March 7, 1961

March 7, 1961 FOMC Minutes: Full Text

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington on Tuesday, March 7, 1961, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Irons Mr. King Mr. Mills Mr. Robertson Mr. Shepardson Mr. Swan Mr. Szymczak Mr. Wayne Messrs. Ellis, Fulton, Johns, and Deming, Alternate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and Clay, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Hexter, Assistant General Counsel Mr. Thomas, Economist Messrs. Einzig, Garvy, Mitchell, Noyes and Walker, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Assistant to the Board of Governors Mr. Marget, Director, Division of International Finance Messrs. Holland and Koch, Advisers, Division of Research and Statistics, Board of Governors Mr. Knipe, Consultant to the Chairman, Board of Governors Mr. Yager, Economist, Government Finance Section, of Research and Statistics, Board of Division Governors

Mr. Petersen, Special Assistant, Office of the Secretary, Board of Governors Messrs. Eastburn, Jones, Parsons, and Tow, Vice Presidents of the Federal Reserve Banks of Philadelphia, St. Louis, Minneapolis, and Kansas City, respectively Mr. Black, Assistant Vice President, Federal Reserve Bank of Richmond Mr. Eisenmenger, Acting Director of Research, Federal Reserve Bank of Boston Mr. Brandt, Assistant Cashier, Federal Reserve Bank of Atlanta Mr. Holmes, Manager, Securities Department, Federal Reserve Bank of New York for this meeting, the Secretary reported that In the agenda advice had been received of the election by the Federal Reserve Banks of members and alternate members of the Federal Open Market Committee of one year commencing March 1, 1961, and that it appeared for a period would be legally qualified to serve after they had executed the persons of office. Prior to the meeting, each newly elected member their oaths member had executed the required oath of office. The and alternate members and alternate members were as follows: President of the Federal Reserve Bank of New Alfred Hayes, F. Treiber, First Vice President of York, with William of New York, as alternate member; the Federal Reserve Bank President of the Federal Reserve Bank of Edward A. Wayne, George H. Ellis, President of the Federal Richmond, with Bank of Boston, as alternate member; Reserve the Federal Reserve Bank of Carl E. Allen, President of with W. D. Fulton, President of the Federal Chicago, of Cleveland, as alternate member; Reserve Bank of the Federal Reserve Bank of Watrous H. Irons, President Johns, President of the Federal Dallas, with Delos C. Bank of St. Louis, as alternate member; Reserve

Eliot J. Swan, President of the Federal Reserve Bank of San Francisco, with Frederick L. Deming, President of the Federal Reserve Bank of Minneapolis, as alternate member. duly made and seconded, and Upon motion by unanimous vote, the following officers of the Federal Open Market Committee were elected to serve until the election of their successors at the first meeting of the Committee after February 28, 1962, with the understanding that in the event of the discontinuance of their official connection with the Board of Governors or with a Federal Reserve Bank, as the case might be, they would cease to have any official connection with the Federal Open Market Committee: Wm. McC. Martin, Jr. Chairman Alfred Hayes Vice Chairman Secretary Ralph A. Young Merritt Sherman Assistant Secretary Kenneth A. Kenyon Assistant Secretary Howard H. Hackley General Counsel David B. Hexter Assistant General Counsel Woodlief Thomas Economist Robert S. Einzig, George Garvy, Associate Economists George Mitchell, Guy E. Noyes, Benjamin U. Ratchford, and Charls E. Walker Upon motion duly made and seconded, and by unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account until the adjournment of the first meeting of the Committee after February 28, 1962. Upon motion duly made and seconded, and by unanimous vote, the selection by the Board of Directors of the Federal Reserve Bank of New York of Robert G. Rouse as Manager of the System Open Market Account was approved. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Committee held on January 24 and February 7, 1961, were approved.

The next item listed on the agenda for consideration was the review of the Committee's continuing operating policies, as follows: a. It is not now the policy of the Committee to support any pattern of prices and yields in the Government securities market, and intervention in the Government securities market is solely to effectuate the objectives of monetary and credit policy (including correction of disorderly markets). b. Operations for the System Account in the open market, other repurchase agreements, shall be confined to short-term than securities (except in the correction of disorderly markets), and during a period of Treasury financing there shall be no purchases of (1) maturing issues for which an exchange is being offered, (2) when-issued securities, or (3) outstanding maturities to those being offered for issues of comparable exchange; these policies to be followed until such time as or modified by further action of the they may be superseded Federal Open Market Committee. for the System Account in the open market shall c. Transactions be entered into solely for the purpose of providing or in the correction of disorderly absorbing reserves (except shall not include offsetting purchases and markets), and securities for the purpose of altering the maturity sales of of the System's portfolio; such policy to be followed pattern as it may be superseded or modified by until such time of the Federal Open Market Committee. further action that the Ad Hoc Subcommittee appointed Chairman Martin stated Market Committee on January 10, 1961, met at the meeting of the Open discussion. It was the unanimous afternoon and had a general yesterday deal of conscientious and the Subcommittee that a great feeling of been done on the study of the continuing operating excellent work had since this was such an important matter, it was policies. However, not be wise to try to hasten to a conclusion. felt that it would of the Subcommittee that consideration Therefore, it was the suggestion

of possible changes in the operating policy statements be tabled in order that everyone might have an opportunity to review and study carefully all of the material compiled by the Subcommittee. The Chairman then turned to Mr. young, who stated that in preparation for a recommendation by the Subcommittee on the operating policies the secretariat undertook a draft that was thought to be consistent with the prevailing thinking. This draft was sent to the members of the Subcommittee prior to the meeting yesterday afternoon. Also, after consultation with Chairman Martin, the draft was sent to all Committee members and Presidents not currently serving on the Committee in order to obtain comments and reaction. Various comments and memoranda were received in reply, following which the secretariat took an inventory of the suggestions and recast the original draft material. In doing so, an effort was made to take into account to the fullest extent possible the suggestions that had been advanced, if not directly then by some manner of rephrasing. One issue that remained for decision was whether any revised statements should be called operating "policies" or operating "rules of practice." Another issue was whether the material should be reduced to the fewest possible statements or whether the material should be kept rather inclusive. The New York Bank, for example, had proposed in a memorandum from Mr. Hayes dated March 1, 1961, that the number of rules be kept to a further question was whether the authority to engage in minimum. A

transactions in longer-term Government securities should be reserved to the Committee or whether open authority should be given to the Management of the Open Market Account. This question, on which the secretariat went one way and the memorandum from Mr. Hayes went in the other direction, must be thought through carefully by the Committee and a decision reached. There was also the question whether it would be desirable that the Committee's directive to the New York Bank, as the Reserve Bank selected to execute transactions for the System Account, be divided into a standing authorization and a current policy directive. The standing authorization would contain the detailed instructions for operation of the System Account that change only rarely, while the current policy directive would outline the specific monetary objectives to be sought in open market transactions during the period from the close of the meeting at which the directive was adopted until the next meeting. The secretariat rather leaned toward the view that it would be desirable to break the directive into these two parts, and generally that view seemed to have found favor with the Committee members and other Presidents. However, at least one member of the Subcommittee felt that in making the division the Committee should go further and provide a current policy directive that would include enough specifications to define quite precisely the range within which the Manager of the Account might the succeeding meeting of the Committee. This again was operate until a matter that the Committee must think through, discuss, and decide.

Chairman Martin stated that all of the members of the Committee and Presidents not currently serving on the Committee either had or would receive all of the draft material mentioned by Mr. Young. He then said that unless there were general comments this morning, he would suggest that further consideration of the subject be tabled until a later meeting. Mr. Mills said that on reading the secretariat's proposal and the suggested amendments to it, his reaction had been that the operating policies should be streamlined and that the flexibility in the operation of the Account should be focused in the directive given by the Committee at each of its meetings. He did not know whether other members of the Ad Hoc Subcommittee had approached the problem in that way. However, it seemed to him that this was a fundamental question that must come up for decision by the entire Committee. then turned to Mr. Irons, who said that he thought The Chairman presented the issues quite clearly. It would be desirable Mr. Young had for all of the Committee members to review fully what had been done thus far, and then the Committee must try to reach a decision. Chairman Martin pointed out that Mr. Bryan was one of the Committee members originally named to the Ad Hoc Subcommittee. In Mr. subsequent absence, his alternate on the Open Market Committee Bryan's (Mr. Irons) had been asked to participate in the work of the Subcommittee. Bryan had returned, both he and Mr. Irons would be included Now that Mr. on the Subcommittee.

Mr. Hayes said he had a good deal of sympathy with what Mr. Mills had said. It seemed to him that the memorandum he (Mr. Hayes) had submitted spoke for itself. In brief, he felt that the broader and more flexible the statement of operating policies could be, the better it would be in the light of all the present circumstances. There was no disposition at all on his part or, he felt sure, on the part of Mr. Rouse to limit the complete authority of the Committee to change its mind at each meeting and give whatever instructions it desired to the Manager of the Account. However, the idea of having the briefest possible continuing policy statement seemed worthy of consideration. Mr. Balderston commented that a rather specific current operating directive such as had been suggested by Mr. Irons would be difficult to prepare immediately at the conclusion of each meeting. He (Mr. Balderston) had sympathy with the need for better communication with the Desk by However, if Mr. Irons' idea were favored, thought would have some means. to be given to the method of implementing it. There being no further comments, it was agreed to table the consideration of the possible changes in the operating policy statements. Consideration was next given to the continuing authorizations of customarily reviewed at the first meeting in March of each the Committee actions set forth subsequently in these minutes were taken year, and the that had been listed on the agenda for review at concerning the matters this meeting.

It was agreed unanimously that no action should be taken at this time to amend or terminate the resolution of November 20, 1936, authorizing each Federal Reserve Bank to purchase and sell, at home and abroad, cable transfers, bills of exchange, and bankers' acceptances payable in foreign currencies, to the extent that such purchases and sales may be deemed to be necessary or advisable in connection with the establishment, maintenance, operation, increase, reduction, or discontinuance of accounts of Federal Reserve Banks in foreign countries. A plan for allocation of securities in the System Open Market Account on the basis of total assets of the Reserve Banks became effective September 1, 1953, pursuant to action of the Federal Open Market Committee at its meeting on June 11, 1953. This procedure was amended at the meeting on March 1, 1960, effective April 1, 1960. Prior to this meeting, there had been distributed to the members of the Committee (1) a memorandum from Messrs. Rouse, Manager of the System Open Market Account, and Farrell, Director of the Board's Division of Bank Operations, dated February 24, 1961, containing a pro forma reallocation of securities held in the System Account as of February 1, 1961, and (2) a memorandum from Messrs. Rouse and Farrell dated February 28, 1961, recommending an amendment to the statement of procedure for allocating the System Open Market Account. The proposed change in the statement of procedure involved the fourth paragraph only, which currently read as follows: 4. Increases and decreases in total amount held in the Account shall be apportioned on the basis of the ratios computed for the latest general reallocation.

