FOMC Minutes
A meeting of the Federal Open Market Committee was held
in the offices of the Board of Governors of the Federal Reserve
System in Washington on Tuesday, March 4, 1958, at 10:00 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr. Balderston
Mr. Fulton
Mr. Irons
Mr. Leach
Mr. Mangels
Mr. Mills
Mr. Shepardson
Mr. Szymczak
Mr. Vardaman
Messrs. Erickson, Allen, Johns, and Deming,
Alternate Members of the Federal Open
Market Committee
Messrs. Bopp, Bryan, andand
Leedy, Presidents of
the Federal Reserve Banks of Philadelphia,
Atlanta, and Kansas City, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Sherman, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Daane, Hostetler, Marget, Roelse,
Walker, and Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Kenyon, Assistant Secretary, Board of
Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Gaines, Manager, Securities Department,
Federal Reserve Bank of New York
Mr,
Swan, First Vice President, Federal Reserve
Bank of San Francisco; Messrs. AbbottEllis,
Mitchell, and Tow, Vice Presidents of the
Federal Reserve Banks of St. Louis, Boston,
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Chicago, and Kansas City, respectively;
Mr. Parsons, Director of Research, Fed
eral Reserve Bank of Minneapolis; Messrs.
Anderson and Atkinson, Economic Advisers,
Federal Reserve Banks of Philadelphia and
Atlanta, respectively
Mr.
Riefler reported that advices of the election by the Fed
eral Reserve Banks for a period of one year commencing March 1, 1958,
of members and alternate members of the Federal Open Market Committee
had been received and that each newly elected member and alternate
member had executed the required oath of office.
The members and
alternate members were as follows:
Alfred Hayes, President of the Federal Reserve Bank of
New York, with William F. Treiber, First Vice President
of the Federal Reserve Bank of New York, as alternate
member;
Hugh Leach, President of the Federal Reserve Bank of
Richmond, with J. A. Erickson, President of the Fed
eral Reserve Bank of Boston, as alternate member;
Wilbur D. Fulton, President of the Federal Reserve Bank
of Cleveland, with Carl E. Allen, President of the
Federal Reserve Bank of Chicago, as alternate member;
Watrous H. Irons, President of the Federal Reserve Bank
of Dallas, with D. C. Johns, President of the Federal
Reserve Bank of St. Louis, as alternate member;
H. N. Mangels, President of the Federal Reserve Bank of
San Francisco, with Frederick L. Deming, President of
the Federal Reserve Bank of Minneapolis, as alternate
member.
Upon motion duly made and seconded,
and by unanimous votes, the following
officers of the Federal Open Market Com
mittee were elected to serve until the
election of their successors at the first
meeting of the Committee after February 28,
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1959, with the understanding that in
the event of the discontinuance of
their official connection with the
Board of Governors or with a Federal
Reserve Bank, as the case might be,
they would cease to have any official
connection with the Federal Open Market
Committee:
Wm. McC. Martin, Jr.
Alfred Hayes
Winfield W. Riefler
Elliott Thurston
Merritt Sherman
Howard H. Hackley
Frederic Solomon
Woodlief Thomas
J. Dewey Daane, L. Merle Hostetler,
Arthur W. Marget, Harold V.
Roelse, Charls E. Walker,
Oliver P. Wheeler, and Ralph
A. Young
Chairman
Vice Chairman
Secretary
Assistant Secretary
Assistant Secretary
General Counsel
Assistant General Counsel
Economist
Associate Economists
Upon motion duly made and seconded,
and by unanimous vote, the Federal Reserve
Bank of New York was selected to execute
transactions for the System Open Market
Account until the adjournment of the first
meeting of the Committee after February 28,
1959.
Mr. Hayes stated that the Board of Directors of the Federal
Reserve Bank of New York had selected Mr. Rouse as Manager of the
System Open Market Account, subject to the selection of the Federal
Reserve Bank of New York by the Federal Open Market Committee as the
Bank to execute transactions for the System Account and his approval
by the Federal Open Market Committee.
Mr.
Leedy entered the room at this point.
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Chairman Martin said that in
order to make certain there
was no misunderstanding as to his position regarding the selection
of the Manager of the System Account,
he would read from the minutes
of the meeting of the Committee held on March 6, 1956 the statement
he made at that time in
as Manager.
connection with the approval of Mr.
Rouse
This statement was:
"Chairman Martin stated that he was voting for approval
of Mr. Rouse as Manager of the System Open Market Account
although he disapproved of the procedure now followed by the
Committee under which the board of directors of the agent
Federal Reserve Bank selects the manager. There were no
personalities involved in this feeling, the.Chairman said,
but he referred to the action of the Committee in authoriz
ing appointment of a special committee at the meeting on
March 2, 1955, to study and bring back to the Committee
concrete proposals for perfecting the structural and operat
ing organization that would best implement the policies of
This committee, he said,
the Federal Open Market Committee.
had met with the Board of Directors of the New York Bank
last November but he, as Chairman of the committee, had
not called a meeting since that time partly, at least, be
Chairman Martin said
cause of pressure of other problems.
that he intended to continue the committee appointed pur
suant to that authorization until it had a report to submit
to the full Committee, and in this connection he stated
that he proposed to have a meeting of the committee on the
day on which the next meeting of the Federal Open Market
Committee (probably to be held on Tuesday, March 27, 1956)
took place."
Chairman Martin went on to say that the Committee that had
met with the Directors of the New York Bank in November 1955 had not
met recently but he would propose that it continue in existence and
that an effort be made to resolve this problem during the coming year.
His purpose in mentioning the matter at this time was to reserve the
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position he had expressed two years ago and to say that in his
opinion a more desirable and proper procedure would be for the
Federal Open Market Committee to select the Manager of the System
Open Market Account with the understanding that the Agent Bank
would accept or reject that selection by the Committee.
this comment,
With
he suggested that the Committee approve the selection
of Mr. Rouse as Manager of the System Open Market Account.
Following a discussion, upon
motion duly made and seconded, and
by unanimous vote, the selection of
Mr. Rouse as Manager of the System
Open Market Account was approved.
Upon motion duly made and seconded,
and by unanimous vote, the minutes of
the meetings of the Federal Open Market
Committee held on January 28 and Feb
ruary 11, 1958, were approved.
Upon motion duly made and seconded,
and by unanimous vote, the action taken
by the members of the Federal Open Mar
ket Committee under date of February 25,
1958,authorizing that the target for free
reserves be increased from $200-$300
million, as established at the February 11
meeting, to between $400and $500 million
during the period from February 25 to the
next meeting of the Committee, subject to
the usual qualifications, was approved,
ratified, and confirmed.
Chairman Martin referred to a memorandum that had been dis
tributed under date of February 28, 1958, relating to the procedure
authorized at the meeting on March 2, 1955,whereby, in addition to
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members and officers of the Committee and Reserve Bank Presidents
not currently members of the Committee,
minutes and other records
could be made available to any other employee of the Board of
Governors or of a Federal Reserve Bank with the approval of a
member of the Committee or other Reserve Bank President, with
notice to the Secretary.
At the Chairman's request, the Secretary
commented briefly on the procedure,
indicating that the list
of
authorizations would be reviewed with the members of the Committee
and the Reserve Bank Presidents in
order to make certain that it
was current.
Thereupon, the procedure was re
affirmed without change.
The Chairman next referred to the resolution adopted by the
Federal Open Market Committee on November 20, 1936 authorizing each
Reserve Bank to purchase and sell, at home and abroad, cable trans
fers and bills of exchange and bankers'
acceptances payable in
foreign currencies to the extent that such purchases and sales may
be deemed to be necessary or advisable in connection with the
establishment, maintenance,
operation, increase, reduction, or
discontinuance of accounts of Federal Reserve Banks in foreign
countries.
It was agreed unanimously that no
action should be taken at this time to
amend or terminate the resolution of
November 20, 1936.
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Before this meeting there had been sent to the members of
the Committee a memorandum dated February 7, 1958,from Mr. Rouse
and Mr.
Leonard, Director of the Board's Division of Bank Operations,
with respect to allocation of securities in the Open Market Account
under the procedure that became effective September 1, 1953,
pur
suant to the action taken by the Committee at the meeting on June
11, 1953.
There had also been distributed a tabulation containing
a pro forma reallocation based on the ratios of each Reserve Bank's
average total assets to the total for all Reserve Banks for the
period March 1, 1957-February 28, 1958.
It was agreed unanimously that no
action should be taken at this time to
amend or terminate the procedure for
allocation of securities in the System
Open Market Account, as adopted pursuant
to the action of the Committee on
June 11, 1953.
Unanimous approval was given to the
distribution of the weekly report of open
market operations prepared at the Federal
Reserve Bank of New York as follows:
1.
2.
3.
4.
5.
6.
7.
8.
9.
The members of the Board of Governors
The Presidents of the 12 Federal Reserve Banks
Officers of the Federal Open Market Committee
The Secretary of the Treasury
The Under Secretary of the Treasury
The Assistant Secretary of the Treasury working on debt
management problems
The Fiscal Assistant Secretary of the Treasury
The Chief of the Division of Bank Operations of the
Board of Governors
The officer in charge of research at each of the Federal
Reserve Banks not represented by its President on the
Federal Open Market Committee
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10.
11.
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The alternate member of the Federal Open Market
Committee from the Federal Reserve Bank of New
York; the two Assistant Vice Presidents of the
Federal Reserve Bank of New York working under
the Manager of the System Account; the Managers
of the Securities Department of the New York
Bank; the Vice President, the Assistant Vice
President and the Manager of the Research Depart
ment cf the New York Bank; and the confidential
files of the New York Bank pertaining to Federal
Open Market Committee matters.
With the approval of a member of the Federal Open
Market Committee or any other President of a Fed
eral Reserve Bank, with notice to the Secretary,
any other employee of the Board of Governors or
of a Federal Reserve Bank.
Unanimous approval was given to the
continuation of the authorization given
by the Committee at its meeting on March
5, 1957 to the Manager of the System
Account to engage in transactions on a
cash as well as a regular delivery basis.
