May 3, 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, May 3, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Balderston Mr. Bopp Mr. Bryan Mr. Fulton Mr. King Mr. Leedy 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 Federal Reserve Banks of Boston, St. Louis, and Minneapolis, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Brandt, Eastburn, Marget, Noyes, Roosa, and Tow, Associate Economists Open Market Account Rouse, Manager, System Mr. to the Board of Governors Mr. Molony, Assistant Division of Research and Mr. Koch, Adviser, Board of Governors Statistics, Keir, Chief, Government Finance Section, Mr. and Statistics, Board Division of Research of Governors Board of to the Chairman, Mr. Knipe, Consultant Governors Daane, Rice, Mitchell, Jones, Messrs. Hickman, of the Federal Vice Presidents and Einzig, of Cleveland, Chicago, Reserve Banks Dallas, and San St. Louis, Minneapolis, Francisco, respectively
Mr. MacDonald, Assistant Vice President, Federal Reserve Bank of Richmond Mr. Willis, Economic Adviser, Federal Reserve Bank of Boston Mr. Holmes, Manager, Securities Department, Federal Reserve Bank of New York Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Com mittee held on March 22 and April 12, 1960, were approved. Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period April 12 through April 27, 1960, and a supplementary report covering the period of April 28 through May 2, 1960. Copies of both reports have been placed in the files of the Committee. With further reference to developments since the Committee meet ing on April 12, 1960, Mr. Rouse made the following comments: I should like to start off with a comment on the change in the bank reserve situation since the time the Committee last met. at the close of the last statement week, required On April 27, reserves were $551 million higher than they were on April 11 and, at the same time, member banks were able to support this from the Reserve Banks. The with $250 million less borrowing figures involved in these calculations are tricky and I shall detail them. However, I feel satisfied, on both not attempt to basis, that, as suggested be done an average and a day-to-day discussion at the last meeting, natural factors pro during the enabled the banks to meet bulk of the reserves that vided the reserves at the same time that they were the higher required This is brought out borrowing from the System. reducing their clearly in the comparison of April 11 and April 27 figures, most the picture is somewhat obscured by the as on an average basis agreements to aid the dealers on Good Friday. special repurchase to assure Government taken by the Committtee The action over the Good Friday week securities dealers of System support help in restoring a better atmosphere end was of considerable three weeks Treasury bills the special April the auction of in
ago. And, while there was an element of good fortune involved, in that market factors supplied fewer reserves than anticipated over the week end, this assistance to the Treasury did not in volve any undue ease in the money market. Although, without System assistance, the results of the auction could have been far worse as far as the Treasury was concerned, it is no secret that the Treasury has been far from happy with its experience in auctioning one-year bills, and the decline of the rate on April 15 bills from the 4.60 per cent established in the auction, with a stopout of 4.74, to close to the 4 per cent level in a short time did nothing to reassure them on this score. While on the subject of the one-year bills, I might mention that the memorandum circulated to the Committee prior to this meeting comments in detail on the swaps undertaken by the Account to acquire $10 million of the July 15 bills. Since this was our first operation under the authorization given by the Committee and since the subject is to be reviewed later on in this meeting, we felt that such a detailed description might be helpful. In the future, however, if the authoriza tion is extended, we would prefer to report further acquisi tions of one-year bills on swaps on a more routine basis. While they would be fully covered in the regular written reports to the Committee, we would not normally expect to report them in such detail. Treasury bill rates moved somewhat lower during the interval between Committee meetings, but there was very little change in Government notes and bonds, reflecting the Treasury prices of billion securities maturing May 15 which is refunding of $6.4 under way. The Treasury's offering in this refunding currently of a one-year certificate at 4-3/8 per cent and a five-year has been well received by the market. note at 4-5/8 per cent quoted at a premium at the market close last night, Rights were and notes were both quoted at and the when-issued certificates bid to par and 3/32 asked. The Treasury decision par and 2/32 the maturing issues was undertaken grant rights to holders of to Treasury representatives had can reluctantly, and only after It is my own feeling that the vassed the market on April 22. refinance on a cash basis might have been able to Treasury there are always un difficulties, although without excessive is attempted. Moreover, problems when an innovation foreseen to have had a for the Treasury would have been desirable it against such contingencies. cash balance as protection larger in the relatively generous that one factor involved I might add being offered was the Treasury's pricing of the new issues and to have the new issues large-scale attrition desire to avoid Advisers to the Treas in the secondary market. stand up well There also was might be large. that attrition ury suggested
some feeling in Treasury circles that pricing would have to take into consideration the probability of some improvement in the business outlook. I believe they had the pending release of the McGraw-Hill survey particularly in mind. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period April 12 through May 2, 1960, were approved, ratified, and confirmed. Supplementing the staff memorandum distributed under date of April 29, 1960, Mr. Noyes made the following statement with regard to economic developments: The abrupt transition from winter to spring that took place in a large part of the United States in April brought with it impressive improvement in several current economic indicators. Most impressive, perhaps, was the spectacular rise in sales at department stores, which probably carried them to a seasonally adjusted level close to the record 150 index of last July. Auto sales also improved substantially in the first 20 days, and scattered reports suggest that in the last 10 days they con tinued in good volume. The fact that the Board's index of industrial production will probably hold even, or decline only one point, in the face of further cutbacks in steel during April will be regarded by many as an encouraging sign. The McGraw-Hill survey released on Friday, but widely cir tangible, but equally welcome, in advance, provided less culated underlying strength. Claims for unemployment evidence of April, up to the week ending declined a little in compensation the other hand they remained at a relatively April 23, but on year ago. In fact, the employ level--a fifth more than a high be a major cause of con generally continued to ment situation especially of blue-collar in many areas, as employment, cern to lag behind expectations. workers, continued profits were generally re At the same time, first-quarter last few days the stock and in the garded as disappointing, its March low--about one-eighth has slipped back to market below the January high. has recently become other information that Most of the quarter. We know to March or the first relates back available indicators showed based on leading diffusion indices now that to levels that and that some dropped declines in March sharp However, their poor heralded major downturns. have heretofore
showing in one month, strongly influenced by comparison with the peak of poststrike activity, is not too meaningful. The early estimates of gross national product for the first quarter, released by the Council of Economic Advisers, are already subject to revision as more data for March become avail able. Inventory data now suggest that the rate of inventory accumulation was even larger than the $9 billion estimateperhaps nearer to $10 or $10.5 billion, thus narrowing the small gap between the GNP estimates and the $500 billion gen erally forecast. At the same time, this additional inventory component in the first-quarter data diminishes the chances that the second-quarter total will compare favorably, Should in ventory accumulation drop back to a low figure, it is hard to pin point expansive factors that would provide $7 or $8 billion of additional expenditure, at annual rates, to replace it in this quarter, since a month of curtailed activity in many lines, especially steel and autos, has already gone by. Hence, even if final takings expand somewhat in the current period, we may well find ourselves with a GNP at midyear that does not show sub stantial improvement over the first quarter. Furthermore, the prospects for substantial improvement in the employment picture are not too good. Present rates of unemployment have persisted despite much smaller additions to the labor force than demographic factors indicated. Thus, we may see more than the usual seasonal increase in those seeking employment this summer, and unemployment rates may push upward in the absence of con siderable strengthening in the demand for workers. It is too early yet to expect any reflection of the some of mortgage funds in residential what improved availability in new construction put in place in building, and the decline of the lower levels of starts in April was largely a reflection However, the rise in residential vacancies February and March. high was widely noted, and first quarter to a new postwar in the considerably the pace of any upward shift in resi may temper mortgage money continues to ease. dential building, even if relates back to the earlier Most of the bearish information part of the year, and quite a bit of improvement may show up in in the next few weeks. data that become available the April of euphoria seems to of spring, some sense With the coming is little or no real country, but there spread across the not one that could be The situation is certainly exuberance. at the leash economy, straining as a burgeoning characterized and the prospect of developments of limited credit availability, so characterized, in the near-term future, seems that could be very slight.
