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, April 12, 1960, at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Balderston
Bopp
Bryan
Fulton
Leedy
Mills
Robertson
Shepardson
Szymczak
Treiber, Alternate for Mr. Hayes
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. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Brandt, Eastburn, Hostetler, Marget,
Noyes, Roosa, and Tow, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Koch, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Keir, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Knipe, Consultant to the Chairman, Board of
Governors
Messrs. Ellis, Storrs, Baughman, Jones, and
Einzig, Vice Presidents of the Federal
Reserve Banks of Boston, Richmond, Chicago,
St. Louis, and San Francisco, respectively
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Messrs.
Parsons and Coldwell, Directors of
Research of the Federal Reserve Banks
of Minneapolis and Dallas, respectively
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering the period
March 22 through April 6, 1960, and a supplementary report covering the
period April 7 through April 11, 1960.
Copies of both reports have been
placed in the files of the Committee.
With further regard to developments since the Committee meeting
on March 22, 1960, Mr. Rouse made the following comments:
Since the Committee last met, the Government securities
market has lived through the Treasury's cash financing, prices
and yields of Government securities have fluctuated widely,
and this morning the market is preparing for the one-year bill
auction at 1:30 p.m. today. As far as the Treasury cash financ
ing of $2 billion 4 per cent notes maturing May 1962 and "up to"
$1.5 billion 4-1/4 per cent bonds is
concerned, I think it
safe
to say that we have not yet seen the end of the post-mortem on
the bond issue. The artificiality of the long-term bond marketwhere prices have moved rapidly in either direction without any
significant volume of trading--has been pointed up by the lack
of public response, but I doubt that this will prove anything
to the Treasury's Congressional critics. The claim that there
would have been a far better response if more time had been
allowed prospective subscribers has little
merit. At the
close last night, the new issues were selling in the when
issued market at discounts that exceeded the value of Tax and
Loan accounts to commercial banks.
I should like to make two comments on the sharp run-up in
rates over the past few days that resulted in
Treasury bill
average rates of 3.622 per cent and 3.854 per cent in yester
day's auction of three- and six-month Treasury bills--about
7/8 point above the average rates a week earlier. First of all,
the upward readjustment of rates to a point closer to the
discount rate may provide some sort of an anchor for the short
term rate structure and make for a better auction of the one
year bills this afternoon. On the other hand, there does not
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appear to be much interest in the April bills from banks,
dealers, or corporations, and there is some concern in the
market about adequate demand to cover the $2 billion offering
at anything like a rate which, in relation to existing rates,
could be regarded as reasonable.
Secondly, the gyration
that the short-term bill rate has been undergoing over the
past few moths is undoubtedly a reflection of the fact that
the bill market has increasingly become a market where nonbank
trading predominates.
With banks relegated to the background,
the market has lost something of its continuity, and rate
movements have become increasingly independent of the bank
reserve situation.
In today's auction the Account Management plans to tender
to roll over its holdings of $122 million special Treasury
bills maturing April 15. This action appears appropriate in
the light of the prospective reserve situation and also to
give the Treasury some help in what may be a difficult financ
ing operation.
I should also like to call the Committee's attention to
the fact that payment date for the new one-year bills falls
on Friday, when both the Chicago and Philadelphia banks will
be closed. The Treasury will consequently not receive pay
ment for subscriptions allotted in those districts until the
18th, while it anticipates that the bulk of maturing bills
will be presented for payment in New York or other districts
open for business on the 15th. In addition, many of the New
York Government securities dealers will not be open on the
15th, and this may create additional complications. It all
adds up to the possibility of a difficult situation around
the week end; there is a possibility that the Treasury balance
may dip sharply, and even result in a need for the System to
purchase special certificates to tide the Treasury over the
week end. Our best estimate at the present time is that this
will not be necessary, but I wanted to make the Committee
aware of this possible development.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period March 22 through April 11,
1960, were approved, ratified, and
confirmed.
Supplementing the staff memorandum distributed under date of
April 8, 1960, Mr. Noyes made the following statement with regard to
economic developments:
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The uncertainty which has characterized the economic
outlook for several months remains unchanged. There has
been, however, considerable shifting among the components that
make up the uncertain mixture. The weather has been good, and
department store sales showed a spectacular increase. Auto
mobile sales improved enough in the last ten days of March to
bring about a seasonally adjusted increase for the month as a
whole. The Consumer Finances Survey reported that consumers'
buying plans were up and at high levels, by historical standards,
confirming the relatively optimistic indications of the quarterly
Census survey, mentioned at the last meeting. Boom or near boom
conditions continue to develop in most industrialized countries
overseas. Business loans at city banks expanded more than in
any March except 1956. The money market firmed dramatically in
the last few days, as has already been reported.
Set against these indications that we may have been experi
encing no more than an exaggerated version of the late winter
lull are a counter-seasonal rise in unemployment in March and
an estimated decline in industrial production of another 1 per
cent. Construction activity dropped back to about the November
level, after three months of increase. The mortgage market
eased noticeably last month, and five of the Home Loan Banks
dropped their lending rates.
Steel production, which had
slipped to 92 per cent of capacity in March, was off further
to a rate of 85 per cent last week, and is scheduled at 80.
per cent this week.
The stock market, at levels well above the early March
lows, showed little signs of decisive movement in either direc
tion--and commodity prices, another composite indicator which
might reflect some shift in the balance of underlying forces,
were substantially unchanged.
There was an upward creep in the
consumer index, attributable largely to technical factors.
Hence, we find again that the only really significant develop
ment, taking everything together, is that an uneasy and uncer
tain balance has been maintained another three weeks. Yesterday
was almost a typical day--both equities and fixed-income
securities dropped substantially in price, rather than following
the orthodox pattern of crosswise movement. Two classic blue
chip companies reported first quarter earnings--du Pont a drop,
and IBM at an all-time high. Perhaps the only generalization
that is justified is that, with the passage of time, the chances
that the average for 1960 as a whole will be spectacular on
either side are thereby reduced.
Mr. Thomas presented the following statement with respect to
financial developments:
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Since the last meeting of the Committee, "liquidation
of the inflationary psychology", which the Chairman was quoted
as mentioning, seems to have continued further, but developments
in the money market and the stock market during the past week
show evidences of a possible shift.
Interest rates declined further in the latter part of
March and the early days of April. Yields on Government
securities reached the lowest levels in about a year. Yields
on corporate and State and local government issues, however,
did not decline as much as those on United States Government
securities. Last week, large tenders by dealers bid down
rates on Treasury bills to new low levels for the year, leav
ing dealers with larger awards than they expected. During
the past week, however, there has been an upturn in rates on
United States Government securities almost as spectacular as
the March decline.
Treasury bill
rates have risen sharply,
and this week's auction averages are about 7/8 of a point
above those of last week. In addition to the pressure of
large positions held by dealers, bills acquired in Chicago
for the April 1 tax date have come onto the market. Also,
banks have been offering securities to cover reserve needs
arising from subscriptions to the new Treasury issues for
which payment is to be made this week.
On the basis of past experience, pressures on the money
market and rising bill rates are not unusual for the first
half of April. There are large cash needs for dividend and
other payments, and the Treasury usually has a cash borrow
ing operation at this time.
A special factor this year may
be that the lower bill rates that have developed are not
sufficiently attractive to many nonbank pruchasers to hold
them in bills. With market rates as far below the discount
rate as at present, pressures of this sort are likely to
result in sharp fluctuations in Treasury bill rates.
Whether
the upturn in rates is due to these temporary influences or
to more fundamental forces remains to be seen.
The upturn in prices of stocks that has occurred in the
past three weeks may indicate a change in expectations.
These increases in stock prices and in short-term interest
rates have been accompanied by some decline in Treasury bond
prices following the previous rise.
Yields on corporate and
municipal bonds, which did not decline as much in the first
quarter as those in Treasury bonds, have not risen notice
ably in the past week. But new issues of corporate secu
rities offered last week at relatively low yields were not
satisfactorily distributed.
Turning back to analysis of the puzzling declining
interest rate trend in the first quarter of the year, one
possible explanation is that credit demands in the aggregate
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were not as large as they were during 1959. The Federal
Government retired more debt than in the first quarter of any
year since 1956. Corporate and State and local government
borrowing in the long-term capital market has been substantially
smaller than in other recent years.
Loans on securities by
banks and by brokers have shown a pronounced decline. Real
estate loans at banks have increased only moderately and there
are reports of an easing in the mortgage market generally,
although it is questionable whether there has been a decrease
in the total volume of mortgage loans made.
Short-term borrowing by business at banks has continued
at a high level, and consumer credit has increased. The
total volume of bank credit has continued to decline, as the
increase in business and consumer loans at banks has been more
than offset by the decline in other loans and by further
reduction in bank holdings of securities.
The second major factor that has been suggested as a
reason for declining interest rates is the large nonbank
demand for Government securities. This may be divided into
three elements: One is the shift in liquid asset holdingsparticularly by corporations but also by others--from bank
deposits to short-term Government securities, attracted by
the interest return available. This shift is in effect the
counterpart to the large volume of short-term securities that
the Treasury had to issue last year and the high interest
rates that had to be offered to float them. The public could
have liquidity with interest without holding cash balances
that give no return. This may be adequate to explain the
decline in bank deposits. It raises a question as to the
economic significance of such a decline which merely repre
sents a shift in types of liquid assets held and not a
decrease in liquidity.
The second element in the large nonbank demand for
Government securities--and the consequent decline in interest
rates--is the shift from equities to bonds. This is the main
feature of the "liquidation of inflationary psychology." The
turn of events in the past week or so raises a question as to
whether this shift has been brought to an end by the very
adjustments which it caused in the relative prices of stocks
Stocks have tended to be firmer while bond prices
and bonds.
have been soft.
The third element that may be responsible for the nonbank
demand for Government securities--and perhaps for the slacken
ing of the increase in economic activity--is more conjectural.
That is the possibility that the rate of saving has increased
further and that spending for goods and services might have
been curtailed. This may be another aspect of the liquidation
of inflationary psychology.
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It seems evident that business saving has tended to increase.
Information is not yet available to show whether consumers are
also saving more. It does appear, in any event, that they have
been channelling more savings into holdings of Government
securities. It is not unlikely that consumer practices as to
spending and saving are being increasingly determined by
their attitudes toward the price structure, rather than by
the level of their incomes.
In this type of situation,
fiscal and monetary policies are less significant than are
the pricing and selling practices of business. Nevertheless,
if the economic situation should weaken for this reason, there
is less reason for the maintenance of a restrictive credit policy.
The trend of the money supply in March is uncertain
because of statistical complexities in adjusting for seasonal
variations. Figures available for March 30, the last Wednesday
in the month, seem to indicate a smaller than seasonal decline
in the five weeks since February 24. The seasonal correction,
however, is questionable because of the difficulty of allowing
for shifts incident to the Cook County tax.
The decline this
year by March 30 seems to have been smaller than has occurred
in most other previous years. There is some evidence that this
is due to a change in technique of handling the Illinois tax
situation rather than to a change in the trend of deposits.
Averages of daily figures for weekly and semimonthly
periods continued to show a greater than seasonal decline in
demand deposits in the last half of March. The total money
supply, seasonally adjusted, is about a billion dollars less
than a year ago and nearly $2 billion below the peak of last
summer. At member banks alone the decline in demand deposits
has been larger. Turnover of demand deposits, however, has
increased by more than 7 per cent in the past year. Time
deposits at commercial banks and also at mutual savings banks
increased more in March than in any month in over a year,
showing an aggregate rise of about $1 billion, but for the
first quarter as a whole the increase of less than half a
billion dollars was smaller than usual.
