FOMC Minutes
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in Washington on Tuesday, August 2, 1955, at 10:45 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Sproul, Vice Chairman
Balderston
Earhart
Erickson, Alternate for Mr. Leach
Fulton
Irons
Mills
Robertson
Shepardson
Szymczak
Messrs. Johns, Treiber, and C. S. Young,
Alternate Members of the Federal Open
Market Committee
Messrs. Williams, Bryan, and Leedy, Presi
dents of the Federal Reserve Banks of
Philadelphia, Atlanta, and Kansas City,
respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Vest, General Counsel
Mr. Solomon, Assistant General Counsel
Messrs. Daane, Hostetler, Rice, Roelse,
Wheeler, and Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. D. C. Miller, Chief, Government Finance
Section, Division of Research and Statis
tics, Board of Governors
Mr. Marsh, Manager, Securities Department,
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 Commit
tee held on July 12, 1955, were approved.
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 July 12 to 27, 1955, in
clusive, and at this meeting there were distributed copies of a supple
mentary report prepared at the Bank covering operations during the
period July 28 through August 1, 1955.
Copies of these reports have
been placed in the files of the Federal Open Market Committee.
Mr. Rouse commented briefly with regard to the effect on the
money and securities markets of a statement with respect to a possible
increase in the discount rate of 1/2 per cent contained in a Government
securities market weekly news letter which was received by subscribers
on Monday morning.
He said that a similar statement was circulated to
Government securities dealers on Friday in a telephone service which the
writer of the news letter provides and that it
had had quite a disturbing
effect.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period July 12 to
August 1, 1955, inclusive, were approved,
ratified, and confirmed.
At the meeting of the Committee on July 12, 1955, the Secretary
was requested to look into and report on the question whether the authori
zation for repurchase agreements covering Government securities should
run to all Federal Reserve Banks or only to the Federal Reserve Bank of
8/2/55
-3
New York.
A memorandum prepared by Mr. Riefler in
accordance with
this request under date of August 2, 1955, which had been sent to the
members of the Committee,
expressed the view that in practice there
was little likelihood that the authority would be used by the Federal
Reserve Banks other than New York.
Therefore, he recommended that
hereafter the Committee's authorization be only to the New York Bank
and that the authorization be in the form attached to the memorandum.
Mr. Riefler outlined briefly the reasons for his recommenda
tion pointing out that it
at the meeting on July 12,
was understood, on the basis of the discussion
1955, that hereafter the Committee would con
sider at each meeting the extent to which repurchase agreements were to
be authorized and the rate at which such agreements would be entered
into.
At the conclusion of a brief discus
sion, upon motion duly made and seconded,
and by unanimous vote the authorization was
approved as follows with the understanding
agreed upon at the meeting on July 12, 1955,
and suggested by Mr. Earhart at this meeting,
that the authority would be used sparingly
in entering into agreements at rates below
the discount rate:
CONDITIONS FOR REPURCHASE AGREEMENTS
PRESCRIBED BY THE FEDERAL OPEN MARKET COMMITTEE
As Amended, August 2, 1955
The Federal Reserve Bank of New York is hereby authorized
to enter into repurchase agreements with nonbank dealers in
United States Government securities subject to the following
conditions
1.
Such agreements
(a) In no event shall be at a rate below which
ever is the lower of (1) the discount rate
of the Federal Reserve Bank on eligible com
mercial paper, or (2) the average issuing
rate on the most recent issue of three-month
Treasury bills;
(b) Shall be for periods of not to exceed 15
calendar days;
(c)
Shall cover only Government securities ma
turing within 15 months; and
(d) Shall be used as a means of providing the
money market with sufficient Federal Reserve
funds to avoid undue strain on a day-to-day
basis.
2.
Reports of such transactions shall be included in the
weekly report of open market operations which is sent
to the members of the Federal Open Market Committee.
3.
In the event Government securities covered by any
such agreement are not repurchased by the dealer pur
suant to the agreement or a renewal thereof, the se
curities thus acquired by the Federal Reserve Bank of
New York shall be sold in the market or transferred
to the System Open Market Account.
Governor Robertson stated that notwithstanding his doubts about
the use of repurchase agreements--which are well known by other members
of the Committee--he would not oppose the above action if,
in addition
to the understanding referred to above, it was understood that the re
purchase authorization would be used only in necessitous cases.
Chairman Martin called on Mr. Ralph Young who made substantially
the following statement which was based largely on a staff memorandum
sent to the members of the Committee under date of July 29, 1955:
Expectations earlier were that some deceleration of
advance in activity might become evident over the summer
in conformity with average business cycle patterns. The
first big item of today's report is that advance continues
with no clear evidence of deceleration in the economy as
a whole.
The index of industrial production for July, sea
sonally adjusted, is tentatively placed at better than 140,
but not clearly at 141. Advances are indicated to be fairly
general in durable and nondurable goods lines, as well as
in minerals. A number of industries--including metals,
building materials, rubber, and chemicals--now appear to
be producing at near capacity. With business demands in
excess of output, backlog orders have continued to rise,
with steel a noteworthy area of further rise.
The second big item of today's report is that a second
ary upsurge of consumer buying seems to be developing.
Con
sumer buying of autos in July remained at record rates.
Buying of appliances and other goods at department stores
showed remarkable gains from last month and a year ago.
While this buying wave reflects the rapid rise of personal
income over recent months as well as recent wage advances in
major industries, it doubtless also reflects pervasive con
sumer confidence, some taking of capital gains on stock in
vestment, an increased willingness to draw on widely held
liquid asset accumulations, and some consumer expectations of
higher prices later.
Consumer instalment credit expansion has been of key
importance in recent buying levels and probably in the recent
The seasonally adjusted increase in June was about
upsurge.
600 million dollars. The expansion of over 2.5 billion for
Maintenance
the six months ending with June was a new record.
of auto sales in July foretells another large rise in out
Competitive liberalization of terms
standings for this month.
as yet shows no alleviation, although recent supervisory steps
in the banking sector and some industry-generated efforts in
the sales finance sector may work to temper further terms
relaxation in the months ahead.
Business inventory accumulation, which attracted much
With the pick-up in
attention in May, slackened off in June.
consumer buying in July, further inventory rise has probably
been moderate in recent weeks. By the end of June, the
total value of business inventories had risen only 2 per
cent from last autumn.
Activity in construction and real estate markets has
been maintained at close to record levels. With residential
construction showing signs of slackening, non-residential
construction awards have been up a third over a year ago in
June and the first half of July.
Mortgage lending on non-farm real estate has continued
in record volume, although mortgage commitments on residential
properties have been harder to get and mortgage yields have
risen somewhat.
To finance their active participation in this
lending, savings and loan associations owed the Federal Home
Loan Banks over a billion dollars on July 21, up 300 million
for the year.
Thus, the insurance companies have not been
alone in lending in excess of available funds. Over the
week-end, the Federal housing authorities took action to
discontinue 30-year maturity and no downpayment mortgages
on Federal underwritings from yesterday on. Maximum maturi
ties become 25 years, with FHA required downpayments raised
along the line by 2 percentage points and with VA introducing
a minimum downpayment of 2 per cent.
Prices of industrial materials have continued upward in
recent weeks and prices of finished goods show more frequent
rises, but over-all these recent increases have been offset
by declines, partly seasonal, of some farm and food products.
The uptrend of industrial prices is now more general than at
any time during the present upswing in general business.
Further information on the steel price advance shows a bigger
indicated.
This increase has not yet
advance than at first
been fully reflected in prices of finished metal products.
Crop prospects continue to point to a sagging level of farm
prices through the harvest and marketing season.
features strength, with non-farm
The labor market still
employment showing further increases and unemployment showing
change or possibly a modest down drift. The number of
little
industrial areas showing labor surpluses fell to 31 in July
compared with 53 a year ago, and present surplus communities
Over-all productivity gains, which
include few major centers.
were sharp last year, have virtually disappeared in recent
months. The present phase is thus one in which a given per
centage gain in output is associated with about an equal per
This is the third big news item
centage gain in man hours.
salary payments up 6 per cent
and
in this report. With wage
from a year ago, recent wage settlements and negotiations
now in process are expected to give important impulse to
still
further rise.
United States imports have continued to rise while ex
ports have held close to their earlier advanced levels.
Abroad, further production advances characterize most im
portant industrial areas, and reflecting this condition as
well as U. S. prosperity, primary materials prices on world
markets have firmed up further. The boom atmosphere in
Britain has obliged the Government again to strengthen its
measures to stem inflationary trends.
In domestic financial markets, the Treasury's financing
needs have now been provided for until early October.
Private and local government financing demands in the
capital markets, while seasonally light, are substantial
enough, with forward negotiations in process, to indicate
continued high levels of market financing in the months
ahead.
Stock prices, on the basis of very favorable
second quarter earnings reports for most reporting com
panies, rose to new highs late in July. Yesterday, a fairly
orderly technical reaction occurred. Stock market credit
to customers and brokers would appear to have shown little
change on balance over July.
During July at city banks, bank credit showed a large
increase, reflecting especially acquisitions of U. S. securi
ties and some further rise in loans. All banking reports
confirm a continuing strong demand for bank credit. While
the money supply showed little
growth in May and June, there
was again an increase in July. Turnover of demand deposits
in leading centers outside New York in May and June was the
highest in recent years. Thus, recent Federal Reserve policy
has restrained the rise of quantity, but use of money has
responded to general business psychology and activity.
Continuing pressures of demand for credit and smaller
growth of supply were reflected in July in resumed advance
in the general level of market yields, particularly for Gov
ernments and municipals but also for private short-term
market paper and to a less marked extent for long-term
corporates, especially new issues. Yesterday, reflecting
a tight credit and bank reserve situation as well as market
expectations of early Federal Reserve discount action, this
upward movement of yields was further extended.
