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/ Monetary Policy and Debt Management

Both full recovery and economic grovth require expansion of
expenditures for business plant and equipment, for state and local
governmental facilities and for residential construction.

To increase

the flov of credit for these purposes, long-term interest rates must

At the same time, the United States must remain competitive in

vorld markets for short-term funds.

The current task of monetary policy

and debt management is to achieve the credit expansion our domestic
economy requires without impairing our ability to hold and to attract
internationally mobile liquid funds.

Reduction, of long-term interest

rates relative to short-term rates is within the present capacity of the
Federal Reserve System and the Treasury.

I shall recommend two further

steps to enable these governmental agencies to meet simultaneously their
\ twin responsibilities, for economic expansion at home and for defense of
the dollar abroad,

(a) Repeal of the ceiling now imposed on the interest

rate concaercial banks may pay on time and savings deposits, to enable Ameri­
/banks to compete for funds, (b) Special issues of short-term securities
available only to foreign central banks and governments, to permit the
Treasury to offer internationally competitive yields when necessary.

* /Not for inclusion in message:
This requires that the Federal Reserve buy genuine long-torn securities
(not "longs” that have become short), offsetting the effects of inject­
ing money on the short-term rate by selling shorts or even by raising
the discount rate. The Board must abandon its position of neutrality
towards the structure of interest rates. Also, the Treasury must for
the time being confine its borrowing to the short end of the market^


To make sure that general expansion of long-term credit is effective
in stimulating residential housing construction, the government is taking
special measures to increase the availability of mortgage funds at lover

The Federal Housing Administration is reducing the borrower's

rate on insured mortgages by 1/2 point, to 5-1/^*

The resources of the

Federal National Mortgage Association in the secondary mortgage market vill
support this change in the rate.*

♦/Hot for Inclusion in message; FNMA vill raise its buying price for
Insured Mortgages by 1/2 point^

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