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FORTY-THIRD ANNUAL REPORT o/the BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM COVERING OPERATIONS FOR THE YEAR 1956 16 FEDERAL RESERVE SYSTEM ANNUAL REPORT OF BOARD OF GOVERNORS DIGEST OF PRINCIPAL FEDEJlAL RESERVE POLICY ACTIONS, 1956 17 RECORD OF POLICY ACTIONS FEDERAL OPEN MARKET COMMITTEE Period Action Purpose of action January Reduced System holdings of U. S. Government securities by over $1.4 billion through sales in the market, redemption of maturing bills, and termination of repurchase agreements. Member bank borrowings! increased to weekly averages of $900 million in late January. To offset seasonal return flow of currency and reduction in reserve needs and restore degree of restraint prevailing before December action to moderate restraint temporarily. February and March Bought small amounts of Government securities at times. Member bank borrowings declined somewhat in February but increased substantially in March as result of sharp increase in required reserves. To meet changing reserve needs and avoid an increasing degree of credit restraint in view of growing tone of uncertainty as to economic prospects. April and May Discount rates raised from 2Y2 per cent to 2% per cent at 10 Reserve Banks and to 3 per cent at 2 Banks around middle of April; System holdings of U. S. Government securities reduced by $350 million. Member bank borrowings at Reserve Banks rose to over $1 billion. To increase restraint on credit expansion, in view of sharp increase in bank credit in March and indications of broad increase in spending, growing demands.for credit, and upward pressures on prices and costs. Late Mayearly August Increased System holdings of U. S. Government securities around end of May and end of June and maintained holdings at higher level than in previous period. To meet currency needs around holidays, to cover added demands for reserves around tax payment and midyear settlement periods, and to avoid increasing the degree of restraint in view of uncertainties in economic situation. AugustNovember Discount rates raised late in August to 3 per cent at the 10 Reserve Banks with rates of 2~ per cent. System holdings of U. S. Government securities increased by nearly $1 billion; member bank borrowings at Reserve Banks rose to average of $900 million in August and averaged between $700 and $800 million in other months. Discount rates increased in conformity with rise in market rates resulting from vigorous credit demands. Policies designed to increase and maintain restraint on undue credit expansion while covering seasonal and other temporary variations in reserve needs, including effects of frequent Treasury financing operations. December System holdings of U. S. Government securities and bankers' acceptances increased by over $550 million, including substantial repurchase agreements with dealers. Member bank borrowings declined to weekly averages of around $600 million, except in last week of year, and at times were less than excess reserves. To iupply reserve funds in recognition of additional pressures in money, credit, and capital markets resulting from seasonal factors and international conditions, at a time when lower liquidity ratios of banks were themselves exerting restraint on bank lending. At the beginning of the year 1956, the policy directive of the Federal Open Market Committee, issued to the Federal Reserve Bank of New York as Agent selected by the Committee to execute transactions for the System open market account, was the one that had been approved at the meeting on December 13, 1955, reading as follows: To make such purchases,sales, or exchanges (including 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 restraining inflationary developments in the interest of sustainable economic growth, and (c) to the practical administration of the account; provided that the aggregate amount of securities held in the System account (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 indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations 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 accommodation of the Treasury; provided that the total amount of such certificates held at anyone time by the Federal Reserve Banks shall not exceed in the aggregate $500 million; To sell direct to the Treasury from the System account for gold certificates such amounts of Treasury securities maturing within one year as may he 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. The policy actions listed on the following pages were taken by the votes indicated at the nineteen meetings of the Federal Open Market Committee held during 1956. 31 ANNUAL REPORT OF BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM The Committee found less exuberance in the economic situation at the time of this meeting than had been observed at either of the two preceding meetings. Although a sidewise movement on a high plateau still seemed to be continuing, divergent tendencies had been noteworthy during the past few weeks. In particular, sales of new automobiles had been weak at the consumer level and dealer inventories of new cars had risen to around 900,000 units with the result that output was being cut back sharply. Use of consumer instalment credit had slowed down further. The Com mittee recognized the possibility that future developments could be affected by weaknesses in some parts of the economy and by a pessimistic business and investor psychology. Another factor was the less ready reception accorded new capital issues as large offer ings came to the market seeking funds to carry out the large busi ness spending programs. Stock prices had declined sharply. Bank inflationary developments while taking into account any deflationary tendencies in the economy. Votes for this action: Messrs. Martin, Chairman, Balderston, Erickson, Johns, Mills, Shepardson, Szymczak, Vardaman, Ful ton, Leedy, and Treiber. Votes against this action: none. weeks than had been anticipated by the Committee, and member bank borrowing at the Federal Reserve Banks had risen to the high est level since early 1953 and held there for several weeks. Bankers and businessmen were expressing fears, at least privately, as to whether credit for needed purposes would be available even at higher interest rates during the months ahead. The Committee still believed that the basic economic factors were expansionary. Under the circumstances, however, it determined to restore to its directive the qualifying clause that would require the Management of the System Open Market Account, in carry ing out transactions in pursuit of a generally restrictive credit policy, to take into account any deflationary tendencies that might be ap pearing in the economy. To implement this policy, the Commit tee agreed that during the immediate future additional reserves Economic data presented at this meeting confirmed that a side wise movement in activity was continuing. May automobile