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.
May 27,
1958,
at 10:00 a.m.
Martin, Chairman
Hayes, Vice Chairman
Pulton
Irons
Leach
Robertson
Shepardson
Szymczak
Vardaman 1/
Deming,
Alternate for Mr.
Mangels
Messrs. Frickson, Allen, and Johns, Alternate
Members of the Federal Open Market Committee
Messrs. Bopp, Bryan, and Leedy, Presidents of the
Federal Reserve Banks of Philadelphia, Atlanta,
and Kansas City, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Daane, Hostetler, Marget, Walker,
Wheeler,
and Young,
Associate Economists
Mr. Kenyon, Assistant Secretary, Board of
Governors
Mr. Koch, Associate Adviser, Division of
Research and Statistics, Board of Governors
Mr. Jones, Chief, Consumer Credit and Finances
Section, Division of Research and Statistics,
Board of Governors
Mr. Keir, Economist, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
1/
Entered meeting at point indicated in minutes
-2
5/27/58
Messrs. Roosa, Mitchell, and Tow, Vice
Presidents of the Federal Reserve
Banks of New York, Chicago, and
Kansas City, respectively; Mr. Larkin,
Assistant Vice President, Federal Re
serve Bank of New York; Messrs. Willis,
Anderson, and Atkinson, Economic
Advisers, Federal Reserve Banks of
Boston, Philadelphia, and Atlanta,
respectively; and Mr. Lapkin, 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 Com
mittee held on May 6, 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 May 6 through
May 21, 1958, and a supplemental report covering commitments executed
May 22 through May 26, 1958.
Copies of both reports have been placed
in the files of the Federal Open Market Committee.
Mr. Larkin said he had nothing to add to the written reports
except to emphasize that the money market had been consistently easy.
Federal funds had been available at minimum rates and the Treasury
bill rate had declined sharply, along with other short-term rates.
The bill
rate in yesterday's auction was 0.63 per cent, and the issue
started out in
trading this morning at that level.
Dealers had been
awarded substantial amounts of bills in yesterday's auction.
In response to a question, Mr. Larkin stated that the $91
million upward revision of the Board staff's estimate of required
5/27/58
-3
reserves at country banks on the basis of final data for the last
half of April was,
as the New York Bank's report had indicated,
much larger than usual, the revision ordinarily being in
the magni
tude of $20 to $30 million.
In response to another question, Mr.
Larkin said that there
had been a continuing wave of speculation in the Government securi
ties market since the change in
credit policy last fall.
With the
approach of the forthcoming Treasury refunding operation, there had
now been a wholesale speculative movement into Treasury rights
maturing in June.
Some estimates placed the magnitude of this
speculation in the vicinity of one-half billion dollars, but yester
day, Mr. Larkin said, he heard a figure mentioned in
billion.
If
trouble.
However, if
tors and if
the area of $1
the refunding went smoothly, this would not cause
the terms were not acceptable to the specula
they unloaded at one time when the subscription books
were opened, there could be trouble in the market place.
essence,
there was a substantial speculative interest in
maturing Treasury issues; if
In
the
the estimate of $1 billion was correct,
that meant $1 billion out of total maturing issues of $9-1/2 billion.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
open market transactions during the
period May 6 through May 26, 1958, were
approved, ratified, and confirmed.
Mr.
Vardaman joined the meeting at this point.
In supplementation of the staff memorandum distributed
under date of May 23,
1958, Mr. Young made the following state
ment on the economic situation:
A bottom to decline in economic activity appears
to be in the making. At least, the composite of indi
cations is fairly suggestive of this.
To identify the
main indices:
Decline in industrial production has apparently
been checked in May.
This reflects turn around in steel
output and modest strengthening of auto output, about
offsetting further declines in producers' equipment and
nonferrous metal output. Other areas of output recently
have been showing little
change.
Thanks to rising transfer payments--unemployment
compensation, old age benefits, and a recent special life
insurance dividend to veterans, personal income has been
leveling out. Reflecting improvement in personal income,
retail markets have developed noteworthy strength. Non
durable goods buying has been particularly buoyant. In
new car and used car markets, combined sales and price
trends, if not pointing to betterment, certainly suggest
cessation of weakening.
Construction awards in nonresidential areas, while
still declining, show somewhat less decline than expected.
A rise in commercial awards and public works in April
served as a partial offset to declines in other non
On a revised seasonal adjustment
residential areas.
basis, private housing starts show an evener level for
the year to date than on the older seasonal adjustment
basis and reports from builders confirm an improved
tone to housing markets. With unsold inventories low,
construction and mortgage money readily available on
more liberal terms, and mortgage interest rates showing
declining tendencies, home builders state that they are
raising their sights (not too high to be sure) for the
year.
New orders in durable goods industries have been
declining at successively reduced rates and, abstracting
the aircraft industry which enjoyed a sharp rise in new
defense orders in March, the latest confidential informa
tion suggests a modest increase for April. Defense
5/27/58
contracts generally have recently been showing marked rise,
with secondary impacts on subcontractors.
Inventory liquidation has probably been continuing over
all, but some key material markets --steel, copper, lumber,
textiles, and fuels--suggest lessening, if not turnabout, in
inventory liquidation. Another straw in the inventory wind
is the recent rise in freight traffic figures covering manu
factured shipments. Still another straw is that inventory
liquidation halted in April at department stores, at least
temporarily; the seasonally adjusted index in fact rose 2
points.
Initial and continued claims for unemployment compensa
tion have shown a more favorable trend this month.
Numbers
of workers submitting claims are still large, but even modest
declines in claims are indicative of change in the labor market
climate.
March figures for exports were up from February while
imports continued to hold up well at the moderately reduced
level of January and February.
Agricultural income has risen this spring, and with crop,
livestock, and farm price prospects relatively favorable for
most areas, the agricultural income outlook is modestly
bullish.
Capital market activity has been well sustained, indica
tive of resistance to further contraction in real capital
formation as well as of a strengthening of liquidity positions
by strategically important sectors of the economy. Banking
developments have also been in the direction of a marked
strengthening of business and individual liquidity positions.
As to prices, a degree of flexibility in the area of
industrial commodities seems to be emerging gradually,
especially at the wholesale level but to a degree also at
retail. At wholesale, there is alleged to be a widening
spread developing between the statistical level of semi
finished and finished goods prices and the actual trans
actions level.
The Federal budget is moving steadily into compensatory
deficit position, and the prospect is for the deficit to rise
more rapidly further in the months ahead.
Finally, investor and business sentiment can reasonably
be read as manifesting on balance cautious optimism about the
future economic outlook.
Each of these points needs specific qualification, indeed
quite a bit of it, but the listing of them together presents a
fairly impressive array of indication that recession may be
bottoming out. But it is a long jump from the conclusion that
recession may be bottoming out to the conclusion that recovery
5/27/58
is shortly to begin. There are a number of factors in the
situation that raise questions about imminent recovery:
Surplus of manpower and industrial capacity remains a
general condition.
That wage rate advance and escalation is still a problem
at the bargaining table of major unionized industry is con
firmed by the recent aircraft plant settlement.
In consumer durable goods markets, instalment credit
liquidation continues to be a major drag, proceeding in recent
months at an annual rate of contraction not far short of its
rate of expansion just a year ago.
Price adjustment so far accomplished is hardly to be
judged very stimulative.
As recession is prolonged, financial strains are cumula
tive. For one thing, as income declines, individuals endeavor
to maintain living standards; thus, absorption of financial
surpluses of many consumers is gaining as a retarding factor
in consumer markets. For another thing, second quarter
earnings for many companies and key industries at prevailing
levels of activity are not likely to bring cheer to many
equity investors and, in the railroad area, to bondholders.
In Europe, French political crisis comes at a time of
increasing indications of inventory liquidation, which could
tip European economic scales downward. Adverse European
developments, together with financial weakness on the part of
various underdeveloped and raw material supplying countries,
could spell new reaction in American foreign trade.
On balance, it seems best to view the period which the
economy is now entering as one of test of recession bottom.
On the basis of past cyclical patterns, the period could
last several months. If the test proves out, there may be
the gathering of financial and enterprise forces to give
sufficient impetus to resource redirection that recovery is
set in motion. This is not a good stage for prejudging this
possibility. The more prudent course is wait for clearer
evidence that recession has bottomed out and that a pattern
of recovery forces has taken shape.
