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, April 15, 1958, at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Fulton
Irons
Leach
Mangels
Robertson
Shepardson
Szymczak
Messrs. Erickson, Allen, Johns, and Deming, Alter
nate Members of the Federal Open Market Committee
Messrs. Bopp and Leedy, Presidents of the Federal
Reserve Banks of Philadelphia 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, 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. Koch, Associate Adviser, Division of Research
and Statistics, Board of Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Stone, Manager, Securities Department, Fed
eral Reserve Bank of New York
Messrs. Mitchell, Strothman, and Tow, Vice
Presidents, Federal Reserve Banks of Chicago,
Minneapolis, and Kansas City, respectively;
Mr. Coombs, Assistant Vice President, Fed
eral Reserve Bank of New York; Messrs. Willis
and Anderson, Economic Advisers, Federal
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4/15/58
Reserve Banks of Boston and Philadelphia,
respectively; Mr. Meigs, Economist, Fed
eral Reserve Bank of St. Louis; and Mr.
Levin, Financial Economist, Federal Re
serve Bank of Dallas
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 25, 1958, were ap
proved.
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 25
through April 9, 1958, and a supplemental report covering commitments
executed April 10 through April 14, 1958.
Copies of both reports
have been placed in the files of the Federal Open Market Committee.
Reporting on operations since the last meeting, Mr. Rouse said
that reserve availability had been maintained and that average free
reserves over the period amounted to around $535 million, slightly
higher than the average of the preceding three-week period.
stated that during the first
He
part of the period since the last meeting,
the money market had been very easy but that some pressures had emerged
during the latter part.
Heavy lending and investing operations by the
New York banks were important factors in producing the pressures that
emerged, and the substantial concentration of over-all free reserves
in country banks aggravated the problem.
An accelerated rate of gold
purchases by foreign central banks also contributed to such pressures
as had developed in the money market.
markets,
Mr.
As regards the securities
Rouse stated that the new issue of 2-5/8 per cent
-3
4/15/58
Treasury notes had been well received.
Further, there had occurred
an improvement in the market for longer-term obligations and the
atmosphere in
weeks ago.
the capital market was better than it
had been three
He stated that in his view there was continued specula
tion in the bond market, and he noted that dealers appeared to be
carrying relatively heavy positions.
Mr.
Rouse recalled that at the Committee meeting on February 11,
1958, there had been discussed a Staff Committee report on the recommenda
tions contained in a report by the New York Clearing House Association on
Interrelations of the Money Market and the Government Securities Market,
He noted that the latter report contained two minor suggestions, and
that it had been recommended in the subcommittee report that these
suggestions be adopted.
One of them had to do with the establishment
of a standing money market committee composed of representatives from
the Federal Reserve Bank of New York and the Clearing House banks to
study, on a more or less continuous basis, technical problems of the
money market.
The other suggestion concerned the daily publication
of figures on reserves and borrowings of the New York Clearing House
banks.
Mr. Rouse indicated that the Federal Reserve Bank of New York
was completing plans to implement these suggestions, which he under
stood to have been approved in
principle at the Federal Open Market
Committee meeting on February 11.
for establishment of a committee,
With respect to the recommendation
he stated that after careful con
sideration it had been decided to include representatives of other
-4
4/15/58
sectors of the New York financial community, including the Govern
ment security dealers,
exchanges,
insurance companies,
besides the Clearing House banks.
savings banks and stock
With respect to the
recommendation of the Clearing House concerning the reserve data,
Mr.
Rouse indicated that in the view of the New York Bank it
be desirable to include in
would
the published data net purchases or sales
of Federal funds by the Clearing House banks, and that the New York
Bank would communicate this view to the Clearing House.
The plan
would be to give the data not only to the Clearing House banks but
to make the figures more generally available by giving the informa
tion to the "broad tape" for the benefit of others who may be in
terested.
With reference to the plans outlined by Mr. Rouse, Chairman
Martin suggested the desirability of keeping the Open Market Committee
fully informed with regard to every step taken in
because of the importance of market relationships.
a matter of this kind
He expressed the
view that the Committee should be given a full opportunity to comment
on such matters before any plans were actually put into operation.
Mr.
Rouse stated that this was the purpose of his report,
that what had been done thus far was in
the nature of planning actions
to be taken, and that this, therefore, seemed to be a good time to
advise the Committee of the steps that were being considered.
also said that it
He
was his understanding that the implementation by
the Federal Reserve Bank of New York of both of these suggestions
-5
4/l5/58
was approved at the meeting of the Open Market Committee on
February 11.
Chairman Martin then stated that he would personally have
no objection but that he was just raising a point of order.
thought it
He
was very important for the Open Market Committee to be
informed concerning what was going on in the Account at every step.
In other words,
every member of the Committee should know what the
Account was doing vis-a-vis the public.
In connection with the
report of the New York Clearing House Association, he suggested
that perhaps the Committee itself ought to meet with the Clearing
House Association for an exchange of views.
satisfactory and it
The report was un
seemed to him that no progress was being made
in dealing with the problem of the money market.
This was some
thing for which the Committee had a real responsibility and which
it should follow up at every opportunity.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period March 25 through April 14, 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
distributed under date of April 11, 1958.
His comments were sub
stantially as follows:
The anomaly of recession in output, employment,and
advancing price levels has
trade at high and even still
-6continued to be one of the striking features of the economic
panorama.
Most recent data on recession are suggestive of
some slowing down in the pace of decline for total output
and employment, some leveling out in trade, and some develop
ments of an expansive character in finance. With construction
activity being maintained, the over-all picture domestically
appears as one of more diversity or crosscurrent than earlier
in the year.
At the same time, the over-all drift is still plainly
downward.
Indeed, current figures offer only slight basis
for hope that the saucering-out phase of recession is at hand,
and very little,
if any, encouragement for hope that revival
will be setting in within a score of weeks. When a more
optimistic data showing becomes crystal clear, we will report
it with emphasis.
As for highlight developments:
(1)
Prices at wholesale and in consumer markets rose
further to late March, putting the indexes a whole one per
cent ahead of December's level.
Higher prices for farm and
food products account for the rise at wholesale, and at
retail there was further rise in service prices as well.
List prices for fabricated items at wholesale have continued
to show little change, but market reports indicate growing
concessions from list.
Basic materials prices have declined
further in recent weeks, following two or three months of
little change. Recently, metal prices have been quite weak.
(2)
The Board's index of industrial production for
March was placed down 2 points further, bringing contraction
in this sector of output to 12 per cent.
Curtailments during
the month were largest in petroleum, steel, autos, and in
dustrial equipment.
Output of nondurable goods was down only
moderately.
Preliminary April information is indicating
further output curtailment, much along the lines of the March
pattern but with the possibility of further slowing.
Construction activity in March is estimated at
(3)
holding close to record levels in value terms. Contract
awards for all nonresidential building, however, were down
Also, housing starts failed to
18 per cent from a year ago.
show any recovery in March from the sharp February contraction.
But VA appraisal requests and FHA applications were both up
sharply further last month, which possibly augurs for revival
in housing starts in coming months, especially considering the
general improvement in the mortgage market.
Retail trade, seasonally adjusted, was off another
(4)
one per cent in March. It was off 2 per cent from a year ago,
and 6 per cent from the late summer high. Sales of household
durables were little
changed from February, and down l4 per
cent for the year. Auto sales were above February by 4 per
cent but 32 per cent under a year ago. April sales of
domestic new cars are showing no improvement, but sales of
foreign cars continue strong. Used car sales have been
active in recent weeks, with the March sales rate up 9 per
cent from February.
Late model used car prices have
strengthened appreciably in this period.
(5) Manufacturers' sales and orders have continued to
show declines, with the fall-off much sharper in durable
goods than nondurable goods lines.
(6) Business inventory liquidation in January and Feb
ruary, especially in durable manufacturing, was very sharp,
and is believed to have continued in March, though it is hard
to imagine that the rate of liquidation could have increased
further.
(7)
The labor market, after allowances for seasonal in
fluences, has continued to show further weakening.
With un
employment failing to recede seasonally, the unemployment rate
rose to a high for this recession of 7 per cent. The increase
in unemployed was again marked for men in the younger age
bracket.
Female unemployment, in contrast, declined more than
seasonally.
Manufacturing employment is now reduced to the
lowest level since August 1950, with the declines largest in
heavy manufacturing.
Employment in nonmanufacturing lines,
which leveled off or showed only modest reduction in the two
preceding postwar recessions, has shown significant reduction
over recent months. Construction employment, despite esti
mates of the value of construction activity continuing close
to record levels, is off a quarter of a million or 9 per cent
from a year ago.
(8)
One result of the unusually high unemployment rate
for male workers at younger age levels is a sharp decline in
the marriage rate. The number of marriages has declined 44
per cent from a year ago, with an accompanying marked decline
in the marriage rate per 1,000 population. This is the lowest
marriage rate since 1933.
