September 1, 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, September 1, 1959, at 1000 a.m. PRESENT Mr. Martin, Chairman Mr. Allen Mr. Balderston Mr. Deming Mr. Erickson Mr. King Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Treiber, Alternate for Mr. Hayes Mr. Bryan, Alternate for Mr. Johns Messrs. Bopp, Fulton, and Leedy, Alternate Members of the Federal Open Market Committee Messrs. Leach, Irons, and Mangels, Presidents of the Federal Reserve Banks of Richmond, Dallas, and San Francisco, respectively Mr. Riefler, Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Mitchell, Parsons, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Assistant to the Board of Governors Mr. Koch, Associate Adviser, Division of Research and Statistics, Board of Governors Mr. Keir, Chief, Government Finance Section, of Research and Statistics, Board Division of Governors Daane, and Tow, Vice Presidents Messrs. Hostetler, of the Federal Reserve Banks of Cleveland, Richmond, and Kansas City, respectively Vice President and General Counsel, Mr. Clay, Federal Reserve Bank of Kansas City Economic Adviser, Federal Reserve Mr. Anderson, Bank of Philadelphia
Mr. Coldwell, Director of Research, Federal Reserve Bank of Dallas Mr. Gaines, Manager, Research Department, Federal Reserve Bank of New York Mr. Stone, Manager, Securities Department Federal Reserve Bank of New York Mr. Brandt, Economist, Federal Reserve Bank of Atlanta Chairman Martin noted a request by Mr. Leedy that Mr. Clay partici pate in this meeting, and no objection was indicated. Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period August 18 through August 26, 1959, and a supplementary report covering the period August 27 through August 31, 1959. Copies of both reports have been placed in the files of the Committee. In supplementation of the information contained in the written reports, Mr. Rouse made the following comments: The most noteworthy occurrences during the past two weeks have been the developments in connection with the proposed re moval of the Treasury's interest rate ceiling and the not unre lated further steep increase in Treasury bill rates. The rate on three-month bills had been at the 3 per cent level in late July, and by the time of the last meeting it had moved up to around 3.40 per cent. Yesterday the rate closed at 3.88 per cent bid and in yesterday's auction the average rate was 3.89 per cent, with a tail running to nearly 4 per cent. The rate on the six-month bills in the auction yesterday average was 4.47 per cent, almost 75 basis points above the average in the auction of August 17. This level of bill rate set increased attention to be focused on the rates has caused rate, and the market regards it discount rate and the prime before one or both of these rates is only a question of time in the market for Treasury notes increased. The atmosphere also been heavy during the past two weeks. and bonds has off substantially and at the close Prices have fallen and bonds reached new all-time yesterday 38 issues of notes in the supplementary report, the lows. As indicated
highest yielding issue, the 2-1/2's of 1961, was yielding 5 per cent at bid prices last night. The general deterioration in the Government securities market during the past two weeks reflects mainly the revival of expectations of higher interest rates in the autumn. Such expectations have, of course, been characteristic of the Government securities market for many months, but the outstanding success of the Treasury's refunding of its August 1 maturities in July, together with the onset of the steel strike and the announcement of the Eisenhower Krushchev exchange of visits, temporarily led to a feeling that interest rates might have reached a plateau for the time being. This feeling has by now completely disappeared, and a major cause of its disappearance has been the evidence of broad strength in the economy despite the steel strike, along with the possibility that the end of the steel strike will witness an even greater rate of economic advance. The weakness in the Government securities market has been reflected in the markets for corporate and municipal bonds, where yields have risen fairly sharply in the past two weeks. The syndicates for three recent utility offerings were terminated last week, with upward yield adjustments ranging to 20 basis points or up to three dollars per hundred. With the calendar of new issues large and still growing, it is hard to see any reversal of the upward trend of yields in those markets. The money market has had a somewhat tighter feel during despite the fact that there has been no the past two weeks figures. Federal funds have significant change in reserve per cent, and New York bank lending remained firmly at 3-1/2 cent. The Account supplied has been at 4-1/4 per to dealers net to the market since the last $196 million reserves of offsetting most of the meeting, which had the effect market factors during the period. withdrawal of reserves by net borrowed reserves at the reserve projections, Looking million next week because rise to over $600 will probably but then will move Day currency outflow, of the pre-Labor the level of recent weeks. back down to through Senator Douglas, Joint Economic Committee, The the Committee with aggregate requested that we furnish has of purchases and sales, dealer positions, volume figures on figures for the wants daily The Committee and borrowing. shorter periods and for selected through 1958 years 1950 information requested to 1937. The all the way back running from the data can be developed Committee, I believe, by the dealers who material for except the in our files, already have sent letters to us. We their figures have not reported
to all dealers explaining the Committee's request and have asked, on behalf of the Joint Committee, their permission to furnish the Committee with the figures. We have heard from about half the dealers thus far, and all but one have given their permission to make the data available. The one refusal is from a dealer who has not been reporting figures to us. Mr. Mills said he noticed in the reports of open market operations that the dealers appeared to have reduced their positions substantially, apparently on the ground that they foresaw uncertain ties in the market. He inquired of Mr. Rouse whether the latter had any concern that the dealers might refrain from performing their accepted function of making markets, thereby adding a push to the deterioration of the Government securities market that could threaten disorder. Mr. Rouse replied that dealers' positions in longer-term securities had not changed materially in recent months. As to short term securities, their positions had gone up in connection with the recent Treasury refunding operations and then moved down in the areas refunding. As indicated in the reports of open market operations, of the dealers were distrustful of a 3.00 per cent level on three-months bills, and even a 3.40 per cent level, because they believed that be higher later on, but nevertheless they made markets. rates would their position in Treasury bills was Prior to the auction yesterday, of $500 to $600 million net. in the neighborhood Mr. Mills inquired how that would compare with the aggregate replied that as to which Mr. Rouse six weeks ago, dealers' position
far as short-term issues were concerned, he would say that it was larger. Ordinarily, the dealers had been going into the auctions in recent weeks with a position in bills in the order of $250 million. However, there had recently been a substantial inflow of bills from customers and the dealers were not able to sell those bills readily. In yesterday's auction, the dealers took another $350 million, so their positions were at a relatively high point. In response to a question by Mr. Robertson, Mr. Rouse con firmed that he had no qualms about the dealers making markets. With reference to Mr. Rouse's comments about the furnishing of daily figures on dealers' positions to the Joint Economic Com mittee, Chairman Martin called attention the to fact that this represented a change in attitude with respect to the furnishing of such figures. During the hearings in New York City, Mr. Rouse had agreed that he would try to supply these data, while heretofore the Committee had taken the position that it would not want to undertake to supply the figures. In the past, when requests were received from the Congress, the Committee had said that the Congress would have to go direct to the dealers. He emphasized that he was not commenting in a critical vein. Under Committee questioning, it was to say that he would not endeavor to supply the hard for Mr. Rouse the position of a witness his own personal experience, figures. From much different from that of a person receiving on the firing line is a request indirectly.
