FOMC Minutes
A meeting of the Federal Open Market Committee was held
in
the offices of the Board of Governors of the Federal Reserve
System in Washington on Tuesday,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
December 2, 1958, at 10:00 a.m.
Martin, Chairman
Hayes, Vice Chairman
Fulton
Irons
Leach
Mangels
Mills
Robertson
Shepardson
Szymczak
Messrs. Erickson, Allen, Johns, and Deming,
Alternate Members of the Federal Open
Market Committee
Messrs. Bopp, Bryan, and Leedy, Presidents of
the Federal Reserve Banks of Philadelphia,
Atlanta, and Kansas City, respectively
Mr. Thurston, Assistant Secretary
Mr. Sherman, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Daane, Wheeler, and Young, Associate
Economists
Mr. Rouse, Manager, System Open Market Account
Mr.
Kenyon, Assistant Secretary, Board of
Governors
Mr. Molony, Special Assistant to the Board of
Governors
Mr. Koch, Associate Adviser, Division of
Research and Statistics, Board of Governora
Mr. Keir, Acting Chief, Government Finance
Section, Division of Research and Statistics,
Board of Governors
Messrs. Ellis, Roosa, Mitchell, Jones, Tow, and
Rice, Vice Presidents of the Federal Reserve
Banks of Boston, New York, Chicago, St. Louis,
Kansas City, and Dallas, respectively
12/2/58
Mr.
Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Messrs. Anderson and Atkinson, Economic
Advisers, Federal Reserve Banks of
Philadelphia and Atlanta, respectively
Mr. Parsons, Director of Research, 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 November 10, 1958, were approved.
Upon motion duly made and seconded,
and by unanimous vote, the action of the
Federal Open Market Committee on November
20, 1958, in approving the recommendation
of the Manager of the System Account that
System holdings of $7,857 million of Treasury
certificates of indebtedness due December 1,
1958 be exchanged into $5 billion of the
3-3/8 per cent Treasury certificates of
indebtedness to mature November 15, 1959 and
$2,857 million of the 2-5/8 per cent Treasury
notes to mature in May 1961, these securities
having been offered for exchange in the
Treasury refunding announced November 18,
1958, was ratified.
Upon motion duly made and seconded,
and by unanimous vote, the sending of a
letter to Congressman Patman on November
26, 1958, in reply to his inquiry of
October 1, 1958 concerning purchases and
sales of Government securities for foreign
accounts, Treasury investment accounts,
and member bank and other accounts was
ratified. The letter, which was signed
by Chairman Martin, reads as follows:
In your letter of October 1, 1958, concerning the photo
static ledger pages showing transactions in the System Open
Market Account during 1957 and earlier years, you refer to
"the purchases and sales of the account acting as agent for
-3-
12/2/58
foreign banks," and you inquire whether the photostatic
pages omit "those instances where the Open Market Account
made the transaction with a dealer or with some other
account." You also ask that we advise you whether the
photostatic pages "are incomplete, and......in what
respects they are incomplete, if any."
The ledger pages are a complete record of every trans
action in United States Government securities in which the
System Open Market Account was a party between March 1951
and December 1957. The System Open Market Account does not
act in the capacity of agent in any transactions in Govern
ment securities, and the transactions for other accounts
consequently are not included in the ledger records of
System Open Market Account operations unless the transactions
are directly with the System Account.
Purchases and sales of Government securities for foreign
accounts and for Treasury investment accounts are made by the
Federal Reserve Bank of New York as agent for those accounts.
In addition, the other Federal Reserve Banks act as agent on
occasion in acquiring securities for their member banks. You
will recall that my letter dated November 14, 1957 responding
to your letter of August 27, 1957, transmitted a complete list
of all transactions in United States Government securities
executed by the Federal Reserve Banks during the year 1956
for foreign accounts, Treasury accounts, and member bank and
other accounts. The listing shows the date of each trans
action, its size, the particular issue bought or sold, and
the price at which the transaction was completed.
The Federal Reserve Banks are being asked to compile
As you know,
similar information for the calendar year 1957.
the preparation of this material represents a large amount of
work and it will be several weeks before the task is com
pleted. However, the listings of the transactions will be
furnished as soon as they are available.
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 November 8
through November 25,
1958, and a supplemental report covering the
period November 26 through December 1, 1958.
have been placed in
Copies of both reports
the files of the Federal Open Market Committee.
12/2/58
-4
Reporting on open market operations since the preceding
meeting,
Mr. Rouse stated that the Treasury refunding operation
had been completed with less attrition than expected--$4l4 million.
The new issues had continued to retain premiums over issue price
despite the general decline in Government securities prices that
began last Wednesday.
The average rate in yesterday's Treasury
bill auction was 2.806 per cent, and the new bill was trading at
2-3/4 per cent, somewhat higher than at the time of the last meeting.
This rise in bill
rates reflected a seasonal buildup in the supply
of the new six-month bills.
Mr. Rouse commented that the System had supplied about $490
million net in reserves since the last meeting.
The past three weeks
had been difficult, with airline strikes and wide movements in re
quired reserves,
currency in
circulation, and the Treasury balance
rendering reserve estimates highly uncertain,
$36 million over the periods
However,
Free reserves averaged
despite heavy purchases of
bills over the past two or three days, it
now appeared that there
might be average net borrowed reserves for the current statement week.
Member bank borrowing from the Reserve Banks exceeded $1 billion last
Wednesday despite the absence of any great tightness in the market.
Mr.
Rouse noted that average net borrowed reserves, in the
amount of about $40 million, were projected for the current statement
week.
Some repurchase agreements had been written yesterday and
12/2/58
-5
perhaps some would be written today, although this was questionable
in view of the comfortable position of the money market.
Mr. Robertson inquired of Mr. Rouse why he would think it
desirable to raise the level of reserves this week, and Mr. Rouse
stated that if average net borrowed reserves should be published
it might well be taken by the market as a change in the direction
of policy.
He felt
that this would be unfortunate in view of the
fact that the distribution of the Treasury's new issues was still
in
process and also in view of the advent next week of the new six
month bills.
Mr. Robertson then stated that he had misunderstood
Mr. Rouse and had thought that the latter mentioned average free
reserves of $40 million for the current week rather than average
net borrowed reserves in
that amount.
Mr. Rouse informed the Committee that the Irving Trust
Company had decided to begin operations as a broker in
and that the bank would try to keep its
separate from the management of its
Federal funds
Federal funds operations
own money position.
He added
that participation of Irving Trust in the Federal funds market
would be in
addition to the participation of Garvin, Bantel and
also of Mabon and Company, which recently entered the field.
stated that Irving Trust Company, with its
He
wide network of contacts,
should add something constructive to the Federal funds market.
12/2/58
-6
Mr. Rouse also stated that the new six-month bills would
be auctioned for the first
time next Monday.
He said that he had
been thinking of these bills as additions to the securities in which
open market operations could be conducted but that he planned to stay
out of the market for the new bills for a while in
order to permit a
market to develop independently of System influence.
On the basis
of the desirability of permitting the market for the six-month bills
to stand on its
own feet, he had advised the Treasury against per
mitting commercial banks to pay for their awards of such bills by
credit to Tax and Loan Accounts.
Mr.
Thomas stated that the market was interested in
knowing
whether the System would or would not deal in the new six-month bills.
To stay out of the market altogether for the next few weeks might
mislead the market into thinking that the System was not interested
in
buying or selling the new bills.
be well for the System to deal in
let
the market know that it
them.
Therefore,
he said, it
the new bills in
might
a small way to
was prepared to conduct transactions in
He did not contemplate operations on a scale that would tend
to dominate the developing market for the six-month bills.
Mr.
Rouse suggested that a memorandum on this subject could
be prepared at the New York Bank and sent to the members of the Com
mittee for discussion at the next meeting if
Chairman Martin suggested that it
that were desired.
might be useful if
each
member of the Committee would comment on the question of a six-month
12/2/58
bill
-7
during the usual "go-around" today.
He thought Mr. Thomas
had a point on whether during the course of the next couple of
weeks the Federal Reserve would want to let
the market get the
idea that the Account had stayed out of the market for these bills.
Personally, he thought it
would be unfortunate to have an argument
on the "bills only" matter start if
Mr.
Rouse,
in
that could be avoided.
response to a question by Mr.
Allen, stated
that the new bills would begin trading on a when-issued basis next
Tuesday.
The System Account would probably be purchasing bills for
reserve purposes next week and question would arise whether to buy
the six-month bills.
Mr. Robertson inquired as to the minimum amount of six-month
bills that could be purchased to show the System's interest,
Rouse replied that it
and Mr.
was difficult to say what the minimum would be;
depending on how the offerings came in,
he would guess that $15 or
$20 million might be the right figure.
