FOMC Minutes

A meeting of the Federal Open Market Committee was held in

the offices of the Board of Governors of the Federal Reserve System

in Washington on Tuesday, March 1, 1949, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

McCabe, Chairman

Sproul, Vice Chairman

Clayton

Draper

Earhart

Eccles

Gidney

Leach

McLarin

Szymczak

Vardaman

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Morrill, Secretary

Carpenter, Assistant Secretary

Vest, General Counsel

Thomas, Economist

John H. Williams, Associate Economist

Rouse, Manager of the System Open Market

Account

Mr. Thurston, Assistant to the Board of

Governors

Mr. Riefler, Assistant to the Chairman, Board

of Governors

Mr. Sherman, Assistant Secretary, Board of

Governors

Mr. Smith, Economist, Government Finance Sec

tion, Division of Research and Statistics,

Board of Governors

Mr. Arthur Willis, Special Assistant, Securi

ties Department, Federal Reserve Bank of

New York

Mr.

Young, alternate member of the Federal Open

Market Committee

Messrs. Leedy and Gilbert, Presidents of the Fed

eral Reserve Banks of Kansas City and Dallas,

respectively

Mr. Irons, Vice President of the Federal Reserve

Bank of Dallas, and Mr. Raisty, Economist of

the Federal Reserve Bank of Atlanta

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The Secretary reported that advices of the election for a

period

of one year commencing March 1, 1949,

of members and alternate members

of the Federal Open Market Committee representing the Federal Reserve

Bnks had been received,

that each newly elected member and alternate

member had executed the required oath of office,

and that it

was the

opinion of the Committee's counsel, on the basis of advices received,

that the following members and alternate members were legally qualified

to serve:

Allan Sproul, President of the Federal Reserve Bank of New

York, with L. R. Rounds, First Vice President of the

Federal Reserve Bank of New York, as alternate member;

Hugh Leach, President of the Federal Reserve Bank of Rich

mond, with Joseph A. Erickson, President of the Federal

Reserve Bank of Boston, as alternate member;

Ray M. Gidney, President of the Federal Reserve Bank of

Cleveland, with C. S. Young, President of the Federal

Reserve Bank of Chicago, as alternate member;

W. S. McLarin, Jr.,

President of the Federal Reserve Bank

of Atlanta, with Chester C. Davis, President of the

Federal Reserve Bank of St. Louis, as alternate member;

C. E. Earhart, President of the Federal Reserve Bank of

San Francisco, with J. N. Peyton, President of the Fed

eral Reserve Bank of Minneapolis, as alternate member.

Upon motions duly made and seconded,

and by unanimous votes, the following

officers of the Federal Open Market Com

mittee were elected to serve until the

election of their successors at the first

meeting of the Committee after February 28,

1950, with the understanding that in the

event of the discontinuance of their

official connection with the Board of Gov

ernors or a Federal Reserve Bank, as the

case might be, they would cease to have any

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official connection with the Federal Open Mar

ket Committee. In connection with the elec

tion of Mr. Morrill, it was agreed unanimously

that the by-laws of the Federal Open Market

Committee, which provide that the Secretary of

the Board of Governors shall be Secretary of

the Committee, should not be changed but that

Mr. Morrill should continue to serve as Secre

tary notwithstanding the applicable provision

of the by-laws:

Thomas B. McCabe, Chairman

Allan Sproul, Vice Chairman

Chester Morrill, Secretary

S. R. Carpenter, Assistant Secretary

George B. Vest, General Counsel

Woodlief Thomas, Economist

John H. Williams, Charles W. Williams*,

Donald S. Thompson, Earl L. Rauber,

and Oliver P. Wheeler, Associate

Economists

*Effective as of the date upon which he assumes

his duties as economist at the Federal Reserve

Bank of Richmond.

Upon motion duly made and seconded,

and by unanimous vote, the Federal Reserve

Bank of New York was selected to execute

transactions for the System open market

account until the adjournment of the first

meeting of the Committee after February 28,1950.

Mr. Sproul stated that the board of directors of the Federal Re

serve Bank of New York had selected Mr. Rouse as Manager of the System

Open Market Account, subject to the selection of the Federal Reserve

Bank of New York by the Federal Open Market Committee as the Bank to

execute transactions for the System account and his approval by the

Federal

Open Market Committee.

Upon motion duly made and seconded, and

by unanimous vote, the selection of Mr. Rouse

as Manager of the System Open Market Account

was approved.

