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, March 22, 1960, at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Bopp
Mr. Bryan
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Fulton
Leedy
Mills
Robertson
Shepardson
Szymczak
Messrs. Leach, Allen, Irons, and Mangels, Alternate
Members of the Federal Open Market Committee
Messrs. Erickson, Johns, and Deming, Presidents of
the Federal Reserve Banks of Boston, St. Louis,
and Minneapolis, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hexter, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Brandt, Eastburn, Hostetler, Marget,
Noyes, Roosa, and Tow, Associate Economists
Mr. Molony, Assistant to the Board of Governors
Mr. Koch, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Keir, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Knipe, Consultant to the Chairman, Board of
Governors
Messrs. Ellis, Storrs, Mitchell, and Einzig,
Vice Presidents of the Federal Reserve Banks
of Boston, Richmond, Chicago, and San
Francisco, respectively
3/22/60
-2Messrs. Larkin and Arlt, Assistant Vice
Presidents of the Federal Reserve
Banks of New York and St. Louis,
respectively
Messrs. Parsons and Coldwell, Directors
of Research of the Federal Reserve
Banks of Minneapolis and Dallas,
respectively
Mr. Holmes, Manager, Securities Department,
Federal Reserve Bank of New York
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on March 1, 1960, were
approved.
Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering the
period March 1 through March 16, 1960, and a supplementary report
covering the period of March 17 through March 21, 1960.
Copies of
both reports have been placed in the files of the Comittee.
Supplementing the written reports, Mr. Larkin made substantially
the following comments on developments since the preceding Committee
meeting:
The sharp downward movement in interest rate levels has
been by far the most significant development in the money and
capital markets since the last meeting of the Committee.
The decline in Treasury bill rates was typified by the
results of yesterday's auction compared with those in the
auction the day before the Committee's last meeting. Yester
day a rate of 3.03 per cent was established for the new 91
day bills and a rate of 3.17 per cent for the 182-day bills.
I understand that the new 91-day bills are quoted in the
Three
market this morning at 3 per cent or slightly lower.
weeks ago, on February 29, the rates established were 4.278
per cent in the auction. In other words, Treasury bill rates
have declined nearly 1-1/4 per cent over the past three weeks.
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Prices of notes and bonds were up by as much as 4 points
during the interval between meetings.
The scarcity of bills
spilled some demand for short-term securities over into the
certificate and short-dated note and bond area, and yields
were about 1 per cent lower on such issues. Of the recent
high-coupon issues, the 4-7/8's of November 1963 were priced
to yield 4.06 per cent, and the 5's of November 196 were
priced to yield .11 per cent. In the long-term area, the
3-1/2's of 1990 were at a yield of 4.07 per cent.
With only light trading in long-term Government bonds,
there is a high degree of artificiality in the price and
yield level of that sector of the capital market.
The market
for new long-term corporate issues provides a more signifi
cant measure of what has happened to rate levels in the
long-term area. Recent issues have been reoffered at yields
in the 4-3/4 per cent to 4-7/8 per cent range, compared with
5 to 5-1/8 per cent about three weeks ago, or a decline of
about 1/4 per cent.
The market has been paying special
attention to call and refunding provisions on new corporate
issues.
I should also mention that the mid-March dividend and
tax period passed without any strain on the banks or on the
money market. This was of course partly due to the net supply
of reserves by the System through open market operations.
Corporations, however, appear to have made careful plans for
They liquidated only a relatively minor
their tax payments.
amount of bills for tax purposes, and generally added to the
striking demand for bills over the period.
In response to a question by Mr. Balderston, Mr. Larkin said
there seemed to have been a fair amount of stockpiling of bills in
preparation for the Cook County personal property tax date (April 1).
There was some feeling that after that date a quantity of bills would
reach the market.
Mr.
Balderston then inquired whether there was evidence of
speculation in
longer-term Government securities, and Mr. Larkin
replied that this was a difficult question to answer.
On the basis
of comments by dealers as recently as a week ago, there was no strong
3/22/60
4
evidence along those lines.
In the past week, some mention had been
made of that type of buying of Treasury issues, but it
could hardly
be extensive because the market at the long end is thin and trading
relatively small.
There were some reports that commercial banks
were giving more attention to extending their maturities in order
to catch the turn of the market and, while this might be just gossip,
mention had been made of some buying by Stock Exchange houses and
underwriting houses.
As he had indicated, he did not think this
kind of activity was extensive, but it
was difficult to substantiate
an opinion.
In reply to a question by Mr. Robertson, Mr. Larkin said
there had been a demand for short-term Treasury securities from State
and local governments as well as from corporations.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period March 1 through March 21,
1960, were approved, ratified, and
confirmed.
Supplementing the staff memorandum distributed under date of
March 18, 1960, Mr.
Noyes made the following statement with regard
to economic developments:
In the last few weeks every shred of information on
the condition of the economy has been examined and re
examined, and interpreted and reinterpreted with the
greatest care. In February the money supply dropped by
a dramatic billion dollars, but this drop was accompanied
by a spectacular rise in deposit turnover. Industrial
production slipped off about one per cent. Housing
starts were down to a 1,100,000 seasonally adjusted
annual rate-off 20 per cent from the peak last spring.
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Short-term money rates declined sharply. The weather was
bad, and so were retail sales, and both of these conditions
continued into the first two weeks of March. On the other
hand, unemployment was down, new orders were up a little,
and plant and equipment expenditure expectations reported
to the Department of Commerce were equal to earlier optimistic
estimates. Erratic movements of stock prices and loans at
city banks provided a rationale for almost any theory.
Commodity price movements were also mixed, but the changes
were small.
It is doubtful that there has ever been a time when all
the "straws in the wind" were watched so closely. In these
circumstances, it is hard to see how a major fault could
remain undetected for long--and yet, careful observers still
generally subscribe to the belief that the underlying forces
are strong, despite moderate declines in most current measures
of activity. Certainly, the customary signs of an overripe
boom are not yet apparent.
The question that remains is whether the adjustment of
spending and saving patterns incident to a major shift in
expectation of inflation might so change the tone of financial
and other markets as to set in motion a recessionary spiral.
Spokesmen for the Federal Reserve System, more than any other
group in the country, have warned of the hidden distortions
in the economy that are built up during a long period of more
or less continuous inflationary expectations. Win Riefler
spelled them out clearly in his paper at Stanford last summer,
from which I would like to quote a brief passage:
"The emergence of a pervasive expectation
of continuing inflation as a dominant motivat
ing force in investment decisions is relatively
new in the experience of this country, even
when that experience is carried back through
the last century and a quarter to cover the
whole period since the opening phases of the
Industrial Revolution. That is the reason,
perhaps, that we have recently been so slow
in recognizing its implications."
It also follows, of course, that we have never before faced
the problems incident to a readjustment from such expectations.
Certainly, we cannot assume that simply because the elimination
of inflationary expectations is a good thing, the process of
adjustment will be painless. It could be very painful-we
do not know because we do not know how great the distortions
If a sizeable share of the consumer
were that preceded it.
expenditures for durables, including housing, in recent years
has been an effort to hedge against inflation, then we may
have to adjust to a very different pattern of spending in
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this area in the period ahead.
The same thing might be said
about business plant and equipment expenditures or inventory
policy.
One can find little
or nothing in the current data to
measure how much of an adjustment of this kind has already
occurred or may still
lie ahead.
The survey of plant and
equipment expenditure expectations would seem to suggest
that adjustment there will not be very severe, at least
initially; that is, unless they are discouraged further by
a decline in final demand, businessmen are likely to go
forward with their expenditure plans in substantial volume.
This may be an important "unless", however, since the
largest planned increases were in iron and steel, motor
vehicles, and electrical machinery, all of which would be
adversely affected if the market for consumer durables
should soften.
The only indications we have about prospective consumer
demand are the results of the quarterly survey of consumer
intentions, which we have been conducting through the Bureau
of the Census.
In January, consumers appear to have been
slightly less enthusiastic about durable goods purchases
than they were in October, but still
quite a bit more in
terested than they were a year ago. Taken at their face
value, these results would suggest some slackening of
demand, but not such as to carry us below year-ago levels.
However, these observations were taken about two months
ago and consumers' attitudes may well have undergone a
further change since that time.
As I suggested at the outset, it is hard to find any
significant change in the balance of economic forces during
the last three weeks, but the fact that the tempered out
look has continued may have some significance in itself.
half, accompanied
Certainly, the chance of a booming first
by inflationary pressure on resources, has measurably
diminished.
Mr.Thomas presented the following statement with regard to
the current financial situation:
Financial developments in recent weeks have contained
They appear to be
a number of surprises and paradoxes.
significant for monetary policy formulation, but the exact
significance may not yet be clear.
The most striking feature has been the virtual comple
tion of the March period of heavy liquidity needs for tax
and dividend payments with an easing rather than tightening
3/22/60
-7-
of money rates that usually occurs in this period.
The
absence of pressures can be attributed little,
if any,
to a reduced borrowing demand from business.
It may be
due in part to Federal Reserve easing actions during the
past two weeks, but such measures have not been unusual
at this period.
An important influence has been the
availability of nonbank funds in the money market, but
the most important influence may have been the change
in the Treasury position from a deficit to a surplus.
The availability of nonbank funds has been a
distinctive feature of the past year.
Nonbank purchases
of Government securities have financed a Treasury deficit
and enabled banks to reduce their portfolios in order to
meet an unprecedented demand for bank loans with little
growth in deposits.
Last year, however, such funds were
attracted by rising interest rates.
Only in recent weeks
has the supply been so great that interest rates have
declined, and this month has been the first
tax period
since the recession without strong pressures of cash
demands that pushed up interest rates.
Interest rates, on the contrary, have declined sharply
and, generally speaking, are at the lowest levels since
early last June. The six-month bill
rate is the lowest
since last March and yields on three-month bills are little
above 3 per cent--showing the widest margin below the dis
count rate since the first
half of 1958.
Yields on Govern
ment securities in the three- to five-year maturity range,
which have shown the highest yields of all issues during
the past year, are now at the lowest level since last May
and only slightly above the average of longer-term issues.
Rates on commercial and finance company paper have been
higher than last
lowered in recent weeks but are still
summer. Yields on outstanding State and local government
and corporate bonds, which did not rise as much as those
on long-term Treasury bonds, have also declined back to
It may be recalled,
around the levels of last June.
however, that last June prevailing rates were considered
to be rather high after a sharp rise during the preceding
quarter. The discount rate was raised in late May to
3-1/2 per cent to bring it more closely in line with
market rates.
The
Borrowing in capital markets has been moderate.
first-quarter totals of corporate and State and local
government issues appear to be less than in other recent
Mortgage lending activity by savings and loan
years.
associations in January and February was reported to be
slightly less than a year ago, with the net increase in
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savings accounts about the same as last year. Treasury net
repayment of debt during the quarter is larger than in any
year since 1956. As I suggested earlier, the change in the
Treasury position alone may be adequate to explain the turn
ing downward of interest rate levels.
