January 26, 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 26, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman 1/ 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. Leach, Irons, and Mangels, Presidents of the Federal Reserve Banks of Richmond, Dallas, and San Francisco, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Thomas, Economist Messrs. Jones, Marget, Mitchell, Noyes, Parsons, and Roosa, Associate Economists Mr. Molony, Assistant to the Board of Governors Adviser, Division of Research and Mr. Koch, Statistics, Board of Governors Keir, Chief, Government Finance Section, Mr. of Research and Statistics, Board Division of Governors to the Chairman, Board Mr. Knipe, Consultant of Governors Eastburn, Hostetler, Daane, Tow, and Messrs. of the Federal Einzig, Vice Presidents of Philadelphia, Cleveland, Reserve Banks City, and San Francisco, Richmond, Kansas respectively in minutes at point indicated Entered meeting 1/
Mr. Larkin, Assistant Vice President, Federal Reserve Bank of New York Mr. Coldwell, Director of Research, Federal Reserve Bank of Dallas Mr. Holmes, Manager, Securities Department, Federal Reserve Bank of New York Mr. Brandt, Economist, Federal Reserve Bank of Atlanta Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on January 12, 1960, were approved. Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period January 12 through January 20, 1960, and a supplementary report covering the period January 21 through January 25, 1960. Copies of both reports have been placed in the files of the Committee. In commenting on developments since the preceding meeting, Mr. made substantially the following statement: Larkin since the last meeting of the Committee Developments been set forth in the written reports previously have I would like to emphasize, however, the distributed. interest rates and the substantial sharp drop in short-term holdings that have occurred in the System Account reduction since the last meeting. The average three-month Treasury auction was, in round numbers, bill rate in yesterday's below 4-1/8 per cent compared with about 4-5/8 slightly I am informed that the two weeks ago. Moreover, per cent the offered side in to 4 per cent on rate has dropped The rate on six-month Treasury trading this morning. than 4-5/8 per cent in yester bills was slightly less 5 per cent two weeks ago. auction as against almost day's per cent in the be down to about 4-1/2 This issue may decline in short-term morning. This sharp market this decline in despite the substantial rates has occurred This decline amounts holdings over this period. System basis over the $1 billion on a delivery to almost
two weeks. Needless to say, there has been a tremendous demand for Treasury bills. This demand has stemmed largely from nonbank investors, including corporations, public bodies such as States and municipalities, and also individuals. Individuals showed a large interest in the most recent auction of one-year Treasury bills. The market is now focusing on the approaching Treasury refunding of over $11 billion February certifi cates, of which the System holds about one half. Market expectations point to an optional exchange offering of two issues--a one-year certificate and a four-five year note. The rate expectations are in the neighborhood of 5 per cent. The market for bankers' acceptances has recently been under less pressure and dealers' portfolios have been reduced. However, rates on bankers' acceptances have not followed Treasury bills downward. We have had the strange situation over the past few days of one dealer having moved acceptance rates lower by 1/8 per cent, with the other four dealers declining to follow this move, leaving their bid rate at 5 per cent. just one further matter that I should like to There is attention, and it has to do with a call to the Committee's technical situation in the Government securities market. scale interest in Government securities on the The large first found real reflection in part of individuals, which magic fives and other recent high-coupon the so-called in a large number of small has also resulted obligations, The dealers claim that transactions executed by dealers. facilities, which have have taxed their these transactions years for wholesale distribu over a period of been designed in small amounts. In rather than retail distribution tion, office work, some the amount of back to spread out an effort procedure in the yesterday a new of the dealers announced Effective February so-called small transactions. handling of $25,000 on a of less than will put transactions 1, they and payment on That is, delivery delivery basis. skip-day on the second business will be made these small transactions in contrast of the transaction the execution day following has hitherto delivery that or next-day with regular, in the market. prevailed motion duly made Thereupon, upon seconded, and by unanimous vote, and transactions during the open market 12, 1960, through period January the were approved, 25, 1960, January ratified, and confirmed.
During the course of Mr. Larkin's comments, Mr. Hayes joined the meeting. The staff economic review at this meeting took the form of a visual-auditory presentation, the participants in which included Messrs. Thomas, Young, Marget, and Noyes along with Messrs. Garfield and Williams of the Board's Division of Research and Statistics. Subsequent to the meeting, copies of the text of the presentation and the related charts were distributed to the members of the Committee and placed in the Committee's files. Mr. Noyes opened the presentation with the following statement: In recent weeks the spotlight of economic news has moved from the steel strike to the budget. Certainly the shift from a cash deficit of $13 billion in fiscal 1959 to an ap proximate balance this year and the prospect of a substantial surplus for next year is dramatic. This shift reflects, in considerable part, important developments in the general economic situation. For more than a year after the recession low in April of industrial production rose 1958, the physical volume to a level in May and June rapidly and without interruption previous high in 1957. By appreciably above the the May-June level of 166 production was close to December, to rise further to about and in January output is expected postwar period, we see look at the whole Taking a quick production has general sweep of industrial that the broad years and the early postwar rapidly during been upward--most upsweep has been that this broad Korean War period--and the recessions--in 1949, 1954, and 1958. interrupted by three more growth shows somewhat revised index Board's recently The inclusion of the rapidly than the earlier index, reflecting and with manufacturing industries along growing utility based on upward adjustments and, more important, mining, Census data. study of comprehensive than those of 1954 and 1958 recession was sharper The start and from the was rapid recovery The subsequent
only a year and a half after the recession began a new high was reached. Part of the rapid rise reflected the laying in of stocks of steel for some months before the plants closed down last July--more stocks than anyone guessed at the time. During the strike, total industrial production declined sharply as steel output slowed to a trickle and output levelled off in most industries not directly affected by the strike. Housing starts, by summer already edging off follow ing an extraordinary advance, declined sharply in early autumn but they recovered part of the decline at year-end. Nonagricultural employment declined temporarily from highs reached earlier, and so did retail sales, but they should turn up this month as autos become more readily available. Sensitive materials prices, which early in this recovery period had risen a little more than in the 1954-55 recovery period, showed little change after spring last year. Common stock prices declined after reaching new highs in early August, recovered when steel production was resumed in early November, and most recently have been declining again. Interruption in economic expansion and uncertainties concerning prospects during the strike period were reflected not only in stock markets but in financial markets generally. After rising moderately in early 1959, the active money and currency--levelled off in late supply--demand deposits spring and, except for a temporary advance in July, sub sequently showed little change. From spring to autumn, of deposits also remained relatively stable, and turnover In security markets, the strike then it advanced somewhat. to re-evaluate profit and provided an occasion for investors to the high returns available stock price prospects relative fixed claims. The spread between bond on bonds and other considerably over the stock yields, which had widened and half of 1959, did not increase much after midyear. first rates increased further, partly because Short-term interest concentrated in short- and intermediate Treasury financing was term securities. mills is beginning to output at steel Now near-capacity output of steel for expanded and is providing ease shortages officials have products. Industry and other metal autos steel prices is increase in no immediate general stated that involves increases they estimate, The new contract, expected. of around 3-1/2 to 3-3/ per in employment costs per manhour those of below is substantially This increase cent per year. appears to be Also, it steel settlements. other postwar negotiated in below increases to or somewhat similar
other industries recently. One important change in the contract is a revision in the escalator clause limiting sharply the amount of any automatic wage increases to offset possible cost-of-living increases. Meanwhile, in Western Europe and elsewhere abroad, production and consumption have risen to new highs, and available resources are being utilized more fully, probably reducing the intensity of foreign competition, which has been one of the factors tending to limit price advances in this country. The presentation continued with discussion of recent develop ments abroad and their relation to the United States balance of payments, followed by a review of demand forces operating in the domestic econoy, price trends and prospects, the extent of utilization of resources, and the developing situation in the financial area. Mr. Thomas concluded the presentation with a statement sub stantially as follows: Recovery in production and employment from strike levels has been rapid and a new high for gross national product of nearly $500 billion is expected for the first quarter of 1960. Unquestionably it will go higher before the year is over. It could approach a level as high as $520 billion by the end of the year without placing undue strains on available resources. is whether the expansion will be sustainable A major question or whether it will go so fast and so far as to bring about advances in prices and important imbalances in the widespread with unfortunate consequences later. economy of particular concern to this group is: How A question adequate expansion to credit will be needed to permit much the development of unsustainable occur and still prevent supply since last Growth in the money credit commitments? has been limited in part by Federal Reserve actions. spring held down by influences monetary needs were At the same time wearing down of of the strike and the gradual growing out built up in excess of current cash balances that had been Velocity of money increased early transaction needs in 1958. in the year and again at the end of the year. brought forth a rates have higher interest In addition, nonbank sources lending from of funds for volume substantial have been exceptionally in the aggregate so that credit supplies
