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, January 27, 1959, at 10:00 a.m.

PRESENT:

Mr. Martin, Chairman

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Hayes, Vice Chairman

Balderston

Fulton

Irons

Leach

Mangels

Mills

Robertson

Shepardson

Szymczak

Messrs. Allen, Johns, and Deming, Alternate Members

of the Federal Open Market Committee 1/

Messrs. Bopp, Bryan, and Leedy, Presidents of the

Federal Reserve Banks of Philadelphia, Atlanta,

and Kansas City, respectively

1/

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, Walker, 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

1/

Messrs. Allen and Leedy joined the meeting at the point indicated

in the minutes.

Mr.

Baughman also entered the room at that time.

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1/27/59

Mr. Latham, First Vice President, Federal

Reserve Bank of Boston

Messrs. Roosa, Jones, and Tow, Vice Presi

dents of the Federal Reserve Banks of

New York, St. Louis, and Kansas City,

respectively

Messrs. Baughman and Einzig, Assistant Vice

Presidents of the Federal Reserve Banks

of Chicago and San Francisco, respectively

Mr. Gaines, Manager, Securities Department,

Federal Reserve Bank of New York

Mr. Anderson, Economic Adviser, Federal Reserve

Bank of Philadelphia

Mr. Parsons, Director of Research, Federal Re

serve Bank of Minneapolis

Mr. Brandt, Economist, Federal Reserve Bank of

Atlanta

Chairman Martin noted that Messrs.

Allen and Leedy had been delayed

because their train was running behind schedule and that Mr. Latham was

attending the meeting in the absence of Mr. Erickson.

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on January 6, 1959, were

approved.

Before this meeting there had been distributed to the members of

the Committee a report prepared at the Federal Reserve Bank of New York

covering open market operations during the period January 6

January 21, 1959,

and a supplemental report covering the period January

22 through January 26,

in

through

1959.

Copies of both reports have been placed

the files of the Federal Open Market Committee.

Mr.

Rouse reported that the money market had been steadily

tight since the last meeting of the Committee.

Federal funds had

traded at the discount rate on every day, although some trading at

1/27/59

-3

rates slightly below the discount rate was reported on a few days,

and market rates of interest on Treasury bills had increased sharply.

Three-month bills traded yesterday at 2.9

per cent, and six-month

bills went at an average rate of 3.34 per cent in yesterday's auction.

The reserve figures had not worked out exactly as planned, Mr.

Rouse said, principally because of erratic movements in

float.

In

spite of average free reserves in one week, however, the average for

the full period since the last meeting had been reasonably close to

what he believed the Committee intended.

In any event, the central

money market had been consistently tight; the temporary buildup in

reserves was concentrated at country banks while the New York and

Chicago banks carried large basic deficiencies steadily.

The new securities issued in

the Treasury's cash financing

earlier this month had not behaved well in

secondary trading.

Al

though the new bonds and notes were attractively priced and were

satisfactorily oversubscribed,

a volume of offerings reached the

market immediately after the books closed and drove both issues to

discounts from issue price.

A principal influence behind this

development was widespread anticipation of higher rates of interest

over the coming months.

It

was generally anticipated that the

discount rate would be increased in

the near future, and the

prospective demands for capital suggested steady pressure on rates.

Mr. Rouse commented that the Treasury was planning to

announce financing terms later this week for the refunding of its

1/27/59

-4

February maturities; meetings with the advisory committees were

scheduled for Wednesday and Thursday.

After completing this re

funding, the Treasury probably would not have to return to market

again until late March or early April, when cash financing would

be necessary.

refunding, it

Allowing 10 per cent attrition on the February

was estimated that the Treasury would find it

sary to borrow about $6 billion in April and May.

should be larger than estimated, however,

it

If

neces

attrition

might be necessary

for the Treasury to return to market a bit earlier and for larger

amounts.

The Treasury was faced with a difficult decision in

pricing its

it

refunding securities.

In the present market atmosphere,

seemed likely that market yields would tend to rise to whatever

level the Treasury set on its

new issue, so that attempts to achieve

a successful exchange through attractive pricing might be self

defeating.

Mr.

Rouse went on to say that present projections suggested

a need for reserves during the next three weeks,

if

an even keel were

to be maintained, but that sales from the System Account to absorb

reserves would then be necessary in subsequent weeks.

Mr. Robertson asked if

Mr.

the 10 per cent attrition mentioned by

Rouse referred to the total of February maturities or to the

publicly-held portion, to which Mr. Rouse replied that he had in mind

that 10 per cent of the total maturities,

or $1.5 million, might be

1/27/59

-5

the maximum attrition, while it

might be possible to hold attrition

to 10 per cent of public holdings, or $900 million.

In response to an inquiry by Chairman Martin regarding the

market attitude with respect to the possibility of an offering of

10-year bonds in the current refunding, Mr. Rouse said that when

Under Secretary of the Treasury Baird met with the dealers in New

York last week the market atmosphere was quite bad and dealer com

ments did not encourage the idea of an issue in

the 10-year range.

While some extremely pessimistic comments suggested that the Treasury

should confine its

it

offering to two issues in

the under-one-year range,

was felt generally that the Treasury could attract as much as $2

billion into a note in

the three-to-five-year range.

to be no interest, however,

There appeared

in anything beyond five years.

Mangels stated that he had heard reports from banks in

to the effect that there was no interest in

Mr.

San Francisco

a longer-term obligation

and that attrition would be quite high unless the Treasury offering

was most attractive.

Chairman Martin then asked what the one-year rate was at

present, and Mr. Rouse responded that although the market rate was

in the neighborhood of 3-5/8 per cent, the Treasury should pay 3.70

to 3.75 per cent on a one-year obligation.

He added that beyond

two or three years the rate curve was virtually flat

Therefore,

at 4 per cent.

if the Treasury offered a security in the three- to five-year

1/27/59

range,

it

probably would have to carry a 4 per cent coupon and be

priced at par or a small discount.

Thereupon, upon motion duly made

and seconded, and by unanimous vote,

the open market transactions during

the period January 6 through January

26, 1959, were approved, ratified, and

confirmed.

In supplementation of the staff memorandum distributed under

date of January 23,

1959, Mr. Young made the following statement with

respect to economic developments:

Major sectors of domestic demand for goods and also

of output have continued to show advance.

Given the

momentum of expansive forces, advance seems likely to

proceed in the months ahead, with stimulus emanating

particularly from active consumer buying and home pur

chasing, business inventory reaccumulation, and more

active investment, business and governmental, in fixed

facilities. The most recent information from abroad

for industrial nations of Europe confirms cessation of

decline in activity and the beginning of recovery. While

steel and textile output continue to be depressed, steel

consumption at least appears to exceed output, a condition

not likely long to persist. U. S. exports to Europe

showed significant pickup during fall months, but downward

adjustment in purchases of U. S. goods by the less-developed

economies has continued.

The highlights of recent domestic and foreign develop

My special

ments are well detailed in the staff memorandum.

and un

employment

recent

comments will be concerned with

employment trends.

Employment gains have lagged output gains in this

The lag, however, has been

recovery, as they usually do.

recovery periods, and the

postwar

preceding

in

greater than

been both higher and

has

unemployment

by

attained

level

somewhat more sluggish in its response to rising activity.

