March 1, 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 in Washington on Tuesday, March 1, 1960, at 10:00 a.m PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr Balderston Mr. Bopp Mr. Bryan Mr. Fulton Mr. King Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Messrs. Leach, Allen, Irons, and Mangels, Alternate Members of the Federal Open Market Committee Messrs. Erickson, Johns, and Deming, Presidents of the Federal Reserve Banks of Boston, St. Louis, and Minneapolis, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Brandt, Eastburn, Marget, Noyes, Roosa, and Tow, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Assistant to the Board of Governors Mr. Koch, Adviser, Division of Research and Statistics, Board of Governors Mr. Keir, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Consultant to the Chairman, Board of Mr. Knipe, Governors Ellis, Hickman, Storrs, Baughman, Jones, Messrs. and Einzig, Vice Presidents of the Federal Reserve Banks of Boston, Cleveland, Richmond, Chicago, St. Louis, and San Francisco, respectively
Messrs. Parsons and Coldwell, Directors of Research, Federal Reserve Banks of Minneapolis and Dallas, respectively Mr. Stone, Manager, Securities Department, and Assistant Secretary, Federal Reserve Bank of New York In the agenda for this meeting, the Secretary reported that advices had been received of the election by the Federal Reserve Banks of members and alternate members of the Federal Open Market Committee for a period of one year commencing March 1, 1960, and that it appeared the persons elected would be legally qualified to serve after they had executed their oaths of office. Prior to the meeting, each newly elected member and alternate member had executed the required oath of The members and alternate members were as follows: office. of the Federal Reserve Bank of Alfred Hayes, President New York, with William F. Treiber, First Vice Presi Bank of New York, as dent of the Federal Reserve alternate member; of the Federal Reserve Bank of Karl R. Bopp, President Philadelphia, with Hugh Leach, President of the Bank of Richmond, as alternate member; Federal Reserve of the Federal Reserve Bank of W. D. Fulton, President Allen, President of the with Carl E. Cleveland, Bank of Chicago, as alternate member; Federal Reserve Reserve Bank of of the Federal Malcolm Bryan, President of the H. Irons, President Atlanta, with Watrous as alternate member; Reserve Bank of Dallas, Federal Bank of the Federal Reserve President of H. G. Leedy, President of the with H. N. Mangels, Kansas City, San Francisco, as alternate Reserve Bank of Federal member.
Upon motion duly made and seconded, and by unanimous vote, the following officers of the Federal Open Market Committee were elected to serve until the election of their successors at the first meeting of the Committee after February 28, 1961, with the understanding that in the event of the discontinuance of their official connection with the Board of Governors or with a Federal Reserve Bank, as the case might be, they would cease to have any official connection with the Federal Open Market Commit tee: Wm. McC. Martin, Jr. Chairman Alfred Hayes Vice Chairman Ralph A. Young Secretary Merritt Sherman Assistant Secretary Kenneth A. Kenyon Assistant Secretary Howard H. Hackley General Counsel Hexter Assistant General Counsel David B. Woodlief Thomas Economist P. Eastburn, Associate Economists Harry Brandt, David L. Merle Hostetler, Arthur W. Marget, Guy E. Noyes, Robert V. Roosa, and Clarence W. Tow Upon motion duly made and seconded, and by unanimous vote, the Federal Reserve Bank of New York was selected to execute trans for the System Open Market Account actions the adjournment of the first meeting until of the Committee after February 28, 1961. motion duly made and seconded, and Upon vote, the selection by the Board by unanimous Federal Reserve Bank of of Directors of the as Manager of the of Robert G. Rouse New York Account was approved. System Open Market made and seconded, and Upon motion duly the minutes of the meeting by unanimous vote, held on Open Market Committee of the Federal 1960, were approved. February 9,
Chairman Martin then referred to a memorandum distributed with the agenda under date of February 2, 1960, relating to the procedure authorized at the meeting on March 2, 1955, whereby, in addition to members and officers of the Committee and Reserve Bank Presidents not currently members of the Committee, minutes and other records could be made available to any other employee of the Board of Governors or of a Federal Reserve Bank with the approval of a member of the Committee or other Reserve Bank President, with notice to the Secretary. The most recent list of persons so authorized (exclusive of secretaries and records and duplicating personnel), as shown by the Secretary's records, was attached to the February 24 memorandum. Chairman Martin inquired whether anyone wished to raise a question with respect to the existing procedure, and no questions were heard. Accordingly, it was agreed unanimously action should be taken at this time that no the procedure authorized on March to amend 2, 1955. Martin' s suggestion, consideration was then given At Chairman Committee customarily reviewed authorizations of the to the continuing and the actions as set in March of each year, at the first meeting taken concerning the matters in these minutes were forth subsequently for review at this meeting. been listed on the agenda that had unanimously that no It was agreed be taken at this time to action should amend or terminate the resolution of
November 20, 1936, authorizing each Federal Reserve Bank to purchase and sell, at home and abroad, cable transfers, bills of ex change, and bankers' acceptances payable in foreign currencies, to the extent that such purchases and sales may be deemed to be necessary or advisable in connection with the establishment, maintenance, operation, increase, reduction, or dis continuance of accounts of Federal Reserve Banks in foreign countries. A plan for allocation of securities in the System Open Market Account became effective September 1, 1953, pursuant to action of the Federal Open Market Committee at its meeting on June 11, 1953. This procedure had subsequently been reaffirmed by the Committee each year at the first meeting in March, Prior to this meeting, there had been distributed to the members of the Committee (1) a memorandum dated February 19, 1960, from Mr. Rouse, Manager of the System Open Market Account, and Mr. Farrell, Director of the Division of Bank Operations, Board of Governors, containing changes in the existing procedure, and (2) a certain suggested memorandum from Messrs. Rouse and Farrell dated February 23, 1960, of securities held in the submitting a pro forma reallocation System Account as of February 1, 1960. statement of procedure adopted in 1953 Paragraph 7 of the read as follows: of securities from losses on the sale Profits and Account shall be allocated on the basis of average the holdings in the Account participations in total daily These ratios shall preceding five years. during the month for the the end of each computed as of be succeeding month.
The recommendation of Messrs. Rouse and Farrell was that paragraph 7 be changed to read as follows: Profits and losses on the sale of securities from the Account shall be allocated on the basis of each Bank' s current holdings at the opening of business on the date of delivery of the securities sold. Paragraph 3 of the statement of procedure adopted in 1953 read as follows: No allocation shall be made which would reduce the reserve ratio of a Bank below 35 per cent. If, because of the provisions of this paragraph, a Bank is unable to take its prorata share based on total assets, the amount which it is unable to take without reducing its reserve ratio below 35 per cent shall be allocated to the Bank or Banks having the highest reserve ratios in such a manner that the ratio of the Bank or Banks to securities are reallocated will not be reduced which of any other Bank. Regardless of below the ratio in reserve ratios, no possible subsequent improvement adjustments shall take place pending reversal of these the next general reallocation. Rouse and Farrell was that The recommendation of Messrs. to read as follows: paragraph 3 be changed first sentence of the would reduce the shall be made which No allocation next to the last busi of a Bank as of the reserve ratio below 35 per cent. ness day of March adopted in 1953 5 of the statement of procedure Paragraph read as follows: 30 per cent ratio falls below If a Bank's reserve day of the month, next to the last a Tuesday or the on close of business as of the of its holdings sufficient to 35 per cent its reserve ratio that day to raise adjustment the following by an shall be reallocated date. general reallocation day is a unless such day,
Such securities shall be allocated to the Bank or anks having the highest reserve ratios.(NOTE: This procedure does not contemplate partial reversal of these adjust ments. However, full reversal of these adjustments will be made when a Bank's reserve position improves to the extent that the full amount of its participation allocated to other Banks under the provisions of this paragraph can be restored without reducing the Bank's reserve ratio below 35 per cent.) The suggestion of Messrs. Rouse and Farrell was that the first sentence of paragraph 5 be changed to read as follows: If a Bank's reserve ratio falls below 30 per cent on the next to the last business day (as observed by the Agent Bank) of a statement week or month, sufficient of its holdings as of the close of business that day to raise its reserve ratio to 35 per cent shall be re allocated by an adjustment the following day, unless such day is a general reallocation date. Upon motion duly made and the procedure for alloca seconded, tion of securities in the System Open Market Account adopted pursuant of the Federal Open Market to action Committee on June 11, 1953, was unanimously, effective as of approved reallocation, in the April 1, 1960, incorporation of the a form reflecting in the three changes recommended Messrs. Rouse and memorandum from February 19, 1960, it Farrell dated that the reallocation being understood April 1, 1960, would to be made as of ratios of each Reserve be based on the of total assets daily average Bank's Reserve Banks for the total for all to the period March 1, 1959 through February 29, 1960. for existing authorization that the Rouse suggested Mr. prepared by the open market report of the weekly distribution refer to so as to York be rephrased Bank of New Reserve Federal
distribution of periodic reports prepared by the Federal Reserve Bank of New York for the Federal Open Market Committee, with the understanding that the authorization for distribution to certain officials of the Treasury Department would extend to the weekly open market reports only and not to other reports, including the annual reports or the reports submitted prior to each meeting of the Committee. There being no objection to the suggestion of Mr. Rouse, it was agreed unanimously to authorize distribution of periodic reports prepared by the Federal Reserve Bank of New York for the Federal Open Market Committee as follows 1. The Members of the Board of Governors 2. The Presidents of the twelve Federal Reserve Banks 3. Officers of the Federal Open Market Committee *4. The Secretary of the Treasury *5. The Under Secretary of the Treasury *6. The Assistant to the Secretary of the Treasury working on debt management problems *7. The Fiscal Assistant Secretary of the Treasury of the Division of Bank Operations 8. The Director of the Board of Governors in charge of research at each of the 9. The officer Federal Reserve Banks not represented by its on the Federal Open Market Committee President member of the Federal Open Market 10. The alternate from the Federal Reserve Bank of New Committee Vice Presidents of the York; the two Assistant Bank of New York working under Federal Reserve Account; the Managers of the System the Manager of the New York Securities Department of the in charge and the Bank; the Vice President Assistant Vice President of the Research Depart of the New York Bank; and the confidential ment York Bank as agent for the files of the New Federal Open Market Committee * Weekly reports of open market operations only.