Mr. Thomas made the following statement concerning financial
developments:
Someone has characterized the current economic situa
tion as an "inflationary recession." It is truly a selective
one, with the declines concentrated in a few sectors--durable
goods and inventories--while other sectors are showing re
markable strength. The inflationary characteristics are:
5/27/58
continued rises in prices of many commodities, notably
foods and services, together with maintenance of prices
of many other processed goods, further increases in wages,
rising stock prices, the enlarging Governmental deficits,
and, most strikingly, the rapid rate of credit expansion.
The last two of these represents deliberate measures
adopted to combat recessionary tendencies. The increase
in prices and wages may be attributed to structural causes
largely outside the influence of credit and fiscal measures.
The stock market strength probably reflects credit develop
ments at least in part.
The expected Federal Government deficit is slow in
developing.
Expenditures have continued below prior esti
mates and, although commitments have been made for additional
expenditures, it is difficult to predict when the larger cash
outlays will eventuate. Receipts, however, are falling some
what below earlier estimates. If expenditures pick up sharply
in the next few weeks, the cash deficit for this fiscal year
may be close to $2 billion.
The Treasury's cash balance has continued at a comfortable
level--above earlier projections and above the level of last
year. The generally higher level of Treasury deposits at banks
as compared with last year has absorbed some of the funds made
available by bank credit expansion, as well as some of the
available bank reserves. Although the Treasury balance will
decline sharply in the next three weeks, June tax receipts,
together with the absence of a maturing issue of tax securi
ties this year, will bring about a large increase in the
This should be
Treasury balance in the latter part of June.
sufficient to carry the Treasury into August before new
financing will be needed.
New security financing by corporations, and by State and
local governments has continued in large volume. Corporate
issues, totaling nearly $800 million in May, are running less
than the large volumes in March and April, but approximate
Indications are that new
the total for May of last year.
public issues and payments on private placements may total
close to $1 billion in June. State and local issues have
remained close to $800 million, exceeding those of previous
The present calendar points to a decline in June.
years.
Money markets and security markets have been influenced
by the large volume of new security issues, and by public
discussion of plans for the Treasury refunding, as well as
Short-term interest
by the growing liquidity of the economy.
to those of mid
close
levels,
low
rates have declined to new
but rose
April,
in
somewhat
declined
1954. Long-term rates
keeps
issues
new
of
volume
large
The
slightly in early May.
5/27/58
this market under steady pressure.
Uncertainty about
Treasury financing has also been a factor in keeping
long-term rates from declining.
The spread between
yields on 3-month bills and the Treasury bond with the
highest yield, at about 2-1/2 per cent, is the widest
differential since the early 1930's.
It compares with
a spread of less than 2 per cent in 1954.
Total loans and investments of all commercial banks
increased by over $4 billion in April--a larger growth
than had been previously estimated--bringing the total
increase since the end of November to above $8 billion.
Marked increases occurred during April in both loans
and investments at country banks, and in holdings of
investments at city banks.
The latter showed little
change in their total loans, as declines in business
loans were offset by increases in loans on securities.
three weeks of May, according to
In the first
partial figures for May 21, total loans and investments
at banks in leading cities declined, reflecting to some
extent seasonal influences, but the decrease was less
Loans declined some
than in the same period last year.
what more than a year ago, but investments increased
somewhat this year in contrast to a considerable decline
Loans to brokers and dealers in securities
last May.
have been substantially reduced in the past three weeks,
and business loans have declined somewhat further, re
flecting in part usual seasonal influences.
Demand deposits adjusted and currency outside banks
showed a seasonally adjusted increase of $1 billion in
April, following similar increases in March and February.
The total of $135 billion at the end of April is the
largest since last July, when there was a peak of $136
billion, and is at the same level as the figure reported
Time deposits, other than interbank,
for April last year.
at commercial banks are about $7 billion larger than a
year ago, and interbank deposits and U. S. Government
deposits have also been at higher levels than a year ago.
three weeks of May, demand deposits
In the first
adjusted at city banks declined by about $1 billion--or
about the same amount as in the corresponding period last
There were small declines in U. S. Government and
year.
interbank deposits, but less than last year. Time deposits
continued to increase.
In addition to the growth in the volume of deposits in
recent months, the rate of turnover of demand deposits
5/27/58
increased in April, contrary to the usual seasonal trend,
and was about the same as in April 1957.
Although changes in bank credit during the past three
or four weeks have resulted in a net decline of about the
usual seasonal proportions in the volume of required re
serves, there have been substantial drains on reserves from
other factors. The continued gold outflow has amounted to
about 4OO million and an increase in currency in circula
tion to nearly $300 million. The latter increase was about
$200 million larger than seasonal. System open market
operations have supplied over 400 million of reserves and
other factors have supplied some. Free reserves have held
close to $500 million.
New York City and Chicago banks have maintained rather
well balanced reserve positions and during the past week or
so have frequently been net sellers of Federal funds rather
than large net buyers as in April. Banks in these two
cities accounted for much of the decline in total loans and
investments at banks in leading cities during the first
three weeks of May. These tendencies have been reflected
in the easing of money market tensions.
Reserve needs will be rather large in June and the
first half of July. In the next two weeks, the gold outflow
and the holiday currency demand will absorb substantial
amounts of reserves. In the latter half of June, required
reserves may increase as a result of the sudden buildup of
Treasury deposits and probable borrowing by taxpayers from
banks.
These projections are especially uncertain.
It
appears that in the absence of System action free reserves
might generally average less than $300 million, except
during the middle week of June when float is temporarily
high. In the weeks ending July 2 and 9, there are likely
to be heavy borrowing needs, producing net borrowed re
serves of over $200 million.
Mr. Hayes presented the following statement of his views re
garding the business outlook and credit policy:
There is still no clear evidence that the recession has
run its course, even though there are signs that the adjust
ment process may be approaching its end in certain segments
and the decline in the economy as a whole is losing momentum.
Perhaps the most reassuring element in recent weeks is the
virtual absence of any cumulative recessionary tendencies in
5/27/58
-10-
the area of consumer spending.
But there is little
in the
picture to suggest a rapid and vigorous recovery. No im
mediate stimulating force of major magnitude is evident,
especially in view of the apparently increasing unlikelihood
of a general tax reduction.
Inventory liquidation is still
going on, and with widely
used inventory-to-sales ratios at peak levels, the end of
this adjustment is not in sight. The rate of liquidation,
however, is probably lower than in the first quarter, so that
gross national product in the current quarter may receive
some upward impetus from this factor, although it may well be
more than offset by declines in final demand for goods, in
cluding business expenditures on plant and equipment. Retail
sales did fairly well in March and April, but fragmentary
reports for May look less promising. Transfer payments of
various types have been a major factor in maintaining aggre
gate personal income at a very satisfactory level, The
considerable growth of personal savings since the beginning
of the year augurs well for ultimate consumer spending, and
long-run business confidence continues strong. On the other
hand, there is an ever-present risk that the recession may
have increasingly adverse effects abroad.
It seems likely that unemployment will remain a serious
The immediate outlook is
problem for a good many months.
inflow
of about two million
the
prospective
dominated by
the labor force
students
into
and
high school graduates
only. But even after
employment
temporary
seeking
them
most of
seasonal adjustment total unemployment may well increase.
discouraging, though we may take
Price behavior is still
some comfort from the apparent further spread of discounts
prices, as competitive pressures become more ef
below list
Even the indexes are
fective in today's buyers' markets.
There does not, on the other
showing signs of leveling out.
hand, seem to be any immediate danger that our sustained
policy of ease will itself produce an early resumption of
Incidentally, from a longer-range
general price increases.
point of view, enactment of a national fair trade bill of
the kind now being urged in the House could make more
difficult our problem of combating inflationary tendencies.
Recent trends in bank earning assets have been similar
to those of earlier months in the year, with business loans
continuing to fall off much more sharply than a year ago,
and with growing security investments offsetting this
decline. On a seasonally adjusted basis, the money supply
is now only a shade higher than at the end of October, but
since January it has risen by more than $2 billion. The
5/27/58
-11-
bulk of the increase in loans and investments since October
has been matched by a sharp rise in time deposits and
Government deposits.