Federal Reserve operations and policies have been
relatively passive in recent weeks and might be said to have
had no positive influence on the recent trend of interest
rates. Open market operations--besides adjusting to rather
wide temporary variations in reserve needs--have shown little
net contribution. In effect reserves released by the more
than seasonal decline in deposits have been used by banks
to reduce indebtedness, and net borrowed reserves have
declined accordingly. No positive stimulus in the way of
additional reserves has been supplied by the System. It
may be said that the market has eased itself and the System
has permitted this ease to develop.
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Maintenance of the discount rate and the repurchase rate
at above market rates on Treasury bills, however, has exerted
something of a restraining influence. In such a situation
banks have an inducement to cover temporary reserve needs by
selling bills rather than by borrowing, or to sell bills in
order to reduce borrowing. One result of this type of rela
tionship between discount rates and open market rates is to
cause rather wide short-term fluctuations in market rates in
response to variations in reserve needs. Such fluctuations
are likely to have a greater restrictive influence than is in
tended in the current policy posture.
Greater than desired restraint can be avoided by one of
three methods, each of which has advantages and disadvantages:
(1) The discount and repurchase rates could be lowered. (2)
The repurchase rate could be reduced, while keeping the dis
count rate unchanged.
(3) The Account Management could
actively purchase and sell bills on a day-to-day basis in an
endeavor to cover temporary needs.
A forth possibility, of
course, is that market rates may eventually adjust upward to
the level of the discount rate. To some extent this has been
happening in the last few days. The level of rates achieved
yesterday seems to be reasonably consistent with a discount
rate of 4 per cent and net borrowed reserves of $300 million
or less.
Whether this adjustment is more than a sharp temporary
fluctuation remains to be seen. If credit demands should be
vigorous, then rates are likely to stay at the current level
or to rise further. They are not high relative to the latter
part of 1959. If, however, credit demands should be slack, the
upward adjustment may be short-lived. If rates decline again,
then the question of appropriate discount and repurchase rates
will need consideration.
Another--and more basic--decision facing this Committee is
whether to take more positive action in an endeavor to check
the net decline in bank credit and the money supply. Any such
decision should be based upon a judgment as to the significance
of the recent continued decline in bank deposits. Is it merely
a shift in asset holdings with no significant change in
liquidity or attitudes of the public? Or has there been a
decrease in spending and an increase in saving relative to in
comes? Events of the last few days might indicate that, what
ever its cause, the decrease in the money supply may be ending.
The situation needs careful watching.
On the basis of the customary seasonal pattern and the
schedule of Treasury financing, and assuming the maintenance
of net borrowed reserves at somewhat below $300 million, it
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appears that no additional reserves may need to be supplied
during April. The estimates for the next statement week, how
ever, are uncertain, and operations may need to be based on the
performance of the market.
Mr. Marget commented as follows regarding the balance of payments:
Since it was the massive gold outflow of 1958 that made
this country aware that it, too, not only could have a
balance-of-payments problem, but quite obviously did have one,
I might begin by inviting the Committee's attention to what has
been happening in the way of gold outflow more recently. For
the year 1959 as you know, if we exclude the quite exceptional
payment of $344 million in gold to the International Monetary
Fund as part of a program to increase that institution's re
sources, the level of gold outflow from the United States, at
around $650 million, was less than 30 per cent of the 1958 gold
outflow of $2.3 billion. We now have the figure for foreign gold
purchases for the first quarter of 1960: at $42 million, it is
less than half the already relatively low figure for the first
quarter of last year.
A decline of this order of magnitude in the level of gold
outflow from the spectacularly high level of 1958 deserves, I
think, itself to be called spectacular. Nothing anywhere near
as spectacular, of course, can be found in the figures for the
combined outflow of gold and dollars, which is what we take as
the measure of the over-all deficit in our balance of payments.
Nevertheless, while it would be quite wrong to characterize as
"spectacular" the improvement that has taken place with respect
to our balance of payments over the last nine months, it would
not be wrong to characterize it--with all due caveats, of
course--as impressive.
This is a conclusion, I grant, which one would not be
likely to reach on the basis of some of the public discussion
of our balance-of-payments position. We still find reference
in that discussion, for example, to the balance-of-payments
position of the United States as one which is still "deteriorat
ing." There can, I think, be only one explanation of this kind
of talk: and that is the habit--quite understandable otherwise,
of course--of taking the calendar year as our unit for comparison.
It is true that the over-all deficit in our balance of payments
was larger for the calendar year 1959, at $3.7 billion, than it
was for the calendar year 1958, at $3.4 billion. But this
completely obscures what was happening during the calendar year
1959, as between the earlier and the later parts of the year,
respectively.
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What happened during the earlier part of 1959 was that our
balance-of-payments position was continuing to "deteriorate."
Indeed, if we are to appreciate the degree of improvement that
we have been witnessing in our balance-of-payments position
since the middle of 1959, it is important to understand that
the degree of deterioration in the first part of last year was
very much greater than is suggested by the figure of $3.7
billion for calendar 1959 as against the figure of $3.4 billion
for calendar 1958. The blunt fact is that in the second quarter
of 1959 the deficit in our over-all balance of payments reached
an annual rate of around $5 billion. It is from this low point
that we have to measure the degree of improvement in our balance
of payments that has taken place since we first witnessed the
turn; and, so measured, the degree of improvement can fairly be
called impressive.
There were times, to be sure, within the last nine months,
when one wondered whether the improvement that had seemed to be
setting in around the middle of 1959 was likely to continue.
For example, the effects first of the port strike in October
and then of the steel strike made the changes appear rather
irregular, and there were also a good many ups and downs from
month to month in trade in particular commodity groups not
obviously affected by the steel strike. But the export figures
for last December, at an annual rate of something like $18
billion, as against a realized export level in 1958 of around
$16 billion, gave reason to hope that the process of adjustment
had been resumed. Then came January, with exports at an annual
rate even slightly higher, at $18-1/2 billion. And now the
February trade figures, adjusted for seasonal variation and
higher annual rate,
the extra day for leap year, show a still
of around $19 billion.
During this whole period, moreover, imports have been
averaging around the $15-1/2 billion level they showed during
the second half of 1959. This means that our merchandise ex
port surplus for the first quarter of 1960, assuming no great
change in exports in March, may be at an annual rate of about
$3 billion. This is just about double the $1-1/2 billion
average that we showed during the second half of 1959; and, if
we remember that at the low point, in the second quarter of
1959, our export surplus was virtually at zero, I think we must
agree that "impressive" is not too strong a word to describe the
improvement that has taken place in our trade position over the
last nine months.
The improvement in the trade figures, I should like to add,
is quite clearly reflected in our gold and dollar figures. As
I have previously reported, the January gold and dollar figures
were so favorable that none of us believed that they could
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continue to improve at the same rate. They have not; but I must
here report that when, at the last meeting of this Committee,
I characterized the movements of gold and dollars for February
and the first half of March as "anything but spectacularly
favorable," I did less than justice to the degree of improve
ment which they in fact represented, because I did not have
available, at that time, the figures for foreign holdings at
the commercial banks. When those holdings are taken into
account, it is not unreasonable to estimate the gold and dollar
transfers in the first quarter of 1960 as between $350 and.
$450 million. This is to be compared with a level of around
$700 million in the first quarter of 1959. The year is still
young, and we still
have a long way to go before our interna
tional accounts are balanced; but it can hardly be denied that
the showing of the last nine months, as we now view it, looks
not only impressive on its own account, but also particularly
encouraging from the standpoint of those of us who want the
balance in our international accounts to be brought about by
methods of expansion, rather than contraction.
Mr. Treiber presented the following statement of his views on the
business outlook and credit policy;
The first quarter of 1960 was marked by high but not
spectacular business activity. The sideways movement in March
followed a February in which some business indicators regis
tered an improvement while others remained unchanged or
declined slightly. Hesitations of this type are not, of
course, at all unusual during the course of a sustained busi
ness expansion. But they always create uncertainty as to
whether there has been a pause for breath which will be
followed by renewed progress or whether, on the other hand,
an advance warning of business recession has been posted.
The impact of this kind of uncertainty on the climate of
opinion in the last few months had probably been unusually
strong because the pace of economic activity has clearly
fallen short of the exuberant expectations held by many
observers at the start of the year. Sales and output have
indeed lagged somewhat, but this may turn out to be largely
the result of a relatively severe winter, culminating in the
heavy snow storms in many parts of the country during March.
To some extent also, these lags have probably been a transi
tional condition. The welcome diminution of inflationary
psychology and the comparative respite in labor unrest have
encouraged wholesome shifts in inventory and production policies
involving a reduced pace from the initial poststrike speed.
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As for the future, the recent survey by the University of
Michigan of consumer intentions suggests that consumers'
optimism is strong and that their buying plans are consider
ably larger than a year ago.
In addition, plant and equipment
expenditures rose substantially in the first
quarter, and
business plans indicate that outlays during the year may rise
at a rate which, if realized, would push fixed-investment
expenditures (in current dollars) above the previous record
reached in 1957.
Increased consumer spending will be needed to offset the
effects of a slower pace of inventory accumulation, to assure
the optimistic background essential to the expansion of invest
ment expenditures, and to expand production and employment.
Credit is more readily available for mortgages; and we may
see a further expansion of mortgage credit stimulating con
struction. A recent Fortune survey shows that home builders
are generally optimistic with respect to the outlook this year.
Municipal construction is also likely to expand as municipalities
become aware of the easier availability of long-term market
financing.
The banks have been experiencing a strong demand for busi
ness loans.
Bankers with whom we have discussed the matter are
looking forward to a continuation of a strong loan demand.
Short-term liquid asset ratios are at postwar lows at reporting
banks both in New York and outside of New York. Loan-deposit
ratios are at new highs.
Despite the fact that the money supply is now lower than
it was a year ago, the first
quarter of 1960 has seen increased
credit availability and reduced interest rates. The reduced
money supply has been accompanied, as one might expect, by in
creased velocity, and over the year there has been a decided
increase in money substitutes held by business concerns and the
public. In such circumstances, I am not yet disturbed about the
present size of the money supply. Sufficient time has probably
not yet elapsed for the System's relaxation of the pressure on
net borrowed reserves to have an appreciable effect on the money
supply.
The present size of the money supply makes it
possible
for the System to create more bank reserves without feeling that
we are encouraging an inflationary expansion of bank credit.
While Treasury tax collections in March have been below
expectations, the Treasury believes that expenditures are also
Thus the over-all
likely to be below earlier expectations.
Treasury picture for the fiscal year ending June 30, 1960, is
about the same as it had been projected earlier this year.
Today the Treasury is conducting an auction to sell $2
to refund the $2
of special one-year Treasury bills
billion
Toward
that mature April 15.
of one-year Treasury bills
billion
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the end of this month the Treasury will be announcing the terms
of a new issue or issues, the proceeds of which will be used to
retire the three Treasury issues totaling over $6 billion which
mature May 15.
Within the last month or so we have seen volatile changes
in short-term interest rates. The dominant influence of corpo
rate investors in the Treasury bill market has undoubtedly
accentuated the movement of bill
rates. Rates can easily move
downward or upward with a modest change in the relationship of
the supply of credit and the demand for credit. Indeed, in
recent days we have seen the rate pendulum move sharply upward.
The upward movement is good in the light of the underlying
situation; it also has the advantage of bringing present rates
into better relationship with the discount rate.