-8
8/2/55
Mr. Miller, commenting on the member bank reserve situation,
stated that recent and projected reserve changes, as shown on a sheet
distributed during this meeting, present a pattern of increasing tight
ness for the coming two weeks, with free reserves for the week ending
August 10 expected to average around a negative $100 million.
He also
stated that the situation had tightened up during the last few days
largely because of an increase in
Treasury balances to more than $600
million, with the result that the Treasury was considering cancelling
one of its
calls.
He noted that, after the next two weeks,
a somewhat
easier pattern was expected because of the mid-month increase in float
so that during that period there may be a small positive reserve posi
tion, but that thereafter a pattern of increasing tightness was expected
resulting from an outflow of currency over Labor Day followed by some
easing as currency flows back and float expands during mid-September.
At the end of the month free reserves were expected to drop to a
negative $230 million.
These projections, he said, were similar to
those of the Federal Reserve Bank of New York as shown in the supplementary
report referred to above except that after the next two weeks the New
York projection showed a much tighter position.
The difference between
the estimates grew out of the different estimates on the movement of
float and the fact that the Board's estimates showed larger declines in
required reserves.
-9Chairman Martin initiated the discussion of credit policy with
a statement substantially as follows:
I want to say that differences of opinion in the Sys
tem are a good thing as long as we resolve those differ
ences in a friendly spirit and handle them properly.
That
is a sign of a strong and vigorous System and is nothing
to be alarmed about. My experience with differences is that
when they are put on the table and people assume responsi
bility for the decisions made, the differences are not as
large as they seem when they first arise.
Since the meeting of the Committee on July 12 a number
of things have happened which I want to report to the members
of the Committee. First, I want to read from the excellent
statement by Mr. Sproul at the last meeting of the Committee.
I think the meetings of the Federal Open Market Committee
are the place where we should discuss all aspects of System
monetary and credit policy and we are very much indebted to
Mr. Sproul for the manner in which he prepares for these
meetings and the fine way in which he brings his thinking to
bear on our problems. We have some very important decisions
to make. The times when critical decisions have to be made
are relatively few and, while I may exaggerate, I am inclined
to think that the decisions we have to make today are criti
The comment in Mr. Sproul's statement which I
cal ones.
want to read is as follows:
"I see nothing in the immediate situation
which demands that we embarrass the Treasury in
its management of the public debt by further re
strictive credit moves during its July-August fi
We are not at a point where the dan
nancings.
gers of inflationary developments clearly out
weigh all other considerations. The danger sig
nals of inventory accumulation outrunning sales
expansion, upward price movements, production,
material and employment bottlenecks, and excessive
increases in bank credit and the money supply have
not yet flashed red."
This statement opens up a number of points. Now in my opin
ion it would have been better if the discount rate at the Federal
Reserve Banks had been increased prior to the recent Treasury
However, financing
financing operations rather than afterward.
8/2/55
-10-
presents a difficult problem for the Treasury as well as for
us.
What I have just said is hindsight. I don't want any
one to think I am criticizing small points. At the same
time, there have been unfortunate developments in the market.
I want to put the whole sequence of developments out on the
table. A lot of comments have been made and a lot of gossip
has gone around. Whether the market is upset or credit is
tight is all part of the same picture:
(1) On July 20, Paul Heffernan had a story in the New
York Times about credit policy. I received inquiries during
the subsequent week whether the story was authoritative and
where it came from. I refused comment.
(2) On July 21 we had a difficult market situation to
deal with because the Treasury financing was still under way
and the market was jittery. Mr. Riefler came to me that
morning with an indication that our projections might be going
awry and that we would have another period of a tightening
market during a period of Treasury financing. Not wanting
to "butt in" on the management of the System account, I
called Mr. Sproul at the New York Bank. Mr. Tiebout, General
Counsel of the Federal Reserve Bank of New York, was taking
Mr. Sproul's calls and I talked with him about keeping the
reserve position on an even keel while the financing was in
After consulting with Mr. Rouse who was in Buffalo
progress.
with Mr. Sproul, and with the desk, Mr. Tiebout called me back
and reported that the Bank could get bills, that purchases
were being made, and that he thought it would be wise to handle
It was handled well and the situa
the problem in this way.
satisfactorily.
out
tion worked
(3) Friday morning I addressed 100 representatives of
stock exchange firms in New York and was very careful to
avoid any reference to Federal Reserve policy. At the end of
the meeting an individualarose and said:"I don't know why you
are so coy because I understand that the New York Bank has
said that the discount rate would be increased and that re
straint would only be mild." I refused to comment on this.
(4) On Saturday the Sylvia Porter letter came out and
quoted a series of seven points as important forecasts of Fed
eral Reserve policy. I did not know whether the statement was
or was not a misquotation and, while it did not trouble me,
nevertheless it is an important episode in recent developments
and I am putting it out on the table because it concerns all
of us.
-11(5)
On Monday of last week Mr. Fulton called to say
that his directors had been considering the discount rate,
that they were disposed to make an increase and would like
some guidance. I replied that now the Treasury financing
was out of the way I would discuss the matter and give him
what guidance I could.
(6) On Tuesday the Board had a discussion of the prob
lem and decided that it would be wise for me to solicit the
views of the Treasury.
I went to the Treasury and met with
Secretary Humphrey and Mr. Burgess. At my suggestion Mr.
Burns, Chairman of the Council of Economic Advisers, was
also present. I laid before them the facts of the situation
indicating a need for an increase in the discount rate and
also the fact that the market might suffer a serious decline
if the discount rate were advanced, that the Treasury might
be embarrassed and that the System might be accused of wait
ing until the financing was out of the way and then letting
the market drop. I said the Board of Governors had been dis
cussing whether it would be better to increase the discount
rate in two steps or to go to 2-1/4 per cent on one step.
While the Board was inclined to believe that a one-step ac
tion was better, it wanted the judgment of the Treasury. I
was given the unequivocal decision that the Treasury would
prefer that the increase be in one step to 2-1/4 per cent.
I think that at the meeting at the Treasury we covered all of
the dangers inherent in such action, although presumably there
was some question subsequently as to that.
(7) After meeting with the Treasury representatives the
Board discussed the matter further and I called Mr. Sproul
and told him what had occurred. I then called Mr. Fulton and,
as he will testify, I did not attempt to put any pressure on
him. I simply told him what the thinking was here and said the
Board was disposed to move to 2-1/4 per cent in one step. Sub
sequently, on July 27, the directors of the Cleveland Bank came
in with a rate of 2-1/4 per cent and I understand the action
Having received that advice from the Cleveland
was unanimous.
Bank, I felt obliged to telephone the other Presidents and I
talked with every President I could reach. I made no effort
to put pressure on them but informed them as to the thinking
Thereafter,
here and as to the course that was being pursued.
Mr. Young telephoned to say that the directors of the Federal
Reserve Bank of Chicago had agreed on a rate of 2 per cent and
on Monday of this week the Boston Bank advised of action by
their directors to fix a rate of 2 per cent.
(8)
On last Thursday Mr. Burgess called me to say
that he had had a long talk with Mr. Sproul and that there
was some concern whether, if the increase in the discount
rate were in one step, it would be very disruptive to the
market. He wanted to know whether I had weakened in my posi
tion that a one-step increase was desirable. I replied that
I knew the action would be disruptive to the market but that
I had not weakened in my position.
Mr. Burgess said he had
talked with Secretary Humphrey again and assured me that
they thought 2-1/4 per cent was the correct rate. At that
point I went to New York with Mr. Burns to address the Con
sumer Credit Conference. The next evening I received a
telephone call from Mr. Riefler which I will ask him to re
late to you.
(9) Mr. Riefler stated that about 3:50 p.m. on last
Friday afternoon Mr. Sproul called to say that he had tried
to reach Chairman Martin and Vice Chairman Balderston but
had been unable to do so, that a dealer had just reported
that the writer of a leading Government securities market
news letter had said that a responsible Federal Reserve of
ficial had made the statement that classically the discount
rate went down by 1/4 per cent and up by 1/2 per cent, and
that action could be expected in the near future.
The dealer
thought that the statement had had a very disruptive effect
on the market Friday afternoon. Mr. Riefler said he responded
that the observation was not one he had heard before and it
did not sound like an inadvertent leak. He added that about
one hour later on the same Friday Mr. Burgess called to say
that he had tried to reach Chairman Martin and Vice Chairman
Balderston but had been unable to do so. He said that he
was with Messrs. Humphrey, Blyth, and Overby of the Treasury,
that they had been considering whether the rate increase should
be in one step or two, and that they had changed their minds
and now felt that two increases of 1/4 per cent each were
probably better than a single increase of 1/2 per cent, that
they realized that this was a change in position, but that they
had in mind that many institutions which had subscribed for
the 3 per cent bonds recently might regard it as a breach of
faith if the rate were increased to 2-1/4 per cent so soon
afterward. Mr. Burgess asked Mr. Riefler to get in touch with
Chairman Martin and ask him to get in touch with Secretary
Humphrey early on Monday morning.
-13(10) (Chairman Martin continuing.) I called Secretary
Humphrey yesterday morning and went over the situation with
him again. He agreed that he had given us the "go ahead"
on a 2-1/4 per cent rate. I told him I had seen several
dealers coming up from the street on Friday (including Mr.
Craft) and that they said the discussion in the market was
all on the point whether the increase would be 2 per cent
or 2-1/. per cent.