Mr. Thomas presented the following statement with regard to the financial situation: Available information indicates that economic activity is showing a fairly satisfactory pickup from the first-quarter lull, but without exuberance. This is evident in the financial area. In some respects financial developments since the last meeting of this Committee represent a reversal of trends then in process. Interest rates, which were then rising following a sharp decline since January, have again turned down. Total loans and investments of city banks increased more than usually in April, after showing a declining tendency for some time. The increase, moreover, reflected substantial additions to bank hold ings of Government securities and loans on securities, while business loans declined somewhat--contrary to previous trends. Deposits at banks--both demand and time--also increased. As a result, previous indications of an upturn in the money supply seem to be confirmed. These shifts reflected greater bank and less nonbank participation in the Treasury financing during April than in other recent operations. City banks acquired a major portion of the new two-year notes, a substantial amount of the one-year bills, and some of the long bonds. They also made a large volume of loans to dealers in Government securities which in increased their positions. The large bank turn substantially acquisitions, together with the marked upturn in and dealer prolonged increase in nonbank indicate that the bank deposits, securities may have halted or slackenedholdings of Government This means that recent Treasury issues, at least temporarily. banks and dealers, yet need to be distributed underwritten by to other investors. played an important role in Federal Reserve operations of the Treasury issues. Substantial facilitating the flotation market and liberal repurchase accommoda purchases of bills in the to dealers have provided additions to the reserve supply. tions increased much trends, required reserves In contrast to recent on the basis of the in April then had been projected more at banks and the usual in Treasury deposits estimated increase Easter currency demands deposits. In addition, trends in other expected, but in the past more reserves than had been absorbed of float at a this has returned. Continuation week much of banks thus were some reserves. Member higher level supplied reserves and increase in required to meet the substantial able their borrowings at the time reduce somewhat further at the same Reserve Banks. in the past three weeks rates on Treasury bills Discount levels reached on April 12, somewhat at below the have fluctuated
at the time of the auction of one-year bills, but above the low points to which they dropped in late March and early April. Yields on Treasury bonds, after rising in the first two weeks of April, have steadied. Yields on seasoned corporate bonds have remained comparatively steady, but those on State and local government securities have risen some in the past week. Although new issues have been in moderate volume, some of them have moved rather slowly into hands of investors and in some cases offering prices have had to be reduced. Indications are for a continued moderate volume of new issues in May. Exuberance in the stock market, which appeared in late March and early April, was brief, and stock prices are back close to the lows of the year. Liquidation of stock market credit seems to continue slowly. With respect to current and future Federal Reserve opera tions, it can hardly be said that the System is following a particularly restrictive policy. Although the discount rate re mains at 4 per cent, reserves have been made available and member bank borrowings have declined to a moderate level with a lessening in the number of borrowing banks. Rates on Treasury bills--except for the new one-year issue--have remained below the discount rate. Question may be raised as to how much, if any, credit restraint is likely to be needed in the near future. Although economic activity is at a relatively high level and will probably continue its expanding trend, the expansion is likely to be moderate and the threat of a boom in this country does not seem to have much basis, although boom conditions exist in some other countries. There are many structural elements in situation of this country that may serve to the current economic prevent or limit any revival of speculative tendencies, without the need for credit restraint. Some of them are familiar, some have been pointed out in the reports presented to the Committee, others are perhaps less obvious. The elimination of the Federal Government deficit has re one of the most important factors working toward inflationary moved can be speculative or other unsustainable tendencies, but there without a deficit. Evidences of excess capacity and developments of slack in the economy, however, may help to of some elements in the labor force has not such tendencies. Growth dampen any of working age, yet reported kept pace with the population larger than at some previous times of high unemployment continues is not large, but there are growing signs activity. The margin on the use of labor. The high of successful efforts to economize other labor costs encourages such attempts. level of wages and This tendency is likely to continue. margin of unused productive There is also an increased Capital expenditures plant and equipment. capacity in industrial
are expected to increase moderately in the year ahead and will add to that capacity equipment that will help to lower costs and further reduce the need for labor. Building activity generally has been reduced from the high levels reached in 1959, and there may be some doubt whether a building boom of great proportions could be regenerated even with an increase in the availability of financing and lower long-term interest rates. The poststrike inventory expansion quickly revealed that stocks of goods were larger than necessary under the circum stances. Although the adjustment to a more normal rate of inventory accumulation may have ended or be approaching an end, only moderate stimulation should be expected from this source in the near future. Requisites for further maximum and sustainable growth in the economy rest primarily in the selling and pricing policies of business. Demands for the increased supply of goods and services that industry is capable of producing will need to be stimulated by attractive pricing and by offering goods that the public wants. It is to be hoped that growing competition at home and abroad will foster the adoption of such practices. The necessary adjustments, however, will not be easy to make in view of past rising price trends. Failure to make them, and any tendency toward price increases, will be more of a damper on the economy than a basis for expansion. In the meantime, until demands are stimulated, business likely to increase much. Continued increases profits are not other labor costs may offset the effects of in wages and and exert a squeeze on profits. For increased productivity there should be little reason to fear the resump this reason of speculative tendencies in the stock market. tion year reached a level that has Interest rates in the past saving and attracted savings into fixed-interest encouraged level of saving is probably adequate investments. The current and investment demands that will develop to meet the credit level of interest rates Not only does the current this year. put a damper on stock prices, relative to returns on equities for consumption and encourage but it may also restrain spending seems to be no At present there types of investment. certain to force interest rates any higher. reason in the money supply was in the rate of growth Slackening of the rapid expansion past year in view during the necessary large volume of liquidity being of the preceding year and the securities to of short-term Government supplied by the issuance assets are still Although these liquid finance the deficit. expansion in ceased, and some their growth has outstanding, might safely be resumed. money expansion, other credit and monetary limitation on One in the reduced rests of reserves, than the availability
liquidity positions of banks. Although no satisfactory standards are available to measure the possible impact of this factor, there has clearly been a significant change, This enumeration of existing structural limitations on exuberance is not intended to convey the impression that adequate growth will not occur. Nor should it be interpreted as suggesting that monetary and fiscal policies should be re directed toward increasing buying power or stiumulating credit expansion. It is designed merely to indicate that official restraints on the use of credit may be less necessary in the immediate future than they have been at other times of high activity in the postwar period. The situation may change quickly and may even now be in the process of changing. Presently available information and analysis, however, sup ports the view that the current somewhat more relaxed monetary policy is not inappropriate. Mr. Marget commented as follows regarding the balance of payments: At the last meeting of this Committee, I ventured to characterize as "impressive" the improvement in our balance of payments that has taken place since the low point around the middle of last year. There is nothing in the news of the last three weeks to warrant a modification of that judgment. The export figures for the month of March, which are now available in their preliminary form, did not, to be sure, show a "zoom" (as an unfortunate headline in the New York Times suggested) above the already relatively high annual rate of $18-1/2 billion which was represented by the January-February average; but the March figures do show that the relatively high January February average rate was being maintained. It was on the basis of an assumption that there would in fact be "no great change in exports in March" that I ventured to suggest, last time, that our export surplus for the first quarter of 1960 would merchandise turn out to be at an annual rate of about $3 billion--" just about double the $1-1/2 billion average that we showed during the itself was $1-1/2 billion above the second half of 1959," which low point (a virtual zero surplus in merchandise trade) in the second quarter of last year. This degree of adjustment in our balance of payments has which, as I have been place within a cyclical environment taken just the kind to favor such an adjust emphasizing, has been of is favorable to abroad, which a strong demand situation ment: our exports, and a relatively less intense demand situation here, of moderating the rate of which would work in the direction But I think that it would be wrong to growth of our imports. on the ground that of the adjustment minimize the significance the improvement we have been witnessing has been "merely cyclical"; and this for several reasons.
