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, D. C., on Tuesday,

June 28,

1949,

at 2:30 p.m.

PRESENT: Mr. McCabe, Chairman

Mr. Sproul, Vice Chairman

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Clayton

Draper

Earhart

Eccles

Evans

Gidney

Mr. Leach

Mr. McLarin

Mr. Szymczak

Mr. Vardaman

Mr. Morrill, Secretary

Mr. Vest, General Counsel

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

Reserve Bank of New York

Mr. Raisty, Economist, Federal Reserve

Bank of Atlanta

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on May 3, 1949, were approved.

Upon motion duly made and seconded,

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6/28/49

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 exec

utive committee held on May 3 and June

3, 1949, were approved, ratified, and

confirmed.

Mr. Rouse then read and discussed a report of open market op

erations prepared by the Federal Reserve Bank of New York,

covering

the period from May 3,

He also

1949, to June 23,

1949,

inclusive.

presented a supplementary report covering commitments executed on

June 24 and June 27, 1949.

Copies of both reports have been placed

in the files of the Federal Open Market Committee.

Particular attention was called by Mr. Rouse to the purchase

of special Treasury certificates on June 15 and the rate of 1/4 per

cent per annum charged the Treasury in that connection.

Mr. Rouse re

ferred to the history of this rate, including the discussion and ap

proval of the same rate at the meeting of the executive committee on

August 6, 1947.

There was general approval of the continuance of

the 1/4 percent rate.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

in the System account for the period May

3, 1949, through June 27, 1949, inclu

sive, were approved, ratified, and con

firmed.

Chairman McCabe referred to discussions of open market policy

at previous meetings and to conversations which he and Mr. Sproul had

had during the past year with the Secretary of the Treasury concern

ing the policy of supporting the Government securities market, stating

6/28/49

.3

that last week he and Mr. Sproul called upon Secretary Snyder at which

time they discussed a possible change in the present support program.

Chairman McCabe then called upon Mr. Sproul to report on the conver

sation with Secretary Snyder and in this connection referred to a

letter dated June 17, 1949, from Mr. Stevens, Chairman of the Board

of the Federal Reserve Bank of New York, to the Board of Governors,

copies of which, he said, had been sent to all Federal Reserve Banks.

The letter outlined the views of the Board of the New York Bank with

respect to the present economic situation and discussed a program for

monetary policy.

Mr. Sproul stated that he and Chairman McCabe presented to

the Secretary of the Treasury the view that declines in business in

recent months had gone faster than had been considered likely at the

beginning of this year, that further declines appeared probable, and

that the policy which allowed the market to determine when it

obtain Federal Reserve credit was no longer appropriate.

could

In outlin

ing to Secretary Snyder a possible change in policy, he said, there

was presented a program which contemplated the release of the Fed

eral Reserve from maintenance of the relatively fixed structure of

prices or interest rates in the Government securities market.

It was

pointed out that under present circumstances the market tends to in

vest any available funds in

Government securities which the Federal

Reserve Banks supply and to keep excess reserves as low as practicable.

This takes funds out of the market when we wish to put them in.

Nov

6/28/49

-4

the time has come for an affirmative credit policy in the light of

the developing business situation, which would have significance to

the market,

the banking system, and ourselves.

Mr. Sproul added

that he and Chairman McCabe expressed the view that the present when

pressures on Government securities prices were upwards and on rates

downward might be the time for the change in policy.

It was suggested

that, with the Treasury's July 1st financing out of the way, the Fed

eral Open Market Committee might begin to govern its operations with

regard to the general business and credit situation as well as to the

maintenance of orderly conditions in the Government securities market,

without attempting to maintain the relatively fixed structure of

prices and rates.

This would contemplate,

ability of reserve funds,

he said, increasing avail

leading to buoyancy in the short-term mar

ket including some further decline in rates.

With respect to long

term rates, Mr. Sproul said that the main risk perhaps would be that

the Treasury would take advantage of the favorable rate situation to

issue securities which later would not hold their place in the market

and the System would again be called upon to "support a rate" or to

protect par quotations.

Mr. Sproul made the further statement that

Secretary Snyder was receptive to the approach which suggested a de

cline in interest rates rather than an increase,

and that he said he

saw no objection to the program but would like to consider it

further

and would get in touch with Chairman McCabe later.

Chairman McCabe stated that in subsequent conversations,

6/28/49

-5

Secretary Snyder again indicated he was favorably disposed to the

program outlined but that he would prefer that there be no public

announcement of a

change in policy.

