FOMC Minutes

A meeting of the Federal Open Market Committee was held

in tne offices of the Board of Governors of the Federal Reserve

Systemin Washington,

D. C.,

on Tuesday, December 13, 1949, at

10:05 a.m.

PRSENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

McCabe, Chairman

Sproul, Vice Chairman

Draper

Earhart

Eccles

Gidney

Leach

McLarin

Mr. Szymczak

Mr. Vardaman

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Rauber, C. W. Williams, and John H.

Williams,Associate Economists

Mr. Rouse, Manager of the System Open Market

Account

Mr. Thurston, Assistant to the Board of Gov

ernors

Mr. Sherman, Assistant Secretary, Board of

Governors

Mr. Youngdahl, Chief, Government Finance

Section, Board of Governors

Messrs. Erickson, Young, Peyton, and Gilbert,

alternte members of the Federal Open

Market Committee

Messrs. Williams and Leedy, Presidents of the

Federal Reserve Banks of Philadelphia and

Kansas City, respectively

Mr. Roelse, Vice President, Federal Reserve

Bank of New York

Upon motion duly made and seconded and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

August 5, 1949, were approved.

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Upon motion duly made and seconded, and

by unanimous vote, the actions of the executive

comittee of the Federal 0pen Market Committee,

as set forth in the minutes of the meetings

of the executive committee held on August 5,

August 19, September 11, and November 18, 1949,

were approved, ratified, and confirmed.

Upon motion duly made and seconded, and

by unanimous vote, the action of the members

of the Federal Open Market Committee on

1949, approving an increase to

2,

Novmber

1.10-1.16 in the range at which Treasury

certificates could be purchased and sold for

the System account was approved, ratified,

and confirmed.

A report of operations in the System open market account cover

ing

the period August 5, 1949, to December 8, 1949, inclusive, prepared

the

at

Federal Reserve Bank of New York, was then read in part and dis

cussed by Mr. Rouse,

together with a supplementary report covering com

mitments executed for the System account for the period December 9 to

12, 1949, inclusive.

Upon notion duly made and seconded, and

by unanimous vote, the transactions in the

System account for the period August 5, 1949,

to December 12, 1949, inclusive, were

approved, ratified, and confirmed.

At Chairman McCabe's request, Mr. Sproul reported on develop

meeting of the Federal Open Markt Committee on August

mentssince the

5, 1949, stating that until the meeting of the executive committee on

November 15, 1949, operations in the System account were carried on

under the policy

at low rates.

approved on August 5 of making credit somewhat easy

By mid-November, however, the business and credit sit-

12/13/49

uation

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had changed sufficiently to warrant a change in open market

policy so as to bring some restraint on the availability of credit,

and,with the approval of all members of the committee and within

the framework of the policy of the June 28 statement, a course was

adopted which was designed to place mild restrictions on the avail

ability of bank reserves through open market operations.

This took

the form of increases in the range of rates within which Treasury

bills and certificates were purchased for the System account, and

contemplated a possible increase in the one-year certificate rate to

1 1/4 per cent, if

subsequent developments seemed to indicate the

desirability of such an increase.

In this connection, Ar. Sproul read

the letter of November 22, 1949, which was sent to the Secretary of the

Treasury following the meeting of the executive committee on November

18, 1949.

The next development, Mr. Sproul said, was a telephone call to

Chairman McCabe on November 28 from the Secretary of the Treasury, who

had been out of the country at the time of the November 18 meeting and

who had not received the letter of November 22 until November 26.

At

that time the rates on 90-day bills and 9-10 month certificates had come

together at about 1.11-1.12.

The Secretary informed Chairman McCabe

that he was thinking of announcing both the December and January financ

ing at once, the December issue to be a two and a half year 1 1/4 per

cent note and the January refunding to be a one-year 1 1/8 per cent

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certificate.

After reviewing the conversations which he and Chair

man McCabe had with the Secretary of the Treasury on November 28,

29, and 30, Mr. Sproul stated that the terms of the December and

January financing were announced by the Secretary on November 30.