Mr. Robertson then inquired
whether the System might get into an embarrassing position by specify
ing a limit as to the amount of six-month bills to be purchased,
Mr.
Rouse replied that he did not think so.
said, was that if
and
The important point, he
the market should seek an answer as to whether the
System was interested in
the new six-month bill,
he should be in
a
position to give the market an affirmative answer.
Chairman Martin said that he did not think the amount was
important,
if
it
came to an affirmative answer; mere dealing in
the
-8-
12/2/58
new bills was the important thing.
He then inquired whether the
Committee wished to pursue the discussion at this time or whether
each member would like to comment on the subject during the "go
around.
Mr.
Hayes replied that he would favor the latter procedure,
and it was understood that it would be followed.
and
the
the
ber
and
Thereupon, upon motion duly made
seconded, and by unanimous vote,
open market transactions during
period November 8 through Decem
1, 1958, were approved, ratified,
confirmed.
In supplementation of the staff memorandum distributed under
date of November 28, 1958, Mr. Young made the following statement on
the economic situation:
Recovery in domestic economic activity--a broadly based
recovery-is continuing.
While some observers have been read
ing recent business data as suggestive of hesitation or slowing
of pace in activity, the weight of statistical evidence is on
the side of fairly well sustained momentum in upward climb.
Business expectations, as expressed in the November Dun
and Bradstreet survey, were more optimistic with regard to
near-term sales and profits gains than at any time since early
1955.
Equity investor expectations, as reflected in the recent
sharp run-up in stock prices following a fairly sharp break in
prices, apparently embrace faith that future corporate earnings
will validate current high levels of stock prices.
With model changeover and labor trouble out of the way in
the automobile industry, the November index of industrial pro
duction is almost certain to reach 140 and possibly I4l. While
steel mill operations were unchanged from October, production
of nonferrous metals rose further. Also there were gains in
business equipment lines and crude oil production. Electric
power production rose further in November, but freight car
loadings were about stable.
12/2/58
Construction activity in November at least remained
at peak levels from current trade reports, and the forward
look, according to a recent joint Commerce-Labor Department
survey, is for further climb in new construction work.
The
heavy current demand for mortgage money, particularly resi
dential mortgages, has been reflected in some further rise
in mortgage yields.
Reflecting the general rise in industrial and construc
tion activity, new orders for machine tools, electrical
equipment, construction machinery, and other durable goods in
October rose significantly further--a full 5 per cent.
Also,
liquidation of manufacturers' inventories apparently ended in
that month.
The labor market has shown additional improvement.
Of
the l49 major labor market areas, the number classified as
substantial surplus areas fell from October to November from
89 to 83.
While both initial
and continued claims for un
employment compensation have risen in November, the rise has
apparently been no more, and perhaps a little
less, than con
sistent with seasonal trends.
Personal income in October held about even with September,
reflecting a decline in payrolls in industries subject to strike
shutdown approximately offsetting a rise in proprietors' income,
and in payrolls of transportation, service, and Government
activities. With work stoppages less of a factor in November,
fresh advance in personal income is to be expected.
After declining from August to September, retail sales
again advanced in October.
Durable goods sales showed improve
ment from September and nondurable goods sales were close to
the August record. In November, department store sales only
averaged about the reduced September-October level, but sales
For the mid
at automotive outlets apparently rose sharply.
November reporting period, new auto sales were up nearly three
fifths from the same period in October, and the indications
from industry sources are that sales for the full month will
Used car sales were also
exceed those of November last year.
Industry
up sharply, about 5 per cent higher than mid-October.
forecasts of sales for the 1959 models are being lifted some
what on the basis of consumer response to the new models.
Consumer instalment credit, on the basis of preliminary
estimates, began to rise in October. Automobile credit declined
further but this decline was more than offset by a rise in credit
Some 60
on other consumer durable goods and in personal credit.
per cent of new car credits are currently on a 36-month basis,
suggesting mounting pressure for a break-through to 42-month
12/2/58
-10-
financing.
Lenders generally deny that they will accede to
these longer terms.
Wholesale prices of industrial commodities have been
rising much more and on a wider front than was earlier thought.
The comprehensive mid-October average recently released shows
average industrial prices up 1.4 index points since June, and
the November weekly index shows a .2 per cent further rise--to
a level exceeding by 1.7 per cent the prerecession high. The
importance of such a rise in GNP figures is important to under
stand. A change of .5 per cent in industrial prices is the
equivalent of $700 million, annual rate, in terms of gross
national product spending.
And it is to be remembered here
that prices of services and construction costs are also tend
ing to rise.
The rise in industrial commodity prices since June has
thus far been offset by declines in prices of agricultural
products. Hence, the index of wholesale prices of all com
modities has held approximately stable.
The consumer price average in October showed stability for
the third consecutive month. The main changes from the Septem
ber index were a half per cent decline in food prices offset
largely by a rise in auto prices.
Fall declines in food prices,
it may be noted, have been smaller than anticipated on the basis
of supply forecasts.
The sum of all of these domestic indicators is for the
attainment this fourth quarter of a GNP annual rate of around
This would
$450 billion, up $11 billion from the third quarter.
be a new high measured in current dollars; in physical volume
GNP would still
be 1 per cent or so lower than the record
volume of the summer a year ago.
Domestic recovery has now gone far enough to be on the
verge of a new expansion period, with the potential of a
significant penetration into new high ground.
In the 1954-55
upswing at this stage, our rate of capacity utilization in
manufacturing was 85 to 87 per cent and our unemployment rate,
This time our rate of
seasonally adjusted, was 4.5 per cent.
industrial capacity utilization appears to be substantially
lower--roughly 10 percentage points lower, and our unemploy
ment rate for a larger labor force is 7.1 per cent. Thus,
we have the resource potential of a longer and bigger
expansion period than in the last cycle--if only we can
maintain a condition of over-all financial equilibrium.
change on
Abroad, recent indications point to little
In Europe, further liquidation
average in levels of activity.
12/2/58
-11-
of steel inventory has taken place, and recession continues
to characterize textiles.
In Germany, the October index of
industrial production, seasonally adjusted, jumped up by 3
per cent, mainly reflecting increased construction and out
put of consumer durables and machinery.
In France, there is
evidence of a new weakening in the external position; at
least, speculation against the franc is again on the rise.
In recognition of a current state of doldrums generally in
European industry and trade, the British and Dutch discount
rates were recently lowered further. In Canada, industrial
output this fall
has not yet reattained the recovery high
of last spring; automobile market developments and heavy
industry work stoppages, however, have mainly accounted for
the setback in recovery.
Mr. Thomas then made the following statement on financial de
velopments:
Except for gyrations in the stock market, develop
ments in the financial area have shown no particularly
striking features during the past month.
They may be briefly
summarized.
1. Stock prices, after risingharply in the first
half
of November to new high levels, declined sharply for three days
and then recovered much of the loss. Currently, averages are
higher than they were a month ago.
Trading activity has con
tinued at a high level of close to 4 million shares daily.
Yields on high grade stocks, on the basis of dividends paid in
the past year, are below 3-1/2 per cent. Dividends have covered
a larger portion of profits than at any time in many years, so
that, notwithstanding greatly improved prospects for corporate
profits, it seems unlikely that dividends will be increased
Stock
much, if any, during the next several months or year.
Margin requirements
market credit expanded further in October.
were increased to 90 per cent the middle of the month.
Bond yields held relatively firm through October and
2.
November, and in fact declined somewhat from the high levels
This decline in yields, meaning a
reached early in October.
rise in bond prices, more or less coincided with rising stock
prices, but in the past week daily movements in prices of bonds
have tended to be opposite to those of stocks. The volume of
new capital issues has been somewhat lighter in this quarter
than in earlier quarters of this year.
12/2/58
-12-
3. In contrast to the decline in bond yields, short
term money rates have tended to rise since early November.
They have been influenced by usual seasonal factors, as well
as by the sizable actual and prospective additions to the
supply of short-term issues from Treasury offerings of tax
and regular bills. Moderate, almost imperceptible, tighten
ing in the reserve positions of banks may also have had some
effect on short-term rates. On the basis of past standards,
however, the level of market rates continues high relative
to the Federal Reserve discount rate and to the current
volume of member bank borrowing. Federal Reserve policy,
therefore, has probably not been an important factor in
current credit and money market developments, except that
System operations have moderated the effect of seasonal and
other temporary factors.
4. Needed Treasury financing has been successfully
accomplished in this period of improved market tone. The
Treasury cash balance, which declined in the first half of
November, increased sharply in the latter half. Attrition
on the exchange operation is somewhat less than had been
estimated. If additional bills at the rate of $200 million
a week, or something equivalent, are sold in connection with
the issuance of the new series of 26-week bills, additional
cash needs in January will be relatively light--less than
$2 billion. A heavy refunding operation will be necessary
in February, and additional cash will have to be obtained
in April, following retirement of tax bills in March.
