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, December 13,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
1955, at 10:00 a.m.
Martin, Chairman
Sproul, Vice Chairman
Balderston
Earhart
Fulton
Irons
Leach
Mills
Robertson
Shepardson
Szymczak
Messrs. Erickson, Johns, and Powell, Alternate
Members of the Federal Open Market Committee
Messrs. Williams, Bryan, and Leedy, Presidents,
Federal Reserve Banks of Philadelphia, Atlanta,
and Kansas City, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Daane, Hostetler, Rice, Roelse,
Wheeler, and R. A. Young, Associate
Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Sherman, Assistant Secretary, Board of
Governors
Mr. 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 meeting
of the Federal Open Market Committee held on
November 16, 1955, were approved.
12/13/55
-2
Before this meeting there had been distributed to the members
of the Committee a report prepared at the Federal Reserve Bank of New
York covering open market operations during the period October 4 to
December 7,
1955, and at this meeting there was distributed a supple
mentary report covering commitments executed December 8-12, 1955. in
clusive.
Copies of both reports have been placed in the files of the
Federal Open Market Committee.
In response to Chairman Martin's request for comments, Mr.
Rouse stated that he would like to emphasize the content of the first
paragraph of the supplementary report which,
in effect, indicated
that the difficult period which developed last week had been passed
successfully but that the underlying tone of uncertainty was still
a
cause of concern.
Chairman Martin stated that he had observed from Mr. Rouse's
report of System transactions with dealers during November that, of
the total of $167 million of Treasury 2-5/8 per cent certificates of
indebtedness purchased on a when-issued basis, $90 million had been
acquired from one dealer, whereas the largest purchase from any other
dealer was $12 million.
The dealer who had sold the $90 million to the
System had indicated in his weekly letter issued shortly after the pur
chases the belief that the Federal Reserve was not "in
the market" for
such securities and that such buying as had taken place was for the
account of the Treasury.
on this situation.
Chairman Martin asked that Mr.
Rouse comment
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12/13/55
Mr. Rouse stated that while he did not have the full details
of the transactions in question, purchases were made both for the
System account and for the account of the Treasury.
The System ac.
count did more business with this dealer than with any other dealer.
This dealer, Mr. Rouse said, had come to the conclusion that the
Treasury's exchange offering announced on November 25 was very attrac
tive and had recommended participation in it
very strongly.
Accord
ingly, Mr. Rouse said, the dealer seemed to feel that he had a commit
ment to help make the offering a success.
Mr. Rouse described some
of the transactions in which the dealer in question had participated
and concluded his comments by stating, in response to a further ques
tion from the Chairman, that he did not think that the dealer knew at
the time that the trading desk was buying 2-5/8 per cent certificates
for System account.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the trans
actions for the System account during the
period since November 15, 1955 were approved,
ratified, and confirmed.
Members of the Board's staff then entered the room for the
purpose of assisting in the presentation of a review of the economic
and credit situation.
The script of the review was sent to the members
of the Committee following the meeting, and after the presentation the
staff members who had entered the room in
that connection withdrew.
The staff review brought out data showing that during 1955
economic activity in the countries of the free world generally has been
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12/13/55
at a high level and rising, and it
emphasized that monetary and fiscal
authorities everywhere have been faced with the problem of checking
actual or potential inflationary developments.
presentation, Mr.
In concluding the
Thomas commented on credit problems under present
conditions of economic activity in the United States at levels close
to capacity operations.
He said that further expansion in total out
put could proceed only at a slackened pace, although there might be
significant increases in some areas as others leveled off or even
declined.
In that situation, use of credit must be more moderate
than over the past year if
Federal Reserve policy to promote sustain
able growth on a noninflationary basis was to be achieved.
Should
credit demands by consumers, business, and State and local governments
continue to exert pressures for further credit and monetary expansion
at a rate beyond the possible growth in output, additional measures of
restraint would be required.
If restraints already imposed or in process
moderated further credit demands,
including deferment or abandonment of
some programs because of increased interest rates and limited credit
availability, further credit restraints probably would not be needed
and some relaxation might be in order.
If the general economic situa
tion should appear to shift to a less ebullient stage, the System would
be in excellent position to modify its
credit and monetary policy in
the direction of less restraint by not absorbing as many of the reserves
that normally flow back to the banking system early in the year.
Thomas expressed the view that at present developments still
Mr.
seemed to
12/13/55
5
point to the need of a firm hand on the reins to keep the pace of
advance within tolerable limits.
Chairman Martin said that the period since the last formal
meeting of the Committee on November 16 had been very interesting.
There had been an increase in discount rates which had been well re
ceived by the business community in the light of the general credit
policy being pursued.
He suggested that today there should be dis
cussion of the adjustments, voluntary or involuntary, that may have
been made in the Committee's activities by meetings held on November 30
and December 8 under telephone conference arrangements,
and of the ad
justments in the money market that would be taking place over the year
end.
It
was important, he said, that all members of the Committee
realize that they were dealing with a very complicated situation in
volving both the velocity of money and its volume and their relation
ship to the general business situation.
Chairman Martin expressed
the view that the Committee had met the situation to date very well.
However, it
should be extremely careful about getting any fixed judg
ments as to the nature of what it
was accomplishing:
the Committee
must not exaggerate or overestimate the importance of monetary policy
in
the general picture.
He suggested that the situation be discussed
in the light of the economic information presented by the staff, of
conditions in the individual Federal Reserve districts, and of the
money market situation.
Since this might be the last formal meeting
of the Committee during 1955, it
would be helpful if
the discussion
12/13/55'
would include general consideration of the Committee's policy over
the year-end, as well as specific suggestions both as to the direc
tion of policy and as to the implementation of whatever policy was
agreed upon.
Chairman Martin then called upon Mr.
