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, September 10, 1957, at 10:00 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Hayes
Mr. Allen
Balderston
Mr.
Leedy
Mr.
Mr.
Mr. Robertson
Mr. Szymczak
Mr. Vardaman
Mr. Williams
Mr. Irons, Alternate for Mr. Bryan
Messrs. Fulton, Leach, and Mangels, Alternate
Members of the Federal Open Market Committee
Messrs. Erickson, Johns, and Deming, Presidents
of the Federal Reserve Banks of Boston,
St. Louis, and Minneapolis, respectively
Mr. Riefler, Secretary
Mr. Sherman, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Marget, Mitchell, Tow, and Young,
Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Koch, Assistant Director, Division of
Research and Statistics, Board of Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Gaines, Manager, Securities Department,
Federal Reserve Bank of New York
Messrs. Abbott, Daane, Roosa, and Strothman,
Vice Presidents of the Federal Reserve
Banks of St. Louis, Richmond, New York
and Minneapolis, respectively; Messrs.
Balles and Einzig, Assistant Vice Presi
dents,
Federal Reserve Banks of Cleveland
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and San Francisco, respectively; Mr.
Walker, Economic Adviser, Federal Re
serve Bank of Dallas; Mr. Anderson,
Financial Economist, Federal Reserve
Bank of Philadelphia
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
August 20, 1957, were approved.
Before this meeting there had been distributed to the members
of the Committee a report prepared at the Federal Reserve Bank of New
York covering open market operations during the period August 20
through September 4,
1957, and a supplementary report covering commit
ments executed September 5 through September 9, 1957.
Copies of both
reports have been placed in the files of the Federal Open Market Com
mittee.
Mr. Rouse reported that he had been on vacation during a good
part of the past three weeks,
but so far as he could determine the
money market had been consistently tight during this interval.
Federal
funds traded briefly below the discount rate the last two days of the
September 4 statement week but remained at the ceiling rate during the
rest of the period.
The reserve projections beginning with the Labor
Day holiday period consistently overestimated net borrowed reserves.
Until the end of August, the projections indicated substantial tightness
through the week ended September 11 and then two weeks of somewhat
lower net borrowed reserves.
On the basis of these projections,
bills were purchased for the System account in
period.
Treasury
the early part of the
The currency outflow prior to the Labor Day holiday was
-3.
9/10/57
smaller than expected, however, and float released more reserves
than expected, with the result that the reserve figures had not
been as tight during the past two weeks as anticipated, despite
sales of Treasury bills from the System account.
On top of all
this, a substantial after-the-fact revision makes the net borrowed
reserves figures look, in
retrospect, even less tight than they did
at the time the Desk was dealing with them.
Mr. Rouse also commented
that the sales from the System account in the past several days were
made without a full go-around, in view of the pressures already
present in the bill
Mr.
market.
Rouse pointed out that the projections attached to the
supplementary report now indicate average net borrowed reserves some
what above $400 million for the week ending September 11 and significantly
lower averages for the following two weeks, partly reflecting free re
serves for a few days in
the first
half of the September 25 week.
Although reserve positions were expected to ease further during the
next two weeks in
reflection of a large projected float bulge,
Rouse felt that, in view of the Treasury financing, it
was unlikely
that much could be done to offset this release of reserves.
week in
the month, however,
Mr.
The last
would call for supplying a large volume
of reserves, assuming the continuation of current policy.
Mr. Rouse also mentioned Treasury plans to announce its new
cash financing on Thursday, September 12, with books open Monday,
September 16, and payment on Thursday, September 26.
Market conditions
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suggest that the Treasury might find it
easier to sell securities of
more than one-year maturity than to sell shorter-term issues, he added,
noting that a somewhat bullish atmosphere had developed in
the bond
market due to such influences as the lessened optimism on the business
outlook,
concern over the outlook for some foreign currencies, and
testimony before the Byrd Committee that had been interpreted to suggest
that interest rates may be near a peak.
These changed expectations
would help the market to absorb the large scheduled corporate and
municipal offerings in
the next few weeks as well as the proposed
Treasury offering.
At the conclusion of Mr.
if
Rouse's remarks,
Mr.
Balderston asked
the March 1958 tax bills were in supply or were being pressed on the
market.
Mr. Rouse replied that there were some March tax bills around
but that they were not being pushed; evidently part of the issue that
was loosely held had been distributed.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period August 20
through September 9, 1957, were approved,
ratified, and confirmed.
At Chairman Martin's request, Mr. Young presented a report in
which he compared the strong and soft spots of the economy at present
with the situation of last spring.
His statement was substantially as
follows:
At the last meeting of the Committee, question was
raisea as to how the strong and soft spots of the economy
9/10/57
now compare with the situation of last spring.
In other
words, what significant changes have occurred since last
spring, and what do these changes indicate with respect
to prospective near-term levels of activity? My report
at this meeting will be directed to a capsule considera
tion of this broad question rather than to a specific
summary of the staff memorandum circulated to you in
advance.
The first and most obvious observation to be made
about the economic situation is that activity, domestically
and abroad, continues at high and fairly intensive levels
of resource utilization. Reflecting strong and still
expanding aggregate demand, wholesale prices are up some
what from late spring and consumer prices are up sharply.
Thus, price stability, for which there was some hope by
late spring, has not yet been achieved, particularly at
the consumer level.
Industrial production, which was showing modest down
ward drift during the spring, has since leveled out and is
now possibly showing an uptilt. The current rate of steel
production in relation to capacity holds higher than was
expected last spring for this time of the year and the
order flow is reported to be swelling again. Output of
consumer goods has strengthened, with durable goods pro
duction, which had been declining during the first
half
of the year, showing revival. Average hours worked per
week, seasonally adjusted, have generally shown some rise
from spring hours, whereas hours worked in the spring had
been declining for some months.
Construction activity has generally maintained record
levels since the spring period, as it had earlier. For
two years through the spring, residential construction
activity had been declining and further decline over the
balance of the year was rather widely expected. Since
spring, residential construction activity has leveled out
and then risen some. The building industry now expects
further rise. If there has been any weakening in the
construction area since spring, it has been in the industrial
and commercial construction area, but the indications here
are by no means clear.
Last spring, business plant and equipment expenditures
rising, though at a much reduced
were thought to be still
Still some further rise was expected, at least through
rate.
Information now available points to a leveling
the summer.
quarter,
out in the total of these outlays since the first
with the near-term prospect for the, to continue level.
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New orders in durable manufacturing, which reflect adjustment
in business plant and equipment expenditures as well as other
influences, were declining last spring and had been for
several months. Since June, they have been stable about 7
per cent under year-ago levels.
National security expenditures rose over the last fiscal
year, and have risen further since. Recently cutbacks have
been announced in defense outlay schedules and further sizable
cutbacks will be required to bring defense outlays within
budget estimate figures.
The immediate background of business inventory spending
last spring was one of abrupt leveling off following two years
of substantial buildup. This adjustment was in recognition
of easier supply conditions and the large stocks in hand.
With these conditions continuing,
business inventory spending
has since been held in close relationship with current sales,
with only modest further growth in holdings.
Consumer spending for goods last spring also had an in
mediate background of leveling out.
Consumer nondurable goods
buying was showing some buoyancy, but purchasing of household
durables was reduced; and buying of automobiles was running
below industry expectations. With further rise in personal
income since mid-spring, consumer buying of nondurable goods
has picked up strikingly further, demand for household durables
has shifted from softness to fair strength, and automobile
demand, though supported by credit purchases more than any
other year at this time, has held up much better than ex
pected.
Car buyers on credit during the 1954-55 new car sales
bulge are becoming debt free in increasing numbers, and the
automobile industry is looking forward to an active replace
ment demand from these car owners to support new model
introductions this fall.
Foreign demand for U. S. goods as reflected in exports,
though reduced from record levels reached earlier in the year,
in consequence of lower petroleum shipments, appears from
latest reports to be holding not too far below the high level
reached in the first quarter.
Reflecting shifting supply-demand relationships in
particular markets, price changes for basic industrial
materials have remained selective.
