April 12, 1960 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington on Tuesday, April 12, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Balderston Mr. Bopp Mr. Bryan Mr. Fulton Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Treiber, Alternate for Mr. Hayes Messrs. Leach, Allen, Irons, and Mangels, Alternate Members of the Federal Open Market Committee Messrs. Erickson, Johns, and Deming, Presidents of the Reserve Banks of Boston, St. Louis, Federal and Minneapolis, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Eastburn, Hostetler, Marget, Messrs. Brandt, and Tow, Associate Economists Noyes, Roosa, System Open Market Account Mr. Rouse, Manager, to the Board of Governors Mr. Molony, Assistant of Research and Koch, Adviser, Division Mr. Board of Governors Statistics, Finance Section, Keir, Chief, Government Mr. Statistics, Board of Research and Division of Governors Board of to the Chairman, Mr. Knipe, Consultant Governors Jones, and Storrs, Baughman, Messrs. Ellis, of the Federal Einzig, Vice Presidents Richmond, Chicago, Banks of Boston, Reserve Francisco, respectively Louis, and San St.
Messrs. Parsons and Coldwell, Directors of Research of the Federal Reserve Banks of Minneapolis and Dallas, respectively Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period March 22 through April 6, 1960, and a supplementary report covering the period April 7 through April 11, 1960. Copies of both reports have been placed in the files of the Committee. With further regard to developments since the Committee meeting on March 22, 1960, Mr. Rouse made the following comments: Since the Committee last met, the Government securities market has lived through the Treasury's cash financing, prices and yields of Government securities have fluctuated widely, and this morning the market is preparing for the one-year bill auction at 1:30 p.m. today. As far as the Treasury cash financ ing of $2 billion 4 per cent notes maturing May 1962 and "up to" $1.5 billion 4-1/4 per cent bonds is concerned, I think it safe to say that we have not yet seen the end of the post-mortem on the bond issue. The artificiality of the long-term bond marketwhere prices have moved rapidly in either direction without any significant volume of trading--has been pointed up by the lack of public response, but I doubt that this will prove anything Congressional critics. The claim that there to the Treasury's would have been a far better response if more time had been allowed prospective subscribers has little merit. At the close last night, the new issues were selling in the when issued market at discounts that exceeded the value of Tax and Loan accounts to commercial banks. I should like to make two comments on the sharp run-up in the past few days that resulted in Treasury bill rates over cent and 3.854 per cent in yester average rates of 3.622 per six-month Treasury bills--about auction of three- and day's rates a week earlier. First of all, 7/8 point above the average rates to a point closer to the the upward readjustment of an anchor for the short some sort of discount rate may provide for a better auction of the one term rate structure and make the other hand, there does not year bills this afternoon. On
appear to be much interest in the April bills from banks, dealers, or corporations, and there is some concern in the market about adequate demand to cover the $2 billion offering at anything like a rate which, in relation to existing rates, could be regarded as reasonable. Secondly, the gyration that the short-term bill rate has been undergoing over the past few moths is undoubtedly a reflection of the fact that the bill market has increasingly become a market where nonbank trading predominates. With banks relegated to the background, the market has lost something of its continuity, and rate movements have become increasingly independent of the bank reserve situation. In today's auction the Account Management plans to tender to roll over its holdings of $122 million special Treasury bills maturing April 15. This action appears appropriate in the light of the prospective reserve situation and also to give the Treasury some help in what may be a difficult financ ing operation. I should also like to call the Committee's attention to the fact that payment date for the new one-year bills falls on Friday, when both the Chicago and Philadelphia banks will be closed. The Treasury will consequently not receive pay subscriptions allotted in those districts until the ment for 18th, while it anticipates that the bulk of maturing bills will be presented for payment in New York or other districts on the 15th. In addition, many of the New open for business securities dealers will not be open on the York Government may create additional complications. It all 15th, and this to the possibility of a difficult situation around adds up possibility that the Treasury balance the week end; there is a and even result in a need for the System to may dip sharply, to tide the Treasury over the purchase special certificates at the present time is that this week end. Our best estimate wanted to make the Committee not be necessary, but I will aware of this possible development. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period March 22 through April 11, approved, ratified, and 1960, were confirmed. under date of memorandum distributed the staff Supplementing with regard to the following statement 8, 1960, Mr. Noyes made April economic developments:
The uncertainty which has characterized the economic outlook for several months remains unchanged. There has been, however, considerable shifting among the components that make up the uncertain mixture. The weather has been good, and department store sales showed a spectacular increase. Auto mobile sales improved enough in the last ten days of March to bring about a seasonally adjusted increase for the month as a whole. The Consumer Finances Survey reported that consumers' buying plans were up and at high levels, by historical standards, confirming the relatively optimistic indications of the quarterly Census survey, mentioned at the last meeting. Boom or near boom conditions continue to develop in most industrialized countries overseas. Business loans at city banks expanded more than in any March except 1956. The money market firmed dramatically in the last few days, as has already been reported. Set against these indications that we may have been experi encing no more than an exaggerated version of the late winter lull are a counter-seasonal rise in unemployment in March and an estimated decline in industrial production of another 1 per cent. Construction activity dropped back to about the November level, after three months of increase. The mortgage market eased noticeably last month, and five of the Home Loan Banks dropped their lending rates. Steel production, which had slipped to 92 per cent of capacity in March, was off further to a rate of 85 per cent last week, and is scheduled at 80. per cent this week. The stock market, at levels well above the early March lows, showed little signs of decisive movement in either direc tion--and commodity prices, another composite indicator which might reflect some shift in the balance of underlying forces, were substantially unchanged. There was an upward creep in the consumer index, attributable largely to technical factors. Hence, we find again that the only really significant develop everything together, is that an uneasy and uncer ment, taking tain balance has been maintained another three weeks. Yesterday was almost a typical day--both equities and fixed-income securities dropped substantially in price, rather than following Two classic blue pattern of crosswise movement. the orthodox chip companies reported first quarter earnings--du Pont a drop, Perhaps the only generalization at an all-time high. and IBM that is justified is that, with the passage of time, the chances a whole will be spectacular on that the average for 1960 as either side are thereby reduced. following statement with respect to Mr. Thomas presented the financial developments:
Since the last meeting of the Committee, "liquidation of the inflationary psychology", which the Chairman was quoted as mentioning, seems to have continued further, but developments in the money market and the stock market during the past week show evidences of a possible shift. Interest rates declined further in the latter part of March and the early days of April. Yields on Government securities reached the lowest levels in about a year. Yields on corporate and State and local government issues, however, did not decline as much as those on United States Government securities. Last week, large tenders by dealers bid down rates on Treasury bills to new low levels for the year, leav ing dealers with larger awards than they expected. During the past week, however, there has been an upturn in rates on United States Government securities almost as spectacular as the March decline. Treasury bill rates have risen sharply, and this week's auction averages are about 7/8 of a point above those of last week. In addition to the pressure of large positions held by dealers, bills acquired in Chicago for the April 1 tax date have come onto the market. Also, banks have been offering securities to cover reserve needs subscriptions to the new Treasury issues for arising from which payment is to be made this week. On the basis of past experience, pressures on the money market and rising bill rates are not unusual for the first half of April. There are large cash needs for dividend and payments, and the Treasury usually has a cash borrow other ing operation at this time. A special factor this year may be that the lower bill rates that have developed are not sufficiently attractive to many nonbank pruchasers to hold them in bills. With market rates as far below the discount of this sort are likely to rate as at present, pressures in sharp fluctuations in Treasury bill rates. Whether result in rates is due to these temporary influences or the upturn to more fundamental forces remains to be seen. of stocks that has occurred in the The upturn in prices indicate a change in expectations. past three weeks may prices and in short-term interest These increases in stock some decline in Treasury bond been accompanied by rates have rise. Yields on corporate and prices following the previous bonds, which did not decline as much in the first municipal in Treasury bonds, have not risen notice quarter as those But new issues of corporate secu ably in the past week. low yields were not last week at relatively rities offered satisfactorily distributed. to analysis of the puzzling declining Turning back the first quarter of the year, one interest rate trend in is that credit demands in the aggregate possible explanation
were not as large as they were during 1959. The Federal Government retired more debt than in the first quarter of any year since 1956. Corporate and State and local government borrowing in the long-term capital market has been substantially smaller than in other recent years. Loans on securities by banks and by brokers have shown a pronounced decline. Real estate loans at banks have increased only moderately and there are reports of an easing in the mortgage market generally, although it is questionable whether there has been a decrease in the total volume of mortgage loans made. Short-term borrowing by business at banks has continued at a high level, and consumer credit has increased. The total volume of bank credit has continued to decline, as the increase in business and consumer loans at banks has been more than offset by the decline in other loans and by further reduction in bank holdings of securities. The second major factor that has been suggested as a reason for declining interest rates is the large nonbank demand for Government securities. This may be divided into three elements: One is the shift in liquid asset holdingsparticularly by corporations but also by others--from bank deposits to short-term Government securities, attracted by the interest return available. This shift is in effect the counterpart to the large volume of short-term securities that the Treasury had to issue last year and the high interest rates that had to be offered to float them. The public could have liquidity with interest without holding cash balances that give no return. This may be adequate to explain the decline in bank deposits. It raises a question as to the economic significance of such a decline which merely repre sents a shift in types of liquid assets held and not a decrease in liquidity. The second element in the large nonbank demand for Government securities--and the consequent decline in interest rates--is the shift from equities to bonds. This is the main feature of the "liquidation of inflationary psychology." The turn of events in the past week or so raises a question as to whether this shift has been brought to an end by the very which it caused in the relative prices of stocks adjustments Stocks have tended to be firmer while bond prices and bonds. have been soft. responsible for the nonbank element that may be The third perhaps for the slacken demand for Government securities--and activity--is more conjectural. of the increase in economic ing of saving has increased that the rate That is the possibility and services might have that spending for goods further and another aspect of the liquidation This may be been curtailed. of inflationary psychology.
