January 12, 1960 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington on Tuesday, January 12, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr, Balderston Mr. Deming Mr. Erickson Mr. Johns Mr. King Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Messrs. Bopp, Bryan, Fulton, and Leedy, Alternate Members of the Federal Open Market Committee Messrs. Irons and Mangels, Presidents of the Federal Reserve Banks of Dallas and San Francisco, respectively Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Jones, Marget, Noyes, Parsons, Roosa, and Willis, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Assistant to the Board of Governors Mr. Koch, Adviser, Division of Research and Statistics, Board of Governors Mr. Keir, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors to the Chairman, Board Mr. Knipe, Consultant of Governors Messrs. Hostetler, Daane, Baughman, Tow, and Einzig, Vice Presidents of the Federal Reserve Banks of Cleveland, Richmond, Chicago, Kansas City, and San Francisco, respectively
Mr. Anderson, Economic Adviser, Federal Reserve Bank of Philadelphia Mr. ColdweIl, Director of Research, Federal Reserve Bank of Dallas Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York Mr. Brandt, Economist, Federal Reserve Bank of Atlanta Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on December 15, 1959, were approved. Upon motion duly made and seconded, and by unanimous vote, the action of the members of the Federal Open Market Com mittee, taken pursuant to a wire from the Secretary dated December 21, 1959, in authorizing that sample sets of the minutes of the Committee be made available to representatives of the Subcommittee on Foreign Operations and Monetary Affairs of the House Government Operations Committee, was ratified. this meeting there had been distributed to the members Before covering the period report of open market operations of the Committee a 6, 1960, and a supplementary report December 15, 1959, through January 11, 1960. Copies of January 7 through January covering the period in the files of the Committee. reports have been placed both preceding meeting, Mr. developments since the In commenting on following statement: Rouse made the has been faced weeks, the Desk the past four During pressures that emerge the customary seasonal not only with special occurrences also with several year-end but at the All of these factors our close attention. that demanded rise in market in a substantial together resulted taken
rates of interest. Among the more significant of these special occurrences was the attitude of the New York banks toward the extension of credit to dealers over the year-end. The details as to the reason for the banks' attitude have already been covered in the written reports and need not be repeated now. Suffice it to say that we regarded this attitude as decidedly harmful to the market at a crucial period. We therefore talked with several banks, and perhaps partly as a result of these conversations their attitude apparently softened somewhat. Nevertheless, dealers reduced inventories to abnormally low levels for this time of year, partly out of apprehension over the availability of credit at year-end. I should also mention in connection with the banks' attitude that some progress may have been made toward breaking down the tradition of window dressing, for two major banks showed substantial borrowings from the New York Reserve Bank on December 31, while another was a net borrower in the Federal funds market. I question, however, whether we should take credit for this since it was policy in one case and real need in the other two cases. In addition to the threatened scarcity of credit at the year-end, additional pressure was put on interest rates by the approaching Treasury financing. Also, expectations of a in 1960 were further strengthened by the developing boom settlement of the steel strike which, in the eyes of many observers, carried inflationary overtones. As a result of these factors, coupled with the increasing demands for credit, and the resulting expectations of higher interest rates ahead, the Government securities market had a generally heavy tone Prices of some long-term bonds declined over the period. bill issues traded at four points while most Treasury nearly new high levels. end of each year, open market As is usual toward the stepped up to meet acceptances were operations for bankers' These pressures, however, pressures in that market. seasonal 1959. The supply of new severe than usual in were more foreign accounts stopped seasonally but acceptances increased many cases, sold on balance, acceptances and, in buying The accepting banks, for window dressing purposes. apparently bills early in addition of dollar exchange faced with a large acceptances onto large blocks of pressed relatively January, to move them in size, with market which was unable a dealer up to a new peak were built that dealer portfolios the result rates further to raise were reluctant million. Dealers of $80 rate would higher that a moderately could not see because they rates were already because they felt the market quickly; clear and because they borrowing rates; to other high in relation tend to correct itself early in believed the situation would
the new year. As a result, the dealers finally curtailed their purchases of acceptances sharply, leaving a large overhanging supply in the hands of the accepting banks. The action by the System both in increasing its out right holdings of acceptances and making repurchase agreements against acceptances was designed to meet the seasonal pressures and to assist in maintaining general stability in the money and securities markets within the framework of restrictive open market policy. The extent of the action was roughly in line with measures taken under similar but less drastic circumstances prevailing at previous year-ends, and in accord with the guides to action arising out of the Committee discussion a little over a year ago. After the year-end, dealers' portfolios were reduced to around $43 million but because of the large backlog of ac ceptances still overhanging the market, dealers have moved their rates up by 3/8 of 1 per cent to 5 per cent bid far 90 days, and even at the new rate have been buyers on balance, portfolios aggregating $52.4 million last night. Some of the backlog has apparently been taken care of at these higher rates, but it may be some time before the market is cleared if the block of Venezuelan dollar exchange up, particularly bills is pressed on the market as appeared likely yesterday afternoon. Whether borrowers generally will be willing to pay the resulting acceptance cost of 6-1/2 per cent (5 per cent, plus 1-1/2 per cent commission) remains to be seen. It is possible that this cost will increase the pressure on the prime loan rate. Dealers are attempting to interest buyers in swaps out of short-term Treasury bills. I might also mention that the special payment of part to the Treasury, amounting to $266 million of System surplus payment which amounted to in addition to the regular monthly a minimum impact on member was handled with $73 million, The payment was made on January 4, but the bank reserves. as the Treasury permitted its reserve impact was neutralized to run higher than usual until balance at the Federal Reserve ran off $206.2 million Treasury January 7, when the System maturity on that date. bills scheduled for financing is concerned, the January As far as Treasury of June 22 tax anticipation of a $2 billion issue program of the $2 billion of only $1.5 billion and the rollover bills, special issue maturing January 15 into one-year Treasury bills, which had been by the market, well received was generally least $2 billion net. borrowing of at anticipating new Treasury the auction of apprehension about considerable early There was bills, particularly in billion one-year Treasury the $1-1/2 Tax and Loan Account would be no the fact that there view of
privilege on this issue. Market guesses last week indicated a range of 5.30 to 5.40 per cent in the auction, but there was a decided improvement in sentiment towards the close on Friday. Over the weekend, an article in the Sunday Times pointing to these issues as the Treasury's "best bargain" led to an unexpectedly large public interest in the issue, reminiscent of the reception accorded the 5 per cent notes of 1964 last October. This is another example of public responsiveness to attractive interest rates. A 5.10 per cent average issuing rate, for example, would mean a net return to an investor of about 5.47 per cent on an investment yield basis. Guessing as to the rate in today's auction is now down to about 5.05 per cent, according to information from the Desk just a few minutes ago. The Systen holds $245 million of the maturing January 15 bills. In view of the projections over the next few weeks, and with the reserve large public interest in today's auction making its success very likely, we plan to submit tenders in today's auction run off a portion of these bills on the 15th. which will part of our subscription will be Our tenders for this below the stop-out bid. The designed to be only a shade is fortunate in having a rally in its securities Treasury bidding today. Basically the develop just prior to the to a bearish position on the rally developed as a reaction was considerably overdone, of commercial banks which part the budget surplusses pro recovery was aided by and the of the Union Message on jected in the President's State seemed to lose steam yesterday Thursday. The bond rally closed with all Treasury bill market afternoon, but the bid. In the below 5 per cent bills at or outstanding per cent and averaged 4.59 91-day bills auction yesterday with 4.60 per per cent, compared 182-day bills 4.99 the cent and 5.10 per cent a week ago. Thereupon, upon motion duly made seconded, and by unanimous vote, and market transactions during the open the period December 15, 1959, through 1960, were approved, January 11, and confirmed. ratified, under distributed staff memorandum of the In supplementation with statement the following Noyes made 1960, Mr. January 8, date of economic developments: to respect
The most noteworthy developments in the period since the last meeting are the settlement of the steel strike and the announcement by the President in his State of the Union Message that he anticipates a small surplus in fiscal 1960, and that in the budget estimates for 1961 receipts exceed expenses by $4.2 billion. While we do not yet know all of the details with respect to the steel settlement, the broad outlines are clear. It provides for a rate of increase in labor cost that will prob ably be slightly in excess of the rate of increase in productivity in the steel industry. The best guesses seem to be that for the industry as a whole, employment costs will go up about 3-1/2 per cent per year over the period of the con tract. On the basis of recent trends, output per man hour will probably increase at a little less than 3 per cent per annum. The difference between these two rates is much smaller than in other postwar settlements, as is evidenced by the industry's estimate that employment costs have increased 7-1/2 per cent per year on the average since 196. In the longer run, the limitations on the escalator clause that are contained in the settlement may be even more important. If one grants that technical factors are likely to carry the consumer price index up a few points in the next two years, in any case, then the steel workers have everything to lose and nothing to gain from further inflation and this fact should be readily apparent to them. From the point of view of the Federal Reserve, and perhaps the country as a whole, this is probably the mos significant fact emerging claims and counter claims as to the from the welter of inflationary or noninflationary nature of the contract. President's message, that there will The estimate in the 1960, appears to be well-founded. a small surplus for fiscal be will survive in an $4.2 billion surplus for 1961 Whether the In any case, the strike year is less certain. election of the Union message, taken together, settlement and the State in which it hasn't market into a position have put the stock despite the universally know which way to turn, seemed to economic activity in the year bullish prognostications for feel that we may have now Some observers seem to ahead. the relative yields point where reached the long-heralded of new institutional flow a substantial are attracting fixed income securities. equities into away from investment are almost of current activity The customary measures certain for the seem as and further increases all up, can be. On a seasonally future as anything near-term which has been activity, even construction adjusted basis, The Board's up in December. months, was for several lagging
revised index of industrial production, moving at new and unfamiliar levels, rose from 156 in November to about 163 or 164 in December, and should easily pass the pre-strike peak of 166 this month. Gross national product is estimated to have been $481 billion in the fourth quarter, and is expected to come close to $500 billion for the current quarter. The record seasonally adjusted rate of 151 per cent of the 1947-49 average which is estimated for department store sales in December represents an impressive volume of cash and credit by any standards. It is almost alarming to estimate what the expansion in instalment credit in 1959 might have been had it not been for the steel strike. The $5-1/2 billion expansion which did take place was equal to 1955 in dollar volume, although the percentage increase was, of course, smaller. These data, portraying as they unquestionably do a high and growing rate of economic activity, stand in interesting contrast to wholesale prices and the money supply, both of which are substantially unchanged from year-ago levels. Perhaps this contrast accounts, at least in part, for the fact that in the forecasts for 1960 one finds much less assurance of the inevitability of inflation than in their counterparts of a year ago. Mr. Thomas presented the following statement concerning financial developments increases in interest rates to new high Further and severe pressures on levels in the past month attributed basically to the large money markets may be of credit demands to cover seasonal liquidity volume expectations as to in part to market needs, though Since the termination of forthcoming developments. the tone of the market has the seasonal pressures, steadied or declined rates have changed and interest causes for the highs. Other somewhat from their were, first, anticipations moods of the market varying Treasury financing, the effect of forthcoming as to when the Treasury the changes that occurred and then when the President needs and also announced smaller of a budgetary surplus. mentioned the possibility aside from credit demands, shifts in actual The are shown by the banking psychology and expectations,
