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, May 7, 1957, at 10:00 a.m.
PRESENT
Mr. Martin, Chairman
Mr.
Mr.
Mr.
Allen
Balderston
Bryan
Mr. Leedy
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mills
Robertson
Shepardson
Vardaman
Williams
Treiber, Alternate for Mr. Hayes
Messrs. Fulton, Irons, Leach, and Mangels,
Alternate Members of the Federal Open
Market Committee
Messrs. Erickson, Johns, and Deming, Presidents
of the Federal Reserve Banks of Boston, St.
Louis, and Minneapolis, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Sherman, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Atkinson, Bopp, Marget, Mitchell, Tow,
and Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Koch, Assistant Director, Division of Research and Statistics, Board of Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Roosa, Vice President, Federal Reserve Bank
of New York
Mr. Gaines, Manager, Securities Department,
Federal Reserve Bank of New York
5/7/57
Mr. Daane, Vice President, Federal Reserve
Bank of Richmond; Messrs. Balles and
Einzig, Assistant Vice Presidents, Federal Reserve Banks of Cleveland and San
Francisco, respectively; Messrs. Ellis,
Parsons, and Coldwell, Directors of Research, Federal Reserve Banks of Boston,
Minneapolis, and Dallas, respectively;
and Mr. Robertson, Financial Economist,
Federal Reserve Bank of St. Louis.
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meetings of the Federal Open Market Committee held on April 16 and 24, 1957, were
approved.
Upon motion duly made and seconded,
and by unanimous vote, Mr. Merritt Sherman
was elected an Assistant Secretary of the
Federal Open Market Committee to serve
until the election of his successor at the
first
meeting of the Committee after February 28, 1958, with the understanding that
in the event of the discontinuance of his
official connection with the Board of
Governors of the Federal Reserve System he
would cease to have an official connection
with the Federal Open Market Committee.
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 April 16
through May 1, 1957,
as well as a supplementary report covering com-
mitments executed May 2 through May 6, 1957.
Copies of both reports
have been placed in the files of the Committee.
Mr. Rouse reported that a fairly steady degree of restraint
had been maintained in
meeting in
the money and securities markets since the last
spite of the aberrations that had affected bank reserves.
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One of these was the unexpectedly large increase in float resulting
from the strike of Railway Express Agency employees.
the unanticipated reduction in
The other was
the Treasury's balance at the Reserve
Banks which had had an effect upon bank reserves over a period of two
or three days.
Currently, the money market was quite tight, a condi-
tion that had been confirmed by several weeks of pressure on the market
prior to the Treasury refunding.
The Treasury's announcement of a re-
funding offering for the $4,155 million of 1-5/8 per cent notes
maturing on May 15 had been taken by the market with neither surprise
nor disappointment at the terms offered, Mr. Rouse said, but it
expected that there would be substantial attrition.
hand,
the bidding for Treasury bills in
was
On the other
the weekly auction yesterday
resulted in an average yield of 2.91 per cent and this made the 3-1/2
per cent eleven-month certificates of indebtedness offered in exchange
for the maturing securities look quite attractive.
There was now some
feeling in the market that attrition would be no greater than had been
anticipated earlier (20-25 per cent) and that it might be somewhat
less.
As far as the next period was concerned,
Mr. Rouse said that
the Account Management was faced with a fairly even reserve situation
except for the expansion that was anticipated in
float in
of the month.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period April 16
through May 6, 1957, were approved,
ratified, and confirmed.
the middle
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5/7/57
At Chairman Martin's request Mr. Young made a statement on
the economic situation as follows:
Over all, the movement of economic activity in this
country continues sidewise but with a slight upward tilt
for both GNP and prices.
In industrial countries abroad,
the most recent information points to resumed advance in
activity and up-creep in prices.
Domestically, modest further rise in the average wholesale prices has reflected mainly a seasonal rise in farm
products and foods which are now about 3 per cent higher
than a year ago.
Wholesale prices of industrial goods remain
stable, both for fabricated and finished items and for basic
materials.
After a
sharp decline,
the price of steel scrap
has leveled off and strengthened some recently; the price
of nonferrous metal scrap has shown some strength, and
prices of other basic materials have shown only small change.
Trade speculation on the expected increase in steel prices
this summer continues active, with $7 a ton at the lower
range of estimates, but hedge buying of steel does not
appear particularly noteworthy. Consumer prices for April
are expected to show some further advance.
For April, the Board's index of industrial production
is estimated to be down one point from March to 145. Output of steel ingots, sheet, auto assemblies, zinc, and
Output of producers' equipment and
petroleum was down.
ordinance, which currently have a weight of about one-third
in the index, was up. Output of nondurable industries was
about maintained.
Manufacturers' sales in March, while off slightly from
up 6.5 per cent over a year ago, with
February, were still
One element of
a good part of the increase in prices.
quarter industrial sales was a 9 per cent
strength in first
further rise in exports to a $27 billion annual rate. While
agricultural exports were at a high level, the increase in
foreign shipments was largely in petroleum and manufactured
products.
Manufacturers' inventories rose about $850 million book
quarter, but distributors' inventories devalue in the first
Since higher prices were a
clined by nearly $350 million.
factor in the manufacturers' inventory accumulation, it now
appears that there was a significant decline over-all in
physical inventory holdings of business in contrast to a
fairly substantial rise in the preceding quarter and over
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the preceding two years.
A large part of the inventory
expansion of the past year has been in work-in-process
in equipment and ordnance industry, so that inventorysales ratios elsewhere seem to continue on the prudent
side. With a more ample capacity situation in key
material areas and also for fabricated items other than
structural and equipment goods, incentives for inventory
accumulation beyond short-run sales needs appear greatly
diminished.
Auto sales for April have run a bit below March, and,
with assemblies down further, dealer stocks have been
additionally reduced. Used car sales have strengthened,
thus holding down a further rise in used car stocks. Prices
on late model used cars continue to hold about 7 per cent
higher than a year ago; older model car prices have risen
recently and are now about 15 per cent above mid-spring of
last year.
Output of furniture and other household durables has
been steady since early in the year at a level about a tenth
under early 1956. Sales in physical units are about the
same as last year and stocks, after a bulge from spring
through summer of last year in relation to sales, are now
back to about the sales relationship of early 1956.
Department store sales in April were apparently off
sharply from March and about the same level as April of
last year. The average for March and April was about 2
per cent ahead of last year, which, at higher prices, would
suggest a lower physical volume of merchandise sales.
Instalment credit outstandings expanded at a slower
rate in March and evidently again in April, with the monthly
increase for these two months $50 to $75 million under the
While downpayments
$200 million rise of January-February.
in auto financing are improved from a year ago, the proportion of longer maturity contracts written continues to rise
month after month.
Although residential construction activity was down
further, total construction in April continued close to a
record rate. Outlays for industrial, commercial, utility,
and public construction were up. Contract awards so far
this year have been running above last year, with strength
notable in areas just mentioned.
In residential financing, supply conditions for construction and mortgage funds in most areas are reported
modestly easier, and builders and lenders both anticipate
some further easing. Home builders' plans for the second
quarter, as reported in two Reserve districts, are indicated to be up sharply from the first quarter. Builders'
-6inventories of finished houses are generally at low ebb
and the first quarter vacancy rate for the whole country
was reported by the Bureau of the Census to be very low-just over 2 per cent.
The labor market continues active, with mainly seasonal
changes reported.
More persons are working part time for
economic reasons than last year, and unemployment claims are
running above a year ago.
This seems mainly to reflect widely
distributed employment attrition in manufacturing, together
with scattered layoffs, notably in the lumber and consumer
durable goods industries.