I told Secretary Humphrey that I had not
changed my mind at all and still
favored an increase of 1/2
per cent. He was worried about whether we had thought
through fully the Treasury's responsibility to the people
who had bought long-term bonds. I said I thought it was a
little late to bring that point up, that while I would go
back and discuss the matter with the Board, I thought the
Board was disposed to go to 2-1/4 per cent for the one Bank
that had acted to fix that rate. After discussing the matter
with the Board, I talked to Messrs. Humphrey and Burns again.
As of the moment, Mr. Humphrey is not happy about the picture
but is relying on our judgment. He has some question whether
we should go first to 2 per cent and then to 2-1/4 per cent
but he thinks that we should get to 2-1/4 because he believes
we are in an inflationary situation. However, he is not al
together happy with the prospect of a single increase to 2-1/4
per cent.
That is a background statement for the discussion at
this meeting. If I have made any errors in what I have said
I hope someone will correct me. We have a difficult situa
tion before us. We will always have differences of opinion
on these matters. I would like to point out that my views
would be the same if we had not had the discussions with the
Treasury.
I would like to go back now to Mr. Sproul's statement
which I read earlier. I think personally that all the danger
Inflation is a
signals he mentions are now flashing red.
thief in the night and if we don't act promptly and decisively
we will always be behind.
All of us know that it sometimes
takes a long time for seeds to germinate, but when they flower,
they do so with explosive force. A move such as we had in
General Motors of fifteen points in one day would be disastrous
if it developed over the whole price level, and once such ac
tion has occurred, neither monetary policy nor anything else
could effectively restore the purchasing power of the dollar
without creating such distress as to preclude its usefulness.
8/2/55
It is true we may have a difficult situation in the Gov
ernment securities market. At the same time, banks are no
different from consumer credit lenders who always want "the
other fellow" to restrict credit. With the heaviest de
mand for credit that we have had for a long time the cost
of credit must go up or the groundwork will be laid for
burgeoning difficulties.
We are faced with a wage cost push at a time of vir
tually full employment, consumer and mortgage credit are
"running out of our ears," and while the housing authorities
have stiffened their terms slightly it would have been
better if they had never gotten into the position of over
stimulating the housing market. The new requirement of a
$200 down payment on a $10,000 house is not my idea of a
drastic credit move.
Inventory accumulation is already under way. I don't
believe in intuitive judgments, but we can not always wait
for statistics. A recent revision of earlier statistics tells
us that in the first quarter gross national product was up $5
billion more than we had thought earlier and I think it is
now at an annual rate of $383 billion. That is quite a jump
and it is utterly incomprehensible that in that situation
orders to expand inventories are not increasing. People with
whom I have talked tell me that the reason inventories have
not increased is because sales have been so high. Easy credit
has pushed up sales when easy credit was not necessary. Plant
and equipment expenditures are definitely on the increase.
I doubt that this trend will change because of a drop in the
Government securities market. At the same time, I doubt that
the increase in the discount rate will cause either panic or
catastrophe. We are having panic and catastrophe "thrown at
us" but we are faced with a situation in which we have to act.
It seems to me money and credit have become a stimulating
force at a time when it is not required in the economy. There
are always offsetting factors. Farm prices are declining, but
I don't want the industrial sector of the economy to go "hay
wire" on its prices and get completely out of adjustment.
Farm prices may well be higher before the end of the year,
and if farm prices were up in addition to what we now have,
general prices would be "sky high".
With reference to the directive to be issued to the Fed
eral Reserve Bank of New York, I would suggest that we change
clause (b) in paragraph (1) to read: "to restraining infla
tionary developments in the interest of sustainable economic
growth."
Chairman Martin then called on the Presidents of the three
Federal Reserve Banks whose directors had acted to increase the dis
count rate.
Mr. Fulton's comments were substantially as follows
My directors met on July 14 at which time they discussed
the discount rate. In view of all of the facts that had
been given by Mr. Young in his economic review at the meet
ing on July 12 and which were existent in the fourth Federal
Reserve District, the directors were in favor of an increase
in the discount rate. However, because of the Treasury's
financing operation which was still
in progress I counseled
against any action at that time. As the minutes will show,
at the meeting of the Federal Open Market Committee on July
12 I expressed the view that inflation was already present
in a degree that was not readily discernible except from
the "feel of the situation." Our directors discussed whether
the increase in the discount rate should be in one or two
steps but they were all of the opinion that an increase of
1/2 per cent was desirable in the circumstances.
The directors held a special meeting last Wednesday
primarily to discuss our Pittsburgh building but they dis
cussed the discount rate problem also. They still
felt that
the rate should be increased. Several of the directors had
talked with bankers and industrialists throughout the dis
trict and one banker had expressed the view that if the Fed
eral Reserve increased the rate by less than 1/2 per cent it
would be temporizing with the situation and would ultimately
regret the action. Our directors were unanimous in their
decision that an increase of 1/2 per cent was desirable from
the standpoint of the over-all economy, including the fact
that the demand for credit was so strong that it seemed to
be without limit. Last Tuesday Mr. Blyth, of the Treasury,
was in Cleveland and I had a long talk with him without di
vulging what we were thinking. He said that the Treasury
probably would have to come into the picture for additional
cash financing in September rather than in October because
of the need for funds for farm price support operations and
-16
8/2/55
other purposes and that this would preclude increasing the
discount rae in two steps.
It was his view that whatever
action was taken should be in one step so that the market
could adjust to it.
That all served to fortify the feeling
of our directors that an increase in the discount rate of
1/2 per cent in the appropriate action to take at this time.
Mr. Young stated that at the meeting of his directors last
Thursday at which seven directors were present (he had previously talked
to the two absent directors and obtained their views) the national eco
nomic situation and conditions in the Seventh Federal Reserve Ditrict
were reviewed and that everything pointed in the direction of strong
expansion.
felt
He had talked with two or three large automobile dealers and
that the credit extended on new automobiles, because of the very
easy terms, was second grade in quality when compared with credit extended
on used cars.
He felt
that the resulting situation was a dangerous one
and that immediate action to restrict credit should be taken.
He added
that the directors considered whether action should be an increase of
1/4 per cent or 1/2 per cent and that they discussed an increase of 1/2
per cent first.
Some of the directors had prepared statements which they
read at the directors'
meeting, Mr. Young said, and while they agreed
that inflation was here and that something should be done, no one wanted
to increase the rate by 1/2 per cent.
They then talked about an increase
of 1/4 per cent and voted to approve that.
Mr. Young went on to say that
he asked his directors for authority to call a meeting of the executive
committee to consider a further increase in the rate on the basis that if
8/2/55
-17
other Federal Reserve Banks should increase their rate to 2-1/4 per
cent he felt
the Chicago Bank should make the same change.
that following the
He also said
meeting two of the directors called to question whether
their action should have been an increase of 1/2 per cent and that he
had received a wire
from one of the directors to the effect
after attending this meeting, he (Mr.
that if,
Young) felt the rate should be
2-1/4 per cent, the director would vote for such an increase.
Mr. Erickson stated that at the meeting of his
March 28 he recommended an increase of 1/4 per cent
directors on
in the discount rate
which the directors approved provided some other Federal Reserve Bank
made a similar increase.
The reason for this action was that the direc
tors did not think that the economy of New England was as buoyant as in
other districts and they wanted some other Reserve Bank to act first.
In
April as soon as the Federal Reserve Bank of Kansas City increased its
rate the Boston directors voted an increase of 1/4 per cent.
In May,
Mr. Erickson said, the directors brought up the question of the unsound
ness of consumer credit development and approved a letter to all banks in
the First Federal Reserve District cautioning them about unsound consumer
credit terms.
He went on to say that the directors recently had been
anxious to increase the discount rate but had not done so because of
Treasury financing, but that at the meeting yesterday after reviewing the
situation again and discussing whether the increase should be 1/4 or 1/2
8/2/55
-18
per cent they felt that, in view of what might happen in the Govern
ment securities market if the increase of 1/2 per cent were made in one
step, they would prefer to take the action in two steps and consequently
voted an increase of 1/4 per cent.
Their thought, Mr. Erickson said,
was that after the market had adjusted to that change the rate could
move up to 2-1/4 per cent if it then seemed desirable.
He added that
the directors also expressed the hope that through open market operations
the market would be further tightened.
Chairman Martin then called on Mr. Sproul who, before reading a
prepared statement, made substantially the following comment:
In view of the reference that has been made to getting
everything "out on the table" I don't want to leave any impli
cation that I have anything "under the table." I would like
to refer first to the New York Times story mentioned by the
with finan
Chairman, which followed a press conference I had
The confer
cial reporters of the New York daily newspapers.
ence was an ordinary press conference such as has been held
at the Federal Reserve Bank of New York ever since I have
been there to provide financial reporters with whatver back
ground information we feel we can give them so that they will
and credit matters.
be better able to write about finacial
what
of
letter
market
The second-hand report in the news
went on was based on a general discussion without explicit
was put
or implicit statements concerning certain matters. It
With
in the form of definite statements as to what happened.
reference to the statement on mild restraint, the reporters
had asked how the present policy could be characterized and
said I did not believe in trying to characterize a policy in
one or two words but that it had been characterized at times
as one of mild restraint. Any questions about the discount
rate were answered that I could not and would not say anything
about it.
So far as the telephone conversations are concerned,
Chairman Martin called and told me of his views and the views
8/2/55
-19-
of the Treasury and Mr. Burns.
Subsequently, he called to
me about the action of the Federal Reserve Bank of
tell
Cleveland. Mr. Rouse was away and I had fairly frequent con
versations with Mr. Burgess for whom we were carrying
out
operations and with whom we were discussing the situation
in the market. He referred to the discussions with Chairman
Martin and to the fact that there was concern about the
credit situation and the view that had been expressed that
the rate be increased by 1/2 per cent. I asked ifhim
ade
quate consideration had been given to what that might do to
the capital and Government securities markets. He said
that it had been considered.
