May 24, 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 24, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Bopp Mr. Fulton Mr. King Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Irons, Alternate for Mr. Bryan Messrs. Leach, Allen, 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 Kenyon, Assistant Secretary Mr. Mr. Hackley, General Counsel Mr. Thomas, Economist Marget, Noyes, Roosa, Messrs. Brandt, Hostetler, and Tow, Associate Economists Rouse, Manager, System Open Market Account Mr. to the Board of Governors Mr. Molony, Assistant of Research and Mr. Koch, Adviser, Division Statistics, Board of Governors Government Finance Section, Mr. Keir, Chief, and Statistics, Board Division of Research of Governors Chairman, Board of Consultant to the Mr. Knipe, Governors President, Federal First Vice Mr. Patterson, Reserve Bank of Atlanta Reserve Bank President, Federal Mr. Daane, Vice of Minneapolis
Messrs. Willis and Anderson, Economic Advisers of the Federal Reserve Banks of Boston and Philadelphia, respectively Mr. Coldwell, Director of Research, Federal Reserve Bank of Dallas Messrs. Black, Netzer, and Lynn, Assistant Vice Presidents of the Federal Reserve Banks of Richmond, Chicago, and San Francisco, respectively Mr. Holmes, Manager, Securities Department, Federal Reserve Bank of New York Mr. Bowsher, Economist, Federal Reserve Bank of St. Louis Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on May 3, 1960, were approved. At the meeting of the Committee on May 3, 1960, Mr. Young reported on questions that had been raised by Aubrey G. Lanston and Company, Inc., regarding that firm's participation in the Treasury-Federal Reserve program security market statistics. Thereafter, with the concurrence of Government of the available members of the Committee, as indicated by advices trans distribution of a draft, the following letter mitted to the Secretary upon Lanston and Company on May 17, 1960, over the was sent to the President of Reserve Bank of New York: of President Hayes of the Federal signature 10 addressed to to your letter of May "This is in reply relating to the Treasury-Federal Madeline McWhinney and Miss security market statistics. program of Government Reserve of procedure regarding the Your letter raised two points to this Bank. of reports of dealers handling of the the major objective the first point, "Concerning been to develop data Reserve program has new Treasury-Federal for public market appropriate the Government securities on to launching a however, that prior We recognize, information.
"continuing release of such statistics, some experience in the processing and interpretation of such data is necessary. There fore, as explained in earlier meetings between our staff and members of your firm, we have planned an experimental period of data collection of several months duration, during which no statistics would be made public. Following this period of familiarization, we further plan to contact the dealers again regarding problems of publication. At that time we will solicit suggestions from each dealer on the content and form of series to be released as well as seek dealer views on the time lag between collection and release date. We have never proposed, however, to make our publication program in this area dependent on the individual approval of specific dealers as to the details of the aggregate data to be released. "Concerning your second procedural point relating to the exceptional conditions under which individual firm data will be available to persons outside the Market Statistics Depart ment, I understand that Mr. Ralph A. Young of the Board's staff has already talked to Mr. Youngdahl at some length about the explicit procedures that the Treasury and Federal Open Market Committee have adopted in order to limit access to individual firm data to specially authorized occasions and persons. As Mr. Young indicated, with the exception of the few summary figures that may be requested by the Manager of the System Open Market Account for individual dealers seeking repurchase accommodations at this Bank, availability of individual firm data outside the Market Statistics Department under special conditions is expected to be rare. specifically the type of conditions under "To illustrate exceptional release of data could occur, I can which such by listing the situations presented perhaps be most helpful Federal Open Market Committee at for the consideration of the time it authorized the new market statistics program: the Market Account may have full "1. The Manager of the Open reports in a market situation to individual dealer access determined to be disorderly. of an exceptional nature, the "2. In other circumstances by the President might be directed Statistics Department Market make selected or full Reserve Bank to of the New York Federal to qualified reports available individual dealer details of for examination and study. System officials designated the Treas Treasury financing, with any "3. In connection of the Federal the President request might, on occasion, ury data be that special York to direct Bank of New Reserve of issues specifi dealer holdings as to individual supplied to, the financing in in, or closely related cally involved question.
"It is impossible for us to foresee at this time how many special occasions for access to individual dealer reports might arise. If any respondent in the program would wish to raise the question after several months of experience, we foresee no reason at this time why an answer might not then be supplied. All instances of access to individual dealer figures will be reported to the Federal Open Market Committee and to the Treasury so that an official record will be maintained. "I am, naturally, pleased to be informed of your prepara tions to cooperate in our program. The expectation of the Treasury and the Federal Open Market Committee is, of course, that all of the dealers will respond cooperatively to our joint request for the statistical material needed to fulfill the program that both agencies are undertaking jointly, through the Federal Reserve Bank of New York, in the public interest. In closing, may I assure you that the handling, the processing, and any exceptional official assess to individual dealer will be protected at all times by the strictest stand figures ards of confidentiality. The program will receive careful staff review from time to time and substantive or procedural change, believed to be desirable may be recommended in the light of such reviews. "Since these matters are of interest to all reporting dealers, we are passing the substance of this letter along to other dealers without mentioning your firm or referring to the questions which you raised." specifically The action taken in sending the fore letter was ratified by unanimous vote. going the Lanston firm had Hayes commented that this connection, Mr. In that it would cooperate New York Reserve Bank informed the subsequently securities dealers all of the Government program. Thus, in the statistical were participating. members of to the had been distributed meeting there Before this the period May 3 operations covering a report of open market the Committee period May 19 covering the supplementary report 1960, and a through May 18, placed in the have been of both reports 23, 1960. Copies through May of the Committee. files
Mr. Rouse made the following comments with respect to developments since the meeting on May 3, 1960: As the written report to the Committee points out, the sta tistical reserve position of member banks, whether measured by total reserves or by net borrowed reserves, has been on average somewhat easier than it had been in the preceding interval be tween Committee meetings. The money market, on the other hand, did not reflect this statistically easier position, and Federal funds traded almost consistently at the 4 per cent ceiling. The reasons for this divergence are not wholly clear, but it appears that they center on unusually large movements through Treasury Tax and Loan accounts in both the past and the preceding period, which affected temporarily the distribution of funds between the money market banks and the country banks. There were large calls on all banks and subsequent heavy redeposits in "C" banks which were in turn recalled. Treasury bill rates fluctuated widely again over the past three weeks. In the auction on May 16 the three- and six-month Treasury bill rates were established at 3.79 and 4.00 per cent, 1/2 per cent higher than in the previous auction. Bill rates moved sharply downward last Thursday and Friday to about 3-1/8 per cent and 3-1/2 per cent on the three- and six-month bills, but bounced back to 3-1/2 and 3-7/8 per cent in respectively, yesterday. The relative instability of our short the auction term rate structure has been a source of increasing perplexity, abroad, and it is a to many bankers here and and concern, Committee may have to pay increasing phenomenon to which the fact that the market has Basically it reflects the attention. nonbanks, and the bill rate has, as a become dominated by the divorced from the reserve positions result, become increasingly past period, however, were Rate movements in the of the banks. situation and reflection of the tense international in part a market of the Treasury's announce the sour reception by the of six-month bill issue $100 million to the that it would add ment the bill offering has While adding to in the May 16 auction. way of raising relatively considered a rather routine always been case, that the dealers felt, in this of cash, the small amounts at a time when they were their positions Treasury was undermining and notes the new certificates process of distributing in the refunding operation. offered in the May cash at the need for additional has no urgent The Treasury balance so that up its cash like to build time, but would present period, early in July, in a can enter into the next financing it indeed be a This would it did in April. position than stronger of view, since it the System's point development from desirable
would undoubtedly make the task of maintaining an even keel dur ing Treasury financing operations easier to accomplish. It now appears that the Treasury believes it can get by with a $3 billion cash financing in early July and at the same time pay off $0.5 billion of the special July 15, 1960, bills on maturity. This would mean that the Treasury would offer only $1-1/2 billion one-year bills in July. I should also report that with June free from normal financing operations, the Treasury is giving serious thought to whether it should attempt a partial advance refunding of the $11 billion 2-1/2's of 1961. Developments in the interna tional situation probably hold the key to the Treasury decision, although there are a number of technical problems to be resolved. As you know, the legislative authority for the System to lend directly to the Treasury up to $5 billion outstanding at any one time expires next June 30. Under Secretary Baird advises us that the Treasury has requested the Congress to renew this authority. System operations in July 15 Treasury bills are fully de tailed in the memorandum prepared by Mr. Larkin, and mailed to you last Friday. So far, $91.5 million July 15 bills have been purchased under the authorization made by the Committee on April 12, of which $48 million were on a swap basis. This brings total System holdings of July 15 bills to $104.9 million. I should also like to call your attention to a slight change in the regular written reports to the Committee. In view of the growing interest within this group in various measurements of bank reserve positions, we have added data on total reserves, borrowings, and nonborrowed reserves to the table describing the factors affecting bank reserve positions, and their inclusion will be continued in subsequent reports. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period 23, 1960, were approved, May 3 through May ratified, and confirmed. Supplementing the staff memorandum distributed under date of May statement with regard to economic 20, 1960, Mr. Noyes made the following developments: of economic information has A large volume and variety meeting. At that time the available since the last become considerable improvement April would show impression that of March was based on a few weekly over the curtailed levels and an obvious reports by businessmen, series, some informal change in the weather.