In nonferrous metals
markets, weakness manifest in the spring and before has
In finished goods markets, recent price increases
continued.
have probably been more numerous than in the spring, partly
because of the recent increase in steel prices. They have
not, however, been as widespread nor as large as in comparable
months of last year. Prices of grain crops were weak in the
spring and have weakened further since. Prices of meat
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animals were strong in the spring and have strengthened
further since.
Financially, aggregate credit and capital demands
have continued to expand, and, with restriction on bank
credit expansion, have intensified money and capital
market pressures. Market interest rates since last spring
have risen appreciably further--to a point, in fact, where
they are pressing against levels prevailing in 1929. This
development, together with uncertainties characteristic of
the period of the year as well as special uncertainties
arising at this time, has precipitated in recent weeks an
abrupt re-evaluation of stock market yields and prices in
comparison with those of alternative investments. Last
spring rebound of business optimism, after an early-in
year wave of pessimism, was finding expression in rising
stock prices and further declines in already low stock
yields.
Last spring, business failures were at high postwar
levels and the background for over a year had been one of
steady rise.
Similarly, new incorporations were low, and
had a background of steady decline.
Both of these series
have shown positive reversal since spring,
Reflecting System policy, monetary expansion has been
virtually absent since the spring. In early months of the
year it had only been very modest. Another development
since spring has been a slackening in the rise of money
turnover. For banks, other financial institutions, and
tighter liquidity
large business corporations, a still
position clearly obtains now than in the spring.
In Europe since spring, inflationary trends and foreign
exchange market disequilibria have moved into a critical
phase, with new or additional monetary restraints introduced
in various countries and with further appreciable increase in
market interest rates in all of them.
Although the money surface of the economy appears more
disturbed than in the spring, the underlying economic situa
tion does not differ enough from the spring to suggest
prospects other than continuation of offsetting adjustments,
at high levels of activity. Some inflationary symptoms
persist but modest growth in total real output still appears
to be a feature of the over-all developments. There is
clearly no formation of forces indicative of imminent up
Neither does there ap
surge of general demand pressures.
pear to be present a combination of developments portentous
Should strength recently
of general downward adjustment.
manifest in consumer markets be extended, strengthening of
demand in semi-finished and primary material marketsmight
well be expected as a secondary response.
With capacity in
major material and manufacturing lines now well expandedand so temporarily a restraint on new business investment
and with restrictive credit conditions continuing, the re
sponse of industrial suppliers to stronger demand might
assume characteristics more overtly competitive in price
terms than has been witnessed for some time.
Such a develop
ment would signalize a breaking up of inflationary clouds.
There are competent business observers, especially in the
financial community, who are inclined to the belief that major
economic forces are shaping toward a downward drift ahead of
general activity. These observers emphasize:
(1) the cumula
tive inhibiting effects of monetary restraints on credit
financed investment; (2) a high and inflexible industrial cost
structure; (3) a cumulating pressure of excess capacity on
markets for industrial materials and fabricated commodities
resulting from the swollen volume of business investment of
recent years; (4) the prospect of a significant reduction in
national defense expenditures during the current fiscal year;
and (5) a developing psychology of gloom in high business
places. This prognosis, which underlies some current pessimism
in "informed financial circles," seems far out of focus in
terms of the recently developing situation.
At the same time, as we have stressed before, one must
recognize that, considering the complex of forces determining
levels of economic activity, any prognosis of future prospects
is dated. The economic situation must constantly be followed
very closely, and assessments of it modified in the light of
trends shown by newly available facts.
In response to a question from Mr.
Vardaman as to when reductions
in defense expenditures that were being discussed might become noticeable
in their effects upon the economy, Mr. Young said that he felt the ef
fects would appear almost at once.
The real question, he said, was how
much cutback actually would be effected,
considering all
of the circum
stances; there was much talk of cutbacks, but up to the present time
it
had not been possible to obtain from either the Defense Department
or the Bureau of the Budget any clear schedule of what they might be.
For this reason it
was not possible to evaluate at the present time
9/10/57
their quantitative effects on economic activity.
Mr.
Thomas next made a statement concerning recent credit de
velopments as follows:
Principal developments in financial markets recently
have been
(1) The continued large volume of payments by the
Treasury.
(2)
The continued large volume of new securities of
fered both by corporations and by State and local govern
ments.
(3)
The leveling out of bank credit expansion, reflect
ing a more moderate loan growth than in the two previous
years and further liquidation of Government securities by
banks.
(4)
Some firming of the bond market at the high level
of yields reached earlier, notwithstanding the large
volume of new issues.
(5)
The persistent decline in stock prices with light
trading.
(6)
The continuation of Treasury bill rates at slightly
above the discount rates and the maintenance of yields on
Government securities maturing in 6 months to 4 or 5 years
at around 4 per cent.
Continuation of member bank borrowing at a generally
(7)
high level, even though at times less than was expected,
with city banks showing tight reserve positions.
The continued high level of Treasury expenditures is dis
concerting.
General national security expenditures at an annual
rate $6 or $7 billion above the budgeted figure for this fiscal
year indicate that such spending has been an important expansion
ary force in the economy and also raise questions as to the
future. The first question is whether the level can be effec
tively cut to within the budgetary limits and the second is
what would be the effect on the economy of such a reduction.
If the cut can be effected, it would release resources for other
uses and help to relieve some inflationary pressures. If it
should be accompanied by decreases in other lines of activity,
the result might be a general decline in total activity, but
the need for some reduction is the more serious and more im
mediate cause for concern. One question to which the answer
is not known is to what extent the larger than expected
expenditures reflect rising prices or an expanded program or
to what extent a speed-up of program deliveries, which will
be followed by a decline.
9/10/57
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Large budget expenditures by the Treasury, together
with continued substantial redemptions of savings bonds,
are exerting a drain on the Treasury cash balance and
necessitating frequent borrowing. The rate of spending
must be reduced if the Treasury is to keep its borrowing
within the statutory debt limit.
Business borrowing at city banks has increased less
in the past five weeks than in the same period of other
recent years--a little over $300 million, on the basis of
partial figures for the latest week, compared with close
to $600 million in 1956 and also in 1955. The increase
since the end of May, including this year's large borrowing
in June, has also been less than in the two previous years.
Corporate borrowing in the capital market, however, has
been very large, and some of these funds have gone into
the payment of bank loans. It appears that in the aggregate
business has received a substantial amount of credit. In
addition to the very heavy volume of new issues being offered
in September, the amount scheduled for October is also large.
Banks have tended to reduce their holdings of Government
securities in recent weeks, notwithstanding important participa
tion by banks in underwriting new Treasury cash-raising issues.
Total loans and investments of city banks have shown little
net
change during the past three months.
Demand deposits adjusted, after increasing more than
seasonally in June and July, have apparently shown a marked
decline since the end of July. Little growth, on a seasonally
adjusted basis, has occurred since last spring.
Bank reserve needs have conformed closely to the broad
seasonal pattern in recent weeks. Net borrowed reserves
averaged about $470 million in August, compared with $350
million in July. The country-wide average has been running
less than S4OO million during the past week, with reserve
demands over the Labor Day holiday being somewhat less than
usual. Country banks have been able to reduce their borrow
ings and increase their excess reserves, but city banks
currently are under a considerable amount of pressure with a
rather large amount of borrowing and relatively small amounts
of excess reserves.
The tight reserve situation at city banks and attempts by
corporations and others to obtain cash for mid-September tax,
dividend, and other payments have kept the bill market under
considerable pressure during the last few days. This is a
period when a high degree of liquidity is required in the
money market. For this reason it may be difficult for the
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System to sell bills to prevent a further drop in net
borrowed reserves in the next two weeks when float will
be temporarily high.
On the basis of the usual seasonal pattern, early in
October the System may need to purchase about $300 million
of securities, plus any amounts that may be sold in the
next week, to keep net borrowed reserves close to the $500
million level. Little additional Federal Reserve credit
would be needed in November, but large amounts would be
necessary in December.
If a more than seasonal growth in
the money supply should occur, demands for Reserve Bank
credit will be larger than those projected.
