March 22, 1960 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington on Tuesday, March 22, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Bopp Mr. Bryan Mr. Fulton 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 Assistant General Counsel Mr. Hexter, Mr. Thomas, Economist Brandt, Eastburn, Hostetler, Marget, Messrs. Associate Economists Roosa, and Tow, Noyes, to the Board of Governors Mr. Molony, Assistant of Research and Mr. Koch, Adviser, Division Statistics, Board of Governors Mr. Keir, Chief, Government Finance Section, and Statistics, Board Division of Research of Governors Board of to the Chairman, Mr. Knipe, Consultant Governors Mitchell, and Einzig, Messrs. Ellis, Storrs, Reserve Banks of the Federal Vice Presidents Chicago, and San of Boston, Richmond, Francisco, respectively
Messrs. Larkin and Arlt, Assistant Vice Presidents of the Federal Reserve Banks of New York and St. Louis, respectively Messrs. Parsons and Coldwell, Directors of Research of the Federal Reserve Banks of Minneapolis and Dallas, respectively Mr. Holmes, Manager, Securities Department, Federal Reserve Bank of New York Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on March 1, 1960, were approved. Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period March 1 through March 16, 1960, and a supplementary report covering the period of March 17 through March 21, 1960. Copies of both reports have been placed in the files of the Comittee. Supplementing the written reports, Mr. Larkin made substantially comments on developments since the preceding Committee the following meeting: interest rate levels has downward movement in The sharp been by far the most significant development in the money and meeting of the Committee. since the last capital markets rates was typified by the decline in Treasury bill The with those in the auction compared results of yesterday's the Committee's last meeting. Yester auction the day before established for the new 91 day a rate of 3.03 per cent was the 182-day bills. per cent for and a rate of 3.17 day bills are quoted in the the new 91-day bills I understand that cent or slightly lower. Three market this morning at 3 per established were 4.278 February 29, the rates weeks ago, on bill rates words, Treasury In other cent in the auction. per past three weeks. cent over the 1-1/4 per declined nearly have
Prices of notes and bonds were up by as much as 4 points during the interval between meetings. The scarcity of bills spilled some demand for short-term securities over into the certificate and short-dated note and bond area, and yields were about 1 per cent lower on such issues. Of the recent high-coupon issues, the 4-7/8's of November 1963 were priced to yield 4.06 per cent, and the 5's of November 196 were priced to yield .11 per cent. In the long-term area, the 3-1/2's of 1990 were at a yield of 4.07 per cent. With only light trading in long-term Government bonds, there is a high degree of artificiality in the price and yield level of that sector of the capital market. The market for new long-term corporate issues provides a more signifi cant measure of what has happened to rate levels in the long-term area. Recent issues have been reoffered at yields in the 4-3/4 per cent to 4-7/8 per cent range, compared with 5 to 5-1/8 per cent about three weeks ago, or a decline of about 1/4 per cent. The market has been paying special attention to call and refunding provisions on new corporate issues. I should also mention that the mid-March dividend and any strain on the banks or on the tax period passed without money market. This was of course partly due to the net supply through open market operations. of reserves by the System have made careful plans for however, appear to Corporations, They liquidated only a relatively minor their tax payments. purposes, and generally added to the amount of bills for tax striking demand for bills over the period. Mr. Balderston, Mr. Larkin said In response to a question by of stockpiling of bills in seemed to have been a fair amount there property tax date (April 1). for the Cook County personal preparation of bills would that date a quantity feeling that after There was some reach the market. evidence of there was inquired whether Balderston then Mr. and Mr. Larkin Government securities, speculation in longer-term On the basis to answer. question this was a difficult replied that there was no strong as a week ago, by dealers as recently of comments
evidence along those lines. In the past week, some mention had been made of that type of buying of Treasury issues, but it could hardly be extensive because the market at the long end is thin and trading relatively small. There were some reports that commercial banks were giving more attention to extending their maturities in order to catch the turn of the market and, while this might be just gossip, mention had been made of some buying by Stock Exchange houses and underwriting houses. As he had indicated, he did not think this kind of activity was extensive, but it was difficult to substantiate an opinion. In reply to a question by Mr. Robertson, Mr. Larkin said there had been a demand for short-term Treasury securities from State and local governments as well as from corporations. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period March 1 through March 21, 1960, were approved, ratified, and confirmed. distributed under date of Supplementing the staff memorandum statement with regard 1960, Mr. Noyes made the following March 18, to economic developments: information on every shred of last few weeks In the examined and re the economy has been the condition of reinterpreted with the and interpreted and examined, In February the money supply dropped by greatest care. drop was accompanied dollars, but this a dramatic billion in deposit turnover. Industrial by a spectacular rise about one per cent. Housing production slipped off seasonally adjusted down to a 1,100,000 starts were 20 per cent from the peak last spring. annual rate-off
Short-term money rates declined sharply. The weather was bad, and so were retail sales, and both of these conditions continued into the first two weeks of March. On the other hand, unemployment was down, new orders were up a little, and plant and equipment expenditure expectations reported to the Department of Commerce were equal to earlier optimistic estimates. Erratic movements of stock prices and loans at city banks provided a rationale for almost any theory. Commodity price movements were also mixed, but the changes were small. It is doubtful that there has ever been a time when all the "straws in the wind" were watched so closely. In these circumstances, it is hard to see how a major fault could remain undetected for long--and yet, careful observers still generally subscribe to the belief that the underlying forces are strong, despite moderate declines in most current measures of activity. Certainly, the customary signs of an overripe boom are not yet apparent. The question that remains is whether the adjustment of spending and saving patterns incident to a major shift in expectation of inflation might so change the tone of financial and other markets as to set in motion a recessionary spiral. Spokesmen for the Federal Reserve System, more than any other group in the country, have warned of the hidden distortions in the economy that are built up during a long period of more continuous inflationary expectations. Win Riefler or less them out clearly in his paper at Stanford last summer, spelled which I would like to quote a brief passage: from "The emergence of a pervasive expectation inflation as a dominant motivat of continuing investment decisions is relatively ing force in the experience of this country, even new in that experience is carried back through when and a quarter to cover the the last century the opening phases of the whole period since Revolution. That is the reason, Industrial recently been so slow perhaps, that we have its implications." in recognizing before faced that we have never follows, of course, It also readjustment from such expectations. problems incident to a the simply because the elimination we cannot assume that Certainly, the process of is a good thing, inflationary expectations of It could be very painful-we adjustment will be painless. great the distortions do not know how know because we do not share of the consumer preceded it. If a sizeable were that housing, in recent years for durables, including expenditures then we may to hedge against inflation, has been an effort of spending in a very different pattern have to adjust to
this area in the period ahead. The same thing might be said about business plant and equipment expenditures or inventory policy. One can find little or nothing in the current data to measure how much of an adjustment of this kind has already occurred or may still lie ahead. The survey of plant and equipment expenditure expectations would seem to suggest that adjustment there will not be very severe, at least initially; that is, unless they are discouraged further by a decline in final demand, businessmen are likely to go forward with their expenditure plans in substantial volume. This may be an important "unless", however, since the largest planned increases were in iron and steel, motor vehicles, and electrical machinery, all of which would be adversely affected if the market for consumer durables should soften. The only indications we have about prospective consumer demand are the results of the quarterly survey of consumer intentions, which we have been conducting through the Bureau of the Census. In January, consumers appear to have been slightly less enthusiastic about durable goods purchases than they were in October, but still quite a bit more in terested than they were a year ago. Taken at their face value, these results would suggest some slackening of demand, but not such as to carry us below year-ago levels. However, these observations were taken about two months ago and consumers' attitudes may well have undergone a further change since that time. As I suggested at the outset, it is hard to find any significant change in the balance of economic forces during weeks, but the fact that the tempered out the last three has continued may have some significance in itself. look chance of a booming first half, accompanied Certainly, the by inflationary pressure on resources, has measurably diminished. with regard to the following statement Mr. Thomas presented the current financial situation: in recent weeks have contained Financial developments They appear to be of surprises and paradoxes. a number monetary policy formulation, but the exact significant for significance may not yet be clear. most striking feature has been the virtual comple The liquidity needs for tax of the March period of heavy tion dividend payments with an easing rather than tightening and
of money rates that usually occurs in this period. The absence of pressures can be attributed little, if any, to a reduced borrowing demand from business. It may be due in part to Federal Reserve easing actions during the past two weeks, but such measures have not been unusual at this period. An important influence has been the availability of nonbank funds in the money market, but the most important influence may have been the change in the Treasury position from a deficit to a surplus. The availability of nonbank funds has been a distinctive feature of the past year. Nonbank purchases of Government securities have financed a Treasury deficit and enabled banks to reduce their portfolios in order to meet an unprecedented demand for bank loans with little growth in deposits. Last year, however, such funds were attracted by rising interest rates. Only in recent weeks has the supply been so great that interest rates have declined, and this month has been the first tax period since the recession without strong pressures of cash demands that pushed up interest rates. Interest rates, on the contrary, have declined sharply and, generally speaking, are at the lowest levels since early last June. The six-month bill rate is the lowest since last March and yields on three-month bills are little above 3 per cent--showing the widest margin below the dis count rate since the first half of 1958. Yields on Govern ment securities in the three- to five-year maturity range, which have shown the highest yields of all issues during the past year, are now at the lowest level since last May and only slightly above the average of longer-term issues. Rates on commercial and finance company paper have been lowered in recent weeks but are still higher than last summer. Yields on outstanding State and local government and corporate bonds, which did not rise as much as those Treasury bonds, have also declined back to on long-term around the levels of last June. It may be recalled, prevailing rates were considered however, that last June to be rather high after a sharp rise during the preceding quarter. The discount rate was raised in late May to closely in line with cent to bring it more 3-1/2 per market rates. been moderate. The in capital markets has Borrowing and State and local first-quarter totals of corporate less than in other recent issues appear to be government by savings and loan years. Mortgage lending activity was reported to be in January and February associations net increase in year ago, with the less than a slightly
