FOMC Minutes
A meeting of the Federal Open Market Committee was held
in
the offices of the Board of Governors of the Federal Reserve
System in Washington on Tuesday,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
May 6, 1958,
at 10:00 a.m.
Martin, Chairman
Balderston
Fulton
Irons
Leach
Mangels
Mills
Robertson
Shepardson
Szymczak
Vardaman
Treiber, Alternate for Mr. Hayes
Messrs. Erickson, Allen, Johns, and Deming,
Alternate Members of the Federal Open Market
Committee
Messrs. Bopp, Bryan, and Leedy, Presidents of the
Federal Reserve Banks of Philadelphia, Atlanta,
and Kansas City, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Daane, Marget, Roelse, Walker, Wheeler,
and Young, Associate Economists
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,
Federal Reserve Bank of New York
Mr.
Tow, Vice President, Federal Reserve Bank
of Kansas City; Messrs. Larkin, Balles,
5/6/58
-2.
and Baughman, Assistant Vice Presidents
of the Federal Reserve Banks of New York,
Cleveland, and Chicago, respectively; Mr.
Parsons, Director of Research, Federal
Reserve Bank of Minneapolis; Messrs. Willis,
Anderson, and Atkinson, Economic Advisers,
Federal Reserve Banks of Boston, Philadelphia,
and Atlanta, respectively; and Mr. Bowsher,
Economist, Federal Reserve Bank of St. Louis
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
April 15, 1958, were approved.
Before this meeting there had been distributed to the members
of the Committee a report prepared at the Federal Reserve Bank of New
York covering open market operations during the period April 15
through April 30, 1958, and a supplemental report covering commit
ments executed May 1 through May 4, 1958.
Copies of both reports
have been placed in the files of the Federal Open Market Committee.
In reviewing open market operations since the last Committee
meeting, Mr. Larkin stated that reserve availability had been main
tained, but that there had been a generally uneven distribution of
aggregate reserves, with a heavy concentration in
country banks.
The New York banks had shown a marked tendency to invest and lend
rapidly when reserves become available to them, if
not before.
As
a result, the central money market had been generally characterized
by some tightness during the period.
Mr. Larkin pointed out that Treasury bill rates had moved
like a pendulum since the last meeting.
Shortly after that meeting,
5/6/58
-3,
when the Board announced the further reduction in reserve require
ments and discount rates, the rate on the longest Treasury bill
moved down to the 1 per cent level, where it
sistance as the market tended to dry up.
met considerable re
The rate subsequently
rose to about 1-3/8 per cent under the influence of fairly heavy
selling and the accumulation of large inventories of bills in
dealers' hands.
The re-emergence of demand at that level, however,
contributed to another downward movement in
bill
rates.
The rate
in yesterday's auction was down to 1.19 per cent and this morning
that issue was trading close to 1-1/8 per cent.
The capital market
had shown considerable hesitation under the leadershipof
declines in the prices of Treasury bonds.
recent
Prices of corporate and
municipal securities resisted the declines registered in Treasury
issues for a time, but subsequently they also moved down.
The
undertone of weakness and hesitation that characterized the capital
market reflected, among other things, a shaking out of earlier
speculative excesses, and also the market's awareness of the
possibility that the Treasury might issue a long-term bond in the
June refunding.
At the present time, the market seemed to be
marking time until more definite information concerning the Treasury's
intentions became available.
Following Mr.
Larkin's statement, Mr.
Leach noted that a
major reason for the pressures that had appeared in
the money market
5/6/58
-4
was the fact the New York banks had increased their investments
substantially and were heavy buyers of Federal funds in order to
maintain their reserve positions.
Mr.
Larkin affirmed Mr. Leach's observation and stated that
this tendency on the part of the New York banks to invest quickly
was something to which attention must be paid.
banks had been in
the Federal funds market and this had indeed been
a most important factor in
Thus,
As a result, the
keeping the rate for Federal funds up.
the usefulness of the Federal funds rate as a measure of the
degree of ease or tightness in
the market tended to be impaired.
In response to a question by Mr.
that the banks had been investing in
Vardaman, Mr. Larkin said
Government securities primarily,
and that they also had expanded their loans to securities dealers.
In their quest for earnings the banks had displayed some tendency
to sell Treasury bills and obtain higher-yielding securities.
Mr.
banks'
Treiber commented that by last October the New York
average ratio of loans to deposits stood at 65 per cent.
The average ratio was now down to 61 per cent but this was still
a
high figure, and quite high when compared with the same stage of
the 1953-54 recession.
By increasing their holdings of Government
securities the banks were improving their liquidity and would be in
better position, in
a time of business loan demand,
and meet that demand.
If
to move forward
the banks had greater liquidity, he said,
they would approach further lending
with greater readiness.
5/6/58
-5
Mr. Roelse pointed out that the New York banks continued
to be subject to very wide swings in
their reserve positions.
Last
Thursday, for example, they lost a couple hundred million dollars,
and they were likely to be hit again from time to time.
Mr. Balderston said that he considered the point raised by
Mr. Leach one of the most timely questions before the Committee.
He had
had some concern about the matter also, and had intended to
refer to it
later in
the meeting.
It
seemed to him that the fairly
obvious answer was that the System should not shoot off all of its
ammunition this spring.
The Treasury was going to have to do a lot
of cash borrowing this fall, which was likely to cause both the
commercial banks and the Treasury to call for increasing the supply
of reserves.
The System, he supposed, might then feel under some
obligation to add to liquidity to assure the success of the Treasury
offerings.
To him it
appeared that a part of the reserves which the
System had been supplying had been misused, for they had been going
into Government securities of somewhat longer maturity than would
seem desirable from the standpoint of rebuilding liquidity.
fore, as he saw it,
the answer was for the System to be somewhat
reluctant this spring in
Mr.
There
the amount of reserves that it supplied.
Bopp said that bankers to whom he had talked had used
reserves in part to repay debt to the Federal Reserve Banks and
build up some excess reserves, and in part to obtain Government
-6
5/6/58
securities.
They did not feel at all liquid in the sense of
wanting to expand.
The immediate problem was, in his opinion,
that the banks at this point did not feel sufficiently liquid
to go out and solicit loans.
In terms of System policy, this
would mean that the System should feed out reserves to produce
a greater feeling of liquidity.
Mr. Allen stated that the banks in the Seventh District
seemed to have sufficient liquidity but that the economic situation
was an important factor in their thinking.
The discussion concluded with a comment by Chairman Martin
that the problem was one which probably would be with the Committee
for some time.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period April 15 through May 4,
1958, were approved, ratified, and
confirmed.
Mr. Young then made a statement on the economic situation, in
supplementation of the staff memorandum which was distributed under
date of May 2, 1958.
His comments were substantially as follows:
Despite a 40 per cent decline from a year ago in
first quarter earnings of 400 of America's large manu
facturing corporations, investors in the stock market
are saying by their actions that recession is bottoming
out, and that inflationary recovery will soon set in.
The most recent economic information, on the other hand,
is saying that recession is still deepening, and that a
bottom is yet to be established.
At the same time, statistical evidence of slowing of
decline is little by little accumulating and a few "straws
in the wind" are suggestive of leveling out and formation
of a recovery pattern. Certainly, the responsiveness of
bank credit expansion and capital flotations to easier
monetary policies is not to be minimized as a counter
recessionary development, though it is much too soon to
conclude that it is a harbinger of early recovery.
The index of industrial production dropped another
two points in April, bringing the decline to 19 points,
or 13 per cent. Declines were fairly widespread among
industrial lines but again greater in metals, industrial
and transportation equipment, and minerals. Output of
lumber, cement, aircraft, and farm machinery, as well as
of household durables, either held steady or improved a
bit.
Manufacturers' sales and new orders were off again
for March, about the same as in February, with the further
decline concentrated in durable goods lines. For the past
two months, the declines in new orders have been modest,
however, in comparison with those of the preceding four
months. In March, new orders for primary metals were
virtually unchanged from February.
Business inventory liquidation in March amounted to a
further $700 or $800 million, suggesting an annual rate of
quarter of possibly $9 billion
liquidation for the first
instead of the $7.5 billion earlier reported for GNP
estimates.
Estimates of new construction outlays, which had been
showing stability at record levels reached last fall, have
recently been revised. Revised estimates show a steady
decline to $47 billion in April from the $48.5 billion
estimate for October. With public construction about
maintained, the decline was caused by lower private expendi
tures, with residential expenditures and commercial con
struction down to about year-ago levels and industrial
construction down sharply to a fourth below last year.
quarter were a tenth
Contract awards through the first
under a year ago, and apparently continued at this reduced
level through April. These figures portend further declines
in private construction.