Chairman Martin next referred to the authorization to the
Federal Reserve Bank of New York to purchase bankers' acceptances
and to enter into repurchase agreements therefor, last approved at
the meeting of the Committee on March 5, 1957.
The present authoriza
tion provided for transactions by the New York Bank with acceptance
dealers, and the Manager of the System Account had suggested in
a
letter to the Secretary dated February 27, 1958 that this authoriza
tion be amended so that it would also permit the New York Bank to
purchase and sell bankers' acceptances direct from and to foreign
accounts of that Bank.
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Mr. Mills made a statement in which he expressed the view
that the proposed broadening of the authority would run counter to
what he understood to be the policy of the Committee to broaden the
market for bankers' acceptances.
After noting that the System
portfolio now was just short of $42 million and that there was a
strong demand for bankers' acceptances, Mr. Mills expressed the
view that a broader market would be developed by the release of
some portion of the acceptances now held by the System.
said that it
He also
had been his thought that System holdings of bankers'
acceptances represented a cushion to pick up the floating supply
and that it
would not be regarded,
as would holdings of Treasury
bills, primarily as a vehicle for the conduct of credit policy.
Mr. Mills said that he would argue against adoption of the recommenda
tion for broadening the authority and would prefer that the New York
Bank deal solely in the established market for bankers' acceptances.
Mr.
Hayes said that the suggested change would permit the
New York Bank to effect transactions when the market was not in a
position to have orders from foreign accounts completed conveniently
for the market.
For example, if a foreign holder gave a sizable
sell order and acceptance dealers at that time had a heavy inventory
and were not interested in buying the acceptances, it would be
difficult to carry out the foreign bank's order.
Mr. Hayes stated
that if dealers were receptive the Bank would, of course, go to
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them and that use of the broadened authority would be a means of
carrying through a transaction when the market was not receptive.
There followed a general discussion of the points raised
by Mr.
Mills and of the views expressed by Mr. Hayes, during which
most of the comments indicated a favorable disposition toward
changing the authorization to permit transactions with foreign
accounts of the New York Bank as well as with acceptance dealers.
Chairman Martin stated that he doubted whether an important
element of credit policy was involved, that he had been favorable
to participation in the bankers'
acceptance market primarily on the
basis of being friendly to the market and because he thought it
important to develop foreign trade, and that it seemed to him that
it would be proper to permit the additional authority requested.
If,
however,
any member of the Committee wished to have more time
to study the question it
could be held over until a later meeting.
A number of the members of the Committee indicated that they would
prefer to act on the question at the present time.
Thereupon, upon motion duly made and
seconded, the authorization for transac
tions in bankers' acceptances was approved
in the following form, including authority
for the Federal Reserve Bank of New York
to buy from and sell to foreign accounts
of that Bank.
Votes for this action: Messrs.
Martin, Chairman, Hayes, Vice Chairman,
Balderston, Fulton, Irons, Leach, Mangels,
Shepardson, Szymczak, and Vardaman. Vote
against this action: Mr. Mills.
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The Federal Open Market Committee hereby authorizes
the Federal Reserve Bank of New York for its own account
to buy from and sell to acceptance dealers and foreign
accounts maintained at the Federal Reserve Bank of New
York, at market rates of discount, prime bankers' accept
ances of the kinds designated in the regulations of the
Federal Open Market Committee, at such times and in such
amounts as may be advisable and consistent with the general
credit policies and instructions of the Federal Open Market
Committee, provided that the aggregate amount of such bankers,
acceptances held at any one time by the Federal Reserve Bank
of New York shall not exceed $50 million and provided further,
that such holdings shall not be more than 10 per cent of the
total of bankers' acceptances outstanding as shown in the
most recent acceptance survey conducted by the Federal Re
serve Bank of New York.
The Federal Open Market Committee further authorizes
the Federal Reserve Bank of New York to enter into repurchase
agreements with nonbank dealers in bankers' acceptances
covering prime bankers' acceptances of the kinds designated
in the regulations of the Federal Open Market Committee,
subject to the same conditions on which the Federal Reserve
Bank of New York is now or may hereafter be authorized from
time to time by the Federal Open Market Committee to enter
into repurchase agreements covering United States Govern
ment securities, except that the maturities of such bankers'
acceptances at the time of entering into such repurchase
agreements shall not exceed six months, and except that in
the event of the failure of the seller to repurchase, such
acceptances shall continue to be held by the Federal Reserve
Bank or shall be sold in the open market.
Such repurchase
agreements shall be at the same rate as that applicable,
at the time of entering into such agreements, to repurchase
agreements covering United States Government securities.
The Committee approved by unanimous
vote a renewal of the following authoriza
tion to the Federal Reserve Bank of New
York to enter into repurchase agreements
with nonbank dealers in Government securi
ties:
1.
Such agreements
(a) In no event shall be at a rate below whichever
is the lower of (1) the discount rate of the
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Federal Reserve Bank on eligible commercial
2.
3.
paper, or (2) the average issuing rate on
the most recent issue of three-month Treasury
bills;
(b) Shall be for periods of not to exceed 15
calendar days;
(c)
Shall cover only Government securities matur
ing within 15 months; and
(d) Shall be used as a means of providing the
money market with sufficient Federal Reserve
funds to avoid undue strain on a day-to-day
basis.
Reports of such transactions shall be included in the
weekly report of open market operations which is sent
to the members of the Federal Open Market Committee.
In the event Government securities covered by any such
agreement are not repurchased by the dealer pursuant
to the agreement or a renewal thereof, the securities
thus acquired by the Federal Reserve Bank of New York
shall be sold in the market or transferred to the
System Open Market Account.
At the meeting on December 3,
1957,
the Committee approved a
recommendation from the Manager of the System Open Market Account and
the Secretary of the Committee that the rate charged on special short
term certificates of indebtedness purchased direct from the Treasury
pursuant to paragraph (2)
of the Committee's directive to the Federal
Reserve Bank of New York be fixed at 1/
of 1 per cent below the
discount rate of the Federal Reserve Bank of New York at the time of
such purchase.
No action was taken to amend or
terminate this authorization for fixing
the rate on special short-term certifi
cates of indebtedness purchased direct
from the Treasury.
On March 1, 1951,
year since,
and at the annual meeting in March of each
the Committee had authorized the Chairman to appoint a
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Federal Reserve Bank as agent to operate the System Account
temporarily in
case the Federal Reserve Bank of New York was
unable to function.
The report of the Subcommittee on Defense
Planning dated January 9, 1956, which was approved by the Federal
Open Market Committee on January 10, 1956, included a recommenda
tion that this authorization be reaffirmed, and such action was
taken on March 6, 1956, and March 5,
Mr. Vardaman suggested that it
1957.
would be desirable to have
the authorization reviewed for the purpose of ascertaining whether
any change was needed to make clear that it
Chairman of the Committee in
extended to the Acting
the event the Chairman was not avail
able.
Thereupon, the authority to the
Chairman to appoint a Federal Reserve
Bank as agent to operate the System
Account temporarily in case the Fed
eral Reserve Bank of New York was
unable to function was reaffirmed,
with the understanding that Mr.
Vardaman's suggestion would be
followed.
The following resolution to pro
vide for the continued operation of
the Federal Open Market Committee
during an emergency was then re
affirmed by unanimous vote:
In the event of war or defense emergency if the
Secretary or Assistant Secretary of the Federal Open
Market Committee (or in the event of the unavailability
of both of them, the Secretary or Acting Secretary of
the Board of Governors of the Federal Reserve System)
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certifies that as a result of the emergency the available
numoer of regular members and regular alternates of the
Federal Open Market Committee is less than seven, all
powers and functions of the said Committee shall be per
formed and exercised by, and authority to exercise such
powers and functions is hereby delegated to, an Interim
Committee, subject to the following terms and conditions.
Such Interim Committee shall consist of seven members,
comprising each regular member and regular alternate of the
Federal Open Market Committee then available, together with
an additional number, sufficient to make a total of seven,
which shall be made up in the following order of priority
(1) each alternate at large (as
from those available:
defined below); (2) each President of a Federal Reserve
Bank not then either a regular member or an alternate;
(3) each First Vice President of a Federal Reserve Bank;
provided that (a) within each of the groups referred to
in clauses (1), (2), and (3) priority of selection shall
be in numerical order according to the numbers of the
Federal Reserve Districts, (b) the President and the First
Vice President of the same Federal Reserve Bank shall not
serve at the same time as members of the Interim Committee,
and (c) whenever a regular member or regular alternate of
the Federal Open Market Committee or a person having a
higher priority as indicated in clauses (1), (2), and (3)
becomes available he shall become a member of the Interim
Committee in the place of the person then on the Interim
The Interim Com
Committee having the lowest priority.
mittee is hereby authorized to take action by majority
vote of those present whenever one or more members thereof
are present, provided that an affirmative vote for the
action taken is cast by at least one regular member,
regular alternate, or President of a Federal Reserve Bank.
The delegation of authority and other procedures set forth
above shall be effective only during such period or periods
as there are available less than a total of seven regular
members and regular alternates of the Federal Open Market
Committee.
As used herein the term "regular member" refers to a
member of the Federal Open Market Committee duly appointed
or elected in accordance with existing law; the term
"regular alternate" refers to an alternate of the Committee
duly elected in accordance with existing law and serving
in the absence of the regular member for whom he was elected;
and the term "alternate at large" refers to any other duly
elected alternate of the Committee at a time when the member
in whose absence he was elected to serve is available.
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Unanimous approval was also given
to a renewal of the resolution set forth
below authorizing certain actions by the
Federal Reserve Banks during an emergency.
The Federal Open Market Committee hereby authorizes each
Federal Reserve Bank to take any or all of the actions set
forth below during war or defense emergency when such Federal
Reserve Bank finds itself unable after reasonable efforts to
be in communication with the Federal Open Market Committee
(or with the Interim Committee acting in lieu of the Federal
Open Market Committee) or when the Federal Open Market Com
mittee (or such Interim Committee) is unable to function.
