FOMC Minutes
A meeting of the Federal Open Market Committee was held
in
the offices of the Board of Governors of the Federal Reserve
System in Washington on Tuesday,
PRESENT
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
September 1, 1959,
at 1000 a.m.
Martin, Chairman
Allen
Balderston
Deming
Erickson
King
Mills
Robertson
Shepardson
Szymczak
Treiber, Alternate for Mr. Hayes
Bryan, Alternate for Mr. Johns
Messrs. Bopp, Fulton, and Leedy, Alternate Members
of the Federal Open Market Committee
Messrs. Leach, Irons, and Mangels, Presidents of
the Federal Reserve Banks of Richmond, Dallas,
and San Francisco, respectively
Mr. Riefler, Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Mitchell, Parsons, and Young,
Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Koch, Associate Adviser, Division of
Research and Statistics, Board of Governors
Mr. Keir, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Messrs. Hostetler, Daane, and Tow, Vice Presidents
of the Federal Reserve Banks of Cleveland,
Richmond, and Kansas City, respectively
Mr. Clay, Vice President and General Counsel,
Federal Reserve Bank of Kansas City
Mr. Anderson, Economic Adviser, Federal Reserve
Bank of Philadelphia
-2Mr.
Coldwell, Director of Research,
Federal Reserve Bank of Dallas
Mr. Gaines, Manager, Research Department,
Federal Reserve Bank of New York
Mr. Stone, Manager, Securities Department
Federal Reserve Bank of New York
Mr. Brandt, Economist, Federal Reserve Bank
of Atlanta
Chairman Martin noted a request by Mr. Leedy that Mr. Clay partici
pate in
this meeting,
and no objection was indicated.
Before this meeting there had been distributed to the members of
the Committee a report of open market operations covering the period
August 18 through August 26, 1959, and a supplementary report covering
the period August 27 through August 31, 1959.
have been placed in
Copies of both reports
the files of the Committee.
In supplementation of the information contained in the written
reports,
Mr. Rouse made the following comments:
The most noteworthy occurrences during the past two weeks
have been the developments in connection with the proposed re
moval of the Treasury's interest rate ceiling and the not unre
lated further steep increase in Treasury bill
rates. The rate
on three-month bills had been at the 3 per cent level in late
July, and by the time of the last meeting it had moved up to
around 3.40 per cent. Yesterday the rate closed at 3.88 per
cent bid and in yesterday's auction the average rate was 3.89
The
running to nearly 4 per cent.
per cent, with a tail
average rate on the six-month bills in the auction yesterday
was 4.47 per cent, almost 75 basis points above the average
This level of bill
rate set in the auction of August 17.
rates has caused increased attention to be focused on the
discount rate and the prime rate, and the market regards it
only a question of time before one or both of these rates is
The atmosphere in the market for Treasury notes
increased.
and bonds has also been heavy during the past two weeks.
Prices have fallen off substantially and at the close
yesterday 38 issues of notes and bonds reached new all-time
As indicated in the supplementary report, the
lows.
9/1/59
highest yielding issue, the 2-1/2's of 1961, was yielding
5 per cent at bid prices last night.
The general deterioration in the Government securities
market during the past two weeks reflects mainly the revival
of expectations of higher interest rates in the autumn.
Such expectations have, of course, been characteristic of
the Government securities market for many months, but the
outstanding success of the Treasury's refunding of its
August 1 maturities in July, together with the onset of the
steel strike and the announcement of the Eisenhower
Krushchev exchange of visits, temporarily led to a feeling
that interest rates might have reached a plateau for the
time being.
This feeling has by now completely disappeared,
and a major cause of its disappearance has been the
evidence of broad strength in the economy despite the steel
strike, along with the possibility that the end of the steel
strike will witness an even greater rate of economic advance.
The weakness in the Government securities market has been
reflected in the markets for corporate and municipal bonds,
where yields have risen fairly sharply in the past two weeks.
The syndicates for three recent utility offerings were
terminated last week, with upward yield adjustments ranging
to 20 basis points or up to three dollars per hundred. With
growing, it is
the calendar of new issues large and still
trend
of yields in
of
the
upward
reversal
hard to see any
those markets.
The money market has had a somewhat tighter feel during
the past two weeks despite the fact that there has been no
significant change in reserve figures. Federal funds have
remained firmly at 3-1/2 per cent, and New York bank lending
The Account supplied
to dealers has been at 4-1/4 per cent.
$196 million reserves net to the market since the last
meeting, which had the effect of offsetting most of the
withdrawal of reserves by market factors during the period.
Looking at the reserve projections, net borrowed reserves
will probably rise to over $600 million next week because
of the pre-Labor Day currency outflow, but then will move
back down to the level of recent weeks.
The Joint Economic Committee, through Senator Douglas,
that we furnish the Committee with aggregate
requested
has
figures on dealer positions, volume of purchases and sales,
The Committee wants daily figures for the
and borrowing.
years 1950 through 1958 and for selected shorter periods
The information requested
running all the way back to 1937.
by the Committee, I believe, can be developed from the data
already in our files, except the material for dealers who
have not reported their figures to us. We have sent letters
9/1/59
-4
to all dealers explaining the Committee's request and
have asked, on behalf of the Joint Committee, their
permission to furnish the Committee with the figures.
We have heard from about half the dealers thus far,
and all but one have given their permission to make
the data available.
The one refusal is from a dealer
who has not been reporting figures to us.
Mr.
Mills said he noticed in
the reports of open market
operations that the dealers appeared to have reduced their positions
substantially, apparently on the ground that they foresaw uncertain
ties in
the market.
He inquired of Mr. Rouse whether the latter had
any concern that the dealers might refrain from performing their
accepted function of making markets,
thereby adding a push to the
deterioration of the Government securities market that could threaten
disorder.
Mr. Rouse replied that dealers'
positions in longer-term
securities had not changed materially in recent months.
term securities, their positions had gone up in
As to short
connection with the
recent Treasury refunding operations and then moved down in
of refunding.
As indicated in
the areas
the reports of open market operations,
the dealers were distrustful of a 3.00 per cent level on three-months
bills, and even a 3.40 per cent level, because they believed that
rates would be higher later on, but nevertheless they made markets.
Prior to the auction yesterday, their position in Treasury bills was
in
the neighborhood of $500 to $600 million net.
Mr.
dealers'
Mills inquired how that would compare with the aggregate
position six weeks ago, to which Mr. Rouse replied that as
9/1/59
-5
far as short-term issues were concerned,
larger.
Ordinarily,
However,
was
the dealers had been going into the auctions
in recent weeks with a position in
million.
he would say that it
bills in the order of $250
there had recently been a substantial inflow of
bills from customers and the dealers were not able to sell those
bills readily.
In yesterday's auction, the dealers took another
$350 million, so their positions were at a relatively high point.
In response to a question by Mr. Robertson, Mr. Rouse con
firmed that he had no qualms about the dealers making markets.
With reference to Mr.
of daily figures on dealers'
Rouse's comments about the furnishing
positions to the Joint Economic Com
mittee, Chairman Martin called attention to the fact that this
represented a change in attitude with respect to the furnishing of
such figures.
During the hearings in
New York City, Mr.
Rouse had
agreed that he would try to supply these data, while heretofore the
Committee had taken the position that it
to supply the figures.
from the Congress,
In
the past, when requests were received
the Committee had said that the Congress would
have to go direct to the dealers.
commenting in
hard for Mr.
figures.
would not want to undertake
a critical vein.
He emphasized that he was not
Under Committee questioning, it
was
Rouse to say that he would not endeavor to supply the
From his own personal experience,
on the firing line is
a request indirectly.
the position of a witness
much different from that of a person receiving
9/1/59
-6
Mr. Thomas commented that certain aggregate figures published
in the recent Treasury-Federal Reserve study of the Government securi
ties market included those of the dealer referred to by Mr. Rouse as
not reporting to the New York Reserve Bank.
Therefore, compliance
with the current request for all but the one dealer would have the
effect of revealing his operations for those periods as to which
comparisons could be made with the securities market study.
Mr. Treiber said that this had been pointed out to the dealer
in question in connection with the current request.