Government expenditures will continue at a high level and
likelihood of obtaining any substantial
there is little
reduction in the deficit until receipts increase in the
next fiscal year.
5. Commercial bank credit showed no striking changes
Banks increased their loans but reduced their
in November.
holdings of Government securities in the first three weeks
of the month. This reduction, however, was more than off
set by a sharp increase in the last week, amounting to about
$1.2 billion at city banks, reflecting additions of new
At the time of the early October offer
Treasury tax bills.
ing of $2.7 billion of bills, city banks showed an increase
of only about $600 million in their bill holdings. During
the past month holdings of other securities declined sub
stantially at city banks, probably reflecting retirement
of some large local Government issue.
Business loans at city banks increased in November
compared with a decrease in November 1957, but this year's
12/2/58
-13-
increase was less than in most other years. Real estate
loans and other loans at banks showed marked increases.
Loans on securities also increased somewhat, particularly
in the last week.
The first of the midmonth reports for all member banks
showed that at country banks there were increases both in
loans and in other securities in the first
two weeks of
November, with no change in holdings of Government securities.
Country banks also added to their reserves and their balances
with other banks.
Because of the absence of data for other
years it cannot be known whether these changes were in any
degree seasonal.
6. Demand deposits adjusted, after showing a much greater
than seasonal increase in October, which largely offset the
August and September declines, increased somewhat further in
the first
half of November.
Decreases in New York and Chicago
were more than offset by increases elsewhere, particularly at
country banks.
Again, it cannot be determined to what extent
this may be a customary change for the period. In the latter
half of November, demand deposits at city banks increased
further.
Currency in circulation increased a little
more than
is usual for November.
On balance, it appears that the money
supply held close to the high level reached in October.
Time deposits at city banks declined further in November,
reflecting in part seasonal withdrawals customary at this
time, as well as some further drawing down of time balances
other than savings in New York.
Along with the seasonally adjusted increase in de
7.
mand deposits in October, the rate of deposit turnover con
This
tinued at close to the level maintained since June.
rate is about 2 per cent below the third quarter 1957 peak
The
and above that for the fourth quarter of last year.
relationship may also be expressed as a ratio of the money
The GNP is estimated
supply to the gross national product.
at about $50 million for the fourth quarter of this year--or
1 per cent above the peak quarter of 1957. The present money
supply at $138 billion, seasonally adjusted, is about 30.7 per
This represents a decline from 31.5 per
cent of that volume.
cent at the bottom of the recession in the second quarter of
above the 30.3 per cent
a little
this year, but is still
That was the lowest
figure for the third quarter last year.
ratio since 1931, but a substantially lower level was customary
in the 1920's.
12/2/58
It may be concluded that by recent standards the
present money supply is closely in line with economic
activity. Further monetary growth may be appropriate
as activity increases, but policy actions permitting
additions should be determined on the basis of the tenor
of the prevailing psychology attitudes and expectations
and by the quality and vigor of credit demands-not by
any mechanical quantitative guides.
History shows that
the forces which cause relatively small variations in
the turnover of money can be the strategic determinants
of the course of events.
8.
Bank reserve needs recently have fluctuated
widely as a consequence of Treasury financing and
seasonal market factors, and System operations have
been adjusted accordingly.
The seasonal growth in cur
rency and an increase in required reserves, caused largely
by additions to Treasury deposits last week, exerted a net
drain of about $900 million on reserves in November.
System holdings of securities showed a net increase of
almost the same amount. Loss of reserves due to inter
national movements slackened, as a continued moderate
gold outflow was largely counterbalanced by withdrawals
from foreign balances at the Reserve Banks. Member bank
borrowings generally declined during November, but have
increased considerably during the past week. Borrowings,
however, have averaged less than $500 million, while
excess reserves have been slightly higher, leaving free
reserves of less than $50 million during most weeks.
Further seasonal reserve drains may aggregate as
much as half a billion dollars by the last week of the
year, followed by a roughly corresponding return flow
in the early weeks of 1959.
Conclusion.--Although expansionary forces in the
credit area have not been vigorous during recent weeks,
the underlying basis for a stimulus to renewed expansion
continues to exist in the broadening economic recovery
Further tightening
and the continuing Government deficit.
of restraints does not seem necessary at this time, but
any tendency toward expansion should be permitted to press
against reserve availability. If this occurs, a further
increase in the discount rate would be appropriate to
bring it into line with market rates and augment the
restraint of borrowing.
12/2/58
The Chairman then turned to Mr.
Hayes, who presented the
following statement of his views on the business outlook and credit
policy:
Evidence of a slower pace of recovery has appeared in
the last three weeks.
While the termination of major work
stoppages in the automobile industry may be expected to give
a new lift
to the index of industrial production, there have
been more signs of a leveling off in other lines than at any
time since the recovery began.
In my view this does not
constitute cause for alarm. Rather the outlook seems to be
for a continuation of moderate gains in production and in
come without significant inflationary overtones--but the
possibility of a sidewise movement cannot be ruled out,
especially if some shock should occur to business confidence.
Evidence of the recovery's loss of momentum may be
found perhaps most clearly in the more restrained tone of
business comment, and also in the leveling off in the steel
industry, in figures on unemployment and average hours worked,
and in personal income and consumer spending statistics.
Transitory influences such as strikes apparently have ac
counted for only a part of this tendency.
Elements of strength in the business picture include the
prospect of continuing high levels of Government spending, the
favorable construction outlook and some improvement in new
orders, especially for machinery.
The automobile industry
continues to express confidence in the prospect for a sub
stantial increase in sales, but the response of the public
to the new models is still unclear.
As for prices, the over-all outlook for stability remains
good.
Farm prices have resumed their downward trend, after a
brief upturn, and record crops seem likely to exert continued
downward price pressure in this sector. A temporary phase of
upward pressure on non-ferrous metals has been reversed.
Even the prices of services-the most recalcitrant element in
the whole price picture--are not, for the time being, rising
at anything like the speed of recent years.
A look at recent bank credit developments is likewise
Declines in bank holdings of Government securi
reassuring.
ties in recent weeks have been responsible for a drop in
The trend
total loans and investments of reporting banks.
of business loans, while stronger than in 1957 or 1954, is
12/2/58
-16
much less buoyant than in 1955 or 1956.
Bank liquidity has
dropped considerably since the summer peak and although still
well above the level of the fall of 1957, is also much lower
than in 1954.
As we compare the period since mid-1958 with
the first
half of the year, there is a sharp contrast with
respect to total loans and investment of all commercial banks,
which rose only $1.5 billion in the four months ending with
October, as against nearly $10 billion in the first
half.
Our
estimate for the money supply as of the end of 1958 has been
revised downward and now indicates a gain of less than 2 per
cent for the calendar year--a gain which seems rather low, if
anything, for a period when we have been trying to promote
recovery. While there has been some comment to the effect
that nonbank investors will be unable to finance so large a
part of the Federal deficit in the coming months as they have
in the recent past, I can see some reason, notably in the
favorable trend of retained earnings and the absence of
buoyant spending plans for plant or inventory, to expect the
favorable nonbank market for Governments to continue for some
time.
All of this points to the wisdom of avoiding any change
in our present basic credit policy. At recent meetings there
has been some discussion as to whether, once the need of main
taining an even keel for the Treasury was past, it might be
Granted that
advisable to tighten credit somewhat further.
the absence of Treasury financing will give us a freer hand
in the coming weeks, I think that it would be a serious mis
take to adopt any more restrictive policy than is now in force.
Basically the economy appears to need the very modest degree of
support provided by current monetary policy. Maintenance of a
small free reserve position has not led to any excessive expan
sion of bank loans during the recovery to date. Moreover,
likelihood of a surge in demand for
there seems to be little
goods and services on the immediate horizon, and the inflation
psychosis seems generally to have diminished, with some
assistance from a sharp, though temporary, decline in the stock
market.
Our emphasis in the next few weeks should be on maintain
ing the present degree of ease as indicated by the feel of the
market. However, while I see no need of a specific target
disturbed to note that
figure for free reserves, I am a little
may result in our
week
wide errors in the projections this
reporting net borrowed reserves, on average, for the first
There is a risk that a development of this
time this year.
kind may be interpreted as a change in policy when in fact
no change is intended--and to my mind it is clear that no
12/2/58
-17
change is desirable.
Hence I would hope that free reserves
would be kept sufficiently high to avoid the risk of their
dropping below zero into net borrowed reserves, on average,
for any reporting period.