Private housing starts, which were at a low level in
February and March, are being awaited with interest for
April. While FHA applications and VA appraisals are both
-8up sharply and pressures of mortgage funds are now widely
reported to be depressing mortgage interest rates, there
is still the question of buyer interest in new home pur
chases.
Builders are generally said to be holding back
on starts pending more test of market demand at current
prices. A sharp reduction in the marriage rate since a
year ago, some rise in residential vacancies, and an
appreciable rise in VA delinquencies since last summer are
developments of uncertainty receiving attention by both
builders and mortgage lenders.
New car sales continue to run over a fourth below
last year, but with auto assemblies sharply down, dealer
stocks were reduced about 60,000 units last month to
around 800,000 cars, or 5 per cent over a year ago.
Used
car sales continue to run about an eighth under last season,
with used car prices about steady, a little under year-ago
levels.
Sales of furniture and household durables at department
and specialty stores continue to hold moderately under year
ago levels.
Reflecting the reduced levels of consumer durable goods
sales, especially of automobiles, consumer instalment credit
extensions have declined sharply relative to repayments,
resulting in a decline in outstandings at the significant
annual rate of $1.5 to $2 billion. Repossession information,
though limited in scope, continues to show the highest re
possession rates since the mid-thirties.
Unemployment in April declined less than seasonally, so
that the seasonally adjusted rate rose from 7 to 7-1/2 per
cent. Initial claims for unemployment benefits still run
at quite high levels, and the number of continued claims
of those unemployed 15 weeks is now double that recorded in
earlier postwar recessions.
Wholesale prices have changed little since late March.
Livestock and dairy prices have edged down, but farm and
8 per cent above a year ago.
food product prices are still
Wholesale prices of industrial commodities have shown little
change for over a year, although prices of some industrial
materials are sharply lower and have declined further since
late March. Recently,a few industrial material prices
subject to earlier declines--copper, synthetic and cotton
textiles, and lumber have shown intermittent strength. On
the other hand, price concessions are being increasingly
reported in the finished equipment area. Actual bids on
quarter showed
Federal highway construction during the first
the first decline since 1953--2 per cent.
Consumer prices experienced the largest monthly in
crease since mid-1956 in March. The rise was accounted
for by further increases in prices of meats, fresh vegetables,
services, and drug items. Prices of appliances, carpets, new
and used autos, and fuel oils declined. With prices of meats
and fresh vegetables rising further from March to April, the
April consumer price index is expected to show a further rise.
Strength in consumer demand outside the durable goods
area is reflected in April department store sales. Such sales
were apparently up 2 or 3 per cent from March and from April
of last year, although down 6 or 7 per cent from last August.
U. S. exports in February, the last month for which data
are available, were down 25 per cent, or by $5 billion annual
rate, from the first quarter level of last year. There were
further declines in exports of steel, other metals, coal, and
agricultural products, but also declines in groups that had
earlier been moving well--automobiles, trucks, textiles,
chemicals, machinery and equipment, and various other materials
and finished products. Along with a spreading of declines
among product groups, there was also a geographical spreading
of decline, especially to less industrialized areas.
Despite declines in exports, imports seem to maintain a
level close to that of last year.
during the
European industrial activity advanced a little
There
two months of the year and held up well in March.
first
are, however, some indications of inventory liquidation in
Europe, and the French financial situation is in a state of
Canadian activity, which began to decline
rapid deterioration.
before activity in the U. S., has shown some recent signs of
Residential construction, which has been actively
recovery.
subsidized by direct government loans, has been a factor of
special strength in the situation. In Japan, a leveling out
in activity after downward adjustment appears to have occurred.
In various Asian and Latin American development economies,
international payments imbalances and internal inflationary
tendencies continue dominant.
Mr. Thomas made substantially the following statement with refer
ence to financial developments:
Financial developments during the past month have been
influenced by the further substantial additions to the avail
ability of bank reserves and have reflected the activity of
At
banks in endeavoring to put their available funds to use.
heavy.
continued
have
markets
capital
on
the same time, demands
-10Renewed sharp declines in interest rates--both short- and
long-term--that began in the latter part of March seem to
have culminated shortly after the mid-April actions by the
System further to ease the credit situation. Common stock
prices have risen in recent weeks to the highest level for
this year, notwithstanding corporate earnings reports indi
cating a sharp reduction in profits of manufacturing
corporations during the first quarter from the same period
last year.
The upturn in yields on Government securities following
System easing action may be attributed to a number of factors.
To begin with, payment for the new Treasury note issue through
tax and loan accounts and addition of much of the issue to
bank portfolios absorbed the bulk of the reserves released by
the reduction in requirements. One factor was the large volume
of commitments of a speculative or temporary nature in both
long- and short-term Government securities by dealers, banks,
and others. With the rise in prices there has been some profit
taking. Another factor is the continued large volume of new
issues of corporate and municipal securities and the heavy
inventories of these held by underwriters and other dealers.
The uneven distribution of excess reserves, with central re
serve city banks holding few notwithstanding the larger decrease
in their reserve requirements, has been attributed as another
influence in the apparent tightness of the money market. It
would probably be more correct to say that the city banks have
been so active in putting available funds to use and were
already so committed in Federal funds borrowing that they
retained none of the reserves released.
New issues of securities by corporations in April, amount
ing to nearly $1.1 billion, exceeded those of the same month
The May total is estimated at $775 million, or about
last year.
the same as last May. The five-month total for corporate issues
at about $$ billion is only L per cent below the record volume
issued in the same months of 1957. Issues by State and local
governments continue large and the total for the five months
at $3.75 billion will exceed that for the same period last year
by about a fifth.
Treasury expenditures have been running below estimates,
while receipts have been maintained at close to the estimated
level. It appears likely that the cash deficit for the fiscal
over $2 billion, instead of the $3 billion
year will be little
previously anticipated, unless expenditures increase sharply.
The apparent lag in expenditures has often resulted in keeping
the Treasury balance at the Reserve Banks at a higher level
5/6/58
-11.
than anticipated and thus in some unintended drain on bank
reserves of a temporary nature.
In the five weeks ending April 30, banks in leading
cities showed a further increase of over $2.5 billion in
total loans and investments--about $1 billion more than
the rather large increase shown in the same period last
year.
It appears that for the five months since the end
of November, total loans and investments of all commercial
banks may have increased by $7 billion or more--a larger
expansion in a season in which little growth usually occurs
than has been shown in any recent twelve-month period.
The
April increase reflected almost wholly additions to holdings
of U. S. Government securities--particularly the new 5-year
notes. Holdings of other securities also increased, and
additions to loans on securities largely offset a further
decline of over $800 million in commercial loans.
Demand deposits adjusted at city banks increased in the
five weeks by nearly $1.5 billion, compared with a growth of
half a billion at these banks in the same period last year.
Demand deposits are now almost as large as they were a year
ago and on a seasonally adjusted basis are at the highest
level since last summer. Time deposits have continued to
increase at a faster pace than a year ago.
With reference to previous discussion of the point raised
by Mr. Leach, it is interesting to note that the bulk of the
deposit increase in April occurred at cities outside New York.
New York City banks, however, continued to add to their invest
ments and their security loans, showing relatively larger in
Since mid-April, New York banks
creases than other city banks.
have reduced their borrowings of Federal funds.
Figures for all commercial banks, now available for the
end of March, indicate that most of the credit expansion since
November has occurred at city banks--both in New York and in
other cities.
Country banks showed a small increase in total loans and
investments which was offset by a decline in cash assets, with
little net increase in total assets or deposits, but these
changes compare with marked declines--largely seasonal--in
assets and deposits of country banks in the same period of
other recent years.
In the four weeks ending April 30, the reduction in
reserve requirements released about $575 million of reserves,
including the effect of the April 1 reduction at country banks
carried over into this period, and a decline of currency in
5/6/58
-12-
circulation added another $120 million. The gold outflow
drained $330 million, and most of the remainder was largely
absorbed by the effect of deposit growth on required reserves.
This increase was about $120 million larger than had been
expected, indicating the extent of bank credit expansion in
excess of usual seasonal trends. System open market opera
tions were light in this period, covering mostly temporary
fluctuations in reserve needs, and resulted in practically
no net change in Federal Reserve holdings of securities.
Member bank borrowings and excess reserves also showed
negligible changes on the average, and free reserves generally
exceeded $$00 million.
