FOMC Minutes
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in Washington on Wednesday, May 23, 1956, at 10:45 a.m.
PRESENT:
Mr. Martin, Chairman
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Balderston
Erickson
Johns
Mills
Powell
Shepardson
Szymczak
Fulton, Alternate
Treiber, Alternate
Messrs. Leedy and Williams, Alternate Members,
Federal Open Market Committee
Messrs. Leach, Irons, and Mangels, Presidents of
the Federal Reserve Banks of Richmond, Dallas,
and San Francisco, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Vest, General Counsel
Mr. Thomas, Economist
Messrs. Abbott, Parsons, Roelse, Willis, and
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, Manager, Securities Department,
Federal Reserve Bank of New York
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
May 9, 1956, were approved.
Before this meeting there had been distributed to the members of
the Committee a report covering open market operations during the period
5/23/56
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May 9 through May 18, 1956, and at this meeting a supplementary report
covering commitments executed May 21-22, inclusive, was distributed.
Copies of both reports have been placed in the files of the Committee.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period May 9,
1956 through May 22, 1956, inclusive, were
approved, ratified, and confirmed.
Chairman Martin called upon Mr. Young for a statement on recent
economic developments.
Mr. Young's statement, which supplemented the
staff report distributed under date of May 18, 1956, was substantially
as follows:
Economic activity has been extending its sidewise move
ment on a high plateau. Divergent tendencies in production,
employment and trade have become more noteworthy than earlier,
but credit demands have remained very strong and average
wholesale prices have been holding about at their high for
this past year's rise of 5 per cent. Abroad, economic condi
tions continue generally strong.
For several months now, retail markets have reflected a
slackened growth of consumer demand. On the other hand, busi
ness capital expenditures have shown impressive strength.
Recently, expenditures for inventory build-up have decelerated,
with accompanying corrective cutbacks in output. Although un
certainty about the strength of the economy for the near term
future is now being expressed with greater frequency at decision
making levels, the market and output adjustments and testing cur
rently taking place in individual sectors are essential to the
Mixed
sustainability of growth for the economy as a whole.
business tendencies at this stage would hardly seem to sum up
to a conjuncture of weakness such as would foreshadow general
economic recession.
Recent data which highlight key business tendencies merit
brief summary:
(1)
Results of the McGraw-Hill survey of business capital
expenditures show remarkable strength of investment programs
and also remarkable business confidence in potential for longer
term economic growth. The gross figure for expenditure plans
of $39 billion needs a $2 billion cutback to put it on a
5/23/56
basis comparable with Department of Commerce business in
vestment estimates, but a $37 billion total for the whole
year 1956 still
implies a very large rise in domestic busi
ness investment from the second to the third quarter of the
year.
(2)
There is, of course, question about how firm these
investment plan figures are. They are being confirmed, how
ever, by most recent production figures for producers' equip
ment and by trade reports of output prospects for equipment
lines. Construction contract award figures for commercial
and industrial building have been showing very large gains
over a year ago, and early May data indicate that the high
March and April levels are being maintained.
Confidential
data on nonresidential construction plans (other than for
manufacturing) reaching architects' drafting boards during
the first
quarter of the year were likewise larger by an ap
preciable amount than a year ago. Architects drafting board
activity seems to lead contract awards by 9 to 15 months.
On the other hand, new orders for durable goods have been
drifting downward in most lines since the end of the year, and
in March were about equal to sales. Orders for machinery and
transportation equipment showed the least decline. The back
log of durable goods orders at the end of March stood at $54
billion, equal to about four months' sales.
(3) April retail sales were off some from March, and
April and March sales together averaged 1 per cent below the
Department store sales for the first
last four months of 1955.
three weeks of May suggest that the May seasonally adjusted
department store figure will hold at the March level of 122,
Hard goods sales
with possibilities that it may reach 123.
Sales
seem to be holding up well at department stores in May.
of furniture and appliance stores in April reached a new high.
(4) New automobile sales are the big weak spot at the
consumer level. Advice from one manufacturer received yester
day states that daily sales thus far in May are averaging 10
per cent under the April rate. This is worse than the first
Dealer new car stocks
10 days' indication for the industry.
continue close to the 900,000 unit level and output, which
had been reduced to 110,000 units per week in early May, is
Representatives
reported to be in process of further cutback.
of two manufacturers have visited the Board's office in the
past two weeks to report the concern of their managements
over market conditions, including the availability of credit
to purchasers.
(5) While the new car market has indeed been sour, sales
of used cars are running well ahead of last month and about
6 per cent under a year ago compared with a decline of 29 per
Stocks have been reduced 14 per cent
cent for new car sales.
5/23/56
under year ago levels and stock-sales ratios are more
favorable than a year ago. Prices of late model used
cars after allowance for depreciation have risen further
and are now above spring levels of the past two years.
(6) Consumer instalment credit slowed further in
April with the increase for the month down to about $100
million on a seasonally adjusted basis, compared with a
monthly average of $275 million for the first
quarter.
Extensions of automobile credit declined considerably but
are only moderately under a year ago levels. About 65
per cent of all new cars were purchased on credit in the
first
quarter compared with 55 per cent a year ago.
Indi
cations, incomplete to be sure, point to an increase in
longer-term automobile instalment contracts this year.
(7)
Industrial production for May is expected to hold
at the April level of 142, though 141index figure is pos
sible. Output of consumers durables, steel, and crude oil
will be off for the month; equipment production and mining
will be up; and nondurables output will likely hold its
reduced March level.
(8)
Total construction expenditures on a seasonally
adjusted basis were up somewhat in April, with residential
outlays showing a small rise and nonresidential a larger
increase. Housing starts rose seasonally in April and on
a seasonally adjusted basis totaled 1.1 million units,
lower than a year ago but higher than in April of the two
preceding years.
Residential contract awards thus far in
May are holding close to the high levels of March and April
and above year ago levels. VA appraisal requests and loan
applications were both up in April but FHA applications were
off some.
(9) Demand for nonfarm labor has continued active, with
manufacturing employment little
changed in April and nonmanu
Unemployment fell
to 2.6
facturing employment at a new peak.
million.
The manufacturing work week was little
changed, as
In June, several wage increases
were also weekly earnings.
go into effect and in steel, present wage agreements expire
as of the end of the month.
(10) The most recent comprehensive figures on inventories
are for March and show a relatively small over-all increase
from February. Retail stocks were down but manufacturers'
At manufacturers, the increase was again in final
stocks up.
Preliminary information indi
product and goods in process.
cates that department store stocks for April will show a rise
again from an index level of 135 in March to a level of 137.
The 137 index compares with one of 124 for April a year ago.
(11) From last June to April, the rise in prices of
industrial commodities averaged .5 per cent a month.
Since
mid-April, average prices of industrial commodities have
about leveled off. There have been declines in copper,
metal scrap, and rubber in recent weeks, but over these same
weeks there have been further price increases for metal
products, building materials, and paper products. With re
gard to the recent price declines of copper, steel scrap
and rubber, these materials had earlier shown very sharp
price increases; the recent declines in these material prices
would seem mainly to reflect specific market situations.
(12) Prices of farm products have recovered about 5 per
cent from the December low, with grains, oil crops and meat
animals accounting for the rise. Recently hog prices have
risen further and dairy product prices have advanced. Farm
land values have risen further, according to the March 1
survey of farm land values, to a level about 4 per cent above
a year ago. The latest rise in land values was concentrated
in the Eastern cornbelt, the Southeast, California, and
Florida.