I expressed the opinion that
the capital market was under strain and was undergoing an
adjustment and I thought that an increase in discount rates
of 1/2 per cent might have a more serious effect than might
be expected.
He called back the next day and told me that he had
talked with Secretary Humphrey and Chairman Martin and that
of the same opinion but thought that the
they were still
matter should be thoroughly discussed at the meeting of the
Federal Open Market Committee and Mr. Burgess said he hoped
I said that I cer
I would express any views that I had.
tainly would. He called again on Friday to say that Mr. Blyth
of the Treasury had returned to the Treasury, that there had
been further discussions with the Secretary, and that it was
thought that it might be better to move in two steps rather
than one and that the Secretary was going to try to get in
He said he had
touch with Chairman Martin on Monday morning.
called me so that I would know that they at the Treasury had
not set their faces definitely and irrevocably against action
That was the end of my conversa
in two steps instead of one.
tion with Mr. Burgess.
Mr. Sproul's prepared statement was as follows:
There is no need to debate whether or not we have entered
1.
an economic area in which increased monetary restraint on
We have had a substantial and
credit expansion is indicated.
contra-seasonal rise in bank loans during the first half of
the year and we face heavy demands for bank credit during the
second half of the year. We have the possibility that, with
8/2/55
-20-
increased costs pushing upward on industrial prices, the
general price level may break out on the upside.
We have
the possibility that, in these circumstances, speculative in
creases in inventories will take place.
We have the fact
that consumer spending (bolstered by expanding consumer
credit and mortgage credit on relaxed terms) has become high
and saving has become low in relation to current income.
We
know that prospective capital expenditures by business are
slated to rise from earlier high levels.
2.
The principal questions of judgment which remain are
(a)
Whether the weight of evidence is now indica
tive of desirable growth but with speculative and
credit excesses in some sectors, or whether it is in
dicative of inflationary forces which have or are
about to get out of hand?
(b) Whether continued steady and probably increas
ing pressure, as the season advances, is the best
contribution which monetary policy can make to the
maintenance of growth and the containment of exces
sive use of credit and of speculation, or whether it
is time to take action which will signal a more seri
ous economic situation and more drastic measures to
deal with it?
There are also subsidiary questions
3.
(a)
As to whether the Treasury's financing needs
during the remainder of the calender year are likely
to hamper us in the later use of credit measures,
and particularly of the discount rate, so that it
might be better to act now in anticipation of pos
sible later need.
(b) As to whether a policy of continued and probably
increasing pressure will interfere more seriously
with Treaury financing than would anticipatory ac
tion now followed by a period of stability, at least
so far as the discount rate is concerned.
the Treasury's fi
Taking up the subsidiary questions first,
4.
nancing difficulties are fundamentally due to its need to come to
the market for refundings, and more particularly for cash, in a
period of rising interest rates. Nothing we can do, short of
abandoning whatever restrictive credit policy is required by eco
nomic conditions can change this situation, or can keep Treasury
issues at par for very long after they begin to be traded in the
-21market. But having said that, we have before us the recent
example of the Treasury's ability successfully to raise cash
and conduct an exchange offering in the face of an already
tightened reserve situation and of widespread expectation of
a rise in interest rates, including the discount rate.
I
see no need to try to anticipate now what may be the situa
tion in late September, in order to be out of the way of the
Treasury's September-October financing, which in any case
will presumably take the form of a tax anticipation certifi
cate not requiring much if any assistance from us. And, cer
tainly, we can give no assurance to the Treasury, nor anyone
else, that whatever action we take now will foreclose the
possibility of
further
action later if the economic situation
seems to require it.
5.
Taking up the main question, I recognize the strength and
the risks of the present situation, but I do not
whether
know
it is getting out of hand. I do not know whether we have
reached the limits of our productive capacity in terms of
men, materials and equipment.
On these matters we have opin
ions rather than conclusive evidence. In such circumstances,
I would deal with the situation with firmness in the light of
what we can see now and immediately ahead, but I would not try
to project myself too far into the future.
What we can see
here and now suggests
(a)
An open market policy which will develop condi
tions tight enough to bring about a further increase
in member bank borrowing and in interest rates. Inso
far as free reserves are still
used as a guide, they
would ordinarily be on the minus side of zero, but
they would be less a guide than fluctuations in member
bank borrowing and in interest rates.
(b) An immediate increase in the discount rate from
1-3/4 to 2 per cent.
(c) Retention of the power to use repurchase agreements,
within the authorized range of rates.
What are the risks of an increase in the discount rate to
6.
2-1/4 per cent instead of 2 per cent, if we want to increase the
pressure of credit restraint in any case? It is only a 1/4 of
1 per cent difference. Well, as I see it they are
The risk of giving expression to a judgment about
(a)
a future economic situation which we do not yet have to
I also see here, again, an attempt to place on
make.
credit policy too much of the burden of fears about
-22future economic developments - with the shadows
they may cast on 1956. If the situation is as
critical as some suggest, credit policy can't do
the whole job, and shouldn't try to do it.
It may
be, for example, that fiscal policy will have to be
called in, and housing policy will have to be over
hauled further. Because these things won't or can't
be done, doesn't mean that credit policy should try
to do more than it is capable of doing effectively.
(b) The risk of bringing about an erosion instead
of an adjustment in the capital markets.
The capi
tal markets have been adjusting to what we have al
ready done, and will adjust gradually further, to
advantage, as the pressure of demand for credit meets
a reluctant supply. Too sharp an adjustment, how
ever, can arouse fears and create strains which
would go beyond what we need or desire. We cannot
dismiss altogether what happened in 1953, even though
conditions then and now are quite different in many
ways. An increase in the discount rate by 1/2 of
1 per cent, after a long period of 1/4 per cent
changes, and coming when capital markets are already
uncertain and beginning to sho strain, would be a
I know that it is argued that the most
risky move.
likely outcome of a substantial increase in the
discount rate now would be to relieve further un
certainty and to put a floor under the market, and
reaction proved too severe
that even if the initial
we could offset it by open market operations to
correct a disorderly market. For my part, I doubt
if any one knows what an increase of 1/2 of 1 per
cent would do to the capital market. I think it is
Nor can we "get it over
an unnecessary risk to take.
with", and put a floor under the market because this
may well be more than a one-shot problem - we may
have to raise the rate again, whatever is done now.
And finally, to raise the rate by 1/2 of 1 per cent
now with the assumption that we would offset the ef
fect of the increase in rate by open market opera
tions would suggest that we did not know what we were
doing or did not mean what we said when we raised the
place.
rate in the first
That is the third risk, the risk of getting the
(c)
discount rate and open market operations out of tandem.
-23
8/2/55
With the smaller increase in the discount rate we
shall have open market operations and the discount
rate running together in harness,
and the discount
rate keeping more or less continuously in touch
7.
with open market rates. With the larger increase,
we run greater risk of having to take counter action
through open market operations, if the business and
credit situation does not perform according to our
projections, or if the immediate results of our ac
tion are more drastic than we intended.
To sum up, these things I have mentioned might not happen,
but we don't need to run the risk of their happening in order
to have monetary policy do its
flationary developments.
share in
trying to prevent in
I think it is a time for steady
pressure, not for jumpy moves. We haven't the same domestic
situation and we have no balance of payments problem forcing
us into immediate and dramatic action, such as has been taken
by the United Kingdom and other countries where substantial in
creases in discount rates have been made, and where monetary
policy was probably asked to bear too great a share of the bur
den of econonic stability. We can afford the better course, at
this stage, of gradual moves fitted to the economic situation
as it
emerges.
Chairman Martin then called on Mr. Bryan who read the following
statement:
The problem of judging appropriate monetary policy is
difficult because of the unusually complex economic situation,
complex, of course, not from the statistical but from the
Monetary policy is also es
standpoint of cyclical analysis.
pecially difficult at this time because we have denied to our
selves a current knowledge of the economic effects of previous
monetary action, and, as if that were not enough, the diffi
culties are compounded by the prospective presence in the mar
ket of the Treasury, a large and necessitous borrower.
is ebul
situation
1. We can all agree that the economic
lient and presses on the comfortable capacity of the economy.
It can thus be concluded that the apparent presenttrends in
the economy simply extend themselves to over-reach comfortable
capacity and that, accordingly, an inflation is inevitable in
the absence of additional immediate, and substantial monetary
restraint.
8/2/55
-24-
I would agree that sophisticated economic arguments
can be advanced to support the opinion that an extension of
recent trends is likely and that, in the absence of sub
stantial monetary restraint, a price-level inflation, with
its accompanying distortions of the economy, is also likely.
So, with regard to the economic situation, I content myself
with two caveats, one in the field of business cycle rela
tionships and one in the field of American economic history.
We should not forget, I think, that a boom extending
toward the upper reaches of comfortable capacity automatically
produces powerful countervailing forces. These forces have
to do with the declining profitability of marginal employ
ment and the declining profitability of new real investment
in the face of a stable or relatively stable level of prices
for finished products.
It would be pointless to pursue such
considerations in detail, but it would also be unwise, I be
lieve, to forget that such forces exist and that they exert
a powerful braking action on an unlimited and continuous ex
tension of an economic boom.
We should also at least remind ourselves of American
economic history. At this time, when we are fearing infla
tion, we can take some comfort from the fact that the American
economy in its now long history has not shown a general im
portant price-level inflation except in war and as the direct
aftermath and consequence of war.