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Upon motions duly made and seconded,

and by unanimous votes, the following

were selected to serve with the Chairman

of the Federal Open Market Committee (who

under the provisions of the by-laws is

also Chairman of the executive committee)

as members and alternate members of the

executive committee until the selection

of their successors at the first meeting

of the Federal Open Market Committee

after February 28, 1950:

Members

Marriner S. Eccles

James K. Vardaman, Jr.

Alternate Members

Ernest G. Draper

R. M. Evans

Lawrence Clayton (to serve

in the order named as

alternates for Messrs.

McCabe, Eccles, and

Vardaman)

Allan Sproul

Hugh Leach

Ray M. Gidney

W. S. McLarin, Jr. (to

serve in the order

named for Messrs.

Sproul and Leach)

Reference was made to the resolution adopted by the Federal Open

Market Committee on November 20, 1936, relating to the purchase and sale

of cable transfers and bills of exchange and bankers acceptances pay

able in foreign currencies.

Mr. Sproul stated that, for reasons dis

cussed at previous meetings when the resolution was reviewed, it was

desirable that the authority remain in effect.

There was unanimous agreement that

no action should be taken at this time

to amend or terminate the resolution of

November 20, 1936.

An excerpt from the minutes of the meeting of the Committee on

November 30, 1937, was then referred to in which it was stated that,

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since securities acquired by Federal Reserve Banks in settlement of

claims account closed banks would be in such small amounts as to be

unimportant from the standpoint of credit control, the Committee

would interpose no objection to Federal Reserve Banks holding such

securities or to the sale of such securities whenever deemed advis

able by the holding bank.

Mr. Gidney expressed the view that, although authority for

such transactions had not been used recently, it

continue it

was desirable to

in effect.

It was agreed unanimously that no

action should be taken at this time to

amend or terminate the authority granted

at the meeting of the Federal Open Market

Committee on November 30, 1937.

Attention was then called to the authority granted to Federal

Reserve Banks by the executive committee of the Federal Open Market

Committee at its meeting on January 20, 1948, pursuant to action taken

by the Federal Open Market Committee at its meeting on December 9,

1947, with respect to repurchase agreements covering short-term Treas

ury obligations with dealers in United States Government securities

qualified to transact business with the System open market account.

There was a brief discussion, follow

ing which it was agreed unanimously that

no action should be taken at this time to

amend or terminate the authority.

During a review of developments since the last meeting of the

Committee,

Chairman McCabe referred to the letter sent by the executive

committee to Secretary of the Treasury Snyder under date of February 4,

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1949, and at his request Mr.

Snyder's reply of February 9,

Carpenter read portions of Secretary

1949, which was as follows:

"Reference is made to your letter

of February 4, 1949,

summarizing the views of the Executive Committee of the Fed

eral Open Market Committee with respect to the problems of

credit policy and debt management developed during discus

sions of the Committee on January 26, 1949.

"I have given careful consideration to the views of the

Committee suggesting the desirability of refunding the cer

tificates maturing March 1 into a 1-3/8% one-year certificate

or a 13-month 1-3/8% note. In the light of conditions exist

ing at this time I find myself unable to agree that the cer

tificate maturing on March 1 should be refunded into a 1-3/8%

security, and I feel that it is too early to decide what

should be done in the refinancing of the certificate maturing

April 1.

"It is noted that the Committee suggests that the pre

sent System policy with respect to bids for bills and purchases

and sales of bills be continued. As you know, I have had some

apprehension concerning the gradual rise in the bill rate, but

understand that it will be the policy of the Federal Reserve

to exercise a high degree of caution so as to enable the Treas

ury to continue the refinancing of the floating debt at the

current one-year rate of 1-1/4% until

such time as a different

rate can be mutually agreed upon.

"With respect to a program for the redemption of maturing

Treasury bills

during the latter

part of March and early April,

I am in general agreement that Treasury bills be redeemed as

the Treasury balance and market conditions permit, but I would

prefer to continue the present policy of considering Treasury

bills on a week-to-week basis and making our decisions accord

ingly.

"It seems to me we should permit more development in the

present factors affecting debt management before making any

substantial changes in our refunding operations or to move to

The April 1 maturity of

higher levels for the one-year-rate.

or thereabouts, and

certificates amounts to only $1 billion,

June 1. In a few months

there is no further maturity until

we can better judge the course of events with particular ref

erence to the legislative program which might be enacted, in

cluding the action which the Congress may take in connection

We

with the President's recommendation for increased taxes.

will then have a much better base upon which to plan our

operations covering the period from June through the balance

of the year.