About 1.4 million workers--about
a million in the railroads, machinery, and aircraft industries-will receive automatic cost-of-living wage increases in May.
Discontinuance of overtime work has recently been a costcutting measure with many industrial concerns and the Defense
Department has just discontinued overtime work as an allowable
item of defense contractors. These developments are being
reflected in the work week and in weekly earnings, with declines in the work week about offsetting recent wage gains.
Business failures have risen each month of this year, in
March establishing a postwar high.
The increase in failures
has been sharpest for companies with liabilities in excess of
$100,000 and for companies in the construction industry. While
the number of failures in retail trade and service activities
was up from a year ago, the number of manufacturing failures
showed no increase, and the number of wholesale failures was
down.
Three items of business expectation information have
recently been released. The first
is a marked drop in
businessmen's optimism concerning sales and profits two
quarters ahead, reported by the quarterly Dun and Bradstreet
survey taken in late March.
The second item is the strength
of the latest McGraw-Hill survey of plant and equipment
expenditure plans, which would indicate growth in these
expenditures through the year rather than a rise in the
The third expectafirst
half with some decline following.
tions item pertains to farm income. The USDA expects net
realized income of farmers to rise modestly further in 1957,
mainly because of Soil Bank Payments; the rise from 1955 to
1956 was an estimated 4 per cent.
Abroad, in Western Europe, there are further indications
of renewed economic expansion and some further up-drift in
Inflationary demand pressures
wholesale and consumer prices.
in Western Europe are a matter of wide concern, and policies
to restrain excess demands have been re-enforced in several
countries, with several more having actions under consideration.
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5/7/57
Canadian economic trends have broadly paralleled those in
this country.
Outside Europe and North America, inflationary pressures remain dominant, but with considerable
variation from one country to another in intensity and
incidence.
In conclusion, the over-all situation continues to be
one of rolling adjustment but of general strength, with
active demands from abroad giving support to domestic developments. Total national product prospects for the
second quarter are for a further gain of $3 billion to a
total annual rate of $430 billion, again partly reflecting
rising prices, though to a lesser extent than in the first
quarter. This outlook would envision relatively stable
industrial and construction output and further rise in
output of services.
In response to a question from Mr. Vardaman, Mr. Young said
that the reported vacancy factor of about 2 per cent in housing during the first
quarter of the year was low historically.
In Mr. Young's
opinion the 2 per cent figure represented a fairly small vacancy margin
and suggested a rather strong over-all residential building picture.
Mr. Thomas then made a statement on recent credit developments
substantially as follows:
Credit markets have continued under the pressure of
large borrowing demands during recent weeks.
New securities issued by corporations, though at a slower rate than
in the first quarter, have continued relatively heavy
An
unusually large volume of issues by state and local governments in April created some congestion in the market. Total
loans and investments of banks, which increased sharply as a
result of the Treasury cash financing at the end of March,
have subsequently continued on a high plateau.
A particularly significant development in the period
has been the fact that as the Treasury has drawn down its
balances built up during March, the funds have gone to swell
Total
private deposits rather than to reduce bank credit.
loans increased about half a billion in the four weeks ending
less than last year and about the sam as in
May 1, a little
1955, but investments decreased less than in the earlier
years.
U. S. Government deposits were reduced by 1-1/4 billion, and demand deposits adjusted increased by the same
5/7/57
amount.
-8The decline in Treasury deposits and the increase
in other deposits were both greater than in 1956 and 1955-periods when expansionary pressures were strong. The money
supply showed a greater than seasonal increase during April.
Pressures of credit demands resulted in a sharp runup
in bond yields. Yields on all categories of bonds increased.
Seasoned corporate issues, which were relatively stable for
about two months, showed the smallest rise, but yields on
new offerings showed a more pronounced increase. Yields on
tax-exempt securities have risen most sharply. Treasury
bond yields also turned up in April, after a period of
relative stability in March. Long-term issues rose close
to the 3-1/2 per cent peak reached in December. The shorter
term issues still sell at higher yields than long-term bonds,
but the margin has narrowed considerably since December.
It appears that money and capital markets are still in
the process of reaching a level and structure of interest
rates appropriate for a period of full utilization of resources with large investment demands.
We cannot be confident that long-term rates are yet high enough to bring investment and savings into balance in such a situation.
In contrast, yields on Treasury bills, which rose somewhat early in April, have again declined to below 3 per cent.
The difference between the movement of yields on bonds and
those on bills reflects to some extent prevailing uncertainty
with respect to the prospective trend of long-term interest
rates--or rather a growing feeling that such rates might
rise further. One aspect of this uncertainty relates to the
imminent announcement of terms on new Treasury financing.
Another factor producing lower bill rates was the marked easing
in the reserve position of member banks, but the tone of the
money market continued to be one of greater tightness than
would be indicated either by the reserve situation or by bill
rates.
The easier reserve position was reflected in a reduction
of member bank borrowing from around $1 billion in the first
half of April to an average of $700 million in the latest
This was in part accidental and has already
statement week.
The principal influence was the
been partly corrected.
higher level of float resulting from the Railway Express
strike at airports, which added some $300 million additional
reserves beyond the usual seasonal trend. Other factors
were the deliberate, though temporary, reduction in Treasury
balances at the Reserve Banks and a more than seasonal deThese sources of reserves
cline of currency in circulation.
more than covered the greater than expected increase in required reserves, resulting from the expansion in private
deposits. A reduction in System holdings of securities held
under repurchase contract and recently a run-off of Treasury
bill maturities, also absorbed some of the reserves made
available.
Reserve needs in the weeks ahead will depend in part upon
how fast float returns to a more normal level and more fundamentally upon the course of bank credit made available to meet
demands for money. The money supply should not be expected to
continue to increase at the April rate, and might reasonably
contract some on a seasonally adjusted basis. Projections
based on the assumptions of a gradual return of float to a
more normal level by early June and a normal seasonal movement
in private deposits and currency, indicate a relatively easy
situation until the end of June, with average net borrowed
reserves ranging from less than $100 in mid-May to over $500
These estimates allow for
million in Memorial Day week.
retirement of System repurchase contracts outstanding, but
for no other System account operations.
In view of the recent expansion in money, it is questionable whether this prospect will be adequately restrictive.
Probably some outright sales by the System would be appropriate
Repurchase contracts could
in the latter part of next week.
then be used to meet the regular and temporary increases in
reserve needs. Any growth in reserve needs beyond these projections would indicate an expansionary development, and banks
should be forced to meet them through borrowing at the Reserve
Banks, in order to keep an element of restraint on continued
credit expansion.
Solicitude for the Government securities market should
If attrition is
not interfere with a policy of this nature.
large on the refunding operations now in process, additional
Amounts
funds will be supplied to the market by the Treasury.
made available for private credit needs should be correspondI do not intend to suggest that an aggressively
ingly reduced.
restrictive policy will be in order. The degree of restraint
needed will depend upon the course of credit demands. The
trend of events so far, however, does not provide any basis
for relaxation.
Chairman Martin noted that Mr. Treiber was attending the meeting
in Mr. Hayes' place and asked that he comment on the economic situation
and credit policy.
Mr.
Treiber made a statement as follows:
5/7/57
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The business situation continues strong, but not expanding. Business sentiment, however, is more optimistic. While
indicators of current business remain strong, a number of those
which anticipate future trends continue to exhibit weakness.
Employment remains high. Over-all consumer buying continues high.
Retail sales continue on a plateau.
Total business inventories are no longer being accumulated.
Auto production schedules have been adjusted to avoid a
piling up of inventories. Steel production has been easing
off, reflecting a decline in demand extending beyond the auto
industry. The steel industry, however, is not concerned about
the outlook. Construction outlays continue at a high rate;
declines in residential building are being offset by a rising
volume of public construction and private nonresidential construction.