figures of the period. At banks in leading cities, business loans, including those to sales finance companies, increased by over $1.1 billion in the four weeks from December 2 to December 30--a larger increase than in the same period of other recent years. Loans on securities also increased substantially, though not as much as in some other years. There were further increases in real estate and other loans and in holdings of securities other than Governments. Holdings of Governments declined further, reflecting redemption of an outstanding tax bill issue, as well as continued bank liquidation to obtain funds to meet loan demands. As a net result total loans and investments, excluding loans to banks, increased by around $1.2 billion--a substantial but not unusual expansion for December. Pressures on the Government securities market resulted from sales by banks and also from a sharp decline in dealers' portfolios. A decline in dealers' positions is unusual for December and it resulted in part from fear of financing difficulties at the year end. At the same time many other holders were probably endeavoring to sell securities to raise needed cash. Treasury bill rates rose to a high level--well over 5 per cent on an investment yield basis for many issues. Long-term rates increased sharply and above the highs reached temporarily in September. rose Within the past few days these trends have been reversed. Bill yields have declined somewhat and reception for the new offerings has been much better than expected. In interest evidenced in the new one-year bill fact, public is exceptional. Less than a week to be auctioned today ago a failure of the offering was viewed as a possibility. The changed tone of the Government securities market also reflect the course of bank in the last few days may week of the month there was an credit. In the first sharp decline in loans at New York City exceptionally a moderate decrease in investments. banks and also in leading cities outside New Partial figures for banks in loans and seasonal declines also show marked York as great as in the perhaps not investments, although other recent years. same week of some by State and local governments, New capital issues during November and December, which were in moderate volume rather large offerings in January. are scheduled for continue moderate. Corporate offerings
Although the number and frequency of Treasury offer ings in January has kept the market under some pressure, the amount of cash financing is less than had been expected. Since early December the volume of the public debt outstanding has been in the process of decreasing, and in the months ahead any new borrowing will be more than offset by earlier or subsequent retirement of debt. It is possible that except for a moderate volume of borrowing in April, no substantial cash borrowing will be needed until July. Bank credit expansion in December apparently resulted in a somewhat greater than seasonal increase in the money supply during that month. At city banks demand deposits increased somewhat more than in other recent years, but there was a larger than usual decline in the first week of January. Time deposit growth was only moderate. Figures are not yet available for country banks, which usually show very large and often unpredictable changes in Decem ber. Comparisons with the past, moreover, are somewhat complicated by the change in definition to exclude Federal Reserve remittance drafts from deposits. When allowance is made for changes in the banking structure and in the definition, demand deposits adjusted at member banks in the last half of December may have been a little smaller than a year ago. Much, or perhaps all, of this decrease was offset by an increase at nonmember banks. The decline for member banks was mostly in central reserve city banks; country member banks showed a moderate increase. Reserves to meet the large and varying seasonal needs of banks in recent weeks have been supplied in part by System purchases of securities, to a small extent through increased vault cash holdings, and to a considerable degree by a large, partly seasonal, increase in float. Banks have average level of between $900 kept their borrowings at an and $1 billion, with a substantial temporary million few days of this year to correct for increase in the first some of the available reserves year-end deficits. Since of the large seasonal from float and also because arose were permitted to increase needs, excess reserves liquidity period. This times during the high levels at to relatively explain in part why money markets were often tighter may reserves would indicate. the level of net borrowed than reserves for have been absorbing System operations yesterday and the Including sales nearly four weeks. next Thursday, the total of maturing bills redemption
reduction effected so far is close to $1 billion. An additional $400 million reduction will be needed in the next two weeks to maintain a level of about $500 million of net borrowed reserves on the basis of usual seasonal demands. Further sales or redemptions of as much as $300 million may be appropriate in late February and in March. The major policy question for the immediate future is how much restriction should be placed on credit growth. Actually the next two months should be a period of seasonal credit contraction. Appraisal of the economic outlook points to the strong likelihood of large and vigorous demands for credit from various sources, which may diminish the size of the seasonal decline. It is possible, however, that the usual seasonal loan liquidation, together with the high level of interest rates already attained, may result in at least a temporary relaxation of pressures toward further increases in rates. The trend in the stock market since the upward spurt at the turn of the year indicates that investors may not be so enamored of stocks as they have been in the past. Savings may move in larger volume into fixed interest securities and give strength to the bond market. It appears evident from December developments that rising interest rates and limitations on reserve avail ability will not prevent banks from meeting the essential of their customers. They will borrow if credit needs necessary. Yet restrictive forces will probably be necessary to induce healthy caution under the circumstances that are in prospect. increase borrowings and banks show any tendency to If credit relative to the seasonal pattern, the dis expand Perhaps it should be raised count rate should be raised. such a development, A higher as a precaution against open market operations which rate, accompanied by discount money supply, should though limited would assure an adequate deterrent to unsound credit commit serve as a desirable In view of the healthy growth. ments without preventing rates, there may be a current level of market interest would be 4-1/2 per cent a rate of as to whether question high enough. the United States with respect to commented as follows Mr. Marget balance of payments: presenting on I have been The broad picture balance of payments to our with respect developments
has been essentially this: a long, sustained deterioration from a peak surplus in 1956-57 to a low point which can be taken as represented by the levels of exports and imports prevailing from February to May of last year; and then, beginning with June of last year, evidence of an underlying improvement which, while it was certainly anything but spectacular, gave reason to hope that, if the right policies were followed, we should expect to attain, in time, the necessary degree of balance in our international accounts. But I have felt it necessary several times to warn against the assumption that this adjustment which seems to have been taking place has been proceeding "so rapidly and certainly that we no longer have a balance-of-payments problem, and that we therefore have no need to frame our policies with reference to what is happening in that area." The need for this kind of warning is illustrated by the foreign trade figures that have become available since the last meeting of this Committee--the trade figures for November. The figures are not good. On the import side, to be sure, the news is not bad: November imports were at the same average rate that prevailed during the six months May to October, and customs collections in December are such as to suggest another month of little change in the import level. But the export showing in November was poor: instead of a continuation of the fairly steady rise in the rate of exports that we have been witnessing since last spring, the November export rate dropped sharply to a level that was not much higher than it was last spring. It would be quite wrong to conclude from this that the adjustment which we believed we had been witnessing since last spring was a snare and a delusion. In the first place, past experience has shown that no great reliance should be placed on the trade figures for any single month. Secondly, there is reason to suspect that steel shortages had something to do with the poor November export figures. More than half the drop in exports, for example, was in automobiles and machinery--sectors, that is, in which steel shortages last November were hindering output. Thirdly, our gold and dollar figures for December, while they are still incomplete, are such as to suggest a distinct improvement in our over-all balance of payments for that month. The thing to say about the disappointing trade figures for November, therefore, is not that they mark the beginning of a reversal of the improvement in our balance of payments
which began to be evidenced last spring, but that they emphasize again how far this improvement will have to go before we can feel comfortable about our position. The relatively favorable gold and dollar figures for the fourth quarter of last year, if our guesses are correct, would suggest, to be sure, an over-all balance-of-payments deficit at an annual rate con siderably below the $4.5 billion, and even below the $4 billion, figures that have been used within recent months. But the over-all deficit for 1959 is almost certain to turn out to be still about twice as large as it was in the years before our balance-of-payments position began to be a matter of national concern. From that standpoint, the disappointing trade figures for November had best be taken as a salutary reminder of how long a road we still have ahead of us in the field of balance-of-payments adjustment. Chairman Martin suggested that during the go-around the Presidents might wish to comment regarding the extent, if any, to which it appeared that borrowing at the discount window was being used to supplement the capital of member banks. Mr. Hayes then presented the following statement of his views business outlook and credit policy: with respect to the Settlement of the steel strike has removed the uncertainty as to the availability of steel for the remains considerable uncertainty economy, but there as to the settlement's over-all inflationary effects, not only the future course of steel prices including consequences in other industries, but also wage and price overlook the importance of public psychology, We cannot and other public that the press and there is no doubt the settlement as inflationary. comment have interpreted can find encouragement in the On the other hand, we hourly wage cost in the average fact that the increase large as in the earlier be only about half as will therefore be much closer agreements and will postwar in the rise in productivity the average annual to of the various cost The staggered effects industry. to get through most may permit the industry increases although I am increasing prices, this year without of
inclined to think this may be overoptimistic. But the country has been alerted to the issues of wages, prices and productivity, and it is possible that the settlement may turn out to be an important first step toward break ing the spiral of wage increases, even though this aim has certainly not been fully achieved as yet. In any case the path is now clear for further business expansion, sparked by inventory rebuilding. Although the full year' s rise in inventories may be only moderately above the $5 billion increase of 1959, a sizable growth of in ventories early this year will contrast sharply with the record of virtually steady inventories in the fourth quarter of 1959. It remains to be seen whether this temporary influence will be supplemented later by a more lasting surge of consumer spending and business investment in plant and equipment. With considerable slack still available in the way of excess plant capacity, it seems doubtful whether sharp upward revisions in business capital spending will develop. To date there are no statistical indications of such a surge. In the consumer area, much may depend on future developments with respect to consumer credit, which will bear watching in the coming months, both as to volume and as to further liberalization of terms. One moderating influence on aggregate spending will be the substantial retirement of Federal debt in prospect for the last four months of this fiscal year and perhaps for the ensuing fiscal year. All in all, I think it is too early to a real boom will develop in the coming months. guess whether we should welcome a moderate rate of further busi Of course the current existence of substantial ness expansion in view of unused resources in the economy. prices, including sensitive commodity prices, Wholesale on the other hand we over-all stability, but continue to show helpful contribution from farm can look forward to a less prices continue progresses--and consumer prices as the year to inch ahead. point to continued area, all statistics In the credit liquidity is being significantly demand, and bank strong loan York banks has been especially Pressure on the New reduced. banks were forced to reduce investments by severe. These in order to July and late November cent between late 22 per at the same time in loans while a 5 per cent increase meet Undoubtedly the cent loss of deposits. a 6 per experiencing a major factor deposits was foreign time loss of severe York banks to for the New difficult making it increasingly business lenders, role as leading play their traditional
