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 30, 1957,
at 10:00 a.m.
Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr. Allen
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Balderston
Bryan
Leedy
Mills
Shepardson
Vardaman
Williams
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.
Mr.
Mr.
Mr.
Riefler, Secretary
Thurston, Assistant Secretary
Solomon, Assistant General Counsel
Thomas, Economist
Messrs. Atkinson, Marget, Roelse, and Tow,
Associate Economists
Mr.
Mr.
Mr.
Mr.
Rouse, Manager, System Open Market Account
Carpenter, Secretary, Board of Governors
Kenyon, Assistant Secretary, Board of Governors
Noyes, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Koch, Assistant Director, Division of Research
and Statistics
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board of
Governors
Mr. Gaines, Manager, Securities Department, Federal
Reserve Bank of New York
Messrs.
Hostetler,
Daane, Abbott, and Rice, Vice
Presidents of the Federal Reserve Banks of
Cleveland, Richmond, St. Louis, and Dallas,
respectively; Messrs. Holland and Einsig,
Assistant Vice Presidents, Federal Reserve
7/30/57
-2Banks of Chicago and San Francisco,
respectively; Mr. Willis, Economic
Adviser, Federal Reserve Bank of
Boston; Mr. Anderson, Financial Econo
mist, Federal Reserve Bank of Philadelphia;
and Mr. Hellweg, Economist, Federal Reserve
Bank of Minneapolis
Chairman Martin extended an invitation to all those in attendance
at this meeting to remain for luncheon in the Board's dining rooms with
Mr. Robert B. Anderson, who was sworn in yesterday as Secretary of the
Treasury to succeed Mr. Humphrey.
The Chairman then noted the absence on vacation of Mr.
Assistant Secretary of the Committee,
Sherman,
and suggested that Mr. Kenyon be
authorized to perform for this meeting the services customarily performed
by Mr.
Sherman in connection with the preparation of the minutes.
being no objection, it
There
was understood that Mr. Kenyon would serve in the
capacity mentioned.
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 July 9, 1957, through
July 24,
1957, as well as a supplementary report covering commitments
executed July 25 through July 29, 1957.
Copies of both reports have
been placed in the files of the Federal Open Market Committee.
Mr. Rouse reported that developments during the period since the
last meeting had been dominated by the large Treasury financing and by
perverse net borrowed reserve figures.
In the first
statement week, the
projections for net borrowed reserves underestimated the actual level, with
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7/30/57
the result that purchases of bills were necessary to maintain an even
keel.
Subsequently, the projections overestimated net borrowed re
serves so that, despite sales of bills from the System Account, net
borrowed reserves have tended to be relatively low.
inaccuracy of the projections,
tion has worked out well.
however, Mr.
In spite of the
Rouse said that the situa
Although net borrowed reserves have been
low, bill rates have risen in competition with the rate available on
the new 3-5/8 per cent certificates.
The average rate in yesterday's
auction of bills was 3.36 per cent against 3.17 per cent a week earlier.
Mr.
Rouse went on to say that the response to the Treasury offer
ing initially was good.
But by late Monday morning, several announce
ments of new corporate financing plans and syndicate breakups created
an air of discouragement in
the market.
Also, the market letters that
morning called attention to the possibility of increases in the dis
count rate and the prime rate.
These influences put a damper on the
financing through Tuesday afternoon, as prices of outstanding Govern
ment issues adjusted to the terms of the new offering. In spite of
the uncertainty at times during the exchange, however, Mr. Rouse noted
that the result was satisfactory, with attrition of only $1.1 billion.
Turning to a review of developments in the immediate future,
Mr. Rouse said that $276 million of System repurchase agreements will
run off on Thursday, August 1, and principally as a result of this
withdrawal of funds net borrowed reserves will climb to a $600-700
million range.
It
is
anticipated that net borrowed reserves will
7/30/57
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then remain in this range for two weeks,
of the mid-August float expansion.
before dipping at the time
The major problem immdiately
ahead is again related to Treasury financing.
While the attrition
on the August maturities was only slightly more than $700 million,
the Treasury will still
first
have a narrow squeeze getting through the
ten days or so of August.
securities before that time, it
If
they do not sell marketable
may prove necessary for them to run
down their balances at the Reserve Banks temporarily, in which case
sales from the System Account could be used to offset the release of
funds.
At the conclusion of Mr. Rouse's report, Mr.
Mills called
attention to the sharp increase in net borrowed reserves on Thursday,
as the System repurchase agreements mature, and asked if
change might not be too abrupt.
problem at that time,
Mr.
the projected
Rouse replied that there may be a
since dealers will have to find financing for new
securities they have not yet sold as well as for the unsold portion of
the $400 million of new bills the dealers were awarded in yesterday's
auction.
If
the pressure on the money market from this source should
threaten to become too intense, it
might prove necessary for the System
to grant some repurchase agreements.
Mr.
it
Mills then commented that if
this were to prove necessary,
would delay the reinstitution of the degree of reserve pressure that
had been maintained prior to the Treasury operations.
With respect to
the lower net borrowed reserves over the past several days, Mr. Mills
7/30/57
asked if
-5
there had been any tendency in
serve figures as suggesting a shift in
the market to view these re
System policy.
Mr. Rouse
replied that he had heard no comments of this sort, and pointed out
that the fact bill rates have risen rapidly, to a point close to 3.40
per cent, would indicate that the market has not really been easy.
Returning to the discussion of Treasury financing, Mr. Leach
asked what the Treasury's financing schedule will be after they get
through the first half of August.
is very difficult.
Mr. Rouse responded that the schedule
The debt ceiling will permit the Treasury to borrow
only about $2 billion in late August or early September, which would
mean that they would have to be back in the market in late September
or early October, when the debt ceiling again will probably prevent
them from borrowing more than about $2 billion.
This sum would scarcely
carry them through October, and an additional amount would have to be
borrowed whenever the debt ceiling permitted.
Because of the debt limit,
the Treasury will have to conduct its cash financing in small pieces,
and the New York Bank estimates--which Mr. Rouse understood to be quite
close to the Board staff's estimates--show that the Treasury will have
to have an increase in the debt limit to get through the year unless it
can be avoided by a reduction in
expenditure and the use of enlarged
agency financing--Fannie Mae mortgage liquidation notes, for example.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period July 9
through July 29, 1957, were approved,
ratified, and confirmed.
7/30/57
Chairman Martin called upon Mr.
Noyes for a statement on the
economic situation, supplementary to the information contained in the
staff memorandum distributed under date of July 26, 1957.
Mr. Noyes'
statement was as follows:
In glancing over the notes for previous reviews of the
economic outlook this year, I observe that, with justice and
commendable caution, my colleagues have referred to the
economic situation as "mixed."
Developments in the economy
might still
be described as mixed--but the mixture seems to
be growing richer as the year progresses.
Industrial production was steady at 143 in June and
indications are that it will hold this level in July despite
the work stoppage in the cement industry and some sizable
cuts in defense contracts.
Prices are up--to new highs--both at wholesale and retail,
and there is every indication that they will increase further
in July.
Average hourly earnings increased by one per cent in May
and by the same amount again in June.
