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 25, 1958, at 10:00 a.m,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Fulton
Irons
Leach
Mangels
Mills
Robertson
Mr. Shepardson
Mr. Szymczak
Mr. Vardaman
Messrs. Erickson, Allen, and Deming, Alternate
Members of the Federal Open Market Committee
Messrs. Bopp, Bryan, and Leedy, Presidents of
the Federal Reserve Banks of Philadelphia,
Atlanta, and Kansas City, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Daane, Hostetler, Marget, 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. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Freutel, First Vice President, Federal
Reserve Bank of St. Louis; Messrs. Ellis,
Roosa, Mitchell, Strothman, and Tow,
-2
3/25/58
Vice Presidents of the Federal Reserve
Banks of Boston, New York, Chicago,
Minneapolis, and Kansas City, respectively;
Mr. Einzig, Assistant Vice President, Fed
eral Reserve Bark of San Francisco; and
Mr. Anderson, Economic Adviser, Federal
Reserve Bank of San Francisco
Chairman Martin stated that Mr. Johns,
Alternate Member of
the Federal Open Market Committee, was unable to attend this meeting
because of illness and that,
in the absence of objection, Mr. Freutel,
First Vice President of the Federal Reserve Bank of St. Louis, would
attend the meeting at the suggestion of Mr.
Johns as an observer.
There being no objection, Mr. Freutel joined the meeting.
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on March 4, 1958, were approved.
Before this meeting there had been distributed to the members
of the Committee a report prepared at the Federal Reserve Bank of New
York covering open market operations during the period March 4 through
March 19, 1958, and a supplemental report covering commitments exe
cuted March 20 through March 24, 1958.
been placed in
Copies of both reports have
the files of the Federal Open Market Committee.
Reporting on operations since the last meeting, Mr. Rouse
said that it
had been necessary to maintain free reserves on the high
side of the range that had been suggested by the Committee in order
to achieve the degree of ease that was intended.
During much of the
-3
3/25/58
period since the last meeting,
the New York and Chicago banks had
been under moderate pressure.
The Chicago situation reflected in
part the stockpiling of bills by banks in anticipation of the
April 1 personal property tax date in Cook County, while some part
of the tightness in New York reflected continued purchases by banks
of Government securities and the extension of sizable loans to dealers.
Also, an underlying influence affecting reserve positions in the
money centers was that the aggregate volume of free reserves had
generally continued to be heavily concentrated in country banks.
Mr. Rouse noted that rates on short-term debt instruments moved
lower toward the close of the period.
the bill
auction on Monday,
The average issuing rate in
was 1.19 per cent, compared
March 24,
to 1.34 per cent the previous week, and the rate on bankers'
ceptances was reduced by an additional 1/
close on March 24.
ac
of 1 per cent after the
The market for longer-term Government securities
showed some improvement during the period, but a restraining influence
had been exerted by recent announcements of large scale financing to
be undertaken by private firms in the near future.
Almost $750 mil
lion of such financing had been announced during the past two weeks.
In view of this large volume of offerings, it
pected that there would be much, if
could hardly be ex
any, decline in long-term in
terest rates.
The Treasury issued special certificates to the New York
Bank on two occasions since the last meeting in order to avoid
3/25/58
-4
overdrafts.
Based on the estimates at the New York Bank, the
Treasury's use of the special certificates reflected not so much
a dearth of available cash balances, although they were low, but
rather a desire to use the device at least once before the legisla
tive authority to obtain such accommodation expires next June 30.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period March 4 through March 24,
1958, were approved, ratified, and
confirmed.
Chairman Martin referred to the preliminary draft of record
of policy actions taken by the Federal Open Market Committee during
the year 1957 which had been distributed with a memorandum from the
Secretary dated March 14, 1958, in order to obtain comments and sug
gestions prior to action by the Board of Governors on the final form
of record to be included in
the Board's Annual Report pursuant to
the requirement contained in the last paragraph of section 10 of the
Federal Reserve Act.
He said that a number of comments had been re
ceived and that the matter had been placed on the agenda for this
meeting to provide an opportunity for any additional comments.
The Chairman then called upon the Secretary, who stated that
comments had been received from most of the Presidents, that they
had been constructive,
and that in almost all cases the suggestions
had been incorporated in the draft.
In a few cases, however, it
3/25/58
-5
was not possible to fit
in the suggestions with the minutes of
the Committee on which the policy record was based.
Two general problems were the subject of comment,
Riefler said, the first
Mr.
having to do with how to treat discussions
relating to the discount rate.
One suggestion was to eliminate
reference to all such discussions,
but this did not seem proper
because discussion of the discount rate represents an important
part of the record.
Therefore, an effort had been made to handle
the matter by making it
was discussed in
clear in the policy record that the rate
objective fashion as something within the responsi
bility of the directors of the Federal Reserve Banks.
general comment,
The second
made by two or three parties, was in substance to
the effect that the record for the first
six months of 1957 showed
considerable filling back and forth and therefore did not seem to
justify the policy of restraint actually adopted.
An attempt had
been made to take account of these comments by certain minor modifi
cations, but in general the draft of policy record reflected the way
the minutes actually ran.
Mr. Riefler concluded by saying that a revised draft of the
policy record would be sent to the Presidents promptly and that the
intention was to place the record before the Board for final approval
in
that fashion.
However, if
any of the Presidents had any strong
feeling about the revised draft, it
would be appreciated if
would get in touch with the Secretary.
they
3/25/58
Mr. Hayes raised a procedural question, asking whether it
had not been suggested at a meeting of the Committee last year that
drafts of entries for the policy record be prepared and distributed
after each meeting so that the drafts could be considered while there
was still
a feel of the respective meetings.
Mr. Riefler responded by explaining the practical problems
that had prevented this practice from being followed last year.
He
said that beginning with this meeting an effort would be made to
follow the suggested practice consistently, with the understanding
that the entries for the meetings held previously this year would be
prepared as soon as practicable.
Mr.
Hayes then referred to a suggestion he had made, and the
reason therefor, relating to a change in the draft of policy record
for the meeting of the Committee on March 5, 1957, and the Chairman
replied that the change would be reflected in the revised draft.
Members of the Board's staff entered the room at this point
to assist Messrs. Young,
Thomas, and Marget in the presentation of
an economic and credit review, illustrated by chart slides.
Storrs,
Mr.
Vice President of the Federal Reserve Bank of Richmond, also
entered the room for this presentation.
A copy of the script of the
review was sent to each member of the Committee following the meeting.
The review indicated that during the period since the similar
review of the economic situation given at the meeting of the Committee
-7.
3/25/58
on January 28, 1958,
activity and employment in this country had
declined considerably further.
Industrial production during Feb
ruary was down to 130 per cent of the 197-49 average,
as compared
with 135 in December and 145 last August, and March appeared to be
lower.
Thus,
in the six months from August to February, industrial
production declined a little
more rapidly than in the corresponding
periods of 1948-49 and 1953-54.
Employment had continued to decline
in manufacturing and also in nonmanufacturing lines, with the declines
particularly marked in
durable goods industries.
sharply to 5.2 million in February,
Unemployment rose
the number of workers on part
time had increased further, and the number working overtime had con
tinued to decline.
In March, new claims for unemployment compensation
remained at a high level.
Meanwhile,
recession, prices generally had
Consumer prices in February were appreciably higher
not declined.
than in December,
for services,
as in the 1953-54
reflecting higher food prices and higher charges
and a further rise in wholesale prices resulted from
advances in livestock and products and also in fresh fruits and
vegetables,
whose supply has been curtailed by unusually severe
winter weather.
little
The broad average of industrial prices had changed
since last summer and sensitive industrial material prices,
which declined sharply late last summer and in
little
early autumn, showed
further decline in recent months.
In security markets, prices of common stocks had moved up
irregularly, and were now about 8 per cent above the low reached
-8
3/25/58
late in 1957,
the first
while stock market credit increased in February for
time since last June.
Prices of high-grade corporate
bonds had declined slightly since late January, following earlier
sharp advances.
The recent declines in economic activity and in business
inventory holdings had been accompanied by a more than seasonal
reduction in bank loans.
Banks, however,
had been increasing their
investments since late last fall, and total bank credit outstanding
Also, despite
had increased at a season when a decrease is usual.
reduced business spending for plant and equipment,
corporations had
sought and obtained large amounts of new capital in security markets
and new borrowing by the United States Treasury and its agencies had
been large.