U. S. foreign trade showed continuing gains up to
(13)
March, but imports, mainly because of lower coffee purchases,
were down in April, and nonagricultural exports were off more
than seasonally. Total exports were up 18 per cent over a
year ago, the total export gain for the month reflecting a
bulge in agricultural shipments which for several months pre
viously had declined.
(14) In industrial countries abroad, economic advance
continues, though evidently at a slackened pace. In a few
countries, there has been little further production gain this
year. Central banking curbs on monetary expansion of varying
sternness generally continue in effect.
In conclusion, it should be said that with diversity of
tendency in business trends more marked than in other recent
reports, the situation will need to be watched closely and
carefully in the weeks immediately ahead. A prospect of ac
cumulating weakness with an increasingly pessimistic business
and investor psychology cannot be ruled out, of course, but
neither can a prospect of relatively rapid correction of
present imbalances and a resumption of expansive momentum.
If business spending plans actually materialize in orders
and construction contracts, there will surely be some lifting
or multiplier effect on consumer incomes and a resulting
The April data on personal
stimulus to consumer spending.
billion, up nearly $5 bil
$317
of
rate
income show a record
billion from a year ago.
$18
and
lion from the fourth quarter
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Mr.
Thomas next made a statement with respect to financial
developments as follows:
The principal financial developments in the past two
or three weeks have resulted in a continuation of a fairly
tight reserve position of banks--tighter than expected.
There has been some rise in Treasury bill yields in reflec
tion of the reserve situation, but this has been accompanied
by unexpected strength in the bond market with declining
yields. At first, there was an improved tone in the new
issues market, but that has been followed by some softness
as a large volume of offerings came to the market. Stock
prices have declined sharply to the lowest level since early
March, the decline from the peak reached on May 4having
been about 5 per cent or roughly the same as the decline
last January. Total loans and investments of city banks
have declined somewhat, reflecting a continuing increase in
business and other loans, more than offset by a further de
crease in holdings of both Government and other securities.
Demand deposits at city banks declined $1.9 billion, in the
past three weeks, compared with $700 million last year.
Since the end of February, there has been a net decline in
demand deposits of these banks of more than $1.2 billion,
whereas no change was recorded during the corresponding
period last year.
Demand deposits adjusted at banks in leading cities
on May 16 were more than $1 billion smaller than a year
earlier. Declines of over $800 million at central reserve
city banks in New York and of $150 million at central re
serve city banks at Chicago accounted for most of this
decrease, and the banks in New York also showed decreases
in U. S. Government and in time deposits.
As of May 9,
demand deposits were also somewhat below year-ago levels
at city banks in the Philadelphia, St. Louis, Kansas City,
and Dallas Districts, while increases had occurred in the
Boston, Cleveland, Atlanta, and San Francisco Districts.
At country banks, demand deposits during the last half of
April were larger than a year ago in all Districts except
Kansas City, although the increases in the Minneapolis
and Dallas Districts were negligible. Time deposits were
somewhat larger in all Districts.
The uncustomary decline in demand deposits adjusted
during the past two weeks was responsible for some reduc
tion in estimated required reserves of member banks during
5/23/56
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that period.
On the other hand, a larger than expected in
crease in currency and the maintenance of Treasury balances
at a higher level than projected, together with a reduction
in Federal Reserve holdings of Government securities, served
to keep net borrowed reserves close to $600 million for the
last three statement weeks, but they will probably average
about $400 million for this statement week.
The recent
tightness in reserves has appeared at reserve city and country
banks but has been moderated a little at New York and Chicago
compared with the preceding month.
Unless there are offsetting System operations, net bor
rowed reserves may again rise to around $600 million next week
and may continue well above that level during June and July, as
indicated on the sheet distributed showing a pattern of pro
jected reserve changes until August 1.
These projections allow
for a substantial increase in credit demands--reflected in re
quired reserves--around the June tax debt period. The allowance
is somewhat smaller than the increase that actually occurred in
March but is in excess of the rather substantial increase around
mid-June of last year.
In summary, the credit picture, like that of the business
situation in general, is by no means clear-cut, and contains
many cross currents. Loan demands continue strong and banks
feel the reserve pressures. Likewise current and prospective
new capital issues remain large. Money pressures are reflected
in higher rates for Treasury bills, but the bond market is
strong. Likewise price pressures in commodity markets continue
strong, notwithstanding the weakness in automobile sales and
some concern about top-heavy inventories, which are reflected
The situation may be likened
in the declining stock prices.
to that we believed we might be facing early in the year, when
it was thought that the anticipated decline in automobile sales
The decline
would release resources for capital expenditures.
in autos was delayed, but has finally arrived in greater amount
than expected, but the planned expansion in capital expenditures
Credit demands were even
is much larger than was anticipated.
larger than had been expected and unquestionaly called for re
straint. We are now entering a period of heavy seasonal demand
for credit and the question for consideration is how much re
straint should be maintained while these demands are being met.
Mr.
Johns raised the question whether the staff was prepared to
discuss the amounts of reserves that would have to be supplied to the mar
ket between now and the end of the current year, and Mr. Thomas commented
-8.
5/23/56
briefly on tentative estimates prepared earlier this year which indi
cated that somewhere in
the neighborhood of $1.6 billion of added re
serves would be needed during the second half of 1956.
Mr. Thomas
also noted that the staff usually prepared projections of these needs
for presentation at a meeting of the Committee in
At Chairman Martin's suggestion, it
June.
was understood that the
staff would prepare a statement with respect to reserve funds that
would be needed by the market during the remainder of this year for
presentation at a meeting of the Committee during June.
In response to a question from Mr.
Erickson regarding Treasury
plans regarding the use of surplus funds, Chairman Martin stated that
there had been general discussions of this subject but he knew of no
specific indications as to what the Treasury plans were.
Mr. Rouse stated that Treasury cash requirements during the
second half of this year were expected to total around $5.5 billion
and that he understood the Treasury expected to begin coming to the
market in
mid-August.
Mr.
Thomas noted that the main reduction in
debt could be ex
pected to take place during the second half of the 1956-57 fiscal year
rather than in
the autumn of 1956.
Mr. Rouse also said that he under
stood that the Treasury probably would make an exchange offering about
mid-July covering Treasury 2 per cent notes maturing August 15, 1956,
in an amount somewhat in excess of $12.5 billion.
Chairman Martin made a statement substantially as follows:
5/23/56
-9-
The first
thing I want to note today is that this is our
first
meeting without the services of Mr. Sproul. I know all
of us regret this deeply. I had hoped to prevail upon him to
be with us today, but he is so overwhelmed with his various
activities at this time that he could not be here. We are
very fortunate in having Mr. Treiber with us and I will be
glad to call on him within a few moments.
This marks a mile
stone.
I did not want to let it go by without saying how much
we regret not having Mr. Sproul's stimulating remarks.
Last night, I reviewed the minutes of our meetings from
the first
of this year.
It is difficult in a period such as
we are in, when everybody and his brother becomes a monetary
expert in the public press, to isolate ourselves and to see
ourselves in the correct perspective.