In the first place, it must be remembered that, in some quarters, our balance-of-payments problem itself has been regarded as a "merely cyclical" problem, which came to us be cause of a special cyclical constellation and could be expected to disappear when that cyclical constellation changed, as it has in fact been changing. This is a view which I do not happen to share. But it is certainly true that a cyclical element was involved in the deterioration of our balance of payments; and my own view is that a failure to recognize this fact was respon sible for some of the excessively pessimistic views that were being expressed when our balance-of-payments deficit was at its maximum. If, now, we have been witnessing developments which attest to our ability to cope with the cyclical part of our problem, this ought to be a source of at least moderate satis faction. For--and this is my second point--we should not have been able to deal as well as we have thus far dealt with the cyclical part of our problem if in fact our general competitive position were as hopelessly bad as some of the more extreme pessimists had implied. A strong demand situation abroad means an opportunity to sell abroad, if and to the extent that we are competitive; it does not provide a guarantee that we shall be able to sell abroad regardless of our products' price, quality, and terms of delivery. Thirdly, there is independent evidence that our producers have not been simply sitting back, with their old lines of wares spread out before them, waiting for a new surge in the cyclical tide of foreign demand to pick them up at the point at which they were left when the earlier tide of foreign demand had ebbed. The most publicized example of this, of course, is the auto mobile industry, which, after what was undoubtedly too long a managed to respond to the period of complacency, finally of foreign competition in a way which has already challenge clearly affected automobile imports into this country, will plans for the still smaller them even more when the affect be able to affect implemented, and will undoubtedly cars are in the degree that we succeed our exports very significantly, countries to put no greater obstacles (such in inducing foreign tariffs, quotas, and a whole battery of discriminatory as buying American auto in the way of their nationals devices) put in the way of our nationals buying mobiles than we now automobile is only one example, even foreign automobiles. The competitive progress in most striking one. Our if it is the example. A third is being of jet planes is a second the field the field of electrical enough, in provided, surprisingly of a change in pricing policy equipment, where a combination of components from practice of procurement and a more flexible
abroad when that is economically preferable has produced some unexpected results in a field in which it was supposed we were hopelessly outclassed. These developments, surely, are more than "merely cyclical." But what has to be stressed, as always, is that improvements of this kind, cyclical or noncyclical, do not come about in a vacuum with respect to general economic and monetary policy. If we have had the degree of success we have had in meeting the cyclical problem, for example, that is because our general economic and monetary policies, oriented though they necessarily were in the direction called for, in the first instance, by the requirements of the domestic economy, have also been compatible with the requirements for continued progress toward a better balance in our international accounts. We are still quite a distance away from a position of "reasonable equilibrium" in our international accounts; it may very well be that, in our further progress toward such a position, we shall have to pass through cyclical phases which will be much less favorable than the current phase obviously is. It would not do to allow our recent successes, in fields relevant to the problem of balance of-payments adjustment--and they have certainly been successes as far as they have gone--to blind us to the hazards that still have to be traversed on the long road ahead of us. Mr. Treiber presented the following statement of his views with respect to the business outlook and credit policy: The most recent business information indicates the proba bility of a moderate expansion in business activity. The is with respect to the rate of increase principal uncertainty and the timing of the expansion. spending shows signs of recovering from the after Consumer effects of the steel strike and the adverse effects of the un weather conditions in many parts of the usually unfavorable country. substantial increase in inventories in the Despite the of 1960, due in large part to the restocking by first quarter processors, inventory-sales ratios automobile dealers and steel near record low levels. and trade continue in manufacturing of inventory accumulation will necessarily While the rate inflationary psychology continues low, decline, especially if will call for some further that consumer demand it seems likely for some time ahead. additions to inventory signs that the decline in residential There are increasing may be bottoming out. Mortgage funds are becoming building to provide considerable this is likely more readily available; remains basically strong. for home building, as demand support
State and local government expenditures are likely to continue their gradual rise. Federal Government spending is expected to expand during the second half of 1960. Increased plant and equipment expenditures with a high portion for modernization will create a demand for a variety of goods and services, With the labor force and productivity rising, a sub stantial reduction in unemployment seems unlikely. The price picture shows little change, even though the consumer price index and the wholesale price index both rose in March; in each case seasonal influences in the food area accounted for a large part of the rise. Municipal and corporate bond markets in recent weeks have been more responsive to the better business outlook than the stock market. The flow of municipal securities has increased. There has been some hesitation in the corporate bond markets with investors expecting somewhat higher yields on new issues. After a slow start, corporate securities floated during the first quarter of 1960 came close to the total of the corre sponding period a year ago. First-quarter corporate earnings reports are on the whole favorable, although not uniformly so. The large liquidation of United States Government security holdings and net repayments of security loans in the first quarter of 1960 reduced total bank credit substantially. Yet loans other than security loans rose twice as much as in 1959, although much less than in 1956. Bank liquidity positions continued to tighten with loan deposit ratios up and short-term liquid asset ratios down. On the other hand, the nonbank public had higher holdings of assets in relation to GNP than in any quarter during liquid banks for business loans has continued to The demand upon be strong all this year, although it has not been as great as observers expected at the beginning of the year. some exuberant are expecting the demand for Bankers with whom we have talked over the coming months. loans to increase business in the midst of a large refunding opera The Treasury is tion. factors counsel no significant change in These various see no reason to change the discount rate, credit policy. We We think it is no or open market policy. the directive, doubts on the side of ease. necessary to resolve longer said he would not discuss developments in the Eighth Mr. Johns was significantly different he saw nothing in them that District because
from the analysis of national affairs that had been presented. His appraisal of the situation was, he hoped, implicit in the discussion of policy that he proposed to present. Mr. Johns then made the following statement: Open market operations since the last Committee meeting have moved quite clearly, I think, in the direction indicated by the Committee. At the April 12 meeting the Committee's con sensus called for more reserves to be supplied to the banking system and for the Desk to have authority to permit net borrowed reserves to reach lower levels in order to provide the indicated increase in bank reserves. Data available to me show that total reserves (seasonally adjusted) have risen by about $500 million from the week ended April 13 to the week ended April 27. While this was being accomplished, net borrowed reserves declined from an average of $205 million for the week ended April 13 to an average of $82 million for the week ended April 27. The rate of increase of total reserves over the past two statement weeks was doubtless greater than would be desirable over a long period of time. In the perspective of the last four months, however, such an increase may be regarded as having properly offset in part the decline in reserves since the first of the year. The adjusted reserve total for the week ended April 27 is approximately the same as the seasonally adjusted total for the week ended February 3, but is still roughly $200 million below early January. In the sense of getting back to where we were three months ago, this increase in reserves may be considered, in my opinion, as eminently satisfactory. In the presence of an economic situation currently lacking I would recommend that total reserves boom characteristics, at a moderate rate over the next three continue to be increased week period. Within the framework of existing operating pro this recommendation again carries with it the further cedures, of the Account continue to have recommendation that the Manager authority to permit the net reserve.position of the banking be necessary to achieve a to reach whatever level may system increase in total reserves. continued rate and the bill rate disparity between the discount The continues to place an has prevailed since January which in the sense that on open market operations unnecessary burden of reserves may be required in order more massive injections increase in total reserves. Accordingly, to bring about an rate at the earliest a reduction in the discount I would favor me that the amount of At the moment it occurs to opportunity. be half a point. reduction should the
As time goes on and business developments are observed, I am brought around to a position stated by others at previous meetings, namely, that clause (b) of the directive needs to be revised so as to eliminate the appearance of single-minded emphasis upon an assumed necessity to guard against excessive credit expansion. I think a guard against too little credit expansion now merits at least a share of the spotlight. But since a policy directive which wars alike against too little and too much is hardly more than a timeless platitude, I am loath to suggest a directive in such terms. However, if the guard against excessive credit expansion is merely deleted from clause (b), there is left only another timeless and self evident intention, that is, to foster sustainable growth, etc. Therefore, I venture to suggest trying to implement the idea of "fostering sustainable growth in economic activity and employment" by saying in the directive what the Committee ex pects the Management of the Account to do toward that end at this time. This, of course, will have to await the end of the discussion today and the derivation of the consensus, but if the consensus should be, for example, along the lines of the consensus three weeks ago, it would be appropriate, I think, to say something like "fostering sustainable growth in economic activity and employment by bringing about moderate growth in the total reserves of the member banks." I, for one, would be willing to add to this the further statement: "with a view to encouraging moderate growth in the money supply." Mr. Bryan presented a statement substantially as follows: A number of new figures are available for the Sixth Dis trict. On the downside, on a month-to-month basis, are nonfarm employment, manufacturing employment, construction employment, bank debits, average weekly hours, manufacturing payrolls, and--of the same significance--insured unemployment is up. Year-ago comparisons in these series tend to be less favorable than they were; and in at least one important series, hours, both the monthly and yearly namely, average weekly comparisons are negative. On the brighter side is a sharp rebound in department store sales generally. Also with some increase in retail sales, the second successive month--in comforting is an increase--for a circumstance that would be the construction contract awards: even so, were not 22.5 per cent more encouraging if awards, below a year ago. apply to March and were of these figures, of course, Most contacts of the by weather. The business substantially affected indicate a bit of improve Bank, and some spot checking, Reserve business and business sentiment. However, ment in April in both a rather informal department has attempted--on our research
