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X.* Since the last meeting of th« Federal Open Market Gosmittee we hairs
been operating under two prohibitions adopted by th« Coswittee, ths general
prohibition Halting operations to short-term securities at all tines, and
the special prohibition Halting operations, during periods of Treasury
financing, to exclude the purchase of naturing issues, vhen-issued securities, sad outstanding issues of co*parable maturity to those being offered
in exchange.

In ay opinion, the present situation and the likely situation during

ths Mxk three smiths require that we remove these prohibitions sod restore
to m m e&fte greater freedom of action. Private demands for capital and
credit continue strong, and the Treasury is going to be a large wad neces­
sitous borrower. Our policy, in the elrcujastences, is one of maintaining
restraint in credit expansion, while trying to prevent that restraint frraa
being intensified by Treasury demands on the banking system.

If this con­

tinues to be our policy, and if we continue to confine our operations to
purchases of Mils, X do not think we can walk the tightrope successfully.
Our policy of restraint will be intensified at a ti»e when it should be
levelling off with the bom*

On what grounds would we continue to deprive ourselves ©f freedom of

aetion? With respect to the prohibitions we adopted at our last nesting,
(a) we wear* told that the market should be reli— ed of the threat of our
intervention in the longer terra areas so that it sight develop breadth,
a n d p e e ilta rm a r.

(b) we have not intervened in these areas for some month* and, in one
way or another, the market has acquired the idea that we are not going to


let seldom has the market shown leee breadth and depth while

quotations have shown, If anything, too such resiliency.
"" '
(c) I think it has been demonstrated that if apprehension concerning our
intervention in the market was once the cause of uncertainty^ it was a
transient phenomenon. Other factors have sines been at work. Eeoently
there has been ear restrictive credit policy, continued hsaYF private
demands £er funds, and mounting Treasury cash needs. These have generated
the expectation of a decline in government security prices (and private
security prieee) and a rise in interest rates of unknown extent and
(d) Under such conditions a market of the sise and present vulnerability
of the Government security aarket doesn't develop real breadth* depth,
and resiliency, and the Treasury*s necessitous financing c&n be made un­
necessarily difficult and onerous.
(e) Insofar as credit policy is responsible for this, the problea is how
to direct open market operations with sufficient flexibility and versatility
to minimise the adverse effects of the general policy without sacrificing
the general objective.

I don't think we can do it if we continue, as we have been doing, to

Confine ourselves at all times to operations in Treasury bills. We have
~ ~ ~ \ _ ---...—_

been told that operations is bills would have prompt and persuasive effecte
throughout the narket. That was the theory of perfect fluidity — perfect

I think historical records and current observation indicate

that a prompt and invariable response between short and long markets can not

i'& s t


always be expected. Under present conditions operations solely in bills
stay relieve the reserve position of the banks without giving tiiaely relief
from the complex pressures in the credit and c apital markets created by
large treasury borrowing operations.
5» If the threat of our intervention lsn*t the source of lack o t hreadth,
depth, and resiliency in the Oovenment security Bsarket, and if that market
and the whole capital market isn't as fli*Ad as the theory of perfect
arbitrage would suggest, why do we deprive ourselves of freadeaa of action?
It awsm to m that we wast either still be seacting violently against market
pegging or anbameiag a somewhat doctrinaire attitude on free markets*
6* There is a middle road. So one here wants to rstwm to pegging nor to try
to substitute our judgsaent as to prices and yields f o those of the market.
Bat if our credit policy calls for putting funds into the market, as it does,
and if at the sane tise we can assist the Treasury with its very difficult
task of debt mnageasent, we should do it. It would be in accord with the
resolution we adopted on relations with the treasury and it would contribute
• o economic stability, We should be free, particularly at times of Treasury
financing, to make purchases in whatever area of the market is under most
pressure, so that there will not be an unnecessary erosion of rates, affeeting
adversely investor and banking psychology and intensifying the restrictive
effects of our credit policy at the wrong tisae,
7* We have made it clear to the market that we are not interested in pegging
prices, and the Treasury has wade it clear that it wants to price its obliga»
tions in the market, not on us. Within this fraaework, I think we should re­
serve for ourselves ®aj&B&na freedo® to operate in any way which, without

sacrificing credit policy*

sao ort the treasury*9 program and the

stability of the market.
8* To withhold the Systea portfolio from participation in the mrket, except
for bill transactions, in the light of the present econos&e situation and
the Treaamry*s needs, seems to »e to be sacrificing credit policy to untried
theory* to go further, and to withheld the System portfolio from participation
in the t**e®»endo«* redistribution and capping proems whieh takes


p la m

the market during the short period of a Treasury financing is likely to
pwv* % be irresponsible*
9* I suggest the elimination, fro® the instructions of the full Co**nittee
to the executive coj®dttee, of the present prohibition against open market
operation* in other than Short-term securities, and against operations in

certain kinds of securities during Tre&aury financings*
10* 1vm though our operations continue to be largely in bi^ps, effective

credit policy om






b s t be achieved, in ay ©pinion, by -igfeaiMng the / * e e t

flexibility of action


to sseet the ^predictable cirmmstances which are a ­

ways arising* To freese the System into a pattern of behavior which involves

doing ©a*
ettain things could be Just as harmful to the ammms of credit

policy a s s frozen cawd.t®©nt to do certain things# We ean*t afford a sue*
session of

black Mondays and Treasury near-failures over the next few months

and the oaens are none too g o *


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102