It is gratifying to see required re
serves (adjusted for changes in required reserve ratios)
running about $600 million ahead of last year in recent
weeks, as against about $300 million in March and April.
Another tangible reflection of our policy of ease may be
seen in the banks' loan-deposit ratios. For New York banks
the average ratio in early May was 59 per cent as against
66 per cent in early October, but it was still
far above
the 1953 peak of 54 per cent. For weekly reporting banks
outside New York the average in early May was 51 per cent
as compared with 55 per cent in early October, and 3 per
cent at the peak in 1953.
For the next few weeks the Treasury's refunding problems
will be requiring our careful attention, but no cash financ
ing is likely to be called for until early August.
Uncertainty
as to the possible inclusion of a long-term issue in the
refunding has been a somewhat upsetting influence in the
capital markets, despite the considerable ease in the money
market.
The business outlook clearly indicates that we should
adhere to our present policy of monetary ease. If present
projections prove to be correct, involving the large rise
in currency circulation associated with the Memorial Day
holiday, together with continuing gold outflows, substantial
System action will be necessary to prevent the level of free
reserves from dropping sharply to the neighborhood of $200
I believe that we should aim to keep
million early in June.
free reserves around the $500-$600 million range, but that
we should resolve doubts on the side of ease and should have
no hesitancy about seeing free reserves rise occasionally to
$750 million or more if this seems desirable after due
consideration of the "feel" of the money and capital markets
and the behavior of key liquidity indicators.
In view of the very sharp decline that has already
occurred in short-term interest rates, there would be a real
advantage in providing the reserves needed in the next few
weeks without depressing short-term rates, especially bill
rates, to unreasonably low levels. It would also be advan
tageous to encourage a diversified flow of bank funds into
various sectors of the credit market, especially in the
light of the uncertain atmosphere of the capital markets.
To my mind these are persuasive reasons for a cut in
reserve requirements at the earliest possible date. A cut
5/27/58
-12-
would be a helpful step toward the System's long-range
objective of achieving a generally lower level of require
ments, and by making added reserves available to a wider
range of users than would be the case if these reserves
were injected solely through open-market operations, it
would increase the likelihood that at least some of the
funds would be almost immediately devoted to longer-term
uses.
A reduction in time deposit reserve requirements
might be especially effective in encouraging a flow of
funds into longer-term markets, including the mortgage
market.
Further narrowing of the differentials between
demand deposit requirements for central reserve city banks
and other categories of banks would also seem appropriate.
Just by way of example, I might point out that a 1/2 per
cent cut in time deposit requirements would free about
$250 million of reserves, and an additional $250 million
would be released by a 1 per cent reduction in the central
reserve city required ratio for demand deposits.
If the reserves needed in the immediate future are
not provided through a reduction in percentage requirements,
I believe it may be quite difficult to provide them through
open market operations without resorting to the purchase of
short-term securities other than Treasury bills, in view of
the low market supply of bills. Presumably, therefore, it
should be understood that the Manager might purchase other
short-term securities if the market supply of bills is in
adequate to satisfy reserve needs.
With respect to the forthcoming Treasury refunding, I
feel that the inclusion of a really long-term issue in the
offering would not be desirable in the present situation.
But I think an offering in the maturity range of 10 - 12
years, which might presumably attract substantial bank sub
scriptions, would be quite appropriate and would achieve
more in the way of improving the debt structure than would
a long range offering which could not be very sizeable
without risking serious adverse effects in the capital
market.
There is, I believe, no need at this time to consider
a further change in discount rates. Perhaps it is enough
in present circumstances to have one of the three chief
instruments of credit control hold the center of the stage
at any one time, and it seems to me quite clear that this
is an appropriate occasion for reserve requirements to
play the leading role.
5/27/58
-13
Mr.
Erickson stated that in
"bottoming out" were still
the First District signs of
elusive, although some indices hinted
at a slower rate of decline and others hinted at some improvement.
Declines still
predominated in manufacturing and employment.
The
April to April figures on nonagricultural employment made a poorer
showing than the March to March figures, and the declines were
particularly severe in
primary metals,
textiles,
nonelectrical machinery,
and
Nonmanufacturing employment continued to fare
better than manufacturing.
Insured unemployment attained a tem
porary peak in the week ending April 12 and now appeared to be
declining both in
total claims and as a percentage of a year ago.
While the Dodge figures for construction in April were not yet
available, engineering construction contracts tabulated by
Engineering News Record were considerably lower in April than a
year ago.
As he reported at the last meeting of the Committee,
electric power output had for ten consecutive weeks shown an
improvement over 1957 and made a better showing than the national
Mr. Erickson said; in
figures.
He could now add three more weeks,
fact, in
only one week since January 25 had it
ago.
been below a year
On the other hand, department store sales had taken a further
decline and were now four per cent behind last year.
In its
April
survey of mutual savings banks the Reserve Bank found that there
5/27/58
-14
was a greater increase in deposits, a decrease in withdrawals, and
an increase in interest credits, so that in April the deposits
showed an increase of $15 million as compared with a $2 million
decrease in April of 1957.
cent.
The twelve months' net gain was 5.6 per
Ordinary life insurance sales for the first
this year in
four months of
New England were 15 per cent ahead of last year,
indicating that there was still a disposition to save.
As to credit policy for the next three weeks, Mr. Erickson
said that he would make no change in the directive or in the discount
rate.
He hoped that the same degree of ease that had prevailed
during the past few weeks could be maintained.
If this meant going
over $600 million of free reserves, he would not be concerned.
Looking at the projection of reserves for the next few months, he
felt that Mr.
Hayes had made a very persuasive case for a reduction
in reserve requirements.
Mr.
encouraging.
it
Irons said that as he saw it the national situation was
A bottoming-out period might be approaching and, if
were, he would rather expect things to continue in a trough for
some time.
He did not see any great signs of developments that
would bring about a rapid and dynamic upsurge in
the economy,
but
he recalled that this does not tend to occur in a business cycle
movement except when war strikes.
Rather,
he felt that there would
be a testing of the bottom and that gradually elements of strength
5/27/58
-15
would begin to appear.
were,
Significant factors in the national picture
or were tending to, bottom out, it
seemed to him, and there
was no evidence that the recession was feeding upon itself.
financial condition was strong and liquid.
The
It was factors such as
this that pointed to encouragement.
Turning to the Eleventh District, Mr.
Irons said that condi
tions were good, with the agricultural situation very favorable.
the first
In
quarter of the year farm cash income was up 30 per cent,
crops 4O per cent, and livestock 20 per cent.
It
had been many years
since he had heard the people west of Fort Worth as optimistic about
the agricultural situation as at the present time.
There had been
plenty of rain and good weather and, although agriculture is a
hazardous vocation, at the moment the situation was very favorable
in practically all areas of agriculture, including cotton, wheat,
and livestock.
The oil situation, Mr.
Irons said, showed some
Production was still
holding at an 8-day allowable basis
and possibly would hold there in
July, but there was a growing feeling
improvement.
among the more responsible elements in the industry that, barring
some unforeseen development, there would be an increase in allowables
as the months went by and that at the end of this year the allowables
would probably get up to eleven or twelve days.
Department store
sales in the district were currently about equal to a year ago, with
strength in
some of the durables.
Employment was up seasonally and
5/27/58
-16
claims for unemployment insurance were tending downward.
The
banks were liquid, loans were increasing along with investments
in
the last three weeks,
was little
reserve positions were easy, and there
borrowing from the Federal Reserve Bank.
Business
confidence was good and more was heard about the possibility of
inflation than about the recession.
A number of people had been
talking to him about monetary policy from the standpoint of whether
it
was getting too easy and how easy the Federal Reserve was going
to make credit.
were quite good.
tions in
In summary, conditions in
the Eleventh District
Although this was not the top of a boom, condi
the district were not too far from that point.
As to policy, Mr. Irons expressed the view that concentration
on maintaining free reserves in
the range of $500-$600 million had
led to an aggressive policy of ease, one which he thought was overly
aggressive.
It
had contributed to driving down the bill rate and
other short-term rates,
to increasing bank liquidity, and to en
couraging some speculation.
In contrast to the view that the current
degree of ease should be continued, he would hope that the Federal
Reserve could edge off a bit on the degree of ease.
