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 Monday, February 18, 1957, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Hayes, Vice Chairman

Balderston

Erickson

Fulton

Johns

Mills

Powell

Robertson

Shepardson

Szymczak

Vardaman

Messrs. Allen, Bryan, Leedy, and Williams, Alternate

Members of the Federal Open Market Committee

Messrs. Leach and Mangels, Presidents of the Federal

Reserve Banks of Richmond and San Francisco,

respectively

Mr. Riefler, Secretary

Mr. Thurston, Assistant Secretary

Mr. Thomas, Economist

Messrs. Abbott, Hostetler, 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

Messrs. Bopp, Daane, Mitchell, and Tow, Vice

Presidents, Federal Reserve Banks of

Philadelphia, Richmond, Chicago, and Kansas

City, respectively; and Mr. Atkinson,

Economist, Federal Reserve Bank of Atlanta

2/18/57

-2

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on January 28, 1957, were ap

proved.

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 January 28 through

February 11, 1957, as well as a supplementary report covering commitments

executed February 13 through February 15, 1957.

have been placed in

Copies of both reports

the files of the Committee.

Mr. Rouse noted that the report of open market operations during

the past three weeks was longer than usual, partly because of his belief

that the Committee would be interested in a detailed description of the

System account sales of certificates of indebtedness and Treasury notes

and the market's response to these sales.

Sales of certificates and notes

had not commenced until Friday, February 8, when System holdings of bills

declined below $250 million, Mr. Rouse said, adding that as of Friday,

February 15, System bill holdings were down to $178.3 million.

Mr. Mills inquired whether as a matter of policy it would be de

sirable in the future to make an immediate and complete explanation of

the purpose of a departure from an established practice where the trans

actions involved represented a change in technique and not a change in

policy (in

this case, departure from the practice of limiting transactions

for the System account to Treasury bills) as a means of making certain

that the market was fully informed.

2/18/57

Mr. Rouse said that the transactions in

certificates and notes

had been handled in a manner (which he described) intended to make

certain that dealers would know that the transactions were for the

System account.

little

Although he felt certain that there had been very

misunderstanding,

have been no harm in

he agreed that, looking backward, there would

indicating even more clearly what was being done.

Mr. Robertson said that he had the same feeling as Mr. Mills

the System might benefit by making even plainer in the future any changes

of this character.

He suggested the possibility of utilizing the morn

ing conference with dealers as a means of spelling out such changes so

as to avoid any possible confusion.

He then inquired whether Mr. Rouse

felt that, in hindsight, it was appropriate to sell certificates and

notes at a time when the System account still held almost $250 million

in Treasury bills.

Mr. Rouse responded that at the time he had felt such sales were

appropriate and desirable, and it still seemed to him that was the case.

He reiterated that since February 8 sales of bills had brought holdings

down to $178 million.

Mr.

Hayes suggested that whether the figure was $200 million or

some other figure, it was clear that there was some level of System

holdings of bills below which the System would ordinarily not wish to go

in order to maintain a supply of bills in the event it became desirable

to withdraw a relatively large amount of reserves from the market very

2/18/57

rapidly.

He said that he had accepted Mr. Rouse's judgment on the

point under discussion.

Mr. Erickson inquired whether, if

it

announced a change in pro

cedure of this type, the Committee might set a precedent which would

make it

necessary to explain every future change in

Mr.

operating procedure.

Rouse stated that there might be some such feeling,

he did not think it

although

would be necessary to make explanations of all

changes of this type.

After some further discussion, upon

motion duly made and seconded, and by

unanimous vote, the open market trans

actions during the period January 28

through February 15, 1957, were approved,

ratified, and confirmed.

Mr. Young's statement on the economic situation, made at Chairman

Martin's request and as a supplement to the staff memorandum distributed

under date of February 15, 1957,

was as follows:

Towards the end of 1956, business and financial observers

were in unusual agreement that further advances in business

activity and further creeping inflation were to be expected for

the year 1957. Subsequent reappraisal has given rise to doubts.

Indeed, views in the direction of a topping-out of the infla

tionary advance have come to be expressed more frequently, with

the implication that a phase of downward deflationary adjustment

may be predestined for later in the year. It seems appropriate

at this meeting to inventory briefly these elements that the

doubters are pointing to as casting their shadows before.

Industrial production has hesitated in January and slipped

back one index point. Of the 24 major industrial groups enter

ing into the make-up of the index, some 14 have shown declines

in output since October of last year and 3 no change in output.

Absence of strength of indications of weakness were especially

characteristic of consumer goods industries. Gains in industrial

consumption of coal and electric power over a year ago have been

narrowing, and freight car loadings have been moderately under

year-ago levels.

2/18/57

While the general level of commodity prices at wholesale

has continued to rise--rising 1/2 per cent from mid-December

to mid-January and probably further to mid-February--the ad

vance in industrial commodity prices has slackened since late

autumn and, among commodity groups, the frequency of price

advance has been reduced. Prices of a number of industrial

materials and scrap, furthermore, have been declining, and

since early December average prices of basic commodities have

receded 4 per cent to about the level obtaining prior to the

closing of the Suez Canal.

Caution in forward buying has come

to be a feature of basic material and scrap markets, of markets

for some steel and metal products such as copper, and of markets

for textiles and for paper.

For some months now, industrial construction.has been below

a year ago and, since last spring, residential contract awards

in millions of square feet have been falling.

Nonresidential

construction awards for business purposes have also been declin

ing, with contract awards dropping from spring through the year

end. Available evidence, moreover, suggests that plant and

equipment expenditures by manufacturing industries are in the

process of leveling off; some observers would say already declin

ing, because for several months, some indexes of machinery orders

have been showing downdrift. Unfilled orders in durable goods

industries have been little

changed since August in contrast to

the earlier situation of a mounting order backlog.

While employment over-all has held up well in recent months,

it can be argued that some weakening in manufacturing employment

has recently occurred. Since October, small, steady, month-to

month declines in durable goods employment have been evident and

declines have also been registered over this period in employment

in some nondurable goods lines. The number of industries repre

Manhours worked per week

sented in the declines has been growing.

have also declined in about half of the major industry groups since

October, with other industries mainly stable, In January there was

a general decline in manhours worked in durable goods industries

and also a decline in some major nondurable industries.

Business inventories have risen through 1956 at about the

The increase in manufacturing inventories

same rate as in 1955.

has been more than sales, so that inventory-sales ratios in

manufacturing are higher than a year ago. With substantially

increased capacity to produce and to distribute finished product

than two years ago, total business inventories of $88.5 billion

and $6 billion higher than a year earlier may well be on the

high side.

Corporate internal funds have been lower in relation to

their plant and equipment expenditures in 1956, resulting in

heavier reliance on external sources of funds and lowered

2/18/57

-6-

corporate liquidity. While the fourth quarter bulge in business

sales and profits relieved corporate financial pressure and

facilitated the pay-off of bank loans in January, many recent

annual reports of corporations indicate that 1956 was a year of

reduction in corporate financial fat.

In Western Europe, industrial production has been relatively

level now for the past three quarters, and for several weeks the

drift in world commodity markets has been downward, with some raw

material prices declining well below pre-Suez levels.

