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January 31, 1961

M E M O R A N D U M F O R THE PRESIDENT

In preparation for tomorrow morning's meeting, I am
attaching a memorandum prepared by Bob Roosa giving the
background of the Federal Reserve "bills usually’ policy.
1
The essence of the matter seems to be that the policy
was correct when originally adopted but that the Federal
Reserve probably was overly cautious in moving away from it
in the last year or two when it was no longer as appropriate
However, the movement toward a new policy now seems to be
successfully under way. Since the Federal Reserve is
apparently prepared to initiate this change of its own
volition, it would seem advisable to avoid any public
implication that they are taking these new steps as a re­
sult of outside pressure.
In extending Federal Reserve operations into the longer
term markets, it is important to realize that there are
limitations to what can be accomplished* Such operations
by the Federal Reserve can help in moving a stagnant market
in the desired direction or in strengthening a trend already
under way. It cannot, however, successfully reverse the
direction of any pronounced trend in the market without
falling into the unacceptable position of attempting to
peg interest rates.

Douglas Dillon

Attachment

CDDillon/ep




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