Over all, wholesale prices are leveling off. The consumer
price index, however, continues to rise. While an increase in
farm prices is not anticipated, other retail prices are likely
to continue to rise. The rise seems to be a delayed reaction
to the cost increases of last year rather than a reflection of
increasing consumer demand.
Plant and equipment expenditures continue at record levels.
As costs rise and market competition intensifies, profit
margins will be subject to pressure that may lead to a re-
appraisal of investment plans.
Reports of corporate earnings
for the first quarter of 1957, however, do not indicate any
general intensification of the pressure, nor does the most
recent McGraw Hill survey for the next three years suggest
such a reappraisal.
Business opinion is becoming more optimistic in the light
of the current strength and the ability of the economy to continue to operate close to record levels without support from
major new expansionary forces.
The demand for bank credit continues strong, but apparently at lesser intensity than last year. The liquidation of
investments this year has been small compared to the heavy
liquidation occurring in the corresponding period of 1956.
Federal Government expenditures are increasing, thus
reducing the Treasury cash surplus for the fiscal year.
Attrition on the current refinancing is expected to be
larger than usual. The Treasury will have to borrow for
cash by July; it may need to do so in June, or in late May.
The policy of monetary and credit restraint should be
continued in order to resist remaining price pressures. We
should not make an overt move toward either more or less
5/7/57
-11-
restraint through open market operations or through a
change in the discount rate. In the present setting and
in the midst of a Treasury refunding operation it is
desirable for the System to maintain a steady degree of
restraint at about the levels of pressure sought in the
last two weeks.
In the period between now and the next meeting of
the Committee it would not seem necessary to make any substantial amount of outright purchases or sales. Maturing
Treasury bills should be run off, but it should not be
necessary otherwise to offset the midmonth float expansion
which will last only a few days. A continuation of repurchase agreements to assist the dealers to carry the
1-5/8 per cent Treasury notes maturing May 15 is in order.
Such action promises to assist the Treasury refunding and
would not be inconsistent with the overriding objective of
credit restraint.
While too much emphasis should not be placed on
statistics, we would think in terms of net borrowed reserves in the neighborhood of a half billion dollars and
member bank borrowings of about $1 billion.
At this point, Mr.
Treiber referred to Item 4c on the agenda re-
lating to the responsibilities of the Treasury and the Federal Open Market Committee in the area of open market operations.
He stated that he
was also prepared to comment on this subject, and Chairman Martin suggested that he do so at this time.
Mr. Treiber's statement was as
follows:
The current Treasury refunding operations have raised
again the question of the Committee's responsibilities in
connection with Treasury financing.
The policies of the Federal Government with respect to
The
income and spending are determined by the Congress.
Committee is bound by those policies. While Federal Reserve
policy may at times seek to discourage or postpone private
borrowing and the anticipated expenditures in connection with
the borrowing, such a purpose is inapplicable to Government
The Government must be financed.
borrowing.
There is, of course, some latitude in the details of
Government financing, and the Treasury has the primary
responsibility for determining those details. The
5/7/57
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Government securities market, however, is the principal
medium for the adjustment of the reserves of banks and
others. We create and extinguish reserves through operations in that market. We administer credit policy by
operating, or by refraining from operating, in that market.
It seems to me that we cannot administer credit policy
without regard to the Government securities market and to
the financing requirements of the Treasury.
It has frequently been said that the Federal Reserve
has primary responsibility for credit policy and the Treasury has primary responsibility for debt management.
There
must be a maximum of coordination between the System and
the Treasury consistent with the primary responsibilities
of each.
Each must avoid as much as possible interfering
with the other in the performance of its duties.
In pursuance of these principles, the Treasury should
price its securities in line with market rates. When it
does so--when it submits itself to the discipline of the
market--the System has a responsibility to avoid action
that may jeopardize the financing. We should then, as we
have consistently since the accord, recognize that the
initial impact of an operation as large as a Treasury
financing may create temporary digestive disturbances
with which we need be concerned.
Within the last couple of weeks our attention has
focused on the administration of Treasury balances. Their
administration affects the amount of bank reserves, and
it is by influencing the amount of bank reserves that the
Federal Reserve carries out credit policy.
The Treasury
has the responsibility for administering its balances so
as to be able to pay its obligations; such administration
must be part of its program for handling receipts and disbursements. Within that program there may be fluctuations
in the Treasury's balances at the Reserve Banks.
The Treasury and the Federal Reserve try to project those fluctuations
and conduct their respective functions in the light of the
When, however, the Treasury manages its acprojections.
counts for the specific purpose of increasing, or otherwise influencing, bank reserves, it is engaging directly in
an act of credit management for which the Federal Reserve
That we do not want.
has primary responsibility.
To avoid the Committee and the Treasury working at
cross purposes and undertaking important steps in the
primary sphere of responsibility of the other party, there
must be a willingness to consider carefully and sympathetically
the problems of the other party.
-13Last month, Norman Davis of the Federal Reserve Bank
of New York and I returned to the United States after a tenweek trip around the world, during which we visited the
central banks in a number of countries in the southern
hemisphere.
In most of the countries the governor and the
directors of the central bank are appointed by or upon the
recommendation of the Minister of Finance, and the degree
of responsibility (or subservience) of the central bank to
the Minister varies.
In most of the countries the government has a special pipeline to the central bank. The government can borrow directly from the central bank, in some cases
merely by drawing checks and creating an overdraft. The
absence of a well-developed government securities market is,
of course, an important factor leading to arrangements for
direct loans by the central bank to the government.
But the
desire to escape the discipline of a market is also an important factor.
In none of the countries is the Treasury
subjected to market discipline the way it is in the United
States where direct accommodation of the Treasury by the
Reserve Banks is in practice granted only infrequently in
small amounts for very short periods and for the limited
purpose of smoothing out the impact of large money movements at tax payment dates.
The central banking system in the United States is,
Not only does the Federal Reserve System
indeed, fortunate.
enjoy a structural independence within the government, but
also present Treasury officials are personally sympathetic
to Federal Reserve problems and objectives. This great
privilege that we enjoy creates a corresponding duty on our
part to consider carefully and sympathetically the problems
If we are arbitrary and aloof--if
and views of the Treasury.
we do not give adequate consideration to the Treasury's problems--a justifiable reaction may undermine our independence;
indeed, the results could be drastic.
It now appears that there will shortly be a new first
It may not be much longer before the
team at the Treasury.
Senate Finance Committee will begin a new study which will
include the inter-relations between Treasury debt management
In these circumstances,
and System monetary and credit policies.
would it not be well for us to consider and prepare for possible discussions with the Treasury--both at the staff and
the policy level? Would it not be to the interest of both
agencies to review together the aims and impact of the actions
which each should be expected to take, in discharging its
respective responsibilities?
5/7/57
-14 Chairman Martin said that he wished to propose that the Com-
mittee have a staff study made of the problem to which Mr. Treiber
had just referred and that it plan to discuss the problem at its
next meeting.
It
would be desirable to furnish the members of the
Committee with data regarding the operations of the Treasurer's account preparatory to a full discussion of the matter, he said, adding
that it
would be appropriate to have preliminary comments this morning.
Mr. Johns said that he was in agreement with the recommenda-
tions concerning credit policy made by Mr. Treiber, as he understood
them.
in
His view concerning the present state of the economy was quite
agreement with the staff review presented this morning.
Perhaps
the degree of restraint should be somewhat although not drastically
greater than in the recent past, Mr. Johns said.
Mr. Treiber's comment that it
He concurred with
might not be necessary to attempt to
offset the mid-month bulge in float to be expected within the next
couple of weeks.