Thus, while real GNP and industrial production are currently

both within striking distance of earlier highs, nonfarm

employment--up 700,000 from its recession low--has regained

less than a third of its recession loss of 2.4 million jobs.

1/27/59

Since September, there has been little

evidence of any

extensive general rehiring of workers other than for seasonal

reasons.

In the two preceding postwar recession-recoveries,

employment stabilized for a number of months after the reces

sion bottom, but once recovery set in, employment increases

were not halted until a new peak was reached.

What accounts for the slower pickup in employment in this

cycle than in preceding postwar cycles?

be mentioned.

Several factors may

(1) Productivity increases in manufacturing industry have

apparently been higher this time than in the earlier recovery

periods, reflecting very high modernization investment in pre

ceding boom as well as the greatly expanded industrial research

and development programs of the boom period. For instance,

automobile output in December, while only 4 per cent lower than

in December 1956, provided one-fifth less in production worker

employment than two years earlier.

ing about as much freight as

less employment.

Similarly,

equalling output levels of a

fever employees.

The larger productivity

The railroads, while carry

in late 1957, provided 10 per cent

the coal mines have been about

year ago with about 15 per cent

gains of this recovery period may

also be a factor in recent stabilizing of average hours of work

per week in all manufacturing industry. Virtually all of the

recession decline in hours worked had been recovered by last

September and there has been no further gain since.

In earlier

postwar cycles, hours of work continued to increase long after

this stage of recovery.

It is important here to note that,

since 1955, there seems to have been a downward drift in the

length of the workweek.

(2)

It may well be that labor cost increases of recent

years have made management more cost conscious than in any

earlier period and that greater efforts are now being applied

to limiting employment and overtime increases in order to keep

costs down. Also, postwar growth in fringe benefits now makes

record-keeping costs and benefit liabilities rise rapidly as

new workers are hired, and this would operate to slow down

additions to work forces.

In machinery and other industries associated with

(3)

recovery rise

investment outlays, employment has shown little

because expansion in fixed investment has not yet shown marked

revival. In the past, expansion of nonproduction worker

employment, associated especially with research and develop

ment, has been correlated with rising investment. In the

preceding two cycles, business investment had shown much more

revival than has been shown up to the present point in this

cycle.

1/27/59

(4)

Nonmanufacturing employment, which had shown strong

growth through the whole postwar period, with only modest

slackening of expansion in the two preceding downturns, de

clined moderately in this recent recession and has shown

little

expansive tendency in recovery.

Judging by the rise

in nonindustrial GNP since last spring, as sharp or sharper

productivity gains have been experienced in nonmanufacturing

activities as in manufacturing industries during this recovery

period.

Presumably these nonmanufacturing activities are

digesting earlier postwar increases in their working force.

(5)

The industries in which recession declines in employ

ment have been highest and greater than in preceding recessions

have been durable manufacturing, railroads, and mining.

These

industries have been subject to a secular decline in postwar

years in employment of semi-skilled workers, with reductions

in semi-skilled jobs more accentuated in each succeeding

recession-recovery period. This means, of course, a sizable

problem of transfer of employment to other gainful activities,

a problem that can be only resolved slowly.

With the rise in employment opportunities lagging, that

is to say, showing slower advance than in preceding postwar

recoveries, what about the unemployment problen and prospects

over the months ahead?

Unemployment has been higher all through this recession

It reached a

recovery period than in earlier postwar cycles.

seasonally adjusted high of 7.5 per cent of the labor force

in the summer and declined to about 6 per cent subsequently.

In numbers of unemployed, the decline has been about 1 million

workers.

While unemployment has been higher than in preceding

not

has

cyclical dips, the general pattern of rise and decline

The seasonally

been dissimilar to that of preceding cycles.

adjusted unemployment did not fall below 4.5 per cent of the

labor force in the 1949-50 recovery until about 12 months after

recession ebb, and in the 1953-54 recovery this rate was not

In the Korean boom, the rate

pierced until after 10 months.

the 1955-57 boom, 4 per cent

in

but

cent,

per

fell to under 3

time the rate fluctuated

the

of

most

and

floor

constituted a

just above 4 per cent.

In the two earlier postwar recoveries, employment rose

and unemployment declined at the same time that sizable addi

In the recent

tions were being made to the working force.

due to the

was

unemployment

in

rise

the

of

part

recession,

working

the

entered

who

earners

secondary

large number of

1/27/59

force when primary earners had their pay reduced or lost

their jobs.

The recent decline in unemployment has

reflected in part withdrawal from the work force of many

of these secondary earners as well as withdrawal of some

older and younger workers for want of job opportunities.

Recovery in job opportunities has been uneven for

different groups of workers.

Younger workers have faired

better than older workers, and females better than males.

Relatively high rates of unemployment persist for durable

goods workers, semi-skilled and unskilled workers, and for

nonwhite workers.

Among those with long duration unemploy

ment, durable goods workers, miners, and railroad workers

are numerous in relation to their role in the labor force.

Recovery re-employment has also been uneven geographically.

In California, unemployment has fallen to reasonably normal

levels.

In Michigan, it has fluctuated only seasonally and

unemployment is currently well above last year's rates. At

midsummer, the number of substantial surplus labor markets was

89 out of 149, and by the present month the number of such

The concentration of sub

markets had declined by only 13.

stantial surplus markets continues to be in the east and

midwest.

Two observations about current labor market conditions

First, on the supply side,

seem warranted from this review.

a conjuncture of secular and cyclical forces seems to have

contributed to the present volume and composition of

As we have noted, a high proportion of the

unemployment.

unemployed is concentrated in durable goods and related

industries, making the continuing unemployment problem a

cluster of localized problems rather than a general problem.

But this may also work to make unemployment slack linger on.

We should not be surprised to hear the terms "technological

unemployment" and "labor immobility" used more frequently

again to describe a possibly slower decline in the unemploy

ment rate than featured the earlier cycles.

Second, on the demand side, the labor market in the

recent period has, on the whole, been experiencing a less

vigorous demand for labor than in the comparable phase of

But as consumption expenditures

the other postwar cycles.

rise further and as capital expenditures begin actively to

expand, demand for labor will surely strengthen, and

particularly in the durable goods areas where unemployment

Gains in worker productivity are

is now concentrated.

typically high in the recovery phase of the cycle and then

Gains in output in the

slow down in the expansion phase.

utilization of older

require

expansion phase increasingly

facilities and these facilities take more manpower per

unit of output.

1/27/59

-10-

How fast available manpower resources will be taken

up in the period ahead depends on the pace of further

expansion in aggregate demand and especially of durable

goods demand and on the strength of competitive responses,

especially price response, in meeting additional growth in

demand.

If expansion in money demand is dissipated in price

advance, the employment impact will, of course, be lessened.

Taking into account the relatively larger pool of un

employed manpower at this stage of the precent cycle compared

with earlier postwar cycles, it seems reasonable to observe

that manpower availability will not become a limiting factor

on the further increase in total production nearly so soon

as it did in the two preceding cycles.

This is clearly a

bullish factor for the length of the expansion period that

now seems to be beginning.