For similar reasons I would urge that the discount rate
and the directive remain unchanged.
On the matter of the six-month bills, I find that I am
in sympathy with both Mr. Thomas and Mr. Rouse.
I think I
like the idea of regarding these bills as a normal means of
investment for the Account.
Perhaps it would be well to show
our face a little
bit, but not to the extent of interfering
with a normal development of the market for these bills.
I
think we should give the Manager of the Account discretion
to proceed accordingly.
Mr. Johns said he saw no substantial evidence that the pace of
recovery had been interfered with or that there had been hesitation,
except such as may have been caused by management-labor
disputes.
He
was not inclined to feel any real doubt about the progress of recovery
in the immediate future and perhaps in
the somewhat longer run.
reference to the analysis of price behavior presented by Mr.
With
Young,
for some time he had been dissatisfied with explanations indicating a
fair degree of price stability, because industrial commodity prices
were up and were being offset for the time being only by the price
decline in
agricultural products.
He believed, therefore, that
reasons for complacency about current price behavior were rather hard
to find.
As a result of these and other considerations,
he continued
to hold the view, which he expressed at the last Committee meeting,
that it
would be in
order for Federal Reserve policy to be on the side
of a gradual although not dramatic tightening.
In his opinion, the
System should be on guard against any possibility of creating the
-18
12/2/58
impression that monetary policy had hesitated or been relaxed.
course,
Of
there were questions of timing involved, for there had just
been a period of Treasury financing and there would be others, and
he did not see a time for several months in the future when it
might
not be possible to argue that under an even-keel policy the Federal
Reserve was prevented from doing anything.
However, he was not
satisfied with the idea that the System should be locked in for any
such period of time.
In summary, while he did not wish to make a
specific recommendation he was considerably disturbed about the
integration of an even-keel policy and the System's monetary policy
in
the light of conditions as seen at the present time.
With regard to the 26-week bills, Mr.
be unfortunate if
against dealing in
Johns thought it
would
an impression developed that the System had a policy
In general, it
them.
was his view that the Desk
ought to treat the 26-week bills much like other Treasury bills and
govern itself
accordingly.
If
the longer-term bills were offered at
a price that was satisfactory, he would not hesitate to buy them, and
he would not put any limitation on the amount that could be held in
the Open Market Account portfolio.
Mr. Bryan said he had nothing of importance to report from
the Sixth District, where the statistical series were behaving about
the same as nationally.
Recovery was continuing,
except perhaps in
one State--Louisiana-where nothing dramatic had happened but a whole
12/2/58
-19
series of small things caused the unemployment figures not to look
as good as in the rest of the district.
Turning to System policy, Mr. Bryan said he could see at the
moment no argument at all for easing. Neither could he see much of
an argument for pursuing a policy materially different from the one
that the System had recently been following.
It seemed to him that
the situation was one in which the System should continue to maintain
a policy posture about as at present.
With regard to the 26-week
bills, he would be rather strongly in favor of making such purchases
as in the eyes of the Manager of the Account would convey to the
market an indication that the System would trade in those bills and
would regard them as a proper instrument for effecting open market
policy.
Mr. Bopp said that developments in the Third District were
not greatly different from those in the country as a whole except
that recovery was proceeding at a somewhat slower pace.
The rate of
unemployment, for example, continued to be higher than the national
rate.
With regard to the immediate prospects of inflation, he was
struck by the fact that the individual going into equities in an
attempt, presumably, to protect himself against inflation often
purchased securities of a company whose management did not appear
to behave the same way.
Consumers were not going heavily into
durable goods, and management was not going heavily into the building
-20
12/2/58
of inventories.
He was impressed by the data presented by Mr. Young
about excess capacity both industrially and as related to the labor
force.
As to monetary policy, Mr.
should be no change in
Bopp said that he thought there
the present position on the availability of
reserves, in the discount rate, or in the directive.
week bills, he agreed with the views of Mr.
to be essentially the same as those of Mr.
Mr.
Fulton stated that in
recession was still
As to the 26
Bryan, which he understood
Johns.
the Fourth District progress from the
on the slow side.
Steel production was below the
national average and the industry seemed to see nothing that would in
crease the rate precipitately, although it
hoped that the automotive
industry would get into substantial production and order more heavily.
At present,
that industry was buying only for current production.
While projections were on the basis of about 5.5 million cars this year,
one man prominent in
that field had indicated informally that 5.2 mil
lion would be an excellent year.
situation, Mr.
In a further comment on the steel
Fulton said that a considerable volume of steel products
was now being imported from abroad.
into Texas from Germany.
For example,
steel pipe was coming
While there was no evidence that manufacturers
were inventorying steel, there was some prospect of accumulation early
next year in anticipation of a strike which at present seemed inevitable.
In the machine-tool industry, a substantial pickup in
orders in October
12/2/58
-21
appeared to have been attributable to a prospective increase in
prices in November.
District department store sales were still
running below a year ago,
and Christmas season buying activity was
not as much as merchants had been hoping for.
While employment had
risen and unemployment was diminishing, the progress was very gradual.
All in
all, recovery had not been as rapid in
the Fourth District as
nationally.
Mr. Fulton expressed the view that monetary policy should be
extended from the degree of restraint that had prevailed in the past
few weeks.
Free reserves in
the zero to $50 million range were in
line with his thinking, and it would not be advisable to change either
the discount rate or the directive at this time.
As to the 182-day
bills, he suggested that the Account take them into position in
the
same manner as other Treasury bills.
Mr.
Shepardson expressed the opinion that the present gradual
rate of recovery was all to the good because the latent feeling in
so
many areas about the threat of inflation made it desirable not to have
too explosive or rapid a movement.
Like Mr. Johns, he was much con
cerned about the continuing upward crawl in prices.
He noted that
one might easily look at the general average and overlook the
divergent trend of agricultural prices that had been masking the
trend in practically all other categories.
The System, he felt,
should be endeavoring to restrain that trend by whatever means might
be available.
12/2/58
-22
Turning to the situation with respect to reserves,
Mr.
Shepardson said that he regarded recent developments as desirable.
At this point, he felt, the Committee should consider further
restraining action of a moderate type such as Mr.
Johns had suggested.
What he had in mind was a constant pressure that would leave the
System in a position to prevent an explosive inflationary development,
for it
was better to have the situation in hand than to try to recover
later.
For these reasons, he hoped that there might be a trend toward
a somewhat lower level of reserve availability in
the period ahead,
and that one might expect a further increase in the discount rate in
the not too distant future.
On the 26-week bills, it
priate to take the matter in
stride, taking some of the bills into
seemed appro
position without any specified limit.
Mr. Robertson said that his views were similar to those of
Mr.
It
Shepardson and that he shared the fears expressed by Mr. Johns.
was only a couple of years ago, he recalled,
that we were complacent
about price changes that were covered up in the averages, and he hoped
that there would be no complacency this time.
He was rather glad that
by accident the reserve position had gotten into the area of net
borrowed reserves,
and he would hope that the level of reserves did
not bounce back too fast because of System actions taken in
an effort
to prove that the movement that had taken place was simply an accident.
Certainly net borrowed reserves had come about by accident, because
12/2/58
-23
they were not in accord with the target mentioned at the last Com
mittee meeting, but he would prefer to explain the situation on that
basis,
if
necessary, and move on further into negative free reserves
since he considered it
necessary to take advantage of every period
when the System was free, from the standpoint of Treasury operations,
to establish as much of a firm rein as possible.
nothing drastic, he wanted to make it
taiing
While he would do
clear that the System was main
a posture of restraint and not ease.
On the 26-week bills, Mr.
Robertson said that he did not wish
to take any position at this time because he had not thought the matter
through to his own satisfaction and did not Know the answer.
He hoped
that the Manager of the Account would not be called upon to make any
purchases at all during the few days that the new bills would be avail
able before the next Committee meeting, and that the matter could then
be discussed again.
However, he was willing to abide by the majority
view.
Mr. Mills said that he thought the discussion of economic condi
tions this morning indicated the desirability of continuing a policy of
moderate restraint over the expansion of commercial bank credit.
regard to the implementation of such a policy,
With
he suggested that natural
forces be allowed to do the work for the System instead of taking posi
tive actions.
In the remaining weeks of this year it
anticipate a natural tightening in
was reasonable to
the market and a strengthening of
interest rates which need not be offset by System action unless the
12/2/58
-24
degree of tightening should indicate that remedial attention was
necessary.
What he had in mind, Mr.
roborated the reasoning of Mr.
Mills said, essentially cor
Thomas and was that the System should
be the one voice to speak quietly in all of the clamor of loose talk
ing and loose thinking affecting the financial markets.