basis, to be sure--to determine if weather can be accounted the sole cause for the uninspiring figures from the District. The conclusion is that the weather explanation does not fit all the facts and that bad weather, although greatly important, has been only a partial explanation of economic events in the Sixth District in the first quarter. As a sort of "straw in the wind" I will note that our April directors meeting, for the first time in my memory, received as a result of the Jacksonville Branch meeting a genuinely pessimistic report on the Florida outlook. There can be no doubt that construction in many of the areas of the State has been overdone, and the construction industry is faced with a considerable contraction. Moreover, while the number of tourists in the State seems to be at an all-time high, the expenditure per person is generally said to be notably lovera point apparently confirmed by banking figures. I note this Florida matter because, while the State may not bulk large in the national economy, it bulks extremely large in the Sixth District: a large part of the District's good showing in the postwar period has resulted from Florida's expansion. Speaking to the national economic situation: It does not seem to me that there are clear signs of an economic downturn. By the same token, I see no signs of out of-hand economic boom; no speculative fever; no effort of the economy to expand at an unsustainable rate. Rather the contrary: the economy seems to have unutilized and growing supplies of manpower, materials, and plant capacity; and I a inclined to think that we may be in the period of slow relative growth generally characterizing the ending phase of an ex pansionary cycle. Whatever may be the case as to our position in the cycle, however, the one clear fact, it seems to me, is that the economy is not now expanding at an unsustainable rate. My own conclu can justify a policy that keeps bank credit sion is thus that we expansion under control, lest we kindle again the inflationary expectations that have heretofore done the country so much must supply the reserves necessary to permit a injury; but we sustainable growth in the economy. of the banking system are less Thus far in 1960 reserves on an actual or a were at the end of 1959--whether than they for no growth of re basis, and allowing seasonally adjusted I think the banking system, and, serves at all. Accordingly, through it, the economy, has been under great and, until just that I think this It is clear increasing restraint. recently, restraint has been inappropriate and dangerous. required reserves have ending April 27 In the three weeks half a billion dollarsmassively--by approximately increased an equal amount. Of the reserves have increased by and total
increase in total reserves, a minor amount has derived from the net of System purchases, repurchase agreements, and discounts; and the larger part by far has derived from other factors. What has happened in effect is that we have permitted float and such like items to supply the increase in required reserves. Attention is called to the derivation of the reserves for a single reason. We shall need to pay close attention to our knitting in the next several weeks, lest the reserve gains we now exhibit disappear in the same way they came. Attention is called to the increase in required reserves to point out that it has occurred in considerable part because of the banks' participa tion in the Treasury's April financing, and to suggest that, unless we supply reserves, the banks will be compelled to divest themselves of investments and to extinguish the derivative deposits--which is, in my judgment, precisely what we do not want. Now, with our recent accomplishments in increasing reserve supplies, where do we stand? Well, although in the weeks just past there has been a large increase in total reserves, using daily average figures, there is still a deficit in total reserves of the banking system, through April as compared with December, of $362 million--and on a seasonally adjusted basis allowing for no secular growth of reserves at all. Allowing for even a modest growth from December, seasonally adjusted, the reserve deficiency, of course, is even greater. to me that the economic and banking situation It seems to repair this deficiency--in a minimum calls for us resolutely approximating $350 million, and then, naturally, order of magnitude to consider where we go from there. I would myself greatly pre very simple instruction in terms fer to see this Committee give a reserves for the month of May, reconsid of daily average total at our next meeting. Since ering the instruction, of course, an attempt to repair the market repercussions of the money be undesirable, I would all at once might reserve deficiency to aim in May for daily average like to see the Desk instructed of $150 million more than the daily average of total reserves million. There is in May a usual reserves in April of $18,090 slightly in excess of $50 million. seasonal decline of reserves with the full instruction, if adopted,--and Accordingly, this to produce a miracle the Desk is not expected understanding that have the effect right on the nose--would by hitting the target $200 million in a reserve deficiency by about of repairing the one-month period. the Committee prefers the infinitely On the other hand, if to net borrowed refer medium of instruction--I more complex set in a range of would like to see the target reserves--I the Desk has understood that with it being $0 to $100 million,
latitude to go below this range into the free reserve area in case required reserves show a tendency to decline. I see no reason to move the discount rate down at this time. I would prefer to see a further reduction in the banks' indebtedness to the System before taking action on the discount rate. I see some merit in the questions that have heretofore been raised, and that Mr. Johns raises at this meeting, with respect to the directive. Mr. Bopp summarized the Philadelphia Reserve Bank's spring survey of Third District manufacturers regarding plans for plant and equipment expenditures, which indicated total estimated expenditures of $410 million, up 15 per cent from expenditures last year and up 8 per cent from expectations last fall. The estimated total would represent an all-time high. On an industry-by-industry basis, the results of the survey fairly well paralleled other surveys except for a significant in petroleum expenditures, Philadelphia manufacturers antici decline would be up about one per cent in the second pated that employment quarter but would return to present levels by the end of the year, and production were similar. Whereas last fall most of the respond views on at present as many expected some increase in inventories, ents expected a decline as an increase. District, Mr. Bopp said that With further reference to the Third except for steel production. Employment activity was fairly satisfactory areas of the in the hardest-hit than a year ago, particularly was better at homes than at any more people looking Builders reported District. were said to be sluggish. experience, but sales time in their about capital market developments, Bopp expressed some concern Mr. on the economic and 25 of the staff memorandum as reported on page 1960. In view of April 29, under date situation distributed financial
of the continuing amount of unemployment and the extent of idle produc tive capacity, the slow movement of corporate and municipal bonds through the capital market was not reassuring. While he would not suggest that the Federal Reserve move into the longer-term market, Mr. Bopp felt it would be appropriate to try to prevent any appearance of tightness in the short-term market. For the next three weeks, it seemed to him that the System should make reserves available to take care of any deposits arising out of loan expansion so that the banks would not have to liquidate Government securities or come to the discount window. He would have sympathy with the views expressed by Mr. Johns on the policy directive, and possibly on the discount rate except for the fact that a period of Treasury financing was now in process. In the circumstances it would not seem appropriate to act on the discount rate at the next meeting of the Philadelphia directors, but action might seem in order after the ensuing two-week period. Mr. Fulton said that the only good news from the Fourth District Department store sales were connection with consumer takings. was in and at the end of that period were 5 per strong over the Easter period people felt that the year. The department store cent ahead of last goods more than unusual circum reflected a desire for level of sales and the late Easter date, and they stances due to weather conditions consumer takings were concerned. a good year as far as anticipated quite quite sharply. Insured unemployment New car sales also had increased throughout the District generally, except in some cities closely was down
connected with the steel industry. Building activity picked up sub stantially in the Cleveland area in April, and to a lesser extent in the Cincinnati area, with the improvement largely in nonresidential con struction. Steel operations continued to decline, Mr. Fulton said, and for the District this week's estimate was 72 per cent of capacity against 74.8 per cent for the nation. The steel mills reported that cancellations were high and that they were shipping more than was being ordered. Even with the pickup in auto sales, it was felt that orders were going to be low almost into September, and that a substantial amount of inventories apparently was being worked off. Reports from the foundries that supply the appliance field were similar. The situation in the machine tool industry was spotty, but new orders were looking up. In summary, the steel industry felt that the low point had not yet been reached and that the national rate might go below 70 per cent of capacity in this quarter, pickup until almost the fourth quarter. Shipments of with no material were said to be demoralizing American pipe and wire from foreign sources some increase in the shipment of production. However, there had been countries apparently were of the country because European sheets out than their capacity to produce. using more Mr. Fulton reported that regard to the financial picture, With reached an all-time high, and were up, savings deposits had bank loans Bank was moderate. He felt, however, that borrowing from the Reserve extent that an in reduced to such an of banks had been the liquidity be quite appropriate. reserves would of in the availability crease
Accordingly, he would like to see the level of net borrowed reserves reduced to around $100 million or less. He would favor postponing a change in the directive and, temporarily at least, he would not be in clined to adjust the discount rate. Mr. King recalled that when he became a member of the Open Market Committee about a year ago the economic indicators were generally point ing upward. Today, however, the picture was different, and many of the indicators were pointing downward. With reference to the unemployment situation, he described how, at a plant in the southeastern part of the country with which he was familiar, there had been a substantial reduction in the number of employees along with a reduction in working hours and management was now considering a further reduction of force in order to increase working hours and retain the more efficient employees. Mr. King recalled that earlier in the year he had expressed con cern regarding the trend of corporate profits. Apparently, he said, there was still need for concern, because it seemed clear from the record that recessions are forecast by a continuing decline historical in corporate profits. From a reading of the minutes of the Committee there was quite a bit of on April 12, he noted that apparently meeting doubt as to the that would suggest taking any action concern about While that of the economy. underlying strength belief in the System's that a reasonably small he did not believe was a point worth considering, economy to go into would cause the of less restraint move in a direction Open Market Committee the part of the a failure on a tailspin. Instead,
