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 Wash
ington on Wednesday, September l4, 1955, at 10:45 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr,
Mr.
Sproul, Vice Chairman
Balderston
Earhart
Fulton
Irons
Leach
Mills
Robertson
Shepardson
Szymczak
Vardaman
Mr. Powell, Alternate Member of the Federal Open
Market Committee
Mr. Williams, President, Federal Reserve Bank of
Philadelphia
Mr. Riefler, Secretary
Mr. Rouse, Manager, System Open Market Account
Messrs. Daane, Rice, Roelse, Wheeler, and Young,
Associate Economists
Mr. Sherman, Assistant Secretary, Board of
Governors
Mr. Koch, Assistant Director, Division of
Research and Statistics, Board of Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Gaines, Securities Department, Federal Re
serve Bank of New York
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meetings
of the Federal Open Market Committee held on
August 2 and August 23, 1955, were approved.
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9/14/55
Before this meeting there had been sent to the members of the
Committee copies of a report prepared at the Federal Reserve Bank of
New York covering open market operations during the period August 23
September 7, 1955, and at this meeting there was distributed a supple
mental report covering commitments executed September 8-13,
1955.
Copies
of both reports have been placed in the files of the Federal Open Market
Committee.
In commenting on the reports, Mr. Rouse stated that most of the
activity in open market operations since the preceding meeting had taken
place during the past few days.
The high-light of the period, he said,
was that the account had gotten through the Labor Day period with the use
of only repurchase agreements,
this period having turned out to be much
easier than had been contemplated.
The problem during the past few days
had been one of a tendency for reserves to appear with the result tha
sales of securities had been made from the System account, both through
runoff of maturing bills and outright sales in the market and to fill
foreign orders,
in the aggregate amount of $186,300,000.
In addition,
repurchase agreements made last Thursday would mature today.
While there
would be a substantial pull against reserves and reserve positions of banks
today and tomorrow,
there would be outward payments by the Treasury and
Mr. Rouse thought that free reserves might return to around the zero level
for a day or two.
next week.
However,
a sharp reversal was anticipated the first of
Taking the period since the last meeting as a whole, Mr. Rouse
felt that operations had been reasonably successful in accomplishing the
objectives indicated by the Committee.
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-3
In response to a question from Mr. Vardaman
as to the tone of the
market, Mr. Rouse made the further statement that the general attitude
seemed to be that the market was becoming accustomed to negative free re
serves.
Very little
"growling" had been reported to the account management.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the transactions in the System open
market account during the period
August 23-September 13, 1955, inclu
sive, were approved, ratified, and
confirmed.
Mr. Young then made a statement on the current economic situation
concerning which a staff memorandum had been sent to the members of the
Committee under date of September 9, 1955.
Mr. Young's statement was sub
stantially as follows:
Currently available data suggest the possibility that
the economy has entered a phase of decelerating advance.
More
irregularity in output trends is beginning to be evident, pro
ductivity gains in manufacturing and mining some months ago
ceased to be a general phenomenon, manufacturing employment in
durable lines has for several months been maintained on an over
time basis, output in several important industries is close to
capacity potentials, the labor market has reached a fairly gen
eral state of tightness, and restrictive monetary developments,
with higher interest rates, have been operating with mounting
pressure to brake credit expansion.
Despite the prevailing high level of aggregate supply at
close to full employment, a condition of demand pressure is still
The considerable
a feature of markets for industrial products.
of a more wide
talk
much
with
occurring,
advances
of
price
number
spread price lifting to come, is presenting a scene perhaps best
described as "prosperity inflation." The over-all stability of
wholesale prices, such as we have been having, has reflected the
Lower farm
offsetting movement of industrial and farm prices.
extending
prices, especially for meats, seem likely this fall,
this appearance of stability for average wholesale prices.
As to the specifics of the situation--industrial production
for August is estimated to show only a small rise from July.
-4Automobile output, seasonally adjusted, was steady, and output
of other consumer durables was up. Steel, machinery and equip
ment production, and output of construction materials all rose.
Flood damage in New England reduced output of fabricated copper.
In nondurable goods lines, output of apparel, rubber, and leather
products was off, Mining output showed little change over July.
The order backlog in manufacturing has continued gradually to
work upward through July and, from trade reports, apparently
also in August.
Business inventories, as estimated from data much less ade
quate than one would wish for, showed a further moderate increase
in July, the latest month for which information is available, At
the end of July, inventories stood 3 per cent above the low reached
at the end of last year. Meanwhile, sales had risen 6 per cent.
Since industrial prices rose 3 per cent over this period, some
part of the inventory rise has been a value rather than physical
increase. A volatile aspect of the present inventory position is
that with all of the talk of price increases going around, indus
trial buyers are tempted to stretch their discretionary ordering
latitude to the limit.
Automobile sales in August strengthened from July on both
the new and used car side. Stocks of new cars were reduced over
the month and further reduction is expected this month. Used car
stocks showed little change. Other consumer hard goods markets
were strong in August, although less strong than in July. Output
of household durables ran more than a fifth above a year ago, With
continuing high retail sales of automobiles and other consumer
durables, further instalment credit expansion at close to the $500
million July rate may be assumed to have reenforced consumer demand
based on income.