Mr. Rouse said that the proposed change, as follows, was intended to clarify the existing language and did not involve any revision of current procedure: 4. The Account shall be apportioned during the ensuing twelve months on the basis of the total assets ratios computed for the latest general reallocation after allowing for any adjustments as provided for in Paragraph 3, unless there shall be further adjustments described in Paragraphs 5 or 6. Thereupon, upon motion duly made and seconded, the procedure for allocation of securities in the System Open Market Account adopted pursuant to action of the Federal Open Market Committee on June 11, 1953, and at the meeting on March 1, 1960, effecamended April 1, 1960, reallocation, was tive as of the further amended, effective as of the April 3, 1961, reallocation, to reflect incorporation of the change recommended in the memorandum from Messrs. Rouse and Farrell dated February 28, being understood that the reallocation 1961, it made as of April 3, 1961, would be based to be ratios of each Reserve Bank's daily on the total assets to the total for all average of Reserve Banks for the period March 1, 1960, through February 28, 1961. It was agreed unanimously to continue the existing authorization for distribution reports prepared by the Federal of periodic Reserve Bank of New York for the Federal Open Market Committee, as follows: 1. The Members of the Board of Governors. of the twelve Federal Reserve Banks. 2. The Presidents Open Market Committee. Officers of the Federal *4. The Secretary of the Treasury. for Monetary Affairs. of the Treasury *5. The Under Secretary Secretary of the Treasury working on *6. The Assistant to the debt management problems. Secretary of the Treasury. *7. The Fiscal Assistant reports of open market operations only. * Weekly

8. The Director of the Division of Bank Operations of the Board of Governors. 9. The officer in charge of research at each of the Federal Reserve Banks not represented by its President on the Federal Open Market Committee. 10. The alternate member of the Federal Open Market Committee from the Federal Reserve Bank of New York; the Assistant Vice President of the Federal Reserve Bank of New York working under the Manager of the System Account; the Managers of the Securities Department of the New York Bank; the officer in charge and the Assistant Vice President of the Research Department of the New York Bank; and the confidential files of the New York Bank as the Bank selected to execute transactions for the Federal Open Market Committee. 11. With the approval of a member of the Federal Open Market Committee or any other President of a Federal Reserve Bank, with notice to the Secretary, any other employee of the Board of Governors or of a Federal Reserve Bank. Unanimous approval was given to the continuation of the authorization to the Manager of the System Account to engage in transactions on a cash as well as a regular delivery basis. Upon motion duly made and seconded, the Committee approved, with Mr. Robertson dissenting, a renewal of the existing authorization to the Federal Reserve Bank of New York to enter into repurchase agreements with nonbank dealers in United States Government securities, subject to the following conditions: 1. Such agreements (a) In no event shall be at a rate below whichever is the lower of (1) the discount rate of the Federal Reserve Bank on eligible commercial paper, or (2) the average issuing rate on the most recent issue of three-month Treasury bills; be for periods of not to exceed 15 calendar (b) Shall days; (c) Shall cover only Government securities maturing within 15 months; and (d) Shall be used as a means of providing the money market with sufficient Federal Reserve funds to avoid undue strain on a day-to-day basis.

2. Reports of such transactions shall be included in the weekly report of open market operations which is sent to the members of the Federal Open Market Committee. 3. In the event Government securities covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, the securities thus acquired by the Federal Reserve Bank of New York shall be sold in the market or transferred to the System Open Market Account. Mr. Robertson dissented on the ground that in his opinion repurchase agreements are, in fact, not purchases of securities in the open market, such as the Reserve Banks are authorized by law to enter into, but instead are loans to dealers at fixed interest rates that are not related to yield on the securities, and that such loans are authority of the Reserve Banks. He realized that beyond the statutory of the Committee considered such purchases legal, but in other members to the legality thereof he believed the repurchase view of his doubt as entered into on a wholesale basis, as they had agreements should not be past year, but rather should be used only as a last been during the to finance dealers who are unable to obtain loans at reasonable resort in maintaining an adequate market others in order to aid them rates from for Government securities. that, for reasons he had he was of the opinion Furthermore, years, nonbank dealers should times during the past eight stated many by being furnished loans from the not be given preferential treatment York at lower rates than member banks are Federal Reserve Bank of New from the same Reserve Bank. obliged to pay for loans

The Committee approved, with Mr. Robertson dissenting, a renewal of the authorization to the Federal Reserve Bank of New York (last renewed March 1, 1960) to purchase bankers' acceptances and to enter into repurchase agreements therefor. The authorization was as follows: The Federal Open Market Committee hereby authorizes the Federal Reserve Bank of New York for its own account to buy from and sell to acceptance dealers and foreign accounts maintained at the Federal Reserve Bank of New York, at market rates of discount, prime bankers' acceptances of the kinds designated in the regulations of the Federal Open Market Committee, at such times and in such amounts as may be advisable and consistent with the general credit policies and instructions of the Federal Open Market Committee, provided that the aggregate amount of such bankers' acceptances held at any one time by the Federal Reserve Bank of New York shall not exceed $75 million, and provided further that such holdings shall not be more than 10 per cent of the total of bankers' acceptances outstanding as shown in the most recent acceptance survey conducted by the Federal Reserve Bank of New York. The Federal Open Market Committee further authorizes the Federal Reserve Bank of New York to enter into repurchase agreements with nonbank dealers in bankers' acceptances covering prime bankers' acceptances of the kinds designated in the regulations of the Federal Open Market Committee, subject to the same conditions on which the Federal Reserve Bank of New York is now or may hereafter be authorized from time to time by the Federal Open Market Committee to enter into repurchase agreements covering United States Government securities, except that the maturities of such bankers' acceptances at the time of entering into such repurchase agreements shall not exceed six months, and except that in the event of the failure of the seller to repurchase, such acceptances shall continue to be held by the Federal Reserve Bank or shall be at the same rate as that applicable, at the time of entering into such agreements, to repurchase agreements covering United States Government securities. Mr. Robertson voted against the renewal of the authority to purchase bankers' acceptances because he felt that the Federal Reserve

System should encourage the utmost freedom of market forces and therefore should withdraw from active participation in the acceptance market in the absence of clear indication that such participation would yield specific public interest benefits. He was not aware of any evidence that such benefits had been realized since the authorization was given to the Federal Reserve Bank of New York in 1955. Needless to say, he would oppose the use of repurchase agreements covering bankers' acceptances not only for these reasons but also for the reasons he had given for opposing the use of repurchase agreements covering Government securities. the acceptance market started in Mr. Hayes stated that when New York the Federal Reserve System took an active interest in promoting the System had a legitimate interest and helping it. In his opinion as broad and sound as possible. its part to make that market in doing are inherently a desirable medium for operations Acceptances, he said, participation of the Federal Reserve by a central bank. Further, the of acceptances outstanding that such a small fraction of the total was it be said that the Federal Reserve was making the in no sense could market. he had a fundamental belief in free Mr. Robertson said that intervention on the part of Governmental markets, with as little market was an area where it authorities as possible. The acceptance As he saw it, the Federal Reserve could was not necessary to intervene. its operations, to no good purpose. help but affect the market through not

The Committee approved by unanimous vote the continuation without change of the existing authorization for fixing the rate charged on special short-term certificates of indebtedness purchased direct from the Treasury, pursuant to paragraph (2) of the Committee's policy directive to the Federal Reserve Bank of New York, at 1/4 of 1 per cent below the discount rate of the Federal Reserve Bank of New York at the time of such purchase. The Committee reaffirmed by unanimous vote the authorization for the Chairman to appoint a Federal Reserve Bank to operate the System Account temporarily in case the Federal Reserve Bank of New York is unable to function, such authorization having first been given on March 1, and having been renewed in March of each 1951, year since. The following resolution to provide for the continued operation of the Federal Open Market Committee during an emergency was reaffirmed by unanimous vote: In the event of war or defense emergency, if the Secretary or Assistant Secretary of the Federal Open Market Committee (or in the event of the unavailability of both of them, the Secretary or Acting Secretary of the Board of Governors of the System) certifies that as a result of the Federal Reserve emergency the available number of regular members and regular alternates of the Federal Open Market Committee is less than seven, all powers and functions of the said Committee shall be performed and exercised by, and authority to exercise such powers and functions is hereby delegated to, an Interim Committee, subject to the following terms and conditions: Such Iterim Committee shall consist of seven members, comprising each regular member and regular alternate of the Federal Open Market Committee then available, together with an additional number, sufficient to make a total of seven, be made up in the following order of priority which shall from those available: (1) each alternate at large (as defined below); (2) each President of a Federal Reserve Bank not then either a regular member or an alternate; (3) each First Vice

President of a Federal Reserve Bank, provided that (a) within each of the groups referred to in clauses (1), (2), and (3) priority of selection shall be in numerical order according to the numbers of the Federal Reserve Districts, (b) the President and the First Vice President of the same Federal Reserve Bank shall not serve at the same time as members of the Interim Committee, and (c) whenever a regular member or regular alternate of the Federal Open Market Committee or a person having a higher priority as indicated in clauses (1), (2), and (3) becomes available he shall become a member of the Interim Committee in the place of the person then on the Interim Committee having the lowest priority. The Interim Committee is hereby authorized to take action by majority vote of those present whenever one or more members thereof are present, provided that an affirmative vote for the action taken is cast by at least one regular member, regular alternate, or President of a Federal Reserve Bank. The delegation of authority and other procedures set forth above shall be effective only during such period or periods as there are available less than a total of seven regular members and regular alternates of the Federal Open Market Committee. As used herein the term "regular member" refers to a member of the Federal Open Market Committee duly appointed or elected in accordance with existing law; the term "regular alternate" refers to an alternate of the Committee duly elected in accordance with existing law and serving in the absence of the regular member for whom he was elected; and the term "alternate at large" refers to any other duly alternate of the Committee at a time when the member elected in whose absence he was elected to serve is available. Unanimous approval was also given to a renewal of the resolution set forth below authorizing certain actions by the Federal Reserve Banks during an emergency: Open Market Committee hereby authorizes each The Federal Bank to take any or all of the actions set Federal Reserve during war or defense emergency when such Federal forth below Reserve Bank finds itself unable after reasonable efforts to be in communication with the Federal Open Market Committee Committee acting in lieu of the Federal (or with the Interim or when the Federal Open Market ComOpen Market Committee) Interim Committee) is unable to function. mittee (or such

(1) Whenever it deems it necessary in the light of economic conditions and the general credit situation then prevailing (after taking into account the possibility of providing necessary credit through advances secured by direct obligations of the United States under the last paragraph of section 13 of the Federal Reserve Act), such Federal Reserve Bank may purchase and sell obligations of the United States for its own account, either outright or under repurchase agreement, from and to banks, dealers, or other holders of such obligations. (2) In case any prospective seller of obligations of the United States to a Federal Reserve Bank is unable to tender the actual securities representing such obligations because of conditions resulting from the emergency, such Federal Reserve Bank may, in its discretion and subject to such safeguards as it deems necessary, accept from such seller, in lieu of the actual securities, a "due bill" executed by the seller in form acceptable to such Federal Reserve Bank stating in substantial effect that the seller is the owner of the obligations which are the subject of the purchase, that ownership of such obligations is thereby transferred to the Federal Reserve Bank, and that the obligations themselves will be delivered to the Federal Reserve Bank as soon as possible. Reserve Bank may in its discretion (3) Such Federal purchase special certificates of indebtedness directly from the United States in such amounts as may be needed to cover overdrafts in the general account of the Treasurer of the United States on the books of such Bank or for the temporary accommodation of the Treasury, but such Bank shall take all steps practicable at the time to insure as far as possible that the amount of obligations acquired directly from the United States and held by it, together with the amount of such obligations so acquired and held by all other Federal Reserve Banks, does not exceed $5 billion at any one time. Authority to take the actions above set forth shall be effective only until such time as the Federal Reserve Bank is able again to establish communications with the Federal Open Market Committee (or the Interim Committee), and such Canmittee is then functioning. By unanimous vote, the Committee reaffirmed the authorization given at the meeting on December 16, 1958, and continued at the meeting on March 1, 1960, providing for System

personnel assigned to the Office of Civil and Defense Mobilization Classified Location (High Point) on a rotating basis to have access to the resolutions (1) providing for continued operation of the Committee during an emergency and (2) authorizing certain actions by the Federal Reserve Banks during an emergency. There was unanimous agreement that no action be taken to change the existing procedure, as called for by the resolution adopted June 21, 1939, requesting the Board of Governors to cause its examining force to furnish the Secretary of the Federal Open Market Committee a report of each examination of the System Open Market Account. Chairman Martin then referred to a memorandum distributed with the agenda under date of March 1, 1961, relating to the procedure authorized at the meeting of March 2, 1955, whereby, in addition to members and officers of the Committee and Reserve Bank Presidents not currently members of the Committee, minutes and other records could be made available to any other employee of the Board of Governors or of a Federal Reserve Bank with the approval of a member of the Committee or other Reserve Bank President, with notice to the Secretary. The most recent list of persons so authorized (exclusive of secretaries and records and duplicating personnel), as shown by the Secretary's records, was attached to the March 1 memorandum. Chairman Martin asked whether anyone wished to raise a question to the existing procedure, and no questions were heard. with respect Accordingly, it was agreed unanimously that no action should be taken at this time to amend the procedure authorized on March 2, 1955.