In our presentation at the last meeting, we suggested

that an increase in the money supply in the period ahead

somewhat above the average of recent years might be appro

priate. This suggestion was on the basis of prospective

manpower and other resource availabilities. If prevailing

inflationary and speculative clouds can be effectively

dispersed by a firm Federal fiscal policy and a firm

monetary policy, this problem of the proper rate of monetary

expansion for a growth period without inflation will become

an urgent matter for the Committee's consideration.

During Mr. Young's statement, Messrs.

Allen, Leedy, and Baughman

joined the meeting.

Staff memoranda on the outlook for member bank reserves and on

the outlook for Treasury cash requirements had been distributed under

dates of January 23 and January 26, 1959, respectively.

With further

reference to financial developments and credit policy, Mr.

Thomas

made the following statement:

In view of current trends and potentials, prospects

point to continued economic expansion for the next year

The monetary basis for such expansion is already

or more.

largely established. Forces mostly outside the area of

1/27/59

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bank credit are likely to determine whether demands for

consumption and investment will be of such magnitude

and nature as to reduce the volume of unemployment,

whether there will be sustainable growth, whether per

sistent pressures on prices will produce creeping inflation,

or whether speculative commitments will create a bubble on a

boom that will burst at an early stage.

The principal forces that may determine the course of

events include, first, the decisions of consumers as to the

rate and nature of their expenditures.

Consumer incomes,

together with accumulated savings, appear to be adequate to

permit further growth in consumption. Incomes will be sup

ported or enlarged by the high level of Government spending

and by other elements of expansion now in process.

The magnitude and nature of consumer expenditures,

however, will be influenced by the second important set of

forces, namely, the pricing and marketing policies of

business. Will consumers be attracted by the goods and

services offered at the prices established? Will producers,

including labor, continue to endeavor to raise their prices

or will consumers be offered some of the benefits of

productivity increases? Will competitive forces under the

impetus of unutilized resources halt the rising tendencies

in finished goods prices and perhaps bring about some down

ward price adjustments? Unless prices are kept down, can

there be sustained growth in consumption?

Sustained long-term growth in real incomes depends

in

productivity per

primarily upon continued improvements

person employed. This requisite for growth cannot be

obtained merely by increasing consumer incomes through

programs of Government spending. Such measures may even

retard productivity increases.

The next element needed for continued growth and to a

considerable extent for productivity improvements is an

appropriate volume of investment in equipment, plants, other

structures, and means of transportation. Pricing can also

be an important factor in encouraging investment, as well as

consumption.

Finally, it must be recognized that investment is not

possible without saving. Saving depends on the decisions of

Most savings are channeled into

individuals and businesses.

investment through financial institutions. The commercial

banking system is only one of these channels and by no means

The

it is of marginal importance.

the dominant one, althogh

creation of money through the expansion of bank credit can at

1/27/59

-12.

times, by stimulating spending and investment, bring about

increased production, but it cannot be a substitute for

saving in real terms or for extended periods. True saving

requires the production of goods that are withheld from

consumption.

This analysis leads to the conclusion that further

recovery to reasonably full utilization of resources and

then continued growth at a sustainable rate will depend

upon individual decisions with respect to pricing and

buying and investment and saving and do not now need any

additional stimulants through fiscal or credit policies.

There is danger that the forces already at work, including

expectations as to the future, may induce commitments of a

speculative or otherwise unsustainable nature or may lead to

pricing policies that will first contribute to inflation but

ultimately discourage buying. Tendencies of this nature

could be aggravated by ready availability of credit to

finance speculative ventures or discouraged by credit

restraints.

Turning to consideration of the present credit situation,

it seems clear that further stimulants to credit expansion are

not necessary. The forces that have been mentioned are not

Credit

being held back by inability to obtain financing.

demands and the availability of funds for investment are

adequate--in the aggregate-to support further expansion and

even encourage excessive speculative commitments. Businesses

and individuals already possess a substantial amount of

liquidity.

Banks can meet a considerable volume of short-term credit

needs of business through the shifting of assets or by temporary

borrowing of any needed reserves. This may mean some increase

in aggregate borrowing at the Reserve Banks. A net increase

of less than half a billion dollars, leaving out temporary

variations, could provide all the reserves needed for adequate

Under the

growth in the money supply during the next year.

conditions likely to exist, any additions to reserves should

be supplied in this manner, which imposes restraints, rather

than through open market operations.

Financial problems facing this country, however, are not

as simple as this. They are complicated by the existence of

a heavy Government deficit and a formidable task of debt

raising and refunding in a period of incipient boom in the

The prospective requirements of Treasury financing

economy.

new Budget are described in a separate memorandum.

the

under

Although the Treasury will be able to retire debt on balance

between now and the end of June, the timing of receipts and

1/27/59

-13-

expenditures and shortly-spaced maturities will require

frequent and substantial operations to raise new cash, as

well as for refunding. In the latter half of this calendar

year largely for seasonal reasons, there will be a deficit

and further heavy cash borrowing needs, even if the projected

balance is obtained in the budget for fiscal 1960 as a whole.

Treasury borrowing, therefore, will continue to exert

demand pressures on the available supply of lendable funds.

At the same time Treasury expenditures will supply funds that

could help finance economic expansion and reduce needs for

private borrowing. The course of interest rates and of other

economic pressures will depend on how much private borrowing

demands increase.

Developments in the money and Government securities

markets since the turn of the year largely reflect the

pressures and anticipations arising from Treasury financing

operations in process and in prospect. The Treasury has just

raised about $3.5 billion of new cash, much of which has not

yet been distributed to firm holders. A major refunding

operation is imminent. Some new cash borrowing--at least

through increased bill issues--is likely to be needed this

quarter and a considerable amount in April.

It is no wonder that rates on Treasury bills, which did

not show the customary increase in December, have increased

in January, instead of declining as they usually do. Nor is

it surprising that bond yields in general have risen to new

high levels. These changes represent adjustments that were

inevitable sooner or later under current prospects. It is

more helpful than harmful to the attainment of a well balanced

market that they have occurred. Continued strength in the

stock market has also been a source of pressure on the bond

market. There has been a further widening of the margin

between stock and bond yields.

Bank credit trends in general have not been startling

and show no particularly strong private credit demands.

Credit increases in December conformed closely to the usual

seasonal pattern. Currency outside banks showed slightly

less than the usual seasonal increase, while demand deposits

remained unchanged on a seasonally adjusted basis. The

total money supply--seasonally adjusted--was 2 per cent or

more above the peak level of mid-1957, while the turnover

of demand deposits was still below the level of that period.

In addition time deposits were about 12 per cent larger.

In the first two weeks of January, total loans and

investments of city banks declined somewhat more than they

1/27/59

-14-

had in the same period of other recent years except 1958.

In the third week, however, according to preliminary

figures, holdings of Government securities increased by

$1 billion, reflecting payment for the new Treasury notes,

and loans showed little

change. A smaller than usual

decline in commercial loans was offset by an increase in

loans on securities.

Ordinarily loans and investments

have continued to decline in that week.

In addition to

the increase in U. S. Government deposits, there appears

also to have been a substantial increase in private

demand deposits in the third week, following moderate

declines in the two previous weeks.