Most of the additional information we have supports the earlier view. Certainly, retail trade improved substantially and the improvement was general--extending to both durables and nondurables. Employment increabed, and unemployment de clined more than seasonally. With prices of farm and food products back up to year-ago levels from their low point of last fall, and crop prospects generally excellent, farm income should improve as the year progresses. One way to summarize the widespread nature of the shifts from March to April is in terms of diffusion indexes for lead ing and coincident indicators, virtually all of which increased in April. On a month-to-month basis, a diffusion index for five groups of leading series was above 50 per cent in April, after hovering in the low 30's in February and March. Similarly, the index for the three roughly coincident groups was up above 70 per cent, from the 40's in the preceding months. The question, of course, is whether this rather dramatic improvement from March to April is significant, or whether it was due to transitory factors influencing each of these months in opposite directions. The scattered information we have so far for May suggests that the latter may well be the case. De partment store sales have certainly reacted from the very high levels of last month. More important, perhaps, the steel rate has continued to drop off as new orders for steel are running considerably below current production. In fact, new orders in durable goods manufacturing generally were off somewhat further in April. With this weakness in the basic industries, there is little chance that the index of industrial production will in crease in May, and it will take unusual strength in the non durable sector to even hold the March-April level. Thus, the average physical output at factories and mines in the second quarter will almost certainly be below the first quarter. If consumption expenditures are maintained at the rates for April and May, there is a good chance that the indicated quarter will not show a national product in the current gross decline, and perhaps a small increase. However, the advance of only about 4 per cent quarter of 1959--a growth from the same for a period in which more vigor or less--will be disappointing on cyclical grounds. was widely anticipated ous expansion abstracted from the thus far, I have In what I have said of the Summit Conference. of the failure economic repercussions might be of two types. speaking, these repercussions Broadly attitude on the in a changed might be reflected First, they part of businessmen and consumers--a renewal of inflationary of durable goods accompanied by an acceleration expectations, and all of rate of inventory accumulation, purchases, a higher provoked by fear of rising prices, the other actions that are Washington is a singularly even physical shortages. or perhaps
unsuitable vantage point from which to judge whether such a psychological reaction has, in fact, occurred; but no evidence of it is apparent. The second area in which the repercussions of the Summit failure might appear is in the expenditures of the Government itself. It has been suggested by a number of observers that intensification of the cold war, which now appears almost in evitable, will lead to an increase in Federal spending and a less favorable fiscal position than was suggested by the budget for 1961. At least in the first instance, such increased ex penditures would be likely to appear in the appropriations for the defense establishment, for military assistance, or both. We had undertaken an analysis of recent and prospective defense expenditures prior to the scheduled Summit Conference, in the hope that it might shed some light on the erratic be havior of the economy so far this year, and for that reason we have assembled somewhat more detailed information on current and prospective outlays in this area than would normally be the case. This information would appear to support the official posi tion taken in recent statements by the Secretary of Defense and his Deputy that the outcome of the Summit Conference should not have an appreciable effect on defense spending. New orders placed by the Defense Department are scheduled to increase considerably in the second quarter, but this is in line with a well-established seasonal pattern of defense order ing and had probably been anticipated by most suppliers. The defense budget for 1961 already involves a substantial further shift from manned aircraft to missiles, and provides for of those missiles which are expected to become opera procurement tional at rates which constitute the practical capacity for 1961. Hence, there would be little their production in 1960 and to be gained from increased appropriations immediate advantage this connection, it should be for missile procurement. In space program has encountered special remembered that while the disappointments, the military missile program difficulties and and witnesses for roughly according to schedule, is proceeding all testified that it is not defense establishment have the lack of current appropriations. retarded by being substantially 1959, fiscal 1960, and the budget expenditures for fiscal Defense rate of $41 billion. Thus, 1961 are all close to an annual for reorientation of the defense program, in the absence of a general period ahead are not expenditures in the it appears that military economic developments. force in general to be a positive likely factor as may be a depressing defense procurement In one sense prototype bomber missiles and shift toward more the further
development, rather than current procurement, will accentuate a trend that has been going on since 1957, in which each dollar of defense procurement has represented a smaller and smaller amount of man-hour employment and conventional resource utilization. Unless there is a widespread shift in attitudes and expectations, or the stimulus of increased military procurement, the prospect appears to be that we will see operations in many basic indus tries for a period at rates well below capacity levels, and more unemployment than has been associated with high-level activity in previous postwar periods. There are always uncertainties as to the future, and these are most pronounced when the economy is showing no signs of decisive movement in one direction or the other, but, as I have tried to bring out in earlier reports, as time passes without any unequivocal evidence of an upward thrust and accompanying inflationary pressure, the chances that such a development will occur are substantially diminished and the need for a restrictive monetary policy is correspondingly lessened. Mr. Thomas presented the following statement with respect to finan cial developments: Recent credit developments indicate that neither borrowers any alacrity to the increased have responded with nor lenders of bank reserves. Although interest rates con availability peaks of last winter, they tend to fluctuate tinue below the any actual or anticipated variations in widely in reflection of supply or demand conditions. bank credit that occurred in April, as The upturn in total has been followed by a underwrite the Treasury financing, banks at city banks in the first in total loans and investments decline and of other securi Holdings of Government three weeks of May. also declined, while and loans on securities ties were reduced and consumers increased finance companies, loans to businesses, continued at a moderate New capital issues have moderately. below last year's peak lending is no doubt level, and mortgage supply, seasonally adjusted, The increase in the money volume. early April has in late March and seemed to be occurring that banks, however, have deposits at U.S. Government not continued. than was expected. much more risen now be made on a pre of funds, that can Estimates of flows indicate the of this year, the first quarter basis for liminary last year. The compared with of credit demands changed nature instruments, which and equity market in all credit net increase
attained a record volume in 1959 as a whole, was substantially smaller in the first quarter of 1960 than in the same period last year but comparable with the corresponding 1958 quarter. The most striking change, of course, was the shift of the Federal Government to a position of debt reduction by an amount that may be considered as normal for the first quarter of the year. In addition, the increase in aggregate private credit was a little less than a year ago. Businesses borrowed somewhat more, accounted for by an increase in bank loans. Consumer indebted ness, however, increased less than in the first quarter of last year, reflecting principally a lower volume of mortgage loans. Partial data indicate that similar contrasts with last year have characterized the second quarter. With respect to sources of funds, gross saving by consumers in the first quarter of 1960 was slightly above last year's high volume, while saving by nonfinancial business was somewhat smaller. Consumers invested more of their savings in tangible capital expenditures, including durable goods, and also borrowed less than they did last year. Thus the volume of funds available for acquisition of financial assets was reduced. Most of this reduction occurred in holdings of deposit-type assets--demand deposits declined more than last year and savings deposits and shares increased less. Individuals' purchases of Government securities were smaller than a year ago--though still substantialwhile purchases of other securities and mortgages were larger. Nonbank financial institutions, receiving smaller amounts also advanced less credit than they did last from consumers, commercial banking system showed year. Credit supplied by the the first quarter of this year than a much larger decline in than seasonal decrease in corresponding to the greater usual, up the market contrast between In essence, these data point deposits. and that of a year ago, brought this year's credit situation fiscal position of the by the shift in the about principally is significant that other Yet, it also Federal Government. offset the decline in increased so as to demands have not credit has continued at a high level, but Government borrowing. Saving there has been a assets and have gone into tangible more savings markets. As a net into credit and equity lessened flow of funds of pressures toward rising there has been a lessening result interest rates. levels reached in from the peak rates have declined Interest of this year, but of 1959 and in early January the latter part four or five were in the first higher than they they are still aggregate credit moderation in view of the of 1959. In months question may be early this year, persisted since demands, which
raised as to why interest rates are not lower. What has kept them from returning to earlier levels? One possible explanation is that something like the current level of interest rates is necessary to attract savings into financial assets. Another is that the shift by the public from bank deposits to other finan cial assets has resulted in increasing the pressures on markets for short-term securities to meet current cash needs. These varying pressures can surely account for some of the wide fluc tuations that have recently been characteristic of Treasury bill rates. A third possible explanation, and one deserving particular attention by Federal Reserve officials, is the impact of System policies. To be sure, positive measures have been taken to ease restraints on the availability of bank reserves. Yet, as mentioned earlier, the response has not been notable. It may be that the demand factors are not sufficiently vigorous and could not be stimulated by more abundant credit availability or lower interest rates. In such an event interest rates should decline. It may be that banks still feel restrained and are holding back rather than pushing credit extensions. Possible reasons for this attitude deserve scrutiny. while bank reserve positions are easier than One is that, the latter half of 1959, they are not any easier they were during than they were in late 1958 and early 1959 or in early 1955 and credit demands but of lower 195 -- all periods of expanding late Member bank borrowings at the interest rates than at present. billion dollars tend to be restric Reserve Banks of over half a very vigorous. Last year's credit demands are tive unless partly underwritten by of heavy Treasury borrowing, policies securities to liquidation of Government followed by bank banks, possible credit a process that made funds for loans was obtain expansion under restraint. large amounts from banks have been borrowing In addition, exceeded $2 recently have generally others. Such borrowings study. It has deserves some possible impact billion. Their the bulk of these borrowings considered that since commonly been of Federal consist largely system and within the banking are banks is on borrowing the restraint funds transactions, to the funds available effect of liquid by the counterbalanced lending banks. funds transactions, figures on Federal Our newly developed is not from by banks of the borrowing that some however, indicate figures from The new Federal funds. is not all banks and other one or two for only available securities, in Government dealers intermediaries may be important these dealers suggest that days,
