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,

PRESENT:

July 9, 1957, at 10:00 a.m.

Mr. Martin, Chairman

Mr. Hayes, Vice Chairman

Mr. Allen

Mr. Balderston

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Bryan

Leedy

Mills

Robertson

Shepardson

Szymcsak

Vardaman

Williams

Messrs. Fulton, Irons, Leach, and Mangels, Alternate

Members of the Federal Open Market Committee

Messrs.

Johns and Deming, Presidents of the Federal

Reserve Banks of St. Louis and Minneapolis,

respectively

Mr.

Mr.

Riefler, Secretary

Thurston, Assistant Secretary

Mr. Sherman, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Solomon, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Atkinson, Bopp, Marget, Mitchell, Roelse,

and Tow, Associate Economists

Mr. Rousa, Manager, System Open Market Account

Mr. Carpenter, Secretary, Board of Governors

Mr. Robinson, Adviser, Division of Research and

Statistics, 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. Volcker, Securities Department, Federal Re

serve Bank of New York

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7/9/57

Mr.

Freutel, First Vice President, Federal

Reserve Bank of St. Louis; Mr. Daane,

Vice President, Federal Reserve Bank

of Richmond; Messrs. Balles and Einzig,

Assistant Vice Presidents, Federal Re

serve Banks of Cleveland and San

Francisco, respectively; Mr, Litterer,

Business Economist, Federal Reserve

Bank of Minneapolis; and Mr. Walker,

Economic Adviser, Federal Reserve Bank

of Dallas.

Chairman Martin suggested that Mr.

Robinson, Adviser, Division

of Research and Statistics, Board of Governors,

and Mr.

Volcker, Market

Specialist, Securities Department, Federal Reserve Bank of New York, be

invited into the meeting.

There being no objection, Messrs. Robinson

and Volcker entered the room.

Chairman Martin then referred to the luncheons that had been

attended by some of the Committee members and staff and by Treasury

representatives at frequent and fairly regular intervals over the past

several years.

He stated that today Under Secretary of the Treasury

Burgess, Mr. Wren,

Assistant to the Secretary,

and Mr. Heffelfinger,

Fiscal Assistant Secretary, were coming to lunch and that all

members

of the Federal Open Market Committee were invited to attend the luncheon

if

they were able to do so.

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on June 18, 1957, were approved.

Upon motion duly made and seconded,

and by unanimous vote, the action by the

members of the Federal Open Market Com

mittee on July 2, 1957, in authorizing

7/9/57

the furnishing of information requested by

Senator Albert Gore relating to transactions

in Government securities during the week

ending June 26, 1957, was approved, ratified,

and confirmed.

Secretary's note:

The letter sent by Chairman

Martin to Senator Gore on July 8, 1957, copies

of which were also sent to Secretary of the

Treasury Humphrey and Under Secretary Burgess,

read as follows:

"This is in response to your letter of July 1, 1957 re

questing information concerning transactions in Government

securities on behalf of the Federal Open Market Committee

consummated during the week ending June 26, 1957.

In accord

ance with the provisions of the Committee's by-laws and its

Rules on Procedure, I have taken up this request with the

Federal Open Market Committee which has authorized me to make

available to you the information asked.

"The accompanying memorandum includes a statement of out

right sales and purchases each day showing the issue bought

or sold and the price received or paid. It also covers U. S.

securities bought and sold during the week under repurchase

agreements. The totals account for the week-to-week changes

shown in the published Statement of Condition of the Federal

Reserve Banks as of June 26, 1957. The figures do not in

clude such purchases or sales as may have been effectuated

through the Federal Reserve Banks acting as agents for other

principals, i.e., the execution of orders on behalf of the

U. S. Treasury, foreign central banks or governments, inter

national institutions, or member banks.

"I appreciate your understanding that this information

in the detailed form shown in the memorandum is not normally

made public."

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 June 18 through

July 2, 1957, as well as a supplementary report covering commitments

executed July 3 through July 8, 1957.

Copies of both reports have

been placed in the files of the Federal Open Market Committee,

7/9/57

-4-

Mr. Rouse reported that the Account Management had been rather

fortunate in

scheduling operations during the period since the June 18

Committee meeting.

throughout, in

A reasonably tight money market had been maintained

spite of difficulties imposed by wide swings in reserve

positions and other potentially disturbing factors in

the money and

securities markets.

the corporate,

municipal,

and Government securities markets were then being rather

severely wrenched,

as it

As discussed at the last meeting,

did in

and the situation appeared to be developing somewhat

the spring of 1953.

Since that time, however,

have been experiencing something of a rally.

meeting,

these markets

At the time of the last

an AAA-rated telephone issue had just reached the market at a

reoffering yield of 4.

85

per cent, marking a further upward step in the

rapid yield adjustments then taking place.

a nonrefundable-for-five-years

That offering, which included

clause, proved to be successful, as the

reflex action of the market following sharp adjustments over previous

weeks resulted in

a rapid distribution of that and other new corporate

issues over the period, with prices subsequently moving higher in

the

secondary market.

Municipal offerings have been rather light since the last

meeting, but the experience in

rather similar.

markets, in

that sector of the market has been

The improved atmosphere in

turn, was an important factor in

Government security prices.

ment market, including in

the corporate and municipal

the moderate recovery of

However, special influences on the Govern

the short-term area a reinvestment demand by

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-5

holders of the tax anticipation obligations maturing on June 24,

were also partly responsible for the improved tone in the Government

securities market since the last meeting.

All in all, Mr. Rouse commented, the atmosphere throughout

the securities markets now seemed definitely better despite the fact

that the money market had remained tight and reserve positions had

been under greater pressure.

The period since the June 18 meeting has included the successful

$3 billion offering of March tax anticipation bills and the July 3 pay

ment date, prior to which there was considerable when-issued distribution

by the banks.

In the absence of serious strain in

the money market up

to that time, operations to provide reserves in connection with that

operation could be deferred until the payment date itself.

time,

At that

the Account Management was able to handle the situation largely

through sizable repurchase agreements.

Mr. Rouse indicated that revised projections now suggest that

reserve positions may turn relatively easy before the forthcoming

Treasury refunding, for which an announcement is expected on July 18

and 19.

Earlier projections had indicated a much tighter reserve

position this week and in the weeks following, justifying the provision

of a substantial volume of funds through repurchase agreements and

through outright purchases.

Since the reserve outlook had been modified

by the new projections (those of the staffs of the New York Bank and of

the Board of Governors are reasonably close),

a commitment was made

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7/9/57

yesterday to run off the System's holdings of bills maturing this

week, and market conditions may make it possible to sell additional

bills through the midmonth period to counter the usual float expansion

at that time.