In

this connection,

McCabe referred to three memoranda prepared in

Chairman

the Board's Division

of Research and Statistics under dates of June 26 and 27, 1949, with

respect to The Current Economic Situation and Outlook, Need for

Positive Program of Credit Policy to Counteract Deflation, and Man

agement of the Bill Market Under a Program of Credit Policy to

Counteract Deflation.

The memoranda had been distributed to Committee

members before this meeting and copies have been placed in the files

of the Federal Open Market Committee.

In connection with a question raised by Mr. Leach as to

whether the program would remove the peg on long-term Government

securities,

Chairman McCabe expressed the opinion that there was no

need to meet that problem before it

uncertainty,

and that it

arose,

that there should be some

was not desirable for banks to feel that

long-term bonds were demand obligations.

He suggested that consid

eration be given to a draft of a proposed press statement which had

been prepared in the Board's offices in the light of the conversa

tions with Secretary Snyder.

Copies of the draft were then distrib

uted.

During an extended discussion, the wording of the statement

was revised and at the request of Chairman McCabe members of the Com

mittee expressed their views as to its significance and the policy

6/28/49

-6

they felt should be followed.

Mr. Earhart stated the view that the Committee had been wait

ing for a suitable time to get away from a pegged market and that in

his opinion now was the time to do so.

Mr. Gidney said that the meaning of the statement was not

clear and that he would want it to be more definite and positive. He

also said that he would be glad to get away from a pegged long-term

bond market and would prefer to make that clear in

of policy issued by the Committee,

adding,

however,

any announcement

that the action

taken rather than the statement issued would be the important factor

determining the reaction of the market and the general public to a

change in

policy.

Mr.

Szymczak stated that he felt

the statement should make it

clear that the policy of the Committee would be to have orderly mar

ket conditions but that it

should not refer to Government bonds in

such a way as to commit the Committee needlessly to support of the

long-term bonds,

that in

the present situation long-term securities

were selling well above par and would continue to do so for the in

definite future, that the Committee did not and could not know at

this time what the future would hold, and that, since there was no

likelihood at this time that long-term bonds would sell below par to

yield more than 2-1/2 percent, it was undesirable for the Committee

to commit itself to support that rate.

Mr. Leach stated that he would like to make it clear to

6/28/49

-7

everybody that the Committee was no longer supporting the long-term

rate of 2-1/2 percent.

Mr. McLarin stated that, on the basis of the statement pro

posed,

he could not be sure whether the Committee intended to abandon

the long-term peg,

of policy in

but that, if

that respect,

it

there was to be a definite change

would be desirable to state the change

in such a manner that the public could understand it.

Mr. Sproul said that understanding of the proposed action

would come more through subsequent actions in the market than from

any statement the Committee might issue and for that reason he would

not place too great importance on the statement.

He also said that

he felt the Federal Reserve was in a dilemma with respect to the state

ment in that it

did not wish to abandon permanently any idea that it

might have to come to the support of the Government securities market

subsequently, but that on the other hand at this moment it

wanted to

abandon the policy of supporting a fairly rigid structure of interest

rates and that it

desired the market to move as freely as possible

except for the necessity of maintaining orderly conditions in the mar

ket.

He suggested that the Committee issue a statement in a form

which he outlined which he felt should come as close as possible to

the statement for the policy record that would be required to be pub

lished under Section 10 of the Federal Reserve Act.

Mr. Evans made the comment that he had difficulty in under

standing a policy under which when reserve requirements were lowered,

6/28/49

-8

the Committee absorbs the resulting reserves by selling securities.

He felt it was unwise to allow the public to believe that lowered

reserve requirements meant easier money conditions, when in actu

ality the Committee was not allowing the reserves to be effective

because they absorbed them through sales from the System portfolio;

that this policy was,

in effect, putting a peg under interest rates,

and since Congress, against the Board's expressed desire, had

turned these reserves loose, they should be free to exert any in

fluence they might have wherever they were used.

In his opinion the

Federal Reserve program of supporting the Government bond market

and in not permitting it

to break par, was one of the major accom

plishments of the postwar period and had, in his opinion, profoundly

affected the course of events in this and less fortunate countries.

Mr. Sproul stated in response to Mr. Evans'

first

comment

that the actions of the Committee were governed by the policy of sup

porting the rate pattern.