large. Much of the nonbank lending and investment has been in liquid form representing what are in effect money substi tutes. Considering the financial and business situation generally, it seems likely that demands for bank credit will again increase and if expansion proceeds moderately and in an orderly manner, it might occur without resurgence of price increases and speculative developments such as often character ize this stage of cyclical expansion. But this prospect is not assured. The postwar period as a whole has seen economic activity and prices of goods, services, and capital assets under strong demand pressure, This pressure was fed by an exceptional supply of bank deposits and other liquid assets at the end of the war and a continuing large flow of credit. It was ac companied by diminishing fear of unemployment and of incurrence of debt by consumers and businesses, and of financial losses from sharp economic reverses. As each postwar recession proved short-lived and moderate, many people came to believe that rapid growth in the economy was assured, and that creeping inflation was almost inevitable. In 1960 we may again be faced with cumulative expansion in demand and strong upward pressures on prices. Unlike 1956, when auto production and housing starts declined while business capital expenditures were rising sharply, 1960 may be a year when rapid business inventory accumulation, expanding business fixed capital outlays, rising net exports, and strong consumer preference for new cars may all hit with great force at once, while residential building may level off or decline only a little. If this should happen, demand pressures on industrial capacity margins and existing supplies may be intensified, of inflationary price tendencies and bringing about resurgence of speculative investment in capital assets other also revival the margins of unused fixed-income obligations. While than unutilized manpower available to meet such re capacity and pressures are larger now than in 1954-55, these inforced demand are still not very great. margins be eliminated rather margins of capacity could These conditions were to and other financial quickly if monetary to develop and to surge of demand permit a concentrated Last year the money encourage inflationary expectations. year was lower the end of the little and by supply increased in the postwar period, at any other time relative to GNP than than in the 1920's. although still higher year, there was rose little last the money supply While and there of money turnover cent in the rate rise of 6 per a holdings of other liquid further increase in was a substantial
assets. The higher velocity of money enabled the economy to transact a larger volume of business with little increase in money balances, while the increase in holdings of other liquid assets indexed a growing volume of funds invested in a form permitting ready transfer to other uses if inflationary expectations are resumed. Conceivably, however, the view in financial markets that has generally prevailed in recent years might not be resumed. The higher interest rates and the abnormal shift in relation ships between bond and stock yields might bring about a re evaluation of the capitalized value of income from capital assets. Moreover, it might turn out that the economic situation before the strike was not as expansive, nor our international payments problem as temporary, as many observers have thought, and that the strike was in fact a dramatic reflection of fundamental change in business and financial appraisals of our domestic and international prospects. If this should prove to be true, resurgence of activity on the basis of inventory rebuilding could not be long sustained. A more hopeful possibility for 1960 than either an inflationary upsurge or an early reaction is that we shall be fortunate enough, now that recovery from the strike has been largely achieved, to have further expansion in demand come serially instead of all at once. In much of the postwar period, have been characterized by this sort of economic developments rather than by concentrated changes in which rolling adjustment all major sectors move together. For this year, it would be hoped that inventory accumula tion, contributing to an initial rise in general activity as and other metal products rises, would soon output of autos in the rate of inventory accumulation slow down. Such a decline would make available resources for other prospective increases, consumer expenditures generally, increased including larger expansion in government outlays, continuing State and local and increased net exports. A developing capital outlays, surplus should facilitate the financing of Federal Government expenditures in these areas. larger how can bank raised earlier, to the question Returning permit and foster be geared to money supply changes credit and developments? With fiscal policy the most desirable of these than to the demand of savings rather to the supply contributing easier in 1960 should be monetary policy the task of for them, some of the may reduce debt retirement in 1959. Treasury than of business, whose that the economy, particularly liquidity in in the budgetary surplus. payments will be a factor larger tax will be needed, in cash holdings renewed growth Perhaps some to draw may continue interest rates high although prevailing more active use. balances into existing
It is evident that to date, prevailing restraints on credit expansion have not been too severe. Credit develop ments in December indicated the strength of demands. It appears highly likely that in the immediate future credit demands will be so vigorous as to require continuing restraint in order to avoid excesses. Available data for January to date, however, show an appropriate seasonal reversal in bank loans and total credit. In addition, the marked easing in bill rates in the face of very heavy System sales indicates the absence of very strong demand pressures so far. These developments suggest that additional restraints are not yet needed. The feeling of tightness in credit markets seems to be acute and it is appropriate to consider whether there is a risk of not supplying the basis for enough bank credit. Can we continue to rely on growth of savings, increasing velocity of the money supply, and the willingness of member banks to increase their borrowings to meet the credit demands needed to support the amount of expansion in economic activity that may appropriately occur in the year ahead? The whole situation at home and abroad is a dynamic one and calls for the closest scrutiny of current developments in shaping policy actions. following statement of his views with Mr. Hayes presented the outlook and credit policy: respect to the business can find encouragement in the In general I think we two weeks, granted that no economic developments of the past be based on so short a of the outlook can firm judgment to improve, but at a moderate Business has continued period. of strain in the have been fewer signs rate, while there there were a few weeks ago. and capital markets than credit business may be looked improvement in Most of the recent settlement and the result of the steel on as the natural in that industry. output and deliveries recovery of both rapid would be pretty well now as if steel inventories It looks Meanwhile, there next three months. within the replenished demand for automobiles the buoyancy of doubts as to are some initial fears and the in general; consumer durables and for are giving way to results of the settlement of inflationary The of price competition. increased talk extent to some with same continuing been losing ground, stock market has a little more to give part of investors on the disposition in housing starts may lessen, to bonds. The decline attention long-term funds. for the pressures a time at least, for to conclude be quite premature that it would I realize credit by inflationary a boom, supported threat of that the
growth in 1960, has been removed. There is a tendency at this season of the year for business attitudes to be less buoyant than at other seasons, and there is also a general tendency for interest rates to move lower. We shall have to watch carefully developments of the next few weeks and months to see whether the present moderate tendencies are merely seasonal; but at least there is more hope than in some time that Federal Reserve policies of the last eighteen months are beginning to show results, with strong support now from the prospective budget surpluses. The most recent data on bank credit suggests some slight slowing in January of the vigorous expansion of loan demand witnessed in December. As we have noted before, the money supply showed almost no growth in 1959, but if we average the results of 1958 and 1959 we find a more or less "normal" growth for the two-year period. The banks are of course much less liquid than at the start of the two-year period. It is harder to judge the present degree of liquidity of the non bank sector, with larger corporate holdings of short-term governments offsetting to some extent the clearly reduced liquidity in terms of bank deposits alone. All things considered, I would hope that the seasonally adjusted money supply could be allowed to expand moderately in the next few months but within the general framework of our policy of credit restraint. Perhaps we should give some attention to the desirability of a slight growth in total reserves, on a seasonally adjusted basis, along the lines of Mr. Bryan's and Mr. Johns' comments at the last two meetings. For the next two weeks I would think that open market operations should be directed toward maintaining about the same degree of pressure on the money market and on bank reserves. We should probably guard against interpreting lower Treasury bill rates as an accurate measure of reduced money market pressure, in view of the large part played in the Treasury market by corporate funds and the fact that the banks as a whole remain in a very tight position. As usual, I would hope that the Manager would be given ample in carrying out the general policy of maintaining leeway the approximate existing degree of restraint. seems to be called for. The No change in the directive same reasons which led to our decision at the last meeting to rate are of course still valid. take no action on the discount increase in the British one per cent While last Thursday's on the flow of a considerable influence bank rate may have States and Europe, I don't funds between the United short-term move on our part in the that it calls for any offsetting think to reconsider the There will be an opportunity near future.
