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:

June 17, 1958, at 9:30 a.m.

Mr. Martin, Chairman

Mr. Hayes, Vice Chairman

Mr. Fulton

Mr. Irons

Mr. Leach

Mr. Mangels

Mr. Mills

Mr. Robertson

Mr. Szymczak

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. Thurston, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Thomas, Economist

Messrs. Daane, Marget, Walker, and Young,

Associate Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Carpenter, Secretary, Board of Governors

Mr. Kenyon, Assistant Secretary, Board of

Governors

Mr. 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

Messrs. Ellis, Mitchell, Tow, and O'Kane, Vice

Presidents of the Federal Reserve Banks of

Boston, Chicago, Kansas City, and San

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Francisco, respectively; Messrs.

Larkin and Coombs, Assistant Vice

Presidents of the Federal Reserve

Bank of New York; Messrs. Balles

and Einzig, Assistant Vice Presi

dents of the Federal Reserve Banks

of Cleveland and San Francisco,

respectively; Mr. Parsons, Director

of Research, Federal Reserve Bank of

Minneapolis; and Messrs. Anderson and

Atkinson, Economic Advisers, Federal

Reserve Banks of Philadelphia and

Atlanta, respectively

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 27, 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 reviewing market developments and open market operations since

February 26, 1958, and dealing in detail with operations during the

period May 27 through June 11, 1958, along with a supplemental report

covering commitments executed June 12 through June 16,

1958.

Copies

of both reports have been placed in the files of the Federal Open

Market Committee.

In comments supplementing the reports which had been dis

tributed, Mr. Larkin drew attention to the magnitude of operations

in the System Open Market Account since the last meeting of the

Committee.

During that period the Account purchased approximately

$600 million of Treasury bills, which was more than the Management

had envisioned at the time of the last meeting and perhaps more than

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6/17/58

the Committee had envisioned.

Despite these operations, however,

Treasury bill rates had risen gradually and the average rate at

yesterday's auction was .95.

Furthermore, the New York city banks

had encountered some reserve shortages, primarily because of the

substantial increase in their loans to Government securities dealers.

In the two weeks which ended June 11, these loans increased more than

$700 million, and at the same time dealer holdings of Government

securities increased by an even larger amount.

This reflected dealer

absorption of securities during the Treasury financing and dealer

absorption of securities sold by corporations raising cash to meet

their June 15 tax liabilities.

Mr. Larkin said that although the Treasury's refunding opera

tion was well received by the market, the sheer weight of exchanges

into the new 2-5/8 per cent bonds had caused some uneasiness toward

that issue.

In response to a question by Mr. Leach, Mr.

Larkin recalled

that at the last Committee meeting there was discussion of the

speculative movement into rights, with concern expressed that per

haps some of these holdings might be dumped on the market in the

period when the Treasury's books were open and thus bring pressure

on the market.

That did not happen, however, and it might be assumed

that most of the speculative holdings had been exchanged for the

2-5/8 per cent bonds.

the exchange,

This fact, together with the magnitude of

had led to caution in the market place with regard to

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these new securities,

but the market nevertheless performed quite

well quotationwise until yesterday, when some pressures appeared

for the liquidation of speculative holdings.

on the 2-5/8s and also on the new 3-1/

the market was cautious,

and it

This depressed prices

per cent bonds.

In general,

was now facing a distribution

problem.

Thereupon, upon motion duly made

and seconded, and by unanimous vote,

the open market transactions during

the period May 27 through June 16,

1958, were approved, ratified, and

confirmed.

In supplementation of the staff memorandum distributed

under date of June 13, 1958, Mr. Young made the following statement

on the economic situation:

The stock market is still

saying, with even stronger

emphasis, that economic recovery, possibly inflationary

recovery, is either under way or just around the corner.

The further economic information available for this meet

ing is confirming our report at the last meeting that

bottoming out of recession is in fact occurring. While

the information is generally on the encouraging side,

some of it is black and is a counterweight to the white.

Perhaps the best approach for today's report is to sift

the whiter from the blacker information. On the white

side, we have these items:

(1)

A one point rise in the index of industrial

production in May, mainly reflecting a rise in durable

Current information points to a further

goods output.

Electric power output is

rise in the index for June.

also up in June, and freight car loadings are showing a

quite dramatic rise.

Pickup in housing construction activity in May

(2)

to a million unit start rate, and a developing volume of

financing activity for both new and used houses that

would suggest builder and lender expectations of a very

active market ahead.

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(3)

Further large inventory decline in April, carrying

inventory liquidation one more step closer to the point where

even reduction in inventory liquidation may function as a

stimulating factor.

(4) Further slackening in the pace of decline in manu

facturers' sales and, in May, a rise at durable goods manu

facturers in new orders.

(5)

Strengthening of the labor market in May and exten

sion of labor market improvement into June.

(6)

Further rise in personal income in May--for the third

month in succession, with more rise in June now indicated.

(7)

Additional strength in retail trade, particularly at

nondurable goods stores. While sales of autos and other durable

goods are running well below a year ago, sales of autos have

improved recently and the decline in sales of other durables

has slackened.

At department stores, sales in June are holding

up well.

(8)

Further gain in agricultural income and a bright

prospect for crops and farm income in the months ahead.

(9)

Strengthening of prices in primary metal markets,

especially of copper and steel scrap. While special factors,

such as prospective new governmental stockpiling, have been

influences in the turn-up in copper, inventory supplies of

primary metals are now such as to make these markets highly

sensitive on the upside to both increases in demand and

decreases in supply.

(10) Capital market activity continues at a high level

and bank credit expansion has now proceeded for four months

at the monthly rate of 1 per cent. Active cash balances have

been rising over these months at the most rapid rate since

1952.

Lastly, account should be taken of the resiliency

(11)

shown by European industrial activity in holding up in the

face of significant contraction in U. S. activity and in the

face of reduced import capacity on the part of raw material

supplying areas.

As we suggested, however, there is black information as

On the blacker side, we can list:

well as white.

The Department of Commerce-SEC release of new plant

(1)

and equipment spending estimates, indicating that such spend

ing had declined more than earlier reports and that spending

during the rest of 1958 is to be further scaled down.

The newly-revised information on the value of con

(2)

struction activity, showing a larger decline from December

through May than had been disclosed earlier, with declines

continuing in the value of private residential, industrial,

and public construction from April to May.

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(3)

The speculative character of the recent bulge in

steel activity, with warehouse demand especially heavy,

according to trade reports, in anticipation of a $5 a ton

rise in the steel prices on July 1.

(4) The continued sluggishness of the new automobile

market, the continuing threat of major work stoppage in this

industry, and the not too hopeful reports on new model design

for 1959 cars.