In that event
a policy decision will need to be made as to how the
additional reserves will be supplied--whether to require
banks to borrow more from the Federal Reserve Banks, or to
relieve the pressure through additional open market pur
chases.
Current developments seem to call for neither a
further tightening nor any relaxation of System policy.
Chairman Martin then called upon Mr.
business activity and credit policy in
Hayes who commented on
substantially the following
terms
There has been no material change in over-all business
activity since the last meeting, or, in fact, for the past
several months.
The economy is
still characterized by
stability of production and employment and by well-sustained
On the other and, there are no visible
consumer demand.
signs pointing to the strong upsurge in the fourth quarter
which had been so widely expected early in the summer.
Business sentiment, in contrast with current business
statistics, has undergone a perceptible change in recent
weeks in the direction of greater caution or even pessi
Apparently this can be traced to (1) recognition
mism.
of the growing gap between industrial capacity and actual
output; (2) the fact that production has been maintained
in the face of declining backlogs of unfilled orders and
some accumulation of inventories at the manufacturing
level; (3) prospective cuts in defense expenditures; and
(4) increased concern over the position of various foreign
The downward trend in stock prices may reflect
currencies.
similar influences and has in turn contributed to the
changed climate of business opinion.
9/10/57
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It seems unlikely that defense spending can actually
be reduced rapidly and by substantial amounts. Hence the
influence of this factor, if any, will probably continue
to be mainly on business expectations rather than on visible
statistics over the next several months.
In the area of
plant and equipment outlays, however, there is now a reason
ably clear prospect for a decline in gross expenditures.
The SEC estimates to be released shortly point to a small
decline in the fourth quarter on a seasonally adjusted basisthe first
decrease since the current investment boom began.
These figures are of course expressed in dollars. In terms
of physical volume, the peak of investment in new plant
facilities may already have been passed around the beginning
of this year.
With supplies now ample in most lines, and with the public
showing increasing signs of price consciousness, there seems to
be hope at last of a leveling movement in prices in spite of
the continued influence of some cost-push factors. Food prices,
which have been largely responsible for the rise in consumer
prices in the last month or two, have probably passed their
seasonal peak. The weekly wholesale price index has been
practically unchanged since mid-July.
Although bank credit has expanded somewhat less rapidly in
the last four weeks than a year earlier, the banks continue to
feel heavy pressure for loans, and the substantial reduction in
bank liquidity since a year ago has intensified this pressure.
For example,
New York City banks are now estimated to have
loans equal to 66 per cent of deposits as against 62 per cent a
year earlier.
Demands for funds in the capital markets continue
at a very high level.
The Treasury is expected to borrow about
$3 billion in a cash financing program due to be announced on
Thursday, with the offering on September 16 and payment on
September 26.
As for credit policy, it appears to me that the stability
of the business situation points to the desirability of main
taining about the same degree of restraint as in recent months.
If anything, the signs pointing toward possible weakening of
the boom would suggest a slight relaxing rather than any in
tensification of restraint, but I think it would be confusing
to the market to give any sign of relaxation so soon after the
recent series of discount rate increases.
It would be premature,
too, to lessen the degree of real restraint just as we seem to
have a fair chance of realizing the price stability which we
have worked so hard to achieve by maintaining a vigorously
restrictive policy through these recent months of sideways
motion in the physical output of the economy.
On the other
9/10/57
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hand, we should certainly provide reserves without
reluctance or delay as they are required to meet
seasonal requirements later this autumn, as well as
to enable the banks to underwrite the Treasury's
prospective offering later this month. In so far as
the next two weeks are concerned, the influence of
float and return currency movements may make it neces
sary for the System Account to do some selling, but if
current projections are borne out, sizable purchases
will be called for in the week of October 2. It is
perhaps worth noting that we are entering a period when
normal seasonal pressures are likely to reinforce our
policy of restraint. At such a time, as we noted in
the autumn of 1956, a given level of net borrowed re
serves may well mean a substantially tighter money
market atmosphere than would be the case under other
circumstances, and this should be doubly true this year
after the substantial further loss of liquidity by
banks and corporations in the past year. Thus I think
it would be well for the Manager to have ample leeway
to maintain an even keel without being tied too closely
to any target figure for net borrowed reserves. And
while $00 to $500 million of net borrowed reserves was
considered a reasonable range at the last meeting, it
might turn out that the same degree of real tightness
could be achieved in the coming weeks with a somewhat
lower figure.
Mr. Johns said that he had come to this meeting prepared to
take the position already suggested in Mr. Thomas' concluding remarks
and reinforced by Mr. Hayes in his comments, namely, that for the time
being no intensification of credit restraint was indicated and there
was not yet an indication for relaxation. However, there seemed to
be developing in the group with which he regularly discussed open
market matters at the St. Louis Bank a view--as yet a somewhat
minority view--that the time for some relaxation of monetary restraint
might be imminent.
Mr. Johns said that he could not accept that view
at this time and therefore for the immediate future would keep the
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9/10/57
situation about as it has been recently.
There was evidence that
banks were under pressure in many places, he noted, but that was not
true in St. Louis.
However, banks in Memphis were under pressure be
cause of the necessity for financing considerable cotton a few weeks
ago, and in recent days Louisville banks appeared to have been under
considerable pressure and were heavy borrowers.
Mr. Williams said that in the Third District over-all business
was at a high level.
Sentiment was not as good as the statistics and
there were some soft spots, with businessmen somewhat less optimistic
as to prospects for the remainder of the year.
was holding up fairly well.
Total consumer buying
There were reports of pressure on manu
facturers of hard goods and some of them who had lost dealer accounts
had established distribution outlets of their own.
Mr. Williams
repeated that the views of business leaders on the whole were less
optimistic than a few weeks ago.
The outlook for the steel industry
showed little change recently; textile operations were slow but the
decline that had been noted for some time seemed to be leveling out.
Smaller manufacturers felt that the real squeeze was on in terms of
profits.
With respect to banking, Mr. Williams reported that loan
demands at Third District reporting member banks in August were some
what less than nationally and total loans of district banks declined.
Deposits also were off somewhat.
Borrowings by member banks continued
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9/10/57
at a high level although there had been some significant shifts in
the sources from which the banks were obtaining funds in connection
with changes in
August.
the discount rates and rates on Federal funds during
Mr. Williams stated that he would suggest no changes in the
Committee's policy at this time.
Mr. Fulton described activity in the Cleveland District as
continuing at a high rate.
The pickup in the steel industry had not
been as great as had been hoped, partly because of the later model
changeover for the automobile industry this year than in 1956.
Also,
the automobile industry seemed to be shortening its projections for
steel needs as compared with last year, waiting to see how the new
model automobiles would sell before placing orders ahead.
in
Softening
the demand for oil goods and plumbing equipment had occurred,
and
appliance manufacturers had reduced their takings of sheet steel and
The railroad industry was taking
also scheduled lay-offs recently.
large amounts of steel.
Businessmen by and large seemed optimistic
that a pickup would occur later in the year.
dustry was shipping more than it
was receiving in new orders, but
this was not considered undesirable since it
improve its
delivery schedule.
The machine tool in
Mr.
helped the industry to
Fulton reported that, contrary
to a statement of a New York banker reported by Mr. Thomas,
there
was some demand for term loans in the Cleveland District where firms
preferred to obtain credit through that source rather than to go into
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9/10/57
the capital markets.
in
employment.
There had been a slight contraseasonal decline
Price changes were continuing with roller bearings,
aluminum, and rubber showing increases.
Mr.
Fulton stated that his conclusion was that the same degree
of restraint on credit expansion that had existed should be continued
for the time being.
There should be no relaxation.
gradual relaxation would be a mistake; if
policy,
it
would be preferable to do it
positive impact.
it
He felt
that any
became necessary to change
in a way that would have a
He suggested a continuation of the present degree
of restraint and of the present policy directive of the Committee.
Mr.
Robertson said that he was somewhat disturbed in reading
the staff economic report prepared for this meeting, showing that net
borrowed reserves had averaged under $400 million since the meeting
of the Committee on August 20.