The foregoing inventory of slackening momentum elements is

clearly impressive enough to occasion caution and to prompt some

bears to come out of hibernation to test feeding grounds. It is

not yet impressive enough, however, to justify a firm conclusion

that rolling adjustment at rising levels of total activity, and

with inflationary pressures, is close to an end and that general

deflationary adjustment is now a greater prospective likelihood.

Before any such conclusion is reached the inventory of elements

to be weighed needs to be extended. For instance:

Industrial production, while not rising, continues at about

record levels. Small declines in some industries have about been

offset by gains in others.

Important types of steel remain in

short supply and are a limiting factor in further expansion of

some lines of output. Declines in durable goods output, especially

in output of machinery, reflect reduced production of mechanical

parts for consumer durable goods. Unfilled orders for durable

goods industries, while not rising since August, remain about an

eighth larger than a year ago, and are particularly heavy in

producer's equipment and machinery lines.

In December, work on architects' drafting boards other than

factory buildings, after declining gradually for several months,

rose sharply. In January, contract awards for construction of

manufacturing and commercial facilities were also up sharply.

Awards for industrial building were up more than half of the

average for the fourth quarter and commercial contract awards

were up about a third. Capital expenditure appropriations of

large corporations, after a marked reduction in the third quarter,

are reported to have shown an appreciable reversal in the fourth

quarter.

While residential construction activity is down, recent month

to-month declines in starts and awards have been smaller than

earlier, and careful review of reports on the housing market indi

Prices of old and

cates considerable strength, and not weakness.

low; vacant houses

are

new houses are reported to be firm; vacancies

are still

housing

rental

on

rents

declining;

been

for sale have

rising; a large volume of home sales transactions continue to find

financing; and the current rate of mortgage lending is high by any

Mortgage commitment funds continue tight

standard, except 1955.

2/18/57

and market demand for Government underwritten mortgages is

slack.

Altogether the labor market is still strong and not weak.

Nonfarm employment is at a record level; demands for nonmanu

facturing employees continue active, after allowing for seasonal

factors; no large lay-offs of manufacturing employees have been

reported; and total employment, seasonally adjusted, is still

low--about the same as a year ago and the average for 1956.

Government spending for goods and services--Federal and

State and local government combined--has been rising steadily

and further steady rise seems to be in prospect.

Consumer incomes have risen further this year and con

sumer spending at retail in January was about the record level

of December--5 per cent ahead of last year. In contrast to

1955, consumers in 1956 increased their holdings of financial

assets more than their total debt, thus strengthening their

aggregate financial position. New automobile sales in January

and the first

part of February have been on the strong side,

all things considered, even if below some highly optimistic

Used car sales have been especially strong and

expectations.

used car prices, after allowance for depreciation, continue stable.

Business financial pressures seem to have eased some early

this year; the upward trend in business failure liabilities ap

pears to have leveled off; market reception to new corporate

issues has been generally favorable; and business optimism, as

reflected in the latest Dun and Bradstreet survey of sales and

profits expectations, taken in early January, ran higher than

was shown by the preceding survey, taken in the third quarter

of 1956, and the increase in optimistic expectations was shared

Demands for long-term

by most manufacturing and retail groups.

business funds continue very strong.

As to agriculture, income of farm proprietors holds at about

year-ago levels, and farm prices recently have been fairly stable

at about 5 per cent above last year.

In Western Europe, productive resources have been intensively

utilized all through the past year, so that further gains could

The fact that the post-Suez fuel shortage

be registered slowly.

visible impact on total industrial production through

had little

December is at least suggestive of underlying strength, especially

in the face of declines in raw materials prices. Indeed, these

declines in some cases reflect more ample supply conditions from

expanded output rather than any appreciable curtailment of demands.

Recent downward adjustments of discount rates in Britain and

Germany seem to be special adaptations to domestic financial

problems rather than early indications of a general economic and

credit easing in Western Europe.

2/18/57

We may conclude this point and counterpoint inventory

of the current economic situation in this way. There is

evidence of some slackening in the momentum of inflationary

advance, but there is as yet no clear-cut evidence of a

conjuncture of forces that would indicate a halting of the

advance in the foreseeable future with a greater than even

possibility that downward deflationary correction will

follow.

If or as such evidence develops in ensuing weeks,

your staff will place it before you promptly. The financial

problem of the economy, in my judgment, continues to be that

of demands in the aggregate pressing against aggregate re

source supply. Basically, the situation is still infla

tionary,

though with moderate abatement of inflationary

tendencies.

Mr.

Vardaman said that he happened to be one of those who felt

that the rise in

economic activity had topped off.

He inquired of Mr.

Young as to what clear-cut evidences of a downward trend in

economic de

velopments would have to appear before the staff indicated to the Com

mittee that a downward trend was developing.

Mr. Young responded that one of the points that had been empha

sized particularly by those who felt that we may have topped out was

that business expenditures for plant and equipment were leveling off

and even declining.

tures,

he said,

and at some point it

out and turn down.

place in

There has been a supercolossal rise in

such expendi

was inevitable that they would top

Although such a topping out appeared to be taking

that particular field, Mr. Young said that this did not mean

that a downward turn in

the economy generally was developing, particu

larly since demands for additional plant facilities even now were at

an extremely high level and still

tures field,

rising.

Outside the capital expendi

a number of indicators continued to show great strength

2/18/57

-9

and advance, Mr. Young said, noting that plans on architects' drafting

boards and construction awards during January had risen sharply.

The

economy was at a point of very intensive utilization of resources and

if plans for expansion were to continue to rise, the problem presented

would be even more difficult. Mr. Young concluded by saying between

this and the next meeting evidences might appear to indicate a general

topping off in the economy and, if so, these would be brought to the

attention of the Committee at once.

Chairman Martin next called on Mr. Thomas for a statement on

the credit situation.

In opening his remarks, Mr. Thomas stated that last week he

attended a conference of business economists in Washington at which

the consensus was that business expenditures were high and not declining,

although there was some indication that they might be leveling off.

A

careful analysis of the situation indicated that business capital expendi

tures would continue at a high level through 1957 on the basis of business

already booked.

Mr. Thomas then made a statement on recent financial develop

ments as follows:

Credit developments in recent weeks continue to indicate

The rate of bank loan liquidation

a relaxation of pressures.

has been well-nigh unprecedented; bank reserve positions have

been less strained, despite heavy absorption by System open

market operations; money rates have declined sharply; and the

tone of the bond market has changed so much as to permit the

sale of a very large volume of new issues of securities at

declining yields, while the stock market has been weak.

2/18/57

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This easing, however, does not lead to a conclusion that

a general downturn in economic activity has begun or is immi

nent.

Some relaxation is customary for this time of the year.

While the readjustment in money rates, for example, has been

somewhat sharper this year than usual, it followed a more pre

cipitous rise, that was probably overdone.

Bond yields, par

ticularly on corporate issues, are still

high by any previous

postwar standards.

Stock prices, while near or below the lows

of 1956, are still

not far below the highs of 1955.

Bank loans

outstanding are larger than they were a year ago and two years

ago by amounts of growth that could not be indefinitely sustain

able. The large volume of new corporate issues provides a basis

for continued heavy investment expenditures by businesses and by

State and local governments.

