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, February 10, 1959, at 10:00 a.m.
PRESENT
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Fulton
Irons
Leach
Mangels
Robertson
Shepardson
Szymczak
Messrs. Allen, Johns, and Deming, Alternate Members
of the Federal Open Market Committee
Messrs. Bopp and Leedy, Presidents of the Federal
Reserve Banks of Philadelphia 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, Marget, Walker, Wheeler, and
Young, Associate Economists
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
Mr.
Mr.
Latham, First Vice President, Federal
Reserve Bank of Boston
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Messrs. Roosa, Baughman, Jones, and Tow,
Vice Presidents of the Federal Reserve
Banks of New York, Chicago, St. Louis,
and Kansas City, respectively
Messrs. Larkin and Balles, Assistant Vice
Presidents of the Federal Reserve Banks
of New York and Cleveland, respectively 1/
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Anderson, Economic Adviser, Federal Reserve
Bank of Philadelphia
Mr. Parsons, Director of Research, Federal
Reserve Bank of Minneapolis
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on January 27, 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 27
through February
4, 1959, and a supplemental report covering the
period February 5 through February 9, 1959.
have been placed in
Mr.
Copies of both reports
the files of the Federal Open Market Committee.
Larkin stated that developments since the last meeting
of the Committee had been dominated by the Treasury refunding, in
which the attrition ($2.1 billion) was substantial and necessitated
emergency cash financing in the form of an issue tomorrow of $1.5
billion of tax anticipation bills due in September.
In yesterday's
1/ Mr. Balles joined the meeting during the presentation of reports
on district conditions.
2/10/59
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Treasury bill auction the average rates on the three-month and six
month bills were 2.81 per cent and 3.33 per cent, respectively, and
the market was anticipating an average rate somewhere between 3-3/8
per cent and 3-1/2 per cent in the auction of tax anticipation bills
tomorrow.
Mr. Larkin also said that the Account Management had about
completed the preparation of the annual report to the Committee and
hoped to put it
the year 1958 in
in the mail this week.
The report, which would review
detail and spell out some of the problems encountered
by the Account Management during the year, would not attempt to offer
solutions for those problems.
it
However, it
would raise questions which,
was hoped, might stimulate thought and discussion and lead to
solutions.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period January 27 through February
9, 1959, were approved, ratified, and
confirmed.
The staff economic and financial review at this meeting was
in the form of a visual-auditory presentation, participants including
Messrs. Thomas, Young,
and Marget.
A copy of the text of the presenta
tion has been placed in the file of the Committee.
In addition,
copies were sent following the meeting to the Committee members and
alternate members and to the Presidents not currently on the Committee.
2/10/59
A summary of portions of the presentation follows:
A further rise of 2 points in industrial production to
an index of l44 in January is now tentatively estimated, with
increases widespread but small. Prices for some strategic
industrial materials and products also have risen further.
Unemployment rose in January about seasonally to an
unadjusted total of 4.7 million, and the seasonally adjusted
rate of unemployment at 6.0 per cent of the labor force was
little changed from December.
The level of unemployment
does not reflect as much strength in demand for labor now
as at the corresponding date of the 1953-54 cycle. In some
major areas, unemployment rates are double the national
average and are raising troublesome questions about structural,
as well as cyclical, unemployment. Limited expansion in labor
demand also is reflected in the January employment figures.
There were further moderate gains in trade, Government, and
similar activities but little change in manufacturing employ
ment.
Total nonfarm employment, seasonally adjusted, although
firm, has shown only a small increase since last September and
is still considerably below prerecession levels.
Average industrial prices have increased only a little
during the marked recovery in activity from last spring's low,
but prices of some basic industrial materials have risen con
siderably as business buying has surged upward, in part
reflecting efforts to get ahead of possible work stoppages.
Consumer prices, as well as wholesale prices, have shown
little
net change from their highs last spring.
Expanding
food supplies made an important contribution to recent
stability in average consumer prices and this influence may
continue for a time. Prices of services have continued
upward.
Wage rates have continued their persistent rise. With
more hours at overtime pay rates, the recent rise in earnings
has been more rapid than earlier last year. Output per man
hour also has increased rapidly, however, and labor costs per
unit of output in manufacturing have declined--a not unusual
development at this stage of the cycle.
Expanding output and sales combined with rapid gains in
productivity have been reflected in sharply higher corporate
profits. By the fourth quarter, profits are estimated to
have returned to the levels prevailing just prior to the onset
of recession, and some further rise is likely in the first
half of this year.
Expansion has been marked in nearly all major categories
Total GNP in the present quarter is now estimated
of demand.
2/10/59
at a $465 billion annual rate, or $39 billion above the
recession low a year ago.
Consumer spending, including
greatly expanded outlays for residential construction,
accounts for half of the increase.
The remaining half
includes a sharp turn-around in inventory buying and
significant expansion in outlays by Federal and by State
and local governments.
Business outlays for fixed
capital are down a little.
Reflecting increased availability of mortgage funds,
strong consumer financial positions, and widespread
confidence, outlays for new housing have risen sharply.
Private housing starts rose from an annual rate of con
siderably less than 1 million units at the low in February
1958 to over 1.4 million in December.
Public housing
starts in 1958 were the largest since 1951. Whether
consumer demands and availability of mortgage funds will
support a continuation of the recent very high level of
private starts is uncertain.
A quicker test of general market strength probably
will come from autos, Sales of new domestic autos rose
in December to a seasonally adjusted annual rate of around
5.8 million, compared with a rate of about 4 million in
January new car sales
three quarters of 1958.
the first
were a little below the December rate, but used car sales
rose further. A clearer indication of the strength in new
auto markets this year should come in the next couple of
Meanwhile, reflecting a sharp rise in auto instal
months.
ment credit, total instalment credit increased $300 million
in December, the largest monthly increase in two years.
International Developments
While gold sales have diminished in recent months, the
balance of payments has produced further large net transfers
of dollars to the rest of the world. In the fourth quarter,
change in
imports rose considerably, and there was little
Whether the balance-of-payments deficit will
total exports.
involve large gold sales again this year will depend partly
on which countries are gainers of gold and dollars and
partly on how much goes into official reserves as opposed
to private dollar holdings.
In Europe, total industrial production advanced to a
new high in the fourth quarter of 1958 after a year of little
Expansion was reported in all countries except France
change.
In Germany, industrial output reached a new
and Belgium.
In Britain,
high in November and was unchanged in December.
the November upturn in output appears to have marked the end
of a three-year consolidation period during which total
2/10/59
industrial output moved within narrow limits, rising 3 per
cent early in 1957 and declining 3 per cent in the 1957-58
recession. Plant and equipment outlays in Britain continued
rising into early 1958 and then declined moderately.
Sub
stantial additions to British plant capacity in recent years
have provided a basis for renewed growth of total output in
1959.
In Japan, a vigorous upswing in activity began last
spring.
In Canada, recovery has been slow and irregular.
Monetary and fiscal policy in Britain and many other
industrial countries is being directed now toward expansion.
With greatly strengthened international reserve positions,
these countries now have interest rates considerably lower than
in the autumn of 1957.