(1)
Whenever it deems it necessary in the light of
economic conditions and the general credit situation then
prevailing (after taking into account the possibility of
providing necessary credit through advances secured by direct
obligations of the United States under the last paragraph of
section 13 of the Federal Reserve Act), such Federal Reserve
Bank may purchase and sell obligations of the United States
for its own account, either outright or under repurchase
agreement, from and to banks, dealers, or other holders of
such obligations.
(2) In case any prospective seller of obligations of
the United States to a Federal Reserve Bank is unable to
tender the actual securities representing such obligations
because of conditions resulting from the emergency, such
Federal Reserve Bank may, in its direction and subject to
such safeguards as it deems necessary, accept from such
seller, in lieu of the actual securities, a "due bill"
executed by the seller in form acceptable to such Federal
Reserve Bank stating in substantial effect that the seller
is the owner of the obligations which are the subject of
the purchase, that ownership of such obligations is thereby
transferred to the Federal Reserve Bank, and that the obliga
tions themselves will be delivered to the Federal Reserve
Bank as soon as possible.
(3) Such Federal Reserve Bank may in its discretion
purchase special certificates of indebtedness directly from
the United States in such amounts as may be needed to cover
overdrafts in the general account of the Treasurer of the
United States on the books of such Bank or for the temporary
accommodation of the Treasury, but such Bank shall take all
steps practicable at the time to insure as far as possible
that the amount of obligations acquired directly from the
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United States and held by it,
together with the amount
of such obligations so acquired and held by all other
Federal Reserve Banks, does not exceed $5 billion at
any one time.
Authority to take the actions above set forth shall
be effective only until such time as the Federal Reserve
Bank is able again to establish communications with the
Federal Open Market Committee (or the Interim Committee),
and such Committee is then functioning.
Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering commit
ments executed February 11, 1958,through February 26, 1958, and a
supplementary report covering commitments executed February 27
through March 3, 1958.
Copies of both reports have been placed in
the files of the Federal Open Market Committee.
Mr.
in
Rouse reported that there had been remarkable fluctuations
bill rates since the February 11 meeting.
The bills auctioned on
February 17 went at an average rate of 1.73 per cent, but the rate
dropped to 1.20 per cent in
per cent on March 3.
the following week and then rose to 1.35
There was a long tail in the auction yesterday,
with the stop-out price at 1.4O per cent.
The sharp drop in
the rate
on February 24 was due to expectations of a large demand for bills
from some State funds,
from the telephone company, and from commercial
banks employing reserves released by the reduction in reserve require
ments.
This buying did not materialize in
the expected volume, and
bills instead had come into the market from foreign accounts, the
System Account,
and State funds.
Mr.
Rouse also reported that the
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market was now entering the period when corporate tax selling would
pick up and, as a result, there had been a build-up in dealers' bill
positions.
Positions totaled $750 million on February 28, and
dealers were awarded $550 million new bills yesterday.
Bank dealers
held most of this supply of bills, and nonbank dealers' holdings ap
peared to be firmly placed, Mr. Rouse said, so there was no reason
for real concern in spite of the large supply.
One factor in the
market at the present was that Chicago banks were stockpiling bills,
apparently for the April 1 personal property tax assessment date.
In Mr.
Rouse's judgment,
the recent backup in
bill rates was a
healthy development.
Turning to the recent Treasury financing, Mr. Rouse said
that the cash offering was a success, with large subscriptions by
both bank and nonbank purchasers.
The allotment was expected to
be less than 25 per cent.
On bond markets generally, Mr. Rouse reported that there
had not been much change in prices of seasoned bonds, but reoffering
rates on new issues had tended to rise in
recent days.
As he had
reported at earlier meetings, there was a good deal of speculation
in
bonds following the reduction in discount rates in November.
The momentum of this speculative demand had driven new issue rates
down to the 3.60 per cent range on Aaa corporate utility issues by
late January; a Aaa utility was reoffered in the last few days to
yield 3.94 per cent and had moved slowly at that rate.
"Aa" new
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issue rates had moved well above 4 per cent and A rates were 4.25
per cent.
A similar situation had developed in the municipal mar
ket, where dealers' inventories had climbed to a record high.
Short-term municipal obligations had sold well, particularly to
banks, but long maturities had moved slowly.
Mr. Rouse said that
exceptional factors had caused bond prices to move higher than
could be supported by the supply of investment funds available to
buy them, and the present consolidation and upward movement of
rates was necessary to establish balance in the market.
Sharply
easier credit policy aimed at improving the capital markets by
supplying bank reserves would not promise to do too much good.
At the conclusion of Mr. Rouse's report, Mr. Allen reported
that he had encountered instances of speculation in bonds that sup
ported what Mr. Rouse had said.
Upon motion duly made and seconded,
and by unanimous vote, the transactions
for the System Account during the period
February 11, 1958, through March 3, 1958,
were approved, ratified, and confirmed.
At Chairman Martin's request, Mr.
Young made a statement on
the economic situation supplementary to the staff memorandum dis
tributed under date of February 28, 1958.
Mr. Young's comments were
substantially as follows:
Economic activity through February continued to recede,
with adverse weather conditions accentuating the decline.
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The February decline in industrial production was
evidently about 2 index points, and possibly larger,
carrying the Board's index at least to 131, or 10 per
cent under last summer's high. The further decline was
distributed among durable and nondurable manufacturing
lines and mining and petroleum.
Output curtailment in
the automobile industry was a special feature of the
month. Reflecting increased demands for heating
associated with the unusually cold weather, output of
electricity and gas picked up considerably.
Construction activity, after seasonal adjustment,
continued close to fall levels, with commercial construc
tion down further, public utility construction up further,
and residential and public construction little
changed.
Highway work was off more than allowed for in the existing
seasonal adjustment and this accounted for an apparent
moderate falloff in total construction activity.
Housing
starts in January continued at just over a million units,
the level sustained since the middle of last year.
Employment has continued to decline and unemployment
to rise. Initial unemployment benefit claims in the week
ending February 22 were close to half a million, or double
the number a year earlier. Continued claims reached 3.1
million--a record level.
The mid-February unemployment estimate has just been
made available to the Committee on a confidential basis,
prior to public release by a week or more.
It shows a
figure of 5.2 million, up 670,000 from January and 2 million
from a year ago.
The normal seasonal movement for January
to February is little changed, and a 5.2 million unemployed
figure is a postwar high. Related to the labor force on a
seasonally adjusted basis, the unemployment percentage comes
out at 6.7 per cent, about as high a rate as reached in 1949.
Also, preliminary Commerce Department estimates of in
ventory change and orders for January were made available to
They show a January
us yesterday on a confidential basis.
inventory liquidation of $600 million, mostly in durable
The estimated January decline compares with
goods lines.
declines of $350 million in December, $232 million in
November, $63 million in October, and $37 million in September.
New orders and unfilled orders both declined in January.
The amount of decline for unfilled orders--$1.5 billion--was
close to the average of recent months.
Retail sales estimates for January are now being lowered
to the December level, in place of the earlier estimate of a
According to department store
significant gain over December.
sales figures in February, retail trade has worsened sharply.
3/4/58
-20
While unfavorable shopping weather was a factor in much of
the country, declines were also marked in areas in which
weather conditions were not severely adverse.
Automobile sales dropped particularly sharply. In the
first
ten days of February deliveries were off 15 per cent
from January and 29 per cent from a year ago. Deliveries in
the second ten days--the period of the most adverse weatherwere off appreciably further. Dealer stocks of domestic cars
rose to 886,000 on February 20, a fourth above a year ago.
A
responsible industry source called yesterday and reported con
fidentially that daily sales of new cars in the last ten days
of February had shown no improvement from the second ten days.
Used car sales were also off sharply in February, ruming
about 8 per cent under January and 18 per cent under last Feb
ruary.
Cash sales of automobiles have apparently fallen off much
more than instalment sales. Preliminary figures on instalment
credit show a January rise of about $100 million on a seasonally
corrected basis. New car repossessions have evidently reached
a very high level, attaining a rate of one in 10 for one large
national finance company.
This is the highest rate for this
company since the early thirties.
The housing market appears to hold fairly strong. Markets
for existing houses remain active and the number of unsold new
houses has held fairly steady at a moderate figure. Easier
credit conditions have been reflected in some increase in mort
gage market activity. Offerings to FNMA for immediate purchase
have continued to decline and recently the volume of mortgages
sold by FNMA has increased markedly. Applications to FHA for
insurance on new houses rose appreciably in January and the
rate was two-thirds above a year earlier.
Wholesale prices have risen recently, reaching a new high
at the end of February, about one per cent above the average
of the fourth quarter. With price averages for industrial
changed, the increase mainly reflects higher
commodities little
prices for farm products and foods, notably livestock, meats,
vegetables, and fruits. Price movements of industrial
materials have been quite selective and the average has been
The most recent purchasing agents'
change.
showing little
roundup indicates that lower materials prices are beginning
to work through to fabricated items and that discounts from
list
prices are increasingly encountered.
Mainly reflecting higher food prices but also some
further advances in prices of services, the consumer price
index for January showed a rise of .6 per cent. With wage
and salary incomes declining further, this increase
3/4/58
-21
accentuated the falloff in consumers' real income.
In March,
approximately 1.3 million industrial workers will receive a
2-to-3 cent an hour wage increase to compensate for this cost
of-living advance.
Most observers agree that the extent and duration of the
present recession is heavily dependent on the course of busi
ness capital expenditures.
Two items of advance release in
formation have become available indicative of the course of
these expenditures.
The first
relates to the Newsweek-NICB survey of capital
appropriations by large manufacturing corporations for the
fourth quarter.
These appropriations were reported to be one
third smaller than a year earlier.
Cancellations of previously
approved appropriations were substantial, and the backlog of
appropriations declined more than a fifth.
The second item relates to the Commerce-SEC plant and
equipment expenditure survey for the second quarter and calendar
year.
This survey is not completely tabulated, but preliminary
indications point to a decline in expenditures for the year of
as much as 10 per cent.
The McGraw-Hill survey of last fall
indicated a year-to-year decline of 7 per cent.
This preliminary information about the indications of
these two surveys should be held confidential until public re
lease.
