FOMC Minutes
A meeting of the Federal Open Market Committee was held
in the offices of the Board of Governors of the Federal Reserve
System in Washington on Tuesday, January 12,
PRESENT:
Mr.
Mr.
Mr.
Mr,
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
1960, at 10:00 a.m.
Martin, Chairman
Hayes, Vice Chairman
Allen
Balderston
Deming
Erickson
Johns
King
Mills
Robertson
Shepardson
Szymczak
Messrs. Bopp, Bryan, Fulton, and Leedy, Alternate
Members of the Federal Open Market Committee
Messrs. Irons and Mangels, Presidents of the
Federal Reserve Banks of Dallas and San
Francisco, respectively
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Jones, Marget, Noyes, Parsons, Roosa,
and Willis, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Molony, Assistant to the
Board of Governors
Mr. Koch, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Keir, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Knipe, Consultant to the Chairman, Board
of Governors
Messrs. Hostetler, Daane, Baughman, Tow, and
Einzig, Vice Presidents of the Federal
Reserve Banks of Cleveland, Richmond,
Chicago, Kansas City, and San Francisco,
respectively
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Mr. Anderson, Economic Adviser, Federal
Reserve Bank of Philadelphia
Mr. ColdweIl, Director of Research, Federal
Reserve Bank of Dallas
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Brandt, Economist, Federal Reserve Bank
of Atlanta
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on December 15, 1959, were
approved.
Upon motion duly made and seconded,
and by unanimous vote, the action of the
members of the Federal Open Market Com
mittee, taken pursuant to a wire from the
Secretary dated December 21, 1959, in
authorizing that sample sets of the minutes
of the Committee be made available to
representatives of the Subcommittee on
Foreign Operations and Monetary Affairs of
the House Government Operations Committee,
was ratified.
Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering the period
December 15, 1959, through January 6, 1960, and a supplementary report
covering the period January 7 through January
11, 1960.
Copies of
both reports have been placed in the files of the Committee.
In commenting on developments since the preceding meeting, Mr.
Rouse made the following statement:
During the past four weeks, the Desk has been faced
not only with the customary seasonal pressures that emerge
at the year-end but also with several special occurrences
that demanded our close attention. All of these factors
taken together resulted in a substantial rise in market
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rates of interest. Among the more significant of these
special occurrences was the attitude of the New York banks
toward the extension of credit to dealers over the year-end.
The details as to the reason for the banks' attitude have
already been covered in the written reports and need not be
repeated now. Suffice it to say that we regarded this
attitude as decidedly harmful to the market at a crucial
period. We therefore talked with several banks, and perhaps
partly as a result of these conversations their attitude
apparently softened somewhat.
Nevertheless, dealers reduced
inventories to abnormally low levels for this time of year,
partly out of apprehension over the availability of credit
at year-end. I should also mention in connection with the
banks' attitude that some progress may have been made toward
breaking down the tradition of window dressing, for two major
banks showed substantial borrowings from the New York Reserve
Bank on December 31, while another was a net borrower in the
Federal funds market.
I question, however, whether we should
take credit for this since it was policy in one case and real
need in the other two cases.
In addition to the threatened scarcity of credit at the
year-end, additional pressure was put on interest rates by
the approaching Treasury financing. Also, expectations of a
developing boom in 1960 were further strengthened by the
settlement of the steel strike which, in the eyes of many
observers, carried inflationary overtones.
As a result of
these factors, coupled with the increasing demands for credit,
and the resulting expectations of higher interest rates ahead,
the Government securities market had a generally heavy tone
over the period. Prices of some long-term bonds declined
nearly four points while most Treasury bill issues traded at
new high levels.
As is usual toward the end of each year, open market
operations for bankers' acceptances were stepped up to meet
seasonal pressures in that market. These pressures, however,
were more severe than usual in 1959. The supply of new
acceptances increased seasonally but foreign accounts stopped
buying acceptances and, in many cases, sold on balance,
The accepting banks,
apparently for window dressing purposes.
faced with a large addition of dollar exchange bills early in
January, pressed relatively large blocks of acceptances onto
a dealer market which was unable to move them in size, with
the result that dealer portfolios were built up to a new peak
of $80 million. Dealers were reluctant to raise rates further
because they could not see that a moderately higher rate would
clear the market quickly; because they felt rates were already
high in relation to other borrowing rates; and because they
believed the situation would tend to correct itself early in
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the new year. As a result, the dealers finally curtailed
their purchases of acceptances sharply, leaving a large
overhanging supply in the hands of the accepting banks.
The action by the System both in increasing its out
right holdings of acceptances and making repurchase
agreements against acceptances was designed to meet the
seasonal pressures and to assist in maintaining general
stability in the money and securities markets within the
framework of restrictive open market policy. The extent
of the action was roughly in line with measures taken under
similar but less drastic circumstances prevailing at
previous year-ends, and in accord with the guides to action
arising out of the Committee discussion a little
over a
year ago.
After the year-end, dealers' portfolios were reduced to
around $43 million but because of the large backlog of ac
ceptances still
overhanging the market, dealers have moved
their rates up by 3/8 of 1 per cent to 5 per cent bid far
90 days, and even at the new rate have been buyers on balance,
portfolios aggregating $52.4 million last night. Some of the
backlog has apparently been taken care of at these higher
rates, but it may be some time before the market is cleared
up, particularly if the block of Venezuelan dollar exchange
bills is pressed on the market as appeared likely yesterday
afternoon. Whether borrowers generally will be willing to
pay the resulting acceptance cost of 6-1/2 per cent (5 per
cent, plus 1-1/2 per cent commission) remains to be seen.
It is possible that this cost will increase the pressure on
the prime loan rate. Dealers are attempting to interest
buyers in swaps out of short-term Treasury bills.
I might also mention that the special payment of part
of System surplus to the Treasury, amounting to $266 million
in addition to the regular monthly payment which amounted to
$73 million, was handled with a minimum impact on member
The payment was made on January 4, but the
bank reserves.
reserve impact was neutralized as the Treasury permitted its
balance at the Federal Reserve to run higher than usual until
January 7, when the System ran off $206.2 million Treasury
bills scheduled for maturity on that date.
As far as Treasury financing is concerned, the January
program of a $2 billion issue of June 22 tax anticipation
bills, and the rollover of only $1.5 billion of the $2 billion
special issue maturing January 15 into one-year Treasury bills,
was generally well received by the market, which had been
anticipating new Treasury borrowing of at least $2 billion net.
There was considerable early apprehension about the auction of
the $1-1/2 billion one-year Treasury bills, particularly in
view of the fact that there would be no Tax and Loan Account
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1/12/60
privilege on this issue. Market guesses last week indicated
a range of 5.30 to 5.40 per cent in the auction, but there
was a decided improvement in sentiment towards the close on
Friday.
Over the weekend, an article in the Sunday Times
pointing to these issues as the Treasury's "best bargain"
led to an unexpectedly large public interest in the issue,
reminiscent of the reception accorded the 5 per cent notes
of 1964 last October. This is another example of public
responsiveness to attractive interest rates. A 5.10 per cent
average issuing rate, for example, would mean a net return
to an investor of about 5.47 per cent on an investment yield
basis. Guessing as to the rate in today's auction is now
down to about 5.05 per cent, according to information from
the Desk just a few minutes ago.
The Systen holds $245
million of the maturing January 15 bills. In view of the
reserve projections over the next few weeks, and with the
large public interest in today's auction making its success
very likely, we plan to submit tenders in today's auction
which will run off a portion of these bills on the 15th.
Our tenders for this part of our subscription will be
designed to be only a shade below the stop-out bid. The
Treasury is fortunate in having a rally in its securities
develop just prior to the bidding today. Basically the
rally developed as a reaction to a bearish position on the
part of commercial banks which was considerably overdone,
and the recovery was aided by the budget surplusses pro
jected in the President's State of the Union Message on
The bond rally seemed to lose steam yesterday
Thursday.
afternoon, but the Treasury bill market closed with all
outstanding bills at or below 5 per cent bid. In the
auction yesterday 91-day bills averaged 4.59 per cent and
the 182-day bills 4.99 per cent, compared with 4.60 per
cent and 5.10 per cent a week ago.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period December 15, 1959, through
January 11, 1960, were approved,
ratified, and confirmed.
In supplementation of the staff memorandum distributed under
date of January 8, 1960, Mr. Noyes made the following statement with
respect to economic developments:
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The most noteworthy developments in the period since
the last meeting are the settlement of the steel strike
and the announcement by the President in his State of the
Union Message that he anticipates a small surplus in fiscal
1960, and that in the budget estimates for 1961 receipts
exceed expenses by $4.2 billion.
While we do not yet know all of the details with respect
to the steel settlement, the broad outlines are clear. It
provides for a rate of increase in labor cost that will prob
ably be slightly in excess of the rate of increase in
productivity in the steel industry.
The best guesses seem to
be that for the industry as a whole, employment costs will go
up about 3-1/2 per cent per year over the period of the con
tract. On the basis of recent trends, output per man hour
will probably increase at a little
less than 3 per cent per
annum.
The difference between these two rates is much smaller
than in other postwar settlements, as is evidenced by the
industry's estimate that employment costs have increased 7-1/2
per cent per year on the average since 196.
In the longer run, the limitations on the escalator
clause that are contained in the settlement may be even more
important.
If one grants that technical factors are likely
to carry the consumer price index up a few points in the next
two years, in any case, then the steel workers have everything
to lose and nothing to gain from further inflation and this
fact should be readily apparent to them. From the point of
view of the Federal Reserve, and perhaps the country as a
whole, this is probably the mos significant fact emerging
from the welter of claims and counter claims as to the
inflationary or noninflationary nature of the contract.
The estimate in the President's message, that there will
be a small surplus for fiscal 1960, appears to be well-founded.
Whether the $4.2 billion surplus for 1961 will survive in an
election year is less certain. In any case, the strike
settlement and the State of the Union message, taken together,
have put the stock market into a position in which it hasn't
seemed to know which way to turn, despite the universally
bullish prognostications for economic activity in the year
ahead. Some observers seem to feel that we may have now
reached the long-heralded point where the relative yields
are attracting a substantial flow of new institutional
investment away from equities into fixed income securities.
The customary measures of current activity are almost
and further increases seem as certain for the
up,
all
near-term future as anything can be. On a seasonally
adjusted basis, even construction activity, which has been
The Board's
lagging for several months, was up in December.
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revised index of industrial production, moving at new
and unfamiliar levels, rose from 156 in November to
about 163 or 164 in December, and should easily pass
the pre-strike peak of 166 this month. Gross national
product is estimated to have been $481 billion in the
fourth quarter, and is expected to come close to $500
billion for the current quarter.
The record seasonally
adjusted rate of 151 per cent of the 1947-49 average
which is estimated for department store sales in
December represents an impressive volume of cash and
credit by any standards.
It is almost alarming to
estimate what the expansion in instalment credit in
1959 might have been had it not been for the steel
strike.
The $5-1/2 billion expansion which did take
place was equal to 1955 in dollar volume, although the
percentage increase was, of course, smaller.