Adjustment of the U. S. balance of payments is likely to
be slow. Provided U. S. exporters--and the Government itself,
in the field of agricultural products--pay attention to competi
tive conditions, expansion of activity abroad will favor
renewed growth of our exports.
Shifts in interest rates may
help shift international demand for credit and loans to
potential lenders in Europe.
Domestic Financial Developments
The sharp rebound in corporate internal funds has been a
major factor affecting money and credit markets in the United
States in recent months.
Profits recovered rapidly after mid
1958 and depreciation allowances also increased, although less
rapidly last year than earlier.
Business demands for both
short- and long-term financing moderated in the latter part
of the year.
While there was some firming of business loan
demands from banks in the fall, it reflected in large part
seasonal influences and was followed by moderate repayments
in January.
Corporate long-term financing, which had been especially
large early in 1958, declined late in the year as did bond
flotations by State and local governments.
Rapid expansion
of mortgage debt, however, about offset the contraction in
other private demands for long-term funds.
Thus far in 1959,
corporate security issues have continued in reduced volume,
but bond issues by State and local governments have increased
The rise in municipal financing reflects in part
sharply.
the large backlog of authorized but unissued bonds.
Net borrowing by the Federal Government was large in
January, in contrast with usual net retirement of debt in
that month, and the net increase in Federal debt over the
half of 1959 will be somewhat larger than in the same
first
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period last year.
Moreover, even with a balanced budget
for fiscal 1960 as a whole, the Treasury will need to
raise almost as much new money in the July-December period
of 1959 as it raised a year earlier.
With private, as well as governmental, demands for
long-term credit sustained at high levels and investors
anticipating increased demands for funds as recovery con
tinues, long-term interest rates have turned up recently
following a moderate decline from the peaks reached last
fall. Yields on outstanding high-grade corporate bonds
have risen to postwar peaks and are seven-eights of a
percentage point above the yields on common stock.
Stock prices have declined recently in less active
trading and are little
changed on balance from the year-end.
The level of stock prices, however, is still
currently
almost two-fifths higher than a year ago, and stock market
credit has expanded by one-fourth.
As the economy pushes into new high ground in 1959 we
will become increasingly concerned with problems of sustain
able growth.
A key question for Federal Reserve policy now
is what rate of monetary growth would contribute most to
sustainable economic expansion without inflation. The rate
of monetary expansion last year was exceptionally rapid
from February through July, and it then slackened.
For the
year as a whole, it amounted to 6-1/2 per cent for all
deposits and about 3-1/2 per cent for the active money
supply. Currently, the active money supply is about 2-1/2
per cent above its prerecession peak in the third quarter
of 1957--about the same rate of increase as for GNP in real
terms.
It thus appears that economic expansion may have about
caught up with the monetary basis that had been previously
Forces outside the banking area, however, are
established.
This situation
likely to determine the course of events.
reflects the fact that the bulk of the lending to finance
investment and consumption comes from sources other than
bank credit and that financial savings appear to be con
While the creation of money through
tinuing at a high level.
the expansion of bank credit can at times, by stimulating
spending and investment, bring about economic expansion, it
should not be a substitute for saving in "real" terms or
for extended periods.
With resumption of business borrowing, prospective large
demands for mortgage and consumer loans, and the financing
needs of governments, total demands on credit and capital
markets are likely to increase as economic activity expands.
2/10/59
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While expansion is not likely to be hampered by lack of funds,
saving will need to be encouraged to cover the bulk of the
financing demands if pressures on bank credit creation are to
be kept within limits consistent with sustainable growth. In
such a situation economic pressures are likely to maintain a
relatively high level of interest rates.
Over-all demand pressure for funds in 1959 on the avail
able supply of loanable funds will be heavily influenced by
Treasury borrowing.
Since the turn of the year, developments
in money and security markets have reflected largely the pres
sures and anticipations rising from Treasury debt operations
in process and in prospect. Treasury bill rates rose early
in January in contrast with their usual decline, and recently
the 90-day bills have declined somewhat, reflecting in part
shifts of funds from maturing obligations. Yields on longer
bills and other short-term issues are considerably above
those for short bills. Bond yields advanced to new highs.
The $2.1 billion cash attrition on the recent large Treas
ury refunding has necessitated an immediate new cash financing
of $1.5 billion of September tax bills which are to be sold
on February 11. Payment is called for on February 16 in order
to attract funds that will be made available from cash
redemptions of the recent refunding before they are invested
elsewhere. After this financing operation, the Treasury does
not expect to be in the market for funds until early April.
Total loans and investments at city banks declined during
the first five weeks of 1959, reflecting substantial, largely
seasonal, reduction in bank loans. As a result of Treasury
financing, bank holdings of Government securities increased
in January, in contrast to the usual decline. As a consequence,
Government deposits at banks did not decline as they usually
do in January. The private money supply appears to have
declined about the customary seasonal amount. This record
shows no evidence of a particularly strong private demand for
bank credit; rather, it is a record of maintenance of total
credit and the money supply on about an "even keel."
Turning to policy matters, economic and financial condi
suggest that any bank credit and monetary
tions generally still
ahead should be held to a moderate rate.
weeks
in
the
expansion
may
need to be more delicately attuned to
actions
Yet, policy
the course of events in order to avoid placing undue restraint
on the supplying of monetary needs for proper growth and at
the same time not to stimulate unsustainable uses of credit.
Perhaps the appropriate degree of restraint on expansion can
be exerted by making it necessary for reserve demands in
2/10/59
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excess of normal seasonal and some merely temporary needs
to be covered by member bank borrowing. Presumably an
early increase in discount rates will be in order.
During February required reserves should decline con
siderably in consequence of the scheduled drawing down of
Treasury tax and loan accounts and a further seasonal
decline in private demand deposits. The reserves due to
be released should be absorbed by open market sales of
perhaps as much as $300 million during the next two weeks,
if restraint is to be maintained on credit expansion. If
deposits decline as much as projected, restraint should
not be any greater than that which has recently prevailed.
If they should show a greater decline, then member bank
borrowing should also be permitted to decrease, but in
view of the current trend of economic forces such a
development is unlikely.
Mr. Hayes made the following statement of his views on the
business outlook and credit policy:
The business recovery is continuing at a moderate
pace, with no upsurge in plant and equipment spending,
no general accumulation of inventories (steel being a
special situation), and no increase in unfilled orders
of manufacturers.
Recent figures on automobile output
and sales, while better than last year, show no sign of
a vigorous surge. Unemployment is still significantly
high, and a good deal of public attention is being given
to the problem of appropriate long-run rates of growth.
The price picture is essentially unchanged since the
last meeting and exhibits a considerable degree of
stability. In the Second District the business outlook
is virtually as favorable as for the nation as a whole,
with construction one of the most buoyant factors.
The behavior of the stock market over the past two
weeks suggests a somewhat more cautious market appraisal
of the outlook. It is encouraging to note some increase
in issuance of new equity securities, while the backlog
of corporate bond issues is, for the present, well below
the level of a year ago.
However, any satisfaction resulting from these
developments must be tempered with concern over the
prospect for Treasury financing. Besides the current
special bill offering, the Treasury will probably have
2/10/59
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to come to the market for new money not only in April and
May but also in most months of the second half of the
calendar year, when the total to be raised will exceed that
of any half-year period in recent years.
