September 22, 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 22, 1959, at 10:00 a.m. PRESENT: Mr. Martin,Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Deming Mr. Erickson Mr. Johns Mr. King Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Messrs. Bopp, Fulton, Bryan, 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. Hackley, General Counsel Mr. Thomas, Economist Messrs. Jones, Parsons, Roosa, and Young, Associate Economists System Open Market Account Mr. Rouse, Manager, to the Board of Governors Mr. Molony, Assistant Adviser, Division of Research Mr. Koch, Associate and Statistics, Board of Governors Mr. Keir, Chief, Government Finance Section, of Research and Statistics, Board Division of Governors President, Federal First Vice Mr. Scanlon, Reserve Bank of Chicago Daane, and Tow, Vice Messrs. Ellis, Hostetler, Banks of Federal Reserve of the Presidents Richmond, and Kansas Boston, Cleveland, City, respectively
Mr. Einzig, Assistant Vice President, Federal Reserve Bank of San Francisco Mr. Anderson, Economic Adviser, Federal Reserve Bank of Philadelphia Mr. Coldwell, Director of Research, Federal Reserve Bank of Dallas Mr. Holmes, Manager, Securities Department, Federal Reserve Bank of New York Mr. Brandt, Economist, Federal Reserve Bank of Atlanta Mr. Knipe, Consultant to the Chairman, Board of Governors Chairman Martin stated that, unless there was objection, he would like to have Mr. James L. Knipe, Consultant to the Chairman, attend the meeting. There being no objection, Mr. Knipe entered the room. Upon motion duly made and seconded and by unanimous vote, the minutes of the meetings of the Federal Open Market Committee held on August 18 and September 1959, were approved. 1, Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period September 1 through September 16, 1959, and a supplementary report covering the period September 17 through September 21, 1959. Copies of both reports have been placed in the files of the Committee. Mr. Rouse supplemented the written reports with a statement as follows: development of the past three weeks The most significant in the atmosphere of the Government has been the deterioration a climax early last week. At securities market. This reached that time rates on Treasury bills reached new high levels, with 5 per cent. Also at bills bid at above the longest outstanding that some dealers were reluctant time it was reported to us that
to make good markets in bills and were operating on an order basis. This was an extreme, and there has been some improve ment in the market since that time. Indications are, however, that the improvement is mainly technical since there has been no real change in the basic factors that underlie the wide spread pessimism that characterizes the market. The market's pessimism grows out of the interrelation of two basic factors. The first is the heavy current and prospective demands for credit by the private sector and by the Treasury, and the second is the fact that the Treasury's needs will have to be met through resort to short-term financing. Credit demands of the private sector of the economy have already been extraordinarily large, and we are just entering the period of a seasonal buildup of such demands. There is a widespread belief that the economy shows sufficient underlying strength to surge ahead rapidly at the conclusion of the steel strike and that this will bring with it further unusual demands for credit by the private sector. The Treasury's needs for funds will be substantial over the next few months, beginning with about $3.5-4.0 billion in October. Furthermore, and quite apart from these immediate needs, there is a growing concern over the fiscal situation generally, since indications point to continuing, if reduced, budgetary deficits. The midyear budget review should be released shortly in view of the adjournment of Congress a week ago. Against the back ground of these heavy current and prospective demands for credit, the failure of Congress to come to grips with the on marketable Treasury bonds has had a interest rate ceiling pervasive influence. First, as I noted earlier, the failure of Congress to act means that the Treasury will have to resort over the next few months to the short end of the market to needs. Secondly, that failure has raised fundamental meet its this country is really capable of questions as to whether keeping its fiscal affairs in order. market anticipates large and growing demands While the stemming from the demand influences I just mentioned, for credit System will not abdicate its also anticipates that the it the funds to meet all these and freely provide responsibilities over the creation of It is expected that restraints demands. credit will continue. of demand and supply for These fundamental influences conviction that interest rates, credit have led to a general in a quarter of a at the highest point which are already This conviction was will rise still further. century, more immediate influences three weeks by in the past heightened pessimism that role in the extreme which played an important First, the large market early last week. emerged in the
demands for liquidity around the mid-September tax and dividend dates caused an excessive supply of Treasury bills to appear in the market as corporate demand virtually dried up and as repurchase agreements which corporations had made with dealers matured; corporations also engaged in some outright liquidation of bills. Furthermore, bank reserve positions came under increased strain as banks accommodated the heavy mid-September demand for loans, and hence some banks also sought to liquidate Treasury bills. The second of the more immediate influences on the market was the focusing of attention on the large prospective demand for credit in the immediate future. The announcement of the Treasury's October cash financing is only ten days away. Furthermore, a heavy calendar of Government agency financing will be superimposed on the Treasury's operation. This agency financing is highlighted by the developing plans of the Federal Home Loan Banks to borrow a total of $300 million new money between now and early November and the difficulties facing the Federal Land Bank in the refinancing of its October 20 maturity in view of the latter's legal limitation of a 5 per cent rate exclusive of commission. Another influence on the market during the past three weeks was the appearance of a press article in a national publication which called attention to the dangers inherent in the current fiscal and which went so far as to suggest that a "money situation panic" might develop. Furthermore, the publication in the New York Bank's Monthly Review of an article dealing with window led some to believe that access to the the discount curtailed although locally it was window might be sharply of the way the window has recognized as a description of years. The publication of the operated over a number articles, and the interpretation placed on first of these the state of mind of the second, are symptomatic of the cash financing. That as it approaches the Treasury market underlying pessimism that, given state of mind is one of demand for credit, and the strong current and prospective rates--including the its limited availability, interest It is in such an underlying discount rate--will increase. set terms on its financing that the Treasury must atmosphere the Treasury will need help next week. It looks as though i.e., from the in this financing, from the underwriters banks from coast to coast. large there was discussion of the Committee At a recent meeting by the International Monetary of the prospective investment bills. We have million of Treasury an additional $300 Fund of Mr. Thomas and Mr. Riefler, in conjunction with been working, this $300 million. program for IMF on an investment with the
