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 Wednesday, September 22,

PRESENT:

Mr.

Mr.

Mr.

Mr.

1954, at 10:07 a.m.

Martin, Chairman

Sproul, Vice Chairman

Balderston

Bryan

Mr. Leedy

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Miller

Mills

Robertson

Szymczak

Vardaman

Williams

C. S. Young

Mr. Riefler, Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Bopp, Mitchell, Rauber, Roelse, Tow,

and R. A. Young, Associate Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Carpenter, Secretary, Board of Governors

Mr. Sherman, Assistant Secretary, Board of

Governors

Mr. Youngdahl, Assistant Director, Division of

Research and Statistics, Board of Governors

Mr. D. C, Miller, Economist, Government Finance

Section, Division of Research and Statistics,

Board of Governors

Mr. Gaines, Securities Department, Federal Re

serve Bank of New York

Messrs. Leach, Fulton, Johns, and Earhart, Alternate

Members of the Federal Open Market Committee

Messrs. Erickson, Powell, and Irons, Presidents of the

Federal Reserve Banks of Boston, Minneapolis, and

Dallas, respectively

Mr. 0. P. Wheeler, Vice President, Federal Reserve

Bank of San Francisco

Upon motion duly made and seconded, and

by unanimous vote, Messrs, Miller and Balderston

9/22/54

-2

were selected to serve as alternate mem

bers of the executive committee for the

remainder of the year ending February 28,

1955, it being understood that in the ab

sence of Messrs. Martin, Szymczak, or

Robertson, alternates for any one of those

three would be, in the order named, Messrs*

Vardaman, Mills, Miller, and Balderston.

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on June 23, 195, were approved.

Upon motion duly made and seconded, and

by unanimous vote, the actions of the execu

tive committee of the Federal Open Market

Committee as set forth in the minutes of the

meetings of the executive committee held on

June 23, July 7, July 20, August 3, August

24, and September 8, 1954, were approved,

ratified, and confirmed.

Before this meeting there had been sent to the members of the

Committee a report of open market operations prepared at the Federal Reserve

Bank of New York covering the period June 23 to September 17, 1954, in

clusive.

At this meeting there was distributed a supplementary report

covering commitments executed September 20 and 21,

1954.

Copies of both

reports have been placed in the files of the Federal Open Market Committee,

Mr. Rouse commented briefly on the supplementary report, particu

larly with respect to the sale of $25 million of bills from the System

account on Monday of this week,

and on the reaction of the securities

market to the announcement made earlier this week of the offering of $4

billion of 1-5/8 per cent Treasury notes to be dated October 4, 1954, and

to mature May 15, 1957.

Upon motion duly made and seconded,

and by unanimous vote, the open market

9/22/54

3

transactions during the period June 23,

1954, to September 21, 1954, inclusive,

were approved, ratified, and confirmed.

Chairman Martin withdrew from the meeting at this point, and

members of the Board's Division of Research and Statistics and Division

of International Finance entered the room for the purpose of assisting

in the presentation of a review of the economic and credit situation,

illustrated by chart slides.

A copy of the text of the review, which

was sent to the members of the Committee following the meeting, has been

placed in the files of the Federal Open Market Committee.

Following the economic review, there was a discussion of the out

look, including reference to mortgage lending, the length of time during

which the economy might move "sidewise" as contrasted with showing a

definite upturn or downturn, and factors relating to the sharp rise in

the average level of securities prices in recent months.

At the conclusion

of the discussion of securities prices, Mr. Sproul commented that perhaps

the thing to be gotten out of the discussion was that the policy of active

ease pursued by the Federal Open Market Committee has not brought about

an inflationary and dangerous rise in stock market prices, but has helped

maintain a stable economic and business situation which, in turn, has given

encouragement to investors.

The members of the staff who entered the room to assist in pre

senting the economic review then withdrew.

Mr. Sproul asked for comments regarding recent open market opera

tions by the members of the Federal Open Market Committee and Reserve Bank

-4

9/22/54

presidents who were not currently members of the Committee.

Messrs. Erickson, Irons, and Leedy expressed general approval of

the handling of the account in terms of the general policy of active ease

authorized at the June meeting of the Committee, and Mr. Earhart concurred

in this view, stating, however, that there had been some complaint from

dealers in Government securities who faced losses on a substantial port

folio.

Mr. Earhart commented on the fact that aggregate excess reserves

had been ample but that early in August there bad been slowness in their

reaching the money markets where they might be used.

In his view

this

indicated that the Committee might well give more consideration to rates

in the money market along with such other considerations as the amount of

excess reserves and free reserves.

