, Assistant Vice President, Federal Reserve Bank of New York Chairman Martin referred to the discussion at the afternoon session of the meeting of the Federal Open Market Committee on March 3, with respect to attendance possible changes in procedures 1959 concerning at meetings of the Committee and distribution of minutes and other Open Market materials. Under date of July 2, 1959, the Secretary had distributed (a) a memorandum from Mr. Hayes dated June 11, 1959 regarding proposed changes in internal "security" arrangements, (b) a
memorandum from Mr. Deming regarding access to information and procedures in handling Open Market and other information relating to Federal Reserve policy, and (c) a memorandum from the Secretary reviewing the procedures regarding attendance at Open Market meetings and distribution of materials during the period 1936 to 1959. Chairman Martin also noted that the Secretary had distributed under date of July 6, 1959 a memorandum summarizing in tabular form positions indicated at the afternoon session on March 3, 1959 with respect to attendance at Open Market meetings and access to Open Market minutes and other materials. He stated that it appeared that the largest group had appeared to favor a position that would continue substantially the present procedure with respect to attendance at meetings and access to materials. He added the comment that this did not resolve the question, and he felt it would be desirable to attempt to arrive at an understanding at this meeting as to the procedure to be followed in the future. The Chairman then commented that his own views as to attendance at meetings and access to materials had not changed from those ex meeting on March 3, 1959, although he had tried to keep pressed at the that had been made at mind in considering other suggestions an open large it still seemed to him that the advantages that meeting. By and the present procedure outweighed the disadvantages of substantially Committee and from the of operations of the both from the standpoint
standpoint of developing management personnel within the System. His view in this respect was not unalterable and he would be glad to have a discussion of the several alternatives that were mentioned in Mr. Riefler's memorandum of July 6. He then called upon Mr. Johns for his comments. Mr. Johns noted that he was not present at the March 3 meeting, at which the principal discussion of this subject had taken place. He had not availed himself of the privilege of submitting a memorandum on the basis of what he had read in the minutes of that meeting, but had he been present, he would have taken a position at that time, and he now took such a position, favoring Alternative D of Mr. Riefler's July 6 memorandum regarding attendance at Open Market Committee meetings; that is, he would continue substantially the present procedure, recog some minor changes might be introduced. Mr. Johns said nizing that he shared Chairman Martin's view completely that the advantages that outweighed any possible disadvantages that of the present procedure might be thought to exist. expressed his views in his memo Mr. Hayes stated that, having the details of his he would not go into of June 11, 1959, randum had taken a position which in his memorandum he reasoning, but that indicated by Chairman with the position he believed to be identical he believed the of Mr. Johns. Personally, as well as that Martin outweighed any risks, present procedure greatly advantages of the
and he would dislike to see any substantial change in this procedure. Messrs. Irons, Leach, and Szymczak indicated that they took the same position as that already indicated. In response to a question by Mr. Szymczak as to whether he wished to have a formal vote on the matter, Chairman Martin stated that he did not want to limit discussion of the subject and that he would be glad to hear any other comments regarding the procedure under discussion. Mr. Balderston stated that this was not a question of choosing white but he responded favorably to Mr. Hayes' sug between black and gestion that the persons attending these meetings constantly give to the care with which Open Market records, including minutes, attention and telegrams of daily telephone conversations were handled memoranda, Banks. In his view the offices and at the Reserve both in the Board's call could, if placed in regarding the 11:00 a.m. telephone memorandum financial organizations, prove hands of an agent of one of the the The minutes of the meetings embarrassing to the Committee. seriously of time but in the initial dangerous with the passage become less agreed that the present While he be closely guarded. stages should and helped to the System's thinking was one that unified procedure Hayes had mentioned of the type Mr. personnel, cautions develop staff in mind. Consideration be kept should continuously in his memorandum to have personnel authorized the list of given to abolishing might be since a list Market records, and other Open access to minutes
containing 70 names might be difficult to explain if it had to be submitted to a critical group. Mr. Balderston said he was not suggesting that the individuals who had been given access to minutes at the proper time no longer have this privilege, but he was sug gesting that such a large distribution list for the minutes was unnecessary. Chairman Martin stated that he felt the discussion of this subject had been most useful and that review of the procedure along the lines suggested by Messrs. Hayes and Balderston was desirable. It was incumbent on everyone participating in these meetings to realize that he had a very real responsibility to see that none of the information was improperly used. Leach said that, while he agreed with the continuation Mr. like to express a different view the present procedures, he would of importance of the minutes of the Committee as to the relative the official record of the meetings. The minutes represented decisions, he said, and discussions and current policy Committee's as strictly confidential. his view they should be considered in to those attending a well be restricted substantially They might meeting and the following period between that meeting during the renewal of the when a new policy--perhaps of the Committee meeting after the It might be acceptable one--was authorized. existing decision to on a policy again acted which the Committee meeting at judgment as Reserve Bank concerned President of the leave to the
to what access should be given to the minutes at his Bank. In that case, it would not be necessary for the Secretary of the Committee to continue the present record of those having access. At Chairman Martin's request, Mr. Sherman described the procedure followed at the present time in preparing and distributing minutes and other materials, noting that one copy of the preliminary draft of the minutes of each meeting was mailed under double cover as soon as completed to the President of each Federal Reserve Bank, except that in the case of New York an additional copy was included for thealternate member of the Committee at that Bank and another for the Manager of the Open Market Account. Similar distribution materials relating to the the revised draft, and all was made of Open Market matters were handled on a strictly minutes and other offices, the minutes and other confidential basis. In the Board's the members of the Board, were distributed to Open Market materials and to other members of official staff members of the Committee, the attended Open Market meetings. the Board's staff who the suggestion of he was sympathetic with Mr. Hayes said that accomplished if each purpose could be but he believed the Mr. Leach, materials represented that Open Market would stress President the matter of handling His feeling was that confidential documents. discretion of be left to the meeting could minutes of a current the put down in trying to Bank without at each Reserve the President
exact terms the procedure that the President should follow even with regard to the minutes of the latest meeting. Mr. Leach commented that his suggestion was intended to make a better record and to make it unnecessary for the Secretary of the Committee to have a list of persons having access to minutes containing as many names as at present. Mr. Bryan said that he could not agree with the suggestion that the handling of current Open Market materials should be left to the discretion of the President of each Federal Reserve Bank. His view was that the Open Market Committee was a statutory body and that it must exercise its responsibility for control of these materials. Mr. Hayes explained that his suggestion was based on the were members, that others were fact that some of the Presidents and that each President had a responsibility alternate members, member by reason of his attendance equivalent to that of a Committee at meetings of the Committee. differ with the view that stated that he did not Mr. Deming lines indicated, that is, meetings should follow the attendance at He believed, however, the present procedure. continue substantially person who partici having every might be worth considering that it Market materials given or who handled Open pated in these meetings at least This would provide security investigation. a full field made of the Committee's that might be to any criticism one answer procedure.