Economic news from abroad has both encouraging and dis
couraging aspects. In Western Europe, economic activity appears
to continue at high levels, with no clear signs of deterioration,
except financially for France.
In Canada, recent data suggest a
leveling out of recession. In Japan, financial adjustment seems
in process of being effected without serious cutback in produc
tive activity. In various other countries in Latin America and
the Far East, internal inflationary pressures are very strong
and balance of payments problems are becoming still more acute.
United States exports continued to decline through December,
but imports have remained close to the level of the past two
years.
By way of conclusion to today's economic summary, one can
The most recent facts
cheer.
say that it is a report of little
clearly suggest that the 1957-58 recession has a better than
even chance of being less moderate in extent and duration than
either the 1948-49 recession or the 1953-54 recession.
Mr.
Thomas summarized recent financial developments as follows:
While business activity has been showing definite indica
tions of deepening recession, bank credit has been expanding
3/4/58
-22
and borrowing in general was held up at a high level. This
contrast may be directly attributable to the Federal Reserve
policy of maintaining a generous supply of bank reserves.
Business borrowing at banks, it is true, has been sharply
reduced, but banks supplied with ample reserves, have expanded
other types of credit by amounts that far exceeded the business
loan liquidation while reducing their borrowings at the Reserve
Bank to a negligible volume.
Total deposits at banks have in
creased in a period when they usually decline seasonally. It
would seem likely that deposit turnover declined in February,
but the January figures, the latest available, held at close
to the fourth quarter average.
To appraise the net effect in credit markets of the de
cline in business and the shift in monetary policy, comparisons
need to be made with the latter part of November, in order to
balance out the large offsetting seasonal movements in December
and January.
From November 27 to February 26, banks in leading
cities increased their total loans and investments by about
$1.1 billion, compared with decreases of about the same amount
in the two previous December-February periods.
Commercial
loans and consumer loans both declined, showing a combined de
crease of over $l-l/4 billion, compared with decreases aggregat
ing less than a quarter billion in the same period a year ago
and increases totaling over half a billion two years ago.
Holdings of securities and loans on securities increased by
over $2-1/4 billion this year, compared with decreases of well
over half a billion last year and about $1.7 billion two years
ago. Substantial portions of this year's increases occurred
in February.
Demand deposits adjusted showed greater than seasonal de
creases in December and January but partial data for February
indicate a seasonally adjusted rise that partly offset the
In the past three months United States
previous declines.
Government deposits have increased, compared with decreases
in corresponding months of the two previous years. Time de
posits showed a spectacular increase of nearly $2 billion
this year--over twice last year's sharp expansion that fol
lowed the interest rate rise.
Since the growth in deposits has been in time accounts,
the net result of these changes on total required reserves
has been negligible, but the lack of change in required re
serves compares with declines of over $500 million in the
corresponding period a year ago and nearly $250 million two
Banks have obtained funds from the usual seasonal
years ago.
return flow of currency, partly offset by other market
This
factors, and have thus been able to reduce borrowings.
3/4/58
-23-
year, in contrast to other years, these additions to the
reserve supply from market factors have not been offset
by a reduction in Federal Reserve open market accounts.
Last year those accounts showed a net drop in the three
months of over $1.3 billion and two years ago a decline
of nearly $600 million. Free reserves this year increased
by nearly $600 million; in the same period last year they
declined by $200 million.
It is evident from these facts that banks have been
supplied with ample reserves and have used them not only
to get out of debt but to expand credit contrary to usual
seasonal trends.
In the face of a liquidation of business
loans, banks have found other uses for funds in securities
and loans on securities.
One result of the easier reserve position has been the
sharp decline in short-term interest rates. The rate on
Treasury bills, which responds sensitively to changes in the
supply of free reserves or when banks are in debt fluctuates
around the discount rate, is now close to 1-1/4 per cent,
This is at the average level that prevailed early in 1955
when free reserves were around $300 million. Treasury bill
rates have almost reached the level at which nonbank buyers
may be inclined to hold deposits rather than bills, as was
the case in 1954. The low bill rate has induced substantial
shifting of liquid balances into time deposits and led to a
reduction in rates paid on such deposits by several leading
banks.
Rates on bankers' acceptances and commercial paper have
also been reduced to the lowest levels since early 1955.
Rates on acceptances are now at a level relative to the prime
loan rate that gives borrowers a substantial advantage to
obtain funds through acceptances. Generally in the postwar
period the advantage has been in favor of borrowers at the
prime rate, when minimum balance requirements are ignored.
Long-term rates have also declined sharply, but not as
much as medium and short-term rates, and they are still above
levels generally prevailing prior to the autumn of 1956.
Long-term rates do not as a rule respond as sensitively or
as promptly as short rates to changes in availability of
credit, but they have also been held up recently by the
continued heavy volume of borrowing in the capital markets.
New issues of securities by corporations and particularly
by State and local governments have been so large that
congestion has developed in capital markets. Recent offer
ings of long and medium-term securities by the Treasury and
by Government agencies have absorbed some available funds
in this sector of the market. In view of the existing
exceptionally wide spread in the pattern of yields, it
3/4/58
seems likely that in the course of time either short
term rates will rise or medium and long-term rates will
decline further.
Figures of free reserves in February have been raised
by $50 to $90 million above original estimates because re
quired reserves at country banks were below preliminary
estimates. The revised figures averaged a little over $300
million for the month.
The average for this week is expected
to exceed $450 million. After that the weekly average may be
less than $400million if usual seasonal trends are shown in
the money supply and in other factors influencing the supply
and use of reserve funds.
To maintain a higher level will
require System purchases of securities.
It will be diffi
cult to supply reserves through repurchase contracts as long
as the repurchase rate is so far above market rates.
With the present levels of free reserves and of short
term interest rates, current Reserve Bank discount rates
have no great significance.
If member banks do find oc
casion to borrow, however, little is gained and something
If
may be lost by making them pay current discount rates.
discount rates at or near this level should be appropriate
at some later time, when a turn has occurred in business,
the ability to raise rates at that time would probably have
some advantage.
After a brief discussion of the comments by Mr.
Thomas, Mr.
Hayes presented the following statement of his views with respect to
the business outlook and credit policy:
Recent statistical data confirm the continued business
decline, and there is no sign yet of any combination of
favorable factors sufficiently strong to reserve this trend.
Besides the lower level of activity in many basic industries,
there have recently been some indications of declines in
Unemployment probably
nondurable goods output as well.
approached the 5,000,000 level in February--and personal
income is apparently diminishing, after excluding the effect
of a sharp dip in seasonally adjusted dividend income in
December.
While consumers, businessmen and the stock market have
shown notable restraint so far in the face of discouraging
business developments, there is always a possibility that
mass psychology will develop quite unfavorably if the ad
verse news that we look for in the next few weeks should
3/4/58
-25-
be considered by the public as unexpected and startling.
I have in mind such items as the February unemployment
figures, S.E.C.-Commerce survey data on plant and equip
ment expenditures for 1958, and estimates of corporate
profits for the fourth quarter of 1957, which may be
sharply lower than the year before. Even allowing for
the effect of bad weather in recent weeks, there are some
signs that retail sales are beginning to reflect the in
creased unemployment, shorter hours, and lower actual and
expected personal income.
On the other hand, psychology
is being buoyed to some extent by expectations of heavier
defense outlays and, in some quarters, by hopes of the
usual spring pick-up. Furthermore, it is also widely ex
pected that if no clear signs of improvement appear within
the next month or so, some major government remedial action
will be forthcoming in the form of a tax cut or substantial
public works expenditures or both.
The price picture remains paradoxical, with both whole
sale and consumer indices showing some increase in spite of
economic recession. It may be that the abandonment of fair
trade price practices by General Electric and some of its
major competitors may become an important influence in re
storing greater price flexibility at the retail level. I
have been disturbed by the evident rigidity of a large part
of the price structure, which seems likely to delay materially
the economic adjustments needed to permit resumption of eco
nomic growth.
There is also ample ground to fear a resurgence
of inflationary pressures in the longer run--but this clearly
would not justify our failing to give primary attention now
to efforts to counter a recession of unknown depth and dura
tion, which seems likely to exceed in severity that of 1953
54.
I think we have already accomplished a good deal in the
way of easier availability of bank credit and improved bank
(and perhaps corporate) liquidity through the various measures
taken since last fall. Bank credit continues to show little
expansion except for Government security holdings, and the
main effects of the change in monetary policy appear to have
been in the capital issues market and, to some extent, in
the mortgage market, neither of which, however, has so far
shown sustained strength. We should see to it that monetary
policy is contributing as much as it can to the recovery
process.
Fortunately the Treasury should be out of the market until
April, so that for the first time in many weeks we can plan the
use of the various instruments of Federal Reserve credit policy
on economic grounds alone.
3/4/58
-26
With respect to open market operations, the pro
jections suggest that a minimum of transactions will be
needed in the next three weeks if, as I hope, the Com
mittee is willing to retain the degree of ease represented
by the target of approximately $400-$500 million of free
reserves adopted last week to avoid large sales of bills
which would have been inconsistent with the Board's action
in lowering reserve requirements. It is hard to predict
what level of free reserves will suffice, in view of the
present fluidity of the national money market and short
term securities market, to provide adequate ease without
creating a needlessly sloppy situation. With this in
mind, I would be inclined to give the Manager wide leeway
with respect to free reserves, with $500 million being
looked upon as an upper limit in the absence of new and
unexpected developments.
I have been glad to note an in
crease in total reserves during February over last February's
level, and our efforts should be directed toward widening
this year-to-year growth in reserves (adjusted for changes
in percentage requirements) and promoting growth in the
money supply.
Turning to the matter of interest rates, I would first
like to point to the steep yield curve which has been estab
lished in the last few weeks. Short-term market interest
rates have been driven sharply lower by easy availability
of bank reserves and by the reduction in supply of short
term Treasury securities resulting from the recent refund
ing. At the same time, the steadily large supply of new
corporate and municipal issues, coupled with Treasury re
funding and cash operations in the intermediate and long
term markets, have caused longer-term rates to reverse
themselves and move higher. Although it is to be expected
that eventually funds will gradually be drawn from the
shorter market out through the maturity structure, I am
rather concerned by the degree of restraint currently being
applied by the congestion in the capital markets and the
reversal in the downward trend of interest rates to would
be borrowers of long-term capital--a degree of restraint
which seems scarcely consistent with current economic
conditions or our own policies.