rate question after completion of the Treasury's February refunding, by which time we shall have the advantage of broader evidence of economic and credit developments following the strike settlement, Meanwhile the decline in market rates of interest has brought the discount rate into better alignment with our open market policy as reflected in market pressures and the level of market interest rates. The System is now in a good strategic position from which to move if we find that we must deal with inflationary credit demands as we get further into 1960. For the time being, watchful waiting would seem to be our best course. Mr. Erickson reported that the First District business situa tion continued to show improvement. Although year-end figures were not yet available on production, construction, or employment, the Business Week survey for 1959 indicated that New England had an increase in personal income of 7.8 per cent over 1958, which was higher than the national average. However, according to the Depart ment of Commerce survey figures for the three previous years, the New England area was slightly under the national average. The December banks indicated a deposit increase of 5.1 survey of mutual savings since February 1958. From the lowest year-ago comparison per cent, rose to almost 7 per cent in October 1958, that point, the comparisons month in the rate of had been a decline each but since then there dropped to the low point rates of gain had not Even so, the increase. the past two weeks, period of 1957. During the previous boom of and there was of Federal funds were moderate sellers district banks during this window. Borrowings use of the discount slightly greater period, due than in the previous $5 million higher period averaged larger city banks. by some of the to borrowing primarily
Mr. Erickson indicated that he would not favor a change in the discount rate or in the policy directive at this time. As to open market operations, he would continue to maintain the same degree of restraint, neither easing nor increasing restraint in any way. Mr. Irons said that following a moderate strengthening in December, which resulted in making 1959 a record year, Eleventh District developments in early January indicated further moderate growth. The banking situation appeared to be a little tighter than in the preceding few weeks. District banks lost deposits rather sharply during the first three weeks in January, there was some decline in loans, perhaps about seasonal, and heavier member bank borrowing reflected increasing use of Federal Reserve credit by three or four of the larger banks. Whereas borrowings had pre running about 5 or 6 per cent of the System total, viously been they were in the range of 10 to 12 per during the past two weeks cent. straws in the wind he detected a few Irons thought that Mr. and bankers with concern among businessmen indicating increasing of letters and comments credit. A scattering respect to consumer of the larger banks of a few bankers and officers from country of such credit. the rapid growth some concern about revealed with open market he was quite satisfied Irons said that Mr. into consideration two weeks. Taking during the past operations and interest Treasury financing the imminent factors, including all
rate developments, he favored continuing to maintain the status quo as nearly as possible, with no change at this time in the discount rate or the policy directive. In open market operations, he would continue to maintain about the same degree of restraint, with the Manager of the Open Market Account given sufficient leeway to meet situations as they might arise in the market. He was hopeful that there would be no increase in the degree of restraint; if it were necessary to have deviations, he would prefer that they fall on the side of easing. Mr. Mangels commented that there had been no particularly developments in the Twelfth District in the past two weeks. unusual u some modification of the research people tho ght they sensed The had existed earlier with respect to a feeling of optimism that coming year. However, district business boom during the general in November, when enployment December was higher than employment in of unemployment in The December rate at record levels. was already was the lowest since the States, .4 per cent, the Pacific Coast in January, district first two weeks 1957. For the late summer of in demand deposits $450 million increase showed a reporting banks out of savings $266 million, mostly time deposits of but a drop in 3.2 per cent decline represented banks. The at California accounts the banks of 1959, whereas as of the end savings deposits of total Most of 10 per cent. as much as might lose that they had expected and into securities into Government to have gone funds appeared the
savings and loan associations now paying dividends at the rate of 4-1/2 per cent. As of the end of the year, savings and loan associa tions were borrowing almost $700 million from the Federal Home Loan Bank of San Francisco, but they repaid between $200 and $300 million by January 15. The repayments were made principally out of new money obtained from savings deposits at commercial banks and from payoffs of outstanding loans. Reporting banks showed a loan decline of nominal amount in the first two weeks of the year and sold Government securities to the extent of $150 to $160 million; the decline in loans was about half as large as during the same period in 1959. Purchases of Federal funds were running about twice the rate of sales. Borrow ings at the Federal Reserve Bank increased in the first three weeks and were about three times as large as during the comparable of 1960, period of 1959, averaging $115 million per day. Whereas borrowings normally run from 3 to 4 per cent of the System total, during this 13 per cent of the System total. Some recent period they reached substantial loss of city banks reflected the of the borrowing by savings deposits. there should be no to feel that Mangels said he continued Mr. was rather pleased time. He at the present discount rate change in the to be somewhat lower turned out of net borrowed reserves that the level indicated at the January 12 Committee meeting. than the goal seemingly in net borrowed increase any substantial would not recommend He for the next as a ceiling regard $400 million preferring to reserves,
two weeks, and he would favor no change in the policy directive at this time. An influence reflecting itself in his comments was the fact that the Treasury was coming into the market. Mr. Deming reported that at a recent meeting of steel ware house executives in the Twin Cities it was generally agreed that shortages of structural steel were disappearing rapidly and all types of steel stocks in the region might be rebuilt nearer the beginning than the end of the second quarter. Cold-rolled sheets and bars were still short and manufacturers buying directly from mills still encountered difficulty in getting enough of specific types of steel, but even this picture seemed to be changing rapidly. District sales managers of automobile manufacturers who serve most of the Ninth Cities also met recently, and it was reported District from the Twin at dealers had built up more rapidly than that stocks of new cars reported that January sales Most of the participants anticipated. and there was talk of special thus far were well below quotas, was dull. Managers of The used car market promotions in February. who serve the Ninth Paul Builders Exchanges, and St. Minneapolis filed with them in January that building plans District, reported activity in of nonresidential construction indicated a high level in the comparable higher than of 1960, probably the first half period of 1959. high in unemployment out that the seasonal Mr. Deming pointed the year. Estimates early part of comes in the the Ninth District in
by the Minnesota Department of Employment suggested a somewhat lower level of unemployment in January, February, and March 1960, than in the same months of 1959, and a substantially lower level than in the first quarter of 1958. Nevertheless, it was anticipated that unemployment would be 20-25 per cent larger than in the same high months of 1956 and 1957. Farm operations were at a seasonal low, but moisture conditions were better and the snow pack in the Montana mountains was large. Although cash receipts from marketings continued to run well behind a year earlier, the gap had narrowed somewhat, apparently reflecting seasonally large cattle movements at favorable prices. Farm machinery dealers and distributors sales to be off from 1959 levels by one-third to one-half expected summer's drought, and from one-fourth off in the areas hit by last land prices showed some signs of even in other sections. Farm to leveling off. at the January 12 meet recalled having reported Mr. Deming loans were up and de of 1959 district bank ing that at the close a year earlier. He holdings down as against posits and security to 58 per cent rose from 46 loan-deposit ratios said that in 1959 country banks, giving to 46 per cent at banks and from 42 at city the end of 1959, the of 50 per cent at a total district ratio and from other Reserve Bank from the 1932. Borrowings highest since in the the year, particularly quite heavy throughout sources were city banks loans at district period total during this second half;
