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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 Federal Reserve System in Washington on Monday, March 1, 1948, at 11:40 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Sproul, Vice Chairman Evans (alternate member) Szymczak Williams Messrs. Clayton and Gilbert, Members of the Federal Open Market Committee Mr. Mr. Mr. Mr. Morrill, Secretary Carpenter, Assistant Secretary Vest, General Counsel Thomas, Economist Mr. Rouse, Manager of the System Open Market Account Mr. Thurston, Assistant to the Board of Governors Mr. Sherman, Assistant Secretary, Board of Governors Mr. Smith, Economist, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. McCabe, Chairman designate of the Board of Governors Upon motion duly made and seconded, and by unanimous vote, Mr. Sproul was reelected Vice Chairman of the executive committee to serve until the election of his successor at the first meeting of the executive committee after February 28, 1949. With respect to the authority to be given to the Federal Re serve Bank of New York to execute transactions for the System ac count, it was stated that, as had been discussed at the meeting of -2 3/1/48 the full Committee this morning, the System open market account probably would have to purchase very substantial amounts of Gov ernment securities during the next five weeks and that, since the amount of offsetting sales and redemptions from the account might be small, the greater portion of the authority given to the exec utive committee should be given to the Bank. the limitation on the first It was agreed to fix paragraph of the authority at $2 bil lion with the understanding that, if necessary, it would be in creased by telephone approval of the members of the committee. It was also suggested that the limitation in the second paragraph of the direction with respect to purchases of securities direct from the Treasury be continued at the present figure of $750 mil lion and that the wording of the direction be changed to bring it into agreement with the direction from the Federal Open Market Committee to the executive committee as approved at the meeting of the full Committee this morning. Thereupon, upon motion duly made and seconded, and by unanimous vote, the ex ecutive committee directed the Federal Reserve Bank of New York, until other wise directed by the executive 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 account, either in the open market or directly from, to, or with the Treasury, as may be necessary, in the light of the general credit situation of the country, for the -3 3/1/48 practical administration of the account, for the maintenance of stable and orderly conditions in the Government security market, and for the purpose of relating the supply of funds in the market to the needs of commerce and business; pro vided that the total amount of securities in the account at the close of this date, shall not be increased or de creased by more than $2,000,000,000 exclusive of special short-term certificates of indebtedness purchased for the temporary accommodation of the Treasury pursuant to para graph (2) of this direction; (2) To purchase direct from the Treasury for the Sys tem open market account 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 in the account at any one time shall not exceed $750,000,000. In taking this action it was under stood that the limitation contained in the direction included commitments for purchases and sales of securities for the System account. There was a further discussion of the recommendations to be made to the Treasury as outlined at the meetings of the Federal Open Market Committee on February 27 and this morning. Chairman Eccles stated that the staff was working on a letter which would contain the four recommendations agreed upon, and that the draft of letter would be submitted to all members of the executive committee for approval. There followed a brief review of the recommendations to be made, and it was agreed that the draft of letter contain ing the recommendations should be prepared and submitted to the members of the execu tive committee for their consideration as promptly as possible. 3/1/48 .4 Secretary's Note: The letter sent to the Treasury on March 8, 1948, with the approval of the members of the executive committee read as follows: "The Federal Open Market Committee, at meetings on February 27 and March 1, reviewed the general credit po sition and related problems of debt management in the light of changes in the economic situation which have taken place since its previous meeting. It was the opin ion of the Committee that inflationary pressures are still strong in our economy, despite the sharp decline in com modity prices during February, and that there is as yet no convincing evidence that the need for restraint upon borrowers and lenders of credit has passed. In the light of this general finding, and for more specific reasons which are mentioned below, the Committee believes that we should continue the program of credit control and debt management we have been following for the past several months, and makes the following four point recommendation to the Treasury. "(1) In view