In reply to a
question by Mr. Robertson, Mr. Rouse indicated that it was the inten
tion of the Reserve Bank to advise the Joint Economic Committee of
the refusal of the one dealer to furnish figures.
If the Committee
wished to do anything further, it would therefore have to contact
the dealer itself.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period August 18 through August 31,
1959, were approved, ratified, and
confirmed.
Supplementing the staff memorandum distributed under date of
August 28, 1959, Mr. Young made a statement substantially as follows
with respect to economic developments:
Since June, industrial activity has shown a divided
Activity in metal output and fabricating lines
trend.
affected by work stoppage or model changeover has declined
sharply, while activity in other lines has continued to
The weight of curtailed industries in the Board's
expand.
9/1/59
production index, however, has been enough to reduce its
level since June by an estimated 4 index points--2 points
each in July and August.
GNP for the third quarter will
reflect the impact of reduced output in these metal pro
ducing or working industries by a much smaller advance
than in the preceding quarter.
Over-all inventory
accumulation for the third quarter is expected to be con
siderably reduced and there also will be the income losses
suffered by strike-bound industries.
Aside from the work stoppage influence, the total
economic picture appears to be one of widespread strength.
For instance:
(a)
While construction activity has shown moderate
decline from its all-time record of April and May, its level
is a third higher than a year ago. A continuing large volume
of contract awards suggests that the current construction
level will be sustained.
(b)
July new order and sales figures for durable goods
manufacturers reflect marked demand strength for most lines,
especially for machinery and transportation equipment other
than motor vehicles.
Retail sales in July sustained their high June level,
(c)
and sales at department stores in August continued vigorous for
both durable and nondurable lines. August sales of new cars
remained about a third higher than last year, while used car
sales also held close to a 15 per cent margin over a year ago.
(d)
Consumers continue to seek and incur instalment and
mortgage debt at a near record pace.
(e) U. S. exports in July again rose abruptly, reaching
a seasonally adjusted annual rate of $18 billion, or a fifth
higher than the low months of earlier this year. While the
rise in July was attributable in part to agricultural exports,
larger shipments of industrial items helped for a second time
to raise total exports.
(f) Total business inventories as of July, not yet back
to prerecession levels, remained historically low in relation
to current sales volume.
(g) The labor market impact of metal strikes appears to
limited, and aside from industrial areas immediately
been
have
affected, total employment has been well sustained.
With demands continuing strong and, in the aggregate,
expanding, prices of industrial commodities have been showing
general strength at a level about 2 per cent higher than a
In recent months, increases in supplies of foodstuffs,
year ago.
and eggs, have resulted in enough price decline
meats
chiefly
the wholesale price average about stable.
keep
to
for foods
price average through July has risen four
consumer
the
However,
successive months, the July rise reflecting a broad range of
price increases.
9/1/59
Industrial expansion in Europe, from the latest figures,
is apparently continuing.
While European price levels have
been generally stable this year, there are spreading indica
tions of official concern about the resumption of inflationary
tendencies.
Mr. Thomas made a statement substantially as follows with respect
to financial developments:
Financial developments during the past three weeks have
been in some contrast to those of preceding weeks. Interest
rates, which had declined somewhat in the latter part of
July and early August, turned sharply upward.
The most
pronounced shifts in both periods occurred in short-term
rates. Ninety-day Treasury bills are now approaching the
4 per cent level.
This tightening of rates has occurred notwithstanding a
slight easing of the pressure on banks' reserve positions and
a continued relatively low level of new securities issues.
It apparently reflects three sets of influences: (1)
continued sales of short-term securities by banks in order
to raise funds to meet an exceptionally strong loan demand
at this period; (2) lessened demand for bills by nonbank
buyers as seasonal increases in cash needs approach; and
(3) further additions to the supply of Treasury bills.
Fundamentally, the situation probably reflects pressures
growing out of the somewhat unusual liquidity position of the
economy. For several months banks have been able to meet
heavy loan demands and at the same time the Treasury has been
able to finance its large deficit through sale of short-term
securities, with only a moderate increase in total bank credit
and the money supply. This has been possible because nonbank
owners of liquid funds have preferred to hold Treasury bills
rather than add to their bank deposits. As cash is needed
to make payments, however, pressures mount in the bill market
and are further reflected in other securities markets.
Figures now available for all member banks for July
indicate that banks supplied a large amount of credit in
that month--much more than had been earlier indicated by the
data for city banks alone. Most of the expansion was in
loans, but holdings of securities also increased moderately.
Private demand deposits showed a much greater than seasonal
increase, and the turnover of deposits also increased. The
availability of bank credit may have eased some of the
pressure on the money market, although banks continued to be
heavy borrowers of reserves.
In August, preliminary and partial figures for city
banks show a continued large expansion in loans.
In con
trast to July, however, this expansion has been more than
offset by a renewed decline in bank holdings of securities.
As a result total loans and investments of banks in leading
cities declined--the first decline for August since 1955,
when banks were also reducing holdings of securities to
increase loans. Whether these developments at city banks
reflect the situation for all banks any better in August
than they did in July remains to be seen. Figures for the
first
two weeks in August indicate that, although loans
increased and investments declined at all classes of banks,
country banks showed a small increase in total loans and
investments and also in demand deposits, in contrast to
declines in the total at city banks.
The city bank loan expansion in August, as indicated by
partial figures for August 26, reflected perhaps slightly
greater than seasonal increases in business loans, in loans
to finance companies, and in consumer loans, together with a
continued moderate increase in real estate loans and little
The city banks reduced sub
change in loans on securities.
stantially their holdings of Treasury bills and also the
total of other Government securities maturing in less than a
They also
year, despite the increase in bills outstanding.
showed a decline in other securities.
It would appear from these data that private demand
deposits may have shown a greater than seasonal contraction
in August, offsetting some of the July increase. Whether all
banks will show such a decline cannot yet be known. In any
event, the total money supply at the end of July was more than
3 per cent larger than a year ago and -1/2 per cent larger
than the July 1957 peak. In addition, there have been sub
stantial increases in the public's holdings of short-term
Government securities and the turnover of demand deposits
has been at a higher level than in mid-1957.
Developments in the past two months may give an indication
of the type of banking and monetary situation that may charac
As nonbank holders attempt to convert
terize the period ahead.
Treasury bills into cash, there will be recurrent pressures on
If, as now seems likely, the
the short-term money market.
Treasury will not be in a position to reduce the liquidity of
the economy by funding some of its short-term debt into long
term securities that will attract more permanent savings, the
situation may be a particularly difficult one to manage.
This type of situation calls for a tight rein on monetary
expansion, not relaxation. It may result in further increases
The six per cent rate in Canada
in short-term interest rates.
9/1/59
-10-
reflects such a situation and the resistance of the central
bank to further monetary creation in the face of heavy
Treasury financing needs.
In view of the prevailing
liquidity of the economy in this country, it is likely that
considerable economic expansion can be accomplished with
little
or no further increase in bank deposits.
In any
event, increases of greater than seasonal amounts might
well be based on member bank borrowing at discount rates
close to or above Treasury bill rates. Any relaxation is
likely to encourage excessive credit and monetary expansion,
In order to minimize further additions to liquidity,
Treasury debt management under an unrealistic ceiling on
long-term interest rates will present difficult problems.
All possible means should be adopted to minimize further
additions to liquidity.
Tax anticipation bills amounting to $1.5 billion will
be redeemed in September and the Treasury will not need to
raise now cash until about mid-October.
At that time some
$3 billion will be needed, with another $3 billion in
December and $2 billion in January. These amounts could be
raised through issues of June and September tax bills and a
final quarterly series of bills to mature in October 1960.
Opportunities for longer-term issues would arise in con
nection with the November and February refunding operations.
Moderate-sized offerings might be made for cash at some
time and the proceeds used to reduce Treasury bills or
other maturing issues.
It is obvious that nothing over 5
years could be offered under present legislation.
If August developments are a reliable indication, the
degree of restraint exerted by member bank borrowings at
the Reserve Banks of around $1 billion may be adequate.