Sproul who made a state
ment substantially as follows:
1. The economic situation and the economic outlook
continue to call for a restrictive credit policy. Produc
tion is still
rising, but demands for raw materials and
many manufactured products tend to expand as rapidly as pro
duction, if not more rapidly, with resulting upward pressure
on prices.
There also appears to be a high degree of confi
dence in future economic developments, on the part of both
consumers and businessmen, which reinforces the immediate
situation. A speculative tinge is added by the urge toward
mergers and the prevalence of stock-splits with resulting
stock market activity.
2. As anticipated, the demand for loans at member
banks has continued strong, particularly for business loans.
The banks have met this demand by further sales of securities
to nonbank investors and to some extent by increased borrow
ing at Federal Reserve Banks.
It appears that the demand for
loans has been larger at central reserve and reserve city
banks, while the flow of deposits has been away from these
banks, so that "country" banks have been able to meet the
substantial demands made upon them without the same relative
strain on their reserve positions.
3. Interest rates at short term have risen fairly
rapidly, and more slowly at longer term, a not unusual develop
ment in a period of increasing credit restraint. More important
perhaps than the actual amount of the increase in long rates has
been the appearance of some congestion in capital markets and of
uncertainty in the minds of dealers and investors concerning the
This uncertainty had an influence upon market be
period ahead.
havior in connection with the Treasury's recent refunding and
cash offering.
When the process of immediate digestion of these offer
4.
further, the Treasury will be out of
ings has proceeded a little
the way as a complicating influence in the credit situation,
assuming that the January C.C.C. financing will not be too large
in amount and not too difficult of absorption by the banks. From
here on, with a substantial cash surplus in prospect for the sec
ond half of the current fiscal year, fiscal operations will be
12/13/55
working on our side, in the sense of exerting some restraining
influence on the economy, that is, unless the prospect of a
surplus induces increased Government spending or anticipation
of a tax cut induces increased consumer spending.
5. During the latter part of December the banking situa
tion will be under the usual year-end pressures,
The money
market now appears to be convinced that no relaxation of credit
restraint is to be expected.
It is doubtful whether the capital
market has yet fully adjusted to the signal of continued and
perhaps increased restraint given by the recent increase in
the discount rate.
In the circumstances it would seem unneces
sary for us to consider further affirmative restrictive measures
until the completion of year-end adjustment, but we should act
to regain in some degree the level of pressure we had reached
before the Treasury financing.
In the light of present re
serve projections, which are somewhat confused by uncertain
ties as to year-end adjustments and the Treasury's receipts
and expenditures, this would call for allowing some maturing
bills
to run off, and possibly for some sales during the re
mainder of December if sales can be effected within the confines
of a policy of maintained pressure.
Presumably this would be
followed by heavier redemptions and perhaps some sales in
January. Meanwhile, if there should be temporary and undesir
able increases in pressure in the money market, relief could
be given by the use of repurchase agreements which we, as
authorized by the Committee, have indicated could be expected
to be available through the year end.
Mr. Erickson stated that Mr. Thomas had summed up his views in
his comments on the credit situation.
on the situation.
bility,
Mr.
A "tight rein" should be kept
The Committee recently had lost some of its flexi
Erickson said, but the difficult period of the Treasury's
financing was now out of the way and he hoped the flexibility that the
Committee had prior to the financing could be regained.
period of the next few weeks,
and if
the Committee might let bills run off
necessary sell some securities; if
too much,
During the
the market seemed to tighten
the Committee could use repurchase agreements to meet tempo-
rary needs.
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12/13/55
Mr.
Irons said that conditions in the Dallas District showed
a mixed trend.
tight.
Employment is very strong and the labor market rather
Production of petroleum and related industries is
Construction is
very strong.
showing some decline, largely due to lower residential
starts, and agriculture is,
of course, a case in itself.
seems to be moving quite strongly.
Retail trade
Banks in reserve cities generally
report that demand for credit continues at the strongest level they
have known.
This demand comes from all types of borrowers and for all
types of purposes.
Banks insist that although loans are rising, the
System's restrictive policy is having some effect and is
causing them
at least to defer some loans which would have been made under differ
ent circumstances.
said,
is
The general feeling in the district, Mr. Irons
one of optimism.
He did not detect any fear of the future.
He had the impression that there was some question as to how well 1956
model automobiles were selling, although such sales did not appear to
be particularly bad.
He thought the general conditions in the Dallas
area were not very different from the over-all national situation.
On
the basis of the economic review presented this morning, he felt the
Committee should maintain a degree of restrictiveness and, to the
extent it
could do so, it
should attempt to regain the position it
had before the Treasury's problem intervened toward the end of November.
He would assume that the System account should be able to meet the situa
tion as it
developed.
During the remainder of this year, he would not
be much more restrictive than the Committee had been prior to the
Treasury's financing but would move back to that degree of restrictive
ness.
After the turn of the year, the Committee should observe whether
12/13/55
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there had been any tendency toward liquidation of bank credit or
lessening of economic activity and then consider the extent to which
it felt credit should be modified.
Mr.
Earhart said that he was in accord with the views ex
pressed thus far this morning.
be in
a boom.
The Twelfth District still
seemed to
The supply of clerical labor seemed to be very short.
Banks were finding continuing demand for loans and some of them had
voluntarily talked with the Reserve Bank as to the possibility of
being able to discount freely over the next several weeks.
The banks
seemed very much afraid, Mr. Earhart said, that at some point the
Reserve Bank might be talking with them if
System first.
Mr.
they did not talk with the
Earhart suggested that the Committee should attempt
to get back to the approximate degree of restraint it
was attaining
toward the end of November.
Mr. Leedy said that he did not differ with the views expressed
thus far.
The Kansas City District was peculiarly affected by the
situation in agriculture, he said, but there was nothing in the credit
field that could be done to help in that situation at the present time.