rose less than half as much as at all city banks and business loans actually declined in contrast to a national gain. These points underlined Mr. Deming's feeling that Ninth District banks lost sub stantial liquidity in 1959. In the first two weeks of January, however, city banks showed deposit gains in contrast to the experience in early Turning to policy, Mr. Deming said that the phrase "watchful waiting," as used by Mr. Hayes, represented about what he would sug gest for the next two weeks. He would favor no change in the discount rate or in the policy directive at this time, and he would like to see open market operations conducted as close to the pattern of the past two weeks as possible. Any deviations, in his opinion, should be on the side of ease, and there should be no further tightening. Mr. Allen made the following statement with respect to Seventh District developments: market and the weaker stock market The stronger bond a deterioration in general busi do not appear to reflect ness sentiment in the Seventh District. January is to show a further increase in total output and expected on a seasonally-adjusted basis. employment to new records sales appear to have continued strong General merchandise in the Chicago area improved January. Housing permits in only 13 per cent in that they were in December relatively month in contrast to a 55 less than in the year-earlier cent drop in November. per sales are regarded as disappointing. However, automobile 10 days of January, not daily sales rate for the second The 10 per cent been up about to have is thought yet available, 10 days, still considerably 16,900 rate of the first from the improve before Unless sales hoped-for figure. below the seem certain. production cutbacks long,
Sales of new farm machinery declined in the last quarter of 1959 compared with the same period in 1958, but some of our manufacturers of such machinery continue to expect a very satisfactory year in 1960. The contraction of loans at weekly reporting banks has been less in the Seventh District than in other parts of the country. Loans at our banks in the first two weeks of January were down only half as much as last year, where as in other districts they have dropped twice as much as last year. Our banks have continued to liquidate Government securities and holdings of Treasury bills by Chicago money market banks are nominal. That is understandable with the reserve positions of the Chicago central reserve city banks under pressure. On the other hand, our reserve city and country banks are in an improved position and their use of the discount window has declined. Only 56 out of more than 900 country member banks borrowed in the period ended January the fewest since early October. 13, Mr. Allen said that in the absence of untoward developments, he would favor continuing through the next two weeks the policy agreed upon by the Committee at its January 12 meeting. He would favor no change in rate or the policy directive at this time, and he would the discount same degree of restraint that maintain approximately the endeavor to during the past two weeks. had prevailed in the Tenth District severe winter weather Mr. Leedy reported or two weeks, with a snow cover over virtually during the past ten days a healthy situa this was on balance area. For agriculture, the entire in neighboring districts, wheat. As for winter tion, particularly than in the loans this year liquidation of had been less there true with respect this being particularly period of 1959, comparable there was however, In that category, loan category. to the business the nation generally. last year than throughout smaller growth late
As in the San Francisco District, there had been a decline in savings deposits at Tenth District banks. One might have expected something of a clamor for an increase in the maximum permissible rate of interest, but in the Tenth District there had been no such clamor. Presumably the banks were hopeful of tax equalization legislation to improve their competitive position vis-a-vis the savings and loan associations. Mr. Leedy said he subscribed to the comments made previously at this meeting that favored continuing the policy of the past two weeks. Mr. Leach reported that Fifth District business conditions had shown continuing expansion, with little or no evidence as yet that the expansion was being sparked by speculative activity. The textile industry continued to be an important element of strength; orders had half of the year, and even beyond in been booked into the second industry was the best The outlook for the furniture some instances. level ever reached. A with unfilled orders at the highest in years, cigarette production in indicated that district preliminary estimate the fact that cigarette for a single month; set a new record December augured well faster than population continued to increase consumption production in Bituminous coal of the industry. the future growth for highs for the new production of 1959 established the closing weeks year. banks ended the District member said that Fifth Mr. Leach earlier. Loans than a year tighter position 1959 in a much year
were up 12 per cent, security holdings were down 8 per cent, and the loan-to-deposit ratio advanced 5 percentage points. He was convinced from talking with bankers and from seeing instructions issued to loan officers in State-wide institutions that System policy was pinching at most of the sizable banks. Borrowings from the Reserve Bank this month, averaging around $20 million, were no higher than in corresponding periods of the last two years, but this was due in large part to certain actions taken by the Reserve Bank in recent weeks in the administration of the discount window. Although district banks reported that thus far they had not seen too much increase in the way of loans to build up inventories, they expected it. This was one of the factors making them feel that they were in a tight position. As to policy, Mr. Leach expressed the view that the imminent clearly called for maintaining an even keel. He Treasury financing at the moment, however, even if the would not want to be any tighter not in the picture. As he saw it, System Treasury financing was System was in a the right extent. The was biting to about policy tighter at the any easier or and not get position to wait good present time. slight flavor in about the said he was puzzled Mr. Mills some increase in toward stimulating that veered today's discussion a monetary policy the same breath recommended the money supply but in the two objectives, was unable to reconcile status quo. He of
because to maintain the status quo policywise apparently would produce a level of negative free reserves somewhat in excess of $500 million for the current reserve week. Therefore, as illus trated by the figures, maintenance of the status quo obviously would mean no relief from the pressures that the commercial banking system and the economy in general had been subjected to by System monetary and credit policy. He felt personally that operations in the current reserve week, although they fulfilled the directive given by the Committee at the January 12 meeting, had produced pressure against reserves that was undesirably severe. Mr. Mills said he concurred with those who had commented would not favor an increase in the discount rate at this that they that the Committee should give some time. He believed, however, to possible, though unlikely, developments careful general thinking States that would follow position of the United in the international rate increase, and the Bank of England's bank in the wake of the in Sweden, Denmark, and increases effected recently discount rate attach so much to he felt did not Germany. The concern Western as to what was perhaps that occasioned those increases the reasons If that trend in the stock market. downward break a fundamental that there would it was possible it should widen, and if continued, that had foreign investments of liquidation be a very substantial occur, the If that should in the market. now been placed until funds would whether those as to arise would immediately question