While loan-deposit ratios have risen throughout the country, the increase in New York has been much faster than elsewhere and the ratio now 69 per cent, is far above that of the rest of the country. With substantial legitimate business borrow ing needs in view to support the prospective business expansion, it seems clear to me that we ought to allow some moderate growth in the money supply if we wish to avoid the excessive pressure on interest rates that is likely to result from exclusive reliance on increased velocity. Presumably this should be accomplished through open market operations designed to reduce slightly the degree of pressure which we have been maintaining on bank reserves. The major question facing us at this time is what to do about the discount rate--or perhaps the question really is not whether to raise the rate, but when and by how much. Obviously the spread between the discount rate and market rates is enough to warrant action if only as an "adjustment" to the market. We must of course be mindful of prospective Treasury financing operations, which include today's bidding on $1.5 billion of one-year bills as well as the announcement late in January of the major February refunding program. A strict interpretation of our "even keel" policy might require us to refrain from a rate change until after the February refunding is out of the way, when there will be a fairly long "free" period. On the other hand, the current range of market rates is already so high, and a discount rate change is so widely expected, that it could be argued that a moderate discount rate rise in the near future would not do any real damage from the Treasury's point of view. bearing on our timing is the prospect that Another factor the banks' prime rate may well be increased in the very near future. While some bankers favor going slowly in the matter in view of the fact that rates of pressing for higher rates, are already high and profits quite satisfactory, the action on the prime rate. probabilities seem to favor early rate moves have followed recent occasions discount On several and I think it would be shortly after prime rate changes, if this sequence should become traditional. unfortunate preferable for the think it would be speaking, I Generally to assume the leadership in interest rate changes. System we should avoid appearing for delay is that One argument settlement and thereby to the steel to react "automatically" settlement as clearly inflationary. seeming to stamp the have special significance abroad. Such an interpretation might considered in are probably being rate increases Incidentally, countries, who may, in fact, be the U.K. and other European here. With international until a move is made delaying action
funds now flowing more freely in response to comparative rates than at any time since the twenties, rate changes here and abroad may now take on an unfortunate "competi tive" aspect. However, despite our position now as the leading international money market, I feel that our decision must be based primarily on domestic grounds. With regard to amount, I don't believe a change of more than 1/2 per cent should be considered at this time. If the move is delayed till late February, a 1 per cent increase might then be warranted if market rates continue to strengthen--but at present it would be too strong a signal. Our directors discussed this whole problem at length last week. Most of them believe that discount rate action fairly soon is inevitable--but there was no disposition to rush matters. On the other hand there was considerable reluctance to see the prime rate lead the discount rate once more in the next advance. On balance, I think I would favor a 1/2 per cent increase this week or next week, accompanied by a slight easing of open market pressure on bank reserves; but I recognize that valid points may be adduced in favor of delay and I am eager to hear how the others around the table feel on this matter. I believe the directive should be renewed without change. Once again, I would like to suggest that serious consideration be given to the feasibility of stand-by authority to impose consumer credit control so that we shall not be caught short if real excesses should develop in this sector. Mr. Johns said that the continuing question in administration member banks were using such credit of the discount function was whether structures. Some Eighth District their capital and deposit to supplement banks, including some of the larger ones, pursued a policy of keeping As long as they could cover fully and even over-loaned and invested. there was only occasional in the market, funds or otherwise with Federal not obtainable and When such funds were to the discount window. resort their indebtedness to lenders, were called upon to discharge the banks
their only choice was to come to the Reserve Bank. Early this month, the St. Louis Bank's discounts reached an all-time high, occasioned partly because banks had preferred to show no indebtedness in their end-of-year statements. In summary, to answer the question whether funds obtained at the discount window were used to supplement some member banks' capital and deposit structures, his answer would be in the affirmative--as long as the Reserve Bank let them pursue such a course, which generally was not very long. Turning to monetary and credit policy, Mr. Johns said that the responsibilities of the Federal Reserve seemed to call for per mitting an increase in restraint in the near future. This would come automatically from a business boom unless the System undertook to accommodate all of the credit demands that the boom would undoubtedly Consumer and investment demands appeared likely to press generate. in many parts of the economic system and on capital limitations were likely to be stronger in the immediate inflationary tendencies immediate past. Likewise, the balance-of-payments future than in the continued to call for restraint. situation of monetary restraint exer the past year the degree During and the quantity of money involved keeping bank reserves cised had for the near future Mr. Johns suggested practically constant. to rise, if at all, credit, and deposits permitting bank reserves, developments, investments To avoid inflationary only slightly. the rate of increase in and an out of savings be financed should
turnover of demand deposits. Apparently velocity of money leveled off in 1959 after midyear, but with the resumption of activity after the steel strike it seemed likely that velocity would again increase. In view of the present strength of credit demands, he wondered whether the greater danger was not in too little rather than too much restraint. Mr. Johns then referred to the chart introduced by Mr. Bryan at the December 15 meeting showing the course of member bank reserves. He agreed that there was a need for developing a means of giving instruction to the Desk in quantitative rather than qualitative terms. The concept of effective reserves seemed to him useful. However, whether the Committee wanted to keep the supply of reserves steady, increase it, or reduce it, he would suggest total reserves as the policy and that instructions to the appropriate objective of monetary would reduce disproportionate emphasis Desk be in such terms. This feel of the market as guides to the on net borrowed reserves and the Desk. and in a sense revived by Since the boom seemed strong that it would be a strike, Mr. Johns felt termination of the steel of bank reserves at a stimulus by an expansion mistake to provide the Desk be instructed would suggest that Therefore, he this time. the next Committee the period until operations during to carry on decline in roughly a seasonal bringing about a view to meting with policy directive. change the He would not total reserves.
Mr. Johns then turned to the question of the discount rate and said he continued to feel that an increase was desirable. As Mr. Hayes had said, the questions of timing and amount were difficult. Hoping that an adjustment of perhaps 1/2 per cent could be made promptly, he found consolation in the memorandum dated January 11, 1960, from the Board's Division of Research and Statistics (showing estimated periods of Treasury financing during 1960) which suggested that the traditional concept of the even-keel policy might appropriately be altered this year. He felt that serious consideration should be given to a prompt change in the discount rate. This might involve action on the part of the St. Louis directors on January 14, effective perhaps January 18, if the Board of Governors should see fit to go that timing. In saying this, he was aware that an increase along with of 1/2 per cent probably was not enough, unless further action was to future. However, he agreed with be expected in the not too distant of more than 1/2 per cent at this time Mr. Hayes that an increase might be a stronger signal than the System ought to give, particularly between the current Treasury of the relatively short period in view expected date of announcement of the forthcoming financing and the all discount rate prudent to take If it were thought refunding. for a while and be willing to wait one time, he would action at per cent increase. a full one then consider did not differ District conditions said that Sixth Mr. Bryan warrant detailed a whole to nation as those for the from sufficiently
comment. On use of the discount window, he recalled having reported at the December 15 meeting that there was disproportionate use of the window in the Sixth District. While this had happened on occasion in the past, it seemed more persistent now and had been running on for a number of months. It seemed to be occasioned (1) by a slight run-off of funds from the district, (2) because loan expansion trends at com mercial banks had been heavier than elsewhere, and (3) because district banks, generally speaking, had not liquidated investments as rapidly as banks throughout the country as a whole. He suspected that the average maturity of portfolios of Sixth District banks was somewhat longer than at banks of the nation generally. As to whether banks were using Federal Reserve credit as a substitute for capital or depositors' funds, Mr. Bryan felt that the answer was clearly in the in a number of cases. There were banks that had borrowed affirmative regularly, yet had bills in their portfolios and in some heavily and of investments at little loss. After discussion cases could dispose executive committee, he was asking for with the Reserve Bank's However, there were of those banks. of the borrowings repayment These situa was more difficult. where the problem other situations of deposits that were totally to banks with a run-off tions related having a hard time accounts and were in their investment illiquid if the bank In two cases, loan accounts. in their making adjustments by selling investments, to reduce its borrowings concerned was required
there would be a substantial diminution of capital because the loss would be so great. With borrowings at the Atlanta Bank running per cent of total member bank borrowings throughout the System, the discount window was proving difficult to administer. Mr. Bryan said that he would like to see an increase in the discount rate rather promptly and that he would be willing to ask the Atlanta directors to lead off such a move. As on two or three other occasions in the past several years, he was even toying with the idea of progressive discount rates to bring some recalcitrant borrowers under restraint. With reference to the steel settlement, Mr. Bryan commented was a temptation to debate the question whether it was that there inflationary on the basis of the degree to which the terms of the increase of productivity. In his settlement were allied to the the entire benefits of judgment, any wage policy which transferred was inflationary, at least productivity to the employees increased in the longer run. pursue the matter of that he would like to Mr. Bryan said at some later quantitative terms in the Desk instructions giving not do so today. time, but he would from the banks borrowed that 224 member Mr. Bopp said year since the than in any in 1959, more Reserve Bank Philadelphia of $42 million was daily average borrowing early 1930s. However, averages of less than 1955 and considerably same as in about the
$68 million in 1956 and $66 million in 1957. The Philadelphia Bank, which in various years was in a position such as reported by Mr. Bryan, had recently been fortunate not to be in such a position, Borrowings were running about 5 per cent of the System total. There were a few problem banks, and on these the Reserve Bank had been working with some insistence. A few other banks had been borrowing for longer periods than usual, but for understandable reasons. For example, in Lancaster County there was a recurring problem related to tobacco and feeder cattle. In another case a bank had held for many years a substantial account that recently was withdrawn; it would not appear that a bank should necessarily be prepared for such a contingency. Two banks perhaps had been using the discount window in lieu of additional capital, and if one took into account borrow ings from the Reserve Bank plus Federal funds transactions, additional have to be placed in this category. However, the Reserve banks would working with those member banks, and as a whole borrowing Bank was seemed moderate relative to 1956 and 1957. District economic developments were Mr. Bopp said that Third on monetary and credit not such as to affect his recommendations present degree of pressure continuing about the policy. He would favor in recent months in the The slow rate of increase on bank reserves. mortgage market, the for velocity, the tight money supply, adjusted ratios go much to see their loan-to-deposit reluctance of banks rate high unemployment of a relatively and the presistence higher,