I was trying last night
to place myself on a desert island to see what would be the
proper approach if we were able to look at the current situa
It seems to me that one of our biggest
tion from a distance.
problems is psychological. We must not be influenced in our
judgments because some commentators may interpret the situa
tion one way or the other, and we should not avoid taking
action that in our judgment should be taken just because some
of them are urging that we act. In my own thinking, I am
quite clear that there has been a real change in business
sentiment. I think monetary policy is getting more credit
for that change in sentiment than it deserves, but it is so
real that some of the people who were saying that monetary
policy could have no effect whatsoever are now claiming that
it has more effect than it really has. We ought to keep
that in mind.
Being a stock market operator, I believe in double tops
and double bottoms upon occasion. Not as anything conclusive,
but just as guides. We have been having that. If you look
back, I took the position in January that there were items of
change coming into the picture and that we should not keep a
firm position indefinitely, but that we should recognize them
when they did come. It was at the January 24 meeting that we
changed our directive by adding the words "while taking into
account any deflationary tendencies in the economy" so that
clause (b) would read "to restraining inflationary develop
ments in the interest of sustainable economic growth, while
taking into account any deflationary tendencies in the
economy." That was followed by a period of watchful waiting,
and gradually we worked up to the action that the System took
six weeks ago on April 12, effective April 13, increasing the
discount rate.
In my opinion, our record is surprisingly good. I say
that knowing that one ought never to say that, but it is a
5/23/56
-10
very intelligent, readable record all through. I think we
ought to consider whether we wish to change our directive
today so that it would show that we are recognizing a change
in emphasis at this time. There have been deflationary
implications in the net borrowed reserve figures recently
and in their implications for management.
There has been a
real change in sentiment and we ought to recognize it. We
should keep alert when the spotlight is on us, and in taking
our vacations we ought to be certain that there is a Com
mittee available to vote on these questions at any time we
may need to. I would hope that we would set the next meeting
of the Committee for June 12, which would mean that this next
period would take us through the Decoration Day holiday.
In
today's discussion, we can think of developments over the
three-week period before we will act again. If need be, we
can make the next meeting earlier, but that is my present
thinking.
It is obvious from what I am saying--I don't want to
take any position until we have all spoken on this--that I
am inclined to the view that some change in the directive
might be appropriate and that a shift in emphasis might be
desirable in our operations.
I question very much whether
there ought to be any change in discount rates, but that also
is a problem. We recognized the problem of momentum in our
discussion at the last meeting, and we should consider that
again. Flexible monetary policy requires us to keep alive
to these changes.
This is not a criticism of anybody, but I have been
alarmed by the tendency of net borrowed reserves to creep
up on us. That has been offset by things like the President's
statement since the last meeting, which unquestionably created
But we ought to remember that the dis
a strong bond market.
Many bankers have become
count window is being watched.
severe in their attitude and they now may be overly severe
on credit requests. We should consider whether we want to
shift our emphasis to somewhat the same approach that we had
in mind at the time of the meeting on January 24, when it
seemed to me that we would have been going along pretty
blindly if we had just maintained our position without con
sideration of the variety of factors that were then appearing.
We can not tell what way things will go and these forces may
move in the opposite direction from what we are inclined to
think. What I am talking about at this time is a change in
emphasis and general direction and not a major change in
policy. Having made those preliminary remarks, I would like
to go around the table and get the comments of others and
then come back to a consideration of what we should do.
5/23/56
-11Chairman Martin then called upon Mr. Treiber, who made a
statement substantially as follows:
Our analysis of the business and credit situation is
similar to that presented by Messrs. Young and Thomas this
morning.
We are still in an area of uncertainty as far as
the forces of expansion and of contraction are concerned.
In the aggregate, the economy moves sidewise.
But the
aggregate conceals divergent trends.
Employment in April was at an all-time record.
Capital expenditures are heavy and each new estimate
shows larger expected capital outlays. There is some ques
tion as to whether capital goods producers can expand out
put fast enough to meet the projected demand.
While consumer demand in the aggregate continues high,
the demand for durables has slackened. Inventories of
automobiles are high and auto production has been cut back
greatly, with further reductions in prospect for the third
quarter. Demand for steel continues high but unbalanced
inventories are building up.
Housing starts, while still high, have declined some
what and will probably not reach levels expected earlier in
the year.
Mortgage market conditions have tightened again,
and are a deterrent to expansion of building activity. Out
lays for nonresidential construction have advanced to record
levels, and the prospects are for continued high activity.
While price changes, as evidenced by the aggregates,
have been small, the aggregates have concealed individual
price movements.
Prices of manufactured goods have risen for
a year. Price increases are generally expected in the steel
industry and in metal-using industries.
The capital markets have adjusted from the low prices
and high yields of a few weeks ago and may be finding a
trading base at which they can operate.
Will the weaknesses in the auto industry and certain
other areas spread their contractive influences to other
parts of the economy? Since expectations in the minds of
men are so important, what effect will there be on business
confidence?
Demands for bank credit, particularly business loans,
continue larger than can easily be explained by the current
needs of a business situation which, in the aggregate, is
moving sidewise. The great bulge in business loans during
It looks as if there may
March has not since been reduced.
be similar high demand for bank loans in June. It is be
ginning to look as if the demand for bank credit of many
5/23/56
-12-
businesses and industries, in considerable part, has grown
out of an over-all squeeze on corporate liquidity, accompany
ing the growth of inventories and receivables, larger capital
expenditures, and the temporary use of tax accruals for work
ing capital purposes.
As for the Treasury, it will need to refund an issue of
$12-1/2 billion of notes maturing August 15; $5 billion of the
issue are held outside the Federal Reserve and Treasury. In
the second half of the year the Treasury will also need to
borrow about $5-1/2 billion for cash. Half of this might be
raised before Labor Day on tax anticipation certificates due
in March 1957.
Such financing will call for some bank under
writing, and some Federal Reserve credit will be needed in
connection with the cash borrowing.
In recent weeks we have heard businessmen expressing
fear as to whether credit for needed purposes will be avail
able.
So far as we can ascertain, needed credit for business
purposes has been available, but at increased cost. All this
would seem to indicate that our restrictive credit policy has
been working reasonably well. We must be on guard, however,
lest the pendulum swing too far. The Chairman, of course,
made strong effort at the recent meeting of the Pennsylvania
Bankers Association to make it clear that needed credit would
be available--that the pendulum would not swing too far.
Net borrowed reserves in the last two weeks were higher
The actual statistics had a way of turning
than expected.
out to be considerably more severe than the projections in
Added to this was a $45 million correction increas
dicated.
ing required reserves in the first half of May by that amount.
It would seem desirable to maintain about the present
degree of pressure in the money market, avoiding any appearance
of increasing pressure and avoiding any reason for the public
to infer that essential credit will not be available.
No change in the discount rate at the Federal Reserve
Bank of New York is called for. It should be clear that the
discount window is always open subject, of course, to appropriate
scrutiny to avoid abuse in its use.
Projections of member bank reserves for the remainder of
May and for June show a need for some open market purchases.
After June, System purchases in much larger amounts will be
probably needed.
In the period immediately ahead, recognizing that "net
borrowed reserves" are only one of many factors measuring
money market tightness, net borrowed reserves might be allowed
This
to decline somewhat, perhaps to the $400 million range.
credit
which
against
wind
the
that
signal
a
minor
be
could
policy is leaning is not blowing quite as hard as it appeared
to be a short time ago.
