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, July 29, 1958, at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Fulton
Irons
Leach
Mangels
Mr. Mills
Mr. Robertson
Mr. Shepardson
Mr. Vardaman
Messrs. Erickson, Treiber, 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.
Mr.
Mr.
Mr.
Riefler, Secretary
Thurston, Assistant Secretary
Solomon, Assistant General Counsel
Thomas, Economist
Messrs. Daane, Hostetler, Marget, Roelse,
Walker, Wheeler, and Young, Associate
Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Kenyon, Assistant Secretary, Board of
Governors
Mr. Koch, Associate Adviser, Division of
Research and Statistics, Board of
Governors
Mr. Keir, Acting Chief, Government Finance
Section, Division of Research and
Statistics, Board of Governors
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
7/29/58
-2Messrs. Ellis, Jones, and Tow, Vice Presidents of the Federal Reserve Banks of
Boston, St. Louis, and Kansas City,
respectively; Mr. Baughman, Assistant
Vice President, Federal Reserve Bank
of Chicago; Messrs. Anderson and
Atkinson, Economic Advisers, Federal
Reserve Banks of Philadelphia and
Atlanta, respectively; and Mr.
Litterer, Business Economist, Federal
Reserve Bank of Minneapolis
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
July 8, 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 July 8 through
July 23, 1958, and a supplemental report covering commitments executed
July 24 through July 28, 1958.
Copies of both reports have been
placed in the files of the Federal Open Market Committee.
Reporting on open market operations, Mr. Rouse stated that
everyone present had followed market developments with particular
interest in recent weeks.
The three-week period since the last meet-
ing had opened with a short-lived rally following the Treasury's
announcement that it
bonds of 1965, $5
6
had purchased $589 million of the 2-5/8 per cent
million of which would be retired.
This was
quickly followed, however, by the news of the Middle East crisis
which, together with further evidence of improvement in business
conditions, led to substantial price declines heightened by liquidation of speculative positions.
Mr. Rouse reported that since the
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last meeting total System purchases of Government securities other
than bills amounted to $1,265 million on a commitment basis.
This
included $1,090 million new 1-5/8 per cent certificates on a whenissued basis and $175 million notes and bonds, of which $110 million
were September rights.
The System purchased $74.5 million bills in
the market while an additional $30 million were taken into the Account
on a swap with a foreign account.
On the other hand, the System
Account made commitments for the redemption or sale of $704 million
bills during the three-week period.
Mr. Rouse wont on to say that the money market had been
generally easy, although there were one or two days earlier in the
period when the Federal funds rate reached 1-5/8 per cent.
He
stated that the amplified volume of free reserves in the banking
system did not seem to make any perceptible difference in market
atmosphere during the period.
The early reception of the 1-1/2 per
cent tax anticipation certificates was satisfactory.
There was some
feeling at the New York Bank that the rate might be on the low side,
but market people seemed to think that the terms were satisfactory.
Mr. Rouse went on to say that the Government securities
market had a bad day yesterday, with some issues off as much as 1-1 1/4
points.
The offerings, mostly small in size, were largely from specu-
lative sources, but there was a virtual absence of buying.
declined further in moonlight trading yesterday.
The market
Mr. Rouse reported
7/29/58
that the average issuing rate in yesterday's bill auction was .98
per cent, with the stop-out running to slightly above 1 per cent.
At the request of the Chairman, the Secretary reviewed the
telephone meetings of the Committee held during the period from
July 15 through July 25, 1958, the minutes of some of which had
not yet been distributed.
He referred particularly to the action
taken on July 18 authorizing the Manager of the System Account to
buy for the Account in
ment securities in
the open market, without limitation, Govern-
addition to short-term securities,
action taken on July 24 terminating that authority.
and to the
In view of the
latter action, he said, the Management of the Account was now operating
under the directive issued by the Committee at the meeting on July 8,
1958.
Chairman Martin inquired whether there was any question about
the effect of the July 24 action, as stated by the Secretary, and no
questions were raised.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period July 8 through July 28,
1958, were approved, ratified, and
confirmed.
In supplementation of the staff memorandum distributed under
date of July 25, 1958, Mr. Young presented the following statement
on the economic situationt
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Domestically, springback of economic activity has
been impressive,
so much so that it now looks as if April
will mark the recession trough and May the first month of
revival. In industrial countries abroad, the situation
looks stronger than earlier reported, with possibility
that depressed industries such as steel and textiles now
may be a bit on the upgrade.
While Middle East war threats have not resulted in
scare inventory buying, according to district reports,
shift towards inventory accumulation because of stronger
final demands must surely be part of the explanation of
recent pickup in output and improvement in the labor market.
For some months, the equity market has reflected investor
expectations of inflationary revival. Recent stock price and
trading behavior would seem to indicate that latest information on financial factors--the very high current rates of
time deposit and monetary expansion, the continued ease of
bank reserve positions, the general state of abundant
liquidity through the economy, and the Treasury's large
deficit--is being interpreted as confirmatory of inflationary
expectations.
Any other interpretation of recent stock market
action is hard to make rational. Second quarter earnings
reports for the 214 manufacturing companies so far reporting
show combined earnings 38 per cent below the second quarter
of 1957 and up only 2 per cent from the first quarter of this
year.
As to details:
The preliminary GNP estimate for the second quarter shows
modest rise from the first quarter, with about the same rate
of inventory liquidation for the two quarters. The estimate
of inventory liquidation, in the light of other evidence,
looks high so that later downward revision of the inventory
liquidation estimate would not be surprising.
Evidence accumulating on industrial production for May
and June confirms the broad range of increased output reported
at the last meeting.
Even equipment and ordnance industries,
which had been declining for more than a year, experienced
modest rise. Output in consumer lines was at a rate only 5
per cent under a year ago. Output of materials and parts was
also up sharply, and farm machinery output rose. New orders
for machine tools have edged up in
the past sixty days.
It now appears that steel activity and automobile
assemblies in July will experience only a seasonal decline.
With strength continuing to feature output in many other
industries, it seems possible that a further one point rise
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in the index of industrial production will be recorded for
July.
Latest data on the labor market in May and June also
confirm broad strengthening of employment demand.
The June
rise in unemployment was about seasonal and was mainly accounted for by the addition of students and graduates to
the labor force.
June unemployment among workers 25 years
or more of age stabilized, and long-duration unemployment
declined.
In July, initial claims for unemployment have declined
further--to about a third ahead of a year ago compared with
three-fifths ahead of last year in May and June.
Incidentally,
the longer hours worked per week in May and June raised sharply
average weekly earnings in manufacturing.
At $83.10, June
weekly earnings averaged $2.30 above April and were higher than
any month last year.
Construction activity in July is currently estimated to
be rising further, with residential up sharply, public construction up some, and industrial construction again down.
Contract awards just reported for June show the highest volume
recorded for any single month on record--an eighth higher than
in May and almost a fifth higher than June a year ago.
In June, one out of three housing starts was governmentally underwritten, compared with one out of six such
starts in the first
quarter.
Requests for FHA and VA ap-
praisals are still rising in July. Mortgage funds now are
reported to be generally available for FHA financing and
available in about half of the metropolitan areas for VA
financing. Downdrift in mortgage rates has apparently halted
temporarily, but the wider gap between bond and mortgage
yields established early in the year still prevails, making
mortgages very attractive to lenders.
Personal income, which at $352 billion in June was about
back to the level of last August, is confidently estimated to
be rising further in July. This July rise is reflecting the
pay raise for Federal employees, with full impact of the
retroactive increase, plus additional benefits to unemployed
workers under the Temporary Unemployment Compensation Act,
plus higher wage payments generally for more hours worked
and more employed workers.
Department store sales, seasonally adjusted, hit their
recession low in February.
Subsequently, they have risen
steeply. The preliminary level estimated for July puts
department store sales about one per cent higher than a year
ago.
Automobile sales in the first twenty days of July were
clearly improved from the first
twenty days of June, running
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a fifth under last year compared with over a fourth less
in the first
six months.
With dealer stocks further
reduced about 20,000 units, manufacturers have raised
somewhat their production schedules for July.
Consumer instalment credit, from preliminary indications,
continued to liquidate in June, though at a somewhat slower
rate, again mainly due to a reduced origination of new car
paper in automobile financing.
Repossession and delinquency
rates, though higher than a year ago, have shown persistent
downdrift in recent months.
The decline in foreign demand for American exports has
apparently leveled off, and perhaps demand has revived
moderately.
Figures for May, the latest month for which a
report is
at hand, show fairly consistent marks of pickup.
Meanwhile,
American import demands apparently continue to
hold steady.
Crop prospects continue to indicate a harvest equal to
peak years. Net farm income for the first six months was
the highest since 1953 and over a fifth ahead of the first
half of last year.
Average wholesale prices have risen half a per cent
since mid-June, wiping out the decline from the March peak.
Especially important in the recent rise has been the advance
in prices of industrial materials.
Price increases have
occurred for scrap metals, copper, tin, rubber, wool and
cotton textiles, hides, plywood, coal, and fuel oils. The
average of finished goods prices has apparently held stable;
one noteworthy price advance, however, was a 3 per cent in-
crease for automobile tires.
Farm prices since mid-June
have experienced some decline but less than in the preceding
month.
The decline this past month has reflected lower
prices for livestock and some further decline in fresh fruit
and vegetable prices, offset by a modest advance in grain
prices.
Average consumer prices rose fractionally again in June.
The further rise was accounted for entirely by a moderate
The July index of
further advance in price for services.
consumer prices is expected to show little change from June.
Abroad, in Western Europe, there has evidently been some
decline in industrial activity from the first to the second
quarter, mainly reflecting liquidation of steel and textile
inventories. With other demands holding up, there is now
more optimism with respect to activity over the balance of
the year. In Canada and Japan, activity in recent months
has been showing moderate rise. Elsewhere the situation is
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not apparently worsening,
except financially; inflationary
problems of many development and material areas continue
to be acute.
Mr. Thomas made the following statement with regard to financial
developments:
During the past two weeks System operations have been
largely concerned with techniques of market manipulation
at the sacrifice of the objective aims of adjusting monetary availability to current economic needs. Whether and
how these operations might have been avoided present questions of judgment and opinion to which there are no precise
answers. The important problem now is how to return to
operations directed toward the major objectives of System
policy.
The principal reasons for the weakness in Treasury bond
prices, which occasioned the support action, are varied but
fairly clear. They include: the technical position of the
market resulting from the large build-up of speculative
positions in bonds by temporary holders led on by expecta-
tions of continued declines in interest rates, the large
volume of Treasury borrowing in prospect for coming months,
the growing feeling that incipient economic recovery will
be accompanied by rising interest rates; and finally the
uncertainties arising from mid-East difficulties.
The middle two of these factors--economic recovery and
heavy Treasury borrowing--are likely to be continuing in-
fluences for many months ahead.
Their conjuncture presents
problems for Federal Reserve policies.
The task before this
Committee is to adjust its policies to deal with these forces.
They will presumably bring about expansion in credit demands.
Unless these demands are met from current savings or existing liquidity, there will be pressure for increased bank
credit and also for rising interest rates. Any attempt to
keep interest rates from rising would hamper the allocation
processes of credit markets and interfere with the use of
existing savings to meet credit demands. It would also
cause an expansion in bank credit and in the money supply
that would sooner or later become inflationary. Interest
rates should be permitted to adjust to market forces, with
no more expansion in bank reserves than is needed for sustained economic growth without inflation.
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Under pressures that have already developed, bond
yields have risen sharply since mid-June.
Long-term
Government bonds rose from an average of 3.14 per cent
to 3.40 per cent, and Treasury issues maturing in three
to five years rose from 2.1 per cent to over 2.50 per
cent.
Outstanding high-grade corporate bonds rose more
moderately from 3.56 to 3.70 per cent.
Offering yields
on new issues have had to be raised.
Bond yields are
higher than at any time this year and are generally above
yields that prevailed prior to late 1956.
Short-term
rates have fluctuated somewhat but those on Treasury bills
have continued at a low level as investors have sought
liquidity.
Coupon rates on recent new short-term Treasury
issues have been higher than the 1-1/4 per cent rate on
the June offering.
Current estimates of Treasury borrowing needs, after
allowance for market support operations and actual and
prospective attrition, indicate borrowing of $9 billion
or more by the end of December. These can be covered by
the $3.5 billion tax certificates now being offered, by
an additional $3 billion of borrowing around mid-October,
by an increase of $100 million each in ten of the weekly
bill issues at some time during the autumn, and possibly
by another cash offering of some $2 billion in December.