The spread that has developed between the 2-3/ per
cent discount rate and short-term market rates naturally
gives rise to the question whether further action is
called for on the discount rate. An additional cut would
perhaps be consistent with recent open market and reserve
requirement policies and might have the effect of trigger
ing a further reduction in bank lending rates, which to
-27
3/4/58
date have responded only slowly and grudgingly to the
change in System policy and are far out of line with
short market rates. On the other hand, it can be argued
that, with member bank borrowing already at a low level,
it is doubtful whether a lower discount rate would induce
banks to reduce lending rates and aggressively seek new
loans. The last cut is only a little over a month old,
and the reduction in reserve requirements scarcely a week
old.
There may be disadvantages in nibbling away at the
discount rate with frequent small cuts so that if a major
move should be considered necessary at some later date
to cope with more critical economic circumstances, it
would bring the discount rate down to a figure lower than
would be consistent with an interest rate level conducive
to adequate saving. To put it another way, there is
something to be said in these circumstances for deliberately
making the discount rate a relatively sluggish rate which
will not necessarily reflect fully the more extreme swings
in short-term market rates.
All things considered, I would think that the next re
duction should not exceed 1/4 per cent and might well be
deferred a bit longer, although it should probably occur
before our next meeting.
Finally, as to the directive: I believe the time has
come for the directive to give more explicit recognition
of the established fact of the business recession and the
switch in credit policy to a direct effort to provide an
availability of money and credit that would help to counter
Clause (b) in the directive might
act recessionary forces.
be amended to read as follows: "to combating economic
recession."
Mr.
Erickson said that the unemployment situation was bad in
the First District, although the district was not quite as badly off
as the national average in the year-to-year comparison for January.
Department store sales, which were good during the first five weeks
of the year,
turned down in February and were now about 4 per cent
behind last year.
Automobile registrations for 1957 ran 5 per cent
behind 1956, whereas the national average was slightly above 1956.
Construction was running about 4 per cent ahead of January 1957.
-28
3/4/58
One bright spot was that the ski resorts had been booming, with
January business well ahead of the previous year.
February also
was a good month and March and April likewise were expected to be
good.
Advance registrations for boys'
and girls'
camps were 6 per
cent higher than the good level of January a year ago.
Loans at
banks had been declining at about the same rate as last year,
while the Reserve Bank discount window was being used only by the
smaller banks.
Mr.
Erickson said that he would favor a change in the Com
mittee's directive and felt that it
to monetary ease,
Thus,
might contain some reference
a phrase that had been used at times in the past.
clause (b) in paragraph (1) might have added to it
tinuing to maintain ease in the money market."
"by con
He doubted that
anything should be done about the discount rate until the Treasury
financing was out of the way,
but he would like to see the rate
reduced another quarter per cent during March.
operations,
As to open market
he would favor giving the Manager of the Account a
certain amount of leeway.
He would hold free reserves in the $350
$500 million range and agreed with Mr.
Hayes that we should prevent
a sloppy situation in the market.
Mr.
Irons stated that Eleventh District conditions continued
to trend downward slightly.
The major exception was in the oil in
dustry, where the situation had deteriorated badly and production
was on a nine-day allowable basis.
This meant that production of
3/58
-29
crude in March would be at a daily average rate of 2-1/2 million
barrels, compared with a daily average of about 3.7 million barrels
at the time of the Suez crisis and a plateau or "normal" of about
3.4 million excluding that period.
The situation, which reflected
imports from the Middle East and elsewhere, was having an effect
not only on the oil and associated industries but also on State
finances.
Retail trade, which ran ahead of last year in January,
was bad during the first two weeks of February and then increased
in
the third week with the result that the first seven or eight
weeks of the year ran around 4 per cent below a year ago.
Depart
ment stores gave various reasons for the decline, including bad
weather and psychology,
be a factor because it
and there were indications that prices might
had been found that whenever price-reduction
sales were held, the response was excellent.
presenting a difficult problem.
down a bit further.
Collections were not
Employment in the district was
The aircraft industry, which experienced a
decline in the latter part of 1957 and was using up a backlog of
orders, seemed to look forward to some improvement,
was holding up fairly well.
and construction
In general terms and excluding the oil
industry, one could say that the extent of the decline in
trict
would range from 2 to 5 per cent below a year ago.
the dis
The decline
in bank loans this year was appreciably less than a year ago,
Mr.
Irons said, the comparison being about $28 million against $67 mil
lion.
Member banks were not borrowing significantly; the city banks
3/4/58
-30
had not been borrowing for some time, and the only borrowing at the
Reserve Bank was by country banks for seasonal reasons.
moment, banks had substantial aggregate free reserves.
At the
Heavy rains,
particularly in the southern part of the district, produced a problem
of getting people into the fields.
favorable,
Citrus prospects were very
and on the whole the agricultural outlook was promising.
As to policy, Mr.
Irons said that in view of the reduction
in reserve requirements, it would be consistent to maintain free
reserves at around the $400 million level, with a certain leeway
given to the Manager of the Account.
He was disturbed about the
disparity between the discount rate and short-term market rates.
If
open market policy was correct and the reduction of reserve
requirements was correct, one might question whether the discount
rate policy was correct.
He was not sure whether he would favor a
reduction of a quarter or a half per cent at this time,
but a re
duction of the rate would move in the direction of being realistic.
On balance,
he felt that consideration might well be given to getting
the discount rate better in line with the market.
change would be in
He hoped that any
such an amount as not to stir up further specula
tion and anticipation, which might cause short-term rates to pull
away from the discount rate even further.
change in
the directive to indicate a shift in policy.
Mr.
little
He would not object to a
Mangels said that the Twelfth District situation was a
different from that in
some other areas.
Preliminary employment
3/4/58
-31
data for December showed only a slight decline other than seasonal,
decreases in manufacturing and mining employment being offset by
gains in
construction and trade.
The decline in
aircraft employ
ment in January was only about 20-25 per cent of the average monthly
decline from July through December.
had picked up somewhat.
In Oregon, lumber employment
Although orders for plywood were up, prices
had been reduced again to $64 per thousand feet, compared with $90
two years ago.
The Oregon unemployment trust fund was now below
the 3 per cent level and all experience rating credits had been
cancelled.
Therefore,
for the first time since 1941, employers
would be charged 2.7 per cent of covered wages until the fund was
built up.
Insured unemployment in
January was unchanged from Decem
ber, the third month of stability after four months of sharp decline.
Department store and auto sales were down somewhat,
were operating at 65 per cent of capacity.
permits were up in
and steel mills
Residential construction
January from January 1957.
Demand for California
citrus fruits was strong and orange and grapefruit prices were up.
The cotton crop was excellent and domestic mills were paying higher
prices than export customers.
19,
For the three weeks ending February
the decline in bank loans was double that of a year ago, Mr.
Mangels said.
demands,
Banks had funds to take care of all foreseeable loan
but demand had moderated somewhat.
Mr.
Mangels said that it
appeared that a period was approach
ing which would afford a good test of the flexibility of both business
-32
3/4/58
and labor to adjust to changing consumer demands.
He believed that
price cuts would be necessary to stimulate consumption, and while
present excess capacity should bring about price declines,
the
latest consumer price index showed a further advance.
Mr.
changed.
Mangels suggested that existing policy should not be
Free reserves in the $4OO-$500 million range would be
about right for the next two weeks, he said, and he would have no
objection to a change in the Committee's directive as suggested.
Mr.
Deming said that the economic slide continued in
Ninth District during February.
during that month although it
Unemployment was still
year,
If
rising
would normally level off in late
February and remain stationary in March.
this year.
the
This might not happen
the movement of iron ore proved to be less than last
unemployment would be greater this spring than for some time,
Mr. Deming said, adding that the taconite plants in Minnesota were
now planning to produce at 80 per cent of capacity this season
compared with 100 per cent last year.
of demand in
the iron ore industry.
This reflected a severe lack
Although the rise in unemploy
ment this year had been more severe than last, there were almost as
many persons employed in
year ago.
the State of Minnesota at this time as a
The two bright spots in the district continued to be
found in agriculture, where cash income in 1957 was about 3 per
cent higher than in 1956, and in home building, where the number
of permits issued in January 1958 was a third higher than in
3/4/58
-33
January 1957.
decline in
Bank loans were about the same as last year, a
business loans having been mostly offset by an increase
in loans of other types.
Mr.
Deming said that he agreed with Mr. Hayes that the
Committee should deal with the situation as it
saw it
today, rather
than on the basis of a possible resumption of inflationary pressures.
He had been impressed with the 4-1/2 million of unemployed at the
time of the preceding meeting and he was more impressed with the
5 million unemployed reported by Mr.
Young this morning.
He would
move toward the $500 million of free reserves cited as an upper
range by Mr.
Hayes.
Mr.
tion of 1/2 per cent in
Deming said that he would favor a reduc
the discount rate as soon as feasible.
As
a matter of fact, he would like to see a greater reduction in order
to bring the rate better in line with the bill
rate, but a greater
reduction might be misinterpreted by the public.
Mr.
Deming agreed
that the Committee's directive should be changed and, while he did
not see a way of achieving it
immediately, he would like to see
reserve requirements further reduced.
Mr.
Allen said that in the last few weeks business activity
in
the Seventh District appeared to have declined a little
in
the nation as a whole,
more than
because the automotive and industrial
machinery industries continued to dominate the district situation.
Supplementing Mr.
sales,
Young's report on the poor record of automobile
Mr. Allen said that new car inventories of 887,000 on
-34
3/4/58
February 20 represented 73 days supply, based on sales in the
second days of the month of 12,149 per day.
This was an industry
figure, and at least some of the makes were in greater than 73
days supply.