Federal Government expenditures have been increasing and

its excess outlays, for various reasons, have been larger and

have extended longer than is usual at this season. In fact,the

reduction in Treasury cash balances has been a most important

factor in the easing of the money markets.

Although there are indications of a lower level of housing

construction and financing and the prospects for automobile

sales are still uncertain, consumer spending has generally con

tinued at a high and rising level. The mixed movements of

commodity prices indicate a moderating of upward pressures but

no general downturn. Wage increases continue to create cost

profit squeezes.

At the best, current developments may be considered as

the relaxation of inflationary pressures which has been de

sired and toward which monetary policies have been directed.

Whether this is but a temporary lull

in the inflationary

pressures, or the beginning of a downturn, small or large,

or the attainment of high-level stability only time can tell.

two

There are no strong indications that either of the first

possibilities is more likely than the last more desirable

course of events.

Treasury difficulty in building up a cash balance to a

more workable level has been due to a combination of factors.

Payments, particularly for defense purposes, have been larger

than were expected; redemptions of savings bonds have con

tinued rather large; and receipts have fallen somewhat short

of estimates. To what extent the short-fall in receipts is

an unexplained lag in tax payments or a lower level of tax

liabilities than expected cannot yet be determined. It seems

evident that the Treasury will need new financing of perhaps

One of the decisions to

$3 billion in the next two months.

2/18/57

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be made is whether to continue to raise $200 million a week

through additional sales of bills or whether to make a special

cash offering and curtail the new weekly borrowing.

Corporate security issues for new capital in February

promise to be close to the near record January volume, and

schedules indicate no let-up in March. While there is a feel

ing that business expenditures for plant and equipment may be

leveling off, available evidence indicates that they are likely

to continue at a high level through this year. Business borrow

ing demands are expected to remain large. Flotations of State

and local government securities will evidently be larger than

were expected earlier. Growing acquiescence by issuers in the

higher level of rates, together with the large volume of public

works expenditures being planned, indicates continued absorption

by this sector of any funds that may be available.

Bond yields, both on new and on outstanding issues, have

declined in recent weeks, but the decrease in corporate yields

has been moderate, compared both with the previous rise and with

the declines in

grade corporate

November, while

of last August.

governmental issues. Yields on outstanding high

bonds are still higher than at any time before

those on Treasury bonds are close to the levels

State and local government issues, which showed

a more precipitate rise in yields, are in an intermediate posi

tion with respect to the decline. Last fall's rise in yields

on medium-term Treasury bonds to well above those on long-term

bonds has been largely eliminated, and the yield structure is

again comparatively flat. Both the strength in bond prices

and the weaknesses in stock prices can be explained by the

relation between yields on stocks and bonds, together with the

apparent leveling out of corporate profits. Investors are

evidently shifting from stocks to bonds.

Treasury bill yields, while fluctuating considerably, are

at a higher level relative to bond yields than was the case

prior to November. Although banks and dealers have initially

absorbed a large portion of recent new bill issues, there has

been a strong secondary market from nonbank buyers. These

demands reflect in part reinvestment of funds obtained from

maturing Treasury issues, in part temporary investment of the

proceeds of new security issues, and perhaps in part some cash

flow to corporation.

Reasons for the probably unprecedented liquidation of bank

loans since the beginning of this year are as yet difficult to

determine. Much of the reduction is seasonal--as in food,

liquor, and tobacco manufacturing, trade lines, commodity

dealers, sales finance companies, and construction--and in some

cases reflects a reaction from more than seasonal increases that

2/18/57

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preceded. The preceding temporary needs were either larger

than usual or were overestimated. Some of the decline in

loans may have been made possible by the new capital issues,

but little of it can be related directly to this source.

Perhaps more will come as the proceeds of recent new issues

become available. Indirect evidence indicates that the de

cline in loans occurred entirely at banks in leading cities.

The decline in bank investments has been less than in the

same period last year, reflecting substantially smaller reduc

tions in securities other than Treasury bills.

This may be an

indication of the lowered liquidity position of banks and the

lower level of bond prices, as well as of the larger decline

in loans.

Much of the decrease in bank credit this year has been

counterbalanced by larger declines than a year ago in U. S.

Government and interbank deposits.

The decrease in demand

deposits adjusted at banks in leading cities in the past six

weeks has been smaller than in the same period last year.

Time deposits have increased compared with a decrease last

year.

The decline in demand deposits has been close to the

usual seasonal amount.

Following a large increase in Decem

ber, the return flow of currency in January was exceptionally

large and exceeded seasonal expectations by over $400 million.

It appears that the total money supply showed a greater than

seasonal decline in January.

Member bank reserve needs in recent weeks have declined

more than usual for this period, owing largely to the sharp

decline in money in

circulation and to a somewhat larger

than expected drop in required reserves. The latter was due

principally to the low level reached by Treasury tax and loan

accounts.

The increase in the gold stock, resulting from the

IMF sale of $300 million of gold to the U. S. Treasury, also

added to reserve availabilities.

Movements of float, though

at a high level, have conformed fairly closely to the seasonal

pattern.

The increased availability of reserves has been fully

offset, with some lag, by reduction in the System Open Market

Account. This decline by the end of this statement week will

have amounted to nearly $2 billion since the last week of

December. Consequently net borrowed reserves have returned

to around the quarter billion dollar level for the first

time since early October, after showing a net free reserve

position during most of January.

In the current statement week, as shown in the table of

projections, a further decline in Treasury balances at the

Reserve Banks below the recent low level and the usual mid

month high level of float are expected to provide an abundance

2/18/57

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of reserves, notwithstanding a continued substantial re

duction in System holdings. Next week, however, this

situation should change sharply and, in the absence of

System purchases to supply reserves, net borrowed reserves

might rise to around $400 million. In the following two

weeks they might be in the neighborhood of $500 million.

Any System purchases to moderate this increase should

probably be offset by sales in some subsequent weeks,

particularly when float rises. Hence repurchase con

tracts would be an appropriate medium for covering some

of these variations.

From the standpoint of policy objectives, the ques

tion is how much restraint in credit should be applied in

the existing and prospective situations.

Evidently any

more stringent restraints at this time would be unnecessary

and inappropriate.

On the other hand, no occasion for

relaxation is evident.

In view of the changed attitude

of banks, net borrowed reserves might be kept around $250

million, or about half the level prevailing in March and

April last year.

If, however, there is a pronounced

reversal in the trend of credit demands with a sharp

increase in bank loans, borrowings should be permitted

or made to increase above that level. On the other hand,

if credit liquidation continues beyond the usual seasonal

pace, a somewhat lower level of reserve needs would de

velop and member bank borrowings might be permitted to

decline.

The final answer lies, as always, in the course of

production and prices, credit demands and interest rates,

The

rather than in the level of member bank borrowings.

forces for rises in costs and prices are apparently still

in operation.

Chairman Martin said that as a prelude to the discussion of the

situation this morning, he wished to report that he had talked with

Secretary of the Treasury Humphrey and Under Secretary Burgess during

the past few days.

He had assured both the Secretary and the Under

Secretary that he would see to it

that the Open Market Committee was in

formed as to the problem the Treasury was facing, and he said that he

felt Mr.

Thomas had pointed up the problem of the Treasury's cash

position very well.

The Secretary was concerned about the Treasury's

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2/18/57

balance,

Chairman Martin said, noting the attrition that had taken place

on the Treasury's latest issue.