5/23/56
-13
We, too, have reviewed the form of the general di
rective by the Committee to the New York Bank, considering
whether a change in the directive is in order. Since
March 27, 1956 the Committee has directed open market
transactions with a view "to restraining inflationary
developments in the interest of sustainable growth."
In
the two preceding months the directive had been qualified
by the addition of the clause: "while taking into account
any deflationary tendencies in the economy." In our de
liberations today we should consider the desirability of
restoring this additional clause.
Mr.
Johns said that the St. Louis Bank had been spending a good
deal of time recently in
trying to evaluate the situation.
that when you have,on the one hand,
He noted
continuing strength in business
expenditures for plant and equipment and, on the other hand, some doubt
as to the future of consumer demand,
weakness in the consumer sector is
there are those who argue that
a forerunner of weakness in
the busi
ness expenditure sector, while others argue that business expenditures
at the levels existing and expected generate personal incomes which
consumers will spend.
penditures is
view no weakness in business ex
In the latter
considered predictible.
aside matters of psychology.
the view that strength in
Mr.
These considerations partly lay
Johns said that he was inclined to
the business expenditures sector should be
appraised as of greater importance than doubts about the attitudes
and expectations of consumers.
He doubted that personal incomes would
sag much in the presence of the expected business spending,
inclined to think that perhaps what we have is
a shift in
and he was
the pattern
of consumer spending rather than a fundamental decision by consumers
not to spend.
He was not too greatly concerned about the slump in
-14
5/23/56
automobile sales, although he did not mean to imply that it is un
important.
Some weakness might be appearing in business psychology,
and he reported comments from bankers yesterday to the effect that
there might not be quite so much confidence and bullishness now as
earlier.
If
this change in
appear in what is
attitude were to grow, weakness might
now the strong sector of the economy.
Mr. Johns
said that he would not favor any dramatic change in policy between
now and the next meeting.
However,
he would be quite pleased if
the
net borrowed reserve figure could be kept somewhat lower than the
recent $600 million level; and he mentioned $$00 million or a little
Mr. Johns said he would not propose any change
below that figure.
in the discount rate at the St. Louis Bank at the present time.
Mr. Williams said that there was no change either statistically
or psychologically to be reported for business activity in the Phila
delphia District.
There is
great strength in
machinery and equipment, and plans in
ward.
Evidence of a little
the manufacture of plant
this field continue to go for
softening in
some areas is related to the
automobile industry--for example, the cutback in
tion of activity is
expected in
steel--but a resump
the third quarter.
Production of steel
goods for general and industrial construction continues strong.
Some
weakness in the apparel industry has appeared, perhaps growing out of
the two-year cycle referred to for that industry, which had a very
good year last year.
There has been a small drop in employment.
In
the over-all, no great change in the economy is indicated, Mr. Williams
5/23/56
said.
-15
In discussions with bankers,
especially those borrowing from
the Reserve Bank, reports indicate no diminution in
credit.
the demand for
Businessmen talk about the restraint and their attitudes
are mixed, some being critical and others regarding the current re
strictive policy with approval.
of the problem and is
credit policy.
As to the general public, it
interested in
is
aware
the controversial aspects of current
The "informed public" reflects the views expressed at
the Business Advisory Council meeting last weekend, Mr.
Williams said,
where there was an attitude of concern, lest confidence weaken.
Mr.
Williams referred to the meeting of the Delaware Bankers Association
which he attended recently where he found a great deal of support for
the System's approach to current problems and some criticism of com
ments which were looked upon as attempts to generate a psychology
which would put pressure on the System.
At that meeting, he said,
views were expressed indicating that the origin of current problems
in the automobile industry was of its own making.
Mr. Williams ques
tioned whether the System should move in anticipation of changes or
on the basis of rumors, suggesting that it might be preferable to
wait until it had some evidence that a move was necessary.
Mr. Fulton said he agreed substantially with Mr. Young's com
ments on the business situation.
In the Cleveland District steel opera
tions continued at a high level, but the outlook depends on whether
there is a strike.
If there is not a strike, operations are expected
to drop to 85 per cent of capacity during the first
part of the third
-16
5/23/6
quarter, although some increase would take place when new model auto
mobile production was being started.
of considerable duration.
If
there is
a strike, it
may be
Mr. Fulton said that while there were excess
inventories of steel throughout the country, this was not considered a
particularly bad factor and most of it
industry.
Structural steel continues very tight.
industry is
active.
was allied with the automobile
working at capacity.
The machine tool
Road building machinery is
also very
Foundries allied with the automobile industry have reduced
output sharply,
but foundries producing products for other industries
are working full time.
to the effect that it
Mr. Fulton commented on the building situation
was very active in the Cleveland District and
that some criticism was being made in connection with the failure of
insurance companies to take up commitments readily.
Capital expendi
tures for which plans were laid a year or two ago are going ahead re
gardless of the restrictive monetary policy, but some pause is
given where plans are not yet formulated.
Mr.
being
Fulton said he had been
disturbed about the size of net borrowed reserves recently, thinking
they were higher than the Committee had anticipated they would be,
due to mechanical factors.
He thought there might be less intensity
of pressure, with net borrowed reserves perhaps around the $500 million
level instead of $600 million.
A change in
the Committee's directive
might be appropriate, but he would not favor any change in
the dis
count rate at this time.
Mr.
Shepardson said that it
ing pressures in
was evident there were conflict
different segments of the market.
He thought this
5/23/56
-17
indicated that the System had been achieving the aims it
had in mind
a short time back.
would be
He recalled earlier comments that it
difficult to meet the continued consumer demand and at the same time
to take care of the capital expansion to provide increased resources.
The allocation of resources then considered necessary had been taking
place, and Mr. Shepardson said he thought this had been wholesome.
Despite some of the softness now appearing,
he did not think conditions
had reached a point indicating a retreat from the Committee's present
policy.
Savings to meet both building and capital investment demand
could come from some turn down of consumer expenditures,
peared to be taking place in
the automobile industry.
such as ap
Mr.
Shepardson
said that he did not know what the level of net borrowed reserves
should be.
Perhaps a lower figure than that we had had recently would
be proper.
But he thought the Committee should be in the position of
providing the needed reserves without providing them in sufficient
amounts to permit any appreciable reduction in the pressures against
unsound credit expansion.
directive,
Mr. Shepardson referred to the Committee's
stating that he had given some thought to suggesting a
change in clause (b) of the first
paragraph so that it
would provide
for "maintaining a climate of sustainable economic growth."
He
thought the Committee would be in sound position if it provided the
additional reserves that would be needed, together with some lessen
ing of the volume of net borrowed reserves.
Mr. Mills made a statement substantially as follows:
5/23/56
-18-
Considering the tangible factors that are bearing
on economic developments and the intangible influences
that are coloring the psychological climate of the busi
ness community, it would seem that the System should
supply additional reserves on a gradual basis that would
aim to bring the level of negative free reserves down to
around $400 million. In the process, the Committee would
observe events, and if the additional reserves had too
great an impact on the market and on the interest rate
structure, we should take a second look. It would seem
important at this time to supply additional reserves on
a lead basis so that the commercial banks, in looking for
ward to the credit demand that they anticipate over the
June 15 tax payment period, can be prepared with reason
able confidence to satisfy those demands.
