FOMC Minutes
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in Washington on Tuesday, March 5, 1957, at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Allen
Balderston
Mr. Bryan
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Leedy
Mills
Robertson
Shepardson
Szymczak
Vardaman
Williams
Messrs. Fulton, Irons, Leach, and Mangels, Alternate
Members of the Federal Open Market Committee
Messrs. Erickson, Johns, and Powell, Presidents of
the Federal Reserve Banks of Boston, St. Louis,
and Minneapolis, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Vest, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Atkinson, Bopp, Marget, Mitchell, Roelse,
Tow, 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. Abbott, Daane, and Rice, Vice Presidents,
Federal Reserve Banks of St. Louis, Richmond,
and Dallas, respectively; Mr. Ellis, Director
3/5/57
-2
of Research, Federal Reserve Bank of
Boston; Mr. Balles, Assistant Vice
President, Federal Reserve Bank of
Cleveland; Mr. Hellweg, Economist,
Federal Reserve Bank of Minneapolis.
Mr. Riefler reported that advices of the election by the Fed
eral Reserve Banks for a period of one year commencing March 1, 1957,
of members and alternate members of the Federal Open Market Committee
had been received, and that each newly elected member and alternate
member, except Mr. Treiber, had executed the required oath of office.
The form for the oath of office had been sent to Mr. Hayes for execu
tion by Mr. Treiber upon his return from abroad.
The members and
alternate members were as follows:
Alfred Hayes, President of the Federal Reserve Bank of New
York, with William F. Treiber, First Vice President of
the Federal Reserve Bank of New York, as alternate member;
Alfred H. Williams, President of the Federal Reserve Bank of
Philadelphia, with Hugh Leach, President of the Federal Re
serve Bank of Richmond,
as alternate member;
Carl E. Allen, President of the Federal Reserve Bank of
Chicago, with Wilbur D. Fulton, President of the Federal
Reserve Bank of Cleveland, as alternate member;
Malcolm Bryan, President of the Federal Reserve Bank of
Atlanta, with Watrous H. Irons, President of the Federal
Reserve Bank of Dallas, as alternate member;
H. G. Leedy, President of the Federal Reserve Bank of Kansas
City, with H. N. Mangels, President of the Federal Reserve
Bank of San Francisco, as alternate member.
Upon motion duly made and seconded,
and by unanimous votes, the following of
ficers of the Federal Open Market Committee
3/5/57
-3were elected to serve until the election
of their successors at the first meeting
of the Committee after February 28, 1958,
with the understanding that in the event
of the discontinuance of their official
connection with the Board of Governors or
with a Federal Reserve Bank, as the case
might be, they would cease to have any
official connection with the Federal Open
Market Committee:
Wm. McC. Martin, Jr.
Alfred Hayes
Winfield W. Riefler
Elliott Thurston
George B. Vest*
Frederic Solomon
Woodlief Thomas
Thomas R. Atkinson, Karl R. Bopp,
Arthur W. Marget, George W.
Mitchell, Harold V. Roelse,
Clarence W. Tow, and Ralph A.
Young
Chairman
Vice Chairman
Secretary
Assistant Secretary
General Counsel*
Assistant General
Counsel
Economist
Associate Economist
*In taking the foregoing action,
the Committee also voted unanimously that,
upon Mr. Vest's retirement from active
service as a member of the staff of the
Board of Governors of the Federal Reserve
System on March 31, 1957, he would be
succeeded as General Counsel of the Fed
eral Open Market Committee by Mr. Howard
H. Hackley, who had been selected by the
Board to succeed Mr. Vest as its General
Counsel.
Upon motion duly made and seconded,
and by unanimous vote, the Federal Re
serve Bank of New York was selected to
execute transactions for the System open
market account until the adjournment of
meeting of the Committee after
the first
1958.
28,
February
3/5/57
4
Mr. Hayes stated that the Board of Directors of the Federal
Reserve Bank of New York had selected Mr. Rouse as Manager of the
System Open Market Account,
subject to the selection of the Federal
Reserve Bank of New York by the Federal Open Market Committee as the
Bank to execute transactions for the System account and his approval
by the Federal Open Market Committee.
Upon motion duly made and seconded,
and by unanimous vote, the selection of
Mr. Rouse as Manager of the System Open
Market Account was approved.
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on February 18, 1957, were
approved.
Chairman Martin referred to a memorandum that had been distrib
uted under date of February 27, 1957 relating to the procedure authorized
at the meeting on March 2, 1955 whereby, in
addition to members and of
ficers of the Committee and Reserve Bank Presidents not currently mem
bers of the Committee,
minutes and other records could be made available
to any other employee of the Board of Governors or of a Federal Reserve
Bank with the approval of a member of the Committee or other Reserve
Bank President, with notice to the Secretary.
He suggested that unless
there were suggestions for change in the procedure it
be continued with
out modification, with the understanding that current lists
of the
authorizations by the members of the Committee and the Reserve Bank
Presidents would be furnished to the Secretary.
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3/5/57
Chairman Martin's suggestion was
approved unanimously.
The Chairman next referred to the resolution adopted by the
Federal Open Market Committee on November 20, 1936 authoriing each
Reserve Bank to purchase and sell, at home and abroad,
and bills of exchange and bankers'
cable transfers
acceptances payable in foreign cur
rencies to the extent that such purchases and sales may be deemed to
be necessary or advisable in
nance,
connection with the establishment, mainte
operation, increase, reduction, or discontinuance of accounts of
Federal Reserve Banks in
foreign countries.
It was agreed unanimously that no
action should be taken at this time to
amend or terminate the resolution of
November 20, 1936.
Before this meeting there had been sent to the members of the
Committee a memorandum dated February 1,
1957 from Mr. Rouse and Mr.
Leonard, Director of the Board's Division of Bank Operations, with re
spect to allocation of securities in the open market account under the
procedure that became effective September 1, 1953, pursuant to the
action taken by the Committee at the meeting on June 11, 1953.
There
had also been distributed on March 4 a tabulation containing a pro
forma reallocation based on the ratios of each Bank's average total
assets to the total for all Reserve Banks for the period March 1, 1956
February 28, 1957.
It was agreed unanimously that no
action should be taken at this time to
amend or terminate the procedure for
3/5/57
-6allocation of securities in the System
open market account, as adopted pursuant
to the action of the Committee on June
11, 1953.
Unanimous approval was given to the
distribution of the weekly report of open
market operations prepared at the Federal
Reserve Bank of New York as follows:
1.
2.
3.
4.
5.
6.
7.
8.
The members of the Board of Governors
The Presidents of the 12 Federal Reserve Banks
Officers of the Federal Open Market Committee
The Secretary of the Treasury
The Under Secretary of the Treasury
The Assistant Secretary of the Treasury working on debt
management problems
The Fiscal Assistant Secretary of the Treasury
The Chief of the Division of Bank Operations of the Board
of Governors
9.
10.
The officer in charge of research at each of the Federal
Reserve Banks not represented by its President on the
Federal Open Market Committee.
The alternate member of the Federal Open Market Committee
from the Federal Reserve Bank of New York; the two
Assistant Vice Presidents of the Federal Reserve Bank
11.
of New York working under the Manager of the System
Account; the Manager of the Securities Department of
the New York Bank; the Vice President in Charge, and
the Manager, of the Research Department of the New York
Bank; and the confidential files of the New York Bank
as agent for the Federal Open Market Committee
With the approval of a member of the Federal Open Market
Committee or any other President of a Federal Reserve
Bank, with notice to the Secretary, any other employee
of the Board of Governors or of a Federal Reserve Bank.
Unanimous approval was given to
the continuation of the authorization
given by the Committee at its meeting
on March 6, 1956 to the Manager of the
System account to engage in transactions
on a cash as well as a regular delivery
basis.
-7Unanimous approval was given to
the renewal without change of the fol
lowing authorization to the Federal
Reserve Bank of New York to purchase
bankers' acceptances and to enter into
repurchase agreements therefor, such
authorization last having been amended
at the meeting of the Committee on
November 27, 1956:
The Federal Open Market Committee hereby authorizes the
Federal Reserve Bank of New York for its own account to buy
from and sell to acceptance dealers, at market rates of dis
count, prime bankers' acceptances of the kinds designated in
the regulations of the Federal Open Market Committee, at such
times and in such amounts as may be advisable and consistent
with the general credit policies and instructions of the Fed
eral Open Market Committee, provided that the aggregate amount
of such bankers' acceptances held at any one time by the Fed
eral Reserve Bank of New York shall not exceed $50 million and
provided further, that such holdings shall not be more than 10
per cent of the total of bankers' acceptances outstanding as
shown in the most recent acceptance survey conducted by the
Federal Reserve Bank of New York.
The Federal Open Market Committee further authorizes the
Federal Reserve Bank of New York to enter into repurchase agree
ments with nonbank dealers in bankers' acceptances covering
prime bankers' acceptances of the kinds designated in the regu
lations of the Federal Open Market Committee, subject to the
same conditions on which the Federal Reserve Bank of New York
is now or may hereafter be authorized from time to time by
the Federal Open Market Committee to enter into repurchase
agreements covering United States Government securities, ex
cept that the maturities of such bankers' acceptances at the
time of entering into such repurchase agreements shall not
exceed six months, and except that in the event of the failure
of the seller to repurchase, such acceptances shall continue
to be held by the Federal Reserve Bank or shall be sold in the
open market. Such repurchase agreements shall be at the same
rate as that applicable, at the time of entering into such
agreements, to repurchase agreements covering United States
Government securities.
The Committee approved by unanimous
vote a renewal of the following authoriza
tion to the Federal Reserve Bank of New
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3/5/57
York to enter into repurchase agreements
with nonbank dealers in Government securi
ties, such authorization last having been
approved by the Committee at the meeting
on April 17, 1956:
The Federal Reserve Bank of New York is hereby authorized
to enter into repurchase agreements with nonbank dealers in
United States Government securities subject to the following
conditions:
1. Such agreements
(a) In no event shall be at a rate below which
(b)
ever is the lower of (1) the discount rate
of the Federal Reserve Bank on eligible com
mercial paper, or (2) the average issuing
rate on the most recent issue of three-month
Treasury bills;
Shall be for periods of not to exceed 15
(c)
calendar days;
Shall cover only Government securities
maturing within 15 months; and
(d) Shall be used as a means of providing the
money market with sufficient Federal Reserve
funds to avoid undue strain on a day-to-day
basis.
2. Reports of such transactions shall be included in
the weekly report of open market operations which
is sent to the members of the Federal Open Market
3.
Committee.
In the event Government securities covered by any
such agreement are not repurchased by the dealer
pursuant to the agreement or a renewal thereof,
the securities thus acquired by the Federal Reserve
Bank of New York shall be sold in the market or
transferred to the System open market account.
On March 1, 1951, and at the annual meeting in March of each
year since, the Committee had authorized the Chairman to appoint a Fed
eral Reserve Bank as agent to operate the System account temporarily in
case the Federal Reserve Bank of New York was unable to function.
The
report of the Subcommittee on Defense Planning dated January 9, 1956,
3/5/57
which was approved by the Federal Open Market Committee on January 10,
1956, included a recommendation that this authorization be reaffirmed,
and such action was taken at the meeting on March 6, 1956.
No develop
ments were reported since that time indicating a need for change in the
existing authorization.
The authority of the Chairman
to appoint a Federal Reserve Bank as
agent to operate the System account
temporarily in case the Federal Re
serve Bank of New York was unable to
function was reaffirmed by unanimous
vote.
Unanimous approval was then given
to the following resolution to provide
for the continued operation of the Fed
eral Open Market Committee during an
emergency
In the event of war or defense emergency, if the Secre
tary or Assistant Secretary of the Federal Open Market Com
mittee (or in the event of the unavailability of both of them,
the Secretary or Acting Secretary of the Board of Governors of
the Federal Reserve System) certifies that as a result of the
emergency the available number of regular members and regular
alternates of the Federal Open Market Committee is less than
seven, all powers and functions of the said Committee shall
be performed and exercised by, and authority to exercise such
powers and functions is hereby delegated to, an Interim Com
mittee, subject to the following terms and conditions.
Such Interim Committee shall consist of seven members,
comprising each regular member and regular alternate of the
Federal Open Market Committee then available, together with
an additional number, sufficient to make a total of seven,
which shall be made up in the following order of priority
(1) each alternate at large (as
from those available:
defined below); (2) each President of a Federal Reserve
Bank not then either a regular member or an alternate; (3)
each First Vice President of a Federal Reserve Bank; pro
vided that (a) within each of the groups referred to in
clauses (1), (2), and (3) priority of selection shall be
-10in numerical order according to the numbers of the Federal
Reserve Districts, (b) the President and the First Vice
President of the same Federal Reserve Bank shall not serve
at the same time as members of the Interim Committee, and
(c) whenever a regular member or regular alternate of the
Federal Open Market Committee or a person having a higher
priority as indicated in clauses (1), (2), and (3) becomes
available he shall become a member of the Interim Com
mittee in the place of the person then on the Interim Com
mittee having the lowest priority.
The Interim Committee
is hereby authorized to take action by majority vote of
those present whenever one or more members thereof are
present, provided that an affirmative vote for the action
taken is cast by at least one regular member, regular
alternate, or President of a Federal Reserve Bank.
The
delegation of authority and other procedures set forth
above shall be effective only during such period or periods
as there are available less than a total of seven regular
members and regular alternates of the Federal Open Market
Committee.
As used herein the term "regular member" refers to a
member of the Federal Open Market Committee duly appointed
or elected in accordance with existing law; the term "regular
alternate" refers to an alternate of the Committee duly
elected in accordance with existing law and serving in the
absence of the regular member for whom he was elected; and
the term "alternate at large" refers to any other duly
elected alternate of the Committee at a time when the member
in whose absence he was elected to serve is available.
Unanimous approval was also given
to a renewal of the following resolu
tion authorizing certain actions by the
Federal Reserve Banksduring an emergency:
The Federal Open Market Committee hereby authorizes each
Federal Reserve Bank to take any or all of the actions set
forth below during war or defense emergency when such Federal
unable after reasonable efforts to
Reserve Bank finds itself
be in communication with the Federal Open Market Committee
(or with the Interim Committee acting in lieu of the Federal
Open Market Committee) or when the Federal Open Market Com
mittee (or such Interim Committee) is unable to function.
(1) Whenever it deems it necessary in the light of
economic conditions and the general credit situation then
prevailing (after taking into account the possibility of
3/5/57
-11
providing necessary credit through advances secured by
direct obligations of the United States under the last
paragraph of section 13 of the Federal Reserve Act), such
Federal Reserve Bank may purchase and sell obligations of
the United States for its own account, either outright or
under repurchase agreement, from and to banks, dealers,
or other holders of such obligations.
(2) In case any prospective seller of obligations of
the United States to a Federal Reserve Bank is unable to
tender the actual securities representing such obligations
because of conditions resulting from the emergency, such
Federal Reserve Bank may, in its discretion and subject to
such safeguards as it deems necessary, accept from such
seller, in lieu of the actual securities, a "due bill"
executed by the seller in form acceptable to such Federal
Reserve Bank stating in substantial effect that the seller
is the owner of the obligations which are the subject of
the purchase, that ownership of such obligations is thereby
transferred to the Federal Reserve Bank, and that the
obligations themselves will be delivered to the Federal Re
serve Bank as soon as possible.
(3)
Such Federal Reserve Bank may in its discretion
purchase special certificates of indebtedness directly from
the United States in such amounts as may be needed to cover
overdrafts in the general account of the Treasurer of the
United States on the books of such Bank or for the temporary
accommodation of the Treasury, but such Bank shall take all
steps practicable at the time to insure as far as possible
that the amount of obligations acquired directly from the
United States and held by it, together with the amount of
such obligations so acquired and held by all other Federal
Reserve Banks, does not exceed $5 billion at any one time.
Authority to take the actions above set forth shall
be effective only until such time as the Federal Reserve
Bank is able again to establish communications with the
Federal Open Market Committee (or the Interim Committee),
and such Committee is then functioning.
Chairman Martin then referred to the following statements of
continuing operating policies that had been last renewed by the Com
mittee at its meeting on March 6, 1956.
a.
It is not now the policy of the Committee to support
any pattern of prices and yields in the Government
-12-
b.
c.
securities market, and intervention in the Government
securities market is solely to effectuate the objec
tives of monetary and credit policy (including cor
rection of disorderly markets).
Operations for the System account in the open market,
other than repurchase agreements, shall be confined
to short-term securities (except in the correction
of disorderly markets), and during a period of
Treasury financing there shall be no purchases of
(1) maturing issues for which an exchange is being
offered, (2) when-issued securities, or (3) out
standing issues of comparable maturities to those
being offered for exchange; these policies to be
followed until such time as they may be superseded
or modified by further action of the Federal Open
Market Committee.
Transactions for the System account in the open
market shall be entered into solely for the purpose
of providing or absorbing reserves (except in the
correction of disorderly markets), and shall not
include offsetting purchases and sales of securi
ties for the purpose of altering the maturity
pattern of the System's portfolio; such policy to
be followed until such time as it may be super
seded or modified by further action of the Federal
Open Market Committee.
The Chairman stated that the Special Committee appointed at
the meeting on January 28,
by Mr.
1957 as a result of the suggestion made
Mills at the January 8 meeting held its
February 18, 1957.
That committee had decided,
proval of the full Committee,
meeting on
first
subject to the ap
that, in addition to studying the
matter of converting the increment in
the System open market account
during the year 1956 into longer-term securities,
it
would start a
review of all of the operating procedures that had been presented
in
the report of the Ad Hoc Subcommittee, as discussed at the
meeting on March 4 and 5, 1953, with the exception of the matters
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3/5/57
relating to the housekeeping aspects of the Subcommittee's report.
Chairman Martin said that it was understood that whatever time was
necessary would be taken to consider the operating procedures cur
rently in effect.
The Federal Open Market Committee included two
new members and it
would not wish to take an action that appeared
to prejudge the current operating procedures,
he said.
With this
understanding and pending completion of the review referred to, the
Special Committee recommended unanimously to the full Committee the
continuation without change of the operating policies now in effect.
In response to a question from Mr.
that it
Bryan, the Chairman said
would be appropriate and helpful for any member of the Com
mittee or any other Reserve Bank President to express in writing or
orally views that he might have with respect to these continuing
operating policies or any other matters he might feel should be
brought before the Committee.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the three statements set forth above
were renewed without change, pending
completion and submission of a report
by the Special Committee.
Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering commit
ments executed December 10, 1956 through February 27, 1957, and a
supplementary report covering commitments executed February 28 through
March 4,
1957.
Copies of both reports have been placed in
of the Federal Open Market Committee.
the files
3/5/57
14
Mr. Rouse stated that the Treasury had asked the Internal
Revenue offices to accelerate in every way possible the collection
of checks tendered in
payment of income taxes in
ever assistance the Reserve Banks could give in
mid-March.
What
expediting the
clearing of these checks would not only facilitate the operations
of the Internal Revenue service but would also help in
carrying out
the Committee's objectives.
Upon motion duly made and seconded,
and by unanimous vote, the transactions
for the System account during the period
December 10, 1956, through March 4, 1957,
inclusive, were approved, ratified, and
confirmed.
Members of the Board's staff entered the room at this point
to assist in
the presentation of an economic review, illustrated by
chart slides.
A copy of the script of the review was sent to each
member of the Committee following the meeting.
The review presented evidence of a slowing down of expansionary
forces in many sectors of the private economy but gave no indication
that a pronounced downturn had begun.
Rather, there were many under
lying forces tending to hold the economy at a high level.
Slowing in
some lines might make possible expansion in others, while relaxing
some of the recent pressures on supplies and prices.
In contrast to the indications of balance in the private
economy, the governmental sectors were showing signs of expansion
and strain.
State and local government expenditures continued to
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3/5/57
increase, and those of the Federal Government also were rising.
The
Federal budget surplus would be considerably less this year than last
and, in
addition, large cash drains on the Treasury were to be ex
pected for nonbudgetary payments such as savings bond redemptions,
aid
to the mortgage market, drawings by international agencies, and attri
tion on refundings of marketable securities.
The review noted some easing in credit markets during January,
partly because of funds made available by the Treasury.
had declined,
issues.
Bank loans
and increased funds had become available for new capital
Increased financing strains had developed for the Treasury,
and it had had to go to the short-term market for new funds at a time
when a reduction in Treasury debt had been expected.
In closing, the review stated that the slackening in demand
for private credit,
if
accompanied by more Government borrowing, might
not present an appropriate occasion for relaxation of restraints on
credit in
general.
It
was essential that the Treasury borrow as much
as possible from savings or that any Treasury borrowing from banks be
largely offset by curtailment in bank credit supplied to private
borrowers.
Serious difficulties would be presented both for the Treas
ury and for the Federal Reserve as a result of the unexpected change
in the Treasury position, which clearly pointed to increased Treasury
financing needs during the current year.
Mr. Mills said that he would like to raise a question that
would go back to the concept that had been presented to the Open
3/5/57
-16
Market Committee over the years that a high level economy and an
active economy must move on a continuous element of growth in
money supply.
the
He had gained the impression that growth in the money
supply essentially validated the pressures that had made possible
wage increases and increases in prices.
mental question whether it
This raised the very funda
was possible to have an element of economic
growth within a constant or static money supply.
In other words, having
reached a very high level of commercial bank loans and investments,
and where there was a factor of revolving of funds and repayments and
relending within that scheme of loans and investments, could that turn
over substitute within limits to prevent stagnation and, in
so sub
stituting, permit the System's monetary policy to exert a degree of
restraint that would moderate and prevent the tensions that have pre
sented the constant problem of rising prices and wages.
In other
words, could there be an effective policy that would hold the money
supply constant but allow for growth?
Chairman Martin called upon Mr. Thomas, who stated that this
raised the question whether there should be a more rapid growth in
the money supply than had taken place or whether there had been too
much growth in
the money supply.
It
was a question of the extent to
which the economy could be kept in balance simply through limitation
on the quantity of money, which is the specific and concrete channel
through which System policy operates.
Mr. Thomas said that it
had
been demonstrated by the experience of the past few years that the
-17
3/5/57
money supply did not have to increase at a constant rate in order
to provide a constant rate of growth in the economy as a whole.
It
was necessary to look beyond the measure of the volume of credit to
the flows of funds, and to look at what was happening in the economy
as a whole.
Variations in these flows are reflected in changes in
turnover of deposits.
He also noted that various measures (aid
through the Federal National Mortgage Association, redemptions of
savings bonds, nonbank holdings of Treasury bills, and the like) had
the effect of stimulating money flows independent of variations in the
quantity of money, and might thus limit the effectiveness of monetary
policy.
Mr. Young said that this presented a question of judgment which
the Committee had to make as it went along.
Looking back, perhaps
System restraint on growth in the money supply should have come sooner
than it did and perhaps pressure on turnover should have come somewhat
earlier.
In the slowing down in the rate of growth in the money supply
from about 3 per cent a few years ago to where it now was showing
almost no change as compared with last year, a great deal of financial
pressure had been exerted on the economy.
Such a movement could lead
to cumulative pressures that would have the effect of bringing an
abrupt change or financial crisis or panicky situation.
These price
movements must be regarded to some extent psychologically.
When
business is expanding, prices have to move because they have a
function to perform in restraining demand.
Some of these price
3/5/57
-18-
movements may be interpreted as psychological and some downward re
adjustment could be expected as economic tensions moderated and
abated.
Chairman Martin said that the question Mr.
was the heart of the Committee's problem.
Mills had raised
It involved fiscal policy,
debt management policy, and monetary policy.
The only way in which
we could continue to have growth without inflation under current condi
tions, he felt, was by reducing spending and increasing saving.
If
spending were not reduced and savings increased to cover the require
ments of capital expenditures for new plant and equipment, and if
new
plant and equipment were not otherwise provided, then we would not
get the growth desired in
Mr.
the economy.
Mills indicated that he thought the problem was one that
deserved further study and discussion.
Chairman Martin asked that Mr.
Hayes start the reports on the
economic situation and suggestions for policy, and Mr. Hayes made a
statement substantially as follows:
1. Little remains of the buoyancy generated by last
year's sharp rise in business expenditures for plant and
Industrial production is on a plateau, with a
equipment.
slight downward drift in the past two months, and the near
prospect is for a continuing sidewise movement at best.
2. With the labor force and productivity tending to
increase, there is progressively less reason to feel that
aggregate demand for materials and labor is pressing hard
against the limit of available resources.
On the evidence now at hand, including well sus
3.
tained consumer sales, the decline in production thus far
3/5/57
-19-
seems to reflect a cessation of inventory buying rather than
reduced demand from the main sectors of final users.
4. The shift to buyers' markets is showing up in the
area of prices, particularly in scrap and raw material prices.
Consumer prices are still
rising, with the latest rise causing
an automatic raise for some1.4 million workers, thus intensi
fying the pressure on profit margins which has already been
visible in the last year.
5. Total outstanding loans of weekly reporting member
banks have changed relatively little
in the last four weeks,
after the very sharp decline of the preceding four weeks.
There is substantial uncertainty as to the extent of tax
borrowing to be expected in March.
In conversations with
New York bankers we have gained the impression that the total
would probably be lower than last March, when business loans
of all weekly reporting member banks rose by about $1.6 bil
lion. On the other hand, the data in the Treasury's confi
dential corporate tax survey point to the possibility of
larger borrowing, but our present guess would be that this
year's total will not exceed last year's level.
6. Turning to the Treasury's activities as they may
affect our own, we have been encouraged to observe the
dealers' recent progress in disposing of their holdings of
certificates and notes offered in the February refunding.
However, the additional $200 million of Treasury bills in
each week's offering has undoubtedly had an appreciable ef
fect on the bill rate, and the market will be called upon
to absorb about $3 billion of new Treasury securities to be
offered for cash on March 18 for delivery March 28. The
banks, directly or indirectly, will probably have to finance
the lion's share of this offering, with consequent needs for
perhaps $500 million of additional reserves.
7. As for credit policy, there is no clear evidence
whether the present business trend represents a temporary
sidewise movement to be followed by further expansion, or
whether it marks the beginning of an appreciable economic
recession. In any case, since the economy's upward momentum
has definitely slackened and since the rise in finished goods
prices seems likely to level off in the near future, any
overt action toward greater restraint would be inappropriate,
called for.
although some degree of restraint is still
Our policy for the next three weeks should take full
8.
account of the pressures which may develop from the prospective
tax borrowing, from the large shifts of funds characteristic of
the March tax date, and above all from the Treasury's cash fi
nancing. Open market operations should, we believe, be directed
3/5/57
-20
toward preventing these influences from adding to the degree
of restraint now being maintained. Repurchase agreements
may help the dealers to absorb the offerings of government
securities by corporations raising funds to meet tax liabil
ities, but outright purchases will probably be required in
view of the magnitude and direction of the expected pressures.
While it would seem desirable to maintain moderate negative
free reserves over the coming period as a whole, we would
not set any fixed target and we would not be disturbed to
see positive free reserves appear temporarily in the third
week of March as a result of a bulge in float. It may be
desirable to commence open market purchases well in advance
of the March tax date.
9.
The discount rate should certainly not be raised
under present circumstances.
As for the directive, we be
lieve that the Committee would be justified in retaining a
qualifying clause in section (1)(b), but we would suggest
that the wording of the clause be changed to read as followss
"while recognizing uncertainties in the business outlook,
the financial markets and the international situation."
Mr.
Erickson stated that in
the Boston District conditions con
tinued to be marked by plusses and minuses.
Figures of nonagricultural
employment were down from December to January in
three states, but in
two states the figures showed an increase over January a year ago.
Figures of construction showed a decline from January a year ago, when
heavy construction had been at a very high level.
was showing large increases.
Commercial building
Business failures were 54 per cent larger
in number than in January a year earlier, but new business incorpora
tions were 20 per cent higher in January this year.
Department store
sales during the 4 weeks ending February 23 showed an increase of 6
per cent over a year ago.
In the copper and brass areas, employment
was down 11 per cent from a year ago.
After commenting on other indicators of business activity, Mr.
Erickson said that he would recommend no change in
discount rates at
3/5/57
-21
this time.
He would hesitate to suggest any figure of net borrowed
reserves for use as a guide during the next three weeks.
He would
give the Management of the System Account an instruction to maintain
so far as possible the same degree of restraint as now existed.
felt
that Mr.
Hayes'
suggested change in
He
the wording of the directive
would be appropriate.
Mr. Irons said that the picture in the Dallas District was
largely one of continuing strength with some weak elements also show
ing up.
Good rains in
been favorable in
Texas within the past three to four weeks had
the agricultural outlook, although these rains had
not broken the drought.
Mr.
Irons noted that despite the drought
last year the dollar amount of farm cash income was only 2 per cent
below the figure for the year before.
This, of course, did not fully
indicate the problems in various segments of agriculture.
Oil produc
tion allowables had been increased and output accordingly had been
stepped up.
As a whole,
the Eleventh District was moving on a high
plateau.
With respect to credit policy, Mr.
not the time to move strongly in
Irons felt that this was
either direction.
He would attempt
to maintain the degree of restraint that we have been effecting,
certainly not moving toward ease but not becoming tighter.
The dis
count rate should not be changed now, and Mr. Irons said he would not
be unhappy if
some of the March tax borrowings and seasonal demands
were met by increased discounts at the Reserve Banks.
He would prefer
3/5/57
-22
this to taking action to make the market easier through open market
operations or to putting funds into the market in anticipation of
pressures around income tax payment date.
However, there should be
some pressure if the Committee was going to maintain a degree of
restraint.
He would prefer the wording Mr. Hayes had suggested for
the directive on the grounds that it
the picture,
was a little
more related to
but he hoped the Committee would not make too frequent
changes in the directive.
In response to a question by Mr.
Shepardson, Mr.
Irons agreed
that part of the explanation for the maintenance of agricultural in
come in 1956 was that the figures included returns from liquidation
of livestock herds in drought areas.
Mr. Mangels stated that final figures confirmed the preliminary
data that he presented at the preceding meeting indicating that the
Twelfth District economy continued strong in
January.
Except for a
few soft spots such as construction, lumbering, and automobiles, the
first
quarter of this year would show a generally high level of
activity.
fell
For the first
time in
a year, nonresidential construction
below the previous year during January, and total construction
volume was 8 per cent below last year's total.
indicated a large backlog of heavy construction.
However, reports
New automobile
registrations were higher in January than in December but 9 per cent
below a year ago.
Lumber output was down 11 per cent from a year ago.
Plywood prices had been increased but some actual sales were still
at the old levels.
-23Bank loans, contrary to the national picture in the past two
weeks, declined $13 million at reporting member banks in the Twelfth
District compared with an increase of $ 8 4 million a year ago.
Borrow
ings at the Federal Reserve Bank had been somewhat heavier in the past
few weeks although at $4
million they were still fairly nominal.
Twelfth District banks were still net lenders in the Federal funds
market.
As to policy, Mr. Mangels said that his thinking conformed
closely to that indicated by Mr. Hayes.
The Committee should consider
the unsettled conditions that would occur during the tax collection
period and the Treasury financing operations.
He had thought in terms
of net borrowed reserves around $200 million but operations should be
based on feel of the market.
He would not change the discount rate
but would agree with the suggestion Mr. Hayes had made for change in
wording of clause (b) of the directive.
Mr. Powell reported that the Federal highway program was still
very much in a blueprint stage in the Ninth District and there seemed
to be no likelihood of its getting to a point where it would increase
employment during 1957.
In Northern Minnesota, he anticipated a very
active year in production of iron ore.
turing lines was holding up well.
Employment in durable manufac
Although agriculture was seasonally
inactive, there was concern about spring planting and crop production
because of the deficient soil moisture.
The open winter had been
favorable for livestock producers, but it would be necessary to have
3/5/57
-24
substantial spring rains if
normal crops.
the district was to harvest anything like
In the banking picture, Mr.
stantial decline in
Powell reported a sub
demand deposits since the first
of this year which
banks had not been able to counteract by selling securities, in
some
cases banks feeling they should hold Government securities to secure
public deposits.
There had been a substantial decline in loans during
January and the net result was a scarcity of reserves among district
banks.
Borrowings at the Reserve Bank had been higher, but he hoped
they would return more nearly to normal after the income tax period.
As to the Open Market Committee's instructions, Mr. Powell
said that he would concur in statements of policy made thus far.
would also concur in
by Mr. Hayes.
He
the change in wording of the directive suggested
However, he wished to avoid any tightening of the re
serve position of banks until after the income tax period and until
there had been some clarification of the economic outlook.
He would
not favor a change in the discount rate at this time.
Mr. Allen said that business activity in the Seventh District
was leveling off.
Activity in the aggregate was ceasing to rise and
inflationary pressures were easing.
Although retail sales were
running ahead of a year ago and Government spending on goods and
services had been rising, there was increasing evidence that the
strong upward thrust which characterized 1956 had,
at least, lost a good deal of its momentum.
for the time being
3/5/57
-25
Mr. Allen said he would not enumerate the evidences of the
leveling off in
activity, since the picture had been well presented
in the economic review and in
it
the comments of others.
However,
if
were granted that the upward movement in business activity had
slowed down or stopped, there was the question whether the time had
yet come for a change in monetary policy.
not believe that time had arrived.
Mr. Allen said that he did
Business activity was still
high and the basic demand situation quite strong.
quite
He would continue
to mark time and remain alert to indications of more definite trends.
In other words, he would not deviate at this time from the present
degree of restraint, although he felt we should be adaptable to the
short-term financial flows as they developed during March.
The
latest information from the Chicago District was that March tax
borrowing by corporations would be less, perhaps significantly less,
than a year ago.
Mr.
Leedy said that he was unable to report favorable rains
in the Tenth District such as Mr.
District.
The outlook for the winter wheat crop in
extremely poor.
in
Irons had reported in the Dallas
his district was
The soil bank program was helping to maintain income
the Tenth District, however,
and was reflected in a 20 per cent
reduction in acreage of winter wheat.
Payments under the soil bank
for 1957 would average $20.04 per acre, compared with $8 in
Thus,
1956.
notwithstanding the drought, those participating in the soil
-26
3/5/57
bank--and it
was general--would fare pretty well.
Nonfarm employment
was up slightly although not as much as nationally.
Retail sales con
tinued to show increases over last year in dollars, although the volume
might be lower.
first
Loan liquidation at reporting member banks since the
of this year had been about double that of the comparable period
a year ago.
last year.
Member bank borrowings had averaged 25 per cent lower than
The over-all picture was a sidewise movement.
Mr.
Leedy
said there was no opportunity for further tightening of credit restraints
at this time, even if
that were required which he felt
He liked the suggestion Mr.
was not the case.
Hayes had made for changing the wording of
the Committee's directive.
Mr. Leach said that there had been no changes in
the economy of
the Fifth District during the past two weeks that warranted special com
ment at this meeting.
He had left
home with the view that the present
evidence as to the national economic outlook was too inconclusive to
call for a change in
credit policy, and this view had been reaffirmed
by the fine presentation of the staff this morning.
In view of the forthcoming Treasury financing,
Mr. Leach thought
the Committee should take pains to avoid any tightening in
This would contemplate net borrowed reserves in
the market.
the neighborhood of $200
million, but he would not hesitate to depart from that target to what
ever extent market conditions warranted.
In other words, during a
period of Treasury financing primary reliance should be placed on the
"feel of the market."
Mr. Leach said that a change in
the discount
3/5/57
-27
rate at this time would be clearly inappropriate.
He would favor the
change in language of clause (b) of the directive suggested by Mr.
Hayes.
Mr. Vardaman said that Mr.
Hayes had saved him the laborious
task of presenting his own thoughts regarding economic developments
and credit policy.
He concurred in
rate and Committee operations,
his suggestion on the discount
and he emphasized even more than Mr.
Hayes the advisability of anticipating needs of the market by purchas
ing bills in
order to avoid any appearance of tightening around income
tax payment period.
He agreed with the comment Mr.
Irons had made
about the wording of the directive, stating that he did not like
frequent changes in wording.
However,
the present wording did not
seem to him appropriate and he would go along with Mr.
gestion in
this respect.
Hayes'
sug
He would hope that the Committee would
study the directive with the idea of getting wording that could be
continued for months and for years without change,
in
letting operations
the System account show whatever changes in policy were necessary.
Mr. Mills said that a successful Treasury financing operation
would seem to be as important to System monetary policy as to Treasury
fiscal policy and,
therefore, he would join strongly with those who
would direct open market operations to the general objective of
facilitating a successful Treasury financing.
He believed that our
efforts to that end could be successfully accomplished without con
flicting with a policy of general monetary restraint.
While we
3/5/57
-28
eschew the responsibility or the propriety of underwriting a Treasury
operation, we do accept a general responsibility for, within reason,
developing a reserve climate that will assist and support the Treasury
operation.
If
the reports are correct,
the Treasury will come to the
market on March 18, which will fall almost immediately after March 15
tax period.
There will be confusion and difficulty in
ascertaining
what the investment position or the capacity of investors will be and
what reserve positions will come out of that turmoil.
Therefore, there
will be a possibility that the Treasury will have to rely on the
initial
underwriting support of the banks and the dealers in
manner as during the last issue of Treasury special bill
the same
offerings,
with the thought that there will be a later redistribution as others
see their way to come into the market.
If
that is
the situation or if
a situation will arise, it
it
appears probable that such
will be incumbent on the System to see that
there is a supply of reserves available sufficient in amount to support
that initial
underwriting.
Mr.
Mills repeated that he believed this
could be accomplished without conflicting with a general policy of
monetary restraint because of a general belief and understanding in
financial circles that the System would assist the commercial banks
to meet the demand for tax loans that is expected to develop during
the next two weeks,
earlier.
but not with the intensity that was anticipated
Adoption of Mr. Hayes' proposal for making some advance
purchases of Treasury bills would therefore be desirable as an
3/5/57
-29
indication and signal that the System was prepared to give reserve
support to the demands on the commercial banks for tax loans.
In following this policy of taking care of the demand for
tax loans, the Committee would also be creating the kind of reserve
climate necessary to support the Treasury's new financing, but in
such a way as to give the impression that the reserves provided at
tax time would be withdrawn as soon as that need had passed.
Mr.
Mills felt that by thus using the demand for tax loans as a vehicle
for also facilitating the Treasury financing program, the way would
be cleared for a readily understandable return to exerting whatever
degree of credit restraint was necessary.
Mr. Robertson said that he did not think it
was necessary to say
anything about the economy as a whole since there seemed to be general
agreement that at the present time a sidewise movement was taking place
with uncertainty as to which way the economy might go.
He said that
he would align himself with the views expressed by Messrs.
Irons and
Allen in favor of maintaining the degree of restraint that has existed
heretofore;
certainly there should be no easing.
Mr. Robertson said
that he was fearful that anticipatory purchases of bills in March
such as had been suggested by others would lead the Committee into
the kind of a situation which had occurred time and again of easing
up the market just before a Treasury financing and of then tightening
immediately afterwards.
possible.
Such a procedure should be avoided, if
Mr. Robertson emphasized that he felt
the Committee must
3/5/57
.30
take into consideration the Treasury's position but he was suggesting
that we should not make it
for the Treasury in
more difficult either for the Committee or
carrying out its
operations and he would, there
fore, be inclined to avoid to the extent possible anticipatory purchases
of the sort referred to.
With respect to Mr.
was in
Irons'
comment,
Mr. Robertson said that he
complete agreement with permitting the discount window to carry
a larger part of the load in meeting the need for reserves in March.
He felt there was no occasion to change the discount rates of the Fed
eral Reserve Banks at this time.
As to the Committee's directive, he
had no strong feelings regarding either the present wording or that
suggested by Mr.
Hayes,
but felt the distinction of one from the other
was quite hazy.
Mr.
Shepardson said that he would not attempt to add to the
comments made on the general situation, since there seemed to be fairly
complete agreement on existing conditions and on the outlook.
He was
very much concerned about the situation confronting the Committee this
month.
While he recognized the need for meeting the situation in
March that would include the Treasury's financing, he would hope this
could be done without undue easing or any semblance of easing in
general policy.
His thought would be to maintain a stable position
prior to the Treasury's financing on which the Treasury could base its
decisions.
However,
he would not give undue encouragement to the market
-31
3/5/57
in a way that might later present a problem such as Mr. Robertson
had referred to.
Mr. Fulton commented on the steel situation, reporting that
a large producer had informed him there was nothing on the horizon
of a deflationary nature and nothing to indicate a downturn in the
economy.
That producer's order book in February was the highest in
history.
While takings from the automobile and appliance industry
had slackened and were not up to original expectations, a substantial
amount of steel was still being taken by those industries.
The out
look for production was still for a slight decrease during the second
quarter, a substantial reduction in the third quarter, and recovery
in
the fourth quarter of this year.
rise is
Steel people say that a price
inevitable, Mr. Fulton said, adding that their profits are
not sufficient to finance needed expansion and that the sale of stock
for this purpose would be prohibitive.
Steel stocks are selling at
a price equivalent to only $60 per ingot ton of capacity in contrast
to a replacement cost of $300 per ton.
Mr. Fulton said that he felt some of the hesitation in business
generally was a reflection of conditions in lines affected by the auto
motive industry, and some reflected the fact that inventory accumula
tions had ceased and were being cut back.
Demand did not seem to have
lessened.
Mr. Fulton agreed completely with the views expressed by Mr.
Robertson on the course to be followed in open market operations during
-32
3/5/57
the next three weeks.
Were the Committee to relax for the benefit
of the Treasury's financing,
tately afterwards,
it
would only have to tighten precipi
and this would cause the same old criticism that
the System had rigged the market for the Treasury and then let
of Government securities fall.
Mr.
Fulton felt
prices
the Committee would
be on much better ground to maintain the present degree of tightness
in
the market.
The discount rate should not be changed,
go along with Mr. Hayes'
suggested change in
and he would
the directive.
Mr. Williams said that there had been no unexpected develop
ments in
the Third District during the last few weeks.
Department
store sales for the last four weeks and for the year to date were
slightly higher than a year ago, and there had been recent improve
ment in
all
January,
reporting centers.
Employment had declined somewhat in
the decline being concentrated in
Unemployment had risen less than in
year.
Shortages of engineers,
manufacturing activities.
the corresponding period of last
tool and die makers,
other highly skilled workers were reported.
At some plants, over
time employment of skilled workers had occurred,
second and third shifts.
extending to the
Construction activity in
and high-priced homes had improved somewhat in
starts in
the low-priced (VA)
draftsmen, and
medium-priced
January, but housing
category were extremely low.
Mortgage
money remained tight.
Business loans had turned up within the past
week at larger banks,
a good part of the increase being in the metal
and metal products lines.
There had been little
change in
total
3/5/57
-33
deposits in
February, and the larger Philadelphia banks had reduced
their holdings of Government securities and increased borrowings from
the Federal Reserve Bank.
Mr.
Williams said that the Philadelphia
Reserve Bank had some special problems to deal with in
with discounting and that it
connection
planned to discuss these with the banks
concerned after the March tax period but before the summer upturn in
borrowings that has occurred in recent years in
Mr. Williams said that he was in
attitude Mr.
Hayes had expressed.
general agreement with the
The Committee should not move to
ward greater restraint, but certainly it
It
the Third District.
should not diminish restraint.
should be sensitive to the Treasury's problem, which was a problem
not just for this month but for the next five or six months.
He did
not believe the Committee should have a fixed target of net borrowed
reserves.
rate.
No increase should be made at this time in the discount
The directive might need soon to put stronger emphasis on
inflationary forces,
but Mr.
Williams did not feel the evidence was
.sufficient to warrant such action at this meeting.
Mr.
Bryan reported no recent outstanding changes in the economy
of the Sixth District, although currently it
a loss of funds to other areas.
seemed to be experiencing
This had happened several times during
the last year and a half and he was not certain of its
Mr.
significance.
Bryan said that he would align himself with the comments
made by Messrs.
Robertson,
Irons,
anticipatory purchases of bills.
Allen, and Fulton with respect to
The Committee could easily get
3/5/57
itself
-34
into trouble by making such purchases, and he doubted the
wisdom of trying to anticipate needs on the basis of feel of the
market.
The Committee should operate on a very different basis,
Mr. Bryan said, that is,
on the behavior of the market, a concept
on which he would like to elaborate at some future meeting.
Mr.
Bryan noted that the Committee had just adopted a continuing state
ment of policy that provided that it
would intervene in the market
solely for the purpose of effectuating monetary policy.
Anticipatory
purchases would amount to intervention, and he felt the Committee
should adhere to the policy to which he had referred.
Mr. Bryan said that he associated himself with those who
wished to maintain the present degree of restraint in the market
although he was unable to say what that degree of restraint now was.
His thought would be to put the Committee's instruction in terms of
behavior of the market, largely of the short-term market, and in
terms of the bill
market.
If
the bill
market began to move above its
present level, he would do some modest buying in order to maintain
the present level of restraint.
On the other hand,
if we moved off
several basis points, he would be inclined to stop the easing.
He
would do nothing about the discount rate at present and he had no
particular views about the suggested wording of the directive.
Mr. Johns said that he had nothing of special note to report
from the Eighth District. There were some chronic unemployment problems
in which no change was occurring.
3/5/57
-35
With respect to policy, Mr. Johns said he would adopt the
statement made by Mr. Allen.
If there were any change in his posi
tion over the past two weeks--and there might be a slight one--Mr.
Johns said he would prefer to exercise caution lest things get too
tight.
At the moment, net borrowed reserves seemed a little on the
high side and the projections also were on the high side.
In the
Eighth District, a feeling of tightness was developing which threatened
to be greater than Mr.
Johns believed to be desirable.
For these
reasons, he felt caution should be exercised to avoid pressures on
reserves becoming greater during the next two or three weeks.
With respect to the directive, Mr.
Johns said that he recognied
the arguments in favor of Mr. Hayes' suggestion, but he clung to the
position he attempted to state two weeks ago based largely on his reluc
tance to tinker with the directive until necessary.
Generally, he was
reluctant to proclaim in the directive that the Committee recognized a
specific condition.
He would assume that at all
times the Committee
would claim to recognize all pertinent conditions in the situation.
He was not yet convinced that the time had come to recognize uncertain
elements in
the economy.
We might do this before long, but his
preference would be to leave the directive unchanged.
He certainly
would not change the discount rate.
Mr. Szymczak said it
change in
policy.
appeared to him that there had been no
the economy that would require a change in the Committee's
While there was some slight fractional change in some sectors
-36
3/5/57
and the Committee faced a practical situation in March because of the
tax period and the Treasury financing, which it had to meet, his over
all
feeling was not particularly different from that expressed at the
preceding meeting.
While at that time he thought the Committee should
strive relatively for negative free reserves between the $200 to $400
million level,
he now felt
that a relative range from $200 million down
would be temporarily preferable because of the situation to be faced in
March.
Whether the Committee should buy or sell depended on the situa
tion to be found in
the Committee felt
the market at any particular time.
To the extent
that reserves should be made available in March, re
purchase agreements would be the best means of providing them.
If it
became necessary to provide reserves through bill purchases, that should
be done as the need arose.
Mr. Balderston said that he saw no significant change from the
situation two weeks ago except for the imminent Treasury financing.
As
to the Treasury problem, he would like to see the Committee adopt a
posture that could be maintained through the period of the financing.
It should avoid loosening the situation in anticipation of the financing
to an extent that would have to be counteracted later.
He still sensed that certain large companies would be reducing
inventories rather than increasing them.
He sensed that a considerable
number of industries were suffering or were about to suffer from excess
capacity.
He did not believe the time was appropriate for any change
in discount rates.
3/5/57
-37
Mr.
Balderston said he liked the wording for the directive
suggested by Mr.
Hayes.
On the other hand,
he shared the feeling
already expressed that the Committee should not change the directive
until it was ready to back up the change with action, i.e., the Com
mittee should not modify the wording of the directive unless it
actually was ready to shift gears.
Mr. Mills stated that there seemed to be a tendency to confuse
discussion of what may or may not be appropriate ways of supporting a
Treasury financing operation with recognition of the Treasury's position
as a necessitous borrower having first
claim to the market.
Mentioning
that these are two entirely different subjects, he expressed his
opinion that as the Committee was always prepared to give appropriate
reserve support to legitimate loan demands coming from private sectors
of the economy,
there were as good or better reasons for its
facilitat
ing a Treasury borrowing operation.
Mr. Vardaman said that in view of the several comments regard
ing anticipatory purchases of securities, he would like to have Mr.
Hayes clarify the suggestion he had made on this point.
Mr. Hayes stated that he wanted to make it clear that he was
not speaking of "rigging the market."
He was speaking of providing
the amount of reserves that would support the amount of underwriting
that the Committee thought the banks would have to do.
To repeat, he
felt that policy for the next three weeks should take full account of
the pressures that might develop from the prospective tax borrowing,
-38
3/5/57
from the prospective shifts of funds characterized by the March tax
date, and above all
from the Treasury cash financing.
Open market
operations should be directed toward preventing these influences from
adding to the degree of restraint now being maintained.
Repurchase
agreements might help dealers absorb the offerings of Government
securities by corporate holders who were raising funds to meet tax
liabilities, but Mr. Hayes felt that outright purchases probably
would be required because of the magnitude and direction of the
expected pressures.
He felt it would be desirable to maintain moderate
negative free reserves over the coming period as a whole, but he would
not set a fixed target and he would not be disturbed to see positive
free reserves appear temporarily in the third week of March as a result
of a bulge in float.
As he had suggested before, it might be desirable
to commence open market purchases well in
If
there was to be tax borrowing,
more if
it
advance of the March tax date.
would develop fairly soon.
there was going to be Treasury borrowing,
by the Committee would be necessary.
much danger in
borrowings.
Mr.
sizable bill
Further
purchases
Hayes did not feel there was
providing the market with some reserves to meet such
Projections of negative free reserves at the moment ran
around $550 million during the coming week, which he felt was on the
high side considering the various problems faced.
It did not seem to
him that it would be out of line to do a little buying within the next
few days with negative free reserve figures of that sort in prospect.
3/5/57
-39
Mr. Vardaman said that he did not before, and he still did not,
see any suggestion in Mr. Hayes' comments of "rigging the market."
He
wished to reiterate the views he had expressed earlier as to the program
to be followed.
Chairman Martin said that he thought this was one of the easiest
meetings the Committee had had for some time.
together on fundamentals than usual.
The members were closer
The degree of difference was in
just how the account should handle the forces we referred to as "color,
tone, and feel of the market"--and now Mr. Bryan had added the word
"behavior."
The Chairman felt this an excellent word.
He was inclined
to believe that the language Mr. Hayes had suggested for the directive
did not represent much change except in the words.
Mr. Hayes said that he thought there was a substantive dif
ference in the sense that the suggested wording would mention the busi
ness outlook, which was not mentioned in the existing wording.
He
recognized that this was a small point, however.
Chairman Martin said that while this did not impress him very
much, he thought the Committee could approve the directive to the New
York Bank with the suggested change without doing violence to any of
the views that had been stated this morning.
Chairman Martin went on to comment on the Committee's opera
tions in the market.
It was very desirable that the Special Ccmmittee
that had been appointed on January 28 was going to review the operating
procedures, he said, because he felt the point Mr. Mills had raised at
3/5/57
-40
the January 8 meeting was a good one.
to assess carefully whether it
The Committee should begin
had a market for Government securi
ties that could be responsive to the type of operation the Federal
Open Market Committee was endeavoring to engage in.
said he did not think we had that type of market.
The Chairman
Either we would
have to create a different type of market than now existed, or we
would have to look on open market operations in a different way than
we have been looking on them.
This was fundamental.
Chairman Martin
said he did not believe we were making too much progress in
it
the market:
might be that the Committee should accept the market as it
he was inclined to think operations should be conducted in
is,
but
a different
way.
For the period between now and the next meeting, Chairman
Martin said that he thought the Management of the System Account
should endeavor to handle operations in
the best way it
could in the
light of the discussion that had gone on at this meeting.
clear that the majority was not in
ment to the Treasury financing.
It
seemed
favor of giving undue encourage
There was no intention in
Mr.
suggestion that there be any rigging of the market in any way.
Hayes'
On
the other hand, the Chairman thought that Mr. Mills had a point in
his comments on the Treasury's financing problem that the Committee
had to bear in mind constantly.
Chairman Martin said that he
recognized the difficult problem presented for the Management of the
Account in
trying to carry out the consensus at this meeting.
3/5/57
-41
Mr. Rouse commented that at times such as the present when
there is a substantial amount of Treasury financing to be done, the
question arises in the market as to where the necessary reserves are
to come from.
Mr. Rouse felt that some indication of the source of
the reserves and of the fact that the System was prepared to provide
them would be essential, adding that smoothness of the Treasury
financing operation was fundamental in carrying out monetary and
credit policy.
In view of the position taken by the Committee this
morning, Mr. Rouse said that in
the normal course he would be putting
some funds into the market along the lines Mr.
Szymczak had suggested.
These would be put in first through repurchase agreements,
dealers needed repurchase agreements.
right purchases.
if
the
Secondly, there would be out
While there might be some upsetting developments
for a few days around March 18, Mr.
Rouse did not think the account's
actions would be misunderstood and he felt that things would work out
along the lines the Committee desired.
As far as the amounts in the directive were concerned, Mr.
Rouse said that he would suggest no change at present and he would
come to the Committee if a change seemed to be needed.
None of the other members of the Committee indicated views as
to policy or operations different from those expressed by Chairman
Martin and Mr. Rouse.
Chairman Martin then said that unless there was objection,
the directive to the New York Bank would be approved with a change
3/5/57
-42
in the wording of clause (b) of paragraph (1) so that it would read
"to restraining inflationary developments in the interest of sustain
able economic growth while recognizing uncertainties in the business
outlook, the financial markets, and the international situation."
This would reflect Mr. Hayes' suggested change in wording of the
latter part of the clause which previously read "...while recognizing
unsettled conditions in the money, credit, and capital markets and
in the international situation."
Mr.
Vardaman said that over the years he had given a great
deal of thought to the Committee's directive and had come to the
conclusion that it
would be advisable to ask members of the Committee
to study the directive with a view to considering whether, at a proper
time, all wording referring to inflationary or deflationary actions
should be eliminated.
It was Mr. Vardaman's thought that it might be
desirable to try to get wording of a permanent character which could
be continued without change over a period of years.
this could result in
He also felt
shortening the directive.
Chairman Martin said that he fully supported the suggestion
that every member of the Committee study the directive.
He felt
that
this should include a study of the history of the wording of the present
directive and the way it had been developed over the years, since this
background was necessary before any major change.
The origin of and
reasons for the wording of the directive were rather obscure unless
one studied its historical development.
He concurred in a suggestion
3/5/57
-43
by Mr. Irons that the Special Committee studying operating techniques
might look into the directive, but added that it was a matter that all
of us should study.
Mr. Shepardson suggested that a fundamental question was in
volved in the proposal that had been made, that is, whether the direc
tive should indicate only changes in direction of policy.
The wording
that Mr. Hayes had proposed did not indicate a change in direction but
only a change in the specific items the Committee would look at in
carrying on its operations.
Mr. Shepardson felt that a first need of
the directive was to indicate the general direction in which the Com
mittee was going.
Mr. Hayes said that he had taken the pattern of the directive
as he had found it when he became a member of the Committee.
He had
assumed that, from time to time, the Committee would change the wording
of certain clauses as the direction or the emphasis of policy changed.
His understanding of Mr.
Vardaman's suggestion was that the directive
be made a more or less permanent document, year in year out, without
regard to how the Committee might vary its
conditions.
This seemed to Mr.
operations to meet changing
Hayes to be a fundamental suggestion
which he was not now prepared to answer.
Chairman Martin repeated a statement he had made in the past,
that the Committee should be slow in a meeting as large as this to
make changes other than those of a minor sort in
the directive.
He
did not believe there was sufficient difference between the wording
3/5/57
Mr.
-44
Hayes had suggested today and that of the previous meeting to
warrant any great concern,
Mr.
Hayes'
suggestion.
although he was inclined to go along with
He also would go along with the suggestion
that each member of the Committee review the directive along the
lines discussed at this meeting.
Mr. Robertson pointed out that a problem that should be borne
in mind in considering the wording of the directive was not only the
Committee's interpretation of its meaning, but the interpretation that
others would place on the actions of the Committee as those actions were
revealed in published reports from time to time.
Mr. Vardaman said that this was one of the reasons why he hesi
tated to have wording in a directive that indicated the Committee felt
that a downturn was taking place in
the economy.
Chairman Martin said that he would like to comment on the points
mentioned by Messrs. Robertson and Vardaman, and he recalled that earlier
this year Senator Fulbright, Chairman of the Senate Banking and Currency
Committee,
had discussed with him whether the Committee should issue
statements from time to time as to its
policy directives without waiting
for their publication in the annual report.
The Committee should be
aware of the fact a well-informed member of the Senate who was in a
position to reflect the views of other Senators felt that a report of
policy actions once a year was not sufficient, Chairman Martin said.
If a change were now to be made so that there was nothing in the record
of policy actions except a pro forma statement, that might cause members
3/5/57
-45
of the Senate to wonder where the present record of policy actions
was going.
The Chairman emphasized that there was a very real problem
in explaining why monetary and credit policy should be determined in
the atmosphere of secrecy that has existed.
Mr. Leach said that his recollection and understanding was
that we had gotten into the habit of making some changes from time
to time in the wording of the Committee's directive for the purpose
of showing in the policy record that the Committee had recognized
that actual or prospective changes in economic or financial conditions
from time to time called for corresponding changes in emphasis even
though insufficient to warrant changes in the direction of over-all
policy.
Chairman Martin said that it had been very helpful to him
upon a number of occasions to have changes in the Committee's views
as to operations and policy reflected in
directive.
shifts in wording in the
He repeated that there was a very real problem, in that
there was a very strong body of opinion not only in the press but
among many others who continued to wonder why in the world the Open
Market Committee did not come out periodically with statements regard
ing its
policy.
At present, the only time such statements (other than
the statements included in the annual reports) were made was when the
Chairman of the Committee or some other member of the Committee ap
peared before a Committee of Congress.
Chairman Martin stated that
he hoped all members of the Committee would have in mind that this
-6presented a continuing problem.
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 uncertainties
in the business outlook, the financial markets, and the
international situation, and (c) to the practical administra
tion of the account; provided that the aggregate amount of
securities held in the System account (including commitments
for the purchase or sale of securities for the account) at
the close of this date, other than special short-term
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 ac
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;
(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.
It was agreed that the next meeting of the Committee would be
held at 10:00 a.m. on Tuesday, March 26, 1957.
3/5/57
-47
Mr. Leedy stated that as a matter of information the
Conference of Presidents contemplated having a short meeting on
the afternoon of the day on which the next meeting of the Federal
Open Market Committee was held, i.e., March 26, 1957, although it
was not anticipated that this would result in presenting to the
Board a written memorandum of topics for discussion at a joint
meeting.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1957, March 4). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19570305
@misc{wtfs_fomc_minutes_19570305,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1957},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19570305},
note = {Retrieved via When the Fed Speaks corpus}
}