View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

APR 1

N E W Y O R K 45. N.Y.
RECTOR

1955

2 5 7 0 0

/

7|

j\

Confidential

M r , Merritt Sherman,
Board of Governors of the
Federal Reserve System,
Washington 25, D . C ,

'

\

D e a r Merritt:
Enclosed are the notes on statements which I m a d e at the
open sessions of the recent meeting of the Federal O p e n Market C o m ­
mittee, which you asked m e to send to you*
The notes on m y statement at the executive session
of the meeting will be coming along under separate cover.
Yours faithfully

Allan Sproul, Vice Chairman,
Federal O p e n M a r k e t Com m i t t e e
Encs,




fct'WLES SECTION

APR 1

econom ic reco very appears to be proceeding m ore gradually

1955

in la s t months of 1954. Perhaps the m ost s trik in g fig u res now
showing up are the steel operating ra te and autom obile production
and s a le s , but there m ay w e ll be an elem ent o f borrow ing fro m the
future in these figures which helps to rob them of explosive p o s s ib ilitie s *
The continued boom in construction and the high le v e l o f consum er
incom es and buying are the broader underpinnings of the general
econom ic situ atio n .
" S till see nothing in that general situ atio n w hich can o r needs to be
c u rta ile d by a generally re s tric tiv e c re d it p o lic y . Scattered increases
in raw m a te ria l prices haven't spread to the general p rice s tru c tu re .
Signs o f speculative inventory accum ulation have not yet appeared.
Th ere a re s till some pools of unem ploym ent, which m ay p e rs is t fo r
some tim e if business upturn does not keep pace w ith a growing
lab o r fo rc e .

Bank c re d it fig u res seem to be consistent w ith m oderate

econom ic re c o v e ry , although not conform ing e n tire ly to ad m itted ly
sketchy seasonal p ro jectio n s.

E ffects of in creases in consum er c re d it

x_
w ill be m oderated by heavy schedule of repaym ents on outstanding c re d it.
A

Business sentim ent, while bu llish fo r the next few months^ is u n certa in
about the la te r months of the y e a r.
The m ortgage c re d it situation obviously is a cause fo r some co ncern .
Even though it is not possible to say that the recent rate of housing
s ta rts is not sustainable, it is possible to have doubts about the c re d it
te rm s w hich have helped to sustain the boom .

W ith respect to th is

s itu atio n , how ever, there are two points to be m ade from the side
of g en eral c re d it p o licy .







F ir s t, the present high le v e l w a r* o f re s id e n tia l building « u
started by U s t y e a r's housing le g is la tio n , and sustained by
easy m oney.

E ven tually the e ffe c t o f the le g is la tio n w ill begin

to ta p e r o ff - te rm s can h a rd ly be fa rth e r lib e ra liz e d • and we
have alrea d y taken some o f the ease out o f the c re d it s itu a tio n .
M eanw hile it would be unwise to t r y to counteract what is a
national housing p o lic y , by fu rth e r re s tric tin g c re d it fo r
the whole econom y.
Second, it m ay be that th is situ atio n is beginning to c o rre c t
its e lf, aided by what we have a lre a d y done to take up the slack
in the rese rv e position of the banks.

The presen t ease in the

m ortgage m arket la rg e ly rep resen ts com m itm ents entered in to
la s t y e a r, fo r the fir s t h a lf of th is y e a r.

Th ere is some

evidence th at this was overdone - some unusual warehousing
of m ortgages w ith banks so as to be able to take up com m itm ents*
H ow , how ever, th ere a re re p o rts th at com m itm ents on the
easiest te rm s are h a rd e r to get, and th is m ay be the beginning
demands
o f an im portant change. In so fa r as ca p ita l/b u t run new
savings in the next s e v e ra l m onths, m ortgage lenders w ill
have to liquidate present holdings to take on new com m itm ents,
o r borrow from banks*

Xf conditions in ca p ita l m a rk e t a re not too

favorable to such liq u id atio n , and i f we keep some check on bank
re s e rv e po sitions, th is sh ifting o r th is re lia n c e on fu rth e r bank
c re d it w ill not be so easy, and re s u lts w ill begin to show la te r
in y e a r.