Assuming usual seasonal variations in deposits, which
would result in some decline in required reserves until mid
June, followed by a sharp increase in the latter part of June,
and assuming also customary seasonal variations in currency
and float and continuation of a gold outflow until mid-June,
projections of the Board's staff for the coming weeks indi
cate continuation of weekly average free reserves of well over
$500 million until the week ending June 4. If banks continue
to expand credit in an endeavor to utilize all available re
serves, they may bring about a contraseasonal increase in the
money supply. Then the volume of free reserves would be
lower, unless maintained by System operations.
Perhaps the time has come when consideration should be
given to whether further credit expansion at the rate and of
the type which has taken place in the recent past should con
tinue to be encouraged. Will commitments be made that might
lead to future difficulties? Perhaps easy money has done all
it can in mitigating recession and promoting recovery until
other essential adjustments are made.
Mr.
Treiber presented the following statement of his views re
garding the business outlook and credit policy:
The business picture continues weak, with the general
declining. There is some evidence
level of activity still
of a slowing down in the recessionary movement in some
areas but there is no clear evidence of a general bottom
ing out. Nevertheless, the business community and consumers
in general continue to have considerable confidence in the
longer run outlook.
As for inventories, there is some evidence of a
tapering off in the rate of inventory liquidation, but the
ratios of inventories to sales are still high. Continued
-13liquidation for some months longer appears likely. Plant
and equipment expenditures may be expected to decline further,
probably into 1959. Such expenditures frequently work toward
lower levels even after economic activity as a whole begins
to expand again. On the other hand, retail sales on the whole
continue to hold up well, even though personal income has been
declining. While consumer spending remains a critical area in
the business outlook, its maintenance at a high level, except
for durable goods, and especially automobiles, is most helpful.
State and municipal spending continues to be a strong element,
but the expected growth in Federal expenditures has been slow
in materializing.
In the production area the steel and automobile industries
continue at about the same depressed level. The construction
picture has been somewhat disappointing.
While further declines
in business construction are to be expected, the outlook for
residential and public construction now appears to be mildly
encouraging.
The employment situation continues to be dis
turbing.
The slight improvement in total employment figures
falls considerably short of seasonal expectations. Unemploy
ment seems likely to continue at a relatively high level for
some months.
Although the consumer price index rose again in
March, there is a good chance that the index will turn downward.
Not only should seasonal factors bring down food prices, but
there is considerable evidence that actual transactions in
finished goods at both wholesale and retail levels are occurring
with increased frequency at below-list prices.
As for bank credit, business loans have shown further con
traction in recent weeks, but bank investments have continued
Since the end of October, total loans and
to expand rapidly.
investments at the weekly reporting banks have risen $6 billion.
The New York City banks have been most aggressive in utilizing
available funds and have shown a 12 per cent increase, while
the other reporting banks have shown a 5 per cent increase.
Easier credit conditions have enabled banks to improve their
The New York City
liquidity and reduce their loan ratios.
banks have reduced their average loan deposit ratios to 61 per
Other
cent in mid-April compared with 65 per cent in October.
to
cent
per
55
from
ratios
their
reporting banks have reduced
higher
considerably
are
52 per cent. Nevertheless the ratios
than in the same stage of the 1953-54 recession; in April 1954
the ratios were 49 per cent and 42 per cent, respectively.
In our opinion further measures are needed to combat the
recession. In this recession, which has already exceeded in
intensity the last two recessions, it must be apparent that
monetary policy cannot, and should not, be expected to do the
It seems to us that a more active fiscal policy is
whole job.
5/6/58
needed. While the System does not have responsibility for
determining fiscal policy, and there are varying views as
to the desirability of different types of Governmental
action, it seems to us tnat a tax reduction could be more
quickly effective and more easily reversible than an equiva
lent expansion in Government expenditures.
At the last meeting
of our directors there was a good deal of discussion of pos
sible Government action, and our directors were strongly of
the opinion that tax reduction is called for. Permission to
speed up the rate of depreciation on new investments would
probably constitute the most important contribution to prompt
increases in business spending. I would favor not only such
a provision but some reduction in the income taxes of all
taxpayers--individual and corporate--and in some excise taxes.
I think, however, that there should be a terminal date for at
least some of the reductions in view of the prospect for
substantially increased Government expenditures later on.
With a view to making the contribution of monetary policy
as great as possible, we would favor somewhat higher free re
serves. Recognizing the dangers inherent in concentrating on
statistical measurements and that it is important that the
"feel of the market" clearly be that of ease, it seems to us
that free reserves up to about $3/4 billion would not be out
of order. We were glad to see the reduction in the prime rate
from 4 per cent to 3-1/2 per cent, but developments in the
long-term market have been less satisfactory. We would hope
that lower rates would stimulate residential construction and
municipal public works, and help to promote further improvement
in corporate liquidity which will subsequently facilitate
Uncertainty regarding the Treasury re
corporate spending.
funding and expectation that a long bond will be offered have
probably tended to hold rates up. A large offering of longer
maturities by the Treasury would be undesirable in present
circumstances. From our preliminary consideration of the
matter, however, it would seem that there should be no serious
objection to a further moderate step of debt extension pro
vided the Treasury limits the amount.
We see no reason for a further reduction in the discount
rate at this time, but we would favor another reduction in
Early in June
reserve requirements as soon as practicable.
might be an appropriate time for such action. The projections
indicate a sharp drop in free reserves at that time. Perhaps
the latter part of May would be equally appropriate. A further
narrowing of the differentials between the banks of different
classes would seem advisable. A greater reduction for banks
in central reserve cities seems especially desirable in view
5/6/58
-15.
of their higher loan deposit ratios, their traditionally
aggressive lending policies, and their practice of making
full use of available reserves.
We believe that the directive by the Committee to
the New York Bank might well be revised to take account
explicitly of the System's efforts to combat recession.
Clause (b) of the directive calls for open market opera
tions with a view "to contributing further by monetary
ease to resumption of stable growth of the economy."
Since that clause was adopted on March 4, 1958, the
economy has moved downward further. Would it not be
desirable to state clearly that we are fighting a reces
sion? Perhaps the clause might be revised to call for
open market operations with a view "to continuing to
combat the recession by contributing further through
monetary ease to the resumption of stable economic
growth."
Mr. Johns said he found little in the way of developments in
the Eighth District that seemed to merit comment.
Business loans of
banks in the district continued to decline while loans against securi
ties continued to rise along with investments,
national pattern.
about in line with the
In the most productive cotton area, namely the
Delta, the outlook was rather bleak due to weather conditions.
The
planting season was said to last only another two weeks and even if
it stopped raining now it would not appear possible to get all of
the crop planted.
This situation, of course, would produce distress
in certain parts of the Delta area.
Mr.
Johns said that he had been on vacation most of the time
since the last Committee meeting,
during which time he made no at
tempt to keep up with open market affairs.
However,
he had tried to look back and apply hindsight.
since returning
He hoped that in the
5/6/58
-16
next three weeks,
or the period until the next Committee meeting,
the Desk would be a little
less diligent about preventing free
reserves from rising to somewhat higher levels.
He would rather
take $500 million as a sort of absolute minimum below which the
Desk would be diligent to keep free reserves from falling, and
he would be not at all concerned about the days when free reserves
rose to a figure of around $800 million, or even $1 billion.
Exactly how this would be accomplished he did not know, but he
would suggest a somewhat broader range of free reserves as a target.
As long as there appeared to be tightness in the money market in
the face of a presumably adequate supply of reserves throughout the
country as a whole,
he would attempt to avoid that tightness and
supply reserves without reluctance.
He realized that this placed
him somewhat in disagreement with the opinion expressed by Mr.
Balderston but that was the way he saw the matter.
Mr.
Johns went on to say that he would like to support the
suggestion by Mr.
Treiber that the first
opportunity be availed of
to accomplish a further reduction in reserve requirements.
own view it
In his
would be desirable to take some action next time--perhaps
not for reasons of monetary and credit policy but for other reasons
he considered important--to adjust the reserve requirements of
country banks.
If reasons were found to reduce reserve requirements
against time deposits, that would affect country banks more than the
-17
5/6/58
other banks and there would be this collateral benefit.
For the
time being he would not do anything further about the discount rate.
Although he had not come to the meeting prepared to argue for a
change in the policy directive, he was somewhat attracted by the
language suggested by Mr.
Treiber.
Mr. Bryan said that developments in the Sixth District con
formed largely to the national pattern.
While there were some dif
ferences they were not too significant.
On the basis of reports
from all over the district which were made at the last directors'
meeting,
it
appeared that the only places in
the district where
there was a sense of optimism were the State of Florida and some
of the coastalresort areas.
Unemployment in the district continued
to go up, although there were no further reports of large and
dramatic layoffs involving large numbers of workers.
