February 9, 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, February 9, 1960, at l0:00 a.m. PRESENT: Mr. Martin, Chairman Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Erickson Mr. Mr. Johns Mr. King Mills Mr. Robertson Mr. Mr. Shepardson Szymczak Mr. Mr. Leedy, Alternate for Mr. Deming 1/ Messrs, Bopp, Bryan, and Fulton, 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. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Jones, Marget, Mitchell, Noyes, and Roosa, 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, Research and Statistics, Board Division of of Governors to the Chairman, Board Mr. Knipe, Consultant of Governors in minutes. point indicated at the meeting 1/ Entered
Messrs. Eastburn, Hostetler, Tow, and Einzig, Vice Presidents of the Federal Reserve Banks of Philadelphia, Cleveland, Kansas City, and San Francisco, respectively Mr. Coldwell, 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 Mr. Litterer, Business Economist, Federal Reserve Bank of Minneapolis 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 26, 1960, were approved. On February 1, 1960, the eleven available members of the Federal Open Market Committee approved a modification of the action taken at the Committee meeting on January 26, 1960, regarding the exchange of System Open Market Account holdings of approximately of Treasury certificates of indebtedness maturing on $5,507 million action authorized exchange of the February 15, 1960. The modified securities into 4-7/8 per cent Treasury notes of November maturing and exchange of the remainder 1964 in the amount of $2 billion per cent one-year certifi million) into 4-7/8 (approximately $3,507 cates. taken by the Federal The action Open Market Committee on February 1, vote. by unanimous 1960, was ratified to the members had been distributed this meeting there Before operations covering the a report of open market of the Committee supplementary report 3, 1960, and a 26 through February period January
covering the period of February 4 through February 8, 1960. Copies of both reports have been placed in the files of the Committee. Supplementing the written reports, Mr. Rouse made substantially the following comments on developments since the preceding Committee meeting: The volume of open market operations since the last meeting of the Federal Open Market Committee has been relatively small. The mopping up of the seasonal reflux of reserves after the first of the year has been ac complished and little needed to be done to keep the money market on an even keel during the Treasury's February refunding. A small amount of repurchase agreements was made against the "rights" at the close of the refunding as dealer holdings of the maturing issues rose to sub stantial proportions. The money market was generally tight throughout the period although at times there developed a little ease at the central reserve city banks in New York, The outcome of the Treasury refunding was very satisfactory as the attrition is relatively low and the public exchange for the four-year nine-month note is about what the market had come to expect. The result will substantially improve the Treasury's cash position over the next few weeks and will obviate any need for further borrowing until April, with a smaller amount of cash to be borrowed at that time. At the close last night the new 4-7/8 per cent certificates were quoted at the notes at 100-14/32, 22/32 above the 100-10/32, and issue price. last meeting the Government securities Since the has been quite strong, fortunately for the Treasury's market financing operation, and rates have declined markedly. Treasury bills produced continuously lower Scarcity of when most outstanding issues rates, especially yesterday dropped about 30 basis points in the absence of any The average rate in the auction appreciable supply. yesterday was 3.563 per cent for 91-day bills, and 4.094 per cent for 182-day bills. also that the recent increase in I want to mention subsequent increase in discount rate and the the British a yield advantage to British bill rate at first gave their bills over our Treasury bills of 3/8 per cent, which by
yesterday had increased to 5/8 per cent. The amount of funds lost from our market because of this differential is uncertain; probably not much so far, but the potential may be large. Prices of notes and bonds also have improved sharply, with yields generally moving to new lower areas. As compared with earlier rates, which were above 5 per cent on a number of issues, the highest rate now available in the Government list is around 4.75 per cent for the new "when-issued" 4-7/8 per cent notes of November 1964; rates on other outstanding issues are considerably lower. Rate declines have occurred in commercial and finance paper and bankers' acceptances. The stock market has declined sharply. All of these developments reflect doubts concerning the prospects for business and the implications for credit policy. The important question facing the market at this point is whether this apparent shift in psychology has substance and whether the present trend of interest rates can be sustained in the weeks to come. The market finds it difficult to reconcile the situation in the securities market with the degree of restraint being exerted on bank reserves. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period January 26 through February 8, 1960, were approved, ratified, and confirmed. Rouse's comments, Mr. Leedy joined During the course of Mr. the meeting. distributed under date of Supplementing the staff memorandum statement with regard Mr. Noyes made the following February 5, 1960, to economic developments: Banks and the Money Market, Randolph In his Reserve with the establishment years ago that observed 30 Burgess swings in interest System seasonal Federal Reserve of the seasonal factors In the been almost eliminated. rates had period 1914 to 1932, which ranged he calculated for the to a high of +4 per -3 per cent in July from a low of about change from December was very little October, there cent in
to January. This was in contrast to a sharp year-end break shown for the 1894 to 1914 period, when the December factor was +8 per cent, and January -4 per cent. In recent years it appears that some of the seasonality of rates around year-end may have returned. Despite the general upward trend, in eight out of the last ten years the bill rate declined from the end of December to the end of January, and we hear frequent reference in the market to the year-end peak and the January decline. There also seems to be a seasonal pattern emerging in appraisals of the economic outlook, although it evades exact measurement. To what extent the bearish reappraisal of economic prospects that is currently spreading so rapidly in the press and financial markets reflects only the usual transitory seasonal disillusionment, and to what extent it is based on more fundamental changes in the economic situation is difficult to judge. In part, at least, the answer must be found in the expectations that came before. The observers who saw a strong surge of activity in early 1960 were the ones who had the firmest expectation of rising prices and speculative inventory accumulation piled on top of the normal rebuilding that was generally anticipated. it is sometimes overemphasized, the manufacture While and sale of automobiles must play an important part in any analysis of the business situation. Recollections of 1955 role in the thinking of those who saw played an important sales of 455,000 new cars swelling boom in 1960. Dealer a disappointment to these were certainly a real in January who had expressed some and a comfort to those analysts, of the 1960 models were skepticism when the prices announced last fall. financing in January level of new corporate The low of offerings for this month and the limited schedule business plant and equipment suggest to some that not exceed the intentions in 1960 may expenditures a margin as they have late 1959 by as large expressed in years. Loan in other boom early intentions exceeded those has also disappointed commercial banks demand at declined more Whether it has with great expectations. to say, but it certainly has than seasonally is hard bear out that would vigor shown the contraseasonal not boom. of an inflationary expectations have been disquieting so far in 1960 If developments the corner, they boom around who saw a run-away to those
have also provided little comfort to the disciples of doom. All of the aggregative measures of the output of the econony are showing gains up to or exceeding informed earlier esti mates. GNF is still expected to be close to $500 billion for the first quarter. As more fragments of data become available, advance estimates of the index of industrial production have been revised up rather than down and we are currently thinking in terms of 170. Employment appears to have been well maintained. Seasonally adjusted depart ment store sales held about the same level in January as December, which is all the more impressive on the heels of a record-smashing Christmas season. Construction activity again confounded the experts by inching up to a seasonally adjusted annual rate of $54.9 billion, the highest January on record. The shakeout in the stock market has unquestionably both reflected and raised doubts as to the future. Whether the appearance of high first-quarter profits, taken together with somewhat lower yields on fixed-income securities, will stem the tide of profit-taking remains to be seen. In summary, it appears that this winter the usual declines have had more than the usual seasonal seasonal due primarily to the exceedingly effect on expectations, that prevailed around the year-end. bullish attitude Investors and speculators are adjusting to a less buoyant a month or so ago. At the same outlook than seemed certain remain confident and are time, consumers and businesses rates for this time of and spending at record producing an inflationary boom The prospects for avoiding the year. the case, the as is inevitably are certainly brighter--and with a major re that we may be confronted possibility Taken altogether, however, is similarly enhanced. adjustment enthusiasm that has the tempering of is hard to see how it be anything but last few weeks can taken place in the of what lies ahead. beneficial, regardless respect to statement with the following Mr. Thomas presented financial developments: boom has not poststrike of the anticipated Evidence that economic activity While it is clear as yet appeared. there are few, if any, satisfactory level, is at a generally true in the This is particularly of undue fervor. signs financial area.