At this point Chairman Martin said that he wished to make the following statement. As indicated by the minutes of the meeting of the Committee on February 7, 1961, it was clearly the understanding that no statement would be released in connection with the decision of the Committee to authorize operations in longer-term Government securities. However, a statement was released on February 20, 1961, coincident with the first operations under the Committee's authorization. He merely wanted to say that although he had cooperated with the Management of the System Account in the issuance of the statement, it was his (Chairman Martin's) decision that the statement should be issued. It was not until the last minute that one could be sure whether or not a statement seemed advisable, but in view of developments that occurred between the date of the Committee meeting and the initial for the System Account, he thought the majority would have transactions him in the action taken. At the same time, he did not want supported anyone to have the impression that the Manager of the Account was in any way acting on his own in making the announcement on February 20; there was in the matter attached to him (Chairman whatever responsibility Martin) and not to the Manager of the Account. Mr. Rouse said that he would like to share some of the responsibility for issuance of the statement. His thought had been that it was such a statement if individual dealers, groups of essential to make dealers, or other parties were not to have special advantages accruing to them.

Before the meeting there had been distributed to the members of the Committee a report of open market operations covering the period February 7 through March 1, 1961, including a brief review of the period since December 7, 1960. A supplemental report covering the period March through March 6, 1961, had also been distributed. Copies of both reports have been placed in the files of the Committee. In supplementation of the written reports, Mr. Rouse commented as follows: Since the last meeting of the Federal Open Market Committee a month ago, money and reserve conditions have been generally comfortable except immediately before and after the Lincoln day weekend when the situation was aggravated by the sizable cumulative deficit accumulating against the New York banks over the weekend. While we have had some help from unexpectedly high levels of float as a result of bad weather and the airlines strike, the System has been able to add reserves when they were most needed without putting undue downward pressure on short-term rates. Except for the past few days, Treasury bill rates rose over the period, partly because the System found it possible to avoid purchases of Treasury bills by supplying reserves when needed through repurchase agreements and through purchases of other than short-term issues. Here again, the System had some help from (1) the announcement by the large New York banks of their plans for issuing time certificates of deposit to corporations, which would tend to create competition for Treasury bills; (2) the early expectations of a poor bill market until after the March tax date, which now by the way have given way to a more optimistic view; and the System's new policy of the growing feeling that (3) operating in a broader range of issues would mean higher (or at least no lower) short-term rates. Over the past few working days, however, bill rates have again come under downward pressure, and sales of short-term securities have been required to keep this from getting out of hand. The reserve impact of these sales has been more than offset by purchases of other securities. Throughout the period sizable purchases of bills for foreign accounts were kept off the market by selling bills from the System Open Market Account.

It is too early to tell what effect the upward revaluation of the Deutsche mark and the guilder will have on international money flows, and how these flows may affect foreign central bank activity in the Treasury bill market. There was considerable churning in international money markets yesterday. We can only hope that the net result will be to reinforce the recent improvement in the United States balance of payments, but it is becoming increasingly clear that international flows of funds will continue to be of great concern to us, and to monetary authorities abroad, for some time to come. These and other varied operations all evidenced the high degree of flexibility needed for carrying out the diverse objectives of current open market policy. So far as money conditions and short-term rates are concerned, the System's activities seem to have achieved a fair measure of success without causing undue disruption or confusion in the money and securities markets. As to the special operations in longer-term issues, we have tried to keep the Committee as fully informed as possible about our operations and the atmosphere in which they have been conducted through the special reports that have been distributed to you. The initial stages of this program have been carried out with reasonable success from the standpoint of market repercussions, which have been remarkably mild so far in view of some of the dire predictions. Dealers responded to the first purchases in a routine manner and appear to have accepted the fact of System operations in longer-term issues as something they can learn to live with. Despite this, there has been, and still remains, a great deal of confusion and misunderstanding which has not yet been dispelled. At this point what the market needs more than anything is a chance for the furor to die down so that dealers and investors generally can get a better understanding of what the System is trying to accomplish in its operations outside the short-term area. A great deal has been said and written about the operations, much of it misleading and ranging from inaccurate to grossly false. Some progress has been made in encouraging a more moderate attitude in the market, especially among the dealers, but only with time, patient explanation, and further experience can the market arrive at a proper evaluation of the newly created operating conditions.

The new approach requires a great deal of flexibility at the Desk and we have had to play pretty much by ear, gaining valuable experience as we went along. The lack of dealer position figures for individual dealers has been a real handicap and a request for them has been held in abeyance in the hope that frequency distribution data may prove to be an adequate substitute. Between now and the next meeting of the Committee, it is quite likely that the Treasury will formulate and announce three financing operations: (1) a junior advance refunding, probably from bonds maturing in 1962 into the 6 to 7 year area (It should be pointed out that this operation is still doubtful and should be treated as confidential.); (2) a new cash financing; and (3) a rollover of April 15 bills. Although the publicity over the System's efforts to raise short-term rates and to lower long-term rates might be expected to reduce the advantages of an advance refunding to the holder of the outstanding issues involved, conditions are still reasonably favorable for an operation of this kind and the Treasury has been advised to go ahead with it. If the usual "even keel" is to be maintained during this operation, the System will probably have to face some additional difficulties and dilemmas, particularly in the period surrounding the March 15 tax date when there will be considerable churning in the securities and money markets. At the instance of Mr. Mills, there was a brief discussion of the prospect of use of the direct borrowing authority by the Treasury around the mid-March tax date, and Messrs. Rouse and Thomas stated reasons why in their opinion it was unlikely that the Treasury would have occasion to resort to that authority. stated that he would like to make certain comments Mr. Robertson First, it seemed to him that, despite all the words that at this point. over the past few weeks in the System had actually engaged had been used, bill rate, as indicated by operation in respect to the Treasury a pegging

the fact that sales were made by the Account yesterday at a time when in his opinion purchases would have been in order. He felt that System operations could not be construed in any way other than an effort to put a floor under the rate on bills. Second, on two occasions during the past few days the Manager of the Account had engaged in swap transactions in the short-term area. Even recognizing the broad authority granted to the Manager by the Committee at the February 7 meeting, Mr. Robertson did not understand that authority for such transactions was included. The minutes contained reference to the swapping of long and short securities, but both of the operations to which he referred involved swaps in the short-term area, which in his opinion went beyond the authority of the Manager except if specifically authorized by the Committee. Third, in his opinion the operations of the Desk during the past period had not been enough in the direction of ease, especially during the past week. He realized that his position favored going further than the Committee consensus, but he did not feel that the operations of the Desk had supplied enough reserves even to be in accord with the consensus. to a question, Mr. Rouse stated that obviously he would In reply disagree with the comment of Mr. Robertson regarding recent operations, and that he would stand on the reports that had been rendered to the Committee.

Mr. Robertson then inquired whether the Committee had contemplated swap transactions in the short-term area, to which Chairman Martin replied that he had thought that at the February 7 meeting the Committee more or less gave the Account Manager broad authority. The Committee was seeking empirical evidence, and if it was going to obtain that evidence the Desk would have to engage in the necessary transactions. Mr. King noted that Mr. Robertson had referred to a pegging operation, which term generally carried with it the connotation of inflationary practice. In this instance, however, the effort was to maintain a bill rate higher than might otherwise have developed through market forces. If this was a pegging operation, at least it was for a purpose different than that usually suggested by the use of the term. Mr. Szymczak commented that current circumstances indicated feasible for the Committee to attempt to give precise why it was not to the Account Management in terms of day-to-day operations. instructions Particularly in view of the diversity of current objectives, the Manager must have latitude to be guided by the feel of the market; he could hardly be expected to operate under detailed instructions. It was not Committee to engage in a pegging operation or to do the intent of the anything except maintain a free market. However, the Committee was attempting to provide reserves to help the domestic economy while at the same time endeavoring to refrain from pushing the short-term rate down because of the problem of the balance of payments.

Mr. Robertson said current operations appeared to constitute an effort to push the short-term rate up, and Mr. Szymczak replied that he thought this was not necessarily the case. Although the short-term rate might go up, the System had no particular level in mind. Mr. Robertson then commented that the argument, if carried to an extreme, would suggest abolishing the Open Market Committee and authorizing the Manager of the Open Market Account to proceed in his own judgment and discretion. There followed comments on the statement issued by the Manager, at the Chairman's direction, on February 20, 1961, regarding the extension of System operations into the longer-term area. Mr. Balderston stated that as one who spoke at the February 7 the issuance of a statement but who urged extreme care meeting against parties, he wished to say that his in dealing fairly with all interested view regarding the issuance of a statement changed completely between February 7 and February 20 in the light of events that transpired. Conpleased that the statement was issued. The issuance of sequently, he was criticism that certain parties may the statement avoided the possible favored by being given an opportunity not available to others. have been that he considered the statement appropriately Mr. Szymczak stated with the decision to issue it. phrased and that he agreed wholeheartedly at the February 7 meeting that Mr. Robertson, who had indicated the issuance of a statement if, contrary to his own view, he would favor

the Committee decided to authorize operations in the longer-term area, stated that he was pleased to observe that members who originally opposed the issuance of a statement had since that time experienced a change of sentiment. Chairman Martin said he would like to make this observation. He felt sure that it would be better for the System if it could limit its operations to supplying and absorbing reserves and say that its operations had nothing to do with interest rates. However, it was not possible to do that. In talking with critics, he had found it difficult to discuss the question of pegging, which Mr. Robertson had properly brought up, in purist terms. Some people outside the System who were opposed to the idea of pegging nevertheless felt that the System ought to provide some guidance in the market occasionally. The Treasury was issuing quantities of securities from time to time which unquestionably exerted an influence on the rate level. Therefore, while it certainly would be easier for the System if it could say that it was simply going to supply and absorb reserves and have nothing to do with interest rates, the influence exerted by the mere supplying and absorbing of those reserves within the framework of the various factors at work in the market was an influence that must be borne in mind. He did not pretend to know the answer, but he felt it was necessary to keep an open mind. In his view, there was no question but that the activities in which the System was currently engaged could lead to pegging. The Committee should watch developments carefully and study all aspects of the matter.

Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period February 7 through March 6, 1961, were approved, ratified, and confirmed. Mr. Noyes presented the following statement with regard to economic developments: In the late winter and early spring of 1957, when industrial production and wholesale prices leveled out--while consumer prices and business capital expenditures were continuing to set new records some observers chose to describe the situation as a "tired" or "fading" boom. The same adjectives might be applied to the recession in the late winter and early spring of 1961. While it is still with us, the downturn seems to have lost momentum. As the current quarter progresses, there is an increasing probability that gross national product will be down moderately-- less than one per cent. In February, industrial production appears to have just about held even--or perhaps declined by one point--we will know in a few days. In any case, it seems unlikely that it will decline further in the current month. The rate of inventory has leveled and may actually be falling--the book value liquidation of manufacturers' inventories declined by only $100 million in January, as compared to a monthly average of $350 million in the New orders held about even, after several months fourth quarter. of decline. Business capital expenditure plans, as reported in the Commerce-SEC survey released yesterday, show a decline of only three per cent for the year, and a small rise from the first to the second half. Recent surveys of consumer confidence and buying intention have generally been interpreted as optimistic--despite some continued weakness in expressed intentions to buy houses and household durables. have had their ups and downs, as Department store sales storms this winter have been more frequent and have seemed to hit were clear a year ago, but the 147 index for February the weeks that suggests demand is at least well maintained. The so-called leading produced a strong showing in January, as more than half indicators of them registered gains. Of all the current data, only the sales and the persistence of a high continuing lag in automobile level of unemployment are disturbing. The latter, of course, lags as business turns up, and the former is widely usually to the unusually severe winter in many areas. attributed

I might add here that we have just received the figures on unemployment for February, which are to be released this afternoon. The actual number of persons unemployed rose to 5.7 million, which yields a seasonally adjusted annual rate of 6.8 per cent. This is 0.2 per cent above January, but the same as December. Our technicians feel that the apparent decline in January is attributable to problems of seasonal adjustment and that, in fact, the seasonally adjusted level has remained about the same for the three months. There are always many good reasons to qualify any appraisal of economic prospects--but there are fewer now than usual. In terms of past experience, almost all the signs point to an increase in economic activity in the coming quarter. Of course, it would be useful to know more, but there is really very little evidence, short of an upturn itself, that one could ask for that is not already at hand, to support the prognosis of a favorable shift in the balance of economic forces. If one feels that monetary policy should attempt to anticipate changes in business, either for the better or the worse--then the present situation might properly be interpreted as calling for a shift in policy. As I have just suggested, it is unlikely that we shall have any more convincing evidence than we have now that we are approaching a turning point until after the turn has in fact occurred. Having said this much, I should like to go a little further, to add that it does not seem to me that the situation I have reported calls for any lessening of the degree of ease presently prevailing in credit markets. While some progress has been made is less liquidity than at the end of other postwar recessions there and there is more idle manpower and more idle capacity. The risk of a runaway boom that would take up the slack in the economy and inflationary pressure quickly seems very small generate serious indeed. situation in none of the more volatile areas of expenditure-- The business capital outlays, residential coninventory accumulation, durable goods purchases--seems conducive to struction, or consumer the early generation of excessive demands on available resources. Governmental expenditures--Federal, State and local--will undoubtedly increase, but the magnitude of the increase in the months immediately moderate. The danger from this source, if a danger in ahead will be fact develops, will come later. developments in the last four weeks appear to confirm, In brief, the conclusion presented at the last meeting rather than modify, shall see some further decline in the current quarter, that we followed, in all likelihood, by a gradual recovery.

Mr. Thomas presented the following statement on the credit situation: In February short-term interest rates tended to rise, while long-term interest rates declined. Stock prices rose to new high levels on exceptionally active trading. Bank reserve positions were somewhat tighter than they had been in January, although in the latter part of the month the persistence of float at a higher level than usual served to increase free reserves at least temporarily. Total loans and investments of city banks, which declined much less than usual in January, fluctuated rather widely in February, with no pronounced trend. The seasonally adjusted money supply, which increased considerably during January, was at a higher level in February then at any time in over a year, but showed little further growth in the course of the month. Diverse movements of interest rates in February may no doubt be attributed to some extent to Federal Reserve operations and to the effects on market participants of System and Administration statements as to aims. There were other factors, however, some of which may be transitory. In the short-term area, for example, dealers have considerably reduced their positions in Treasury bills from the large holdings accumulated in December and early January. City bank holdings which had previously increased, were also reduced in February. of bills, With some reduction in reserve availability in the first half of the month, many member banks needed to borrow in the Federal funds market and occasionally at the Reserve Banks. The discount cent no doubt serves to prevent much decline in bill rate of 3 per rates. Even during the extremely easy reserve periods of 1954 and remained within 3/4 of a the 3-month bill rate generally below the discount rate. With similar amounts of percentage point free reserves, bill rates were much lower than they are now because the discount rate was lower. The further decline in long-term rates may be attributed in part to seasonal factors. Yields on long-term bonds by each major issuer group, after declining in the first eight months of year, rose contra-seasonally from August until December. last in these yields from December to the last half of February Declines been a little less than the usual seasonal decrease. appear to have The largest decline occurred in corporate bonds, and this may be due in part to the small volume of new issues in this area. Yields on State and local government bonds have remained relatively firm, reflecting a moderately large volume of new issues and the accumulation of unsold offerings in dealers' inventories.

It may be noted that, contrary to a popular impression, the decline in yields on long-term U.S. Government bonds from the peak reached in January 1960 has been approximately as large as the declines from previous peaks to lows in the two previous recessions. Also, the spread between yields on 3-month Treasury bills and the average yield on long-term Treasury bonds has widened less in the past year than it did in the 1957-58 decline in interest rates. In other words, long-term yields have declined as much as bill yields relative to the previous period of decline. Total loans and investments at city banks, following a less than seasonal decline in January and a substantial increase in the week of February 1, which was due largely to the special Sears transaction, showed little net change in the four weeks ending March 1 (as indicated by partial data for the latest date). Ordinarily some decline occurs in February. There have been rather wide variations in recent weeks. Increases in loans to business and to sales finance companies during February were roughly in accord with seasonal trends. Loans to dealers in securities, which had been rather large in January, Government declined in February. Holdings of Government securities also but holdings of other securities showed a sizable declined, increase. City bank holdings of Treasury bills were reduced. Reflecting in part the effect of the Treasury refunding operations and the approach to maturity of outstanding issues, the banks' holdings of certificates also declined, but their holdings of notes within one year increased by almost as much as and bonds maturing the decrease in bills and certificates. Holdings of notes and maturing in over a year continued to decline, notwithstanding bonds the shift in the maturity of the new issue. deposits adjusted at city banks declined by about Demand in February, after declining less the usual seasonal amount in January. Time deposits continued to show than seasonally than seasonal increase. U.S. Government deposits a greater also increased substantially. The daily average, seasonally supply continued to increase in the first half adjusted money of February and preliminary data indicate the possibility of a higher average for the second half of February--the slightly level in over a year. Most of the recent increase, highest however, had already been attained by early February. Weekly little further growth since that time. data indicate recent leveling out of monetary growth is reflected The required reserves relative to in the figures for member bank of the usual seasonal pattern. After projections on the basis less than usual through the week of declining substantially February 1, changes in required reserves fell below the pronext three weeks, but then rose, jected levels during the data, in the week of March 1. according to preliminary

Total reserves were maintained in the three weeks ending February 22, in part through a somewhat larger volume of member bank borrowing than had recently been customary, and were kept up in the week of March 1 primarily by the continuation of float at a higher level than expected. All of these differences, however, were too small to be of any great significance. If they have any particular import, it is that there was little or no further monetary expansion after the beginning of February. In this current statement week and the next, some $500 million of additional reserves will need to be supplied in order to meet current needs and maintain free reserves at close to $600 million. The experience of the last two months indicates that a free reserve level of over $600 million is conducive to credit expansion, while a level below $500 million may not be. Projections of reserve needs around the middle of March are unreliable because of variations in the timing of large tax payments and float. In any event liquidity needs are substantial at that time and reserves should be abundantly available. Substantial amounts will probably be supplied through the midmonth increase in float, and System operations, after supplying reserves in the first half of the month, might be reversed somewhat to absorb some reserves in the last half. To meet seasonal needs, only moderate increases in the Federal Reserve portfolio will be needed on balance during the second quarter of the year, with the usual intramonth variations. These estimates allow for a continued gold drain of $25 million a week; if this should not develop, System action to supply reserves may need to be negligible except for the intramonth operations. To foster credit growth, however, an additional $50 million or more a month might be needed. Demands in credit markets in the months ahead might be expected to require more bank reserves than are allowed for in these projections. As indicated in the memorandum on the Treasury cash outlook given to the Committee, even with moderate economic recovery Treasury borrowing needs will be much larger during the remainder of this year than they were last year, and those during the last six-months may be as much as $9 or $10 billion, exceeding borrowings in the corresponding periods of 1958 and 1959. In order to indicate the possible nature and magnitude of demands on the credit system, the Board's staff has made some projections of sources and uses of credit on the basis of stated assumptions as to economic recovery. Net borrowing by State and local governments is likely to increase and to be

larger this year than in any previous year. The increase in home mortgages is now running less than in 1959 and 1960 but might be expected to increase in the last half of the year. Corporate borrowing--both at long- and short-term--will probably continue to be smaller than in other recent years. Total expansion of all types of credit in 1961, under such assumptions, would be similar in amount to 1960 and 1957, but less than in 1955, 1958, and 1959. The commercial banking system will probably be called upon to supply a somewhat larger portion of these credit needs this year than last, principally through additions to holdings of securities, and more than in any other year except 1958. The expansion in bank credit may occur with only a moderate increase in loans. Such expansion in bank credit would be needed to provide for a resumption of expansion in the money supply, which showed little growth in 1959 and 1960. In addition, time deposits at commercial banks will probably continue to increase at close to last year's rate. Consumers may be expected to increase their additions to deposit-type assets, as well as their claims on insurance and pension reserves, but might reduce their holdings of securities. Liquid assets of corporations, which declined last year, might be expected to increase moderately this year in holdings both of cash balances and of Government securities. This pattern of financial development would call for an increase in bank reserves of well over half a billion dollars in the course of the year--or an average of about of usual seasonal needs. $50 million a month in excess These reserves would need to be supplied by Federal Reserve credit, and any gold outflow would necessitate additional amounts of Federal Reserve credit. Hence, to finance recovery the System should supply somewhat more economic reserves than the usual seasonal needs. If the projected develop, the availability of reserves in credit demands would not cause a decline in interest rates, such amounts would be needed to prevent too sharp an increase. but a question by Mr. Mills regarding the weight that In reply to be given to seasonal interest rate movements as an should properly Mr. Thomas agreed that such data must element of economic analysis, they represented merely a rough indication be studied carefully, that