This volume of borrowing, together with a reduction of
about $4.5 billion in the Treasury's cash balance, would
cover a half-year cash deficit of $10 billion and cash
redemption of outstanding debt of About $4 billion (including some agency issues).
It is estimated that even with an economic recovery
equalling that of 1954-55, the Treasury's cash deficit
for this fiscal year as a whole would be around $9 billion,
To cover debt retirement
but a higher figure is likely.
that will occur in the last half of the fiscal year substantial additional cash borrowing would be necessary in
that period. Assuming a reduction of about $5 billion
in the exceptionally large cash balance of the Treasury
at the beginning of the fiscal year, the net increase in
the public debt both for the first half and for the fiscal
year as a whole would be about $5 billion. The absorption
of this amount of securities by investors should not be an
insurmountable obstacle, although the flotation of perhaps
as much as $18 billion of new issues in the course of the
year presents formidable problems.
The striking development of this year has been the
continued large demands on the capital market by business
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corporations, as well as by State and local governments.
New corporate issues in July, swelled by the U. S. Steel
Corporation $300 million offering, amounted to about $1,150
million, an amount exceeded in only three months of the
past two years.
Offerings by State and local governments,
at $575 million, were larger than had been expected,
although less than in several earlier months of the year.
These various issues have been successfully floated notwithstanding unsettlement in the Government securities
markets, but yields have been higher than earlier in the
year.
Calendars of new issues for August are light, as is
generally the case in that month. With capital expenditures
continuing to decline in the months ahead, corporate borrowing should decline, and corporations might also be able to
rebuild their liquidity.
Common stock prices have risen to new high levels for
the year and are only moderately below the peak of a year
ago, with trading volume heavy, despite reports of declining
corporate earnings.
There has been a moderate increase in
stock market credit.
Total loans and investments at city banks declined by
nearly $2 billion in the four weeks ending July 23, following
an increase of $3.7 billion in the preceding four weeks.
The
substantial net increase for the eight weeks compares with no
net change in the same period last year.
In July of this year
banks showed declines in their loans on securities and their
holdings of securities, which had increased even more sharply
in June.
The July decline in business loans exceeded the
moderate June increase, in contrast to last year when the
July decline was much less than the sharp expansion in June.
U. S. Government deposits at city banks declined in the
four weeks ending July 23 by nearly $4 billion, slightly
exceeding the increase of the preceding four weeks. At least
half of the funds thus distributed were apparently used for
reduction of bank credit and some went into the build-up of
other deposits. Demand deposits adjusted, which had shown
little change in June, increased by over $1.1 billion in
the past four weeks, in contrast to a small decline in the
same period last year. Last year in July there was a much
greater than seasonal increase in demand deposits, but most
of it occurred at banks outside leading cities.
Presumably
the increase for all banks in July this year will exceed
that of last year. This would raise the seasonally-adjusted
figure of the money supply above the peak reached a year ago.
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Interbank deposits at city banks have increased somewhat
more so far in July than they did in the same period last
year, indicating some accumulation of funds by nonreporting
banks.
The recent growth in time deposits practically
ended in July.
Member bank reserve needs declined in July as a result
of a $360 million decrease in required reserves and a small
decline in currency in circulation. Both of these decreases
were somewhat less than had been projected on the basis of
the usual seasonal pattern, reflecting the previously mentioned seasonally adjusted increase in the money supply.
Reserves were absorbed by a reduction of close to $400 million in the System portfolio and by a further gold outflow
of a little over $100 million. The gold outflow has
slackened compared with previous months, while foreigners
have increased somewhat their dollar assets. Weekly average
free reserves moved within a range of $450 million to $700
million. They are expected to average about $500 million
in the current statement week.
Next week, reserves will be supplied by System payment
for the new certificates and released by a decrease in required reserves resulting from a continued drop in Treasury
tax and loan balances. Allowing for a runoff in System
holdings of this week's bill maturities (not included in
estimates shown in the table) and other factors absorbing
reserves, free reserves may average close to $1.2 billion,
in the absence of further System operations. They will be
reduced next week by over $200 million as a result of a
required reserve rise resulting from the Treasury cash
financing,
partly offset by other factors.
If System hold-
ings of bills are reduced, free reserves might decline to
about $800 million. Assuming usual seasonal changes in
monetary demands without expansion, a further moderate outflow of gold, and some further Treasury cash financing,
free reserves would be likely to continue close to or above
$700 million until late in October.
In order to avoid an undue expansion of bank credit,
greater restraint than that would presumably be required.
To reduce free reserves below the $500 million level would
call for sales of about $300 million of bills in addition
to redeeming System holdings of regular maturities this week
and next.
With the level of reserves prevailing and the large
volume of cash redemptions of recent maturing Treasury
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securities, funds should be available in the money market
to absorb such a reduction in the System's portfolio, as
well as to take on the new Treasury offer of tax anticipation certificates.
The delicate question is what might be
the effect of such operations upon a bond market that is
in the process of adjusting to an expected and probably
inevitable higher level of interest rates. It is possible
that any attempt to retard this adjustment by support
operations may only make it more severe in the end.
Chairman Martin noted that the next regular meeting of the
Committee was scheduled for Tuesday, August 19.
he thought it
In looking back,
was a good thing that the policy directive was not
changed at the meeting three weeks ago.
However, he hoped that each
person in his remarks today would direct attention to clause (b) of
the directive.
The Treasury offering would be over tonight, and the
Treasury then would be out of the market for about two months.
fore, it
There-
seemed advisable in the discussion today to consider what
should be done to meet the situation.
For clause (b) of the directive,
the Secretary had suggested "to recapturing redundant reserves,"
while he (Chairman Martin) had in mind "to absorbing reserves when-
ever consistent with an orderly market."
While he did not feel that
there should be any dramatic change in the directive, the words "to
contributing further by monetary ease" seemed to him to be inappropriate at this time.
The Chairman then turned to Mr.
Hayes, who presented the
following statement of his views on the business outlook and credit
policy:
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Both current statistical data and the recent improvement in business sentiment suggest that an uptrend in economic activity may now be under way. Considerable doubt
remains, however, as to whether expansionary forces will
gather much momentum before autumn and whether the recovery
will be vigorous enough to result in a satisfactory rate of
utilization of labor and plant capacity by the year-end or
even in early 1959.
The crisis in the Middle East has injected major new
uncertainties into the outlook, and we cannot ignore the
possibility that it may trigger a strongly inflationary trend.
So far, however, there is fortunately no convincing indication
of such a development.
The initial speculative flurry in the
commodity markets accompanying the outbreak of the crisis appears to have lost most of its steam, and informal inquiries
we have made provide no evidence at all of a rush toward
precuationary buying on the part of either business firms or
consumers. We discussed this point at last week's directors
meeting, and the above view was confirmed unanimously. I
might add, just as a matter of interest, that our directors
expressed the hope that direct price and wage controls would
be initiated immediately if our forces should become involved
in actual fighting in the Middle East, in order to avoid the
kind of price movement which we experienced in the Korea
crisis.
It
does seem likely that at a minimum the heightened
international tensions will lead to widespread reconsideration of inventory policies both because of greater emphasis
on the need for ample supplies in the event of a sudden
emergency and because of greater expectation that price
increases may now be effected more readily than had previously been considered likely, with the Middle East crisis
serving as a catalyst. In my view, slackening in the rate
of inventory liquidation has probably already been a major
cause of the upturn in business to date, together with
some improvement in final demand, and this trend may be
expected to continue.
The recent gains in gross national product, industrial
production, employment and average hours worked are encouraging, as are the pronounced upswing in housing starts,
the increase in defense orders, and the demonstrated
stability of consumer spending, which should continue to
make a good showing under the influence of rising personal
income and somewhat more optimistic consumer attitudes.
Reports that the decline in corporate profits may have
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7/29/58
been slowed or even reversed in the second quarter may
have encouraging longer-run implications with respect
to plant and equipment spending programs.
On the other hand, I still feel some concern over
the probability that even a rather substantial advance
in over-all business activity during the remainder of
the year could still leave a relatively high level of
unemployment if "latent" productivity gains built into
the economy as a result of the recent investment boom
are translated into actual gains as the rate of plant
utilization rises. There is also a possibility that,
in the absence of any sharp forward push in major areas
of final demand, the upswing might lose its momentum
after a few months and thus fail to maintain sound
recovery.
The current cash financing of the Treasury is somewhat larger than had been expected before it became clear
that an abnormally high attrition in the recent refunding
was inevitable.
I must confess that I have some qualms
as to the rate which has been set for the new tax certifi-
cates, as it seems to be uncomfortably close to the market,
whereas some leeway would have seemed desirable in view of
the experience with the refunding.
At least it is a
satisfaction to know that the Treasury should now be out
of the market until October. It is also good to know that
the Treasury is moving now to obtain a more realistic debt
ceiling which should prevent a recurrence of last fall's
artificial Treasury financing problems.
In the area of bank credit, the four weeks to July 16
witnessed a sharp reduction in loans and investments-equivalent to something less than half of the increase of
the preceding four weeks. According to our estimates, the
seasonally adjusted money supply at the end of June,
although showing an annual rate of increase of 2.7 per
cent over the December figure, was still $1 billion below
the peak of last summer.
But,
with the prospect that the
banks will be called on to finance the major portion of
the Treasury's deficit in the second half of the year,
and after allowing for seasonal loan expansion, the
seasonally adjusted money supply may increase rapidly
during the latter half of the year. However, if we view
this in longer perspective, the growth in money supply
for the four years 1955-58, even with an increase of, say,
6 per cent this year, would average a little over 2 per
cent per annum, which does not appear unreasonable.
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As for policy, the growing evidence of business improvement, together with the possibility that the degree of ease
prevailing in recent months might produce a very rapid expansion in bank credit and the money supply, raises the
question whether we should consider some modification of this
degree of ease. My view, however, is that there will be time
to consider such a move after an additional month or two of
observation, which might permit a better appraisal both of
the vigor of the recovery and of the danger of a crisis-
induced inflationary trend.
In the meantime, we should
probably be content to restore free reserves to about the
level of $500 million prevailing up to the time of the
recent Treasury refunding.
(Parenthetically, I might say
that while the figures are distorted and we are prospectively
running way above that this week, I do not think that in
terms of actual atmosphere there has been any material change
from the degree of ease prevailing before the recent upset
market.) This will undoubtedly call for some outright sales
in addition to bill runoffs, and besides bills it may prove
useful to sell some of the System Account's certificates to
help meet this need without unduly depleting our bill holdings.
At the same time we cannot overlook the fact that the Government securities market is understandably still in a very
uneasy state, based in good part on fears of a change in
monetary policy, and that we may conceivably be faced with a
recurrence of disorderly conditions in the coming weeks.
Furthermore, I am troubled by the thought that the rise
in bond yields may conceivably have carried far enough to
constitute a threat to the recovery process.
It seems to me
that we should resist any further deterioration in
the capital
markets and do what we can to promote stability and eventual
strengthening of these markets.
to how this can best be done.
Admittedly I am puzzled as
Under these circumstances, and especially in view of
today's Treasury cash offering, I would prefer at this time
not to alter the directive by eliminating the word "further"
from the phrase "contributing further by monetary ease to
resumption of stable growth of the economy"--although it
may be well to do so or to make some other change in wording
at an early subsequent meeting. I would therefore feel
inclined not to adopt the wording that has been proposed by
the Secretary. Believing as I do that we should avoid at
this time even any suggestion that we may contemplate a
change in basic policy, I would be opposed to a change in
discount rates. Although the recent growth in stock market
credit suggests that it would be well to keep this area
under close surveillance, the growth has not been of such
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7/29/58
magnitude as to provide justification at this point for
considering higher stock margin requirements.
Finally,
in view of the continued unsettled conditions in the U.
S. Government securities market and the delicate international situation, I think it would be unwise to make
any public statement indicating termination of the instructions, publicly announced on July 18, by the Committee to the Manager of the Account to purchase
Government securities in addition to short-term
Government securities.
Mr.
Johns said that although there appeared to be evidence,
perhaps convincing evidence, that some improvement in business had
occurred, was occurring, and might continue to occur, he had not yet
been able to reach the conclusion that the time to indicate a change
Although
in policy--at least a radical change in policy--had arrived.
it would appear that reserve projections were much higher than would
have been the case except for the events of the last ten days-perhaps higher than the Committee would like them to be--he had the
feeling that rapid steps to absorb redundant reserves--assuming that
anyone knew how many were redundant--might be misconstrued.
It was
his feeling that, at least for a while, the toleration of some
redundant reserves might not be harmful, and therefore he would be
inclined to move cautiously rather than precipitately.
Mr.