Following extremely tight conditions in the money market with sharply rising interest rates and an unusually heavy seasonal loan demand during December, money has eased notably in January. Interest rates declined and bank loans were reduced about as much as they had increased in Decem ber. Figures now available as to the sharp increase in business inventories during December may help to explain some of the heavy loan demand in that month. It seems hardly likely, however, that the loan decline in January reflects a corresponding cut in inventories. The decrease in business loans was no greater than usual for January, but there was a larger than usual decline in loans to finance companies and a substantial drop in security loans. Partial figures for the first week of February show a moderate upturn in business loans, which is not usual for that week. In addition to the decrease in loans, banks also continued to liquidate Government securities in January, with the largest decrease in the one- to five-year maturity group. As a result total loans and investments at city banks declined more in the five weeks ending February 3 than in the same period of any other recent year in total dollar amount and also relative to the December increase. New corporate security issues continued relatively expected to be even smaller in light in January and are February. New issues by States and local governments, on considerably in January, but a the other hand, increased on the calendar for February. Stock prices, smaller volume is high at the close of December, rising close to the 1959 after with yesterday's sharp drop sharply in January, and declined of the past 12 months. During that are close to the low of averages have generally period the various indexes about 10 per cent. At present within a range of fluctuated allowance is made for higher levels of prices, even if stocks are still yields on principal this year, earnings somewhat above yields, although relative to bond very low to be a growing feeling lows. There continues recent of portfolios from that some shifting among investors to bonds is wise. stocks in price since bonds have risen to stocks, In contrast long-term Government yields on the year and first of the Yields on outstanding November levels. are back to bonds close have continued bonds, however, corporate high-grade December. Long-term reached in which they to the highs much as those as have not declined bond yields Government
on shorter-term securities. Yields on 3- to 5-year Government securities, which have generally been higher than those on other maturity categories, have declined to around the lowest levels of last October. Yields on Treasury bills are at the lowest levels since late A gust. Under the circumstances, Treasury financing operations have been eminently successful, with low attrition and a substantial exchange for the four-year, nine-month note, as well as for the certificate. These issues are now selling at premiums. The Treasury will evidently not need to do any more financing until the end of March or early April. The easier money situation is clearly a result of action by the market itself, rather than of monetary policy. Since mid-December, Federal Reserve holdings of Government securities have been reduced by more than $1.5 billion, offsetting reserves supplied largely by the return flow of currency and by System payments to the Treasury. Required reserves have declined by at least the usual seasonal amount. Net borrowed reserves of member banks have continued generally at around $400 million. in loans and investments at city banks has The decrease by a greater than usual drop in depositsbeen accompanied and time--at those banks. At country banks both demand of January, deposits increased during the first two weeks did in the same period last year; somewhat more than they but holdings of Governments loans declined seasonally, for country banks are not yet available increased. Figures we yet obtaining weekly end of January, nor are as of the from all the Reserve for country banks deposit figures Banks. money supply, seasonally that the total It is estimated after in slightly in January may have declined adjusted, based on new are These computations in December. creasing total is only factors. The seasonal adjustment improved 1/2 of one per less than a billion dollars--or about half the money supply The trend of a year ago. than cent--larger rising for since midsummer-after slightly downward has been over $5 is a little current figure half. The and a a year annual average of mid-1957--an the peak than larger billion of Turnover 2 per cent. less than of of increase rate at a has risen centers financial outside at banks deposits over 6 per it was of 1959, last quarter in the pace; faster 7 per and about a year earlier figure for above the cent of money figures The combined 1957 peak. above the cent
supply and turnover indicate a rate of growth in total monetary transactions of nearly 4 per cent a year since mid-1957. Question may be raised as to what extent increased turnover of cash balances can be relied upon to finance further growth in economic activity, without some increase in amount of deposits. Liquidity--in the form of short-term assets other than cash--has expanded greatly in the past two years, but its active use may call for some additions to the supply of cash or at least the availability of cash. Per haps the time has come when some further growth in bank credit and in the money supply should be permitted. In the absence of strong pressures for credit expansion--a situation that seems to exist at present-it would appear safe to provide some additional reserves and thereby add to the availability of credit without the risk of unduly encouraging excessive credit commitments. Mr. Marget commented substantially as follows with regard to the United States balance of payments: When I reported to this Committee on January 12, the figures for transfers of gold and dollars to foreigners for the month of December were still incomplete. Now that we have the complete figures, we can step back a bit and take a look at the figures for the whole of the 1959, as compared, in particular, with the calendar year figures for the calendar year 1958. It was in the year 1958, as you will recall, that we which was the occasion of had the massive outflow of gold so much of it so discussion in the press, such widespread alleged "flight from the in its emphasis on an mistaken at the time, there was no dollar." As we emphasized The proof of this was the dollar" in 1958. "flight from was supposed to be the very time this "flight" that at actually increasing their taking place, foreigners were the United States by over of dollar balances in holdings but a there was anything the same token, billion. By $1 the contrary, the in 1959. On from the dollar" "flight foreigners was more held by in dollar balances increase in 1958. Indeed, the as large in 1959 as than twice than half of was also less outflow in 1959 actual gold be said, there It can fairly in 1958. the gold outflow of dollar balances, foreign holders in 1959 the fore, that gave the dollar from the dollar, running away instead of they had given of confidence than stronger vote an even it in 1958.
These foreign holders of dollar balances are not ir rational. In giving this vote of confidence they were, quite obviously, expressing a judgment that the United States would succeed in its efforts to meet the problem of which the visible symptom was the combined figure for gold outflow and additions to dollar balances held by foreigners, namely, the problem of the over-all deficit in the balance of payments of the United States. What do the final figures for 1959 show in this respect? If we were to deal only with the totals for 1958 and 1959, one might wonder what there was in these figures to give anybody, foreigner or other, any basis for confidence that the problem was likely to be solved. The figure for 1959 is $3.7 billion, as against a figure of $3.4 billion for 1958, the year in which the world was suddenly made aware that the United States did in fact have a balance of payments problem of serious dimensions. But of course the explanation of the paradox is to be found in the movements of gold and dollars, and therefore our over-all balance of payments, within the calendar year 1959. The early months of the year, instead of showing a reversal of the deterioration in our balance of payments which had occurred in 1958, showed an intensification of the deterio ration, to the point that, as I reported to this Committee, the projections made by the Balance of Payments Group of the National Foreign Trade Council suggested that we should ended 1959 with an over-all deficit no be lucky if we greater than $4.5 billion, as compared with the $3.4 billion of 1958. The fact that we ended with an over-all deficit much closer to the 1958 figure than had been supposed on the basis of the showing in the earlier months possible a measure of the degree of improvement that of 1959 is had in our over-all balance of payments in the we in fact later months of the year. by these reports of you have been made aware But, as that improvement has three-week intervals, mine at roughly no doubt whatever as to a kind that left us in not been of that seemed of the adjustment pace and solidity the future occasion last time, for example, to be taking place. I had export figures for November, the relatively poor to report for this poor while an explanation and to suggest that, in the steel shortages growing out showing might be found provided a warning strike, the figures themselves of the troubles with the balance supposing that all our against and all. It is us for good were behind of payments for December trade figures that the to report gratifying
are very much better than the November figures; and the preliminary gold and dollar figures for January of this year are also distinctly encouraging. There is no reason to discount good news when it comes, particularly since the news is of developments of the kind that have been eagerly awaited, not least by those foreign holders of dollar balances who, according to our gold and dollar figures, gave the dollar, and therefore the monetary authorities of the United States, an even stronger vote of confidence in 1959 than they had given in 1958. The essential point is that the basis of this confidence is the belief that balance of payments developments depend, to a very large extent, upon the policies pursued by the monetary and fiscal authorities of the country experiencing the balance of payments difficulties. In the present instance, that means a belief that the fiscal and monetary authorities, in determining their actions, are not likely to confuse evidence that a salutary process of adjustment is under way with a conclusion that the adjustment has been virtually completed. Mr. Hayes presented the following statement of his views with respect to the business outlook and credit policy: Data becoming available in the past two weeks indicate that business has continued to move forward at a very satisfactory pace, as Mr. Noyes has already told us. On growing public impression that an the other hand, the may be avoided, widely commented on at inflationary boom meeting, seems to be equally evident today and the last justification in recent business seems to find considerable Doubtless the persistent stock and credit statistics. effects, as has decline has had good psychological market prospective Federal Government awareness of the increasing sales to keep pace with The failure of automobile surplus. For this and other is another factor. production schedules in steel output in may be some modest drop reasons there the second quarter. however, to over it would be a mistake, I believe since the basic these moderate tendencies, emphasize and spending is strong, for production, employment, outlook boom cannot be of an inflationary and the possibility the year is yet so young. It dismissed completely while which was residential construction, of note that is worthy elements in the economy, has one of the major laggard
taken a turn for the better; and exports will probably provide somewhat greater stimulus to the economy than in the past year. In general, bank credit developments in January were about in line with the seasonal pattern, in contrast with earlier expectations of highly exuberant demands. Continuing ample cash earnings of nonfinancial corporations, coupled with relief from December seasonal pressures, and relatively conservative investment outlays by such corpora tions, help to explain their active buying of securities which, together with buying by public funds and other nonbank investors, has been a major cause of the substantial decline in market interest rates. The downward rate move ment may also reflect a normal reaction to earlier excesses in the other direction. These better market conditions were doubtless in large part responsible for the successful market borrowings which enabled the finance companies to make unusually heavy repayments of their bank loans in January. Security loans and bank investments were also off sharply last month. Nevertheless, the nation's banks remained in a tight position, with liquidity ratios especially low in the New York banks, to whom large corporate borrowers look as a major source of term loan financing as well as of current seasonal credit. The New York banks now appear to be making a strenuous effort to prevent a further large rise in their loan-deposit ratios, will of course have a bearing on their attitude and this an increase in the prime rate over the next month toward or two. The outstanding success of the Treasury's refunding earlier hopes that the Treasury operation should confirm could remain out of the market until early April. Hence, latter part of February and most of we can consider the a so-called "free period" for March as constituting monetary policy. to change our I can see no reason For the time being, As I have said before, policy of credit restraint. basic to see somewhat greater growth in the money I would hope in the and I was interested the current year, supply in line, but there is along that same comments of Mr. Thomas as long as busi this problem urgency in meeting no great and credit demands going ahead so satisfactorily ness is pattern. We the normal seasonal about in line with seem in the New York Bank to been giving careful study have objective quantitative for a more Mr. Bryan's proposals A number of questions open market operations. approach to
