November 4, 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 Wednesday, November 4, 1959, at 10:00 a.m. PRESENT: Mr. Hayes, Vice Chairman, presiding Mr. Allen Mr. Balderston Mr. Deming Mr. Erickson Mr. Johns Mr. King Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak 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. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Jones, Marget, Mitchell, Parsons, Roosa, and Young, Associate Economists Manager, System Open Market Account Mr. Rouse, Adviser, Division of Mr. Koch, Associate and Statistics, Board of Governors Research Mr. Keir, Chief, Government Finance Section, of Research and Statistics, Board Division of Governors Chairman, Board of Consultant to the Mr. Knipe, Governors Daane, Vice Presi Hostetler, and Messrs. Ellis, of the Federal Reserve Banks of Boston, dents Cleveland, and Richmond, respectively President, Federal Assistant Vice Mr. Einzig, Bank of San Francisco Reserve
Mr. Coldwell, Director of Research, Federal Reserve Bank of Dallas Mr. Anderson, Economic Adviser, Federal Reserve Bank of Philadelphia Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York There had been distributed to the members of the Committee a preliminary draft and a revised draft of minutes of the meeting of the Committee held on October 13, 1959. Mr. Hayes referred to that portion of the minutes covering dis cussion of a memorandum prepared by a staff study group under date of September 28, 1959, setting forth an inventory of areas for possible administrative action growing out of the recent Treasury-Federal Reserve study of the Government securities market. After noting that he was not present at the October 13 meeting, Mr. Hayes said that upon reading the minutes he felt there was some ambiguity as to what action by the Open Market Committee regarding the suggestion was intended and initiation of a new program of relating to the formulation all Government securities dealers. From statistics collection from not clear as to whether the Committee the minutes, he said, he was an experimental basis with decision to go ahead on really reached a securities market statistics, proposed collection of Government the and position of dealers. on the trading volume including data this matter that when he discussed went on to say Mr. Hayes and Under Secretary with Chairman Martin October 13 meeting before the that the desire had the feeling he (Mr. Hayes) Treasury Baird, of the
was to map out the program before jumping to a decision as to who was to collect these statistics. Personally, Mr. Hayes said, he had some fairly strong views--and perhaps others did also--as to what was needed by the Desk and as to whether the Desk should have access to the figures collected from the dealers. Therefore, before changing a procedure that had now been in effect for many years, he felt that the Committee ought to be clear as to what it was doing. His suggestion would be that the matter be discussed further at another meeting of the Committee when the Chairman was present. Also, before such a further discussion he would like to submit to the Committee members the reasoning of the New York Reserve Bank as to the merits of the proposal. would not suggest disapproval of the Mr. Hayes said that he judgment, however, the question to which October 13 minutes. In his fully clarified and deserved additional he referred had not been time and discussion. the feeling that it was important Balderston said he had Mr. of the interest of the Congress to delay this matter unduly because not securities market. However, in in the joint study of the Government at the October 13 Mr. Hayes was not present view of the fact that Mr. Hayes' views Balderston that to Mr. it seemed appropriate meeting, between now of the Committee before the members matter be laid on the matter might be put meeting, so that the say, the next Committee and, at that time. for further discussion on the agenda
Mr. Shepardson said that he thought the matter was presented quite fully by Mr. Young at the October 13 meeting. He also noted that discussion of the suggestions presented in the staff memorandum was reflected in several pages of minutes. The general tenor of the discussion at that meeting seemed to him clearly to indicate a desire on the part of the Committee that Mr. Young go ahead with an experi mental approach. In order that the matter might not be left in an uncertain status, he (Governor Shepardson) had made the comment reflected on page 55 of the minutes, in which he stated his under standing that the term "on an experimental basis" meant that Mr. Young and his associates would go forward on an experimental basis and that an indication of Committee assent to the program for collection of statistics would constitute authorization for Mr. Young to proceed in the minutes, there was no indication on such basis. As recorded and Mr. Young had added that disagreement with this understanding, of cooperation with the Desk. steps would be taken in the experimental that the matter was he had assumed, therefore, Mr. Shepardson said begin taking experimental steps. clear and that Mr. Young would Bank was proceeding, the New York commented that Mr. Hayes then the Desk on what a memorandum to produce Mr. Young, with in cooperation It did not was needed. the information and why the dealers wanted from collection the actual ahead with to go Hayes said, Mr. seem feasible, be collected. what should as to was a decision there until of statistics
Mr. Shepardson agreed, but he added that the question related to where the initiative and responsibility should lie. As he had understood it, the action of the Committee at the October 13 meeting was to authorize Mr. Young to take the initiative in proceeding with an experimental approach. Mr. Hayes responded that to him the ambiguity arose out of the fact that the New York Bank was now proceeding, in cooperation with Mr. Young, on a study of what statistics were to be collected. He did not see how it would be possible to proceed with the actual collection until the aforementioned information had been entirely analyzed. Mr. Shepardson then suggested asking Mr. Young for his understanding, and Mr. Young commented that there appeared to have as to what came out of the discussion been some misunderstanding matter stood at present was 13 meeting. The way the at the October the preparation of two memoranda. the Desk was proceeding with that of what statistics the general question would deal with One of these of the System and the Treasury, be desirable from the standpoint would contain a detailed was to other memorandum public. The and also the of statistics. for the collection schedule how to proceed of the question that he thought Young said Mr. left that should be it is, whether that some clarification; needed see what and then its studies with proceed Bank would New York the should program the planning or whether show, would two memoranda the
be placed in the hands of a committee of Reserve Bank, Board, and perhaps Treasury representatives. The program would be a complicated one in various respects, including the problem of relationships with the dealers and the problem of launching the program of statistics in an appropriate public relations setting. There would also be the problem of obtaining the sanction of the Budget Bureau because the proposed statistics would take on a different aura from the standpoint of the Federal statistics program and would have to be collected under the provisions of the Federal Reports Act. Mr. Young concluded by saying that the staff would do its best to implement whatever procedure the Committee might decide upon. Mr. Hayes inquired of the Committee members as to their feeling for a full review of the matter at the next regarding his suggestion he noted, would give the Committee members meeting. Such a procedure, being prepared at the New York opportunity to see the memoranda an Reserve Bank. that the first memorandum Mr. Rouse stated In this connection, it was almost ready. The important of the two and that was the more and might be ready also was in course of preparation second memorardum within about a week. as to whether for his opinion asked Mr. Young Mr. Balderston proposed by Mr. the matter in the manner consideration of further and with of the study the progress unduly with would interfere Hayes and the Congress. the System between relationships
Mr. Young responded that the System was under some pressure from the Congress to proceed as expeditiously as possible. At least that was the commitment made to the Joint Economic Committee for resolution of the whole problem. However, considering the work that was now in process, to carry the matter over until the next Committee meeting probably would not be a handicap to the general program, and in any event it was necessary to know how the matter stood before going ahead. He was not sure, however, whether the suggested procedure would permit an adequate technical review of the New York Bank's pro posals before the matter was submitted to the Open Market Committee. This was a highly technical subject and some confusion might develop if the matter was submitted to the Committee prematurely. The technical staff should first give the matter some thought in collabora tion with the technical staff of the Treasury. Therefore, if the memoranda were submitted directly to the Committee, it would seem desirable that discussion of them at the next meeting be of a preliminary character and subject to review. Mr. Hayes commented that it was the intent of the New York the memoranda in detail with Mr. Young and his staff Bank to discuss and also with the Treasury. that the first memorandum said he had had in mind Mr. Rouse with Mr. Mayo of the Treasury. over with Mr. Young and would be worked would be a that there with his understanding This was in accordance general ideas submitted technical level of the working over at the to the Committee.
Mr. Young commented concerning the necessity of "feeling our way along." Review at the technical level should make it possible by the next Committee meeting to be a little clearer on the issues; that is, to know what disturbed people, how such questions could be resolved, and how to devise a mechanism that would make sense. The program could then go forward in a cooperative way. Mr. Rouse commented that the proposed procedure seemed clear and satisfactory to him. Mr. Robertson said he had thought that the whole matter was settled at the last Committee meeting by authorizing Mr. Young to go forward, which meant merely that Mr. Young was to get started. How ever, any time that a Committee member wished to come forward with suggestions he should feel free to do so, and the program no doubt would have to be varied from time to time. It would not be desirable to hold up the staff group but any Committee member should be free to from time to time. He would have no objection to the make comments proposed procedure. Mr. Shepardson said that his remarks had been directed to on page 51 of the minutes to the question referred particularly the question of an appropriate October 13 meeting; namely, of the collection and analysis of of responsibility for the assignment Considerable discussion proposed to be collected. the statistics of that question at the October 13 meeting, followed the presentation discussion that the trend of the he sensed from and he had thought
there was sentiment for assigning this responsibility to the Research Division of the Board. Therefore, he had stated this as his understanding, and as reflected in the minutes there was no disagreement with that understanding or with Mr. Young's added observation about proceeding in cooperation with the Desk. In other words, he (Mr. Shepardson) had thought that there was a clear cut assignment of responsibility. Mr. Hayes replied that he thought the reference to proceeding in cooperation with the Desk was not entirely clear; the addition of those words left some ambiguity as to the assignment, at least in his mind. Some of his associates who were present at the October 13 meeting felt there was some question whether the minutes reflected the full discussion, and they suggested that the nature of the discus sion may have made it difficult for all of the comments to be recorded. If the Committee felt definitely that the action suggested by Mr. was the action taken, it would be easy to confirm that Shepardson next Committee meeting. It was desirable, Mr. Hayes action at the to be sure it had all the background suggested, for the Committee and facts and that it did not reach a conclusion prematurely. Mr. Hayes referred to the Shepardson inquired whether Mr. might be done or for for determining what background and facts for moving ahead, to the assignment of responsibility determining agreed that the study of Mr. Hayes replied that it seemed which the Committee might want was moving ahead, in what statistics
cooperation between the Board and the New York Bank and with the thought of bringing in the Treasury as fast as possible. Mr. Hayes felt that Mr. Young's comments supported his own view that it was not possible to go out and collect statistics until it was clear what statistics the Committee actually wanted to collect. Mr. Shepardson then stated that, as he understood it, the immediate question was whether the Committee intended to assign a primary responsibility for moving ahead with this program. This did not represent delineating what statistical program ought to be developed, for that would come forward later. However, in a program of this kind, it seemed to him--and he thought it was the intention of the Committee--that primary responsibility for leadership in initiating and pushing the matter along in a coordinated way was desirable. While Mr. Young made no recommendation at the October 13 meeting other than to present the various alternatives as to where and responsibility for leadership might lie, he (Mr. the initiative and had so stated, that it seemed to him to Shepardson) understood, wanted the Research Division of the Committee that it be the opinion assume the leadership of the program. of the Board to was where he found some responded that this Mr. Hayes of leadership of the is, between the question ambiguity; that collected and who was of what was to be program and the question There was a distinction agent from the dealers. going to be collecting As Mr. Young he thought worthy of consideration. in this respect that
had pointed out, it was understood that the initial memorandum on what statistics were needed was being done at the New York Bank. That, Mr. Hayes said, was his understanding with Chairman Martin, and the Chairman so indicated at the meeting with the Treasury. It was also understood that there would be constant consultation with the Board and the Treasury. Mr. Hayes then said that the matter could be taken up again at the next Committee meeting without prejudicing anyone's position. He felt that the question should be clarified in order to go ahead constructively. Mr. Allen said that his understanding of the action taken at the October 13 meeting was the same as Mr. Shepardson had stated. He also agreed with Mr. Robertson that there was no reason why any Com his thinking at any time and that such mittee member could not submit consideration by the Committee. However, views should be taken into clear to him that the situation at the October 13 meet it was quite was as Mr. Shepardson had stated. ing of the minutes of the Hayes then suggested approval Mr. that the discussion today 13 meeting, with the understanding October meeting. He asked minutes of today's in the would be incorporated object, and Mr. Shepardson the Committee would any member of whether would not involve if the procedure have no objection said he would Young, who commented then turned to Mr. delay. Mr. Shepardson undue with the two aforementioned Bank was proceeding that the New York
memoranda and that until these memoranda were available as a basis for exchange of ideas, it did not seem feasible to move ahead further. Thereupon, upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on October 13, were approved. 1959, Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period October 28, 1959, and a supplementary report covering October 13 through 2, 1959. Copies of both reports the period October 29 through November the files of the Committee. have been placed in operations had supplied that open market Mr. Rouse commented a delivery basis during to the market on of reserves net $82 million However, this of the Committee. since the last meeting the period the volume of open the fact that small figure obscured relatively substantial expan represented a quite large and operations was market the past three period. During over the preceding sion of activity million Treasury redeemed $205 sold or the Account weeks, for example, million new $270 In addition, $195 million. and purchased bills $175 mil agreements totaling were made, while repurchase agreements gross purchases $400 million Of the were withdrawn. or lion matured weeks, $250 the past three over bills outright sales of Treasury and with foreign transactions cent, represented over 60 per or million, accounts.
