FOMC Minutes
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in
Washington on Tuesday, February 9, 1960, at l0:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Allen
Balderston
Erickson
Johns
King
Mills
Robertson
Shepardson
Szymczak
Leedy, Alternate for Mr.
Deming 1/
Messrs, Bopp, Bryan, and Fulton, 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. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Jones, Marget, Mitchell, Noyes, and
Roosa, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr.
Mr.
Mr.
Mr.
1/
Molony, Assistant to the Board of Governors
Koch, Adviser, Division of Research and
Statistics, Board of Governors
Keir, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Knipe, Consultant to the Chairman, Board
of Governors
Entered the meeting at point indicated in minutes.
2/9/60
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Messrs. Eastburn, Hostetler, Tow, and
Einzig, Vice Presidents of the
Federal Reserve Banks of Philadelphia,
Cleveland, Kansas City, and San
Francisco, respectively
Mr. Coldwell, 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
Mr. Litterer, Business Economist, Federal
Reserve Bank of Minneapolis
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on January 26, 1960, were
approved.
On February 1,
1960, the eleven available members of the
Federal Open Market Committee approved a modification of the action
taken at the Committee meeting on January 26, 1960, regarding the
exchange of System Open Market Account holdings of approximately
$5,507 million of Treasury certificates of indebtedness maturing on
February 15,
1960.
The modified action authorized exchange of the
maturing securities into 4-7/8 per cent Treasury notes of November
1964
in
the amount of $2 billion and exchange of the remainder
(approximately $3,507 million) into 4-7/8 per cent one-year certifi
cates.
The action taken by the Federal
Open Market Committee on February 1,
1960, was ratified by unanimous vote.
Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering the
period January 26 through February 3, 1960,
and a supplementary report
2/9/60
-3-
covering the period of February 4 through February 8, 1960.
of both reports have been placed in
Copies
the files of the Committee.
Supplementing the written reports, Mr. Rouse made substantially
the following comments on developments since the preceding Committee
meeting:
The volume of open market operations since the last
meeting of the Federal Open Market Committee has been
relatively small.
The mopping up of the seasonal reflux
of reserves after the first
of the year has been ac
complished and little
needed to be done to keep the money
market on an even keel during the Treasury's February
refunding.
A small amount of repurchase agreements was
made against the "rights" at the close of the refunding
as dealer holdings of the maturing issues rose to sub
stantial proportions.
The money market was generally
tight throughout the period although at times there
developed a little
ease at the central reserve city
banks in New York,
The outcome of the Treasury refunding was very
satisfactory as the attrition is relatively low and
the public exchange for the four-year nine-month note
is about what the market had come to expect. The result
will substantially improve the Treasury's cash position
over the next few weeks and will obviate any need for
further borrowing until April, with a smaller amount of
cash to be borrowed at that time.
At the close last
night the new 4-7/8 per cent certificates were quoted at
100-10/32, and the notes at 100-14/32, 22/32 above the
issue price.
Since the last meeting the Government securities
market has been quite strong, fortunately for the Treasury's
financing operation, and rates have declined markedly.
Scarcity of Treasury bills produced continuously lower
rates, especially yesterday when most outstanding issues
dropped about 30 basis points in the absence of any
appreciable supply. The average rate in the auction
yesterday was 3.563 per cent for 91-day bills, and 4.094
per cent for 182-day bills.
I want to mention also that the recent increase in
the British discount rate and the subsequent increase in
gave a yield advantage to British
rate at first
their bill
bills over our Treasury bills of 3/8 per cent, which by
2/9/60
yesterday had increased to 5/8 per cent. The amount of
funds lost from our market because of this differential
is uncertain; probably not much so far, but the potential
may be large.
Prices of notes and bonds also have improved sharply,
with yields generally moving to new lower areas. As compared
with earlier rates, which were above 5 per cent on a number
of issues, the highest rate now available in the Government
list is around 4.75 per cent for the new "when-issued" 4-7/8
per cent notes of November 1964; rates on other outstanding
issues are considerably lower. Rate declines have occurred
in commercial and finance paper and bankers' acceptances.
The stock market has declined sharply.
All of these developments reflect doubts concerning the
prospects for business and the implications for credit policy.
The important question facing the market at this point is
whether this apparent shift in psychology has substance and
whether the present trend of interest rates can be sustained
in the weeks to come. The market finds it difficult to
reconcile the situation in the securities market with the
degree of restraint being exerted on bank reserves.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period January 26 through February
8, 1960, were approved, ratified, and
confirmed.
During the course of Mr. Rouse's comments, Mr. Leedy joined
the meeting.
Supplementing the staff memorandum distributed under date of
February 5, 1960, Mr. Noyes made the following statement with regard
to economic developments:
In his Reserve Banks and the Money Market, Randolph
Burgess observed 30 years ago that with the establishment
of the Federal Reserve System seasonal swings in interest
rates had been almost eliminated. In the seasonal factors
he calculated for the period 1914 to 1932, which ranged
from a low of about -3 per cent in July to a high of +4per
cent in October, there was very little change from December
2/9/60
-5
to January. This was in contrast to a sharp year-end
break shown for the 1894 to 1914 period, when the
December factor was +8 per cent, and January -4 per cent.
In recent years it appears that some of the
seasonality of rates around year-end may have returned.
Despite the general upward trend, in eight out of the
last ten years the bill
rate declined from the end of
December to the end of January, and we hear frequent
reference in the market to the year-end peak and the
January decline.
There also seems to be a seasonal pattern emerging
in appraisals of the economic outlook, although it evades
exact measurement.
To what extent the bearish reappraisal
of economic prospects that is currently spreading so
rapidly in the press and financial markets reflects only
the usual transitory seasonal disillusionment, and to what
extent it is based on more fundamental changes in the
economic situation is difficult to judge.
In part, at
least, the answer must be found in the expectations that
came before. The observers who saw a strong surge of
activity in early 1960 were the ones who had the firmest
expectation of rising prices and speculative inventory
accumulation piled on top of the normal rebuilding that
was generally anticipated.
While it is sometimes overemphasized, the manufacture
and sale of automobiles must play an important part in any
analysis of the business situation. Recollections of 1955
played an important role in the thinking of those who saw
Dealer sales of 455,000 new cars
a swelling boom in 1960.
in January were certainly a real disappointment to these
analysts, and a comfort to those who had expressed some
skepticism when the prices of the 1960 models were
announced last fall.
The low level of new corporate financing in January
and the limited schedule of offerings for this month
suggest to some that business plant and equipment
expenditures in 1960 may not exceed the intentions
expressed in late 1959 by as large a margin as they have
Loan
exceeded early intentions in other boom years.
demand at commercial banks has also disappointed those
Whether it has declined more
with great expectations.
than seasonally is hard to say, but it certainly has
not shown the contraseasonal vigor that would bear out
expectations of an inflationary boom.
If developments so far in 1960 have been disquieting
to those who saw a run-away boom around the corner, they
2/9/60
have also provided little
comfort to the disciples of doom.
All of the aggregative measures of the output of the econony
are showing gains up to or exceeding informed earlier esti
mates.
GNF is still
expected to be close to $500 billion
for the first
quarter.
As more fragments of data become
available, advance estimates of the index of industrial
production have been revised up rather than down and we
are currently thinking in terms of 170.
Employment appears
to have been well maintained.
Seasonally adjusted depart
ment store sales held about the same level in January as
December, which is all the more impressive on the heels
of a record-smashing Christmas season.
Construction activity again confounded the experts by
inching up to a seasonally adjusted annual rate of $54.9
billion, the highest January on record.
The shakeout in the stock market has unquestionably
both reflected and raised doubts as to the future.
Whether
the appearance of high first-quarter profits, taken together
with somewhat lower yields on fixed-income securities, will
stem the tide of profit-taking remains to be seen.
In summary, it appears that this winter the usual
seasonal declines have had more than the usual seasonal
effect on expectations, due primarily to the exceedingly
bullish attitude that prevailed around the year-end.
Investors and speculators are adjusting to a less buoyant
At the same
outlook than seemed certain a month or so ago.
and are
confident
remain
businesses
and
time, consumers
time of
this
for
rates
at
record
spending
and
producing
boom
inflationary
an
avoiding
for
prospects
The
the year.
the
case,
the
inevitably
is
as
brighter--and
are certainly
possibility that we may be confronted with a major re
Taken altogether, however,
adjustment is similarly enhanced.
it is hard to see how the tempering of enthusiasm that has
taken place in the last few weeks can be anything but
beneficial, regardless of what lies ahead.
Mr.
Thomas presented the following statement with respect to
financial developments:
Evidence of the anticipated poststrike boom has not
While it is clear that economic activity
as yet appeared.
is at a generally satisfactory level, there are few, if any,
This is particularly true in the
signs of undue fervor.
financial area.
2/9/60
Following extremely tight conditions in the money
market with sharply rising interest rates and an unusually
heavy seasonal loan demand during December, money has eased
notably in January.
Interest rates declined and bank loans
were reduced about as much as they had increased in Decem
ber.
Figures now available as to the sharp increase in
business inventories during December may help to explain
some of the heavy loan demand in that month.
It seems
hardly likely, however, that the loan decline in January
reflects a corresponding cut in inventories.
The decrease
in business loans was no greater than usual for January,
but there was a larger than usual decline in loans to
finance companies and a substantial drop in security loans.
Partial figures for the first
week of February show a
moderate upturn in business loans, which is not usual for
that week.
In addition to the decrease in loans, banks also
continued to liquidate Government securities in January,
with the largest decrease in the one- to five-year maturity
group.
As a result total loans and investments at city
banks declined more in the five weeks ending February 3
than in the same period of any other recent year in total
dollar amount and also relative to the December increase.
New corporate security issues continued relatively
light in January and are expected to be even smaller in
New issues by States and local governments, on
February.
the other hand, increased considerably in January, but a
Stock prices,
smaller volume is on the calendar for February.
after rising close to the 1959 high at the close of December,
declined sharply in January, and with yesterday's sharp drop
During that
are close to the low of the past 12 months.
period the various indexes of averages have generally
At present
fluctuated within a range of about 10 per cent.
levels of prices, even if allowance is made for higher
earnings this year, yields on principal stocks are still
very low relative to bond yields, although somewhat above
There continues to be a growing feeling
recent lows.
among investors that some shifting of portfolios from
stocks to bonds is wise.
In contrast to stocks, bonds have risen in price since
of the year and yields on long-term Government
the first
Yields on outstanding
bonds are back to November levels.
high-grade corporate bonds, however, have continued close
Long-term
to the highs which they reached in December.
Government bond yields have not declined as much as those
2/9/60
-8-.
on shorter-term securities.
Yields on 3- to 5-year
Government securities, which have generally been higher
than those on other maturity categories, have declined
to around the lowest levels of last October. Yields
on Treasury bills are at the lowest levels since late
A gust.
Under the circumstances, Treasury financing operations
have been eminently successful, with low attrition and a
substantial exchange for the four-year, nine-month note, as
well as for the certificate.
These issues are now selling
at premiums.
The Treasury will evidently not need to do
any more financing until the end of March or early April.
The easier money situation is clearly a result of
action by the market itself, rather than of monetary policy.