These data, portraying as they unquestionably do a
high and growing rate of economic activity, stand in
interesting contrast to wholesale prices and the money
supply, both of which are substantially unchanged from
year-ago levels.
Perhaps this contrast accounts, at least in part,
for the fact that in the forecasts for 1960 one finds
much less assurance of the inevitability of inflation
than in their counterparts of a year ago.
Mr.
Thomas presented the following statement concerning
financial developments
Further increases in interest rates to new high
levels in the past month and severe pressures on
money markets may be attributed basically to the large
volume of credit demands to cover seasonal liquidity
needs, though in part to market expectations as to
Since the termination of
forthcoming developments.
the seasonal pressures, the tone of the market has
changed and interest rates have steadied or declined
somewhat from their highs. Other causes for the
anticipations
varying moods of the market were, first,
financing,
Treasury
forthcoming
of
effect
the
to
as
and then the changes that occurred when the Treasury
announced smaller needs and also when the President
mentioned the possibility of a budgetary surplus.
The shifts in actual credit demands, aside from
psychology and expectations, are shown by the banking
1/12/60
figures of the period.
At banks in leading cities,
business loans, including those to sales finance
companies, increased by over $1.1 billion in the four
weeks from December 2 to December 30--a larger increase
than in the same period of other recent years. Loans
on securities also increased substantially, though not
as much as in some other years. There were further
increases in real estate and other loans and in holdings
of securities other than Governments.
Holdings of
Governments declined further, reflecting redemption of
an outstanding tax bill issue, as well as continued bank
liquidation to obtain funds to meet loan demands. As a
net result total loans and investments, excluding loans
to banks, increased by around $1.2 billion--a substantial
but not unusual expansion for December.
Pressures on the Government securities market resulted
from sales by banks and also from a sharp decline in dealers'
portfolios. A decline in dealers' positions is unusual for
December and it resulted in part from fear of financing
difficulties at the year end. At the same time many other
holders were probably endeavoring to sell securities to
raise needed cash. Treasury bill rates rose to a high
level--well over 5 per cent on an investment yield basis
for many issues. Long-term rates increased sharply and
rose above the highs reached temporarily in September.
Within the past few days these trends have been reversed.
Bill yields have declined somewhat and reception for the
new offerings has been much better than expected. In
fact, public interest evidenced in the new one-year bill
to be auctioned today is exceptional. Less than a week
ago a failure of the offering was viewed as a possibility.
The changed tone of the Government securities market
in the last few days may also reflect the course of bank
week of the month there was an
credit. In the first
exceptionally sharp decline in loans at New York City
banks and also a moderate decrease in investments.
Partial figures for banks in leading cities outside New
York also show marked seasonal declines in loans and
investments, although perhaps not as great as in the
same week of some other recent years.
New capital issues by State and local governments,
which were in moderate volume during November and December,
are scheduled for rather large offerings in January.
Corporate offerings continue moderate.
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Although the number and frequency of Treasury offer
ings in January has kept the market under some pressure,
the amount of cash financing is less than had been
expected.
Since early December the volume of the public
debt outstanding has been in the process of decreasing,
and in the months ahead any new borrowing will be more
than offset by earlier or subsequent retirement of debt.
It is possible that except for a moderate volume of
borrowing in April, no substantial cash borrowing will
be needed until July.
Bank credit expansion in December apparently resulted
in a somewhat greater than seasonal increase in the money
supply during that month. At city banks demand deposits
increased somewhat more than in other recent years, but
there was a larger than usual decline in the first week of
January.
Time deposit growth was only moderate. Figures
are not yet available for country banks, which usually
show very large and often unpredictable changes in Decem
ber. Comparisons with the past, moreover, are somewhat
complicated by the change in definition to exclude Federal
Reserve remittance drafts from deposits. When allowance
is made for changes in the banking structure and in the
definition, demand deposits adjusted at member banks in
the last half of December may have been a little
smaller
than a year ago. Much, or perhaps all, of this decrease
was offset by an increase at nonmember banks. The decline
for member banks was mostly in central reserve city banks;
country member banks showed a moderate increase.
Reserves to meet the large and varying seasonal needs
of banks in recent weeks have been supplied in part by
System purchases of securities, to a small extent through
increased vault cash holdings, and to a considerable degree
by a large, partly seasonal, increase in float. Banks have
kept their borrowings at an average level of between $900
million and $1 billion, with a substantial temporary
increase in the first few days of this year to correct for
year-end deficits. Since some of the available reserves
arose from float and also because of the large seasonal
liquidity needs, excess reserves were permitted to increase
to relatively high levels at times during the period. This
may explain in part why money markets were often tighter
than the level of net borrowed reserves would indicate.
System operations have been absorbing reserves for
Including sales yesterday and the
nearly four weeks.
redemption of maturing bills next Thursday, the total
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reduction effected so far is close to $1 billion. An
additional $400 million reduction will be needed in the
next two weeks to maintain a level of about $500 million
of net borrowed reserves on the basis of usual seasonal
demands.
Further sales or redemptions of as much as
$300 million may be appropriate in late February and in
March.
The major policy question for the immediate future
is how much restriction should be placed on credit growth.
Actually the next two months should be a period of seasonal
credit contraction. Appraisal of the economic outlook
points to the strong likelihood of large and vigorous demands
for credit from various sources, which may diminish the size
of the seasonal decline. It is possible, however, that the
usual seasonal loan liquidation, together with the high
level of interest rates already attained, may result in at
least a temporary relaxation of pressures toward further
increases in rates. The trend in the stock market since
the upward spurt at the turn of the year indicates that
investors may not be so enamored of stocks as they have
been in the past. Savings may move in larger volume into
fixed interest securities and give strength to the bond
market.
It appears evident from December developments that
rising interest rates and limitations on reserve avail
ability will not prevent banks from meeting the essential
They will borrow if
credit needs of their customers.
necessary. Yet restrictive forces will probably be
necessary to induce healthy caution under the circumstances
that are in prospect.
If banks show any tendency to increase borrowings and
expand credit relative to the seasonal pattern, the dis
count rate should be raised. Perhaps it should be raised
A higher
as a precaution against such a development,
discount rate, accompanied by open market operations which
would assure an adequate though limited money supply, should
serve as a desirable deterrent to unsound credit commit
ments without preventing healthy growth. In view of the
current level of market interest rates, there may be a
question as to whether a rate of 4-1/2 per cent would be
high enough.
Mr.
Marget commented as follows with respect to the United States
balance of payments:
The broad picture I have been presenting on
developments with respect to our balance of payments
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has been essentially this: a long, sustained deterioration
from a peak surplus in 1956-57 to a low point which can be
taken as represented by the levels of exports and imports
prevailing from February to May of last year; and then,
beginning with June of last year, evidence of an underlying
improvement which, while it was certainly anything but
spectacular, gave reason to hope that, if the right policies
were followed, we should expect to attain, in time, the
necessary degree of balance in our international accounts.
But I have felt it necessary several times to warn against
the assumption that this adjustment which seems to have
been taking place has been proceeding "so rapidly and
certainly that we no longer have a balance-of-payments
problem, and that we therefore have no need to frame our
policies with reference to what is happening in that area."
The need for this kind of warning is illustrated by
the foreign trade figures that have become available since
the last meeting of this Committee--the trade figures for
November.
The figures are not good. On the import side,
to be sure, the news is not bad: November imports were
at the same average rate that prevailed during the six
months May to October, and customs collections in December
are such as to suggest another month of little
change in
the import level. But the export showing in November was
poor: instead of a continuation of the fairly steady
rise in the rate of exports that we have been witnessing
since last spring, the November export rate dropped sharply
to a level that was not much higher than it was last spring.
It would be quite wrong to conclude from this that the
adjustment which we believed we had been witnessing since
last spring was a snare and a delusion. In the first place,
past experience has shown that no great reliance should be
placed on the trade figures for any single month. Secondly,
there is reason to suspect that steel shortages had
something to do with the poor November export figures.
More than half the drop in exports, for example, was in
automobiles and machinery--sectors, that is, in which
steel shortages last November were hindering output.
Thirdly, our gold and dollar figures for December, while
incomplete, are such as to suggest a
they are still
distinct improvement in our over-all balance of payments
for that month.
The thing to say about the disappointing trade figures
for November, therefore, is not that they mark the beginning
of a reversal of the improvement in our balance of payments
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which began to be evidenced last spring, but that they
emphasize again how far this improvement will have to
go before we can feel comfortable about our position.
The relatively favorable gold and dollar figures for
the fourth quarter of last year, if our guesses are
correct, would suggest, to be sure, an over-all
balance-of-payments deficit at an annual rate con
siderably below the $4.5 billion, and even below the
$4 billion, figures that have been used within recent
months.
But the over-all deficit for 1959 is almost
certain to turn out to be still
about twice as large
as it was in the years before our balance-of-payments
position began to be a matter of national concern.
From that standpoint, the disappointing trade figures
for November had best be taken as a salutary reminder
of how long a road we still have ahead of us in the
field of balance-of-payments adjustment.
Chairman Martin suggested that during the go-around the
Presidents might wish to comment regarding the extent, if any, to
which it
appeared that borrowing at the discount window was being
used to supplement the capital of member banks.
Mr. Hayes then presented the following statement of his views
with respect to the business outlook and credit policy:
Settlement of the steel strike has removed the
uncertainty as to the availability of steel for the
economy, but there remains considerable uncertainty
as to the settlement's over-all inflationary effects,
including not only the future course of steel prices
but also wage and price consequences in other industries,
We cannot overlook the importance of public psychology,
and there is no doubt that the press and other public
comment have interpreted the settlement as inflationary.
On the other hand, we can find encouragement in the
fact that the increase in the average hourly wage cost
will be only about half as large as in the earlier
postwar agreements and will therefore be much closer
to the average annual rise in productivity in the
industry. The staggered effects of the various cost
increases may permit the industry to get through most
of this year without increasing prices, although I am
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inclined to think this may be overoptimistic.
But the
country has been alerted to the issues of wages, prices
and productivity, and it is possible that the settlement
may turn out to be an important first step toward break
ing the spiral of wage increases, even though this aim
has certainly not been fully achieved as yet.
In any case the path is now clear for further business
expansion, sparked by inventory rebuilding. Although the
full year' s rise in inventories may be only moderately above
the $5 billion increase of 1959, a sizable growth of in
ventories early this year will contrast sharply with the
record of virtually steady inventories in the fourth quarter
of 1959. It remains to be seen whether this temporary
influence will be supplemented later by a more lasting surge
of consumer spending and business investment in plant and
equipment.
With considerable slack still
available in the
way of excess plant capacity, it seems doubtful whether
sharp upward revisions in business capital spending will
develop.
To date there are no statistical indications of
such a surge. In the consumer area, much may depend on
future developments with respect to consumer credit, which
will bear watching in the coming months, both as to volume
and as to further liberalization of terms.
One moderating influence on aggregate spending will be
the substantial retirement of Federal debt in prospect for
the last four months of this fiscal year and perhaps for the
ensuing fiscal year. All in all, I think it is too early to
guess whether a real boom will develop in the coming months.