He felt it wholly unlikely that the action

which the Committee proposed to take would have the effect of causing

a loss of confidence on the part of investors, that it

contemplated

permitting the additional reserve funds to become fully available to

the market, which would have the effect of increasing demand for

Government securities, but that if

the situation Mr. Evans described

should arise he assumed the Committee would then be meeting and

would be desirous of doing what seemed appropriate under all the circum

stances.

Mr. Sproul said that, while he would object strenuously to

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6/28/49

issuance of a statement that the long-term 2-1/2 percent rate would

be maintained for all time in the future, he would approve a state

ment in the form proposed which indicated that the confidence of in

vestors would be maintained but which left some doubt as to just

what would be done with respect to the long-term peg.

Mr. Evans reiterated the view that the announcement should

include a statement that the 2-1/2 percent rate on long-term Govern

ment bonds would be maintained in the future, but that he would ap

prove a statement along the lines of the one under discussion so long

as it was clearly understood that the Committee's action did not con

template abandoning support of that rate.

Chairman McCabe then raised the question whether any announce

ment of the proposed policy should be issued, in view of Secretary

Snyder's preference that the proposed change in policy not be announced

but that it

become evident by the actions taken in

the market.

It

was the consensus of the members of the Committee that a statement

should be issued along the lines of the one under discussion, so that

all concerned would have an equal opportunity to be informed as to

the Committee's action.

Chairman McCabe then stated that he had also given some con

sideration to issuance of an additional statement jointly by himself

and Secretary Snyder, explaining in greater detail the change in

policy.

One of the principal reasons for doing so, he said, would be

to obtain a clear understanding in advance with Secretary Snyder of

6/28/49

-10

the interpretation of the action.

There was a discussion of such a

statement, during which Chairman McCabe read portions of a draft

he had prepared, and it was the consensus of the members of the Com

mittee that it would be preferable to stand on the Committee's of

ficial announcement of policy and that there should be no supplemen

tary or explanatory statements.

Chairman McCabe stated that in their discussions, Secretary

Snyder raised the question, in view of the size of future refunding

operations and possible new financing needs, whether there would be

any change in the policy of the Federal Open Market Committee in sup

porting the Treasury in its future financing, and Chairman McCabe

read a draft of letter for his signature to Secretary Snyder, as fol

lows:

"In connection with our recent discussions of System

policy, you asked me whether you could count on complete

support from the Federal Reserve System in future refunding

and new money financing.

"I think our record of the past is clear. There has

been maximum support on the part of the Board of Governors

of the Federal Reserve System and of the Federal Open Mar

ket Committee in your debt management problems.

"I am confident that our close and cordial relation

ship will continue in the future as it has in the past. I

am not aware of any disposition to deviate from this re

lationship which is so essential in enabling the Treasury

and the Reserve System to carry out their responsibilities.

We all agree, I am sure, that the programs and policies to

be pursued would be decided upon after full discussion and

mutual understanding."

There followed a discussion of the draft, during which Mr.

Earhart asked whether Secretary Snyder felt that under the proposed

change in policy the Federal Reserve System was committed to support

6/28/49

-11

of long-term Government bonds at par.

Chairman McCabe said that he did not think Secretary Snyder

felt the System was committed, but that he did feel it

would be

catastrophic if long-term Government bonds were allowed to drop be

low par.

Mr.

Sproul stated that he felt it

had been made clear to

Secretary Snyder that the Federal Reserve System would retain the

obligation and the opportunity to consider that situation when and

if

it

arose, and that the proposed letter to Secretary Snyder con

templated that there would be mutual understanding of policy and

decision by those who had responsibility under the statutes.

Thereupon, upon motion duly made

and seconded, the foregoing letter to

Secretary Snyder, prepared for Chairman

McCabe's signature, was approved unani

mously.

The discussion then returned to consideration of the statement

of policy to be issued by the Federal Open Market Committee, during

which various drafts and changes were considered.

Mr. Riefler ques

tioned whether the new policy would preclude a change in bill opera

tions, for example, a change so that the System would not replace

maturing bills.

Mr. Sproul stated that it

was clear to him that such a change

would not be precluded by the proposed statement.

Mr. Eccles said that he agreed with this interpretation, add

ing that, as he interpreted the proposed policy, if

the Federal Open

6/28/49

-12

Market Committee also wished to replace maturing bills

by bidding a

little higher for new bills, it would be permissible to do so.

The

main point, he said, was to permit the reserves that would go into

the market as a result of the expiration of the supplemental reserve

requirements authority on June 30, 1949, to have their full effect

without interference by the System.