(5)

The further decline in consumer instalment credit,

which, though diminishing in amount, is still operating as a

contractive influence on consumer spending.

(6)

The failure of prices for fabricated industrial

commodities to show response to contracted demand.

(7) The possible vulnerability of the current level of

stock prices in view of the sharp rise in customer credit that

has accompanied the recent market advance.

(8) The failure of the Canadian economy, which led the

U. S. economy in recession, to show bounce-back from its re

cession bottom.

(9)

The indications from very recent European informa

tion that British and Continental economic activity may be

weakening, with the next move downward.

And finally:

(10) The undercurrent of concern about the future role

of gold that seems to be present in international markets.

We infer from this inventory of the hopeful and caution

ary items of intelligence now at hand that the haze obscuring

the outlook has not suddenly lifted, and that it is the better

part of wisdom not to conclude as yet that a recovery pattern

On the other hand, one cannot deny

has definitely taken form.

recovery movement is now

an

accelerating

that

possibility

the

shaping up.

Mr. Thomas made the following statement on financial develop

ments:

In the past three or four weeks, demands on capital mar

kets, including the Treasury bond offering for cash, have been

heavy.

Some of these demands have been met from a continued

substantial expansion in bank holdings of securities and loans

on securities. Bank reserves have been absorbed by increases

in required reserves and currency and a continued gold outflow,

and reserves have been supplied by rather large but selective

System purchases of securities. On balance free reserves of

member banks declined and have been at a lower level than they

were in May.

Notwithstanding the heavy demands in capital markets

and the decline in free reserves, the money market con

tinued relatively easy until the past week, when the

customary large-scale last-half-of-June financial turnover

began to be felt. Long-term rates showed little

change and

short-term rates during most of the period continued at very

low levels reached in the latter part of May.

Treasury financing operations were effected with remark

ably slight repercussions in the market, but the real effect

may be just beginning with settlement yesterday for the com

mitments made. Heretofore the principal tangible effect has

been in dealers' purchases of maturing issues and commitments

for purchases and sales of when-issued securities.

These

operations resulted in considerable churning of funds in the

market, but until the past week dealers had little

difficulty

in covering their financial needs by borrowing temporary

liquid funds. These funds are now being needed to meet mid

June obligations for taxes, dividends, and other payments,

and other pressures are beginning to appear in the market.

Dealers' committed positions in securities and borrowings

are at record levels and a large portion of financing needs

will have to be obtained from the banking system in the next

two weeks.

Business payments to the Treasury and for other

purposes may also necessitate a considerable amount of busi

ness borrowing at banks.

In the absence of maturing tax securities to pay off, the

Treasury's cash balance will increase sharply in the next ten

days to a high figure of over $9 billion. The resulting rise

The Treasury

in deposits will increase bank reserve needs.

balances will be drawn down sharply in subsequent weeks, but

it is possible that they are adequate to cover cash needs

An early increase of $100 million in the weekly

until October.

Treasury bill offering probably could assure sufficient funds

until that time. Treasury cash borrowing needs, however, will

be very heavy in the October-December quarter--probably about

$6 billion.

New issues of securities by corporations have continued

In the

moderately large in June, though less than a year ago.

second quarter, corporate issues are expected to total about

over $400 million less than last

$2.7 billion, or a little

year. Finance companies, whose public offerings of long-term

securities have recently been negligible, account for about

half of this drop. Issues of industrial corporations have

declined, while offerings by utility companies have continued

State and local government

somewhat larger than a year ago.

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issues have been somewhat less in June than in April and

May, but the quarterly total was larger than in the same

period of other recent years.

Yields on long-term securities--both new and outstanding

issues--have continued relatively firm, notwithstanding the

Treasury bond offering.

Distribution of some of the new

issues has been rather slow, but perhaps no more than should

be expected in view of the demands on the capital market.

Total loans and investments of banks in leading cities,

as indicated by partial figures for June 11, increased by

about $1.7 billion in the three weeks ending on that date,

compared with an increase of $1.1 billion in the same period

last year, which included payment for a new Treasury issue.

The larger increase this year reflected principally increases

in loans to dealers in securities and in holdings of securi

ties other than those of the U. S. Government.

Bank holdings

Business

of Government securities have continued to increase.

loans increased only moderately in the week of June 11,

following declines in the two previous weeks, whereas last

two weeks of

year they increased considerably in the first

As previously mentioned, further large increases in

June.

business borrowing are to be expected this week and perhaps

next.

Demand deposits at city banks continued to increase in

June somewhat more than last year, following a less than

seasonal contraction in May. It is estimated that demand

deposits and currency at all banks showed a seasonally ad

justed increase of about $500 million in May, to a figure

U. S. Government

nearly $1 billion larger than a year ago.

deposits have declined seasonally in recent weeks, but as

mentioned will begin to increase sharply this week. Time

deposits have continued to increase at a rapid pace at com

mercial banks and moderately at mutual savings banks.

four months of the year indicate

Estimates for the first

that nonbank holders have reduced their holdings of Govern

ment securities, particularly bills and certificates, in

contrast to an increase in total holdings in the same period

This would indicate that the growth in liquidity

last year.

has been predominantly in bank deposits.

Short-term money rates have risen somewhat in the past

two weeks, following a decline during May to a relatively low

level. This shift accompanied a decline in free reserves from

over $500 million to around $4OO million. The tone of the New

York money market, however, at first seemed relatively easier

This reflected largely the distribu

than it had been in May.

tion of reserves among banks and also the ability of securities

6/17/58

dealers to obtain financing from nonbank sources.

This

atmosphere has changed, however, in the past week. Fed

eral funds rates have been closer to the discount rate

and yields on Treasury bills, which declined to about

5/8 per cent, have approached the 1 per cent level.

Reserves have been absorbed in recent weeks by

greater than seasonal increases in required reserves and

in currency and by a further, though slackening, outflow

of gold.

In the meantime reserves have been supplied by

System open market operations, aggregating around $900

million in the past four weeks.

An abundant supply of reserves will be needed during

the next two or three weeks to meet the heavy liquidity

needs of this period. Recent System operations together

with the usual mid-month float increase, may be adequate

to cover needs this week and next. Reserve needs in the

subsequent two weeks will be increased by the holiday

currency demand, as well as by the usual end-of-month

decline in float, and they may be further enlarged by a

continued increase in required reserves, if there is heavy

borrowing at banks to cover tax and other payments at the

time.

This is an uncertain element.

In any event, in the

absence of further System operations free reserves are

likely to continue during July and most of August and

September at below $400 million. On the basis of usual

seasonal factors they will decline further in the last

quarter of the year.