be repatriated or whether conditions in the United States would be such as to encourage their reinvestment here in short-term United States Government securities or other eligible liquid investments of high quality. Mr. Mills then said that he would like to place before the Committee a redical line of thinking that could be disputed over the weeks to come but perhaps might be in a direction in which the System would at some point find it advisable to consider moving. Accordingly, he presented the following statement: Premature action to raise the discount rate at the Federal Reserve Banks as a defensive measure to hold foreign funds in the United States would be a mistake. The domestic situation calls for a more moderate, rather than a more restrictive, monetary policy, and if the rate were raised, the increased pressure that discount be exerted on commercial bank reserve presumably would positions by System actions taken to make the higher rate effective could seriously dislocate the economy. fully persuasive reasons matter, there are no For that that the English and West German financial to believe so robust as to encourage a repatriation situations are States solely to obtain of funds out of the United Therefore, an attempt to higher investment returns. movement of foreign funds from anticipate an outward Reserve System actions on the this country by Federal as lack of probably be regarded discount rate would part and, as a result, in the dollar on our confidence funds whose prevention very outflow of could produce the had been aimed at. that reasoning contemplated of this Acceptance recognize the would not System policy Federal Reserve rate at this time. in the Bank of England's increase tangible evidence period, there was If, after a waiting States in out of the United movement of funds of the Reserve Banks at the Federal discount rate volume, the cent to 5 per from 4 per be raised dramatically should that our financial cent as a signal or 5-1/2 per cent
authorities were taking a firm hold of the situation and were prepared to take whatever further measures might be necessary in order to protect the integrity of the dollar as the world's key currency. Response to such actions could be expected to dissipate any concern felt about the dollar abroad and to reverse whatever outward movement of funds was then in progress. If, in the course of these events, an anti-cyclical easier monetary policy should be called for by a deteriora tion in domestic economic conditions, the Federal Reserve System should be able to take technical actions that would continue the emergency-raised level of the discount rate at the Federal Reserve Banks at the same time that the availability of credit was expanded substantially. Maintenance of the emergency discount rate would signify that our financial authorities had every intention to defend the international integrity of the dollar while they were simultaneously seeking to stimulate the economy with easier credit conditions, whose effects would prevent the "exoort" abroad of recessionary influences in this country. These seemingly conflicting objectives would be attained by increasing the supply of reserves needed to expand bank credit by encouraging member banks to discount heavily at the Federal Reserve Banks. Notice would be given that under existing conditions the prohibi tions against continuous borrowing would be suspended. the supply of reserves would be increased Accordingly, expansion of member bank discounts, but as through a major made at the emergency high discount they would have been it had been established would rate, the purposes for which would be necessary for the preserved. Moreover, as it be banks to recover the high cost of their Federal member Reserve Bank discounts, they could be expected to charge to their borrowers, thereby tending relatively high rates of interest rates appropriate to to produce a structure process of adaptation to investment. In the encouraging discounts, Federal Reserve use of member bank a massive actions would be necessary from System open market policy shortages or surpluses in time to time to offset temporary fluctuations in the occasioned by the supply of reserves and so discount windows Reserve Bank use of the Federal could be maintained. level of reserves that a predetermined fact that liberal be paid to the Attention should should call Reserve Banks at the Federal discount privileges U. S. and long-term on intermediatea flow of advances forth Inasmuch as such as collateral. Government securities value of U. S. Government be made at the par advances would
securities trading at a discount, the effect on the market should be favorable at a time when market strength would be psychologically desirable. Furthermore, an improvement in the U. S. Government securities market that was engendered by the knowledge that banks were being relieved of pressure to sell securities in order to finance new loans and investments would also strengthen the receptiveness of the market to whatever sales the System Open Market Account might see fit to make from time to time. A further factor that would redound to improved market sentiment for U. S. Government securities would be that any letdown that should occur in business conditions would witness an automatic increase in corporate liquidity, together with a correspond ing incentive for corporations to invest in high quality short-term investments. Mr. Robertson expressed agreement with the policy of watchful waiting referred to by several of the Committee members. He thought that quite obviously this was not the time to change the discount rate or the policy directive. However, he would not align himself with those who felt that this was a time for easing. Instead, it seemed to him that the situation called for maintaining as even a keel as possible. Mr. Shepardson commented on a meeting yesterday in Chicago lenders in agriculture, particu which was attended by institutional on farm mortgages. The price of farm land, he larly those lending without interruption and on a rising trend almost noted, had been for several years. However, in almost uniformly across the country had apparently been a definite change. the last quarter of 1959 there which included group that met yesterday, sentiment of the The companies, the farm of the major insurance of most representatives
credit agencies, and the American Bankers Association, indicated at least a leveling off of prices, and in many areas a significant down turn. Demand for the very top-level farms-those that had been sought as investments by "Main Street farmers"--appeared almost to have vanished; prices on such farms were reported to have fallen off $150 to $200 an acre from the levels of $600 to $700 an acre that prevailed six months ago. Also, there had been a drop of $50 to $100 an acre in some of the lower-priced farm land; in the wheat country of Montana, land that sold previously at around $250 an acre was reported to be selling in a range from $125 to $150. A number of those at the meeting said that whereas they heretofore were lending freely on the appraised value of land without too much regard to the owner's opera tions and without looking closely at his operating statement to see where the funds for repayment were coming from, they were now cutting down or refusing entirely loans that did not show from the operating statement a good probability that the operator would be able to pay from funds accruing out of his operations. In addition, them down increasing reluctance of banks to several persons mentioned the credit on equipment and livestock purchases, with the extend term were now coming to the mortgage that some of those applicants result there were outstanding mortgages to get term credit. Where lenders with the present market, almost all of at favorable rates compared or extension of whenever an adjustment reported that those present term credit, was requested, in the form of borrowing, particularly the rate upward. In most cases lenders were they were adjusting
requiring the new rate to be on the basis of a complete renegotiation. Many participants reported no significant resistance to higher rates from borrowers seeking to purchase additional holdings to increase their units. In summary, it appeared that there had definitely been a turn in farm land prices and that more careful consideration was being given to the earning capacity of the farmer in extending credit. From the standpoint of the increasing cost-profit squeeze faced by agriculture, it seemed fortunate that prospective borrowers were getting a more realistic appraisal of what land was worth. Mr. Shepardson agreed that this was a period in which the System be watching developments closely. For the period immediately should maintaining the status quo as nearly as possible. ahead, he would favor King made several references to material in the economic Mr. this meeting, including the portion dealing presentation given at in relation to trend of corporate earnings with the position and indicated that he of recession. He during past periods earnings of the presentation studying this portion be interested in would was close to a feel that the country While he did not further. nearer and nearer that it was moving he did feel general recession, in the presentation to comments time. With reference to one all the with in public expectations of a change the possibility regarding the had mentioned that Mr. Larkin he noted to inflation, respect securities. into Government going of individuals number increasing smaller concerns and that more individuals to him It was encouraging