Johns said that he had not come to this meeting prepared
to argue for a change in the directive and that, for reasons which
he was not able to state clearly, he felt unsatisfied with the suggestion that the Committee merely say in clause (b) that operations
were going to be conducted with a view toward absorbing redundant
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-17-
reserves.
Instead of language along these lines, he would prefer
to leave the directive about as it stood.
He would be a little
more inclined than Mr. Hayes to argue for a change in margin
requirements.
Although some might say that the increase in stock
market credit outstanding was not unduly large, it
and had been going on for some time.
was continuing
In the circumstances it
might
be that the Board could appropriately conclude that it should attempt
to slow down the utilization of credit for that purpose.
Mr. Bryan made substantially the following statement:
Economic statistics in the Sixth District give an increasingly clear picture of economic recovery. It is our
judgment that national economic statistics also give the
same increasingly clear picture.
The matter of overshadowing importance at this time,
however, seems to be the extremely grave problem of managing
monetary policy and Government finance.
It is my own
judgment that it would be only the slightest exaggeration to
say that we face in monetary policy and national finance a
situation of approaching crisis. This situation is compounded of a number of elements, all of them tending to be
cumulative rather than self-cancelling.
1. Economic recovery is obviously in process. The
process will be stimulated in the next several months as
Government spending from deficit finance is piled on top
of a natural economic recovery and the Government deficits
appear as private deposits available for expenditure.
The
process of economic recovery, in the light of recent
history, creates the expectation of an upward adjustment in
interest rates.
2. The natural adjustment of interest rates upward is
compounded by a genuine loss of confidence in the future
integrity of the dollar as a store of value. There has been
continuous, pervasive, and increasingly convincing propaganda
to the effect that inflation is
inevitable.
That propaganda
now carries almost universal conviction. Such an almost
universal conviction means that the increase of yields on
fixed income obligations is destined to be greater than would
7/29/58
-18-
be likely as an uncomplicated response to economic
recovery.
3. The problem of yields on fixed income obligations is increased by the fact that the banking system
has intended to use its increased security holdings and
security loans, on some timely occasion, to provide the
cash requisite to the acquisition of higher yielding
loans. The same is true in varying degree of other
investors and investing institutions. This means that
we are likely to face a continuing, though probably
irregular, attempted liquidation of Government securities
from these sources in the next several months.
4. The normal liquidation for the purpose of using
fixed income securities as a source of cash has been increased by the revulsion in Government security prices.
The revulsion itself has created in both the banking and
nonbanking groups a large number of unwilling holders of
Government and other fixed income securities.
5. The perversity of markets being what it is, the
prospective increase in yields is likely to have the effect
of hastening and of increasing fixed income offerings as
borrowers endeavor to advantage themselves by getting ahead
of anticipated increases in yields.
6. The sophisticated investment public has been shocked
by an ill-considered Treasury support operation in the 2-5/8s.
The sophisticated investing community has been even more
shocked by the System's operation that began on the presumption
of correcting disorder but that turned promptly into one of
the most massive support operations ever undertaken. The
shock has been the greater because the support operation has
been so resounding a failure and because it seems to forecast the use of the Federal as a complaisant medium of inflation.
We will be well advised in such a situation, I think,
not to be deceived by the possibility of temporary rallies
or the assurances of bond dealers or possibly institutional
investors. The wound to confidence in my opinion goes too
deep for simple reassurance or for cure by exhortation.
We will do better to listen to the investor who says,
"I intend to get out of bonds on the first rally but think
I am foolish. I'd probably better dump my bonds now.".. to
the investment house that says, "Bonds are out the window
for anyone who wants to keep his money"....to the banker
who says, "I used to think there was some hope of stopping
inflation.
Now, I guess there really isn't a chance...."
7/29/58
-19These are just overheard by chance in a single minor
town, Atlanta.
What I am trying to say in listing the foregoing points
is that, in my judgment, we are facing a very real deterioration of confidence, approaching crisis proportions within the
foreseeable future. Under such circumstances, the fundamental
problem, both for the System and the Treasury, is the restoration of confidence in the future of the dollar. This will not
be easily accomplished, but all other monetary and economic
problems pale into insignificance.
In approaching the solution to the problem a recognition
must be had of certain points:
a) We face the real possibility of a radical adjustment
of interest rates upward, the more particularly in the longer
sectors of the market, and more or less despite anything that
the System can do about it.
If this be considered an alarmist
possibility, we should ask ourselves, "Who wants a long bond,
or even an intermediate obligation, if he is convinced that
inflation is a continuing certainty?"
If it be believed that
we can stop the adjustment by supplying unlimited reserves to
the banking system, then we should recall that the investment
community and a considerable segment of the public at large
is now sufficiently sophisticated to realize that our action
simply makes inflation the more certain, so that, by an un-
limited supply of reserves in an effort to prevent the upward
adjustment of yields, we confront ourselves with the probability of a perverse effect, our very action increasing the
severity of the adjustment apparently in the making.
b) We should also recognize that if we stand in the way
of the market, whether on the theory of nudging or probing or
on the basis of some preconceived yield, or in an effort,
sincere though mistaken, to do the Treasury a favor, we are
likely to wind up by monetizing a considerable fraction of
the public debt and, as said, making the revulsion against
fixed income obligations, now a probability, practically a
certainty.
c)
The Treasury is under the necessity of getting the
national finances in order.
portions, when related
indeed, even desirable
recovery, now contains
in the light of what I
A deficit of insignificant pro-
to the gross national product and,
as an encouragement to economic
the seeds of disaster when considered
would call a rapidly developing con-
fidence crisis.
Now we have the question of what can be done. I think
that the first step to take is to resolve that we will not
7/29/58
-20-
stand in the way of yield readjustments.
The faster those
come the better. We should assist them by getting free reserves below $500 million and getting them there promptly.
Also, at some opportune time the public should be reassured
that the System is not going to be an engine of inflation.
I do not quite know how you give that assurance except to
increase the discount rate at the first opportunity. These
steps all entail risks, risks that none of us would have
imagined three weeks ago but which must be accepted in order
to avoid greater risks. That we are compelled to accept them
is the consequence of recent events and recent policy.
I am in favor of changing the directive.
Mr. Bopp made substantially the following statement:
In general, business developments in the Third District
continue to show some improvement. There has been a marked
change to a more optimistic attitude toward the business otlook. Businessmen report that inventory liquidation has been
mostly completed and that employment prospects are improving
slowly.
The Mideast crisis is reported to have had practically
no effect as yet.
Businessmen indicate no moves to restock,
and there is no evidence of anticipatory spending by consumers.
There are reports that labor unions, with contracts coming up
for renegotiation, would like to delay such negotiations until
the foreign situation clarifies.
Several problems confront the System in the realm of
monetary policy. The immediate problem is to work down the
level of free reserves, now projected at nearly $1.2 billion
for the week ending August 6, to a more appropriate level.
This requires either liquidation of earning assets or an increase in nonreserve liabilities.
Substantial liquidation of bills should be pursued even
though the yields might rise to, say, 1-1/4 per cent so long
as this does not unsettle the money and capital markets unduly.
At the same time it would seem appropriate to attempt
to negotiate with the Treasury an increase in its balance at
the Reserve Banks to absorb reserves for a temporary period
as needed.
The inherent merit of this move is reinforced by
the fact that the excess reserves were created in support of
the Treasury financing.
An even more difficult problem, though not perhaps as
urgent, is whether operations outside the short-term market
should be limited to purchases and thus become a one-way
-21-
7/29/58
street. If so, over time we will tie up more and more
of our resources and thus reduce our ability to restrict.
The portfolio of short securities sets the limit to the
amount of reserves that can be absorbed through their
liquidation. Although the System is not near that limit
at the moment,
it might be well to consider the possi-
bilities of liquidating other than the shortest issues on
appropriate occasions, as in periods of restraint, rather
than defer such liquidation until the portfolio of bills
has been exhausted.
With regard to the directive, I would be in favor of
a change of the general type mentioned by Chairman Martin,
that is, to absorb reserves consistent with an orderly
market.
Mr.
Fulton reported that in
to be a change in sentiment,
the Fourth District there seemed
a feeling that the last quarter of the
year would be materially better than the present level of activity.
The steel industry, he said, was reporting a better July than it
had
at first anticipated, with some orders coming in for August and
September delivery, particularly in the automotive field.
It was
reported that all segments of users were buying some steel, mostly
as the result of over-liquidation of inventories.
However, unemploy-
ment was not being relieved to the extent that the increase in activity
would seem to warrant.
It
would seem that there had been some addi-
tions to productivity and, as Mr.
Hayes had said, the unemployment
figures might be something to conjure with for some time.
investments, it
Capital
seemed, were not going to take the same number of
men as heretofore.
Mr. Fulton said he agreed that the open market operation in
which the System had just participated was a saving one--or designed
7/29/58
-22-
to be to some extent a saving one--for
the Treasury.
To retain in
the System Account indefinitely the securities which had been purchased would deprive the System of a flexibility that it
Therefore, he would favor running off those issues,
needed.
or other issues
in the short-term sector, and he felt that those in the market would
understand such an operation.
Inasmuch
as the Committee had an-
nounced that the System was going into the market for a definite
purpose, there should be no one-way street and the System should
have the right to come out again.
Mr. Fulton said he concurred in the feeling that the increase
in
stock market credit had been very substantial and that an upward
revision in margin requirements might be appropriate.
It
would have
a sobering effect on the gyrations of the stock market and it
would
have a salutary effect on the long-term end of the bond market.
Mr. Fulton went on to say that the System should absorb the
large accumulation of reserves in the banks as rapidly as possible
without upsetting the market.
They might be dormant at present
because of the rapidity with which they were created, but they would
not stay that way very long and System operations therefore should be
aimed at reducing them very materially.
Mr.
Fulton said he thought it would be appropriate to change
the policy directive, possibly along the lines of some of the directives that the Committee had issued at times in the past which
7/29/58
-23-
indicated a desire to sustain growth in the economy
without en-
couraging inflationary influences.
Mr.
Shepardson said that Mr.
Bryan had stated eloquently
his own feeling about the present situation.
As far as the general
economy was concerned, he thought that there had been clear evidence
of some change in direction.
While one could not yet say that
developments were reaching an explosive point on the upside, the
evidence of a change in
the offing had exerted an effect on the
total market situation.
With respect to the exercise that the
System had gone through during the past several days, he did not
understand at the time, and he still did not see, to what extent
the System had helped.
However, regardless of the effect of the
Treasury financing the operation had put the System in a position
from which it must extricate itself as promptly as possible.
Mr.
Shepardson said that he saw a great deal in Mr. Bryan's
thesis of a loss of confidence.
When the economy moved into a down-
turn, the System had moved aggressively to make possible a recovery,
but with frequent statements that at the appropriate time it must
have the courage to move with equal vigor on the other side.
The
developments of the last week, he said, made it necessary to move
vigorously at this time to absorb some of the redundant reserves,
to
and in so doing the Account should not necessarily limit itself
bills but use any appropriate action that could be taken.
As
7/29/58
quickly as possible, the Committee should try to recapture the
position that it had lost in this recent period.
Mr. Shepardson said that he would favor a change in the
policy directive along the lines that Chairman Martin had indicated.
Mr. Robertson made the following statement:
I have spent some time trying to ferret out the good
aspects of such a miserable bit of monetary-policy backsliding as has been witnessed over the past ten days, and
have found some in the form of lessons:
1. Not only must we be on our guard against panicky
reactions in such circumstances--all of us, I suppose, are
now only too alert to that danger--but we must also beware
of being so wary of that hazard that we do not act with
sufficient speed and decisiveness when the situation really
demands it. We responded too readily to the cry of "Wolf!"
on this occasion, and we may do so again; but such ex-
periences must not cause us to disregard the warning signs
and remain passive and complacent when the situation actually
calls for vigorous measures.
2. The experience indicates the need for being more
explicit in our directions to the Manager of the Account so
that we cannot be so easily maneuvered from an action "to
correct a disorderly market" to one designed to "support a
Treasury issue."
The experience indicates the futility of "support"
3.
actions. We add to the reserve supply at a time when we
should be reducing it and still by such action we do not
prevent attrition in substantial amounts, which, of course,
is the motivating reason for the action. At the same time
by adding to the money supply at exactly the wrong time we
multiply the difficulties of making monetary policy an effective instrument in maintaining a proper economic
equilibrium.
4. The experience also shows how easy it is to slip--
once you have gone off the wagon--and do things which you
later hate to try to justify but which at the time seemed
worth doing--I refer, of course, to "swaps." We should not
engage in swap transactions even when, as in this case, it
seemed to be to our advantage to do so.