savings accounts about the same as last year. Treasury net repayment of debt during the quarter is larger than in any year since 1956. As I suggested earlier, the change in the Treasury position alone may be adequate to explain the turn ing downward of interest rate levels. There are few indica tions of an increase in capital market borrowing in the immediate future, although business and State and local government borrowing should increase somewhat, particularly if interest rates stay down. Bank loans increased in February somewhat more than is usual for that month, and partial figures for banks in leading cities for March 16 indicate a further rise of close to usual seasonal amounts in the three weeks ending on that day, Loans to business and finance companies increased sharply last week. Loans on securities declined in the three weeks ending March 16, contrary to usual seasonal trends. Real estate loans also declined slightly and "other loans", which include consumer loans, showed little change. City banks added to their holdings of Treasury bills last week, as they usually do at a time of tax payments, but for the past three weeks as a whole continued to show a net decline in total holdings of Government securities. There have been substantial reductions in bank holdings of securities maturing after five years and also within one to five years. Holdings of other securities have increased in March. Total loans and investments at city somewhat in the three weeks ending March 16 about banks increased period last year but somewhat less as much as in the same in the three preceding years. than and probably also at deposits at city banks, Demand as usual in the middle week of country banks, increased income taxes. Estimates prior to payment of corporate March, trend of deposits, after adjust indicate, however, that the may have continued to decline, ment for seasonal variations, in January and February. following the sharp decrease aspect of astonishing and perplexing Perhaps the most of a has been the combination financial developments recent accompanied by demand for bank loans, relatively strong by banks to the point of Government securities liquidation at the same time a in deposits, and of a net reduction would appear rates. This combination decline in interest money supply has been the decrease in the to indicate that liquidate credit on banks to entirely to pressure due not of cash to shift a desire by holders in large part to but not of a This is evidence Government securities. into a shift in liquid but rather of decrease in liquidity, assets. There may holdings from cash to interest-bearing net increase in total liquid holdings. even have been a
The significance of this shift from the standpoint of the current and future course of the economy, and of monetary policies, depends upon its cause. Is it merely a matter of the nature of holdings of liquid assets or does it reflect an increase in savings that are being withdrawn from the flow of spending and investing to be held relatively idle? The sharp seasonally-adjusted increase of about 5 per cent in debits to bank accounts in February would indicate that there has been an increase rather than a reduction in the use of money. As to increased investment of genuine savings in Government securities, dealers report some decline in odd-lot purchases of longer high-coupon Treasury notes as their yields have declined, but this is a relatively recent development. A large portion of recent acquisitions of Government securities is reported to be by nonfinancial corporations. Continuation of such demands during the tax payment period and along with heavy business borrowing at banks is difficult to explain. It probably means that some corporations are accumulating liquid assets while others are borrowing. More complete understanding of this development must await an analysis of corporate statements, as well as the subsequent actions of corporations. Federal Reserve operations, after absorbing a portion of released by the decline in deposits and in re the reserves February, have added to the availability quired reserves during to the decline in during March and thus contributed of reserves four weeks, including estimates rates. In the past interest have increased by a week, required reserves for the current a purely seasonal basis, than expected on smaller amount than expected. These has shown a larger increase but currency have been made reserves, but reserves have absorbed increases accounts at nonmember and other by a reduction in available Federal Reserve reflecting principally the Reserve Banks, purchases of Stabilization Fund the Treasury and payments to of securities during System purchases bills in the market. These acquisitions supplied reserves. period also the the net last week, including over $250 million amounted to a decline in holdings contracts, but increase in repurchase of repurchase 2 and retirement week ending March during the weeks to gain for four the net week reduced this contracts changes, net of all these As a result about $100 million. $250 million remained below have generally borrowed reserves of March 2. since the week to what extent future is for the immediate A question endeavor to toward an be directed System operations should in, bank deposits. the decline least check or at increase,
Projections indicate some drain on reserves in the next statement week as a result of the customary decline in float, partly offset by a reduction in required reserves as deposits are reduced by the payment of taxes. In the second week of April, reserves will be needed to cover increased requirements related to Treasury financing and the Easter currency demand. Should reserves be supplied in excess of these needs? If the decrease in the money supply reflects merely a shifting of liquid assets from cash to securities, attracted by interest returns, it may be checked by System operations which will force down interest rates. Such shifts, however, have little or no effect on the total volume of spending, and forcing excess reserves on banks might stimulate unsound uses of credit. If, however, the decline in money reflects an increase in savings being taken from the spending stream, then some stimulus to bank credit expansion may well be in order. It is not easy to reach a satisfactory answer to these questions. It does seem clear, in any event, that there is no for any tightening of restraints at this time. occasion Mr. Marget commented as follows with respect to the balance of payments: this Committee, I referred to At the last meeting of that seem to be emerging with respect to what "the changes constellation as between our might be called the cyclical and ourselves..."--"a strong, principal trading partners boom abroad, and a moderation, at inflation-threatening All the news that we of boom tendencies here." least, weeks confirms the "abroad" had from abroad in recent have the boom in virtually all foreign part of the story; countries is continuing to gather strength. industrialized tendencies toward moderation This means that if the we shall also continue should continue, in this country the kind of constellation which, by to have "just country and moderating the encouraging exports from this should be favorable into the country, movement of inports of payments in the in our balance to further adjustment what some of the This is, in fact, we desire." direction In the themselves forecasting. authorities are European ran a very sizeable surplus for example, which Netherlands, in 1959, the Central Planning in their balance of payments decline in the forecast a significant Bureau has recently surplus for 1960. Netherlands
At the same time, all the evidence would indicate that, up to now, the foreign fiscal and monetary authorities are prepared to resist the inflationary pressures that the boom is engendering. The latest example is from Austria. Only about six months ago, it was generally reported that the Austrian authorities were considering lowering the discount rate from 4-1/2 to 4 per cent. The week before last they actually raised the discount rate from 4-1/2 to 5 per cent; and they simultaneously raised minimum reserve ratios against demand and savings deposits. This does not mean what has been suggested, not only by some journalists, but also by the Governor of the Bank of Norway in a recent speech; namely, that the counter-inflationary measures now being adopted are about to turn the economies of the Western European countries, in particular, into a tailspin, so that we shall have a reversal of the cyclical constellation whose emergence we have been witnessing. It means only that we cannot rely upon, even if we were foolish enough to wish for, a wave of inflation abroad to provide an easy--even if short-lived-market for the increased exports we wish to bring about. The best we can probably hope for is a strong, but not inflation-dominated, demand situation abroad which, if combined with a continuation of the recent tendencies to moderation in our own economy, will provide an environ ment generally favorable to the kind of all-out competitive effort that we are going to have to make if we are to balance our international accounts. It is, indeed, against this kind of reasonably hopeful that one has to judge the figures that we now have background for the breakdown of the otherwise encouraging total figure for our exports in January that I reported last time: exports rate of some $18-1/2 billion, as against a at an annual realized level of exports for the years 1958 and 1959 of of the declines that continued to around $16 billion. Some increase in exports were registered within the total be not evidence of our declining competitiveness. certainly case of coal, in which we is true, for example, in the This which is being kept out of certainly competitive, and are a combination of dis markets only by important foreign and governmental purchasing criminating import restrictions And it was good to notice a marked pick-up, arrangements. and December, in a levels of November from the depressed been called into has in which our competitiveness field trucks, and parts. exports of autos, question; namely, element in the total other hand, the dominating On the of raw cotton, much heavier shipments increase was the very for the month. When one million bales which totalled over
this figure is related to a figure of expected exports of cotton, during the current season, of about 6-1/2 million bales, and when seasonal factors are taken into account, it is fairly clear that the January rate of cotton exports is unlikely to be sustained in coming months. It is considerations of this kind, in combination with the anything but spectacularly favorable movements of gold and dollars for February and the first half of March, that ought to continue to warn us against cheering too loudly too soon. We seem to be on the road of adjustment in our balance of payments, but it still looks like a pretty long, hard road ahead of us. Mr. Hayes presented the following statement of his views on the business outlook and credit policy: Although some of the new business data becoming avail able since the last meeting point in divergent directions, for the most part they seem to support a reasonably optimistic view of 1960. Among the more encouraging new statistics are those on plant and equipment expenditures and employment, whereas production and sales data have been somewhat disappointing, and statistics on orders and inventories could be interpreted as signalling trouble ahead. Perhaps the lag in sales may be attributed in large measure to such factors as the weather and the aftereffects of the steel strike; and special factors may also be adduced to account for the drop in orders. With the decline in stock prices and in inflationary expectations, has been some change of pace in business and consumer there spending plans. On the other hand, greater availability of long-term investment funds may prove to be a stimulant to activity in construction and other sectors, and the general of prices should be a sustaining factor in the stability run. On balance, the current business lull appears long likely to represent a period of hesitation in a strong or than the beginning of a cumulative expanding economy, rather downward movement. of uncertainty, however, so There are enough elements possibilities besides keep in mind two other that we must I have suggested as likely. First, the economy that which appears from current statistics, may be stronger than it may appear altogether the current lull and in retrospect of several periods of was true in the case trivial, as the lull may foreshadow in 1956. Secondly, hesitation