Mr. Thomas commented that certain aggregate figures published in the recent Treasury-Federal Reserve study of the Government securi ties market included those of the dealer referred to by Mr. Rouse as not reporting to the New York Reserve Bank. Therefore, compliance with the current request for all but the one dealer would have the effect of revealing his operations for those periods as to which comparisons could be made with the securities market study. Mr. Treiber said that this had been pointed out to the dealer in question in connection with the current request. In reply to a question by Mr. Robertson, Mr. Rouse indicated that it was the inten tion of the Reserve Bank to advise the Joint Economic Committee of the refusal of the one dealer to furnish figures. If the Committee wished to do anything further, it would therefore have to contact the dealer itself. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period August 18 through August 31, approved, ratified, and 1959, were confirmed. under date of the staff memorandum distributed Supplementing made a statement substantially as follows August 28, 1959, Mr. Young with respect to economic developments: has shown a divided industrial activity Since June, and fabricating lines in metal output trend. Activity changeover has declined stoppage or model affected by work lines has continued to while activity in other sharply, in the Board's of curtailed industries expand. The weight
production index, however, has been enough to reduce its level since June by an estimated 4 index points--2 points each in July and August. GNP for the third quarter will reflect the impact of reduced output in these metal pro ducing or working industries by a much smaller advance than in the preceding quarter. Over-all inventory accumulation for the third quarter is expected to be con siderably reduced and there also will be the income losses suffered by strike-bound industries. Aside from the work stoppage influence, the total economic picture appears to be one of widespread strength. For instance: (a) While construction activity has shown moderate decline from its all-time record of April and May, its level is a third higher than a year ago. A continuing large volume of contract awards suggests that the current construction level will be sustained. (b) July new order and sales figures for durable goods manufacturers reflect marked demand strength for most lines, especially for machinery and transportation equipment other than motor vehicles. (c) Retail sales in July sustained their high June level, and sales at department stores in August continued vigorous for both durable and nondurable lines. August sales of new cars remained about a third higher than last year, while used car sales also held close to a 15 per cent margin over a year ago. continue to seek and incur instalment and (d) Consumers mortgage debt at a near record pace. U. S. exports in July again rose abruptly, reaching (e) a seasonally adjusted annual rate of $18 billion, or a fifth higher than the low months of earlier this year. While the attributable in part to agricultural exports, rise in July was of industrial items helped for a second time larger shipments to raise total exports. of July, not yet back inventories as (f) Total business historically low in relation levels, remained to prerecession to current sales volume. appears to of metal strikes market impact (g) The labor aside from industrial areas immediately have been limited, and has been well sustained. affected, total employment strong and, in the aggregate, With demands continuing industrial commodities have been showing expanding, prices of higher than a about 2 per cent at a level general strength in supplies of foodstuffs, ago. In recent months, increases year enough price decline have resulted in meats and eggs, chiefly about stable. price average keep the wholesale for foods to has risen four through July price average However, the consumer reflecting a broad range of successive months, the July rise price increases.
Industrial expansion in Europe, from the latest figures, is apparently continuing. While European price levels have been generally stable this year, there are spreading indica tions of official concern about the resumption of inflationary tendencies. Mr. Thomas made a statement substantially as follows with respect to financial developments: Financial developments during the past three weeks have been in some contrast to those of preceding weeks. Interest rates, which had declined somewhat in the latter part of July and early August, turned sharply upward. The most pronounced shifts in both periods occurred in short-term rates. Ninety-day Treasury bills are now approaching the 4 per cent level. This tightening of rates has occurred notwithstanding a slight easing of the pressure on banks' reserve positions and a continued relatively low level of new securities issues. It apparently reflects three sets of influences: (1) continued sales of short-term securities by banks in order to raise funds to meet an exceptionally strong loan demand at this period; (2) lessened demand for bills by nonbank buyers as seasonal increases in cash needs approach; and the supply of Treasury bills. (3) further additions to Fundamentally, the situation probably reflects pressures growing out of the somewhat unusual liquidity position of the economy. For several months banks have been able to meet heavy loan demands and at the same time the Treasury has been able to finance its large deficit through sale of short-term securities, with only a moderate increase in total bank credit and the money supply. This has been possible because nonbank owners of liquid funds have preferred to hold Treasury bills rather than add to their bank deposits. As cash is needed to make payments, however, pressures mount in the bill market and are further reflected in other securities markets. Figures now available for all member banks for July indicate that banks supplied a large amount of credit in that month--much more than had been earlier indicated by the Most of the expansion was in data for city banks alone. loans, but holdings of securities also increased moderately. showed a much greater than seasonal Private demand deposits of deposits also increased. The increase, and the turnover credit may have eased some of the availability of bank continued to be market, although banks pressure on the money heavy borrowers of reserves.
In August, preliminary and partial figures for city banks show a continued large expansion in loans. In con trast to July, however, this expansion has been more than offset by a renewed decline in bank holdings of securities. As a result total loans and investments of banks in leading cities declined--the first decline for August since 1955, when banks were also reducing holdings of securities to increase loans. Whether these developments at city banks reflect the situation for all banks any better in August than they did in July remains to be seen. Figures for the first two weeks in August indicate that, although loans increased and investments declined at all classes of banks, country banks showed a small increase in total loans and investments and also in demand deposits, in contrast to declines in the total at city banks. The city bank loan expansion in August, as indicated by partial figures for August 26, reflected perhaps slightly greater than seasonal increases in business loans, in loans to finance companies, and in consumer loans, together with a continued moderate increase in real estate loans and little change in loans on securities. The city banks reduced sub stantially their holdings of Treasury bills and also the total of other Government securities maturing in less than a year, despite the increase in bills outstanding. They also showed a decline in other securities. It would appear from these data that private demand deposits may have shown a greater than seasonal contraction offsetting some of the July increase. Whether all in August, banks will show such a decline cannot yet be known. In any money supply at the end of July was more than event, the total -1/2 per cent larger a year ago and per cent larger than there have been sub July 1957 peak. In addition, than the in the public's holdings of short-term stantial increases and the turnover of demand deposits Government securities has been at a higher level than in mid-1957. months may give an indication in the past two Developments monetary situation that may charac of the type of banking and holders attempt to convert period ahead. As nonbank terize the pressures on cash, there will be recurrent Treasury bills into as now seems likely, the money market. If, the short-term to reduce the liquidity of Treasury will not be in a position debt into long some of its short-term the economy by funding permanent savings, the that will attract more term securities difficult one to manage. situation may be a particularly for a tight rein on monetary This type of situation calls in further increases It may result expansion, not relaxation. cent rate in Canada The six per interest rates. in short-term
reflects such a situation and the resistance of the central bank to further monetary creation in the face of heavy Treasury financing needs. In view of the prevailing liquidity of the economy in this country, it is likely that considerable economic expansion can be accomplished with little or no further increase in bank deposits. In any event, increases of greater than seasonal amounts might well be based on member bank borrowing at discount rates close to or above Treasury bill rates. Any relaxation is likely to encourage excessive credit and monetary expansion, In order to minimize further additions to liquidity, Treasury debt management under an unrealistic ceiling on long-term interest rates will present difficult problems. All possible means should be adopted to minimize further additions to liquidity. Tax anticipation bills amounting to $1.5 billion will be redeemed in September and the Treasury will not need to raise now cash until about mid-October. At that time some $3 billion will be needed, with another $3 billion in December and $2 billion in January. These amounts could be raised through issues of June and September tax bills and a final quarterly series of bills to mature in October 1960. Opportunities for longer-term issues would arise in con nection with the November and February refunding operations. Moderate-sized offerings might be made for cash at some time and the proceeds used to reduce Treasury bills or other maturing issues. It obvious is that nothing over 5 years could be offered under present legislation. If August developments are a reliable indication, the degree of restraint exerted by member bank borrowings at the Reserve Banks of around $1 billion may be adequate. It is probably unnecessary to bring about any reduction in reserve availability. Adequate pressure can probably be exerted at the present level of borrowing by keeping the rates above the three-month bill rate. Seasonal discount reserve needs may be supplied through open-market operations. If greater-than-seasonal credit demands are supplied by banks, then borrowings should be permitted to increase and the discount rate raised further. If demands are less than then borrowings should be allowed to decline seasonal, accordingly. of customary seasonal needs indicate that Projections should be supplied in the next week some additional reserves be met through repurchase contracts. or two. These might needs in October and sub There will be further moderate stantial reserve needs in November and December.