have arisen, many of which have apparently also troubled Mr. Thomas. While we are inclined to agree generally with the reservations expressed in his letter of February 4 to Mr. Bryan, we also feel that continuing analysis of what is happening to total reserves should be of real help to the Committee in formulating its judgments, and to the Manager in carrying them out. We certainly think that this whole area deserves further study, Meanwhile, I think we should preserve the status quo with respect to open market pressure as measured by the general feel of the market, with no hard and fast target of net borrowed reserves and with the usual ample leeway for the Manager to take account of developing pressures or their absence. As for the discount rate, the case for near-term action has been much weakened by the sharp decline in short-term market rates and the calmer business appraisals occurring since we decided to defer rate consideration pending completion of the Treasury refunding. From a Treasury standpoint we would be free to move before our next meeting; but whereas a few weeks ago I would have expected that action in late February would be desirable, I no longer think so. I think we shall have ample opportunity to review the matter in March, by which time we shall have a better basis for knowing whether the present lull in economic pressures is of lasting significance or a mere passing phase of a developing boom. At present business and credit conditions do not justify a discount rate rise. If we did move, it would doubtless bring a rise in the whereas the banks may hold off action if we prime rate, I see no reason for the System to want to stand pat--and off a wave of rate increases in the next few weeks. set Inaction on our part would have the further advantage of who see an international "rate allaying the fears of those I would not urge this as a war" developing--although domestic scene called for a significant factor if the discount rate increase at present. I think, be appropriately left The directive may, unchanged. at this time on to report very briefly I should like program for the collection of the progress of the new securities market approved statistics on the Government at the FOMC meeting of January 12. representatives of all held a meeting with senior We 29, introducing Miss McWhinney the dealer firms on January the scope of the program. Mr. Young to them and outlining
and Mr. Mayo participated in this meeting. Since that time Miss McWhinney, in association with representatives of both the Board and the Treasury, has met individually with representatives of each of the dealer firms. Although the response has been varied, no dealer has indicated a refusal to comply, and several have warmly endorsed the entire program. Each of the dealers now has copies of all the proposed schedules, and the technicians in each of the firms are now studying the detailed problems concerned with actual reporting. After taking into account suggestions that the various firms may offer, aimed at improving methods of obtaining the data we intend to collect, final schedules will be prepared for clearance with the Bureau of the Budget. We hope to reach this stage by mid-March. I think it is barely possible that full scale operations on the new basis may begin in April, although the recital of diffi culties that we have heard from some dealers (including the need they face to employ and train additional clerical staff) may persuade us to begin somewhat later. said that basically he did not see that business Mr. Johns prospects for future activity had changed much over conditions or weeks. In his opinion, the situation still called for the past few monetary policy could do the direction of doing what efforts in increases. Thus far that make for price about resisting pressures appeared to have 1959, open market operations in 1960, and in late restraint. Total firmness in monetary brought about appropriate not seem to have increased, adjusted, did bank reserves, seasonally supply, seasonally adjusted, did not appear that the money and it operations in the that open market He would suggest had risen. holding the money supply with a view toward near future be conducted about level; if the money reserves, seasonally adjusted, and bank future, he hoped in the near should increase or bank reserves supply
the rise would be slight. Within the framework of a stable, or nearly stable, money supply and total reserves for the next few weeks, short-term interest rates and net borrowed reserves might increase if demands for money should become stronger. This, he thought, should be no cause for alarm. On the other hand, if such demands did not materialize, decreases in net borrowed reserves and money market interest rates would not disturb him. With respect to the discount rate, Mr. Johns commented that an argument could be made for an increase of 1/2 per cent, and he would not go so far as to say that the argument was footless. Except for interest rate developments in the past two weeks or so, which to be unusual and transitory, the discount rate had some believed relationship to other money market rates. been below its "normal" their rates recently, and it could be Other countries had marked up did not do likewise this might be conducive argued that if the System long-run terms of trade. On the other hand, to deterioration of the rate decline was not altogether cause of the recent interest since the increase at this time that a discount rate clear, it seemed probable in policy toward of a change taken as an announcement would be not believe that such restraint, and he did significantly greater of System policy at be the aim or intent greater tightness should in the discount that an increase Therefore, he concluded this time. he favor a Neither would at this time. would be inappropriate rate policy directive. change in the
Mr. Bryan commented substantially as follows: The latest figures for the Sixth District seem to show generally continuing strength in the economic situation. They do not, as noted at our last meeting, show in many of the figures a differentially greater strength than the nation as a whole: a matter of note to us because we have come in the postwar period to think that comparatively greater gains in the District's economy are typical. Figures available since our last meeting indicate no change in nonfarm employment; a very minor increase in manufacturing employment; a decrease in department store sales; a serious decrease in construction contract awards but an increase in construction employment; and an increase in commercial bank loans that contrasts sharply with a decrease for the nation. In connection with nonfarm employment we have shown a decrease in Florida, Mississippi, and Tennessee, which is notable because Florida has for the entire postwar period been the outstandingly strong spot in the economy of the Sixth District. As we see the picture nationally, the situation is one of great current strength and probable but not certain further strength for some months. The rather dramatic price improvement that has recently occurred in almost the whole range of fixed income maturities raises inescapable questions. It is tempting on the one hand to assume that these changes are purely temporary, seasonal, and technical in character. It is almost equally tempting to argue, from the magnitude and consistency of the changes, that they arise out of some more fundamental shift in the economic and monetary climate. it is still much too early to say certainly In our judgment, whether the recent reduction in yields is temporary and a more fundamental shift in the seasonal or represents thus conclude that at this and credit tide. We economic to rest our policy on either time it would be perilous assumption. this situation it seems to me again In the light of should effect a the view that we reasonable to express that does not of the banking system reserve position expansion of credit and the develop permit an excessive probably speculative boom. ment of an unsustainable and of the long period in which, At the same time--because easing of reserves, to a previous excessive in adjusting continue to at all--I growth of reserves allowed no we until events indicate we must now contemplate, believe that
otherwise, a modest growth in the reserve supplies of the banking system. For want of a better figure I continue to believea belief in which judgments can well differ--that for the time being a growth rate of 2 per cent annually in total reserves would keep the banking system under restraint but minimize the dangers implicit in an effort of an expanding economy to grow against a fixed reserve base arrived at either by policy or by inadvertence. Accordingly, I would suggest that our daily average reserve target for February be $18,585 million with a range for practical administration of the Account of $18,635 to $18,535. Thus far, in February (as of the opening of business on Monday, February 8th) we have had daily average reserves of approximately $18,515 million. 1/ Mr. Bopp reported that business conditions in the Third Dis trict had continued to improve in recent weeks, with advances moderate but generally widespread. With the effects of the steel strike all but dissipated, the employment picture was brighter; in the four areas for which December reports were available, slightly over 5 per cent of the labor force was jobless compared with just under 7 per cent a year earlier. New unemployment claims had been declining seasonally and were below the levels of both 1959 and 1958. Depart increasingly large gains on a ment store sales had been registering four weeks was 7 per cent and volume in the past year-ago basis, of new cars in eastern 1959 period. Sales above the corresponding were low in December, primarily due to shortages. Pennsylvania Philadelphia steel district had been running Steel production in the operations in the capacity for 10 weeks; at or above theoretical compared with per cent of capacity, week were at 101 latest at the end of a table, attached subsequently furnished 1/ Mr. Bryan on the deriva providing information Item No. 1, minutes as these these figures. tion of
94 per cent nationally. Freight carloadings continued high above year-ago levels, while construction contract awards in December registered an increase of 11 per cent over the year, as against a 3 per cent decline nationally. Mr. Bopp said that business loans of district weekly reporting banks seemed to have declined somewhat less than seasonally since the turn of the year. In the past two weeks, investments had decreased as banks reduced their holdings of Governments. Adjusted demand deposits had continued downward, while time deposits had increased moderately. The basic reserve position of large city banks showed improvement in the past few weeks; the average basic deficiency declined from $73 million to $13 million. Borrowing from the Federal Reserve Bank had reflected this change by dropping from $65 million to $13 million. Country banks, on the other hand, had increased their borrowing from the Reserve Bank. As the result of Third District now accounted for 4 per these mixed changes, the cent of total borrowings from the System, as compared with 6.7 per in the preceding two weeks. cent and 8.8 per cent, respectively, that this was a Bopp expressed the view As to policy, Mr. recommend any change at waiting. He would not time for watchful the discount rate, or the this time in the degree of restraint, directive. that Fourth District activity continued Mr. Fulton stated 97 per cent averaging about production was high rate. Steel at a
of capacity, with Cleveland and Cincinnati around 100 per cent. He was told, however, that there was a noticeable softening in the demand for steel and that the production level would decline. The forecast of production for the year 1960 had been reduced from 135 million tons to 125-127 million, but the reduced estimate was still considerably higher than the largest previous year, 117 million. Industry expected that operations for the year would average out at about 80 per cent of capacity, which was a desirable rate from the standpoint of the mills, and profits were expected to be quite good. Auto companies had cut back tonnage for the second quarter, and other users of steel were not stocking inventories as expected because they were getting whatever they needed when they needed it and also because they did not want to borrow to carry Some domestic users of foreign steel reportedly were inventories. willing to pay damages to get out of their contracts with foreign The steel workers were still going strong and pro producers. rates of November and maintained at the high ductivity was being December. reported new machine tool companies Mr. Fulton said that rate and expected a than the fourth quarter orders much higher of profits and production. year from the standpoint good the rubber industry had strong auto production, Anticipating were high. However, in great volume and inventories produced tires ahead of were now running cut back, shipments had been production
production, and the industry expected a good year as a whole. Auto sales in the Fourth District had been quite good, higher than in recent years, but used-car sales were not so strong. A glass company supplying the auto industry had cut its estimate of auto mobile production to 6.8 million, while the rubber companies contended that a 6.4 million car year would be doing very well. It appeared that dealer inventories would amount to about one million cars by the end of this month, which would necessitate quite a drastic cut in production. The impact of the new compact cars had not yet been thoroughly appraised, but it was expected that stickiness in larger cars would to a degree be taken up by the smaller models. Reports from various metal-working industries indicated that they were expecting a good year in terms of stable production and satisfactory profits. Department store sales for the four weeks ended January 30 were 13 per cent above last year. A disturbing factor, however, was that unemployment trends had with the improvement in business. A longer time not kept pace that development, but it did seem would be necessary to appraise was becoming something of a that a higher rate of unemployment in every quarter of were being heard factor. Reports continuing had gone up 5 to 10 goods. Prices increases for finished price at those companies goods, particularly cent for manufactured per contract that the in terms of the up with workers that signed district were just Business loans in the steel companies signed.