The outcome of the heavy volume of open market operations during the past three weeks was a generally steady degree of pressure on bank reserve positions. As noted in the written reports to the Committee, Federal funds were at 4 per cent on nearly every day of the period, and dealer lending rates generally moved in a narrow range of 4-1/3-4-3/4 per cent, although in the past few days most New York banks had been quoting a rate of 5 per cent on new loans. The latter was a surprising development at the onset of Treasury financing and at a time when the basic reserve position was lighter than it had been for some weeks. The explanation might be that the liquidity positions of the New York banks were under particular pressure. The rising trend of prices for Treasury notes and bonds which was evident at the time of the last meeting was reversed toward the end of October. Through October 23, prices had risen by as much as points, but losses ranging to 1-6/32 were subsequently sustained. 1-3/4 The reversal of the rising trend of prices apparently reflected two major factors. The first, and perhaps most important, was the steel situation. The settlement of the strike with Kaiser and other small producers generated optimism concerning the possibility of an on the other hand, the statements by the early general settlement; determination not to settle on the major steel companies of their and also the questions raised formula used in the Kaiser agreement, by the union's challenge of the constitutionality of the Taft-Hartley
Act, gave rise to pessimism concerning an early settlement. Further more, the approach of the Treasury's refunding operation--the second of the major factors noted above--created the usual uncertainties as to what would be offered and how the market would react to the new issues. In this atmosphere, trading activity was noticeably reduced as both buyers and sellers tended to move to the sidelines and await development s The Treasury's announcement of the terms of the refunding was well received, and the market regarded the 4-3/4 per cent rate for one year and 4-7/8 per cent for four years as adequate. Both the rights and the when-issued securities traded at a premium on Friday and Monday, and a successful outcome of the refunding was anticipated. Mr. Rouse then stated that he would like to mention to the Committee a technical problem that arose in connection with the repurchase agreements made last Monday and how the Desk had handled it. This technical problem involved rights that came into the market, and which they placed in repurchase which dealers had positioned, Bank. Since today was the final day for agreements with the New York minds by tonight as to the dealers must make up their the exchange, of rights between the new one-year how they would split their holdings the rights were the extent that issue. To and the new four-year issue New York Bank would be holding the longer security, the exchanged for tomorrow. Accordingly, under repurchase agreement a four-year issue
the Bank informed the dealers when the repurchase agreements were made that on Thursday they would in effect have to substitute new collateral for the rights which they had exchanged into the four year note. Mr. Rouse inquired whether anyone wished to comment on this technical problem. Mr. Allen inquired as to the total amount in which rights were held under repurchase agreements, and Mr. Rouse replied that he did not have the exact amount; however, the New York Bank made $9 million of repurchase agreements on Monday, mostly against rights. Mr. Mills commented that this was a problem with which the dealers were thoroughly familiar by virtue of earlier experience. On this particular occasion, he believed it would be a mistake to change already established and to afford a temporary relief the precedent the four-year notes in the form of repurchase against rights to that were done, the dealers would unquestionably, in accounts. If sort of treatment on future occasions his opinion, expect the same would have destroyed the precedent and the Open Market Committee that was now well established. Account made a that if the Open Market Mr. Thomas remarked the dealers should in the market amount of funds available reasonable Mr. Rouse the Federal Reserve. financing outside be able to obtain that this was correct. indicated He said that he to another problem. Rouse then turned Mr. connection with meetings in last week for was at the Treasury At a time of the refunding. as to the terms at a decision arriving
when he and Mr. Balderston were in Under Secretary Baird's office a phone call was received from the Secretary of the Treasury, who raised a question with respect to.how the System would exchange the $5 bil lion of securities maturing November 15 that were held in the Open Market Account portfolio. Mr. Balderston commented that the Secretary, who was calling from Texas, said it was immaterial to him, as Secretary of the Treasury, what the decision might be. Mr. Balderston felt that the Secretary was completely sincere in that statement, although he (Mr. Balderston) could see some impact upon future Treasury financings. The Secretary went on to say, however, that in discussions on the Hill last summer and in the early fall it was pressed home to him by many Congressmen of the so-called "liberal" school that the Federal Reserve was doctrinaire and inflexible. The Secretary said it had occurred to him that the System might wish to use such occasions as were presented to make the record clear that it was not doctrinaire, provided those decisions did not involve any sacrifice of principle. Mr. Balderston to the Secretary was to the effect that this was a said his reply Open Market Committee as a whole. matter that should come before the in time to was meeting this morning he had added, The Committee, make a decision on the exchange. feelings were some on to say that his own Balderston went Mr. thought that the appreciated the the one hand, he what mixed. On was deeply concerned he felt, The Secretary, had expressed. Secretary
ll/4/59 -17 about the attacks on the System that might come when Congress reconvened and seemed anxious that the System not overlook opportunities to demonstrate that it was not dogmatic in the positions it held. On the other hand, the last time such action (to split an exchange between two issues) was taken the Committee had a more valid reason than now seemed to be the case. At that time the Committee acted in order to assist the Treasury's layout of its program, and that would seem to be a complete enough explana tion for anybody. If the Committee should instruct the Desk to exchange the $5 billion of securities held in the Open Market Account portfolio for $4 billion of one-year certificates and $1 billion of he felt that the Committee should have in mind a four-year notes, The Secretary apparently had good monetary policy explanation. of his interest in the System and had raised the question because statement that the decision was done so with an accompanying point of view. Mr. Balderston immaterial to him from the Treasury's comments on the point raised that there might be individual suggested go-around at this meeting. Secretary during the by the desirable to have comments that it would be Mr. Hayes agreed inquired whether members the go-around. He then on this point during had comments at this time. of the Committee's staff if the System should what it would mean Mr. Riefler asked the sake of indicating notes simply for some of the four-year take Such a move, the that it was not doctrinaire. to the Congress
practical effect of which would be nothing more than to make the Open Market Account portfolio somewhat less liquid, might cause some people to think that the System had attempted to do something for the long-term market when actually it had not. Persons abroad would be likely to interpret the move as an attempt to bolster the dollar. Mr. Thomas suggested that an exchange of part of the maturing securities into the four-year note would involve a sacrifice of prin ciple. Such a move, however, would have little practical effect. Aside from the maturing certificates, the Open Market Account port folio contained about $2.5 billion of bills and over $11 billion of other securities maturing in not more than one year. Consequently, Mr. Thomas said, it was just a question of whether the Committee wanted to give up a principle or not. inquired whether the first problem on repurchase Mr. Robertson to by Mr. Rouse was considered settled, and Mr. agreements referred been going to raise the same question. Hayes responded that he had said to the dealers and the matter Mr. Rouse had indicated what was felt that the position should rest that way unless the Committee would be changed. agreed completely with Mr. then said that he Mr. Robertson he would not were to be changed, an established principle Mills. If the middle of the stream. change it in
Mr. Hayes asked if there were further comments on this point, and it developed that there was unanimous agreement with the position expressed by Mr. Mills. Mr. Rouse inquired whether it would be appropriate to raise this question at the annual organization meeting of the Open Market Committee next March, and Mr. Robertson expressed the view that this would be proper, although he doubted whether any decision at that time to change the current policy would be appropriate if the Account was again in the middle of a situation similar to that described today by Mr. Rouse. Mr. Hayes agreed with the thought that the general question come up for discussion by the Committee at an appro could properly priate time. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period October 13 through Novem ber 2, 1959, were approved, ratified, and confirmed. had been sent to each of October 14, 1959, there Under date member of the Federal Open Market Committee, member and alternate of the Committee, a copy President not currently a member and to each Account, made by System Open Market of audit of the of the report as at the Board of Governors of the of Examinations the Division has been placed report, which 1959. The August 21, close of business of the to the Secretary was submitted files, in the Committee's
Committee under date of September 30, 1959, in accordance with the action of the Federal Open Market Committee at its meeting on June 21, 1939, as reaffirmed at the meeting on March 3, 1959. Vice Chairman Hayes inquired whether any of the members of the Committee wished to comment on the report, and there was no indication to such effect. Accordingly, the audit report was noted and accepted without objection. Supplementing the staff memorandum distributed under date of October 30, 1959, Mr. Young made the following statement with respect to economic developments: In introductory comment to last meeting's report, the point was made that prospects ahead appeared less weighted than earlier towards inflationary boom and more weighted to a poststrike period of high-level expansion, featuring more active competitive play of demand and supply and a tolerable stability of wholesale and consumer price levels. Indica tions pointing to this prospect are to be found in underlying financial forces shaping developments; that is cyclical and to say, they represent indications discernible despite the steel strike. needs to be recognized, of course, that settlement It long and so sharp a curtailment of of the strike, after so release demand forces strong enough, given a output, could metals supply situation, to produce a quick run-up disrupted and prices, a run-up having characteristics in activity superficially inflationary. We are inclined to interpret data reflective of basic trends, however, as most recent interpretation. In further our last meeting's supporting run-up in activity, accompanied by other words, a poststrike likely in the present perspective inflationary symptoms, seems in the nature of a temporary to be a self-limiting danger, bulge. the economic statistics most recent news from As to the and facts--to various fresh items--estimates front, there are As regards the estimates: be reported.
