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, December 16, 1958,
PRESENT:
Mr.
Mr.
at 10:00 a.m.
Martin, Chairman 1/
Hayes, Vice Chairman 2/
Mr. Fulton
Mr.
Mr.
Irons
Leach
Mr . Mangels
Mr. Mills
Mr. Robertson
Mr. Shepardson
Mr. Szymczak
Messrs. Erickson, Allen, Johns, and Deming, Alter
nate 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. Sherman, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Daane, Hostetler, Marget, 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 Governors
Mr.
Keir, Acting Chief, Government Finance Section,
Division of Research and Statistics, Board of
Governors
Messrs. Ellis, Jones, Tow, and Rice, Vice Presidents
of the Federal Reserve Banks of Boston, St.
Louis, Kansas City, and Dallas, respectively
1/
2/
Entered meeting at point indicated in minutes.
part of meeting.
Presided during first
12/16/58
Messrs.
Coombs,
Baughman, and Einzig,
Assistant Vice Presidents of the
Federal Reserve Banks of New York,
Chicago, and San Francisco, respectively
Mr. Gaines, 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
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 December 2
through December 10, 1958, and a supplemental report covering the period
December 11 through December 15,
placed in
1958.
Copies of both reports have been
the files of the Federal Open Market Committee.
Mr. Rouse reported that the usual seasonal liquidation by corpora
tions had resulted in
that bill
rates in
some pressure on Treasury bills, with the result
the auction on Monday,
December 15, were up 10 basis
points from the previous week on the three-month bills and one basis
point on the six-month bills.
He added that the new six-month bills ap
peared to have been well accepted on the basis of the first
The first
two auctions.
auction required a fair amount of underwriting by dealers, but
the preliminary statistics for the second auction suggested that this
underwriting had been reduced.
In the money market, the period since the last meeting had been
characterized by corporate preparations for dividend and tax payments.
-3
12/16/58
The flow of money into New York prior to the December 10 dividend rate
created easy money market conditions for a few days,
10 the money market had been quite tight.
with the reserve projections in
but since December
The principal difficulty
the past two weeks had been in the
management of the Treasury's balance, which had tended to run lower
than expected.
however, it
Large calls had been made on the "C" depositary banks;
had sometimes not been feasible to call enough money from
these banks to bring the balance up to customary levels.
Mr.
Rouse con
cluded, with respect to the money market, that there probably had been
somewhat less pressure this year than during most previous years at
this season.
Mr.
Rouse said that additional reserves would have to be provided
during the balance of 1958 to offset seasonal currency withdrawals and
other influences on reserves, but that in
his judgment it
should be
possible to do most of this job through repurchase agreements.
he planned to intersperse one outright operation in
However,
Treasury bills and
to use this occasion to purchase some of the new six-month bills.
The
market generally understood that the System Account would buy and sell
these bills, but an actual operation in them would help to confirm this
understanding.
With respect to Treasury financing, Mr. Rouse reported that the
Treasury was planning to announce the terms of its
January 8,
cash offering on
with subscription books opened on January 12.
He added that
12/16/58
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he had no further details on what the Treasury planned to offer but
that he had mentioned the timing since this might be a matter that
would influence discussion during this meeting.
At the conclusion of Mr.
Rouse's report, Mr.
Shepardson said
that although he had no criticism of the conduct of open market opera
tions, he had thought that reserve positions would be tighter than they
actually turned out to be.
He asked whether the projections had gone
astray.
Mr.
projections.
Rouse replied that there had been sizable errors in
In fact, however,
the
he had given principal attention to
market atmosphere rather than reserve figures,
and the atmosphere in
the money market on most days had been about as tight as the Committee
would have wished.
The principal reason for the easier than expected
reserve figures was the tendency for the Treasury balance to fall
below estimates; the Treasury hesitated to call enough money from the
"C" depositary banks to pull its
Mr.
balance up.
Thomas noted that the Treasury's balance on the previous
day had risen to above $4OO million, considerably higher than expected,
so that the reserve figures for the current statement week would be
lower than shown in
the New York projections.
had been revised upward,
reserve figures.
Also,
required reserves
and that would have an influence on the
12/16/58
-5Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions during the period
December 2 through December 15, 1958, were
approved, ratified, and confirmed.
In supplementation of the staff memorandum distributed under
date of December 12, 1958, Mr.
Young made the following statement on
the economic situations
If one takes a cyclical frame of reference for evaluat
ing the economy's performance since the low of last April,
the conclusion reached is that the performance has been
remarkably good.
Gross national product, personal income,
retail trade, residential construction activity, manufacturers'
new orders, industrial production, freight carloadings, and
various other economic indicators have increased about as
much in the past seven months as in corresponding seven-month
periods of cyclical recoveries following earlier postwar
contractions.
Recent recession was somewhat deeper than in the preceding
two declines.
On the other hand, for brevity and the speed of
turn-around to recovery, performance this time has been front
rank both as compared with postwar and with prewar cycles.
While peak levels of activity have not been reattained, they
are now so close at hand that one can view the approaching
period as likely to be characterized by resumed economic
expansion.
To highlight the current cyclical position:
1.
In the present quarter, gross national product in
current dollars is estimated to reach a new record annual
rate of $452 billion. The physical volume of goods and
services output is probably within less than one per cent of
the earlier high.
The increase in GNP from the spring low of about $27
billion, or about 6 per cent, reflects widespread strength.
Consumer spending has moved up on a broad front; combined
Government outlays for all purposes have increased to a new
postwar high; and the sharpest inventory liquidation of the
postwar period has about reached an end.
2.
By midyear, business fixed investment had stabilized,
following a pronounced cyclical decline, and has risen
Past cyclical experience suggests that renewal
modestly since.
of business investment expansion will tend to gather momentum
12/16/58
slowly.
Such outlays typically lag behind recovery else
where, but after a period they join the upswing.
Already
output in business equipment lines is a tenth above its
low and last month private industrial construction rose
for the first
time in 15 months.
Other fixed investment, as reflected in new construction,
is now up over an eighth from the recession low reached in May.
This is a little
better than in preceding postwar cycles, for
the decline in this cycle was greater.
Incidentally, private
housing starts for November, at 1.3 million units annual rate,
were up two-fifths from the spring low, with the pattern of
upswing closely paralleling the 1949-50 and 1954-55 recoveries.
3.
Early resumption of advance in consumer spending,
after only a slight hesitation, has been associated with prompt
recovery in personal income.
Near stability of personal in
come during recession has been a notable feature of the three
postwar cycles--a feature contrasting strikingly with the
pattern of consumer income fluctuation in prewar cycles.
This
year, income payments under Government unemployment and other
special security programs were considerably increased, con
tributing to upturn in personal income in March ahead of other
major economic indicators.
In response to the maintenance of
consumer income, retail buying has risen in this cycle about
This is about par
7 per cent, after declining 5 per cent.
performance for postwar cycles.
Large-scale production of 1959 model autos is finally
4.
under way, and recovery in industrial production in November
few months
and December is showing nearly the speed of the first
The industrial production index in Novem
after the April low.
ber was put at l4l and the December figure is expected to be
The rise since April in
one or two index points higher.
industrial production is close to the experience of earlier
postwar cycles, despite a larger decline in this cyclical
Nondurable goods
recession than in both of the earlier ones.
have made an especially good showing in this recovery period.
On the other hand, output and the rate of capacity utilization
for metals are lower now than at the corresponding points in
New orders for metal products and
earlier postwar cycles.
other durable goods, however, have shown as strong a rise
through October as in the 1954-55 and 1949-50 recovery periods.
5. About as many major industries have contributed to
the rise in nonagricultural employment in this recovery period
as in the earlier postwar cycles, but the over-all gain in
Manufacturing employment
employment has been somewhat smaller.
has lagged more this time relative to output, because of an
12/16/58
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indicated sharper rise in output per manhour.