He would like
to deemphasize the amount of consideration given to free reserves
and felt that a determination to keep free reserves within a certain
pattern had been a contributing factor to the ease that had developed.
Much had been made of a range of $500-$600 million, with the statement
5/27/58
-17
also made that it
should not be a matter of concern if
reserves rose to $600 or $700 million.
free
While he would not want
to argue that point strongly and, in fact, did not put much faith
in free reserves in any event, he did not feel that it
should be
a matter of concern if the level of free reserves dropped to $300
or $400 million as long as the money market was generally easy.
The Committee, he suggested, should not be governed in its actions
by trying to maintain a statistic which has a lot of tricks in it.
Short-term rates, the Federal funds rate, the bill rate, and the
movement of bank credit seemed to him more expressive at this time
than the level of free reserves. He also thought it would be well
not to place too much emphasis on tying reserve projections into
decisions on free reserves, because moving on the basis of such
projections might, if the projections did not work out, draw the
System into excesses one way or the other.
He saw no objection
to operating in other parts of the short-term market than Treasury
bills if
that should seem the right thing to do.
Mr. Irons said that he would not favor changing the discount
rate, reserve requirements, or the policy directive.
As he had said
at the last meeting, he would like to delete the word "further" from
clause (b) of the directive, but he would not want to press that as
a recommendation except on an occasion when there was some other
suggestion for a change in the directive.
-18
5/27/58
Mr. Deming said that the Ninth District economy continued
to show mixed trends.
It
seemed that the disparity between the
factors of strength and those of weakness was widening, which
meant that the weak areas,
mainly the mining sections, were grow
ing in weakness.
the effects did not seem to be spreading
However,
beyond those areas.
It
also meant that those areas were expected
to remain weak throughout 1958, for such seasonal expansion as had
taken place had been far short of the normal pattern.
Mining
employment in Minnesota in March was 13 per cent smaller than a
year earlier, in April it was 19 per cent smaller than in April
1957,
and in May the gap appeared to be widening further.
Upper
Peninsula unemployment in March reached the highest level since
May 199 and had grown since then.
As of last Friday, eighteen
banks were borrowing from the Federal Reserve Bank and the important
point was that ten were in the mining areas of Minnesota, Wisconsin,
and Michigan.
Mr.
Half of them had not borrowed at all in 1957.
Deming went on to say that manufacturing employment,
almost all of which is
levels in
in
Minnesota,
April and May than it
slipped further behind year-ago
had been in
February and March.
In
contrast, agriculture continued to be a very strong factor, with
cash income running about 4 per cent ahead of last year and prospects
good.
Residential construction was quite strong, with the number
of dwelling units authorized by permit in
the first
four months of
5/27/58
-19
this year around a fourth larger than in the same period last year.
Mortgage money was available and a further decline in interest rates
was expected in the near future.
Prospects were extremely bright in
the resort business, while lumber activity was moving back close to
normal levels.
Therefore, except for mining, conditions in the
district were quite good.
Banking developments continued to reflect
deposit gains relative to a year earlier along with improved liquidity.
With regard to policy, Mr. Deming said that be would go along
with those who suggested maintaining about the same degree of ease
as in the past three weeks.
He did not see any particular reason
for a change in the discount rate but he agreed with Mr. Erickson
that Mr. Hayes had made a good case for injecting, via a reduction
in reserve requirements, at whatever time seemed feasible, such
additional reserves as might be needed on a more or less permanent
basis.
Mr. Allen reported that increased confidence that the second
quarter was bringing at least a temporary leveling in general business
activity had been expressed at the meeting of business .economists held
at the Federal Reserve Bank of Chicago on May 11.
Among the points
made by individuals present were that (1) oil product inventories
had been brought into line, (2) Sears Roebuck sales had shown modest
improvement since February, and (3) steel orders and production were
moving up.
Automobile production for the second quarter continued
5/27/58
-20
to be estimated at 1,000,000,
or 35 per cent below the corresponding
Quarter of 1957, while production in the third quarter was estimated
at 500,000 - 600,000.
Parties in Detroit believed inventories, which
were 809,000 on April 30, would be reduced by October 1 to 465,000
or less, and that approximately half of the October 1 inventory would
be 1959 models.
The manufacturers expressed determination to hold
down fourth quarter schedules until sales demonstrated the need for
additional production.
Mr. Allen said that on April 15 there were 465,000 unemployed
in Michigan, or 15.9 per cent of the work force, and that the com
parable figures in Detroit were 275,000, or 18 per cent.
The
Michigan Unemployment Security Commission, whose comparable records
started with 1949, indicated that this was probably the largest un
employed total since 1938.
in
They expected unemployment to increase
the coming months and reach a maximum in August of more than
500,000 in
the State of Michigan and 330,000 in
Detroit.
Business loans at major Seventh District banks continued to
decline, Mr.
Allen said, and the larger banks seemed to think there
would be a further decline as borrowers took advantage of the op
portunity to fund term loans in
rates.
capital markets at more attractive
This did not appear to disturb the bankers, who pointed out
that their present loan totals were high by any standards except
those of one year ago.
To give one comparison, the outstanding
-21
5/27/58
loans of the six largest Chicago banks were 31.3 per cent above
the figure at a corresponding date four years ago, whereas total
deposits had increased only 2.8 per cent.
Mr.
Allen also said that he had recently spent some time
in the industrialized parts of Michigan, that unemployment was
running about 15 per cent in those areas, but that savings con
tinued to increase, which indicated that people were just being
more cautious.
What struck him most was that manufacturers were
using this period to get some of the foolishness out of their
operations.
In the matter of such adjustments they were really
doing much better now than in 1953-54,
and they would be in good
shape when things turned up.
Mr.
Allen stated that he would be inclined to keep free
reserves in the $500-$600 million range.
Mr. Irons had expressed
certain things which he had had on his own mind and, like Mr. Irons,
he would not be disturbed
$500-$600 million level.
if free reserves went somewhat below the
He had been groping for something which
would be a better benchmark than free reserves but he felt that the
System should maintain a posture of ease and he had not found any
better way to exhibit that posture than through free reserves.
Mr. Leedy said that the report at this meeting as to
economic affairs was certainly the most optimistic one that the
Committee had heard for some time.
Personally, he felt more
-22.
5/27/58
encouraged than for a number of months.
Through its
he said, the Tenth District was doing quite well.
agriculture,
Moisture condi
tions were said to be more favorable throughout the entire area for
this time of year than for any similar period on record, and
prospects for crops of all kinds continued to be good.
wheat in
the district, which is
Winter
particularly important, was now
estimated to be well above the 1957 level from the standpoint of
the size of the crop--around 23 per cent above the recent ten-year
average.
Cash receipts from farm marketings were 25 per cent higher
in March than a year ago, compared with an increase of 12 per cent
nationally,
and first-quarter cash receipts averaged 21 per cent
above the corresponding period of 1957, compared with an 8 per cent
increase for the nation as a whole.
Nonfarm employment had ex
perienced deterioration but not to the extent that it
nationally.
had deteriorated
In the Tenth District the reduction had been due
primarily to a drop in the number of factory jobs, but there again
the decline had been less than 5 per cent compared with the national
figure of around 9 per cent.
Nonmanufacturing sectors had ex
perienced some small gains in
employment but not enough to offset
the losses in
the first
the manufacturing areas.
four months of the year ran about the same as in the first
four months of 1957,
first
Department store sales for
being down only about 1-1/2 per cent.
three weeks in May,
same period last year.
For the
sales had been about equal to those of the
As he previously reported to the Committee,
5/27/58
-23
business loans had been edging forward contrary to the national
pattern.
That trend had continued, whereas in
last year business loans were declining.
the same period
Reporting member banks
showed a striking development with regard to interbank balances,
which totaled $958 million in mid-May, about $85 million higher
than a year ago.
A very sweeping increase occurred during the
most recent two or three-week period, which reflected the large
volume of farm cash receipts from marketings.
Mr. Leedy concurred in the view that the System should
maintain about the same degree of ease as in the past three weeks.
He was not too happy about using the free reserve position as a
benchmark but in
that it
the absence of something better it seemed to him
must continue to be used, at least for the time being.