Scheduled wage rate in
creases both in existing and newly negotiated contracts seem
certain to push the hourly average up further in July and
August.
Revised data indicate that we have enjoyed a slightly
larger gross national product than we thought at the time in
recent years.
The rate for the second quarter of this year is
now estimated at $433.5 billion--up about one per cent from the
first
quarter and 5.5 per cent from a year ago.
This is some
what more than the experts anticipated and they hasten to
remind us that a large part of the increase reflects rising
prices and inventory accumulation in anticipation of further
rises--hardly a sound basis for economic growth.
Over all, construction is strong and despite Mr. Leavitt's
protestations to the President that it is a depressed industry,
housing starts have held close to the million unit annual rate.
It is interesting, but not reassuring, that residential build
ing costs have again turned upward, after almost a year of
relative stability.
Automobiles haven't moved quite so well in recent weeks as
they did in June, but the increased scheduling by major manu
facturers for the third quarter indicates continued confidence.
three weeks of July, department stores en
In the first
joyed unusually favorable sales for this time of year and, if
they continue at this rate for the remainder of the month, they
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7/30/57
will carry the Board's index to 133 per cent of the 1947-49
average--well above the level of other recent months.
This month four European central banks have increased
their discount rates and reports indicate that inflationary
pressures persist in Asia, South America, and other parts
of the world as well.
Chairman Martin next called upon Mr.
Thomas for a review of
recent credit and financial developments, and Mr. Thomas presented
the following statement:
During July there was some moderation of tightness in
money and securities markets. The principal developments
of the period were the continuation of a relatively large
volume of new corporate security issues, the completion of
a massive Treasury refunding operation, and substantial
reduction in bank loans and investments following a sharp
increase in June.
Money rates and bond yields declined
from the peak levels reached at the end of June, but con
tinued firm and showed some rising tendency toward the end
of the period.
The tone of markets throughout the world
continues to reflect an inflationary psychology.
Completion of Treasury refunding for August and October
in one large operation relieves the money market of an over
hanging threat.
The terms of the financing were more real
istic
with respect to the current and possible future state
of the money market than had been the case in some time.
The results can be considered as satisfying with respect
both to the moderate size of the attrition and to the
distribution of the exchanges among the alternatives.
The
relatively moderate volume of the exchanges into the December
maturity makes the handling of a refunding at that difficult
time less worrisome than was feared. The favorable reception
to the longest issue serves to diminish some of the liquidity
available from the large volume of short-term issues out
standing and also provides an example of a new procedure
that might be useful in other financings.
By no neans, however, are the problems of Treasury
The Treasury
financing all solved for the rest of the year.
cash balance declined much more in July than had previously
The attrition of $1.1 billion in the refund
been expected.
ing operation, although less than on some recent occasions,
was nevertheless larger than could be desired as a regular
practice.
Treasury purchases of securities in the market
Redemptions of savings bonds
have also exerted a cash drain.
have continued large. With existing higher rates on outstanding
7/30/57
marketable issues such redemptions present a constant threat
to the Treasury balance.
It appears certain that the Treasury will need to raise
$2 billion or more of new money probably as early as the
middle of August.
Four billion additional will be needed
early in October, partly to cover the $1.5 billion tax bill
maturing in September.
Some of these needs could be met by
increasing the regular weekly bill offer by $200 or $300 mil
lion each week; others by tax anticipation issues.
Corporate new capital issues in July are likely to
aggregate $1 billion, which is more than had been expected.
While the calendar of prospective new issues is comparatively
light for the first
half of August, there will be a substantial
volume in the last half of that month and in future months.
Issues of State and local governments continue fairly large
with plenty more on the waiting list
or in the planning stage.
Reception of new issues has been more favorable in recent
weeks than earlier.
This may be attributed in part to higher
offering rates and more limited call provisions on many issues.
Outstanding bonds rated AAA are now yielding 4 per cent, after
declining some earlier in July. Yields on new issues have also
resumed their upward trend. Treasury bond yields have risen
further.
Prices of common stocks have declined somewhat in the past
two weeks after rising earlier in the month to highest levels
in nearly a year.
Trading has been moderately active. For
several weeks yields on high-grade common stocks at current
prices and dividend rates have been below yields in seasoned
time in over 20 years. This
high-grade bonds for the first
relationship reflects the current inflation psychology.
half
Review of general credit developments for the first
of this year shows that total credit growth in the period, as
indicated by preliminary estimates, was in about the same
half of last year. The principal forms
volume as in the first
of private debt showed a smaller increase in the aggregate,
but the net reduction in Federal Government debt of $7 billion
was less than the nearly $10 billion reduction in the first
Mortgage credit expansion was about $2 billion
half of 1956.
less than in the same period of 1956 and $3 billion less than
Consumer instalment credit growth at $800 million
in 1955.
was moderately less than last year and only a third of the
Increases in business and other
increase shown two years ago.
loans at commercial banks were barely half last year's volume
The principal increases were in
and also less than in 1955.
issues of corporate and municipal securities, which offset
only a part of the decreases.
As a net result, the t otal growth in the major types of
credit, other than the United States Government debt, was
7/30/57
somewhat smaller in the first
half of this year than in the
same period of both 1956 and 1955.
The continued rise in
interest rates in face of the slackening in private credit
growth can probably be attributed to the increased diffi
culty of liquidating United States Government securities
in order to shift to other assets.
This change is due in
part to the reduction in Treasury debt retirement, but
probably also to the lessened availability of idle cash
that could be attracted into investment.
Following an exceptionally sharp increase in bank loans
during June, there has been a marked decline in July at banks
in leading cities.
Just as the June expansion was larger
than a year ago, the July contraction was also greater.
For
the two months taken together there were net increases of
close to $800 million in each year, using partial figures
for the latest week.
Banks have disposed of some of the
additional Government securities acquired in connection
with the new money financing operation at the beginning of
July, and for June and July together show a net decrease in
their holdings, although a smaller decline than in the same
period last year.
Total loans and investments for the two
months show a small increase compared with a small decrease
in the same period last year,
Demand deposits declined sharply in the first
week of
July but since then have increased fairly substantially,
but for the two months of June and July the growth at city
banks was a little
less than a year ago.
The time deposits
growth, which was so large earlier this year, has shown a
pronounced slackening.
United States Government deposits
have declined sharply from the peak reached on July 3 but
have shown a net increase for the past two months compared
with a sharp decline during the same period last year,
reflecting primarily a difference in Treasury financing
dates.
The rate of turnover of demand deposits, outside
financial centers, continues to increase at a pace which,
sufficient to finance
though slackened somewhat, is still
continued growth in economic activity with some price rise.
Member bank reserve positions eased considerably in
the past two weeks from the tight situation that prevailed
at the beginning of the month. Some of the decreased tight
ness is due to the decline, largely seasonal, in bank credit
and the post-holiday return flow of currency, as well as to
continuation of a rather large volume of float. System
holdings of Government securities, which increased con
siderably early in July, were subsequently reduced only
moderately, as repurchase contracts to finance dealers'
acquisitions of rights were not fully offset by outright
sales.
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7/30/57
Although net borrowed reserves, which declined from
over $700 million early in the month to below $200 million
last week, may average little
over $200 million for this
statement week, there will be a sharp increase to well over
$600 million on Thursday.
