The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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, July 12, 1955, at 10:45 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Sproul, Vice Chairman
Mr. Balderston
Mr. Fulton
Mr. Irons
Mr.
Mr.
Mr.
Mr.
Mr.
Leach
Robertson
Shepardson
Vardaman
Powell, Alternate for Mr. Earhart
Messrs. Treiber and Johns, Alternate Members of
the Federal Open Market Committee
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Vest, General Counsel
Mr. Solomon, Assistant General Counsel
Messrs. Daane, Hostetler, Rice, Wheeler, and
Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Sherman, Assistant Secretary, Board of
Governors
Mr. Koch, Assistant Director, Division of
Research and Statistics, Board of Gov
ernors
Mr. Gaines, Securities Department, Federal Re
serve Bank of New York
Messrs. Williams and Bryan, Presidents of the Federal
Reserve Banks of Philadelphia and Atlanta, re
spectively
There was presented for the approval of the Committee a revised
draft of minutes of the meeting of the Federal Open Market Committee held
7/12/55
-2
on Wednesday, June 22, 1955, copies of which had been distributed to the
members of the Committee before this meeting.
Mr. Robertson suggested that the last sentence of the first full
paragraph on page 10* of the revised draft of minutes be changed to delete
the word "should" and to insert in its place the words "be invited to"
so that the sentence would be modified as follows:
Mr. Robertson also suggested that the point mentioned
by Mr. Leedy might be covered by providing specifically that
all Presidents of the Federal Reserve Banks [DEL:should]BE INVITED
TO be present at meetings of the Open Market Committee.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the min
utes of the meeting of the Federal Open
Market Committee held on June 22, 1955,
revised to include the foregoing change,
were approved.
Before this meeting there had been sent to the members of the
Committee a report of open market operations prepared at the Federal Reserve
Bank of New York covering the period June 22 to July 6, 1955, inclusive,
and at this meeting there was distributed a supplementary report covering
commitments executed July 7-11,
1955, inclusive.
Copies of both reports
have been placed in the files of the Federal Open Market Committee.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period June 22
July 11, 1955, inclusive, were approved,
ratified, and confirmed.
Chairman Martin referred to the discussion at the meeting on
June 22 of Mr. Robertson's suggestion for rewording statements of certain
* Refers to mimeographed copy.
made to page 11.
In the typed copy, reference should be
7/12/55
-3
continuing operating policies of the Committee relating to support of
Government securities, intervention in
operations in
the Government securities market,
the short end of the market, operations during a period
of a Treasury financing, and operations for the purpose of providing or
absorbing reserves.
The statements had been approved at the meeting of
the Committee on March 2,
1955, and a memorandum had been sent to the
members of the Committee by the Secretary under date of July 7, 1955,
presenting Mr. Robertson's proposed rewording, as well as alternative
language suggested by Mr.
Sproul at the June 22 meeting.
The statements as approved March 2, 1955 and as presently in ef
fect read as follows:
It is agreed that it is not now the policy of the Com
mittee to support any pattern of prices and yields in the Gov
ernment securities market, and intervention in the Government
securities market is solely to effectuate the objectives of
monetary and credit policy (including correction of disorderly
markets).
It is agreed that operations for the System account in
the open market, other than repurchase agreements, be confined
to short-term securities (except in the correction of disor
derly markets) and that during a period of Treasury financing
there be no purchases of (1) maturing issues for which an ex
change is being offered, (2) when-issued securities, or (3)
outstanding issues of comparable maturity to those being of
fered for exchange; and that these policies be followed until
such time as they may be superseded or modified by further ac
tion of the Federal Open Market Committee.
It is agreed that transactions for the System account in
the open market shall be entered into solely for the purpose
of providing or absorbing reserves (except in the correction
of disorderly markets), and shall not include offsetting pur
chases and sales of securities for the purpose of altering the
7/12/55
maturity pattern of the System's portfolio; such policy to
be followed until such time as it may be superseded or modi
fied by further action of the Federal Open Market Committee.
Mr. Robertson's suggested revision read as follows:
It is not now the policy of the Committee to support
any specific pattern of prices and yields in the Government
securities market, and transactions in the System Open Mar
ket Account shall be undertaken solely for the purpose of
influencing the volume of bank reserves and thereby the
costs and availability of credit, in order to promote eco
nomic growth and stability (including correction of disor
derly markets).
Transactions for the System account in the open market
shall be confined (except in correction of disorderly markets)
to short-term securities, preferably bills, and shall not in
clude offsetting purchases and sales of securities of different
maturities.
During periods of Treasury financing there shall be no
purchases for the System Open Market Account of (1) maturing
issues for which an exchange is being offered, (2) when
issued securities, or (3) outstanding issues of comparable
maturity to those being offered for exchange.
Mr. Sproul's proposed alternative language would change the first
two paragraphs of Mr. Robertson's suggested revision as follows:
It is not now the policy of the Committee to support
any specific pattern of prices and yields in the Government
securities market, and transactions in the open market shall
be undertaken [DEL:solely] TO EFFECTUATE THE OBJECTIVES OF MONETARY
AND CREDIT POLICY (INCLUDING CORRECTION OF DISORDERLY MAR
the purpose of]influencing the volume of bank
KETS) BY {DEL:for
reserves and thereby the costs and availability of credit, in
order to [DEL:promote] FOSTER economic growth and stability ([DEL:includ
ing
of
correction
disorderly markets]).
Transactions for the System account in the open market
shall be confined (except in correction of disorderly markets)
-5
7/12/55
to short-term securities, preferably bills, and shall not
include offsetting purchases or sales of securities of
different maturities EXCEPT BILLS.
Mr. Robertson stated that his proposal for rewording of these
statements of continuing operating policies, which had first
been adopted
by the Committee in 1953, was for the purpose of clarifying the existing
statements and eliminating language which may have caused misunderstand
ing or misinterpretation of the intent of the statements in the past.