The reserve projections still

suggest tightness for the

remainder of this statement week, but then some easing, at least in

the sense of lower net borrowed reserves.

In conclusion, Mr.

Rouse remarked that one feature of the

recent period had been heavy member bank borrowing at the start of

each statement week.

This was particularly marked just before the

midyear statement date, but it

the current week.

was also true again at the start of

Overborrowing in New York and elsewhere subsequently

contributed to a greater availability of Federal funds in the market

after the calendar weekend, helping to take the sting out of the

tightness indicated by the daily reserve data.

Upon motion duly made and seconded,

and by unanimous vote, the open market

transactions during the period June 18

through July 8, 1957, were approved,

ratified, and confirmed.

Chairman Martin called upon Mr.

Koch for a statement on the

economic situation, supplementary to the information contained in

staff memorandum distributed under date of July 5, 1957.

Mr.

the

Koch's

statement was as follows:

At mid-year, over-all economic activity is being main

tained at about the high level of the past winter. Downward

adjustments have been going on in a number of lines but the

7/9/57

areas of weakness have not widened significantly and upward

adjustments have been taking place in other areas.

The general sidewise movement is similar to the trend

of business during the first

half of last year.

In 1956,

easing tendencies through July were followed by strong ex

pansion later in the year.

A like course of events is widely

anticipated in business and financial circles today.

Aside from the recent steel price increase, price changes,

the most direct measure of demand pressures, have continued

small and generally offsetting in the case of industrial

commodities.

The steel price rise is estimated at slightly

more than 4 per cent for all steel mill products.

Altogether

since mid-1955 the price of steel has gone up 25 per cent

compared with a rise of 8-1/2 per cent for all commodities

other than farm products and food.

Among farm products meat prices have continued strong in

recent weeks.

Over-all consumer prices advanced further in

May owing mainly to higher food prices, and another increase

seems likely for June. Government spokesmen, however, have

recently stated that they expect the index to level off by

August, presumably in large part because of the seasonal

topping off in food prices by that time.

Turning to the over-all measure of economic activity,

the gross national product, the growth from the first

to the

second quarter of the year may have been at a seasonally ad

justed annual rate of $4-5 billion rather than the $3 billion

anticipated earlier. This larger estimated growth is due

partly to the fact that it now appears likely that the moderate

rate of inventory liquidation of the first

quarter may have

been replaced by slight accumulation.

In terms of book value,

total business inventories seasonally adjusted rose about

$400 million in May, slightly more than April. Total business

sales also rose slightly in May as contrasted to small de

clines in the previous three months.

Despite a possible turn-around in the inventory situation

from liquidation to slight accumulation, the Board's seasonally

adjusted index of industrial production may have edged off some

what further since May, reflecting among other influences more

extensive vacation curtailment than usual in some lines. Steel

mill operations, which were up to 88 per cent of capacity in

early June, subsequently fell below these higher schedules and

for the month as a whole averaged 86 per cent, about unchanged

from May. There was a notable lack of extensive forward buying

in anticipation of the steel price increase posted July 1.

Thus far in July steel production has declined seasonally to

about 79 per cent of capacity.

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Automobile assemblies were up more than seasonally in

June, though not as much as scheduled at the beginning of

the month.

Tentative production schedules for the third

quarter have been revised upward to almost 1.3 million cars,

or more than a fifth above a year ago.

One of the strong factors in the current review of

economic developments is construction. Outlays on residential

building increased in June, the first rise in seven months.

Total construction contracts rose sharply in May--the last

month for which these data are available. In the first five

months of the year, contracts were 10 per cent above a year

ago.

One of the current disturbing elements in construction

is the renewed rise in construction costs after six months

of relative stability.

Another factor of potential strength in the current situa

tion is the rise in new orders of durable goods manufacturers

that occurred in May.

This was the first

rise since November

last year.

Moreover, it was widely distributed among all major

groups of producers except those of primary metals. May new

orders remained below the rate of sales, however, indicating

some further decline in unfilled orders.

In the labor market average weekly hours worked in manu

facturing increased slightly in June following several months

of decline.

In nonmanufacturing, as in manufacturing industries,

hours of work have been somewhat lower this spring than a year

earlier. There were increases in the number employed as well

as unemployed in June but the changes were mainly seasonal and

due to the usual influx of students to the labor market in the

summer months.

Unemployment claims declined seasonally but re

mained slightly higher than a year ago.

In the field of consumer credit, outstanding instalment

credit has been expanding at a seasonally adjusted rate at

about $200 million a month since the third quarter of last year.

Personal loans and automobile credit have accounted for most

of the increase. A noteworthy development in the consumer

credit field recently is the fact that the proportion of 36

month contracts on new cars has been increasing steadily this

year, but there has been no tendency for maturities longer than

that to rise.

Finally, economic activity abroad remains buoyant with

In most other

further expansion in Britain and Germany.

countries strong inflationary pressures continue to be felt.

Recently, France, Japan, and several other countries adopted

additional measures to restrain demand.

-9Mr.

Thomas next made a statement on recent credit develop

ments, substantially as follows:

Notwithstanding adjustments in various areas, views as

to the future generally continue more confident than cau

tious. Inflationary pressures are still

being felt. The

cost-price push, which is a manifestation of inflation as

well as a contributor to the spiral, is still

in evidence.

At the same time the cost-price-profit squeeze, which might

be relied upon to check the inflationary spiral, does not

appear to be developing.

Financial markets, which appeared to be on the verge

of a crisis for various reasons at the time of the last

meeting of this Committee, have shown surprising stability

and strength during the past two weeks.

Banks extended a

record-breaking volume of loans during the tax payment

period; an exceptionally large volume of new corporate

bond issues has been floated with unexpected success; the

Treasury has sold a $3 billion issue of March tax notes,

which are being absorbed by the market without undue pres

sure; and the early July enlargement of member bank reserve

needs has turned out to be less than expected and has been

adequately covered by System operations. Bond yields and

interest rates have levelled out and in fact declined

somewhat after reaching new peaks. The ominous speculative

upward spurt in the stock prices was followed by a down

ward reaction, but more recently the rise has been resumed,

and a new high average for this year was reached yesterday.

Although moderation has continued to charactarize

changes in total loans and investments of banks and in the

money supply, which are the credit elements directly af

fected by Federal Reserve policies, it can not be said

that credit availability has been unduly restricted.

Corporate capital issues have been in record volume;

state and local government indebtedness continues to in

crease at a substantial pace; increases in consumer in

debtedness and in mortgage credit, although slower than

the record of 1955, continue at rates of around 8 per

cent a year, which could hardly be sustained indefinitely.

The Federal Treasury is finding it necessary to borrow

more than it did last year owing in part to a smaller

surplus and in part to more cash redemption of outstanding

issues.