During most of the remainder of
this year occasional purchases of the securities by the
System will be needed to provide for seasonal factors.
Most if not all of these might be met through occasional
repurchase contracts until near the end of the year.
If strong demands for credit in excess of seasonal
needs should lead to an increased volume of member bank
borrowing, then discount rate increases would be essential.
Since the existing discount rate is now so far out of line
with market rates and since steady borrowing by some banks
continues in substantial volume, increases to as high as
3-1/2 per cent would be appropriate now, at least in some
districts. A question of timing, however, may be raised
because of the just completed Treasury refunding operation
and the need for cash financing in the immediate future.
Although recent credit expansion has been moderate, the
world-wide atmosphere of ebullience and the tendency to
accept inflation as inevitable seems to call for continued
restraint through whatever monetary and fiscal measures
may be feasible.
In response to an inquiry by Mr. Balderston regarding the
change in the money supply since the first
of May, Mr.
Thomas said
that on a seasonally adjusted basis there was a relatively small de
crease in
May and that preliminary figures for June indicated a small
increase in approximately an offsetting amount.
For July it appeared
likely that there might be a small decrease but not very much.
In
general, it appeared that the changes in the money supply had been
in accord with the usual seasonal pattern.
Mr. Hayes then made a statement on the business and credit
situation and credit policy as set forth below:
to add to
It seems to me that there is very little
in
developed
the picture of the economy which has been
7/30/57
-11-
recent meetings. Such new data as have become available,
while indicative of divergent trends in various areas, do
not alter the over-all impression of a sidewise movement
and provide no clue as to the direction and intensity of
the next major change in economic activity.
Newly revised figures on expenditures for producers
durable goods tend to confirm a leveling out of plant ex
penditures. While inventories rose moderately in the second
quarter, this seems to have reflected primarily a disappoint
ing volume of sales rather than a policy of deliberate ac
cumulation. Widespread business optimism with respect to
the fourth quarter rests to a considerable extent on hopes
of a resurgence of consumer buying. In this connection the
latest Michigan Survey suggests a somewhat more cautious
attitude than seven months ago. Also there seem to be a
growing number of economists who look upon the outlook as
"mixed" or "spotty." In spite of the fact that Federal
Government expenditures are higher than expected, I think
it is fair to say that the economy is at the moment rela
tively free from broad demand pressures. The price picture,
however, continues to be a source of grave concern.
Bank credit developments in the past four weeks do not
seem especially significant, except that the Treasury's
larger cash requirements this year have prevented as great
a decline in bank credit as occurred a year earlier. How
ever, we estimate that the money supply will not show any
appreciable net growth for the year as a whole. Velocity
continued to rise in the second quarter, contrary to earlier
indications. Most banks in New York are still feeling heavy
pressure for loans and at the moment are concerned about the
CCC cotton financing on August 16 which may amount to $400
million or more for the entire country. The capital markets
have been under a renewed severe strain, mainly because of
the seemingly unending prospect of heavy new corporate offer
ings, the volume of which as yet shows no reflection of the
leveling tendency of plant expenditures.
Turning to credit policy, I would like to dwell for a few
moments on some of the basic considerations which I feel we
should bear in mind. It seems clear to me that the application
of monetary policy is going through a testing period which is
one of the most difficult in the System's history. For over
two and a half years we have been following a policy of re
straint, and interest rates have risen steadily. In the last
month or two, bond yields have risen about as fast as in any
previous period of comparable length. In spite of our efforts,
prices have shown a disturbing degree of imperviousness to
monetary restraint for more than a year. The Treasury after
7/30/57
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showing great reluctance to face the facts of this interest
rate rise, has at last accepted these facts and has priced
the latest issues realistically. The relative success of
the offering should not cause us to overlook the fact that
there were moments when the result seemed pretty doubtful,
nor that the size of this refunding pointed up the in
adequacies of the existing mechanism for underwriting
Treasury securities.
These inadequacies may become in
creasingly evident, with additional heavy refundings in
prospect over the coming year, as bank and corporate
liquidity continues under pressure.
It is hard to measure the degree of public acceptance
of Federal Reserve policy.
The extent of acceptance seems
to me encouragingly broad, but there is constant danger of
our policies being made a major political issue, and the
high degree of public interest in the subject increases the
risk of public revulsion and political attack if our policies
should misfire. In other words, I feel that we are in a
sufficiently critical phase to warrant very considerable
caution. As Governor Balderston aptly put it at the last
meeting, the System seems to be climbing a canyon with ever
rising walls.
Now I am quite ready to admit that it is exceedingly
frustrating to see prices edging up month after month in
spite of our best efforts, and I can see the natural appeal
of the argument that what we should do is to tighten credit
further and see if that will prove any more effective. How
ever, appealing though this argument is, I think it involves
place, there is enough un
unwarranted risks. In the first
certainty as to which way the economy is going to move next
so that we must give serious thought to the consequences to
the System if we are later blamed for recession and sub
stantial unemployment. In the second place, we cannot be
at all certain that even greater strains and tighter money
and higher interest rates would do the trick. If they did
not, we would merely have compounded the Treasury's troubles
and intensified political opposition to monetary policy, to
no purpose.
It seems to me clear that the prudent course is to con
tinue doing what we have been doing, keeping the banking
system under substantial but not overwhelming pressure, pre
venting any national expansion in bank credit and the money
supply, and allowing reduced liquidity to take effect on the
economy.
In terms of immediate open market policy, I think we
should maintain about the same degree of pressure as we
7/30/57
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have in recent months.
If our current projections prove
accurate, this may call for a minimum of transactions in
the next three weeks. If we should have occasion to make
any open market purchases in the third week of August, it
might be useful to buy acceptances in amounts somewhat
greater than usual in view of their probable availability.
I think we would be wise to leave the discount rate un
changed at this time, both to avoid the accusation of
having "let down" investors in Treasury securities im
mediately after completion of the refunding, and because
I see no justification in the economic situation for a
signal that we believe intensified restraint is in order.
The capital markets are already subject to strong upward
rate pressure, and an increase in the discount rate would
tend to validate the recent rate advances and to set the
stage for the next notching up of rates. Conscious System
action to generate higher capital market rates would not
be consistent with the present general stability in the
economy. I do not know whether the prime rate is to be
advanced in the near future, but even if it is I think
we should not necessarily be forced into action by such
a move and we should have in mind that the market tends
to look upon a change in the discount rate as generally
reflecting a change in the System's policy intentions.
No such change seems justified at the present time.
Mr.
with all
tendency,
Johns said that he found himself thoroughly in
aspects of the statement by Mr. Hayes.
even a temptation, to look back a little
agreement
He discerned a
way and observe
the price changes which had occurred almost continuously and to con
clude that monetary policy should have been more restrictive.
While
he was not disposed to argue with that conclusion, he was inclined to
feel that the Committee should be cautious about translating such a
conclusion into a decision at this time to become significantly more
restrictive in order to attempt to repair what might be regarded as
oversights or errors in the past.
On the basis of his impression of
the state of economy--whichwas about the same as that of Mr. Hayes-
7/30/57
-14
he found it impossible to come to the conclusion that System policy
should become significantly "tougher."