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"In line with these views, I am reluctant at the pre

sent time to use the cash balance to retire any of the Sys

tem's holdings of certificates maturing on March 1, and

would prefer to have the System exchange its holdings of

this maturity."

Mr. Sproul expressed the view that the last sentence of the

third paragraph of Secretary Snyder's letter was not correct in that

there was no commitment on the part of the System to maintain the

1-1/4 per cent rate until a different rate was agreed upon, and that,

while the Committee would not undertake to change the market rate

without full discussion with the Treasury, that point should be made

clear to Secretary Snyder.

It was agreed unanimously that

this matter should be discussed with

Secretary Snyder the next time Messrs.

McCabe and Sproul met with him.

In a discussion of the sale of long-term issues from the Sys

tem account since the previous meeting of the Committee, Mr. Rouse

referred particularly to the discussion at the meeting of the execu

tive committee on January 26, 1949, and expressed the view that prices

of restricted issues perhaps had risen a little

weeks,

too rapidly in recent

that there might well have been somewhat larger sales from the

System account in relation to demand,

that there had been somewhat

larger sales during the last two weeks,

and that in the absence of ob

jection such sales would be continued in order to keep prices from

rising too rapidly.

Because of the small System holdings of long-term

bank eligible issues, he said, it

would be necessary to try to have

that segment of the market take care of itself.

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It was the view of the members of the Committee that the

procedure of selling securities as followed in recent weeks should

be continued and that it

would be desirable if

the yield on the

long-term ineligible issues could be kept from declining below

2.40 per cent.

Mr.

Rouse discussed the probable effects of Treasury pay

ments into the market and withdrawals of funds from the market

during the next few weeks,

and there was a review of the policy

followed in the past of using war loan balances in such a manner

as to keep some pressure on member bank reserve accounts.

He also

reported his discussions with Mr. Bartelt, Fiscal Assistant Secre

tary of the Treasury, with respect to the use of war loan balances

and stated that a program had been agreed upon for the next few

weeks which would largely neutralize Treasury operations in the

money market.

In this connection,

memorandum from Messrs.

February 24,

there were distributed copies of a

Thomas and Smith prepared under date of

1949, with respect to the Treasury cash position and

the refunding program in relation to System policies.

A copy of

the memorandum has been placed in the Federal Open Market Committee

files.

Mr. Rouse also discussed the program for retirement of

maturing Treasury securities during the next several weeks,

stat

ing that the Treasury had agreed to the retirement of $400 million

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of the System's holdings of March 1 certificates and $600 million

of market held bills in the last half of March and early April,

and that these retirements would about exhaust the funds available

for debt retirement during the calendar year.

Mr.

Sproul said that at the meeting of the executive com

mittee yesterday morning reference was made to the discussion at

the meeting on November 30, 1948, of a possible program for the

conversion of long-term Treasury debt into issues which would be

so held that System support would not be necessary.

He outlined

the reasons why representatives of the Federal Open Market Commit

tee and the Treasury had not met to consider the matter as con

templated at the earlier meeting of the Committee and stated that

probably the matter should be taken up directly with Secretary

Snyder.

He also said that the executive committee agreed to rec

ommend to the full Committee that members of the staff prepare a

study of this matter which could be considered by the executive

committee and recommended to the full Committee, after which, de

pending on the conclusions reached,

it

could be taken up with the

Treasury at top policy level if at such time it seemed desirable.

Following a brief discussion, it was

agreed unanimously that the recommendation

of the executive committee should be car

ried out.

Reference was then made to the proposal made at the meeting

on October 4, 1948, that a study be made of the advisability of

the Treasury refunding some of the long-term securities held by

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the System account with special short-term issues at a lower in

terest rate, which was also discussed at the meeting on January 4,

1949.

It was stated that the committee appointed for the purpose

would complete its study of the question if

it

seemed desirable to

do so, but that the executive committee at its meeting on January

4 had agreed that the matter should be presented to the full Com

mittee for discussion of the question whether further action should

be taken.

It was the consensus of the mem

bers present that there was no need

for further study of the matter at

this time.

In this connection, Mr. Rouse stated that Mr. Bartelt,

Fiscal Assistant Secretary,

to inquire whether,

called him a month or six weeks ago

if the Treasury should so desire, the System

would be willing to sell approximately $500 million of long-term

bonds from the System account, and if

so at what price.

His re

sponse, he said, was that he did not think the System would be

willing to make such sales except at current market prices and

that, if Mr.

it

Bartelt felt the proposal should be pursued further,

should be presented to the executive committee or the full Com

mittee.

