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Station K, Dallas, Texas 7 5 2 2 2

Circular No. 84-10
January 23, 1984


All depository
Reserve District


Chief Executive Officer


Open market operations


The Board of Governors of the Federal Reserve System
has issued a statement discussing the relationship of
contemporaneous reserve requirements to open market
operating procedures.


Text of Board's statement


Public Affairs Department, Extension 6289


in the Eleventh Federal

Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank: 1-800-442-7140
(intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (

Beginning Thursday, February 2, the new contemporaneous reserve
requirement (CRR) system will become effective.

In that connection, questions

have been raised about the implications of this change for the Federal Reserve's
open market operating procedures.
Federal Open Market Committee.

This issue has been considered by the

Taking account of technical transitional

uncertainties as well as policy judgments about the role of Ml and other
monetary aggregates under current circumstances, the Committee agreed to
make no substantial change in current operating procedures at this time.
The new CRR system differs from the present lagged reserve requirement
structure in two principal ways.

First, required reserves against transactions

deposits will have to be held on an essentially contemporaneous basis, instead
of being lagged by two weeks.

Second, the reserve holding period has been

lengthened from one week to two weeks {with the relevant period for deposits
also lengthened to roughly the same two weeks— the 2-week deposit period
running from Tuesday to the second Monday, and the reserve period running
from Thursday to the second Wednesday).
This structural change in the reserve accounting system has
tightened the linkage between reserves and the current behavior of transactions
deposits— demand deposits and interest-bearing accounts with full checking
privileges{NOW and similar accounts).

These deposits, along with currency,

held by the public, comprise Ml, the measure of money most nearly related
to the transactions needs of the economy.

But because of NOW and similar

accounts, which have grown substantially in volume over the past few years.
Ml is also affected by saving propensities and patterns.

The Committee



has been placing less weight than formerly on Ml because of the institutional
changes that have altered its composition, affected its behavior, and increased
uncertainties about its relationship to the economy.
Other, broader aggregates— M2 and M3— encompass Ml plus other highly
liquid assets and forms of saving, such as money market funds accounts and time
and savings deposits held at banks and thrift institutions.

Some of these

other assets also, in one degree or another, serve transactions purposes,
though they are not, by law, subject to transactions reserve requirements.
In general, the bulk of the assets in the broad aggregates are not subject
to reserve requirements, although nonpersonal time deposits bear a relatively
small lagged requirement.
Open market operations and CRR
Adaptations in open market operating procedures to CRR must take
account of certain technical and transitional issues as well as the policy
issue about the weight to be given Ml and other monetary aggregates in

The more technical and transitional issues involve how the

depository system as a whole adjusts to the new reserve requirement system—
which may influence demands for excess reserves, attitudes toward the
discount window, and the speed of asset and liability adjustments generally.
It can be expected that some time will elapse before banks and other depository
institutions have fully adjusted their reserve management, as well as portfolio
and liability management, to the new system.

Money managers have to become

to operating without certain knowledge of their required reserves

for a full reserve averaging period during most of that period.

In addition,



usual start-up problems with new

data systems will probably add to uncertainties

at least for a while.

problems would also affect

Such data

reliability of figures available
These technical issues


timing and

to the Federal Reserve.
aside, the new reserve requirement structure

would potentially permit somewhat closer short-term control of Ml in particular.
With CRR, if open market operations were geared primarily to Ml, an "automatic"
tightening or easing of reserve positions that worked to bring Ml under control
would tend to occur somewhat more promptly than with lagged reserve accounting.
Whether operating procedures should be adapted for this purpose
does not depend on the technical characteristics of the reserve requirement
system in place but rather on broader policy judgments about the relative weight
to be given to Ml as a target and the desirability of seeking close short-run
control of that aggregate.

To the extent less weight continues to be placed

on Ml, and relatively more on broader aggregates less closely related to
reserves, "automatic" changes in reserve pressures in response to short-run
movements in Ml alone may not be appropriate.
In light of these various considerations, the Committee agreed that
no substantial change would be made in open market operating procedures at
this time.

These operating procedures will be reviewed after a transitional

period in the context of the role played by the monetary aggregates.
Particularly Ml, in policy implementation and the potential implicit in CRR
for achieving closer short-run control of Ml.


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