Increased availability of funds in both long- and short-term
markets on terms much more favorable to borrowers than earlier had
reflected in
considerable part broad economic developments tending
to increase the supply of funds and to limit demands.
Also, Federal
Reserve policy had contributed to easier credit conditions,
through
actions to increase the availability and lower the cost of bank re
serves.
As to external developments,
stability in
there had been a fair degree of
activity abroad, the leveling off in activity had had a
disproportionate impact on exports from this country, but the major
part of the downward adjustment in exports appeared to have already
3/25/58
-9
been completed.
On the other hand, the recession in the United
States had thus far had only a limited impact on other countries.
The review also pointed out that the 1957-58 recession in
activity had now extended as far as the recessions of 1948- 9 and
1953-54,
and that there was as yet little
indication that the
leveling off which came at about this stage in
was an immediate prospect.
those earlier periods
Consequently, many people were concerned
over the possibility that declines in
activity, income,
and trade
might become cumulative--despite easing of credit conditions--and
that this recession might be of considerably more serious proportions
than the other two postwar recessions.
At the same time, adjustments
in prices to changed demand conditions had been few, except for
sensitive materials.
to stem the decline in
Thus,
it
seemed possible that action intended
activity and employment might not succeed
until more realistic adjustments had been made in policies with re
spect to prices and costs.
The shift from inventory accumulation to
liquidation at a substantial rate apparently had about run its
course,
which might suggest a leveling out in the economy near the present
rate.
Producer outlays for capital goods, however, were continuing
downward and as yet no turning point was in sight, with scheduled
outlays in the second half well below those of the first
record of earlier cycles,
half.
The
however, indicated that leveling off in
activity and even recovery need not necessarily await a turnaround
in
capital goods.
-10
3/25/58
Government outlays were rising at both the national and
local levels,
but at this point the course of consumer outlays,
whose rapid advance was a key element in the 1954-55 recovery,
seemed rather uncertain.
Consumer prices had continued upward
notwithstanding declines in consumer incomes, and the current de
cline in private capital goods spending might have a greater
dampening effect on consumer confidence than the declines in
Government expenditures in the 1953-54 recession.
How far resi
dential building might be stimulated by easier credit conditions
was yet to be determined.
Wnile the decline in activity appeared to be carrying further
than in
either of the other postwar recessions,
there were strong
reasons for believing that it would not go to any such length as in
the years following 1929,
1937-38.
and that it would not be as sharp as in
The current business and financial situation, both at
home and abroad, was hardly comparable with the situation after 1929
and many elements were more favorable than conditions prevailing in
1937.
To the extent that policies of credit restraint in
effect
from 1955 to 1957 discouraged speculation and unwise financial com
mitments, they had no doubt helped to limit the extent of the current
decline and to increase the likelihood of recovery without prolonged
unemployment or basic loss of confidence,
and the shift to a policy
3/25/58
-11
of credit ease in recent months represented an important development
whose effects should be felt increasingly as necessary adjustments
were made in various sectors of the economy.
Projections based on
usual seasonal trends, together with Treasury financing needs, indi
cated prospects for free reserves generally averaging well above half
a billion dollars during the next three months without any further
Federal Reserve action.
Should banks put available reserves to use
and maintain credit above usual seasonal trends,
would be lower.
then free reserves
How long maintenance of bank credit and further
recession in economic activity could continue simultaneously raised
an interesting question as to the future.
Following the review, Mr. Hayes made a statement on business
activity and credit policy substantially as follows:
Unfavorable developments have dominated business news
in the past three weeks and will probably continue to do so
in the coming weeks. Recent figures on industrial produc
tion, unemployment and actual and projected capital expendi
tures were fully as bad as, or worse than expected. It is
true that several economic series seem to be leveling offnotably new orders for machinery, paperboard, plywood and
other products, steel production, prices for industrial raw
materials (including the very sensitive index for scrap and
But no reliable
waste materials), and ocean freightrates.
inference can be drawn from these scattered signs, and on
the whole business activity in March will very probably fall
short of the seasonal improvement normally to be expected.
Inventory liquidation continues at a rather rapid paceperhaps at an annual rate of about $5 billion--but this will
not necessarily set the stage for a rapid business recovery
in view of the pronounced downward trend of plant and equip
ment expenditures. While consumer buying has been remarkably
well sustained so far, the February figures on retail sales
3/25/58
-12-
were below a year ago for the first
time and the shortfall
may increase in March in view of the cumulative effect of
unemployment and shorter hours on consumer expectations and
consumer buying, aggravated by poor weather and perhaps by
expectations of future excise tax cuts. Whether and when
higher Government spending will become an important favorable
force is still problematical. The prospective increase in
the actual level of defense expenditures in the coming months
seems scarcely large enough to provide a major offset to down
ward economic influences.
On the other hand, as a result of
current widespread discussion of important new Government
spending programs or a tax cut, or both, important new
stimulating forces may be injected into the economy within a
few months. Meanwhile the public, both here and abroad,
seems to exhibit an encouragingly calm attitude toward the
recession as it has developed to date.
In the area of bank credit, the last few weeks have wit
nessed a very sharp rise in holdings of Government securities
as compared with a small drop a year earlier. Although tax
borrowing has run considerably behind last year, the rise in
total loans and investments has far exceeded that of last
year. If we compare early March with mid-November figures,
we find that total loans and investments in weekly reporting
banks increased by nearly $2.5 billion, of which a large
Money supply figures are less
proportion was in New York.
satisfactory, mainly because of continuing growth of time
deposits and a bulge in Government deposits. The latter,
of course, may prove to be temporary, bringing a corresponding
rise in the money supply in March, and in any case the trend
of the money supply was better in February than in the two
preceding months. Required member bank reserves declined
about $270 million in the period from mid-November to early
March, but after making allowance for the first cut of 1/2
per cent in reserve requirements, we may say that total
required reserves (the base for a larger money supply) rose
by about $200 million--a trend which we should certainly
regard as encouraging, since free reserves were also rising
at the same time.
Estimates of the Treasury's receipts and expenditures
over the rest of the fiscal year point to a need for perhaps
$3 to $4 billion of cash financing, and a good part of this
may be undertaken within the next week or two.
The business outlook clearly calls for a policy of ease.
I think we would all like to see monetary policy playing as
effective a role as it can, particularly during this phase of
3/25/58
-13
recession when so much is expected of it by the country in
general. While the statistical record of free reserves and
short-term interest rates since the last meeting suggests
that the degree of ease desired by the Committee has been
achieved, I have been somewhat disturbed by the recurring
tendency for a feeling of relative tightness to develop in
the money centers, with unused reserves accumulating in the
country banks.
There is no assurance that the big city banks
will always be able to find and use those accumulated reserves.
We should, in my view, seek ample availability of bank credit
and the creation of an atmosphere where banks are actively
seeking loans rather than looking with equanimity on their re
payment.
In a sense, just as excessive bank liquidity made it
difficult to apply effective restraint two or three years ago,
so the sharply reduced level of liquidity achieved in the later
stages of the boom is having a dulling effect on our efforts
to stimulate lending.
For example, the New York banks still
feel that their loan-deposit ratios are rather high, in spite
of the sizable acquisition of Government securities already
mentioned, and we see little
evidence yet of an aggressive
search for good loan opportunities.
I believe that open market policy should seek to maintain
at least the present degree of ease and preferably to achieve
a greater feeling of ease in the money centers. While I would
de-emphasize the free reserve target, I would expect that a
minimum of $500 million of free reserves would prove necessary
to achieve the desired result, and I would have no qualms about
going as high as $750 million if this did not cause an atmos
phere of market sloppiness. While the latest reduction in re
serve requirements has done much of the necessary job for the
coming three weeks, some moderate purchases may be needed.
Incidentally, in view of the recurring tendency toward
undesirable tightness in the money centers, I was a little
sorry that the latest reserve requirement cut did not include
some start toward narrowing the differentials among the various
classes of banks, especially with respect to the central reserve
city banks. At last week's meeting, the New York Bank's di
rectors unanimously expressed the view that it would be helpful
in promoting greater availability of credit if the Board of
Governors would move as promptly as practicable to eliminate
the differential between central reserve city and reserve city
requirements.
As I mentioned at the last meeting, I feel some concern
over the heavy backlog of new capital issues and the rather
heavy tone in the capital markets, which are responding only
very sluggishly to the ease engendered by Federal Reserve
I might say
policy action in the short-term market.