The Treasury surplus both for the fiscal year as a

whole and for the last six months was somewhat less than

-10had been previously expected, owing primarily to increased

expenditures.

In addition redemptions of savings bonds

have been quite large and promise to continue so, even

though maturities of F and G bonds will not be as large as

in May and June.

Unless attrition on the August

maturing

issues is unusually small, the Treasury will probably need

to borrow again early in September. There is question

whether the $275 billion debt limit will be large enough

to permit all borrowing that is likely to be needed before

the season of large tax returns early in 1958.

The increase in bank loans during the June tax-payment

period was larger than in March and than in June, last year,

notwithstanding a somewhat smaller corporate tax liability.

Nearly all business increased their borrowings, but the big

gest change from a year ago was this June's large increase

in finance company loans at banks, compared with a decrease

in the same month last year.

Tendencies noted during recent

months for the increase in loans and the decrease in bank

holdings of Government securities each to be less than in

the previous year were reversed in June. The decrease in

holdings of Governments reflected substantial bank holdings

of the tax anticipation securities retired in June. Bank

subscription for the new tax bill, for which payment was

made on July 3, however, will probably more than wipe out

the decrease in bank holdings of Governments during the

preceding weeks.

Unless a marked loan contraction follows

along with reduction in the newly created tax and loan

accounts, bank credit expansion will be excessive.

Last

week's figures for New York show considerable reduction in

loans.

As measured by changes in privately owned deposits and

currency, the money supply has conformed closely to the cus

Needed

tomary seasonal pattern during most of this year.

reserves have been supplied in part by System open market

There are

operations and in part by member bank borrowing.

indications that some of the borrowing by member banks may

Some banks in a

not be as restraining as might be desired.

few of the reserve cities continue to be rather heavy steady

borrowers, and there has been an increase in the amount of

such borrowing in recent weeks, as well as in the volume of

Because of the

in-and-out borrowing at the Reserve Banks.

volume of willing borrowing, System purchases, until the

last few days, were somewhat smaller than it had been thought

would be needed.

The stabilizing of money rate; and in fact some decline

in yields, is an indication that the recent volume of member

bank borrowing has not been as restraining as might have been

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7/9/57

expected.

To some extent, no doubt, the settling down of

money rates reflects the effect of the higher rates in at

tracting funds to the market.

The large redemptions of

savings bonds are probably an indication of the tendency

to shift holdings and help to account for the improvement

in the corporate bond market in the face of heavy new

issues.

Estimates of future reserve needs, based on customary

seasonal factors and expected changes in Treasury deposit

balances, indicate that measures to meet the early July

squeeze have been fully adequate. In fact, it appears

likely that without reverse action restraints during July

and August might be insufficient in the view of the current

credit demands and the apparent willingness of many banks

to borrow to cover their needs.

To maintain member bank

borrowing at a restraining level--probably at least $1

billion--System sales of $200 or $300 million of securities

will be appropriate next week.

If

credit demands show a

tendency to expand beyond normal seasonal amounts, a dis

count rate increase would be in order.

In view of the

prevailing tone of confidence in the economy, consideration

might be given to the advisability of raising discount rates,

at least in districts where steady borrowing has been evi

dent, or of establishing a penalty rate on such borrowing,

as a precautionary measure to forestall anticipatory borrow

ing by bank customers.

Mr. Hayes then presented his views on the business and credit

situation, and his suggestions as to the credit policy that should be

followed.

His statement follows:

confronted

As was true three weeks ago, we are still

with a generally strong business situation, but one which

is moving sideways and which gives no clear evidence as to

the trend to be expected in the latter part of the year.

While the steel price rise is unquestionably disturbing,

it remains to be seen to what extent resistance to higher

prices by consumers and business may check the spread of

price increases for many metal products which would

normally tend to result from the increase in steel prices.

A further element of uncertainty has to do with future

Will the cautious policy of the past

inventory policy.

six months be encouraged by price resistance or perhaps

by the rising trend of interest rates, or will it give

way to a new wave of heavy buying in the belief that

additional price rises are inevitable?

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-12-.

Borrowing from banks in the June tax period was con

siderably larger than had been expected and seemed to con

firm earlier evidence of a sharp decline in the liquidity

of corporations as a whole over the last year or so. Some

satisfaction is to be found in the fact that total loans

and investments increased less rapidly in the three weeks

ending June 26 than in the corresponding period of 1956.

Preliminary figures on income velocity of money for the

second quarter of 1957 provide additional evidence that

credit restraint is proving effective.

These figures

indicate that income velocity failed to increase appre

ciably for the first

time in nearly three years, during

most of which period velocity has scored substantial gains,

thus offsetting much of the restraining effect of a

relatively stable money supply.

The continuing threat of inflation, whether defined as

"cost-push" inflation or as any other variety, clearly calls

for maintenance of a policy of restraint. On the other

hand, current business and credit conditions do not, in my

view, justify increasing the present degree of tightnessand our responsibilities to the Treasury lend strong sup

port to this conclusion. With the terms for refunding the

large August maturities due to be announced within ten days,

one of our major objectives should be to preserve as steady

an atmosphere as possible to facilitate this financing with

out of course attempting in any way to establish an artificial

interest rate level. At the last meeting it was agreed that

the Manager of the Account should have ample leeway to exer

cise his judgment rather than to be tied to a specific target

of net borrowed reserves. This leeway turned out to be use

ful, as it has been possible recently to maintain a constant

degree of restraint while allowing net borrowed reserves to

average well above the $500 million mark we had looked upon

as more or less a norm. By the same token I think the

Manager should be free to adjust to the feel of the market

in the next three weeks and should not consider himself

obliged necessarily to offset temporary availability of

reserves attributable to market factors such as float.

Rumors of impending changes in the discount rate and

in the prime rate have been a disturbing element in the

market at a time when success of the coming Treasury refund

ing hinges to a considerable extent on market expectations

in relation to the rates set by the Treasury.

It could

therefore be argued that an immediate rise in the discount

rate, which would dispel these uncertainties in large part,

would be beneficial to the Treasury's program. I find it

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7/9/57

hard to accept this argument, since it is more than possible

that action of this kind, instead of "clearing the air"

would merely set off a series of new increases in short-term

market rates which would leave the Treasury in no better

position to compete with other demands for funds.

Moreover,

there would seem to be much merit in trying to maintain

something like the present spread between short and long

term rates to lend impetus to whatever modest funding the

Treasury might attempt to accomplish at this time--perhaps

encouraged by the tendency of longer term rates to find at

least temporary stability. Finally, and more importantly,

just as I see no justification in the business situation

for appreciably greater restraint through open market opera

tions, I also believe that a higher discount rate is not

warranted by the present economic outlook, nor is there,

it seems to me, such a wide spread between the discount rate

and market rates that the discount windows of the Reserve

Banks are in grave danger of abuse. I would therefore be

opposed to a discount rate change at this time.