He noted that the Secretary of Agriculture might be modifying some of
his views as to the agricultural program and that after the first
of
the year efforts might be made to relieve the present unsatisfactory
agricultural situation.
in
Mr.
Leedy said he did not think a situation
the agricultural segment of the economy so much less satisfactory
than conditions in the rest of the economy could be permitted to con
tinue indefinitely.
Creditwise,
demand at the Kansas City Reserve Bank
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12/13/55
had recently appeared to be heavier than in other parts of the country.
This reflected a special situation in Oklahoma where personal property
was taxable as of the end of November and there had been a large exodus
of bank balances from the principal cities of Oklahoma in anticipation
of this date.
Mr.
Leedy went on to say that he considered it
that the Treasury had felt
it
unfortunate
had to suggest to the Committee that
the Committee assist in the recent financing.
that the Committee had done what it
However, he thought
should have done in acceding to
the Treasury's request and purchasing the 2-5/8 per cent one-year
certificates on a when-issued basis as of December 8.
He assumed
that with the publication of the weekly figures in the condition
statement this week, an appropriate announcement would be made which
would give some positive assurance that the action taken did not repre
sent a departure from policy with respect to confining purchases for
the System account to bills and avoiding purchases of securities in
volved in a Treasury financing.
Without some such statement, Mr.
Leedy felt that the System would be open to a charge that it was
again a captive of the Treasury Department.
As to current credit policy, Mr. Leedy subscribed to the view
that the Committee should as soon as possible return to the point of
applying pressure on the reserve position of banks at the level that
had existed before the Treasury's financing.
Further, to the extent
that any additional funds might be required, if it were at all possible
12/13/55
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such credit should be extended through repurchase agreements rather
than otherwise.
Mr. Leach said he knew of no significant differences between
the economic situation of the Fifth District and in
the country gen
erally except perhaps in connection with the impact of the new mini
mum of a dollar an hour in wages which would become effective next
spring.
This factor would have more impact in the Fifth District
than in
some others because of the substantial numbers of workers in
the textile, furniture, and other industries who were now below the
minimum.
As to credit policy, Mr.
Leach felt that the Committee
should continue a policy of restraint.
He did not see how restraint
could be increased between now and approximately mid-January. However,
the Committee might then wish to consider seriously a change in policy
if conditions continued in the direction they have been going.
Mr.
Leach thought perhaps some of the actions already taken by the Com
mittee had not yet had their full effect in the capital markets.
would try to regain what the Committee had lost in
He
connection with the
Treasury financing but would not put on any additional pressure until
some time after the end of the year.
This would seem to be an appro
priate time for use of repurchase agreements to take care of temporary
tightening in
the market.
Mr. Powell said that the Ninth District was feeling the con
tinued and somewhat increased effects of the agricultural depression.
Recently,
retail trade in that area has turned down.
from what is
This differs
happening in the rest of the country, he said, and he
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12/13/55
noted that agricultural borrowings are up and are being watched
carefully by bank examination departments to see whether the increase
is just seasonal or whether farmers would not be able to pay off
seasonal borrowings.
At the moment, banks are borrowing less from
the Federal Reserve and Mr. Powell associated this with the fact
that the crop movement had been substantially completed.
Banks are
much interested in whether the Federal Reserve will "turn off the
spigot" if they really need funds later at the discount window.
He
commented again on the depressed situation in retail trade, expres
sing the view that inventories will become bothersome to stores in
January. While Mr. Powell felt that there should be no increase in
credit restraint measures in the Ninth District, he suggested that in
the country as a whole restraint should be kept at substantially the
recent levels.
He was sorry that restraint had been eased off any at
the time of the Treasury's financing, and if the Committee could re
cover its position that would be desirable.
He doubted that this
would be possible between now and the end of the year but thought
that after the turn of the year there might be an opportunity to re
cover the earlier degree of restraint.
Mr. Mills said that the consensus of opinion seemed to be a
middle-of-the-road policy in System actions through the rest of the
year that appealed to him as being very well adapted to the needs of
the situation.
In other words, where there has come about an increase
in the supply of reserves, it becomes necessary that the Committee
12/13/55
-13
recover within reason its
earlier position; but in
doing so, it
should allow sufficient latitude to relieve the congestion in the
new securities market by allowing dealers to reduce their inventories
and, with that, the atmosphere created in
that type of operation.
This would also serve to allay some of the uncertainty that is
preva
lent in the minds of the investment fraternity regarding System policy
and the general condition of the market.
policy, as Mr.
Sproul had suggested,
run off of bills
To implement that sort of
would require presumably some
and possibly some sale of bills,
with resort to re
purchase facilities as the balancing feature to pick up any unevenness.
Mr. Mills also suggested that, for the purpose of helping to relieve
pressure at the year end,
the mechanism for handling repurchases over
the year end might call for permitting the maximum period to extend
beyond the existing 15-day period--perhaps to 20 or 25 days--with the
understanding that this additional authority would be cancelled auto
matically at the end of January.
Chairman Martin asked that Mr. Rouse comment on Mr. Mills'
suggestion for lengthening the maturity of repurchase agreements.
Mr. Rouse stated that in
November 30,
accordance with the understanding on
the New York Bank had given dealers to understand that
repurchase facilities
would be available through the year-end period.
This general impression was now held by the dealers,
he said, and
while the suggestion made by Mr. Mills would help give assurance on
the point, it
was not essential.
12/13/55
-1l
There followed a brief discussion of the projections of
net borrowed reserves during the next few days, after which Chair
man Martin called upon Mr.
Robertson.
Mr. Robertson stated that he thought the economy outside
the agricultural area was in the midst of a boom.
restraint.
During the next four weeks it
This called for
would be practically
impossible to get the degree of restraint that the Committee had had
up to the Treasury's financing, he said, but it
such restraint.
market.
should strive toward
This meant the Committee must sell securities in the
The amount of run-off available was very slight, and one
could not predict at this time what the situation would be over the
next three weeks.