-14
3/25/58
parenthetically at this point that a lot of these new
issues are designed to repay bank loans, which I think
is a highly desirable objective in the present circum
stances.
There have recently been a number of comments
in the market as well as from economists and the press
to the effect that the System is open to criticism for
failing to take direct action in the longer-term marketthat the process of arbitrage has been operating too
erratically to provide the timely and vigorous encourage
ment for investment which current economic conditions call
for.
Our own analysis does not indicate a need for releas
ing reserve funds directly into the long-term market at
present.
I am hopeful that the passage of time may bring
substantial improvement, as longer-term expectations become
clarified, so that I would certainly think it premature to
suggest direct System action at this time.
Nevertheless,
I think the Committee should be fully aware of this possible
obstacle to a maximum contribution by monetary policy to
the forces of recovery and should keep this matter under
study.
I can see no need for considering at this meeting a
change either in the discount rate or in the directive.
Mr.
to show,
Bryan stated that the picture in the Sixth District seemed
over all, a slow but steady deterioration.
There were a num
ber of district statistics going in different directions but it seemed
to him that the most reliable indicator of the general economic picture
was insured unemployment, which was steadily growing although a little
better than the national picture.
trict
There were two States in the dis
having over 10 per cent of the insured workers unemployed,
the only really good situation was in
while
Florida where the rate of in
sured unemployment was only about 3 per cent.
Commercial bank loans
had been going down recently at a rather more rapid rate than for the
country as a whole.
With regard to the national outlook, Mr.
Bryan said he shared
the view which had been expressed that there was a very considerable
3/25/58
-15
problem regarding use of the commercial banking system as a
dynamic instrument in fostering recovery.
He did not believe
the commercial banking system would be brought in as a dynamic,
active factor until it
at present.
had substantially greater liquidity than
The situation differed from 1953 because the move
toward recovery would have to start from a much higher level of
"illiquidity."
Consequently,
he would favor a substantially
greater easing of the monetary situation in an effort to induce
the commercial banks actively to seek out good borrowers,
and to
him it seemed immaterial whether that was done by open market
operations or by further reductions in
member bank reserve require
ments.
Mr. Bopp said that there was as yet little
a seasonal upturn in business activity in
evidence of even
the Third District.
Pre
liminary data for eight labor-market areas in eastern Pennsylvania,
including Philadelphia, indicated that factory employment in Feb
ruary was 1-1/2 per cent below January, and 6-1/2 per cent below
February 1957.
Employment had declined in
areas except Harrisburg,
each of the labor-market
which had only a small increase.
Although
new unemployment compensation claims in Pennsylvania declined in
each of the three weeks ending March 13 and continued claims leveled
off after dropping slightly in the first week of March, both new and
continued claims were still
about double the levels prevailing during
the same period last year.
Department store sales had shown some
-16
3/25/58
iprovement in the past three weeks.
Sales in early March were
substantially above a year ago, but volume in the latest week was
unchanged from last year.
The good showing in
early March reflected
comparison with a low level of sales in the same weeks last year and
the fact that Easter is
earlier this year than last.
For the four
weeks ending March 15 and for the year to date, sales were 2 per
cent below last year.
Sales of new automobiles were slow, and in
ventories were reported to be burdensome.
New car registrations in
eastern Pennsylvania for February were about 25 per cent below
January and nearly 30 per cent below February last year.
tions in Philadelphia in
Registra
the first three weeks of March were 10 per
cent above the preceding three weeks,
but still
nearly one-third
The consumer price index for Philadelphia was up
below a year ago.
one-tenth per cent in February as compared to an increase of two
tenths nationally.
Mr.
Bopp went on to say that business loans of district
reporting banks,
after having declined each week so far this year,
turned upward in March,
the increase for the two weeks ending March
19 being $46 million (less than 2 per cent).
The rise was accounted
for mostly by sales finance companies and utilities, and probably
reflected borrowing to meet tax payments.
In both 1957 and 1956
there was a seasonal expansion in business loans beginning in
February and continuing, with only minor interruptions, until
midyear.
Consumer and real estate loans had shown little
change
3/25/58
-17
this year,
the former being slightly above and the latter
below the levels of last
year.
adding to their investments,
Weekly reporting banks had been
the increase being fairly well dis
tributed among Treasury bills,
securities.
slightly
certificates,
and bonds,
and other
Private demand deposits and time deposits were also
up substantially.
Member bank borrowing from the Reserve Bank,
reflecting the easier credit policy,
continued at
a very low level.
During the three weeks ending March 19,
the daily average was $7
million as compared to $67 million last
year.
Purchases of Federal
funds were also at a low level.
As to monetary policy, Mr.
Bopp expressed the view that a
further reduction of one-half per cent in
warranted by the deterioration in
of reserve positions,
In
the business situation,
the easing
and the current rate on Treasury bills.
open market operations,
the money market.
the discount rate seemed
As to
he would favor maintaining an easy tone in
part because of the reduction in reserve require
ments that would become effective
for country member banks on April 1,
he would not pay much attention to the level of free reserves and
would not be disturbed to see the level significantly higher than
would otherwise be needed to maintain an easy tone.
appropriate measure of ease at this time,
As a more
he would prefer to see
the Federal funds rate below the discount rate.
In
the broader
area of credit, he was disturbed by the contrasting developments
in
the capital markets on the one hand and in
the money market on
3/25/58
-18
the other, as reflected in the report of open market operations
distributed prior to this meeting.
The yield on Aaa corporate
bonds had been rising recently--only very slightly but still rising,
not falling.
The reoffering yields on new public utility bonds,
though down a bit in the past weeks, were significantly above those
of two months ago, and there had been periodic congestion in the
bond market.
What disturbed him in these developments,
Mr. Bopp said,
was that the increasing ease created and permitted to develop in
the money market had not been transmitted effectively enough to
the capital market.
This transmission might come eventually, but
he wondered how much time there was.
When he read some of the
proposals that were not only being brought forward but were receiv
ing considerable support, he doubted whether there was very much
time.
It seemed to him that an easier and cheaper capital market
would make a significant contribution to recovery,
for it would
encourage new issues that would bolster a sector of the economy now
giving concern.
In this connection, a compilation by one of the
Reserve Bank's directors regarding use of the proceeds of public
utility issues (other than the A.T.&T. issue) in the last three
months showed that out of $730 million of new offerings, only $40
million was for refunding; $246 million was to repay bank loans
and $443 million was for new money.
-19
3/25/58
Mr.
Bopp said that he was aware of some of the dangers
and disadvantages,
as well as the technical and operating diffi
culties, that arise when a central bank exhibits a direct interest
in the capital market.
On the other hand,
he was disturbed by some
of the proposals being pushed and gaining support to promote recovery
and that, on balance, seemed to him to be less desirable.
Therefore,
he wondered whether the System could or should do anything in this
area in the light of current developments and their possible short
and long-run consequences.
In reviewing conditions in the Fourth District, Mr.
Fulton
said he could not add any sunshine to the comments made thus far.
The steel industry was steady, but at a low level of operations, with
one company at the lowest rate since 1939.
was one reflecting poor demand.
In essence,
However, a little
the situation
firmness seemed
to be coming from the structural end of the steel production picture
and steel men were looking to that as a part of the industry to in
crease in
the months ahead.
The lake shipping season was about to
open but only a portion of the ore boats were going to be put into
commission.
The comment had been made that if
two-thirds as much
ore was carried this year as last, they would be satisfied, but,
in view of the current stockpiles, not too good a movement was
expected.
low.
Scrap was at a price representing almost a four-year
The possibility of a price increase in basic steel seemed
quite imminent after wages in the steel industry go up again in
3/25/58
July.
-20
The machine-tool industry had had a pickup in
orders, but
this was not of too much substance because in December orders hit
the lowest point in many years and they were still
rate for the industry.
at a very low
Shipments were running at double the rate
of sales so that backlogs would soon be used up.
The glass in
dustry was going along in fair shape although automobile glass was
very slow.
The comment had been made that if
one million new houses
were built this year, there would not be too much impact because
manufacturing capacity is
large.
The coal industry was going along
with the steel industry and no pickup seemed imminent.
ventories,
As to in
some companies seemed to have reduced inventories below
working requirements.
Several manufacturers reported that they had
received so-called "expedited orders," and when the manufacturer
began to make up the order he found that he too was short of material.