persistent "high-level stagnation" or even a real cyclical dip in activity. Fortunately, we need not try to reach any definitive judgment today. February data for all commercial banks reinforced earlier impressions of unusually strong loan demand in that month, particularly for business loans. However, an unusually sharp shrinkage in the banks' holdings of invest ments brought a decline in total bank assets roughly comparable with the February drop in other recent years. As for March business borrowing, the inconclusive evidence available so far suggests that it also was about in line with the usual seasonal pattern. Strong corporate cash positions, from which taxes could be paid without signifi cant strain on either the securities market or the banks, doubtless found reflection in the general tone of the Treasury bill market in the past week or two. I can see no reason for a basic change in the policy adopted at our last meeting. In the present period of cautious business and price expectations, we can probably give some encouragement to a more plentiful money supply without any serious risk of feeding an inflationary credit expansion. I might add that the New York banks are rather concerned over their ability to meet seasonal loan demands later in the year in the light of their present peak loan deposit ratios and dearth of liquid assets. On the other hand, the recent rise in money substitutes and in velocity, coupled with the easier tone of the credit markets, indicates that to date ample credit has been availabl, from one source or another. Thus, while we should certainly seek a larger money supply over a period of months, the need may not be an immediate one. a statistical target for the next three weeks, In seeking I would think the range of $250 to $300 million mentioned by at the last meeting is still suitable; but the Chairman on either side should be permitted rather wide fluctuations developments. Thus, I in the light of market if appropriate reluctant to encourage any further should think we would be the decline in which has probably plunge in interest rates, realities of underlying conditions. already outrun the the Treasury at this time to Incidentally, any action by the long end should have advantages push its borrowings toward the long-term rate influence on the way of a steadying in of any added outweigh the drawback which would structure sweep of short to the current downward it might give impetus term rates. weapon which has at hand another The Board of Governors of general credit of as an instrument do not usually think we
control but which may possess some of the attributes of such an instrument under present conditions. I refer to the possibility of an increase in the ceiling on deposit interest rates under Regulation Q. Some of us have long felt and still feel that an increase is warranted on a variety of grounds. But in addition such a move now might have a salutary effect in checking exaggerated market expectations of a trend toward ever lower interest rates; for it might suggest to the public that the System does not expect rates to reach a range where present ceilings under Regulation Q would no longer present any problem. In view of the business uncertainties and the un desirability of a further decline in market rates of interest in the near future, I believe we should particu larly avoid any dramatic or overt move at present, such as a cut in discount rates, even though "even keel" considerations may make it hard to act during the interval from next week until completion of the May refunding. A discount rate reduction might be interpreted by the public to reflect a gloomy appraisal of the outlook, with adverse effects on business sentiment. Also, it could easily shift in market expectations that would generate a sharp to a downward race between market rates and discount lead that discount rates should be kept in rates. The view line with market rates loses much of its force when a "penalty rate" situation exists. that the directive as fomulated at the It seems to me last meeting is still appropriate. at recent Committee meetings he had Mr. Johns recalled that of monetary re with the view that a continuance identified himself at the March 1 persisted in that view in order. He had straint was It was not small minority. was one of a relatively meeting, when he his position; suffice to attempt to justify purpose at this time his the recent period any time during not intend at say that he did it to It had been his feeling, of restraint. to argue for an intensification future course of indication of the until some clearer however, that continue a policy in order to it would be economy was available, the
which at the February 9 meeting was characterized by a number of members as "watchful waiting." Obviously, the fact that he was one of a small minority three weeks ago required a reappraisal of his thinking in the light of such changes, facts, and circumstances as might be observed. While the changes had not been dramatic, except for interest rate developments, he was not so much inclined as he had been earlier to expect that the country would emerge from the current period of low visibility into a resumption of strong expansionary forces. This led him to a consideration of the imple mentation of the policy expressed quite clearly by the majority at the March 1 meeting. The views he would state were not as firm and might appear, and his comments should not be under doctrinaire as stood as criticism of the Account Management. Instead, they reflected consideration of the Committee's own practices with respect to the expression of its policy mandate and its instructions to the Desk. 1 meeting, Mr. Johns brought out, there were At the March expressions of concern about the continued decline in the money on February 9, and at had expressed similar concern supply. Some the Committee, Mr. Mills, had expressed concern least one member of the Manager of the Account of time. On March 1, over a longer period to ease the degree of as Mr. Johns understood it, was directed, as to what was was not specific The instruction monetary restraint. doubt that the seemed little but there and by how much, to be eased in the money market. some relaxation of pressure majority wanted
Furthermore, it was evident that the majority wanted no further decline in the money supply. In fact, there seemed to be con siderable support for a modest increase in bank reserves and the money supply. In certain respects, some appearance of the objective of relaxation may seem to have been attained. Member bank borrow ings declined, net borrowed reserves declined from over $400 million to a level around $250 million, and interest rates dropped. Nevertheless, if it was the basic desire of the Committee to achieve an increase in the money supply, the result of open market operations since May 1 may not have been altogether satisfactory. Despite large net purchases of Government securities, total central bank credit, seasonally adjusted, and bank reserves, seasonally adjusted, were in early March than in February, and commercial banks no larger did not increase deposits or money. Member banks apparently probably to a greater extent than the attempted to reduce their indebtedness by the Committee. Some borrowed reserves used revised target of net may have found it more more cautious, and some may have become to sell Government securities, at current market prices expedient from the Reserve level of borrowings any case the average but in expect the Desk could not be that one It might Banks fell markedly. or the quantity of change in bank reserves accomplish any given to However, since to four weeks. period as three in such a short money for some had been declining the money supply reserves and total of for maintenance was calling the Committee during which months,
the same degree of restraint and, more recently, for an easing of monetary pressure, there seemed to be a need to re-examine the method of instructing the Desk. The time had come, in his opinion, for the Committee to subordinate its consideration of net borrowed reserves and other money market pressures to objectives expressed in terms of total bank reserves or the money supply. He did not mean to say that the Committee thereby would have adopted a system that would assure the avoidance of mistakes, but the use of such a technique would help to avoid doing things to total reserves and money that the Committee did not intend. As to the immediate future, Mr. Johns said he would suggest instructing the Desk to buy over the next few weeks whatever was necessary to keep total reserves, seasonally adjusted, from declining, annual rate of increase, with a and indeed to show a 1 or 2 per cent decline in the money supply. It might be view to reversing the there was no certain seasonal adjustment of the money objected that be used, but he felt of reserves that could supply or the quantity the judgment of the Desk would be good enough to keep sure that the Committee desired. going in the direction change in the discount the view that no Mr. Johns agreed with indicated at this time. rate was were substantially as follows, Mr. Bryan's comments happened in the thing that has The most astonishing the weather. It has disrupted Sixth District has been
farming operations with freezes, ice, and heavy snow in areas entirely unaccustomed to such phenomena. The greatest immediate damage has apparently been in the broiler industry, which is the more serious because the industry was already in most areas of the District suffering from acute economic ill ness. Some people are guessing that the greatest long-run damage has been to the timber crop in the areas affected. Total nonfarm employment has set a new record in the District. Both manufacturing and nonmanufacturing employment have apparently risen somewhat more in the District as a whole than in the United States, which we note because it reverses a relationship of about a year's duration. Construction contract awards show little change after earlier months of sharp decline. Seasonally adjusted department store sales have declined in February, which may be a result of weather. But broader measures of retail trade in the last three months have been below the high volume of last summer and fall, somewhat more so in the District than in the nation. During the three weeks ended March 9, loans at weekly District reporting member banks have remained almost unchanged. Liquidation of bank investments has continued. The loan to deposit ratio of our banks has edged up again after some months of stability. Our impression of the banking situation in the District is that it is highly illiquid and that the banks are under continuing and considerable pressure. from the Federal Reserve Bank has declined some Borrowing result of liquidation of investments and what, apparently as a increasing use of the Federal funds market. But borrowing from high in relationship to national totals. the Federal remains As we see the picture nationally the country is operating with increasing evidence that the recovery is at a high level that some massive readjustments are taking losing momentum, that others are in prospect. Among readjustments, place, and the increasingly competitive seem especially worth noting: two its domestic and foreign aspects; nature of the economy, both in of the American public from an inflationary and the adjustment noninflationary psychology, which is an excellent develop to a some months if not but could be, for for the long pull, ment in its economic implica two, gravely troublesome for a year or tions. equity capital market situation with an We confront this past norms. We the standard of inflated by still seriously moreover, with a highly confront the economic situation, liquidity measures of Indeed, the illiquid banking system. of the late approximate those system closely the banking twenties.