In
view of the imminence of the Treasury refinancing, he would not want
to deviate very much from the current level of free reserves and
certainly would not want to see any lower level.
As to the possi
bility of a reduction in reserve requirements, he felt that this
problem had to take into account the Treasury refinancing.
If,
however, a reduction could be accomplished without jeopardizing
the very sizeable job of financing, it
should be done.
was his feeling that this
To maintain over the longer period ahead the
degree of ease that the System had been aiming at, he felt that
the reserve requirements route was by far the more desirable and
5/27/58
-24
practicable one.
as it
The fact that the short-term rate had gone as low
had, and so quickly,
seemed to him to require particular
caution in order to be sure that the System's operations in the
market did not accentuate that development.
It
was his feeling
that a reduction in reserve requirements, if it could be made,
might overshoot the mark a little bit and provide more reserves
than the System would want to provide, which would require some
mopping up of the excess by sales of bills in the market.
Except as
he had otherwise indicated, it was his feeling that nothing further
needed to be done or should be done.
Mr. Leach stated that recent weeks had brought no evidence
of further economic deterioration in the Fifth District except in
West Virginia.
trict
Contrary to the trend in other States of the dis
and the United States as a whole, unemployment in West Virginia
had increased as coal production continued to decline despite a
leveling off in exports.
The rate of bituminous coal production in
the Fifth District was now 36 per cent below a year ago and the rate
of insured unemployment in West Virginia had passed 14 per cent.
The other States in the district were beginning to show a mixed
picture rather than widespread declines.
In the textile industry,
there had been a better demand for print cloth and slight improve
ment in
rayon and acetate gray goods,
but sheetings and heavy
industrial cotton fabrics continued in a depressed condition.
5/27/58
-25
According to industry contacts, production of cigarettes was
currently increasing.
Building permits in 37 cities had risen
substantially after seasonal correction and a pickup was re
ported by lumber mills.
Two weeks of good weather had been of
material assistance to farmers but planting still
Mr.
made its
Leach said he still
lagged somewhat.
believed that monetary policy had
appropriate contribution toward promoting recovery and
that efforts to obtain further ease would interfere with market
processes without benefiting the economy.
The reserves made
available since October had supported substantial increases in
the liquidity of commercial banks and of the economy generally.
Banks were now well able to meet the credit demands made upon
them, and additional reserves would largely go to the purchase
of Treasury bills or lie
idle as excess reserves of country banks.
Short-term rates were now at extremely low levels; indeed, at
current yields Treasury bills had lost their attraction to many
investors.
An official of a large member bank remarked to him
recently that this was true not only of customer banks but also
of the smaller corporations, both of which groups had begun to
carry larger deposit balances.
In summary,
achieved and that it
believing that sufficient liquidity had been
would serve no useful purpose to drive short
term rates below current levels,
Mr. Leach would request the
-26
5/27/58
Manager of the Account to maintain the present degree of ease,
giving less emphasis to the free reserves benchmark and more
emphasis to other indicators such as short-term interest rates.
As he said at the last Committee meeting, if and when a need
developed to supply additional reserves over a period of time,
he felt that this should be done by reducing reserve requirements
rather than by buying bills.
But he would do that only to furnish
reserves needed for ordinary purposes and not just to establish
additional ease.
Mr.
Vardaman said that unless there should be some inter
national development of such gravity as to warrant a special meet
ing of the Committee, he would hope that present policy might be
continued for the next few weeks.
in
He would not favor any change
reserve requirements at this time.
In substance,
he would
prefer to go along just about as at present.
Mr. Robertson stated that he was pleased to see the traces
of optimism in
meeting.
all that it
It
some of the comments which had been made at this
seemed to him that the System had accomplished about
could with monetary policy, and that there was plenty
of money and credit available to finance the recovery of the
economy.
In his opinion it
could be harmful if
the System did not
maintain an even keel for the time being and rest on that position,
and he felt that it
would be a mistake if
the System were to adopt
5/27/58
-27
the position that credit policy could force recovery.
he would maintain the present position.
would not be the least concerned if
Therefore,
At the same time, he
free reserves dropped a little,
because there were signs of an upward movement in the economy.
He
felt that the System should be careful during the next month not to
jump in and bail out the speculators, and he would not be too con
cerned if they got hurt a little bit.
In summary, he would attempt
to maintain as even a position as possible for the next three-week
period.
Mr.
Shepardson said that he could not add anything of sub
stance to the discussion, for his own views had well been expressed
by Mr.
Irons and others on around the table.
interested, Mr. Shepardson said, in Mr.
He was particularly
Allen's comment about the
adjustments going on in some businesses, for such adjustments were
wholesome and the country must have them.
said, would continue to be made only if
to make them.
These adjustments,
he
there was some inducement
In his opinion, flooding the economy with funds
might impede that kind of adjustment and would be the worst thing
that could happen.
In the present circumstances,
align himself with Mr.
he wished to
Irons and the others who had expressed them
selves as being opposed to further easing of credit and who had
said that they would not be disturbed if
were to fall off a little
at any time.
the level of free reserves
-28
5/27/58
Mr. Fulton said that the Fourth District seemed to be
the "low man on the totem pole" at the present time. Debits
to commercial accounts so far this year were 7 per cent under
last year, and the Chicago District, where debits were 4 per
cent under last year, made the next poorest showing in that
respect.
This afforded evidence of the severity of the in
dustrial decline in the Fourth District.
Although steel pro
duction edged up very slightly this past month, in the opinion
of the steel men there was nothing in the picture that would
give a strong boost to the industry.
Tin plates, galvanized
sheets, and structural plates were the only items showing any
firmness at this time.
The machine tool industry had a slight
upturn in orders in March but fell out of bed again last month,
so that the backlogs were further diminished and were now at the
lowest point since 199.
been a little
in
Unemployment was still high; there had
slackening in
new claims in
the Cincinnati area but
the Cleveland area claims were higher recently.
Construction
seemed to be turning upward for two months, but in the past month
had again shown a decline.
In all, things seemed to be scraping
along the bottom, with the consensus among businessmen that there
was no prospect of any perceptible upturn until the fourth
quarter.
In fact, there was considerable doubt as to how much
upturn would develop then, and the probabilities were that things
5/27/58
-29-
would go on into next year before anything substantial was seen on
the better side.
The automobile industry was not contemplating
heavy production of year 1959 models, and intended to await public
acceptance of those models before ordering from the steel companies.
Mr. Fulton said that he was in agreement with Mr. Irons and
others who had expressed themselves about the effectiveness of monetary policy so far.
It seemed to him that maintenance of a set
structure of free reserves resulted, so to speak, in the System
chasing its own tail, for the reserves tended to disappear as soon
as they became available whenever there was some way to put them to
work.
As a consequence,
soft.
Therefore, he felt that the System would do well to stand
where it
was and let
the feeling in the market had gotten quite
the market firm somewhat.
Monetary policy had
not had too much effect on long-term rates, because of the volume
of issues coming into the market, but it had affected the short-term
end to a point where rates were very much lower than would seem
desirable,
even under a policy intended to produce a feeling of ease
in the market.
Rather than to pinpoint or maintain any set level of
free reserves, Mr. Fulton said, the feel of the market would seem to
represent a more appropriate guide.
The System had made available
an enormous sum of reserves which probably would complicate its
work when conditions turned up, for they could give a considerable
impetus to inflation at such a time.
5/27/58
-30Mr.
Fulton concluded by saying that he would like to see
an appropriate degree of ease in the market and that he would not
be concerned too much if
rates firmed a bit at the short-term end,
including the Federal funds rate and the Treasury bill rate.
Mr.
Bopp stated that less discouragement,
some encouragement,
could be derived from the latest dta
ness activity in the Third District.
the first
reflecting a seasonal rise in employment,
struction and the service industries.
on busi-
Unemployment in the Philadelphia
area declined nearly 2 per cent in April,
months,
possibly even
decrease in seven
primarily in con-
Manufacturing employment in
the area was unchanged, with a rise in nondurables offsetting a
further drop in durables,
and total factory employment in ten of
the district's 14 labor market areas was also unchanged in April.
An important contributing factor was settlement of the textile
strike which resulted in substantial employment gains in WilkesBarre and Scranton.
still
Factory employment in April, however,
7.7 per cent below a year ago.