As for bank credit developments,
there does not seem
to be anything to worry about yet in the expansion of business
loans. The decline in January at weekly reporting member banks
was sharper than in any of the last four years except 1958.
Recent changes in bank investments have been less reassuring,
reflecting as they do the underwriting of the Treasury's
January cash financing.
It seems to me clear that the business situation calls
for no change in the present degree of credit restraint.
Yet
the large and almost continuous schedule of Treasury borrowing
shows every likelihood of bringing the capital markets in
creasingly under pressure, thus tightening credit conditions
even without any aggressive System effort at restraint. I as
troubled by the prospect that the upward trend of interest
rates caused by this Treasury borrowing--even without further
restrictive action by the System--may be sharper than will be
appropriate for the general state of business activity. If
we were to attempt to compensate fully for the inadequacies
of fiscal policy with a policy of intensified credit restraint,
it would be all the more inappropriate. I think we must guard
against presenting too restrictive a "posture" to fit the
economic facts. All of this points to the wisdom of using
open market operations to preserve a steady but not increasing
I
degree of restraint as measured by the feel of the market.
see no need to alter the directive.
I
The discount rate presents a more difficult question.
am aware that several of the Banks have spoken for some time
of an increase being "overdue",
and most of us would probably
have moved before this if there had been no Treasury financing
problem. Although I would regret further action on our part
to produce greater restraint, I suspect we will have to raise
the rate in order to get it into closer alignment with the
degree of pressure now in effect and likely to persist as
Treasury borrowing operations continue in the weeks and months
ahead.
Assuming that the Board and most of the Banks still
favor an increase within the next few weeks (after completion
of the Treasury financing), I would therefore be inclined to
Two factors in
recommend an increase at the New York Bank.
favor of such a recommendation are the desirability of
presenting as uniform a front as possible and the fact that
this will be one of the few periods in prospect this year
when we will be "free" to act from the standpoint of an
even-keel policy for the Treasury's operations.
2/10/59
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It is essential, I think, that the increase be regarded
as a technical adjustment to reflect an increase which has
already occurred in market rates, and not as a signal that
we intend to move aggressively toward further restraint.
In any case a discount rate rise may invite blame for an
upward trend of interest rates which is likely to come for
reasons quite apart from monetary policy. I believe we
should be very reluctant to "lead" the rise.
The decline
in Treasury bill rates of the last two weeks would, if
sustained, have made it difficult to explain a discount
rate rise to 3 per cent as a technical adjustment. In the
last two days, however, the unexpected return of the Treasury
to the market for $1-1/2 billion of new money and the re
sulting rise in bill
rates have made it a little
easier to
justify a 3 per cent rate, although the case is as yet by
no means clear. It may be clearer by the time we are
actually prepared to move. Of course, one factor arguing
for an increase this time of 1/2 per cent rather than 1/4
per cent is the prospective scarcity of opportunities when
we will have some freedom of action.
Our directors discussed this issue in general terms at
their meeting last week. They showed considerable reluctance
to increase the rate in the face of the continued high level
of unemployment and the uncertain pace of the recovery, the
possibility that the System might invite criticism for
accelerating the interest rate rise, and the likelihood that
this criticism would be accentuated if, as seems possible,
the prime rate were to be raised almost immediately after a
discount rate increase.
If we do agree on the wisdom of an increase, there is
still the matter of timing to decide upon. To my mind, the
need for a decent interval after completion of the current
Treasury financing suggests that the move should not be made
earlier than the last week of February or the first week of
March. The latter period would have one advantage in that
it would give us another chance to canvass the situation
together before making the move.
Mr. Johns stated that in the last two weeks he possibly had
lost a little
of his zeal for a policy change in the direction of
tightening, perhaps for tactical or strategic reasons rather than on
economic grounds.
Recent estimates by the St. Louis Bank regarding
2/10/59
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growth of the money supply indicated that during the four-month
period ended January 31, 1959, the active money supply and the
total money supply might have increased by about 4.8 per cent and
4.5 per cent, respectively, whereas statistics for the four-month
period which ended January 31, 1955, suggested increases of 4.5
and 4.2 per cent, respectively.
As he read the policy record of
the Open Market Committee for the earlier period, there appeared
to have been two months of active ease, one month of ease, and a
fourth month when policy was more or less neutral, which tended to
cast some doubt upon a conclusion that recent open market policy
had been very restrictive.
More important, it seemed to him, was
the thought that the Committee ought to begin now--in fact should
have begun sooner--to pay more attention to what was happening to
the money supply and less to what was happening day-by-day and
week-by-week in terms of a reserve target of some particular figure.
Mr. Johns recalled that at the Committee meeting on
August 19, 1958, Chairman Martin referred to a suggestion by Mr.
Young that the wording of the policy directive be in terms of
tempering the rate of expansion of the money supply, which would
have the advantage of being directed specifically to what the Open
Market Committee does.
At the same meeting Mr. Balderston also
suggested a similar concept, stating that he would like to see the
directive phrased along lines of adjusting the money supply to the
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2/10/59
constructive needs of the economy,
important at that time.
which he felt was especially
By and large, however,
fell on deaf ears, including his own.
those suggestions
The suggestion of Mr. Young
drew from one person present a comment that it
seemed to contemplate
some continued expansion of the money supply, which in the view of
that person would be undesirable.
Mr. Johns said that he was not sure exactly how this thought
might be carried through to an ultimate conclusion as far as policy
directives and open market operations were concerned.
However,
it
seemed to him that the idea was worthy of serious consideration and
study with a view to concentrating the attention of the Committee
upon its
ultimate objective and diverting attention from other
targets and methods of operation which in his opinion were not very
obviously and closely related to the Committee's objectives.
fact, they sometimes tended to operate in perverse fashion.
In
The
argument, of course, might be made that this would not give the
Desk any specific instruction under which to operate.
Assuming,
however, that the Committee knew what concept of the money supply
it wanted to use, and recognizing that there would be some lag in
statistics of the kind he had mentioned, he envisaged that procedure
under such a directive might involve doing the best job possible in
the transition period and then adjusting if
necessary.
In any event,
he would feel that the money supply as a guide to open market opera
tions was no more general than the concept of sustainable economic
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2/10/59
growth and stability now stated in the Committee's directive.
Mr.
Bopp said that, except for an upsurge in
steel pro
duction, there had been no notable business and financial develop
ments in
the Third District in
the past two weeks.
Department
store sales continued to show gains over a year ago, automobile
sales were somewhat below last year, employment in December was
steady, and loans and deposits of district reporting banks had
declined.
Borrowing from the Reserve Bank in the past two state
ment weeks was at a daily average of $15 million, reflecting
primarily borrowing by country banks.
had been obtaining practically all
The large Philadelphia banks
of their funds in
the Federal
funds market, with purchases averaging somewhat more than $20
million daily, but they borrowed a total of $63 million from the
Federal Reserve Bank last Friday,
the first
time all
city banks had borrowed at one time since June 1957.
six reserve
All such
borrowings were repaid yesterday.
Mr. Bopp then reported that a meeting of economists from
the Philadelphia area last week, with representation from varied
types of businesses, revealed moderate but somewhat restrained
optimism as to prospects for 1959.
