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The meeting of the Federal Open Market Committee was recon vened in the offices of the Board of Governors of the Federal Reserve System in Washington on Wednesday, PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. May 5, 1957, at 10:50 a.m. Eccles, Chairman Harrison, Vice Chairman Broderick Szymczak McKee Ransom Davis Sinclair Mr. McKinney Mr. Martin Mr. Day Mr. Mr. Mr. Mr. Mr. Morrill, Secretary Goldenweiser, Economist Williams, Associate Economist Wyatt, General Counsel Carpenter, Assistant Secretary of the Board of Governors Mr. Thurston, Special Assistant to the Chairman of the Board of Governors There ensued a general discussion of open market policy and the directions to be given to the executive committee to effect trans actions in the System open market account. Upon motion duly made and seconded, and by unani mous vote, the Committee instructed the executive com mittee to direct the replacement of maturing securi ties in the System open market account with other Govern ment securities and to make such shifts between maturi ties in the account as may be necessary in the proper ad ministration of the account, provided that the amount of securities maturing within two years be maintained at not less than $1,000,000,000 and that the amount of bonds having maturities in excess of five years be not over $850,000,000 nor less than $500,000,000. During a discussion of the extent to which author ity should be given to the executive committee to increase 5/5/37 -2 or decrease the total amount of securities held in the System account, Mr. Davis moved that the Committee di rect the executive committee to make purchases and sales (including authority to allow maturities to run off) of United States Government securities for the System open market account to such extent as may be necessary before the adjournment of the next meeting of the Federal Open Market Committee, for the purpose of preventing disorderly market conditions, provided that the aggregate amount of securities held in the account shall not be increased to an amount exceeding $2,680,000,000 nor decreased to an amount less than $2,180,000,000; the kinds and maturities of the secur ities acquired or sold to be determined in the light of current market developments. Mr. Harrison referred to the resolution of similar nature adopted by the Federal Open Market Committee on April 4 and to the actions taken by the executive committee under that authority, and he inquired whether, if the motion offered by Mr. Davis were carried it would be the intention of the full Committee that the executive com mittee would have authority to decrease as well as increase the ac count, whether there would be any restriction on the executive com mittee with respect to reductions in the account within the limitations provided in the new authority, or whether it would be expected that another meeting of the Committee would be called before the account could be decreased. It was agreed that each member of the Committee should state his views on the questions raised by Mr. Harrison. Chairman Eccles stated that he did not feel it would be advis able to reduce the portfolio by more than a small amount, although he did not object to slight reductions merely for the purpose of accustoming -3. 5/5/37 the public to changes in the account, but that he was of the opinion that it would be unwise to make any substantial reduction in the ac count until the budget was more nearly balanced and the gold problem was nearer a solution than was the case at the present time. He fa vored the process of shifting maturities of securities in the System account to the fullest extent possible in order to prevent disorderly market conditions. He stated that he would if necessary increase the portfolio by purchases in the market of Treasury bills at the time of a new offering of bills, with the understanding that securities equal to the amount of bills acquired would be disposed of as soon as pos. sible thereafter, and that he would also favor temporary increases in the System account with a view to preventing disorderly conditions over a quarterly income tax payment period or Treasury financing per iod, with the understanding that securities in an amount substantially equal to the amounts purchased would be disposed of as soon as the mar ket had adjusted itself to the shifts of funds during such period. Mr. Martin stated that it had been his understanding that the procedure under which the executive committee had operated was that the full Committee determined the policy that should be followed in the light of existing conditions, that under the instructions of the full Committee the executive comittee carried out operations in accordance with that policy, and that if it should become necessary to reconsider policy matters another meeting of the full Committee would be called 5/5/37 -4, and the executive committee given further instructions. He expressed the opinion that under existing conditions the executive committee should be authorized to increase or decrease the account in ner as would be in such man accordance with the policy of preventing disorderly market conditions. Mr. Harrison stated that he would vote for Mr. Davis' motion on the ground that he believed it always advisable for the executive com mittee to be prepared to act promptly in exercising its preventing, influence toward as far as possible, disorderly money market conditions. also stated that in voting for the resolution it He was his understanding that the motion was intended to enable the executive committee to act equally freely and flexibly either by making purchases or sales of secur ities, in carrying out this purpose. He added that if, in the course of routine operations by the System designed to