Since mid-December, Federal Reserve holdings of Government
securities have been reduced by more than $1.5 billion,
offsetting reserves supplied largely by the return flow of
currency and by System payments to the Treasury. Required
reserves have declined by at least the usual seasonal amount.
Net borrowed reserves of member banks have continued generally
at around $400 million.
The decrease in loans and investments at city banks has
been accompanied by a greater than usual drop in depositsboth demand and time--at those banks. At country banks
two weeks of January, deposits increased
during the first
somewhat more than they did in the same period last year;
loans declined seasonally, but holdings of Governments
Figures are not yet available for country banks
increased.
as of the end of January, nor are we yet obtaining weekly
deposit figures for country banks from all the Reserve
Banks.
It is estimated that the total money supply, seasonally
adjusted, may have declined slightly in January after in
These computations are based on new
creasing in December.
improved seasonal adjustment factors. The total is only
about half a billion dollars--or less than 1/2 of one per
cent--larger than a year ago. The trend of the money supply
has been slightly downward since midsummer-after rising for
over $5
a year and a half. The current figure is a little
annual
average
mid-1957--an
of
billion larger than the peak
of
Turnover
cent.
per
2
than
less
rate of increase of
deposits at banks outside financial centers has risen at a
faster pace; in the last quarter of 1959, it was over 6 per
cent above the figure for a year earlier and about 7 per
The combined figures of money
cent above the 1957 peak.
2/9/60
supply and turnover indicate a rate of growth in total
monetary transactions of nearly 4 per cent a year since
mid-1957.
Question may be raised as to what extent increased
turnover of cash balances can be relied upon to finance
further growth in economic activity, without some increase
in amount of deposits.
Liquidity--in the form of short-term
assets other than cash--has expanded greatly in the past two
years, but its active use may call for some additions to the
supply of cash or at least the availability of cash. Per
haps the time has come when some further growth in bank
credit and in the money supply should be permitted.
In the
absence of strong pressures for credit expansion--a
situation that seems to exist at present-it would appear
safe to provide some additional reserves and thereby add
to the availability of credit without the risk of unduly
encouraging excessive credit commitments.
Mr.
Marget commented substantially as follows with regard to
the United States balance of payments:
When I reported to this Committee on January 12, the
figures for transfers of gold and dollars to foreigners
for the month of December were still
incomplete. Now
that we have the complete figures, we can step back a bit
and take a look at the figures for the whole of the
calendar year 1959, as compared, in particular, with the
figures for the calendar year 1958.
It was in the year 1958, as you will recall, that we
had the massive outflow of gold which was the occasion of
such widespread discussion in the press, so much of it so
emphasis on an alleged "flight from the
mistaken in its
emphasized at the time, there was no
we
dollar." As
"flight from the dollar" in 1958. The proof of this was
that at the very time this "flight" was supposed to be
taking place, foreigners were actually increasing their
holdings of dollar balances in the United States by over
By the same token, there was anything but a
$1 billion.
On the contrary, the
dollar" in 1959.
the
from
"flight
increase in dollar balances held by foreigners was more
Indeed, the
than twice as large in 1959 as in 1958.
than half of
less
also
was
1959
in
outflow
actual gold
said, there
be
fairly
can
It
1958.
in
the gold outflow
balances,
dollar
of
holders
foreign
the
1959
fore, that in
dollar
the
gave
dollar,
the
from
away
running
instead of
given
had
they
than
confidence
of
vote
an even stronger
it in 1958.
2/9/60
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These foreign holders of dollar balances are not ir
rational.
In giving this vote of confidence they were,
quite obviously, expressing a judgment that the United
States would succeed in its efforts to meet the problem
of which the visible symptom was the combined figure for
gold outflow and additions to dollar balances held by
foreigners, namely, the problem of the over-all deficit
in the balance of payments of the United States. What
do the final figures for 1959 show in this respect?
If we were to deal only with the totals for 1958 and
1959, one might wonder what there was in these figures to
give anybody, foreigner or other, any basis for confidence
that the problem was likely to be solved.
The figure for
1959 is
$3.7 billion, as against a figure of $3.4 billion
for 1958, the year in which the world was suddenly made
aware that the United States did in fact have a balance
of payments problem of serious dimensions.
But of course
the explanation of the paradox is to be found in the
movements of gold and dollars, and therefore our over-all
balance of payments, within the calendar year 1959.
The
early months of the year, instead of showing a reversal
of the deterioration in our balance of payments which had
occurred in 1958, showed an intensification of the deterio
ration, to the point that, as I reported to this Committee,
the projections made by the Balance of Payments Group of
the National Foreign Trade Council suggested that we should
be lucky if we ended 1959 with an over-all deficit no
greater than $4.5 billion, as compared with the $3.4 billion
The fact that we ended with an over-all deficit
of 1958.
much closer to the 1958 figure than had been supposed
possible on the basis of the showing in the earlier months
of 1959 is a measure of the degree of improvement that
we in fact had in our over-all balance of payments in the
later months of the year.
But, as you have been made aware by these reports of
mine at roughly three-week intervals, that improvement has
us in no doubt whatever as to
not been of a kind that left
of the adjustment that seemed
solidity
and
pace
the future
I had occasion last time, for example,
to be taking place.
to report the relatively poor export figures for November,
and to suggest that, while an explanation for this poor
showing might be found in the steel shortages growing out
of the strike, the figures themselves provided a warning
against supposing that all our troubles with the balance
It is
of payments were behind us for good and all.
gratifying to report that the trade figures for December
2/9/60
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are very much better than the November figures; and the
preliminary gold and dollar figures for January of this
year are also distinctly encouraging.
There is no reason
to discount good news when it comes, particularly since
the news is of developments of the kind that have been
eagerly awaited, not least by those foreign holders of
dollar balances who, according to our gold and dollar
figures, gave the dollar, and therefore the monetary
authorities of the United States, an even stronger vote
of confidence in 1959 than they had given in 1958. The
essential point is that the basis of this confidence is
the belief that balance of payments developments depend,
to a very large extent, upon the policies pursued by
the monetary and fiscal authorities of the country
experiencing the balance of payments difficulties.
In
the present instance, that means a belief that the fiscal
and monetary authorities, in determining their actions,
are not likely to confuse evidence that a salutary process
of adjustment is under way with a conclusion that the
adjustment has been virtually completed.
Mr. Hayes presented the following statement of his views with
respect to the business outlook and credit policy:
Data becoming available in the past two weeks indicate
that business has continued to move forward at a very
satisfactory pace, as Mr. Noyes has already told us. On
the other hand, the growing public impression that an
inflationary boom may be avoided, widely commented on at
the last meeting, seems to be equally evident today and
seems to find considerable justification in recent business
and credit statistics. Doubtless the persistent stock
market decline has had good psychological effects, as has
increasing awareness of the prospective Federal Government
The failure of automobile sales to keep pace with
surplus.
production schedules is another factor. For this and other
reasons there may be some modest drop in steel output in
the second quarter.
I believe it would be a mistake, however, to over
emphasize these moderate tendencies, since the basic
outlook for production, employment, and spending is strong,
and the possibility of an inflationary boom cannot be
dismissed completely while the year is yet so young. It
is worthy of note that residential construction, which was
one of the major laggard elements in the economy, has
2/9/60
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taken a turn for the better; and exports will probably
provide somewhat greater stimulus to the economy than
in the past year.
In general, bank credit developments in January
were about in line with the seasonal pattern, in contrast
with earlier expectations of highly exuberant demands.
Continuing ample cash earnings of nonfinancial corporations,
coupled with relief from December seasonal pressures, and
relatively conservative investment outlays by such corpora
tions, help to explain their active buying of securities
which, together with buying by public funds and other
nonbank investors, has been a major cause of the substantial
decline in market interest rates.
The downward rate move
ment may also reflect a normal reaction to earlier excesses
in the other direction.
These better market conditions were
doubtless in large part responsible for the successful
market borrowings which enabled the finance companies to
make unusually heavy repayments of their bank loans in
January.
Security loans and bank investments were also off
sharply last month.
Nevertheless, the nation's banks
remained in a tight position, with liquidity ratios
especially low in the New York banks, to whom large
corporate borrowers look as a major source of term loan
The New
financing as well as of current seasonal credit.
York banks now appear to be making a strenuous effort to
prevent a further large rise in their loan-deposit ratios,
and this will of course have a bearing on their attitude
toward an increase in the prime rate over the next month
or two.
The outstanding success of the Treasury's refunding
operation should confirm earlier hopes that the Treasury
Hence,
could remain out of the market until early April.
most
of
and
of
February
part
we can consider the latter
for
period"
"free
so-called
March as constituting a
monetary policy.
For the time being, I can see no reason to change our
As I have said before,
basic policy of credit restraint.
I would hope to see somewhat greater growth in the money
supply in the current year, and I was interested in the
comments of Mr. Thomas along that same line, but there is
no great urgency in meeting this problem as long as busi
ness is going ahead so satisfactorily and credit demands
seem about in line with the normal seasonal pattern. We
have been giving careful study in the New York Bank to
Mr. Bryan's proposals for a more objective quantitative
A number of questions
approach to open market operations.
2/9/60
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have arisen, many of which have apparently also troubled
Mr. Thomas. While we are inclined to agree generally with
the reservations expressed in his letter of February 4 to
Mr. Bryan, we also feel that continuing analysis of what
is happening to total reserves should be of real help to
the Committee in formulating its judgments, and to the
Manager in carrying them out.
We certainly think that
this whole area deserves further study,
Meanwhile, I think we should preserve the status quo
with respect to open market pressure as measured by the
general feel of the market, with no hard and fast target
of net borrowed reserves and with the usual ample leeway
for the Manager to take account of developing pressures
or their absence.
As for the discount rate, the case for near-term action
has been much weakened by the sharp decline in short-term
market rates and the calmer business appraisals occurring
since we decided to defer rate consideration pending
completion of the Treasury refunding.
From a Treasury
standpoint we would be free to move before our next meeting;
but whereas a few weeks ago I would have expected that
action in late February would be desirable, I no longer
think so. I think we shall have ample opportunity to review
the matter in March, by which time we shall have a better
in economic
basis for knowing whether the present lull
pressures is of lasting significance or a mere passing
phase of a developing boom. At present business and
credit conditions do not justify a discount rate rise.
If we did move, it would doubtless bring a rise in the
prime rate, whereas the banks may hold off action if we
stand pat--and I see no reason for the System to want to
set off a wave of rate increases in the next few weeks.
Inaction on our part would have the further advantage of
allaying the fears of those who see an international "rate
war" developing--although I would not urge this as a
significant factor if the domestic scene called for a
discount rate increase at present.
The directive may, I think, be appropriately left
unchanged.
I should like to report very briefly at this time on
the progress of the new program for the collection of
statistics on the Government securities market approved
at the FOMC meeting of January 12.
We held a meeting with senior representatives of all
the dealer firms on January 29, introducing Miss McWhinney
to them and outlining the scope of the program. Mr. Young
2/9/60
and Mr. Mayo participated in this meeting. Since that
time Miss McWhinney, in association with representatives
of both the Board and the Treasury, has met individually
with representatives of each of the dealer firms.