Mr.

Irons commented briefly on the national situation, summing

up his remarks with a statement that high levels of activity were being

maintained as a net of offsetting movements in

individual areas.

In

the Eleventh District, the over-all picture was substantially similar

to the national picture, he said, with high-level activity continuing

without much change from the situation reported three weeks ago.

De

partment store sales recently had picked up and construction was strong,

while there had been some further decline in the petroleum industry.

Automobile sales on a cumulative basis this year were running 10-12 per

cent ahead of a year ago.

The agricultural outlook, particularly as to

cotton, was very favorable in terms of crop production.

Bank reserve

positions were not under great pressure except perhaps at two or three

banks,

although borrowing at the Reserve Bank recently had increased

a little.

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7/9/57

Mr.

Irons felt that inflationary forces and the high-level

economic activity continued to call for restraint at least of the

degree that had existed during the past three weeks.

The Treasury

refunding was a factor, and the Manager of the System Account should

have considerable leeway and should be watchful of the Government

securities market.

While Mr.

Irons would favor maintaining as strong

a degree of restraint as consistently could be maintained in

of the situation in

favor an increase in

a change in

Mr.

the light

the Government securities market, he would not

the discount rate at this time nor would he favor

the Committee's directive.

Mangels said that the Twelfth District situation had not

changed markedly in

the past three weeks.

Some of the savings and loan

associations had increased dividend rates to 4 per cent and he antici

pated that during the next few months banks would discover whether the

gain in

their savings deposits during the first

be retained.

half of this year would

Discontinuance of overtime work at aircraft plants in

Southern California had had important effects on payrolls for large

numbers of employees; it

was estimated that this factor would reduce

Southern California payrolls by $75 to $125 million a year.

The

Pacific Northwest continued to reflect the unfavorable situation in

the lumber industry.

Some reports indicated that collections were

slowing although delinquencies were not yet particularly high.

The

agricultural outlook was fairly good with normal pea and wheat crops

expected in

the Pacific Northwest.

Over-all employment had been

7/9/57

-15

maintained at a satisfactory level and department store and automobile

sales were holding at the level of recent months.

The housing surplus

that had existed in Southern California and Oregon was being worked off

and by the year-end the situation might again indicate a need for con

struction of substantial numbers of housing units.

banks reported that corporate tax borrowings in

large as anticipated.

Twelfth District

June had not been as

Bank borrowings had been quite high and banks

were buying more funds than they were selling in the Federal market.

The pressure that had been maintained seemed to Mr. Mangels

to be about as great as it

should be.

He felt that the Committee

should continue about the degree of pressure that had existed recently

but that it

should not make it

more intense.

The Manager of the Account

should have considerable leeway during the period immediately ahead.

Mr.

Mangels would make no change in

the discount rate at this time, but

he noted many rumors about a change in the prime rate and suggested

that if

the prime rate should increase, the System would be compelled

immediately to take some action on the discount rate.

banks initiated an increase in

in

commercial

the prime rate, considerable sting

would be taken out of a discount rate increase, but in

some such development, Mr.

If

the absence of

Mangels would not now recommend an increase

the discount rate.

Mr. Deming said that Ninth District conditions tracked those

of the nation. The farm situation was favorable, although there had

been too much rain in some areas.

Business sentiment was still

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7/9/57

generally cautiously favorable, and loan demand was strong.

the directors of the Minneapolis Bank were thinking in

increase in the discount rate, Mr.

Some of

terms of an

Deming said, but his personal

feeling was that this would not be the time to change that rate,

primarily because of the Treasury financing situation.

However, open

market operations should be continued about as they have been recently.

Mr.

Allen said that business sentiment appeared to remain

optimistic, perhaps cast in

terms of an expected continuation of the

recent high level of activity rather than any vigorous rise from the

present level.

Construction employment in

a gain over a year ago.

facturers were in

in

Farmers were doing better.

good spirits.

excellent shape.

the Seventh District showed

Motor car manu

The used car situation seemed to be

Automobile dealers as a group were making pretty

good money this year, and the manufacturers still

1,300,000 cars during the current quarter,

expected to turn out

compared with a million in

the third quarter a year ago.

As to monetary policy, Mr. Allen said that in

view of the con

tinuing high level of economic activity and the optimistic sentiment

which he felt prevailed, he had nothing to suggest other than con

tinuance of the restraint that the Committee had practiced for some

time now.

He occasionally had nostalgic longings for the days when

it seemed appropriate to use the discount rate and reserve require

ments as instruments of monetary policy, rather than to have constant

concern with and operations in the bill

market,

but he did not at this

7/9/57

-17

time advocate use of either of those so-called "blunt" tools.

He

suggested that the Open Market Committee should continue about as

it

had been doing, at least until the next meeting.

Mr. Leedy stated that rains had persisted in the Tenth District

during recent weeks and had interfered with threshing with some result

ant losses of wheat.

The rains had benefited growing corn and other

crops, and improved pasture conditions had contributed to considerable

strength in

the cattle market, particularly for stockers and feeders.

Nonagricultural employment was up slightly as a result of increases at

aircraft plants and in

defense work.

construction were down slightly.

own since the first

Residential and nonresidential

Retail sales had barely held their

of this year, although recently there had been

some indication of an upturn.

The Tenth District shared with the rest

of the country the substantial increase in business loans over the

June tax period, he said, although since the first

of this year there

had been less growth in Tenth District business loans than in the rest

of the country and they were running at about the same level as a year

ago.

Borrowings from the Reserve Bank had increased lately largely

from reserve city banks which had lost deposits, especially those of

country correspondents.

Mr. Leedy said that he had observed little

reluctance on the part of many banks to borrow.

For the period immediately ahead and until the Treasury refund

ing was out of the way, Mr. Leedy said that he would continue the pro

gram that had been followed by the Committee during the past three weeks.

7/9/57

-18

However, he felt that when the refunding was out of the way the

System should attempt to do something more than it has done in

applying pressure.

He was impressed with the performance of the

capital and securities markets during recent weeks and with the

strength shown during a period of a substantial financing by the

Treasury.

These provided evidence of great underlying strength

which perhaps called for more pressure than the Committee had been

applying.

Mr. Leedy said he would not favor an increase in

discount rate immediately, but he wondered whether it

sirable to let

borrowed reserves creep up further.

the

might be de

He noted that

earlier this year there was a feeling that net borrowed reserves of

about a half billion dollars might give suitable pressure, but perhaps

we had found out that borrowed reserves might go much higher without

producing results that were unwelcome.