It seems evident that business saving has tended to increase. Information is not yet available to show whether consumers are also saving more. It does appear, in any event, that they have been channelling more savings into holdings of Government securities. It is not unlikely that consumer practices as to spending and saving are being increasingly determined by their attitudes toward the price structure, rather than by the level of their incomes. In this type of situation, fiscal and monetary policies are less significant than are the pricing and selling practices of business. Nevertheless, if the economic situation should weaken for this reason, there is less reason for the maintenance of a restrictive credit policy. The trend of the money supply in March is uncertain because of statistical complexities in adjusting for seasonal variations. Figures available for March 30, the last Wednesday in the month, seem to indicate a smaller than seasonal decline in the five weeks since February 24. The seasonal correction, however, is questionable because of the difficulty of allowing for shifts incident to the Cook County tax. The decline this year by March 30 seems to have been smaller than has occurred in most other previous years. There is some evidence that this is due to a change in technique of handling the Illinois tax situation rather than to a change in the trend of deposits. Averages of daily figures for weekly and semimonthly periods continued to show a greater than seasonal decline in demand deposits in the last half of March. The total money supply, seasonally adjusted, is about a billion dollars less than a year ago and nearly $2 billion below the peak of last summer. At member banks alone the decline in demand deposits has been larger. Turnover of demand deposits, however, has increased by more than 7 per cent in the past year. Time deposits at commercial banks and also at mutual savings banks increased more in March than in any month in over a year, showing an aggregate rise of about $1 billion, but for the first quarter as a whole the increase of less than half a billion dollars was smaller than usual. Federal Reserve operations and policies have been relatively passive in recent weeks and might be said to have had no positive influence on the recent trend of interest rates. Open market operations--besides adjusting to rather wide temporary variations in reserve needs--have shown little In effect reserves released by the more net contribution. than seasonal decline in deposits have been used by banks to reduce indebtedness, and net borrowed reserves have declined accordingly. No positive stimulus in the way of reserves has been supplied by the System. It additional may be said that the market has eased itself and the System has permitted this ease to develop.
Maintenance of the discount rate and the repurchase rate at above market rates on Treasury bills, however, has exerted something of a restraining influence. In such a situation banks have an inducement to cover temporary reserve needs by selling bills rather than by borrowing, or to sell bills in order to reduce borrowing. One result of this type of rela tionship between discount rates and open market rates is to cause rather wide short-term fluctuations in market rates in response to variations in reserve needs. Such fluctuations are likely to have a greater restrictive influence than is in tended in the current policy posture. Greater than desired restraint can be avoided by one of three methods, each of which has advantages and disadvantages: (1) The discount and repurchase rates could be lowered. (2) The repurchase rate could be reduced, while keeping the dis count rate unchanged. (3) The Account Management could actively purchase and sell bills on a day-to-day basis in an endeavor to cover temporary needs. A forth possibility, of course, is that market rates may eventually adjust upward to the level of the discount rate. To some extent this has been happening in the last few days. The level of rates achieved yesterday seems to be reasonably consistent with a discount rate of 4 per cent and net borrowed reserves of $300 million or less. Whether this adjustment is more than a sharp temporary remains to be seen. If credit demands should be fluctuation vigorous, then rates are likely to stay at the current level further. They are not high relative to the latter or to rise demands should be slack, the part of 1959. If, however, credit upward adjustment may be short-lived. If rates decline again, appropriate discount and repurchase rates then the question of will need consideration. this Committee is more basic--decision facing Another--and action in an endeavor to check whether to take more positive the net decline in bank credit and the money supply. Any such upon a judgment as to the significance decision should be based deposits. Is it merely continued decline in bank of the recent a shift in asset holdings with no significant change in has there been a of the public? Or liquidity or attitudes relative to in an increase in saving in spending and decrease indicate that, what of the last few days might comes? Events supply may be ending. decrease in the money its cause, the ever The situation needs careful watching. pattern and the of the customary seasonal On the basis assuming the maintenance financing, and schedule of Treasury reserves at somewhat below $300 million, it of net borrowed
appears that no additional reserves may need to be supplied during April. The estimates for the next statement week, how ever, are uncertain, and operations may need to be based on the performance of the market. Mr. Marget commented as follows regarding the balance of payments: Since it was the massive gold outflow of 1958 that made this country aware that it, too, not only could have a balance-of-payments problem, but quite obviously did have one, I might begin by inviting the Committee's attention to what has been happening in the way of gold outflow more recently. For the year 1959 as you know, if we exclude the quite exceptional payment of $344 million in gold to the International Monetary Fund as part of a program to increase that institution's re sources, the level of gold outflow from the United States, at around $650 million, was less than 30 per cent of the 1958 gold outflow of $2.3 billion. We now have the figure for foreign gold purchases for the first quarter of 1960: at $42 million, it is less than half the already relatively low figure for the first quarter of last year. A decline of this order of magnitude in the level of gold spectacularly high level of 1958 deserves, I outflow from the think, itself to be called spectacular. Nothing anywhere near of course, can be found in the figures for the as spectacular, combined outflow of gold and dollars, which is what we take as over-all deficit in our balance of payments. the measure of the Nevertheless, while it would be quite wrong to characterize as "spectacular" the improvement that has taken place with respect of payments over the last nine months, it would to our balance it--with all due caveats, of not be wrong to characterize course--as impressive. I grant, which one would not be This is a conclusion, on the basis of some of the public discussion likely to reach We still find reference balance-of-payments position. of our for example, to the balance-of-payments in that discussion, as one which is still "deteriorat position of the United States explanation of this kind can, I think, be only one ing." There is the habit--quite understandable otherwise, of talk: and that calendar year as our unit for comparison. of course--of taking the in our balance of payments that the over-all deficit It is true at $3.7 billion, than it for the calendar year 1959, was larger $3.4 billion. But this calendar year 1958, at was for the happening during the calendar year completely obscures what was parts of the year, and the later between the earlier 1959, as respectively.
What happened during the earlier part of 1959 was that our balance-of-payments position was continuing to "deteriorate." Indeed, if we are to appreciate the degree of improvement that we have been witnessing in our balance-of-payments position since the middle of 1959, it is important to understand that the degree of deterioration in the first part of last year was very much greater than is suggested by the figure of $3.7 billion for calendar 1959 as against the figure of $3.4 billion for calendar 1958. The blunt fact is that in the second quarter of 1959 the deficit in our over-all balance of payments reached an annual rate of around $5 billion. It is from this low point that we have to measure the degree of improvement in our balance of payments that has taken place since we first witnessed the turn; and, so measured, the degree of improvement can fairly be called impressive. There were times, to be sure, within the last nine months, when one wondered whether the improvement that had seemed to be setting in around the middle of 1959 was likely to continue. For example, the effects first of the port strike in October and then of the steel strike made the changes appear rather irregular, and there were also a good many ups and downs from month to month in trade in particular commodity groups not obviously affected by the steel strike. But the export figures for last December, at an annual rate of something like $18 billion, as against a realized export level in 1958 of around $16 billion, gave reason to hope that the process of adjustment had been resumed. Then came January, with exports at an annual rate even slightly higher, at $18-1/2 billion. And now the trade figures, adjusted for seasonal variation and February the extra day for leap year, show a still higher annual rate, of around $19 billion. moreover, imports have been During this whole period, averaging around the $15-1/2 billion level they showed during of 1959. This means that our merchandise ex the second half first quarter of 1960, assuming no great port surplus for the may be at an annual rate of about change in exports in March, double the $1-1/2 billion This is just about $3 billion. average that we showed during the second half of 1959; and, if low point, in the second quarter of we remember that at the I think we must at zero, was virtually our export surplus 1959, a word to describe the is not too strong agree that "impressive" position over the place in our trade that has taken improvement last nine months. the trade figures, I should like to add, The improvement in figures. As in our gold and dollar is quite clearly reflected January gold and dollar figures previously reported, the I have that they could that none of us believed were so favorable
continue to improve at the same rate. They have not; but I must here report that when, at the last meeting of this Committee, I characterized the movements of gold and dollars for February and the first half of March as "anything but spectacularly favorable," I did less than justice to the degree of improve ment which they in fact represented, because I did not have available, at that time, the figures for foreign holdings at the commercial banks. When those holdings are taken into account, it is not unreasonable to estimate the gold and dollar transfers in the first quarter of 1960 as between $350 and. $450 million. This is to be compared with a level of around $700 million in the first quarter of 1959. The year is still young, and we still have a long way to go before our interna tional accounts are balanced; but it can hardly be denied that the showing of the last nine months, as we now view it, looks not only impressive on its own account, but also particularly encouraging from the standpoint of those of us who want the balance in our international accounts to be brought about by methods of expansion, rather than contraction. the following statement of his views on the Mr. Treiber presented business outlook and credit policy; The first quarter of 1960 was marked by high but not spectacular business activity. The sideways movement in March followed a February in which some business indicators regis tered an improvement while others remained unchanged or declined slightly. Hesitations of this type are not, of all unusual during the course of a sustained busi course, at create uncertainty as to expansion. But they always ness for breath which will be whether there has been a pause by renewed progress or whether, on the other hand, followed an advance warning of business recession has been posted. this kind of uncertainty on the climate of The impact of had probably been unusually opinion in the last few months because the pace of economic activity has clearly strong of the exuberant expectations held by many fallen short year. Sales and output have observers at the start of the but this may turn out to be largely indeed lagged somewhat, culminating in the of a relatively severe winter, the result of the country during March. snow storms in many parts heavy probably been a transi these lags have some extent also, To The welcome diminution of inflationary tional condition. in labor unrest have the comparative respite psychology and and production policies shifts in inventory encouraged wholesome from the initial poststrike speed. involving a reduced pace
As for the future, the recent survey by the University of Michigan of consumer intentions suggests that consumers' optimism is strong and that their buying plans are consider ably larger than a year ago. In addition, plant and equipment expenditures rose substantially in the first quarter, and business plans indicate that outlays during the year may rise at a rate which, if realized, would push fixed-investment expenditures (in current dollars) above the previous record reached in 1957. Increased consumer spending will be needed to offset the effects of a slower pace of inventory accumulation, to assure the optimistic background essential to the expansion of invest ment expenditures, and to expand production and employment. Credit is more readily available for mortgages; and we may see a further expansion of mortgage credit stimulating con struction. A recent Fortune survey shows that home builders are generally optimistic with respect to the outlook this year. Municipal construction is also likely to expand as municipalities become aware of the easier availability of long-term market financing. The banks have been experiencing a strong demand for busi ness loans. Bankers with whom we have discussed the matter are looking forward to a continuation of a strong loan demand. Short-term liquid asset ratios are at postwar lows at reporting banks both in New York and outside of New York. Loan-deposit ratios are at new highs. Despite the fact that the money supply is now lower than it was a year ago, the first quarter of 1960 has seen increased credit availability and reduced interest rates. The reduced money supply has been accompanied, as one might expect, by in creased velocity, and over the year there has been a decided increase in money substitutes held by business concerns and the public. In such circumstances, I am not yet disturbed about the present size of the money supply. Sufficient time has probably not yet elapsed for the System's relaxation of the pressure on net borrowed reserves to have an appreciable effect on the money size of the money supply makes it possible supply. The present for the System to create more bank reserves without feeling that we are encouraging an inflationary expansion of bank credit. While Treasury tax collections in March have been below Treasury believes that expenditures are also expectations, the to be below earlier expectations. Thus the over-all likely Treasury picture for the fiscal year ending June 30, 1960, is about the same as it had been projected earlier this year. Today the Treasury is conducting an auction to sell $2 special one-year Treasury bills to refund the $2 billion of that mature April 15. Toward of one-year Treasury bills billion
the end of this month the Treasury will be announcing the terms of a new issue or issues, the proceeds of which will be used to retire the three Treasury issues totaling over $6 billion which mature May 15. Within the last month or so we have seen volatile changes in short-term interest rates. The dominant influence of corpo rate investors in the Treasury bill market has undoubtedly accentuated the movement of bill rates. Rates can easily move downward or upward with a modest change in the relationship of the supply of credit and the demand for credit. Indeed, in recent days we have seen the rate pendulum move sharply upward. The upward movement is good in the light of the underlying situation; it also has the advantage of bringing present rates into better relationship with the discount rate. It seems to us that the economy is basically strong and that the next move is more likely to be renewed expansion than stagnation or recession. Therefore, it would be unwise to signal doubts as to the strength of the economy by either reducing the discount rate at this time or making any substantial change in open market policy. Therefore, we favor the continuation of about the present degree of restraint, with no change in the directive. To the extent that consideration is given to net borrowed reserves, a figure of plus or minus a quarter billion dollars would seem recognizing that the actual figure might fluctuate appropriate, a good deal either way, particularly on the side of lower net borrowed reserves. Turning to another subject, Mr. Treiber went on to say: has just informed the Reserve Banks of the Mr. Sherman Reserve Bank of Philadelphia has had in success the Federal on deposits and related items from obtaining daily information I am pleased to report that the New York Bank member banks. from all member banks in to collect daily reports has arranged District beginning in the latter the Second Federal Reserve part of May. following are basically those The techniques we are as seemed with such modifications by Philadelphia, developed had sufficient experience After we have to suit our situation. and to button up any loose ends, to afford adequate analysis Reserve Banks on our to the Board and the other we will report program. the earlier available forward to using We are looking of member and projections our estimates to improve information of open market for use in the planning bank reserve balances operations.