For most of the types of
business represented, production and sales were expected to be
from 5 to 10 per cent above last year.
expected 1960 to be a really good year.
Most of the economists
2/10/59
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Mr.
Bopp also commented on a telephone survey of consumer
intentions by one of the Reserve Bank's economists in which a
random sample of 400 families in the Philadelphia metropolitan
area responded to the question:
"If
you received $2,000 that you
had not expected, how would you use it?"
Even though the responses
reflected "off the cuff" rather than considered judgment, the re
sults were interesting in that over one-half of the respondents
stated they would save the money or use it
21
to pay bills, another
per cent would divide the amount between spending and saving,
and only 16 per cent would spend the entire amount.
form of saving,
As to the
about 70 per cent of those who would save said
they would put the money in a commercial bank, savings bank, or
savings and loan association, about 20 per cent would buy stocks,
and 10 per cent would buy bonds or build up their cash reserves.
Of those who would spend, about 25 per cent would make home repairs,
18 per cent would buy furniture, 10 per cent would make a down
payment on a new home, 8 per cent would take a vacation, 6.8 per
cent would buy an automobile,
and only 3.6 per cent would buy major
appliances.
Mr.
Bopp said that he saw no need for a change in the policy
directive at this time.
He would favor continuing approximately the
present degree of pressure on the market,
and he was open to sug
gestion regarding the discount rate, particularly with regard to
the timing of any change.
2/10/59
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Mr.
Fulton reported that steel mills in the Fourth
District were receiving heavy orders.
Some users of steel
who anticipated a strike in the industry this summer had come
in earlier with their orders, and those who delayed making a
decision were now trying to get orders placed on the books.
Although the mills were operating at high rates, products such
as galvanized sheets and electro-plated tinned strip were in
tight supply.
It might be said that at the moment the industry
was living in a fool's paradise.
It was endeavoring to get
customers to agree that, in the event of a strike of short dura
tion, they would take only 20 per cent of their steel needs from
their inventories and would buy at 80 per cent of the normal rate
until excess inventories were worked off in order to assure the
mills some continued operation.
After stating that orders for machine tools had increased
rather sharply, Mr.
Fulton said that in a recent survey the Reserve
Bank's Research Department asked a number of industrial firms
whether they were going to increase their capital investment this
year and more than half responded affirmatively, with the emphasis
on equipment rather than plant.
In this connection, one steel mill
reported that the number of its employees had increased from about
40,000 at the low point of the recession to about 60,000 at present,
compared with a peak figure of about 70,000, but that it
did not
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2/10/59
anticipate going back to the peak figure.
Other industries also
advised that modernization of equipment and capital investment was
permitting a smaller group of employees to produce more goods than
a larger number of employees produced some time ago.
This seemed
to suggest a rather chronic condition of unemployment, for employees
of this type could not easily transfer into service industries.
Mr. Fulton said that department store sales in the Fourth
District were down somewhat since December and were now running
about 3 per cent under a year ago, but automobile sales had in
creased.
People in the automobile industry appeared to have dropped
their estimate of 1959 sales potential from 6 million to 5.8 million
cars, exclusive of imports of foreign cars.
As to policy, Mr.
Fulton said he felt that he would like to
see a firmer hand kept on the availability of funds, although he
appreciated that float resulting from weather conditions had made
it difficult for the Desk to engage in day-to-day operations such
as to maintain the contemplated degree of pressure.
the bill
The fact that
rate had moved up after slackening off was indication of a
little greater pressure, which seemed desirable.
agreeable to a change of 1/2 per cent in
He would be
the discount rate as early
as possible, and he believed that some time early in March probably
would be about the first appropriate opportunity.
favor a change in the directive at this time.
He would not
2/10/59
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Mr.
Shepardson said that the increasing productivity of
industry was certainly all to the good as far as long-run develop
ments were concerned.
The unemployment situation apparently would
be a problem for some time due to the difficulty in
a reallocation of labor in any short period.
bringing about
The prospect of a
high level of consumer income should encourage expansion of new
outlets for increased consumer spending, and there might be a need
to provide for reasonable continued growth.
On the other hand,
study of the picture as to reserves and money market rates seemed
to indicate that there had not been the degree of firmness con
templated at the last two meetings of the Committee.
While the
picture was confused by differences between the reserve projections
of the New York Bank and the Board's staff, he was inclined to
agree with Mr.
Fulton that the Desk had not quite maintained the
degree of pressure sought by the Committee.
The projections seemed
to indicate a need for action at some point in
the period just ahead
to absorb some of the excess reserves that would appear in the ab
sence of such action.
Mr. Shepardson said that he thought Mr.
Johns had touched
on a point that was of importance and should not be lost sight of
this spring.
The Committee should not get trapped in
a situation
such as prevailed last year, when by setting up a target of free
reserves it
continually added at a faster rate to the money supply
than perhaps was realized at the time.
Therefore, he would hope
-19
2/10/59
that a little
more pressure might be exerted on the market than
seemed to have been accomplished recently.
Such a degree of
restraint probably would have a desirable reaction on the bill
rate and result in its
of last month.
returning to the levels of the earlier part
In line with such a change, it
would seem entirely
appropriate, after a suitable lapse of time following the present
Treasury financing, to look forward to an increase of 1/2 per cent
in
the discount rate.
Mr. Robertson suggested that this was a most difficult period
from the standpoint of knowing what to do, because the economy seemed
to be going down a road on which one could not see the turns ahead.
While he was inclined to think that the next turn was going to be
upward and that it
would be desirable to slow the speed a little
in
the meantime by being slightly more restrictive, he could not bring
himself to feel that System policy should be a great deal more
restrictive than at present.
Mr. Johns, he said, deserved credit
for bringing to the Committee's attention the possibility of changing
its targets, for he was not at all sure the Committee had arrived at
the most intelligent way of providing targets or issuing directives.
While he could not see at this moment exactly how the money supply
might be used as a target instead of free reserves, the matter
deserved careful study.
As to the discount rate, Mr.
Robertson noted that the System
probably would have only about six weeks in which to act.
It
could
2/10/59
-20
not act this week and it
should not act next week.
period of possibly five weeks,
This left a
after which the Committee in
a
sense might just as well take a vacation through April and most
of May.
Consequently,
it
seemed important to act in
the most
intelligent way when the opportunity was available, especially
since it
seemed unlikely that there would be more than one action
on the discount rate.
In all the circumstances,
action might be deferred until it
he hoped that
was possible to see as clearly
as possible what amount of increase would be appropriate.
At this
moment, his inclination would be to suggest an increase of 1/2 per
cent, but he was not sure this was right and a better judgment
might be possible by the first
week of March.
Certainly, discount
rate action should be taken to put the System in a proper posture
to meet whatever was ahead, which in his opinion would be a movement
upward, perhaps quite sharply.
Mr. Leach stated that data on the Fifth District economy
which had become available since the last Committee meeting were a
little
disappointing.
Nonagricultural employment,
adjusted, declined slightly during December,
seasonally
and seasonally adjusted
man-hours were down that month in most manufacturing industries.