to recognize the facts of the situation seemed more likely to cause the economy to go into a downturn. While he did not believe that the country was in a recession, he thought it possible that a recession might develop in a reasonably short time. One problem, as he saw it, was to destroy the idea that if the System moved in a certain direction the whole economy was going to go in that direction. The psychology seemed to be that when the System was exercising restraint the economy was fine, and that when the System moved toward less restraint things were going badly. It was important, he suggested, to destroy that kind of thinking, and this seemed a good time to try to accomplish that objective. said that he would be agreeable to supplying reserves Mr. King by Mr. Bryan, although he did not comprehend along the lines suggested Bryan's system. In terms of net all of the details of Mr. completely would consider a range of from zero to $100 million borrowed reserves, he appropriate as a target. Johns that it would be with the view of Mr. Mr. King agreed the phrase "while guarding to remove from the directive appropriate was not of too great importance, credit expansion." This against excessive weaknesses in was as alert to that the Committee it would indicate but approve a reduction be inclined to He would as to strength. the economy the Reserve Banks if a majority of rate of 1/2 point in the discount wanted to move on the rate. about a possible had been concerned that he said Mr. Shepardson of the year. air at the beginning that was in the of the fever recurrence
However, it seemed to him now that the economy had passed that period and today his views were much like those expressed around the table thus far. In view of the lack of real strength in a good many areas and definite lack of strength in other areas, perhaps the System should be easing further than it had to date. There seemed to be a need for further expansion of the money supply, or rather a rebuilding of the contraction that had taken place earlier. Therefore, he would favor a further in crease in the supply of reserves. Mr. Shepardson felt that the point that had been made regarding the directive was well taken, and that the phrase "guarding against ex cessive credit expansion" could be eliminated. He had no wording to be willing to go along with the idea expressed by propose, but would Mr. Johns. As to the discount rate, it seemed to him that the time might be changed. Since the Treasury be approaching when the rate should through a substantial part of the period until financing would extend in the rate might not be meeting, an immediate change the next Committee such action might depending on interim developments, appropriate, but, in order by the time of the next meeting. seem who had spoken thus far commented that those Mr. Robertson factors when just as the weight on unfavorable to be putting all seemed the economic picture during favorable. As he reviewed many factors were by the Committee the policy followed he felt that the past few months, the moment to change saw no reason at right, and he been pretty nearly had errors on a time for aking that this was did not believe policy. He
the side of ease, although he would not advocate tightening or adding to restraint. In his view, this was a time for the System to be almost neutral, and thus be in a position to move in either direction. Looking at the economic indicators, he felt the chances were greater that the economy would move upward than that it would move downward. Conse quently, although he would not seek greater restraint at the moment, neither would he seek greater ease. Mr. Robertson went on to say that for the moment he would not favor a change in the discount rate. He might come to the point where he would favor such a change in the relatively near future, but he was not certain. Neither would he favor a change in the directive at this time, for he felt that the System was still in a position of having to guard against excessive credit expansion. Credit demands were heavy, and apparently would continue to be heavy. As to the liquidity position of the banks, he felt that the current situation was desirable because it placed the System in a position where it could exert a greater impact on the case. In summary, he would leave the economy than would otherwise be forthcoming three weeks. as they now stood for the things pretty much Leach said that economic activity in the Fifth District, Mr. markets and by the year's pickup in most retail reinvigorated by a spring orders received by mills for cotton cloth, first substantial batch of new that the evidence, however, There was no at a high level. had continued There were enough was more than seasonal. recent business improvement businessmen to situation to cause the over-all business soft spots in
pursue conservative purchasing and inventory policies and to view prospects with cautious optimism. Circumspect policies were apparent at the spring furniture market in North Carolina, which was marked by good attendance, the shoving of many new lines, and considerable interest on the part of dealers. Nevertheless, sales were not heavy. Dealers apparently were unwilling to carry anything but the bare minimum of in ventory since most items could be obtained quickly from manufacturers' stocks and no price advances were anticipated in the near future. In line with earlier estimates of increased capital outlays this year, con struction firms reported that there was plenty of business; however, profit margins of most contractors were down sharply. In fact, competi tion among contractors bidding for a given job has been so severe in some cases that successful bid prices were below cost estimates. Evidence that pressures on member banks continued to be strong was provided by higher than seasonal borrowings from the Federal Reserve Bank and by the fact that Fifth District member banks were net purchasers of Federal funds in each of the past three weeks. With respect to policy, Mr. Leach said that he thought the Com was about where it should be and that he would recommend maintain mittee ing substantially the position achieved in the past three weeks, resolving reserves, he had in mind of ease. As to net borrowed doubts on the side a level seemed con as a benchmark. Such around $150 million a figure and he would not want it higher. with current economic conditions, sistent and required reserves were again expanding, Now that loans and investments
maintenance of a fixed level of net borrowed reserves would presumably mean purchases of securities to provide additional reserves to support growth in the economy. In any event, the current Treasury financing called for an even-keel policy for the immediate future. Mr. Leach noted that he had spoken in the past in behalf of an improved technique in handling the directive. Inasmuch, however, as the old form was still retained, he had recommended at the last meeting elimination from the directive of the expression "while guarding against excessive credit expansion." Believing that the Committee should be more flexible with respect to the directive, he would remove the expres sion now, although its elimination would have been more timely three weeks ago. He saw nothing in the remarks of Messrs. Noyes and Thomas that called for guarding against a booming credit expansion in the near future. He would not favor a change in the discount rate at this time. Mr. Leedy said that available Tenth District statistics indi trends. Prospects for the winter cated trends quite similar to national wheat crop continued to be good despite the severe winter weather; in of the wheat was reported from of the District the condition most parts the Department of Agriculture As of the first of April, good to excellent. this year would be wheat output of the District anticipated that the the same as last year. approximately expressed the view that the respect to policy, Mr Leedy With to reserves. in making additions started too soon had not Committee against the favorable indicators number of the substantial Weighing
unfavorable ones, it seemed to him that some further active participa tion by the System in the direction of making reserves available for needed expansion was a proper course to follow. While he would not want to do anything dramatic in that direction, he felt that the course the Committee had embarked upon should be continued, with net borrowed reserves trending downward. Mr. Leedy noted that the existing discount rate was fixed at a time when the System was aggressively attempting to exert restraint, and that such a policy was not called for at present. In view of the action taken with respect to providing reserves, it did not seem to him that the discount rate level was quite appropriate; he thought this was in events in the past few weeks. Therefore, he would favor a dicated by of 1/2 point as soon as that could be reduction in the discount rate of the Treasury financing. In this connection, he done in the light would have meetings of their a number of the Reserve Banks noted that month, after which there would on the second Thursday of this directors time in June, too late to meetings until the same be no other regular quite promptly. Since he thought was required kind of thing that do the he assumed that rather than an increase, reduction was involved, a rate might be the Treasury financing called for by period of equilibrium the there was a mini case. He thought otherwise be the shorter than would as reflecting an would be regarded that a rate reduction mum of danger rates on Government because short-term of the economy adverse appraisal of line with so far out and were now so sharply had declined securities
the discount rate. The suggestion of Mr. Johns regarding the directive appealed to him, and its adoption would be in line with the kind of program that he (Mr. Leedy) had indicated he would favor. Mr. Allen reported that unemployment compensation claims for the first three weeks of April were substantially higher in Iowa, Wisconsin, and Michigan than last year. The cutback in automotive employment had begun to result in layoffs rather than merely a reduc tion in hours of work. Recently, layoffs had been reported also in farm machinery, construction machinery, and household appliances. The optimism in Detroit that he reported three weeks ago con The daily sales rate for the last tinued to prevail, Mr. Allen said. to have exceeded 23,500, which ten-day period of April was believed 580,000 in April. Production in April probably would mean sales of undoubtedly remained above 1,000,000 equaled 580,000 so inventories to continue to produce at a units. Manufacturers prefer, of course, and at the same of the economies involved, high rate because steady, that sales in the them disposed to gamble the improved sales made time current produc dual task of covering accomplish the weeks ahead would reducing the high inventories. tion and just under 80 per in mid-April was the operating rate In steel, Chicago area. cent in the was 85 per whereas it for the nation, cent above the generally well erratic but Detroit had been The rate in District were in the Seventh store sales Department average. national
strong, with the year-to-date improvement about the same as reported for the nation. Chicago money market banks had recovered the deposits lost over the April 1 tax date, and their reserve position had improved markedly since a month ago. However, they were still borrowing, at the discount window and in the Federal funds market, this being attributable largely to participation in recent Treasury financing operations. Mr. Allen commented that he liked the phrase "lean against the wind." Right now, however, it did not seem that there was much, if any, wind. Recent developments, particularly the strength of retail trade in March and April, seemed to have dispelled the concern that a reces sion might be in process or imminent. However, most forecasts indicated that the rise in aggregate demand in the months ahead would not be sufficient to press upon the available supply of labor and productive facilities. As he saw it, business was good but was running scared, which was not a bad way for it to be. Mr. Allen felt that there was little For the moment, therefore, way and that the System could pursue a neutral point in leaning either course. On that basis he would not object to seeking a zero position free. He would not favor a neither net borrowed nor net on reserves, aside from the current rate at this time. Quite change in the discount for the next an even-keel position which argued for Treasury financing, factors were such that he could few weeks, he did not think other story. He hence could be another now. Three weeks a lower rate support
