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 Monday,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

October 30, 1950, at 12:05 p.m.

McCabe, Chairman

Sproul, Vice Chairman

Davis

Erickson

Evans

Norton

Peyton

Powell

Szymczak

Vardaman

C. S. Young

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Rouse, Manager, System Open Market

Account

Chairman McCabe reviewed a discussion in which he participated

with Secretary of the Treasury Snyder on Thursday, October 26, 1950,

and outlined the reasons why he felt it

was desirable to address a

letter to Secretary Snyder stating in brief form the policy of the

Committee with respect to (1) the maintenance of the 2-1/2 per cent

rate on the longest term Government securities now outstanding and

(2)

the rate on short-term securities on a one-year basis.

He said

that a draft of such a letter had been prepared for consideration

by the Committee at this meeting.

Copies of the draft were distributed and in

cussion a number of changes were suggested.

the ensuing dis

During a recess for

luncheon a revised draft of the letter was written to include the

changes proposed during the earlier session and when the meeting

10/30/50

reconvened at 2:15 p.m. further changes were made.

At the conclusion of the discussion,

upon motion duly made and seconded, and by

unanimous vote, the letter was approved as

follows, with the understanding that it

would be sent by messenger to Secretary

Snyder this afternoon.

"Since our meeting on Thursday, October 26, a meeting of

the Federal Open Market Committee has been held. The Committee

has been and is in complete agreement that under present con

ditions it is necessary to protect the 2-1/2 per cent rate (par)

on the longest term Treasury bonds no. outstanding. The Com

mittee's policies have been determined in accordance with that

conclusion.

"For the reasons outlined in my letter of October 16, 1950,

the Committee is convinced that continued flexibility in the

short-term money market is essential to carrying out an effec

tive credit policy. It believes, however, that for the present

the market yield on Government securities on a one-year basis

(now about 1-1/2 per cent) may have worked as high as is neces

sary in the light of present economic conditions and as high as

it can without having such an impact on the market for the

longest term Government securities as might interfere with our

policy of credit restraint. Accordingly, for the present, the

Committee will endeavor to maintain an orderly and flexible

market within a maximum of 1-1/2 per cent per annum for any

securities maturing within one year.

"If further inflationary or market forces should develop at

any time in the future which would make it necessary for the

Committee to reconsider these decisions, we would, of course,

feel it desirable and compelling to seek your counsel. In the

meantime, we should like to consult with you freely concerning

our mutual problems in the light of market developments and the

general credit situation.

Chairman McCabe raised the question whether any change should be

made in the understanding arrived at in the last meeting of the full

Committee with respect to the prices at which Government securities

would be purchased for the System open market account.

The matter

was discussed in the light of the statement at the last meeting of the

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executive committee that the main purpose of System policy was to

avoid putting funds into the market, that purchases of bonds should

be for the purpose of supporting that objection, and that the timing

and volume of bond purchases would depend on market conditions and if

fe:.er funds would be put into the market by permitting a gradual de

cline in prices of the long-terms that course should be followed, but

that if

after the short-term rate were increased or for any other rea

son offerings of bonds were heavy it would be desirable to let the

prices decline rapidly to between 4/32 and 8/32 above par,

Mr. Rouse outlined the reasons why he felt that no change should

be made in the present understanding and why the actions taken by the

New York Bank since the last meeting of the executive committee were

in accordance with that understanding.

Chairman McCabe inquired whether anything would be gained by

bringing about some slight movement up and down in the market prices

of long-term Government bonds, and Mr. Rouse said that, while such a

procedure might have some advantages, it might also result in the Sys

tem taking more bonds than otherwise would be the case.

Mr. Sproul

added that, .ith the amount of institutional selling that was over

hanging the market because of prior commitment of funds and not because

of price factors, it might be unwise to lower current market prices

substantially, thus running the risk of causing a large volume of addi

tional sales by other holders who might become alarmed.

While he

thought it might be feasible to bring about some slight movement up

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and down in

the prices of long-terms he was not sure what the result

would be.

At the conclusion of the discussion of this point, it was

agreed that no change should be made in the existing understanding

or the procedure being followed in

connection with it.

Mr. Rouse commented that the Treasury would soon be faced

with the task of refunding $2.6 billion of bonds maturing on Decem

ber 15, 1950, and $5.4 billion of certificates maturing on January 1,

1951, that it

was possible that the Treasury might wish to refund

these maturities in one operation, and that it was important that

there be stability in market prices for a period of some three weeks

before the books were closed in order to insure the success of the

new offering.

In a discussion of whether the full Committee should meet to

discuss the recommendations to be made to the Treasury with respect

to the financing, it

was suggested that since the American Bankers

Association Committee on Government Borrowing was to meet with the

Secretary of the Treasury on November 14 and 15, it would be desir

able for the executive committee to meet shortly thereafter for the

purpose of considering the recommendations to be made to the Treasury

with respect to the refunding with the understanding that, if neces

sary, the views of the executive committee could be checked with the

members of the full Committee by telephone.

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It was agreed unanimously that the ex

ecutive committee should meet upon call of

the Chairman for the purpose referred to.

It was also agreed unanimously that no

action should be taken at this meeting to

change the direction issued at the meeting

of the Committee on October 11, 1950, nor

the understandings reached at that meeting

as to the carrying out of this direction.

Thereupon the meeting adjourned.

Secretary.