In response to an inquiry from Mr. Riefler, Mr. Vest expressed

the opinion that there was no legal question involved in the proposed

statement.

Mr. Clayton suggested and it was agreed that the statement as

proposed would not preclude either of the courses of action described

by Messrs. Eccles and Riefler.

Thereupon, upon motion duly made and

seconded, the following statement of pol

icy was approved unanimously with the

understanding that it would be given to

the press today for immediate release:

"The Federal Open Market Committee, after consultation

with the Treasury, announced today that with a view to in

creasing the supply of funds available in the market to meet

the needs of commerce, business, and agriculture it will be

the policy of the Committee to direct purchases, sales, and

exchanges of Government securities by the Federal Reserve

Banks with primary regard to the general business and credit

situation. The policy of maintaining orderly conditions in

the Government security market and the confidence of investors

in Government bonds will be continued. Under present condi

tions the maintenance of a relatively fixed pattern of rates

has the undesirable effect of absorbing reserves from the mar

ket at a time when the availability of credit should be in

creased."

Chairman McCabe then asked for an informal expression of views

6/28/49

-13

of the members of the Committee who were Presidents of Reserve Banks

as to changes that should be made in reserve requirements ofmember

banks, particularly as to whether reserves should be further reduced

by the Board by an amount in

addition to the release of about $800

million of reserves that would result from expiration on June 30,

1949,

of the authority for supplemental reserves.

Mr. McLarin stated that he felt reserve requirements of banks

should be lowered,

that reserve city banks were keeping most of their

funds invested, and that banks in nonreserve cities were selling se

curities in order to make seasonal agricultural loans.

duction, he felt,

should go to banks in nonreserve cities.

response to a request from Mr. McLarin,

basis of a recent survey in

re

In

Mr. Raisty said that, on the

the Atlanta district,

the smaller banks definitely desired reductions in

ments,

The first

it

was evident that

reserve require

that this was the season of heavy demand for loans,

that they

were selling securities to obtain reserves for use in making loans,

and that some of them also felt

a further reduction in security mar

gin requirements to 25 per cent would be helpful,

feeling that a

great many stocks with long dividend records would then become avail

able for collateral for bank loans.

Mr. Leach stated that while a reduction in reserve requirements

would have the advantage of lessening the competitive advantages of

nonmember banks over member banks,

he did not think a substantial re

duction at this time would be desirable from the standpoint of monetary

6/28/49

policy.

-14

It

was his opinion that the System should make sufficient

funds available to create a favorable climate for bank lending with

some reduction in interest rates, but that it would not be desirable

to take action that would force rates down substantially.

He said

he would, however, favor reducing reserve requirements of central

reserve city banks by 2 percentage points at the same time that the

supplemental reserve requirements were lifted from reserve and non

reserve city banks.

Messrs. Earhart and Gidney stated they thought it would be

appropriate to take no action beyond letting the requirements de

crease by reason of the expiration of the statutory authority for

supplemental reserve requirements until there had been an oppor

tunity to observe the effects in the market of the resulting addi

tion of $800 million of reserves.

They felt that this was a sub

stantial amount.

Mr. Eccles said that he felt that there was a question as

to the advisability of further reducing reserve requirements in

central reserve cities at this time.

He pointed out that the Fed

eral Reserve Act provided for a basic requirement of 7 percent at

nonreserve city banks, 10 percent at reserve city banks and 13 per

cent at central reserve city banks and a maximum of double those

percentages; that the reserve requirements in central reserve cities

were already 2 percentage points less than the statutory limit of

26 percent, whereas in all other banks the requirements were at the

6/28/49

-15

statutory limit; and that, unless there was a very good case for

a reduction at central reserve cities, consideration would have to

be given to the psychological effect on the other banks.

He stated

that the money market is extremely easy in New York and Chicago,

that loans in those cities have gone off to a substantial extent;

not because of any desire on the part of the bankers but because

borrowers are not seeking additional loans and are paying off exis

ting loans, and that, consequently, funds have been added to the

reserves in the money market with the result that rates are going

down, and money market banks are beginning to look for term loans

again.

He added that banks outside central reserve cities can not

use their funds quite as effectively as the central reserve city

banks which are able to keep fully invested, and that a large part

of the $800 million that would be released by expiration of the

supplemental reserve requirements authority on June 30 would flow

quickly into central reserve city banks.

Therefore, he thought

that it would be a mistake at this time to reduce the requirements

at central reserve cities although at some later time it might

prove to be desirable to reduce reserve requirements on demand de

posits 2 percentage points at all member banks.