It seems to us that the economy is basically strong and
that the next move is more likely to be renewed expansion than
stagnation or recession. Therefore, it would be unwise to signal
doubts as to the strength of the economy by either reducing the
discount rate at this time or making any substantial change in
open market policy.
Therefore, we favor the continuation of about the present
degree of restraint, with no change in the directive. To the
extent that consideration is given to net borrowed reserves, a
figure of plus or minus a quarter billion dollars would seem
appropriate, recognizing that the actual figure might fluctuate
a good deal either way, particularly on the side of lower net
borrowed reserves.
Turning to another subject, Mr. Treiber went on to say:
Mr. Sherman has just informed the Reserve Banks of the
success the Federal Reserve Bank of Philadelphia has had in
obtaining daily information on deposits and related items from
I am pleased to report that the New York Bank
member banks.
has arranged to collect daily reports from all member banks in
the Second Federal Reserve District beginning in the latter
part of May.
The techniques we are following are basically those
developed by Philadelphia, with such modifications as seemed
to suit our situation. After we have had sufficient experience
to afford adequate analysis and to button up any loose ends,
we will report to the Board and the other Reserve Banks on our
program.
We are looking forward to using the earlier available
information to improve our estimates and projections of member
bank reserve balances for use in the planning of open market
operations.
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Mr. Erickson said that the elements of strength in the First
District continued to outweigh te
elements
of weakness.
In February,
the New England index of industrial production was up one percentage
point.
In the March survey of New England purchasing agents, 37 per cent
of the respondents looked forward to increased production activity,
compared with 29 per cent in February, while the number of respondents
looking for a downturn was only one per cent greater than in February.
Compared with the same month a year ago, construction contracts in
February were off 17 per cent, reflecting a substantial decrease in the
nonresidential and utility company sectors.
Residential construction
appeared to be going counter to the national figures, registering an
increase of 17 per cent in the past four months compared with the same
four months a year ago.
February was 23 per cent ahead of February 1959,
which in turn was 87 per cent ahead of February 1958.
Nonagricultural
employment was down a fraction of one per cent, with employment in textiles,
apparel, and leather off somewhat.
Transportation equipment also was
down becuase of a strike, now 12 weeks old, that closed the Bethelehem
Steel shipyards.
Retail trade was following the national pattern closely;
the past four months were even with the same four months a year ago.
For
the week ended April 2, however, department store sales were up 21 per cent.
Automobile registrations were better than they had been.
Mr. Erickson also said that during the past three weeks District
reporting banks purchased more Federal funds than they sold.
In the same
period, member banks used the Reserve Bank discount window a little
more
4/12/60
-15
actively than in the previous three weeks.
There were two or three days
when borrowings were at the highest levels for a number of weeks.
Mr. Erickson then commented on the Regional Outlook Conference
held during the past week, which was attended by economists from through
out New England.
It was the consensus of the participants, he said, that
there would be healthy growth in the economy for the rest of the year.
The median of predictions for gross national product in the last quarter
of 1960 was $514.5 billion, annual rate, and for the index of industrial
production a figure of 113.5.
A 5 per cent rate of unemployment was
expected in December 1960, and the median of forecasts for the consumer
price index in December was 126.5.
Mr. Erickson expressed agreement with the views stated by Mr.
Treiber with regard to the outlook.
He recommended no change in the
discount rate or the policy directive at this time.
As to open market
operations for the next three weeks, he would leave it
to the Manager
of the Account to maintain the situation about as it had been, being
sure there was no undue ease and no further tightness.
Mr. Irons said that Eleventh District conditions had been mixed,
as was true nationally, but probably for somewhat different reasons.
In
general, District activity was on a high plateau, although some elements
were up, some were holding about even, and some were down a little.
Department store sales and retail trade in general were showing satis
factory improvement, while nonfarm employment increased contraseasonally
in February and was expected to show a seasonal increase in March.
4/12/60
-16
Unemployment was declining slightly.
Farm activity had stepped up greatly
as better weather conditions prevailed, and in general the agricultural
outlook appeared favorable.
The major area of slowing down of activity
continued to be in the petroleum industry.
remained in effect, and it
The nine-day allowable basis
appeared to be the present thinking of oil men
that the industry must learn to live with nine- or ten-day allowables at
least as far ahead as one could look this year.
This decline in crude oil
production, and in refining, had had some effect on the District's
industrial production index, which dropped one point.
Construction
developments appeared to be about seasonal in the early part of the year,
and there were indications that mortgage credit was now more available.
On the whole, the situation in the District was strong, with the only real
problem being in the petroleum industry.
Turning to the financial side of the picture, Mr. Irons said that
loan demand was still
strong, but not pressingly so.
There continued to
be some liquidation of Government securities by banks, deposits continued
to decline, and the reserve positions of banks seemed to have shown some
improvement, that is,
some lessening of pressure.
Reserve Bank had dropped substantially.
Borrowings from the
Whereas they were running earlier
at from 10 to 15 per cent of the System total, recently they had dropped
to the range from 5 to 10 per cent.
In the past week or 10 days, large
banks of the District had reduced their purchases of Federal funds to more
or less nominal amounts.
In substance, it appeared that District banks
were getting their houses in better order than they were a few weeks ago.
4/12/60
-17
Mr. Irons expressed agreement with the comments of Mr. Treiber
regarding the national picture.
In view of the Treasury situation, con
ditions in the Government securities market, the economic situation, and
"stras
in the wind" pointing to strength rather than weakness or
deterioration, he would hold steady for the next three weeks
any overt action.
and avoid
He would not favor a change in the discount rate, in
the directive, or in open market policy or objectives.
An overt action
might be regarded as signalling doubts at a time when it was questionable
whether any such signal would be justified.
Accordingly, he would con
tinue to move along as at present.
Mr. Mangels said that Twelfth District employment data for March
were not yet available, but that an increase in unemployment insurance
claims had been observed, no doubt reflecting reduced employment at air
craft plants.
Because of the decision to discontinue the Bomarc missile
program, Boeing planned to release some 2,500 or 3,000 workers, and plans
for four Bomarc bases on the Pacific Coast had been cancelled in line with
the decision.
Steel production was down 10 per cent in March from February
and was about 4 per cent below 1959.
The three large mills were producing
at a little less than 81 per cent of capacity, compared with 90 per cent
in February.
While lumber prices had been fairly steady during the past
few weeks, the mills were revising their 1960 sales estimates downward
and were becoming more cautious about building inventories.
The total
value of construction contracts in February was up 8 per cent from 1959,
reflecting principally increases in public works and utilities.
Nonresi-
4/12/60
-18
dential construction was up 11 per cent, while residential construction
showed an increase of 2 per cent.
For the four weeks ended April 2,
department store sales showed a slight decrease from 1959, but after
making allowance for the difference in Easter dates, it was expected
that they would compare favorably with last year.
In the first three
weeks of March, sales of new cars in California were up 12 per cent from
February and up the same extent from a year ago.
Mr. Mangels said that loans of District banks increased moderately
in the three weeks ended March 30, the increase being much smaller than
in the corresponding period a year ago, and that reporting banks reduced
their holdings of Government securities almost $100 million.
Demand
deposits were down somewhat and time deposits were down slightly, but
savings deposits increased $7 million.
deposits was not large, it
While the increase in savings
might indicate a reversal of the recent trend.
One savings and loan association in southern California had now gone to
a dividend rate of 4-3/4 per cent, and there was again considerable general
discussion of the 3 per cent interest rate ceiling on savings deposits.
Reporting banks were net sellers of Federal funds in the past week and
expected to be net sellers in nominal amount this week.
Borrowings from
the Reserve Bank were quite nominal.
There appeared to be a moderate degree of strength in the general
business and credit situation, Mr. Mangels said, with no particular
indication that the economy was going to move up rather fast or, on the
other hand, that it was going to go down fast.
There was considerable
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4/12/60
excess productive capacity, and there continued to be a larger amount
of unemployment than would be desired.
Bank loans had not increased
excessively, and predictions for this year were in terms that, although
there would be some further increase in loans, the amount of that increase
would be substantially less than last year.
At the same time, there had
not been any downward modification of lending rates.
Under present conditions, Mr. Mangels felt that there should not
be any change in the discount rate or the directive.
As to operations of
the System Open Market Account, he would favor going perhaps a little
further in supplying reserves than Messrs. Treiber, Erickson, and Irons
had indicated.
He would have in mind somewhere around $100 million of
net borrowed reserves as an indication of maintenance of restraint, but
to a lesser degree than in the past.
Mr. Deming reported that automobile sales in the Twin Cities, as
measured by registrations, were down in the first
half of March but up
in the second half of the month, and the favorable trend appeared to be
continuing in April.
Accordingly, dealers were now enthusiastic about
prospects for the rest of the year.
Department store men in the area
also were satisfied, because sales thus far in April were higher and at
satisfactory levels.
The improvement extended not only to sales of
apparel but also to sales of appliances and home furnishings.
A recent
survey by the Minnesota Home Builders Association indicated that
inventories of unsold new houses, which were quite high earlier, had now
been reduced to a rather low figure.
It appeared that there would not be
4/12/60
-20.
too much in the way of speculative building during the coming year, and
that building would be more on a contract basis.
yet no large movement,
Although there was as
shipments of ore down the Great Lakes had gotten
under way.
Mr. Deming went on to say that District banks, both city and
country, showed sharp loan increases, sharp declines in security holdings,
and contraseasonal deposit decreases.
As measured against a year ago,
loans were up 12 per cent, holdings of Government securities were
own
12 per cent, holdings of other securities were down 9 per cent, and
deposits were off 5 per cent.
Thus, liquidity positions continued to
worsen.
Mr. Deming then reported briefly on certain statistics that had
been compiled on average bank reserves over a period of years.
These
figures showed that a decline from December to March was quite usual from
year to year, but that the decrease was more marked, in terms of both
percentages and dollars, from December 1959 to March 1960 than in any
other comparable period since 1951.
Mr. Deming said he was somewhat concerned about the total reserve
base and the money supply.
As to the national picture in general, he felt
that sentiment was running a little
ment statistics would justify.
better than production and unemploy
He came out in his thinking to a position
much like that expressed by Mr. Mangels.
In his opinion, there should be
no change in the discount rate or the directive, but the Committee should
be moving toward a somewhat easier position through open market operations.
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4/12/60
He did not have in mind easing too much and would not
want to suggest
any particular figures, but he felt it would be advisable to probe
toward easier money market conditions through the open market device.
Mr. Allen said he expected reports for March, as they became
available, to continue to include less favorable news, such as a drop in
total industrial production and an increase in unemployment.
the situation varied with areas and industries.
However,
Although in general it
seemed to be the durable goods industries that were experiencing a sag
in demand, Wisconsin, an important producer of durables, had the strongest
employment situation of any State, based on the classification of major
labor markets.
In March, all four of the Wisconsin centers classified
by the Department of Labor showed less than 3 per cent unemployment,
the two centers classified in Iowa were in the same group.
and
The unemploy
ment situation in Indiana and Illinois was better than for the nation, so
only Michigan, among the Seventh District States, was worse off than the
average, as it had been for several years.
Mr. Allen went on to say that the expected seasonal increase in
auto sales, stimulated by incentive sales contests, may have materialized.
The daily sales rate for the last ten days of March was 26,023 cars,
higher than any similar period since 1955, and first-quarter sales totaled
1,515,000 units, 14 per cent higher than last year.
In the first quarter,
2,000,000 cars were produced, and estimates for the next three quarters
were 1,700,000, 1,000,000, and 1,700,000, making 6,400,000 for the year.