Mr. Burgess wanted the Committee to

know that the Treasury might have to come to the Federal Reserve for

direct borrowing,

since it

did not know whether it

go to the market for funds in

an amount such as Mr.

might be needed during the next two months.

would be feasible to

Thomas had suggested

The Treasury was also at a

crossroad on the savings bond program and some time might elapse before

it

knew how the program would work out.

The Chairman then called upon Mr. Hayes, who made a statement

with respect to economic activity and open market policy as follows:

1. We continue to find evidence that the country's economic

activity as a whole may be flattening out--admittedly at a

high level, but with nothing in sight to provide upward mo

mentum on the scale witnessed last fall. At the same time

there was no clear evidence of serious weakness in the economy.

2. There are some fragmentary signs that inventories may no

longer be growing as rapidly as in 1956, and there is further

confirmation of a leveling out of capital expenditures.

For

example, machinery orders and industrial construction con

tracts in December were appreciably lower than a year earlier.

Some industries are reported to have decided to stretch out

their plant expansion programs.

3. The outlook in the automobile, steel, and residential

construction industries remains substantially as it was at

too

In our view it is still

the time of our last meeting.

early to say whether automobile sales for 1957 will come up

to early expectations of a gain of perhaps 10%over 1956.

Housing starts will probably be lower than last year, and

lower steel operating rates in relation to capacity are

expected soon.

4. Divergent price tendencies for finished goods and

sensitive scrap and waste materials have now continued for

a good many weeks. It would be unusual for this condition

to persist for an extended period, and it is at least pos

sible that the weakness in scrap prices portends a more

2/18/57

general easing in demand-supply relationships which may

ultimately be reflected in lower prices for finished goods.

5.

The most recent figures on bank loans at all weekly

reporting member banks showed a continuation of the pro

nounced January decline, although the pace of the decline

had slackened, and the February 13 data show an increase

in business loans at the central reserve city banks.

The

decline in the first

six weeks of this year was the largest

in recent years.

To a considerable extent this is doubt

less merely a reversal of the sharp seasonal upswing of

November and December, but the size of the drop suggests

that it has gone beyond this point. Bankers seem to look

for somewhat less of a bulge in borrowing for March taxes

than had previously been expected.

The trend toward sharply

lower corporate liquidity which was so prominent a feature

of last year's financial developments appears to have slowed

or even to have been reversed, temporarily at least--due

doubtless in part to the recent heavy volume of successful

corporate capital flotations, and perhaps also due to the

temporary sharp drop in Treasury balances, as well as a

possible shrinkage in inventories.

6.

While the Treasury's first

major refunding problem of

the year is now out of the way, we must reckon with sub

stantially larger Treasury cash needs than were looked for

at the beginning of the year or even at our last meeting.

The Treasury's present cash problem, together with the

facts that dealers still

hold sizable positions in the

securities offered in the refunding, and that our holdings

of bills are now minimal, have created some difficulty in

maintaining net borrowed reserves in the current week. We

are not unduly concerned over this development, however,

since the market will doubtless recognize this situation

as a reflection of temporary influences, notably the diffi

culty with Treasury's balance and the bulge in float.

We feel that this is clearly a time when we should make

7.

no overt change, in either direction, from the policy of

restraint which we have been following. However, if some

moderate easing of the banks' reserve position should be

caused by further declines in total bank loans and invest

ments, we question whether the System should counteract it.

We can see no reason to consider a change in the discount

rate under present conditions.

8. While there is no longer the degree of unsettlement in

the financial markets that prevailed some weeks ago, there

are some continued uncertainties and irregularities in the

capital markets and continued unsettlement in the international

2/18/57

-16.

situation.

There is some question in my mind as to whether

the directive might appropriately be modified at this time.

Perhaps it would be well to defer discussing this point till

we have heard the views of the others present as to general

policy.

Mr. Johns said that he found no reason to disagree with the views

expressed by Mr. Young in appraising the current situation.

After review

ing the situation with his staff last Friday, he failed to see any con

vincing evidence that what was going on amounted to a beginning of reces

sion. He was rather inclined to like what he saw; perhaps there was some

leveling off of the boom and of inflationary pressures, and, if so, this

was all to the good and what the System had been striving for for many

months.

Rather than deflation, he was inclined to feel that current

developments indicated a somewhat better allocation of resources, and he

liked this development.

Aside from this, Mr.

Johns said that there were

some forces that might produce a resurgence of inflation and he felt the

Committee should keep on guard against these.

Therefore, his view was

that there should be no overt change of policy at this time.

He would

favor maintaining about the same degree of restraint that had been the

Committee's target for the last two meetings.

He would favor no change

in discount rate at this time, would like to see net borrowed reserves

somewhere in

the neighborhood of $200-250 million, and since he did not

like to tinker with the Committee's directive any oftener than necessary,

he would prefer not to amend the directive at this meeting.

Mr. Bryan said that there was nothing in the Sixth District that

would warrant a detailed report to the Committee this morning.

The

2/18/57

-17

tendencies, as in the national picture, were somewhat more mixed than

they had been previously but generally speaking he could deduce no

convincing signs that the momentum of expansion had shifted.

national picture,

On the

Mr. Bryan said that he saw no reason to differ from

the conclusions expressed thus far this morning.

The picture was more

mixed than it had been, but it did not seem clearly to portray an ebbing

of the tide at present.

A difference in emphasis that he would make was

his belief that the Committee's policy had not been recently one of re

straint but one of rather definite ease.

policy but in

any event it

This may have been the correct

was now time for the Committee to abandon at

least for the moment all talk of getting back to the tightness of last

November and early December.

There was some danger that we could get

an even greater ease than we have had, Mr. Bryan said.

The bill

rate

could go temporarily well below the discount rate and this would be a

blunder in

his opinion.

He felt

the System should make constantly such

sales into the market as to try to keep the bill rate somewhat above

the discount rate.

He would like to have a greater posture of restraint

than the Committee has had recently.

In response to Chairman Martin's question as to whether he felt

the recent ease had been "overt" or whether it

Mr.

had been "inadvertent,"

Bryan said that the ease to which he referred had arisen to some

extent out of the free reserve concept.

He would commend the desk in

having gotten net borrowed reserves between the $200-300 million mark,

2/18/57

-18

which had been suggested as a desirable objective at the preceding

meeting.

In his opinion, Mr. Bryan said,

the recent ease had been

inadvertent ease.

Mr. Williams stated that in preparation for this meeting repre

sentatives of the Philadelphia Bank had talked with a number of economists

for industrial concerns in the Third District during the past few days,

and he reported the results of these discussions, particularly whether the

industrial firms had modified their plans for capital expenditures during

1957.

A number of the concerns interviewed were smaller ones while some

of them were large national organizations.

The substance of Mr. Williams'

report was that in most cases the companies had made no move to cut back

or postpone their capital expenditure programs but were planning to go

ahead with projects that had been announced.

In some cases, firms re

ported that orders had fallen off early this year, but in a number of

cases the most recent data indicated a resumption of orders.

the inventory situation was not causing concern.