Weekly hours in manufacturing in March were little
(9)
changed from February, which may reflect technical adjustments
in production schedules rather than in average hours worked per
Average weekly earnings were about 2 per
week over the month.
cent under a year earlier but adjusted for the lower purchasing
power of the consumer dollar, were off 5 per cent from that
time.
The spring McGraw-Hill survey of business plant and
(10)
equipment expenditure plans, made in March, is due for release
later this week. It will show a projected cutback of 12 per
cent for 1958 vs. 1957, compared with a 13 per cent cutback
between the two years shown by the earlier Commerce-SEC survey.
Since the McGraw-Hill survey is more heavily weighted with re
ports from large companies, this result may be interpreted as
roughly the same as the Commerce-SEC survey.
The McGraw-Hill
survey obtains a preliminary projection of expenditure plans
for 1959. These come out at 20 per cent under the 1957 level,
or approximately the level that is indicated by these surveys
to be reached by the fourth quarter.
(11)
GNP for the first quarter is now estimated within
Government to have been at an annual rate of $424 billion,
down $8-1/2 billion from the fourth quarter and $16 billion
from the third quarter. This makes a percentage decline since
early fall of 3-1/2 per cent in value terms, but with prices
higher the decline in physical terms is more nearly 4-1/2 per
cent.
In order of importance, the major factors in the con
traction have been inventory liquidation, lower plant and
equipment spending by business, reduced consumption, and re
duced purchases of U. S. exports by foreigners.
(12)
Exports for February, the latest month for which
data are available, experienced a further sharp drop. The
decline was again concentrated in steel, coal, and agricul
tural products and continued the earlier declines in exports
to Western Europe.
In Western Europe, stability in industrial production
(13)
has continued to be the outstanding feature, but recent move
In Japan,
ments of the European indexes show mixed tendencies.
In Canada, however,
recession in output has been extended.
industrial output has turned about since December and edged up
slightly.
(l4) A closing observation about the unemployment figure,
which has been receiving much attention as a business cycle
index. The unemployment volume, while coincident in movement
with general economic activity on the downside is a sluggish
This is attributable, on the one
mover as revival sets in.
labor supply that are constantly
to
the
to
accretions
hand,
occurring and, on the other hand, to the increases in labor
productivity that are particularly marked in recession periods
and which, once gained, tend to be sustained during the re
vival.
A staff memorandum on the outlook for Treasury cash requirements
and bank reserves had been sent to the members of the Committee under
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4/15/58
date of April 11, 1958.
ments,
With further reference to financial develop
Mr. Thomas made the following statement:
In the financial area, during recent weeks, total credit
has apparently continued to expand, but in a manner that in
dicates enhanced liquidity of the economy.
Savings of con
sumers held in financial form seem to be increasing, while
consumer debt has been decreasing or not increasing as rapidly
as in the past. Business loans at banks have increased less
than at this time in other recent years, but corporate issues
for new capital have continued at a high level, as have new
issues of State and local governments.
The Federal Government,
which generally reduces debt in the early months of the year,
has become a small net borrower with payment for the April
financing today.
Demand deposits of business and individuals
have turned up, on a seasonally adjusted basis, and time de
posits have continued to increase.
Existence of crosscurrents and adjustments within the
structure of credit markets is indicated by variations in
interest rates and by reserve shifts among banks.
Short- and
medium-term rates have generally declined further to the lowest
levels since early 1955, while long-term rates have remained
firm since January at levels above those prevailing prior to
The more sensitive short-term rates--for
September 1956.
Treasury bills and Federal funds--have tended to fluctuate
considerably.
These rate differences have reflected the varying impacts
of market forces. When the margin between short-term market
rates and Reserve Bank discount rates becomes wide, the market
rates are likely to fluctuate more erratically in response to
changes in market forces. Short-term rates normally respond
more sensitively to temporary changes in market factors and
on the longer swings move faster and farther than long-term
Important recent factors causing a continued wide
rates.
margin have been the marked reduction in short-term borrowing
from banks and the continued strong demands on capital markets.
Although new capital issues in April may total somewhat less
Some
than in other recent months, they are by no means small.
reductions in the volume of outstanding short-term issues of
the Federal Government and additions to medium and longer-term
obligations have also had some effect on the rate structure.
Wide variations in financing needs of securities dealers
and shifts in the distribution of reserves among member banks
have also influenced the sensitive open-market rates. Posi
tions and borrowings of securities dealers have fluctuated
widely and at various times have risen to record high levels.
-10Dealers have often been unable to obtain financing from usual
sources at rates which permit them to carry their positions
on favorable terms.
They have frequently had to borrow from
New York banks at penalty rates.
While the net amount of free reserves for all member banks
has remained generally stable for a number of weeks at close to
or above $500 million--a level ordinarily denoting an easy
situation, banks in New York City and Chicago and probably in
some other cities have shown wide changes in their reserve
positions. Shifts in reserves have been greater than indi
cated by reserve balances and borrowings at Federal Reserve
Banks, because frequently city banks have maintained their
reserve positions by borrowing from other banks that had ex
cess reserves.
It may be said that to some extent the interest
rate variations help to bring into use existing reserves that
might otherwise remain idle. On the other hand, it is possible
that some of the funds loaned might have found other uses were
outlets through the Federal funds markets unavailable.
The
borrowing banks would have had to resort to the Reserve Banks
for needed reserves or to liquidate assets. Any such pressures
would tend to bring the bill rate close to the discount rate.
In the past week or ten days there are indications of some
rise in bill rates above the very low levels reached around the
turn of the month.
At the same time rates on long-term U. S.
securities have shown some tendency to decline.
If present
indications of a lower level of corporate borrowing in capital
markets are borne out, a more general decline in long-term rates
might be expected.
Treasury borrowing needs for new money seem
to have been covered until around the middle of July unless
there is a sudden burst of expenditures before that time.
Treasury refunding in June, however, might be expected to in
clude a long-term option.
Analysis of bank credit developments since the latter part
of February indicates that demand deposits, other than inter
bank, have increased at New York City banks while they declined
at banks in other cities. In the same period last year these
deposits showed a general decline. Time deposits have increased
somewhat more outside New York, and interbank deposits have in
creased at outside banks while showing little change in New
York; this appears to be a usual seasonal development. The net
result shows that, after adjustment for the decreases in require
ment percentages, required reserves have increased fairly sub
stantially at New York banks and to a smaller extent at reserve
city banks, while showing slight decreases at Chicago and at
country banks. New York City banks have had to increase their
borrowings from other banks to cover their reserve needs.
Total loans and investments at city banks have continued
since February 26 to increase at a somewhat faster rate than
4/15/58
-11
they did in the same periods of 1957 and 1956.
Although
the dollar amount of the increase was smaller in New York
than in other leading cities, relative both to February
levels and to increases in the same period of the two pre
vious years, the recent growth in New York has been more
rapid.
This is due largely to the increase in loans to
securities dealers by New York City banks.
Nearly $1 billion of reserves have been released by
the reductions in reserve requirements since February 26,
and an additional $250 million have been supplied through
System open market operations through April 9. These addi
tions to the reserve supply have been absorbed roughly as
follows: Required reserves have increased by about $200
million as a result of a growth in deposits at a time when
a seasonal decline is customary.
Currency in circulation
has increased by $200 million--also a greater than seasonal
increase.
Foreign operations--principally gold withdrawalshave accounted for a drain of over $00 million on reserves,
and some $200 million have been absorbed by float and other
factors.
Finally, free reserves have increased by $230 mil
lion from $330 million to $560 million.
It appears likely that the gold drain, which is again
close to $100 million in the current week, will continue at
the rate of $100 million or more a month for the next two
months, if not longer.
Payment for the new Treasury issue
through tax and loan accounts today will result in a sharp
increase in required reserves, which will be gradually re
duced, however, in the next two months as the tax and loan
accounts are drawn down.
Other demand deposits would
ordinarily show only a moderate increase during the next
two or three months, but under present circumstances a
greater than seasonal growth would be desirable.
On balance, to maintain a condition of ease conducive
to further credit and monetary expansion, which would prob
ably require keeping free reserves at $500 million or more,
some $300 million of additional reserves may need to be
supplied in the next three weeks.
Additional amounts might
Variations
be needed at the end of May or early in June.
in money market pressures and in sensitive interest rates
would probably be somewhat less erratic if discount rates
or at least repurchase rates were lowered to nearer the
market rates. Pressures on central money markets could
be relieved by a reduction in reserve requirements at city
Country banks seem to be well supplied with reserves
banks.
-12for the present.
Any reduction in reserve requirements of
half a billion dollars or more would probably need to be
offset in part by System sales of securities in order to
prevent unduly easy money market conditions.
Mr.
Hayes presented the following statement of his views with
respect to the business outlook and credit policy:
With the release of various significant statistical
data for March, it seems clear that the usual seasonal
upturn in business activity has not yet occurred.