The question of policy is how and when these reserves

System policies and the response of

should be supplied.

the banks to those policies have resulted in bank credit

expansion during the past four or five months at a

seasonally-adjusted annual rate of 12 per cent and sharp

declines in short-term rates to exceedingly low levels.

Much of this credit has directly or indirectly financed

Some of it has evidently been

long-term commitments.

speculative or at least is believed to be of a temporary

In view of the changed tenor of current business

nature.

statistics, indicated by Mr. Young's review, the major

policy question to be determined is whether there should

be some moderation of the recent vigorous policy of ease.

Mr. Hayes presented the following statement of his views on

the business outlook and credit policy:

Business statistics in

been generally encouraging,

the last three weeks have

suggesting that the low

6/17/58

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point of the recession may be close at hand, although it

is not clear that it has already been reached--and there

is certainly no evidence yet pointing to any substantial

recovery during the remainder of 1958. High levels of

consumer and Government demands seem now to be roughly

offsetting recessionary forces generated in the invest

ment area of the economy.

Perhaps the most obscure element in the outlook is

the probable trend of aggregate inventories.

The present

rate of liquidation is almost certainly less than the

steep rate of the first

four months of the year, and the

speed of liquidation should drop further in coming months;

but stock-sales ratios, even after some decline in April,

are still

high, and the process of inventory correction

may still

take some time.

The direction of consumer

spending, as well as price developments, particularly in

the area of raw materials, will doubtless be a crucial

influence on inventory trends.

Well-sustained personal income and consumer spending

have been major stabilizing factors to date. Aided by

high farm income, large transfer payments, and the first

increase in wage and salary payments since last August,

personal income rose in May to a level less than 1 per cent

below that of August.

Consumer cash outlays, i.e., con

sumption expenditures less changes in consumer credit, have

increased in each quarter throughout the recession. However,

the future trend of consumer spending is still

a major

question mark.

The latest SEC-Commerce figures on plant and equipment

expenditures show a considerably sharper than expected drop

quarter, suggesting that there is greater

in the first

flexibility in capital expenditure plans than had been

We can, however, find encouragement in

generally thought.

the projection of a much slower rate of decline--only about

$1 billion (annual rate)--in each of the ensuing three

Declines of this magnitude could of course be

quarters.

offset by relatively modest gains in consumer spending or

in public expenditures.

Although actual defense spending

has so far shown no upward tendency, a gradual but sub

stantial rise is expected over the next year; and this

factor, together with recent increases in Federal pay

scales, and the extension of unemployment benefit payments,

points to a substantial and rising Government deficit.

Among recent rather favorable developments have been

some improvement in residential building starts and in new

orders, a continued pickup in steel output and a leveling

6/17/58

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of industrial production as a whole. However, the better

level of housing starts, which is especially marked in

apartment units, may reflect greater speculative building

activity rather than a genuine improvement in underlying

demand. The upward trend in the steel industry may be

attributable in large part to expectations of higher prices

at the end of this month, and in part to a rebuilding of

seriously depleted inventories. It seems questionable

whether much stress should be laid on the modest drop in

unemployment in May on a seasonally adjusted basis, since

unemployment is likely to remain at a relatively high level

for many months unless production rises sharply, I believe

probabilities still favor a slow recovery rather than a

sharp and rapid one.

The price outlook is more encouraging than at any time

in the last few years. Farm prices are now declining at

last, and the general wholesale price index seems likely to

hold steady or even to move lower over the rest of the year,

with the consumer price index perhaps showing a similar trend

after some months' lag.

As for Treasury finance, we can probably assume with

safety that the Treasury will not be in the market again for

new money until around the middle of August.

(Our estimates

indicate that their needs will come sooner than Mr. Thomas'

But the Treasury will be faced with

forecast of October.)

another substantial refunding--the August 1 maturity,

probably combined with the September 15 maturities.

In spite of the mildly improved business outlook, I

think the present is emphatically not the time for backing

away from our policy of outright monetary ease or for

creating any public impression that we may be backing away

from it. The policy we have been following in recent weeks

should be continued until there are much clearer signs of

I think we should be gratified by the

imminent recovery.

extent to which banks and others have restored some of the

liquidity lost during the years of credit restraint. As

usual, it is hard to set policy in terms of any specific

free reserve figure. Although a level of about $500 million

seems as satisfactory as any, I would prefer to see the

Manager give greater weight to the feel of the money and

capital markets. Despite the favorable reception of the

Treasury's recent financing operations, I think we must

continue to give close attention to the capital markets

to assure as receptive an atmosphere as possible for new

corporate and municipal issues. While I would see no

6/17/58

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objection to our letting free reserves fall appreciably

below $500 million at times when the market feels easy

and when the banks in the money centers are well supplied

with reserves, I would be fearful of going much below

that level--and would, in fact, welcome appreciably

higher figures--during periods when the money centers

feel tight.

To my mind the need for substantial additional re

serves to take care of holiday currency requirements,

coupled with the prospect of rising seasonal reserve

needs in August and later months, points to an opportunity

in the very near future for the System to take an addi

tional step toward its long-term objective of attaining

somewhat lower levels of reserve requirements.

If such a

move is made, however, it would be highly desirable that

any accompanying publicity stress the point that it is

designed to meet these seasonal and long-term needs and

should not be looked upon as a sign of increased appre

hension on the part of the System as to the business

outlook.

As for whether the discount rate should be reduced

further, I believe this is a relatively unimportant ques

tion at this time. A case might be made for lowering the

rate, say to 1-1/2 per cent, chiefly to achieve a lower

level from which to effect decisive increases when strong

signals of credit restraint are once again called for.

We could also justify some modest reduction as a move to

"clear the air" by bringing the rate down to the "rock

bottom" figure reached in the last two recessions and by

reducing the unusually wide spread between the discount

rate and short-term market rates. However, this last

is not a very weighty argument when borrowing by banks

is at such a low level, and I would be somewhat reluctant

to change the rate mainly for technical reasons when no

It is even

additional signal of credit policy is needed.

conceivable that a rate cut might be misconstrued by the

market as an indication that the System is more worried

over the outlook than we actually are. This could have

unfortunate results just at a time when business develop

ments are giving some basis for somewhat greater optimism

or less pessimism. Against this it may be contended that

the market has already discounted a further reduction to

On balance I think I would prefer to leave

some extent.

the 1-3/4 per cent rate unchanged, especially if there

is any likelihood that reserve requirements may be reduced

in the near future, since I see no reason to confront the

public with a double signal in the direction of a policy

of greater ease under present conditions.

6/17/58

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Mr.

Johns said he agreed with Mr.

Hayes that this was not

the time to back away from the present policy of monetary ease or

to give the public appearance of doing so.