Retail sales as a whole for August, including
sales of both nondurables and durables, are estimated to have held
at advanced July rate, about 9 per cent over a year earlier.
Activity in construction markets in August was about at the
July level, just under spring levels. Contract awards continued
to run well above a year ago. Housing starts in August were con
traseasonally higher and at 123 thousand units again reached a
seasonally adjusted annual rate of 1.3 million units. The rate
for August of last year was 1.2 million units. This revival in
housing starts confirms information from builders that the stock
of unsold houses has been running low. In the mortgage market,
commitment money is reported to continue tight but a close-to
being written under outstand
record volume of mortgages is still
ing commitments.
Reflecting high and rising product demands and the consider
able tax and labor cost incentives prevailing, the business plant
and equipment expenditure plans most recently reported manifest a
decidedly optimistic tone.
Third quarter expenditures, ac
cording to reports, should equal the 1953 peak level and
fourth quarter expenditures should exceed that level.
In
vestment plans of business generally seem in process of up
ward revision, so that fall columns of business news will
feature the announcement of new expansion programs by many
companies.
In commodity markets, demands for industrial and con
struction materials are very strong and supplies, particularly
of metals, on the tight side. Price trends in these markets
look upward. With higher material and wage costs, prices of
many industrial products have been advanced. Farm prices,
after fresh declines through much of the summer, leveled off
about mid-August.
Reflecting late season drought in the corn
belt, corn prices have firmed a bit and prices of eggs and
dairy products have risen seasonally.
Total employment has now reached record levels. Employ
ment in nonagricultural establishments, after seasonal allow
ance, remains about stable at the high July level, somewhat
short of the mid-1953 peak. The work week at factories aver
aged 40.8 hours in August. With average hourly earnings about
steady over July, weekly earnings reached a new peak.
In the capital markets, partly reflecting tightening credit
conditions and interest level adjustments, new flotations have
been in reduced volume.
Common stock prices have moved into new
high ground, mainly on a cash investment basis.
The preliminary
report from the Stock Exchange indicates a small decline in cus
tomers' debit balances at member firms for the month of August.
Security loans to customers at city banks to carry other than
U. S. Governments also declined.
Business loans, consumer loans, and mortgage loans at banks
have continued to increase, the former sharply. Security loans
Banks met their need for
and agricultural loans have declined.
loan funds by liquidating U. S. Governments, in fact, liquida
tions were more than enough. Altogether banking developments
point to a slight decline, on a seasonally adjusted basis, in
the currency and demand deposit holdings of individuals and
business. Turnover of demand deposits at centers outside New
York has continued at the high level of recent months.
The recently effected advance in market interest rates was
rapid, and current market levels approximate those reached in
the early spring of 1953.
In the early spring of 1953, the
advance in market interest rates contributed to market uncer
tainty. Reflecting a better understanding of flexible monetary
policy as well as greater confidence in the strength of under
lying economic forces, the recent advance in rate levels has
unsettling effect on market psychology,
had little
-6Abroad, production has continued to rise in industrial
countries. Resource utilization in Western Europe has reached
an intensive degree, with aggregate demand pressing fairly hard
against available supply, thus giving rise to various inflation
ary symptoms. Inflationary pressures have been most acute and
persistent in Britain and weakness in the sterling position has
continued. There are signs, but by no means clear signs, that
the Government's financial measures of correction are gradually
taking hold.
Following a brief discussion of Mr. Young's report, Mr. Sproul
called for comments with respect to open market operations.
Mr. Leach noted that the report furnished by the Federal Reserve
Bank of New York projected free reserves during the week ending September
21 averaging about $58 million negative, whereas projections prepared at
the Board's offices indicated negative free reserves of about $259 million
for the period, and Mr. Rouse commented briefly on the reasons for the
difference.
Mr. Leach went on to say that he felt
to be one of gradually increasing restraint.
policy should continue
He recalled that at the pre
ceding meeting he expressed the hope that a large part of the needs for
reserves in coming weeks would be met through the discount window.
This
had happened and discounts for the System had risen to around one billion
This amount seemed about right under existing conditions but he
dollars.
would not be unhappy if
or so.
If
discounts should increase by another $100 million
additional reserves were needed late in September and during
October, as estimates indicated, they should be provided through open
market purchases.
Mr. Leach said that he would not favor another increase
in the discount rate at the present time but he thought further gradual
increase in the degree of restraint was desirable and would result from
actions already taken by the System.
9/14/55
-7
Mr. Earhart said that the effects of a tight market were evident
on the Pacific Coast.
There was solicitation from the New York area of
participation by Pacific Coast banks in
longer-term loans as well as so
licitation for Federal funds and call loans.
There had also been some
indication that banks which formerly held Commodity Credit Corporation
paper did not care to continue to hold it
since the discount rate had
been at 2-1/4
per cent, which was the net yield to the banks on Commodity
Credit paper.
Banks indicated that they were screening loans more care
fully than earlier.
Mr. Earhart felt that the Committee should at least
maintain and preferably increase slightly the pressure it
had been exer
cising through open market operations.
Mr. Irons said that increasing pressure was noticeable among re
serve city banks in the Dallas District, but that country banks were not
under pressure.
were strong.