He made it
clear,
however,
that in making this statement he was referring only to the short run.
At the present time, Mr.
the time for a change in
record of member banks in
Johns said, he was not convinced that
the discount rate had arrived.
From the
the St. Louis District, there seemed to be
no reason for an increase in the rate to inhibit borrowing,
appeared that in
for it
all cases the borrowing was for the purpose of
effecting short-run adjustment of reserve positions.
Therefore, he
would not like to be in the forefront of a rate movement.
Also,
having in mind the recent and prospective Treasury financing operations,
he had some doubt whether a rate change should be made within the next
three weeks.
However,
he would not want to look any further ahead
than that at this time.
Mr.
Bryan reported that in the past three weeks there had been
no significant economic developments in the Atlanta District.
ment remained high, at practically the record levels of May,
appeared to be no summer letdown.
looked at payrolls.
Employ
and there
The same thing was true when one
Construction contracts for the first
five months
of 1957 were substantially above the same period last year, and banks
seemed to be tending to make loans at a somewhat faster rate.
With respect to Federal
Reserve policy, Mr. Bryan said that
he was rather troubled by some of the statements now being made about
the sidewise movement in the economy.
It
was important to his own
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7/30/57
thinking that this sidewise movement was occurring in physical terms
rather than in value terms,
is
measured.
Therefore,
for it
he felt it
is
in
the latter that inflation
was possible to be misled by
putting emphasis on the sidewise movement.
course,
He was concerned,
of
about the problem of public understanding and public reaction
to System policy,
and he recognized that the System had a fundamental
obligation not only to follow a correct policy but to make i
stood and acceptable.
However,
he believed that a mistake could easily
be made by thinking in terms of policy too much "in
political con
nections," and he felt that the System would be better off in
run if
it
done.
Thus,
under
the long
simply did straightforwardly those things that needed to be
the question on which he would lay greater emphasis was
whether a tightening of policy was needed.
He could see no essential
difference between the situation now and six or three weeks ago.
other words,
In
nothing new had come into the picture that would seem to
require more restraint than if
circumstances,
the System had acted then.
In the
he was puzzled as to what reasons could be given for
tightening now that could not have been advanced previously.
Like
Messrs. Hayes and Johns, he was concerned about the reaction if the
System were to tighten immediately after a Treasury financing opera
tion of such magnitude as the recent one, for he felt that any such
action would almost certainly be misinterpreted.
Mr.
Williams referred to his statement at the last meeting
of the Committee concerning the increase in member bank borrowing
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7/30/57
from the Philadelphia Reserve Bank and the decision of the Bank to
deal with the problem through firmer administration at the discount
window.
Since that time, he said, there had been discussions with
the two principal borrowing banks, in
each case preceded by a re
quest that the bank's representatives be prepared to discuss the
period ahead in
specific terms,
to state their objectives,
and to
indicate how they were attempting to attain those objectives.
the same time, the Reserve Bank emphasized that it
of trying to manage the institutions.
At
had no intention
Mr. Williams went on to say
that the results were more satisfactory than anything that the Re
serve Bank had attempted heretofore.
Both banks had analysed in
detail their present situation and prospects,
plans for improving their liquidity.
While these plans varied in
certain respects as between the two banks, it
that the plans, if
ment.
and both had formalized
appeared in
carried out, would result in
each case
substantial improve
The next two months, he said, were critical because there is
normally a seasonal runoff, and the Reserve Bank was already thinking
in
terms of further steps in the event that the member banks did not
carry out their plans.
He also said that the Reserve Bank was now
moving over to discussions with country banks in the district's
resort area to see what was in
prospect for those banks, for it
would not want to see a repetition of past performance.
The Reserve
Bank recognized the dangers in this type of procedure but was trying
to avoid them, and on the whole it believed that this type of action
was worth while.
7/30/57
-17With respect to economic developments in the Third District,
Mr. Williams said that there were no clearly discernible trends.
Part of the area was experiencing severe drought, but there had been
a slight gain in the industrial level and residential construction
awards were somewhat above last year.
banks in
Loans were down a little at
the district, while member bank borrowing was heavier than
a year ago.
Mr.
Williams said he had had no discussion with the
Bank's Board of Directors regarding the discount rate since the last
meeting of the Open Market Committee,
and in
the meantime he had no
recommendations for change in policy.
Mr. Fulton reported that in talking with businessmen and
manufacturers he had found a surprisingly high degree of optimism,
largely on the basis that the fourth quarter of the year was expected
to be very good.
The steel business was down somewhat, with the
Pittsburgh rate above the national average and the Youngstown
Cleveland-Lorain rates below the average.
that when the automobile industry began its
the operating rate would be higher.
It was expected, however,
orders for the new models,
There had been a drop in the
demand for stainless steel and titanium due to changes in
Government
orders reflecting increasing emphasis on guided missiles and less on
aircraft.
Production of automotive parts was holding up fairly well,
but those foundries doing job business and making small parts for
appliances were not doing well.
The appliance industry was in
the
-18
7/30/57
doldrums to quite a severe extent, and some appliance manufacturers
were reported to be stopping deliveries for the next 30 days.
general pick-up should not take place in
there might be a deterioration in
However,
If a
the month of September,
the whole psychology of businessmen.
there was no indication of any postponement of plans because
of the cost of money.
Many people were saying that they were con
cerned about inflation, but on the other hand they were adding to
the pressure by going ahead with whatever plans they had already
formulated.
Housing starts had improved, there appeared to be some
easing in the availability of mortgage money,
and retail sales, while
showing no gain as compared with last year, nevertheless were quite
high.
Member banks were borrowing with no apparent inhibitions, the
volume of borrowing in
last year.
recent weeks being more than twice that of
The Reserve Bank had had a number of discussions with
them, but the member banks claimed there had been an outflow of
deposits from the district--which they expected to get back--and that
the demand for loans was very heavy.
They expected a further increase
in loan totals in the final quarter of the year.
Mr.
Fulton expressed the view that in the past couple of weeks
the pressure exerted on the banking system through open market opera
tions had been too light, and he was hopeful that it would be possible
to get back to a level of approximately $600 million of net borrowed
reserves.
Something around that level, he felt, would reflect a
policy of real firmness and would be so understood.
If the prime
7/30/57
-19
rate should be raised, he would favor increasing the discount rate,
but he did not think that the Reserve Banks ought to make the change
themselves at this time, for such action might mistakenly be regarded
as a change in policy.
On the other hand, he would be prompt in
following any change in the prime rate.
Mr. Shepardson expressed concern about the apparently wide
spread extent of the feeling that further inflation was inevitable.
He recalled that at the last two meetings of the Committee he was
very much in favor of moving further in the direction of restraint.
At present he did not think that the situation was substantially
different.
While he was somewhat apprehensive about a change at
this time immediately after the Treasury financing, nevertheless he
still had a great deal of concern regarding the prevalence of the
attitude he had mentioned, and also about the continuing upward
price movement.
It was his view that there should be more pressure
in terms of negative reserves than had been the case recently, and
he felt that developing conditions might soon make a change in the
discount rate feasible.