There are few indica
tions of an increase in capital market borrowing in the
immediate future, although business and State and local
government borrowing should increase somewhat, particularly
if interest rates stay down.
Bank loans increased in February somewhat more than is
usual for that month, and partial figures for banks in
leading cities for March 16 indicate a further rise of close
to usual seasonal amounts in the three weeks ending on that
day,
Loans to business and finance companies increased
sharply last week. Loans on securities declined in the three
weeks ending March 16, contrary to usual seasonal trends.
Real estate loans also declined slightly and "other loans",
which include consumer loans, showed little
change.
City banks added to their holdings of Treasury bills
last week, as they usually do at a time of tax payments,
but for the past three weeks as a whole continued to show a
net decline in total holdings of Government securities.
There have been substantial reductions in bank holdings of
securities maturing after five years and also within one to
Holdings of other securities have increased
five years.
Total loans and investments at city
somewhat in March.
banks increased in the three weeks ending March 16 about
as much as in the same period last year but somewhat less
than in the three preceding years.
Demand deposits at city banks, and probably also at
country banks, increased as usual in the middle week of
March, prior to payment of corporate income taxes. Estimates
indicate, however, that the trend of deposits, after adjust
ment for seasonal variations, may have continued to decline,
following the sharp decrease in January and February.
Perhaps the most astonishing and perplexing aspect of
recent financial developments has been the combination of a
relatively strong demand for bank loans, accompanied by
liquidation of Government securities by banks to the point
of a net reduction in deposits, and at the same time a
decline in interest rates. This combination would appear
to indicate that the decrease in the money supply has been
due not entirely to pressure on banks to liquidate credit
but in large part to a desire by holders of cash to shift
This is evidence not of a
into Government securities.
decrease in liquidity, but rather of a shift in liquid
There may
holdings from cash to interest-bearing assets.
even have been a net increase in total liquid holdings.
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The significance of this shift from the standpoint of
the current and future course of the economy, and of monetary
policies, depends upon its cause.
Is it merely a matter of
the nature of holdings of liquid assets or does it reflect
an increase in savings that are being withdrawn from the flow
of spending and investing to be held relatively idle? The
sharp seasonally-adjusted increase of about 5 per cent in
debits to bank accounts in February would indicate that there
has been an increase rather than a reduction in the use of
money. As to increased investment of genuine savings in
Government securities, dealers report some decline in odd-lot
purchases of longer high-coupon Treasury notes as their yields
have declined, but this is a relatively recent development.
A large portion of recent acquisitions of Government
securities is reported to be by nonfinancial corporations.
Continuation of such demands during the tax payment period
and along with heavy business borrowing at banks is difficult
to explain. It probably means that some corporations are
accumulating liquid assets while others are borrowing. More
complete understanding of this development must await an
analysis of corporate statements, as well as the subsequent
actions of corporations.
Federal Reserve operations, after absorbing a portion of
the reserves released by the decline in deposits and in re
quired reserves during February, have added to the availability
of reserves during March and thus contributed to the decline in
interest rates. In the past four weeks, including estimates
for the current week, required reserves have increased by a
smaller amount than expected on a purely seasonal basis,
but currency has shown a larger increase than expected. These
increases have absorbed reserves, but reserves have been made
available by a reduction in nonmember and other accounts at
the Reserve Banks, reflecting principally Federal Reserve
payments to the Treasury and Stabilization Fund purchases of
System purchases of securities during
bills in the market.
These acquisitions
the period also supplied reserves.
amounted to over $250 million last week, including the net
increase in repurchase contracts, but a decline in holdings
during the week ending March 2 and retirement of repurchase
contracts this week reduced the net gain for four weeks to
about $100 million. As a result of all these changes, net
borrowed reserves have generally remained below $250 million
since the week of March 2.
A question for the immediate future is to what extent
should System operations be directed toward an endeavor to
increase, or at least check the decline in, bank deposits.
3/22/60
-10-
Projections indicate some drain on reserves in the next
statement week as a result of the customary decline in
float, partly offset by a reduction in required reserves
as deposits are reduced by the payment of taxes.
In the
second week of April, reserves will be needed to cover
increased requirements related to Treasury financing and
the Easter currency demand.
Should reserves be supplied
in excess of these needs?
If the decrease in the money supply reflects merely
a shifting of liquid assets from cash to securities,
attracted by interest returns, it may be checked by System
operations which will force down interest rates. Such
shifts, however, have little
or no effect on the total
volume of spending, and forcing excess reserves on banks
might stimulate unsound uses of credit. If, however, the
decline in money reflects an increase in savings being
taken from the spending stream, then some stimulus to
bank credit expansion may well be in order. It is not
easy to reach a satisfactory answer to these questions.
It does seem clear, in any event, that there is no
occasion for any tightening of restraints at this time.
Mr. Marget commented as follows with respect to the balance
of payments:
At the last meeting of this Committee, I referred to
"the changes that seem to be emerging with respect to what
might be called the cyclical constellation as between our
principal trading partners and ourselves..."--"a strong,
inflation-threatening boom abroad, and a moderation, at
least, of boom tendencies here." All the news that we
have had from abroad in recent weeks confirms the "abroad"
part of the story; the boom in virtually all foreign
industrialized countries is continuing to gather strength.
This means that if the tendencies toward moderation
in this country should continue, we shall also continue
to have "just the kind of constellation which, by
encouraging exports from this country and moderating the
movement of inports into the country, should be favorable
to further adjustment in our balance of payments in the
direction we desire." This is, in fact, what some of the
In the
European authorities are themselves forecasting.
Netherlands, for example, which ran a very sizeable surplus
in their balance of payments in 1959, the Central Planning
Bureau has recently forecast a significant decline in the
Netherlands surplus for 1960.
3/22/60
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At the same time, all the evidence would indicate that,
up to now, the foreign fiscal and monetary authorities are
prepared to resist the inflationary pressures that the boom
is engendering.
The latest example is from Austria. Only
about six months ago, it was generally reported that the
Austrian authorities were considering lowering the discount
rate from 4-1/2 to 4 per cent. The week before last they
actually raised the discount rate from 4-1/2 to 5 per cent;
and they simultaneously raised minimum reserve ratios against
demand and savings deposits.
This does not mean what has been suggested, not only by
some journalists, but also by the Governor of the Bank of
Norway in a recent speech; namely, that the counter-inflationary
measures now being adopted are about to turn the economies of
the Western European countries, in particular, into a tailspin,
so that we shall have a reversal of the cyclical constellation
whose emergence we have been witnessing. It means only that
we cannot rely upon, even if we were foolish enough to wish
for, a wave of inflation abroad to provide an easy--even if
short-lived-market for the increased exports we wish to
bring about.
The best we can probably hope for is a strong,
but not inflation-dominated, demand situation abroad which,
if combined with a continuation of the recent tendencies
to moderation in our own economy, will provide an environ
ment generally favorable to the kind of all-out competitive
effort that we are going to have to make if we are to balance
our international accounts.
It is, indeed, against this kind of reasonably hopeful
background that one has to judge the figures that we now have
for the breakdown of the otherwise encouraging total figure
for our exports in January that I reported last time: exports
at an annual rate of some $18-1/2 billion, as against a
realized level of exports for the years 1958 and 1959 of
around $16 billion. Some of the declines that continued to
be registered within the total increase in exports were
certainly not evidence of our declining competitiveness.
This is true, for example, in the case of coal, in which we
are certainly competitive, and which is being kept out of
important foreign markets only by a combination of dis
criminating import restrictions and governmental purchasing
And it was good to notice a marked pick-up,
arrangements.
from the depressed levels of November and December, in a
field in which our competitiveness has been called into
question; namely, exports of autos, trucks, and parts.
On the other hand, the dominating element in the total
increase was the very much heavier shipments of raw cotton,
which totalled over one million bales for the month. When
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this figure is
related to a figure of expected exports of
cotton, during the current season, of about 6-1/2 million
bales, and when seasonal factors are taken into account,
it is fairly clear that the January rate of cotton exports
is unlikely to be sustained in coming months.
It is
considerations of this kind, in combination with the
anything but spectacularly favorable movements of gold
and dollars for February and the first
half of March,
that ought to continue to warn us against cheering too
loudly too soon. We seem to be on the road of adjustment
in our balance of payments, but it still
looks like a
pretty long, hard road ahead of us.
Mr.
Hayes presented the following statement of his views on
the business outlook and credit policy:
Although some of the new business data becoming avail
able since the last
meeting point in divergent directions,
for the most part they seem to support a reasonably
optimistic view of 1960.
Among the more encouraging new statistics
are those on
plant and equipment expenditures and employment, whereas
production and sales data have been somewhat disappointing,
and statistics
on orders and inventories could be interpreted
Perhaps the lag in sales may be
as signalling trouble ahead.
attributed in large measure to such factors as the weather
and the aftereffects of the steel strike; and special factors
may also be adduced to account for the drop in orders. With
the decline in stock prices and in inflationary expectations,
there has been some change of pace in business and consumer
spending plans. On the other hand, greater availability of
long-term investment funds may prove to be a stimulant to
activity in construction and other sectors, and the general
stability of prices should be a sustaining factor in the
long run. On balance, the current business lull appears
likely to represent a period of hesitation in a strong or
expanding economy, rather than the beginning of a cumulative
downward movement.
There are enough elements of uncertainty, however, so
that we must keep in mind two other possibilities besides
First, the economy
that which I have suggested as likely.
may be stronger than it appears from current statistics,
may appear altogether
and in retrospect the current lull
several periods of
of
case
as was true in the
trivial,
may foreshadow
lull
the
Secondly,
1956.
in
hesitation
3/22/60
-13-
persistent "high-level stagnation" or even a real cyclical
dip in activity.
Fortunately, we need not try to reach
any definitive judgment today.
February data for all
commercial banks reinforced
earlier impressions of unusually strong loan demand in
that month, particularly for business loans.
However, an
unusually sharp shrinkage in the banks' holdings of invest
ments brought a decline in total
bank assets roughly
comparable with the February drop in other recent years.
As for March business borrowing, the inconclusive evidence
available so far suggests that it also was about in line
with the usual seasonal pattern.
Strong corporate cash
positions, from which taxes could be paid without signifi
cant strain on either the securities market or the banks,
doubtless found reflection in the general tone of the
Treasury bill
market in the past week or two.
I can see no reason for a basic change in the policy
adopted at our last meeting.
In the present period of
cautious business and price expectations, we can probably
give some encouragement to a more plentiful money supply
without any serious risk of feeding an inflationary credit
expansion.