Moreover,
nonmanufacturing employment has shown somewhat slower
recovery.
In past cycles, the increase in employment
and the decline in unemployment has gained momentum as
the period of output recovery shaded into the later,
expansionary phase of the cycle.
6.
In the 1948-9 recession, industrial commodity
prices declined fairly sharply, but in the two following
recessions were modest. Increases in average industrial
prices for seven months following the troughs have been
roughly equivalent, with most of the rise being accounted
for by recovery in material prices.
In all three recoveries,
reports of markups on fabricated goods prices were appearing
with increasing frequency after seven months.
7.
Cyclical developments are usually anticipated by the
stock market, and this time the rise is about par compared
with the two preceding cycles.
Of course, the percentage
rise is a wholly mechanical basis of analysis. This time the
beginning level for the rise was high relatively, for yields
on stocks were only slightly lower than yields on bonds of
the same companies.
Now, stock yields are well below bond
yields, a condition not reached in the first postwar cycle
and only reached late in the second cycle.
8.
Economic recovery has been aided by a pronounced
growth in the money supply this year, at a somewhat faster
rate than in the last cycle. Comparison here with the 1949-50
recovery period is inappropriate since flexible monetary policy
Since January of this year,
was not operative in this cycle.
the amount of expansion sums up to a 4 per cent annual rate.
The money supply is now about 3 per cent above last year at
this time.
In preceding postwar recessions and recoveries, United
9.
States exports showed only modest downturn and revival, while
In this cycle, United States
imports were about maintained.
prior to recession, declined
receding
been
exports, which had
Recently,
again maintained.
were
imports
though
more sharply,
exports continue to lag, but scattered indications in leading
countries abroad suggest that strengthening markets may be
ahead. Meanwhile, United States imports have risen significantly.
As a concluding point of diagnosis, one may ask what might
be expected on the basis of normal cyclical developments over
In other words, what kind of performance might
the year ahead.
the economy experience if conformity with the broad contours of
past cyclical patterns continues to work out?
12/16/58
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Without endeavoring a forecast or a projection, at
least this specific an answer can be offered on historical
cycle grounds. By midyear, industrial production might
reach an index level of 150, and by year-end it might attain
155. By year-end, GNP in constant dollars might reach $485
billion, up 7 per cent from present levels.
These figures abstract from inflationary potentials,
which have been much stressed in recent staff reports to the
Committee. From a purely cyclical standpoint, if the economy
has overshot the mark in inventory liquidation, in business
investment contraction, and in export sales, a condition of
cyclical inflationary pressures can quickly be generated.
Domestic and foreign purchasing agents coming to market in
a catching-up mood can afford to bid actively against one
another while suppliers can afford to become more and more
reluctant in offerings. Inflationary psychology, already
generated in financial markets, can spread to commodity and
service markets at wholesale and thence to retail markets.
It cannot be said that this will happen, but it is enough
of a potential to constitue a problem for the Committee
in its moulding of a financial climate for the period of
economic expansion in prospect. If it does happen, there
could well result a decided lag in expansion of real output
and employment and a higher rate of unemployment than would
otherwise be expected to occur.
Mr. Thomas made the following statement with respect to the credit
situation:
Money and credit markets have operated with surprising
smoothness in the past month in the face of the vigorous
progress of economic recovery, the rather heavy financing
operations of the Treasury, the liquidity demands customary
at this season of the year, and a moderate tightening of
bank reserve positions. Interest rates have fluctuated
moderately, close to or below the high levels reached earlier.
In the past two or three weeks rates have firmed somewhat,
but so far increases have not been as great as customarily
occur in December.
Additional offers of Treasury bills have so far been
taken by the market without severe pressures. City banks
have actually reduced their holdings of bills in the past
two weeks. It appears that businesses continue to have
adequate liquidity to meet their needs with only moderate
borrowing at banks and have even been able to acquire Treasury
bills.
12/16/58
In the first two weeks of December, preliminary and
partial figures for city banks indicate that loans increased
somewhat less than in the corresponding weeks of the two
previous years and that holdings of Government securities
were considerably reduced. As a result total loans and in
vestments declined somewhat in contrast to increases in
December 1957 and 1956.
In capital markets, the volume of new issues has been
somewhat smaller in the fourth quarter than in previous
quarters.
Offerings of corporate issues have been larger in
December than in November, but less than a year ago.
Flota
tions of State and local governments remain at a relatively
low level. The slackening of these demands may have ac
counted for the absence of more severe pressures in the market.
Home mortgage markets, however, continue to tighten. The stock
market has continued strong with active trading.
Does the absence of severe pressures on the money market
mean that cyclical and seasonal adjustments are being met with
unusual smoothness through the processes of the market without
undue expansion or contraction? Or is it that demand and supply
factors have not yet caught up with the sharp rise in rates
that developed earlier in part on the basis of anticipations?
That is, in the jargon of the market, had the current develop
ments already been discounted? Or has the current posture of
monetary policy been so easy as to permit these adjustments to
be made without strain?
It has often been noted recently that market interest
rates are unusually high in relation to the existing level of
free reserves and the discount rate. Long-term rates are close
to or above the highest levels of the 1957 period of strong
capital demands. With member bank borrowing generally less
than $500 million, short-term rates are as high as when
borrowings were close to $1 billion. In fact they are higher
relative to the discount rate.
Banks would find it profitable to expand credit even if
they had to borrow. Has bank credit not expanded or has there
been an expansion based on reserves supplied by System open
market operations, so that banks did not need to increase
borrowings?
In the first half of the year, when reserves were freely
available, total loans and investments of member banks ex
panded sharply. The bulk of the increase was at city banks.
Country banks, partly for seasonal reasons, showed only a
Since midyear,
moderate increase, as did nonmember banks.
when the availability of reserves has been more restricted,
12/16/58
-10-
until the end of November, New York City banks showed a sub
stantial decline in their total loans and investments, and
those of reserve city banks increased only slightly. In
contrast, country banks expanded by much larger amounts than
in the same period of the two previous years.
As a result total bank credit has shown a further expan
sion of a greater than seasonal amount.
Most of the increase
occurred in holdings of U. S. Government securities at country
banks. Total loans showed little
change compared with a small
decrease in the same period last year and a substantial in
crease in 1956. Country bank loans have increased this year
while those at city banks decreased, due principally to a
decline in security loans from the high June level.
The 1956
increase in loans was mostly at city banks.
Figures that have just become available for November again
show that country banks account for a substantial portion of the
increase in bank loans and investments in that month, although
city banks also showed some increase.
The net result of all these changes on bank deposits is of
significance from the standpoint of monetary policy.
Since June,
the money supply seasonally adjusted has increased by over $3
billion, which is at an annual rate of over 5 per cent.
Two
thirds of this increase occurred in July, followed by partially
offsetting decreases in August and September and renewed expan
sion in October and November.
On almost any basis of comparison
the rate of growth has exceeded 3 per cent a year. The time
deposit growth, which was so rapid in the first
half of the year,
has slackened in recent months and there were declines in Novem
ber at all classes of banks.
In the first
two weeks of December demand deposits adjusted
at city banks increased by about $1-1/4 billion. A sharp in
crease is usual in that period, as deposits are built up for
payments of taxes and dividends and for other purposes, and this
year's increase is not any larger than usual.
By classes of banks, it would appear that privately-owned
demand deposits have increased substantially at reserve city banks
and at country banks since midyear, with little
growth at central
U. S. Government deposits, which were ex
reserve city banks.
ceptionally large at city banks at the end of June, have accounted
This analysis
for the decline in total deposits at city banks.
would seem to indicate that the increased stock of money built
half of the year, largely through expansion of
up in the first
Government security holdings at city banks, has become more
widely distributed around the country, partly through Government
Further expansion
spending of the proceeds of its borrowings.
has occurred in the second half-year on the basis of greater
than seasonal credit growth at country banks.