At the last Committee

meeting, he said, it was his understanding of the majority view

that the Desk would not be expected to concentrate too much upon

the statistic of free reserves.

Rather, the Desk would be expected

to rely to a considerable extent on the feel of the market, and in

doing so the Account Management might find it

appropriate to permit

the free reserve figure to drift somewhat lower than the target.

He

now found himself in the position of regretting that the feel of

the market was not so sensitive as to prevent in the past week an

appearance of tightening, or at least less ease.

He wished that

this had not occurred, although he realized that perhaps it could

not reasonably have been prevented.

For the next three weeks, he

would hope that this trend could be arrested and that operations

in the Account might make it

continued to be one of ease.

clear that the posture of the System

In his view there should be no

alteration of current policy in the direction of less ease, and

certainly not in the direction of restraint.

Mr. Johns recalled that at the last meeting he had arguedand he was clearly in the minority--that there were good reasons

for a further reduction in the discount rate.

Although he still

agreed with Mr. Hayes that arguments could be made in favor of

6/17/58

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a reduction in the rate, he did not wish to reiterate the argument

he made at the last meeting.

In spite of the economic information

that had become available in the last three weeks which was con

sidered by many to be of an encouraging nature and to indicate a

bottoming out of recession, it

seemed reasonable to him to anticipate

that in the next few weeks or months there might be deterioration in

some of the indices.

be surprised if,

In the forthcoming summer months, he would not

for example, great strength failed to appear in

the index of industrial production, and employment and unemployment

The

statistics likewise might give the appearance of deterioration.

fear he had was that there might be public misunderstanding if

set

backs occurred which were essentially of a seasonal character.

If

so, it

might be more important to be in a position to counteract

any such developments at the time than to anticipate them by doing

something now.

Mr.

Johns went on to say that, like Mr.

Hayes, he would

prefer to see some of the additional reserves which would almost

surely be needed in the coming weeks supplied through a further

reduction in reserve requirements.

He wished again to emphasize

the view he expressed at the last Committee meeting that it

would

be desirable to accomplish at least part of that by a reduction

in reserve requirements against time deposits.

Mr. Bryan said that at the meeting of the Atlanta Board

of Directors last Friday, at which representatives of the branch

6/17/58

-15

boards were present, the economic discussion was led by the

directors rather than the staff and the underlying tone of the

reports made by directors representing various lines of business

and industry was distinctly more optimistic than it

had been.

The only sour notes came from the textile industry, where dis

couragement seemed to be endemic, and from rice milling, a

specialized agricultural industry hardly representative of the

general agricultural picture.

Mr. Bryan went on to say that statistics for the district

seemed to be behaving quite well, rather better than he reported

at the last meeting of the Committee.

Some of the figures still

were moving down but others showed signs of bottoming out and the

district did seem to be performing better than the national

averages.

For the first

time,

therefore, he was encouraged, but

he felt there could be some setbacks to the present atmosphere of

confidence,

which might be a little

premature.

As to policy, Mr. Bryan said he realized that if

the System

continued a policy of active ease, and especially if the degree of

ease should be increased, it might get into difficulty in the event

that recovery should take hold in boom proportions.

However, he

did not foresee such a development and he would like to continue

the present policy of ease.

He was impressed by the fact that

although the commercial banks had recovered a substantial degree

6/17/58

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of liquidity as the result of System policy, they would nevertheless

go into the next period of recovery with liquidity ratios which were

unfavorable when contrasted with those prevailing at the time of the

previous recovery movement.

This meant that the probabilities of an

explosive loan expansion such as occurred in 1955 and 1956 were con

siderably reduced.

Mr. Bopp said that he could generalize for the Third District

fairly accurately by saying that although there had been some improve

ment, conditions in the district were still

year ago.

significantly below a

The evidence of a bottoming out of recession, as indicated

in the staff memorandum, was encouraging,

but in his opinion the

situation called for continuing the policy of monetary ease.

Since

the Treasury had issued a long-term bond and long-term yields were

relatively firm, he would not do anything in the short-term market

which might be subject to misinterpretation.

On balance he would

be disposed to recommend a reduction in the discount rate of at

least 1/4 per cent as a clear signal to the market that the policy

of ease was being continued.

Also, since it

appeared that in the

relatively near future additional reserves would be required, he

would favor a reduction of reserve requirements against time

deposits.

Mr.

He would not change the existing policy directive.

Fulton said that the Fourth District continued to lag

behind the rest of the nation and that statistics for the district

6/17/58

-17

failed to show improvement.

was temporary in

The recent increase in

the steel rate

nature, being attributable largely to orders in

anticipation of a rise in the price of steel, which seemed imminent

come the first

of July.

Despite the fact that there was some volume

of orders coming in from small steel users whose inventories had

been reduced to low levels, steel men expected the month of July to

be the worst month of the whole year.

While they did expect some

pickup in August, with initial orders for steel for the new model

automobiles, it

appeared that the automobile manufacturers were

going to play the situation close to the vest.

Mr.

Fulton then commented on the reasons for a recent reduc

tion of $2 a ton by companies furnishing steel to Detroit.

His

explanation indicated that this local situation had no bearing on

the general picture with respect to the price of steel, and it

continued to be the expectation,

would go up.

he said, that the price of steel

By and large, the outlook was for a continued low

level of production and that, along with low levels in the metal

working industry, would reflect itself in increasing unemployment.

Additional cities in the Fourth District had been added to the

category of distressed labor areas, and in those areas the situation

had had some effect on food sales, including the selection of foods.

While there had not been a drop in

rate of increase had diminished.

total sales from last year, the

Department store sales for the

district were down about 5 per cent on the average from last year,

6/17/58

-18

against a drop nationally of about 2 per cent, and automobile sales

were down sharply in the Cleveland and Cincinnati areas.

Bank loans

were moving down, but to some extent that might be attributed to a

desire on the part of the banks to obtain the degree of liquidity

which was lost some time ago.

No indication of softness was seen

yet in published prices, and some indication of price maintenance

might be found in the fact that two recent wage negotiations had

culminated in new contracts calling for wage increases of approxi

mately 5 and 7 per cent, respectively.

Mr. Fulton expressed the view that the present degree of

ease was appropriate to the situation and said that most assuredly

he would not want any indication of tightness to develop in the

market.

In his opinion the Desk had done a good job since the

last meeting in the light of the conditions surrounding the Treasury

financing, and he would like to see the present degree of ease

maintained.

He subscribed fully to the thinking that a reduction

in reserve requirements to supply reserve needs in the immediate

future would be quite appropriate, provided the action was ac

companied by an explanation of the reasons therefor, but he would

not touch the discount rate at this time.