For this reason, he felt
the Manager of the System
Account should be given a free hand, under a general instruction that
he should act to get back to the degree of restraint that existed be
fore the Treasury's financing, if
it
possible to do so--and he doubted
would be possible.
Mr. Shepardson said that the situation seemed to him to call
for trying to recover such ground as was lost during the period of
This would be desirable so that the Commit
the Treasury financing.
tee could be in
the year.
as strong a position as possible after the turn of
He said that he was impressed with Mr.
Sproul's comment
to the effect that the prospects of a budget surplus might induce
increased Government spending or that anticipation of a tax cut
might induce increased consumer spending and add to the boom situa
tion that now exists.
Mr.
Shepardson felt
such a result was very
12/13/55
-15
definitely in prospect, and that was reason for the Committee to
try to regain a position from which to apply restraint.
Mr. Fulton said he agreed with Mr.
ment by Mr.
Sproul.
"full steam ahead."
Shepardson and the state
In the Cleveland District, activity was running
This was true in
the steel, chemical, and other
industries where materials were in short supply.
short supply of labor.
There was also a
Retail sales have increased very substan
tially in the district, he said.
He felt it
important that the Com
mittee get back as rapidly as possible to a position where it could
hold a tight rein on the rapidly advancing boom.
Mr. Williams said that the general attitude toward business
activity of industrialists in the Philadelphia District was one of
high confidence.
prices,
Some businessmen expressed concern about high
particularly of steel, and there were some comments showing
concern as to the automobile situation,
dence was running high.
In general, however,
confi
Mr. Williams also said that the general
standing of the Federal Reserve in the Philadelphia District is high
and that there was widespread approval of the actions the System was
taking in
trying to restrain the situation.
He detected some screen
ing of loans among banks but there would be more of it
if
it
were not
for the interbank competitive situation.
Mr.
Bryansaid that there had been an extended discussion of
the economic situation at the Atlanta Bank's meeting of directors
last Friday, led chiefly by the directors themselves.
The discussion
12/13/55
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indicated the existence of an economic boom from one end of the
district to the other.
and is
The agricultural situation is
serious in various spots, Mr.
deteriorating
Bryan said, but this is
not
showing up except sporadically in figures of banks in the agricultural
areas.
Retail trade is
going forward in large volume.
talk restraint and talk of screening loans, Mr.
While bankers
Bryan questioned
whether they were actually applying as great a degree of restraint
as such comments indicated.
Mr. Johns said that he assessed the situation as one of
boom,
notwithstanding the fact that the St. Louis District was per
haps having more than its
share of surplus labor areas,
and notwith
standing the fact that the agricultural sectors of the district economy
were somewhat unhappy--especially cotton traders, for example.
He was
inclined to view the situation as having somewhat dangerous aspects
for the future.
The larger banks were revealing a good deal of appre
hension as to what policy would be at the discount window over the
year end and were indicating that in
borrow during that period.
some cases they would have to
While he had not seen fit
to give them
any assurances, he had not talked with any of them recently about their
borrowings and some of them seemed to have lost part of their apprehen
siveness.
Mr. Johns said he felt that there should be no relaxation
and that the Committee should restore as rapidly as possible the degree
of restraint that existed before the Treasury financing.
12/13/55
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Mr.
Szymczak suggested that the Committee should continue
the policy which it had been following between now and the end of
the year; that it should allow bills to run off to the extent
possible and perhaps sell some if
situation in the market.
that would not cause an extreme
Repurchase agreements should be used to
meet temporary needs to the extent possible over the year end.
Mr. Balderston stated that he would favor restoring the
degree of tightness that existed in the market before the Treasury
financing, even if
this involved selling of bills from the System
open market account.
Chairman Martin said he thought it
was valuable to have dis
cussions of this sort although he realized that by the time the last
persons called upon spoke many of their ideas had already been pre
sented in the discussion.
He then called for any further comments,
and Mr. Shepardson stated that in keeping with the idea of screening
loans at commercial banks it
might be desirable if the Federal Re
serve Banks would do some screening of loans at the discount window.
Chairman Martin stated that this was a pertinent comment.
However,
he felt this would create a very difficult administrative
problem particularly at this time.
Mr. Szymczak stated that he agreed there was much to the
point Mr. Shepardson made, but he doubted whether it was feasible
to carry it
into effect at this particular tine.
period with year-end adjustments coming up, and if
This was a tight
member banks
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12/13/55
were given the idea now that the System was screening applications
for discounts, that might result in
their developing a feeling such
as that which existed in 1953 regarding "closing" the discount
window.
This could create additional uncertainty, Mr. Szymczak
said, in a market that was already fidgety.
Mr. Leach said that he had a very definite feeling that the
Reserve System would not wish to do anything along the lines of Mr.
Shepardson's suggestion until after the end of the year.
Mr.
Leedy said that he thoroughly agreed with Mr. Leach's
comment; to make any move in the direction indicated by Mr.
Shepardson
might create a feeling that the discount window was "coming down."
Mr. Johns stated that he agreed with this view.
Mr. Robertson said that he thought it
would be equally bad
for any Federal Reserve Bank to attempt to urge any member bank to
aid a Treasury financing with an implication that the discount win
dow would remain open.
Mr.
time it
Sproul referred to the discussion on December 8, at which
was understood that a majority of the Committee favored in
dicating to the banks that the discount window would be available to
them for the purpose of underwriting Treasury bills to the extent
that reserves were needed to carry them.
There was no assurance of
continued or excessive availability of the discount window, he said.
On the broader question of discount administration, Mr. Sproul said
12/13/55
-19
he did not believe the discount windows should ever be shut or
that action should ever be taken that would imply the window was
shut.