As to the economic picture,
conditions in
the Dallas area
Mr. Irons felt that the situation called for maintenance of
steady and gradually increasing pressure and at this stage he thought this
should come preferably through market pressure rather than through a fur
ther increase in the discount rate.
Mr.
However,
Szymczak felt that the present policy should be continued.
on the basis of the projections of free reserves,
it
might be
necessary toward the end of September to use repurchase agreements and
perhaps to make moderate outright purchase of bills.
Mr.
Balderston said that he had been impressed with the fact that
the central banks in Europe which he had visited recently were watching
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9/14/55
the moves of the Federal Reserve System in connection with monetary
policy with great care.
With respect to present policy, Mr.
Balderston
suggested that the Committee should maintain a steady situation during
the immediate future.
in terms of a bill
He would like to see a target or goal expressed
rate of from 2.10 to 2.15
combined with negative free
reserves ranging from $300 to $400 million.
Mr.
Powell said that in
the Minneapolis area the results of the
agricultural price declines were being felt more than he judged to
bethe
case in other areas and he described the various measures which reflected
that situation.
He also noted that while borrowings by city banks in
the
Ninth District had been reduced recently, borrowings by country banks were
somewhat higher.
His view was that national credit policy should go along
about as at present, putting pressure on the economy.
However, he did not
feel that the credit situation in the Ninth District was contributing much
to the boom and he presently was in
a rather passive frame of mind on credit
policy.
Mr. Williams commented on recent changes in
the Philadelphia District.
bank credit figures for
He said that the attitude of the directors of
the Philadelphia Reserve Bank was that a further increase in
the discount
rate should be deferred, reflecting some feeling of concern as to any action
that might cause further disturbance to the level of money rates.
Mr. Fulton described economic conditions in the Cleveland District
generally as active with further plant and equipment expansion projected.
Demand for loans was active but the liquidity position of banks had been
9/14/55
-9
impaired and, while banks did not feel they could decline to make loans
for proper purposes to established customers, there was evident a feel
ing of tightness.
On the other hand, Mr. Fulton said that there was an
inflationary spirit throughout the entire district, including agricul
tural areas,
and his view was that the Committee should lean toward
tightness rather than to compromise its
thing now being done.
If
anything,
present policy or to relax any
a little
more tightness would seem
to be called for.
Mr. Shepardson said that the situation called for continuing
firm pressure.
He liked the proposal Mr.
Balderston had made as to a
target which included both rates and free reserves.
He was inclined to
think that in the last week or so the degree of tightness in the market
had not been as great as the Committee had had in mind at its
August 23,
meeting on
and he would favor continuing firm pressure during the next
few weeks.
Mr. Robertson said that the degree of restraint the Committee had
been maintaining had been wholesome but that he felt
been doing "too little
too late".
the Committee had
The recent restraint had been exercised
on the same basis that the earlier policy of ease was exercised, that is,
all the errors were being made on the side of ease rather than tightness.
Too much attention was being given to the volume of free reserves and not
enough to money rates which, in
his opinion, would provide an effective
indication of the Committee's objectives.
Mr. Robertson said that he
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9/14/55
favored increasing the degree of restraint, that we were in
a boom
economy, that he felt the ebullience was greater than had been brought
out in
the economic review and in
other comments this morning, and that
he would like to see Committee policy point toward a bill rate above the
2.15 figure mentioned by Mr.
the discount rate.
Balderston--at least up to and perhaps above
He would hope that the System might be in a position
to raise the discount rate further although he doubted this could be done
prior to the Treasury's October financing.
In sum, he hoped the Committee
today would adopt a policy of greater restraint than was indicated at the
preceding meeting of the Committee and that it
would look for evidence of
this increase in restraint in the money rate structure.
Mr. Mills said that he shared the general tone of the views ex
pressed that the direction of System policy should be toward restraint
and rising pressure of restraint.
He had a question, however, growing out
of Mr. Rouse's opening statement, as to whether the Committee might be too
aggressive in
some of its
actions.
It
had already taken a series of actions
withdrawing reserves from the market and reducing the liquidity of banks.
If the Treasury's operations were now to result in an abrupt depletion in
the supply of reserves,
a "kink" could develop in the market.
If
a "kink"
resulted from stringency in the situation, he hoped the Committee would be
prepared to meet the situation with whatever assistance might seem appro
priate under the particular circumstances.
He referred to the Treasury's
financing operations for October, stating that some additional reserves
would be necessary during that period if
the financing costs were to be
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9/14/55
kept within reason.
As to "moving too fast" and then having to correct
the situation just as sharply, Mr. Mills felt that it would be prefer
able for the Comittee to shade its operations so that it
would not move
too aggressively toward reducing reserves with the consequence of having
to correct that situation sharply.
He recalled that during the fall of
1954 there was a release in November of pentup emotion that expressed it
self immediately in the stock market and this was followed by a change in
the general business climate.
Mr. Mills felt
that there was the possibility
of a similar recurrence growing out of the Labor Day holiday period.
There
had been rising activity in the stock market during the last few days which
might gain momentum, and, if
this developed, it
might be reflected in in
creased credit use and might also be reflected in further enthusiasm and
lack of caution in planning by the business community.