I might add that the New York banks are rather
concerned over their ability to meet seasonal loan demands
later in the year in the light of their present peak loan
On the other
deposit ratios and dearth of liquid assets.
hand, the recent rise in money substitutes and in velocity,
coupled with the easier tone of the credit markets, indicates
from one source
that to date ample credit has been availabl,
Thus, while we should certainly seek a larger
or another.
money supply over a period of months, the need may not be an
immediate one.
target for the next three weeks,
In seeking a statistical
I would think the range of $250 to $300 million mentioned by
suitable; but
meeting is still
the Chairman at the last
be permitted
should
side
on
either
fluctuations
rather wide
Thus, I
if appropriate in the light of market developments.
should think we would be reluctant to encourage any further
plunge in interest rates, the decline in which has probably
of underlying conditions.
already outrun the realities
Incidentally, any action by the Treasury at this time to
borrowings toward the long end should have advantages
push its
in the way of a steadying influence on the long-term rate
structure which would outweigh the drawback of any added
impetus it might give to the current downward sweep of short
term rates.
The Board of Governors has at hand another weapon which
we do not usually think of as an instrument of general credit
3/22/60
control but which may possess some of the attributes of
such an instrument under present conditions.
I refer to
the possibility of an increase in the ceiling on deposit
interest rates under Regulation Q. Some of us have long
felt and still
feel that an increase is warranted on a
variety of grounds.
But in addition such a move now
might have a salutary effect in checking exaggerated
market expectations of a trend toward ever lower interest
rates; for it might suggest to the public that the System
does not expect rates to reach a range where present
ceilings under Regulation Q would no longer present any
problem.
In view of the business uncertainties and the un
desirability of a further decline in market rates of
interest in the near future, I believe we should particu
larly avoid any dramatic or overt move at present, such
as a cut in discount rates, even though "even keel"
considerations may make it hard to act during the interval
from next week until completion of the May refunding.
A
discount rate reduction might be interpreted by the public
to reflect a gloomy appraisal of the outlook, with adverse
Also, it could easily
effects on business sentiment.
generate a sharp shift in market expectations that would
lead to a downward race between market rates and discount
rates. The view that discount rates should be kept in
line with market rates loses much of its force when a
"penalty rate" situation exists.
It seems to me that the directive as fomulated at the
last meeting is still
appropriate.
Mr.
Johns recalled that at recent Committee meetings he had
identified himself with the view that a continuance of monetary re
straint was in order.
He had persisted in that view at the March 1
meeting, when he was one of a relatively small minority.
It was not
his purpose at this time to attempt to justify his position; suffice
it
to say that he did not intend at any time during the recent period
to argue for an intensification of restraint.
however,
It
had been his feeling,
that until some clearer indication of the future course of
the economy was available, it
would be in
order to continue a policy
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which at the February 9 meeting was characterized by a number of
members as "watchful waiting."
Obviously, the fact that he was
one of a small minority three weeks ago required a reappraisal of
his thinking in the light of such changes,
as might be observed.
facts, and circumstances
While the changes had not been dramatic,
except for interest rate developments,
he was not so much inclined
as he had been earlier to expect that the country would emerge from
the current period of low visibility into a resumption of strong
expansionary forces.
This led him to a consideration of the imple
mentation of the policy expressed quite clearly by the majority at
the March 1 meeting.
The views he would state were not as firm and
doctrinaire as might appear, and his comments should not be under
stood as criticism of the Account Management.
Instead, they reflected
consideration of the Committee's own practices with respect to the
expression of its
policy mandate and its instructions to the Desk.
At the March 1 meeting, Mr.
Johns brought out, there were
expressions of concern about the continued decline in the money
supply.
Some had expressed similar concern on February 9, and at
least one member of the Committee, Mr. Mills, had expressed concern
over a longer period of time.
On March 1, the Manager of the Account
was directed, as Mr. Johns understood it,
monetary restraint.
to ease the degree of
The instruction was not specific as to what was
to be eased and by how much, but there seemed little
doubt that the
majority wanted some relaxation of pressure in the money market.
3/22/60
-16
Furthermore,
it
was evident that the majority wanted no further
decline in the money supply.
In fact, there seemed to be con
siderable support for a modest increase in
money supply.
In certain respects,
bank reserves and the
some appearance of the objective
of relaxation may seem to have been attained.
Member bank borrow
ings declined, net borrowed reserves declined from over $400 million
to a level around $250 million, and interest rates dropped.
Nevertheless,
if
an increase in
it
was the basic desire of the Committee to achieve
the money supply, the result of open market operations
since May 1 may not have been altogether satisfactory.
Despite large
net purchases of Government securities,
total central bank credit,
seasonally adjusted, and bank reserves,
seasonally adjusted, were
no larger in
early March than in February,
and commercial banks
probably did not increase deposits or money.
Member banks apparently
attempted to reduce their indebtedness to a greater extent than the
revised target of net borrowed reserves used by the Committee.
may have become more cautious,
and some may have found it
Some
more
expedient at current market prices to sell Government securities,
but in
any case the average level of borrowings from the Reserve
Banks fell
markedly.
It
might be that one could not expect the Desk
to accomplish any given change in
money in
bank reserves or the quantity of
such a short period as three to four weeks.
However, since
total reserves and the money supply had been declining for some
months, during which the Committee was calling for maintenance of
3/22/60
-17
the same degree of restraint and, more recently, for an easing of
monetary pressure, there seemed to be a need to re-examine the method
of instructing the Desk.
The time had come, in his opinion, for the
Committee to subordinate its consideration of net borrowed reserves
and other money market pressures to objectives expressed in terms of
total bank reserves or the money supply.
He did not mean to say that
the Committee thereby would have adopted a system that would assure
the avoidance of mistakes, but the use of such a technique would help
to avoid doing things to total reserves and money that the Committee
did not intend.
As to the immediate future, Mr.
Johns said he would suggest
instructing the Desk to buy over the next few weeks whatever was
necessary to keep total reserves, seasonally adjusted, from declining,
and indeed to show a 1 or 2 per cent annual rate of increase, with a
view to reversing the decline in the money supply.
It might be
objected that there was no certain seasonal adjustment of the money
supply or the quantity of reserves that could be used, but he felt
sure that the judgment of the Desk would be good enough to keep
going in the direction the Committee desired.
Mr.
Johns agreed with the view that no change in the discount
rate was indicated at this time.
Mr.
Bryan's comments were substantially as follows,
The most astonishing thing that has happened in the
Sixth District has been the weather. It has disrupted
3/22/60
-18-
farming operations with freezes, ice, and heavy snow in
areas entirely unaccustomed to such phenomena.
The greatest
immediate damage has apparently been in the broiler industry,
which is the more serious because the industry was already in
most areas of the District suffering from acute economic ill
ness.
Some people are guessing that the greatest long-run
damage has been to the timber crop in the areas affected.
Total nonfarm employment has set a new record in the
District. Both manufacturing and nonmanufacturing employment
have apparently risen somewhat more in the District as a whole
than in the United States, which we note because it reverses
a relationship of about a year's duration.
Construction contract awards show little
change after
earlier months of sharp decline.
Seasonally adjusted department store sales have declined
in February, which may be a result of weather.
But broader
measures of retail trade in the last three months have been
below the high volume of last summer and fall, somewhat more
so in the District than in the nation.
During the three weeks ended March 9, loans at weekly
District reporting member banks have remained almost unchanged.
Liquidation of bank investments has continued. The loan to
deposit ratio of our banks has edged up again after some months
of stability. Our impression of the banking situation in the
District is that it is highly illiquid and that the banks are
under continuing and considerable pressure.
Borrowing from the Federal Reserve Bank has declined some
what, apparently as a result of liquidation of investments and
increasing use of the Federal funds market. But borrowing from
the Federal remains high in relationship to national totals.
As we see the picture nationally the country is operating
at a high level with increasing evidence that the recovery is
losing momentum, that some massive readjustments are taking
place, and that others are in prospect. Among readjustments,
two seem especially worth noting: the increasingly competitive
nature of the economy, both in its domestic and foreign aspects;
and the adjustment of the American public from an inflationary
to a noninflationary psychology, which is an excellent develop
ment for the long pull, but could be, for some months if not
for a year or two, gravely troublesome in its economic implica
tions.
We confront this situation with an equity capital market
seriously inflated by the standard of past norms. We
still
confront the economic situation, moreover, with a highly
Indeed, the liquidity measures of
illiquid banking system.
the banking system closely approximate those of the late
twenties.
3/22/60
-19-
Although it seems too early, in the light of some elements
of economic strength in the current situation, to take dramatic
monetary steps, still, it seems to me that we must have a re
appraisal of our policy as it has been evolving over the past
few months. In saying this, I am also saying that in my
judgment the evolution of our policy in the recent past has
been alarming and is likely to confront us with problems from
which we can extricate ourselves only with the greatest
difficulty. I am also saying that the evolution of our policy
does not seem to me appropriate in view of the illiquid position
of the banking system and the economic situation as it has
developed in the first quarter of 1960.
Let me comment in support of this view:
1. By the year-end we had gone through a long period in
which, broadly speaking, there had been no growth of bank
reserves. The recovery movement had pressed, properly I think,
against an essentially stable supply of reserves. Much the
same thing could be said about funds in the hands of the public,
namely, the money supply.
2.
In the period since the year-end we have permitted no
growth in reserves. Indeed, the result of our actions, which
is de facto our policy, has not been to effect a growth in
reserves, however modest; not to hold reserves stable; but to
diminish them. Thus we stand, as of this meeting, with the
total reserves of the banking system about 2 per cent less
than they were a year ago at this time and less than they were
at the year-end even on a seasonally adjusted basis. We find
that the money supply gives us much the same story.
3.
It does not seem to me that this de facto policy has
been at all appropriate. It seemed to me at the year-end,
and it seems to me now, that our policy should appropriately
have been one of affecting a small growth rate in the reserve
supplies of the American banking system--seasonally adjusted.
a) Although it is possible to debate endlessly the
appropriate rate of growth in the reserves of the banking
system in any given banking and economic situation, there is
an ample and highly competent body of monetary theory to
supply a view that some rate of growth is necessary to an
expanding economy and, if not permitted, will sooner or later
have a deflationary effect both on prices and the tempo of
economic activity.
b) However, it is hardly necessary to appeal to monetary
theory, The same point is involved in a long historical
experience, which we can ignore only at our peril,
4. Now, I am alarmed by the evolution of our policy in
the last two and one-half months because it puts us in an
3/22/60
-20-
extremely difficult posture with regard to the rationaliza
tion of our policy and because, as indicated above, I think
it will, if it is permitted to continue, produce an economic
result that we do not intend and cannot defend.
As for the rationale of our policy--in short periods we
do not control the expansion of the money supply. Monetary
policy at least in short periods is permissive, not determi
native of the money supply. We can make a defense on that
point. What we cannot defend ourselves against is the charge
that by constricting the reserves of the banking system we
have not in fact permitted an increase in the money supply.
It is precisely therein that in my judgment we are subject
to deadly attack.
As for the eventual economic result, I myself think that
our policy, unless greatly ameliorated, will in a matter of
time, whether weeks or months, produce effects that we do not
at all want.
I think here we should remind ourselves of what
we have learned many times: monetary policy produces lagged
effects. If the effects of an overdone restriction begin
sooner or later to be overtly evident, and are unfortunate,
as I think they will be, we shall not be able to plead
ignorance.