A part of that amount, $100 million, became available last week, and we have thus far bought $22 million bills, and have tendered for $8 million, in working toward the program adopted by the Fund. We have discretion as to the timing of these purchases and as to the issues purchased under the program. This statement may appear pessimistic since the market has been somewhat better in the last few days, but the bidding in yesterday's auction showed a considerable lack of interest, even though the average rate at which bills were allocated had fallen from the previous week. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period September 1 through September 21, 1959, were approved, ratified, and confirmed. Members of the staff of the Board of Governors entered the room at this point for the purpose of presenting a review of the economic and credit situation in the form of a chart show. Copies of the script, Economic Situation After the Steel Strike, and of the accompanying charts were sent to the members of the Committee follow ing the meeting, and copies also have been placed in the Committee files. Mr. Young introduced the economic review with the following statement: of 1958 through June this year From the spring was rapid and uninter in economic activity recovery production rose In 14 months, industrial rupted. cent above the about 7 per per cent to a point After June, production level of mid-1957. prerecession the steel and affected by not directly in industries the total index somewhat, but copper strikes rose declined from 155 in June to 119 in August. the rise in output was For all goods and services all in physical 12 per cent, almost $53 billion or
volume. This increase reflected chiefly a major advance in consumer spending, which had declined little during the recession; an upsurge in residential building; a dramatic shift from rapid inventory liquidation to rapid accumulation; and an increase in Government expenditures. Business capital outlays, which declined until the third quarter of 1958, have risen since then. In the current quarter, despite the strike, GNP may be above the second quarter annual rate of about $4 5 billion. With production rising, profit margins have widened and profits--which had dropped sharply--have risen well above prerecession levels. Reflecting market views as to prospects for earnings and capital values, prices of common stocks by this summer had advanced two-fifths and were one-fourth higher than in mid-1957. In recent weeks they have declined and at yesterday's close were 8 per cent below their high of early August. Stock prices rose much more than dividends and stock yields declined sharply. Meanwhile; yields on bonds rose to levels far above those on stocks and the spread for some time now has been unusual. Expansion in business, consumer, and Government demands for goods and services has been facilitated by a rapid rise in credit outstanding. Federal requirements for funds have been high this year partly as a result of the delayed impact of the recession in reducing revenues. In capital markets, corporate flotations have been at a more moderate pace this year. Abroad, activity this year has expanded considerably and in some countries such as Germany and the Netherlands demand for labor is beginning to press on the available output is up even more than supply. In Japan industrial in the United States. Gold and foreign exchange reserves of many countries have been greatly strengthened. Foreign demands for U. S. goods were declining until last spring but are now on the increase, while shipments to the United States are no longer rapidly rising. As is usual in a recovery period, the initial effects demands have been largely to increase production of increased to raise prices. Sensitive materials have rather than advanced about 10 per cent, as they did from early 1954 to Industrial commodities have shown an increase mid-1955. but perhaps not than that before mid-1955, somewhat larger expected in view of the greater as large as might have been production this time. increase in industrial As in the period from early 1954 to mid-1955, farm the recovery period considerably during prices have declined
and, as a result of offsetting changes, the index of all wholesale prices has shown little change. Whether market pressures, domestic and international, will bring about a marked rise in industrial prices such as developed after mid-1955, is a central current question. Closely related questions are whether, after activity is resumed at steel mills, total output will be appreciably higher than before the strike, and if so, how closely it will approach the limits of our expanded capacity. Events of the past year and a half suggest that activity may rise considerably in the period ahead but do not provide assurance that substantially higher levels can be reached without strong upward pressures on prices. One encouraging feature of the current situation is evidence of some free productive capacity at a time of record final demand and of rapid inventory rebuilding. Another encouraging feature is the prospect for balancing of the Federal budget in fiscal 1960, after a deficit of $13 billion in fiscal 1959, a fact not to be lost sight of because of present Treasury financing difficulties--although it may be regretted that a surplus is not being achieved. Money rates now are higher than at any time in 1953 or than in mid-1955. Net borrowed 1957 and considerably higher reserves are at the level reached at the end of 1955. Corporations and banks are in less liquid positions than at this stage in some earlier cycles--although corporations holdings of Government securities. have substantial One prospect after steel production is resumed is a of demands from many sources in a short period, generation very high level in relation to carrying activity to a prices under strong upward capacity and putting industrial of the current situation However, some features pressure. monetary policy is beginning suggest that anti-inflationary in forward investor exuberance business and to temper realistic environ In this more and planning. expectation by more orderly might be followed strike settlement ment, high levels from present activity of economic expansion price advances. inflationary without with substantially by Mr. Thomas was concluded The presentation remarks: the following plus the money markets, state of about the Uneasiness the period in financing Treasury of heavy hard facts credit, are for private peak demands ahead and immediately
among the important elements that need to be considered in appraising the general business and financial situation. The postwar years, like the 1920's, have been years of strong upward push in demand and production. Real gross product has grown at a substantial rate, with only three important interruptions--in 1949, 1954, and 1958--and these turned out to be mostly inventory adjustments. Demand in fact has been so strong that the basic problem of monetary policy has been to hold credit within bounds in order to discourage speculative spurts in demand and prices and thereby promote sustainable growth in output. It is to be hoped that through such restraints the speculative excesses of the late 1920's and the credit collapse of the 1930's may be avoided. A continuing problem in promoting orderly growth and maintaining stable prices has been the development of cumulative forces during various phases of the business cycle. In fact, in contrast to the 1920's, price increases during boom periods--immediately after the war, during the Korean period, and even in the period of high activity from 1955 to 1957--have been great enough, along with failure of prices to decline during recession, to lend support to the view that creeping inflation is inevitable-and perhaps even essential for continued growth. Acceptance of this view by many people in business, academic circles, and Government, lies at the heart of many of the difficult problems that face the System at this time. A basic issue at this stage of the cycle is whether further substantial expansion can be achieved in the near future without distortions in prices, production, and incomes that would prevent sustained growth over a considerable period and also place new difficulties in the way of inter national balance-of-payments adjustment. Increasing demands after mid-1955 resulted in relatively small increases in output but marked advances in prices; the rise in gross dollars was much greater than in real product in current terms. Distortions such as undue inventory accumulation, too hasty capital expansion in some areas, too rapid a rise burden, and consumer resistance to price increases in debt the prevailing high activity and led to the undermined these years the United States recession of 1957-58. During also failed to strengthen its international competitive Can that type of development be avoided this position. time? been indicated, the existence of somewhat As has already capacity in relation to current production larger industrial provide reason to think the agricultural supply situation and