However,

In general,

Mr. Williams

noted that the prospects for 1957 were not now being viewed with as much

exuberance as they had been at the turn of the year, representing a more

conservative appraisal of business prospects.

primarily a shift in

This seemed to reflect

psychology rather than any fundamental weakening in

the business and financial situation.

Mr. Williams suggested that per

haps as far as capital expenditures were concerned,

the evidence he had

presented indicated that there might be a distinction between large and

2/18/57

-19

small corporations and that some of the announcements of postponement

of plans that had appeared in the press received undue attention because

they came from large firms.

Continuing,

Mr.

Williams reported that demand for bank loans in

the Philadelphia District continued strong, with some easing having ap

peared within the past few weeks.

Various other indicators of economic

activity continued generally strong,

new automobile registrations in

below January a year ago.

although Mr. Williams noted that

January of this year were 13 per cent

Summing up, Mr. Williams said that the out

look seemed to run counter to the psychology as indicated by press re

ports.

His attitude was that the Federal Reserve should make no signifi

cant change in policy at this time.

Mr.

optimistic.

plans.

ment,

Fulton said that businessmen in

the Cleveland District were

They talked caution but were going right ahead with their

Operations of the steel industry seemed satisfactory to manage

he said, and one member of the industry had commented that the

newspapers were doing the worrying for the steel companies.

automobile steel had been about as expected in

letdown in

appliance takings had been noted.

steel continued good.

Takings of

recent weeks, but some

Demand for construction

Industry was going ahead with plans for con

struction, and the higher cost of credit was not deterring such programs.

Some bankers expected a fairly substantial rise in tax borrowings during

2/18/57

-20

March because of the reduced liquidity position of corporations.

sumers were calling more frequently for terms of 36 months in

Con

purchas

ing automobiles than had been the case earlier.

Mr.

Fulton said that he believed no change should be made in

the Committee's present policy and that net borrowed reserves should

be held about the $250 million level.

During March, banks should be

permitted to come to the discount window to take care of their needs

in

meeting the prospective rise in loan demand.

He referred to clause

(b) of the Committee's directive, stating that he felt

conditions in

mind when it

the unsettled

the money and capital markets that the Committee had in

added the second part of the clause had changed, and he

suggested that this part of the directive might be modified so that it

would indicate that transactions should be with a view "to restraining

inflationary developments in

the interest of sustainable economic growth,

while recognizing that activity in

receded from peak levels.

Mr.

some segments of the economy has

Fulton said that he would not change the

discount rate at this time.

Mr.

Shepardson said that he felt Mr. Young had done an exception

ally good job in

pointing up the divergent trends in

there were some indications of leveling off, he felt

the good and were in

working.

the economy.

While

these were all to

the direction toward which the Committee had been

There were still

Committee should bear in

very strong inflationary pressures that the

mind and this was no time to make any change

2/18/57

-21-

toward slackening off restraint on credit expansion.

Mr. Shepardson

said that he had felt restraint had not been quite up to the mark that

the Committee had in mind for the last few weeks, and he hoped operations

would show no tendency to ease off at this time.

Some of the comments

appearing in the press might indicate a more widespread feeling on the

down side than was warranted, and it would be a mistake for the Committee

to take an action that would indicate a belief that a downward movement

had started in the economy.

Mr. Robertson said that he had prepared a statement for this

meeting which he now found was generally in agreement with views that

had been expressed by others.

He then read the statement as follows:

The present situation is reported to be one of stable to

slightly rising total output, with utilization of resources

generally high and output close to capacity in some areas.

Demands on capital markets continue to be very large. In

dustrial production is holding about level at the rate that

has prevailed since October. However, total expenditures for

gross national product apparently will be up in the current

quarter, reflecting more largely price increases than growth

in real output. In the immediate future, Federal Government

spending is scheduled to go up; State and local construction

and other outlays are likely to rise at least as rapidly as

last year; consumer spending for nondurable goods and services

will probably continue to grow. These add up to an impressive

total of plusses.

The behavior of some other components of expenditures is

more problematical, but there is no evidence at present that

any of them is behaving as an important contractive force, or

is likely to do so in the next month or so.

Plant and equip

ment spending may rise more slowly, or perhaps level off, in

the immediate future, but is unlikely to decline. There are

no signs of any substantial shift in business inventory

policies that might involve the start of a liquidation move

ment. Any further declines in residential construction that

might occur would undoubtedly not be large enough to be an

2/18/57

-22-

important factor affecting the course of over-all activity.

Auto sales, after rough allowance for seasonal influences,

have been rising somewhat since the introduction of 1957

models.

What this seems to add up to is that output and employ

ment are not changing much at the moment. The pressure of

prices is still

upward, although more selectivity has been

shown lately. No one knows how long this period of relative

stability will last. When it ends, no one knows whether the

subsequent movement will be gradual or sharp, or which direction

it will take.

But we do know that supply conditions generally

are tight enough that any considerable upsurge in spending

would result in aggravated inflationary pressures.

It should be remembered that although GNP has continued to

rise over the past year, half of this rise has not represented

an increase in real output but rather an increase of prices. It

should also be recalled that the upward pressure from wage in

creases stems in part from general price rises which have been

automatically entered into the wage scale for more and more

workers under cost of living contracts. Consumer and wholesale

prices now are at an all-time high.

Any easing of monetary policy now would be a mistake. The

present situation is different from that of the second half of

1956 in that expenditures are not rising rapidly, but what is

called for is to hold the line on policy until events make it

clear which way the wind is blowing. A brief period of relative

stability in total output under the present circumstances does

not call for adoption of an easier or expansionist policy.

Indeed, such a period is what we need to permit increases in the

supply of goods to take pressures off prices and to permit

tendencies toward excessive exuberance to be gradually replaced

with more realistic planning.

If output continues level over a considerable period, up

ward pressure is removed from prices, and an appreciable margin

of unused resources begins to develop, then an easing of policy

will be appropriate; but that situation has not yet arrived.

If the economy again breaks out on the upside from a period of

stability, further tightening will be called for.

The direction in which the economy is tending will become

clearer in the next few weeks as we move out of the confusing

early period of the year. Many of the bearish predictions now

voiced are reminiscent of those that were prevalent in early

1956. In early March we will have the results of another survey

of expected business spending for plant and equipment that will

include data on expenditures expected in the second quarter of

the year and for the year as a whole. This will give an

2/18/57

indication whether such spending is or is not leveling off.

Preliminary findings of the survey of consumer finances will

be available near the middle of March.

Borrowing from banks

around the March tax date is an important piece of information.

Whether the economic situation calls for a change in monetary

policy should be considerably clarified by the developments of

the next feweeks.

Our experience last year, it seems to me, illustrates the

dangers involved in assuming that we ought to hasten to ease

policy when there is a temporary letup in expansion or a bearish

period in market psychology. With the advantage of hindsight,

it is clear that we should not have eased in January or May.

Rather, if we had maintained a steady and tight policy through

those short periods of uncertainty, we would have made a more

adequate contribution to limiting inflation last year. I

think that the same considerations apply now. We cannot

effectively curb inflationary developments if we adopt a

policy of easing every time there is a temporary lull in an

expansion or every time expectations of expansion in future

months become something less than unanimous. Furthermore,

in view of the degree of inflation already accomplished,

every effort should be made to hold the line now against

further inroads.