between banks as borrowers and corporations and others as lenders. Dealers' "reverse repurchase agreements" with banks exceeded their borrowings from banks. The bulk of dealer financing was obtained from corporations. These data, of course, need a longer period of study before definitive conclusions can be drawn as to their significance. Another likely factor of restraint on banks at present is the level of the Reserve Banks' discount rate relative to market rates. This may be more of a restrictive factor than the volume of borrow ings and undoubtedly accounts for some of the wide fluctuations in Treasury bill rates. This is the case not only because banks own ing bills and needing reserves prefer to sell bills at the market rates prevailing than to borrow at the higher discount rate. It is also true because banks--and others--possessing available funds that they want to keep in liquid form can sell Federal funds, i.e., lend the funds to other banks or to dealers, at a higher yield than they can obtain from the purchase of Treasury bills. Banks pur chasing the funds thus avoid borrowing from the Reserve Banks. Such borrowing would have had the effect of supplying additional reserves to the market. It might have induced additional Federal Reserve purchases of securities to relieve the strain. The addi tional reserves would have been conducive to further bank credit expansion. Recent behavior of the money market supports the view that the maintenance of the discount rate above market rates is an effective penalty on borrowing and credit expansion. The question at present is whether it is exerting more re to be considered under the circumstances. The review of straint than is desirable developments to date indicates that this may be the case. credit of excessive uses of credit There are few, if any, indications it be in the area of consumer that need to be restrained--unless Whether the dramatic events in the inter instalment credit. change this picture raises serious national political area will are matters of conjecture and judg questions that at this stage considered, nevertheless, before taking ment. They need to be would be interpreted as a shift of policy. any overt action that seasonal demands will immediately ahead, As for the period the next two or on reserves during a substantial drain exert million or more, and at will equal $400 three weeks. This drain needed through the continue to be of that amount will least half the pressure of markets will be under half of June, when last amounts will Substantial additional liquidity needs. seasonal demands. After holiday currency July to meet early in be needed further until will not increase reserve needs mid-July, seasonal Day week end. the Labor
If it seems appropriate to encourage a resumption of bank credit growth, $400 million or more of additional reserves might be supplied in the course of the next three to six weeks. A re duction in the discount rate might accomplish the same purpose with a somewhat smaller volume of open market purchases. Mr. Marget commented as follows regarding the United States balance of payments: No new data have become available since the last meeting of this Committee which would change significantly the picture, justifying an attitude of relative optimism with respect to re cent developments in our balance of payments, that I have been presenting at recent meetings of the Committee. I would like, of course, to stress very strongly that the optimism that would seem to be justified is in fact only a very relative optimism: relative, that is to say, to some of the extremely pessimistic views as to our balance-of-payments prospects that one still hears expressed. Certainly it would not do, for example, to put any particular stress upon the fact that gold purchases by for eigners (which, in the first quarter of this year, as I reported a couple of meetings back, were, at $42 million, less than half the already relatively low figure for the first quarter of last year) were almost negligible in the first three weeks of May. (Actually, including a transaction announced but not yet executed, the total of gold sales to foreigners in those three weeks was below $5 million.) One should not overstress such figures, in the first place, because gold movements are very erratic in the short period. In the second place, even over a longer periodalthough this is still a hard thing for many people to understand are not necessarily a good indicator of what is -- gold movements payments; and it is the balance of happening to the balance of remain our primary source of concern. payments which must From this standpoint, there is one matter which does seem further comment. In my reports to this Commit to me to deserve to account for the international movements tee, in undertaking as a measure of what has dollars, which we do take of gold and I have con balance of payments, happening to our over-all been figures for exports and on what the trade figures--the centrated quite deliberate: for showing. This has been imports--have been view, it is our performance that, in the long the simple reason whether our in that will decide commodity trade in the field of be balanced at a or are not going to accounts are ternational
high level without the imposition of arbitrary restrictions. But this is not to say that we can leave the so-called "invisible" items in our balance of payments altogether out of account; and this is especially true with respect to the particular "invisible" item which is represented by the movements of capital. More specifically, one should ask: are the capital items in our bal ance of payments currently moving in our favor or are they cur rently moving against us? The answer, so far as the figures for the first quarter of this year are concerned (and these are the latest figures avail able to us) is, quite clearly, that the capital items on balance moved against us during that quarter of this year, to an extent of the general order of magnitude of $200 million, as compared with the first quarter of 1959. If the noncapital items in our balance of payments had remained the same, this would have meant, of course, that gold and dollar transfers to foreigners would have been higher by that amount than they were a year ago. Actually, however, gold and dollar transfers to foreigners in the first quarter of 1960 were about one-fourth less than they were a year ago. From this set of facts, some obvious conclu sions can be drawn: First, it is clearly wrong to suppose, as so much of recent discussion seems to have been supposing, that we can come to a conclusion as to what is going to happen to the size of our bal ance-of-payments deficit solely on the basis of what may be hap pening to the capital movements component in the balance of pay ments. Specifically: a very considerable part of the discussion to which I have referred has rested on the assumption that if, as interest-rate structure here and the result of a differential abroad, capital--particularly short-term capital--moves out, we losing "gold," and therefore are likely to shall find ourselves find ourselves effectively barred from any efforts that we might make in the direction of a counter otherwise have wished to cyclical monetary policy. into all the weaknesses of this argu I do not enter here by implication, of for example, its great exaggeration, ment: in the United States foreign balances held the proportion of in the degree which can be said to be "interest-sensitive" which the difference between its ignoring of suggests; or the argument which still hold relatively as the United States, a country such and a to its foreign obligations, reserves in relation massive position is whose reserve as the United Kingdom, country such wrong to talk that it is My point is simply much more tenuous. as if it depended balance of payments future of our about the (and short-term on capital movements or even primarily, solely,
capital movements, at that) without regard to what is happening to the central matter of trade--the basic relation between our exports and imports of commodities. I have tried to illustrate the point particularly by the experience of our balance of pay ments thus far this year as compared with the experience last year. This year, I have pointed out, despite a shift against us in capital movements, our balance of payments deficit this year is significantly less than it was at this time last year because the improvement in our trade position has been much more than enough to offset the adverse capital movements. This in itself is, I think, an encouraging finding, pre cisely because it is in the field of trade, and all that "trade" implies in the way of technical efficiency in production and com petitiveness in the broadest sense of the term, that the adjust ments required in order to bring our international accounts into close balance are the most difficult to make: much more diffi cult, for example, than is implied by the suggestion that the balance can be brought about simply by keeping our interest rate structure higher than that of our trading partners at all times. Monetary policy certainly has a critical role to play in the process of adjustment of our international accounts; in my own view it has already played a role in that process which is cer tainly not to its discredit. What is to be rejected is not the conception of a role for monetary policy in the process of balance-of-payments adjustment, but a conception of it, in rela tion to differential interest-rate structures and short-term capital flows, which rests on so narrow a technical base that it misses the really essential point even vithin the field of capital movements: namely, that capital moves internationally to interest-rate differentials, but also not only in response by the well-informed as to whether on the basis of a judgment in question have an authorities of the countries the monetary in relation of their responsibilities, adequate understanding inflation and fostering sus to the twin goals of containing courage and determination to tainable growth, and adequate understanding into accomplishment. carry the fruits of that of his views with re the following statement Mr. Hayes presented and credit policy: to the business outlook spect last three weeks data of the whole, statistical On the views already held by a good lend considerable support to the New York, to the my associates in the System, including many in in business activity further moderate expansion effect that
this year is a reasonable expectation--but with no likelihood of a real surge involving inflationary pressures. The basic outlook has remained about the same through a disappointing March and an encouraging April. Natu: lly the sudden worsen ing of the international situation could have major effects on the domestic economy, but neither the extent nor even the direc tion of such effects is yet visible. Of course we must expect a sharp decline in the rate of total inventory accumulation in the second quarter. However, this may be offset by gains in final consumption. Favorable factors include continuing optimism on the part of consumers and businessmen, although this is tempered, in the case of businessmen, by rather sober profit expectations for the remainder of the year, attributable in large part to increasing price competition. Housing starts reported for April, and for March on a revised basis, suggest that residential construction may have bottomed out. While steel output has continued to drop, there seems to be sub stantial evidence that inventories are being drawn down, which should limit further declines, especially with plant and equipment spending on the rise. Although unemployment is clearly higher than it should be, the problem seems to be due in large part to inadequate train ing and inadequate mobility of labor--causes which are not easily influenced by credit availability. Demand for credit is generally strong but not excessive. Total loans and investments of all commercial banks rose sharply in April, reflecting a roughly seasonal expansion of business loans, unusual strength in other loan categories combined, and holdings of Government securities incident a large increase in demand has been less in Treasury financing. Loan to the April but this seems in line with sistent in New York than elsewhere, supply still shows a seasonal pattern. The money the usual past year. On the other one-half per cent in the drop of about total liquid assets new statistics on the Board staff's hand, the sharp contrast be the nonbank public emphasize held by by this total and liquidity as tween liquidity as measured alone. In the first quarter, indicated by the money supply annual rate of 3-1/2 per assets rose at an for example, liquid annual rate of 2 per money supply fell at an cent, while the in the past nine years interesting to note that cent. It is have been asset holdings in liquid increases the year-to-year larger, on the average, steadier and considerably both much than the increases in the money supply. quite steady, although bond market has been The corporate next thirty days scheduled for the of new issues the calendar in 1959 and 1960. than at any time is higher