about even with December 30 figures, and the banks did not expect a large increase in those loans in the immediate future. They felt that the payment of corporate taxes in March would not be accompanied by unusual borrowing and that the using up of corporate liquidity would probably not come to light in terms of credit demand until April or May. All in all, Mr. Fulton said, businessmen and bankers expected a good year. As Mr. Noyes had suggested, they felt that expectations for a booming economy after the first of the year were much too high, and that a leveling-off of those expectations was a healthy thing in terms of permitting a sustainable economy for a longer period. Mr. Fulton felt that the Desk should continue about the same that had been brought to bear in the past few degree of pressure He also felt that neither the discount rate weeks, without easing. the directive should be changed at this time. nor he found himself in agreement with practically Mr. King said He thought that this was had been said thus far. everything that way or the other, and positive action one a time to take any not when the Desk should not apply any that it was definitely a time moderation of the opinion, the apparent In his more restraint. due to the experiences boom was partly of the prospective course they remembered the during the last recession; of many people and were not quite well during that recession lessons learned
going to get into a position where caution was thrown to the winds. A thing that seemed to be working in favor of the System and the economy at the present time was that people apparently were not going to permit themselves to get overextended. That had been the basis for his view, expressed several months ago, that there was not going to be a wild boom after settlement of the steel strike. He felt that people had learned their lessons and were not likely to forget them in a hurry. Mr. Shepardson said he considered it fortunate that some of the excessive exuberance manifested a few weeks ago seemed dampened somewhat. He also considered it fortunate that basic indicators were still strong and suggested continued growth. Like two weeks ago, the situation seemed to be one calling for watchful waiting. During this seasonal period, it was difficult to predict just what spring opened up, and in the circumstances he would happen when maintain the present position of restraint. would Mr. Bryan for his work in trying to develop After commending Robertson said that for the Committee, Mr. useful policy guidelines a time when, without a change in policy and without a change this was followed, the Com that had been the degree of restrictiveness in different from that prevailing found itself in a situation mittee At that time in the existing policy directive. when it adopted that could not on, but today was going credit expansion flationary be adopted under should not the directive said. In his opinion, be
certain circumstances and then left intact under different circum stances. If the directive were changed, it was possible, of course, that the Committee might come back to it in a short time; his own thinking was on that side. However, in view of the situation existing today, he thought it would be desirable to change clause (b) of the directive to eliminate the reference to "restraining inflationary credit expansion." If this were done, clause (b) would provide for fostering sustainable economic growth and expanding employment opportunities. If the Committee wanted to add "without inflation," that would be agreeable to him. In either event, such a directive would be more indicative than the existing directive of the situation at the moment. Mr. Robertson agreed with the view that there should be no easing or tightening. As Mr. Bopp had said, this was a time for watchful waiting. to pick up at a point where Mr. Mr. Mills said he proposed the Committee focus its attention Bryan had left off and urge that had occurred in the prices fluctuations that on the kaleidoscopic the past six weeks or securities over of United States Government in prices that had the very sharp rise thereabouts, particularly decline in weeks with a consequent the past two taken place over there had been discussion today, he picked up the yields. As related to natural movements were that those general acknowledgment should be case, the Committee were the If such market factors.
chary in embarking on any actions that would tend to alter the outlook that the market had taken on the movements in prices of United States Government securities. If the Committee did so, it would be flying in the face of the long-expounded concept that the Federal Reserve believed in a free Government securities market and that there should be a minimum of interference with the movements therein. This harked back to comments he had made at previous Com mittee meetings, and the January 26 meeting in particular, that the maintenance of a status quo position, if that were interpreted in the level of negative free reserves and if the Committee had in mind negative free reserves in the range of $500 million, would inevitably mean further pressure on the reserve positions of the banks and further restriction of the money supply. It seemed quite probable that the marked shrinkage of bank deposits in January was more than a seasonal symptom and was fundamentally a reflection of of a continually maintained level of negative free the pressure reserves. If that should be an objective of the Committee, he In the first place, it would would be damaging two ways. felt it outlook in the United States Government completely destroy the a free market and was had been derived from market that securities Second, it would put far greater his mind a reassuring factor. in banks than justified by reserve positions of the pressure on the as depicted in the various comments today. the economic outlook,
A great deal had been said, Mr. Mills noted, regarding the money supply and the fact that it could be held to a very low level of expansion or forced to contract below an earlier level, and that the economy would not suffer from that trend in that there was a make-up of the deficiency through increasing velocity in the turn over of money. However, it seemed quite possible that the velocity being thought of was the velocity of turnover of bank balances in the hands of large corporations or other personal or institutional entities whose balances are substantial. At the other end of the spectrum, he would suspect that there might be quite a different in the statistics of the smaller businessman or entrepreneur picture time, operates with only small balances who, at his most affluent dependent, by and large, on augmenting those balances through and is any basis to that reasoning and if, the use of credit. If there was to look at the is a purpose of the economist as he understood, it stability and growth as the means of obtaining whole of consumption pressure, would much pressure, and unrelenting in the economy, too of credit to the so push back the accessibility sooner or later brackets that the smaller operating of consumers in large body the product of the country's to consume and refine their ability would be severely damaged. manufacturing mechanism changing the discount would not favor said that he Mr. Mills proposed wording to accept Mr. Robertson's He would be willing rate.
of the directive in lieu of the language he (Mr. Mills) had offered on several occasions, although he still commended his suggestion to the consideration of the Commttee. Mr. Leedy reported that Tenth District conditions continued to show strength. The sharp advance in nonfarm employment late last year had brought the job level back to its pre-strike magnitude. Increased employment had occurred not only in plants directly affected by the steel strike and other strikes in the district, including some in the packing industry, but also in several nonmanufacturing areas, including trade and services. Department store sales were up in January, but not as much as the national average, the rise being only 2 per cent. The trend in business loans to which he referred at the preceding Committee meeting had continued. Contrary to the national pattern, the seasonal movement in these loans had been much than in past years; loans to manufacturing and mining less pronounced contraseasonally, and loans to companies had actually increased There had been some decline dealers had also increased. commodity current trend of banks; with the at weekly reporting in deposits had been some increase in losses of deposits, there loans and these the Reserve Bank. city banks from borrowings by reserve period, Mr. Leedy said it As to policy for the forthcoming what had been done continuation of there should be a seemed to him recently seemed that had occurred weeks. The change in the past few area. As pointed out, all pretty much in the psychological to him
of the major economic indicators were still on the side of strength. Although there were some indications of a possible slowing down, for example, in steel output and auto production, the over-all picture continued to be one of such strength that there seemed no sufficient reason for any basic change in System policy. He subscribed to the view that there should be some addition to the money supply, but to inject additional funds for that purpose at this time did not seem to him appropriate. The policy that the Committee had been follow ing in recent weeks had permitted a general decline in interest rate levels, and nationally there had been at least a seasonal decline in business loans. Until the outlook was more clear and until there was a confirmation or some repudiation of the change in psychology that had occurred, it seemed to him the Committee should continue what it had been doing, making certain that the pressure on bank reserves was not increased. Mr. Allen said the assumption that business activity would rise vigorously through the first half of the year was being tempered building than had been anticipated. Steel by more rapid inventory rapidly being eliminated, although some items, chiefly shortages were ones, were still in short supply. The auto industry is the lighter preference, but if of steel that it receives so important a user steel supplies should ease sub production should be cut back, auto and it did not January was 690,000, Auto production in stantially. figure. Therefore, if would exceed that appear that February
original first-quarter production schedules of 2,250,000 cars were to be achieved, 900,000 would have to be produced in March, which seemed unlikely in the light of sales thus far. January sales were 455,000, better than in 1959 or 1958 but not as good as in 1957, 1956, or 1955. Inventories on January 31 were 79,000 units. If 700,000 cars were produced in February, then even if February sales exceeded those in January by 10 per cent, inventories on February 29 would be at the very high figure of 994,000. It seemed more certain every day that first-quarter production would be less by 150,000 to 250,000 than originally forecast, and that a 7 million car year was out of reach. The industry was re-evaluating its schedule mix. The sales of compact cars--22 per cent of the January totalincreased were forcing conversion of more assembly lines to the small cars, growing in Detroit that this was a transition and the feeling was of models to less expensive auto period in a permanent adjustment of television sets and household A check with producers mobiles. that sales of these items, in the Chicago area indicated appliances than anticipated, with the result automobiles, had been less like On the was occurring. inventory building that some involuntary strong in January. nondurable goods continued hand, sales of other above last were 8 per cent department stores sales at Daily average the rise in country. Also, per cent for the with 7 year, compared continued, and the prospects capital goods had orders for producers' a few months back, had building, rather dim for farm income and home
improved. Although sales of consumer durables were not as strong as exuberant forecasts had suggested, they were at relatively high levels and could increase further in the spring. The increased ease in the money market in recent weeks had not been reflected in the reserve positions of the Chicago banks to the extent that it had shown up elsewhere. The most important fact was the effect of loan changes. The large Chicago banks had not had the January decline in loans which was shown by the New York banks. Summarizing, Mr. Allen said that business was at a very good level and inflationary expectations had diminished. He subscribed to the view of those who felt that the Committee should continue about as it had been in the matter of monetary restraint. He would favor no change in the discount rate and would prefer no change in the directive, perhaps being overly influenced by the Seventh District loan picture toward continued use of the word "inflationary" in the directive. He would not feel too strongly if the majority of the to adopt Mr. Robertson's suggestion, but his personal Committee wanted to leave the directive as it stood. preference would be said that most recent changes noted in the Twelfth Mr. Mangels Lumber production and the result of seasonal factors. District were had been operating at a little had declined, but the mills new orders or so. The lumber for the past month than the usual rate better the next 60 days to see how they awaiting developments in people were in the district were contracts awarded fare. Total construction would in both residential ago, with increases against a year up 3 per cent
and nonresidential construction, primarily in apartment house and motel type construction. An FHA survey indicated that about half of the building contractors in the district expected fewer starts in 1960 than in 1959, and it had been noted that there was a longer period between finishing and selling homes. Steel production in January declined, which was to be expected following the high rate of production in December to meet critical shortages. The three major producers were operating at 94, 87, and 77 per cent of capacity, respectively. It was expected that demand and prices would hold up through March, but that in the second quarter that there would be some reduction of sales in certain lines. Aluminum production had increased substantially with the addition of another Two producers were operating at capacity and the potline by Alcoa. cent of capacity. The increased demand other two at about 75 per and also new uses of aluminum, The reflected foreign buying by one company and two others were copper strike had been settled or ten days. While no recent settlement within a week hopeful of a were available, in figures on automobile registrations over-all week in January increased for the second California registrations store sales in January the first week. Department 60 per cent from for the district as a whole, cent over a year ago were about 3 per Bank loans in Portland there was a decline. but in Seattle and decline of $130 27 showed a further two weeks ending January the declined about Government securities holdings of million, and