Mr. Erickson said that the elements of strength in the First District continued to outweigh te elements of weakness. In February, the New England index of industrial production was up one percentage point. In the March survey of New England purchasing agents, 37 per cent of the respondents looked forward to increased production activity, compared with 29 per cent in February, while the number of respondents looking for a downturn was only one per cent greater than in February. Compared with the same month a year ago, construction contracts in February were off 17 per cent, reflecting a substantial decrease in the nonresidential and utility company sectors. Residential construction appeared to be going counter to the national figures, registering an increase of 17 per cent in the past four months compared with the same four months a year ago. February was 23 per cent ahead of February 1959, which in turn was 87 per cent ahead of February 1958. Nonagricultural was down a fraction of one per cent, with employment in textiles, employment apparel, and leather off somewhat. Transportation equipment also was down becuase of a strike, now 12 weeks old, that closed the Bethelehem Steel shipyards. Retail trade was following the national pattern closely; months were even with the same four months a year ago. For the past four sales were up 21 per cent. 2, however, department store the week ended April were better than they had been. Automobile registrations three weeks District during the past also said that Mr. Erickson sold. In the same Federal funds than they banks purchased more reporting a little more discount window the Reserve Bank banks used period, member
actively than in the previous three weeks. There were two or three days when borrowings were at the highest levels for a number of weeks. Mr. Erickson then commented on the Regional Outlook Conference held during the past week, which was attended by economists from through out New England. It was the consensus of the participants, he said, that there would be healthy growth in the economy for the rest of the year. The median of predictions for gross national product in the last quarter of 1960 was $514.5 billion, annual rate, and for the index of industrial production a figure of 113.5. A 5 per cent rate of unemployment was expected in December 1960, and the median of forecasts for the consumer price index in December was Mr. Erickson expressed agreement with the views stated by Mr. Treiber with regard to the outlook. He recommended no change in the discount rate or the policy directive at this time. As to open market operations for the next three weeks, he would leave it to the Manager of the Account to maintain the situation about as it had been, being sure there was no undue ease and no further tightness. Mr. Irons said that Eleventh District conditions had been mixed, as was true nationally, but probably for somewhat different reasons. In was on a high plateau, although some elements general, District activity even, and some were down a little. were up, some were holding about in general were showing satis store sales and retail trade Department factory improvement, while nonfarm employment increased contraseasonally increase in March. to show a seasonal and was expected in February
Unemployment was declining slightly. Farm activity had stepped up greatly as better weather conditions prevailed, and in general the agricultural outlook appeared favorable. The major area of slowing down of activity continued to be in the petroleum industry. The nine-day allowable basis remained in effect, and it appeared to be the present thinking of oil men that the industry must learn to live with nine- or ten-day allowables at least as far ahead as one could look this year. This decline in crude oil production, and in refining, had had some effect on the District's industrial production index, which dropped one point. Construction developments appeared to be about seasonal in the early part of the year, and there were indications that mortgage credit was now more available. On the whole, the situation in the District was strong, with the only real problem being in the petroleum industry. Turning to the financial side of the picture, Mr. Irons said that still strong, but not pressingly so. There continued to loan demand was of Government securities by banks, deposits continued be some liquidation and the reserve positions of banks seemed to have shown some to decline, of pressure. Borrowings from the improvement, that is, some lessening they were running earlier substantially. Whereas Reserve Bank had dropped at from 10 to 15 per cent of the System total, recently they had dropped or 10 days, large cent. In the past week from 5 to 10 per to the range funds to more purchases of Federal had reduced their of the District banks District banks it appeared that In substance, less nominal amounts. or than they were a few weeks ago. their houses in better order were getting
Mr. Irons expressed agreement with the comments of Mr. Treiber regarding the national picture. In view of the Treasury situation, con ditions in the Government securities market, the economic situation, and "stras in the wind" pointing to strength rather than weakness or deterioration, he would hold steady for the next three weeks and avoid any overt action. He would not favor a change in the discount rate, in the directive, or in open market policy or objectives. An overt action might be regarded as signalling doubts at a time when it was questionable whether any such signal would be justified. Accordingly, he would con tinue to move along as at present. Mr. Mangels said that Twelfth District employment data for March were not yet available, but that an increase in unemployment insurance claims had been observed, no doubt reflecting reduced employment at air craft plants. Because of the decision to discontinue the Bomarc missile program, Boeing planned to release some 2,500 or 3,000 workers, and plans for four Bomarc bases on the Pacific Coast had been cancelled in line with the decision. Steel production was down 10 per cent in March from February and was about 4 per cent below 1959. The three large mills were producing at a little less than 81 per cent of capacity, compared with 90 per cent in February. While lumber prices had been fairly steady during the past the mills were revising their 1960 sales estimates downward few weeks, cautious about building inventories. The total and were becoming more value of construction contracts in February was up 8 per cent from 1959, works and utilities. Nonresiprincipally increases in public reflecting
dential construction was up 11 per cent, while residential construction showed an increase of 2 per cent. For the four weeks ended April 2, department store sales showed a slight decrease from 1959, but after making allowance for the difference in Easter dates, it was expected that they would compare favorably with last year. In the first three weeks of March, sales of new cars in California were up 12 per cent from February and up the same extent from a year ago. Mr. Mangels said that loans of District banks increased moderately in the three weeks ended March 30, the increase being much smaller than in the corresponding period a year ago, and that reporting banks reduced their holdings of Government securities almost $100 million. Demand deposits were down somewhat and time deposits were down slightly, but savings deposits increased $7 million. While the increase in savings deposits was not large, it might indicate a reversal of the recent trend. One savings and loan association in southern California had now gone to rate of 4-3/4 per cent, and there was again considerable general a dividend discussion of the 3 per cent interest rate ceiling on savings deposits. Reporting banks were net sellers of Federal funds in the past week and sellers in nominal amount this week. Borrowings from expected to be net the Reserve Bank were quite nominal. degree of strength in the general There appeared to be a moderate Mr. Mangels said, with no particular business and credit situation, fast or, on the to move up rather economy was going indication that the down fast. There was considerable that it was going to go other hand,
excess productive capacity, and there continued to be a larger amount of unemployment than would be desired. Bank loans had not increased excessively, and predictions for this year were in terms that, although there would be some further increase in loans, the amount of that increase would be substantially less than last year. At the same time, there had not been any downward modification of lending rates. Under present conditions, Mr. Mangels felt that there should not be any change in the discount rate or the directive. As to operations of the System Open Market Account, he would favor going perhaps a little further in supplying reserves than Messrs. Treiber, Erickson, and Irons had indicated. He would have in mind somewhere around $100 million of net borrowed reserves as an indication of maintenance of restraint, but to a lesser degree than in the past. Mr. Deming reported that automobile sales in the Twin Cities, as measured by registrations, were down in the first half of March but up in the second half of the month, and the favorable trend appeared to be Accordingly, dealers were now enthusiastic about continuing in April. prospects for the rest of the year. Department store men in the area also were satisfied, because sales thus far in April were higher and at The improvement extended not only to sales of satisfactory levels. and home furnishings. A recent apparel but also to sales of appliances indicated that Home Builders Association survey by the Minnesota earlier, had now were quite high new houses, which inventories of unsold there would not be figure. It appeared that to a rather low been reduced
too much in the way of speculative building during the coming year, and that building would be more on a contract basis. Although there was as yet no large movement, shipments of ore down the Great Lakes had gotten under way. Mr. Deming went on to say that District banks, both city and country, showed sharp loan increases, sharp declines in security holdings, and contraseasonal deposit decreases. As measured against a year ago, loans were up 12 per cent, holdings of Government securities were own 12 per cent, holdings of other securities were down 9 per cent, and deposits were off 5 per cent. Thus, liquidity positions continued to worsen. Mr. Deming then reported briefly on certain statistics that had been compiled on average bank reserves over a period of years. These figures showed that a decline from December to March was quite usual from decrease was more marked, in terms of both year to year, but that the percentages and dollars, from December 1959 to March 1960 than in any other comparable period since 1951. said he was somewhat concerned about the total reserve Mr. Deming in general, he felt As to the national picture base and the money supply. that sentiment was running a little better than production and unemploy his thinking to a position justify. He came out in ment statistics would In his opinion, there should be much like that expressed by Mr. Mangels. but the Committee should rate or the directive, no change in the discount through open market operations. toward a somewhat easier position be moving
He did not have in mind easing too much and would not want to suggest any particular figures, but he felt it would be advisable to probe toward easier money market conditions through the open market device. Mr. Allen said he expected reports for March, as they became available, to continue to include less favorable news, such as a drop in total industrial production and an increase in unemployment. However, the situation varied with areas and industries. Although in general it seemed to be the durable goods industries that were experiencing a sag in demand, Wisconsin, an important producer of durables, had the strongest employment situation of any State, based on the classification of major labor markets. In March, all four of the Wisconsin centers classified of Labor showed less than 3 per cent unemployment, and by the Department the two centers classified in Iowa were in the same group. The unemploy ment situation in Indiana and Illinois was better than for the nation, so among the Seventh District States, was worse off than the only Michigan, it had been for several years. average, as seasonal increase in to say that the expected Mr. Allen went on sales contests, may have materialized. auto sales, stimulated by incentive The daily sales rate for the last ten days of March was 26,023 cars, sales totaled since 1955, and first-quarter any similar period higher than In the first quarter, than last year. 14 per cent higher 1,515,000 units, three quarters for the next and estimates cars were produced, 2,000,000 making 6,400,000 for the year. were 1,700,000, 1,000,000, and 1,700,000, Therefore, if production 1,020,000 on March 31. car inventories were New