11. With the approval of a member of the Federal Open Market Comittee or any other President of a Federal Reserve Bank, with notice to the Secretary, any other employee of the Board of Governors or of a Federal Reserve Bank. Unanimous approval was given to continuation of the authorization to the Manager of the System Account to engage in transactions on a cash as well as a regular delivery basis. With reference to the authorization to the Federal Reserve Bank of New York to enter into repurchase agreements with nonbank dealers in United States Government securities, Mr. Robertson commented that his views on the subject of repurchase agreements were well known because of statements he made previously from time to time. These views had not changed, and he continued to doubt the legality of the use of repurchase agreements. He did want to raise the question of ultra vires action since so many members of the Committee were convinced that the use of the repurchase agreement over a long period of time this mechanism for making loans to nonbank dealers. had legalized However, in view of the question of legality-the statutory right of the Open Market Committee to make loans as distinguished from purchasing securities-and the possibility that we can accomplish well through the development of the System's objectives equally as he felt that we should minimize to the fullest possible cash trading, of repurchase agreements and maximize cash trading, extent the use palatable to the and less be less profitable though this might even to continue the several years ago When it was concluded dealers.
use of repurchase agreements notwithstanding the question of legality, it was understood, as he recalled it, that they would be used as sparingly as possible in achieving System objectives. In recent times, however, the tendency had been to use them frequently, and in his opinion excessively, to offset items that he doubted seriously needed to be offset. He felt that the Account should go back to a basis of using repurchase agreements as sparingly as possible, and then only for the purpose of taking care of the borrowing needs of the dealers in instances where they could not possibly get financing from other sources with which to carry securities and hence contribute to the smooth functioning of the Government securities market. In addition, he felt there should be an amendment of the authorization covering rates on repurchase agreements. In his opinion, the rate to the discount rate, rather than allowing, under should be confined the use of a rate less than the discount rate. some circumstances, This was not important today because we are not actually engaged in of repurchase agreements) at rates less making loans (in the form become important under other the discount rate, but it could than completely inequitable to permit He felt that it was conditions. Reserve System at rates to borrow from the Federal nonbank dealers those banks member banks, whether prescribed for below the rates in Government securities. dealers or nondealers were that the use of repurchase said he had sensed Mr. Hayes needs appealed strongly for meeting relatively short-term agreements
to many members of the Committee. It seemed to him that repurchase agreements had been considered a useful technique for combining the objectives of providing reserves temporarily, assisting dealer financing, and preventing any knots from developing there. On theoretical grounds and on the basis of past experience, it was a desirable technique that he would hate to see minimized. Mr. Hayes recalled that there had been some discussion recently as to whether, because of the frequent use by banks of Government securities ranging to, say, two years in adjusting their reserve positions, the repurchase agreement authorization should be to permit agreements covering Government securities maturing amended months. Recognizing, however, that this question was beyond 15 to the Committee's operating policies, he did not closely related wish to raise the issue for action now. Mr. Rouse said it had been found impracticable to use any of the factor mentioned discount rate because rate other than the rate would create a To go above the discount by Mr. Robertson. that they were being of the nonbank dealers feeling on the part would mean that the discount rate while to go below imposed upon, upon. As a practical matter, dealers would feel imposed the bank been used for rate had than the discount no rate other therefore, one or two exceptions. with perhaps years, only one exception. he could find Robertson said Mr. in its present the authority that in continuing he felt However,
form the Committee subjected itself to the criticism, for no purpose, of appearing to differentiate between banks and nonbank dealers. Mr. Shepardson inquired whether he understood correctly that Mr. Rouse would not object to eliminating the authority for a rate other than the discount rate. Mr. Rouse stated that he would not object. Chairman Martin then said that he would not want to change the existing rate authorization without more discussion. He disagreed with Mr. Robertson' s views on the use of repurchase agreements. In they were a convenience to the System and of great his opinion, monetary policy. It was not just a matter importance in carrying out the dealers. The repurchase agreements were not of accommodating and he would not to monetary management, only useful but important want to see their use minimized. agreements were helpful commented that repurchase Mr. Szymczak Chairman Martin added the securities market, and to the Government were extremely helpful. comment that they want to see the that he would not Martin repeated Chairman to use a rate lower the right changed to eliminate authorization if that appeared under certain circumstances, the discount rate than desirable. bills were low, if rates on Treasury commented that Mr. Rouse in order to get discount rate to go below the it might be necessary to which the objectives to accomplish agreements out repurchase
Chairman Martin had referred. At least, that was the concept. Mr. Mills then moved that the existing authorization with respect to repurchase agreements be continued. However, since Mr. Robertson had expressed himself for the record, the Committee would be alerted to study the problem as the year progressed. The Chairman then called for any further comments, but none were heard. Thereupon, the motion of Mr. Mills having been seconded, the Committee ap proved, with Mr. Robertson dissenting, a renewal of the existing authorization to the Federal Reserve Bank of New York to enter into repurchase agreements with nonbank dealers in United States Govern ment securities, subject to the following conditions 1. Such agreements shall be at a rate below whichever is (a) In no event the lower of (1) the discount rate of the Federal Reserve Bank on eligible commercial paper, or the average issuing rate on the most recent (2) issue of three-month Treasury bills; to exceed 15 calendar for periods of not (b) Shall be days; only Government securities maturing (c) Shall cover within 15 months; and means of providing the money (d) Shall be used as a Reserve funds to with sufficient Federal market strain on a day-to-day basis. avoid undue be included in the transactions shall 2. Reports of such which is sent to of open market operations weekly report Open Market Committee. members of the Federal the by any such securities covered the event Government 3. In pursuant to by the dealer are not repurchased agreement securities thus thereof, the or a renewal the agreement of New York shall Reserve Bank by the Federal acquired to the System Open be sold in the market or transferred Market Account.
The Committee approved by unanimous vote a renewal of the authorization to the Federal Reserve Bank of New York (last renewed March 3, 1959) to purchase bankers' acceptances and to enter into repurchase agreements therefor. The authorization was as follows: The Federal Open Market Committee hereby authorizes the Federal Reserve Bank of New York for its own account to buy from and sell to acceptance dealers and foreign accounts maintained at the Federal Reserve Bank of New York, at market rates of discount, prime bankers' acceptances of the kinds designated in the regulations of the Federal Open Market Committee, at such times and in such amounts as may be advisable and consistent with the general credit policies and instructions of the Federal Open Market Committee, provided that the aggregate amount of such bankers' ac ceptances held at any one time by the Federal Reserve Bank of New York shall not exceed $75 million, and provided further that such holdings shall not be more than 10 per cent of the total of bankers' acceptances outstanding as shown in the most recent acceptance survey conducted by the Federal Reserve Bank of New York. The Federal Open Market Committee further authorizes Bank of New York to enter into repurchase the Federal Reserve with nonbank dealers in bankers' acceptances cover agreements the kinds designated in bankers' acceptances of ing prime the regulations of the Federal Open Market Committee, subject Reserve Bank of conditions on which the Federal to the same from time to hereafter be authorized York is now or may New Market Committee to enter into time by the Federal Open United States Government agreements covering repurchase of such bankers' that the maturities securities, except entering into such repurchase at the time of acceptances and except that in not exceed six months, agreements shall seller to repurchase, such of the failure of the the event by the Federal Reserve continue to be held acceptances shall market. Such repurchase be sold in the open Bank or shall applicable, at same rate as that shall be at the agreements to repurchase into such agreements, the time of entering Government securities. United States agreements covering
The Committee approved by unanimous vote the continuation without change of the existing authorization for fixing the rate charged on special short-term certifi cates of indebtedness purchased direct from the Treasury, pursuant to paragraph (2) of the Committee's policy directive to the Federal Reserve Bank of New York, at 1/4 of 1 per cent below the discount rate of the Federal Reserve Bank of New York at the time of such purchase. The Committee reaffirmed by unanimous vote the authorization for the Chairman to appoint a Federal Reserve Bank as agent to operate the System Account temporarily in case the Federal Reserve Bank of New York is unable to function, such authorization having first been given on March 1, 1951, and having been renewed in March of each year since. The following resolution to provide for the continued operation of the Federal Open Market Committee during an emergency was re affirmed by unanimous vote: In the event of war or defense emergency, if the Secretary or Assistant Secretary of the Federal Open Market Committee (or in the event of the unavailability of both of them, the Secre tary or Acting Secretary of the Board of Governors of the Federal Reserve System) certifies that as a result of the emergency the available number of regular members and regular alternates of the Federal Open Market Committee is less than of the said Committee shall be seven, all powers and functions exercised by, and authority to exercise such performed and powers and functions is hereby delegated to, an Interim Com subject to the following terms and conditions: mittee, Such Interim Committee shall consist of seven members, regular alternate of the each regular member and comprising available, together with Market Committee then Federal Open an additional number, sufficient to make a total of seven, which shall be made up in the following order of priority each alternate at large (as defined from those available: (1) a Federal Reserve Bank not then below); (2) each President of or an alternate; (3) each First Vice either a regular member
President of a Federal Reserve Bank, provided that (a) within each of the groups referred to in clauses (1), (2), and (3) priority of selection shall be in numerical order according to the numbers of the Federal Reserve Districts, (b) the President and the First Vice President of the same Federal Reserve Bank shall not serve at the same time as members of the Interim Committee, and (c) whenever a regular member or regular alternate of the Federal Open Market Committee or a person having a higher priority as indicated in clauses (1), (2), and (3) becomes available he shall become a member of the Interim Committee in the place of the person then on the Interim Committee having the lowest priority. The Interim Committee is hereby authorized to take action by majority vote of those present whenever one or more members thereof are present, provided that an affirmative vote for the action taken is cast by at least one regular member, regular alter nate, or President of a Federal Reserve Bank. The delegation of authority and other procedures set forth above shall be effective only during such period or periods as there are available less than a total of seven regular members and regular alternates of the Federal Open Market Committee. As used herein the term "regular member" refers to a of the Federal Open Market Committee duly appointed member or elected in accordance with existing law; the term "regular alternate" refers to an alternate of the Committee duly with existing law and serving in the elected in accordance of the regular member for whom he was elected; and absence "alternate at large" refers to any other duly elected the term of the Committee at a time when the member in whose alternate absence he was elected to serve is available. Unanimous approval was also given to a renewal of the resolution set forth below certain actions by the Federal authorizing Reserve Banks during an emergency: hereby authorizes each Federal Open Market Committee The the actions set any or all of Bank to take Federal Reserve when such Federal war or defense emergency forth below during efforts to unable after reasonable Bank finds itself Reserve Open Market Committee with the Federal be in communication lieu of the Federal acting in the Interim Committee (or with Open Market Com or when the Federal Open Market Committee) is unable to function. such Interim Committee) mittee (or in the light of Whenever it deems it necessary (1) credit situation then and the general economic conditions
prevailing (after taking into account the possibility of providing necessary credit through advances secured by direct obligations of the United States under the last paragraph of section 13 of the Federal Reserve Act), such Federal Reserve Bank may purchase and sell obligations of the United States for its own account, either outright or under repurchase agreement, from and to banks, dealers, or other holders of such obligations. (2) In case any prospective seller of obligations of the United States to a Federal Reserve Bank is unable to tender the actual securities representing such obligations because of conditions resulting from the emergency, such Federal Reserve Bank may, in its discretion and subject to such safeguards as it deems necessary, accept from such seller, in lieu of the actual securities, a "due bill" executed by the seller in form acceptable to such Federal Reserve Bank stating in substantial effect that the seller is the owner of the obligations which are the subject of the purchase, that ownership of such obligations is there by transferred to the Federal Reserve Bank, and that the obligations themselves will be delivered to the Federal Reserve Bank as soon as possible. Bank may in its discretion (3) Such Federal Reserve purchase special certificates of indebtedness directly from the United States in such amounts as may be needed to cover overdrafts in the general account of the Treasurer of the United States on the books of such Bank or for the accommodation of the Treasury, but such Bank temporary shall take all steps practicable at the time to insure as far as possible that the amount of obligations acquired from the United States and held by it, together directly amount of such obligations so acquired and held with the Federal Reserve Banks, does not exceed $5 by all other billion at any one time. above set forth shall Authority to take the actions as the Federal Reserve only until such time be effective communications with the Bank is able again to establish (or the Interim Committee), Federal Open Market Committee and such Committee is then functioning. unanimous vote, the Committee By given at reaffirmed the authorization the meeting on December 16, 1958, and at the meeting on March 3, continued for System personnel 1959, providing Office of Civil and assigned to the