12/16/58
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Reserves to provide the basis for this credit have been
largely supplied through System open market operations since
August, as free reserves have shown little
change since that
time.
Free reserves declined sharply in August, stayed close
to $100 million from early September to mid-November, and
have declined a little since then. Since the bulk of the
expansion has been at country banks, reserve needs have not
been as great as they would have been had the growth been at
city banks.
It also means that, for operating purposes, cur
rent estimates of required reserves have tended to understate
the growth.
Current estimates of bank reserve positions are now being
revised again on the basis of country bank figures for the last
half of November that have just been received.
Required re
serves are about $40 million larger than had been previously
estimated.
This means that member banks have had a net borrowed
reserve position during most of the past four weeks.
They are
likely to show moderate net borrowed reserves this week and
next.
A sharp increase in borrowings will occur in the last
week of the month, unless System operations supply about $500
million of reserves.
These needs may be met largely, if not
entirely, through repurchase contracts. After the turn of the
year, reserves will need to be absorbed at a rapid rate--perhaps
as much as $1 billion in January.
These estimates allow for a large return flow of currency
in January to offset the greater than seasonal expansion that
has occurred in recent weeks. They also allow for usual
seasonal changes in deposits and required reserves, and like
wise in float. A continued gold outflow at an average of $25
No special allowance is made for
million a week is assumed.
the
increase in the weekly bill
through
financing
Treasury
offering, as it is assumed that these funds will be promptly
expended by the Treasury and enter into the general flow of
This would require no build-up of deposits greater
funds.
On a seasonal basis, deposits
than would otherwise be needed.
and required reserves should decline considerably in January
and February.
Mr.
Hayes then made the following statement of his views on the
business outlook and credit policy:
It seems to me that this is an appropriate time for us
to take very careful stock of what the System's general
approach--or "posture", if you will--should be at this stage
I think we are all agreed on our
of the business cycle.
general objective, which might be described as facilitating
12/16/58
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orderly progress toward fuller utilization of our productive
capacity and manpower and the renewed growth of the economy
at a sustainable rate. During the past several months, I
think that our policies have helped the economy to move towards
that objective.
But I left the last meeting of the Committee
somewhat disturbed by references to the need for a policy of
further restraint.
In my opinion, such a move would be pre
mature at this stage of recovery.
I am particularly disturbed
by the possibility that a downward drift of free reserves sub
stantially into the negative range, or a discount rate increase,
might suggest to the public a policy of progressive tightening
and set off an exaggerated market reaction.
I would like to direct my remarks to two aspects of the
situation: (1) whether a policy of further credit restraint
would be consistent with our current directive; and (2) whether
such a policy would be well attuned to the actualities of
present business and credit conditions.
First, as to the directive: We describe our goal in the
directive as "balanced economic recovery." The "balanced" of
course implies among other things that recovery should be free
from price distortions, although that is not stated explicitly.
But the explicit word "recovery" seems to me to indicate to any
concern is with the achievement of fuller
reader that our first
If we feel that we should be at
resources.
nation's
use of the
least equally concerned, or possibly even more concerned, with
a developing threat of inflation and should make a major effort
to prevent it by credit restraint, we should, I think, make the
record clear on this point.
Second, we have the question whether a restrictive credit
policy would be well attuned to current economic conditions.
I think we can agree that, when it became evident that recovery
was well under way, a shift away from a policy of active ease
was appropriate. The main question then concerned the timing
and rapidity of the shift, in view of the highly disturbed
market conditions that prevailed in the summer. But traditionally
a restrictive monetary policy has been applied only when there
were developments in the credit situation that called for
restraint.
If we believe that there is a long-term inflationary bias
in the economy regardless of whether business is prospering or
ailing, I submit that we should not conclude either that monetary
policy alone can solve this problem or that it should be focused
so strongly on this problem as to run serious risks of itself
preventing adequate use of resources.
In our Bank, we have used the past two-week period to review
very carefully our thinking as to current forces and trends in
12/16/58
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the economy. It is, of course, entirely possible that the
recovery may gain such momentum as to encourage speculative
inventory policies and excessive credit expansion or other
distortions. We can, however, see nothing at present to
suggest such an acceleration of activity and a renewal of
inflationary demand pressures.
Consumer demand is good but
not ebullient, prospects of a strong upsurge are remote,
and businessmen are conservative in their ordering and in
ventory policies, as well as in their spending for fixed
capital. Business investment in fixed plant and equipment
was lower than expected in the third quarter, and only a
very modest rise is in prospect after the turn of the year.
The meaning of recent data indicating a considerable drop
in unemployment is somewhat obscured by the apparent de
parture of a sizeable number of workers from the labor force
and seasonal adjustment problems.
The biggest question mark
in the business outlook relates to the automobile industry,
and it will be six weeks or more before we can really appraise
reception of the new models. The current high production rate,
designed partly to replenish inventories, and the rise in sales
that accompanied the buildup in dealer stocks, still
give no
clear indication of the sales outlook.
As for prices, the evidence of some continued balance
during this phase of the recovery is reflected in free market
prices during the last two weeks. The very sensitive index of
waste and scrap prices has turned down, and raw materials in
the daily sensitive commodity price index have now followed
While finished goods prices
the downturn for farm products.
continue to reflect upward pressures, the latter are less pro
nounced than in recent months, and approximate over-all price
appears to be in prospect for some months
stability still
ahead.
Conditions in the credit and capital markets likewise
yield no argument for restraint. The capital markets continue
to operate without any undue pressure and the stock market
seems to have lost some of its ebullience temporarily at least.
The backlog of new bond issues is somewhat smaller than it has
been in recent months, whereas equity financing has increased
somewhat. In the credit area, the most valid cause for appre
hension would seem to be the possibility that too much liquidity
Yet I am
may have been injected into the economy in 1958.
impressed by the fact that the liquidity of the banks is well
below the summer's peak and even further below the 1954 leveland that the increase in money supply for the year as a whole
does not appear excessive. While we must be watchful to prevent
12/16/58
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the banks from feeling too free to add to their investments,
we must also be careful to see that they remain well able to
take care of all legitimate business requirements.
The very real effort now being made to achieve something
approaching a balanced Federal budget for the next fiscal year
is ground for hope of much reduced pressure from this quarter
for excessive credit expansion.
As we consider immediate policy questions, we should bear
in mind that the year-end period is normally one of rising
pressures in the short-term money markets. Thus short-term
interest rates may be expected to rise for a time even with no
change in System policy. The markets will most likely take
such rate increases in stride, as a matter of seasonal routine,
unless there should appear to be some change in System policy
during this normal period of stress. Wholly inavertent factors
prevented our reporting net borrowed reserves last week, on
average, although the Desk had been aiming in this direction
in accordance with the consensus of our last meeting. (This
was written before I had seen the latest figures.) I think this
turn of events may prove to have been fortunate for the System,
in view of the possible effects of general recognition, at this
time, of a change of policy. The System is in an unusually
good position this year to indicate the temporary nature of the
reserves supplied to meet year-end pressures, remaining needs
being of a magnitude which can be provided in large part through
repurchase agreements.
Aside from general economic considerations, another reason
for continuing present credit policy unchanged is the Treasury's
need to borrow about $2 billion sometime during January and to
borrow additional cash through the new cycle of six-month bills.
The January Treasury offering appears to be the best opportunity,
for some time to come, for including a long-term issue, in view
of recent market stability and the traditional availability of
I believe success
investment funds after the turn of the year.
ful issuance of a long-term Treasury obligation at this time in
a moderate amount could have useful effects in the way of dampen
lingers in some areas.
ing the inflation psychology which still
It would seem unwise to jeopardize this chance with disturbing
policy changes on the part of the System in the next few weeks.
To me, all of these factors argue conclusively for maintain
ing the status quo in open market policy (year-end reserve needs
being provided without change in the present degree of pressure).