were going into Government securities for this would give them an increased stake, so to speak, in the United States, a development which would be healthy. Mr. Shepardson's remarks on farm land prices also seemed to him an indication that the public was turning toward an expectation of less inflation. At the livestock show in Denver last week, he (Mr. King) felt that he detected quite a bit of apprehension. He thought it healthy that people throughout the country were actually a little doubtful about a boom developing to the extent that one had been talked about and more or less expected earlier. During the steel strike, he said at Committee meetings that he did not think the steel strike was a major dent in the economy or that there would be a wild boom following settlement of of that opinion. He was inclined to the strike, and he was still optimism on the part of businessmen, discount some of the reported to be optimistic, and he was more inclined for they naturally desired the portions of the chart show relating to think about such things as trend of corporate earnings. to the downward would not suggest any change in policy Mr. King said that he favor continuing on an even-keel this time and instead would at the impossible to it was almost asking He realized that basis. errors on one side not to make any the Account Management request he would prefer resolving doubts, if it came to the other. Thus, or the first time he of ease. This was them on the side to resolve System was in a but he believed the had made this suggestion,
position where it should not do anything to dampen the possibility of the economy going forward and achieving the greatest possible sound growth. Since there was some doubt as to how much growth would or would not be sustainable, he would err on the side of allowing growth, particularly in view of the encouraging indication that people did not appear to be talking inflation as much as they had earlier. This feeling was apt to manifest itself in the actions of the legislative bodies. In summary, this might be the big break that the System had been looking for in terms of a change in public sentiment. Mr. Fulton stated that the pace of Fourth District business activity was quite brisk. The steel mills were putting out a lot of material that was being taken and used; inventory building was going on apace. After describing the results of an election held at a steel company that did not enter a contract with the union on the terms of the general settlement, Mr. Fulton went on to say that Fourth District building activity had increased sharply since the in department store sales was first of the year, while the increase than the national average. Auto sales were brisk throughout greater to be the prospect of a good year. the district, and there seemed Bank loans had declined, but not to the same extent as last year, of bankers that they did bearing out the earlier statements thus that loan demand, which was any substantial decline and not expect take up any slack. Consumer credit and mortgage quite strong, would
credit were both in great demand. While member banks were borrowing somewhat more heavily, borrowings were running at only 6 to 7 per cent of the System total, as against the 10 per cent that might be regarded as proportionate for the district. As to expectations, businessmen appeared to have no apprehensions about the first half of this year but were wondering what would happen in the second half when steel inventories again became adequate. Mr. Fulton agreed with the view that neither the discount rate nor the directive should be changed at this time. He did not have the feeling that any substantial downturn in business was impending. The expectation of businesses appeared to be to spend substantial sums for improved equipment and for promotion of their products; in general, businessmen were acting as though the economy was booming, which he it was. In these circumstances, he would continue the degree thought recently and not err too much on of pressure that had been maintained become cumulative, and in his opinion the side of ease. That could of the System to trend constantly it was not in the best interests into an easier position. business and financial that Third District Mr. Bopp reported the nation. Steel to those of weeks were similar trends in recent per cent of operating at 102 region were mills in the Philadelphia 95 per cent rate nationally. moderately above the capacity, which was had about strike on employment effects of the The secondary existed to a secondary unemployment in Pennsylvania, disappeared;
measurable extent in only one industry, metal products. There was a fractional increase in district manufacturing employment from Novem ber to December according to preliminary data, and total employment was 3 per cent higher than a year ago. New unemployment claims in Pennsylvania had been moving seasonally in the past two weeks but were substantially below the levels of both 1958 and 1959. District department store sales had been strong; sales for the past four weeks were 12 per cent above last year's high level. Automobile sales in Philadelphia showed the effect of the shortages in December; according to preliminary data, they were more than one-third below a year earlier. The large Philadelphia banks had been under somewhat greater reserve pressure in the past few weeks. Their daily average basic reserve deficiency was $68 million as compared with $47 million in the pre vious two weeks, and the increased pressure was reflected in their Daily average borrowings from the Reserve Bank total borrowings. from $36 million to $65 million. Country banks also increased rose Bank from $9 million to $16 million. their borrowings from the Reserve was 8.8 per cent of the by district member banks Total borrowing the latest week compared with 6.4 per cent and 4.4 System total in the preceding two weeks. respectively, in per cent, the view that although the time might Mr. Bopp expressed Committee would want to modify the come, perhaps this year, when the that would be only if during Treasury financings, even-keel policy were in the direction of rapid economic developments clearly
expansion. He did not see such a development at this point. Accordingly, he favored continuing the present degree of restraint, with no change in the directive or the discount rate. Mr. Bryan said he could see nothing in the Sixth District developments that appeared to be of great significance as against major national trends. The latest figures showed activity still going up, but they were definitely related to national trends. Most of the time in the past few years the district had seemed to grow at rates greater than the national growth rate, but it appeared that this might be coming to at least a temporary halt. District banks appeared to be very illiquid, and borrowing from the Reserve Bank continued at levels disproportionate to reserve resources. The latest figures showed that district borrowings were more than 16 per cent of the System total, against the figure of about 5 per cent that would be indicated on the basis of total reserve positions. It was to call some of the loans on the instalment being found necessary the economic situation at the most recent plan. The round-up of than it had seemed slightly less enthusiastic directors' meeting quite definitely pessimistic months, with one director been in other in his line of business. as to the outlook to certain statistics ccmpiled After referring incidentally the future course some doubt on seemed to cast sources which by private a real shift in inflationary Bryan said that he sensed of business, Mr.
psychology. This was noticeable in the situation with regard to land prices that had been discussed by Mr. Shepardson. While one could analyze that development on the basis of a reappraisal of earning power, he felt that it also reflected to a considerable extent a shift from the psychology that had made people willing to buy farm land, regardless of income prospects, as an inflationary hedge. It was his impression that the country was in a situation of great economic strength but certainly not of unlimited boom, and he believed there was danger of a rather extensive and perhaps abrupt shift in psychology that might change things in a substantial way in the equity markets. As to the discount rate, he certainly would not want to take any action at this time. referred to the chart on reserves that he had Mr. Bryan then Committee meeting on December 15, 1959, placed in the record of the that connection made the following statement: and in been favored once before by At this time, having to place a chart in the record, I would like permission in the record the same chart (but permission to place and a related chart. The with additional information) the seasonally un other things, shows first, among as the seasonally adjusted adjusted figures as well The second chart shows figures previously presented. related, in two cases, rates from points certain growth directive and, in changes in the Committee to Comittee full month of experience. December, our last one case, if the Chairman and my At this time, moreover, like to begin an bear with me, I would colleagues will to the Desk in drawing an instruction experiment in effective reserves. based on total quantitative terms, fair to me to say it would seem In making this attempt through December 1959 period from June 1958 that in the