Construction contract awards dropped in December,
continuing a
decline that began last August, and bituminous coal production in
the first
three weeks of January was down from recent levels,
due
2/10/59
-21
principally to the fall-off in foreign demand.
Although business
loans of weekly reporting member banks rose during the past two
weeks,
there was a net decline of 5 per cent for the month of
January-more than in the corresponding period of any of the past
four years.
Notwithstanding these adverse indications, however,
he believed that business activity in
the district was still
gradually expanding.
One of the more significant developments in the district,
Mr.
Leach said, was the increase in wage rates now spreading through
the textile industry.
The general pattern seemed to be an increase
in the minimum wage to $1.25 an hour and a raise of around ten cents
an hour for workers already above the new minimum.
The immediate
effect of this wage increase, coupled with lower support prices for
1959 cotton, was a decrease in trading activity because of price
uncertainty.
Mr. Leach expressed the view that prevailing economic condi
tions did not call for an immediate marked change in
credit policy.
Similarly, although Treasury bill rates had advanced again in the
last day or two, this did not, in his opinion, require a hurried
increase in the discount rate.
for a changed posture, it
In the absence of a pressing need
seemed essential to continue for a
reasonable time after February 16--the date of completion of the
current Treasury financing--the even-keel policy now being maintained.
-22
2/10/59
This would rean attempting to continue until the next meeting of
the Committee the same degree of pressure that the Committee had
been aiming at, with the discount rate unchanged.
He would like
to see any change in the rate made at a time when the Treasury bill
rate was such that the change would be interpreted as an alignment
rather than a signal of greatly increased intensity.
The main con
sideration regarding the timing of a rate change was the Treasury
financing,
along with a desire not to play unfair with those who
had just purchased new Treasury securities in
the refunding, for
that would make the difficult task of the Treasury even more
difficult.
in
For those reasons, he would prefer to postpone a change
the discount rate until after the March 3 meeting.
After commenting that he had no developments of significance
Leedy expressed the view that
to report from the Tenth District, Mr.
the most important thing with which the System had to deal at the
moment was the rampant inflationary psychology pointed up by the
recent experience of the Treasury, which indicated to him that
something more needed to be done than had been done thus far.
The
System, of course, wanted growth as well as stability, but if
temporarily there had to be a choice between growth and arresting
inflationary psychology he would favor the latter course.
The fact
that the System had not given greater evidence of a firm intent to
grapple with the problem might have,
in Mr.
some contribution to what had occurred.
Leedy's opinion, made
In the short interval
2/10/59
-23
available, he felt that the System should show an intent to play
its
role in
undertaking to dissipate the feeling that inflation
was inevitable.
To him that meant that as soon as the Treasury
financing was out of the way the System ought to apply some
noticeable additional pressure on bank reserves and also increase
the discount rate.
third week in
While the rate need not be adjusted before the
February or even the first
week in
March, the idea of
regarding the increase as merely a technical adjustment was rather
distressing to Mr. Leedy; it
would be preferable if
were regarded as a move further in
the direction of combating what
he considered the System's principal problem.
in
such a change
What could be done
this area was quite limited, but to the extent possible the
System should be giving notice that it
was not going to be a party
to continuing inflation in this country.
Mr. Allen stated that evidence from the Seventh District
since the meeting two weeks ago indicated further increases in
business activity.
January sales of Sears Roebuck,
far and away
the nation's largest seller of general merchandise, were up about
15 per cent from January 1958,
and although the results a year ago
were relatively poor the current performance was very strong on its
own.
District department store sales in
were 6 per cent over last year,
rise in
the week ended January 31
and deepite concern about the slow
employment there was ample evidence that labor markets were
gradually tightening.
A recent report by the Bureau of Employment
2/10/59
-24
Security indicated that three district cities had been upgraded
and since July 1958,
the worst month, ten cities had been upgraded.
Three Chicago area steel producers had recently announced plans to
increase capacity.
Such announcements,
to be plagued with excess capacity,
rise in
coming from an industry said
could herald a fairly general
capital spending.
Mr. Allen said that commercial and industrial loans of
district reporting banks in
the two weeks ended January 28 were off
only $16 million, compared with declines of $121 million in 1958
and $42 million in 1957,
and Chicago banks reported no net change in
business loans in the week ended February 4.
a stronger loan demand in the district than in
These figures indicated
the nation generally,
doubtless accounted for by the fact that borrowing by producers of
metals and metal products was so important in that area.
Reserve
pressures on large district banks had eased considerably over the
past three weeks,
and borrowing at the Reserve Bank's discount
window had dropped to less than half the level that prevailed from
early December to mid-January.
Turning to the automobile situation, Mr.
sales in
Allen said that
the last ten selling days of January were at the rate of
16,820 per day,
compared with 16,951 in the eight selling days of
the January 11-20 period.
While the usual pattern calls for a
steady rise through the month and this was the first
time since
August 1958 that a declining intramonthly rate had been seen, the
2/10/59
-25
decline was slight and some industry analysts blamed inclement
weather.
Furthermore, total January sales exceeded those of a
year ago by 12.3 per cent.
As to policy, Mr. Allen said he would like to see the
prevailing degree of restraint continued for the next three weeks,
with any doubts resolved on the side of further restraint.
While
the question of a change in the discount rate in the near future
perhaps had not been discussed as fully with the Chicago directors
as with the boards of directors of some of the other Banks, he felt
that the Chicago directors would be agreeable to moving the rate
up one-half per cent at any time provided other Banks also moved.
It was his present feeling that he would recommend a discount rate
increase at either the February 19 or March
5
directors' meeting,
and apparently March 5 might be the better date.
Mr. Deming said that Ninth District conditions were not
appreciably different from those reported previously.
Like Mr.
Shepardson, he did not quite understand the major differences
between the reserve projections of the New York Bank and the Board's
staff.
However, from the report on the tone of the market it ap
peared that the degree of pressure had been just about what he
would like.
While he believed that the discount rate ought to be
increased, he had been uncertain about timing at the last Committee
meeting and he was even less certain now.
On balance,
he would
-26
2/10/59
prefer to wait until after the next Committee meeting before
moving.
At this point, he would be inclined to an increase of
one-half per cent, and he leaned toward the position that the
move should be regarded more as a technical adjustment than an
outright restrictive action.
Mr.
Mangels reported that Twelfth District business condi
tions continued on the up side.
Final December employment figures
were better than the estimate he reported at the last meeting.
Los
Angeles had been reclassified from a substantial surplus labor area
to one of slight surplus.
the Northwest,
Boeing Aircraft,
the largest employer in
was now operating with some 73,700 employees,
an
all-time peak, and that company had military orders alone somewhat
in excess of $2 billion in hand or anticipated for 1959.
in December was about 6 per cent above November,
Construction
the increase re
flecting mostly residential construction, and about 66 per cent
higher than a year earlier.
Mortgage funds were still
available,
although one large San Francisco bank that was quite active in
mortgage field had indicated that it
the
was rapidly approaching the
point where it would have to restrict real estate credit.
Interest
rates on conventional mortgages were now 6 per cent, compared with
5.85 per cent last October.
Steel output in January was at the
highest levels since mid-1957,
to show improvement in
while the lumber industry continued
orders along with some price increases.
2/10/59
-27
Mr.
