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, May 3, 1949,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

at 10:30 a.m.

McCabe, Chairman

Sproul, Vice Chairman

Clayton

Draper

Earhart

Eccles

Gidney

Leach

McLarin

Szymczak

Vardaman

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Vest, General Counsel

Messrs. Thompson, Wheeler, and John H.

Williams, Associate Economists

Mr. 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. Ralph A. Young, Associate Director,

Division of Research and Statistics,

Board of Governors

Mr. Smith, Economist, Government Finance

Section, Division of Research and

Statistics, Board of Governors

Mr. Arthur Willis, Special Assistant,

Securities Department, Federal Re

serve Bank of New York

Messrs. Erickson, C. S. Young, Davis, and

Peyton, alternate members of the Fed

eral Open Market Committee

Messrs. Williams, Leedy, and Gilbert, Pres

idents of the Federal Reserve Banks

of Philadelphia, Kansas City, and

Dallas,

respectively

Messrs. Demming, Assistant Vice Pre

sident of the Federal Reserve Bank

of St. Louis, and Raisty, Economist,

Federal Reserve Bank of Atlanta

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meetings of the Federal Open Market Com

mittee held on February 28 and March 1,

1949, were approved.

Upon motion duly made and seconded,,

and by unanimous vote, the actions of the

executive committee of the Federal Open

Market Committee as set forth in the

minutes of the meetings of the executive

committee held on February 28 and March

1, 1949, were approved, ratified, and

confirmed.

A report of open market operations prepared by the Federal Re

serve Bank of New York covering the period from March 1, 1949, to

April 28, 1949,

inclusive, was then read and discussed by Mr. Rouse.

He also presented a supplementary report covering commitments exe

cuted on April 29 and May 2, 1949.

Copies of both reports have been

placed in the files of the Federal Open Market Committee.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

in the System account for the period Feb

ruary 28, 1949, through May 2, 1949, in

clusive, were approved, ratified, and

confirmed.

Before this meeting, there had been brought to the attention of

each member of the Committee a report of examination of the System open

market account as of January 28, 1949, made in connection with the

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regular examination of the Federal Reserve Bank of New York and sub

mitted by the examiner in charge for the Board of Governors.

The

report took no exception to the handling of the account and stated

that the accounting procedures,

records,

and system of internal con

trols maintained and the degree of care exercised by the New York

Bank in

connection with the account continued to be regarded as satis

factory.

Upon motion duly made and seconded,

and by unanimous vote, the report was

received and ordered filed.

Before this meeting a memorandum of current economic conditions

and the economic outlook for 1949, prepared by the staff of the Board's

Division of Research and Statistics,

the Committee.

was distributed to the members of

Mr. Ralph A. Young, Associate Director of the Board's

Division of Research and Statistics,

commented on the situation out

lined in the memorandum stating that since the meeting of the Federal

Open Market Committee on February 28, 1949, economic developments had

shown a

sufficiently broad and consistent downward movement to justify

the expectation of continuing moderate recession as most likely for

the remainder of this year, which would mean that inflation had been

succeeded by a more or less extended period of decline.

He added that

to date the decline in employment, production, and prices from the high

level reached last year had been relatively moderate and that the

situation was one that was changing rapidly and would require continu

ing reviews of current tendencies.

A copy of the memorandum has been

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5/3/49

placed in the files of the Federal Open Market Committee.

Mr. John H. Williams stated that he felt there was more of a

fear of depression than an actual experiencing of one,

that unemploy

ment was astonishingly small and reductions in prices were disappoint

ingly slow, that such declines in production as had taken place recently

had been from extremely high levels, and that the decreases thus far

could not be regarded as returning the economy to normal.

He expressed

the opinion that the real adjustment from the postwar inflation was

ahead, but that he could not see anything to be alarmed about in the

situation thus far.

With respect to Federal Reserve policy, he stated

that the System had not had a tight money policy, that any effort to

ease money conditions to counter the recession would be starting from

an already easy situation, and that he felt the System was likely

to be frozen into a low-interest rate situation, about which it might

not be able to do anything.

Mr. Thompson discussed increases that had taken place recently

in productivity per manhour at industrial plants in the Fourth Fed

eral Reserve District by means of weeding out less efficient employees,

rearrangement and improvement in

scheduling of production processes,

and shutting down of some higher cost plants.

Mr. Raisty stated that some reductions in output had taken

place in manufacturing plants in the Sixth Federal Reserve District

but that the District as a whole had not been hurt materially by the

decline to date.

5/3/49

Mr. Riefler suggested there was danger in becoming too com

placent about the decline, that when one considered the past ten

years of rising prices and wages which set in motion the dynamics of

inflation and the adjustments that would still

it

would not be surprising if

have to take place,

the index of industrial production

should decline substantially further before the stage was set for a

period of expansion.

Chairman McCabe reported briefly on developments since the

last

meeting of the Committee.

Reference was then made to a memorandum prepared by Messrs.

Young,

Smith, and Youngdahl of the Board staff with respect to Treas

ury cash requirements and bank reserves,

mitted by Messrs.

and to two memoranda sub

Riefler and Rouse on the subjects (1)

and possible new money borrowing,

June refunding

and (2) relative roles of market

able and full marketable issues in longer-range debt management and

monetary operations.