$180 million, Demand deposits were down almost $390 million, a larger decline than for the country as a whole, and time deposits were down $80 million, about half of the decline for the United States as a whole. The banks were still losing savings deposits to savings and loan associations paying 4-1/2 per cent dividends and to the Government securities market. There continued to be a large volume of small purchases of Government securities by indi viduals. To indicate the degree of tightness of the banks, in the past week reporting banks purchased Federal funds to the extent of about $1.5 billion, this being six times the amount of sales. This week they expected to buy $1.4 billion, with virtually no sales. Borrowings from the Reserve Bank had been somewhat on the heavy side, with over $100 million of loans outstanding on February 4. Borrow scattered and were not in large number, but those who ings were to come in for substantial amounts. borrowed tended that the signal was still red As to policy, Mr. Mangels noted concerned. Even if the light were as far as Treasury financing was to align himself with those who green, however, he would be inclined mean net borrowed reserves the line. This would suggested holding January 13 meeting of the $400 million. At the of somewhere around the sentiment was moving it appeared that San Francisco directors, 1/2 per cent or rate of either in the discount toward an increase convinced that came in Thursday the directors cent, but last 1 per that he would favor Mangels felt should be made.. no change present form. By the pretty much in its leaving the directive
time of the next Committee meeting, however, a change perhaps would be warranted. Mr. Irons said there had not been any significant changes in the Eleventh District. Business activity was going along at a good level, department store trade was off less than seasonally in January, and the crude oil situation was satisfactory in terms of what it had been earlier. Employment and unemployment figures were satisfactory, with the changes in January less than seasonal On the nonfinancial side, therefore, the general picture was one of slight to moderate improvement at a high level of activity. There seemed to be less thinking among businessmen and bankers as to the probability of a strong inflationary push than two or three months ago, but the optimism may have been dampened by factors that might" change. On the banking side, Mr. Irons said, there had been a bit usual seasonal decline in loans. There had been a more than the a seasonal decline in deposits, in investments and more than decline been in interbank deposits. of the deposit decline having the bulk had been under the city banks, apparently The banks, principally year. Borrowings from since the first of the considerable pressure been larger in several weeks have Bank in the past the Reserve borrowing from the System in proportion to total amount and larger $130 million on They totaled about earlier the case. than was and rather for the district, which was high one or two days,
consistently had been running about 10 per cent or more of the national total. The borrowing was coming in large part, dollarwise, from four or five of the larger reserve city banks, but there had also been some increase in the number of "real" country banks that were borrowing. A few of the country banks that borrow seasonally had begun to borrow sooner than in other years. The national picture, as Mr. Irons saw it, did not call for a change in any of the basic policies that the System had been following. He would not favor a change in the discount rate at this time. He would like to see open market operations continue about as they had been during the past two-week period, feeling that this represented the appropriate amount of pressure on reserve positions. He would prefer not to change the policy directive at this time, although he felt that the Committee might be getting nearer to the point where a change would be in order. Mr. Erickson said that most of the statistical measures in show growth, but that the situation the First District continued to boom. A spot check of characteristics of a did not have any of the last week indicated that users, and warehousers steel distributors, adequate except for back to normal and were regarded as inventories past two weeks district sizes. During the specific shapes or certain a moderate way. They used of Federal funds in banks had been sellers than in the previous slightly more window on the average the discount the year had averaged the first of but borrowings since two weeks, the System total. per cent of only 2.5
Mr. Erickson expressed agreement with the summarization of the current situation made by Mr. Noyes and said that he would continue present policy, making no change in the discount rate or the directive. Although he agreed that the language suggested by Mr. Robertson was more in line with the present situation than the existing directive, he would prefer to wait until the next Committee meeting before making a definite decision. He would favor giving the same instructions to the Desk as were given at the January 26 meeting, Mr. Szymczak said that, as at the time of the January 26 meeting, he believed the System should provide reserves to the so without disturbing the Account Manager could do extent that the the Account Manager should absorb market, or putting it differently, other sources. He felt there was less of the reserves provided from reserve figures, as get wedded to certain net borrowed a tendency to in the System and outside the we have done before, and that people frequently with disturbing this and acted accordingly, System knew Government securities market and the in the money consequences formed it was of the habit by the nature market and, therefore, a change became in policy when a change to establish difficult for the System it would be better He felt evidently required. on the basis sug figure, whether borrowed reserve to vary the net or on Mr. Bryan, by basis suggested or on the by Mr. Mills, gested
the basis of the current seasonal situation; it seemed advisable to allow some of the reserves provided by outside influences not to be absorbed by selling securities. However, in his opinion the over-all economic picture was one of strength and, therefore, he would not suggest a change in the directive at this time or a change in the discount rate at this time. Mr. Balderston stated that in view of his comment at the January 26 meeting that the Committee should not be deceived by the doldrums of February, what he proposed to suggest at this time might come as something of a shock. Continuing, he said that in'pondering the fundamental questions Messrs. Mills and Bryan had raised, he had taken advantage of the experience and skills of Messrs. Thomas, Young, and Noyes and their colleagues in order to gear his own thinking. He found himself ready to join Messrs. Mills and Robertson in favoring a change in the language of the directive, primarily because he thought the Committee to consider its responsibility in it was timely for respect to the long-run money supply. to him the present period was a Mr. Balderston said it seemed might be witnessing merely of uncertainty. The Committee long moment in the recovery, or it might of expectations or a pause a reappraisal of a downturn. It was his guess be witnessing the beginning possibly but at a decelerating might still be climbing, of today that business as adjustment that starting a rolling economy might be and that the rate, he noted, would current recovery, time. The for some could persist
celebrate its second anniversary in May. What gave him cause for concern was not the dampening of bullish expectations, which might only reflect February pessimism. The Committee had warned itself two months ago that this might happen. What did impress him, however, was the behavior of the financial markets, The decline in loans and investments had been greater than was to be expected for seasonal reasons, and the calendar of corporate issues was small. While a surge of offers like that in March 1956 might still be experienced, he saw no evidence of that as yet. The money markets had eased on their own initiative, and this easing was reflected in the current decline of the bill rate. It was time, Mr. Balderston suggested, for the Committee to ponder its policy, its directive, and its procedure. On the second and last of those steps, he had had the help of Messrs. Thomas and Young. His conclusion was that the directive should be modified to reflect the present uncertainty, the disappearance, whether temporary or not, of speculative ebullience, and the need for further growth in the money supply. He feared that the Committee would hang on too long to the restraint it had been exerting. The wording he would suggest for clause (b) was "to fostering sustainable growth while guarding against excessive in economic activity and employment credit expansion." Like the language Mr. Robertson had suggested, directive would drop the word "inflationary." If the directive this were changed in this manner, he would recomend that policy be a week to the reserve base, by adding about $20 million implemented
after allowance for seasonal and other transitory factors, which would permit a rate of growth in the money supply of about 2 per cent a year. At this point, there were distributed copies of a table of projected operations allowing for 2 per cent growth. The term "projected operations" represented operations necessary to allow for seasonal changes plus growth of currency in circulation and required reserves at an annual rate of 2 per cent, a total of $20 million a week. The figures were presented on a weekly basis and on a cumulative basis through the end of June. Mr. Balderston then said that by using these calculations and following a procedure designed to implement such a policy the Committee would add about a half a billion dollars a year to the circulation and about half a billion dollars a year to currency in percentages, the increase Expressed in terms of required reserves. 1.6 per cent a year, and in required in currency would be about a year. He hoped that this little less than 3 per cent reserves a would employ a language if it should seem desirable, procedure, criticisms from the the Committee to the that would not expose the Committee were leveled at it if would surely be outside that He proposed, therefore, like 2 per cent. use a percentage figure to even in in absolute terms, be expressed weekly increment that the might the risk of misinterpretation so that Committee discussions, per week as $20 million he suggested Consequently, be minimized. expression of Committee policy.
His reason for urging this procedural change, Mr. Balderston said, was to foster continued growth at a high level. In 1958 the Committee added to the money supply by 4 per cent, and in 1959 by .5 per cent. The Committee, quite properly, let the economy grow up to the enlarged supply of reserves put into the market in 1958. However, one who pondered the admonitions of Messrs. Mills and Bryan might conclude-as he had-that the Committee should now begin again to provide for growth in the money supply at a steady pace, To fail to do so might magnify any decline in the economy, if and when it occurred. Mr. Balderston said he had sought to explain the change in his own thinking and his concern regarding the impact that continuing restraint might have upon the long-run money supply unless the Com mittee shifted procedure. If it shifted procedure and adopted what Mr. Thomas had worked out, and there would be good reason, he felt, seemed to him that it would be timely to change the directive as it well. Martin said the Committee was indebted to Messrs. Chairman Balderston for doing work on a formula approach that might Bryan and for the points on the Committee was also indebted be of help. The a period of time. He Mr. Mills had made over money supply that that all of the Committee members were beginning to recognize thought as meriting consideration. these points was as far think the Committee said he did not The Chairman All appeared to be leaning appear from the discussion. apart as might
in the same direction. The question came to a matter of judgment on what the economy was going to do, and with regard to that he felt there were varying judgments. Turning to the directive, Chairman Martin said this involved a problem that had concerned him since the Open Market Committee started meeting at three-week intervals with all of the Presidents in attendance. If the Committee was going to meet so frequently, it must be prepared to take cognizance of minor shifts in the economy as well as major shifts, that is, the short-run as well as the longer run problem. For that reason, Mr. Robertson's comment was pertinent. The dramatic shift in the past couple of weeks certainly was not of inflationary psychology. Whether inflationary implica indicative dominant was a matter of doubt, on which there could tions were still be differing judgments. Chairman Martin said that he had tried hard over the past own thinking. He came out, essentially, week end to pull together his that there had been a fundamental that he still was not persuaded however, that the adjust the economy. He did not believe, change in weeks was something that could be shrugged ment of the past several just a minor adjustment that this was To say with certainty off. sense) would be market in a business bull market (a bull in a long the state of business not sure of The Committee was unwarranted. came into the and then the strike the steel strike, even before of business and a new assessment It was now settled, picture.