The
best that can be said of these figures as a whole is that
there has been some slowing down in the recent rapid
deterioration--but the economy is still
headed downward,
and even though there may be some signs warranting hope
that business will level off within a few months, never
theless there is little
on the horizon to point toward a
rapid or dynamic recovery.
On the unfavorable side may be mentioned the continuing
poor performance of the steel and automobile industries, re
newed pressure on metal prices (which may induce further in
ventory reduction), and slippage rather than strength in
construction--besides additional evidence that economic
Among the few
expansion in Europe has virtually ceased.
favorable developments has been some improvement in orders,
especially in the producers' goods sector.
The longer the recession continues, the greater is the
threat that layoffs, short hours, exhaustion of unemployment
benefits, salary cuts for higher-paid personnel and adverse
psychological factors in general may cause a serious set
So far the latter has held up
back in consumer spending.
pretty well, in ccntrast with inventory and fixed capital
investment, but retail sales figures declined slightly from
February statistics on consumer credit
February to March.
time in several years, there
indicate that, for the first
was a drop in the amount of such credit outstanding.
Public policies continue tc affect current business
developments through expectations of a possible tax cut or
possible large-scale increases in Federal expenditures
rather than through any recent actual changes of significance.
the housing act and highway bill are unlikely to have an im
portant short-run effect on construction outlays or on the
flow of consumer income, and in the meantime total Federal
Pressure
cash spending is not showing any material growth.
4/15/58
-13
for prompt action by the Government in the fiscal area seems
likely to increase in the absence of convincing signs that
the recession--or at least its declining phase--has about
run its course.
Despite a few recent price reductions by manufacturers
designed to stimulate higher volume, there has been no wide
spread move as yet along these lines. There is, however,
some ground for hope that a halt in the rise in the indexes
of consumer and wholesale prices may be imminent.
In the
consumer index this would probably reflect primarily an ex
pected more-than-seasonal drop in meat prices.
With the Treasury's highly successful cash financing out
of the way, the prospect is for no further major Treasury
operation until the refunding program scheduled for early
June.
For the time being the debt ceiling is of course ample,
but perhaps it is not too early to have in mind the probable
inadequacy of the ceiling to meet prospective cash needs in
the July-December period. It is certainly to be hoped that
we can avoid a repetition this year of last autumn's trouble
some and embarrassing debt ceiling complications with respect
to Treasury financing activities.
Comparisons of trends in total bank credit in the last
four weeks with a year ago are rendered difficult by last
year's sizeable Treasury financing operations.
In the area
of business loans, however, tax-period borrowing apparently
fell short of last year's experience by about a third. It
is interesting to note that the money supply at the end of
March was still below the end-of-October level, on a season
ally adjusted basis, despite an increase of some $3 billion
in total loans and investments of weekly reporting banks.
The explanation lies principally in the rapid growth of time
deposits, and the increase in combined money supply plus time
deposits points to an encouraging improvement in over-all
The seasonally adjusted money supply has
nonbank liquidity.
It is also encouraging
been growing in the last two months.
that the excess of total reserves and required reserves over
a year earlier (after adjustment for changes in required
reserve ratios) has widened from month to month during the
quarter.
first
I think that the prospect of a continued decline in
business activity, with unemployment probably continuing
for some months at socially unacceptable levels, suggests
that antirecession measures going beyond those already
In the area of monetary policy this
adopted are needed.
means maintenance of at least the degree of ease prevailing
since the last meeting. While we should of course do our
4/15/58
share in meeting the problem, I am somewhat apprehensive
over the tendency to place too much of the antirecession
burden on credit policy as compared with fiscal and other
measures.
Perhaps the coming Congressional hearings will
give System representatives a suitable occasion to point
out publicly that the country does not seem to be suf
ficiently aware of the limitations of credit policy.
The last meeting's discussion brought out interesting
differences of opinion as to the danger, on the one hand,
of permitting too much illiquidity in the banking structure
to inhibit lending activities which would be helpful to
recovery, and the danger, on the other hand, of forcing
interest rates to artifically low levels, inducing the
banks to extend unsound credits, and creating excess
liquidity which will be hard to cope with when inflationary
pressures revive. While I think we must tread cautiously
between these risks, my own judgment is that we have not
moved too far or too fast, especially as there is little
likelihood that the recovery process will be so rapid as
to make it difficult to cope with excessive liquidity. I
believe that our first
thought should still
be for the
encouraging of greater readiness to lend on the part of
the banks.
In terms of free reserves I would think that we should
maintain a minimum target of $500 million, and I would not
be at all concerned if the figure should rise at times to
as much as $750 million, if this seemed necessary to pre
vent a tightening in the position of banks in the money
centers, or to maintain an easy "feel" in the money market,
or to induce a continued gradual widening in the spread of
adjusted required reserves over last year's level. Cur
rent projections suggest that this may be accomplished in
the next two weeks with a minimum of open market operations
but that fairly sizeable purchases may be necessary early
in May.
As for reserve requirements, I would hope that the
Board of Governors might take advantage of any period when
substantial additional reserves are needed to carry out a
further reduction in reserve requirements, in accordance
with the longer-run objective of attaining a more equitable
Such an opportunity may occur
level of required reserves.
in late May or early June, when a reduction in requirements
would be of immediate help to the Treasury in connection
with the June refunding and would obviate the need for open
market purchases which now seems likely to develop at that
I would also hope that the next cut in requirements
time.
-15
4/15/58
would result in narrowing the spread between require
ments at central reserve and reserve city banks.
With the Treasury financing out of the way, the
question naturally arises whether a further cut in
the discount rate is appropriate.
While we speak a
good deal of the wide discrepancy between the 2-1/4
per cent rate and market rates, this is much more
pronounced in the case of the Treasury bill
rate than
as applied to other market rates.
One argument for a
reduction is that it might put additional pressure on
the prime rate. On the other hand, it has been argued
that the banks have already resisted such pressure and
that another discount rate reduction would make little
difference.
As a matter of interest, the head of one
of the largest New York banks expressed the view last
week that if the prime rate were cut, it would be
primarily because of the pressure induced by lower
yields recently prevailing in the corporate bond market.
My own inclination would be to recommend a reduction in
the discount rate by 1/4 per cent to 2 per cent, but to
try to hold the discount rate at that level, in the
absence of further serious economic deterioration, in
the interest of providing a benchmark for long-range
encouragement of saving and investment.
Mr.
Erickson said that business in the First District still
continued to move downward.
At the end of February nonagricultural
employment was more than 3 per cent lower than in February a year
ago; textiles were down 15 per cent and durables about 10 per cent,
with the decline in
machinery,
durables attributable largely to nonelectrical
primary metals, and fabricated metals.
The figure for
insured unemployment on March 22 was 4O per cent higher than the
peak reached in
1954 but 30 per cent lower than the peak in 199.
He pointed out in this connection that when comparing 1949 and 1954
it
must be realized that there were more people employed in textiles
in 199.
Construction awards for the first
two months of this year
4/15/58
-16
followed the national average.
Through April 5, retail sales for
the year were even with last year but in the four weeks preceding
Easter they were 6 per cent below last year as compared with the
national average of 4 per cent.
The collection ratio in
was slightly better than February a year ago.
tions for the first
February
New car registra
two months were 28 per cent below last year.
The March poll of New England purchasing agents reflected the
rather optimistic tone of the February poll and was quite optimistic
in
comparison with the polls in
December and January.
Outstanding
business loans at reporting banks were down on April 9 by $8-1/2
million, this being the first
resort business was still
decline for six weeks.
The winter
very good.
Mr. Erickson stated that the Reserve Bank had conducted
for three years a survey of plans for plant expenditures in
Massachusetts and that this year the survey was expanded to in
clude the other New England States, with respondents reflecting
40 per cent of manufacturing employment.
The 1958 survey, which
had just been completed, indicated a reduction this year of 24 per
cent below 1957 compared with a reduction of 17 per cent indicated
by the Commerce-SEC survey.
However,
in Massachusetts plant
expenditures last year expanded 16 per cent as compared with a
national average of 7 per cent, so that 1957 probably presented a
rather high base for comparative purposes.
-17
4/15/58
Mr.
Erickson went on to say that participants in the
Reserve Bank's recent semiannual business roundup, including
economists from banks,
insurance companies,
industry, and trade,
estimated that gross national product in the last quarter of 1958
would be $7 billion higher than in the first
quarter,
that the
index of industrial production would move down further but would
stand at 133 in December,
and that the unemployment figure in
December would be about 4.5 million.
At the Reserve Bank's annual
professor-banker seminar held last week, the participants were asked
when they thought an upturn in business would come and about one
half said they thought it
year.
would develop in the last quarter of this
A few said the third quarter, and the remainder said that an
upturn would not occur until the first
As to policy, Mr.
drifting downward,
or second quarter of next year.