indicated caution about moving to a significantly more restrictive policy. On the other hand, the persistent upward trend in prices, other than of farm and food products, the absence of evidence that high interest rates were causing a downward adjustment in plant and equipment expenditure programs, indications that the bulk of unemploy ment was frictional and structural, and the prospect that the steel strike settlement would initiate an upsurge in business activity and intensify price pressures all suggested that any significant easing of restraint at this time would be inadvisable. In weighing these two sets of factors, Mr. Bopp found no strong evidence that present policy was either too restrictive or too easy. At this stage of the upward phase of the cycle and in view of current optimistic expecta believed the risk that any significant easing of credit tions, he spiral of prices and the develop might contribute to another upward was greater than the risk that continua ment of an unsustainable boom would inhibit a current degree of restraint approximately the tion of The System should be alert, sustainable rate of growth of the economy. was becoming so tight emerging evidence that credit however, to detect rate of growth. All things that it was retarding a sustainable change in the directive. would favor no considered, he rate presented that the discount Bopp then commented Mr. of any increase. timing and amount relative to the difficult questions between the for some time that had prevailed The wide disparity that the either rates indicated market rate and short-term discount
discount rate was too low or that market rates were too high. He would not favor supplying funds to bring market rates down close to the discount rate; instead he would favor moving the discount rate up to closer alignment with current market rates. However, on the timing and the amount of increase that would be appropriate, he was less certain. The interval between completion of the current Treasury financing and expected announcement of the terms of the February refunding was less than two weeks. This was hardly enough time for the market fully to adjust to a rate increase before the Treasury must consider the terms of the February refunding. The longer interval from the latter part of February through most of March would be distinctly preferable from the standpoint of Treasury financing. As to the amount of increase, there was no evidence yet as to whether settlement of the steel strike would set off a stable, sustained expansion or a feverish, speculative boom. An increase be warranted to bring the discount of at least 1/2 per cent would now an increase of with market rates; however, rate into better alignment if evidence of a boom should per cent, which would be justified one absence of such evidence. now in the would not be appropriate emerge, to see a one per cent boom emerge, he would like Should a speculative to indicate that the Federal as a sort of shock treatment increase inflation and its powers to prevent determined to use Reserve was disadvantages of the advantages and boom. Weighing an unsustainable in order that no increase now he leaned toward these possibilities,
the System might be in better position for a one per cent increase should evidence of a boom appear. However, he would not be opposed to an increase of 1/2 per cent if the Manager of the Open Market Account thought there was sufficient time for the market to adjust to the increase before announcement of the terms of the February refunding. Mr. Fulton said that Fourth District member banks had been borrowing considerably less than a proportionate amount of total member bank borrowings, taking into account the size of the district. The proportionate size of the district was around 10 per cent of the total of the System, whereas borrowing had been only two to three per cent of the System total. The Reserve Bank had initiated conversations with some member banks. There was an inclination, he felt, to use the discount window, if permitted, in order to augment capital and to arbitrage the discount rate against rates on Treasury bills or any short-term securities that would yield more than the discount rate. The Reserve Bank is watching that carefully. member bank concerned, the Reserve Regardless of the size of the Bank followed the practice of finding out why it was borrowing, temporary. The Reserve Bank when the borrowing was very except the member bank, and it had been then initiated discussion with number of continuous borrowers down. quite successful in keeping the developments, Mr. Fulton to Fourth District economic Turning that the steel strike had was a general feeling of relief said there
been settled. After discussing some of the developments that had led to the strike settlement, Mr. Fulton commented that the terms were better than those accepted by the can companies and the aluminum industry. They would involve an increase of about 3.5 per cent of total payroll, but if the terms of the aluminum settlement had been applied the increase would have amounted to about 4.7 per cent. If the Kaiser formula had been applied, the mills, taking into account the older mills, would have had an increase amounting to about 5 per cent. There was no letup in the demand for steel and inventory building was going on apace. Present production was at an annual rate of about 140 million tons, but some industry spokesmen felt that production for the year would be around 125 to 130 million tons, which would indicate a cutback later when the pipelines for steel had been filled. The outlook for profits and prices depended to a considerable extent on the efficiency of the employees. Reports indicated that the mills had good cooperation during November and December and that some production records were broken; if this continued, cost increases to the companies might not be too great, for production would take up the slack. However, the price of steel would tend to reduce other costs entering into one company reported a significant rise in profits. For example, Nevertheless, there was during the coming year. the cost of gas their expansion and would cut back on that the mills no indication After commenting on one such anticipated improvement programs.
program, Mr. Fulton said it was claimed that foreign competition was still great and that some foreign steel was obtained during the strike on promise of future orders over a period of time. At the same time, it was reported that European users were taking all of the cold-rolled steel available and it was expected that United States mills would be able to ship this particular steel product to Europe in quantity. Mr. Fulton said the general tenor among businessmen was one of considerable optimism for the first quarter of 1960. Unemployment was going down and employment was increasing, although it was asserted that overtime would be used as an alternative to hiring additional employees as long as it was profitable to follow such a course. Loan demand was strong and persistent, and doubt was expressed that the usual seasonal run-off would prevail. The pressure for mortgage loans was great; brokers were trying to obtain expanded lines and promises of more funds. Inventories were being financed from internal funds did not expect that those funds to the extent possible, but bankers department store sales, and in would last too long. Construction, District was high and gamut of business in the Fourth fact the whole seemingly going higher. All of this would add to inflationary pressures. that the discount it was appropriate In Mr. Fulton's opinion, relationship between of the current at this time because rate be raised that such an increase rates. He felt short-term market that rate and
had been discounted by the market to a substantial degree. If action were deferred, that might be a cause of unsettlement in the market while a rate increase would not appear to be a surprise. Accordingly, while he would not change the Committee's directive, he would favor increasing the discount rate by 1/2 per cent now regardless of the impending Treasury financing, feeling that this would have a stabilizing rather than a disruptive effect. He recommended that the pressure on bank reserves be maintained in about the same degree as during the past week, with net borrowed reserves as near the $500 million level as could be reasonably achieved. Mr. King recalled that his standard comment at the past several Committee meetings had been to the effect that System monetary and credit policy was putting the economy under sub pressure. He felt that this was still a stantial and desirable statement. He did not believe that a constant increase proper should be a major objective of System policy, and in restraint money supply seemed clearly indicative the lack of growth of the the past year had produced a of the fact that System policy over on the expansion of bank credit. substantial amount of restraint on expansion of the money market and restraint Tightness in commitments were where unsound credit had reached a point credit applications were being be made; it appeared that not likely to unanimous to apparently were carefully. Predictions screened
the effect that 1960 was likely to be a year of high activity, and along with this no doubt would come additional inflationary pressures. Mr. King said he was not surprised to hear Mr. Bryan's comments about the extent of member bank borrowing in the Sixth District. This seemed a natural consequence of a tight situation in credit markets generally, and of the South being an area experiencing more rapid industrial development than the country as a whole. Mr. King agreed with Mr. Thomas that a 1/2 per cent discount rate increase at this time was not likely to accomplish great results, and he would not recommend a change in the Committee directive at present. He found himself in agreement with Mr. Bopp's thinking on both the directive and the discount rate. Like Mr. Bopp, he would prefer to postpone action on the discount rate rather than to make what amounted to a technical adjustment now and then follow in a with another technical adjustment. As he had commented few weeks changes were more disturbing to the before, he believed frequent should be applied. when it dose of medicine than one good public discount rate action to he would favor postponing Accordingly, increase then seemed in order, first of March and, if an around the statement was, of course, by one per cent. That to move upward that might take place. subject to developments Mr. Bryan's comment agreement with Shepardson expressed Mr. The wage settlements. aspect of recent the inflationary regarding
idea that there was no inflationary effect if labor got no more than the productivity increase seemed to him definitely a mistaken concept. There would be continuing inflationary aspects until such time as there was a different allocation of the fruits of increased productivity. Mr. Shepardson said that the outlook in the country generally appeared to be one of extreme optimism, one that was likely to be stimulative of excessive developments. In many areas, price changes either were occurring or were on the verge of occurring. Already there had been advances in segments of the labor market that were going to have their effect on prices. It seemed that the country was going to be faced with growing inflationary pressures. For that reason, he considered it highly important that the System stay ahead of the game and through reasonable restraint try to curb enthusiasm before it got to a point beyond control. excessive Mr. Shepardson felt it appropriate to consider more restric From the standpoint of bank reserves, the tive action at this time. return flow of the try to recover the normal seasonal System should What effect that would out during the fall. reserves that were put determined by the way that reserves would be have on net borrowed not as great as demands were reacted. If credit the economy the level of net some lowering of it might result in anticipated, were heavier, it might If the demand pressures borrowed reserves. In any event, the level of net borrowed reserves. mean a higher
System should try to keep reserves at a level that would maintain restraint during the next few weeks. As to the discount rate, Mr. Shepardson said he would prefer that the System take the lead rather than follow. There had been much talk recently of an increase in the commercial bank prime rate. There had been situations in the past where it was desirable not to take the lead, and to explain later discount rate action as a technical adjustment. In the present situation, however, it appeared to him that the System rather than making a technical adjustment, should be moving ahead of a change in the prime rate. The amount of a discount rate increase was, of course, open to question. His own inclination would up by 1/2 per cent, and fairly promptly. He would favor be to move existing directive; the System was still faced with continuing the and the present directive seemed the problem of combating inflation appropriate. he agreed with everything Mr. Mr. Robertson commented that stage of the business cycle, had said. At this particular Shepardson to maintain a restrictive upon the System considered it incumbent he about expansion accompanied would inevitably bring policy. Any easing turn by painful readjustments. be followed in which would by inflation, and credit that the monetary he had the feeling the same time, At bite as the to past was beginning in the recent policy followed view, the Com In his system was reduced. of the banking liquidity than he had at the moment a bigger bite policy was taking mittee's
thought would be likely not too long ago. It was not taking too big a bite; he would not advocate any lessening of restrictiveness. However, it appeared that System policy was beginning to be quite effective, and in this he was rather pleased. Mr. Robertson said that Mr. Bopp had set forth well the pros and cons as to the discount rate. He (Mr. Robertson) leaned toward moving up step by step, that is, 1/2 per cent now, and quickly. Then, if the situation called for an additional step later on, he would take it. There were times when an increase of one per cent should be the action of the System, but as he saw it today an increase of 1/2 per cent might be the right amount to add now to the psychological atmosphere in which business was being carried on. He would not recommend a change in the directive. Mr. Mills said that in furtherance of the very thin line of sentiment expressed in favor of lessening pressure on the reserve position of member banks, he proposed to enlarge on the statement that he made at the December 15, 1959, meeting of the Open Market Committee, after which he would warn against an increase in the dis count rate at this time. Mr. Mills then presented the following statement: The opening of the year 1960 reveals the national economy badly overextended creditwise and finds the System's Open Market Committee faced with the necessity of conducting a monetary and credit policy that will prevent tautness in the credit markets from reaching breaking point and will allow enough credit the stable and sustainable economic headroom to support The rationale of such a policy argues that growth.