Defense Mobilization Classified Location (High Point) on a rotating basis to have access to the resolu tions (1) providing for continued operation of the Committee during an emergency and (2) authorizing certain actions by the Federal Reserve Banks during an emergency. There was unanimous agreement that no action be taken to change the exist ing procedure, as called for by the resolution adopted June 21, 1939, requesting the Board of Governors to cause its examining force to furnish the Secretary of the Federal Open Market Com mittee a report of each examination of the System Open Market Account. The next item on the agenda was a review of the continuing operating policies of the Federal Open Market Committee. However, Chairman Martin stated that he would like to defer consideration of this item until later in the meeting and proceed at this time open market operations since the meeting of the to a review of Committee on February 9, 1960. There being no disagreement, it was understood that this procedure would be followed. Before this meeting there had been distributed to the members of the Committee a report of open market operations covering 24, 1960, and a supplementary 9 through February the period February February 29, 1960. February 25 through the period report covering files of the Committee. been placed in the of both reports have Copies Mr. Rouse made of the written reports, In supplementation the following comments: substantially
Since the last meeting of the Committee, the statistical position of the money market experienced wide swings but the over-all atmosphere was on the whole much the same as in other recent periods: continued restraint without extremes other than for very short periods. Net borrowed reserves went from a peak of about $900 million on February 15 to a low of $47 million free reserves on February 19, but averaged about $400 million over the period. The peak was reached at a time when the money market was in the throes of settling for the Treasury's February refunding, which produced symptoms of extreme tightness requiring System repurchase agreements to ease the situation. Subsequently, banks gained reserves rapidly as float increased at a more than normal pace and other factors added to the bulge. A reduction in the System's holding of Treasury bills was needed to offset this trend. Toward the close of the period further repurchase agreements were made to temper renewed pressures on reserves, but none of the open market operations carried out during the period were large. Opera tions were for the most part done through bill redemptions, transactions with foreign accounts, and repurchase agreements. The distribution of reserves also swung sharply in favor of New York City banks at two points, adding to the peculiarities of the period. With the advent of the two-week reserve period for country banks, a new pattern seems to have emerged wherein the country banks shift sizable amounts of funds to their New York correspondent banks every other Tuesday and Wednesday, causing an oversupply of reserves in New York central reserve city banks which has tended to make the Federal funds market unusually easy on those Wednesdays when the New York banks must also settle their reserve positions. Despite this easing, bill rates moved up substantially, reflecting mainly a cautious attitude toward the approaching March 15 tax date-91-day bill Treasury issuing rates rose of about 3.56 per cent to more than 4.25 per cent from a low auctions. Prices of longer-term issues in yesterday's the list up to the middle of last week improved throughout vote of the House Ways and Means Com when the favorable for revising the rate on the compromise measure mittee for advance refundings. This ceiling enhanced the prospects drop in prices of the longest-term action brought a sharp with shorter issues continuing to improve moderately. issues, municipal bonds have been under some Also, corporate and pressure as potential buyers have been reluctant to take up view of the House new issues in a number of recent promptly
Committee action and the growing calendar of new flotations which they think may offer better investment opportunities. The approach of the mid-March tax and dividend dates and accompanying liquidity needs are now beginning to attract attention in the market. Although this is a factor contributing to the upward tilt of short-term rates, it does not seem to be a matter of concern and most of the major corporations have already provided for their needs in one way or another, largely through tax anticipation bills. Mr. Mills said it appeared to him that the Desk had permitted a greater degree of restraint to exist during the reserve week ending tomorrow than was contemplated by the sense of the Committee at the February 9 meeting. Negative free reserves, at the $460 million level estimated by the Federal Reserve Bank of New York in the pro jection accompanying its supplementary report of Open Market opera tions to March 1, will have risen above the general level of the weeks and above what he had sensed to be the Committee's previous own choice. agreements, Mr. Mills regard to the use of repurchase With to get into the too fine a line whether it was drawing inquired been done twice in the past week or thereabouts, Account, as had day from their falling on the succeeding agreements with a maturity to the market could be confusing thought that this He origination. should not leeway greater maturity a somewhat whether and inquired be provided. the past period the swings during replied that Mr. Rouse out of line pretty badly had been and guesses been enormous, had
on a number of days. Some days the Account was not planning on doing anything, and then repurchase agreements were written. If they were needed on a one-day basis, he thought the right thing had been done. Yesterday morning it was estimated that the average of net borrowed reserves for the week ending tomorrow would be around $17 million, but now it appeared that the average would be about $60 million. As far as the temper of the market was con cerned, he felt that the degree of restraint had been fairly consistent throughout the period with the exception of February 15 and the following morning, when there was far more tightness in the market than the Committee wanted. Mr. Allen commented that on several days Federal funds went begging. Mr. Hayes noted that at one stage of the discussion at the Chairman had referred to "slight but not February 9 meeting the easing." This, he said, is about what has happened. visible define his interpretation of the Mr. Mills said he could in this manner. If on to the Desk at the last meeting instruction reserve changes that the table on recent and projected looked at it could be seen of this meeting, at the beginning was distributed reserve weeks preceding for the several negative free reserves that lower. He million or $400 had been averaging 9 meeting the February on February 9 as to the Desk the instruction would have interpreted level of pressure. from that results developed with the satisfaction
Consequently, any increase in pressure above those general averages would have been contrary to the instructions. Mr. Hayes said it seemed to him there was again the danger, to which he had referred from time to time, of giving too much emphasis to a single figure (net borrowed reserves). The feeling of ease in the market was greater than might have been associated with net borrowed reserves in the range of $400-$500 million. Chairman Martin said he understood from Mr. Rouse's explana tion that there had been no conscious effort on the part of the Desk to absorb reserves for the purpose of yielding a specific figure of net borrowed reserves. Mr. Rouse replied that the Desk had tried to maintain the same before the February 9 meeting. The feeling in the market that existed net borrowed reserves, for net went back to the question of problem million in January and February were borrowed reserves of $400-500 borrowed reserves of easier situation than net associated with a much As far as the feel and temper million in November and December. $300 easier situation than may were concerned, there was an of the market reserves in level of net borrowed with the same have been associated reviewed its notes New York Bank had As usual, the a previous period. when they became also the minutes, February 9 meeting-and of the the right track. Desk was on whether the determine available--to meeting to not the easiest 9 meeting was the February However, interpret.
Mr. Mills then said that with the greater degree of pressure that occurred last week, there was a reflection in the downward move ment of the prices of securities in many sectors. There were extenuating circumstances, he granted, but he could not feel that those circumstances were conclusive in the movement of the Govern ment securities market. He felt that the pressure placed on reserves equalled, or at least ranked with, other influences in the market. Mr. Robertson noted that he had sometimes criticized the Desk because he had the feeling that the easiest thing to do is to move toward ease and that easing had been the over-all general In this instance, it might be that the net borrowed tendency. a little higher than some anticipated. reserve figure had gone the Desk had tried to not mean to him that However, this did indicated by the discussion beyond the degree of restraint tighten once in a while operations He was glad that of the Committee. to commend the side, and he wished figure on the higher produced a Desk. upon motion duly made Thereupon, and seconded, and by unanimous vote, transactions during the open market 9 through February the period February ratified, and 1960, were approved, 29, confirmed. respect to statement with the following Mr. Noyes presented economic developments we made at the beginning In the visual presentations attention of first that the year, we commented of the of the on the settlement was focused economic analysts
steel strike. In a subsequent revision we added that it had shifted to the President's Budget Message, and the final version reported that the spotlight had turned to the sharp decline in the stock market. If we were to do still another version, we might report that interest is now centered on developments in money and credit markets, and perhaps especially on the decline in the money supply. Whatever its true significance, there is no doubt that the persistent downward trend in the volume of demand deposits and currency adjusted, which started last summer and has continued beyond the period of depressed activity attribu table to the steel strike, is an important factor in bearish sentiment. The prospect of a further decline in February will undoubtedly add to the attention focused on credit markets and monetary policy, Another area being closely watched from all sides, which provides the basis for some misgivings as to the future, is that of inventories and new orders. The rapid rate of inven tory accumulation which occurred in January, and appears to have continued in February, combined with the slight decline in new orders, suggests to some that we are mearing the end of the spurt of activity attributable to the resumption of steel production before any other expansive factor has emerged to take its place. These people will probably find some confirmation of their fears if the February index of industrial production shows little or no increase over January, as now appears likely. In further support of their view, they can also point to the fact that seasonally adjusted department store sales, December to January, appear to have which declined from little further in February on the basis of the slipped a first three weeks' data and that, in fact, total retail sales were down from December to January, if one excludes While these declines are small and retail auto dealers. at a very high level, the edging off may trade remains from the fact that it occurred gain some added significance when employment and production were rising to in a period some spurt in might have expected levels and one record incomes were restored. spending as strike-curtailed three weeks have also other hand, the last On the confidence and that there is considerable produced evidence stock market has If the in the situation. basic strength upside, its stubborn much "oomph" on the not shown declines has been "across the board" to general resistance impressive. Mr. Thomas will discuss money market develop is worth mentioning here that, ments in detail, but it
whatever the technical factors, the recent firming could hardly have occurred in a period of general weakness. Further evidence of underlying strength can be drawn from the February expansion of loans at weekly reporting banks. The $425 million increase in business loans in the first three weeks was larger than in the comparable period of any other year. hile much of the increase was accounted for by metal fabricators, most categories showed more than seasonal increases or less than seasonal declines. Hence, the strength of loan demand can hardly be attributed solely to the reaccumulation of steel inventories and durable goods. Commodity markets have shown neither dominant strength nor weakness--some prices moved up, others down. Taken altogether, industrial prices have been stable. Without impinging unduly on Mr. Marget's extensive territory, perhaps I should mention that the near boom conditions developing in many countries abroad constitute an important element of strength in the domestic economic picture. In summary, no convincing signs of basic weakness have emerged since the last meeting, but there is added support for the view that the moderate gap between capacity and current output is not closing rapidly. In these circumstances, it would appear that some adaptation of monetary constraint would be consistent with continuing price stability. At the same time, there is every reason to suppose that credit demands are sufficient to keep the proverbial string taut and that any supplement to the volume of loanable funds through bank credit expansion will be quickly made available absorbed. We may be, in fact, in one of the relatively when melioration of monetary policy would rare periods to vigorous, healthy growth in the actually contribute economy. statement with regard to the Mr. Thomas presented the following financial situation: Probably the most important current financial develop this group, is the indication the standpoint of ment, from decline in the money supply. of further greater-than-seasonal Demand deposits adjusted at city banks declined by a larger the same month of any other during February than in amount for the first Country bank figures year except 1956. recent increase that occurred failed to show the half of the month possible that the year. It is the same period last in as much as half declined by money supply adjusted seasonally a level of as much as $300 dollars in February to a billion million less than a year ago.