felt the same way on the policy directive; for the reasons stated by Mr. Robertson, he would continue to include the phrase "while guarding against excessive credit expansion." Mr. Deming said there were two points about the Ninth District that might be noted. First, there was optimism in the farm areas of the Dakotas and Montana about crop prospects, mainly because of favorable moisture and planting conditions. Second, the District might be witness ing the ending of an unusually deep seasonal deposit decline. Country bank deposits and city correspondent balances had increased in the past two or three weeks. The banks were still pressed hard for liquidity, however. Relative to a year ago, their loans were up $250 million. In had financed this loan increase by an equivalent liquida effect, they tion of Government and other securities, and at the same time they had themselves to a $250 million deposit loss. had to accommodate Mr. Deming said, the general economic At the national level, impressive or depressive. he saw it, was not particularly picture, as expanding at an the economy as not characterization of Mr. Bryan's well. Thus, he saw own feeling very rate expressed his unsustainable change policy. At the same time, to take any drastic action to no reason with respect to easier policy following a mildly no danger in he saw borrowed reserves, level for net aiming at a zero reserves, perhaps bank discount rate to wait on any He would prefer by Mr. Allen. as suggested at this time. the directive not change and he would change,
Mr. Mangels reported that developments in the Twelfth District were rather mixed. Employment increased in March by a fraction of one per cent, mostly in the food processing plants, but unemployment also was up a fraction of one per cent, reflecting reduction of personnel at aircraft plants offset to some degree, in California, by increased employment at electronic plants. In the first three weeks of April, steel production was at 74 per cent of capacity against 80 per cent for March. Some steel companies had reduced prices on certain items, with discounts running as high as 11 per cent on items subject to in tensive foreign competition. Total construction was up, with all of the increase in the nonresidential category. In the first quarter of 1959, residential vacancies in the West increased to 9.7 per cent com pared with a rate of 8.3 per cent in the fourth quarter of 1959. After making allowance for the later Easter, department store sales for the year to date were about even with last year; sales for the four weeks ended April 23, unadjusted, were up 8 per cent from the same period a year ago. Automobile sales in California were 12 per cent over a year was continuing in April. Reports were ago in March, and the improvement cars were strong, while of compact cars and expensive heard that sales models were a drug on the market. the intermediate-price District banks increased on to say that Twelfth Mr. Mangels went by $300 million in the three-week holdings of Government securities their about $265 million in 20, and that loans increased period ended April
the same period, with increases in all classifications except real estate loans. Demand deposits were up more than $500 million from March 30, and time deposits showed a modest increase, but savings deposits declined about $34 million. Bankers, particularly those representing the larger banks, were quite concerned about the continued loss of savings deposits and expressed the view that they could not recover the deposits they had lost, or halt the continued decline, unless something was done about the maximum permissible rate of interest. Borrowings from the Reserve Bank were scattered and on a nominal basis, while District banks were net sellers of Federal funds. With respect to policy, Mr. Mangels observed that apparently little could be done in the next week or two in view of the Treasury financing. He noted that net borrowed reserves averaged $82 million for statement week, and his inclination would be not to go above the latest feasible and practicable, he would that figure. In fact, if it were basis. He saw no harm perhaps even to a zero inclined to go lover, be to be no steam in the this time for there seemed in going lower at of retail sales had been small, the boiler at present. The growth the steel industry did steel production was rather extensive, decline in situation, and there had any major change in that not seem to expect in the press of Reports were seen an increase in unemployment. been although those reports establishments and, layoffs in manufacturing In the Twelfth of a trend. they might be indicative were scattered,
District, price-cutting with respect to autos, home appliances, and other commodities had been observed. Generally speaking, business had been good thus far, but there was considerable concern about what the rest of the year was going to bring and it was not unusual to be asked whether the country was heading toward recession. With that as back ground, it appeared to him that the System could afford to be somewhat on the easier side without damage to the economy, and the directive seemed broad enough to permit such a course. Mr. Mangels felt that perhaps it would not be appropriate to make a change in the directive today, and he had the same feeling with regard to the discount rate. The next meeting of the San Francisco directors was to be held on Thursday, May 5, and the directors then would not meet again until the first Thursday in June. At present, it was his thought to recommend to the directors that no change be made in the discount rate. in the Eleventh District were Mr. Irons stated that conditions the major factors had not shown much change. quite satisfactory and that in the past month and the totals store trade moved up sharply Department cumulative basis. Nonfarm of last year on a running a little ahead were had de while unemployment about seasonally, employment had increased activity had moved proportions. Construction in about seasonal creased residential construction three weeks, with during the past upward strength in con the gain; the greatest a good part of accounting for area to the from the Dallas to have shifted activity appeared struction
Houston area. The petroleum situation continued unchanged; allowables were dropped back to eight days for the current month and probably would continue on that basis. However, there were no signs of great despair in the industry, which recognized that it had a problem and was facing up to it. Some increase was noted in drilling activity within the past month. The industrial production index for the District was down a point due to the petroleum situation. With good weather prevailing recently, the agricultural sectors of the District were encouraged. While cash farm income was about 6 per cent under a year ago, the out look for current crops was good. On the basis of recent visits with bankers and others around the District, Mr. Irons said that on the whole conditions appeared to be generally satisfactory. There was no sense of boom or surging activity, no feeling of pessimism. On the financial side, there had but he got in total bank loans, business loans, and consumer loans been increases weeks. The banks had added to their investments over the past three in Treasury financing, Deposits in connection with their participation in the past three weeks. showed a sizable increase had turned upward and up, that loan demand they were still loaned banks indicated that City selective in granting credit. strong, and that they were being was and was in about had increased somewhat the Reserve Bank Borrowing from Federal funds the System total. to percentage relationship the usual by a few of the larger amount, mostly were being used in substantial bills to sell. ratios and no with high loan-deposit banks
With regard to the national picture, Mr. Irons indicated that he leaned toward the views expressed by Mr. Robertson. Some of the current developments in the economic field appeared to be in the nature of inevitable adjustments, and the economy might be getting on a sounder foundation than if the earlier rate of expansion had continued longer. In steel and autos, for example, it could not be expected that there would be additions to inventories at the earlier rates over a very long period of time. In fact, the economy might be moving toward the growth and stability that the System had been seeking rather than the other type of development that appeared earlier to be in prospect. While he did not foresee a surge upward, neither did he see points of basic weakness that were likely to lead to serious economic difficulties. In these circumstances, while he saw no need for greater restraint, he saw no need for greater ease. Mr. Irons indicated that he would not favor a change in the The rate was only out of line with the bill discount rate at this time. tried to keep the discount rate in line rate, and if the System always to have trouble. If one looked bill rate it would be likely with the was found. In this rates, quite a good alignment at other short-term had usually thought of the Treasury Mr. Irons said that he connection, to the dis an alternative approach instrument offering bill as a bank a bank instrument; he the bill was hardly count window. Now, however, than 10 per cent of the outstanding noticed recently that less had as to the raised some question by banks. This bills were owned 91-day
significance of the discount rate being out of line with the bill rate at the moment. Mr. Irons also said he would not favor a change in the directive, although he did not particularly like the wording that related to guard ing against excessive credit expansion. With the Treasury in the market and the economic situation as he saw it, he would favor continuing the existing open market policy. He would not set any particular goals for the Account, but he would instruct the Desk to come as near to the conditions of the past three weeks as it could. Mr. Erickson said that the situation in the First District differed only slightly from the national picture. Nonfarm employment was up in March, but only to the same extent as nationally; on the other hand, insured unemployment was up a fraction of one per cent for the most recent week. This was the second week this year that the figure than a year ago. Construction contracts showed an increase was higher due primarily to nonresidential construction of 2 per cent in March, construction contracts were For the year to date, being up materially. the first month when residential a year ago. March was 6 per cent below and for the first with last year, were down in comparison contracts cent. Department store they were up 9 per months of the year three continuing satis business and were very good Easter sales reflected District banks were favorable. sales also while auto factorily, borrowings at the on balance, and Federal funds continued to purchase million, or between just under $25 in April averaged discount window
2 and 3 per cent of the System total. A survey of capital expenditures conducted in collaboration ith the McGraw-Hill survey indicated that District manufacturers expected to make total expenditures of $634 million in 1960, which would represent an increase of 12 per cent from 1959. Durable goods manufacturers expected to spend 22 per cent more than last year, and manufacturers of nondurables expected to spend 3 per cent more. As to policy, Mr. Erickson said he wished to associate himself with the view expressed by Messrs. Robertson and Irons that the System should continue to maintain a neutral position. He would favor postponing any action on the discount rate or the directive at least until the next meeting of the Committee. With respect to open market operations for the next three weeks, he would give the Desk the same instruction as at the April 22 meeting. Mr. Szymczak commented favorably with regard to open market operations during the past three weeks and expressed the view that a the presentations of Messrs. had been made by significant contribution on to say that although he would favor supply Johns and Bryan. He vent such fashion as banking system in reserves to the ing some additional million or belowreserves to $100 level of net borrowed to bring the that this be done would not suggest to zero if necessary--he down in the economy that there was not the exuberance quickly. Obviously, week of the was only the first However, this anticipated earlier. was the Treasury was of the year, and of the second quarter second month