He added that nothing further had been heard from Mr.

Bartelt on the matter.

In the ensuing discussion, Mr. Eccles suggested that con

sideration might be given to selling from the System account at

the average cost of the securities sold.

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Turning to a discussion of open market policy and rec

ommendations to be made to the Treasury, Chairman McCabe called

on the Presidents of the Federal Reserve Banks who were in atten

dance for their comments.

Some of the Presidents expressed the

view that the Committee should continue to press for an increase

in the short-term rate while others felt that, in view of the

fact that the Treasury was not likely to act favorably at this

time on such a recommendation and in view of the uncertainties in

the business outlook and the possible misinterpretation of such

action, it

would be preferable not to increase the rate at the

present time.

One of the Presidents would not recommend such an

increase in connection with the April refunding, but would do so

in connection with the June financing.

Another suggested that

holders of maturing savings bonds should be permitted to reinvest

the proceeds of such bonds in new savings bonds bearing a higher

rate of interest.

Following these comments Mr.

Sproul said that the Com

mittee should consider open market policy in the framework of the

general credit policy of the System and in the light of changing

business and credit conditions.

He outlined three possibilities

with respect to the economic trend, (1)

the present situation

might be a temporary hesitation with inflationary pressures being

resumed later in the spring,

(2)

a healthy readjustment,

the beginning of a downward spiral of deflation.

or (3)

While his own

view was that the second possibility was the most likely, he recog-

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nized that a condition of balance could not be maintained for a long

time; however, he felt that open market policy should attempt to sus

tain that balance as long as possible.

He added that for the past

period the policy of open market operations and Treasury debt manage

ment had been to exercise

some restraint on credit expansion and that

now consideration should be given to a change from a policy of re

straint and mild pressure on the market to a policy of as near neu

trality in the money market as it

would be possible to achieve.

In

stead of trying to get a large redemption of bills each week, he said,

and thereby force sales of bills to the System account, the System

should try to achieve a greater exchange of bills so that banks

would not be forced to sell bills.

that if

In the past it

had been thought

the Treasury were willing to move the rate on one year cer

tificates of indebtedness to 1-3/8 or 1-1/2 per cent, the discount

rate of the Federal Reserve Banks should be increased to 1-3/4 per

cent.

He now felt that if the Treasury should move the rate to 1-3/8

or 1-1/2 per cent, the discount rate should not be increased.

He

added that the objective of an increase in the short-term rate on

Treasury obligations would not now be to combat inflation, but to

improve the interest rate structure so as to facilitate later Treas

ury refundings,

and to avoid the appearance of more of less per

manently pegged rates at both ends of the rate pattern.

hand, a further increase in the discount rate, because it

On the other

is more

a sign or a symbol, he said, would be interpreted as an indication

3 /l/ 4 9

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of an anti-inflationary policy which would be difficult to justify.

Consideration should also be given, he said,, to what should be

done in the field of consumer instalment credit and margin require

ments and the entire credit policy of the System should be con

sistent.

He went on to say that a policy of neutrality in the mone

tary and credit field would leave the System free to move in either

tirection depending upon developments.

With respect to a change in the certificate rate he felt

that the

Committee should take the position that it would be de

sirable to increase the short-term rate in connection with the April

refunding to 1-3/8 per cent.

While he saw some justification for

the position that the increase should not be made in April but should

be deferred until the June refunding, he thought the Committee should

make a firm recommendation that the rate be increased at the earlier

date.

Mr. Eccles questioned whether an increase in the short-term

rate would be interpreted as being consistent with a policy of

neutrality and thought that it would be regarded by the market and

the Treasury as indicating a policy of continued restraint.

He

also said that it would have been very helpful if the rate could have

been increased further before the downturn occurred in the economy

and that it was probably too late now to get an increase.

He agreed,,

however, that it would be desirable to put the increase into effect

if the Treasury were willing to do so.

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This point was discussed, and Mr. Sproul suggested that this

might be the last chance for an increase in the short-term rate and

if so the System should urge it.

He thought that, as long as credit

was still available at low rates and there was no increase in the dis

count rate, it would be possible to explain an increase in the Treas

ury borrowing rate in terms of debt management policy and preparation

for the refunding of the large maturities of Government securities in

the next four years.

During the discussion, Mr. Thomas suggested that the Committee

might follow a policy of maintaining the bill rate at about the pre

sent level which would shift more bills into the market from the Sys

tem account and would make bills more flexible and responsive to mar

ket conditions.