New unemployment claims in
Pennsylvania had declined in recent weeks,
senting a low thus far in 1958.
was
the latest week repre-
New claims in the Philadelphia
area had declined every week except one since mid-April and were
now at the lowest level of the year, while continued claims had
also been declining.
In the opinion of the Philadelphia office,
improvement in the employment situation had been a more important
5/27/58
-31-
factor in the drop in continued claims than exhaustion of benefits.
Mr.
Bopp went on to say that steel mill operations rose to
61 per cent of capacity in the latest week,
after having been
steady at about 56 per cent for several weeks.
Freight carloadings
in the Philadelphia area had also shown some improvement in the past
few weeks but were still considerably below last year.
The consumer
price index for Philadelphia eased slightly in April--down two-tenths
of a point--but was 2.7 per cent above a year ago.
Department store
sales, on the other hand, declined, the dollar volume in the past
three weeks being 5 per cent below a year ago.
Sales were down in
all reporting cities except one, and for the year to date sales were
3 per cent below last year.
Automobile sales continued to lag
badly, new car registrations in eastern Pennsylvania in April being
22 per cent below a year ago, and registrations in Philadelphia in
the first three weeks of May indicated a further decline instead of
a pickup.
Business loans of weekly reporting banks dropped nearly
$50 million in the three weeks ending May 21, a substantial part of
the decrease being accounted for by a public utility which used a
part of the proceeds of a recent security offering to repay bank
loans.
Most of the remainder was accounted for by sales finance
companies.
District banks continued to use excess funds to purchase
securities; holdings of Governments--Treasury bills and notes--rose
$13 million, and other securities $24 million.
Total investments
5/27/58
-32-
were nearly $270 million above a year ago.
Demand deposits, other
than U. S. Government, dropped sharply, but time deposits were up
nearly $50 million.
Reserve positions of district member banks continued easy,
Mr. Bopp said.
Reserve city banks had not borrowed from the Fed-
eral Reserve Bank in the past three weeks, and borrowings of other
member banks had been quite small. Daily average purchases of
Federal funds in the first two weeks of May were less than $2 million but rose to $16 million in the latest week,
reflecting mainly
the borrowing of one large Philadelphia bank.
As to policy for the near future, although banks and probably
businesses had been restoring their liquidity more rapidly than in
the two previous recessions, Mr. Bopp pointed out that they started
from far lower levels and suggested that more needed to be done.
This could be done, he said, by continuing the degree of ease that
had prevailed recently.
He would not change the directive or the
discount rate and, since maintenance of relatively the same degree
of ease would seem to call for injections of additional reserves
over a considerable period, he would inject those reserves through
reduction of reserve requirements, preferably against time deposits.
Mr. Bryan said that he could point out in the Sixth District
the usual aggregate of good signs and bad signs.
By taking certain
figures on department store sales, agriculture, and steel employment, for example, he could make out a case that there were good
5/27/58
-33-
signs, but by making an equally careful selection of other figures,
he could make a case that there were bad signs.
However,
in dealing
with the good signs he was compelled to add that he would have to
utilize certain statistical tricks like shifting the base in order
to make a strong case.
In general, the district was not showing
any further rapid deterioration, and some rather good things were
happening.
For example, the State of Florida and most of the coastal
areas were making a good recovery.
With respect to the national picture, it
seemed to him that
a case could be made that there was an incipient bottoming-out of
the recession.
He was impressed by the fact that in this situation
there had not developed the characteristic sign of deep and harassing
depressions; namely, a frantic rush for liquidity.
Having said all
that, he had the feeling that there might be some tendency around
the table this morning to deliver the recovery baby a little prematurely.
Certainly, it was an incubator infant and would have to
be dealt with skillfully if it was to develop into maturity and
strength.
To put it another way, he felt that the recovery was
still quite hazardous and was at the mercy of forthcoming events.
As to policy, Mr. Bryan said he certainly did not believe
that the System should allow any tightening to develop. When it
came to particular policy instruments, it seemed to him that the
System had to use the open market instrument in connection with
-34-
5/27/58
the matters that were going to be troublesome in the near future.
However, the problem of the discount rate puzzled him a great deal.
He was tempted to say that there was no point in changing the rate
at this time, yet it
had been used in recent years to do a variety
of things and it had performed the function of announcing policy to
the public.
Therefore,
if the rate were allowed to remain too far
out of line with the short-term market, he was puzzled about what
the System would be saying to the people of the United States.
Would it in fact be saying that the short-term rates were erratic
and invalid?
He was also puzzled as to what the System's position
would be in a real recovery when it wished to signal a shift in
policy and was confronted with the necessity of letting rates
tighten substantially in the market before it signaled such a shift.
Accordingly, while he had not come to any real conclusion about the
discount rate, he believed that an argument could be made--perhaps a
valid argument--for bringing it more into line with the present facts
of the market place.
Mr.
Bryan recalled that the question had been posed on a
number of occasions as to whether monetary policy had done all that
it could to further recovery.
It seemed to him that monetary policy
was now beginning to take effect and was beginning to be successful.
He was delighted by a fact to which Mr. Hayes had referred; namely,
that, adjusting for changes in the level of reserve requirements,
5/27/58
-35-
against a year ago there was a substantial increase in required
reserves both percentagewise and figurewise.
Coming, however,
to the question of the money supply, it could be seen that as
compared with the end of April a year ago, when the System was
fighting a boom rather than a recession, the money supply, defined
as demand deposits adjusted and currency, was still fractionally
down.
level.)
(This figure has since been revised to equal the year ago
If adjustment were made for the change in velocity, the
money supply would probably be down from the peak last summer.
In all the circumstances,
it
seemed to him that the banking system
had performed magnificently with regard to not panicking, making
loans, and particularly expanding investments.
However, despite
the figures cited with regard to the increase in investments, in
the light of the money supply there appeared to him to be a grave
question whether those figures were great enough, even as great as
they were.
Personally, he would reduce reserve requirements, cutting
them in the category of requirements against savings deposits, for
he felt that there is a real difference in the way banks feel about
committing savings deposit money as against demand deposit money.
He believed that such a move would have a good and pervasive effect
by putting in reserves that would give the banks confidence, and he
believed that the reserves which were freed would go where the
System wanted them to go in the economy at the present time.
-36-
5/27/58
Mr. Robertson inquired at this point whether the rate of
turnover of deposits at country banks was not equal to the rate
a year ago and whether the rate was not higher in New York.
The
reply given was that in banks in cities outside of the six or seven
leading financial centers the rate of turnover increased in April
and was fully as high as a year ago.
In New York the rate of
turnover was higher, and in the six or seven leading financial
centers it was about as high as in April 1957.
In the month of
March the rate of turnover outside New York had been slightly
lower than a year ago.
Mr.
Johns said that some of his views were quite similar
to those expressed by Mr.
Bryan.
It was pleasing to him, he said,
to have the appraisal which he had made of the present state of the
econony supported and validated by the presentation given by Mr.
Young.
He believed that there were signs that the recession might
be bottoming out, but he liked the emphasis which had been placed
upon the point that these signs must not be translated immediately
into certainty of recovery.
Recovery might not yet be on its way,
and if it were it might not come for a while.
Mr. Johns said that in the Eighth District he found little
to comment on which was different from the national picture.
Of
local interest was the fact that the steel rate in the district was
better than the national rate; the average rate for the last four
-37-
5/27/58
weeks was 77 per cent, and for the most recent week it was 7 8 .4
per cent.
In this connection, it
should be noted that the mills
in the area produce relatively little
for the automobile industry
and relatively more for construction purposes.
As he had reported
to the Committee before, the cotton crop had experienced the first
of its three annual losses.
sunshine and so it
Now, however, there had been some
was estimated that perhaps 90 per cent of the
crop in the Delta had been planted.
Although some of that had been
planted in a wet seed bed, it did appear that the Delta would have
a cotton crop.
Business loans at banks in the district were still
contracting, Mr. Johns said.
In the three weeks which ended May 14,
they declined about 23 per cent, whereas on a seasonal basis a
decline of about 10 per cent might have been expected.
However,
at
rural banks total loans in the last four months were up $20 million,
and during this period those banks had reduced their investments.
With reference to a statement made earlier by Mr. Larkin, a considerable speculative interest in the June Treasury issues was
being financed by at least one of the large banks in the area.