Reserves released by after-Christmas seasonal factors

have been absorbed by a reduction of nearly $900 million

in System holdings of bills and of repurchase contracts

and a decline in float. Member bank borrowings, on a

weekly average basis, have been as high as $700 million,

although in the past week they have averaged around $450

million, reflecting a larger than usual mid-month float

increase caused by weather conditions.

There is no

evidence that the low discount rate is encouraging credit

expansion on the basis of borrowed reserves.

Figures for the current week include the effects of a

large increase in required reserves due to payments for

the new Treasury securities through tax and loan accounts

and of some decline in float, only partly offset by a

continued return flow of currency, and will apparently show

net borrowed reserves of well over $100 million. Indications

are for net borrowed reserves of over $300 million during

If

the next two weeks, in the absence of System operations.

the usual seasonal decline in private demand deposits con

tinues, along with the reduction in Treasury accounts from

the present increased level, there will be net free reserves

during the last part of February and the first half of March,

which should be prevented by System operations.

Unless strong demand pressures for bank credit should

develop, the situation will probably be one calling for only

It might be advisable to let varying

moderate adjustments.

pressures that develop in the market bring about their own

adjustments with a minimum of System intervention, except

for large changes in required reserves caused by variations

Under such a procedure, any

in tax and loan accounts.

credit expansion would bring about a tightened reserve

situation and credit contraction would result in an easier

money market.

1/27/59

-15

Chairman Martin stated that the next meeting of the Federal

Open Market Committee would be held on February 10, 1959, with the

annual organizational meeting of the Committee on March 3, 1959.

The views expressed during the discussion today therefore should be

made with that schedule in

mind.

Mr. Hayes then made the following statement with regard to

the business outlook and credit policy:

It is encouraging to note that business activity has

continued to expand at a vigorous pace and that this trend

seems likely to be maintained in the coming months.

This

gradual recovery, marked by restrained optimism rather than

exuberance, is more likely to bring sustained growth than a

more rapid advance which would tend to generate exaggerated

expectations and speculative tendencies. At present the

stock market is the only area where such tendencies are

clearly in evidence.

Favorable business influences include the likelihood of

some restocking by retailers and wholesalers after the good

Christmas sales experience, the apparent cessation of inven

tory liquidation at the manufacturing level, and the prospect

of well-sustained residential construction. On the other

an open question,

hand, the vigor of automobile demand is still

and the accelerated steel purchasing which has already com

menced in anticipation of a possible strike is of course only

One distinctly disturbing feature is

a short-run stimulant.

the prospect for seasonal increases in unemployment in

January and February, despite the recovery in output. Per

sistent substantial unemployment is disturbing both because

of the economic losses involved and because of the possibility

that it may give rise to unsound proposals for artificial

Another fundamentally disturbing element, of course,

remedies.

is the serious doubt whether a balanced budget can really be

achieved in the next fiscal year.

There is a gratifying degree of price stability in evi

dence at the moment, despite the obvious inflationary dangers

For example, the wholesale price index was

on the horizon.

unchanged in December at a figure lower than that recorded at

the bottom of the recession. Declines have been reported for

1/27/59

-16.

most sensitive commodity prices, and the consumer price index

has receded slightly. The case for expecting inflationary

forces to break out must therefore rest essentially on

prospective financial and collective bargaining developments,

rather than on excessive acceleration of business or consumer

spending. The 5 per cent wage increase now being granted by

the oil industry seems overly generous in relation to national

productivity gains and will not help other industries to

"hold the line" in the next few months.

As for credit developments, the preliminary estimates for

all commercial banks in December show an above-average growth

of loans, with real estate loans continuing to expand rapidly

and with business and security loans increasing seasonally.

Fragmentary January data for reporting member banks suggest,

however, that rather heavy seasonal repayments are now oc

curring.

Loan demand can still

not be labeled ebullient; and

I might add that the New York banks feel under sufficient

pressure to be rather cautious in their lending policies.

Viewing the Treasury's financing program for the rest of

this fiscal year, it appears likely that, after the mid

of something over a

February refunding, there will be a lull

month before substantial cash borrowings, totaling around $6

Presumably the

billion, are required in April and May.

announcement of the April financing will be made late in

March.

With respect to credit policy, the economic situation

Open market

does not call for any change at the present time.

financing

Treasury's

the

with

operations, in conjunction

activities, have produced a reasonably tight money market

I think we should aim for about the same degree

atmosphere.

of tightness as we have had, as evidenced by the feel of the

market, and there would seem to be no reason to change the

directive.

The only area of doubt concerns the discount rate. With

market rates now well in excess of 2-1/2 per cent, we are

close to the point where a 3 per cent discount rate would seem

However, we are not free

desirable on technical grounds alone.

prospective Treasury

the

for

weeks,

few

agents for the next

indicates the advisabil

strongly

Thursday

this

due

announcement

until the refunding is

now

from

keel

even

an

ity of maintaining

completed and the market has had a short time to digest the

new issues. Moreover, subscribers to the recent Treasury cash

offerings might look upon a rate increase at this time as a

sign of bad faith. Since the market is expecting a 1/2 per

1/27/59

-17

cent rate rise, and only the timing is really in doubt,

our failure to raise the rate at the present time should

not prevent a realistic pricing of the securities to be

offered in the refunding.

And there is always the danger

that an increase now could be interpreted as a signal of

intensified restraint, creating fears of a progressive

rise in interest rates over the coming months, and thus

adding to the Treasury's difficulties and perhaps inviting

political trouble, especially if the prime rate were to

move up as a consequence. Finally, there is some advantage

in letting the dust settle a little longer on the recent

international monetary developments before moving our

discount rate higher. In short, the combination of these

factors points to late February or early March as the

first

opportunity for a rate change. Action at that time

is indicated in the absence of unforeseen developments in

the interim.

Mr. Irons said that in

moving along at a high level.

the Eleventh District the economy was

While not too much higher than it

had

been, the strong and favorable level of activity was spread through

the various sectors of production and trade.

Unemployment was down

a little

in the last month, and generally speaking conditions were

good.

A strong demand for bank loans was reported, with the implica

tion that bankers in the district were trying to hold back and could

increase their loans further if

in

they were so inclined.

An increase

activity at the discount window was being noticed, with some of

the larger reserve city banks coming in

occasionally, which seemed

to bear out the reports regarding the strength of loan demand.

There appeared to be more confidence with regard to the continuation

of economic and business expansion and also, unfortunately,

inevitability of inflation.

about the

People seemed doubtful about the

1/27/59

-18

possibility of balancing the Federal budget.

It

was difficult to

see how this attitude could be dispelled until something actually

was done to convince the public that perhaps there was not going

to be inflation.

As to policy, Mr.

quandary.

He felt

restrictive as it

Irons said that he was in something of a

that open market policy should continue to be as

had been,

since he saw no argument for any relaxa

tion, and whenever there were doubts he believed that they ought to

be resolved rather deliberately on the side of restraint rather than

ease.

In these circumstances,

the Manager of the Account must rely

very heavily on his impressions and sensitivity to the market.

The

forthcoming Treasury refunding operation might be unusually difficult

and result in

a large amount of attrition, with the result that the

Treasury then would be looking for money again rather soon.