We must put the experience of this past ten days behind
and
strike out on the basis of the lessons with energy
us
and rectitude to get back on the straight and narrow path,
-25-
7/29/58
the path of monetary righteousness--a path which permits
monetary policy to be most effective in keeping the money
supply in proper relationship to economic conditions,
without being warped out of shape and effectiveness by
being used for such purposes as underwriting Treasury
issues and altering interest yields and prices in various
segments of the Government bond market in accordance with
some preconceived pattern which does not seem to jibe
with the forces of the market place.
If we believe in a free market--as I trust we do--we
must permit it to function even when its results seem to
veer from our own concept of a proper pattern and even
when it seems to be creating difficulties for the Treasury
in its financing program.
Mr.
Robertson said he would take it
for granted from the re-
ports of Mr. Young, Mr. Thomas, and others around the table that
economic conditions unquestionably were on the upswing and that the
Committee's policy of monetary ease, as indicated in the current
policy directive,
was no longer appropriate.
As to operations,
there should be a tightening to the fullest extent possible by
runoffs and sales of bills and other short-term securities.
Per-
haps this should be augmented by changes in reserve requirements
and margin requirements.
However,
the longer-run view would indi-
cate that those actions might not be appropriate now; they might be
needed later on when inflationary pressures call for vigorous
countering moves.
Mr. Robertson said he agreed with those who had advocated a
suggest "to
change in clause (b) of the policy directive and would
absorb reserves to the fullest extent consistent with an orderly
market."
need for
Language of that kind would put emphasis on the
7/29/58
-26-
for absorbing reserves but would provide also for maintaining a
consistent position.
Mr. Mills said that the month of July 1958 was going to be
recorded in the history of the Federal Reserve System as a turning
point.
None could argue that this was not a period that would take
hard thinking and require hard decisions. Mr. Mills said that he
shared all of Mr. Bryan's concern about the deterioration of confidence in the financial community.
However, his own approach to
the correction of that kind of a situation was exactly opposite,
and he would like to make the case for intervening to support the
Government securities market.
Mr. Mills then made the following statement:
The Federal Open Market Committee is faced with the
difficult decision of whether to
allow prices on U. S. Government securities to
find a new trading level unassisted by Federal
Reserve System action; or
(2) vigorously support the U. S. Government securities market.
It is argued that if let alone, the U. S. Government
securities market will settle down to a new low level of
prices at which two-way trading will resume actively. In
favor of keeping the Federal Reserve System out of the market, it is further argued that the drastic drop that has
taken place in the prices of U. S. Government bonds reflects
a realistic alignment of long-term interest rates to a
possibly protracted period of international emergency and
to a return to a Federal Reserve System policy of credit
restraint to control incipient inflationary pressures that
are making their appearance along with rising business
activity. Fundamentally, those who favor a hands-off
approach to Federal Reserve System policy action place
economic considerations ahead of the growing threat of a
financial emergency.
(1)
7/29/58
-27-
In the light of the present situation and especially
because of yesterday's further substantial drop in the
prices of U. S. Government securities, there are cogent
reasons for attacking the financial emergency in advance
of developing Federal Reserve System credit policy solely
for economic considerations. In my belief, the Federal
Reserve System would err in allowing prices for U. S.
Government securities to suffer further serious reductions
or to temporize with such a situation by half-hearted support actions undertaken at succeedingly lower stages in
the prices of U. S. Government securities. Such a policy
would tend to force U. S. Government bond prices steadily
lower, increase the volume of offerings, and threaten a
market panic, all of which would make the Federal Reserve
System's problem of correcting a badly disordered market
condition most difficult. Moreover, to delay action in
supporting the U. S. Government securities market will
stand to aggravate the difficulty of handling the substantial volume of reserves that would presumably have
to be injected into the commercial banking system at some
future date when System action to support the market could
no longer be put off.
As a practical matter, the Federal Reserve System's
problems have already been complicated by the fact that
so many commercial banks have extended the maturities of
their investments in U. S. Government securities and may
now be frozen into such positions by the market depreciation in their holdings, which depreciation would grow
further as long as the prices of U. S. Government securities should continue to fall. The financing problems of
the United States Treasury are involved in this situation
in that to the extent that commercial banks have become
frozen into their investment positions in U. S. Government
securities, their power to free themselves from such
investments in order to engage either as underwriters or
investors in new issues of U. S. Government securities is
correspondingly eliminated, except as the Federal Reserve
System should follow the economically undesirable and
inflationary alternative of constantly supplying the commercial banking system with new reserves in order to
support their participation in U. S. Treasury financing
operations.
Everything considered, Federal Reserve System action
to vigorously support the U. S. Government securities
market is called for at this time.
7/29/58
-28Mr. Vardaman said that he agreed with Mr. Bryan in his
excellent photographic exposure of the situation with reference
to the paramount need for restoration of confidence, and assurance
that the System will not become an operational aid to inflationary
pressures.
He also agreed with Mr. Bryan's analysis of the effects of
our recent operations in the Open Market Account; and he believed
strongly that the Federal Open Market Committee should allow the
pattern of interest rates to reach, in as orderly manner as possible,
a logical level, in view of the economic recovery apparent, and in
view of the international situation.
Mr. Vardaman said, in
passing, that he would like to express
his opinion that telephone meetings were generally unsatisfactory,
and even dangerous,
and should be avoided except under real emergency
conditions, and stated that he did not think that a temporarily disorderly market would ordinarily be a sufficient cause for such a
meeting.
He pointed out that, in his opinion, these telephone con-
ferences had a potentially panic aspect which was not fair to the
participants,
since the participants were denied the advantage of
meeting face to face with their other members and allowing a full
discussion of the grave problems.
In substance, he felt that any
problem which was serious enough to warrant a telephone meeting
made it all the more important that the situation should be dealt
with by a personal gathering of the members of the Committee.
7/29/58
-29As to the directive,
Mr. Vardaman stated that he felt the
words "further" and "ease" should be eliminated, and suggested that
a proper wording might be something like "to contributing by appropriate monetary policy to sustainable growth of the economy."
He
would not make any reference in the directive to orderly market
conditions or to absorbing redundant reserves.
Mr. Leach said that favorable economic signs were widespread
in the Fifth District.
The cotton textile industry had ad encourag-
ing market developments in recent weeks which portended a better
second half, bituminous coal was facing an improved demand situation,
and cigarette production continued to do well.
In fact, manufacturing
man-hours figures for June showed gains in virtually every line, as
did employment in
nonmanufacturing industries.
Despite smaller acre-
ages, the outlook for 1958 farm production was considerably improved
over 1957's record.
Department store sales for July were now esti-
mated at 5 per cent above June for the best monthly total this year,
due partly, but not entirely, to increased trade in the District of
Columbia following the Federal pay increase.
The supply of funds
for residential mortgage loans continued sufficient to exert downward pressure on rates.
The most common rate on conventional loans
appeared to be 5-1/2 per cent but some of the Reserve Bank's contacts reported rates as low as 4-3/4 per cent on prime loans.
Mr. Leach said, with respect to policy, that he was worried,
as he had been at the July 8 meeting, about further increases in
the
7/29/58
-30-
liquidity of the banking system and the economy if the System continued net free reserves at the $500-$600 million level. Moreover,
there was stronger evidence now than three weeks ago that there had
been a definite change in
economic conditions and prospects since
the current directive was adopted on March
4. In early March the
economy was in a rapid decline which had persisted for several months,
with no reversal in sight.
Accordingly, a policy that was appropriate
then seemed clearly inappropriate now, when economic developments were
increasingly favorable.
He would not like the record to indicate that
the Committee had seen no change in economic conditions between March 4
and the present time.
Mr. Leach went on to say that in his judgment the System had
already supplied ample liquidity.
The financial stage had been set
for economic recovery and in his opinion recovery was under way.
Providing redundant liquidity would be highly dangerous because it
would aggravate inflationary pressures in the future, and he would
therefore favor a shift to less ease.
Admittedly, such a change
would be difficult to implement in the immediate future because of
current Treasury financing and the large payment that would be made
on August 1 for the new certificates that the System Account pur-
chased last week.
However, it
now appeared that there would be
quite an interlude before the next Treasury financing and he considered it imperative to move toward less ease as soon as practicable.
7/29/58
-31-
This implied net free reserves below the $500-$600 million level
that had been maintained up until now, and it
directive highly desirable.
made a change in the
In considering such a change the Com-
mittee might want to look at the outstanding directive and see what
about that directive it
did not like.
For example, it
now appeared
that resumption of economic growth started in April or May.
Also,
consideration might be given to whether the word "ease" should be
continued in the directive; personally, he thought that it should
be continued because the upturn was still very small and there was
still
a long way to go before achieving complete recovery.
One way
in which clause (b) of the directive might be worded to reflect a
change in emphasis toward less ease would be the following:
"to
contributing by monetary ease to recovery of the economy without
creating redundant liquidity."
In making these comments, he was
assuming that the System would endeavor to recapture as soon as
possible the reserves that would become available on August 1.
Mr.
Leedy stated that the economic situation seemed to
provide clear evidence of the direction in which policy should be
moving but that other elements in the picture today tended to obscure
the economic considerations.
In particular, he referred to the
inflationary psychology that was rampant, fed in part by the situation in the Middle East, and to the Treasury's needs for the balance
of this year.
To him, it was difficult to reconcile support of the
7/29/58
-32-
Government securities market with the System's responsibility to
provide only the requirements of the economy as far as the money
supply is
concerned.
It seemed to him that the Committee would
have to face up to that problem and make a very positive decision.
He was not going to make any judgments from hindsight as to what
had been done recently, but it
seemed to him that from this point
forward, with the Treasury having announced that it
would be out
of the market until October, the System should move as quickly as
it
could to get back into the position that prevailed before the
recent open market operations took place.
In saying this, he
recognized that there might be great difficulty due to the uncertainties in the market, but he had the feeling that continued
participation by the System in the market by way of support operations might have an effect opposite to that intended.
In other
words, the System might actually be contributing to inflationary
psychology.
Mr. Leedy expressed the view that the policy directive must
be changed if it was going to reflect accurately what was intended
between now and the Committee meeting on August 19.
The operation
that he had in mind would mean orderly absorption of some of the
redundant reserves to the extent possible.
In these circumstances
"with
he had drafted as a possibility for clause (b) the following:
excess of those
a view to the orderly absorption of reserve funds in
7/29/58
-33-
required to provide monetary ease for the resumption or promotion
of stable growth of the economy."
He expressed the view that as
soon as possible, consistent with the market situation, an announce-
ment should be made to the effect that the directive authorizing the
Manager of the Account to operate in all sectors of the market had
been withdrawn.
Such a statement, of course, would have to be
carefully worded.
It should point out that Committee policy con-
tinued to be one of operating in
if
other than short-term securities
necessary for the correction of a disorderly market.
It seemed
to him that the very fact that public notice had originally been
given might cause some uncertainty in
the market and that in fair-
ness to those dealing in the market word should be given that the
directive announced on July 18 was no longer in effect.
Perhaps, Mr. Leedy said, the time was approaching when there
should be less ease than there had been.
For the next three weeks,
however, if it were possible to cut back to the point before the
recent open market operations took place, he felt that that would
be doing extremely well.
Afterward, it might be appropriate to take
a look to see whether a lesser degree of ease should be the policy.
Mr. Allen reported that a survey of Seventh District businessmen and bankers indicated that the situation in the Middle East had as
yet had little,
if
any,
effect on business plans or conditions.
There
seemed to be agreement, he said, that inventory liquidation should end
7/29/58
-34-
soon, because it
had proceeded for so long without a corresponding
drop in gross national product and because the Middle East situa-
tion and the prospects for further inflation would bring about at
least a review of inventory situations, and possibly actions.
Local
producers of steel and copper products reported that the pickup in
orders which was reported in May and June was continuing.
boost for steel of $5 or $6 per ton was still
probably in August.
A price
generally expected,
Opinions expressed at a meeting of Chicago area
housing economists on July 23 confirmed improvement in that sector.
New mortgage lending by savings and loan associations was running
well below 1957 earlier in the year but was now somewhat higher.
Employment trends appeared to be moderately upward in all States
in the district except Michigan, although it was doubtful that any
State other than Iowa was witnessing better performance than the
nation.
One encouraging sign was the call back of 1,000 workers
by Caterpillar.
Sales of road-building machinery had begun to
improve several months ago but inventories were so heavy that there
had
been no need to increase production.
Mr. Allen said that a number of local firms had told the
Reserve Bank that they were enjoying a substantial improvement in
output per worker.
Employees seemed to be putting forth a greater
effort, personnel managers had been able to be more selective on
new hirings, and absenteeism had been reduced very sharply.