It is probably unnecessary to bring about any reduction in
reserve availability. Adequate pressure can probably be
exerted at the present level of borrowing by keeping the
discount rates above the three-month bill rate. Seasonal
reserve needs may be supplied through open-market operations.
If greater-than-seasonal credit demands are supplied by
banks, then borrowings should be permitted to increase and
the discount rate raised further. If demands are less than
seasonal, then borrowings should be allowed to decline
accordingly.
Projections of customary seasonal needs indicate that
some additional reserves should be supplied in the next week
or two. These might be met through repurchase contracts.
There will be further moderate needs in October and sub
stantial reserve needs in November and December.
9/1/59
-11Mr. Treiber presented the following statement of his views
with respect to the business outlook and credit policy:
The economic situation shows continuing strength
despite the steel strike. If the strike is long, we may
expect increasingly disruptive effects with a reduction
in economic activity and an increase in unemployment.
Yet, when the steel strike is settled, we are likely to
see a new burst of expansion and an upward pressure on
prices.
The intensity of the pressure will depend on
the length of the strike and the nature of the settlement.
While wholesale prices have been relatively stable,
consumer prices rose in July to an all-time high. The
consumer price index has risen 1 percentage point over
the last three months.
While U. S. exports in June and July were a shade
higher than a year ago, foreign countries continued to
build their official and private dollar holdings at about
the same rate as in the second quarter.
The demand for bank credit, especially consumer
credit, continues to be very strong, and deposit turnover
has been increasing.
The money market has continued tight. Member bank
borrowings have averaged about $1 billion in recent weeks.
Prices of U. S. Government securities of practically
all maturities have declined since the last meeting of the
Committee.
In the auction yesterday, three-month Treasury
bills were awarded at an average yield of about 3-7/8 per
cent; this compares with an average yield two weeks ago of
a bit over 3-3/8 per cent.
In the last month, yields have
risen about 3/
of 1 per cent.
The Treasury will need about $3.5 - $4 billion cash
It will probably have to announce the
early in October.
terms of its financing in the latter part of September.
Two issues mature November 15 and the Treasury will have
If the Federal Reserve
to refund them early in November.
is to take affirmative action without interfering with
Treasury financing, it will have opportunities to do so
within the next three weeks, and within a shorter period
near the middle of October.
Business developments, credit developments, and money
market developments counsel some overt action of further
Should the discount rate be raised within the
restraint.
next few weeks? Public discussion indicates that a number
of people expect an increase in the discount rate and in
As the
the prime rate in the not too distant future.
demand for credit increases and short-term rates advance,
-12increased pressure can be expected at the discount window.
The Federal Reserve should not so act, however, as to
jeopardize action by the Congress on the proposed legislation
to remove the limitation on the maximum interest rate on U.S.
Government bonds. If there is still a possibility of
Congressional action at this session, it would seem well for
the Federal Reserve to avoid overt action at this time which
might possibly raise extraneous issues and jeopardize the
legislation. Since it is generally expected that the Congress
will recess within the next couple of weeks, this basis of
uncertainty should be soon removed.
If the Congress does not
act on the bill, the prospect of the Treasury having to do
all its financing in short-term issues is another factor
counseling further steps to restrain the creation of too much
bank credit.
If it is already clear that the Congress will
not act on the bill,
this fact, coupled with business, credit,
and money market developments, would counsel overt Federal
Reserve action soon.
The steel strike is of course an important uncertainty.
Steel does not play as large a part in the economy of the
Second Federal Reserve District as of other Districts. We
would not want to suggest action that might be embarrassing
to other Districts or that might be unwise in the light of
the developing situation in other parts of the country. We
look forward to hearing the discussion on this point around
the table.
The same reasoning that leads us to our views regarding
the discount rate would apply to a change in the directive.
If a change in the discount rate is appropriate, a change in
the directive should also be considered.
If such changes seem appropriate, it would also seem
desirable for the System to move toward greater restraint
The Manager might feel his
through open market operations.
way along to accomplish this. If no overt action is appro
priate, it would seem desirable to maintain about the status
quo with respect to open market operations.
At this point Chairman Martin reported having received advice
that the First National City Bank of New York had raised its prime rate
from 4-1/2 per cent to 5 per cent.
Mr.
Bryan reported that statistics for the Sixth District
becoming available since the last Committee meeting reflected continua
tion of the upward movement of the economy.
In a number of cases, the
9/1/59
-13
district figures were up by fractions more than the comparable
national figures,
and only two items failed to show improvement.
Construction contracts were running less than in 1958 and there
had been some increase in the percentage of insured unemployment.
Loan demand in
the district was extraordinarily strong in
all sectors,
and borrowings from the Reserve Bank were running well above the
Bank's "appropriate" percentage of total System discounting.
From
the district figures and the national statistics, he could discover
no serious effects of the steel strike as yet.
Some rumors were
heard to the effect that metal-working industries would shortly be
out of steel, but thus far no one had been able to verify these
rumors.
With the ending of the steel strike, there might be a very
ebullient economy, going in
the direction of boom, which would argue
for further restraint on the part of the Federal Reserve System.
However,
he had difficulty in
reaching that conclusion because it
seemed to him that the Government securities market, for reasons in
part unrelated to System policy, was in
a situation where disorder
verging on chaos could easily develop.
He was bothered, therefore,
about exercising further restraint on the general ground that such
a course might at some point force the System to put reserves into
the banking system to a greater extent than if
were avoided at this time.
further restraint
Subject to change in the light of
arguments that might be expressed around the table today, his
preference at the moment would be not to change the discount rate.
-14He would move delicately in
supplying seasonal requirements for reserves.
Mr. Bopp's comments were substantially as follows:
Business activity in the Third District is holding up
well despite the impact of the steel strike. The Pennsylvania
Department of Labor and Industry estimated that by last week
215,000 persons in that State had been idled by the strike,
of whom 147,000 were steel workers.
Secondary unemployment
has increased only about 6,000 in the past two weeks. A
special survey by the State Employment Service of practically
every major user of steel in the Philadelphia metropolitan
area revealed that none had been forced to curtail employ
ment.
Furthermore, most of the major users anticipated no
difficulty for weeks ahead.
Some small producers are
beginning to feel the pinch, but few expected to be forced
to cut employment by the end of August--yesterday.
The
potential impact in the event the strike is not settled is
indicated by the fact that over 200,000 factory jobs in the
Philadelphia area are vitally dependent upon steel supplies.
Unemployment in July, which does not reflect the strike,
was 7 per cent in the District, as compared with 5.2 per cent
nationally. New unemployment claims and continued claims in
Pennsylvania declined in the latest two weeks.
Department store sales for the week ended August 22 were
12 per cent below a year ago, primarily because of unfavorable
weather for shopping.
Sales in the past four weeks were 1 per
cent above a year ago, and for the year to date 7 per cent
above last year.
change in total loans of District
There was little
reporting banks in the past two weeks. Business loans were
off slightly. Holdings of Governments increased, presumably
reflecting purchases of the recent tax anticipation bill.
Total deposits were up, a substantial increase in Govern
ment deposits more than offsetting a decrease in private
demand deposits.
The reserve positions of the large Philadelphia banks
have been somewhat easier during the past two reserve weeks.
Their basic reserve deficiency averaged around $50 million,
and daily average borrowing from the Reserve Bank was $26
million and $31 million, respectively. District banks were
net sellers of Federal funds in the latest reserve week for
the first time since early May. Borrowing from the Reserve
Bank by country banks has been decreasing; the daily average
for the latest week was $5 million.
Turning to monetary policy, I have been concerned about
whether we should raise the discount rate now or defer a
9/1/59
-15-
decision until after the next meeting of the Committee.
On
balance, I believe it is preferable to defer a decision at
this time.
There are indications that an increase in the discount
rate would be appropriate.
An important one is that Septem
ber is probably the longest period for the remainder of the
year in which the System will be free to act without inter
fering with Treasury financing.
Treasury borrowing at short
term will increase liquidity and the money supply.
The
money supply, seasonally adjusted, rose substantially in
July and has increased more since the trough of the recession
than in the same period following the 1953-1954 recession.
Market rates on Treasury bills have moved well above the
discount rate.