For the same reasons I think there should be no change in the
discount rate nor in the directive--subject, of course, to the
policy decided upon by the Committee and to my earlier comments
on the latter point.
12/16/58
-15
Mr.
Erickson stated that First District conditions were good
but did not seem to have the vigor indicated nationally by the staff
memorandum.
In November,
the New England index of manufacturing pro
duction failed to rise above the October level due to a slower rate
of recovery in durable goods industries, while the most recent poll
of purchasing agents showed,
for the first
time since June, a smaller
percentage of respondents expecting an increase in production beyond
the previous month.
August and September,
Construction contracts were at high levels in
but in October they were only one per cent ahead
of last year, with no large contract awards.
Residential construction
was up in October, but by a much smaller percentage than nationally.
Nonagricultural employment was down .2 per cent in
ber, due primarily to seasonal trends in
industries.
October from Septem
some of the nonmanufacturing
Electric power output, which each week since the middle
of the year had exceeded the corresponding week of the preceding year,
again exceeded the year-ago figure in the first
meant that in
as a whole.
week of December, which
this respect the district was doing better than the nation
In the first week of December, department store sales were
lower than in the corresponding week last year, the second time since
the middle of the year that this had happened.
Last year's good
Christmas business was attributable to sales volume in the last week
before Christmas; this year the district would have to do even better
to exceed the previous year because to date the figures were lower
12/16/58
-16
than for 1957.
In October,
new car registrations in most of the
States of the district were still
running 25 per cent less than
last year.
A survey of 168 lending institutions, covering all types
of lenders,
indicated that extensions of credit in
October were 9.6
per cent less than a year earlier.
Turning to policy for the next three weeks,
that in
Mr.
Erickson said
view of the pressures of the year end and the indication of a
Treasury financing announcement shortly after the beginning of next
year,
he would favor no change in
directive.
tained as in
the discount rate or in
the policy
He would like to see the same degree of restraint main
the past few days, with modest negative free reserves.
He hoped that any necessary reserves could be put into the market
through the use of repurchase agreements.
Mr.
Irons said that his appraisal of the economic situation
pointed toward continuing strength, and development of further strength,
both in the nation and in the Eleventh District.
strength was broadly based, being reflected in
including production, sales,
Perhaps the point was here,
retail
As he saw it,
the
a large number of areas
trade, and the inventory situation.
or at least near at hand, where one could
cease to use the word "recovery."
Eleventh District conditions were strong, Mr. Irons said.
Although department store sales had been affected somewhat by low
temperatures, he felt that they would pick up by Christmas, and the
tone generally was one of optimism.
to be good.
Construction activity continued
12/16/58
-17
On the financial side, Mr.
Irons observed that there had been
an increase in bank credit and a further increase in the money supply,
together with what appeared to him to be comparatively comfortable
reserve availability conditions.
outside the major cities.
shown increases in
A strong credit growth was noted
Both bank credit and bank deposits had
the Eleventh District, and for reasons not entirely
clear to him there had been a substantial and steady increase in cur
rency in
circulation for the past couple of months, with the totals
moving up to record highs.
The Dallas Bank, Mr.
Irons noted, was the
only Reserve Bank whose Federal Reserve note circulation was less than
its
member bank reserve deposits.
District banks,
The reserve position of Eleventh
as reflected by borrowing at the Reserve Bank, appeared
to be fairly comfortable,
with no appreciable discounting by either
city or country banks.
As to policy, Mr.
Irons saw a number of problems in
the picture,
including the Treasury financing early in January and the refunding
scheduled for early February.
He would like to see reserve availability
move to the negative side and stay there, for in his opinion negative
free reserves would be appropriate under the circumstances in which the
Federal Reserve was now operating.
amount of negative free reserves,
He was not thinking of a substantial
but more in terms of zero to minus
$100 million during the ensuing period.
Fluctuations within that
negative range seemed to him more appropriate than on the positive side.
12/16/58
-18
Also, he thought the Manager of the Account during the next period
should rely more on the feel of the market than on reserve projections;
that is,
to be sensitive to the feel of the market.
If
that should
cause the reserve figures to go awry for a day or so, this could be
offset by operations on a cash basis.
In substance,
he would hold a
more continuous and firm restraint on the side of negative free re
serves, with short-term rates permitted to remain at about current
levels.
It would not disturb him if
the bill
rate were to rise.
He
doubted whether the discount rate was actually as much out of line as
the figures would seem to indicate.
Other things being equal, con
sideration might be given to the discount rate level at some time in
the quite near future.
the point,
As to the directive,
he felt this might be
or nearly so, when a change in wording would be in
so as to move a little
order
away from the concept of recovery and recognize
the existence of other problems.
Mr.
Mangels reported that there had not been major changes in
the Twelfth District in the past two weeks.
reported in
Contrary to the situation
the First District, retail stores were quite enthusiastic
about the volume of Christmas trade, which was running six per cent
ahead of 1957.
Employment in defense-related industries showed a
small increase in November, reflecting a continuing trend, while un
employment was showing less than the usual seasonal rise for this time
of the year.
Steel production had improved somewhat, with mills
12/16/58
-19.
operating at 75 to 80 per cent of capacity, the highest rates for
the year.
Production of copper and aluminum also was up, while
lumber was down a little.
Freight carloadings for the first
quarter
of 1959 were expected to increase around 12 per cent over the first
quarter of 1958,
nominal,
in
Member bank borrowings from the Reserve Bank were
but purchases in
the Federal funds market had been greatly
excess of sales.
Mr. Mangels said it
seemed evident that recovery was progres
sing at a moderate pace, with indications that it
would continue to
progress moderately without too much immediate inflationary pressure,
at least until such time as productive capacity and the labor force
were utilized more fully.
Prices had been reasonably steady and any
increase was likely to result from sources other than changes in the
money supply.
While the System should not furnish fuel for the fire,
he would not want to exert such a degree of restraint as to discourage
the progress of recovery.
In the ensuing period, free reserves around
the zero level might be appropriate--perhaps a little more or a little
less--with the Manager of the Account authorized to use his discretion
on the basis of the feel of the market.
Mr. Mangels said that he
would not favor changing the discount rate at present, at least during
the next three-week period, and he saw no occasion to change the
directive.
Mr. Deming said that the Ninth District was presently going
through a sharp seasonal contraction in
activity but that the general
12/16/58
-20
recovery trend seemed to be continuing at a moderate rate.
The
employment authorities were estimating the seasonal decline in
employment to mid-January to be smaller than usual, reflecting a
pickup in
durable goods manufacturing.
At the same time,
initial
unemployment claims in late November and early December were running
about one per cent ahead of last year.
The Minneapolis Reserve Bank, Mr. Deming said, had just com
pleted a study based on bank debits which showed that on a seasonally
adjusted basis total debits this year had run about 5 per cent ahead
of last year,
in
with the gain slightly larger in
the earlier months of the year.
the later months than
Debits for 1958 had averaged just
about the same as the mid-year peak level (seasonally adjusted) for
1957.
The picture was much stronger in
the farming centers,
second half debits were running well ahead of the first
and those in
half of 1958,
turn were above the 1957 peak levels.
As to policy, Mr.
lean a little
where
Deming said he thought the System should
more heavily on reserve availability.
He was not sure
what he would like to see done about the discount rate, but he supposed
the question was academic,
at least for the immediate future.
He
thought, however, that a rate change probably should be in the cards
for the rather near future.
be arranged to fit
He had not thought out what timing could
in with the Treasury financing, especially since
he had not anticipated a Treasury announcement as early as Mr. Rouse
12/16/58
-21
had indicated, and in any event he would not favor a rate change in
the next three weeks.
Perhaps wording of the directive should be
changed to speak in
terms of sustainable growth rather than balanced
economic recovery.
Mr. Deming concluded by saying that he would be
a little
tighter during the next three weeks but would not favor a
dramatic move on the discount rate.