might be taking place. One way to think about the matter would be in terms of assuming the worst, that is, that the country was starting into a business recession. He did not assume this for a minute, but he put the possibility forward for the purpose of an intellectual exercise. Using such an assumption, the question was what the System should be doing; whether it should drastically revise the discount rate and push on the entire problem. As he saw it, the Chairman continued, the System ought to be looking at the growth of the money supply and the factors that would produce it. It should be looking for some orderly growth in the economy on the assumption that the country was not in a serious down turn but was in a modest adjustment that would require picking up. This might be entirely different from 1957 and 1958 and might require an entirely different assessment of the picture. As things stood, it the Committee ought to give serious consideration seemed to him that adjust the directive mildly at this point. to whether it should not importance. If the was a matter of great did not feel that this He from now should find and a few weeks adjusted the directive Committee it could readjust the directive movement was temporary, that the current appropriate, At language if that seemed and reinstate the existing an awareness of what Committee would be showing least, however, the was occurring in the economy. said it concerned Chairman Martin the money supply, As to in the past week informed individuals talking to some him that in that the System number of them convinced days, he found a or ten
has been easing. They would have been much more alarmed had they known that the recent developments occurred without any easing of pressure by the Federal Reserve. This was a rather interesting point to him, the Chairman said. It indicated that the System would be tightening against a trend, and he questioned whether the Committee would want to do that. He felt that the situation had moved beyond the point where continuation of an even-keel policy on account of Treasury financing was called for. There was still the matter of the Treasury payment date, but he believed the Treasury was sufficiently over the hurdle so that this was not a serious consideration--at least, it was not a consideration serious enough to guide the extent to which the Committee might wish to mop up reserves coming into the market independently of Federal Reserve action. The Chairman noted that the discussion today had been in terms of moderate growth of the money supply. For example, Mr. $20 million a week and Mr. Bryan about Balderston had suggested $31 million this month, and others had suggested supplying some should give serious was that the Committee His judgment reserves. it wanted to present conditions, to whether, under consideration Committee could be working quo. If so, the maintain the status money market and exerting current trend in the actively against a might be a warranted. There current events pressure than more System might want from now and the two or three weeks tightening
to go in the opposite direction, but at present the Committee was dealing with the problem of the money flow. Chairman Martin said he interpreted the consensus today as favoring no change in the policy directive, although a substantial minority favored a modest change. Personally he did not think a change in the directive of fundamental importance, but there had been some shifting, whether one called it psychological or anything else, If an outsider compared the discussion at the January 12 Committee meet ing with the discussion today, he would probably say there was not much justification for having exactly the same directive on January 12 and February 9. The Chairman then called for discussion of the consensus, specifically as to whether it would be wise to make a modest adjust ment of the directive on the basis of what had happened between January 12 and February 9, and with full recognition that the Com to meet again on March 1, at which time it might mittee was going wind up by reinstating the present language. Allen noted that the psychology in January reflected Mr. when the current directive was much more of a boom feeling than Committee members evidently felt quite first adopted in May 1959. 12; most seemed to feel than they did on January different today The country was not in a boom at present, somewhat different. business was very good. but
Upon request, the language for clause (b) of the directive proposed by Mr. Robertson and that proposed by Mr. Balderston was read. Mr. Hayes then said that he leaned toward continuing the present directive for at least another three weeks in view of the fact that clearly the consensus favored keeping policy about the same. He had had the feeling that a change in the directive should suggest a measurable change in policy. It might well be that the time was getting near when the Committee would want to do that, but he did not feel that the majority favored a basic change in policy now. Therefore, the Committee might want to defer a change in the three weeks rather than to get whipsawed into directive for another during that period indicated that a quick reversal if developments the recent trends did not represent a very lasting economic change. Mr. Hayes recalled that he had had sympathy for a long time the money supply expand a little, with the thought of trying to let he believed there was had that feeling. However, and he still directive to policy or the present inherent in present nothing 2 per cent a year from occurring, a change in the order of preclude guide to the Desk, of a short-term operational From the standpoint of an increase in the money supply an instruction for this kind see $20 million could hardly The Desk be almost meaningless. would it was offsetting of factors that to the kind a week in relation such an able to tell whether scarcely be time and would all the
objective was being accomplished or not. Of course, the Account Manager could look later and see whether, in a general way, he had gotten toward that goal, but in day-to-day operations the Desk could not be guided by such an instruction. This did not mean that a $20 million increase could not be built into the projections. He rather liked the idea of setting the projections up cumulatively, as Mr. Thomas had done, with allowance for growth; to a very minor degree, the Committee would be giving recognition to the desirability of having this growth. However, the swings are such that the Manager could not determine whether he would accomplish that growth or not within any three-week period. Mr. Rouse said that he thought Mr. Hayes had stated the problem precisely. Mr. Young said it was not the feeling of Mr. Thomas or himself that the Desk could turn the situation around in a three-week period decline in the money supply to no growth to a little from an actual The Committee might have to play along with this bit of growth. several months before there was evidence that it was procedure for taking hold. be good reason for he felt there might Mr. Szymczak said more frequently than had been done in the past, changing the directive a decision. In time to make such this was the but he doubted whether felt that recent be wrong, he he might place, although the first a decision to the time to make seasonal. Second, developments were
change the directive more frequently would logically seem to be at the annual organizational meeting on March 1. At that time it could be decided whether, in the event of a determinable change in the situation, even if it were only slight, the Committee would want to change the directive. However, to change now, and then come back again to the directive that had been outstanding for a long time, might create confusion both for the Committee and the reader of the Committee's policy record. To summarize, he felt that the recent economic and financial developments were of a seasonal character, he felt that any decision to change the policy directive more frequently than in the past should be deferred until the March 1 meeting, and providing some reserves within the terms of the present he would favor he believed there should be some easing and also directive because because he would like to get away from a fixed level of around $500 To remain at a fixed net negative million net negative reserves. made it more difficult to change reserve level too long, he said, when the time came to change. meeting at this point to Martin withdrew from the Chairman receive a telephone call. to go forward that he hesitated Chairman Hayes indicated Vice seemed to be because there Chairman's absence meeting in the with the with regard to of the Chairman views and those in his some difference the directive.
Mr. Mills then suggested taking a poll of the Committee members with regard to the directive and with regard to whether additional reserves should be supplied, either according to one of the formulas that had been suggested or otherwise. Chairman Martin then returned to the room. In response to a suggestion made while the Chairman was oat of the room and of which he was advised after he returned, Mr. Thomas undertook a technical explanation of the proposal of Mr. Balderston, He said the differences that existed between this proposal and the total reserve guide suggested by Mr. Bryan were in some respects significant. Ignoring for the moment the smallness of the figures, whichever guide was used, and the question of how good the instruc to the Desk from the standpoint of day-to-day opera tion might be this was an approach that said tions, from a procedural standpoint of what happened to net so many securities regardless buy or sell might be necessary or total reserves. Adjustments borrowed reserves from projections. The variations in market factors because of use of total reserves results as the produce the same proposal would proceeded according growth in the economy reserves if or net borrowed if, therefore, borrowings on the table and to the pattern indicated if the growth in the money supply remained unchanged. However, for the be necessary it would than projected, be greater should borrowing, which needs by reserve their additional banks to meet amount of the by the would increase that total reserves would mean
borrowing; net borrowed reserves would increase and banks would be under greater restraint, as they should be. If the growth was less than projected, the banks could pay off their borrowings and be under less restraint. Under the total reserve formula, if the growth was greater than considered desirable and the System attempted to keep the supply of reserves stable, the Account would have to sell in the market to offset borrowings, and that would make the banks discount more or force them to liquidate securities. If the System tried to buy in the market to offset borrowings, that would create more ease. Under the Balderston proposal, if growth of currency in circulation reserves were as projected, reserves would increase as and required reserves would not change. If growth were desired and net borrowed reserves would increase, but than projected, however, total greater pressure on thus putting additional net borrowed reserves, so would borrowings would be were less than projected, the market. If growth decline. Under the and total reserves would permitted to decline, growth than projected standard, any greater net borrowed reserve would be different This market operations. supported by open would be would try to which the System standard, under the total reserve from borrowings. Under to changes in in reserves due offset any changes toward more growth there was a tendency proposal, if the Balderston would have because borrowings would rise projected, restraint than restraint would than projected, were less If growth to increase. given in The figures would decline. because borrowings decrease
the Balderston proposal would allow for about a half billion dollar annual increase in currency in circulation. This would include not just the currency included in the money supply but also bank vault cash; and in a sense it would allow for growth in the reserves of nonmember banks held in the form of vault cash, The action permit ting member banks to count some vault cash as reserves meant that the formula would have a little less effect than formerly. One would have to make less allowance for that factor than formerly. If it was desired to effect a 2 per cent increase per year in the money supply, that would call for adding about $8 million of reserves a week-corresponding to the $30 million a month figure in Mr. Bryan's proposal. The Committee could vary the directive by saying that the Desk could take care of currency in circulation and then have $8 or $10 million left for growth in total reserves. whether the projections related to the Mr. Johns inquired for seasonal changes or for intra Balderston proposal made allowance Mr. Thomas replied in the in float, and monthly fluctuations affirmative. proposal would whether the Balderston Mr. Hayes then asked want to do over the Committee might guide for what not be a better week. He repeated than in a particular of several weeks a period accordance with this proposal that an instruction in his belief for a week's operations an adequate guide would not constitute the degree of such as to keep additional guidance, without some