For
7/29/58
-35-
some firms the increase in output per worker, both white collar and
blue, appeared to be in the order of 4 or 5 per cent over the past
six months to a year.
All of this suggested that unemployment might
remain fairly high even if over-all activity improved significantly
from now to the end of the year.
In Detroit, for instance, where
unemployment was expected to run between 315,000 and 335,000 in late
August as a result of the model changeover shutdowns, unemployment
of 200,000 was expected even after the new models were in production.
The Michigan Employment Commission stated that eight years' seniority
would be the minimum requirement when rehiring began, and outmigration of low seniority workers would doubtless occur.
Mr.
meetings,
Allen went on to say that, as he had reported at recent
the agricultural areas of the district were for the most
part in good shape.
corn belt.
Crop conditions continued favorable across the
Allis-Chalmers and International Harvester reported that
sales of farm machinery and equipment were above 1957 frr the first
half of the year.
Continuing, Mr. Allen said that business loans at the district's
reporting member banks had continued to decline, as had been the case
in the nation.
Because there was so little use of the Reserve Bank's
discount window, he was not as fully informed as he would otherwise
be regarding the investment portfolio situations in member banks,
but he did know that two of the largest banks overinvested--speculated
was the word--in the 2-5/8 per cent issue.
-36-
7/29/58
As to open market policy, Mr. Allen said he was sad and unhappy about what had happened in the last few weeks.
Because it
bore out what someone had said this morning, he wished to read his
comments at a telephone meeting on April 24, 1957, when the Treasury
was urging the System to enter the market to support what it feared
would be an unsuccessful financing operation. Mr. Allen then read
the following comments:
The Treasury in its past financing has taken political
action with bad economic results.
Characteristically, as happens in every country, they
want the Central Bank to bail them out. They don't want or
dare to admit their mistakes--for political reasons.
If we bail them out it is at the expense of the
country--which is not the right thing to do--and furthermore,
it is the way to our own ruin. Once we assist by bailing
out--then we are responsible--and we should confine our
responsibility to our own field--in this and any other administration.
The Treasury--and Burgess in particular--are controlminded--we should not be--we should be market-minded. If
Burgess were in our shoes he would help the Treasury because
he is control-minded. We must keep ourselves and the Desk-market and not control-minded.
Mr. Allen said it might be argued that those comments did not
apply to the same extent at present.
plied in large measure.
However, he thought that they ap-
Even at that time, he recalled, the international
situation was advanced by the Treasury as an argument.
It was obvious, Mr. Allen said, that he hoped the Committee
would "get back on the wagon and take the pledge again." Last
Thursday the Committee apparently did decide to go back on the wagon
and he hoped that the public would be advised as soon as possible.
7/29/58
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Mr. Allen said it seemed obvious that the directive should be
changed.
Of the suggestions that had been made, the wording pro-
posed by Chairman Martin would suit him best at this time.
Mr. Deming stated that the economic picture in the Ninth
District, based on a review yesterday, tended to support the feeling
expressed at this meeting that an economic upturn had occurred in
the country.
Within the district, however,
there was weakness in
the mining areas of Minnesota, Wisconsin, and Michigan, and the
Reserve Bank had taken a hard look at the mining sections through field
investigation.
There were now about 25,000 people unemployed in those
areas, 2-1/2 times the number unemployed last year, and it appeared
that this situation would continue through the balance of the year.
So far this year, Lake Superior ore shipments were down 60 per cent
from a year ago.
Copper was off only 6 per cent but 1957 was 6 per
cent below 1956.
While the tourist business was good, it was not as
good as had been hoped for and it was not enough to offset all of
the adverse factors.
People were running out of regular unemploy-
ment compensation benefits and, although all three of the States
had passed legislation to utilize Federal loan funds to extend
payments, those payments also would run out before the mining
regions were restored.
That was the major area of weakness in
the district, and otherwise everything was quite good.
-38-
7/29/58
Mr. Deming said that, having been on vacation for three
weeks, he had formed his impressions of open market developments
from reading about what had transpired.
He shared some but not
all of the concern expressed about the return to inflationary
psychology.
While he was sorry that the System had had to go
into the market last week, it was an action taken in the light
of the circumstances.
Now, however, the System should get back
as quickly as possible to a lower and more realistic level of
free reserves although, in view of the present state of the market,
he would not favor operating on the selling side except in the
shortest securities.
Mr. Deming said he was not sure that the System had contributed so completely as had been suggested to an excessive liquidity
position of the banking system.
Statistics compiled recently in the
Ninth District showed that the country banks had gone very strongly
into long-term securities to meet earnings problems, and to a more
limited extent the same thing also was true of the city banks.
Therefore, with the change in the interest rate structure the banks
were not in quite as liquid a position as might have been thought,
and the presumed upward adjustment in rates would act as something
of a brake.
Mr.
Deming felt that it would be a serious mistake to take
any dramatic action at this time to underline the point that the
7/29/58
-39-
System feared inflation.
quite good.
The System's record, he thought, was
He would not favor a discount rate change at this
time for he believed that the hazards of an upward adjustment
would far outweigh the gains.
If it were decided to make a change
in the policy directive, he would want the directive to reflect
the economic change that the Committee saw in process as well as
the unique temporary intervention in the market.
He would suggest
"to contributing to the continuance of economic growth while absorbing redundant reserves."
Mr. Mangels stated that further economic improvement was
evident on the West Coast as in other parts of the country, although
the degree of improvement was rather moderate.
Business firms seemed
to have resumed buying to restore inventories for current needs but
there was no evidence of undue and unnecessary inventory accumulation.
In the course of a recent informal survey it was indicated that this
would not be worthwhile for business for in the event of a national
emergency prior precautionary inventory increases would be taken
into consideration in subsequent allocation of materials.
Therefore,
they were just continuing to take care of items in short supply.
There was some evidence, Mr. Mangels said, of a little more strength
in defense supporting expenditures.
Increases were noted in employ-
ment at Government ordnance plants, and the airplane factories were
maintaining steady employment.
While retail sales were holding up
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7/29/58
well, there were indications that July might be somewhat lower than
June.
Housing starts had improved materially; the Federal Housing
Administration had advised the Reserve Bank that requests for inspections and appraisals in the second quarter were double those
in the second quarter of 1957.
Also, there was some demand for
twenty-five year, 10 per cent down-payment mortgages.
Auto sales
in June were down somewhat from May but this probably reflected a
seasonal pattern.
Industrial plant construction had not shown a
great deal of improvement, either in terms of actual construction
or planning, but in the second quarter heavy engineering contract
awards exceeded the same period in 1957 by 11 per cent.
Although
employment was up 1/2 per cent in June, there had not been any
moderation in unemployment totals.
Insured unemployment dropped
less than seasonally in June and it appeared that unemployment for
July would be slightly above the national average, due primarily
to material increase in the labor supply on the West Coast.
In
Oregon and Washington the new unemployment compensation year started
July 1, which would result in quite a rise in claims because unemployed persons who had exhausted their benefits would be reinstated.
Mr. Mangels said that, although real estate loans were up $17
million and agricultural loans were up $14
million, total bank loans
for the three weeks which ended July 16 were down $47 million, most
of the decline having been in loans to Government securities dealers.
-41-
7/29/58
The rather substantial increase of $355 million in demand deposits
was four times the increase last year, and for the three-week period
the increase was almost as large as for all banks in the United
States.
Time deposits continued to increase.
Bank borrowings were
virtually nil and Federal funds sales exceeded purchases slightly
in moderate volume.
Turning to the national picture, Mr. Mangels said that there
were rather clear signs of a bottoming-out of the recession. There
were some signs that a pickup was being generated, but no conclusive
evidence that this pickup would be permanent. Instead, it might be
on a somewhat temporary basis.
situation and its
With regard to the international
effect on Federal Government expenditures,
Mr.
Mangels said that unless the Government expanded its position in
the Middle East or was drawn into other ventures, there might not
be any great increase in Federal expenditures.
Nevertheless, there
would be a heavy calendar of Government financing and refinancing
for the remainder of this year, and it would probably be necessary
to supply additional bank reserves in the next few months.
There
probably would be considerable churning in the market because of
the large number of holders with large amounts of securities who
did not exchange and allowed the maturities to mature.
The new
Treasury cash offering might absorb some of those funds.
Mr. Mangels felt that a change in the policy directive
along the lines suggested by Chairman Martin would be quite
7/29/58
-42-
appropriate for the next three-week period.
Because the present
volume of free reserves was above the range of the normal thinking
of the Committee, the objective should be try to get back to a more
normal basis--somewhere around $500 million or perhaps a little
less.
Mr. Mangels went on to say that he saw no reason to change
the discount rate at the present time.
He felt that it probably
would be in order to make some announcement of the Committee's
return to a "bills only" policy but that it might be advisable to
wait a little while until the situation settled. Then, it might
be announced that as of a particular date the special authority
was terminated and the System had not intervened in the market
since that time.
Mr. Irons stated that he would not dwell on the specifics
of the economic situation in the Eleventh District.
In general
terms, however, recent economic developments both in the nation
and the district convinced him that the worst of the recession
had been seen and that the country was moving into a period of
recovery.
In the circumstances, System policy should now be
related to the rate of economic recovery,and the degree of potential
inflation apparent in that development, rather than to the recession
and various problems that might arise out of it.
In view of his
appraisal of the economic situation and because of his feeling that
System action should be governed by the economic pattern and not
predominantly by the Treasury's problems, he felt that the Committee
7/29/58
-43-
should move away from ease.
Accordingly, he would like to see the
words "contribute further through monetary ease" taken out of the
directive.
While he would not want to shift to a policy of real
restraint, he would move away from ease and, feeling that a change
in policy of that sort would be beneficial, he would not be disturbed if
the market recognized it.
Some of the trouble in the
Government securities market, he said, had been the result of bad
appraisals on the part of the market, and he would not be concerned
about taking action that could be regarded as an indication of a
change in policy.
To recapture or absorb a large part of the re-
serves that had been put into the market, he would take advantage
of every runoff possibility.
He would favor selling bills when-
ever possible and he would not be opposed to selling other short
issues if
the Account was "out of merchandise in bills."
The
problem that the System must face arose out of the economic situation on the one hand and the Treasury's deficit financing problems
on the other hand.
If the System followed the economic approach in
its policy, it seemed almost inevitable that there would be rising
interest rates, while the danger of the other course was inflation.
As for himself, the choice would be one of not preventing a rise
in interest rates rather than to continue monetizing the public
debt and permit inflation. In line with his appraisal of policy
and appropriate System action, he would expect to see rising shortterm rates in the market, and he would like to see the present
7/29/58
-44-
discount rate level become more realistic in relation to such rates.
While he would not favor a change in the discount rate at the moment,
possibly that might be appropriate in a comparatively short period,
especially if some of the present degree of ease were removed so as
to permit market rates to move up. He favored proceeding through
open market operations to absorb this ease and reach toward less
artificial conditions in the market.
Mr. Irons also said that he would favor a change in margin
requirements for there had been a considerable increase in the amount
of credit outstanding in the stock market.
There were inflationary
undercurrents in the market and he questioned whether the Board
should permit them to be supported by additional injections of credit.
It was his estimate that between January and the present time the
amount of credit in the market had increased about 20 per cent.
Mr.
Irons felt that the directive should be changed now.
As previously indicated, he would like to take out not only the
word "further" but also "monetary ease."
He concurred in the sug-
gestion of Chairman Martin, but he would not favor the suggestion
of the Secretary because it would tie the Committee too specifically
to correcting a particular development. Another possibility would be
"to foster sustainable economic recovery and growth in the economy
by providing reserves consistent with economic requirements and
orderly market conditions."
Mr. Irons commented that one could not
7/29/58
-45-
discard from consideration the matter of orderly market conditions.
There is a difference, he noted, between operations to correct disorder in
the market, when it
Treasury offering.
appears,
and operations to support a
The concept of orderly market conditions appeared
to belong in the directive, and he questioned restricting the directive
to absorbing redundant reserves.
Mr. Erickson stated that a review of conditions in the First
District following his return from vacation indicated that the worst
of the recession had probably ended.
The New England manufacturing
index went up in May for the first time in seven months and went up
again in June.
Employment likewise was up in May and again in June,
with 4 8 ,000 more workers employed in June.
Also, for the first time
in several months manufacturing employment exceeded the previous
month.
May of last year was an all-time peak in construction, and
May of this year was also a good month.
While department store sales
in June were disappointing, first and second week figures in July were
appreciably better, probably due to the fact that Boston stores were
open on Saturdays for the first time in a number of years and weather
conditions were conducive to shopping.