He said that the Treasury had accepted substantially the Committee's

recommendtion on the December financing, with a 4 1/4 year 1 3/8

per cent note but had nullified that acceptance so far as market

rates were concerned by announcing that the January refunding would

be done with a 1 1/8 per cent certificate, despite the urging of

Chairman McCabe and Mr. Sproul that the announcement be deferred until

the

matter could be more fully discussed and the market reaction to

the December refunding could be observed.

Mr. Sproul added that these developments brought into sharp

focus the difficulties faced in determining open market policies and

general credit policies.

The question might be posed, he said, as to

whether we can even be sufficiently certain that an increase of 1/8

per cent in the short-term rate is of such importance in restraining

an expanding business and credit situation as to justify the risk of

our causing the failure of a large Treasury refunding operation.

Feeling that that risk should not be taken under present conditions,

the members of the executive committee on November 30, 1949, informally

agreed that rates on the longest bills and certificates should be held

at their then existing levels and not allowed to increase further,

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pending this meeting of the full Committee.

In a further comment on the discussions with the Secretary

of the Treasury, Chairman McCabe stated that it

was unfortunate that

the meeting of the executive committee on November 18 came during the

absence of the Secretary of the Treasury from the country when he was

not available for a conference during which he could have been informed

currently of the discussions of the executive committee and the reasons

for the actions that were taken.

Chairman McCabe then called upon Mr. Thomas who made a state

ment on recent economic developments and their relationship to Federal

Reserve policies.

Mr. Thomas said that recent expansion in economic

activity and prospects for further expansion supported the steps taken

by the Committee late in November toward a somewhat firmer policy with

respect to interest rates.

He felt that the likelihood of a higher

level of economic activity during the next few months,

throughout 1950,

and possibly

accompanying substantial deficits in governmental

budgets (Federal and other),

presented the System with a situation

different from any previously faced except in war periods, that under

these conditions the advisability of continuing to keep down money

rates would be questionable, and that greater flexibility in rates

was needed in order that policies could respond to changes in the

economic situation.

Mr. Thomas indicted that currently the problem

was to prevent rates from rising in view of the announced Treasury

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refunding, while in January the money markets were likely to be ex

tremely easy for temporary reasons.

The problem before the Committee

then would be whether, in view of the economic situation, to permit

rates to decline accordingly.

If

it

should be desired to absorb

reserves, this could be done (1) by selling bills and certificates,

either at declining rates or at present rates,

holdings to mature without replacement,

(2) by permitting bill

or (3) by selling restricted

bonds.

In connection with Mr. Thomas'

statement, there was distributed

a memorandum dated December 12, 1949, on the Current Economic Situation

and Outlook, prepared by the Division of Research and Statistics of the

Board of Governors,

a copy of which has been placed in the files of the

Federal Open Market Committee.

During Mr. Thomas'

statement, Mr. Davis joined the meeting.

Reference was made to the action at the meeting on August 5,

1949, authorizing the Federal Reserve Banks to enter into repurchase

agreements covering short-tern Government securities with nonbank dealers

at a rate not below 1 3/8 per cent pending a decision to reduce the dis

count rate at Federal Reserve Banks from the existing level of 1 1/2 per

cent, and to the understanding that, if

the discount rates were reduced

under sections 13 and 13a of the Federal Reserve Act, the authority

granted at the meeting of the executive committee on January 20, 1948,

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pursuant to the authorization of the full Committee at a meeting on

December 9, 1947, with respect to repurchase agreements with dealers

would again apply.

During September it was decided that for the time

being the discount rates in effect at the Federal Reserve Banks should

not be changed and the question before the Committee at this meeting was

whether any change should be made in the authority granted to the Fed

eral Reserve Banks on August 5 with respect to repurchase agreements.

Mr. Rouse stated that the authority had been of material assist

ance in handling situations which arose in August, September, and early

October, that it

had operated to keep rates on bank loans to dealers

lower than they otherwise would have been which had made it

possible for

dealers to carry their positions in short-term issues without too great

a loss, that the authority had not been used in recent weeks, but that

if present discount and certificate rates continued in effect such

standby authority would be useful.

It was agreed unanimously that

no change would be made at this time in

the authority granted on August 5, 1949.

Chairman McCabe requested a discussion of the policy with re

spect to sales of long-term restricted bonds from the System account.