Note, I believe that a policy of reducing the
reserves of the banking system when (a) the banking system
is illiquid and is struggling to produce its own liquidity;
(b) the economic system, though operating at a high level,
has unutilized and increasing resources of manpower and
materials available for utilization, I think, without infla
tion; and (c) is going through and must go through quite
massive readjustment--such a policy of reducing bank reserves
is in fact, in my opinion, severely restrictive regardless of
what we may say about it,
Let me also suggest, as a sort of aside, that the period
we are in is one that illustrates the grave dangers of the
free-reserve, net-borrowed reserve concept as a guide to
policy. The circularity of reasoning involved in that concept
tends to betray us, I am sure, into an inadequate policy in a
period in which required reserves fall rapidly.
5. Be all the arguments as they may--many more could be
advanced-I do now strongly urge that we promptly proceed to
ameliorate our policy by effecting an increase in the reserve
supplies of the commercial banking system--whether using as a
guide the free-reserve concept or any other rational approach.
As the matter stands today, we have, from December, a total
reserve deficit of approximately $450 million in daily average
reserves on a seasonally adjusted basis. That's at the
previously suggested growth rate of 2 per cent per annum in
But the 2 per cent growth rate, alone, if we
total reserves.
cannot agree on that, has accounted in the months since it
3/22/60
-21
was suggested for less than $90 million of reserves. We
have a deficit since December, seasonally adjusted, of
approximately $350 million even if we had decided, as a
matter of policy, to permit no growth of reserves at all.
I do not believe that we canlogically support this cir
cumstance in the light of current economic and financial
events.
I likewise think that by inadvertence we have not
done what we intended. It does not seem to me in the
slightest accurate to say that a single one of us, in
the last two and a half months, has wanted to enforce an
actual diminution of the money supply or to effect an
actual diminution of the seasonally adjusted reserves of
the banking system.
Now, we find outselves confronted with a very diffi
cult problem of maneuver.
There is a large deficiency of
reserves, but, to make up the deficiency all at once, or
even in a brief interval, would produce gyrations in the
money market; and, at the same time, we are confronted
shortly with a Treasury offering and the presumed
necessity of an even keel. Nonetheless, it is my
judgment that we must resolutely begin an amelioration
of our policy and begin an amelioration by increasing
the reserves of the commercial banking system.
I would make no change in the discount rate at this
time.
Mr. Bopp said that in the Third District, as in the nation as
a whole, business developments had been mixed in recent weeks.
The
upward trend of activity seemed definitely to have slowed somewhat,
but there were no signs of serious weakness.
The reserve positions
of the large Philadelphia banks had been under increasing pressure.
The daily average basic reserve deficiency in the past three weeks
was $90 million, compared with $74 million during the previous period.
To meet this drain on reserves, banks purchased Federal funds and
also borrowed more from the Federal Reserve Bank.
3/22/60
-22
Mr. Bopp expressed the view that no change was called for
in
the policy directive, in
was easier than it
Mr.
ments in
had been,
the tone of the money market, which
or in the discount rate.
Fulton reported that most of the industrial measure
the Fourth District showed some softening and that some
moderate decline had taken place.
In a number of cases, however,
this seemed to reflect the impact of severe weather and other
temporary factors.
While department store sales were down, for
the year to date they were 2 per cent above last year.
Likewise,
although automobile sales had softened recently, for the year to
date they were 11 or 12 per cent above last year.
industry was still
The steel
operating at a very active rate, with operations
in the district at 93 per cent of capacity against a national
average of 91 per cent.
In Cleveland, operations in the past week
were at 102 per cent of capacity.
The mills supplying the automotive
industry seemed to have cut back more than those supplying other
users of steel.
Projections of two of the mills indicated that they
would continue to operate at a high rate in the first half of the
year-around 90 per cent of capacity-and that production would fall
substantially in
the third quarter and then rise again in the fourth
quarter when the new-model cars would be in
substantial production.
While customers seemed to feel that there would be no precipitate
decline in their takings, they were not inventorying steel for they
were able to get
most types without delay.
Building activity had
3/22/60
-23
declined somewhat, but a survey of builders' plans in northeastern
Ohio indicated a 6 per cent increase over last year in dwelling
units constructed, with 62 per cent of the houses priced to sell
over $20,000.
Mr. Fulton said that several manufacturers had told him
of the large amounts of Treasury bills and other Government securi
ties their companies were holding.
the bank, they had it
Instead of having the money in
in the form of income-producing cash.
A
recent survey of capital expenditures revealed that manufacturers
still
planned to spend substantial sums, with the financing to be
largely from internal sources rather than recourse to the markets.
District member banks had been borrowing at a rate averaging from
4 to 6 per cent of the System total.
There seemed to be no real
distress among the banks, and funds were available to meet their
requirements.
Bank debits were running 10 per cent above last year,
indicating a full
use of money.
Mr. Fulton said he was impressed by the comments at this
meeting on the money supply.
However,
he felt that the large amount
of liquid holdings by corporations could not be ignored.
The opera
tions of the Desk and the results achieved by Committee policy in
recent weeks seemed to him appropriate,
in policy.
and he would make no change
Neither would he favor a change in the discount rate
or the policy directive.
-24
3/22/60
Mr. Shepardson said it seemed to him, from the views and
information at hand, that the country was still
visibility.
Nevertheless, while it
was not entirely clear what the
trend might be as the spring season opened, it
were still
in a period of low
appeared that there
strong underlying forces and that one might reasonably
expect an upsurge of spring activity.
supply, he found himself puzzled.
On the matter of the money
He thought it was proper that
the Committee wanted to see some reasonable growth in the money
supply, and with that in mind he went along with the consensus at
the March 1 meeting.
It seemed to be a time when the System might
ease a little and permit some increase in the money supply.
How
ever, developments of the past three weeks brought to attention
again the question of what comprises the money supply, in view of
the amount of "near money" and the effect it might have.
He was
not sure that the money supply was as inadequate as figures based
on the conventional definition would indicate, and for this reason
he felt the Committee should be cautious about further activity in
the direction of easing.
He would prefer to try to hold about the
situation that had existed in
the past three weeks.
This would
contemplate taking care of such seasonal needs as might develop,
but not going further.
He would not suggest a change in the
directive or the discount rate at this time.
Mr. Robertson said that in his view this was a very un
certain period.
As a result, overt actions by the Open Market
3/22/60
-25
Committee were likely to be given an exaggerated meaning or importance
by the public,
with unfortunate results.
He thought it
would be a
mistake to over-emphasize the money supply figure and to launch on a
program of trying to push up the basis on which the money supply could
be increased.
He could agree almost word for word with the analysis
of the staff and of Mr. Hayes, with the exclusion of the latter's
comments concerning use of the maximum permissible rate of interest
on time and savings deposits as an instrument of credit control.
He
would not like to see intentional easing, because what the System
did was likely to be interpreted as an indication of something more
in
the picture than actually existed.
reserves,
Accordingly, as to net borrowed
he would favor a target between $250 and $300 million.
he would not be upset if
net borrowed reserves went a bit
side of that range, he hoped they would not go below it
While
on either
to a point
where the public would think this was a continuing trend of policy
on the part of the Federal Reserve,
of its
indicative of a definite change
views on the economy of the country.
country was in
the midst of a lull
forces in the near future.
In his own view, the
before an outbreak of expansionary
He fully expected to see the strong
factors in the economy emerge within the next two months, with the
result that System policy would be moving back toward restraint.
Mr.
Mills expressed the view that the decisions reached at
today's meeting should hinge on the extent to which reserves should
be injected into the commercial banking system so as to arrest the
3/22/60
-26
shrinkage of the money supply.
In his judgment, the injection of
reserves should not be on a basis that would give further impetus
to the strong upward movement in
Government securities prices or
to the speculative climate that is attached to such a movement in
its
present stages.
In line with that sort of an objective, he
felt that negative free reserves should be maintained at approxi
mately the $300 million level, minus or plus.
In this way the
Committee could experiment with a testing period that would reveal
the true amount of ease that had been permitted in bank reserve
positions by the System's actions thus far.
Although this could be
wishful thinking, the experiment might show that inasmuch as open
market operations over the past several weeks had permitted a
reduction in
the volume of discounts at the Federal Reserve Banks,
a static position would be reached in
that would permit certain banks,
the volume of discounting
or groups of banks, latitude to
expand their holdings of bills and in that way foster some increase
in the money supply.
position in
He felt also that if
a relatively static
the volume of discounts were reached, the commercial
banking system would be more free to meet the credit demands with
which it
was confronted at the present time, and which might require
accommodation to carry the economy through the period of uncertainty
that had been dwelt on extensively in
the discussion around the table
to this point.
Another factor that Mr.
Mills felt should be explored closely
related to the holdings of Government securities and related near-money
3/22/60
-27
substitutes in
the hands of corporations and others, and to the
concern expressed that they were of a volatile nature.
readily be turned into cash, it
They could
was argued, and their liquidation
might produce results that would be economically undesirable.
However, it
seemed to have been overlooked that the holdings of
those near-money substitutes were largely in the hands of nonfinancial
institutions, mainly corporations.
In his opinion, it
was unlikely
that those holdings would be converted and activated to any substantial
extent if
at the same time the money supply was shrinking, because a
shrinkage of the money supply implies that the commercial banking
system is
without the means of epanding its
wise increasing the availability of credit.
deposit totals or other
If
there was a lack of
availability of credit generally throughout the economy, particularly
to consumers and smaller economic units, there would be no means of
giving acceleration to their activities, and consequently no incentive
to the corporations to divest their holdings of near-money substitutes
and put them to work.
He felt quite strongly that the mere fact that
corporations were heavy investors in Government securities and other
near-money substitutes was by no means an indication that they would
convert their holdings and put the proceeds into the money stream.
In the same way, he had reservations about some of the comments that
had been made from time to time regarding an increase in the velocity
of the turnover of money under conditions such as those now being
experienced.
It
seemed likely that increasing velocity at the time
3/22/60
-28
of a falling money supply did not reflect an upward active thrust
in economic activity, but in reality a strained condition on the
part of holders of cash balances.
In conclusion, Mr. Mills said he
would not favor changing the discount rate at this time.
Mr. Leach reported that the Fifth District business situa
tion was characterized by a high level of activity supported by
large backlogs and a substantial volume of current orders, but that
activity had been held back in
snow and ice.
still
each of the past three weeks by heavy
The textile, furniture,
and construction industries
had the benefit of large backlogs, although unfilled orders
in textiles were being worked down.
Bituminous coal production was
below the expectations of the early part of the year.
Hardest hit by
the weather had been lumber operations, construction, and outdoor
activities, along with retail trade.
Sales in some areas were also
being adversely influenced by demonstrations against lunch-counter
segregation in stores.
Mr. Leach said there had been signs in the past three weeks
that pressures were lessening somewhat at Fifth District banks.