In supplying
additional reserves, I would doubt that we would call
into being any inflationary risks. When you pause to
think that the banks are in a decidedly tight position
and that their liquidity is at a low point, you might
reasonably expect their first
move, as new reserves are
acquired, would be to improve their liquidity and not ag
gressively to expand their loans except for the constructive
and necessitous requirements of their customers. Banks will
move to improve their liquidity by building up their holdings
of Treasury bills, and in their doing so we should look for
pressure on Treasury bill yields which, however, should not
disturb us at the present time, especially as our primary
responsibility hinges on the question of adequate avail
ability of credit. Any doubts about supplying additional
reserves and the possibility for their having inflationary
consequences can be resolved by the knowledge that the
leverage of the System's actions works much more quickly
when the banks are in a tight position, as is now the case,
than when they are in an easier position. Therefore, as
bank reserve positions are eased, we should anticipate
prompt results, and by the same token, earlier reserve
positions can be promptly restored, if deemed necessary,
by subsequently withdrawing reserves.
purchases are
It would seem that direct Treasury bill
the best means for supplying new reserves. Repurchase
The com
agreements might not serve the desired purposes.
mercial banks, in following the policy actions of the Fed
eral Reserve, are going to look for a continuity of direc
tion that is not as perceptible where reserves are provided
on a temporary and ephemeral basis as in the case of re
purchase agreements. Therefore, if reserves are supplied
in correlation with changes in the economic picture, a case
5/23/56
-19-
can be made for providing them through direct Treasury bill
purchases.
Any resulting change in the interest rate struc
ture should be considered of secondary importance to the
need of making credit more available. I also have some
doubts about whether making repurchase agreements for only
overnight is appropriate.
It might be better to make them
for longer periods and to allow the dealers to use their
own judgment and initiative in picking them up before
maturity, as they presumably can and will if there is a
marked upward movement of Treasury bill prices.
It would seem appropriate to modify the directive to
the Manager of the System Open Market Account.
It would
not seem that the present situation calls for any change
in the discount rate; but as and if additions to the supply
of reserves react toward lower yields on the list
of U.S.
Government securities, and where the pressure on yields on
short-term securities presumably will be accentuated over
the next six weeks as outside investors come into the mar
ket and as Treasury tax anticipation certificates are retired,
a softening of interest rates is likely. In that event it
would be a logical time to reduce the discount rate in order
to be consistent with the over-all change taking place in
the interest rate structure.
Mr. Leach said that Fifth District business in recent weeks has
shown a slight weakening.
Tobacco manufacturing and bituminous coal
production are holding at good levels, but furniture manufacturing has
slowed down and price concessions have been necessary to get orders,
particularly in
the cheaper lines.
Output of textiles has continued to
decline, and hosiery mills are operating at only about 50 per cent of
capacity.
Department store sales declined in April from the record
level of March, but are still
high.
There is
definitely less exuberance
now than a month or two ago.
Borrowings at the Richmond Bank were down to $22 million last
Friday,
the smallest in the System, but this did not reflect a lack of
-20
5/23/56
loan demand at member banks.
especially at larger banks.
Loan demand continues very strong,
Aside from increased demand from com
mercial customers, correspondent banks report heavy demands from
their bank customers both for outright loans and for carrying excess
lines.
It seems apparent that a substantial amount of bank credit
is going into plant expansion:
small and medium-size concerns have
no other place to go.
Mr. Leach said that he thought the policy the Committee has
been following recently has been about right and he believed it
be a mistake to ease perceptibly at present.
would
He would continue almost
the same degree of tightness, taking pains to assure that needed re
serves are provided in
tax squeeze in June.
in discount rates in
sufficient amounts in
ample time to avoid a
Mr. Leach said he hoped there would be no change
the immediate future but that it
would seem ap
propriate to make a slight change in wording of the directive by adding
to clause (b) a statement to the effect that any deflationary tendencies
in the economy should be taken into account.
Mr.
Leedy said that there had been no substantial change in
Tenth District activity recently.
The District has not been enjoying
the same degree of prosperity that exists in most other districts.
There is
some unemployment due to cutbacks in
in automobile assemblies.
defense production and
Agriculture has been very severely affected
this year by the drought, perhaps more so than in other predominantly
-21
5/23/56
agricultural districts.
Mr. Leedy felt that nationally business was
moving sidewise, the one exception being the indicated strength in
capital expenditures, now bolstered by the latest McGraw-Hill survey.
It
seemed apparent there had been some deterioration in
the part of businessmen.
optimism on
There had been some marked change in the
public psychology, reflected in
the stock market.
Great inflationary
pressures do not seem to be present across the board, Mr. Leedy said,
even though some may exist in
the case of capital expenditures.
In
view of some deflationary trends reported, he felt that the Committee's
directive should be changed to restore the wording that was used in
clause (b) of the first
year.
paragraph from January 24 to March 27 of this
He also thought that additional reserves should be supplied,
stating that net borrowed reserves in the $400 million to $450 million
range would be about the level he had in mind.
to change the discount rate at this time.
be no change in
It
would be a mistake
In summing up, there should
policy, Mr. Leedy said, but a lessening of the tight
policy the Committee has been applying.
Mr. Powell said that practically all business indicators in
the Ninth District were showing good increases, and unemployment con
tinues very low.
Bankers are very optimistic.
Borrowings from the
Reserve Bank reflect this feeling, and Mr. Powell noted that Minneapolis
District reserve city banks recently have been borrowing about 24 per
cent of their required reserves, more than in any other district.
5/23/56
-22
Many banks have increased the rate they pay on time and savings de
posits to 2 or 2-1/2 per cent.
Mr. Powell referred to a city bank
which presented some paper as collateral for borrowing at the Reserve
Bank yesterday which included notes of finance companies.
said that he felt
Mr. Powell
there was every reason to retain the 3 per cent dis
count rate at the Minneapolis Bank at this time, although this did not
blind him to the fact that there may be shoft[sic]spots developing in the
economy generally.
In fact, he thought the economy was developing
more and more weak spots and that at some point it
for the System to reduce the discount rate in
would be necessary
order to maintain the
high level of economic activity that was desired nationally.
might be necessary rather soon.
Mr. Powell felt
This
that this would call
for open market operations and he thought there was not much reason to
let the level of net borrowed reserves get any higher than it is at
present.
Mr. Mangels said that Twelfth District activity seemed to be
continuing at a relatively higher rate than was shown for the national
picture.
This applied particularly to the employment situation, where
there had been a further decrease in unemployment than was indicated
nationally.
Department store sales in April were better in the Twelfth
District than nationally.
During the three weeks ending May 9, Twelfth
District credit extentions accounted for 30 per cent of the rise for
the country as a whole.
Except for automobiles and lumber, output of
-23
5/23/56
most industries continued to expand.
Residential building declined
in April, and this had had an effect on the lumber industry.
had also been a further weakening in
industry, Mr.
wood is
the plywood section of the lumber
Mangels said, since he reported two weeks ago; and ply
now selling below the lowest point last year.
some easing in prices of Douglas fir,
been reflected in
is
There
There has been
although that easing has not
actual quoted price reductions.
The lumber industry
not pessimistic and expects this to be a good year.
Mr. Mangels
said that there was less tightness at country banks than at city banks
in the Twelfth District and that borrowings at the Reserve Bank had
continued at a very modest level.