followed the estimates, and if inventories were reduced by September to the desired target of 500,000, sales in the second and third quarters must exceed those of last year by 12 per cent. Right now the feeling in Detroit was again one of optimism. Mr. Allen commented that capital expenditures had been estimated as substantially higer this year than last, and that spot checks with a number of business firms had not revealed cancellation or postponement of plans. All firms contacted appeared to be going ahead as planned. In fact, there seemed to be no feeling that recent less favorable business reports marked the beginning of a recession; rather, it was felt that favorable elements in the picture would soon be more evident and that the total demand for goods and services was much more likely to rise than to contract. Mr. Allen reported that during the past three weeks the mortgage market had eased in the Chicago area. Two of the largest savings and loan their "prime" mortgage interest rates from 6-1/4 associations had reduced undoubtedly a reflection of a low demand for loans to 6 per cent. This was but it was understood there had been a pickup in the in the first quarter, in mentioning banking statistics There seemed little point past two weeks. because the Chicago banks, which bulk large in Seventh District figures, However, in the first yet past their April 1 dislocation. were not banks declined less than year earning assets of District quarter of this year had been much the decline this while for the nation a year ago, District banks were Moreover, loans at Seventh larger than last year,
up slightly from the year end, although all reporting banks in the country showed a net decrease in excess of $1 billion. On the basis of the information at his disposal, Mr. Allen said that, as at the March 22 meeting, he would prefer to await the results of the Easter season before changing the direction of monetary policy or the degree of restraint. He would leave the directive and the discount rate as they were. Mr. Leedy commented that there had been no significant develop ments in the Tenth District in the past three weeks. Business loan figures were in line with the national figures; that category of loans continued to increase, but liquidation of Government securities by the banks had more than offset the increase. Mr. Leedy said he shared the concern that had been expressed about the money supply. In view of the uncertainties existing at the present time, whatever the causes might be, the downward trend of money supply, and the high loan-deposit ratios of the banks, it seemed to him that the be presented to it to make every opportunity that might System should use supply. He would not want to do anything some additions to the money was fearful regarding the an impression that the System drastic or create market developments since However, the nature of open economic future. of net borrowed reserves toward lower levels decided to move the Committee which the System could was an area within to him that there indicated time not create an and at the same some additional reserves inject which he had referred. It was his feeling, impression of the kind to
therefore, although perhaps not quite to the same extent as Mr. Mangels, that the Committee should use whatever opportunities might arise to make some injections of reserves. Beyond that, and particularly with respect to the discount rate, he would make no change. Mr. Leach said that scattered but definite signs of a spring sales pickup constituted the only recent change that had been noted in the high level of Fifth District business activity. Weather was apparently the only factor that had exerted any significant downward pressure, and such evidence as was available pointed to continuing high levels of personal income and potential pruchasing power in the District. Textile mills had recently granted wage increases averaging about 5 per cent, and it was expected that these increases will be absorbed by the manufacturers. This highly competitive industry had increased wages 39 per cent since the 1947-49 base period, while prices received for its products decreased 9 per cent. The slightly easier position of District member banks at the time of the March 22 Committee meeting seemed to have been temporary, Mr. Leach said. Loan demand during the past three weeks had been greater than seasonal, investments had been liquidated at a faster rate than customary, borrowing at the discount window had been fairly heavy, and District banks had been net purchasers of Federal funds. With respect to policy, Mr. Leach suggested that the principal or become a little easier. to continue as at present question was whether data provided inadequate guidance for At a time when available economic
policy decisions, it seemed to him desirable to pay particular attention to credit developments. For the past six weeks, Mr. Leach noted, clause (b) of the directive had provided for "fostering sustainable growth in economic activity and employment while guarding against excessive credit expansion." As stated in the staff report distributed prior to this meeting, total credit at city banks declined moderately over the five weeks ending March 30 in contrast to substantial increases in comparable periods of most other recent years. Moreover, new offerings of corporate and municipal securities continued to be light. Under these circumstances, it seemed to him appropriate to increase reserve availability somewhat and to eliminate from the directive the reference to special concern over excessive credit expansion. In this connection, he did not favor an approach that sought to determine whether the Committee could do what it wanted to do under an existing directive. Instead, he favored flexibility in directives as well as in policy. Under the policy he had in mind for the next three weeks, Mr. Leach said, net borrowed reserves might be in the neighborhood of $150 rate at the moment, for reasons He would not change the discount million. He would not want to lead others to think already expressed by others. actually was. However, the was more gloomy than it that the System would not (b) of the directive final part of clause elimination of the the record look it would make and in his opinion be an overt action, better.
Mr. Mills said he was one of those who believed that the money supply, as conventionally defined, was the pressing tactical problem to which policy should continue to be addressed. In his opinion, the fact that the money supply had continued to shrink should give pause for thought and was reason for concern. In this connection, an interesting problem had developed that deserved analysis, namely, that over the past three weeks the money markets had been relatively tight in the face of a lower level of negative free reserves. According to past thinking, the lower level of negative free reserves presumably afforded a basis on which credit would have expanded and the decline in the money supply would have been at least arrested. However, such had not been the case. A possible reason could be found in the staff memorandum on the outlook for positions, distributed to the Committee under date of member bank reserve April 8, which showed that in January through March 1959, when the System was commencing policyvise to accelerate pressure on the expansion of bank bank required reserves declined to the extent of $656 credit, member had been a decline in member same period of 1960, there million. In the of $998 million. It would be possible to interpret bank required reserves attributable to the accelerated decline this year as being the greater of many months. over a period policy had exerted that System pressure current year, a first quarter of the continued into the This pressure bank in commercial a decline there is customarily year when of the period deposits.
It does not come into the practical reasoning of the management of a member bank, Mr. Mills said, that because the bank's required reserves are declining and the bank is in a sense thereby reaching an easier reserve position, it is in a better position to expand its loans and investments. Instead, the banker fashions his thinking on the movement of his deposits. Looking at developments in that light, one could like wise make the interpretation that a level of $250 million of negative free reserves, more or less, over the past several weeks had in fact represented much greater pressure on the reserve positions of the banks than the actual figures would indicate. This would be for the reason previously mentioned, namely, that a major element that had brought down the level of negative free reserves was the decline in required reserves. a comforting factor to the banks or the kind of development This was not stimulate banks to act in such a way as to check the contrac that would tion of the money supply. saying went back to what he under Mr. Mills said that what he was had neglected and ignored the Mr. Bryan's thesis. The System stood to be the downward movement in total reserves, movement of total reserves and to serious financial and economic would in due course lead if not arrested, Mr. Mills read the explanation of his reasoning, consequences. In further following statement: in the economic history of There are recurrent occasions reach a position of when financial factors the United States cash balances and The piling up of dominating significance. securities in the U. S. Government holdings of short-term huge such an occasion by corporations may signify hands of large
way of denoting a malfunctioning between debtor and creditor relationships. Idle cash balances and inert investments in U. S. Government securities in creditor hands represent re sources which, as they fail to circulate back through the economy, do not lodge in debtor hands where they can be availed of for constructive purposes that assist in the service of out standing debts. When at the same time monetary policy has limited the availability of credit and has contracted the money supply, the economy may be left in a position where the gap between idle money resources and the availability of credit reaches proportions that tend to induce economic stagnation. If this kind of situation should be left unattended, a period of over-saving and underspending could put in an appearance. In the belief that while capital formation is a process of saving it must nevertheless be lubricated by an appropriate flow of newly created bank credit, it follows that the stimulus of new credit is now needed to prime the economy's powers of consumption in ways that will better activate corporation functioning and release impounded money reserves to fruitful uses. If that objective can be reached, an improved relation ship between consumption and production, and between debtors and creditors, will have been realized. In closing the gap between consumer-debtors and producer-creditors it can be hoped that an enlivened economy, besides giving a material assist to debt service, will also provide the means for reducing its burden through a return flow of repayments on outstanding obligations. Mr. Mills then said that the immediate implementation of a policy based on the reasoning he had outlined would be to bring the level of negative free reserves down to a lower level, with a maximum of $200 million as a ceiling that ought to be avoided and a lower level sought. should be as disturbed and unsettled If the Government securities market would be at hand for a favorable opportunity today as it was yesterday, This would serve the purpose of giving injecting additional reserves. that the economic objective market at the same time some confidence to the was being accomplished.