In June, as in May, the
Massachusetts retail price index declined, the vacation business
appeared not to be meeting expectations, and the Reserve Bank's
survey of mutual savings banks showed that deposit growth continued
at a higher rate than last year.
In July, to date, the Reserve
Bank's discount window had been used less on a daily average than
7/29/58
-46-
in any other month since January 1952.
Turning to policy, Mr.
any change in
Erickson said that he did not favor
the discount rate but believed that the directive
should be changed.
Of all the suggestions made thus far, he
preferred the suggestion of Chairman Martin.
As rapidly as pos-
sible, the Account Management should work toward getting the level
of free reserves down to the $400 million level.
He would sell
bills first, but if the objective could not be accomplished with
bills he would use other short-term securities.
Mr.
Erickson hoped
that the bill rate would move up, and also the Federal funds rate.
With reference to System operations during the last ten
days, Mr.
Erickson noted that continuing Committee policy calls
for the System to go into the market in the event of a disorderly
situation.
While he was surprised that the operations had to be
so massive, that may have been necessary.
He would not favor an
announcement of the termination of the special authority given
to the Manager of the Account since under present conditions there
might still be a disorderly market.
Therefore, he would not make
any announcement until the market was clearly out of that situation.
He would favor allowing interest rates to seek their true level,
but in the event of a clearly disorderly condition the System would
have to go into the market.
Mr. Balderston stated that although he would subscribe to
the wording for clause (b) of the policy directive which had been
7/29/58
-47-
suggested by Mr. Irons, his own point of view would be emphasized
by the phrase "to absorbing redundant reserves and eliminating free
reserves as rapidly as possible without creating a disorderly market."
The System having taken unusual and emergency action last week, he
believed that the directive should be pointed toward escaping from
the situation that had resulted.
In his view, Mr. Balderston said,
reserves had in fact been redundant since early June.
While the
recession might not have bottomed out permanently, the decline
certainly had ceased for the moment and business psychology had
again turned ebullient.
He went on to say that the excess of bank
reserves that he thought was present even before the Lebanon incident
might have stemmed from adhering too long to a fixed level of free
reserves and perhaps the Committee had been deceived by the appearance
of market tightness, especially in New York City, caused by heavy
bank securities investments.
To put it
another way, the Committee
might have tended to watch the depth of the water in the irrigation
ditch rather than the use of the water in the fields being cultivated.
Mr.
Balderston said he believed in
the use of the free reserve
figure as the best language available for indicating a target or goal.
However,
adherence to a $500 or $600 million level of free reserves
week after week pressed reserves into the banking system in such
fashion as in
Accordingly,
his judgment to make the banking system unduly liquid.
the Committee now found itself unpleasantly surprised
7/29/58
-48-
by having that credit used in places where it was not constructive,
such as in the stock market at the present time.
The emergency
action of last week therefore accentuated a problem which was
already serious from the economic point of view, because the credit
that the System had supplied was tending to be misused.
then, was what to do about so serious a situation.
Mr.
The question,
Balderston
believed that sufficient bills and other short-term issues should be
sold to more than reverse the recent emergency action. Rather than
return to free reserves of $500 million, he was thinking of the
elimination of free reserves as steadily, consistently, and rapidly
as possible right up to the point of disorderliness in the market
because he felt that the price of bonds would have to drop four or
five points.
If free reserves were eliminated--and he hoped that
could be accomplished prior to Labor Day--he would favor raising
the discount rate 1/4
of a percentage point, and then 1/2 of a
percentage point, in order not to repeat the "pitty pat" policy
followed in 1956. With regard to the question of publicizing the
return to a "bills only" policy, he said that he would favor no
announcement.
Rather, he would merely stay out of the market.
Chairman Martin began his remarks by commenting that it
would not be possible to "change the world" between now and
August 19, the date of the next scheduled meeting of the Federal
Open Market Committee.
In view of the statements that had been
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7/29/58
made around the table, he thought that he should say something
by way of observation on the matter of principle and the Treasury.
It was terribly important, he said, for all to realize that the
Committee was dealing with the most difficult problem in political
science in the whole world.
In order to maintain perspective it
must also be realized that the Federal Reserve System, like others,
can occasionally make mistakes; one should not blame the other
fellow all of the time and sit in a vacuum.
Furthermore, it is
necessary to look at one's own mistakes before looking at the
mistakes of others.
As persuasive as were Mr. Bryan's comments
about loss of confidence, it was not too long ago, he recalled,
that Mr. Bryan was advocating a reduction in reserve requirements
as essential to the promotion of economic recovery.
The Chairman,
too, had been in error a great deal, and no one can claim to be
correct 100 per cent of the time.
This pointed up the need for
flexibility and, as he had remarked on other occasions, "steel
which bends is much stronger than iron which breaks."
On several
occasions he felt that the System had let itself get into the
position of the iron that breaks.
Chairman Martin said that he also felt that he must say
a word on behalf of the Treasury, for the Treasury and the Federal
Reserve are working toward a common objective.
It might be that
-50-
7/29/58
both of them could be completely right but that neither would
attain the objective.
At present there was a very fortunate
situation at the Treasury because both Secretary Anderson and
Under Secretary Baird were just as anxious as anyone to correct
the current situation.
his mind.
Of this, there was no question at all in
They were dealing with a very difficult problem that
the System had compounded for them, for if
the System had not
been as intent on following an easy money policy there could not
have been the speculative fever that developed and finally
culminated in the speculation in the 2-5/8 per cent bonds.
The
Treasury probably had made some technical errors, but those errors
were easy to make when the Treasury had to consider that the Federal
Reserve was following a policy of further ease.
The Chairman then commented on the extent to which he believed in maintaining operating procedures or principles.
On the
other hand, he said, the Committee should not throw up its hands
the first time circumstances developed which made the Committee
realize that some flexibility was required.
He recalled, and
said he was delighted by the fact, that the special authority
given at the second afternoon meeting on July 18 was granted by
unanimous vote of the Committee.
He went on to say that the cry
of "wolf" always looks bad in retrospect.
However, at the time
7/29/58
-51-
the action was taken no one knew what would happen over the week
end which preceded the Treasury financing.
It might have been
perfectly right to say "just step aside and the market may not
collapse," but if fighting had actually occurred in the Middle
East the Committee probably would now be glad that it took action
in the way that it did.
Also, regardless of theories, when certain
things are involved the public will not sit by and let the situation
go unheeded.
He might be in error in that opinion, but it was
certainly something that the Committee must bear in mind at all
times.
The market, he said, is a free market but one in which the
Federal Reserve System does participate.
Many times he had expressed
his own dissatisfaction with that participation, and work must be
done continually on the System's relationships with the market.
However, unless a situation should develop where the Treasury is
deliberately forcing the System and the System knows that the
Treasury is wrong, it will be necessary to proceed on a "give and
take basis."
Chairman Martin reiterated that both Mr. Anderson and Mr.
Baird were just as anxious as the Federal Reserve to correct the
current situation in the most effective way. He also repeated
that he believed the Federal Reserve had a real share in the problem
that the Treasury faced with the 2-5/8 per cent bonds, because the
policy of easy money that it
extent that had occurred.
pursued permitted speculation to the
7/29/58
-52Continuing, Chairman Martin said that it was well to have
different views within the System.
He was glad that Mr.
Mills had
presented a statement on behalf of the position that the System
should support the Government securities market even though he did
not agree with that point of view.
The Chairman went on to say
that he rather got the impression from the comments around the
table that perhaps the System was taking itself a little too
seriously, and perhaps he was falling into the same error.
However,
he again pointed out that the Committee was now addressing itself
to a three-week period.
At the moment it seemed fairly clear that,
without risking a market collapse, the Committee probably could not
do a whole lot to mop up excess reserves in that period of time.
Assuming the success of the Treasury's offering today, on August 19
the Committee would have a clear field for whatever it
do with respect to monetary policy.
wanted to
The System, he felt, had an
obligation to pick up all of the reserves that it
could, and he
thought it was clear that the majority of the Committee wanted to
do that in order to reestablish a position which had been completely
distorted by the events of the last two weeks.
of confidence described by Mr.
done during this period.
However, the element
Bryan was involved in what could be
Personally, he would not want to give up
the fight against inflation or assume that the recovery now developing should make the Federal Reserve throw up its hands.
What the
7/29/58
-53-
Committee was faced with over the next three weeks was to try to
recover as far as possible its position and poise, and in conversations with those outside the System not give way to defeatism.
The
view that must be presented to the public was that the System was
not licked but would continue the fight.
Also, the Committee must
do everything possible to aid the Manager of the Account in a period
like this.
Naturally, members of the Committee might disagree with
some of the things that he did, but the Manager was under pressure.
It must be borne in mind, the Chairman said, that the struggle in
which the System was now engaged is a never-ending one.
In his
opinion, the System had made remarkable progress within the limitations of its powers.
For example, there was a large Federal budget
and if the System had not moved in the way that it did there might
well have been a substantial tax cut in addition to the larger
budget.
The Chairman said he did not think that the System had lost
any of its
basic principles in
the recent operations.
battle with inflation probably was coming in the 1960s,
The real
so it
was
important for each person to try to keep his feet on the ground.
When mistakes were made, one should not just say that it was a
mistake but try to see what the benefits and failures were and
then move forward.
7/29/58
Today, Chairman Martin said, the Committee seemed to be
in agreement to a surprising extent.
The question was principally
the wording of the policy directive, and there could be a lot of
views on that question. When he considered it in the light of the
three-week period ahead, he was inclined to think that perhaps Mr.
Riefler had a point.
At this time it was difficult to appraise
the situation and spell out a directive in precise terms, and
language that would achieve the Committee's short-run purpose
therefore would seem desirable.
Then, at the meeting on August 19,
the Committee could spell out a more effective directive, perhaps
along the lines mentioned by Mr. Deming, Mr.
Irons, or others.
There were expressions of agreement around the table with
Chairman Martin's suggestion.
Mr. Hayes stated that, although he had always questioned
whether the directive should get into detail rather than basic
policy changes, there was no question in his mind about the recapturing of redundant reserves.
concerned,
He said that he was a little
however, that if the redundant reserves were recaptured
within the ensuing three-week period the Management of the Account
would, in effect, be left without any directive.
Comments on this point stressed the unlikelihood that the
redundant reserves could be absorbed in the next three weeks.
Mr.
Rouse observed that if they were recaptured before the August 19
7/29/58
-55-
meeting it would be possible to call a meeting of the Committee
by telephone and consider the need for a new directive.
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 to the needs of commerce and
business, (b) to recapturing redundant reserves, and (c) to
the practical administration of the Account; provided that
the aggregate amount of securities held in the System Ac-
count (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.
At the last meeting* of the Committee consideration was given
to a suggestion for increasing from $50 million to $75 million the
limitation on outright holdings of bankers' acceptances by the
*
Refers to meeting on July 8, 1958.
7/29/58
-56-
Federal Reserve Bank of New York.
However, in view of differing
opinions which were expressed, a decision on the matter was deferred.
Subsequently, under date of July 25, 1958, there were distributed to
the members of the Committee copies of a memorandum from Mr. Rouse
discussing, on the basis of the minutes of the Federal Open Market
Committee and its executive committee, the apparent objectives of
the authorized acceptance operations.
The memorandum suggested
that the authorizations of the Committee appeared to contemplate
coordinating acceptance operations with Government securities
operations and that such coordination was not contrary to the
System's objective of fostering interest in the acceptance market
merely because, on certain occasions, the New York Bank had been
prevented from filling orders received from foreign central bank
correspondents.
In supplementation of Mr. Rouse's memorandum, Mr. Hayes
made the following comments:
1.
The record seems to me pretty clear that the
Committee, besides undertaking to encourage the develop-
ment of the acceptance market, has adopted a policy of
making our acceptance transactions consistent with our
general credit policies.
2. Although the size of these transactions is
admittedly minute by comparison with our Government
security operations, acceptances do have characteristics
which make them a convenient money market instrument for
effecting open market operations.
7/29/58
3.
The New York Bank has felt that consistency with
Government security operations would be accomplished most
effectively if week-to-week changes in acceptance holdings
were always in the same direction as changes in Government
security holdings. Perhaps this concept has been a little
too rigid.
4. Our principal interest being to develop a larger
and more active acceptance market, it is logical that our
aim should be mainly in the direction of a greater domestic
interest in the market, in which foreign buying already plays
a disproportionately active role. We believe that the very
fact of the Federal Reserve Bank's being consistently in
the market is one of the best means of stimulating this
domestic interest.