There is also evidence that current restraint may be
sufficient to counteract existing and near-term prospective
inflationary pressures.
Percentagewise, the increases in
consumer instalment credit, residential mortgages, and bank
loans to business have been considerably less than in the
same period of the upswing following the 1953-1954 recession.
The availability of credit has been diminished not only by
System pressure on bank reserves but also by high loan-to
deposit ratios which many bankers are reluctant to see go
Most market rates are already above their
much higher.
Foreign competition is exerting fairly strong
1957 peaks.
pressure against price increases of international trade
products, and there seems to be fairly widespread determina
tion to avoid another round of inflation.
There are significant advantages in deferring discount
until after the strike is settled. The serious
action
rate
ness of the inflationary threat will depend in part on the
A substantial wage increase
terms of the strike settlement.
would almost certainly result in widespread fear of price
Deferring an increase until after the strike is
increases.
settled would make possible a more accurate appraisal of the
job to be done and would give the System more leeway for a
decisive increase in the discount rate if needed to counter
It would also avoid
act the spread of inflation psychology.
an increase in
from
result
to
likely
reaction
the adverse
the strike.
of
grip
the
in
is
economy
the
the rate while
mid-October,
until
borrow
to
need
not
If the Treasury does
for
time
be
still
should
there
as now appears likely,
Committee.
the
of
meeting
next
the
after
discount rate action
maintain
should
we
believe
I
weeks,
For the next three
I would
weeks.
two
past
the
in
as
about the same restraint
time.
this
at
not favor a change in the directive
-16
9/1/59
Mr.
Fulton said that he had nothing new to report from the
Fourth District regarding the steel strike.
While the strike of
course had the effect of throwing out of work many railroad workers,
miners,
and transportation workers,
there was thus far no substantial
unemployment resulting from shortages of steel.
Steel warehousemen
were experiencing no great surge of orders and the steel companies
reported having had no comments from their customers.
However,
orders were now coming into the steel companies strongly for flat
These products had
rolled and strip steel for the fourth quarter.
been inventoried in
considerable quantity by the automobile industry,
but some other users apparently were not quite as fortunate.
Rather
surprisingly, there appeared to be a low rate of delinquencies in the
payment of phone bills and loans in
of nonferrous metals,
shape.
June,
steel towns.
There was no shortage
so industries depending on them were in
New orders for machine tools were down slightly in
but were still
considerably higher than a year ago.
good
July from
While the
backlog of orders had increased, shipments were lower due to reluctance
on the part of purchasers to take delivery.
In the rubber industry,
where wage contracts were up for negotiation, the companies were
reported to be negotiating vigorously and hoping to get a settlement.
Due to the 80-day strike earlier this year, it
recurrence of work stoppages could be avoided.
was hoped that a
There was talk of a
settlement providing an increase of about eight cents an hours, and
if
such a settlement were proposed to the workers it
was believed
9/1/59
-17
that they might accept.
With orders for tires heavy, the companies
had been working on a six-day basis to restore inventories, which
had gotten quite low.
Mr.
Fulton said that construction was down a little
in
the
district although commercial and educational building construction
was up.
The cause of the slight downward movement was attributable
mostly to a reduction in heavy engineering contracts.
store sales were down 2 per cent in the past week,
in
large part to very hot weather.
Department
apparently due
For the year to date, sales were
7 per cent above a year ago.
Turning to the financial picture, Mr.
commercial loans in
Fulton reported that
the Fourth District were up.
folios were lower in
Investment port
order to permit the banks to make new loans.
The banks had been coming to the discount window rather freely, but
not to the extent that might have been expected, and borrowing was
less than the 10 per cent of the System total normally expected in
the Cleveland District.
Part of this might be due to the fact that
the Reserve Bank had discussed borrowings with some of the member
banks.
Mr.
Fulton stated that he would not like to see a change in
the discount rate at this time, his reasoning being quite similar to
that of Mr.
Bopp.
He would prefer to wait until after the termination
of the steel strike in
and its
order to see what type of settlement was made
potential effect on the price structure.
At such time, a
9/1/59
-18
forthright action could be taken by the System if
the settlement was
not one that promised to permit a reasonable degree of price stability.
He felt that the present degree of restraint, without relaxation, was
appropriate and that the directive might be left in its present form.
Mr. King observed that Mr.
Treiber had outlined two alterna
tive approaches to the question of policy and said that he would be
in agreement with the one which suggested avoidance of overt action
for the moment.
Such an approach appeared to him to carry more
possibility of aiding the Treasury in
ceiling legislation that it
obtaining the interest rate
so badly needed,
and he felt that any
action on the part of the System should be weighed in the light of
possible passage of such legislation.
found himself in
With that factor in mind, he
agreement with Messrs.
Bryan, Bopp,
and Fulton
regarding the directive and also the discount rate.
Mr.
Shepardson commented that there appeared to be general
agreement on what the various indices showed and on the direction in
which the System should be looking.
largely one of timing.
Thus,
the question seemed to be
He was not as optimistic as some others
might be regarding the price situation and inflationary pressures.
The price rise was going on continually, as indicated by the gradual
upward crawl of consumer prices,
and the wage situation was not good.
Every day, reports were seen of new settlements that would add to
costs.
While claims no doubt would be made to the effect that these
settlements were not inflationary and that the higher wages would be
9/1/59
-19
absorbed in
increased productivity, he questioned such claims
seriously and feared that costs were being built up to the point
where the situation would explode.
progress,
With the steel strike in
he realized that there might be some advantage in waiting
to see what eventuated, but it
was his feeling that regardless of
how the strike was settled, there would still
Therefore,
be pressures ahead.
a strong affirmative position on the part of the System
probably would do no harm and possibly would be helpful in bringing
about a more favorable situation.
legislation was,
argued that it
of course, an unknown quantity, and it
might be
would be unwise to muddy the waters until that was
On the other hand,
settled.
The pending interest rate ceiling
System to act in
it
might be said that a failure of the
the face of clear economic indications would be an
evidence of backing water,
and the System should not get into such a
position.
Mr.
Shepardson felt
that there might possibly be a little
time
for the System to delay, but he hoped that the delay would not be long.
Personally,
he would prefer prompt action, and in any event the
difficulty often experienced in
action is
getting prompt implementation after
decided upon should be borne in
mind.
Therefore,
all con
cerned should be laying the ground work for action as promptly as
possible after a decision was reached.
Mr.
Shepardson said that he would favor a change in
rate shortly.
the discount
He would also favor maintaining the present degree of
-20
9/1/59
restraint and meeting seasonal reserve needs reluctantly.
Thomas had indicated that seasonal needs in
the next few weeks
probably could be met through repurchase agreements,
this course would be possible.
ahead of the game.
It
Mr.
and he hoped
seemed to him essential to stay
He hoped that the System might stay ahead of
the situation better than it
did following the 1953-54 recession,
with a view to forestalling the results that came to pass later.
The legislative situation might suggest the advisability of going
slow for a week or two.
When that situation was clarified, however,
he would act promptly.
Mr. Robertson stated that the situation seemed very clear.
The Committee was sitting on the edge of what might be almost a
volcano.
The economy would be burgeoning out and the System would
find itself behind the game.
Therefore, he felt that it
would be a
mistake to wait for the steel settlement before moving to a more
restrictive position.
It
would be easy to delay on the grounds that
the political situation and the strike situation loom large in
picture, but the System ought to make its
the
decisions on the basis of
economic factors, and concerning them there seemed to be no dispute.
As he saw it, this was a time when the System ought to be moving,
and he would like to see the discount rate increased without too
much delay.
Although there would be about a month in which to act
without interfering with Treasury financing, it is never possible to
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9/1/59
get action "tomorrow."
He would be reluctant in meeting seasonal
reserve needs and would reduce the availability of credit to some
extent by moving up the level of net borrowed reserves.
Looking at
the policy directive, he could not see offhand any change that would
strengthen it.
If there was a way to do so, however, he would be
willing to go along with such a change.
In conclusion, Mr. Robertson expressed the view that the
System ought to adopt an affirmative position of restrictiveness
in order to keep on top of the potential inflationary situation
ahead.