This confirmed the feeling of dis
quietude that he had had over recent weeks in
reading the daily reports
on the market situation that are obtained from the desk.
He then went
on to make a statement substantially as follows:
My concern about recent reserve developments stems from
I agree wholeheartedly with Mr. Young's
two reasons: first,
statement this morning that the current business and economic
situation remains strong; secondly, I feel that the net bor
our
rowed reserve figure, despite its shortcomings, is still
best indicator of over-all credit and money market conditions.
The task of the Manager of the Account is to carry out
the will of the majority of the Open Market Committee, even
though he may think that the minority point of view is more
And yet, it seems to me that the account has not only
sound.
been aiming at the very bottom, if not below, the broad range
of net borrowed reserves desired by the majority at our last
9/10/57
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meeting, but that it has also been reluctant to take offset
ting action when the actual net borrowed reserve figures
have continued to be below those projected.
I have this feeling even though I recognize, first, that
in view of continuing Treasury financing problems the account
was given a wide range of latitude at our last meeting, and
second, that part of the difference between actual and pro
jected net borrowed reserves in recent weeks has been due to
unforeseeable changes and revisions in certain factors affect
ing reserves. Nevertheless, I continue to be struck by the
inactivity of the account when net borrowed reserves fall
below the general target range in contrast to the rapid cor
rective action generally taken when these reserves go above
the target.
Turning from the past to the future, assuming there was
some justification for the view that when short-term interest
rates were rising rapidly, as they were a few weeks ago, a
somewhat lower level of net borrowed reserves than our target
of from $500 to $600 million was consistent with the main
tenance of the prescribed degree of restraint; now that the
rise in interest rates has slackened somewhat, a level of
net borrowed reserves of under $l00 million is not suffi
ciently restrictive.
The delayed and inadequate action of the desk in off
setting decreases in the average level of net borrowed re
serves since the last meeting of this Committee is particularly
troublesome because of the imminence of another Treasury cash
financing and the temporary further drop in net borrowed re
serves that will occur in the weeks immediately ahead as the
result mainly of the usual mid-monthly increase in float.
Therefore, I would strongly urge that the Manager of the
Account do all that he can, both before and after the an
nouncement of the financing, to keep net borrowed reserves
within the range prescribed,
Mr. Rouse stated that it
was quite clear to him at the August 20
meeting that the majority of the Committee was aiming at net borrowed re
serves in
the $500-600 million range, whereas the operations had turned
out to be closer to the $400-$500 million range.
This was the result of
the developments that had taken place in the market and in no way re
flected bad faith in attempting to carry out the Committee's directive.
-18-
9/10/57
Mr. Mills stated that, granting that intuition was an un
reliable guide, his intuition told him that Labor Day marked not
only a seasonal turning point but also a turning point in movement
of economic activity that deserved the Committee's attention.
With
the change to a decidedly more pessimistic attitude on the part of
the business community, he believed that the strain of conservatism
that had developed, along with the reduced corporate and commerical
bank liquidity that was so much in evidence, could in a very real
way take over some of the System's responsibilities for exerting
restraint over general economic activity.
On that assumption, it
would be logical for the Committee not to aim at too high a target
level of negative free reserves, Mr. Mills said, and a level of
around $400 million should be adequate to carry out the System's
policy of general credit restraint on commercial bank credit expan
sion.
Along that line, he noted a movement of the supply of reserves
out of the central reserve bank cities and to a lesser extent out of
reserve city bank cities to country areas as harvests are completed.
The proceeds of harvests had lodged in banks in these country areas
and, having lodged there, did not move with readiness back into the
money market areas.
That being the case, where the total supply of
reserves might seem abundant, there could still be a starving of
reserves at the city bank levels.
Consequently,
Mills felt that
Mr.
allowing some reserve leniency at the central reserve city bank level
-19
9/10/57
should not touch off an undesirable expansion of bank credit.
There
fore, his thinking had brought him to the conclusion that for the
present the System could accept a lower level of negative free reserves
without losing the tangible degree of credit restraint that is
to the maintenance of economic stability.
essential
The great question in his
mind was whether the credit resources and economic factors that might
be disengaged from the capital expansion program would move through the
process of a rolling readjustment to employment in other areas, such
as housing, in a manner that would maintain a stable, high level of
economic activity.
Mr. Vardaman complimented Messrs. Young and Thomas for the
clear and comprehensive reports they had presented to the Committee
this morning on the economic and credit situation. His view was that
the Committee should make no change in its policy or in the general
operations to carry out that policy during the next three-week period.
He agreed with the suggestion by Mr.
Hayes that the trading desk
should have considerable leeway in its operations pursuant to the
Committee's policy directive.
Mr. Vardaman emphasized, however, that
he felt transactions for the System Open Market Account always should
be confined to the shortest maturity Treasury bills.
Mr. Leach reported that the Fifth District economy was dis
playing no strong tendency toward change in
either direction.
principal industries were continuing at their summer pace.
The
Bituminous
-20
9/10/57
coal production was still
expected to exceed 1956 although by a
smaller margin than was earlier thought.
Hampton Roads and Baltimore ports in
Coal loadings through
early August were 13 per cent
ahead of last year but were expected to decline in
In response to a later question by Mr.
Vardaman,
the coming months.
Mr. Leach said that
a substantial part of coal shipped from Fifth District ports was
destined for Western Europe.
With reference to the textile industry, Mr.
the long expected upturn was still
and 5-day weeks in
Despite cutbacks to 4
most mills, production was still
Defense Department cutbacks in
been announced,
awaited.
Leach said that
in line with sales.
the number of civilian employees had
he noted, but they did not bulk large relative to
total employment of that type in
the Fifth District.
scattered reports of declines in
employment by Government contractors
whose contracts had been curtailed.
There were
More than offsetting these cut
backs was the recent award to the Newport News Shipbuilding and Dry
Dock Company of the construction of what was expected to be the
largest ship ever built, namely, a $314 million atomic-powered carrier.
Recent rains had helped Fifth District crops,
but good tobacco prices
were only a slight offset to the smaller crop grown on the curtailed
acreage.
In so far as the national economy was concerned, Mr. Leach
said that he saw no significant shift in either direction although
he did sense some change in expectations for the rest of this year.
-21
9/10/57
There now seemed to be no boom psychology, and fewer people expected
a sizeable upsurge in business this fall.
prices were still
On the other hand,
retail
increasing and expectations of continued increases
over the long run did not seem to have diminished.
Mr. Leach commented
on a Washington newsletter which predicted that prices would be 15 per
cent higher in 10 years and 50 per cent higher in
recommended certain hedges against inflation.
25 years and which
While coming weeks might
show some delayed effects of the System's past actions toward restrain
ing credit expansion, for the time being he would oppose any relaxation
in
the policy of credit restraint.
He felt that the Committee should
aim at the same degree of tightness that had been its
objective recently,
and he suggested that as a benchmark the objective might be for net
borrowed reserves of around $150 million during the next three weeks.
Mr. Leedy said that although he had been away from the Tenth
District during most of the period since the August 20 meeting, the
statistics indicated no material change in district conditions during
that period.
Some increase in business loans was occurring a little
later this year than was ordinarily the case, presumably because of
the later harvest.
Mr. Leedy referred to the comment Mr.
made as to the loan-deposit ratio of New York banks,
Hayes had
stating that in
contrast with the New York ratio of around 66 per cent,
Tenth District
banks now had loans equal approximately to 43 per cent of their depositsonly slightly higher than a year ago.
-22
9/10/57
Mr. Leedy felt
that the general picture required a continua
tion of the policy the Committee had been following and said he would
subscribe to the view that for the next three weeks we should attempt
to apply the degree of restraint that had been aimed for during the
preceding three weeks.
Like Governor Robertson, he had observed that
the target of net borrowed reserves had been missed during this period,
as he had understood the discussion at the August 20 meeting, but he
was under the impression that this was the result of the difficulties
in making accurate projections of factors that influenced reserves.
In any case, he could see no reason for a change now in the course the
Committee had been following.