Mr.

Riefler was of the opinion that it would be a mistake to

increase the short-term rate at this time as it would be interpreted as

an anti-inflationary step.

He favored a policy of encouraging the sale

of certificates to the System account and of bills from the account to

the market.

This, he said, would permit policy in the short-term area

of the market to be effected by small minor moves in bills rather than

by what had come to be regarded as a major move in the form of an in

crease of 1/8 per cent in the certificate rate.

Mr. John H. Williams was in agreement with the views expressed

by Mr.

Sproul.

Several members of the Committee expressed agreement with Mr.

Sproul's position.

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Mr. Clayton stated that, while a good case could be made for

an increase in the short-term rate from the standpoint of monetary

and credit policy, he was convinced that, in view of the cessation

of credit expansion and the growing opinion that the economy might be

facing a depression, there would be no favorable response to a pro

posal to increase the short-term rate.

Mr. Eccles stated that in connection with the June refunding

consideration might be given to an offering at rates which would per

mit the new issues to be sold at a premium so that they would not de

cline below par if,

at a subsequent date, the short-term rate were in

creased.

Chairman McCabe suggested that, when he and Mr. Sproul met with

Secretary Snyder again, they take the position that had been taken once

or twice before that the Committee would not urge an increase in the

short-term rate as strongly as it

had at other times in the past, but

that in view of the refunding problem facing the Treasury over the

next four years and in the interest of effective debt management gen

erally it

was believed that an increase in the short-term rate would

be advisable for the reasons expressed in the recent past.

In commenting on the refunding program, Mr. Rouse suggested

that the members of the Committee keep an open mind as to the types of

securities that might be offered in the June financing for the reason

that a number of things might happen to change the decision on that

point before the date arrived when that decision would have to be made.

Mr.

Clayton suggested that the Treasury be advised that in

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the past the Committee had urged an increase in the short-term

rate on the grounds that it

ure,

that it

would assist

it would help in

would be an anti-inflationary meas

in

refunding the public debt,

and that

bringing about a more natural interest rate struc

ture, and that, while the first reason was not now applicable, it

would be of real assistance to the Treasury in

gram if

its refunding pro

a better interest rate structure could be brought about.

After some further discussion, the

suggestions made by Chairman McCabe and

Mr. Clayton were approved unanimously.

In taking this action, it was also

agreed unanimously that the suggestion

made by Mr. Sproul with respect to Sys

tem bids for, and purchases and sales

of, Treasury bills

would be carried out

under the authority of the general di

rections issued by the Federal Open

Market Committee and its executive com

mittee.

During a discussion of the direction to be issued to the

executive committee to arrange for transactions for the System open

market account, Mr.

Rouse suggested that, while the policies of

the Committee as discussed at this meeting could be carried out

under the existing direction, consideration be given to changing

the direction so as to make it clear that present policies are be

ing carried out in the light of changing economic conditions.

It

was agreed that the change should be made, and that the amended

direction should provide for the same limitations on transactions

in the account as were contained in the direction issued at the

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meeting on November 30, 1949.

Thereupon, upon motion duly made and

seconded, the following direction to the

executive committee was approved, with the

understanding that the limitations con

tained in the direction would include com

mitments for the System open market account:

The executive committee is directed, until other

wise directed by the Federal Open Market Committee, to

arrange for such transactions for the System open market

account, either in the open market or directly with the

Treasury (including purchases, sales, exchanges, re

placement of maturing securities, and letting maturi

ties run off without replacement), as may be necessary,

in the light of changing economic conditions and the

general credit situation of the country, for the prac

tical administration of the account, for the mainte

nance of stable and orderly conditions in the Govern

ment security market, and for the purpose of relating

the supply of funds in the market to the needs of com

merce and business; provided that the aggregate amount

of securities held in the account at the close of this

date other than special short-term certificates of in

debtedness purchased from time to time for the tempor

ary accommodation of the Treasury shall not be increased

or decreased by more than $2,000,000,000.

The executive committee is further directed, un

til otherwise directed by the Federal Open Market Com

mittee, to arrange for the purchase for the System open

market account direct from the Treasury of such amounts

of special short-term certificates of indebtedness as

may be necessary from time to time for the temporary

accommodation of the Treasury; provided that the total

amount of such certificates held in the account at any

one time shall not exceed $1,500,000,000.

It was tentatively agreed that the next meeting of the Fed

eral Open Market Committee would be held during the week of May 2,

1949.

Thereupon the meeting adjourned.

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Secretary.

Approved:

Chairman.