deflation is a more imminent danger than inflation, and that if a severe deflation is to be avoided economic momentum must be maintained through the invigorating impulse of a reasonable flow of newly created commercial bank credit into the economy. The objectives of this program cannot be reached through a monetary and credit policy whose primary purpose is to eradicate the assumed evidences of inflationary pressures through restricting the availability of commercial bank credit solely within the narrow limitations of repayments on outstanding credits and the proceeds of securities sold into the hands of nonbank investors. This kind of policy in all likelihood will induce the very deflation, escape from which should be sought after. The rejection of a severely restrictive monetary and credit policy demands the adoption of a policy of moderate restraint over the expansion of commercial bank credit that will allow sufficient leeway for the extension of some volume of new credits that, in serving constructive economic purposes, will at the same time foster an appropriate complementary growth in the money supply. In the process of conducting this kind of a policy, the backwash of previous inflationary pressures can be expected to carry over into the opening months of the year and to give the dangers that in all probability illusion of inflationaly materialize. Based on this expectation, a will never restraint over the expansion of bank policy of moderate against the possible is a sufficient safeguard credit dangers, especially of tangible inflationary occurrence is strongly reinforced by the restriction as such a policy over credit expansion by the heavily that is exerted the banks. In fact, the loan-to loaned-up position of banks may now be ratio of the commercial deposit deter their creation of a point that will approaching even though reserves are made essential new credits, Under such cir them for that purpose. available to by Federal Reserve new reserves supplied cumstances, actions are apt to largely find their way System policy bills and in Treasury bank investment into commercial In that Government securities. U. S. other short-term short-term interest softening of event, any consequent indication of a weakening be taken as an rates must not credit policy demanding System monetary and effect of measure rather as a precautionary attention, but remedial partially relieve of the banks to taken at the initiative by their heavy to which they are subjected the strain loan and investment positions.
With regard to the discount rate, Mr. Mills said that the recent increase in the call loan rate in New York City, the dif ferential between the discount rate and the yield on Treasury bills, and the increase in rates on commercial paper and bankers' acceptances all argued technically for an increase in the discount rate. A case might be made that such an increase would clear the air and set a more favorable climate for the Treasury's various financing opera tions. On the other hand, although an increase in the discount rate might produce the impressions mentioned, it was likely that on second thought the financial community, particularly the commercial banks, would logically and properly regard an increase as an official tighter money could be expected to continue on an announcement that incumbent upon the System to basis and that it would be accelerated its open market actions. increased rate effective through make the community might anticipate that the commercial banking The financial of a high level of negative be subjected to the pressure system would would come at a season of that kind reserves. Interpretations free a shrinkage in banks customarily experience when the commercial In the face of that experience, and contraction in loans. deposits statistics, the already evidence in available of which there was look forward to extreme difficulty could properly and reasonably banks to the business community. their credit obligations in fulfilling be deprived of would then and the economy business community The For these reasonable supply. must be in of credit which sources
reasons Mr. Mills believed it would be a serious error for the Federal Reserve Banks to increase discount rates at the present time. With regard to the discount window, Mr. Mills said that extreme care should be given not to confuse the purposes for which borrowings were being sought. In his guess, there were few instances where borrowings were undertaken to scalp the differential between the discount rate and higher yields obtainable on other loans and investments. His instinct told him that the greatest cause of the high level of discounts in evidence at the present time was strain on the banks, a strain they sought to alleviate by discounting at the Federal Reserve Banks in order to maintain their normal function ing. Mr. Mills said that he wished again to propose the rewording of the policy directive that he had submitted for consideration at This would change clause (b) the two previous Committee meetings. for "fostering sustainable economic growth and so as to provide opportunities while guarding against inflationary expanding employment credit expansion." said a few Tenth District banks had been using the Mr. Leedy discount window in substitution for capital. One of the principal fully invested and had traditionally kept was a bank that offenders and it was a was under water, some of its portfolio loaned up; a bank that had borrower was Another chronic chronic borrower.
experienced rather phenomenal growth. This bank had from time to time been increasing its capital account, but the increase was not keeping pace with loan demands. A number of banks were borrowing from the Reserve Bank for various reasons that could not be generalized, but not in substitution for their own capital. Some banks in the cattle areas were unwilling to require liquidation of cattle loans, and their borrowings remained high and constant. Some banks having a high rate of fluctuation in deposits from month to month or during each month seemed unable to anticipate the extent of those fluctuations with enough accuracy to avoid borrowing from the Reserve Bank. The Reserve Bank analyzed all such cases; where it appeared that a member bank was not using the facilities of the as it should, the Reserve Bank entered into discus discount window sion with the bank concerned. said that with few exceptions, indicators for the Mr. Leedy same as the national indicators. economy were much the Tenth District the degree of pressure that System policy He would not favor reducing he increase it at this on bank reserves, nor would had been applying this policy had been him the results that time. It seemed to rate, Mr. Leedy On the discount were rather salutary. accomplishing certain as to the but he was not it should be changed, felt that should be technical adjustment him that a It seemed to timing. and that increase market rates, levels of short-term due to the made in mind the Treasury's as possible bearing be made as early should that the Reserve to the view did not subscribe program. He financing
Banks should be thinking of a rate increase in excess of 1/2 per cent at this time. Sufficient steam might develop in the economy later on to require some shock treatment, but as the situation now existed it seemed to him that that kind of treatment was neither necessary nor desirable. If it developed later on that a larger increase than 1/2 per cent was required, this would indicate that in the System's judgment the country was on an inflationary spree and it might have the repercussions that Mr. Hayes had indicated on rates in other countries. Mr. Leedy concluded by saying that he would make no change in the directive at this time. Mr. Allen presented the following statement with regard to Seventh District developments: The steel strike settlement is commonly interpreted in our area as inflationary, and that attitude, whether or not justified, has bullish overtones in itself. Our in the steel industry continue to forecast pro friends duction in the first half of 1960 at near capacity, or tons, and second half production at around 70 million million tons for the year com 60 million tons, or 130 record of 117 million tons. pared with the 1955 of construction and earth A very large producer that its dealers will be "on moving equipment expects a prospect based in part allocation" throughout 1960, strong demand from abroad. Surprisingly on anticipated expect 1960 sales producers of farm machinery perhaps, despite the prospective further close to the 1959 figures decline in farm income. as stated in the staff Stocks of new automobiles, The industry talks at December 31. review, were 575,000 production of 2,250,000 new high for first quarter of a say that they will probably At the same time they cars. inventories reach if and when cut back production to that view about cutting cars. If they hold 1,00,000 rate, sales at the anticipated and if they produce back, 23,400 per selling day in of cars will have to average an inventory of which would mean the first quarter,
1,000,000 cars on March 31. The daily rate of 16,4 3 cars for the last ten-day period in December was re garded as disappointing; our friends in the industry felt that the mix of cars in the hands of dealers warranted a higher sales rate. The middle sales period in January is regarded as important. If sales move up to around 20,000 cars per day, the feeling about the first quarter will be more assured. Unemployment in Detroit is expected to drop below 100,000 in the first quarter. In March of 1959 it was 200,000, and in March of 1958 it was 250,000. While complete retail trade estimates for December are not available, it is certain that the rise in the total will be dampened by the low automobile sales. However, Seventh District department store sales were 5 per cent above the previous year, and Sears Roebuck, with the biggest sales month in its history, was 6 per cent above the previous December. We have nothing to add to what the staff review reports concerning the farm situation except that our people feel that the prospective decline in hog production, mentioned in the staff review, could mean hog prices next fall 20 per cent above the prices of this past fall, which may result in a smaller decline in net farm income than is generally forecasted. The final three weeks of 1959 were marked by strong demands for bank credit in the Seventh District. Total our weekly reporting banks rose 5 per cent compared loans of with an increase of 3 per cent for all reporting banks in the country. Nevertheless, for Chicago banks the ratio of 30 was about the same as at loans to deposits on December the ratios in Detroit and 1957 peak, 58 per cent, and the Indianapolis were only 50 per cent, the loan expansion our weekly reporting To finance in December, and on liquidated Governments banks steadily held only $63 mil Chicago banks January 6 the six largest volume in two years. bills--the smallest lion of Treasury early April maturities wish to acquire While they doubtless their current posi the April 1 tax date, connection with in will come that such acquisitions make it probable tions some other years. than in in smaller amounts slowly and more he did not Mr. Allen said discount window, respect to the With Seventh District. abuse in the been any significant there had feel that number. During his they were few in were problem banks, While there
tenure as President of the Chicago Bank, he had found that the problem banks tended to be the same ones. In 1959, 250 banks borrowed from the Chicago Bank, slightly less than 1/4 of the member banks. The volume of borrowing was higher in amount, but he did not feel that there was significant abuse of the discount window. With regard to the discount rate, Mr. Allen said his personal preference would be to make no change at this time but to be poised to go from 4 to 5 per cent during the period from February 15 to April 1, if developments meantime should make the desirability of an increase more apparent. Although the present rate of 4 per cent was out of line with other rates, an increase to 4-1/2 per cent would not elimi nate the disparity. He did not feel that the differential had produced significant abuse at the discount window, at in least the Seventh District. Having stated his personal preference, Mr. Allen noted that a majority of those who had spoken thus far appeared to favor a prompt in crease to 4-1/2 per cent, and he recognized the desirability of System uniformity. He was agreeable to recommending a 4-1/2 per cent rate, the Chicago directors would go along, particularly if and he believed were taking that action at about the same time. other Banks Mr. Allen said he would recommend no change in the policy the current degree of favor continuing about directive and he would restraint through open market operations until the next meeting of the Committee. In summary of the Ninth District situation at year end, Mr. loans were up off one per cent, bank deposits were Deming said that