of the nature of the situation, and that the broad movements over longer periods tended to be more accurate guides. Mr. Marget then presented the following statement on international financial developments: Last Saturday the German government announced an appreciation of the mark. This was closely followed by a comparable announcement by the Netherlands government with respect to the guilder. According to one line of thinking which has become fairly widespread, these actions should be regarded as events of very great importance for the United States balance of payments. For, according to this thinking, the deficit in the United States balance of payments has not only been--as, in a sense, every dificit must be--a reflection of the surplus in the balance of payments of certain other countries, of which Germany was the most notable, but has been the result basically of a wrong set of foreign exchange rates. In particular, the German over-all surplus was alleged to be the result of an undervaluation of the mark. Correct that undervaluation and the German surplus would disappear, and with it the United States deficit, and therefore all the balance-of-payments problems of the United States. It would be pleasant to believe that the matter is as simple as this. Unfortunately it is not. It might be well, therefore, to review the argument of those who, while they insisted that the decision with respect to the foreign exchange rate of the mark was basically one for the Germans themselves to make, and while they did not regard the prospect of an appreciation of the mark as necessarily portending disaster, nevertheless refused to accept the suggestion that it was in this direction that we must seek salvation of the international payments system in general, and of the United States balance of payments in particular. In the first place, it was known that the extent of the supposed "under-valuation" of the mark, as calculated by those Germans who themselves favored an appreciation of the mark, was very small--around 5 per cent, according to these Germans themselves. And in fact the announced appreciation has been of this order. Given any reasonable degree of flexibility in profit margins, it is difficult to believe that a change of this magnitude will so seriously affect the competitiveness of German industry as to destroy the German surplus at one stroke. On the other hand, it will be interesting to see

what effect the announcement of this small degree of appreciation will have on those movements of capital which have been so largely affected, in recent years, by expectations of an appreciation of the mark. If the speculative fraternity becomes convinced that this is the final answer on the question of the appreciation of the mark, then perhaps we shall have peace in this area for a while, and we may even see some reflow to the United States of funds that went abroad on the expectation of a German appreciation. But if the smallness of the degree of appreciation convinces the speculators that it can be regarded only as a first instalment on a much larger degree of exchange adjustment, it is anything but clear that we shall have the peace that we have been seeking in this field. It must be said, however, that, if the step was to be taken at all, it was well to take it at this time, when our new Administration's repeated statements of its determination to defend the dollar at its present parity have apparently served to reestablish confidence in our currency. For one of the dangers inherent in an emphasis upon the necessity for an appreciation of the currency of surplus countries is that it encourages an obvious counter-argument that could have very disconcerting consequences: namely, that if it is the exchange rate that is at fault, it is, after all, just as reasonable to insist that the deficit countries correct the situation by depreciating their exchange rates to insist that the surplus countries appreciate theirs. as it is It may very well happen, indeed, in the days immediately ahead of us, that the very smallness of the degree of appreciation of the mark may lead speculators to precisely this view with respect to the exchange rate of the British pound, and thereby intensify speculative pressure on the pound considerably to have been expected in any event as the beyond what was result of the clear weaknesses in the basic position of sterling, which have until very recently been masked by the very capital movements that have masked the undeniable improvement in the basic balance-of-payments position of the United States. It is that this improvement in our basic position, together to be hoped commitments of our new Administration, may with the unequivocal the United States a similar back-lash of speculative spare consequent upon the action by the German and Dutch sentiment but on this we shall have to wait and see. authorities; reason why some have felt that it was wrong to The second upon the desirability of appreciating the mark, put all emphasis in particular, as a way of solving the balance-of-payments States is really independent of the extent problems of the United

of the appreciation involved. For there is the further issue of the sharing of burdens by the Western alliance: in the fields of development assistance, on the one hand, and a contribution to the joint military effort, on the other. The Germans, to be sure--and, for that matter, a very considerable proportion of the Western financial community, including its central bankers--have persistently denied that there is any connection whatever between a country's balanceof-payments position and its ability to contribute to interin the field of development assistance and national efforts joint defense. I cannot take the time here to go over the relevant arguments in detail. But surely one thing is certain: and this is that if a country is to provide a net amount of development assistance, for example, it must surplus in its balance of payments. Otherwise there have a be nothing to transfer as assistance to the recipient would The difficulty with Germany, in this respect, countries. was not that it had a balance-of-payments surplus, a good of which was going to the less-developed countries; part the difficulty was that it had not shown itself willing to finance that surplus, with the result that it acquired a of monetary reserves from countries which, very large amount in one way or another, were financing this development assistance. If, now, the effect of an appreciation of the destroy the German suprlus, as some commentators mark were to is likely to be the case, we should still be have suggested left to face the problem of who is going to provide the development assistance and the means for military expenditures abroad, which certainly makes part of our balance-of-payments It is for this reason that the United States problem. while it has maintained an attitude of neutrality Government, on the subject of the advisability of an appreciation of the mark per se, has made it very clear that it does not regard of the mark as in any sense a substitute for an appreciation in the field of development assistance and those measures, military burden-sharing, which it regards as reasonable to from Germany as a member of the Western alliance. expect does not take the necessary measures in these two If Germany fields, the additional burdens will fall upon us; and no amount of sophistication can get around the fact that these additional burdens would seriously aggravate our balance-ofpayments problem. And there is a final, and decisive, reason why it would be extremely unwise to rely for the solution of our own balance-of-payments problem wholly upon the actions of other governments, in the field of exchange-rate policy or in any

other field. It is always fair to ask of surplus countries that they follow, in the field of trade and aid, those policies which are characterized collectively as "good creditor policies." But to go beyond this, and to insist, or imply, that nothing can be done by the deficit countries to get their own international accounts in balance and keep them in balance is a position whose inherent absurdity is matched only by its possibilities for a fatal weakening of moral fiber in the field of national policy-making. We have indeed made great progress toward a balancing of our international accounts since the low point of the spring of 1959; and our own policy actions have undoubtedly played a role in the achieving of that progress. If this slight adjustment of the German and Dutch exchange rates turns out, without adverse consequences otherwise, to help along the process of adjustment in our basic position, well and good; but it will still be true that the future of the United States balance of payments, and all that hangs on its, will depend fundamentally upon our own actions: and specifically, and prosaically, on the degree of success we attain in pursuing those policies, in all fields, which will keep us competitive in the markets of the world and here at home. Mr. Hayes presented the following statement of his views on the business outlook and credit policy: Economic activity has continued to decline moderately, as indicated by January statistics and fragmentary data for February. There is no sign of a speed-up in the recession. On the other hand, although the decline in some series slowed and there was an actual upturn in others, this evidence is too fragmentary to warrant a judgment that the bottom has been reached. Some indications of improvement in February, as in department store and automobile sales, may have been attributable largely to the weather. Consumer buying intentions point to a more favorable outlook than could be supported by current statistics, and likewise business sentiment seems more buoyant than actual business spending. There is no way of knowing whether inventory liquiits course. On the one hand, manufacturers have dation has run liquidating purchased materials and goods in apparently stopped However, the inventory position of finished goods (both process. manufacturers' and retail) remains rather heavy. Continuing stability in commodity prices has contrasted with the considerable rise in stock prices. The latter development may not be entirely a healthy one and may perhaps reflect fears

of future inflation as much as optimism on the business outlook. Nevertheless, the stock price rise in itself probably constitutes a stimulus to greater consumer and business spending. The latest statistics on bank credit and bank reserves are again encouraging. Total loans and investments at weekly reporting member banks recorded a sizable gain in February--a much stronger showing than in most recent years--and the comparison is favorable even if we adjust for the inclusion in February figures of a $1.1 billion sale of receivables by Sears Roebuck to the company's banks. The larger New York banks generally expect their loans to hold up well or to rise somewhat in the coming months, in contrast with declines during the corresponding period of 1958. Total reserves of all member banks, on a seasonally adjusted basis, rose substantially in February to surpass the 1960 high set in November (the gain above the April 1960 low being at an annual rate of 6 per cent); and required reserves, adjusted, reached a record high in February. There is also considerable cause for gratification in having to do with the dollar and the balance recent developments of payments. I am thinking of such items as the sharp reduction outflow, the drying up of demand and sharp price in the gold drop in the London gold market, and the preliminary statistics pointing to the virtual cessation of the outward flow of shortin January and February. However, this improvement term capital by the atmosphere of uncertainty following the is threatened revaluations, and it could easily be upset by German and Dutch variety of developments casting doubt on our any one of a willingness and ability to follow through on the statements and actions responsible for the improvement. Even though the business outlook is not especially encouraging, the fact that the trend is no worse than in the past few months and that we may even be seeing some faint signs pointing to recovery suggests that we can afford to continue about the same policy we have been following, without to ease further. On the other hand, the banks should any effort continue to be given sufficient reserves to meet all reasonable demands--and incidentally, with the likelihood of continuing serious unemployment even after an uptrend gets well under way, would seem appropriate to contemplate continuing a relatively it easy policy for a longer period than may have been desirable in earlier post-war business recoveries. Since we have made only a beginning (if a rather gratifying one) toward remedying our balance-of-payments position and the of confidence in the dollar, the level of short-term problem interest rates must continue to be a matter of primary concern to the Committee. It seems to me that policy in the next three weeks should be directed mainly to preventing any decline in

bill rates and preferably to encouraging some further rise. Subject to this overriding objective, I would hope the Manager would try to preserve about the same degree of ease in the market as has prevailed in the past few weeks, again as measured by the feel of the market rather than by any particular level of free reserves. If, as seems quite possible, it proves necessary to let free reserves fall well below their recent level in order to keep bill rates from going lower, I would be quite prepared to see this happen. It is hard to predict just what will be required in the way of open market operations, since there will be important cross-currents influencing market rates, including the usual seasonal dividend and tax pressures around the middle of the month and the greater scarcity of bills which will follow redemption of the March tax bills. The Manager may be able to moderate downward pressures on bill rates by spreading purchases along the maturity spectrum, thus making good use of the greater flexibility which the Committee has authorized him to exercise. At the same time I hope that the coming three weeks will provide a further opportunity for cautious probing with respect to the possibilities for nudging longer-term rates in a downward direction. The desirability of lower rates to help stimulate the economy is no less now than it has been. I am very glad that the Manager has moved with such care and moderation in this program, and I have no dobut that [sic] he will continue to do so. I think the System has made a good start toward demonstrating that it can operate in intermediate and longer-term governments in a more or less "routine" fashion, without upsetting the market or entrapping itself in any sort of pegging operation. But it is obvious that much more time and much more testing will be needed before the policies we have adopted can be said to have had a fair trial--and I believe the Committee agrees that a fair trial is what we must seek, now that we have set our course. Incidentally, I feel strongly that many of the press comments on the new policy have been ill-informed and have been critical on the basis of gross misinterpretation of our intentions. I would hope that all parts of the System would share in the important job of education that must be done if we are to minimize this critical attitude and provide a reasonably objective atmosphere in which to carry out our probing operations. Furthermore, I think it is essential, if our operations outside the short-term area are to make the maximum possible contribution to the economy, that the authorization for these operations be as broad as possible. To allow the public to think that they have been authorized merely as a "temporary aberration" would be to hobble their effectiveness from the start, as I believe was explicitly recognized at our last meeting.