Otherwise, the System would get behind the game and might
never catch up--repeating the mistakes of a few years ago.
Mr. Mills said that in his opinion the immediate problem
facing the Open Market Committee was that of diagnosing develop
ments in the U. S. Government securities market and their bearing
on the System's monetary and credit policy.
As he saw them, those
developments confirmed abundantly the concern he had expressed on
earlier occasions to the effect that System policy was unduly
restrictive.
It had now, as regards the Government securities
market, produced a situation that threatened disorder and
demoralization.
His concept was that the System's objective con
tinued to be one of fostering longer-term economic growth and
stability, and in his opinion there was a real question whether
the System was moving consistently with that objective.
If there
-22
9/1/59
was any doubt about the desirability of producing a credit avail
ability that would sustain the seasonal needs of the economy, he
would like to bring out that this had always been a fundamental
purpose of System policy.
As he understood it,
the System had
always met the legitimate seasonal needs of the commercial banking
system when the latter was in receipt of demands for credit.
Beyond that, he felt that one must look back on economic develop
ments in the past year and take into account the fact that there
had been a recovery from recession.
new ground, brought about a rise in
That recovery,
now moving into
the gross national product that
had desirable and legitimate foundations.
If,
therefore,
the System
were to follow a monetary and credit policy over the years that had
the aim of fostering economic growth and stability, he would question
a restrictiveness that did not take into account the increase in
gross national product.
System policy stood, if
The restrictiveness that had stemmed out of
not corrected,
to interfere with the kind of
economic accomplishments on which the country had set its sights.
With regard to comments favoring continuance of about the existing
degree of pressure, that is, the status quo, he wished to call
attention to the fact that discounts at the Federal Reserve Banks
were running to a level averaging over $1 billion.
In spite of
that level of discounts and the reserves that were introduced
incident to Treasury financing, there was still a level of net
borrowed reserves in the area of $500 million.
That level of net
9/1/59
-23
borrowed reserves constituted persuasive evidence that the System was
persistently tending to contract the credit base.
The efforts of the
member banks to maintain their reserve positions had been fruitless,
even with use of the discount window, and in consequence the current
high level of net borrowed reserves existed.
If
it
continued, it
would produce insistent and growing cumulative pressures that would
create additional complications for the Treasury in its financing and
provoke a very unsatisfactory situation in the U. S. Government
securities market.
Mr. Mills said that his own thinking obviously would favor
modifying the kind of policy that the System had been following.
Inasmuch as that policy had been instrumental in
creating the condi
tions that technically argued for an increase in the discount rate,
and since he felt that the policy was faulty, obviously he would not
favor increasing the discount rate.
Mr. Leach made substantially the following comments:
The first
break this year in the continuity of the
uptrend in manufacturing man-hours in the Fifth District
occurred in July with a decline of 1.5 per cent. The drop
in this significant indicator of economic activity was due
principally to shutdowns in the steel industry. The impact
of the strike in the Fifth District has been most pronounced
in Baltimore where cessation of operations at Bethlehem's
gigantic Sparrows Point plant and at other steel mills put
over 28,000 employees out of work. In addition, over
3,700 workers in other industries in the Baltimore area were
idle at the end of August as a consequence of the steel strike.
Secondary unemployment has been severe also in certain areas
of West Virginia where 8,200 workers were out of work because
Despite the steel strike,
of the strike at mid-August.
however, manufacturing employment in the District rose
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9/1/59
slightly in July, both in durable and nondurable goods.
Indicative of the strong position of the textile industry
was the rise in cotton consumption by District mills in
July to an all-time high--some 3 per cent better than the
previous high in July 1942. Department store sales in
August are estimated to have held at the near-record level
of the preceding month.
The usual late summer pickup in business borrowing at
District reporting banks appeared in the second and third
weeks of August despite the steel strike. Banks relied
somewhat less on borrowings and more on liquidating securi
ties to meet the August loan demand than in immediately
preceding months.
If I knew when the steel strike will end and when
Congress will act, if at all, on the interest rate ceilings,
I would be better able to make positive recommendations as
to policy, but I do not know these things. I believe there
is great underlying strength in the economy, but I think
further tightening of credit at this time would be unwise.
While I would not increase the discount rate at this moment,
I think that the Reserve Banks should be prepared to act
promptly, and as unanimously as possible, on the discount
rate if the situation should change in the next three weeks.
The existing degree of restraint should be maintained through
open market operations. I would not favor changing the
directive at this time.
Mr. Leedy said that, having been away from the Tenth District
for the past couple of weeks, he could give no first-hand report on
conditions.
However,
it was quite evident from the available
statistics that the economy of the district continued to be strong.
Bank loans continued to advance and the high level of borrowing from
the Federal Reserve Bank was continuing.
It
seemed to Mr. Leedy that the question of a change in the
discount rate involved solely a question of timing.
At present the
rate was obviously out of line with other market rates, and the
action reported this morning on the prime rate would further intensify
the need and pressure for action on the discount rate.
However. he
9/1/59
felt
-25
that this particular juncture was not the time for the System
to
act.
First, there were the uncertainties connected with the steel
strike,
and the longer the strike continued the greater those un
certainties would be.
Second, in
the past three weeks there had been
a marked change in rates on Government securities,
the short end of the market.
itself
to the charge that it
The System, he felt, should not subject
had jumped in
precipitately and con
tributed to the trend that was occurring in
market.
As he understood it,
particularly in
the Government securities
there would be a period of freedom
following the next meeting of the Open Market Committee for action on
the discount rate.
On that assumption, it
seemed to him that it
be a mistake for overt action to be taken in
present,
the meantime.
For the
therefore, he would favor maintaining the status quo, neither
relaxing pressure on bank reserves nor tightening the pressure.
ever, unless there should be a marked change in
it
would
How
the present picture,
appeared to him that by the time of the next Committee meeting the
System might be faced with the necessity of moving on the discount
rate even though the steel strike had not yet been settled.
Mr.
Allen commented as follows with respect to Seventh District
developments:
No significant changes in business trends in the Seventh
District have been reported in the past two weeks.
Consumer
spending, as measured by department store sales, faltered
somewhat, probably due more to the humid, disagreeable weather
and timing of promotions than to a change in consumer in
tentions to spend.
9/1/59
-26-
As to residential construction, Chicago is the only
major center in the District to reflect the advanced level
of home construction characteristic of the country as a
whole.
Building in Chicago continues at recent levels, with
rather surprising strength in apartment units.
The employment situation is as good as can be expected
during a model changeover time for autos and during a steel
strike in an area heavily oriented to metalworking. What
might be called a placid attitude seems to prevail in
businesses not yet affected by the steel shut-down, but
vulnerable to a longer-term interruption. If a settlement
is not in sight shortly after Labor Day, the employment out
look will deteriorate rapidly.
Despite disturbances in the money market accompanying the
latest upsurge in short-term money rates over the past two
weeks, banks in the Seventh District still
show little
evidence
of increased pressure. Loan volume of our weekly reporting
banks has continued to rise, with most of the growth in busi
ness loans.
These banks have reported some deposit gains
recently but most of their loan funds were acquired through
continued net sales of Governments and other securities.
Business loans at our large banks were up $38 million in
the two weeks ended August 19 and, in addition, loans to sales
finance companies increased by $22 million. National figures
for the two August weeks also show substantial growth in
lending to business and to finance companies ($280 million).
A mid-August bulge in business loans, in part reflecting
seasonal credit needs by dealers and processors of farm
commodities, has been apparent in reporting bank data in
every year since 1954, but this year it follows a six-week
period of almost steady expansion. Use of bank credit by
manufacturers of metals and metal products has not receded
from pre-steel strike levels. Reports from our large banks
indicate that although repayments of inventory loans by
metals producers are high, outstandings have been maintained
because of a continued high volume of new loans to the metals
industries.
Except for the temporary effects of purchases of the ad
ditional issue of March tax bills, investments of our weekly
reporting banks have moved sharply downward throughout this
month so that total credit outstanding at these banks is down
While total loans rose by roughly $100 million from
somewhat.
August 5 to 19, securities were off about $130 million.