11 per cent, and Government security holdings were down 11 per cent, The banks were under considerable pressure during the greater part of the year, particularly the second half. The summer drought and the steel strike had caused a loss of $400 million in district personal income. Putting it another way, the district's gain in income in 1959 was about half as large as that recorded for the nation as a whole. He foresaw that this spread between district and national gains might continue for several months in the future. As for the use of the discount window, Mr. Deming said he agreed with Mr. Mills' analysis. He felt that there was relatively little scalping of the discount rate and that borrowing reflected largely the degree of pressure on the banks. He agreed with Mr. Allen that the of today were mostly the same ones as two years ago, problem banks been conversations with some ten years ago. There had and probably get progressively tougher it had been necessary to member banks, and with a few of them. that the discount out with the feeling said he came Mr. Deming concurred in Mr. per cent. He up now by 1/2 ought to be moved rate treatments if try to avoid shock the System should Leedy's view that expected by the at this time was in the rate An increase possible. he thought ought and that was what by people in general, market, and the economy at shock wait and deliberately rather than to to be done Ninth District perhaps by time, influenced At the same a later date. further in go see the Committee to would dislike he developments,
terms of restrictiveness through open market operations. On balance, he would favor easing a little the present level of restrictiveness. He saw no reason to change the policy directive. Mr. Mangels said that preliminary information as at the end of 1959 indicated plusses in practically all categories of West Coast production, except steel production and nonresidential construction. For the year through November, awards for residential construction increased about 24 per cent and the number of dwelling units increased about 21 per cent, refuting statements that tight money had cut back residential construction. December showed increases in practically all lines of business except construction. Department store sales for the Christmas week were 22 per cent above a year ago and for the year the gain was a little better than for the nation. Copper pro week of December but production was duction resumed during the last pending settlement of some issues in labor not yet back to normal, Steel production was about 92 per cent of capacity, with negotiations. of 100 per cent and Kaiser running at two large producers in excess Employment for due to some technical difficulties. about 78 per cent further cutbacks in aircraft at an all-time high despite November was cancellation of because of California and Washington employment in During the four weeks ending orders for jet aircraft. military increased about $250 million, 30, reporting member bank loans December largest in The all loan categories. in practically with increases the greatest of that, was $92 million; loans, in business crease,
portion of the increase came in the week ending December 16 to make corporate tax payments. Demand deposits were up by about the same amount as loans, while time deposits were up a little more. After year end, however, California banks had rather substantial withdrawals from savings and time accounts reflecting shifts to savings and loan associations that had now gone to a dividend rate of 4-1/2 per cent. After three large associations announced such an increase some time ago, others voluntarily or reluctantly followed suit. It appeared that savings and loan associations were somewhat overcommitted and had had to cancel some commitments and increase borrowings at the Home Loan Bank. The San Francisco Home Loan Bank increased its rate from 5 to 5-1/4 per cent on loans up to 2-1/2 years and from 5-1/2 of 2-1/2 years. Banks also lost 5-3/4 per cent on loans in excess to deposits when public treasurers and others put money into Treasury bills. San Francisco and Los Angeles banks reported that they had bills. The Federal funds market never seen so many individuals buying were about even on purchases to be tight; district banks was reported but the amounts were nominal in relation to the usual volume. and sales significantly. The Bank had not increased from the Reserve Borrowings member banks that and Los Angeles assured San Francisco Reserve Bank as estimated, the deposits was as extensive if the run-off of savings banks as particular problem There were no window was open. discount he cited isolated concerned, although window was far as the discount special instances of borrowings.
Mr. Mangels reported a general feeling throughout the district that business would be booming for the next six months, perhaps on through the year. Such exuberance ordinarily would be alarming, but factors in the picture might have a dampening effect on what normally would generate inflationary pressures. For example, there was still some excess productive capacity and an excess labor supply, and there was rather general and aggressive competition from abroad. There were the indications of a balanced budget, and there also was an increasing public feeling against any policies, public or private, that would result in further inflation. Thus, while there would probably be price changes, those changes might be rather moderate. Mr. Mangels said he would not be inclined toward deliberate action increasing restraint at this time. Instead, he would let natural credit demands for legitimate needs exert a further tightening offset part of it. In the Twelfth District, banks effect and perhaps had been screening applications for credit thoroughly for some time, legitimate applicants were getting credit. and it appeared that only sure that the San Francisco Bank's Mr. Mangels felt quite for a change in the directors would go along with a recommendation tomorrow, but he would be inclined discount rate at their meeting somewhere around now. Action to make such a recommendation not financing schedule period in the Treasury 15 during an open February a change in the He would not recommend would perhaps be appropriate. Committee directive.
Mr. Irons commented that this was a particularly difficult time to form judgments. It was true that everything pointed to expansion, composed perhaps of some substantial inventory build-up, deferred as a consequence of the steel strike, along with some real growth and probably some speculation and possibly inflation. The situation in the money market seemed to point to a thin and possibly a weak Government securities market, in which the rate structure had already moved up substantially. He did not know whether the present rate structure was solid or whether it still reflected some of the adjustments and tightness of the year end. Turning to the Eleventh District, Mr. Irons said that in the last month there had been modest strengthening, after a fairly flat some period of time. He anticipated further moderate growth level for but believed that district activity would move upward at less than the The petroleum situation apparently was national average for a time. defense contracts in the district not going to be a strong stimulant, been cut back, and agricultural aircraft, which had were mostly for prices were declining. was not much dif member bank borrowing as to The situation were around 5 per Irons said. Borrowings from normal, Mr, ferent Four or five the usual percentage. total, about cent of the System under almost any discount window continuously banks would use the them to do it, but Reserve Bank would permit circumstances if the from was much different general situation that the did not feel he restraint and months. As credit been for several what it had
reserve pressures increased, some pressure at the discount window was to be expected. With respect to policy, Mr. Irons said he would be a little cautious. He would lean toward open market operations designed to continue about the degree of restrictiveness that had prevailed. If he understood correctly, Mr. Hayes had suggested operations with a little deviation on the side of ease, and he (Mr. Irons) also favored leaning toward that side, in view of the uncertainties that had been mentioned. Not knowing whether the interest rate structure was solid, and with the Treasury situation and the position of the Government securities market to consider, he would prefer not to move on the discount rate at this time even though a case could be made for a technical adjustment. There might be an increase in the prime rate, but he did not feel that the System should necessarily base a decision on action that might be taken on the prime rate. To summarize, he came out in his thinking on the side of maintaining through open degree of pressure on bank operations about the present market if there was a shade of he would not feel too badly reserves, but present level and discount rate at its he would leave the easing; the next few weeks, and took place in what developments actually see policy directive. the Open Market no change in he would make District statistics recent First said that Mr. Erickson not as but in many classifications to show progress, continued first week of During the the progress nationally. strongly as
December, district banks were net buyers of Federal funds, but in the remaining weeks they were net sellers. For the three weeks ending January 6, average member bank borrowings were only $16 mil lion, and last week average borrowings were only $11 million; this was much lower than usual. No evidence was seen of any banks scalping the discount rate, and there were no problem banks. Three smaller banks had been borrowing for several reserve computation periods, but this was due to seasonal factors and agricultural obligations. The loan ratios of Boston banks had been averaging better than 60 per cent recently. Mr. Erickson felt that it would be desirable to continue a restrictive policy and to raise the discount rate at some time. How ever, after analyzing the pros and cons enumerated by Mr. Bopp, on balance he would prefer to wait on the discount rate until after the next meeting or the February meeting of the Committee before taking recommend no change in the directive. action. He would Mr. Erickson added that he was a participant in the morning weeks and that, in view of the calls during the past four telephone and some new factors which were in the picture, usual seasonal factors He would Account most skillfully. had handled the he felt the Desk latitude to of restraint, leaving the same degree favor continuing his feel of the based on to make judgments of the Account the Manager slightly lower reserve levels led to net borrowed market. If that not bother him. this would than recently,
Mr. Szymczak said that on balance, after having listened to all of the information presented at this meeting, he felt sure there should be no change in the policy directive. However, he agreed with those who felt that reserve positions should be eased somewhat, without any change in basic policy. As to the discount rate, he noted that the interest rate structure had changed and that the Treasury was in the market. All things considered, it was his view that the rate situation might be helped by changing the discount rate as soon as possible by 1/2 per cent. Mr. Balderston said that he would favor continuing the current degree of restraint for the reasons Mr. Bopp had set forth. Until policy was modified, he felt that the directive should remain un changed. As to the discount rate, he would hold a change in abeyance until after February 20. At that time, if an increase was appropriate, he would make the increase a full one per cent. These conclusions unfortunately he could not on certain impressions which were based the steel strike settle with objective data. Although substantiate was only one of a attention, it focal point of public ment was the those in the labor settlements, including number of inflationary with the and the settlement and copper industries rubber, aluminum, to him somewhat the moment seemed Statistics at can companies. to rise were certain steel prices that The statement deceptive. companies were long as the steel one as seemed a questionable overhead, as apparently and were able to absorb operating at capacity
they could during the next six months. Furthermore, the inventory build-up assumed to be going on was offset to the extent that manu facturers at long last were able to ship out work in process which had been held up because of the shortage of one or two parts. Similarly, work-in-process inventories tended to be inflated over the year end in the case of manufacturing companies selling consumer durables because of the practice of forward billing. They were forced to hold in work-in-process items shipped out for the Christmas trade until dealers disposed of them. He assumed that the apparent ability of corporations to finance inventories and capital expenditures from internal funds would continue for a while, but not indefinitely. He was surprised that it had continued as long as it had. When the time came that the companies must resort more heavily to the banks and to the capital markets, the System should be prepared for a sharp increase in credit demand and to meet such an increase with vigor. this, he was suggesting a situation that might be ahead In saying not here yet. From the charts of estimated Treasury but which was by the Board's staff, it appeared that financing periods prepared during the year ahead, each of about there would be four open periods duration. These would fall in March, June, September, and a month's of much use to the System. one would not be December, and the last of the Presidents seemed to indicate that a change in The comments not imperative and next two weeks was rate during the the discount could wait until February. If the System were to wait until February,
