November 4, 1965 FOMC Minutes

FOMC minutes

practices because the System action, if it occurred, would be picked up in the market as evidence that the market needed help. It would be better if the Desk could get along without having to do this. Messrs. Galusha, Patterson, and Scanlon agreed with Mr. Ellis. Mr. Bopp, after noting that he was not a voting member of the Committee, also concurred. Mr. Mitchell said that, while he would approve the proposal, he rather hcped that the Manager would start taking steps that might help to obviate the necessity. While he did not know exactly what the proper steps would be, he would prefer to reassure the market by indirection rather than to be forced to assure the market by direct operations in when-issued securities. Messrs. Maisel and Robertson concurred with Mr. Mitchell's comments. Mr. Hayes said he thought it would be difficult to accomplish what Mr. Mitchell had in mind without creating a false impression about the direction of System policy. He felt it was necessary to strike a delicate balance between preventing disorderly conditions and misleading the market on basic System policy. Chairman Martin commented that he thought this was obvious and that he would question operating across the board in this situation. The Committee, he felt, had to leave this essentially

to the judgment of the Account Manager. What the Committee was really doing was giving the Manager latitude to deal in when-issued securities if he thought it wise. Otherwise, the Manager's authority would remain just the same as it had been. Mr. Balderston said he felt it was important that the problem of the Treasury refinancing not change the direction of monetary policy. It was also important not to give the impression of pegging. What the Manager was proposing was to depart from the tradition against operating in when-issued securities if a disorderly market seemed in prospect. If a disorderly market was an actuality, the Manager had authority to act in any way required. The one difference was that the Manager was proposing to act in an anticipatory way if the threat of a disorderly market seemed serious. Mr. Mitchell said he would not dissent from giving the Manager the requested leeway. However, just as Mr. Hayes was con cerned that some action the Manager might take could give an impres sion of a change of System policy in the direction of greater ease, he (Mr. Mitchell) was equally concerned that the Manager's failure to take action could create an impression of a change toward a tighter policy. He had confidence that the Manager would attempt to carry out the Committee's directive to the best of his ability, but he wanted to be on record that there were operations at this stage that could give rise to anticipation cf a change in policy

in either direction. He was prepared to place matters in the Manager's hands, but would not want it thought that he agreed that a change in the direction of policy could only be in one direction as a result of the Desk's operations. Mr. Hayes agreed that what the Manager should do was give, to the greatest extent possible, the impression that policy remained exactly as it had been. Chairman Martin said he thought all were in agreement on that point. The only thing this meeting was concerned with, he added, was the question of the Manager's dealing in when-issued securities within the framework of a potentially disorderly market. Mr. Galush said he wanted to be sure he understood correctly that the Manager could work in an anticipatory way as well as a responsive one, and Chairman Martin replied that the Manager had full authority with respect to the maintenance of an orderly market. Mr. Holmes said he had nothing to add. The purpose of his requesting this meeting had been to have the Committee consider the possibility of purchasing when-issued securities, if necessary, with all other prescriptions of policy remaining unchanged. He hoped he would not have to purchase when-issued securities, and he did not now anticipate having to do so, but it seemed well to be prepared if market forces required such action.

Thereupon, it was agreed unanimously that the Manager of the System Open Market Account was authorized to purchase Treasury 4-1/4 per cent notes of May 15, 1967, for the Account on a when-issued basis if in his judgment circumstances warranted such action. Secretary The meeting then adjourned.