Although the response has been varied, no dealer has
indicated a refusal to comply, and several have warmly
endorsed the entire program. Each of the dealers now
has copies of all the proposed schedules, and the
technicians in each of the firms are now studying the
detailed problems concerned with actual reporting.
After taking into account suggestions that the various
firms may offer, aimed at improving methods of obtaining
the data we intend to collect, final schedules will be
prepared for clearance with the Bureau of the Budget.
We hope to reach this stage by mid-March.
I think it is
barely possible that full scale operations on the new
basis may begin in April, although the recital of diffi
culties that we have heard from some dealers (including
the need they face to employ and train additional clerical
staff) may persuade us to begin somewhat later.
Mr.
Johns said that basically he did not see that business
conditions or prospects for future activity had changed much over
the past few weeks.
called for
In his opinion, the situation still
efforts in the direction of doing what monetary policy could do
Thus far
about resisting pressures that make for price increases.
in 1960, and in late 1959, open market operations appeared to have
brought about appropriate firmness in monetary restraint.
Total
bank reserves, seasonally adjusted, did not seem to have increased,
and it
did not appear that the money supply, seasonally adjusted,
had risen.
He would suggest that open market operations in the
near future be conducted with a view toward holding the money supply
and bank reserves,
seasonally adjusted, about level; if
the money
supply or bank reserves should increase in the near future, he hoped
2/9/60
-15
the rise would be slight.
Within the framework of a stable, or
nearly stable, money supply and total reserves for the next few
weeks,
short-term interest rates and net borrowed reserves might
increase if
thought,
demands for money should become stronger.
should be no cause for alarm.
This, he
On the other hand, if
such
demands did not materialize, decreases in net borrowed reserves and
money market interest rates would not disturb him.
With respect to the discount rate, Mr.
Johns commented that
an argument could be made for an increase of 1/2 per cent, and he
would not go so far as to say that the argument was footless.
Except
for interest rate developments in the past two weeks or so, which
some believed to be unusual and transitory,
been below its
the discount rate had
"normal" relationship to other money market rates.
Other countries had marked up their rates recently, and it
argued that if
could be
the System did not do likewise this might be conducive
to deterioration of the long-run terms of trade.
On the other hand,
since the cause of the recent interest rate decline was not altogether
clear, it
seemed probable that a discount rate increase at this time
would be taken as an announcement of a change in policy toward
significantly greater restraint,
and he did not believe that such
greater tightness should be the aim or intent of System policy at
this time.
Therefore,
he concluded that an increase in the discount
rate would be inappropriate at this time.
change in the policy directive.
Neither would he favor a
2/9/60
-16
Mr.
Bryan commented substantially as follows:
The latest figures for the Sixth District seem to show
generally continuing strength in the economic situation.
They do not, as noted at our last meeting, show in many of
the figures a differentially greater strength than the
nation as a whole: a matter of note to us because we have
come in the postwar period to think that comparatively
greater gains in the District's economy are typical.
Figures available since our last meeting indicate no
change in nonfarm employment; a very minor increase in
manufacturing employment; a decrease in department store
sales; a serious decrease in construction contract awards
but an increase in construction employment; and an increase
in commercial bank loans that contrasts sharply with a
decrease for the nation.
In connection with nonfarm employment we have shown a
decrease in Florida, Mississippi, and Tennessee, which is
notable because Florida has for the entire postwar period
been the outstandingly strong spot in the economy of the
Sixth District.
As we see the picture nationally, the situation is one
of great current strength and probable but not certain
further strength for some months.
The rather dramatic price
improvement that has recently occurred in almost the whole
range of fixed income maturities raises inescapable questions.
It is tempting on the one hand to assume that these changes
are purely temporary, seasonal, and technical in character.
It is almost equally tempting to argue, from the magnitude
and consistency of the changes, that they arise out of some
more fundamental shift in the economic and monetary climate.
much too early to say certainly
In our judgment, it is still
whether the recent reduction in yields is temporary and
seasonal or represents a more fundamental shift in the
economic and credit tide. We thus conclude that at this
time it would be perilous to rest our policy on either
assumption.
In the light of this situation it seems to me again
reasonable to express the view that we should effect a
reserve position of the banking system that does not
permit an excessive expansion of credit and the develop
ment of an unsustainable and probably speculative boom.
At the same time--because of the long period in which,
in adjusting to a previous excessive easing of reserves,
we allowed no growth of reserves at all--I continue to
believe that we must now contemplate, until events indicate
2/9/60
-17-
otherwise, a modest growth in the reserve supplies of
the banking system.
For want of a better figure I continue to believea belief in which judgments can well differ--that for the
time being a growth rate of 2 per cent annually in total
reserves would keep the banking system under restraint
but minimize the dangers implicit in an effort of an
expanding economy to grow against a fixed reserve base
arrived at either by policy or by inadvertence.
Accordingly, I would suggest that our daily average
reserve target for February be $18,585 million with a
range for practical administration of the Account of
$18,635 to $18,535. Thus far, in February (as of the
opening of business on Monday, February 8th) we have had
daily average reserves of approximately $18,515 million. 1/
Mr.
trict
Bopp reported that business conditions in the Third Dis
had continued to improve in recent weeks, with advances moderate
but generally widespread.
With the effects of the steel strike all
but dissipated, the employment picture was brighter; in the four
areas for which December reports were available, slightly over 5 per
cent of the labor force was jobless compared with just under 7 per
cent a year earlier.
New unemployment claims had been declining
seasonally and were below the levels of both 1959 and 1958.
Depart
ment store sales had been registering increasingly large gains on a
year-ago basis, and volume in the past four weeks was 7 per cent
above the corresponding 1959 period.
Pennsylvania were low in
Sales of new cars in eastern
December, primarily due to shortages.
Steel production in the Philadelphia steel district had been running
at or above theoretical capacity for 10 weeks; operations in the
latest week were at 101 per cent of capacity, compared with
1/ Mr. Bryan subsequently furnished a table, attached at the end of
these minutes as Item No. 1, providing information on the deriva
tion of these figures.
2/9/60
-18
94 per cent nationally.
Freight carloadings continued high above
year-ago levels, while construction contract awards in December
registered an increase of 11 per cent over the year, as against a
3 per cent decline nationally.
Mr. Bopp said that business loans of district weekly reporting
banks seemed to have declined somewhat less than seasonally since the
turn of the year.
In the past two weeks, investments had decreased
as banks reduced their holdings of Governments.
Adjusted demand
deposits had continued downward, while time deposits had increased
moderately.
The basic reserve position of large city banks showed
improvement in the past few weeks; the average basic deficiency
declined from $73 million to $13 million.
Borrowing from the
Federal Reserve Bank had reflected this change by dropping from
$65 million to $13 million.
Country banks, on the other hand, had
increased their borrowing from the Reserve Bank.
As the result of
these mixed changes, the Third District now accounted for 4 per
cent of total borrowings from the System, as compared with 6.7 per
cent and 8.8 per cent, respectively, in the preceding two weeks.
As to policy, Mr. Bopp expressed the view that this was a
time for watchful waiting.
He would not recommend any change at
this time in the degree of restraint, the discount rate, or the
directive.
Mr. Fulton stated that Fourth District activity continued
at a high rate.
Steel production was averaging about 97 per cent
2/9/60
-19
of capacity, with Cleveland and Cincinnati around 100 per cent.
He was told, however, that there was a noticeable softening in
the demand for steel and that the production level would decline.
The forecast of production for the year 1960 had been reduced
from 135 million tons to 125-127 million, but the reduced estimate
was still
considerably higher than the largest previous year, 117
million.
Industry expected that operations for the year would
average out at about 80 per cent of capacity, which was a desirable
rate from the standpoint of the mills, and profits were expected to
be quite good.
Auto companies had cut back tonnage for the second
quarter, and other users of steel were not stocking inventories as
expected because they were getting whatever they needed when they
and also because they did not want to borrow to carry
needed it
inventories.
Some domestic users of foreign steel reportedly were
willing to pay damages to get out of their contracts with foreign
producers.
The steel workers were still
going strong and pro
ductivity was being maintained at the high rates of November and
December.
Mr.
Fulton said that machine tool companies reported new
orders much higher than the fourth quarter rate and expected a
good year from the standpoint of profits and production.
Anticipating strong auto production, the rubber industry had
produced tires in great volume and inventories were high.
However,
production had been cut back, shipments were now running ahead of
2/9/60
-20
production, and the industry expected a good year as a whole.
Auto
sales in the Fourth District had been quite good, higher than in
recent years, but used-car sales were not so strong.
A glass
company supplying the auto industry had cut its estimate of auto
mobile production to 6.8 million, while the rubber companies
contended that a 6.4 million car year would be doing very well.
It
appeared that dealer inventories would amount to about one
million cars by the end of this month, which would necessitate
quite a drastic cut in production.
The impact of the new compact
cars had not yet been thoroughly appraised, but it
that stickiness in
the smaller models.
was expected
larger cars would to a degree be taken up by
Reports from various metal-working industries
indicated that they were expecting a good year in terms of stable
production and satisfactory profits.
Department store sales for
the four weeks ended January 30 were 13 per cent above last year.
A disturbing factor, however, was that unemployment trends had
not kept pace with the improvement in business.
A longer time
would be necessary to appraise that development, but it
did seem
that a higher rate of unemployment was becoming something of a
continuing factor.
Reports were being heard in every quarter of
price increases for finished goods.
Prices had gone up 5 to 10
per cent for manufactured goods, particularly at those companies
that signed up with workers in
steel companies signed.
terms of the contract that the
Business loans in the district were just
2/9/60
-21
about even with December 30 figures, and the banks did not expect
a large increase in
those loans in the immediate future.
They
felt that the payment of corporate taxes in March would not be
accompanied by unusual borrowing and that the using up of corporate
liquidity would probably not come to light in terms of credit demand
until April or May.
All in
a good year.
all, Mr. Fulton said, businessmen and bankers expected
As Mr.
Noyes had suggested, they felt that expectations
for a booming economy after the first of the year were much too high,
and that a leveling-off of those expectations was a healthy thing in
terms of permitting a sustainable economy for a longer period.
Mr. Fulton felt that the Desk should continue about the same
degree of pressure that had been brought to bear in the past few
weeks, without easing.
He also felt that neither the discount rate
nor the directive should be changed at this time.
Mr. King said he found himself in agreement with practically
everything that had been said thus far.
He thought that this was
not a time to take any positive action one way or the other, and
that it
was definitely a time when the Desk should not apply any
more restraint.
In his opinion, the apparent moderation of the
course of the prospective boom was partly due to the experiences
of many people during the last recession; they remembered the
lessons learned during that recession quite well and were not
2/9/60
-22
going to get into a position where caution was thrown to the winds.
A thing that seemed to be working in favor of the System and the
economy at the present time was that people apparently were not
going to permit themselves to get overextended.
That had been the
basis for his view, expressed several months ago, that there was
not going to be a wild boom after settlement of the steel strike.
He felt that people had learned their lessons and were not likely
to forget them in a hurry.
Mr. Shepardson said he considered it
fortunate that some of
the excessive exuberance manifested a few weeks ago seemed dampened
somewhat.
He also considered it
fortunate that basic indicators
were still
strong and suggested continued growth.
Like two weeks
ago, the situation seemed to be one calling for watchful waiting.