If
the Committee
were confronted with such a situation, he would agree with the proposal
for greater restraint expressed by Mr. Robertson although for a slightly
different reason.
crease in
He felt
the System should not rule out a further in
the discount rate--such an increase would be as much a signal of
caution to the public as a reflection of a rising cost of money to the busi
ness community.
On the other hand,
ing operation coming in October,
he agreed that, with the Treasury financ
an increase in the discount rate during the
period immediately ahead would be confusing.
if
Mr. Mills went on to say that
the tone of the discussion thus far at this meeting was to be reflected
in positive action during the remainder of this month, there would be a
further distinct reduction in
the supply of reserves and an increase in
9/14/55
-12
money rates.
Such an increase in money rates might produce a very diffi
cult pricing problem for the Treasury in connection with its October financ
ing.
Mr. Rouse commented that presumably the Treasury would make its
offering for new money around October 3 or 4, which would be about the time
of the next meeting of the Committee,
and that payment would be called for
around October 17.
Mr, Vardaman was of the opinion that there had been considerable
leveling off in the situation and said that he did not observe the exu
berance that he thought he felt a few weeks ago.
The continuing pressure
which the System had been exercising had been producing good results.
He
would not like to see additional tightening during the next two weeks, not
only because of the Treasury's financing but because the System should per
mit actions already taken to have their effect.
meeting in October would indicate it
It
might be that the first
was time to increase the discount rate
again or to take other actions which would prevent too much exuberance to
ward the end of the year.
However,
unfilled orders had not built up as had
been anticipated and the inventory situation had not developed as might have
been feared.
Mr.
Vardaman felt
credit policy should continue about as at
present, that pressure should not be increased, but that the Committee
should be in
a standby position and if
ferred to should occur, it
a stringency such as Mr. Mills re
should be prepared to call a special meeting to
take care of the situation.
Mr.
Sproul then made a statement substantially as follows
9/14/55
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1.
The Committee's usual able review of recent developments
in the business and credit situation has underlined the great
strength in the general economy and the further evidence of up
ward pressures on prices as the economy presses closer to the full
utilization of its productive resources, while pointing out some
deceleration in the rate of expansion. At the same time there
does not appear to me to be sufficient evidence of imminent and
severe inflation, and speculative excesses, to justify further
and more vigorous action in the field of credit policy.
The con
tinued advance in production and employment has been based largely
on strong consumer demand and high levels of capital investment.
The dangers of a price-cost spiral developing, accompanied by in
ventory speculation, must be balanced against the attractive goal
of continued and orderly growth in the economy at high levels of
production and employment.
And the dangers of excesses in consumer
credit, or mortgage credit, must be balanced against our own ability
to reach these areas effectively, by general credit controls, with
out running equal or greater risks of restricting credit unduly in
other areas.
2.
The ideal role of bank credit is to meet the real needs of
this economy of high level production and employment, without con
tributing to inflationary developments as competing demands for raw
materials and finished products tend to press against available sup
plies.
By and large, bank credit has been filling this role. While
business loans of reporting member banks have continued their upward
movement during the past several weeks, the total volume of loans
changed--as loans have increased the
and investments has been little
banks have sold investments to nonbank investors. This has been the
pattern pretty much throughout the year. As a consequence the money
supply of the country declined in absolute amount during the first
seven months of the year about in line with the experience of recent
preceding years, and an increase in the velocity of use of money has
been necessary to keep the money factor roughly in line with expand
ing economic activity.
3. Without claiming too much for credit policy, I think the
banking statistics are impressive evidence of the constructive in
fluence of Federal Reserve actions during this period of expansion.
A gradual lessening of reserve availability, emphasized by increases
in the cost of reserves, has kept bank credit more or less in line
with economic needs, without throttling business growth and without
throwing the capital markets into disorder. This has been true even
as we stepped up the pressure in recent weeks, allowing seasonal de
mands for credit to snow up in increased borrowing by member banks
at the Reserve Banks, and raising discount rates twice within a short
I think it is now time for a breather--not relaxing but not
period.
intensifying restraint--until we have more evidence of the probable
9/14/55
-14-
course of the economy during the last quarter of the year and
of the consequences of actions we have already taken.
4. Fortunately, if that is the right word, this period
of stabilization would coincide with a period of Treasury fi
nancing when, in any case, our secondary responsibility for
the success of debt management would suggest a period of sta
bility. During the period September 15 to October 15 the
Treasury will be in the process of preparing for, offering,
and receiving payment for about $2.5 billion of new money securi
ties. Again fortunately, however, the borrowing will be of a
character--short term tax anticipation obligations--which does
not require much sustained conditioning of the market before or
after sale.
The period during which our freedom of action will
be somewhat curtailed should be relatively short.
5. During this period, and I would expect following it
also, our sights should be shifted from free reserve targets to
member bank borrowing and the entire structure of interest rates.
Member bank borrowing has reached as high as $1 billion recently
and borrowing of this general magnitude, for the present, would
maintain the pressure we have put on the banks allowing for the
usual intra-monthly variations due to movements of float and
other more or less ordinary market factors.