The

Treasury seemed likely to be in the picture rather continuously,

and it

was hard to reconcile the developing economic situation with

the needs of the Treasury.

Perhaps the most that could be done in

the next two weeks would be to continue monetary policy about as it

had been, in no event less restrictive and with any deviations on

the more restrictive side whenever there was doubt.

Turning to the discount rate, Mr. Irons said that technically

it should be raised.

While he did not think that it made a great

deal of difference, he would lean on the side of acting sooner than

1/27/59

-19

the month of March, particularly because this would not be a

startling change.

As he had noted, the Treasury might have to

come to market again early in March if

coming refunding was very high.

attrition on the forth

In substance, while he did not

feel strongly one way or the other, he had some question whether

the System ought to wait for a considerable time before it

gave

confirmation to the prevailing interest rate structure by an in

crease in the discount rate.

Chairman Martin inquired of Mr. Irons whether he thought

it

would not be wise to change the rate before the next meeting

of the Open Market Committee, to which Mr.

Irons replied that he

had not meant to suggest by his remarks that it

be unwise.

If

necessarily would

in the judgment of the directors of a Reserve Bank

there should be an increase in

the discount rate before the meeting

on February 10, he would not object.

Meetings of the directors of

several of the Reserve Banks were scheduled shortly after the next

meeting of the Committee on dates when it

refunding would not yet be completed.

whether it

appeared that the Treasury

Consequently, he did not know

would make much difference if

discount rate action were

deferred until such time.

Mr.

Mangels said that the situation on the West Coast was

somewhat similar to that reported by Mr. Irons for the Eleventh

District.

Business conditions continued to show strength and were

1/27/59

-20

at quite a good level.

As usual at the end of the year, bankers

and businessmen had engaged in

forecasting, and almost without

exception the opinions reflected strong confidence in

of the economy.

the progress

At the same time, no more than one or two of the

forecasters expressed a feeling that boom conditions were in

prospect for this year.

Defense procurement and space programs

of the Government now being developed in the Twelfth District

continued to provide major support to the economy.

This tied in

with the increased consumer spending that the district had ex

perienced.

Preliminary data for December revealed that employment

reached a new record, while unemployment was down to 5.4

about the level of a year ago.

January,

Through the first

unemployment figures were running a little

year-ago levels.

during the recession.

lower than

the sector of business hardest hit

Metals and mining activity had now leveled

off, while lumber showed increases in

Farm income prospects,

both orders and prices.

however, were not as good for this year as

they had appeared to be in

the early part of 1958.

Automobile

the State of California in December were up LO

per cent over November,

September 1955,

two weeks in

The greatest improvement was attributable to

durable goods manufacturing,

registrations in

per cent,

thus producing the highest month since

and scattered reports through mid-January indicated

that improvement had continued.

Department store sales in the first

1/27/59

-21

two weeks of January continued at the record December levels,

10 per cent over a year ago, and home appliance sales were up

25 to 30 per cent.

Turning to banking developments in

the district, Mr. Mangels

said that demand deposits during the three weeks ended January

14

showed an increase larger than the increase during the corresponding

period last year.

Time deposits likewise rose, although the rate of

increase had been declining in

recent periods.

All categories of

bank loans except real estate loans reflected declines,

though not

to the extent anticipated; bankers reported that repayments had not

been as heavy as they expected.

During this same period district

banks sold about $135 million of Government securities, and their

purchases and sales of Federal funds on January 14 were almost in

The Reserve Bank had been experiencing a slight increase

balance.

in member bank borrowing; as of Thursday,

banks,

January 22, five member

including two reserve city banks, were borrowing a total of

about $30 million.

With respect to policy, Mr.

Mangels commented that a principal

factor during the next few weeks would be the heavy Treasury financing,

on which there was likely to be heavy attrition unless the Treasury

priced its

offering on a very acceptable basis.

tions, he felt

its

Under those condi

that the Desk should be given wide discretion to base

operations pretty much on day-to-day market conditions, although

1/27/59

-22

he hoped that it

might be possible to maintain net borrowed reserves

of around $100 million.

The directive seemed satisfactory.

As to

the discount rate, he hoped that no action would be taken until

around the end of February or the first

part of March.

The next

meeting of the San Francisco directors was to be held on February 11,

with the succeeding meeting on March 11, which meant that if

discount

rate action were taken prior to the latter date the San Francisco

Bank was likely to lag behind.

In his opinion, the San Francisco

directors would be favorable to an increase in

Mr.

the rate at that time.

Deming said that the upward trend continued in the Ninth

District, although muted by the seasonal laws.

After commenting

that he had been impressed by the presentations of Mr.

Mr.

Thomas,

Young and

he went on to say that the Minneapolis Bank had spent

considerable time in

the last three weeks looking into longer-run

prospects for the economy and had come to conclusions not appreciably

different from those given or implied by those papers.

for the immediate long-run, if

Therefore,

that was not too paradoxical an

expression, he believed that appropriate monetary posture should

produce a drag,

although not a strong and positive restriction.

This would be similar to the position taken by Mr. Thomas.

For the next two weeks,

be no appreciable change in

Mr.

Deming felt that there should

pressure and no overt action.

Following

1/27/59

-23

that period, however,

he believed that it

would be appropriate to

adjust the discount rate upward to put it

in line with the market.

While he did not think the exact timing of such action made a great

deal of difference,

it

was his view that the rate should be increased

with reasonable promptness after the completion of the refunding

operation.

His preference, he thought,

would be not to do anything

until the refunding was completed.

Mr.

it

Allen said that with recovery under way for nine months

was now apparent that a number of Seventh District areas had

lagged behind the nation, partly because of strikes in the automobile,

farm machinery,

and construction machinery industries, but more so

because producers'

goods are relatively important in the district.

Machinery of all types and construction equipment accounted in

1957

for 43 per cent of manufacturing employment in the district's five

state area,

pattern in

compared with 28 per cent for the nation, and the typical

a recovery is

for the district's type of industry to

improve less rapidly than others.

However, reports indicated that

a large backlog of proposed heavy construction work was building

up, mainly in utilities and manufacturing.

Engineering News Record

indicated backlogs of proposed projects at the end of 1958 at a

new high,

amounting to 10 times the contracts awarded during 1958, a

comparison that held true for both the United States and the Midwest.

If

the current business expansion should follow the pattern of earlier

1/27/59

-24

recoveries, the lags in Seventh District recovery would give way to

rapid increases in output and employment later in 1959 and in 1960.

In the three post-Christmas weeks ending January 17, Mr.

Allen said, district department store sales were 3 per cent higher

than a year ago, compared with a 4 per cent increase nationally.

The district's larger banks had experienced tighter money market

conditions since the end of the year, in

large degree because

deposits declined more rapidly than loans were paid off.

banks,

the loan decline had been less than in

At Chicago

either 1958 or 1957.

Steel ordering was picking up smartly, doubtless due in part to the

possibility of a strike next summer, but also due to the sharp

decline in inventories in 1958.

The district's steel mills were

operating well above the national average, the rate in Chicago being

85 per cent and in

Detroit 96 per cent.