During this seasonal period, it was difficult to predict just what
would happen when spring opened up, and in the circumstances he
would maintain the present position of restraint.
After commending Mr. Bryan for his work in trying to develop
useful policy guidelines for the Committee,
Mr. Robertson said that
this was a time when, without a change in policy and without a change
in the degree of restrictiveness that had been followed, the Com
mittee found itself in a situation different from that prevailing
when it
adopted the existing policy directive.
At that time in
flationary credit expansion was going on, but today that could not
be said.
In his opinion, the directive should not be adopted under
2/9/60
-23
certain circumstances and then left intact under different circum
stances.
If
the directive were changed, it
that the Committee might come back to it
thinking was on that side.
was possible, of course,
in a short time; his own
However, in view of the situation
existing today, he thought it
would be desirable to change clause
(b) of the directive to eliminate the reference to "restraining
inflationary credit expansion."
If this were done, clause (b) would
provide for fostering sustainable economic growth and expanding
employment opportunities.
If the Committee wanted to add "without
inflation," that would be agreeable to him.
In either event, such
a directive would be more indicative than the existing directive
of the situation at the moment.
Mr.
Robertson agreed with the view that there should be no
easing or tightening.
As Mr. Bopp had said, this was a time for
watchful waiting.
Mr. Mills said he proposed to pick up at a point where Mr.
Bryan had left off and urge that the Committee focus its attention
on the kaleidoscopic fluctuations that had occurred in the prices
of United States Government securities over the past six weeks or
thereabouts,
particularly the very sharp rise in prices that had
taken place over the past two weeks with a consequent decline in
yields.
As he picked up the discussion today, there had been
general acknowledgment that those movements were related to natural
market factors.
If such were the case, the Committee should be
2/9/60
-24
chary in embarking on any actions that would tend to alter the
outlook that the market had taken on the movements in prices of
United States Government securities.
If the Committee did so, it
would be flying in the face of the long-expounded concept that the
Federal Reserve believed in a free Government securities market and
that there should be a minimum of interference with the movements
therein.
This harked back to comments he had made at previous Com
mittee meetings, and the January 26 meeting in particular, that the
maintenance of a status quo position, if that were interpreted in
the level of negative free reserves and if
the Committee had in
mind negative free reserves in the range of $500 million, would
inevitably mean further pressure on the reserve positions of the
banks and further restriction of the money supply.
It seemed quite
probable that the marked shrinkage of bank deposits in January was
more than a seasonal symptom and was fundamentally a reflection of
the pressure of a continually maintained level of negative free
reserves.
felt
it
If
that should be an objective of the Committee, he
would be damaging two ways.
In the first
place, it
would
completely destroy the outlook in the United States Government
securities market that had been derived from a free market and was
in his mind a reassuring factor.
Second, it
would put far greater
pressure on the reserve positions of the banks than justified by
the economic outlook, as depicted in the various comments today.
2/9/60
-25
A great deal had been said, Mr.
Mills
noted, regarding the
money supply and the fact that it could be held to a very low level
of expansion or forced to contract below an earlier level, and that
the economy would not suffer from that trend in that there was a
make-up of the deficiency through increasing velocity in the turn
over of money.
However, it
seemed quite possible that the velocity
being thought of was the velocity of turnover of bank balances in
the hands of large corporations or other personal or institutional
entities whose balances are substantial.
At the other end of the
spectrum, he would suspect that there might be quite a different
picture in the statistics of the smaller businessman or entrepreneur
who, at his most affluent time, operates with only small balances
and is
dependent, by and large, on augmenting those balances through
the use of credit.
as he understood, it
If there was any basis to that reasoning and if,
is
a purpose of the economist to look at the
whole of consumption as the means of obtaining stability and growth
in the economy, too much pressure, and unrelenting pressure, would
sooner or later so push back the accessibility of credit to the
large body of consumers in the smaller operating brackets that
their ability to consume and refine the product of the country's
manufacturing mechanism would be severely damaged.
Mr. Mills said that he would not favor changing the discount
rate.
He would be willing to accept Mr. Robertson's proposed wording
2/9/60
-26
of the directive in lieu of the language he (Mr.
on several occasions, although he still
Mills) had offered
commended his suggestion to
the consideration of the Commttee.
Mr. Leedy reported that Tenth District conditions continued
to show strength.
The sharp advance in nonfarm employment late last
year had brought the job level back to its pre-strike magnitude.
Increased employment had occurred not only in plants directly affected
by the steel strike and other strikes in the district, including some
in the packing industry, but also in several nonmanufacturing areas,
including trade and services.
Department store sales were up in
January, but not as much as the national average, the rise being
only 2 per cent.
The trend in business loans to which he referred
at the preceding Committee meeting had continued.
Contrary to the
national pattern, the seasonal movement in these loans had been much
less pronounced than in past years; loans to manufacturing and mining
companies had actually increased contraseasonally,
commodity dealers had also increased.
and loans to
There had been some decline
in deposits at weekly reporting banks; with the current trend of
loans and these losses of deposits,
there had been some increase in
borrowings by reserve city banks from the Reserve Bank.
As to policy for the forthcoming period, Mr. Leedy said it
seemed to him there should be a continuation of what had been done
in the past few weeks.
The change that had occurred recently seemed
to him pretty much in the psychological area.
As pointed out, all
7/9/60
-27
of the major economic indicators were still
on the side of strength.
Although there were some indications of a possible slowing down, for
example, in steel output and auto production, the over-all picture
continued to be one of such strength that there seemed no sufficient
reason for any basic change in System policy.
He subscribed to the
view that there should be some addition to the money supply, but to
inject additional funds for that purpose at this time did not seem
to him appropriate.
The policy that the Committee had been follow
ing in recent weeks had permitted a general decline in interest rate
levels, and nationally there had been at least a seasonal decline
in business loans.
Until the outlook was more clear and until there
was a confirmation or some repudiation of the change in psychology
that had occurred, it
seemed to him the Committee should continue
what it had been doing, making certain that the pressure on bank
reserves was not increased.
Mr. Allen said the assumption that business activity would
rise vigorously through the first half of the year was being tempered
by more rapid inventory building than had been anticipated.
Steel
shortages were rapidly being eliminated, although some items, chiefly
the lighter ones, were still in short supply.
so important a user of steel that it
The auto industry is
receives preference,
but if
auto production should be cut back, steel supplies should ease sub
stantially.
Auto production in January was 690,000, and it did not
appear that February would exceed that figure.
Therefore, if
2/9/60
-28
original first-quarter production schedules of 2,250,000 cars were
to be achieved, 900,000 would have to be produced in March, which
seemed unlikely in the light of sales thus far.
January sales were
455,000, better than in 1959 or 1958 but not as good as in 1957,
1956,
or 1955.
Inventories on January 31 were 79,000 units.
700,000 cars were produced in
exceeded those in
February, then even if
If
February sales
January by 10 per cent, inventories on February 29
would be at the very high figure of 994,000.
It
seemed more certain
every day that first-quarter production would be less by 150,000 to
250,000 than originally forecast, and that a 7 million car year was
out of reach.
The industry was re-evaluating its
schedule mix.
The
increased sales of compact cars--22 per cent of the January totalwere forcing conversion of more assembly lines to the small cars,
and the feeling was growing in Detroit that this was a transition
period in a permanent adjustment of models to less expensive auto
mobiles.
A check with producers of television sets and household
appliances in the Chicago area indicated that sales of these items,
like automobiles, had been less than anticipated, with the result
that some involuntary inventory building was occurring.
other hand,
sales of nondurable goods continued strong in
On the
January.
Daily average sales at department stores were 8 per cent above last
year, compared with 7 per cent for the country.
orders for producers'
Also, the rise in
capital goods had continued, and the prospects
for farm income and home building, rather dim a few months back, had
2/9/60
-29
improved.
Although sales of consumer durables were not as strong
as exuberant forecasts had suggested, they were at relatively high
levels and could increase further in the spring.
The increased
ease in the money market in recent weeks had not been reflected in
the reserve positions of the Chicago banks to the extent that it
had shown up elsewhere.
loan changes.
The most important fact was the effect of
The large Chicago banks had not had the January decline
in loans which was shown by the New York banks.
Summarizing, Mr. Allen said that business was at a very good
level and inflationary expectations had diminished.
He subscribed
to the view of those who felt that the Committee should continue
about as it
had been in the matter of monetary restraint.
favor no change in
He would
the discount rate and would prefer no change in
the directive, perhaps being overly influenced by the Seventh District
loan picture toward continued use of the word "inflationary" in the
directive.
He would not feel too strongly if
the majority of the
Committee wanted to adopt Mr. Robertson's suggestion, but his personal
preference would be to leave the directive as it
stood.
Mr. Mangels said that most recent changes noted in the Twelfth
District were the result of seasonal factors.
Lumber production and
new orders had declined, but the mills had been operating at a little
better than the usual rate for the past month or so.
The lumber
people were awaiting developments in the next 60 days to see how they
would fare.
Total construction contracts awarded in the district were
up 3 per cent against a year ago, with increases in both residential
2/9/60
-30
and nonresidential construction, primarily in apartment house and
motel type construction.
An FHA survey indicated that about half
of the building contractors in the district expected fewer starts
in 1960 than in 1959, and it had been noted that there was a longer
period between finishing and selling homes.
Steel production in
January declined, which was to be expected following the high rate
of production in December to meet critical shortages.
The three
major producers were operating at 94, 87, and 77 per cent of
capacity, respectively.
It
was expected that demand and prices
would hold up through March, but that in the second quarter that
there would be some reduction of sales in certain lines.
Aluminum
production had increased substantially with the addition of another
potline by Alcoa.
Two producers were operating at capacity and the
other two at about 75 per cent of capacity.
The increased demand
reflected foreign buying and also new uses of aluminum,
The
copper strike had been settled by one company and two others were
hopeful of a settlement within a week or ten days.
While no recent
over-all figures on automobile registrations were available,
in
California registrations for the second week in January increased
60 per cent from the first
week.
Department store sales in January
were about 3 per cent over a year ago for the district as a whole,
but in Seattle and Portland there was a decline.
Bank loans in
the two weeks ending January 27 showed a further decline of $130
million, and holdings of Government securities declined about
2/9/60
-31
$180 million,
Demand deposits were down almost $390 million, a
larger decline than for the country as a whole, and time deposits
were down $80 million, about half of the decline for the United
States as a whole.
The banks were still losing savings deposits
to savings and loan associations paying 4-1/2 per cent dividends
and to the Government securities market.
There continued to be a
large volume of small purchases of Government securities by indi
viduals.
To indicate the degree of tightness of the banks, in
the past week reporting banks purchased Federal funds to the extent
of about $1.5 billion, this being six times the amount of sales.
This week they expected to buy $1.4 billion, with virtually no sales.
Borrowings from the Reserve Bank had been somewhat on the heavy side,
with over $100 million of loans outstanding on February
4.
Borrow
ings were scattered and were not in large number, but those who
borrowed tended to come in for substantial amounts.
As to policy, Mr. Mangels noted that the signal was still
as far as Treasury financing was concerned.
Even if
red
the light were
green, however, he would be inclined to align himself with those who
suggested holding the line.
This would mean net borrowed reserves
of somewhere around $400 million.