Erickson said that, with the economy still
he would make no change in the directive.
would be inclined to favor a reduction in
He
the discount rate to 2 per
cent and he would like to see a $600 million minimum of free reserves
rather than $500 million.
If
it
would not prejudice the bill on
reserve requirements recently introduced in Congress at the Board's
request, he would go along with the views of Mr. Hayes regarding a
further reduction in reserve requirements.
Mr.
Irons said that, considering the fact that the country
was in a recession, it
seemed to him that the most recent develop
ments had been mildly encouraging.
He did not see signs that the
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4/15/58
downward movement was feeding upon itself or accelerating; in fact,
it
might be slowing down a bit.
This was reflected in conditions
in
the Eleventh District and in
the state of mind and thinking of
the people in the district.
Of course, as he had reported pre
viously, oil production was being cut back and a decision was being
made this week on the number of days allowable for the next month.
However,
it
seemed reasonably safe to say that the situation had
about hit bottom, and he could not imagine that a decision would
be made to go below an eight-day allowable basis.
The agricultural
outlook was quite favorable and available reports indicated that
the people in
agriculture were quite optimistic.
much rain up to two or three weeks ago but in
There had been too
the last few weeks the
weather had been very good and agriculture made much progress.
Construction was holding up very well with quite a bit of major
construction going on, including several major projects in the Dallas
area.
it
The Texas Highway Commission had issued a report stating that
planned $250 million in
highway construction this year, a sub
stantial increase over last year.
was very good.
adjustment,
Retail trade in
the last two weeks
Although the reports through April 5 needed some
they indicated that department store sales in three of
the five major cities in
the district were above a year ago.
were down in Houston, which was the ill
there was really any such spot.
spot in
They
the district if
As to the banking picture,
loan
demand continued strong, with loans running ahead of comparable
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4/15/58
periods last year.
The banks apparently were liquid and interest
rates were holding well.
Some bankers had indicated that they saw
no need to reduce rates as long as the volume continued strong and
rates could be held.
The only borrowing from the Reserve Bank was
by a few country banks for seasonal needs.
Summarizing, Mr. Irons said that the situation, while not
booming and not moving up, seemed to be moving along at quite high
levels.
In general, the lack of pessimism was noticeable. At a
joint directors' meeting held in Houston last week, the reports
were quite optimistic and favorable.
Excluding those affiliated
with the oil industry, there was an absence of pessimism though a
recognition that it would take a little time to work out of the
present situation.
As to credit policy, Mr. Irons said that he would like to
see the status quo maintained as nearly as possible, without further
ease.
The availability of reserves appeared to be adequate, a con
siderable degree of liquidity had been achieved, and the money supply
was increasing.
After the deposits created by the recent Treasury
issue had gone through the banks, he supposed that they would show
up within not too long a time in private deposits, with another sub
stantial increase in
the money supply as a result.
Accordingly, he
would prefer to let the situation move along with the present degree
of ease and with free reserves at their current level.
He would
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4/15/58
prefer not to see any further action at this time on the discount
rate or a reduction of reserve requirements.
He would not favor
any change in the directive at this time.
Mr.
Mangels said that there was not a great deal to report
in the way of changes in the economy of the Twelfth District.
Final
February employment data indicated moderate declines in California
and Oregon but the other States reported relatively stable employment.
In Southern California, auto assembly plants reduced workers by some
24OO in late March,
reduce employment by
unemployment in
and a Ford plant in
4OO later in April.
the Bay area was planning to
At the beginning of April,
Oregon decreased by over 8,000 persons, with employ
ment increases in lumber, construction, and agriculture due to
favorable weather conditions,
and farmers in the Northwest were in
a good mental state. At the meeting of the Portland Branch directors
last Thursday, the directors seemed somewhat more optimistic than
they had been for some time.
It
was expected that conditions would
improve definitely by mid-year and the sentiment of major retailers,
while not optimistic, was reported to be far from pessimistic.
Continuing rains in California had delayed the planting of early
field crops, which would mean missing the first
prices.
markets and premium
Cotton planting had also been delayed, so that when a
dry spell came the farmers who do not operate in large units would
be clamoring for labor and for the limited supply of rentable heavy
farm equipment.
Steel production in
March was up
5
per cent from
4/15/58
-21
February, with the mills running at an average rate of about 71
per cent, but in early April the rate was down to about 61 per
cent due to a shutdown of some units for relocation of plant
facilities. Some West Coast paper container manufacturers had
cut prices as much as 10 per cent in the hope of stimulating sales.
Department store sales for the week ended April 5 showed no change
from a year ago because of certain large sales held in Portland
during the comparable week last year.
If Portland were disregarded,
sales this year would have been up about 8 per cent for the week
throughout the district.
In the three weeks ending April 2, com
mercial and industrial loans were up $67 million, this being about
a 13 per cent increase over the same period a year ago and contrary
to the national pattern for the period.
Demand deposits were down
about $109 million while time deposits were up $111 million, an
increase about 2-1/2 times that of a year ago.
Borrowing from the
Federal Reserve Bank was negligible and the Federal funds market
was relatively quiet.
In summary,
Mr. Mangels said that according to present
indications the expected March seasonal upturn probably was not
realized.
When all the data were in,
they would be somewhat
disappointing, for there was no evidence at all of a seasonal
upturn.
However,
interpretation of the data probably would be
complicated a little by the unseasonal weather.
Mr. Mangels did
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4/15/58
not see any particular evidence of positive strength in the economy,
except possibly in the field of residential construction.
When
March and April data became available, they probably would not show
much more than a slowing down of the rate of decline.
On the basis of the factual situation, Mr. Mangels felt that
a continued policy of ease was in order.
This would be particularly
pertinent if taxes were not going to be cut, for in that event mone
tary policy would have an even greater responsibility to be as
helpful as possible.
He would favor a range of $600-$700 million
for free reserves, going a little higher if necessary, and he also
would favor some reduction in the discount rate.
At last week's
directors' meeting the 2-1/4 per cent rate was continued, but with
the understanding that next week there would be,
if
necessary,
another meeting of the full board of directors to consider a change
in
the rate.
Mr.
Mangels felt
that the present policy directive
was entirely in order and that it was too soon to reduce reserve
requirements again.
However, in May or June a reduction probably
would be appropriate.
Mr. Deming said that economic activity in the Ninth District
was showing some seasonal pickup, but not as much as was hoped for
nor as much as is usual. The district, however, continued to be
less affected by economic downturn than the nation as a whole.
The farm sections of the district were getting along fine; agri
cultural prices, particularly meat animal prices, were substantially
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4/15/58
higher than a year ago and farm income was holding up very well.
The winter had been exceptionally open and mild, moisture generally
was adequate for spring planting, early prospects indicated a big
increase in wheat acreage, and the general crop outlook, as of now,
was excellent.
As against a year ago, March bank deposits in
country banks were up 7 per cent, bank debits and department store
sales in farm areas both were up 8 per cent, and farm machinery
sales were particularly good.
A local newspaper recently had a
headline reading "dealers report spring sales running strong" and
went on to say that "there's no recession this spring in the Upper
Midwest farm machinery business."
The current business recession
was neither "farm led" nor "farm fed"; in fact, the favorable farm
picture gave a strong underpinning to the entire district economy.
Residential building also continued to be a strong factor in the
district--stronger than in the nation.
As compared with a year ago,
the number of dwelling units authorized by permits in the Ninth
District was up 40 per cent in January and
45per cent in February,
and preliminary information indicated that the number authorized
in March also was up.
Twin City builders were optimistic for the
first half of the building season.
The downturn in the Ninth District, Mr. Deming said, con
tinued to reflect almost exclusively weakness in mining and manu
facturing and thus its impact was mainly in the copper country of
Montana and the iron ranges of Northern Minnesota, Wisconsin, and
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4/15/58
Michigan,
plus some impact in
the Twin Cities.
Virtually all of
the above-normal employment was in these sections.
Lumber activity
seemed to be picking up a little, thus offsetting some--or at least
not leading to more--unemployment in the areas where both mining
and lumbering are important.
Preliminary March figures on employ
ment in Minnesota and Montana indicated that nonfarm employment
continued to slide off in that month.
In February, in Minnesota
and in Montana, it was 4,500 and 5,700, respectively, under last
year; in March the figures were 11,244 and 7,000, respectively,
below a year earlier.
The mining areas also posed the biggest
questions about unemployment for the balance of 1958.
Much of the
current unemployment there was seasonal--perhaps two-thirds of it,
but with expectations that iron ore shipments this season would not
run more than 65 per cent of last year, the seasonal pickup in
mine
employment would be far weaker than usual and high unemployment was
expected to continue in the iron country throughout the summer.
addition to unemployment,
there was now,
In
and probably would continue
to be, considerable underemployment in iron mining.
Copper, on the
other hand, was not expected to get any weaker and hence copper
mining unemployment should not grow.
In further comments, Mr.
economic conditions.
Deming discussed public reaction to
Like the rest of the country, the Ninth District
was going through "think up" and "buy now" campaigns, without any con
spicuous success.