Continuing his comments on district developments,

Mr. Allen

said that a January survey of country bankers indicated a strengthening

of interest in farm real estate, with over half the bankers in

Iowa

and Illinois stating that the current trend of land values was up

and about one-third of the bankers in

same report.

surveys,

other farm areas making the

These proportions were larger than in

other recent

and almost no bankers reported a downward trend.

for agricultural loans remained strong through December,

in

The demand

especially

cattle-feeding areas, with the volume of new loans continuing to

exceed year-earlier levels.

-25

1/27/59

With respect to the automobile industry, Mr. Allen commented

that sales of new model cars through the first

10 days in

January

were high enough to be a pleasant surprise to the auto manufacturers

and dealers.

During December,

approximately 490,000 cars were

retailed in the 26 selling days for an average selling rate of better

than 18,800, and for three weeks of that month Chrysler Corporation

was handicapped by strikes that eventually choked off all

Studies have indicated a typical seasonal decline in

production.

sales between

December and January of 10 per cent, so when January opened at a

lower sales rate than December it

was not a surprise.

In fact, sales

during the first 10 days of January were a slightly less than seasonal

9 per cent below sales during the similar period in December and a

significant 5.5 per cent above sales during the opening period in

1958.

While some industry observers believed there was no question

about public acceptance of the new models, a survey made last week

by the Wall Street Journal mentioned that the dealers felt

it

be necessary to wait until spring for the real market test.

even those who thought that only March and April would tell

would

However,

the story

were optimistic about 1959 bettering the dismal showing of 1958.

of January 10, the stock of unsold new cars totaled

6

14,000, more

than 100,000 below the figure at the same time last year.

on the selling rate of early January,

As

When based

this represented a 39.6 days'

supply, but a calculation based on the average selling rate of the

1/27/59

-26

last three periods and the January 10 stocks would indicate a more

acceptable 33.5 days' supply.

Since early October, Mr. Allen noted,

automobile men had had one obstacle after another placed in the way

of production plans.

When strikes within the industry were settled,

those at plants of suppliers of strategic parts remained a problem,

Chrysler being particularly vulnerable because of its greater

dependence on outside suppliers.

With Chrysler now faced by a

shortage of windshield glass, the pattern of January production was

not entirely clear, but a conservative estimate of 570,000 would

represent a 16.5 per cent improvement over 1958.

Mr. Allen also stated that in early January the Chicago

Business Economists Group was polled concerning expectations for

1959.

Whereas in the past there had always been at least a few

members who took a relatively gloomy view of the outlook, this year

there was unanimous agreement on steady improvement during 195 9,

differences of opinion relating only to the speed of the advance.

Turning to policy, Mr. Allen expressed the view that open

market operations should continue with the same goals in mind as

in the recent past and any doubts resolved on the side of restraint.

With reference to the discount rate, the view held by all of the

Chicago Bank's directors, as well as by the Bank's economists and

himself, was that economic considerations, including the pace of

industry, the structure of money market rates, and fears of

inflationary pressures, made a case for increasing the rate to

1/27/59

-27

3 per cent.

As a matter of fact, the Bank's economists had urged

him to recommend such a change at the directors'

it

meeting last week,

being their view that an increase was a technical necessity and

that it

would be unfair to purchasers of Government bonds if

change were not made.

His answer,

the

Mr. Allen said, was in terms

that the economists were worrying about the fellow in the plugged

hat rather than the fellow who shines shoes, for if

the Federal

Reserve should contribute in any way to the failure of the Treasury

financing it

people.

would be doing a disservice to the majority of the

For that reason, he felt that the discount rate should not

be changed before the next meeting of the Committee.

Although the

directors of the Chicago Bank were in his opinion ready to act, it

was not his present intention to recommend a rate change before

In the meantime there would

the meeting scheduled for February 19.

be another meeting of the Open Market Committee, and the Chicago

Bank could be guided in the light of conditions as they might develop.

Mr. Leedy reported continued ample evidence of the expansive

forces at work in

the Tenth District.

with record-breaking cold spells in

There had been a severe winter,

December and thus far in

and quite a bit of snow in recent weeks.

January

While the weather had been

quite favorable for the wheat areas, the indications for winter wheat

pointed to a much smaller crop than last year.

Feeding of livestock

showed startling increases; in New Mexico, the number of cattle on

1/27/59

-28

feed this year was 58 per cent higher than last year, and there were

smaller but significant increases in

While insured unemployment in

the other States of the district.

the district increased in December,

rate continued more favorable than in the nation as a whole,

downward from a high of 4.7 per cent in

Oklahoma.

the

ranging

Department store

sales continued strong, with sales in the week ending January 17

running 11 per cent higher than in the comparable week of 1958 and

a 13 per cent increase above the year-ago level indicated for the

four-week period ending on that date.

There had been a continued

demand for credit; in the four weeks ended January 14, business loans

increased contrary to the seasonal pattern.

Mr. Leedy said he would continue to apply about the same degree

of pressure that the Committee had been undertaking to apply in recent

weeks.

He would move as quickly as possible on the discount rate.

Considering the problem of the Treasury, he would not want to move

until after the books for the exchange offering were closed, but after

that he saw no reason to delay.

An adjustment of the rate was expected

generally, and everyone seemed to agree that it

was overdue.

Mr. Leach said that Fifth District economic developments

during January appeared to have followed the pattern of the preceding

few months, with continued but by no means booming advance.

The

cotton gray goods business was limited by the customary lull in

first

half of January,

the

but mills had substantial orders on hand for

immediate and nearby deliveries.

While new orders for later delivery

1/27/59

-29

of apparel fabrics were a bit slow, new orders for industrial fabrics

reflected the steady improvement that had taken place in this end of

the textile business in recent weeks.

Representatives of the furni

ture industry reported a rising volume of new orders, and with the

exception of the export trade the demand for bituminous coal appeared

to be improving.

Seasonally adjusted department store sales in

January were estimated to have held very close to the near-record

volume of December, and available reports on general business condi

tions indicated expectations of gradual increases in production,

employment,

and wage and salary payments during the first half of

this year.

Mr. Leach expressed the opinion that the System's policy of

keeping a gradually tightening rein on bank reserves had appropriately

contributed to the continuing, moderate, widely-based expansion of

production and consumption experienced since last spring.

However, he

was concerned about inflationary dangers and felt that the objective

of stability in

mind.

the value of the dollar should be kept foremost in

Except for periods of Treasury financing, he had thought in

recent weeks that appropriate policy called for a gradual tightening

through open market operations,

followed by an increase in the

discount rate for the purpose of rate alignment.

In his judgment,

short-term rates had now reached the point where an increase in

the discount rate to 3 per cent would be appropriate if

not for other considerations.

it

were

Such a change had probably been

1/27/59

-30

discounted to a large extent and would not be interpreted as a

move to aggressive restraint, as it

might have been three weeks

ago when the longest Treasury bill was trading under 2.70,

time being, however,

For the

the condition of the Government securities

market and the size of the forthcoming Treasury refunding clearly

called for an even keel policy.

be feasible, practicable,

In such circumstances it

would not

or advisable to change the discount rate,

and he hoped that during this period any doubts would not be resolved

on the side of restraint.

Mr.