San Francisco directors, it
At the January 13 meeting of the
appeared that the sentiment was moving
toward an increase in the discount rate of either 1/2 per cent or
1 per cent, but last Thursday the directors came in
no change should be made..
convinced that
Mangels felt that he would favor
leaving the directive pretty much in
its
present form.
By the
2/9/60
-32
time of the next Committee meeting, however,
a change perhaps would
be warranted.
Mr. Irons said there had not been any significant changes
in
the Eleventh District.
Business activity was going along at a
good level, department store trade was off less than seasonally in
January,
what it
and the crude oil situation was satisfactory in terms of
had been earlier.
Employment and unemployment figures were
satisfactory, with the changes in
January less than seasonal
On the
nonfinancial side, therefore, the general picture was one of slight
to moderate improvement at a high level of activity.
There seemed
to be less thinking among businessmen and bankers as to the
probability of a strong inflationary push than two or three months
ago, but the optimism may have been dampened by factors that might"
change.
On the banking side, Mr. Irons said, there had been a bit
more than the usual seasonal decline in loans.
There had been a
decline in investments and more than a seasonal decline in deposits,
the bulk of the deposit decline having been in interbank deposits.
The banks, principally the city banks, apparently had been under
considerable pressure since the first of the year.
Borrowings from
the Reserve Bank in the past several weeks have been larger in
amount and larger in proportion to total borrowing from the System
than was earlier the case.
They totaled about $130 million on
one or two days, which was high for the district, and rather
2/9/60
-33
consistently had been running about 10 per cent or more of the
national total.
The borrowing was coming in large part, dollarwise,
from four or five of the larger reserve city banks, but there had
also been some increase in the number of "real" country banks that
were borrowing.
A few of the country banks that borrow seasonally
had begun to borrow sooner than in
other years.
The national picture, as Mr.
Irons saw it,
did not call for
a change in any of the basic policies that the System had been
following.
He would not favor a change in the discount rate at
this time.
He would like to see open market operations continue
about as they had been during the past two-week period, feeling
that this represented the appropriate amount of pressure on reserve
positions.
He would prefer not to change the policy directive at
this time, although he felt that the Committee might be getting
nearer to the point where a change would be in order.
Mr. Erickson said that most of the statistical measures in
the First District continued to show growth, but that the situation
did not have any of the characteristics of a boom.
A spot check of
steel distributors, users, and warehousers last week indicated that
inventories were regarded as back to normal and adequate except for
certain specific shapes or sizes.
During the past two weeks district
banks had been sellers of Federal funds in
a moderate way.
They used
the discount window on the average slightly more than in the previous
two weeks, but borrowings since the first
only 2.5 per cent of the System total.
of the year had averaged
2/9/60
Mr. Erickson expressed agreement with the summarization of
the current situation made by Mr. Noyes and said that he would
continue present policy, making no change in the discount rate or
the directive.
Although he agreed that the language suggested by
Mr. Robertson was more in line with the present situation than the
existing directive,
he would prefer to wait until the next Committee
meeting before making a definite decision.
He would favor giving
the same instructions to the Desk as were given at the January 26
meeting,
Mr. Szymczak said that, as at the time of the January 26
meeting, he believed the System should provide reserves to the
extent that the Account Manager could do so without disturbing the
market, or putting it
differently, the Account Manager should absorb
less of the reserves provided from other sources.
He felt there was
a tendency to get wedded to certain net borrowed reserve figures, as
we have done before, and that people in
the System and outside the
System knew this and acted accordingly, frequently with disturbing
consequences in
the money market and the Government securities
market and, therefore, by the nature of the habit formed it
was
difficult to establish a change in policy when a change became
evidently required.
He felt it
would be better for the System
to vary the net borrowed reserve figure, whether on the basis sug
gested by Mr. Mills, or on the basis suggested by Mr.
Bryan, or on
2/9/60
-35
the basis of the current seasonal situation; it
seemed advisable to
allow some of the reserves provided by outside influences not to be
absorbed by selling securities.
However, in his opinion the over-all
economic picture was one of strength and, therefore, he would not
suggest a change in the directive at this time or a change in the
discount rate at this time.
Mr. Balderston stated that in view of his comment at the
January 26 meeting that the Committee should not be deceived by the
doldrums of February, what he proposed to suggest at this time might
come as something of a shock.
Continuing, he said that in'pondering
the fundamental questions Messrs. Mills and Bryan had raised, he had
taken advantage of the experience and skills of Messrs. Thomas, Young,
and Noyes and their colleagues in order to gear his own thinking.
He
found himself ready to join Messrs. Mills and Robertson in favoring a
change in the language of the directive, primarily because he thought
it was timely for the Committee to consider its responsibility in
respect to the long-run money supply.
Mr. Balderston said it seemed to him the present period was a
long moment of uncertainty.
The Committee might be witnessing merely
a reappraisal of expectations or a pause in the recovery, or it might
possibly be witnessing the beginning of a downturn.
It was his guess
as of today that business might still be climbing, but at a decelerating
rate, and that the economy might be starting a rolling adjustment that
could persist for some time.
The current recovery, he noted, would
2/9/60
-36
celebrate its
second anniversary in May.
What gave him cause for
concern was not the dampening of bullish expectations, which might
only reflect February pessimism.
The Committee had warned itself
two months ago that this might happen.
What did impress him, however,
was the behavior of the financial markets,
The decline in loans and
investments had been greater than was to be expected for seasonal
reasons,
and the calendar of corporate issues was small.
surge of offers like that in March 1956 might still
he saw no evidence of that as yet.
While a
be experienced,
The money markets had eased on
their own initiative, and this easing was reflected in the current
decline of the bill
It
ponder its
and last
Young.
rate.
was time, Mr.
policy, its
Balderston suggested, for the Committee to
directive, and its
On the second
of those steps, he had had the help of Messrs.
Thomas and
His conclusion was that the directive should be modified to
reflect the present uncertainty,
or not,
procedure.
the disappearance, whether temporary
of speculative ebullience,
in the money supply.
and the need for further growth
He feared that the Committee would hang on
too long to the restraint it
had been exerting.
The wording he
would suggest for clause (b) was "to fostering sustainable growth
in
economic activity and employment while guarding against excessive
credit expansion."
Like the language Mr. Robertson had suggested,
this directive would drop the word "inflationary."
were changed in this manner,
If
the directive
he would recomend that policy be
implemented by adding about $20 million a week to the reserve base,
2/9/60
-37
after allowance for seasonal and other transitory factors, which
would permit a rate of growth in the money supply of about 2 per
cent a year.
At this point, there were distributed copies of a table of
projected operations allowing for 2 per cent growth.
The term
"projected operations" represented operations necessary to allow
for seasonal changes plus growth of currency in
circulation and
required reserves at an annual rate of 2 per cent,
million a week.
a total of $20
The figures were presented on a weekly basis and
on a cumulative basis through the end of June.
Mr.
Balderston then said that by using these calculations
and following a procedure designed to implement such a policy the
Committee would add about a half a billion dollars a year to the
currency in circulation and about half a billion dollars a year to
required reserves.
Expressed in terms of percentages,
the increase
in currency would be about 1.6 per cent a year, and in required
reserves a little
procedure,
if
it
less than 3 per cent a year.
He hoped that this
should seem desirable, would employ a language
that would not expose the Committee to the criticisms from the
outside that would surely be leveled at it
to use a percentage figure like 2 per cent.
if
the Committee were
He proposed,
that the weekly increment be expressed in absolute terms,
therefore,
even in
Committee discussions, so that the risk of misinterpretation might
be minimized.
Consequently,
he suggested $20 million per week as
expression of Committee policy.
2/9/60
-38
His reason for urging this procedural change,
said, was to foster continued growth at a high level.
Committee added to the money supply by
.5 per cent.
Mr.
Balderston
In 1958 the
4 per cent, and in 1959 by
The Committee, quite properly, let
the economy grow
up to the enlarged supply of reserves put into the market in 1958.
However,
one who pondered the admonitions of Messrs. Mills and Bryan
might conclude-as he had-that the Committee should now begin again
to provide for growth in the money supply at a steady pace,
To fail
to do so might magnify any decline in the economy, if and when it
occurred.
Mr. Balderston said he had sought to explain the change in
his own thinking and his concern regarding the impact that continuing
restraint might have upon the long-run money supply unless the Com
mittee shifted procedure.
If
Mr.
and there would be good reason, he felt,
it
Thomas had worked out,
seemed to him that it
it
shifted procedure and adopted what
would be timely to change the directive as
well.
Chairman Martin said the Committee was indebted to Messrs.
Bryan and Balderston for doing work on a formula approach that might
be of help.
The Committee was also indebted for the points on the
money supply that Mr.
thought that all
Mills had made over a period of time.
He
of the Committee members were beginning to recognize
these points as meriting consideration.
The Chairman said he did not think the Committee was as far
apart as might appear from the discussion.
All appeared to be leaning
2/9/60
in
-39
the same direction.
The question came to a matter of judgment
on what the economy was going to do,
felt
and with regard to that he
there were varying judgments.
Turning to the directive,
Chairman Martin said this involved
a problem that had concerned him since the Open Market Committee
started meeting at three-week intervals with all
of the Presidents
in
attendance.
it
must be prepared to take cognizance of minor shifts in the economy
If
the Committee was going to meet so frequently,
as well as major shifts, that is,
run problem.
the short-run as well as the longer
For that reason, Mr. Robertson's comment was pertinent.
The dramatic shift in
the past couple of weeks certainly was not
indicative of inflationary psychology.
Whether inflationary implica
tions were still dominant was a matter of doubt, on which there could
be differing judgments.
Chairman Martin said that he had tried hard over the past
week end to pull together his own thinking.
He came out, essentially,
that he still was not persuaded that there had been a fundamental
change in the economy.
He did not believe, however,
that the adjust
ment of the past several weeks was something that could be shrugged
off.
in
To say with certainty that this was just a minor adjustment
a long bull market (a bull market in
unwarranted.
a business sense) would be
The Committee was not sure of the state of business
even before the steel strike, and then the strike came into the
picture.
It was now settled, and a new assessment of business
2/9/60
-40
might be taking place.
One way to think about the matter would be in
terms of assuming the worst, that is,
into a business recession.
that the country was starting
He did not assume this for a minute, but
he put the possibility forward for the purpose of an intellectual
exercise.
Using such an assumption,
should be doing; whether it
the question was what the System
should drastically revise the discount
rate and push on the entire problem.
As he saw it,
the Chairman continued, the System ought to be
looking at the growth of the money supply and the factors that would
produce it.
It
should be looking for some orderly growth in the
economy on the assumption that the country was not in a serious down
turn but was in a modest adjustment that would require picking up.
This might be entirely different from 1957 and 1958 and might require
an entirely different assessment of the picture.
As things stood, it
seemed to him that the Committee ought to give serious consideration
to whether it
should not adjust the directive mildly at this point.
He did not feel that this was a matter of great importance.
If the
Committee adjusted the directive and a few weeks from now should find
that the current movement was temporary, it
and reinstate the existing language if
could readjust the directive
that seemed appropriate,
At
least, however, the Committee would be showing an awareness of what
was occurring in the economy.