As a member of the Committee of three appointed to conduct a
study of Federal Reserve float, Mr. Johns said that he had had the
privilege of reading the report by the staff group on the subject.
He had discovered that, if the staff group was correct, most of what
he previously thought he knew about float was not correct.
His
tentative conclusion was that the Committee should not attempt through
open market operations to offset relatively short-run fluctuations in
5/7/57
-15-
float.
This view had some implications regarding the usefulness of
net borrowed reserve figures as indicators of Committee policy, Mr.
Johns said, and he would hesitate to name any net borrowed reserve
figure at which the Committee might aim.
of pressure should be somewhat greater.
He agreed that the degree
Mr. Johns said that he would
make no change in the discount rate at this time.
Mr. Bryan stated that the Sixth District situation seemed to
be mixed.
However,
There had been a slight increase in nonfarm unemployment.
contract awards had taken another spurt.
In general, there
seemed to be no distinct trend in economic activity in
District.
the Atlanta
The banking situation seemed to be a little better, and
borrowing at the Federal Reserve had gone down sharply.
Mr. Bryan's
impression of the national picture was much as Mr. Young had outlined
it;
if
there was an upward tilt to the economy at the moment it was a
very modest tilt.
He did not believe, particularly in view of longer
run considerations, that any easing of credit restraint at the present
time would be justifiable.
Accordingly, Mr. Bryan agreed with the
statements so far made that the System should not take the dramatic
step of reducing the discount rate.
His feeling was that open market
operations should be continued with a view to keeping the bill rate
from moving too far below the discount rate.
This was because he felt
there would be unfortunate implications for the long run, if
gressively lower yields developed in
that area.
pro-
Mr. Bryan said that
he would be inclined, if there seemed to be a continued lowering of
5/7/57
-16-
yields in the bill market, to effect sales from the System account.
He was increasingly concerned about the long-run problem of equilibrium in the interest rate which he had mentioned in the past.
He referred to a recent book by Peter Drucker, America's Next Twenty
Years, which he felt pointed up the problem.
The net of his feeling
was that he would not like to see easing at the present time that
would complicate the Committee's longer-run problem of getting equilibrium in
this area.
Mr. Williams said that the Philadelphia Bank had rechecked
capital expenditure plans and conferred with some twenty economists
of business concerns since the preceding meeting of the Committee.
One of the strong factors brought out was the high level of capital
expenditures expected.
Many plants were revising their plans upward,
and current plans for expenditures during 1957 are about 6 per cent
higher than were anticipated in the fall
of 1956.
If
these plans
are realized, Mr. Williams said that expenditures during the current
year would be about 20 per cent above the 1956 total.
The staff of the Philadelphia Bank found in its
meeting with
industrial economists a general attitude of "tempered optimism," Mr.
Williams said.
Prospects were reported good for the next several
months, with new orders running about the same as last year.
There
were some soft spots, for example, freight carloadings continued below
last year, perhaps reflecting the growth of commercial and private
trucking, Mr. Williams said.
Manufacturing employment continued
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5/7/57
steady.
Department store sales for 1957 to date were up 2 per cent
from last year, and in some recent weeks the increase had been as
much as 10 per cent.
Automobile registrations continued well below
last year.
Loans of reporting member banks declined in
weeks,
Mr.
the most recent
Williams said, mainly because of decreases in real estate
and business loans, whereas last year there was an increase in total
loans.
Borrowings at the Federal Reserve declined, although
Philadelphia banks continued to be net purchasers of Federal funds
in three of the four weeks of April.
Mr. Williams said that the
conclusions to be drawn from the review by the Philadelphia Bank
were about the same as from the economic review presented by the
staff at this meeting.
On the basis of current developments, he
felt that a continuation of substantially the existing degree of
restraint would be appropriate.
Mr. Fulton said that Fourth District industrial activity continued strong despite some downward movements in activities associated
with the automotive industry.
Employment was holding up well.
Retail
sales were being well maintained and anticipated capital expenditures
continued high.
Loan demand was strong.
There was no indication of
inventory accumulations and, as a matter of fact, there was a likelihood that inventories were being liquidated because of the greater
availability of goods.
New orders for machine tools were about equal
5/7/57
-18-
to production.
it
The backlog of orders was no longer increasing as
had been over the past two years, but there was still a good
working backlog.
The steel industry reported some softening in
demand for sheet, strip, and continuous welded pipe, as well as
for certain types of plate.
Companies using steel strip were re-
ducing inventories quite rapidly.
manufacturers,
It was expected that automobile
who were now consuming more steel than they were
ordering, would be in the market for steel by the third quarter of
the year.
The road building program had a good potential but had
been very slow in getting started.
Mr. Fulton noted that the con-
tracts between automobile manufacturers and unions expired in
June
1958 and this might be a factor causing manufacturers to operate
at high rates of production during the last quarter of this year
in order to build up inventories of dealers in anticipation of a
possible prolonged strike in
Mr.
1958
Fulton said that there seemed to be no reason for any
relaxation of the Committee's policy of restraint.
utilized at a high rate and,
if
Funds were being
additional funds were supplied, the
inflationary potential would become more active.
that perhaps there should be some tightening.
Mr. Fulton felt
He would not change
the discount rate at this time but he agreed with Mr. Bryan that if
the bill
rate as an index of the use of funds declined too far below
the discount rate, the Committee should bring it
with the discount rate.
more into consonance
-19-
5/7/57
Mr.
Shepardson said that he was generally in
with the comments made thus far.
agreement
The economic outlook was still
on the optimistic side even though conditions varied in
industries.
The point mentioned by Mr.
different
Bryan as to the long-run
picture and the prospective need for capital funds in the future
made Mr.
Shepardson feel that this was no time for easing.
he would favor a little
increase in pressure.
Rather,
This need not be the
result of overt action, but the Committee should keep the market
"snugged up."
Mr.
Shepardson noted that Mr.
Bryan had said he would
not recommend a reduction in the discount rate.
feeling was that, if
sidering a little
Shepardson's
anything, the System should expect to be con-
later on whether the rate should be increased.
He certainly would not favor a reduction now.
Mr.
Mr.
Shepardson felt it
would be desirable if
closer to the level at which it
As to the bill rate,
it
were brought back
had been in the recent past.
Mr. Robertson said that he had prepared a memorandum of his
views and that they followed closely what had been said at the meeting this morning.
situation.
He agreed that this was no time for easing the
The Committee should maintain restraint, and he hoped it
would do so during the next three weeks in accordance with the tone
of the discussions at the preceding two meetings of the Committee.
Mr.
Robertson went on to say that it
seemed to him that Mr.
Treiber's points with respect to the relationship between the Committee and the Treasury were well taken, and he agreed as far as the
5/7/57
-20-
comments went.
He felt that the attempt of the Treasury to inter-
fere with open market policy was unjustified.
This should be a
matter of real concern to the Committee and he hoped the Committee's
feelings would be presented to the Treasury.
This should not be
done on an "off-the-cuff" basis but only after staff study and full
discussion of the matter.
There should be a definite understanding
between the Committee and the Treasury of the fields of operations
of each.
The Committee should not be unsympathetic to the Treasury's
problem; on the contrary, it
should be very sympathetic.
However,
the Treasury also should be sympathetic to the Federal Reserve's
problem.
In summary, Mr. Robertson said that he would hope the Com-
mittee would find a means of bringing about a better understanding
between the Treasury and the Committee with respect to the functions
and responsibilities of each.