However,
there were dribbles of layoffs which seemed to represent tightening
of managerial practices and elimination of
employment expenditure
items that perhaps could have been eliminated all along.
Mr. Bryan said that he had reviewed the national picture as
carefully as he could and that personally he could see no evidence
of quick or immediate recovery.
While there did appear to be some
slowing down of the rate of decline, he became a little disturbed
when he tried to calculate what would be necessary in the way of
recovery to absorb new workers coming into the labor market and at
the same time reduce unemployment to acceptable levels.
He wished
-18
5/6/58
to align himself with the point made earlier in the meeting by
Mr. Bopp to the effect that the banks did not have sufficient
liquidity to be a very dynamic factor in
recovery, except for
making investments which enabled them to obtain same income
without materially reducing their liquidity.
Accordingly,
he
rather believed that the time might be close at hand when a
further reduction of reserve requirements would be in order.
If
such a step were taken, he would like to see some reduction in
the requirements against savings and other time deposits.
While
he could make that argument on two or three counts, he wished to
mention only one; namely, that the typical bank tends to regard
its savings deposits as less volatile and more available as a
basis for longer-term credit than is
its demand deposits.
true in the case of most of
Accordingly, there being some concern with
the problem of longer-term investments, he believed that a reduction
in the reserve requirements against time deposits would have a
favorable effect.
He saw no reason to change the discount rate at
the moment but he would have no objection to a change in the directive
along the lines suggested.
of the Account,
If errors were to be made in the operation
he felt that the errors should be on the side of ease
rather than tightness.
Mr. Bopp reported that business activity in the Third District
continued downward, with no significant evidence that the decline was
-19
5/6/58
flattening out.
Department store sales improved somewhat in the
week ending April 26,
but sales for the past four weeks and the
year to date were two and three per cent, respectively, below
last year.
year.
Automobile sales in March were 22 per cent below last
Preliminary data indicated an upturn in April, however,
with registrations in
April spurt in
Philadelphia 18 per cent above March, the
sales reflecting the "You-Auto-Buy-Now" campaign
conducted in Philadelphia from April 19 to May 3.
The campaign
was reported to have been a success and many dealers reported
"healthy" sales increases,
believed, however,
and June.
especially in suburban areas.
Some
that the result was to borrow sales from May
Unemployment in
the district's fourteen labor market
areas rose in March and amounted to 9.6 per cent of the labor
force, with the percentage unemployed in those fourteen areas
ranging from a low of 5.8 to a high of 21.2.
Eight of the areas,
mostly the coal-mining and heavy-goods manufacturing centers, had
more than 10 per cent of their labor force unemployed.
in
The rise
unemployment reflected mainly a continued decline in manufactur
ing employment.
New unemployment compensation claims, although
below the usual quarterly peak, were still
at a very high level.
Continued claims for Pennsylvania remained at about 350,000
compared with 150,000 in April of both 1956 and 1957.
5/6/58
-20
Mr. Bopp continued by saying that a recent re-check of
manufacturers'
capital expenditure plans for 1958 showed that
manufacturers had revised their plans downward by 6.5 per cent
since last fall.
All of the decline was in durables, the plans
of nondurable manufacturers remaining the same.
In the Philadelphia
metropolitan area, which accounted for the major part of the survey
total, the downward revision was 3 per cent.
of transportation equipment,
While manufacturers
printing and publishing, paper, rubber,
and stone, clay, and glass reported significant upward revisions in
their spending plans, according to the revised estimates total
capital expenditures in 1958 would be 20 per cent below actual
expenditures in
1957.
Construction, although showing some improve
ment recently, was running considerably below last year.
Total
contract awards in March were above February, but still 13 per cent
below last year.
Awards for public works and utilities were slightly
above last year, but those for residential and nonresidential con
struction were about one-fifth below year-ago levels.
Mr. Bopp then said that before turning to a discussion of
policy he would like to make a few comments about inventories.
An
approach to the inventory situation from the point of view of gross
national product tended to indicate that liquidation at an annual
rate of $8 or $9 billion could not be sustained very long.
On the
other hand, such a rate meant in actual dollar terms a liquidation
5/6/58
-21
per quarter of something like S2-1/4 billion.
If
this figure were
compared with total inventories of around $90 billion, it
seemed
possible that inventory liquidation could continue at this rate
for a very considerable period of time.
This approach,
therefore,
suggested caution with regard to the prospect of a quick turn
around in
the inventory situation.
It might be mentioned, however,
that at the last meeting of the Philadelphia Bank's directors there
were reports that orders coming in were increasingly being marked
"rush."
As to the policy directive, Mr. Bopp said that a change
along the lines suggested would be agreeable to him.
hand,
On the other
he thought about the same thing might be accomplished by
substituting the word "recovery" for the words "resumption of stable
growth," so that the directive would provide for "contributing
further by monetary ease to recovery of the economy."
suggest any change in
He would not
the discount rate at this time but he would
favor a somewhat larger volume of free reserves.
with reserve requirements,
In connection
he had one comment of a technical nature.
This concerned the possibility that if
the Board should be authorized
to allow banks to count vault cash in their required reserves,
it
might want to consider, for reasons which he outlined, whether
reserve requirements should be computed on the basis of deposits
as of the close of the business day.
study but it
This matter would require
might be something to bear in mind.
-22
5/6/58
Mr.
Fulton referred to a recent tabulation in the American
Banker which indicated that in the first
quarter of this year the
decline in bank debits in the Fourth District, as compared with
last year, far outstripped the decline in any other district.
He
said that this tabulation seemed to point up rather well the facts
of life in
the Fourth District.
spring upturn but it
The steel industry had expected a
did not materialize, and new orders from the
automobile industry were simply not coming in.
It was not expected
now that they would come in until the latter part of July or in
August, since the new models would probably be introduced late in
September or in
October.
The operating rate was low in practically
all of the mills and there was no immediate prospect for improvement.
One mill in
the Cleveland area closed down for repairs and then
stated that it
would not reopen until orders picked up and that
meanwhile orders would be filled from other mills.
There were,
however, some orders being placed for large transmission pipe, as
companies apparently were feeling pressure to expand their facilities.
The demand for structural steel and plates had softened due to a
considerable extent to postponement of expansion plans.
Actually,
the tin plate mills were the only bright spot, although the small
pipe situation had picked up a bit by reason of some ordering for
home construction and nonmanufacturing structures.
Inventories in
the hands of some steel users would be substantially reduced by
July and should be replenished.
However,
it
was indicated that
-23
5/6/58
inventory liquidation would go on for some time in the case of
those manufacturers having fairly good inventories.
The steel
men were optimistic about the fourth quarter, maybe too much for
their hopes to be realized.
They seemed surprised that there was
not some anticipatory buying due to the fact that steel prices
might go up in
it
July following the contract wage adjustment.
appeared that consumers were just not ordering even in
that anticipation.
It
However,
the face of
might be that the consumers were in a sense
daring the steel companies to raise their prices.
Mr.
still
Fulton said that in the machine tool industry orders were
far below last year's level, despite the improvement that took
place in February and March.
In the last couple of months there
were several orders for large machines but by and large the machine
tool industry was eating up its
production a little
was still
later in
backlog and expected to restrict
the year.
Unemployment in
the district
going up, although not at quite the earlier rate, and more
areas had been added to the surplus labor area classification.
Housing starts showed some signs of increasing and the anticipations
of builders were better than they had been; they now intended to
start a greater number of houses within the next three months than
they had expected to start a short time ago.
Mortgage money was
becoming available but builders and lenders were both quite cautious.
Retail trade, other than in automobiles, was down about 5 per cent
from a year ago.
In the retail food lines, which had been somewhat
5/6/58
-24
insulated from the recession, there was an indication in cities of
substantial labor surplus that the situation was beginning to be
felt in declining sales and also in differences in the selection
of goods.
All in
all, there was no indication in
the district that
the recession had bottomed out or that there would be better days
in the immediate future.
Mr.
Fulton said that, like Mr.
Johns, he felt that the Desk
had possibly been a little too precise in trying to achieve free
reserves of around $500 million.
He would like to see a wider
fluctuation, and if float and certain other temporary factors pro
vided more reserves he would not act to offset those factors.
He
would like to see a volume of free reserves around $600 million,
believing that the decline in the velocity of money meant that
there was a need for a larger volume of free reserves in order to
offset that decline.
He would favor a reduction of reserve require
ments against time deposits and felt that this would be helpful
particularly to the country banks,
even though most of the free
reserves were now lodged with those banks,
for it
might induce the
country banks to expand their loan portfolios at the longer-term
end.