New car inventories were 1,020,000 on March 31.
Therefore, if production
4/12/60
-22
followed the estimates, and if inventories were reduced by September 30
to the desired target of 500,000, sales in the second and third quarters
must exceed those of last year by 12 per cent.
Right now the feeling in
Detroit was again one of optimism.
Mr. Allen commented that capital expenditures had been estimated
as substantially higer this year than last, and that spot checks with a
number of business firms had not revealed cancellation or postponement of
plans.
All firms contacted appeared to be going ahead as planned.
In
fact, there seemed to be no feeling that recent less favorable business
reports marked the beginning of a recession; rather, it
was felt that
favorable elements in the picture would soon be more evident and that the
total demand for goods and services was much more likely to rise than to
contract.
Mr. Allen reported that during the past three weeks the mortgage
market had eased in the Chicago area.
Two of the largest savings and loan
associations had reduced their "prime" mortgage interest rates from 6-1/4
to 6 per cent.
in the first
This was undoubtedly a reflection of a low demand for loans
quarter, but it was understood there had been a pickup in the
past two weeks.
There seemed little
point in mentioning banking statistics
because the Chicago banks, which bulk large in Seventh District figures,
were not yet past their April 1 dislocation.
However, in the first
quarter of this year earning assets of District banks declined less than
a year ago, while for the nation the decline this year had been much
larger than last year,
Moreover, loans at Seventh District banks were
4/12/60
-23
up slightly from the year end, although all reporting banks in the
country showed a net decrease in excess of $1 billion.
On the basis of the information at his disposal, Mr. Allen said
that, as at the March 22 meeting, he would prefer to await the results
of the Easter season before changing the direction of monetary policy or
the degree of restraint.
He would leave the directive and the discount
rate as they were.
Mr. Leedy commented that there had been no significant develop
ments in the Tenth District in the past three weeks.
Business loan
figures were in line with the national figures; that category of loans
continued to increase, but liquidation of Government securities by the
banks had more than offset the increase.
Mr. Leedy said he shared the concern that had been expressed about
the money supply.
In view of the uncertainties existing at the present
time, whatever the causes might be, the downward trend of money supply,
and the high loan-deposit ratios of the banks, it seemed to him that the
System should use every opportunity that might be presented to it to make
some additions to the money supply.
He would not want to do anything
drastic or create an impression that the System was fearful regarding the
economic future.
However, the nature of open market developments since
the Committee decided to move toward lower levels of net borrowed reserves
indicated to him that there was an area within which the System could
inject some additional reserves and at the same time not create an
impression of the kind to which he had referred.
It was his feeling,
4/12/60
-24
therefore, although perhaps not quite to the same extent as Mr. Mangels,
that the Committee should use whatever opportunities might arise to make
some injections of reserves.
Beyond that, and particularly with respect
to the discount rate, he would make no change.
Mr. Leach said that scattered but definite signs of a spring
sales pickup constituted the only recent change that had been noted in
the high level of Fifth District business activity.
Weather was
apparently the only factor that had exerted any significant downward
pressure, and such evidence as was available pointed to continuing high
levels of personal income and potential pruchasing power in the District.
Textile mills had recently granted wage increases averaging about 5 per
cent, and it
was expected that these increases will be absorbed by the
manufacturers.
This highly competitive industry had increased wages 39
per cent since the 1947-49 base period, while prices received for its
products decreased 9 per cent.
The slightly easier position of District member banks at the time
of the March 22 Committee meeting seemed to have been temporary, Mr. Leach
said.
Loan demand during the past three weeks had been greater than
seasonal, investments
had been liquidated at a faster rate than customary,
borrowing at the discount window had been fairly heavy, and District banks
had been net purchasers of Federal funds.
With respect to policy, Mr. Leach suggested that the principal
question was whether to continue as at present or become a little
easier.
At a time when available economic data provided inadequate guidance for
4/12/60
-25
policy decisions, it
seemed to him desirable to pay particular attention
to credit developments.
For the past six weeks, Mr. Leach noted, clause
(b) of the directive had provided for "fostering sustainable growth in
economic activity and employment while guarding against excessive credit
expansion."
As stated in the staff report distributed prior to this
meeting, total credit at city banks declined moderately over the five
weeks ending March 30 in contrast to substantial increases in comparable
periods of most other recent years.
Moreover, new offerings of corporate
and municipal securities continued to be light.
it
Under these circumstances,
seemed to him appropriate to increase reserve availability somewhat
and to eliminate from the directive the reference to special concern over
excessive credit expansion.
In this connection, he did not favor an
approach that sought to determine whether the Committee could do what it
wanted to do under an existing directive.
Instead, he favored flexibility
in directives as well as in policy.
Under the policy he had in mind for the next three weeks, Mr.
Leach said, net borrowed reserves might be in the neighborhood of $150
million.
He would not change the discount rate at the moment, for reasons
already expressed by others.
He would not want to lead others to think
that the System was more gloomy than it
actually was.
However, the
elimination of the final part of clause (b) of the directive would not
be an overt action, and in his opinion it would make the record look
better.
4/12/60
-26
Mr. Mills said he was one of those who believed that the money
supply, as conventionally defined, was the pressing tactical problem to
which policy should continue to be addressed.
In his opinion, the fact
that the money supply had continued to shrink should give pause for
thought and was reason for concern.
In this connection, an interesting
problem had developed that deserved analysis, namely, that over the past
three weeks the money markets had been relatively tight in the face of a
lower level of negative free reserves.
According to past thinking, the
lower level of negative free reserves presumably afforded a basis on
which credit would have expanded and the decline in the money supply would
have been at least arrested.
However, such had not been the case.
A
possible reason could be found in the staff memorandum on the outlook for
member bank reserve positions, distributed to the Committee under date of
April 8, which showed that in January through March 1959, when the System
was commencing policyvise to accelerate pressure on the expansion of bank
credit, member bank required reserves declined to the extent of $656
million.
In the same period of 1960, there had been a decline in member
bank required reserves of $998 million.
It would be possible to interpret
the greater decline this year as being attributable to the accelerated
pressure that System policy had exerted over a period of many months.
This pressure continued into the first quarter of the current year, a
period of the year when there is
deposits.
customarily a decline in commercial bank
4/12/60
-27
It
does not
come into the practical reasoning of the management
of a member bank, Mr. Mills said, that because the bank's required reserves
are declining and the bank is
reserve position, it
investments.
is
in a sense thereby reaching an easier
in a better position to expand its
loans and
Instead, the banker fashions his thinking on the movement
of his deposits.
Looking at developments in that light, one could like
wise make the interpretation that a level of $250 million of negative
free reserves, more or less,
over the past several weeks had in fact
represented much greater pressure on the reserve positions of the banks
than the actual figures would indicate.
This would be for the reason
previously mentioned, namely, that a major element that had brought down
the level of negative free reserves was the decline in required reserves.
This was not a comforting factor to the banks or the kind of development
that would stimulate banks to act in such a way as to check the contrac
tion of the money supply.
Mr. Mills said that what he was saying went back to what he under
stood to be Mr. Bryan's thesis.
The System had neglected and ignored the
movement of total reserves and the downward movement in total reserves,
if not arrested, would in due course lead to serious financial and economic
consequences.
In further explanation of his reasoning, Mr. Mills read the
following statement:
There are recurrent occasions in the economic history of
the United States when financial factors reach a position of
dominating significance. The piling up of cash balances and
huge holdings of short-term U. S. Government securities in the
hands of large corporations may signify such an occasion by
4/12/60
-28-
way of denoting a malfunctioning between debtor and creditor
relationships. Idle cash balances and inert investments in
U. S. Government securities in creditor hands represent re
sources which, as they fail to circulate back through the
economy, do not lodge in debtor hands where they can be availed
of for constructive purposes that assist in the service of out
standing debts.
When at the same time monetary policy has
limited the availability of credit and has contracted the money
supply, the economy may be left in a position where the gap
between idle money resources and the availability of credit
reaches proportions that tend to induce economic stagnation.
If this kind of situation should be left unattended, a period
of over-saving and underspending could put in an appearance.
In the belief that while capital formation is a process of
saving it must nevertheless be lubricated by an appropriate
flow of newly created bank credit, it follows that the stimulus
of new credit is now needed to prime the economy's powers of
consumption in ways that will better activate corporation
functioning and release impounded money reserves to fruitful
uses. If that objective can be reached, an improved relation
ship between consumption and production, and between debtors
and creditors, will have been realized.
In closing the gap
between consumer-debtors and producer-creditors it can be hoped
that an enlivened economy, besides giving a material assist to
debt service, will also provide the means for reducing its
burden through a return flow of repayments on outstanding
obligations.
Mr. Mills then said that the immediate implementation of a policy
based on the reasoning he had outlined would be to bring the level of
negative free reserves down to a lower level, with a maximum of $200
million as a ceiling that ought to be avoided and a lower level sought.
If
the Government securities market should be as disturbed and unsettled
today as it was yesterday, a favorable opportunity would be at hand for
injecting additional reserves.
This would serve the purpose of giving
some confidence to the market at the same time that the economic objective
was being accomplished.
4/12/60
-29
Mr. Robertson said that as he looked to the future he had no
feeling of gloom whatsoever.
It
seemed to him the chances were strong
that the country was on the verge of a definite upswing of economic
activity, accompanied by a surge of inflationary psychology and by
inflation itself.
In his opinion, therefore, this would be exactly the
wrong time to reduce the weights that were on the pendulum.
Instead,
the wise course would be to hold steady, with no reduction whatever in
the degree of restraint that had been provided.
If
anything, he would be
inclined to move on the other side, and it was his guess that in another
three weeks the Committee would be moving in that direction.
He would
not change the directive or the discount rate, nor, as he had indicated,
would he change the degree of ease or of tightness (whichever one might
call it)
that the Account had been striving for in the past three weeks.
Mr. Shepardson said he saw no reason to review in detail the
various trends in the economy.
up and some were down.
Suffice it
to say that some of them were
However, the reports on some of the most recent
shifts were indicative of an upswing with the advent of spring weather,
which was belatedly beginning to make itself manifest.
still
some uncertainties, it
Since there were
seemed to him that it would not be advisable
to make any move in the direction of greater restraint until the condi
tions that he had mentioned actually manifested themselves.
At the same
time, there was sufficient promise of them that it would be unwise to
make any move in the way of a lessening of restraint.
4/12/60
-30
Mr. Shepardson said he would go along closely with the views
expressed by Mr. Treiber.
He would favor holding about the degree of
restraint that had prevailed in recent weeks, and be would not favor any
easing.
(Subsequently, as recorded later in the minutes, Mr. Shepardson
indicated that he saw no objection to permitting such ease as might develop
in the market through the operation of natural forces to remain in the
market.)
Mr. Fulton commented that in general Fourth District activity
could be characterized as an operation of relative dullness at a high
level.
Steel production was going down rather precipitantly.
One mill
which was producing at over 100 per cent of capacity a short time ago was
now in the 70's and admitted that cancellations were greater than new
orders coming in.
Other mills reported a good demand for galvanized
sheet and tin plate, but pipe of all sizes was a drug on the market.
Sales departments of the mills indicated that customers were buying hand
to mouth and apparently had larger inventories at the end of the strike
than many admitted at the time.
In further comments on the steel situation, Mr. Fulton noted that
if
present rates of production continued, total production of about 120
million tons for the year would be indicated.
Turning to the foundries,
he said there were reports of widespread cutbacks; while those in the
industry felt that the year as a whole would be a good one, March, April,
and May typically are months of high production.