At Chairman Martin's suggestion, it
was understood that the
memorandum that Mr. Robertson had prepared in
meeting would be placed in
the minutes.
anticipation of the
The memorandum was as follows:
Since the last regular meeting of the Federal Open
Market Committee, net borrowed reserves of member banks
have declined sharply, suddenly, and unexpectedly from
a weekly average level of over $600 million in the first
In
half of April to an average of around $300 million.
the meantime, the Treasury bond market has been generally
market
weak with yields tending to rise, while the bill
declining
yields.
has been strong with
1. On the basis of the discussion at the last regular
meeting of the Committee and the minutes of the special
telephone conference meeting held in the interim, the aims
of System operations in this period were, in view of the
-21prospective Treasury financing, to prevent the development
of undue tightness that might arise from the high level of
borrowings previously prevailing, but not to create a condition of ease that would indicate any reversal of restraint
on credit expansion.
2. The unexpectedly sharp decline in member bank borrowing was due primarily to a substantial increase in Federal Reserve float during the Railway Express strike. This accounted
for the supplying of some $300 million additional reserves in
this period. Another temporary factor supplying reserves was
the deliberate reduction by the Treasury in its balance at
Reserve Banks which, accidentally, was ill-timed because of
the concurrent increase in float. There was also during these
weeks a more than seasonal decline of currency in circulation
that added a moderate amount to the supply of reserves. An
offsetting factor was a contraseasonal increase in required
reserves and some moderate sales of securities from System
account.
3.
The somewhat anomalous developments in the money market were the result of various crosscurrents. On one hand,
there was a continued strong credit demand both at banks and
in the capital market and the outlook for continued large
capital market borrowing, as well as a more bullish attitude
toward the general economic outlook. These forces tended to
reduce bond prices. At the same time, uncertainties as to
the terms of the prospective Treasury financing and the outlook for long-term interest rates led investors to place funds
in Treasury bills, thus tending to reduce the bill rate.
4. One of the most significant developments in this
period was the more than seasonal expansion in private deposits,
which is indicated by the rise in required reserves. This expansion in private deposits resulted largely from a reduction
in Treasury deposits which had been built up during March by
Funds expended
tax receipts and by Treasury cash financing.
by the Treasury apparently went into the building up of cash
balances rather than into the liquidation of bank credit.
They are thus available for further use and represent an
expansionary influence.
In essence, the current situation is one in which
5.
borrowing by the Treasury and by Government agencies is contributing to credit and monetary expansion that has gone
Under these cirbeyond the aims of Federal Reserve policy.
cumstances, the Treasury should be obliged to compete with
other borrowers for available funds and the System should
avoid as much as possible making things easier for the
Treasury with the result of creating a situation inconsistent
5/7/57
-22-
with the System's broad objectives. Whether or not the
terms of the current Treasury refunding offerings are
realistic will depend upon the future course of expansion in the volume and use of the private money supply.
The situation prevailing today is not one that calls
for relaxation in the System's policy of restraint on
expansion and I would recommend that we "hold the line"
until the next meeting--in accordance with the expression
of opinion contained in the minutes of the last two meetings.
However, it seems to me that the Treasury's operations
during the period, in one respect at least, represented an
obvious and unjustifiable attempt to interfere with Federal
Reserve credit policy.
This should be a matter of real concern to the Open Market Committee. Our concern should be
clearly expressed to Treasury officials.
Mr. Mills said that to some extent at the last meeting of the
Committee and even more so at today's meeting he had been struck by
the tone of the discussion which, in his opinion, tended to confuse
what was theoretically desirable in the field of economics with what
was practically attainable in the area of markets.
He referred to a
statement by Mr. Thomas this morning to the effect that the long-term
rate of interest had not yet risen to the point that would bring
about a balance between the supply of available savings and the uses
to which those savings could be practically put.
The implication
that would derive from that statement, Mr. Mills suggested, was that
the objective of System policy would be to seek a long-term rate of
interest that would realize the desirable equilibrium.
In so doing,
he said, the System's fundamental responsibility to the economy for
maintaining a proper degree of credit availability would of necessity
be discarded.
Furthermore, marching along that path would raise the
complications to the Treasury that were voiced very ably by Mr.
Treiber.
5/7/57
-23To put the case in a little
that in
different way,
Mr. Mills said
his opinion the present market for U. S. Government securi-
ties registered the availability of credit in a very real way because it
was having to absorb the securities that the pressure of
System policy properly compelled the banks to sell in
order to care
for the legitimate demands for credit that were made upon them at a
time that its absorptive capacity had already been reduced by the
previous effects of the heavy demand for bank credit.
Therefore,
as viewed by Mr. Mills, price movements in a U. S. Government securities market that System policy had made extremely sensitive registered
the availability of bank credit in line with the volume of necessitous
bank sales of U. S. Government securities.
Considering the System's
responsibility for maintaining a reasonable degree of credit availability and also considering the desirability of avoiding actions
that would throw roadblocks in front of the Treasury's financing
program,
Mr. Mills expressed his belief that a System credit policy
belligerently seeking a higher interest rate structure would force
the prices of U. S. Government securities down rapidly and their
yields up in a manner contrary to the best interests of all concerned.
Accordingly, it was his thought that the Manager of the Open Market
Account should have latitude for gauging the feel of the market and
for supplying or withdrawing reserves to the end that a degree of
pressure would be exerted sufficient to prevent any overexpansion
of credit while at the same time the Treasury's reasonable needs
-24-
5/7/57
could be accommodated.
Such a policy should presumably produce
an interest rate structure consistent with the System's general
policy objectives.
Mr.
Vardaman said that on the basis of statistics it
appear that more pressure should be applied.
However,
might
his impression
based on conversations with many persons during the past six weeks
suggested the contrary.
was off the rose."
He had gotten the impression that the "bloom
Psychologically, the economy seemed to be in a
very touchy period, he said, and he did not think the boom would
continue.
Stress could easily develop quickly if there were undue
tightness in money markets.
Mr. Vardaman said that his view would
be to maintain about the same course that had been maintained
recently.
He certainly would not tighten the situation at all.
Neither would he loosen it, nor would he reduce the discount rate,
because the psychological effect of any dramatic action might be
unfavorable.
He would emphasize through System educational publica-
tions that the economy was sound, that the System expected it to
develop satisfactorily, and that the Federal Reserve would supply
the reserves necessary to maintain the economy.
Mr. Vardaman re-
iterated the statement that he would not tighten the situation at
all and would not commit any overt act to change the present level
of pressure, but he would be prepared to supply whatever reserves
were needed.
He would let the public know that the System was
prepared to do this.
5/7/57
-25As to Treasury relations and the study proposed by the
Chairman, Mr. Vardaman raised the question whether relations between the two institutions were such that a unilateral study should
be carried out.
It would be preferable, he suggested, to have a
joint study made by the Federal Reserve and the Treasury.
He thought
this especially desirable in view of the fact that a Committee of
Congress would be studying monetary and credit policy in the course
of the next few months.
Mr. Leach said that the Fifth District economy continued in
balance.
Evidence of further weakening in manufacturing was offset
by signs of strength in other sectors.
Employment in virtually all
nonmanufacturing categories had shown recent increases as well as
gains from a year ago.
brought the first
High construction contract awards in March
quarter to a total nearly two-fifths above 1956.
Cotton textile operations continued a downward adjustment with more
mills cutting back to a five-day work week.
Prices were holding
steady, and once again it was felt that an improvement should not
be far off.
Bituminous coal production was down somewhat from the
high level of March,
changed.
but the underlying strength of demand was un-
Automobile dealers within the district reported dis-
appointing new car sales in April.
Used car sales were said to
have shown a satisfactory gain from March.
A spot check of a few
real estate lenders indicated that mortgage money was becoming more
available with some effect on conventional loan interest rates and
on prices of FHA loans.