Loan
demand had slackened slightly, the rate of liquidation of investments
had slowed down, and borrowing at the discount window was a little
less heavy than a year ago.
in most areas, and it
The mortgage situation continued tight
was said that the flow of mortgage money into
West Virginia, North Carolina, and Virginia had been curtailed because
of the 6 per cent usury laws in those States.
3/22/60
-29
Turning to the policy area, Mr. Leach said he had been
pleased with developments.
He thought the restrictive policy
followed by the Committee up to the last meeting was right, but
he believed the Committee should now be careful to recognize the
changed outlook.
In his judgment,
the current situation called for
perceptibly less restraint than three weeks ago, and he believed that
the Committee had achieved it.
To him, the crucial question was
whether the System could moderate restraint a little
encouraging excessive credit expansion.
more without
He believed it
could, if
the change was small, but he was willing to defer further relaxation
and go along with those who advocated maintenance of approximately
the same degree of restraint that had been achieved in the past two
weeks.
Speaking of net borrowed reserves merely as a benchmark, he
would be pleased if they should average less than $250 million in
the period immediately ahead.
He thought it
would be a mistake to
moderate restraint at this time to the point where there would be
a further reduction in
temporary.
interest rates that might prove to be
The economic situation had not changed to the extent
that a decrease in the discount rate was warranted, and he would
not worry at this time about rate alignment.
Mr.
Leach expressed the view that the general policy of
the Committee, as expressed in
clause (b) of the directive to the
New York Reserve Bank, should be continued.
His interpretation of
the second part of clause (b)--"while guarding against excessive
3/22/60
-30
credit expansion"-- was that the Committee felt that in the next
several months there was a reasonable or above-normal chance that
undue expansionary pressures on the economy might arise.
he was willing to go along, his conviction in
as strong as it
Mr.
Although
that regard was not
had been three weeks ago.
Leedy commented that Tenth District statistics had been
distorted due to weather conditions.
One favorable result of the
bad weather was that the district now had ample spring moisture.
The banking picture was about the same as reported nationally.
Business loans continued strong,
in
there had been a seasonal reduction
demand deposits, and there had been some liquidation of Government
securities.
As to policy, Mr.
Leedy said that to him the idea of adding
to the money supply on any formula basis, regardless of the period
through which the economy was passing, had little
appeal.
Although
he subscribed to the view that the System should make additions to
the money supply, he did not feel that the matter could be put on a
short-term basis.
particularly in
In a period when interest rates were declining,
such dramatic fashion as in recent weeks,
the argument
for current additions to the money supply did not seem to him to have
a valid basis.
Mr.Leedy said he had wondered whether the use of a net
borrowed reserve target might be producing a result not entirely
in
accord with the Committee's desires.
During the recent period,
3/22/60
-31
when there was only a small reduction in net borrowed reserves, there
were times when the Federal funds rate was considerably below the dis
count rate and short-term rates generally were dramatically below the
discount rate.
The use of the net borrowed reserve figure had become
such that a substantial change in any period might cause some concern
and produce a reaction that the Committee did not desire.
the extent it
could be done, it
However, to
seemed to him that, in addition to the
net borrowed reserve target, the trend of short-term rates and the
Federal funds rate might be observed a little
more closely in the
course of open market operations.
Mr. Leedy said he did not feel that this was a time for any
further tightening or a time when the System should consciously relax
further the degree of pressure that it
on reserves.
had been attempting to place
Instead, for the period ahead, he would prefer to main
tain substantially the same degree of restraint that had prevailed
recently.
With respect to the maximum permissible interest rate on time
and savings deposits, Mr. Leedy said that, like Mr. Hayes, he had
felt that something should be done in this area.
light of recent interest rate developments, it
However, in the
did not seem to him
that this would be an appropriate time to increase the maximum
permissible rate.
Mr.
Allen commented that on the basis of available figures,
conditions in the Seventh District appeared to be a little
stronger
3/22/60
-32
than those in
the nation as a whole.
In January, manufacturing
employment was up 5.3 per cent, compared with an increase of 4.8
per cent nationally.
In January and February, new claims for un
employment were 16 per cent below the low levels of a year ago,
compared with a 4 per cent decline for the nation as a whole.
For
the nation, retail sales in January and February were 3 per cent
over last year's record level, and in view of the pessimism concern
ing automobile sales it
was interesting to note that dollar sales
of automotive dealers for this year were 4 per cent above last year
and practically equal to the record dollar level of 1957.
during the first
Even
ten days of March, when severe weather over wide
areas of the country was an adverse factor, the average daily selling
rate was 4 per cent over last year.
Continuing, Mr. Allen noted that increases in loans to busi
ness, including finance companies,
by reporting banks in New York
and Chicago in the week ended March 16 amounted to $533 million and
$95 million, respectively, the largest single-week increases on
record, even for a tax period.
Although dollar increases in business
loans at those banks were greater in
and March 1957, it
the same periods of March 1956
must be remembered that the amounts of taxes due
in those years were considerably higher as a result of the Mills
Plan schedule.
New York and Chicago banks had generally accounted
for from one-half to two-thirds of business loan expansion to all
weekly reporting banks in previous tax periods.
If that relationship
3/22/60
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prevailed this year, the total business loan increase for all report
ing banks in the country would be between $900 million and $1 billion,
Mr. Allen pointed out that the tax week loan upsurge followed
an unusually large expansion in
February.
From the first of the year
through March 9, total loans of all Seventh District weekly reporting
banks were off only $25 million, in
contrast to a decline of $225
million in the same period of 1959, with all loan categories stronger
this year.
For the country as a whole; however,
the net decline in
total loans at reporting banks was considerably greater than in 1959,
as a smaller contraction in
commercial and industrial borrowing was
more than offset by larger declines in
those on securities.
other types of loans, especially
Total bank credit and deposits continued to fall
through February as banks sold large amounts of Government securities,
and this was reflected in a continued shrinkage in the money supply.
Mr. Allen said he was not as concerned about the money supply
as many of those at this meeting appeared to be or, rather, that he
did not share their views.
It
seemed to him that too small a portion
of increased production had been financed out of savings, and that too
large a portion had been an unnatural and forced increase, financed by
credit.
The System had provided the reserves that made the abnormal
increase possible, with higher price levels as a result.
He thought
this was an appropriate time to consider carefully whether or not the
System should continue to feed such abnormality at a time when business
activity was at a high and satisfactory level.
His thinking was
3/22/60
-34
influenced in part by a recent review of the loan portfolios of
several banks, some of them sizable.
He was surprised at what he
saw, particularly the terms of the credits, and he did believe he
was looking at isolated cases.
He agreed with Mr.
Bryan's statement
that the banks were illiquid, but, based on his own observations,
he
questioned whether it could be said that they were striving to become
more liquid.
His observations had made him more sure than he was
before that an adjustment was coming, a painful adjustment which was
the result of financing growth by means of credit rather than through
savings.
He was equally sure that to put in more reserves at this time,
when business was showing a tendency to level off at a very high level,
would only make the adjustment more painful.
Accordingly,
Mr. Allen said, he would prefer to do nothing
further for the present in the way of easing credit restraint, and
instead to await the results of the Easter season.
Given the high
rate of personal income and the evident disposition of people to
spend and to borrow, the very satisfactory level of activity might
continue.
Whether it
did or not, he saw no reason yet to anticipate
a "recessionary spiral," as Mr.
deserve System action.
in
Noyes had phrased it,
that would
He would try to keep net borrowed reserves
the range of $250 to $300 million, and he would not favor changing
the discount rate or the directive at this time.
Mr. Deming reported that Ninth District business sentiment
seemed to be a little
more optimistic than a month ago.
Actually,
3/22/60
-35
however,
the available statistics showed only modest improvement,
Continuing the trend in evidence for the past several months,
February data on personal income in Minnesota indicated a 2.7 per
cent gain from a year earlier and a .7 per cent gain from January.
Wage and salary income was up 6 per cent in the year and .5 per cent
in the month, while farm proprietors'
from last February.
income was off 20 per cent
District nonagricultural employment in February
was at a new high, seasonally adjusted, bank debits were 14 per cent
above a year ago, and department store sales had been relatively good.
The iron ore situation nationally was about as good as at
this time in 1959, with stocks only one million tons smaller.
However,
the impact of the steel strike on Lake Superior ore could be seen by
the fact that stockpiles from that source were 12 million tons smaller
than in early 1959.
It
Most of the difference represented foreign imports.
was too early to tell
when Lake shipments from the Superior ports
would begin this year, but it
was expected that some ore would go down
the lakes from Escanaba (on Lake Michigan) about the first of April.
Mr. Deming reported that Ninth District banking figures con
tinued to show what might be called "accented seasonal trends".
Deposits were off more than usual, and loans were up more strongly.
The net result was a continued pinch on bank reserve positions and
a continued rise in loan-deposit ratios.
Mr. Deming said he had some question about the point made by
Mr. Thomas that the decline in Government securities held by the
3/22/60
-36
banking system reflected mainly a demand by nonbank investors for
such securities.
It
seemed to him that the banks continued under
some pressure and were liquidating Governments more because they
had to than because others wanted to buy the securities.
words,
In other
he continued to be concerned about the general level of bank
liquidity.
While he would not go as far as Messrs. Johns and Bryan
in moving strongly to bring up the total reserve base, he thought it
would be well to attempt to move toward the objective of increasing
that base.
Therefore, he would look with favor on additional probing
toward moderately easier conditions despite the current level of
interest rates.
and gradual,
This probing action, he believed, should be cautious
and not forceful.
The phrase used at the March 1
meeting--conscious but moderate easing"--with a tone of continuing
movement about expressed his feeling as to open market policy.
He
saw no need to change the discount rate or the policy directive.
Mr. Mangels said there was little
new to report from the
Twelfth District, with no changes in employment,
sales, retail trade,
comment.
department store
or automobile sales that seemed worthy of
A couple of steel mills reportedly had cut back production
of a few types of items because of foreign competition.
Also, it
had been learned that the Defense Department budget for fiscal 1961
included $1.5 billion for Boeing contracts, which would be helpful
not only because of the contracts themselves but also because of
results that would filter through the district.
3/22/60
-37
Mr. Mangels said that district bank loans increased in the
past three-week period, but at only about one-third the rate of
increase for the similar period last year.
Demand deposits also
increased, but again at a rate considerably less than last year.
Banks continued to lose time and savings deposits, at a rate more
moderate than earlier in the year, but in general district banks
appeared to be in a somewhat easier position.
In the past week,
reporting banks were net sellers of Federal funds to the extent of
$500 million, and this week it was estimated that they would be net
sellers to the extent of about $1 billion.
Borrowings from the
Reserve Bank had fallen to modest proportions.
Mr. Mangels said the business situation in general seemed
to him to continue to show a somewhat mixed trend.
Business had
been affected by bad weather throughout most of the nation, but
there was not much to indicate that even with better weather there
would be a quick upward movement.
In view of the prevailing un
certainties, he would be inclined to stay somewhat on the easy side,
perhaps a little
easier than in the past three weeks.
He would aim
for net borrowed reserves in the area of $200-$300 million, with
leeway given to the Account Management.
satisfactory.