Similarly, he wondered whether

the figure of around a billion dollars of member bank borrowings might

be too low.

He felt that when the Committee was in

position to do so,

it might undertake to test how far the figures of net borrowed reserves

and member banks borrowings might go without producing unwanted results.

Mr. Leach said that the principal piece of economic news in

Fifth District was the failure of the slight improvement in

textile industry to be sustained.

basis.

the

the cotton

Sales were again largely on a spot

Furniture production was continuing at a lower level, and there

were no indications of an immediate improvement.

Somewhat more optimistic

signs were, however, apparent in other leading district industries.

-19

7/9/57

Bituminous coal output and shipments were running higher than a year

ago.

The lumber industry reported increased orders.

Cigarette pro

duction also was above a year ago, and both shipbuilding and aircraft

continued to evidence marked strength.

Mr. Leach said that preliminary reports from automobile dealers

indicated no improvement in new car sales during June, with sales con

tinuing below expectations.

There was no evidence of further relaxation

of credit terms for automobiles.

In the Fifth District, as in the country as a whole, there was

a large temporary increase in borrowings from the Reserve Bank for

several days near the end of June.

Daily average borrowings for June

totaled slightly less than in May, and there was no indication that

member banks were taking advantage of the spread between the discount

rate and other short-term rates.

Mr.

Leach felt that in determining Committee policy, it was

incumbent on the System to be as restrictive as it could be without

causing a downturn in the economy or a disorderly Government securities

market.

This would be a difficult objective to attain even if the

Treasury financing were not in the picture, he noted, and the refund

ing now facing the Treasury was unusually large.

Mr. Leach felt that

the Committee should follow an even keel policy until the refunding

was over.

That is, it

should endeavor to maintain the same degree of

pressure that we had been achieving in

recent weeks.

The Manager of

the System Account should be instructed to give even more consideration

7/9/57

-20

to the feel of the market than in periods when no Treasury financing

was in

the offing.

This did not mean, Mr. Leach said, that open

market policy should be subordinated to the needs of the Treasury,

but it

recognized that the Committee had an inescapable obligation

to the Treasury with respect to the timing of its

actions.

Considera

tion of further tightening in policy, which in Mr. Leach's opinion

should initially take the form of an increase in the discount rate,

must await completion of the refunding.

in

Noting that demand for loans

the Fifth District continues strong, Mr.

Leach suggested that after

the summer doldrums are past and when the Treasury financing is

the way,

out of

serious consideration should be given to increasing the dis

count rate.

Mr. Vardaman said that, speaking for the three weeks that would

intervene between now and the next meeting of the Committee,

he would

continue the present wording of the Committee directive, would continue

the present policy of restraint without any increase in

even lean toward the side of less restraint.

it,

and would

He would not vote at this

time for an increase in the discount rate.

Mr.

Mills said that the economic conditions that had been

described to the Committee this morning and the movements in the

securities market confirmed,

in his judgment,

continuing a firm policy of credit restraint.

the desirability of

The degree of credit

restraint that he would conceive and that he would believe to be

attainable would be to continue to endeavor to have the 3 per cent

-21

7/9/57

discount rate not only effective as reflected in the interest rate

structure, but also foreshadowing to the investment community the

possibility of an increase in the discount rate at a not far distant

date.

A policy of that sort presumably would be such as to compel a

continued divestment from the commercial banks of their holdings of

the March 1958 special Treasury tax anticipation bills and their re

distribution to other classes of investors in a manner that would have

the effect of freeing reserves at the commercial banks.

If

that were

done the banks would be in a position to supply reserves needed to

support the seasonal demands for credit without the necessity for the

System to supply new reserves that could produce an abundance of

reserves.

Mr.

Mills felt it

applied in a manner that, if

If

essential that the reserve pressures be

possible, would achieve this purpose.

the pressures were applied too severely and if reserves were not

freed to the banks as they divested themselves of their Treasury bills,

the effect might be to invite a far higher amount of attrition on the

August Treasury refunding than would be desirable.

objective could be attained,

Mr.

If

this policy

Mills said that he would judge that

as a sequel to the Treasury refunding,

and assuming that economic

conditions at that time had the life and optimism they now have, an

increase in

the discount rate would be in order.

He felt very strongly

that such an increase should have been made over the last five or six

weeks but that it would be impossible to make it under the present

conditions.

7/9/57

-22Mr. Robertson said that he thought there could be no doubt

that the biggest problem facing the country today was the inflationary

pressure.

Hindsight was much better than foresight,

of course, but

he did not feel the System had been as restrictive as it

been.

should have

At this moment he did not see what could be done other than to

maintain the degree of restrictiveness that the Committee had tried

to maintain in recent weeks and to hope that the cumulative effects

of that policy would increase.

correct in

Mr. Robertson felt

that Mr. Mills was

saying that the discount rate should have been raised earlier but

he did not see how such action could be taken now.

He agreed with

Mr. Leach that the matter should be considered in August.

that the Committee could do something to evidence its

the economic inflationary spiral before it

He hoped

intent to stop

got out of hand.

He would

not permit any ease to come into the picture during the next few weeks

and would not attempt to offset the effects of changes in

caused an increase in

float that

tightness nor would he attempt to offset such

effects on the side of ease.

Over the next three weeks, Mr. Robertson

hoped that the System Account would do everything possible to tighten

the situation in

the hope that when the Treasury refunding was out of

the way an increase in

Mr.

restraint would be brought about.

Shepardson expressed the view that the country was very

definitely confronted with the problem of inflation.

wise movement,

as Mr.

Hayes had expressed it,

The present side

presented a situation of

seasonal summer slack, but there was every evidence of confidence and

7/9/57

-23

optimism that would make for an upswing in the fall.

If the Com

mittee were to wait until this upswing gained momentum, far more

drastic action would be required to cope with the situation than

if

action were taken before the rise.

Mr. Shepardson noted that

discussions often suggested that the time was not opportune to

take a given action.

He recognized that there were problems con

nected with the forthcoming Treasury financing, but he wondered

whether the Treasury might not be in a better position to face its

problems if

the System took action promptly on the discount rate

and thus "cleared the air," rather than to have uncertainty and

speculation as to when an increase might occur.

Mr.

Shepardson

said that he did not believe the Committee could afford any easing,

advertent or inadvertent,

during the next few weeks.

would much prefer to see the situation tightened.

Personally, he

He felt that now

was the time to increase the pressure in order to avoid setting up

conditions that would allow the fall boom to get under way.

His

inclination would be to take action more restrictively than the

Committee had taken up to the present time.

Mr.