5/7/57
-26Mr.
Leach said that in
his judgment over-all economic
activity was continuing on a plateau at very high levels.
He
saw no evidence of the development of a cumulative downward
spiral in activity.
In the hope that a healthy readjustment at
present high levels might be brought about,
he would continue the
degree of restraint that had existed during the current statement
week.
Having that view of the immediate economic outlook, he
thought that the Committee might expect net borrowed reserves
around the $500 million level to be appropriate.
it
Mr. Leach made
clear that this figure was merely an indication of his thinking
at the moment,
and he was not setting it
Mr. Leach went on to say that it
as a fixed goal.
was difficult for him to
understand the statements that had been made to the effect that
the Committee should take no overt action during the next few weeks.
He felt that if
net borrowed reserves declined to $38 million in
week of May 22,
as indicated by the staff projections prepared at
the
the Board, the Committee might need to take some action in order to
maintain the existing degree of restraint.
Mr. Vardaman commented that his statement that he would not
take overt action to change the present level of pressure did not
mean he thought there should be no purchases or sales for the System
account.
He meant that nothing should be done that would be in-
consistent with present policy.
Mr.
Treiber said that his remarks contemplated that there
might be some small operations for the System account but that it
5/7/57
-27-
was not expected that there would be substantial operations.
Mr. Leedy said that Tenth District agricultural conditions
continued to improve.
Recent rains were in sharp contrast to the
conditions that had existed for several years, and growing conditions for the wheat crop at this time were favorable with expectations of a good winter wheat crop.
These conditions, plus the
sizable amount of soil bank payments being made, should place agriculture in a favorable position during the current year.
Mr.
Leedy
went on to say that he had been surprised at the strength shown by
statistics thus far this year for most parts of the district in the
face of the widespread drought that had been experienced.
sales were at the same level as a year ago.
and,
Retail
Employment was stable
although there was variation from area to area, the over-all
situation seemed strong.
There had been no evidence of pressure on
bank reserves in recent weeks.
This situation probably had been
influenced by large payments made at the end of March by the Commodity
Credit Corporation on wheat loans, and there also had been a sizable
increase in bank deposits flowing into the district, particularly in
the oil area in Oklahoma.
As to System policy, Mr. Leedy would continue to exercise
restraint.
Statistically, perhaps there should be greater restraint
than had existed on the average since the preceding meeting of the
Committee.
5/7/57
-28With reference to relations with the Treasury, Mr. Leedy
said that he did not differ with the suggestion for a study of the
ability of the Treasury to counteract policy of the Committee.
He
felt that the recent Treasury action of reducing its balances for
the purpose of putting funds into the market was an act that was
intended to circumvent the program being followed by the Committee.
Mr.
Leedy said that while he would not attempt to summarily resolve
the issue with the Treasury,
he wished to make the point that from
the very nature of the operation the Treasury should have discussed
the action it
had in mind with the Chairman of the Committee before
undertaking to carry it
that it
into effect.
Mr. Leedy felt, accordingly,
would be appropriate for the Treasury to be promptly in-
formed to that effect and at the same time advised that the Committee expected to go further into the matter and to discuss it
with the Treasury at a later date.
Mr. Allen said that business activity in the Seventh District
continued at a high level.
Total construction was about the same as
a year ago despite the fact that Midwest awards for both residential
and nonresidential construction had been weaker than in the nation.
The job market in
the Seventh District had continued to ease somewhat.
In March and April, a number of Midwest centers failed to experience
employment gains that had been anticipated by the local analysts.
In
no case, however, was there any significant deterioration expected in
the months to come, and many centers expected some improvement.
5/7/57
-29The major development in Seventh District business loans
during recent weeks had been a slowing in the rate of increase in
loans to metal and metal product firms.
From the start of the year
through March 20 and the final spurt in
corporate borrowing to meet
tax payments, the rise in
outstandings of metals companies at
district reporting banks matched the gain recorded a year earlier.
In
the seven succeeding weeks from March 20 through May 1, however,
such loans registered a $1
lion rise last year.
million decline compared with a $49 mil-
Time deposits at Seventh District member banks
made further gains during March,
per cent above a year ago.
rate.
bringing balances to a level 6-1/2
Recent gains had been at an increasing
In general, cities where banks had boosted interest rates
paid on savings deposits showed the largest gains in balances.
increase in
savings deposits reflected both a rise in
The
savings in-
flow and a decline in withdrawals.
With respect to credit restraint, Mr. Allen said that he
believed the program should be continued with roughly the same
degree of restraint as we have had.
He considered that feel of the
market was more important than any figure to be used as a guide, but
he would consider that net borrowed reserves around $500 million
might be indicative.
If
that degree of restraint were to be maintained,
the Committee would either have to sell securities or permit present
holdings of bills to mature without replacement,
projections of reserves.
on
basis of the
the
5/7/57
-30Mr. Allen then referred to the comments he had made at the
telephone conference meeting on April 24 regarding the Treasury's
action in
reducing its
the market.
balances in order to put more reserves into
The Treasury does a good many things that offer diffi-
culty for the Committee, Mr. Allen said.
The reduction in balances
was a minor action compared with many other things that cause difficulty for the Committee.
While it
would be appropriate to discuss
this matter with the Treasury, he felt
that the Committee should not
complain about everything the Treasury did that caused the Committee
difficulty.
Mr.
Deming said that in
the Ninth District employment was up
from a year ago in both manufacturing and nonmanufacturing activities.
Farm prospects were better than they had been for the last several
years.
Credit demand continued extremely strong.
this was in
At city banks,
the face of a seasonal loss in deposits.
These influences
had resulted in a sharp increase in borrowings from the Federal Reserve
Bank in
recent weeks.
Nationally, Mr. Deming said that he was impressed more with
the factors of strength in the economy than with the factors of
weakness.
This argued for a continuation of a policy of restraint.
He would not disagree with the estimate of around $500 million of
net borrowed reserves.
the bill
He shared with Mr. Bryan the feeling that
rate might be higher than the discount rate, and he hoped
that a continuation of pressure would be reflected in a somewhat
5/7/57
-31-
higher bill rate than at present.
Mr. Deming said that he also
felt that during the week of May 22 when projected net borrowed
reserves would be low, it
would be desirable to take some action
to keep the level of net borrowed reserves in rough line with the
$500 million average level suggested.
Mr. Mangels said that there seemed to be some evidence of
a change in pace of activity in
the Twelfth District.
In past years
the increase in nonagricultural employment during the first
quarter
of the year had been somewhat above the increase nationally, and in
1956 each quarter had showed a rise over the preceding quarter.
During the first
quarter of 1957, the figures of employment showed
practically the same level as during the last quarter of 1956.
For
two months in succession now, nonagricultural employment had shown
a slight decline with most of the decline coming in manufacturing,
mining,
and construction.
Total manhours worked in manufacturing
industries declined from January through March,
Mr. Mangels said,
although the total at the end of the quarter was 6 per cent higher
than a year earlier.
There had been a slight increase in building
and March was above February, although residential permits were
still
down.
Public construction was expected to show some increase
during the next few months and there had been indications of an increase in heavy construction.
Steel production, contrary to the
national picture, was about 100 per cent of capacity and there were
-32-
5/7/57
plans for expansion of steel facilities on the .est Coast.
production was still
little
below 1956, but Mr.
Lumber
Mangels said he sensed a
more optimistic feeling on the part of lumber people than a
few weeks ago.
Some of the plywood mills had gone to a five-day
week and there were indications of some strengthening in prices.
Retail sales in the Twelfth District were up 6 per cent
during the Easter period.