Mr. Sproul stated that the alternatives were (1) to allow funds coming

into the long-term market to have their full effect on the rate structure

which would mean the System would do little, if any, selling of long-term

bonds, (2) to decide that long-term rates are low enough and to prevent

12/13/49

-8

further decline in long-term yields by market sales, or (3)

this question in the light of general credit policy,

to determine

in which case, if a

restrictive credit policy were desired, we would sell restricted bonds

in the market when the opportunity was presented, thus absorbing re

serves without providing the banks with a short-term asset.

He sug

gested that the full Committee grant the executive committee relatively

full discretion to follow any one or all of these alternatives, depending

upon the situation as it

developed in the next few weeks.

This suggestion was discussed in the light of the effect on the

market of the Treasury decision to refund the January maturities with a

1 1/8 per cent one-year certificate, the tendency of the long-term issues

to move to higher levels as a result of that decision as well as other

factors, and an increased demand for bonds which would come into the

market during the next 30 to 45 days for investment purposes.

In that connection, Mr. Sproul stated that the recent policy of

the committee had been to purchase short-term securities so as to provide

reserves to banks to meet increased demands for loans, rising currency

circulation, and other factors; that during the same period the market

demand for long-term issues had been light, and it

had seemed undesirable

to try to sell restricted issues from the System account which would have

taken funds out of the market.

December it

He also said that during the rest of

would be necessary to continue to supply the market with re

serves but that the market for long-terms could be expected to broaden

12/13/49

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somewhat and might afford an opportunity to sell restricted issues from

the System account without conflicting with the System's credit policy

or the requirements of an orderly market in Government securities.

Unless, he said,

the System should wish to reverse its

restrictive policy, it

present mildly

would be necessary in January to sell a very sub

stantial amount of securities to absorb funds coming into the market and

it would be in order to use all the means at the disposal of the Com

mittee to accomplish such absorption including the sale of long bonds

from the System account.

He went on to say that while there were some "doubtful spots" in

the indications as to which way the economy would move next year, he

felt that for the time being the System should follow a policy of

neutrality or mild restraint which would suggest the opportunity to take

funds out of the market by the sale of long-terms as well as other market

issues.

There was agreement with the analysis presented by Mr. Sproul and

it was understood that in

carrying out the general direction to be issued

by the Federal Open Market Committee today the executive committee would

have the discretion suggested by Mr. Sproul which it

would exercise in

the light of the discussion at this meeting.

Referring again to the decision of the Treasury to refund the

January maturities with a 1 1/8 per cent certificate,

Chairman McCabe

stated that he felt that the obligation of the Federal Open Market Com-

12/13/49

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mittee to support that rate was only a temporary one and that when the

refunding operation was out of the way the executive committee should

consider the course to be followed thereafter.

There was agreement that the policy to be followed after the

turn of the year would depend on the economic and credit situation and

outlook, that in future discussions with the Treasury there should be a

more complete exploration of the importance of small changes in interest

rates, and that every effort should be made to persuade the Treasury to

concur that such changes were important as part of System credit policy

and that they had substantial psychological value and a marked effect on

the willingness of lenders to lend.

In a brief consideration of the status of discussions with re

spect to a long-range financing program, Mr. Thomas stated that the System

Committee on Banking and Credit Policy was meeting this afternoon to dis

cuss the "framework" memorandum presented at the meeting of the Committee

on August 5,

1949.

It was also stated that at the meeting of the execu

tive committee on November 18, 1949, it

was agreed that the System Re

search Advisory Committee should continue to study the problem of long

term debt management, and that the members of the staff who had worked

on the problem should prepare a memorandum containing all the sugges

tions that had been made by the Federal Reserve staff on the subject

without any implication of approval of any of these suggestions, with

the understanding that when the memorandum was prepared it would be sub-

12/13/49

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mitted to Messrs. Bartelt and Haas of the Treasury Department with the

statement that the memorandum did not in any way commit the Open Market

Committee, the Board of Governors,

the Federal Reserve Banks, or their

staffs, but was submitted by the staff as a means of presenting to the

staff of the Treasury for consideration the various suggestions that had

been made in

connection with the problem.