If
borrowing threatens to become excessive,
ing privilege is
abused,
or if
the borrow
the Federal Reserve System should use higher
discount rates and firm administrative techniques, but it
should
never shut the window.
Chairman Martin stated that he thought this view was correct.
Mr.
Robertson said that while the majority feeling expressed
during the discussion on December 8 was that the banks should be
given assurance that the discount window would be open for carrying
Treasury bill
acquisitions,
he felt it
was a perversion of the dis
count function as well as a perversion of the auction market mecha
nism.
It
amounted to getting the Federal Reserve Banks into the posi
tion of being security salesmen in
ing.
connection with a Treasury financ
Growing out of such a procedure was the implication that to the
extent banks aided the Treasury financing, the discount window
He reiterated that he thought the procedure
be open.
would
wasa bad one,
notwithstanding the fact that a majority of the Open Market Committee
favored it
during the discussion on December 8.
Mr. Mills said that he would add that the great virtue of the
discount window is
that the transactions are "man-to-man" individual
transactions and allow a meeting of the minds on those transactions
that is
not possible in multiple operations.
He recalled that he was
one who proposed that, where there appeared to be an emergency, the
12/13/55
-20
Reserve Banks might indicate to member banks that the discount window
would be open to assist them in carrying the Treasury tax anticipa
tion bills.
In an atmosphere such as had existed, he felt
was appropriate and desirable,
if
it
that this
could be accomplished without
sacrifice of some other authority or some other policy which was
essential to the System.
In this case, he could see no way in which
there was a sacrifice of policy or a loss of control.
The ability
to discuss with individuals and work out arrangements with individual
banks provided a safeguard against abuse or loss of authority.
Mr.
Robertson thought that perhaps the difference of opinion
on this point was whether the situation constituted an emergency.
Mr.
Szymczak said that he did not think any of the members
of the Committee liked the situation but that it
the time in which to try to meet it
had existed and
had been very short.
In the
light of that situation, the Committee's decision was to advise the
banks that those who controlled the borrowings intended that the dis
count facilities be available to the extent that the banks that pur
chased the tax anticipation bills were losing their position and find
ing themselves in
bills.
a tighter position because of the purchases of such
He thought it
was the right thing for the Committee to have
done under those circumstances.
Mr. Johns said that his earlier comment to the effect that
the St. Louis Bank had not given assurances to member banks about
the discount window should not be taken as indicating a critical
attitude of any actions taken elsewhere in connection with this
12/13/55
problem.
-21
In their particular situation, he felt that the St. Louis
Bank had other ways of accomplishing the desired result.
Chairman Martin said that Mr.
Shepardson had raised a key
question about the discount window but that he thought the discus
sion that had already taken place revealed the difficult administra
tive problem that would result if Mr.
carried out.
fast rule in
Shepardson's suggestion were
He did not believe the System could have a hard and
a matter such as this, and he thought that it was a
problem on which there should be further discussions from time to
time.
Mr.
Shepardson said he agreed with this view, adding that
he was not criticizing any past actions taken.
suggestion because,
He had made his
in his visits in other parts of the country
last week, he got the impression that some bankers had already gone
pretty far in their use of the discount window and were expecting
to continue to use it.
Chairman Martin said that the tenor of the discussion at
this meeting regarding the policy to be followed indicated that
there was almost unanimous agreement on the general policy, as had
been the case at the last few meetings of the Committee.
His under
standing of the views this morning was that there be no change in
the Committee's general policy of restraint on the situation as
followed recently.
in
This would also include the understanding that
the present situation the desk should have some latitude in de
ciding how far to go in applying restraint.
12/13/55
-22In response to a question from Chairman Martin, Mr. Rouse
stated that he had no suggestions for change in either the authoriza
tion for repurchase agreements or the general directive to be issued
to the Federal Reserve Bank of New York.
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
Committee:
(1) To make such purchases, sales, or exchanges (includ
ing 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 securi
ties, by direct exchange with the Treasury, as may be neces
sary in the light of current and prospective economic condi
tions 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 restraining infla
tionary 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
(2)
of 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 certificates 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
(3)
account for gold certificates such amounts of Treasury securi
ties maturing within one year as may be necessary from time
12/13/55
-23-
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 prac
ticable at the prices currently quoted in the open market.
The following authorization was
approved by unanimous vote:
The Federal Reserve Bank of New York is hereby
authorized to enter into repurchase agreements with non
bank dealers in United States Government securities subject
to the following conditions:
1.
Such agreements
(a) In no event shall be at a rate below whichever
is the lower of (1) the discount rate of the
Federal Reserve Bank on eligible commercial
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 calen
dar days;
(c) Shall cover only Government securities maturing
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 pursuant
to the agreement or a renewal thereof, the securities
thus acquired by the Federal Reserve Bank of New York
shall be sold in the market or transferred to the Sys
tem open market account.
Chairman Martin then made a statement substantially as follows:
I think there are other aspects of the situation which we
should discuss. Before that, I wish to comment on the money
market as I see it. I think we should be very careful in our
thinking. It is impossible to measure the psychology of the
market. That does not mean we do not have to measure it, but
I think we have to look at the market in relation to actions
and in relation to trends. When we raise the discount rate
after a long period of time, and when some of us think it might
have been wiser to have raised it earlier (that is just a matter
of judgment and does not mean that anyone with that opinion was
right), and when we have this matter of timing and of Treasury
12/13/55
-24-
requirements and Treasury needs, this Committee must be ex
tremely sympathetic to those who are confused about the state
of the market.
This does not mean we have to be overly cautious or un
willing to take a position.
However, we must observe the
forces developing at all times.
When we get to the end of
the boom, we may see a dramatic situation--something perhaps
in the way of explosion.
I for one do not think we are any
where near the end of the boom, although we may be in for an
adjustment.
But when the end of the boom comes, it may be
with an explosive force which will have its effects in the
money markets or in a combination of factors affecting the
money markets.