Our
experience has been
that the productive capacity of American
the
economy, its com
petitive nature, and the countervailing forces already alluded
to, have made the American economic system exceptionally dif
ficult to inflate in peacetime.
In making these brief comments, I do so merely in order
to indicate that our inflationary problems may not be as great
or as intractable as we may be inclined to fear.
2.
It seems to me that we can take comfort from another
factor. The monetary situation is such that general inflation
is hardly going to get off the ground unless we, by decision
subsequent to this time, deliberately decide that we will
supply the funds necessary for an inflationary price-level
movement in the economy. There exist, by and large, no free
The money supply as against
reserves in the banking system.
last year represents a modest increase. The increase of bank
ing reserves as against last year is likewise quite modest.
Even if these factors should be countervailed by an excited
increase in the turnover of the money supply, we have the power
to dampen down the result with no untoward delay.
8/2/55
-25-
All this is to me quite comforting because it has a
definite meaning.
If the economic system endeavors to over
run its comfortable capacity it will not be supplied by
large, existing, and idle reserve funds.
It will automat
ically run against an extremely limited reserve situation,
and we will be quite able to make decisions from time to time
regarding the degree and extent to which we supply additional
reserve funds or subtract from them.
That is, we can make
such decisions provided we preserve a monetary climate in
which we can act of our own volition and do not create a
climate in which we must act involuntarily.
3.
Let me now turn to what I consider the major awkward
ness in our consideration of further immediate monetary re
straint. In so doing, it is necessary to recite some recent
monetary history, not for the sake of history but particularly
to illustrate what I regard as the grave danger of getting
ourselves into precisely the same box in the future in which
we now find ourselves uncomfortably confined.
It will be recalled that some months ago we raised our
discount rate to 1.75 per cent. We thus adopted a stated
short-term rate of 1.75 per cent, which I believe could only
indicate our belief that the economic system required the re
straint of an increased cost for the borrowing and using of
money and an increased reward for money savings. That was a
correct decision, but at the time of the May financing we ap
parently became a little tremulous and fearful of the effects
consequent to the course we had adopted, and entered into
token purchases in the open market.
Thereafter, flushed with
a heavy corporate and other demand for bills, the open market
rate drifted down into the 1.50ies, the 1.40ies, the 1.30ies
and actually reached a point more than 40 basis points below
During nearly the whole period after th
the discount rate.
increase in the discount rate, the corresponding open market
rate was permitted by us to be substantially lower than the
The net effect of this situation was to prevent
discount rate.
the arbitrage of yields that would have made the cost of bor
The net effect, in
rowing and using money more expensive.
restraint that we
economic
the
to
prevent
short, was largely
had presumably thought desirable.
Only in the last few weeks, with the Treasury increasing
offerings and with a variety of factors causing corporate
bill
rate
purchasers to need funds, has the bill
and other bill
gotten into touch with the System's discount rate.
Only in
-26the last few weeks, therefore, have the arbitrage effects
of the previous increase in the System's discount rate begun
to occur. Only in the past few weeks have we been able to
see what the money market and yield curve effects of our
previous action are in kind and degree; but we still
do not
know the degree of economic restraint that we have accomplished.
We do not know that vitally important fact because of the lag
in transferring money rate causes to real economic effects.
We thus, it seems to me, have gotten ourselves into an
embarrassing position. Our embarrassment arises from the
necessity of considering further restraint at a time when we
might have been currently pretty well informed regarding the
restraint involved in our preceding action but are actually
uninformed in major aspects because we did not quite mean
what we said when we previously raised the discount rate.
As I say, I do not recite all this for the sake of his
tory but as a caution. We should caution ourselves, I be
lieve, about getting into the same box again, and we should
caution ourselves against an over-zealous action a: a time
when we are not, to be sure, flying entirely blind but when
the visibility is not good.
4.
In the past few weeks, when the arbitrage of a pre
ceding action has been allowed to come into being, we have
been able to see something of the direction and extent of the
money effects (not yet the consequent real economic effects)
that we have produced. However, we can at least know the di
rection of theeconomic effects that our actions have created.
us a story.
The money markets have been trying to tell
That story seems to me not to have been a story read in fine
print and whispered to us by innuendo. Instead, it seems to
me to have been a story written in headline letters and cried
I will not attempt to state in
out to us in a loud voice.
saying, but two major items
voice
has
been
what
the
detail
are newsworthy.
a.
The government market in nearly every sector of its
maturity schedule has been exceedingly weak, and there has
We
been a major adjustment of yields and capital values.
should not overlook the magnitude of the yield changes that
have occured, I believe, and should not be at all sanguine
about the theory that this merely represents an anticipatory
discount of further monetary restraint. An examination of
yield curves over the past few months does not settle the
question, but it does not seem to me to support such a view.
8/2/55
-27-
The existing adjustment of yields is more likely, in my
opinion, to represent a normal adjustment as the short open
market rate has conformed itself more nearly to the System's
discount rate, and further increases in short rates are
likely, I judge, to involve further upward arbitrage of
yields and downward arbitrage of capital values throughout
the whole range of maturity and quality schedules.
b.
The municipal market has been dreadfully sick.
Unless we pump funds into the banking system in tremendous
quantity, which I think we will not do voluntarily at near
term, it would seem reasonable to suppose that that market
is going to be ill for a good long time and have a slow re
cuperation.
There are going to be many offerings; undigested
inventories of municipal securities are great; and most im
portant of all, the banking system, which has for years pro
vided a major market for the short end of the municipal ma
turity strip, is now loaded.
These developments tell
us a story.
They tell
us that
the banks of the country, almost without exception, have
substantial losses in their investment portfolios not
alone in governments, but in municipals and corporates.
They have a substantial erosion of their capital accounts.
That fact in turn tells us another story. Whereas, a few
weeks ago, the banks of the country could peddle securities
with, for the most part, minor losses and plus accommodate even
marginal borrowings, we know that now their net security sales
will generally be accompanied by losses that are not so minor
and in many instances are major. Whereas, a few weeks ago,
the banks were really not restrained in accommodating marginal
borrowings, now the restraint has been increased.
I cannot pretend to say how great the restraining ef
fect on the banks will be in quantity, but I think it can
safely be asserted that the effects of the past few weeks
have established a new and restraining influence that was
not present theretofore, and I would personally judge that
that restraining influence is far more powerful than we may
Unfortunately, it will hardly show
be inclined to imagine.
up in our statistics or in any contraction of loans for some
little
time in the future.
The markets for both municipals and government securities
us that there will be a slower
have also been trying to tell
but nonetheless considerable revulsion in the mortgage markets
For many classes of mortgage lenders,
as commitments expire.
in consideration of taxes, administrative costs, and the risk
-28aspects of some mortgage loans, the municipal markets give
a higher net yield at shorter term, with equal or greater
safety, than the mortgage market.
Indeed, for some mort
gage lenders the government market is also attractive.
We
thus know that the restraint already begun in the mortgage
lending field is going to be powerfully increased and aug
mented by investment opportunity relationships now clearly
evident, and, in a few months, as mortgage lenders run out
of existing commitments, these money market and investment
shifts will begin to show up in real economic effects.
Other things of the sort I have noted can be cited. I
will not even allude to what I diagnose as the metastasized
cancers eating at the equity markets, markets still
in the
apparent flush of good health. What I have said, though, is
enough to indicate the awkwardness of our position if we
adopt large further restraint withouta fairly good knowledge,
which we do not have, of the economic effects we have already,
though very recently, set in motion.
5. Now, if we raise the discount rate we shall be con
fronted with the problem that has tripped us so badly in the
past.
That is, if we adopt a new and higher System rate,
we will be saying, in effect, that the cost and use of money
should be more expensive, and that the reward for money sav
ing should be increased. We will then be confrontod with
the problem of whether we mean what we say or whether we
are merely making a polite observation. If
wemean what
we say, then we will have to permit the short open market
rate to conform itself to the System discount rate, or force
it to do so, and thus effect an arbitrage of interest costs
along the whole maturity and quality schedule.
Before we take any long step in that direction, we
ought to have in mind, I think, not merely the hazard of
acting in the absence of knowledge of the economic effects
that we have thus far set in process, but we should also,
lest we be startled by developents, have in mind the magni
tude of the price changes that can occur as a result of cer
tain upward shifts of yields at this time, for if we become
surprised and startled, we may respond erratically.
Let us then consider the possibilities of 25 more basis
points in the short rate, bring the short rate in the neigh
borhood of 2 per cent. No one would, of course, contend
that a quarter of a per cent increase in the short market
-29would make an exactly corresponding increase in yields in
the long market.
If it did, then, the new forty-year 3's
would sell in the neighborhood of 90. Still,
a man would
be considered reasonably conservative if he judged that a
25 basis point upward change in the short rate could easily
produce a change in the longest rate in the range of 8 to
12 basis points.
That puts the new forty-year 3's in the
neighborhood of 95.
The basis point adjustment to the short
rate will be greater naturally, as we go down the maturity
curve.
A corresponding adjustment in the 2-1/2's of 67-72
could put them in the neighborhood of 90.
Neither figure
allows much, if anything, for the overrun typical of free
markets.
There would be further repercussions in the munic
ipal
and corporate markets.
It seems to me, accordingly, that we should have in
mind some price adjustment magnitudes in the approximate
order of those I have indicated, because, once we get them
in mind, we begin to understand, and only by having them in
mind can we at all understand, the power and force of the
financial and economic effects that we can set in train.
For my part, I have little
doubt that capital losses in the
magnitude I suggest--losses that I deem entirely likely from
even a 25 basis point increase in the short rate in the face
of a large money demand--would, if they occurred suddenly
and dramatically, set in motion an economic restraint of
the first
class.