The capital markets
have behaved well so far, avoiding those exaggerated expectations
of a restrictive credit policy which can set off a spiralling and
disorderly movement of yields and prices. This is the reward, I
think, of gradual rather than aggressive pressure. Aggressive
pressure is usually only justified in the face of more serious in
flationary developments than we have yet encountered and should
be reserved for meeting such developments.
6.
The open market policy which this brief analysis suggests
is to try to continue the present degree of actual pressure, which
should further permeate the banking system and the money and capi
tal markets the longer it is maintained, while allowing the Treas
ury to work out its immediate financing problem in as favorable a
In the light of present forecasts of the re
climate as possible.
serve situation it further suggests that, between now and our next
meeting, we may have to use repurchase agreements and outright pur
chases to prevent an unwanted intensification of pressure, but that
we should provide reserves to the banking system reluctantly rather
than readily.
Continuing, Mr. Sproul said that while he did not wish to seem to
speak for another member of the Committee,
with Chairman Martin just before the latter
he had discussed the situation
left
for Turkey and that he
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9/14/55
believed the views he had just expressed concerning the near-term course
of open market policy were substantially the same views that Chairman
Martin held.
Mr. Sproul said that from the discussions it appeared that
during the period of the Treasury's financing in October, the Committee
would be doing its best job if it maintained pressure, neither relaxing
nor intensifying the existing general level of pressure.
This might be
characterized as continuing the present policy with the understanding that
if
errors were to be made in
side of restraint,
carrying out the policy they might be on the
although the Committee would not seek to make errors
on that side.
Mr. Robertston said that he could not go along with such a program.
Mr. Shepardson said that operations in
the recent past impressed
him as not having attained what the Committee indicated as its
meeting on August 23.
Errors in
goal at its
attaining the Committee's goal would un
doubtedly be made but these errors had tended to be mostly on the side of
ease, and his view was that there might at least be compensating errors
which would approach more nearly the objective indicated by the Committee.
Mr.
Earhart said that he would concur in this view.
He felt
the
existing pressure should be maintained and his suggestion would be that if
errors were made in
carrying out operations,
they be on the side of greater
restraint.
Mr. Leach concurred in this view.
After further brief discussion,
it
was agreed that the general
policy for the period between now and the next meeting of the Committee
-16
9/14/55
should be to continue the general program of restraint indicated at the
meeting on August 23, with the understanding that operations in the open
market should be handled in
a manner which would result in
errors being
on the side of greater restraint rather than ease.
Mr. Robertson disagreed with this conclusion for the reason that
he felt a policy of increasing restraint should be pursued,
Mr.
Earhart referred to a situation in
the Twelfth District in
which some commercial banks had indicated that in view of the recent state
ment issued by the Chairman of the Federal Home Loan Bank Board with respect
to borrowing by savings and loan associations from the Home Loan Banks, com
mercial banks were being approached by savings and loan associations with
requests to borrow funds to enable them to take up commitments they had made
on real estate mortgages.
He wondered whether other Districtshad experienced
the same situation,
Mr. Sproul stated that he understood the general situation was under
discussion between the Home Loan Bank Board and the Treasury and he also
understood that the Board was watching developments to see whether steps
were needed to clear up the intent of the Home Loan Bank Board regarding
borrowings in this field.
Mr. Robertson stated that he had received an inquiry from represen
tatives of the Farm Credit Administration in connection with proposed legis
lation which would permit Federal Reserve Banks to make advances to member
banks secured by obligations of the Federal Land Banks at the discount rate,
It
was his hope that this proposal, which had been made on at least one
occasion in
the past, would again be dropped.
9/14/55
-17
Mr.
Sproul referred to the authority given by the Committee to the
Federal Reserve Bank of New York at its
meeting on August 23 for repurchase
agreements and inquired whether there was any suggestion for change in
the
authority approved at that meeting.
There was unanimous agreement that the
Federal Reserve Bank of New York be authorized
to enter into repurchase agreements with non
bank dealers in United States Government secu
rities, subject to the conditions for such agree
ments prescribed by the Committee at its meeting
on August 23, 1955.
Mr. Rouse referred to the existing authorization under which the
Federal Reserve Bank of New York is
ances to an amount not in
authorized to acquire bankers' accept
excess of $25 million at any one time.
(See
minutes of June 22, 1955 meeting of Committee at which authorizations there
tofore granted by the executive committee and still
in effect on June 22,
1955 were adopted by the Committee; and authorization previously given by
executive committee at its
meeting on March 29, 1955.)
Mr. Rouse suggested,
for reasons which he indicated, that this figure be increased to $50 million.
Mr. Mills raised the question whether an increase in the amount of
bankers'
acceptances purchased by the Federal Reserve System was desirable
under present circumstances, particularly whether such an increase at the
present time might indicate that the Federal Reserve System was becoming a
"banker of last resort to the acceptance dealers."
There followed a brief discussion of Mr. Rouse's suggestion during
wnich Mr. Sproul suggested that the staff be requested to prepare a memo
randum on the matter for consideration at the next meeting of the Committee
-18This suggestion was approved unanimously.
Mr. Rouse stated in
response to a question from Mr. Sproul that
he had no suggestion for change in the general directive to be issued to
the Federal Reserve Bank of New York at this meeting.