Therefore,
it
came,
there was a feeling among businessmen that any pickup, when
would be manifested quickly down the line of manufacture be
cause inventories were at such a low level.
Companies having a
smaller portion of their sales to the automotive industry were faring
better than those companies which make a substantial portion of their
sales to that industry.
The net increase in unemployment was below
new claims filed, indicating that some employers were rehiring
employees previously laid off.
One new area had been added to the
substantial labor surplus classification.
Department store sales
were about 5 per cent below last year on a year-to-year basis and
-21
3/25/58
this was not too good for the period before Easter.
Building was
a bright spot in the picture, but not too bright; permits were
higher than last year but business plans were being stretched out
over a longer period and some plans were being postponed temporarily.
Mr. Fulton had received verification that companies were
resorting to the capital market to pay off bank loans, which tended
to indicate that the banks would have adequate funds to make loans
if
they wished.
However,
because of the thought in the minds of
some bankers that loans were high, he did not believe that anything
the System could do would encourage the banks to make loans as long
as the ratio of loans to deposits was as high as had been the case
for the past year or so.
He sensed a reaching for liquidity that
would very probably make the bankers hesitate to increase their
loans regardless of the repayment factor, and he did not believe
that monetary policy could foster the making of loans where the
policy of the individual bank dictated against increasing the loan
portfolio.
With reference to monetary policy, Mr. Fulton said that he
still
would like to see the discount rate reduced at least to 2 per
cent, with possibly, as Mr. Bopp had suggested, a reduction of 1/2
per cent from the present 2-1/4 per cent rate.
It was his opinion
that free reserves should be at a minimum of $500 million; in other
words,
that figure would seem to him appropriate as a floor.
He
believed that the Committee should have a posture of supplying
3/25/58
-22
reserves willingly and in
sufficient volume.
Some restraint, he
said, would come from the attitude of bankers and the market itself.
Therefore,
Mr.
the System should supply reserves freely.
Shepardson said that although he did not see anything
particularly bright in the economic picture, the dark spot to him
was the failure during the current period to get many of the adjust
ments that he had hoped for, particularly in respect to the price
situation.
However,
some of the reports in
the press with regard
to wage negotiations and similar matters did indicate the possibility
that the labor interests were going to temper their requests somewhat.
He considered it
important not to try to stimulate and change too
quickly until the adjustments which he mentioned had been obtained,
and for that reason he would not like to see any further easing of
monetary policy at this time.
banks,
Except possibly for the money market
the banks of the country seemed to have plenty of funds,
and
in the circumstances he would not favor raising the target for free
reserves.
From the standpoint of its relationship to other money
market rates, the discount rate might be further adjusted, but there
appeared to him to be a sufficiency of available funds at the present
time.
Mr. Robertson said that on the basis of the facts presented,
he saw no reason to deviate from the goal fixed by the Committee at
its
last meeting.
However, since he was firmly convinced that the
3/25/58
-23
economy was tending to bottom out and would do so soon, he would
favor taking every opportunity to reduce both reserve requirements
and the discount rate in
order to be in
a better position to move
fast and in big jumps when the upward movement in the economy
started.
He hoped that the System would have the wisdom and courage
to act quickly to sop up reserves when the time was appropriate.
Mr. Mills commented that his position was contrary to the
general tone of recommendations expressed up to this point at the
meeting.
He believed everyone would recall that when an aggressive
policy of credit restraint was being followed last year, both here
and abroad,
the point was made in some quarters that a heavier burden
had been placed on monetary policy than could be reconciled with its
potentialities as an economic corrective.
In his opinion, the same
point could justifiably be raised again, but this time on the easy
side of credit policy which, by constantly piling new reserves on
new reserves,
was in
that process forcing interest rates down to a
level that would hinder rather than help the Federal Reserve System
in its
efforts to foster economic growth and stability.
trate his point, Mr.
To illus
Mills said that in retrospect the tentative
goal of $500 million of positive free reserves set by the Committee
at its last meeting may prove to have been more liberal than called
for by the necessities of System policy.
As this was a period that
had been subject to the unsettling market influences of Federal in
come tax collections,
Treasury financing,
and preparation for the
3/25/58
-24
Illinois personal property tax date,
little
significance to the fact that some signs of tightness had
occasionally appeared,
area.
Mr. Mills felt that there was
especially in
On the contrary,
the central reserve city bank
he believed that the true facts reflecting
the supply of reserves available to the commercial banking system
had been revealed by the 1.18 per cent Treasury bill yield produced
at yesterday's auction, another reduction in
bankers'
It
acceptances,
and a 1/2 of 1 per cent rate for Federal funds.
seemed to him that if
the response in
the interest rate for
reserves had been supplied less aggressively,
interest rates would have been more consistent with
the System's general policy objectives.
Consideration of the facility
with which commercial paper and bankers'
acceptances were being
marketed at constantly lower interest rates suggested to him that the
rates of interest acceptable to the more distant credit markets were
presently a more reliable indicator of over-all credit market condi
tions than the gyrating rates currently applicable to Federal funds
and Treasury bill
credit transactions in the New York money market,
and hence System policy actions should be guided accordingly.
Mr.
Mills went on to say that he had been impressed by Mr.
Bryan's able analysis of the commercial banking system and the
liquidity considerations related to the high level of bank loans as
compared to past years.
strongly from Mr.
However,
his own thinking diverged very
Bryan's suggestion that it
would be desirable to
drive the commercial banks into more aggressive lending and investment
-25
3/25/58
policies by freely supplying them with new reserves.
saw it,
As Mr. Mills
such a policy would merely serve to lay another layer of
reserve fat over a framework of bank loans that may stand to be
weakened by the deterioration in economic conditions.
circumstances,
Under such
to supply additional reserves to a point that would
substantially soften the interest rate structure could tend to draw
the commercial banks into making unwise investments and weak loans
as a means of maintaining their earning positions.
In the light of the reasoning which he had expressed,
was Mr.
in
Mills'
it
opinion that the Committee should proceed cautiously
supplying reserves and should allow a reasonable period for test
ing the effects of previous reserve actions before taking new ones.
He thought that a level of $400 million of positive free reserves,
or even lower, would be adequate to exert the kind of economic in
fluence sought for by System policy.
He also called attention to
the Treasury's approaching financing operation and the problem that
would arise as to what reserve support it
opinion, it
should be given.
In his
would be preferable for such support to come as far as
possible from the reserves already available at the time of the
Treasury's financing and without supplying any additional reserves.
As a last point illustrating the kind of difficulties that
arise from overloading the mechanism of monetary policy, Mr.
Mills
contended that the problem in handling repurchase agreements that
was the subject of Mr. Rouse's recent memorandum could be traced
-26
3/25/58
directly to System policy actions in supplying reserves that had
had the undesirable effect of forcing a wide divergence between
short-term interest rates and the Federal Reserve Bank discount
rate.
All things considered, he felt that it
would be a mistake
for the System to be stampeded into a policy too aggressively on
the side of credit ease.
Mr. Vardaman said that in order to save time and avoid
repetition, and primarily because in
completely with Mr.
join in
Bryan, he would ask Mr.
his thesis.
Mr. Mills'
remarks,
this instance he agreed so
Bryan's permission to
He found himself in disagreement with part of
although he appreciated what Mr.
and would like to see his comments in writing.
hope expressed by Mr.
Mills had said
He concurred in
the
Hayes that $$00 million of free reserves would
be set as a base, with leeway above that figure up to the point of a
sloppy market.
He disagreed with the theory expressed by Mr.
Shepardson
and felt that the System would have to lay another layer of reserve fat
on the banks before they were going to get out and make loans aggres
sively, since he felt that the principal deterrent right now to people
doing business was the unfortunate and unnecessary attitude of alleged
conservatism on the part of the commercial banks.
In his opinion, this
meant that all the System could do was to give the banks reserves and
that it
was up to the banks whether they wished to use them.
Mr. Leach stated that economic activity continued to decline
in
the Fifth District, with coal mining currently showing the sharpest
-27.
3/25/58
change.
Output of coal in the four weeks ended March 1 was 12 per
cent smaller than in the preceding month and 26 per cent less than
a year ago, reflecting weakness in both domestic and foreign demand.
Furniture manufacturers continued to cut back their operations and
the only textile division showing improvement was hosiery, which
had been in a depressed state for several years.