The reason for and significance of this decline is not easy to appraise. Bank loans, after declining sharply in January, turned up in February. Business loans at city banks, which had declined only moderately in January following the sharp December increase, increased substantially in February a month that usually shows little change. Other categories of loans showed little change, except for a moderate increase in the "all other" category, which includes consumer loans. At the same time banks continued to reduce their holdings of U. S. securities. The net decline in total loans and investments was fairly substantial, though not as large as in February last year or in 1956 and 1955. Banks had to increase their borrow ings to avoid further liquidation of investments, in the face of the loan increase and the deposit decline. To some extent the decline in bank investments and deposits may reflect the further shifting of funds by holders from bank deposits to Government securities, attracted by the prevailing high interest rates. In the past three weeks, however, in terest rates have risen, following the sharp drop in the early weeks of the year. At the same time demands on capital markets have not been heavy. Offerings of new securities by corpora tions and by State and local governments have been relatively light. It appears that new issues in the first quarter of the year will be smaller than in the same period of most other Offerings by finance companies have comprised a recent years. larger portion of total corporate issues than usual. Mortgage have continued heavy, and there has demands, on the other hand, volume of short-term issues by Federal been a considerable agencies. Treasury bills are again above the Rates on three-month for a situation in which banks are discount rate-as is normal much lower than in December and borrowing-but they are still bills, which declined The rate on six-month early January. more sharply after early January, has risen less in the past and is below levels that than the three-month rate three weeks Yields on since early September. have generally prevailed sharply, but issues issues have risen rather two- to three-year area have shown greater strength in the four- to five-year on longer bonds declined during most than previously. Yields since action by the House Ways of February but have risen again interest ceiling legislation. last week on and Means Committee been tending to rate structure has In general, the interest months, with medium-term the past several flatten out over rates higher short and very long-term lower and the very rates relative to the average. erratically at slightly have fluctuated fairly Stock prices Interest rates early in February. low level reached above the
in other industrial countries have been tending to rise in response to economic activity and speculative developments, and official policies have moved further in the direction of restraint. System operations have generally had the effect of maintaining pressure on banks. Reserves have been released by the decrease in required reserves, but various market factors and continued reduction in the System's portfolio have absorbed larger amounts of reserves. As a consequence, using preliminary estimates for this week, net borrowed reserves have increased somewhat in the past month on the basis of revised figures for a month ago. For the period as a whole, net borrowed reserves averaged less than $400 million, with borrowings averaging close to $800 million. It appears from the course of events that a figure of this magnitude has kept the banks under pressure to liqui date securities in order to meet loan demands. The net result has evidently been the greater-than-seasonal decline in the money supply, as previously mentioned. Although it is possible that the public may be willing to reduce its cash holdings in order to invest in earning assets, it seems hardly necessary under existing conditions for System opera tions to be an inducement to credit liquidation by banks, with further increases in interest rates. During the next three or four weeks money markets are likely to be under severe pressures to provide liquidity needed at this season. At similar periods in the past year the System has not acted to ease these pressures, with the result that interest rates have risen sharply and subsequently declined somewhat. Some pressures are desirable at such order to attract funds to the market and avoid periods in the same as money, but it might be making Treasury bills well for the System to be somewhat more liberal in supplying times than has been customary in the past. reserves at such longer-run standpoint, in view of the absence From a speculative tendencies or excessive credit of noticeable it would be difficult to defend a continued expansion, reserves can be supply. More abundant decline in the money by maintaining a somewhat the weeks ahead either supplied in than has been the aim of net borrowed reserves lower level by operations that past--say around $300 million-or in the reserves than are currently somewhat more would supply In the short run cover usual seasonal demands. needed to in the conduct and impact there would be little difference long run the difference In the of these two approaches.
would depend upon what the banks did with the additional reserves. Subsequent action could be guided accordingly. Mr. Marget made substantially the following comments with respect to the balance of payments: One thing is clear, above all others, with respect to our balance-of-payments position at this juncture. It is bound to be affected, to a very considerable degree, by the changes that seem to be emerging with respect to what might be called the cyclical constellation as between our principal trading partners and ourselves. Things are booming abroad, particularly in the industrialized countries. The inflationary pressures accompanying this boom abroad are strong enough to be of very real concern to the monetary authorities. The action by the Bank of England last Wednesday in relation to the London securities market was only the latest in a series of actions, by the monetary authorities of the industrialized countries, which provide a measure of their concern in this respect. And while this is going on abroad, our own internal position is such as to lead the authors of the current staff report on economic developments to use phrases such as "a questioning mood," "business prospects... being reappraised," "the strength of demand...undergoing fresh testing," and so on. This kind of cyclical constellation--a strong, boom abroad and a moderation, at inflation-threatening just the kind of of boom tendencies here--is least, exports from this constellation which, by encouraging of imports into the country and moderating the movement to further adjustment in our country, should be favorable we desire. And this of payments in the direction balance happening. December witnessed fact what seems to be is in to virtually all qualified increase in our exports which, an surprisingly large; and the preliminary observers, seemed interpretations in very misleading figures for January--some exports at contrary notwithstanding-show the press to the that reached in was higher than level which, if anything, a we have had months in succession for two December. Indeed, for the full to the one projected at a rate close exports Trade Council balance-of the National Foreign year 1960 by weeks ago-that is, group at its meeting several payments
about $18 billion, as against a realized level of exports for the years 1958 and 1959 of around $16 billion. And on the import side, one must say of the results suggested by our advance indicators for January that the drop in imports was so considerable as to be almost too good to be true, in the sense that it will almost certainly turn out to have been temporary, so far as its magnitude is concerned, though hopefully, not as to its direction. As I suggested lasttime, there is no reason why one should always hasten to discount good news when it comes, particularly when the news is what one would have expected on the basis of what I have described as the changing cyclical constellation as between ourselves and our principal trading partners. But at least two further comments would seem to be appropriate. The first comment is one of common caution. Even if we do reach and maintain the levels of exports and imports indicated by the projection of the National Foreign Trade Council balance-of-payments group to which I referred a moment ago, we shall still be running an over-all deficit of between $2-1/2 to $3 billion. This is better than the $3. billion deficit of $3.7 billion deficit of 1959, but it is still not 1958 and the by far. And we shall not succeed in keeping the good enough these limits if there is any relaxation in deficit even within efforts, on all fronts, to keep ourselves sufficiently our competitive to be able to profit from cyclical constellations which we have been profiting recently. of the kind from of clarification of the state The second comment is by way reference to the policy actions I have just made. It has ment Committee if the cyclical to be considered by this that will have being forecast in some in a way that is constellation develops boom abroad, with correspond a position of very strong quarters: own internal economic there, while our high interest rates ingly I wish to make The point into clear recession. situation moves in the name of to be expected that is that it is not here authority of a competitive" the monetary "keeping sufficiently deficit should deprive evidencing a balance-of-payments country of action regardless and all freedom itself of all flexibility situation, and the domestic economic is happening to of what to be. These position happens what its reserve of regardless weigh when will duly which this Committee are considerations to offer only Here I should like comes to do so. the time that bear on the subject. from recent statements two quotations England. I the Bank of Cobbold of is from Governor One position can the British reserve remind you that need hardly with our own fragile, in comparison described as only be statement that this is the and yet reserve position; massive 12 of this year: made on February Governor Cobbold
"...With the much greater stability of the exchanges in the past year or two, and with increasing freedom of trade and currency movements, comparative interest rates have become somewhat more decisive, both in shifting short-term investment from one country to another, and perhaps even more important, in making borrowing cheaper in one market than another. "It seems to me that we should learn to live with move ments of this sort without taking them too tragically. Of course it becomes inconvenient if interest rates are too far out of line for too long, and this must always be a consideration in the mind of every monetary authority. But I do not think it should be the dominant consideration, or that we should be in too much of a hurry to 'keep up with the Joneses' in raising or lowering interest rates. Where there is a conflict between these 'overseas' arguments and the 'domestic' arguments for interest rate changes, I would rather see some resort to use of reserves than a slavish following of interest rate movements made by other countries for their own reasons." (I think it is worth adding, at the same time, Governor Cobbold's next sentence: "On January 21, however [the date Bank rate was raised to 5 per cent], there was no such conflict, and both 'domestic' and 'overseas' arguments pointed the same way,") is from a letter which the Chairman sent The other quotation Senator Javits. This was in response to on February 19 last to a letter from the Senator which asked the Chairman to comment on statements that had appeared in a much-discussed article certain the New York Times, suggesting that a very serious conflict in goals of economic policy, and in existed as between certain because of our balance-of-payments position "a particular that in the near future would be allowed to drift into U. S. recession Government would be afraid to act severe unemployment because the the Times article, "would against it," "This," said vigorously an aggressive anti-recession action-chiefly come about because bring on the feared run on gold. This easy-money policy--could will be limited by the country's freedom of action domestically world currency." To this part fact that the dollar is a reserve the Chairman replied as follows: of Senator Javits' letter, position of the United international reserve "The to permit 'freedom of is comfortable enough States action' in case of a recession. The balance of is not now situation in the next.recession payments depend to a large extent because it will predictable, on conditions then existing abroad. A temporary en payments deficit, should it occur largement of the to the process of not be a permanent setback need adjustment.
"What is needed today is not so much to discuss ways to meet a hypothetical dilemma as to see to it that we continue to follow policies designed to ensure the domestic and international financial equilibrium of the United States, so that the dilema will not arise," Mr. Hayes presented the following statement of his views with re spect to the business situation and credit policy: While we may face difficult problems today in the matter of determining operating procedures and the form of the Committee's instructions, it seems to me that our decision as to credit policy itself should be relatively easy, since I can see no basis either in the business situation or in credit conditions for any substantial policy change. Such pessimistic views as have been expressed by some busi nessmen and business economists seem to reflect disappointment over the actual course of events as contrasted with earlier exuberant expectations; but there is no evidence to suggest that 1960 will be other than a prosperous year, with an upward trend in the economy through most of the year. Consumer spending will be of key importance for the strength and duration of the expan sion. So far retail trade figures are very satisfactory but not spectacular. Construction prospects continue good, aided by a somewhat increased availability of mortgage funds and a leveling of mortgage costs. Revised data now show that inventory inventory liquidation in 1958--and accumulation in 1959 exceeded further accumulation may proceed at a more this suggests that rate than was expected at the end of the steel strike, moderate inventory-sales ratios are still low. Plant and even though should be an area of gradually increasing equipment outlays there is little evidence of any widespread upward demand, but spending plans. Moderation in inventory revision of such out of spending for fixed capital should building and phasing in stretching out the boom and moderating any subsequent result cyclical downswing. rather satisfactory. The developments also have been Price some extent reflect the the stock market may to decline in views with respect to creeping emergence of some less fatalistic indices have been and wholesale price inflation. Consumer have tended to decline. and sensitive prices generally stable, on the loan side outstanding feature bank credit, the As for strength of business February was the three weeks of in the first in a variety of sectors, rose more than seasonally loans, which line with the roughly in a January performance as compared with further reduced, with liquidity has been pattern. Bank seasonal to the 69 per cent figure ratio in New York back the loan-deposit
of November and December and outside of New York at a new high for recent years of over 59 per cent. In view of this sustained pressure on liquidity positions, the January-February drop in interest rates may prove to have been only a temporary respite. Much will depend on the pattern of corporate financing. Aggregate credit demands on the capital market from corporations have remained surprisingly light so far in 1960, but this picture could of course change quite rapidly. Because of the distribution of reserves and an unexpectedly large bulge in float, the feel of the money and credit markets has recently been comfortable in spite of the squeeze on liquidity. In my view the aim of open market operations over the next three weeks should be to keep about the degree of pressure on the money and short-term securities markets as now exists, which we should bear in mind is rather less than the pressure which would ordinarily be associated with net borrowed reserves of $400 mil lion or more. I would hope the Manager would be given ample latitude to deal liberally with the pressures and churning usually encountered over the middle of March. If for this purpose net borrowed reserves are permitted to average well below the $400-500 million level I think no harm would be done, since I would look favorably on a tendency for the money supply to resume some moderate growth in the next month or two. Repurchase agreements might prove to be the best vehicle for releasing funds needed at the mid-March period. At this point I should like to make just a brief observation on the Committee's current efforts to find a more "objective" and "quantitative" guide for the Manager's use. I can well understand this search; and certainly it has the reasons that have prompted our attention on some of the problems been useful to concentrate statistical data on total involved and on some of the available the money supply. But I think the distinction reserves and between the kind of data to which the needs to be kept in mind close attention at each meeting and Committee can and does give practical working guide to data that might provide a the kind of On the latter score, I for day-to-day operations. the Manager couched in terms of "the believe that our usual instructions or "more" or "less" are sufficiently same degree of restraint" the Manager to react to changing and make it possible for precise a way as to carry out fully developments flexibly and in such As we have often the Committee's instructions. the spirit of the daily conference of reports, including noted, our system has ample opportunity to so extensive that each member call, is from the Committee's he sees any deviation the Manager if inform be giving up a highly advantageous I think we would instructions. to attempt to years, if we were developed over many technique, mathematical terms. in some very exact couch the instructions
Of all the tested statistical guides we have available, net borrowed reserves are still probably the best, but this guide is certainly a long way from being sufficient by itself. In the coming period, for example, I should think that the volume of borrowing should not rise much above three-quarters of a billion dollars, even over the tax date, and that if it were to become larger, the Account should supply reserves unless (as sometimes happens) the money market should be easy or quite comfortable at the time, with Federal funds occasionally trading below the discount rate. Although most of March will represent a so-called "free period" from the standpoint of Treasury operations, I can see no basis whatever for considering a discount rate change at this time. As for the directive, I think that we should adhere to the practice of changing it relatively infrequently-say two or three times a year--with the understanding that within a given directive there is room for different shadings in the degree of ease or restraint, and that the instructions to the Manager embodied in the minutes (and reported in the policy record) should continue to reflect these minor variations. On the other hand, even though we decide, as I think we should, not to change our basic credit policy at today's meeting, I would like to see us take advantage of the annual meeting to what I believe would be an improvement in the directive, effect of clause (b) into two parts: a new i.e., the separation embody objectives to which we would wish to clause (b) to on a continuing basis, throughout the business cycle; adhere new clause (c) which would be reserved to take account and a cyclical economic conditions and policy purposes of changing the same time be sufficiently broad so as not to but would at changes for mere variations in shading. The require frequent (d). Thus, the new clause (c) would be relabeled present would include the following clauses: directive the supply of funds in the market (a) to relating to needs of commerce and business, sustainable economic growth and (b) to fostering opportunities and the conditions expanding employment conducive to both, of reasonable price stability of moderate credit maintaining a policy (c) to restraint that will support current expansionary while guarding against a developments in the economy of inflationary pressures, and renewed outbreak of the to the practical administration (d) Account ....