pressure about as it had been or a little stronger or a little weaker, Mr. Johns suggested that the study would be incomplete unless the Committee reconsidered carefully the necessity of off setting short-run, self-correcting fluctuations in the reserve supply, for example, intramonthly fluctuations of float. That factor alone would complicate the figures substantially and make for wide fluctuations in a short period of time. If there was no offsetting, it was his view that nothing dire would happen. Chairman Martin indicated that he thought Mr. Johns had made a valid point. Hayes then commented that he found the Balderston Mr. and deserving of thought. However, if it was proposal interesting as a basis for changing the type of operating being considered that such a step should be given to the Desk, he felt guidance to study the matter there had been an opportunity deferred until an interesting proposal, he In other words, while it was further. should adopt it today. did not feel that the Committee should be that the proposal agreed, stating Chairman Martin of two weeks ago. as Mr. Bryan's suggestion put in the same category the real problem this morning The Chairman then said that to cover the type way of finding words there was any was whether by the discussions To judge at present. that existed of situation was more concern meeting, there the January 26 meeting and at this
within the System than for a long time about the question of growth of the money supply and when to do something about it. Mr. Rouse had said that the market was generally tight during the past two weeks. However, the rate structure was not tight. Therefore, the problem got into terms of the feel, color, and tone of the market. Mr. Hayes suggested that the Desk might be instructed to continue about the same degree of pressure, bearing in mind, however, the wish of the Committee that, within the general framework of some modest increase in the money supply could be present policy, encouraged. At this point Mr. Mills again proposed that the Committee the directive and the manner in which reserves members be polled on the period until the next Com be withheld or supplied during should mittee meeting. although the shades said he had no objection, Chairman Martin a poll would reveal he was not sure so slight that difference were of directive, and then a go-around on the There might be too much. for there would of the directive, of the implementation discussion depending on questions of implementation to be different appear that was At least or changed. was renewed the directive whether this morning. sensed the discussion the way he for views around the table going then suggested The Chairman on the directive. comment on difficult to found it rather said he Mr. Johns concerning majority determination he knew the directive unless the
policy, for the directive ought to express what the current policy was. If he must comment, however, he would adhere to his position that he would mildly prefer not to change the directive now. Chairman Martin suggested that it was important to have in mind what was involved. The Committee was talking about modest degrees. The problem was one of restraint or less restraint, but not ease, and it is always difficult to handle such a problem in terms of words. Mr. Bryan noted that he was not presently a member of the Committee. He then said that he had not come to the meeting with a change in the directive in mind. However, the arguments made by Messrs. Robertson, Mills, and Balderston were profound. He believed favor a change in the directive, and either form of that he would wording that had been proposed for clause (b) would be satisfactory to him. said he agreed with Mr. Bryan. Mr. Bopp go along with that view also, with Mr. Fulton said he would suggested by Mr. Balderston. preference for the language change in the di as to whether a King expressed doubt Mr. and suggested that anything substantial would accomplish rective He felt the Com was more important. to the Desk the instruction was going to have to abandon a point where it mittee had reached extent that it had a guideline to the reserves as net borrowed would be to avoid any heretofore. His thinking used that figure
additional tightness and, if necessary, to increase the Account portfolio by whatever amount was necessary to avoid additional tightness. This did not mean necessarily that some securities might not be sold on any given date, but he would lean against divesting securities from the portfolio on balance even if net borrowed reserves went to any particular figure. Instead, he would prefer, so to speak, to turn the market loose. If the Com mittee was likely to turn around in three or six weeks, he questioned directive that might be given the New York Bank would be whether any than the existing directive. In substance, he much more meaningful at this time, but he would let the would not change the directive point it might go as borrowed reserves go to whatever level of net present general range. He would, it did not get out of the long as not be a seller of securities. on balance, he had not proposed a said that although Mr. Shepardson had brought out arguments the directive, the discussion change in Balderston's suggestion. would favor Mr. a change. He for making a change in the that he would favor Robertson said Mr. directive. and that he favor a change he also would Mr. Mills said to the language by Mr. Balderston the wording suggested would prefer by Mr. Robertson. suggested fact that in the past was troubled by the Mr. Leedy said he a change in only when it made changed the directive Committee had the
policy. In his own thinking, he was not yet prepared to make a distinct change in policy. While the Committee should be thinking about some additions to the money supply, it seemed to him that this was not the time to add to the money supply affirmatively. On the other hand, he would not like to see any further tightening occur in reserve positions. In his opinion, the directive, as it read, could remain in effect indefinitely. The Committee was always desirous of restraining inflationary credit expansion, even though at the present time it was not confronted with actually doing that. The Committee would be fighting windmills if it attempted to restrain inflationary credit at the moment, but in theory it was always seeking would be to wait until the next Committee to do that. His preference on any program that in before deciding to embark actively meeting volved an actual change in policy. not to change policy or change Mr. Allen said he would prefer the directive at this meeting. that the Committee he had thought originally Mr. Mangels said object to changing the 1, but he would not might wait until March not increase restraint in the forthcoming directive now. He would of restraint. toward a lessening would be inclined instead, he period; question was one of using a broad, Mr. Irons said that the a year or or three times change two that would directive continuing meeting to meeting change from that might a short-term directive time. In at the particular to fit the situation specifically today to provide change the directive to of the proposal thinking
for fostering sustainable economic growth and expanding employment opportunities, he did not see what could happen to warrant changing such a directive three weeks from now or even in a longer period, for the Committee always would want to do such things. However, if the Committee was going to change the directive today, in a period of uncertainty, with the possibility of changing again in three weeks, he felt the Committee ought to spell out in detail what it proposed to do for the next three weeks and what might cause it to change again. The directives that had been suggested could go on indefinitely for he could not conceive when the Committee would not want to foster sustainable growth and employment opportunities. In his judgment, what was needed now, rather than such a change in the and thought as to how to develop a form directive, was careful study might be changeable in two or three or of specific directive that On the basis of that six weeks, in contrast to broad generalities. reasoning, he would not change the directive today. Mr. Irons said that he would have no objection Continuing, He had felt that way at the past to a little ease in the market. the degree of restraint try to maintain about two meetings. He would side of ease if he would go on the recently, but that had existed This was not too good seemed to call for that. the market situation better than a mechanistic Desk, but it seemed a guide to the as a week. He was put in $20 million for the Desk to formula calling
yet not ready to accept such a formula and felt that it should have more testing, because he did not think the Manager of the Account had the slightest idea what the situation was going to be in the market next Thursday. The Manager of the Account could sense an attitude in the consensus of Committee thinking, but he (Mr. Irons) would not want to use a mechanistic approach, whether in terms of total reserves, net borrowed reserves, or anything else. Mr. Erickson said he agreed with Messrs. Leedy and Allen. He would not change the directive at this time. Also, he found it diffi cult to find a way of going ahead in terms of supplying reserves at so much a week. For the next three weeks, if there were any errors he would make them on the side of ease. Mr. Hayes said that he found himself closely in agreement with the views expressed by Messrs. Leedy, Irons, and Erickson. the general question of what it the Committee should study Although do, the Committee thus far had been following meant the directive to forth in the directive a kind of basic the practice of setting should be. Thus, the directive approach to what monetary policy three times a year. He did been changed only two or had normally today warranted one of those changes. not feel that circumstances a change by the date of would warrant such Perhaps the situation Committee could vote to change the next meeting, at which time the should be issued. what kind of directive and consider the directive continuing about that he would favor Mr. Hayes repeated of the discussion the Desk mindful pressure, with same degree of the
about the money supply, which would suggest veering on the side of ease in a minor way. He felt strongly that a purely mechanistic directive would not be workable because the Manager of the Account has to deal with five or six different elements, such as the psychology of the market, the feeling of the banks, or actual reserve changes, all of which might call for some market action that could not possibly be predicted. Mr. Szymczak repeated his earlier suggestion that the Committee consider at the March organization meeting whether the directive should be changed whenever the Committee makes slight changes in policy in the direction of either restraint or ease. Up to the present time, he noted, the Committee had not followed the practice of reflecting slight policy variations in the directive. If the practice was going to be changed, that should be decided at the annual meeting and the directive frequently. As yet, he was not ready to accept the then changed more that had been suggested, but he might be if he studied refinements more and action was taken at the next meeting. Thus, while the matter the period ahead, he did not less restraint in he would favor somewhat the directive at this time. change in policy to change favor enough favor changing the directive Balderston said that he would Mr. today, he too would favor a change, but Chairman Martin said that against it. In his opinion, however, that the consensus appeared to be thing was that thing. The important not the most important this was
even those who did not favor a change in the directive leaned toward slightly less restraint. He was glad that the question of the form of tne directives had been raised and discussed. The annual meeting was coming up, and perhaps there should be a further discussion of that point. However, he noted, the matter of finding language to express degrees of restraint is difficult. The Committee did not have a mechanistic approach, and he agreed with that completely, but it was necessary to have some guidelines. Mr. Balderston said that what had been most helpful to him was the point referred to by Chairman Martin in his comments that there is a distinction between ease appearing in the market due to the operation of factors that the System can not control, restrain, or push and ease or restraint that is created through System open The question was whether, in the next three weeks, market actions. mop up any ease that just would want the Desk to the Committee seemed to him that that was appear in the market. It happened to given to the Desk. the crux of any instruction was essentially the same said he thought this Mr. Shepardson comments. It would getting at in his Mr. Johns had been thing that ease. It might be called inadvertent to pick up what mean not trying Shepardson) had attempted same idea that he (Mr. was essentially the mean letting such 26 meeting. It would to express at the January of the market develop. come from the action changes as might inadvertent might come into reserves that to mop up excess would not try The Desk
the market because of factors other than System operations. Mr. Hayes commented that the Desk had been following a policy of not automatically offsetting everything that happened in the market. If an attempt had been made to offset fully the tenden cies toward ease generated by the market itself, net borrowed reserves might have been a billion dollars or more, and even then such tendencies might not have been fully offset. The Desk was not guided by the single thought that it must offset what happened in the market itself. This was merely one of several elements that the Desk must be watching. Mr. Shepardson then commented that to the extent the Com mittee aimed at a fixed target of net borrowed reserves, say $500 million, it would automatically tighten the situation by continuing as they appeared. On the other side, there was to mop up reserves of 1958 when the System was that existed in the spring the situation and kept pouring in more certain level of free reserves aiming at a as the supply was used. reserves he had commented on agreed entirely. As Mr. Hayes said he Committee should not overemphasize he felt that the other occasions, net borrowed reserves. would not permit he hoped the Committee Mr. Johns said and Mr. Bryan advanced by Mr. Balderston such as those proposals "mechanistic approach" of court by attaching.a to be laughed out felt that any such proposals were worthy of label to them. He serious study.
