FORTY-SEVENTH Annua{ Report OF THE BOARD OF GOVERNORS of the Federal Reserve System COVERING OPERATIONS FOR THE YEAR FEDERAL RESERVE SYSTEM ANNUAL REPORT OF BOARD OF GOVERNORS DIGEST OF PRINCIPAL FEDERAL REsERVE POLICY DIGEST OF PRINCIPAL FEDERAL REsERVE. POLICY ACTIONS, 1960 ACTIONS, 1960-Cont. Period Action Purpose of action Period Action Purpose of action August­ Reduced discount rates from To reduce further the cost of January­ Reduced System holdings of To offset the seasonal inflow September 3'11 to 3 per cent at all borrowing from the Reserve March U.S. Government securities of reserve funds, mainly from Reserve Banks. Banks and reduce the differ­ by about $1.6 billion. Mem­ the post-holiday return of ential between the discount ber bank borrowings at the currency from circulation, rate and market rates of Federal Reserve Banks while permitting some reduc­ interest. dropped from an average of tion in borrowed reserves. $900 million in December to August­ Bought or sold at different To encourage bank credit $635 million in March. November times varying amounts of and monetary expansion by Government securities with a meeting changing reserve Late March­ Increased System holdings of To promote further reduc­ net increase in System hold­ needs and offsetting the im­ July Government securities by tion in the net borrowed re­ ings of about $1 billion, pact of a large gold outfiow nearly $1.4 billion. Member serve positions of member including securities held un­ without exerting undue bank borrowings at Reserve banks and, beginning in May, der repurchase agreement downward pressure on short­ Banks declined to an average to provide reserves needed and issues with short ma­ term Treasury bill rates that of less than $400 million in for moderate bank credit and turities other than Treasury might stimulate further out­ July. monetary expansion. bills. Member bank borrow­ flow of funds. ing declined further to aver­ June Reduced discount rates from To reduce the cost of bor­ age below $150 million in 4 to 3'11 per cent at all rowed reserves for member October and November. Reserve Banks. banks and to bring the dis­ count rate closer to market Late Authorized member banks interest rates. November­ to count all their vault cash December in meeting their reserve re­ July Reduced margin require­ To lower margin require­ quirements and increased ments on loans for purchas­ ments from the high level in reserve requirements against ing or carrying listed securi­ effect since October 1958 in net demand deposits for ties from 90 to 70 per cent of recognition of decline in vol­ country banks from 11 to 12 market value of securities. ume of stock market credit per cent. The net effect of To provide, on a liberal basis, outstanding and lessened these two actions, effective for seasonal reserve needs, to danger of excessive specula­ November 24, was to make complete implementation of tive activity in the market. available about $1,050 legislation directed in part million of reserves. toward equalization of re­ August Authorized member banks to serve requirements of central count about $500 million of Reduced reserve require­ reserve and reserve city their vault cash as required ments against net demand banks, and to offset the reserves, effective for country deposits at central reserve banks August 25 and for To provide maiIlly for sea­ effect of continued gold out­ sonal needs for reserve funds, city banks from 17~ to 16'11 flow, while avoiding direct central reserve and reserve per cent, effective December impact on short-term rates city banks September 1. and to implement 1959 legis­ lation directed in part toward 1, thereby releasing about that might stimulate further Reduced reserve require­ equalization of reserve re­ $250 million of reserves. outflow of funds. ments against net demand quirements of central reserve Sold U.S. Government se­ deposits at central reserve and reserve city banks. curities except for seasonal city banks from 18 to lTYz purchases in last week of per cent, effective September December. Member bank 1, thereby releasing about borrowings at the Reserve $125 million of reserves. Banks averaged less than $90 million in December. 4 5 ANNUAL REPORT OF BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM interest rates and an unusually heavy seasonal loan demand, clause (b), upon the fostering of sustainable growth in economic money conditions eased notably in January. Interest rates de activity and employment rather than upon restraint of infla clined, and bank loans were reduced, about as much as they had tionary credit expansion. In support of such a modification it increased in December. Stock prices, after rising close to the was pointed out, among other things, that business and financial 1959 high at the end of December, declined sharply thereafter attitudes and trends were less exuberant than in May 1959, when and presently were near the low of the past 12 months. In con the existing policy directive was first adopted. The