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Response of the Federal Open Market Committee to Economic Changes 1951-1960

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Response of the Federal Open Market Committee to Economic Changes 1951-1960 Louisiana State University LSU Digital Commons LSU Historical Dissertations and Theses Graduate School 1967 Response of the Federal Open Market Committee to Economic Changes 1951-1960. Edward Burford Selby Jr Louisiana State University and Agricultural & Mechanical College Follow this and additional works at: https://digitalcommons.lsu.edu/gradschool_disstheses Recommended Citation Selby, Edward Burford Jr, "Response of the Federal Open Market Committee to Economic Changes 1951-1960." (1967). LSU Historical Dissertations and Theses. 1316. https://digitalcommons.lsu.edu/gradschool_disstheses/1316 This Dissertation is brought to you for free and open access by the Graduate School at LSU Digital Commons. It has been accepted for inclusion in LSU Historical Dissertations and Theses by an authorized administrator of LSU Digital Commons. For more information, please contact [email protected]. This dissertation has been microfilmed exactly as received 67-14,011 SELBY, Jr., Edward Burford, 1938- RESPONSE OF THE FEDERAL OPEN MARKET COMMITTEE TO ECONOMIC CHANGES 1951-1960. Louisiana State University and Agricultural and Mechanical CoUege, Ph.D., 1967 Economics, finance University Microfilms, Inc., Ann Arbor, Michigan Copyright by EDWARD BURFORD SELBY, 1967 RESPONSE OF THE FEDERAL OPEN MARKET COMMITTEE TO ECONOMIC CHANGES 1951-1960 A Dissertation Submitted to the Graduate Faculty of the Louisiana State University and Agricultural and Mechanical College in partial fulfillment of the requirements for the degree of Doctor of Philosophy in The Department of Economics by Edward Burford Selby, Jr. B.S., Clemson University, 1962 M.B.A., University of South Carolina, 1963 May, 1967 ACKNOWLEDGMENT I would like to express my deep appreciation to my major professor, Dr. Thomas R. Beard, fo r h is many help fu l suggestions and guidance in the preparation of this study. Also, Dr. William Stober was especially helpful in assisting me to narrow my dissertation topic. The other members of my committee, Dr. Lee J. Melton, Dr. Leon C. Megginson, and Dr. William F. Campbell, are to be commended for their pertinent comments and encouragement. In addition, I wish to express my grati­ tude to Dr. Frank Morgan, J r ., Professor o f E nglish at Northeast Louisiana State College, for his suggestions. Finally, I wish to thank my w ife fo r her patien ce and a ssista n ce. TABLE OF CONTENTS PAGE ACKNOWLEDGMENT.................................................................................................................... i i LIST OF TABLES................................ v LIST OF FIGURES............................................................................................................... v± ABSTRACT..................................................................................................................................... v i i CHAPTER I . INTRODUCTION........................................................................................................... 1 I I . FCMC MEETING PROCEDURE AND ECONOMIC INDICATORS USED BY THE COMMITTEE ' . .......................................................................... 6 Development of the FGMC.......................................................................... 6 The Conduct of POMC M eetings................................................................. 10 Economic Indicators Considered by the Committee ..... 25 I I I . TARGETS USED BY THE FOMC IN POLICY AC TIO N...................................... 3.6 Interest Rates As A Target...................................................................... 36 Free Reserves As A Target ....................... 52 The Total Reserve T arget.......................................................................... 65 The Money Supply T a r g e t.......................................................................... 67 Feel As A Target............................................................................................. 72 S u m m ary........................................................... 75 IV. MONETARY L A G S ....................................................................................................... 77 Problems Involved in Lag Determination.......................................... 77 Evidence of the Inside Lag During Downturns.............................. 85 iv CHAPTER PAGE Evidence of the Inside Lag During Upturns.........................................108 Summary and Conclusions of Chapter I V ...............................................124 V. POTPOURRI AND CONCLUSIONS....................................................................... 131 Targets vs. Indicators ................................................................................ 131 The FOMC’s D ecision Making Pr o c e s s..........................................................132 Structure vs. Function ..................................................................... 137 Conclusions.........................................................................................................142 BIBLIOGRAPHY..........................................................................................................................144 APPENDIX A .............................................................................................................................. 152 APPENDIX B .............................................................................................................................. 155 VITA ........................................................................................................................................... 157 LIST OF TABLES PAGE Open Market Committee Policy Decisions and Dissents, 1955-64 ........................... ................................................. 23 Monetary Lags .... ........................................................................ 7a Seasonally Adjusted Monthly Values of MaxB^, MaxE^ * * and MaxE2* January, 1953-June, 1954 ........................... 94 * Seasonally Adjusted Monthly Values of MaxE^, MaxE^ , * and Mao^2> July, 1957-June, 1 9 5 3............................................ 107 St Seasonally Adjusted Monthly Values of MaxE^, MaxE^ , •at and MaxEg, July, 1954-June, 1955 ............................................ 115 * ** Seasonally Adjusted Monthly Values of MaxE^, MaxE^ , •if- and MaxB2> 1953 .............................• ............................................... 123 Response of the FQMC to Economic Changes—-The Inside Lag 124 Average Inside Lags of the FCMC ................................................. 126 Part I of the Outside Lag as Revealed by Peaks, Troughs, and Changes in MiaxS ............................................. 126 Part I of the Outside Lag as Revealed by Changes in Free Reserves ............................................................................ 129 The Average Number of Times per Meeting Which the Various Participants in the 1956 FQMC Meetings Had Their Name Recorded in the FOMC Minutes .................. 141 LIST OF FIGURES FIGURE PAGE I. A Model of the FOMC Decision Making P ro cess............................................ 136 ABSTRACT One agency of the Federal Government holds one-eighth of the national debt, purchases and sells about a billion dollars worth of government securities monthly, and exerts a significant influence over the financial conditions of this country. Yet, the decision-making process of this agency has remained at least a partial mystery to both laymen and professional economists alike. This study is devoted to examining the guides which one portion of the Federal Reserve System— the Federal Open Market Committee—uses in decision-making as well as to examining the Committee's lag in response to economic change. Previous analyses of the Federal Open Market Committee have had to rely on the Annual Report of the Board of Governors of the Federal Reserve System. testimony of the Committee members before Congressional committees, and other public statements by System officials. The publication of the minutes of the Federal Open Market Committee has made it possible for outside scholars to examine previously inaccessible segments of its decision-making process. This study draws extensively from those minutes. At the outset it is important to distinguish between the goals, indicators, and targets which the Committee recognizes. The goals of the Federal Reserve System are the broad objectives which the System is attempting to achieve or promote, such as price stability, a high level of employment, economic growth, and a reasonable balance in our inter­ national payments. Economic indicators reveal changes in the economic situation. Variables which the System attempts to alter or to maintain viii at some particular level are called targets. This study also considers the "inside11 lag of monetary policy. The inside lag is composed of (l) a recognition lag—the time between a need for a change and the recognition of that need; (2) a decision lag—the time it takes to decide on a course of action; and (3) an action lag— the time necessary to put the course of action into operation. Chapter II of this study first surveys the general procedure followed in Federal Open Market Committee meetings. Next, it examines the various economic indicators used by the Committee as an indication of output, employment, and price levels, as well as the condition of financial markets. Chapter III is devoted to an analysis of the targets used by the Committee in policy action. Specifically, such variables as interest rates,
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