He
then commented briefly on the proposed language of the statements and on
reasons why he preferred language he had suggested to that suggested by
Mr. Sproul at the meeting on June 22.
Mr. Sproul said that, as he had indicated three weeks ago, his
suggestions were made in
the interest of clarity, since he would have to
vote "no" on the statements in
anything like their present form.
In ex
planation of his specific suggestions, he saids
1. It is desirable to retain the positive or affirmative
statement of intent included in the policy statement of March
2, 1955, and to place it in immediate opposition to the nega
tive statement. It is also desirable to tie in the correc
tion of disorderly markets with the objectives of monetary
and credit policy.
2. We should not seem to deny, by use of the word "solely",
a secondary responsibility to coordinate credit policy with
debt management, a responsibility which we actually respect
whenever it is possible to do so without running wholly counter
to credit policy.
3. The permissive swaps of bills would facilitate the prac
tical administration of the account, contribute to the func
tioning of the bill market, and not transgress the general
principle which led the majority of the Committee to prohibit
swaps.
-6
7/12/55
Several other suggestions for change in language were made by
other members of the Committee and there followed a general discussion
of the various suggestions made.
Chairman Martin commented that there had been a great deal of
discussion of the wording of the Committee's directive and of language
of the continuing operating policies.
did not feel it
As he had indicated before, he
was practicable to convert meetings of this size into
"drafting sessions".
In his view, the language changes being suggested
did not make a great deal of difference and to a considerable extent
represented only a shifting of words.
Mr. Bryan stated that, as indicated by Mr. Sproul's comments, it
would seem to be important to debate the substantive matter in
the state
ments of continuing operating policies rather than the language.
Committee reached a decision that it
If
the
wished to follow certain policies,
Mr. Bryan felt that the matter of language could be taken care of fairly
readily.
Chairman Martin agreed with this point of view.
He referred specif
ically to the prohibition in the existing statements of policy against
"swap" transactions and asked Mr.
Sproul under what circumstances he felt
this prohibition should not apply to bills.
Mr.
Sproul cited the example of the need of the System account, at
times, for January and February bills which could be allowed to run off
after the turn of the year, and he also cited a situation in which a
7/12/55
-7
corporation might have a need for bills maturing on October 21 in
order
to meet cash needs that day, but which found that the market was bare of
bills maturing October 21 although bills maturing October 28 were in
supply.
He could not see how the System account in
good
swapping such near
money instruments would be interfering with arbitrage of the market and
the relationships between Government securities of different maturities.
To him, this would appear to be making the System portfolio contribute
to the functioning of the bill
market.
In response to Chairman Martin's
question as to how the System account would find out that the corporation
needed the October 21 bills, Mr. Sproul stated that this information would
come through dealers who were experiencing a demand for the October 21
bills.
The System account would not be taking care of individual corpora
tions; rather, the swaps would be for the purpose of improving the opera
tion of the market.
The transaction would, of course, be tied in with the
operations of the System account under the credit policy in force.
Chairman Martin said that if the Committee was trying to acquire
bills with specific maturities that aided in carrying out policy and an
offer to sell such bills came to it through dealers, swapping from one
maturity to another could be justified under some conditions.
if
it
For example,
wanted January maturities so that they could be permitted to run off
when banks would need less reserves because of a return flow of currency
and other seasonal factors, swaps might be all right.
If,
however, the
swapping was a result of an attempt on the part of the System account to
-8
7/12/55
accommodate dealers or, through dealers, to accommodate individual cor
porations in adjusting their portfolios, he felt
put the Committee on dangerous ground.
transactions on an impersonal basis.
to keep this point in
such transactions would
The central bank should keep its
It was necessary for the Committee
mind all the time, Chairman Martin said, and the
Committee should be very careful about any approach which a dealer or a
corporation might make for the purpose of showing how a transaction would
benefit the System account or the Committee's operations.
As Mr.
Sproul
had said, swaps of bills seemed to be a very small matter from the stand
point of affecting the rate relationships, but when it
came to using the
account to accommodate dealers the Committee would not be justified in
risking the criticism that might result.
In other words, the advantages
of such transactions from the standpoint of monetary policy would be so
slight that they might be much more than offset by the violation of the
principle involved.
got back to Mr.
It was Chairman Martin's thought that the discussion
Bryan's point that perhaps the Committee should have another
full-dress debate on the entire substance of the principle involved in the
prohibition against swaps.
Mr. Robertson stated that, as he had indicated earlier, his whole
purpose in suggesting a revision in the wording of these statements was to
eliminate some of the language which had been misunderstood or misconstrued
before, and he had not intended to change the substance of the statements.
-9
7/12/55
If
the revision as suggested or as modified in discussion did not achieve
this purpose, he would be disposed to continue with the statements in the
form in which they were approved at the meeting on March 2, 1955.
Chairman Martin said that there was enough disagreement in emphasis
and in words to indicate that the Committee should pass over the matter for
today and, if it desired, take another look at the statements at a later
meeting with a view to deciding whether it desired any change at all in the
wording approved at the meeting last March.
if
He suggested, further, that
any of the members of the Committee or other Reserve Bank Presidents
wished to have a further discussion of the matter and wished to suggest
language for the statements, such suggestions be submitted to the Secre
tary in writing in order that the language could be made available for
study prior to the meeting at which the matter was to be discussed.
No disagreement with Chairman Martin's suggestion was indicated.
Chairman Martin then referrred to the suggestion that had been made
by Mr. Robertson at the meeting on June 22, 1955, that the Committee fix
a rate at which repurchase agreements covering Government securities could
be made by the Federal Reserve Banks,
concerning which suggestion the Sec
retary distributed a memorandum dated July 7, 1955, as a part of the agenda
for this meeting.
He noted that prior to abolishing the executive committee
on June 22, 1955, the full Committee had given to the executive committee
general authority for directing the Federal Reserve Banks to enter into
-10
7/12/55
repurchase agreements and for fixing the rate or rate range on such
agreements.