Optimistic straws noted by Mr. Allen included a
slight improvement in
orders for steel, improved demand for certain
industrial goods such as welding rod, and some rehirings of a
seasonal nature in the farm machinery industry.
But the continued
declines in automotive and industrial machinery production were
dominating.
Claims for unemployment insurance were being filed at
a faster rate, relative to a year ago, in the Seventh District than
in
the nation.
However,
as of February 8 the proportion of covered
workers receiving unemployment insurance was somewhat less than the
national average in Illinois, Iowa, and Wisconsin.
It
was higher
than the national average in Michigan and Indiana.
Department store results thus far available made it
seem
unlikely that February would maintain the rather good January rate
of consumer buying,
Mr. Allen said, adding that big ticket house
hold items had been especially weak.
On the other hand, consumers
were showing less than expected resistance to high meat prices,
and certain luxury goods such as cameras were moving well.
The
public seemed wary of purchases involving large outlays, particularly
if
credit was involved, although in the rural areas favorable farm
prices and income trends were reported to be supporting relatively
good levels of sales of retail goods and farm machinery.
Steel
3/4/58
-35
firms reported some improvement in orders and their rate of produc
tion seemed to have stabilized.
In January, however,
ingot output
was 4O per cent below last year, whereas metal fabricating was off
only 11 per cent, which suggested a rapid liquidation of inventories.
The size of the gap between use and production of steel indicated
that steel output could rise moderately despite a continued decline
in over-all industrial production.
Bank debit figures for January
from 32 metropolitan reporting areas were off 1 per cent from a
year ago, but 19 of the 32 areas reported gains, with the largest
gains in Iowa cities.
Mr. Allen reported that figures indicated savings were being
well maintained,
inflows to time accounts at commercial banks during
January approximately matching January of 1957, while withdrawals
were below a year ago.
Little use of the discount window was being
made by the larger district banks, in
last week.
fact none of them borrowed
One of the largest banks had been a consistent buyer
of Federal funds, but that bank now had a large portfolio of Treasury
bills in preparation for the April 1 tax date.
Doubtless there would
be more bill accumulation during March and other banks would be buy
ing funds or borrowing or both, but in
recent years the district's
banks had been getting away from their former practice of buying
bills in January and carrying them until April.
up bills in
Rather, they pick
March or they cover their problem through repurchase
arrangement s.
-36
3/4/58
With regard to the directive, Mr. Allen said he had come
to the meeting with the idea that the instruction for "mitigating
recessionary tendencies" was not realistic,
way.
and he still
He had had in mind language such as Mr.
felt that
Hayes suggested but
perhaps a more positive phrase such as "promoting economic recovery"
woulu be better.
As to the discount rate, the Chairman of the
Chicago Bank had commented yesterday that he did not think he would
want to do anything until the first
week in April, when the results
of the Easter business were known.
Mr.
Allen expressed the view
that the discount rate had lost much of its significance, except
perhaps psychologically,
effect it
and that the more it
was used the less
Subject to further discussion at this meeting, he
had.
would be inclined to favor holding free reserves in the $400-$500
million range.
Mr. Leedy reported that the Tenth District was seeing evidence
of the cumulative effects of recession.
Employment was down but not
as sharply as for the country generally,
apparently because the dis
trict
was less industrialized than most others.
sales had failed to match last year.
tinued good.
Department store
Agricultural conditions con
Livestock in the district was up from a year ago, and
the prices for meat animals were favorable.
Business loans had de
creased less since the first of the year than they did last year,
while deposits stayed at about the same volume as last year.
As to policy,
it
seemed to Mr.
Leedy that the target for
free reserves should be pretty much in line with what it
had been
-37
3/4/58
since the reduction of reserve requirements.
The action taken in
reducing reserve requirements produced publicity to the effect that
$500 million of reserves were being released and, therefore, it
should not appear that the level of free reserves was being reduced.
Conditions reported at this meeting would seem to justify working
toward the upper edge of that range of free reserves.
discount rate, Mr.
As to the
Leedy felt that a reduction of not less than a
half per cent should be made as quickly as feasible.
Anything less
would cause disappointment and undermine the psychological value of
a reduction.
The System had followed short-term market rates up
when they were increasing and there was the same reason to follow
them down, along with the matter of getting to a level of rates
consistent with the System's purposes.
As to the directive, Mr.
Leedy agreed with the views expressed by Mr. Allen.
The present
wording of clause (b) indicated a rear guard action and that would
be his objection to the wording suggested by Mr.
Hayes.
In his
opinion, the directive should indicate that the System was taking
the offensive, and wording such as Mr. Allen had suggested would
seem appropriate.
His own suggestion would be "to stimulate recovery
in the economy."
Mr. Leach said that weaknesses in the Fifth District economy
appeared to have deepened and spread further during February, with
no evidence as yet of a leveling off in
the decline.
District pro
duction of bituminous coal dropped sharply in early February,
-38
3/4/58
continuing its decline over the past several months, and the most
recent figures confirmed earlier reports of further cutbacks in
textile operations.
Insured unemployment continued to increase,
and somewhat more rapidly than in the country as a whole.
weekly hours in manufacturing industries in
durable goods had dropped,
important exception.
Average
both durable and non
cigarette manufacturing being a fairly
Changes in business loans at district report
ing member banks confirmed other evidences of weakness.
For
some time, Mr. Leach said, he had been favoring some
what greater reserve availability, but the recent reduction in re
serve requirements created more than he had advocated.
He had
concurred in a $400 to $500 million free reserves range after the
reserve requirement reduction because free reserves had been averaging
around $250 million and it seemed to him that if the reserve requirement
reduction were to have economic significance the System would have to
leave outstanding a reasonable proportion of the reserves made avail
able by the reduction.
The $400 to $500 million range still seemed
appropriate as a benchmark of desired ease.
Mr. Leach went on to
say that, in a declining economy flexible monetary policy requires
the System to provide reserve ease appropriate to that situation.
Fears of future inflationary dangers, serious as they may be, should
not deter the System from fulfilling present obligations but rather
make us hope that we will have the wisdom and foresight to tighten
adequately as soon as there is an end to the need for this degree
-39
3/4/58
of ease.
He saw no reason to tighten at this time, and recent rates
in the short-term market made it clear that further ease would serve
no useful purpose.
The discount rate was not very significant at
the moment but it was out of line with short-term market rates and
with policy actions recently taken by the System.
He thought that
a reduction had been discounted and would have little effect on
market rates, but it might have some effect on bank rates and it
would give more room to increase later.
He would much prefer a half
per cent reduction to a quarter and felt that the reduction should
be made around the middle of this month.
He also felt that recent
changes in the economy called for a change in the directive.
Use
of the expression "combatting economic recession" in clause (b)
might be desirable.
Mr. Vardaman directed attention to the psychological aspect
of the current situation.
He sensed a spirit of apprehension in
many banking quarters which seemed to be spreading rapidly.
Some
bankers appeared to be discouraging their customers from the normal
amount of borrowing,
and there was a disturbing parallel between the
attitude of bankers now and in
the early 1930's.
He suggested that
the Presidents of the Reserve Banks endeavor to point out to bankers
in
their respective districts that there was no basic change in the
soundness of the economy as a whole and that consideration be given
to working along the same lines through the bank examination function.
3/58
-40
On the basis of the psychological factors, Mr.
expressed the view that a reduction in
Vardaman
the discount rate might
be interpreted as fear on the part of the System.
If
a change
were made, he would much rather nibble at the rate and reduce it
by only 1/4 of one per cent.
At some time soon a further reduction
of one per cent in reserve requirements might be considered,
but
for the moment the Reserve Banks and the member banks ought to
emphasize the availability of loanable funds.
free reserves,
As to the range of
probably the Committee ought to continue to set a
goal in the area of $400-$500 million.
suggestion would be acceptable.
On the directive, Mr.
Hayes'
Instead of using the word "recovery"
it might be better to use something like "restoring the economy to
its
normal level of activity."
He doubted whether we had reached
the point where use of "recovery" was necessary.
Mr.
it
Mills suggested that in
setting near-term System policy,
would be advisable to think back over observations Mr.
earlier in
Rouse made
the meeting regarding the subject of plentiful reserves
in the hands of the commercial banks as contrasted to congestion in
the capital markets.
made it
Mr. Mills said further that this situation
clear to him that reserves cannot serve as a substitute for
savings of the kind that are essential for financing the capital
markets and that, therefore, the risk of a sloppy market would be
run if
reserves were supplied too liberally in
lieve
capital market congestion.
any attempt to re
In his opinion such a risk could
-41
3/4/58
be incurred if the System should supply reserves so aggressively
as to bring them rapidly up to a positive $500 million free reserve
level.
He noted that on the basis of projections for the next three
weeks or so and following the March 10 payment date for the Treasury's
current offering, positive free reserves might range in the $375
million area, which range, as he saw it, would be acceptable as
offering the commercial banks a freedom of maneuver in loaning and
investment without the hindrance of a sloppy market.
Subsequently,
when long-term interest rates in the capital market sectors had
adjusted to the Treasury offering and it was clear that additional
reserves would be helpful to the economy,
it
might then be desirable
to bring the supply of positive free reserves up to the $500 million
level.
However, Mr.
Mills said that he would hesitate to supply new
reserves in quantity until a long look could be taken at the impact
of the Treasury's financing on the capital market.
He thought that
by that time, which might be ten days or two weeks hence, a discount
rate reduction of 1/2 of 1 per cent would be in
order to bring the
discount rate into better alignment with market rates.
He would favor
a change in the wording of the directive with a preference for
language of the kind suggested by Mr. Hayes.
Mr. Shepardson said that he regarded as significant the
statement made by Mr.
Young to the effect that continuing liquidation
of inventories must inevitably bring stocks to a level from which
they would again tend to build up, accompanied by a pickup in orders.
-42
3/4/58
As to prices, there were indications that whenever an adjustment
of prices took place, there was a response on the part of consumers,
thus indicating that there was still a need for price adjustment.
We were facing wage negotiations that Mr. Shepardson felt should
take place in a framework of continuing restraint on price advances.