It seems to me that the satisfactory business outlook warrants maintenance of our recent policy which might be characterized as one of substantially lessened restraint as compared with a few months ago. It does not, in my judgment, call for any further easing action at this time. Another con sideration suggesting a steady policy is the uncertain economic and political impact of recent international developments. Moreover, an even keel policy will be appropriate if the Treasury undertakes an advance refunding program in the next few weeks. I should think that the Manager might be instructed to pursue the same open market policy as in the past three weeks, with emphasis on the feel of the market rather than any specific target. The projections clearly indicate that substantial out right purchases and/or repurchase agreements will be required in the next three weeks. Liquidation of bills by corporations and others prior to the June 15 tax date, and perhaps some pre liminary window dressing, should supply bills to the market, and this may minimize the impact of System purchases on market rates of interest. As for the discount rate, I recognize that a case might be made for a reduction at this time on the grounds that the 4 per cent rate was adopted last September at a time when inflationary expectations were far stronger than now; that there is some question whether current business conditions justify the highest discount rate of the last 30 years; that with business still rather strong we could reduce the rate without the danger of signalling fear of recession on the part of the Federal Reserve; and that a lower rate would put us in a better position to increase it at some later date when firmer restraint might be needed. my judgment there are even stronger reasons However, in rate. As we look back a taking no action on the discount for that the existence of the few months, I think we can conclude 4 per cent rate since last September has had a good stabilizing glad that we resisted the and we can certainly be influence; when temporary market to increase it in January temptation pointed strongly in that direction. Later the 4 per pressures deter market rates from dropping even cent rate probably helped business nor credit At present neither than they did. lower gap between the signal--and the call for any overt conditions which is not excessive in any discount rate and market rates, of discount administra any problems and is not creating case on market rates as seasonal pressures may tend to narrow tion, the influence the next couple of months--including increase in
of the Treasury's prospective shift from surplus to seasonal deficit. Moreover, the credit markets appear to be pretty well stabilized, suggesting that it might be best not to "rock the boat." Having just returned from Europe, I can't help giving some weight to the consideration that any reduction in our discount rate could tend to accentuate the flow of short-term capital to Europe--a flow which is already raising difficult problems for some of the European central banks. Also, as I havealready mentioned, the post-Summit uncertainty of international affairs in general would point to the wisdom of deferring any change in credit policy, even if a change were indicated by domestic con siderations--and in my judgment it is not indicated on that score. So I come out with a clear conviction that we should leave the rate unchanged between now and our next meeting. With respect to the directive, I would still like to see a procedural change in the way of separating long-range goals from immediate objectives--but there is no urgent need for such a move immediately. that business performance and sentiment in the Mr. Erickson said First District had improved somewhat, and that business reports were generally good. The New England production index was up in February and There was nothing new to report on remained at the same level in March. construction or employment. In recent weeks, total claims for unemploy higher than a had been running and additional claims ment compensation Retail sales were not as high as nationally. year ago, but the rates registrations were ahead by ahead of last year, and new automobile were average. The April higher than the national cent, a rate of gain 30 per deposits of 4.6 per an increase in savings banks showed survey of mutual the past three months. During in other recent less than cent, slightly about in banks were funds by reporting sales of Federal and weeks purchases window, with use of the discount slightly greater but there was balance, period. three-eek the preceding then in the window coming to more banks
Mr. Erickson said that he would not recommend a change in the discount rate or the directive at this time, although he did not feel too strongly about the directive. With the System having been supplying reserves, he was rather surprised that the Federal funds rate did not go below 4 per cent, except for a day or two, during the past three weeks. As to open market operations in the forthcoming period, he would favor giving the Desk the same instruction as at the meeting of the Committee three weeks ago. He would supply needed reserves freely, and he hoped there might be a number of days when the Federal funds rate would not be at the discount rate. Mr. Erickson commented that he would like to see a paper pre interest rates that would review the past two or three years, pared on of factors such as the increased use of Federal particularly in light short-term securities, including Treasury bills, funds, the greater use of was unable to under and the fact that the Treasury by nonbank interests, excess of 4-1/4 per cent. financing at rates in take long-term movements in the Eleventh District, with Mr. Irons reported mixed level. Department satisfactory over-all at a generally economic activity ago, while the from a year were off somewhat thus far in May store sales apparently would be substantially was unchanged and oil situation a slight decline in construction, some time. There had been unchanged for was quite outlook and the agricultural was satisfactory but employment good.
With regard to the banking situation, Mr. Irons said that in the past three weeks District banks lost deposits and loans and investments declined somewhat. Bankers in the larger cities with whom he had talked recently reported a strong demand for credit and stated that they were being selective in granting applications for loans. They indicated that if more funds were available, they would be making more loans. Borrowing at the Reserve Bank had increased in terms of the number of banks borrow ing, with more of the larger country banks coming to the window. The large city banks continued to operate substantially in the Federal funds market; during the past three weeks purchases of Federal funds had been running around $450-$475 million, with sales around $150 million. Had it not been funds, more banks would have been coming to the for the use of Federal discount window. With respect to Federal Reserve policy, Mr. Irons said that although he had not been dissatisfied with open market operations during by the fact that the was concerned and confused past three weeks, he the a period of some six weeks appeared only to lessening of restraint over in New York City. Upon reviewing have reflected itself to any degree of April, it appeared since the first reserves and borrowing statistics on net borrowed banks showed substantial reserve city him that on average to New York City On the other hand, $200-$250 million. reserves of around and free reserves Federal Reserve from the not been borrowing banks had
had appeared quite frequently. The Chicago picture seemed to be more like that of the reserve city banks. Thus, it appeared that the results of the lessening of restraint were not extending to a substantial part of the banking system, that is, the reserve city banks. If the System really wanted to lessen restraint and encourage an increase in the money supply, it occurred to him that this might be a situation in which it would be desirable to make a further change in the amount of vault cash permitted to be included in required reserves, with the adjustment of such a nature as to allow the reserve city banks to reap some benefit. In suggesting this, he was not arguing for a lot of ease, but the statistics appeared to bear out his feeling that what the System had been trying to achieve was through to a substantial part of the banking system. A further not flowing release of vault cash might be a way to supply a reasonable amount of addi them widely. The action could be defended tional reserves and distribute as a desire to encourage an in. of seasonal demands as well on the basis not sure whether he would Thus, while he was in the money supply. crease be some basis for it. there seemed to favor this procedure, to leave the dis that he would prefer went on to say Mr. Irons in accord with position being time, his unchanged at this count rate the discount rate, any reduction of Mr. Hayes. In considering that of wanted a general whether it have to decide Reserve would the Federal it wanted or whether banking system over the entire of restraint lessening
to aid special cases. He would prefer to keep the present discount rate until there was evidence of some adjustment of market rates. One reason why the Federal funds rate had not drifted away from the discount rate appeared to be that, on the one hand, the Reserve Banks were trying to administer the window in accordance with the principles of Regulation A pertaining to continuous borrowing while, on the other, member banks were in need of funds. In conclusion, Mr. Irons said he was not particularly concerned about the policy directive. Mr. Mangels summarized the results of a poll among members of the California Bankers Association which showed that 58 per cent of the respond ents expected business to continue at present levels during the second half an upturn and 16 per cent a decline. of this year, while 26 per cent expected had not been checked, while 82 per cent Some 78 per cent felt that inflation steady for the remainder of rates would remain fairly thought that interest only 2 per cent foresaw an increase. the year and Mangels said there District economy, Mr. Turning to the Twelfth recently, although conditions probably had been no outstanding changes was at 4.2 ago. In April, unemployment better than a month were slightly of .3 per cent half of a gain in March. About 4.5 per cent per cent, against of persons in for by the employment April was accounted employment in in in May was census. Steel production the taking of the connection with but it was per cent of capacity, level of 71 at about the April holding
felt that production probably would drop further in the next month or two. Lumber production again declined, and in late April and early May some mills in the Pacific Northwest had closed temporarily because of the weakness of demand. Department store sales during the four weeks ended May 14 showed no change from a year ago. In the first quarter of this year, farm cash receipts were 5 per cent higher than in the corresponding period of 1959. With respect to the banking situation, Mr. Mangels reported that during the three weeks ended May 11 loans were down $50 million, holdings of Government securities were down $188 million, and demand deposits were down $579 million. Time deposits were up $87 million and savings deposits million, most of the increase occurring outside of the State were up $32 Reserve Bank were quite nominal. Trad of California. Borrowings from the purchases and sales about in funds was quite active, with ing in Federal balance. been some slight improvement while there had Mangels noted that Mr. and there seemed upward push was evident over all, no in business conditions, these conditions, he about the future. Under be rather general concern to its policy of easing. be justified in continuing that the Committee would felt reserves, with perhaps zero balance in net borrowed look forward to a He would be free reserves. when there would a week or so a period of even that a reduction Mangels suggested rate, Mr. As to the discount ago in view than a month effect adverse psychological have a less might A number of change in conditions. been some there had the fact that of