Mr. Mills expressed the view that the economic situation, as
pictured, would call for a continuing policy of credit restraint, and
he gathered that the sentiment of those who had spoken at this meeting
was in favor of attempting to regain as rapidly as practicable the
degree of restraint that was exerted prior to the Treasury financing.
This would appear to mean regaining that degree of restraint at the
7/30/57
-20
same time that an increasing volume of new security offerings would
be coming into the market.
The pressure on the capital markets.,
working at the same time as the pressure that would be placed on the
reserves of the banking system, would very likely result in an in
creasing tendency of rates to rise.
it
If
that assumption was correct,
followed that a 3 per cent discount rate would very quickly be
come entirely out of line, and an increase in the rate then would do
no more than recognize the existence of a condition that had materi
alized out of the course of events.
These,
he believed, were the
developments that could be anticipated if the System succeeded in
regaining the proper degree of pressure on bank reserves.
It
might
be a mistake, he said, to look at an increase in the discount rate
as reflecting a change in the direction of System policy rather than
a recognition of the existence of market events that had necessitated
a change in
the rate.
Bearing in mind all of these considerations, it
was his feeling that the rate should be raised, very probably to 3-1/2
per cent, before the Treasury's next financing operation and before the
seasonal demand for bank credit gained momentum.
delayed beyond that time, it
If
the increase were
might well give the impression of a
change in System policy rather than a recognition of events that had
already occurred.
He did not share the feeling that an increase in
the near future in
the discount rate would be widely regarded as
signalling a major change in policy.
made shortly, would in
The discount rate change, if
a very real sense reflect changes in
the
7/30/57
-21
interest rate structure of the capital markets rather than a change
in
the availability of credit for short-term purposes.
It
to him that the careful analyst would regard a change in
seemed
the discount
rate as a reflection of the cost of credit rather than a change in
System policy in the direction of restricting the availability of
credit.
Mr. Vardaman said that for the present he was not attempting
to go beyond thinking on a "week-to-week" basis.
While he agreed
with Mr.
Bryan's comment about the sidewise movement in the economy
being in
physical rather than value terms, he did not believe that
a change in
the discount rate at the present time would have anything
other than a potentially disastrous psychological effect.
that it
He doubted
would have any practical effect on the price movement.
general terms, he found himself in
presented by Mr.
Hayes.
In
full agreement with the views
He would make no change in the Open Market
Committee's directive at this time and he would move along from week
to week, with the understanding that a special meeting of the Com
mittee might have to be called at any time if
developments warranted.
Mr. Leach said that the economy of the Fifth District did not
show any decisive movement in
either direction, current developments
in
the principal industries reflecting mixed changes presently and
in
prospect.
industry,
There were indications of improvement in
the textile
particularly with respect to hosiery, which had recently
increased production following a long slump,
The furniture industry
7/30/57
-22
continued to have inventory problems and while bituminous coal
production was holding up well, with export shipments the chief
factor of strength, declining shipping rates for coal to Europe
might foreshadow a future decline in shipments.
As to agriculture,
reports indicated substantial damage to crops in certain parts of
the district resulting from drought conditions.
On a daily average
basis, borrowing from the Reserve Bank for the months of May,
June,
and July had remained substantially the same.
With respect to the national situation, Mr. Leach said he was
impressed by the manner in
ments,
which the economy had absorbed many adjust
including the cut-back in inventory buying which now seemed to
have ended.
He expected a definite upturn in the fall even though
there was little
tangible evidence of it
at the moment.
however, tangible evidence that consumer prices were still
and that wholesale prices had turned upward again.
stances, it
There was,
going up
In the circum
seemed to him that there were at least two positions that
one might take at the present time.
First, one might take the
position that the economy was moving sideways, that the System was
doing all that could be expected of monetary policy, and that price
increases could not be stopped without causing a serious downturn.
On the other hand, one might take the position that the System should
tighten further in
an effort to lessen the economy's capacity to
absorb higher prices.
Personally,
Mr.
Leach said, he would take the
latter position, and this meant that he was willing to take whatever
-23
7/30/57
risk was involved in being a little
more restrictive.
Perhaps it
was not practicable to completely stop price increases through
monetary policy, but he believed that the System had a responsibility
to do all that it
could in
that direction.
of timing, he had thought that it
With regard to the question
would be inappropriate for the System
to become more restrictive just before the Treasury refunding,
and he
now thought that it would likewise be inappropriate for the System to
become more restrictive just after the refunding.
Accordingly, he
would not recommend an increase in the discount rate today and he
would not favor applying any more pressure through open market opera
tions than the System was applying just before the refunding.
Perhaps,
he said, the situation would take care of itself during the next two
or three weeks, and another look could be taken at the picture after
that time.
Mr.
Leedy stated that there had been no significant changes in
the Tenth District in recent weeks,
His principal concern was that in
the course of the Treasury financing operation the System had lost the
tight rein over credit that it
had had prior to that time.
In making
this statement he did not intend to criticize the management of the
System Open Market Account for he recognized the great difficulties
involved, including the fact that in the period of the financing the
management of the account was under severe pressure to avoid develop
ments that might have been disastrous to the refunding operation.
Nevertheless, in viewing the operation from a distance he got the
-24
7/30/57
feeling that the results had been contrary to what was intended in
adopting the report of the Ad Hoc Subcommittee with respect to opera
tions in the market in connection with Treasury financing.
He sug
gested that aid to the dealers had the effect of accomplishing
indirectly what the Committee had resolved in the report not to do
The first
directly.
objective,
he thought,
should be to regain the
degree of restraint that prevailed before the Treasury financing
operation.
As Mr. Hayes had suggested, the recent experience might
raise a serious question as to the adequacy of the existing mechanism
for underwriting Treasury issues, and it seemed to him that the
difficulty may have been compounded by the rates on repurchase agree
ments.
The rate, Mr. Leedy said, seemed to have lost touch with the
market,
and as a consequence,
it
appeared to him that the System was
the dealers.
bound to be under great pressure to take care of all
The System now found itself
in
a position where it
was more difficult
to carry out its major responsibility; that is, to hold the tight rein
on bank reserves that had been deemed prudent.
discount rate, he felt
a move.
As to a change in the
that this was not the appropriate time for such
However, as Mr. Mills had said, if the System should regain
and maintain the degree of pressure that was intended, it
probably be found necessary to move on the discount rate.
in fact,
the move was now overdue.
At this juncture,
the large Treasury operation hardly out of the way,
would
Perhaps,
however, with
with the problem
of cash financing confronting the Treasury, and with the need for
7/30/57
-25
digesting the securities that had been issued in exchange, he did not
feel that a change in the discount rate should now be made.
Mr. Allen reported that in
the Seventh District optimism
characterized the business climate and business activity,
continued at a high level.
over all,
In the four weeks ended July 20, depart
ment store sales in the district exceeded those of a year ago,
improvement being a little
The district's
the
better than that of the country as a whole.
part of the steel industry also was doing a little
better than the national figure because Inland Steel had been operating
at 100 per cent of capacity right along.
With regard to the automotive
industry, the projections for the third quarter which he had mentioned
at the last two meetings of the Committee were thus far being borne
out.
The introduction of models in late October and early November
was less assured because the usual "bugs" in the production process
and the machinery required for production were appearing earlier this
year than usual.
nationally in
the area.