Reserve positions of Seventh District city banks have
eased somewhat in the past two weeks. Central reserve city
banks reduced borrowings and showed net sales of Federal Funds
9/1/59
-27
last week, and their basic net deficit averaged about
$25 million, compared with $50 million two weeks ago.
The net position of reserve city banks has also improved
markedly in recent weeks. Reduction in borrowing has
been accompanied by substantial net sales of funds--a
large portion of which has gone to New York in response
to heavy demands there.
In the week just ended, net
sales of Federal Funds by two Detroit banks averaged
$80 million per day. These banks have enjoyed strong
deposit inflows; extensive use of this money in the
Federal Funds market indicates that its effect is
expected to be quite temporary.
Pressures on country banks, on the other hand, con
tinued to intensify. The number of country banks borrow
ing at the discount window reached a new high of 72 in
the first half of August and the volume of borrowing
continues to creep upward.
With respect to policy, Mr. Allen said he was inclined to agree
with Mr.
Shepardson, for he was pessimistic as to what might occur
when the steel strike was settled and therefore did not see much
point in waiting for the settlement.
Accordingly, he felt that
action should be taken on the discount rate, and very soon.
The
increase in the prime rate was an additional factor that must
be taken into consideration.
While the Seventh District was an
important steel area, the Chicago Bank would not be embarrassed if
a Reserve Bank in some district where steel was not so important a
factor wanted to take action on the discount rate.
however,
As things stood,
the Chicago directors might prefer not to be the first
raise the rate.
to
Directors' meetings were scheduled for September 3
and September 17, and he felt that September 17 might be the very
latest that action should be taken unless developments in the interim
produced a noticeable change.
He would favor continuing the existing
9/1/59
-28-
degree of restraint in
open market operations.
This degree of restraint
had helped to produce an atmosphere in which, in his opinion, the discount
rate should be raised, and raised soon.
Mr. Deming presented the following comments:
The economic situation in the Ninth District is not
significantly different today from what it was two weeks ago.
The effects of the steel strike are still
largely localized
along the iron ranges and to a degree are masked by an
excellent tourist season. We are informed, however, that
unless iron mining is resumed by mid-September the iron
country will be in great difficulty for the remainder of the
year and into 1960. An informed source tells
me that under
the most favorable weather conditions lake shipping cannot
run beyond December 15, and the long-range weather forecast
indicates that it may well close up before then. Some rail
shipments may be made but not much ore will be moved by rail,
partly because it cannot be mined and processed in cold winter
weather, partly because rail facilities are inadequate to move
movement is quite expensive.
much ore, and partly because rail
The agricultural picture continues to worsen. Crop esti
mates as of August 10 were lower than earlier estimates.
Drought conditions prevail over much of the Dakotas and into
Ranges and pastures are very dry, with some
eastern Montana.
Small grain pro
livestock liquidation beginning to appear.
duction in the Dakotas is expected to be only half that of
1958. It is true that 1958 was a record year, and that
District output of grains in 1959 will be close to the 10-year
average, but this is not much comfort to the farmer who has
lost his crop nor to the bank that financed him.
As a matter of fact, the farm picture had apparently
brought about some tapering off of the economic upswing in
the District before the steel strike began, and we anticipate
more slowing down in the rate of gain as the year advances.
On the national scene two factors aside from the steel
strike influence our thinking--continued high unemployment
and relative price stability so far. As we see it from
such study as we have given employment-unemployment data,
unemployment today is widely distributed both industrially
In July, 46 of 149 major labor areas
and geographically.
-29
9/1/59
had unemployment rates of 6 per cent or more. For
comparison, in the 1954 recession there were but 53
major surplus labor areas and in 1956-57 only about 20.
No doubt some, perhaps a substantial part, of the un
employment is structural, but the dispersion would seem
to argue that a substantial part would be susceptible
to increasing aggregate demand and thus that it can
serve as a strong base for further growth in the economy
without pressing severely on the labor supply.
These conditions in the District and the nation
cause me to believe that credit policy should not aim at
additional restriction at present.
I would not like to
see relaxation of pressure, but neither would I favor
any increase in pressure. I believe that it would be a
mistake to change the discount rate now, even though
there seems to be some market expectation that a change
is imminent.
An overt act at this time would be hard
to explain economically as well as politically and
probably would compound the Treasury's difficulties.
I
see no need to change the directive.
Mr. Mangels said that there were over 80,000 workers in the
Twelfth District idle on account of strikes, the highest figures since
1954.
While the effects so far had been slight, one could foresee
that in the relatively near future the effects of these strikes would
be more detrimental.
stantially in
Although total retail sales increased sub
the first
three weeks of August, stocks were becoming
depleted rather rapidly due to the teamsters'
strike.
The merchants
had stocks in warehouses but no means of getting them to the retail
stores.
Auto sales in
per cent higher than in
than June.
the first
ten days of August were at a rate 5
July, which in turn was ten per cent higher
In the two weeks ended August 19, bank loans increased
$136 million, somewhat less than in
previous periods.
reportedly were declining to make new loans and in
Bankers
some cases were
9/1/59
-30
beginning to call some outstanding loans.
While they talked a great
deal about the tightness of money, perhaps the reason for restraint
was more a concern about loan-to-deposit ratios and the desire to get
into a more satisfactory position.
Borrowings at the Reserve Bank
had been quite nominal, totalling only $12 million last Thursday.
District reporting banks were rather large net sellers of Federal funds
last week and it
was expected that they would continue to be net
sellers this week.
Turning to policy, Mr.
Mangels said he recognized that there
was a heavy demand for credit and that the period of seasonal increase
was ahead.
With the settlement of the steel strike, there would
probably be a further increase in the demand for credit to take care
of the resumption of business and expansion of operations.
However,
his thinking was along the lines of that expressed by Mr. Deming.
this point the System should not ease in
cautious about any increase in
At
any way, but it should be
restraint.
A period was being entered
when the Desk should have considerable latitude for the exercise of
discretion, based somewhat on the feel of the market, particularly
with the Government securities market in its
directive seemed satisfactory.
present condition.
With regard to the discount rate, his
thinking before the announcement of the change in
the prime rate was
that the System could afford to wait until October,
of that opinion.
The
and he was still
9/1/59
-31
Mr.
Irons said that his appraisal of the national situation
was quite similar to that expressed by Mr.
Young and others.
Despite
the steel strike and other uncertainties, the situation appeared to
be one of unusual strength.
In the Eleventh District, activity was
continuing at a high level, although with some tendency toward
leveling off.
This tendency, apparent in
three or four sectors of
the economy of the district, might be a purely seasonal thing.
It
may be of significance that industries such as petroleum and aircraft,
which are important to the district, are operating below year-ago
figures on a national basis.
In the petroleum industry, for example,
allowables had been set at nine days for September and probably would
be set at nine or ten days in
sales in
October.
Also, while department store
July and August were well ahead of a year ago, July was at
just about the same level as June.
Unemployment,
as a percentage of
the labor force, was running lower than the national average.
In
agriculture the outlook was very promising, and 1959 should be an
excellent year.
Around mid-August,
showed an upward tendency,
some of the statistics again
particularly department store sales,
refining, and possibly employment.
On the financial side, Mr.
Irons said there appeared to have
been some tempering of the demand for loans,
having been slower than in
ratios were still
the loan growth recently
recent previous periods.
very high.
Loan-to-deposit
Borrowing at the Reserve Bank ran some
what lower during the last two or three weeks than during the
9/1/59
-32
preceding six-week period.
pressure, it
While bank reserves were still under
did not appear that the pressures had been intensified.
Demand deposits were up in August, reflecting a substantial increase
in
Government deposits and some increase in
partnerships,
and corporations.
being selective in
deposits of individuals,
Bankers indicated that they were
the granting of credit.
Mr. Irons commented that his thinking with regard to policy
was marked by uncertainty.
He felt that the performance of the
Account Management had been excellent, was in
agreement with the
degree of restraint maintained during the past two-week period, and
believed that the same degree of restraint should be continued.