Mr. Erickson said that construction contract awards in the First District in January were 3 per cent under the previous year, slightly less than the national average. Public works and utilities were down 68 per cent, reflecting one large contract in January 1959, but nonresidential contracts were up 61 per cent from January a year ago. Residential contracts were up 17 per cent from January 1959 and January 1959 was 32 per cent ahead of January 1958. The number of residential units in January was up 25 per cent, which might reflect open weather in parts of the area and represent a borrowing from the season. For the first seven weeks of this year, department spring cent ahead of last year. Sales at downtown store sales were 4 per whereas in 1959 their sales were stores were also up 4 per cent, that the trend to suburban which might suggest equivalent to 1958, stores had turned. weeks of this in the first eight also said that Mr. Erickson an increase of compared with were down $83 million, year bank loans banks were net last year. District in the same period $3 million but they had past three weeks, funds for the of Federal purchasers Borrowings averaged more than before. discount window not used the 81 mutual savings survey of The January and $25 million. between $20 showed savings deposits, cent of total about 56 per banks, holding cent, the lowest was 4.8 per in January deposit increase that the at the rate in January, years. Withdrawals in over two rate of gain purchase one-year to included withdrawals per cents probably of 12
bills, which were popular with some people in the district. The savings banks' mortgage position was up 11 per cent from a year ago; 67 per cent of their deposits were in real estate mortgages, A representative of one of the largest banks said recently that he estimated his bank would be able to loan only one-half as much this year as last year due to the decline in deposit growth and also due to the fact that in 1959 the amount the savings banks could put in mortgages in Massachusetts was increased and advantage was taken of that opportunity last year. The banks were getting about a 12-1/2 per cent payoff on present mortgages, however, and that would serve as a basis for further extensions of mortgage credit. Mr. Erickson said that for the next three weeks he would continue a policy of watchful waiting. He foresaw that there might be a difficult time over the 15th of March. While he would not favor the discount rate at this time, he would change the directive. changing was rather intrigued by parts of the In the latter connection, he of Mr. Hayes. Pending thorough study of that proposal, proposal soon keep the present form of directive however, he would just as for clause (b) along the lines suggested by Mr. and adopt language would provide for 9 meeting, which at the February Balderston growth in economic to fostering sustainable operations with a view against excessive credit and employment while guarding activity for the next three weeks, As to open market operations expansion. leave it to restraint. He would same degree of would keep the he
the Manager in this period to conduct operations so as to maintain that degree of restraint, Mr. Irons said that the Eleventh District continued to enjoy the generally high level of economic activity that had characterized the area for the past several weeks. However, there were some sectors of activity within the total that might be said to be less vigorous. These included petroleum, with a tendency to build up excessive stocks, and construction, which was off a little more than seasonally. There was the continuing situation in regard to the defense plants, and employment in the plants, and there was the usual uncertainty at this season of the year regarding agriculture, especially in view of unseasonal weather recently. financial picture, Mr. Irons said that the large Turning to the tight credit position and a low especially in Dallas, showed a banks, only a moderate decline in They had been showing level of liquidity. of bills and other short because they were out investments, possibly There was to sell other issues. and were reluctant term investments had been an increasing deposit decline. There a substantially larger purchase of short being used for the of reports of deposits number drawing on their country banks and of Government securities term were general enough to correspondents. Reports balances with city out of the might be shifting that money suggest the likelihood had been fairly strong While there at least temporarily. district, latest week Bank, in the from the Reserve for borrowing requests
borrowings declined somewhat. This might have been attributable to a bit of easing in the money markets and the fact that on some days Federal funds were selling below the discount rate; it might also reflect the fact that the Reserve Bank had held discussions with those member banks that had been borrowing in substantial amounts and rather continuously. In summary, Mr. Irons said, the psychology of businessmen and bankers in the district was less strongly optimistic. They were less inflation minded, not pessimistic but not as optimistic as six or eight weeks ago. Turning to the national picture, Mr. Irons referred to the shades of uncertainty at the present time. The picture was not what had been expected. Looking just at the 15-day period ahead, he came out in his thinking along the following lines, Instead of continuing the existing degree of restraint but making any inadvertent errors on the siae of ease, he would favor a conscious but moderate lessening between now and the next meeting of the Committee, having of restraint demand for funds which situation and the seasonal in mind the economic That lessening of restraint the tax payment period. was tied into such as average net borrowed be reflected in relationships might from $275 to $325 million. perhaps to the range reserves dropping rate at least be under the discount funds rate would The Federal on short-term upward pressure and the seasonal of the time, part that pressure. way as to lessen in such a largely met would be rates
He would look on this period as a sort of testing period to see what might happen under these circumstances with a little lessening of restraint. Mr. Irons noted that the position he had expressed would argue for a change in the directive, but he saw no reason to change the discount rate at this time. Language for the directive along the following lines would be illustrative of his thinking: The Committee instructs the Account to engage in operations in the open market so as to lessen restraint and pressure on bank reserves moderately, to avoid seasonal credit factors distorting the pattern of short-term rates, and to test the market's response to a moderate lessening of restraint by maintaining average net borrowed reserves at a lower levelperhaps in the range of $275-$325 million, and by influencing market conditions so that the Federal funds rate will tend to fluctuate moderately below the discount rate and other will tend to move within reasonable range short-term rates of the discount rate. The Account is expected to assume leeway to meet day-to-day situations of un sufficient tightness or ease, when necessary, as reflected anticipated by the tone and feel of the market. the problem of the directive, Mr. With further reference to somewhat the same lines as he had been thinking along Irons said that statement of the kind suggested he would regard a Mr. Hayes. However, than a directive to forth objectives, more by Mr. Hayes as setting the relating of had continually as objectives the Desk. The Committee commerce and business to the needs of funds in the market the supply of sustainable economic growth and employment and the fostering of be setting forth Committee would respects, the In these opportunities.
something in the nature of an objective that would seldom be changed. Within that framework he would issue at each meeting a detailed and specific directive such as he had suggested. Realizing that a large group of people around a table could hardly develop such a directive, he would suggest a procedure under which, after the go-around, the Chairman would summarize and present a consensus on which the members would agree. Then the Secretary of the Committee, working with the Manager of the Account, would draft the specific directive on the afternoon of the meeting. This would be subject to the approval and confirmation of the Chairman of the Committee and would be the directive for the next three weeks, subject to ratification by the Committee. Anyone objecting could bring the matter up in the next three weeks, but it would take a majority of the Committee to sub the difference. He felt that in practice the differences scribe to would be so minor that there would be no problem. The procedure problem, and at each meeting the Manager would meet an administrative Account would be given a specific directive. of the activity continued at Mangels said that Twelfth District Mr. levels. At this time of year, a decline in employment satisfactory but, except for defense-related would normally be expected, figures January almost across the was an employment increase in areas, there plants continued to decline, Although employment at aircraft board. Coast States in January was 4.1 per cent, unemployment in the Pacific cent below December 1959. as in July 1957 and .3 per about the same
Construction contracts awarded in January were down 16 per cent from a year ago, mostly in the residential field, reflecting adverse weather and mortgage market conditions. Lumber production and new orders improved in the first half of February, partly as a result of increased exports to Great Britain and Commonwealth countries. Department stores sales in January and into February showed increases against year-ago figures, but automobile registrations in California showed a sharp drop in early February. Grapefruit growers were netting 80 cents a box in California and 50 cents in Arizona, as compared with However, prices for winter vegetables were up. $3.50 last year. On the financial side, Mr. Mangels said that loans of report increased only $23 million in the three weeks ending ing banks two loans of $28 million and $5 million, respec February 17 despite funds were about even during tively. Purchases and sales of Federal banks expected to for the coming week district the past week, while buy about $250 million net. In the three weeks ended February 17, from their portfolios. $220 million of securities the banks sold about relatively high, although the Reserve Bank continued Borrowings from time and demand deposits, they had been. Both not as high as a decline. During January, former, continued to show particularly the California increased associations in savings and loan accounts at share that some public Francisco bank reported One large San $322 million. running off bill holdings. treasurers were general evidence to sense fairly said he continued Mr. Mangels there would tax period approaching, the March 15 tightness. With of
be some further demands for credit. That would likely have an effect on short-term rates, which in turn might cause some further specula tion regarding the possibility of increases in the discount rate and the prime rate. While the economy was operating at a satisfactory level, activity was not so strong as to justify a change in the discount rate. With regard to operations of the Account during the forthcoming period, he would favor net borrowed reserves of around $300 million, and he would not be unhappy if net borrowed reserves fell to $250 or $275 million. As to the directive, he would go along with language such as suggested by Mr. Balderston at the February 9 meeting. While he thought that Mr. Hayes and Mr. Irons had made good points, their suggestions would require more time for study than could be given to them today. that total Ninth District employment in Mr. Deming reported of a year earlier, in contrast to a January was .5 per cent ahead cent. In part, the lesser gain in the national gain of 1.6 per than usual seasonal drop in farm district reflected a sharper at a record high for employment was employment. Nonagricultural employment had not but seasonally adjusted manufacturing January, July. With the growth level of last reached the pre-strike quite high even though was still fairly labor force, unemployment of the Cities the un In the Twin year-ago levels. declined from it had contrast to 6.3 per 5.3 per cent, in rate in January was employment over the next to rise was expected earlier. Employment cent a year