Fulton said that the Fourth District picture was about

the same as three weeks ago:

high-level activity, with some weaknesses

accompanied by other evidences of strength.

optimistic for the future,

Businessmen seemingly were

allowing for some seasonal adjustments

during the next few weeks because of the heat and vacations.

months were expected to bring a high order of business.

The fall

With reference

7/9/57

-24

to the machine tool industry, Mr.

Fulton pointed out that although

new orders are running about 50 per cent of last year, men in the

industry felt that 1957 would be a good business year.

About $600

to $700 million of new orders for machine tools are anticipated,

while shipments during the year would total around $900 million,

reducing the backlog.

Their views on the profit outlook were much

more optimistic than those of the statisticians.

Mr. Fulton reported

that employment in the district was good and, while department store

sales in June were down about 4 per cent from a year ago, for the year

to date they were about even.

Discussions with businessmen indicated

that about two-thirds of them anticipated increases in prices up to

10 per cent within the near future; about 20 per cent indicated they

would not increase prices because they had already done so; and very

few indicated any expectation of reductions in prices.

Loan demand continued large in

the Fourth District, Mr. Fulton

reported, and delinquencies remained low.

Banks were borrowing heavily

at the Reserve Bank despite discussions with bankers who seemed to have

no reluctance to show borrowings in their statement,

Mr. Fulton stated

that he agreed completely with the views expressed by Mr.

Shepardson.

The Committee should give no indication of easing but should maintain

firm restraint during the next few weeks,

and in

August the Federal

Reserve should give serious consideration to a change in the discount

rate.

Mr.

Williams indicated that changes in the Philadelphia

District's economy in recent weeks had been minor.

He reported

-25

7/9/57

discussions at a recent meeting of licensed small loan companies,

all of whom made it

clear that they were feeling the effects of

the tight money policy.

They were paying higher rates both on bank

lines and for money market funds and were finding that banks and in

vestors were not eager to extend lines or to increase the funds made

available for consumer financing.

The smaller independent finance

companies reported they could now find very few country banks with

any loanable fund capacity, whereas last fall they were able to get

lines of credit from smaller banks in units as low as $25,000.

Mr.

Williams also stated that the loan companies had observed the new de

vice used by one of the large finance companies whereby the investor

could select his own maturities for the debentures the company was

selling, adding that other large companies which financed through the

open market planned to follow this procedure with interest.

Mr. Williams went on to say that the chief banking development

recently was the increase in borrowing from the Philadelphia Reserve

Bank, an increase that was large both in

amount and in relation to

total borrowing from all Reserve Banks.

Part of the increase was

seasonal,

but discussions with bankers indicated that they now antici

pated no diminution in

demands were expected.

demands upon them.

On the contrary, rising

Under these conditions, consideration had been

given to increasing the discount rate at the Philadelphia Bank, Mr.

Williams said, so as to establish a differential between the rate at

7/9/57

-26

that Bank and other Reserve Banks.

The decision, however, was not

to make such an increase because (1) a higher rate did not seem

warranted by national developments; (2)

a higher rate at Philadelphia

would create uncertainty in money and capital markets already in

delicate balance;

(3) the added uncertainty would be prejudicial to

prospective Treasury financing;

(4) the borrowing at the Philadelphia

Reserve Bank was concentrated in

a few institutions.

As a consequence,

Mr. Williams said that the decision was to deal with the problem

through firmer administration at the discount window.

In his view,

firmer credit restraint might be coming and the System should be

getting mentally adjusted to that possibility, but he did not think

the present was a propitious time for such action.

Mr. Bryan said that the Sixth District condition was one of

boom, the only exception being in the textile industry where there

were some signs of stability.

Minor reductions in lumber and steel

output had been counterbalanced by other gains.

had great strength.

were strong in

increase in

June.

Consumer spending

Bank debits were high and department store sales

Mr.

Bryan said that he had not recommended an

the discount rate to the directors of the Atlanta Bank,

chiefly because of the almost unanimous opinion expressed in a recent

open market meeting that such action would be unwise.

However, in

his view an increase in the rate should be made and there might now

be a few days when that could be done.

He agreed with practically

-27

7/9/57

everything Messrs.

Mills, Robertson, and Shepardson had said although

he perhaps went a little

further than some of their comments.

While there was apparent stability in

Mr.

the current situation,

Bryan said that the System would have to supply a great amount of

reserves during the remainder of this year to take care of seasonal

borrowings and Treasury needs.

With the traditional signals calling

for an increase in discount rate, failure to make such an increase

would inject into the capital markets an element of uncertainty that

could be expected to increase attrition and cause difficulty.

Mr.

Bryan stated that he was keenly alive to the responsibility of the

Federal Reserve to the Treasury, but he wished to raise a question as

to how that responsibility could best be discharged.

If

the inflation

continued, the Treasury would be maneuvered into the classical pattern

of a Government whose expenses were increasing faster than revenues.

An attempt to assist the Government through easing its financing

problems would only add to the difficulties.

Mr. Bryan felt that the

System should do nothing that would encourage the issuance of Govern

ment securities that would promptly go to a discount in the market.

He suggested that the argument that the discount rate should not be

raised now but that it might be increased in August was, in effect, one

for supplying reserves through open market to help a Treasury issue

go over at a rate, and shortly thereafter signaling the market for

an increase in the rate that would cause the Treasury issue to show a

loss to investors.

Mr.

Bryan suggested that this had happened on

7/9/57

-28

several occasions; he did not think the Committee should risk a

repetition.

Mr.

Johns indicated that Eighth District conditions did not

differ materially from the general picture described for the nation

as a whole.

District banks did not seem to be under great pressure,

and discounts at the Reserve Bank were nominal.

apparent ease of district banks,

Notwithstanding the

Mr. Johns reported some indications

that corporations were doing anticipatory borrowing for seasonal and

other future needs, although he did not think the banks were rushing

to accommodate such borrowers.

Mr. Johns stated that he did not con

template recommending to the directors of the St. Louis Bank a change

in

the discount rate at this time, although this did not imply what

hiw view might be three weeks hence.

He would not favor any relaxation

of pressure at present by the Open Market Committee or otherwise.

He

would not resolve doubts on the side of relaxation but would try to

maintain an even keel for the next three weeks.

Mr. Szymczak referred to the memorandum prepared at the New

York Bank under date of July 3, 1957 regarding relations between the

System and the Treasury, stating that this memorandum indicated the

difficulties that the New York Bank had in

carrying on operations at

the same time for the Treasury and for the Open Market Committee.

This presented a difficult problem for the Manager of the System Open

Market Account.

Mr.

Szymczak expressed the view that the economy was

now at a high level and all

indications were that it

would continue at

7/9/57

-29

a high level.

However, he felt there was nothing that the Committee

could do at this time other than to pursue the policy that it

following during the past three weeks.