The most
constructive way for the System to act without ostentatious display
would be to let the interplay of natural forces bearing on monetary
policy, market psychology, and market conditions develop with a
minimum of interference.
Mr.
Mills said he would join with those
who would operate in the new 26-week bills in the same manner as the
Account operates in conventional bills.
Mr.
Leach reported that while recovery apparently had continued
at a moderate rate in most Fifth District industries, a significant
improvement had occurred in
largest industry.
recent weeks in
textiles, the district's
This developing textile strength was across the
board--cotton gray goods for both apparel and industrial uses, finished
fabrics,
and synthetics.
Knitting mills in general were operating at
the best levels this year and producers of women's seamless hosiery
and knitted tights were encountering delivery problems despite full
capacity operations.
It
remained to be seen whether the improved
market for textiles would be allowed to progress,
were concerned,
production.
or whether it
so far as the mills
would be smothered by sharply stepped-up
Increases in nonagricultural employment had occurred in
both manufacturing and nonmanufacturing businesses but the gains were
12/2/58
-25
extremely thin.
Production of bituminous coal in the four weeks
ending November 8 was down slightly from the comparable period a
month earlier as foreign shipments continued their downward trend,
and seasonally adjusted department store sales for the first three
weeks of November were below October levels.
Business loans at
weekly reporting member banks had risen more than seasonally in
each
of the past four weeks; the over-all increase far exceeded gains in
comparable periods of the previous three years and had taken place
on a broad base.
About 75 per cent of reporting banks had experienced
heavier loan demands in
the last four weeks.
Gains were reported for
eleven of the twelve categories of business loans.
Mr. Leach said he could see no developments in the continuing
moderate expansion of production and consumption that would warrant a
change in
System policy, but that one could not avoid concern over
inflationary dangers.
Substantial additional reserves would be needed
between now and the end of the year to enable member banks to meet
seasonal and other credit needs.
change in
While he did not favor any material
policy, he thought that member banks should obtain some
needed reserves through temporary borrowing from the Reserve Banks.
Since December is
traditionally a month for borrowing,
he also felt
this would be a good time to go over on the side of net borrowed
reserves to a modest extent.
This would mean that repurchase agree
ments and direct purchases would be used to supply the bulk but not
12/2/58
-26
all of the needed reserves, that borrowings from the Reserve Banks
would rise above recent levels, and that net borrowed reserves would
again appear in the weekly statements.
In other words, the System
would not make any great effort to avoid them.
In view of the under
lying strength of the widespread upward expansion now occurring, he
did not think a moderate increase in borrowing would deter further
desirable recovery.
He would not favor an increase in the discount
rate at this time.
On the 26-week bills, Mr.
Leach expressed the opinion that the
System should at least indicate a willingness to buy,
small amount.
and even buy a
He would not treat them just like other bills in the
beginning because he saw something to the argument that the new bills
should find their own level ir the market.
Mr. Leedy reported beneficial rains and snows in the Tenth
District recently that were needed for surface conditions.
This had
brought improvement in the outlook for winter wheat and other fall
seeded crops.
Cash receipts from farm marketings for the first nine
months of this year for the country generally increased 11 per cent
from last year, but in the Tenth District the increase was 32 per cent.
Mr.
Leedy commented that he could not derive any satisfaction from the
fact that the stability in commodity prices was at the expense of
agricultural commodities.
gains in
Based on incomplete estimates for October,
nonfarm employment in the district had been better than the
12/2/58
-27
customary seasonal gains but the level of nonfarm employment remained
below that of a year ago.
over November a year ago,
Christmas season.
Department store sales increased sharply
and the general expectation was for a record
Loans in all categories at weekly reporting member
banks were above a year ago with commercial and industrial loans show
ing a particularly marked increase.
having more than its
The Kansas City Bank had been
normal share of member bank borrowing,
but the
picture was distorted by the November 30 tax assessment date in Oklahoma
which involves substantial deposit withdrawals and causes the larger
banks in Tulsa and Oklahoma City to borrow from the Reserve Bank heavily.
Mr.
Leedy said that the general economic situation would seem to
require the System at least to continue the policy of restraint that it
had been following.
Some seasonal factors would exert restraint on the
reserve position of the banks,
and he would subscribe to the view that
the System should not undertake to offset them fully.
He found it
difficult to believe that publication of a nominal net borrowed reserve
figure would be interpreted as a real change in
connection, he pointed out that it
System policy.
In this
would be difficult after the first
the year to maintain even the present position.
of
Accordingly, he had the
feeling that the Desk ought to be operating in the direction of getting
as quickly as possible to a net borrowed reserve position, allowing
some time for redistribution of the securities recently sold by the
Treasury.
On the 182-day bills, he had the feeling that the Desk
should not indicate any reluctance to purchase.
While it
should not
12/2/58
-28
be aggressive with regard to transactions in those bills, neither
should it
give lip service only.
offers seemed appropriate,
in
It
should make purchases when
with the objective of creating a feeling
the market that the System considered those bills in
the same
light as the ordinary 91-day bills.
Mr. Allen stated that in the Seventh District there was a
tendency to be impressed by the part of work stoppages in slowing
down the rate of increase in
general activity and less inclination
to feel that the slowing down indicated any basic weakness in
business recovery.
the
This was because the district had had such a
big share of strike trouble--notably in the automobile and farm
machinery industries.
All of the important strikes had been in
durable goods lines where demand had been strong or improving,
where,
as in autos,
Mr.
or
new models were being introduced.
Allen reported considerable disagreement in Detroit with
regard to the 1959 automobile sales forecasts and said that those who
a month ago predicted a 5-1/2 million car year were now less confident
of that estimate.
Sales in
the second 10 days of November were at a
daily rate of 16,196 compared with a rate of 11,600 in the first
days.
Therefore,
even if
10
expectations of an 18,000 daily rate in the
last 10 days were realized, November would wind up with total deliveries
of 383,000,
duction in
or approximately 15 per cent behind November 1957.
November was estimated at 533,000 units, and in
at 59h,000, while in the first
Pro
December
four months of 1959 production of over
12/2/58
-29
500,000 cars per month was currently scheduled.
If
the production
figures for the next three months were realized and if
sales were
at a daily rate of 18,500, the inventory at March 1 would be 687,000
cars compared with 881,000 on March 1, 1958.
daily rate of only 17,000,
less than a year ago.
If
sales were at a
the inventory at March 1 would still
be
This seemed to add up to the probability that
production would be substantial and steady at least through February.
Mr. Allen said that in recent weeks steel production in
the
Chicago area had been at 88 per cent of capacity and in Detroit at
90 per cent of capacity, while the national average rate in November
was about 75 per cent of capacity.
In the four weeks ending Novem
ber 22, department store sales were about even with last year in
the
district, which represented improvement, but the district was still
behind the national figures.
The corn referendum had been of great
interest in the area and the net result seemed likely to be an in
crease in
the acreage of corn in
reported that business loans in
noticeably above a year ago.
1959.
Major banks in the district
only three categories were running
As to reserves, the larger Chicago
banks continued to maintain a net surplus position, although smaller
than before.
The discount window was doing about its
of total System lending,
normal share
but the aggregate figures remained small.
More country banks borrowed in
any period since last March.
the first
half of November than in
12/2/58
-30
Turning to policy for the next two weeks, Mr. Allen expressed
the view that the System should try to stay about where it
had been
for the last two weeks but be poised for more restrictive action, which
it
appeared to him might be called for before too long.
be disturbed by net borrowed reserve figures if
He would not
they should appear.
As to the 26-week bills, he felt that the System should show a disposi
tion or willingness at the first
for effecting monetary policy.
opportunity to use them as a medium
At first, however,
the Account should
buy as few as possible.
Mr.
Deming reported that one of the few areas of weakness in
the Ninth District--copper production--was being reduced.
In Montana,
Anaconda was reported to be at about full-scale operations and if
price level should hold or improve it
producers in
the
appeared that even the marginal
the Upper Peninsula might expand production somewhat.
With regard to Mr. Young's comment about excess capacity from the stand
point of the labor force, Mr.
Deming noted that the Minnesota employment
authorities were currently estimating that unemployment in the State
would remain higher than normal until next fall despite the reclassifica
tion of the Twin City area to one with only moderate labor surplus.
Putting it
another way,
it
was not expected that nonagricultural employ
ment would reach previous peak levels until about next September.
City
banks were showing about the same amount of seasonal expansion in business
loans as prevailed in
1955,
somewhat more than in
1956 and 1957.
Business
12/2/58
-31
loans at such banks were now about 7 per cent higher than at this
time last year.
At the discount window, more country banks were
borrowing but the total amount was not large.
Mr. Deming said that Mr. Thomas'
views expressed his own
feeling with regard to policy; namely, to let the credit expansion
press on reserve availability and to be poised to move on the discount
rate.