If building operations should be tu rn ing down in any ca se,

a t th at tir o * , we m ight have a d iffe re n t lit w t le a on our hand *.
We have a lre a d y dona quit* a bit to taka up the ala ck in the c re d it
situ atio n .

A verage w eekly free re s e rv e s o f m em b er bank* w hich w ara

running around 409 to 500 m illiA is D e c e m b e r, ranged arouad 300 to
400 m illio n in January and have fluctuated fr om ISO to 300 m illio n in
F e b ru a ry .

And it m ust be rem em bered th at these tre e re s e rv e * a re

now la rg e ly in little poola In the country banka.

M oat of the tim e , the

reserve and c e n tra l rese rv e c ity banka,* the m eat senaitive m oney
lenders - have &ero o r even negative fre e re s e rv e poaitiona and
th ere haa been aome in te rm itte n t in crease in bor r owing fro m the
R eserve B anka.
T h ere is alao the fact that the banka haee a lre a d y liquidated a
la rg e am ount of aecondary reserves (m o s tly ab o rt te rm G overnm ent*)
to avoid borrow ing fro m the R eserve Bank a and to taka on in term ed iate
o r longer te rm se c u ritie s and m ortgagee.

Because of decreased

liq u id ity , th ey should now be m ore senstive to p res su re than they w e re .
Then, th e re is the m a tte r of exp ectatio n a.

The general

expectation in the m a rk e t is that ra te * a re bound to go up .

If we do

too much to co n firm and in flam e those exp ectatio n * th ey m ay get out o f haad.
F in a lly , th ere a re the T re a s u ry 's position and needs.

It looks aa i f the

T re a s u ry would have to borrow from 3 to 4 .5 b illio n cash during the re at
of the fis c a l y e a r, of which 2 to 3 b illio n w ill be needed in e a rly A p ril (could
take the fo rm o f a ta x an ticipation b ill m atu rin g in June) and 1 to 1.5 b illio n
w ill probably be needed at m id -M a y when 1.5 b illio n of S eries B Saving a Notes
m a tu re .



In ad dition because o f the p ro s p ec tiv e tem p o ra ry dip in T re a s u ry




balances during the fir s t h a lf of M a rc h and June, soroe borrow ing fro m tint
F e d e ra l R eserve Banka (perhaps up to $1 b illio n in June) on a special
c e rtific a te m ay be n ecessary.

We s h a ll have to keep these needs In

m ind, as w e ll as the te m p o ra ry e ffects on the m oney m a rk e t and on
business conditions, of the M a rc h and A p r il ta x paym ents.
Putting a ll th is to gether, we m ay be on the threshhold of a re s tric tiv e
c re d it policy - m ore re s tric tiv e than is req u ire d by the economic
situation and m ore re s tric tiv e than we have intended.

1 think we

sh all have to be c a re fu l during the next s e v e ra l weeks to see that we do
not pass over that threshhold unintentionally*
run-up

T h ere could be a rap id

in short te rm ra te s , a considerable ris e in long te rm ca p ita l

yields (and decline in p ric e s ), aid w ith T re a s u ry borrow ing entering the
p ic tu re , a cum ulative expectation of re a lly tig h t money such as we had in
e a rly 1953 • 1 should say we want to avoid such developm ents and it m ay
re q u ire some open m arket pu rchases.
We have now gotten to the po int, I b e lie v e , w here the Treasury b ill
ra te w ill hover slig h tly below the discount rate (o r at tim es equal it)
and m em ber banks w ill be encouraged by the p ro fit m otive to shift to
borrow ing to m eet rese rv e needs ra th e r than going through the s e c u rity
m a rk e t.