Although it seems too early, in the light of some elements of economic strength in the current situation, to take dramatic monetary steps, still, it seems to me that we must have a re appraisal of our policy as it has been evolving over the past few months. In saying this, I am also saying that in my judgment the evolution of our policy in the recent past has been alarming and is likely to confront us with problems from which we can extricate ourselves only with the greatest difficulty. I am also saying that the evolution of our policy does not seem to me appropriate in view of the illiquid position of the banking system and the economic situation as it has developed in the first quarter of 1960. Let me comment in support of this view: 1. By the year-end we had gone through a long period in which, broadly speaking, there had been no growth of bank reserves. The recovery movement had pressed, properly I think, against an essentially stable supply of reserves. Much the same thing could be said about funds in the hands of the public, namely, the money supply. 2. In the period since the year-end we have permitted no growth in reserves. Indeed, the result of our actions, which is de facto our policy, has not been to effect a growth in reserves, however modest; not to hold reserves stable; but to diminish them. Thus we stand, as of this meeting, with the total reserves of the banking system about 2 per cent less than they were a year ago at this time and less than they were at the year-end even on a seasonally adjusted basis. We find that the money supply gives us much the same story. does not seem to me that this de facto policy has 3. It been at all appropriate. It seemed to me at the year-end, and it seems to me now, that our policy should appropriately one of affecting a small growth rate in the reserve have been supplies of the American banking system--seasonally adjusted. a) Although it is possible to debate endlessly the rate of growth in the reserves of the banking appropriate system in any given banking and economic situation, there is ample and highly competent body of monetary theory to an is necessary to an that some rate of growth supply a view permitted, will sooner or later expanding economy and, if not have a deflationary effect both on prices and the tempo of economic activity. it is hardly necessary to appeal to monetary b) However, is involved in a long historical theory, The same point which we can ignore only at our peril, experience, by the evolution of our policy in 4. Now, I am alarmed one-half months because it puts us in an the last two and
extremely difficult posture with regard to the rationaliza tion of our policy and because, as indicated above, I think it will, if it is permitted to continue, produce an economic result that we do not intend and cannot defend. As for the rationale of our policy--in short periods we do not control the expansion of the money supply. Monetary policy at least in short periods is permissive, not determi native of the money supply. We can make a defense on that point. What we cannot defend ourselves against is the charge that by constricting the reserves of the banking system we have not in fact permitted an increase in the money supply. It is precisely therein that in my judgment we are subject to deadly attack. As for the eventual economic result, I myself think that our policy, unless greatly ameliorated, will in a matter of time, whether weeks or months, produce effects that we do not at all want. I think here we should remind ourselves of what we have learned many times: monetary policy produces lagged effects. If the effects of an overdone restriction begin sooner or later to be overtly evident, and are unfortunate, as I think they will be, we shall not be able to plead ignorance. Note, I believe that a policy of reducing the reserves of the banking system when (a) the banking system and is struggling to produce its own liquidity; is illiquid system, though operating at a high level, (b) the economic resources of manpower and has unutilized and increasing for utilization, I think, without infla materials available through and must go through quite tion; and (c) is going a policy of reducing bank reserves massive readjustment--such regardless of in my opinion, severely restrictive is in fact, what we may say about it, suggest, as a sort of aside, that the period Let me also the grave dangers of the we are in is one that illustrates concept as a guide to net-borrowed reserve free-reserve, involved in that concept The circularity of reasoning policy. inadequate policy in a us, I am sure, into an tends to betray reserves fall rapidly. in which required period could be more as they may--many all the arguments 5. Be proceed to urge that we promptly do now strongly advanced-I in the reserve an increase policy by effecting ameliorate our using as a banking system--whether of the commercial supplies other rational approach. concept or any guide the free-reserve a total from December, today, we have, the matter stands As in daily average $450 million deficit of approximately reserve That's at the adjusted basis. on a seasonally reserves annum in per cent per rate of 2 growth suggested previously alone, if we cent growth rate, But the 2 per total reserves. since it in the months that, has accounted agree on cannot
was suggested for less than $90 million of reserves. We have a deficit since December, seasonally adjusted, of approximately $350 million even if we had decided, as a matter of policy, to permit no growth of reserves at all. I do not believe that we can logically support this cir cumstance in the light of current economic and financial events. I likewise think that by inadvertence we have not done what we intended. It does not seem to me in the slightest accurate to say that a single one of us, in the last two and a half months, has wanted to enforce an actual diminution of the money supply or to effect an actual diminution of the seasonally adjusted reserves of the banking system. Now, we find outselves confronted with a very diffi cult problem of maneuver. There is a large deficiency of reserves, but, to make up the deficiency all at once, or even in a brief interval, would produce gyrations in the money market; and, at the same time, we are confronted shortly with a Treasury offering and the presumed necessity of an even keel. Nonetheless, it is my judgment that we must resolutely begin an amelioration policy and begin an amelioration by increasing of our the reserves of the commercial banking system. make no change in the discount rate at this I would time. in the Third District, as in the nation as Mr. Bopp said that had been mixed in recent weeks. The a whole, business developments upward trend of activity seemed definitely to have slowed somewhat, The reserve positions no signs of serious weakness. but there were been under increasing pressure. large Philadelphia banks had of the past three weeks deficiency in the average basic reserve The daily the previous period. $74 million during compared with was $90 million, funds and purchased Federal reserves, banks this drain on To meet Reserve Bank. more from the Federal also borrowed
Mr. Bopp expressed the view that no change was called for in the policy directive, in the tone of the money market, which was easier than it had been, or in the discount rate. Mr. Fulton reported that most of the industrial measure ments in the Fourth District showed some softening and that some moderate decline had taken place. In a number of cases, however, this seemed to reflect the impact of severe weather and other temporary factors. While department store sales were down, for the year to date they were 2 per cent above last year. Likewise, although automobile sales had softened recently, for the year to date they were 11 or 12 per cent above last year. The steel industry was still operating at a very active rate, with operations in the district at 93 per cent of capacity against a national average of 91 per cent. In Cleveland, operations in the past week per cent of capacity. The mills supplying the automotive were at 102 cut back more than those supplying other industry seemed to have Projections of two of the mills indicated that they users of steel. in the first half of the operate at a high rate would continue to that production would fall 90 per cent of capacity-and year-around again in the fourth quarter and then rise in the third substantially in substantial production. cars would be quarter when the new-model would be no precipitate to feel that there While customers seemed inventorying steel for they their takings, they were not decline in Building activity had get most types without delay. were able to
declined somewhat, but a survey of builders' plans in northeastern Ohio indicated a 6 per cent increase over last year in dwelling units constructed, with 62 per cent of the houses priced to sell over $20,000. Mr. Fulton said that several manufacturers had told him of the large amounts of Treasury bills and other Government securi ties their companies were holding. Instead of having the money in the bank, they had it in the form of income-producing cash. A recent survey of capital expenditures revealed that manufacturers still planned to spend substantial sums, with the financing to be from internal sources rather than recourse to the markets. largely borrowing at a rate averaging from District member banks had been seemed to be no real of the System total. There 4 to 6 per cent were available to meet their distress among the banks, and funds running 10 per cent above last year, requirements. Bank debits were indicating a full use of money. by the comments at this Fulton said he was impressed Mr. that the large amount However, he felt on the money supply. meeting ignored. The opera could not be holdings by corporations of liquid by Committee policy in Desk and the results achieved tions of the would make no change and he to him appropriate, recent weeks seemed rate in the discount a change he favor Neither would in policy. or the policy directive.
Mr. Shepardson said it seemed to him, from the views and information at hand, that the country was still in a period of low visibility. Nevertheless, while it was not entirely clear what the trend might be as the spring season opened, it appeared that there were still strong underlying forces and that one might reasonably expect an upsurge of spring activity. On the matter of the money supply, he found himself puzzled. He thought it was proper that the Committee wanted to see some reasonable growth in the money supply, and with that in mind he went along with the consensus at the March 1 meeting. It seemed to be a time when the System might ease a little and permit some increase in the money supply. How past three weeks brought to attention ever, developments of the again the question of what comprises the money supply, in view of the amount of "near money" and the effect it might have. He was supply was as inadequate as figures based not sure that the money would indicate, and for this reason on the conventional definition be cautious about further activity in he felt the Committee should prefer to try to hold about the direction of easing. He would the three weeks. This would had existed in the past situation that such seasonal needs as might develop, contemplate taking care of a change in the He would not suggest but not going further. discount rate at this time. directive or the Mr. Robertson said that in his view this was a very un by the Open Market overt actions As a result, certain period.
Committee were likely to be given an exaggerated meaning or importance by the public, with unfortunate results. He thought it would be a mistake to over-emphasize the money supply figure and to launch on a program of trying to push up the basis on which the money supply could be increased. He could agree almost word for word with the analysis of the staff and of Mr. Hayes, with the exclusion of the latter's comments concerning use of the maximum permissible rate of interest on time and savings deposits as an instrument of credit control. He would not like to see intentional easing, because what the System did was likely to be interpreted as an indication of something more in the picture than actually existed. Accordingly, as to net borrowed reserves, he would favor a target between $250 and $300 million. While he would not be upset if net borrowed reserves went a bit on either side of that range, he hoped they would not go below it to a point where the public would think this was a continuing trend of policy on the part of the Federal Reserve, indicative of a definite change of its views on the economy of the country. In his own view, the country was in the midst of a lull before an outbreak of expansionary forces in the near future. He fully expected to see the strong within the next two months, with the factors in the economy emerge moving back toward restraint. System policy would be result that reached at the view that the decisions Mr. Mills expressed which reserves should on the extent to should hinge today's meeting so as to arrest the commercial banking system be injected into the
shrinkage of the money supply. In his judgment, the injection of reserves should not be on a basis that would give further impetus to the strong upward movement in Government securities prices or to the speculative climate that is attached to such a movement in its present stages. In line with that sort of an objective, he felt that negative free reserves should be maintained at approxi mately the $300 million level, minus or plus. In this way the Committee could experiment with a testing period that would reveal the true amount of ease that had been permitted in bank reserve positions by the System's actions thus far. Although this could be wishful thinking, the experiment might show that inasmuch as open market operations over the past several weeks had permitted a reduction in the volume of discounts at the Federal Reserve Banks, a static position would be reached in the volume of discounting that would permit certain banks, or groups of banks, latitude to holdings of bills and in that way foster some increase expand their also that if a relatively static in the money supply. He felt were reached, the commercial in the volume of discounts position the credit demands with would be more free to meet banking system time, and which might require which it was confronted at the present through the period of uncertainty to carry the economy accommodation around the table in the discussion been dwelt on extensively that had to this point. Mills felt should be explored closely Another factor that Mr. and related near-money of Government securities related to the holdings