Mr. Sproul said that, in terms of the amount of reserve

funds needed in the market, he felt the addition of $800 million

would be sufficient, but that there was the factor of location of

reserves, that central reserve city banks were not supplied with

6/28/49

-16

excess reserves, and that in terms of the psychology of the banks

with respect to their loans and investments there was something to

be said for placing those banks in a position and creating for them

a climate for credit expansion.

If the funds released to reserve

and nonreserve city banks by expiration of the supplemental reserve

authority would flow into the money market as quickly as Mr. Eccles

believed, this argument might fall, and he would not want to keep on

piling up excess reserves.

In response to a question from Mr. Evans as to the volume

of excess reserves that Mr. Sproul thought would be desirable the

latter said that he thought the aggregate volume created by the re

lease of the $800 million on June 30 would be sufficient at this

time.

The discussion again returned to the question of the action

that might be taken in

carrying out the policy adopted by the Com

mittee as set forth in the statement approved for release to the

press.

Mr. Riefler said that the economic situation had deterio

rated to a point where positive action on the part of the Federal

Reserve System to ease conditions was justified, and that the main

tenance of a volume of active excess reserves of around $500 million

seeking investment would influence banks to increase their financing.

Since the market has shown itself willing to hold up to about

$1,000 million excess reserves without active pressure on lending

6/28/49

-17

pattterns, this policy would imply the maintenance on a statistical

basis of $1,500 million excess reserves,

or about the amount that

would be present in the market as a result of the release of $800

millions on June 30.

He stated that the problem before the System

was how it could maintain this volume of excess reserves without

at the same time actively bidding short rates down and further accent

uating the present distorted pattern of interest rates.

This problem

grew out of the peculiarities of the auction system of marketing

bills.

The System would be able to roll over its certificates at

whatever rate was set by the Treasury in view of the market.

It

could not roll over its bill holdings, however, without actively

bidding against the market to replace bills as they matured.

He

said that in his view an ideal situation would be one in which the

influence of the System would be neutral with respect to the rate

for any particular maturity and was confined solely to the respon

sibility for the maintenance of excess reserves.

These would them

selves, of course, produce easier rates throughout the market.

How

ever, if the System desired to hold its total portfolio constant in

order to maintain the volume of excess reserves that were in prospect,

it would have to bid actively in the bill auction each week to roll

over its maturities.

This would involve active competition with mar

ket bids at a time when excess reserves were active.

It

would force

a disproportionate drop in rates at the short end of the market and

would perpetuate and accentuate the present distortion in the interest

6/28/49

-18

rate structure as between the long and the short end.

The problem,

In theory, could be met by allowing the bills to run off as they

matured and by replacing them in the System portfolio by equiva

lent purchases of certificates and bonds.

The trouble with this

solution is that it would involve the System in open market purchases

at a time when there would exist independently a bull market for

Treasury certificates and bonds.

To buy in such a market to main

tain the System portfolio would be unsound and might have serious

effects on prices.

In view of this dilemma, he felt the logical

solution led inexorably to a policy in which the System would put

in no bids for bills as present holdings matured, and in which re

serve requirements would be reduced progressively to permit the

bills from the System account to be acquired by the market.

Out

of this, he felt, would come a different pattern of interest rates

than now existed, one that would not be so much affected by Federal

Reserve purchases of securities, and one which would leave the Sys

tem in a more flexible position when it may be faced with rising

yields in the Government securities market at a time of business

revival.

He suggested that if present holdings of bills of about

$4,000 millions were allowed to run off and reserves were reduced

to make it possible for the market to take them up, it might mean

a reduction in reserve requirements of as much as 6 percentage points

by the end of this calendar year.

Mr. Riefler further explained that he was not interested in

6/28/49

-19

lower short-term interest rates as such during the period immed

iately ahead.

He was prepared to accept them, however, as an

inevitable consequence of bank reserve positions that would put

banks under some pressure as lenders.

He felt that conditions

would change as business recession was succeeded by revival and

at that stage rates would rise.

The System, if it were out of

the bill market at that time, could more easily follow policies

to move short-rates up.

In a comment on Mr. Riefler's remarks, Mr. Sproul said he

felt the System faced a problem of choices, that, regardless of

how it did it, the System would be the active agent in pushing in

terest rates downward, and that the question whether it was better

to reduce reserve requirements than to bid in the market for bills

was something that would have to be worked out in practice.