that price advances as rapid as those that occurred after mid-1955 can be avoided. Moreover, the strengthened competitive position of other industrial countries and their restraints on inflationary developments may also help to hold down price rises in this country. But if actions are taken to stimulate demand and to raise costs and prices, and if expectations of inflationary developments continue, efforts to prevent rising prices and to achieve this goal of sustained growth may be thwarted. Expansion in economic activity and price increases in recent years have been accompanied by persistently heavy demands for credit and by growth in total debt, in the bank credit component, in the money supply, and in other liquid assets. When private credit demands have slackened in some areas, governmental borrowing has generally increased. Demands for mortgage credit have been persistently strong with variations in the amounts extended determined by other competing demands. Savings have increased along with the growth of income, with significant variations among the various sectors--consumers, business, and Government. A significant feature of credit developments has been the proportion of savings that has gone into consumer indebtedness, including mortgages, and into governmental debt, relative to investment for expansion of productive capacity. An essential for the promotion of sustainable growth with stable prices is the maintenance of an savings, and investment appropriate balance of consumption, the type that contributes to expansion in output. This of is a combined problem of fiscal, debt management, and of private actions with respect to monetary policies and costs, prices, and long-term commitments. is the responsibility of the Federal Money supply, which years. The growth has has expanded during recent Reserve, as great as that in GNP at constant prices, generally not been at an even faster pace. current prices has risen and GNP in has increased, reflecting in Turnover of money, therefore, some of which were of money substitutes, part the utilization in the past and some currently. accumulated to insure or and Government actions Debt management and to forms of indebtedness values of various guarantee growth of over to the have contributed enhance their liquidity sharp increase balances. The than cash liquidity other all and the virtual outstanding Treasury obligations in short-term in view of them, particularly of decreasing impossibility that must be is a factor rate ceilings, existing interest level of the money determining the appropriate considered in It is likewise of bank credit. and the availability supply
a factor that may be expected to produce money market pressures whenever heavy cash needs emerge-as illustrated by last week's developments. The idea that in such a situation the Federal Reserve System should do something--beyond meeting seasonal needsto ease the financial strain or to prevent further tightening, may be supported by arguing that the situation in financial markets is becoming disorderly-an argument which at some point might have some validity--or on the ground that public and private demands for credit should not be restricted because its restriction will limit growth and economic activity. However, in view of the present levels of activity and the prospect for higher levels when output of steel is resumed, and in view of upward pressures on costs and prices, the need for maintaining restraints seems persuasive. Another question of great importance to the System at the present time is how much positive value there is in large increases in interest rates as a restraining factor in themselves, apart from the basic weapon for limiting growth of credit availability in the face of increasing demands for funds. Clearly, high interest rates help towards balance of-payments equilibrium, and clearly the healthy functioning of the whole interest rate structure is essential for the market's allocation of supply to meet competing demands. Under the circumstances likely to prevail in the months ahead, increasing the availability of credit for the purpose interest rates from rising can provide no of keeping assurance of either stable money markets or the allocation resources in a manner that will maintain sustainable of growth. this broad review of economic forces, Supplementing comments may be added about certain specific aspects of the Partial figures for city banks for immediate situation: (1) that in the past three weeks bank September 16 indicate quite as large as usual supplied may not have been credit (2) demand deposit expansion the September tax period; during banks also appears to have been somewhat smaller at city a seasonally-adjusted decline in than usual, following reserves have increased correspondingly required August, and (3) projections of weeks ago; and projected three less than that to maintain for the future indicate reserve needs and cover seasonal degree of restraint about the recent reserves should of additional about $100 million demands, weeks. Additional of the next three supplied in each be November and December. be needed in amounts will
There being no questions regarding the economic and financial review, Chairman Martin next called upon Mr. Hayes, who commented as follows: The lull in business activity reflecting mainly the slowly spreading effects of the steel strike has developed about as expected. For August we have seen a fairly sharp drop in industrial production, a small increase in seasonally adjusted unemployment, and a slight decline in retail sales. The Second District has been affected somewhat less than the nation as a whole. One of the strongest factors in the outlook is the upward trend of private expenditures on plant and equipment. Earlier estimates have been raised, with a 9 per cent gain now expected for the full year 1959 over 1958, and a considerably higher annual rate in the last quarter. Residential housing volume, while perhaps limited somewhat by the cost and availability of mort gage money, has held up better than had been expected. As is so often the case, the price situation is not clear cut. The index of wholesale prices was down in August, especially in the area of farm products and processed foods, whereas the consumer price index showed a disturbing upward tendency through July, the latest month for which it has been reported. Recent wage settlements and price developments in several industries justify some uneasiness. Stock prices have dropped about 7 or 8 per cent in the past six weeks--the decline being attributed to the steel strike, rising interest rates, and some drying up of interest on the part of large investors at current advanced prices. It seems well to recognize that a real showdown is in process in the current struggle in the steel industry. a possibility at least that a rather There is therefore lengthy period of strike-induced stagnation is in sight. On the other hand, I think the probabilities are strongly of a rapid recovery as soon as the strike ends, in favor perhaps developing boom characteristics. In the area of bank credit the most striking develop is the sharp drop in the since the preceding meeting ment reported for August. We adjusted money supply seasonally for the past four months a money supply increase estimate rate of 1 per cent, as against about 2-1/2 at an annual comparable 12-month months. The in the past twelve per cent
period in 1954-55 showed a 3.8 per cent rise, suggesting that the record of early action to combat inflation has been more impressive this time than in the previous business expansion. The rise in bank loans in August was at a record level; and while the banks have continued to be able and willing to dispose of Government securities at a record rate, the net effect has been to make them increasingly illiquid. We are of course again confronted with a difficult Treasury financing operation--a cash offering of perhaps $3.5 billion--with the market apprehensive in view of the very sharp run-up in interest rates on Treasury securities and other market paper in recent weeks, some of which reflected a sharp reversal in corporate demand for Govern ments as well as the growing illiquidity of the banks. This, combined with the spreading public view that credit may be becoming unavailable, suggests a situation in which I believe we should adopt a cautious attitude. Last week our directors expressed the fear that we might be pressing the economy a little too hard. I would certainly not advocate any change in our basic policy of credit restraint. However, having confirmed that policy publicly with our latest discount rate increase, I think we can well afford to recognize the Treasury's problem and the pressure of seasonal demands for credit and to try to take some of the sharp edge off the present policy of restraint with a view to helping the market achieve at least some temporary rate stability. We should make clear our readiness to provide for seasonal needs. It would be better to put out some reserves now in a modest amount rather than run the risk of subsequent knots in the market that would require a large injection of reserves. I think the Manager should be given considerable leeway, with the understanding that any shading in the degree of restraint should be handled in such a way as to avoid any erroneous impression of a change in basic policy. It seems to me that the directive should be continued as it is. in the Boston District con Mr. Erickson said that the economy there was in the statistics to be healthy. Whatever softness tinued the steel strike or to factors rather than to seemed due to seasonal industrial production index in the economy. The basic weaknesses decrease further in was expected to per cent in July and went down 1 of the four most store sales in three he said, and department August,