substitutes in the hands of corporations and others, and to the concern expressed that they were of a volatile nature. They could readily be turned into cash, it was argued, and their liquidation might produce results that would be economically undesirable. However, it seemed to have been overlooked that the holdings of those near-money substitutes were largely in the hands of nonfinancial institutions, mainly corporations. In his opinion, it was unlikely that those holdings would be converted and activated to any substantial extent if at the same time the money supply was shrinking, because a shrinkage of the money supply implies that the commercial banking system is without the means of epanding its deposit totals or other wise increasing the availability of credit. If there was a lack of availability of credit generally throughout the economy, particularly to consumers and smaller economic units, there would be no means of acceleration to their activities, and consequently no incentive giving their holdings of near-money substitutes to the corporations to divest strongly that the mere fact that put them to work. He felt quite and Government securities and other were heavy investors in corporations an indication that they would substitutes was by no means near-money proceeds into the money stream. their holdings and put the convert comments that some of the about way, he had reservations In the same an increase in the velocity from time to time regarding had been made as those now being under conditions such turnover of money of the velocity at the time likely that increasing experienced. It seemed
of a falling money supply did not reflect an upward active thrust in economic activity, but in reality a strained condition on the part of holders of cash balances. In conclusion, Mr. Mills said he would not favor changing the discount rate this at time. Mr. Leach reported that the Fifth District business situa tion was characterized by a high level of activity supported by large backlogs and a substantial volume of current orders, but that activity had been held back in each of the past three weeks by heavy snow and ice. The textile, furniture, and construction industries still had the benefit of large backlogs, although unfilled orders in textiles were being worked down. Bituminous coal production was below the expectations of the early part of the year. Hardest hit by the weather had been lumber operations, construction, and outdoor activities, along with retail trade. Sales in some areas were also being adversely influenced by demonstrations against lunch-counter segregation in stores. had been signs in the past three weeks Mr. Leach said there at Fifth District banks. Loan that pressures were lessening somewhat rate of liquidation of investments slackened slightly, the demand had window was a little and borrowing at the discount had slowed down, mortgage situation continued tight less heavy than a year ago. The of mortgage money into it was said that the flow in most areas, and had been curtailed because North Carolina, and Virginia West Virginia, in those States. per cent usury laws of the 6
Turning to the policy area, Mr. Leach said he had been pleased with developments. He thought the restrictive policy followed by the Committee up to the last meeting was right, but he believed the Committee should now be careful to recognize the changed outlook. In his judgment, the current situation called for perceptibly less restraint than three weeks ago, and he believed that the Committee had achieved it. To him, the crucial question was whether the System could moderate restraint a little more without encouraging excessive credit expansion. He believed it could, if the change was small, but he was willing to defer further relaxation and go along with those who advocated maintenance of approximately the same degree of restraint that had been achieved in the past two weeks. Speaking of net borrowed reserves merely as a benchmark, he would be pleased if they should average less than $250 million in the period immediately ahead. He thought it would be a mistake to moderate restraint at this time to the point where there would be rates that might prove to be a further reduction in interest had not changed to the extent temporary. The economic situation was warranted, and he would in the discount rate that a decrease at this time about rate alignment. not worry the view that the general policy of Mr. Leach expressed of the directive to the as expressed in clause (b) the Committee, of His interpretation should be continued. York Reserve Bank, New guarding against excessive second part of clause (b)--"while the
credit expansion"-- was that the Committee felt that in the next several months there was a reasonable or above-normal chance that undue expansionary pressures on the economy might arise. Although he was willing to go along, his conviction in that regard was not as strong as it had been three weeks ago. Mr. Leedy commented that Tenth District statistics had been distorted due to weather conditions. One favorable result of the bad weather was that the district now had ample spring moisture. The banking picture was about the same as reported nationally. Business loans continued strong, there had been a seasonal reduction in demand deposits, and there had been some liquidation of Government securities. said that to him the idea of adding As to policy, Mr. Leedy supply on any formula basis, regardless of the period to the money which the economy was passing, had little appeal. Although through should make additions to to the view that the System he subscribed could be put on a not feel that the matter the money supply, he did when interest rates were declining, short-term basis. In a period weeks, the argument fashion as in recent in such dramatic particularly to him to have did not seem to the money supply for current additions a valid basis. use of a net whether the he had wondered Mr. Leedy said a result not entirely might be producing reserve target borrowed During the recent period, the Committee's desires. in accord with
when there was only a small reduction in net borrowed reserves, there were times when the Federal funds rate was considerably below the dis count rate and short-term rates generally were dramatically below the discount rate. The use of the net borrowed reserve figure had become such that a substantial change in any period might cause some concern and produce a reaction that the Committee did not desire. However, to the extent it could be done, it seemed to him that, in addition to the net borrowed reserve target, the trend of short-term rates and the Federal funds rate might be observed a little more closely in the course of open market operations. Mr. Leedy said he did not feel that this was a time for any further tightening or a time when the System should consciously relax further the degree of pressure that it had been attempting to place on reserves. Instead, for the period ahead, he would prefer to main tain substantially the same degree of restraint that had prevailed recently. the maximum permissible interest rate on time With respect to that, like Mr. Hayes, he had savings deposits, Mr. Leedy said and area. However, in the should be done in this felt that something did not seem to him rate developments, it light of recent interest increase the maximum time to would be an appropriate that this permissible rate. commented that on the basis of available figures, Mr. Allen appeared to be a little stronger conditions in the Seventh District
than those in the nation as a whole. In January, manufacturing employment was up 5.3 per cent, compared with an increase of 4.8 per cent nationally. In January and February, new claims for un employment were 16 per cent below the low levels of a year ago, compared with a 4 per cent decline for the nation as a whole. For the nation, retail sales in January and February were 3 per cent over last year's record level, and in view of the pessimism concern ing automobile sales it was interesting to note that dollar sales of automotive dealers for this year were 4 per cent above last year and practically equal to the record dollar level of 1957. Even during the first ten days of March, when severe weather over wide areas of the country was an adverse factor, the average daily selling rate was 4 per cent over last year. Continuing, Mr. Allen noted that increases in loans to busi finance companies, by reporting banks in New York ness, including and Chicago in the week ended March 16 amounted to $533 million and increases on the largest single-week $95 million, respectively, dollar increases in business even for a tax period. Although record, in the same periods of March 1956 loans at those banks were greater amounts of taxes due that the 1957, it must be remembered and March a result of the Mills higher as years were considerably in those generally accounted and Chicago banks had schedule. New York Plan loan expansion to all to two-thirds of business for from one-half If that relationship previous tax periods. banks in weekly reporting
prevailed this year, the total business loan increase for all report ing banks in the country would be between $900 million and $1 billion, Mr. Allen pointed out that the tax week loan upsurge followed an unusually large expansion in February. From the first of the year through March 9, total loans of all Seventh District weekly reporting banks were off only $25 million, in contrast to a decline of $225 million in the same period of 1959, with all loan categories stronger this year. For the country as a whole; however, the net decline in total loans at reporting banks was considerably greater than in 1959, as a smaller contraction in commercial and industrial borrowing was more than offset by larger declines in other types of loans, especially those on securities. Total bank credit and deposits continued to fall through February as banks sold large amounts of Government securities, and this was reflected in a continued shrinkage in the money supply. Mr. Allen said he was not as concerned about the money supply to be or, rather, that he many of those at this meeting appeared as that too small a portion It seemed to him not share their views. did and that too out of savings, had been financed of increased production increase, financed by an unnatural and forced a portion had been large made the abnormal the reserves that System had provided credit. The result. He thought levels as a with higher price increase possible, or not the carefully whether time to consider was an appropriate this a time when business abnormality at to feed such should continue System His thinking was satisfactory level. at a high and activity was
influenced in part by a recent review of the loan portfolios of several banks, some of them sizable. He was surprised at what he saw, particularly the terms of the credits, and he did believe he was looking at isolated cases. He agreed with Mr. Bryan's statement that the banks were illiquid, but, based on his own observations, he questioned whether it could be said that they were striving to become more liquid. His observations had made him more sure than he was before that an adjustment was coming, a painful adjustment which was the result of financing growth by means of credit rather than through savings. He was equally sure that to put in more reserves at this time, when business was showing a tendency to level off at a very high level, would only make the adjustment more painful. Accordingly, Mr. Allen said, he would prefer to do nothing further for the present in the way of easing credit restraint, and await the results of the Easter season. Given the high instead to the evident disposition of people to rate of personal income and level of activity might and to borrow, the very satisfactory spend not, he saw no reason yet to anticipate continue. Whether it did or had phrased it, that would spiral," as Mr. Noyes a "recessionary net borrowed reserves would try to keep action. He deserve System and he would not favor changing of $250 to $300 million, in the range the directive at this time. the discount rate or District business sentiment reported that Ninth Mr. Deming a month ago. Actually, optimistic than be a little more seemed to
however, the available statistics showed only modest improvement, Continuing the trend in evidence for the past several months, February data on personal income in Minnesota indicated a 2.7 per cent gain from a year earlier and a .7 per cent gain from January. Wage and salary income was up 6 per cent in the year and .5 per cent in the month, while farm proprietors' income was off 20 per cent from last February. District nonagricultural employment in February was at a new high, seasonally adjusted, bank debits were 14 per cent above a year ago, and department store sales had been relatively good. The iron ore situation nationally was about as good as at this time in 1959, with stocks only one million tons smaller. However, the impact of the steel strike on Lake Superior ore could be seen by stockpiles from that source were 12 million tons smaller the fact that represented foreign imports. than in early 1959. Most of the difference shipments from the Superior ports It was too early to tell when Lake that some ore would go down begin this year, but it was expected would Michigan) about the first of April. the lakes from Escanaba (on Lake figures con Ninth District banking reported that Mr. Deming "accented seasonal trends". show what might be called tinued to were up more strongly. than usual, and loans Deposits were off more positions and pinch on bank reserve result was a continued The net loan-deposit ratios. continued rise in a the point made by had some question about Mr. Deming said he securities held by the that the decline in Government Mr. Thomas
banking system reflected mainly a demand by nonbank investors for such securities. It seemed to him that the banks continued under some pressure and were liquidating Governments more because they had to than because others wanted to buy the securities. In other words, he continued to be concerned about the general level of bank liquidity. While he would not go as far as Messrs. Johns and Bryan in moving strongly to bring up the total reserve base, he thought it would be well to attempt to move toward the objective of increasing that base. Therefore, he would look with favor on additional probing toward moderately easier conditions despite the current level of action, he believed, should be cautious interest rates. This probing and not forceful. The phrase used at the March 1 and gradual, easing"--with a tone of continuing meeting--conscious but moderate as to open market policy. He movement about expressed his feeling discount rate or the policy directive. saw no need to change the little new to report from the Mr. Mangels said there was department store with no changes in employment, Twelfth District, that seemed worthy of trade, or automobile sales sales, retail had cut back production steel mills reportedly A couple of comment. Also, it of foreign competition. types of items because of a few for fiscal 1961 budget the Defense Department learned that had been which would be helpful for Boeing contracts, included $1.5 billion because of but also themselves of the contracts not only because the district. filter through that would results