Many of the country banks were well loaned up in mortgages
and the type of thing that credit policy was now trying to encourage.
As to the policy directive, he felt that some change along the lines
Mr. Bopp had mentioned might be desirable at this time,
that is,
for
5/6/58
-25
the Committee to express itself as being in
favor of recovery.
In other words, the Committee would be positive in
it
the fact that
was trying to create recovery rather than to promote resumption
of stable growth.
He would not favor any further change in the
discount rate at this time.
Mr. Shepardson said that although he could not see any
bright rays of sunlight in
the picture at present he would like
to raise a question as to what should be done about the situation.
He then referred to the experience over a period of many years in
trying to correct the agricultural problem by setting up artificial
situations that were not in
conformance with reality.
This had
resulted in
building up surplus upon surplus and had created dis
tortions in
the agricultural picture that only gradually were
beginning to work themselves out in
some areas.
He went on to say
that the country was now suffering from a period of excesses.
For
example, the concern expressed about the lack of continued expan
sion of plant and investment raised a question as to why one would
expect a lot of additional expansion in
the face of existing excess
capacity and what inducement there would be for someone to expand
further in the face of present conditions.
Favorable depreciation
rates, tax relief, or other measures might be provided in
an effort
to encourage people to spend money for things for which there was
no present demand,
but he could not see the logic in
such actions.
5/6/58
-26
In the past, for instance, people had acquired household durable
goods a piece at a time when they had the resources available,
but in recent years most new home purchases had included package
deals including a complete assortment of such items and people
were not going to be in the market again for a while.
As far as
living expenses were concerned, the consumer generally seemed to
have money available, outside of the heavy unemployment areas.
The thing that concerned him most, Mr.
Shepardson said, was
the continued talk about artificial moves of one kind or another
designed to stimulate overindulgence at a time when there was a need
for adjustment,
for in his opinion the country had not gone through
the adjustments that must take place unless there was going to be a
bigger binge in
the future.
Consequently,
while he would not pretend
to say that the sun was shining brightly, he felt that it would not
help to follow a policy of endeavoring aggressively to produce addi
tional spending and investment on the part of people and business
he felt that the System
for things that were not needed.
In summary,
could afford to go along with its
present policy for the time being
and let some of the existing conditions go through the natural process
of adjustment,
painful as that might be.
Mr. Robertson said that he would accept Mr. Shepardson's
statement almost verbatim except for the conclusion, since he agreed
that there were adjustments which must take place.
There were some
people, he said, who were not gloomy, including himself, and it
might
-27
5/6/58
be well to accent some of the positive things that were admitted,
even by those who were the gloomiest.
For example, there was the
good agricultural picture along with some rise in residential and
nonresidential construction and an optimistic feeling in those
fields.
Retail sales were holding up and State and local govern
ment spending was doing well, which would offset some of the declines.
Furthermore, there were optimistic features of the inventory situation,
some of which had even slipped into the comments at this meeting, for
it
appeared that inventories might be getting down to minimum working
levels.
While the economy was in the bottoming-out process, which he
thought was now taking place despite some denials, he would favor
doing everything possible by means of monetary policy to aid the
process of recovery.
He would agree with those who had commented
about the undue diligence of the Desk in holding down the level of
free reserves, and he would be inclined to move up, with a target
of perhaps $800 million, instead of holding to the present levels.
This would increase the liquidity of the commercial banks by in
creasing the availability of funds, and one result might be to
pull longer-term rates down and create an incentive for the expan
sion of bank credit, not only by city banks but eventually by other
banks as well.
The present language of the policy directive seemed to him
very clear and more appropriate now than when it
was adopted.
He
5/6/58
-28
said the Committee is attempting to contribute through monetary
ease to the resumption of stable economic growth and the directive
as now worded represents a clear statement of that objective.
He
saw no need for a change in the discount rate and he would wait to
comment on reserve requirement changes, if any, until the appropriate
time.
Mr.
Mills said that Mr.
Balderston had stated his own views
with regard to policy and that the statement by Mr.
lighted the same line of reasoning.
It
Thomas had high
seemed to him that the System
already had accomplished a very important objective in
decline and in laying the basis for new growth in
stemming a
the money supply.
To inject additional reserves aggressively into the commercial bank
ing system, as he saw it,
increasing,
could work toward reducing, rather than
commercial bank liquidity if
acquire long-term securities.
they were employed to
For the present, he felt that it
would be advisable for the System to concentrate on its
fundamental
responsibility to provide adequate credit availability to the com
mercial banking system.
free reserves in
It appeared to him that a level of positive
the range of $500 million would allow the commercial
banks ample latitude to meet such an additional loan demand as might
occur and to expand their investments within reasonable limits.
felt
He
that level was also a range that would permit the movement of
reserves between central reserve city, reserve city and country
-29
5/6/58
banks without in the process producing a money market tightness
that could not be corrected promptly by modest direct Treasury
bill purchases or the use of repurchase agreements.
Looking at the U. S. Government securities market in recent
weeks, he was conscious of an impending problem in regard to the
Treasury bill sector of the market. Where in recent years the
Treasury had properly increased the amounts of its weekly bill
offerings, the market might now be losing its previous capacity for
their absorption, due to two reasons:
the first reason has to do
with the outflow of gold, the dollar amount of which had formerly
been invested in Treasury bills which were now coming back onto the
market.
The second reason has to do with the resistance of corpora
tion purchasers of Treasury bills when their yield falls to around
one per cent.
A side issue of that situation may find corporations
pressuring their depository banks for time deposit privileges at interest
rates above the yield on Treasury bills and the banks covering such
demands by acquiring higher yielding issues of U. S. Government securi
ties.
In order to prevent the heaviness in the Treasury bill market
that stands to result from these conditions, the Desk might flexibly
operate so as to jockey the yield on Treasury bills to the end of
maintaining their investment attractiveness to those corporations
and other investors who would otherwise shy away from that sector
of the U. S. Government securities market.
In Mr. Mills' belief,
-30.
5/6/58
adoption of this policy would not lift
the level of Treasury bill
yields high enough to handicap long-term financing at economically
favorable interest rates.
Mr. Mills also expressed the view that by refraining from
further forcible injections of reserves into the commercial banking
system, a reasonable pressure would be placed on the reserve posi
tions of commercial banks that would have the effect of encouraging
a redistribution of the longer-term U. S. Government securities that
they had acquired on the occasions of recent Treasury financing
operations.
In that event, the previous procedure of resorting to
the commercial banking system as the initial
underwriter of new U. S.
Treasury security offerings would have been reactivated and a step
taken toward broadening the market for the Treasury's recent offer
ings at the same time that the commercial banks would have been
given an incentive to readjust the composition of their investment
portfolios for liquidity considerations.
Mr. Mills did not feel that there should be another reduction
in reserve requirements in
the near future, that the policy directive
should be changed, or that there was any need to consider a further
reduction in
the discount rate at this time.
Mr. Vardaman said that any detailed statement he might make
would be in effect a repetition of the situation described by Mr.
Shepardson and the conclusion reached by Mr. Robertson.
In particular,
-31
5/6/58
he would try to raise the level of free reserves to around $700
million or perhaps $800 million and keep free reserves at a level
from there on up.
He would not favor reducing reserve requirements
further at this time and he could not see any circumstances under
which a reduction would be appropriate unless things became much
more serious than he felt they would.
be discussed at the proper time.
However,
that matter could
He went on to say that he had
spent most of the month of April away from Washington talking
almost exclusively to nonbanking groups, both large and small,
and that personally he did not agree with the statement that an
atmosphere of gloom was prevalent.
It seemed to him that the
country was in better shape than at any time in the past six months,
not in terms of economic conditions but in the sense that the
American people seemed to realize now what confronted them.
The
feeling of panic on which the country had been teetering at the
first of the year appeared now to have been replaced by an attitude
of calculation and the country had come to grips with known condi
tions.
He did not find any sense of panic at present in the places
he had been, but rather a determination toward moderate buying and
moderate spending in accordance with present circumstances.
He did
not find anybody running to cover except perhaps a few bankers who
were the exception rather than the rule.
The sentiment that was
most pronounced was to be let alone, as Mr. Shepardson had stated
5/6/68
-32
so well.
It
appeared that the American people would not welcome a
broad tax cut program or broad incentives to corporations to in
crease already excessive capacity.
left
The people just wanted to be
alone to work their problems out for themselves, provided the
System made ample money available.
If
any pressures should develop
with regard to the availability of reserves,
he would be inclined
to reduce reserve requirements further but right now there were at
least two layers of reserve fat in the case of the country banks.