recent weeks were off 8 per cent compared with last year, probably reflecting weather conditions. The drop in nonagricultural employ ment in July of this year was less than in either 1957 or 1958, and insured unemployment had been down in five of the last six weeks. At savings banks, deposits showed a 6 per cent increase and mortgages a 10 per cent increase compared with a year ago. All information indicated that the steel strike had had only small effect on the First District, Mr. Erickson said, noting that carloadings in the seven weeks of the strike decreased less than 4 per cent in that area compared with an 11 per cent decrease for the nation. Speaking of monetary policy for the next three weeks, Mr. Erickson said he would be inclined to leave open market operations to the Desk and to keep the same degree of restraint without in creasing it in any way. He would make no change in the directive at this time. had been no important basic changes in Mr. Irons said there activity in the Eleventh District recently. The oil industry economic whether there would allowable and he doubted continued on a nine-day the next two or oil situation over change in the district be much were favorable and this Agricultural conditions three months. store sales were that field. Department be a good year in should had improved and unemployment during August. Employment excellent lower than running substantially force was of labor as a percentage month. The during the past had declined Construction nationally.
effects of the steel strike had not been significant in the Eleventh District thus far. Demand for bank loans continued strong, but the rise had been tempered over the past three weeks. Member bank borrowing at the Reserve Bank averaged lower in August than in July. Pressure on banks continued heavy, Mr. Irons said, and their liquidity positions continued relatively low with ratios of loans to deposits high. Mr. Irons said that he felt operations for the System Account had been quite satisfactory during the past three weeks, with continued pressure in the money market that had not been entirely reflected in the statistics. During the next few weeks reserves should be provided as needed, neither anticipatory nor reluctantly but as the situation evolved. Mr. Irons felt it particularly important for the System Account to be free to operate as needed according to the tone and feel of the market during this period. He would like to continue the present degree of restriction, but recalling that over the past several months he had expressed a view that deviations be on the side he now was inclined to feel that in this period it would of restraint, deviations be on the side of less re be more appropriate that any straint. This was because he believed less damage would be done in just ahead, when the seasonal demands for credit the period of rising doubts in itself anyway, by resolving would tend to tighten market of restraint. He would deviated on the side that way than if they or the directive at this time. not change the discount rate
Mr. Mangels reported figures for California showing mid August employment at an all-time record high level. Unemployment had dropped to 3.4 per cent of the labor force, the lowest percentage in two years. In the Pacific Northwest the present high rate of employment reflected a later than usual expansion in agricultural employment rather than in general activity. Seasonal cutbacks in that area during October were expected with increasing unemployment during the winter in various industries. Consumer spending continued high, department store sales increasing 11 per cent over 1958 for the year to date and 12 per cent in the four weeks ending September 15. Consumer borrowings also had been increasing. Mr. Mangels referred to the effects of the strike in copper in Utah, noting that banks reported some requests for extensions mining although it had not yet become a on loans because of this factor, He also commented that tax receipts for the State serious problem. adversely because of the copper strike. of Utah would be affected little higher than last year construction was still a Residential from month to month. but was declining $100 million issue of school After reporting that a proposed $50 million and been reduced to California had in the State of bonds Mangels said per cent, Mr. yield of 4.01 sold at a it had been that feeling of tightness in the money bankers were emphasizing the that during the past were showing increases even though loans market by sales was offset loans, however, increase in weeks. This several
of Government securities. However, Twelfth District banks were net sellers of Federal funds in this period and borrowings from the Federal Reserve Bank had been quite low. Mr. Mangels said that consideration of the factors reviewed led him to the conclusion that, while Committee policy should not be modified, there should be no increase in the degree of restraint and the Federal Reserve should be willing to supply freely legitimate credit needs between now and the end of the year as seasonal demands increased. He would make no change in the Committee's directive. Mr. Deming said that the long steel strike and the short small-grain crop were likely to have a double effect on the Ninth District economy. The steel strike effects had been masked partly by an excellent tourist season, but after Labor Day when the tourist season ended the effects of the strike had begun to show up in the district, particularly in the areas directly affected. Considerable seasonal unemployment in the mining areas was anticipated this winter and, for reasons that he outlined, income in the mining areas would be severely affected even if the steel strike is settled soon. The of the State of Minnesota would also be closely balanced budget adversely by the steel strike. Cash farm income was likely affected to be reduced by 13 to 15 per cent during current crop year, Mr. effects of the steel and and the combination of the Deming said, undoubtedly have a reduced farm income would copper strikes and the during the next twelve the district's economy dragging effect on
months. The district would probably tag behind the rest of the country. Mr. Deming said he saw no reason to change the Committee's directive or the discount rates of the Federal Reserve Banks at this time. He agreed that there should be no increase in the degree of restraint through open market operations or otherwise in the light of all of the factors that had been mentioned at this meeting. He would resolve doubts in carrying out policy on the side of ease rather than of restraint during the coming weeks. Mr. Allen commented that the steel supply situation was the subject of greatest current interest and concern in the Seventh Dist.ict. Although deteriorating at an accelerated pace, the transition from adequate to inadequate steel supplies had not been suggested by press reports. About ten million tons of as abrupt as beginning of the strike were believed to the steel on hand at the leaving about twelve to thirteen have been used up by mid-September, the amount held at the on hand at present, or about million tons did not adequately measure This sizable tonnage beginning of 1959. some firms held relatively supply, however, because the current steel of inventory, because problem of mix because of the large supplies, stay there, and channels and would steel was in speculative some their basic stocks below be slow to deplete some users would because LIFO stock on December 31.