Of course we should welcome a moderate rate of further busi
ness expansion in view of the current existence of substantial
unused resources in the economy.
Wholesale prices, including sensitive commodity prices,
continue to show over-all stability, but on the other hand we
can look forward to a less helpful contribution from farm
prices as the year progresses--and consumer prices continue
to inch ahead.
In the credit area, all statistics point to continued
strong loan demand, and bank liquidity is being significantly
reduced. Pressure on the New York banks has been especially
These banks were forced to reduce investments by
severe.
22 per cent between late July and late November in order to
meet a 5 per cent increase in loans while at the same time
experiencing a 6 per cent loss of deposits. Undoubtedly the
severe loss of foreign time deposits was a major factor
making it increasingly difficult for the New York banks to
play their traditional role as leading business lenders,
1/12/60
While loan-deposit ratios have risen throughout the country,
the increase in New York has been much faster than elsewhere
and the ratio now 69 per cent, is far above that of the rest
of the country.
With substantial legitimate business borrow
ing needs in view to support the prospective business
expansion, it seems clear to me that we ought to allow some
moderate growth in the money supply if we wish to avoid the
excessive pressure on interest rates that is likely to result
from exclusive reliance on increased velocity.
Presumably
this should be accomplished through open market operations
designed to reduce slightly the degree of pressure which we
have been maintaining on bank reserves.
The major question facing us at this time is what to do
about the discount rate--or perhaps the question really is
not whether to raise the rate, but when and by how much.
Obviously the spread between the discount rate and market
rates is enough to warrant action if only as an "adjustment"
to the market. We must of course be mindful of prospective
Treasury financing operations, which include today's bidding
on $1.5 billion of one-year bills
as well as the announcement
late in January of the major February refunding program.
A
strict
interpretation of our "even keel" policy might require
us to refrain from a rate change until after the February
refunding is out of the way, when there will be a fairly long
"free" period.
On the other hand, the current range of market
rates is already so high, and a discount rate change is so
widely expected, that it could be argued that a moderate
in the near future would not do any real
discount rate rise
damage from the Treasury's point of view.
Another factor bearing on our timing is the prospect that
the banks' prime rate may well be increased in the very near
future. While some bankers favor going slowly in the matter
of pressing for higher rates, in view of the fact that rates
are already high and profits quite satisfactory, the
probabilities seem to favor early action on the prime rate.
On several recent occasions discount rate moves have followed
shortly after prime rate changes, and I think it would be
unfortunate if this sequence should become traditional.
Generally speaking, I think it would be preferable for the
System to assume the leadership in interest rate changes.
One argument for delay is that we should avoid appearing
to react "automatically" to the steel settlement and thereby
seeming to stamp the settlement as clearly inflationary.
Such an interpretation might have special significance abroad.
Incidentally, rate increases are probably being considered in
the U.K. and other European countries, who may, in fact, be
With international
delaying action until a move is made here.
1/12/60
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funds now flowing more freely in response to comparative
rates than at any time since the twenties, rate changes
here and abroad may now take on an unfortunate "competi
tive" aspect. However, despite our position now as the
leading international money market, I feel that our
decision must be based primarily on domestic grounds.
With regard to amount, I don't believe a change of
more than 1/2 per cent should be considered at this time.
If the move is delayed till
late February, a 1 per cent
increase might then be warranted if market rates continue
to strengthen--but at present it would be too strong a
signal.
Our directors discussed this whole problem at length
last week.
Most of them believe that discount rate action
fairly soon is inevitable--but there was no disposition to
rush matters.
On the other hand there was considerable
reluctance to see the prime rate lead the discount rate
once more in the next advance.
On balance, I think I
would favor a 1/2 per cent increase this week or next week,
accompanied by a slight easing of open market pressure on
bank reserves; but I recognize that valid points may be
adduced in favor of delay and I am eager to hear how the
others around the table feel on this matter.
I believe the directive should be renewed without
change.
Once again, I would like to suggest that serious
consideration be given to the feasibility of stand-by
authority to impose consumer credit control so that we
shall not be caught short if real excesses should develop
in this sector.
Mr. Johns said that the continuing question in administration
of the discount function was whether member banks were using such credit
to supplement their capital and deposit structures.
Some Eighth District
banks, including some of the larger ones, pursued a policy of keeping
fully and even over-loaned and invested.
with Federal funds or otherwise in
resort to the discount window.
As long as they could cover
the market, there was only occasional
When such funds were not obtainable and
the banks were called upon to discharge their indebtedness to lenders,
1/12/60
-16
their only choice was to come to the Reserve Bank.
Early this month,
the St. Louis Bank's discounts reached an all-time high, occasioned
partly because banks had preferred to show no indebtedness in their
end-of-year statements.
In summary, to answer the question whether
funds obtained at the discount window were used to supplement some
member banks'
capital and deposit structures,
his answer would be in
the affirmative--as long as the Reserve Bank let them pursue such a
course, which generally was not very long.
Turning to monetary and credit policy, Mr. Johns said that
the responsibilities of the Federal Reserve seemed to call for per
mitting an increase in restraint in the near future.
This would come
automatically from a business boom unless the System undertook to
accommodate all of the credit demands that the boom would undoubtedly
generate.
Consumer and investment demands appeared likely to press
on capital limitations in many parts of the economic system and
inflationary tendencies were likely to be stronger in the immediate
future than in the immediate past.
Likewise, the balance-of-payments
situation continued to call for restraint.
During the past year the degree of monetary restraint exer
cised had involved keeping bank reserves and the quantity of money
practically constant.
Mr.
permitting bank reserves,
only slightly.
Johns suggested for the near future
credit, and deposits to rise, if
To avoid inflationary developments,
at all,
investments
should be financed out of savings and an increase in the rate of
1/12/60
-17
turnover of demand deposits.
Apparently velocity of money leveled
off in 1959 after midyear, but with the resumption of activity after
the steel strike it
seemed likely that velocity would again increase.
In view of the present strength of credit demands, he wondered whether
the greater danger was not in too little
Mr.
rather than too much restraint.
Johns then referred to the chart introduced by Mr.
Bryan
at the December 15 meeting showing the course of member bank reserves.
He agreed that there was a need for developing a means of giving
instruction to the Desk in quantitative rather than qualitative terms.
The concept of effective reserves seemed to him useful.
However,
whether the Committee wanted to keep the supply of reserves steady,
increase it,
or reduce it,
he would suggest total reserves as the
appropriate objective of monetary policy and that instructions to the
Desk be in
such terms.
This would reduce disproportionate emphasis
on net borrowed reserves and the feel of the market as guides to the
Desk.
Since the boom seemed strong and in a sense revived by
termination of the steel strike, Mr.
Johns felt that it
would be a
mistake to provide a stimulus by an expansion of bank reserves at
this time.
Therefore,
he would suggest that the Desk be instructed
to carry on operations during the period until the next Committee
meting with a view to bringing about roughly a seasonal decline in
total reserves.
He would not change the policy directive.
1/12/60
-18
Mr. Johns then turned to the question of the discount rate
and said he continued to feel that an increase was desirable.
As
Mr. Hayes had said, the questions of timing and amount were difficult.
Hoping that an adjustment of perhaps 1/2 per cent could be made
promptly, he found consolation in the memorandum dated January 11,
1960,
from the Board's Division of Research and Statistics (showing estimated
periods of Treasury financing during 1960) which suggested that the
traditional concept of the even-keel policy might appropriately be
altered this year.
He felt that serious consideration should be
given to a prompt change in the discount rate.
This might involve
action on the part of the St. Louis directors on January
14, effective
perhaps January 18, if the Board of Governors should see fit to go
along with that timing.
In saying this, he was aware that an increase
of 1/2 per cent probably was not enough, unless further action was to
be expected in the not too distant future.
However, he agreed with
Mr. Hayes that an increase of more than 1/2 per cent at this time
might be a stronger signal than the System ought to give, particularly
in view of the relatively short period between the current Treasury
financing and the expected date of announcement of the forthcoming
refunding.
If it were thought prudent to take all discount rate
action at one time, he would be willing to wait for a while and
then consider a full one per cent increase.
Mr. Bryan said that Sixth District conditions did not differ
sufficiently from those for the nation as a whole to warrant detailed
1/12/60
-19
comment.
On use of the discount window, he recalled having reported
at the December 15 meeting that there was disproportionate use of the
window in the Sixth District.
the past, it
While this had happened on occasion in
seemed more persistent now and had been running on for a
number of months.
It
seemed to be occasioned (1) by a slight run-off
of funds from the district, (2)
because loan expansion trends at com
mercial banks had been heavier than elsewhere, and (3) because district
banks,
generally speaking, had not liquidated investments as rapidly
as banks throughout the country as a whole.
He suspected that the
average maturity of portfolios of Sixth District banks was somewhat
longer than at banks of the nation generally.
As to whether banks
were using Federal Reserve credit as a substitute for capital or
depositors' funds, Mr. Bryan felt that the answer was clearly in the
affirmative in a number of cases.
There were banks that had borrowed
heavily and regularly, yet had bills in their portfolios and in some
cases could dispose of investments at little
loss.
After discussion
with the Reserve Bank's executive committee, he was asking for
repayment of the borrowings of those banks.
However, there were
other situations where the problem was more difficult.
These situa
tions related to banks with a run-off of deposits that were totally
illiquid in their investment accounts and were having a hard time
making adjustments in their loan accounts.
concerned was required to reduce its
In two cases, if
the bank
borrowings by selling investments,
1/12/60
-20
there would be a substantial diminution of capital because the loss
would be so great.
With borrowings at the Atlanta Bank running 15
per cent of total member bank borrowings throughout the System, the
discount window was proving difficult to administer.
Mr. Bryan said that he would like to see an increase in the
discount rate rather promptly and that he would be willing to ask
the Atlanta directors to lead off such a move.
As on two or three
other occasions in the past several years, he was even toying with
the idea of progressive discount rates to bring some recalcitrant
borrowers under restraint.
With reference to the steel settlement, Mr. Bryan commented
that there was a temptation to debate the question whether it
was
inflationary on the basis of the degree to which the terms of the
settlement were allied to the increase of productivity.
In his
judgment, any wage policy which transferred the entire benefits of
increased productivity to the employees was inflationary, at least
in the longer run.
Mr.
Bryan said that he would like to pursue the matter of
giving the Desk instructions in quantitative terms at some later
time, but he would not do so today.
Mr.
Bopp said that 224 member banks borrowed from the
Philadelphia Reserve Bank in 1959, more than in any year since the
early 1930s.
However, daily average borrowing of $42 million was
about the same as in
1955 and considerably less than averages of
1/12/60
-21
$68 million in 1956 and $66 million in 1957.
The Philadelphia Bank,
which in various years was in a position such as reported by Mr.
Bryan, had recently been fortunate not to be in such a position,
Borrowings were running about 5 per cent of the System total.
There
were a few problem banks, and on these the Reserve Bank had been
working with some insistence.
A few other banks had been borrowing
for longer periods than usual, but for understandable reasons.