(1) At the beginning of this week, the number of industrial workers idled by the steel strike is estimated to have exceeded 900 thousand and by the week end is expected to exceed 1 million. (2) Latest available information continues to confirm our earlier estimate of a further decline of industrial pro duction in October of 2 index points. Strike settlement could permit some rebound in November, but with steel pipe lines emptied the total index recovery would probably be modest. (3) Even with early strike settlement, fourth quarter revival in GNP will probably be moderate, with the second quarter level of $485 billion little more than regained. (4) The projected fourth quarter increase in business plant and equipment expenditures is now placed below earlier estimates by a significant margin. The forthcoming projec tions of increase in plant and equipment expenditures for 1960 over 1959 are also expected to fall below earlier guesses and well below the actual increase from 1955 to 1956. of the steel strike and the (5) Reflecting the impact automobile industry change-over in the third quarter, pre liminary estimates of third quarter corporate profits yield figures somewhat below $46 billion, down about a seventh quarter level. With present partial output from the second of steel metal and steel fabrication and even with full recovery of such output by the year end, fourth quarter corporate profits can hardly be estimated now at much higher than third quarter profits. adjusted income of farm (6) Third quarter seasonally at a $9.5 billion rate, down operators has been estimated from the high third quarter level of a year over a fourth Reduced cash sales and lower Government payments ago. of the acreage reserve of the resulting from termination cash expenses account for the decline. soil bank plus higher of farmers is estimated to be Fourth quarter realized income the year 1959 as a whole rate but estimates for at a higher will fall about $2 billion that farm realized income indicate below last year's $13 billion. regard to recently reported facts: With early October were for autos in (1) Consumer demands seasonally adjusted the month a suggesting for very strong, Sales of other of 6.9 million units. annual sales rate and household television, durable goods--furniture, consumer at advanced rates apparently maintained appliances--were store sales gains in department earlier. Moderate reached strength in suggest continuing September to October from as well as durables. demands for nondurables consumer
(2) Reflecting consumers' willingness to finance purchases with credit, consumer instalment credit in September rose a further $485 million on a seasonally adjusted basis, thus about sustaining the $6 billion annual rate of expansion reached in July and August. (3) Manufacturers' sales of durable goods in September, seasonally adjusted, showed little change from the reduced August level which was a tenth below June sales, but sales of nondurable manufacturers were close to the early summer record. (4) Manufacturers' inventories again declined in September, with inventory reduction in the durable goods sector only partly offset by rise in inventories at non durable manufacturers. Partial data point to little September change in distributors' inventories. (5) Construction activity in September, seasonally adjusted, fell again to an annual rate of $53 billion. This level was about 5 per cent lower than the record attained earlier this year, but better than 7 per cent higher than a year earlier. Housing starts at 1.3 million plus units, annual rate, while below the spring peak, were in largest number for any September on record. Early October residential construction plans of builders, as reported by FHA field offices, were only moderately less optimistic than a year ago. Average interest rates on conventional mortgages early in October were reported by FHA to have reached a postwar high of 6.10 per cent; in the West, the average rate was reported at 6.5 per cent, with placement fees in individual cases bringing the effective rate to borrowers even higher. in September showed further marked (6) U. S. exports pickup, but the reported figures may be swollen by the the longshoremens' strike. September anticipation effects of import data are not yet reported. continues to in economic activity (7) Strong expansion especially in Western foreign industrial nations, characterize Europe and in Japan. abroad, as well as con Strengthening of activity (8) strength of demands in domestic markets, tinued underlying prices for most basic been making for firm-to-rising have there continue to On the other hand, industrial materials. fabricated materials increases for few reports of price be prices of all products. Average and finished industrial now been about stable at wholesale have industrial commodities roughly comparable autumn of 1955--a months. In the for five industrial prices the last economic cycle--average phase of cent per month. rate of .5 per at a were rising
Mr. Thomas presented the following statement with regard to the current financial situation: Financial markets are still in a transition stage. Following heavy pressures of over-all demands for funds during the preceding year, moderating of pressures began in late September and continued to characterize these markets until the past week. At this stage, it is not possible to judge whether this easing reflects a change in trend or a passing phase. Yields on U. S. Government securities maturing from about 6 months on out to many years have declined further in the past three weeks, although during the past week there have been some upward adjustments. In some medium and long-term issues declines in yields offset all or most of the increases that occurred in August and September. Although the longer Treasury bills have shown marked declines in yields from the September peaks, 90-day bills have continued to fluctuate around 4 per cent or higher, and all bill yields are three-fourths of a percentage point higher than they were in late July and early August. Other short-term issues are also well above levels of that period. Yields on State and local government issues have also declined in recent weeks, but relatively not as much as U. S. Treasury bonds. Corporate bond yields have shown little or no decline from peaks reached at the end of September. Common stock prices, after declining in the latter half of September, have been steadier in October, with some increase in trading activity. There are some indications of increased in terest in bonds on the part of investors, because of the higher yields on bonds than on stocks, as well as because of uncertainty as to current and future corporate profits. Current estimates indicate that profits before taxes, which reached a high level of $$2.6 billion annual rate in the second quarter, may have been below $46 billion in the third of little recovery in the quarter, with the possibility fourth quarter. Next year's outlook is dimmed by the labor disturbances and settlements that will possibility of to rising prices or lower profits-or both. lead either pronounced tendency toward a shifting of However, no is as yet apparent. investments issues continue in moderate volume and New capital rates of over 5 per cent. have moved rather well at
Short-term issues by Federal agencies have been fairly large, but also have been well absorbed at rates of 5-1/8 per cent or higher. The mortgage market continued tight. Although the volume of mortgage transactions is large, commitments for future mortgages are becoming more difficult to obtain. Discounts on mortgages have continued to increase. In October the Treasury successfully floated two cash offerings of about $2 billion each, including a 5 per cent note of nearly 5-year maturity and a June tax anticipation bill at an average yield of 4.78 per cent. The bill promptly sold in the market at a lower rate, contrary to the usual experience with such issues subscribed for by banks to obtain tax and loan accounts. The current refund ing operation, which may effect an exchange of over $5 billion of issues held outside the Federal Reserve-a larger amount than had been anticipated--for 1-year certificates and 4-year notes, appears to be promising a successful conclusion. The Treasury will apparently need another $2 billion of cash in late November and a similar amount in January, but the exact amounts will depend on attrition in the exchange offering and the extent to which tax returns may be affected by the steel strike. Payment for the two new cash issues within one week was effected with little evidence of strain in the market. Moderate amounts of the issues were taken by banks those outside of New York-but for the month particularly these takings-at least at city banks--were as a whole offset by earlier and subsequent sales of largely therefore, continue to be securities. Nonbank investors, of funds for the Treasury borrowing. the principal source cities--according to partial At banks in leading holdings of Government figures for October 28--total in October, while loans increased slightly securities moderately, giving a net and other securities declined investments. Usually loans decline in total loans and loans showed little change, increase in October. Commercial declined by a substantial loans to finance companies while Loans to brokers and more than seasonally. amount--perhaps loans, and other loans real estate dealers in securities, seem to indi These figures would showed small increases. least partly seasonal--during cate some slackening--at which has been very consumer credit expansion, October in of business loans The maintenance in recent months. large decline in inventories a probable further the face of in on to credits borrowers are holding indicate that may
previously obtained. The continued increase in nonbank holdings of Government securities supports this supposition. Demand deposits at city banks increased on balance during October, while United States Government deposits declined after fluctuating considerably during the month. Time deposits declined by over $250 million during the month, reflecting decreases in interbank deposits as well as in those of others. These withdrawals may be associated with purchases of the new Treasury issues. Currency in circulation has shown somewhat less than the usual seasonal increase in recent weeks. The growth in private demand deposits at city banks was close to the seasonal pattern, but it is not yet possible to obtain a good measure of money supply changes for October because of the absence of data for country banks, which usually show a rather large increase in that month. Reserves needed to support Treasury financing operations, which were somewhat smaller than had been expected, were more than amply supplied by an unusually large and prolonged mid month increase in float. System holdings of Government securities were actually reduced and in addition member bank borrowings declined. Net borrowed reserves were little over $300 million in that week, but subsequently rose to nearly $500 million. Currency and required reserves increased less than had been projected in October, but the figure for required reserves for the latter part of the month is still uncertain. In the current statement week, the System has again been purchasing securities to supply seasonal reserve needs. Operations have exceeded $350 million, including repurchase contracts, some of which mature during the week. These operations should be sufficient to meet needs for the next two weeks. In the four weeks from mid-November to mid December, about $800 million of reserves may need to be supplied. In January approximately $1 billion should be absorbed. In view of the leveling out--and perhaps easing-of demand pressures on money and credit markets, and prevailing uncertainties as to the future turn of events and effects of the steel strike, there is no need for any tightening of restraints on credit expansion at this time. Nevertheless, are still strong and the longer-run since basic forces of expansion--probably at an outlook is for a resumption is little occasion for positive accelerated pace--there action toward easing the money market by increasing the in excess of usual seasonal needs. availability of reserves