Two special surveys
last week cast current light on the district construction picture.
Home builders stated that mortgage money was readily available on
improving terms and they were confidently planning expanded opera
tions in 1958.
The most common rate on conventional loans was now
5-1/2 per cent but some loans were being made at 5 and 5-1/4
cent.
per
The number of points discount asked by lenders on FHA loans
had recently declined from 3 per cent to 1-1/2 to 2.
Contractors
in the heavy construction area expected a high level of work this
year, primarily for State and local governments and nonprofit
organizations,
keen.
and they reported that competition was extremely
The number of bids on each project had been increasing and
bids recently submitted had been substantially lower than advance
estimates.
Some bids were said to include little profit to the
contractors or subcontractors.
In the light of current economic developments, Mr. Leach
thought it
in
was incumbent upon the System to do all that it
the field of monetary policy to promote a recovery.
could
As a
corollary to the recent reduction in reserve requirements and as
-28
3/25/58
continued reassurance to the market, he believed that it would be
desirable to establish more ease through a higher level of free
reserves.
He was thinking currently of $600 million of free re
serves as a benchmark, with the usual qualification as to the value
of this single indicator.
This would allow a sizable part of the
reserves released by the recent reduction in reserve requirements
to be reflected in additional liquidity of the banking system if
not in new loans.
This further step to increase reserve availability
and add to the liquidity of the banking system represented, in
his
judgment, the proper role of the System under current conditions.
Admittedly,
as was demonstrated in 1954,
actions which increase the
liquidity of the banking system during a recession automatically
create problems for the future in
terms of delaying the impact of
inherent in monetary policy
subsequent tightening actions.
This is
actions to combat a recession.
The only possible offset, as he saw
it, was to place greater emphasis on prompt and effective action when
the need for tightening reappeared.
He was aware that in a recession
there is always some point beyond which further ease has no beneficial
economic effect.
The System may have gone somewhat beyond that point
in 1954, but in his judgment there was some leeway for more ease at
the present time.
While he agreed in principle with the remarks by
Mr. Mills, he differed with Mr. Mills in that he did not think the
point had yet been reached where rates were being driven down to an
unnecessarily low level.
3/25/58
-29
Mr.
Leedy, who had been away from the Kansas City District
most of the time since the last Committee meeting, said that his re
view of developments following his return to Kansas City late last
week indicated some signs that were less pessimistic than those in
dicated for the nation in
general.
Like the country generally, the
district had experienced a very substantial increase in unemployment,
and that had continued since the first
of the year through the date
of the last release of such figures, but there was an indication that
the volume of unemployment was leveling off.
The rate of increase in
unemployment had been generally less than during January and the early
weeks of February.
Department store sales through the middle of March
were about 2 per cent below the volume of a year ago, while automobile
registrations in
January were only slightly less than a year ago in
five of the States in the district and were,
than last year in the State of Colorado.
in fact, a little
This compared with a de
crease of about 13 per cent for the country as a whole.
struction contracts in
higher
Total con
January were off considerably but, contrary
to the situation nationally, residential construction was up, the
figure being about 4 per cent.
Crop and pasture conditions remained
virtually ideal, with adequate rain, and the wheat crop had progressed
well in the winter.
brightest things in
Livestock prices were certainly one of the
the district.
As to banking conditions,
business
loans by banks had continued to decline in about the same volume as
last year but loans by country banks had increased sharply since the
first
of the year.
3/25/58
-30
As to policy, Mr. Leedy thought that the accomplishment of
the Desk in bringing about pretty much the degree of ease contem
plated at the last Committee meeting was certainly most commendable.
He had some question, however, whether very much additional ease at
this time was either required or advisable.
To some extent, he
wished to associate himself with the views of Mr. Mills, as he under
stood them, except that he would not favor reducing the current degree
of ease.
As for himself, he would not greatly increase that degree of
ease as he would question whether very much more ease would be appro
priate at present.
As Mr. Mills had pointed out,
the level of short
term rates should be a matter of concern to the Committee.
In view
of the rate at which Treasury bills went this week and in view of
the level of short-term rates generally, it seemed to him that a rate
structure might be developing that was not in the best interests of
the ultimate objectives that the Committee had in
mind.
He recognized
the problem of the forthcoming Treasury financing and felt that the
Federal Reserve should see that reserves were provided and the fi
nancing accomplished successfully.
The Committee should ascertain
the extent to which the commercial banks were using the reserves
being made available as he did not feel that just adding additional
reserves was justified unless some use was being made of them.
Unless
they were going to be used, he doubted whether the supplying of more
reserves would accomplish any purpose that was in
System.
the interest of the
For the time being, he would not favor changing the discount
3/25/58
-31
rate or taking any other action.
He would favor waiting for a while
to see what adjustments occurred because of what had already been
done.
Up to now, the System had made some very valuable contribu
tions and he felt that it
Mr.
should not overdo a good thing.
Allen stated that the economic situation had been so well
covered that he would be brief.
With respect to the unemployment
situation, the deterioration had continued in
all Seventh District
States except Iowa and the situation was less favorable than the
national showing.
In Michigan, where unemployment was now the
greatest, an advance estimate for March placed unemployment at 14
15 per cent of the labor force.
There were two bright spots, however.
In Kenosha, where the Rambler automobile is produced, the unemploy
ment figure was quite low and unchanged from a year ago, and in the
so-called Quad-Cities--the Davenport-Moline area where farm machinery
is
important--there was more,
than a year ago.
Mr.
but not a great deal more,
unemployment
Allen then commented informally regarding cer
tain observations about the trend of economic conditions which had
been made at the meeting of the Reserve Bank's Board of Directors
last Thursday and at yesterday's meeting of the Detroit Branch di
rectors.
He concluded his resume with comments on the forthcoming
wage negotiations in the automobile industry.
Mr. Allen then said that although recession winds were still
blowing heavily, they did not seem to be quite as strong as they had
been.
Whether they would start up again with great force, he did
3/25/58
-32
not know.
While he agreed with much of what Mr.
Mills had said, it
seemed to him that the posture resulting from two reserve require
ment reductions called for a higher level of free reserves than the
goal set by the Committee at the last meeting, which was $400-$500
million with a leaning toward the higher figure.
posture, if
In view of that
for no other reason, he felt that $500 million should be
the low figure for the next few weeks, and he would favor a range of
$500-$600 million.
He would not favor changing the discount rate at
this time.
Mr.
Deming referred to a remark he had heard recently to the
effect that economic distress signals were not flying as strongly in
the Ninth District as in
other places.
In other words,
conditions
were better than for the nation as a whole, although in some spots
they did not look very good.
One good area was in the Dakotas where
bank debits were up 10-15 per cent,
Generally speaking,
agriculture
was doing well and the elements of distress were centered in
ing and mining.
in
Also, there was some difficulty in
terms of employment,
ment in
the Twin Cities
and the employment situation in
generally was giving rise to some concern.
lumber
Minnesota
At present, unemploy
the State was estimated at 130,000 compared with 90,000
last year.
This represented a percentage figure of 9.7 in
to 6.8 in March of 1957.
contrast
Unemployment claims were up roughly 50 per
cent from 4OO,000 to 60,000 and it
was stated that in the mining
region in northern Minnesota unemployment was running about 25 per
3/25/58
-33
cent of the labor force.
On the banking side, commercial bank
loans were holding up in total although business loans were off.
Savings deposits generally were up; in
was a very substantial rise in
associations as well as in
January and February there
share accounts at savings and loan
savings deposits at the one large savings
bank and in time deposits at commercial banks.
This might have some
bearing on the question of consumer buying to the degree that spend
ing was being held back by resistance to price, quality, and kind of
product.
There seemed to be a little more competition for loans but
mostly from the insurance companies,
savings and loan associations,
and savings banks trying to make mortgage loans.
banks still
The commercial
seemed to feel somewhat tight and were not pursuing loans.
With regard to the comments about bank liquidity, this same problem
obtained in Minneapolis,
in New York and Chicago.
although perhaps not to the same degree as
In the circumstances,
he believed that the
System should overlay the banking system with another layer of re
serve fat and have reserves at a higher level than at present.
agreed with Mr.
He
Robertson, though perhaps for a somewhat different
reason, that the System should make every effort to bring reserve
requirements and the discount rate down as it
Hayes had said,
went along.