Furnishing reserves by buying Treasury

bills at a time when dealers ' portfolios were low was a factor in the de

cline in the bill rate to a point where many banks were no longer interested

in bills at the prevailing rates and it became necessary to reestablish an

interest.

Mr. Powell said that during the past few months there had been a

"stickiness" of excess reserves at country banks, and such reserves had not

flowed into central money markets as rapidly as had been contemplated by

figures on which Committee operations were projected.

In other words, some

of the aggregate amounts of free reserves which served as a guide to opera

tions for the System account simply were not effective in the market.

He

questioned whether, when central reserve city banks were deficient in re

serves early in August, it had been wise for the System account to sell bills

-5

9/22/54

and then find that it

thought it

had to take them back.

In hindsight, Mr. Powell

might have been better to have allowed the larger total of

free reserves to remain until there was evidence they were doing damage.

Mr. Rouse stated in

response to a question from Mr. Erickson

that there had been a tendency on the part of some central reserve city

banks to overinvest, which had been a factor in their accumulating a

deficiency in their reserves.

This had resulted in an atmosphere in the

market different from that indicated by the over-all reserve position

which had existed immediately following the effective date of the reduction

in

reserve requirements for member banks at the end of July.

Mr. Rouse

also commented on the lag in movement of excess reserves from country

banks to reserve and central reserve city money markets,

a factor for

which some allowance had been made in arranging for transactions for the

System account in trying to comply with the instructions of the executive

committee.

This factor, he said, together with unexpected fluctuations

in the Treasury's balance in August,

had created a most difficult period

in which to handle open market operations.

Mr. Johns said that he had no intention of being critical of the

handling of the System account but that he had sympathy with the views

expressed by Mr. Powell at this meeting and those expressed by Mr. Mills

as recorded in the minutes of recent meetings of the executive comittee.

He felt August had been an unfortunate time to raise a question in the

minds of a good many persons as to whether Federal Reserve policy had

turned from one of active ease to one of tightness.

He was inclined

-6

9/22/54

to think that an unnecessary risk of doing harm had been run, even though

it

was not apparent that any harm actually had been done.

Mr. C. S. Young felt that operations for the System account had

been carried on in

accordance with the understandings at recent meetings

of the executive committee and that they should be continued about on this

basis, although he would suggest that after the current Treasury financing

was out of the way, consideration be given to a further reduction in the

System portfolio by way of a reduction in reserve requirements, if

should prove feasible.

that

Mr. Young also noted that country banks were not

the only banks which had been slow to put their free reserves to use:

a

good many reserve city banks were equally slow in making use of free

reserves.

Mr. Leach told of discussions which he had had with bankers re

cently who were in

general agreement that everything the System account

had done recently was about right, although some regretted that the bill

rate had been permitted to go as low as 5/8 per cent.

Mr. Leach said that

he would not have wanted the situation any easier than it

had been; on the

whole, he thought the Committee s policy and operations had been about

right.

Mr. Vardaman stated that, as he had indicated at recent meetings

of the executive committee, he personally would prefer to have as a target

figure for free reserves an amount of $800 million rather than a range

of $400-70 0 million.

This, he felt, would counteract in some measure the

failure of country banks and many city banks to use their free reserves

9/22/54

more promptly.

He indicated that his general philosophy of open market

operations at this time was along the lines expressed by Messrs. Powell

and Johns, and by Mr. Mills at recent meetings of the executive committee.

Mr. Mills then made a statement substantially as follows:

I have rather grave misgivings about the recent han

dling of the account, not having a bearing on either easy

or tight money, but on what may be the consequences of our

withdrawals and injections of reserves. It has already

been touched upon. It could be we have been engrossed too

much in an effort to maintain a target volume of free re

serves and that in doing so we have prevented the natural

forces in the market having their effect. It may be we have

confused the market as to what our intentions may be or what

they were intended to be. Going back three weeks, we have

withdrawn reserves, then supplied them, then withdrawn them

again. It would seem very difficult for those in the market

to reach judgments on the basis of this behavior as to how

they should react to policy in making their own purchases

and sales. Beyond that, the matter that can prove to be

of serious concern is the result these injections and with

drawals can have over a period of weeks by tending to set

a pattern of interest rates, which could be fraught with

danger because it allies itself very closely with a pegged

market. It would be very difficult from the outside to

look at our operations without having the impression they

are aimed at a pegged rate. Now if the market should come

to the view that we have a set rate, and if we should wish

to make an abrupt change in policy, it will have a greater

impact on the market than would be the case if we had per

mitted the natural forces to have their effect. To il

lustrate, it seems to me that within the next few days we

face the fact we have withdrawn reserves; the Treasury will

withdraw more reserves; float will withdraw a further amount;

and the Treasury will come into the market before October

6, The consequence is that we now must inject a very sub

stantial amount of reserves at a time when the market can

only regard the action as a very palpable support of Treasury

But to give the im

We should support them.

operations.

pression that that is a main objective of Federal Reserve

policy could be a danger.