Mr. Mangels said that district bank loans increased in the past three-week period, but at only about one-third the rate of increase for the similar period last year. Demand deposits also increased, but again at a rate considerably less than last year. Banks continued to lose time and savings deposits, at a rate more moderate than earlier in the year, but in general district banks appeared to be in a somewhat easier position. In the past week, reporting banks were net sellers of Federal funds to the extent of $500 million, and this week it was estimated that they would be net sellers to the extent of about $1 billion. Borrowings from the Reserve Bank had fallen to modest proportions. Mr. Mangels said the business situation in general seemed to him to continue to show a somewhat mixed trend. Business had been affected by bad weather throughout most of the nation, but not much to indicate that even with better weather there there was upward movement. In view of the prevailing un would be a quick he would be inclined to stay somewhat on the easy side, certainties, three weeks. He would aim little easier than in the past perhaps a area of $200-$300 million, with for net borrowed reserves in the The policy directive seemed given to the Account Management. leeway the discount rate not favor changing While he would satisfactory. at some time in the too surprised if he would not be at this time, want to give some System might not near future the relatively unless conditions changed. consideration to a downward adjustment
Mr. Irons said there had been a slight lessening of activity in the Eleventh District, which perhaps could be attributed to weather conditions. Construction and department store sales had not been showing as much strength as earlier, the latter being 2 per cent under a year ago for the year to date. Another factor that might be having some influence was the further decline in petroleum production. Allowables had dropped to nine days, and there was no immediate prospect for improvement. This situation was reflected in drilling operations and the psychology of people closely associated with the oil industry. In general, however, district conditions were about the same as three weeks ago. They reflected many of the uncertainties seen in the national picture. said that for the period ahead he Turning to policy, Mr. Irons with the views Mr. Hayes had expressed. He wished to identify himself price and rate movement in the Govern was somewhat disturbed by the increasing number and also about the apparently ment securities market regarding a shift in Federal Reserve policy to ease, of press comments thought were to become be unfortunate if that for he believed it would maintain about the would be to His preference a strong expectation. would not try to force three weeks. He as in the past same position of restraint no further lessening and he hoped into the market, funds weeks. If the two or three during the next become apparent would some uncertainty be to introduce operations should effect of System that might be market, he felt people in the thinking of into the
desirable. He would not favor a change in the discount rate or in the policy directive. Mr. Erickson reported that conditions in the First District continued to show general strength, with no apparent upward or down ward pressures. There was nothing of importance to report with respect to production, construction, or employment. In the February survey of mutual savings banks, the tendencies that he reported at the March 1 meeting continued. Compared with last year, the deposit increase in February was less than in January, and withdrawals were higher. In February, mortgage portfolios increased only 2 per cent, which was the lowest rate of increase in over two years, week ending March 16, district reporting banks showed For the in business loans of over $30 million, which was several an increase million dollars higher than during the comparable period last year. three weeks those banks were net purchasers of During the past extent than in the previous six weeks. Federal funds to a greater Average borrowings from the Reserve Bank had gone down. During about $20 million, which three weeks borrowings averaged the past 2 per cent of the System total. was only a little more than continuing the policy of Erickson said he would favor Mr. appropriate and the directive weeks. He considered the past three rate. For net borrowed change in the discount would favor no plus or minus, as a target. he would suggest $250 million, reserves,
Mr. Szymczak said that for the next three weeks he would favor continuing the policy followed during the past three weeks. This was on the basis that the seasonal trend would be clearer by that time than at present. Also, the Treasury would have to come into the market several times within the near future, and the Easter season was about to begin. As to the money supply, which was a longer-range problem, the question he had in mind was how to accomplish an increase without adding to the inflationary potential. Additions to the money supply are not always feasible because there are factors over which the System does not have direct control, such as debt management and public psychology. The might decide, for example, to add to the money supply Committee when the market was bank reserves at a time additions to through he recalled Chairman Martin's changing. In this connection, already that some persons meeting to the effect the February 9 statement at had changed its policy, that the System already in the market thought developing tech was one of not. The problem actually it had when to the money supply at enable the System to add niques that would disturbing the the right amount without right time and in the of debt manage making the problem market and Government securities ment more difficult. changing the would not favor said that he Mr. Balderston existing policy continue the that he would rate and discount followed during the policy favor continuing He would directive.
the past three weeks that had produced net borrowed reserves averaging about $230 million. Chairman Martin said he thought there was almost a general consensus in the views expressed at this meeting. He had no con viction on the short-term aspects of the money supply, he said, and he was as perplexed as anyone with regard to the interest rate move ment. However, it must be remembered that the Treasury would announce its next financing at the end of this month, and the Committee should consider the psychological implications in the money market of moves on the part of the System. He found the situation difficult to analyze and interpret. Some people had overanalyzed the sitution and were making various assumptions, including the assumption that the System might change the discount rate. That was a matter of some concern. Chairman Martin expressed the view that in the present cir cumstances the Committee should be thinking in terms of an even keel policy, and he thought the consensus was very much along that line. He would not want to complicate the Treasury's problem. The con sensus, with which he was in agreement, favored no change in the and continuing about the same policy that had been policy directive followed for the past three weeks. Chairman Martin went on to say that he thought System policy that all things considered the System had had been quite good, and too much, perhaps, about right direction. He worried moved in the
overinterpretations and psychological aspects. In this connection, he felt there was a general tendency to exaggerate or overestimate what System policy was going to do to the economy. Chairman Martin added that the staff, as well as the members of the Committee, should be particularly careful in their comments to outsiders with respect to Federal Reserve policy in a time like this. Care should be taken, particularly, not to show undue concern. Chairman Martin said that in his view the economy was developing well. Some of the things that the System had been struggling to achieve for a long time were being achieved. It was necessary, however, to be careful about the psychological aspects of the current period, Chairman Martin then said he understood from the go-around that the Committee would favor continuing the existing policy di rective, and that, while there were views plus or minus here and there, it was the general consensus that the Desk should do the best it could to avoid any indication of tightening or of easing. The Chairman asked whether there were any questions or comments, and none were heard. He then turned to Mr. Larkin, who stated that he had no comment. Thereupon, upon motion duly made seconded, the Committee voted and unanimously to direct the Federal Reserve 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 ex change 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 close of this date, other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. members of the staff except Messrs. At this point all of the Young, Sherman, Thomas, Roosa, and Larkin withdrew from the meeting. Martin referred to a memorandum from Messrs. Rouse, Chairman ways in which the March 18, 1960 regarding Thomas, and Young dated so as to help minimize Account might function System Open Market transactions do when such of the Treasury refinancing difficulties not interfere with Federal Reserve credit and monetary policy represented an felt the memorandum stated that he He objectives.
excellent job and should be studied carefully. The Chairman also referred to a letter he had received from a group of members of the United States Senate dated March 12, 1960, copies of which had been released to the press by the Senators concerned, which contained suggestions for change in some of the Federal Reserve operating procedures. The Chairman then pointed out that action on renewal of three of the Committee's continuing operating policies that customarily are considered at the first meeting in March of each year was held in abeyance at the meeting three weeks ago. The Committee could continue to hold these in abeyance, he said, or it could affirm the operating procedures in the form in which they had been renewed a year ago. He was not suggesting that the Committee unanimity on these statements of operating policy or should seek if the three statements were and he anticipated that procedure, might be some negative votes. For himself, he had renewed there would be wiser not to modify the existing operating concluded that it form that would get unanimity. His policy statements to a compromise whether it wished to Committee discuss today was that the proposal or whether it of operating procedure the present statements affirm substance. He repeated wording and their to change their preferred they should not be the position that swung clearly to that he had that the statements were only at this time. It was true changed but there had been wording could be modified, words and that the
interpretations of the existing wording over a period of seven years and there had been misinterpretations, some conscious and some un conscious, some of which had tended to set apart the Board of Governors or the Committee and the Federal Reserve Bank of New York on the basis of different interpretations of such words as "solely," "primarily," and so on. In general, he felt certain that the actual operations called for by the Committee had followed procedures that were approved by virtually all members of the Committee, and in his opinion operations generally speaking had moved in the right direction. There was a question, of course, whether the Committee might have made more exceptions to its statements of operating policies than had been balance, however, he was convinced that there was no the case. On for a change in these statements simply because of attacks necessity that were being made on the Federal Reserve's so-called "bills only" Chairman Martin said that he would like or "bills usually" policy. first on the procedure that might be to have Mr. Hayes comment would be to take a vote (Chairman Martin's) proposal followed. His of operating policies, to affirm the present statements on whether regarding their person who had reservations it clear that any making vote against their perfectly free to should feel continuation a decision on this question, the Committee had reached renewal. After of the March 18 to take up the content suggestion would be his Thomas, and Young. by Messrs. Rouse, that had been prepared memorandum Martin at one that Chairman said he had understood Mr. Hayes problems such as first to discuss it would be preferable stage felt
those covered in the Rouse-Thomas-Young memorandum and, after reach ing some conclusions as to those proposals, to take up the question of the continuing operating statements. He would still have sympathy with that procedure, but he assumed that Chairman Martin now was calling for an expression of views on the three operating statements first. Chairman Martin indicated that this was correct. His reason for feeling that it was desirable to act on the operating policy state ments was partly related to the fact that the open market policy record that would be published early in 1961 would reflect whatever action the Committee decided to take at its March meeting on these statements, which had now been a matter of public record for seven years. He did not think action on reaffirming or changing these statements should be held indefinitely in abeyance because, in view of the history of what the Committee had done, that would be difficult to explain to the public; and he did not think the Committee should act as though it influenced by outside criticism of its statements of operat had been in substantial agreement as to the ing policies when, in fact, it was be followed. Chairman Martin operating procedures that should actual brought to the Committee's repeat what he had said that he also would of the United States that some members before, namely, attention should be of policy action to feel that statements Senate continued Report once a in the Board's Annual more frequently than issued year, perhaps on a quarterly basis.