Copies of these memoranda had been handed to

the members of the Committee before this meeting and copies have been

placed in

the files

of the Committee.

Mr. Riefler stated that the last of the three memoranda above

referred to was an interim report of the staff group appointed by the

Committee to study and make a report on a program for conversion of

long-term Treasury debt.

He reviewed the experience with the various

types of securities issued by the Treasury during and after

and restated the suggestions contained in

the war

the memorandum with respect

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to future financing.

There followed a discussion of the interim report, the issues

that might be used in future financing, and the problems presented by

the present policy of supporting both the short- and long-term rates.

At the conclusion of the discussion,

it was understood that the staff

Committee

would continue to work on the problem of a

longer term refunding program so that when

the time came to make a recommendation to

the Treasury the Committee would be prepared

to do so.

Preliminary to a discussion of recommendations to be made to

the Treasury with respect to refunding of the June maturities, Mr.

Rouse commented on the suggestions contained in the memorandum on June

refunding and Chairman McCabe presented the recommendation of the

executive committee on this subject as agreed upon at the separate meet

ing of that committee.

During the ensuing discussion it was

agreed unanimously that, since a further

increase in the short-term rate does not

appear to be likely at this time, the

Committee should adopt the suggestion of

the executive committee and that, in their

conversations with representatives of the

Treasury, Messrs. McCabe and Sproul should

recommend that the June 1 certificate matur

ity and the June 15 2 percent bond maturity

be refunded into a new issue of Treasury

notes due in 4 or 5 years to be priced at

the market and offered at par.

there

It was recognized that if later

should be a further increase in the short

below par.

term rate the new issue might sell

However, it was suggested that such a change

might not come soon enough to have such an

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effect but that in any event notes and cer

tificates had sold below par before and there

would be no real objection to the new issue

going below par. The new issue would reduce

the total of certificate maturities and would

have a maturity date beyond the period in

which the greater part of the 2 per cent bonds

matured. It was expected that it would be

made clear to the Treasury that the recommenda

tion that the note be issued would not carry

with it any commitment to support the issue at

par or above except during the period imedi

ately following its issue.

It was suggested, however, that it might

be desirable for the July refunding also to be

in the form of a 4 or 5 year note depending on

what is done with the June maturities and sub

sequent market developments and that in the

discussion which Messrs. McCabe and Sproul

would have with representatives of the Treas

ury it might be desirable to recommend that

at the same time the Treasury undertake to

raise about $1 billion of new money to meet

its cash requirements. It was felt, however,

that this suggestion should not be urged to the

point of jeopardizing the proposed June refund

ing.

Turning to the question of subsequent re

funding, it was agreed unanimously to authorize

the executive committee, pending another meet

ing of the full Committee, to make such recom

mendations with respect to the July, September,

and October financing as might appear to the

executive committee to be desirable in the light

of the action to be recommended to the Treasury

in connection with the June maturities.

At this time Chairman McCabe withdrew from the meeting to keep

another appointment.

Mr. Sproul then raised the question of the use of war loan

balances and this subject was discussed in the light of the situation

presented in the memorandum on Treasury cash requirements and bank

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reserves.

It was agreed unanimously that the scope

of discretion in the use of war loan balances

to affect the money market was greatly limited

by the disappearance of the cash surplus of

the Treasury and that the present program of

consultation with the Treasury, which contem

plated the use of available balances at least

to neutralize the effect of Treasury opera

tions in the money market, should be continued.

In a discussion of System bids for, and purchases and sales

of, Treasury bills, Mr. Rouse stated that the objective had been

generally to keep a neutral position and that, while for short periods

recently it had been difficult to carry out that objective and rate

policy simultaneously, he would suggest that it be continued fairly

closely on a day to day basis with the idea, however, of putting no

restraint on bank reserves, except in the event of a rate decline.

It was agreed unanimously that Mr.

Rouse's suggestion should be carried out.

In a discussion of the authority to be given to the executive

committee to direct transactions for the System open market account,

Mr. Rouse suggested that, since another meeting of the Committee might

not be held until late in August or early September, and in view of

prospective market developments during that period, it would be desir

able for the executive committee to have authority to increase and de

crease the account by as much as $3 billion.

Thereupon, upon motion duly made and

seconded, the following direction to the

executive committee was approved unani

mously, with the understanding that the

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limitations contained in the direction

would include commitments for the System

open market account:

The executive committee is directed, until otherwise di

rected 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, replacement of maturing securi

ties, end letting maturities 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

practical administration of the account, for the maintenance

of stable and orderly conditions in the Government security

market, and for the purpose of relating the supply of funds

in the market to the needs of commerce 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 indebtedness purchased from time to time

for the temporary accommodation of the Treasury shall not

be increased or decreased by more than $3,000,000,000.

The executive committee is further directed, until other

wise directed by the Federal Open Market Committee, 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 Federal

Open Market Committee would be held during the week beginning August

29, 1949.

Thereupon, the meeting adjourned.

Secretary.

Approved:

Chairman.