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 (including
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 gen
eral 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 restraining inflationary developments in the
interest of sustainable economic growth, and (c) to the practical
administration of the account; provided that the aggregate amount
of securities held in the System account (including commitments
for the purchase or sale of securities for the account) at the
close of this date, other than special short-term certificates
of indebtedness purchased from time to time for the temporary
accommodation of the Treasury, shall not be increased or decreased
by more than $1 billion;
To purchase direct from the Treasury for the account of
(2)
the Federal Reserve Bank of New York (with discretion, in cases
where it seems desirable, to issue participations to one or more
Federal Reserve Banks) such amounts of special short-term certifi
cates of indebtedness as may be necessary from time to time for
the temporary accommodation of the Treasury; provided that the
total amount of such certificates held at any one time by the
Federal Reserve Banks shall not exceed in the aggregate $500
million;
To sell direct to the Treasury from the System account
(3)
for gold certificates such amounts of Treasury securities matur
ing 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 aggregate $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.
9/14/55
-19
Mr. Szymczak said that last Friday Senator Douglas called him
on the telephone and referred to a discussion he had had with Mr. Sproul
and himself several years ago in which the Senator mentioned that he would
like to learn more about open market operations.
The Senator suggested
that he now pay a visit to the New York Bank for the purpose of observing
operations on the security desk and otherwise with a view to becoming more
familiar with the open market procedures,
done between October 20 and November 1,
indicating that this might be
He also suggested that he would
like to take a qualified economist with him to assist him in
observing and
analyzing the details of the operations.
Mr. Sproul said that Mr. Szymczak had discussed this matter with
him and that he felt the Committee would wish to reply to Senator Douglas
that it
would be glad to have him observe the operations of the Committee
at the Federal Reserve Bank of New York.
The response should indicate,
however, that information as to the policy of the Committee and details as
to its
operations could only be furnished to the appropriate committees in
the Congress in
accordance with established procedure.
In the meantime,
Mr. Sproul said that he did not think that the Committee could or would
wish to deny such a request as that made by Senator Douglas.
However, he
thought the Committee would wish to guard against individual members of
the Congress using such visits as a means of obtaining information which
should come to them through official channels in
a manner already well es
tablished.
Mr. Vardaman said that he agreed that the Committee should welcome
the Senator's visit but that he questioned the propriety of his bringing
9/14/55
-20
with him an economist.
Rather, Mr, Vardaman thought, it
might be suggested
that the System designate one of its economists to assist Senator Douglas
during his visit in whatever way he wanted so as to avoid any question of
having an individual other than the Senator himself observing the open
market operations.
Mr. Ralph Young stated that he had received a call from Mr. Ensley,
Chief of Staff on the Joint Committee on the Economic Report, which might
be related to Senator Douglas'
call,
Mr. Ensley had asked that he (Mr.
Young) meet with Senator Douglas, Mr. Ensley, and Mr. Wallace,
Director of
Staff of the Senate Banking and Currency Committee, to discuss monetary and
banking statistics.
It was Mr. Young's thought that this invitation, which
he had accepted, might be related to the other proposal of which he had not
previously known.
There was further discussion of Senator Douglas'
request and it
was
agreed that Mr. Szymczak would talk further with the Senator, assuring him
that the Committee and the New York Bank would be glad to have him observe
the operations.
question
In the discussion, Mr. Szymczak would also present the
whether Senator Douglas felt
it
would be desirable under all the
circumstances that he be accompanied by an economist from the Committee's
staff or whether he might find a System economist adequate for his purpose.
It
was understood that Mr. Szymczak would report his conversation to the
Committee.
Mr. Sproul noted Chairman Martin had been authorized at the meeting
on July 12,
1955 to appoint a subcommittee to review plans for carrying out
-21the operations of the Federal Open Market Committee in
emergency.
subject in
the event of an
He noted that Mr. Robertson had a special interest in this
connection with the reviews being made of Federal Reserve plans
for emergency operations,
and he stated that in the absence of appointment
of a subcommittee he hoped that Governor Robertson could do some work on
existing plans with the view of expediting Committee consideration and
action,
Mr. Sproul stated that he had one other matter that he would like
to discuss concerning both the procedure for getting matters before the
Committee for its consideration and the substance of the discussion regard
ing discount rate policy at the meeting on August 23,
1955.
He then made
a statement substantially as follows:
1. I would like to make same tentative comments on the sug
gestions with respect to discount rate policy which were made at
the last meeting of the Committee, first
as to matters of form
and then as to substance.
2. As to form or procedure it has always seemed to me that,
if at all possible, statements such as those presented by Mr.
Riefler and Mr. Young should be distributed to members of the
Committee--and to the other Presidents--sufficiently in advance
of a meeting so that they would have time to consider the com
plex problems involved and thus be better able to contribute to
their discussion. Otherwise the record is likely to have a lop
sided appearance, perhaps adequately presenting only those views
In this case the Board members
held by the writers of the papers.
may have had time to study the memoranda, as suggested by Governor
Mills' statement, but the Presidents had to rely on immediate re
actions to an oral presentation.