As Mr.
the next time--assuming there was a next time-
that reserve requirements were reduced, the requirements for central
reserve city banks might be reduced a little
of the country.
more than for the rest
He concluded by expressing the view that banks still
3/25/58
-34
did not feel liquid enough and that they must be encouraged to
make more loans.
Mr. Mangels said that the latest available information
indicated that the business situation in the Twelfth District de
clines a little more in February, although at a somewhat lesser
rate than for the nation as a whole.
In Arizona, information indi
cated that the employment situation had remained stable, while in
the State of Washington there had been some gain and in California
about a 1 per cent decline, primarily in manufacturing and construc
tion, the latter perhaps due somewhat to inclement weather.
Aircraft
employment in California was down only about 800 persons from January
to February and this was offset by an increase at the Boeing plant in
Seattle.
He was rather interested in Mr. Leach's comments about the
construction picture, for the Twelfth District had somewhat the same
situation.
The comment was made recently that on a $7 million project
in San Francisco, the bids were about 10 per cent lower than they
would have been a year ago.
labor was producing more.
The cost of materials had gone up but
A check had been made by the Reserve Bank
in the branch cities of the district and a varying picture was found.
In Los Angeles, building costs were about 2 per cent higher, with no
increase in the efficiency of labor, while in Salt Lake City there
was a decrease of about 2 to 3 per cent in building cost figures.
The Salt Lake City people anticipated that the year would be good
for commercial building.
In Seattle, there was a decrease of 5 to
3/25/58
-35
10 per cent in
building costs, and construction in the first
months of 1958 was 40 per cent higher than in 1957.
two
In Portland,
contractors had been bidding for some time past on a basis which
included only recovery of overhead, but now there had been some
increase in building projects and prices were up about 15 per cent.
It
was expected that in
90 days contractors in that city would use
more construction labor than at any time in Portland in the past.
The lumber market generally was still
not strong.
However,
in
response to an increase in new orders for plywood.which arose from
earlier price reductions, plywood prices had recently been increased
from $64
to the former levels of $68 and $72 per thousand.
Some
buyers, however, were reluctant to place any large orders because
of the frequent price fluctuations.
In Washington, the apple situa
tion was not too good, with top-grade apples bringing only $3 a box,
which was 60 cents below the cost of getting the apples to market.
A substantial number of people in Washington had exhausted unemploy
ment insurance benefits and were now receiving surplus foods.
the district as a whole,
the first
In
unemployment was up more than seasonally
three weeks of February,
mostly in
California.
However,
the Reserve Bank director from Idaho reported that the economy there
was progressing on a much better scale than for some time past.
the mining industry was in
While
rather poor condition and a large aluminum
plant had closed down, the situation with respect to agriculture and
-36
3/25/58
cattle was excellent and there was a good feeling in the entire
State.
On the financial side, total loans for the three weeks
ending March 12 dropped slightly less than in 1957, but in the
commercial and industrial loan category the decrease was three
times as great as in 1957.
The rate of increase in time deposits
had continued and was substantially ahead of a year ago.
There
was practically no borrowing from the Federal Reserve Bank.
An
analysis of the seven largest banks in the district's reserve
cities showed that from March 14, 1957, to March 14, 1958, the
ratio of total loans to total deposits had dropped from 56.5 to
53.3 per cent.
While these ratios were down, actually total loans
had increased by 3 per cent, but deposits had increased 9 per cent.
The ratio of real estate loans to time deposits had declined from
52.1 per cent to
3.6 per cent.
Real estate loans actually decreased
only 2.7 per cent, but time deposits increased 16.2 per cent in the
period.
The larger banks were soliciting loans aggressively and
were inviting applications for loans to pay taxes.
They had had a
very substantial runoff, in the consumer loan field particularly,
which had not been offset by an increase in new loans.
Retail
sales in the district were down, as were automobile sales, and in
the housing field the outlook was perhaps not as optimistic as had
been thought.
More investment was needed, and more spending,
and
there was a question whether a tax cut would increase spending or
whether a large part would go into savings.
There had been no
3/25/58
-37
general reduction in lending rates although there were some instances
where rates had been cut, particularly in the conventional mortgage
field.
There was some discussion of a possible cut in the prime
rate and there was more and more talk about the possibility, or even
the need, of a reduction in the rate of interest on savings deposits.
This might occur on the first of July.
The Reserve Bank's directors
were still concerned about the failure of prices to recede.
With respect to policy, Mr. Mangels said it must be recog
nized that the Treasury was coming into the market and he would have
in mind a goal for free reserves of between $600 and $700 million.
He did not favor any further change in reserve requirements or in
the discount rate.
wait a little
Rather,
he felt that it
would be advisable to
while in order to observe the results of the actions
already taken.
Mr.
Irons reported that, in general terms,
ward trend in
the slight down
the Eleventh District was continuing.
Probably the
outstanding problem in the district--one which was getting no better
was the oil situation.
Production had been cut back to an eight-day
allowable basis for April and that obviously had marked effects
wherever the influence of the oil industry was found.
In substance,
conditions in the oil industry and associated industries were
probably worse than they had been for some years, and it
seemed
doubtful whether they were going to show very much improvement over
the next few months.
For the past week, Mr. Irons said, he had been
-38
3/25/58
on the road talking with bankers and businessmen, and he had not
found much optimism among the oil group.
Basically,
the problem
was tied into the import problem and was not primarily a problem
of the recession, although the recession aggravated it.
It was
essentially the problem of a high-cost producer trying to compete
with the low-cost producer of a virtually identical product.
the problem was long run for Texas, and it
reappraise the position of Texas oil in
Thus,
would be necessary to
the world framework.
The
situation of course had serious effects on State financing, for
the State practically finances itself through oil.
It
was now
estimated that at the end of this year the deficit in State finances
would be about $100 million, and the State probably would have to
adopt a sales tax or some other revenue measure.
The oil situation
was reflected also in the attitudes found in different parts of the
State.
The people in San Antonio were quite optimistic, there was
no talk of recession in
El Paso, but in Houston the people had begun
to get apprehensive about depressed conditions because the economy
there has more to do with oil.
Mr.
Irons said that agricultural conditions in the district
were basically very good, the cattle situation was strong, and retail
trade gyrated pretty much with the weather.
The first
March were fairly good but the third week was bad.
two weeks in
The construction
picture was quite good, with housing starts ahead of a year ago, but
auto sales were down from a year ago, the decline being about 12 per
3/25/58
-39
cent in four major cities.
The aircraft industry was strong, with
one company reporting the largest backlog in its
history.
The
picture as to bank loans was more favorable than a year ago, Mr.
Irons continued.
The major banks were not sitting back and letting
any loans go by them, they were looking aggressively for business,
and they reported loan demand strong.
The banks were resisting a
fall in rates and were hopeful that there would not be a reduction
in the prime rate.
Talking in a rather casual way,
the bankers
were expressing the wish that they could get the rate down on savings
deposits, especially in
cent rate.
those cases where they had gone to a 3 per
The banks were liquid and were not borrowing from the
Federal Reserve Bank.
In summary,
Mr.
Irons said, employment was
down a bit, retail trade also was down a bit, there was much un
certainty in the district, and most of the pessimism was either
direct, or one or two steps removed,
As to policy, Mr.
statement.
from an oil man.
Irons said that he agreed with Mr.
He would not like to see any change in
Mills'
the discount rate
or in the Committee's policy directive.
Mr.
Erickson reported that there was little
sunshine in
the
New England States from the standpoint of either the weather or the
business situation.
Insured unemployment was about the same in
February as in January, and initial claims seemed to be leveling off.
As to construction, the moving average was considerably behind the
average for the same three months of the previous year, while
3/25/58
-40
department store sales were running 3 per cent behind last year
and this year's Easter business would not match that of last year.
Weather had been a factor.
The February poll of New England pur
chasing agents showed less pessimism than the January poll.
Bank
loans for the two weeks ending March 19 were only one-half of what
they were a year ago, savings bank deposits were up 5 per cent over
last year, and withdrawals were almost 8 per cent below last year.
Mr.
Erickson went on to say that a meeting of the Boston
Bank's Board of Directors was held yesterday,
that there was a longer
discussion than customary,
and that there was much more pessimism
than at any other meeting.
The directors expressed the hope that
there would be further ease in open market operations and, if
condi
tions should worsen in April, a further reduction in the discount
rate and possibly in reserve requirements.