few months, but the increase forecast between now and May was less than the usual seasonal amount. Continuing, Mr. Deming said that Anaconda had settled its copper strike in Montana after a long fight. It was reported that the settlement was more favorable than those negotiated earlier in some other areas, costing perhaps about two-thirds as much over the next two and one-half years as in other cases. New techniques in mining, stimulated by rising labor costs, had sharply reduced copper industry employment in Montana over the past three years. Even with production holding at about the same level, employment, when everyone got back to work in the mines, smelters, and refineries, apparently would be about 8,500, in contrast to 13,500 three years ago. The Minnesota personal income figure for January was up slightly from December on a seasonally adjusted basis, with the gain fractionally smaller than that registered for the country. Relative cent, about a third that for the a year ago, the gain was 2.3 per to part the farm income situation, but that nation. This reflected in the district simply had not recovered fully was not the whole story; businessmen seemed to Expectations of from the steel strike lows. than was the case six or eight have become a little less fulsome there seemed to be no feeling that the economy weeks ago, although would not even characterize leveling off. He turning down or even was it might be described, as "cautious" optimism; the current feeling and recognition that this year perhaps, as "realistic" appraisal,
might be better than any previous year, without being quite as good as expected earlier. Expectations of the general public seemed quite optimistic, as indicated by the results of a Statewide consumer out look survey made by a Minneapolis newspaper in the second half of January. Mr. Deming said that the points he had mentioned for the district, taken in conjunction with those made for the nation as a whole, including the existence of excess capacity and relatively high unemployment, seemed to add up to an economic picture that caused one to be less concerned about the development of unsustainable expan sion and inflation, at least in the short run. He agreed with the view that the Committee might well change the directive at this time and that it might follow a somewhat more liberal policy in supplying reserves. He liked the phrasing Mr. Irons had used: conscious lessening of restraint. He saw no need to change the discount rate at this time. he would be agreeable to the wording of the directive, As to Mr. Mills had been suggesting recently. language along the lines that sustainable economic growth and This would provide for fostering to be alert to while continuing employment opportunities expanding With reference to of inflationary credit expansion. the resumption as had been suggested by form of the directive such changes in the that be was sympathatic Irons, Mr. Deming indicated Messrs. Hayes and suggestions needed more study. but felt that the
Mr. Allen said that, all things considered, he regarded the business situation as satisfactory at this time. Business psychology was less ebullient in some respects, a desirable development. It seemed clear that sales of consumer durables, particularly automobiles, were not meeting earlier expectations. Inventories of new cars would probably cross the million mark today or tomorrow, and production would doubtless be geared to sales from here on. A psychologically depressing factor in Detroit was that the car manufacturers were finding their break-even points higher as the lower-profit compact cars became a higher percentage of output. However, the basic trends in the economy, as evidenced by income and employment, remained strong. In January, personal income increased from December nationally and was estimated to be 6.6 per cent above the same month of 1959, a gain larger than the 5.9 per cent rise reported for the entire year 1959 over 1958. It was also worth noting that the January increase was exclusive of the rise in the Social Security tax from 2.5 to 3 per cumulative wage and salary income cent. Also, individuals whose pay the Social Security tax once $4,800 during 1959 began to exceeded personal income was in fact 1960. Thus, the rise in again in January by the foregoing figures. greater than indicated to rise on a that employment continued Mr. Allen noted in the Seventh District basis through January, seasonally adjusted in the nation 16 largest centers Two of the as well as nationally. than 3 per cent current as having less classified as of January were
and prospective unemployment. One of them, Milwaukee, is important in the production of capital goods, and it appeared that activity in the capital goods sector would continue to rise. Home building was showing more strength than anticipated. Producers of various textiles, carpets, tires, farm machinery, and construction machinery had raised prices from 1 to 5 per cent since the start of the year. A National Industrial Conference Board survey of consumer buying intentions, released last week, showed that individuals were highly confident and planned to increase their purchases of houses, appliances, and automobiles very substantially over year-ago levels. The head of a factory-locating service reported that his firm's backlog of work was the largest in history; from past experience, he estimated that capital nationally would be about 15 per cent higher this year expenditures than last. banking statistics showed substantial Mr. Allen commented that all reporting banks in Business loans for credit demand in February. the three weeks ended February 17, the country rose $427 million in a year ago, and the in the like period times the increase several most of the loan growth was the same, with Seventh District picture the Chicago money market banks. in economists and he thought that Mr. Allen said Summarizing, recent develop did not interpret the Seventh District businessmen in Instead, they letdown in the economy. as marking a general ments ideas of a from the extravagant their sights moderately had lowered
few months ago. Business and investor psychology seemed to be the major factor contributing to the uncertainty in the short-term out look. He doubted that any further worsening in this factor was in prospect, and he believed that the best policy was to wait and see. Therefore, he felt that monetary policy was, and had been in recent months, about as close to right as could be expected. The decision of a few weeks ago to refrain from raising the discount rate had proved to be correct, at least thus far, and that move could still be made whenever conditions might justify. Based on his view of the business picture, he would do nothing at this time; that is, be would not change either the directive or the discount rate, and he would not seek to vary the degree of restraint that had been achieved. As to the directive, Mr. Allen said that he would defer further of operating policies, because it was his comments until the discussion the directive could well be that the operating policies and view at least as a transitional move. combined in one statement, no changes in the Tenth District Mr. Leedy said there had been worthy of recording in detail. February 9 meeting that seemed since the Based on time had continued. referred to at that The trends he centers, with one in the principal reports, employment preliminary loans continued to grow, favorable. Business exception, continued at a high level. Bank were still from the Reserve and borrowings had not been at first of the year sales since the Department store but some of that the rest of the country, a level as in as high
probably was due to severe winter weather. Mr. Leedy said he subscribed to the view that in the period immediately ahead, when there would be some need for additional re serves, they should be supplied. He would attempt to feed in a modest supply of reserves without undertaking any sharp change in the existing level. While no one was completely satisfied with net borrowed reserves as a yardstick, apparently it was necessary to make some use of it, and he would not be concerned if the level should drop down to around $300 million. He would not want the Federal funds rate to get far below the discount rate and remain there long, but he would feel his way in the direction of feeding some modest additional amount of reserves into the banking system. Mr. Leedy said that, although he would not suggest doing it should be given to the elimination now, he felt that consideration ordinarily approved at each meeting. In of a directive of the kind contained a great deal that was in the his opinion, such a directive and little in the way of exact area of Committee responsibilities While he would have the period until the next meeting. guidance for had suggested, he such as Mr. Hayes objection to a format no strong was served by repeating every the feeling that little purpose had continuing responsibilities. that were the Committee's time the things in the format of he would make no change the time being, however, For language along the (b), he would adopt directive. For clause the had suggested, or perhaps Mr. Mills or Mr. Balderston lines that
some combination, that would provide for operations with a view to fostering sustainable economic growth and expanding employment op portunities and to maintaining a policy of modest credit restraint. He would not suggest that there be any change in the discount rate at this time. Mr. Leach said recent and current reports indicated that Fifth District business activity was following fairly generally the pattern of national developments. The substantial expansion in January had been followed by some moderation of earlier estimates of the upsurge in coming months. Reports from the textile industry were representative of the change in sentiment. In January, order backlogs in the industry were very large and man-hours worked indicators gave no signs of current increased; these and other of weeks, however, there was same weakness. In the past couple have topped out. Loans of district that the textile boom may talk seasonally during the increased more than weekly reporting banks large member banks were virtually two weeks, but officers of past been strong, it had loan demand had in saying that while unanimous the first of the year. had forecast around as strong as they not been to make a few he would like Leach said that Continuing, Mr. Committee and procedure of the to the general with respect comments he hoped would advance what York Bank, and to the New its directive there had been the situation, As he sensed a helpful suggestion. be
some difference of opinion as to what extent the directive was intended to serve as a statement for the policy record and as to what extent it was intended to serve as a real directive to the New York Bank. Also, he was not convinced that the procedure now followed, as outlined in the memorandum of October 9, 1959, from Chairman Martin to the Committee, offered the best solution of the voting problem. Therefore, he wished to offer for consideration a three-part program which would follow the go-around. The program would involve, first, the adoption of a short statement of general policy which would correspond in general to what in the past had been included in clause (b) of the directive. There would then be a recorded vote of members of the Committee on this general policy, which would be treated in the policy record as general policy and not as a directive. Ordinarily, he would expect policy to be renewed until there was a change in general this general economic conditions. There might be, say, four or five changes a year, were in clause (b) of the directive in 1956, 1957, and 1958. as there policy at this particular meeting His recommendation for general suggested at the February 9 meeting for clause would be the language for "fostering sustainable which would provide (b) of the directive, while guarding against economic activity and employment growth in he felt that the policy expansion". In passing, excessive credit had not remained better if the directive would have been record
unchanged since May 1959. The directive might have at least shown that the Committee was aware of the uncertainties created by the steel strike. Some might consider this of little importance, but he did not agree. Outside appraisal of Committee actions during the last nine months would be based to some extent on the published directive. Mr. Leach next suggested that, having adopted a general policy, it would then be in order for the Committee to get more specific; that is, to indicate whether the Committee desired for the ensuing three weeks the same degree of restraint, more restraint, or less restraint. The Chairman would present the consensus as he using such expressions as a little less or a little saw it, perhaps resolving doubts, etc. If the Committee agreed that more restraint, the Chairman had accurately expressed the consensus, the Chairman Committee an opportunity to record dis would give members of the senting votes. said that his recommendation for At this point, Mr. Leach would be a little less this particular meeting specific policy at recognize the change maintained. This would than had been restraint permit more growth outlook and would in the economic that had occurred in the be concerned if developments He would not in the money supply. again, for to him Committee to tighten should cause the near future admission of a rather than be evidence of flexibility that would mistake.