He felt that there was

not at this time a great deal of confidence on the part of busi

nesses or individuals that the recession had hit bottom.

Despite

the thinking of some people that a bottom had been reached and

that a turn-around was imminent, he did not believe that any

6/17/58

-19

immediate developments in that direction would be of such a

magnitude as to indicate that recovery was here and that the

System should tighten its reins.

Mr.

Robertson said that to him the economic report indi

cated very clearly a leveling out or possibly an upward movement.

Although the System ought to try very carefully to catch the turn

before inflationary forces emerge, he did not feel that this was

the right time to start tightening.

Rather, this was a time to

sit still and watch carefully, making sure that no indication was

given of any tightening or, on the other hand, any easing.

He

would refrain from any action on reserve requirements or the dis

count rate and would seek a level of free reserves of about S4OO

million, with leeway on either side to account for the tone of

the market.

While this was not the time for action, it

however, a time for thinking.

was,

It might be necessary, for example,

to do something about margin requirements in view of the volume of

credit going into the stock market; he commented on the fact that

stock prices have risen disproportionately to the earnings records

of corporations.

Although no action might be called for at this

time, that situation should be watched carefully.

In summary,

Mr. Robertson said, he would maintain as even

a position as possible for the next three weeks.

Mr.

Mills said that his comments at this meeting would focus

upon the mechanical functioning of credit policy.

In that connection,

6/17/58

-20

until the present digestive period of Treasury financing was over,

along with the tax payment period, he believed that it

would be

necessary for the Manager of the Account to give whatever assistance

might be required to the market to allay any suspicion of a change

in the direction of System policy.

However,

when that short period

was past it would seem appropriate to implement the line of reason

ing expressed by Mr. Thomas which would call for moderating the

degree of aggressiveness with which reserves had been supplied

through the commercial banking system over the past months.

To

that end he would propose a line of policy such as indicated in the

following statement:

1. Continuing to believe that System policy, in

supplying reserves in recent weeks, has been overgenerous

and that as

2. the objective was reached and the economic purpose

achieved some time ago of raising the money supply, there

is

3. a distinct risk that any further heavy injections

of reserves seeking to maintain a positive level of free

reserves in the $500-million range would abet the specula

tive factors in the U. S. Government securities market that

are already in evidence, and

4. would have the more serious effect of underwriting

a new inflation by creating excessive liquidity, in the

process of which

5. support would be given the existing rigidities in

the wage-price structure that stand in the way of sought

after economic adjustments.

Therefore, under these circumstances,

6. advantage should be taken of the interval before

a new Treasury financing operation to allow natural factors

affecting the supply of reserves to have free play, to the

end that

7. System policy will set adequate credit avail

ability as its objective and only supply such reserves as

are necessary for that purpose, which would mean that

6/17/58

-21

8. rather wide fluctuations in the prices of

intermediate- and long-term U. S. Government securities

should not be a cause of concern or a reason for

specific System action, except in the unlikely case of

a disorderly market, but

9. rather should be regarded as a reflection of

the working of free market forces that would presumably

eliminate some of the speculative elements now in the

market.

10.

The conduct of a System policy looking to these

objectives would contemplate that the Manager of the

System Open Market Account would be guided largely by

the feel of the market when supplying reserves, rather

than any set level of positive free reserves as a goal.

11. In keeping with this policy, another reduction

in reserve requirements would not be made unless further

substantial withdrawals of gold or a pattern of downward

movements in the supply of reserves to levels as low as

those that have been projected for near-by weeks should

make that action necessary.

In further comments, Mr.

Mills said he believed there should

be no concern if the level of discounts at the Federal Reserve Banks

should rise, because seemingly that would indicate that some of the

excessive reserves would be squeezed out of the market as the banks

adjusted their positions to a more realistic scheme of reserve

supplies.

He did not believe that any change should be made in

the

discount rate at the present tie.

Mr. Leach said that although on balance there was no evidence

of further decline and only slight evidence of further improvement in

the Fifth District, there was nevertheless a definite optimistic

attitude that was striking by reason of its prevalence.

diversification of the textile industry made it

The complex

difficult to get a

-22

6/17/58

clear and comprehensive picture of the current situation, but he

did not sense in recent developments any material changes for

better or worse.

last week,

At the joint meeting of the Bank's directors

two of the directors expressed the opinion that although

many marginal producers had gone out of business, still

others would

have to go before much fundamental improvement in textiles could be

achieved.

Reports from a number of residential builders and lenders

indicated a sharp upturn in building activity last month that had

continued this month.

The most common rate on conventional loans

now ranged between 5-l/4 and 5-1/2 per cent, with the average on

the low side, and many prime mortgage loans were being made as low

as 5 per cent.

Increased building activity had strengthened the

demand for lumber and firmed prices,

and retail lumber yards ap

peared to be more willing to stock up than they had been.

The West

Virginia picture had brightened slightly since the last Committee

Production of bituminous coal had increased a little

meetirg.

though exports,

declined.

even

which had been giving indications of leveling off,

The latest report on insured unemployment showed a de

cline, 18 per cent of which was due to expiration of unemployment

benefit rights.

Mr. Leach went on to say that the opinion was expressed by

several of the directors at the joint meeting last week that the

recession had not consisted solely of minus signs.

Many things

long needing to be reviewed and improved in business had received

6/17/58

-23

a searching scrutiny, with consequent cost-cutting improvements in

efficiency of operation and administration.

Mr. Leach said he did not believe that there had been suf

ficient change in

the economy to warrant a change in

or in the degree of ease maintained.

current policy

Current projections indicated

that additional reserves would have to be supplied in the near future

to maintain the degree of ease that had been the System's goal, and

he believed that this should be done through the medium of reserve

requirement changes rather than through open market operations.

Although he thought that a case could be made for a reduction in the

discount rate, he would not favor a reduction because, regardless of

the facts, it would very probably be interpreted by some as a move

toward further ease.

He believed that the System had already made

its contribution and he would not like to give any indication of

wanting to ease further.

A reduction in reserve requirements like

wise might be regarded by some as an indication of further ease in

the absence of some statement explaining why the action had been

taken.

Mr.

Leedy said that there had been no material changes in

the Tenth District since the last meeting of the Committee.

As to

policy, he agreed with those who favored continuing during the next

three-week period about as at present.

It seemed to him that the

Desk had accomplished quite a bit in making very large purchases of

Treasury bills in an attempt to maintain about the degree of ease

-24

6/17/58

contemplated.

In view of these purchases it was rather surprising

to him that the bill rate had edged up to the extent that it had.

Projections for the period after the next two weeks indicated that

over the longer period, with seasonal demands coming into the

picture, some permanent addition to reserves would be required, and

he would like to see those reserves supplied by a reduction in reserve

requirements.