The policy directive seemed
While he would not favor changing the discount rate
at this time, he would not be too surprised if at some time in the
relatively near future the System might not want to give some
consideration to a downward adjustment unless conditions changed.
3/22/60
-38
Mr. Irons said there had been a slight lessening of activity
in the Eleventh District, which perhaps could be attributed to
weather conditions.
Construction and department store sales had not
been showing as much strength as earlier, the latter being 2 per cent
under a year ago for the year to date.
Another factor that might be
having some influence was the further decline in petroleum production.
Allowables had dropped to nine days,
for improvement.
and there was no immediate prospect
This situation was reflected in drilling operations
and the psychology of people closely associated with the oil industry.
In general,
however, district conditions were about the same as three
weeks ago.
They reflected many of the uncertainties seen in the
national picture.
Turning to policy, Mr. Irons said that for the period ahead he
wished to identify himself with the views Mr. Hayes had expressed.
He
was somewhat disturbed by the price and rate movement in the Govern
ment securities market and also about the apparently increasing number
of press comments regarding a shift in Federal Reserve policy to ease,
for he believed it
would be unfortunate if that thought were to become
a strong expectation.
His preference would be to maintain about the
same position as in the past three weeks.
He would not try to force
funds into the market, and he hoped no further lessening of restraint
would become apparent during the next two or three weeks.
If
the
effect of System operations should be to introduce some uncertainty
into the thinking of people in the market, he felt that
might be
3/22/60
-39
desirable.
He would not favor a change in the discount rate or in
the policy directive.
Mr. Erickson reported that conditions in the First District
continued to show general strength, with no apparent upward or down
ward pressures.
There was nothing of importance to report with
respect to production, construction, or employment.
In the February
survey of mutual savings banks, the tendencies that he reported at
the March 1 meeting continued.
Compared with last year, the deposit
increase in February was less than in January,
higher.
and withdrawals were
In February, mortgage portfolios increased only 2 per cent,
which was the lowest rate of increase in over two years,
For the week ending March 16, district reporting banks showed
an increase in business loans of over $30 million, which was several
million dollars higher than during the comparable period last year.
During the past three weeks those banks were net purchasers of
Federal funds to a greater extent than in the previous six weeks.
Average borrowings from the Reserve Bank had gone down.
During
the past three weeks borrowings averaged about $20 million, which
was only a little
more than 2 per cent of the System total.
Mr. Erickson said he would favor continuing the policy of
the past three weeks.
He considered the directive appropriate and
would favor no change in the discount rate.
reserves,
For net borrowed
he would suggest $250 million, plus or minus, as a target.
-40
3/22/60
Mr.
Szymczak said that for the next three weeks he would
favor continuing the policy followed during the past three weeks.
This was on the basis that the seasonal trend would be clearer by
that time than at present.
Also, the Treasury would have to come
into the market several times within the near future, and the
Easter season was about to begin.
As to the money supply, which
was a longer-range problem, the question he had in
mind was how
to accomplish an increase without adding to the inflationary
potential.
Additions to the money supply are not always feasible
because there are factors over which the System does not have
The
direct control, such as debt management and public psychology.
Committee might decide,
for example,
to add to the money supply
through additions to bank reserves at a time when the market was
already changing.
In this connection, he recalled Chairman Martin's
statement at the February 9 meeting to the effect that some persons
in the market thought that the System already had changed its
when actually it
had not.
policy,
The problem was one of developing tech
niques that would enable the System to add to the money supply at
the right time and in
the right amount without disturbing the
Government securities market and making the problem of debt manage
ment more difficult.
Mr.
Balderston said that he would not favor changing the
discount rate and that he would continue the existing policy
directive.
He would favor continuing the policy followed during
3/22/60
.41
the past three weeks that had produced net borrowed reserves
averaging about $230 million.
Chairman Martin said he thought there was almost a general
consensus in the views expressed at this meeting.
He had no con
viction on the short-term aspects of the money supply, he said, and
he was as perplexed as anyone with regard to the interest rate move
ment.
its
However,
it
must be remembered that the Treasury would announce
next financing at the end of this month,
and the Committee should
consider the psychological implications in the money market of moves
on the part of the System.
analyze and interpret.
He found the situation difficult to
Some people had overanalyzed the sitution
and were making various assumptions,
including the assumption that
the System might change the discount rate.
That was a matter of
some concern.
Chairman Martin expressed the view that in the present cir
cumstances the Committee should be thinking in
policy,
terms of an even keel
and he thought the consensus was very much along that line.
He would not want to complicate the Treasury's problem.
sensus, with which he was in agreement,
The con
favored no change in the
policy directive and continuing about the same policy that had been
followed for the past three weeks.
Chairman Martin went on to say that he thought System policy
had been quite good, and that all things considered the System had
moved in
the right direction.
He worried too much, perhaps,
about
3/22/60
42
overinterpretations and psychological aspects.
In this connection,
he felt there was a general tendency to exaggerate or overestimate
what System policy was going to do to the economy.
Chairman Martin added that the staff, as well as the members
of the Committee, should be particularly careful in their comments
to outsiders with respect to Federal Reserve policy in a time like
this.
Care should be taken, particularly, not to show undue concern.
Chairman Martin said that in his view the economy was
developing well.
Some of the things that the System had been
struggling to achieve for a long time were being achieved.
It
was necessary, however, to be careful about the psychological
aspects of the current period,
Chairman Martin then said he understood from the go-around
that the Committee would favor continuing the existing policy di
rective, and that, while there were views plus or minus here and
was the general consensus that the Desk should do the
there, it
best it
could to avoid any indication of tightening or of easing.
The Chairman asked whether there were any questions or
comments,
and none were heard.
He then turned to Mr. Larkin, who
stated that he had no comment.
Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal
Reserve Bank of New York until
otherwise directed by the Committee:
3/22/60
-3-
(1) To make such purchases, sales, or exchanges
(including replacement of maturing securities, and
allowing maturities to run off without replacement)
for the System Open Market Account in the open market
or, in the case of maturing securities, by direct ex
change with the Treasury, as may be necessary in the
light of current and prospective economic conditions
and the general credit situation of the country, with
a view (a) to relating the supply of funds in the market
to the needs of commerce and business, (b) to fostering
sustainable growth in economic activity and employment
while guarding against excessive credit expansion, and
(c) to the practical administration of the Account;
provided that the aggregate amount of securities held
in the System Account (including commitments for the
purchase or sale of securities for the Account) at the
close of this date, other than special short-term
certificates of indebtedness purchased from time to time
for the temporary accommodation of the Treasury, shall
not be increased or decreased by more than $1 billion;
(2)
To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks)
such amounts of special short-term certificates of
indebtedness as may be necessary from time to time for
the temporary accommodation of the Treasury; provided
that the total amount of such certificates held at any
one time by the Federal Reserve Banks shall not exceed
in the aggregate $500 million.
At this point all of the members of the staff except Messrs.
Young,
Sherman, Thomas, Roosa, and Larkin withdrew from the meeting.
Chairman Martin referred to a memorandum from Messrs. Rouse,
Thomas,
and Young dated March 18, 1960 regarding ways in which the
System Open Market Account might function so as to help minimize
refinancing difficulties of the Treasury when such transactions do
not interfere with Federal Reserve credit and monetary policy
objectives.
He stated that he felt the memorandum represented an
3/22/60
-44
excellent job and should be studied carefully.
The Chairman also
referred to a letter he had received from a group of members of
the United States Senate dated March 12, 1960, copies of which had
been released to the press by the Senators concerned, which contained
suggestions for change in some of the Federal Reserve operating
procedures.
The Chairman then pointed out that action on renewal of
three of the Committee's continuing operating policies that
customarily are considered at the first
meeting in March of each
year was held in abeyance at the meeting three weeks ago.
The
Committee could continue to hold these in abeyance, he said, or it
could affirm the operating procedures in the form in which they had
been renewed a year ago.
He was not suggesting that the Committee
should seek unanimity on these statements of operating policy or
procedure,
and he anticipated that if
the three statements were
renewed there might be some negative votes.
concluded that it
For himself, he had
would be wiser not to modify the existing operating
policy statements to a compromise form that would get unanimity.
proposal was that the Committee discuss today whether it
His
wished to
affirm the present statements of operating procedure or whether it
preferred to change their wording and their substance.
He repeated
that he had swung clearly to the position that they should not be
changed at this time.
It was true that the statements were only
words and that the wording could be modified,
but there had been
3/22/60
-45
interpretations of the existing wording over a period of seven years
and there had been misinterpretations,
conscious,
some conscious and some un
some of which had tended to set apart the Board of
Governors or the Committee and the Federal Reserve Bank of New York
on the basis of different interpretations of such words as "solely,"
"primarily," and so on.
In general, he felt certain that the actual
operations called for by the Committee had followed procedures that
were approved by virtually all members of the Committee, and in his
opinion operations generally speaking had moved in the right direction.
There was a question, of course, whether the Committee might have made
more exceptions to its
the case.
statements of operating policies than had been
On balance, however,
he was convinced that there was no
necessity for a change in these statements simply because of attacks
that were being made on the Federal Reserve's so-called "bills only"
or "bills usually" policy.
Chairman Martin said that he would like
to have Mr. Hayes comment first on the procedure that might be
followed.
His (Chairman Martin's) proposal would be to take a vote
on whether to affirm the present statements of operating policies,
making it
clear that any person who had reservations regarding their
continuation should feel perfectly free to vote against their
renewal.
After the Committee had reached a decision on this question,
his suggestion would be to take up the content of the March 18
memorandum that had been prepared by Messrs. Rouse, Thomas,
and Young.
Mr. Hayes said he had understood that Chairman Martin at one
stage felt it
would be preferable first to discuss problems such as
3/2/60
-46
those covered in the Rouse-Thomas-Young memorandum and, after reach
ing some conclusions as to those proposals, to take up the question
of the continuing operating statements.
He would still
have sympathy
with that procedure, but he assumed that Chairman Martin now was
calling for an expression of views on the three operating statements
first.
Chairman Martin indicated that this was correct.
for feeling that it
His reason
was desirable to act on the operating policy state
ments was partly related to the fact that the open market policy record
that would be published early in 1961 would reflect whatever action the
Committee decided to take at its
March meeting on these statements,
which had now been a matter of public record for seven years.
He did
not think action on reaffirming or changing these statements should be
held indefinitely in
abeyance because, in view of the history of what
the Committee had done,
that would be difficult to explain to the
public; and he did not think the Committee should act as though it
had been influenced by outside criticism of its
ing policies when, in fact, it
was in
statements of operat
substantial agreement as to the
actual operating procedures that should be followed.
Chairman Martin
said that he also would repeat what he had brought to the Committee's
attention before, namely, that some members of the United States
Senate continued to feel that statements of policy action should be
issued more frequently than in the Board's Annual Report once a
year, perhaps on a quarterly basis.