Mr. Sproul commented that the executive committee had never set

a specific figure as a target for free reserves,

that its

target had

-8

9/22/54

always been a range and had been understood and interpreted with some

flexibility, depending on developments in the banking situation and in

the market.

As a matter of fact, he said, over the past several weeks

the volume of free reserves had tended to be above the upper level of the

range indicated by the executive committee,

rather than in the middle or

lower part of the range, whereas at times, such as in August,

a majnrity

of the members of the executive committee had expressed the hope that the

level of free reserves could be kept nearer the lower limits of the range.

Swings in

reserves during the last few weeks had been of the order of

$500 million, Mr, Sproul noted, and it

was felt

that open market opera

tions should be in terms of moderating these swings but not offsetting

them entirely.

Mr. Sproul thought that operations had been in the direction

of such moderation.

Mr. Robertson said that to his way of thinking the only way in

which open market operations properly should be conducted was in

with the needs of the economy as a whole.

past had been good.

He felt

accordance

operations in the recent

It was true, he said, that the reserves provided coun

try banks early in August did not flow back into the money markets promptly,

a factor which had been taken into .onsideration by the executive committee

in giving a range to be used as a guide for the operation of the account.

As the free reserves at country banks come into the market, he would hope

that the total level of free reserves could move to the lower limits of

the range rather than to the higher side.

So far as general policy was con

cerned, he hoped it would continue as at present.

9/22/54

-9Mr. Bryan then made a statement substantially as follows:

I would in general associate myself with the comments

made by Messrs. Powell and Johns and, certainly with the

statement by Mr. Mills of deep misgivings.

This is said

with modesty because I am not certain I would have handled

the situation any better,

As I see the problem, it has been one in which the

distribution of free reserves, in combination with our

policy, has allowed a very considerable increase in short

rates, which has at times carried over into longer rates.

The result can be explained on many grounds; but the effect

has been that we have permitted a policy of monetary ease

to some extent to be contravened by the holders of free re

serves, who have wanted liquidity, I am puzzled to know

whether this partial contravention of a policy of monetary

ease was a result that was wanted or desirable.

The effect, as I see it, has been somewhat dangerous

because the increase in rates came in an economic situation

in which broad-scale and continuing economic recovery was

far from assured. Among the adverse effects was the down

ward drag on the value of capital assets. There is a ques

tion, in my mind, whether we did not produce a result, not

realized in a dangerous degree, but one that was contra

indicated in the light of all the economic circumstances.

We ought not overlook the possibility that the banks clinging

to their free reserves may have been doing so for reasons

to which we have given insufficient emphasis. They may

regard theeconomic situation with less optimism than we

have been inclined to do,

We have had demonstrated in the discussions of the

economic situation before the Presidents' Conference and

here at this meeting, the fact that no one can say with

certainty where we are going. The best that can be said is

that, at the moment, we are fairly stable at a fairly high

level.

In a situation of that sort it has not seemed to me

that it was appropriate policy to permit an increase in

interest rates. At the same time, when the banks of the

country who were holding the free reserves were showing that

they had a preference for cash liquidity as against an in

crease in earning assets, we were saying to them by our dis

count rate that they could not restore their cash position

except under the danger of considerable penalties. I thus

also doubt the wisdom of our rate policy.

-10

9/22/54

I think our discount rate policy at this time encour

aged banks to hold liquid assets rather than to use them.

This was a period in history when I think they should have

been used. I say this with a repetition of the statement

that I am not certain I would have done any better if I had

been making the decisions; but I think the rediscount rate

should have been in much closer relationship to the short

term

rates,

Mr. Williams stated that he felt the results of the Committee's

recent operations had been generally satisfactory.

The Committee had been

faced with a problem of a maladjustment of free reserves and had been

working on a range for the country as a whole, playing by ear from week

to week.

Mr. Williams doubted whether recent developments had given any

widespread adherence to the theory that the System was trying to achieve

a pegged market.

He questioned Mr. Bryan's assumption that the behavior

of country banks in holding on to free reserves indicated a judgment as to

the future course of business.

Mr. Williams felt there was a large element

of inertia in the situation and that it

would be desirable for the Committee

to obtain information through use of the field forces of the Federal Reserve

Banks so that it

would pursue its

operations without the need for specu

lation as to what the thinking was among country banks.