now in the market. Therefore, he would be inclined to move slowly. He would not favor changing the discount rate or the directive at this time. Mr. Balderston said that although he considered the description of the state of the economy given by Mr. Bryan an excellent one, he had come to the same general conclusions as expressed by Messrs. Leach and Allen with respect to policy. Continuing, he observed that projections for plant and equipment expenditures included a contemplated 70 per cent increase in expenditures for equipment. This would tend to accentuate the problem of unemployment and at the same time productive capacity, now excessive, would be expanded somewhat. On the other hand, there beneficial result that the adequacy of supplies would would be the diminish the inducement to build up inventories for protective reasons. capacity would provide a brake on increases in the prices Also, excess of tangible goods. When he looked at services and unemployment jointly, he was concerned about what might lie ahead during the next few years. would continue to rise, while unemploy Prices of services doubtlessly that one might have hoped at this ment had not receded to the extent lie what had been Ahead, therefore, might stage of cyclical expansion. prices of services banking: rising the dilemma of central referred to as and rising unemployment. a change in the he would favor indicated that Mr. Balderston policy that he suggested. The monetary as Mr. Johns had directive such ease, the implementa as one of reluctant might be described would favor discount rate. of the present embrace continuation of which would tion
If the Treasury bill rate remained considerably below the discount rate, the differential would, of course, induce banks to sell Government securities, to the extent that they had such securities in their port folios, and to operate in the Federal funds market. Such a tendency would not seem inappropriate to him because it would tend to relieve the pressure on the discount window. It would call, however, for open market action in the direction of a net borrowed reserve target of zero, In summary, as long as the discount rate was above the bill rate and as long as there was no real evidence of a change in the active money supply, he felt that the Committee should move toward a lower level of net borrowed reserves. He would rather place the stress on open market operations than force increased use of the discount window. Chairman Martin said that upon rereading the minutes of the Open Market Committee beginning with October 1959, he found them interesting and encouraging. In the past several months, as noted in the minutes, he had from time to time expressed an optimism that he certainly did time he did not see the answers to a not feel a year ago, for at that He now saw answers to some of the problems in the number of problems. expectancy as to their solution. financial field and a reasonable Reserve policy, he felt, had been about right. Federal Martin commented, the System ought At the present time, Chairman feel that anyone could While he did not be struggling for stability. to for optimism. Some going to do, he saw reason what the economy was know as is of good business, in the midst financial trouble were in concerns
always true in a period comparable to the present. Some concerns had overexpanded, for example, and financing had not yet been found. By and large, however, the economy seemed quite solid. The Chairman noted that Mr. Mills had for some time raised ques tions about the level of reserves. He (Chairman Martin) also had had some question on this point since the turn of the year. After commenting on the difficulty he experienced in understanding the money supply, the Chairman said that at the present time he saw no reason why the System should not be supplying more reserves to the market, adding that in say ing this he had in mind the longer trend. He would disagree with Mr. Treiber's analysis only to the extent that he (Chairman Martin) felt should be resolving doubts on the side of ease. As he that the System six weeks to cause the System to it, nothing had changed in the past saw of tightness. There had been a long period resolve doubts on the side same time a real change in the in the money supply and at the of decline of the odds seemed to be in favor of the economy. Thus, all exuberance of supplying more reserves. that it would be a mistake said he felt strongly The Chairman in the rate would this time. A change discount rate at to change the the System had people that to many action indicating a dramatic overt be occurred. Per economy had change in the mind that a basic made up its ready for that. he was not sonally, regarding the had been raised the question that With regard to the matter did not consider that he indicated the Chairman directive,
terribly important one way or the other and that much depended on how one read the language of the directive. It could be said that the System always guards against excessive credit expansion, and it could be that unsound credit expansion would develop in the future. In this con nection, he pointed out that the directive is not made public until published in the Annual Report of the Board of Governors, Although he had argued at times on both sides of the question, basically he did not think that the language of the directive was terribly important unless the Committee was making a basic change in policy. Chairman Martin expressed the view that the most recent Treasury financing had been ell handled. He went on to comment that Treasury activities had for some time been complementary, if not supplementary, to monetary and credit policy; debt management policy and monetary policy had been working closely together. The Chairman said that he would like to see in the next three approach on net borrowed reserves of trending toward weeks a general the zero level. With the start provided by Mr. Bryan, studies were in progress with a view to the possibility of developing a better concept hoped that additional material borrowed reserves, and it was than net of work at the Board too long as the result would be available before however, it seemed reserve target, the net borrowed elsewhere. Using and at the present time. zero would be in order to him that a trend toward the directive or any change in not call for judgment, that would In his
the discount rate. There would be another meeting of the Committee on May 24, and things might then be clearer; at that time, the thinking might be in terms of changing the discount rate and amending Federal Reserve policy. However, it seemed to him that any such action would be premature at the present time and that the System should take all the time it could to be sure that System policy was adjusting itself. What impressed him was the gradual evolution of thinking on the part of the Committee that had taken place. From January 12 to the present date, there had been a steady evolution of Federal Reserve policy largely molded by the economy itself, and this had been a satisfactory way for things to develop. However, there was enough uncertainty in the economy today so that it would not seem premature to supply some additional re there would be little likelihood of generating serves to the market, and enthusiasm by supplying reserves in a modest way. any real speculative noted that some differences had been expressed Chairman Martin a healthy situation. Within the discussion today, which was during the slight majority in favor of continuing there appeared to be a Committee majority favored a change, while a large directive without the present no change in the dis borrowed reserves and in the level of net decrease a vote, that would be in order, rate. If anyone wished to record count fairly well evolved discussion had that the general seemed to him but it to take a without anyone having guide for policy into a satisfactory strong stand.
Continuing, the Chairman said that his approach to the relation ship between the discount rate and the bill rate was similar to that stated by Mr. Irons. The fact that there were now three-month bills and six-month bills in the picture had changed the situation a little. Generally speaking, it occurred to him that it would be well for the System to stay steady in the boat until it was absolutely certain that a wind was blowing. This point had been brought out well by Mr. Allen. He (the Chairman) did not know where the wind was at the moment, but the reserve position was such that the odds seemed to favor what he understood to be the view of the majority; namely, that the trend of net borrowed reserves should be toward zero. If the reserves were not used, the Committee could quickly reverse itself, whereas a change in the discount rate could not be reversed quickly. In summary, he would maintain maximum flexibility at the present time, yet be moving in line with the way that the economy had developed. said that unless someone wanted to record a The Chairman then of the Committee until favor accepting as the consensus vote he would net borrowed reserves. direction of lower moving in the the next meeting he would favor to specify figures, was not too desirable While it did not mean that that this zero with the understanding trending toward that. As to or anything like in three weeks had to get there the Desk that there to be the consensus understood it he policy directive, the is not the subject discount rate this time. The be no change at should that the but it appeared Committee meetings, at Open Market of decision
majority view clearly was against action on the discount rate before the next meeting of the Committee. He did not know what the Board of Governors would do if any Reserve Bank should come in with a change in the discount rate, and he did not want to deter any Banks from doing so if they desired; if this happened, the responsibility would be on the Board of Governors. However, he wished to express himself personally as questioning very much whether the Board of Governors should approve a change in the discount rate in the near future. Chairman Martin then asked whether there were any further comments, and none were heard. Accordingly, he stated that the directive would be approved in its present form and that the comments of individual persons would, of course, be included in the minutes. Thereupon, 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: such purchases, sales, or exchanges (including (1) To make and allowing maturities to replacement of maturing securities, the System Open Market Account without replacement) for run off case of maturing securities, by in the open market or, in the as may be necessary in the exchange with the Treasury, direct conditions and the and prospective economic light of current with a view (a) to credit situation .of the country, general to the needs of funds in the market the supply of relating growth in to fostering sustainable and business, (b) commerce against exces while guarding and employment economic activity practical administration and (c) to the sive credit expansion, amount of securities that the aggregate the Account; provided of for the pur (including commitments in the System Account held the close of Account) at for the or sale of securities chase of indebted certificates special short-term other than this date, temporary accommodation time for the time to purchased from ness by more than or decreased not be increased shall of the Treasury, $1 billion;
(2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certif icates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. Chairman Martin then referred to the action taken by the Federal Open Market Committee at its meeting on April 12, 1960, authorizing the acquisition, in the period between that date and the next Committee meet ing, of up to $150 million of one-year Treasury bills maturing July 15, 1960, either by outright purchase or by swapping other Treasury bills. The activities of the Desk under this authorization, which resulted in the acquisition of $10 million of July 15 bills against offsetting sales of a like amount of other bills, were reported swaps or in detail in a memorandum dated May 2, 1960, from Assistant Vice President Federal Reserve Bank of New York. The memorandum was Larkin of the prior to this meeting with a transmittal distributed to the Committee Copies of both have been Rouse of the same date. memorandum from Mr. placed in the files of the Committee. considered Mr. Larkin's comment that he Martin made the Chairman following which Mr. summary of developments, memorandum an excellent Bank the experience of the New York that in the opinion Treiber said April 12 had been Committee on given by the under the authorization would be warranted. of the authorization and continuation satisfactory