Sales, price concessions,
and real selling campaigns,
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4/15/58
however, gave some indications that consumer buying could be
maintained and increased if a real effort was made, particularly
along price-cutting lines.
Savings continued to grow, apparently
at a faster rate than last year, and purchasing power seemed to be
maintained reasonably well.
Even in the iron country, unemployment
compensation plus company payments plus part-time work was holding
up purchasing power pretty well--from 50 to 65 per cent of normal.
Mr. Deming then summarized the results of a State-wide public
opinion poll on business conditions which was taken by a Minneapolis
newspaper in the last week in March.
In general, the poll indicated
considerable optimism about the state of business for the balance
of 1958, little anticipated change in personal financial conditions
over the next 12 months, and expectation of the same or higher prices.
A large percentage of the respondents appeared not to be affected
directly by the recession.
With reference to credit policy, Mr.
Deming said that he
wished to associate himself completely with the position taken by
Mr.
Hayes regarding open market operations and reserve requirements.
He would differ with Mr.
on the discount rate.
Hayes,
however,
in
regard to his thinking
The Minneapolis Board of Directors met last
week and, while the existing rate was not changed after a rather
thorough discussion, he felt sure that the directors would like to
reduce the rate by 1/2 per cent very quickly, thus putting the
discount rate in closer touch with the bill market.
Although one
-26
4/15/58
cannot be completely logical on the matter of relationships, the
directors were of the opinion that a rate of 1-3/
per cent would
be more logical than 2 per cent and far more logical than 2-1/
per cent.
Mr.
it
Allen stated that where comparable data were available,
appeared that in March and thus far in April Seventh District
States, Iowa excepted, continued to experience greater declines
proportionately than the nation as a whole.
That situation was,
of course, directly related to the emphasis upon machinery and
automobiles in the district.
in
The impact of rising defense contracts
the area was not yet of importance,
inventory reductions and
capital cutbacks continued to dominate the picture, and retail trade
was significantly slower in February and March.
Amidst the general
atmosphere of deterioration, however, there were reports from indi
vidual firms that new models meeting with customer approval were
doing well and were "on allocation" in some instances.
were to be found in
lines.
the appliances and in
The most encouraging spot in
that inventories in
Examples
camera and office machinery
the general picture was evidence
some lines were on a hand-to-mouth basis, and
that sales were being lost as a result of restrictive inventory
policies.
Sears, Roebuck officials, for example, were said to be
receiving complaints from local outlets that stocks of certain goods
were inadequate.
It seemed apparent that the ratio of total stocks
-27
4/15/58
to total sales did not tell the whole story.
Mr. Allen went on to say that total construction awards
in the district, as tabulated by F. W. Dodge, trailed 1957 by
10 per cent in the United States and 32 per cent in the Midwest
during the first two months of the year.
Contract awards in the
area had been less favorable than for the nation in all major
categories.
Public works projects, particularly road building,
which had helped maintain contract awards totals in the United
States as a whole, had been the weakest link in the Midwest.
Reports on potential home building activity in the area were mixed,
both pessimistic and optimistic reports having been received.
The
true picture appeared to be that builders and lenders were proceed
ing cautiously, awaiting the acceptance of new models.
It was
apparent in the Chicago area that builder emphasis had shifted to
lower-priced brackets as compared with other recent years.
Reports
from consumer credit lenders indicated that delinquencies and re
possession rates on consumer credit contracts were rising signifi
cantly; meanwhile,
there was some evidence that instalment credit
terms eased further in February.
Reports from one sales finance
corporation showed an increase during February in the proportion
of paper acquired with low percentage downpayments on farm equip
ment and trucks.
Although Midwest bank lenders reporting automobile
credit activity generally showed no reduction in downpayments in
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4/15/58
February, most of them did report an increased proportion of con
tracts with maturities of over 30 months.
For the entire district
the proportion of loans at more than 30-month maturity rose from
22 to 24 per cent between January and February.
In Chicago, where
no loans of over 30 months were reported as recently as last October,
the rise was from 7 to 10 per cent.
Midwest banks in
Business borrowing from major
the two March tax borrowing weeks rose 77 million,
about 35 per cent of last year's increase during this period, but
by April 2 net repayments had offset half of this growth.
Loan
demand appeared to be much lighter relatively in
the Seventh
District than for the United States as a whole.
In the four weeks
ended April 2,
Seventh District banks accounted for only about 7
per cent of the national business loan growth, compared with roughly
20 per cent in the same period last year.
Mr.
Allen said that according to the quarterly interest rate
survey,
covering business loans made by large district banks during
the first
half of March, the average interest rate on loans with
less than one-year maturity was 4.42 per cent,
average of 4.84 per cent last December.
compared with an
This decline,
of course,
reflected the reduction of the prime rate from 4-1/2 to 4 per cent
in
January.
loans,
The decline in
the rate was greatest on the largest
which commonly are made at the prime rate.
On loans under
$10,000, the average rate dropped only 28 basis points--from 5.88
-29
4/15/58
to 5.60 per cent.
The effects of the April 1 Cook County tax
situation had been pretty well washed out by now.
The reserve
drain on the leading Chicago banks due to the decline in deposits
over April 1 was about the same as last year--close to $500 million
on a reserve week average basis.
That drain, however, was more
than offset by declines in required reserves and earning assets,
and an inflow of correspondent balances.
ings reached a peak on March 26,
Bill holdings and borrow
but a smaller increase in indebted
ness accompanied the buildup of bill inventories this year than in
1957,
and most of the borrowed funds were obtained in the Federal
funds market.
It
appeared that in the current circumstances the
banks were not liquidating their bill portfolios as rapidly as they
did a year ago.
After commenting on the wage negotiations in the automobile
industry, Mr. Allen turned to System policy and expressed the view
that the situation called for further action.
As far as free re
serves were concerned, he agreed with Mr. Irons that it would be
suitable to maintain the range of $500-$600 million.
On the dis
count rate, he was inclined to agree with the views expressed by
Mr. Hayes and Mr. Erickson, and he would favor a reduction to 2
per cent.
He said that bankers in the Seventh District seemed to
agree that the prime rate was tottering--in fact, a good many loans
were being made at less than the prime rate.
He was pleased to see
the developments with respect to time deposits and felt that the
-30
4/15/58
rate structure undoubtedly was having an effect in that respect,
but that might also be tottering.
At any rate, he would be in
clined to recommend a discount rate of 2 per cent at the next
meeting of the Bank's directors.
Mr.
Leedy stated that the situation in the Tenth District
showed little change since his report at the last meeting of the
Committee.
There had been some delay in planting due to a back
ward spring and an excess of moisture, but things were now going
ahead.
With reference to previous comments about farm machinery,
there had been some discussion at the directors' meeting last week
based on observations at the last meeting of the Omaha Branch
directors.
It appeared that as far as used farm machinery was
concerned, dealers' stocks were practically depleted, but that
the picture with regard to new farm machinery was not quite
comparable.
trict,
There were a few additional minus notes in
further curtailment of oil production being one.
the dis
Also,
there had been some temporary shutdowns in automobile assembly
plants which affected the employment situation.
However, the
strength generally of agriculture and livestock prices affected
to a very significant extent the economy of the district.
Mr. Leedy said that to him both a reduction in reserve
requirements and a reduction of the discount rate were called for,
but that he was troubled about the question of timing.
To take
-31
4/15/58
both of these actions virtually simultaneously seemed to him to
involve some risk from the standpoint of public psychology.
How
ever, as Mr. Thomas had said, the System would have to supply $300
million of additional reserves in the next three weeks to maintain
approximately the level of free reserves that had prevailed over
the past three weeks, and he subscribed to not reducing the present
level of free reserves.
level moderately,
If anything, he would favor increasing that
and he felt that a range of $500-$700 million
would not be inappropriate.
To handle the operation through the
System Account would tend to reduce further the limited supply of
short-term obligations.
Therefore,
preference would be to have first
ments, followed a little
if
it
could be done, his
a reduction of reserve require
later by a reduction in the discount rate.
As to the reduction in reserve requirements,
he suggested that the
Board of Governors might now be in a better position than previously
to do something for the central reserve city banks for several
reasons which he mentioned.
It was in the central reserve cities
that added reserves appeared to be most needed,
and it
seemed to
him that the Board could make a case for doing something now for
the banks in
those cities, particularly in view of the change that
had occurred over the years in the position of central reserve
cities as centers for the concentration of bank deposits.
On the
discount rate, it was his view that anything less than a reduction
-32
4/15/58
of 1/2 per cent might be regarded as an indication that the System
was not moving as rapidly as it
should in
economic situation.
as he saw it, reductions in reserve
requirements and in
Therefore,
the light of the current
the discount rate were quite important and both
actions should be taken as quickly as possible.
said before,
However, as he had
the timing of these actions was the element that was
disturbing to him.
Mr.