Mr.

in

Irons reported on a check made during the first

part of August

the Dallas District among some 40 or 45 country banks which indicated

that the overwhelming majority had a neutral feeling regarding the recent

reduction in

reserve requirements, which had come at a time when they were

not getting an increase in

loan demand,

and that 80 per cent of the banks

contacted said they did not plan to employ their funds in the Government

-11

9/22/54

securities market since it

was not worth their while to buy Treasury

bills yielding less than 1 per cent.

Mr. Irons thought that the frequency

with which this comment was heard, stressing 1 per cent as a marginal rate,

was significant.

On the matter of rates, Mr.

justment of bill

Sproul remarked that the downward ad

rates in the spring had reflected the market's analysis

of what our policy moves implied,

and this analysis had overshot the mark,

assuming greater ease than we had intended.

moved down too far at that time and the

bill

Rates may be said to have

recent rate recovery has brought

yields to a level that probably is more consistent with the general

kind of policy the System is

attempting to pursue.

He added that he would

not place as much emphasis on the degree to which rising rates in the short

term market have "slopped over" into the capital markets as had Mr.

Bryan.

Chairman Martin reentered the meeting at this point.

Mr. Fulton stated that in the Cleveland District there was some

indication that to a considerable extent country banks were in

an over

loaned position and that when these excess reserves came into their posses

sion early in August they held on to them.

The only criticism of System

operations which he had heard among banks was that the bill rate had been

permitted to go to a point below that which they liked.

Mr.

Szymczak said that under the circumstances he felt recent opera

tions for the Open Market Account had been very well handled.

Such opera

tions could not be perfect and must be based on the best information avail

able at the time.

The executive committee had used a range of $400-700

-12

9/22/54

million of free reserves as a rough guide to its operations and while

he personally had not liked the idea of supplying reserves through a

reduction in requirements and then withdrawing them from the market,

under the circumstances the operation had worked out very well as a means

of providing a sort of stability in the market.

Mr. Thomas made a statement in which he brought out the view that

a technical factor had affected the situation in recent months.

The

volume of money in the market measured by free reserves had been fairly

stable.

One of the factors in the market had been the performance of

dealers, Mr. Thomas said, who had bought bills in May and June and helped

to put the bill rate down and who had been selling bills since July, thus

doing the opposite of what dealers might be expected to do.

Another

factor, Mr. Thomas pointed out was that the Treasury retired short-term

securities from March to June and put out additional short-term securities

since July.

Mr. Sproul then made a statement substantially as follows

1.

2.

All during 1954, in the face of a declining or sidewise

movement of the general economy, we have followed a credit

policy labeled a policy of "active ease". It has involved

the use of all of the three main instruments of credit

management - open market operations, discount rates, and

reserve requirements.

Its objective has been to encourage

the free use of credit and an active capital and mortgage

market.

Its main technical guide has been the maintenance

of a substantial volume of "free reserves" in the banking

system*

While the use of such a guide has raised problems of central

banking technique, which have been discussed here, the

general policy has served the economy well. The ready

availability and low cost of bank credit and of capital

9/22/54

3.

4.

5.

6.

-13-

funds have maintained a monetary climate favorable to

business expansion and high employment, recognizing that

credit policy is only one part of the whole complex.

The present economic outlook suggests to me a continuance

of existing credit policy, relying on open market opera

tions to make it effective.

We appear to have been on an economic plateau for the

past three or four months following upon the decline in

economic activity which began in the summer of 1953.

It is possible to view this record doubtfully, if we do

not have a substantial upturn during the fall, The ex

pectation of a substantial upturn may have caused a

check to the previous liquidation of inventories and re

duction of working forces, which could be resumed if

anticipated gains are not forthcoming, and private capital

outlays might begin to show signs of fear of a prolonged

slump.

It is also possible to view the record, hopefully. The

downturn was checked while the economy was still

operating

at a high level, the recession has shown no signs of

feeding on itself in a way which would bring on a cumu

lative downward movement, and the economy appears to have

elements of strength which should prevent such a movement

developing. While inventory liquidation does not seem to

have been completed, the rate of liquidation has slowed

down. While Government defense outlays may decline further,

the decline will be small compared with that of the past

year. Private capital investment and State and local

capital outlays are holding up to earlier estimates. Con

sumer spending, on which much of the rest of the economy

depends, has remained high, encouraged by the present and

prospective stability of prices and evidently not too fear

ful of spreading unemployment and loss of income,

I prefer and hold the hopeful view. Despite the dangers

of economic forecasting, we must make some judgments, and

I believe that a generally sidewise movement of the economy

is more likely during the next few months than a pronounced

and cumulative movement either up or down.

This hopeful view is supported by the prospect of deficit

financing by the Federal Treasury. The recent mid-year re

view of the budget estimated a cash deficit of 1.8 billion

in fiscal 1955. We estimate that it may be nearer 4 bil

lion, with lower receipts and higher expenditures than in

These net figures for the fiscal year

the official figures.

result

of a much larger deficit in the

whole

are

the

as a

July-December 1954 period and a surplus in the January-June

9/22/54

7.