One of the Bank's directors recently
reported a slackening of business and some development of pessimism in
the inter-mountain district, but that was the only area in which there
has not been evidence of more optimism.
Mr.
Mangels expected the dis
count rate to be discussed at the June meeting of the directors but,
in
his opinion, it
was now preferable to hold the 3 per cent rate.
Mangels said there seemed to be some change in
psychology.
Mr.
He would be
inclined to make no change in policy until this was more clearly indi
cated, but he would favor a change in wording of the Committee's di
rective along the lines suggested by others.
Mr.
Mangels then com
mented on the results of a questionnaire distributed recently at the
meeting of the California Bankers Association to which responses indi
cated bankers predominantly expected business activity to continue at
-24
5/23/56
a high level during the rest of this year and in which they also indi
cated widespread approval of the discount rate in effect at San Francisco.
Mr.
Irons said that the economic trend in the Dallas District
was about what it
has been for the past three to six weeks--pretty much
a sidewise movement.
There had been a further decline in unemployment
and the labor situation is tight.
Department store sales declined
slightly in April but have been very strong thus far in May,
However,
petroleum refining activity is up, and crude oil production is very
high although it has declined seasonally lately.
Construction is main
taining record levels and gains in residential construction are adding
to the strength in nonresidential.
of last year.
Contract awards are running ahead
It is difficult to find areas of weakness.
With respect
to the confidence factor, Mr. Irons said that businessmen and bankers
generally were confident as to the outlook for business in the Dallas
District.
He described the feeling three months ago as one of "unbridled
confidence" to such an extent that some businessmen were concerned as to
what might happen, whereas now the concern has disappeared and a more
cautious type of confidence exists.
There is no pessimism in the Dallas
District so far as he has observed, Mr. Irons said.
Loans have con
tinued to increase in the past several weeks, and bankers report very
strong demand for credit.
The greatest pressure exists at a few re
serve city banks; for example,
per cent, and in
it
the loan-deposit ratio in Dallas is
one other city 58 per cent; but in
is around 27 to 30 per cent.
67
some other cities
Country banks have excess reserves,
5/23/56
-25
and their loan-deposit ratios are not high.
This situation is reflected
in borrowings of member banks, most of the demand at the Reserve Bank
coming from a few large city banks.
Credit policy is being effective
in causing bankers to scrutinize loans and to be more selective in their
credit extensions, Mr. Irons said.
In the overall, the strength of
factors on the side of business expansion, rising personal income,
record employment, and low unemployment impressed him more than the
healthy readjustment taking place in the automobile industry. He would
not wish to see any change in policy at this time and would not be pre
pared to recommend a change in discount rate.
He would like a measure
of restrictiveness maintained. Bank reserves may have been a little
snugger in the market in
recent weeks than was necessary,
not wish to see policy any tighter.
and he would
Perhaps net borrowed reserves
should be $500 million or under, rather than on the over side.
There
should be a willingness to provide funds to the market when needed.
Mr.
Irons said he thought the Committee's directive might be changed
to restore to the wording of clause (b) of the first
adopted at the January 24 meeting or in
paragraph that was
some other way to take into ac
count the other factors mentioned this morning,
but the change should
not be strong enough to imply that the Committee had changed its
Mr.
ness in
policy.
Erickson said that there had been no marked change in busi
the Boston District except that there was evidence that business
sentiment was not quite as optimistic as he had reported at the previous
meeting.
Our recent Massachusetts
survey of plant and equipment expan
sion shows an increase of 21 per cent over last year.
Greater use of
-26
5/23/56
the discount window has been made in the past few weeks, and Mr.
Erickson stated that within the past few days three banks which
had never before borrowed from the Boston Bank had come in for funds
while five others that had not borrowed since 1953 had come in.
Mr.
Erickson referred particularly to the third paragraph of the staff's
review of economic developments dated May 18, 1956, which described
the recent economic situation as one "in which expansion forces have
about been balanced by forces of deceleration of advance and of cor
rection of various imbalances which have accumulated," and which he
stated expressed his present views.
Under these circumstances,
Mr.
Erickson felt
the directive should be changed by inserting the words
in
of paragraph 1 that had been taken out at the meeting
clause (b)
on March 27.
He would make no change in
discount rate at this time
and would prefer to see net borrowed reserves a little
than they have been; for example, in
less tight
the range of $450 to $550 million,
tending on the low side of that range.
Mr. Szymczak said he would prefer to wait until a later meeting
for a change in the wording of the directive, although he did not think
this was important.
He did not think there ought to be any change in
discount rate at this time, and net borrowed reserves should be brought
down to about the $500 million level with the idea of watching develop
ments carefully to see what else is needed.
Mr. Balderston made a statement substantially as follows:
5/23/56
-27Our difficult task is to pick a proper course among
the cross currents that are now evident. Like Mr. Erickson,
I picked up the third paragraph of the staff review as re
flecting the current situation. It seems to me an accurate
portrayal of what we face today. My solution would be to
break free from the inertia of the status quo and take action
which seems to me imperative if we are to act in time.
On
this I have to struggle with myself because I am addicted
to the philosophy of gradualness.
But there are turns in
the road that you cannot get around by a slight turn of the
wheel.
I gather we may be at such a point now.
Although I
am content with existing discount rates that may inhibit
some marginal debt or plant expansion, the availability of
credit should be increased, and substantially.
My reason for urging this change in posture, which is
an extension of my thinking of two weeks ago, is that we
seem to have arrived at a cessation of demand for automobiles.
The policies of the automobile industry last year have helped
to create a dearth now of buyers.
The number of suppliers to
the automobile industry is very great, perhaps as many as
20,000, and the effects of the reduction in production and
employment in the automobile plants are extremely pervasive
and will injure a considerable number of plants in many
localities.
The number two consideration is the apparent end, even
if temporary, in the long forward advance of common stock
prices. A 40 point reduction in the Dow Jones industrial
price index seems to presage market weakness that, added to
the weakness in the automobile industry, may have considerable
It may have an effect out of proportion
psychological impact.
to its real importance, especially when these factors strike
the public consciousness at the same time as the summer
doldrums.
Third is the sharp drop in bank deposits, especially in
May.
It has been of great concern to me these last few days.
It was quite understandable some time ago that investors should
withdraw deposits to invest in Government bonds, but the May 9
reporting member bank report shows a sharp drop of $379 million
of demand deposits, compared with an increase of $253 million a
year ago.
That remedial action is imperative is indicated by the
fact that corporate holdings of cash are so inadequate to meet
the June tax payments as to cause heavy demands on banks just
It would seem imperative to meet
before and after that time.
that tax demand by putting substantial funds into the market,
and I agree with Governor Mills and President Leach that we
My preference is to return to the wording of
cannot wait.
5/23/56
-28-
the directive adopted last January 24, to maintain present
discount rates, but to increase sharply the availability of
credit. Unless we take action on those portions of the
economy that are slumping, our remedial action may be too
late. If there should occur a fresh upsurge of consumer
demand, which is quite possible, our philosophy of flexi
bility means we would take whatever action may be appro
priate then. I would suggest net borrowed reserves of
around $250 million. If our staff forecasts of reserve
needs are correct, we may have to buy $400 to $500 million
of bills. We should not temporize with a situation which
seems to me to call for real action. I think we should act
and act now.