Should credit and monetary demands fall below the seasonal pattern, as appears to have been the case in the past month, some moderate easing might safely be permitted to develop. In further comments, Mr. Thomas summarized views on the longer-run business outlook, particularly as it might affect the demand for credit, that were expressed at a meeting of the Conference of Business Economists held last week in New York City. Mr. Johns then inquired of Messrs. Young and Thomas whether there was any substantial difference in their views on the state of the economy and the economic outlook. Mr. Young replied that there were probably shades of dif ference. He had used the word "boom," but not "strong inflationary boom, whereas Mr. Thomas referred to "expansion," which could mean a strong expansion. He (Mr. Young) did not want to be committed to the position that the forthcoming period would not be expansionary, feel that the current developments pointed less in the but he did an inflationary boom than was earlier considered likely. direction of October 13 Committee meeting he had enumerated In his comments at the that seemed to suggest a revised outlook, and a number of factors that had come by other information had been reinforced those factors These data included the McGraw-Hill survey, to light since then. somewhat smaller plant and equipment which seemed to point to he did not envisaged. In substance, than previously expenditures Mr. Thomas were very far apart. feel that he and
Mr. Thomas said he was apprehensive concerning the develop ment of unsustainable elements in the economy that might lead to a recession. Whether these were called inflationary or not depended on one's definition. He would prefer to use "unsustainable" rather than "inflationary." Mr. Johns then stated that the ultimate question for decision was whether a change in policy was indicated. Mr. Thomas replied that he thought neither he nor Mr. Young would so conclude, to which Mr. Young added that the implication of his statement, on the basis of the things covered in it, was that certainly no tightening was indicated for the time being. He saw a need to watch developments unfold a little longer before making a change in policy and felt that the position taken by the Committee at the last meeting was about right. Mr. Marget then presented the following comments on the United States balance-of-payments situation: At the last meeting of the Committee, I reported that our figures for the outflow of gold and dollars--which we take as the measure of the over-all deficit in our balance of payments--showed an outflow during the third quarter of around $4 billion, seasonally adjusted annual rate; and I suggested that this was better than what had been implied by the projection, produced some months ago under the auspices of the National Foreign Trade Council, of an over-all deficit for the calendar year 1959 of $4.5 billion. But, even apart from the fact that a deficit of $4 deficit, there was a is still a very sizeable billion special reason for being concerned about that figure of
a $4 billion deficit annual rate for the third quarter. The reason was this: that the gold and dollar outflow for the second quarter of this year had also been at an annual rate of $4 billion-so that there was no net improvement in the over-all deficit as between the two quarters-despite the fact that our trade figures, particularly in the crucial field of exports, had been showing an improvement since June. Without the trade figures for September, which were not available when I last reported to this Committee, one had to speculate as to which of two possibilities was the more probable: (1) Had there been a change in the non-trade items (such as capital movements and aid transactions) which offset the improvement in the trade figures since June? Or (2) had there been a serious deterioration in the trade picture in September, sufficient to offset the trade gains of the earlier months since June? From many points of view, this second possibility was the more disturbing; because, even though one was prepared to make some allowance for the distorting effects of the steel strike, such a deterioration in the trade picture would have cast doubt on whether the movement toward balance in our international accounts, which we hoped had begun, in the critical field of exports, in June of this year, was really under way at last. We now have the trade figures for September. It is comforting to report that they continue to give evidence in foreign demand for our exports which has of the pickup June of this year. Indeed, the export been evident since September are so good that the Department of figures for has suggested that they may have stolen some Commerce from the following month.because of the speeding exports in anticipation of the of ship departures in September up strike that was then threatening. shipping something about this. figures will tell us Next month's it remains true that we have to guard In the meantime, to developments in error with respect two types of against more widespread than they of payments that are our balance supposing that no adjust One is the error of ought to be. in our balance of payments, particularly ment is taking place is the error of exports; the other vital field of in the is taking place so rapidly supposing that the adjustment longer have a balance-of-payments that we no and so certainly need to frame our therefore have no and that we problem, in that area. to what is happening with reference policies
An over-all balance-of-payments deficit at an annual rate of $4 billion is still a very sizeable deficit indeed; the deficit will still be a sizeable one if it is reduced to the level at which it was last year-$3.4 billion-which, after all, was more than twice the average level of the deficits in the years 1950 to 1956, when the competitive situation in world trade was much less intense than it is now. It cannot be reiterated too often: our trade position does seem to be improving; but it still has a long way to go. Mr. Hayes presented the following statement of his views on the business outlook and credit policy: Analysis of the business situation for the purpose of determining credit policy presents unusual difficulties at this time because of all the uncertainties of the steel strike. The strike has begun to exert a seriously dis ruptive and cumulative impact on over-all production, employ ment, and income; and these effects seem likely to spread further in the next three weeks regardless of strike develop ments. There seems, at least in our District, to have been a perceptible change in business sentiment since our last meeting. after the end of the strike Resumption of the business expansion is still generally expected, but there are growing doubts as to the vigor and duration of the expansion. the declines in over-all business indices On the whole, such as those for orders, sales, production, and employment to date, do not appear too large to be attributed reported The decline in gross national product entirely to the strike. in the third quarter was more than accounted for by a $9.5 billion drop in the annual rate of inventory accumulation. activity is leveling off for reasons Although construction and there have been declines in some independent of the strike lead turning points in business, time series which usually the underlying forces of picture suggests that the over-all some uncertainty is strong. An area of expansion are still but the and equipment expenditures, outlook for plant the be clearly upward. still seems to of such outlays direction for some time to statistics will, Because current business related to the strike, largely dominated by factors come, be underlying general to assess the probably be hard it will in the coming weeks. business trend
Consumer expenditures have been better sustained than personal income, while the ratio of savings to disposable income has dropped to the lowest level since mid-1955. Moreover, consumer credit has continued to expand at a rate which can hardly go on indefinitely. Thus the expansionary effect of such credit is likely to diminish in the period ahead; and strikers and other workers laid off because of the strike have been given an opportunity to defer various payments of debt and have thus been anticipating future buying power to a considerable extent. Recent price developments have not been encouraging. Farm prices were responsible for a higher wholesale index in September, and the daily index was rising through October; while food and services were responsible for a higher consumer price index in September. On the more hopeful side, we can find some positive elements in the Kaiser settlement in that the wage increase seems to be more moderate than those of recent years and the contract establishes machinery for company-level consideration of the broader problem of sharing the benefits of further productivity gains, with the consumer apparently included among the beneficiaries. Earlier hopes of a radical turning point in the pattern of inflationary wage settlements no longer seem justified, but there is still a chance that the industry's wage settlement will not be high enough to justify a general increase in steel prices in the next few months. Pressure on the capital markets has abated considerably in the last few weeks, and an improving bond market psychology helped both by strike considerations and by the has been Treasury's recent financing success. Bank loans of all commercial banks continued to grow with a strong showing especially rapidly through September, consumer loans, and real estate loans. for business loans, more mixed and point to a data for October are Fragmentary loan increase considerably smaller than in October 1955. securities by the liquidation of Government With continued were pretty stable through banks, total loans and investments shows an annual rate October. The money supply September and 1/2 per cent for the year 1959 to of increase of only about some allowance below the 1955 gain--although date--sharply deposits are now the fact that Government should be made for high level. at a relatively the year-end when between now and will be few weeks There of Treasury financ not have to take account our policies will completed. Cash in prospect or recently ing operations either month and in January. expected late this offerings are now devising a credit difficult task of System faces the The economic pattern to the unusual which is appropriate policy
indicated for the next three weeks but which will not give rise to harmful results over the longer run. Unquestionably we should take no action that might add to the existing strain on business firms and complicate the process of adaptation to the effects of the strike. Were it not for the danger of creating false expectations which might be abruptly reversed if a firmly restrictive policy became necessary after the strike is over, I would lean toward a measurable easing of restraint for the next few weeks. However, recognizing the danger of being "whipsawed," I think the aim of policy should be to preserve a feeling of stability in monetary and credit conditions and to assure that there will be ample availability of funds for seasonal credit needs. Such a policy is indicated on general economic grounds as well as to preserve an "even keel" for some period following this week's Treasury refunding operation. I would hope the Manager would be given ample leeway to focus more on interest rates and the feel of the market than on any specific level of net borrowed reserves. I would not be disturbed if net borrowed reserves should swing fairly widely in the attainment of these aims, but I would not like to see the weekly average rise above $500 million. present directive is not ideally adapted to conditions The faced in the next three weeks--but since any change now might be subject to misinterpretation, I would prefer to leave it as the discount rate should be left alone in it is. Certainly It is quite possible that as events this very fluid situation. may find it necessary to meet in advance of the unfold we interval to consider a changed business regular three-week outlook. to our informal discussion here some weeks ago Reverting of implementing the new vault-cash as to the desirability of seasonal credit needs, I legislation during this period suggest a need for like to point out that projections should reserves in the week ending about $400 million additional $200 million in the ensuing week December 2, and for another however, that there are ending December 9. I recognize, that must be taken into account. important complications like to note in which I should merely One other matter stand-by powers whereby the is the absence of any passing controls on consumer credit, System could reimpose selective the expansion to deemed necessary. While if this should be give cause for credit does not necessarily date of consumer a System we should at least be studying alarm, I feel that as would be required for any in view of the time that this area enabling legislation.