Advance distribution of such papers, in addition to contribut
ing to discussion, would also mitigate the dilemma as to how widely
such papers should be distributed. So long as they were not part
of the records of the Federal Open Market Committee, but merely
provocative papers dealing with a System problem, the confidential
character of the records of the Federal Open Market Committee would
not be in question. This would appear to be particularly so in the
case of documents having to do so largely with the discount rate.
-223.
As to substance, I have several observations which may
need to be considered or reconsidered after further study, but
which I feel I should mention now. There is no real question,
it seems to me, about the desirability of exploring new or dif
ferent methods of using our weapons of credit policy, in the
light of present day conditions in the banking system and the
money market, if we remember that our experiments are not of the
laboratory but are experiments with the economic blood stream.
4. Now to some of the specific questions with which I have
difficulty.
(a)
It is said that "the basic tradition of central
banking is that the discount rate in boom times ought to
be a penalty rate." In my opinion this is not the basic
tradition of central banking in the United States as it
has evolved since 1914.
It is the basic tradition of
central banking in the United Kingdom on which we tried
to pattern ourselves without complete success because of
differences in the banking system and the discount mecha
nism. The discount mechanism in the United States serves
a purpose which is almost absent in the United Kingdom in
that it supplements reserve averaging so as to enable a
large number of relatively small individual banks to ad
just their reserve positions to their individual and
This is quite apart from differences
often temporary needs.
in the discount mechanism which have been found essential
to maintain the penalty rate apparatus in the United Kingdom
and which do not exist in the United States.
(b) Second, I have difficulty with the argument that
the vast difference between "then" and "now" makes the
"penalty rate" tradition more acceptable now than it was
in the twenties, and that this is largely because there is
now one single pivotal or strategic or dominant rate in the
short-term money market, namely, the Treasury bill rate.
It seems to me that in recent months and years, the Treas
ury bill rate has become less a part of the money market
structure, reflecting the availability of reserve funds at
the banks, and more a reflection of the availability of
So long
corporate and state or municipal short-term funds.
as the economy continues to include large nonbank investors
who acquire and require increasing holdings of liquid assets,
and so long as the payment of interest on demand deposits is
prohibited, there will be an increasing special influence in
the market for Treasury bills, and the bill rate will often
move out of relation to other rates in the sensitive money
I doubt if we are much closer than we were to hav
markets.
ing a single short-term market rate against which a penalty
discount rate could be uniformly set,
9/14/55
-23(c)
In fact I have difficulty with the whole "penalty
rate" concept under our conditions. What is to be penalized?
It is suggested that we penalize any bank that attempts to
borrow from us and use the funds to buy highly liquid paper
at a profit, and to remove any incentive for member banks to
adjust reserve deficiencies through discounting rather than
through disposal of securities in the market. I have diffi
culty in seeing how that kind of penalty can be enforced by
relating the discount rate to the bill rate. In the broadest
sense it is still
true that the basic reason for member bank
borrowing is to obtain reserves to meet heavy demands for
loans, which are made at rates well above the discount rate.
In a narrower sense, even if the so-called penalty rate were
designed to affect bank investments, it would have to be re
lated to the rates on Government securities stretching out
well beyond the 90 day bill.
(d)
I have difficulty also with the actual role of open
market operations under the policy suggested. As I understand
it open market operations would be used to maintain a volume
of negative free reserves sufficient to make market rates of
interest highly responsive to the discount rate, but not in
such large volume as to raise the bill rate above the dis
count rate.
Does this mean that the System should maintain
a formal penalty rate situation by easing up on reserve pres
sure whenever the bill rate tends to rise above the discount
rate, or does it mean that the discount rate should be raised
again and again, say in a period of increased seasonal demand
for credit, to keep it in the proper position with respect to
the bill rate? If the first
course is followed we are likely
to lose rather than gain control of the credit situation and
if the second course is followed we would seem to have acquired
a built in device for shoving the discount rate up, during
periods of credit restraint, with real risk of creating dis
The only time in
orderly conditions in the capital markets.
recent years when the bill rate went substantially above the
discount rate was in the spring of 1953. Such increases in
the discount rate at that time might have created conditions
which would have brought the capital markets to more of a
standstill than was actually the case.
This leads me to another difficulty. The discount
(e)
rate has been above the bill rate most of the time during
the past two years, and the existing relationship is now
about what has been suggested as the appropriate one. We
have not needed a timeless or rigid formula to achieve this
result. It may be said that it has come about in the wrong
way, that the discount rate has followed open market opera
tions instead of leading, but I think that is more a matter
9/14/55
of terms and definitions than of unchanging fact. We have
had a situation in which bank borrowing has increased but
in which most banks are still swayed by their reluctance to
borrow over long periods, and we have had a situation in
which there has been large scale adjustment of individual
bank portfolios as they sold Government securities to ac
commodate loans.
That, I would say, is what we wanted,
If more severe "penalty rates" than have obtained during
this period are now envisaged and, if we want to get the
discount rate up faster and higher in order to force the
banks to sell whatever Government securities they have of
whatever maturities, we are really talking about discount
rate action and discount rates which could have a demoralis
ing effect on all capital markets.