he supposed that the prime rate might then be 5-1/2 per cent, or that it would be raised shortly after the System acted on the discount rate. The six-month bill rate was already at 5 per cent; this ought not be ignored by confining attention solely to the three-month bills. In the light of those factors, he felt that a change in the discount rate of only 1/2 per cent would give an impression to sophisticated observers that the System did not mean business. Chairman Martin commented that most of the time the Chairman of the Board of Governors has a relatively simple role in matters such as the discount rate because of the availability of a group of men in the System who, with their associates, study the situation carefully and offer the benefit of their judgment. However, the role of the Chairman was not quite so simple today. It seemed to him that the System was not far from a turning point, and the discussion around how difficult a problem becomes when such a the table indicated past six or nine months, he had not seen point is near. For the Now for the first time, as he said answers to the System's problems. meeting, he was beginning to be hopeful that a at the December 15 He approached these problems without solution was in the making. but he wanted to take this opportunity any dogmatic point of view, the Chairman of the to be the role of explain what he conceived to matters with a He approached such in System operations. Board a dictator within desire to be and he had no sense of humility,
the System or to assert leadership for leadership's sake alone. However, a particular responsibility is placed on the Chairman for Presidential, Congressional, and Treasury relationships. This did not mean that the other members of the Board and the Open Market Committee might not be superior in judgment or that under certain circumstances they might not differ completely with the Chairman. He solicited their advice even when he was of a different point of view. He had leaned over backward when dealing with the Committee never to assert leadership unless he felt it essential, and then with due regard to the fact that he might be in error. He had initiated the procedure at Committee meetings according to which the Chairman speaks last rather than first. This was not because he did not have convictions, but because he wished to have the best judgments that he could get and avoid taking a firm position until after hearing those judgments. The Chairman then posed the question of the right thing to do at the present time. The fact that there was some doubt around of System policy caused him to lean in a the table about the course different way than if there had been unanimity of opinion. If, in table, he had found that to a man-or perhaps with going around the united, he might have Committee was only one or two exceptions--the along. However, because of view and gone his own point forgotten judgment in an area of System sufficient doubt about a there was the doubts expressed, he because he shared some of policy, and
wished to say from the standpoint of Presidential, Congressional, and Treasury relations--and without indicating in any sense that the System should play politics-it seemed to him that it would be wiser not to act on the discount rate at the present time and upset the even-keel approach by jumping the gun on the Treasury financing, payment for which would come due on the 15th of this month. Instead, he would prefer to await developments, The Open Market Committee presumably was to meet on January 26 and again on February 9. It was dangerous, he felt, to talk about what the System might do at some point in the future. In fact, he would feel a little better at the moment if the discount rate were moved immediately to 5 per cent rather than to take action at this juncture which might lead to a expectation that there would be a further increase of general market a short period of time. 1/2 per cent within The Chairman again said if this group were united on moving he would be disposed to go along to 5 per cent at the present time, about which he was now talking. However, he despite the factors risk that the antici would be running a serious felt that the System would have moved in which event it might not develop, pated boom on the news from a statement then noted The Chairman prematurely. the President had today been handed to him that ticker that had just of plea for elimination renewing his to the Congress sent a message This was Treasury bonds. ceiling on interest rate 4-1/4 per cent the at this session, message to the Congress first special the President's
and it was something that he felt ought to be borne in mind. He recalled that last summer he had tried to the best of his ability to determine what was politics and what was not in regard to the thinking on money, and he had found that there was a great deal of misunderstanding. Certainly the System ought not swerve from its course when it had come to a meeting of the minds, but he felt that the System would be dissipating some of its resources if at this early juncture it put itself in the position of leading the commercial banks into an increase in the prime rate, much as he would like to see the System move in advance of the banks. If in time, the Chairman said, forces in the economy made action on the discount rate clearly appropriate, the System would have a responsibility to act promptly, effectively, and efficiently. How ever, his assessment of the present situation was that the market would not be stabilized by a technical adjustment of the discount per cent. He felt that the System would come closer rate to 4-1/2 effect for some period of time if the to a permanently stabilizing course, that was a matter of to 5 per cent. Of rate were increased judgment. If the System waited for a limited period of time and be that it would develop that reappraised the situation, it might be to go to 4-1/2 per cent. In any event, when the best move would as to what to be no misunderstanding taken there ought action was action was out of the and no doubt that System the System was doing, for the time being. way
In further comments regarding recent discussions that he had had with the Secretary and Under Secretary of the Treasury, during which he emphasized that neither of these individuals had indicated in any way a desire to interfere with System policies or operations, Chairman Martin said he had remarked to the Secretary yesterday that as he understood it the Secretary would be happier, all things con sidered, if the situation was not complicated at this juncture by a premature move on the part of the System, and the Secretary had re sponded that that was definitely his feeling. In going over the matter in his own mind last night, the Chairman concurred in that view. As he had said, there had been no pressure of any kind from the Treasury, but later in the year there might be real pressure from other quarters. In his opinion the System should not throw away its ammunition need lessly, or until it knew more about the present picture than was known at the moment. He did not believe in rushing to abandon the even-keel philosophy. said that to the best of his In conclusion, the Chairman to espouse the view that, with no change in ability he was trying postpone a decision on the discount the directive, the System should in the period following the Treasury refunding, rate until some time any punches necessary for the System should not pull at which time discount rate inflation. The role in fighting of its the performance within the discussed separately could have been he noted, question, to put it before but he had chosen the Board of Governors, ranks of
this meeting, realizing that there might be differences of opinion. There appeared to be enough differences of opinion at the present time so that he would be loath to see any Reserve Bank move to 4-1/2 per cent in the next week or so, and to have the Board approve such an increase. Mr. Hayes commented that in advocating an early move on the discount rate he had done so with some doubt in his mind, as indicated by the statement that he was eager to know how others felt on the matter. He was inclined to think that if and when a move was made, it ought to be a move in which the System participated wholeheartedly and more or less as a body. He had respect for the Chairman's appraisal of the intangible elements having to do with System relation ships. Therefore, he was inclined to go along with the Chairman's thinking on the matter, Chairman Martin then suggested further discussion, following which Mr. Robertson inquired whether that comment related to the discount rate only or also to open market policy. Mr. Robertson respect there was also a division of opinion. noted that in the latter Chairman Martin said that there was a division of opinion as to be sought through open market operations to the degree of restraint probably favored maintaining the but that he thought the consensus status quo. whether the consensus was not more in the Mr. Hayes inquired of ease, and the Chairman slightly on the side direction of going
replied that he thought a vote if taken, might result in about an even split. Mr. Robertson said he would be willing to go along with the procedure suggested by the Chairman on the discount rate, even though personally he would have been inclined toward a different course. On open market operations, the decision appeared to him to be between maintaining the status quo or easing off somewhat. The Chairman then suggested going around the table for a summary of views with respect to open market operations. He turned first to Mr. Johns and inquired whether the latter would favor going somewhat on the tighter side. Mr. Johns said that he would, but not very much. What he had meant to suggest, he said, was that the System accommodate itself to Whether or not that would result in a tighter the seasonal movement. situation would depend on the demand side. As to the discount rate, by the doubts expressed around the table. he was not unaffected the discount rate, that he had Mr. Bryan said, with regard to the help that might be afforded partly because of favored an increase Sixth District. If he borrowing in the dealing with member bank in have expressed an operations, he would spoken on open market had but not much. the side of ease, go a little on to inclination that he would favor maintaining the status quo, Mr. Bopp said recapture the like to that he would Fulton said which Mr. following
firmness that seemed to have been lost in the early part of December. Therefore, he would favor being slightly tighter. Mr. King favored maintaining the status quo but not being any tighter. He would attempt to avoid giving the impression that there had been any change of policy. He would leave the market alone as far as that could be done, and reassess the situation later. Mr. Shepardson commented that if the System moved only as far as to recapture the ordinary seasonal movement of reserves and if the demand for credit was less than anticipated, this might mean a lower ing of negative free reserves and perhaps a lowering of pressure. If demand was greater, however, there might be an increase of net borrowed reserves and an increase in pressure. The view that Mr. Thomas spelled out in his statement set forth what he thought the Committee should try On the matter of the discount rate, he was in favor of effec to do. at some later time would appear to tive action. If a large increase than piecemeal increases, he would be represent more effective action in favor of such a course. said he would oppose any easing of restraint, Mr. Robertson while Mr. Mills said he would favor easing. the status was toward maintaining that his view Mr. Leedy said the Chairman had a rate, he agreed that As to the discount quo. had indicated. that the Chairman in the areas special responsibility that the Chairman change, he felt of a rate to the timing With regard presently involved. what was others to appraise able than was better
Mr. Allen said he would favor maintaining the status quo in open market operations, while Mr. Deming favored a mild easing. Mr. Deming also commented that the Minneapolis Bank's directors probably would not want to lead on the discount rate. Mr. Mangels agreed with waiting on the discount rate. He suggested letting natural forces of demand develop any tightening of credit restraint, without deliberate tightening on the part of the System but offsetting part of such tightening; therefore, a slight easing would be acceptable to him. Messrs. Irons and Erickson expressed the view that the status quo should be maintained through open market operations, the former adding, however, that he felt any deviations should be on the side of ease, while Messrs. Hayes and Szymczak expressed themselves as favoring a slight easing. Mr. Balderston favored maintaining the status quo. The Chairman then said that the consensus seemed to favor status quo. He added that he doubted whether there maintaining the could measure the matter with suffi was any way that the Committee to get away from that consensus. cient preciseness had thought the Committee's commented that he Mr. Hayes in terms which were directive was expressed as stated in the policy slight change toward could be a within it there enough so that broad the directive at Committee had approved He noted that the ease. deviations should understanding that subject to an times in the past restraint or of ease. on the side of be either