Mr. Allen concurred in Mr. Vardaman's comment on the reports
of Messrs. Young and Thomas.
He went on to say that he had observed
growing signs of uneasiness in business sentiment during the past
month,
following the shifts of the past year from optimism to pessi
mism and back again.
He found it
hard to rationalize the recent
tendency toward uneasiness with actual developments.
Perhaps the
best explanation was there had been a sobering recognition on the
part of the business community that a great deal of the good business
of the past few years had been financed by borrowing and that presently
indebtedness was heavy in almost every sector of the economy.
Mr.
Allen felt that this situation might at last be affecting business
sentiment.
pressing.
Recent developments otherwise could not be called de
9/10/57
-23Mr. Allen recalled that at the preceding meeting he had
mentioned the renewed uptrend in retail sales.
Since then, figures
on sales at department stores had been well maintained both in the
Seventh District and in the nation as a whole.
Sears, Roebuck and
Company had reported that August was one of the best months the
company had ever had.
The whole picture indicated that consumers
had increased their buying this year in line with the 6 per cent
rise in their incomes.
The current caution on the part of business
men might reflect the difficulty in employing profitably the enlarged
productive facilities which had been constructed with the help of
large sums of borrowed money.
Mr.
Allen then reported on the agricultural situation, noting
that prices received by farmers in mid-August averaged 5 per cent above
the year-earlier level.
Meat animals had led the advance, while feed
grain prices were substantially lower than last year.
That situation
should result in increased production of meat animals.
With respect to the automobile industry, Mr. Allen said that he
had obtained information from Detroit yesterday that inventories of new
finished automobiles totaled 832,000 units on September 1, including
20,000 of the new Edsels.
but in
day,
The figure of 812,000 of 1957 models was high,
the last ten days of August sales averaged over 20,000 units a
and if
this rate were continued it would help reduce the stocks
substantially.
The industry was generally optimistic on prospects for
9/10/57
-24
cleaning up current year models.
Output of new cars for the fourth
quarter of this year was expected to total 1,600,000 units--the same
as in the final quarter of 1956.
Turning to bank credit, Mr. Allen said that business loans at
reporting Seventh District banks increased only $3 million in August
this year compared with $l3 million a year ago.
Demand for loans may
be less, but Mr. Allen felt that banker resistance to increasing loans
was the more important factor.
He noted reports from bankers that the
proceeds of new security issues were being used in many cases to repay
bank loans.
Mr. Allen then presented the results of a survey on the
mortgage situation made in the Seventh District during the past week.
It did not appear, he said, that recent changes in FHA terms were
proving to be a stimulus to mortgage lending, although a month's
experience coming at a time when building activity was beginning to
taper off could not be considered as conclusive.
Since the new FHA
rates permitting a total charge to the borrower of 5-3/4 per cent
went into effect on August 6, there had been a further tightening in
the availability of mortgage money.
The net return on FHA-insured
loans (allowing for a discount of 2 points) would provide a yield of
about 4.9
5
Allen
per cent on a 25-year loan, which Mr.
felt was not
quite enough to make such loans attractive in comparison with yields
on some of the recent high grade bond issues.
Furthermore, lending
had been highly selective and some of the institutional lenders had
9/10/57
-25
refused to go along on the lower FHA down payments.
Mr. Allen also
said that any change in the flow of new corporate issues could alter
this mortgage situation markedly,
particularly since there was some
evidence that cash reserves were being accumulated which could be put
to work quickly if it became apparent that the rise in interest rates
was reaching a crest.
Another factor influencing the situation was
the upward movement in rates being paid on savings.
associations were paying 3-1/2 to 4
Savings and loan
per cent and they apparently needed
a 2 per cent spread between those rates and the yields on new invest
ments.
As to monetary policy, Mr. Allen said he believed the Committee
should continue the degree of restraint it had sought recently as far
as that was possible.
He referred to Mr. Rouse's earlier comment that
the desk would try to sell Treasury bills during the next few days and
stated that he did not know what more it
could do.
The Committee
talked about giving the desk leeway, Mr. Allen said, and of course the
desk must have leeway.
He believed, however, that the desk had tended
to recognize that leeway more on the down side than on the up side, and
he thought there were times when it could lean in the direction of
having larger rather than smaller net borrowed reserves than the targets
indicated by the Committee.
Mr.
Deming said that activity in the Ninth District seemed to
be picking up a little
with the gain somewhat more than would be
9/10/57
-26
expected seasonally.
Expectations for the fourth quarter were for a
continuation of this kind of record, that is,
better than the regular seasonal rise.
lines was stronger,
for something a shade
Employment
and retail sales continued good.
in nonagricultural.
Iron mining
activity was high, but nonferrous mining continued weak as did lumber
production.
The farm picture continued good with income rising.
Livestock producers had had the best year in
1957 since 1951; ranges
and pastures had been good all season and winter feed supplies would
be ample.
Business loans in the Ninth District had dropped slightly
in the past three weeks and total loan growth had moderated; deposit
growth also had been less than in the comparable period of last year.
All of this added up to a picture of no strong rise in credit or in
the economic situation in the forthcoming period, Mr. Deming said,
and although there was no sign of any great weakness, his conclusion
was that the Committee's present policy should be renewed, aiming at
substantially the same degree of restraint that had been had during
the past three weeks.
Mr. Mangels said that the Twelfth District economy had not shown
much change in
recent weeks.
Nonferrous metals mining had been curtailed
with some of the smaller operations having shut down and others having
shortened their workweek.
would be reduced in
Aluminum production in
September because of the power shortage and some
permanent shutdown might result in
power problem.
the Pacific Northwest
aluminum production because of the
The lumber industry was still
feeling a pinch.
-27
9/10/57
Department store and automobile sales were holding about even, but
department store managers were hard put to maintain sales volume at
the existing level and were using special sales and other devices.
Steel output in the Twelfth District area declined from 97 per cent
of capacity in
June to 91 per cent in
July.
Loans of reporting member
banks in the Twelfth District during the four weeks ending August 28
increased $49 million, Mr.
Mangels stated, the same as in the
corresponding period of 1956.
Commercial and industrial loans and
consumer loans had increased, while real estate and agricultural
loans declined during this period.
Demand deposits declined during
recent weeks while savings deposits continued to increase.
Borrowings
of Twelfth District banks continued moderate.
Mr. Mangels stated that the over-all situation as a whole con
tinued somewhat mixed with no definite trend either up or down.
economy is
The
not experiencing over-all pressures of demand in relation
to productive capacity that might force prices up further, and it has
virtually no unemployment.
other is
Until a tendency in
one direction or the
more clearly discernible he would suggest no change in the
Committee's directive or in
the general program of credit restraint,
and during the next three weeks would aim for net borrowed reserves
at about the $400 million level.
He would not be inclined to aim at
a figure as high as $500 million.
Not much change had taken place recently in
situation, Mr.
Irons said.
the Dallas District
The petroleum situation continued about as
-28
9/10/57
he had reported it at recent meetings.
The agricultural situation
was favorable with good grain crops, a good outlook for cotton
production, and favorable livestock prices.
Agriculture was in the
best position that it had been in for several years.
was holding well and employment was at record levels.
declined in August.
Retail trade
Construction
Automobile sales continued fairly good and for
the year to date were about 10 per cent ahead of a year ago.
Selling
activity was intensive, Mr. Irons said, but there was not much sign
of price cutting.
weeks,
Bank loans had increased moderately during recent
compared with a slight decline a year ago.
Bankers with whom
he had talked recently reported that loan demand continued very strong
and that this included considerable demand for term loans.
Member
banks were borrowing from the Dallas Reserve Bank more than they had
been a short time ago, with discounts in
the $28-$35 million range,
compared with a $15-$18 million range prior to ten days ago.
Borrow
ings were mostly by reserve city banks where the reserve position had
been negative,
while country banks were continuing to have reserves
around 10 per cent in
excess of requirements.
With respect to the "pessimism" reported among businessmen, Mr.
Irons said that he could see nothing in the Dallas District that could
be considered as pessimistic.
