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FORTY-SEVENTH
Annua{ Report
OF THE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATIONS FOR THE YEAR
FEDERAL RESERVE SYSTEM
ANNUAL REPORT OF BOARD OF GOVERNORS
DIGEST OF PRINCIPAL FEDERAL REsERVE. POLICY ACTIONS,
Period
JanuaryMarch
Action
To offset the seasonal inflow
of reserve funds, mainly from
the post-holiday return of
currency from circulation,
while permitting some reduction in borrowed reserves.
Late MarchJuly
Increased System holdings of
Government securities by
nearly $1.4 billion. Member
bank borrowings at Reserve
Banks declined to an average
of less than $400 million in
July.
To promote further reduction in the net borrowed reserve positions of member
banks and, beginning in May,
to provide reserves needed
for moderate bank credit and
monetary expansion.
June
Reduced discount rates from
4 to 3'11 per cent at all
Reserve Banks.
To reduce the cost of borrowed reserves for member
banks and to bring the discount rate closer to market
interest rates.
August
Period
Action
AugustSeptember
Reduced discount rates from
3'11 to 3 per cent at all
Reserve Banks.
To reduce further the cost of
borrowing from the Reserve
Banks and reduce the differential between the discount
rate and market rates of
interest.
AugustNovember
Bought or sold at different
times varying amounts of
Government securities with a
net increase in System holdings of about $1 billion,
including securities held under repurchase agreement
and issues with short maturities other than Treasury
bills. Member bank borrowing declined further to average below $150 million in
October and November.
To encourage bank credit
and monetary expansion by
meeting changing reserve
needs and offsetting the impact of a large gold outfiow
without exerting undue
downward pressure on shortterm Treasury bill rates that
might stimulate further outflow of funds.
Late
NovemberDecember
Authorized member banks
to count all their vault cash
in meeting their reserve requirements and increased
reserve requirements against
net demand deposits for
country banks from 11 to 12
per cent. The net effect of
these two actions, effective
November 24, was to make
available about $1,050
million of reserves.
Purpose of action
Purpose of action
Reduced System holdings of
U.S. Government securities
by about $1.6 billion. Member bank borrowings at the
Federal Reserve Banks
dropped from an average of
$900 million in December to
$635 million in March.
July
DIGEST OF PRINCIPAL FEDERAL REsERVE POLICY
ACTIONS, 1960-Cont.
1960
Reduced margin requirements on loans for purchasing or carrying listed securities from 90 to 70 per cent of
market value of securities.
Authorized member banks to
count about $500 million of
their vault cash as required
reserves, effective for country
banks August 25 and for
central reserve and reserve
city banks September 1.
Reduced reserve requirements against net demand
deposits at central reserve
city banks from 18 to lTYz
per cent, effective September
1, thereby releasing about
$125 million of reserves.
4
To lower margin requirements from the high level in
effect since October 1958 in
recognition of decline in volume of stock market credit
outstanding and lessened
danger of excessive speculative activity in the market.
To provide maiIlly for seasonal needs for reserve funds,
and to implement 1959 legislation directed in part toward
equalization of reserve requirements of central reserve
and reserve city banks.
Reduced reserve requirements against net demand
deposits at central reserve
city banks from 17~ to 16'11
per cent, effective December
1, thereby releasing about
$250 million of reserves.
Sold U.S. Government securities except for seasonal
purchases in last week of
December. Member bank
borrowings at the Reserve
Banks averaged less than $90
million in December.
5
To provide, on a liberal basis,
for seasonal reserve needs, to
complete implementation of
legislation directed in part
toward equalization of reserve requirements of central
reserve and reserve city
banks, and to offset the
effect of continued gold outflow, while avoiding direct
impact on short-term rates
that might stimulate further
outflow of funds.
ANNUAL REPORT OF BOARD OF GOVERNORS
2. Authority to acquire Treasury bills through "swap" transactions.
The authorization given at the meeting on April 12, 1960, and
renewed at the May 3 meeting, to acquire up to $150 million of
1-year Treasury bills maturing July 15, 1960, either by out
right purchase or by swapping other bills, was continued until the
date of the next meeting of the Committee.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Fulton, King, Leedy, Mills, Shepardson, and Irons.
Mr. Robertson voted "no" on this action insofar as it extended
to the acquisition of the 1-year bills by "swap" transactions.
June 14, 1960
1. Authority to effect transactions in System Account.
The data presented for the Committee's consideration included
an extensive review of domestic and international business and
financial developments since the recession low of 1958. Atten
tion was drawn to the developing business investment boom
abroad and to the fact that in many foreign countries the current
problems of adjusting monetary policy to economic events stood
in contrast to those in the United States. The domestic situation
reflected an absence of dramatic business or financial develop
ments since the breakdown of the Summit Conference in Paris
four weeks earlier. While exports were expanding relative to im
ports, in none of the broad categories of domestic demand
inventory accumulation, capital goods, residential building, con
sumer spending, or Government activity-was a marked upsurge
evident. In general, activity continued at a comparatively high
level, with prices relatively stable.
The privately held money supply declined substantially in
May while, on the other hand, the rate of turnover of deposits
continued at an advanced level, and holdings of liquid assets
other than money appeared to have risen further. Interest rates
in markets for both short-term and long-term funds had been
moving downward recently, reflecting not only the sharp reduc
tion in Treasury requirements this year but also some slackening
of other credit demands.
FEDERAL RESERVE SYSTEM
Net borrowed reserves of member banks had been progres
sively reduced since the beginning of the year as required re
serves declined more than seasonally. In recent weeks the Fed
eral Reserve System had purchased Government securities, and
the net borrowed reserve position of banks gave way in early
June to small free reserve positions. A reduction from 4 per cent
to 1/2
3
per cent in the discount rates of the Federal Reserve
Banks, accomplished within the past two weeks, also tended fur
ther to ease restraint on bank credit expansion. Despite the easing
of reserve positions, however, no significant expansion of total
bank credit had occurred. Although borrowings from the Federal
Reserve Banks were considerably below the levels prevailing
earlier in the year, city banks still had a large volume of other
indebtedness, consisting mostly of purchases of Federal funds
from other banks. The banking system also continued to dispose
of holdings of Government securities, principally Treasury bills
and other short-term securities. In view, however, of the con
tinued demand for short-term investments from nonbank in
vestors, bill rates declined further and the gap between such rates
and the discount rate continued to be substantial.
Since no marked shifts in the economic situation were visible,
and since the degree of responsiveness of the banking system to
the recent easing of reserve positions and to interest rate differ
entials was still uncertain, the consensus at this meeting favored
waiting watchfully in the period immediately ahead, although
with the understanding that any deviations in the conduct of open
market operations should be on the side of ease rather than
restraint. In the light of this consensus, the policy directive
adopted at the meeting on May 24, 1960, which provided for
fostering sustainable growth in economic activity and employ
ment by providing reserves needed for moderate bank credit
expansion, was renewed without change.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Bryan, Fulton, King, Leedy, Mills, Robertson, and
Szymczak. Votes against this action: none.
ANNUAL REPORT OF BOARD OF GOVERNORS
2. Authority to acquire Treasury bills through "swap" transactions.
The authorization given at the meeting on April 12, 1960,
and renewed at the two subsequent meetings, to acquire up to
$150 million of 1-year Treasury bills maturing July 15, 1960,
either by outright purchase or by swapping other bills, was con
tinued until the date of the next meeting of the Committee.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Bryan, Fulton, King, Leedy, Mills, and Szymczak.
Mr. Robertson voted "no" on this action insofar as it ex
tended to the acquisition of the 1-year bills by "swap"
transactions.
July 6, 1960
Authority to effect transactions in System Account.
Available data indicated that at midyear economic activity
was at a high, probably close to record, level. Little upward
momentum was evident, however, and uncertainty regarding
future trends continued to be widespread in business circles. Ac
cording to preliminary estimates, industrial production had been
maintained in June at approximately the May level, which was
slightly higher than April, while gross national product in the
second quarter of the year appeared to have shown a modest
advance over the first quarter, due principally to a somewhat
greater seasonally adjusted rate of inventory accumulation than
had been anticipated earlier. Retail sales of automobiles and
consumer goods increased in June following declines in May, and
prices, particularly at wholesale, continued to be quite stable.
The level of unemployment remained relatively high, steel mill
operations declined further through the month of June, and the
seasonally adjusted rate of total construction outlays also had
declined. April data on U.S. foreign trade and preliminary May
figures indicated a slow but steady increase in exports and, if
anything, a slight decline in imports; thus, improvement in the
FEDERAL RESERVE SYSTEM
trade sector of the balance of payments was tending to offset an
opposite trend in the capital sector.
In the period since the preceding Committee meeting there
had been varied and substantial pressures on money and credit
markets, but for the period as a whole large net Federal Reserve
purchases of Government securities kept those pressures from
constricting bank reserve positions. During the month of June
there was a further drop in interest rates, particularly in the
short-term sector; except for the summer of 1958, Treasury bill
rates were lower than at any time since early 1956. The decline
in interest rates reflected mainly fundamental market forces that
had been in process earlier, including the changed position of the
Federal budget from large deficit to small surplus, the lessened
fear of inflation, and a tendency to shift a greater part of the
public's liquid asset holdings from cash to securities. However,
the reduced pressure on the reserve position of banks and the re
duction of Federal Reserve discount rates in the first half of June
also exerted an influence. In June there was a substantial expan
sion in the volume of new financing in private capital markets,
but the seasonal increase in bank loans and the seasonal decline
in bank holdings of securities were both moderate in amount.
While demand and time deposits increased, it seemed unlikely
that the seasonally adjusted rise in demand deposits was sufficient
to offset the sharp drop in May. Treasury deposits continued at
a high level in June, and at the time of this meeting financing
operations that would help to meet large cash needs during the
next two months were in process.
Although some Committee members favored moving some
what further in the direction of making reserves available to the
banking system, the consensus for the period immediately ahead
was to continue to provide reserves at approximately the present
rate, within the general framework of the existing policy direc
tive to the New York Bank which called for fostering sustainable
growth in economic activity and employment by providing re
serves needed for moderate bank credit expansion. Accordingly,
the directive was renewed.
@FedFRASER