Leach stated that the principal industries of the Fifth
District continued to show downward changes.
many weaving mills were on a 4-day week,
In the textile industry
some were on a 3-day week,
and fewer and fewer were operating 6 days a week.
showed further cutbacks in
the first
ment in
Furniture factories
operations as orders ran substantially under
part of 1957, and there was still
no sign of the improve
the lumber market which traditionally comes in the spring.
The output of bituminous coal was currently running about 25 per
cent behind the corresponding period last year, and insured unemploy
ment in
West Virginia had reached 12.4 per cent, a level exceeded by
only three other States.
With respect to prices, there seemed to be
continued rigidities resulting in part from cost rigidities and in
part from mental rigidities that had developed in periods of expanded
markets.
A spokesman for one of the big three aluminum companies
stated in Richmond recently that under the "new economics" price
competition within an industry is
of no importance compared to
research and adaptation of product to new uses.
Other companies
-33
4/15/58
seemed to hold similar views.
Nevertheless,
there had been a
scattered weakening of prices--some apparent, some hidden.
other producers,
Like
Reynolds Metals Company of Richmond had reduced
the price of aluminum two cents a pound.
A spokesman for the coal
producers in West Virginia said that prices remained firm, but a
survey of large consumers and sales organizations in the Richmond
area revealed price concessions ranging from ten to forty cents a
ton.
A Baltimore manufacturer had reduced prices on portable
electric tools and fertilizer manufacturers reported reductions
in prices of about $1.50 a ton.
Reports from Southern Virginia
and the eastern part of the Carolinas, regions in which there was
a tremendous decline last year in cash receipts from crops, indi
cated that the impact on the farmers themselves was softened con
siderably by soil bank payments and lower production expenses.
There lower expenses were a depressing influence, however,
since
they represented smaller payments to labor and merchants in
agricultural areas, particularly those selling fertilizer and
other farm supplies.
With respect to System policy,
Mr. Leach said he believed
that the degree of ease appropriate under current conditions had
been achieved.
While it
was a difficult matter to judge, he thought
the point had been reached where further additions to liquidity
would have little,
if
any, beneficial economic effect.
There
-34
4/15/58
appeared to be little
reason for putting additional downward
pressure on short-term rates.
He recommended,
therefore,
that
the directive be renewed without change and that the Manager of
the Account be requested to maintain substantially the same degree
of ease that had prevailed during most of the past three weeks.
He would not care to see net free reserves average above $600
million.
Another reduction in reserve requirements would be de
sirable at this time when substantial amounts of additional reserves
are needed.
Mr. Robertson said he had a very definite feeling that the
economy was getting ready to start upward.
The change in weather
would bring about a big psychological change and it
appeared that
price cutting was going on at the moment, which would help to
stimulate buying.
Consequently,
he was firmly convinced that this
would be about the last clear opportunity to move downward policywise
and thus be in a position to start back up again.
Therefore, it was
his view that the Board ought to consider reducing reserve require
ments.
In his opinion it
should reduce reserve requirements at
central reserve city banks by 1 per cent and requirements for re
serve city banks by 1/2 per cent, thus making available additional
free reserves to the extent of about $450 million.
The country
banks appeared to have ample reserves at the moment and he would,
therefore, not reduce the requirements applicable to them at this
-35
4/15/58
time.
The action on reserve requirements would offset the gold
drain which Mr. Thomas had mentioned and, if
offsetting actions could be taken.
necessary, partially
At the same time it would be
possible to operate within a range of free reserves between $500
and $700 million.
On the mechanics of the change in reserve re
quirements, he would favor first a 1/2 percentage point reduction
for central reserve city banks and then in a week a 1/2 percentage
point reduction for both central reserve and reserve city banks.
He would hope that the discount rate could then be reduced from
2-1/
per cent to 1-3/4 per cent as soon as possible.
Mr. Robertson suggested that these actions would be appro
priate no matter what developments might occur in the economy.
the downward trend continued they would be suitable, while if
If
condi
tions turned upward they would likewise be appropriate for the
reasons he had mentioned.
He saw no reason to change the Committee's
policy directive at this time and would favor continuing the present
language.
Mr.
Shepardson said he would agree with Mr. Robertson to the
extent of feeling that the weather inevitably would have some effect.
The country had been through a hard winter season and the prospects
of good spring weather were bound to have some e ffect psychologically.
On the other hand, he was not quite ready to agree that a turn in the
economic situation was as imminent as Mr. Robertson seemed to think.
-36
4/15/58
Neither, however,
was he inclined to be as pessimistic in his
thinking as some of the expressions that were heard.
He felt
that the System was in a good position to wait and observe develop
ments for the present.
With reference to a comment by Mr. Hayes, Mr. Shepardson
said he had a little
prices in
different idea about the future trend in meat
that he would expect not to see as much as the usual
price change.
In any event,
he felt that meat prices would stay
relatively high for some time.
The effect on food prices resulting
from damage to the fruit and vegetable crops due to weather condi
tions appeared to him to be something that would work out reasonably
soon, with the result that there would be some change in food prices
to help the general price index.
With regard to policy,
Mr.
Shepardson expressed the view
that a range of $500-$600 million of net free reserves was reason
able and appropriate, for he thought that there was now the desired
degree of ease in
the market.
He was inclined to agree with Mr.
Hayes that a 2 per cent discount rate would be appropriate and
would maintain some base for a savings rate that still
be encouraged.
needed to
He was not prepared to say specifically what should
be done on reserve requirements although he thought that a further
reduction might be appropriate as a means of meeting the pending
need for additional reserves.
4/15/58
-37
Mr. Fulton said that in the Fourth District unemployment
was continuing to edge up, although at not quite as high a rate
of increase as in the latter part of last year and the early part
of this year.
In all, 22 areas in the district were now designated
as substantial labor surplus areas and 8 were considered major labor
surplus areas.
The steel industry was working at only about 4O per
cent of the rate that prevailed last year and there was nothing in
the offing to turn that around.
The industry was hopeful for an upturn
in the fourth quarter but even that would depend somewhat on develop
ments in the automobile industry.
Unless there was some change in
the acceptance of new models, estimates of the use of steel in auto
mobiles would have to be revised.
Since nonresidential building and
residential construction contracts were down 20 per cent and 32 per
cent, respectively, it was the consensus of the builders to proceed
carefully, and the bankers were proceeding just as carefully with
them.
Retail trade was lower at present than it had been for a
number of years throughout the whole district.
The only bright
spot was in Lexington, Kentucky, where a joint directors' meeting
was held last week.
In this predominantly agricultural section,
retail sales were 3 per cent above last year and the area was not
feeling much of the current recession.
Directors of the Bank
representing steel and aluminum made the observation about prices
that although they had heard of reductions and under-the-counter
-38
4/15/58
concessions being made, as basic producers of these commodities
they felt strongly that price reductions would have a depressing
effect on the economy because people would wait until further con
cessions were given.
The industry also would inaugurate new
retrenchment moves which would have an undesirable effect on the
economy.
The steel wage contract was to come up in July and it
appeared that there would be an increase of about 20 cents an hour.
In those circumstances,
it
was the feeling that a price increase
was inevitable and in fact quite appropriate.
philosophy would be held in
matter,
Mr.
Fulton said.
How well this price
the face of declining orders was another
He then reported inquiries from some of
the smaller banks about the possibility of a reduction in the
maximum permissible rate of interest on savings accounts,
said that he had given the inquirers little
As to policy, Mr.
but he
comfort on that score.
Fulton expressed the view that the System
must take a posture and have it
known that it
was doing everything
possible and reasonable to establish the basis for a turnaround in
the economy.
He felt that a level of free reserves of about $600
million would be more appropriate than $500 million.
Anything less
than a reduction of 1/2 per cent in the discount rate would in his
opinion be temporizing with the situation, and he felt that the
reduction should be made as quickly as possible.
He reported it
to be the consensus of the Bank's directors that, with the Treasury
-39
4/15/58
financing out of the way, the discount rate change could be made
quite quickly.
As to reserve requirements, it was his opinion
that they should be reduced in order to supply through that means
the reserves that quite obviously were going to be necessary.
He
did not agree with Mr. Leedy that a series of System policy actions
in quick succession might have a bad effect psychologically.
were looking for moves from the central bank in
People
this kind of a
situation and nothing that the System could do on the side of
assisting business by making credit available would create appre
hension. In fact, in his opinion such moves would be of comfort
to the people and the more quickly they were accomplished the better
would be the System's position.
Mr. Bopp reported that developments in the Third District
were quite similar to those reported for the nation as a whole.
Unemployment was rising in the district a little more rapidly and
continued unemployment claims had risen to a new high for 1958.
A special survey of 50 automobile dealers revealed a continuation
of the gloom permeating that industry.
Mr.
Bopp said that he had been experiencing some difficulty
in interpreting the price indices.
