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G O U ^ J ^ W r ^ r p ^ r C t T f 'f C y O T C ^ ^ v T s E ^ S

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August 31, 4 9
-96- —*

M E M © a ^ N 3 9 m W ^ S r¥ ffE ^


The Discount Rate Cut

The process of cutting the Federal Reserve discount rate from
5-1/2% to 5-1/4% has finally been completed. On Thursday, the
Federal Reserve Board approved reductions by the last four district
New York, San Francisco, St. Louis, and Atlanta.
Thus, it took two weeks for the cut to be adopted by all 12
district banks. A delay of this length is unusual, although
not unprecedented.
Some of the district banks were clearly dragging their heels.
Moreover, none of them was prepared to move more than a
quarter of a point, even though the Fed Board had invited a
decline of half a point.


The present attitude of the district banks is w orrisom e, because
the recent discount rate cut was only the first of many steps we
w ill need to ease credit adequately.
The discount rate cut has been successful in consolidating
most of the decline in interest rates that previously occurred.
But it is not acting, as a new force to push rates down further.
Actually, interest rates have risen a little in the last few
weeks - - special, temporary factors have outweighed the Fed!s
signal of ease.

Although home build ing does appear to be headed upward once
again, the strong and prompt recovery we need to sustain the
economy is not in the bag, by any m eans. The 1.5 million
rate of housing starts in July looked good. But it was almost
surely inflated by a temporary spurt in the Northeast when
legal interest rate ceilings were lifted.

We b e lie v e that fu rth er action to ease c r e d it should be taken in
S e p te m b e r, eith er

by increased open market purchases to provide more
bank reserves, or

by a further cut in the discount rate to 5%.

We w ill keep urging the Fed, but we don!t know when the message
w ill get through to the district banks.
The present problems with the district banks raise anew some old
issues about Federal Reserve organization.
The Fed]s powers to control credit are dispersed in a curious
way, with
open market operations controlled by the Open Market
Committee (consisting of the 7 Board Members plus
5 district bank presidents),
r e s e r v e requ irem en ts c o n tro lle d by the Board, and

the discount rate set by the individual banks subject to
nreview and determination1 by the Board..

This arrangement has worked reasonably well in recent years,
in part because Bill Martin has an unusual ability to achieve a
consensus among often widely disparate views.
Nevertheless, desirable action in the national interest may
occasionally be thwarted by district bank presidents (or even
district bank boards of directors). These officers are not
appointed by the President or confirmed by the Senate.

Reorganization has often been suggested.
form s, including

It might take various

elimination of the role of the district banks and vesting
all authority in the Federal Reserve Board - - as recom ­
mended by the bipartisan Commission on Money and




C red it in 1961 and endorsed by you r T a sk F o r c e on
G overnm ent O rganization ch a ired by Ben Heineman, o r
making the heads of the d is t r ic t banks P r e s id e n tia l
appointees and elim in ating the r o le of the d is tr ic t bank
boards of d ir e c to r s in m o n eta ry p o lic y decisions*
We hope you w ill consider this issue f o r possible inclusion
in January’ s le g is la tiv e p r o g r a m .

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