In the past couple of weeks, we have all seen these
factors.
We have seen a slow and delayed reaction to some
of the actions taken earlier, such as the increase in the dis
count rate. We have seen that at times the yield on Government
securities is almost meaningless because of cross currents in
short-term and other yields. Those things have to be borne in
mind.
I want also to comment on the operation of the System
account. I believe we should attempt to regain and to re
assert the general degree of restraint we had prior to the
Treasury's financing and this psychological atmosphere. We
may not have assessed the atmosphere correctly, but we assessed
it, nevertheless. Governor Robertson made a good point when he
expressed doubt whether we could really reassert the degree of
restraint we had. I too question whether we can in the immedi
ate future, i.e., before the New Year, or whether we should if
we could, because I think the operation may be too delicate to
press that much. If we try to do so, we may get results that
we do not want. I think we are more concerned with reassert
ing a trend than with any particular volume of reserves.
When it comes to the problem of Treasury financing, of
course we have had differences of opinion. My view is that,
the Treasury having appealed to us for assistance and the re
funding issue having been priced correctly, we could be open to
the charge of being "doctrinaire" if in this particular instance
we had wanted to assert and to stick rigidly with those princi
ples which we have enunciated and which I believe to be with us
and which I believe in just as firmly now as when they were
adopted. That does not mean for one i-stant that I doubt the
validity of those principles. As I pointed out to the Treas
ury, there were complicating factors this time--the very recent
increase in the discount rate as well as other factors in the
12/13/55
market.
Nevertheless, every time we give way in those principles
we encourage the market to think that the System has been
"panicked" into taking a position to bail the Treasury out.
Ultimately, if we do that enough and pick up the Treasury
issues, the charge can be made that it is becoming necessary
for the Fed to pick up and establish the going rate on the
securities. We have been through all of that before,
However, I don't think we have enough perspective on
the market at the moment to be rigid on this principle. I
think we are in a period of dangerous waters.
It may be too
late for credit policy to have the impact on price adjustments
that may come in an explosive period of boom.
But that is
water over the dam and we cannot now concern ourselves with it.
We ought to start a process of thinking that cannot end
today. We need further perspective on developments of the
past few weeks.
We need to come to further conclusions as
to our really fundamental policy on this matter. If this
was not an exception, we must explore it very thoroughly
with the Treasury. From here on out we must be very care
ful in our thinking and in the way we handle these situations.
I am assuming for the moment that this was an exception.
Now the question Gavin Leedy has raised is one we
should discuss--whether we should make an announcement in
connection with publication of this week's figures to the
effect that this was an exception to our policy. So far
as public announcements of policy are concerned, I believe
we have made almost no public announcements of this Commit
tee's policy other than those contained in the annual reports.
My own thinking would be that we should have a general dis
cussion of this question today. I have not decided in my
mind whether we want to make a formal statement along the
lines of Mr. Leedy's suggestion. I am not sure whether we
want to bind ourselves by a formal statement. Perhaps we
should have a discussion of the whole question at our meet
ing in the latter part of January when we have had a chance
to think about the question with more perspective. It is
most unsatisfactory to have a telephone meeting and to have
to take a position as a Committee on something like this,
although it seems to me that we have demonstrated that these
telephone meetings can work. I don't think we have to be
concerned about the mechanics of telephone meetings. We
now know that when we are in the middle of a stream, we can
act.
Mr. Robertson said that although the question of the recent
purchases of 2-5/8 per cent certificates in connection with the
-26Treasury's financing would be discussed at a later meeting, he would
like to present a memorandum commenting on these purchases with the
thought that it might be helpful in later discussions of the problem.
He then read a memorandum as follows:
Two weeks ago we authorized the purchase of newly
offered Treasury certificates on a when-issued basis. This
action was taken because the Treasury Department expected
that, in the absence of System support, a very large amount
of the maturing securities would be turned in for cash, and
the Treasury wished to avoid such "attrition".
The Committee's action was based on the best judgment
of a majority of its members, and the views I wish to pre
sent are in no sense a criticism of the Committee's action,
but rather an examination of the matter for the purpose of
presenting my ideas as to where the Committee now stands
and in what direction it should proceed.
The Committee decided in 1953 that "operations for the
System account in the open market, other than repurchase
agreements, be confined to short-term securities (except
in the correction of disorderly markets) and that during
a period of Treasury financing there be no purchases of
(1) maturing issues for which an exchange is being offered,
(2) when-issued securities, or (3) outstanding issues of
comparable maturity to those being offered for exchange".
It is unnecessary to dwell at length on the reasons
underlying our policy in this matter. They were developed
fully in the report of the Ad Hoc Committee and the subse
quent deliberations of this Committee. For present pur
poses, it suffices to recall our conclusion that detach
ment of the Federal Reserve System from Treasury financ
ing operations would be beneficial (1) to the Treasury in
its ability to reach debt management decisions, (2) to
the Federal Reserve in its ability to pursue single
mindedly the objectives of monetary policy, (3) to the
development of a strong and self-reliant Government secu
rities market, and consequently (4,) to the nation's economy
generally.
By this means we intended to minimize the technical
market repercussions that result in some degree from opera
tions on the part of the Federal Open Market Account and
that tend to hamper the development of a self-reliant pri
vate market for Government securities. It was recognized
that operations for the Federal Open Market Account run
-27the danger, if executed through faulty techniques, of
exerting an unduly disturbing or even disruptive effect
upon the market for U. S. Government securities. This
danger arises because of the large volume of such opera
tions under a single control motivated by other than
profit and loss considerations and because of the effect
of such operations upon high-powered bank reserves. They
thus could make it difficult for financial intermediaries,
which are essential for the functioning of a self-reliant
market, to know whether prices of Government securities
were being established by competitive market forces or as
the result of official actions.