financial writers, he noted, were analyzing the easing that had taken place through open market operations and were commenting on the possibility of a discount rate reduction. Nevertheless, he would not favor changing the discount rate at this time, There was likely to be some increase in Government spending, along with seasonal pressures, and the System might find itself again having to hold the line. For the same reason, the directive seemed to him to be satisfactory as it stood. Mr. Deming said there had been no new developments of significance in the Ninth District during the past three weeks. The trend that had been evident for several months continued: modest gains in many measures of appreciably smaller than national gains, and substantial liquidity activity, pressure on the banks. In April, only one major economic indicator--depart for the District than the nation. In ment store sales--shoved up better were off fractionally from year-ago levels, unemployment contrast, bank debits income in Minnesota rose year earlier, and personal slightly higher than a was the season was late In agriculture, was the case nationally. much less than winter wheat was quite good. The forecast for but prospects seemed reasonably District reflected lag in the Ninth respects, the Since, in many favorable. season, if forth a good agricultural last summer, of the drought the effects the picture somewhat. should change coming, and national of the international to the discussion With reference looked at As he comments. had no additional said he Mr. Deming situation, trend toward that the the view seemed to support they recent developments,
easier money market conditions could be continued without appreciable danger. However, the current uncertainties, in the international picture particularly, argued against any sharp change in policy. Mr. Deming expressed agreement with the views of Mr. Hayes regarding the discount rate and the directive. He would continue, as Mr. Mangels had suggested, to probe toward easier conditions in the total reserve picture. Like Mr. Irons, he was somewhat confused regarding the development of easier conditions in New York City than elsewhere. He did not see that conditions were appreciably easier in the Ninth District, where the pressure on banks seemed about the same as a month or two months ago. The suggestion that a release of additional vault cash be used as a means of alleviating the situation had some appeal, although he had not thought particularly about this possibility before today's meeting. To summarize his views on the he saw no particular danger in probing toward a general policy program, mildly easier position. weeks activity in certain hard Allen reported that in recent Mr. District, including steel, farm goodslines of importance in the Seventh reduced further. The machinery, had been machinery, and construction whole by cutbacks in the nation as a been affected more than District had the four weeks ended May 7 new by the fact that in output, as indicated area were 50 per in the five-State for unemployment compensation claims increase nationally. a 25 per cent compared with above last year, cent sales were store May 14, department weeks ended the four post-Easter For
only slightly above last year, both in the country and in the District. For the final two weeks of this period, the District showed declines from last year, possibly accounted for by cold and rainy weather this year and excellent sales last year. The analyst for the nation's largest retailer of general merchandise found recent trends "confusing," Mr. Allen said. However, this analyst continued to look for a good year-to-year rise and believed that the use of credit by consumers was still moderate in the aggregate and could expand relative to cash sales. Business and financial circles continued to view the future with confidence but without enthusiasm. With few exceptions, capital spending plans were being carried through. The prospect of shrinking profit margins, naturally enough, was cited by some firms as the reason for a high level of capital outlays. Examples were found in petroleum, chemicals, and food processing. The Purchasing Agents of Chicago continued railroads, deliveries of goods were speeding up, and more and more of to report that had been completed. That seemed that inventory reduction programs them found example. The steel industry nationally was to be the case in steel, as an In Chicago the rate had cent of capacity in mid-May. operating at 72 per and in Detroit operations than the national rate, been a point or two higher industry now estimated Contacts in the near capacity. had been maintained the third quarter 69 average 72 per cent, quarter rate would that the second in the 80's. the fourth quarter per cent, and noted, with last Mr. Allen continued to increase, Auto production the prior week. 146,000 in as against at 156,000 output estimated week's
It appeared that May production might exceed 623,000, and June schedules called for 628,000 assemblies. That meant that despite good sales-- April sales and early May sales were the best since 1955--inventories would continue at a high figure at least through June. On May 10 they were 1,042,000 units, a record high for the industry. Production in the third quarter was scheduled to drop to 1,000,000 cars--450,000 in July, 250,000 in August, and 300,000 in September. The assembly lines would start to go down in July, with most of the down time coming in August. Compact car changes reportedly would be negligible, so on those lines the changeover time would be the shortest on record. And manufacturers would work hard to get out the new models, so September production could run well over the 300,000 projection. several years the number of Allen pointed out that in the past Mr. passenger cars delivered in the first four months had been just about one the past seven years it had for the year. In four of third of the total should prevail in 1960, the been exactly one-third. If that relationship With five or be just under 6,300,000. car deliveries would number of new imports, total deliveries would be at about the 6-3/4 six hundred thousand suggested at the beginning of level that conservative forecasts million the year. Mr. Allen in the District, financial picture regard to the With at least a tight position, banks were in of the larger said that many So far this year of loan trends. reason being disparity relatively, the
the business loans of weekly reporting member banks in Chicago had in creased by 7 per cent, in Detroit by 10 per cent, in Indianapolis by 13 per cent, in Des Moines by 15 per cent, and in Milwaukee by 20 per cent. In New York there was a decline of 2.3 per cent. Excluding New York and the five major Seventh District cities he had mentioned, business loans in the rest of the country increased by 3 per cent. Without going into a detailed analysis, the disparity seemed to lie in loans in nonmanufacturing categories, chiefly public utilities, which declined in New York and increased rather generally elsewhere throughout the country. Mr. Allen said that in view of the conditions in the Seventh District that he had mentioned, he would not favor a change in the discount rate at this time. Mr. Thomas had suggested that the discount rate, at its present level, might be a deterrent to credit extension, but this did not appear to be the case in the Seventh District. For the next three weeks, Mr. Allen suggested continuing to aim at a zero level of net borrowed reserves, al not object to $100 million either way. Again having in though he would he would leave the directive in mind conditions in the Seventh District, in the directive to guard In his opinion, the reference its present form. expansion was appropriate. excessive credit ing against indicators in the Tenth financial and economic Mr. Leedy said that in the nation, although generally to those elsewhere District corresponded as favorable as for the country indicators were not quite in some areas the retail sales, where with respect to was true, for example, as a hole. This
the Tenth District was one of those on the minus side this year. There had been a pronounced decline in demand deposits. While unemployment compensation claims were lower than earlier this year, they were still at a higher level than last year. Mr. Leedy indicated that he continued to be concerned about the money supply and the fact that, notwithstanding the program followed in recent weeks to provide some ease in the reserve position of the banks and in the credit picture, the System was not getting the results that might have been anticipated. The fact that the effects of the breakdown of the Summit Conference could not yet be fully measured must be taken into account. From the analysis presented by Mr. Noyes, there apparently was not much to be feared as far as Governmental expenditures were con cerned, but the effects of recent developments on the private sector of the economy were yet to be determined. The performance of the market quite reassuring, but whether developments yet seemed to him to have been had happened might set off another and further appraisal of what to come remained to be seen. in the direction of inflation movement said he would be hesitant to suggest that the System Mr. Leedy direction of ease or that any very much further in the should be moving rate. Nevertheless, he should be taken on the discount immediate step referred. The Mr. Thomas had matters to which about the was concerned in the bill rate and the gyrations discount rate feature of the penalty level might be operating present discount rate to him that the indicated
to defeat, or at least retard, obtaining the results that had been sought in the program of providing additional reserves. He would favor continu ing to make some moderate additions to reserves and, recognizing the diffi culties involved in attempting to fix a target in terms of net borrowed reserves, he would leave to the Management of the Account considerable latitude in continuing to conduct operations in accordance with that objective, even if this meant creating some amount of net free reserves. At the same time, he would feel that if, by the time of the June meetings of the directors of the respective Reserve Banks, there had not been any developments, or more evidence than now existed, to indicate that the events week portended something substantial in the way of inflationary of the past to a change in the discount rate. bias, consideration might be given District business activity had expanded Mr. Leach reported that Fifth moderately in recent weeks, reflecting a pattern of seasonal changes and of either speculative expansion There was virtually no evidence normal growth. in the good volume growth was reflected contraction. District or cyclical projects planned and in and commercial building and diversity of industrial declining rate of evident in the District's strength was process. Seasonal in textile markets of new activity in the appearance insured unemployment, market improvements. and in lumber still substantial, backlogs were while be equal to estimated to were furniture manufacturers backlogs of Existing Cigarette manu fairly strong. was considered which weeks' production, 3-1/2 while bituminous and earnings, good sales were experiencing companies facturing
coal production improved in April and was one per cent above a year ago. On balance, the District farm situation continued to improve, although unseasonably cool weather had made necessary the replanting of considerable cotton acreage. At Fifth District banks, Mr. Leach said, loans continued to rise more than seasonally. During the past three weeks, they had increased by a larger percentage than during any corresponding period since 1955. The discount window continued active and banks had been net purchasers of Federal funds. With respect to open market operations, Mr. Leach said he would continue to maintain the present posture and not lean in either direction. Any further easing might invite trouble, and maintenance of the status quo needed to support economic growth. He should provide such reserves as were zero. Developments in the net borrowed reserves to be around would expect his opinion as to the discount weeks had not caused him to change past three As he had said before, pat for the time being. he would prefer to stand rate; excessive credit expansion" "while guarding against he felt that the expression be omitted from and that it should for several weeks had been inappropriate fearful of in report made him in today's economic directive. Nothing the flation in the immediate future. Federal level of outstanding that the said the facts Mr. Mills required reserves the level of a year ago, no higher than credit was Reserve at a money was maintained turnover of of the and the velocity was lower,
high rate convinced him that the money supply continued to be under heavy pressure and accounted for the fact that the money supply remained at a figure below a year ago. In the light of those facts, it seemed to him that the Federal Reserve System was called upon to provide additional reserves through some vehicle that would help to sustain the increase in gross national product and the higher level of personal income, to the end that, it would be hoped, the expansion in economic activity being looked for in some areas would be achieved. Listening to the discussion around the table, he was impressed that there were so many who seemed to feel that the System was groping in the dark for an understanding of the financial situation, and particularly the factors that affect the commercial banking system in the utilization of the reserves supplied to it. To add his speculation as to the reasons for the perplexity, he thought it not in hindsight attention would be focused on the attitude of improbable that of their investment and lending the commercial banks, as a reflection imponderables relative to the Mr. Thomas had developed the positions. an area that deserved much situation and, more importantly, Federal funds the volume of bank borrowing investigation and analysis, namely, greater and the Federal funds Federal Reserve Banks outside of the that originates borrowing was tend the volume of such his impression that market. It was reserve city banking moved fast into the that it had ing to increase, the country bank rather rapidly into it was now moving picture, and that that found themselves of country banks in the case sector, particularly