For
example, in Lancaster County there was a recurring problem related
to tobacco and feeder cattle.
In another case a bank had held for
many years a substantial account that recently was withdrawn; it
would not appear that a bank should necessarily be prepared for such
a contingency.
Two banks perhaps had been using the discount window
in lieu of additional capital, and if one took into account borrow
ings from the Reserve Bank plus Federal funds transactions,
banks would have to be placed in this category.
Bank was working with those member banks,
However,
additional
the Reserve
and as a whole borrowing
seemed moderate relative to 1956 and 1957.
Mr.
Bopp said that Third District economic developments were
not such as to affect his recommendations on monetary and credit
policy.
He would favor continuing about the present degree of pressure
on bank reserves.
money supply,
The slow rate of increase in
recent months in the
adjusted for velocity, the tight mortgage market,
the
reluctance of banks to see their loan-to-deposit ratios go much
higher,
and the presistence of a relatively high unemployment rate
1/12/60
-22
indicated caution about moving to a significantly more restrictive
policy.
On the other hand, the persistent upward trend in prices,
other than of farm and food products, the absence of evidence that
high interest rates were causing a downward adjustment in plant and
equipment expenditure programs, indications that the bulk of unemploy
ment was frictional and structural, and the prospect that the steel
strike settlement would initiate an upsurge in business activity and
intensify price pressures all suggested that any significant easing
of restraint at this time would be inadvisable.
In weighing these
two sets of factors, Mr. Bopp found no strong evidence that present
policy was either too restrictive or too easy.
At this stage of the
upward phase of the cycle and in view of current optimistic expecta
tions, he believed the risk that any significant easing of credit
might contribute to another upward spiral of prices and the develop
ment of an unsustainable boom was greater than the risk that continua
tion of approximately the current degree of restraint would inhibit a
sustainable rate of growth of the economy.
The System should be alert,
however, to detect emerging evidence that credit was becoming so tight
that it
was retarding a sustainable rate of growth.
All things
considered, he would favor no change in the directive.
Mr. Bopp then commented that the discount rate presented
difficult questions relative to the timing and amount of any increase.
The wide disparity that had prevailed for some time between the
discount rate and short-term market rates indicated either that the
1/12/60
-23
discount rate was too low or that market rates were too high.
He
would not favor supplying funds to bring market rates down close
to the discount rate; instead he would favor moving the discount
rate up to closer alignment with current market rates.
However, on
the timing and the amount of increase that would be appropriate, he
was less certain.
The interval between completion of the current
Treasury financing and expected announcement of the terms of the
February refunding was less than two weeks.
This was hardly enough
time for the market fully to adjust to a rate increase before the
Treasury must consider the terms of the February refunding.
The
longer interval from the latter part of February through most of
March would be distinctly preferable from the standpoint of Treasury
financing.
As to the amount of increase, there was no evidence yet
as to whether settlement of the steel strike would set off a stable,
sustained expansion or a feverish, speculative boom.
An increase
now of at least 1/2 per cent would be warranted to bring the discount
rate into better alignment with market rates; however, an increase of
one per cent, which would be justified if
evidence of a boom should
emerge, would not be appropriate now in the absence of such evidence.
Should a speculative boom emerge, he would like to see a one per cent
increase as a sort of shock treatment to indicate that the Federal
Reserve was determined to use its powers to prevent inflation and
an unsustainable boom.
these possibilities,
Weighing the advantages and disadvantages of
he leaned toward no increase now in order that
1/12/60
-24
the System might be in better position for a one per cent increase
should evidence of a boom appear.
However,
he would not be opposed
to an increase of 1/2 per cent if the Manager of the Open Market
Account thought there was sufficient time for the market to adjust
to the increase before announcement of the terms of the February
refunding.
Mr. Fulton said that Fourth District member banks had been
borrowing considerably less than a proportionate amount of total
member bank borrowings, taking into account the size of the district.
The proportionate size of the district was around 10 per cent of the
total of the System, whereas borrowing had been only two to three
per cent of the System total.
The Reserve Bank had initiated
conversations with some member banks.
There was an inclination, he
felt, to use the discount window, if permitted, in order to augment
capital and to arbitrage the discount rate against rates on Treasury
bills or any short-term securities that would yield more than the
discount rate.
The Reserve Bank is watching that carefully.
Regardless of the size of the member bank concerned, the Reserve
Bank followed the practice of finding out why it
except when the borrowing was very temporary.
was borrowing,
The Reserve Bank
then initiated discussion with the member bank, and it
had been
quite successful in keeping the number of continuous borrowers down.
Turning to Fourth District economic developments, Mr. Fulton
said there was a general feeling of relief that the steel strike had
1/12/60
-25
been settled.
After discussing some of the developments that had
led to the strike settlement,
Mr.
Fulton
commented that the terms
were better than those accepted by the can companies and the
aluminum industry.
They would involve an increase of about 3.5
per cent of total payroll, but if
the terms of the aluminum settlement
had been applied the increase would have amounted to about 4.7 per
cent.
If the Kaiser formula had been applied, the mills, taking
into account the older mills, would have had an increase amounting
to about 5 per cent.
There was no letup in the demand for steel
and inventory building was going on apace.
Present production was
at an annual rate of about 140 million tons, but some industry
spokesmen felt that production for the year would be around 125 to
130 million tons, which would indicate a cutback later when the
pipelines for steel had been filled.
The outlook for profits and
prices depended to a considerable extent on the efficiency of the
employees.
Reports indicated that the mills had good cooperation
during November and December and that some production records were
broken; if
this continued, cost increases to the companies might
not be too great, for production would take up the slack.
However,
other costs entering into the price of steel would tend to reduce
profits.
For example,
one company reported a significant rise in
the cost of gas during the coming year.
Nevertheless, there was
no indication that the mills would cut back on their expansion and
improvement programs.
After commenting on one such anticipated
1/12/60
-26
program,
Mr.Fulton said it was claimed that foreign competition
was still great and that some foreign steel was obtained during
the strike on promise of future orders over a period of time.
At
the same time, it was reported that European users were taking all
of the cold-rolled steel available and it was expected that United
States mills would be able to ship this particular steel product to
Europe in quantity.
Mr. Fulton said the general tenor among businessmen was one
of considerable optimism for the first quarter of 1960.
Unemployment
was going down and employment was increasing, although it was asserted
that overtime would be used as an alternative to hiring additional
employees as long as it
was profitable to follow such a course.
Loan
demand was strong and persistent, and doubt was expressed that the
usual seasonal run-off would prevail.
The pressure for mortgage loans
was great; brokers were trying to obtain expanded lines and promises
of more funds.
Inventories were being financed from internal funds
to the extent possible, but bankers did not expect that those funds
would last too long.
Construction, department store sales, and in
fact the whole gamut of business in the Fourth District was high and
seemingly going higher.
All of this would add to inflationary
pressures.
In Mr. Fulton's opinion, it was appropriate that the discount
rate be raised at this time because of the current relationship between
that rate and short-term market rates.
He felt that such an increase
1/12/60
-27
had been discounted by the market to a substantial degree.
If
action were deferred, that might be a cause of unsettlement in
the market while a rate increase would not appear to be a surprise.
Accordingly, while he would not change the Committee's directive,
he would favor increasing the discount rate by 1/2 per cent now
regardless of the impending Treasury financing, feeling that this
would have a stabilizing rather than a disruptive effect.
He
recommended that the pressure on bank reserves be maintained in
about the same degree as during the past week, with net borrowed
reserves as near the $500 million level as could be reasonably
achieved.
Mr. King recalled that his standard comment at the past
several Committee meetings had been to the effect that System
monetary and credit policy was putting the economy under sub
stantial and desirable pressure.
proper statement.
He felt that this was still a
He did not believe that a constant increase
in restraint should be a major objective of System policy, and
the lack of growth of the money supply seemed clearly indicative
of the fact that System policy over the past year had produced a
substantial amount of restraint on the expansion of bank credit.
Tightness in the money market and restraint on expansion of
credit had reached a point where unsound credit commitments were
not likely to be made; it
screened carefully.
appeared that applications were being
Predictions apparently were unanimous to
1/12/60
-28
the effect that 1960 was likely to be a year of high activity,
and along with this no doubt would come additional inflationary
pressures.
Mr. King said he was not surprised to hear Mr. Bryan's
comments about the extent of member bank borrowing in the Sixth
District.
This seemed a natural consequence of a tight situation
in credit markets generally, and of the South being an area
experiencing more rapid industrial development than the country
as a whole.
Mr.
King agreed with Mr.
Thomas that a 1/2 per cent discount
rate increase at this time was not likely to accomplish great results,
and he would not recommend a change in the Committee directive at
present.
He found himself in agreement with Mr. Bopp's thinking on
both the directive and the discount rate.
Like Mr.
Bopp, he would
prefer to postpone action on the discount rate rather than to make
what amounted to a technical adjustment now and then follow in a
few weeks with another technical adjustment.
As he had commented
before, he believed frequent changes were more disturbing to the
public than one good dose of medicine when it
should be applied.
Accordingly, he would favor postponing discount rate action to
around the first
of March and, if
to move upward by one per cent.
an increase then seemed in
That statement was,
order,
of course,
subject to developments that might take place.
Mr.
Shepardson expressed agreement with Mr. Bryan's comment
regarding the inflationary aspect of recent wage settlements.
The
1/12/60
-29
idea that there was no inflationary effect if labor got no more
than the productivity increase seemed to him definitely a mistaken
concept.
There would be continuing inflationary aspects until such
time as there was a different allocation of the fruits of increased
productivity.
Mr. Shepardson said that the outlook in the country generally
appeared to be one of extreme optimism, one that was likely to be
stimulative of excessive developments.
In many areas, price changes
either were occurring or were on the verge of occurring.
Already
there had been advances in segments of the labor market that were
going to have their effect on prices.
It
seemed that the country
was going to be faced with growing inflationary pressures.
that reason, he considered it
For
highly important that the System stay
ahead of the game and through reasonable restraint try to curb
excessive enthusiasm before it
Mr.
Shepardson felt it
tive action at this time.
got to a point beyond control.
appropriate to consider more restric
From the standpoint of bank reserves,
the
System should try to recover the normal seasonal return flow of the
reserves that were put out during the fall.
What effect that would
have on net borrowed reserves would be determined by the way that
If
the economy reacted.
anticipated,
it
credit demands were not as great as
might result in
borrowed reserves.
If
some lowering of the level of net
the demand pressures were heavier,
mean a higher level of net borrowed reserves.
it
In any event,
might
the
1/12/60
-30
System should try to keep reserves at a level that would maintain
restraint during the next few weeks.
As to the discount rate, Mr.
Shepardson said he would prefer
that the System take the lead rather than follow.
There had been
much talk recently of an increase in the commercial bank prime rate.
There had been situations in the past where it
was desirable not to
take the lead, and to explain later discount rate action as a technical
adjustment.
In the present situation, however, it
appeared to him that
the System rather than making a technical adjustment,
ahead of a change in the prime rate.
increase was, of course,
should be moving
The amount of a discount rate
open to question.