I would le t the situation sim m er th ere fo r a w h ile , em ploying

repurchase agreem ents to m eet te m p o ra ry squeezes in the m a rk e t, and
buy se cu rities if the squeeze seems to have become perm anent o r
if th ere is need to put in some rese rv es to support bank un derw ritin g
of the T re a s u ry 's fin an cing .
Such a program would not c a ll fo r any change in our present d ire c tiv e *




F O M C 3/2/55
AS

D is c o u n t R ate
In broadest terms, a change in the discount rate m u s t be considered
in relation to the performance of the whole economy, in its domestic
and international aspects*
Take two recent examples U . K . w h e r e the rate w a s recently increased
f r o m 3 to 3 l/2 percent and then to 4 l/2 percent, and C a n a d a w h e r e
the rate has just been reduced f r o m 2 to 1 l/2 percent*
(a)

In the U . K . the e c o n o m y appeared to be operating at full
stretch, with a tendency toward over-employment, and foreign
exchanges showed a weakening of the international position.
A n increase in bank rate w a s the classical and proper response,
and w h e n the first mild warning didn’ do the trick a sharper
t
warning followed.

(b)

In C a n a d a the mild recession of 1954 has not been succeeded by
a strong recovery, there is still concern about unemployment,
and the Canadian dollar w a s strong - perhaps too strong in t e r m s
of C a n a d a 1 export trade*
,s

A reduction in bank rate s e e m e d to

fit the domestic and international position.
It is m o r e difficult to generalize with respect to our o w n country, perhaps
because w e k n o w m o r e about it, but I would say our situation is s o m e w h e r e
inbetween these two situations.

O u r domestic e c o n o m y after a period of

recession and then of stability in 1954, m a d e a vigorous start on recovery
in the last quarter of 1954.

This u p w a r d m o v e m e n t appears to have gone

forward, but at a slower pace, thus far in 1955.

W e are well advanced

f r o m the recession lows of 1954 but still in the phase of gradual

-2 -

recovery and not yet in the full "prosperity” phase, particularly
w h e n prospective levels of e m p l o y m e n t and increases in the labor
force are taken into account.

In t e r m s of economic conditions, an

increase in the discount rate at this time would s e e m to be premature.
The adjustments the m o n e y m a r k e t m a y be called upon to m a k e during

4.

the M arch-April tax period and over the period of Treasury borrowing in
April would be complicated by an increase in the discount rate.

The

reaction to such a m o v e might result in a deterioration in m a r k e t
values - particularly long t e r m or capital value - that would be
indicative of a m o r e restrictive piiicy than the S y s t e m yet wishes to follow.
There is also the matter of expectations*

5.

The general expectation in

the m a r k e t is that rates are bound to go up.

W e are already getting a

delayed rate action to our change in open m a r k e t policy.

If w e should

raise discount rate now, and thus further strengthen expectations of
tighter credit and high rates which already exist, w e should probably
get m o r e of an immediate reaction than w e want.

6.

Finally, there is the question of international m o n e y m a r k e t relationships,
hich w e are again paying s o m e attention.

The two increases in

discount rate at the B a n k of England in recent w e e k s have been partly to
try to protect a weakening balance of payments position.

So long as there is

nothing in our domestic situation which d e m a n d s or requires an increase
in discount rate, it might be helpful to the British position to have
as wide a spread as possible in short rates, between our two markets.







S o m e m o v e m e n t of short funds to L o n d o n (or the retention of funds
there which might have c o m e home) to take advantage of higher rates,
could give t e m p o r a r y relief to the British position which would be in
our long run interest*
I should say w e shall want to watch the rate situation closely but
that no change shall be m a d e now*

REC'D IK FILES SECTION
JS

APR 1

1955

j

M a tin g of F e d e ra l Open M a rk e t C om m ittee M arch 2, 1955
R eview of Continuing O perating P o lic ie s
Agenda Item 13(b)
Although I am going to ro te NO on the continuance of these
operating p o lic ie s , 1 am not going to try- to rearg u e the question a t th is
tim e *

1 have no reason to believe I would be m ore successful today,

than I have been a t past m eetings when the subject has been under
discussion.
I

have been encouraged, how ever, by the public statem ent th at

these operating p o licies a re ex p e rim e n ta l, and by the warning this
should convey to the m arket that th ere is no p ro m is e , express o r
im p lie d , th at these policies w ill alw ays be fo llow ed.

A continuing period of intensive study of how our present
methods of operation arc w o rking, and how they m ight be im proved,
seems to m e to be in dicated .

I am follow ing that course and I

recom m end it to other m em bers of the C o m m ittee , les t they lapse
into thinking that these questions have been settled fo r a ll tim e .





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102