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FOM C 3 /2 7 / 5 6
AS
G eneral Com m ents
This turn in the outlook, em phasized today, has com e a b o u t very
quickly.

Just as we have had to rev ise our opinions, the co m m e rcia l

banks are now having to consider what adjustm ents they are going to
m ake to m eet a situation which they had thought to be tem porary
but which now shows signs of being of longer duration*

This should

m ean that our policy of m ild restra in t, particularly if it is now
stepped-up a little , will p re ss harder on the banks than it has been doing.
So far as the capital m arket is concerned this change is already taking
place;

a substantial readjustm ent in rates is going on right now, and

there has been some backing up of issu e s p articularly in the revenue
bond fie ld .

In such circu m sta n ce s, as we know, there is always the

p o ssib ility of expectations of difficulty outrunning the fa c ts , and
making acute what is alread y a difficult situation.

We do not want to

precipitate such a developm ent if we can avoid it.
An even m ore difficult problem has been referred to - the po ssib ility
of our running into a c o st-p r ic e spiral - growing out of increased wages
and other costs which producers attempt to pass on to co n su m e r s.

This

m ight encounter consum er resistan ce which would have a dampening
effect on production and em ploym ent, or what se e m s m ore likely in
the p resen t state of the econom y it might generate an inflationary sp ir a l.
In the fir s t c a s e , question could be raised as to whether it is the
resp on sib ility of the central banking system to make credit e a sier and
cheaper to obtain in order to try to head off a decline in production

-2 -

and em ploym ent*

The second and m ore difficult case would raise

questions as to whether the central banking system should make
credit so dear and difficult to obtain as to cause a decline in
production and em ploym ent as the le s s e r of two e v ils e We havenH
yet had to run head-on into the philosophy of the Employm ent A ct
of 1946 to that extent and it wouldn’t be e a sy , so maybe we had
better hope that som e degree of econom ic respon sib ility on the part
of m anagem ent and la b o r, will avoid presenting us the problem in
seriou s form*)

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