There was also at least one layer at the city banks if
abuse the situation.
Accordingly,
requirements at this time.
they did not
he would not move on reserve
In summary,
he would favor letting
things go along more or less as at present for another three weeks.
Mr. Leach stated that although the decline in economic
activity in
the Fifth District continued,
recent weeks had brought
some--mostly seasonal--favorable developments.
southern pine lumber in
the first
production and shipments,
in
three weeks of April exceeded
a slight but spotty improvement occurred
March in manufacturing man-hours,
awards rose sharply in March.
sales,
New orders for
seasonally adjusted,
and construction contract
Early estimates of department store
showed a sizable pickup in April over
there were once again reports and signs of improve
March.
Also,
ment in
making the textile industry.
or clearly discernible,
While these were not strong
and were certainly not conclusive,
there
5/6/58
-33
had been a gradual expansion in demand for cotton print cloth for
spot and nearby delivery,
and mills had been receiving an increas
ing number of inquiries about third and fourth quarter coverage.
In addition, there had been sizable forward buying of synthetic
goods for the first
time this year.
The most unfavorable district
development was a further decline from already low levels in the
production of bituminous coal.
Largely because of this, West
Virginia had one of the highest rates of insured unemployment in
the country.
Business loan demand had been relatively strong,
Mr. Leach
said, and weekly reporting member banks in the Fifth District had
been able to increase their investments only 6 per cent since the
first
of the year as compared with 14 per cent for all weekly
reporting member banks.
This relatively strong loan demand had
been an important factor in
the reluctance of member banks to
reduce rates to business borrowers not on the prime rate list.
There had been some,
but not many, reductions of 1/4 to 1/2 per
cent to such customers.
Mr.
Leach went on to say that business and financial
leaders in the Fifth District did not seem to be greatly worried
about a further deepening of the recession even though they did
not expect early recovery.
There was, however, considerable talk
about inflation, and the unexpected rise in the consumers'
index in
price
a period of recession was causing more and more people
5/6/58
-34
to wonder whether inflation was inevitable.
gives him concern even though as yet it
This growing feeling
seemed to have had little
practical effect, except possibly on the stock market.
In regard to policy, Mr. Leach expressed the view that the
System had gone as far as it should go under existing conditions
to promote recovery from the recession.
its
contribution and, in his judgment,
constructive.
Monetary policy bad made
further easing would not be
He would continue to use repurchase agreements, to
the extent practicable, to meet temporary needs for reserves and
would reduce reserve requirements in preference to making open
market purchases if substantial amounts of reserves should be
needed for longer periods.
It
was his recommendation that the
directive be renewed without change, with the understanding that
the Manager of the Account would aim at the same degree of ease
that the Committee had been trying to attain during the last three
weeks.
He would not change the wording of the directive unless
the Committee was going to change policy, and he did not favor
any change in
policy.
Mr. Leedy stated that his report from the Tenth District
would be for the most part just a continuation of what he had
heretofore reported.
The agricultural situation in the district
was quite different from that which Mr. Johns had reported in the
Eighth District, due to a considerable extent to the fact that
5/6/58
-35.
winter wheat is the Tenth District's predominant crop.
There had
been some late planting of spring crops due to moisture conditions
but the crops were now pretty well in and planting had not been so
late as seriously to affect the prospect for good crops in all
areas.
Reports for the first three months of the year indicated
that agricultural cash receipts measured very well against the
similar period last year.
There had been some weakening of cattle
prices due to increasing marketing of cattle, but the price of
feeder cattle had been well maintained because of excellent pastures
in the district and the good supply of feed.
The employment picture
had followed the national pattern; after a contraseasonal downturn
between February and March, employment had continued to edge down
ward,
the loss having been in factory jobs.
Those losses had more
than offset increases in nonmanufacturing employment.
In the Tenth
District that meant for the most part reductions in employment at
automobile assembly plants, at aircraft plants, and in the petroleum
industry.
Construction awards during the first
year had been little
different from the first
three months of the
quarter of 1957, but
nonresidential building awards were the only major type of construc
tion activity in which awards were higher than last year.
Depart
ment store sales were about the same as last year, which meant that
the district was doing better than the national average.
Contrary
to the national pattern, there had been some recent strength in
business loans.
Nonguaranteed loans to farmers were close to the
5/6/58
-36.
peak of the past several years, due in large part to the cattle
feeding operations that were being carried on.
Mr.
Leedy said that he would make no change in policy
although he would favor a change in
the execution of that policy.
Having just gotten through reducing reserve requirements and the
discount rate, he felt that it would be untimely to take further
action in these areas and he could see nothing to justify such
action.
At the last Committee meeting, as he understood it, the
consensus favored a range of free reserves between $500-$750 mil
lion, but reports showed operations to have been decidedly at the
lower end of that range.
The fact that the New York banks had
been employing fully the reserves made available to them did not
indicate to him conclusively that they had been in quest of earnings
altogether for there had been two unusual situations.
was the Treasury financing in
First, there
this period in which the banks partici
pated very substantially and, second, there had been a large amount
of financing of securities dealers.
On the latter point, it occurred
to him that the System may have contributed something to the situa
tion by limiting the making of repurchase agreements to a rate equal
to the discount rate.
In any event, it
System would be justified in
seemed to him that the
feeding out further reserves, running
the level of free reserves up beyond $600 million, and reaching,
if
necessary,
to the upper part of the range which he understood
had been agreed upon at the last meeting.
Aside from that, Mr.
5/6/58
-37
Leedy said, it was his feeling that the Committee should no nothing,
for what had already been done tended to put the System in
posture.
As he saw it,
the proper
no change should be made in the directive at
this time.
Mr. Allen said that in the Seventh District the month of April
produced little
movements in
trend in
news of a favorable nature except for the usual seasonal
construction and outdoor work.
Of course the downward
steel and automobiles had slackened and might be over, but
the current level of operations was low.
being experienced in
Relatively good times were
Iowa and other agricultural areas, and it
now
appeared that Midwest farm income was more likely to show an improve
ment in 1958 than could have been anticipated at the beginning of the
year.
Prospects hinged primarily on meat animal prices, which were
also the most uncertain element.
Prices, of course, should decline
as supplies increased, but on the demand side, consumer buying of
meats had been encouraging.
Checkbook spending in the district's
metropolitan areas in March was 4-1/2 per cent below March 1957.
This was the third consecutive month in which bank debits fell below
a year ago, and the margin had been increasing.
In the matter of savings,
activity.
there had been a slowing down in
Inflow to bank savings account in March was relatively
smaller than a year ago, but withdrawals were still
balances continued upward.
lower, so
Most of the reserve ease in
the past
-38
5/6/58
few weeks had been concentrated at country banks.
The Chicago
central reserve banks had been showing a basic reserve deficit,
but this was attributable to the operations of one bank which had
been carrying a heavy dealer position in
Governments.
That bank
had been covering its deficit by purchasing Federal funds rather
than by borrowing.
Over the past week end, Mr.
Allen said, he attended a
National Industrial Conference Board meeting in which approximately
50 businessmen participated.
The feeling over-all was decidedly
optimistic--or perhaps complacent would be a better word.
president of the company which is
The
the world's largest manufacturer
of small engines said that they shipped more engines in the first
quarter than in any first
quarter in
their history, and that May
would be a good month--much better than expected.
There were a
number of other reports which, while not as good, were surprisingly
satisfactory.
Mr.
However,
no steel or automobile people were present.
Allen went on to say that although automobile sales
figures for the last 10 days of April would not be out until to
morrow,
it
was understood that they would show no improvement over
the second 10 days, when the daily average was 14,125.
The national
inventory, which on April 20 was 835,000, was probably a little
on May 1, but not by more than 20,000.
estimated at 962,000 cars as follows:
325,000, June 321,000.
It
lower
Second quarter production was
April 316,000 (actual), May
appeared that nothing could happen to
5/6/58
-39
increase that projection, while a decline in sales would reduce it.
Sources in Detroit were talking about production of 500,000 cars in
the third quarter and 1,200,000 in
mean a 3,900,000 car year.
It
the fourth quarter,
which would
seemed definite that new model intro
duction--Ford and Chevrolet at least--was planned for October 1 this
year as against November 1 last year.
As to policy, Mr. Allen felt that the System should stay just
about where it was.
Like Mr. Leedy, he understood at the last Com
mittee meeting that the agreement was on a range of free reserves
from $500 to $750 million, and the results of open market operations
therefore showed figures lower than he had expected.
He would favor
a continuation of that range, with the expectation that probably in
the next three-week period the Desk would find it
possible and
practicable to achieve a little higher level of free reserves than
had prevailed recently.