Comparison of the record of various Treasury financ
ing operations before and after the adoption of this policy
clearly demonstrates its wisdom. An essential for the success
of the policy, recognized and observed by the Treasury, has
been the setting of terms on new Treasury issues attractive
enough to elicit adequate market reception without Federal
Reserve support. The Ad Hoc Committee report recommended
that "the Federal Open Market Committee ask the Treasury to
work out promptly new procedures for financing". This has
been done to some extent, but the current experience indi
cates the need for further consideration of these procedures
to avoid requests for emergency support action by the System.
Features of the latest Treasury refunding operation
that led to departure from established System policy may be
considered as being of a special nature. They raise a ques
tion as to whether Treasury debt management procedures might
be revised to avoid a repetition of such a situation. The
special aspects of the recent situation are:
(1) The heavy cash needs of corporations and re
serve needs of banks around December 15, the maturity
date of the maturing issues, made many holders of those
issues want to redeem them for cash on that date.
(2) The earlier exchange date for the new issues
(December 8) would leave holders that sold rights or
the new when-issued securities with cash earlier than
planned or needed.
(3) The closeness of the pricing of the new
issue to market prices, as they developed after the
announcement of the offering (but were anticipated),
gave little inducement for sale of rights or when
issued securities by holders not desiring the exchange.
The lessons to be drawn from this experience may be
summarized as follows:
-28(1) Situations may occasionally develop in which
a Treasury exchange offering, though priced attractively
in the light of general market forces, might not be
favorably received because of special and temporary
market factors.
(2) Federal Reserve - or Treasury - purchases of
rights or when-issued securities at or below par in such
situations cannot assure a satisfactory exchange if holders
of substantial amounts want cash at maturity. While such
purchases, particularly if concealed, might stimulate con
fidence and induce some exchanges, there is a risk that
they will also deter potential buyers that would other
wise be attracted by low prices. Moreover, if the market
knows or suspects official intervention, the subterfuge
would not produce the desired confidence effect.
The Treasury should recognize and openly ac
(3)
knowledge the risk of substantial attrition and be pre
pared to meet it by contemporaneous or subsequent sales
of securities for cash, rather than rely upon Federal
Reserve efforts to produce an adequate exchange. The
procedure followed in the current financing of an
offering of a tax bill on an auction basis a week
later provides an example of a combination that serves
the purpose. With gradual resumption of substantial
corporate tax payments on September 15 and December 15
and in view of other cash needs at such times, the
Treasury might follow a practice of issuing bills to
mature near those dates. New cash offerings could be
made to raise needed funds at some appropriate subse
quent date.
Parenthetically, even if the Treasury occasionally
had to borrow directly from the Federal Reserve for a
few days to bridge over any gap of timing, that would
be preferable to direct Federal Reserve intervention
in the market to aid a refunding operation. Such
Treasury borrowing around December 15 would help supply
reserves always needed at that time.
It might be contended that our recent action was not
really a departure from our general policy on the ground that
the Treasury thought that quick and exceptional action by the
Federal Reserve System was required to deal with an exceptional
situation. When our basic policy on this subject was adopted,
we were aware that adherence to that policy would require the
Committee to decline to support Treasury financing operations
might regard such support as
even though the Treasury itself
essential from the short-term viewpoint of the "success" of
the particular offering.
-29No doubt there are circumstances in which we would all
agree that the System Account would be obligated to give
support to a Treasury offering, just as we would be prepared
to move into the intermediate and long-term areas in order
to correct a disorderly market. However, ordinarily the
mere prospect of a substantial attrition in connection with
a roll-over offering is not a sufficient cause for Federal
Reserve support. On the contrary, it is precisely the situa
tion which, by our general policy, we decided does not justify
our support. Unless we refrain from such action in such situa
tions, our purported policy becomes worse than meaningless; it
becomes misleading to the market.
Even through hindsight, it seems clear to me that no sub
stantial damage would have been done if we had maintained our
hands-off policy. At most, the Treasury might have had to in
crease its subsequent offering of tax bills. If the Treasury
finds that it can call upon the Federal Reserve to bail out an
offering that the market is unable or unwilling to absorb, there
might be a tendency for the Treasury to be less careful in its
analysis of the market's probable effective demand, in the
That is
light of any special factors such as those enumerated.
to say, ready availability of Federal Reserve support is likely
to work against the development and use of the best techniques
of debt management, with the result that offerings that are
unacceptable to the market for any reason might become more
frequent. If that were to happen, we might be faced with a
much more serious "attrition" - attrition of our fundamental
objectives of having Open Market Committee actions governed
solely by monetary policy objectives, and encouraging the
growth of a strong independent Government securities market.
Chairman Martin suggested that Mr. Robertson's statement be in
cluded in the minutes of this meeting.
The paper presented an excellent
basis for further consideration of the problem, he said, and while he
disagreed with some aspects of the paper, it would be desirable for the
Committee to study the whole problem and discuss it at a later meeting.
Mr. Leedy said that his suggestion for an announcement regard
ing the purchases of 2-5/8 per cent certificates which would be reflected
in the statement of condition of the Federal Reserve Banks to be issued
this week was not intended to imply that any statement should be made
-30
12/13/55
which would commit the Federal Open Market Committee to a particular
policy in the future.
been, however,
The market is aware of what the policy has
and while it
might not be necessary to make statements
in all cases, Mr. Leedy said that he thought publication of the condi
tion statement this week might result in some consternation regarding
what had occurred in the light of what consistently had been done by
the Committee during the period since the spring of 1953.
An announce
ment such as he had in mind would give assurance to the market and to
the banking system that the purchase of the when-issued securities
in this case as shown by the weekly statement did not represent a
change in the policy that has been followed since 1953, and that in
this case such purchases served to assist credit policy in providing
needed reserves to the banking system.