(f)
I also have some difficulty with a formula which
implies that the discount rate should be set uniformly by
all Federal Reserve Banks, even though in the past I have
been doubtful whether this could be avoided. It may be
that recent experience suggests certain tactical advantages,
at times, in staggered increases in discount rates. It
would seem unfortunate, in any case, unless the grounds were
very clear, to adopt a "penalty rate" formula which would
further reduce the role of the directors of the individual
banks in setting discount rates.
5. What this may all boil down to is the question in my mind
mind as to whether we should contemplate tying ourselves down to
one course of action with respect to the discount rate at all times
This is not necessarily the same thing as ex
of credit restraint.
ploring and using all possible methods of making the discount rate
effective under a variety of conditions. There are times and circum
stances when the discount rate should lead more than it has, but in
attempting to substitute a formula for judgment we have to beware of
abandoning responsibility.
6. These are some of the thoughts which have occurred to me,
I think they suggest that the proposals put forward at the last meet
ing need further study and clarification before we can weigh them
properly, and that is why I wished to make these tentative comments
today.
Mr. Williams stated that Mr.
Bopp, Vice President of the Federal
Reserve Bank of Philadelphia, had prepared a statement with respect to dis
count rate policy which related to the subject discussed by Mr. Sproul, and
he then read the statement as follows:
9/14/55
-25-
"MONEY MARKET IMPLICATIONS OF NEGATIVE FREE RESERVES
The discount rate, market rates, free reserves and member
bank borrowing
"Since free reserves are defined as excess reserves minus
member bank borrowings from the Federal Reserve Banks, they can
be negative only if borrowings exceed excess reserves.
Further
more, since excess reserves rarely fall below $1/2billion, free
reserves do not reach a negative level until borrowing exceeds
that figure. In other words, negative free reserves mean that the
money market is dependent directly on the Reserve Banks to a con
siderable degree.
"Attempts of member banks to reduce this dependence, either
because of tradition possibly reenforced by moral suasion or be
cause it is made more expensive, will tend to tighten the money
market in terms of both availability and cost of credit.
"But these attempts to reduce dependence will be frustrated
if a specified level of negative free reserves continues to be
the goal. A primary effect will be a further rise in market rates.
If the discount rate is to continue to be a penalty rate or to lead
the market, it will have to be increased again.
"We may begin with member bank borrowing of, say, $700-800
million and negative free reserves of $100-200 million. The dis
count rate is raised to lead the market--or to make it a penalty
rate.
But this penalty rate will not reduce borrowing so long as
open market operations are designed to maintain negative free re
serves at the original level. Market rates, however, may be ex
pected to rise because credit has become more expensive at one of
If
its important sources (Federal Reserve Bank discount windows).
the new discount rate is to be kept above market rates, it will have
to be increased again.
"The point is that the periodic upward adjustments of rates
could be very rapid. Too rapid an upward adjustment could create
a liquidity crisis.
"An ultimate purpose of tightening the market is, of course,
to curb demand, but the question of policy is the speed with which
the brakes should be applied. Although the central bank operates
in the money market, its ultimate purpose is to influence the flow
of purchases throughout the economy. If the existing tone of the
money market is judged to be appropriate to the state of theeconomy,
the discount rate should not be changed for the purpose of assuring
that it will continue to "lead" rather than to "follow" market rates.
Anticipations and the rate structure
"II.
"Although many factors influence the time structure of interest
rates, a pervasive influence is the market's expectations as to rates
If the market expects rates to rise, the slope will
in the future.
tend to be positive (rates on short maturities will be lower than
The basic reason is that borrowers will
those on longer maturities).
wish to issue long terms before the expected rise takes place, and
"I.
-26
9/14/55
the lenders will hesitate to invest in long issues until after
the expected rise has taken place.
In other words, the expecta
tion tends to increase the demand for and to reduce the supply
of long-term funds. At the same time, lenders, not wishing to
keep funds idle, will tend to invest in short terms, whereas
borrowers will borrow on short term only if they secure a rate
concession.
The expectation of a rise tends to increase the
supply of and reduce the demand for short-term funds.
"If the market expects rates to rise, it may be difficult
to force up short-term rates without "drying up" the long-term
capital market to a greater extent than may appear desirable."
In the ensuing discussion Mr. Vardaman requested that copies of the
statements presented by Messrs.
Sproul and Williams be made available to the
Committee along with the statements by Messrs. Young and Riefler on
August 23.
Mr. Riefler said that he assumed that further comments by others could be in
cluded and it
was agreed that the papers referred to should be made available
for further study and discussion by the Committee.
Mr. Sproul stated that he did not intend his remarks to be critical
of Mr. Riefler or Mr. Young but that his purpose in presenting the comments
he had made this morning was to stimulate thought regarding discount rate
policy in the hope that at a subsequent meeting there could be a discussion
of the problem and its
It
various aspects on the broadest possible basis.
was agreed that the next meeting of the Committee would be held
on October 4, 1955,
at which time a meeting of the Conference of Presidents
of the Federal Reserve Banks would also be held in Washington.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1955, September 13). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19550914
@misc{wtfs_fomc_minutes_19550914,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1955},
month = {Sep},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19550914},
note = {Retrieved via When the Fed Speaks corpus}
}