With regard to Mr. Rouse's question about the exchange of securities, I do not feel that it is vital but I would be inclined to think that if the System took, say, $1 billion of the 4-year notes and $4 billion of the one-year certificates, that would be helpful to monetary policy in the long run. Mr. Erickson reported that economic activity in the First District was continuing to hold up quite well considering the back ground of the steel strike and the seasonal lull in some industries. The impact of the steel strike, direct and indirect, was still rela tively slight in the district. The New England index of production for October was down only one point from June. The October survey of New England purchasing agents showed that 3 per cent expected an upward trend of production, which compared with 49 per cent in the September survey and 51 per cent in August, which was the peak figure. In September, construction contracts were down 16 per cent, this being the third consecutive month in which construction contracts were down. However, for the first nine months of this year construc contracts were up 2 per cent, with residential construction tion the first nine months last year. There still 25 per cent ahead of gain in nonagricultural employment in mid-August to was a seasonal less than a year ago. Department mid-September, although somewhat four weeks ended October 24, fluctuated widely during the store sales more than anything else, but they due probably to weather conditions four weeks last year. On pretty much the same still followed member banks loans of reporting and industrial October 24, commercial
were $24 million lower than the peak reached on September The Reserve Bank discount window had been used less during the last three weeks than for some period of time. The September survey of mutual savings banks revealed an increase in deposits of 5.8 per cent over September of last year, which was less than the year-to-year increases had been running earlier. Real estate loans were up 10 per cent, and there had been further shifts at mutual savings banks toward paying higher rates of interest on deposits. Mr. Erickson went on to say that investors in the First District took $62 million of the so-called "magic fives" in the recent Treasury financing. Comments had appeared in the press regarding the effect on mutual savings banks in the New York area, and the Boston Bank made a check of the effect in the mutual savings banks in its district. In the smaller communities and cities there apparently had been little effect, and in Hartford and Providence mutual savings banks in slight effect. The two largest only a dates falling on October 5 and October Boston have interest payment would be affected more been expected that they 15, so it might have obtained indicated that otherwise. However, the information than of somewhere between $1 million banks probably had withdrawals these and $1-1/2 million. Boston Bank had held Committee meeting the Since the latest and at that time most of the participants its fall business roundup,
expected the steel mills to be back in operation by the end of October. On that assumption, they were reasonably optimistic about the business outlook. Estimates of gross national product at the end of next June averaged $503.5 billion, while guesses on the index of industrial production averaged 160. It was expected that 4.8 per cent of the labor force would be unemployed, that the wholesale price index would stand at 120.1, and that the consumer price index would stand at 126. Over the years, Mr. Erickson noted, the estimates of this group had been on the con servative side. Turning to policy, Mr. Erickson expressed the view that the Committee should continue to mark time, with no change in the discount rate or the directive. As to open market operations, he agreed with Mr. Hayes that the Account Manager should be given latitude. He would not increase the existing degree of restraint, and he would try to let any errors fall on the side of ease. He would not be disturbed if net borrowed reserves fluctuated more than they had His views on policy were expressed on the assumption that recently. shortly as the result of mills would resume operations the steel negotiations or under the provisions of the Taft-Hartly Act. If, in the next week or two, he felt however, the mills were not opened meet earlier than the next scheduled the Committee might want to that weeks instead of three. to hold a meeting in two meeting, that is,
With regard to the exchange of System Account securities in the Treasury refunding, Mr. Erickson said that he had no fixed opinion but would not object to putting up to $1 billion into the four-year notes. He thought it might be well to do that in order to show some flexibility, and such a move would not interfere with over-all monetary policy. In recent years the Open Market portfolio had sometimes contained less than the present quantity of obligations maturing in one year or less, and additional holdings were due to move into that area shortly. Mr. Irons reported that conditions in the Eleventh District were moving along on a sort of plateau at the high level reached some two or three months ago. Speaking in the over-all sense, there had been little change during the past three-week period. Most indices were at high levels and a few had moved up slightly. Un employment was running about 4.1 per cent of the labor force, compared a higher national figure, and some cities were substantially with cent. Crude oil production was running quite steadily under 4.1 per store sales showed little change, at recent levels, while department substantially. The agricultural in October but not being up a little a very large cotton output was expected. situation was favorable; be good and cattle were doing all Range conditions were expected to due to the steel there was some hesitancy right. As elsewhere, to produce the but inquiries continued and its consequences, strike too much effect upon manufacturing the strike had not had comment that
industries or upon economic activity in the district. A check of thirteen major steel-using manufacturers revealed few curtailments or labor layoffs attributable to the strike. Instead, layoffs were due principally to local conditions, such as a strike in the con struction industry in a particular city, or to institutional industry problems. General Motors had pretty well closed up its plant outside Dallas and Ford was beginning to cut back. Also, a number of manu facturing firms reported that they would have to close down if the strike continued as long as the end of November or December. The strike appeared to have caused no change in capital investment programs and no great surge of demand for bank credit was expected when the strike was over. on district developments, Mr. Irons Continuing his comments said that credit demand may have been down a little recently, but not significantly. Similarly, it might be up somewhat during the mean anything. The picture had three weeks but not enough to next that basis since the middle of June or July. been moving along on to be a little slower than movement this year appeared The seasonal less marked. While borrowing was probably a little usual and demand district banks engaging was not heavy, those from the Reserve Bank were now net borrowers. Federal funds transactions in district a little discussions in the Irons sensed from Mr. money. In financial about tight at the moment less conversation of watchful waiting to there appeared to be an attitude circles
see what might happen. The insurance companies were doing pro motional work in the form of an anti-inflation campaign that had been drawing some public interest and publicity. In view of the economic picture in the Eleventh District, which he felt was not too different from that in the nation as a whole, Mr. Irons said that he would recommend no change in basic policy. He would not try to bring about any less restraint, but rather to maintain about the degree of restraint that had prevailed in the past few weeks. If there should be any deviations, he would prefer that they be on the side of ease, looking on any such deviation, however, as an inadvertent heppenstance rather than a deliberate attempt to ease. He would not be too disturbed if a little ease should remain in the market, but he would not allow it to accumulate to any great extent. He agreed that the Account Manager should have leeway to maintain about the same degree of pressure on reserve positions. He was not particularly concerned about the level of net borrowed reserves, particularly at the concerned much more about the level of interest present time; he was in the market that the Account Manager rates and other conditions expect much of significance to happen in might sense. He did not if the steel strike should be settled. the next three weeks even it might be possible to see better the shape If it were settled, but he would not expect any significant change of things to come, in the discount rate He would favor no change in the near future. or the directive.
On the question raised regarding the refunding, Mr. Irons said he did not feel strongly about the exchange of System Account holdings. However, he would prefer to take the one-year certifi cates and not allocate $1 billion to the four-year notes. He saw no good reason to do otherwise. To take some of the four-year securities would not mean being less doctrinaire; it would not make much difference from the standpoint of monetary and credit policy and would seem like an attempt to fool somebody. While he would be willing to deviate from a policy of rigidity, he would like to have a good reason that could be explained, and a decision to take some of the four-year notes could not be explained on grounds that it connoted a flexible policy. Accordingly, although he would not feel too strongly on the matter, he would prefer not to split the exchange. Mr. Mangels reported that a recent meeting of the California State Governor's Business Advisory Council had produced several items of interest that might be regarded as straws in the wind. A repre sentative of insurance companies reported that at a recent Chicago meeting the insurance industry had agreed to spend a substantial in 400 United States newspapers against amount for advertisements of the automobile industry reported inflation, while a representative was planning to gear its Motors Acceptance Corporation that General between 6.2 and 6.5 million estimated sales of 1960 operations to reported that and Chemical Corporation The Food Machinery cars. it had sufficient steel to last for the remainder of this year; it
also indicated that for the past year it had been establishing plants in foreign countries to meet competition in markets outside the United States. This company's recent domestic expansion had been in areas outside California because of considerably higher labor costs in that State than in other areas, with the result that San Jose, where a large part of the company's production facilities were located, would more and more become a research and development center. A representative of the aircraft industry forecast that total aircraft employment in California would continue to decline for the next two years. One factor was an increase in the complexity of defense items and their cost, thus reducing the physical of production; there was also a reduction in airframe construc volume manufacturing of defense hardware outside tion resulting in increased the aircraft companies had reached the the State. Further, most of and all would reach that of production of commercial airliners peak this participant in the conference peak early in 1960. Nevertheless, scientific, and technical skills was optimistic because of engineering, Of 240,000 aircraft industry in California. found in the aircraft that 18 per cent had college California, it was said employees in 18 per cent were and that another or science degrees in engineering technicians. said it Mr. Mangels steel settlement, Regarding the Kaiser take only about period might that the start-up at first hoped was
ten days. Then it was found that there had been extensive damage to open-hearth furnaces and it now appeared that it would be at least a month before sizable shipments could be made. For three weeks, it appeared that operations probably would only average about one-third of capacity. Mr. Mangels also reported that residential construction in August was up 9 per cent over July. He felt, however, that this was a temporary bulge and did not represent a change in trend. Lumber output in September and October was at a rather high level despite lower prices and reduced demand. In agriculture, heavy crop marketings brought returns 5 per cent above a year ago in spite of lower prices. The response to the new-model automobiles had been favorable but dealers were limited in their stocks of both 1959 and 1960 cars. Department store sales continued to be somewhat above the figures of a year ago, both on a and on a cumulative basis, but the rate of improve month-to-month unemployment in the had declined somewhat. In September, ment district increased to 5 per cent. Mangels said that during the On the financial side, Mr. period ended October 21, bank loans were up $43 million, three-week to retail traders. Of of this increase in loans with $26 million in the week of October 21, this increase, $17 million occurred firm for accounts to one large retail because of a loan principally banks were up holdings of reporting financing. Security receivable time deposits million, but were up $91 demand deposits $47 million,
were off $38 million although savings accounts increased $50 million. For the first time in ten weeks, district reporting banks last week were net purchasers of Federal funds. Borrowings at the Reserve Bank continued quite nominal. The average ratio of borrowings to reserve requirements in September was .4 per cent. With respect to policy, Mr. Mangels said that he agreed with the views expressed by Mr. Hayes and that he would not favor changing the directive or the discount rate at this time. As to the exchange of System Account securities, Mr. Mangels said he agreed with Mr. Irons. In the absence of a factor such as existed when the earlier partial exchange into longer-term securities was made, he felt the Committee would be well advised to stay in short-term securities. However, he would have no strong objection to taking $1 billion of the four-year notes. Mr. Deming said that Ninth District economic indicators the nation. This reflected the lack of continued to lag those for iron and copper mining activity and a weak agricultural situation. the preceding Committee meeting that if He recalled having said at there would be 17 million tons of the steel strike ended promptly of this year. Now ore production for the balance potential iron tons. The Soo lock closing the potential was down to 10 million that date no ore 12; thus after for December had been announced of ore could not the lakes. Rail shipments boats would go down
and would not be large. In western Montana the copper mining strike was continuing, causing Anaconda to toy with the idea of closing its mining operations for an indefinite period if there was no settlement soon. As yet, however, this was not regarded as a serious proposal. Mr. Deming said that the uncertainty in the national scene plus the forthcoming Treasury financing seemed to argue for no change in basic policy at this time, although he would go along with any deviations being made on the side of ease. In his view it would be inappropriate to change the discount rate or the directive at this time. With respect to the exchange question, he agreed with Messrs. Irons and Mangels since he did not see how the Committee could demonstrate any more flexibility or a less doctrinaire approach to open market operations by splitting the take-up of the exchange issues. Therefore, although he did not feel strongly on the matter, he would favor exchanging entirely into the one-year issue. Mr. Allen made substantially the following comments with respect to Seventh District developments and with respect to monetary policy: Despite the steel strike, and its impact on the automobile industry, the employment situation in the District cannot yet be termed bad. Our cities Seventh more satisfactory picture than as a group make a far the nation as a whole. Through the that of the rest of first three weeks of October there was surprisingly compensation claims in little rise in unemployment number of new claims States. The Seventh District was less than during the for the five States combined we expect the situation last year. Of course same period thus far it has not deteriorated to worsen rapidly, but at the pace expected.