Inventories of consumer
durable goods were reported to be particularly high.
On the other hand,
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4/12/60
one company reported a marked pickup in orders in March, with the export
situation strong, particularly to Latin American countries.
Another
report, from a large maker of heavy machinery, was to the effect that it
had been working full time to get out drawings and proposals for manu
facturers that had not yet been put in the form of orders.
It was still
generally expected that a good deal of money would be spent for machinery
and modernization of equipment throughout the current year.
Mr. Fulton also made reference to a recent meeting of Fourth
District business economists, at which projections for the fourth quarter
of the year were quite good.
The economists foresaw some slackening in
the second quarter and felt that the third quarter would be marked by the
usual summer doldrums, but they expected a pickup in the fourth quarter
and felt
that as a whole this would be a good year.
Mr. Fulton went on to say that department store sales and auto
mobile sales were following the trend already reported, department store
sales being 2 per cent above last year and automobile sales 8 per cent
higher.
Construction activity, which had been in the doldrums until
recently, now seemed to be picking up, while unemployment insurance
claims declined substantially in the past week.
Bank loans were 8 per
cent above last year, demand deposits had gone down, and time deposits
were up.
Borrowings from the Reserve Bank had been quite modest, averaging
around 2 or 3 per cent of the System total.
Mr. Fulton expressed the view that the current dullness was the
result of a number of factors, including expectations that were too high,
-32
4/12/60
weather conditions,
and the existence of larger inventories than had
previously been admitted.
He would not be averse to a slight easing of
the net borrowed reserve position, and he suggested $200 million, give
or take.
He would not change the discount rate or the directive at the
present time.
Mr. Bopp said that employment, a factor always of concern in the
Third District, was 4 per cent higher in February than in February 1959.
Both new and continued unemployment insurance claims also were below
1959.
The Johnstown, Pennsylvania, area had been reclassified upward by
the Department of Labor, but only from F to E, and four of the 13 major
labor areas in the District were classified E (unemployment from 9 to
11.9 per cent).
The employment situation in the District, Mr. Bopp said,
was one reason he had frequently been on the pessimistic side, although
he was not pessimistic today.
One area of difference between the District and the nation was
in the banking picture, Mr. Bopp said.
There had been some expansion of
loans which was not equalled by reduction of investments.
A decline in
deposits, which had persisted over the years and was larger this year,
created a problem for District banks in adjusting their reserve positions.
Until the past two or three days the banks had been making their adjust
ments primarily through purchases of Federal funds, but recently they had
been borrowing more heavily from the Federal Reserve Bank.
Mr. Bopp said that he would recommend that there be no change in
the directive or the discount rate at this time.
Neither would he
4/12/60
-33
recommend any change in the degree of restraint or in the tone of the
money market.
In the latter respect, he referred, of course, to the
general tone that had prevailed in the market rather than the erratic
movements of the past few days.
(Subsequently, as recorded later in
the minutes, Mr. Bopp said that in the light of the discussion at this
meeting he would favor some easing of the reserve positions of banks.)
Mr. Bryan said that most recent Sixth District statistics showed
only small changes, which were essentially similar to those reported
nationally.
little
As he saw the national situation, there was at the moment
basis for predicting a marked upsurge in the economy, and certainly
not a downturn.
For that reason, he was in agreement with those who had
expressed the opinion that it would be a mistake to embark on any massive
or overt easing operation through the use of any of the instruments of
Federal Reserve policy.
At the same time, he felt that none of the
economic and financial criteria seemed to justify a policy of restraint.
As he listened to the discussion this morning, it occurred to him that
one of the crucial points involved was a determination of what System
policy actually had been, either overtly or through inadvertence.
Such
a determination seemed to him extraordinarily important because until the
Committee came to a conclusion as to what its policy had been, it was not
in a position to modify policy in either direction.
In his opinion,
Committee policy, de facto, had been one of restraint.
The actual level
of total reserves had been following a downward trend, even allowing for
no growth at all, and the total was lower than a year ago.
Required
4/12/60
-34
reserves continued to fall, banks continued to liquidate investments, and
the banking system was being kept in debt to the Federal Reserve System.
Average net borrowed reserves had fallen, but to him that was deceptive
because ultimately that decline had come about simply because of a reduc
tion in required reserves.
System policy had permitted the total of
Federal Reserve credit to move downward, so that member banks had
actually received no easing of their positions from that source.
How the
Committee could have expected the money supply to do anytning other than
it
actually had done, he did not know.
Mr. Bryan repeated that he considered the level of net borrowed
reserves especially deceptive as a guide to policy in a period when re
quired reserves were falling sharply, so sharply in fact that the estimates
were frequently overrun by the facts.
There was enough historical experi
ence, he said, to indicate that if the System kept the reserve supplies
of the banking system either declining or completely stable, this would
sooner or later exert a deflationary pressure on the economy.
He shared
the views of Mr. Mills regarding the position of the banking system, which
he felt was highly illiquid and potentially dangerous.
The problem, as Mr. Bryan saw it,
was to take no massive action
in either direction, but to use available opportunities to put some
additional reserves into the banking system.
disastrous had happened so far, but if
He did not think that anything
System policy continued de facto as
it had been, he saw trouble ahead that would be hard to explain.
If the
net borrowed reserve concept was to be used, he felt that during the
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next couple of months it
would be advisable to move toward a zero
figure.
Mr. Johns said he continued to associate himself, as he had
three weeks ago, with the view that the continued decline in total reserves
and the money supply ought to be at least arrested or, better yet, reversed.
He then presented substantially the following statement:
There has been for some time a conjuncture of forces
operating to bring about a continuing reduction of total
member bank reserves and contraction of the money supply.
Parenthetically these resulting phenomena--contraction of
total reserves and the money supply--have at times been
obscured by other developments heraldedin various quarters
as indicators of lessening monetary restraint, namely, a sharp
decline in interest rates (until recently) and a decrease in
that widely accepted barometer of monetary policy, net bor
rowed reserves.
On March 1, 1960, the Committee took note, among other
things, of a February decline in the seasonally adjusted money
supply to a level as much as $300 million below a year earlier
and concluded, to quote the draft of policy record entry for
that meeting, that "it would be appropriate to supply reserves
to the banking system somewhat more readily." "Accordingly,"
the draft says, "the consensus favored, for the immediate
future, a policy of moderately less restraint." Notwithstanding
this, total reserves and the money supply have continued to
decline, and the responsibility for this state of affairs is,
I think, substantially the Committee's own. I want to say why
I think so, although I have spoken along these lines before.
Insofar as the Management of the System Account receives
from the Committee a guide to open market operations, it is in
terms of a net borrowed reserve target or range, subject,
expressly or tacitly, to latitude or leeway according to the
way things develop and to the "feel of the market." In the
immediate past I would judge that the range of net borrowed
reserves has been about $200 to $300 million. This means that
member bank indebtedness to the Federal Reserve Banks has
averaged between, say, $600 and $800 million.
However, with Treasury bills yielding 3 per cent or below
(as they were until last Friday), and with the discount rate
at 4 per cent, profit-minded bankers may generally be counted
4/12/60
-36-
on to prefer liquidating bills for purposes of adjusting to
reserve drains, rather than borrowing from their Reserve Banks.
Even if the recent increase in bill rates should prove to be
permanent, it is not at all certain that member banks will not
continue to desire to reduce their indebtedness to the Reserve
Banks.
The Committee's staff has been pointing out for some time
that bank liquidation of short-term Government securities has
been occurring at a rapid rate. Nevertheless, in order to
induce borrowings at such levels as would bring about net
borrowed reserves within the target range, the Management of
the System Account has had to sell bills. Thus, a mechanism
has been adopted by the Committee which, under the conditions
existing, virtually assured a continuing contraction of total
reserves, commercial bank credit, and the money supply. These
results may reasonably be calculated to persist until one, or
more, of the following events occurs: (1) the disparity
between market interest rates and the discount rate is re
dressed; or (2) the Committee, having made clear its intent with
respect to total reserves and the money supply, adopts a guide
or guides to open market operations which will not result in
defeating the Committee's intentions, at least, as to the
direction of movement which should occur in the supply of
reserves and, over time, in the quantity of money.
In attributing the liquidation of Government securities
by banks to the combination of a penalty discount rate and a
policy of keeping banks indebted to the System, I may have
oversimplified. Some have seemed to think that the banking
community has been reflecting a change in the expectations of
the business community. If so, this could be considered
ominous. But whether that is so or not, it appears to me that
steps should be taken to reverse the decline in total reserves
with a view to reversing also the decline in the money supply,
if for no other reason than because the Committee made a
decision at the March 1 meeting to supply reserves more readily
and at the March 22 meeting did not, as I recall it,
indicate
that it wanted reserves again and further reduced. Unless the
policy adopted March 1 and 22 is to be reversed, I see no way
to defend continued contraction of the supply of total reserves
and money.
If the Committee does not want to continue reducing total
reserves and the money supply, what means can it employ? The
way I prefer is to direct the Desk to increase total reserves,
seasonally adjusted, at a designated annual rate, say about
2 per cent. However, if it is desired, at least for the time
being, that net borrowed reserves be used as an operating
4/12/60
-37
guide to open market operations, I suggest that the Desk be
authorized to cause or permit the level of net borrowed reserves
to fluctuate more flexibly with a view to bringing about the
Committee's desired results as to total reserves and the money
supply, rather than treating net borrowed reserves as if they
were the proximate objective of policy. In such case the level
of net borrowed reserves in the near-term future may need to be
substantially reduced, maybe as low as $100 million or even
free reserves. If net borrowed reserves are thus used as a
means to an observable end, it would make sense to give the
Management of the Account considerable latitude as to the level
of net borrowed reserves which from time to time will be deemed
appropriate in order to induce the effect upon reserves and the
money supply which the Committee desires. This, I think, would
preserve a meaningful distinction between the Committee's policy
responsibility and the Desk's operating function.
The present discount rate, in its effect upon bank reserves
and money supply, has been substantially more restrictive in the
period since about February than it was in the previous six
months when the discount rate was below the bill rate. Unless
we think that the recent rise in short-term rates will persist,
a logical technical case can be made, I think, for reducing the
discount rate to a closer relationship with market rates. I
agree, however, that it would be better to wait and see what
the recent movement in market rates amounts to, and whether it
will persist.
Mr. Szymczak commented that the views presented by Messrs. Mills,
Bryan, and Johns merited study. At the present time, he felt that the
economy, over-all, was strong. There were, however, uncertainties in the
Government securities market and in his opinion, therefore, this would
be a good time to provide some reserves through open market operations.
When it came to the volume of reserves that might be supplied, he would
leave the decision to the judgment of the Manager of the Account, but
he would allow the level of net borrowed reserves to go down.
Mr. Balderston said the situation at the moment seemed to be one
that might be described as "rolling prosperity."
Whether it was rolling
4/12/60
-38
uphill, on the level, or downhill, he did not know, and he suspected
that his own uncertainty with regard to the future was shared by many
businessmen and by those in the financial markets.
On the one hand,
there were evidences of strength, such as an 8 per cent increase over a
year ago in long-distance telephone toll calls.
Also, he had gotten a
report from a chemical company that despite unsatisfactory sales in
January and February, both of which had fallen behind the budget, sales
in the last two weeks of March were surprisingly good.
A report from
an electrical company indicated that while export business was off, sales
of components to a large number of customers, large and small, had been
very strong, leading the company to suppose that its users of components
were doing well and that the export business would be better.