Mr.
Allen stated that information that had become available
since the preceding Committee meeting indicated that the uptrend in
business activity remained vigorous.
sales in
Preliminary reports for retail
November showed that a new record, nationally, was achieved,
and the fact that sales of household appliances were finally picking
up was encouraging.
There had been reports to such effect from Sears
Roebuck, from Norge, and from department stores in the Seventh
District.
In further regard to department store sales, those in
Detroit showed a three per cent gain over a year ago in
the week
ended December 6, and Detroit was not particularly depressed at
this time last year.
A second indication that the business uptrend
remained vigorous was the improvement in November in employment.
Nationally, 18 centers were reclassified upward on the basis of that
improvement,
and seven of those were in
the Seventh District.
A
third factor was that plant and equipment expenditures hit a low in
the third quarter; the fourth quarter of this year and the first
quarter of 1959 should, on the basis of reports from businessmen,
show appreciable gains.
In the Chicago area, residential construction
12/16/58
-22
was booming, with building permits issued in November for 55 per cent
more units than in
the same 1957 month.
Mr. Allen went on to say that earning assets and deposits of
Seventh District banks declined somewhat in the past two weeks as
sales of securities exceeded loan growth, while credit demands on the
whole had been moderate for this time of the year.
Manufacturers of
metals and metal products--an important element in
the district--had
steadily repaid borrowings during the past two months.
bankers apparently felt
that the moderateness in
ing could be attributed in
inventories.
Some district
the amount of borrow
large part to the continued decline in
Since that decline may have stopped and an increase
started, they suspected that the drop in
loans which usually comes in
the early months of a new year might be less this time than heretofore.
Mr.
Allen recalled that at the last meeting of the Committee he
had suggested doing about what had been done in the last two weeks, but
that the Committee should be poised to take action on the restrictive
side.
He had come to this meeting with the idea of suggesting for the
next three weeks a little more restrictiveness than the reserve
figures would suggest, but doing nothing about the discount rate be
cause he had anticipated a Treasury financing announcement later in
January.
Thus, he had anticipated that the Committee meeting on
January 6 would present an opportunity for discussion of the subject.
In view of Mr. Rouse's statement, however, it would appear that action
12/16/58
-23
on the discount rate, if
any were to be taken, must be taken prior
to the January 6 meeting.
Personally, he felt that the recovery
had proceeded so far,
and the inflationary bias was such, that some
thing should be done on the rate.
action in
However,
the System desirable always,
he considered unity of
and particularly so at this
time, and he would be persuaded by the thinking of the majority.
Thus far, the comments indicated that everyone thought there should
be no action until after the period of Treasury financing.
might mean a long wait, and he was concerned about that.
favor changing the directive along the lines Mr.
This
He would
Deming had suggested.
Mr. Leedy said that from the staff review of the economic
situation and from personal observations, there could be no doubt
but that the recovery was progressing, and in many respects in a
surprising way.
He considered that moving down to a negative free
reserve position was called for; if
more,
it
the figure moved down a little
would seem to him to be in line with what the Committee
should be doing.
In view of the prospective budget deficit, the
very substantial increase in
the money supply,
referred to at this meeting, he felt that it
for the System to be more vigorous in
the recent past.
If
its
and the other indicators
was going to be necessary
actions than it
had been in
possible, he would like to see action at this
time both on the discount rate and on the directive, but he did not
feel that discount rate action would be possible because of the
seasonal factors between now and the end of the year and the
12/16/58
-24
forthcoming Treasury financing.
The directive, he thought, should
be changed for he saw no reason to refer further to promoting of
recovery.
In the past the Committee generally had undertaken to
change the directive on the occasion of a change in policy and he
did not think that some further slight tightening of reserve avail
ability would actually represent a change in policy.
Therefore,
the interim between now and the next Committee meeting it
in
was his
feeling that the extent to which the System should go would be to
allow negative free reserves to edge down a little
more.
Also, he
would subscribe to the suggestion that the Manager of the System
Account be guided more by the feel of the market than by reserve
projections.
Mr.
weeks in
Leach reported very little
general economic conditions in
change during the past two
the Fifth District.
Wage
increases had been discussed in the textile industry--one large
knitting concern had in
fact announced an increase for January-
and a $2 per day wage rise had been contracted for in
the bituminous
coal industry, where workers were now being paid $22.25 per eight
hour day.
in
This seemed to him of particular significance for it
came
the face of a recent shrinkage in production and a poor outlook
for the future.
Bituminous coal had for some years been losing in
importance relative to competing fuels, and this past year saw a
further sharp drop, due in
no small measure to the decline in
residual fuel oil prices as coal prices held firm.
Overseas
12/16/58
-25
shipments fell by a third in 1958, and European restrictions on
coal imports pointed to a further drop this year.
While improved
steel operations and higher levels of industrial activity called
for more coal, the market was scarcely favorable for the price
increases that some producers now expected to make.
West Virginia,
which produces about one-third of the country's total bituminous
coal output,
had had severe unemployment problems over the past year,
and he thought that one could look for little
help for this situation
from the higher wages now to be paid.
Continuing,
Mr.
Leach recalled that prior to 1955 average
borrowings of member banks generally rose steadily toward the end
of the year to a peak in
early December several hundred million
dollars higher than September-October levels.
This was true regard
less of whether the System was following a policy of active ease,
ease,
or neutrality, and the temporary rise in borrowings was not
considered to be inconsistent with System policy.
Committee's emphasis in
As the Open Market
policy guidance became more and more centered
on free reserve or net borrowed reserve figures, however,
no longer appeared.
this pattern
There now seemed to be a reluctance to permit an
increase in
borrowings to occur despite the seasonal pressures in this
direction.
This seemed unfortunate to him, for he saw merit in meeting
some of the seasonal needs through borrowings, which are automatically
repaid.
12/16/58
-26
Mr.
Leach commented that during the first
ten days of
December member bank borrowings averaged only $376 million, which
was $200 million less than during the corresponding period last
December and about $100 million less than the average for November
of this year.
He still
thought that seasonal needs should be allowed
to run borrowings up a little.
To him, this would not mean a signifi
cant change in policy even though it
amount of net borrowed reserves.
would presumably produce a small
The appearance of net borrowed
reserve figures for more than one week might have some adverse effect
on the Government securities market, but he believed this was a risk
that should be taken.
As to reserve availability, Mr.
Leach noted that he had wanted
to see the System get over the "hurdle of zero" and the importance it
seemed to have to the market.
With regard to the degree of tightness,
he felt that the Manager of the Account should be guided by the feel
of the market, and he would like to see modest net borrowed reserve
figures.
This would represent no real change in
slightly tighter than before.
policy, just being
He would not favor a change in the
discount rate but he would remove the word "recovery" from the directive,
with appropriate changes in wording.
During Mr.
Leach's comments,
Chairman Martin joined the meeting.
Mr. Mills expressed the view that the trend of economic develop
ments and the multiplying evidence of optimistic expectations in both
the financial and business communities justified a System policy of
12/16/58
-27
firm restraint over the volume of bank credit.
terms,
Put in
technical
such a policy would contemplate negative free reserves in
modest amounts.
In that connection, he felt that he should comment
on the subject of the money supply.
Although an increase in
the
money supply over the past year of approximately 3 per cent might
be considered to be consistent with the concept of cyclical long
term and fundamental economic growth, it
was questionable whether
additions to the money supply that had derived so largely from
previous System actions did not reflect in some degree a failure
to force the kind of redistribution of U. S. Government securities
out of commercial bank portfolios that would have been desirable
in
order to limit the expansion of commercial bank credit to the
basis of the reserves that the System had supplied in
to support Treasury financing operations.
sion at earlier Committee meetings,
recent months
As brought out in discus
a case can be made for compelling
the use of reserves supplied by the System under such conditions to
do the double duty of first
supporting the Treasury in
its
financing
and then subsequently financing the legitimate seasonal expansion of
commercial bank credit, all through the process of exerting System
pressure to force the commercial banks to reduce their investments
in
U. S. Government securities and to use the reserves thus freed to
sustain the loan demands of their customers.