They would much prefer
to see monetary policy used to combat the recession than built-in
machines of inflation, such as a "temporary" tax cut which might
become permanent and too much in highway construction which might be
wasteful.
Mr.
Erickson said that he and his staff felt the same way.
On policy for the next three weeks,
directive or in
he would favor no change in the
the discount rate, and he wished to associate himself
with those who suggested a minimum of $500 million of free reserves,
going above that figure as necessary as long as there was not a
sloppy market.
-4l
3/25/58
Mr.
Szymczak said he felt,
like Mr.
Robertson, that the
economy was leveling off.
In his opinion it
level off during the first
half of the next quarter and then start
would continue to
upward, so that at the end of the second quarter the System's con
cern would be about inflation.
He agreed with Mr. Mills that the
Committee ought to be careful about adding reserves to the banking
system.
Mr.
Szymczak went on to say that he thought the Board
should give careful consideration, at a time appropriate in relation
to the forthcoming Treasury financing, to a change in the reserve
requirements applicable to banks in central reserve cities.
He would
not pay too much attention to the exact figure of free reserves, that
is,
whether it was $500 million or $600 million, but he would relate
that to the reduction in
Perhaps, if
reserve requirements of which he had spoken.
such action were taken, it
would be necessary to absorb
some reserves through open market operations.
He had the definite
feeling that prices were not going down, and he felt that a certain
amount of uncertainty might, in fact, be created by a reduction in
prices,
for people would wait to see whether they would go down
somewhat further.
Thus, a price decline might have an effect con
trary to what was hoped for.
He thought that the System must get
into a position that was realistic in order to be able to do what
it
could as and when the economy started moving up.
He would not
favor changing the discount rate now or in the foreseeable future.
3/25/58
-42Mr.
Balderston said that what impressed him in the current
situation were the influences not reflected in the charts we usually
watch.
For example, the stock market was strong in the face of the
recession, which might signify not only the large short interest but
a feeling that Government stimuli might be overdone and cause further
inflation.
Also, another twist of the price spiral may develop from
the revolt in the auto union to which Mr.
Allen had alluded.
These
skilled trades are determined that they should have a 30 cents per
hour increase,
and their applications for separate bargaining rights
to the National Labor Relations Board cast uncertainty over the
negotiations and might postpone a settlement.
On the favorable side,
he also detected forces that ought to be taken into account, among
them the fact that there might be more downward revision of whole
sale and consumer prices than had been reflected thus far in the
indices.
This appeared to be taking place through modifications of
terms of sale, bargain prices forced upon other retailers by the
discount houses, and substitutions--like chicken for beef--which
may have brought about more softening in prices than the nominal
prices would indicate.
Also, cost reduction appeared to have been
progressing apace among manufacturing plants.
Because the bottom of the cyclical valley might be closer
at hand than the superficial signs would indicate and because one
could not foresee at the moment which of the many doctors would
3/25/58
-43
succeed in
economy,
injecting his particular brand of stimulant into the
Mr.
Balderston felt that it
would be advisable for the
Federal Reserve to await more enlightenment.
He would favor a
target of $500-$600 million of free reserves, which would,
believed,
he
provide the banking system with slightly more reserves
than the country banks customarily keep.
In this connection, he
had been informed by Mr. Rouse that the excess reserves of the
country banks fluctuate within each month within a range of $100
to $600 million.
He would favor giving the banking system just
enough more reserves so that the money supply would expand no
faster than the economy could put the funds to constructive use.
Since the end of last November, making allowance for seasonal
loans and investments had gone up about $4 billion,
influences,
the bulk of which had gone into securities and security loans.
That represented an annual rate of increase of about $12 billion.
Consequently,
be would prefer to keep the present posture and
observe for a little
while.
Chairman Martin said that although he did not want to sound
he wanted to express himself as pleased with current
complacent,
Federal Reserve policy.
sidered it
perfect.
This,
of course, did not mean that he con
The policy had been about 130 days in the making
and it
had covered a tremendous amount of territory in that period of
time.
In general,
far apart in
he did not believe that the Committee members were
their general thinking.
Concededly, it
is
much easier
-44
3/25/58
to go down than up,
and that was something all ought to bear in
mind in terms of monetary policy.
Mr.
Mills, he said, had per
formed a real service in pointing out that the movement might be
going too fast.
that it
That might be possible, but he did not think
could be regulated.
The posture at present was one of
ease and it should continue to be such.
The System should not
continue to inject reserves indefinitely into the market but
should bear in
mind what happened in 1954 and not be carried away
with the preservation of ease.
of the discount rate, but it
logical in all
Logic would call for a reduction
was not possible to be entirely
of these things and he would hope there would not
be a rate reduction until after the Treasury financing.
In about
130 days the rate had gone from 3-1/2 per cent to 2-l/4 per cent
and, while logic might call for a rate of 1-3/4 per cent if
against the bill
It
viewed
rate, that rate might go down to 1/2 of 1 per cent.
was his view that a change in
actually would do little
the discount rate at the moment
except to incite speculative operations
on the eve of the Treasury financing.
Therefore,
change would have no practical influence,
it
since a rate
seemed to him that
the proper time to make whatever logical adjustment was needed
would be some time after the Treasury financing rather than just
preceding it.
Also, while this was not too important a point, he
did not like to see the Federal Reserve on the front pages all the
time with policy actions unless such actions really meant something.
3/25/58
-45
If there was another discount rate reduction, that would be on
the front pages, without anything having been done except to arouse
speculation in the market.
Chairman Martin continued that he would like to associate
himself with those who favored free reserves of $500 million or
slightly higher, without a specific top figure.
Free reserves of
$600 million would not alarm him, but he would be alarmed if
were much in excess of that figure.
they
That was the fine line that
he thought ought to be maintained,
On the subject of bank lending,
the Chairman said his own
thinking on the matter was that the banks that had become "illiquid"
and now wanted to get more liquidity probably were the chief offenders
in
the period of tight money.
He doubted the desirability of forcing
loans upon marginal borrowers at a time like this on the theory that
it
was going to promote recovery and then have them in so deep that
they could not get out and would face bankruptcy as the result of
having overborrowed.
It was well, of course, for the banks to seek
good loans, but not to have them become so aggressive due to having
reserves as to persuade marginal borrowers to accept loans on the
theory that it
would correct a recession which actually had come
about from previous inflationary excesses and would be corrected
only after a period of convalescence.
period of convalescence,
The economy now was in a
he said, and he had no idea how long it
would last, but he felt that recovery might come faster if
people
3/25/58
-46
did not do so much tinkering.
period of convalescence,
They were trying to avoid any
and he did not think that was possible
in the world in which we are living.
Chairman Martin then said that it seemed to him that there
was a fairly clear majority in favor of maintaining the present
directive, postponing any change in the discount rate for the time
being, and maintaining a degree of ease signified by free reserves
of $500 million to slightly more than that.
There were some dif
ferences of opinion but he thought that this reflected the majority
view.
Therefore, he would propose that the Committee accept the
present directive as the consensus of the meeting, with the minutes
showing whatever deviations there were around the table.
asked whether there were any objections,
He then
and none were heard.
Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal Re
serve Bark of New York until otherwise
directed by the Committee:
(1) To make such purchases, sales, or exchanges
(including replacement of maturing securities, and
allowing maturities to run off without replacement)
for the System Open Market Account in the open market
or, in the case of maturing securities, by direct
exchange with the Treasury, as may be necessary in
the light of current and prospective economic condi
tions 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 commitments for the purchase or
sale of securities for the Account) at the close of
this date, other than special short-term certificates
of indebtedness purchased from time to time for the
3/25/58
-47
temporary accommodation of the Treasury, shall not be
increased or decreased by more than $1 billion;
(2) To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks) such
amounts of special short-term certificates of indebted
ness as may be necessary from time to time for the tem
porary 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,
Chairman Martin then referred to a memorandum from Mr.
Rouse
dated March 20, 1958, which had been distributed to the members of
the Committee and the Presidents not presently serving on the Com
mittee, concerning administrative problems which had arisen in con
nection with the use of the discount rate as the rate applicable to
repurchase agreements.
The memorandum stated that although these
problems had not as yet been serious nor had they interfered with
the Account Manager's ability to maintain reserve availability con
sistent with the Committee's objectives, the spread between the
market rate on short-term securities, especially Treasury bills, and
the discount rate was so wide as to impair the use of repurchase
agreements for the most part as an instrument of reserve adjustment.