Farm income has declined in the District, with the decline greatest in the Corn Belt States--understandable with hog prices 25 - 30 per cent lower than last year. However, the large crop of feed grains should boost farm income in the last quarter, and our country banks which have suffered a drop in demand deposits are hoping to see that trend at least arrested. Bank loan growth has slowed in the past month; in fact total loans of weekly reporting District banks declined $30 million in the first three weeks of October. Security hold ings, on the other hand, show that acquisition of the June tax bills and, to a lesser extent, the 5 per cent notes, more than offset the net reduction in holdings of Governments earlier in the month. These recent acquisitions, in the eyes of some of our banks whose basic reserve positions should not encourage any increase in loans or investments, are justified under the guise of helping the Treasury. And the improvement in the bond market is not proving to be a discouraging factor; makes continued help for the Treasury a more rather, it and a more pleasant so-called duty and administra necessary tion of the discount window more difficult. We are impressed, or perhaps the right word would be settlements coming to our by the number of wage depressed, for substantial wage increases in the attention which call or more per hour--most of them to neighborhood of 20 cents of not more than two years. It is be effective over a period monetary policy can be a question as to how effective still influences but they strongly in combating these inflationary to contemplate an present is no time to us that the suggest in the light of the lower policy. On the other hand, easier it may turn out however temporary of business activity, level a more stringent policy am not disposed to recommend to be, I favor endeavoring to Consequently, I would at this time. for another three degree of restraint continue the current sticking to the I would favor As to the exchange, weeks. shorter securities. changes in been no significant that there had Mr. Leedy stated effects of the steel The secondary since mid-October. the Tenth District great. not yet been particularly district had in the strike on employment continue beyond if the strike should indicated that However, projections in unemployment. a sharp increase would be there of November the middle
With respect to policy, Mr. Leedy said he was in accord with the views that had been expressed thus far. He was somewhat surprised that the System had been able to get along as well as it had over the past period in following the policy that had been set. In the light of the forthcoming Treasury financing and economic conditions generally, he saw no reason for an immediate change in policy. Accordingly, he would favor continuing the present policy. As to the exchange, he would find it difficult to assign a convincing reason for splitting the System's subscription between the longer and the shorter maturities. The Government securities market had given a good account of itself recently and the reasons that existed earlier for making a departure from the usual practice did not seem to have weight at the present time. As he understood it, the that the matter was immaterial of the Treasury had indicated Secretary and also had suggested that the System from the Treasury's standpoint principles. Therefore, Mr. be expected to sacrifice any should not who had expressed the view would go along with others Leedy said, he entire amount in the shorter be preferable to take the that it would term issue. following comments: substantially the Mr. Leach made the steel strike effects of the most noticeable While still concentrated in certain industries in Maryland are District economy is its impact on the and West Virginia, tangible evidence the most Probably spreading. definitely worked decline in man-hours is in the continuing of this the strike, however, industries. Despite in manufacturing
activity in leading industries, such as textiles, chemicals, furniture, and cigarettes continues at a very high level. Employment generally is only slightly below the peak 1959 levels established prior to the strike. Rising cloth prices and lower cotton prices have further strengthened the textile outlook, and profits are at their highest level in many years. Producers report large order backlogs with production of print cloths substantially sold into the second quarter of 1960. Finished goods inventories are abnormally small. The industrial chemical industry in West Virginia is reportedly running at peak capacity. Furniture production and shipments are increasing from their near-record levels. Cigarette production is running 6 per cent above 1958, which was a record year in this industry. Pressures on District banks were eased somewhat during most of October as evidenced by a less than seasonal loan demand, a very low level of borrowings from the Federal Reserve Bank, and sales of Federal funds. During the past week, however, member banks borrowed more heavily from the Bank and shifted from sales to purchases of Federal Reserve Contrary to the situation in the Dallas District, funds. I hear comments about tight money everywhere I as reported, go. and prospective Treasury borrow The current refunding ing seem to preclude any real change in policy during the The steel situation cannot be settled next three weeks. the adverse effects of the monetary measures, but through It seems that this on the economy are increasing. strike some recognition under a development should be given and be reflected in the policy flexible monetary policy seasonal needs for we could agree that record. Perhaps be met somewhat more readily. Certainly reserves should side of ease. I would be resolved on the all doubts should directive or a change in the not favor a change in the discount rate at this time. I do not have a strong With respect to the exchange, know of no good reason to be flexible but opinion. I like the four-year notes. to take any of that the restate his position he would like to Mr. Mills said a less re toward to move cautiously be well advised System would his own mind clear in He was increasingly credit policy. strictive
that the economy was passing through a period of rather drastic adjustment. While that adjustment was being made, the System was tending to make its projections and to determine policy against a momentum of past events reflected in statistics that were no longer reliable. Accordingly, the recommendation that he would make first would be to revise the policy directive by changing clause (b) to read "to fostering sustainable economic growth and expanding employ ment opportunities while guarding against inflationary credit expan sion." To go further into the reasoning that brought him to this position, Mr. Mills read the following statement: There are strong advocates of the theory that an effective monetary policy can only overcome the lag in its impact on economic events if such events are antici pated well in advance of their occurrence and appropriate countermeasures then undertaken. The most active proponents of this theory lay greatest emphasis on the importance of formulating a monetary and credit policy that will act as a backfire against an anticipated outburst of inflationary pressures, and in practice are apparently prepared to take the risk that the policy which they support may miscalculate the future actions and induce deflationary pressures. the capacity of the human mind Whether it is within to read the future accurately and to conduct a monetary assumed future course of events is policy adapted to an open to argument. In any event, however, forecasting, into the formulation of monetary and when translated much weight to possible should give as credit policy, and doubt to inflationary developments, deflationary as of a middle of resolved on the side should at least be future uncertain the present time, policy. At the road a monetary and credit enough to argue for ties are strong restraint over the degree of that will lessen policy in the level of expansion that is implicit credit imposed on the that is presently negative free reserves effects of system. The cumulative commercial banking
current policy actions may already have curtailed a normal seasonal expansion of commercial bank credit that may account for the easing that has occurred in the demand for bank credit which, in turn, can be put to policy advantage by permitting its moderating effects to be reflected in an improvement in bank liquidity. A lessened demand for bank loans as transposed into an increase in bank holdings of U. S. Treasury bills should not be thwarted by the maintenance of a severely restrictive monetary and credit policy. Instead, the gradual modification of current policy that has been made automatically possible in the slackened demand for bank credit should be reinforced further by lightening the pressure on bank reserves to the extent that whatever divestment of recently acquired U. S. Government securities banks may find necessary in order to meet other legitimate credit demands can proceed unhurriedly and without subjecting the U. S. Government securities market to depressive price influences. Implementation of such a policy conforms to the belief that the economy can only be freed from the lagging and cumulative downward effects policy actions if the level of negative of past System is slowly reduced. A cautious modifica free reserves of accomplishment with tion of policy should be possible on the prices of U. S. Government out major repercussions matter, any risk of instigating a securities. For that upward movement in the prices of U. S. speculative is inherent in a modification securities that Government System monetary and credit of existing Federal Reserve by the greater risk that its policy is outweighed have so severely limited will in due course continuation as to require a drastic the availability of credit that should be the case and liquidity policy reversal. If policy actions as an the economy by is then forced into been set for a new and antidote, the stage will have Federal Reserve System's policies. immoderate swing in the said he wished to align exchange, Mr. Mills With regard to the into the one-year maturity. with those who would exchange himself scholarly presentation despite the said that Mr. Robertson Thomas the Young and by Messrs. and judgments economic factors of
future-even the short-term future--was so uncertain in his own mind that he could see no justification for a change of policy. In saying this, he hoped that the System would do nothing toward lessening of restraint. He had felt for a long time that the System was not being tight enough. In recent weeks, he had the feeling that perhaps he might have been wrong and that the policy had been just about right and was beginning to take effect. Last week, however, he was not sure this was the case. At present he would recommend staying just about still, with no intentional diminution of restraint. This posture, he felt, was needed as a starting point to deal with the situation as it unfolded following settlement of the steel strike. He would not change the directive or the discount rate at this time. As to the exchange, he would also align himself with the majority of those who had spoken. He did not think that the System would eliminate the charge of being a change in the usual policy which had no apparent doctrinaire by reason and which would not actually indicate flexibility. noted the high degree of uncertainty at the Mr. Shepardson present time as to future trends. Because of that situation, it for the System to maintain its seemed to him highly desirable should not overlook the position. He felt the Committee present settlements that had been Allen regarding the wage comments by Mr. to expect would be place and that it seemed reasonable taking
reflected sooner or later in price adjustments. The movement of prices reported by Mr. Young was still another matter of concern. As System experience would indicate, it is always easier to ease than to tighten. Therefore, while there might be adverse effects of the strike that would retard the movement of the economy most generally expected in the months ahead, he felt that the System would be well advised to maintain its present position until further developments made themselves clear. Accordingly, he would maintain the present degree of restraint giving appropriate leeway to the Manager of the Account to measure the effect of that restraint. He would not favor changing the directive or the discount rate. As to the exchange, Mr. Shepardson noted the statement that no particular for changing the usual policy. However, reason had been advanced that there was no particularly strong it had also been implied If the latter was true and if there argument against deviation. beneficial psychological effect in some quarters, he might be some System's subscription to take no harm in splitting the would see one-year securities and $1 billion on the order of $4 billion of the of the four-year securities. in the fact that saw no reason to rejoice Mr. King said he were perhaps less inflationary settlements already made the steel settlements made years ago. The into a few the ones entered than to some extent. were going to be inflationary thus far probably in the that wage increases into thinking delude himself One might
vicinity of 20 cents an hour were not particularly inflationary, Mr. King said, but they sounded uite inflationary to him unless they were coupled with other things that the steel industry had been try ing to achieve. He did not know that any of those things had been achieved and gathered that they probably had not. Mr. King expressed the view that the degree of restraint in force had been desirable and adequate. In the face of current uncer tainties, he would give no evidence to the public of a change in policy one way or the other, although he would feel that the Account Manager should have leeway to do as he thought proper in this uncertain period. With respect to the reference that had been made to the possibility of another Committee meeting before three weeks, Mr. King said he could not conceive of any development taking place meeting. He would think that a so fast as to necessitate a special meeting at the normal time probably would be adequate to take what necessary. He would favor leaving the directive ever action might be change in the discount rate at in its present form and making no he would not take the With regard to the exchange, this time. probably was justified in acting longer-term security. The Committee the Government securities earlier this year when to authorize a split present, and if pressure than at considerably more market was under in the future he at some time developed more pressure the market At the present time, however, again favor such a decision. might to have turned well and appeared to be doing quite the market seemd that it had to climb. a hill