Automobile registrations in
California
in the first three months of this year were 6 per cent above the
first quarter of last year, although in other States declines were
reported.
A decrease in
the volume of work at automobile service
establishments was also indicated.
Twelfth District reporting member banks showed an increase in
loans during the four weeks ending April 24, Mr. Mangels said.
Banks
expect that loan totals will be held below the figures of a year ago.
There continued to be a runoff in mortgage loans and an increase in
savings accounts, Mr. Mangels said,
and those funds are not being
fully reinvested in mortgages.
As to policy,
Mr. Mangels said that he had in
mind a figure
of about $500 million for net borrowed reserves as a maximum.
He
would not be concerned if they fluctuated between $400-500 million.
Neither would he be concerned if some variations in float created
some temporary easing.
Mr. Mangels thought the present directive
was satisfactory, and he would propose no change in the discount rate
at this time.
-33Mr. Mangels said that he agreed that the Committee must
consider not only the needs of commerce and industry and the general
credit condition of the country, but it should also give sympathetic
consideration to Treasury needs.
Mr.
Irons said that the national situation seemed to be one
of improving strength with still some uncertainty in the picture.
This was about the picture in the Eleventh District also.
was up in manufacturing.
Employment
Construction activity was also up. There
was considerable plant expansion in the Dallas, Fort Worth, Houston,
and Gulf Coast areas.
some time.
Agricultural conditions were better than for
Automobile sales in Dallas and Houston were running
counter to most reports and showed an increase of 11 per cent during
the first four months of this year as compared with the same period
a year ago.
In April they were well above April a year ago.
Mr. Irons said that he considered impressions of businessmen
to be important, and he observed them now as reflecting a cautious
optimism.
He knew of no pessimism.
More and more businessmen were
becoming fearful of the steady inflationary rise in business costs.
They feared that they might not be able to continue to pass on the
rise in costs in higher prices.
Businessmen more or less accepted
the necessity of a restrictive credit policy, Mr. Irons said, and
they were trying to decide what that meant to their own businesses.
Mr. Irons said that he would continue a policy of firm credit
restraint with any deviation from the normal being on the side of
5/7/57
-34-
greater restraint rather than on the side of ease.
As to net
borrowed reserves, he thought the Account Management should be
guided by the behavior and feel of the market.
That might be
the guide whether net borrowed reserves were $800 million or $300
million.
He did not think the average of net borrowed reserves was
too significant, feeling that it
was a resultant of forces that of
themselves might not be too significant.
The Account Management
must take the responsibility of appraising the feel and the tone
of the market.
With respect to the Treasury problem that arose in
three weeks,
Mr.
the last
Irons said that while this was an important issue,
he doubted the wisdom of making it a major issue.
As Mr. Allen had
indicated, handling of the Treasury balance was within the province
of the Treasury.
policy.
It
was not within their province to handle credit
With the two institutions each having important and basic
responsibilities,
he believed it
desirable to try to bring about
understanding by contact between the Chairman of the Committee and
the Secretary of the Treasury.
He doubted that a statistical study
of the Treasury balance or that making a major issue out of movements in that balance would provide the answer to the problem.
Mr. Erickson said that conditions in
the New England District
were not materially different from the national picture outlined.
found the same feeling of cautious optimism that Mr.
ported, along with concern about future inflation.
He
Irons had reMr. Erickson said
5/7/57
-35-
that ordinary life insurance sales in
the First District in
were substantially ahead of March 1956.
Construction in
March
all
classifications also was ahead of March last year except in the case
of public works,
high.
in which the total a year ago had been especially
Residential building in
the first
also only 4 per cent below last year.
quarter of this year was
For the first time in some
months there had been evidence of optimism in the textile industry,
Mr.Erickson said, and he reported the comments of wool and worsted
dealers last week who said that business was very good.
Mr. Erickson
reported a semi-annual conference held last week with economists from
insurance companies, banks, and other businesses.
He summarized their
views as recognizing the deceleration of growth, which might continue
during the second and third quarters of 1957.
However, they antici-
pated that the last quarter of this year would show an upward movement.
As far as policy was concerned, Mr. Erickson said that he
would suggest no change in the discount rate or in the Committee's
He agreed that the present degree of restraint
directive at this time.
should be maintained.
He would hesitate to name a figure of net
borrowed reserves as a guide, although he would accept the $500 million
mentioned as a rough indicator.
Mr. Balderston said that he was much impressed by the comments
made by Mr. Irons regarding the concern in the Eleventh District as to
creeping inflation.
He had had the feeling that it was the mission of
the Federal Reserve to control the money supply so effectively that
-36inflationary tendencies might be curbed until such time as excess
capacities served as a brake on cost increases and wage advances.
Mr.
Balderston said that this led him to a problem for which he was
not prepared to suggest a fully developed solution.
it
He mentioned
now because June might be the only nearby time for the introduc-
tion of a remedy on account of the Treasury's recurrent approaches
to the market.
He then made a statement substantially as follows
The problem has to do with facilitating the administration of the discount window. I fear that we increased the
money supply inadvertently during the month of April through
member-bank borrowing, some of which has been described as
complacent.
The total of member-bank borrowings rose to $1
billion 50 million in the week of April 3, $1 billion 205
million in the week of April 10, $1 billion 122 million in
the week of April 17.
Chiefly because of the Railway Express
strike it then dropped to $704 million for the week of May 1.
At the end of the borrowing bulge, however, 107 Central Reserve and Reserve City banks had borrowed continuously for
7 weeks or more and 338 country banks for 4 or more borrowIn short, the member banks seem to have taken
ing periods.
care of the Treasury cash offer of March 28 and the Chicago
tax situation of April 1 by borrowings at the discount
window which had the effect of increasing the money supply
by perhaps $1 billion. This estimated increase, if accurate,
carried the money supply (that is currency plus demand deposits, excluding those of the U. S. Government) from $133.8
billion at the end of March to $134.8 billion at the end of
I point to this increase with some hesitation beApril.
cause, although seasonally adjusted, one cannot be sure of
the accuracy of the seasonal correction and of the influence
The year-ago figures also increased beof random causes.
tween the end of March and the end of April, and by $1 billion 3 million, Moreover, the current estimate of $134.8
might be looked upon by some as so close to the April total
of a year ago of $134.4 as not to cause concern.
However, I am concerned that our instruments of control
need to be perfected and that June may offer the only nearby
opportunity in which to do it.
5/7/57
-37Those districts that have experienced trouble with
continuous borrowers might wish to think of a penalty
discount rate 1/2 per cent higher than the regular discount rate for those borrowers who come to the window
for the third, or perhaps for the fifth successive discount period. Governor Coyne of Canada told us recently
that he has used a penalty rate for banks that borrow
more than once within a month. Such a penalty might help
make Federal Reserve or federal funds borrowing intermittent, and thus reduce the difficulties of discountwindow administration.
I am not suggesting that this
device would be needed by all districts or that it would
be appropriate for those banks having heavy seasonal loan
fluctuations associated with cotton and other agricultural
products.
I do not know whether a change in the discount rate
will be indicated by the state of business and of business
psychology in June. If, however, some action at that time
is needed, it might take the form in one or more districts
of a penalty discount rate of 3-1/2 per cent for continuous
borrowing, thus giving the System an opportunity to test
out a new instrument of control while leaving the present
discount rate unchanged for the majority of member banks.
Chairman Martin said that he was gratified with the thoughtful
and interesting way in which the members of the group had been approaching the problems before it.
He thought there was no great
problem of a consensus this morning.
The Committee,
the Chairman said, was struggling with the
most difficult and the only fundamental problem that the System faced-the medium of communication and how to handle the over-all problem.