As for the discount rate and the directive, there appears to be no reason to consider a change at this time. Mr. Johns reported that within the St. Louis Reserve Bank there was some feeling that the forces of economic contraction might be losing some of their energy and that possibly a turnaround in economic activity might be imminent. He expressed the hope that it would be possible for the Committee to continue, as it had been doing recently in modest degree, to encourage monetary expansion. In saying this, he wished to emphasize that he was speaking of expansion in most modest terms; he was not advocating that the Committee proceed recklessly and in terms of large increments. He would hope, of course, that this could be accomplished within the interest rate objectives the Committee had adopted, and he was encouraged to believe that this might be possible. that at a briefing session last Friday the staff Mr. Bryan stated of the Atlanta Bank was able to point out a few Sixth District economic series that had actually turned upward, and there were several others where the rate of change downward had slowed markedly. There appeared to be a prevailing note of optimism on the part of the staff and, except for the this note of optimism seemed to be fairly general thoughState of Florida, out the District. He shared the staff's feeling that the economy might be or at least that there was no great danger that the recession bottoming out, would turn into an accelerating slide. Mr. Bryan indicated that, like Mr. Johns, he Turning to policy, would favor a continued modest encouragement of monetary expansion. He

did not believe that at this stage there was any danger of inducing inflation by a very modest monetary expansion. In his view, the Committee's prime concern should not be the short-term rate, but rather the encouragement of economic recovery. The short-term rate was an important factor, but it should be of secondary concern. If the Committee should get hypnotized by the short-term rate, it might easily fall into errors of policy. Mr. Bopp stated that, along with the fragmentary glimmerings of optimism appearing on the national scene, there were a few hopeful signs in the Third District. Steel production had increased a little in recent weeks and department store sales had improved somewhat, as had freight car loadings. While unemployment claims were still high, they indicated that unemployment might not be as severe as in 1958. In commenting on the monetary situation, Mr. Bopp said that despite decreases in bank credit and deposits since the beginning of the in the District still reflected the influence of credit year, bank data ease. The declines seemed not to be as pronounced as might be expected at year. Reserve city banks had begun borrowing again on a this time of continued to borrow. One reason for the small scale and country banks State funds for fourth class school districts had been latter was that authorities were forced to borrow from their somewhat delayed and school local banks. that the slight promise of improvement Mr. Bopp expressed the view economy was not adequate to support any change in the over-all in the

degree of ease. Attention should continue to be focused on open market operations in maturities beyond the short-term area. These had been handled skillfully and the results thus far were gratifying. Even this early in the game, however, it might be well to caution against expecting too much. Some of the conditions under which the operations were being conducted were unfavorable, and the fact that they were necessarily experimental made it more difficult to achieve the desired results. The market clearly had a "show me" attitude. A second disadvantage was the cycle in which the experiment had been begun. If it turned stage of the the operations had a limited effect in lowering long-term rates, out that this might not necessarily indicate that similar operations could not be more successful in an earlier phase of recession when expectations of lower rates were greater and when, in fact, lower long-term rates might be more effective in stimulating the economy. In general, Mr. Bopp said, he would continue the present degree of ease. reported that in the Fourth District insured unemployMr. Fulton ment had increased more than seasonally and was widespread. The unemployment situation was reflected in the number of cities in the District, both large and small, that had been classified as areas of substantial labor surplus. Coal production had edged down to an all-time low, and electric power output was substantially below a year ago. Auto sales declined in January, and it seemed there was no pick-up in February.

While department store sales in the past two weeks had been above the year-ago levels, for the year to date sales were 3 per cent under a year ago. The steel industry, Mr. Fulton said, continued in the doldrums. Orders from the automotive industry were almost nonexistent, and those orders already on the books were being pushed back for delivery at some later date. However, some orders from other users of steel had been coming in on an emergency basis. If the steel they wanted was on the dock, a sale was made; if not, they went elsewhere. Inventories of steel users apparently were being kept at minimum levels, and their purchases of steel seemed to reflect that situation rather than any pickup in orders. Auto production a considerably depressed rate; the dealers were caught in was of course at squeeze, with too much inventory for them to move successfully. a profit feeling in the steel industry was that the automobile situation The current to any great extent until the fourth quarter of the year, would not improve when new models might give a stimulus to sales. The profit squeeze a severe problem in many industries, particularly in the continued to be which had another contractual wage increase coming up in steel industry, October. While they were able to absorb the increase last December, they did not think they could do so next time. Mr. Fulton said, the situation in the Fourth District In summary, bright. Perhaps the most optimistic factor was that although was far from were somewhat less in dollar amount than last year, capital spending plans

there had been few cut-backs in the planned expenditures. Also, inventories of heavy finished goods had been reduced somewhat. In terms of policy, Mr. Fulton indicated that he would favor a continuation of the degree of ease that had prevailed recently. He was hopeful that the degree of ease would not be reduced precipitantly, thus depriving the market of funds. He continued to hope that the directive would be changed to provide for fostering "recovery" rather than "sustainable growth." Mr. King said it was tempting to speculate on exactly what stage of the cycle the economy was in at the present time. However, this was clearly not a time to make any significant change in System policy. After commenting on the unemployment figures and the significance he attached to them, Mr. King said it was quite evident that economic recovery was not yet in progress. Consequently, from the point of view of monetary policy he saw little point in trying to make a case that the recession was bottoming out or that a turnaround might be near. Concerning the bill rate, he had expressed the view in the past that the System could get quite a bit of mileage out of a bill rate increase, and he now felt that the System had gotten considerable mileage out of the rise of the bill rate that occurred. As to the experimentation in longer-term securities that the Committee authorized on February 7, he wished to say for the record that he would have concurred in that action had he been present at that meeting. If the going to give the experiment a fair chance to succeed, he felt Committee was

it would be working at odds with the objective of lower long-term rates if an effort was made to push short-term rates higher. He did not believe it was possible to control the bill in minute degree, but he would be satisfied with a rate in the range of 2.25 to 2.50 per cent. As he saw it, there was little to be gained from any pressure to push the bill rate higher than it now was, and a rising bill rate might work against any drop in longer-term rates. There was a question in his mind as to whether any substantial results would be obtained from the experimentation in the longer-term area. However, the experiment was being conducted in a spirit to do whatever was possible to help the recovery of the economy. of trying it a fair chance, he thought there was a basis for not pushing To give up further at the present time. He saw no reason for a short-term rates discount rate. As to free reserves, they seemed likely to change in the a stage in his thinking where he range quite widely, and he had reached give a target figure at this particuconsidered it rather futile to try to lar time. that he would agree generally with the Mr. Shepardson indicated of the economy. Further, since it staff appraisal of the present state might come, it seemed entirely to tell just when an upturn was not possible He agreed with the present degree of ease. to continue the appropriate for growth, within reasonable that there should be some provision suggestion If the current degree of ease as called for by the directive. bounds, with some slight provision for growth, it could be fully maintained,

appeared to him that this would be consistent with the stated objective. The short-term rate was still a factor to be considered. However, by using the new approach authorized by the Committee, it might be that both objectives, that is, monetary expansion and maintenance of the bill rate, could be achieved. Mr. Robertson said that he agreed generally with the views expressed It was his feeling that monetary policy had not by Messrs. Johns and Bryan. contribution to recovery of which it was capable because of been making the the bill rate. He found himself even less convinced the emphasis placed on than at previous meetings as to the necessity of holding up the bill rate. More important than that, however, was the failure of the Committee to provide adequate reserves to enable the economy to turn in an upward He was pleased at the indications of a possible turn-around direction. this was no time to relax, and he would increase the in the economy, but availability of reserves. He would shoot at free reserves in the range of $650 to $750 million; if the figure got as high as $750 million, he concerned, in fact rather pleased. As far as the bill rate would not be it was time for the Committee to get away from using it was concerned, for open market policy. If the level of free reserves as the criterion he had mentioned was maintained and the bill rate dropped, he would not be concerned. Mr. Marget's statement on the Mills expressed the opinion that Mr. affairs had provided a guide of the United States in international position

to the Committee's thinking for some time ahead. He (Mr. Mills) continued to believe that the international financial situation was the marginal factor on which the Committee should base its policy formulation. Although he realized he was decidedly in the minority, he felt that the reserve situation in the reserve weeks of February 1, 8, and 15, when the level of positive free reserves was modestly below $500 million, was appropriate to the international problem. Also, in his opinion a Treasury bill rate which ranged to 2-1/2 per cent was consistent with the balance-of-payments position, a problem with which the Federal Reserve still must contend. As policy that would produce a level of positive free reserves of he saw it, a around $500 million would be more desirable than an injection of reserves of raising the level of free reserves to $600 or $700 million. to the point There was, of course, the unresolved question as to whether a $500 million level of free reserves was distorted by lack of familiarity and experience vault cash into required reserves. However, with the effects of taking that the placing of such a volume of experience of earlier years indicated of the commercial banking system had reserves consistently at the disposal expansion of credit at times when such expansion been adequate to permit was sought. the Committee should keep in mind an Mr. Mills then suggested that Thomas. Beginning around mid-year the important fact brought out by Mr. into deficit, which would Treasury would fall increasingly position of the the market for new cash. When that involve more frequent recourse to

occurred, presumably the Federal Reserve System would have to make allowance for the Treasury borrowing through the provision of reserves. If at such time the volume of free reserves was already at an extravagant level in relation to economic conditions, the Federal Reserve would only compound its difficulties by overloading the banking system with superfluous reserves. As he had indicated, Mr. Mills said, he believed a somewhat lower level of free reserves would be consistent with the kind of policy that should guide the Committee at this juncture in the light of international events, and also because such a reserve position should produce a reasonably high level of Treasury bill rates. If there was a lesser volume of reserves available in the financial community, this might mean that the impact of System operations in the intermediate and longer-term sectors of the Government securities market would be sharper than if such operations were undertaken within the context of a scheme of bill rates lower than those experienced in recent weeks. Mr. Wayne reported that a spot check in the Fifth District indicated a feeling of optimism for the first time in nearly a year, but the optimism appeared to exceed the statistical support. There was some encouragement in the chemical industry and in the new orders received by the furniture The textile industry, on the other hand, was somewhat disturbed industry. about the effect of foreign competition on its profit margins. Mortgage money appeared plentiful and rates were under considerable pressure. However, lenders did not expect to let mortgage rates ease off as yet,

preferring to wait and see what would develop. Bankers did not appear surprised by the decision of the Open Market Committee to authorize operations in longer-term securities. They were displaying interest in the decision of New York City banks to offer negotiable time certificates of deposit to corporations, and there was some indication that Fifth District banks might move in the same direction. Mr. Wayne went on to say that it would be premature to maintain there was any clear evidence that the recession had bottomed out. Nevertheless, all of the evidence that was available seemed to indicate that if the economy had not bottomed out, it was very close to that point. In his view, there would be no strong reason to increase the degree of ease that had existed for the past several weeks. At the same time, he concurred in the view that because of the amount of unused resources and the volume of unemployment, the Committee might be able to continue the present degree o ease somewhat longer than would otherwise be the case. He saw little dang of inflation. In his opinion the Desk had handled operations over the pas several weeks with skill, and he would be reluctant to set specific target for open market operations during the next three weeks. However, he saw no reason to change the present degree of ease, the policy directive, or the discount rate. Mr. Clay said there were no economic developments in the Tenth on which it seemed necessary to report. As to the national District picture, encouragement could be derived from the fact that the downward

movement appeared not to be cumulative, and there appeared to be some slight evidence that the downward movement was stopping. On the other hand, it was still not possible to tell when an upward movement might begin. Perhaps a more important factor was the unusually high level of unemployment and unused resources. These levels were higher than might be expected from the standpoint of cyclical considerations, and they might prove to be intractable even at the time of a cyclical upturn. Mr. Clay expressed the view that monetary policy should continue to be directed toward encouraging an expansion of economic activity. In view of the international situation, he would not like to see short-term rates decline. Within the limitations of that statement, however, he felt that a continuing effort should be made to squeeze longer-term rates downward. Mr. Allen reported that business in the Seventh District supported the topic sentence in the staff's highlight summary to the effect that recessionary forces appeared to have lost strength. The steel operating index at the end of February had risen to 93 in the Chicago area and to 90 in Detroit. That compared with 85 for the nation, which was also an improvement over the recent past. For the four weeks ended February 25, department store sales in the District were a little higher than last year, as was the case for the nation. The automobile business, while poor compared with other years, improved as February progressed, and seasonal factors should bring further improvement. The feeling in Detroit was that February would

turn out to be the low sales month of the year. Production for the first quarter was likely to be only 1.2 million units, and current estimates for the remaining three quarters were 1.3, 1.0, and 1.5 million, making 5.0 million for the year, the poorest showing since 1958. Bank loans showed signs of strength in February, Mr. Allen said, with total loans of Seventh District weekly reporting banks increasing about $100 million in the first three weeks of the month, almost as much as in the same period last year. To meet the loan demand and also a deposit decline of $200 million, District reporting banks sold Government securities, both short- and longer-term. Total holdings of Governments of over one year maturity declined, despite substantial acquisition of the new 3-1/4 per cent notes on February 15. The temporary pressures on reserves in the week of that financing had abated, and borrowing at the discount window dropped to a negligible level by the end of the month. Although the larger Chicago banks had acquired a substantial amount of Treasury bills in anticipation of the April 1 tax date and still showed deficit, they had improved their position by sales of securities a basic and did not use the discount window in the latest statement week. Turning to policy, Mr. Alien commented that the apparent abatement of recessionary forces was most welcome and might well be followed by an increase in business activity. However, there was not enough evidence of the latter to suggest that a change in the direction of monetary policy was in order. Accordingly, he would not change the discount rate, the directive, or the degree of ease, which had been more or less constant for some time.

Mr. Deming stated that, for the most part, economic developments in the Ninth District during the past four weeks were similar to those in the nation, and represented a continuation of the developments he had reported previously. However, one exception in the District picture should be noted: loan demand currently was significantly stronger than had been anticipated. In February, city bank loans turned up rather sharply. This upward movement, due only partly to participation in the Sears financing, almost completely reversed the January experience and expectations. Taking the two months together, loans were down seasonally, but not much, and not much more than in the same period last year. Deposits also were down seasonally, but not much and far less than last year. movements together, it could be said that the Taking loan and deposit trend toward greater bank liquidity continued, but at a substantially and that the level of liquidity was not particularly high. reduced rate, respect to credit policy, Mr. Deming suggested continuation With of about the present degree of ease, perhaps shading that a bit by having of ease rather than on the side of tightness. any deviations on the side to use the short-term rate as a general At the same time, he would continue in such a way as to keep it from falling guide line and direct operations He saw no need to change the directive or discount in significant degree. rate at this time. that Twelfth District developments had not been Mr. Swan stated in the country generally. There had markedly dissimilar from developments

been some improvement in the seasonally adjusted rate of unemployment in the three Coastal States during January, and the increase in unemployment compensation claims in California in the first three weeks of February were somewhat less than in other recent years. Also, there had been a slight improvement in the rate of steel output, and construction contract awards were up markedly in January. On the other hand, unemployment continued at a high absolute level. Lumber production, production of durables, and automobile sales were still weak. There had been some easing in the mortgage market, reflecting primarily an increased availability of funds, but with only scattered indications of actual rate reductions. Some analysts had indicated that the increased availability of funds might be contributing to an improvement in the market for existing houses and there had been some increase in FHA and VA applications for that type of financing. However, little or no effect was seen from the standpoint of the market for new houses or plans of builders for the next few months. Mr. Swan said there were no particular indications as yet of any increase in the current demand for bank loans. In the past couple of weeks, the position of major District banks in the Federal funds market was roughly in balance between purchases and sales. There had been virtually no borrowing from the Federal Reserve Bank during the past 10 days or two weeks. As to policy, Mr. Swan said he had no particular change to suggest in view of the program on which the Committee had now embarked. He felt

that the Desk had done well during the past couple of weeks, but at the same time he would like to express the view that one should not be carried away by any appearance of success. Even with the forecast of a possible upturn of the domestic economy, the current domestic situation--if it were possible to concentrate solely on that--obviously argued for more ease. Even if a recovery should begin there would be quite a long way to go. While he agreed that the Federal Reserve must still concern itself with the short-term rate, he had some apprehension about the definition of undue pressure. He did not feel that any pressure that might tend to move short-term rates down from whatever level they might reach was necessarily "undue" pressure. To put it another way, he had the feeling that whatever significance may have been ascribed to a rate of 2-1/4 per cent several weeks ago was now being ascribed to a rate of 2-1/2 per cent, and he would not like to see a continuation in that direction. It was difficult to quantify this point of view, but he agreed with those who had suggested that the Federal Reserve should encourage monetary expansion as much as possible in the present circumstances. He was impressed by the remark of Mr. Thomas to the effect that a level of $600 million of free reserves perhaps was necessary to obtain some credit expansion. Therefore, he would hope that free reserves could be maintained in the range of $600-$650 million if possible, having in mind the concern that the Committee still must have for the international situation and the short-term rate. He would not favor a change in the discount rate at this time, and he had no

suggestion with regard to the directive except that he would prefer to have it call for fostering "recovery" rather than "sustainable growth." Mr. Irons said that conditions in the Eleventh District were quite good and that there had been some improvement in the past month. The January industrial production index for Texas was up two points, with fairly broad strength throughout the various categories, and construction awards in January were at an all-time peak for that month. Department store sales were up a little more than seasonally, perhaps due to good weather, while the petroleum situation was a bit better than it had been. In March, production was on a 10-day allowable basis. In general, therefore, District conditions were reasonably satisfactory, considering the stage of the present cycle. The position of District banks was liquid, Mr. Irons said. There was relatively little borrowing from the Reserve Bank, and District banks were net sellers of Federal funds. said his appraisal of the national picture was about as Mr. Irons Mr. Noyes. He went on to express satisfaction with the described by performance of the Desk during the past month, and said he would like to of about the same degree of ease. He aligned himself see a continuation with the thinking of Mr. Mills with regard to open market policy generally of the policy he would have in mind, he would say Using figures indicative of free reserves, a bill rate of around 2-1/2 per cent, about $500 million funds rate of around 2-1/2 per cent, plus or minus a quarter. and a Federal

It would not disturb him if there was some borrowing, as in the past threeor four-week period. He would make reserves available, but not excessively so; he would not like to move toward further ease. For the period ahead, it would be fortunate if the Desk could continue to do as fine a job as it had done during the past month. With regard to operations in the longerterm market, Mr. Irons said he believed Mr. Hayes had referred to a cautious probing. He liked this expression, and he would favor continuing along that line. He saw no reason to change the discount rate or the directive at this time. Mr. Ellis reported that in the First District statistics indicated continuation of a slight downward tilt in production and employment. In the light of this situation, it was somewhat surprising that business be as good as it was. Perhaps this was because in the optimism could the employment record, for example, had been a little better First District country generally in the past year. In construction there than that of the had been some stimulation from nonresidential and heavy engineering contract awards, which tended to offset weakness in residential construction. Preliminary tabulations from the recently completed spring survey of capital investment intentions, covering companies representing about 15 per cent of manufacturing employment in New England, indicated that intentions for 1961 were about 2 per cent below the 1960 level. However, after elimination of the extremes within the survey, roughly no change Past experience with this series would indicate that any was indicated.

continuing contraction probably would be overstated, so the results of the survey were fairly reassuring. Consumer spending continued to hold up vell, considering the amount of unemployment. The ski resorts had missed most of the snow, and there appeared likely to be an early end to the season. Department store sales for the past four weeks were 4 per cent above last year and the year-to-date sales were also up. Mr. Ellis remarked that business loan demand was stronger than expected in January, but that the banking situation continued to be one of ease. Sales of Federal funds continued to exceed purchases, both in number and amount, and the level of borrowing from the Reserve Bank was the lowest in the past five years. A check on mortgage loan rates at mutual savings banks indicated that six banks had lowered their average rates but that four others had increased their rates, so in effect there was no change in the level. Mr. Ellis noted a Boston member bank, in a special supplement to its monthly letter, had raised certain serious questions about the recent Committee action authorizing operations in longer-term Government securities. After summarizing the nature of the comments in this release, Mr. Ellis said he had made it a point to talk to several bankers, academicians, and representatives of investment funds in order to obtain their reaction. In general, the opinions of the bankers ranged from strongly critical to cautiously neutral, while the academicians endorsed the move and felt that it was overdue. In the judgement of the investment trust and pension fund

people, the impact of the operations on interest rates would be relatively minor. They did not expect too much, but they were watching developments closely to judge the effectiveness of the action. With regard to monetary and credit policy for the next few weeks, Mr. Ellis suggested that perhaps a bill rate of around 2-1/4 per cent could If the short-term rate was thought of as a be lived with satisfactorily. hurdle set up for the Manager of the Account, he would say that the hurdle should not be raised progressively. As to free reserves, he would endorse the view that they should run above $500 million, perhaps around $600 million, with sufficient reserves available in the market to encourage credit expansion in view of the widely recognized level of unemployment direction. He would prefer to the need for supportive action in that and have free reserves at around that level rather than to go below, say, $500 the hope of obtaining a reaction in longer-term rates against million in rates in the short end of the market. As to the directive, he had hoped that at this meeting the Committee might change the directive to provide or stimulating recovery. In general, the directive was for fostering acceptable to him. said that he would favor no change in current policy, Mr. Szymczak which he thought was about as right as it could be in the circumstances. He added that he agreed wholeheartedly with the comments of Mr. Bopp. Mr. Balderston said he was pleased with the way the Desk had conducted operations since the February 7 meeting, except that he felt the

bill rates need not be kept quite as high as they had been on some occasions. He would hope that with some clearing of the international situation the System might be able to get along with a lower bill rate, say in the range from 2-1/4 to 2-1/2 per cent. Further, he would like to see the bill rate give the appearance of some vacillation so people would not think that the System was pegging the rate. As to the domestic situation, he was impressed by two points. First, he thought there were signs of recovery. Consequently, any reserves that the System now fed into the banking system might be put to more constructive use. Second, the Committee must look ahead to the second half of the year and remember that there would be deficit spending at raised a question to which he did not have the answer at the that time. This moment; namely, how monetary and fiscal policy could best be integrated as to timing and degree. One way of looking at the problem had been expressed by the fall the System would have to help the Treasury get its Mr. Mills. In funds. Another way to look at the problem was in terms that now was the time for the System to do its work in stimulating investment, which would supposed, if that part of the unemployment associated with be needed, he For the moment, he would feel that the heavy durables was to be absorbed. reserves, that it should continue at System ought to continue to supply Perhaps the System could afford to be a least the current degree of ease. problem than it had been in the little less sensitive to the international weeks immediately past.

Chairman Martin said he did not think there were great differences this morning. As he saw it, the most important thing was that as long as the level of unemployment that had existed continued to prevail, and as long as there were uncertainties in the business situation, the posture of the Federal Reserve System ought to be one of doing everything it could to encourage and promote recovery. On the other hand, the balance-of-payments situation had not been corrected. In passing, he would make the observation that perhaps there would continue to be a substantial problem in this respect even when a full-fledged recovery occurred. Some people were beginsay that in the event of economic recovery there would be no balancening to of-payments problem. In his view, however, if the wage-productivity got out of hand at this stage, the situation would be serious. relationship that he could understand the problem faced by Chairman Martin said the nature of the comments made at Committee the Desk, part of which reflected how to deal precisely with terms such as color, meetings. He did not know words might mean one thing to him and tone, and feel of the market. Such he would not like to see different to others. Nevertheless, something with respect to the short-term rate the Committee eliminate its guidance with respect to the longer-term to eliminate its guidance or leadership or sound, he felt there was a difference However contradictory it might rate. on the one hand and pegging on the other between leadership or guidance was a difficult course to steer but essentially, he thought, hand. This this was what the Committee wanted to do. He would take it that no one

would want to attempt to say precisely what the level of free reserves should be or to try to define exactly the right degree of ease. Generally speaking, however, a moderately easy money policy reflected the posture that the System should be in at the present time and that it should retain until there was definite assurance not only of recovery but lasting recovery and economic progress. Chairman Martin again stated that he thought there was not a great difference in the points of view expressed today. Several had commented on a possible change in the directive, but the majority clearly did not favor a change. In his opinion this was not particularly important either way. However, he thought it migt be well to ask Mr. Rouse whether he wished to suggest any changes in the policy directive or in the special authorization given at the February 7 meeting with respect to operations in longer-term securities. In his (Chairman Martin's) opinion the Committee should give the Manager as much latitude as possible without abdicating its interest in the Open Market Account. The Chairman then turned to Mr. Rouse, who said that possibly the Committee might like to combine the policy directive and the special authorization for operations in longer-term securities given at the February he did not know exactly how that might be done. Mr. 7 meeting, but that Rouse went on to say that he could understand the feeling Mr. Robertson had expressed about offsetting operations in the short-term area, for there appeared to have been some confusion on that point. The question had been

discussed at the New York Bank and finally was resolved in a manner that reflected the Bank's understanding of the Committee's over-all intention, but there was room for difference of opinion. Mr. Rouse said it was his understanding from the discussion at this meeting that the Committee would like to see some resistance to any sharp decline in short-term rates, and that it would like to have a decline in longer-term rates encouraged. The limitation on the volume of operations would continue to be the figure contained in the policy directive adopted at the February 7 meeting, and in the longer-term sector the latitude for operations would continue to be the figure contained in the special authorization given on February 7. He went on to say that it would be necessary to put reserves into the market currently, and in the next 10 days, to the extent of about $500 million. In view of the Treasury financing, he did not know exactly how this would work out, but if the Treasury should do some financing that required reserves it might be possible to add somewhat to their availability. This, Mr. Rouse said, would be his interpretation of the instructions being given to the Desk at this meeting. Chairman Martin said he thought this stated the matter quite well. He added that it was necessary to steer in a rather wide area and that he did not know how this type of operation could be pinpointed. Mr. Allen referred to the special authorization for operations in longer-term securities given by the Committee at the meeting on February 7. As he had indicated at the February 7 meeting, when he was an alternate

member rather than a member of the Committee, he was opposed to the decision to authorize transactions in longer-term securities. He continued to be of that view. Therefore, now being a member of the Committee, he would like to have his vote recorded in opposition to the continuation of that authorization, for the reasons that he had then indicated. He added that he was in agreement with the reasons presented by Mr. Robertson as recorded in the minutes of the February 7 meeting. Mr. Robertson said that he was, of course, of the same view as Mr. Allen. He then requested verification of the dollar limitation contained in the authorization. Mr. Rouse replied that, as he understood it, the authorization on February 7 was for a change, between that date and the date of the current meeting of the Committee, of not more than $500 million in the Account's holdings of intermediate and longer-term securities, along with authority to acquire securities of this category up to a maturity f 10 years. Mr. Robertson agreed that the authorization had been correctly stated. Chairman Martin inquired whether there were others who wished There being no such indication, the Chairman then to record a dissent. stated that between this date and the date of the next meeting of the that the Account Management would Committee, it would be understood proceed under the terms of the policy directive as supplemented by

the special authorization for operations in intermediate and longer-term securities. Mr. Hayes commented that it had been the practice of the Committee to issue a policy directive to the New York Reserve Bank at each meeting, but that the language thereof was changed only infrequently. However, at each meeting there was also a statement of the consensus of the Committee as to open market operations in the forthcoming period. It was not entirely clear to him whether the authorization to the Manager of the Account extending the maturity spectrum in which he was to operate was intended to be a part of the policy directive or a part of the instruction given by the Committee on open market operations. He felt that probably it was intended to be a part of the supplemental instruction. Chairman Martin commented that the special authorization was given at the February 7 meeting in accordance with the provision in the Committee's statements of operating policy which make it clear that exceptions may be made by the Committee at any meeting. At this meeting was reasserting the action taken at the February 7 meeting the Committee in granting the special authorization. Mr. Hayes then said it was his understanding that the special directive were not mutually exclusive, to authorization and the policy that until further action on the part of which Chairman Martin replied there would be in effect both the customary policy directive the Committee to the New York Bank and the special authorization of the Committee with to operations in longer-term securities. respect

Mr. Johns commented that it had been emphasized at the meeting on February 7 that the special authorization was not intended to change monetary policy, and that transactions carried out under it should be consistent with the general monetary policy expressed in the Committee's policy directive. Chairman Martin replied that Mr. Johns' statement as to monetary policy was correct. Mr. Mills pointed out that the special authorization on February 7 constituted an authority for a change in Account holdings of intersecurities not to exceed $500 million. He noted mediate and longer-term that certain operations subsequently had been conducted under that authorization, and for this reason he raised the question whether it was understood that the authorization of $500 million was being reestablished at this meeting. He also inquired whether it had not been indicated at the February 7 meeting that the authorization included the power to purchase up to $400 million of securities maturing beyond and an additional $100 million of 15 months and up to 5-1/2 years, securities maturing beyond 5-1/2 years and up to 10 years. Mr. Rouse responded to the second question of Mr. Mills by pointing out that in the plan he had presented to the Committee on February 7 he had suggested dividing an authorization of $500 million by Mr. Mills. However, it was his understanding in the manner mentioned reached by the Committee at that meeting provided an that the decision

authorization of $500 million with no breakdown, He further understood that it was now the intention of the Committee to reestablish the authorization of $500 million for the period until the next meeting. Chairman Martin stated that this was correct and that the $500 million authorization was for the period from this date until the next meeting of the Committee. He also stated that there was no change in the over-all limitation of $1 billion contained in the first paragraph of the Committee's policy directive. There was no indication of dissent from the statement by Chairman Martin with regard to the scope of the special authorization or its relationship to the policy directive. Thereupon, upon motion duly made and seconded, it was voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to supply of funds in the market to the needs of relating the commerce and business, (b) to encouraging monetary expansion for the purpose of fostering sustainable growth in economic activity and employment, while taking into consideration international developments, and (c) to the practical current administration of the Account; provided that the aggregate of securities held in the System Account (including amount commitments for the purchase or sale of securities for the Account) at the close of this date, other than special shortterm certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not increased or decreased by more than $1 billion; be

(2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special shortterm certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. In addition, the Committee voted to renew the special authority that had been given at the meeting on February 7, 1961, relating to changes in System Open Market Account holdings of intermediate and longer-term securities. Specifically, the Committee authorized the Federal Reserve Bank of New York, between March 7 and the next meeting of the Committee, within the terms and limitations of the directive issued at this meeting, to acquire intermediate and/or longer-term U. S. Government securities having maturities up to 10 years, or to change the holdings of such securities, by an amount not to exceed $500 million. Votes for this action: Messrs. Martin, Hayes, Balderston, Irons, King, Mills, Shepardson, Swan, Szymczak, and Wayne. Votes against this action: Messrs. Allen and Robertson. Mr. Robertson's reasons for dissenting from the foregoing action were those he had stated at the meeting on February 7, 1961, and Mr. Allen indicated that his reasons for voting against the action were had expressed at the February meeting when he was not a those that he the Committee. Mr. Allen added that he was in subvoting member of reasons stated by Mr. Robertson at that stantial agreement with the meeting.

In a memorandum dated March 3, 1961, which had been distributed to the members of the Committee and the Presidents not currently serving on the Committee, the Treasury-Federal Reserve Steering Committee for Study of the Government Securities Market requested authorization from the Committee to proceed with the publication of current statistics on the Government securities market, with a publication target date of March 30, 1961. The recommended publication program would supply information on closing price quotations, volume of transactions, dealer positions, and dealer financing, as shown in pro forma releases attached to the memorandum. The publication time lags were intended to be short enough to give the data current value, but long enough to obviate the danger of injuring individual dealers. The proposed program had been developed through a process of circulating to dealers a comprehensive outline of statistics that might be published and then cutting back somewhat in the light of criticisms and objections received. It was not known whether all dealers would accept even the more limited program without further criticism or objection, and some revisions therefore might still be required. Accordingly, the Steering Committee suggested that the staff be authorized to make such minor adjustments in the program as might seem appropriate to meet dealer comment. However, any major problem of dealer cooperation would be brought back to the Open Market Committee before publication was actually begun.

As soon as the initial publication program was agreed to by the Federal Open Market Committee and the Treasury Department, the Steering Committee suggested that Mr. Hayes forward to each of the dealers a letter signed jointly by the Secretary of the Treasury and Chairman Martin indicating the nature of the program and the starting date. The Steering Committee also suggested that if positions figures were to be included in the program it might be indicated informally to the dealers from whom objections were anticipated that new legislation on this matter was a likely alternative. If any of the dealers should refuse to continue to submit daily reports, the publication plans presumably would have to be temporarily suspended. However, if no complications developed the Steering Committee hoped that publication might begin on March 30, 1961. At the request of Chairman Martin, Mr. Young reviewed the scope of the proposed publication program, the process by which it had been developed, and the principal reservations expressed by dealers, his comments being based generally on the memorandum that had been He then discussed the possibility of lack of cooperation distributed. on the part of one or more dealers and the purpose of the proposed joint letter from the Secretary of the Treasury and Chairman Martin. of the matter, Chairman Martin expressed the view In discussion information on the Government securities market was that more public required and that it was necessary to take steps to arrange to have

such information supplied in some way. Mr. Rouse expressed the view that the proposed program represented the minimum that should be done. With reference to the portion of the memorandum that suggested giving an informal indication to any objecting dealers that legislation was a likely alternative, question was raised whether it would be advisable for the Federal Reserve to make any statement that might be regarded as in the nature of a threat. In reply, it was brought out that such advice would be a matter of supplying information for the dealers' consideration. At the same time, however, it was agreed that exercised by the Federal Reserve to avoid anything that care should be might be construed as a threat. At the conclusion of the discussion, the Steering Committee to proceed along the lines contemplated by the memorandum was authorized of March 3, 1961. Secretary's Note: Under date of March 16, 1961, a letter signed by Secretary of the Treasury Dillon and Chairman Martin was addressed to 18 Government securities dealer firms in the following form: 1960, the then Secretary of the Treasury and "In January the Chairman of the Board of Governors of the Federal Reserve wrote the Government securities dealers requesting System in initiating and carrying out an infortheir collaboration program covering the Government securities market. mation All primary dealers are cooperating in this program. "You will remember that the earlier letter contemplated during which the data would be used only by a trial period the Treasury Department and the Federal Reserve System. period, it was noted that selected composite data After this would be published regularly on a current basis with an appropriate time lag.

"The trial period has now run for almost a year. The current information on the market that has been collected has been of real use to our two agencies. "We are now ready to proceed with the publication phase of the program which is described in some detail in Mr. Hayes' accompanying letter and its attachments. The publication schedule indicated will be timely enough to give the data current value. We feel that publication should enable market participants, economists, and the general public to follow and analyze better the major trends in the market, and that it would contribute to an even better functioning market. "Our staffs will continue to be available to work with you in implementing this new publication program. We appreciate your continuing cooperation in this effort to increase the range of publicly available objective information about the market, particularly in view of the additional reporting burden it places on your organization." It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, March 28, 1961. The meeting then adjourned. Secretary

Source

Also: Record of Policy Actions