The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FIFTIETH
Annua{ Report
OF THE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATIONS FOR THE YEAR
Period
Description
Purpose
lanuarymid-May
Reduced System holdings of U.S. Government securities and then increased them in line with seasonal
and moderate growth needs of the economy. Total
holdings rose about $470 million on balance, owing
mainly to net purchases of issues maturing in more
than 1 year. Member bank borrowing rose slightly to
a level of about $150 million in the first half of May.
To offset seasonal downward pressures on short-term interest rates
early in the period and to provide for growth in bank credit and
the money supply at a rate consistent with minimizing capital outflows in accordance with the policy of slightly reduced reserve
availability adopted at the December 18, 1962, meeting of the
Federal Open Market Committee.
Mid-Maylate-July
Reduced the degree of reserve availability slightly further. System holdings of U.S. Government securities
increased nearly $1.2 billion, about one-fifth representing net purchases of issues maturing in more
than 1 year. Member bank borrowing increased further, averaging $275 million over the period.
To achieve a slightly greater degree of firmness in the money market in order to minimize the outflow of capital while continuing
to provide reserves for moderate monetary and credit growth.
Mid-July
Raised the discount rate from 3 to 31h per cent.
Raised maximum interest rates payable by member
banks on time deposits (other than savings) and
certificates of deposit with maturities of 90 days to
6 months from 2Y2 to 4 per cent and with maturities
of 6 months to 1 year from 3V2 to 4 per cent.
To help reduce short-term capital outflows by firming U.S. short-term
money market rates and permitting member banks to compete more
effectively for foreign and domestic funds.
Reduced a little further the degree of reserve availLate-Julyability. System holdings of U.S. Government securiDecember
ties increased about $1.1 billion, of which more than
one-half represented purchases of securities with
maturities of more than 1 year. Member bank borrowing averaged about $325 million over the period.
To attain slightly more firmness in the money market, in the context
of a higher discount rate, with a view to minimizing the outflow
of funds abroad while offsetting seasonal reserve drains and providing for growth needs of the domestic economy.
Raised margin requirements on loans for purchasing
or carrying listed securities from 50 to 70 per cent
of market value of securities. Also increased retention requirements on proceeds of sales from undermargined accounts from 50 to 70 per cent.
To help prevent excessive use of stock market credit, which had increased sharply since July 1962, when margin requirements were
lowered from 70 to 50 per cent.
November
8
9
ANNUAL
REPORT OF BOARD OF GOVERNORS
and the United States were subject to reversals in direction, and,
more generally, because the reciprocal currency arrangements
were best viewed as a mutual defense under which short-term
credit would be extended by either party when required by the
other.
In a related action the Committee modified the amounts and
form of the dollar limitations specified in the continuing authority
directive for System foreign currency operations. In place of the
previous limit of $1.75 billion on total foreign currency holdings
at any one time, two separate limits were specified: a limit of
$1.95 billion on foreign currencies held under reciprocal currency
arrangements, and a limit of $150 million on foreign currencies
held as a result of outright purchase. The former figure was equal
to the sum of the amounts currently specified by the Committee
for all individual authorized reciprocal currency arrangements,
and therefore represented the maximum of System covered hold
ings of foreign currencies under these arrangements, in the remote
possibility that they might all simultaneously be fully drawn on.
The limit of $150 million on forward transactions that had been
previously specified was retained.
Reflecting these actions, the directive issued to the Federal
Reserve Bank of New York read as follows:
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 reaffirmed by the Federal Open Market Committee on March
5, 1963, as amended May 28, 1963; provided that the aggregate amount
of foreign currencies held under reciprocal currency arrangements shall
not exceed $1.95 billion equivalent at any one time, and provided further
that the aggregate amount of foreign currencies held as a result of outright
purchases shall not exceed $150 million equivalent at any one time:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
FEDERAL RESERVE SYSTEM
Swiss francs
Belgian francs
Canadian dollars
Austrian schillings
Swedish kronor
Japanese yen
The Federal Reserve Bank of New York is also authorized and directed
to operate in any or all of the foregoing currencies in accordance with
the Guidelines and up to a combined total of $150 equivalent, by
means of:
(a) purchases through forward transactions, for the
purpose of allowing greater flexibility in cover
ing commitments under reciprocal currency agree
ments;
(b) purchases and sales through forward as well as
spot transactions, for the purpose of utilizing its
holdings of one currency for the settlement of
commitments denominated in other currencies;
and
(c) purchases through spot transactions and sales
through forward transactions, for the purpose of
restraining short-term outflows of funds induced
by arbitrage considerations.
Votes for this action: Messrs. Martin, Hayes,
Balderston, Bopp, Clay. Mills, Mitchell, Robertson,
Scanlon, Shepardson, and Shuford. Votes against this
action: None.
Messrs. Mills and Mitchell voted favorably on this directive
despite their opposition to a reciprocal currency arrangement
with the Bank of Japan because the Committee earlier had
approved negotiation of such an arrangement in an action to
which their dissents were already recorded.
November 12, 1963
1. Authority to effect transactions in System Account.
Information available for October indicated a pick-up in
domestic economic activity and broad stability in price indexes,
but a continued high rate of unemployment. Industrial produc
tion was estimated at or fractionally above the September level,
ANNUAL
REPORT OF BOARD OF GOVERNORS
and retail sales had risen to a new high, with automobile markets
especially strong. Construction activity continued steady at a
level about 5 per cent above a year earlier.
Business sentiment appeared more optimistic than earlier. A
private survey of business plans for 1964, released November 8,
indicated an increase of 4 per cent in fixed capital outlays rela
tive to 1963. In past business expansions this survey had tended
to underestimate the amount of change actually realized.
Seasonally adjusted commercial bank credit expanded only
moderately further in October, and growth so far this year had
been somewhat slower than in the corresponding period of 1963.
Business loan demand again was strong, and banks continued to
make substantial sales of U.S. Government securities.
The private money supply, seasonally adjusted, increased
substantially further in October. The rise was associated with
an unusually large decline in U.S. Government deposits at com
mercial banks. Time and savings deposits also increased at a
rate somewhat greater than in other recent months.
Stock market prices declined moderately in early November,
after reaching new highs in late October. The October rise was
associated with a large trading volume and a further increase
in stock market credit. Effective November 6, the Board of
Governors increased margin requirements from 50 per cent to
70 per cent.
Corporate and municipal financing increased sharply in Oc
tober from the moderate volume of preceding months, but was
expected to drop back in November. Yields on U.S. Govern
ment securities continued to rise and except for the longest
maturities were at their highest levels since the spring of 1960.
Rates on 3-month Treasury bills recently had moved above the
31/2 per cent discount rate and prior to this meeting were
3.55 per cent. These rate increases were attributable to a com
bination of factors: a large volume of short-term issues by the
Treasury in the last 10 days of October; continued bank liquida
tion of Government securities; increased optimism about the
FEDERAL RESERVE SYSTEM
business outlook; and an expectation, widely held in financial
markets, that money market conditions might soon become
somewhat firmer.
The third-quarter international payments deficit, sharply re
duced from the second quarter by declines in direct investment,
in new foreign security issues, and in outflows of short-term
money market funds, was estimated at a seasonally adjusted
annual rate of about $2 billion. (This estimate excluded the
effects of special Government transactions and of the July reflux
of window-dressing credits.) Abroad, activity was continuing to
expand, but it seemed possible that limited availability of man
power and other resources in several major European countries
in the face of expanding demands might result in slower rates
of real growth, stronger inflationary trends, and more restrictive
monetary policies in those countries.
The Committee believed that circumstances did not warrant
a change in monetary policy at this time and agreed that over
the next 3 weeks reserves should be supplied to accommodate
the expected seasonal expansion in demand for bank credit.
Within this consensus, however, several members expressed
concern about the recent increases in short-term interest rates,
especially the rise in the rate on 3-month Treasury bills to a
level somewhat above the discount rate. They felt that these
increases were undesirable because they reinforced market ex
pectations of imminent discount rate action and, if continued,
would contribute to upward pressures on both domestic longer
term yields and interest rates abroad. Some other members felt
that the recent increases in short-term rates and the firming of
other credit market indicators were appropriate in view of the
substantial recent expansion of the reserve base and the high
level of liquidity in the economy. They expressed the view that
a firmer policy posture might be warranted in the near future.
The current economic policy directive issued to the Federal
Reserve Bank of New York differed from the one adopted at
the previous meeting of the Committee only by deletion of a
ANNUAL
REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
reference, no longer applicable, to Treasury financing. It read
as follows:
except for the period between the meetings of June 18 and
July 30, when it was $1.5 billion.
It is the Federal Open Market Committee's current policy to accom
modate moderate growth in bank credit, while maintaining conditions in
the money market that would contribute to continued improvement in
the capital account of the U.S. balance of payments. This policy takes into
Votes for this action: Messrs. Martin, Hayes, Bald
erston, Bopp, Clay, Irons, Mills, Mitchell, Robertson,
Scanlon, and Shepardson. Votes against this action:
None.
consideration the fact that domestic economic activity is expanding fur
ther, although with a margin of underutilized resources; and the fact
that the balance of payments position is still adverse despite a tendency
to reduced deficits. It also recognizes the increases in bank credit, money
supply, and the reserve base of recent months.
To implement this policy, System open market operations shall be con
ducted with a view to maintaining the degree of firmness in the money
market that has prevailed in recent weeks, while accommodating moder
ate expansion in aggregate bank reserves.
Votes for this action: Messrs. Martin, Hayes, Bald
erston, Bopp, Clay, Irons, Mitchell, Robertson, Scan
lon, and Shepardson. Vote against this action: Mr.
Mills.
Mr. Mills dissented because he felt that present policy was
undesirably restrictive for viability of the domestic economy.
He thought that measures required to combat any further bal
ance of payments difficulties should be taken in the area of
fiscal controls, and he favored increasing the supply of re
serves to relieve some of the existing upward pressure on in
terest rates and to reduce what he considered to be a threat
to appropriate growth in the money supply.
2. Amendment of continuing authority directive.
In accordance with a suggestion of the Account Manager,
Section 1(a) of the continuing authority directive to the Fed
eral Reserve Bank of New York was amended to reduce the
limit on net changes in the System Open Market Account in
any period between meetings of the Committee to $1 billion
from the $1.5 billion that had been established at the meeting
on October 1. Earlier in the year the limit had been $1 billion,
3. Authority to purchase and sell foreign currencies.
Since early September the U.S. Stabilization Fund had been
engaged in a program of spot purchases of Italian lire for two
purposes: to help the Italian authorities cushion the abrupt
decline that had been occurring in their monetary reserves,
and to accumulate funds for repayment of the Treasury's bonded
debt denominated in lire and maturing over the period from
March 1964 to September 1965. However, the resources of the
Stabilization Fund for this type of operation were limited. The
Special Manager of the System Account recommended that the
Federal Reserve Bank of New York be authorized to make spot
purchases of Italian lire, at a rate above par if necessary, for
purposes of immediate forward sale to the Treasury at the same
rate, in order to assist in achieving the two objectives underlying
recent Treasury lire purchases. He also recommended that au
thority be granted to conduct similar operations in other foreign
currencies in which the Treasury had outstanding indebtedness
to facilitate Treasury repayment of these debts. The Committee
concluded that such operations appeared sufficiently likely to
be useful to warrant their approval on an experimental basis,
and the continuing authority directive for System foreign cur
rency operations was amended by the addition of the following
paragraph:
The Federal Reserve Bank of New York is also authorized and directed
to make purchases through spot transactions, including purchases from
the U.S. Stabilization Fund, and concurrent sales through forward trans
actions to the U.S. Stabilization Fund, of any of the foregoing currencies
in which the U.S. Treasury has outstanding indebtedness, in accordance
ANNUAL
REPORT OF BOARD OF GOVERNORS
with the Guidelines and up to a total of $100 million equivalent. Pur
chases may be at rates above par, and both purchases and sales are to be
made at the same rates.
Votes for this action: Messrs. Martin, Hayes, Bald
erston, Bopp, Clay, Irons, Mills, Mitchell, Robertson,
Scanlon, and Shepardson. Votes against this action:
None.
November 26, 1963
Authority to effect transactions in System Account.
This meeting was held by telephone on the first business day
following the death of President Kennedy. It was called for the
purpose of considering whether action by the Committee was
required to deal with any actual or potential unsettlement in
domestic financial markets or in foreign exchange markets stem
ming from the President's death.
Reports by the Manager and the Special Manager of the Sys
tem Open Market Account indicated that there was no evidence
of adverse market developments as of late morning. The Account
Manager reported that the Government securities market had
opened with a confident tone, and that prices at the opening
were unchanged or slightly higher on securities of various ma
turities. The stock market already had made a good recovery
in early trading. The Special Manager noted that gold and for
eign exchange markets were steady, and that where necessary
central banks were acting to maintain foreign exchange rates
at their previous levels.
The Committee decided that it was desirable, as a precaution
ary measure, to revise its current economic policy directive in
order to insure that the Federal Reserve Bank of New York
would have ample authority to deal with any unsettlement that
might develop. The revision was confined to the second para
graph, and the directive was issued in the following form:
It is the Federal Open Market Committee's current policy to accom-
FEDERAL RESERVE SYSTEM
modate moderate growth in bank credit, while maintaining conditions in
the money market that would contribute to continued improvement in
the capital account of the U.S. balance of payments. This policy takes
into consideration the fact that domestic economic activity is expanding
further, although with a margin of underutilized resources; and the fact
that the balance of payments position is still adverse despite a tendency
to reduced deficits. It also recognizes the increases in bank credit, money
supply, and the reserve base of recent months.
To implement this policy, System open market operations shall be
conducted with a view to cushioning any unsettlement that might arise in
money markets stemming from the death of President Kennedy and to
maintaining about the same conditions in the money market as have
prevailed in recent weeks, while accommodating moderate expansion in
aggregate bank reserves.
Votes for this action: Messrs. Martin, Hayes, Bald
erston, Bopp, Clay, Irons, Mitchell, Robertson, Scan
lon, and Shepardson. Vote against this action: Mr.
Mills.
Mr. Mills dissented for the same reasons he had dissented from
the directive adopted at the meeting of November 12, 1963; he
thought the Committee should modify its policy to one of greater
ease.
December 3, 1963
1. Authority to effect transactions in System Account.
Information on economic and financial developments since
the death of President Kennedy, while quite incomplete, sug
gested that the economy had shown little tendency to depart from
the path of continued moderate advance in over-all activity and
broad stability of commodity prices. Business and consumer
confidence appeared to have remained firm and widespread.
Unsettlement in sensitive commodity and security markets had
been minimal, and corporate stock prices had quickly recovered
from the losses suffered on November 22. Speculative switching
out of dollars into other currencies or gold had been limited.
More complete data on domestic activity in October confirmed
119
@FedFRASER