Mr. Robertson said that as he looked to the future he had no feeling of gloom whatsoever. It seemed to him the chances were strong that the country was on the verge of a definite upswing of economic activity, accompanied by a surge of inflationary psychology and by inflation itself. In his opinion, therefore, this would be exactly the wrong time to reduce the weights that were on the pendulum. Instead, the wise course would be to hold steady, with no reduction whatever in the degree of restraint that had been provided. If anything, he would be inclined to move on the other side, and it was his guess that in another three weeks the Committee would be moving in that direction. He would not change the directive or the discount rate, nor, as he had indicated, would he change the degree of ease or of tightness (whichever one might had been striving for in the past three weeks. call it) that the Account Mr. Shepardson said he saw no reason to review in detail the in the economy. Suffice it to say that some of them were various trends were down. However, the reports on some of the most recent up and some shifts were indicative of an upswing with the advent of spring weather, manifest. Since there were beginning to make itself which was belatedly it would not be advisable it seemed to him that still some uncertainties, of greater restraint until the condi to make any move in the direction At the same manifested themselves. had mentioned actually tions that he be unwise to them that it would promise of there was sufficient time, lessening of restraint. the way of a make any move in
Mr. Shepardson said he would go along closely with the views expressed by Mr. Treiber. He would favor holding about the degree of restraint that had prevailed in recent weeks, and be would not favor any easing. (Subsequently, as recorded later in the minutes, Mr. Shepardson indicated that he saw no objection to permitting such ease as might develop in the market through the operation of natural forces to remain in the market.) Mr. Fulton commented that in general Fourth District activity could be characterized as an operation of relative dullness at a high level. Steel production was going down rather precipitantly. One mill which was producing at over 100 per cent of capacity a short time ago was and admitted that cancellations were greater than new now in the 70's orders coming in. Other mills reported a good demand for galvanized but pipe of all sizes was a drug on the market. sheet and tin plate, Sales departments of the mills indicated that customers were buying hand larger inventories at the end of the strike to mouth and apparently had than many admitted at the time. steel situation, Mr. Fulton noted that In further comments on the production of about 120 of production continued, total if present rates year would be indicated. Turning to the foundries, million tons for the cutbacks; while those in the he said there were reports of widespread be a good one, March, April, that the year as a whole would industry felt Inventories of consumer are months of high production. and May typically particularly high. On the other hand, durable goods were reported to be
one company reported a marked pickup in orders in March, with the export situation strong, particularly to Latin American countries. Another report, from a large maker of heavy machinery, was to the effect that it had been working full time to get out drawings and proposals for manu facturers that had not yet been put in the form of orders. It was still generally expected that a good deal of money would be spent for machinery and modernization of equipment throughout the current year. Mr. Fulton also made reference to a recent meeting of Fourth District business economists, at which projections for the fourth quarter of the year were quite good. The economists foresaw some slackening in the second quarter and felt that the third quarter would be marked by the usual summer doldrums, but they expected a pickup in the fourth quarter and felt that as a whole this would be a good year. went on to say that department store sales and auto Mr. Fulton the trend already reported, department store mobile sales were following last year and automobile sales 8 per cent sales being 2 per cent above had been in the doldrums until Construction activity, which higher. up, while unemployment insurance now seemed to be picking recently, Bank loans were 8 per in the past week. claims declined substantially down, and time deposits deposits had gone last year, demand cent above Bank had been quite modest, averaging up. Borrowings from the Reserve were 2 or 3 per cent of the System total. around dullness was the view that the current expressed the Mr. Fulton that were too high, including expectations of a number of factors, result
weather conditions, and the existence of larger inventories than had previously been admitted. He would not be averse to a slight easing of the net borrowed reserve position, and he suggested $200 million, give or take. He would not change the discount rate or the directive at the present time. Mr. Bopp said that employment, a factor always of concern in the Third District, was 4 per cent higher in February than in February 1959. Both new and continued unemployment insurance claims also were below 1959. The Johnstown, Pennsylvania, area had been reclassified upward by the Department of Labor, but only from F to E, and four of the 13 major labor areas in the District were classified E (unemployment from 9 to 11.9 per cent). The employment situation in the District, Mr. Bopp said, was one reason he had frequently been on the pessimistic side, although he was not pessimistic today. One area of difference between the District and the nation was said. There had been some expansion of in the banking picture, Mr. Bopp loans which was not equalled by reduction of investments. A decline in deposits, which had persisted over the years and was larger this year, created a problem for District banks in adjusting their reserve positions. Until the past two or three days the banks had been making their adjust of Federal funds, but recently they had ments primarily through purchases Federal Reserve Bank. more heavily from the been borrowing there be no change in he would recommend that Mr. Bopp said that Neither would he discount rate at this time. the directive or the
recommend any change in the degree of restraint or in the tone of the money market. In the latter respect, he referred, of course, to the general tone that had prevailed in the market rather than the erratic movements of the past few days. (Subsequently, as recorded later in the minutes, Mr. Bopp said that in the light of the discussion at this meeting he would favor some easing of the reserve positions of banks.) Mr. Bryan said that most recent Sixth District statistics showed only small changes, which were essentially similar to those reported nationally. As he saw the national situation, there was at the moment little basis for predicting a marked upsurge in the economy, and certainly not a downturn. For that reason, he was in agreement with those who had expressed the opinion that it would be a mistake to embark on any massive operation through the use of any of the instruments of or overt easing policy. At the same time, he felt that none of the Federal Reserve seemed to justify a policy of restraint. economic and financial criteria morning, it occurred to him that he listened to the discussion this As one of the crucial points involved was a determination of what System inadvertence. Such been, either overtly or through policy actually had because until the extraordinarily important seemed to him a determination policy had been, it was not conclusion as to what its Committee came to a direction. In his opinion, to modify policy in either in a position The actual level been one of restraint. de facto, had Committee policy, a downward trend, even allowing for of total reserves had been following ago. Required than a year total was lower all, and the growth at no
reserves continued to fall, banks continued to liquidate investments, and the banking system was being kept in debt to the Federal Reserve System. Average net borrowed reserves had fallen, but to him that was deceptive because ultimately that decline had come about simply because of a reduc tion in required reserves. System policy had permitted the total of Federal Reserve credit to move downward, so that member banks had actually received no easing of their positions from that source. How the Committee could have expected the money supply to do anytning other than it actually had done, he did not know. Mr. Bryan repeated that he considered the level of net borrowed reserves especially deceptive as a guide to policy in a period when re quired reserves were falling sharply, so sharply in fact that the estimates were frequently overrun by the facts. There was enough historical experi ence, he said, to indicate that if the System kept the reserve supplies declining or completely stable, this would of the banking system either or later exert a deflationary pressure on the economy. He shared sooner banking system, which the position of the views of Mr. Mills regarding the was highly illiquid and potentially dangerous. he felt take no massive action saw it, was to as Mr. Bryan The problem, to put some to use available opportunities either direction, but in system. He did not think that anything additional reserves into the banking de facto as System policy continued so far, but if had happened disastrous explain. If the would be hard to ahead that been, he saw trouble it had be used, he felt that during the borrowed reserve concept was to net
next couple of months it would be advisable to move toward a zero figure. Mr. Johns said he continued to associate himself, as he had three weeks ago, with the view that the continued decline in total reserves and the money supply ought to be at least arrested or, better yet, reversed. He then presented substantially the following statement: There has been for some time a conjuncture of forces operating to bring about a continuing reduction of total member bank reserves and contraction of the money supply. Parenthetically these resulting phenomena--contraction of total reserves and the money supply--have at times been obscured by other developments heraldedin various quarters as indicators of lessening monetary restraint, namely, a sharp decline in interest rates (until recently) and a decrease in that widely accepted barometer of monetary policy, net bor rowed reserves. On March 1, 1960, the Committee took note, among other things, of a February decline in the seasonally adjusted money supply to a level as much as $300 million below a year earlier and concluded, to quote the draft of policy record entry for that meeting, that "it would be appropriate to supply reserves to the banking system somewhat more readily." "Accordingly," the draft says, "the consensus favored, for the immediate future, a policy of moderately less restraint." Notwithstanding this, total reserves and the money supply have continued to decline, and the responsibility for this state of affairs is, I think, substantially the Committee's own. I want to say why I think so, although I have spoken along these lines before. Insofar as the Management of the System Account receives a guide to open market operations, it is in from the Committee borrowed reserve target or range, subject, terms of a net latitude or leeway according to the expressly or tacitly, to of the market." In the things develop and to the "feel way that the range of net borrowed past I would judge immediate reserves has been about $200 to $300 million. This means that Federal Reserve Banks has bank indebtedness to the member say, $600 and $800 million. averaged between, yielding 3 per cent or below However, with Treasury bills the discount rate last Friday), and with (as they were until cent, profit-minded bankers may generally be counted at 4 per
on to prefer liquidating bills for purposes of adjusting to reserve drains, rather than borrowing from their Reserve Banks. Even if the recent increase in bill rates should prove to be permanent, it is not at all certain that member banks will not continue to desire to reduce their indebtedness to the Reserve Banks. The Committee's staff has been pointing out for some time that bank liquidation of short-term Government securities has been occurring at a rapid rate. Nevertheless, in order to induce borrowings at such levels as would bring about net borrowed reserves within the target range, the Management of the System Account has had to sell bills. Thus, a mechanism has been adopted by the Committee which, under the conditions existing, virtually assured a continuing contraction of total reserves, commercial bank credit, and the money supply. These results may reasonably be calculated to persist until one, or more, of the following events occurs: (1) the disparity between market interest rates and the discount rate is re dressed; or (2) the Committee, having made clear its intent with respect to total reserves and the money supply, adopts a guide or guides to open market operations which will not result in defeating the Committee's intentions, at least, as to the direction of movement which should occur in the supply of reserves and, over time, in the quantity of money. In attributing the liquidation of Government securities by banks to the combination of a penalty discount rate and a policy of keeping banks indebted to the System, I may have oversimplified. Some have seemed to think that the banking community has been reflecting a change in the expectations of the business community. If so, this could be considered ominous. But whether that is so or not, it appears to me that steps should be taken to reverse the decline in total reserves with a view to reversing also the decline in the money supply, if for no other reason than because the Committee made a decision at the March 1 meeting to supply reserves more readily and at the March 22 meeting did not, as I recall it, indicate that it wanted reserves again and further reduced. Unless the policy adopted March 1 and 22 is to be reversed, I see no way to defend continued contraction of the supply of total reserves and money. If the Committee does not want to continue reducing total the money supply, what means can it employ? The reserves and way I prefer is to direct the Desk to increase total reserves, seasonally adjusted, at a designated annual rate, say about 2 per cent. However, if it is desired, at least for the time being, that net borrowed reserves be used as an operating
guide to open market operations, I suggest that the Desk be authorized to cause or permit the level of net borrowed reserves to fluctuate more flexibly with a view to bringing about the Committee's desired results as to total reserves and the money supply, rather than treating net borrowed reserves as if they were the proximate objective of policy. In such case the level of net borrowed reserves in the near-term future may need to be substantially reduced, maybe as low as $100 million or even free reserves. If net borrowed reserves are thus used as a means to an observable end, it would make sense to give the Management of the Account considerable latitude as to the level of net borrowed reserves which from time to time will be deemed appropriate in order to induce the effect upon reserves and the money supply which the Committee desires. This, I think, would preserve a meaningful distinction between the Committee's policy responsibility and the Desk's operating function. The present discount rate, in its effect upon bank reserves been substantially more restrictive in the and money supply, has period since about February than it was in the previous six the discount rate was below the bill rate. Unless months when recent rise in short-term rates will persist, we think that the be made, I think, for reducing the a logical technical case can with market rates. I rate to a closer relationship discount be better to wait and see what agree, however, that it would to, and whether it movement in market rates amounts the recent will persist. presented by Messrs. Mills, commented that the views Mr. Szymczak he felt that the At the present time, and Johns merited study. Bryan, in the however, uncertainties strong. There were, over-all, was economy, therefore, this would and in his opinion, securities market Government open market operations. some reserves through good time to provide be a he would might be supplied, reserves that the volume of it came to When the Account, but the Manager of the judgment of the decision to leave to go down. borrowed reserves of net allow the level he would to be one moment seemed at the the situation said Mr. Balderston it was rolling prosperity." Whether described as "rolling that might be