Mr. Treiber presented the following statement of his views with respect to the business outlook and credit policy: The economic situation shows continuing strength despite the steel strike. If the strike is long, we may expect increasingly disruptive effects with a reduction in economic activity and an increase in unemployment. Yet, when the steel strike is settled, we are likely to see a new burst of expansion and an upward pressure on prices. The intensity of the pressure will depend on the length of the strike and the nature of the settlement. While wholesale prices have been relatively stable, consumer prices rose in July to an all-time high. The consumer price index has risen 1 percentage point over the last three months. While U. S. exports in June and July were a shade higher than a year ago, foreign countries continued to build their official and private dollar holdings at about the same rate as in the second quarter. The demand for bank credit, especially consumer credit, continues to be very strong, and deposit turnover has been increasing. The money market has continued tight. Member bank borrowings have averaged about $1 billion in recent weeks. Prices of U. S. Government securities of practically all maturities have declined since the last meeting of the Committee. In the auction yesterday, three-month Treasury bills were awarded at an average yield of about 3-7/8 per cent; this compares with an average yield two weeks ago of a bit over 3-3/8 per cent. In the last month, yields have risen about 3/ of 1 per cent. The Treasury will need about $3.5 - $4 billion cash early in October. It will probably have to announce the terms of its financing in the latter part of September. mature November 15 and the Treasury will have Two issues them early in November. If the Federal Reserve to refund is to take affirmative action without interfering with will have opportunities to do so Treasury financing, it weeks, and within a shorter period within the next three near the middle of October. Business developments, credit developments, and money overt action of further counsel some market developments rate be raised within the Should the discount restraint. indicates that a number next few weeks? Public discussion rate and in an increase in the discount of people expect future. As the in the not too distant the prime rate and short-term rates advance, demand for credit increases
increased pressure can be expected at the discount window. The Federal Reserve should not so act, however, as to jeopardize action by the Congress on the proposed legislation to remove the limitation on the maximum interest rate on U.S. Government bonds. If there is still a possibility of Congressional action at this session, it would seem well for the Federal Reserve to avoid overt action at this time which might possibly raise extraneous issues and jeopardize the legislation. Since it is generally expected that the Congress will recess within the next couple of weeks, this basis of uncertainty should be soon removed. If the Congress does not act on the bill, the prospect of the Treasury having to do all its financing in short-term issues is another factor counseling further steps to restrain the creation of too much bank credit. If it is already clear that the Congress will not act on the bill, this fact, coupled with business, credit, and money market developments, would counsel overt Federal Reserve action soon. The steel strike is of course an important uncertainty. Steel does not play as large a part in the economy of the Second Federal Reserve District as of other Districts. We would not want to suggest action that might be embarrassing or that might be unwise in the light of to other Districts situation in other parts of the country. We the developing on this point around to hearing the discussion look forward the table. same reasoning that leads us to our views regarding The would apply to a change in the directive. the discount rate appropriate, a change in in the discount rate is If a change directive should also be considered. the it would also seem changes seem appropriate, If such to move toward greater restraint desirable for the System The Manager might feel his through open market operations. If no overt action is appro along to accomplish this. way about the status desirable to maintain it would seem priate, open market operations. with respect to quo received advice reported having Chairman Martin At this point its prime rate York had raised City Bank of New the First National that cent to 5 per cent. from 4-1/2 per for the Sixth District that statistics Mr. Bryan reported reflected continua Committee meeting since the last becoming available of cases, the In a number of the economy. of the upward movement tion
district figures were up by fractions more than the comparable national figures, and only two items failed to show improvement. Construction contracts were running less than in 1958 and there had been some increase in the percentage of insured unemployment. Loan demand in the district was extraordinarily strong in all sectors, and borrowings from the Reserve Bank were running well above the Bank's "appropriate" percentage of total System discounting. From the district figures and the national statistics, he could discover no serious effects of the steel strike as yet. Some rumors were heard to the effect that metal-working industries would shortly be out of steel, but thus far no one had been able to verify these rumors. With the ending of the steel strike, there might be a very ebullient economy, going in the direction of boom, which would argue for further restraint on the part of the Federal Reserve System. However, he had difficulty in reaching that conclusion because it that the Government securities market, for reasons in seemed to him was in a situation where disorder part unrelated to System policy, easily develop. He was bothered, therefore, verging on chaos could on the general ground that such about exercising further restraint System to put reserves into at some point force the a course might extent than if further restraint the banking system to a greater in the light of Subject to change avoided at this time. were expressed around the table today, his arguments that might be discount rate. to change the would be not at the moment preference
He would move delicately in supplying seasonal requirements for reserves. Mr. Bopp's comments were substantially as follows: Business activity in the Third District is holding up well despite the impact of the steel strike. The Pennsylvania Department of Labor and Industry estimated that by last week 215,000 persons in that State had been idled by the strike, of whom 147,000 were steel workers. Secondary unemployment has increased only about 6,000 in the past two weeks. A special survey by the State Employment Service of practically every major user of steel in the Philadelphia metropolitan area revealed that none had been forced to curtail employ ment. Furthermore, most of the major users anticipated no difficulty for weeks ahead. Some small producers are beginning to feel the pinch, but few expected to be forced to cut employment by the end of August--yesterday. The potential impact in the event the strike is not settled is indicated by the fact that over 200,000 factory jobs in the Philadelphia area are vitally dependent upon steel supplies. Unemployment in July, which does not reflect the strike, was 7 per cent in the District, as compared with 5.2 per cent nationally. New unemployment claims and continued claims in Pennsylvania declined in the latest two weeks. Department store sales for the week ended August 22 were 12 per cent below a year ago, primarily because of unfavorable weather for shopping. Sales in the past four weeks were 1 per cent above a year ago, and for the year to date 7 per cent above last year. There was little change in total loans of District reporting banks in the past two weeks. Business loans were off slightly. Holdings of Governments increased, presumably purchases of the recent tax anticipation bill. reflecting were up, a substantial increase in Govern Total deposits ment deposits more than offsetting a decrease in private demand deposits. The reserve positions of the large Philadelphia banks during the past two reserve weeks. have been somewhat easier averaged around $50 million, Their basic reserve deficiency from the Reserve Bank was $26 and daily average borrowing District banks were and $31 million, respectively. million funds in the latest reserve week for net sellers of Federal from the Reserve early May. Borrowing the first time since has been decreasing; the daily average Bank by country banks the latest week was $5 million. for been concerned about policy, I have Turning to monetary rate now or defer a we should raise the discount whether