5. At the same time, our interest in providing a wellrounded service to the foreign central banks justifies our
making considerable efforts to satisfy those banks' needs,
provided that in so doing we are not being inconsistent with
our general credit policies. I think there is room here
perhaps for a somewhat more flexible approach to the matter
of week-to-week changes in holdings. That is, I would see
no harm in our reducing our acceptance holdings by a modest
amount for a week while we were adding to Government
security holdings, or vice versa--provided we were showing
a consistent interest in the acceptance market by having
at all times a substantial and reasonably stable portfolio.
Since we are entering a season when acceptance
6.
financing is expected to expand, and in view of the upward
trend in outstanding acceptances over a period of years,
and with our present holdings uncomfortably close to the
$50 million limit, it would seem highly desirable to raise
that limit to $75 million.
Mr. Robertson stated that he had prepared a paper on the subject before receiving Mr. Rouse's memorandum.
However, after reading
the memorandum he would not want to change his own paper at all.
then read the following statement:
I am going to outline briefly the development of
Federal Reserve System participation in the bank acceptance market over the past four years. This little
history, of which the proposal now before us is the
latest episode, demonstrates how necessary it is for
He
7/29/58
this Committee to be ever vigilant, in order to avoid
finding itself in a position it never intended to assume.
Early in 1954 it was suggested that we take the
initiative in purchasing some $20 or $30 million of acceptances in order to "free demand generally from administered rate constriction and to make market rates
responsive to changes in the demand for and supply of
acceptances." I discussed this proposal in my memorandum
5
of June 1, 1 94,
in which I expressed doubts and presented
four questions that I felt should be clarified before the
Committee acted on the proposal.
The proponents of the proposal did not attempt to
answer the questions presented in my memorandum, but the
proposal nevertheless was reactivated some months later.
In March 1955 the subject was again presented to the
Committee, although the original objective--to "free
demand generally from administered rate constriction"--
was no longer presented as a basis for action. The
Committee authorized System purchases of bank acceptances
in an amount not to exceed $25 million; the Chairman
stated that the System "should avoid any 'finagling' in
the market but should participate in a very modest way
in order to show the interest of the central banking
organization." This limited objective made our action
relatively innocuous, in my opinion, although I felt
that the acceptance market would receive more convincing
assurance of Federal Reserve interest if we resumed the
"back-stopping" procedure that worked quite well in the
1920's.
In view of the fact that the System intended, in
effect, simply to maintain a token portfolio of bank
acceptances to show its interest in that market, the
Committee expressly provided that transactions in bank
acceptances "would be entered into only when consistent
with the general credit policies of the Federal Open
Market Committee." In other words, our general credit
policies necessarily were to be paramount, and the
Committee's subordinate objective of showing interest
in the bank acceptance market would not justify purchases or sales of acceptances in circumstances where
such action would be inconsistent with current credit
policies.
At the Committee's March 1955 meeting, approval of
form of the resolution on this subject was
actual
the
7/29/58
-59-
delegated to the executive committee.
The resolution ap-
proved by the executive committee did not provide that
acceptance transactions should be entered into "only when
consistent with the general credit policies," but provided
instead that such transactions were authorized,
"at such times and in such amounts as the executive
committee may deem advisable and consistent with
the general credit policies."
The change in emphasis may seem insignificant, but later
events reveal that such a change in emphasis can be the
first step in the unintentional development of a policy
quite different from that originally intended.
At our meeting in March 1956 we renewed the authorization to the New York Reserve Bank to hold up to $25 million
of acceptances. However, our published explanation was that
the action was taken "on the grounds that the System should
assist in the further development of an acceptance market in
the United States...." Literally this was not inconsistent
with the original purpose of "showing the interest of the
central bank organization in this market," but the new
language hinted at a more aggressive participation.
The attitude of the Trading Desk on this subject was
perhaps reflected in the following statement in a July 1956
publication of the New York Reserve Bank on "Federal Reserve
Operations in the Money and Government Securities Markets":
"...expressing a general intention to vary the size
of this holding [i.e., of bank acceptances]in a manner
that would parallel other Federal Reserve action in
the money market (the available supply of acceptances
permitting), the Committee on March 29, 1955 authorized
the Manager of the System Open Market Account to begin
purchases....
"...the scale of operations in the acceptance market
has not reached magnitudes that could be considered
significant in supplementing operations undertaken in
the Government securities market to influence the money
market and general credit conditions."
derlining added)
(page 88; un-
As far as I am aware, this Committee never expressed an
intention that the holdings of bank acceptances should
"parallel other Federal Reserve action in the money market,"
but this idea apparently existed at the Trading Desk.
At the November 27, 1956 meeting the maximum limit was
raised from $25 million to $50 million, and this increased
authorization was renewed without change in March 1957.
7/29/58
-60-
The memorandum attached to Mr. Riefler's covering
memorandum of July 7, 1958 recommends that the maximum
limit now be raised to $75 million. The camel's head
and neck are now following his nose into the tent, but
even more important is the explanation of the proposal,
which opens the way for the entire animal to move in-in fact, it hints that he is already in possession.
The memorandum reveals that our acceptance holdings
have been increased recently in order "to be consistent
with increases in System holdings of United States
Government securities." Referring to the existing $50
million limit, the memorandum further states that
"...if
we were to continue to coordinate acceptance activities with other market operations,
our acceptance holdings could quickly reach the
limit."
This language cannot reasonably be interpreted
otherwise than as meaning that the Trading Desk regards
its transactions in bank acceptances as paralleling, as
far as possible, the operations in Government securities.
This Committee never has authorized dealings in acceptances as a supplementary means of effectuating our
general credit policies--a sort of small-scale "me too"
operation, along with Government securities transactions.
If bank acceptance transactions have been entered into
for these purposes, such action goes beyond the scope of
the existing authorization.
To sum up, the Committee in 1955 decided to hold a
modest portfolio of bank acceptances "as a means of showing
the interest of the central banking organization." By 1956
the explanation of our operations was that "the System
should assist in the further development of an acceptance
market." Later that year the maximum was increased to $50
million. Now it is suggested that the ceiling be raised
to $75 million, but far more important is the first casual
intimation that bank acceptance transactions should be used
(and apparently already are being used) as one of our
mechanisms for implementing general credit policy.
It is conceivable, although very unlikely in my opinion,
that there are sound reasons for effectuating our credit
policies through operations in acceptances as well as in
Government securities.
If this is so, however, the recom-
mendation should be openly presented, and supported, on
that ground, so that the Committee will have an opportunity
7/29/58
-61-
to reach an informed judgment and to make a deliberate
decision on the matter. If the Committee were to take
the recommended action on the basis outlined in the
memorandum referred to, it might later find that it had
been jockeyed into adopting bank acceptance operations
as a regular tool of general credit policy without ever
having realized that it was doing so.
Mr.
Hayes said that he was at a loss to understand what Mr.
Robertson feared.
If, in operating in acceptances, the New York
Bank happened to be paralleling open market operations, he could
not see what harm was being done.
It was clear to every member of
the Committee that acceptance holdings were being changed week by
week and there was no thought, he said, of having any concealed
objective.
He saw nothing irreconcilable between encouraging the
acceptance market and using the bankers' acceptance as an instrument
of open market policy.
Mr. Robertson said that he did not agree.
The matter had
never been put forward on the basis that the acceptance would be
used as an additional open market instrument; instead, it
put forward in
had been
terms of showing an interest in the acceptance market.
To go outside of that and use the acceptance as an open market tool
was in his opinion inconsistent with the position that the Federal
Open Market Committee had taken.
He did not like the idea of taking
an authorization given on one basis, gradually getting more and
more into the market, and finally taking control.
7/29/58
-62Mr. Hayes replied that he disagreed with Mr. Robertson's
view of the importance of the New York Bank's share of the acceptance
market.
He pointed out that when the acceptance authority was first
granted, $25 million was just as big a share of the market, proportionately, as $50 million is today, for the size of the market
has increased markedly.
In response to a question, he observed
that acceptance holdings are also limited to 10 per cent of total
acceptances outstanding as shown by the most recent bankers'
acceptance survey and that at present $75 million would represent
5 per cent of total acceptances outstanding.
After further discussion relating to the view of the New
York Bank regarding the authorization if
the total volume of bankers'
acceptances should increase substantially further, Mr. Balderston
said that he had never heard a reasoned argument for participation
in this area as a means of fostering foreign trade.
He thought,
however, that such an argument probably could be advanced.
Therefore,
before the Committee reached a final decision on the suggestion made
by the New York Bank, with which he had some sympathy,
he would like
to have the staff advise the Committee what national advantage they
could see in using acceptances as an open market instrument.
Mr.
Robertson, he said, had performed a useful service in warning the
Committee not to proceed without knowing what it was doing, but
7/29/58
-63-
he (Mr. Balderston) was concerned with the leadership of the United
States in foreign trade and he would not wish to have a decision
made by the Committee that would prevent participation in something
that might be to the national advantage.
After Mr. Robertson said that he thought such a staff presentation would be appropriate, Mr. Hayes said he had thought it
was a foregone conclusion that the acceptance market was one that
the Committee wanted to encourage.
He did not think that this was
a point at issue today, but he would have no objection to a study
such as suggested.
Chairman Martin commented that he thought the position had
been clear--at least it
had always been his own position--that the
Committee wanted to do what it could to help the acceptance market.
As he understood it, the differences of opinion related to how the
System could be of most help, and there were two sides to that
question.
In response to a question by Mr. Shepardson, Mr. Hayes said
that, in general, it
had been the approach of the New York Bank that
the extent of its own activities did not make a large difference in
the amount of acceptances that foreign buyers were getting.
Foreign
buyers were already so predominant in the picture on the demand side
that from the standpoint of developing the acceptance market the New
York Reserve Bank did not feel that it had to be so solicitous about
7/29/58
them.
-64Therefore, the Reserve Bank had not felt
hurting the acceptance market if
that it
was
on occasion its own activities
were the cause of foreign buyers not being able to obtain quite
as many acceptances as they desired.
Mr. Allen noted that there are relatively few banks operating
in acceptance credits to any large extent.
The New York banks, of
course, do what is to their best advantage; if they are loaned up
otherwise and want to handle an operation by means of an acceptance,
they will do it.
If they wish to handle a transaction by means of
a clean note, they will do it
that way.
Mr. Allen said that few
people he talked with--people who regularly invest for a short
term--had ever heard of acceptances.
Therefore, he was rather in-
clined to feel that being friendly to the acceptance market meant
encouraging the dealers to get out and sell acceptances, with some
small participation, if necessary, to take pressure off the dealer.
Mr. Hayes said he rather liked the idea of actively considering the merit of the acceptance as an instrument from the
open market standpoint.
He went on to say that the New York Bank
had received some good comments in the past from the Board's staff
regarding the usefulness of the acceptance as a money market in-
strument.
If the study previously suggested was to be made, perhaps
the Committee would also like to have an opinion on how good an
instrument the acceptance is for open market operations.
-65-
7/29/58
After some discussion of the points that had been raised
by Messrs. Balderston and Hayes, Messrs.
Thomas and Marget were
requested to submit a paper for the Committee's consideration
relevant to those points.
At the same time it was agreed to table
for further discussion the suggestion of the New York Reserve Bank
for an increase in the limitation on bankers' acceptance holdings.
It was agreed that the next regular meeting of the Committee
would be held on Tuesday, August 19, 1958, at 10:00 a.m.
Thereupon the meeting adjourned.
A meeting of the Federal Open Market Committee was held
in the office
of the Board of Governors of the Federal Reserve
System in Washington on Tuesday, July 29, 1958, at 2:45 p.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Fulton
Irons
Mills
Robertson
Shepardson
Vardaman 1/
Deming, Alternate for Mr. Mangels
Messrs. Allen and Treiber, 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. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Hostetler, Walker, and Young, Associate
Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Kenyon, Assistant Secretary, Board of
Governors
Mr. Keir, Acting Chief, Government Finance
Section, Division of Research and
Statistics, Board of Governors
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Tow, Vice President, Federal Reserve Bank
of Kansas City; and Messrs. Anderson and
Atkinson, Economic Advisers, Federal Re
serve Banks of Philadelphia and Atlanta,
respectively
1/
Entered the meeting at point indicated in minutes.
-2
7/29/58
Mr. Rouse, at whose request this meeting had been called,
noted that in
his remarks at this morning's meeting he had referred
to the condition of the Government securities market in yesterday's
light trading.
The members of the Committee had subsequently re
ceived a summary of conditions in the market at 11:00 a.m. today.
Following the Committee meeting, he had talked with the Trading
Desk and had found that another wave of selling was developing.
This was in
ing; it
accord with the pattern that the market had been follow
would steady for a time and then another wave of selling
would develop.
That seemed to be the course of events again today.