On the
other hand, there was ahead Treasury financing that ought not fail, and
there was the continued decline in the money supply that had already been
discussed this morning.
Then, too, the period of business expansion was
already two years old and, if past cyclical movements were to repeat
themselves, there would be happenings under the surface that it would be
difficult to observe until too late.
He hoped the System would act
sooner rather than later to counter any weaknesses that might be coming
into the economy that would cause the rolling prosperity to roll downhill.
Mr. Balderston said he had been somewhat disturbed in the past
three weeks by the apparent failure to let the economy have and hold
such ease as had developed.
While he could not be sure of this, he had
the uneasy feeling as the weeks passed that such ease as developed was
-39
4/12/60
again being mopped up by the System.
The net borrowed reserve level
that had emerged in the past three weeks was higher than be would have
liked, and thus far the System apparently had failed to cause the money
supply to increase.
He hoped that corrective action might be taken in
the next three weeks, but that it could be taken unobtrusively.
If the
net borroed reserve figure should drop to around $200 million or lessa development he would like to see--that would be noted, of course, and
publicized.
However,
he thought it
necessary to move in that direction
because the System may have overstayed restraint in the fashion explained
by Messrs. Mills and Bryan.
At the same time, since businessmen them
selves seemed to be groping to discover what the future might hold, he
hoped that overt action by the System might be avoided.
Chairman Martin commented that Mr. Thomas had quoted him correctly
as saying that the inflationary psychology had somewhat diminished.
That
did not necessarily mean, of course, that inflationary psychology would
not reassert itself.
He was inclined to think that System policy,
generally speaking, had been quite correct.
It
could perhaps have been
modified in a number of respects, and without criticizing the Desk it
was
his impression that there may have been too much reliance on net borrowed
reserve figures over the past few weeks.
been given to them by the Desk.
Too much attention may have
This was just an observation of the kind
it is easy to make when not operating the Desk, but it was one that he
thought was rather obvious.
4/12/60
-40
Chairman Martin said he thought a fairly good case could be made
that the general economic picture required that some attention be paid to
making additions to the money supply.
How such additions might be brought
about, he did not know, but the reason he considered it important was that
monetary policy and debt management policy had now come together for the
first time in a long period.
Also, even with the prospect that Govern
ment spending for welfare programs might be in the headlines in the
course of the next few weeks, it
small
looked as though there would be a
budget surplus for this fiscal year and a substantial budget surplus in
the next fiscal year.
Thus, the Treasury would be paying down debt for
the first time in a long period.
Furthermore, although only about $370
million had gone into the new long-term Treasury bond, that was a defla
tionary step.
The Treasury had indicated, and the market expected, that
the Treasury would lengthen the debt whenever it had an opportunity.
Thus,
monetary policy was being supplemented actively by debt management policy,
and this was something to bear in mind.
Turning to the discussion at this meeting, the Chairman noted
that there had been practically no sentiment in favor of an increase in
restraint. With regard to the question of what Committee policy had been,
he suggested that this fell somewhat into the area of semantics.
The
Committee could never quite know whether its intentions were carried out
or to what extent the situation developed on its own accord.
Continuing, the Chairman said it should be recognized that the
Treasury was now in the market for some time.
The Committee had generally
4/12/60
-41.
followed a policy of even keel at such ties.
By and large, however, and
without any overt action, he felt that a trend toward lower net borrowed
reserves would be the part of wisdom and would be what the economy re
quired.
As to the broad economic picture, he did not want to repeat
what he had said on previous occasions.
However, the farm situation still
concerned him, for he saw gradual pressures in that area that were likely
to multiply.
In his opinion, the banks had made themselves illiquid; one
of the things now in the picture was that many of the easy credit plans
the banks were espousing so actively several months ago were now a source
of some worry to the banks.
Taking all these things together, it
seemed
to him that when debt management policy and monetary policy came together
as at present, and when there were uncertainties in the economy, the
System certainly ought not absorb any more of the reserves being created
by the action of the economy itself than it was necessary to absorb.
Looking at the matter as an outsider and not in any way as a critic, it
seemed to him that during the past week or so the Desk had been keeping
up a target that got into the area of more restraint rather than less.
That again touched upon the cumulative effect of policy over a period of
time.
Chairman Martin expressed the view that any overt action on the
part of the System in either direction would be unfortunate at this time.
However, he felt that the Account Management might look toward a lower
level of net borrowed reserves when that level was coming about from
natural sources and could be avoided only by sales from the System Account
-42
4/12/60
portfolio.
That, he suggested, would be in accord with both the spirit
and purpose of System policy.
As he had said on other occasions, he
thought there was a tendency to take what monetary policy can do too
seriously.
He did not think $100 million of reserves one way or the
other was going to make or break the economy.
However, with the manage
ment of the debt and open market policy now complementing each other,
ordinary prudence would make the System lean in the direction of supply
ing more reserves than there had been in the banking system until it
could be seen clearly where the economy was going.
System might want to take overt action.
At that point, the
It was possible, of course,
that there might be another bonfire of inflationary psychology; that was
the essential problem in the balance of payments.
The System ought to
take overt action if something like that should occur, but he considered
it
unlikely, and in his judgment it
particular cycle if it
would be the last bonfire of this
did occur.
Chairman Martin commented that there had been only one suggestion
for a change in the directive during today's discussion.
When it
came to
the level of net borrowed reserves, a tally just handed to him by the
Secretary indicated that a large majority of those who had spoken appeared
to favor moving downward.
In this connection, Mr. Bopp said he had found the discussion
subsequent to his previous comments convincing, and that he would favor
some slight easing.
4/12/60
-43
Chairman Martin then said that the consensus favored no change in
the directive.
It was also the consensus that the Committee should move
in the direction of slightly easing the picture as far as reserves were
concerned, but with great care on the part of the Desk not to do this in
an overt way.
Mr. Rouse, who had left the room somewhat earlier to confer with
the Desk by telephone, commented at this point on developments in the
Government securities market.
The essence of his report was that the bill
market, which closed more or less at bottom yesterday, had been deterio
rating rather steadily this morning.
It was now the view of the market that
the auction of one-year bills this afternoon would result in an average
rate higher than 4-1/2 per cent, with outside bidding likely to be weak and
dealers reportedly reluctant to underwrite the issue.
Mr. Rouse said that
the Treasury expected to enter tenders for about $100 million of the one
year bills, and that if prices for the issue turned out to be spread over
too wide a range, the Treasury might award less than the amount of the offer
ing.
In further comments, he said that the new three-month bills auctioned
yesterday were now being quoted at 3.70-3.65 and the new 182-day bills at
4.00-3.96.
The long-term market also had been affected.
Mr. Rouse said he had authorized the Desk to buy from $75 to $100
million of the bills auctioned yesterday for Thursday delivery, and to make
repurchase agreements in about the same amount to mature on Thursday.
He
hoped that that would bring some degree of stability to the market, and he
felt it was about all that could be done today.
In view of the fact that
4/12/60
-44
yesterday's net borrowed reserve figure was lower than estimated, he had
thought there would be some payoffs of repurchase agreements.
However,
dealers evidently had not been able to make sales from their portfolios
and there were no payoffs.
He repeated that he thought the actions he
outlined were about all that the Desk could do as far as today was con
cerned.
With respect to policy for the next three weeks, as indicated by
Chairman Martin's statement of the concensus, Mr. Rouse said he thought
the Desk could handle the situation on that basis.
He hoped it would be
possible to avoid any second-guessing about targets in terms of net
borrowed reserves.
There was always the problem of minds being fixed on
some particular target.
Mr. Mills referred to the situation in the Government securities
market, as described by Mr. Rouse, and inquired whether it
would be
profitable to have discussion as to whether this was a disorderly market
that deserved aggressive action on the part of the Desk in the bill area.
One possibility would be to let the market know that the System was inter
posing its buying power up to some certain amount of bills which would be
acquired from the market following the auction.
assurance to the market, he did not know.
What amount would give
If the figure was too low it
would mean nothing; if too high it might look out of line with good
common sense.
Mr. Rouse then said that in addition to what was already being
done, the only other thing that in his opinion would make a contribution
4/12/60
45
would be to give assurance to the dealers of repurchase agreements
being available on Friday, the payment date for the new one-year bills.
In addition to the fact that Good Friday is a legal holiday in some States,
it
is
a day when the Government securities market is
many of the dealers'
normally closed, and
financing sources also would be closed.
Therefore,
the situation was an unusual one that might create additional complica
tions.
Accordingly, Mr. Rouse said, he would like to be able to advise
the dealers that the Desk would be favorably disposed to assisting the
dealers on Friday by making repurchase agreements available on a liberal
basis.
Mr. Mills said that presumably this should be generous help, and
the repurchase agreements should cover a period sufficient to allow the
dealers bidding in the auction to work off their purchases.
Chairman Martin said he saw no objection, in the light of the
holiday, to giving such an indication.
He felt it would be unfortunate
to intervene in the market in any other way than the manner in which the
situation was being handled, because such intervention would produce
more adverse comment and uncertainty than any good that might come out of
it.
Mr. Rouse then said that if agreeable to the Committee he would
like to be excused, because time was of importance,
in order to authorize
the Desk to advise the dealers that repurchase agreements would be avail
able on Friday on a liberal basis in order to help them with any financing
problems they might encounter.
4/12/60
-46
The Chairman asked whether there were any further comments, and
no dissenting views were stated.
Accordingly, Mr. Rouse withdrew from
the meeting to get in touch with the Desk.
Chairman Martin recalled that he had previously stated the con
sensus as to open market policy in the ensuing period.
He went on to say
that anyone who would like to be recorded as voting against the policy
indicated by the consensus was free to express himself at this time.
Mr. Robertson said that he would vote in the negative except for
the fact that this was not a large problem.
of the meeting, the consensus favored
As he understood the summary
slight easing.
Therefore, the
problem was not a large one, and he would not want to make an issue of it,
although in his own judgment it would be wiser to take the other course.
Chairman Martin said that he had used the word "overt" because
he thought that was the real key to the problem.
He would not want
overt easing; he would not want to do anything that might be construed
as overt.
Mr. Shepardson commented that the Chairman had referred earlier
to not absorbing such ease as the market itself developed.
disagree with that, Mr. Shepardson said.
He would not
It had been his thought that
the Committee should not take positive action on its own to produce an
easing, but it seemed appropriate to allow such ease as developed in the
market to remain there.
Chairman Martin replied that a very thin line was involved,
following which Mr. Shepardson said he did not wish to dissent from the
policy indicated
bythe consensus.
4/12/60
Chairman Martin then said that, although this represented
second-guessing,
if one were talking of the color, tone, and feel of the
market, along with the level of net borrowed reserves, he felt that the
Desk had kept net borrowed reserves somewhat higher than he would have
kept them himself during the past period.
In saying this, he realized
that it is easy to sit at a distance from the market and second-guess the
targets, and he did not think for a moment that $100 million of reserves
one way or the other was going to make or break the economy.
With reference to Mr. Shepardson's comment,
Mr. Szymczak
observed that situations might arise in the market where the policy
indicated by the consensus would not only allow natural forces to operate
but would add a little
to the situation.
Mr. Shepardson agreed.
He added that in his comments he had
reverted to a phrase the Chairman used earlier.
The Chairman then stated that he would put the question, that
he did not want to urge anyone to record a negative vote, and that a
very modest thing was involved.
Mr. Robertson said that he did not went to record a negative
vote, particularly in the light of the market situation which might call
for putting reserves into the market, thereby automatically dropping the
level of net borrowed reserves.