The matter was on the agenda for today's meeting in order
to determine the rate or rate range for such agreements and to consider
a proposed revision in the language of "Conditions for Repurchase Agree
ments."
The proposed revision, which had been presented in the Secre
tary's memorandum attached to the agenda, would eliminate reference to
the executive committee and would make it
clear that authority for direct
ing the Federal Reserve Banks to enter into repurchase agreements and
for fixing rates on such agreements was centered in the full Committee.
Mr. Robertson stated that he had raised two questions regarding
repurchase agreements at the meeting on June 22.
One of these related to
the fixing of the rate at which such agreements should be made, which
subject was referred to in the Secretary's memorandum of July 7.
The
other question that he had raised and which he felt should be decided
prior to the fixing of a rate had to do with the general procedure to be
followed regarding repurchase agreements.
His suggestion as originally
made at the meeting on March 2, 1955, and as repeated at the meeting on
June 22, 1955, was that the use of repurchase agreements be continued,
where considered advisable, not as a supplementary technique in the regu
lation of credit, but for the purpose of enabling dealers in Government
securities to maintain broad and ready markets.
Mr. Robertson felt that
such agreements could be utilized in a manner similar to rediscount
7/12/55
-11
operations--an open window for carrying dealers at rates preferably
above but in no event below the discount rate--in order to assist them
in sustaining a closer and more continuous market.
Under this arrange
ment, dealers should feel assurance that the facility was always avail
able to them within reasonable limits, as the discount window is open
to member banks.
Mr. Robertson then moved that the Com
mittee adopt a procedure for repurchase
agreements along the lines he had indicated,
under which an open window would be estab
lished at the Federal Reserve Banks for use
in financing dealers at rates preferably
above but not lower than the discount rate,
such procedure to supersede that now being
followed.
Chairman Martin said that he would vote against a proposal such
as that made by Mr. Robertson.
He felt
the proposal would require more
study than had been given to the question to date.
The Chairman then asked
for discussion of Mr. Robertson's proposal, but none of the members of
the Committee indicated that they wished to comment.
Mr. Robertson's motion was put by the
Chair and lost, Messrs. Martin, Sproul, Bal
derston, Fulton, Irons, Leach, Shepardson,
Vardaman, and Powell voting "no" and Mr.
Robertson voting "aye".
In connection with the foregoing action,
Mr. Robertson made a statement substantially
as follows:
I dissent from the action taken today because it is
likely to encourage unnecessarily frequent and extensive use
of repurchase agreements in order to affect the level of
-12-
7/12/55
short-term rates in the money market, and to do so by giv
ing dealers differentially advantageous access to Federal
Reserve credit at times when short rates in the money mar
ket are below the discount rate. In such circumstances, if
Federal Reserve credit is to be supplied at rates lower
than the discount rate, it seems to me preferable that the
supply be accomplished directly through purchases of bills
rather than by "loans" to dealers.
In recent months I have tried to clarify for myself
the justification for, and benefits from, use of repurchase
agreements generally. Up to the present, I have not re
ceived what have seemed to me to be satisfactory answers to
the inquiries I have made; consequently, I am inclined to
assume that the basic positions developed in my memoranda
of October 20 and December 9, 1954 are sound and no valid
answers can be made.
We are making frequent use of repurchase agreements
with dealers in Government securities.
Pending eventual
clarification of the basic questions referred to, I do not
object to a continuation of the use of repurchase arrange
ments where considered advisable to further the objective,
not of providing or absorbing reserves, but of enabling
dealers to maintain broad and ready markets by protecting
them at the discount rates or slightly above against the in
accessibility of credit except at penalty rates. That is, I
should raise no objection if this procedure were utilized and
policed in a manner similar to rediscount operations - an
open window for financing dealers at rates preferably above
but not lower than the discount rate.
Dealers should know
that the facility is always available to them (within a speci
fied range, e.g., a dollar or percentage figure), as the dis
count window is open to member banks, subject to such policing
as may be necessary to avoid its abuse by any dealer or a use
of it which unduly interferes with our credit policy.
Mr. Bryan stated that while he was not a member of the Committee
he would like to indicate that he concurred in the general approach taken
by Mr. Robertson.
Mr. Sproul said that he did not want to repeat all that he had
said about repurchase agreements at the last meeting of the Committee,
7/12/55
-13
which was included in
the minutes of that meeting.
He did say, however,
1. That he does not believe that repurchase agreements
should be used only as an aid to Government security dealers,
at their initiative, and he does believe that repurchase
agreements should be used as a supplementary means of making
open market policy effective, at our initiative.
2. The arrangement suggested by Governor Robertson
with respect to continuing dealer facilities, at their ini
tiative, would seem to have a maximum potential for offset
ting the intentions of open market policy. There would or
dinarily be little
inducement for dealers to use the facility.
They would use it only when money market conditions, presum
ably in line with System policy, became tight enough to bear
down on them as they would bear down on the rest of the
money market.
This would mean that a sheltered corner had
been created for Government security dealers, and that release
of credit to them on repurchase agreement would to that ex
tent, and perhaps to a greater extent, undermine general
credit policy.
3.
This is not to argue against making our open market
operations as impersonal as possible. That is the aim of the
administration of the present repurchase authority. But im
personal dealing is only one objective, and cannot be pursued
as an end in itself to the detriment of over-all policy. It
must also be remembered that the Government securities market
is a negotiated market, not a public auction market, and that
there is an element of the personal in all transactions which
take place within it.
Chairman Martin next turned to the question of the rate to be
established on repurchase agreements under the existing procedure, and
he called upon Mr. Sproul for a suggestion as to the rate to be authorized
by the full Committee.