To
the extent that deviations might be necessary, he would be inclined
to prefer that they be on the side of restraint rather than ease,
always keeping in mind that the Management of the Account must have
freedom to respond to the feel of the market.
be difficult with the market in its
That might prove to
present stage of weakness.
Almost anything might happen and the Account Management must be alert
to the situation as it
developed.
The reserves needed for seasonal
requirements must be provided, but perhaps with reluctance.
Turning to the discount rate, Mr.
preferred to be in
left
at its
Irons said he would have
the position of recommending that the rate be
present level for a few weeks.
that the market would permit this.
However,
In other words,
he was not sure
he could not say
today that he would favor leaving the discount rate alone until
9/1/59
-33
September 22, the date of the next meeting of the Committee.
The
bill rate was close to 4 per cent, the prime rate had been raised
to 5 per cent, and other rates in the market seemed likely to adjust
accordingly, with the result that there would almost be no alternative
to a discount rate change.
Accordingly, while he would not today recom
mend a change in the rate, he could hardly say that he would not favor
raising the rate at any time during the next three-week period, for
he did not know how much longer this action could be deferred if
System wanted to be realistic about the situation.
the
The System might
find itself with a rate thoroughly out of realistic alignment with
other market rates.
In view of recent market developments, he would
not look upon a change in the discount rate as an overt act on the
part of the System.
He was not impressed by the thought that the
steel strike should be regarded as an important reason for deferring
rate action.
On whatever terms settlement might be made, the ending
of the strike would be stimulative to economic activity and the
question was really one of degree.
Mr. Irons expressed concern about the Government securities
market, for he doubted whether the present situation could be regarded
as a temporary one.
worse.
He only hoped that conditions would not grow
The situation in
the Government securities market was to him
quite an important factor when thinking in
terms of the discount rate.
While he had no implusive urge to rush out and change the discount
rate, the facts of life
and the state of affairs in the market might
9/1/59
-34
lead to a situation that would require doing something before
September 22.
Therefore, his position was almost one of watching
on a day-by-day basis.
It
might be that developments in the market
a week from now would point to a rate increase, and under such
circumstances an increase in
stitute an overt action.
the discount rate would hardly con
Under such conditions,
could not be criticized on the grounds that it
the System certainly
had led the way.
Mr.
Irons saw no impelling reason for changing the directive at this time.
While he might not object to a change,
he felt that the present
directive would serve appropriately for the forthcoming period.
Mr. Erickson reported some easing in
expansion in
the pace of over-all
the First District but no pronounced weakness.
The
slowing down might be due to a number of things, including seasonal
factors, the weather, cumulative effects of the steel strike, and
possibly a natural letdown from the earlier pace.
were still
Credit demands
very strong.
Looking at monetary policy for the next three weeks,
Mr.
Erickson felt
on balance that a question of timing was involved.
He thought it
proper to wait a little
rate and on a change in
the directive,
while longer on the discount
and he would maintain the
same degree of restraint as had prevailed during the past two weeks.
He would supply reserves reluctantly.
in
The announcement of the change
the prime rate, which he had not thought would come so soon,
tended to change the picture somewhat and might force action on the
9/1/59
-35
discount rate at an earlier date than he had had in mind.
It
tended
to remove the quality of overtness from anything that the System
might want to do.
Mr.
Szymczak recalled that two weeks ago he thought the
international situation, the status of pending legislation on interest
rate ceilings, and the uncertainties in
the Government securities
market, together with certain other factors in the economy including
the steel strike, suggested that it
might be better to wait than to
do anything on the discount rate or through open market operations.
At this point, however, he doubted whether any legislation on
interest rate ceilings would be obtained at this session of Congress.
The best to be looked for apparently was legislation authorizing the
President to increase the rates on savings bonds.
If the steel
strike should end, inventories would have to be built up quickly.
With the strength evident in
the economy,
Mr.
Szymczak felt
that the most that could be done toward helping the Government securi
ties market might be to take slightly more restrictive action through
open market operations,
thus tending to produce net borrowed reserves
of $550 million or even a little
higher.
rate to 4 per cent as soon as possible.
already discounted a change in
the rate.
might help the most by doing whatever it
He would change the discount
The market, he felt,
In substance,
had
the System
was going to do as quickly
as possible and then getting out of the picture.
9/1/59
-36
Mr. Balderston said that his views were similar to those
expressed by Messrs. Treiber, Allen, Irons, Erickson, and Szymczak.
However, he would be inclined to change the directive at this time.
He was unhappy about the continuance of a directive that had been in
force for a long time when, in his view, the situation called for
increased restraint.
Mr. Balderston then suggested that clause (b) of the directive
might be changed to read somewhat along these lines: "to restraining
actively such speculation and price advances as are inimical to sustain
able growth and expanding employment opportunities."
which would contrast with that used in
a little
time of recession, would exhibit
more vigor and realistic concern about the speculation evident
in certain areas of the economy,
market.
Such wording,
such as real estate and the stock
As to open market policy, Mr.
Balderston indicated that he
would favor more restraint rather than less.
Mr. Balderston said that he would favor increasing the discount
rate to 4 per cent before the next meeting of the Open Market Committee,
but after Congress had had an opportunity to aid the Treasury by the
passage of legislation relative to interest rate ceilings.
some chance,
There was
he believed, that Congressional leaders might not prefer to
go home and leave the Treasury in
its
present plight, with no alterna
tive except to increase further the liquidity of the economy.
As long
as there was even a small chance of getting legislation, he would not
want to see it diminished by System action during the next few days.
-37
9/1/59
However, he would prefer to see such action as the System might decide
upon taken before the adjournment of Congress, for that seemed to him
the courageous and forthright thing to do.
per cent and the bill
left in
With the prime rate at 5
rate approximating 4 per cent, the System was
an almost inexplicable technical position.
If
there was continued reliance on the discount window,
reluctant borrowers might become less reluctant as time went on, thus
making the administrative problem increasingly more difficult for the
discount officers.
Also, he noted, System Account portfolio holdings
were now at an all-time high of $26.5 billion.
had happened since April 1958, it
Taking a look at what
could be seen that the Open Market
Account portfolio increased $2.5 billion, member bank discounts and
advances increased $1 billion, and excess reserves had gone down $.3
billion.
On the other side of the picture,
by $2 billion, currency in
circulation increased by $1.5 billion, with
some evidence of tax avoidance in
increased by $.3 billion.
gold holdings decreased
that increase,
and required reserves
On top of this basic problem was the "near
money" situation to which he had referred at previous Committee meet
ings.
Since April 1958 the increase in bills held outside of financial
institutions was in
billion was in
considered in
the order of $13 billion, of which about $6.2
the hands of corporations.
That $6.2 billion should be
the light of the tax obligations of such corporations.
Their tax liabilities may have gone up from perhaps $18 billion to
$23 billion, which might explain most but not all of the bill
by corporations.
holdings
9/1/59
-38
In the light of the fiscal policy that the Treasury seemed
forced to follow at the moment and in
pressures in the economy, it
the light of the speculative
was Mr. Balderston's conclusion that
more restraint rather than less was indicated, especially if
technical
considerations required a change in the discount rate very soon.
summary,
his conclusions were quite close to those of Mr.
In
Treiber.
Chairman Martin commented that he had come into this meeting
less clear in
his own mind as to exactly what ought to be done than
at any other recent meeting of the Committee.
he found it
This was partly because
difficult to separate the monetary politics from the
economics of the situation.
currents were,
It was hard to know exactly what the cross
and he was no better informed than the other members of
the Committee concerning what might happen with respect to the interest
rate ceiling legislation.
However, one aspect of the present situation
was clarified somewhat by the action of the First National City Bank
on the prime rate this morning.
had hoped it would not.
He had no idea this was coming, and
He now questioned whether the System could
be in the position of ignoring the market and continuing to sit on
the sidelines, as it had been doing for some time.
question whether the current trend in
it
While there was a
interest rates would continue,
was also questionable whether the System could continue in a strong
position if it waited until after the next Committee meeting to act,
assuming that it
was going to act.
The Treasury would begin its
meetings with the banking and investment advisory committees at the
9/1/59
-39
end of September.
other factors in
With the steel strike, political implications, and
the picture, it
have a waiting period.