decision until after the next meeting of the Committee. On balance, I believe it is preferable to defer a decision at this time. There are indications that an increase in the discount rate would be appropriate. An important one is that Septem ber is probably the longest period for the remainder of the year in which the System will be free to act without inter fering with Treasury financing. Treasury borrowing at short term will increase liquidity and the money supply. The money supply, seasonally adjusted, rose substantially in July and has increased more since the trough of the recession than in the same period following the 1953-1954 recession. Market rates on Treasury bills have moved well above the discount rate. There is also evidence that current restraint may be sufficient to counteract existing and near-term prospective inflationary pressures. Percentagewise, the increases in consumer instalment credit, residential mortgages, and bank loans to business have been considerably less than in the same period of the upswing following the 1953-1954 recession. The availability of credit has been diminished not only by System pressure on bank reserves but also by high loan-to deposit ratios which many bankers are reluctant to see go much higher. Most market rates are already above their exerting fairly strong competition is 1957 peaks. Foreign against price increases of international trade pressure seems to be fairly widespread determina products, and there tion to avoid another round of inflation. in deferring discount are significant advantages There strike is settled. The serious rate action until after the in part on the will depend threat of the inflationary ness wage increase settlement. A substantial terms of the strike fear of price result in widespread would almost certainly the strike is until after an increase Deferring increases. of the accurate appraisal possible a more would make settled leeway for a the System more and would give job to be done to counter rate if needed in the discount decisive increase also avoid It would psychology. of inflation the spread act in from an increase to result likely reaction the adverse the strike. grip of is in the the economy rate while the until mid-October, need to borrow does not If the Treasury time for be still there should likely, now appears as the Committee. of next meeting after the rate action discount maintain we should I believe weeks, next three For the I would two weeks. the past as in same restraint the about this time. at the directive in a change not favor
Mr. Fulton said that he had nothing new to report from the Fourth District regarding the steel strike. While the strike of course had the effect of throwing out of work many railroad workers, miners, and transportation workers, there was thus far no substantial unemployment resulting from shortages of steel. Steel warehousemen were experiencing no great surge of orders and the steel companies reported having had no comments from their customers. However, orders were now coming into the steel companies strongly for flat rolled and strip steel for the fourth quarter. These products had in considerable quantity by the automobile industry, been inventoried users apparently were not quite as fortunate. Rather but some other to be a low rate of delinquencies in the surprisingly, there appeared loans in steel towns. There was no shortage payment of phone bills and depending on them were in good of nonferrous metals, so industries down slightly in July from orders for machine tools were shape. New than a year ago. While the were still considerably higher June, but were lower due to reluctance had increased, shipments backlog of orders delivery. In the rubber industry, part of purchasers to take on the the companies were were up for negotiation, where wage contracts hoping to get a settlement. vigorously and reported to be negotiating hoped that a year, it was earlier this to the 80-day strike Due talk of a There was could be avoided. of work stoppages recurrence eight cents an hours, and an increase of about settlement providing it was believed to the workers were proposed if such a settlement
that they might accept. With orders for tires heavy, the companies had been working on a six-day basis to restore inventories, which had gotten quite low. Mr. Fulton said that construction was down a little in the district although commercial and educational building construction was up. The cause of the slight downward movement was attributable mostly to a reduction in heavy engineering contracts. Department store sales were down 2 per cent in the past week, apparently due in large part to very hot weather. For the year to date, sales were 7 per cent above a year ago. Turning to the financial picture, Mr. Fulton reported that commercial loans in the Fourth District were up. Investment port folios were lower in order to permit the banks to make new loans. The banks had been coming to the discount window rather freely, but not to the extent that might have been expected, and borrowing was less than the 10 per cent of the System total normally expected in the Cleveland District. Part of this might be due to the fact that the Reserve Bank had discussed borrowings with some of the member banks. Mr. Fulton stated that he would not like to see a change in his reasoning being quite similar to the discount rate at this time, of Mr. Bopp. He would prefer to wait until after the termination that to see what type of settlement was made of the steel strike in order on the price structure. At such time, a and its potential effect
forthright action could be taken by the System if the settlement was not one that promised to permit a reasonable degree of price stability. He felt that the present degree of restraint, without relaxation, was appropriate and that the directive might be left in its present form. Mr. King observed that Mr. Treiber had outlined two alterna tive approaches to the question of policy and said that he would be in agreement with the one which suggested avoidance of overt action for the moment. Such an approach appeared to him to carry more possibility of aiding the Treasury in obtaining the interest rate ceiling legislation that it so badly needed, and he felt that any action on the part of the System should be weighed in the light of possible passage of such legislation. With that factor in mind, he found himself in agreement with Messrs. Bryan, Bopp, and Fulton regarding the directive and also the discount rate. Mr. Shepardson commented that there appeared to be general agreement on what the various indices showed and on the direction in which the System should be looking. Thus, the question seemed to be largely one of timing. He was not as optimistic as some others the price situation and inflationary pressures. might be regarding as indicated by the gradual The price rise was going on continually, prices, and the wage situation was not good. upward crawl of consumer that would add to were seen of new settlements Every day, reports to the effect that these no doubt would be made costs. While claims wages would be and that the higher were not inflationary settlements
absorbed in increased productivity, he questioned such claims seriously and feared that costs were being built up to the point where the situation would explode. With the steel strike in progress, he realized that there might be some advantage in waiting to see what eventuated, but it was his feeling that regardless of how the strike was settled, there would still be pressures ahead. Therefore, a strong affirmative position on the part of the System probably would do no harm and possibly would be helpful in bringing about a more favorable situation. The pending interest rate ceiling legislation was, of course, an unknown quantity, and it might be argued that it would be unwise to muddy the waters until that was other hand, it might be said that a failure of the settled. On the clear economic indications would be an System to act in the face of not get into such a water, and the System should evidence of backing position. be a little time there might possibly felt that Mr. Shepardson the delay would not be long. to delay, but he hoped that for the System any event the and in prompt action, he would prefer Personally, after prompt implementation in getting often experienced difficulty all con Therefore, in mind. be borne upon should is decided action promptly as action as work for the ground should be laying cerned was reached. a decision after possible the discount in a change favor he would said that Mr. Shepardson of degree the present favor maintaining also He would rate shortly.