6.
The general direction of the argument that I am try
ing to make is now clear.
I am arguing that we are in an awkward position because
the restraining capital losses in the financial markets are
now considerable and can be expected to have a considerable
real economic effect, but those losses have been created so
recently that we are not in a position reliably to appraise
That situation has occurred
their real economic effects.
because we have used the discount rate as an admonition,
not until very recent weeks, as an effective rate in the
We are thus flying through heavy clouds in consider
market.
ing further restraining measures .
The obvious danger is that we may, with further measures,
find ourselves developing a cumulative economic restraint
The danger that I would here em
that overshoots the mark.
may adopt a new and higher dis
we
that
is
however,
phasize,
count rate, clearly indicating to the financial and economic
8/2/55
-30
worlds that an arbitrage of yields throughout the rate and
maturity schedule should occur.
Then, when the arbitraging
process begins, we may easily find ourselves startled by
the magnitude of the downward capital adjustments in the in
vestment market and promptly come in with open market pur
chases in order to prevent the effective open market rate
from conforming to our discount rate and thus deny that we
meant what we said when we raised the discount rate.
In
short, I am afraid that what we will do is to say that we
want an arbitrage of yields and capital values in order to
provide economic restraint and then, when they begin, deny
the arbitrage of yields and capital values by establishing
an effective open market rate substantially below the dis
count rate.
Such a monetary maneuver in my judgment is nearly al
ways inept and has had unfortunate consequences at certain
periods of the System's history. It is particularly dangerous
To my mind it has two clear dangers
at the present time.
that we should by no means underestimate.
a.
One danger of importance is that, if we raise the
discount rate in the face of a booming economic situation
and then, in the open market, countermand the effects, we
can find outselves, say in October, in the same position we
are in today.
That is, we will be under the necessity of
increase in the discount rate, as we
knowl
without
had
it
ifrate
be operating
thus
been an effective rate. We willagain
without a knowledge of the lagged, real economic effets in
volved in past action, and our second case will be worse
The ultimate conseqence of such procedure
than our first.
seems to me clear. At some point we shoot well beyond the
degree of restraint that we want.
The second and perhaps even more important danger of
b.
such a procedure at this time is that the market, taking us
at our word with regard to the increase of discount rates,
will logically assume that we intend with reasonable prompt
ness to conform the short open market rate to that statement
of policy. We then get substantial upward adjustments of
yields and downward adjustments of capital values. Remember
ing the tendency of free markets to overrun their mark, we
can easily get a situation of actual or incipient disorder.
considering a further
action
are now, and considering such further
edge of the effects of the previous discount
8/2/55
-31-
At that point we are almost certain to be frightened and
practically compelled to perform a rescue operation with
sole regard to the investment markets, not the underlying
economic situation. That rescue operation in the presence
of a raised discount rate is almost certain to involve put
ting reserves into the market in magnitudes far greater
than would have been required if we had not given our dis
count rate signal and far greater than the economic situa
tion, either on a long-run or seasonal basis, would re
motely justify. The danger, then, is precisely this: that
we maneuver ourselves into a position, in a momentary ex
cess of enthusiasm, in which we will have to feed the very
inflation that we are intending to restrain.
7.
Having emphasized the awkwardness of our position
at the present time and the hazards of giving a discount rate
signal, it is fair to ask how I would proceed. Well, one
thing is clear, I would not at the moment increase the dis
count rate to 2-1/4%.
If we do so increase the rate, I take
it as a practical certainty that we do not intend at all
promptly to conform the short rate to it. I would judge
that so large a short rate increase would produce yield
and capital value arbitrage effects so great that we, our
selves, would not find them tolerable as a policy result
at this time and that would not, in any event, be a prac
tical maneuver in the field, let us say, of political
economy.
So I would assume that a 2-1/4% rate would automatically
mean that we would promptly establish an open market rate
substantially below the discount rate. We would thus, by
putting the discount rate so far above the effective open
market rate, deny to ourselves the safety valve feature of
the discount rate in the event adverse market developments
tended to create an undesired degree of financial stringency.
We would thus also be likely to find ourselves, as I have
repeatedly said, later on considering further action without
It is my judg
the degree of knowledge that we should have.
ment, then, that the maximum increase of the discount rate
that we should consider is to 2%.
However, I would consider this a time in which further
restraint could be approached with the least danger by doing
four things. I would thus be inclined to:
a. Use as our chief present guide to policy, not free
reserves, not total reserves, but money rates, relying upon
-32
8/2/55
our knowledge that increases in those rates, particularly
as they are transmitted into the long markets, will have a
pervasive and powerful, though lagged, effect in the real
economy.
b. Preserve the present discount rate for its safety
valve feature, relying on our knowledge that, as banks are
pressed for reserves, they will have to come in
and borrow
and, in their present illiquid position, such borrowing will
act as a further important restraining measure.
c.
To experiment with further rate increases by let
ting the bill
rate float above the discount rate, carefully
observing the effects in the government and other fixed in
come investment markets and stopping out the rate increase
whenever the downturn of capital values appears to have
mounting disorder or the existence of two-way markets seems
seriously impaired by the withholding of investment funds
in anticipation of lower prices.
d. To stop out, in any event, the increase in short
rates in sufficient time to provide the Treasury with sta
bility for its financings.
It is my judgment that proceeding in this way we could
effect further powerful restraint, remain consistent in the
handling of our instruments, and minimize the hazards that,
to my mind, appear so great. If the economic boom is as
powerful as we think it is, representing an unsustainable
rate of economic expansion, and if the financial markets are
able to take the restraint without erratic disorder, which
would represent an unwanted degree of financial stringency,
then, by floating the effective short rate above the dis
count rate, we shall be able to raise the discount rate as
the visibility improves and as such a move seems needed.
At the end of his written statement Mr. Bryan said that he re
alized that the program outlined in his statement might not be followed
and that the Atlanta Bank would increase its
rate promptly to either 2
or 2-1/4 per cent as determined following the discussion at this meeting.
Chairman Martin then asked for the comments of Mr. Balderston
who was the first
to suggest an increase in the rate to 2-1/4 per cent.
-33Mr. Balderston's statement was substantially as follows:
It seems to me that we have to face the fact that many
bankers will not like a 2-1/4 per cent rate. Some stand to
suffer substantial portfolio losses, perhaps significant in
relation to capital.
Contrary to the line of thinking that
Mr. Bryan has presented, I find myself greatly disturbed by
Dr. Goldenweiser's remarks about the failure of the Board
to act soon enough in 1919 because of Treasury financing.
Also, the drastic action of 1928 and 1929 failed to control
a movement that had gotten out of hand. Mr. Young's report
reinforces my concern that the inflationary forces now loose
will be difficult for monetary policy alone to stem. It
will
take more than monetary action. It will take fiscal action,
and prudent decisions by businessmen as to borrowing and by
banks as to lending. Loans are on a high plateau. Indus
trial
production is up 14 per cent over the year, with the
nondurable component up 13 per cent, and the durable goods
component up 16 per cent.
Capacity levels have been reached
in metals, building materials, rubber and chemicals.
Then
there is the impact of personal incomes, which are up 6 per
cent over a year ago, on retail sales. Automobile sales are
up two-fifths over a year ago and the sales of major appli
ances at department stores are up three-fifths. It is clear
that retail sales have recently been increasing at an increas
ing rate.
Not only the current peak figures but increases in
the rate of improvement should be taken into account.
Plans of entrepreneurs to expand capacity, and the growth
of consumer credit and its misuse to the point where dealers
are selling terms instead of automobiles are evidences of
Increases in heay construction, consumer credit,
ebullience.
the upsurge in retail sales, and flurries in the stock mar
ket may indicate that general credit has been too easy. I
feel that a greater degree of ease has existed throughout
This leads me to
this year than the Committee contemplated.
believe that action should be taken at once, and that a 1/2
per cent increase in the discount rate is indicated despite
the fact that it may create disorderly conditions in the Gov
Since the price of inaction for the
ernment security market.
economy as a whole seems greater than the price of disturbing
the bond market and bank portfolios, we should act decisively
and not temporize with the situation.
8/2/55
-34
Inasmuch as Mr. Williams had to leave the meeting early,
Chairman Martin called on him next.
He said that there had been a
number of extended staff discussions of the discount rate and discus
sions at two meetings of the directors of the Philadelphia Bank in
which the staff participated.
He added that his board of directors
took a cautious attitude in respect to change in the discount rate
in the present circumstances as indicated by the fact that the Phila
delphia Bank had earlier this spring lagged behind other Banks in
changing the discount rate; the businessmen on the board of directors
were questioning the present rate of expansion and felt that the economy
was coming to a period in which it could easily level out.
on the experience of one of his directors
were conditions in
He commented
which indicated that there
the automobile industry which raised a question
whether the present rate of production would be maintained. He went on
to say that some smaller manufacturing concerns which are noted for
quality work have not been making profits because of the squeeze on costs.
There were other things, he said, which indicated that the economy is not
likely to continue to expand at its
present rate.
He related an experi
ence at the Bank recently in which the department stores came to the
Reserve Bank and sought its offices in bringing together the credit rating
bureaus.
Four groups were interested including the commercial banks,
large department stores, discount houses, and small loan companies.
survey had been made which indicated that in
a number of instances
A
8/2/55
-35
consumer credit had been granted beyond any relationship of the abil
ity of the customer to repay in a reasonable time.
The group was
attempting to establish in Philadelphia and throughout the State re
gional credit rating bureaus.
All of these experiences, Mr. Williams
said, caused the directors to be concerned, and, while there was no
question that they feel some restraining action is necessary, they are
fearful of the effect of a rate increase of as much as 1/2 per cent.