He gathered that roughly three
fourths of the cost-of-living increase was represented by food and
services, and he was wondering whether that part was factual; that
is, whether the "marKet basket" had been changed to reflect changes
-40
4/15/58
in the quality of goods and services included in the index.
As
examples, he pointed out that the repair of an automobile, the
operation of a doctor's office, and the repair of a television
set involve services of a different and more complicated nature
than in years past.
Therefore, he wondered whether what had
happened to the price index was more apparent than real; in other
words, whether the increase in the price index was greater than
the realities that had taken place.
Unfortunately, he said,
escalator clauses are written in terms of the index.
He went on
to say that a director had commented at the last meeting of the
Bank's board that although a manufacturer may not quote a lower
price it
is
not always impossible to use methods such as changing
the specifications a little, which meant that in fact prices might
be a little weaker than they appeared to be in the index.
In
construction, a number of people had mentioned that they were able
to make contracts at significantly lower prices than they had
anticipated,
in part because construction men wished to keep their
crews together.
While this could not be done many times, the
present seemed to be a time when some were able to get real
bargains in the building area.
With all of these developments,
Mr. Bopp said, it was difficult to be sure exactly what was
happening in the area of prices.
With regard to policy, Mr. Bopp referred to the comparative
risks involved in different courses of action and expressed the view
-41
4/15/58
that the risks being faced by the System were quite unequal at
this point.
He would favor reducing the discount rate by 1/2
per cent because a lesser reduction would, as Mr. Fulton had
said, seem to be temporizing with the situation.
He saw no need
for a change in the directive, he would avoid any semblance of
tightness in the money market, and he would be favorably inclined
toward a reduction of the differential between reserve requirements
for central reserve and reserve city banks.
Mr. Johns said that there was little
in
the economic situation
in the Eighth District which differed sufficiently from the national
picture to merit much comment.
retarded spring season.
As noted by others, there had been a
In the northern parts of the district the
moisture was much better than it
had been for years, while in the
southern part of the district farmers were plagued by problems of
excess moisture which damaged the cotton crop so much last year.
As far as policy was concerned, he wished to associate
himself completely with those who had said that the discount rate
should be reduced promptly by 1/2 per cent.
Bank's directors last Thursday,
At the meeting of the
there was extensive discussion of
this matter and it was the consensus that a reduction of 1/2 per
cent should be made as promptly as possible.
only because of a feeling that it
The action was deferred
would not be prudent to change the
rate in the midst of the Treasury financing operation which was then
-42
4/15/58
in progress.
In view of this consensus there would be no dis
appointment on the part of any of the directors if,
despite the
Bank's general policy that action to change the discount rate
shall be taken only at a meeting of the full Board of Directors,
the executive committee at its
lowering the rate to 1-3/
Mr.
meeting next week should propose
per cent.
On the matter of free reserves,
Johns said that he would be diligent not to go below $500 million
and that he would be in
favor of broadening the range to an upper
limit of $700 or $750 million and letting free reserves go to that
point either on a daily or weekly average basis.
He would be glad
to see a further reduction in reserve requirements,
but as to timing
and the effect of such a reduction on the proposed reserve require
ment legislation he would, of course, defer to the judgment of the
Board of Governors.
Mr.
that it
Szymczak said he still
felt that the System had done all
could through monetary policy but that it
do what was being done at the present time.
should continue to
Open market operations
should continue to provide a tone in the market indicating ease and
whether this meant free reserves of $400, $500,
would depend on the situation in
the market.
or $600 million
He thought that part
of the necessary reserves could be supplied through a reduction in
reserve requirements and part through open market operations, with
the relationship depending on the timing of the action taken on
43
4/15/58
reserve requirements.
It
would be his suggestion that any change
in reserve requirements take into account adjustment of the reserve
positions of central reserve and reserve city banks.
A change in
the discount rate seemed evident, but whether that should precede
or follow a change in reserve requirements would depend on the
situation in
the money market at the time.
discount rate were effected,
If a change in the
he felt that it
should be not less
than 1/2 per cent.
Mr. Balderston said that he favored the suggestion of Mr.
Robertson but for different reasons.
He saw no evidence yet of a
bottoming out of the economic decline, but there undoubtedly were
changes below the surface which were not visible in the indices.
He would favor immediate reduction of the discount rate by 1/2 per
cent and he would favor a change in reserve requirements so timed
as to take care of the necessity for furnishing reserves to the
market.
Unlike Mr. Robertson, he would favor changing reserve
requirements in
one move rather than two,
for he felt that the
latter procedure might be somewhat confusing to the public.
Chairman Martin said that he was much more optimistic than
he had been, although he could assign no specific reason for this
feeling except perhaps the change in weather conditions.
After
having given considerable thought to System policy, he was inclined
to agree with those who felt that if
in
the area of monetary policy it
the System was going to move
should try, if
possible, to move
-44
4/15/58
in
such a way as to wind up what monetary policy could do at this
juncture and thus dispose of it as an issue.
This appeared to him
to be an appropriate time to make those moves although, as Mr. Bopp
had suggested, there were risks on both sides.
No one could say
for certain whether an upturn was taking place, or whether it would,
but personally he was inclined to think that there would be a spring
upturn at least.
The real test for monetary policy would in his
opinion come later and not at the present time.
He could not say
that he subscribed entirely to Mr. Robertson's philosophy, and he
did not subscribe to the view that the discount rate should be set
in terms of its being a savings rate.
However meritorious the
reasoning on that point, he felt that the difficultios of such a
course would outweigh the advantages derived.
Instead, the System
should look at the market and the reactions.
Chairman Martin went on to say that he saw no great harm at
the present time in a split discount rate.
This matter, he noted,
had not been discussed by the Board of Governors, and no one at
this meeting should feel bound by anything that was said in terms
of making final decisions.
However, in his own thinking the rate
question at the moment had become largely academic.
Some types of
reasoning, he realized, would indicate that it was currently important,
but in his opinion that line of reasoning was a bit tortured.
He did
not see much logic in a 2-1/4 per cent rate under present conditions,
-45
4/15/58
and he was not particularly enthusiastic about going into the market
at this point to buy bills to provide reserves.
He recognized the
limitations of monetary policy but he thought posture was terribly
important.
If
he were deciding policy on his own, therefore,
he
would favor a consolidated action to put monetary policy in the posture
of doing everything possible to assist the recovery of the economy.
At
this juncture he did not think that one was in too good a position to
worry about the development of a sloppy market which would make more
difficult the System's problems at a later stage.
In the circumstances-
and perhaps for different reasons than those held by others--be aligned
himself with the philosophy that it
actions now and eliminate,
would be desirable to take the two
for the time being at least, the question
of where monetary policy stood.
That, he felt, was the proper posture
for the System.
The Chairman said that, as he understood it, there was no
desire to change the directive.
There seemed to be a split of opinion
between a discount rate of 1-3/
or 2 per cent, and also a difference
of opinion as to timing.
There was some general thinking that free
reserves ought to be kept at $500 million and up, with a disposition,
on the part of Mr. Irons at least, to hold the gap to as low a margin
as possible.
$750 million if
Others, starting with Mr. Hayes, would go to $700 or
need be.
Actually, if
action should be taken in
the near future on both reserve requirements and the discount rate,
-46
4/15/58
there would be no need to worry too much about whether the level
of free reserves was $500 million or $600 million, as long as the
reserve position did not tighten so drastically that it
as though the System was reversing direction.
would appear
Accordingly, the
question of the level of free reserves would also become somewhat
academic if these other actions should be taken.
Chairman Martin continued by saying that System policy deci
sions would have a real test once a recovery was really under way and
money was being put to use in a way that would impair the purchasing
power of the dollar--a development which might take place rapidly.
Then it
would be important for the System to have the courage and
fortitude to take action, and very difficult judgments would be in
volved.
He thought, however,
that the general tenor of this meeting
would indicate that in the minds of the great majority of those
present the right policy was being pursued at this time.
it
In essence,
was a matter of implementing that policy in the most effective
way.
While there were hazards in
of taking it
taking a bold course,
seemed to outweigh the hazards,
the advantages
provided one kept in
mind that the System would have to be prepared to reverse the policy
at some point and not get into a really easy money position and stay
there.
The tendency,
he noted, is
always to stay in a position of
status quo.
Summarizing the meeting, Chairman Martin said there was no
contention for a change in
the directive; as to free reserves,
no
-47
4/15/58
one would want to see a drastic reduction; a reduction of the
discount rate to either 1-3/
or 2 per cent was favored; and a
reduction in reserve requirements was seen as a possibility to
take the place of supplying the $300 or $400 million of reserves
that would otherwise have to be supplied by open market operations
in
order to maintain the present level of free reserves over the
period of the next three or four weeks.
At the instance of the Chairman, there followed a discus
sion of the reserve position of central reserve city banks in
relation to the position of other banks and the reasons which might
be given for taking action to reduce the differential in reserve
requirements between central reserve and reserve city banks.