-l41955 period.

The Treasury has already borrowed 4 billion of new money

in

this half-calendar year and will need to borrow about

6 billion more, including the 4 billion offering just

announced.

The rest of the program might call for 1 bil

lion of cash financing in late November and the sale of

1 billion of CCC participation certificates, or the

Treasury might be able to get by with no additional di

rect new money financing.

The present new money financing

is directed toward the commercial banks, and the banks

will need additional reserve funds in order to play their

8.

9.

10.

part, if the amount of bank credit available to the private

economy is not to be restricted,

Adding this need growing out of Treasury financing to the

needs of a moderate seasonal expansion of private busi

ness, and the reserve effects of usual fall

increase in

currency circulation, suggests that the member banks will

require about 3/4 billion to 1 billion of additional re

serve funds between now and the end of the year if our

The first

policy of "active ease" is to be continued.

substantial injection of reserve funds will be needed

during the statement week ending October 6, when payment

for the new Treasury issue falls due. The next big drain

will be during the months of November and December when

seasonal factors will gradually absorb reserves and

another Treasury offering or CCC certificates may be ex

pected to come to the market. In order to carry on existing

credit policy, I would provide these reserve funds as

needed, by open market operations.

For the immediate present, we have just passed a peak of

excess reserves and free reserves well above the usual

range.

These additional reserves evidently were considered

temporary by the market, as, of course, they were. Con

sequently they did not express themselves in a sloppy money

market. While they will be substantially reduced during

the coming statement week by ordinary market factors, their

presence has relieved some of the strain of meeting the re

serve demands of the Treasury financing in the following

week.

I should say we shall have to make some purchases during

the statement week ending September 29 to maintain our

position, and more substantial purchases during the week

ending October 6.

Chairman Martin expressed the view that the Committee had success

fully been operating on a policy of active ease.

His own thinking was

9/22/54

-15

that the Committee wanted a flow of money and credit that was like a

stream with a ripple on it;

it

wanted to maintain a flow so that the

water would not go over the banks and when the flow built up in force,

to have had a chance to build an adequate channel in which to retain the

volume of water without having it

flow over the banks.

Chairman Martin

did not think the Committee should give too much attention to minor

fluctuations over short periods of time.

He thought the Committee's

policy and operations had more or less generated confidences in the busi

ness and financial world and in the community at large.

The Committee

now had before it the problem of how to achieve a continuation of the

policy of active ease which it had been pursuing, unless there was a view

that this policy should be changed.

In response to Chairman Martin's question, none of the members of

the Committee indicated that there should be any modification of the

general

policy of active ease which was being pursued by the Federal Open Market

Committee.

Chairman Martin then said that for the guidance of the executive

committee it

would be his thought that in the immediate future it

should

continue to supply reserves to the market in accordance with the general

policy of active ease, and that any errors it might make in the period

of the next few weeks should be on the side of ease rather than the reverse.

Chairman Martin also recalled that in August he had felt that if the

Committee were to err in supplying reserves,

it

was wiser to lean on the

side of tightness, whereas his view now was that with the seasonal

9/22/54

-16

developments ahead, operations should be shifted so that they would lean

on the side of ease.

Without guaranteeing any particular prices in the

Government securities market, there should be an adequate supply of re

serves available to assure that the current Treasury financing would be

successful.

In response to a question from Mr.

Bryan as to the difference in

the situation in August when Chairman Martin would have leaned on the side

of tightness and at the present time when he felt the Committee should lean

on the side of ease, the Chairman stated that he felt the difference in

timing was of real importance.

ness psychology.

In August, it

situation would be in

This related to the delicate area of busi

was generally expected that the business

the doldrums,

a common occurrence for that time of

year, and as long as there was no clear indication that things would be

going hog-wild in

either direction there was no serious psychological im

pact on the economy in

carrying on operations as had been done.

On the

other hand, as September receded into October and October into the general

fall pickup of activity in many lines,

that a definite degree of ease in

it

was Chairman Martin's judgment

the market would exert a favorable

psychological impact on the situation.

Mr. Szymczak felt

that the full Committee should continue the

policy of active ease under which it

had been operating.

There should be

no change in the discount rate at this time nor should there be a further

reduction in

reserve requirements at present.

reserves were required during the latter

To the extent additional

months of this year, they should

9/22/54

-17

be supplied through open market operations or through the discount window.

Mr. Sproul said that he was in

general agreement with Chairman

Martin's statement as to policy and the way it

the immediate future.

should be carried out in

He felt that the risk of erring on the side of

greater ease in this immediate future period was less than the risk if

errors were made on the side of tightness.