The expansion in
bank loans which had taken place
the past six weeks had shown up strongly in banks in
However, due chiefly to the sale of Government securities,
the large Chicago banks were now less active users of the discount
window.
The Detroit banks had been substantial borrowers in
recent
weeks due to a decline in deposits which seemed to occur each year
at about this time, but the last few days had seen some recovery from
that situation.
Savings deposits continued to expand at banks in the
Seventh District, with banks in 45 cities showing a gain in June of
7/30/57
-26
87 cents per $100 of deposit totals compared with
1956.
43 cents in June
As to residential real estate, the market in the Chicago area
was regarded as weak, with project builders cutting back on new starts
and holding the price line by eliminating frills.
seen further tightening in
availability of funds,
Recent weeks had
the mortgage market from the standpoint of
with the interest rate on conventional mortgages
around 5-3/4 to 6 per cent.
Mr. Allen said that to his way of thinking the policy of credit
restraint that the System had followed for some time should be resumed.
He felt that inflation was still
the big problem.
Consumer price
indexes continued to rise, and of equal importance was the indicated
rise in
July of the industrial component of the wholesale price index
following a marked degree of stability in
the first
half of 1957.
It
was his view that the System should use every available weapon in the
fight on inflation, if
it
concluded that the action would be effective,
and that certainly the brake on the supply of money and credit should
be continued.
Personally,
he believed that industrial management
would continue to grant wage increases without too much argument as
long as it
was found that all
or a large part of the increases could
be added to selling prices.
As to the discount rate, Mr.
creased,
Allen felt that it
and he subscribed to what Mr.
Mills had said.
should be in
The next meeting
of the Chicago directors was scheduled for August 8, and while he was
not personally in
any great rush, he rather expected that a recommenda
tion for an increase in
the rate would be made if
the prime rate had
7/30/57
-27
gone up in the meantime.
If not, he would probably defer a recom
mendation for a couple of weeks.
He was not prepared to say what
the reaction of the directors might be to such a recommendation.
In conclusion, Mr. Allen said that he concurred fully in what Mr.
Bryan had said with respect to System policy and political considera
tions.
He felt strongly that the System must do what seemed proper
irrespective of such considerations.
Mr.
Deming said that the Ninth District, like the country as
a whole, continued to show some contrasting trends, with the total
picture just a shade less strong than a month ago.
Nonagricultural
activity was being maintained at a high rate, but the early summer
expansion had been a little smaller than in former years.
In non
agricultural production and employment the district was now lagging
slightly behind the nation, while in retail sales and in farm prospects
it was a bit above the national picture.
Mining and lumber activity
was off from last year's level, particularly in western Montana.
Farm
prospects were better than in 1956, although they were not quite as
good now as had been thought earlier.
year ago,
Wheat would be better than a
livestock prices were higher, and farm income prospects were
quite good.
Residential construction was off substantially, but the
price of housing seemed to be strengthening in the Twin Cities, perhaps
a seasonal development.
growth than in
in
Bank loans were showing appreciably more
the comparable period of 1956 and the seasonal upturn
deposits was now stronger than in
1956.
While loan growth for
-28
7/30/57
1957 to date was smaller than in 1956, this reflected the rather
heavy liquidation of January and February.
Since March, the loan
expansion this year had been larger than a year ago.
In recent weeks
borrowing from the Reserve Bank had been smaller, but it
was still
relatively heavy.
While on their face these developments would seem to argue for
no change in policy, Mr. Deming said, he was in
agreement with Mr.
Bryan's point that the sidewise movement in the economy was in physical
terms and he was impressed by the price picture and the strength of
credit demand.
Assuming that reserves would have to be put into the
market, he felt that they should be put in
at a higher cost.
All in
all, he was inclined to feel that action to increase the discount rate
to 3-1/2 per cent was indicated before the Treasury had to go into the
market again for funds.
He would lean to about the same degree of
restrictiveness in open market operations as had prevailed, and he
would let the banks seek reserves at the discount window at higher
rates.
The directors of the Minneapolis Bank were scheduled to meet
on August 8 and, while he did not know whether there would be any
recommendation at that time for a change in the discount rate, his
present feeling was in favor of such a recommendation in the absence
of interim developments.
Mr.
Mangels characterized recent economic changes in the Twelfth
District as rather minor, although a few developments of some significance
7/30/57
-29
had occurred.
let
A large aviation plant in
the Los Angeles area had
out some 16,000 employees because of a cutback in
Government
contracts, there had been some strikes, and in southern California
banks had indicated some concern about a slowing up in collections.
However, the Reserve Bank could find no evidence of a major increase
in delinquencies in consumer credit accounts.
In the Seattle area a
large aircraft firm had cut back on overtime payments involving about
46,000 employees.
Department store sales had not changed greatly,
although charge account sales had declined somewhat.
changed appreciably in
dropped off.
Bank loans had
only one category, and bank borrowing
had
However, banks in the district were continuing to
purchase Federal funds greatly in
excess of the amount of their sales.
Mr. Mangels then said that, having listened to the comments at
this meeting, he would not be inclined at the moment to changethe dis
count rate.
He had sensed recently some change in
the thinking of some
of the Bank's directors who had heretofore been inclined to maintain
the existing rate, and there might be some movement at the next meet
ing of the directors on August 14 to increase the rate either to 3-1/
or 3-1/2 per cent.
In his opinion,
taining net borrowed reserves in
If a change should be made in
the System should aim toward main
the vicinity of $400-500 million.
the commercial bank prime rate, he
thought that action should be taken promptly on the discount rate.
Mr. Irons said that he had noticed no change in the optimistic
outlook of businessmen, which continued very strong in the Dallas
7/30/57
-30
District.
Neither did there seem to be any change in the feeling
on the part of a good many people that there would inevitably con
tinue to be some gradual inflation.
Within the past week, he said,
two bankers had called him to ask whether he sensed, as they did from
their dealings with customers,
of further inflation.
this feeling regarding the inevitability
They had sensed this on the part of would-be
borrowers and their reaction to the higher rates of interest that were
quoted.
Mr.
Irons reported that in general economic conditions in the
district continued strong at a high level, the only soft spot being
the situation in petroleum where stocks had been increasing.
was down a little
Refining
in the district but not enough to prevent some
accumulation of petroleum products.
This situation might be due
largely to imports and some lessened demand for petroleum products,
but within the last three weeks the demand for gasoline had increased
appreciably and now appeared to be at a record level.
Department store
sales had been good and there was a situation of full employment.
The
chemical and aircraft industries were strong, and agricultural condi
tions were generally satisfactory in most parts of the district.
In
the banking field, a very heavy demand for loans was being reported,
some bankers saying the demand was as strong as they had ever seen in
the past.
The bankers maintained they were conscientiously attempting
to restrain loan expansion and indicated that the demands were some
what larger per borrower than had been the case a year ago. Borrowings
-31
7/30/57
from the Reserve Bank were not unusually high, but there had been
some signs that business at the discount window could be expected
to increase.
On top of the high level of loans, bankers were
anticipating a strong seasonal demand.
Mr. Irons then expressed the view that the System ought to
recapture at least the degree of restraint that had been maintained
up to about ten days ago.