As to the money supply, Chairman Martin said it
concerned
him that in talking to some informed individuals in the past week
or ten days,
he found a number of them convinced that the System
2/9/60
-41
has been easing.
They would have been much more alarmed had they
known that the recent developments occurred without any easing of
pressure by the Federal Reserve.
This was a rather interesting
point to him, the Chairman said.
It indicated that the System
would be tightening against a trend, and he questioned whether the
Committee would want to do that.
He felt that the situation had
moved beyond the point where continuation of an even-keel policy
on account of Treasury financing was called for.
There was still
the matter of the Treasury payment date, but he believed the
Treasury was sufficiently over the hurdle so that this was not a
serious consideration--at least, it was not a consideration serious
enough to guide the extent to which the Committee might wish to mop
up reserves coming into the market independently of Federal Reserve
action.
The Chairman noted that the discussion today had been in
terms of moderate growth of the money supply.
For example, Mr.
Balderston had suggested $20 million a week and Mr. Bryan about
$31 million this month, and others had suggested supplying some
reserves.
His judgment was that the Committee should give serious
consideration to whether, under present conditions, it wanted to
maintain the status quo.
If so, the Committee could be working
actively against a current trend in the money market and exerting
more pressure than current events warranted.
There might be a
tightening two or three weeks from now and the System might want
2/9/60
-42
to go in the opposite direction, but at present the Committee was
dealing with the problem of the money flow.
Chairman Martin said he interpreted the consensus today as
favoring no change in the policy directive, although a substantial
minority favored a modest change.
Personally he did not think a change
in the directive of fundamental importance, but there had been some
shifting, whether one called it psychological or anything else,
If
an outsider compared the discussion at the January 12 Committee meet
ing with the discussion today, he would probably say there was not
much justification for having exactly the same directive on January 12
and February 9.
The Chairman then called for discussion of the consensus,
specifically as to whether it
would be wise to make a modest adjust
ment of the directive on the basis of what had happened between
January 12 and February 9, and with full recognition that the Com
mittee was going to meet again on March 1, at which time it
might
wind up by reinstating the present language.
Mr. Allen noted that the psychology in January reflected
much more of a boom feeling than when the current directive was
first
adopted in May 1959.
Committee members evidently felt quite
different today than they did on January 12; most seemed to feel
somewhat different.
The country was not in a boom at present,
but business was very good.
2/9/60
Upon request, the language for clause (b) of the directive
proposed by Mr. Robertson and that proposed by Mr. Balderston was
read.
Mr. Hayes then said that he leaned toward continuing the
present directive for at least another three weeks in view of the
fact that clearly the consensus favored keeping policy about the
same.
He had had the feeling that a change in the directive should
suggest a measurable change in policy.
It might well be that the
time was getting near when the Committee would want to do that, but
he did not feel that the majority favored a basic change in policy
now.
Therefore, the Committee might want to defer a change in the
directive for another three weeks rather than to get whipsawed into
a quick reversal if
developments during that period indicated that
the recent trends did not represent a very lasting economic change.
Mr. Hayes recalled that he had had sympathy for a long time
with the thought of trying to let the money supply expand a little,
and he still
had that feeling.
However, he believed there was
nothing inherent in present policy or the present directive to
preclude a change in the order of 2 per cent a year from occurring,
From the standpoint of a short-term operational guide to the Desk,
an instruction for this kind of an increase in the money supply
would be almost meaningless.
The Desk could hardly see $20
a week in relation to the kind of factors that it
all the time and would scarcely be able to tell
million
was offsetting
whether such an
2/9/60
-44
objective was being accomplished or not.
Of course, the Account
Manager could look later and see whether, in a general way, he
had gotten toward that goal, but in day-to-day operations the Desk
could not be guided by such an instruction.
This did not mean that
a $20 million increase could not be built into the projections.
He
rather liked the idea of setting the projections up cumulatively, as
Mr.
Thomas had done, with allowance for growth; to a very minor
degree, the Committee would be giving recognition to the desirability
of having this growth.
However,
the swings are such that the Manager
could not determine whether he would accomplish that growth or not
within any three-week period.
Mr. Rouse said that he thought Mr. Hayes had stated the problem
precisely.
Mr. Young said it
was not the feeling of Mr. Thomas or himself
that the Desk could turn the situation around in a three-week period
from an actual decline in the money supply to no growth to a little
bit of growth.
The Committee might have to play along with this
procedure for several months before there was evidence that it was
taking hold.
Mr. Szymczak said he felt there might be good reason for
changing the directive more frequently than had been done in the past,
but he doubted whether this was the time to make such a decision.
the first place, although he might be wrong, he felt that recent
developments were seasonal.
Second, the time to make a decision to
In
2/9/60
-45
change the directive more frequently would logically seem to be at
the annual organizational meeting on March 1.
be decided whether, in
situation, even if
it
At that time it
the event of a determinable change in
could
the
were only slight, the Committee would want to
change the directive.
However,
to change now, and then come back
again to the directive that had been outstanding for a long time,
might create confusion both for the Committee and the reader of the
Committee's policy record.
To summarize, he felt that the recent
economic and financial developments were of a seasonal character,
felt
he
that any decision to change the policy directive more frequently
than in
the past should be deferred until the March 1 meeting, and
he would favor providing some reserves within the terms of the present
directive because he believed there should be some easing and also
because he would like to get away from a fixed level of around $500
million net negative reserves.
To remain at a fixed net negative
reserve level too long, he said, made it
more difficult to change
when the time came to change.
Chairman Martin withdrew from the meeting at this point to
receive a telephone call.
Vice Chairman Hayes indicated that he hesitated to go forward
with the meeting in
the Chairman's absence because there seemed to be
some difference in his views and those of the Chairman with regard to
the directive.
2/9/60
-46
Mr. Mills then suggested taking a poll of the Committee
members with regard to the directive and with regard to whether
additional reserves should be supplied, either according to one
of the formulas that had been suggested or otherwise.
Chairman Martin then returned to the room.
In response to a suggestion made while the Chairman was oat
of the room and of which he was advised after he returned, Mr. Thomas
undertook a technical explanation of the proposal of Mr.
Balderston,
He said the differences that existed between this proposal and the
total reserve guide suggested by Mr. Bryan were in
significant.
some respects
Ignoring for the moment the smallness of the figures,
whichever guide was used, and the question of how good the instruc
tion might be to the Desk from the standpoint of day-to-day opera
tions, from a procedural standpoint this was an approach that said
buy or sell so many securities regardless of what happened to net
borrowed reserves or total reserves.
Adjustments might be necessary
because of variations in market factors from projections.
The
proposal would produce the same results as the use of total reserves
or net borrowed reserves if
growth in the economy proceeded according
to the pattern indicated on the table and if,
remained unchanged.
However,
if
therefore, borrowings
the growth in the money supply
should be greater than projected, it
would be necessary for the
banks to meet their additional reserve needs by borrowing, which
would mean that total reserves would increase by the amount of the
2/9/60
-7
borrowing; net borrowed reserves would increase and banks would be
under greater restraint, as they should be.
If
the growth was less
than projected, the banks could pay off their borrowings and be under
less restraint.
Under the total reserve formula, if
the growth was
greater than considered desirable and the System attempted to keep
the supply of reserves stable, the Account would have to sell in the
market to offset borrowings,
and that would make the banks discount
more or force them to liquidate securities.
buy in the market to offset borrowings,
Under the Balderston proposal, if
If
the System tried to
that would create more ease.
growth of currency in circulation
and required reserves were as projected, reserves would increase as
desired and net borrowed reserves would not change.
greater than projected,
If
growth were
however, total reserves would increase, but
so would net borrowed reserves, thus putting additional pressure on
the market.
If
growth were less than projected, borrowings would be
permitted to decline, and total reserves would decline.
Under the
net borrowed reserve standard, any greater growth than projected
would be supported by open market operations.
This would be different
from the total reserve standard, under which the System would try to
offset any changes in reserves due to changes in borrowings.
Under
the Balderston proposal, if there was a tendency toward more growth
than projected, restraint would rise because borrowings would have
to increase.
If growth were less than projected, restraint would
decrease because borrowings would decline.
The figures given in
2/9/60
-48
the Balderston proposal would allow for about a half billion dollar
annual increase in currency in circulation.
This would include not
just the currency included in the money supply but also bank vault
cash; and in a sense it would allow for growth in the reserves of
nonmember banks held in the form of vault cash,
The action permit
ting member banks to count some vault cash as reserves meant that
the formula would have a little
less effect than formerly.
One
would have to make less allowance for that factor than formerly.
If it was desired to effect a 2 per cent increase per year in the
money supply, that would call for adding about $8 million of reserves
a week-corresponding to the $30 million a month figure in Mr. Bryan's
proposal.
The Committee could vary the directive by saying that the
Desk could take care of currency in circulation and then have $8 or
$10 million left for growth in total reserves.
Mr. Johns inquired whether the projections related to the
Balderston proposal made allowance for seasonal changes or for intra
monthly fluctuations in
float, and Mr.
Thomas replied in the
affirmative.
Mr.
Hayes then asked whether the Balderston proposal would
not be a better guide for what the Committee might want to do over
a period of several weeks than in a particular week.
his belief that an instruction in
He repeated
accordance with this proposal
would not constitute an adequate guide for a week's operations
without some additional guidance,
such as to keep the degree of
2/9/60
-49
pressure about as it
had been or a little
stronger or a little
weaker,
Mr.
Johns suggested that the study would be incomplete
unless the Committee reconsidered carefully the necessity of off
setting short-run, self-correcting fluctuations in the reserve
supply, for example, intramonthly fluctuations of float.
That
factor alone would complicate the figures substantially and make
for wide fluctuations in a short period of time.
offsetting, it
If there was no
was his view that nothing dire would happen.
Chairman Martin indicated that he thought Mr. Johns had
made a valid point.
Mr. Hayes then commented that he found the Balderston
proposal interesting and deserving of thought.
However,
if
it
was
being considered as a basis for changing the type of operating
guidance given to the Desk, he felt that such a step should be
deferred until there had been an opportunity to study the matter
further.
In other words, while it
was an interesting proposal, he
did not feel that the Committee should adopt it
today.
Chairman Martin agreed, stating that the proposal should be
put in the same category as Mr.
Bryan's suggestion of two weeks ago.
The Chairman then said that the real problem this morning
was whether there was any way of finding words to cover the type
of situation that existed at present.
To judge by the discussions
at this meeting and the January 26 meeting, there was more concern
2/9/60
-50
within the System than for a long time about the question of growth
of the money supply and when to do something about it.
Mr. Rouse
had said that the market was generally tight during the past two
weeks.
However, the rate structure was not tight.
Therefore, the
problem got into terms of the feel, color, and tone of the market.
Mr. Hayes suggested that the Desk might be instructed to
continue about the same degree of pressure, bearing in mind, however,
the wish of the Committee that, within the general framework of
present policy,
some modest increase in the money supply could be
encouraged.
At this point Mr.
Mills again proposed that the Committee
members be polled on the directive and the manner in which reserves
should be withheld or supplied during the period until the next Com
mittee meeting.
Chairman Martin said he had no objection, although the shades
of difference were so slight that he was not sure a poll would reveal
too much.