3/22/60
-47
Mr. Hayes said that although he felt a debate on the specific
problems covered in the Rouse-Thomas-Young memorandum might clarify
the thinking of the group, he did not wish to prolong this discussion
of procedure,
Turning to the operating policies, which he had not expected
to discuss at this stage of this meeting, he stated that, ever since
he became a member of the Committee,
within the Committee as to what it
he
had felt
that the differences
wished to do were relatively small.
He agreed with Chairman Martin that the Committee had been operating
most of the time in
felt,
a way that was satisfactory to all
members.
He
however, that an impression of excessive rigidity on the operat
ing policy statements that had been renewed each year since 1953 had
placed the Committee in
a disadvantageous spot publicly.
This had
been demonstrated to some extent in the internal discussions within
the Committee.
tie
its
He did not believe the Committee should voluntarily
hands with a rigid statement of policy,
sake or from the standpoint of public relations.
either for its
own
He had hoped that
he could convince the Committee of this view and he had tried to do
so over a period of time.
He recalled that at the first
meeting in
March 1958 he had sought a compromise between his views and those
of some others by suggesting language for two of these statements
that he felt
was more satisfactory than that previously used.
Committee had reached a different decision.
decision at that time was wrong,
and he still
He felt
The
the Committee's
believed it
to have
3/22/60
-48
been wrong.
He reaffirmed this position a year ago.
This year, Mr. Hayes said, he was impressed with the suggestion
the Chairman had made several meetings back that a committee try to
arrive at a solution of this problem, and the draft of revised state
ments that had been distributed by the staff committee under date of
February 5, 1960, had seemed to him to be a good job.
He would have
been perfectly willing to adopt the suggestions contained in that
draft and would be willing to do so at present.
Mr. Hayes said that
this was his position at the moment; he will be willing to adopt the
5
February
draft but, if this could not be adopted, he would wish to
revert to the position he had stated at the March meetings in 1958
and 1959.
Mr. Balderston commented on the procedure that might be
followed at this meeting, saying that in view of the attacks being
made on the System it seemed to him important that the Committee
think in terms of what would be in the 1961 Annual Report covering
policy decisions.
First, he had come to the conclusion himself that
in the face of the attacks being made he would reaffirm the existing
statements.
Secondly, he liked the wording Mr. Mills had used at
an earlier meeting about experimentation.
He would experiment
during the remainder of this calendar year, following the type of
analysis that had been presented by Messrs. Rouse, Thomas,
and Young.
Third, he believed that better progress would be made by considering
specific problems than by arguing over words and their possible
3/22/60
-49
interpretation or misinterpretation.
Whatever the final decision,
however, he felt the staff suggestions, as embodied in the March 18
memorandum, represented a worthwhile contribution that should have
the Committee's attention.
Mr. Szymczak said that there was the academic position to be
considered, which seemed to want the System to go into intermediate
and longer-term securities on all occasions to meet monetary needs.
Against that, there was the practical side, and on this he found it
better for the Committee to continue saying what it
for seven years.
had been saying
This gave a definite position, and that was helpful
in relations with the Treasury.
After commenting on the paper sub
mitted by Messrs. Rouse, Thomas, and Young, Mr. Szymczak said that
at this meeting he would reaffirm the three statements of procedure
that the Committee adopted some years ago, and, as practical problems
arose before the Committee, make decisions on how to deal with those
problems, which might include making exceptions to the general
policies stated, as provided for in the statements themselves.
Mr.
Szymczak said he hoped any such exceptions would not be frequent.
Mr.
Bopp said that he had some difficulty in reconciling the
statements of policy and the suggestion in the Rouse-Thomas-Young
memorandum which seemed to involve rather frequent exceptions to the
general statements of policy and which would go beyond the usual
intervals between meetings of the Committee.
-50
3/22/60
Mr.
Johns noted that he previously had expressed reluctance
about changing the wording of the operating policy statements.
In
view of the way the Committee was now operating, he would not wish
to change them at this time.
If,
however, at this meeting the Com
mittee should readopt the three statements of policy that were carried
over at the meeting three weeks ago, should that action be taken as a
complete rejection of any further consideration of the points mentioned
in the letter sent to Chairman Martii on March 12 by a group of
Senators?
If
so, he inquired whether this would be prudent.
Chairman Martin said that he had considered this aspect very
carefully.
If
the letter from the group of Senators were to be looked
upon as a controlling factor, then the answer to Mr.
would be in the affirmative.
Johns'
question
He did not believe, however, that there
was any intention to permit that letter to be a controlling factor in
the Committee's views or operations.
His view was that, if the Com
mittee was unanimous in wishing to change the operating procedure,
it
should go ahead and make the change regardless of the letter from the
group of Senators.
As one member of the Committee, however, his
judgment was that the Committee had been operating in the right way
and that there was no reason for change in the operating policies.
The Committee should decide what to do about the operating policy
statements on the basis of what it
to do,
believed to be the right thing
not on the basis of some interpretation that might be put on
these statements of policy by the Senators or other persons.
The
3/22/60
-51.
Committee should continue to study the problem of its operating
procedures, but it
should not be in
the position of having a group
of Senators dipping into the policy implications of the System
unless there was a change in the provisions of the Federal Reserve
Act.
After Mr. Johns remarked that he would wish to be very sure
that there was no merit in the suggestions of the group of Senators
before they were rejected out of hand, Chairman Martin said that
there was no suggestion in his mind of rejecting any proposal for
study of Committee operations.
He repeated that the Committee should
study any suggestions that came to it
with a completely open mind.
This was a different thing from determining whether to reaffirm the
operating statements that the Committee had been using because a
letter from a group of Senators placed certain interpretations on
the Committee's statements of procedure.
The question was not
whether to reject the views expressed in the letter to which Mr.
Johns had referred but rather to consider the fundamental purpose
of the statements of operating policy and whether the procedures
that the Committee had been following were the right ones.
Chairman Martin said he was not asking any member of the
Committee to vote to continue the operating procedures against his
judgment.
The statements of procedure were subject to change but
he seriously doubted whether the System would have been able to
carry on the procedure it
had followed in the past several years
3/22/60
if
it
-52
had not had some statements of operating policy such as those
adopted in 1953.
It was easy to forget the difficulties of the
transition from a pegged market for Government securities to a rela
tively free market.
These statements had been brought together and
put in their present form because of the situation that existed
during that transition.
operations,
There had to be a framework for System
and these statements had provided that framework.
The
suggestion had been made that perhaps the Committee did not need the
statements of continuing operating procedures any longer.
that was true.
Perhaps
The Committee could adopt at every meeting a state
ment as to what its operating techniques should be, as well as its
directive on policy.
If there was no history back of these three
statements, that might be the best solution, but there was a history
back of them.
history.
He did not think the Committee could disregard this
If the Committee were to arrive at a decision to do away
with the statements of operating policy, it
was the Chairman's
belief that this would require consideration not only of the views
that had been expressed by certain Senators in their recent letter
to him but also a complete review of many other aspects of policy,
including the Radcliffe Committee report, the problems of guides
that Mr. Bryan had brought before the Committee on several occasions,
and other matters.
Mr. Robertson said that he believed it
statements of continuing operating policies.
desirable to have the
Further, he believed
3/22/60
-53
that the Committee should make a decision now as to whether to re
affirm them in their present form rather than to let the questions
run on beyond this meeting.
Mr.
Hayes had suggested that the present
statements inhibited members of the Committee from making suggestions
for changes in actual operations, and he (Mr. Robertson) believed
any basis for this feeling could be removed by (1) deleting from
statements (b) and (c)
the provisions indicating that these policies
are to be followed until such time as they may be superseded or
modified by further action of the Federal Open Market Committee,
and (2) inserting in lieu thereof an additional statement that
would apply to all three of the policies indicating that, because
of variations in conditions, from time to time exceptions may be
made to any of these statements.
He would also include a specific
requirement that the Manager of the System Open Market Account bring
to the attention of the Committee any situation that he believed
warranted an exception.
Mr. Szymczak said that he would not object to the proposal
of Mr. Robertson, but he believed the points were already covered.
Mr. Fulton said that the inclusion of the word "solely" in
statement (c) prohibiting swaps was a red flag to some people.
He
thought this might be changed or deleted without changing the
meaning of the statement so far as actual operations were concerned.
Chairman Martin responded that in his judgment any change
in the wording of the operating policies at this time would require
3/22/60
-54
an explanation as to why the Committee had made a change and what
the significance of the change was.
That explanation would have
to be published in the Board's Annual Report early in 1961.
He
questioned whether a change in words with an explanation that it
did not change the meaning would serve any purpose.
Mr.
Robertson commented that in view of the history of these
statements, a change of this sort would mean a change in the policy,
and Mr. Szymczak said that the saving feature of the whole period
since the Treasury-Federal Reserve accord had been the fact that
the monetary authority had a statement of its position for use in
its
relations with the debt management authority.
Chairman Martin said that none of the members of the Committee
should lose sight of the fact thatin the record the Committee was
building for the period between now and the end of this year, there
would be new factors and perhaps new developments to be dealt with,
and any actions taken by the Committee or by the System would be
subject to different interpretations both within and outside the
System.
Mr. Irons said that he thought it would be desirable to
retain the present statements with no change.
Any change in the
wording would call for an explanation as to why the change was made
and what its significance was.
He recognized that there was an area
of semantics in this and that changes could be made in wording
without having any substantive meaning.
It was for this reason
3/22/60
55
that he leaned toward reaffirming the statements in their present
form.
As an alternative, if
ground of the statements,
it
were not for the historical back
he would not object to dropping them
entirely and operating without such statements,
Mr.
Hayes stated that he thought changes in the statements
could be justified on two grounds.
First, it
was seven years since
the original language had been adopted and the environment and
conditions under which the Committee was working had changed in this
period, during which we had moved a long way from a pegged market
for Government securities.
The market had come to understand the
basis of System operations in this time,
and the need for statement
of this sort was much less today than it
was seven years ago.
The
second reason was that he believed the Committee had changed in
a
small way to indicate a little
He
more willingness to experiment.
did not see why the comittee could not admit such a change if
it
was true.
Mr.
Martin did.
Deming said he came out very close to where Chairman
Part of the problem was semantics.
He commented on
points he believed should be kept in mind in considering the problem,
including the history and background of the "bills only" policy, the
fact that Government securities dealers apparently believe the policy
is
sound and that its
abandonment would make for a less broad market,
the discussion of the Reuss amendment in the Congress last year,
the
fact that many professional economists view the "bills only" policy
as unwise and allege that it needlessly ties the hands of the
3/22/60
-56
central bank, and the fact that some members of the Congress object
to the policy.
Mr.
Deming said that he believed the System could
best meet the situation by issuing a formal statement which attempted
to answer some of the criticism of professional economists as well as
the uninformed criticism of others.
air.
Such a statement might clear the
He would keep the basic framework of the operating policy state
ments but would modify them gently along the lines suggested by the
Rouse-Thomas-Young memorandum.
After describing some additional
changes that he thought might be made in
said that if
the statements,
this were done he would make a flat
Mr.