Chairman Martin then said that it appeared the majority of the Committee would prefer to retain the directive in its present form. As to the matter of policy under that directive, one possi bility would be again to go around the table on the question of "slight but not visible" easing. After a summary by Mr. Sherman of the positions expressed on the directive by the members of the Committee, the Chairman raised the question whether, in tackling the problem of degree, there was anything further the Committee members could say that would be helpful to the Desk or whether the essence bad not already been expressed. Mr. Leedy said he thought the discussion had told the story quite well. that he was satisfied, and no Mr. Rouse agreed and said further comments were heard. Mr. Mills asked that he be recorded as again favoring a the language he had suggested in the directive to substitute change This would involve at the past several meetings. for clause (b) growth and expanding sustainable economic providing for "fostering inflationary credit while guarding against employment opportunities expansion." would not forthcoing period whether the Mr. King asked through not for the Committee, excellent opportunity provide an of the situation. the true state to evaluate mopping up reserves,
It seemed to him an opportunity to find out, by not creating additional restraint, what the trend of natural forces would be if the System let them develop. Mr. Robertson commented that the Manager should understand that this was not the will of the Committee. Mr. Rouse then commented that the Desk might be putting reserves into the market next week. On the basis of the figures alone, one might feel that the Desk should be drawing out reserves. It might be a confusing situation. It would seem necessary to play by ear to a considerable extent. 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 replacement of maturing securities, and allowing cluding to run off without replacement) for the System maturities market or, in the case of Market Account in the open Open by direct exchange with the Treasury, maturing securities, in the light of current and prospective as may be necessary situation of the and the general credit economic conditions the supply of funds in with a view (a) to relating country, and business, (b) to to the needs of commerce the market in order to foster credit expansion restraining inflationary and expanding employment op sustainable economic growth of the the practical administration and (c) to portunities, amount of securities that the aggregate Account; provided for the (including commitments in the System Account held at the for the Account) of securities or sale purchase short-term certifi than special this date, other close of to time for the from time purchased cates of indebtedness shall not be of the Treasury, temporary accommodation more than $1 billion; decreased by increased or
(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. In accordance with the understanding at the Committee meeting on January 12, 1960, there had been distributed, with a covering memorandum from Mr. Young dated February 5, 1960, a memorandum of the same date from a staff group consisting of Messrs. Thomas, Rouse, and Young with regard to the continuing operating policies of the Federal Open Market Committee. Attached to the staff memorandum was a sug operating policies. The revision was gested revision of the three intended to be generally consistent with the statements of policy in Committee on March 3, 1959 but endeavored the form reaffirmed by the operating problems in flexibility for meeting to provide additional proposed revised language might market. The manner in which the the Market Account purchases of the 2-1/2 be applied toward making Open as a means of helping the Treasury per cent Treasury bond of 1961 in the memorandum. was outlined refunding difficulties minimize its that no action on the proposed Chairman Martin commented but that at this meeting called for policies was revised operating committee to make members of the staff appropriate for the it seemed they might desire. any statements
Mr. Thomas said that the staff committee did not presume, in the absence of more direction from the Open Market Committee, to make any change in the basic nature of the operating policies. How ever, it had suggested some changes in wording that might permit a little more flexibility in operations, and in any event should clarify the extent to which there could or could not be flexibility in opera tions. The proposed revision also endeavored to clarify what to some seemed to be the important point that these operating policies were in a sense working procedures and not inviolate rules. It attempted to make clear that the Open Market Committee at any meeting could give any direction it desired as to what procedures were to be followed without this being interpreted as establishing a new precedent or making a drastic change. In going over the rules, the staff com mittee tried to clarify to what extent action could be taken on the 2-1/2 per cent bonds of 1961 within the framework of the operating policies and the extent to which action with respect to that issue would require special authorization by the Open Market Committee. the conclusion was that as soon as the bonds had become In general, "short term"--and in this respect the Open Market Committee might could be purchased or want to make a more precise definition--they any other short-term securities. However, sold in the same way as any operations of that sort could not be very large without making in the Open Market Account portfolio, at quite a substantial charge any substantial bills. Therefore, portfolio of Treasury least the
move to acquire the 2-1/2 per cent bonds would, and probably should, require special consideration by the Committee. The intent of the staff committee was to open up discussion by the Open Market Com mittee, which might or might not want to recommend a more thorough review of the operating procedures. Mr. Young said one of the aspects of the matter the staff committee had in mind was the public relations angle, because the current statement of operating policies had been referred to in some quarters as unduly limiting and doctrinaire. The staff had tried to find language which would take away some of that implication while retaining basic principles and at the same time providing flexibility to the degree that experience had suggested some flexibility might be desirable. Mr. Rouse said he thought it would be necessary to provide a different definition of short-term securities in order to take the suggested action with respect to the 2-1/2 per cent bonds. At was in the case of re the nearest thing to a definition present purchase agreements, where 15 months is prescribed. Almost any adopt would have to be arbitrary. definition that the Committee might Because banks up to five years. be almost anything The period could to adjust their reserve up to two years generally use maturities be for the Committee to go up to positions, one possibility would on repurchase agreements accordingly. years and adjust the rule two would deal the Account presumably were made, If such a definition
in all such securities, not only in the 2-1/2 per cent bonds. It would ask for bids or offers on such securities, as the case might be, and not specify one issue such as the 2-1/2 per cent bonds. Mr. Rouse saw no point in changing the language of the operating policies unless there was a change under which actions could be taken that would relieve the kind of criticism that had been directed at the Committee. Mr. Young noted that the criticism went to matters of substance as well as semantics. Mr. Hayes expressed the hope that any change would be more than merely a change of language and would be in the direction of signifying an actual willingness on the part of the Committee to exemplified in certain decisions during the past be flexible, as to make exchanges of maturing issues in part into several months also as exemplified by the Chairman's statement longer issues, and the Joint Economic Committee last summer. to at this time only the comment Mills said he would offer Mr. suggested wording would represent an abject that adoption of the on the sweeping connotation He placed a more of error. recantation was one the question Hayes. Fundanentally, did Mr. proposal than policy had been completely a "bills only" of deciding whether that would of a policy in favor should be jettisoned incorrect and securities market. of the Government in all areas permit operations want to be Committee should member of the that no He granted
doctrinaire, but this proposal contemplated a vast change from the philosophy under which the Committee had been operating for the past several years. Mr. Allen said he would make no comment on the proposed changes that he thought were improvements. He noted, however, that paragraphs (b) and (c), in their revised form, each concluded with a clause stating that exceptions to the general operating policies stated therein might be made at any time upon express authority of the Fed eral Open Market Committee. To him, the right to make exceptions was inherent in the powers of the Committee. If the majority felt that for public relations reasons it was important to mention this, he would do so only once, by eliminating the final clause in (b) and (c) and adding that clause as a new paragraph (d). Mr. Allen then referred to the fact that paragraph (a), as proposed, would state that it was not the policy of the Committee to pattern of prices and yields in the Government securities support any operations in the Government securities market were market and that of monetary and credit policy. primarily to effectuate the objectives in the Government states that intervention (The present language effectuate the objectives of monetary securities market is solely to correction of disorderly markets.).) credit policy (including the and paragraph (a) in its the Committee had accepted He recalled that said that he would prefer dissenting votes, and present form with no in paragraph (c) the word "solely." Similarly, to continue to use "primarily" for "solely". In he would prefer not to substitute
the past, he observed, there had been only one dissent from the wording of this policy. As to the portion of the revised paragraph (b) which would state that open market operations were to be con ducted in short-term securities (principally but not exclusively Treasury bills), he would prefer to retain the present language which states that operations for the System Account in the open market, other than repurchase agreements, shall be confined to short-term securities (except in the correction of disorderly markets). Mr. Johns inquired as to the purpose of changing "solely" to "primarily" in paragraph (a). Since the current statement was Committee had been averring that transactions in the adopted, the conducted solely for the purpose of effectuat open market should be objectives of monetary and credit policy (including corrections ing the markets). As Mr. Allen said, no objection had been of disorderly the vote was unanimous. It would indicated to the current language; must be for the purpose of saying appear that the change of wording transactions in the other reason for conducting that there was some the objectives than that of effectuating securities market Government to know what those and he would like and credit policy, of monetary might be. other objectives to cover was intended that the memorandum Mr. Young responded the statement asked to consider committee was point. The staff this of making some with a view to the possibility of operating policies
adaptations in operations that might facilitate the refunding problem of the Treasury. The Committee could not very well suggest something that would serve this purpose and leave in the word "solely" so the suggestion was to shift to "primarily." The staff was advancing nothing more than a suggestion; it had simply been reaching for words that might accomplish the aforementioned purpose. Mr. Thomas noted that the change in paragraph (a) would sub stitute a general phrase and eliminate reference to a specific practice, namely, the correction of disorderly markets. The language of the present statement is subject to the possible interpretation that the Manager might take action to correct disorderly markets without coming Committee, although the minutes of the Committee's meetings to the the Manager must obtain Committee authorization clearly require that The proposed revised language is intended for taking any such action. the statement itself that the Manager must to make it clear within for the correction of Committee to obtain authorization come to the disorderly markets. clear that the had made it quite said the discussion Mr. Bryan the suggested revisions or nothing from would gain little Committee changes in actual contemplated considerable at the same time it unless wording until of the revised not favor adoption He would practice. spelled out to him. changes had been the nature of those (a) of the current and pro Mr. King referred to paragraph the statement in both versions observed that and posed statements
began by indicating what was not the policy of the Committee. While there might have been reasons for that approach in the past, he wondered whether it was still necessary to start with a negative statement. It seemed to him that it might be preferable to begin by stating what the Committee wanted to encourage. Chairman Martin then said he hoped the Committee members would try to think the problem through in all of its aspects before the date of the next meeting. He felt that the Committee was quite well united in matters of general operating policy. There were disagreements at times, but the disagreements were not nearly as widespread as they had been at times in the past. The thing for the Committee to do was to think the matter through and to know doing; to think the problem through objectively and what it was One reason for instituting the operating to look at it objectively. Government securities market, and policies had been to improve the that market had actually been question was whether or not the years. That was a logical subject improved over the past several him by several individuals had been suggested to of inquiry. It be abandoned; that operating policies right that the continuing it should not have three weeks perhaps Committee met every if the was another possible policies. That continuing operating any not put something like least the Committee should approach. At once a year. It was something on paper and debate the matter this clear in what would be that the Committee through so to be thought it was doing.
It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, March 1, 1960, at 10:00 a.m. Thereupon the meeting adjourned.
Reserve Target for February using Total Reserves (Daily average figures - 000,000 omitted) (1) February growth amount $ 31 1/ (at 2% annual rate) ....... ............ (2) Actual reserves - $ 18.854 2/ January . ........ (3) Deduct normal decline in reserves (300) between January and February . ..... $ 18,554 $ 18,554 (4) Target for February .................. . $ 18,585 (5) February Target range for practical $ 18,635 administration of account ..... . . . .. . . .. . . $ 18,535 annually would be 47.0 million; at 4 percent 1/ February growth amount at 3 percent annually would be 62.0 million. close to the ($18,704) was extraordinarily after seasonal adjustment 2/ This amount suggested at the last ($18,650 to $18,750) target range for January center of the indeed, is somewhat nothing; and, circumstance proves meeting. This FOMC attempt to show how at this meeting an experimental because it prevents regrettable instructions on a total would be handled in adjusting overages and underages short-run reserve target basis.
Also: Record of Policy Actions