Mr. Johns said that although he had reservations about some
aspects of using free reserves as an indicator of monetary policy,
he wished to align himself with the position taken by Mr. Hayes.
He would consider $500 million of free reserves as about the absolute
minimum and would prefer to broaden the target range somewhat on the
5/27/58
-38-
upper side.
He would not be sorry if there were some days or short
periods when free reserves ran to $700, $800, or even $900 million,
especially when that bulge was the result of float.
In the coming
weeks an opportunity to release additional reserves by a reduction
in reserve requirements seemed likely, and he felt that such an
opportunity should be used.
He liked the emphasis which had been
placed on the desirability of a reduction in reserve requirements
against time deposits.
As to the discount rate, he thought that a
case could be made for a reduction in the rate, subject, of course,
to determination of an appropriate time in relation to the forthcoming Treasury refunding operation.
That would seem to mean
postponing a change of the rate at least beyond the Treasury announcement and the time that the books were opened.
were closed, however,
to make a change.
at this time,
When the books
it might be appropriate very shortly thereafter
He would not argue for a change in the directive
although he did not care particularly for the present
wording.
Mr. Szymczak said that he thought the President's statement
on taxes was very helpful because of the uncertainty which had prevailed and the fact that many had been wondering whether taxes, both
corporate and excise,
were going to be reduced at the end of June.
It was helpful, he thought, for business to know where the President
and the Administration stood.
5/27/58
-39Continuing, Mr. Szymczak said that he felt monetary policy
can achieve only so much, and that other things have to happen in
the economy before the full extent of utilization is derived from
the policy followed.
He also felt that there had been a tendency
to overstress the level of free reserves, not only in the minds of
persons within the System but in the minds of a great many people
in the market who adjusted themselves accordingly.
According to
this thesis, if available reserves were used the System would
just
put in a little more, and if that policy were changed it might make
for an abrupt change in the minds of people in the market.
Mr. Szymczak said that he felt there should be a further
reduction of reserve requirements.
He would favor reducing require-
ments against time deposits, and perhaps against demand deposits for
central reserve and reserve city banks for the purpose of adjustment.
However, he would sell bills to absorb some of the reserves made
available, for this would help the bill rate and at the same time
help to keep an even keel for the Treasury refunding.
Whether this
could be accomplished before the Treasury refunding was another
question, and he would want to consider further whether a reduction
should be made now or after the Treasury was out of the market.
would not favor changing the discount rate, and he felt that the
interest rate structure should be watched carefully, so that the
System could get into a position of varying free reserves rather
He
-40-
5/27/58
than to keep them at a certain level and have everyone become
accustomed to that level.
Chairman Martin said that in his own view monetary policy
was performing
just
about as it
should at the moment.
He had con-
sidered the matter of reserve requirements very carefully during
the last few days and had come to the conclusion they should not
be changed at the present time.
Neither would he reduce the discount
rate nor make any abrupt change in either direction from the present
level of free reserves.
In the latter connection, he agreed heartily
with Mr. Irons' comments about the "statistic." There was a lot of
talk about the feel of the market, but there was frequently a
tendency to give up the feel and go to the statistics.
It seemed to him, Chairman Martin said, that it was not possible to force monetary policy and that the System should not try to
do so.
Nor should the System rush in to help the Treasury, but
rather maintain an even-keel policy such as prevailed now.
Considera-
tion should be given to whether the reserve projections were accurate
enough to warrant taking any drastic action that might overdramatise
the statistics.
He himself was a little bit surprised by the pro-
jections, but admittedly he did not have too much confidence in them.
In his own opinion, the reserves would not work out to be quite as
low as indicated by the projections.
Chairman Martin went on to say that the job of the System is
primarily to regulate the money supply, which is a difficult task.
5/27/58
-41-
If one looked at the production indices and then thought of the fact
that the System had gotten the money supply gradually moving upward,
that would seem to be just the way it
should be.
In substance, he
said, he would argue very strongly for maintaining the status quo
at this time, particularly through the period of the Treasury refinancing, which would be a difficult one.
The refinancing had
been discussed a great deal in terms of the possibility of a longterm bond,
and this was a matter on which people had taken violent
positions on one side or the other.
In doing so, they had gotten
the matter out of focus.
Therefore, Chairman Martin said, he sided with what he thought
was the majority position in that he would not want to change the directive or the discount rate or reserve requirements at the moment.
This,
of course, had nothing to do with the situation which might develop at
the time of the next Committee meeting.
In terms of approach, this
position contemplated that the Account Management was not going to be
bound by the "statistic" but would try to take account of the feel
of the market in order to maintain an even-keel operation.
The posture
of the System was one of ease and it should continue to be such.
as he understood it, was the majority position.
That,
Everything he had
heard around the table tended to confirm that view, and he himself
concurred in it.
At the instance of Mr. Hayes, there ensued a discussion concerning the majority view with respect to reserve requirements during
5/27/58
-42-
which some of the members of the Committee who had expressed themselves in favor of a reduction in reserve requirements clarified
the fact that they had been speaking in terms of preferring to make
additional reserves available through a reduction of reserve requirements at such time as it might become necessary to provide
additional reserves on a more or less permanent basis.
At the same
time, Chairman Martin clarified the fact that his own position did
not go beyond the period of the next three weeks.
judgment,
It was his
Chairman Martin said, that to cut reserve requirements
at the moment might produce a situation that would require offsetting
sales out of the Account.
This would be an impossible situation to
present to the general market.
Even if the reserve projections were
accurate, he would question cutting reserve requirements on the eve
of a Treasury financing due to the situation that such an action
would produce in the market.
During the discussion Mr. Hayes stated that he had been
speaking of a reduction in reserve requirements as a means of
maintaining about the current degree of ease in substitution for
open market purchases which otherwise would have to be made, and
made soon, if the reserve projections were about right.
In a
further comment Mr. Hayes expressed the view that the action could
be taken now without upsetting the market.
He then turned to Mr.
Larkin, who said that the next week or two would be a rather critical
5/27/58
-43-
period, for the projections suggested a need for reserves at the
same time as the Treasury refunding.
He took it to be the sense
of the meeting to place less emphasis on free reserves as a
statistic and more on the feeling of ease in the market.
Assuming
that the reserve projections worked out, it was conceivable that
in conducting open market operations about the same degree of ease
could be maintained by buying a minimum amount of securities.
However,
that might mean a smaller aggregate of free reserves.
Chairman Martin said that, as he understood it,
that would
be consistent with the majority view, following which Mr. Larkin
said that if this meant a modest rise in the bill rate he understood
that such an increase would be acceptable to the Committee.
Chairman Martin then inquired whether anyone would like to
dissent from continuing the present directive, the discount rate,
or the general posture of credit ease, and no dissents were heard.
Thereupon, upon motion duly made
and seconded,
the Committee voted
unanimously to direct the Federal Reserve Bank of New York until otherwise
directed by the Committee:
(1)
To make such purchases, sales,
or exchanges
(including replacement of maturing securities, and
allowing maturities to run off without replacement)
for the System Open Market Account in the open market
or, in the case of maturing securities, by direct
exchange with the Treasury, as may be necessary in the
light of current and prospective economic conditions
and the general credit situation of the country, with
a view (a) to relating the supply of funds in the market
-44to the needs of commerce and business, (b) to contributing
further by monetary ease to resumption of stable growth of
the economy, and (c) to the practical administration of the
Account; provided that the aggregate amount of securities
held in the System Account (including commitments for the
purchase or sale of securities for the Account) at the
close of this date, other than special short-term certificates of indebtedness purchased from time to time for the
temporary accommodation of the Treasury, shall not be
increased or decreased by more than $1 billion;
(2) To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks) such
amounts of special short-term certificates of indebtedness
as may be necessary from time to time for the temporary
accommodation of the Treasury; provided that the total
amount of such certificates held at any one time by the
Federal Reserve Banks shall not exceed in the aggregate
$500 million.
With reference to the question which had been raised at a
recent meeting of the Committee concerning the use of a rate on repurchase agreements lower than the discount rate, Mr. Robertson stated
that he had decided not to submit a memorandum on the subject because
he did not see, at this time or in the foreseeable future, any reason
for going below the discount rate.