Mr. Hayes said that although he felt a debate on the specific problems covered in the Rouse-Thomas-Young memorandum might clarify the thinking of the group, he did not wish to prolong this discussion of procedure, Turning to the operating policies, which he had not expected to discuss at this stage of this meeting, he stated that, ever since he became a member of the Committee, he had felt that the differences within the Committee as to what it wished to do were relatively small. He agreed with Chairman Martin that the Committee had been operating most of the time in a way that was satisfactory to all members. He felt, however, that an impression of excessive rigidity on the operat ing policy statements that had been renewed each year since 1953 had placed the Committee in a disadvantageous spot publicly. This had been demonstrated to some extent in the internal discussions within the Committee. He did not believe the Committee should voluntarily tie its hands with a rigid statement of policy, either for its own of public relations. He had hoped that sake or from the standpoint the Committee of this view and he had tried to do he could convince so over a period of time. He recalled that at the first meeting in his views and those a compromise between 1958 he had sought March two of these statements language for some others by suggesting of that previously used. The felt was more satisfactory than that he different decision. He felt the Committee's Committee had reached a believed it to have wrong, and he still at that time was decision
been wrong. He reaffirmed this position a year ago. This year, Mr. Hayes said, he was impressed with the suggestion the Chairman had made several meetings back that a committee try to arrive at a solution of this problem, and the draft of revised state ments that had been distributed by the staff committee under date of February 5, 1960, had seemed to him to be a good job. He would have been perfectly willing to adopt the suggestions contained in that draft and would be willing to do so at present. Mr. Hayes said that this was his position at the moment; he will be willing to adopt the February 5 draft but, if this could not be adopted, he would wish to revert to the position he had stated at the March meetings in 1958 and 1959. Mr. Balderston commented on the procedure that might be followed at this meeting, saying that in view of the attacks being made on the System it seemed to him important that the Committee of what would be in the 1961 Annual Report covering think in terms to the conclusion himself that decisions. First, he had come policy being made he would reaffirm the existing in the face of the attacks Mr. Mills had used at he liked the wording statements. Secondly, He would experiment meeting about experimentation. an earlier following the type of of this calendar year, during the remainder Thomas, and Young. by Messrs. Rouse, that had been presented analysis would be made by considering that better progress Third, he believed and their possible over words than by arguing specific problems
interpretation or misinterpretation. Whatever the final decision, however, he felt the staff suggestions, as embodied in the March memorandum, represented a worthwhile contribution that should have the Committee's attention. Mr. Szymczak said that there was the academic position to be considered, which seemed to want the System to go into intermediate and longer-term securities on all occasions to meet monetary needs. Against that, there was the practical side, and on this he found it better for the Committee to continue saying what it had been saying for seven years. This gave a definite position, and that was helpful in relations with the Treasury. After commenting on the paper sub mitted by Messrs. Rouse, Thomas, and Young, Mr. Szymczak said that at this meeting he would reaffirm the three statements of procedure that the Committee adopted some years ago, and, as practical problems Committee, make decisions on how to deal with those arose before the include making exceptions to the general problems, which might in the statements themselves. Mr. policies stated, as provided for would not be frequent. said he hoped any such exceptions Szymczak some difficulty in reconciling the Mr. Bopp said that he had and the suggestion in the Rouse-Thomas-Young statements of policy exceptions to the to involve rather frequent memorandum which seemed go beyond the usual and which would statements of policy general meetings of the Committee. intervals between
Mr. Johns noted that he previously had expressed reluctance about changing the wording of the operating policy statements. In view of the way the Committee was now operating, he would not wish to change them at this time. If, however, at this meeting the Com mittee should readopt the three statements of policy that were carried over at the meeting three weeks ago, should that action be taken as a complete rejection of any further consideration of the points mentioned in the letter sent to Chairman Martii on March 12 by a group of Senators? If so, he inquired whether this would be prudent. Chairman Martin said that he had considered this aspect very carefully. If the letter from the group of Senators were to be looked upon as a controlling factor, then the answer to Mr. Johns' question would be in the affirmative. He did not believe, however, that there to permit that letter to be a controlling factor in was any intention views or operations. His view was that, if the Com the Committee's to change the operating procedure, it mittee was unanimous in wishing of the letter from the and make the change regardless should go ahead of the Committee, however, his group of Senators. As one member in the right way the Committee had been operating judgment was that in the operating policies. was no reason for change and that there The Committee should decide what to do about the operating policy believed to be the right thing on the basis of what it statements that might be put on basis of some interpretation to do, not on the other persons. The by the Senators or statements of policy these
Committee should continue to study the problem of its operating procedures, but it should not be in the position of having a group of Senators dipping into the policy implications of the System unless there was a change in the provisions of the Federal Reserve Act. After Mr. Johns remarked that he would wish to be very sure that there was no merit in the suggestions of the group of Senators before they were rejected out of hand, Chairman Martin said that there was no suggestion in his mind of rejecting any proposal for study of Committee operations. He repeated that the Committee should study any suggestions that came to it with a completely open mind. This was a different thing from determining whether to reaffirm the that the Committee had been using because a operating statements placed certain interpretations on letter from a group of Senators of procedure. The question was not the Committee's statements in the letter to which Mr. to reject the views expressed whether consider the fundamental purpose Johns had referred but rather to and whether the procedures of operating policy of the statements the right ones. been following were the Committee had that member of the not asking any said he was Chairman Martin against his operating procedures to continue the to vote Committee to change but were subject of procedure The statements judgment. been able to would have the System doubted whether he seriously past several years it had followed in the carry on the procedure
if it had not had some statements of operating policy such as those adopted in 1953. It was easy to forget the difficulties of the transition from a pegged market for Government securities to a rela tively free market. These statements had been brought together and put in their present form because of the situation that existed during that transition. There had to be a framework for System operations, and these statements had provided that framework. The suggestion had been made that perhaps the Committee did not need the statements of continuing operating procedures any longer. Perhaps that was true. The Committee could adopt at every meeting a state ment as to what its operating techniques should be, as well as its on policy. If there was no history back of these three directive that might be the best solution, but there was a history statements, could disregard this He did not think the Committee back of them. to arrive at a decision to do away history. If the Committee were policy, it was the Chairman's with the statements of operating not only of the views would require consideration belief that this their recent letter Senators in expressed by certain that had been other aspects of policy, complete review of many to him but also a of guides the problems Committee report, the Radcliffe including on several occasions, before the Committee Bryan had brought that Mr. and other matters. to have the it desirable that he believed said Mr. Robertson he believed Further, policies. operating of continuing statements
that the Committee should make a decision now as to whether to re affirm them in their present form rather than to let the questions run on beyond this meeting. Mr. Hayes had suggested that the present statements inhibited members of the Committee from making suggestions for changes in actual operations, and he (Mr. Robertson) believed any basis for this feeling could be removed by (1) deleting from statements (b) and (c) the provisions indicating that these policies are to be followed until such time as they may be superseded or modified by further action of the Federal Open Market Committee, and (2) inserting in lieu thereof an additional statement that would apply to all three of the policies indicating that, because of variations in conditions, from time to time exceptions may be of these statements. He would also include a specific made to any Open Market Account bring that the Manager of the System requirement any situation that he believed to the attention of the Committee warranted an exception. said that he would not object to the proposal Mr. Szymczak points were already covered. but he believed the of Mr. Robertson, of the word "solely" in Mr. Fulton said that the inclusion people. He a red flag to some swaps was (c) prohibiting statement without changing the be changed or deleted thought this might were concerned. as actual operations so far of the statement meaning his judgment any change responded that in Chairman Martin time would require policies at this wording of the operating in the
an explanation as to why the Committee had made a change and what the significance of the change was. That explanation would have to be published in the Board's Annual Report early in 1961. He questioned whether a change in words with an explanation that it did not change the meaning would serve any purpose. Mr. Robertson commented that in view of the history of these statements, a change of this sort would mean a change in the policy, and Mr. Szymczak said that the saving feature of the whole period since the Treasury-Federal Reserve accord had been the fact that the monetary authority had a statement of its position for use in its relations with the debt management authority. Chairman Martin said that none of the members of the Committee should lose sight of the fact thatin the record the Committee was building for the period between now and the end of this year, there factors and perhaps new developments to be dealt with, would be new by the Committee or by the System would be and any actions taken interpretations both within and outside the subject to different System. would be desirable to that he thought it Mr. Irons said Any change in the with no change. the present statements retain change was made as to why the call for an explanation wording would that there was an area what its significance was. He recognized and could be made in wording this and that changes of semantics in was for this reason meaning. It having any substantive without
that he leaned toward reaffirming the statements in their present form. As an alternative, if it were not for the historical back ground of the statements, he would not object to dropping them entirely and operating without such statements, Mr. Hayes stated that he thought changes in the statements could be justified on two grounds. First, it was seven years since the original language had been adopted and the environment and conditions under which the Committee was working had changed in this period, during which we had moved a long way from a pegged market for Government securities. The market had come to understand the basis of System operations in this time, and the need for statement of this sort was much less today than it was seven years ago. The second reason was that he believed the Committee had changed in a small way to indicate a little more willingness to experiment. He did not see why the comittee could not admit such a change if it was true. said he came out very close to where Chairman Mr. Deming of the problem was semantics. He commented on Martin did. Part points he believed should be kept in mind in considering the problem, including the history and background of the "bills only" policy, the fact that Government securities dealers apparently believe the policy would make for a less broad market, is sound and that its abandonment the discussion of the Reuss amendment in the Congress last year, the fact that many professional economists view the "bills only" policy the hands of the it needlessly ties and allege that as unwise