prevent a disorderly market, money rates should change substantially or become too high or too low for the good of the country's economy, whether because of budgetary pol icy or gold policy or for any other reason, then, he felt, there should be another meeting of the Federal Open Market Committee to consider major credit policy. Mr. McKinney said that the language of the proposed motion was clear; that it set out none of the factors that should be taken into con sideration by the executive committee except that transactions in the ac count should be for the purpose of preventing disorderly market con ditions; that, therefore, the burden was on the executive committee to 5/5/37 -5 consider the desirability of sales as well as the desirability of pur chases for the purpose stated; and that the motion would leave to the executive committee the determination of what constituted disorderly market conditions. He also said that, if a question with respect to influencing interest rates or some other matter of general policy should arise, a meeting of the full Committee should be held to ex plore the problem. Mr. Szymczak said that, when the Board of Governors adopted the policy of increasing reserve requirements, that action was taken because of the amount of excess reserves which provided a base for credit expansion beyond the needs of commerce, industry and agriculture. The action, he said, placed the System in a position to take action in the open market, and he had felt that action in the open market would be taken only when further excess reserves were to be absorbed, or when a reversal of the anti-inflationary policy was to be adopted for the purpose of making possible further expansion of credit in accordance with the needs of industry, commerce and agriculture. Since then, how ever, there has been no evidence presented that would show the need of reversal of the policy adopted by the Board, when the increase in re serve requirements was announced. He did not feel that the System could assume responsibility for the condition of the Government secur ities market, particularly in view of the fact that other factors, in cluding the gold and budget problems, which were beyond the control of -6 5/5/37 the Federal Reserve System but which must be taken into consideration in determining System policies, had a direct effect on the condition of the market. Since the System's Open Market Committee has recently adopted a policy of increasing its the purpose of reversing its open market portfolio, not with anti-inflationary policy, but to ease the condition of the market over the period of adjustment to the May first increase in reserve requirements, and since May first has passed, there remained only the question of continuing the policy of preventing disorderly market conditions. He felt, therefore, that the Committee should now sell or allow to run off, as well as purchase, Government securities in accordance with that policy. He also stated that he felt discretionary power should be given to the executive committee to pur chase, sell or allow to run off, securities within the limitations fixed by the full committee. Mr. Sinclair did not think that at this particular time the System should apply any restrictive measures. He also expressed the opinion that when reference was made to open market operations as a flexible instrument of control the term should mean just that and that the System intended to use the instrument both ways according to con ditions in the money market from day to day. It was his view that the executive committee under the proposed motion should not, without a further declaration of policy by the full Committee, endeavor to stem changes in trends of interest rates, but should limit itself primarily 5/5/37 -7 to offsetting sudden and drastic changes in rates either way, which was his understanding as to what was meant by "preventing disorderly market conditions". He said that the causes of such conditions may be manifold, such as those arising out of the gold or budget problems or the exigencies of government financing; that the executive committee should, by purchases and sales, meet opportunities to steady the market in these respects, but should not attempt to support the market the trends in which may be affected by underlying causes over which the committee can have no con trol or but little influence, He added that with this brief statement of his view as to what he considered to be the function of the executive committee under the motion, he would vote in favor of its adoption. Mr. Ransom stated that he would support Mr. Davis' motion but that he thought it could be worded somewhat differently to state more nearly the thoughts which had been expressed and certainly his own views. He did not think the general question of interest rates could be disassociated from order or disorder in the Government securities market and he expressed agreement with the opinion that there were other very important factors, including the gold question and the budget situ ation in particular, which were beyond control of the System except as it was able to influence them indirectly. 