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A meeting of the executive committee of the Federal Open Market Committee was held in the offices of the Board of Governors of the Fed eral Reserve System in Washington on Monday, February 28, 1949, at 9:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Sproul, Vice Chairman Eccles Szymczak Williams Vardaman (alternate for Chairman McCabe) Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Morrill, Secretary Carpenter, Assistant Secretary Vest, General Counsel Thomas, Economist Rouse, Manager of the System Open Market Account Thurston, Assistant to the Board of Governors Riefler, Assistant to the Chairman, Board of Governors Smith, Economist, Government Finance Section, Division of Research and Statistics, Board of Governors Arthur Willis, Special Assistant, Securities Department, Federal Re serve Bank of New York It was stated that Chairman McCabe had been delayed in Philadel phia and would not be able to attend this meeting. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the executive committee held on January 26, 1949, were approved. Upon motion duly made and seconded, and by unanimous vote, the transactions in the System account, as reported to the members of the executive committee, for the period Janu ary 26 to February 27, 1949, inclusive, were approved, ratified, and confirmed. Upon motion duly made and seconded, and by unanimous vote, the following letter to 2/28/49 -2the Secretary of the Treasury, prepared for Mr. Sproul's signature in accordance with the action taken at the meeting of the executive committee on January 26, 1949, and sent to Secretary Snyder under date of February 4, 1949, was approved, ratified, and confirmed: "In the absence of Chairman McCabe I have undertaken to summarize below the views of the executive committee of the Federal Open Market Committee with respect to the problems of credit policy and debt management as discussed with you on January 26, 1949, and at a subsequent meeting of the committee on that day: 1. The Treasury program of calls on war loan ac counts to offset the seasonal return flow of currency, gold imports and other factors and to maintain some pressure on bank reserves has worked satisfactorily and should be continued. 2. Available Treasury balances should be used to retire System holdings of March and April certificates and to redeem $600 million of Treasury bills during the latter part of March and early April. 3. The present System policy with respect to bids for bills and purchases and sales of bills has proved satisfactory and should be continued. 4. With the lifting of pressure from the long term market, the most pressing consideration to be taken into account in setting the rate for the March and April certificate refundings is the desirability of holding investment interest in a steadily growing volume of short-term debt. The market will be called upon to absorb a very heavy volume of refundings in the near future. Certificates will mature in the amount of $30 billion in the coming year. In addition $1 billion of bonds will mature in June, $1.3 billion in September, and The proportion of the public $4.4 billion in December. debt falling into the shorter maturities is already large and will increase substantially. Short-term rates should be set at a level which will attract investment in these issues and avoid or minimize the inducement to 'play the pattern of rates'. During recent weeks there has been a. growing evidence of a tendency on the part of the banks to resume this practice. The System has been called upon to purchase bills in large volume while banks were increasing their purchases of eligible long-term bonds. The System's port folio of eligible bonds callable after 4 years now 2/28/49 -3amounts to only a little over $300 million. If the practice of 'playing the pattern of rates' continues or spreads significantly, it will be impossible for the System to prevent a disorderly rate structure and to keep long term bonds, particularly bank eligibles, from developing erratic premiums. b. Once the System is unable to sell long term eligible bonds to offset its acquisitions of short-term securities, excess reserves will again be created in large volume leaving the un desirable alternative, which the System would like to avoid, of imposing higher reserve re quirements on member banks. c. While in the opinion of the committee it will shortly become desirable to refund some of the maturing debt into intermediate term securities this can not be accomplished within the present structure of rates without accentuat ing the problem of market support and debt manage ment. d. A short rate that will hold market interest will permit the continued refunding of maturing long-term bonds into shorter issues without in creasing the aggregate cost of servicing the market held debt. It will also tend to avoid undue con centration of short-term debt in the portfolios of the Federal Reserve Banks. e. Since there is to be continued support of the 2-1/2 percent long-term rate, it is essential that there be permitted a greater degree of flexi bility in short-term rates. It is not possible to exercise a flexible monetary policy with two pegsone at the short end and one at the long end--as far apart as at present. 5. All these considerations point toward the desirabil ity of refunding the certificates maturing on March 1 into a 1-3/8 percent 1-year certificate or a 13-month 1-3/8 per cent note. The latter would make possible the combination of the March and April maturities into a single issue. "The committee's views are based on the conviction that preparation should be initiated now for the successful placement outside the Federal Reserve Banks of the large amount of financ ing necessary to refund issues maturing or callable through 1952. We hope you will find yourself in agreement with these views." -4 2/28/49 Reference was then made to the discussions at the meeting of the Federal Open Market Committee on November 30, 1948, and the execu tive committee on January 4, 1949, with respect to the development of a program for the conversion of long-term Treasury debt into issues which would be so held that System support would not be necessary. It was stated that developments had been such that representatives of the Federal Open Market Committee and the Treasury had not met to discuss the matter and that probably it would be preferable to take the matter up directly with Secretary Snyder. suggestion was made that it Upon further consideration the might be advisable for the staff members who had been studying the problem to prepare a report of their find ings which could be considered by the executive committee and used as a basis for recommendation by it to the Federal Open Market Committee, after which, depending on the conclusions reached, with the Treasury at top policy level if it it could be taken up then seemed desirable. It was agreed unanimously that such a procedure should be recommended at the meeting of the Federal Open Mar ket Committee tomorrow, and that, in the absence of objection on the part of the Federal Open Market Committee, a study of a proposed conversion program should be prepared by Messrs. Thomas, Morrill, Riefler, and Rouse for submission to the members of the executive committee. Thereupon the meeting adjourned. Approved: Chairman. Secretary.
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