His own inclination would
be to move up by 1/2 per cent, and fairly promptly.
continuing the existing directive; the System was still
He would favor
faced with
the problem of combating inflation and the present directive seemed
appropriate.
Mr. Robertson commented that he agreed with everything Mr.
Shepardson had said.
he considered it
policy.
At this particular stage of the business cycle,
incumbent upon the System to maintain a restrictive
Any easing would inevitably bring about expansion accompanied
by inflation, which would be followed in turn by painful readjustments.
At the same time, he had the feeling that the monetary and credit
policy followed in the recent past was beginning to bite as the
liquidity of the banking system was reduced.
In his view, the Com
mittee's policy was taking a bigger bite at the moment than he had
1/12/60
-31
thought would be likely not too long ago.
It was not taking too
big a bite; he would not advocate any lessening of restrictiveness.
However, it
effective,
appeared that System policy was beginning to be quite
and in this he was rather pleased.
Mr. Robertson said that Mr. Bopp had set forth well the pros
and cons as to the discount rate.
moving up step by step, that is,
He (Mr.
Robertson) leaned toward
1/2 per cent now,
and quickly.
Then,
if the situation called for an additional step later on, he would take
it.
There were times when an increase of one per cent should be the
action of the System, but as he saw it
today an increase of 1/2 per
cent might be the right amount to add now to the psychological
atmosphere in which business was being carried on.
He would not
recommend a change in the directive.
Mr. Mills said that in furtherance of the very thin line of
sentiment expressed in favor of lessening pressure on the reserve
position of member banks, he proposed to enlarge on the statement
that he made at the December 15, 1959, meeting of the Open Market
Committee, after which he would warn against an increase in the dis
count rate at this time.
Mr. Mills then presented the following
statement:
The opening of the year 1960 reveals the national
economy badly overextended creditwise and finds the
System's Open Market Committee faced with the necessity
of conducting a monetary and credit policy that will
prevent tautness in the credit markets from reaching
the breaking point and will allow enough credit
headroom to support stable and sustainable economic
growth. The rationale of such a policy argues that
1/12/60
-32-
deflation is a more imminent danger than inflation, and
that if a severe deflation is to be avoided economic
momentum must be maintained through the invigorating
impulse of a reasonable flow of newly created commercial
bank credit into the economy. The objectives of this
program cannot be reached through a monetary and credit
policy whose primary purpose is to eradicate the assumed
evidences of inflationary pressures through restricting
the availability of commercial bank credit solely within
the narrow limitations of repayments on outstanding
credits and the proceeds of securities sold into the
hands of nonbank investors.
This kind of policy in all
likelihood will induce the very deflation, escape from
which should be sought after.
The rejection of a severely restrictive monetary and
credit policy demands the adoption of a policy of moderate
restraint over the expansion of commercial bank credit that
will allow sufficient leeway for the extension of some
volume of new credits that, in serving constructive economic
purposes, will at the same time foster an appropriate
complementary growth in the money supply. In the process
of conducting this kind of a policy, the backwash of
previous inflationary pressures can be expected to carry
over into the opening months of the year and to give the
illusion of inflationaly dangers that in all probability
will never materialize. Based on this expectation, a
policy of moderate restraint over the expansion of bank
credit is a sufficient safeguard against the possible
occurrence of tangible inflationary dangers, especially
as such a policy is strongly reinforced by the restriction
that is exerted over credit expansion by the heavily
In fact, the loan-to
loaned-up position of the banks.
deposit ratio of the commercial banks may now be
approaching a point that will deter their creation of
essential new credits, even though reserves are made
available to them for that purpose. Under such cir
cumstances, new reserves supplied by Federal Reserve
System policy actions are apt to largely find their way
into commercial bank investment in Treasury bills and
In that
other short-term U. S. Government securities.
event, any consequent softening of short-term interest
rates must not be taken as an indication of a weakening
effect of System monetary and credit policy demanding
remedial attention, but rather as a precautionary measure
taken at the initiative of the banks to partially relieve
the strain to which they are subjected by their heavy
loan and investment positions.
1/12/60
-33
With regard to the discount rate, Mr. Mills said that the
recent increase in the call loan rate in New York City, the dif
ferential between the discount rate and the yield on Treasury bills,
and the increase in rates on commercial paper and bankers' acceptances
all argued technically for an increase in the discount rate.
A case
might be made that such an increase would clear the air and set a
more favorable climate for the Treasury's various financing opera
tions.
On the other hand, although an increase in the discount rate
might produce the impressions mentioned, it was likely that on second
thought the financial community, particularly the commercial banks,
would logically and properly regard an increase as an official
announcement that tighter money could be expected to continue on an
accelerated basis and that it would be incumbent upon the System to
make the increased rate effective through its
open market actions.
The financial community might anticipate that the commercial banking
system would be subjected to the pressure of a high level of negative
free reserves.
Interpretations of that kind would come at a season
when the commercial banks customarily experience a shrinkage in
deposits and contraction in
loans.
In the face of that experience,
of which there was already evidence in
available statistics,
the
banks could properly and reasonably look forward to extreme difficulty
in
fulfilling
their credit obligations to the business community.
The business community and the economy would then be deprived of
sources of credit which must be in reasonable supply.
For these
-31
1/12/60
reasons Mr. Mills believed it
would be a serious error for the
Federal Reserve Banks to increase discount rates at the present
time.
With regard to the discount window, Mr. Mills said that
extreme care should be given not to confuse the purposes for which
borrowings were being sought.
In his guess, there were few instances
where borrowings were undertaken to scalp the differential between
the discount rate and higher yields obtainable on other loans and
investments.
His instinct told him that the greatest cause of the
high level of discounts in evidence at the present time was strain
on the banks, a strain they sought to alleviate by discounting at
the Federal Reserve Banks in order to maintain their normal function
ing.
Mr. Mills said that he wished again to propose the rewording
of the policy directive that he had submitted for consideration at
the two previous Committee meetings.
This would change clause (b)
so as to provide for "fostering sustainable economic growth and
expanding employment opportunities while guarding against inflationary
credit expansion."
Mr. Leedy said a few Tenth District banks had been using the
discount window in
substitution for capital.
One of the principal
offenders was a bank that had traditionally kept fully invested and
loaned up; some of its portfolio was under water, and it
chronic borrower.
was a
Another chronic borrower was a bank that had
1/12/60
-35
experienced rather phenomenal growth.
This bank had from time to
time been increasing its capital account, but the increase was not
keeping pace with loan demands.
A number of banks were borrowing
from the Reserve Bank for various reasons that could not be
generalized,
but not in substitution for their own capital. Some
banks in the cattle areas were unwilling to require liquidation of
cattle loans, and their borrowings remained high and constant.
Some
banks having a high rate of fluctuation in deposits from month to
month or during each month seemed unable to anticipate the extent of
those fluctuations with enough accuracy to avoid borrowing from the
Reserve Bank.
The Reserve Bank analyzed all such cases; where it
appeared that a member bank was not using the facilities of the
discount window as it
should, the Reserve Bank entered into discus
sion with the bank concerned.
Mr. Leedy said that with few exceptions, indicators for the
Tenth District economy were much the same as the national indicators.
He would not favor reducing the degree of pressure that System policy
at this
had been applying on bank reserves, nor would he increase it
time.
It
seemed to him the results that this policy had been
accomplishing were rather salutary.
felt that it
timing.
It
should be changed,
On the discount rate,
Mr. Leedy
but he was not certain as to the
seemed to him that a technical adjustment should be
made due to the levels of short-term market rates, and that increase
should be made as early as possible bearing in mind the Treasury's
financing program.
He did not subscribe to the view that the Reserve
1/12/60
-36
Banks should be thinking of a rate increase in excess of 1/2 per
cent at this time.
Sufficient steam might develop in the economy
later on to require some shock treatment, but as the situation
now existed it seemed to him that that kind of treatment was neither
necessary nor desirable.
If it developed later on that a larger
increase than 1/2 per cent was required, this would indicate that
in the System's judgment the country was on an inflationary spree
and it might have the repercussions that Mr. Hayes had indicated on
rates in other countries.
Mr. Leedy concluded by saying that he
would make no change in the directive at this time.
Mr. Allen presented the following statement with regard to
Seventh District developments:
The steel strike settlement is commonly interpreted
in our area as inflationary, and that attitude, whether
or not justified, has bullish overtones in itself. Our
friends in the steel industry continue to forecast pro
duction in the first half of 1960 at near capacity, or
around 70 million tons, and second half production at
60 million tons, or 130 million tons for the year com
pared with the 1955 record of 117 million tons.
A very large producer of construction and earth
moving equipment expects that its dealers will be "on
allocation" throughout 1960, a prospect based in part
on anticipated strong demand from abroad. Surprisingly
perhaps, producers of farm machinery expect 1960 sales
close to the 1959 figures despite the prospective further
decline in farm income.
Stocks of new automobiles, as stated in the staff
review, were 575,000 at December 31. The industry talks
of a new high for first quarter production of 2,250,000
cars. At the same time they say that they will probably
cut back production if and when inventories reach
1,00,000 cars.
If they hold to that view about cutting
back, and if they produce at the anticipated rate, sales
of cars will have to average 23,400 per selling day in
the first quarter, which would mean an inventory of
-371,000,000 cars on March 31. The daily rate of 16,4 6 3
cars for the last ten-day period in December was re
garded as disappointing; our friends in the industry
felt that the mix of cars in the hands of dealers
warranted a higher sales rate. The middle sales period
in January is regarded as important. If sales move up
to around 20,000 cars per day, the feeling about the
first quarter will be more assured.
Unemployment in Detroit is expected to drop below
100,000 in the first quarter. In March of 1959 it was
200,000, and in March of 1958 it was 250,000.
While complete retail trade estimates for December
are not available, it is certain that the rise in the
total will be dampened by the low automobile sales.
However, Seventh District department store sales were 5
per cent above the previous year, and Sears Roebuck, with
the biggest sales month in its history, was 6 per cent
above the previous December.
We have nothing to add to what the staff review reports
concerning the farm situation except that our people feel
that the prospective decline in hog production, mentioned in
the staff review, could mean hog prices next fall 20 per
cent above the prices of this past fall, which may result
in a smaller decline in net farm income than is generally
forecasted.
The final three weeks of 1959 were marked by strong
demands for bank credit in the Seventh District. Total
loans of our weekly reporting banks rose 5 per cent compared
with an increase of 3 per cent for all reporting banks in
the country. Nevertheless, for Chicago banks the ratio of
loans to deposits on December 30 was about the same as at
the 1957 peak, 58 per cent, and the ratios in Detroit and
Indianapolis were only 50 per cent,
To finance the loan expansion our weekly reporting
banks steadily liquidated Governments in December, and on
January 6 the six largest Chicago banks held only $63 mil
lion of Treasury bills--the smallest volume in two years.
While they doubtless wish to acquire early April maturities
in connection with the April 1 tax date, their current posi
tions make it probable that such acquisitions will come
more slowly and in smaller amounts than in some other years.