However, as had been suggested by others, he thought

that an effort should be made to obtain general understanding that

the action was not a further anti-recession move.

Mr. Leedy did not see that any purpose would be served at

the present time by a reduction of the discount rate.

Certainly the

rate need not be reduced as an anti-recession measure, and he had

some concern that a reduction might be interpreted as being of that

nature.

Actually, with the low level of borrowings at present, the

question seemed somewhat academic.

Rather than to undertake to lead

the short-term market by any indication on the part of the System

through the discount rate, he would prefer a later adjustment, if

that should become necessary in the light of the rates established

by the market.

In summary, Mr. Leedy said, he would continue as at present,

neither increasing the degree of ease nor reducing it in the period

immediately ahead,

and he would take no other actions aside from

supplying needed reserves through a reduction in

ments when that became essential.

reserve require

-25

6/17/58

Mr.

Allen said that the accumulating evidence that the

economy had begun to move up slowly from its low point was showing

up in

the Seventh District in a number of ways.

First, in all of

the States of the district there was some improvement in labor

market conditions.

still

New claims for unemployment compensation were

running substantially above last year, but in recent months

the percentage of increase over a year ago was declining.

Second,

department store sales, while markedly poorer than in the nation

as a whole, were improving.

Third, building activity showed signs

of picking up more than seasonally.

F. W. Dodge figures on contract

awards for Region V, which includes Minnesota and the Dakotas in

addition to Seventh District States,

from a year ago was only 4

showed that in April the decline

per cent, much less than in

earlier months.

Fourth, steel pourings at the present time were above 60 per cent of

capacity in Detroit and over 70 per cent of capacity in Chicago.

The

low in April was 12 per cent for Detroit and 54 per cent for Chicago.

Fifth, cash r eceipts from farm marketings were showing very notice

able improvement in Iowa, with March receipts 20 per cent above a

year ago.

Wisconsin was somewhat above last year, whereas Illinois,

Indiana, and Michigan were slightly below.

most of the Seventh District were favorable,

Crop conditions over

which meant that in

parts of the district conditions were substantially improved from

a year ago.

6/17/58

-26.

Continuing, Mr. Allen noted that commercial and industrial

loans of all weekly reporting banks in the nation dropped another

$128 million in the three weeks ended June 4, of which total Seventh

District banks accounted for almost one-fourth, with metal firms

representing a large part of the drop in

the district.

In the week

ended June 11, Chicago banks showed an increase of $21 million in

commercial and industrial loans, which was undoubtedly associated

with corporate tax payments.

For obvious reasons, it

was not

expected that tax borrowing would come close to a year ago or even

to March of this year.

Money market banks as a group continued to

maintain a surplus reserve position and borrowings at the discount

window were practically negligible.

Mr. Allen said that at the joint meeting of the head office

and Detroit Branch directors held on June 12 the following were

among some of the things mentioned.

First, the steel industry had

not decided whether to increase prices on the first of July.

There

were differences of opinion and those who argued against an increase

mentioned industry statesmanship and the threat of competing metals.

It

was believed,

however,

that prices would be increased.

Second,

the Sears Roebuck fall catalogue was to show price reductions

averaging 1-1/2 per cent.

Third, effective the first

of July there

would be decreases of 1/2 per cent in the rate paid on savings

deposits by a number of institutions.

In some cities where savings

6/17/58

-27

and loan associations are active, both those associations and the

banks were going to reduce by 1/2 per cent and thereby retain exist

ing differentials.

Fourth, the favorable crop conditions would

benefit the railroads in the area, which would be particularly

welcome to those roads that had had hard going.

Fifth, the directors

from Michigan differed as to whether the existing contract stalemate

in the auto industry was working to the benefit of the unions or

management,

but there seemed to be a majority feeling that time was

on the side of the unions.

Sixth, in Flint, where unemployment is

high, bank deposits were steady, collections were excellent, and

the mortgage business was picking up.

It

was said that persons

with unencumbered homes were taking mortgages in order to retire

indebtedness of various types,

mortgage lenders.

minimized in

tests.

perhaps with encouragement from

Seventh, the late May surge in auto sales was

some quarters by the widespread use of selling con

However,

one study showed that new car sales had hit a

cyclical low and had turned upward.

Another recent poll indicated

that consumers were planning to buy more cars in the next twelve

months than an earlier survey had indicated.

It

was understood

that the average introduction date for 1959 models would be some

what earlier than last year.

New car inventories on May 31 were

755,000, which was below the figure on the same date a year ago,

but the present inventory represented 45 days' sales whereas a

6/17/58

-28

year ago the figure was 34 days.

Production for the second quarter

was estimated at 1 million cars, while the estimates for the third

and fourth quarters were 600,000 and 1,250,000, respectively.

Thus far, Mr.

Allen said, it

had begun to move upward,

months,

seemed agreed that the economy

however slowly.

The chief worry in recent

as far as he was concerned, was not that the country had

experienced a recession,

because that was to be expected following

the sustained boom and the general level of business had been quite

good.

Rather, it

had been his worry that the recession would con

tinue in a downward spiral.

Inflationary tendencies were still

such that he felt the System must try to call the turn and shift

from its

policy of ease just as soon as the upward movement seemed more

definite, but he was not yet willing to say that in his judgment such

a time had come.

For the next three weeks, he felt that the System

best to stay just about where it

should do its

erring neither

was,

on the side of ease nor on the side of restraint.

Perhaps,

however,

the signs would be clearer three weeks from today to the point that

an overt act one way or the other would be in order.

In concluding,

Mr. Allen said he was not one who would argue that temporary or

seasonal reserve needs should be met by a reduction of reserve

requirements.

Instead, he would say that those needs should be met

by open market operations.

Mr.

Deming said that there had not been much change in

conditions in

the Ninth District.

Agricultural prospects had

6/17/58

-29

diminished a little

sections,

due to lack of adequate rai

but the situation was not serious and in

quite good.

last year.

fact was still

Almost certainly, farm income would be higher than

On the nonagricultural side, expansion had been of

something less than seasonal proportions.

employment in

Nonagricultural

May was 1,360,000, about 35,000 less than in May

1957, while unemployment was estimated at 69,000, or about 36,000

more than a year earlier.

Although unemployment had fallen

seasonally in the last three months, the total number of un

employed had continued to exceed last year's totals by about the

same amount.

In other words,

the actual number of unemployed had

fallen each month by about the same amount as last year but the

decline started from a higher total.

employment drop in

Roughly one-third of the

May from year-ago levels was in mining, with

iron ore mining accounting for about 60 per cent of the decline

and copper mining about 4O per cent.