handicapped in meeting the loan demands of their communities in the face of a leveling-off or loss of deposits and were turning as a consequence to borrowing from their correspondent banks, since Regulation A properly does not encourage more than temporary borrowing from the Federal Reserve Banks. It was his impression that there was a backing up of general borrow ing demands from the country banks to the reserve city banks, thus exerting a depressive influence on their credit activities. If the System should see fit--and he believed it would be advisable--to supply additional reserves and bring negative free reserves down to the zero level, or perhaps to bring about some free reserves, he considered it doubtful that the effect of those reserves, as they reached the commercial banking system, would be other than beneficial, for he felt that the commercial banking system required some loan demand that was reaching the banks. leeway in order to meet a reasonable was pressing against their loan-to-deposit ratios, the As that loan demand aggressively. In consequence, if were not encouraged to expand credit banks reasonably expect some increase freely available, one might reserves were more by banks of short-term an expansion of holdings loans, and beyond that in afford the banks a certain psycho securities. This in turn would Government about their them less discomfort and give in their attitudes logical easiness sort--and the of that to a development ratios. Parallel high loan-to-deposit thought it New York City banks--he appearing at the might already be symptoms in order and their houses act to put banks would that the commercial likely same time meeting while at the credit commitments, reduce their outstanding
the necessitous demands for credit that were properly brought before them. In other words, such a dovetailing of influences--a reduction of commitments and a reduction of loans in some areas while, on the other hand, the banks justifiably and properly serviced credit demands that commercial banks have an obligation to meet--might bring about a proper increase in the level of commercial bank loans while at the same time the banks were curtailing their credits in other areas. Thus, there was not likely to be the kind of credit expansion that would arouse concern from the standpoint of inflationary in fluences. In short, he saw little need to be concerned that an increased supply of reserves would spark any expansion of bank credit that would be other than helpful to the economy at the present time. Mr. Mills noted that in countries abroad, particularly the United Kingdom and to a somewhat lesser extent, perhaps, Germany, the Low Countries, and Japan, the forces of business expansion appeared to be approaching a point that was requiring more aggressive attention from the monetary authorities. not too far in the future the effects It seemed to him that at some point be reflected in United States exports of those restrictive policies would If and when that might fall to a degree. that the volume of exports and it would be a matter of serious concern in the United States, came about, possibilities that there were reasonable with that development because along activity would be of domestic economic lack of aggressive expansion the he suggested of imports. Accordingly, substantial contraction followed by a develop some projections staff would if the economic it might be advisable that
that might reveal the extent to which a contraction of imports could proceed without producing a reversal in the dollar and gold positions of friendly neighbors and compelling a flow of gold to this country that might be em barrassing to them. In view of the substantial time lag from the date of origination of export and import transactions to their reflection in balance of-payment statistics, he also suggested that it would be desirable to obtain some sense of what was going on in both domestic and foreign business communities as to forward commitments that in due course would affect the international balance of payments. Mr. Mills said he would not be inclined to favor a reduction of the discount rate until about the time of the next Committee meeting, at least. If, by that time, additional reserves were supplied in reasonable quantity, the System might be in a better position to assess the impact of those would not change the directive at this reserves on the financial markets. He time. in view of the international situation and Mr. Robertson said that either up or down, he the absence of any strong trends domestically, in in favor of maintaining present policy would agree with those who had spoken a position that It was easing nor tightening. time being, neither for the Thomas and Irons grateful to Messrs. neutral. He was consider quite he would rate and vault to the discount had made with regard suggestions they for the next Committee meeting by the time of the the feeling that cash. He had the discount rate, to a change in should be given consideration perhaps
depending entirely an what happened in the interim. He also felt that there should be exploration of the proposal of Mr. Irons with respect to supplying reserves through instruments of policy other than open market operations in a way that would scatter them throughout the country. Mr. Shepardson expressed the view that the economy, in general, seemed to be moving along in satisfactory fashion. Thus far, there had been no evidence of undue disturbance because of recent international developments, although some uncertainty was bound to exist. At the time of the May 3 meeting, Mr. Shepardson recalled, he had the feeling that by this time serious consideration should be given to a change in the discount rate, Because of the current uncertainty, however, he was not sure. He still thought there would be some advantage in a change in the rate, but in view of the present situation it might be appropriate to defer consideration of a change for some little period. He felt that the discount rate, at its having an effect on the distribution of funds, as Mr. present level, was had pointed out, and the lack of growth in the money supply continued Thomas If no change was to be made in the discount rate, to give him some concern. desirable to continue to supply reserves through he believed that it would be a zero level of net borrowed reserves, market operations, looking toward open the direction of somewhat further in This would mean reaching plus or minus. as he recalled it, at contemplated by the consensus, supplying reserves than the May 3 meeting.
Mr. Shepardson commented that, like Mr. Leach, he had felt at the past two meetings that it might be well to change the directive to eliminate the portion of clause (b) having to do with guarding against excessive credit expansion. He still thought such a change would be appropriate, with perhaps a substitution of language along the lines suggested by Mr. Johns at the May 3 meeting. Mr. King noted that those who had spoken today apparently were in general accord. His own thoughts, he said, were in line with those ex pressed by the group as a whole. In terms of net borrowed reserves, he felt that the Committee should aim at zero and try to work in that general area. Three weeks ago, Mr. King recalled, he had said that he would be inclined to approve a change in the discount rate if a majority of the Reserve Banks wanted to move on the rate. At present, he was inclined be better to defer such action for some time, at to feel that it would matter in the light of circumstances as they least, and reconsider the he believed that future. Like Mr. Irons, a few days in the might develop not reached out very far from market operations had the effects of open the suggestion of In his opinion, therefore, the New York City banks. vault cash was worth exploring. to a further release of Mr. Irons in regard of today he would that as Mr. King repeated In further comments, have been in the System would He felt that rate alone. leave the discount
a better position to have moved on the rate three weeks ago. At present, he thought the System would be well advised to sit tight on the rate and to continue easing the reserve position of the banking system through open market operations. As he had indicated, he would try to reach a zero level of net borrowed reserves. He would favor deleting from clause (b) of the directive the phrase having to do with guarding against excessive credit expansion. Mr. Fulton said that in the Fourth District there were a few favorable developments, including a high level of new auto sales, an increase in the output of coal, and a higher volume of construction than last year, with the increase largely in the industrial field. Unemployment had declined, but not as much as seasonally, and some pockets of substantial unemployment remained. The situation with respect to heavy industries might be character ized as one of "deteriorating stagnation." Nationally, the rate of steel production for this week was projected at about 67 per cent of capacity; in from 41 per cent in Youngstown to 76 per the District the projections ranged rate was admittedly high and was expected to go cent in Cleveland, where the were that during the holiday week of July 4 lower. At present, expectations 50 per cent nationally. New might go as low as the rate of steel production at a rate of only about and were coming in were deteriorating rapidly orders inventory liquidation that the Steel men claimed per cent of capacity. They did not in their experience. was the most rapid among their customers was felt that the off, although it would level when the situation know
automobile industry might begin to order in the latter part of July. In the case of some steel customers, it was indicated that the use of computers was enabling them to control inventories more precisely than in the past. Thus, they would tend to keep inventories at a minimum, expecting that the mills would be able to deliver promptly whatever was required. In the next ten days, several thousand workers at one mill were scheduled to be laid off because of a declining order book. Mr. Fulton commented that an unfavorable inventory situation prevailed among the auto parts manufacturers, who had scheduled their operations in line with the substantially higher rate of output anticipated by the auto companies earlier in the year. Now that the auto companies were dealing on a 20-day inventory basis instead of a 5-day basis, these parts were being carried by the manufacturers and their operations were quite low. Appliances were over stocked, and machine tools and heavy machines were not moving well. The orders incident to plant and equipment expenditures had not that had been anticipated appeared; there were, reportedly, lots of plans, but there were few firm orders. the picture in the Fourth District was All in all, Mr. Fulton said, of months, at least. for the next couple not bright expressed the view that more reserves were needed, that Mr. Fulton that the aim should degree, and starved to a considerable supply had been the He did not feel of free reserves. up to $100 million from zero be a situation this time. The country (agri reserves were appropriate at that net borrowed and there was a good were in a tight situation, cultural) banks particularly
demand for loans. If the loan demand was not satisfied to a degree, a psychology might develop that could be cumulative in its effect; and if such a psychology developed, it might be difficult to reestablish loan demand once it had stopped. Mr. Fulton agreed with Mr. Irons that the distribution of reserves was not good and that an adjustment of reserve requirements by way of per mitting additional vault cash to be counted as required reserves might be a highly appropriate means of achieving a better distribution. It appeared to him from the projections that substantial quantities of reserves would be needed in the near future, and it might be appropriate to provide them in this way. out that borrowings of member banks from the Mr. Fulton pointed had been at a rate around $500 million for some time, and Reserve Banks banks probably would want to get out of debt to the he noted that the for lending purposes when rather than employ their funds Federal Reserve The present degree of restraint reserves became available. additional what he viewed as a in the light of a little too strong seemed to him already stated business. For reasons the psychology of deterioration in rate at this time. However, would not change the discount by others, he the directive by deleting be appropriate to change he felt that it would against excessive referred to guarding clause (b) that the portion of credit expansion.