The Chairman then inquired of Mr. Treiber whether he saw any
reason for a change in the directive, and Mr. Treiber responded in the
negative.
Accordingly, upon motion duly made
and seconded, the Committee voted unani
mously to direct the Federal Reserve Bank
of New York until otherwise directed by
the Committee:
(1)
To make such purchases, sales, or exchanges (includ
ing 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 securi
ties,
by direct exchange with the Treasury, as may be necessary
in the light of current and prospective economic conditions
and the general credit situation of the country, with a view
(a) to relating the supply of funds in the market to the needs
of commerce and business, (b) to fostering sustainable growth
in economic activity and employment while guarding against
excessive credit expansion, and (c) to the practical admin
istration of the Account; provided that the aggregate amount
of securities held in the System Account (including commit
ments 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;
To purchase direct from the Treasury for the account
(2)
of the Federal Reserve Bank of New York (with discretion, in
cases where it seems desirable, to issue participations to one
or more Federal Reserve Banks) such amounts of special short
term certificates of indebtedness as may be necessary from
time to time for the temporary accommodation of the Treasury;
provided that the total amount of such certificates held at
any one time by the Federal Reserve Banks shall not exceed in
the aggregate $500 million.
Chairman Martin referred to the discussion at the Committee
meeting on March 22, 1960, relative to a memorandum from Messrs. House,
Thomas, and Young, dated March 18, 1960, with respect to 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 indicated that the matter had been placed on the agenda for this
4/12/60
-49
meeting to permit anyone who so desired to discuss it
time and that it
further at this
would be the intention to bring up the subject period
ically for consideration.
Mr. Treiber then made the following statement:
It is fortunate for the Federal Reserve System that the
U. S. Treasury is subject to the discipline of the market in
selling its securities and does not have a pipeline to the
central bank. In order to assure the continuation of this
fortunate situation the System must recognize an obligation
to assist the Treasury wherever it can without jeopardizing
System responsibilities.
The Federal Reserve is concerned with promoting maximum
sustainable economic growth with reasonable price stability.
Monetary policy can contribute to the attainment of this
goal; so can debt management.
The System has a duty to do
the maximum within its power to promote the ultimate goal.
To the extent the System can assist debt management in pro
moting that goal without adversely affecting monetary policy
it
has a duty to do so.
I think the System could offer assistance to the Treasury
that would still be consistent with monetary policy and with
general market conditions and that would not distort yield or
price patterns. This would involve no specific commitment
on the part of the System to undertake operations in prescribed
amounts in either the one-year Treasury bills that mature
quarterly or the 2-1/2 per cent bonds of 1961.
The Manager now has authority, I believe, to buy various
issues of Treasury bills, including the special one-year bills
which mature July 15 and quarterly thereafter. The Committee
might indicate that it would look with favor upon the gradual
acquisition of the July 15 and other quarterly bills in
regular open market operations. In addition, the Committee
might instruct the Manager to acquire July 15 bills in
response to dealers' offers and concurrently to sell other
securities provided the purchase and sale do not create
distortions in the market prices of the securities involved.
The Manager would proceed modestly under such instructions
with the understanding that he would be expected not to
acquire more than, say, $150 million of the July 15 Treasury
bills between now and the next meeting of the Committee.
The System should also seek, I think, to increase its
holdings of 2-1/2 per cent Treasury bonds of 1961. I would
expect that the amount of such bonds so acquired would be
modest and that they would be acquired in the same way as
just outlined with respect to the one-year Treasury bills.
4/12/60
-50
Therefore, I suggest that we make a start on the
acquisition of these issues, recognizing that the amount
acquired between now and the next meeting may be small--or,
indeed, that none at all may be acquired.
Such acquisitions would also help to increase the
flexibility and usability of the System's short-term port
folio--a goal that should be pursued in any event as an aid
to the effectiveness of the management of the Account. It
seems little short of remarkable that the Account has done
so well in meeting the wide swings of reserve needs and
reserve pressures with average holdings of less than $2
billion of Treasury bills, which have, for practicable pur
poses, been our only stock in trade. For the scale of
present markets and reserves, I should think that the Account
ought to contain at least twice that amount of bills or other
short-term securities available for active trading.
The question today is merely one of modest transactions
in the special one-year Treasury bills maturing quarterly
and in the 2-1/2 per cent Treasury bonds of 1961. It seems
to me that such transactions should be undertaken.
In response to an inquiry by Chairman Martin, Mr. Treiber stated
that, with respect to the one-year bills maturing July 15, 1960, he
would have in mind an instruction to the Manager of the Account in
terms of acquiring up to $150 million of such bills between now and
the next meeting of the Committee, either through swaps or outright
purchases.
This, he pointed out, would represent a modest approach.
Mr. Allen noted that there were already $13.4 million of those
bills in the Account portfolio.
Mr.
Szymczak said that he agreed with this part of Mr. Treiber's
proposal, but that he was not sure about the part of the proposal involv
ing the acquisition of 2-1/2 per cent Treasury bonds of 1961.
He sug
gested that the two parts of the proposal be discussed separately.
4/12/60
-51
Accordingly, Chairman Martin stated that the part of the
proposal relating to the one-year bills would be discussed first.
Mr. Erickson said that he would favor starting on a program
of acquiring one-year bills.
If
it
developed that such a program
was helpful, he would extend it to comprehend the acquisition of
other issues of one-year bills in addition to those maturing July 15.
He raised the question whether it was advisable to fix any particular
amount of such bills to be acquired between meetings of the Open Market
Committee, and suggested that the instruction might be in terms of
giving the Account Manager permission to acquire a modest amount of
the bills as they appeared in the market.
Mr. Irons likewise expressed agreement with Mr. Treiber's
suggestion for buying one-year bills.
Upon inquiry by the Chairman
as to whether his thought would be to review the matter at the next
meeting of the Committee, Mr. Irons responded affirmatively.
He indi
cated, however, that he would prefer not to specify acquisition of any
particular amount of the bills in the period between meetings.
Messrs. Mangels, Deming, and Allen indicated that they would
have no objection to this part of Mr. Treiber's proposal.
Mr. Leedy said that he would favor the proposal, if it
terms of purchases of one-year bills maturing in July.
was in
However, if it
contemplated swapping longer maturities to acquire the bills, he would
have reservations.
As he understood it, this would be involved.
4/12/60
-52
Mr. Treiber commented that the ability of the Account to
acquire any substantial amount of the bills would be reduced if the
Account were not authorized to make offsetting sales, following which
Mr. Leedy noted that according to current reserve projections, pur
chases of securities to the extent of as much as $150 million might
be needed between now and the next meeting of the Committee to ef
fectuate the objectives of open market policy.
If the one-year bills
could be acquired on that basis, he would have no objection.
However,
he would like to have the benefit of more discussion before taking a
definite position on the question of swapping longer maturities into
one-year bills.
Mr. Treiber commented that his suggestion did not mean neces
sarily that longer maturities would have to be sold.
It might be
possible to swap other bills in the Account portfolio for the one-year
bills.
Mr. Leedy said that in view of the swings that had been occurring
in the market he would be fearful of the interpretation that might be
placed on transactions reflecting a decision to use longer maturities
for the purpose of swap transactions.
As he had understood it,
Mr.Treiber's
suggestion contemplated that in acquiring one-year bills maturing July 15,
the Account would dispose of holdings other than bills through swap
transactions.
Mr. Treiber then indicated that as far as this particular part
of his proposal was concerned, he would think in terms of swapping holdings
4/12/60
-53
in the System Account portfolio, to which Mr. Treiber replied in
terms that his suggestions had been divided into two parts.
One part
had to do with the possible acquisition of quantities of the 2-1/2
per cent bonds of 1961 by purchasing them when they were available
and selling something else, but he did not understand that this part
of the proposal was presently under discussion,
Neither did he under
stand that the question of future policy in building up the proportion
of bill
holdings, to which he had also referred in his statement, was
comprehended by the suggestion presently being considered.
Mr. Leedy then said that he would not be averse to the type of
operation in July 15 bills that had been outlined.
that the Account sell securities other than bills
However, a proposal
in the market in the
period immediately ahead would cause him to have some concern.
Chairman Martin stated that this was a good point, and Mr. Szymczak
commented that if the Account were to buy July 15 bills at a time when
it did not want to put additional reserves into the market, the Account
would have to sell something else.
ahead, it
However, in the period immediately
might not be necessary to sell other securities.
Mr. Leach said that be would agree with the program suggested by
Mr. Treiber as it related to one-year bills.
As he understood it,
Mr. Treiber also had suggested the desirability of increasing the pro
portion of bills held in the Account portfolio but that was something
for discussion in the future.
4/12/60
-54
Mr. Leach vent on to say that he would be in favor of experi
menting with swaps in the short-term maturity area, which he would
define as extending to securities,
other than bills, with maturities
as long as perhaps 1-1/2 years.
Mr. Mills said that he shared some of Mr. Leedy's reservations.
While he believed that the Committee should experiment and get its
feet wet, he would do it
very gingerly.
He doubted very much whether
the Account should go immediately into a program such as had been
suggested, that is,
before the market situation had been clarified
and steadiness in the market had developed.
Chairman Martin commented that he felt the Committee could
rely on the Manager of the Account to understand that the Committee
was talking about what it would be permissible for him to do when in
his judgment it
would be appropriate.
Mr. Robertson commented that this was the same kind of proposal
that came before the Committee in 1956, at which time the Committee
voted against it.
He said that he had prepared a memorandum regarding
"swaps" that he would like to read to the Committee.
He wished to
preface his reading of the memorandum by saying that as long as the
program was confined to the area of bills it
cance than if
it
was of far less signifi
were extended to other securities.
On the other hand,
he felt that this would be a step in the wrong direction, without say
solid profits to be achieved.
He was thoroughly in accord with buying,
-55in the ordinary course of operations, any particular maturities that
would enable the Committee to assist the Treasury.
However, his
views on swap transactions were as stated in the following memorandum,
which he then read:
Section "c" of the continuing operating policies of
the Federal Open Market Committee, originally adopted in
1953 and reaffirmed at the March 22, 1960 meeting of the
Open Market Committee, specified that: "Transactions for
the System Account in the open market shall be entered into
solely for the purpose of providing or absorbing reserves
.
. and shall not include offsetting purchases and sales
of securities . . ." This obviously precludes "swaps".
Just as obviously, this policy can be changed by the Com
mittee. The question is whether it should be.
At the time this policy was under consideration I pointed
out to the Committee that there may be circumstances in which
our intervention elsewhere than in the shortest-term sector
of the market might have beneficial effects from the point of
view of debt management, without having any material relation
to monetary and credit policy. I still
hold to that view, but
also I have been convinced by the intervening history that the
possible advantages of participating in all sectors of the
Government securities market, with a variety of objectives, are
generally outweighed by the benefits of a strictly limited
participation.
Our job, as the central bank of the United States, is to
supply reserves and withdraw reserves in order to contribute
to the maintenance of an economy that is both stable and highly
In ordinary circumstances, the way to accomplish
productive.
this efficiently, without weakening the fiber of the Government
securities market and without tinkering with problems of debt
management that are primarily the responsibility of the Treasury,
is to confine our open market operations to selling securities
in the shortest-term sector when we believe reserves should be
absorbed and buying such securities when we believe additional
reserves should be supplied. This will enable us not only to
pursue single-mindedly our most vital duty of keeping reserves
as close as possible to the optimum level, but at the same time
to contribute to the strength of the market by enabling dealers
and investors to make decisions and take positions with a mini
mum of worry about a potentially massive but largely imponderable
"X" factor--i.e., the effect of transactions on behalf of the
mammoth portfolio of the Federal Reserve System.