It
was pointed out that, when vault cash holdings are added to present
reserve requirements,
the differentials are not as wide as the
percentages of requirements taken alone indicated; the average
spread between central reserve city and reserve city banks is
about one percentage point and that between reserve city and
country banks is
less than 4 points.
Thus,
reductions of 1 point
for central reserve city banks and 1/2 point for reserve city banks
would leave an effective differential
between these two classes of
only 1/2 point.
At the conclusion of the discussion, attention was drawn
to the fact that the nature of the items discussed at this meeting
made it
tion.
particularly important to guard against any leak of informa
Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal Re
serve Bank of New York until otherwise
directed by the Committees
(1) To make such purchases, sales, or exchanges (in
cluding replacement of maturing securities, and allowing
maturities to run off without replacement) for the System
Open Market Account in the open market or, in the case of
maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective
economic conditions and the general credit situation of the
country, with a view (a) to relating the supply of funds in
the market to the needs of commerce and business, (b) to
contributing further by monetary ease to resumption of stable
growth of the economy, and (c) to the practical administra
tion of the Account; provided that the aggregate amount of
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;
(2) To purchase direct from the Treasury for the ac
count of the Federal Reserve Bank of New York (with discretion,
in cases where it seems desirable
to issue participations to
one or more Federal Reserve Banks) such amounts of special
short-term certificates of indebtedness as may be necessary
from time to time for the temporary accommodation of the
Treasury; provided that the total amount of such certificates
held at any one time by the Federal Reserve Banks shall not
exceed in the aggregate $500 million.
Chairman Martin then referred to a memorandum from Mr. Roelse
to Mr. Rouse dated April 11, 1958, copies of which had been distributed
to the members of the Committee, commenting further on certain aspects
of the problem of the rate on repurchase agreements, on which a deci
sion had been deferred following discussion at the last meeting of
the Committee.
4/15/58
-49
The Chairman called for the views of the Committee and
Mr. Robertson said that he had hoped to make available to the
Committee a memorandum summarizing arguments against making re
purchase agreements at a rate less than the discount rate but
that he had not been able to complete it for this meeting.
If
the matter was urgent, he felt that the Committee should go ahe.d
and make a decision, but if
it
was not considered urgent he would
request that the matter be held over until the next meeting.
In view of the comments by Mr. Robertson, Chairman Martin
called upon Mr. Rouse, who said that if
reserves were put into the
market, in line with the position of ease the Committee had taken,
dealers would be finding money available at less than the discount
rate, in which event there would be little occasion to put money
in
through repurchase agreements.
However, if
it were necessary
to put money into the market, it would have to be on a permanent
basis unless the Board should act to reduce reserve requirements.
Such action on the part of the Board might, however, put more
reserves into the market than the Committee would want to see kept
in, and the Account might be in the position of having to sell
bills to withdraw some of the reserves.
Mr. Rouse also said that
appropriate use could be made of repurchase agreements today and
tomorrow.
Mr. Robertson then said that, admitting the usefulness of
the repurchase agreement mechanism, the question was whether the
-50
4/15/58
matter was sufficiently important to deviate from what he considered
a sound position on the rate.
While the Account Management had
authority to go to a rate less than the discount rate, this authority
had been given with the understanding that it would be used only
sparingly.
The Chairman stated that in line with this discussion, perhaps
the general question could be carried over until the next meeting.
However,
if
the situation became so severe that the Account Manage
ment thought something ought to be done, he did not think that there
would be any feeling that the existing authority should not be exer
cised.
Mr. Robertson commented at this point that although he did
not concur in the thinking about the over-all problem relating to
the use of a rate less than the discount rate, he thought that the
course suggested by the Chairman was appropriate.
There ensued a discussion of anticipated conditions in the
market in the next few days during which it was suggested that
conditions might be such as to make the use of a lower rate helpful
but not vital.
Mr. Hayes then asked Mr.
Robertson about his feeling con
cerning the use of the lower rate authority on this occasion, stating
that he thought it would be very helpful to utilize repurchase agree
ments and that the question was whether this would prejudice the
longer-run decision.
4/15/58
-51
Mr. Robertson replied that he thought use of a rate equal
to the discount rate at this time would be sufficient,
would go slow, that he thought it
that he
was the wrong time, but that
the Committee would have to make the decision.
If
the situation
was deemed urgent, the Account Management had the authority.
Mr.
Rouse commented that if
money could be put out at 2-1/4
per cent there was no problem, and that this would depend on move
ments of float and on developments in the market for Federal funds.
It
might be that a 2-1/
per cent repurchase rate would get some
money out over the next two days.
Reference then was made to a memorandum from Mr.
dated April 3,
Hackley
1958, with regard to a question raised at the Com
mittee meeting on March 4,
1958, concerning whether the authority
of the Chairman of the Committee to appoint a Federal Reserve Bank
to operate the System Account in the event the New York Reserve
Bank was unable to function extended to an Acting Chairman.
memorandum,
The
which had been distributed to the members of the Com
mittee, also dealt with the question whether the resolution provid
ing for continued operation of the Committee during an emergency
should contain any specific provision for the selection of a
Chairman or Acting Chairman.
position was taken in
have authority, in
Regarding the first question, the
the memorandum that the Vice Chairman would
the absence of the Chairman, to appoint a
-52
4/15/58
Federal Reserve Bank to operate the Account and that, if both the
Chairman and Vice Chairman should be unavailable,
would have authority under its by-laws to fill
any meeting of the Committee.
it
the Committee
the vacancies at
With regard to the other question,
was suggested that the Interim Committee authorized by the Open
Market Committee resolution would have the same authority to elect
a Chairman and a Vice Chairman and to fill
regular Committee has under its by-laws.
vacancies that the
Accordingly, no necessity
was seen for a change in the resolution to provide for a Chairman
or Acting Chairman.
There being no question raised, the
memorandum from Mr. Hackley was accepted
by the Committee.
At this point Mr.
Marsh, Assistant Vice President of the
Federal Reserve Bank of New York, was invited to join the meeting
for discussion of a problem of emergency planning.
Mr.
Marsh said that at this point emergency planning for
System open market operations was focused almost entirely on the
ability of the System to supply liquidity, if
that was indicated
as a national policy in an emergency, and on the responsibility
of the System to take the leadership in reactivating the Government
securities market, which was both a System and Treasury objective.
Thus far, all of the planning had been internal as far as it related
to open market operations and little
had been done about including
the Government securities dealers in the planning except to prepare
-53
4/15/58
a list
of dealers'
offices and a list
of key personnel.
It
had
been recognized from the start that something more would have to
be done with the dealers and that they would have to do more on
their own account to fit
into System planning and the over-all
planning for the financial community.
This planning,
it
was felt,
should provide particularly for the System to obtain dealer aid
in achieving the liquidity which the System presumably would be
trying to bring about, and to get it
the emergency.
help in
as soon as possible after
This would apply also to getting the dealers'
reactivating the Government securities market and completing
unfinished business.
the leadership in
mercial banks so it
The American Bankers Association had taken
developing an approach to planning for the com
seemed important at this time to consider what
should be done about extending the System's efforts and planning
in the direction of the dealers, particularly in view of the fact
that the Office of Defense Mobilization had issued a directive
giving the System broad responsibility in the field of money and
credit.
It
was not certain at this time what plans the dealers
might have made, but a few may have arranged to keep duplicate
records outside the city.
In the circumstances,
Mr.
Marsh said, the thought was to
call a meeting of nonbank dealers, and probably representatives
of the dealer departments of commercial banks also, in
order to
-54
4/15/58
have a unified approach.
At such a meeting an effort would be
made to try to get a good reception for the idea of planning in
general and to get the dealers to appoint a committee which would
work with the System in developing a coordinated planning approach.
While there would be other possible approaches,
that appeared best; it
was thought preferable to an approach under
which the System would do all
Mr.
the planning.
Marsh suggested that it
would also be desirable to
advise the Treasury what was in mind in
any suggestions,
this was the one
general terms, ask for
and inquire whether the Treasury wished to
participate.
Following a discussion of the plan
outlined by Mr. Marsh, the Committee
authorized proceeding along the lines
indicated, with the understanding that
Chairman Martin would discuss the
matter with the Treasury. It was also
understood that Mr. Allison, Special
Consultant to the Board, would be
invited to participate in the program
as it developed and that Mr. Robertson
would keep closely in touch with develop
ments.
Chairman Martin then inquired whether anyone had suggestions
for changes in
open market operating procedures other than in
con
nection with the question of the rate on repurchase agreements, which
had been discussed earlier at this meeting, and no suggestions were
heard.
-55
4/15/58
It
was agreed that the next meeting of the Federal Open
Market Committee would be held on Tuesday, May 6, 1958, at 10:00 am
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1958, April 14). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19580415
@misc{wtfs_fomc_minutes_19580415,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1958},
month = {Apr},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19580415},
note = {Retrieved via When the Fed Speaks corpus}
}