If

an opportunity presented

itself to do something about the discount rate, it

to discuss the matter with the Treasury.

had been

would be desirable

His recommendation for the

present would be to continue the program that the Open Market Committee

has been following in recent weeks but to watch the situation carefully.

Mr.

Balderston said that he had been taught that monetary policy

faced the ultimate dilemma when we had rising prices on the one hand and

rising unemployment on the other,

It

seemed to him clear that we were

moving up a canyon with ever-rising walls and without the benefit of

significant support from fiscal policy such as we had last year.

Mr.

Balderston said that he was concerned because the escalator clauses in

certain manufacturing industries were giving rise to wage advances that

were spreading out through the service industries.

He was concerned at

the moment not only with continuing plant expansion but with the heavy

demand upon commercial banks which signified to him that inventory

reduction may have ceased, and that short- and intermediate-term money

was continuing to be used for long-term purposes.

He felt

System and the commercial banks had been complacent.

that the

The 1 per cent

increase in the money supply over last year in which we took comfort

had been negated in

large part by increased velocity of demand deposits.

This brought him to the question for which he had not found the answer.

He liked the way in

which the Desk had handled its

problems during the

7/9/57

-30

last three weeks which had resulted in quite appropriate pressure.

He disliked the fact that we might have an increase in the prime

rate which would catch us without our own guns being cocked.

If

an increase in the prime rate were to come shortly, he felt that

the System should respond almost immediately.

In commenting further

on this possibility, he suggested that if one or more Reserve Banks

found themselves ready to recommend an increase in the discount rate,

such recommendation might be laid before the Board of Governors

hoping, of course, that no such recommendation would leak.

The Board

would then have something before it on which action could be taken

if that seemed important.

Because of the scheduling of the Treasury's

financing, there was not much time in which to take action on the

discount rate.

a rise in

If,

however,

the prime rate it

the System were to delay for long after

would seem as though it

were abdicating

its responsibilities.

In response to a question from Mr.

Bryan as to whether it

would be preferable for the commercial banks to take action on the

prime rate first or for the Federal Reserve Banks to take leadership

by changing the discount rate, Mr.

Balderston stated that under

existing circumstances he would prefer that the commercial banks act

first.

Mr.

Shepardson stated that he would take a view opposite that

expressed by Mr.

Balderston, adding that Mr.

Bryan had expressed

effectively his feelings as to why the System should not be in the

7/9/57

-31

position of tightening the market immediately after a Treasury

financing.

Mr.

Szymczak interjected that the System did not operate

in a vacuum, and that an ideal policy from all standpoints is not

always possible.

In the current circumstances,

the Treasury's needs

must be considered.

Mr.

Hayes also referred to the comments Mr. Bryan had made,

stating that he did not believe that the material gathered in the

memorandum of July 3,

1957,on relations with the Treasury supported the

contention that regularly or quite often the System had misled the

Treasury by following one policy before and a different policy im

mediately after a Treasury financing.

He also said that he felt that

rates in the market were the major factor that influenced the Treasury

in pricing its

securities.

Reflecting the recent rise in rates, the

Treasury officials were quite aware that they had to price the securi

ties in

the forthcoming refunding much more attractively than on the

recent refunding, Mr.

Hayes said, and he doubted that a movement of

the discount rate would be a crucial factor in the Treasury's pricing

problem.

Rather, an increase in the discount rate would signify a

strong feeling on the part of the Federal Reserve that general credit

policy should be considerably tighter than it

has been.

If

this were

not the intent, he would think an increase in the rate would be quite

inappropriate at this time.

Mr.

Hayes said that his feeling was that

sufficient doubt existed as to the economic justification for an

7/9/57-3

increase in the discount rate so that he would prefer to see the com

mercial banks take the lead in a change in rates, as Mr.

Balderston

had indicated.

Chairman Martin stated that he had in mind placing on the

agenda for consideration at the next meeting of the Committee the

memorandum distributed with Mr. Rouse's letter of July 3,

1957,re

garding relations between the Federal Reserve and the Treasury.

felt that there were many facets to that document and that it

He

would

not be profitable to get into a discussion of its content at this

meeting since some of those present had not had adequate opportunity

to study the material.

Chairman Martin then commented that the Committee today had

had a repeat performance of the preceding meeting,

Balderston was not present three weeks ago.

desirable for the Committee to get too far in

except that

He felt that it

advance of itself

projecting what might be done several weeks hence.

Mr.

was not

in

The important

thing for the Treasury at this time was to face up to the current

market.

In retrospect,

the rate on its

it

was clear that the Treasury underpriced

offering in May.

Chairman Martin said that he felt

the Treasury recognized this and that it

forthcoming issue.

felt it must not underprice the

From the standpoint of the Committee, he felt it

important to give as good an atmosphere to the market during the re

funding as was feasible.

Chairman Martin went on to say that he believed there was

danger in thinking that the Federal Reserve was the only agency that

7/9/57

-33

could stop inflation.

We were at the crucial period in

the fight

against inflation, he said, and the country would have to "fish or

cut bait" in

the next few months in

of the Federal Reserve,

and the whole public.

his opinion.

He was not speaking

but of the Congress and the business community

He had come more and more to the view that the

Federal Reserve was the only group that had been actively fighting

inflation.

This position could become untenable.

The Chairman said

that he agreed with virtually everything that had been said here today,

and he then referred to the summary statement of policy recorded in

the minutes for the meeting of June 18, 1957, in which he stated that

he had come to the conclusion that we could not simultaneously

increase the flow of reserves and raise the discount rate ef

fectively under present conditions; that the Treasury was

about to make an offering of securities for which payment

would be made when we were going into a seasonal demand for

reserves; that in his view the Committee should give the

Manager of the Account as much latitude in the execution of

policy as consistently could be given; that we were in a

period of prosperity as well as of inflation; that the con

sensus seemed to be that there should be no change in the

directive for the next three weeks; and that we should not

deviate from the present general policy but that we should

give the Manager of the System Account whatever latitude

was needed to try to adjust around the feel of the market,

recognizing that in a period such as this net borrowed re

serve figures were very difficult to determine.

Chairman Martin stated that the June 18 summary of policy seemed to

apply to the situation today,

and he inquired whether there was any

disagreement with this view.

In the absence of an indication of dis

agreement,

he suggested that the Committee approve a renewal of the

directive to the Federal Reserve Bank of New York in

its

present form.

7/9/57

-34

Mr.

Shepardson inquired whether this contemplated a con

tinuation of the existing degree of pressure and, after the Chairman

commented that this seemed to be the consensus, Mr. Shepardson stated

that he disagreed with such a policy because he believed that the

pressure should be increased.

