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FORTY-NINTH
Annua{ Report
OF THE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATrONS FOR THE YEAR
Period
Action
Purpose of action
Reduced System holdings of U. S. Government
securities by about $500 million through net
sales and redemptions. Member bank borrowings from the Reserve Banks averaged
less than $100 million.
Authorized open market transactions in foreign
currencies.
Increased System holdings of U. S. Government securities by about $1.3 billion, of
which half represented purchases of securities with maturities of more than 1 year.
Member bank borrowings from Reserve Banks
continued to average less than $100 million.
To permit further bank credit and monetary expansion by
absorbing only part of seasonal inflow of reserve funds,
mainly from post-holiday return of currency from circulation, while minimizing downward pressures on short-term
interest rates.
To moderate and offset short-term pressures on the dollar in
the foreign exchange market.
To promote further bank credit and monetary expansion while
avoiding sustained downward pressures on short-term
interest rates.
Mid-J uneIncreased System holdings of U. S. Governlate October ment securities by about $200 million with
net sales and redemptions of Treasury bills
of about $700 million being more than offset
by purchases of coupon issues, of which twothirds were issues maturing in more than 1
year. Member bank borrowings from Reserve
Banks averaged less than $100 million.
July
Reduced margin requirements on loans for
purchasing or carrying listed securities from
70 to 50 per cent of market value of
securities.
To permit moderate increase in bank credit and money supply while avoiding redundant bank reserves that would
encourage capital outflows, taking into account gradual improvement in domestic economy and possibilities for further advance, while recognizing the bank credit growth of
past year and continuing adverse balance of payments.
October
To help meet seasonal needs for reserves, while minimizing
downward pressures on short-term interest rates, and to
provide for the longer-term growth in bank deposits needed
to facilitate the expansion in economic activity and trade.
JanuaryFebruary
February
Marchmid-June
Reduced reserve requirements against time deposits from 5 to 4 per cent, effective
October 25 for reserve city banks and November 1 for other member banks, thereby
releasing about $780 million of reserves.
Late October- Increased System holdings of U. S. GovernDecember
ment securities by about $1.0 billion, with
more than half of the net increase in issues
maturing in more than 1 year. Member
bank. borrowing from the Reserve Banks
rose gradually over period, but only to an
average of about $200 million.
6
To take into account the recent sharp reduction in stock
market credit and the abatement in speCUlative psychology
in the stock market.
To help further in meeting seasonal needs for reserve funds
while encouraging moderate further increase in bank credit
and the money supply and avoiding money market conditions unduly favorable to capital outflows internationally.
In mid-December open market operations were modified to
provide a somewhat firmer tone in money markets and to
offset the anticipated seasonal easing in Treasury bill rates.
7
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
tions attend the meetings of the Committee and obtain guidance
for the conduct of their operations.
The policy directives of the Federal Open Market Committee
are issued to the Federal Reserve Bank of New York as the
Bank selected by the Committee to execute transactions for the
System Open Market Account. During the year 1962 the Bank
operated in the area of domestic open market operations under
two separate directives from the Open Market Committee-a
continuing authority directive and a current economic policy
directive, this separation of directives having been decided upon
by the Committee at its meeting on December 19, 1961, for
reasons set forth on pages 91-94 of the Board's ANNUAL REPORT
for 1961. At the beginning of the 1962 calendar year, the con
tinuing authority directive was in the form set forth in the policy
record entry for the meeting on January 9, 1962. This directive
was changed only once during the year, as described in the
policy record entry for the meeting on March 6, 1962. On the
other hand, the current economic policy directive was changed
frequently during the course of the year, as shown in the respec
tive policy record entries The current economic policy directive
that was in effect at the beginning of 1962 instructed the Fed
eral Reserve Bank of New York as follows:
January 9, 1962
It is the current policy of the Committee to permit further bank credit
and monetary expansion so as to promote fuller utilization of the econ
omy's resources, together with money market conditions consistent with
the needs of both an expanding domestic economy and this country's
international balance of payments problem.
To implement this policy, operations for the System Open Market
Account shall be conducted with a view to providing reserves for bank
credit and monetary expansion (with allowance for the wide seasonal
movements customary at this time of the year), but with a somewhat
slower rate of increase in total reserves than during recent months. Opera
tions shall place emphasis on continuance of the 3-month Treasury bill
rate at close to the top of the range recently prevailing. No overt actions
shall be taken to reduce unduly the supply of reserves or to bring about a
rise in interest rates.
Authority to effect transactions in System Account.
The domestic economic situation, as it appeared from national
and regional reports at this first meeting of the Federal Open
Market Committee in 1962, continued to be characterized by
growth in output and spending, stability in average prices, and a
reduced but still relatively high level of unemployment. There
was a continuing sizable deficit in the U.S. balance of payments.
Domestically, preliminary data indicated that the industrial
production index for December would show a further 1 or 2
point rise to 115-116 per cent of its 1957 average. While total
construction activity dipped in December from its sharply ad
vanced November rate, it remained at a high level and, within
the total, private residential construction continued to rise. Retail
sales had moved up vigorously in October and November, and
department store sales in December were at record levels. Auto
mobile sales, however, declined from their high November levels.
Incomplete evidence on price developments in December sug
gested continued stability in the averages. It appeared that the
seasonally adjusted unemployment rate in December remained
at about the level of 6.1 per cent to which it had dropped in
November from the rates near 7 per cent that had persisted
through most of 1961.
Bank credit increased sharply in December, with the rise in
loans close to or above the record increase of December 1960.
At year-end the money supply (conventionally defined to include
currency in circulation and privately held demand deposits) was
3 per cent larger than at the beginning of the year and had
shown an annual rate of increase of over 6 per cent since
August. Incomplete figures for the week ended January 3 showed
a rather large decline in loans and investments at city banks, and
it was not clear at the time of the meeting whether the sharp
December expansion was a transitorydevelopment or was indic
ative of a longer-run tendency. Short-term money market rates
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
rose somewhat to their highest levels since mid-1960, while long
term bond yields remained fairly steady after their advances of
November and early December.
Shortly before this meeting the Treasury had announced plans
to raise between $1.5 billion and $1.75 billion in new cash dur
ing the month of January, partly by offering $2 billion in 1-year
bills to replace $1.5 billion in such bills maturing during the
month, and partly by a supplementary cash financing the terms
of which were to be announced later.
With respect to the U.S. balance of payments, what evi
dence there was of developments in December indicated continued
deterioration in this country's position. Although December
balance of payments figures had usually shown some improve
ment because of year-end debt payments by foreign countries
to the U.S. Treasury, preliminary and fragmentary figures for
December 1961 indicated a deficit of about the same magnitude
as in the two preceding months. The net decline in the gold
stock in the fourth quarter, although only about half that in
the last quarter of 1960, exceeded the total for the first 9 months
of 1961.
It was the judgment of the Committee that both the economic
situation and the desirability of maintaining an "even keel" in
the money market during the period of the Treasury financing
warranted making no change for the coming 2 weeks in the basic
policy that had been decided upon at the previous meeting of
the Committee (December 19, 1961). Accordingly, the follow
ing current economic policy directive was issued to the Federal
Reserve Bank of New York:
taining current money market conditions, without action to alter the level
of interest rates.
It is the current policy of the Committee to permit further bank credit
and monetary expansion so as to promote fuller utilization of the econ
omy's resources, together with monetary conditions consistent with the
needs of an expanding domestic economy, taking into account this coun
try's adverse balance of payments as well as the Treasury financing
calendar.
To implement this policy, operations for the System Open Market Ac
count during the next 2 weeks shall be conducted with a view to main-
(c) To buy U.S. Government securities with maturities of 24
months or less at the time of purchase, and prime bankers' acceptances,
from nonbank dealers for the account of the Federal Reserve Bank of
New York under agreements for repurchase of such securities or ac
ceptances in 15 calendar days or less, at rates not less than (a) the
discount rate of the Federal Reserve Bank of New York at the time
such agreement is entered into, or (b) the average issuing rate on the
most recent issue of 3-month Treasury bills, whichever is the lower.
Votes for this action: Messrs. Martin, Balderston, Irons,
King, Mills, Mitchell, Robertson, Shepardson, Swan, Wayne,
Fulton, and Treiber. Votes against this action: None.
No change was made in the continuing directive, first adopted
at the meeting on December 19, 1961, when new procedures
calling for separate continuing and current economic policy
directives were instituted. The continuing directive, which re
mained in effect, read as follows:
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, to the extent necessary to carry out
the current economic policy directive adopted at the most recent meeting
of the Committee:
(a) To buy or sell U.S. Government securities in the open market
for the System Open Market Account at market prices and, for such
Account, to exchange maturing U.S. Government securities with the
Treasury or allow them to mature without replacement; provided that
the aggregate amount of such securities held in such Account (includ
ing forward commitments, but not including such special short-term
certificates of indebtedness as may be purchased from the Treasury
under paragraph 2 hereof) shall not be increased or decreased by more
than $1 billion during any period between meetings of the Committee;
(b) To buy or sell prime bankers' acceptances in the open market
for the account of the Federal Reserve Bank of New York at market
discount rates; provided that the aggregate amount of bankers' ac
ceptances held at any one time shall not exceed $75 million or 10 per
cent of the total of bankers' acceptances outstanding as shown in the
most recent acceptance survey conducted by the Federal Reserve Bank
of New York;
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
2. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York to purchase directly from the Treas
ury for the account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue participations to one
or more Federal Reserve Banks) such amounts of special short-term
certificates of indebtedness as may be necessary from time to time for
the temporary accommodation of the Treasury; provided that the total
ment at the meeting for moving toward a moderately less easy
monetary policy in the period before the financing, in view of the
continued expansion of the domestic economy and the persisting
deficit in the U.S. balance of international payments. An oppos
ing view was also expressed, however, reflecting a judgment that
current domestic developments made any firming actions less
appropriate than they might have appeared earlier. On balance,
the Committee favored no change in the basic monetary policy
that had been in effect for the past several weeks, and the follow
amount of such certificates held at any one time by the Federal Reserve
Banks shall not exceed $500 million.
ing current economic policy directive was issued to the Federal
Reserve Bank of New York:
January 23, 1962
1. Authority to effect transactions in System Account.
Available evidence indicated little change in the basic eco
nomic situation in the 2-week period since the previous meeting
of the Committee. While the demand for bank loans appeared
to have moderated somewhat following the large increase in
December, an expansion in domestic activity evidently was con
tinuing, with prices generally stable. There appeared to be
enough unused capacity to accommodate a further increase in
production without creating strong pressures on resources or
prices.
In the period since the previous meeting, and particularly in
the past week, there had inadvertently been a somewhat greater
degree of monetary ease than was contemplated by the Commit
tee, as indicated by some downward drift in Treasury bill rates
from the levels reached early in the month, lower Federal funds
rates, and a relatively large volume of free reserves. This situa
tion had resulted mainly from unexpectedly high levels of Fed
eral Reserve float and a greater than seasonal decline in required
reserves.
An announcement was expected on February 1 of the terms
of a Treasury financing to be carried out later in the month, and
the Committee considered it desirable to maintain steady money
market conditions during the financing. There was some senti-
It continues to be the current policy of the Committee to permit further
bank credit and monetary expansion so as to promote fuller utilization of
the economy's resources, together with monetary conditions consistent
with the needs of an expanding domestic economy, taking into account
this country's adverse balance of payments as well as the Treasury
financing calendar.
To implement this policy, operations for the System Open Market Ac
count during the next 3 weeks shall be conducted with a view to main
taining a supply of reserves adequate for further credit expansion, while
minimizing downward pressures on short-term interest rates. In view of
the imminence of Treasury financing, emphasis shall be placed on main
taining a steady money market.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Irons, King, Mills, Mitchell, Robertson, Shepardson, Swan,
Wayne, and Fulton. Votes against this action: None.
2. Authority for program of System foreign currency operations.
At this meeting the Federal Open Market Committee ap
proved a motion that the Committee go on record as favoring in
principle the initiation on an experimental basis of a program of
System foreign currency operations; that representatives of the
Committee be authorized to explore with the U.S. Treasury, on
behalf of the Committee, needed guidelines for actual opera
tions, drawing on the experience of the Treasury Stabilization
Fund, and to develop plans for effective working relations in the
foreign exchange field between the Federal Reserve and the
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