February 7, 1961 FOMC Minutes

FOMC minutes

Alternate Members Irons, Leach, and Mangels; and nonmember Presidents Deming, Erickson, and Johns. Votes against the recommendation: Member Robertson and Alternate Member Allen. In voting against the recommendation, Mr. Robertson argued along the following lines, which he later submitted in written form: It was his opinion (1) that the established operating procedures and policies of the Committee were, in fact, the product of careful empirical and analytical study, (2) that they had proved in practice to be sound both in terms of monetary policy and in terms of fair dealing with the market, (3) that in deviating from its established policies Market Committee was asserting, without reason or the Federal Open conviction, that it made a critically incorrect judgment eight years pursued incorrect operating practices since, and (4) that ago and had present methods of operating in the market were relying on critics of the simplest theories of determination of market interest rates and making allegations on postulates having little if any basis in empirical fact. further stated that he, for one, believed that Mr. Robertson from established operating techniques would not con this departure influence market rates, and he gathered from the discussion structively that not many (if any) at the table were confident of such a result. of, however, was that the Committee was running What he was confident (a) of undermining domestic and foreign confidence in the serious risk

System's integrity and judgment, and the reliability of the new Administration's assertions of an intent to maintain the stability of the dollar, (b) of impairing the market for Government securities by placing dealers and investors in the position of having to guess which area of the market the Federal Reserve was going to enter and hence affect prices, and (c) of impeding Government financing by making it extremely difficult for the Treasury to determine objectively appropriate market rates for future intermediate- and long-term financing. It was his view that these risks were too large to run. He also felt that the reversal of such a fundamental position as this should not be taken without a public announcement of the nature Market Committee's future operating procedures and the of the Open there would be grave doubt concerning reasons therefor, for otherwise and extent of the System's operations in other than the the purpose area of the Government securities market with a consequent short-term on general public confidence, the diminution of which adverse effect can be ill afforded at this time. it to be inadvisable for the Committee In addition, he believed to abdicate its authority and responsibility by giving virtually to the Manager of the Open Market practically unlimited authority securities in any area of the market up Account (1) to buy and sell for the stated purpose of affecting rates to 10 years, as he saw fit, reserves from the banking from providing or withdrawing as distinguished

system, and (2) to engage in "swap" transactions--i.e., buying securities in one maturity area and selling in another--to effectuate changes in rates and hence marshal the System's portfolio of Government securities against market forces. Chairman Martin then put the question as to whether a statement should be issued explaining the departure from established operating procedures of the Federal Open Market Committee. From the roundtable discussion that had preceded and which then further took place, the majority sentiment, the Chairman thought, was clearly against such a statement and, without objection, he so ruled. In this concluding discussion, it was brought out and strongly emphasized that there was a real risk that this test might be frustrated if word got around the market that System purchases of longer terms were just an experiment. For the test to provide useful empirical evidence, the market needed to look upon the transactions as a change in Federal Open Market Committee practice. In concluding the discussion, Chairman Martin stated that the documentation that the Subcommittee had had before it would be distributed to all of the members and nonmember Presidents for their information. The meeting then adjourned. Secretary's Note: The Manager of the Open Market Account commenced open market operations in longer-term Government securities on the after noon of February 20, 1961. At that time he issued the following statement:

of the Chairman of the Open Market Committee At the direction of the Federal Reserve System, the following announcement was made today by the Manager of the System Open Market Account for the information of the public and all participants in the market for Government securities: "The System Open Market Account is purchasing in market U. S. Government notes and bonds of the open varying maturities, some of which will exceed 5 years. "Price quotations and offerings are being requested of all primary dealers in U. S. Government securities. Determination as to which offerings to purchase is being governed by the prices that most advantageous, i.e., the lowest prices. appear of all transactions for System account Net amounts be shown as usual in the condition statements will issued every Thursday. "During recent years transactions for the System in correction of disorderly markets, Account, except in short-term U. S. Government securities. have been made transactions in securities of longer Authority for granted by the Open Market Committee maturity has been System in the light of conditions of the Federal Reserve economy and in the have developed in the domestic that with other countries." U. S. balance of payments a statement, which The decision to issue reached at the reversed the understanding February 7 meeting, was made in the light of discussions between Chairman Martin, subsequent Mr. Rouse, Manager of the Vice Chairman Hayes, System Open Market Account, and Mr. Roosa, Secretary of the Treasury. The consider Under heavily in the decision was ation weighing most the desirability that all market participants at the same time that the Trading be informed transactions outside the Desk was engaging in short-term sector and that no market group usual in the operations by gain any trading advantage not known by the whole virtue of information market. Secretary