They believe that it might be too harsh and that an increase in two steps
would be better. However, he thought that there was also no question in
his directors' minds but that the action taken should be a System action
and that, if the decision is to increase the rate by 1/2 per cent, his
directors would feel that because of the
fluidity of the money market
the Philadelphia Bank should go along.
Mr. Earhart, who also had to leave the meeting early, stated that
his directors would meet tomorrow morning, that he knew from early discus
sions that the directors would be prepared to increase the rate, and
that the only question would be how much.
felt,
The San Francisco directors
he said, that the System had not been asserting sufficient re
straint in the earlier part of the year but they had withheld any action
on the discount rate because of the timing of Treasury financing.
Mr.
Earhart said that, notwithstanding the fact that some of his directors
might prefer an increase in the rate to 2-1/4 per cent, it was his own
-36
8/2/55
judgment that it would be preferable to increase the rate to 2 per cent
for reasons which had been mentioned at this meeting.
He believed it
was important that open market operations conform closely to discount
rate policy; that is
that market rates should be closer to the discount
rate than had been the case in the past. While he would like to have
an increase in the discount rate when there was a substantial amount of
borrowing so that the increase would have more than a psychological ef
fect, the volume of discounts in the Twelfth District had been nominal
up to the present time.
He thought it was possible, if the market
tightened as it had during the past week, that there might be more dis
counting.
In the circumstances his preference was to go to the 2 per
cent rate.
Mr. Irons had no question that there is great strength in the
economy but he did not feel that the situation called for severe action.
It was not a question in his mind of continuing growth but of avoiding
speculative developments that would lead to unsustainable growth.
He
also felt that System policy should be pointing toward increasing re
straint.
The question of the discount rate, he said, was not one of in
action but rather whether the increase should be to 2 or 2-1/4 per cent.
His appraisal of the economy and the situation in
the capital markets
called for a 2 per cent action now with the understanding that the short
term rate (i.e., the longest Treasury bill rate) would be allowed to move
8/2/55
-37
up, if desirable, through the 2 per cent rate and in any event closer
to the discount rate.
The Committee could observe the reaction to that
situation and the banks could determine rather quickly whether a second
increase in the rate was justified--perhaps within a month or six weeks.
Before the end of the year, if inflationary pressures develop further
and persist, possibly even a third increase might be necessary.
It was
his view that the situation was such that the System should maintain
steady and, if necessary, increasing pressure on the market and on bank
reserves but should not take action that would cause a shock or a sharp
down turn.
He stated that the matter had been discussed at the last two
meetings of the Dallas directors and that if two or three Reserve Banks
increased their rate to 2-1/4 per cent, because of the fluidity of the
money market, he would recommend that hisBank go to that rate notwith
standing his preference for an increase to 2 per cent.
Mr. Leedy did not feel as complacent about the situation as Mr.
Irons.
He had not felt complacent about the economy since the System
changed the direction of its policy last December.
Since that time, he
said, the System had undertaken to apply a little restraint, increasingly
perhaps, but apparently without too much in the way of results.
After
reading Mr. Young's review of the economic situation and listening to the
discussion at this meeting, Mr. Leedy felt that if the figures are to be
believed, the country is in a very serious economic situation inflation
wise and so far as the credit picture is
concerned.
In
his judgment
the
-38
8/2/55
increase in the discount rate in April had not created a "ripple."
An
increase of 1/4 per cent at this time would not create a "ripple."
It
was his view that the market is
therefore, it
already discounting such a change and,
would be necessary to increase the rate more than that.
He thought the time had come that the System should give an indication of
its
concern about the credit situation and one way that could be done
would be to increase the rate by 1/2 per cent.
without some risk as to its
That could not be done
effects on the market, but in his opinion
the System could never take action that would be effective without taking
some risks.
He referred to Mr. Sproul's view that some monetary action
was required and expressed the opinion that if an increase in the dis
count rate was to be used for that purpose the increase would have to be
more than the minimum increase that had been approved in the past.
In
view of the over-all economic situation nd the very real threat of in
flation as presented at this meeting, his view was that rather vigorous
action was required at this time.
Mr. Johns commented that there was no disposition in the Eighth
District to deny the strength that exists in the economy.
However, there
were sections and people in the Eighth District who would question the
existence of any inflation, and he saw no likelihood of an increase in
agricultural prices but rather a continuation of the downtrend through
this year.
Notwithstanding these reservations,
his Bank was inclined to
8/2/55
-39.
believe that the situation calls for continuously increasing pressure
without any dramatic or theatrical move.
The discount rate problem,
he said, was discussed thoroughly at the meeting of his directors on
July 14, particularly because of the custom of his board to eliminate
its
August meeting.
It
was understood, he said, that in all probability
before another meeting was held an increase in the discount rate would
be given serious consideration and the executive committee was authorized
to take whatever action was necessary.
On the basis of the information
obtained from Chairman Martin over the telephone, Mr. Johns had requested
a meeting of his executive committee on Friday morning of last week at
which time the committee recognized the need for continuing pressure but
was of the opinion that it would be a mistake at this time to increase
the discount rate to 2-1/4 per cent in one step although it
would be glad
after this meeting of the Open Market Committee to vote for a 2 per cent
rate.
Mr. Johns agreed that the last increase in the discount rate had
had little effect but he concurred in the view that had been expressed
by others that the System is
increase,
rate.
and he felt
However,
if
just now beginning to see the effects of that
that greater pressure was possible with the present
the disposition of the other Banks was to go to 2-1/4
per cent his directors would fix that rate at the St. Louis Bank.
Turning to the System's fundamental responsibility for supplying
and withdrawing reserves from the market and the volume of reserves
8/2/55
-40
necessary to sustain the economy without inflationary tendencies and
how this may be related to an increase in the discount rate, Mr. Mills
referred to the fact that the System was faced at the moment with a
tight money market--a market that has been made tight by System actionsand a situation in which the System has indicated by a declared policy
and by inference that additional reserves would be added during the
approaching season in amounts,
in the discretion of the System, which
would sustain a high level economy.
at a crossroads where there is
He also said that the System is
now
a really tight market and an economy that
needs tightening and a signal of danger in the form of an increase in
the discount rate which was a psychological signal rather than an action
that would produce a further tightening.
It
appeared to him that the
Committee should determine at this meeting what the mechanism would be
to complement an increase in the discount rate in a manner that would re
affirm the System's previously declared intention and at the same time
indicate beyond
any question that in the judgment of the System the
economy should be restrained.
He pointed out that within the last week
$108 million had been put into the market in the form of repurchase
agreements which was withdrawn when the agreements expired yesterday,
that the forecast was that there would be deficiencies in
the present week and in
succeeding weeks,
reserves in
and that the Committee should
look rather closely at the total supply of reserves,
and the possibility
8/2/55
-41
that excess reserves at country banks have not become available to the
central money market through the medium of Federal funds.
The tenor
of his thinking was that the Committee should give serious consideration,
as a means of reaffirming its
intention and at the same time relieving
pressure on the money market, to at least replacing the reserves that had
been withdrawn through the expiration this week of repurchase agreements.
He felt
that that would relieve the position of dealers and enable them
to pick up their purchases of this week's offering of Treasury bills.
At the same time, he said, it
a little
would allow the New York money market banks
leeway to purchase bills and thereby take some pressure off the
market but only that pressure that could be reaffirmed through natural
factors over a short space of time if
that if
desirable to do so.
He suggested
simultaneously with an announcement of an increase of the dis
count rate, which in his judgment should be 2-1/4 per cent, the System
could reaffirm its
intention to provide additional reserves, it
would be
making a declaration of combined policy to the investment and financial
community which would be unmistakable and would allay any fear of a
steadily drifting downward of prices in the securities markets.
His
opinion was that the replacement of reserves that had been lost to the
market by the maturity of the repurchase agreements should be the minimum
amount of reserves that should be supplied and that, for the purpose of
giving confidence,
direct purchases of bills should be the means of sup
plying such additional reserves as judgment might dictate.
-42
8/2/55
The meeting then recessed for luncheon and reconvened at 1:45
p.m. with the same attendance as at the morning session except that
Messrs. Williams and Miller were not present.
Chairman Martin suggested that consideration be given to the
suggestion which he had made at the morning session with respect to a
change in the language of the Committee's directive to the Federal Re
serve Bank of New York.
After a brief discussion it
was agreed that the
changed language should be incorporated in the new directive to be issued
at this meeting.
In a discussion of the suggestion made by Mr. Mills before the
luncheon recess, Mr. Szymczak commented that reserves put into the market
affect bank lending and the price of credit and the extent of the effect
depended on the amount of reserves supplied.
in
the New York money market there is
When reserves are supplied
no assurance that they will stay
there or for what purpose they will be used.
He interpreted Mr. Bryan's
statement to mean that if the Federal Reserve should put reserves into
the market at this point, in
effect it
would be putting the discount
rate up and keeping the short-term market rate down.
He said he realized
that the System may be faced with a disorderly market in which case it
might be forced to correct the disorderly condition by purchasing securi
ties contrary to current credit policy.
To make certain, however, that
we do not go in both directions at the same time, an early decision on
-43what is
a disorderly market and on the manner in which we shall pur
chase the securities and the amount of purchases considered essential,
is
vital lest we undo what we shall have done by an increased discount
rate.
He also said that any such securities should be sold as promptly
as possible.
He questioned the desirability of a statement to the ef
fect that the discount rate would be increased but that the System was
going to supply reserves to the extent necessary and he felt that such
a statement would be confusing and would possibly be misconstrued.
Chairman Martin asked Mr.
gestion and in response to Mr.