Mr. Fulton reported that the steel strike had exerted profound effects in the Fourth District. Unemployment was now rising rapidly, as evidenced by the fact that General Motors, the largest employer in the Cleveland area, had practically shut down its operations. Inventories in the hands of steel customers were lower now than had been thought possible. Further, there was the concern that the strike had lasted so long that an actual permanent loss of tonnage demand had occurred. This year it was expected that the figures would be about 95 million tons of production against projections of 115 million tons, which left a residue of 20 million tons not produced. It was feared that about of this loss would be irretrievable. Also, there had 25 per cent damage to the equipment and furnaces by been an unknown amount of their lying idle this long, and it was not anticipated reason of be turned out for the first two or three that much tonnage would shipped practically every since the mills had weeks, particularly addition, the ore situation the strike. In thing on the floor before the Cleveland harbor with were ore boats still in was tight. There for pulling ore was a limited time remaining no place to go, there employment. While it had gotten other down, and many crew members it would be the coming spring, to squeak through might be possible in by rail. The high cost ore brought to have some necessary 10 cents an on the surface: read quite well with Kaiser agreement the cost admitted and then the first year, fringe benefits hour in
in the second year would be about 9-1/2 cents. However, steel men maintained that if the same package were accepted by the older mills it would cost those companies about 19 cents an hour the first year and then the other 9-1/2 cents. There was great pressure on the part of the union for the companies to accept that kind of settlement but without doubt such a settlement would mean a significant increase in the price of steel. The steel companies reportedly had made three offers, each one a little better than the preceding one, but the union apparently had made no counter-offer after the original proposal. In the field of automobiles, Mr. Fulton said, production was now very flat, with only Studebaker and American in good production. In a recent conference of business economists held at the Cleveland Bank, it was indicated that it would take six or seven weeks for the to get back to prestrike levels. With sales high, automobile industry of dealers would be reduced substantially. It is presently inventories domestic cars will be produced in anticipated that 6.5 to 7 million side, the rubber industry was overcoming 1960. On the brighter were at record lows and the deficiencies. Tire stocks inventory load up the dealers, a normal was now building stocks to industry demand again would It was felt that at this time of year. process down because this industry had not shut in 1960. The glass be good used by the auto stocks of glass being used to rebuild period was gotten quite low. glass had also Plate and window industry. sales were up 19 per recorded that of large appliances Manufacturers
cent over last year and that it was hard to maintain inventories. Production was going "out the window" to consumers, perhaps because consumers felt that steel would be short and it would not be possible to get the appliances later. Business machines were reported to have been showing strong sales this year and enough steel reportedly was available to continue operations through the rest of the year. In aluminum, this had been a record year for primary production but customers found themselves with large inventories. Orders therefore had been falling off, with production cut back. Mr. Fulton said that the district unemployment situation was not good. In Youngstown, Ohio, for example, over 25 per cent of the labor force was out of work due to the effects of the strike upon the steel industry and allied industries. Department store sales, how ever, had been holding up quite well and for the district as a whole were 6 per cent over last year. Loans of district reporting banks declined slightly during the past week, while total deposits increased. With the exception of the week ended October 28, when country banks borrowed rather heavily, member banks had not been coming to the discount window to an unduly large extent. Borrowings had been running from 5 to 7 per cent of the national total. Mr. Fulton said that he did not believe any relaxation of policy should take place. He felt that the Desk had done a good job to the Manager of the Account ample latitude should be given and that
with a view to maintaining the current degree of firmness in the market. He would favor no change in either the directive or the discount rate. With regard to the exchange, he concurred in the views expressed by Mr. Shepardson. The effect on the liquidity of the Account seemed to be a matter of academic interest, at least in the small degree that it would be affected by a partial exchange into the four-year securities. Accordingly, for the sake of appearance alone and in the absence of any strong reason for not doing so, he would consider putting $1 billion in the four-year notes and the balance in the one-year securities. Mr. Bopp made substantially the following comments: We have just completed our annual survey of capital expenditures by manufacturers in the Philadelphia area, and they are expected to be about the same in 1960 as expenditures this year. Estimates for 1959 total about the same as the revised estimates reported in a re-check last spring, but the total is substantially higher than for the original estimates made last fall. Our experience has been that manufacturers underestimate their expendi tures during periods of business expansion, the underesti mate usually being largest during the first year of the upturn. Manufacturers also reported that they expect little change in employment, production, and inventories third quarter of this year to the second quarter from the Nearly 70 per cent of the firms expect their of 1960. inventories to remain about the same, 18 per cent expect 12 per cent a decrease. A re-check an increase, and firms last week revealed that with several of the large plans have not been affected their capital expenditure so far by the strike. Idleness caused by the strike increased about 14,000 three weeks, according to the in Pennsylvania in the past Labor and Industry. This State Department of Pennsylvania in the previous more than the increase is about one-third
three weeks. Metals and metal products manufacturing and railroads accounted for most of the newly idled. Nevertheless, new and continued unemployment claims have not risen significantly. I agree that there should be no change in the degree of restraint, in the discount rate, or in the directive. With regard to the exchange, I do not feel strongly, since whatever we do will have no effect on the liquidity of the economy and the liquidity of the central bank creates no concern on my part. On balance, however, I would take the one-year certificates. Mr. Johns said he wished to align himself with those who had stated that they would not vary policy one way or the other at the present time. He would like to adopt as his own views the analysis presented by Mr. Robertson. Without arguing the merits of the exchange question, he would express himself firmly on the side of exchanging in full into the shorter-term securities. Mr. Szymczak said he felt this was a time when the System followed through the spring and ought to ease somewhat the policy to the extent of changing the He would not change policy summer. for a change in case of develop but he would get ready directive, the strike and in view of the dampening ments that might result from the beginning of the calendar that usually comes after of the economy into something quite serious. Developments could snowball year. the extent that it some easing, to he would recommend Accordingly, to ease without a change the Manager of the Account was possible for been most un it would have As to the exchange, in basic policy. that the Treasury requested of the had the Secretary fortunate longer-term securities. billion of the $2 billion or $3 System take
However, the problem of the Secretary must be borne in mind. To the extent that the System could assist in meeting this problem, he (Mr. Szymczak) would favor going along and taking some of the four-year notes, even up to $2 billion, rather than to wait until the Secretary might ask the System to follow such a course. Mr. Balderston said that the central question was the extent to which the steel strike was resulting in permanent injury to the economy as opposed to a mere postponement of the filling of demands. Between now and the time of the next Committee meeting the impact of the strike would become more apparent as stocks were exhausted and workers were laid off. Already the available data indicated a reduction of inventories at an annual rate of about $10 billion, had begun to be reflected in a lower demand for and the situation demand deposits outside the principal business loans. Turnover of some five months ago and the increase financial centers leveled off only about 0.5 per cent. In short, in the money supply has been pushing part of the boom over into the strike seemed not only to be was continuing to a point where valley might be ahead but whatever between now and might be evident injury to the economy some actual Christmas. he would favor no Balderston said that As to policy, Mr. the current degree felt, however, that in restraint. He increase situation clarified until the should be continued of restraint hope that for he would were to be deviations, itself. If there
the immediate future they would be on the lower side. He did not feel strongly about the exchange. However, he lacked an explanation as to why the System should take any of the four-year notes. Consequently, he would stick with the shorter securities. Summarizing the meeting, Vice Chairman Hayes said that certainly the overwhelming view expressed today was in favor of no change in basic policy. There had been considerable indication that the Manager of the Account should have leeway in implementing that decision. More comments were in the direction of saying that there should be no increase in restraint or that any deviations should be on the side of ease, to the extent that there were deviations, than there had been comments in the opposite direction. In neither direction, however, had the comments been frequent enough to constitute a majority view. The consensus, therefore, favored no change in basic policy, with ample latitude to the Manager of in carrying out that decision. The consensus also the Account favored no change in the discount rate. The Vice Chairman inquired whether there was any disagreement of the consensus, and no comments were heard. He with this statement any Committee member wished to vote negatively then inquired whether indicated by the consensus. on the policy vote should be recorded as contrary Mr. Mills stated that his in his opinion the Committee He added, however, that to the consensus. subject and that a in voting on this making a serious mistake was
record vote was going to produce comment, discussion and in vestigation that would not be helpful to the Federal Reserve System. The Vice Chairman then stated that in the absence of Chairman Martin he felt the Committee should not revise the procedure instituted at the last meeting. Certainly the subject was open for discussion, and the Committee was only experimenting with the current procedure. However, he would be inclined to follow, at least for the time being, the procedure that the Chairman followed at the last meeting. Mr. Szymczak commented that his position was not sufficiently different from the consensus as stated by Mr. Hayes for him to record a negative vote, although he thought his position was closer to the individual views Mr. Hayes had expressed earlier than to the con sensus. Mr. Hayes likewise commented that his position was not sufficiently different from the consensus to cause him to vote against the policy indicated by the consensus. Mr. Szymczak then inquired whether the point Mr. Mills had voting procedure would not come back for further discus raised about sion, following which Mr. King asked for clarification on the purpose of the vote. Chairman noted Mr. King's comment that In response, the Vice set forth the consensus of the Chair properly he thought the statement
of the meeting. However, the purpose of the vote now being taken was to determine whether the members of the Committee agreed with the policy views set forth in the consensus as stated, or whether any member wished to be recorded as voting in opposition to those policy views. In other words, this was a vote on the policy to be followed until the next meeting. Mr. King then inquired whether a vote on the policy directive would not afford a member sufficient opportunity to record himself, to which Mr. Hayes replied that the opinion had been expressed by certain members of the Committee that a vote on the directive did not provide a sufficient opportunity. Therefore, the Committee was experimenting with this procedure. Mr. Shepardson said he had thought that Mr. Mills was one of those who felt there should be a record vote on the policy indi cated by the consensus. Mr. Mills replied in the negative. His contention, he said, was that the minutes in the past had recorded a vote that was not actually taken by poll of the Committee members. In response to a Mr. Mills said his preference would be that a further question, consensus be reflected, that a vote not be asserted, and that the minutes be drafted in a manner that would indicate the different polls of opinion. The consensus would state the policy. that the opinions he had stated would Mr. Szymczak commented that such a procedure was sufficient be recorded in the minutes and as far as he was concerned.