He would not contemplate aiming

toward tightness in any case, he said, and not having an exact science to

work with, that meant the Committee s operations should be directed so that

to the extent errors were made they would be on the side of ease.

There was general agreement with the views expressed by Chairman

Martin and Mr. Sproul.

Mr. Mills added the comment that he would hope the open market

account would not intermittently interfere in the market in a way that

would upset the play of natural factors,

and that interference by the

Committee would solely be to cover the longer run need for reserves which

could be expected to follow during the next three months.

Mr. Sproul felt that Mr. Mills overemphasized the effect of buying

and selling securities for the System account.

He had not been able to

observe any misunderstanding growing out of that procedure on the part of

businessmen or bankers.

The principal criticism had come from those who

were playing in the market and who had attempted to make profits out of

market moves.

When they had guessed wrong they attempted to create a

misunderstanding as to the Committee s policy.

Mr. Sproul reiterated that

he did not see evidence of the misunderstandings to which Mr. Mills

9/22/54

-18

referred growing out of the Committee's purchases and sales.

Chairman Martin said that he shared Mr. Sproul's views on this

point, based on talks he had had with people in

the business and financial

community; the only misunderstandings he had observed were those based on

wilful

misunderstanding.

Mr. Mills responded that if

tinually in

as

the Committee was going to be con

and out of the market it

was going to create a misunderstanding

to policy.

Mr. Rouse stated that the recent period of operations for the account

had been unusual,

resulting from an over-supply of reserves in the market

as a consequence of the reduction in

reserve requirements and the need to

absorb that supply until there was a need for the additional reserves.

Chairman Martin said that he favored the minimum intervention of the

account in

the market at all

Mr. Robertson felt

of active ease but that it

times in

order to acheive its

the Committee should continue to follow a policy

should not intervene unnecessarily in the market.

During the period immediately ahead, he felt

doubts in

ease in

the Committee should resolve

favor of ease rather than tightness in

Mr.

Bryan said that he was,

the market.

objectives.

the market.

of course, in favor of a policy of

He wished to say again, however, that he felt

dis

count rate policy at the present time was out of gear with open market

policy so that in

that its

effect the System was saying to the financial community

reserves could be replaced only through the investment account

9/22/54

-19

of the Open Market Committee.

He felt that the policy of active ease

applied only to those banks who could receive reserves through the flow

of the market.

If

there were to be a policy of ease generally applicable

to member banks the discount rate should be reduced, preferably to 1 per

cent and at least to a level of 1-1/

per cent.

Chairman Martin suggested that there be a discussion of the views

expressed by Mr. Bryan as to lowering the discount rate.

Mr. Williams stated that Mr. Bryan's earlier discussion of the role

of discounting and of the relationship between the discount rate and open

market rates raised important questions that were being considered by the

Special System Committee on the Discount and Discount Rate Mechanism.

With respect to a reduction at this time, he felt that such a reduction

could be misinterpreted as indicating that the System judged economic

developments to be weaker than the System actually believed them to be.

Mr. Fulton agreed completely that the discount rate should come

down, especially since this would give smaller banks access to reserve funds

other than through the open market.

Mr. Szymczak felt that a reduction at this time would be misunder

stood by everybody and he did not think that the banks,

particularly the

smaller ones, were in need of additional funds.

Mr. Sproul said he could not understand what is the obstacle to

banks securing funds through the discount window at a rate of 1-1/2 per

cent if

they had a demand for loans or wanted to make investments,

or if

they felt they needed access to more reserves in order to assure their

9/22/54

-20

liquidity.

He felt

that the Committee s policy of maintaining a sub

stantial volume of excess and free reserves-not the level of the dis

count rate-had relegated the discount window to a minor position in

terms of actual use.

So long as banks as a whole have substantial free

reserves, maintained through open market operations, most of the reserve

adjustments may be expected to take place in the money centers and in the

market for Government securities, Mr. Sproul said, and in

these circum

stances and with existing market rates, the present discount rate may be

said to be effective:

it is close enough to market rates to keep banks

on the threshold of borrowing but it encourages them to make most of

their adjustments in the market.

It isn't possible to pin down exactly

the relative costs of borrowing and making adjustments through the market

in all transactions, Mr. Sproul said, but the advantage now seems to be

only slightly on the side of market adjustments.

It was his view that

if the present discount rate is fairly well adjusted to market rates, if

reserve funds are readily available either by reason of open market opera

tions or through the discount window, and if the System had no emphasis

or change of policy it wished to signal or symbolize, it should reserve

this major policy instrument for more effective use at a more appropriate

time.