Following a brief discussion as to whether the summary state

ment the Chairman had made represented a consensus or a majority view,

Mr. Vardaman stated that he felt it

undesirable for these meetings to

include projections of potential actions for more than three weeks in

the future.

Chairman Martin then called on Mr.

Rouse and Mr.

Hayes, mention

ing that the matter of swaps had come up yesterday in a discussion with

Under Secretary of the Treasury Burgess.

The Chairman said he had not

encouraged him to believe that the Committee would be favorable to

swaps, but he had

stated that he would bring the question up at this

meeting.

Mr. Rouse responded that the question of swaps had not been

mentioned to him recently.

Mr. Hayes stated that Mr.

Burgess had mentioned this question

to him, and Chairman Martin said that while Mr. Burgess was not pro

posing a definite action, he was wondering whether anything could be

done at this particular juncture which might help in connection with

the Treasury refunding to be announced shortly.

-35

7/9/57

Mr. Rouse expressed the view that the value of any swap

would depend upon the particular circumstances prevailing at any

given time, but that at times it would be possible to utilize swaps

to some extent to assist the Treasury without harming general open

market policy.

While the Committee was aware of his general views

on this matter, authority for such operations in Treasury bills had

not seemed vital to him recently, although such operations could

occasionally be useful; he could not suggest any specific swaps that

would be useful currently but would be glad to look into the question.

On the general situation, Mr.

had indicated the market had felt

Rouse said that as Mr. Bryan

from time to time that "the rug had

been pulled from under it" by reason of changes in

the System's actions.

This was not necessarily because of changes in the discount rate but

because of changes that tightened the reserve position of banks, whether

fortuitous or deliberate,

so soon after a Treasury offering that the

dealers and underwriting banks had not had an adequate opportunity to

work out of commitments that had been taken.

This had resulted in

considerable feeling that whatever the new Treasury issue proved to

be,

purchasers might be buying into a loss, Mr.

Rouse said, adding

the comment that to his way of thinking this was not correct.

On the rate situation, Mr. Rouse said that he had learned of

reports by dealers that many banks outside New York City had received

telephone calls from New York suggesting that some banks other than

7/9/57

-36

those in New York take the lead in raising the prime rate.

There

was general discussion among the principal banks that as soon as

it

was decently possible after the Treasury financing, the rate

should be raised.

It was expected also that the discount rate would

be increased by 1/2 of 1 per cent.

This was gossip, Mr. Rouse noted,

and was talked to customers as well as bankers.

One other point Mr. Rouse mentioned had to do with a position

he had taken.

announced in

The Treasury and the market felt that the refunding

May was priced on the market.

results of that offering, Mr.

In trying to appraise the

Rouse felt that almost everybody had

been influenced by the record of the past fifteen years in that there

had been support for Treasury issues by the Federal Reserve during

the war period and the pattern of rates could be played, so that there

was not really any point in

pricing securities under the market.

It

had been difficult to get away from this type of thinking, Mr. Rouse

said, and it

was now necessary for the Treasury to take all of these

factors, including the possibility of increases in the prime rate

and the discount rate, into consideration in pricing the forthcoming

issue.

Mr. Rouse said that he had taken this position fairly strongly

in discussions with Mr.

Burgess and others at the Treasury over the

past two months, emphasizing that the new issues must stand on their

own feet.

Mr.

Robertson asked for clarification of Mr. Rouse's statement

that he did not think dealers were correct in

feeling that whatever the

-37

7/9/57

Treasury issue might be, purchasers might be buying into a loss.

Mr. Rouse responded that there had been occasions when that

had happened in

the past but that he did not think the fear was

justified on the present occasion.

Mr. Hayes commented that it

was well to bear in mind that in

a rising trend of interest rates, any financing was likely to be in

danger of going to a discount shortly after it

was announced.

This

had happened in many corporate issues and was considered not abnormal.

Mr.

that all

Hayes then referred to the discussion of swaps,

that Mr.

stating

Burgess had mentioned to him was the possibility of

some kind of direct buying by the Federal Reserve of an issue of one

year or longer maturity and selling of shorter-term securities in

order to satisfy the liquidity needs of holders of rights.

intent is

The general

to avoid a necessity for the Treasury offering a very short

term security which might tend to cut off demand for the other new

issues.

Mr. Allen suggested that this would not be a swap as be

understands swaps.

Chairman Martin said that he did not think the Committee would

wish to exchange some of its

and Messrs.

arrangement.

shorter securities for longer securities,

Robertson and Allen indicated they would not favor such an

The Chairman then inquired whether anyone present would

favor such action and, in

the absence of any affirmative response,

stated that the matter was thus disposed of.

7/9/57

Chairman Martin asked for other comments in

the renewal of the Committee's directive,

in

connection with

response to which Mr.

Rouse stated that he had no suggestions for change in the amounts.

Thereupon, upon motion duly made

and seconded, the Committee voted

unanimously to direct the Federal Re

serve Bank of New York until other

wise directed by the Committee:

(1) To make such purchases, sales, or exchanges (in

cluding replacement of maturing securities, and allowing

maturities to run off without replacement) for the System

open market account in the open market or, in the case of

maturing securities, by direct exchange with the Treasury,

as may be necessary in the light of current and prospective

economic conditions and the general credit situation of the

country, with a view (a) to relating the supply of funds in

the market to the needs of commerce and business, (b) to

restraining inflationary developments in the interest of sus

tainable economic growth while recognizing uncertainties in

the business outlook, the financial markets, and the inter

national situation, and (c) to the practical administration

of the account; provided that the aggregate amount of securi

ties 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 in

creased 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

(3)

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;

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7/9/57

provided that the total

shall not exceed in the

and such sales shall be

at the prices currently

Mr.

amount of such securities so sold

aggregate $500 million face amount,

made as nearly as may be practicable

quoted in the open market.

Rouse stated that net borrowed reserves had been running in

excess of $700 million for about 10 days and that the market appeared

very calm although he sensed some turbulence underneath the surface.

He also sensed less unwillingness on the part of banks to borrow.

Mr.

Rouse also referred to a report this morning of another AAA rated thirty

year utility bond issue that was being re-offered at 4.43 per cent,

stating that that illustrated the rapidity with which the recent move

ments in

bond prices had taken place.

He expressed the view that the

decline a few weeks ago had been faster and had gone farther than was

warranted and that the recovery during the last few days reflected the

same situation.

It was agreed that the next meeting of the Committee would be

held at 10:00 a.m. on Tuesday, July 30, 1957.

Thereupon the meeting adjourned.

Secretary's note: Immediately following the

meeting, Governor Robertson reviewed plans

for Operation Alert 1957, during which Mr.

Leonard, Director, Division of Bank Opera

tions, and Mr. Allison, Special Consultant,

entered the room.

Secretary