He saw no reason to treat the 26-week bills appreciably dif
ferent from ordinary bills.
Mr.
Mangels said that Twelfth District business activity con
tinued to expand but at the moderated rate that he reported at the
last Committee meeting.
Residential and heavy construction were now
reflecting only seasonal changes,
increases during the past summer.
contrasted with some rather sharp
Lumber and agriculture were somewhat
on the favorable side although neither was in
Farm cash income in
the district for the first
was about 5 per cent over 1957,
perienced nationally.
an expansionary area.
nine months of this year
approximately one-half the gain ex
Retail trade picked up somewhat in late October
and early November but automobile sales were still
handicapped by lack of stock.
first
major improvement in
down, with dealers
The unemployment situation showed the
October since the first
of this year,
the
rate dropping to 7 per cent compared with 7.5 per cent in September.
The employment situation continued strong in
all manufacturing
activities related to defense production.
Continuing his review, Mr. Mangels said that in the three weeks
ending November 19 the increase in bank loans in
the district was double
12/2/58
-32
the increase for the same period in 1957.
While commercial and
industrial loans were beginning to show the expected seasonal upturn,
the heaviest increase was in real estate loans, and banks had indicated
tlat
such loans probably would continue to increase through April or
May of next year.
It
was also reported that insurance companies and
some pension funds were again beginning to show an interest in purchasing
real estate mortgages.
Some bankers expected an increase in loans due
to inventory buildup, while others did not.
Demand deposits showed an
increase but time deposits dropped for the reasons mentioned by Mr.
Thomas and also because of the paying out of Christmas funds.
November 26, ten banks were borrowing from the Reserve Bank,
On
all but
two of them reserve city banks, but the aggregate of borrowing was
nominal.
Banks in
the district were net borrowers of Federal funds,
contrary to past experience,
Mr.
with purchases about double sales.
Mangels expressed the view that System policy could best
mark time for the next two-week period and that free reserves should
continue in the range of zero to $50 million.
He would not be in
clined to move too rapidly to net borrowed reserves.
satisfactory and he would not favor changing the discount
was still
rate at this time.
them in
The directive
As to the 26-week bills, he would favor purchasing
modest amounts according to the judgment of the Manager of the
Open Market Account.
Mr.
Irons reported that Eleventh District business continued
to expand and that there had been further improvement in the employ
ment and unemployment situation, in industrial activity,
and in
12/2/58
-33
department store trade.
favorable.
Agricultural conditions continued very
It was expected that the district cotton crop would
be about 14 per cent above last year and in the State of Texas
about 17 per cent higher.
The crude oil situation was better,
with production now on a 12-day allowable basis.
During the first
three weeks of November department store sales were up, and there
was optimism about the seasonal business ahead.
Borrowing from the
Reserve Bank was less than might be regarded as the Dallas Bank's
normal proportion of the System total.
A few country banks were
coming to the discount window, and some city banks were in for a
day or two.
Bank loans continued to move up in
period, with strength in
the past three-week
consumer credit and real estate loans,
moderate increase in business loans,
a
and quite a wide variation among
types of business loans.
Turning to the national picture, Mr.
Irons said that the
recovery appeared to be continuing and broadly based.
qualms about its
gradual pace,
been stated by Mr. Johns.
He had no
and the tone of his own thinking had
It seemed to him that most of the moderate
nature of the recovery could be attributed to strike situations.
New
housing starts were very high along with other types of construction,
the unemployment
situation was improving, and inventory liquidation
had about come to an end.
In many areas there appeared to be some
tendency toward inventory accumulation and businessmen were referring
12/2/58
-34
to the possibility of shortages more than previously.
It now
appeared that the industrial production index would be up two
or possibly three points in November.
He had no apprehension
about the business situation and did not think that the movement
of the price structure was such as to generate complacency.
Mr. Irons subscribed largely to the view that this was a
period when increased credit demand might be expected and the System
should permit some of the pressure to be felt.
If market developments
should tend to produce net borrowed reserves, he would not take off
setting action just because of a desire to have free reserve figures
perpetuated.
While he was not unhappy about the operation of the
Account during the past few weeks in the light of the even-keel policy,
he would be willing, in fact, would like to see, a move toward a little
more firmness in
preference to so-called moderate restraint, which might
be interpreted as almost a minor degree of ease.
he felt that the System ought to let it
On the 26-day bills,
be known by its
actions that
those bills were an eligible instrument in which the Account would deal
if
it
seemed appropriate,
actions in
the bills if
and there should be no limitation on trans
the Management felt it
desirable to buy them.
They should be treated as an instrument in which the Account would
operate according to the dictates of judgment.
Mr. Erickson said that the latest available statistics in the
First District indicated further recovery but at a slower pace.
There
12/2/58
-35
was continued strength in
electric power output and department store
sales and there were spurts in construction activity, but automobile
sales were lagging.
There was a continued disposition to save, as
evidenced by the fact that in October total life insurance sales ran
11 per cent over last year.
In the past two weeks there had been more
activity at the discount window than at any time in
the recent past,
most of the borrowing being by banks in the larger cities.
As to policy, Mr.
Erickson suggested that the System should
continue to maintain a posture of restraint.
He saw no need for change
at this time in the directive or in the discount rate.
the opinion that the Desk had handled itself
weeks,
well in
After expressing
the last three
he said that he would favor keeping free reserves within the
range of zero to $50 million.
However,
if
they fell into the area of
net borrowed reserves in a modest way, he would not be inclined to take
positive action to change the situation.
As to the 26-week bills, he
would leave it to the Manager of the Account to indicate that the bills
were an instrument in which the System Account would deal.
Mr. Szymczak said he had the feeling that the Desk should try
to maintain a free reserve position, unless it were found during the
next two weeks that placing money in
the market to hold the position
above zero would add too much to the money supply.
would let reserves go to zero or below.
In that event, he
In other words, he would
prefer a free reserve position but would not take extreme measures to
12/2/58
-36
maintain it
if
the strength of the demand for credit should be such
as to cause net borrowed reserves.
forces determine the situation.
Mr.
If
possible, he would let market
Szymczak expressed the opinion
that the 26-week bills should be treated the same as any other bills.
As soon as possible and if
convenient to do so, he would buy some of
those bills without waiting to have to answer questions about whether
the System would buy and to what extent.
He would let the purchases
speak for themselves.
Chairman Martin said it
appeared from the discussion that there
Was again fairly close agreement around the table.
Personally,
he sub
scribed to the view of those who would favor some increase in the
degree of restraint, with the proviso that due consideration must be
given to the problems of the Treasury.
He liked Mr. Mills' point
about letting market forces operate.
The Chairman saw grave danger in
becoming complacent about the
price situation and said he believed the System ought to be poised, as
far as possible, to take effective action whenever and wherever the
price situation seemed likely to get out of hand,
for otherwise it
might become too late for the System to be very effective.
same time, it
At the
must be remembered that the Treasury was about to issue
a new type of bill.
It
would be unfortunate to have articles appearing
in the press purporting to give intimate information regarding policy
discussions and decisions, he said,
noting that the System was being
12/2/58
-37
charged with being a sieve of information.
With a meeting of this
size, one could see how those charges arose, but the System must not
let its critics consume it with that kind of charge.
Whatever the
disadvantages of meetings as large as this, it was necessary to have
these discussions in order to get all views in the System and he was
convinced that the advantages outweighed the disadvantages.
Chairman Martin again expressed the view that the System could
not afford to become complacent about price trends, nor could it afford
tc let anyone get the impression that its attitude was just neutral.
Market forces, he noted, would make for a tightening at this time of
the year, and all the System had to do was to let the market forces
play.
He would hope that, without aggravating the problem of the
Treasury in floating the new bills, the System might try to let the
forces of the market play as far as possible in the direction that he
understood had been clearly indicated by a majority of the Committee.
This would not represent a conscious change of policy; it
would amount
to taking advantage of a year-end opportunity to let the forces of the
market frame themselves.
If they did not develop as anticipated, there
could be further discussion at the next Committee meeting on December
16 but it
was his feeling that they would frame themselves between now
and the end of the year.
It was very important, he repeated, not to
lessen whatever influence the System had by letting anyone get the
impression that it was disposed to temper a policy of restraint.
He
found himself unimpressed by statements that there was no inflationary
12/2/58
-38
impact in the economy at the moment.
Such a thing buils up, he said,
and he felt that it was building up at this time.
He anticipated
another difficult period ahead and expressed the hope that the situa
tion would not be complicated by having the System's actions interpreted
in the press and elsewhere in such a way as to create more difficulties
for the System and the Treasury.