Mills said that during the two-week period between now

and the next Committee meeting a continuation of the present type

of System policy and policy actions seemed to be in

judgment,

order.

last week would have been the appropriate time,

latest practical time, to increase the discount rate.

In his

and the

However,

since action was not taken, there was now no appropriate way of

moving until after the Treasury had completed its

As Mr. Rouse reported,

financing operation.

the Treasury was now engaged in consultation

with the various financial groups.

Since the advice it

receives

would very definitely be based on the prevailing discount rate and

the pride of recommendation would attach to those consultations,

he

believed strongly that it would be a serious mistake to consider an

increase in the discount rate immediately and run the risk of up

setting the basis of the discussions now in progress.

1/27/59

-31

Mr. Robertson said that he saw no alternative to maintaining

an even keel policy between now and the date of the next Committee

meeting.

This would be in accord with the position taken by the

Committee consistently.

His only suggestion would be that all

parties keep their eyes peeled with a view to increasing the dis

count rate whenever such action was possible without interfering

with Treasury operations.

At such time, he felt that the rate ought

to be increased more than the amount already discounted in

order to

establish a proper posture to combat what he considered the real

danger of inflationary pressures.

Mr. Shepardson said it

seemed to him that the national economy

as a whole was in a healthy state of growth.

He considered it fortu

nate, in fact,that activity was not booming too fast.

policy, he thought it

As to System

desirable to continue to exert some degree of

pressure in order to prevent unduly exuberant economic growth.

To

reap the full benefit of the increased productivity that had been

mentioned, it appeared that a little more time must elapse, and in

his opinion it was all to the good that the country was not experienc

ing too rapid an expansion.

the budgetary situation, it

were still

definitely in

In view of the Treasury's problem and

seemed to him that inflationary pressures

the ascendancy,

which suggested that the

System should try to maintain, as far as possible, a degree of

restraint that would inhibit further accumulation of inflationary

attitudes.

While he doubted that System policy could do a great

1/27/59

-32

deal to influence the thinking on Capitol Hill with respect to the

Federal budget, the System should endeavor to exert such force as

possible at all times on the side of correcting the unbalanced

budget situation.

In the period immediately ahead, there was little

that could be done so far as any change in

cerned,

System policy was con

but he urged maintaining fully the degree of pressure that

had prevailed recently,

with any deviations on the side of a little

greater restraint rather than the reverse.

Regrettably, it had not

been possible to work in a discount rate adjustment, and it would

be unwise to contemplate a change in

the immediate future.

However,

he would hope that a change might be made shortly after the next

Committee meeting.

In his summary of developments in

the Fourth District, Mr.

Fulton reported on a recent series of disastrous floods that pro

duced considerable human suffering and interrupted manufacturing

processes.

As to the steel industry, he reported a situation

similar to that described by Mr.

Allen in the Seventh District,

with the average rate of operations running above the national

average.

of all

Users of steel were endeavoring to build up inventory

types in

contemplation of a strike, which did not augur

well for the third quarter.

Department store sales had been very

large during the Christmas season, with the result that sales for

the year ran only about 2 per cent below 1957, but since the

-33

1/27/59

Christmas season trade had slackened a little.

Persistent unemploy

ment continued of concern despite the record upturn in activity in

many areas of business and service throughout the district.

Member

banks had been borrowing at the discount window in rather large

volume,

perhaps because the district had not gotten its

share of the increase in

the money supply.

proportionate

Requirements for business

loans were comparatively small, but the outflow of payments had caused

a diminution in

the availability of reserves and banks had been

borrowing to replenish their reserves.

Mr.

Fulton said that he would not favor an increase in

the

discount rate at this time in view of the Treasury situation and also

because the rates on long-term issues had been rather stable.

Whether

that would persist in the light of additional Treasury offerings he

did not know,

but he would like to wait a little

recent levels would hold.

be appropriate if

directors,

longer to see if

the

In March a rate adjustment probably would

all other factors were equal.

The Cleveland

he felt, would be favorable to a technical rate adjustment

which would not be interpreted as overt action signalling a change in

policy.

In the meantime, he would favor continuing the degree of

restraint that had been exerted recently, with no relaxation of

pressure in

job in

any way.

In his opinion, the Desk had been doing a good

a period of erratic float fluctuations.

Mr.

Bopp said that business activity in the Third District

continued to rise slowly.

Department store sales were by all odds the

1/27/59

-34

strongest sector,

continuing to run well above a year ago.

Comparatively, sales for the latest week were 12 per cent higher

and sales for the past four weeks were 16 per cent higher.

On

the other hand, automobile registrations were faring more poorly

than reported from other areas.

above a year ago in

December,

After being about 10 per cent

registrations in Philadelphia turned

downward and were considerably below year-ago levels in

three weeks of January.

December,

in

the first

Manufacturing employment rose slightly in

contrast to a small decrease nationally,

but employment

was 4.4 per cent below a year ago compared with a drop of 3.6 per

cent for the United States as a whole.

Mr.

Bopp went on to say that at the meeting of the Philadelphia

Board of Directors last week a number of the directors expressed the

view that business sentiment was not quite as optimistic as a few weeks

ago.

Also, the rise in

business activity was expected to be somewhat

slower than earlier anticipated.

in the oil industry, it

Regarding the recent wage settlement

was reported that although the industry wanted

to hold the line on wage rates, most companies preferred to grant an

increase up to 5 per cent rather than to risk a strike.

There had

been no increase in wage rates in that industry last year, so the 5

per cent increase was really a two-year adjustment,

and it

was hoped

that the industry could pass the year 1960 without another adjustment.

In the early postwar period the oil industry was a comparatively low

cost industry because wage costs were a relatively small fraction of

1/27/59

-35

total costs.

Now, however, the percentage of total costs attributable

to labor had grown considerably.

Mr. Bopp said it

seemed to him the System should maintain an

even-keel policy at this time because of conditions in the Government

securities market.

There had been some discussion by the Philadelphia

directors concerning the discount rate at their meeting last week, and

he felt that the directors would not be unwilling to go along with a

discount rate increase following the Treasury refunding operation.

Mr. Bryan said there was nothing of particular note to report

from the Sixth District.

ing satisfactorily.

The recovery had a hard core and was proceed

There could well be virtue in the fact that the

country was not experiencing a spectacular boom; even without such a

boom, most of the statistics were at or approaching previous peaks.

Recovery thus far had been characterized by relatively stable price

levels, with perhaps some underlying difficulties in the industrial

price component.

It

was also characterized, however, by the unsatis

factory nature of the employment figures, which tended to cause a

great deal of dismay on the part of the public.

Another thing he saw

in the situation was that the Government securities market was very

sick indeed, and he believed that if anything it

If

the Federal Reserve held to its

would grow weaker.

reserve position without doing

anything overt, he felt that money rates were destined to go higher

because of normal pressures incident to economic recovery and because

1/27/59

-36.

the public was beginning to get apprehensive about inflation and

fiscal affairs and Federal finance.

Therefore, whether or not the

budget for fiscal 1960 was balanced, he felt that the Government

bond market was going to be in difficulty.

reduction in

reserve requirements,

After allowing for the

figures seemed to indicate that

as against a year ago there had been about a 7 per cent increase in

reserves, with a lesser percentage increase in the money supply.