Chairman Martin responded that this was a good suggestion and that he would ask the Secretary to look further into it. Mr. Mills said he had a strong belief that Federal Reserve policy at the right time should be fully open to research analysis and study and to constructive criticism. What he had in mind was that, if there were no objection, he would like to give his records of Open Market materials through calendar year 1957 to the Harvard Graduate School of Business Administration to serve as source material on which to develop a better insight into Federal Reserve policy actions. Chairman Martin responded that he believed this would be far too recent a period for which to make such materials available. There were too many people who were still living and who would have an emotional bias who would be involved in such matters to consider such a short term. Mr. Hayes stated that, while he felt there should be strict handling of current Open Market materials, he felt differently about records. At some time, in his view, it became suitable historical to others for study. A very strict for material to be made available current policy matter, but at some control should be invoked over any for current policy should be made available for time the basis historical analysis and study. Chairman Martin stated that he would go along with the sug the date after which materials by Mr. Mills if he put gestion made
would not be made available at, say, 1932. He was serious in suggesting this date, he said, adding that he had been asked on numerous occasions about discussions in 1951 and 1952 regarding the Treasury-Federal Reserve accord and that anything like this represented a too-recent period for making available these records. To make available records of the recent past would inject into policy considerations an influence that would be undesirable. However, he would repeat that records might now properly be made available for the period up to the year 1932. Mr. Hayes suggested that the question Mr. Mills was raising was a different one from that under consideration. It was a matter that should be dealt with perhaps at another meeting and on the basis of separate and special considerations. Mr. Shepardson stated that as far as the current question was concerned, he was in thorough accord with continuing a program along the lines of Alternative D in the July 6 memorandum, that is, continuing substantially the present procedure as far as records and Committee minutes were concerned. He did not think the Open Market to be changed as to either the persons present procedure needed to records. He also felt attending the meetings or accessibility that a valuable suggestion had been made in trying to distinguish were current records, perhaps from one meeting to between what those that were available had suggested, and another as Mr. Leach
for more widespread use. He could not see that anything would be lost by restricting the minutes of the most recent meetings as strictly confidential to the President and his one adviser who accompanies him to the Open Market meetings until after the next succeeding meeting. As far as general knowledge and training problems were concerned, it seemed to him that access to Open Market records after the next meeting of the Committee was quite sufficient. As to the total number of persons having access to records, he doubted that the Committee should be straining at a gnat on its top level staff who attended the meetings in view of the large technical and clerical staff necessarily engaged in processing Open Market materials. He thought the Committee might exercise care in distributing its current records and would favor a procedure such as that indicated whereby the current records would be kept strictly confidential until after the succeeding meetings. Chairman Martin stated that he gathered that the majority of present favored continuation of substantially the procedure those presently being followed with respect both to attendance at meetings and to access to Committee records, with appropriate minor adjust had just referred to. None of ments such as the one Mr. Shepardson a different view. those present indicated stated that as a matter of detail if the telegrams Mr. Bopp conferences each morning were commenting on the 11:00 a.m. telephone a full security clearance, by persons who had had to be handled only
it would involve full field investigations for a large number of telegraph operators throughout the System who were not presently cleared. These operators were carefully selected and instructed to treat telegraphic communications in a confidential manner, and in Mr. Bopp's view this was sufficient for their handling the 11:00 a.m. wire. Mr. Johns concurred in this view, adding that if exception were to be taken to the handling of the 11:00 a.m. wire by the operators there were many other matters that would have to be investigated on the assumption that the telegraph operators of the Federal Reserve Banks would not respect confidential data. Chairman Martin commented that it was extremely difficult to write a regulation of the type that Mr. Leach had suggested. In his view, this matter had to be in large measure one for administra tive handling by the members of the Committee and other Reserve Bank Presidents. He proposed that the Committee dispose of the question by accepting the alternative that would continue substantially the as to attendance at meetings and access to minutes present procedure Open Market Committee data, with any minor adjustments and other legitimate criticism that might be desirable for minimizing that information within the from the handling of Open Market could come King, he said that this to a question from Mr. System. In response a check of the suggestion for having proper security would include Open Market materials. for those handling clearance
There was general concurrence with the Chairman's suggestion, and it was understood that the Secretary would proceed to review the existing procedures in the light of the discussion at this meeting but that no change in the general procedures now followed was contemplated at this time. Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions