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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

tem holdings (apart from sums that might be acquired from the Stabiliza
tion Fund) be purchased directly from foreign central banks.
It shall be the practice to arrange with foreign central banks for the
coordination of foreign currency transactions in order that System trans
actions do not conflict with those being undertaken by foreign monetary
authorities.

Proposals of the Special Manager to initiate forward operations shall
be submitted to the Committee for advance approval.
For such operations, the New York Bank may, where authorized, take
over from the Stabilization Fund outstanding contracts for forward sales
or purchases of authorized currencies.

3. Transactions in Spot Exchange
The guiding principle for transactions in spot exchange shall be that,
in general, market movements in exchange rates, within the limits estab
lished in the International Monetary Fund Agreement or by central bank
practices, index affirmatively the interaction of underlying economic
forces and thus serve as efficient guides to current financial decisions,
private and public.
Temporary or transitional fluctuations in payments flows may be
cushioned or moderated whenever they occasion market anxieties, or un
desirable speculative activity in foreign exchange transactions, or excessive
leads and lags in international payments.
Special factors making for exchange market instabilities include (i) re
sponses to short-run increases in international political tension, (ii) differ
ences in phasing of international economic activity that give rise to
unusually large interest-rate differentials between major markets, or
(iii) market rumors of a character likely to stimulate speculative trans
actions.
Whenever exchange market instability threatens to produce disorderly
conditions, System transactions are appropriate if the Special Manager,
in consultation with the Federal Open Market Committee, or in an emer
gency with the members of the Committee designated for that purpose,
reaches a judgment that they may help to re-establish supply and demand
balance at a level more consistent with the prevailing flow of underlying
payments. Whenever supply or demand persists in influencing exchange
rates in one direction, System transactions should be modified, curtailed,
or eventually discontinued pending a re-assessment by the Committee
of supply and demand forces.
4. Transactions in Forward Exchange
Occasion to engage in forward transactions will arise mainly when
forward premiums or discounts are inconsistent with interest-rate differ
entials and are giving rise to a disequilibrating movement of short-term
funds, or when it is deemed appropriate to supplement existing market
facilities for forward cover as a means of encouraging the retention or
accumulation of dollar holdings abroad.

5. Exchange Rates
Insofar as practicable, the New York Bank shall purchase a currency
through spot transactions at or below its par value, and should lower the
rate at which it is prepared to purchase a currency as its holdings of that
currency approach the established maximum.
The Bank shall also, where practicable, sell a currency through spot
transactions at rates at or above its par value, and should raise the rate
at which it is prepared to sell a currency as its holdings of that currency
approach zero.
Spot transactions at rates other than those set forth in the preceding
paragraphs shall be specially authorized by the members of the Com
mittee designated in Section VIII of the Authorization for Open Market
Transactions in Foreign Currencies.
CONTINUINGAUTHORITY DIRECTIVE
ON SYSTEM FOREIGN CURRENCY OPERATIONS

The Federal Reserve Bank of New York is authorized and directed to
purchase and sell through spot transactions any or all of the following
currencies in accordance with the Guidelines on System Foreign Currency
Operations issued by the Federal Open Market Committee on Febru
ary 13, 1962:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Total foreign currencies held at any one time shall not exceed $500
million.

March 6, 1962
L Authority to effect transactions in System Account.

The data on the domestic economy presented at this meeting
showed mixed tendencies and suggested in general that the hesi-

ANNUAL REPORT OF BOARD OF GOVERNORS

FEDERAL RESERVE SYSTEM

tation noted at the preceding meeting was continuing. There
evidently was some modest improvement in employment in Feb
ruary, and the seasonally adjusted unemployment rate declined
to 5.6 per cent from 5.8 per cent in the previous month. Con
struction activity was off slightly from a January level that had
been revised downward since earlier reports. February produc
tion figures were available as yet for only a few products, includ
ing steel ingots and automobiles, both of which showed declines.
It appeared likely, however, that the over-all index of industrial
production in February would recover the 1 point loss of Janu
ary, or at least would not decline. New orders received by manu
facturers of durable goods had risen to a new high in January
and were appreciably above sales in that month.
Partial figures for banks in leading cities suggested that total
bank credit might have increased in February, after adjustment
for usual seasonal changes. Time deposits at commercial banks
continued to expand rapidly, although the rate of increase prob
ably was not so high as earlier. Demand deposits increased on a
seasonally adjusted basis in the first half of the month, but the
situation in the second half was still uncertain.
The Treasury extended the maturities of about $5 billion of
its securities in an advance refunding operation during the latter
part of February, after refunding some $11 billion of maturing
securities earlier in the month. The security markets also ab
sorbed a substantial volume of new corporate issues and an ex
ceptionally large volume of State and local government issues.
Yields on high-grade corporate bonds continued to show little
change, and those on long-term municipal bonds firmed at low
relative levels in the second half of February after their earlier
sharp declines. Long-term Government security yields declined
somewhat in the latter part of the month but medium-term yields
declined more, with the difference reflecting in part the shift of
securities from the medium- to the long-term area in the advance
refunding. Treasury bill rates also declined after the middle of
February, but later rose somewhat.
Incomplete data on the U.S. international payments situation

suggested a marked improvement in the first 2 months of 1962,
with the available figures indicating a deficit close to zero in
January and relatively low in February. It was not clear, how
ever, to what extent this improvement was real and to what ex
tent transitory; many of the underlying figures, including those
for exports and imports, were not yet available for the months in
question. Some of the January improvement was due to a rever
sal of the earlier recorded outflow reflecting short-term lending,
and some to a reversal of the year-end window dressing by for
eign banks. It was noted that figures for the first quarter had
appeared reassuring in 1961 also, and that there might be sea
sonal forces favoring the first-quarter picture.
There were no marked differences among Committee mem
bers with respect to the type of policy called for by these devel
opments. However, some members while not advocating a
substantial shift in policy, were impressed by the probability of
continuing deficits in the international accounts and by the un
derlying elements of strength that they saw in the domestic econ
omy. Therefore, they leaned toward a slightly reduced degree of
ease. Others felt that in view of the recent domestic hesitation
and the apparent improvement in the international accounts it
would be appropriate to increase the degree of ease slightly, with
less emphasis on minimizing downward pressures on short-term
rates. The majority favored no change in policy, and at the con
clusion of its deliberations the Committee voted unanimously to
issue the following current economic policy directive to the Fed
eral Reserve Bank of New York:
In view of the continued underutilization of resources, and particularly
of the evidence of some hesitation in the pace of business activity, it re
mains the current policy of the Federal Open Market Committee to pro
mote further expansion of bank credit and the money supply, while giving
recognition to the country's adverse balance of payments and the need to
maintain a viable international payments system.
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, taking

ANNUAL REPORT OF BOARD OF GOVERNORS
account of the desirability of avoiding undue downward pressures on
short-term interest rates.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bryan, Deming, Ellis, Fulton, Mitchell, Robertson, and
Shepardson. Votes against this action: None. (Mr. King
stated subsequently that if he had been present at the point
in the meeting when this action was taken he would have
voted in favor of the directive.)
2. Review of continuing authorizations.

This being the first meeting of the Federal Open Market Com
mittee after the election of new members from the Federal
Reserve Banks for the year beginning March 1, 1962, the Com
mittee followed its customary practice of reviewing all of its

continuing authorizations and directives. Among other actions,
it voted unanimously to reaffirm the authorization to the Federal
Reserve Bank of New York covering open market transactions
in foreign currencies and the continuing authority directive for
these operations, both of which were first adopted at the meeting
of February 13, 1962, and are quoted in the entry for that date.
The Committee also decided to consolidate the substance of its
previous continuing authority directive covering operations in
U. S. Government securities and bankers' acceptances, first
adopted on December 19, 1961, with that of several separate
authorizations last reaffirmed on March 7, 1961. The latter in
cluded authorizations relating to repurchase agreements in Gov

ernment securities, transactions in bankers' acceptances, the rate
to be charged on special certificates of indebtedness purchased
directly from the Treasury, and the effecting of transactions on a
cash as well as a regular delivery basis. Accordingly, the follow
ing new continuing authority directive was issued to the Federal
Reserve Bank of New York:
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:

FEDERAL RESERVE SYSTEM
(a) To buy or sell U.S. Government securities in the open mar
ket, from or to Government securities dealers and foreign and in
ternational accounts maintained at the Federal Reserve Bank of New
York, on a cash, regular, or deferred delivery basis, for the System
Open Market Account at market prices and, for such Account, to
exchange maturing U.S. Government securities with the Treas
ury or allow them to mature without replacement; provided that
the aggregate amount of such securities held in such Account (in
cluding forward commitments, but not including such special short
term certificates of indebtedness as may be purchased from the Treas
ury 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 of the kinds desig
nated in the regulation of the Federal Open Market Committee in the
open market, from or to acceptance dealers and foreign accounts main
tained at the Federal Reserve Bank of New York, on a cash, regular,
or deferred delivery basis, for the account of the Federal Reserve Bank
of New York at market discount rates; provided that the aggregate
amount of bankers' acceptances held at any one time shall not exceed
$75 million or 10 per cent of the total of bankers' acceptances out
standing as shown in the most recent acceptance survey conducted by
the Federal Reserve Bank of New York;
(c) To buy U.S. Government securities with maturities of 24
months or less at the time of purchase, and prime bankers' acceptances
with maturities of 6 months or less at the time of purchase, from non
bank dealers for the account of the Federal Reserve Bank of New
York under agreements for repurchase of such securities or accept
ances in 15 calendar days or less, at rates not less than (a) the dis
count 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; pro
vided that in the event Government securities covered by any such
agreement are not repurchased by the dealer pursuant to the agree
ment or a renewal thereof, they shall be sold in the market or trans
ferred to the System Open Market Account; and provided further that
in the event bankers' acceptances covered by any such agreement are
not repurchased by the seller, they shall continue to be held by the
Federal Reserve Bank or shall be sold in the open market.
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 dis-

ANNUAL REPORT OF BOARD OF GOVERNORS

FEDERAL RESERVE SYSTEM

cretion, 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 rate charged
on such certificates shall be a rate 1/4 1 per cent below the discount
of
rate of the Federal Reserve Bank of New York at the time of such pur
chases; and provided further that the total amount of such certificates
held at any one time by the Federal Reserve Banks shall not exceed $500
million.

To some extent this sluggishness appeared attributable to tempo
rary factors, such as unusually severe weather conditions.
The slower rate of economic expansion had been reflected in
credit markets. Bank loan expansion had been large, but not un
usually so for the March tax period. Bank investments in U. S.
Government securities had declined more than usual for this
time of year, but holdings of other securities had increased.
While time deposits at banks continued to show sharp gains, de
mand deposits, seasonally adjusted, appeared to be little changed.
The volume of public offerings of corporate and municipal
securities had not been so large during March as in February,
but those offered had been generally well received and a larger
volume appeared in prospect for April. Prices of common stocks
had shown little net change, with trading volume moderate.
Despite the fact that the money market had been relatively
firm because of seasonal and liquidity needs, yields on U.S.
Government and other fixed-income securities declined. Yields
on long-term Treasury bonds dropped below 4 per cent for the
first time since November 1961, and average yields on 3-5
year issues were the lowest since May 1961. Treasury bill yields
had declined from mid-February levels but remained close to
the 1961 highs reached at the end of the year. Rates on Fed
eral funds were generally at or only slightly below 3 per cent.
Free reserves had averaged a little lower in March than in Feb
ruary, partly because of a tendency for actual reserve levels to
turn out below projections. In addition, intermittent downward
pressures on short-term interest rates exercised some restraining
influence on System operations to supply reserves.
Preliminary information on the U.S. balance of payments in
the first quarter suggested a marked reduction in net payments
as compared with the fourth quarter of 1961, but the deficit
appeared slightly larger than in the first quarter of 1961. The
improvement from the preceding quarter apparently reflected
mainly a smaller volume of short-term capital outflows, partly
for technical reasons related to year-end window-dressing oper
ations by banks abroad. The trade surplus, judging by the

Mr. Robertson dissented from the foregoing action for the
same reasons that he dissented on December 19, 1961, from the
adoption of the continuing authority directive. In substance, he
felt that it was an inadequate directive, without sufficient guid
ance and restrictions. A detailed statement of his views is set
forth on pages 93-94 of the ANNUAL REPORT of the Board of
Governors for the year 1961.
March 27, 1962
Authority to effect transactions in System Account.

The domestic economic situation continued in February and
early March to reflect expansion in over-all activity but at a
much slower rate than in the final quarter of 1961. Some key
monthly series, including industrial production and nonfarm em
ployment, recovered in February following declines in January,
and the unemployment rate declined slightly further. The decline
in housing starts continued in February. Preliminary information
indicated little change in retail sales, though with some evidence
of more than a seasonal rise in department store and automobile
sales appearing in the early weeks of March. Gross national
product was tentatively estimated at an annual rate of $548
billion to $550 billion for the first quarter of 1962, compared
with $542 billion in the fourth quarter of 1961.
The performance of the economy thus far in 1962 appeared
sluggish in relation to the high rates of increase that had been
projected in late fall and early winter, and in relation to what
was needed for satisfactory reduction in levels of unemployment.

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