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•jr February U, 1949 Ho.coraV.de John l? Secretary of the boa* : . C, 1 Mr. Secretary: IB of Cha I have m: LM -low to? vtom . lie executive coasiitee s Mftlfctt r w i t f M vith respect i tf problem of credit policy and •at as tflitnii I • th you OB /AttlUU/ 26 and At I subseMMtlag of the cosislttee on tbftt day: 1, The Trs&eury prograrfl of ealXfl on war ios.n aeccimts to offset the teftsonal r t t u m flov of curre^c.;jorts otfcter factors wmA to in t,ozm pres$ur :.nk r e serves httt v/orK.ed e&tisfactorily i \ . 4 2« Availatle TI'iMMIJ bslances- ahoul^ t i r e System holdings of Mtrtii LI eartlfieat* redeei: aillicn of tl—I r t o f MkTC early April* to re*to 3» Tbe present « policy wltln ror b i l l s and |HU'ihi.i#i ana sale© of bill© h; I . red ss.li.£"'actory and should be 4* ¥ith th© lifting ^gure from the long-term a»rk©t, tb« aoat pressing conaldarati • nto acccunt in aetting the rate fof t ; .;,rii ceri,ifioat€^ refiiDdings | i Uk i l i t y of holdin..; irivest-;;jeat interest i s a staadily growing volume of short-term d*bt« Th^ market will be called upon to fcbtorfe • v$ry aea^ volume of rsfmndiogu ia tilt near future* Certificates will m,txir% ia the amount of $30 billion, in &• eanlB| year. million of bond-: will aatmnt in Jun®, | 1 . 3 million ia 'id %k*U b l l l i •• . vroporv. •: .. .: • suitor:* L la alrw Honorsble John V, ©nyd*r — 2 large &nd vill Increase substantially. Short-terst r&t#s should be set a- a level which v i l l attract Invesisseiit in these iasues and avoid or ise the inducement to "pla the pattern of rates". &• DttriOf recent weeks there \m$ beea eri&eace ©f a tendency oa the part or' Ihe baaks to resmae this practice. The System has been called upon to [Winilmie bills la ls.rge volume vMle banks vere la* creasing their purchases of siigible lon^-ters: The ByMoft** portfolio of eligible bonde callable after 4- years M« MMHttti to only t l i t t l e ovc- r |J00 millicn. If Uu practice oI rates' 1 co-itinues or spreads signi?lcaxit.iY, i t v i l l be ia^OMdble for the 8y«t«& to prvvwtt I oisorclerly rate structure t&4 to keep loag-teiTt b(mds9 particuV. D •Xtglblftfj from developing erratdc b« Once the Ijfit— &J I t o §tHX 1»ng 11 eligible bonds to offset i t s acquisition -hortterm securities, excess rtftil"fti will ftfftia be 1Q lerge voliime leaving the und which tht fcystes voold like to avoid, of imposing L#T res^i^re requirements on c. WhlXe la the opinion of the cassitte: •ill shortly beeosi^ desirable to refund BOSS of the mxtari . debt into in termed imte term tecttrltlt tbii c^uinot be accomplished within the present stmoture of mtejg without aeoentuating ihd preblev of tffcet eappeyt debt MSJ 'at. '.. A short rate that v i l l liold Bjarket interest v i l l permit the continued refuniiiag of •fttttrtftf longtern bea4l into shorter issues witlSMNlt ijacreat;in^ tlM aggregate cost of servicing the isarket-hel\ debt* It v i l l ftjjg tend to avoid urume concentration .-=•-ttt*r>r; debt in the portfolios of the Fed&^.l IHeserv® Banks. t t Since . i is to be coatinueti support or t)M 2-1/2 per cent iong-tena rat«, i t is essential \ itxiiitted & greater decree of flexibility in 9 -term Honorable John i« £nyder —• 3 rates. I t is not possible to exercise & flexible anna taiy policy vith tvo pegs—one t t the giiort end and one at the long end—M : W*% M frt present* |« H i DUMMI considerations point tov&ra the desirability o; refunding the certificates maturing on Maroh 1 into s 1-3/S per cent l-ye&r certificate or i 13~®onth 1-3/6 mr cent note* The l a t t e r would make possible tine coaxbin»t.ten - -;&reh irlti4Mi into • single issue* view i\re N ' conviction uhat .preparation suoulo be initiated nov for the successful pi 11 oiitsdersl Reserve Bsal cae large MMWfct of necessary to refund IjilMH maturing or callable through 1952. tf* hope you v i l l n»d youreelf in agreement vith these vievs. Oincerely roui, ?iM CaaixOtHM • Cosamittee. TBC/mg February 9, 1949 Dear Allan: Reference is made to your letter of February 4> 194-9, summarizing the views of the Executive Committee of the Federal Open Market Committee with respect to the problems of credit policy and debt management developed during discussions of the Committee on January 26, 1949. I have given careful consideration to the views of the Committee suggesting the desirability of refunding the certificates maturing March 1 into a 1-3/8$ one-year certificate or a 13-iaonth 1-3/8^ note. In the light of conditions existing at this time I find isyself unable to agree that the certificate maturing on March 1 should be refunded into a 1-3/8$ security, and I feel that it is too early to decide what should be done in the refinancing of the certificate maturing April 1. It is noted that the Committee suggests that the present System policy •with respect to bids for bills and purchases and sales of bills be continued. As you know, I have had some apprehension concerning the gradual rise in the bill rate, but understand that it will be the policy of the Federal Reserve to exercise a high degree of caution so as to enable the Treasury to continue the refinancing of the floating debt at the current one-year rate of 1-1/4$ until such time as a different rate can be mutually agreed upon. ¥ith respect to a program for the redemption of maturing Treasury bills during the latter part of March and early April, I am in general agreement that Treasury bills be redeemed as the Treasury balance and market conditions permit, but I would prefer to continue the present policy of considering Treasury bills on a week-to-week basis and making our decisions accordingly. It seems to me we should permit more development in the present factors affecting debt management before making any substantial changes in our refunding operations or to move to higher levels for the one-year rate. The April 1 maturity of certificates -2amounts to only $1 billion, or thereabouts, and there is no further maturity until June 1. In a few months we can better judge the course of events with particular reference to the legislative program which might be enacted, including the action which the Congress may take in connection with the President's recommendation for increased taxes. We will then have a much better base upon which to plan our operations covering the period from June through the balance of the year. In line with these views, I aa reluctant at the present time to use the cash balance to retire any of the System's holdings of certificates maturing on March 1, and would prefer to have the System exchange its holdings of this maturity. Sincerely yours, (Signed) JOHN ¥. SNIDER Secretary of the Treasury Mr. Allan Sproul, Vice Chairman, Federal Open Market Committee, Federal Reserve System, Washington 25, D. C.
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