Thus mining employment was

about 25 per cent less than a year ago, and it

it

looked as though

was going to hang there for the balance of the year.

mining appeared to be showing a little

Copper

more strength at the

present time and the Anaconda Copper Company had just announced

a price increase, so things might be looking a little

Montana.

as it

In summary,

better in

the Ninth District was going along about

had been and was not being affected as seriously by the

-30

6/17/58

recession as some other regions.

As to policy, Mr.

Deming said he agreed with those who

advocated about the same conditions as had prevailed for the

past three weeks.

He was content with current policy and with

its execution.

Mr. Mangels said that some recent rather preliminary

reports covering business activity in

the Twelfth District

indicated that the usual spring pickup might be developing a

little

more favorably than appeared earlier.

In the State of

California, manufacturing employment increased more than seasonally

in May, but for the district as a whole employment gains were about

what was expected on a seasonal basis.

craft employment was a little

In the Seattle area, air

better, while in

Southern California

there were reports that some companies expected to release about

5,000 employees within the next few months.

Steel production in

the district increased 8 per cent in May over April and production

was now at about a 75 per cent rate, some 15 per cent higher than

the national average.

In the lumber business there had been some

improvement in both April and May.

in

Douglas fir orders improved

both months and plywood prices strengthened because of improved

demand, but in

other types of lumber the situation was about as it

had been, with little

change in

demand.

In the construction

6/17/58

-31

industry, heavy engineering contracts showed a 25 per cent

increase in

May over April, although the total was still

below

a year ago, while FHA and VA applications were about double the

level of May 1957.

up a little

in

Bank loans had not changed much, but were

the last three weeks,

and San Francisco banks

reported that applications for loans to pay taxes were nominal.

Demand deposits were down but time deposits continued to increase.

There had been no announcement of any change in

posit interest rate but it

effective the first

2-1/2 per cent.

the savings de

was quite generally expected that

of July there would be a reduction to about

The strategy appeared to call for announcing at

about the same time a reduction in mortgage loan rates, and ap

parently savings and loan associations also were going to follow

somewhat the same technique.

Borrowings from the Federal Reserve

Bank had been nominal; as to Federal funds, the large banks had

been buying and selling in about equal amounts although at lower

levels than in

Mr.

the past.

Mangels said that he sensed a somewhat firmer undertone

of confidence in the area on the part of both businessmen and the

public.

The possibility was seen that the recession might be ap

proaching bottom, with the further thought,

bottoming-out process might take some time.

however,

that the

There appeared to be

no shortage of credit for constructive purposes, but Mr.

Mangels

-32

6/17/58

was somewhat concerned about the amount of credit being used for

speculative purposes,

market.

particularly in

the Government securities

He did not feel that the present degree of monetary ease

should be increased,

and he suggested that $500 million of free

reserves be used as an objective, with the thought of staying

rather close to that figure.

He would not favor any change in

the discount rate at this time nor would he like to recommend any

change in

reserve requirements at this time.

to him satisfactory,

The directive seemed

although perhaps at the next meeting or some

time thereafter, the Committee might want to give thought to a

change.

Mr.

Irons said that on balance national developments were

on the encouraging side; perhaps for the last six weeks or two

months the trend had been in that direction.

District,

As to the Eleventh

he would not take time to identify the various develop

ments but would simply say that economic conditions in

were unusually good.

the district

At the most recent board meeting, directors

from the branches suggested by the tenor of their reports that if

this was a recession they would not do anything to discourage it.

The oil industry,

of course, was a drag on the economy but the

situation there seemed to be improving.

As to policy, Mr.

Irons said that in the light of the

economic situation he would feel strongly against taking any action

6/17/58

-33

which would add to the present degree of ease.

Like Mr. Mills,

he believed the System had been liberal in providing reserves,

and he would be delighted if the market would firm up a little,

In other words, he favored a policy of ease but not one as

aggressive as that followed until recently.

During the past

three weeks, he said, the Account Management had done an excellent

job under difficult conditions.

It had managed to take up some of

the sloppiness in the market and, by de-emphasizing the statistic

of free reserves and being concerned more with the feel of the

market and short-term rates, it had brought about a better situation.

Mr. Irons said he would not favor any change in the discount rate

since he saw no reason for a change; neither would he favor a

reduction in reserve requirements at this time for he did not

think that a reduction would accomplish the objective of meeting

the anticipated seasonal situation.

Banks would not be likely to

sit still and hold reserves waiting for a time in the future.

Rather, if reserve requirements were reduced now and $400-$500

million of additional reserves were provided, the banks would act

to invest the funds quickly and subsequently, when seasonal require

ments appeared, the banks would be found to be fully invested. With

that in mind, he believed it would be better to feed in reserves

gradually, and as needed, through open market operations.

If they

were supplied by a reduction in reserve requirements now, additional

6/17/58

-34

reserves might have to be supplied later, thus providing a

"double dose."

Mr.

Irons agreed with Mr. Robertson that the

situation in the stock market should be watched closely in the

light of the increasing amount of credit going into the market

and that a change in margin requirements could be indicated in

the not too distant future.

He would not want to recommend

changing the policy directive although, as he had said at recent

Committee meetings,

if

anyone wanted to delete the word "further"

from clause (b) of the directive,

he would favor that.

Mr. Erickson said that although not too many statistics

were available for the month of May,

those that were available

indicated somewhat more strength than in April.

he could not say that optimism was evident in

Nevertheless,

the First District.

Most manufacturing indices were following roughly the national

pattern,

but shoes for the first

four months of the year were

12 per cent below last year, as compared with a drop of 5 per

cent nationally.

Insured unemployment declined during May but

for the month was still

more than double the year-ago figure.

Department store sales were up 3 per cent for the first

week in

June, but for the year to date they were 3 per cent behind 1957.

The April collection record was better than last year,

continued in

strength

the main store sales relative to basement sales, and

there had been an unexpected increase in

dress sales.

The

6/17/58

-35

Massachusetts consumer price index dropped .2 per cent in May,

which was the first

decline since last August.

Registrations

for summer camps began slowly this year, but by the end of April

operations at 85 per cent of capacity were assured.

Mr. Erickson said that when he considered all factors, in

cluding seasonal factors,

he would make no change in the policy

directive or in the discount rate.

He felt that the present posture

of ease should neither be increased nor decreased,

target should not be changed.

and certainly the

He would leave it to the Manager of

the Account to judge the feel of the market.

Mr. Szymczak said that although he would like to take a

position similar to that expressed by Messrs.

Irons,

he was a little

Mills, Robertson, and

There were many uncertainties in

confused.

the economy and there would be a need for additional reserves due

to seasonal and other factors.

He felt that the Committee ought

to vary the free reserve position, with changes in the level from

time to time as the market permitted.