Mr. Leedy said that while he
did not feel that any change in the policy followed since 1953 was
necessary it would be appropriate to reexamine it since conditions
might have changed in the interval since its adoption.
Chairman Martin responded that there was a very real diffi
culty in phrasing a statement such as Mr. Leedy suggested.
Generally
speaking, he thought statements were not desirable and that it was
preferable to let actions speak for themselves.
Also, the same
"sophisticated people" to whom such a statement would really be
addressed are already well aware of the facts in the situation.
His
feeling, he said, would be that the Committee should not compound its
-31difficulties and he would wish to see a draft of statement before
he could feel that it would be desirable to issue one.
His feeling
was that any statement that might be issued would simply incite more
comment rather than less.
Mr. Sproul then made a statement substantially as follows:
First, I would like to say that I think it is desirable
that there be further study and discussion of the relation be
tween credit policy and debt management, not on the narrow
basis of the recent Treasury financing and our purchase of
when-issued securities in connection with that financing,
but taking account of the whole area of this relationship.
This is a matter which has had some discussion in the
Federal Open Market Committee, and which it was understood
would be the subject of further study by the members. In
pursuance of this objective, the Federal Reserve Bank of
New York has recently prepared and distributed one memoran
dum on the subject and I would hope others would be moved
to consider it further so that we may develop a basis for
conversations with the Treasury on the broadest possible
grounds.
So far as our recent purchase of when-issued securities
is concerned, I have detected in some of the comments which
have been made a seeming reversion to the idea that the
directives which the Committee has adopted from time to time
are a form of Mosiac law, rather than an experiment, as they
were described by the Chairman at the hearings of the Flanders
subcommittee of the Joint Committee on the Economic Report.
But by the terms of Committee action they are only valid
until superseded by other action of the Committee, which was
done in this case under circumstances which recommended such
action to a majority of the Committee. I do not think, my
self, that this will mislead the market. One of my concerns
has been that the longer we went without deviation from the
general principle adopted by the Committee, the more likely
it would be that when we did have to deviate it would be
taken as a sign that a situation had developed which was more
dangerous and critical than actually was the case, and that
this would mislead the market.
What has hapnened, as I see it, is that the principle
adopted by the Committee, until superseded, was put to a real
12/13/55
-32-
test when question arose as to the success of an appro
priately priced Treasury refunding, plus cash financing,
at a time when a restrictive credit policy was being fol
lowed.
It was decided that it would be consistent with
our primary responsibility for credit policy to take ac
count of our secondary responsibility for coordination of
that policy with debt management, in so far as possible.
This is not at all a commitment or precedent for "bailing
out" the Treasury every time it comes to the market and
on whatever terms.
I continue to hold the view, of course,
that under conditions of credit restriction when the Treas
ury has to come to market for large refundings, and when it
is also faced with the necessity of some cash borrowing, it
is unlikely that the market will always be able to make the
massive readjustments which are necessary within the short
period of the Treasury's offering; some form of underwriting
of part of the transaction is likely to be necessary.
On the question of whether a statement should be
issued about our recent purchase of when-issued securities,
I am of two minds.
Fundamentally, I am of the opinion that
we must allow our actions to speak for themselves, particu
larly in view of the difficulty of phrasing a brief official
statement which will adequately represent the views of all
members of the Committee, each one of whom may have arrived
at a decision by a different route, and because of the likeli
hood of misinterpretation of such statements no matter how
I have noted, however, that
carefully they may be worded.
what we do here often seems to reach the press and the
Government Bond services by one route or another, and I
think that the pressure for information concerning these
In the circumstances, I raise
purchases may be very great.
the question as to whether it would not be better to agree
on an official explanation to be added to our public condition
statements this week, to which all questions could be referred,
with the understanding that no one here would comment on the
purchases in any other way. So that you might consider this
alternative, I have written out a possible explanatory note.
"The statement this week indicates purchases of
$167 million certificates of indebtedness for System
Although it has for some time
Open Market Account.
been the policy of the Federal Open Market Committee
to avoid purchases of when-issued securities during a
Treasury financing, the Committee decided, in this
instance, that such purchases were consistent with its
overriding aim of providing reserves to the banking
system in accordance with the objectives of credit
policy."
12/13/55
-33
Mr. Mills said that with all respect to Mr.
Sproul, he
thought that a statement such as he had read would open the Com
mittee to the challenge that if
the 2-5/8 per cent certificates
of indebtedness were purchased to provide reserves, the Committee
could quite as easily have provided such reserves through purchases
of Treasury bills rather than the certificates,
Mr.
Sproul responded that his thought was only that the
statement would say that the purchases that had been made were con
sistent with the overriding aim of the Committee to provide reserves
to the banking system under its current credit policy.
He recognized
the difficulty of phrasing a suitable statement and he agreed strongly
with the benefits of saying nothing, but he doubted that "nothing"
would be said in
connection with the present case.
There followed a further discussion of the possible desira
bility
of issuing a statement commenting on the purchases of when
issued securities and of the question whether issuance of any state
ment on the matter could be avoided.
In the course of the discussion,
one suggestion was that the Chairman or Vice Chairman of the Committee
be designated as the individual to respond to any inquiries regarding
the purchases made last week.
It became clear during the discussion
that none of the members of the Committee desired a statement if its
issuance could be avoided, and that it
would be difficult to phrase a
statement that would be acceptable to the Committee.
The discussion
concluded without a definite decision but with a consensus that no
statement be issued.
12/13/55
-34
Chairman Martin brought up the question of the date for
the next meeting of the Committee and, after a brief discussion,
it was agreed unanimously that the next regular meeting should be
scheduled for Tuesday, January 10, 1956.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1955, December 12). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19551213
@misc{wtfs_fomc_minutes_19551213,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1955},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19551213},
note = {Retrieved via When the Fed Speaks corpus}
}