we essentially allowed no growth in total reserves, a policy justified as a mopping-up operation because we had previously effected a very large excess, based upon a long-run trend line, in the growth of reserves. The justifiable mopping-up operation seems to me to be completed. We are now confronted with a situation of great economic strength, but not immediately a situation of unlimited boom. Accordingly, I would conclude that a policy of restraint is still justifiable. But I would also conclude that the time has come when we should allow some growth of reserves. Such a growth of reserves should in my judgment be less than the 3.6 per cent reserve-growth of the postwar period, for it is clear that such a rate of growth has permitted an undesirable degree of inflation in the postwar period and, I would conclude, is inappropriate to a period of great economic strength. Thus I would suggest that the rate of growth in total reserves that we contemplate for the time being be at 2 per cent. Translated into concrete terms this would put the total reserve figure, seasonally adjusted, at something over January. Since it would hardly be appro $18,700,000,000 for the Desk to attain such a precise figure on a priate to ask basis, I would also suggest that there be a daily average to the goal stated. Just as certain plus or minus latitude I would think we might well say that we are a suggestion, a total reserve figure, on a daily average basis, aiming for and $18,750,000,000. This would between $18,650,000,000 for the Desk to adjust to conditions in the allow latitude as they develop, and, at the same time, would money market centered on a slow and give us a quantitative instruction restraining growth rate in total reserves. such a goal I should say that in January, In suggesting of last week, we have had daily average through Wednesday This has put actual actual reserves of $19,059,000,000. the figure that would in January well above total reserves per cent trend line, and, up been indicated by a 3.6 have per cent trend line even Wednesday, above the 3.6 to last adjusted basis. on a seasonally a definite easing in the money The result has been to measure such easing we are to be permitted market--if in suggesting a goal test of rates. Thus, by the objective reserves in January, the goal suggested, for daily average of growth in the a restraining rate it calls for although what I would regard does not permit total reserve position, that, up to last Wednesday, rate of growth as the excessive
had been permitted in the total reserve figure. Let me make clear that I am not asking that the Committee adopt the suggestion that has been made. I am merely experimenting--and hope that the Committee will permit me to experiment from time to time in the future--to determine whether the total reserve concept represents a practicable foundation on which the Com mittee could base instructions (a) in quantitative and, thus, in measurable terms; (b) in terms of a phenomenon, namely total reserves, that are determinable by the Reserve System even after the influence of items not determinable by the System; (c) avoid qualitative terminology as represented by such indefinable terms as tone, feel, ease, tightness, and so on; and, at the same time, (d) leave the Desk with sufficient latitude to accommodate itself to the practical administration of the Account and to conditions as they unfold from meeting to meeting. The Chairman stated that the material presented by Mr. Bryan 1/ would be taken under study. said he found nothing in Eighth District statistics Mr. Johns that was particularly significant. In the past two weeks, he had endeavored to find out whether in the business community of the district there were many "reluctant optimists." Outside the agri special consideration, he had cultural sector, which deserved of flagging optimism. Farmers, discovered little or no evidence owners, and operators were, of course, not wildly plantation high costs, if not contemplated continued They enthusiastic. uncertain. For picture was and the price rising costs, steadily borrowing had risen member bank as yet unexplained, some reason, at the end of at $108 million week and stood in the past sharply are attached Mr. Bryan to by referred two charts of the 1/ Copies to these minutes.
the week. This represented not only rather large increases in borrowing by reserve city banks but also some increase on the part of country banks. It appeared, at least in St. Louis and Memphis and to a lesser extent in Louisville, that city banks were not feeling very easy. At Memphis it also appeared necessary to face again the condition that cotton loan demand was becoming steady and constant throughout the year rather than seasonal. This probably meant that the Reserve Bank had some work to do on the problem of member bank borrowing in the southern reaches of the district. Mr. Johns said that while he would like to go along with Mr. Hayes' concept of watchful waiting, as he understood that concept, he would be inclined to keep a rather firm and steady hand on monetary policy. He would suggest truly watchful waiting, moving neither in one direction nor the other. presented by Messrs. Mills After commenting that the papers Szymczak expressed the view that at and Bryan deserved study, Mr. there was nothing in the economy appearing to the present time In his opinion, however, change in monetary policy. require a basic position of the some easing of the situation required the seasonal is apt to be season of the year out that this banks. He pointed helpful. On might be some easing therefore dull, and that rather on the expanding side the economy was still the other hand, since favor no fundamental he would this would continue, he felt that and
change in monetary policy. While these views might at first seem contradictory, he pointed out that it is not feasible to change basic monetary policy on a month-to-month or quarter-to-quarter basis. Instead, the Committee must look at monetary policy on an over-all, long-range basis. If the Committee was continually changing its record, that would be hard to explain either outside or within the System. With this explanation, he would recommend no change in basic policy and some easing through open market operations. Mr. Balderston said he was fearful that the Committee members, in reading the stock market figures from day to day, might tend to get carried away by the pessimism that is to be expected in the first two months of the calendar year. He expected February to be a month in which there would be a lot of pessimistic expressions; when it came to March he was not sure. He had been told of some companies being advised by their counselors not to approach the capital markets in January and February because the Treasury was at the trough, so possibly it might be found that resort to the capital markets in be as heavy as in March 1956. In short, he had a March would up from this period of pessimism that the System might wake suspicion onward. Because of his in full swing from March to find the recovery pulled off base, he would suggest the System would not be hope that an even-keel policy, with no easing. maintaining that, unless the Committee expressed the view Chairman Martin make a change, the even-keel philosophy was certain it wanted to
ought to prevail during a period of Treasury financing, and such a period was imminent. The Chairman then said it seemed clearly the consensus of this meeting that no change in the policy directive or the discount rate was called for at this time and that the Desk should come as close to perfection as it could in adhering to an even keel. Mr. Mills inquired whether the Chairman would care to qualify his statement of the consensus with an indication as to whether errors should fall on the side of ease or of tightness. He (Mr. Mills) had detected a trend of sentiment during the go-around in favor of moving to errors on the side of ease, but he had not attempted to keep count and did not knew whether that was the majority view. Mr. Szymczak commented that his position was related to what been doing during the past two weeks. the Desk had on open market operations in Following comments by Mr. Larkin of net borrowed reserves during the relation to changes in the level of the Desk seemed said that operations period, Chairman Martin past even keel. He doubted to maintain an to have been intended clearly thinking was in the situation where its Committee, in a whether the want to make the Treasury's further restraint, would direction of be resolved on that doubts should difficult by saying problem more involved a matter he suggested, The question, the side of tightness. express shades of differences, It was desirable to of deliberateness.