Rouse for his views on Mr. Mills'
sug
Rouse's request Mr. Mills stated his pro
posal as follows:
We are in a position in the central money markets where
a case can be made that, under almost any consideration, we
should immediately or very shortly supply additional reserves
to the market. We believe that the economic situation suggests
a higher discount rate as being in line width that situation
and the changes in interest rates. We have a tacit commitment
to the financial community to provide reserves in amounts suf
ficient in our judgment to sustain the economy. If we raise
the discount rate sharply and at the same time ignore the fact
that the money market is temporarily starved for funds, and,
speaking solely in terms of the money market and its relation
ship to the structure of the market fo: Government securities,
we may very well be giving the impression that we are engaged
in a policy of severe credit restraint and are reenforcing
emphasis on that restraint by not supplying reserves in accord
ance with what the financial community regards as being a com
mitment. In my mind, there is a great distinction between
the discount rate and the supplying or withdrawal of reserves
and I can't see that there would be any contradiction in policy
if we supply reserves in at least the amount necessary to re
place the funds removed this week by the expiration of the
repurchase agreements.
-44
8/2/55
Mr. Rouse expressed the opinion that the reserve situation
over the next two or three weeks would not suggest any injection of
reserves into the market and that the only reason for such action would
be to make clear at the time the discount rate was raised that the Sys
tem had not forgotten the market.
Mr. Mills raised the question whether there were sufficient
serves in
the money market to carry it
re
over this week in the light of the
commitment that the dealers have to pick up this week's offering of bills.
He also inquired whether there were not good grounds for giving a tem
porary assist to the market to give a minimum of reassurance and confi
dence until the reaction to the increase in the discount rate could be
ascertained and until market prices of Government securities and the
whole range of corporate and municipal bond prices could move in
adjust
ment to the discount rate.
Mr. Rouse stated that when the increase in the discount rate is
announced there will be a mark-down of security prices to levels which
the dealers think appropriate.
Should the Committee intervene and buy
bills, the price at which these purchases were made would be taken a
the rate that the Committee was establishing in the short-term money mar
ket.
He added that, in the light of the discussions in recent weeks and
at this meeting,
it
was his judgment that on the basis of the possible
8/2/55
-45
reserve position during the next two weeks there would not be occasion
to put reserves into the market.
Mr. Mills asked if there had been a sufficient test in a period
of investment unsettlement, and also what situation the Committee will
meet when the weekly average of free reserves declines.
In his opinion,
that question was particularly important when measured against the total
supply of excess reserves, the larger portion of which is
banks and does not find its
in
the country
way into the money market except over a
period of time.
Mr. Rouse referred to the reserve projections contained in the
supplementary report of open market operations prepared by the Federal
Reserve Bank of New York which estimated average negative free reserves
for the current week of $85 million and for the week ending August 10
of $150 million.
Following a discussion of the possible. level of bill
the discount rate is
increased to 2 per cent and if
it
is
rates if
increased to
2-1/4 per cent, Mr. Earhart stated that he was strongly of the view that
open market operations and discount policy should be consistent and that
the policy relating to both should be the
same underlying policy.
That
was part of the reason why he did not want to move the discount rate up
too far too fast.
He thought it
would not be consistent for the System
to use the discount rate for psychological purposes and then keep money
-46
8/2/55
rates down through open market policy.
Such action, he said, would con
fuse the dealers and the general public.
Mr. Robertson stated that there was agreement on the part of
everyone that action to tighten the market was called for and that he
would suggest that the discount rate be laid aside for the moment and
that open market policy to be followed during the next three weeks be de
termined.
It
would be his suggestion, he said, that no reserves be put
into the market unless the bill
rate exceeded something like 2 per cent
(in the event the discount rate were raised to 2 per cent) which would
mean that the Federal Reserve would not put funds into the market but
leave it
to the member banks to go to the discount window unless the
need for reserves was so great as to drive the bill
cent.
rate above 2 per
In the event of a disorderly market, he said, the Committee could
always step in.
Mr. Sproul questioned whether the Committee should fix a rate
on bills which would determine whether open market operations should be
undertaken.
He thought that with the existing demand for credit and a
discount rate of 2 per cent, the bill
rate might properly go above 2 per
cent.
Mr. Robertson said he did not mean that the Committee would have
to put reserves in the market if
that it
the rate went above 2 per cent but rather
would be reluctant to supply reserves and that a guide would be
8/2/55
-47
whether the bill
rate went up.
An increase above 2 per cent would not
necessarily mean that the System would supply reserves.
In a discussion of this point, Mr. Mills stated that the Commit
tee did not know what unusual situation might arise that would find the
market stripped of reserves.
The impact of that situation would fall on
the dealers who might find it
difficult and certainly expensive to posi
tion themselves and carry through a market situation which the Committee
would wish to foster through the dealers'
efforts.
If
the Manager of
the Account, he said, had a clear prohibition that he could not
reserves,
supply
then the only course open would be to poll the members of the
Committee to get a reversal of that prohibition with a possible loss of
time in correcting a worsening situation in the market.
Mr.
Robertson did not feel that the Committee
operations but should supply a guide.
tion were such as to require it,
should prohibit
It was his view that if the situa
the manager would arrange for repurchase
agreements or the outright purchase of bills, but the 2 per cent rate
would be a guide indicative of the sense of this meeting.
Mr. Sproul stated that the action already taken by the Committee
at this meeting gave the New York Bank authority to enter into repurchase
agreements which might be the only authority it
would need to meet a
temporary situation in the market during the next three weeks.
It would
be necessary, he said, to look at the reserve situation, member bank
-48
8/2/55
borrowings, and the action of money rates, and that it was the desire
of the Committee as he sensed it to have increasing pressure on the
market but to observe the effects of that pressure on the available
supply of reserves and act accordingly.
With expectations based on the
projections presented at this meeting possibly nothing would need to be
done in the open market within the next two or three weeks.
Mr. Bryan stated that he understood that repurchase agreements
might do the job and that Mr. Robertson's comments were to the effect
that if the discount rate is raised it should be made an effective rate
as soon as possible.
Mr. Sproul added that the bill rate could go to
the discount rate or where it would.
Mr. Bryan commented that this point bothered him, that the last
time the System had a 2 per cent rate the market rate went up to 2.41,
that he felt that if
the discount rate is fixed at 2 per cent the market
should be in some relation to that rate and it would not seem proper to
allow the market rate to get out of touch with the discount rate.
other words,
he felt
In
the System should not increase the discount rate to
2 per cent and then allow the effective open market rate to get as far
out of line as would be indicated, for illustration, by a rate of 2.41
or 1.70.
Chairman Martin then asked if
any other change should be made in
the general directive to be issued by the Committee to the Federal Reserve
-49Bank of New York.
Mr.
Rouse stated that he saw no need for any further
change and that the amounts contained in the existing directive were
appropriate.
Thereupon, upon motion duly made and
seconded, the Committee voted unanimously
to direct the Federal Reserve Bank of New
York until otherwise directed by the Com
mittee:
(1)
To make such purchases, sales, or exchanges (in
cluding replacement of maturing securities, and allowing
maturities to run off without replacement) for the System
Open Market Account in the open market or, in the case of
maturing securities, by direct exchange with the Treasury,
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 re
straining inflationary developments in the interest of sus
tainable economic growth, and (c) to the practical administra
tion 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 certif
icates of indebtedness purchased from time to time for the
temporary accommodation of the Treasury, shall not be in
creased or decreased by more than $750 million;
(2)
To purchase direct from the Treasury for the account
of the Federal Reserve Bank of New York (with discretion, in
cases where it seems desirable, to issue participatons to one
or more Federal Reserve Banks) such amounts of special short
from
term certificates of indebtedness as may be necessary
time to time for the temporary accommodation of the Treasury;
provided that the total amount of such certificates held at
any one time by the Federal Reserve Banks shall not inexceed
the aggregate $500 million;
To sell direct to the Treasury from the System ac
(3)
count for gold certificates such amounts of Treasury securities
maturing within one year as may be necessary from time to time
for the accommodation of the Treasury; provided that the total
amount of such securities so sold shall not exceed in the ag
gregate $500 million face amount, and such sales shall be made
as nearly as may be practicable at the prices currently quoted
in the open market.
-50
8/2/55
Chairman Martin stated that he had received two letters from
Congressman Patman, one inquiring about the role of short selling in
the United States Government securities market and the other raising
several questions about the Federal funds market.
He also said that
the reply to the latter inquiry was being sent to Mr. Patman today and
that a draft of the reply to the other letter had been distributed by
Mr. Riefler at this meeting.
He also said that it would be appreciated
if the Presidents would study the draft and advise Mr. Riefler of any
suggested changes that they might have, so that the reply could be sent
within the next day or two.
It was understood that the suggested
procedure would be followed and that copies
of the two replies as transmitted to Mr.
Patman would be sent to the Presidents of
all the Federal Reserve Banks.
In response to an inquiry by Mr. Bryan, Chairman Martin stated
that following a meeting this afternoon of himself and Messrs. Sproul
and Balderston with representatives of the Treasury, the Board would
consider the action which it
would take with respect to an increase in
the discount rate and would advise the Reserve Banks of the decision
reached.
Mr. Bryan stated that as soon as his executive committee learned
of the Board's decision it would act on an increase in the rate at the
Atlanta Bank.
It
was agreed that the next meeting of the Federal Open
Committee should be held on August 23, 1955.
Thereupon the meeting adjourned.
Secretary
Market
Cite this document
Federal Reserve (1955, August 1). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19550802
@misc{wtfs_fomc_minutes_19550802,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1955},
month = {Aug},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19550802},
note = {Retrieved via When the Fed Speaks corpus}
}