He doubted that the
System had accomplished that purpose and to the extent that it
failed to do so,
had
a System policy of firm restraint should be continued
12/16/58
if
-28
the undesirable consequences of financing the Treasury's require
ments through the commercial banking system were to be avoided.
a policy of restraint,
By
he did not contemplate that the Manager of
the Account would be foreclosed from supplying new reserves if,
in
his discretion, that action would be necessary to avoid kinks in
the market during the remainder of the year.
Working on the side of
System policy would be the fact that the liquidity requirements of
corporations and banks until the year-end should add to the supply
of Treasury bills and other short-term U. S. Government securities
that should come on the market and thereby develop a firmness in
short-term interest rates that would of itself
exert a restraining
influence over the expansion of bank credit.
This kind of develop
ment could occur even though the actual volume of reserves supplied
to relieve undue market tightness seemingly might be contrary to any
upward movement in Treasury bill rates that might appear.
as that kind of situation would reverse itself
the year-end, its
Inasmuch
automatically after
appearance would not have implied any change in
System policy, except for the possibility that some market participants
might have been confused by a level of reserves that seemed to be
technically out of line with the interest rate on short-term U. S.
Government securities.
Under present conditions, Mr. Mills felt that it was not
appropriate to consider an increase in the discount rate.
After the
12/16/58
-29
end of the year when the supply and demand status for U. S. Government
securities had settled down, a clearer and more logical view could be
obtained as to what level of interest rates had become pertinent to
the new year situation in
the securities markets.
Mr. Robertson said it
given by Mr. Young,
would seem from the economic report
the comments of Mr. Thomas,
and most of the remarks
around the table this morning that the country was moving out of a
period of recovery.
He felt that it
was time to change the directive
so as to get away from reference to economic recovery and refer instead
to conditions conducive to sustainable economic growth and stability.
Under present conditions, it
appeared to him that maintenance of a
policy of firm restraint would be appropriate,
that policy was firm enough at the moment.
and he did not feel
The upward movement on
the part of business throughout the country was not spotty but broadly
based, he said, and a policy of less than firm restraint might serve
as an encouragement to labor to seek higher wages.
Prices, he believed,
were already moving higher along the line, although this development
was covered up by lower prices in the agricultural field which made it
easy to fail to see a price movement that the System ought to be doing
its
part to stop.
For the moment,
he said, the Committee should be
moving toward an increased negative availability of reserves.
Also,
he agreed with Mr. Leach that seasonal needs for the rest of the year
should be supplied to the extent possible through member bank borrowing,
12/16/58
even in
-30
preference to the use of repurchase agreements.
He would
have no objection to rate increases coming about, because he did
not believe that the System should be operating on the basis of
maintaining any particular rate structure.
It
seemed extremely
important to him to take advantage of the period between now and
the Treasury announcement in
where it
January to put the System in
could live during the next month or two.
a position
The System should
not hold steady during the intervening period, let the financing take
place, and then find itself in
destroy the market.
It
a position of having to come in and
should let rates increase, if
necessary, avoid
taking up any more of the slack than absolutely necessary, and maintain
had to date.
a tighter position than it
In other words,
he was arguing
for a movement of reserve availability downward to a tighter position
than maintained up to the present time, and he regarded this as very
important in
its
view of the fact that the Treasury would be announcing
new cash offering early in
January.
Serious consideration should
be given to an increase in the discount rate before the January 6
Committee meeting,
for it
probably would not be possible to take
action after that date and before the Treasury announcement.
the rate were not increased before the announcement,
possible to move on it
it
If
might not be
until well into the spring, which he felt would
be very unfortunate.
Mr.
Shepardson said that his views were similar to those
expressed by Mr. Robertson.
The report from the staff, other available
12/16/58
-31
reports, and his own contacts in
the field all supported the view that
recovery had been largely achieved,
that there was a high degree of
confidence regarding the period ahead,
and that the System should
achieve a much firmer policy position than had prevailed.
He thoroughly
agreed with working toward lower reserve availability, possibly toward
the level of $100 million of negative free reserves that Mr.
Irons had
mentioned.
He also agreed that there should be a change in the directive
and that it
would be desirable to have a discount rate change while it
was possible to move, rather than to have the System find itself boxed
in,
as it
had on occasions in
the past, and thereby fall behind the
parade.
Mr.
Fulton indicated that on the basis of developments in the
Fourth District he was not optimistic about the situation to the extent
of favoring "drastic" action such as Mr.
operations in the district were still
Robertson had suggested.
Steel
at rates below the national average
and there was no high degree of anticipation that those operations would
turn up precipitately, although in
and in
the latter part of the first
quarter
the second quarter there would probably be some inventory build
ing against the prospect of a steel strike.
Thus far, the users of
steel had been buying only what they could use in production.
Also,
while unemployment had declined, the decline had been slow and this
was expected to be the continuing trend.
There had been some upturn
in orders placed with manufacturers but not in
which was still
in
the doldrums.
the machine tool industry,
Construction activity had been rather
12/16/58
-32
high, both residential and heavy engineering,
fillip
to the figures in the district.
department store sales were still
while auto sales were still
some pickup recently.
heartening,
Mr.
but it
and this had given a
For the year to date, however,
three per cent behind last year,
about30 per cent below last year despit
All in all, the recovery in the district was
was not rapid by any means.
Fulton expressed the view that no precipitate move toward
tightness should be made.
He noted that the increase in bank loans
had been largely in loans on securities and in real estate loans rather
than in loans to business; the figures did not show any great demand
for credit from the businessman.
As to reserves, he believed that a
range from zero to $50 million of net borrowed reserves might be appro
priate, which would be similar to what had prevailed this week and last
week.
He did not feel that the discount rate should be changed at the
present time.
On the directive, it
would perhaps be appropriate to
make a change in wording to recognize the recovery that had taken place,
but the revision should not be an indication of any substantial change
in the System's position.
Mr.
Bopp said that the most important development in the Third
District in the past two weeks had been the continued strength in con
sumer buying.
Department store sales had continued to improve,
sales
for the latest week having been 19 per cent above a year ago--when
there was a snow storm--and 9 per cent above a year ago for the past
12/16/58
-33
four weeks.
The volume of Christmas buying was reported to be good
and most store executives thought that more
this year than last.
However,
which improved considerably in
shoppers" were buying
the demand for major appliances,
the fall, had waned since October,
consumers were reported to be price conscious,
keen.
Sales of new automobiles were still
registrations in Philadelphia in
and competition was
at a low level, new car
November having been about one-fourth
below last year and registrations in eastern Pennsylvania in
October
about one-third below October 1957. Final data showed a small decline
in
district factory employment in
decrease in fabricated metals,
October,
primarily because of a
and average hours worked and average
weekly earnings also had decreased.
Total factory employment in
October was six per cent below last year, with employment in
off 10 per cent and in
little
change in
weeks; in
nondurables off two per cent.
steel production in
the latest week,
There had been
the Philadelphia area in recent
operations were scheduled at 70.5 per cent
of capacity as compared with nearly 75 per cent nationally.
loans of district weekly reporting banks declined in
two weeks following small to moderate increases in
four weeks.
durables
Total
each of the past
each of the preceding
Business loans, which rose sharply in early November,
had
also been declining, and the decrease in the past two weeks was some
what more than in the corresponding period last year.
Weekly reporting
banks seemed to have made good progress in redistributing the new tax
bills.
Their holdings of Government securities rose $37 million in the
12/16/58
-34
week ending November 26, presumably reflecting allotments of the
new bill,
and then dropped $48 million in
the following week.
The
large Philadelphia banks had had substantial basic reserve deficiencies
in
recent weeks.