uphill, on the level, or downhill, he did not know, and he suspected that his own uncertainty with regard to the future was shared by many businessmen and by those in the financial markets. On the one hand, there were evidences of strength, such as an 8 per cent increase over a year ago in long-distance telephone toll calls. Also, he had gotten a report from a chemical company that despite unsatisfactory sales in January and February, both of which had fallen behind the budget, sales in the last two weeks of March were surprisingly good. A report from an electrical company indicated that while export business was off, sales of components to a large number of customers, large and small, had been very strong, leading the company to suppose that its users of components were doing well and that the export business would be better. On the other hand, there was ahead Treasury financing that ought not fail, and there was the continued decline in the money supply that had already been discussed this morning. Then, too, the period of business expansion was already two years old and, if past cyclical movements were to repeat under the surface that it would be themselves, there would be happenings hoped the System would act until too late. He difficult to observe sooner rather than later to counter any weaknesses that might be coming rolling prosperity to roll downhill. economy that would cause the into the had been somewhat disturbed in the past Mr. Balderston said he economy have and hold failure to let the weeks by the apparent three of this, he had not be sure While he could ease as had developed. such as developed was that such ease as the weeks passed the uneasy feeling
again being mopped up by the System. The net borrowed reserve level that had emerged in the past three weeks was higher than be would have liked, and thus far the System apparently had failed to cause the money supply to increase. He hoped that corrective action might be taken in the next three weeks, but that it could be taken unobtrusively. If the net borroed reserve figure should drop to around $200 million or lessa development he would like to see--that would be noted, of course, and publicized. However, he thought it necessary to move in that direction because the System may have overstayed restraint in the fashion explained by Messrs. Mills and Bryan. At the same time, since businessmen them selves seemed to be groping to discover what the future might hold, he hoped that overt action by the System might be avoided. Chairman Martin commented that Mr. Thomas had quoted him correctly as saying that the inflationary psychology had somewhat diminished. That did not necessarily mean, of course, that inflationary psychology would not reassert itself. He was inclined to think that System policy, had been quite correct. It could perhaps have been generally speaking, and without criticizing the Desk it was modified in a number of respects, been too much reliance on net borrowed his impression that there may have weeks. Too much attention may have reserve figures over the past few an observation of the kind by the Desk. This was just been given to them was one that he the Desk, but it make when not operating it is easy to was rather obvious. thought
Chairman Martin said he thought a fairly good case could be made that the general economic picture required that some attention be paid to making additions to the money supply. How such additions might be brought about, he did not know, but the reason he considered it important was that monetary policy and debt management policy had now come together for the first time in a long period. Also, even with the prospect that Govern ment spending for welfare programs might be in the headlines in the course of the next few weeks, it looked as though there would be a small budget surplus for this fiscal year and a substantial budget surplus in the next fiscal year. Thus, the Treasury would be paying down debt for the first time in a long period. Furthermore, although only about $370 million had gone into the new long-term Treasury bond, that was a defla tionary step. The Treasury had indicated, and the market expected, that the Treasury would lengthen the debt whenever it had an opportunity. Thus, monetary policy was being supplemented actively by debt management policy, and this was something to bear in mind. meeting, the Chairman noted to the discussion at this Turning in favor of an increase in had been practically no sentiment that there what Committee policy had been, regard to the question of restraint. With of semantics. The somewhat into the area that this fell he suggested were carried out quite know whether its intentions Committee could never on its own accord. the situation developed or to what extent that the be recognized said it should the Chairman Continuing, time. The Committee had generally was now in the market for some Treasury
followed a policy of even keel at such ties. By and large, however, and without any overt action, he felt that a trend toward lower net borrowed reserves would be the part of wisdom and would be what the economy re quired. As to the broad economic picture, he did not want to repeat what he had said on previous occasions. However, the farm situation still concerned him, for he saw gradual pressures in that area that were likely to multiply. In his opinion, the banks had made themselves illiquid; one of the things now in the picture was that many of the easy credit plans the banks were espousing so actively several months ago were now a source of some worry to the banks. Taking all these things together, it seemed to him that when debt management policy and monetary policy came together as at present, and when there were uncertainties in the economy, the System certainly ought not absorb any more of the reserves being created by the action of the economy itself than it was necessary to absorb. Looking at the matter as an outsider and not in any way as a critic, it seemed to him that during the past week or so the Desk had been keeping the area of more restraint rather than less. up a target that got into That again touched upon the cumulative effect of policy over a period of time. Chairman Martin expressed the view that any overt action on the part of the System in either direction would be unfortunate at this time. might look toward a lower felt that the Account Management However, he when that level was coming about from level of net borrowed reserves sources and could be avoided only by sales from the System Account natural
portfolio. That, he suggested, would be in accord with both the spirit and purpose of System policy. As he had said on other occasions, he thought there was a tendency to take what monetary policy can do too seriously. He did not think $100 million of reserves one way or the other was going to make or break the economy. However, with the manage ment of the debt and open market policy now complementing each other, ordinary prudence would make the System lean in the direction of supply ing more reserves than there had been in the banking system until it could be seen clearly where the economy was going. At that point, the System might want to take overt action. It was possible, of course, that there might be another bonfire of inflationary psychology; that was the essential problem in the balance of payments. The System ought to take overt action if something like that should occur, but he considered in his judgment it would be the last bonfire of this it unlikely, and particular cycle if it did occur. Martin commented that there had been only one suggestion Chairman during today's discussion. When it came to for a change in the directive the level of net borrowed reserves, a tally just handed to him by the a large majority of those who had spoken appeared Secretary indicated that to favor moving downward. he had found the discussion connection, Mr. Bopp said In this convincing, and that he would favor subsequent to his previous comments some slight easing.
Chairman Martin then said that the consensus favored no change in the directive. It was also the consensus that the Committee should move in the direction of slightly easing the picture as far as reserves were concerned, but with great care on the part of the Desk not to do this in an overt way. Mr. Rouse, who had left the room somewhat earlier to confer with the Desk by telephone, commented at this point on developments in the Government securities market. The essence of his report was that the bill market, which closed more or less at bottom yesterday, had been deterio rating rather steadily this morning. It was now the view of the market that the auction of one-year bills this afternoon would result in an average rate higher than 4-1/2 per cent, with outside bidding likely to be weak and dealers reportedly reluctant to underwrite the issue. Mr. Rouse said that expected to enter tenders for about $100 million of the one the Treasury and that if prices for the issue turned out to be spread over year bills, might award less than the amount of the offer too wide a range, the Treasury that the new three-month bills auctioned ing. In further comments, he said the new 182-day bills at quoted at 3.70-3.65 and yesterday were now being also had been affected. The long-term market 4.00-3.96. Mr. Rouse said he had authorized the Desk to buy from $75 to $100 delivery, and to make yesterday for Thursday of the bills auctioned million on Thursday. He the same amount to mature agreements in about repurchase the market, and he of stability to bring some degree that that would hoped done today. In view of the fact that felt it was about all that could be
yesterday's net borrowed reserve figure was lower than estimated, he had thought there would be some payoffs of repurchase agreements. However, dealers evidently had not been able to make sales from their portfolios and there were no payoffs. He repeated that he thought the actions he outlined were about all that the Desk could do as far as today was con cerned. With respect to policy for the next three weeks, as indicated by Chairman Martin's statement of the concensus, Mr. Rouse said he thought the Desk could handle the situation on that basis. He hoped it would be possible to avoid any second-guessing about targets in terms of net borrowed reserves. There was always the problem of minds being fixed on some particular target. Mr. Mills referred to the situation in the Government securities market, as described by Mr. Rouse, and inquired whether it would be profitable to have discussion as to whether this was a disorderly market action on the part of the Desk in the bill area. that deserved aggressive One possibility would be to let the market know that the System was inter power up to some certain amount of bills which would be posing its buying acquired from the market following the auction. What amount would give assurance to the market, he did not know. If the figure was too low it would mean nothing; if too high it might look out of line with good common sense. said that in addition to what was already being Mr. Rouse then thing that in his opinion would make a contribution done, the only other
would be to give assurance to the dealers of repurchase agreements being available on Friday, the payment date for the new one-year bills. In addition to the fact that Good Friday is a legal holiday in some States, it is a day when the Government securities market is normally closed, and many of the dealers' financing sources also would be closed. Therefore, the situation was an unusual one that might create additional complica tions. Accordingly, Mr. Rouse said, he would like to be able to advise the dealers that the Desk would be favorably disposed to assisting the dealers on Friday by making repurchase agreements available on a liberal basis. Mr. Mills said that presumably this should be generous help, and the repurchase agreements should cover a period sufficient to allow the dealers bidding in the auction to work off their purchases. Chairman Martin said he saw no objection, in the light of the holiday, to giving such an indication. He felt it would be unfortunate way than the manner in which the intervene in the market in any other to situation was being handled, because such intervention would produce and uncertainty than any good that might come out of more adverse comment it. to the Committee he would Rouse then said that if agreeable Mr. was of importance, in order to authorize like to be excused, because time agreements would be avail to advise the dealers that repurchase the Desk able on Friday on a liberal basis in order to help them with any financing might encounter. they problems
The Chairman asked whether there were any further comments, and no dissenting views were stated. Accordingly, Mr. Rouse withdrew from the meeting to get in touch with the Desk. Chairman Martin recalled that he had previously stated the con sensus as to open market policy in the ensuing period. He went on to say that anyone who would like to be recorded as voting against the policy indicated by the consensus was free to express himself at this time. Mr. Robertson said that he would vote in the negative except for the fact that this was not a large problem. As he understood the summary of the meeting, the consensus favored slight easing. Therefore, the problem was not a large one, and he would not want to make an issue of it, in his own judgment it would be wiser to take the other course. although Martin said that he had used the word "overt" because Chairman he thought that was the real key to the problem. He would not want anything that might be construed he would not want to do overt easing; as overt. that the Chairman had referred earlier Mr. Shepardson commented developed. He would not such ease as the market itself to not absorbing had been his thought that Shepardson said. It with that, Mr. disagree to produce an action on its own not take positive Committee should the as developed in the to allow such ease but it seemed appropriate easing, market to remain there. line was involved, that a very thin Martin replied Chairman dissent from the not wish to said he did which Mr. Shepardson following indicated by the consensus. policy
Chairman Martin then said that, although this represented second-guessing, if one were talking of the color, tone, and feel of the market, along with the level of net borrowed reserves, he felt that the Desk had kept net borrowed reserves somewhat higher than he would have kept them himself during the past period. In saying this, he realized that it is easy to sit at a distance from the market and second-guess the targets, and he did not think for a moment that $100 million of reserves one way or the other was going to make or break the economy. With reference to Mr. Shepardson's comment, Mr. Szymczak observed that situations might arise in the market where the policy indicated by the consensus would not only allow natural forces to operate but would add a little to the situation. Mr. Shepardson agreed. He added that in his comments he had reverted to a phrase the Chairman used earlier. The Chairman then stated that he would put the question, that a negative vote, and that a not want to urge anyone to record he did very modest thing was involved. went to record a negative said that he did not Mr. Robertson situation which might call in the light of the market vote, particularly for putting reserves into the market, thereby automatically dropping the level of net borrowed reserves. then inquired of Mr. Treiber whether he saw any The Chairman responded in the and Mr. Treiber a change in the directive, reason for negative.