4/12/60
-56
Although, as stated, I am not opposed to a deviation from
our existing policy in order to experiment for the purpose of
testing the validity of the policy, there should be a purpose
in mind which is sufficiently meritorious to warrant the action.
I do not believe the stated purpose of this proposed experi
mental authorization to engage in "swaps"--i.e., to aid the
Treasury in its debt management operations--will provide bene
fits sufficient to offset the potential detriments of such
action.
In engaging in "swap" transactions, our efforts to acquire
a particular issue would necessarily affect the structure of
market prices, in some degree, for they would diminish the
supply, of the issue purchased, available to investors and
increase the availability of whatever issues were swapped there
for. The more aggressively we engaged in such transactions,
the greater would be the effect on the market prices of the
issues involved. At the same time the profits of the few
dealers who handled the transactions would be enhanced--dealers
who are sufficiently sophisticated to "outswap" the System. It
is
questionable whether this could be justified on the basis of
potential benefits to the Treasury in its debt management opera
tions.
In connection with the $11 billion issue of 2-1/2 per cent
bonds of November 1961, some have suggested that it would be
necessary to acquire between $2 and $3 billion of the issue in
order to provide any substantial help to the Treasury in its
refinancing. The effects of "swap" transactions of this size
are readily apparent. To engage in such transactions in a
lesser volume would be to inject into the Government securities
market the upsetting factor of uncertainty as to the proposed
use of our large portfolio with relatively slight benefits to
the Treasury.
It might be argued--and has been--that the purpose of the
"swap" transactions would not be exclusively for the purpose of
aiding the Treasury, but rather would also help to perfect the
maturity schedule of our own portfolio. The need for this now
At the present time we have in our portfolio
is not apparent.
short-term securities of approximately $1,300 million. It
appears to me that during the balance of this year at least we
will be adding to the reserve supply rather than absorbing
reserves, and therefore we will be acquiring an even larger
portfolio of short-term securities. But even assuming that we
did need to alter the maturity schedule of our portfolio, would
it not be better to do so in transactions tailored for our needs
by the Treasury--even though this might involve a special deal
with the Treasury, a deal which would not be offered to other
4/12/60
.57
investors? Or in the alternative, would it not be better to
amend our policies so that the Account Management could in its
normal operations, at times when market conditions were pro
pitious, sell short certificates in lieu of bills, and then
when purchases had to be made, make them in bills so as to
build up the bill portfolio?
In my judgment, an authorization from the Committee to the
Manager of the Account to engage in "swap" transactions on an
experimental basis for the stated purpose of aiding the Treasury
in its debt management functions would not be justified by the
possible benefits to be derived therefrom by the Treasury.
Such
an arrangement would inject an additional element of uncertainty
into the Government securities market, which might well have the
effect of providing a disincentive for dealers to take positions
in issues in which the System might be likely to buy or sell for
purposes other than providing or absorbing reserves. In addi
tion, it would appear to be a first step toward more general
interference with forces in all areas of the Government securi
ties market and might lead ultimately to relatively frequent
operations for purposes other than providing or absorbing re
serves; at the least it would lead to a fear thereof--which in
itself would be disruptive to a freely-functioning market.
In short, it is my belief that, with institutional rela
tionships like those prevailing within the System and between
the System and the Treasury, it is very desirable to keep the
lines of precedent as clear and clean as possible and to avoid
muddying them by moves that might subsequently be used as levers
for compromising basic monetary policy objectives--especially
when the potential benefits of such moves appear to be so limited.
Mr. Shepardson indicated that he would favor the proposal of
Mr. Treiber relating to the one-year bills, and Messrs. Fulton and Bopp
also indicated that they would favor it, although Mr. Fulton added that
he hoped the number and volume of swap transactions could be held to
small proportions.
Mr. Bryan stated that he would have no objection, on the basis
of precedent or otherwise, to the purchase from time to time of such
amounts of one-year bills as seemed justifiable.
Even in that, however,
the Committee should note that it was establishing a precedent for it had
4/l2/60
-58
customarily confined open market operations to short-term securities,
usually three-month bills.
This had been for a number of reasons,
among which was the theory that the three-month bill is
that always goes through cash.
it
The auction is
an instrument
always covered.
Now
was proposed to go into one-year bills for precisely the opposite
reason; namely, that the Treasury might be embarrassed.
Nevertheless,
the one-year bill is a short-term security, and he agreed with the
proposal.
On other aspects of the matter, Mr. Bryan commented, he had a
great deal of sympathy with what Mr. Robertson had said.
He was afraid
that if the Committee began tinkering with the 2-1/2 per cent bonds of
1961 it could do the Treasury an injustice.
By a little tinkering, the
Committee could create a situation in which public interest as to the
rollover would practically disappear.
Mr. Johns said he would be willing to experiment, along the
lines suggested by Mr. Treiber, with some acquisition of the July 15
bills, for example, even including some swaps in the short-term area.
However, there had been one aspect of the discussion at the March 22
Committee meeting that was not clear to him.
As he understood the
comments made at that meeting by Mr. Larkin, who attended in place of
Mr. Rouse,
it was contemplated that a dealer with whom
a transaction
was being conducted would be advised that it was a swap transaction
in order to avoid confusion with transactions intended to supply reserves.
-59
4/12/60
There followed discussion of this point during which Mr. Roosa
offered an explanation of what he understood Mr. Larkin had had in
mind.
In substance, Mr. Larkin's point was that if the Desk were to
seek to effect a swap,
price and it
it
would of course wish to obtain the best
would as a general rule ask dealers for quotations on
both sides of the transaction.
Hence dealers would ordinarily know
that a swap was involved and would not be confused or misled by the
transactions.
Messrs. Szymczak and Balderston then stated that they would be
favorable to the proposal outlined by Mr. Treiber insofar as it related
to one-year bills.
Chairman Martin said that he would favor going ahead with the
bills on an experimental basis, but that he would not go further and
hoped there would be a minimum of swaps.
He just
did not like the
technique of swaps, and nothing that had come up had persuaded him that
it
was a good technique for the Account to use.
a little
He might be wrong, and
experimentation probably was a good thing.
However, he cer
tainly would be hesitant about going into the 2-1/2 per cent bonds of
1961, at the present time or in the near future.
Mr. Leedy commented that the explanation of swapping technique
presented by Mr. Roosa had differed somewhat from his understanding of
the procedure indicated by Mr.
Larkin at
the March 22 meeting.
clarification was helpful to him, for he felt
that it
This
would be a far
-60
4/12/60
better technique to indicate generally that a swap was involved than to
attempt to confine a whole swap transaction to any one dealer.
Mr. Rouse,
who had returned to the meeting during the foregoing
discussion, commented that the volume of business through the Desk,
including open market transactions,
Treasury account business,
a good knowledge of its
is
foreign account transactions,
and
so large and continuous that the Desk has
markets.
Accordingly,
if
a dealer were to
propose a swap transaction, the Desk would generally be in
a position
to effect the swap or to execute one side of the transaction with such
dealer and the other side with another dealer, without further checking
of prices.
However,
there would be times when the Desk would need to
check further to ascertain whether a proposal was in line with the market.
Chairman Martin then suggested that the Committee act on the
basis that had been outlined; namely, to authorize the Management of the
Account to acquire up to $150 million of the one-year bills
maturing
July 15, 1960, between now and the next Committee meeting, either through
swaps or outright purchases,
with the understanding that the matter
would be called up again for review at
Mr.
the next meeting of the Committee.
Robertson stated that he would vote against proceeding on that
basis, for the reasons indicated in the memorandum that he had read
pertaining to swap transactions.
No other member of the Committee indicated that he would be
opposed to proceeding on the basis that had been suggested.
4/12/60
-61
Chairman Martin then referred to the letter that had been addressed
to him by a group of Senators under date of March 12, 1960, which contained
suggestions for change in some of the Federal Reserve operating procedures,
and to the draft of proposed reply that had been distributed to the Reserve
Bank Presidents under date of April 8, 1960.
He inquired whether any of
the members of the Committee or other Presidents had comments on the
draft of reply.
Mr. Leedy referred to that portion of the draft reply relating to
the prevention of undue speculation in Government securities, particularly
the part having to do with the possible issuance of a supervisory
instruction to Federal bank examiners in terms that prudent and sound bank
lending practice calls for appropriate margins in the case of all loans
to nondealer borrowers against Government securities as collateral.
Mr.
Leedy pointed out that the Federal Reserve Banks loan at par on United
States Government securities tendered as collateral for advances to member
banks and that all of the Federal bank supervisory agencies permit banks
under their supervision to carry Government securities at par regardless
of market value.
In these circumstances, he questioned whether the approach
cited in the portion of the draft reply to which he had referred would
be consistent with these practices and would be effective.
There followed some discussion of this point, during which Chairman
Martin said that the possible approach to which Mr.
Leedy referred had
been discussed at length by the Board and the other Federal bank supervisory
agencies.
It was understood that one of the supervisors (the Comptroller
4/12/60
-62
of the Currency) intended to go ahead with such an instruction to examiner
regardless of what the other agencies did.
Mr. Young pointed out that the suggestion was not new, having been
one of those advanced in the course of last year's Treasury-Federal Reserve
study of the Government securities market.
Chairman Martin then commented that the points brought out by Mr.
Leedy were worthy of consideration.
Mr. Treiber suggested that the group of Senators appeared to be
urging massive purchases of longer-term Government securities by the
Federal Reserve and that pertinent portions of the draft reply might be
reviewed in that light.
There followed comments on whether massive purchases of longer
term securities appeared to be envisaged by the Senators, from which it
seemed that there might be doubt as to what scale of open market operations
in securities other than bills the group of Senators may have had in mind.
In
response to a question by the Chairman, Mr. Treiber said he had no
specific language to suggest for the proposed letter
in
relation to the
point he had mentioned, and the Chairman indicated that the point would
be borne in mind.
Mr. Mills commented that the proposed reply represented a
compromise of many views and, therefore,
no one person might be completely
satisfied with the reply in the light of his own thinking, following which
Mr. Deming indicated that he had a suggestion of an editorial nature that
he would pass along to the Board's staff for consideration.
4/12/60
-63
It was agreed that the next meeting of the Federal Open Market
Committee would be held on Wednesday, May
, 1960, at 10:00 a.m.
Secretary's Note: In the light of subse
quent developments, the members of the
Committee and the other Presidents were
polled by telegram and it was decided to
hold the next meeting on Tuesday, May 3.
Chairman Martin stated, as a matter of information, that repre
sentatives of the Federal Reserve System, including a certain number of
Reserve Bank Chairmen and Reserve Bank Presidents, might be called upon
to appear at hearings before a Subcommittee of the House Banking and
Currency Committee in connection with one of several bills introduced by
Congressman Patman, probably H.R. 2790, which would call for a change in
the number of members of the Board of Governors,
abolishment of the Federal
Open Market Committee, and transfer of the Committee's functions to the
Board.
No date had yet been announced, he said, but it did not appear
that any such hearings would commence until after Easter.
Secretary's Note: It was learned subse
quently that hearings probably would be
held instead on H.R. 8516, also introduced
by Congressman Patman, which would provide
for retirement of the stock of the Federal
Reserve Banks and purportedly would make
any insured bank eligible for System
membership.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1960, April 11). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19600412
@misc{wtfs_fomc_minutes_19600412,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1960},
month = {Apr},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19600412},
note = {Retrieved via When the Fed Speaks corpus}
}