With regard to the policy directive, he
would prefer not to include the word "recession," among other reasons
for the unimportant one that once that word was in
the directive he
felt that there would be differences of opinion as to the timing of
its
removal.
Consequently, he thought it
would be just as well to
leave the directive in its present form.
Mr. Deming reported that there had not been much change in
basic conditions in the Ninth District although,
sentiment seemed to have improved somewhat.
as elsewhere,
With reference to the
farm situation, the magazine of the Great Northern Railroad said
-40
5/6/58
that in the area there had probably never been a spring as en
couraging as this one.
seemed pretty good.
In all, the farming side of the picture
In nonagricultural lines seasonal expansion
was taking place, but the expansion was not as strong as usual nor
was it
expected to be.
Employment layoffs had continued and in
some areas the situation probably would continue through the summer.
Banking presented a considerable contrast to last year, the seasonal
deposit loss being just about 60 per cent of last year.
The loan
decline at city banks was being offset by expansion elsewhere, with
the result that loans in
total were even with the end of last year.
While there was some recent expansion at city banks,
was not as strong as last year.
gressive in making loans,
it
apparently
Some city banks seemed more ag
that is,
there was advertising for loans in
more eager to make loans,
and
contrast with last year.
Mr. Deming expressed agreement with those who were inclined
to feel that monetary policy had done its
was in just about the right position.
job thus far and that it
However,
he felt that the
Desk might seek a somewhat higher level of free reserves than ap
parently it
had been able to achieve.
difficulty in
While he recognized the
getting to that statistical position at the present
time, he felt that the objective could be pursued a little
strongly.
more
He saw no reason to change the directive for, as Mr.
Robertson had said,
when it was written.
the language seemed more pertinent now than
-4l
5/6/58
Mr. Mangels stated that the West Coast had not experienced
the increase in activity that had been expected.
Production of
automobiles, machinery, and metals, was still somewhat unfavorable
while there had been some improvement in construction and lumbering
along with gains in aircraft and shipbuilding.
In March, public
construction was somewhat above the previous month, and also a year
ago, as was residential construction, and there were indications
that the Veterans Administration had had quite a substantial increase
in appraisal requests.
Department store sales did not show much
change, being down about 1 per cent in April from a year ago, while
automobile sales were down 16 per cent from last year.
There had
been delays in getting in the spring crops due to adverse weather
conditions, but it developed that farm income in the first two
months of the year was higher than the level of any comparable
period in
the last five years.
At the last meeting of the Salt
Lake City directors, the director who is in the farm equipment
business indicated that his business and that of his competitors
was going along very well, and tne Idaho economy, as previously
reported, seemed to be in
meeting in Seattle it
quite good shape.
At the last directors'
was mentioned that the Boeing plant was now
employing about 62 thousand workers, some 2,000 more than estimated
a few months ago, and it
for the next year or two.
appeared that this level would be sustained
Boeing expected to have orders for B-52a
-42
5/6/58
aggregating $500 million, the Government had ordered some new ships
in the Seattle area, and a $75 million missile base was to be con
structed near Spokane.
A director representing the lumber industry
said that sales were better than last year in the Washington area.
The lumber people were somewhat optimistic about an increase in
residential construction and Government orders for shipments to
Korea.
The Chairman of the head office directors found among busi
ness sources a somewhat more optimistic attitude, and he himself was
somewhat more optimistic although he could not quite explain the
reasons.
Bank loans in all six categories showed an increase in the
three weeks ending April 23, and both time and demand deposits in
creased more than the normal Twelfth District proportion of the
Borrowings from the Federal Reserve Bank were
national figures.
nominal.
The banks continued to feel that they had adequate funds
to meet foreseeable loan demands, and they were not concerned about
their liquidity position.
Mr. Mangels said that the San Francisco directors joined in
the recent discount rate reduction without enthusiasm, in fact with
some reluctance.
He went on to say that he would not recommend a
further reduction in
the banks in
reserve requirements although he felt sure that
the district with large amounts of savings funds would
welcome a reduction in
the requirements against savings deposits.
In terms of policy actions, he felt that the System had done about
5/6/58
what it
-43
should do and he would be content to coast along on the
basis of those actions for the present.
Mr.
Irons reported that there had not been much change of
significance in
the Eleventh District, except possibly with regard
to weather conditions.
He said that the Reserve Bank tried to
maintain fairly good contact with businessmen and other parties in
the district, and that it
did not find an attitude of pessimism
but rather an attitude of confidence.
Businessmen--and not only the
large ones--realized that they had to be cautious and sound and could
not do some of the things that they did a couple of years ago.
How
ever, he found more comment and underlying concern about high and
rising prices,
inflationary possibilities,
big Government deficits,
and deficit spending than about unemployment or declining business
or gloom in the oil industry.
Also, while the sample might not be
conclusive, the Bank had not found any great enthusiasm, even among
the reserve city banks,
quirements.
about the second reduction of reserve re
In summary, while he did not mean to paint a rosy
he found more conversation and talk about the price situa
picture,
tion and the possibility of more inflation than about the problems
of the recession.
Mr.
awards in
Irons said that construction had turned up, with contract
April about 28 per cent above a year ago.
Both residential
and nonresidential construction awards were running ahead of last year.
5/6/58
In this connection, the Reserve Bank had invited bids on a remodeling
and expansion of the head office building and four of the ten firms
invited to bid immediately rejected the invitation, stating that they
were already too fully occupied to take on another job.
The agri
cultural situation had been slowed down due to rains, particularly
in central and northern Texas, but in other parts of the district
the agricultural outlook was very good, and in all probability the
farmers would get in their crops.
In the "valley" the agricultural
interests were very happy with the weather and the state of the
world.
From the standpoint of money in pocket, farm cash receipts
for January and February were 30 per cent above a year ago.
The
rate on mortgage money had apparently declined by about 1/4 per
cent on conventional loans and was now 5-1/4 to 5-3/4 per cent,
with money available.
Insurance companies,
savings banks, and
The
others were saying that they had money for mortgage loans.
oil situation seemed to look a little
duction was still
better at the moment.
running on an eight-day allowable basis but it
appeared quite certain that the rate would not go lower.
it
Pro
seemed possible that it
would go up a little
in
June.
In fact,
There had
been some decline in stocks and the price situation was somewhat
better than that prevailing three or four months ago.
In the oil
industry there was a feeling--somewhat similar to that with regard
to the general economic situation--that nothing was going to happen
to skyrocket the industry out of the current bottoming-out process,
but that recovery would be more or less gradual.
5/6/58
-45
Mr. Irons said that the banks in
the district were in a
much more liquid position than they had been and that there was
no borrowing from the Reserve Bank except by a few country banks.
In the last week or two,
there had been a decline in commercial
bank loans, largely due to a decline in loans for oil drilling
and sales finance.
There had been some increase in employment
but less than seasonal.
Unemployment was running 5 to 5-1/2 per
cent, with some of the cities running about 4-1/2 per cent and
Houston higher.
On policy, Mr.
Irons said that the System had taken a
position of ease and that he questioned whether there should be
any further easing in
any way.
While he would not place too much
importance on free reserve statistics, he would like to see free
reserves remain in the $500-$600 million range and he would not
try to push beyond that, especially with central reserve city
banks utilizing all available funds.
He would dislike to see
free reserves move up to $700-$750 million, for he felt that the
System had done all that it
could through easy money and he could
not see that the answer to some of the economic problems, for
example, in the automobile and steel industries, would come from
still easier money.
Something else was wrong in the automobile
industry than just a lack of availability of money.
In addition
to observing free reserves as a statistic he would observe interest
rates, the Treasury bill rate, and the Federal funds rate as a guide,
5/6/58
46
along with the money supply and the extent of credit expansion.
The trend in the money supply he considered quite important.
There seemed to be a strong demand in
the capital markets and
some concern that the rates on longer-term funds had not been
driven down enough,
but he questioned whether they should be
driven down any lower.
He would not be disturbed about the
current level of longer-term rates in view of the current demand
in the capital markets.
in
Obviously,
he would not favor a change
the directive of the kind suggested, but he had been something
less than happy about the language of the directive in the past
few weeks.
If
he were recommending any change,
he would like to
see the word "further" deleted because that seemed to put the
Committee in
the position of committing itself at every meeting
to further ease and he thought that was not a good thing ever to
get into the directive.
in
He did not favor any further reduction
reserve requirements and he would like to hold policy about
where it
was now, with the bill rate around 1-1/
the Federal funds rate in
rate.
per cent and
some kind of touch with the discount
As he had said, he would watch credit expansion, the in
crease in
the money supply, and other factors of that sort and
be sure before taking any further easing action that the System
could see what further ease would accomplish other than to stimulate
speculation and drive up the price of Government securities.