Mr. Erickson said that banks in the Boston District were reluctant

to borrow and he could see no reason for reducing the discount rate at the

present time.

Mr. Irons did not favor a reduction in the discount rate now and

9/22/54

-21

had not favored the reduction made last April,

His reason for not

favoring a reduction now was the possibility that the differential between

the market rate (i.e.,

the bill rate) and the discount rate might reappear

as was the case when the discount rate was lowered in April.

In his view,

the actual level of the discount rate was not so important as was the

spread between the discount rate and the market.

He said, in

response to

a question from Chairman Martin, that if the discount rate were reduced

to 1 per cent and the bill

rate remained at its present level of just

under 1 per cent, borrowing at the Dallas Bank might be expected to in

crease, but that if the bill rate remained appreciably below the discount

rate, borrowing would probably not increase.

Mr. Leedy could see no purpose to be served by reduction in the

discount rate at this time.

There was no evidence that banks were hesitating

to use the discount facilities because of the possible cost relationship

and he felt that by making a further reduction in the discount rate at this

time the System might be helping to get the level of interest rates down

to a point where it

would not be healthy for the credit situation.

Mr.

Leedy also thought such action might be misinterpreted as indicating con

cern on the part of the System regarding the economic outlook.

Mr. Earhart felt that, while in the past discount rate policy had

not been kept fully in line with open market policy, at the present time

the discount rate was at a sufficiently low level and he would prefer to

reserve any further lowering of that rate for a time when a reduction

might do more good.

-22Mr. C.

S. Young thought that a reduction in the discount rate

at this time would be misinterpreted and he would not now favor taking

action.

Mr. Leach did not think the discount rate should be changed now

to implement an active ease policy, his concept of the policy of active

ease in the bank credit field being a situation where any reasonably eli

gible borrower could go to a commercial bank and readily obtain a loan

at a reasonable rate.

That condition now existed and lowering the discount

rate would not make bank credit more readily available; on the other hand,

if

it

resulted in

other rates moving downward,

this would produce inequities

without being of benefit to the economy.

Mr. Powell could see no immediate reason for lowering the discount

rate, feeling that banks would borrow at existing rates if

they had any

real need for funds.

Mr.

Johns concurred in

the views expressed by Mr. Bryan for about

the same reasons as had been stated by Mr. Bryan.

Mr. Vardaman felt

it

would be bad policy to reduce the discount

rate at the present time since he could see nothing in

which required such a reduction over the entire System.

recent developments

However, he stated

that a reduction in the Atlanta District might possibly be advisable, and

that conditions in

the southern half of the St. Louis District were such

as might require consideration of a reduction in

that District.

The same

might apply to the Dallas District, but he was not sufficiently informed

as to current conditions there.

9/22/54

-23

Mr. Thomas referred to the situation that exists when additional

reserves are needed for short periods of time.

He noted that the dis

count facility was one device for taking care of those temporary needs

without making outright purchases or sales for the System account, and

that another device was the use of the repurchase agreement.

methods to operate smoothly, however, he said it

be not too far above the market rate.

Hence,

For these

was essential that rates

some reduction in the dis

count rate or the repurchase rate might be helpful.

Mr. Robertson said that he was very much in favor of revitalizing

the discount facility as an instrument of monetary policy and that he did

not feel it

to be essential that the discount rate be uniform in all

Federal Reserve districts.

The discussion of this matter closed with the statement by Chairman

Martin that it

would be desirable for members of the Committee and Presi

dents of Federal Reserve Banks who were not currently members of the Com

mittee to continue to study the comments made by Mr.

Bryan regarding the

discount facility and discount rate, and with the understanding that the

Committee's general policy of active ease would be continued along the

lines suggested by Chairman Martin earlier during this meeting.

Messrs.

Sproul and Rouse stated in response to Chairman Martin's

inquiry that they had no suggestions for change in the directive to be

issued by the full Committee to the executive committee concerning open

market operations.

Thereupon, upon motion duly made and

seconded, the following directive to the

executive committee was approved unanimously &

9/22/54

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 ma

turing securities, and letting maturities run off without

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

and prospective economic conditions and the general credit

situation of the country, with a view (a) to relating the

supply of funds in the market to the needs of commerce and

business, (b) to promoting growth and stability in the

economy by actively maintaining a condition of ease in the

money market, (c) to correcting a disorderly situation in

the Government securities market, and (d) to the practical

administration of the account; provided that the aggregate

amount of securities held in the System account (including

commitments for the purchase or sale of securities for 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 direct from the Treasury for the account of

the Federal Reserve Bank of New York (which Bank shall have

discretion, in cases where it seems desirable, to issue par

ticipations to one or more Federal Reserve Banks) of such

amounts of special short-term certificates of indebtedness as

may be necessary from time to time for the temporary accommo

dation of the Treasury, provided that the total amount of

such certificates held at any one time by the Federal Reserve

Banks shall not exceed in the aggregate $2,000,000,000.