of an expected substantial net drain on bank reserves in March, resulting from an excess of Treas ury receipts over expenditures, no further calls on war loan accounts are recommended (during March) except as may become necessary for money market reasons in event withheld taxes are channeled through war loan accounts as suggested in paragraph (4) below. "(2) Federal Reserve holdings of maturing certificates on April 1 should be redeemed and the retirement of Treas ury bills should be continued as long as funds are avail able. In order to make the weekly maturities of bills more clearly even in amount, it is suggested that 200 million dollars be retired on March 18, 300 million on April 1 and April 8, and 100 million in other weeks. "(3) An 11-month 1-1/8 per cent certificate issue should be offered in exchange for the 7/8 per cent issue maturing April 1, 1948. This would accomplish a desirable consolida tion of the small April 1 issue with the outstanding March 1 maturities, and would pave the way for an increase in the one year certificate rate to 1-1/4 per cent, as of June 1, if the credit situation and the situation in the Government securities market confirm present expectations that such action will be desirable when the June 1 financing terms are determined. On the other hand, if there should be a 3/1/48 -5 "complete reversal of existing pressures in the interven ing weeks, the Treasury would still be free to fix the terms of the June 1 financing in the light of these changed circumstances. "The Committee wishes to emphasize that in the ab sence of such a complete change in the existing situation its recommendation of an eleven months 1-1/8 per cent cer tificate to be issued as of April 1 is predicated upon the assumption that the one-year rate will move up to 1-1/4 per cent with the June 1 issue. Otherwise we might find ourselves in the untenable position of appearing to re duce rates and release pressure (by issuing a one-year 1-1/8 per cent certificate on June 1 following the eleven months 1-1/8 per cent certificate on April 1), at a time when credit policy and the condition of the Government security market counselled contrary action. "(4) As a means of providing better control of the impact of Treasury transactions on the money market, we are in accord with your proposal that the payment of withheld income taxes through bank depositaries should be channeled into war loan accounts rather than directly into the Federal Reserve Banks. Calls on war loan de posits would presumably be timed in the future, as they have been in the past, after consultation between the Treasury and the Federal Reserve, with a view to obtain ing desirable money market effects. If the procedure for channeling withheld taxes through war loan accounts is not put into effect before the middle of March, no calls on those accounts will be needed before April. "We should be glad to discuss these recommendations with you, at your early convenience, and particularly our recommendation with respect to the April 1 financing, but perhaps it will be helpful to our discussion if we indi cate here what underlies the latter recommendation. Brief ly, we are of the opinion that from the standpoint of bal ance in the Government security market and the maintenance of an effective monetary policy, some further narrowing of the spread between short and long-term rates is neces sary, and that the April 1 maturity offers an excellent step toward this objective, opportunity to take the first since there will be a period of two months (between the April 1 announcement and the June 1 announcement) with in which to smooth the market effects of the transition Our purpose in moving to a higher to the higher rate. 3/1/48 "rate would be to increase the attractiveness of short securities, both in relation to the longer term obliga tions and to other outlets for bank funds. "It now appears likely that pressure on the banks' reserves will be greatly lessened after the first quar ter of the year and that banks may actually acquire ad ditional reserve funds (as a result of Treasury trans actions, gold imports, and other factors). In these circumstances, it seems to us imperative that the com mercial banks be encouraged to purchase short-term Gov ernment securities from the Federal Reserve Banks (in order to absorb their excess funds) rather than the System's holding of bonds, or to seek other outlets which would further increase the supply of credit at Otherwise we may again the disposal of the public. be faced with the problem of 'playing the pattern of rates', with downward pressure on the long-term rate reasserting itself, or with a further unnecessary ex pansion of bank loans, or both. And, finally, our hands would be tied, at a most inappropriate time, with respect to a further increase in the discount rate of the Federal Reserve Banks, unless the certif icate rate had also been advanced. "The executive committee of the Federal Open Mar ket Committee will be meeting from time to time to can vass the situation further as it develops during the second quarter of the year." Thereupon the meeting adjourned. Secretary. Approved: Chairman.
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