Mangels said that reporting banks showed a decline
in both demand and time deposits in
while loans were down in all
consumer credit loans.
the two weeks ended January 28,
categories except real estate and
Holdings of United States Government securi
ties increased during the same period and purchases and sales of
Federal funds ran about even.
Borrowing at the Reserve Bank was
rather scattered and intermittent.
Mr.
much in
Mangels said that the System should not increase restraint
the period immediately ahead and he would continue to use as
an objective what the Committee had had in mind recently.
One
Twelfth District bank had expressed informally the opinion that some
thing should be done to restore confidence in
market such as permitting free reserves in
million.
the Government securities
the range of zero to $100
He did not endorse such a view, however, and felt that
free reserves should stay on the negative side at somewhat below the
$100 million level.
As to the discount rate, Mr. Mangels felt it
to wait until March before making a change.
would be desirable
He saw no pressing need
for change at this time for psychological effect since prices had
been reasonably stable, unemployment continued high, business was
exhibiting no particular boom, there continued to be excess pro
ductive capacity, and inventory accumulation was quite modest.
He
did not consider it necessary to raise the rate to restrain member
bank borrowing, for borrowing in
January averaged only $567 million
2/10/59
and in
-28.
the week ended February
4 only $390 million.
The market
was still in a period of digesting Treasury issues and he felt
that such issues should be permitted to get into firmer hands
before action was taken on the discount rate.
Mr. Mangels said
that he considered the policy directive satisfactory.
Mr. Irons said that Eleventh District conditions continued
to show modest strengthening, with some segments of broad economic
activity showing clear improvement.
On the less favorable side,
weather had been bad for the past month, which gave a slightly
unfavorable tinge to agricultural developments.
industry was not quite as optimistic as it
rather substantial and some decline in
had been, with imports
prices, which appeared to
some fall-off in drilling.
have been reflected in
The crude oil
Employment and
unemployment figures had about tracked the usual seasonal movement.
He was not too disturbed about the employment situation nationally
or in
the Eleventh District.
On banking, Mr.
Irons said that the Eleventh District was in
general experiencing a seasonal movement.
Demand for loans continued
strong, with some larger reserve city banks rather fully loaned in
terms of loan-deposit ratios.
Taking into consideration that January is
always a rather
uncertain month, along with the complications involved in
factors,
the weather,
seasonal
and some strikes, he felt that the general
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2/10/59
situation was favorable and that the district was continuing to show
gradual improvement and strength.
As to policy, Mr.
Irons said that he too had been confused
by the differences between the reserve projections of the Board's
staff and the New York Bank.
If,
as the Board's staff suggested,
there would be free reserves ranging up to $293 million during the
next three weeks, some selling by the Open Market Account would be
indicated.
On the other hand, if
the latest New York projections
showing net borrowed reserves up to $236 million were correct, some
funds possibly should be put into the market to lessen the pressure.
At this point, Chairman Martin called upon Mr. Thomas for
comment regarding the reserve projections.
Mr. Thomas said that for the current statement week it now
appeared that there would be a lower level of net borrowed reserves
than had been expected, due primarily to unpredictable variations
in
float and the Treasury balance.
Float had held higher and
Treasury balances had stayed lower than anticipated.
That was one
of those margins of error that one could not do anything about in
any particular week.
After Mr.
Shepardson observed that even for the statement
week ending tomorrow there was considerable variation, with the
Board's staff estimating net borrowed reserves averaging $24 million
and New York estimating an average of $102 million, Mr.
Thomas said
2/10/59
-30
that the revised New York figures would be available within a few
minutes and probably would be lower than $102 million in view of what
had happened yesterday.
However, the differences between the projec
tions for the forthcoming weeks were fundamental and of substance.
As he had said, float was remaining at a higher level recently than
one might have expected on the basis of the normal pattern, and the
Board's staff had made the assumption that it
level.
However,
would stay at a higher
the longer-run and more fundamental difference was
in the estimate of required reserves.
The Board's staff was assuming
that the Treasury balance, now very large, would decline and that
at the same time there would be the normal seasonal decline in private
deposits.
On the other hand,
New York apparently had assumed that
the decline in Treasury deposits would be more or less offset by an
increase in other deposits.
That would be contrary to normal
seasonal variations and would indicate a seasonally adjusted expan
sion in the money supply.
Chairman Martin then turned to Mr. Larkin, who expressed
general agreement with what Mr. Thomas had said.
He added that this
was one of the problem areas the Desk encountered last year and that
comments on it
would be included in the annual report to the Com
mittee as well as on the problem of free reserves or net borrowed
reserves as targets, alluded to by Mr. Johns earlier in the meeting.
Mr. Irons then stated that he considered the execution of policy
during the past two weeks to have been satisfactory, with appropriate
2/10/59
-31
restraint on the availability of reserves throughout that period.
He hoped that in the next three weeks it would be possible to
maintain about the same degree of restrictiveness, although any
deviations should be on the side of further restraint.
He would
not deliberately try to achieve further restraint but would resolve
any errors on that side.
That would not be out of line with
economic conditions as they were developing.
The main thing was to
avoid errors on the side of ease in the present situation.
As to the discount rate, Mr. Irons said he was not sure what
to recommend, but he felt that what the System was doing was not
exactly right.
The Committee was constantly talking about maintain
ing an even-keel policy, but the Treasury did not have huge success
with its
recent financing, although in
policy things might have been worse.
the absence of an even-keel
He suggested that deferring
a discount rate change would not "fool" anyone since informed people
were even now assuming that after the Treasury was out of the market
the rate would be increased, and whether the change was made on
or March 3 would not make a fundamental
February 12,
February 19,
difference.
He then suggested that the term "technical change"
implied that the need for a discount rate change was something
the market had created, whereas the Committee had been influencing
the availability of reserves right along.
This was all part of a
credit package, for what the System had been doing was to make
traditional use of open market operations to prepare the market for
2/10/59
-32
a subsequent rate change.
Mr. Irons said he would not like to give
the impression that a discount rate change really did not mean much,
or that it was only a technical adjustment for which the System should
not take responsibility.
Furthermore, he did not like to hear it said
in February that the System could do nothing in April or May, for that
seemed to represent almost an abdication of policy determination.
So
far as he was concerned, it would be as well to change the discount
rate on February 12 instead of waiting until March when another set of
circumstances would appear.
Whether the Chairman and the Secretary of
the Treasury ought to work out some different approach, he did not
know, but he did not think the necessary job was getting done, as
reflected by the results of the latest Treasury offering.
clined to agree with
He was in
r. Leedy that sooner or later the System must take
a firm stand, work the matter out with the Treasury, and let the market
know what it intended to do.
Mr. Szymczak said he was hopeful at the preceding meeting that
the Committee would have a clearer picture of all the economic factors
by the date of this meeting, and thus be in a position to recommend
action on the discount rate.
However,
the picture was still
mixed as
to all the economic factors and trends and, therefore, not conducive
to action on the discount rate.
The question was simply whether to
add to the degree of restraint to leave monetary policy where it is,
or to add to the reserves in the banks.