Therefore, the Account Management was considering resort to the
latitude to establish a rate below the discount rate, at least in
part, when the occasion suggested that repurchase agreements were
the best technique to meet a particular problem.
Although present
authority from the Committee permits a rate on repurchase agreements
3/25/58
-48
not lower than (a) the discount rate or (b) the average issuing
rate on the most recent issue of three-month Treasury bills, the
Account Management had previously been operating under the under
standing that a rate below the discount rate should be used only
sparingly, and in practice a rate different from the discount rate
had not been used since November 1955 when the repurchase agree
ment rate was 1/8 of 1 per cent above the discount rate of 2-1/2
per cent.
The memorandum also mentioned, as a matter of somewhat
lesser importance,
the limitation placed on Government securities
eligible for repurchase agreements, namely,
within 15 months.
securities maturing
The Account Management was not recommending any
particular limitation but saw no serious objection to extending the
limit from 15 months to two years and suggested that the Committee
consider the question.
A memorandum from Mr. Rouse transmitting the March 20
memorandum indicated that the rate problem on repurchase agreements
was not as immediate as it
in reserve requirements,
had been before the most recent reduction
but that it
might not be long before it
again developed.
Mr. Rouse said that it
seemed better sometimes to meet
temporary problems by the use of repurchase agreements and that
the question was whether the Committee would go along with a rate
somewhat below the discount rate, but above the rate on Treasury
bills, so that the repurchase agreement mechanism might be used
3/25/58
-49
more in
lieu of buying and selling bills outright in the market.
Currently, the dealers were able to finance their securities for
the most part at rates in
the neighborhood of 1 - 2 per cent, but
occasionally they had had to come to the New York banks to get
overnight loans at 2-1/4 per cent or higher.
The first
break ap
parently came this morning when one commercial bank quoted a 2 per
cent rate.
The Account Management,
he went on to say, had been
fortunate on two or three occasions in being able to put out money
on repurchase agreements just over the week end.
If
there was a
material difference of opinion within the Committee, however, this
problem was not a vital matter.
Mr. Rouse went on to say that an
extension of the 15-month maturity limitation on securities eligible
for repurchase agreements also would be helpful, but again it was not
a vital matter.
by the Committee.
However, he would like to see the proposal approved
If the consensus should be to allow using a rate
below the discount rate at a time when efforts were being made to
keep banks out of debt, it
would not disturb him.
Chairman Martin then said that under present conditions it
seemed to him that this would be quite an appropriate use of the re
purchase agreement mechanism.
However, he said, the matter was open
for discussion by the Committee.
Mr. Mills said that he would propose approval of the rate plan
but would suggest taking a longer time to consider whether to accept
3/25/58
-50
the proposal that Government securities having a maturity beyond
15 months be made eligible as collateral for repurchase agreements.
While the Committee obviously had every desire to facilitate the
Government securities market in achieving breadth, depth, and
resiliency, which in a sense might be done by extending the maturity
limitation from 15 to
2
4 months, there was a possibility that such
an extension could restrict the initiative and control of the Account
Management over the acceptance and denial of repurchase agreements.
If
a broader list
of securities was madeeligible,
the dealers would
have a greater incentive to position themselves in anticipation of
a greater access to repurchase agreements and, by the same token,
they might put the Desk under pressure to enter into repurchase
agreements more freely than the Desk would otherwise choose to do.
A broader problem that also deserved study was the relationship of
this question to the "bills only" policy that the Committee had
since an indirect reflection of that policy seemed to him
adopted,
to be found in the decision to restrict, within reasonable limitations,
the maturity of the securities eligible as collateral to repurchase
agreements.
though in
The further that the Account moved away from cash, even
terms of collateral, the greater would be the chance of
gradually weakening the "bills only" policy.
Mr. Irons said that he would be a bit reluctant to go below
the discount rate since member banks can borrow only at the discount
rate and a lower rate on repurchase agreements might be regarded as
3/25/58
-51
discriminatory.
Aside from this question, it
unusual to fix a rate at 1/4
seemed to him a little
of 1 per cent below the discount rate
for special short-term certificates purchased from the Treasury, and
then perhaps to accommodate nonbank dealers at a lower rate.
For
these reasons, he would be inclined to continue the current policy
although he recognized the problems in
the market.
In this connection,
he would not be disturbed about buying and selling bills for short
term; he thought some of that might not hurt.
were made at less than the discount rate, it
If loans to dealers
might increase that
business to an extent which would be beyond emergency or necessary
levels.
Mr. Allen concurred in the views of Mr. Irons.
He thought that
it was better not to lower the rate when it was not vital, for this
might give ammunition to critics of the System who would claim that
dealers were being favored as against the member banks.
Governor Robertson said he felt strongly that it would be a
very bad move to start making loans to dealers at less than the dis
count rate for the reason stated by Mr. Allen, and he saw no need to
engage in that type of operation on a large scale in the near future.
Furthermore, the cash-sale basis had now been developed and that
could be used.
He agreed with Mr. Irons that the change would be
more harmful than helpful.
He would, therefore, suggest that the
Committee take no action at the moment and that all concerned study
the matter carefully.
3/25/58
-52
Chairman Martin said that, with the bill rate at its
level and the discount rate at 2-1/4 per cent,
if
present
the effect would be-
the repurchase agreement mechanism was used at all--to penalize
dealers if
they wanted to use this instrument.
There might be a
question whether to use repurchase agreements at all, which would
involve a different study, but in terms of logic he would go along
with the comments of Mr. Rouse.
However,
of opinion within the Committee,
he would suggest that the matter be
since there was a difference
carried over until the next meeting.
Mr. Rouse made the further comment that some of the remarks
had left a very strong inference of favoritism toward the dealers
which he did not think was valid.
repurchase agreements is
He then said that the making of
an open market operation conducted under
section 14 of the Federal Reserve Act; while repurchase agreements
might be loans from the standpoint of the dealers,
from the stand
point of open market operations they are security transactions.
Primarily,
they are operations to facilitate the Committee's policy.
He thought it
was more confusing to the market to go into and out
of the market through outright sales and purchases,
that in
and he noted
the past the Committee had wanted the Account Management
to stay out of the market as much as possible.
The rate suggestion,
he said, arose from no other source.
After Mr. Leach commented that, if
this time, he would have voted in
a vote had been taken at
favor of the rate proposal, Mr.
3/25/58
-53
Thomas remarked that free reserves fluctuate widely from week to
week and that it
ment in
is
very convenient to use the repurchase agree
order to take care of those temporary fluctuations, for
example, around the end of the week.
The arrangement,
actually tends to benefit the banks because it
the necessity of borrowing.
he said,
relieves them of
He considered the repurchase agree
ment ideally suited for that purpose and felt that the rate should
be related realistically to current conditions in the money market.
With respect to the current maturity limitation, it
lection that the Committee at first
was his recol
thought that the limitation
should be within one year but that the 15-month limit was fixed
because the Treasury at some times issues certain securities with
a 13-
or 14-month maturity.
Later,
the Comptroller of the Currency
made a ruling which stipulated 18 months as the maximum maturity
for Government securities eligible for repurchase agreements by
member banks without the usual limit on loans to one borrower.
Accordingly, he suggested that the Committee might want to consider
fixing the same maximum maturity as fixed by the Comptroller.
Mr. Hayes stated that he had a great deal of sympathy with
what Mr.
Rouse and Mr. Thomas had said.
He was rather puzzled, he
said, that some of the Committee members seemed to feel this was a
dubious or undesirable thing,
rate had actually been in
because the authority for a lower
effect for a long time.
-54
3/25/58
Chairman Martin concluded the discussion by stating that
in view of the differences of opinion around the table it
would
seem advisable for everyone to think about the matter further and
then to consider it
again at the next meeting of the Committee.
It was agreed that the next meeting of the Federal Open
Market Committee would be held on Tuesday, April 15, 1958, at
10:00 a.m.
In this connection, Chairman Martin said he had been asked
about the tentative schedule of Committee meetings for the balance
of the year.
Looking at the calendar, it
planning purposes it
seemed to him that for
would be quite in order to think in
terms of
a meeting every three weeks for the remainder of the year.
point,
At this
the only question would seem to be the appropriateness of
a meeting on the 23d of December.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1958, March 24). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19580325
@misc{wtfs_fomc_minutes_19580325,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1958},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19580325},
note = {Retrieved via When the Fed Speaks corpus}
}