Mr. Sproul stated that he would leave the existing range of rates
in effect, that is, he would authorize the Federal Reserve Banks to enter
into repurchase agreements with the understanding that in no event shall
7/12/55
-14
they be at a rate above the discount rate or below whichever is
the
lower of (1) the discount rate of the purchasing Federal Reserve Bank
on eligible commercial paper, or (2) the average issuing rate on the
most recent issue of three-month Treasury bills.
Mr. Sproul said that
the effect of Mr. Robertson's second proposal (that repurchase agreements
be entered into only at a penalty rate equal to or above the discount
rate) would be to limit the scope of effectiveness of this device as a
supplement to other open market operations and to credit policy in gen
eral.
The Committee would then only be able to use this device when re
purchase money could usefully be put into the market, on the Committee's
initiative,
at a rate equal to or above the discount rate.
been situations in
There have
the past and will be in the future when a repurchase
rate below the discount rate can make possible a desirable temporary
release of credit to meet an unusual and concentrated need for immediate
bank reserves.
Mr. Sproul felt
that a Federal Open Market Committee
meeting every three weeks should be able to keep this operation under
control.
would seem paradoxical if
It
the Committee denied itself this
privilege of making repurchase agreements at rates below the discount
rate while it
continued regularly to buy and sell Treasury bills out
right at such rates.
Mr.
Robertson said that his proposal was intended to retain in
the full Committee the power to fix or change rates on repurchase
7/12/55
-15
agreements.
In other words, he wished to have the Committee, rather
than the individual Federal Reserve Bank, decide whether during a
given period repurchase agreements should be made and whether they
should be at rates below the discount rate.
Chairman Martin noted that the proposal before the Committee was
to fix for the next three weeks (pending the next meeting of the Commit
tee) a rate or range of rates on repurchase agreements.
Mr. Sproul repeated his suggestion that the existing range of
rates be continued by the Committee as a range of rates at which repur
chase agreements could be entered into by the Federal Reserve Banks be
tween now and the date of the next meeting of the Committee.
In response to a question from Chairman Martin, Mr. Vest stated
that the existing authority for repurchase agreements, including the rates
on such agreements, was currently outstanding as an authority of the full
Committee,
the setting of rates having been taken over as full Committee
authority at the meeting on June 22, 1955, when the executive committee
was abolished and the authority previously granted to the Federal Reserve
Banks by the executive committee became an authority of the full Committee.
Chairman Martin suggested that it
be understood today that the
authority previously granted to the Federal Reserve Banks by the execu
tive committee,
pursuant to the authorization of the full Committee as
renewed on March 2, 1955, had been revoked.
In its
place, the full
-16
7/12/55
Committee would now authorize the Federal Reserve Banks to enter into
repurchase agreements in accordance with the general conditions pre
viously specified by the full Committee, it being understood that here
after the full Committee would specify at each meeting the rate or range
of rates for such agreements and when and to what extent Reserve Banks
should enter into them.
The Chairman then read the proposed revision
in language of the "Conditions for Repurchase Agreements" approved at
the meeting on March 2, 1955, which revision would eliminate reference
to the executive committee.
Mr. Sproul said that his thought was that the full Committee should
consider at each meeting what authority should be granted to the Federal
Reserve Banks to enter into repurchase agreements and at what rates.
Mr. Robertson said that this would meet his suggestion that the
Committee, rather than the individual Federal Reserve Banks, determine
the rate or rate ranges for repurchase agreements.
He also inquired
whether there was any expectation at the present time that there would
be a need for entering into repurchase agreements at rates below the
discount rate during the next three weeks.
Mr. Sproul responded that he did not think the Committee could
forecast for even three weeks in advance whether a situation might arise
where the Committee would wish to put funds into the market, at its
initiative, at rates below the discount rate.
-17
7/12/55
Mr. Robertson said that he would not object to authorizing
repurchase agreements at the range of rates previously specified for
such agreements, if it was understood that a rate below the discount
rate would be used only if
such procedure seemed essential as a means
of carrying out Committee policy.
Mr. Sproul stated that this was the way in which the range had
been used in the past.
At this time,
he did not know whether a need
would arise within the next three weeks for repurchase agreements at a
rate below the discount rate.
Chairman Martin said that his sentiment was in accordance with
Mr.
Robertson's suggestion that repurchase agreements be at a rate below
the discount rate only in case that seemed essential for the purpose of
carrying out Committee policy.
This was the way in which he understood
the authority had been used in the past, and he felt
to operate that way in the future.
it
should continue
However, his view was that a situa
tion might well arise within the next three weeks in which the Committee
would wish to put funds into the market through repurchase agreements at
a rate below the discount rate.
Mr. Robertson replied that he would not object to authorizing the
range of rates proposed if it was understood to be the sense of the meeting
that a rate below the discount rate would be applied only in case of need,
and if
it
sparingly.
was also understood that the repurchase authority would be used
-18
7/12/55
Mr. Bryan inquired what kind of a situation might be envisaged
which would call for repurchase agreements at less than the discount
rate.
Mr. Rouse responded that the tightness during the last several
days had been centered in New York City, and that there may be continued
pressure on the central money market.
Under these circumstances, it is
possible that a degree of tightness more severe and more pervasive than
the Committee contemplated might develop.
Mr. Bryan stated that he interpreted this as meaning that a
situation might develop where a sudden tightening in the market was indi
cated which might bring about a rapid upward movement in the bill rate
toward the discount rate, which would have a tightening effect on the
entire money market.
Mr.
Rouse said that there might, in addition, be psychological
pressures affecting money and capital markets.
This raised the whole question in Mr. Bryan's mind of the substance
of the procedure--it went beyond the questions raised by Mr. Robertson
and to the problem of the management of the short-term rate in relation to
the discount rate.
Mr. Leach stated that the question of repurchase agreements was
tied to the question of whether it was desirable for the Open Market Com
mittee to be in
the market frequently, making direct purchases and sales
7/12/55
-19
of Government securities for the purpose of attaining credit policy
objectives.