There was no indication of any lack of funds to meet loan demands,
he said, and it
seemed to him that the present target of free re
serves was ample.
He would prefer to lean a little toward the low
side of the range rather than to the high side, but the range itself
appeared to be adequate.
The discount rate seemed to be out of line
but he did not see any purpose in making a quick change.
The System
had made a number of policy changes in fairly rapid succession, and
he hoped that action on the discount rate might be deferred for some
little
time.
At such time as a change was made,
he saw merit in
a
shift of 1/2 of 1 per cent because he doubted the advisability of
changing the rate too frequently in the current economic framework.
He would have no objection to a change in the directive, but at this
stage he would not like to shift to wording which indicated too
strongly aggressive upward action.
Mr.
Fulton said that the Fourth District, a highly industrial
ized area, was probably feeling the impact of the current recession
more than most other areas.
Steel production was at a low rate--one
company reported operations the lowest since 1938.
Automobile and
3/4/58
-43
appliance concerns were cutting back deliveries because of lack of
sales, and no improvement was in sight.
Oil companies simply were
not buying and were shifting the supply of pipe back and forth among
themselves.
However,
customers'
inventories were generally in good
shape except for automobiles and pipe.
Steel warehouses were not
overstocked and there was a fairly good mixture of inventories.
The
ore situation mentioned by Mr. Deming was definitely going to affect
operations this year, for a great amount of ore had been brought down
last year and stockpiles were ample throughout the Fourth District.
One slight gleam of hope in the picture was the fact that representa
tives of machine tool manufacturers recently reported orders stronger
than last year, and a large foundry reported a surprising number of
inquiries about quotations for the fourth quarter of 1958 and the
first
quarter of 1959.
Department store sales in February were about
10 per cent under last year and automobile sales were down about 25
Unemployment was up more than seasonally in
per cent.
up still
further in
February.
January and
Mr. Young had expressed the consensus
of businessmen in the Fourth District, Mr.
Fulton said, in suggesting
that the current recession had the possibility of being deeper and
longer-lasting than other recent recessions.
Mr. Fulton felt that if
the discount rate were at or near 2
per cent the System would be in a better position to move in either
direction.
The rate should be reduced to that area as soon as pos
sible, he said, and a reduction of 1/4 of one per cent would be
-44
3/4/58
niggardly in the face of existing market rates.
remarked to him that the present congestion in
A banker had
the long-term
market might be caused to some extent by comments that the reces
sion was a very temporary thing; therefore, investors were not
willing to put out money for long-term securities at existing rates,
believing they could get higher returns if
they waited.
This banker
claimed that the amount of savings was adequate for the supply of
capital issues but that these issues were going begging because of
anticipation of a revival.
Mr.
Fulton regarded $400-$500 million
as an acceptable level of free reserves, preferring $500 million.
In concluding, he expressed the view that the current recession was
of great significance and not a temporary thing.
He would change
the directive in a way to indicate that the Committee was actively
taking action to combat the recession.
Mr.
Bopp reported that economic conditions in the Third
District continued to deteriorate.
Although data for the entire
district could be interpreted to mean that it
economy,
had a well-balanced
there had been areas of chronic unemployment for years,
including the hard coal areas,
like Scranton, Wilkes-Barre,
and
to a lesser extent, Pottsville; the old railroad repair area of
Altoona; and on a seasonal basis, vacation areas like Atlantic City.
Even a year ago, unemployment in all of these areas except Altoona
exceeded 10 per cent of the labor force.
It now exceeded 15 per
3/4/58
-45
cent in all except Altoona and had passed 20 per cent in Atlantic
City.
In January,
unemployment in the fourteen principal labor
markets of the district, seasonally adjusted, was 8.5 per cent of
the labor force, compared with 6.7 per cent for the country as a
whole.
Only four areas were below the national average and none
was as low as 5 per cent.
The classification of three areas had
been lowered and the district had seven areas of substantial labor
surplus.
Both new and continued claims for unemployment benefits,
despite temporary aberrations, continued far above the levels of a
year ago.
In another major area of System concern, namely, prices, Mr.
Bopp reported that the cost of living in Philadelphia rose .1 of 1
per cent in January,
compared with a rise of .6 per cent nationally.
There seemed to be little
coming from strong demand.
if any upward thrust to consumer prices
Some declines should be in prospect,
encouraged by the change in pricing policies of some durable con
sumer goods manufacturers.
in
In retail trade, new car registrations
January were 16 per cent below those of a year ago in Eastern
Pennsylvania; in Philadelphia, registrations during the first three
weeks of February were 25 per cent below a year ago.
Department
store sales collapsed as a result of the bad weather and disrupted
transportation.
For the year to date they were 7 per cent below a
year ago; for the four weeks ending February 22, they were 12 per
cent below; and for the last single week 39 per cent below.
There
-46
3/4/58
had been little
change in bank credit during the past three weeks.
Business loans continued to be repaid and were now about 5 per cent
below a year ago.
The only optimistic note was a report on the
expectations of the 4OO largest industrial customers of the Pennsylvania
Power and Light Company, the consensus being summarized in the phrases:
"The downturn is
Mr.
about over, the upturn will come by summer."
Bopp expressed the view that these developments called
for a policy of continued and possibly greater ease.
count rate, it
As to the dis
seemedto him the question was not whether it
should
As to timing, he felt it
be reduced, but when and by how much.
should be as soon as an "even keel" policy was no longer required
for the current Treasury financing.
In the light of the recent re
duction in reserve requirements and the structure of market rates,
and since this would be another move toward greater ease, he thought
that period would be shorter than usual or than if we were moving
toward greater tightness.
He would,
however,
of the market specialist as to timing.
choice was not between 1/
accept the judgment
As to amount,
he thought the
per cent and 1/2 per cent but between 1/2
per cent and some larger amount.
might justify a reduction of 3/
In the light of market rates, one
per cent to a level of 2 per cent-
the rate prevailing for a short time in 1955, when the boom was
gaining momentum.
On the other hand, he appreciated that only once
had the System reduced the rate by more than 1/2 per cent and that
was just after the stock market crash of 1929.
For this reason, he
3/4/58
-47
would favor a reduction of 1/2 per cent at this time.
In this
connection he noted that the Philadelphia Bank's board of directors
would meet this Thursday and that the next scheduled meeting would
be two weeks from that date.
As to the directive, Mr. Bopp said
he would like to see it changed to convey the general idea that the
Committee's purpose was to promote recovery by maintaining ease in
the money market.
Mr. Bryan said he would like to report that the Sixth District
was prosperous and doing well but that he could not make such a state
ment since the district's scorecard was continuing to show declines in
practically all lines of activity.
Private advices indicated addi
tional plant layoffs and plant closings.
District banks seemed to
be responding in general fairly wel1 to the current situation with
regard to funds, and loans were up slightly over the same period
last year.
However, he sensed, like Mr. Vardaman, that the banks
were policing their loans rather more carefully now than when the
System wanted them to police loans strictly during a period of up
turn.
As the downturn continued, he felt that there might develop
a tendency in the banking system toward more liquidity so that
psychological reserve requirements could go a good deal higher than
legal requirements.
On policy, Mr. Bryan expressed himself as pleased with the
recent reduction of reserve requirements because it seemed to him
that such action was necessary on all grounds.
If he interpreted
-48
3/4/58
the statistics correctly, this meant that if
the $500 million of
reserves released by this action were kept available for the rest
of this half of the year there would be a growth of total reserves
slightly in
excess of 3 per cent.
He felt that the System should
avoid doing anything through open market operations to offset that
growth factor in a period of recession.
free reserves,
Putting this in
terms of
he would agree with a range of $400-$500 million,
with the qualification that any error should be toward the top of
that range or above it
rather than toward the low side.
Technically,
a reduction in the discount rate was called for, but there was also
the psychological problem which he found it
difficult to appraise.
A reduction of 1/4 of one per cent would give the impression of
nibbling at the rate and he doubted whether this was an advisable
posture for the System to take.
As to the directive, he thought
that it should be changed.
Mr.
Johns said that some of his colleagues thought they saw
indications that the rate of recession in
not as rapid as it
had been.
However,
the Eighth District was
in his own judgment,
the
points leading to that view were not conclusive and other develop
ments caused him to believe that the situation in the district gave
no cause for cheer.
For example,
operations of the St. Joseph Lead
Company had been shut down for 30 days; although there had been
recent evidence of recalling employees to appliance plants, there
3/4/58
-49
had now been an announcement of a closedown of the General Electric
Appliance Park in Louisville.
Lumbering was not doing well, rail
roads simply were not buying,and last year's cotton crop was of
deplorable quality.
As to policy, Mr.
ment with Mr.
Leedy.
Johns said that he found himself in agree
He would not only urge working toward the upper
end of a $400-$500 million range of free reserves,
but he would favor
setting $500 million as the operating minimum and not worry if
figure went somewhat higher.
to be reduced,
the
He agreed that the discount rate ought
and as promptly as possible, whatever that might mean
in view of the current Treasury financing.
should not be higher than 2 per cent.
In his opinion the rate
Historically,
this would be
strong medicine but he felt that the patient needed strong medicine
and he would not hesitate to administer it.
suggested that it
In this connection, he
would be a good time for the System to exhibit
sone appearance of unity with respect to discount rate action.
The
directors of a number of the Banks were to meet the second Thursday
of the month and it
would be his hope that as many Banks as possible
would act to reduce the rate at that time.
the change could be deferred if
the Board regarded this as following
too closely upon the Treasury financing.
felt that it
The effective date of
As to the directive, he
was time to stop talking about mitigating recessionary
tendencies and he would suggest,
like Mr. Allen, that the wording
of the directive be in positive rather than negative terms.
3/4/58
-50
In a further comment,
Mr.
Johns said that he was becoming
progressively more concerned about statements both within and out
side the System to the effect that the discount rate was not very
important or significant and that a change in the rate therefore
was not significant.
Even if the rate were reduced as much as one
per cent there might not be a flood of discounting,
Mr.
Johns said,
but this did not mean that a rate change was not important or with
out significance.