Under his proposed program, Mr. Leach said, the next item in order of consideration would be the directive to the New York Bank, which would be treated as an internal matter and would not be referred to in the policy record. The directive could be divided into a continuing directive embodying standard instructions and a current directive which would contain both the general policy and the more specific instructions to which he had referred. In other words, it would embody what had been agreed upon as to general policy and then cover specific policy for the next three weeks. On the latter, his recommendation at this time would be for a little less restraint. With regard to the question of improving instructions to the Account Management, Mr. Leach said he was sympathetic to any and all efforts to develop better measures for expressing the Committee's intentions. No one would welcome more the development of a single tangible indicator to replace the "feel of the market" approach. So far, he had found none that seemed practicable for day-to-day operations, but he would favor further study of the suggestions that had been made, and any others that might be made. In the meanwhile, for "feel of the market" Committee would substitute he hoped the the idea of careful analysis expression that would convey some other it. The best that occurred rather than a "feel" for of the situation to all market factors," the moment was "giving consideration to him at better term. Another could suggest a someone else but he hoped outside the System was "give expression subject to misinterpretation
the Manager of the Account latitude." Of necessity, the Manager must have latitude to exercise judgment in the day-to-day execution of the Committee's instructions. This was not to deny, of course, that the Manager's job was more difficult at some times than at others. In conclusion, Mr. Leach said that he would not favor a change in the discount rate at this time. Mr. Mills said that movements in the economy since the February 9 meeting had served further to strengthen his belief that the System's credit policy had been, and continued to be, too severely restrictive. Moreover, the very sharp and continuing contraction in the money supply was a clear warning that if the System was to make a contribu tion to economic growth and stability, it was imperative that some relief be given to the reserve positions of the commercial banks, subjected to heavy pressure going back over many which had been be well advised to move toward months. Accordingly, the System might level of negative free reserves, but in doing so ap a $300 million period. This would guard against proach that level as a testing was in progress a major reversal any impression that there inspiring activities in in turn permit speculative policy that would of System securities market. the Government said he had no brief directive, Mr. Mills With respect to the should move except that the Committee any particular wording, for inflation out of lift the shadow of revision that would quickly to a part of clause (b). the first
Mr. Robertson stated that his comments probably would fall somewhere in the middle of the range of those that had been expressed. In the light of the comments by Messrs. Noyes, Thomas, and Marget, he would favor using the forthcoming seasonal situation to inject reserves into the banking system in the hope that this would expand the money supply. As he understood it, a short-term period was involved, and he would fully contemplate moving back in the not too distant future. For the moment, however, he would concur in the view of most of those who had spoken this morning. With reference to the form of the directive, Mr. Robertson said that he would suggest eliminating from the present directive clauses (a), (b), and (c). He would eliminate clause (c) because he was not sure what it meant, and clauses (a) and (b) really repre sented continuing policy rather than a directive to the Manager of the Account. Turning to Mr. Hayes' suggestion, Mr. Robertson sug gested incorporating his paragraphs (a) and (b) into a continuing lieu of the present directive, he of Committee policy. In statement a statement such as Mr. Hayes had labeled paragraph would substitute be called the thought should preferably directive, which he (c). The "instruction," would give the Manager of the Account authority to a degree that would support current moderate credit restraint to against a economy while guarding in the expansionary developments That would be the of inflationary pressure. renewed outbreak period, after which for the ensuing three-week specific instruction
it would be amended. In the policy record, he would have the con tinuing policy stated once, and then, for the record of each meeting, just the changes in clause (c). That would provide a picture of how the Committee had changed its instruction from time to time as economic conditions varied, and it would carry out the need for issuing instruc tions to the Manager in a way that would be more readily understood by the reader of the policy record. The reader would not have to go through a long dissertation on instructions, some permanent and some not meaningful, Mr. Robertson indicated that he would defer other comments until the Committee dealt with the question of continuing operating policies. Mr. Shepardson said that the economic review indicated con tinuance of strong underlying factors throughout the economy. Expectations were not as exuberant as they were earlier, which be situation, and there was still thought was a wholesome and healthy It had been mentioned that retail sales a strong outlook ahead. bad weather might have had as high as expected, but were not quite some effect. that there had been said it concerned him Mr. Shepardson not only a lack of growth but actual curtailment in the money supply. growth, there must be sound was to provide for sound If the System System should look for opportunities the money supply. The growth in some of that growth without help to provide for when it could
undesirable effects. For that reason, and in view of the general tone at the present time, it seemed to him that the Committee could relax pressure. He rather liked the way Mr. Rouse had put it-relax the restraint--rather than developing ease. The System still needed to maintain a posture of restraint, but it was in position to relax for the immediate future and test the results. Accordingly, he would favor the suggestion made by several others of looking toward a target in the area of $300 million of net borrowed reserves in the forthcoming period. After stating that he would not favor a change in the discount rate, Mr. Shepardson turned to the directive and said that, not knowing how fast the Committee could proceed on extensive changes, he would in a change at this time along the lines suggested by several concur as to provide in clause (b) for fostering sustainable growth persons so in economic activity and employment while guarding against excessive real merit, however, in a revised approach credit expansion. He saw for a separation of the Committee's to the directive which would provide section a relatively long-term objectives, and in another continuing when there was would be changed infrequently of policy which statement The third section, it and clear change in direction. a definite than heretofore short define more specifically to him, should seemed In summary, he degree of ease or restraint. run variations in the the third part that with a statement in three categories contemplated time. This would from time to reflect variations would more accurately
avoid getting into a position of having a statement continued for a year, or many months, under varying conditions. He would like to study such an approach further, but for the moment he would suggest a change in clause (b) along the lines that he had mentioned. Mr. King said that the continuing trend of the money supply to decrease, or at best remain relatively steady, was a clear indica tion of the cumulating pressure of the Committee's policy of restraint. In his opinion, action to effectuate a reversal of this trend of the money supply was desirable at this time. He would not recommend any change in the discount rate. He thought it was in the right place from a technical viewpoint, and it certainly would not be appropriate to talk of a decrease with the international picture in mind. He would recommend a change in the directive along the lines of Mr. at the February 9 meeting and would hope that Balderston's proposal a target figure of about $200 million of the Committee might adopt suggest a figure that low because net borrowed reserves. He would four weeks ending February 24 averaged net borrowed reserves for the he would have been $500 million, the average had million. If $370 would be all right. However, with felt that a target of $300 million a target of $300 million million, he felt that an average of $370 reduction in actual If any to the problem. be a timid approach would would require a target he believed it pressure was to be accomplished, the $200 million range. figure in entering a new era System might be that the Mr. King suggested Reserve of the Treasury-Federal Since the time monetary policy. of
accord, the System had struggled with a money supply too large for the economy, but there were increasing indications that the country had pretty well grown up to this inflated money supply. In the past, the System constantly had to be on guard against further expansion, but it would now have to become more sensitive to the other side of the problem as well. As to the directive, Mr. King suggested that the problem was primarily one of what the Committee did rather than how the directive was worded. On balance, he was rather inclined to stay with what had been tried and found workable. At the present time, he would suggest a change in clause (b) along the lines proposed by Mr. Balderston at the February 9 meeting. Mr, Fulton reported that business activity was still at a high the Fourth District. There seemed little basis for pessimism. level in business would remain reasonably good, with Expectations were that not looking for any unsustainable profits, and businessmen were fair 80-85 per cent of rate of production of around highs. In steel, a which would afford as a whole was anticipated, for the year capacity for production of was now The prediction good and steady employment. higher tonnage was being tons for the year, and about 125 million in the mills. reflecting improvements fewer people, obtained with and customers quite well satisfied, of customers seemed Inventories number of days' inventory Some had cut back the were not stockpiling. A check prompt delivery. the mills for on and were depending on hand
indicated that softness in the appliance industry seemed to center largely in washing machines and home dryers, which were in an over inventoried position. Otherwise, the appliance industry as a whole was looking forward to a fairly good year. With new car inventories at around one million, production of parts was being cut back persistently in the Fourth District on a temporary basis and shorter workweeks also were in prospect. It had been indicated that auto mobile manufacturers would have their first showings of the new 1961 models a little earlier than usual. Continuing, Mr. Fulton said it appeared that building and improvement plans of manufacturers were going along about as pro jected. One recent survey showed that 92 firms were expecting to increase expenditures 15 per cent in 1960 and 25 per cent in 1961, with emphasis on labor-saving machinery. As much as possible of the financing would be from self-generated funds. Building activity was holding up well in the district. The only thing of real concern at this time was the unemployment picture, which had not improved improvement in business. Unemployment was commensurately with the degree in unskilled workers and women, centered to a considerable Total bank loans skilled workers was strong. while the demand for to be no real rush although there reported up from last year, were the past three weeks, however, deposits were down. In for credit, and 4 per cent of the only from 2 to borrowing had averaged member bank was quite low. System total, which
Turning to policy, Mr. Fulton expressed the view that the Desk had done a good job. He felt that restraint was warranted. Possibly it was not warranted to the extent that it had been earlier, but he would not like to see any precipitate easing. A policy of meeting the requirements of the period immediately ahead would be appropriate, without any real easing. He would not favor doing anything with regard to the discount rate at this time. Mr. Fulton felt that the directive could well be changed along the lines suggested by Mr. Balderston at the February 9 meeting. With respect to Mr. Hayes' suggestion, he was a little concerned about the wording of the proposed clause (c). This would call for guarding outbreak of inflationary pressures, and in view of against a renewed pressures from that area he did not think price increases and other pressures actually had been allayed. Mr. Hayes' that inflationary that the hazard of a renewal would indicate to an outsider language that the System should look pressures was something of inflationary hazard was still present. Fulton felt that the again, while Mr. at view of the considerable speculation Mr. Bopp said that in inventories as business would accumulate recently as to whether Philadelphia Bank of the year, the expected at the turn rapidly as of metal products. survey of local manufacturers had made a spot considered their most of the manufacturers revealed that This survey They had and somewhat unbalanced. too high present inventories were of others. Inventories items and surpluses of some shortages
accumulated rapidly in November and December in anticipation of a large outflow of incoming orders, but final demand appeared not to be as great as expected. Some firms, therefore, were now less opti mistic about 1960, although they still expected it to be a reasonably good year. The changed outlook suggested that firm would be trying to operate more economically by holding down their inventory require ments. Reserve pressures on the large Philadelphia banks had increased substantially, Mr. Bopp said. The combined basic reserve deficiency had risen in each of the three latest reserve weeks from a daily average of $12 million to $109 million. To meet the drain on reserves, banks had purchased Federal funds and, to a smaller extent, borrowed from the Reserve Bank. In the past three weeks, of Federal funds (excluding repurchase agreements) net purchases banks averaged $52 million daily; they had risen by reserve city of $3 million to purchases of $85 million. Borrowings from sales averaged $14 million. Borrowing from from the Reserve Bank had the past three reserve by country banks during the Reserve Bank averaged about $14 million. weeks also lessening of the felt that a modest to policy, Mr. Bopp As a change in the and that would be appropriate, degree of restraint Mr. Mills or the suggestion of the lines of the directive along He would not would be appropriate. of Mr. Balderston suggestion time. Offhand, Mr. discount rate at this favor a change in the
Bopp said, the suggestions of Messrs. Hayes and Irons contained appeal. However, he would like more time to think them through before the Com mittee settled on any basic change in the form of the directive. Mr. Bryan said there was nothing of particular significance in recent Sixth District figures. The Reserve Bank had made a spot check, principally among bankers but also a few businessmen and former directors in the principal cities, from which it appeared that there had been some shifting in sentiment and that optimism was less than it had been. On the other hand, the only real pessimism that was discovered, in New Orleans, probably related to the oil industry. All in all, there was nothing in the district that seemed visibly alarming, and by the same token there was no evidence of a hilarious boom. Borrowings from the Federal Reserve Bank remained high in total, but the Reserve Bank had had some relation to the System success in discouraging certain borrowers. Mr. Bryan agreed with Mr. Irons that the Committee, as a group, at each meeting. There to be able to draft a directive was not going Committee had indicated the mechanism so that when the must be some could be turned over directive it wanted, the drafting nature of the he would like to see the or persons. For the present, to some person the directive. As for more fundamental shadow taken out of inflationary drafting of the and how the of the directive changes in the format been a number of that there had handled, he noted might be directive during this meeting. interesting suggestions
Continuing, Mr. Bryan commented that what he would have said himself regarding the money supply and reserves had already been said. He then referred to his experimentation with the possibility that the directive might be issued in terms of a total reserve concept. As things worked out in February, actual reserves were more than $390 million less, on a daily average basis, than the center of the target he had suggested. If the target had been hit, he presumed there might have been somewhat less bank liquidation of securities, somewhat less of a rise in rates, and, he suspected, somewhat greater repayment of loans to the Reserve Banks. He did not wish to assert, however, that this necessarily would have been a wise result; it would have to be tested in the light of subsequent developments. At the same time, in the light of the money supply and reserve figures in comparison to last year and in view of total reserves being deeply under a trend line, he had some concern, particularly because he guessed that there had been somewhat more than a typical reduction in required reserves of the banking system in this period. System policy had more than offset the ease that would have occurred by this reduction in required reserves. he would like to experiment further with Mr. Bryan said that reserves and requested permis target in terms of total a possible a chart into the minutes of this meeting. sion to introduce that the chart would be incorporated Chairman Martin stated in the minutes. 1/ is attached to these minutes as Item No. 1. 1/ The chart