Mr. Leach thought that repurchase agreements had a very
useful purpose in keeping the Federal Reserve from having to make fre
quent outright purchases and sales of securities.
Such frequent pur
chases and sales were undesirable, he said, because they had an effect
upon the securities market itself and because they might confuse the
public as to what the Committee was trying to attain.
Mr. Leach felt
that the Committee's basic policy should be agreed upon, and that ac
tions should of course be taken to carry that policy out.
He recalled
that it had been suggested earlier during this meeting that the Committee
might attempt to operate more precisely toward an objective of some
amount of free reserves.
In the absence of repurchase agreements, the
only way to operate more precisely, Mr. Leach said, would be to make
more frequent purchases and sales in the open market.
For the reasons
which he had indicated, this was not desirable, and it was his view
that there was much to be said for authorizing repurchase agreements
in a manner which would permit the Committee to carry out its policy ob
jectives more effectively.
There was a further discussion of the use of repurchase agree
ments and of the rate at which such agreements might be authorized during
which the suggestion was made that clause 1(d) of the statement of con
ditions that had been approved on March 2, 1955 should be changed by
-20
7/12/55
deleting the words "with care and discrimination" from the provision
which formerly had provided that such agreements "Shall be used with
care and discrimination as a means of providing the money market with
sufficient Federal Reserve funds to avoid undue strain on a day-to-day
basis."
During this discussion, Chairman Martin stated that he agreed
with much of the comment made regarding repurchase agreements, adding
that he felt the Committee could well give further study to the use of
the repurchase instrument.
For the present, it was Chairman Martin's
suggestion that the full Committee issue an authorization, in terms of
the "Conditions for Repurchase Agreements" revised to eliminate reference
to the executive committee and to delete from 1(d) the words "with care
and discrimination."
If
this suggestion were approved,
it
would be with
the understanding that (a) the authority would apply to the period be
tween today and the next meeting of the Committee; (b) such agreements
would in no event be at a rate below whichever is the lower of (1) the
discount rate of the purchasing Federal Reserve Bank on eligible commer
cial paper, or (2) the average issuing rate on the most recent issue of
three-month Treasury bills; and (c)
the authority would be used sparingly
in entering into agreements at rates below the discount rate.
Chairman Martin's suggestion
was approved unanimously.
Secretary's Note: The "Conditions
for Repurchase Agreements," as re
vised by the foregoing action, were
as follows:
-21In lieu of all authority previously granted by the Fed
eral Open Market Committee with respect to repurchase agree
ments, each Federal Reserve Bank is hereby authorized to
enter into repurchase agreements with nonbank dealers in
United States Government securities at such times, in such
amounts, and at such rates (or rate ranges) as the Committee
shall prescribe, subject to the following conditions:
1.
Such agreements
(a) In no event shall be at a rate below which
ever is the lower of (1) the discount rate
of the purchasing Federal Reserve Bank on
eligible commercial paper, or (2) the average
issuing rate on the most recent issue of
three-month Treasury bills;
(b) Shall be for periods of not to exceed 15
calendar days;
(c)
Shall cover only Government securities ma
turing within 15 months; and
(d) Shall be used as a means of providing the
money market with sufficient Federal Reserve
funds to avoid undue strain on a day-to-day
basis.
2.
Reports of such transactions shall be made to the Man
ager of the System Open Market Account to be included
in the weekly report of open market operations which is
sent to the members of the Federal Open Market Committee.
3.
In the event Government securities covered by any such
agreement are not repurchased by the dealer pursuant
to the agreement or a renewal thereof, the securities
thus acquired by a Federal Reserve Bank shall be sold
in the market or transferred to the System Open Market
Account.
Mr. Robertson stated that the action just taken authorized all
Federal Reserve Banks to enter into repurchase agreements but that, as
-22
7/12/55
he understood it, the authority actually had been used recently only
by the Federal Reserve Bank of New York.
He suggested that a statement
of the reasons why the authority should be extended to all Federal Reserve
Banks, rather than to the New York Bank only, be prepared and that the
Secretary distribute the statement to all members of the Committee for
discussion at a later meeting.
This suggestion was ap
proved unanimously.
Before this meeting there had been sent to the members of the
Committee a memorandum from Mr. Riefler dated July 7, 1955 suggesting
that in the future the daily telephone call between the New York Bank,
the Board's offices,
market situation as it
and one other Federal Reserve Bank relating to the
appeared at the opening include, on a rotating
basis, the four Federal Reserve Banks other than the New York Bank which
were currently represented on the Open Market Committee.
This procedure
would replace that followed since the call was originated in May 1954
when only one Reserve Bank, other than New York, was included because
only one other Reserve Bank was represented on the executive committee.
The memorandum also suggested that the summary prepared in the Board's
offices on the basis of the 11:00 a.m. telephone call be sent by telegram
to the Presidents of all Federal Reserve Banks,
After discussion, there was unani
mous agreement that the procedure recom
mended in Mr. Riefler's memorandum be
7/12/55
-23
adopted, effective immediately, with
the understanding that the detailed ar
rangementswould be worked out by the
Secretary.
At this point Mr. Shepardson withdrew from the meeting to keep
another appointment.
Chairman Martin called upon Mr. Young, who made a statement re
garding the economic and credit situation with respect to which a staff
memorandum had been distributed to the members of the Committee under
date of July 8, 1955.
The outstanding feature of the over-all economic situa
tion, Mr. Young said, is underlying strength and further ad
vance, domestically and abroad.
While stability of average
prices can be said to continue, markets for industrial ma
terials and products and construction components are under
pressure from high levels of demand and income. Markets for
agricultural products on the other hand are under pressure
from very large supplies. Business and financial expectations
as to sales and profits are decidedly optimistic and confi
dence in future prospects is pervasive.
The Board's index of industrial production was probably
about the same in June as in May--138.