However,
would perhaps have been desirable to
assuming that the present range of
bill rates was going to continue and that other banks would follow
First National City in raising the prime rate, there would be a real
administrative problem for the System with member bank borrowings in
the neighborhood of $1 billion.
It
would be possible,
move in the opposite direction, as Mr. Mills suggested.
of course, to
This would
involve deciding that the degree of tightness of System policy had not
been warranted and moving aggressively toward ease to validate a lower
level of interest rates.
Assuming, however,
that the majority did not
want to move toward validating a lower level of rates and was not
dissatisfied with current policy, the question that concerned him was
whether the Federal Reserve should lead or follow or do neither--just
rock along.
The question, the Chairman repeated, was whether the System
could disregard the state and trend of the market, including the
prospect that the bill
rate might go to 4.25 per cent, and say that
because of the steel strike and other factors it
maintain a discount rate of 3-1/2 per cent.
practicable or desirable.
Also, it
those conditions,a change in
would be content to
To him this did not seem
seemed questionable whether, under
the discount rate could be regarded as an
overt act on the part of the System.
9/1/59
-40
Chairman Martin said he was not certain whether he could go
along in
the thought that additional pressure should be put on the
market.
There was some question in his mind as to what would be
achieved other than to complicate and further upset a market that
was likely to have a good many cross currents without such action.
He did not think that the market was disorderly or on the verge of
being disorderly at this time.
The market, however, had a good idea
as to the likely trend of interest rates based on trends in
economy that it
saw developing.
the
Under such conditions, he had some
question about putting additional pressure on the market.
Instead,
he would prefer to see about the present degree of pressure continued,
with no overt action as to the level of reserves.
that the current bill
phenomenon,
Assuming, however,
rate turned out not to be just a temporary
a question on which more light would be shed by the auction
this Friday, the next ten days or so might produce a situation
change in the discount rate clearly was called for.
where a
Assuming that the
current level of interest rates was maintained, he would be disposed
to favor an increase in the discount rate to 4 per cent some time soon
after Labor Day irrespective of developments with respect to the steel
strike or political implications.
The Chairman said that personally he did not see any reason to
change the directive at this time.
objection to a change,
While he would have no strong
he would hesitate at this juncture, with the
steel strike and other factors in
the picture, to assert definitely
9/1/59
-41
that the System was going to put additional pressure on the market.
This was a matter of judgment and he could only express his own view.
Nevertheless,
the Committee must be alert and alive to what was going
on, unless it
wanted definitely to change its
policy.
Chairman Martin expressed agreement with Governor Balderston's
thought that it
would be desirable to act on the discount rate, if
possible, before the adjournment of Congress rather than to take such
action just after adjournment.
precisely.
However,
such things can not be timed
He had reached the conclusion that it
do what you think is
is
good politics to
right.
The Chairman suggested that the System not retrace its
at this juncture unless it
ing was wrong.
believed that the course it
course
had been follow
Instead, the System should follow the course forward
to a sensible and intelligent conclusion.
Personally, he would not
want to intentisy restraint at this time, but he would recognize the
realities of the present market.
It
was hard for him to see how the
System could justify waiting on the discount rate for three or four
weeks if
the commercial banks were going to 5 per cent on the prime
rate and Treasury bill
rates were in
the area of 4 to
4-1/4 per cent.
To wait too long under such circumstances would make all the System's
points about changes in
the discount rate appear to be Alice in
Wonderland operations and would open the floodgates to contentions
that discount rate policy was not needed,
the discount window.
just administration of
9/1/59
-42
The Chairman then raised the question of resolving the cross
currents at this meeting and said that, if
the Committee so desired,
he would be prepared to take a vote on the question of leaving the
directive in its
present form.
Mr. Robertson commented that it
would make a difference,
in
considering the directive, whether the Committee wished to move toward
more restrictiveness on reserves.
As he understood the discussion,
the large majority did not favor moving in that direction.
The
directive should not be changed to indicate overt action if
such
action was not going to be taken.
Mr.
Balderston said that he thought Mr. Robertson was correct.
That was why, at the outset of his remarks,
he (Mr.
Balderston) indi
cated that he thought he was out of step with the majority of the
Committee in his feeling on this point.
He felt definitely that the
majority did not want to change the directive or to increase the
degree of restraint.
Mr. Szymczak said that he would favor increasing the pressure
on reserves somewhat,
but not much.
He would like to see net borrowed
reserves rise to perhaps $550 million but not much more than that.
He would not change the directive, which he thought was satisfactory.
Mr. Shepardson said that he liked the phraseology Mr.
Balderston had suggested for the directive.
such a change probably would be more in
than this one.
However,
he felt that
order at the next meeting
-43
Chairman Martin commented that he thought this statement was
quite correct.
He said that in
endeavoring to summarize the meeting
he had tried to recognize monetary politics, economics,
statements around the table.
and various
In doing so, it struck him that it
would not be well to change the directive at this point.
If this
meeting were one that was reported to the public, he did not think
that justification could be shown for a change.
The Chairman then stated that, if
dissents,
there were no serious
the present wording of the directive would be retained.
No comments were heard in response to this statement.
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:
(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
restraining inflationary credit expansion in order to
foster sustainable economic growth and expanding
employment opportunities, 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
9/1/59
-44
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; pro
vided 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.
Turning to the level of reserves,
it
Chairman Martin stated that
appeared the Manager of the Account would have to use his own
judgment.
Mr.
Szymczak apparently was the only member of the Committee
who would like to see net borrowed reserves go up to $550 million.
With regard to the discount rate, the Chairman noted that
agreement on the rate is
Open Market Committee.
not a subject for action at meetings of the
It
could only be said that a majority of the
members of the Board of Governors evidently would be disposed to look
with favor on an increase in
the discount rate some time after Labor
Day.
Mr. Robertson added the comment "soon after Labor Day and
before Congress adjourns."
At the instance of Mr.
to the dates when directors'
Treiber, there followed comments as
meetings were scheduled at the respective
Reserve Banks.
Chairman Martin noted that the discussion at this meeting had
included references to future actions that might or might not be taken.
9/1/59
-45
For this reason particularly, he urged caution on the part of those
in
attendance with respect to discussing the meeting with other
parties.
It was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday, September 22, 1959, at
10:00 a.m.
Chairman Martin then referred to the discussion at the Com
mittee meeting on August 18,
1959, regarding the appropriate degree
of accessibility to the discount window for member banks acting as
"underwriters" in
connection with Treasury financings and inquired
whether anyone had additional points that he would like to make at
this time.
There being no comments in
response to this invitation,
the Chairman indicated that he thought the matter could be left as
it stood.
At the Chairman's request, Mr. Leach commented,
information of those present,
for the
concerning a visit paid to the Federal
Reserve Bank of Richmond on Friday, August 21, by Congressman Patman
and several of his colleagues from the House of Representatives.
Mr.
Leach also referred to a letter received subsequently from
Congressman Oliver of Maine,
a member of the group, in which Mr.
Oliver raised a number of questions with respect to the status and
operations of the Richmond Bank.
Mr. Leach said it
was the intention
of the Bank to answer those questions to the best of its ability on
an independent basis but that copies of the Bank's reply would be
sent to the Board and to the other Reserve Banks.
-46
9/1/59
Chairman Martin also referred to letters sent recently by
the Under Secretary of the Treasury to the Board and the Reserve
Bank Presidents requesting comments regarding suggestions of
Senator Javits of New York relating to a "peace bond" campaign
as part of the savings bond program.
The Chairman said that it
might be well for the Presidents to send copies of their replies
to the Under Secretary to the Board for its information.
At least one of the Presidents indicated that he was con
sidering taking advantage of language in
the Under Secretary's letter
which suggested that a reply was optional.
the Chairman whether he had in
Question was raised with
mind that the Open Market Committee
should respond, and Chairman Martin replied that he did not envisage
such a response unless the Committee was disposed to make one or
unless Senator Javits should pursue the matter.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1959, August 31). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19590901
@misc{wtfs_fomc_minutes_19590901,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1959},
month = {Aug},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19590901},
note = {Retrieved via When the Fed Speaks corpus}
}