It

seemed to him that the 7 per cent increase in reserves available to

support the recovery was altogether ample and that no increase in

total reserves of the banking system was called for in the near

future.

Accordingly, it was his view that the Federal Reserve ought

to discard day-to-day or week-to-week adjustments based on reserve

projections and come out for the foreseeable future with no net

addition to total reserves.

Believing as he did that reserve avail

ability was ample for the time being and that there would be a

tightening in money rates incident to further recovery of the economy,

he felt

that a natural and normal restraint would be developing.

When it

came to the discount rate, Mr.

Bryan said, one must

face up to the fact that the System, on the basis of strict logic,

probably ought to conform the rate more closely to short-term rates

in the market.

However, that would be very difficult because of the

necessity of maintaining an even keel during the period of Treasury

financing.

Moreover, he questioned the advisability of moving on the

-37

1/27/59

discount rate for some time because, even though such a move would

have elements of logic, he doubted whether it

would accomplish much

more than could be accomplished by keeping a tight rein on the reserve

position.

As he saw it,

about all that would be accomplished by an

increase in the rate would be that the System would step forward and

accept responsibility for events that probably were going to occur

anyway,

and he did not see the necessity or desirability for taking

such a step.

Also, as he had said before at Committee meetings, he

disagreed with the idea of increasing the rate promptly after a

Treasury financing.

Even without a discount rate increase,

the rug

was likely to be pulled from under the financing by virtue of a

progressive upward tendency of money market rates, and action on

the discount rate would simply give the Federal Reserve the credit

for the rug-pulling.

Accordingly,

the discount rate for some time.

he would advocate no change in

On the other hand, he would favor

keeping an extremely tight rein on the growth of reserves.

If

an

even-keel policy--which he interpreted as meaning an even keel in

terms of short-term rates--forced putting in

that they should be removed promptly.

some reserves, he felt

In summary, he would avoid

any overt actions that merely would gain for the System public

responsibility for events that were in

Mr.

in

policy,

the cards anyway.

Johns recalled that he had argued heretofore for a change

both through announcement of a change in the discount rate

1/27/59

-38

and through open market operations, prior to the period of the

Treasury financing.

At present, he was resigned to, but not happy

about, waiting until an even-keel policy was no longer applicable.

After referring to the problems dealt with in

the statements

presented by Messrs. Young and Thomas, Mr. Szymczak expressed the

view that in the current situation monetary policy quite obviously

should assume a posture of restraint, tempered only by considerations

relating to the management of the public debt and the unemployment

statistics.

like it

He used the word "tempered" advisedly, he said, because,

or not, monetary policy cannot be administered in a vacuum.

The System would be expected to make a contribution in the areas

dealing with the management of the public debt and with unemployment,

which suggested careful study of the papers of Messrs. Young and

Thomas.

If it were not for those two factors, it would be relatively

easy to see the proper course of monetary policy in the period ahead.

Until the date of the next Committee meeting, Mr. Szymczak

said, it

seemed necessary to stay about as at present as far as open

market operations were concerned.

As soon as practicable, however,

consideration should be given to increasing the discount rate.

Mr. Balderston said that the most significant policy con

siderations today seemed to be financial ones.

The high rate at

which the active money supply increased between February and August

last year--about 8 per cent annual rate--had now decelerated to the

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1/27/59

point where the rate of growth for the full year 1958 was only

about 3-1/4 per cent.

This seemed quite a satisfactory outcome

for a year which began with a short recession and ended with eight

months of recovery.

He was not entirely sure what change in the

money supply should be planned for the remainder of the current

year,

but he thought it

probably should be less than 3-1/4 per

cent despite residual unemployment in places like Detroit resulting,

in part at least, from technical changes in

and even the service industries.

agriculture, manufacturing,

Other financial considerations that

impressed him as relevant at this time were, first, the fact that

total credit and total loans at city banks during the first two weeks

of January declined more than anticipated and, second, the fact that

the differential between the Treasury bill rate and the discount rate

did not seem as yet to have brought about misuse of the member bank

borrowing privilege.

Of course, that situation might change quickly

and put some strain on the administration of the discount window.

Since no action was taken on the discount rate at the beginning of

January, it

seemed to him that the System now had an obligation to

the Treasury not to alter the present rate until the completion of

the February refunding, for reasons set forth by Mr. Hayes and others.

Further,

he hoped that the System would not pull the rug from under

the Treasury immediately after the refunding, for the reasons Mr.

Bryan had indicated. When a change was made, however, he felt that

1/27/59

-40.

Mr. Robertson was correct.

It

must be remembered that the "open

hunting season" for the System would not be a very long one; the

times when it

could act during the remainder of this year would

be lessened due to the plight of the Treasury.

Consequently, when

the System did act, the action should be decisive.

This time it

would not be feasible to move, as in 1955, in small steps of 1/4 per

cent.

Current policy, Mr. Balderston said, should be continued

until the next meeting of the Committee.

Chairman Martin said he could add nothing to today's discus

sion and that he would reserve any comments until the February 10

meeting.

Opinion, he noted, seemed virtually unanimous.

no call for a change in

the directive and it

There was

was felt that the

System should endeavor to maintain an even keel during the forth

coming period, recognizing that the Manager of the Open Market Account

must determine the meaning of "even keel" in the light of the comments

around the table.

The Chairman then asked whether there was any disagreement

with this summary.

Mr.

Hayes said he had no disagreement but would like to make

one observation.

He was glad that Messrs. Bryan and Balderston had

commented about the undesirability of "immediately pulling the rug,"

for he had been somewhat concerned about earlier references to a

change in the discount rate as soon as the books on the Treasury

1/27/59

refunding were closed.

Deliveries were scheduled to be made on the

16th of February, and he felt that a decent interval ought to be

observed before any change in the rate was made.

Mr. Mangels stated that he concurred in the view expressed

by Mr. Hayes, and Mr. Szymczak observed that this whole subject

could be discussed further at the next meeting of the Committee.

Mr. Deming referred to comments by Messrs. Robertson and

Balderston regarding a stronger than normal action on the discount

rate and asked for interpretation.

Mr. Robertson replied that he had had in mind something more

than 1/2 per cent, for he felt that a 1/2 per cent increase had

already been discounted.

Thereupon, upon motion duly made

and seconded, the Committee voted unani

mously to direct the Federal 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

1/27/59

than special short-term certificates of indebtedness

purchased from time to time for the temporary accom

modation of the Treasury, shall not be increased or

decreased by more than $1 billion;

(2)

To purchase direct from the Treasury for

the account of the Federal Reserve Bank of New York

(with discretion, in cases where it seems desirable,

to issue participations to one or more Federal Reserve

Banks) such amounts of special short-term certificates

of indebtedness as may be necessary from time to time

for the temporary accommodation of the Treasury;

provided that the total amount of such certificates

held at any one time by the Federal Reserve Banks shall

not exceed in the aggregate $500 million.

It

was stated that the next meeting of the Federal Open Market

Committee would be held on Tuesday,

February 10, 1959, at 10:00 a.m.

and that the next succeeding meeting would be on Tuesday, March 3,

1959.

Thereupon the meeting adjourned.

Secretary