Manufacturers' orders
are generally running ahead of sales. Unfilled orders are
rising further, although they are still considerably under
1953 highs. Business inventories rose sharply in May at both
manufacturer and distributor levels, after a period of relative
stability since last fall. Despite this rise, inventories of
business are substantially below the levels of early fall of
1953 and, with sales at or above 1953 peaks, ratios of inven
tories to sales appear conservative.
Automobile sales (both new and used) continue impressively
high. Consumer instalment debt has been rising at the rate of
about a half billion dollars a month recently. Credit terms for
new automobiles have been extended to a point where 30 months
appears to be the most common maturity in most areas and 36
months is not an uncommon maturity--it is very common in the
-24
7/12/55
Boston, New York, Philadelphia, and San Francisco Districts.
Over-allowances on trade-ins with phantom delivered prices
have been resulting in low actual down-payments on new auto
mobiles. Credit terms on used automobiles do not seem to
have been liberalized as much as on new cars.
Construction activity appears to be stabilizing at
peak levels, mainly reflecting a leveling out of residen
tial building while business and other private construction
continue to rise gradually. Nonfarm employment, seasonally
adjusted, rose somewhat further in June and unemployment
declined. Crop and pasture developments have been generally
good: prospects are for crop output in 1955 about 3 per
cent above last year's large total, and for large output
of livestock products. United States exports have leveled
off this spring following an upswing late last year and
early in 1955, while imports have continued to advance.
Industrial production in most industrial countries abroad is
still on the rise, and world prices of many basic materials
have recently advanced somewhat.
Credit demand at city banks continues active, with loans
expanding substantially further during June offset largely
Growth in the privately
by sales of Government securities.
held money supply since January has been at an average annual
rate of about 2 per cent whereas the annual rate of growth in
the preceding 5 months was about 6 per cent. Deposit turnover
at banks outside leading financial centers has risen further
and is at a new postwar high. Reflecting the strong credit
demands and Federal Reserve policies, both short- and long
term interest rates have moved upward moderately in recent
weeks.
Mr. Koch commented briefly on the outlook for bank reserves, re
ferring particularly to a sheet showing a pattern of recent and projected
reserve changes prepared in the Board's offices under date of July 11,
1955,
and to similar figures contained in the supplemental report of open
market operations prepared at the Federal Reserve Bank of New York and
distributed at today's meeting.
Mr. Koch noted that the projections pre
pared at the New York Bank and the Board indicated about the same amounts
-25
7/12/55
of free reserves for weeks ending July 20 up through Labor Day.
Dur
ing the week ending July 20, a moderate amount of free reserves was
anticipated, while during the week ending July 27 negative free re
serves averaging around $100 million were projected and during the week
ending August 3 average negative free reserves might run closer to
$200 million.
Thus, if
the Committee wished to have free reserves of
around zero level during the week of August 3, it might be necessary
to put some funds into the market through repurchase agreements or other
wise.
The Committee might, however, feel that this would be an appro
priate time to permit the development of average negative free reserves
in moderate amounts, assuming Treasury refinancing operations permitted.
Following a rise in free reserves during the weeks ending August 17 and
24, owing largely to the usual mid-month influences, there would be a
substantial decline around Labor Day when holiday demands for currency
and other factors would draw down reserves.
Chairman Martin stated that the Committee appeared to have been
reasonably successful in its operations during the past three weeks and
that the projections of factors affecting free reserves presented at the
meeting on June 22 had been borne out reasonably well.
In his opinion,
the economic situation required little comment other than to say that it
was such as to call for thought on the part of the Federal Reserve regard
ing the possibility of increasing the discount rate when the Treasury's
financing operations would permit--perhaps during early August.
7/12/55
-26Mr.
Sproul noted that the Treasury might soon announce an
offering of securities to take care of its August 15 refinancing which
would call for payment around August 1.
In that event,
it
might not
be desirable to experiment with a lower level of free reserves between
now and August 1.
He then made a statement substantially as follows:
1. The strength and breadth of the present upward
movement in the economy, as reported to us today, suggests
that whatever check to rate of growth may take place dur
ing the present quarter will be less than might previously
have been anticipated. The economy appears set to continue
to expand at high levels of employment and production for
the next few months.
2. Bank credit thus far has followed the course of
business. There was a contra-seasonal advance in bank lend
ing during the first half of the year, while bank invest
ments in Government securities declined. Private demands
for bank credit during the remainder of the year are ex
pected to be substantial, and to these will be added a siz
able Treasury demand.
The money supply, which declined 3.1
per cent (from $134.5 billion to $130.3 billion) during the
January-May period of seasonal decline, is estimated to in
crease over the year as a whole by perhaps 5%. To prevent
viewing this latter figure too seriously, however, it should
be related to an estimated increase in the country's Gross
National Product of more than 6% during the year.
3. The total amount of bank reserves needed to meet
prospective private and public demands for bank credit during
the second half of the year, without relaxing present credit
restraint, is estimated to be between 1 3/4 and 2 billion.
Our previous discussions have indicated that we would provide
these reserves, and that we would do it through open market
operations, supplemented by increased borrowing of member
banks to meet seasonal needs. The problem, of course, is to
supply the right amount of reserves to foster stable growth
without encouraging speculative excesses which would endan
ger such growth.
4. We are obviously nearer than we have been since
early 1953 to full utilization of plant, equipment, and man
power; prices which have been stable, in the aggregate, for
7/12/55
-27-
two years may be about to get a push on the up-side due to
pressure from costs and from anticipation of price rises
by businessmen, purchasing agents, and consumers; and there
is a prevailing feeling of optimism in the community about
economic developments during the next six months which in
some of its manifestations, as in the stock market, cannot
help but cause concern.
5. On the other hand, we don't want to get scared by
prosperity; our present record level of economic activity
doesn't exceed the bounds of normal growth as compared with
two or three years ago. We don't want to underestimate the
power of the productive competitive forces in our economy
to counteract some of the tendencies which may now be caus
ing us concern. And we don't want to overlook the possi
bility that a diminishing rate of growth during the third
quarter may cool off some over-speculative tendencies.