He realized that there were risks on both
sides, but was inclined to think that the risks were greater on the
side of not being sufficiently restrictive.
restraint on reserve positions.
He would favor firm
Such a degree of restraint, however,
if it could be achieved in the next two or three weeks, would lead
to a situation where the discount rate would be even more out of line
than at present.
No meeting of the Dallas directors was scheduled
for August, but if the prime rate were to move he would call a
special meeting immediately.
if
He would also call a special meeting
any of the other Reserve Banks were to raise the discount rate.
He did not feel that a change in
the rate would constitute a "shock
treatment" or indicate a change in
System policy.
In substance, he
agreed generally with the views expressed by Mr. Mills.
Mr. Erickson said that economic conditions in the Boston
District did not differ materially from those indicated by the
national picture.
were down.
Some things in
the district were up, while others
Increases in nonmanfacturing activities continue to push
New England's nonagricultural employment to new highs but manufacturing
7/30/57
-32
employment was off from last year, due primarily to conditions in
the textile industry.
The vacation business was very good and con
struction awards in May were well ahead of 1956.
However,
such
awards during June lagged somewhat behind the previous year.
The
agricultural situation in the northern part of the district was very
good, but in the southern section conditions were poor due to lack
of rainfall.
In the second quarter activity at the discount window
had been well above 1956, but since July 1 the activity had been less,
both as to the number of banks,
of System total.
Mr.
amount of borrowing,
and percentage
There continued to be a couple of "problem" cases.
Erickson favored regaining as rapidly as possible the
degree of restraint in System policy that prevailed prior to the
Treasury financing.
He would not at this time favor an increase in
the discount rate, but his view might well have changed by the time
of the next Committee meeting.
If the prime rate should be moved up,
he would be inclined to call a meeting of the Bank's directors to
consider increasing the discount rate.
Mr.
Balderston expressed agreement with Mr. Bryan that the
System must follow the policies that it
considered to be right and
proper regardless of possible political consequences.
This,
he said,
was the basic reason why the Congress made the System independent in
the first
instance, and any departure would be in violation of the
System's basic mission.
However,
the question of the right thing to
do at the right time was often hard to resolve.
At present, he
-33
7/30/57
thought one might tend to be misled by summer doldrums.
One matter
that concerned him was the current heavy loan demand in the face of
the additional demand to be expected in the fall.
As Mr, Williams
had said, the next two months would be critical in getting con
tinuous discounters straightened out before they came in
borrowing later in
the year.
for more
He was also concerned by the fact that
wholesale prices had risen 3-1/2 per cent in the last year and by
the seeming reluctance of employers to bargain strongly in making
their wage contracts.
This made him feel that one must look forward
to some further rise in
consumer prices unless both entrepreneurs
and union officials could be induced to change their expectations.
The scarcity right now was in savings, and as long as the expectations
of businessmen and union leaders continued as at present the pressure
on savings would continue to be great and might well rise.
The heavy
calendar of security issues, both public and private, in the months
ahead seemed to indicate that the price of money would remain high
for a considerable time.
If
the discount rate were raised this summer,
Mr.
Balderston
thought the business community very probably would view the action
not as a new signal or an indication of new policy but merely as an
indication that the System believed the current rates of interest
were likely to remain high for some time in the future.
words,
it
In other
would probably be regarded as a recognition of what had
7/30/57
-34
already happened.
Consequently, it seemed to him that the time had
come for the System to take action as soon as the normal methods of
System procedure would permit.
now through with its
The Treasury,
heavy refunding but it
he pointed out, was
would be in the market
for cash more than once before the end of the year.
If
the System
continued to wait for the Treasury to be in the clear and to refrain
from acting either just ahead or after a Treasury operation, it
might well be that the System would not act at all.
He would prefer
to see action taken before the Treasury went to the market rather
than afterward because he considered that the sounder way to proceed.
It
was better, he thought, for the market to know definitely what the
System's position was.
Mr.
Balderston went on to say that he would like to see action
on the discount rate in August, with the rate increased to 3-1/2 rather
than to 3-1/
per cent.
An increase of 1/2 per cent from the 3 per
cent level would be smaller relatively than the same increase from a
level of 1-1/2 per cent.
Also, if
at some time the System had to
reverse itself and signal a policy change, it
would be in a far better
position to act from the 3-1/2 per cent level than from some lower
level.
Mr.
Vardaman noted that some of those at this meeting had
indicated that in the event of an increase in the commercial bank
prime rate, they would be inclined to take action immediately to
increase the discount rate.
He inquired whether this would be
7/30/57
-35
desirable, since he wondered whether it was well to tie action on
the discount rate too closely to changes in the prime rate.
Chairman Martin then commented concerning the several state
ments at this meeting about regaining the degree of restraint that
prevailed prior to the recent Treasury financing.
He inquired of
Mr. Rouse whether he was not correct in assuming that what had
developed had been inadvertent in terms of open market policy
rather
than conscious.
Mr. Rouse confirmed that the developments had been inadvertent.
He said that the management of the account had considered it advisable
to assist the dealers in carrying securities, but had attempted to off
set repurchase agreements by sales to the extent that this could be
done without producing an adverse effect upon the Government securities
market.
The record, he said, made that clear on both sides.
Repurchase
agreements had been made against "rights" in spite of the reserve figures,
in line with Committee instructions to consider the refunding a critical
operation.
Chairman Martin then stated that, if he had interpreted correctly
the various statements that had been made at this meeting, it was clearly
the consensus that, regardless of what might develop in the course of the
next few weeks, there should be no change at this time in policy or in
the Committee's directive.
No disagreement was expressed with the Chairman's statement.
Chairman Martin stated that he found himself in agreement with
the general approach taken by Governor Mills.
He agreed completely
7/30/57
-36
with the view that there should be no change in
Committee's directive at the moment,
policy or in
the
but he believed that natural
developments would put the discount rate question in quite a dif
ferent perspective.
So far as the outlook was concerned, he sub
scribed to the thought which had been expressed regarding the
necessity for the System to accept certain risks.
one should persuade himself that, in
He did not think
the event of a major downturn
in the economy this fall, the degree of criticism would be any dif
ferent if the discount rate was raised.
The so-called "tight money"
policy had been aired enough so that in terms of political repercussions
it appeared that the System might just as well "relax and enjoy it."
The Chairman went on to comment that at times there appeared to be a
tendency to talk about the impotency of monetary and credit policy,
while at other times there seemed to be a tendency to ascribe more
influence and effect to that policy than it really deserved.
As for
himself, he said,he had more faith in the vitality of the economy and
its ability to adjust, and less faith in policy, than some people who
were constantly discussing the matter.
Chairman Martin suggested that the Committee should not attempt
to correct in one day a situation which had been plaguing it for a
number of months.
The Treasury no doubt would be coming into the
market again for funds and the System must face that situation. With
regard to the question raised earlier by Mr. Vardaman, he expressed
the opinion that although a decision on the discount rate should not
7/30/57
-37
be wedded automatically to the prime rate, the prime rate was a
factor that must be borne in mind in
He felt it
looking at the rate structure.
would be a mistake to think that if
the prime rate moved
up, action must be taken on the discount rate immediately.
same time, it
appeared that if
pected to follow a change in
be little
At the
the rate structure that might be ex
the prime rate should emerge there would
alternative to raising the discount rate unless the System
was content to have that rate get even more out of line with the de
velopments in
the rate structure.