sales had proved generally disappointing but sharp cutbacks in produc tion had started to reduce the heavy dealer stocks of new cars. Some reduction in output of household appliances had been re ported and production of textiles, particularly synthetics, had been reduced. Common stock prices had declined further during this period. In contrast to these indications of weakening in parts of the economy, little change in total employment and over-all output was evident and credit demand continued vigorous. A particularly significant development was indicated by the latest figures of busi ness plans for plant expansion which showed a still further rise in such programs. It appeared that the continuation of the boom in business investments would largely offset the readjustment cur rently taking place in the automobile industry. On the financial side, a somewhat better tone had appeared in markets for new capital issues and additional offerings had been reported. Interest rates had steadied after the decline in long-term rates earlier in May. Bank reserve positions had been eased as a result of the Sys tem's action in putting nearly $300 million of reserves into the market during the preceding two weeks, in addition to making repurchase agreements available. Estimates indicated that addi tional reserves would have to be supplied in order to take care of seasonal and other temporary needs for credit and currency during should be supplied to take care of seasonal and growth needs; it the June tax payment and midyear settlement period and over reserves had been under greater pressure during the past three did not wish to permit a further tightening to develop as pres sures for increased credit bore against the existing supply of reserves. June 5, 1956 Authority to effect transactions in System account. The Committee made no change in the directive to the Federal Reserve Bank of New York that had been approved at the preced ing meeting held on May 23, 1956, stating a policy of restraining the July 4 holiday. In view of the atmosphere of uncertainty that still existed in some quarters, it appeared desirable for the Committee to continue a program that would dispel any doubts as to its readiness to meet seasonal and other temporary reserve needs. It was recognized that the past momentum that had been evident in the economy did not necessarily indicate prospective economic conditions. The Committee did not wish policy to become more restrictive at this 32 ANNUAL REPORT OF BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM stage of the sidewise movement in the economy, although it was satisfied that no material change from the general policy of restrain ing inflationary developments was called for. The decision to renew its directive without change thus contemplated a continua tion of operations that would limit credit expansion but which would supply additional reserves during the next few weeks as a means of avoiding an increase in pressure. from data on production, trade, employment, and prices, was one of a basically strong and expanding economy. It believed, however, that in carrying forward its policy, it should for the pres ent continue to take into account any deflationary tendencies and maintain as nearly as possible stability in the money market. It June 26, 1956 Authority to effect transactions in System account. The Committee again renewed its directive to the Federal Reserve Bank of New York without change from the instruction approved at the meeting on May 23, 1956. Votes for this action: Messrs. Martin, Chairman, Balderston, Erickson, Johns, Mills, Powell, Shepardson, Szymczak, Varda man, Fulton, and Treiber. Votes against this action: none. The economic situation looked considerably stronger at the time of this meeting than at either of the two preceding meetings of the Federal Open Market Committee. While evidence of summer doldrums was beginning to appear and the imminent steel strike was creating uncertainties, total industrial production was holding steady within the narrow range maintained for some months. Retail sales of new automobiles had picked up noticeably during June, common stock prices had rebounded a little, business senti ment had a much more confident tone than during the second half of May, and demand for credit was showing exceptional strength. Average wholesale prices had shown little further advance in recent weeks although industrial commodities continued to rise. In the financial picture, Treasury operations had exerted less of a drain on reserves of commercial banks than had been ex pected. Reserve System operations had added to bank reserves, which on the whole had been more freely available during the past month than earlier in the spring, although the money market had not eased significantly. The Committee's decision to continue without change the exist ing directive calling for restraint on inflationary developments was taken on the basis that the composite picture at midyear, as judged 33 noted that immediate seasonal demands would require several hundreds of millions of reserves over the July 4 holiday period, and it also gave consideration to the prospective needs of the econ omy for perhaps $15 billion of additional reserves during the second half of 1956 in order to meet seasonal and growth needs, in cluding needs connected with Treasury financing operations to be announced shortly. The Committee agreed that, within the frame work of the restrictive policy it had been following, doubts should be resolved on the side of ease during the next few weeks, rather than on the side of actions that might be construed as additional restraint, even though there was the possibility that the System would find it desirable to move toward substantially greater restraint in the fall. July 17, 1956 Authority to effect transactions in System account. The Committee continued without change the directive to the Federal Reserve Bank of New York that had been approved on May 23, 1956 and at each meeting since. The policy stated in that directive was one of restraining inflationary developments while taking into account any deflationary tendencies in the economy. Votes for this action: Messrs. Martin, Chairman, Balderston, Johns, Mills, Powell, Shepardson, Treiber, Vardaman, Fulton, and Williams. Votes against this action: none. Economic data presented at this meeting showed continued broad strength in the economy with a further upward tilt to activity. Wholesale prices had been fairly steady for several weeks, but con sumer prices had been rising. Credit demand continued active and business and financial sentiment optimistic. The impact of the steel strike had been limited mainly to that industry and closely related activities; it did not appear to have had a marked effect gen erally in the economy, partly because of the large inventories of steel that had been built up prior to the beginning of the strike. Gross
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