To say that the discount rate was not an important
or effective instrument of monetary policy was, in his opinion, to
do the country a long-run disservice.
It
seemed important to him
not to say by way of the rate that the degree of ease which had been
achieved might not be here to stay, and he thought that this was the
message that the System was conveying when the rate was not in line
with short-term market rates.
Mr.
Johns recalled that a few years
ago there was a thorough study of the discount rate mechanism which
resulted in
a revision of Regulation A, Advances and Discounts by
Federal Reserve Banks.
At that time it
was stated that this would
be followed up by a study of discount rate policy but the second
study had never been made.
He thought that no time was more appro
priate than the present to launch that study, in order to decide
what this implement of monetary policy was worth and how it
should
be used.
Mr. Szymczak said that he was impressed by the tone of
pessimism--perhaps it
should be referred to as realism--which
-51
3/4/58
dominated the comments at this meeting.
He believed that the
discount rate should be reduced to 2 per cent and that open market
operations should be conducted with a view to having a level of
free reserves of $500 million or a little more.
a change in
He would favor
the directive along the lines suggested by Mr.
Hayes.
Mr. Balderston said that he was somewhat concerned about
the situation in the capital markets referred to by Mr. Mills,
especially in the light of the profit squeeze that seemed to be
affecting business planning.
However,
the immediate problem was
the one to which Mr. Deming had referred,
ment.
namely,
rising unemploy
This meant that the System continued to be confronted with
the dilemma of rising unemployment while prices remained sticky.
The price situation was encouraging buyer resistance and prolonging
price-cost maladjustments that needed to be removed if
was to regain its health.
the economy
In the face of that dilemma, Mr. Balderston
said he would favor a target of $00-$500
million of free reserves,
and he would suggest a change in the directive using the positive
approach mentioned by Mr. Allen.
He would like some wording which
would bring back into the directive the word "ease" and specifically
would like to suggest that clause (b)
provide that operations for the
System Account be directed toward "encouraging sound recovery and
employment by a policy of ease.
As to the discount rate, Mr.
Balderston would favor a change of at least 1/2 of 1 per cent when
the Treasury financing was completed.
If it
were not for apprehension
-52
3/4/58
about the psychological reaction, he would favor a move to 2 per
cent, but he noted that of the 27 downward adjustments in the rate
since 1920 all but one of them had been in the amount of 1/2 of 1
per cent or less.
In the event of a greater reduction, he was appre
hensive that the press would carry the news in terms of this being
the greatest reduction since 1929.
Chairman Martin said he thought the question of the amount
of change that might be appropriate in the discount rate was one that
was open to debate.
himself.
He would not want to take a strong position
A 2 per cent rate was justified in terms of money market
relationships, but certainly the psychological point was a very real
one and the reduction could be misinterpreted.
He agreed that it
would be desirable to try not to have a sloppy operation, and he
added that it might not be helpful in this particular situation to
have the discount rates of the various Banks at different levels.
With respect to changing the Committee's directive, he thought it
was a question of a positive or negative approach and he had no
strong views on that point.
He would have no objection to the
use of language such as "combatting recession and establishing
conditions for recovery."
The Chairman then presented different
suggestions for changing the wording of the directive, including
one that suggested language for clause (b) which would state that
open market policy would be with a view, among other things, "to
contributing further by monetary ease to resumption of stable
growth of the economy."
-53
3/4/58
The other members of the Committee indicated that they would
favor such language.
Chairman Martin then said that the consensus of the meeting
appeared to favor a range of $400-$500 million as a target for free
reserves, with a leaning toward the higher end of that range rather
than to the lower end.
There followed a general discussion of the discount rate level
and procedure in the light of the views expressed at this meeting, at
the conclusion of which Chairman Martin suggested that the matter be
allowed to take its
course at the respective Federal Reserve Banks.
In view of current circumstances,
including the action taken
by the Congress to increase the national debt limit from $275 to
$280 billion, Mr. Rouse suggested eliminating from the directive
paragraph (3) authorizing the sale direct to the Treasury from the
System Open Market Account for gold certificates of such amounts of
Treasury securities maturing within one year as might be necessary
from time to time for the accommodation of the Treasury up to an
aggregate of $500 million face amount.
Thereupon, upon motion duly made
and seconded, the Committee voted unan
imously to direct the Federal Reserve
Bank of New York until otherwise di
rected by the Committee:
(1) To make such purchases, sales, or exchanges
(including replacement of maturing securities, and
allowing maturities to run off without replacement)
3/4/58
-54
for the System Open Market Account in the open market
or, in the case of maturing securities, by direct ex
change 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 contributing
further by monetary ease to resumption of stable growth
of the economy, and (c) to the practical administration
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) 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;
To purchase direct from the Treasury for the
(2)
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.
The meeting recessed at this point and reconvened at 2:00 p.m.
with the following in attendance:
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Fulton
Irons
Leach
Mangels
Mills
Shepardson
Mr. Szymczak
Mr.
Vardaman
Messrs. Allen, Deming, Erickson, and Johns, Alter
nate Members of the Federal Open Market Committee
3/4/58
-55
Messrs. Bopp, Bryan, and Leedy, Presidents
of the Federal Reserve Banks of Philadelphia,
Atlanta, and Kansas City, respectively
Mr.
Mr.
Mr.
Mr.
Riefler, Secretary
Thomas, Economist
Roelse, Associate Economist
Rouse, Manager, System Open Market Account
At this session there was a discussion of the study that had
been made by the Special Committee appointed at the meeting on January
28, 1957 consisting of Messrs. Martin, Hayes, Allen, Balderston,
Erickson, and Szymczak.
ing on March 5, 1957,
In accordance with the agreement at the meet
this Special Committee had been reviewing all of
the operating procedures that had been presented in the report of the
Ad Hoc Subcommittee as discussed at the meeting on March 4
and 5,
1953, with the exception of the matters relating to the housekeeping
aspects of that Subcommittee's report.
In the course of the discus
sion, there was presented for the approval of the Committee the follow
ing continuing operating policy that had last been reaffirmed at the
meeting on March 5, 1957:
It is not now the policy of the Committee to
a.
support any pattern of prices and yields in the Govern
ment securities market, and intervention in the Govern
ment securities market is solely to effectuate the
objectives of monetary and credit policy (including
correction of disorderly markets).
Upon motion duly made and seconded,
and by unanimous vote, the foregoing
statement of policy was reaffirmed.
There was also presented for the consideration of the Com
mittee the following continuing operating policy which, by unanimous
-56
3/4/58
action, was reaffirmed at the meeting of the Committee on March 5,
1957, pending completion and submission of a report by a Special
Committee appointed at the meeting on January 28, 1957.
b. Operations for the System Account in the open market,
other than repurchase agreements, shall be confined to short
term securities (except in the correction of disorderly markets),
and during a period of Treasury financing there shall be no
purchases of (1) maturing issues for which an exchange is being
offered, (2) when-issued securities, or (3) outstanding issues
of comparable maturities to those being offered for exchange;
these policies to be followed until such time as they may be
superseded or modified by further action of the Federal Open
Market Committee.
During a discussion of this statement of policy, Mr. Hayes
said that, in an effort to promote general agreement, he would vote
to approve the statement if
it
included the qualifying phrase, "as
a general rule," after the word "shall" in the second line and after
the word "shall" in the fourth line.
A motion to reaffirm the statement
in its existing form was approved,
Messrs. Martin, Balderston, Fulton, Irons,
Leach, Mangels, Mills, Shepardson,
Szymczak, and Vardaman voting "yes," and
Mr. Hayes voting "no."
Messrs. Allen, Bopp, Bryan, Deming,
Erickson, Leedy, and Johns stated that,
had they been members of the Committee,
they would have voted to reaffirm the
foregoing statement of policy.
The following continuing operating policy was then presented
for the consideration of the Committee:
c.
Transactions for the System Account in
the open
market shall be entered into solely for the purpose of
-57providing or absorbing reserves (except in the cor
rection of disorderly markets), and shall not include
offsetting purchases and sales of securities for the
purpose of altering the maturity pattern of the System's
portfolio; such policy to be followed until such time as
it may be superseded or modified by further action of
the Federal Open Market Committee.
Mr.
Hayes stated that he would vote to reaffirm this statement
of policy if the statement were amended to read as follows:
Transactions for the System Account in the open
market shall be entered into solely PRIMARILY for the
purpose of providing or absorbing reserves (except in
the correction of disorderly markets), and shall, AS A
GENERAL RULE, not include offsetting purchases and
sales of securities for the purpose of altering the
maturity pattern of the System's portfolio; such policy
to be followed until such time as it may be superseded
or modified by further action of the Federal Open Mar
ket Committee.
The Chair put a motion to reaffirm
the statement in its existing form with
out the changes suggested by Mr. Hayes,
and this motion was carried, Messrs.
Martin, Balderston, Fulton, Irons, Leach,
Mangels, Mills, Spehardson, Szymczak, and
Vardaman voting to approve, and Mr. Hayes
voting "no."
Messrs. Allen, Bryan, Deming, Erickson,
Johns, and Leedy indicated that, had they
been members of the Committee, they would
have voted to reaffirm the existing state
ment of policy.
Mr. Bopp stated that, had he been a
member of the Committee, he would not have
voted to reaffirm the existing statement
of policy but that he would have voted to
approve a statement that was changed to
read as follows:
"Transactions for the System Account in the open market
shall, as a general rule, not include offsetting purchases
3/4/58
-58
and sales of securities for the purpose of altering the
maturity pattern of the System's portfolio; such policy
to be followed until such time as it may be superseded
or modified by further action of the Federal Open Market
Committee."
Mr. Hayes stated that he would be
willing to vote for a statement such as
Mr. Bopp had indicated he would approve.
It was agreed that the next meeting of the Federal Open Mar
ket Committee would be held on Tuesday, March 25, 1958,
Thereupon the meeting adjourned.
Secretary
at 10:00 a.m.
Cite this document
Federal Reserve (1958, March 3). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19580304
@misc{wtfs_fomc_minutes_19580304,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1958},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19580304},
note = {Retrieved via When the Fed Speaks corpus}
}