With respect to the discount window, Mr. Allen said he did not
feel that there had been any significant abuse in the Seventh District.
While there were problem banks, they were few in number.
During his
1/12/60
-38
tenure as President of the Chicago Bank, he had found that the problem
banks tended to be the same ones.
In 1959, 250 banks borrowed from the
Chicago Bank, slightly less than 1/4 of the member banks.
The volume
of borrowing was higher in amount, but he did not feel that there was
significant abuse of the discount window.
With regard to the discount rate, Mr. Allen said his personal
preference would be to make no change at this time but to be poised to
go from 4 to 5 per cent during the period from February 15 to April 1,
if
developments meantime should make the desirability of an increase
more apparent.
Although the present rate of 4 per cent was out of
line with other rates, an increase to 4-1/2 per cent would not elimi
nate the disparity.
He did not feel that the differential had produced
significant abuse at the discount window, at least in the Seventh
District.
Having stated his personal preference,
Mr. Allen noted that a
majority of those who had spoken thus far appeared to favor a prompt in
crease to 4-1/2 per cent, and he recognized the desirability of System
uniformity.
He was agreeable to recommending a 4-1/2 per cent rate,
and he believed the Chicago directors would go along,
particularly if
other Banks were taking that action at about the same time.
Mr. Allen said he would recommend no change in the policy
directive and he would favor continuing about the current degree of
restraint through open market operations until the next meeting of
the Committee.
In summary of the Ninth District situation at year end, Mr.
Deming said that bank deposits were off one per cent, loans were up
1/12/60
-39
11 per cent, and Government security holdings were down 11 per cent,
The banks were under considerable pressure during the greater part
of the year, particularly the second half.
The summer drought and
the steel strike had caused a loss of $400 million in district
personal income.
Putting it
another way,
the district's
gain in
income in 1959 was about half as large as that recorded for the nation
as a whole.
He foresaw that this spread between district and national
gains might continue for several months in the future.
As for the use of the discount window, Mr. Deming said he agreed
with Mr.
Mills'
analysis.
He felt that there was relatively little
scalping of the discount rate and that borrowing reflected largely the
degree of pressure on the banks.
He agreed with Mr. Allen that the
problem banks of today were mostly the same ones as two years ago,
and probably ten years ago.
member banks, and it
There had been conversations with some
had been necessary to get progressively tougher
with a few of them.
Mr.
Deming said he came out with the feeling that the discount
rate ought to be moved up now by 1/2 per cent.
He concurred in
Mr.
Leedy's view that the System should try to avoid shock treatments if
possible.
An increase in
market, and by people in
the rate at this time was expected by the
general, and that was what he thought ought
to be done rather than to wait and deliberately shock the economy at
a later date.
developments,
At the same time, influenced perhaps by Ninth District
he would dislike to see the Committee go further in
1/12/60
-40
terms of restrictiveness through open market operations.
he would favor easing a little
On balance,
the present level of restrictiveness.
He saw no reason to change the policy directive.
Mr. Mangels said that preliminary information as at the end
of 1959 indicated plusses in practically all categories of West Coast
production, except steel production and nonresidential construction.
For the year through November, awards for residential construction
increased about 24 per cent and the number of dwelling units increased
about 21 per cent, refuting statements that tight money had cut back
residential construction.
December showed increases in practically
all lines of business except construction.
Department store sales
for the Christmas week were 22 per cent above a year ago and for the
year the gain was a little
better than for the nation.
Copper pro
duction resumed during the last week of December but production was
not yet back to normal, pending settlement of some issues in labor
negotiations.
Steel production was about 92 per cent of capacity, with
two large producers in
excess of 100 per cent and Kaiser running at
about 78 per cent due to some technical difficulties.
Employment for
November was at an all-time high despite further cutbacks in aircraft
employment in California and Washington because of cancellation of
military orders for jet aircraft.
During the four weeks ending
December 30, reporting member bank loans increased about $250 million,
with increases in practically all loan categories.
crease,
The largest in
in business loans, was $92 million; of that, the greatest
1/12/60
41
portion of the increase came in the week ending December 16 to make
corporate tax payments.
Demand deposits were up by about the same
amount as loans, while time deposits were up a little
year end, however,
more.
After
California banks had rather substantial withdrawals
from savings and time accounts reflecting shifts to savings and loan
associations that had now gone to a dividend rate of 4-1/2 per cent.
After three large associations announced such an increase some time
ago, others voluntarily or reluctantly followed suit.
It appeared
that savings and loan associations were somewhat overcommitted and
had had to cancel some commitments and increase borrowings at the
Home Loan Bank.
from 5 to 5-1/4
The San Francisco Home Loan Bank increased its rate
per cent on loans up to 2-1/2 years and from 5-1/2
to 5-3/4 per cent on loans in excess of 2-1/2 years.
Banks also lost
deposits when public treasurers and others put money into Treasury
bills.
San Francisco and Los Angeles banks reported that they had
never seen so many individuals buying bills.
The Federal funds market
was reported to be tight; district banks were about even on purchases
and sales but the amounts were nominal in relation to the usual volume.
Borrowings from the Reserve Bank had not increased significantly.
The
Reserve Bank assured San Francisco and Los Angeles member banks that
if the run-off of savings deposits was as extensive as estimated, the
discount window was open.
There were no particular problem banks as
far as the discount window was concerned, although he cited isolated
special instances of borrowings.
1/12/60
-42
Mr.
Mangels reported a general feeling throughout the district
that business would be booming for the next six months,
through the year.
perhaps on
Such exuberance ordinarily would be alarming, but
factors in the picture might have a dampening effect on what normally
would generate inflationary pressures.
For example, there was still
some excess productive capacity and an excess labor supply, and there
was rather general and aggressive competition from abroad.
There were
the indications of a balanced budget, and there also was an increasing
public feeling against any policies, public or private, that would
result in further inflation.
price changes,
Thus, while there would probably be
those changes might be rather moderate.
Mr. Mangels said he would not be inclined toward deliberate
action increasing restraint at this time.
Instead, he would let
natural credit demands for legitimate needs exert a further tightening
effect and perhaps offset part of it.
In the Twelfth District, banks
had been screening applications for credit thoroughly for some time,
and it
appeared that only legitimate applicants were getting credit.
Mr. Mangels felt
quite sure that the San Francisco Bank's
directors would go along with a recommendation for a change in the
discount rate at their meeting tomorrow, but he would be inclined
not to make such a recommendation now.
Action somewhere around
February 15 during an open period in the Treasury financing schedule
would perhaps be appropriate.
Committee directive.
He would not recommend a change in the
1/12/60
-43
Mr. Irons commented that this was a particularly difficult
time to form judgments.
It was true that everything pointed to
expansion, composed perhaps of some substantial inventory build-up,
deferred as a consequence of the steel strike, along with some real
growth and probably some speculation and possibly inflation.
The
situation in the money market seemed to point to a thin and possibly
a weak Government securities market, in which the rate structure had
already moved up substantially.
He did not know whether the present
rate structure was solid or whether it
still
reflected some of the
adjustments and tightness of the year end.
Turning to the Eleventh District, Mr.
Irons said that in the
last month there had been modest strengthening,
level for some period of time.
after a fairly flat
He anticipated further moderate growth
but believed that district activity would move upward at less than the
national average for a time.
The petroleum situation apparently was
not going to be a strong stimulant, defense contracts in the district
were mostly for aircraft, which had been cut back, and agricultural
prices were declining.
The situation as to member bank borrowing was not much dif
ferent from normal,
Mr, Irons said.
Borrowings were around 5 per
cent of the System total, about the usual percentage.
Four or five
banks would use the discount window continuously under almost any
circumstances if
the Reserve Bank would permit them to do it,
but
he did not feel that the general situation was much different from
what it
had been for several months.
As credit restraint and
1/12/60
-44
reserve pressures increased, some pressure at the discount window
was to be expected.
With respect to policy,
cautious.
Mr.
Irons said he would be a little
He would lean toward open market operations designed to
continue about the degree of restrictiveness that had prevailed.
If
he understood correctly, Mr. Hayes had suggested operations with a
little
deviation on the side of ease, and he (Mr.
Irons) also favored
leaning toward that side, in view of the uncertainties that had been
mentioned.
Not knowing whether the interest rate structure was solid,
and with the Treasury situation and the position of the Government
securities market to consider, he would prefer not to move on the
discount rate at this time even though a case could be made for a
technical adjustment.
There might be an increase in the prime rate,
but he did not feel that the System should necessarily base a decision
on action that might be taken on the prime rate.
To summarize, he
came out in his thinking on the side of maintaining through open
market operations about the present degree of pressure on bank
reserves, but he would not feel too badly if
there was a shade of
easing; he would leave the discount rate at its present level and
see what developments actually took place in the next few weeks, and
he would make no change in the Open Market policy directive.
Mr. Erickson said that recent First District statistics
continued to show progress, but in many classifications not as
strongly as the progress nationally.
During the first week of
1/12/60
-45
December,
district banks were net buyers of Federal funds, but in
the remaining weeks they were net sellers.
For the three weeks
ending January 6, average member bank borrowings were only $16 mil
lion, and last week average borrowings were only $11 million; this
was much lower than usual.
No evidence was seen of any banks scalping
the discount rate, and there were no problem banks.
Three smaller
banks had been borrowing for several reserve computation periods,
this was due to seasonal factors and agricultural obligations.
but
The
loan ratios of Boston banks had been averaging better than 60 per
cent recently.
Mr. Erickson felt that it
would be desirable to continue a
restrictive policy and to raise the discount rate at some time.
How
ever, after analyzing the pros and cons enumerated by Mr. Bopp, on
balance he would prefer to wait on the discount rate until after the
next meeting or the February meeting of the Committee before taking
action.
He would recommend no change in the directive.
Mr.
Erickson added that he was a participant in the morning
telephone calls during the past four weeks and that, in view of the
usual seasonal factors and some new factors which were in the picture,
he felt the Desk had handled the Account most skillfully.
He would
favor continuing the same degree of restraint, leaving latitude to
the Manager of the Account to make judgments based on his feel of the
market.
If
that led to net borrowed reserve levels slightly lower
than recently, this would not bother him.
1/12/60
-16
Mr. Szymczak said that on balance, after having listened
to all of the information presented at this meeting, he felt sure
there should be no change in the policy directive.
However, he
agreed with those who felt that reserve positions should be eased
somewhat,
without any change in basic policy.
As to the discount
rate, he noted that the interest rate structure had changed and that
the Treasury was in the market.
All things considered, it
was his
view that the rate situation might be helped by changing the discount
rate as soon as possible by 1/2 per cent.
Mr. Balderston said that he would favor continuing the current
degree of restraint for the reasons Mr.
Bopp had set forth.
Until
policy was modified, he felt that the directive should remain un
changed.
As to the discount rate, he would hold a change in abeyance
until after February 20.
At that time, if
an increase was appropriate,
he would make the increase a full one per cent.
These conclusions
were based on certain impressions which unfortunately he could not
substantiate with objective data.