The market yesterday was down in a number of cases in terms of
thirty-seconds, and it was down in similar amounts today.
The 3-1/2
per cent bonds of 1990 were now down to 98.
Much of the time, Mr. Rouse said, there were no bids and no
buyers.
One dealer had been able to work out some swaps but had not
been able to do outright business.
The outstanding Treasury certifi
cates were off a thirty-second in some cases, and the new ones were
quoted below par and were available in volume.
The whole picture
was one of gloom and a fading market, and reports from dealers were
to the effect that the element of speculation in the market was
greater than anyone had visualized.
One dealer termed the market
disorderly in the sense that there were no bids, while another
expressed the view that the market was "in
the disorderly range."
-3
7/29/58
An insurance company spokesman was of the opinion that the market
had been disorderly for days.
In response to an inquiry from Chairman Martin, Mr. Rouse
summarized available information on subscriptions for the new
Treasury 1-1/2 per cent tax anticipation certificate.
In the course
of his summary he said that a private survey of 25 large banks by a
securities dealer indicated subscriptions by those banks amounting
to $2.7 billion, which led the dealer to estimate that the allotment
would be around 50 per cent.
However, the picture was not yet clear
enough to make accurate predictions about the fate of the issue.
Continuing, Mr. Rouse said it
seemed to him that the amount
of potential selling in the Government bond market was not known.
After a price decline which had by now certainly reached the four or
five points mentioned by Mr.
Balderston at this morning's meeting,
one might expect that there would be an unwillingness to take the
losses entailed in those prices and that selling would tend to dry
up.
However, speculative holders who had delayed selling, in the
thought that prices would get a little better and that the System
would step in, might now feel that it
was better to get out.
Chairman Martin commented that the sooner such elements
got out of the market the better it would be from the standpoint
of the System.
Mr. Rouse agreed.
He went on to say that the System un
doubtedly would be criticized if this was really a disorderly market
7/29/58
-4
and the System had not appeared in it for the last two or three days.
Turning to available alternatives, he said that one possibility would
be for the Federal Reserve Banks to do a little
"arm-twisting" as far
as the subscriptions to the Treasury certificates were concerned, in
an effort to assure that the financing did not "fall out of bed."
As to possible System intervention in the market,
Mr.
Rouse expressed
the view that it would be unwise to try to do more than insert a few
bids through brokers in a nameless way in the hope of having a modest
amount of transactions at levels as the market went down.
To go
direct to the market and start to buy would invite an avalanche of
offers, and that, of course, was something to avoid.
Furthermore,
if the Federal Reserve acted to support the market, the speculators
would be apt to stay in.
Mr. Rouse stated that he was inclined to recommend staying
out of the market,
or at most doing something through brokers in a
nameless way and attempting some arm-twisting with respect to the
certificate subscriptions.
Chairman Martin asked whether it
was not too late in the
day for the System to do anything that would substantially affect
the subscriptions, to which Mr. Rouse replied that he thought a
little
could be done.
Of course,
the word would get around to some
extent and the official closing time of the market is only nominal
under prevailing market conditions.
7/29/58
-5
The Chairman then stated that the Committee seemed to be
right up against the wall and that it
right here.
seemed best to stand or fall
Personally, he would be disposed to stay out but watch
carefully.
He then called upon the other members of the Committee
for comment.
Mr.
Mills said that he could not add anything to the state
ment which he made at this morning's meeting.
He strongly believed
that the System Account should intervene aggressively and support
the market.
If
the Committee was not disposed to do that, he would
be fearful of making bids on a declining basis through brokers with
out revealing the source.
There is
general public knowledge that
the Open Market Committee meets at three-week intervals,
so he
presumed there was an understanding that a meeting had been held
today.
The market therefore would be looking for an indication of
System policy today, or certainly at the opening of the market to
morrow, and if
support was not forthcoming the market could reasonably
reach the conclusion that the Committee had refused to declare a
disorderly condition and had abandoned the market.
circumstances,
It
Under those
there could be complete disorder.
was an unfortunate circumstance,
Mr.
Mills said, that
today the books were open for subscription to the new issue of
Treasury certificates,
for if
the System intervened in
the inference would be drawn that its
secondary,
primary,
the market
or at least a
purpose had been to assist the Treasury rather than to
correct a disorderly market.
7/29/58
In response to a question from Mr. Rouse,
Mr. Mills
verified that even so he would advocate going into the market,
with full knowledge of the risks involved.
Intervention on the
part of the System might inspire a greater volume of sales rather
than stem sales.
However, in almost all cases sales made at the
present levels would involve losses, and it was difficult for
him to reason that people would willingly take those losses if
there was an indication that the market would be stabilized by
the institution that had the ability and armament to provide
stability.
At this point Mr. Vardaman joined the meeting and Mr.
Rouse
reviewed for him the market situation that had resulted in this
meeting being called.
Mr. Hayes said that he favored going into the market last
time but that he was troubled by the thought of going in on a very
temporary basis, really with the Treasury financing primarily in
mind,
it
and then almost immediately pulling out.
himself, he would be glad to go in,
If he were doing
but only on the condition
that the System was going to stay in for quite a while and cushion
the market.
Since he saw no disposition in
part of the majority of the Committee,
that direction on the
he would not want to go
into the market now.
Messrs.
Irons, Allen, Leedy, and Vardaman expressed agree
ment with the view that the System should stay out of the market
-7-
7/29/58
today and see what happened.
In response to an inquiry by Mr.
Vardaman regarding the inference to be drawn from the use of
the word "today" in
not think it
these comments,
Chairman Martin said he did
was fair to ask the Manager of the Account to take
the responsibility.
It
was fortunate, he said, that the Manager
was here today and that this meeting could be held.
The remaining members of the Committee, except Mr. Mills,
then expressed concurrence in
out of the market today,
the view that the System should stay
as did the other Reserve Bank Presidents
who were present.
In response to a question raised by Mr. Balderston, Mr.
Keir said that the 3-1/2s of 1990 would have to fall to 95-13/32
Mr. Balderston said he
to sell on a 3-3/4 per cent yield basis.
asked the question because he felt that if
to intervene in
the market again, it
and when the System had
should be when the price level
was such that the System could make its
intervention stick, and so
convincingly that other market forces would come in
to assist and
"pick up the ball" from that point.
Mr. Bryan inquired as to possibilities if
offering today were to fail,
the Treasury
and Mr. Thomas commented that the
Treasury had plenty of money on which to operate for a time, for
it
would, of course, get something from today's offering.
If
necessary, one possibility would be to increase the weekly bill
auction.
-8
7/29/58
Mr. Bryan then inquired about the possibility of using
the direct borrowing authority on a short-term basis while the
Treasury was regrouping its
forces, as opposed to System assistance
to the market on a scale that could not be foreseen.
He agreed
with a comment by the Chairman that one could hardly expect a re
grouping of the market within a period of a few days.
After some discussion of the question raised by Mr. Bryan,
Mr.
Robertson suggested that in any event there was not much that
the System could do between 3:10 (the present time) and 3:30 to
Mr.
affect the outcome of the Treasury offering.
he did not concur completely.
Rouse said that
He felt that the System could do
something; that System action would have a little effect on the
success of the Treasury issue.
In a restatement of his position, Mr.
Hayes said that he
had aligned himself with the majority, but reluctantly.
If he had
felt that the majority would go as far as he personally wanted to
to, that is,
to have a sustained cushioning of the market, he would
favor that course.
In reply to an inquiry by Mr. Vardaman, he said
that the cushioning might be at descending,
but slowly descending,
prices.
Mr. Rouse commented that he was puzzled about the significance
of the 3-3/4 per cent rate mentioned by Mr.
present rate.
Balderston as against the
He noted that the 3-1/2s of 1990 had moved in price to
-9
7/29/58
where they were close to a 3.60 yield basis.
was thinking in
was his (Mr.
If
Mr.
Balderston
terms of the possibility of a shooting war, it
Rouse's) thought that the present rate might be as
satisfactory as a 3-3/4 per cent rate at which to hold, for other
wise the level of rates on business credit might be extremely high.
A 3-3/4 per cent rate to the Government would mean about a 4.35
rate on AAA bonds,
about
cent on bonds rated BAA.
flexibility,
Mr.
4.75 on AA bonds,
Thus,
and perhaps 5-1/2 per
there would not be much room for
for the rates would almost be up against the ceiling.
Balderston replied that the Canadians evidently con
cluded that for them a 4-1/2 per cent rate would be appropriate
for 25-year bonds.
He asked what rate was reached under free
market conditions at the height of the 1955-57 boom.
Mr. Rouse commented in response that if
to do any long-term financing,
the Treasury had had
a 4 per cent bond would have been re
quired.
Mr.
Balderston said that his 3-3/4 per cent rate was on the
lower side of the range that he thought would be indicated in the
event of a shooting war.
More likely was a combination of an ex
pensive cold war and expansionary conditions in
of the economy.
the civilian sector
A combination of private and public borrowing under
such circumstances would push the price of money up so that a 4 per
cent level was as likely as any other.
Asked by Mr. Vardaman whether
7/29/58
-10
his comments meant that he would favor entering the market at the
3-3/4 per cent level, Mr. Balderston said that he would put his
answer in
terms that he would not want to see "the cat's tail
cut
off inch by inch."
Mr. Vardaman then stated reasons why he felt that the
ultimate level of rates might be higher than suggested by Mr.
Balderston.
For these reasons, he said, he would want to think
a long time before stepping into the market at the 3-3/4 per cent
level and offering encouragement that the market would stick at
that level.
Mr.
Balderston commented that a 4 per cent yield for the
3-1/2s would mean a price of 90, and that he thought a drop to
such a price would mean a more disorderly market than could be
tolerated.
Chairman Martin raised certain questions about the likeli
hood of institutional selling at present market levels and about
the rumored possibility of a situation of panic developing.
Mr. Hayes commented that he did not think it
was the level
of prices as much as the lack of a market that was disturbing to
public psychology.
If
insurance company,
Mr.
he were managing the portfolio of a bank or
Hayes said,
he would be slower in
going into
the market next time, and Chairman Martin expressed agreement with
that comment.
7/29/58
-11
In further discussion of the questions raised by the
Chairman, Mr.
Vardaman said that he could not imagine holders
dumping securities, for the tax-saving stage was now past.
A
more likely prospect was a virtual suspension of trading, follow
ing which trading might be renewed on a more realistic basis.
Mr. Hayes said he saw a big difference between where rates
might go under inflationary psychology and where they might go in
the event of a shooting war.
It was quite clear to him that in the
latter event yields could go up to a 4 per cent basis, but he was
not sure whether that would be the right rate.
At present, he
noted, yields were already in the upper part of the range established
over a 50-year period.
Additional comments were to the effect that at a certain level
it
would be hoped that a self-correcting movement would occur in the
market.
Mr.
Allen agreed with Mr.
Vardaman in
thinking that present
holders of bonds would not be apt to get panicky and that they would
tend to sit tight, knowing that they had good bonds.
That, he felt,
would be true in the case of banks holding the 2-5/8 per cent bonds,
at least until a strong loan demand developed.
Mr. Bryan returned to the possibility of a failure of today's
Treasury issue and use of the direct borrowing authority, if neces
sary, in order to avoid acute embarrassment.
He asked whether such
a course would not be less shocking to the market than for the
7/29/58
-12
System to bail out the Treasury with unlimited funds.
During a discussion of that point, Mr. Hayes commented
that one could not look with any sort of equanimity on the failure
of a Treasury financing, and Chairman Martin expressed agreement.
Mr.
Hayes also made the comment that every dollar the System put into
the market last week had saved more than a dollar in the way of at
trition.
When some doubt was expressed by Messrs. Vardaman and
Robertson,
he said that without question the System operations had
caused a number of people to exchange.
At this point Mr. Rouse, who had left
the room to talk with
the Trading Desk, returned and said that although there was not too
much selling of securities, buyers continued to be missing from the
market.
However,
might be a little
the market had not gotten any worse; in
better.
fact, it
A dealer's survey indicated that the
large banks included in the survey were subscribing to a little
over $3 billion of the 1-1/2 per cent tax anticipation certificates.
At the request of the Treasury, a representative of the New York
Bank was approaching some of the New York City banks informally
for information on their plans and some line on the situation there
fore might be available in
the next hour.
Chairman Martin then stated that another telephone meeting
of the Committee would be held tomorrow morning at 10:45 a.m. to
7/29/58
-13
appraise early developments in
the market.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1958, July 28). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19580729
@misc{wtfs_fomc_minutes_19580729,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1958},
month = {Jul},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19580729},
note = {Retrieved via When the Fed Speaks corpus}
}