Chairman Martin then made a statement substantially as follows:
As far as the consensus is concerned, there is an over
whelming majority in favor of altering the directive, and un
less I hear a dissent we will change the directive by tacking
on the last phrase to clause (b) of the first paragraph so
that it will read "to restraining inflationary developments
in the interest of sustainable economic growth while taking
into account any deflationary tendencies in the economy."
Perhaps we could have better language but there may be some
merit to sticking to the language that we have used in the
past.
Now I would like to make my own comments. I have listened
very intently to the discussion and I lean even further than
Governor Balderston does to the other side. I deliberately
avoided using any figure of net borrowed reserves in my own re
marks. To me, the capital survey McGraw-Hill has just released
is adequate justification for the policy we have pursued. Also,
I think perhaps we were late in our tightening moves and that
we ought to recognize the fact that we got in here in a diffi
cult period; there has been a backwash that has carried negative
free reserves higher, along with the increase in the discount
rate, than we expected. That is not intended as a criticism of
the account, but supply and demand factors have worked that way.
We have gotten accustomed to accepting $600 or $700 million as
more or less a figure that is normal, whereas earlier we were
talking about getting to around $00 or $500 million. We are
coming into Decoration Day and the tax situation which is upon
us. I think I discern straws in the wind. I realize how
dangerous that is. Governor Szymczak and Mr. Williams think
we ought to wait and see the statistics before we act. Never
theless, we see banks coming in to borrow who have never
borrowed before, as Mr. Erickson said, and we know that is
-29going on all around the country.
There are delayed reactions
in all of this and the psychological factors may have gotten
ahead of us,
We have had marvelous acceptance of our policies.
Bankers
are almost 100 per cent behind us.
You have to differentiate
between the banker and the borrower, however, and there are the
other components of the economy. I have had at least twelve
directors of substantial corporations not connected with the
automobile industry talk to me recently in entirely different
terms than they talked to me a few weeks ago. That will not
appear in the statistics for another four to six weeks, but
it is enough of a consideration in my thinking to say, as I did
in January, that we ought to be trending in a direction so as
to make it plain that we are following a flexible monetary
policy. We cannot do this tomorrow. We could not start to
morrow and go to "X" reserves unless we just completely shocked
the market.
But I think we ought to be trending towards zero
reserves.
This could easily be a double bottom, and there may
well be another upsurge; we may find later that we want to put
the discount rate higher than it is now. But I think we are in
grave danger of being put in the position of not recognizing
In
the interpretations that will be put on these developments.
my address before the Pennsylvania Bankers Association, I tried
to provide some reassurance.
I think we should be trending towards zero free reserves.
Governor Balderston says $250 million. I would not worry about
a charge that we were "selling out" because of pressures that
That is one of the things you have to
have been put on us.
But if we had been successful
anticipate from the commentators.
in keeping lower net borrowed reserves in this period, we would
not have had built up the pressures that we now have. I really
feel, and I would like to be recorded on this, that we have made
a great mistake in our emphasis on figures. We have debated this
I have been one of the offenders in wanting to
again and again.
get our discussions as close as we could to saying what we wanted
But we talk about
and of having an understanding of our policy.
these figures, and they get put in a framework in which others
think of the figures as a measure of what we are doing. There
are far too many people around Washington who are looking at the
figures of net borrowed reserves. We have helped produce that
psychology. When I say we ought to be trending to zero free
reserves, it is the trend I am talking about. We cannot afford
to let the market think that we are not trending in the direc
tion of supplying the reserves that will be needed under these
How that is done is not particularly important,
conditions.
and I am not saying that the desk could get to $250 million by
the next meeting of the Committee, but if I were running it on
my own I would want to be certain that the trend was in that
direction. That is what I mean by a shift in emphasis and not
a change in policy.
-30
5/23/56
Mr. Szymczak inquired as to how long it
would be, under such
a program as that suggested by Chairman Martin, before the discount
rate would have to be adjusted also.
Chairman Martin reiterated that he was not talking about getting
to zero free reserves tomorrow but about trending in that direction.
It
was necessary to talk about that trend or we would find that the backwash
was working in
the other direction.
Mr. Balderston said that originally he had put down a target of
zero to $250 million free reserves, and when he got the supplemental re
port from New York this morning he noticed that net borrowed reserves
had averaged $253 million during December, January, and February.
It
seemed to him that the Committee should be aiming at a figure at least
as low as $250 million if
it
readopted the wording of the January 24
directive.
Mr. Williams suggested that perhaps it
scious program of the Committee to get to its
straint as a means of bringing attention to its
had been almost a con
present position of re
policy.
Only when the
public became thoroughly aroused and when the pressure had been put on
by the System had real restriction resulted.
Mr. Williams also raised
the question whether to follow the suggestion the Chairman made before
statistical evidence became available would amount to having the general
public tell
the Committee how to run the shop.
Chairman Martin said that the point he would make on this was
that the Committee should not ignore the general public.
important factor.
It is an
That does not mean that the Committee succumbs to
-31
5/23/56
the pressures of the general public.
He felt that a flexible mone
tary policy required an adaptation to the views of the public.
The
Committee had been getting more and more into the position where people
who ought not to be alarmed about credit were alarmed about credit, and
he did not know how to eliminate that feeling so as to avoid knots such
as we had in
the spring of 1953.
He thought that the Committee should
make clear the direction in which it
was going.
point as to how long the Committee could go in
On Mr.
Szymczak's
this direction without
the discount rate coming down, this was a matter of watching develop
ments,
Mr. Szymczak said that the rate could not be separated from
the supply factors in
credit and if
Mr.
If
there was a demand for
the reserves were not there to supply it,
of course, go up.
abruptly, it
the credit situation.
If
the rate would,
enough reserves were supplied to the market
meant that rates would come down.
Johns said that he had difficulty with the idea of trending
toward zero free reserves, and he raised the question whether such a
directive to the Manager of the System Account might be setting a policy
that would carry beyond the next meeting of the Committee, if
we were not
to get down to the zero free reserve level by the date of that meeting.
Was it
necessary to set policy that far ahead at this time?
Chairman Martin said that his thought was that the shift in
emphasis he had proposed was necessary but that he did not believe it
was necessary to go beyond a shift in
emphasis at the present time.
5/23/56
-32
Mr. Leach said that he agreed net borrowed reserves should
be brought down from where they have been.
It
bothered him some
what, however, to say that they should be brought to zero and to
say that this was not a change in policy.
Chairman Martin said that he may have overstated the situa
tion but that he had been discouraged as he listened to the comments
around the table this morning.
It
had not seemed to him that we were
alert enough to the implications in
the situation.
pretty well insulated from the operation, he said.
policy is
that stage.
He
was three years ago, but today things have moved beyond
He was not asking for any set figure of net borrowed re
He had suggested zero free reserves because he wanted to make
clear his own position.
if
Flexibility of
not just a catch phrase that has come into the picture.
thought it
serves.
The Committee is
He thought it
would be a very serious mistake
by accident the Committee permitted the trend to appear other than
that.
As to the discount rate, Chairman Martin said that his feeling
was that the rate and the supply of reserves could not be separated;
he had hoped that the increase in
the rate could be eased by greater
availability of reserves, but the supply and demand factors that had
come into the picture had operated against this.
The committee should
be aware of storm signals and should not ignore them.
Mr.