Chairman Martin agreed that this had been done at times, but said that he questioned whether the Account Manager could resolve questions of degree very well in terms of any policy di rective that could be issued by the Committee, There being no further comments, Chairman Martin said he understood the consensus was to continue the present policy directive, that the Account Manager should do the best he could to maintain the status quo, and that the Manager should endeavor to conduct operations in such manner as to make it apparent that no change in policy had occurred. He then inquired whether there was agreement with these statements as representing the consensus. There being no comment to the contrary, the Chairman then inquired of Mr. Mills whether the latter would like to be recorded on the broad question of monetary and credit policy in the same way as in the minutes of the past several Committee meetings, with a memorandum of his views included in the record. in the affirmative, adding that since he Mr. Mills replied he would like to be recorded proposed a change in the directive, had "no" on continuing the present directive. as voting upon motion duly made Thereupon, the Committee voted, with and seconded, "no," to direct the Mr. Mills voting Bank of New York until Federal Reserve by the Committee: otherwise directed sales, or exchanges To make such purchases, (1) securities, and replacement of maturing (including
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 sustain able economic growth and expanding employment opportuni ties, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. Chairman Martin said he would propose that the Open Market 26 and February 9, 1960, with the organiza Committee meet on January 1, 1960, and no objection was tion meeting following on March indicated to this proposed schedule of meetings. Chairman Martin then commented that the Open Market Committee, organization meeting, would be looking in connection with the annual ought to start that the Committee He felt operating procedures. at consider any possible pressure, to there was no real now, when seemed an appropriate This operating techniques. changes in its such changes in wanted to make any see whether the Committee time to
its operating procedures, which would include consideration of the "bills only" policy. In this connection, he referred to questions likely to arise in the course of time relating to the 2-1/2 per cent bonds of 1961. The Chairman then suggested asking Messrs. Young, Thomas, and Rouse to review these matters and give the Committee, at the earliest opportunity, material that would afford a basis for discus sion. In the absence of objection, Messrs. Young, Thomas, and Rouse were requested to consider the matters mentioned by the Chairman. Chairman Martin then turned to a memorandum from Mr. Young on an information program for the Government securities market which had been distributed under date of January 7, 1960. The memorandum noted that at its meeting on October 13, 1959, the Committee requested the staff to bring forward a specific program, under Treasury-Federal Reserve auspices, for the collection and publication of information about the Government securities market, and that in carrying out it had seemed appropriate to work through the this assignment steering group and associated staff of the Government securities The report of that group, dated January 5, 1960, was market study. The proposed program would continue attached to the memorandum. securities in of ownership of Government responsibility for surveys statistics relating to market and responsibility for the Treasury Reserve. Accordingly, the Treasury operations in the Federal
participants in the report had not shared in the administrative recommendations pertaining to the System's responsibility, except insofar as it impinged on Treasury debt management responsibilities. In putting the statistical program into effect, various unforseeable problems were considered likely to develop, for example, with regard to schedule content, and it was suggested that the Committee delegate to the staff authority for resolving these technical problems without referring them back for Committee consideration. Those associated in the preparation of the report included Messrs. Young, Koch, and Keir of the Board's staff, Messrs. Larkin and Roosa of the New York Bank, and Messrs. Mayo and Saunders of the Treasury. Submitted with the memorandum and report was a draft of letter, to be signed by the Secretary of the Treasury and the Chairman of the Federal Open Market Committee and to be sent to all potential respondents, outlining the new program and indicating that full collaboration was anticipated. In commenting on the matter, Chairman Martin noted that the planning group had tried to achieve four basic things in this program. enlarge the factual base available daily for System The first was to The second was and Treasury debt management. open market operations to meet potential Congressional to provide adequate information a flow of current information The third was to provide requests. for public uses, and the fourth was to do these things in such a way dealer reports and confidentiality of individual as to protect the criticism of System operating same time avoid any market at the officers.
Chairman Martin commented that the report had not come out with all of the answers but that the program, which resulted from negotiation with the Treasury and the Desk, appeared on the whole to be one that should be carried forward. The Chairman then stated that he would like to have the views of Messrs. Hayes and Rouse. Mr. Hayes said he agreed that Mr. Young had done a splendid job, in cooperation with the Treasury and the staffs of the Board and the New York Bank, On the whole, the proposed program was a constructive and needed one. The only part on which he had serious doubts involved the question whether it was wise to cut off the Desk from information on individual dealer data. He had felt generally that the more the Desk knew, the more effective a job it could do. Recognizing differences of viewpoint on this phase of the matter, he suggested that the program be given a fair trial. He added that he and the Desk and everyone else at the New York Bank would be willing to give it a fair trial. Mr. Rouse agreed that the report represented an excellent a statement so that However, he wished to make job in most ways. of view on the matter before it his point Committee might have the Mr. Rouse then read had just made reference. to which Mr. Hayes the following statement: I would like to a few comments that There are just with this program. It certainly make in connection in the development of informa constitutes a major step the public interest is deeply tion in an area where reaches a point where When the program involved. in the Government data covering activity publication of
securities market becomes a reality, it should make for a more informed public and may even lead to a better public understanding of the relationship between monetary policy and the market. This information program is the most urgent of the suggestions that developed out of the Treasury-Federal Reserve Study. However, the program contains unnecessary restrictions on the availability of data to the Management of the System Open Market Account. Up to this time, the data on the operations of individual dealer firms has been available to the Management and this information has been helpful to it in making a general appraisal of the market and in dis charging its responsibilities to the Committee. I wish to point out that under this new program the Manager is denied access to individual dealer data except under particular conditions, and that only information on the aggregate of dealer operations would be available to him. Ordinarily, these aggregate data would be sufficient to form an over-all appraisal of market conditions. Yet there are, and have been, many occasions when it has been necessary to go beyond the data covering all dealers as a group and to review the operations of individual dealers for the purpose of interpret ing and evaluating the significance of the aggregative data. Dealer operations in terms of both the aggregate and of individual dealer firms also have an important bearing on Treasury financing--before, during, and after. To deprive the Committee and the Secretary of the Treasury and their staffs of any of the information collected from dealers on a regular basis is an unnecessary limitation on the use of the data. The people in authority having a public responsibility have an obligation to be as well informed as market. This means getting to know the possible about the and it would embrace an understanding of whole market dealer performance through behavior patterns and individual contact with dealers and the data continuous day-to-day data on operations of operations. The covering their dealer firms is particularly important--indeed, individual the repurchase agreement it is essential--in administering Reserve Bank of New York. arrangements at the Federal makes special allowance information program While the new on individual dealers of certain data for the availability of repurchase agreements, it in connection with the use the total information enough. In effect, does not go far has been avail operations that individual dealer covering be sharply reduced many years will the Manager for able to information will even though that under this program, we like it dealers. Whether be collected from continue to is a personalized market securities or not the Government
market. That is, it is a market in which a number of highly individualistic personalities play a crucial part, and it is this characteristic that prompts this comment on my part. I hope the time will arrive when the market will be large enough so that no one or two personalities at any one time can dominate it. When that time comes the use of aggregate figures may be sufficient. If the Committee concludes that individual dealer data should be denied the Desk on a trial basis, we will of course do our best to operate effectively under the proposed limitation. In my experience the current information available on the financial standing of dealer firms has been adequate. I question the need, as set forth in the proposal, for obtaining formal income statements from dealers and I also have reservations concerning the need for balance sheet information as often as four times a year. I have one final comment to make. It has to do with the protection of the confidentiality of individual dealer positions and the need for an appropriate time lag between current dealer reports and their date of publication, even in aggregate form. The paper submitted to the Committee covers this point, but I would like to emphasize here for the benefit of the group that will carry out your instruc tions the importance of having an adequate time lag between current dealer operations and their release for public consumption. Some of my comments have been covered in greater detail in a paper on this subject prepared in November of last year Reserve Bank of New York, primarily as an by the Federal aide memoire for Mr. Young's group. If any of you would be that paper, I would be glad to interested in receiving forward copies. that Mr. Young's group continue I would like to suggest looking to recommendations to the Federal Open its work, and the Treasury arising out of the addi Market Committee by their Study and also some of tional matters uncovered were raised. These latter points the technical points that for example, extending maturity of securities include, agreement, reverse Federal Reserve repurchase eligible for of System securities to agreements, lending repurchase of dealings with swaps, and the confidentiality dealers, of these suggestions While most Reserve System. the Federal the direction of operations at related to the are primarily an interest for the Treasury as this Committee, they hold the market for for primarily responsible in that it is well its own securities.
Chairman Martin suggested that Mr. Rouse send to all of the Committee members and other Presidents, without specific request, the paper of the New York Bank to which he had referred. The Chair man then proposed that the Committee adopt the program suggested by the planning group and review it some time in the course of the next three months. No objections to this proposal were heard, and the Chairman said that the matter would proceed on the basis he had suggested. then the next meeting of the Federal Open Market It was agreed that January 26, 1960, at 10:00 am. Committee would be held on Tuesday, The meeting then adjourned. Secretary
Also: Record of Policy Actions