Chairman Martin referred to memoranda on bankers'

acceptances

which had been distributed during the spring of this year and which had

been included on the agenda for consideration at this meeting.

gested that,

He sug

for reasons he stated, consideration of these memoranda be

deferred until the next meeting of the full Committee.

Mr. Szymczak suggested that it

Federal Open Market Committee if

would be of assistance to the

the Special Committee on Foreign

9/22/54

-25

Operations of American Banks (Mr. Alfred E. Neal, First Vice President

of the Federal Reserve Bank of Boston, Chairman) be asked to look into

the question of bankers'

acceptances and the suggestions made in the

several memoranda prepared by members of the staff, and there was agree

ment that Mr. Neal be asked to have his committee study the matter, and

that the subject be placed on the agenda for the next meeting of the full

Committee.

Mr. Sproul stated that in view of the fact that a situation might

arise early in

October in connection with the Treasury's financing when

the System would wish to put funds into the market on a temporary basis,

he contemplated proposing at the meeting of the executive committee to be

held immediately following this meeting that that committee authorize the

Federal Reserve Banks to enter into repurchase agreements at a range of

rates of 1-1/4 to 1-1/2 per cent for a temporary period.

This action, he

felt, would support open market policy and would not do damage to the dis

count facility.

The discount facility, he noted, was one under which banks

could obtain a relatively unlimited amount of reserves at a price (with

reluctance on the part of borrowers to remain continuously in debt a

limiting factor); whereas the open market window, including the repurchase

facility, represented a means by which the banking system obtained the

amount of reserves the Committee wanted to give it,

Committee saw fit,

at going market rates.

for as long as the

Mr. Sproul could see no incon

sistency, when policy is one of credit ease, in providing these reserves,

either through open market purchases,

or infrequently and temporarily through

-26

9/22/54

repurchase agreements,

at a rate below the discount rate; and he felt that

such a relationship might be desirable in the course of the next two weeks.

Mr. Robertson stated that he did not agree with this position, and

it was understood that the matter would be considered at the meeting of the

executive committee to be held later today, inasmuch as the executive com

mittee was authorized by the action of the full Committee at its

June 23,

meeting on

1954 to direct the Federal Reserve Banks to enter into repurchase

agreements at such rates or rate ranges as the executive committee might

prescribe,

subject to certain conditions established by the Committee.

Reference was made to a draft of letter which had been prepared at

the Federal Reserve Bank of New York relating to the procedure to be fol

lowed for securing Federal Reserve notes by the pledge of participations in

obligations held in the System Open Market Account,

in the event a Federal

Reserve Bank other than New York were appointed to operate the System Open

Market Account in an emergency.

Copies of the letter from Mr. Tiebout,

Vice President and General Counsel of the Federal Reserve Bank of New York,

and of a draft of letter which might be sent by the Board of Governors to

the individual Federal Reserve Banks had been distributed before this meeting.

In response to a question from Mr. Leedy, Mr. Riefler stated that the draft

of letter had been distributed for information only and that it

to be considered by the Board of Governors and, if

was a matter

the Board so agreed, to

be sent to the individual Federal Reserve Banks for their consideration.

In a discussion of the time for the next meeting of the Federal

Open Market Committee,

it

was tentatively agreed that such meeting would be

9/22/54

-27

held during the period December 6-8, 1954, subject to change if it seemed

desirable to change the meeting to another date.

Mr. Sproul stated that at the next meeting of the Committee he would

like to call up for discussion the actions taken in December 1953 and in

March of this year when it

was voted that transactions of the System Open

Market Account shall be entered into solely for the purpose of providing

or absorbing reserves (except for disorderly markets).

Mr. Sproul said he

thought this represented much too narrow a view of central banking, was mis

leading to the public, and should have the Committee's early consideration.

He did not believe that open market operations could be entered into without

concern for the costs and availability of credit.

This was well stated, he

said, in a recent stimulating memorandum on the discount mechanism which

said that open market "purchases and sales were made in the full knowledge

(of the Open Market Committee) that they would have noticeable effects upon

(a) the volume of member bank borrowing,

market,

(b) the level of rates in

the money

and (c) on the margin between those rates and the discount rate."

Mr. Bryan suggested that Mr. Sproul circulate a memorandum on the

subject between now and the next meeting of the full Committee,

and Chairman

Martin stated that the members of the Committee would be glad to receive

such a memorandum if

Mr. Sproul wished to distribute it.

Thereupon the meeting adjourned.

Secretary