restraint and meeting seasonal reserve needs reluctantly. Mr. Thomas had indicated that seasonal needs in the next few weeks probably could be met through repurchase agreements, and he hoped this course would be possible. It seemed to him essential to stay ahead of the game. He hoped that the System might stay ahead of the situation better than it did following the 1953-54 recession, with a view to forestalling the results that came to pass later. The legislative situation might suggest the advisability of going slow for a week or two. When that situation was clarified, however, he would act promptly. Mr. Robertson stated that the situation seemed very clear. The Committee was sitting on the edge of what might be almost a The economy would be burgeoning out and the System would volcano. Therefore, he felt that it would be a find itself behind the game. settlement before moving to a more mistake to wait for the steel delay on the grounds that position. It would be easy to restrictive situation loom large in the situation and the strike the political decisions on the basis of the System ought to make its picture, but concerning them there seemed to be no dispute. economic factors, and when the System ought to be moving, As he saw it, this was a time without too discount rate increased like to see the and he would in which to act be about a month Although there would much delay. never possible to financing, it is interfering with Treasury without
get action "tomorrow." He would be reluctant in meeting seasonal reserve needs and would reduce the availability of credit to some extent by moving up the level of net borrowed reserves. Looking at the policy directive, he could not see offhand any change that would strengthen it. If there was a way to do so, however, he would be willing to go along with such a change. In conclusion, Mr. Robertson expressed the view that the System ought to adopt an affirmative position of restrictiveness in order to keep on top of the potential inflationary situation ahead. Otherwise, the System would get behind the game and might never catch up--repeating the mistakes of a few years ago. Mr. Mills said that in his opinion the immediate problem facing the Open Market Committee was that of diagnosing develop ments in the U. S. Government securities market and their bearing on the System's monetary and credit policy. As he saw them, those developments confirmed abundantly the concern he had expressed on to the effect that System policy was unduly earlier occasions had now, as regards the Government securities restrictive. It that threatened disorder and market, produced a situation the System's objective con His concept was that demoralization. economic growth and one of fostering longer-term tinued to be was a real question whether and in his opinion there stability, If there with that objective. was moving consistently the System
was any doubt about the desirability of producing a credit avail ability that would sustain the seasonal needs of the economy, he would like to bring out that this had always been a fundamental purpose of System policy. As he understood it, the System had always met the legitimate seasonal needs of the commercial banking system when the latter was in receipt of demands for credit. Beyond that, he felt that one must look back on economic develop ments in the past year and take into account the fact that there had been a recovery from recession. That recovery, now moving into new ground, brought about a rise in the gross national product that had desirable and legitimate foundations. If, therefore, the System were to follow a monetary and credit policy over the years that had the aim of fostering economic growth and stability, he would question a restrictiveness that did not take into account the increase in gross national product. The restrictiveness that had stemmed out of System policy stood, if not corrected, to interfere with the kind of economic accomplishments on which the country had set its sights. With regard to comments favoring continuance of about the existing degree of pressure, that is, the status quo, he wished to call to the fact that discounts at the Federal Reserve Banks attention to a level averaging over $1 billion. In spite of were running and the reserves that were introduced that level of discounts was still a level of net to Treasury financing, there incident That level of net the area of $500 million. borrowed reserves in
borrowed reserves constituted persuasive evidence that the System was persistently tending to contract the credit base. The efforts of the member banks to maintain their reserve positions had been fruitless, even with use of the discount window, and in consequence the current high level of net borrowed reserves existed. If it continued, it would produce insistent and growing cumulative pressures that would create additional complications for the Treasury in its financing and provoke a very unsatisfactory situation in the U. S. Government securities market. Mr. Mills said that his own thinking obviously would favor modifying the kind of policy that the System had been following. Inasmuch as that policy had been instrumental in creating the condi tions that technically argued for an increase in the discount rate, and since he felt that the policy was faulty, obviously he would not favor increasing the discount rate. Mr. Leach made substantially the following comments: The first break this year in the continuity of the uptrend in manufacturing man-hours in the Fifth District occurred in July with a decline of 1.5 per cent. The drop in this significant indicator of economic activity was due principally to shutdowns in the steel industry. The impact the Fifth District has been most pronounced of the strike in cessation of operations at Bethlehem's in Baltimore where gigantic Sparrows Point plant and at other steel mills put over 28,000 employees out of work. In addition, over Baltimore area were industries in the workers in other 3,700 a consequence of the steel strike. idle at the end of August as also in certain areas unemployment has been severe Secondary were out of work because Virginia where 8,200 workers of West at mid-August. Despite the steel strike, of the strike in the District rose however, manufacturing employment
slightly in July, both in durable and nondurable goods. Indicative of the strong position of the textile industry was the rise in cotton consumption by District mills in July to an all-time high--some 3 per cent better than the previous high in July 1942. Department store sales in August are estimated to have held at the near-record level of the preceding month. The usual late summer pickup in business borrowing at District reporting banks appeared in the second and third weeks of August despite the steel strike. Banks relied somewhat less on borrowings and more on liquidating securi ties to meet the August loan demand than in immediately preceding months. If I knew when the steel strike will end and when Congress will act, if at all, on the interest rate ceilings, I would be better able to make positive recommendations as to policy, but I do not know these things. I believe there is great underlying strength in the economy, but I think further tightening of credit at this time would be unwise. While I would not increase the discount rate at this moment, I think that the Reserve Banks should be prepared to act promptly, and as unanimously as possible, on the discount rate if the situation should change in the next three weeks. The existing degree of restraint should be maintained through open market operations. I would not favor changing the directive at this time. Mr. Leedy said that, having been away from the Tenth District for the past couple of weeks, he could give no first-hand report on conditions. However, it was quite evident from the available statistics that the economy of the district continued to be strong. Bank loans continued to advance and the high level of borrowing from the Federal Reserve Bank was continuing. It seemed to Mr. Leedy that the question of a change in the discount rate involved solely a question of timing. At present the rate was obviously out of line with other market rates, and the action reported this morning on the prime rate would further intensify for action on the discount rate. However. he the need and pressure
felt that this particular juncture was not the time for the System to act. First, there were the uncertainties connected with the steel strike, and the longer the strike continued the greater those un certainties would be. Second, in the past three weeks there had been a marked change in rates on Government securities, particularly in the short end of the market. The System, he felt, should not subject itself to the charge that it had jumped in precipitately and con tributed to the trend that was occurring in the Government securities market. As he understood it, there would be a period of freedom following the next meeting of the Open Market Committee for action on the discount rate. On that assumption, it seemed to him that it would be a mistake for overt action to be taken in the meantime. For the present, therefore, he would favor maintaining the status quo, neither relaxing pressure on bank reserves nor tightening the pressure. How ever, unless there should be a marked change in the present picture, it appeared to him that by the time of the next Committee meeting the System might be faced with the necessity of moving on the discount rate even though the steel strike had not yet been settled. Mr. Allen commented as follows with respect to Seventh District developments: No significant changes in business trends in the Seventh District have been reported in the past two weeks. Consumer spending, as measured by department store sales, faltered somewhat, probably due more to the humid, disagreeable weather and timing of promotions than to a change in consumer in tentions to spend.