Mr. Bopp said that conditions in the Third District were not as good as nationally, and the national movement had been described as side ways. Turning to the discount rate, he reported that the directors of the Philadelphia Bank, at their meeting on May 5, felt unanimously that the discount rate should be reduced. They went along unanimously with continuing the present rate only as an expression of confidence in manage ment, perhaps, and because the Treasury was in the market at about that time. At the meeting last Thursday the directors again voted unanimously to continue the existing discount rate, but only because of the inter national situation, which still required interpretation and might have led to a revival of inflationary pressures. The directors felt unani mously that in the economy as a whole there were very few bottlenecks. Looking at plant capacity, employment levels, industrial production, and prospects for the immediate future, they concluded that there was adequate capacity to permit a significant increase in output without the danger of strong inflationary pressures developing. On the basis of this the domestic economy, they felt that a discount rate reduction appraisal of would be appropriate. he agreed with the directors. Although he Mr. Bopp said that possible results of recent international developments, appreciated the those developments pretty as though the country had taken it appeared discount rate and made now in the If a reduction were much in stride. move in the System could always should revive, the inflationary pressures
other direction. A reduction would indicate that the System was flexible and did not always tend to lean in the direction of tightness. After indicating that he had been impressed by the analysis presented by Mr. Thomas concerning the sources of funds, Mr. Bopp outlined the general picture that he would like to see develop. This embraced a position of free reserves, the Federal funds rate periodically, at least, below the discount rate, and member bank borrowings less than $500 million. He would recommend reducing the discount rate one-half point, and he would delete the portion of clause (b) of the directive which referred to guarding against excessive credit expansion. Mr. Patterson reported that Sixth District indicators showed signs of some improvement in business activity although there were many mixed Nonfarm employment was up in April and department store sales movements. doubled the rate of increase for the nation as a whole. While construction down in March, the fact that awards increased in January and employment was in construction employment. The pointed to possible improvement February the cotton crop of $4 to $6 in estimated damage to late cold spell resulted relatively good. Farm outlook vas still but the farm production million, still 9 per cent rates were last spring, although were higher than wages were being main Farm marketings in the nation. farm wages elsewhere below in the District than nationally. tained at a higher level said that Mr. Patterson banking developments, Turning to District early in May. declined slightly April and then rose in lending
Deposits rose modestly in April. Borrowings of member banks in relation ship to the System total were still high. Mr. Patterson said that few complaints had been heard from commercial bankers with regard to monetary policy. However, many bankers had expressed the view that the legislation passed by Congress last year to permit the carrying of vault cash as part of required reserves was intended to produce some benefit to the banks and that they had gotten little from the present allowances. Mr. Johns said he continued to hold the views that he had expressed at the May 3 meeting. He thought it highly desirable for such additions to be made to the supply of reserves as would in time, it might be hoped, be reflected in an increase in the money supply. In this connection, he wished to make the point, as he had done repeatedly on previous occasions, that in as a proximate objective of monetary his view the use of net borrowed reserves not intended. This he that were not wanted and policy might lead to results reason, primarily, that a net done in recent months, for the felt it had of what the banks of account the question target leaves out borrowed reserve available. The evidence seemed quite clear, do with the reserves that are used to reduce in the reserves are out, that when Mr. Thomas had pointed as not obtain the the System does Reserve Banks, to the Federal debtedness for which it is aiming. or the money supply result in total reserves the Eighth District days banks in that in recent Mr. Johns said measured both discount facility, use of the somewhat their had decreased
in terms of number of banks borrowing and in dollar amount. However, he felt it would be quite erroneous to construe this as evidence that the banks felt easier or were in fact in an easier position. The disposition of Government securities continued, but there was also another factor involved. Some of these banks had been rather steady customers at the discount windows of the Reserve Bank. In some cases, there had been tactful discussion with those banks of their situation and plans for the future; in other cases, the banks well knew the time was approaching when they might expect similar approaches from officers of the Reserve Bank. This was particularly true in Memphis, where the cotton financing banks continued to be under pressure but had gotten out of debt to the Reserve Bank. Mr. Johns added that he wished to underline what Mr. Thomas had the indebtedness of banks to other banks and to nonbank lenders. said about This had been observed for quite a time. said, he would like to see in In the circumstances, Mr. Johns bring about an increase in the total issued to the Desk that would structions this would result in hope that sooner or later of reserves, in the supply caution that if the He again wished to in the money supply. increases target this objective net borrowed reserve too closely to a Committee adhered might be defeated. had expressed the view, for ago, Mr. Johns recalled, he Three weeks rate ought to today, that the discount which Mr. Thomas referred reasons to as soon as one-half point reduction of a and he had suggested be reduced,
possible. This was not intended, however, to be taken as meaning that a reduction should necessarily be made right at that time. At the meeting of the directors of the St. Louis Bank a few days later, he did not recom mend a reduction, for he had in mind the traditional policy of even keel during a period of Treasury financing. Similarly, when he said today that the discount rate was in need of downward adjustment, he was quite aware of the fact that there had been a radical change in the international situation. Therefore, although with some regret, he would be quite prepared to accept a further deferment of action on the discount rate rather than to take such action too hastily without full realization of the impact of the international situation. For his own part, he was inclined to think that the impact on the economy would not be too great and that before long the System might see its way clear to make the downward adjustment of the discount rate that he thought was needed. Mr. Johns said that he would still like to see the directive changed in the manner he had suggested three weeks ago, so as to remove what he considered undue and inappropriate emphasis at this time on guarding against excessive expansion of credit. Mr. Balderston said the rolling prosperity that he thought descriptive ago seemed to be continuing to roll, and on a high of the economy three weeks was higher than the not see ground ahead that However, he did plateau. travelling. Steel production was down, plateau on which the economy had been unsatisfactorily high rates were were up, and unemployment rental vacancies
in relation to the current phase of the business cycle. Consequently, believing as he did that the System should take action earlier rather than later, even though it might not want to make overt moves, he would favor a change in the directive. It seemed to him three weeks ago that monetary policy had changed, and that it was being changed even more at that time. Accordingly, he felt that it would be appropriate to make one of two changes: either to eliminate from clause (b) of the directive the phrase "while guarding against excessive credit expansion" or to substitute some modification of clause (b) along the lines suggested by Mr. Johns at the May 3 meeting. He was inclined to favor the latter alternative and therefore would like to suggest an amendment of clause (b) so as to provide with a view "to fostering sustainable growth in economic for operations increasing moderately the total reserves of activity and employment while member banks." open market operations, Mr. Balderston With regard to the target for of free reserves of at least $100 million said he would consider a target the Committee had that the efforts He was deeply concerned appropriate. far proved ineffective. supply had thus increase the money been making to the banks and the condition of was that the loaned-up His conclusion had created a during the fall demands upon them of heavy loan expectation level of reserves to make the current bankers that tended psychology among years ago when the case some than had been different fashion operate in a not sure that he was In short, was lower. to deposits ratio of loans the
a zero level of net borrowed reserves would increase the money supply promptly, and he felt that the System must seek some results promptly. He would, therefore, like to see free reserves at once, and in the amount of at least $100 million. He was rather impressed with the suggestion of Mr. Irons that another move might be made to increase the portion of vault cash countable as required reserves. He was not certain whether that should be done during the next month or until the System found it appropriate to change the discount rate. Nevertheless, he thought the idea was well worth studying. Chairman Martin said it seemed to him that the only added starter at this time, as compared with the May 3 meeting, was the international situation. It was too early to attempt to evaluate with any degree of certainty the effects of the breakdown of the Summit Conference. However, it was his feeling that the evolution of Federal Reserve policy was quite clear; it had been moving in a clear direction. If he understood correctly, nobody today had indicated a desire to tighten, and the question, therefore, increase the money supply, and when, under present conditions. was how to said he did not think there was evidence of any strong The Chairman He thought the Committee could pressure on prices at the moment. upward increasing reserves in the in the way it had been find some satisfaction of response of the concern about the lack there was reason for market, but not be corrected overnight, but supply. In his opinion, this could money The most significant to face up to some fundamentals. it was necessary
unexplained item in the first half of the year, to date, had been the decline in interest rates, that is, the way it came about. There had as yet been no satisfactory explanation of that development, but it convinced him that something had been going on in the economy. While he did not want to sound too bearish, his choice of one word to describe the present situation would be "saturation." As he saw it, the economy was in a period of temporary saturation, of which the automobile market was an indication. Despite good sales of cars, some unemployment might be seen in that and other areas before long, because for the time being the market was saturated. A new demand must be developed for some products. In certain respects, Chairman Martin said, he thought the System must reorient its thinking. The situation with respect to the balance of him. He was not optimistic about the longer-run aspects payments disturbed and he was not completely convinced that one of the balance of payments, To pursue any policy such as ignore world money markets. could totally be moves of that There could not 1958 would be disastrous. in 1957 and the economy was a decline development in where the only significant sort, of 1957 and 1958, that Looking back at the recession in interest rates. be adjustments in prices Instead, there must was about all that occurred. As he had would be painful. admittedly this in some areas, although more of a problem. margin was becoming the profit mentioned before, at the May 3 meeting he had been firm recalled that Chairman Martin discount rate. to adjust the would be a mistake he thought it in saying that
Basically, he believed that the international situation was a disturbing element to business planning, and not the reverse. If a firm were con sidering plant and equipment expenditures, and the development of markets, the management would not be thinking primarily of inflationary consequences at this particular juncture. Instead, the thinking would be likely to center on the prospect of an extension and intensification of the cold war, with no prospect of a break in the situation for some time. In these circum stances, such a firm might well be inclined to be more cautious and less likely to spend. This, Chairman Martin added, was a tentative judgment, and the matter could be argued on both sides of the fence. He was merely throwing out as his own tentative thinking. this After referring to the gyrations of the bill rate, the Chairman said call for some adjustment of the discount rate. that the situation seemed to It would be preferable to have another ten days, or possibly two weeks, to overt action. However, net the international news before taking digest the zero level. In fact, free reserves were already down to around borrowed statement week. If it average, for the current were indicated, on reserves reserves--and the to supply additional the intention of the Committee was put more pressure would today so indicated--this around the table sentiment not know at what point passed. While he did discount rate as time on the process was hold, the market would take additional reserves supplying of the become necessary before it would a matter of time It was only clear. perfectly face up to that. to
In his opinion, Chairman Martin said, the System should continue to feel its way; the odds were all with the System. He found himself in fluenced by the sentiment around the table in favor of moving, slowly and cautiously, in the direction of supplying additional reserves. At some point the money supply would begin to take hold, and then the System could consider what ought to be done. In further comments, the Chairman alluded to the difficult problems confronting the System in the psychological area. There had recently been speculation, he noted, regarding a reduction of margin requirements. He did not know what the manifestations of that would be, but there would be a difficult problem of explanation. In either a further release of vault cash, a possibility to which he had been attracted for some time, or a would be a difficult problem of cut in reserve requirements, there direct not generally understood. A lot because the broad problem was explanation some time ago were now for a who favored an easy money policy of people the balance of payments. In because of the problem of tight money policy impact, but without doubt grossly exaggerating the his opinion, they were were cross currents and swings. there that he felt the System had been moving Chairman Martin repeated better chance to to have a It would be helpful the right direction. in Conference and of the Summit out of the breakdown what was coming digest the summer doldrums At the same time, the domestic economy. effects on the would be justified view, the Committee hand. In his close at were now rather
on that basis alone in moving in the direction of supplying additional reserves. Chairman Martin then said that if open market operations were going to move into the direction indicated by the consensus it would seem to him to make good sense to change the policy directive. Mr. Balderston had made a suggestion, as had several others. He (Chairman Martin) had before him a suggestion of Mr. Thomas, which was that clause (b) be amended to provide for operations with a view "to fostering sustainable growth in economic activity and employment by providing reserves needed for moderate credit expansion." This, he noted, would be a simple, straightforward statement; it would not state how much would be done or in any way say that the Committee would necessarily do anything or change anything. called for discussion and, in the light of a The Chairman then Shepardson, the suggestion was made that the word "bank" comment by Mr. just prior to the words "credit expansion," be inserted alternative would be to strike the Mr. Robertson noted that an the word "employment" so that the existing clause (b) after language of growth in economic activity read "to fostering sustainable the clause would and employment." amended to read "to that clause (b) be Shepardson then moved Mr. and employment by providing in economic activity sustainable growth fostering motion was and this credit expansion", moderate bank needed for reserves seconded.