6. On balance, it now looks to me to be a question of
the timing and degree of pressure we may want to exert in
order to deter possible speculative excesses which would
jeopardize sustained growth, or would promote its continu
ance only temporarily, and then at the cost of a depreciating
dollar.
7. I see nothing in the immediate situation which de
mands that we embarrass the Treasury in its management of
the public debt by further restrictive credit moves during
its July-August financings. We are not at a point where the
dangers of inflationary developments clearly outweigh all
other considerations.
The danger signals of inventory accumu
lation outrunning sales expansion, upward price movements,
production, material and employment bottlenecks, and exces
sive increases in bank credit and the money supply have not
yet flashed red. Meanwhile, we shall not be standing still
if we do nothing more during the next few weeks than maintain
the pressure we have already applied. What we have already
done will have a continuing and probably increasing effect.
The general banking situation is now tight including the
money centers. Bank liquidity is low as a result of a really
massive liquidation of Government securities by the banks
during the past six months; the banks are having to continue
to sell securities (or to borrow) to make loans, and now they
usually take a loss on the sales. Treasury bill rates are
rising and presumably will continue to rise as the weekly in
crease in offerings and the new Tax Anticipation Certificates
-28
7/12/55
add to the supply of short-term securities. There is begin
ning to be some tightness in the long-term market which
ought to be increased somewhat by the Treasury's offering
of 3% bonds. A substantial volume of flotations of state
and municipal securities is in prospect and the market re
cently has been backing up.
8.
I would say that we should maintain open market
policy as is for the rest of July and until our next meeting
in August, which would mean free reserves ranging around
zero, a continued higher average level of member bank borrow
ing, and some further rise in Treasury bill rates. Some fur
ther purchases of Treasury bills, during this three week
period, will probably be necessary under such a policy di
rective.
I would hope that the Treasury would proceed with plans
to get its August refunding out of the way by the end of
July so that we would then have a clear field until late
September in which to decide what to do next. As I see it
now, if the business and credit situation during the first
half of August suggests further action, our next move might
It could serve
well be an increase in the discount rate.
as a cautionary signal while still permitting ready access
to the reserves needed to support necessary private and pub
lic demands for bank credit.
Chairman Martin called for comments on the general economic situ
ation and on any changes in credit policy that seemed to be merited.
Mr. Leach stated that he agreed in general with the views ex
pressed by Mr. Sproul on the economic situation and on credit policy.
He had a question as to the target for free reserves during the period
ahead,
however, stating that if
borrowings of member banks were to rise
to, say, the $800 million level compared with the average of around $400
million that had existed during June,
a change in the target would seem
necessary since the significance of free reserves ranging around zero
would be different if
member bank borrowings increased substantially.
-29
7/12/55
In other words, reserves supplied through borrowings by member banks
did not have the same easing effects that might result from reserves
supplied through open market operations because banks do not like to be
in debt.
It would not seem necessary to move the target for free re
serves by as much as the change in member bank borrowings, but Mr. Leach
was of the opinion that some change in the target would be in order
if
there was a large increase in borrowings.
Chairman Martin said that he would agree with the view expressed
by Mr. Leach, but he noted that the Treasury was still
in the "middle
of the stream" and that the Committee should be very careful about alter
ing its
course during the period of the Treasury's operations.
Mr.
Leach responded by stating that he felt
a change in the tar
get for free reserves might be necessary as member bank borrowings in
creased in order to keep from changing the degree of pressure on banks,
since, with a larger volume of member bank borrowings, zero free reserves
meant something different than it
did a few weeks ago.
Mr. Robertson agreed that the level of free reserves took on a
different meaning as borrowings changed.
He went on to say that, while
it appeared to be the consensus that the Committee should not change the
degree of restraint during the period when the Treasury was in the midst
of its
financing, he felt
that we were rapidly reaching the point where
a change in the degree of restraint would be desirable.
For example,
he
-30
7/12/55
felt that an increase in the discount rate should be considered at the
earliest possible time.
Mr. Balderston inquired as to the amount of change that might
be made in the discount rate if one were made soon after the first of
August.
said.
Such a change might be 1/4, 1/2, or 3/4 of one per cent, he
While the Federal Reserve should try to hold a steady situation
in the market so long as it was under obligation to the Treasury, he
personally would favor an increase of at least 1/2 per cent in the dis
count rate as early in August as the Treasury's position would permit.
It was Mr. Balderston's view that the Committee should get in a posi
tion to deal more effectively with the situation when a down-turn in
activity developed.
Mr. Sproul said that the amount of any change in the discount
rate should be based on the situation as it existed when the action was
taken, and not on how the situation appeared as of now. As of today,
he felt this was not the time when the Federal Reserve should take
dramatic action, such as increasing the discount rate by 1/2 or 3/4 per
cent after a long period of 1/4 per cent changes, which would indicate
that it thought signs of inflation were more serious than we actually
think they are.
As for "laying in nuts for the winter" by getting the
discount rate up substantially now so that there would be room to lower
it later, he expressed the opinion that the System would have ample means
7/12/55
-31
through open market operations and discount operations to deal with a
changed situation that might develop.
Mr. Bryan said that he thought the economic situation in pro
spect was such that it
might need further restraint.
he would like to approach this position in stages.
At the same time,
He could see no
point in a further increase in the discount rate--certainly not in an
increase by a dramatic amount--until the Committee had taken full advan
tage of the possibility of permitting or forcing a movement in the
short-term rate up toward the discount rate, and at that point, of per
mitting or forcing a further increase in member bank borrowing.
He also
would dislike to see any massive additions to reserves until a further
rise had taken place in the short-term rate.