There might be a go-around on the directive, and then
discussion of the implementation of the directive, for there would
appear to be different questions of implementation depending on
whether the directive was renewed or changed.
At least that was
the way he sensed the discussion this morning.
The Chairman then suggested going around the table for views
on the directive.
Mr.
Johns said he found it
rather difficult to comment on
the directive unless he knew the majority determination concerning
2/9/60
-51
policy, for the directive ought to express what the current policy
was.
If
he must comment,
however,
he would adhere to his position
that he would mildly prefer not to change the directive now.
Chairman Martin suggested that it
mind what was involved.
degrees.
was important to have in
The Committee was talking about modest
The problem was one of restraint or less restraint, but
not ease, and it is always difficult to handle such a problem in
terms of words.
Mr.
Bryan noted that he was not presently a member of the
Committee.
He then said that he had not come to the meeting with
a change in
the directive in mind.
Messrs. Robertson, Mills,
However,
the arguments made by
and Balderston were profound.
that he would favor a change in
He believed
the directive, and either form of
wording that had been proposed for clause (b) would be satisfactory
to him.
Mr.
Bopp said he agreed with Mr.
Bryan.
Mr. Fulton said he would go along with that view also, with
preference for the language suggested by Mr.
Mr.
Balderston.
King expressed doubt as to whether a change in
the di
rective would accomplish anything substantial and suggested that
the instruction to the Desk was more important.
mittee had reached a point where it
He felt
the Com
was going to have to abandon
net borrowed reserves as a guideline to the extent that it
used that figure heretofore.
had
His thinking would be to avoid any
2/9/60
-52
additional tightness and, if necessary,
to increase the Account
portfolio by whatever amount was necessary to avoid additional
tightness.
This did not mean necessarily that some securities
might not be sold on any given date, but he would lean against
divesting securities from the portfolio on balance even if
borrowed reserves went to any particular figure.
net
Instead, he
would prefer, so to speak, to turn the market loose.
If
the Com
mittee was likely to turn around in three or six weeks, he questioned
whether any directive that might be given the New York Bank would be
much more meaningful than the existing directive.
In substance, he
would not change the directive at this time, but he would let the
level of net borrowed reserves go to whatever point it
long as it
on balance,
might go as
did not get out of the present general range.
He would,
not be a seller of securities.
Mr. Shepardson said that although he had not proposed a
change in the directive, the discussion had brought out arguments
for making a change.
He would favor Mr.
Balderston's suggestion.
Mr. Robertson said that he would favor a change in the
directive.
Mr.
Mills said he also would favor a change and that he
would prefer the wording suggested by Mr. Balderston to the language
suggested by Mr. Robertson.
Mr.
Leedy said he was troubled by the fact that in the past
the Committee had changed the directive only when it
made a change in
2/9/60
policy.
-53
In his own thinking, he was not yet prepared to make a
distinct change in policy.
While the Committee should be thinking
about some additions to the money supply, it
seemed to him that
this was not the time to add to the money supply affirmatively.
On the other hand, he would not like to see any further tightening
occur in reserve positions.
In his opinion, the directive, as it
read, could remain in effect indefinitely.
The Committee was always
desirous of restraining inflationary credit expansion, even though
at the present time it was not confronted with actually doing that.
The Committee would be fighting windmills if it
inflationary credit at the moment,
to do that.
attempted to restrain
but in theory it
was always seeking
His preference would be to wait until the next Committee
meeting before deciding to embark actively on any program that in
volved an actual change in policy.
Mr.
Allen said he would prefer not to change policy or change
the directive at this meeting.
Mr.
Mangels said he had thought originally that the Committee
might wait until March 1, but he would not object to changing the
directive now.
He would not increase restraint in the forthcoming
period; instead, he would be inclined toward a lessening of restraint.
Mr. Irons said that the question was one of using a broad,
continuing directive that would change two or three times a year or
a short-term directive that might change from meeting to meeting
specifically to fit
the situation at the particular time.
In
thinking of the proposal to change the directive today to provide
2/9/60
-54
for fostering sustainable economic growth and expanding employment
opportunities,
he did not see what could happen to warrant changing
such a directive three weeks from now or even in a longer period,
for the Committee always would want to do such things.
However, if
the Committee was going to change the directive today, in a period
of uncertainty, with the possibility of changing again in three
weeks, he felt the Committee ought to spell out in
detail what it
proposed to do for the next three weeks and what might cause it
change again.
to
The directives that had been suggested could go on
indefinitely for he could not conceive when the Committee would not
want to foster sustainable growth and employment opportunities.
In
his judgment, what was needed now, rather than such a change in the
directive, was careful study and thought as to how to develop a form
of specific directive that might be changeable in two or three or
six weeks, in contrast to broad generalities.
On the basis of that
reasoning, he would not change the directive today.
Continuing, Mr. Irons said that he would have no objection
to a little
ease in the market.
two meetings.
He had felt that way at the past
He would try to maintain about the degree of restraint
that had existed recently, but he would go on the side of ease if
the market situation seemed to call for that.
as a guide to the Desk, but it
This was not too good
seemed better than a mechanistic
formula calling for the Desk to put in $20 million a week.
He was
2/9/60
-55
yet not ready to accept such a formula and felt that it
should have
more testing, because he did not think the Manager of the Account had
the slightest idea what the situation was going to be in the market
next Thursday.
The Manager of the Account could sense an attitude
in the consensus of Committee thinking, but he (Mr.
Irons) would not
want to use a mechanistic approach, whether in terms of total reserves,
net borrowed reserves, or anything else.
Mr.
Erickson said he agreed with Messrs. Leedy and Allen.
would not change the directive at this time.
Also, he found it
He
diffi
cult to find a way of going ahead in terms of supplying reserves at
so much a week.
For the next three weeks, if
there were any errors
he would make them on the side of ease.
Mr. Hayes said that he found himself closely in agreement
with the views expressed by Messrs. Leedy,
Irons, and Erickson.
Although the Committee should study the general question of what it
meant the directive to do, the Committee thus far had been following
the practice of setting forth in
the directive a kind of basic
approach to what monetary policy should be.
Thus,
the directive
had normally been changed only two or three times a year.
He did
not feel that circumstances today warranted one of those changes.
Perhaps the situation would warrant such a change by the date of
the next meeting, at which time the Committee could vote to change
the directive and consider what kind of directive should be issued.
Mr. Hayes repeated that he would favor continuing about
the same degree of pressure, with the Desk mindful of the discussion
2/9/60
-56
about the money supply, which would suggest veering on the side of
ease in a minor way.
He felt strongly that a purely mechanistic
directive would not be workable because the Manager of the Account
has to deal with five or six different elements,
of the market, the feeling of the banks,
such as the psychology
or actual reserve changes, all
of which might call for some market action that could not possibly be
predicted.
Mr. Szymczak repeated his earlier suggestion that the Committee
consider at the March organization meeting whether the directive should
be changed whenever the Committee makes slight changes in policy in the
direction of either restraint or ease.
Up to the present time, he
noted, the Committee had not followed the practice of reflecting slight
policy variations in
the directive.
If the practice was going to be
changed, that should be decided at the annual meeting and the directive
then changed more frequently.
As yet, he was not ready to accept the
refinements that had been suggested, but he might be if he studied
the matter more and action was taken at the next meeting.
Thus, while
he would favor somewhat less restraint in the period ahead, he did not
favor enough change in policy to change the directive at this time.
Mr. Balderston said that he would favor changing the directive
today,
Chairman Martin said that he too would favor a change, but
that the consensus appeared to be against it.
this was not the most important thing.
In his opinion, however,
The important thing was that
2/9/60
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even those who did not favor a change in the directive leaned toward
slightly less restraint.
He was glad that the question of the form
of tne directives had been raised and discussed.
The annual meeting
was coming up, and perhaps there should be a further discussion of
that point.
However, he noted, the matter of finding language to
express degrees of restraint is difficult.
The Committee did not
have a mechanistic approach, and he agreed with that completely,
but it
was necessary to have some guidelines.
Mr. Balderston said that what had been most helpful to him
was the point referred to by Chairman Martin in his comments that
there is a distinction between ease appearing in the market due to
the operation of factors that the System can not control, restrain,
or push and ease or restraint that is created through System open
market actions.
The question was whether, in the next three weeks,
the Committee would want the Desk to mop up any ease that just
happened to appear in the market.
It seemed to him that that was
the crux of any instruction given to the Desk.
Mr. Shepardson said he thought this was essentially the same
thing that Mr. Johns had been getting at in his comments.
It would
mean not trying to pick up what might be called inadvertent ease.
was essentially the same idea that he (Mr.
to express at the January 26 meeting.
It
Shepardson) had attempted
It would mean letting such
inadvertent changes as might come from the action of the market develop.
The Desk would not try to mop up excess reserves that might come into
2/9/60
-58
the market because of factors other than System operations.
Mr. Hayes commented that the Desk had been following a
policy of not automatically offsetting everything that happened in
the market.
If an attempt had been made to offset fully the tenden
cies toward ease generated by the market itself, net borrowed
reserves might have been a billion dollars or more, and even then
such tendencies might not have been fully offset.
guided by the single thought that it
the market itself.
The Desk was not
must offset what happened in
This was merely one of several elements that
the Desk must be watching.
Mr.
Shepardson then commented that to the extent the Com
mittee aimed at a fixed target of net borrowed reserves, say $500
million, it would automatically tighten the situation by continuing
to mop up reserves as they appeared.
On the other side, there was
the situation that existed in the spring of 1958 when the System was
aiming at a certain level of free reserves and kept pouring in more
reserves as the supply was used.
Mr. Hayes said he agreed entirely.
As he had commented on
other occasions, he felt that the Committee should not overemphasize
net borrowed reserves.
Mr.
Johns said he hoped the Committee would not permit
proposals such as those advanced by Mr.
Balderston and Mr. Bryan
to be laughed out of court by attaching.a "mechanistic approach"
label to them.
serious study.
He felt that any such proposals were worthy of
2/9/60
-59
Chairman Martin then said that it appeared the majority of
the Committee would prefer to retain the directive in its present
form.
As to the matter of policy under that directive, one possi
bility would be again to go around the table on the question of
"slight but not visible" easing.
After a summary by Mr. Sherman of the positions expressed
on the directive by the members of the Committee, the Chairman
raised the question whether, in tackling the problem of degree,
there was anything further the Committee members could say that
would be helpful to the Desk or whether the essence bad not already
been expressed.
Mr. Leedy said he thought the discussion had told the story
quite well.
Mr.
Rouse agreed and said that he was satisfied, and no
further comments were heard.
Mr. Mills asked that he be recorded as again favoring a
change in the directive to substitute the language he had suggested
for clause (b) at the past several meetings.
This would involve
providing for "fostering sustainable economic growth and expanding
employment opportunities while guarding against inflationary credit
expansion."
Mr.
King asked whether the forthcoing period would not
provide an excellent opportunity for the Committee,
through not
mopping up reserves, to evaluate the true state of the situation.
2/9/60
It
-60
seemed to him an opportunity to find out, by not creating
additional restraint, what the trend of natural forces would be
if
the System let
them develop.
Mr. Robertson commented that the Manager should understand
that this was not the will of the Committee.
Mr. Rouse then commented that the Desk might be putting
reserves into the market next week.