Bankers were more cautious than they had
been a few months ago but he had not found pessimism.
The factors
that perhaps justified this feeling of caution included:
(1)
an
9/10/57
-29
assumption that the Federal Reserve would continue to maintain a
policy of firm restraint and for this reason bankers generally could
see little chance of a breakthrough on the up side, and (2) bankers
were anticipating and were hoping that there might be a substantial
cutback in Federal Government expenditures--this feeling having de
veloped as a result of press comments emanating from Washington in
recent months.
As far as credit policy for the next three weeks was concerned,
Mr. Irons said that he would like to have the Committee maintain a
policy of firm restraint.
There was greater risk that the Committee
might ease off too soon rather than maintain firm restraint too long,
he felt.
While he did not place much reliance on any figure of net
borrowed reserves, if
in
he were to name one he would prefer something
the neighborhood of $500 million.
He would expect that discounts
would continue around a billion dollars.
He would hope that the short
term rate would move around the discount rate.
Mr.
Irons said that he
would generally prefer to be on the side of firm restraint over the
next three-week period, to wait before moving on the side of easing,
and to resolve doubts on the side of restraint.
Mr.
in
Erickson stated that no significant changes had occurred
the First District economic situation in recent weeks.
sentiment was considerably more cautious than it
Business
had been earlier.
Nonfarm employment during July was higher than in June.
Shoe produc
tion for the first seven months of 1957 was down 3.5 per cent from a
-30
9/10/57
year ago, but 1956 had been an excellent year.
The newspaper strike
in
Boston had affected department store sales unfavorably,
it
was over some signs of pickup were being observed.
contract awards turned up in
but now
Construction
July and were ahead of July a year ago.
Mutual savings bank deposits in
the First District were still
creasing but at a slower pace than they had been earlier.
being paid on savings deposits were tending higher.
in
Rates
The discount
window at the Boston Reserve Bank was being used less actively than
it
had been earlier.
The loan deposit ratios of Boston banks were
fairly high, as had been indicated by Mr.
Mr.
Hayes for New York banks.
Erickson expressed the view that this was partly the result of a
decline in deposits rather than an expansion in their loans.
As to
Committee policy, Mr. Erickson said that he would continue the same
firm restraint during the next three weeks that had been followed in
recent weeks,
neither intensifying nor relaxing during this period.
Mr. Szymczak said that while he was not as certain as Mr.
Mills
seemed to be that there had been a change in the economic situation, he
believed that the Committee should lean in the direction of a $400
$500 million range in net borrowed reserves during the next three weeks.
This was especially true because of developing seasonal needs and be
cause of the Treasury financing that would be needed during the remainder
of this year.
in
Mr.
Szymczak felt
administering monetary policy,
were more difficult when it
that it
was necessary to be cautious
recognizing that many of the problems
came to carrying out operations than they
9/10/57
-31
appeared to be in
factors came in
discussions at meetings of the Committee.
to affect the tone of the market.
Different
In a period of re
duced negative free reserves, there might well be other factors in the
picture that would result in
reserves indicated.
a tighter situation than the figures of
For this reason, Mr. Szymczak said that he would
give the Manager of the System Account as much leeway as possible in
carrying out operations pursuant to the Committee's general policy,
with the general thought that it
would be desirable to aim at a degree
of restraint that would be indicated by net borrowed reserves around
$400 million.
Mr.
Balderston noted that we had heard conflicting testimony
that the rolling adjustment still
continued to roll and that loan
demand was accelerating at a lesser pace than was true a year ago,
even though part of the explanation was that borrowers had tapped the
capital markets in
order to obtain money to pay off bank loans.
His
concern about this situation stemmed from his inability to discern how
much impact the cutbacks in defense expenditures might have on the
economy.
He recalled Mr. Thomas' observation that in the spring of
1953 the business decline came from cutbacks in defense expenditures
of perhaps $12 billion.
Whatever the reasons, it appears that current defense expendi
tures have gotten out of hand and that to get back to the level budgeted
will require a drastic reduction.
As part of such a cutback, the
Defense Department might restrict its
advance payments to contractors
9/10/57
-32
and thus throw a greater loan demand on the commercial banks.
In general, Mr. Balderston said that the fall outlook seemed
to him to be good.
He would suggest net borrowed reserves in the
$l00-$500 million range during the next several weeks, realizing that
the trading desk might have difficulty in getting above the $lOO mil
lion level during the next two weeks.
Mr. Balderston then brought up the question how the desk would
take care of dealer needs during the substantial forthcoming Treasury
financing and at the same time work toward getting net borrowed reserves
into the range indicated at this meeting.
He referred to a comment by
a Government securities dealer to the effect that sometimes dealers
were able to get repurchase agreements easily while at other times they
were made available by the System account only with reluctance.
The
dealer also observed that in some cases it took only a few minutes to
know whether repurchase agreements were available, whereas in other
cases such information could not be obtained for perhaps three hours.
Mr. Rouse said that he did not anticipate a need for repurchase
agreements during this Treasury financing.
Funds should be ample
throughout the period, and he did not contemplate making repurchase
agreements available.
With respect to letting dealers know when re
purchase agreements would be used, Mr. Rouse commented that it was
customary to indicate by noon or shortly after whether the System
account wished to make funds available on any given day through this
means.
This gave dealers time to scout around the country during the
9/10/57
-33
morning hours to find out whether funds were available elsewhere, and
it was usually noon or a little later before the desk had a real indi
cation of the pressure that existed.
Dealers would, of course, be
glad to be assured at the beginning of the day that funds were avail
able at the repurchase rate, and, in some instances, when the account
knew at the beginning of the day that it would wish to put funds into
the market through repurchase agreements, a suggestion that repurchase
agreements would be available might be given to the dealers in initial
daily contacts.
However,
Mr. Rouse pointed out that making funds avail
able in this manner was at the initiative of the System and that a
procedure which gave the dealers the initiative would mean that the
System account would have to take offsetting action at times.
At the conclusion of a discussion of the question raised by Mr.
Balderston, Mr.
Rouse said that he had discussed the general use of re
purchase agreements with dealers along the foregoing lines and that he
believed there was a fairly good understanding of the procedure followed
by the trading desk and of the reasons for that procedure.
Chairman Martin stated that it seemed clear that the consensus
at today's meeting was that there should be no change in the Committee's
policy and no change in the wording of the directive at this time.
He
noted that most of the discussion at meetings of the Committee since
early July had been about execution of Committee policy rather than about
policy itself.
Chairman Martin said that on returning from a brief
vacation, he sensed a feeling of real encouragement as to the progress
-34
9/10/57
the System was making.
He also was encouraged with the discussions
that had been taking place in these meetings:
all who were participa
ting were learning a great deal and getting a better grasp of the
problems the Federal Reserve was dealing with.
He could not help but
be conscious of the load that the Committee placed on the Manager of
the System Account, he said, noting that the Committee issued a
directive and then expected the Manager to keep in mind the majority
and minority views expressed.
After stating that he had no real idea whether business was
going up or down at the moment,
the Chairman commented that he had
been fishing during the past few days and that the thought had occurred
to him that "the System has the fish on the hook."
Its policy of re
straint is now understood from one end of the country to the other.
However,
it
would be a mistake for the System to hold so tightly on
the hook that the line would snap, and this could happen if
the tight
ness were so great as to embarrass the Treasury seriously.
Chairman
Martin said he did not think the Committee should minimize the diffi
culties that were facing the Treasury.
change in
This had nothing to do with a
general policy, he noted, but it
did involve a problem for
the Manager of the System Account who had to carry on operations on
the basis of tone,
color, and feel of the market.
The Chairman would
align himself with the views expressed that there should be no change
in policy at the present time, but it was always necessary to resolve
doubts one way or the other in carrying out Committee policy, and for
9/10/57
-35
the immediate future he would resolve these doubts on the side of ease
rather than tightness.
He felt that the Committee's directive gave
the Manager of the Account a clear indication of its policy but this
did not mean that there would be any inconsistency if some "minor ease"
were permitted during the period of the Treasury's financing.