He urged, therefore, that care be
exercised in making any comments to the press or others concerning the
course the System was following.
The Chairman then noted that there had been no suggestion for
a change in the directive.
Nor had a specific target for free reserves
been indicated, although the majority appeared to favor letting market
forces move in the direction of negative free reserves.
Mr. Hayes said there were certain things that puzzled him about
some of the expressions of opinion.
He found it hard to reconcile what
Mr. Mills had said about maintaining moderate restraint, and what Mr.
Leach had said about making no change in policy, with the idea of letting
the seasonal increase in
market.
credit demand have the effect of tightening the
It was his impression that in
the past the System had followed
quite steadily a policy of meeting seasonal demands through open market
operations.
After Mr. Leach commented that his reference had been to no
"material" change in policy, Mr. Hayes said he felt that a failure to
meet seasonal demands through open market operations would be
12/2/58
-39
interpreted by the market as a real change in policy, one which, if
decided upon, should be entered into knowingly and with open eyes.
He would also be troubled about the wording of clause (b) of the
policy directive--to fostering conditions in the money market conducive
to balanced economic recovery--for,
main problem, it
if
inflation was regarded as the
seemed to him that this wording in the directive was
perhaps misleading.
While he did not think himself that inflation was
the main problem at this particular time, he had the feeling that a
number of those around the table did.
Committee could tighten its
excess capacity,
He found it
hard to see how the
policy in the face of factors such as
the unemployment picture, and doubts about the auto
mobile outlook.
Mr.
Shepardson suggested that the phrase "balanced recovery"
was the key to the directive.
and unemployment,
While there was some excess capacity
there was also the price crawl.
As he saw it,
the
objective was to foster a balanced and continuing long-term recovery
rather than too precipitate a recovery.
Mr.
centrate its
Hayes then asked whether the System could afford to con
attention on one factor, for there were three or four
objectives that he considered about equal in importance,
to which Mr.
Shepardson responded that he did not think the System could afford
not to concentrate on the price factor.
Chairman Martin commented that he too was anxious to get the
unemployed back to work,
but in his judgment a balanced recovery would
12/2/58
-10
not come about if
price pressures in
the economy were ignored or if
they were strengthened through following an easy money policy.
the latter point Mr.
On
Hayes stated that he was advocating a policy of
"staying where we are" and not easy money.
Mr. Szymczak inquired whether a matter of degree was not in
volved.
He would agree that the System should supply some reserves,
but not to the same extent as heretofore.
He suggested that the
establishment of a target for reserves tended to set up an artificial
goal.
While he felt
that there would be a seasonal demand for credit
and while he would favor supplying some reserves through open market
operations,
he would not try to force the reserve figures to hold
above zero continually and indefinitely--to do so would get into a
box like the one last spring when a target of $500 million of free
reserves was used.
Mr. Rouse commented that yesterday the Account Management
took no action to buy in
net borrowed reserves.
this morning,
it
the bill market in
the face of projected
On the basis of the reserve figures distributed
turned out that the market was the important thing
rather than the figures.
However,
he thought that the sense of the
meeting favored a tighter feel.
Mr.
Thomas observed that there was a risk of going too far in
offsetting quantitative seasonal factors, because they were not divided
evenly among banks-some were under pressure, while others were not.
12/2/58
-41
Market rates should be permitted to have some effect so as to draw
money to where it
was needed from where it
exists.
If
the System
were to supply money automatically to everyone desiring funds for
temporary purposes,
trying to find use.
little
too far in
this might result in
He wondered if
a lot of money running around
there was not a tendency to go a
trying to base an even-keel operation on a given
figure of net borrowed or free reserves and whether the figures should
not be permitted to fluctuate a little.
Chairman Martin said he thought this point was well taken.
Mr.Johns stated that inasmuch as the Committee was going to
meet again in two weeks, he wondered if it might not be appropriate
simply to instruct the Desk to stay out of the market for the next
two weeks.
If the projections were reasonably accurate, this would
mean that the reserve figures would bounce around somewhat from day
to day, but he was not sure whether attempts at daily adjustment were
necessary or entirely effective.
In response, Chairman Martin expressed the view that the Com
mittee must always leave discretion with the Manager of the Account
to a certain degree and not say hands off despite whatever situation
might develop.
Mr. Szymczak agreed, as did Mr. Robertson who said
that he also agreed with the Chairman's earlier summary of views
expressed at this meeting.
The Chairman then referred again to his concern about not
giving a false impression of System actions which would complicate
12/2/58
-42
the Treasury's problem with respect to the new bills.
If
it
were not
for this concern, he said, he would favor an even more positive course.
In further comments,
Mr.
Szymczak referred to the limitations
on the role of monetary policy and Mr. Hayes said that this pointed up
the risk he saw in
tightening policy at this time.
No one,
he said,
could expect monetary policy alone to deal with the price threat.
Chairman Martin then called for further comments and, receiving
none, stated that there appeared to be general agreement on the course to
be followed in
the next two weeks.
Mr.
Shepardson inquired whether this
contemplated letting market forces tend to increase restraint, to which
the Chairman responded in
the affirmative, with the understanding that
this would leave latitude for the exercise of discretion by the Manager
of the Open Market Account.
In response to a question from Mr.
Szymczak,
Mr.
that he thought he understood the sense of the meeting,
in mind what Mr.
Rouse stated
that he had
Shepardson had said, and that the Treasury's financing
was involved.
Thereupon, upon motion duly made
and seconded, the Committee voted unan
imously to direct the Federal Reserve
Bank of New York until otherwise di
rected by the Committee:
To make such
(1)
(including replacement
allowing maturities to
the System Open Market
purchases, sales, or exchanges
of maturing securities, and
run off without replacement) for
Account in the open market or, in
12/2/58
-43
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 fostering conditions in the money
market conducive to balanced economic recovery, 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 ac
count of the Federal Reserve Bank of New York (with discretion,
in cases where it seems desirable, to issue participations to
one or more Federal Reserve Banks) such amounts of special
short-term certificates of indebtedness as may be necessary
from time to time for the temporary accommodation of the
Treasury; provided that the total amount of such certificates
held at any one time by the Federal Reserve Banks shall not
exceed in the aggregate $500 million.
Mr. Robertson referred to efforts made by the supervisory
agencies to combat the "window-dressing" of condition statements by
some commercial banks.
While much progress had been made,
he said, it
was sometimes charged that the Federal Reserve System aided and abetted
"window-dressing"
It
at year end through the use of repurchase agreements.
was his suggestion that between now and the next meeting of the
Committee the Account Manager give thought to ways and means of off
setting that criticism if
it
seemed to be a justifiable one.
There
would then be an opportunity for further consideration of the matter
before the end of the year if
necessary.
12/2/58
-44
In accordance with discussion at the meetings of the Committee
on July 8 and 29, 1958,
there had been distributed under date of Novem
ber 19 a memorandum dated November 17 from Messrs. Thomas and Marget
discussing reasons for Federal Reserve open market operations in
bankers'
acceptances and guides for such operations.
memorandum has been placed in
A copy of the
the Committee's files.
Commenting on the memorandum, Mr.
Thomas referred to the ac
ceptance market as an important sector of the money market, one close
to monetary policy both now and historically.
The relationship had
been diminished by the growth in use of Treasury bills but it
still
was
close enough to suggest that monetary policy should use the acceptance
as one of its
instruments.
The System should not,
in his opinion,
discriminate against acceptances by refusing to operate in them on the
basis that the acceptance market was now sufficiently on its own feet.
Furthermore,
it
appeared that the System could operate in
fully as much as it
occurred in
acceptances
had been without the danger of domination that
the 1920s.
In fact,
some additional operations in the
acceptance market might be appropriate, particularly at the time of
year marked by seasonal credit demands.
in
Generally speaking, variations
acceptances outstanding conform to seasonal variations in the demand
for bank reserves so the System could add to its holdings in
part of the year, reduce those holdings in
the latter
the early part of the next
year, and conform to both monetary policy and the needs of the acceptance
market.
12/2/58
-45
Mr. Hayes expressed the opinion that Messrs. Thomas and
Marget had done a splendid job in
clarifying the historical back
ground and the present position of the acceptance market.
read it,
As he
the memorandum pointed to the desirability of operating in
the acceptance market in
somewhat larger volume.
He would suggest
that the Manager of the Account be authorized to purchase and hold
acceptances at any time up to 10 per cent of the total amount of
acceptances outstanding as revealed by the latest report at his
disposal.
This would be with the understanding that if reasons
should appear to suggest going beyond that limitation, the Manager
could come to the Committee, state the reasons, and ask permission
to exceed the limitation.
At present, 10 per cent of acceptances
outstanding would be about $120 million, and he would not expect the
Manager would go immediately to the 10 per cent.
