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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
country's current economic problems. He noted that the country's
ability to withstand heavy balance of payments deficits and ac
companying gold drains was not unlimited and that he had yet
to see any convincing evidence of a real turn in the tide. He ex
pressed particular concern about the volume and breadth of
foreign borrowing in the United States, both from banks and
through bond offerings. In these circumstances, he felt that the
System should edge toward a moderately less easy reserve posi
tion, thus encouraging the development of a somewhat higher
structure of interest rates, particularly short-term rates.
Another member of the Committee (Mr. Mills) continued of
the view he had expressed at previous meetings that a firming of
policy was indicated. At the moment, however, he felt that the
imminent Treasury financing precluded policy changes such as
he had advocated.
Less favorable to economic prospects were the early indica
tions of corporate profits for the first quarter. Although sub
stantially above year-earlier levels, such profits had apparently
failed to hold the rise achieved in the fourth quarter of 1961.
Also, the volume of new orders received by durable goods pro
ducers had declined somewhat further in March from the ad
vanced level reached at the beginning of the year. Stock market
prices continued to decline.
Bank reserves available to support private deposit expansion
had risen more than seasonally in April. Excess reserves had
increased, while the small amount of member bank borrowing
had been further reduced. Free reserves averaged moderately
higher than in March. Total bank loans and investments rose
again in April, with the sharpest increase in bank holdings of
securities other than U.S. Governments. Both total and business
loans had shown moderate strength.
The seasonally adjusted money supply, which increased some
what in March, rose substantially further in April. Time and
savings deposits at commercial banks had continued to rise, but
at a somewhat less rapid pace than in other recent months.
Capital market financing had accelerated in April, and new
corporate issues were substantially above the first-quarter aver
age. Municipal issues held at the relatively high first-quarter
average. Both corporate and municipal issues were expected to
be in smaller volume in May.
Money markets had been generally steady in the 3 weeks pre
ceding the meeting. Federal funds were traded in the 2 -3 per
cent range, with the bulk of the trading at 2 3/4
per cent. Yields
on U.S. Government securities had been unusually stable, while
yields on corporate and municipal bonds had continued to edge
lower.
In the first quarter of 1962, the U.S. balance of payments
position was far more favorable than in the preceding quarter
(partly reflecting seasonal factors), but less favorable than in the
first quarter of 1961. The balance of payments deficit dropped
sharply between March and April, but some of the improvement
May 8, 1962
Authority to effect transactions in System Account.
The economy had continued to register moderate gains in
over-all activity, with little change in commodity prices. One
factor of significant improvement was a sharp rise in March in
the number of new housing units started, following 4 months of
decline of much more than seasonal proportions. Another was
the expansion of business plans for fixed capital outlays, as re
ported by a recent survey. This survey indicated a prospective
rise in such outlays of 11 per cent for 1962, as compared with
a rise of 8 per cent reported by a different survey taken several
weeks earlier. Although data had not yet become available for
total retail sales and industrial production in April, incomplete
weekly and other information suggested moderate further ad
vances. There was no significant change in the rate of un
employment.
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
appeared to have been temporary, probably reflecting move
ments of capital from Canada preceding the abandonment of
flexible exchange rates and the establishment on May 2 of a new
par value of 92.5 U.S. cents for the Canadian dollar.
May 29, 1962
Economic expansion in Western Europe was reported as con
tinuing, possibly at an accelerated rate, while conditions else
where appeared to have shown little change.
Upon consideration of these mixed developments, it was the
majority view that the current posture of monetary policy con
tinued to be appropriate, pending the availability of further in
formation on the strength of the improvement in economic
conditions and on the state of business and financial confidence.
Accordingly, the Committee re-issued the current policy direc
tive to the Federal Reserve Bank of New York that had been
issued at the two preceding meetings of the Committee.
Votes for this action: Messrs. Martin, Balderston, Bryan,
Deming, Ellis, Fulton, King, Mitchell, Robertson, Shepard
son, and Treiber. Vote against this action: Mr. Mills.
In dissenting from this action, Mr. Mills took the position that
a protracted period of credit ease featured by heavy Federal
deficit financing through the banking system had developed an
increasingly unsatisfactory financial situation that urgently re
quired remedial attention. In his opinion, policy actions were
called for that, by moderately reducing the supply of reserves
and by simultaneously shifting emphasis away from pegging the
level of Treasury bill rates, would facilitate return to a free
market concept for the conduct of monetary and credit policy.
The kind of policy revision which he visualized would, in Mr.
Mills' belief, result in a somewhat firmer interest-rate structure
that would serve as an incentive for broader private invest
ment in approaching offerings of new issues of Treasury secu
rities, thereby implying less resort to Federal deficit financing
through the banking system, and would also be regarded abroad
as a desirable central bank action for countering this nation's
balance of payments problems.
1. Authority to effect transactions in System Account.
Following improvement in April, some additional gains in
economic conditions were indicated for May. The April index
of industrial production moved 1 percentage point higher to a
record 117 per cent of the 1957 average, and the index for May
appeared likely to hold at that level or rise slightly further.
A major exception to the moderately improved performance
of the domestic economy was the continued decline in stock
market prices. On May 28, the day preceding the meeting of the
Committee, stock prices broke sharply and at the close had
fallen to a level 24 per cent below the high reached in December
1961. In addition, and almost apart from the stock market de
cline and its possible ramifications, questions were being raised
about the strength of general economic prospects over the
months ahead. Certain leading business cycle indicators, includ
ing data on profit margins and business purchasing policies, were
being interpreted by some analysts as signs that economic expan
sion would not continue long.
Bank loans rose more than seasonally during May, while in
vestments were little changed. Further increases occurred in real
estate and consumer loans, but security loans declined. Loans to
construction firms had been moving up briskly since March,
paralleling the pick-up in building activity.
Bank reserves required to support private deposits declined
considerably more than seasonally in the first 3 weeks of May,
in contrast with a larger than seasonal rise in April. Average
free reserves, however, continued relatively high and were not
significantly different from the April level.
Recent developments in the U.S. balance of payments, al
though still unsatisfactory, were viewed as mildly encouraging.
However, gold and foreign exchange markets, after having been
relatively quiet for some time, recently had shown some nervous
ness with consequent unfavorable effects on the U.S. dollar.
@FedFRASER