He would favor reducing

reserve requirements at a suitable time and then using open market

operations in reverse to permit a varying degree of positive free

reserves,

thus getting away from a set figure.

Margin requirements

should be considered in the course of time, but he did not feel

that there should be any change in

the discount rate at present.

For the purpose of departing from a fixed pattern of free reserves

6/17/58

-36

as well as for the purpose of providing for seasonal needs, he

would change reserve requirements now,

since there might not be

a chance to do so later.

Chairman Martin referred to comments which he had made at

the last Committee meeting about Federal Reserve policy and said

he continued to feel that the current policy was about right.

so, he suggested,

For the first

the System ought not to force its

time,

If

luck unduly.

he detected a feeling around the country that

monetary policy might be too easy,

and this was something that

ought to be taken into consideration.

On the matter of public

psychology and interpretations of System policy, if

it

were not

for the flowing reserve picture the best thing, in his opinion,

would be to do nothing at all and let things stay just about where

With labor negotiations in progress and the wage-cost

they were.

price relationship still

felt that it

a fundamental problem in the economy, he

would be simply asking for trouble to take any overt

action which would have to be explained.

example,

In his opinion, for

a reduction in reserve requirements could not be explained

satisfactorily on the basis of technical long-run considerations.

Likewise,

there would be great difficulty in

that a reduction in

attempting to explain

the discount rate was not an anti-recessionary

movement or an indication that the System considered the country to

be in a bearish period rather than a period of leveling off.

was not certain and he might be wrong,

He

but personally he would not

6/17/58

-37

want to take action.

In making these comments,

he brought out,

he was talking about the period of the next three weeks.

Continuing, Chairman Martin said that the present situation

was not one of recovery, boom,

or decline.

He then expressed the

view that the best thing to do for the next three weeks would be to

try to follow the color,

feel, and tone of the market and not get

unduly easier or tighter.

He felt that the Account Management had

done a good job in this respect during the past three weeks,

ing when it

times it

had to respond.

Unlike Mr.

Johns,

he thought that at

would have been desirable to be a little

Chairman Martin then said that it

he believed,

respond

less easy.

was his own view, and,

the majority view--with some variations in

degree-

that there should be no change at this time in the policy directive,

the discount rate, or reserve requirements.

the next Committee meeting on July 8 was,

What might happen after

of course, a different

story, since the summer doldrums were approaching.

He would not want

to give labor negotiators or others any indication of Federal Reserve

thinking on policy, he would not want to validate a price level or

to invalidate it,

and he would not want to play a larger role than

monetary and credit policy should appropriately play.

own view, and apparently that of the majority,

stay about where it

was now,

While in

his

the System should

the situation should be watched care

fully during the next three weeks.

For the feel, color,

and tone

-38

6/17/58

of the market, responsibility should be placed on the Management

of the Account.

Then, three weeks from now, another look could

then be taken at the situation.

Mr.

Hayes questioned whether there was a clear majority

opinion against a change in reserve requirements,

stating that

he sensed quite a lot of feeling that this was an opportunity to

take such action.

it

With reference to the comments made by Mr.

Irons,

appeared from looking at the reserve projections of the New York

Bank, and perhaps from the projections of the Board's staff also,

that there would be an almost immediate reserve need and the banks

would not have a chance to use the reserves to expand their invest

ments.

Chairman Martin replied that he fully understood the point.

However,

in his view it

would be almost impossible to explain a

reduction in reserve requirements to the public on the basis of

technical considerations,

and he felt that it

would be a great

mistake to attempt such an explanation.

Mr.

Mills commented that, leaving aside the technical

problem mentioned by the Chairman and turning to the point of view

expressed by Mr. Hayes,

it

appeared to him that the anticipated

need for substantial amounts of reserves might, if

the projections

were realized, make a reduction of reserve requirements the only

logical choice.

The alternative would be very large purchases of

6/17/58

-39

Treasury bills by the Account,

and if

the Account were to go in and

purchase aggressively against the available supply of bills at a

time when corporations and banks were back in the market, there

would be a strong possibility of depressing bill yields to a very

low level and increasing the spread between the bill rate and the

discount rate to a point that would be distinctly unrealistic.

He

would not like to reduce reserve requirements but he was inclined

to believe that this might be the only reasonable choice in

the near

future if present reserve projections came to pass.

Mr.

Fulton stated that Mr. Mills'

thinking, and Mr. Leach said that in

comments reflected his own

suggesting a reduction in reserve

requirements he had had in mind that he would not like to see the bill

rate driven down too far.

After some further discussion of the reserve projections,

Chairman Martin said that the Board of Governors would bear the

problem of reserves in

mind.

With regard to the decisions to be made at this meeting,

the Chairman inquired whether in his previous comments he had

correctly outlined the majority position as to general policy,

and no dissents were heard.

Turning to Mr.

Rouse, the Chairman

asked whether he saw any need for a change in

Mr.

Rouse replied in

the negative.

the directive and

6/17/58

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

(including replacement of maturing securities, and allow

ing 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 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 certifi

cates 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 indebted

ness 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 aggre

gate $500 million.

Mr. Hayes reported that the Federal Reserve Bank of New York

had discussed with the New York Clearing House Association the publica

tion of aggregate figures for Clearing House banks on required reserves,

borrowings from the Federal Reserve Bank, and Federal funds borrowings.

-41l

6/17/58

He recalled that in its report last year the Clearing House

Association made such a proposal,

except that the figures

were to be made available only to the Clearing House banks.

The New York Bank, on the other hand, felt that it

helpful if those figures could be made public.

now been received under date of June 2,

1958,

would be

A letter had

stating that

the Clearing House Association had discussed the matter and

had concluded that the proposal was not acceptable.

However,

the Clearing House would be willing to accept the plan if

it

were expanded to provide for making public similar information

for banks in other cities.

Mr.

Hayes said that although he had some sympathy for

the position of the Clearing House, he thought that the signifi

cance of the matter had been greatly exaggerated.

to say that he had reported to the Presidents'

He went on

Conference

yesterday and had suggested referring the question to the Federal

funds study group, which was already preparing to consider the

desirability of collecting broader statistics than the Clearing

House had suggested.

If

this were done,

the Clearing House could

be told that the System was looking into the matter and would be

unable to give any definitive reply in

the near future.

Chairman Martin inquired whether any objection was seen

to handling the matter along the lines suggested by Mr.

Hayes,

-

6/17/58

2

and no objection was heard.

It

was agreed that the next meeting of the Federal Open

Market Committee would be held on Tuesday, July 8, 1958,

Thereupon the meeting adjourned.

Assistant Secretary

at 10:00 a.m.