Mr. Johns said he would like to associate himself with the views expressed by Mr. Allen. He particularly liked Mr. Allen's method of expression, although the views stated were substantially similar to those expressed by two or three others. Mr. Johns realized that this established him as one of a relatively small minority. Continuing, Mr. Johns said he would prefer no change in the discount rate at this time, although he thought some argument could be made for at least a technical adjustment, especially in view of the fact that if the Committee continued to follow an even keel policy during periods of Treasury financing there might not be another opportunity to change the discount rate for quite a period of time. Later, the System might wish that the discount rate was up to or above short-term market rates. Nevertheless, as he had said, he would prefer not to take discount rate action at this time. he would suggest that if a need to change the rate should Instead, was pre-empting the stage, the become pressing while the Treasury Committee might be forced to re-examine the even keel policy. He to such a re-examination in any case. would not be averse Mr. Johns went on to say that if his own view on policy be no change in the suggest that there prevail, he would should quite sure that since he felt time. However, at this directive to revise it would seem appropriate would not prevail, this view policy. These way consistent with Committee the directive in some
comments did not mean that he had no interest in the longer-range problem regarding the format of the directive. However, he felt that the problem could be handled without relation to current Committee policy. After commenting favorably on the discussion this morning, particularly the part having to do with operating procedures and the form of the directive, Mr. Szymczak said he thought the economy was still on the expansionary side and the situation therefore was likely to develop into inflation. However, in view of the money supply and the seasonal situation, he felt that the Committee should ease its policy of restraint slightly at this point. To give an indication of the degree he had in mind, he would suggest net borrowed reserves in the range of $300-$400 million. He would not the discount rate at this time. As to the directive, favor changing the word "inflationary" should be it was his thought that perhaps of clause (b) otherwise might be included, and that the wording suggested by Mr. Balderston. He along the lines that had been "inflationary" stay in the directive prefer to have the word would as of now. that, as many had pointed out, the Mr. Balderston commented the February 9 to decline since apparently had continued money supply would be confirmed when the meeting. He assumed that fact Committee a matter of fact, the seasonally became available. As February figure
adjusted monthly figure had been declining since last July with the exception of one month. With a decline in turnover outside the financial centers, the level had been about .9, apparently un changed since the first of the year. He believed one could not assume that depositors would find additional means of economizing on cash. This situation caused him to be concerned today, as he was three weeks ago, about the money supply. Mr. Balderston noted from the reports of Messrs. Noyes and Thomas that banks had continued to divest themselves of Government securities. This process had placed the money supply under more restraint than he believed appropriate for this stage of the current recovery and in view of the current business uncertainty. Also, the percentage of companies able to better their year-ago earnings had been falling, reflecting competitive pressures and rising costs. He would use the coming weeks, as suggested by Mr. Robertson, to experiment with less restraint. In short, during this period he would add more reserves than those necessary to take care of seasonal of the market. If the economy had now and other temporary vagaries the System introduced in 1958, then to grown up to the reserves care of the seasonal needs of the direct the Desk merely to take would not cause a change in the fundamental next couple of weeks problem discussed at the February 9 meeting and this meeting. It be necessary to do more than that. would Mr. Balderston said that With regard to the directive, could be renodeled, perhaps along until the form of the directive
the lines suggested by Messrs. Hayes, Irons, Leach, Robertson, and Shepardson, all of whose suggestions he found helpful, he would favor the change in wording that he had suggested at the February 9 meeting. Clause (b) would then provide for "fostering sustainable growth in economic activity and employment while guarding against excessive credit expansion." Until the next Com mittee meeting, he would suggest a target of net borrowed reserves of about $300 million in view of the fact that the average since the turn of the year had been about $375 million, as pointed out by Mr. King. Regarding the format of the directive, Mr. Balderston ex pressed the hope that the Committee would continue to study the matter between now and the next meeting. He felt the suggestion made by several persons that the Committee needed a three-fold directive would help straighten out a dilemma he had observed. As he saw it, the Committee needed a policy statement, standing orders, and an interim instruction. What Messrs. Bryan and Mills and what Mr. Thomas provided at the February 9 had contributed with interim instruction to meeting would not help in connection of Messrs. Bryan and Thomas Desk, although the suggestions the its objectives from time to would help the Committee in checking but he hoped that the Committee Perhaps words would suffice, time. Where the Committee words in some fashion. could quantify those
had been wrong in recent months, he thought, was in permitting a fixed target of net borrowed reserves to distort the goal to which he felt the Committee had been driving. He did not believe that the Committee had intended to continue restraint to a point where the money supply failed to increase. He was grateful to Mr. Bryan for contributing something that, although it might not help in instructing the Desk week by week or meeting by meeting, would test the Committee's work over longer periods. Chairman Martin said his concern about the money supply began at the turn of the year. In expressing that concern, however, he wanted to emphasize that he felt System policy had been about right, straight through from last July. In his view, the System had done a better job than it could have hoped for. It would take present all of the background of his thinking on a long time to like at least to reiterate what he said this subject, but he would that he saw more hope than he at the January 12 meeting; namely, solutions to problems a long time. He saw long-range had seen for At that time, the Treasury a year ago seemed insoluble. now that the hope of getting the seemed hopeless, and financing problem a budget surplus seemed relatively in the position of having Treasury In good deal of encouragement. could take a Today, one hopeless. was not to spend. Hill as of today tendency on the judgment, the his by the President, in the budget recommended there might be shifts While have a surplus balance and perhaps was to keep in he felt the tendency
as large as projected, if not larger. This would have a stabilizing effect on the economy. Since the time of the January 12 meeting, Chairman Martin said, all were aware that the country was probably going to experience the jitters of February and March, and that was occurring as in every other year. He had tried to compare the situation with the nine previous years during which he had been associated with the Treasury or the Federal Reserve. While he did not think he could assess the differences, he had hesitantly come to the conclusion that there might be developments this time of more importance than usual. Since Mr. Shepardson mentioned farm prices at a recent Committee meeting, he had talked to many people, and there appeared to be something going on in the farm picture that was a little deeper than a year ago. The oil industry also concerned him; he was not sure it was over the hurdle, for a glut was developing that bothered him. There were a number of other things that he would not detail, but they seemed to be straws in the wind. In this connection, he emphasized that he had prefaced these remarks by saying that he was very hopeful. Chairman Martin said Mr. King had put his finger on something that he (Chairman Martin) had been going to say himself, although had mentioned that if the same words. Mr. King perhaps not quite in of inflation over the solution to the problem there was a long-run next few years, then the System must start thinking about the money
supply in relation to business attitudes in a different way than heretofore. Illustrative of this was the fact that a leading student in the field, who thought that inflationary psychology had diminished a great deal in the last three months, now asserted that there would be a problem of business attitudes in living on the profit margin without inflation, because business generally had gotten accustomed to living with inflation. While this related to the profit margin problem and not to the level of activity, it was of concern in considering the money supply. The Chairman said that in the 1957-58 recession, which was a phase of the inflationary process of the last 10 years, the country did not get adjustments in prices, other than interest rates. Then the money supply was expanded substantially. Whether the country money supply, he did not know. had completely grown up to the expanded Certainly, however, the System had done a fair job of mopping up that expansion. Martin noted, was concerned The rest of the world, Chairman exceeding expectations and The European boom was about inflation. in handling inflation this were showing more zeal foreign countries they might be was another heretofore. How successful time than might cause it that a boom had developed but the mere fact story, to be more short-lived. said, to which the all things, the Chairman These were that inflation must not be assumed be alert. It Committee must
was the order of the day. Manufacturers who had subconsciously accepted it as part of the profit margin might now find themselves in the position of seeing their cost-price relationships changed. Of course, there might be another revival and the country might go on a spending binge, in which event the System might want to raise the discount rate. The Committee might well want to tighten credit further before this was all over. In long-range perspective, however, he had the feeling that the next time would be the end. It would be the last phase of this particular operation, assuming that the budgetary and fiscal situation and Governmental attitudes did not change substantially. In making this last comment, he was not the elections but about other aspects of the matter. talking about Chairman said he thought that in a time like Continuing, the System should not just let the money supply con the present, the be translated in terms of moving tinually diminish. This might at a level of $250 or $300 million. toward net borrowed reserves the emphasis would be on moving, an imperfect method, but This was that doing this on describe it. He thought one wanted to however that the Committee even with the expectation a temporary basis, and caution. the part of wisdom itself, was have to reverse might within the System's future was well believed the longer-term He well as the as need for development the if it recognized control do was to keep was trying to What the System danger of inflation. a balance.
It was clear today, Chairman Martin said, that the general consensus, with which he agreed, favored moderately less restraint in the immediate future than had prevailed. He did not want to jump to the conclusion that the Committee would want to continue that course indefinitely, but he would like to see a slight pickup. He emphasized the point he made at the Committee meeting on February that a good many informed people thought the System was already easing credit. Those people would be quite disturbed, in some cases, if they knew there had been no tendency to ease; that, if anything, the System had absorbed all the ease coming into the market and nevertheles there had been easing in the market. This was a phenomenon that had not been seen for some time in the money market, and many people in community were concerned about it. For the first time, the financial of people felt that the country was in a recession, a small number also a factor to keep in mind. It was part of the and this was turn. He felt those people were wrong, and would be psychological if they meant a broad movement. If they meant, proved wrong, they might be quite right. however, a period of reduced activity, said that he thought the consensus Chairman Martin again the direction of slightly favored a move in today quite clearly When it came to the that might be worded. restraint, however less Committee could certain that the he felt of the directive, matter He was quite interested around the table. not write the directive discussed the whom he had not Mr. Irons, with suggestion of in the
matter previously, and he felt that the suggestion should be discussed at some time. The possibility of having the Secretary of the Com mittee and the Account Manager write a directive following the meeting interested him. It might be a good exercise for the Account Manager to put on paper his understanding of the instructions at the meeting. He would not want to make a decision of that kind offhand, but it was something to look at. He felt that the directive and the operating procedures did to some extent go hand in hand. The Chairman then suggested that the Committee continue the discussion of the directive and the continuing operating policies, with Messrs. Young, Thomas, and Rouse present. all of the members of the staff except Messrs. Accordingly, Thomas, and Rouse withdrew from the meeting at this point. Young, thought of providing full information on the issues With the form of the statement of the Committee, namely, the present before the directive to the policies and the form of continuing operating Secretary had distributed, at Bank of New York, the Federal Reserve from past minutes (1) pertinent extracts the Chairman's request: (2) suggestions for of operating policies; relating to the statement by members of the that had been advanced changes in the statement defense of "bills only" and its staff; (3) a special Committee the Secretary of the staff for the use of prepared by the Treasury with the issues in connection an inventory of and (4) Treasury; prepared by the Secretary operating policies statement of continuing of the Committee.
With respect to the statement of continuing operating policies, the consensus that developed from this meeting was favorable to reviewing the matter, but it was evident from the discussion that careful thought and full discussion would be re quired before any change was made. Accordingly, it was agreed that the existing statement of operating policies would be con tinued on a temporary basis, with the understanding that the question would be brought up again for discussion as soon as the members of the Committee had had an opportunity to develop their thinking further, especially in the light of whatever conclusions might be reached on the Treasury's suggestions mentioned below. With regard to suggestions by the Treasury that the Com mittee might provide some assistance in connection with two forthcoming refinancings, two staff memoranda (one prepared by Mr. Keir of the Board's staff under date of February 26, 1960, and the other prepared by the Securities Department of the Federal under date of February 29, 1960) were Reserve Bank of New York to the staff committee consisting of Messrs. Young, referred at the next further study and recommendation and Rouse for Thomas, meeting of the Committee. it was under format of the directive, respect to the With at this time but that the matter stood that no change would be made with the study of the given further study in connection would be policies. It was unanimously of continuing operating statement
agreed, however, that a modification of the wording of clause (b) of the first paragraph of the Committee's directive was called for at this time, and that operations for the System Account should be with a view, among other things, "to fostering sustainable growth in economic activity and employment while guarding against excessive credit expansion." Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to fostering sustainable growth in economic activity and employment while guarding against excessive credit expansion, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the of this date, other than special short-term close certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; the Treasury for the purchase direct from (2) To account of the Federal Reserve Bank of New York (with seems desirable, to issue in cases where it discretion, one or more Federal Reserve Banks) participations to certificates of amounts of special short-term such from time to time as may be necessary indebtedness
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. It was agreed that the next meeting of the Federal Open Market Comittee would be held on Tuesday, March 22, 1960, at 10:00 a.m. Thereupon the meeting adjourned. Secretary
RESERVE TARGET FOR MARCH USING TOTAL RESERVES (Daily average figures---000,000 omitted) (1) March growth amount 1/ (at 2% annual rate) $ 31 (2) Target for February $ 18,585 - February 18,188 $ 18,188 (3) Actual reserves (4) Shortage in reserves from February target $ 397 397 (5) Add normal increase in reserves between February and March $ 18,225 18,225 (6) Target for March $ 18,653 (7) March target range for practical administration of account 18,603 to 18,703 1/ March growth amount at 3 percent annually would be $47.0 million, at 4 percent annually would be $62 million. I§
Also: Record of Policy Actions