Reference was then made to a memorandum prepared in the Board's

offices under date of December 12, 1949, with respect to the question

whether Treasury savings bonds should be made eligible collateral for

bank loans and to a memorandum dated December 8, 1949,

prepared at the

Federal Reserve Bank of New York, relating to the question of recommend

ing additional inducements to holders of maturing savings bonds to rein

vest the proceeds of such bonds in new savings bonds.

Both memoranda

were distributed and copies have been placed in the files of the Federal

Open Market Committee.

After a brief discussion, during which no con

clusions were reached,

Chairman McCabe suggested that the two topics be

given further consideration at the joint meeting of the Board and the

Presidents to be held tomorrow.

Mr. Vardaman withdrew during the foregoing discussion to keep

another appointment.

On the question of Government fiscal policy, Chairman McCabe ex

pressed the opinion that every effort should be made to reduce Federal

expenditures,

that the tax structure should be revised to eliminate in-

12/13/49

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equities and place it on a basis which would be in harmony with present

day conditions, and that tax rates in the revised structure should be at

levels which in times like the present would permit of a balanced budget

or produce a surplus for debt retirement.

While he realized that

such a program would be a difficult one in an election year, he felt it

was important that the Federal Reserve should urge its

opportunity.

adoption at every

He also said that in connection with the preparation of

the President's messages to the Congress, he (Chairman McCabe) undoubtedly

would be questioned on these points and that if the Presidents of the

Federal Reserve Banks had any other views he would like to have them

before the Presidents left Washington.

different views were expressed and it

In the ensuing discussion no

was understood that the Presidents

and the Board would give some thought to the subject and be prepared to

discuss it

at the joint meeting of the Presidents and the Board tomorrow.

Consideration was then given to the policy to be followed in the

interim before the next meeting of the executive committee with respect

to the replacement of maturing Treasury bills.

Mr. Sproul referred to

the understanding at the meeting of the executive committee on November

18, 1949, that the Federal Reserve Bank of New York should be guided in

the redemption or replacement of System bill holdings by what would be

required in the light of current conditions in the money market to carry

out the general credit policy of the Federal Open Market Committee.

After a discussion, at his suggestion, no change was made in this under-

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standing.

In a discussion of the policy to be followed by the Committee,

there was agreement that the policy of mild restraint should be con

tinued within the limits imposed by the necessity of supporting a 1 1/8

per cent one-year rate in

connection with the January refunding operation.

It was also agreed that, as soon as the refunding was out of the way, the

executive committee should consider whether the situation was then such

as to call for some further increase in the short-term rate, and, if

so,

the matter should be discussed with the Treasury with a view to permitting

the rate to increase prior to the February refunding.

In line with the

decision to prevent the rates on bills and certificates from rising above

1 1/8 per cent until after the January refunding was out of the way,

there

was also agreement that the upper limits of the ranges at which Treasury

bills and certificates would be purchased and sold for the System account

should be fixed for the time being at 1.12.

Subject to the foregoing limitation,

the executive committee was authorized

to determine from time to time the exact

ranges at which bills and certificates

would be purchased by the Federal Reserve

Bank of New York for the System open

In taking this action

market account.

it was understood that if, following the

January financing, there should be agree

ment among the members of the executive

committee, after consultation with the

Treasury, that the short-term rate should

be increased to 1 1/4 per cent on one

year obligations, the upper limits of

the ranges on bills and certificates could

be increased to not to exceed 1.24.

12/13/49

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In connection with the general direction to be issued to the

executive committee with respect to the execution of transactions for

the System account, it

was suggested that no change be made in the

wording of the direction, but that the limitation contained in the first

paragraph be set at $2 billion and in the second paragraph at $1 billion.

Thereupon, upon motion duly made

and seconded, the following direction

to the executive committee was approved

unanimously with the understanding that

the limitations 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 sit

uation of the country, for the practical administration of

the account, for the maintenance of 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

$2,000,000,000.

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 cer

tificates 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 $1,000,000,000.

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It

was agreed that the next meetings of the Committee would

be held on Tuesday, February 28, and Wednesday, March 1, 1950, with

the understanding that actions at the meeting on February 28 would be

confined to routine matters, including the ratification of previous

actions and transactions for the System account and that discussions

of questions of policy would be deferred until the meeting on March 1.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.