Chairman Martin said that he would like to return to Mr. Leach's
point regarding the relationship between borrowings of member banks and
the level of free reserves, and whether the amount of pressure on banks
should be changed.
It
was the Chairman's understanding that none of the
views expressed at this meeting indicated a desire to ease the situation
at the present time.
Rather, the objective appeared to be to continue
the present policy of "mild restraint."
Whatever action or emphasis was
necessary to "keep the situation on an even keel" should be the goal of
the Committee for the next three weeks.
It
was very difficult to measure
degrees of tightness, Chairman Martin said, but the Committee should not
be carried away with any particular level of free reserves as a goal.
-32
7/12/55
He felt it important to know whether there was any disagreement with
this approach.
None of those present indicated disagreement with the approach
Chairman Martin had indicated, that is,
until its
that the aim of the Committee
next meeting should be a continuation of the present policy
of "mild restraint" and of "keeping an even keel."
Chairman Martin also asked if
there were further comments regard
ing his suggestion that consideration be given to an increase in the dis
count rate when the Treasury's refinancing was out of the way, perhaps
early in August.
Mr.
Robertson said that he would assume that, along with any
increase in the discount rate that might later be decided on, correspond
ing tightening actions would be taken by the System "across the board."
Mr. Fulton said that in his opinion there was more inflation in
the wind than the figures indicated.
He cited instances of persons get
ting into the stock market as hedges against inflation and of their buy
ing stocks having unattractive yields, not for investment but for specu
lation.
Mr. Fulton said that he would look with favor on a good-sized
increase in the discount rate, at least as a psychological influence.
Mr. Irons said that he would not favor a dramatic action but would
favor an increase in the degree of restraint on the market as soon as
the Treasury situation permitted.
In his opinion, the situation did not
7/12/55
-33
call for an increase of 1/2 or 3/4 per cent in the discount rate, which
would be a startling change.
A gradual increase in the discount rate
as short-term rates moved up, along the lines Mr. Bryan had indicated,
would serve to increase restraint.
Chairman Martin said that he would not wish to take a position on
these points at the present time.
way.
He thought the System should feel its
However, it was his view that insofar as the Committee may have
erred in attaining its objectives in recent months, the error had been
on the easy side rather than on the too-tight side.
He commented further
that, when explosive factors occur in the credit situation, they move
just as fast as they do in the stock market.
It was the Chairman's
thought that there might be more "explosive tinder" lying around at this
juncture than any of us realize.
We would all know when it
had exploded,
but the problem the Committee was struggling with was to project the past
into the future.
Mr. Powell inquired as to the effect of the slowing down in auto
mobile production that was predicted for the next few weeks.
Would such
slowing down affect business volumes sufficently to slow down the infla
tionary tendencies that have been discussed at this meeting?
Chairman Martin stated that he had heard well-informed persons
argue both sides of the question,
some feeling that changes in automobile
output would have a slowing effect while others took the view that
7/12/55
-34
momentum in other parts of the economy would increase.
For himself,
he had no firm view.
Mr. Fulton said that he had heard the view expressed in
steel
circles that the anticipated slowing down in automobile output during
the next few weeks would help the steel situation because of the loss in
steel output that had taken place during the recent short-lived strike.
Chairman Martin inquired whether there were other views or fac
tors bearing on the policy of the Committee for the next three weeks
that should be considered at this time, and none of the members of the
Committee indicated additional factors should be considered in determining
policy for the immediate future.
Chairman Martin then called upon Mr. Rouse for suggestions as
to the directive to be issued to the New York Bank, and Mr. Rouse pro
posed that the limitation in the first paragraph of the directive be
reduced from $1 billion to $750 million.
Thereupon, upon motion duly made and
seconded, the Committee voted unanimously
to direct the Federal Reserve Bank of New
York until otherwise directed by the
Committee:
To make such purchases, sales, or exchanges (in
(1)
cluding 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 securities, 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
7/12/55
-35
fostering growth and stability in the economy by maintain
ing conditions in the money market that would avoid the
development of unsustainable expansion, and (c) to the
practical administration of the account; provided that
the aggregate amount of securities held in the System ac
count (including commitments for the purchase or sale of
securities for the account) at the close of this date,
other than special short-term certificates of indebted
ness purchased from time to time for the temporary accom
modation of the Treasury, shall not be increased or de
creased by more than $750 million;
(2)
To purchase direct from the Treasury for the ac
count of the Federal Reserve Bank of New York (with dis
cretion, in cases where it seems desirable, to issue partic
ipations 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 accommoda
tion of the Treasury; provided that the total amount of
such certificates held at any one time by the Federal Re
serve Banks shall not exceed in the aggregate $500 million;
(3) To sell direct to the Treasury from the System ac
count for gold certificates such amounts of Treasury securi
ties maturing within one year as may be necessary from time
to time for the accommodation of the Treasury; provided that
the total amount of such securities so sold shall not exceed
in the aggregate $500 million face amount, and such sales
shall be made as nearly as may be practicable at the prices
currently quoted in the open market.
Mr. Sproul stated that the Federal Reserve Banks have been ex
amining their programs for operations in the event of an emergency.
suggested that it
He
might be desirable for the Federal Open Market Commit
tee also to review its program for emergency operations, which is now
largely based on the supposition that if
the Federal Reserve Bank of New
York were unable to operate another Federal Reserve Bank would be desig
nated to carry on operations for the System Open Market Account.
Mr.
Sproul went on to suggest that it would be appropriate and desirable for
-36
7/12/55
the Chairman to be authorized to appoint a subcommittee to study the
problem and to suggest any revisions that should be made in the present
plan.
Thereupon, by motion by Mr. Sproul
Chairman Martin was authorized to appoint
a subcommittee to reappraise the emergency
plans for open market operations.
It was agreed that the next meeting of the Federal Open Market
Committee would be held at 10:45 a.m. on August 2, 1955.
Thereupon the meeting adjourned.
Secretary
@FedFRASER