central bank, and the fact that some members of the Congress object to the policy. Mr. Deming said that he believed the System could best meet the situation by issuing a formal statement which attempted to answer some of the criticism of professional economists as well as the uninformed criticism of others. Such a statement might clear the air. He would keep the basic framework of the operating policy state ments but would modify them gently along the lines suggested by the Rouse-Thomas-Young memorandum. After describing some additional changes that he thought might be made in the statements, Mr. Deming said that if this were done he would make a flat statement that the changes in wording did not change the Committee's operating policy statements as amended by these suggestions in precisely their present position, that is, he would keep them out of the Committee's policy directive. Mr. Leedy said that regardless of any statement the Committee as to its purpose in changing the operating policy state might make a change would be interpreted as having ments at this time, such change, he could see If there was no significant some significance. statement of ground rules changing the wording of the no reason for had been used and had become understood, now. These ground rules Committee could make that any statement the and he did not think be appropriate. He exceptions that might would cover all possible a member of the Committee had been was not aware of any case where the operating procedures, exceptions to from suggesting inhibited
He concluded that there was no sound basis in the present circum stances for any change in the statements. Mr. Leach said he rather liked the suggestion Mr. Robertson had made. He did not see how such a change could possibly need any explanation. When these rules were adopted seven years ago, there was considerable discussion as to whether they were to be rigid rules. Over the seven years, they had been interpreted in some quarters to mean that the Committee was rigid. So far as the third statement was concerned, Mr. Leach said he did not know why some swaps of securities within rather short maturities could not be an acceptable change of wording could be made, but he doubted that today. Perhaps it would be best to reaffirm the policy agreed upon some change in the rule on today, but he would prefer statements of this statement was believed the present wording swaps because he too strong. to him that it was easy to get Chairman Martin said it seemed to get away from the for operations and into specific suggestions to dispose of He would like of operating policy. general statements to hold in wanted to continue whether the Committee the question or whether operating procedures on the present abeyance a decision to continue the operating vote today on a proposal it wanted to have a question should that this He felt present form. in their statements talk about could the Committee it was decided, After be decided. rules. The any of the to make under might wish that it exceptions
question he was trying to present was whether the existing statements should be reaffirmed. Mr. Erickson said that in view of developments during the past three weeks he would reaffirm the present policy statements. He would be interested, however, in reviewing the suggestion Mr. Robertson had made. Chairman Martin stated that while there was merit in this sug gestion, he felt it was difficult to discuss this without getting into a redrafting of the statements of operating policy. Mr. Mills said he agreed completely with the view that had been expressed that the Committee should reaffirm the operating policy statements in full. In his view the Committee should suspend any of these policy statements whenever conditions necessitated deviations or exceptions. He also commented on how he felt the letter from a group of Senators might be answered. Chairman Martin then asked whether there were further com ments on the operating policy statements prior to his calling for a vote on whether they should be reaffirmed. Mr. Mills said that he would favor the existing policy a modification somewhat along statements, although he would accept by Mr. Robertson. the lines suggested seven years there had been said that over the Mr. Shepardson existing at the time these policies changes in the situation from that in the situation again. a potential change adopted. There was were
No one could guess what that might be, but in his view it was desirable to have the statements as something that the Committee could stand on during this period. Mr. Hayes said that the Committee thought it important to explain to the market seven years ago something of its approach to operations. He did not think the Committee needed these state ments any longer. If the System was doing a job as a central bank, it had to stand up to the Treasury under all conditions and it should not have to rely on these statements in order to do so. Many central banks do stand up to their Treasury, he said, and most of them don't have operating statements of this type. Mr. Balderston inquired whether the proposal that Mr. Robertson had made, adoption of which would show some flexibility, would be preferable to the existing statement, and Mr. Mills responded that he would prefer the original form of the statement although he would not object to the form suggested by Mr. Robertson. Chairman Martin then said that he would call for a vote as of operating procedure should be to whether the three statements In calling for this vote, he reaffirmed in their present form. in voting against the no one should be inhibited emphasized that if that was the view he held. statements indicated, Chairman this procedure being No objection to vote to reaffirm the three operating Martin stated that he would the following form: change in statements without
a. It is not now the policy of the Committee to support any pattern of prices and yields in the Government securities market, and intervention in the Government securities market is solely to ef fectuate the objectives of monetary and credit policy (including correction of disorderly markets). b. Operations for the System Account in the open market other than repurchase agreements, shall be confined to short-term securities (except in the correction of disorderly markets), and during a period of Treasury financing there shall be no purchases of (1) maturing issues for which an exchange is being offered, (2) when-issued securities, or (3) outstand ing issues of comparable maturities to those being offered for exchange; these policies to be followed until such time as they may be superseded or modified by further action of the Federal Open Market Committee. (c) Transactions for the System Account in the open market shall be entered into solely for the purpose of providing or absorbing reserves (except in the cor rection of disorderly markets), and shall not include offsetting purchases and sales of securities for the purpose of altering the maturity pattern of the System's portfolio; such policy to be followed until such time as it may be superseded or modified by further action of the Federal Open Market Committee. Messrs. Balderston, Bryan, Fulton, Leedy, Mills, Robertson, stated that they would vote to reaffirm the Shepardson, and Szymczak statements in their present form. to statement "a" he would Hayes stated that with respect Mr. in view of the fact "solely" to "primarily" to change the word like considerations other monetary policy included that he believed that and "c", he would to statements "b" reserves. As than supplying the same reasons. year ago, for had done a them, as he vote against about the "no swapping" he had serious reservations He would add that rule on any basis.
Mr. Bopp stated that he was bothered by use of the word "solely" in statements "a" and "c." He felt that, since the full Committee meets every three weeks, it was not necessary to have statements of continuing operating policies. Should they be retained, he felt they should be phrased so as to indicate that exceptions might be made to them as circumstances warranted. Thus, he would vote against reaffirming all three statements in their present form. Messrs. Allen, Deming, Erickson, Johns, Irons, Leach, and Mangels indicated that if they were members of the Committee they reaffirm the three statements in their present form. would vote to recessed and reconvened at 2:00 p.m. with The meeting then the close of the morning session except the same attendance as at that Chairman Martin was not present. Mr. Young for comments on Chairman Hayes called upon Vice Rouse, Thomas, and 18, 1960 from Messrs. the memorandum of March Open Market Account that the System dealing with a suggestion Young Treasury minimize its refinancing function to help the might interfere with would not when such transactions difficulties The specific policy objectives. credit and monetary Federal Reserve that the Federal Open the memorandum was discussed in suggestion of one-year the refinancings cooperate in smoothing Market Committee blocks of those bonds by acquiring November 1961 bills and Treasury the time of them over at and then rolling prior to maturity issues refinancings.
Mr. Young stated that the suggestion discussed in the staff memorandum had originated with the Treasury, that it would be appro priate for the Federal Open Market Committee to study the suggestion in its own self-interest, and that in his opinion a case could be developed that some participation by the System Account would be desirable from the standpoint of the Committee's objectives and purposes. Mr. Young added that the staff had not felt that it should make such a case to the Committee. Therefore, the memorandum simply attempted to summarize the principal aspects of the proposals and to highlight the main technical and procedural issues involved without presenting any detailed recommendations for System action. There was a discussion of the procedure that might be followed in considering the staff memorandum, during which the sug gestion was made that consideration of the refinancing of the 2-1/2 per cent bonds of November 1961 might be deferred until after a discussion of the proposal for acquiring maturing one-year bills for rollover in the forthcoming April auction. Mr. Young stated that to a degree the problem of the refinancing of the approximately $2 billion of one-year Treasury bills maturing on April 15, 1960, had of, although developments in connection with the been taken care Illinois, as of April 1 might cause tax assessment in Cook County, a problem to develop again. There was a possibility, he said, that a specific instruction to the Committee might wish to give the beyond the amount that acquire up to $150 million System Account to
the Account already holds of the maturing one-year bills, with the thought that, according to circumstances at the time, this addi tional amount might be permitted to run off or be used to seek an allotment of securities offered in the impending April financing. Mr. Young added that it was an open question whether the Committee would have any need to go further, such as to provide for swaps of bills. Possible additional action might be a problem for further study, once the Committee had set a course with regard to operations in the one-year bills as a continuing procedure. Vice Chairman Hayes commented that Mr. Young's remarks indicated that there might be a discussion of whether to go into the maturing April bills in a small way, after which the Committee whether it would wish to authorize any swaps. Mr. would consider the tentative suggestion in the Hayes said that he had understood was that the Committee might wish to authorize March 18 memorandum of the maturing April bills, the acquisition of up to $150 million swaps or outright purchases. to be acquired either through total was correct but that there might Mr. Young stated that this before the next question of swaps for going into the be no need meeting of the Committee. entered the meeting. point Chairman Martin At this the proposal for discussion of followed a long There either on an out with an April maturity, acquiring 1-year bills of executing swap of the techniques or through swaps, right basis to experiment might be desirable of whether it and transactions,
with swap transactions during the period between this meeting and a meeting on April 12 or whether such experimentation, if authorized, should be subsequent to completion of the forthcoming Treasury financing. There was also a discussion as to whether, apart from acquiring maturing one-year bills through swap trans actions, it would be desirable for the System Account to attempt to make outright purchases of these maturities. During this discussion, Chairman Martin pointed out that no special authoriza tion was needed for acquiring bills of different maturities on an outright basis under the Committee's general operating procedures, if such acquisitions were in accordance with the Committee's policy directive, and Mr. Larkin added the comment that System Account holdings now included bills maturing as late as January 1961. At the conclusion of the discussion, it was the consensus for engaging in swap transactions in bills that no authorization noted that as a practical matter be given at this meeting, it being possibility for using such an appeared to be little or no there basis for the purpose of authorization even on an experimental meeting of the Com bills prior to the acquiring 1-year maturing however, that further on April 12. It was understood, mittee meeting of the Committee be given at the next consideration would included in the staff memorandum of March 18, to the proposals authorizing swap transactions the possibility of 1960, including operating policy, exception to the Committee's in bills as an
reaffirmed earlier during this meeting, that precluded offsetting purchases and sales of securities for the purpose of altering the maturity pattern of the System' portfolio. It was agreed that meetings of the Federal Open Market Committee would be held on Tuesday, April 12, and Wednesday, May 4, Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions