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FORTY-EIGHTH
Annua{ Report
OF'IHE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATIONS FOR THE YEAR
19 61
ANNUAL REPORT OF BOARD OF GOVERNORS
DIGEST OF PRINCIPAL FEDERAL RESERVE POLICY
ACTIONS, 1961
Period
January
FebruaryAugust
SeptemberDecember
December
Action
Purpose of action
Limited net sales of U.S.
Government securities from
Federal Reserve portfolio to
about $500 million. Member
bank borrowing at Reserve
Banks averaged only $50
million.
Bought substantial amounts
of U.S. Government securities with maturities over 1
year, following February 20
announcement that System
open market operations
would include securities outside the short-term area.
These purchases were partly
offset by net sales of shortterm securities. Total System
holdings of Governments increased about $700 million.
Member bank borrowings
averaged $75 million.
To encourage bank credit
and monetary expansion by
absorbing only part of seasonal inflow of reserve funds
not otherwise offset by a
large gold outflow.
Bought or sold at different
times varying amounts of
U.S. Government securities,
including securities with
longer maturities. Total System holdings of Government
securities increased about
$1.6 billion. Mmnber bank
borrowings at Reserve Banks
remained generally low.
Raised, effective Jan. 1,1962,
maximum interest rates payable by member banks on
any savings deposit from 3 to
3~ per cent, and to 4 per
cent on those left in the bank
for 1 year or more; also
raised maximum rates on
time deposits with a maturity
of 6 months to I year from 3
to 3~ per cent, and to 4 per
cent on those deposits with a
maturity of a year or longer.
4
To encourage bank credit
and monetary expansion
while avoiding direct downward pressure on short-term
interest rates, thereby moderating pressures on the U.S.
balance of payments from
outflow of short-term capital
attracted by higher interest
rates abroad.
To continue to encourage
bank credit and monetary
expansion while allowing for
changing reserve needs due
to seasonal and other factors,
including a large gold outflow, and while continuing to
give consideration to the
balance of payments problem.
To enable banks to compete
more effectively for savings
and other time deposits, including foreign time deposits, thus moderating pressures on the U.S. balance of
payments, and, over the long
run, to offer additional incentive for the accumulation of
savings required for financing future economic growth.
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
Although available reports suggested that the U. S. balance of
trade was showing some improvement, the over-all balance of
payments continued to pose a serious problem for the inter
national strength of the dollar.
Taking all of these factors into consideration, it was the con
sensus of the Committee that in view of the state of the domestic
economy the System should seek to maintain approximately the
same amount of ease in the market as it had since the preceding
meeting, at the same time paying close attention to developments
in the international area. There was a minority view favoring
greater ease in order to do what was possible to reverse the
trend of the economy in this country. There were, on the other
hand, some who believed that the System should "mop up" more
of the ease that had prevailed, it being argued that the System
had injected sufficient credit into the market and should concern
itself more at this point with endeavoring to assure a short-term
interest rate level conducive to checking the outflow of funds
and possibly reversing it.
starts during December, had also contributed to the decline.
However, some encouraging developments were beginning to
appear in the economic picture, including a continued large
export surplus, signs of greater availability of mortgage money,
though this had not yet led to noticeably lower interest charges
or to expansion in residential construction, and slight signs of
pick-up in steel production and orders.
There was ample evidence of continuing money market ease.
However, after taking into account the usual seasonal patterns,
bank credit developments during the first part of January were
somewhat mixed. Bank loan-deposit ratios, while still relatively
high by historic standards, had declined somewhat. Also, while
there had been only a modest gain in the money supply proper
during the second half of 1960, total nonbank liquid assets had
risen at a rate almost equal to the average for the last 10 years.
A delicate situation existed in international financial markets,
stemming mainly from the continued U. S. balance of payments
deficit, and this created something of a dilemma for monetary
policy. The problem was one of providing sufficient reserves to
the banking system to encourage growth of the domestic econ
omy, which was operating at a relatively low level, while en
deavoring to prevent short-term rates from declining to levels
that might aggravate the already sizable payments deficit of the
United States. The consensus as to policy for the period immedi
ately ahead was that there should be no change in the existing
degree of monetary ease and that in operating the Open Market
Account the Management should continue to give close attention
to the level of short-term rates in view of the current inter
national financial situation. However, at least one member of
the Committee (Mr. Robertson) favored a moderately greater
degree of ease, in view of the level of domestic economic activity.
January 24, 1961
Authority to effect transactions in System Account.
The Federal Open Market Committee directed the Federal
Reserve Bank of New York to continue to conduct open market
operations with a view toward encouragement of monetary ex
pansion for the purpose of fostering sustainable growth in eco
nomic activity and employment, while taking into consideration
current international developments.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Bryan, Fulton, King, Leedy, Mills, Robertson, Shep
ardson, and Szymczak. Votes against this action: none.
The decline in economic activity was continuing, with no
discernible signs of a bottom having been reached. There was
evidence of a continued rise in seasonally adjusted unemploy
ment figures, and declines in employment and in industrial pro
duction were rather general. A further weakening in personal
income and retail sales, along with a sharp drop in housing
February 7, 1961
1. Authority to effect transactions in System Account.
The Committee's directive to the Federal Reserve Bank of
New York, calling for the encouragement of monetary expan-
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
sion for the purpose of fostering sustainable growth in economic
activity and employment, while taking into consideration cur
rent international developments, was continued without change.
week fluctuations. In general, indications were that the reserves
supplied in recent months had permitted or perhaps encouraged
monetary expansion relative to the usual seasonal pattern with
out having depressive effects on the Treasury bill rate.
The gold outflow had declined in January from the December
and November 1960 levels. While the rate was still high, it was
felt that short-term balance of payments forces were working
toward some reduction in the rate of outflow.
The consensus of the Committee favored no change in open
market policy, with the Treasury bill rate to be watched closely
in conjunction with market needs for reserves. However, within
the framework of the directive, which was broad enough to en
compass his own position, one member (Mr. Robertson) felt
that open market policy should be aimed toward providing a
more ample supply of reserves in order to enable the banking
system to make what contribution it could toward reversing the
downward economic trend. This member suggested that, as the
economy began to move upward, interest rates would rise and
the current outflow of capital, to the extent that it was based on
interest rate differentials, would be reversed.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Fulton, King, Leedy, Mills, Robertson, Shepardson,
Szymczak, and Irons. Votes against this action: none.
There appeared to have been little or no improvement in the
levels of output, employment, and trade since the preceding
meeting. Although steel mill operations were up slightly from
the depressed December levels, automobile assemblies had slipped
further, and it seemed likely that the industrial production index
would show a further decline of 1 point for January. Long-term
unemployment continued to increase, and there was no signifi
cant change in the seasonally adjusted rate of total unemploy
ment. Lagging automobile sales and department store sales,
reflecting in part severe weather conditions in many areas, had
pulled down total retail trade. While there were some signs of a
leveling off or bottoming out in a few economic sectors, none of
them seemed poised for a rapid upward surge. Nevertheless,
there appeared to be a continued optimistic sentiment in business
and financial markets.
Total loans and investments of banks appeared to have de
clined less than seasonally in January, largely a reflection of
banks continuing to add to their holdings of U. S. Government
securities. The bulk of these additions were in shorter-term
issues, mainly Treasury bills, and this growth, together with
other factors, had improved the liquidity of the banking system.
The seasonally adjusted money supply increased substantially in
the latter part of January after dipping somewhat in the first half,
and preliminary data indicated that by the beginning of February
the money supply was above the year-earlier level. Demand
deposits, which ordinarily fall in January, fell less than usual for
the month, and time deposits continued to show sizable gains.
Member bank reserve positions continued relatively easy on
average during January, although they showed wide week-to-
2. Authority to effect transactions in intermediate- and longer-term securi
ties.
The Federal Open Market Committee authorized the Federal
Reserve Bank of New York, between this date and the next
meeting of the Committee, within the terms and limitations of
the policy directive issued at this meeting, to acquire for the
System Open Market Account intermediate- and/or longer-term
U. S. Government securities having maturities up to 10 years, or
to change the holdings of such securities, in an amount not to
exceed $500 million.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Fulton, Leedy, Mills, Shepardson, Szymczak, and
Irons. Vote against this action: Mr. Robertson.
The Committee's decision to authorize transactions in inter
mediate- and longer-term securities reflected a conclusion that
ANNUAL REPORT OF BOARD OF GOVERNORS
under prevailing circumstances such transactions might facilitate
the implementation of current monetary policy. This policy
called for providing reserves to the banking system to meet the
needs of the current business situation and also for avoiding
direct downward pressure on short-term interest rates or not
resisting any tendency for them to rise, in view of the relation
ship of short-term rates to the balance of payments problem.
While maintenance of the Treasury bill rate could possibly be
accomplished by reducing the availability of reserves to the bank
ing system, this would be inconsistent with one of the current
objectives of monetary policy. On the other hand, the purchas
ing of securities in the intermediate- and longer-term areas, as
contrasted with the short-term area, offered the possibility of
supplying reserves without creating direct pressure on short-term
rates. Also, such purchases, by having a moderating influence
on long-term interest rates relative to short-term rates, might
have the effect of facilitating the flow of funds through the
capital and mortgage markets, thereby encouraging the progress
of recovery. Accordingly, the combination of domestic and inter
national circumstances confronting the Committee seemed to
call for a high degree of flexibility in open market operations.
While some members of the Committee were uncertain as to
the feasibility of attaining the aforementioned policy objectives
through the increased flexibility provided by operating in
intermediate- and longer-term securities as well as short-term
securities, the Committee believed that a determined effort was
warranted. However, it was understood that it would not be the
objective to seek a given fixed rate for Government securities of
any maturity.
Also, there had been a great deal of controversy in recent
years as to the efficacy of the System's policy of operating exclu
sively in the short-term area of the market. Inherent in this
controversy was an apparent feeling that the System was main
taining an unduly rigid attitude in the position it allegedly took
toward its own operating procedures and policies. The entire
FEDERAL RESERVE SYSTEM
issue of the proper techniques for conducting System open market
operations had become one of conceptual contention. It was
felt by the Committee that the conduct of operations outside the
short-term sector of the Government securities market might
contribute to determining whether the criticisms of the System's
policy of confining its open market operations to short-term
securities, except in the correction of disorderly markets, was
warranted. Likewise, it was envisaged that the procedure might
throw some light on the possibility of influencing longer-term
rates while maintaining the short-term rate level.
The initial entry into the market under the program agreed
upon by the Committee contemplated moderate purchases in the
-year maturity range. Then, after the market had be
1- to 5 1/2
come accustomed to the change in System open market pro
cedures, it was contemplated that the Manager of the System
Open Market Account would undertake operations in the 5 1/2
to 10-year maturity range. However, all open market operations
under the special authorization were to be consistent with the
monetary policy set forth in the Committee's current policy di
rective. (At this particular time the directive called for encourag
ing monetary expansion for the purpose of fostering sustainable
growth in economic activity and employment, while taking into
consideration current international developments.) The amount
by which the Account's holdings of intermediate- and longer
term securities could be changed between this date and the next
meeting of the Committee, i.e., $500 million, was part of the
$1 billion limitation contained in the policy directive.
The Committee's action represented a departure from certain
policies set forth in its operating policy statements, which were
last reaffirmed on March 22, 1960, not only because it author
ized operations in intermediate- and longer-term securities but
also because it permitted "offsetting purchases and sales of securi
ties for the purpose of altering the maturity pattern of the
System portfolio." Within the terms of the policy directive it
was possible, for example, that short-term interest rate considera
tions might suggest the sale of short-term securities at a time
FEDERAL RESERVE SYSTEM
ANNUAL REPORT OF BOARD OF GOVERNORS
when the System did not want to absorb reserves. In such a
circumstance, it might be expedient to buy longer-term securities
simultaneously with the sale of shorter-term securities or to make
offsetting transactions within an interval of a few days.
Mr. Robertson, in dissenting from this action, expressed the
opinion: (1) that the established operating procedures and poli
cies of the Committee were, in fact, the product of careful em
pirical and analytical study; (2) that they had proved in practice
to be sound, both in terms of monetary policy and in terms of
fair dealing with the market; (3) that in deviating from its
established policies the Federal Open Market Committee was
in effect asserting, without reason, that it had made a critically
incorrect judgment 8 years ago and had pursued incorrect oper
ating practices since; and (4) that critics of present methods of
operating in the market were relying on the simplest theories of
determination of market interest rates and making allegations on
postulates having little if any basis in empirical fact. In his
opinion this departure from established operating techniques
would not constructively influence market rates, and he gathered
from the discussion that not many (if any) at the table were
confident of such a result. What he was confident of, however,
was that the Committee was running serious risk (a) of under
mining domestic and foreign confidence in the System's integrity
and judgment and the reliability of the new Administration's
assertions of an intent to maintain the stability of the dollar,
(b) of impairing the market for Government securities by
placing dealers and investors in the position of having to guess
which area of the market the Federal Reserve was going to enter
and hence affect prices, and (c) of impeding Government financ
ing by making it extremely difficult for the Treasury to deter
mine objectively appropriate market rates for future intermediate
and long-term financing. It was his view that these risks were
too large to run.
In addition, Mr. Robertson believed it to be inadvisable for
the Committee virtually to abdicate its authority and responsi
bility by giving practically unlimited authority to the Manager
of the Open Market Account (1) to buy and sell securities in
any area of the market up to 10 years, as he saw fit, for the
stated purpose of affecting rates as distinguished from providing
or withdrawing reserves from the banking system, and (2) to
engage in "swap" transactions-i.e., buying securities in one
maturity area and selling in another-to effect changes in rates
and hence marshal the System's portfolio of Government securi
ties against market forces.
Note: On February 20, 1961, the date of initial operations
in the longer-term Government securities market, the Account
Manager, at the direction of the Chairman of the Open
Market Committee, issued the following press statement:
The System Open Market Account is purchasing in the open market
U. S. Government notes and bonds of varying maturities, some of which
will exceed 5 years.
Price quotations and offerings are being requested of all primary
dealers in U. S. Government securities. Determination as to which offer
ings to purchase is being governed by the prices that appear most advan
tageous, i.e., the lowest prices. Net amounts of all transactions for System
Account will be shown as usual in the condition statements issued every
Thursday.
During recent years transactions for the System Account, except in
correction of disorderly markets, have been made in short-term U. S.
Government securities. Authority for transactions in securities of longer
maturity has been granted by the Open Market Committee of the Federal
Reserve System in the light of conditions that have developed in the
domestic economy and in the U.S. balance of payments with other
countries.
March 7, 1961
1. Authority to effect transactions in System Account.
The Federal Reserve Bank of New York was directed by the
Committee to continue to conduct open market operations with
a view toward encouraging monetary expansion for the purpose
of fostering sustainable growth in economic activity and employ
ment, while taking into consideration current international
developments.
@FedFRASER