These deficiencies had been met mainly by purchasing
Federal funds but in
the last week of November the banks borrowed
substantial amounts from the Reserve Bank.
borrowed in the latest reserve week, and its
$3 million.
Only one of them, however,
daily average was only
Total member bank borrowing from the Reserve Bank in
the
latest two statement weeks averaged $27 million and $16 million,
respectively.
Turning to policy,
Mr.
Bopp expressed the view that in
with national and regional developments,
at this time should be moderate.
line
any move toward restraint
He would not favor a change in
discount rate or, at this point, in
the
the directive, which he would
like to see changed when there was a change in the discount rate.
Mr.
Bryan stated that the Sixth District continued to move
ahead at a very satisfactory,
things, nonfarm employment,
construction contracts,
not to say rapid, pace.
Among other
department store sales, demand deposits,
and manufacturing payrolls were up, insured
unemployment was down, and many of the indices were going beyond the
national average figures.
As far as the district was concerned,
the
recovery was vigorous.
As to policy,
Mr.
Bryan said that in his view more than an
even-keel policy was indicated at the present time.
He felt that
12/16/58
-35
there should be increasing restraint, and he agreed with those who
had suggested that unless a move were made on the discount rate
fairly soon the System was likely to find itself boxed in for a far
longer period than would be indicated by prospective economic and
financial developments.
Mr.
Johns said that nothing pertaining to the economy of the
Eighth District required comment,
while his thoughts regarding the
behavior of the national economy would be indicated by the views he
would express about the use of policy instruments and about the
directive.
He went on to say that he wished to align himself with
those, beginning with Mr.
Irons, who had taken the position that the
System should be moving toward greater restraint.
moving in
He would favor
that direction somewhat more vigorously and aggressively
than in recent weeks.
As to timing,
first by Mr. Robertson.
he agreed with the view stated
With respect to the directive, he felt that
it was time to eliminate the emphasis on recovery to the exclusion of
everything else and begin to say that the primary objective was re
straint upon expansion at an unsustainable rate.
He would be glad to
adopt wording such as suggested by Mr. Robertson.
Mr.
Johns continued by saying that he would favor increasing
the pressure on bank reserves, that he would not care to suggest any
net borrowed reserve target, but that he would simply increase the
pressure more rapidly than had been the case so far.
With respect to
12/16/58
-36
the discount rate, he had come to this
that the Treasury would not be in
January.
meeting under the misapprehension
the market until the third week of
Having now learned that the Treasury planned to come in
early as the eighth of January, it
adjusted promptly, and in
as
was his view that the rate should be
advance of the Treasury financing.
He was
aware of the quirks of the year-end period and the stresses and strains
generally prevalent at that time of the year, but he balanced against
those considerations the view, to which reference had already been
made,
that if
the even-keel policy meant what it
to mean at Committee meetings the arguments in
had often been said
favor of increasing the
rate before the Treasury case to the market were strong,
it
especially if
were true, as many seemed to believe, that the Treasury might offer
a long-term instrument.
Accordingly,
he would prefer to cast his lot
on the side of moving before the Treasury financing rather than after
ward.
Although he would be reluctant to call a special meeting of
the St. Louis directors at this season, he would prefer that to being
for a longer period than he would like to contemplate.
boxed in
With
respect to the magnitude of a discount rate change, at the moment he
would contemplate an increase of 1/4 per cent, although that might be
debatable.
Mr.
Johns said that he would like to protest mildly against
characterization of Mr.
Robertson's position as drastic, for he did
not think that it
Short-term rates being as they were,
was.
an
12/16/58
-37
adjustment of the discount rate would not be, in his opinion, a
drastic policy move.
To summarize,
As a matter of fact, it
might be long overdue.
he would favor changing the discount rate promptly and
he would favor revising the directive at this meeting.
Mr.
Szymczak said that he would favor maintaining a negative
free reserve position to the extent possible during the current period
of seasonal demand.
He did not think that it
mattered too much one
way or the other whether the directive was changed, and it seemed
questionable whether the discount rate could be increased at this time
without undue effect on the rate structure generally, which might hamper
some areas of the econony.
Chairman Martin said that after making his own comments,
would ask Mr.
Hayes to summarize the meeting.
The Chairman then commented that in
some hazards in
his own thinking he saw
the situation that perhaps were not real.
favor more pressure on the market,
feeling that it
he
He would
and he agreed with Mr. Szymczak in
did not make too much difference whether the directive
was changed at this time.
After mentioning that the index of industrial
production stood at 141 in
November against last year's high of 145,
he said there was a question about the point at which the trend of the
economy constituted more than a recovery movement.
However,
he would
have no objection to changing the directive at this time on the basis
of forecasting--about which one should be careful--and on the basis
12/16/58
-38
of "where we are, relative to where we were."
Chairman Martin remarked that this had been a difficult year
in the money market, and he then expressed the view that at present
it was more important to get the level of reserves down than to in
crease the discount rate.
Referring to current seasonal pressures
in the market, he said that the System should be endeavoring not to
supply all of the needs and the banks should be encouraged to come
to the discount window if they needed reserves.
At the same time,
the System should try to prevent knots from developing in the money
market.
It did not seem to him necessary to rush up on the Treasury
just because it had set a financing date, and a discount rate change
would attract quite a bit of attention.
The Chairman went on to say that his thinking was colored
somewhat by the efforts being made currently to balance the budget.
Beyond that, however,
he did not think that a discount rate change
would be terribly effective.
If
he were doing it on his own,
he
would not change the rate at this juncture regardless of the fact
that the System might be frozen in
for a while.
Furthermore,
he
did not think the System would necessarily be frozen in if more
pressure were put on the money market.
Following the Treasury
financing, the rate would probably have to be changed, but at that
time the change would come as confirmation.
were changed, it
3 per cent.
If
the discount rate
would be his view that the increase should be to
12/16/58
-39
In essence,
Chairman Martin said, he felt that the System
was in another difficult period.
and,
This was the end of a trying year
although conditions admittedly had been difficult, he did not
feel that the System had handled things too well.
There was a question
in his mind about the desirability of going into the Christmas maelstrom
just to beat the Treasury to the punch on the financing.
To change the
rate might create a more difficult situation for the Desk, and it
was
going to be difficult for the Desk anyhow.
In conclusion, the Chairman said that he would favor putting
pressure on the market,
the seasonal needs,
in
consistent with supplying some but not all of
the direction of a larger volume of negative
free reserves.
Summarizing the meeting, Mr. Hayes said it
appeared that in
the area of open market operations there was quite a clear consensus
favoring a move toward somewhat tighter restraint, but a very moderate
move.
The figures mentioned were mostly in
the zero to minus $100
million range, although some mentioned a range of zero to $50 million.
Several persons had indicated that they would favor less emphasis on
figures and more on the feel of the market,
and he judged those
persons would like to see a somewhat tighter feel than had prevailed.
There appeared to be no inhibitions about being in the negative free
reserve area; in
in that area.
fact, it
seemed to be regarded as desirable to be
There were a few who would favor going a little
further than others in that regard.
12/16/58
-40
On the discount rate, Mr. Hayes said, his count indicated
that a slight majority favored leaving the rate unchanged, although
quite a number spoke in favor of changing the rate before the Treasury
financing.
The only comments with regard to the magnitude of a rate
change were those made by Mr.
Johns and Chairman Martin.
There were
some who saw a need to prepare the way for the Treasury, while others
felt
that the System should wait until the Treasury financing was
completed.
Continuing his summary,
Mr.
Hayes said it
majority would like to see some change made in
appeared that the
the wording of the
policy directive, with the word "recovery" either deleted completely
or modified and emphasis put on the objective of preventing expansion
at an unsustainable rate.
Chairman Martin inquired how many felt that a change in the
directive was important, and several so indicated.
how many would favor language in
He then inquired
clause (b) referring to sustainable
economic growth and stability in place of balanced economic recovery,
and a large majority gave affirmative indications.