Leedy said that he had felt
that net borrowed reserves,
having been around the $550 million mark, in
being dropped $100 or
$150 million would require such substantial additions to reserves,
5/23/6
-33
according to current projections, that the size of those additions,
aside from the level of net borrowed reserves, would indicate the
policy being pursued.
Mr. Mills suggested that it might be preferable to set the
next meeting for June 5 instead of June 12 with the thought that the
Manager of the Account could be given another directive within a short
period of time.
Chairman Martin said this was agreeable to him and, after brief
discussion, it
was agreed that the next meeting of the Committee would
be held on Tuesday, June 5, 1956.
Chairman Martin went on to say that on the basis of the discus
sion there appeared to be a consensus that operations should be con
tinued so as to have a downward trend in the amount of net borrowed re
serves without any statement as to the amount of reserves.
Mr. Thomas commented that he did not think the public looked
at the volume of net borrowed reserves as much as at the direction of
System operations.
He noted that during the next two weeks there would
have to be substantial operations in order to keep the pressures from
increasing.
It
was not correct to say that at the present time net
borrowed reserves were higher than the Committee had intended at its
meeting two weeks ago; they had been last week, Mr. Thomas said, but
that was not true now.
lion.
At the present time they were around $400 mil
The figure to look at was the growth of credit and not net
borrowed reserves,
he said.
From now on, in order to take care of
seasonal demands for credit the Committee would have to inject
5/23/56
-34
substantial volumes of reserves.
Mr. Thomas said that he had been
concerned before this meeting that the injection of these needed re
serves to meet seasonal demands might be looked upon as more drastic
than the Committee intended, but if
as indicated at this meeting the
Committee wished to change the emphasis of its
policy,
perhaps the
supplying of the volume of reserves that would be needed to take care
of seasonal credit demands would not be misinterpreted.
Mr. Rouse said he appreciated the statement Mr.
Thomas had
made and that he also wished to call attention to the fact that the
System account was purchasing about $80 million of bills today and
that it
intended to make an additional purchase tomorrow.
Net
borrowed reserves for the week might be $400 million or less, although
they would be higher than that on Wednesday.
ment was issued on Friday, it
would be in
However,
when the state
the light of the market's
knowledge that the System account had been in the market both today
and tomorrow.
Chairman Martin inquired whether there was agreement with
his suggestion that the directive of the Committee be modified so
as to include in
clause (b) of paragraph 1 the additional words he
had suggested earlier during the meeting which would provide that
the Committee would take into account any deflationary tendencies.
He also inquired whether it
was agreed that the Committee's opera
tions should be carried on between now and the next meeting with a
5/23/56
view to. bringing about a downward trend in
borrowed reserves.
In response to Mr.
the volume of net
Johns'
question, Chairman
Martin re-read clause (b) of the Committee's directive of January
24, 1956.
There being no indication of dis
agreement with Chairman Martin's
statement of the policy to be followed
by the Committee between now and the
next meeting, upon motion duly made
and seconded and by unanimous vote,
the Federal Reserve Bank of New York
was directed until otherwise directed
by the Committee:
(1) To make such purchases, sales, or exchanges (in
cluding replacement of maturing securities, and allowing
maturities to run off without replacement) for the System
open market account in the open market or, in the case of
maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective
economic conditions and the general credit situation of the
country, with a view (a) to relating the supply of funds in
the market to the needs of commerce and business, (b) to
restraining inflationary developments in the interest of
sustainable economic growth while taking into account any
deflationary tendencies in the economy, 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 securi
ties 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 ac
(2)
count of the Federal Reserve Bank of New York (with discre
tion, in cases where it seems desirable, to issue participa
tions 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;
-36
5/23/56
(3) To sell direct to the Treasury from the System
account for gold certificates such amounts of Treasury
securities maturing within one year as may be necessary
from time to time for the accommodation of the Treasury;
provided that the total amount of such securities so sold
shall not exceed in the 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.
Chairman Martin noted that the agenda included as a topic for
consideration Mr.
to engage in
Sproul's proposal that the System account be authorized
swapping of Treasury bills, along the lines discussed at
the meeting on May 9.
He suggested that because of the lateness of the
hour this topic be carried over until the next meeting of the Committee,
and there was agreement with this suggestion.
Chairman Martin then referred to the Committee action at its
May 9 meeting at which it
decided to set up a staff committee to study
the facts of the experience with present operating procedures along the
lines suggested by Mr.
Sproul.
This would be a "spade work" study.
Chairman Martin went on to say that he had consulted with Mr.
Sproul
with respect to participation from the staff of the Federal Reserve
Bank of New York and as a result would suggest that the committee con
sist
Mr.
of Mr. Harold V. Roelse, Chairman; Mr. Tilford C. Gaines, Secretary;
J.
Dewey Daane; Mr. Robert Holland; and Mr. Donald C. Miller.
Riefler,
expected,
Mr.
as Secretary of the Federal Open Market Committee, would be
ex officio, to keep in
touch with the committee's work.
Chairman Martin also said that Mr.
Sproul had suggested that Mr.
Rouse
not be asked to serve on the committee as such but that he would be
-37
5/23/56
available for counsel and information.
when the committee is
organized it
His suggestion would be that
present the Federal Open Market
Committee with a report indicating the nature and scope of the material
it would undertake to gather.
There was no indication of disagreement with Chairman Martin's
suggestion for the membership of the staff committee or of the procedure
to be followed by the committee in proceeding with the study suggested.
Mr. Mangels withdrew from the meeting at this point.
Chairman Martin said that he was forwarding to the Treasury, as
authorized by the Committee at its meeting on May 9, copies of Mr.
Riefler's memorandum "Experience Since the Accord with Short-Dated Fed
eral Debt" distributed to members of the Committee under date of April
10, 1956.
After the Treasury representatives had had an opportunity
to study the memorandum he would plan, in
standing at the May 9 meeting,
accordance with the under
to discuss with them possible approaches
to studying the problems of coordination of debt management and credit
policy.
Chairman Martin stated that Mr.
Sproul had suggested that it
might be appropriate to send the Treasury also a copy of the memorandum
prepared at the Federal Reserve Bank of New York under date of Septem
ber 29, 1955, entitled "Notes on Debt Management--Structure of the Debt
and Credit Policy."
He suggested that between now and the next meeting
of the Committee the members review this memorandum to refresh their
5/23/56
-38
minds with respect to its
contents, with a view to deciding at that
time whether to send the New York Bank's memorandum also to the
Treasury.
There was no disagreement with Chairman Martin's suggestion.
Chairman Martin next referred to the proposal by Mr. Sproul
at the meeting on May 9 that there be a study of the Federal Funds
market,
the first
phase of which would be the development of factual
information by a subcommittee operating under the Committee on Re
search and Statistics of the Presidents'
Conference.
The Chairman
said that he understood that Mr. Leedy was taking steps to appoint
this subcommittee of the Presidents'
Conference.
Mr. Leedy said that he had referred this matter to the System
Advisory Committee on Research and Statistics.
Chairman Martin noted that the next meeting of the Committee
would be held on Tuesday, June 5, 1956.
Thereupon the meeting adjourned at 1:28 p.m.
Secretary.
Cite this document
Federal Reserve (1956, May 22). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19560523
@misc{wtfs_fomc_minutes_19560523,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1956},
month = {May},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19560523},
note = {Retrieved via When the Fed Speaks corpus}
}