Although the steel strike settle
ment was the focal point of public attention, it
was only one of a
number of inflationary labor settlements, including those in the
rubber, aluminum, and copper industries and the settlement with the
can companies.
deceptive.
Statistics at the moment seemed to him somewhat
The statement that steel prices were certain to rise
seemed a questionable one as long as the steel companies were
operating at capacity and were able to absorb overhead, as apparently
1/12/60
-47
they could during the next six months.
Furthermore, the inventory
build-up assumed to be going on was offset to the extent that manu
facturers at long last were able to ship out work in process which
had been held up because of the shortage of one or two parts.
Similarly, work-in-process inventories tended to be inflated over
the year end in the case of manufacturing companies selling consumer
durables because of the practice of forward billing.
They were forced
to hold in work-in-process items shipped out for the Christmas trade
until dealers disposed of them.
He assumed that the apparent ability
of corporations to finance inventories and capital expenditures from
internal funds would continue for a while, but not indefinitely.
was surprised that it
had continued as long as it had.
He
When the
time came that the companies must resort more heavily to the banks
and to the capital markets, the System should be prepared for a sharp
increase in
credit demand and to meet such an increase with vigor.
In saying this, he was suggesting a situation that might be ahead
but which was not here yet.
From the charts of estimated Treasury
financing periods prepared by the Board's staff, it
appeared that
there would be four open periods during the year ahead, each of about
a month's duration.
These would fall in March,
June, September, and
December, and the last one would not be of much use to the System.
The comments of the Presidents seemed to indicate that a change in
the discount rate during the next two weeks was not imperative and
could wait until February.
If the System were to wait until February,
1/12/60
.48
he supposed that the prime rate might then be 5-1/2 per cent, or
that it
would be raised shortly after the System acted on the
discount rate.
The six-month bill rate was already at
5 per cent;
this ought not be ignored by confining attention solely to the
three-month bills.
In the light of those factors, he felt that a
change in the discount rate of only 1/2 per cent would give an
impression to sophisticated observers that the System did not mean
business.
Chairman Martin commented that most of the time the Chairman
of the Board of Governors has a relatively simple role in matters such
as the discount rate because of the availability of a group of men in
the System who, with their associates, study the situation carefully
and offer the benefit of their judgment.
Chairman was not quite so simple today.
However, the role of the
It
seemed to him that the
System was not far from a turning point, and the discussion around
the table indicated how difficult a problem becomes when such a
point is
near.
For the past six or nine months, he had not seen
answers to the System's problems.
Now for the first time, as he said
at the December 15 meeting, he was beginning to be hopeful that a
solution was in the making.
He approached these problems without
any dogmatic point of view, but he wanted to take this opportunity
to explain what he conceived to be the role of the Chairman of the
Board in System operations.
He approached such matters with a
sense of humility, and he had no desire to be a dictator within
1/12/60
49
the System or to assert leadership for leadership's sake alone.
However,
a particular responsibility is
for Presidential,
Congressional,
placed on the Chairman
and Treasury relationships.
This
did not mean that the other members of the Board and the Open Market
Committee might not be superior in
judgment or that under certain
circumstances they might not differ completely with the Chairman.
He solicited their advice even when he was of a different point of
view.
He had leaned over backward when dealing with the Committee
never to assert leadership unless he felt
it
essential, and then
with due regard to the fact that he might be in
error.
He had
initiated the procedure at Committee meetings according to which
the Chairman speaks last
rather than first.
he did not have convictions,
This was not because
but because he wished to have the best
judgments that he could get and avoid taking a firm position until
after hearing those judgments.
The Chairman then posed the question of the right thing to
do at the present time.
The fact that there was some doubt around
the table about the course of System policy caused him to lean in
different way than if
If,
there had been unanimity of opinion.
a
in
going around the table, he had found that to a man-or perhaps with
only one or two exceptions--the Committee was united,
forgotten his own point of view and gone along.
there was sufficient doubt about a judgment in
he might have
However,
because
an area of System
policy, and because he shared some of the doubts expressed,
he
1/12/60
-50
wished to say from the standpoint of Presidential, Congressional,
and Treasury relations--and without indicating in any sense that
the System should play politics-it seemed to him that it would be
wiser not to act on the discount rate at the present time and upset
the even-keel approach by jumping the gun on the Treasury financing,
payment for which would come due on the 15th of this month.
he would prefer to await developments,
Instead,
The Open Market Committee
presumably was to meet on January 26 and again on February 9.
It was
dangerous, he felt, to talk about what the System might do at some
point in the future.
In fact, he would feel a little
better at the
moment if the discount rate were moved immediately to 5 per cent
rather than to take action at this juncture which might lead to a
general market expectation that there would be a further increase of
1/2 per cent within a short period of time.
The Chairman again said if this group were united on moving
to 5 per cent at the present time, he would be disposed to go along
despite the factors about which he was now talking.
However, he
felt that the System would be running a serious risk that the antici
pated boom might not develop, in which event it
prematurely.
would have moved
The Chairman then noted from a statement on the news
ticker that had just been handed to him that the President had today
sent a message to the Congress renewing his plea for elimination of
the 4-1/4 per cent interest rate ceiling on Treasury bonds.
This was
the President's first special message to the Congress at this session,
1/12/60
and it
-51
was something that he felt ought to be borne in mind.
He
recalled that last summer he had tried to the best of his ability
to determine what was politics and what was not in regard to the
thinking on money,
and he had found that there was a great deal of
misunderstanding.
Certainly the System ought not swerve from its
course when it
had come to a meeting of the minds, but he felt that
the System would be dissipating some of its resources if
juncture it
at this early
put itself in the position of leading the commercial banks
into an increase in the prime rate, much as he would like to see the
System move in advance of the banks.
If
in time, the Chairman said, forces in the economy made
action on the discount rate clearly appropriate,
the System would have
a responsibility to act promptly, effectively, and efficiently.
How
ever, his assessment of the present situation was that the market
would not be stabilized by a technical adjustment of the discount
rate to 4-1/2 per cent.
He felt that the System would come closer
to a permanently stabilizing effect for some period of time if the
rate were increased to 5 per cent.
judgment.
If
Of course, that was a matter of
the System waited for a limited period of time and
reappraised the situation, it
might be that it
the best move would be to go to 4-1/2 per cent.
would develop that
In any event, when
action was taken there ought to be no misunderstanding as to what
the System was doing, and no doubt that System action was out of the
way for the time being.
1/12/60
-52
In further comments regarding recent discussions that he had
had with the Secretary and Under Secretary of the Treasury, during
which he emphasized that neither of these individuals had indicated
in any way a desire to interfere with System policies or operations,
Chairman Martin said he had remarked to the Secretary yesterday that
as he understood it
sidered, if
the Secretary would be happier, all things con
the situation was not complicated at this juncture by a
premature move on the part of the System, and the Secretary had re
sponded that that was definitely his feeling.
In going over the
matter in his own mind last night, the Chairman concurred in that view.
As he had said, there had been no pressure of any kind from the Treasury,
but later in the year there might be real pressure from other quarters.
In his opinion the System should not throw away its ammunition need
lessly, or until it
at the moment.
knew more about the present picture than was known
He did not believe in rushing to abandon the even-keel
philosophy.
In conclusion, the Chairman said that to the best of his
ability he was trying to espouse the view that, with no change in
the directive, the System should postpone a decision on the discount
rate until some time in the period following the Treasury refunding,
at which time the System should not pull any punches necessary for
the performance of its
question, he noted,
role in fighting inflation.
The discount rate
could have been discussed separately within the
ranks of the Board of Governors, but he had chosen to put it
before
1/12/60
-53
this meeting, realizing that there might be differences of opinion.
There appeared to be enough differences of opinion at the present
time so that he would be loath to see any Reserve Bank move to 4-1/2
per cent in the next week or so, and to have the Board approve such
an increase.
Mr. Hayes commented that in advocating an early move on the
discount rate he had done so with some doubt in his mind, as indicated
by the statement that he was eager to know how others felt
matter.
on the
He was inclined to think that if and when a move was made,
it ought to be a move in which the System participated wholeheartedly
and more or less as a body.
He had respect for the Chairman's
appraisal of the intangible elements having to do with System relation
ships.
Therefore, he was inclined to go along with the Chairman's
thinking on the matter,
Chairman Martin then suggested further discussion, following
which Mr. Robertson inquired whether that comment related to the
discount rate only or also to open market policy.
Mr. Robertson
noted that in the latter respect there was also a division of opinion.
Chairman Martin said that there was a division of opinion as
to the degree of restraint to be sought through open market operations
but that he thought the consensus probably favored maintaining the
status quo.
Mr. Hayes inquired whether the consensus was not more in the
direction of going slightly on the side of ease, and the Chairman
1/12/60
-54.
replied that he thought a vote if taken, might result in about an
even split.
Mr. Robertson said he would be willing to go along with the
procedure suggested by the Chairman on the discount rate, even though
personally he would have been inclined toward a different course.
On
open market operations, the decision appeared to him to be between
maintaining the status quo or easing off somewhat.
The Chairman then suggested going around the table for a
summary of views with respect to open market operations.
He turned
first to Mr. Johns and inquired whether the latter would favor going
somewhat on the tighter side.
Mr.
Johns said that he would, but not very much.
What he had
meant to suggest, he said, was that the System accommodate itself to
the seasonal movement.
Whether or not that would result in a tighter
situation would depend on the demand side.
As to the discount rate,
he was not unaffected by the doubts expressed around the table.
Mr. Bryan said, with regard to the discount rate, that he had
favored an increase partly because of the help that might be afforded
in dealing with member bank borrowing in the Sixth District.
If he
had spoken on open market operations, he would have expressed an
inclination to go a little
Mr.
on the side of ease, but not much.
Bopp said that he would favor maintaining the status quo,
following which Mr. Fulton said that he would like to recapture the
1/12/60
-55
firmness that seemed to have been lost in the early part of December.
Therefore,
he would favor being slightly tighter.
Mr. King favored maintaining the status quo but not being any
tighter.
He would attempt to avoid giving the impression that there
had been any change of policy.
He would leave the market alone as
far as that could be done, and reassess the situation later.
Mr.
Shepardson commented that if the System moved only as far
as to recapture the ordinary seasonal movement of reserves and if the
demand for credit was less than anticipated, this might mean a lower
ing of negative free reserves and perhaps a lowering of pressure.
If
demand was greater, however, there might be an increase of net borrowed
reserves and an increase in pressure.
The view that Mr. Thomas spelled
out in his statement set forth what he thought the Committee should try
to do.
On the matter of the discount rate, he was in favor of effec
tive action.
If
a large increase at some later time would appear to
represent more effective action than piecemeal increases, he would be
in favor of such a course.
Mr. Robertson said he would oppose any easing of restraint,
while Mr. Mills said he would favor easing.
Mr. Leedy said that his view was toward maintaining the status
quo.
As to the discount rate, he agreed that the Chairman had a
special responsibility in the areas that the Chairman had indicated.
With regard to the timing of a rate change, he felt that the Chairman
was better able than others to appraise what was presently involved.
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Mr. Allen said he would favor maintaining the status quo
in open market operations, while Mr. Deming favored a mild easing.