Chairman Martin noted that some of the comments at this meeting
had referred to a net borrowed reserves target of $4OO million while
others had suggested $500 million.
He thought these differences were
not significant, but he said that it
were to become "sloppy."
Also, it
would be undesirable if
the market
would be a serious mistake if
the
business community were to get the feeling that the Committee's policy
had been changed away from a policy of restraint to one of easesomething that clearly was not contemplated.
The Chairman went on to say that he did not think the problem
of inflation had been licked and he doubted that this would occur until
there had been a modest correction of past excesses.
He did not know
when such a correction would come, but there had been many excesses in
the course of the past eighteen months and adjustments would have to
be made at some point.
When that time arrived, he doubted that the
Federal Reserve would have enough curative powers to arrest the type
of decline that might occur,
although it
could contribute to psychological
aspects of the situation.
As far as the present was concerned, Chairman Martin felt there
had been a distinct gain on the psychological front.
This was reflected
-36
9/10/57
in
the stock market and by Mr.
Irons'
comment that bankers were
cautious partly because they now felt that the Federal Reserve
would maintain a firm policy of restraint, a view that was not
widespread four months ago but which was widely accepted now.
also referred to Mr.
nesses,
Robertson's comment that despite their weak
the net borrowed reserve figures were the best guide to
operations for the System account.
still
He
Chairman Martin stated that he
considered the limitations of the net borrowed reserve figures
to be too great to make them of use as more than a target.
The Com
mittee may have set the wrong target at times, although this was a
matter of judgment.
at this juncture,
The Treasury has a particularly difficult problem
he noted, and its
problems might have been compounded
by the swings in net borrowed reserves.
In concluding his remarks,
the fish was hooked and that it
taut that it
might break.
the Chairman said that he believed
would be a mistake to pull the line so
He would cast his lot on the side of net
borrowed reserves of around $4OO million, using that as a rough target,
rather than the $500-$600 million range, until after the current
Treasury financing was out of the way.
He did not think such a pro
cedure would cause any comment about a change in
the System policy.
Chairman Martin then inquired whether there was any disagreement
with the general policy aims he had stated or whether there were any
suggestions for change in
the Committee's directive.
-37
9/10/57
Mr.
Allen said that he did not see how the Manager of the
System Account could hope to attain a figure of $100 million of net
borrowed reserves over the period of the next two weeks unless there
were unexpected developments; he felt that the Committee should
recognize this in giving its
Mr.
instructions today.
Rouse stated that he too recognized the difficulty of
attaining a $400 million net borrowed reserve figure in this period.
He also reviewed the figures for the past three weeks,
stating that
he felt that Mr. Robertson's earlier comments had indicated a greater
departure from the Committee's target than was actually the case.
Mr.
Hayes said that he felt the point Mr. Allen had made as
to the difficulty of getting net borrowed reserves up to the $400
million level during the next two weeks was important.
The projections
indicated figures of $100 to $200 million during some of this period,
and it
was probable that actual net borrowed reserves would fall short
of the target that had been discussed,
Mr.
thoughts Mr.
Allen said that he also wished to give some support to the
Robertson had expressed that the trading desk seemed more
inclined to resolve doubts toward the minimum of the net borrowed re
serve target rather than toward the maximum
He had been on the wire
during the morning telephone call the past three weeks and early in
that period the System account had purchased acceptances when the
demand was so strong that the rate was lowered.
At times of such
9/10/57
-38
strong demand,
he said, the System might save its
Chairman Martin stated that it
ammunition.
was important that these
matters be discussed freely and fully at any meeting of the Com
mittee.
He wanted Mr.
Rouse to feel free to bring up questions or
comments as to the operations of the trading desk.
Mr.
Rouse stated that he would like to bring up a question
concerning the rate on repurchase agreements.
ments should be needed in the next three weeks,
If
repurchase agree
he had in
mind the
desirability of increasing this rate from 3-1/2 per cent to 3-5/8
per cent in
order to break the connection between the discount rate
and the rate on repurchase agreements so as to avoid the kind of box
the System found itself in
increase.
At that time,
prior to the most recent discount rate
the rate on Federal Reserve repurchase agree
ments was so attractive when compared with rates on any other financing
that dealers naturally were tempted to turn to the Reserve Bank first.
At the same time,
Mr.
Rouse said he had hesitated to increase th
re
purchase rate since such action might have been viewed as a signal
that the discount rate would soon be increased.
would still
be attractive in
term Governments,
to finance.
A 3-5/8 per cent rate
comparison with current yields on short
and would be in
line with rates dealers are paying
In response to a question from Mr.
Mills as to whether
such an increase would discriminate against nonbank dealers in Govern
ment securities,
Mr.
Rouse indicated that he did not think this would
be the case, noting that banks operating dealer departments do not
9/10/57
-39
borrow specifically to finance that department and, in any event,
bank access to the discount window had been somewhat limited under
the discount policy currently being followed,
Mr.
Rouse emphasized
that he did not anticipate using repurchase agreements before the
next meeting of the Committee,
the end of the period and it
in rate suggested.
might then be desirable to make the change
During a brief discussion of this question Chairman
Martin suggested that, if
it
although there might be some use toward
Mr. Rouse anticipated a change in
the rate,
might be desirable to have an informal telephone discussion of the
matter before such a change was made, and it
was understood that Mr.
Rouse would bring up the question on the morning call the day before
he contemplated changing the rate.
Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal Re
serve Bank of New York until otherwise
directed by the Committee
(1)
To make such purchases, sales, or exchanges (in
cluding replacement of maturing securities, and allowing
maturities to run off without replacement) for the System
open market account in the open market or, in the case of
maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective
economic conditions and the general credit situation of the
country, with a view (a) to relating the supply of funds in
the market to the needs of commerce and business, (b) to
restraining inflationary developments in the interest of
sustainable economic growth while recognizing uncertainties
in the business outlook, the financial markets, and the
international situation, and (c) to the practical administra
tion of the account; provided that the aggregate amount of
securities held in the System account (including commit
ments for the purchase or sale of securities for the account)
9/10/57
-40
at the close of this date, other than special short-term
certificates of indebtedness purchased from time to time
for the temporary accommodation of the Treasury, shall
not be increased or decreased by more than $1 billion;
(2)
To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks) such
amounts of special short-term certificates of indebtedness
as may be necessary from time to time for the temporary
accommodation of the Treasury; provided that the total
amount of such certificates held at any one time by the
Federal Reserve Banks shall not exceed in the aggregate
$500 million;
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;
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 referred to a letter addressed to him under date
of August 21,
he had made in
1957 by the Honorable Wright Patman regarding the requests
his letters of August 14,
that information concerning
policies of the Federal Open Market Committee and operations of the
System Open Market Account be furnished to the House Banking and
Currency Committee for the use of himself and other members of the Com
mittee.
The earlier requests had been discussed at the meeting on
August 20 at which time the Committee gave a blanket authorization for
the furnishing of such noncurrent information as appeared feasible and
proper in
response to this and other requests of Mr. Patman.
In taking
that action, it was understood that Messrs. Riefler and Rouse would
9/10/57
-41-
confer with respect to preparing and furnishing the information re
quested in Mr.
Patman's letters and in a list of questions dated
August 6, 1957 submitted to Chairman Martin at the hearings before
the House Banking and Currency Committee on the Financial Institutions
Act.
At Chairman Martin's request, Mr. Riefler commented on a draft
of reply to Mr.
Patman's letter of August 21, copies of which had been
distributed before this meeting.
Mr. Leedy suggested a change in the
second paragraph; Mr. Allen had not had an opportunity to read the
letter carefully but it was understood he would do so and give Mr.
Riefler any suggestions he might have.
The letter as changed was approved
unanimously, subject to further suggestions
from Mr Allen.
Secretary's note:
formed Mr. Riefler that
for change, the letter,
Martin's signature, was
later in the day in the
Mr. Allen having in
he had no suggestions
prepared for Chairman
sent to Mr. Patman
following form:
"This letter is in response to your letter of August 21,
1957, in so far as it relates to furnishing of information to
the House Banking and Currency Committee regarding operations
of the System Open Market Account.