On the basis of the figures
alone, one might feel that the Desk should be drawing out reserves.
It might be a confusing situation.
It would seem necessary to play
by ear to a considerable extent.
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 (in
cluding replacement of maturing securities, and allowing
maturities to run off without replacement) for the System
Open Market Account in the open market or, in the case of
maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective
economic conditions and the general credit situation of the
country, with a view (a) to relating the supply of funds in
the market to the needs of commerce and business, (b) to
restraining inflationary credit expansion in order to foster
sustainable economic growth and expanding employment op
portunities, 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 certifi
cates 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;
2/9/60
-61
(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.
In accordance with the understanding at the Committee meeting
on January 12,
1960, there had been distributed, with a covering
memorandum from Mr. Young dated February 5, 1960, a memorandum of the
same date from a staff group consisting of Messrs.
Thomas, Rouse, and
Young with regard to the continuing operating policies of the Federal
Open Market Committee.
Attached to the staff memorandum was a sug
gested revision of the three operating policies.
The revision was
intended to be generally consistent with the statements of policy in
the form reaffirmed by the Committee on March 3, 1959
but endeavored
to provide additional flexibility for meeting operating problems in
the market.
The manner in which the proposed revised language might
be applied toward making Open Market Account purchases of the 2-1/2
per cent Treasury bond of 1961 as a means of helping the Treasury
minimize its
refunding difficulties was outlined in the memorandum.
Chairman Martin commented that no action on the proposed
revised operating policies was called for at this meeting but that
it
seemed appropriate for the members of the staff committee to make
any statements they might desire.
2/9/60
-62
Mr. Thomas said that the staff committee did not presume,
in the absence of more direction from the Open Market Committee, to
make any change in the basic nature of the operating policies.
ever, it
little
How
had suggested some changes in wording that might permit a
more flexibility in
operations, and in
any event should clarify
the extent to which there could or could not be flexibility in opera
tions.
The proposed revision also endeavored to clarify what to some
seemed to be the important point that these operating policies were in
a sense working procedures and not inviolate rules.
It attempted to
make clear that the Open Market Committee at any meeting could give
any direction it desired as to what procedures were to be followed
without this being interpreted as establishing a new precedent or
making a drastic change.
In going over the rules, the staff com
mittee tried to clarify to what extent action could be taken on the
2-1/2 per cent bonds of 1961 within the framework of the operating
policies and the extent to which action with respect to that issue
would require special authorization by the Open Market Committee.
In general, the conclusion was that as soon as the bonds had become
"short term"--and in this respect the Open Market Committee might
want to make a more precise definition--they could be purchased or
sold in
the same way as any other short-term securities.
However,
any operations of that sort could not be very large without making
quite a substantial charge in the Open Market Account portfolio, at
least the portfolio of Treasury bills.
Therefore, any substantial
2/9/60
-63
move to acquire the 2-1/2 per cent bonds would, and probably should,
require special consideration by the Committee.
The intent of the
staff committee was to open up discussion by the Open Market Com
mittee, which might or might not want to recommend a more thorough
review of the operating procedures.
Mr. Young said one of the aspects of the matter the staff
committee had in mind was the public relations angle, because the
current statement of operating policies had been referred to in
some quarters as unduly limiting and doctrinaire.
The staff had
tried to find language which would take away some of that implication
while retaining basic principles and at the same time providing
flexibility to the degree that experience had suggested some
flexibility might be desirable.
Mr. Rouse said he thought it
would be necessary to provide
a different definition of short-term securities in order to take
the suggested action with respect to the 2-1/2 per cent bonds.
At
present the nearest thing to a definition was in the case of re
purchase agreements, where 15 months is prescribed.
Almost any
definition that the Committee might adopt would have to be arbitrary.
The period could be almost anything up to five years.
Because banks
generally use maturities up to two years to adjust their reserve
positions, one possibility would be for the Committee to go up to
two years and adjust the rule on repurchase agreements accordingly.
If
such a definition were made, the Account presumably would deal
2/9/60
in
-64
all such securities,
not only in the 2-1/2 per cent bonds.
would ask for bids or offers on such securities,
It
as the case might
be, and not specify one issue such as the 2-1/2 per cent bonds.
Mr. Rouse saw no point in changing the language of the
operating policies unless there was a change under which actions
could be taken that would relieve the kind of criticism that had
been directed at the Committee.
Mr. Young noted that the criticism went to matters of
substance as well as semantics.
Mr. Hayes expressed the hope that any change would be more
than merely a change of language and would be in
the direction of
signifying an actual willingness on the part of the Committee to
be flexible, as exemplified in
certain decisions during the past
several months to make exchanges of maturing issues in part into
longer issues, and also as exemplified by the Chairman's statement
to the Joint Economic Committee last summer.
Mr. Mills said he would offer at this time only the comment
that adoption of the suggested wording would represent an abject
recantation of error.
proposal than did Mr.
of deciding whether a
He placed a more sweeping connotation on the
Hayes.
Fundanentally, the question was one
"bills only" policy had been completely
incorrect and should be jettisoned in favor of a policy that would
permit operations in
all areas of the Government securities market.
He granted that no member of the Committee should want to be
2/9/60
-65
doctrinaire, but this proposal contemplated a vast change from the
philosophy under which the Committee had been operating for the past
several years.
Mr. Allen said he would make no comment on the proposed changes
that he thought were improvements.
He noted, however, that paragraphs
(b) and (c), in their revised form, each concluded with a clause
stating that exceptions to the general operating policies stated
therein might be made at any time upon express authority of the Fed
eral Open Market Committee.
To him, the right to make exceptions was
inherent in the powers of the Committee.
for public relations reasons it
If
the majority felt that
was important to mention this, he
would do so only once, by eliminating the final clause in
(c)
(b) and
and adding that clause as a new paragraph (d).
Mr. Allen then referred to the fact that paragraph (a), as
proposed,
would state that it
was not the policy of the Committee to
support any pattern of prices and yields in the Government securities
market and that operations in
the Government securities market were
primarily to effectuate the objectives of monetary and credit policy.
(The present language states that intervention in
securities market is
the Government
solely to effectuate the objectives of monetary
and credit policy (including the correction of disorderly markets.).)
He recalled that the Committee had accepted paragraph (a)
in its
present form with no dissenting votes, and said that he would prefer
to continue to use the word "solely."
Similarly, in
paragraph (c)
he would prefer not to substitute "primarily" for "solely".
In
2/9/60
the past, he observed, there had been only one dissent from the
wording of this policy.
As to the portion of the revised paragraph
(b) which would state that open market operations were to be con
ducted in
short-term securities (principally but not exclusively
Treasury bills), he would prefer to retain the present language
which states that operations for the System Account in the open
market,
other than repurchase agreements,
short-term securities (except in
shall be confined to
the correction of disorderly
markets).
Mr. Johns inquired as to the purpose of changing "solely"
to "primarily" in paragraph (a).
Since the current statement was
adopted, the Committee had been averring that transactions in the
open market should be conducted solely for the purpose of effectuat
ing the objectives of monetary and credit policy (including corrections
of disorderly markets).
As Mr. Allen said, no objection had been
indicated to the current language; the vote was unanimous.
It would
appear that the change of wording must be for the purpose of saying
that there was some other reason for conducting transactions in the
Government securities market than that of effectuating the objectives
of monetary and credit policy, and he would like to know what those
other objectives might be.
Mr. Young responded that the memorandum was intended to cover
this point.
The staff committee was asked to consider the statement
of operating policies with a view to the possibility of making some
2/9/60
-67-
adaptations in operations that might facilitate the refunding problem
of the Treasury.
The Committee could not very well suggest something
that would serve this purpose and leave in the word "solely" so the
suggestion was to shift to "primarily."
nothing more than a suggestion; it
The staff was advancing
had simply been reaching for words
that might accomplish the aforementioned purpose.
Mr. Thomas noted that the change in
paragraph (a) would sub
stitute a general phrase and eliminate reference to a specific practice,
namely, the correction of disorderly markets.
present statement is
The language of the
subject to the possible interpretation that the
Manager might take action to correct disorderly markets without coming
to the Committee, although the minutes of the Committee's meetings
clearly require that the Manager must obtain Committee authorization
for taking any such action.
to make it
The proposed revised language is
clear within the statement itself
intended
that the Manager must
come to the Committee to obtain authorization for the correction of
disorderly markets.
Mr.
Bryan said the discussion had made it
quite clear that the
Committee would gain little or nothing from the suggested revisions
unless at the same time it contemplated considerable changes in actual
practice.
He would not favor adoption of the revised wording until
the nature of those changes had been spelled out to him.
Mr. King referred to paragraph (a)
of the current and pro
posed statements and observed that in both versions the statement
2/9/60
-68
began by indicating what was not the policy of the Committee.
While
there might have been reasons for that approach in the past, he
wondered whether it
statement.
It
was still
necessary to start with a negative
seemed to him that it
might be preferable to begin
by stating what the Committee wanted to encourage.
Chairman Martin then said he hoped the Committee members
would try to think the problem through in all of its aspects before
the date of the next meeting.
He felt that the Committee was quite
well united in matters of general operating policy.
There were
disagreements at times, but the disagreements were not nearly as
widespread as they had been at times in
the past.
The thing for
the Committee to do was to think the matter through and to know
what it
was doing; to think the problem through objectively and
to look at it
objectively.
One reason for instituting the operating
policies had been to improve the Government securities market, and
the question was whether or not that market had actually been
improved over the past several years.
of inquiry.
It
That was a logical subject
had been suggested to him by several individuals
that the continuing operating policies right be abandoned; that
if
the Committee met every three weeks perhaps it
any continuing operating policies.
approach.
should not have
That was another possible
At least the Committee should not put something like
this on paper and debate the matter once a year.
It was something
to be thought through so that the Committee would be clear in what
it
was doing.
2/9/60
-69
It was agreed that the next meeting of the Federal Open
Market Committee would be held on Tuesday, March 1, 1960, at
10:00 a.m.
Thereupon the meeting adjourned.
Reserve Target for February
using Total Reserves
(Daily average figures -
(1)
000,000 omitted)
February growth amount
(at 2% annual rate) . . . . ...
$ 311/
............
(2)
Actual reserves - January . . . . . . . . .
(3)
Deduct normal decline in reserves
between January and February . . . . .
$ 18.854 2/
(300)
.
$ 18,554
(4)
Target for February
(5)
February Target range for practical
administration of account .....
$ 18,554
.
..................
$ 18,585
$ 18,635
.
.
.
.
.
.
.
.
.
.
.
$ 18,535
1/ February growth amount at 3 percent annually would be 47.0 million; at 4 percent
annually would be 62.0 million.
2/
This amount after seasonal adjustment ($18,704) was extraordinarily close to the
center of the target range for January ($18,650 to $18,750) suggested at the last
This circumstance proves nothing; and, indeed, is somewhat
FOMC meeting.
regrettable because it prevents at this meeting an experimental attempt to show how
short-run overages and underages would be handled in adjusting instructions on a total
reserve target basis.
Cite this document
Federal Reserve (1960, February 8). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19600209
@misc{wtfs_fomc_minutes_19600209,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1960},
month = {Feb},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19600209},
note = {Retrieved via When the Fed Speaks corpus}
}