Mr. Deming also commented that the Minneapolis Bank's directors
probably would not want to lead on the discount rate.
Mr. Mangels agreed with waiting on the discount rate.
He
suggested letting natural forces of demand develop any tightening
of credit restraint, without deliberate tightening on the part of
the System but offsetting part of such tightening; therefore, a
slight easing would be acceptable to him.
Messrs.
Irons and Erickson expressed the view that the status
quo should be maintained through open market operations, the former
adding, however,
that he felt any deviations should be on the side
of ease, while Messrs. Hayes and Szymczak expressed themselves as
favoring a slight easing.
Mr.
Balderston favored maintaining the
status quo.
The Chairman then said that the consensus seemed to favor
maintaining the status quo.
He added that he doubted whether there
was any way that the Committee could measure the matter with suffi
cient preciseness to get away from that consensus.
Mr. Hayes commented that he had thought the Committee's
policy as stated in
the directive was expressed in
broad enough so that within it
ease.
terms which were
there could be a slight change toward
He noted that the Committee had approved the directive at
times in
the past subject to an understanding that deviations should
be either on the side of restraint or of ease.
1/12/60
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Chairman Martin agreed that this had been done at times,
but said that he questioned whether the Account Manager could
resolve questions of degree very well in terms of any policy di
rective that could be issued by the Committee,
There being no further comments, Chairman Martin said he
understood the consensus was to continue the present policy directive,
that the Account Manager should do the best he could to maintain the
status quo, and that the Manager should endeavor to conduct operations
in
such manner as to make it
occurred.
apparent that no change in policy had
He then inquired whether there was agreement with these
statements as representing the consensus.
There being no comment to the contrary, the Chairman then
inquired of Mr. Mills whether the latter would like to be recorded
on the broad question of monetary and credit policy in the same way
as in the minutes of the past several Committee meetings, with a
memorandum of his views included in the record.
Mr.
Mills replied in the affirmative, adding that since he
had proposed a change in
as voting "no"
the directive, he would like to be recorded
on continuing the present directive.
Thereupon, upon motion duly made
and seconded, the Committee voted, with
Mr. Mills voting "no," to direct the
Federal Reserve Bank of New York until
otherwise directed by the Committee:
(1) To make such purchases, sales, or exchanges
(including replacement of maturing securities, and
1/12/60
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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 sustain
able economic growth and expanding employment opportuni
ties, 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.
Chairman Martin said he would propose that the Open Market
Committee meet on January 26 and February 9, 1960,
with the organiza
tion meeting following on March 1, 1960, and no objection was
indicated to this proposed schedule of meetings.
Chairman Martin then commented that the Open Market Committee,
in
connection with the annual organization meeting,
at operating procedures.
now,
He felt
would be looking
that the Committee ought to start
when there was no real pressure, to consider any possible
changes in
its
operating techniques.
This seemed an appropriate
time to see whether the Committee wanted to make any such changes in
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1/12/60
its operating procedures, which would include consideration of
the "bills only" policy.
In this connection, he referred to
questions likely to arise in the course of time relating to the
2-1/2 per cent bonds of 1961.
The Chairman then suggested asking Messrs.
Young,
Thomas,
and Rouse to review these matters and give the Committee,
at the
earliest opportunity,
material that would afford a basis for discus
sion.
In the absence of objection, Messrs. Young,
Thomas,
and Rouse
were requested to consider the matters mentioned by the Chairman.
Chairman Martin then turned to a memorandum from Mr. Young
on an information program for the Government securities market which
had been distributed under date of January 7,
noted that at its
meeting on October 13,
1960.
The memorandum
1959, the Committee requested
the staff to bring forward a specific program, under Treasury-Federal
Reserve auspices,
for the collection and publication of information
about the Government securities market,
this assignment it
and that in
carrying out
had seemed appropriate to work through the
steering group and associated staff of the Government securities
market study.
The report of that group, dated January 5, 1960, was
attached to the memorandum.
The proposed program would continue
responsibility for surveys of ownership of Government securities in
the Treasury and responsibility for statistics relating to market
operations in the Federal Reserve.
Accordingly, the Treasury
1/12/60
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participants in the report had not shared in the administrative
recommendations pertaining to the System's responsibility, except
insofar as it
impinged on Treasury debt management responsibilities.
In putting the statistical program into effect, various unforseeable
problems were considered likely to develop, for example, with regard
to schedule content, and it was suggested that the Committee delegate
to the staff authority for resolving these technical problems without
referring them back for Committee consideration.
Those associated
in the preparation of the report included Messrs. Young, Koch, and
Keir of the Board's staff, Messrs. Larkin and Roosa of the New York
Bank, and Messrs. Mayo and Saunders of the Treasury.
Submitted with
the memorandum and report was a draft of letter, to be signed by the
Secretary of the Treasury and the Chairman of the Federal Open Market
Committee and to be sent to all potential respondents,
outlining the
new program and indicating that full collaboration was anticipated.
In commenting on the matter, Chairman Martin noted that the
planning group had tried to achieve four basic things in this program.
The first was to enlarge the factual base available daily for System
open market operations and Treasury debt management.
The second was
to provide adequate information to meet potential Congressional
requests.
The third was to provide a flow of current information
for public uses, and the fourth was to do these things in such a way
as to protect the confidentiality of individual dealer reports and
at the same time avoid any market criticism of System operating
officers.
1/12/60
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Chairman Martin commented that the report had not come out
with all
of the answers but that the program, which resulted from
negotiation with the Treasury and the Desk, appeared on the whole to
be one that should be carried forward.
The Chairman then stated that
he would like to have the views of Messrs.
Mr.
job, in
Hayes and Rouse.
Hayes said he agreed that Mr. Young had done a splendid
cooperation with the Treasury and the staffs of the Board
and the New York Bank,
On the whole,
constructive and needed one.
the proposed program was a
The only part on which he had serious
doubts involved the question whether it
was wise to cut off the Desk
from information on individual dealer data.
that the more the Desk knew,
He had felt
the more effective a job it
generally
could do.
Recognizing differences of viewpoint on this phase of the matter,
he suggested that the program be given a fair trial.
He added that
he and the Desk and everyone else at the New York Bank would be willing
to give it
a fair trial.
Mr. Rouse agreed that the report represented an excellent
job in most ways.
However,
he wished to make a statement so that
the Committee might have before it
his point of view on the matter
to which Mr. Hayes had just made reference.
Mr. Rouse then read
the following statement:
There are just a few comments that I would like to
It certainly
make in connection with this program.
constitutes a major step in the development of informa
tion in an area where the public interest is deeply
When the program reaches a point where
involved.
publication of data covering activity in the Government
1/12/60
-62-
securities market becomes a reality, it should make for
a more informed public and may even lead to a better
public understanding of the relationship between monetary
policy and the market.
This information program is the
most urgent of the suggestions that developed out of the
Treasury-Federal Reserve Study.
However, the program contains unnecessary restrictions
on the availability of data to the Management of the System
Open Market Account.
Up to this time, the data on the
operations of individual dealer firms has been available to
the Management and this information has been helpful to it
in making a general appraisal of the market and in dis
charging its responsibilities to the Committee.
I wish to
point out that under this new program the Manager is denied
access to individual dealer data except under particular
conditions, and that only information on the aggregate of
dealer operations would be available to him.
Ordinarily,
these aggregate data would be sufficient to form an over-all
appraisal of market conditions.
Yet there are, and have been,
many occasions when it has been necessary to go beyond the
data covering all dealers as a group and to review the
operations of individual dealers for the purpose of interpret
ing and evaluating the significance of the aggregative data.
Dealer operations in terms of both the aggregate and of
individual dealer firms also have an important bearing on
Treasury financing--before, during, and after.
To deprive
the Committee and the Secretary of the Treasury and their
of any of the information collected from dealers
staffs
on a regular basis is an unnecessary limitation on the use
The people in authority having a public
of the data.
responsibility have an obligation to be as well informed as
This means getting to know the
possible about the market.
whole market and it would embrace an understanding of
behavior patterns and individual dealer performance through
continuous day-to-day contact with dealers and the data
The data on operations of
covering their operations.
individual dealer firms is particularly important--indeed,
it is essential--in administering the repurchase agreement
arrangements at the Federal Reserve Bank of New York.
While the new information program makes special allowance
for the availability of certain data on individual dealers
in connection with the use of repurchase agreements, it
does not go far enough. In effect, the total information
covering individual dealer operations that has been avail
able to the Manager for many years will be sharply reduced
under this program, even though that information will
Whether we like it
continue to be collected from dealers.
is a personalized
market
securities
Government
or not the
1/12/60
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market. That is, it is a market in which a number of
highly individualistic personalities play a crucial
part, and it is this characteristic that prompts this
comment on my part. I hope the time will arrive when
the market will be large enough so that no one or two
personalities at any one time can dominate it.
When
that time comes the use of aggregate figures may be
sufficient.
If the Committee concludes that individual
dealer data should be denied the Desk on a trial basis,
we will of course do our best to operate effectively
under the proposed limitation.
In my experience the current information available
on the financial standing of dealer firms has been adequate.
I question the need, as set forth in the proposal, for
obtaining formal income statements from dealers and I also
have reservations concerning the need for balance sheet
information as often as four times a year.
I have one final comment to make. It has to do with
the protection of the confidentiality of individual dealer
positions and the need for an appropriate time lag between
current dealer reports and their date of publication, even
in aggregate form. The paper submitted to the Committee
covers this point, but I would like to emphasize here for
the benefit of the group that will carry out your instruc
tions the importance of having an adequate time lag between
current dealer operations and their release for public
consumption.
Some of my comments have been covered in greater detail
in a paper on this subject prepared in November of last year
by the Federal Reserve Bank of New York, primarily as an
aide memoire for Mr. Young's group. If any of you would be
interested in receiving that paper, I would be glad to
forward copies.
I would like to suggest that Mr. Young's group continue
its work, looking to recommendations to the Federal Open
Market Committee and the Treasury arising out of the addi
tional matters uncovered by their Study and also some of
the technical points that were raised. These latter points
include, for example, extending maturity of securities
eligible for Federal Reserve repurchase agreement, reverse
repurchase agreements, lending of System securities to
dealers, swaps, and the confidentiality of dealings with
the Federal Reserve System. While most of these suggestions
are primarily related to the operations at the direction of
this Committee, they hold an interest for the Treasury as
well in that it is primarily responsible for the market for
its own securities.
1/12/60
-6
Chairman Martin suggested that Mr. Rouse send to all of the
Committee members and other Presidents, without specific request,
the paper of the New York Bank to which he had referred.
The Chair
man then proposed that the Committee adopt the program suggested by
the planning group and review it
some time in the course of the next
three months.
No objections to this proposal were heard, and the Chairman
then said that the matter would proceed on the basis he had suggested.
It was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday, January 26, 1960, at 10:00 am.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1960, January 11). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19600112
@misc{wtfs_fomc_minutes_19600112,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1960},
month = {Jan},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19600112},
note = {Retrieved via When the Fed Speaks corpus}
}