Mr. Mills said this was what he had felt in the past but that he objected to recording as a vote a consensus of opinions which on occasions hid a rather wide range of individual policy views. The Vice Chairman inquired of Mr. Mills whether he would advocate the procedure that was followed up until the last meeting of the Committee. Mr. Mills indicated an affirmative response, except that he objected to recording a vote that was not actually taken. Mr. Erickson said it was his understanding that the consensus would stand as always. However, within that consensus the opinions might vary from one extreme to the other. Mr. Robertson interjected that the statute called for a vote on policy. Mr. Mills said that he did not recall the exact language of not certain that it contained a mandate the statute and that he was for a vote. to Mr. Hackley for clarification Vice Chairman then turned The that the statute Mr. Hackley stated the statutory requirement. of then read the last para require a vote. He does, in so many words, provides that Reserve Act which 10 of the Federal graph of section Open Market Committee) (rather than the Federal the Board of Governors by the Board and by of the action taken keep a complete record shall of policy relating upon all questions Open Market Committee the Federal
to open market operations and shall record therein the votes taken in connection with the determination of open market policies and the reasons underlying the action of the Board and the Committee in each instance. The paragraph further provides that the Board shall keep a similar record with respect to all questions of policy determined by the Board and shall include in its annual report to the Congress a full account of the action so taken during the pre ceding year with respect to the policies determined by it and shall include in such report a copy of the records required to be kept under the provisions of this paragraph. Mr. Hackley said that it was clear, therefore, from the law that the vote on any open market policy action taken by the Committee The question was what constituted such an action. must be recorded. Mr. Hayes agreed that this was the question, adding that of interpretation in the past as to there had been a difference directive was the only policy action whether the action taken on the taken. been assumed in the that it had always Mr. Riefler commented constituted the on the Committee's directive past that the action the period between be carried out during on the policy to action year or two a in the past the next one. However, that meeting and and the modifica this procedure, raised regarding had been question 13 meeting had Martin at the October presented by Chairman tion answer this question. it would help the thought that suggested with been
Mr. Hayes said that if anyone, like Mr. Mills, felt that the Committee was proceeding on the wrong tack it would be desirable for that member to give the Committee a memorandum of his views and to discuss the matter at a future meeting. Although he was not present at the last meeting, it was his understanding that the Committee was proceeding on an experimental basis with the revised procedure. In response to a question from Mr. King regarding Chairman Martin's letter of October 9, 1959, suggesting a modification in the voting procedure, Mr. Hayes stated that the procedure did not contemplate a vote on whether the Chair had stated the consensus correctly, but rather on whether the Committee members approved the policy indicated by the consensus. Mr. Riefler noted that the first step in Chairman Martin's letter indicated that the Chair would guide the discussion to a statement of the consensus. The second step contemplated was a vote on the policy embodied in the consensus. Mr. Hayes noted that this vote had just been taken and that one dissent had been found. Mr. Johns, who was not present at the October 13 meeting, Martin's letter, and even now, he said that upon reading Chairman the idea that the Committee would have two was a little confused by the policy indicated by the consensus policy determinations, one on in what respect these the directive. He inquired and the other on to be different. were thought determinations
In reply, Mr. Riefler said that the Committee had always assumed that the vote on the directive to be issued to the Agent Bank was the vote on the policy to be carried out and that opera tions must always be within that policy for the period until the next meeting. This had been challenged within the past year or two, and it had been suggested that the Committee was not really taking a vote on policy and that the minutes were not truly reflecting the Committee's decisions on policy. As a result of this question having been raised, the procedure suggested in Chairman Martin's letter of October 9 was devised as a procedure that would meet the legal requirements for a vote and which would give an additional chance for any member who wished to do so to vote against the policy as stated in the consensus. This was in addition to the vote on the directive to the Agent Bank. Mr. Johns said it seemed to him that such a procedure necessarily involved some sort of admission that there might be a difference between the directive and Committee policy. It also probably involved a confession that during all the years when the other procedure was followed the Committee really had not recorded its policy decisions correctly. Mr. Hayes commented that this might be possible but that another interpretation could be that the directive states policy that this was a step to refine it more in very broad terms and inquired of the policy. He then within that broad definitely
Secretary who had challenged the former procedure, to which Mr. Riefler replied that the question had been raised originally by Mr. Mills. Mr. Johns then said that, as he understood it, Mr. Mills merely had challenged that the minutes recorded a vote that was never actually taken. Mr. Szymczak commented that, in policy matters, no one can be so precise as to know exactly the proper amount of restraint to be applied at any particular time. Therefore, there must be varying degrees of acceptance of the agreed upon policy. At this point the Vice Chairman suggested that since Mr. Mills originally had raised the question on the procedure that had been followed, it would be helpful if Mr. Mills would submit a memorandum of his views as to why the procedure instituted at did not meet the objection that the October 13 Committee meeting he had raised earlier. Mills stated that he would be agreeable to presenting Mr. such a memorandum. directive, the Vice Chairman With regard to the policy (b) had been made for a change in clause noted that a suggestion who mentioned the everyone else Mills. As he recalled, by Mr. at this not be changed that it should the view directive expressed it desired to Committee whether of the He then inquired time. of Mr. Mills. with the suggestion in accordance the directive change
Mr. Balderston observed that Mr. Leach had indicated some degree of discomfort with the fact that the directive had not recognized a situation (the steel strike) that was of concern to the Committee. While he shared this thought, unless there was actually a change in policy he (Mr. Balderston) would not desire to change clause (b) of the directive. On the other hand, the directive was going on meeting after meeting with no reflection of the situation discussed by the Committee. Mr. Johns expressed the view that the policy record would explain and distill the comments that would appear in the minutes regarding the steel strike. Thus, he did not think that in the policy record that would appear in the annual report the steel strike would be overlooked. Mr. Riefler added the comment that a shift in policy actually at the meeting on September 22, 1959, when the decision was occurred made that any deviations should be on the side of ease. inquired whether there were other comments Mr. Hayes then Mills stated that he would wording of the directive, and Mr. as to vote "no" on its present wording. would be recorded as stated that a vote The Vice Chairman except that Mr. Mills no change in the policy directive, favoring that the minutes would reflect the language dissented. He added suggested by Mr. Mills.
Thereupon, upon motion duly made and seconded, the policy indicated by the consensus, as stated earlier by the Vice Chairman, was approved, Mr. Mills voting "no" for the reasons he had stated. Upon motion duly made and seconded, the Committee then voted, with Mr. Mills voting "no," to direct the Federal Reserve Bank of New York, until otherwise directed by the Committee: (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 op portunities, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certifi cates 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) purchase direct from the Treasury for the (2) To account of the Federal Reserve Bank of New York (with where it seems desirable, to issue discretion, in cases to one or more Federal Reserve Banks) such participations short-term certificates of indebtedness amounts of special as may be necessary from time to time for the temporary of the Treasury; provided that the total accommodation amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. of maturing securities now held With respect to the exchange stated that the Account, the Vice Chairman in the System Open Market
majority clearly favored taking the shorter-term securities only. Therefore, unless someone wished to change his position in the light of the go-around, that would stand as the decision. He in quired whether anyone wished to change the views that he had previously expressed and there were no comments to such effect. The Vice Chairman then noted that four Committee members, during the go-around, had indicated that they would favor taking some of the four-year notes. Mr. Thomas commented that one reason that might be cited for taking some of the four-year notes was that there would be a possible risk of having an outstanding issue held predominantly by the System. Conceivably, the result might be that $5 billion of an issue totaling less than $7 billion would be held by the System. Mr. Hayes said that, abandoning his position as Chairman of the meeting, he was sympathetic to the point Mr. Thomas had made. There was an area of doubt and he felt that the Secretary spite of his expression of neutrality, would of the Treasury, in to take some of the four-year notes. be happier if the System were said he would take a modest circumstances, Mr. Hayes Under these amount. that he felt there was a difference Mr. Shepardson stated securities in against buying longer-term a general policy between
the market and taking a portion of longer-term securities on exchange. He would not be in favor of going into the market and buying longer term securities but on an exchange the proposition seemed to him somewhat different. Mr. Hayes noted that this point had been brought out in con nection with the refunding earlier this year. Mr. Mills then said that he would like to present a basis for taking the shorter-term securities in entirety. It was only at the last refunding that the System split its subscription, and that produced a certain amount of comment in the press. If the System again split at this time, it might in the eyes of the interested public seem to be making a change in its basic policy. Thus, the public might reasonably look forward to a repetition on each similar occasion when the System held maturing securities. Mr. Thomas recalled two occasions--one last year and one this year--when a split was made, and Mr. Mills added the comment that in such circumstances the System might appear all the more to be falling into a groove. that if the System took $1 billion of Mr. King commented a relatively small portion of four-year notes, that would be the were going to depart from the total financing. If the Committee from it at a time when he would rather depart its general policy, more trouble than at present and then possibly the market was in issue. The question amount of the longer-term take a larger
involved the principle of whether the System was going to go into the longer-term issue every time. Mr. Szymczak said he had the reverse feeling. When the System patently was going in to help the Treasury, the market would clearly assign that as the reason. However, on an occasion when the Treasury did not appear to need any help, an opportunity was provided for the System to get away from what could become dogma. Mr. Johns noted that in this case the Secretary of the Treasury had said that he neither wanted nor solicited help and that he was only thinking of the System protecting itself against the charge of being doctrinaire. Mr. Thomas commented that he felt that it might hurt the issue for the System to hold some of the longer-term Treasury securities more than it would help. said that in talking with the Secretary of Mr. Balderston an earlier occasion than the one previously the Treasury, on the hope that the interest rate fixed mentioned, he had advanced to attract buyers so that the by the Treasury would be rich enough owning the entire issue. The Reserve would not end up by Federal of a rate of time was the question of discussion at that point said he less. Mr. Balderston or 1/8 per cent 4-3/4 per cent be so priced as not that the offering would expressed the hope
to fail in the market, thereby leaving the System with the entire issue. In view of the point just made by Mr. Thomas, Mr. Balderston asked Mr. Rouse whether there was any indication from the market as to whether non-Federal Reserve holdings of the one-year security would be substantial. Mr. Rouse replied that he thought it was generally believed that corporations would go more for the one-year certificate than the four-year note. There would be some evidence in the attrition of expectations as to rates. On the whole, however, he felt that the System would have ample company in the one-year category. Mr. Balderston said that if this were not the expectation he would vote to take some of the four-year notes for the reason Mr. Thomas had advanced. Thereupon, upon motion duly made and seconded, it was voted that all of the $5 billion 3-3/8 per cent certifi cates of indebtedness maturing on November 15, 1959, and held in the System Open Market Account would be exchanged for the 4-3/4 per cent certificate maturing November 15, 1960. this motion Messrs. Hayes, Erickson, On and Szymczak voted "no" for Shepardson, the reasons they had stated. of the Federal Open Market that the next meeting It was agreed on Tuesday, November 24, 1959. would be held at 10:00 a.m. Committee next meeting, Mr. the date fixed for the In connection with of the of Presidents of the Conference as Chairman Johns, speaking
Federal Reserve Banks, noted that a committee consisting of Governor Robertson, representing the Board of Governors, and the members of the Committee on Fiscal Agency Operations, repre senting the Presidents' Conference, had been working on problems relating to the verification and destruction of United States currency and that a joint meeting of the Board and the Presidents had been suggested in order to consider the recommendations that would soon be made available by the special committee. Mr. Johns inquired whether it would be agreeable to hold this joint meeting following the meeting of the Federal Open Market Committee on November 24, and it was decided that the joint meeting would be held at such time. Mr. Johns also referred to the fact that the Vice Chairman of the Board of Governors had referred to the Presidents' Conference for comment a letter addressed to him under date of October 30, 1959, of the Treasury with respect to proposed by the Under Secretary in the United States Savings Federal Reserve Bank participation the question whether 1960. Mr. Johns raised Bonds program during should meet on this matter today or following the the Presidents on November 24. Federal Open Market Committee meeting of the follow the latter procedure it was agreed to After discussion too long a delay in that this would not involve if it developed to the Treasury. replying
Secretary's Note: Subsequent to this meeting, it was decided that the Presidents would meet later today on the questions raised by the Under Secretary's letter. Mr. Johns then noted that if the usual schedule were observed, a meeting of the Federal Open Market Committee would be held December 15,1959. He inquired whether it would be agree able to schedule a meeting of the Presidents' Conference on December 14 and 15, and possibly on December 16 depending on the agenda that developed. There being no objection, Mr. Johns stated that the Secretary of the Conference would be instructed to make plans on the basis of a meeting of the Presidents' Conference on the dates mentioned. The meeting then adjourned. Secretary
Also: Record of Policy Actions