As to residential construction, Chicago is the only major center in the District to reflect the advanced level of home construction characteristic of the country as a whole. Building in Chicago continues at recent levels, with rather surprising strength in apartment units. The employment situation is as good as can be expected during a model changeover time for autos and during a steel strike in an area heavily oriented to metalworking. What might be called a placid attitude seems to prevail in businesses not yet affected by the steel shut-down, but vulnerable to a longer-term interruption. If a settlement is not in sight shortly after Labor Day, the employment out look will deteriorate rapidly. Despite disturbances in the money market accompanying the latest upsurge in short-term money rates over the past two weeks, banks in the Seventh District still show little evidence of increased pressure. Loan volume of our weekly reporting banks has continued to rise, with most of the growth in busi ness loans. These banks have reported some deposit gains recently but most of their loan funds were acquired through continued net sales of Governments and other securities. Business loans at our large banks were up $38 million in the two weeks ended August 19 and, in addition, loans to sales finance companies increased by $22 million. National figures for the two August weeks also show substantial growth in to business and to finance companies ($280 million). lending A mid-August bulge in business loans, in part reflecting seasonal credit needs by dealers and processors of farm has been apparent in reporting bank data in commodities, but this year it follows a six-week every year since 1954, almost steady expansion. Use of bank credit by period of metals and metal products has not receded manufacturers of from our large banks strike levels. Reports from pre-steel repayments of inventory loans by indicate that although have been maintained producers are high, outstandings metals of new loans to the metals of a continued high volume because industries. of purchases of the ad Except for the temporary effects bills, investments of our weekly ditional issue of March tax throughout this moved sharply downward banks have reporting banks is down at these total credit outstanding month so that $100 million from loans rose by roughly While total somewhat. about $130 million. were off 5 to 19, securities August city banks have of Seventh District Reserve positions Central reserve city in the past two weeks. eased somewhat of Federal Funds net sales and showed reduced borrowings banks
last week, and their basic net deficit averaged about $25 million, compared with $50 million two weeks ago. The net position of reserve city banks has also improved markedly in recent weeks. Reduction in borrowing has been accompanied by substantial net sales of funds--a large portion of which has gone to New York in response to heavy demands there. In the week just ended, net sales of Federal Funds by two Detroit banks averaged $80 million per day. These banks have enjoyed strong deposit inflows; extensive use of this money in the Federal Funds market indicates that its effect is expected to be quite temporary. Pressures on country banks, on the other hand, con tinued to intensify. The number of country banks borrow ing at the discount window reached a new high of 72 in the first half of August and the volume of borrowing continues to creep upward. With respect to policy, Mr. Allen said he was inclined to agree with Mr. Shepardson, for he was pessimistic as to what might occur when the steel strike was settled and therefore did not see much point in waiting for the settlement. Accordingly, he felt that action should be taken on the discount rate, and very soon. The the prime rate was an additional factor that must increase in be taken into consideration. While the Seventh District was an Bank would not be embarrassed if important steel area, the Chicago was not so important a some district where steel a Reserve Bank in wanted to take action on the discount rate. As things stood, factor to be the first to might prefer not the Chicago directors however, scheduled for September 3 Directors' meetings were raise the rate. 17 might be the very and he felt that September and September 17, in the interim taken unless developments should be latest that action the existing He would favor continuing a noticeable change. produced
degree of restraint in open market operations. This degree of restraint had helped to produce an atmosphere in which, in his opinion, the discount rate should be raised, and raised soon. Mr. Deming presented the following comments: The economic situation in the Ninth District is not significantly different today from what it was two weeks ago. The effects of the steel strike are still largely localized along the iron ranges and to a degree are masked by an excellent tourist season. We are informed, however, that unless iron mining is resumed by mid-September the iron country will be in great difficulty for the remainder of the year and into 1960. An informed source tells me that under the most favorable weather conditions lake shipping cannot run beyond December 15, and the long-range weather forecast indicates that it may well close up before then. Some rail shipments may be made but not much ore will be moved by rail, partly because it cannot be mined and processed in cold winter weather, partly because rail facilities are inadequate to move much ore, and partly because rail movement is quite expensive. The agricultural picture continues to worsen. Crop esti mates as of August 10 were lower than earlier estimates. Drought conditions prevail over much of the Dakotas and into and pastures are very dry, with some eastern Montana. Ranges beginning to appear. Small grain pro livestock liquidation is expected to be only half that of duction in the Dakotas record year, and that that 1958 was a 1958. It is true of grains in 1959 will be close to the 10-year District output comfort to the farmer who has average, but this is not much the bank that financed him. lost his crop nor to fact, the farm picture had apparently As a matter of tapering off of the economic upswing in brought about some strike began, and we anticipate District before the steel the as the year advances. in the rate of gain more slowing down aside from the steel scene two factors On the national our thinking--continued high unemployment strike influence As we see it from stability so far. and relative price as we have given employment-unemployment data, such study both industrially is widely distributed today unemployment labor areas of 149 major In July, 46 and geographically.
had unemployment rates of 6 per cent or more. For comparison, in the 1954 recession there were but 53 major surplus labor areas and in 1956-57 only about 20. No doubt some, perhaps a substantial part, of the un employment is structural, but the dispersion would seem to argue that a substantial part would be susceptible to increasing aggregate demand and thus that it can serve as a strong base for further growth in the economy without pressing severely on the labor supply. These conditions in the District and the nation cause me to believe that credit policy should not aim at additional restriction at present. I would not like to see relaxation of pressure, but neither would I favor any increase in pressure. I believe that it would be a mistake to change the discount rate now, even though there seems to be some market expectation that a change is imminent. An overt act at this time would be hard to explain economically as well as politically and probably would compound the Treasury's difficulties. I see no need to change the directive. Mr. Mangels said that there were over 80,000 workers in the Twelfth District idle on account of strikes, the highest figures since slight, one could foresee effects so far had been 1954. While the near future the effects of these strikes would that in the relatively retail sales increased sub detrimental. Although total be more of August, stocks were becoming stantially in the first three weeks strike. The merchants due to the teamsters' depleted rather rapidly them to the retail but no means of getting had stocks in warehouses August were at a rate 5 in the first ten days of stores. Auto sales was ten per cent higher in July, which in turn per cent higher than bank loans increased ended August 19, In the two weeks than June. Bankers periods. than in previous less somewhat $136 million, cases were and in some make new loans to were declining reportedly
beginning to call some outstanding loans. While they talked a great deal about the tightness of money, perhaps the reason for restraint was more a concern about loan-to-deposit ratios and the desire to get into a more satisfactory position. Borrowings at the Reserve Bank had been quite nominal, totalling only $12 million last Thursday. District reporting banks were rather large net sellers of Federal funds last week and it was expected that they would continue to be net sellers this week. Turning to policy, Mr. Mangels said he recognized that there was a heavy demand for credit and that the period of seasonal increase was ahead. With the settlement of the steel strike, there would probably be a further increase in the demand for credit to take care of the resumption of business and expansion of operations. However, his thinking was along the lines of that expressed by Mr. Deming. At this point the System should not ease in any way, but it should be cautious about any increase in restraint. A period was being entered when the Desk should have considerable latitude for the exercise of somewhat on the feel of the market, particularly discretion, based in its present condition. The with the Government securities market directive seemed satisfactory. With regard to the discount rate, his in the prime rate was announcement of the change thinking before the and he was still to wait until October, the System could afford that of that opinion.