Therefore, it seems to me that we ought to aim at holding

to about the degree of restraint that we had last fall, and

that we have been aiming for recently but not achieving.

Net

borrowed reserves should be held to between $200 and $400 mil

lion, in the absence of market developments which definitely

indicate the need for a departure from this target.

In the same breath I should add that errors should be made

on the restrictive side of the range for the next two weeks in

order to permit an easing of our policy somewhat in early and

mid-March if a potential credit squeeze develops. There are

varying opinions on the size of corporate demand for credit for

tax purposes on March 15, but it appears that such demand will

Consider

be substantial and exert pressure on money markets.

able liquidation of Government securities by corporations can

also be expected then. On top of this demand for funds, the

Treasury may have to borrow more new money, or to borrow earlier

Even with the addition of $200 million

than had been expected.

offering, the Treasury

in the bill

increases

through

week

per

need additional funds to get through early March, and,

may still

in any case, will probably have to borrow in early April.

System action cannot completely offset or guard against the

development of such a squeeze but the effects can be spread out

somewhat by maintaining a tighter policy now; we would be better

2/18/57

-24

able to ease up in March, if necessary to alleviate any

credit squeeze that might develop and provide any needed

aid to the Treasury, without creating conditions that

might contribute to renewed inflation.

Mr. Mills said that the evidence before the Committee had not

revealed any clearly defined trend in the economy that would warrant a

change from a policy of credit restraint.

As usual, there was the ques

tion as to what degree of restraint should be applied through the System

account.

Even more than usual, it

was his opinion that the members of

the Committee should confine their thinking and their recommendations to

the short interval between today and the next meeting of the Committee

and not attempt to project their thinking on policy beyond that period.

There was with the Committee again the question what bench mark

should be chosen on which to tie policy action, Mr.

Mills noted, adding

that the general trend of thought expressed seemed to lodge on a level

of negative free reserves of $250 million more or less.

He had been

impressed with Mr. Hayes' statement regarding the desirability of

following closely the trend in

commercial and industrial loans of banks,

and he suggested that the trend of these loans might be a prime bench

mark around which to develop the Committee's thinking during this next

period.

Mr.

Mills'

thought was that if

there was a definite further

contraction in the volume of commercial and industrial bank loans, that

contraction might be fixed upon as the clearest straw in

indicating policy actions.

If

the wind for

commercial and industrial loans tended

to contract further, doubt would be raised whether in the face of such

2/18/57

-25

contraction it

would be advisable to offset the easing effects of the

contraction which could happen if

the objective of policy was to main

tain some fixed level of negative free reserves.

in

these loans would suggest a change in

Continued contraction

the economy against which it

would be illogical to assert an aggressive policy of credit restraint.

On the contrary, such a trend might suggest as Mr. Hayes had indicated

that the Committee should allow natural easing forces deriving from

the changes in loans to assert their influence on reserves.

Mr.

Mills said he did not believe a change in the discount rate

should be considered at this time, and he doubted that the situation

called for any change in

the Committee's directive.

The Committee should

not be overly influenced by market conditions that might bring the yield

on Treasury bills continuously below the discount rate where that fall

ing off in yields might be a market phenomenon and not a phenomenon

associated with the availability of bank reserves.

case might be made that the softening in

In fact, a good

bill yields was a reflection

of the absorption of bills into hands that would not be of a permanent

character and, in

consequence,

the market at a later date.

a supply of bills might come back into

However,

that might not transpire if new

securities issues continued to receive a good market reception and their

proceeds were then invested in Treasury bills that came out of the hold

ings of previous borrowers on the capital market who were then finding

a need for cash expenditures on their projects.

In that event, no great

change in the demand for Treasury bills might occur.

2/18/57

-26

Mr.

largely in

Vardaman made a statement in

which he said that he was

agreement with the general views that had been expressed

this morning.

He felt that it might be necessary to observe the

situation for a period of several weeks, perhaps for two or three

months, before the Committee could be sure which way activity would

move from its

present level.

Under the circumstances he suggested

that the Committee make no change in

Mr.

policy at this time.

Leach reported that a meeting of the branch and head office

directors of the Richmond Bank had been held last week at Charlotte and

while he had been unable to attend because of illness he had received a

report of the views expressed at that meeting.

These views revealed no

new elements of strength in the Fifth District economy and pointed to a

possible slackening in the rate of advance in aggregate activity with

some narrowing of profit margins.

The textile industry now seemed un

able to escape far-reaching adjustments which appeared to be due in

1950 but which were postponed by Korea.

Specifically, capacity in

that industry must be reduced by the elimination of marginal producers.

The furniture industry was reported to be running below a year ago and

cutting into order backlogs.

On the other hand, shipbuilding and bi

tuminous coal continued to enjoy a favorable outlook.

Such limited information as had come to his attention regard

ing sales of new model automobiles indicated to Mr. Leach that dealers

were willing to give substantial price discounts as a means of main

taining sales at the current rate.

He reported specific instances,

-27

2/18/57

stating that while the discounts were not uniform they ranged as high

as $600 to $700 on medium priced automobiles, at least as high as the

discounts being given a year ago when sales competition was very sharp.

As to credit policy, Mr. Leach felt that economic developments

clearly did not call for any increase in restraint at this time.

The

only question seemed to be whether the System might appropriately de

crease the degree of restraint.

Despite the growing weakness in certain

sectors, Mr. Leach did not believe the System should relax its restraint.

This would mean,

of course, no change in

the discount rate.

He went on

to say that he believed now, as he had indicated at the preceding meet

ing, that the latter part of clause (b) of the first paragraph of the

Committee's directive calling for recognition of unsettled conditions

in the money, credit, and capital markets and in the international situa

tion might well be deleted.

It had been inserted in the directive for a

special purpose and that situation seemed to have passed.

Mr. Leedy said that his conclusions were much-the same as those

expressed by others.

He felt that we were still in a period when it was

particularly difficult to appraise the current situation and prospects.

Since the next meeting would take place only two weeks hence, he would

continue during that period the policy that had been followed during the

past three weeks.

ing Mr.

Mr. Leedy said that he would be apprehensive regard

Hayes' suggestion that it might be wise not to take action to

counteract a moderate easing of the banks' reserve position should that

be caused by further declines in total loans and investments.

A

2/18/57

-28

sufficient level of net borrowed reserves should be maintained to make

clear that present policy was being continued.

projected reserve figures,

Mr.

After commenting on

Leedy said that he would not wish to

have too much tightness develop in the next two weeks.

no change in

change in

discount rate.

At the preceding meeting he had noted a

atmosphere in the capital markets,

a change in

He would suggest

the wording of clause (b)

recognition of unsettled conditions.

and he had then suggested

of the directive that called for

He still

felt

some change might

be desirable to recognize that conditions had changed since the words

were placed in the directive.

Mr.

Allen said that Seventh District capital goods lines such

as industrial and construction machinery and railroad equipment con

tinued to operate at peak levels.

Automobiles and trucks,

farm machinery,

and consumer durables such as televeision and certain appliances,

well below previous highs.

were

Material "shortages" appeared to be confined

to the heavy steel products used in

capital goods,

that is,

structurals,

pipe, and plate.

Mr. Allen reported in

some detail on current views of leaders in

the automobile industry, stating that sales of the 1957 models were now

estimated at 6.2 million by the optimists, at 6 million by the realists,

and 5.8 million by the pessimists.

One leader in

the industry had

expressed the belief that the used car situation was deteriorating and

currently was in

worse condition than in

many years.

He had described

2/18/57

-29

his feeling as representing "an informed sense."

This leader's standing

was such that Mr. Allen felt his sense of things automotive was worth

noting.

In view of the importance in the Seventh District of the auto

mobile, farm machinery, and consumer durable goods industries, Mr. Allen

said it was understandable why non-farm employment in that area had not

shown the rise recorded nationally:

14 of the 24 major labor markets in

the area had moderate or substantial labor surpluses with unemployment of

3 per cent or more in

ago.

January,

compared with 7 areas in January a year

Consumer demand remained strong and January sales of department

stores,

retail chains,

and mail order firms topped year ago figures com

mensurate with the increase shown nationally.

Their inventory situations

were reported as good to excellent.

Business loans at leading banks in

the district increased slightly in

the week ending February 6 after five

weeks of decline, but were 4 per cent below January 1.

A year ago the

decline in the corresponding period was 2 per cent.

In Mr.

Allen's opinion, the continued strong consumer demand

provided a bulwark against contractive forces and it

basis for expansive forces as the year developed.

could provide a

Although an increas

ing segment of business sentiment was mildly pessimistic, he did not

feel that recession was yet evident or on the way.

It was in order to

mark time from the standpoint of monetary policy and to remain alert

to developments.

This would apply to the discount rate, to the degree

of restraint at which the Committee had aimed, and to the wording of

the directive.

2/18/57

-30

After noting that outdoor activity was at a seasonal low in

the Ninth District, Mr. Powell reported on the agricultural situation,

which he described as quite satisfactory.

Farm land prices had con

tinued to rise during the second half of 1956.

Moisture conditions had

been improved recently by heavy snows in the western part of the district,

and the outlook for spring crops from that standpoint was fairly satis

factory.

Prices of farm products in the Ninth District averaged about

6 per cent above a year ago, he said, reflecting particularly a 40

per cent rise in

prices of hogs, with prices for none of the major

Ninth District products showing a reduction over the past year.

In

urban areas the economy was in a healthy condition generally with bank

deposits in

January about 7 per cent higher than a year ago.

Depart

ment store sales were continuing to increase although at a slower rate

than somewhat earlier.

Employment in manufacturing industries was

running 6 to 7 per cent ahead of a year ago and average earnings of

factory workers were higher than in

January of last year.

Mr. Powell

noted a less favorable factor in the recent increase in borrowings of

city banks from the Reserve Bank during the past few weeks.

This was

not a result of increased loans but rather a sharp loss of deposits

by those particular banks.

The banks were making adjustments to this

situation but would continue to borrow from the Reserve Bank for

several weeks.

Nationally,

Mr. Powell agreed with the apparent con

sensus as to the economic situation and credit policy called for, stating

2/18/57

-31

that he could see no reason for reducing the degree of restraint at

the present time although he felt the System must watch economic

trends closely and be prepared to move whichever way seemed to be

called for.

At the moment he would make no change in

directive of the Committee or in

either the

the general objectives for net borrowed

reserves.

Mr.

Mangels stated that reports covering January indicated that

Twelfth District economic activity was continuing about as he had re

ported at recent meetings.

Employment in the apparel industry had de

clined rather sharply, with a larger decline reported in the number of

hours worked.

A further decline had also occurred in

lumber industry.

employment in the

Aluminum plants were receiving less electric power

because of reduced supplies of water for generating electricity in the

Pacific Northwest, and output of aluminum was being reduced somewhat,

tending to bring a better balance between demand and supply.

sales in

ago.

Automobile

California during January were about 10 per cent below a year

Over-all construction continued at fairly high levels with no

recent changes in

either residential or non-residential activity.

Bank

loans had declined during the past three weeks and borrowings at the

Reserve Bank were very nominal.

net lenders in

Twelfth District banks continue to be

the Federal funds market.

Mr. Mangels reported on further checks that had been made on

the expected demand for tax borrowings in

the Twelfth District, stating

2/18/57

-32

that most of the banks do not anticipate any large increase in corporate

demand for credit for that purpose this year.

As to credit policy, Mr. Mangels said that even though available

data did not indicate significant changes in activity during the past

few weeks, there was some indication that the economy might currently be

moving toward better equilibrium.

He would not suggest a change in

policy at this time but would aim for negative free reserves somewhere

around $200 million, and would not go much over that figure; he would

not change the discount rate; and he would be inclined to leave the

directive unchanged at this time.

Mr. Erickson said that economic conditions in the First District

did not differ from the excellent presentation that had been given by Mr.

Young.

ber.

Nonmanufacturing nonfarm employment was up in December over Novem

Most manufacturing industries were up except for textiles, where

the situation was not good.

Production of shoes in 1956 had been of

record proportions but was now "in between" seasons, and this period of

reduced output was running a little longer than usual because of the

late date of Easter this year.

Department store trade was good.

Mr. Erickson said that he would make no change in the discount

rate at this time and he would not change the directive of the Committee

even though the unsettled conditions in the money, credit, and capital

markets that had been discussed in December might not be quite as un

settled as at the time the directive was last modified.

He would con

tinue the policy of restraint through open market operations.

2/18/57

-33

Mr. Szymczak said that the next two weeks might offer a good

period in which to spot check the situation in various districts to

the extent possible.

He did not think it

a time for any change in

policy:

any change at this time might hurt rather than help the

economy,

and any easing might indicate that the System felt activity

was about to turn down.

The System should be mindful of Treasury

needs and should go along with those needs.

that a negative free reserves position in

Mr. Szymczak suggested

the $200-00 million range

would seem appropriate between now and the next meeting of the Com

mittee.

Mr.

Balderston said that the rolling adjustments that had

characterized the economy in

this time.

recent years seemed to be. continuing at

On the one hand, he sensed less ebullience, some consumer

price resistance, and the probability of a leveling off in

construction and in manufacturing inventories.

factory

He noted that some

insurance companies had experienced a drop since November in applica

tions for conventional mortgages.

On the other hand, Government

spending at both national and local levels was certainly on the in

crease,

and fiscal policy would probably not lend as much support to

monetary policy in

the future as it

had in the recent past.

Mr.

Balderston said that he would like to see the Committee regain the

restraint it

clear.

had attained last fall until the situation became more

As to the Committee's directive, he felt there had been a

reason at the time for inserting the instruction in clause (b) to

2/18/57

-34

recognize unsettled conditions, and he raised the question when the

clause would be removed if it were not taken out at this time.

Chairman Martin stated that he had just completed ten days of

travel during which he had talked before groups in Florida, Texas, and

Iowa and while he recognized that impressions gained on these "travelogues"

were not in any sense conclusive he felt it might be worth while to com

ment on those he had gotten during this period.

There was no question,

he said, but that business sentiment had changed and that there was not

the optimism that existed six weeks or two months ago.

general.

This was fairly

In Florida, he had noted less optimism even in areas where

new hotels were going up, despite the fact that the tourist season had

only begun. Persons in that business in whom he had some confidence had

commented, nevertheless, that they expected a "whale of a season" later

on.

The Chairman said that his over-all feeling as a result of observa

tions in the areas he had visited was one of more confidence of the

vitality of the economy than he had had before he started the trip.

He

felt the Committee should be very wary about permitting monetary policy

to get into the position of helping to promote a new bulge.

There have

been sharp increases in prices in some areas which may well have created

a situation that had to be corrected.

This condition and some practices

that were recognized as unsound by many of those who were engaging in

them would not be corrected by an easing of monetary restraints.

Chairman Martin went on to say that the consensus at this meet

ing seemed clear in calling for continuation of the status quo.

On the

2/18/57

-35

directive, while he had no strong feeling about it one way or the

other, he felt that the international situation to which reference

was now made in clause (b) was no better than at the time the refer

ence was inserted in the directive, and it might be worse.

There had

also been generated some talk of depression by remarks of the Secretary

of the Treasury and former President Hoover as well as by others.

Cur

rently the Treasury's balance was low and the outlook for receipts was

very uncertain at this time.

It

might well become necessary for the

Treasury to borrow directly from the System, although he hoped this

would not develop.

In view of these developments and of the many cross

currents in the situation, it

did not seem to him necessary to eliminate

the reference to unsettled conditions in the directive at this time.

On the whole,

his feeling was that it

might be continued in its

present

form since the next meeting would be held only two weeks away.

Specifi

cally, he suggested that the Committee maintain the status quo with the

understanding that the minutes would reflect the different degrees of

emphasis that different individuals had suggested this morning, and

that these be used by Mr. Rouse as a guide in carrying on operations

during the next two weeks.

He then called upon Mr. Rouse for comments.

Mr. Rouse said that he felt he understood the various views

expressed this morning.

He commented on the projections of reserve

funds during the next few days and stated that the System account might

be in a position of buying securities shortly.

Mr.

Hayes noted that if

permitted to run off, its

bill

the System's maturing bills were

portfolio would decline to approximately

2/18/57

-36

$100 million.

Mr. Robertson inquired whether Mr. Hayes felt this would

be undesirable, and Mr. Hayes responded that it would be undesirable

only in the sense that if the System had only $100 million of bills, and

if it wished to make sizable sales of securities for the purpose of ab

sorbing reserves quickly, such a move would be more difficult to accomplish

than if the System had larger bill holdings.

Mr.

Rouse agreed with this comment.

He then raised the question

whether the Committee felt that transactions in

short-term securities

other than bills should be made only on the sell side, or whether in the

event the System wished to put funds into the market it

short-term securities other than bills.

might purchase

He added that System account

operations might help to broaden the market for these short-term securi

ties if

transactions were entered into on both sides of the market.

Mr.

bills

Mills stated that he felt

purchases of securities other than

would raise a very fundamental question.

very serious misgivings on his part, and it

the market.

Mr.

Such action would cause

might lead to confusion in

Mills hoped there was a clear understanding that the

selling of certificates and notes was for the purpose of absorbing re

serves and that when it

became necessary to supply additional reserves

and Treasury bills were available,

there would be no move to buy back

certificates or notes that had been disposed of.

Mr. Robertson said that he had the same views as those expressed

by Mr.

Mills.

Mr.

Hayes commented that his off-hand thought was that the System

might wish to rebuild its

bill

holdings.

2/18/57

-37

Chairman Martin said that he did not think the Committee at

any time had intended to put reserves into the market by purchasing

Treasury notes or securities other than bills.

Mr. Hayes then stated that he would also like to make an

observation for the purpose of keeping the record straight as to the

references made earlier in this meeting to lack of tightness in the

market in recent weeks.

The fact is, he said, that in the three weeks

ending February 13 there was an average net borrowed reserve figure of

$236 million, which was in the $200-300 million average that had been

suggested at the preceding meeting.

It was true that in the first

three weeks of January positive free reserves existed.

The tone of

the market recently may not have confirmed the figure of negative free

reserves, but Mr. Hayes said that he wished to call attention to the

fact that operations had attained the figures that the Committee seemed

to have in

mind.

Chairman Martin stated that he was glad Mr. Hayes had brought

out this point, adding that this was the thought back of his comment

when he asked Mr.

(Mr.

Bryan earlier in the meeting whether the ease he

Bryan) had referred to recently was in

or "overt."

Chairman Martin said that it

his judgment "inadvertent"

seemed clear that the ease

that had been referred to was not overt.

Mr. Vardaman said that he had understood the selling of

certificates and notes recently was brought about because bills were

in

short supply,

and he inquired whether it

was clearly understood

2/18/57

-38

that the System was not going to buy back any certificates or notes

if

any bills were available for purchase when funds were to be put

into the market.

Chairman Martin stated that he assumed this was clearly under

stood, and none of the Committee indicated a different view.

Mr. Rouse stated that he had raised the question because he

wished to clarify the matter, and the Chairman said he thought it im

portant to have that point clarified.

Mr.

sensus,

Shepardson returned to the Chairman's comments on the con

stating that he hoped that errors in

carrying on operations

during the next two weeks would be on the side of tightness rather than

of ease.

Chairman Martin replied that he did not think any purpose would

be served in taking a vote on this question and that this was why he

felt the record of the discussion should be used by the Management of

operations during the next

the Account as a guide to carrying out its

period.

Mr.

Thomas noted that during January credit was being liquidated

very rapidly during the period when "ease" was indicated in

in terms of some positive free reserves.

the market,

He pointed out that it was

not necessary to add to tightness in order to carry out the Committee's

objectives when the liquidation of bank loans was accomplishing what the

Committee desired.

The ease referred to in

January, he said, was not

2/18/57

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because the System was not carrying out a restrictive policy but re

sulted entirely because credit was being liquidated very rapidly.

Chairman Martin stated that this was correct and that he was

glad this point had been brought out.

There was no point in trying

to pursue a more restrictive policy if the objectives were being carried

out.

Chairman Martin then turned to the directive to be issued to the

Federal Reserve Bank of New York, stating that if there was no objection

the directive would be renewed without change in the wording.

In re

sponse to the Chairman's question, Mr. Rouse stated that he would suggest

no change in the limitations contained in

anything developed to make it

the directive and that if

necessary he would come to the Committee

for additional authority.

Thereupon, upon motion duly made

and seconded, the Committee voted

unanimously to direct the Federal Re

serve Bank of New York 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 recognizing unsettled

conditions in the money, credit, and capital markets and

in the international situation, 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

Secretary

2/18/57

-40-

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;

(2)

To purchase direct from the Treasury for the account

of the Federal Reserve Bank of New York (with discretion, in

cases where it seems desirable, to issue 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; pro

vided 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;

(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 stated that the next meeting of the Committee would

be held at the time tentatively agreed upon, that is,

at 10:00 a.m. on

Tuesday, March 5, 1957, noting that this would be the annual organization

meeting of the Committee.

The Chairman also stated that he had received word from Mr.

that he would be in Washington on March 4, 5,

Sproul

and 6, and that he hoped all

of the Presidents and others who knew Mr. Sproul would plan to attend a

luncheon to be given for him in

the Board's dining rooms on March 5.

Chairman Martin also noted that the Special Committee that had been

appointed for the purpose of studying the questions raised by the suggestion

made by Mr.

Mills at the meeting on January 8 would hold a meeting today.

Thereupon the meeting adjourned.