'ay 1 increase in anticipate it He said that, now that the reserve requirements had become effective, he did not would be the policy of the Federal Open Makket Committee to increase the portfolio for the purpose of increasing reserves, and that, while he felt the executive committee might be able to function -8 5/5/37 more happily with more definite authority than that contained in the mandate incorporated in Mr. Davis' motion, he did not have at the time any specific suggestions to offer, Mr. Davis expressed the opinion that the Committee's action should be treated as nearly as possible as a routine matter and in a way that would attract as little would not be disturbed if attention as possible. He said he the total amount of securities in the ac count dropped below the existing level; that he did not believe the proposed motion would authorize the executive committee to use the authority to bring about a progressive increase in interest rates; and that he favored continuing authority in the executive committee to change the total amount of securities in the account should conditions warrant and to prevent the total from again becoming fixed. He said that he preferred having the executive committee maintain the status quo as far as possible and that he would not want the total of the account decreased by an amount that could be regarded as a change in policy or that might result in a hardening in rates. The account, he said, should be operated to prevent a disorderly rise as well as a disorderly fall in the Government securities market. Mr. Day stated that he would vote for the resolution in order to give the executive committee the opportunity, in its discretion, fluctuate the account to meet the demands of the day as such demands arise in connection with the policy of preventing disorderly market to 5/5/37 -9 conditions. He felt that, should a substantial change in the situation occur which would require a reconsideration of policy, a meeting of the full Committee should be held. He interpreted the resolution not as an authority to influence money rates or security prices but as authority to effect transactions in the System open market account with a view to maintaining orderly conditions in the Government security market which might require sales as well as purchases of Government securities for the account. Mr. McKee said he was ready to vote in favor of the motion pro posed by Mr. Davis, believing it to be a continuation of the authority given to the executive committee by the full Committee at the meeting on April 4, 1957. He expressed the hope, however, that it would not be necessary to further increase the portfolio if the authority were re newed, and that an opportunity would be presented for some decrease in the account through sales or allowing maturities to run off. He ex pressed the opinion that in the past the open market portfolio had been allowed to remain in a static condition for an undesirable length of time, that the recurrence of such a condition in the future should be avoided, and that the Committee should take advantage of opportunities to make such reasonable reductions in the portfolio as might be made without creating disorder in the market. his reasons for voting in He also stated that one of favor of increasing the portfolio at the time action was taken by the Federal Open Market Committee was predicated on the understanding that the Treasury would continue its present gold 5/5/37 -10 sterilization policy, and that, if and when the Treasury saw fit change such policy, he believed it advisable for the full Committee to to meet immediately after notice of such change for the purpose of considering the advisability of decreasing its portfolio so as to counteract any adverse effect on the volume of reserves caused by a reversal of the policy referred to. Mr. Broderick favored Mr. Davis' motion. He said that gen eral open market policy was determined by the Open Market Committee, that the executive Committee, as the operating body, must be given discretionary power to operate within the limits of the general au thority in order to be able to meet changing market and business con ditions, and that this procedure was necessary because of daily uncer tainties as well as psychological reactions. He also said that in this connection he was looking forward with great interest to the re action on Wednesday of this week to the weekly statement of condition of Federal reserve banks which will show no increase in the portfolio over the previous week. He did not think the System could peg the market nor exercise control, but could only influence the trend and check the pace. It was his impression that, in the future, attention would not be focused on the aggregate amount of securities in the port folio but rather on the amount of long term bonds, and that changes in maturities would not be of as great importance as the changes in holdings of long term bonds. As to the Treasury bill market, he ex pressed the opinion that there should be a wider market, of interest 5/5/37 -11 to banks in sections of the country other than New York where the mar ket is now largely concentrated; that it may be that the 9 months maturities are too long to be attractive; that it might be well to try 3 and 6 months maturities; that the banks need short term bills to balance their position; that the System should always be interested in the success of Treasury bill offerings, but should not give, nor be requested to give, a guaranty that it would stand prepared to make such offerings successful; and that a better way of arriving at the desired result would be to increase interest in the bill market through a wider participation by banks and investors throughout the country. Mr. Goldenweiser stated that he felt that the proposed motion was not adequate, that there was clearly a policy issue before the Committee whether the authority to be granted should be used merely to see that no violent fluctuations were permitted to occur or whether the Committee wished to use its influence to maintain easy money con ditions and low money rates, and that the full Committee should take a position on this issue. At this point Mr. Dreibelbis, Assistant General Counsel, joined the meeting. At the conclusion of the ensuing discussion, Mr. Davis' motion, having been duly seconded, was put by the chair and carried unanimously. Thereupon the meeting adjourned. Approved: Chairman.
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