Mr. Hayes noted that Committee policy had been changing only gradually and said it would be his preference that the directive also change gradually. The thing that some members of the Committee had been wanting to get rid of was the portion of clause (b) relating to guarding against excessive credit expansion. He wondered whether the proposed change might not represent too much of a jump at one meeting, and whether the Committee should not remain on more neutral ground for a while. Mr. Johns asked what a more liberal supplying of reserves was in tended for, if not to provide reserves needed for moderate bank credit expansion, and Mr. Irons stated that his objection to the shorter form of clause (b) mentioned by Mr. Robertson would be on the ground that the language was so broad it could almost never be changed. Chairman Martin suggested that each of these statements should be looked at in the context of what the Committee had been doing in the weeks, following which Mr. Hayes said he had been concerned past several time about the fact that clause (b) typically contained long for a long He suggested that appropriate as well as more immediate objectives. run goals asked to work on a method of the Committee's staff might be members of of clause (b); that is, the more permanent part separating the two parts temporary objective. and the a somewhat longer that this would represent Martin replied Chairman well be Committee could of the that the Secretary He felt range project. is, the way in directive; that the form of the to work on improving asked
which the directive is cast. However, for the immediate purpose of the meeting today, the question was one of deciding whether clause (b) of the existing directive should be changed in the manner that had been suggested. The Chairman then read again the proposed change in clause (b) that had been moved and seconded. Turning to the level of reserves, Chairman Martin said it seemed clearly to be the consensus that the Committee should not tighten and that it should continue in the direction of a modest increase in the supply of reserves. In this connection, Mr. Shepardson clarified that his thought had been to provide an increase in the supply of reserves. In making his earlier statement, he had had in mind that the target at the May 3 meeting was in terms of a range from $100 million of net borrowed reserves down to zero. If it would make his position clearer, he definitely contemplated some further increase in the supply of reserves. Mr. Allen said that, as he understood it, the consensus at the zero, and Chairman Martin of trending toward 3 meeting was in terms May to carry that a little further. suggestion today would be said the Martin then referred back to the change in the directive Chairman inquired whether anyone wished to had been moved and seconded, and that indication, he stated that There being no such record a negative vote. He also stated that the be approved in such form. the directive would slightly further in the direction of providing consensus would be to trend reserves.
Mr. Balderston inquired whether the consensus would be interpreted by the Desk as meaning net free reserves rather than net borrowed reserves, and Mr. Rouse said he thought this was understood. Accordingly, the Committee voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the gen eral credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to fostering sustainable growth in economic activity and employment by providing reserves needed for moderate bank credit expansion, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of indebtedness pur for the temporary accommodation of the chased from time to time not be increased or decreased by more than $1 Treasury, shall billion; from the Treasury for the account (2) To purchase direct Reserve Bank of New York (with discretion, in of the Federal issue participations to one or where it seems desirable, to cases such amounts of special short-term more Federal Reserve Banks) from time to as may be necessary certificates of indebtedness of the Treasury; provided for the temporary accommodation time held at any one time total amount of such certificates that the shall not exceed in the aggregate by the Federal Reserve Banks $500 million. Mr. Shepardson said to the discount rate, With further reference the international particularly clarified, as the situation he hoped that of events, consideration unfavorable turn there was an and unless situation, Committee meeting. before the next in the rate given to a change might be
Mr. Hayes noted that the discount rate was not within the scope of the consensus reached at Open Market Committee meetings, and Chairman Martin agreed that the role of the Committee was purely advisory, with neither the Board nor the Presidents being committed. Mr. Hayes then said he thought it proper to emphasize that a large majority of those who commented today had indicated that they would not favor moving on the discount rate now. Also, he wished to point out that advance refunding by the Treasury of the 2-1/2 per cent bonds of 1961 might be in the wind. As of now, there was a question whether this might be done before the next Committee meeting. He also mentioned again, as a factor to be considered, that the System should have in mind the position of friendly foreign countries; he felt that this factor deserved some weight. that without question this factor was involved. Chairman Martin said He added, however, that the System could not let the problems of foreign Mr. Hayes said that he granted the compound its own problems, and countries point. that he thought the role of the Federal Chairman Martin repeated was clearly under discount rate relation to the Committee in Open Market any President or does not bind within the Committee stood. Discussion any member of the Board of Governors. that this was an evolving situation, The Chairman went on to say That was the framework as it moved along. must tackle it that the System and
in which it was necessary to work at the present time. It might be that a week from today nobody would want to do anything on the discount rate but that in two weeks, for example, the situation might be different. He went on to say that the more time the System could have to digest developments the better it would be, and that the System would not want to jump prematurely. The more time it could get and the more orderly a manner in which it could take things, the better off it would be. On the other hand, things cannot always be ordered in a way that one would like to see them. The System cannot set dates and be bound by them. Mr. Bopp commented that at a number of Reserve Banks it is the practice of the Board of Directors to meet only once a month. This presented a technical problem of a complicating nature. Mr. Hayes said he had always considered it desirable that timing of discount rate actions be coordinated, and that it had been his feeling on the rate at the Federal Open Market Committee meetings that a consensus coordination. The general feeling to had been helpful in achieving this rate would not be a good idea. to be that a change in the day appeared Hayes was well expressed. the view of Mr. Martin said that Chairman of the discount rate previously, however, discussion As he had indicated not be binding upon anyone. Market Committee meetings could at Open Mr. Hayes that time might expressed agreement with Mr. Balderston this particular field. in the situation internationally help to clarify noted that a concerned, he were Treasury operations as far as However,
reduction of the discount rate was a different thing from an increase. In the fall of 1957 the Treasury postponed a financing operation temporarily, if he remembered correctly, because the Federal Reserve System was prepared to decrease the discount rate, but there was only a short interval between the two actions. Had the System been moving in the opposite direction, it would have been an entirely different matter. Mr. Bopp pointed out there are relatively short, and few, intervals when the System is free to move on the discount rate. If the Treasury should take up these intervals by advance refunding or similar operations, the opportunities for discount rate action would become very limited. Mr. Robertson commented that if there was to be a move on the move should be made not after advance refunding took discount rate, that Balderston and Bopp expressed before such time, and Messrs. place but agreement. attitude of the System be one Martin suggested that the Chairman he issued a word of In a further comment, of flexible, watchful waiting. conversations after most careful in their those present be caution that all left the room today. they Mr. Rouse dated a memorandum from referred to Martin then Chairman date from Mr. of the same a memorandum which transmitted May 20, 1960, Bank of New York, of the Federal Reserve Assistant Vice President Larkin, the Open Market given by under the authorization operations summarizing at the meeting 1960, and renewed on April 12, at its meeting Committee
on May 3, 1960, to acquire up to $150 million of one-year Treasury bills maturing July 15, 1960, either by outright purchase or by swapping other Treasury bills. Mr. Larkin's memorandum indicated that a total of $91.5 million of the bills maturing July 15, 1960, had been acquired under this authorization, so that total holdings of such bills, including holdings of $13.4 million acquired by outright purchase prior to April 12, 1960, amounted to $104.9 million. Mr. Rouse commented that if the Treasury was successful in developing a better cash position so that it could cut down by $500 million when it came to the rollover, the present holdings of the bills due July be sufficient. On the other hand the situation 15, 1960, would probably was not clear. Therefore, he would suggest that the outstanding authorization for acquisition of the July 15 bills be renewed. Under it, he noted, there was still leeway to acquire up to $58.5 million of such bills. inquired whether anyone had heard of repercussions Chairman Martin of the transactions in the one-year bills, and no in the market because was in a way rather strange that heard. Mr. Rouse said it comments were comment, because the swap transactions there seemed to have been no market be identified in some cases as swaps. that had been undertaken could clearly authorization was the outstanding Committee Mr. Thomas noted that Martin added that bills, to which Chairman acquisition of July limited to the acquisition of one-year July bills as far as Desk was limited to the the stating that, Mr. Rouse agreed, transactions was concerned. bills by swap
as far as outright purchases were concerned, it was his understanding that the Account had authority to acquire other issues of the one-year bills, and no disagreement with this comment was heard. Mr. Hayes said he supposed that at some time the Committee would wish to consider authorizing acquisition of the one-year bills of October 17, 1960, on a basis similar to the authorization relating to the July 15 bills. However, he thought there was no hurry to consider that matter. Mr. Rouse expressed the view that the operation in the July 15 bills should first be completed so that the Open Market Committee might make an appraisal as to whether it wanted to authorize further operations in one-year bills along the lines of the current authorization. Thereupon, it was agreed to renew until the next meeting of the Open Market Committee the authorization given on April 12, 1960, and renewed on May 3, 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. Mr. Robertson dissented from this action to the extent that it involved acquisition of the one-year bills by swap transactions, as opposed to outright purchases. It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, June 14, 1960, and that the succeeding meeting would be held on Tuesday, July 5, 1960. letter from Mr. Hayes which noted receipt of a Chairman Martin of the members of to call to the attention that he might want suggested thereon that the not currently serving and the Presidents the Committee
New York Bank would welcome visits to the Desk. The Chairman said he would like to support this invitation to learn firsthand what was going on at the Desk whenever visits could be worked out. Mr. Hayes said his thinking was in terms of rather extensive visits, perhaps in the order of a week, during hich members of the Committee teeth into the operations of the Desk and see what was could sink their actually going on there. Reserve Bank Presidents (Messrs. Chairman Martin noted that three to testify before the Subcommittee and Mangels) had been called Hayes, Allen, that was to hold hearings in of the House Banking and Currency Committee retirement of Federal provide for the 8516, which would with H.R. connection Reserve Bank stock. The meeting then adjourned. Secretary
Also: Record of Policy Actions