consensus, trast, bonds had risen in price since the first of the year, and however, did not favor a change at this time, on the grounds that yields on long-term U.S. Government bonds were back to it would indicate a basic shift in open market policy and that November levels. Yields on intermediate-term Government such a shift was not called for at present. securities had declined to around the lowest levels of October Therefore, the action taken was to renew the directive, which 1959, while yields on Treasury bills had fallen to the lowest called for restraining inflationary credit expansion in order to levels since late August. foster sustainable economic growth and expanding employment opportunities. Together, figures for money supply and turnover of bank de transactions posits indicated a rate of growth in total monetary Votes for this action: Messrs. Martin, Hayes, Allen, Balder of nearly 4 per cent a year since mid-1957, but the money sup ston, Erickson, Johns, King, Robertson, Shepardson, Szymczak, ply, which appeared to have declined slightly in January, was and Leedy. Vote against this action: Mr. Mills. only about one-half of 1 per cent larger than the year-ago level. The current figure was a little more than $5 billion larger than Mr. Mills continued to favor a change in the directive along the lines he had suggested at the past several meetings, which the peak of mid-1957, representing an average annual rate of economic growth and increase of less than 2 per cent. would provide for fostering sustainable expanding employment opportunities while guarding against in this juncture, the Com In appraising open market policy at flationary credit expansion. mittee took into account all of the aforementioned elements, along with the fact that the easier money situation had resulted from market forces rather than any change in monetary policy. March 1, 1960 There was unanimity of opinion that any tightening in the degree of restraint should be avoided. On the contrary, while a majority 1. Authority to effect transactions in System Account. favored watchful waiting during the period immediately ahead, Clause (b) of the first paragraph of the Committee's policy there were several within that group who leaned toward slightly directive was revised at this meeting so as to provide that open less restraint, and the views of some members of the Committee market operations should be conducted with a view "to fostering were more positively in that direction. It was felt rather gen sustainable growth in economic activity and employment while would be erally that a moderate increase in the money supply guarding against excessive credit expansion." This replaced the desirable. clause of the directive that had been in effect since May 26, In the light of the current situation, consideration was given 1959, calling for operations with a view "to restraining infla to the possibility of a modification of the policy directive to the tionary credit expansion in order to foster sustainable economic Federal Reserve Bank of New York so as to place emphasis, in growth and expanding employment opportunities." ANNUAL REPORT OF BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM Votes for this action: Messrs. Martin, Hayes, Balderston, ness loans particularly large. In order to meet loan demands, Bopp, Bryan, Fulton, King, Leedy, Mills, Robertson, Shepard banks continued to reduce their holdings of U.S. Government son, and Szymczak. Votes against this action: none. securities. However, demand deposits adjusted at city banks de National and regional reports at this meeting indicated con clined by a larger amount during February than in the same tinuance of underlying economic strength, with evidence lacking month of any other recent year except 1956, and country bank to suggest that 1960 would be other than a prosperous year. It figures for the first half of the month failed to show the increase appeared, however, that some of the earlier exuberant expecta that occurred in the corresponding period of 1959. It appeared tions were not being fully realized and that excesses in commit that the seasonally adjusted money supply may have declined ments and in credit extensions were not developing. The rapid further in February to a level below that of a year earlier. inventory accumulation that occurred in January and which ap System open market operations during the period since the peared to have continued in February, combined with a slight previous meeting of the Committee had continued generally to decline in new orders in January, suggested to some observers maintain pressure on the reserve positions of banks. The mid that the spurt of activity attributable to the resumption of pro March tax and dividend dates were now approaching, and the duction upon conclusion of the steel strike might be nearing an money market might be under some degree of pressure to accom end before any other expansive factor had emerged to take its modate seasonal liquidity needs.