Accordingly, upon motion duly made and seconded, the Committee voted unani mously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (includ ing 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 securi ties, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to fostering sustainable growth in economic activity and employment while guarding against excessive credit expansion, and (c) to the practical admin istration of the Account; provided that the aggregate amount of securities held in the System Account (including commit ments 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; direct from the Treasury for the account (2) To purchase of the Federal Reserve Bank of New York (with discretion, in seems desirable, to issue participations to one cases where it Banks) such amounts of special short or more Federal Reserve as may be necessary from term certificates of indebtedness for the temporary accommodation of the Treasury; time to time such certificates held at that the total amount of provided shall not exceed in Federal Reserve Banks any one time by the aggregate $500 million. the at the Committee to the discussion Martin referred Chairman from Messrs. House, 22, 1960, relative to a memorandum meeting on March to ways in which 18, 1960, with respect and Young, dated March Thomas, to help minimize so as might function Open Market Account the System do not when such transactions of the Treasury refinancing difficulties policy objectives. and monetary Reserve credit with Federal interfere the agenda for this had been placed on that the matter He indicated
meeting to permit anyone who so desired to discuss it further at this time and that it would be the intention to bring up the subject period ically for consideration. Mr. Treiber then made the following statement: It is fortunate for the Federal Reserve System that the U. S. Treasury is subject to the discipline of the market in selling its securities and does not have a pipeline to the central bank. In order to assure the continuation of this fortunate situation the System must recognize an obligation to assist the Treasury wherever it can without jeopardizing System responsibilities. The Federal Reserve is concerned with promoting maximum sustainable economic growth with reasonable price stability. Monetary policy can contribute to the attainment of this goal; so can debt management. The System has a duty to do the maximum within its power to promote the ultimate goal. To the extent the System can assist debt management in pro moting that goal without adversely affecting monetary policy it has a duty to do so. I think the System could offer assistance to the Treasury that would still be consistent with monetary policy and with general market conditions and that would not distort yield or price patterns. This would involve no specific commitment on the part of the System to undertake operations in prescribed amounts in either the one-year Treasury bills that mature or the 2-1/2 per cent bonds of 1961. quarterly now has authority, I believe, to buy various The Manager bills, including the special one-year bills issues of Treasury and quarterly thereafter. The Committee which mature July 15 look with favor upon the gradual might indicate that it would other quarterly bills in of the July 15 and acquisition In addition, the Committee regular open market operations. to acquire July 15 bills in might instruct the Manager concurrently to sell other to dealers' offers and response purchase and sale do not create securities provided the of the securities involved. in the market prices distortions would proceed modestly under such instructions The Manager that he would be expected not to with the understanding acquire more than, say, $150 million of the July 15 Treasury the next meeting of the Committee. bills between now and seek, I think, to increase its The System should also per cent Treasury bonds of 1961. I would holdings of 2-1/2 bonds so acquired would be that the amount of such expect be acquired in the same way as modest and that they would Treasury bills. with respect to the one-year just outlined
Therefore, I suggest that we make a start on the acquisition of these issues, recognizing that the amount acquired between now and the next meeting may be small--or, indeed, that none at all may be acquired. Such acquisitions would also help to increase the flexibility and usability of the System's short-term port folio--a goal that should be pursued in any event as an aid to the effectiveness of the management of the Account. It seems little short of remarkable that the Account has done so well in meeting the wide swings of reserve needs and reserve pressures with average holdings of less than $2 billion of Treasury bills, which have, for practicable pur poses, been our only stock in trade. For the scale of present markets and reserves, I should think that the Account ought to contain at least twice that amount of bills or other short-term securities available for active trading. The question today is merely one of modest transactions in the special one-year Treasury bills maturing quarterly and in the 2-1/2 per cent Treasury bonds of 1961. It seems to me that such transactions should be undertaken. to an inquiry by Chairman Martin, Mr. Treiber stated In response that, with respect to the one-year bills maturing July 15, 1960, he to the Manager of the Account in would have in mind an instruction of such bills between now and of acquiring up to $150 million terms either through swaps or outright the next meeting of the Committee, represent a modest approach. This, he pointed out, would purchases. million of those were already $13.4 noted that there Mr. Allen bills in the Account portfolio. this part of Mr. Treiber's said that he agreed with Mr. Szymczak the proposal involv the part of was not sure about but that he proposal, of 1961. He sug cent Treasury bonds of 2-1/2 per ing the acquisition discussed separately. proposal be parts of the that the two gested
Accordingly, Chairman Martin stated that the part of the proposal relating to the one-year bills would be discussed first. Mr. Erickson said that he would favor starting on a program of acquiring one-year bills. If it developed that such a program was helpful, he would extend it to comprehend the acquisition of other issues of one-year bills in addition to those maturing July He raised the question whether it was advisable to fix any particular amount of such bills to be acquired between meetings of the Open Market Committee, and suggested that the instruction might be in terms of giving the Account Manager permission to acquire a modest amount of the bills as they appeared in the market. Mr. Irons likewise expressed agreement with Mr. Treiber's suggestion for buying one-year bills. Upon inquiry by the Chairman as to whether his thought would be to review the matter at the next Irons responded affirmatively. He indi meeting of the Committee, Mr. that he would prefer not to specify acquisition of any cated, however, amount of the bills in the period between meetings. particular and Allen indicated that they would Messrs. Mangels, Deming, part of Mr. Treiber's proposal. have no objection to this would favor the proposal, if it was in Mr. Leedy said that he July. However, if it bills maturing in of purchases of one-year terms acquire the bills, he would longer maturities to contemplated swapping it, this would be involved. As he understood have reservations.
Mr. Treiber commented that the ability of the Account to acquire any substantial amount of the bills would be reduced if the Account were not authorized to make offsetting sales, following which Mr. Leedy noted that according to current reserve projections, pur chases of securities to the extent of as much as $150 million might be needed between now and the next meeting of the Committee to ef fectuate the objectives of open market policy. If the one-year bills could be acquired on that basis, he would have no objection. However, he would like to have the benefit of more discussion before taking a definite position on the question of swapping longer maturities into one-year bills. that his suggestion did not mean neces Mr. Treiber commented sarily that longer maturities would have to be sold. It might be to swap other bills in the Account portfolio for the one-year possible bills. of the swings that had been occurring Mr. Leedy said that in view interpretation that might be would be fearful of the in the market he longer maturities decision to use a reflecting placed on transactions had understood it, Mr.Treiber's transactions. As he for the purpose of swap in acquiring one-year bills maturing July 15, suggestion contemplated that other than bills through swap the Account would dispose of holdings transactions. this particular part that as far as Treiber then indicated Mr. think in terms of swapping holdings was concerned, he would of his proposal
in the System Account portfolio, to which Mr. Treiber replied in terms that his suggestions had been divided into two parts. One part had to do with the possible acquisition of quantities of the 2-1/2 per cent bonds of 1961 by purchasing them when they were available and selling something else, but he did not understand that this part of the proposal was presently under discussion, Neither did he under stand that the question of future policy in building up the proportion of bill holdings, to which he had also referred in his statement, was comprehended by the suggestion presently being considered. Mr. Leedy then said that he would not be averse to the type of operation in July 15 bills that had been outlined. However, a proposal sell securities other than bills in the market in the that the Account period immediately ahead would cause him to have some concern. Martin stated that this was a good point, and Mr. Szymczak Chairman to buy July 15 bills at a time when commented that if the Account were into the market, the Account not want to put additional reserves it did else. However, in the period immediately would have to sell something not be necessary to sell other securities. ahead, it might with the program suggested by Leach said that be would agree Mr. bills. As he understood it, Treiber as it related to one-year Mr. of increasing the pro also had suggested the desirability Mr. Treiber but that was something the Account portfolio of bills held in portion in the future. for discussion
Mr. Leach vent on to say that he would be in favor of experi menting with swaps in the short-term maturity area, which he would define as extending to securities, other than bills, with maturities as long as perhaps 1-1/2 years. Mr. Mills said that he shared some of Mr. Leedy's reservations. While he believed that the Committee should experiment and get its feet wet, he would do it very gingerly. He doubted very much whether the Account should go immediately into a program such as had been suggested, that is, before the market situation had been clarified and steadiness in the market had developed. Chairman Martin commented that he felt the Committee could rely on the Manager of the Account to understand that the Committee what it would be permissible for him to do when in was talking about his judgment it would be appropriate. Mr. Robertson commented that this was the same kind of proposal Committee in 1956, at which time the Committee that came before the voted against it. He said that he had prepared a memorandum regarding Committee. He wished to would like to read to the "swaps" that he that as long as the memorandum by saying his reading of the preface was of far less signifi area of bills it was confined to the program securities. On the other hand, than if it were extended to other cance this would be a step in the wrong direction, without say he felt that accord with buying, thoroughly in He was to be achieved. solid profits
in the ordinary course of operations, any particular maturities that would enable the Committee to assist the Treasury. However, his views on swap transactions were as stated in the following memorandum, which he then read: Section "c" of the continuing operating policies of the Federal Open Market Committee, originally adopted in 1953 and reaffirmed at the March 22, 1960 meeting of the Open Market Committee, specified that: "Transactions for the System Account in the open market shall be entered into solely for the purpose of providing or absorbing reserves . . and shall not include offsetting purchases and sales of securities . . ." This obviously precludes "swaps". Just as obviously, this policy can be changed by the Com mittee. The question is whether it should be. At the time this policy was under consideration I pointed out to the Committee that there may be circumstances in which our intervention elsewhere than in the shortest-term sector of the market might have beneficial effects from the point of view of debt management, without having any material relation to monetary and credit policy. I still hold to that view, but also I have been convinced by the intervening history that the possible advantages of participating in all sectors of the Government securities market, with a variety of objectives, are generally outweighed by the benefits of a strictly limited participation. Our job, as the central bank of the United States, is to supply reserves and withdraw reserves in order to contribute to the maintenance of an economy that is both stable and highly productive. In ordinary circumstances, the way to accomplish this efficiently, without weakening the fiber of the Government market and without tinkering with problems of debt securities management that are primarily the responsibility of the Treasury, open market operations to selling securities is to confine our reserves should be sector when we believe in the shortest-term and buying such securities when we believe additional absorbed reserves should be supplied. This will enable us not only to most vital duty of keeping reserves pursue single-mindedly our but at the same time to the optimum level, as close as possible market by enabling dealers to the strength of the to contribute to make decisions and take positions with a mini and investors but largely imponderable a potentially massive mum of worry about transactions on behalf of the factor--i.e., the effect of "X" of the Federal Reserve System. mammoth portfolio