Newspaper reports notwithstanding, Mr. Allen said that reports in the automobile industry indicated that steel inventories would permit it to operate at scheduled rates of production at least until October 15 and possibly until October 31. If as reported the steel industry could reach 60 per cent of capacity by the end of the first week of production after the end of the strike and 90 per cent by the end of the second week, and if the mills went back into operation soon after October 1, there might be little, if any, hesitation in automobile production. Loan expansion at reporting member banks had slackened over the past three weeks, Mr. Allen said, security loans having been paid down and real estate loans having been virtually unchanged. Consumer loans continued strong. The most striking feature was the decline in growth of loans to business, he said. Factors contributing to this included the high degree of corporate liquidity and accumula of tax funds as manufacturers of metal products liquidated tion inventories. Despite the slow-down in loan growth, bank reserve positions had become tighter, particularly in the larger centers sharply, although the tightness of where deposits were down rather Chicago banks had become no greater than in late spring or early appeared in Detroit and reserve pressures had summer. Increased hand, country banks Chicago. On the other as well as Milwaukee unusually high levels somewhat from the had reduced their borrowings of recent months.
Mr. Allen said he felt the Committee should maintain approximately the current degree of restraint. He hoped and he believed that the high cost of money was beginning to bite. He thought there would be an increased bite resulting from the policy that the Committee had been following, but he could see no reason now to change what the Committee was doing. As Mr. Thomas had noted, additional reserves would be needed to meet seasonal demands between now and the end of the year. Mr. Allen said that he would make no change in the directive at this time, although he hoped the time would come soon when the reference to expanding employment opportunities might be removed from clause (b) of the first para graph. said that Tenth District conditions continued Mr. Leedy though output of agriculture, particularly of wheat, strong even last. There was some concern as to was smaller this year than on livestock were said of livestock and banks lending the prices and to require additional to cut back such loans to have attempted a lower level than in continued at security. Insured unemployment the first of store sales since as a whole. Department the nation exceeded only in which have been to show gains this year continued increase in a slight banks reported District. Member the Twelfth been some reduction but there had past three weeks, loans in the discount window. Reserve Bank Kansas City on the in demands
Mr. Leedy said he subscribed to what had been said thus far regarding policy for the coming weeks. He would continue what the Committee has been doing, making every effort not to tighten any further. He would not anticipate the seasonal needs that were coming up but he would readily respond as the needs actually appeared. With the recent increase in the discount rate, with no change in credit policy, and with the Treasury financing needs this fall, it would be inappropriate to change the directive at this time or otherwise to change any policy indicators. Mr. Leach said that the Fifth District economy had been largely unaffected by the steel strike except in specific areas such as Baltimore and the West Virginia mining centers. This was because the district's economic structure predominantly was not directly and immediately tied in with activity in the steel industry. The textile industry remained in strong position with virtually no possibility of scheduling new orders for 1959 delivery in many lines. Furniture orders picked up strongly in midsummer, putting unfilled orders at the highest level in the current expansion. Bituminous coal production was at a reduced level because of the continuing sales for 1959 through August established steel strike. Cigarette that of 1958. The rise in cigarette sales a new record well above in the number of smokers among teen was said to reflect an increase of filter tips and the The continuing popularity agers and women. responsible for this year's boom in menthols was primarily growing rise.
Loan demand kept district banks under pressure through the first week in September, Mr. Leach said, this being evidenced by continued reduction in investments, by a high level of borrowings from the Federal Reserve, and by net Federal funds purchases. A temporary inflow of funds during the past week enabled banks to reduce borrowings at the Federal Reserve sharply and to sell Federal funds. Mr. Leach said that he felt it would be inappropriate to tighten credit any further at this time in view of the current weakness in the Government securities market, the impending Treasury financing, and the continuance of the steel strike with its secondary effects becoming more and more pronounced. At the moment, he would resolve doubts on the side of ease while maintaining approximately the present degree of restraint and recognizing that the need for may well reappear in the near future. He would further restraint not advocate a change in the directive. that he was in general agreement with Mr. Mr. Mills said and financial situation and with Hayes' appraisal of the economic as to current policy. that he had suggested the recommendations Reserve System was that the Federal had grave fears, however, He to policies and of clinging dogmatically drifting into a position deserved a of current developments in the light theories that to the psycho He pointed particularly thoroughgoing rethinking. should be a market and which that clouded the logical factors
matter of first concern in the Committee's policy developments, adding that he did not believe the Committee could ignore the effects on general thinking of the decline in the stock market or the fears that had been expressed about a Federal Reserve policy that would so restrict the availability of credit as to handicap the normal growth of the business community and the regional economy. Mr. Mills said that it might be superstition, but he recalled clearly many years ago the Hatray failure in London that unlocked the doors to a financial collapse, and he read only yesterday of the Jasper situation that had developed there and which conceivably could foretell a similar development in that market. We in the United States, he said, must continue to be the element of strength in the international picture and should bend our greatest efforts toward maintaining the sort of strength and the sort of posture that would give the greatest assurance internationally. He doubted whether that confidence would be strengthened if we continually expressed a lack of confidence in our own ability to maintain a viable economy. If at some point it should be the desire of the Committee to ease the situation of the commercial banking system moderately (he believed in restraint), and when the Committee arrived at the point of wishing to supply reserves, a moderate shift should be engaged high level of This was because the abnormally in very cautiously. Banks has had the discounts at the Federal Reserve member bank funds market which would reserves into the Federal effect of feeding
not be extinguished simultaneously with an expected reduction in the volume of discounting, and as a result when new reserves were additionally supplied a superfluity of reserves could occur that might erroneously give rise to an impression of a reversal rather than a moderation of System policy. After referring to the information presented by the staff regarding economic conditions, Mr. Robertson stated that it was clear from that presentation that the economy was on the edge of a boom. He could see some evidence that during the past three weeks the policy the Committee had been following had, as Mr. Allen had commented, begun to bite. In Mr. Robertson's view this was wholesome. He could see no indication that the Federal Reserve was pressing too hard on restraint, and he would recommend that the Committee maintain the same degree of tightness that now prevailed throughout the forth coming Treasury financing period. He differed perhaps from some who had spoken this morning only in that he would not resolve others side of ease. He would hope there would be no doubts doubts on the would maintain an even to resolve and that Account operations position throughout this period. Mr. Shepardson said that there seemed to be general agree taken in System operations during far on the approach to be ment thus fine shadings of views as to just exactly the next few weeks, with to feel as Mr. Irons should be. He was inclined what the position seasonal demands adding that is, that with had expressed himself,
pressure during the next few weeks there would be less danger if the Committee's operations were to err on the side of ease than if doubts were resolved on the side of increased tightness. He would prefer to hold as nearly as possible to the present position, with a recommendation that if a drop in the degree of pressure became evident the seasonal demand for credit would be permitted to restore the present position. Mr. King said that he agreed generally with the comments made at this meeting, more specifically with those of Messrs. Hayes, Irons, and Shepardson. The need for additional reserves to meet the seasonal rise had been well pointed up and there was no question in his mind but that the System should do everything appropriate to for this purpose. With reference to supply the reserves necessary there might be a resumption of boom conditions when comments that ended, Mr. King commented that he doubted industry the steel strike the strike was settled. The fact that would run out of steel before thus far had had little effect on other parts of the the strike think that its settlement might not spur activity economy made him businessmen led him to believe generally. His discussions with that the economy was not on the verge of a new boom. Repeating suggestion of Mr. Hayes, Mr. King that he agreed with the policy at this time in the directive make no change that he would said the fall months needs during that the financing but would hope System operations. be met through would
Mr. Fulton described conditions in the steel industry as he observed them in the Fourth District, commenting that in so far as the strike was concerned both management and labor appeared to be standing adamantly on the original premises they had expressed. He doubted that a noninflationary contract would result in the end. There had been rather few complaints as to shortages of steel, but inventories were becoming unbalanced. A rapid rise in unemployment might result from this factor within the next week or two. Mr. Fulton said he was not quite as sanguine as Mr. Allen regarding a rapid rise in output in steel within the first two weeks after the strike was settled. In fact, his information was that 90 per cent capacity operations would not be attained for some little time after production had been resumed. Mr. Fulton reported that department store sales in the Fourth during the current month although un District were holding up well rising. Construction had declined and employment claims had been the level of housing activity the latter there was concern regarding substantial but banks had not of this year. Loan demands were part discount window in inordinate to the Reserve Bank's been coming amounts. said, should aim toward continuing Monetary policy, Mr. Fulton demands would Normal fall that now existed. degree of restraint the on the side of ease, favor erring a little credit and he would tighten to the doing violence be done without that this could believing Reserve's position. Federal
Mr. Fulton went on to say that he would like to see an effort made to get part of member banks' vault cash counted as reserves as would be permitted under the new reserve requirements law. He hoped that this could be done during the fall of 1959, thus reducing the need for putting so much in the way of reserves into the market through Account operations. He would make no change in the Committee's directive or in the discount rate at the present time. Mr. Bopp commented on the discussions that directors of the Federal Reserve Bank of Philadelphia had regarding a change in the discount rate subsequent to the meeting of the Federal Open Market Committee on September 1, his remarks being for the purpose of indicating that the fact the Philadelphia Bank was the last of the Banks to raise its discount rate from 3-1/2 to 4 per cent Reserve way indicated that the directors of the Bank were reluctant in no to take such action. Mr. Bopp said that to economic developments, With respect District resulting from the unemployment in the Third secondary during the past three had increased only moderately steel strike region had been fabricators in the Philadelphia weeks. Few steel steel, but some of a shortage of to shut down because compelled consensus was key items and the running out of reported to be were the end of this serious by steel would become shortage of that the time many fabricators settled by that strike was Unless the month.
would face reduced operations or shutdowns. Mr. Bopp also commented on the industrial centers classified as chronic labor surplus areas, noting that five of the seventeen major areas so classified were in the Third District. This classification meant that such areas had an unemployment rate at least 50 per cent above the national average during four of the past five years. New claims in Philadelphia for unemployment insurance averaged somewhat less in the last three weeks and continued considerably below the corresponding period of 1958, he said, adding that the Pennsylvania Secretary of Labor and Industry had reported a few days ago that 78 plants in the State had shut down completely because of the steel strike. Philadelphia member banks increased their borrowings from the Reserve Bank in the latest week and also had been net purchasers of Federal funds recently. Mr. Bopp said that he agreed in general with the statements that had been made regarding Committee policy during the next three is, it should aim to maintain the present degree of weeks, that any doubts on the side of ease. There restraint and should resolve or in the discount rate. should be no change now in the directive almost no new figures on economic Mr. Bryan commented that available since the meeting Sixth District had become activity in the he reported that construction ago. At that meeting, three weeks information indicates but more recent had declined sharply, contracts figures of banks August loan has shown a reversal. that this measure but this probably was cessation of growth, showed an almost complete temporary.
On the matter of national policy, Mr. Bryan said he sub scribed to the policy implied by Mr. Hayes and by others who felt that the Committee should freely supply seasonal reserve needs and make its errors on the side of ease rather than restraint in the next few weeks. He added that he had been studying data regarding the long-run growth rates in reserves of the banking system and that, on any basis he had been able to arrive at, it appeared that by the end of this year there would have been no growth rate in reserves unless the Federal Reserve met seasonal needs and a little bit more. The System could easily get itself into the position of bringing about greater tightness this fall than it desired unless it freely supplied the amounts estimated for these seasonal needs, plus a little bit more. Mr. Johns said that economic activity in the Eighth District gave no noticeable evidence of differing from the nation as a whole. Louisville had been affected by the scarcity of steel which already in curtailed operations at the General Electric appliance had resulted had an especial impact on activities in that area plant, and this because of the relatively large local importance of that industry. that his views as to policy accorded with those pre Mr. Johns said sented by Mr. Hayes. the Committee could that he did not believe Mr. Szymczak said that the Federal Reserve at this time. He felt afford to change policy
should have an operational attitude at the discount window and in the open market that would not create further tension or further tightness in the market. Mr. Balderston recalled that three weeks ago he was one of those who felt the brakes should be applied more vigorously. Evidence that had come forward during the past three weeks had changed his view, however, at least for the moment. In this period the cumulative effects of System policy to which Mr. Mills had referred had become evident. A report this morning indicated that new orders had declined. The steel strike was showing no signs of termination. This was a strike, he noted, that involved working rules that affect the job security of union members, and he thought it might be an unusually difficult strike to settle. A resulting concern outside the steel industry might be inhibiting exuberance and delaying plant construction. For these and other reasons, Mr. Balderston said he would sense that some of the speculative fever that had disturbed him so greatly during the summer months and which was reflected in the stock market might have been reduced. Consequently, he would continue for the moment great deal of caution in order of recent weeks but with a the policy to avoid a psychological knot occurring. he believed that that for his part Martin said Chairman recently and that it was achieving policy had been about right System been seeking. One of the Committee had that the members the purpose
of the problems at the moment was to keep from having a psychological situation carry us away and into a position on one side or the other which would be inconsistent with the long-term objectives sought by the Committee. This was always true, he thought, when the expectation that the Committee must meet large seasonal requirements and the growth factor in the economy impinged on what the actual situation in the economy would be. The imponderable at the moment was the steel industry. The Chairman said he did not think any of us could be certain what the result of the strike would be when it was settled. He was less optimistic about the result than he was several weeks ago and perhaps about having the economy fall into a more a little more optimistic state than then appeared likely. This was because psychology stable stabilizing influence. The stock was now working toward having a the fever seemed to have gone dropped somewhat and some of market had worried about the availability of credit. out of it. People were still automobiles were going to not know whether the new model We could the new small cars would was doubt as to whether click, and there sweep the country. view was that clearer, the Chairman's the picture was Until He agreed with in its approach. should be cautious the Committee that had problem the psychological he believed Szymczak because Mr. from the to get relief of the Treasury by the failure been created and the rate ceiling to the interest with respect Congress
unquestionable problem that faced the Treasury in its current financing, along with all the difficulties in the Government securities market, were matters of major concern to the Federal Reserve. He supported Mr. Robertson's view that it would be desirable to have perfection in the Committee's policy and opera tions, but he did not believe that the Committee could get perfection and he did not believe that it should ask the Desk to get perfection in its operations. Tone, color, and feel in the market were too difficult to measure. For this reason, he favored resolving whatever errors there were on the side of ease during the next three weeks. This was because he felt that the odds were on this side. Several weeks ago he felt that the odds were on the other side. The Chairman went on to say that his observation of the comments at this meeting made him feel there was so little difference in the views expressed that it was unnecessary to elaborate on the understanding as to operations for the System Account during the next three weeks. It was clear that the majority favored no change in the directive and no rate. It desired the same degree of restraint change in the discount allowing for tone, color, and feel in the market, to be maintained, whatever deviations there were from with a clear majority resolving of ease and in favor of giving the Manager that policy on the side had requested for latitude that Mr. Hayes System Account the of the the members of the Committee whether any of him. The Chairman inquired to be recorded in whether any wished comments and differed with these
the minutes of the meeting as holding views other than those that would be recorded in their comments during the go-around. Mr. Mills said that the question of the record of policy actions of the Committee had come up before and that perhaps the Committee would like at some time to consider whether the policy record truly recorded the actions of the Committee. These actions were recorded as votes, he noted, but in his view, the actions were not based on votes. The Committee reached a general consensus through discussion, and the Chairman then asked whether there was a difference of opinion. In Mr. Mills' view, that did not constitute a vote, and personally, he did not think it possible to take a vote on problems of the sort that come up in Open Market meetings. He contrasted the procedure at Open Market meetings with that in meetings of the Board or in Boards of Directors of the Reserve Banks, where the of Governors made possible specific votes on procedure and nature of problems was no difficulty in reaching formal matters concerning which there that the opposite was true in by the members. He suggested decisions members came to draw on the thinking Market meetings, where the the Open regional reports of those and to have the benefit of the of others there was a general thinking was distilled, When all of that present. be recorded Mr. Mills' opinion, could not, in agreement that area of Open Market policy task of drafting the in a vote. The difficult shades of opinion by drawing a consensus called for indicating record reading public gathered by the would not be so that the impression
that there was unanimity in a group as diverse as this. Chairman Martin said that he was glad Mr. Mills had raised this question. There had been a number of discussions of this matter in the past and there were differences of opinion as to how the record might be made most satisfactory. He thought it probable that the Chair had been in error at times in that it should have given individuals greater opportunity to vote against a policy decision on the record. As to Mr. Mills' question whether the policy record really gave the differences of opinion that were brought out in the meetings, Chairman Martin suggested that it would be desirable for of the all members of the Committee to review the minutes carefully and to give consideration to the matter in terms of the comments that Mr. Mills had made. This was not something that the Committee could come to a conclusion on in an offhand discussion, and he suggested that at a subsequent meeting a there could be a full discussion of period be set aside during which the Committee was developing the kind of policy the subject and whether obligation to the Congress under it should have to meet its record that Martin said that shades of policy the provisions of the Act. Chairman the other hand, he in to record, but on differences were difficult member of the whenever any individual to make it clear that tended he should a policy decision, a vote against wished to record Committee that vote with so and for recording for doing have full opportunity have in the record. he wished to amplifying comments whatever