Mr. Mills had mentioned theory and practice.
Chairman Martin was
convinced that the answer was somewhere in the middle ground:
if
the Committee ignored theory completely, it would be in trouble, and
if it ignored practice, it also would be in trouble.
He agreed
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5/7/57
completely with Mr. Vardaman that a joint study of the institutional relations with the Treasury was the way to approach that
problem.
However,
it
must be recognized that under the present
structural setup the Management of the Account had a very real
problem.
It
was dealing constantly with the Treasury, handling
its balances,
its trust accounts,
and other operations under the
fiscal relationship on a day-to-day basis.
A good many of the
Committee's critics believed that the present arrangement was too
cumbersome and that it
should be changed.
A special committee was
now reviewing the work that had been done by the Ad Hoc
several years ago on the question of internal operations,
man noted.
It
Subcommittee
the Chair-
was also necessary to do some work on the problem
that Mr. Treiber had so adequately and clearly raised this morning
concerning the Treasury, about which there could be honest differences of opinion.
However,
the Chairman expressed his judgment
that the present, with the possibility of a change in the management of the Treasury, was not a particularly good time for a joint
study.
Continuing, Chairman Martin said that it
was important that
was to study.
He suggested that
the Committee know exactly what it
Mr. Rouse,
as Manager of the Account, with the assistance of Messrs.
Treiber and Riefler, bring together for all of the members of the
Committee as much information as possible regarding this problem.
5/7/57
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He thought that it would be necessary for all members of the
group to do considerable reading and thinking about the problem.
The Chairman went on to suggest that the Committee had
not in the past been in a position to speak to the Treasury as a
Committee.
The Treasury would discuss its problems with the
Manager of the Account, or with the Chairman of the Committee,
when neither Mr. Rouse nor the Chairman or any other member of
the Committee was in a position to say that the Committee had
discussed the matter and that it had reached a judgment as a
Committee.
The Committee should try to work toward a broad study
and to get in a position where it would be possible to say what
the Committee's judgment was.
None of the members of the group
should underestimate the complexity or the nature of this problem,
the Chairman said, noting that it was not a stationary problem
and not one that could be resolved at a given time--rather it was
one that was continuously with the Committee.
This was the problem the Manager of the Account was struggling
with constantly,
Chairman Martin said.
out more clearly than it
to follow.
The Committee should hammer
had to date just what procedures it wanted
As Mr. Johns had suggested this morning in connection
with the study of float, if all of us studied this problem individually we might not be quite as certain that we had the answers
when questions arose.
The Committee should work toward the joint
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5/7/57
study with the Treasury but what was needed fundamentally was a
review of the ideas raised in the Ad Hoc Subcommittee report regarding the position of the Manager of the Account, the New York
Bank, and the operations for the Treasury.
All of these should
be put in focus, not as they were working at the moment but as
they were likely to work over the next few months.
The Chairman
said that he felt the Committee had been making progress and he
was not expressing dissatisfaction on what had been done thus far.
The Committee should be encouraged that it had done as well as it
had with a difficult credit problem.
Chairman Martin then referred to the comments of Mr.
Balderston regarding a penalty discount rate.
This should be
considered in terms of public relations and public understanding
as well as technicalities.
Inflation is the most serious problem
confronting the countries of the Western World today, the Chairman
said.
He reported recent inquiries by two senators and a congress-
man as to whether he could name any products that were in short
supply.
Personally,
Chairman Martin said, he knew of nothing in
short supply at the moment but the essence of the problem was
whether the market was going to create the demand or whether we
were going to use borrowed money to take the products that were
in supply; whether short-term credit would be used for long-term
purposes to create demand where there seemed to be temporary
5/7/57
-41-
overcapacity or overproduction of some products.
Mr. Young had
presented the Committee with a paper on the basic economic problem.
The Chairman said that he might not be able to name products that
were now in short supply, but monetary policy could not be used to
restore a price level that had been lost through inflationary
processes.
The country was now operating at an inflated price
level and adjustments were taking place.
The difficulty of passing
higher costs on to the consumer had increased,
Chairman Martin said,
and we were at the juncture where pressures would become increasingly
great for creating demand by simply pumping up credit.
basic problem in the struggle against inflation.
This was the
The Committee could
expect a good deal of questioning on this problem by Senator Byrd's
Senate Finance Committee in
its
forthcoming study.
None of us be-
lieve that money and credit policy can do the whole job of restraining inflationary developments, the Chairman said, but a posture of
monetary and credit policy that was set to counter such developments
was infinitely more important in present circumstances than at any
other time.
If the general posture of the Committee was right, the
Committee would then be discharging its
responsibility.
Chairman Martin then referred to the directive, stating that
it
seemed clear that the consensus was to maintain essentially the
status quo.
There was no intention overtly to ease or overtly to
tighten the situation.
The Manager of the Account would have to
exercise his judgment.
Since this was partly an institutional
5/7/57
-42-
problem, the Committee should bear in mind that if
should run, say, $2 billion of attrition on its
the Treasury
current refunding,
the Treasury would have to obtain additional money somewhere.
While he was not forecasting such a development,
he felt it
important that the Committee see both sides of the problem.
Chair-
man Martin then inquired whether there was any disagreement with
the consensus as he had stated it.
Mr. Vardaman asked whether the Chairman's remark that he
knew of no products now in
short supply suggested that demand for
these goods would be increased if
policy were relaxed and negative
free reserves were permitted to go to par.
Chairman Martin responded that he didn't know but in his
judgment such action would increase the inflationary pressures.
Mr. Rouse said, in response to the Chairman's inquiry, that
he (the Chairman) had stated clearly the consensus as indicated at
this meeting.
He would interpret this as giving him clearance to
continue to assist dealers in
agreements,
the refunding through repurchase
if there should be a need for such assistance.
However,
he added that dealers were not buying "rights" in volume and he
would not expect a substantial need for repurchase agreements to
emerge.
Mr. Rouse noted that there had been several suggestions
as to the Treasury bill rate.
While the System account did not
now have enough Treasury bills to influence the rate, Mr. Rouse felt
that the present level of bill rates was principally a reflection of
5/7/57
-43-
the desire for liquidity at the present time.
System policy.
It also reflected
He would not expect to attempt to influence the
bill rate, but he would attempt to maintain the current level of
pressure until the next meeting of the Committee.
Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal Reserve Bank of New York until otherwise
directed by the Committee:
(1) To make such purchases, sales or exchanges
(including 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 administration of the account: provided that the aggregate amount of securities held in the
System account (including commitments for the purchase or
sale of securities for the account) at the close of this
date, other than special short-term certificates of indebtedness purchased from time to time for the temporary
accommodation of the Treasury, shall not be increased or
decreased by more than $1 billion;
(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;
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5/7/57
(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.
The Chairman then referred to items 4b and 4c on the agenda,
4b relating to guides for open market operations to carry out Committee policy, and 4c relating to the responsibilities of the Treasury and the Committee in the area of open market operations.
He
suggested that the general discussion of these matters that had
already taken place might be sufficient for this meeting,
and there
was no disagreement with this suggestion.
Mr.
Erickson,
Robertson stated that the Committee on Float (Messrs.
Johns,
and Robertson, Chairman) had received from the
subcommittee a report dealing with the subject.
He suggested that
copies of the report be distributed to each Reserve Bank President
and to each Board Member,
and it
was understood that this procedure
would be followed.
It
was agreed that the next meeting of the Committee would
be held at 10:00 a.m. on Tuesday,
May 28, 1957.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1957, May 6). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19570507
@misc{wtfs_fomc_minutes_19570507,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1957},
month = {May},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19570507},
note = {Retrieved via When the Fed Speaks corpus}
}