_45 It was noted at this point that some of the members of the Committee had not yet had an opportunity to review Mr. Larkin's memorandum fully. Accordingly, Mr. Rouse presented a rather detailed statement of developments under the Committee authoritization, his comments being based largely on the memorandum that had been distributed. Mr. Rouse also said that it had been obvious to all concerned that there were swaps involved in the transactions undertaken pursuant to the authorization, but that, as far as he knew, there had been no comment at all in the market. The transactions had all been accomplished at market prices and without any market repercussions having come to his attention. Chairman Martin said that he had heard of no repercussions in the market. He went on to say that since an experiment was involved, he would suggest the preparation and distribution of another report along the lines of Mr. Larkin's memorandum if the April 12 authorization should that the April 12 authorization be renewed be renewed. He then proposed adding that by that time the Com three weeks from this date, for another the experiment in a better perspective. mittee should be able to view as voting against would like to be recorded Robertson said he Mr. that he had ex reasons of principle for renewal of the authorization, to swap transactions. April 12 with regard at the meeting on pressed good job in had done a the Desk in his opinion however, that He added, an experiment. which involved in this field and carefully lightly treading
Thereupon, with Mr. Robertson dissenting, it was agreed to renew until the next meeting of the Open Market Committee the authorization given at the meeting on April 12, 1960, to acquire for the System Open Market Account, either by outright purchases or by swaps of other bills, up to $150 million of one-year Treasury bills maturing July 15, 1960. Chairman Martin then referred to a letter from Under Secretary of the Treasury Baird dated April 13, 1960, requesting the views of the Open Market Committee on an enclosed draft of circular under which refunding securities would be offered for either cash or maturing securities but no special subscription privilege would attach to the maturing securi ties. In the event of oversubscription, there would be allotments. Al though it was not so stated in the proposed circular, the Under Secre tary's letter stated that the Treasury contemplated that subscriptions Reserve System, Government investment accounts, and all from the Federal amount would be allotted in full. In sub subscriptions up to a minimum had indicated that it was the discussions, the Under Secretary sequent full all subscriptions, irrespective the Treasury to allot in intention of constitute a who would certain other subscribers of amount, made by State and local governments, group, including, for example, substantial international institutions, foreign central banks, foreign governments, pension funds. and publicly administered to the had been distributed a revised draft of reply and A draft the first draft With to this meeting. Committee prior of the members 1960, from the April 15, memorandum dated a was also distributed there
General Counsel of the Open Market Committee expressing the view that acquisitions by the Federal Reserve Banks pursuant to en arrangement such as described by the Under Secretary would not be subject to the $5 billion limitation contained in section 14(b) of the Federal Reserve Act, which states that "the aggregate amount ...of obligations* acquired directly from the United States which is held at any one time by the twelve Federal Reserve banks shall not exceed $5,000,000,000." The revised draft of reply indicated that the Open Market Committee had reached such a conclusion and that furthermore, since it was contemplated that a substantial group of other investors would be eligible to refund on the same basis as the Federal Reserve Banks, the objection indicated by the Committee to a somewhat similar proposal of the Trearury in 1958 (In 1958 the Committee had strongly questioned the did not apply. advisability of a debt management move that would distinguish in any way by the Federal Reserve Banks and the securities between the securities held reply would conclude with the by other investors.) The proposed held questions regarding monetary and credit statement that, subject to usual the refunding security, the the terms eventually set for policy and refunding some or be prepared to consider Reserve Banks would Federal under such a proposal. of their maturing securities all to whether there Martin as question by Chairman reply to a In in the certain changes Treiber suggested the matter, Mr. comments on were and stated reasons in sup draft of reply to the Under Secretary revised port of those suggestions. of ... obligations read: amount * Should
There being no further comments, it was agreed unanimously that a letter in the form of the revised draft distributed under date of April 26, 1960, as modified to take into account the suggestions of Mr. Treiber, should be sent to the Under Secretary of the Treasury in reply to his letter of April 13, 1960. Secretary's Note: The letter sent over the signature of Chairman Martin to the Under Secretary on May 6, 1960, pursuant to this action was as follows: Your letter of April 13, 1960, requests the views of the Federal Open Market Committee on an enclosed circular under which refunding securities would be offered for either cash or maturing securities, but no special subscription privilege would attach to maturing securities. In the event of over-subscription, there would be allotments. Your letter also states that you contemplate that subscriptions from the Federal Reserve System, Government investment accounts, and all subscriptions up to a minimum amount would be allotted in full. In subsequent oral discussions you indicated that it is the intention of the Treasury to allot in full all subscriptions, irrespective of the amount, made by certain other subscribers who would constitute a substantial group, includ ing, for example, State and local governments, foreign governments, foreign central banks, international institutions, and publicly administered pension funds. Presumably the Treasury circular would state that all sub scriptions by such a group would be allotted in full; it seems to the Committee that it is important that the market be so informed in order to be able to evaluate the offering and the prospects of allotments to others. The question arises whether, under such a refunding offer, of the refunding securities in the Federal Reserve acquisitions for the maturing securities would be "acquired directly exchange within the purview of section 14(b) of from the United States" Reserve Act, which provides that "the aggregate the Federal directly from the United ... of obligations* acquired amount the twelve Federal Re at any one time by States which is held shall not exceed $5,000,000,000." serve banks was presented by the A substantially similar proposal Committee's consideration in early October 1958. Treasury for the 1958, the Committee took the position In a letter dated October 21, Banks pursuant to such a refunding that acquisitions by the Reserve from the a direct acquisition would not constitute arrangement within the meaning of section 14(b). United States amount of ... obligations * Should read:
Although the Committee's letter did not so state, the Committee strongly questioned the advisability of a debt management move that would distinguish in any way between the securities held by the Federal Reserve Banks and the securities held by other investors, and with your letter of October 24, 1958, you suggested a modified proposal under which there would be no difference in any respect in the treatment accorded the Federal Reserve System as compared with any other investor. To that proposal, the Committee responded that it had concluded that acquisitions by the Reserve Banks pursuant to such a refunding would not be subject to the $5 billion limit stated in section 14(b) of the Federal Reserve Act and that, subject, of course, to usual questions regarding monetary and credit policy and the terms eventually set for the refunding security, the Federal Reserve Banks would be prepared to consider refunding some or all of their maturing securities under such a proposal. The Committee has reiewed the proposal in your letter of April 13, 1960, as modified by your oral statement referred to above, and has concluded that, like the arrangements proposed in October of by the Federal Reserve Banks pursuant to such a 1958, acquisitions refunding would not be subject to the $5 billion limit stated in section 14(b) of the Federal Reserve Act. Furthermore, since it is contemplated that a substantial group of other investors would be on the same basis as the Federal Reserve Banks, eligible to refund first proposal made in 1958 would not seem to the objection to the the circular would contain an appropriate apply. (It is assumed that statement regarding the subscriptions to be allotted in full.) monetary and credit to usual questions regarding Accordingly, subject refunding security, the eventually set for the policy and the terms refunding some or be prepared to consider Reserve Banks would Federal all of their maturing securities under such a proposal. meeting of the Federal Open Market It was agreed that the next Committee would be held on Tuesday, May 24, 1960. the Chairman, Mr. Young commented on develop At the request of on the Government securi the statistical program ments in connection with was moving ahead satisfactorily that the program ties market. He reported with the dealers, and of schedules and relations in terms of the planning on May 20, 1960. dealers to begin reporting to request the it was intended G. Lanston and Co.) arisen. One dealer (Aubrey one problem had However,
had raised questions about the access of the Desk to the individual dealer reports that were to be submitted to the newly-organized Market Statistics Department of the New York Reserve Bank. These questions having been raised, it seemed desirable to advise the dealer candidly as to the pertinent provisions of the plan. Therefore, it was stated that the individual dealer reports would not usually be available to the Desk, but that (1) in the extension of repurchase agreements the Desk could call for and obtain from the Market Statistics Department certain figures that would be helpful from the standpoint of the extension of credit, (2) in the event of the declaration of a disorderly market the Manager of the Account would have full access to individual dealer reports until the situation was corrected, (3) to provide against con tingencies the Desk could seek permission from the President of the Federal Reserve Bank of New York to have access to dealer reports, and be granted in certain circumstances. A fourth such permission could provision of the plan, namely, that the Treasury might request compila dealer reports that would be helpful in appraising tions of individual not been mentioned to over a past period, had underwriting experience the dealer because that provision was not pertinent to his inquiry. expressed the view that the dealer later Young went on to say Mr. that the firm would was good and the statistical program that by and large for access of the view of the provision but that in be glad to cooperate, the dealer had in the event of contingencies to dealer reports Desk would have in that respect, was done unless something and, reservations
to decline to participate in the program. However, the dealer suggested exploration of a possible compromise with those concerned, namely, that this dealer and other dealers would be informed promptly on each occasion in which contingency access was granted. If such assurance were given, the dealer indicated that his firm would go along with the program. Mr. Young added that the Treasury and the New York Reserve Bank had been kept informed of developments. It was indicated that efforts would be continued to work out a solution to the problem that Mr. Young had described. The Chairman then referred to comments at the April 12 Committee meeting regarding the likelihood of hearings by a Subcommittee of the House Banking and Currency Committee on one of several bills pertaining the Federal Reserve System that had been introduced by Congressman to development, reported to the Reserve Bank Patman, and to the subsequent change of plans under which the Subcommittee Presidents, concerning a would relate to a different bill, had indicated that the hearings Chairman stated that by Mr. Patman. The R. 8516), also introduced (H. as additional information regarding the Presidents would be kept advised the hearings became available. The meeting then adjourned. Secretary
Also: Record of Policy Actions