"Because some of the open market information requested
in your two letters of August 14, 1957 has not been published,
your requests were taken up at the meeting of the Federal Open
Market Committee held on August 20, 1957, in accordance with
the provisions of the Committee's Rules on Organization and
Information regarding disclosure of unpublished information.
The Committee authorized the furnishing of all information
requested that could be supplied without disclosing policy
In accord
decisions governing recent or current operations.
ance with this view, the Committee felt that it would not be
9/10/57
-42-
"proper to divulge at this time information regarding Com
mittee policy decisions and operations relating thereto
for the current calendar year.
"Information regarding individual sales, purchases, and
repurchase agreements made pursuant to instructions of the
Federal Open Market Committee from the date of the Treasury
Federal Reserve Accord, March 4, 1951, to the end of 1956 is
being compiled.
Preparation of this information involves a
substantial amount of work, including the photostating of
approximately 1700 pages of records, but it appears that the
material will be ready before the end of this month.
"One of your requests was for a copy of each instruction
or policy guide issued by the Open Market Committee to the
Manager and to the Secretary of the Open Market Account.
The
Committee issues its policy instructions or guides for trans
actions in the open market to the Federal Reserve Bank of New
York, which is the Federal Reserve Bank selected by the Com
mittee to execute transactions for the System open market
account; such instructions are not addressed to the Secretary
of the Committee or to the Manager of the System Account.
All
policy instructions are made a matter of public record in the
Record of Policy Actions, prepared pursuant to section 10 of
the Federal Reserve Act and published in the Annual Report of
the Board of Governors of the Federal Reserve System. This
record includes not only the directives and the economic back
ground therefor, but it also includes policy actions of the
Committee with respect to transactions in bankers' acceptances,
repurchase agreements covering Government securities, and
various continuing statements of policy.
The attached sheet
contains references to the pages of the Board's Annual Report
for the years 1951-1956 on which these instructions and policy
guides are contained and discussed.
"You also requested a copy of the letter sent to the
Presidents of all Federal Reserve Banks under date of August 3,
1955 concerning repurchase agreements, along with instructions
and policy statements relating to this subject before and after
August 2, 1955.
As indicated above, the policy decisions re
garding repurchase agreements are included in the Record of
Open Market Policy Actions published in the Annual Report of
the Board of Governors of the Federal Reserve System. Actions
relating to repurchase agreements are recorded in the Annual
Reports under dates of October 4, 1951 (page 107); September
25, 1952 (page 97); March 4-5, 1953 (page 91); June 23, 1954
(page 96); August 2, 1955 (page 102); and March 6, 1956
paragraph under Item 3, Review of Continuing
(page 24, first
Authorities or Statements of Policy.) A copy of the letter
9/10/57
-43-
"of August 3, 1955 to the Presidents of all Federal Reserve
Banks transmitting essentially the information given in
the policy record entry for the same date is also enclosed
in accordance with your request.
"Another request was that we furnish you with sample
copies of the weekly report of the Manager of the System
Open Market Account, plus a description of other reports
made at regular intervals.
Two of the weekly reports pre
pared during the calendar year 1956 are enclosed--those for
the weeks ending May 23 and June 20.
Because of the nature
of these reports, their contents should be held confidential.
"Reports in substantially the same form as the weekly
report are prepared prior to each meeting of the Federal Open
Market Committee.
The Manager of the System Account prepares
these reports of open market transactions to cover the interval
since the most recent meeting of the Committee. They are
brought to date on the morning of the meeting by a supplemental
report from the Manager.
"Among the reports prepared and distributed to members of
the Federal Open Market Committee is a monthly statement show
ing the volume of transactions in United States Government
securities and in bankers' acceptances, both outright and
under repurchase agreement, with dealers under authorizations
of the Federal Open Market Committee.
An annual report cover
ing operations of the securities function of the Bank designated
to execute transactions for the System Account is prepared early
each year.
Also, the Manager of the System Open Market Account
periodically prepares a report containing financial and operat
ing data regarding individual dealers in United States Govern
ment securities. This report is compiled from information
provided in strictest confidence. It is confidential and the
Committee would not be in position to release it.
"While not falling strictly within the description of re
ports, members of the Committee are kept informed by telegrams
in the course of the day concerning activity in the Government
securities market and operations for the System Account.
"I believe that this letter comments on all of the matters
mentioned in your several letters having to do with Open Market
The other questions which you presented
Committee matters.
such as those relating to waiver of penalties for deficiencies
in reserve requirements, audit and examination reports, expenses
of the Federal Reserve Banks, and transactions in Government
securities for member banks and others, either have been or
will be covered in separate letters."
Mr.
have Mr.
Balderston stated that he believed it
would be helpful to
Riefler comment along lines of a statement that he had made
9/10/57
-44
before the directors of the Federal Reserve Bank of Chicago last week
concerning a number of the arguments presented by critics of the
System's current credit policies at the recent hearings before the
Senate Finance Committee.
Mr. Riefler summarized his comments having to do with the
following propositions or assertions:
(1) that higher interest rates
account for an important part of the inflation of prices; (2) that
the American economy today is
not characterized by a shortage of man
power, since unemployment is one-third higher than in 1952 when prices
were stable; (3) that the American econony today is not confronted
with a shortage of physical capacity to produce since new capacity has
been and still is being greatly enlarged; (4) that consumer disposable
income, in terms of real purchasing power, has not grown during the
past year; and (5) that it is generally recognized that more production
is the best cure for inflation.
Mr.
Riefler stated that the first
of these assertions was now
being less confidently asserted than when the hearings began.
Statistics
presented at the hearings showed that interest costs were in fact a
very small proportion of total business expense,
had made this assertion a pretty farfetched one.
and these statistics
He then commented on
the remaining four principal assertions, pointing out their respective
pitfalls.
Given assent to these four assertions, he said, the con
clusion followed that measures to stimulate consumer spending, rather
than saving,
would so increase the output of goods and services,
for
9/10/57
-45
which both manpower and capacity are available, as to cure inflation.
This conclusion really asserts that the creation of more money, by
increasing the demand for output, would curb inflation.
Mr.
Riefler went on to say that the logical validity of any
conclusion could be tested by stating it in reverse.
In this case,
the reverse proposition would be that the sure way to cure a deflation
would be to raise interest rates and force contraction of the money
supply.
However,
such logical refutation of the main conclusion does
not meet the need for refuting each of the assertions separately, he
said, and he then commented more fully on each of these four assertions.
After Mr.
Riefler had concluded his remarks,
Mr. Allen stated
that following the presentation of these points by Mr. Riefler at the
meeting of the Chicago Bank's Board of Directors, three of the directors
asked whether the statement could be prepared in written form for dis
tribution to interested persons.
if
Mr.
He suggested that it
Riefler would do this, and Mr.
would be desirable
Riefler stated that he would pre
pare a summary of his comments.
Secretary's notes In accordance with
the foregoing, a summary of Mr. Riefler's
comments was distributed under date of
September 12, 1957.
During a brief discussion of the comments Mr. Riefler had made
and of the desirability of improving public understanding of the points
discussed, Mr. Hayes stated that yesterday the Federal Reserve Bank of
New York started a series of sessions with leading businessmen in the
-46
9/10/57
area in
ten in
which such men would be invited to the Bank in
number,
to have luncheon and to spend a couple of hours discussing
Federal Reserve policies and related matters.
the first
group,
groups of about
meeting in
He was encouraged with
that these men, who were from the top executive
showed complete agreement with what the System was doing.
Hayes stated that it
not necessarily in
to participate in
It
Mr.
was also contemplated that businessmen who were
the top executive positions would also be invited
similar sessions at a later stage.
was agreed that the next meeting of the Committee would be
held at 10:00 a.m. on Tuesday,
October 1,
1957.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1957, September 9). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19570910
@misc{wtfs_fomc_minutes_19570910,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1957},
month = {Sep},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19570910},
note = {Retrieved via When the Fed Speaks corpus}
}