Deming
statement that the
changes in wording did not change the Committee's operating policy
statements as amended by these suggestions in
position, that is,
precisely their present
he would keep them out of the Committee's policy
directive.
Mr.
Leedy said that regardless of any statement the Committee
might make as to its
purpose in
changing the operating policy state
ments at this time,
such a change would be interpreted as having
some significance.
If
there was no significant change,
he could see
no reason for changing the wording of the statement of ground rules
now.
These ground rules had been used and had become understood,
and he did not think that any statement the Committee could make
would cover all
possible exceptions that might be appropriate.
He
was not aware of any case where a member of the Committee had been
inhibited from suggesting exceptions to the operating procedures,
3/22/60
-57
He concluded that there was no sound basis in the present circum
stances for any change in
Mr.
had made.
the statements.
Leach said he rather liked the suggestion Mr. Robertson
He did not see how such a change could possibly need any
explanation.
When these rules were adopted seven years ago, there
was considerable discussion as to whether they were to be rigid
rules.
Over the seven years, they had been interpreted in some
quarters to mean that the Committee was rigid.
statement was concerned,
So far as the third
Mr. Leach said he did not know why some
swaps of securities within rather short maturities could not be
made,
but he doubted that an acceptable change of wording could be
agreed upon today.
statements today,
Perhaps it
would be best to reaffirm the policy
but he would prefer some change in
the rule on
swaps because he believed the present wording of this statement was
too strong.
Chairman Martin said it
seemed to him that it
was easy to get
into specific suggestions for operations and to get away from the
general statements of operating policy.
He would like to dispose of
the question whether the Committee wanted to continue to hold in
abeyance a decision on the present operating procedures or whether
it
wanted to have a vote today on a proposal to continue the operating
statements in
be decided.
their present form.
After it
exceptions that it
He felt that this question should
was decided, the Committee could talk about
might wish to make under any of the rules.
The
3/22/60
-58
question he was trying to present was whether the existing statements
should be reaffirmed.
Mr. Erickson said that in view of developments during the past
three weeks he would reaffirm the present policy statements.
He would
be interested, however, in reviewing the suggestion Mr. Robertson had
made.
Chairman Martin stated that while there was merit in this sug
gestion, he felt it was difficult to discuss this without getting
into a redrafting of the statements of operating policy.
Mr. Mills said he agreed completely with the view that had
been expressed that the Committee should reaffirm the operating
policy statements in full.
In his view the Committee should suspend
any of these policy statements whenever conditions necessitated
deviations or exceptions.
He also commented on how he felt the
letter from a group of Senators might be answered.
Chairman Martin then asked whether there were further com
ments on the operating policy statements prior to his calling for
a vote on whether they should be reaffirmed.
Mr. Mills said that he would favor the existing policy
statements,
although he would accept a modification somewhat along
the lines suggested by Mr. Robertson.
Mr. Shepardson said that over the seven years there had been
changes in the situation from that existing at the time these policies
were adopted.
There was a potential change in the situation again.
3/22/60
-59
No one could guess what that might be, but in his view it
was
desirable to have the statements as something that the Committee
could stand on during this period.
Mr.
Hayes said that the Committee thought it
explain to the market seven years ago something of its
to operations.
approach
He did not think the Committee needed these state
ments any longer.
it
important to
If
the System was doing a job as a central bank,
had to stand up to the Treasury under all conditions and it
should not have to rely on these statements in
central banks do stand up to their Treasury,
order to do so.
Many
he said, and most of
them don't have operating statements of this type.
Mr.
Balderston inquired whether the proposal that Mr.
Robertson had made,
adoption of which would show some flexibility,
would be preferable to the existing statement, and Mr. Mills
responded that he would prefer the original form of the statement
although he would not object to the form suggested by Mr. Robertson.
Chairman Martin then said that he would call for a vote as
to whether the three statements of operating procedure should be
reaffirmed in their present form.
In calling for this vote, he
emphasized that no one should be inhibited in voting against the
statements if
that was the view he held.
No objection to this procedure being indicated, Chairman
Martin stated that he would vote to reaffirm the three operating
statements without change in the following form:
3/22/60
-60-
a.
It is not now the policy of the Committee
to support any pattern of prices and yields in the
Government securities market, and intervention in
the Government securities market is solely to ef
fectuate the objectives of monetary and credit
policy (including correction of disorderly markets).
b. Operations for the System Account in the open
market other than repurchase agreements, shall be
confined to short-term securities (except in the
correction of disorderly markets), and during a period
of Treasury financing there shall be no purchases of
(1) maturing issues for which an exchange is being
offered, (2) when-issued securities, or (3) outstand
ing issues of comparable maturities to those being
offered for exchange; these policies to be followed
until such time as they may be superseded or modified
by further action of the Federal Open Market Committee.
(c) Transactions for the System Account in the
open market shall be entered into solely for the purpose
of providing or absorbing reserves (except in the cor
rection of disorderly markets), and shall not include
offsetting purchases and sales of securities for the
purpose of altering the maturity pattern of the System's
portfolio; such policy to be followed until such time as
it may be superseded or modified by further action of
the Federal Open Market Committee.
Messrs. Balderston, Bryan, Fulton, Leedy, Mills, Robertson,
Shepardson, and Szymczak stated that they would vote to reaffirm the
statements in their present form.
Mr. Hayes stated that with respect to statement "a" he would
like to change the word "solely" to "primarily" in view of the fact
that he believed that monetary policy included considerations other
than supplying reserves.
As to statements "b" and "c", he would
vote against them, as he had done a year ago, for the same reasons.
He would add that he had serious reservations about the "no swapping"
rule on any basis.
3/22/60
-61
Mr. Bopp stated that he was bothered by use of the word
"solely" in statements "a" and "c."
Committee meets every three weeks, it
He felt that, since the full
was not necessary to have
statements of continuing operating policies.
Should they be
retained, he felt they should be phrased so as to indicate that
exceptions might be made to them as circumstances warranted.
Thus,
he would vote against reaffirming all three statements in their
present form.
Messrs. Allen, Deming, Erickson, Johns,
Irons, Leach, and
Mangels indicated that if they were members of the Committee they
would vote to reaffirm the three statements in their present form.
The meeting then recessed and reconvened at 2:00 p.m. with
the same attendance as at the close of the morning session except
that Chairman Martin was not present.
Vice Chairman Hayes called upon Mr. Young for comments on
the memorandum of March 18, 1960 from Messrs.
Rouse, Thomas,
and
Young dealing with a suggestion that the System Open Market Account
might function to help the Treasury minimize its
refinancing
difficulties when such transactions would not interfere with
Federal Reserve credit and monetary policy objectives.
The specific
suggestion discussed in the memorandum was that the Federal Open
Market Committee cooperate in smoothing the refinancings of one-year
Treasury bills and November 1961 bonds by acquiring blocks of those
issues prior to maturity and then rolling them over at the time of
refinancings.
3/22/60
-62
Mr. Young stated that the suggestion discussed in the staff
memorandum had originated with the Treasury, that it
would be appro
priate for the Federal Open Market Committee to study the suggestion
in its own self-interest, and that in his opinion a case could be
developed that some participation by the System Account would be
desirable from the standpoint of the Committee's objectives and
purposes.
Mr. Young added that the staff had not felt that it
make such a case to the Committee.
Therefore,
should
the memorandum simply
attempted to summarize the principal aspects of the proposals and to
highlight the main technical and procedural issues involved without
presenting any detailed recommendations for System action.
There was a discussion of the procedure that might be
followed in considering the staff memorandum, during which the sug
gestion was made that consideration of the refinancing of the 2-1/2
per cent bonds of November 1961 might be deferred until after a
discussion of the proposal for acquiring maturing one-year bills for
rollover in the forthcoming April auction.
Mr. Young stated that to
a degree the problem of the refinancing of the approximately $2
billion of one-year Treasury bills maturing on April 15, 1960, had
been taken care of, although developments in connection with the
tax assessment in Cook County, Illinois, as of April 1 might cause
a problem to develop again.
There was a possibility, he said, that
the Committee might wish to give a specific instruction to the
System Account to acquire up to $150 million beyond the amount that
3/22/60
-63
the Account already holds of the maturing one-year bills, with the
thought that, according to circumstances at the time, this addi
tional amount might be permitted to run off or be used to seek
an allotment of securities offered in the impending April financing.
Mr. Young added that it
was an open question whether the Committee
would have any need to go further,
bills.
such as to provide for swaps of
Possible additional action might be a problem for further
study, once the Committee had set a course with regard to operations
in the one-year bills as a continuing procedure.
Vice Chairman Hayes commented that Mr. Young's remarks
indicated that there might be a discussion of whether to go into
the maturing April bills in a small way, after which the Committee
would consider whether it
would wish to authorize any swaps.
Mr.
Hayes said that he had understood the tentative suggestion in the
March 18 memorandum was that the Committee might wish to authorize
acquisition of up to $150 million of the maturing April bills, the
total to be acquired either through swaps or outright purchases.
Mr. Young stated that this was correct but that there might
be no need for going into the question of swaps before the next
meeting of the Committee.
At this point Chairman Martin entered the meeting.
There followed a long discussion of the proposal for
acquiring 1-year bills with an April maturity, either on an out
right basis or through swaps, of the techniques of executing swap
transactions, and of whether it
might be desirable to experiment
3/22/60
-64
with swap transactions during the period between this meeting
and a meeting on April 12 or whether such experimentation, if
authorized,
should be subsequent to completion of the forthcoming
Treasury financing.
There was also a discussion as to whether,
apart from acquiring maturing one-year bills through swap trans
actions, it
would be desirable for the System Account to attempt
to make outright purchases of these maturities.
During this
discussion, Chairman Martin pointed out that no special authoriza
tion was needed for acquiring bills of different maturities on an
outright basis under the Committee's general operating procedures,
if
such acquisitions were in accordance with the Committee's policy
directive, and Mr. Larkin added the comment that System Account
holdings now included bills maturing as late as January 1961.
At the conclusion of the discussion, it
was the consensus
that no authorization for engaging in swap transactions in bills
be given at this meeting, it
there appeared to be little
being noted that as a practical matter
or no possibility for using such an
authorization even on an experimental basis for the purpose of
acquiring 1-year maturing bills prior to the meeting of the Com
mittee on April 12.
It was understood, however, that further
consideration would be given at the next meeting of the Committee
to the proposals included in the staff memorandum of March 18,
1960, including the possibility of authorizing swap transactions
in bills as an exception to the Committee's operating policy,
3/22/60
-65
reaffirmed earlier during this meeting, that precluded offsetting
purchases and sales of securities for the purpose of altering the
maturity pattern of the System'
portfolio.
It was agreed that meetings of the Federal Open Market
Committee would be held on Tuesday, April 12, and Wednesday, May 4,
1960.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1960, March 21). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19600322
@misc{wtfs_fomc_minutes_19600322,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1960},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19600322},
note = {Retrieved via When the Fed Speaks corpus}
}