To him, the policy that the
2/10/59
-33
Committee has been pursuing is
correct in
view of the total economic picture.
the circumstances and in
In spite of seasonal factors,
one could not disregard the unemployment statistics, for whatever
the cause--seasonal,
frictional, or structural,
these and other causes-there still
are more than 4 million, almost
5 million, persons unemployed, and that is
a major consideration in
the formulation of economic policy anywhere in
has been doing the best it
or a combination of
could do in
all
the world.
The System
these circumstances,
adding
some reserves to allow for economic growth with consideration of the
unemployment figure and the difficulties in
Treasury financing but
not pursuing a policy of ease at a time when inflationary expectations
are dominant.
It
is leaning in
to the extent that it
vacuum,
the direction of restraint, but only
can because monetary policy cannot operate in a
and monetary policy is
based on art as well as science.
As to the discount rate, Mr.
Szymczak said that he did not
think that the System was prepared at this point to tighten monetary
policy and a change in the rate at this time would be so construed.
Rather, he felt that monetary policy should be left in
its
present
posture with bank reserves somewhat on the negative side and that on
March 3 another look could be given to the discount rate.
Mr.
Balderston said he agreed with the remarks of Messrs.
Hayes and Robertson concerning the discount rate.
He would be inclined
2/10/59
-34
to wait until after the March 3 meeting and then increase the rate
by one-half per cent.
If
it
were humanly possible, he hoped that
all connected with the System would refrain from making remarks that
could be quoted in the press.
While rumors cannot be prevented, those
in the System should endeavor to keep from feeding them.
As to open market operations, Mr.
Balderston said that the
kind of policy followed in the immediate past seemed to him quite
appropriate,
for the steadiness that the System had been maintaining
probably would be helpful in
everyone desired.
however,
achieving the sustainable growth that
He was much concerned about the long-run problem,
for the reasons Mr. Johns had outlined.
It was his feeling
that the concept of a balanced economy--however arrived at--ought to
be kept in mind by the Committee,
particularly because of the enormous
expansion of plant capital since World War II.
Industries had so
improved their equipment and techniques as to be able to get along
with a smaller number of employees,
industrial unemployment.
leaving the country with heavy
The problem was how to achieve a balanced
economy that would cause the scale of living to rise and at the same
time provide an acceptable number of job opportunities.
the problem, Mr.
He could see
Balderston said, but he saw no answer.
Chairman Martin began his observations by suggesting that the
Committee could not expect at any given time to be perfectly logical.
The big problem at present was one of timing,
and it
would continue
-35
2/10/59
as long as there was the problem of Treasury financing, which had
been out of focus now for a period longer than ten years.
What
happened this past week had changed his own views slightly as to
emphasis, but he liked to look at the present period in relation to
others--for example, early 1957.
Without question the discount rate
should have been moved up earlier than August of that year, but be
cause of the persistent Treasury problem the System did not have an
opportunity.
Hence, there was now a continuing argument as to
whether the System knew what was happening in
finally did move on the rate.
While it
the economywhen it
did little
good to go back
and talk about what may have been past mistakes, one ought not try
to justify policy for the wrong reasons.
It was quite interesting, the Chairman remarked, that at the
recent hearing before the Joint Economic Committee on the President's
Economic Report Senator Douglas of Illinois asked for a paper--which
it was agreed would be written--on why the System should not give up
the discount rate and just proceed through open market operations.
This would not be an easy question to eliminate if
going to sit
all concerned were
around the table and say that under all circumstances the
rate pattern because of a lapse of time had no relationship to other
factors.
Actually, the adjustment that had taken place in
short-term
rates was the result of Federal Reserve influence in the market.
2/10/59
-36
Chairman Martin then said that at this juncture he was in
clined to favor maintaining an even keel.
with Mr.
Irons:
In that, he disagreed
having followed a general policy of even keel during
Treasury operations, he did not think that at this point the System
should discard that policy.
It was important, he said, to have some
framework in which to operate.
The System was under no particular
pressure at the moment, although it
should not get into a position
of easing the market to a point that would make it
difficult to adjust
the discount rate at a later stage.
The Chairman suggested re-reading the minutes of January and
February meetings of the Open Market Committee over a period of several
years, for they would show that at an early point in the year there
always seemed to be a flood of bad news of one sort or another that
could not be evaluated.
conditions if,
In fact, he would be quite upset under present
as February came along, some items of the kind to which
Mr. Leach had referred did not appear.
away by little
One must avoid getting carried
downswings into making out on the basis of them a
justification for a situation that had arisen primarily because of
Treasury financing.
He could see no harm in relating to the Treasury
the observations made by Mr.
Irons; in
fact, he had discussed at some
length with the Treasury the possibility of a discount rate change
considerably before the last Treasury financing.
It
was necessary to
bear in mind the Treasury's problem and also to minimize overt actions
2/10/59
-37
that would not be explainable, particularly at a time when speculation
and investment had gotten out of hand.
The real problem was that the
saving-investment process was now impaired in
its
this country as far as
usefulness for building plant and equipment was concerned.
Secretary Anderson said in recent testimony, if
when the public thought it
the time should come
wise to speculate but foolish to invest,
the country would really be in trouble.
been reached,
As
While such a stage had not
the fact that there had been a movement in that direction
was something that must be borne in mind.
If
the attrition on the
financing had been lower and the Treasury had not been forced to go
back to the market for $1.5 billion, he would have favored increasing
the discount rate at the earliest opportunity, which in his judgment
would have been about February 19.
However,
since the Treasury
financing was construed by the public as a failure-even though it
seemed questionable whether the financing actually was a serious
failure--the System ought to be careful about doing anything to create
the appearance that it
was unaware,
unalert,
or unsympathetic to the
plight of the Treasury.
Therefore, he would be inclined to delay on
the discount rate a little
longer, and that seemed to be the sense
of the meeting.
Assuming that the Committee was going to continue
about the same degree of pressure and there was no ease in
in
the market
the interim, logical and correct discount rate timing in the light
of existing factors would suggest forgetting about February 19 or 26
and moving on the rate around March 5.
2/10/59
-38
The Chairman commented that Mr. Balderston had made a very
real point in
cautioning about leaks.
The Committee had been dis
cussing for the last two meetings what was going to be done in the
future instead of in the present, and this created an unusual burden
in talking with outside contacts.
While the Treasury's problem and
the circumstances of the present period warranted this kind of Com
mittee discussion, he hoped that the Committee soon would be able to
get back to the point of considering the steps to be taken in the
reasonably near future.
Chairman Martin observed that the majority comments today
indicated no change in
continued, if
the policy directive.
no ease developed in
If present policy were
the market, if
pressure were created by overt actions,
and if
no additional
the Desk kept a posture
of restraint within the framework of present Committee policy, it
would be almost a requirement by the time of the next Committee
meeting to recognize the market by raising the discount rate one-half
per cent.
An increase of one-quarter per cent would be a mistake in
the present picture, he suggested, for the System would not want to
lag the market when it
had already been lagging for quite a period.
While he believed that a discount rate change should be held over
until the next meeting of the Committee, he hoped such a move would
not be sidetracked on the theory that present policy could be handled
through open market operations and no attention need be paid to the
2/10/59
-39
discount rate--a position that would play into the hands of those
who argued there was no need for the discount rate because a change
in
rate would react psychologically on the market.