Probably, the discount rate was
already lagging too much behind the rate structure,
primarily because
of the Treasury's financing problems.
In terms of general comment,
the Chairman said that he wished
to align himself with acceptance of the necessary risk if the rate
structure presented a problem to the System in terms of the discount
rate.
in
A change in the discount rate might be mentioned in the press
terms of a change in
System policy but he felt that the market
technicians would clearly understand the circumstances.
recognized,
of course, that an increase in
It
must be
the discount rate might
create certain further difficulties for the System from the standpoint
of relations with the Treasury
stood it,
He then repeated that, as he under
no one at this meeting wished to commit himself at this time
beyond the feeling that as of today there should be no change in
policy and no change in the Committee's directive.
In a concluding remark, Chairman Martin said that as far as
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7/30/57
he was concerned personally, he would want to assume the risk of
being charged with precipitating a downturn rather than to take
any action except one that was believed to be correct in the
technical as well as the policy sense.
Mr.
Shepardson said that he wished to endorse most emphatically
what Chairman Martin had said about facing up to the risk that might
be involved in pursuing the course which was believed to be most ad
visable.
With respect to the reference by Mr.
purchase agreements,
Leedy to the rate on re
Mr. Rouse said that the management of the account
had given considerable thought to the advisability of raising the rate.
On the one hand, it
the Treasury bill
increase in
was recognized that the rate was out of step with
rate.
On the other hand, with the possibility of an
the discount rate being rumored for the past few months
there was a feeling that a change in
the rate on repurchase agreements
might have been regarded by the market as the forerunner of a move in
the discount rate.
With regard to repurchase agreements entered into
with dealers during the recent Treasury financing to enable them to
carry rights without loss, Mr. Rouse said it
a warranted facility.
rate,
was felt that this was
If there should be a change in
the discount
he would hope that the rate on repurchase agreements could be
kept more on the flexible side.
Mr.
Hayes added to Mr. Rouse's comments by saying that he did
not think there had been as much loss in
the degree of restraint
7/30/57
-39-
during the period of Treasury financing as might have been suggested
by the statistics.
He had not sensed any feeling of greater ease on
the part of the New York banks.
Also,
Mr.
Hayes said that he would
heartily endorse Mr. Vardaman's suggestion that the discount rate
should not immediately follow the prime rate.
Chairman Martin then repeated that he had assumed there was
no intention in
the operation of the System Open Market Account during
the Treasury financing to deviate from the terms of the Committee's
directive, that this had been verified, and that he considered it
important to have this on the record.
Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal Re
serve Bank of New York until otherwise
directed by the Committee:
(1) To make such purchases, sales, or exchanges,
(including replacement of maturing securities, and allow
ing 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 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
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7/30/57
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 in
debtedness as may be necessary from time to time for the
temporary accommodation of the Treasury; provided that
the total amount of such certificates held at any one
time by the Federal Reserve Banks shall not exceed in
the aggregate $500 million;
(3)
To sell direct to the Treasury from the System
account for gold certificates such amounts of Treasury
securities maturing within one year as may be necessary
from time to time for the accommodation of the Treasury;
provided that the total amount of such securities so sold
shall not exceed in the aggregate $500 million face amount,
and such sales shall be made as nearly as may be practicable
at the prices currently quoted in the open market.
Chairman Martin then referred to the memorandum that had been
prepared under date of July 3,
from Mr.
1957, and distributed with a letter
Rouse of the same date, concerning institutional relations
between the Federal Reserve Bank of New York, the Board of Governors,
and the Treasury.
This memorandum contained sections dealing with
management of the Treasury's cash balances,
transactions in Govern
ment securities for Treasury investment accounts,
during Treasury financings,
System operations
other fiscal agency relations between the
Treasury and the Securities Department of the Federal Reserve Bank of
New York, and Board of Governors'
relations with the Treasury.
The
material had been prepared by the New York Reserve Bank except for
the last section and certain accompanying tables which were prepared
by the staff of the Board of Governors.
-41
7/30/57
Chairman Martin stated
what the memorandum had been put on
the agenda for this meeting in the thought that, with the anticipated
appointment of a new Under Secretary of the Treasury, the Committee
should start exploring these relations actively and that it
desirable to have some preliminary discussion at this time.
would be
However,
the anticipated appointment had not yet been made and therefore there
did not appear to be quite the same degree of urgency.
Chairman Martin went on to say that Mr. Hayes had pointed out
very well that a major question confronting the System related to the
underwriting of Treasury issues, and he felt that this was a problem
with which the System must come to grips.
He then said that with Mr.
Riefler's assistance he had prepared under date of July 30, 1957,
a
memorandum relating to techniques of debt management which would be
distributed at this meeting to the members of the Federal Open Market
Committee and also to the Presidents not currently serving on the
Committee.
Inthis connection, he commented that in the past few
months he had noticed increasingly that the Treasury was tending
actively to request a resumption on the part of the System of under
writing responsibilities during financing periods, and he said that
he had experienced increasing difficulty in discussing this matter
with the Treasury.
He felt it essential that the Open Maket Com
mittee review carefully this very important problem and that all
points of view be put on the table for consideration, for he was
sure the right answers could be obtained if
all
concerned expressed
7/30/57
-42
their views freely.
It was his feeling that sometimes the dis
cussions tended to be too polite in tone, whereas the meetings
of the Open Market Committee are meetings of the System "family"
at which all parties should feel free to express themselves fully.
He had wanted these documents to be distributed so that all concerned
might have the benefit of them and have a chance to be developing
their views.
As to procedure, he suggested that the material first
be the subject of discussion by the Special Committee appointed at
the meeting on January 28, 1957, which included, in addition to him
self, Messrs. Hayes, Allen, Balderston, Erickson, and Szymczak.
Due
to vacations, Messrs. Hayes and Szymczak would not be present at the
Open Market Committee meeting on August 20, but all of the members
of the Special Committee apparently would be available on September 10.
Therefore, he would like to have a meeting of the Special Committee on
that date and, on the basis of the Special Committee's discussion, to
bring the problems concerned before the whole Committee in late Septem
ber or at least in early October.
During a discussion of the matter, Mr.
that it
Hayes expressed the view
might not be possible for the Special Committee to make a very
full or complete report on the basis of a single meeting on September
10.
Chairman Martin indicated that he recognized this possibility and
said that this was one reason why he had been anxious to have the
pertinent material distributed to all concerned.
events were moving rapidly and that it
He commented that
was impossible to tell what the
7/30/57
-43
Committee might be faced with in the course of the next 30 or
60 days.
At the conclusion of this discussion, it
was agreed that
the procedure suggested by Chairman Martin would be followed.
It
was also agreed that the next meeting of the Committee
would be held at 10:00 a.m. on Tuesday,
August 20, 1957.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1957, July 29). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19570730
@misc{wtfs_fomc_minutes_19570730,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1957},
month = {Jul},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19570730},
note = {Retrieved via When the Fed Speaks corpus}
}