He

vent on to say that he would prefer to roll over the present bill

holdings and see how the market responded rather than to adopt at

this moment a policy of reducing reserve requirements to enable

banks to take the bills.

Mr. Rouse stated that the Treasury might have a need for

cash financing in the immediate future, perhaps in July, that the

rate to be bid on bills would come into the picture very promptly,

and that he would like to have a clear understanding of the proced

ure to be followed.

Mr. Sproul suggested that the Committee have a general

6/28/49

-20

understanding that it

would be the policy to maintain about $1,500

million of excess reserves in the market and that the way in which

that would be done would depend on developments after the $800 mil

lion of reserves was released at the end of June by expiration of

the supplemental requirements.

No disagreement with this suggestion

was indicated by any of the members of the Committee.

Chairman McCabe again invited the members of the Committee

who were Presidents of Reserve Banks to express their informal

views as to action that should be taken with respect to reserve re

quirements in the light of the foregoing discussion, and each of

them indicated that he would favor letting the supplemental authority

expire without additional reductions at this time,

Mr. McLarin

adding that he was glad to know that consideration was being given

to a possible further reduction, and, therefore, in view of the ap

parent intention of taking prompt action when considered advisable

he would not urge further reduction immediately.

Mr. Sproul commented that although he felt there was some

basis for reducing reserve requirements of central reserve city

banks at this time, he felt such action could wait until it could

be observed whether the reserves released to reserve and nonreserve

city banks would flow quickly into the money market.

At this time a memorandum from Messrs. Young and Smith dated

June 28, 1949, with respect to Treasury requirements for the fiscal

year 1950 was distributed.

A copy of the memorandum has been placed

6/28/49

-21

in the files of the Federal Open Market Committee.

Question was raised as to whether, if the Treasury should

need to obtain additional cash during July and August, the Com

mittee would wish to make a recommendation as to the means for ob

taining such funds.

Mr.

Rouse stated that the Treasury would probably contem

plate the issuance of additional bills at least during July and

August, that it

might need to raise as much as $1 1/2

or $2 billion

over the near-term future, and that he would like to see an issue

of 4 to 5 year notes, maturing in March 1954.

Several members of the Committee expressed the view that

it would be desirable to recommend to the Treasury that it

draw

down its cash balance during the next few weeks while the effects

of the changed policy were becoming apparent,

Treasury needed new money it

and that when the

be obtained through the issuance of

an intermediate term obligation, probably a 4 to 5 year note, at

whatever rate was indicated by the market at the time it

was

issued.

Mr. Clayton suggested that the full Committee make no formal

recommendation to the Treasury at this time but that it

authorize

the executive committee to make such recommendation to the Treas

ury as seemed desirable in the light of developments over the next

few weeks and of the view of the full Committee that new money

should be raised by the Treasury through the issue of intermediate

6/28/49

-22

securities of the type referred to in the foregoing discussion.

Mr. Clayton's suggestion was ap

proved unanimously.

During the discussion of the recommendation to be made on

Treasury financing, question was raised as to the date for the next

meeting of the Federal Open Market Committee which had been tenta

tively set for August 29, 1949, at the meeting on May 3, 1949.

Chairman McCabe suggested that the date be left subject to call,

and this suggestion was approved.

Consideration was then given to the direction to be issued

to the executive committee to arrange for transactions in the Sys

tem open market account and to the question whether any changes in

the wording of the direction should be made because of the changed

policy adopted at this meeting.

Reference was made particularly to

the part of the first sentence which directed the executive com

mittee to arrange for transactions "for the maintenance of stable

and orderly conditions in the Government security market," and Mr.

Sproul suggested that the words "stable and" be deleted.

He pointed

out that, while the objective under the new policy was to maintain

orderly conditions, there might well be some decline in rates under

the new policy, and it

was agreed that the change should be made.

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

executive committee,

it

was suggested that the existing $3 billion

limit in the first paragraph of the direction and the $1.5 billion

limit in the second paragraph be continued.

6/28/49

-23Thereupon, upon motion duly

made and seconded, the following

direction to the executive commit

tee was approved unanimously, with

the understanding that the limita

tions contained in the direction

would include commitments for the

System open market account:

The executive committee is directed, until otherwise

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, replacement of

maturing securities, and letting maturities run off with

out replacement), as may be necessary, in the light of

changing economic conditions and the general credit

situation of the country, for the practical administra

tion of the account, for the maintenance of orderly con

ditions 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 accomodation of the Treasury shall not

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

The executive committee is further directed, until

otherwise 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.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.