Mr. Irons said that his appraisal of the national situation was quite similar to that expressed by Mr. Young and others. Despite the steel strike and other uncertainties, the situation appeared to be one of unusual strength. In the Eleventh District, activity was continuing at a high level, although with some tendency toward leveling off. This tendency, apparent in three or four sectors of the economy of the district, might be a purely seasonal thing. It may be of significance that industries such as petroleum and aircraft, which are important to the district, are operating below year-ago figures on a national basis. In the petroleum industry, for example, allowables had been set at nine days for September and probably would be set at nine or ten days in October. Also, while department store sales in July and August were well ahead of a year ago, July was at just about the same level as June. Unemployment, as a percentage of the labor force, was running lower than the national average. In outlook was very promising, and 1959 should be an agriculture the excellent year. Around mid-August, some of the statistics again showed an upward tendency, particularly department store sales, refining, and possibly employment. said there appeared to have the financial side, Mr. Irons On for loans, the loan growth recently been some tempering of the demand recent previous periods. Loan-to-deposit having been slower than in Bank ran some at the Reserve very high. Borrowing were still ratios weeks than during the the last two or three what lower during
preceding six-week period. While bank reserves were still under pressure, it did not appear that the pressures had been intensified. Demand deposits were up in August, reflecting a substantial increase in Government deposits and some increase in deposits of individuals, partnerships, and corporations. Bankers indicated that they were being selective in the granting of credit. Mr. Irons commented that his thinking with regard to policy was marked by uncertainty. He felt that the performance of the Account Management had been excellent, was in agreement with the degree of restraint maintained during the past two-week period, and believed that the same degree of restraint should be continued. To the extent that deviations might be necessary, he would be inclined to prefer that they be on the side of restraint rather than ease, always keeping in mind that the Management of the Account must have feel of the market. That might prove to freedom to respond to the its present stage of weakness. with the market in be difficult might happen and the Account Management must be alert Almost anything The reserves needed for seasonal to the situation as it developed. but perhaps with reluctance. requirements must be provided, said he would have rate, Mr. Irons to the discount Turning the rate be that of recommending be in the position preferred to he was not sure weeks. However, for a few its present level left at he could not say In other words, would permit this. that the market alone until discount rate leaving the he would favor today that
September 22, the date of the next meeting of the Committee. The bill rate was close to 4 per cent, the prime rate had been raised to 5 per cent, and other rates in the market seemed likely to adjust accordingly, with the result that there would almost be no alternative to a discount rate change. Accordingly, while he would not today recom mend a change in the rate, he could hardly say that he would not favor raising the rate at any time during the next three-week period, for he did not know how much longer this action could be deferred if the System wanted to be realistic about the situation. The System might find itself with a rate thoroughly out of realistic alignment with other market rates. In view of recent market developments, he would not look upon a change in the discount rate as an overt act on the part of the System. He was not impressed by the thought that the regarded as an important reason for deferring steel strike should be might be made, the ending rate action. On whatever terms settlement to economic activity and the of the strike would be stimulative was really one of degree. question the Government securities concern about Mr. Irons expressed could be regarded the present situation he doubted whether market, for conditions would not grow one. He only hoped that as a temporary was to him securities market in the Government The situation worse. the discount rate. in terms of factor when thinking quite an important the discount out and change urge to rush had no implusive While he the market might of affairs in and the state facts of life rate, the
lead to a situation that would require doing something before September 22. Therefore, his position was almost one of watching on a day-by-day basis. It might be that developments in the market a week from now would point to a rate increase, and under such circumstances an increase in the discount rate would hardly con stitute an overt action. Under such conditions, the System certainly could not be criticized on the grounds that it had led the way. Mr. Irons saw no impelling reason for changing the directive at this time. While he might not object to a change, he felt that the present directive would serve appropriately for the forthcoming period. Mr. Erickson reported some easing in the pace of over-all expansion in the First District but no pronounced weakness. The slowing down might be due to a number of things, including seasonal factors, the weather, cumulative effects of the steel strike, and a natural letdown from the earlier pace. Credit demands possibly were still very strong. policy for the next three weeks, Mr. Looking at monetary of timing was involved. felt on balance that a question Erickson a little while longer on the discount He thought it proper to wait maintain the and he would change in the directive, rate and on a the past two weeks. as had prevailed during same degree of restraint reserves reluctantly. The announcement of the change He would supply would come so soon, which he had not thought in the prime rate, action on the and might force picture somewhat to change the tended
discount rate at an earlier date than he had had in mind. It tended to remove the quality of overtness from anything that the System might want to do. Mr. Szymczak recalled that two weeks ago he thought the international situation, the status of pending legislation on interest rate ceilings, and the uncertainties in the Government securities market, together with certain other factors in the economy including the steel strike, suggested that it might be better to wait than to do anything on the discount rate or through open market operations. At this point, however, he doubted whether any legislation on interest rate ceilings would be obtained at this session of Congress. be looked for apparently was legislation authorizing the The best to the rates on savings bonds. If the steel President to increase should end, inventories would have to be built up quickly. strike the economy, Mr. Szymczak felt With the strength evident in helping the Government securi the most that could be done toward that more restrictive action through might be to take slightly ties market net borrowed reserves thus tending to produce open market operations, change the discount higher. He would or even a little of $550 million The market, he felt, had per cent as soon as possible. rate to 4 the System the rate. In substance, a change in already discounted going to do as quickly whatever it was the most by doing might help of the picture. getting out and then as possible
Mr. Balderston said that his views were similar to those expressed by Messrs. Treiber, Allen, Irons, Erickson, and Szymczak. However, he would be inclined to change the directive at this time. He was unhappy about the continuance of a directive that had been in force for a long time when, in his view, the situation called for increased restraint. Mr. Balderston then suggested that clause (b) of the directive might be changed to read somewhat along these lines: "to restraining actively such speculation and price advances as are inimical to sustain able growth and expanding employment opportunities." Such wording, which would contrast with that used in time of recession, would exhibit a little more vigor and realistic concern about the speculation evident in certain areas of the economy, such as real estate and the stock market. As to open market policy, Mr. Balderston indicated that he would favor more restraint rather than less. Mr. Balderston said that he would favor increasing the discount rate to 4 per cent before the next meeting of the Open Market Committee, but after Congress had had an opportunity to aid the Treasury by the to interest rate ceilings. There was passage of legislation relative leaders might not prefer to some chance, he believed, that Congressional plight, with no alterna the Treasury in its present go home and leave further the liquidity of the economy. As long tive except to increase he would not of getting legislation, was even a small chance as there action during the next few days. want to see it diminished by System
However, he would prefer to see such action as the System might decide upon taken before the adjournment of Congress, for that seemed to him the courageous and forthright thing to do. With the prime rate at 5 per cent and the bill rate approximating 4 per cent, the System was left in an almost inexplicable technical position. If there was continued reliance on the discount window, reluctant borrowers might become less reluctant as time went on, thus making the administrative problem increasingly more difficult for the discount officers. Also, he noted, System Account portfolio holdings were now at an all-time high of $26.5 billion. Taking a look at what had happened since April 1958, it could be seen that the Open Market Account portfolio increased $2.5 billion, member bank discounts and advances increased $1 billion, and excess reserves had gone down $.3 billion. On the other side of the picture, gold holdings decreased currency in circulation increased by $1.5 billion, with by $2 billion, some evidence of tax avoidance in that increase, and required reserves On top of this basic problem was the "near increased by $.3 billion. situation to which he had referred at previous Committee meet money" in bills held outside of financial Since April 1958 the increase ings. $13 billion, of which about $6.2 was in the order of institutions should be That $6.2 billion the hands of corporations. billion was in of such corporations. light of the tax obligations considered in the $18 billion to up from perhaps may have gone Their tax liabilities all of the bill holdings explain most but not billion, which might $23 by corporations.