Although, as stated, I am not opposed to a deviation from our existing policy in order to experiment for the purpose of testing the validity of the policy, there should be a purpose in mind which is sufficiently meritorious to warrant the action. I do not believe the stated purpose of this proposed experi mental authorization to engage in "swaps"--i.e., to aid the Treasury in its debt management operations--will provide bene fits sufficient to offset the potential detriments of such action. In engaging in "swap" transactions, our efforts to acquire a particular issue would necessarily affect the structure of market prices, in some degree, for they would diminish the supply, of the issue purchased, available to investors and increase the availability of whatever issues were swapped there for. The more aggressively we engaged in such transactions, the greater would be the effect on the market prices of the issues involved. At the same time the profits of the few dealers who handled the transactions would be enhanced--dealers who are sufficiently sophisticated to "outswap" the System. It is questionable whether this could be justified on the basis of potential benefits to the Treasury in its debt management opera tions. In connection with the $11 billion issue of 2-1/2 per cent bonds of November 1961, some have suggested that it would be necessary to acquire between $2 and $3 billion of the issue in order to provide any substantial help to the Treasury in its refinancing. The effects of "swap" transactions of this size are readily apparent. To engage in such transactions in a lesser volume would be to inject into the Government securities market the upsetting factor of uncertainty as to the proposed use of our large portfolio with relatively slight benefits to the Treasury. It might be argued--and has been--that the purpose of the "swap" transactions would not be exclusively for the purpose of aiding the Treasury, but rather would also help to perfect the of our own portfolio. The need for this now maturity schedule At the present time we have in our portfolio is not apparent. short-term securities of approximately $1,300 million. It during the balance of this year at least we appears to me that will be adding to the reserve supply rather than absorbing we will be acquiring an even larger reserves, and therefore portfolio of short-term securities. But even assuming that we of our portfolio, would alter the maturity schedule did need to transactions tailored for our needs it not be better to do so in might involve a special deal Treasury--even though this by the not be offered to other Treasury, a deal which would with the
investors? Or in the alternative, would it not be better to amend our policies so that the Account Management could in its normal operations, at times when market conditions were pro pitious, sell short certificates in lieu of bills, and then when purchases had to be made, make them in bills so as to build up the bill portfolio? In my judgment, an authorization from the Committee to the Manager of the Account to engage in "swap" transactions on an experimental basis for the stated purpose of aiding the Treasury in its debt management functions would not be justified by the possible benefits to be derived therefrom by the Treasury. Such an arrangement would inject an additional element of uncertainty into the Government securities market, which might well have the effect of providing a disincentive for dealers to take positions in issues in which the System might be likely to buy or sell for purposes other than providing or absorbing reserves. In addi tion, it would appear to be a first step toward more general interference with forces in all areas of the Government securi ties market and might lead ultimately to relatively frequent operations for purposes other than providing or absorbing re serves; at the least it would lead to a fear thereof--which in itself would be disruptive to a freely-functioning market. In short, it is my belief that, with institutional rela tionships like those prevailing within the System and between the System and the Treasury, it is very desirable to keep the lines of precedent as clear and clean as possible and to avoid muddying them by moves that might subsequently be used as levers for compromising basic monetary policy objectives--especially benefits of such moves appear to be so limited. when the potential Mr. Shepardson indicated that he would favor the proposal of Mr. Treiber relating to the one-year bills, and Messrs. Fulton and Bopp Mr. Fulton added that would favor it, although indicated that they also of swap transactions could be held to he hoped the number and volume small proportions. objection, on the basis that he would have no Mr. Bryan stated time to time of such to the purchase from of precedent or otherwise, amounts of one-year bills as seemed justifiable. Even in that, however, a precedent for it had note that it was establishing the Committee should
4/l2/60 customarily confined open market operations to short-term securities, usually three-month bills. This had been for a number of reasons, among which was the theory that the three-month bill is an instrument that always goes through cash. The auction is always covered. Now it was proposed to go into one-year bills for precisely the opposite reason; namely, that the Treasury might be embarrassed. Nevertheless, the one-year bill is a short-term security, and he agreed with the proposal. On other aspects of the matter, Mr. Bryan commented, he had a great deal of sympathy with what Mr. Robertson had said. He was afraid that if the Committee began tinkering with the 2-1/2 per cent bonds of 1961 it could do the Treasury an injustice. By a little tinkering, the Committee could create a situation in which public interest as to the rollover would practically disappear. Mr. Johns said he would be willing to experiment, along the lines suggested by Mr. Treiber, with some acquisition of the July 15 swaps in the short-term area. example, even including some bills, for the discussion at the March 22 there had been one aspect of However, to him. As he understood the meeting that was not clear Committee in place of Larkin, who attended meeting by Mr. made at that comments with whom a transaction that a dealer Rouse, it was contemplated Mr. that it was a swap transaction conducted would be advised was being intended to supply reserves. confusion with transactions in order to avoid
There followed discussion of this point during which Mr. Roosa offered an explanation of what he understood Mr. Larkin had had in mind. In substance, Mr. Larkin's point was that if the Desk were to seek to effect a swap, it would of course wish to obtain the best price and it would as a general rule ask dealers for quotations on both sides of the transaction. Hence dealers would ordinarily know that a swap was involved and would not be confused or misled by the transactions. Messrs. Szymczak and Balderston then stated that they would be favorable to the proposal outlined by Mr. Treiber insofar as it related to one-year bills. Chairman Martin said that he would favor going ahead with the bills on an experimental basis, but that he would not go further and hoped there would be a minimum of swaps. He just did not like the technique of swaps, and nothing that had come up had persuaded him that it was a good technique for the Account to use. He might be wrong, and probably was a good thing. However, he cer a little experimentation tainly would be hesitant about going into the 2-1/2 per cent bonds of 1961, at the present time or in the near future. Mr. Leedy commented that the explanation of swapping technique from his understanding of by Mr. Roosa had differed somewhat presented 22 meeting. This Larkin at the March indicated by Mr. the procedure felt that it would be a far was helpful to him, for he clarification
better technique to indicate generally that a swap was involved than to attempt to confine a whole swap transaction to any one dealer. Mr. Rouse, who had returned to the meeting during the foregoing discussion, commented that the volume of business through the Desk, including open market transactions, foreign account transactions, and Treasury account business, is so large and continuous that the Desk has a good knowledge of its markets. Accordingly, if a dealer were to propose a swap transaction, the Desk would generally be in a position to effect the swap or to execute one side of the transaction with such dealer and the other side with another dealer, without further checking of prices. However, there would be times when the Desk would need to check further to ascertain whether a proposal was in line with the market. Chairman Martin then suggested that the Committee act on the namely, to authorize the Management of the basis that had been outlined; $150 million of the one-year bills maturing Account to acquire up to meeting, either through now and the next Committee July 15, 1960, between that the matter with the understanding swaps or outright purchases, at the next meeting of the Committee. would be called up again for review proceeding on that he would vote against Robertson stated that Mr. that he had read indicated in the memorandum basis, for the reasons pertaining to swap transactions. he would be indicated that of the Committee No other member had been suggested. on the basis that opposed to proceeding
Chairman Martin then referred to the letter that had been addressed to him by a group of Senators under date of March 12, 1960, which contained suggestions for change in some of the Federal Reserve operating procedures, and to the draft of proposed reply that had been distributed to the Reserve Bank Presidents under date of April 8, 1960. He inquired whether any of the members of the Committee or other Presidents had comments on the draft of reply. Mr. Leedy referred to that portion of the draft reply relating to the prevention of undue speculation in Government securities, particularly the part having to do with the possible issuance of a supervisory instruction to Federal bank examiners in terms that prudent and sound bank lending practice calls for appropriate margins in the case of all loans to nondealer borrowers against Government securities as collateral. Mr. Leedy pointed out that the Federal Reserve Banks loan at par on United States Government securities tendered as collateral for advances to member all of the Federal bank supervisory agencies permit banks banks and that to carry Government securities at par regardless under their supervision value. In these circumstances, he questioned whether the approach of market draft reply to which he had referred would cited in the portion of the practices and would be effective. be consistent with these discussion of this point, during which Chairman There followed some Mr. Leedy referred had possible approach to which Martin said that the by the Board and the other Federal bank supervisory been discussed at length (the Comptroller that one of the supervisors agencies. It was understood
of the Currency) intended to go ahead with such an instruction to examiner regardless of what the other agencies did. Mr. Young pointed out that the suggestion was not new, having been one of those advanced in the course of last year's Treasury-Federal Reserve study of the Government securities market. Chairman Martin then commented that the points brought out by Mr. Leedy were worthy of consideration. Mr. Treiber suggested that the group of Senators appeared to be urging massive purchases of longer-term Government securities by the Federal Reserve and that pertinent portions of the draft reply might be reviewed in that light. There followed comments on whether massive purchases of longer term securities appeared to be envisaged by the Senators, from which it seemed that there might be doubt as to what scale of open market operations in securities other than bills the group of Senators may have had in mind. In response to a question by the Chairman, Mr. Treiber said he had no the proposed letter in relation to the specific language to suggest for that the point would and the Chairman indicated point he had mentioned, be borne in mind. that the proposed reply represented a Mr. Mills commented therefore, no one person might be completely compromise of many views and, his own thinking, following which with the reply in the light of satisfied nature that of an editorial that he had a suggestion Mr. Deming indicated staff for consideration. pass along to the Board's he would
It was agreed that the next meeting of the Federal Open Market Committee would be held on Wednesday, May , 1960, at 10:00 a.m. Secretary's Note: In the light of subse quent developments, the members of the Committee and the other Presidents were polled by telegram and it was decided to hold the next meeting on Tuesday, May Chairman Martin stated, as a matter of information, that repre sentatives of the Federal Reserve System, including a certain number of Reserve Bank Chairmen and Reserve Bank Presidents, might be called upon to appear at hearings before a Subcommittee of the House Banking and Currency Committee in connection with one of several bills introduced by 2790, which would call for a change in Congressman Patman, probably H.R. of Governors, abolishment of the Federal the number of members of the Board and transfer of the Committee's functions to the Open Market Committee, he said, but it did not appear Board. No date had yet been announced, commence until after Easter. that any such hearings would Secretary's Note: It was learned subse quently that hearings probably would be 8516, also introduced held instead on H.R. Congressman Patman, which would provide by of the stock of the Federal for retirement Banks and purportedly would make Reserve any insured bank eligible for System membership. The meeting then adjourned. Secretary
Also: Record of Policy Actions