5/6/58
-47
Mr. Erickson stated that the downtrend still continued in
the First District, but that there were some hopeful signs.
Non
agricultural employment continued to move down, with the unemploy
ment ccncentrated in
manufacturing.
Nonmanufacturing employment
in March, for the first time during this recession, dropped slightly
below a year ago.
In March, employment was down 4 per cent compared
with the national average of 3.
also showed declines.
15 per cent in
per cent.
All manufacturing indices
However, construction contract awards were up
March, so that awards in
the first
with the corresponding period last year.
quarter were even
The increase in March was
attributable to public works and utilities.
For the past 10 con
secutive weeks, electric power output had shown a more favorable
comparison to a year ago than U. S. output.
Easter department store
sales were disappointing, but after Easter sales improved and thus
far this year were 3 per cent behind last year compared with a 2 per
cent decline nationally.
Mr. Erickson went on to say that the Boston Bank had completed
a survey of 79 mutual savings banks and that in March they showed the
largest monthly increase in deposits since November 1953, while real
estate loan balances in March reflected the first decline since
September 1954.
A short time ago the larger savings banks reduced
their rate on conventional mortgage loans to 4-3/4 per cent and
other banks were following suit.
Even in
Providence, Rhode Island,
5/6/58
-48
which is
the worst labor area in
the Northeast, one of the larger
commercial banks stated that their savings deposits were increasing
at the rate of $200-$300 thousand a week.
As to policy, Mr. Erickson said that he would make no change
in
the discount rate or in the policy directive, which he felt
covered the situation
adequately.
Neither would he favor a change
in reserve requirements at this time.
In open market operations, he
would like to have a target of $500-$700 million for free reserves,
with errors on the side of ease with less reluctance.
Mr.
Szymczak said it
was his feeling that current policy
should be continued but that reserve requirements should be reduced
further if
and when an opportunity appeared.
Whether anything was
done in regard to time deposits should, in his opinion, depend on
the situation prevailing at the particular time.
He had a feeling
that something should be done in that regard, but that was simply
his feeling as of the moment.
More important, as he saw it, was
the question of adjustment in requirements of central reserve and
reserve city banks.
He agreed with Mr. Mills that there was a
problem created by the excess reserve position which may have to
be taken up by open market operations in case reserve requirements
are reduced.
He agreed with Mr. Robertson that the direction as
written related more to the present situation than the situation
prevailing when it was adopted.
There was a point in Mr.
Irons'
-49
5/6/58
comment about the word "further," but he did not think that the
directive should be changed at this time.
He would do nothing
on discount rates but he would watch the situation as to fiscal
policy,
as recommended by Mr.
Treiber, because the System no
doubt would be expected to take a position on taxes.
Whether
the System should recommend that the present tax levels be held
would again, he felt, depend on the situation as it
the particular time.
was seen at
However, the System ought to be prepared
to take a position in connection with the tax rates--excise and
corporate--that terminate in
June.
Mr. Balderston said that disenchantment with both the
design and price of this year's automobiles, the stickiness of
prices,
and the indication that some American products had been
priced out of foreign markets would seem to call for some very
fundamental remedies on the part of business itself which might
require some time.
For the long pull, the most disconcerting
current happenings were imprudent Government spending and the
possibility that the automobile industry might perpetuate
escalator clauses in its
wage contracts.
Although he had favored
a quick tax adjustment some time ago, he was now apprehensive
about the large Federal deficits that apparently would flow from
spending actions already taken.
reduction,
If
increased by a large tax
the inflationary basis created by those deficits might
5/6/58
-50
be beyond the power of monetary policy to control.
market policy,
As to open
the staff had made clear that there was no tangible
evidence that the capital goods recession was bottoming out.
Hence,
a continuation of present policy would seem to be indicated, with a
target for free reserves of perhaps $600 million and no further
change in the discount rate.
Since he felt that the directive
should be changed only when there was actually a change in policy,
he would leave the directive unchanged for the moment.
Chairman Martin said that in his own view the present open
market policy was about right, and that he felt this statement largely
reflected the general thinking.
and he found it
There were shades of opinion, however,
difficult to express the consensus on free reserves.
He was not sure whether, as had been suggested here, the Committee
actually agreed on a range of $500-$700 million at the last meeting.
He himself had said $500-$600 million and there were different
observations around the table, some being on the high side, some
favoring the status quo, and at least one member favoring a somewhat
lower position.
His own thinking, Chairman Martin said, was that
the Committee was pursuing a policy of ease and that it
have any knots develop in
ought not
that policy.
With regard to changing the directive which was first
adopted at the March 4 meeting,
Chairman Martin suggested that a
change along the lines suggested by Mr.
Treiber might leave the
Committee open a little to the question of whether it was aware
-51
5/6/58
on March 4 that a recession was under way, whereas actually no
one around the table had any doubt on that score at the time.
Therefore,
to make the suggested change might have the effect
of producing a record that would be confusing.
his own view it
Accordingly, in
would probably be better not to tamper with the
directive, although he did not think that any great problem was
involved.
Chairman Martin then said he took it
view that there should be no change in
to be the majority
the directive.
When no
one questioned that statement, he returned to the subject of free
reserves and said again that he was not sure quite how to state
the consensus of the meeting in the light of the different views
that had been expressed.
At this point Mr. Thomas commented that it seemed to him
that the idea of a target for free reserves of $700-$800 million
was a delusion.
A level of around $500 million had prevailed
and at the same time there had been an expansion of bank credit
to the extent of about $7 billion.
If
this expansion had not taken
place,
there would now be free reserves of $1 billion, or perhaps
more.
It did not appear to him that the level of free reserves
could be kept at $700-$800 million as long as the present attitude
of the banks continued,
that is,
the attitude that they would put
to use all available funds and keep no excess reserves.
The country
-52
5/6/58
banks were not likely to keep more than about $500-$600 million
of excess reserves so that any free reserves in excess of that
amount would be absorbed by further credit expansion.
A sub
stantially higher level, he suggested, could be achieved only
if
the Treasury bill
yield were pushed down so low that banks
would hold idle cash rather than buy bills.
Chairman Martin said that these comments pointed up the
problem of using free reserve target figures at all.
However,
they had to be used as an indication, for that was the framework
within which the Account Management had to work.
As he saw it,
the majority would favor a slight easing of the recent free reserve
level, and that, he said, was about the best he could do to state
the matter.
In comments which ensued, Mr.
Shepardson said he wished to
align himself with the view of Mr. Irons that free reserves ought
to be kept in
the $500-$600 million range, while Mr. Treiber said
he would feel that if
free reserves went up to $700 million there
were times when this should not be disturbing at all.
stated that if
Mr.
Johns
the level should go up for a few days he would not
act too quickly to bring it
down, and Mr. Robertson indicated that
he agreed completely with Mr.
Johns.
At the conclusion of the discussion,
Chairman Martin said
that there appeared to be a reasonable meeting of the minds, if
5/6/58
-53
one were to accept the $500-$600 million range that had been sug
gested within the framework of the general discussion, and that
this was probably sufficient guidance for the Desk.
Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal Re
serve Bank of New York until otherwise
directed by the Committee:
(1) To make such purchases, sales, or exchanges (in
cluding replacement of maturing securities, and allowing
maturities to run off without replacement) for the System
Open Market Account in the open market or, in the case of
maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective
economic conditions and the general credit situation of the
country, with a view (a) to relating the supply of funds in
the market to the needs of commerce and business, (b) to
contributing further by monetary ease to resumption of
stable growth of the economy, and (c) to the practical ad
ministration of the Account; provided that the aggregate
amount of securities held in the System Account (including
commitments for the purchase or sale of securities for the
Account) at the close of this date, other than special
short-term certificates of indebtedness purchased from
time to time for the 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.
With reference to the question of the rate applicable to re
purchase agreements, Chairman Martin suggested that further considera
tion of the matter be deferred unless the problem was regarded as
-54
5/6/58
urgent.
When Mr. Larkin stated that the problem was not at all
urgent, it
was agreed to carry the matter over until the next
meeting of the Committee.
It was then agreed that the next meeting of the Federal
Open Market Committee would be held on Tuesday, May 27, 1958, at
10:00 a.m.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1958, May 5). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19580506
@misc{wtfs_fomc_minutes_19580506,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1958},
month = {May},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19580506},
note = {Retrieved via When the Fed Speaks corpus}
}