Mr. Hayes said that he had sympathy with the position indicated by Mr. Mills. He had wondered whether, without recording a vote, the record of policy actions might state in a general way that there were differences of opinion in arriving at a policy decision. Chairman Martin reiterated his suggestion that the Committee schedule a meeting before the end of this year at which it would discuss the character and nature of the policy record. Mr. Hayes then mentioned the desirability of getting drafts of policy record entries currently, so that the shades of opinion expressed by the participants would not be lost with the passage of time. Chairman Martin responded that the secretariat was working on this and planned to get the entries to the members of the Committee earlier than in the past. to the discussion of policy at this Governor Shepardson reverted in this case the consensus was near universal. meeting, stating that favored resolving doubts on the side Although Mr. Robertson would have be no other difference in the policy of tightness, there seemed to in a case such as this the Shepardson suggested that decision. Mr. could include a sentence record of the policy decision writing of a this one shade of difference. that would cover this to be the thing Mr. Chairman Martin said he understood for the it would be desirable but he felt that Mills was suggesting, in terms of and think it through review the matter Committee to whole by Mr. Szymczak with a suggestion He also agreed the entire record. so to send the wishing to do for anyone it would be desirable that
Secretary comments on the form of the policy record. This should be taken, he suggested, as an opportunity for anyone who had any disagree ment with the present form of the policy record to express his views and give his constructive suggestions, either in writing or at the meeting at which the subject would be discussed. Following a question as to when drafts of 1959 policy record entries might be available, Mr. Shepardson recalled that some time ago it had been the consensus that these entries should be prepared and distributed from meeting to meeting. For various reasons this work had not gotten on to a current basis, he said, but it was expected that the draft entries for meetings held during 1959 would be distributed before the end of the year. that without minimizing the importance of Mr. Johns commented be an enlightening rather than a having a policy record that would a critical consideration was one to the public that read it, confusing understanding that the record so confirmed the whether the written the meetings that his Account took away from Manager of the System the decisions at the meetings. to be consistent with actions seemed the problem of as a part of should not be overlooked He thought this of policy actions. the record preparing as to the to the understanding then turned Chairman Martin that he weeks, stating the next three followed during to be policy to the that the directive unanimous agreement there was gathered without change. should be renewed of New York Reserve Bank Federal
Hearing no indication that any member of the Committee wished to be recorded as voting otherwise, the Chairman stated that the directive would be so renewed. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Com mittee: (1) To make such purchases, sales, or exchanges (in cluding 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 oppor tunities, and (c) to the practical administration of the provided that the aggregate amount of securities Account; System Account (including commitments for the held in the sale of securities for the Account) at the close purchase or special short-term certificates of of this date, other than from time to time for the temporary indebtedness purchased shall not be increased or accommodation of the Treasury, by more than $1 billion; decreased Treasury for the direct from the (2) To purchase Reserve Bank of New York (with account of the Federal it seems desirable, to issue discretion, in cases where or more Federal Reserve Banks) such participations to one certificates of indebtedness of special short-term amounts time to time for the temporary as may be necessary from that the total the Treasury; provided accommodation of held at any one time by the amount of such certificates shall not exceed in the aggregate Federal Reserve Banks $500 million. Economic Com of the Joint to the request Mr. Rouse referred on September 1, reported at the meeting through Senator Douglas, mittee
1959, that that Committee be furnished with aggregate figures over a period of years on Government security dealers' positions, volume of purchases and sales, and borrowing. In a letter to Senator Douglas on September 11, 1959, he (Mr. Rouse) had explained that all but two of the dealers had given permission to supply the requested information. Since these two had declined on the grounds that the burden and expense of preparing the data would be unreasonable, he had informed the Senator that the Federal Reserve would not be able to furnish the totals desired. This was because the position of at least one of the two nonreporting dealers might be revealed, since both of the nonreporting dealers (one large and one very small) had furnished 1957-1958 material that had been published in the Treasury-Federal Reserve study of the Government securities market. Thus, if their figures were to be omitted from a series covering a period of years, their positions might be by a process of subtraction. Mr. Rouse said that, accordingly, revealed to Senator Douglas that the Joint Economic his letter had suggested from the dealers if the Com obtain the information directly .Committee procedure would be desirable. mittee concluded that such he and Mr. Riefler had now went on to say that both Mr. Rouse Joint Economic Mr. Knowles, Economist, calls from received telephone for the period since a series of figures requesting that Committee, that had agreed total for the firms by adjusting the 1950 be furnished reported by the it by the proportion data so as to raise to supply the covered by the the 1957-58 period firms during two nonreporting
Treasury-Federal Reserve study. Mr. Rouse said that he had pointed out to Mr. Knowles that such method of adjustment might produce mis leading figures. While such a series could be prepared, Mr. Rouse said that he would not wish to furnish it to the Committee unless it were accompanied by a statement that clearly pointed out the statistical defects in the procedure. Mr. Riefler said that although he felt the suggestion made by Mr. Knowles was statistically unsound, there had been a commitment to furnish data on dealers' positions, if in so doing the Federal Reserve did not reveal directly or indirectly the positions of individual dealers. Therefore, Mr. Riefler felt that if the Joint Economic Com make a written request for the figures, including a mittee desired to statement as to how it wanted the estimated totals prepared, there for declining to comply with the Committee's would not be a good basis request. and at Chairman Martin's suggestion, it After some discussion were received from the Joint was agreed that if a written request on the basis outlined the preparation of figures Economic Committee for with the request with the be no objection to complying there would they would be the figures were transmitted that when understanding of a series on the unreliability a statement commenting accompanied by in the manner suggested. prepared near the con to the discussion then referred Mr. Balderston problem of regarding the on May 26, 1959, of the meeting clusion
estimating the money supply. He recalled the understanding that the System Research Advisory Committee be asked to prepare a memorandum setting forth the problem and perhaps making some suggestions, and he inquired of Mr. Thomas as to the progress toward developing such a memorandum. Mr. Thomas reported that a preliminary memorandum was now being prepared by a subcommittee and that it would be considered by the System Research Advisory Committee at a forthcoming meeting. Chairman Martin noted that the next meeting of the Committee would be scheduled for Tuesday, October 13, 1959, unless there were objection. In view of the fact that Tuesday, November 3, which normally would be the date for the following meeting, was an election holiday in some States, he suggested that it might be desirable to schedule that meeting for Wednesday, November 4. After brief discussion, it was the next two meetings of the Committee would be held on agreed that Tuesday, October 13, and Wednesday, November 4, 1959. Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions