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 26, 1957, at 10:00 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr.
Mr.
Mr.
Mr.
Allen
Balderston
Bryan
Leedy
Mr.
Robertson
Mr. Shepardson
Mr.
Szymczak
Mr. Williams
Messrs. 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.
Mr.
Mr.
Mr.
Mr.
Mr.
Riefler, Secretary
Thurston, Assistant Secretary
Vest, General Counsel
Hackley, General Counsel-elect
Solomon, Assistant General Counsel
Thomas, Economist
Messrs. Bopp, Marget, Mitchell, Roelse, Tow,
and Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Carpenter, Secretary, Board of Governors
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
Mr.
Mr.
Mr.
Thompson, First Vice President, Federal
Reserve Bank of Cleveland
Messrs. Hostetler and Daane, Vice Presidents,
Federal Reserve Banks of Cleveland and
Richmond, respectively; Messrs. Parsons
3/26/57
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and Coldwell, Directors of Research,
Federal Reserve Banks of Minneapolis
and Dallas, respectively; Mr. Willis,
Financial Economist, Federal Reserve
Bank of Boston; and Mr. Kester,
Economist, Federal Reserve Bank of
St. Louis.
Chairman Martin noted that Mr. Fulton, alternate member of the
Committee from Cleveland, was unable to attend the meeting today be
cause of illness but that Mr. Thompson, First Vice President of the
Cleveland Bank, was in Washington.
The Chairman stated that while he
did not think it desirable to open up the meetings of the Committee as
a regular procedure, he felt it important that a Reserve Bank be repre
sented by one of its executive officers whenever possible.
gested,
in
Mr.
therefore,
that Mr.
He sug
Thompson be invited to attend this meeting
Fulton's absence, although he emphasized that this should not
be considered a precedent for inviting persons not regularly associated
with the Committee to attend meetings in
the future.
There being no objection to Chairman Martin's suggestion, Mr.
Thompson entered the room at this point.
Upon motion duly made
and by unanimous vote, the
the meeting of the Federal
Committee held on March 5,
and seconded,
minutes of
Open Market
1957, were
approved.
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 March 5 through
March 20, 1957,
as well as a supplementary report covering commitments
3/26/57
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executed March 21 through March 25, 1957.
have been placed in
Mr.
Copies of both reports
the files of the Committee.
Rouse stated in response to Chairman Martin's invitation
for comments that projections of reserves prepared by the New York
Bank and by the Board's staff for the two weeks ending March 27 and
April 3 were close together, but the projections were quite far apart
for the week ending April 10.
However,
he observed that the differ
ences would probably disappear as the April 10 week approached.
Rouse went on to say that if
for improvement in
Mr.
any member of the Committee had suggestions
the reports of open market operations he would be
happy to receive them.
Mr.
Robertson said that he would like to make a few comments
on the operations that had been carried out since the March 5 meeting
of the Committee and that he wished to make it
clear that these com
ments were being made as dispassionately as possible.
He then made
a statement substantially as follows:
At the last meeting of this Committee, there was a
great deal of discussion as to need for, and the manner
of, conducting open market operations so as to aid Treasury
financing during this month. A variety of views were ex
It was evidently agreed that the general aim of
pressed.
policy at this time should be to maintain about the same
degree of restraint on expansion that had prevailed; at
the same time it was recognized that System operations
should take into consideration temporary pressures on the
market resulting from Treasury financing operations.
Differences of opinion related largely to the timing
Some felt that
and degree of System aid to the market.
anticipation of needs, thereby giving assurance that re
serves would be available, was essential to assure a
Others felt that
successful Treasury financing operation.
System aid to the market should not be given until need
3/26/57
was evident.
The Chairman's summary was that the majority
was not in favor of giving undue encouragement to Treasury
financing and he expressed recognition of the difficult
problem presented for the Account Management.
Review of System operations since that meeting indi
cates that they were conducted with considerable emphasis
upon the forthcoming Treasury offering, and market develop
ments suggests a pronounced response to these policies.
In the week ending March 13 System purchases were moderate
and net borrowed reserves increased to over $400 million,
yet the behavior of the money market, while firm, showed
no signs of acute tightness.
At the end of that statement
week the midmonth float increase, together with a reduction
in Treasury balances at the Reserve Banks, was expected to
supply a substantial volume of reserves.
Nevertheless the
Account Management continued to purchase securities through
Wednesday, March 13.
Again on Monday, March 18, notwithstanding the easy re
serve position for that statement week and the absence of any
particular pressure on the market, the Management again
entered the market and made outright purchases of bills for
both cash and regular delivery.
This particular operation
was designed to aid Treasury financing and also to anticipate
reserve pressures that would develop the next two days, al
though projected weekly averages indicated a relatively easy
position. Purchases at that time were inconsistent with the
customary policy of refraining from operating in the market
the day of a Treasury bill auction. Also on that day sub
scriptions were being received on the new Treasury offerings.
These purchases were promptly followed by a pronounced
strengthening of the market for Government securities.
Before the end of the week the bill rate in the market de
clined below the discount rate.
There were many factors other than System operations
Some of these
bringing about this change in the market.
were difficult to predict, but some were evident and ques
tion may be raised whether the System needed to contribute
as much as it did to easier money, particularly in view of
the general aim of current policy. If the Committee con
tinues its policy of restraint on credit expansion and if
credit demands should continue strong, it is questionable
whether this level of yields and prices of Government
securities will be maintained.
The reason for bringing this record to the attention
Committee is to raise questions for the Committee
the
of
and the Account Management to consider for guidance in
3/26/57
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conducting operations in the future. In the first place, this
experience indicates the risk of endeavoring to anticipate
market needs rather than waiting for them to develop before
taking action. The major question is whether System operations
during a period of Treasury financing should guide the market or
merely endeavor to maintain an even keel.
Another question is
whether operations should be such as to result in a lowering
(or raising) of market rates relative to those prevailing at
the time of the Treasury announcement and those likely to
prevail under current System policy after the financing is
completed. Shouldn't we scrupulously try to avoid misleading
either the Treasury or the market as to the level of rates at
which a new issue may be floated and be maintained in the near
future?
Measures to ease the market prior to or during periods
of Treasury financing run this risk. This experience also
raises another question as to technique of operations in
general, namely: is too much effort directed toward evening
out day-to-day changes in reserve positions, and particularly
projections of such changes, which sometimes turn out to be
unnecessary? Shouldn't the weekly averages be the more
decisive data?
Chairman Martin suggested that Mr. Robertson's statement be fur
nished to the members of the Committee so that they could study it care
fully.
He then called upon Mr. Rouse for comments that he might care to
make at this point.
Mr. Rouse stated that he felt the reports of open market opera
tions that had been furnished to the Committee covered fully what the
account had done during the past three weeks and why the operations
had been carried out as they had.
He felt that the Account Management
had taken a very substantial risk in
as they had during this period.
allowing reserves to stay as tight
Some fortunate breaks had permitted
the situation to work out satisfactorily, including a distribution of
reserves that avoided serious strain in the central money market, even
though there were pressures in the market that were not apparent from
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3/26/57
the figures presented.
Mr. Rouse vent on to say that he understood
that the Committee recognized a secondary responsibility in connec
tion with financing operations of the Treasury, to the extent that
additional pressures on bank reserves and the money market that might
interfere with these operations should be avoided.
the Committee might
not realize the serious situation that the Treasury
faced in this particular financing operation.
announced,
Some members of
there was a good deal of doubt in
When the terms were first
some quarters as to whether
the offering would prove acceptable and the situation had been "touch
and go" for several days.
Mr.
Hayes noted that Mr. Robertson had spoken of weekly average
figures as being important in determining account operations.
He called
attention to the fact that during the three weeks ending March 20,
negative free reserves averaged approximately $300 million and that they
were as high as $425 million during the week ending March 13.
At the
meeting on March 5, there had been some discussion of negative free
reserves around $200 million or in the $0-200 million range, and he
did not recall any suggestions for negative free reserves higher than
$300 million during this period.
From a statistical standpoint, Mr.
Hayes felt that the operations had kept fairly well in line with what
the Committee contemplated.
During the week of March 13, when negative
free reserves rose to $425 million, the account had refrained from
purchasing bills in the volume that would have been necessary to
achieve the reserve figures discussed by the Committee because it
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3/26/57
thought it foresaw additional reserves from float during the follow
ing week.
Mr. Hayes pointed out the difficulty of carrying out the
open market operation, adding that at many stages during the past
three-week period the New York Bank was consciously trying to maintain
as much restraint as possible in the market while still
giving recogni
tion to the fact that the Committee had some responsibility for the
Treasury financing.
if
any,
Mr. Hayes said he did not believe there was much,
a n ticipatory buying of securities such as Mr.
Robertson had
implied.
Mr.
Robertson stated that he was unable to see any justifica
tion for some of the activities that had been carried on by the Account
Management.
He had the impression that operations had not been based
on figures or feel of the market but rather on what the account felt
was going to happen the next day or later, and primarily with the idea
of making the Treasury financing a success without regard to what the
Committee had authorized as shown by the minutes of the March 5 meeting.
Chairman Martin said that he would like to point up this discus
sion.
He thought it was clear that Mr. Rouse felt
he was operating
within the authority given by the Committee at the March 5 meeting.
Mr.
Rouse stated that this was, of course,
correct.
His only
fear was that the operations had been keeping the situation too tight
in terms of the Treasury s financing:
in the week when negative free
reserves averaged $425 million he thought there was a risk of giving
the impression that the System was going to a little
than the Committee had contemplated.
tighter policy
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3/26/57
Mr.
Robertson said that this was not a criticism of Mr. Rouse
but of all of the members of the Committee:
try to justify what had happened.
there was a tendency to
At the March 5 meeting, he said,
the consensus seemed to be that a majority of the voting members of
the Committee favored not easing the situation but maintaining as tight
a position as had existed prior to that meeting.
Primary emphasis was
not placed on any figures.
Mr. Hayes raised the question of what had indicated such great
ease during this period.
The bill rate had gone down, he agreed, but
a special and unusual demand for bills had driven that rate down, just
as in the summer of 1956.
Mr. Hayes felt that this had no real con
nection with the general state of the market; in this period, the bill
rate was not a true measure of over-all tightness and its
decline did
not indicate a basically easier money market situation.
Mr. Robertson said that he was certain that both Mr. Rouse and
Mr.
Hayes felt that the System account's actions were within the intent
of the Committee.
What he was casting reflections on, he said, was the
inadequacy of the steps the Committee had taken to specify what it
wanted.
Personally, he felt that the actions taken in this period were
not in accord with the actions desired by the Committee.
Mr.
Johns inquired whether there had been any Treasury request
to anyone in Washington or elsewhere for assistance in connection with
the recent financing.
3/26/57
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Chairman Martin stated that he would not say that there had
been a request for assistance, and Mr. Rouse also said that there had
been no request made to the New York Bank.
Chairman Martin went on
to say that he and Mr. Rouse had attended a luncheon with Treasury
officials at which the latter were told of the Committee's policy that
would apply during this period.
He felt that the Treasury had been
given a clear impression that it
would have to carry on its operations
within the limits of the Committee's policy, and Mr. Rouse stated that
the statements could not have been more blunt.
The Chairman went on to say that he felt
it
a good thing that
Mr. Robertson had raised the questions he had regarding the operations
of the System account.
He felt that anyone who had such questions
should not hesitate to bring them up--in fact, there was a duty to
raise them.
In this particular case, the Chairman remarked that an
item had appeared in the press in which credit was given to the Chair
man of the Committee for the success of the Treasury's financing be
cause of comments he had made in an address to the National Press
Club on March 15.
Mr. Shepardson inquired as to the relationship between Mr.
Rouse's comment that the success of the Treasury's financing had
been "touch and go" and the fact that the offering had been heavily
oversubscribed.
Mr. Rouse stated that the Treasury had made a judgment that
the banking community would be willing to buy a substantial amount of
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3/26/57
the securities.
It
had received advice that, instead of reopening
the 3-3/8 per cent note, it
should offer a 3-1/2 per cent one-year
security with a convertible feature.
that advice and it
The Treasury chose to disregard
ran a risk based on its
would enter subscriptions.
judgment that the banks
This judgment turned out to be correct.
Chairman Martin said that as a matter of information, it
was
the judgment of some of the Committee staff as well as that of the
Chairman of the Committee that the rate offered by the Treasury would
not be sufficient to make the issue a success.
out to be wrong.
This judgment turned
The Chairman also stated that Mr. Shepardson's in
quiry could be answered by the statement that the money market was
more ready for the securities than many people believed to be the case.
Mr. Allen stated that he had been on vacation during the period
of the Treasury financing but that his impression was the same as that
of Mr.
Robertson,
that is,
that the account had operated in a way that
seemed to denote an inappropriate degree of responsibility to the
Treasury.
Chairman Martin said that this view could easily be read into
the record and that this was why he asked the Manager of the Account
to express himself.
He felt it was clear in Mr. Rouse's mind that he
was not operating with responsibility to the Treasury but on the basis
of what he conceived to be the operating instruction of the Federal
Open Market Committee.
3/26/57
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Mr.
Shepardson recalled that there had been frequent discus
sions of the level of reserves as a guide to operations.
The bill
rate had also been referred to, and that rate had now declined after
having been at a somewhat higher level.
cance of the bill
He inquired as to the signifi
rate as an indicator of a decrease in
restraint during
the past few weeks.
Mr.
Rouse stated that in these circumstances he did not feel
that the decline in
of restraint.
the bill
rate indicated a lessening of the degree
He suggested that the rate on Federal funds had been an
indicator of restraint during this period, and the effective rate for
such funds had remained at 3 per cent throughout the period.
bill
A higher
rate might to some extent be a reflection of general pressure in
the banking system, particularly when banks held bills and needed to
sell them.
By and large, however, Mr.
Rouse felt that during the
period under discussion the decline in the bill rate had reflected
principally the Treasury's decision not to continue adding to each
weekly issue, just as the higher bill rates in February and early
March had reflected principally the additions to the weekly issues
being made at that time.
Mr. Hayes stated that he agreed that the reduction of $200
million in the March 11 auction by the Treasury of the weekly bill
offerings had had an effect on the rate through decreasing the supply
of bills available.
Chairman Martin added the comment that he thought
this probably had more to do with the decline in
this period than any other factor.
the bill
rate during
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3/26/57
Mr. Robertson said that he would disagree with the statement
that the bill rate was not to any extent an indicator of tightness or
easing, to which Mr. Rouse responded that while the bill rate was a
factor it
was not the prime index of pressure in the money market.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period March 5
through March 25, 1957, were approved,
ratified, and confirmed.
Chairman Martin next called upon Mr. Young for a statement on
the economic situation.
Mr.
Young stated that the staff memorandum distributed under
date of March 22,
1957,
presented a current review of economic and
financial developments in
the United States and abroad and that he had
prepared for presentation at this meeting an analysis of the basic
economic problem now confronting the System.
He then read a statement
as follows:
The staff report on current economic tendencies pictures
a sidewise movement of activity over all at inflated price
levels.
This morning, instead of enumerating highlight de
velopments included in the report, I should like to direct my
remarks to what seems to me the basic economic problem now
confronting System policy. That problem relates to the con
flict that can and does arise for monetary policy at certain
points between the short-term business adjustment objective
and the long-term stabilization objective. Such a conflict
presents itself sharply at this particular juncture.
In its post-accord official literature, the System has
made much of adapting flexibly and promptly to changing
credit market and business conditions--seasonal and cyclical;
leaning against the wind, it is called. On the other hand,
the System's literature has also strongly affirmed a longer
run goal of a stable value for the dollar, recognizing that
How then
this stability can only be relative, not absolute.
should monetary policy react when it is presented with
3/26/57
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evidence of slackened momentum of cyclical advance after
some 30 months of sustained rising activity, and after a
depreciation in the purchasing power of the wholesale
dollar over these months of about 6 per cent and of the
consumer dollar of over 3 per cent?
As students of economic cycles have many times ob
served, each cyclical swing is a unique unit of experience.
Certainly, the present one has been.
It got first
stimulus
from consumer outlays for houses and durables, purchased
heavily on credit. This development was in direct response
to the exceptionally easy credit conditions prevailing just
after ebb tide of the last cycle. The massiveness with which
this stimulus took hold necessarily induced, after a period,
a massive acceleration effect in the form of business plant
and equipment expenditures.
There were, of course, other
circumstances (such as already high wage costs and much
technologically obsolescent plant and equipment) favorable
to this result. But had these circumstances not been present,
accelerated capital investment would still
have been sizable.
An unusually big capital investment response to the con
sumer outlay stimulus had several implications.
It meant
that total demands for credit would indeed be heavy.
It
further meant that savings would need to increase substantially
if monetary expansion were not to get out of control. Then,
it meant that interest rates of necessity would have to rise
to a higher level. Finally, since additions to the resource
supply would need to be largely diverted to producing goods
for the future, thus generating additional income without
enlarging short-run supplies of end products for current use,
rapidly rising business investment meant that commodity and
service markets would be under heavy demand pressure, likely
to result in some advance in prices.
The broad dimensions of the central economic problem then
unfolding were recognized by the Open Market Committee in its
discussions over the early spring of last year.
Accordingly,
a policy course was set, directed to resisting inflationary
pressures as they intensified. Such temporary relaxations of
resistance as were made, to meet transient shifts in the
economic climate, actually seemed to work as stimuli to infla
tionary trends.
Although relative stability of price levels had generally
prevailed for over three years following the post-Korean
transition to flexible monetary action, a considerable amount
of discussion had gone on in economic and business circles as
to whether a little inflation, say 2 or 3 per cent per annum,
might not be a good thing, perhaps an essential thing to assure
3/26/57
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that private capitalism would provide the sustained high
employment levels which the community was asking of it.
With this discussion as background, business saw monetary
policy, in combating the 1953-54 recession, undertake a
massive enlargement of the credit base. Shortly there
after, business confronted a strong and rapid expansion
in aggregate demand.
Advances in price quotations, business
found, were in fact supported by market demands; wage-cost
concessions to labor could be readily passed along in market
prices.
Industries that had modernized or expanded earlier
realized handsome profits; those that had lagged behind
moved swiftly to catch up.
Creeping inflation was no longer a theory, it was a fact
being realized.
Moreover, the process was predicted to con
tinue, with more and more confidence, for the longer-run.
Had not monetary policy validated the immediate postwar price
level? Had not the post-Korean price level also been sub
stantially validated? Had not monetary action aggressively
met the threat of serious recession in 1953-54? Even a re
search subcommittee of the CED on the issues of longer-run
creeping inflation could not reach enough agreement that
price stability was a desirable social end to prepare a
Little by little,
the busi
policy statement on the subject.
that creeping inflation was
ness community convinced itself
an attribute of the new era.
Those businesses that borrowed to finance investment dur
two years of this cyclical upswing, experienced
ing the first
with advancing prices, either a very low interest cost or a
Little wonder, with prices continu
negative interest carry.
ing to advance and expectations of a longer-run uptrend in
creasingly widespread, that business demands for short- and
long-term credit multiplied. The real interest cost to con
sumer borrowers over this period also worked out to be in
their favor.
Let me digress a moment to explain this idea of a negative
interest carry in consequence of inflation. Any illustration
must suffer from oversimplification.
Assume that a year ago, a manufacturing company borrowed
$1,000,000 from an insurance company for one year at 4 per
The proceeds of the loan were to help finance
cent interest.
The capital expenditures then
in process.
expansion
capital
made would at today's prices cost $1,080,000. The company
saved $80,000 by the timing of its investment, while incurring
In real terms, it enjoyed a nega
a $40,000 interest expense.
tive interest carry of $40,000, and even more than this after
In addition, the company
tax benefits of the indebtedness.
was able to maintain or increase its share of the market as
3/26/57
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compared with competitors who did not expand at that time.
Furthermore, by applying to its well-timed investment the
more liberal depreciation provisions available since 1954,
the company strengthened its internal cash flow. It thus
improved its capacity to return again to the credit market
at some future time.
The point of these observations is that one tool of
monetary action to restrict demand for credit--the cost of
money--has been seriously blunted over the past year and a
half by depreciation of the dollar. This development has
come before a significant rise in savings has occurred.
that is, before the investment-savings gap has been effec
tively closed. Indeed, depreciation of the dollar has wiped
out a part of the higher interest returns essential to
establishing a better balance between credit demand and
savings supply.
Given loss of momentum to business advance and the ap
pearance of uncertainties regarding future market trends,
monetary policy is now getting under pressure to demonstrate
again its flexibility by prompt adaptation to relaxed output,
employment, and credit market tensions. If credit ease is
permitted to develop, or is actively fostered on grounds of
uncertainties, before more competitive conditions emerge in
those markets experiencing the greatest expansion of demand,
then the only conclusion for the business and consumer com
munity to reach is that the dollar depreciation of the past
year and a half is to be validated. In the light of the
widely-held view that, to sustain high employment, creeping
inflation is desirable, and in any case inevitable, such a
conclusion would invite also the expectation that further
inflation is highly probable.
Spread of this expectation would rapidly activate new
spending and borrowing, further increasing the turnover of
deposit money. Instead of a period of rolling adjustment in
output and prices under more actively competitive conditions
and in preparation for a new stage of advance without infla
tion, immediate resumption of inflationary tendencies would
threaten. In recent reports to this Committee, we have
several times stressed the basic strength of demand factors
in housing and automobile markets as well as the still strong
incentives for business investment, even without inflation.
These remarks, of course, have a moral. The Committee
needs to consider carefully at this time whether it should not
regard the objective of a stable value for the dollar as over
riding the objective of adjusting flexibly and promptly to
short-run cyclical changes in activity. It needs to weigh the
3/26/57
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risk that monetary policy may lose strategic opportunity
to make its discipline effective, keeping in mind that, as
experience of the late 1920's shows, such opportunity can
be lost--and lost forever.
From mid-1955 through 1956, capacity in major materials
and power output lines was utilized intensively, as it was
also in producers' equipment and construction areas. With
the huge additions to industrial capacity of the past two
years and with a larger manpower supply, we may at last have
attained a situation in which competitive forces, with roll
ing adjustments, can themselves do much of the work of
stabilizing the purchasing power of the dollar. As long as
savings are being translated promptly into spending through
the intermediation of the credit market, there will be a
financial environment favorable to the interplay of competi
tive forces toward this end--if these forces are given a
chance to play.
At the request of several members of the Committee, it
stood that a copy of Mr.
was under
Young's statement would be distributed following
this meeting and that, as usual,
his remarks would be included in
the
minutes of the meeting.
Mr. Thomas then presented the following statement on recent credit
and financial developments.
Credit developments during the past three or four weeks
show the anomalous combination of continued large demands for
credit with some decline in money rates and a firming of bond
yields. To some degree these conflicting developments may be
attributed to System operations to provide reserves during the
difficult period of large tax payments and the receipt of sub
scriptions for a $3 billion Treasury offering.
Some elements in the market have apparently interpreted
System operations as indicating a shift of policy toward less
restraint. Views as to likely development of slacks in the
economy both support this interpretation and re-enforce its
market effect.
The acquisition and holding of a substantial
amount of Treasury bills in Chicago and the willingness of
Chicago banks to build up substantial borrowings at the Re
serve Banks is one influence toward a decline in bill yields.
The decline in yields reflects also the effect of the reduc
tion in the amount of weekly bill offerings and reinvestment
3/26/57
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of the proceeds of maturing Treasury issues being redeemed
for cash on March 22.
The eventual offsetting effects of
making payment for the new offerings, which are more remote
and will be felt more gradually, are apparently not being
anticipated. Whether the current easing of money rates is
more than transitory will presumably be determined by the
course of credit demands after these temporary influences
have spent themselves.
New security issues continued in large volume during
March, with corporate issues, at about $1-1/4 billion, ex
ceeding $1 billion for the fifth consecutive month-the
highest sustained level on record.
Compared with other
recent periods, a larger proportion of financing is being
effected through public offering and less through private
placements, and also there are more stocks and convertible
bond issues.
New securities offered by State and local
governments were somewhat less in March, following two
months of heavy volume. Dealers' unsold stocks of these
issues, which increased sharply in February, have remained
relatively large. The stock market has continued at a low
level of trading activity with prices close to the lowest
point of the past year.
The Treasury has been a net supplier of funds to the
market, despite the fact that this is a period of heavy tax
receipts. While Treasury borrowing has been larger than
usual, its balances have been reduced to exceptionally low
levels.
Much of the borrowing, moreover, has come from the
banking system at a time when demands on banks are seasonally
lighter than usual. After March 22, however, Treasury bal
ances will increase again to more normal levels and the new
borrowing should build up substantial pressure on the banks
beginning March 28. In the first half of April, the Treasury
will have very large outpayments, thus returning funds to the
market.
From mid-April until early June cash receipts and
payments are expected to be approximately in balance.
Large
outpayments in the first
half of June will reduce the Treasury
cash balance to around a minimum, but net receipts in the last
Additional financing of a substantial
half will rebuild it.
amount will be needed in July. Early financing through additions
to the weekly bill
issues and through an exchange for maturing
F and G bonds will not only reduce July borrowings but avoid
a possible squeeze in June.
Bank loans, after the wide swings in December and January,
showed no striking development in February. During the first
three weeks of March, according to preliminary figures, loans
increased sharply. Although the increase did not reach the
3/26/57
-18-
high record of last year, it was much larger than in the
corresponding period of other years.
Commercial loans in
the three weeks increased by over $1.2 billion, compared
with $1.4 billion in the same period last year. Loans on
securities showed a much smaller increase than last year,
and the increase in all other loans was also somewhat smaller
this year. Loans on real estate have declined in recent
weeks.
Demand deposits at banks have continued to show little
more than usual seasonal changes. In other words, seasonally
adjusted deposits show little or no growth.
Time deposits at
commercial banks, however, continued to increase at what may
be considered as a fairly rapid pace. The increase at weekly
reporting banks since the end of November has exceeded $1-1/4
billion, compared with no change in the same period a year ago.
No doubt, this growth and the leveling out of demand deposits
reflects some shifting of balances from demand to time accounts,
as well as perhaps some shifting from other forms of savings to
commercial banks, attracted by the higher interest rates. This
trend makes it difficult to interpret the significance of
changes--or the lack of change--in demand deposits. Turnover
of demand deposits has continued to increase, maintaining an
annual rate of growth of about 7 per cent.
Required reserves in the past four weeks have conformed
fairly closely to the usual seasonal pattern increasing by
nearly $400 million in the first
three weeks of March and
probably decreasing by over $100 million this week, on a weekly
average basis.
The continuing low level of the Treasury balance
at the Reserve Banks maintained at times only by transferring
$100 million from the Stabilization Fund Account, has made more
reserves available than might have been expected while float
appears to have absorbed on balance more than usual.
System
purchases of securities, including repurchase agreements, sup
plied over $330 million of reserves in the first three weeks
of March, but sales will absorb over $100 million this week.
Net borrowed reserves increased from a weekly average of a
little over $200 million in the last week of February (revised
downward by about $100 million from the first reported estimate)
to over $400 million in the second week of March. The average
declined to about $150 million in the statement week ending
March 20 and is estimated at around $250 million for the current
statement week.
Looking into the near future, reserve requirements next week
will be affected by important offsetting factors-the usual April 1
decline in deposits in Chicago and the increase in Treasury tax
On
and loan accounts resulting from payment for the new issue,
3/26/57
-19-
balance a moderate increase in required reserves is to be
expected. In addition reserves will be absorbed by the
restoration of the Treasury balance at the Reserve Banks
to a normal level and by the usual end-of-month decline in
float. Net borrowed reserves might average as much as $800
million in that week in the absence of System action to supply
reserves. They will continue rather large in the week ending
April 10, although a sharp decline in Treasury tax and loan
accounts should bring about some reduction in the volume of
required reserves. Thus, rather substantial System purchases$400 or $500 million might be needed in the next statement week
to prevent unduly severe tightening in the money market.
Reserve demands in subsequent weeks will depend to a con
siderable extent upon how the money market makes use of the
large volume of funds to be paid out by the Treasury in the
first half of April, as well as upon the course of bank credit.
Payments by the Treasury will draw funds from tax and loan
accounts at banks, thus draining reserves from some banks, but
at the same time funds will move into other accounts.
If
private demand deposits show only usual seasonal changes, re
quired reserves will tend to decline. Net borrowed reserves
should, therefore, also show a declining tendency,
On this basis, any System operations to supply reserves
in the next week or two of tightness should be followed by
sales to absorb reserves.
If credit demands do not exceed
the usual seasonal pattern and some restraint is still needed,
sales should be as much as half of the preceding purchases.
If credit demands should not come up to the amounts projected,
then less restraint would be in order and borrowings should be
permitted to decline. But if there should be a greater than
seasonal credit expansion (such as is indicated in the New York
Reserve Bank's projections of required reserves in the next
three months),
the additional reserve demands should be met
through additions to member bank borrowings and not through
open market operations. To follow a course of providing re
serves necessary to keep down borrowings under these conditions
would be in effect feeding inflation through the Treasury--a
result contrary to the policy directive.
Under those conditions policy should not be directed toward
maintaining either a definite volume of net borrowed reserves or
a definite level of bill rates. Interest rates should be per
mitted to rise. Rates and borrowings should be permitted to
reflect the forces of credit demands playing upon a normal supply
of bank credit. Policy should be determined on the basis of the
behavior of the economy in general--the level of production and
3/26/57
-20-
employment and the pressure on prices.
Although there are
some indications of a leveling off in these economic measures,
current credit demands are still
large, and as long as all
available funds are being borrowed and put to use, a serious
decline in economic activities cannot be said to be in process.
Chairman Martin called upon Mr.
Hayes at this point for an expres
sion of his views regarding the economic situation and the policy to be
pursued by the Committee.
Mr.
Hayes'
statement was as follows:
1. While the view is now rather widely accepted that the
boom has lost much of its buoyancy, it is impossible to tell
at this juncture whether the economy is heading for a decline
or whether the present sideways movement can be relied on to
continue for some months, with perhaps a renewed upward move
ment in the making.
On the whole, recent data have been re
assuring.
2.
Consumer demand, industrial production, and employ
ment remain at or near record levels, but they are no longer
rising appreciably. In fact, production has been showing a
tendency to decline slightly, probably to a large extent be
cause of a decline in inventory accumulation. There is evi
dence that some manufacturers are reducing raw material in
ventories, while finished goods inventories are being increased
moderately at the retail levels especially in the automobile
industry.
3. Steel production continues to recede and may pull the
March index of total industrial production below the February
level of 146. However, there is some likelihood that the de
cline in steel largely reflects inventory adjustments and may
not carry far below the 90 per cent level during the second
quarter.
4. The most conspicuous "soft spot" in the economy is
the residential construction outlook. In February residential
starts fell to a rate of 910,000 units, the lowest figure since
early 199. While several types of remedial measures are under
discussion, there is no clear prospect of a pick-up. However,
other kinds of construction remain so strong that no great slack
is apparent yet in employment of building labor.
The recently-released SEC-Commerce survey of actual and
5.
anticipated plant expenditures confirms that this major upward
force in the economy is leveling out. It is now estimated that
3/26/57
-21-
such expenditures will be only 6-1/2 per cent ahead of 1956
as compared with a 22 per cent gain in 1956 over the preceding
year.
6. Some weeks ago we spoke of the disparity between de
clining scrap and raw material prices and rising finished goods
prices. Since the end of January the general index of whole
sale prices has shown little change, while consumer prices have
risen further.
7. Developments in the field of bank credit have tended
to confirm the other signs of reduced upward pressure in the
economy. Thus total loans of reporting member banks rose dur
ing the four weeks through March 13 by less than two-thirds as
much as a year ago, and about the same ratio applies to the
change in total loans of the New York banks in the two weeks
ending March 20, in which period borrowing for tax purposes
played a leading role. The final outcome of the tax period,
however, is still uncertain; the increase in business loans
at New York banks in the last two weeks was one-fifth less
than last year, but the increase at Chicago banks was greater
than a year ago.
8. Underwriting by banks was the major factor respon
sible for the success of the Treasury's recent cash offering.
Thus while a difficult problem has been successfully met, it
is clearly incumbent on us to provide sufficient reserves to
enable the banks to take up their subscriptions on March 28
without creating undue money market strains.
9. Other credit and capital markets appear to be about
in balance. In the stock market, trading continues rather
lethargic.
10. Turning to credit policy, we feel that the elements
of stability in the present business situation are sufficiently
impressive to justify our maintaining a general policy of
credit restraint pending further appraisal of the probable
direction of the next major change in economic activity. At
the same time, we should recognize that economic developments
themselves--and a growing recognition that the boom is less
buoyant than it was--have meant some relaxation of strained
conditions in the credit markets, even though the level of
net borrowed reserves has generally been close to that of last
autumn. This tendency toward less intense restraint has been
enhanced by the distribution of reserves as between the central
money market and the rest of the country.
Perhaps the phrase
"passive restraint," reportedly used by the Chairman in a
recent speech, correctly conveys the spirit of our activities
in recent weeks.
11. We can see every reason to prevent the degree of
restraint from becoming more intense than it has been in
-22-
3/26/57
recent weeks.
Reserve projections suggest that if we are
to maintain net borrowed reserves of say, $200 to $300 mil
lion, it will be necessary to make open market purchases of
some $500 million in the next week or so, largely to enable
the banks to take up their subscriptions to the new Treasury
issues. Purchases of this order, applied to a relatively
limited market for Treasury bills, and coming at a time when
corporations are adding to their bill holdings for June tax
purposes, will probably drive bill rates even lower and will
make the bill rate itself
a poor criterion of credit policy
for this period. We might add that redistribution of the
securities acquired by the banks on March 28 should tend to
prevent any material decline in short-term rates generally,
and the passage of the April 1 tax date in Chicago should
release considerable amounts of bills thereafter.
Under
these circumstances, we would lean toward use of a target of
$200 to $300 million net borrowed reserves and would not be
disturbed to see a temporary substantial drop in bill rates.
We would, however, permit net borrowed reserves to rise above
the suggested target level if this seemed necessary to prevent
an unduly easy "feel" in the money market.
12. We would not favor any action at this time which
would suggest a major change in credit policy, and any change
in the discount rate therefore would appear undesirable. The
directive as presently worded seems to cover adequately the
credit policy which we have proposed.
Mr. Johns said that three weeks ago he had expressed the view
that a policy of restraint should be continued, perhaps indicating a
target of net borrowed reserves of $200 million with a preference for
being on the easier side of that figure rather than on the tighter side.
If there had been a change in his attitude in
the last three weeks it
would reflect less apprehension about the development of a downturn in
the economy.
Therefore,
he would now continue a policy of restraint.
While he would rather not make errors, he would prefer that such errors
as were made be on the side of restraint at this time.
He was dis
couraged about the use of net borrowed reserves as a guide and hesitated
3/26/57
-23-
to mention any figure at all.
discount rate now.
He could see no need for changing the
In sum, he would maintain a firm condition for the
time being.
Mr.
Bryan expressed appreciation to Messrs. Robertson and Young
for the very carefully prepared papers they had presented.
Mr. Young
had made a number of points that he hoped would be subject to comment
by the Committee when the members had had an opportunity to study the
text of the paper.
With respect to short-run credit policy, Mr.
Bryan said that a
factor that he believed to be pertinent was the trend of long-term
interest rates and the demand for savings in
relation to the supply.
This might affect what the Committee would like to do in
the short run.
He suggested that we may be in for a generation of an upward trend in
interest rates.
As for the economic situation, the Sixth District was continuing
essentially in
a boom situation, Mr.
Bryan said, with most figures per
forming somewhat better than those for the nation as a whole.
almost no excess reserves in
the district, and borrowings both in the
Federal funds market and at the Reserve Bank are high.
picture, his comments would be about like those of Mr.
said that he had quite consistently felt it
easing policy, and if
it
There are
On the national
Johns.
Mr. Bryan
was too early to adopt an
there had been any change in his views recently
would be that the economy had shifted toward greater ebullience and
-24
3/26/7
confidence.
As a consequence, he did not feel that any easing action
whether through open market intervention or the discount rate was
called for at this time.
As a matter of fact, without criticizing
anyone, he felt that since the turn of the year the Committee had again
been following a policy of "inadvertent ease."
The situation was much
easier than the Committee's judgment indicated at the beginning of the
year, when he understood that policy was to attain a degree of restraint
approaching that of late November and early December of 1956.
The in
terest rate structure had been permitted to ease more than had been
desirable in
the light of all the circumstances,
this unfortunately had created in
Mr.
Bryan said, and
the minds of practically all business
men and bankers the impression that we were on the verge of a major
policy action looking toward further easing.
The policy of inadvertent
ease had contravened the intentions of the Committee, Mr.
Bryan felt,
and he would prefer that the Committee get into a posture of greater
restraint.
useful.
He did not think a target offree reserves particularly
He would not make purchases in the market with the bill
rate
under the discount rate; rather, he would intervene in the market by
making sales of securities with the bill rate below the discount rate.
He also commented that reactions to changes in
the bill rate confused
him; when the rate rose to 3.25-3.30, there tended to be a feeling that
things were too tight; but when the bill rate went below the discount
rate, it
ceased to he a good measure of economic restraint
Mr.
Williams said that activity in the Third District con
tinued to mark time with no clear sign of moving either up or down.
3/26/57
-25
Department store sales turned up sharply in the week ending March 16
after substantial declines in
four weeks,
the two preceding weeks.
For the past
sales were 6 per cent below a year ago, and they were down
2 per cent for the year to date.
Television sales in
Philadelphia were
off about 50 per cent and new automobiles were moving slowly, with
registrations during the first
under a year ago.
two months of the year about 15 per cent
During the first
Philadelphia were down 31 per cent.
half of March registrations in
Claims for unemployment benefits
had been slightly above those for the preceding year in
February, but
during the past three weeks such claims had been below those filed last
year.
in
Sentiment on the business outlook had not changed significantly
the past few weeks,
Mr. Williams said.
that 1957 would be a good year,
The consensus seemed to be
characterized by both strong and weak
spots, with total business activity expanding at a slower rate than
last year.
Turning to credit, Mr. Williams said that the volume of business
borrowing in
the Third District during the past four weeks was slightly
higher than a year earlier.
Tax borrowing had been about the same but
business loans had turned up in mid-February and had risen more in
four-week period than in
changes in
1956.
this
After presenting data covering recent
business loans at several large Philadelphia banks, each of
which showed an increase since mid-February, Mr. Williams concluded his
remarks by stating that as he viewed the situation business and financial
developments did not now indicate a change in
the discount rate or in the
3/26/57
-26
directive for open market operations.
Personally, he agreed with Mr.
Young that the System should allow rolling readjustments to continue.
Mr. Thompson said that the trend of business in the Cleveland
District appeared to be much the same as in the United States as a
whole.
It
was fulfilling the more optimistic forecasts made at the
turn of the year, remaining fairly stable close to top records.
were some weaknesses and different degrees of weakness.
in
somewhat of a down trend.
There
Steel had been
The automobile industry was one of the
weak spots with sales failing to show the expected upward surge.
ventories of new automobiles were high, and it
In
was expected that the
automobile industry would have to cut back production goals.
Foundries
were bearing out this expectation, with producers of castings for
automobiles quite unhappy about the orders they have been receiving,
while foundries making heavy castings were doing well.
The machine
tool industry had a six-month order-backlog and although that was
lower than in
the past, the situation was considered to be good with
employment high.
With respect to appliances,
scheduled on the basis of a reduction in
one major producer had
over-all demand and was
watching inventories carefully; another producer was basing production
on an increased demand.
Residential builders were unhappy, Mr. Thompson
said, but nonresidential work in process continued at a very high level.
With regard to credit, Mr. Thompson reported that business loans
of reporting member banks in
the Fourth District had increased more in
March of this year than last, somewhat to the surprise of bankers who
3/26/57
-27
as recently as two weeks ago had expected demand to be lower than
last year.
Banks do not seem to feel as tight as they did, and
borrowings at the Reserve Bank have been less than a year ago.
Mr.
Thompson said that while there was some surface appearance
of stability in
commodity prices, the basic pressures appeared to be
upward although there had been some weakness among industrial prices.
A further advance in
steel prices was anticipated.
Wage rate increases
this year would put pressure on costs and this might be reflected in
commodity prices.
no letup in
All in all,
Mr. Thompson felt that there should be
the restraint exerted through open market operations and
there should be no change in
the directive of the Committee that would
indicate a softening of attitude.
Mr.
Shepardson said that he was particularly pleased with the
statements that Messrs.
morning.
Young and Thomas had given the Committee this
It seemed to him that the Committee was constantly being in
fluenced--perhaps subconsciously--by the bias toward inflation and by
the fear that the Committee's operations might be at a point of turning
the economy down.
He recalled that he had expressed views upon a
number of occasions that the Committee may not have been sufficiently
tight in its operations-not as tight as it had intended. At the
preceding meeting he had expressed the hope that during the Treasury
financing this month the Committee would not get into a position where
it would have to turn around and increase pressures again.
There had
been discussion of maintaining the same degree of restraint) but Mr.
-28
3/26/57
Shepardson wondered whether what had happened was not a result of
the fear that the Committee might make conditions too tight.
likened the situation to that of a person who was a little
He
nervous
and disturbed while driving a team of horses and who, without letting
go of the reins, permitted them to slip through his hands.
Personally,
Mr. Shepardson said, he would prefer that the Committee "take another
bite" rather than permit the reins to slip further.
He would not
suggest any specific figure of reserves or any level of bill
rates.
In the past he had thought both of these had some useful significance
as guides, although this was a matter for the technicians.
He would
hope that the Committee would get a firmer grip on the reins so that
it would have restraint that would combat the growing feeling among
many persons that a certain amount of inflation must be accepted.
Mr. Shepardson did not think the Committee should accept inflation
as inevitable, and it should take every step that it could to curb
such a development.
Mr. Robertson said that he concurred completely in
Shepardson's comments.
Mr.
As to the economic situation and prospects
on which monetary policy should be based, he would adopt the comments
Mr. Young had made.
One way of doing what Mr. Shepardson suggested
was to let the discount window have a bigger share in providing the
reserves needed, rather than to try to do the whole job through open
market operations.
It was obvious that we must engage in open market
3/26/57
-29
operations,
Mr. Robertson said, but he hoped that they would be
minimized and that some of the slack would be taken up through the
discount window.
He certainly would do nothing to ease, he would
"take another bite" as Mr.
Shepardson had indicated, and he would
be sure that any errors were on the side of tightness.
Mr.
Leach said that business activity in
continued mixed with little
net change.
the Fifth District
The coal industry was on the
strong side, with production increasing slightly in recent weeks in
response to satisfactory domestic demand and a strong export market.
Cigarette output was high and orders at shipyards were exceedingly
large.
The textile industry on the other hand had continued to
exhibit weaknesses in production, orders, prices, and profits.
Opera
tions at furniture factories dropped slightly during February and were
also slightly under the February 1956 levels.
The lumber situation
appeared somewhat weaker, with production off and stocks up sharply.
Income received by farmers from cotton and tobacco this year would
probably be down from 1956 as a result of large acreage reductions.
Mr. Leach said that since the last meeting of the Committee
he had given considerable thought to bank loans in the district and
had talked with a number of senior officers of large banks about their
loan demand.
latter
The sharp seasonal rise in business loans during the
part of 1956 led to repayments after the turn of the year that
were considerably larger than a year ago.
A bottom was reached in
3/26/57
-30
outstandings in early February and since then there have been in
creases in
business loans,
closely comparable to those of 1956.
In
the Fifth District gains in these loans had been slightly greater
than in the corresponding period of 1956, while in the United States
they had been somewhat smaller, possibly due to a lower level of tax
borrowing.
As to the strength of current loan demand,
Mr. Leach said that
about two-thirds of the bankers with whom he talked stated that under
lying demand for business loans was as strong as ever.
Others felt
that demand continued very strong but not quite as feverish as it was
last year.
The demand for business loans did not furnish evidence
that the economy was weakening.
On balance,
Mr. Leach said that he did not look for a signifi
cant change in business activity in the near future either in
District or in
the country as a whole.
was likely to be slight.
the Fifth
Any movement in either direction
As to policy, he thought the Committee should
continue to maintain the present degree of pressure, resolving doubts
on the side of restraint.
judgment,
Any lessening of restraint would, in his
quickly result in an undesired expansion of loans.
Consistent
with this view, he did not think the discount rate should be changed at
this time.
Mr. Leedy said that the most important thing that had taken
place in the Tenth District recently had been the snow storms that
-31
3/26/57
had brought considerable moisture throughout the drought-stricken
parts of the district.
This did not mean the drought was ended, but
the moisture furnished had been important and would have a favorable
effect on the outlook.
Mr. Leedy said this was not the time to tighten up.
recognize the soft spots and the general leveling off in
We all
the economy.
He felt that, without actually applying additional restraint, the
Committee might give
a little
more evidence of an intent to keep bank
reserves under pressure than it
past.
had been able to give in
the recent
This had been a difficult period, Mr. Leedy said, with the
convergence of corporate tax payments and Treasury financing.
the period immediately ahead,
that its
For
he felt the Committee should indicate
purpose was not to relax but that it
had a policy of con
tinuing at least the degree of restraint that had been intended in
the recent past.
As to business loans in
the Tenth District, Mr. Leedy said
that there had been a very large increase in
recent weeks.
He felt
that as a guide the Committee might watch more closely what was
developing in
business loans.
He thought that a level of $200-300
million of net borrowed reserves might prove too low to obtain the
desired restraint, and he referred to the negative free reserves of
over $400 million in
wanted effect.
the second week of March as not having an un
The Committee should lean toward tightness rather
than to the contrary.
Mr. Leedy said he would go along with Mr.
3/26/57
-32
Robertson's view that the additional reserves the banks apparently
were going to need should be supplied to a greater degree through
borrowings than through open market operations.
No change in
dis
count rate or the wording of the directive was needed at this time,
Mr. Leedy said.
Mr.
Allen said that in the Seventh District there was evidence
that the leveling in
general business activity was a little
nounced than in the country as a whole.
more pro
Employment in Michigan and
Indiana, for instance, was less than a year ago because the gains in
nonmanufacturing were not sufficient to offset the declines in manu
facturing employment.
In Illinois, Iowa, and Wisconsin, the declines
in manufacturing employment had been more than offset by gains in
non
manufacturing employment.
Department store sales in
the Seventh District were running
slightly lower than a year ago, Mr. Allen said, but there is
a belief
that when the late Easter has arrived,
sales for the year to date will
have passed the figures of last year.
With respect to the automobile
situation, Mr.
Allen said that sentiment in Detroit during the past
few days had been less optimistic, or more pessimistic, than in recent
weeks.
In summary, Mr. Allen felt that the level of general business
activity was still high.
The so-called "bubble" seemed to be off the
boom, which was to be desired. Mr. Allen said he supposed the Committee's
task was to do what it properly could to see that the high level of
3/26/57
-33
business activity continued without any bubble.
He continued to
feel that for the present monetary policy should mark time, that is,
it
should not add to or subtract substantially from reserves, and it
should confine actions to the temporary requirements of an orderly
market situation.
Mr. Allen concluded his remarks by saying that he liked and
agreed with the comments Mr. Hayes and others had made to the effect
that guides to operations not be exclusively net borrowed reserves or
feel of the market, but a combination of both.
Mr. Powell said that business activity in the Ninth District
during the first quarter of 1957 appeared to have held its own, with
some measures of activity up and others down.
On the soft side there
was persistent weakness in residential construction, some easing in
inventory accumulation, a slight increase in unemployment, a decline
in prices of some basic raw materials such as copper, steel scrap,
and aluminum, and more or less business pessimism generated in part
by recent downward trends in stock market prices and profit margins.
On the strong side the district economy showed a high level of non
residential construction, rising employment, a high level of incomes,
a favorable outlook for farm machinery sales, farm prices holding at
a slightly higher level than a year ago, iron ore mining scheduled
for a strong opening this spring, and a strong demand for commercial
and industrial loans.
Both city and country member banks suffered a greater deposit
loss thus far this year than last and while liquidation of loans and
3/26/57
-34
investments had aided banks in meeting the large deposit outflow,
there had been a rising level of borrowings from the Federal Reserve
Bank and through the Federal funds market.
In recent weeks melting snow had improved the soil moisture
supply and opened up more ranges for livestock grazing.
Breeding
cattle and ewes had come through the winter in seasonally good condi
tion.
Although soil moisture had been improving, it was still in
adequate in the Dakotas and Montana and generous rains would be needed
this spring to start crops off satisfactorily.
Farmers' intentions
to plant indicate a substantial reduction in wheat acreage partly be
cause of the heavy sign-up in the soil bank program.
Mr. Powell stated that he, too, had been much interested in
Mr. Young's comments.
He felt that it would be helpful if Mr. Young
could also comment on steps that might be taken to offset the rising
turnover of bank deposits.
He concluded his remarks by saying that
the Committee should continue firm restraint in every way it could,
although he would not favor an increase in the discount rate.
Mr. Mangels commented that the earthquake damage in the Pacific
Coast area over the past weekend was not of major proportions.
As to general business, the Twelfth District was continuing a
fairly strong tendency although there were indications that in the next
few months the rate of increase would not be as great as over the past
year.
Nonagricultural employment in February was 5 per cent higher
than a year earlier but level with January of this year.
There had
3/26/57
-35
been a slight increase in claims for unemployment insurance in
February largely because of weather conditions.
Plywood mills in
the Pacific Northwest were operating at about 75 per cent of capa
city.
Department store sales were off in
February and March but
this might reflect the late Easter this year.
On the other hand,
new automobile registrations seemed to have shown a little
spurt
in recent weeks with quite an increase having been reported in
California during February.
January and February together would
show a total about the same as a year earlier.
Residential and non
residential construction were down, but there was a fairly large back
log of nonresidential construction and a good program of building was
expected for the year.
Mr. Mangels said that bank loans in the Twelfth District for
the four weeks ending March 13 moved contrary to the national picture
by showing a moderate decrease.
vidual banks in
relatively little
There was still
He reported that a survey of indi
connection with corporate tax borrowing indicated
demand for such loans as compared with last year.
some pressure for term loans although banks were
trying to get out of that field.
Several banks indicated that loan
demand was brisk, but the majority indicated less demand than in
past.
Savings deposits were increasing and it
the
was reported that at
one bank in California such deposits were growing at the rate of $1
million a day.
Mr. Mangels expressed the view that there might be developing
a better balance between supply of and demand for goods than has
3/26/57
-36
existed in
the past.
Certainly in the Twelfth District an easier
situation was developing.
Despite this, he would not modify the
Committee's policy of restraint although he felt that the Committee
should not take undue action to increase pressure.
He had in mind
a net borrowed reserve figure in the $200-300 million range as
suitable for a policy guide during the coming period.
He would make
no change in discount rates at this time.
Mr.
Irons said that confidence in
stronger than it
the Dallas District was
had been several weeks earlier, largely reflecting
the widespread rains and plentiful moisture supplies during recent
weeks.
Heavy rains for the district generally had improved subsoil
moisture as well as surface moisture.
He noted a word of caution
among cattlemen in Houston, who urged that cattle ranchers not rush
to restock their herds.
However,
the rains had had a very marked
effect on confidence of businessmen generally.
One aspect of this
was the fact that some farmers now appeared to be unhappy that they
participated in the soil bank program even though soil bank payments
might range from $100 to $125 per acre on some irrigated cotton land.
Mr. Irons went on to review the industrial situation in
Dallas District.
the
He stated that both residential and nonresidential
construction had been higher recently than a year ago.
Department
store sales had been somewhat lower after adjustment for the late
Easter, but an increase was anticipated.
The automobile business had
turned better the past month, with registration of new cars in Dallas
3/26/57
-37
and Houston in
the first
half of March 24 per cent higher than a
year ago and 17 per cent above February.
extremely competitive,
however,
Sales conditions were
with terms about what buyers of
cars want.
Borrowings at the Federal Reserve Bank continued negligible,
Mr.
Irons said, and business loans recently were off.
Bankers say
that loan demand continues strong but point out that their position
is
Mr.
much easier than six to nine months ago.
As to credit policy,
Irons felt that in view of the national situation, the Committee
should make every effort to maintain a degree of firm restraint on
banks.
He felt that the Committee had lost ground since last Novem
ber, stating that there had been an unconscious tendency when in
to be on the side of ease.
Policy should be flexible, Mr.
doubt
Irons said,
and the Committee should "lean against the breeze," but should guard
against being motivated to action at the first "flutter of the leaves."
Errors should be on the side of restraint, and he hoped that some sub
stantial part of the funds that would be needed during the next few
weeks would be supplied through the discount window.
At themoment,
he would not change the discount rate although he felt such a change
might come.
Mr. Erickson said that he too felt Mr. Young's statement was
excellent.
movement.
In the First District, business continued its sidewise
Most figures were not now as high as they were a few months
ago but were higher than a year ago.
There had not been the expansion
3/26/57
-38
in commercial and industrial loans that had been reported elsewhere
either for tax purposes or for other reasons.
On the other hand,
since the preceding meeting there had been greater use of the discount
window.
Last year a peak use of the discount window was reached in
May, and recent borrowing had been almost as high as last May.
Mr.
Erickson said he would suggest no change in the discount rate or in
the Committee directive.
As to open market operations, he would re
solve any questions on the side of restraint.
He still hesitated to
set any figure of net borrowed reserves as a target, but he hoped
that as far as possible credit needs would be supplied through the
discount window.
Mr. Szymczak recalled that two meetings ago he felt relatively
that the Committee should try for a figure of $200-00 million of
negative free reserves.
At the March 5 meeting, he felt it should
relatively strive for a figure of $0-200 million of negative free
reserves because of the conditions brought about by the Treasury
financing and corporate tax borrowing.
At the present time, he felt
the Committee should strive for a degree of restraint indicated by a
figure of $200-300 million of negative free reserves.
Nothing now
indicated a change in the economy sufficient to call for a change in
credit policy at this time.
It appeared that activity would continue
at a high level and the Committee was more likely to need to absorb
reserves, than supply them.
Mr. Szymczak said that he would recom
mend getting back to the degree of restraint that the Committee con
templated a few weeks ago.
3/26/57
-39
Mr.
Balderston said that there had been so many sound things
said so well that he hesitated to add any comments.
He noted Mr.
Bryan's suggestion that the Committee bear in mind both the long run
objectives and the immediate problem.
cerned about the long run because it
Mr.
Balderston said he was con
seemed to him that certain factors
created the framework within which the Committee and the System must
operate.
He referred (1) to the continuing inadequacy of savings to
meet investment demand,
(2) to the increased Governmental spending at
both Federal and local levels,
(3)
to the lessening adequacy of fiscal
policy as a partner in restraint, and (4)
to the numerous Governmental
proposals to use short-term credit for long-term purposes.
Mr.
Balderston said that at least one or two of these factors seemed to
have changed for the worse.
He referred not only to the very disturb
ing suggestion that Government make direct loans but to the policy of
having the Federal National Mortgage Association make long-term
mortgages with short-term money.
As to the future, Mr. Balderston said that rolling adjustment
seemed to him to be the thing the Committee should aim for.
It
A
be watching the time when rolling adjustments ceased to roll.
measure would be when aggregate demand ceased to be as strong.
this test to the present, Mr.
Balderston said that it
that country-wide demand for bank credit was still
should
Applying
seemed to him
almost as strong.
The apparent ease with which new capital issues had been floated was
in
part explained by redemptions of F and G Treasury bonds.
Thus,
-40
3/26/57
the Treasury had supplied some of the funds that had made it
easy
for corporations to get their capital requirements taken care of.
During the next three weeks, Mr.
Balderston said he personally
would like to see the Committee supply considerably less credit through
the open market than either forecast indicated.
One of the forecasts
indicated net borrowed reserves of $630 million and the other of $800
million.
Instead of operating as the Committee normally would, Mr.
Balderston suggested supplying considerably less credit than these
forecasts indicated, thereby forcing member banks to use the discount
window.
Mr. Balderston emphasized that he was on the side of restraint.
Chairman Martin said that he, too, had been impressed with Mr.
Young's paper.
The Chairman stated that he would align himself with what seemed
to be the consensus of the meeting,that errors in System account opera
tions be on the side of restraint rather than of ease.
He felt this
particularly because of the fact that the Treasury would have to come
to grips with the problem of long-term money, and the System should do
nothing that would mislead the Treasury on what that rate should be.
took it
He
that the consensus today was that the Committee should maintain
the directive at its present form.
The only figures of net borrowed
reserves mentioned had been in the $200-300 million range with
one suggestion of $400 million, the Chairman noted.
He assumed that both
feel of the market and behavior of the market would be recognized in
carrying on operations for the System account and that the Manager would
endeavor to make his errors on the side of tightness rather than of ease.
-41.
3/26/57
Mr.
Rouse said that he agreed with the Chairman's comments
but that he would like to go one step further in order to avoid any
misunderstanding.
His approach to operations during the next three
week period, during which a considerable volume of reserves must be
supplied, would be to let the market come to the System.
not contemplate going out to seek Treasury bills.
some backing up in
He would
This might mean
the rate and would require purchases only in
order
to avoid getting an extreme situation on the tight side.
Mr.
Hayes said that he would like to comment on the peculiar
nature of the problem from a day-to-day operating standpoint and of
the criteria that should be used in carrying on operations.
very difficult to say what the criteria should be.
It
was
Looking ahead,
seemed clear that in the immediate period the System should let
it
the
banks depend on borrowing to obtain a good part of needed reserves.
He illustrated the difficulty of using statistics as guides by noting
the suggestion made at earlier meetings this year that the Committee
should restore the degree of restraint that existed last November.
Mr.
Hayes pointed out that at that time net borrowed reserves averaged
less than $200 million whereas during the last few weeks they had
averaged around $300 million, despite which there was a greater spirit
of ease recently than last November.
At this meeting it
had been sug
gested that net borrowed reserves might be in the $200-300 million
range but Mr.
Hayes stated that this would not do the job of restoring
the restraint that existed last November.
To do that might require
3/26/57
-42
net borrowed reserves of $400, $500, or $600 million.
Mr. Hayes stated
that he wished to emphasize the danger that existed in any instruction
that might be given to the System account on the basis of statistics.
He had been impressed with Mr. Thomas' suggestion regarding the use of
week-to-week developments in bank credit as a guide for Committee
policy.
Mr. Robertson stated that he realized the difficulty of using
any figures.
in
References to figures for an earlier period were made
relation to the feel of the market at that time.
This was a rela
tive matter, and Mr. Robertson said that he did not think the Com
mittee could rely on a specific figure as the sole indicator of the
degree of tightness at a given time.
Mr. Shepardson said he wished to emphasize the same point that
Mr. Robertson had mentioned.
The Committee should not get confused by
the references to figures since, as Mr.
Hayes had pointed out, one
figure might create a certain degree of restraint at one time but it
would not cause the same degree of restraint at another time.
He
gathered that the Chairman's statement of the consensus was intended
to indicate that in the immediate future needed reserves might come
largely through the discount window and not through open market
operations.
Chairman Martin said that Mr. Rouse as Manager of the System
Account was trying to point out the difficulty of bringing this about:
until the banks came to the System, we could not supply reserves
through the discount window.
The liquidation of long-term Treasury
3/26/57
-43
debt and its
conversion into short-term debt had been a constant drag
on the System's operations.
Mr. Rouse noted that at the present time member bank borrowings
were at a level which in
other periods would cause a great deal of con
cern, because they would cause strain in the market.
However,
on
analysis, with Chicago banks borrowing $400 million out of a total of
$900 million, these figures caused concern to no one.
Chairman Martin said he wished to make it clear that anyone was
privileged to speak again as to how he felt operations for the System
account should be carried on.
Mr. Allen said that he hoped that at some time there would be
an opportunity for discussion of Mr. Young's phrase that monetary
policy had "validated price levels."
Chairman Martin said that he felt it would be desirable for all
members of the Committee to study the paper that Mr. Young had prepared
and to have a discussion of its
content at a later meeting.
for
After Mr. Rouse had stated that he had no recommentations [sic]
change in
the Committee's directive, the Chairman suggested that it
renewed without change, and there was no disagreement with this sug
gestion.
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:
be
-44 -
3/26/57
(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 certifi
cates 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;
provided that the total amount of such certificates held at
any one time by the Federal Reserve Banks shall not exceed
in the aggregate $500 million;
To sell direct to the Treasury from the System account
(3)
for gold certificates such amounts of Treasury securities matur
ing within one year as may be necessary from time to time for
the accommodation of the Treasury; provided that the total amount
of such securities so sold shall not exceed in the aggregate $500
million face amount, and such sales shall be made as nearly as
may be practicable at the prices currently quoted in the open
market.
Chairman Martin noted that a copy of a report by the Subcommittee
on Emergency Planning (Messrs.
Shepardson, Hayes,
had been distributed under date of March 26, 1957,
and Robertson, Chairman)
and at his request Mr.
Robertson commented briefly on the content of the report and the recom
mendations contained therein.
He stated that a staff group had reviewed
3/26/57
-45
the emergency planning program and activities of the Federal Open
Market Committee and that it
was their unanimous opinion (1) that
the structure of the planning was sound and required little
and (2)
change,
that the effectiveness of the emergency planning activities
from here forward would depend essentially on training provided by
simulated problems posed in successive Alerts.
The report recommended, Mr.
Robertson said, that a process
of review similar to the one embodied in
taken annually to see that all
phases of the emergency program were
kept current with developments in
the Government.
the current report be under
the general emergency planning of
One of the specific recommendations was that the
training of System personnel at the Securities Trading Desk of the
New York Bank be continued and that personnel from the Board's staff
be included in
the participating group.
It
was also recommended that
more personnel in Federal Reserve Banks be cleared so that they could
participate effectively in
all
parts of the emergency planning, that
at least two individuals from Federal Reserve Banks be sent to the
Board to participate as full members of the Board's organization
during each major Alert, and that each Federal Reserve Bank again
review its organization to see that a sufficient number of its
staff had been trained to participate effectively in these emergency
operations.
Mr. Robertson went on to say that in the event the
Federal Open Market Committee approved the report, the Subcommittee
on Emergency Operations would undertake to see that the recommendations
-46
3/26/57
were carried out.
After discussion, the report
of the Subcommittee was approved
by unanimous vote.
It
was agreed that the next meeting of the Federal Open
Market Committee would be held at 10:00 a.m. on Tuesday, April 16,
1957.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1957, March 25). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19570326
@misc{wtfs_fomc_minutes_19570326,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1957},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19570326},
note = {Retrieved via When the Fed Speaks corpus}
}