Chairman Martin then inquired whether there was agreement with
his summary that the consensus favored no change in the policy directive
at this time, and that it favored maintaining the same degree of pres
sure that had been exerted thus far during the period of even keel for
some reasonable period after the books on the Treasury financing were
closed.
Such period might not have to extend until the first
March, but in
view of the results of the Treasury financing it
week in
probably
would be wise to give the market that long a period of adjustment.
Mr.
Shepardson inquired whether "the same degree of pressure"
referred to the degree of restraint earlier contemplated by the Com
mittee or the degree of pressure actually being exerted at present,
which he felt was not very strong.
Chairman Martin commented that this was a good point.
on to say,
however, that it
He went
had been customary for the Committee to
give the Manager of the Account discretionary authority based on the
color, tone, and feel of the market.
Mr. Shepardson had suggested
that what was intended by the Committee had not quite been attained,
but he (the Chairman) was quite certain the Desk felt that its
tions had been in
conformity with the enunciated policy.
called upon Mr. Larkin for comment.
opera
He then
2/10/59
-40Mr. Larkin suggested the necessity of looking beyond mere
figures.
The Account Management, he pointed out, had been charged
with maintaining an even keel during the period of Treasury financing.
Therefore, while the Desk wished to maintain pressure on reserves, it
did not want to take any overt action that would be disturbing to the
market.
With reference to the general feel of the market, he noted
that Federal funds had been traded at the discount rate quite con
sistently during the last two weeks.
There had been a temporary drop
in bill rates, related primarily to the flow of money out of maturing
Treasury issues, but other short-term rates did not go down.
This
period had also seen a 3-3/4 per cent rate on one-year certificates
offered by the Treasury not generally accepted by the public.
The
general posture of the market seemed to him one of rather considerable
pressure, as measured by a number of indicators.
It was necessary,
therefore, to look beyond the actual figure of net borrowed reserves
to ascertain the true degree of ease or tightness.
Chairman Martin commented that Mr. Larkin's remarks brought
out the element of judgment that must go into the execution of open
market policy, and Mr. Shepardson said he was aware of that factor.
Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal Re
serve Bank of New York until otherwise
directed by the Committee:
2/10/59
-41
(1)
To make such purchases, sales, or exchanges
(including replacement of maturing securities, and
allowing maturities to run off without replacement) for
the System Open Market Account in the open market or,
in the case of maturing securities, by direct exchange
with the Treasury, as may be necessary in the light of
current and prospective economic conditions and the
general credit situation of the country, with a view
(a) to relating the supply of funds in the market to
the needs of commerce and business, (b) to 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 securities for the
Account) at the close of this date, other than special
short-term certificates of indebtedness purchased from
time to time for the temporary accommodation of the
Treasury, shall not be increased or decreased by more than
$1 billion;
(2)
To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks) such
amounts of special short-term certificates of indebtedness
as may be necessary from time to time for the temporary
accommodation of the Treasury; provided that the total
amount of such certificates held at any one time by the
Federal Reserve Banks shall not exceed in the aggregate
$500 million.
At Chairman Martin's request, there were distributed to the
members and alternate members of the Committee and to the other Presi
dents copies of an outline prepared by the Board's staff for a Treasury
Federal Reserve study of the Government securities market, the broad
objective of which would be to develop information and suggestions
pertinent to (a)
market,
improvement in
the mechanism and functioning of the
(b) prevention of speculative excesses that are possible from
2/10/59
-42
time to time, and (c) attainment of market conditions continuously
adapted to orderly debt management and monetary operations.
The Chairman indicated that the outline was being distributed
as a matter of information and also to elicit
the assistance of all
of
the Presidents.
Its preparation had come about as a result of the
speculation in
the Government securities market last summer and the
work done on that problem to date, including the work done by the New
York Reserve Bank through the Technical Committee of the New York
Money Market.
The members of the Committee, he noted, had now received
the minutes of the meeting of the Technical Committee on December 10,
1958, which provided insight into the problems that had been raised,
and Under Secretary of the Treasury Baird had expressed appreciation
of the close assistance that he had received from the Desk and from
the System in
this matter.
Chairman Martin noted that among the questions raised by the
work of the Technical Committee was whether an association of Govern
ment securities dealers, if it should develop, might involve a problem
from the standpoint of the antitrust laws.
In all the circumstances,
the Board had concluded that it would be desirable to proceed in co
operation with the Treasury,
and he (Chairman Martin) had had meetings
with Secretary Anderson and other Treasury Department officials.
wished to make it
He
very clear that there was not the slightest intention
to minimize the role of the New York Bank in
the study of this subject,
-43
2/10/59
and that it
was the intent to bring the Bank into the study to the
fullest extent.
Rather, the thought was that this should be a joint
study of the Federal Reserve System and the Treasury, and he con
sidered it
It
extremely important that the study be a System operation.
had been agreed that the Secretary of the Treasury would get in
touch with the Attorney General and that he (Chairman Martin) would
be in touch with the Securities and Exchange Commission in order to
be sure that those parties were alerted.
While it would not be de
sirable to spread the word of this project unduly, it was the desire
to make a careful and intelligent study not only from the standpoint
of minimizing speculation but also from the standpoint of effecting
improvements in the functioning of the Government securities market.
Chairman Martin also commented that the rough study outline
had just been finished this morning and that the Board members them
selves had not yet had an opportunity to review it.
The Chairman then called upon Mr. Young who said it
was the
thought of the Board's staff, with which members of the Treasury staff
agreed generally, that the study could be broken down into three parts.
One part would be a fact-gathering operation to fill
the gaps in in
formation currently available, while a second part would consist of
consultation with individuals in
the market, partly to obtain factual
information and partly to elicit suggestions for ways and means of
strengthening and improving the market and preventing developments
2/10/59
-44
such as occurred last year.
The third part would consist of
evaluating the various issues, such as the possibility of establish
ing an organized exchange type of market instead of an over-the
counter market,
legal limitations on the use of repurchase agreements,
the possibility of establishing margin requirements against Government
securities,
and the possibility of a dealer organization.
would have to be carried out rather expeditiously and it
The study
would be
helpful to be able to call upon the Reserve Banks for personnel to
the extent necessary.
Also, it
was contemplated that inquiries made
of banks and nonfinancial organizations would go through the Federal
Reserve Banks and be handled on a personal basis so as to minimize
the number of questions that might arise.
Chairman Martin then commented that this was something of
major importance to the work of the Federal Reserve System.
He sug
gested that any views on the study be transmitted direct to Mr. Young.
Mr.
Hayes commented that this was a highly constructive ap
proach to a needed move.
It
was a matter that had been given much
thought at the Federal Reserve Bank of New York,
and that Bank was
happy to cooperate.
The Chairman concluded the discussion by saying that he
hoped the Technical Committee of the New York Money Market would not
disband, for there would be reason to call upon the Technical Com
mittee for assistance.
-45
2/10/59
It was agreed that the next meeting of the Federal Open
Market Committee would be held on Tuesday, March 3, 1959, at
10:00 a.m.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1959, February 9). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19590210
@misc{wtfs_fomc_minutes_19590210,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1959},
month = {Feb},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19590210},
note = {Retrieved via When the Fed Speaks corpus}
}