The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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,
DIGEST OF PRINCIPAL FEDERAL REsERVE POLICY
ACTIONS, 1960-Cont.
1960
Period
Period
JanuaryMarch
Action
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.
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.
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.
July
August
Purpose of action
Purpose of action
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
FEDERAL RESERVE SYSTEM
Following moderate credit expansion in July and August, total
bank credit expansion in September, according to preliminary
data, was larger than in the corresponding month of other recent
years. Business loans at city banks increased fully as much as is
usual in September, loans on securities rose much more than
seasonally, and bank holdings of securities increased substantially
in contrast to the usual decline. These developments appeared
to have been associated primarily with heavy tax payments in
September. Their liquidity having declined since early in the
year, corporations were compelled to sell securities, as well as
borrow, in order to meet tax payments. As a result of the pres
sures on banks and securities markets engendered by the heavy
demands for liquidity, there had been some rise in interest rates
from the low levels reached in August, notwithstanding actions
on the part of the Federal Reserve System to make reserves
readily available. The money supply increased slightly more than
seasonally in August, and it appeared that there may have been
some further increase in September. The Treasury was expected
to announce within a few days the terms of refunding of the 1
year Treasury bills maturing in mid-October, along with the
terms of an offering to raise new cash.
The latest available information indicated no deterioration in
the trade sector of the U.S. balance of payments, but the short
term capital outflow had intensified, apparently due in part to the
spread between short-term rates of interest in the United States
and the higher rates elsewhere. Net gold purchases by foreigners
in September were equal to total purchases for the two preceding
months.
In the prevailing circumstances, it was agreed that open mar
ket operations should continue to supply needed reserves readily
in order to avoid seasonal strain on bank reserve positions, and
that doubts should be resolved on the side of ease. The feel and
tone of the market were to be emphasized more than statistical
guidelines, since the free reserve figure, for example, was still
distorted by the inclusion of a widely scattered volume of newly
created reserves that were slow in becoming a factor in the
market. To the extent practicable, it was hoped that downward
influences on short-term rates could be minimized. The policy
directive, which called for encouraging monetary expansion for
the purpose of fostering sustainable growth in economic activity
and employment, was again renewed without change.
Votes for this action: Messrs. Martin, Balderston, Bopp,
Fulton, King, Leedy, Mills, Robertson, Shepardson, Szymczak,
Irons, and Treiber. Votes against this action: none.
October 25, 1960
Authority to effect transactions in System Account.
At this meeting the Committee's policy directive was changed
in two respects. Clause (b) of the first paragraph, which since
August 16, 1960, had provided for open market operations with
a view "to encouraging monetary expansion for the purpose of
fostering sustainable growth in economic activity and employ
ment" was amended to add the words "while taking into consid
eration current international developments." In addition, the
first paragraph of the directive, as approved at this meeting, spec
ified that the aggregate amount of securities held in the System
Open Market Account (including commitments for the purchase
or sale of securities for the Account) at the close of this date,
other than special short-term certificates of indebtedness pur
chased from time to time for the temporary accommodation of
the Treasury, was not to be increased or decreased by more than
$1.5 billion. The comparable figure contained in the preceding
directive was $1 billion.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Fulton, King, Leedy, Mills, Robertson, Shepardson,
and Irons. Votes against this action: none.
Gross national product in the third quarter of the current year
was estimated to have declined from the second quarter by a
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
fraction of one per cent, and industrial production, as measured
by the Board's index, appeared to have contracted by approxi
mately 3 per cent from July to September. Thus, although eco
nomic activity remained at a relatively high level, a downward
drift continued. In September, factors on the favorable side in
cluded an increase in new orders for durable goods, a slight
decline in unemployment, and maintenance of a high level of
personal income. However, industrial production, nonfarm em
ployment, the average workweek in manufacturing, and retail
sales were down from August, while housing starts decreased
about 17 per cent to a rate one-third below the peak reached in
1959. Such information as had become available for the first
part of October suggested no significant change in the over-all
trend, although it appeared that some improvement in consumer
spending may have occurred in view of a modest strengthening
of department store sales and satisfactory, though not spectacu
lar, public acceptance of new model automobiles. Initial unem
ployment compensation claims continued at high levels in early
October, and the rate of steel output showed little change.
While no downturn in the volume of exports was indicated by
available statistics, the outflow of short-term capital from the
United States appeared to have continued through the first three
weeks of October, apparently reflecting at least in part the rela
tive attractiveness of short-term rates in foreign centers. The
outflow of gold also persisted, and within the week preceding
this meeting speculative demand from private sources had pushed
the gold price in the London market substantially above $35 an
sonal pattern. Yields on Treasury bills, which had advanced
substantially during the first ten days of October, declined
sharply thereafter to approximately the low levels of early
August, but yields on medium- and long-term securities remained
relatively high and in fact had been following an upward trend
until the past few days.
Projected movements in required reserves and market factors
indicated a need for additional reserves in the amount of ap
proximately $1,300 million for seasonal purposes during the
remainder of the calendar year, and the projections also indicated
substantial drains on reserves in the forthcoming 2-week period
due to market factors. The Treasury was expected to announce
shortly the terms of refunding of a large quantity of securities
maturing in mid-November.
It was the consensus that seasonal reserve needs should con
tinue to be met on a liberal basis, with doubts arising in the
conduct of open market operations resolved on the side of ease
and with emphasis placed on the tone of the market. At the same
time, there was a general view that it would be desirable if the
objective indicated by the consensus could be accomplished with
a minimum of downward pressure on the 90-day Treasury bill
rate, particularly in light of the disparity already existing between
that rate and short-term rates abroad. If, however, a conflict
should arise between providing additional reserves and a further
decline in the bill rate, it was understood that the first of these
considerations would take precedence.
The prevailing circumstances suggested that during the forth
coming period occasions might arise when it would be found
advisable to conduct open market transactions not only in bills
but also in other Treasury securities, to the extent permissible
within the framework of the Committee's operating policy which
limited open market transactions to short-term securities except
in the correction of disorderly markets. Reference also was made
to possible alternative methods of supplying reserves, including
adjustment of member bank reserve requirements through the re-
ounce.
Analysis of bank loan developments during the four weeks
prior to this meeting indicated that most of the record-breaking
to
expansion during the previous four weeks was attributable
heavy borrowing for tax payment
temporary factors, particularly
purposes, and did not reflect a basic change in the economic
in
climate. For the 8-week period as a whole, the net change
customary seabank loans appeared to have been close to the
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
lease of additional vault cash to be counted as required reserves
or through a reduction of the reserve requirement against de
men and consumers failed to provide a basis for optimism regard
ing any significant reversal of trends. The October rise in the
seasonally adjusted rate of unemployment was a matter of con
cern, especially since normal seasonal trends might be expected
to result in a further increase in the number of unemployed over
the next several months. The prevailing tone was therefore one
of mild deterioration, but the declines in economic activity that
had occurred thus far were less severe than those in 1954 and
1957-58, and the available evidence did not seem to suggest
impending acceleration of the rate of decline.
mand deposits of member banks in central reserve cities, both of
which actions would serve to implement the reserve requirement
legislation enacted in 1959.
Insofar as it described the objectives of domestic monetary
policy, the existing directive to the New York Reserve Bank was
regarded as continuing to be appropriate. However, in view of
the increasing import of international developments in relation
to problems within the Open Market Committee's jurisdiction, a
matter to which the Committee had been giving close attention
for some time, it was considered desirable that specific reference
now be made to such developments in the policy directive. Ac
cordingly, clause (b) of the directive was amended for that pur
pose. The other change in the first paragraph of the directive,
enlarging the permissible magnitude of Open Market Account
operations until the next Committee meeting, was made in recog
nition of the volume of transactions that might have to be con
ducted by the Account in pursuing a program such as envisaged
by the consensus.
November 22, 1960
Authority to effect transactions in System Account.
Although the downward drift of certain key statistical indi
cators that had been in process since about the middle of the
year leveled off in October, this appeared to be attributable for
the most part to temporary or unusual factors; no fundamental
moderation of recessionary tendencies in the general economy
was believed to have occurred. As to prospects for the near-term
future, recently released surveys of the expectations of business-
Statistics through the end of October indicated that some
monetary expansion, in accordance with the objectives stated by
the Committee in its current policy directive, had been taking
place. Over a 4-month period total loans and investments of all
commercial banks had increased almost 4 per cent, with the
growth concentrated in holdings of Government securities. While
most of this growth in earning assets reflected expansion in time
deposits, the active money supply (demand deposits and cur
rency) also had risen. The increase in member bank total re
serves in the 6-month period ending with October was a direct
reflection of the credit-easing actions taken by the Federal Re
serve, which, in the attainment of domestic credit policy objec
tives, had more than compensated for the impact on reserves of
the outflow of gold.
The fairly large outflows of capital from the United States that
began earlier in the year appeared to have been continuing, and
foreign gold purchases thus far in November exceeded the total
for each of the two preceding months. Apart from capital move
ments, however, the United States apparently was close to
equality of its international receipts and payments, with the mer
chandise trade surplus continuing to be substantial.
It was the consensus that no change in the current degree of
monetary ease was called for and that a comfortable reserve
position should be maintained in the market. One member of the
@FedFRASER