but he questioned whether there was any precise way of defining them. The Desk, he observed, already has enough difficulties. The Chairman again expressed the view that it ought to be the intent during a period of Treasury financing, unless the Committee wanted to make a fundamental change in its policy, to try neither to complicate nor help the Treasury's problem. Rather, it should be the aim to give the Treasury as closely as possible a fair test of the market. Mr. Shepardson suggested that this would mean maintaining as nearly as possible the degree of restraint at which the Committee had been aiming. said that this was what bothered him, and that he Mr. Mills could see where the Management of the Account might have serious During the first two reserve weeks of the year, he difficulties. of natural factors operating that more by accident, because surmised design, the degree of restraint, the market, than by deliberate in into the $400 million reserves, dropped as measured by net borrowed were brought up, week net borrowed reserves Then in the past range. million. In to around $500 the Committee directive, consistent with to sense what find it difficult the Desk might these circumstances, tended to if natural factors was; whether, Committee's meaning the permit that the Desk should supply of reserves, increase the net borrowed and bring it deliberately or move against increase higher level. to some reserves
Mr. Larkin said that the lower net borrowed reserve figures were inadvertent; the Desk was just trying to keep up with the changing situation in the market. Mr. Hayes commented that some of the remarks made at this meeting pointed up the danger of placing too much emphasis on the net borrowed reserve figure. The Committee had talked from time to time about not paying quite so much attention to that figure, but nevertheless there was an inclination to give it perhaps too close attention. Personally, he did not feel that the Committee should ever define its objective in terms of one figure, because it was necessary to think about various elements in the situation. The the Account sold a large volume of securities in a week fact that to his mind, and represented an important offset was important, wound up at a somewhat lower to the fact that net borrowed reserves the Desk must consider the feel of the level. Among other things, along with what was being and the feel of the banks, bill market not a game that could be played the banks and others. It was said by in terms of one figure. point. He went was quite a valid Martin said this Chairman any desire to in the go-around he had not detected on to say that Committee was Instead, the policy by design. change the existing that some would prefer While it was true talking about a trend. philosophy vis-a-vis spirit of the even-keel ease, he felt the more not consciously make that the Desk would Treasury should be the
errors on the side of ease or of restraint. The Treasury financing would not involve a very lengthy period, and it was directly ahead. He would prefer this morning that the Committee renew the current directive and let it go at that. Mr. Mills said that he again wished to submit his proposal that clause (b) of the directive be changed to provide for "fostering sustainable economic growth and expanding employment opportunities while guarding against inflationary credit expansion." Mr. King commented that the intent of his previous remarks was more in the direction of avoiding errors on the side of tightness than resolving doubts on the side of ease. Mr. Larkin said that as he caught the sense of the meeting, it was more important to avoid further tightness than to resolve doubts on the side of ease. In reply, the Chairman said to Mr. Larkin that, to sum up, the Committee wanted the Desk to be "perfect." Mr. Larkin commented that he felt the suggestion of Mr. Bryan and that it would be studied at the deserved further consideration New York Bank. Chairman Martin concluded the discussion by stating his dissent, the Committee desired to understanding that, with one in its present form, and no dissenting renew the existing directive in response to this statement. comments were heard
Thereupon, upon motion duly made and seconded, the Committee voted, with Mr. Mills voting "no", to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (in cluding replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to restraining inflationary credit expansion in order to foster sustainable economic growth and expanding employment opportunities, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the or sale of securities for the Account) at the close purchase of this date, other than special short-term certificates of purchased from time to time for the temporary indebtedness shall not be increased or accommodation of the Treasury, by more than $1 billion; decreased direct from the Treasury for the (2) To purchase the Federal Reserve Bank of New York (with account of seems desirable, to issue in cases where it discretion, to one or more Federal Reserve Banks) such participations certificates of indebtedness amounts of special short-term time to time for the temporary as may be necessary from provided that the total accommodation of the Treasury; at any one time by the of such certificates held amount shall not exceed in the aggregate Federal Reserve Banks $500 million. discussed the matter Treasury had not first that the Observing by the System Open referred to the holding with him, Chairman Martin $11.363 billion billion of the $5.5 of approximately Market Account of indebtedness maturing February 15, issue of Treasury certificates choice of a exchange the offer in Treasury should 1960. If the
shorter and a longer issue, he pointed out, this would present the question whether the System should subscribe entirely to the shorter issue. If that course were followed, it might appear as though the Treasury had priced the issue for the convenience of the System. The Chairman said he felt that the Treasury probably expected the Federal Reserve to go to the short end of the market. However, looking at the matter from the management standpoint, it was his feeling that the Account might well take 1/3 of the exchange in the longer issue and 2/3 in the shorter issue as a means of dividing the bulk. When it got to a point where the Federal Reserve held as much as $5.5 billion in any one issue, this made a pretty big load. The broad problem was one that the members of the Committee should he had referred at the January 12 meeting to the matter be studying; 1961. As far as he could see, the of the 2-1/2 per cent bonds of any principle if it wished to split Committee would not be violating exchange, and he therefore wished the subscription in the forthcoming matter on the table for consideration. to put the not studied the matter in detail, Mr. Hayes said that he had general idea of splitting the exchange. but he liked the recently had a similar recalled that the Committee Mr. King shorter side. Since to stay on the before it and decided question in the light of further and, had studied the problem that time he would have been different. he felt that his preference such study, by Chairman Martin. the plan suggested heartily endorse He would
The Chairman commented that this was not a vital matter but he thought it would make some sense to split the subscription. Mr . Mills commented that this would have the advantage, also, of showing variation in the System's thinking. This time the System would be moving out on the longer side, while on other occasions it had moved from long to short. Mr. Mills then moved that a splitting of the subscription in the manner suggested by Chairman Martin be approved, and Mr. Johns seconded the motion. Thereupon, the motion was put to a vote and was approved unanimously. that the next meeting of the Federal Open It was agreed Market Committee would be held on Tuesday, February 9, 1960, at 10:00 a.m. The meeting then adjourned.
Effective Reserves Correction of seasonal factors made: January 1, 1960 of daily figures) (Monthly averages Janur 11yli op doll, T Po P o a: Fes rve s urplus *655 milln 1a.5 V, Ses oflly Adjusted 19 Reserves Reserve surplus I $490 million ReserveI 3 defcit D M J 3 D N J $474 illln Each square - $25 mi.llon r%'t-Reserves Without 'iI- Straitht Line Trend Saonal Adjtent !!o (4last squares method) ~l$ s (.6g per year) Surplus in seas. adJ. reserves from trend 4609 millonen Deebear 1959 . Milliaas of dollars SReserve deficit. $406 milion Re8s.erves7: adJusted 18.55 Seasonally adjusted 18,7 January 1960 l9 9s lreast 19& 19 n195sd Lin e 18,760 .LLIe. ---c . - - . r a - per year or $45 mflion per month. n arnnal froth Of 3.6 percent Trend line exnbitsn Last month plotted: Desember 1959 n deaoolbed on reverse Side. method o computati
Reserve figures are total member bank reserves (monthly averages of daily figures) adjusted for changes in reserve requirements and for seasonal influences. No effort was made to remove the expansion potential of total reserves resulting from shifts in deposits among classes of banks and between types of deposits subject to different requirements through April 1958. Method of computation: For May 1958-December 1959, figures used are actual member bank reserves, adjusted for seasonal influences. Monthly values of effective reserves for January 1947 through April 1958 (when reserve requirements were last changed) have been derived by (1) obtaining the ratio of average required reserves to average deposits subject to legal reserves for May 1958-April 1959; (2) multiplying actual reserves by the percentage is of the ratio of required reserves to deposits subject the above ratio to legal reserves for each specified month; and (3) adjusting the values for seasonal influences. Trend based on monthly values January 1947 through August 1959.
_ Alternate Growth Rates of Effective Reserves (Seas. Adj.) Reserve Levels (Seas. Adj.) Using Actual Fpr August 1958, June 1959, and December 1959 as Starting Points 1/ lions of dollars a o Sillion ~ ~- Era l& ~ rr-u7 i f I:i tIrii diil 11 _ 71f 4i ..ITJi f T trl -1LL 4_4 _44 ?j T t, H-" - t4*ti It h4 r I I f4 LL~- ~~L~~_I ~.~ LL~ ' LYI ~ ' '"' _T ft irs.o xB.o WT 1W,. -1 -1I I I I I I I fI I H tI'i1 Mi ~Stj l Ii H ir L.- 4 ~ +~ ii iI ~LLL~i1 I ri t 11 1l l r 1 I i 11r I1I1 L II ' i L9.01J mm LI ALL.J..LLL.i..L4.j..j~..-...- - f i 1. 1 1 -. - HHHt-tRfst~ [Wi T A ±LLLL- i _- 4 .+, . 4 t iS. - -4-4- 4-4-t- -4-4-4--+-+-- +- V Mtfl ~iErf 1-1~ I- t n 0r IFhdt- tor -Ii r J- -f-t- r LJ8jl'm : A U r r I i I I I i _11- '~ I I--~---- -~-~-
Also: Record of Policy Actions