However, such a
limitation would provide more leeway to use acceptances when seasonal
forces were strong and when their use was generally in keeping with
open market policy.
After Mr.
Thomas stated that in
his view the present $50 mil
lion limitation was too low relative to the existing volume of acceptances,
Mr.
Allen made the following statement:
1. Acceptances have been and still are useful
instruments in financing foreign trade, even though the
amount of scceptances outstanding is much smaller relative
to the total dollar volume of foreign trade than it was in
the 1920's.
2. Because acceptances are useful in financing foreign
trade, the System should be interested in promoting their
12/2/58
usage.
Such promotion involves holdings of acceptances by
the System, but if promotion of the acceptance is our primary
object, System holdings must be adjusted (bought and sold)
according to the condition of the market and not to effectuate
monetary policy.
3.
There is nothing wrong with System holdings of accep
tances as an instrument of monetary policy provided we adopt
that as our purpose.
However, if we buy and sell to effectuate
monetary aims we cannot at the same time treat promotion of
acceptances as our primary object.
4. Since we cannot deal in acceptances with both friend
ship to the acceptance market and effectuation of monetary
policy as equally important objects, we must make one of them
our first
choice.
So long as we make a choice, I do not think
it is terribly important which we choose.
However, my own
choice is friendship to the acceptance market because in the
matter of monetary policy we have Treasury bills available in
such substantial amounts and with such a wide range of maturi
ties.
If my choice is adopted, our holdings of acceptances
5.
will never be large. We will be slow to buy, always keeping
pressure on the market to develop new customers, and we will
sell whenever the market will take what we have in portfolio.
6. Obviously, if my choice is accepted the current
authorization to the Desk to buy acceptances would not be
increased.
Mr.
Robertson then made the following statement,
The proposal presented to us in July 1958 was to raise
from $50 million to $75 million the maximum amount of bankers'
This was a
acceptances to be held in the System account.
quantitative proposal, but in the course of discussion it
transpired that a qualitative change also was contemplated by
the proponents--namely, that we should participate in the
acceptance market as an instrument of monetary policy.
In some ways the attitude of some members of our staff
regarding Federal Reserve activity in the acceptance market
Originally he wanted
reminds me of a boy with a new knife.
He was given
the knife so that he could learn how to throw it.
the knife with the warning that he must not use it in that way
A few days later
but only to sharpen pencils and to whittle.
he is discovered carving huge chunks of bark from valuable
shade trees in order to leave his initials for posterity. When
his father remonstrates, he asks whether that is not what a
knife is for, and why they gave it to him if they did not want
him to use it?
12/2/58
-47-
I have reviewed our actions in this field, and the
relevant documents and discussions, since the original
proposal almost five years ago. The latest discussion is
that in the November 17, 1958 memorandum prepared by members
of the staff. The reason originally advanced for our partici
pation in the acceptance market--to "free demand generally
from administered rate constriction"--has long since been
abandoned, and, as the November 17 memorandum concedes, the
magnitude and flexibility of the acceptance market have gotten
along very well on their own.
But the proponents continued to
press their proposal for new reasons, and in 1955 the Committee
agreed to "participate in a very modest way in order to show
the interest of the central banking organization."
A beachhead having been established, the next steps were
to spread out and bring in more fire power. The "interest of
the central banking organization" certainly could be displayed
"in a very modest way", as we intended, with a portfolio of
$25 million. But after a while we were persuaded to raise the
limit to $50 million, and now an increase to $75 million is
being sought. Even more important, in my judgment, is the
change that apparently has occurred in the nature of our
participation in the acceptance market, which is now presented
to us for semiformal recognition. When we authorized the hold
ing of acceptances for the purpose I mentioned, the Chairman
explicitly stated that the System "should avoid any 'finagling'
in the market". But now, as disclosed by the November 17
memorandum, our acceptance activities are sought to be justified
on the ground that they may lead to changes in acceptance rates,
which in turn may "affect the prime loan rate of leading banks
and thereby speed the response of that rather sluggish rate to
many market changes."
Keeping fundamentals in mind, let us be mindful of the fact
that our open-market operations are designed to affect credit
conditions by raising or lowering the level of bank reserves.
Under present-day conditions, the short-term Government securi
ties market provides an ideal vehicle for these operations.
There has been nothing presented to this Committee to support
any contention that our open market operations would be more
effective because we bought $190 million of Treasury bills and
$10 million of acceptances, rather than $200 million of bills.
I confess that several readings of the November 17 memo
randum have not enlightened me as to either the usefulness of
our participation in the acceptance market from the viewpoint
of monetary policy, or how our participation would contribute
12/2/58
-48
to a more flexible acceptance market.
There is some sug
gestion, as I mentioned before, that increased System
activity might indirectly affect the prime loan rate. With
respect to that, I can only say that it seems to me that
this result would be improbable and--more important--that
if it did occur it would be undesirable; that would be the
very thing--the "finagling"--that we intended to avoid when
we decided to hold a modest portfolio of acceptances simply
as a token of the central bank's interest in the acceptance
market.
The November 17 memorandum seems to state also (page 2)
that the System's chief concern should be "with the develop
ment of a broad and flexible market". This shifts the ground
to the third question to which the memorandum is addressednamely, the "Need for Federal Reserve Participation". But on
that point, the memorandum concedes that the acceptance market,
on its own, has developed very well during the last decade and
that rates on acceptances have become quite flexible without
Federal Reserve interferences.
If, as the memorandum states, a
broad and flexible market for acceptances is the nub of our
interest, it is difficult to see any justification for the
central bank's tinkering with a machine that is running very
efficiently on the basis of the incentives and the judgment
of an independent market.
We are all subject to the temptation to exercise our
powers broadly and forcefully.
This is a temptation that an
organization like the Committee must resist with particular
strength. In many areas, we have made great efforts to en
courage the developments of markets that could stand on their
own feet without our support.
Here we have a market that has
developed and grown independently in a very healthy manner.
It is impossible for me to see how the natural strength and
flexibility of that market could be improved by "more active
Federal Reserve participation" to use the currently popular
euphemism.
This point--the "need for Federal Reserve participation"
is dealt with in pages 7 to 11 of the November 17 memorandum,
and I should be grateful to have pointed out to me any argument
therein that tends to establish that expanded Federal Reserve
participation in the acceptance market is desirable as a means
of promoting the developmert of that market. The memorandum
refers to the benefits of "a moderate position in bankers'
acceptances on the part of the Federal Reserve". However,
that already exists by virtue of our present portfolio of
acceptances; the instant question is whether we should hold a
still larger amount and whether we should abandon the original
12/2/58
49-
purpose of showing, in a very modest way, the interest of
the central bank. It is my sincere belief that no sound
justification can be advanced for either the quantitative
increase or the qualitative change, and that by adopting
these proposals, we would be gaining nothing but an
opportunity to prove our virtuosity in the art of central
banking by playing upon still another instrument, and that
the proposed change in policy could easily lead to a situa
tion in which a healthy, broad, flexible, and--above allindependent financial market could lose these attributes,
which we have been so eager to develop in other markets.
To me, this is a striking example of a situation in which
we should exercise self-restraint and resist the impulsein ourselves or in our staff--to become a more important
participant in a healthy self-reliant market, on the
paradoxical theory that its independent depth, breadth and
resiliency can be enhanced by increased governmental inter
ference.
I have discussed not only the substantive question now
before us but also its genesis, because it seems to exemplify
a danger against which we should be constantly vigilant not
only with respect to acceptance activities but in all our
fields of action. But to recapitulate the situation with
respect solely to the substantive merits of the instant pro
posal, it must be borne in mind that the Federal Reserve Act
requires our open-market operations to be governed (1) "with
a view to accommodating commerce and business", and (2) "with
regard to their bearing upon the general credit situation".
As far as the general credit situation is concerned, our
objectives can be carried out quite as effectively, and more
simply, in the Government securities market. As far as the
accommodation of commerce and business is concerned, that
means, in this case, the scope and flexibility of the
acceptance market. But the acceptance market is flexible,
self-reliant, and growing without our "support", and in
creased Federal Reserve participation, particularly if
designed directly to affect rates, is likely to diminish
rather than enhance the strength of that market. In other
words, if the proposal before us were adopted, we would be
disregarding the statutory mandate as to the proper
objectives of our open-market operations.
Mr. Thomas said Mr. Riefler had made the comment that, although
not brought out clearly in the memorandum, increased System participa
tion in the acceptance market had come at a time when it probably
helped to expand that market.
Cite this document
Federal Reserve (1958, December 1). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19581202
@misc{wtfs_fomc_minutes_19581202,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1958},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19581202},
note = {Retrieved via When the Fed Speaks corpus}
}