He noted that if such an occasion
did develop the Manager of the Open Market Account had authority to
use a rate lower than the discount rate, with the admonition that it
should be used sparingly.
Mr. Larkin stated that he would like to think the Account
Management had the authority to use a lower rate if circumstances
were such as to warrant its use.
Conceivably,
there could be
situations where the use of repurchase agreements would accomplish
5/27/58
-45-
System policy more effectively than outright purchase and sale
transactions.
The Account Management,
he said, would use the
existing authority sparingly and would make sure that the reasons
were sufficient.
Mr. Robertson inquired whether this accommodation would be
made available to bank dealers, to which Mr. Larkin replied in the
negative,
stating that the existing authority would have to be
broadened.
Mr. Robertson said that in all the circumstances he would
prefer to wait until the authority was used and then express his
views,
following which Mr. Hayes commented that as long as the
matter was on the agenda the Management of the Account felt pretty
much precluded from using the authority even though the Manager's
judgment might indicate its use.
In response, Chairman Martin made a statement, in which Mr.
Robertson concurred, that the authority stood now as it had stood
before the question of the rate on repurchase agreements was placed
on the agenda recently.
Consideration then was given to the question raised by Mr.
Johns in a letter dated May 12, 1958, copies of which had been
distributed to the members of the Committee, concerning the policy
that should appropriately be followed in making available, on a
continuous basis, to persons who had participated in the System
5/27/58
-46-
Open Market Account training program such information and documents
concerning the work of the Federal Open Market Committee as would
keep such persons current and preserve the benefits of the training
program.
In his letter Mr. Johns pointed out that the staff members
in question were concerned primarily with technical and accounting
aspects of System Account operations as distinguished from policy
aspects, but that in the training program they appeared to have
been exposed quite substantially to current policy considerations.
Chairman Martin began the discussion by saying that he
favored developing all of the talent available within the System
and extending the use of information to anyone who could really
benefit from it.
The only reservation that he had was with regard
to the Committee minutes, and that was because of the scope of the
minutes as presently written.
It might be, he suggested, that the
end could be achieved just as effectively by furnishing the parties
in question reports of the New York Bank on open market operations
and similar material rather than by widening too broadly the area
of access to the minutes.
In comments which ensued, the suggestion was made that the
purposes indicated by Mr. Johns might be achieved by granting access
to noncurrent minutes or by providing access to drafts of entries
for the policy record of the Federal Open Market Committee.
Mr. Hayes said that he recognized the importance of discreet
use of the minutes, but that he would tend to emphasize the positive
5/27/58
-47-
rather than the negative factors.
He referred to the records
made available to persons who attend the meetings of the Committee
and pointed out that many of the people participating in the
System Open Market Account training program occupy positions at
their respective Banks equal in importance to those held by the
persons attending the Committee meetings.
He suggested that it
would be greatly to the advantage of the System if those men who
had shown an interest in keeping current following the training
program were permitted to do so.
He would not have any hesitancy,
Mr. Hayes said, about a policy under which the President of each
Reserve Bank in his discretion could decide whether a particular
person was one who would benefit by having access to open market
records on a continuous basis.
Mr.
Johns then commented that there are two Open Market
Account training programs, one at the policy level and the other
at the technical and accounting level.
In the St. Louis Bank, he
said, the only people thus far sent to the policy level training
program were those already having access to Committee minutes and
other materials.
The officers mentioned in his letter had partici-
pated in the technical and accounting training program, but it did
appear that when they were in New York no attempt was made to keep
them away from the policy level.
That might be quite appropriate,
and he had full confidence in the men in his Bank, but he thought
5/27/58
-48-
that a Committee decision was desirable before increasing substantially the number of persons throughout the System who would
be getting minutes and similar materials.
It appeared to him
that a man on the technical or accounting side could be kept
reasonably current if he were given reports of open market operations.
Mr. Allen indicated that he hoped any permission given
would be on a permissive rather than on a mandatory basis, to
which Chairman Martin replied that he felt that any decision
should be of a permissive nature and that there should not be
any hard and fast rule on any matter of this sort.
Personally,
he would want to give everyone whatever tools were reasonably
necessary.
As a precaution, however, he felt that the Committee's
files should contain a record of the persons given access to the
Committee's records, as prescribed under current procedures.
There ensued comments by Mr.
Larkin concerning the extent
of exposure to policy matters given to participants in the Open
Market training program at the technical and accounting level,
from which it
appeared that the exposure was of a minimum degree.
Reaction to this minimum exposure and interest in policy matters
depended somewhat on the individual concerned.
Mr. Hayes then inquired whether it would be agreeable, if
the President of a Reserve Bank felt that an exception should be
5/27/58
-49-
made because a man had distinct qualifications or potentialities
for the future and it
would be useful to further the individual's
training, for the President to request specifically that the
individual be added to the list of persons granted access to
Open Market Committee records.
Chairman Martin commented that this would be in line with
present procedure.
In concluding remarks, Chairman Martin said it
appeared on the basis of the discussion to be the consensus that
the existing procedure should be retained and that any President
wanting to increase the number of persons granted access to Open
Market Committee records should follow the rule presently in effect.
This contemplated, however,
that the general problem of access to
Open Market Committee records would continue to be discussed from
time to time in order to determine what basis appeared most appropriate.
Chairman Martin reported that Professor Lester Chandler, in
preparing his biography of former Governor Benjamin Strong which
was now in manuscript form, had been given access to open market
minutes prior to 1929.
Dr. Chandler had called attention to the
fact that he intended to include certain excerpts from those minutes
in the biography and had raised the question whether there would be
any objection.
Chairman Martin said he had told Dr. Chandler that
he saw no objection.
should be advised.
However,
he felt that the whole Committee
5/27/58
-50The members of the Committee indicated that they con-
curred in the position taken by Chairman Martin.
Chairman Martin then called upon Mr. Hayes for a statement
with respect to the proposal, previously discussed at the meeting
of the Open Market Committee on April 15, 1958, to establish a
standing money market committee composed of representatives from
the New York Reserve Bank and the New York Clearing House Association banks to study, on a more or less continuous basis, technical
problems of the money market.
This would be in implementation of
one of the minor suggestions contained in the report by the Clearing
House Association on interrelationships of the money market and the
Government securities market.
In this connection, and with further reference to certain
comments made at the April 15 meeting, Chairman Martin stated that
since that meeting he had checked the records of the Committee and
had confirmed that the Federal Reserve Bank of New York had authority
from the Committee to take steps to implement the suggestion in the
Clearing House report.
Mr. Hayes then read the names of those who had been asked to
serve on the technical committee and noted that this would afford
representation not only from the Clearing House banks but also from
other sectors of the New York financial community.
He said that all
of those invited to serve on the committee had accepted and that it
was therefore proposed to organize the committee and move forward.
5/27/58
-51-
He was hopeful that the committee could make a useful contribution
to the thinking on some of the problems of the money market.
In answer to a question by Mr. Robertson, Mr. Hayes said
that the exact role to be played by the committee was still somewhat nebulous, but that it was thought that this should be the kind
of group that could meet with Mr. Rouse perhaps twice a year and
discuss any phases of the money and securities markets on which
the New York Bank felt that the committee could supply helpful
information, advice, or comment.
Conceivably, the Committee might
also undertake certain studies if it seemed desirable.
Mr. Robertson then inquired whether he was correct in thinking
that the technical committee would have nothing to do with what the
Open Market Committee's program was or might be, and Mr. Hayes stated
that that was correct.
In further discussion, it
was made clear that the technical
committee was being established by the Federal Reserve Bank of New
York and that Mr. Rouse would be representing the New York Bank in
dealing with the committee.
Chairman Martin stated that Mr. Riefler had been authorized
by the Board of Governors to go to London next month to testify
before the Radcliffe Committee (the Committee on the Working of the
Monetary System).
He added that acceptance of the invitation to
5/27/58
-52-
testify had been cleared with the State and Treasury Departments.
It was agreed that the next meeting of the Federal Open
Market Committee would be held on Tuesday, June 17, 1958, at 10:00 a.m.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1958, May 26). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19580527
@misc{wtfs_fomc_minutes_19580527,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1958},
month = {May},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19580527},
note = {Retrieved via When the Fed Speaks corpus}
}