In the light of the fiscal policy that the Treasury seemed forced to follow at the moment and in the light of the speculative pressures in the economy, it was Mr. Balderston's conclusion that more restraint rather than less was indicated, especially if technical considerations required a change in the discount rate very soon. In summary, his conclusions were quite close to those of Mr. Treiber. Chairman Martin commented that he had come into this meeting less clear in his own mind as to exactly what ought to be done than at any other recent meeting of the Committee. This was partly because he found it difficult to separate the monetary politics from the economics of the situation. It was hard to know exactly what the cross currents were, and he was no better informed than the other members of the Committee concerning what might happen with respect to the interest rate ceiling legislation. However, one aspect of the present situation was clarified somewhat by the action of the First National City Bank on the prime rate this morning. He had no idea this was coming, and had hoped it would not. He now questioned whether the System could continuing to sit on ignoring the market and be in the position of While there was a been doing for some time. the sidelines, as it had in interest rates would continue, question whether the current trend continue in a strong whether the System could it was also questionable meeting to act, until after the next Committee position if it waited would begin its to act. The Treasury that it was going assuming at the advisory committees banking and investment with the meetings
end of September. With the steel strike, political implications, and other factors in the picture, it would perhaps have been desirable to have a waiting period. However, assuming that the present range of bill rates was going to continue and that other banks would follow First National City in raising the prime rate, there would be a real administrative problem for the System with member bank borrowings in the neighborhood of $1 billion. It would be possible, of course, to move in the opposite direction, as Mr. Mills suggested. This would involve deciding that the degree of tightness of System policy had not and moving aggressively toward ease to validate a lower been warranted however, that the majority did not level of interest rates. Assuming, lower level of rates and was not want to move toward validating a that concerned him was current policy, the question dissatisfied with or follow or do neither--just Reserve should lead whether the Federal rock along. was whether the System the Chairman repeated, The question, including the and trend of the market, disregard the state could cent, and say that go to 4.25 per bill rate might prospect that the content to it would be and other factors the steel strike because of did not seem To him this 3-1/2 per cent. rate of a discount maintain under whether, seemed questionable Also, it or desirable. practicable as an be regarded rate could in the discount change those conditions,a of the System. the part act on overt
Chairman Martin said he was not certain whether he could go along in the thought that additional pressure should be put on the market. There was some question in his mind as to what would be achieved other than to complicate and further upset a market that was likely to have a good many cross currents without such action. He did not think that the market was disorderly or on the verge of being disorderly at this time. The market, however, had a good idea as to the likely trend of interest rates based on trends in the economy that it saw developing. Under such conditions, he had some question about putting additional pressure on the market. Instead, he would prefer to see about the present degree of pressure continued, with no overt action as to the level of reserves. Assuming, however, that the current bill rate turned out not to be just a temporary question on which more light would be shed by the auction phenomenon, a days or so might produce a situation where a this Friday, the next ten clearly was called for. Assuming that the change in the discount rate current level of interest rates was maintained, he would be disposed to 4 per cent some time soon increase in the discount rate to favor an with respect to the steel irrespective of developments after Labor Day strike or political implications. any reason to he did not see said that personally The Chairman would have no strong time. While he directive at this change the with the at this juncture, he would hesitate to a change, objection in the picture, to assert definitely steel strike and other factors
that the System was going to put additional pressure on the market. This was a matter of judgment and he could only express his own view. Nevertheless, the Committee must be alert and alive to what was going on, unless it wanted definitely to change its policy. Chairman Martin expressed agreement with Governor Balderston's thought that it would be desirable to act on the discount rate, if possible, before the adjournment of Congress rather than to take such action just after adjournment. However, such things can not be timed precisely. He had reached the conclusion that it is good politics to do what you think is right. The Chairman suggested that the System not retrace its course unless it believed that the course it had been follow at this juncture the System should follow the course forward ing was wrong. Instead, conclusion. Personally, he would not to a sensible and intelligent time, but he would recognize the to intentisy restraint at this want for him to see how the market. It was hard realities of the present rate for three or four waiting on the discount System could justify to 5 per cent on the prime commercial banks were going weeks if the to 4-1/4 per cent. in the area of 4 bill rates were rate and Treasury make all the System's would such circumstances too long under To wait to be Alice in rate appear in the discount about changes points to contentions open the floodgates and would operations Wonderland of just administration was not needed, rate policy that discount discount window. the
The Chairman then raised the question of resolving the cross currents at this meeting and said that, if the Committee so desired, he would be prepared to take a vote on the question of leaving the directive in its present form. Mr. Robertson commented that it would make a difference, in considering the directive, whether the Committee wished to move toward more restrictiveness on reserves. As he understood the discussion, the large majority did not favor moving in that direction. The directive should not be changed to indicate overt action if such action was not going to be taken. Mr. Balderston said that he thought Mr. Robertson was correct. That was why, at the outset of his remarks, he (Mr. Balderston) indi cated that he thought he was out of step with the majority of the feeling on this point. He felt definitely that the Committee in his did not want to change the directive or to increase the majority degree of restraint. that he would favor increasing the pressure Mr. Szymczak said like to see net borrowed but not much. He would on reserves somewhat, not much more than that. perhaps $550 million but reserves rise to not change the directive, which he thought was satisfactory. He would that he liked the phraseology Mr. Mr. Shepardson said he felt that directive. However, for the had suggested Balderston at the next meeting be more in order change probably would such a than this one.
Chairman Martin commented that he thought this statement was quite correct. He said that in endeavoring to summarize the meeting he had tried to recognize monetary politics, economics, and various statements around the table. In doing so, it struck him that it would not be well to change the directive at this point. If this meeting were one that was reported to the public, he did not think that justification could be shown for a change. The Chairman then stated that, if there were no serious dissents, the present wording of the directive would be retained. No comments were heard in response to this statement. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to restraining inflationary credit expansion in order to foster sustainable economic growth and expanding employment opportunities, and (c) to the practical the Account; provided that the administration of of securities held in the System aggregate amount for the purchase or (including commitments Account the Account) at the close of sale of securities for other than special short-term certificates this date,
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; pro vided 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. Turning to the level of reserves, Chairman Martin stated that it appeared the Manager of the Account would have to use his own judgment. Mr. Szymczak apparently was the only member of the Committee who would like to see net borrowed reserves go up to $550 million. With regard to the discount rate, the Chairman noted that agreement on the rate is not a subject for action at meetings of the Open Market Committee. It could only be said that a majority of the members of the Board of Governors evidently would be disposed to look with favor on an increase in the discount rate some time after Labor Day. Mr. Robertson added the comment "soon after Labor Day and before Congress adjourns." At the instance of Mr. Treiber, there followed comments as meetings were scheduled at the respective to the dates when directors' Reserve Banks. Chairman Martin noted that the discussion at this meeting had or might not be taken. actions that might references to future included
For this reason particularly, he urged caution on the part of those in attendance with respect to discussing the meeting with other parties. It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, September 22, 1959, at 10:00 a.m. Chairman Martin then referred to the discussion at the Com mittee meeting on August 18, 1959, regarding the appropriate degree of accessibility to the discount window for member banks acting as "underwriters" in connection with Treasury financings and inquired whether anyone had additional points that he would like to make at this time. There being no comments in response to this invitation, the Chairman indicated that he thought the matter could be left as it stood. At the Chairman's request, Mr. Leach commented, for the concerning a visit paid to the Federal information of those present, August 21, by Congressman Patman Bank of Richmond on Friday, Reserve from the House of Representatives. and several of his colleagues referred to a letter received subsequently from Mr. Leach also of the group, in which Mr. Oliver of Maine, a member Congressman the status and respect to of questions with raised a number Oliver it was the intention Mr. Leach said Richmond Bank. of the operations of its ability on to the best answer those questions of the Bank to would be the Bank's reply copies of basis but that an independent Reserve Banks. and to the other to the Board sent
Chairman Martin also referred to letters sent recently by the Under Secretary of the Treasury to the Board and the Reserve Bank Presidents requesting comments regarding suggestions of Senator Javits of New York relating to a "peace bond" campaign as part of the savings bond program. The Chairman said that it might be well for the Presidents to send copies of their replies to the Under Secretary to the Board for its information. At least one of the Presidents indicated that he was con sidering taking advantage of language in the Under Secretary's letter which suggested that a reply was optional. Question was raised with the Chairman whether he had in mind that the Open Market Committee should respond, and Chairman Martin replied that he did not envisage Committee was disposed to make one or such a response unless the unless Senator Javits should pursue the matter. The meeting then adjourned. Secretary
Also: Record of Policy Actions