The discussion turned at this point toward interpretation of
the apparent consensus favoring a trend toward further negative free
reserves,
and Mr.
Hayes noted that no one had mentioned a figure
1/ Somewhat later, Mr. Leach suggested that the majority favoring no
change in the discount rate at this time may have been more than
"slight," and Mr. Hayes agreed.
12/16/58
-41
greater than $100 million.
Chairman Martin said that he thought the
situation would have to be measured by the Desk in terms of knots in
the market and the feel of the market, and Mr. Szymczak indicated
that he agreed with the Chairman's statement.
Mr.
Hayes commented that certainly the consensus was for a
moderate change,
and Chairman Martin put the matter in terms that
"moderate further negative free reserves were desirable."
Mr. Shepardson said he thought that was right, that the con
sensus was for a moderate move.
However,
the period of the last four or five weeks,
he had in mind that over
including this one, the
average would be close to $40 million of net borrowed reserves.
A
further move would mean trending somewhat below that figure.
Chairman Martin then inquired of Mr. Rouse whether the con
sensus was clear to him, and the latter replied that he understood
the consensus to be "tighter but not too tight."
With respect to the discount rate, Chairman Martin noted
that the comments of individuals around the table would be included
in the minutes.
The Chairman asked whether any member of the Committee felt
strongly enough to want to be recorded against a change in
the di
rective such as had been suggested, and Mr. Hayes replied that he
would like to be recorded against such a change.
Mr.
Leedy noted
12/16/58
-42
that he was not a member of the Committee and therefore had no
However,
as he had said earlier, it
vote.
was his view that the directive
ought not to be changed except at the time of a real change in policy.
Mr.
Szymczak said that although actions were more important
than the wording of the directive, he was somewhat concerned about
deleting the word "recovery" when it
appeared from the reports today
that some sections of the country still
had a way to go before
achieving full recovery.
Mr.
Shepardson commented that he would not want to argue too
strongly the point made by Mr.
however,
Szymczak.
Even conceding that point,
the momentum was such as to direct attention to what the
System was planning from this point.
While the goal of recovery
might not yet have been reached completely, it
was so close as to
permit attention to be focused on another spot.
Chairman Martin stated that that was why he would have no
objection to changing the directive,
and Mr.
would go along with the comment made by Mr.
Fulton said that he
Shepardson.
Mr.
Irons
noted that the next Committee meeting would be held on January 6
and that the Treasury's financing announcement apparently would
follow shortly thereafter.
It was his impression that the Committee
had been reluctant to change the directive just prior to a Treasury
financing.
in his mind.
Chairman Martin said that this point had been very much
He did not believe that the Committee should change
the policy directive on the eve of a Treasury financing,
and this
12/16/58
would argue for a change now rather than at the January 6 meeting.
With reference to the comment about no real change in policy,
Mr.
Rouse suggested that the Committee was sliding gradually into a
definite change.
He said he thought the Committee should know that
this was not yet realized by the market, where people were still
thinking in terms of moderate free reserves.
Thereupon, upon motion duly made
and seconded and with Mr. Hayes voting
"no", it was voted to direct the Fed
eral Reserve Bank of New York until
otherwise directed by the Committee:
(1) To make such purchases, sales, or exchanges (in
cluding replacement of maturing securities, and allowing
maturities to run off without replacement) for the System
Open Market Account in the open market or, in the case of
maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective
economic conditions and the general credit situation of the
country, with a view (a) to relating the supply of funds in
the market to the needs of commerce and business, (b) to
fostering conditions in the money market conducive to
sustainable economic growth and stability, and (c) to the
practical administration of the Account; provided that the
aggregate amount of securities held in the System Account
(including commitments for the purchase or sale of securi
ties 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
12/16/58
-44
amount of such certificates held at any one time by
the Federal Reserve Banks shall not exceed in the
aggregate $500 million.
Mr. Riefler stated that in connection with the emergency
planning program, System personnel were to be assigned to High
Point on a rotating basis beginning in
the near future.
Prior
authorization was needed for disclosure of Federal Open Market
Committee emergency resolutions to the persons so assigned, and
it was his suggestion that the Committee give a general authorization
to make available to such persons the emergency resolutions, last
approved at the meeting on March 4, 1958.
This suggestion was approved unani
mously.
Mr.
Rouse reported that the second meeting of the Technical
Committee of the New York Money Market was held on December 10, 1958,
and that the Committee was continuing its
avoid speculation in
work on plans designed to
the Government securities market and ensuing
disturbances of the kind that developed earlier this year.
Among
the suggestions that the Committee was considering were the following:
1.
That a program of education be undertaken to
show lenders, both bank and nonbank, the dangers of
or no margin to ultimate borrowers
lending on little
who may or may not be known to them.
2.
That there be instituted a new statistical
reporting system under which important lenders would
report data on the amount rate, term, collateral,
and purposes of their loans or repurchase agreement
12/16/58
-45
transactions against Government securities, and also
that discussions be held with the National Association
of Securities Dealers looking toward the provision by
member firms of data similar to the data now reported
to the New York Stock Exchange by its member firms.
3.
That further exploration concerning the possi
bility of a dealer organization be pursued.
5.
That the feasibility of developing a system of
regulation of the terms (especially margins) of loans
against Government securities be explored.
(The group
felt that regulation would be necessary but hoped that
this could be worked out within the framework of existing
legislation. The Technical Committee also believed that
recognition of dealers as a separate group was indis
pensable to an effective regulatory system.)
5. That the Federal Reserve consider using its
influence to achieve wider and more regular participation
of the banking community in financing dealers.
Mr.
Rouse said that the job immediately ahead was to explore
ways of implementing the Committee's suggestions.
He added that he
was planning to send a summary of the minutes of the December 10
meeting to each member of the Open Market Committee or that, if
any
member desired, a complete set of the minutes would be provided.
On Chairman Martin's suggestion, it was decided that complete
minutes should be sent to each member of the Committee and to each
Reserve Bank President not currently serving on the Committee.
Mr.
Rouse commented that the suggestion for a dealer organiza
tion should be kept confidential because it
standpoint of getting anything done if
would be damaging from the
word got out of the Technical
Committee.
Chairman Martin commented that Under Secretary of the
Treasury Baird had been very active in working on the problem of
12/16/58
-46
speculation in
Government securities and in
due course would
have reports from savings and loan and savings bank groups.
Mr.
Robertson recalled that at the last meeting of the
Committee he had requested that Mr. Rouse give consideration to
the problem of window-dressing of year-end bank condition state
ments from the standpoint of the use of repurchase agreements.
Mr.
Rouse said that the officers of the Securities Depart
ment of the New York Bank had been discussing the matter, that they
thought it
was necessary to deal with the market as it
exists,
and
that an attempt to shut down on repurchase agreements beyond the
general policy adopted by the Open Market Committee might have an
effect on the market that Committee policy did not contemplate.
It
appeared that the place to deal with the problem was where the
window-dressing took place rather than to attempt to deal with it
through the market.
Mr.
Robertson agreed that the problem was a difficult one.
He noted, however, that in past years the volume of repurchase
agreements had jumped up on the last day of the year and borrowings
went down.
It appeared that the banks paid off debt and that the
dealers then went to the Federal Reserve Bank for repurchase agree
ments.
While he was not prepared to offer any solution, he felt
that the problem should be borne in mind.
Mr.
Rouse indicated that further consideration would be
given to the matter.
12/16/58
-47
It was agreed that the next meeting of the Committee would
be held on January 6, 1959,
at 10:00 a.m.
Thereupon the meeting adjourned.
Cite this document
Federal Reserve (1958, December 15). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19581216
@misc{wtfs_fomc_minutes_19581216,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1958},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19581216},
note = {Retrieved via When the Fed Speaks corpus}
}