Regional President Speech

Outline for Graduate School of Banking, Rutgers U. INVESTMENTS IV - MAJOR June 15-16, 1954 Mr. Bopp FEDERAL RESERVE SYSTEM AND INVESTMENT MANAGEMENT I. MECHANICS OF THE FEDERAL RESERVE SYSTEM A. Direct and immediate importance of Federal Reserve actions to investment managers 1. General purpose of the System: To promote credit conditions appropriate to stable economic growth 2. General method of operation: Through influencing supply, availability, and cost of credit 3. Specific illustrations Extent of authority of System to deal in Government securities 5. Relation of System operations to - (a) Security prices and yields (b) Member bank reserves B. Primary role of bank reserves in our money system C. How the amount of reserves changes 1. Federal Reserve Bank accounting 2. Major accounts affecting reserves II. DEVELOPMENT OF FEDERAL RESERVE POLICY AND IMPLICATIONS FOR INVESTMENT MANAGERS A. The heritage of war financing 1. Size and ownership of the public debt 2. The structure of Interest rates (a) Origin of the "pattern of rates” (b) Implication of the pattern (c) Search for alternative methods of influencing credit conditions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - B. The "Accord” of March 3> 1951 1. Background 2. 2. Terns 3. Operations under the Accord (a) "Maintaining orderly conditions" (b) "Preventing disorderly markets" (c) "Correcting disorderly conditions" III. OBJECTIVES OF POLICY AND RELATED PROGRAMS A. Alternative objectives 1. Convertibility 2. Productive credit 3. Stable prices 4-. Full employment 5. Maintaining fixed rate of interest B. Need for choice or combination IV. GUIDES TO CURRENT OPERATIONS AND MEASURES OF INFLUENCE A. From the point of view of the central banker B. From the point of view of the investment manager 1. Volume of money and reserves 2. Availability of credit 3. Cost of credit 4. Policy statements Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - V. INSTRUMENTS OF POLICY A. General 1* Reserve requirements 2. Open market operations 3. Advances and discounts A, Repurchase agreements B. Selective C. Coordinated use of instruments VI. HOW DECISIONS ARE MADE KRB Digitized for FRASER 1/19/54 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis LECTURE NOTES K. R. Bopp, Vice President of the Federal Reserve Bank of Philadelphia for Investments IV, Graduate School of Banking, Rutgers University, New Brunswick, N. J#, June 15-16, 1954 I am a part of the Federal Reserve System - But this is not an indoctrination course. I hope the System will not consider me disloyal if I present more than one side of issues on which it has taken official position. I hope you won't consider me naive if I come out on side of System at times on general ground that - Alles verstchen heisst alles verzeihen. I. THE MECHANICS OF THE FEDERAL RESERVE SYSTEM A. Why go into mere mechanics 1. Because what the System does has direct and immediate effects on your portfolios e.g., when the Systeii withdrew the peg in 1951 present ease in money market (esp. short term'.) because System is providing reserves exclusively through bills 2. The only way you can understand what the System is doing is to learn the mechanics 3. To emphasize relationships - that each act has consequences (degrees of freedom) a. Our latent hope for isolated action (1) Cas on higher coupons but no capital loss on outstandings (2) Why not a tax without economic consequences? b. The inevitability of relationships (1) If the F.R.S. buys securities, then other Reserve Bank accounts must change so that the books remain in balance (2) Ijf the Treasury sells long bonds, somebody must buy them - and he cannot use that money to buy something else - the liquidity of the economy is reduced. (3) This is so simple - we take it for granted - but we also act as though it were not trueI Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - c. Elements of judgment - as related to F.R.S. (i) Which other accounts vill change in fact (The "uncon­ trollable" (a) Not every purchase is inflationary accounts) - e.g. to offset currency to offset changes in other non-reserve accounts Need to look at major accounts - not simply Governments (*> The importance of the Reserve accounts (c The role of excess reserves (d Free reserves - availability of credit (e Ease and pressure - changes in the rate (f Impossibility of predicting day-to-day changes Transit delays Treasury account Use average figures B. Why have a Federal Reserve System? 1. Glib talk about letting money manage itself 2. Kemmerer's study for the N.M.C. a. Average call money rates 1S90-1908 (19 years) 1st week in June 2.28% Last week in Dec.7.38% b. 1907 Average call rate for June 1-3/4% On Thursday, Oct. 24. 125% 3. One reason for creating System was to provide an elastic currency 4. But that is monetary management C. The power of the System 1. To withdraw money ( M=$30 $25 billion of earning assets (Member bank reserves ( <$20 bill. 2. To add money a. Free gold to buy $38 billion b. Reserve requirements of members above legal minimum $ 8 billion 3- To what purpose should these powers be used, since the System doesn't operate for profit? To promote stable economic progress - but that is pretty vague. - Digitized for FRASER by Influencing the supply, availability and cost of credit http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - II. DEVELOPMENT OF FEDERAL RESERVE POLICY AND IMPLICATIONS FOR INVESTMENT MANAGERS A. The heritage of wax financing (I hope you won't conclude: These are the conclusions 1. Size and ownership of the public debt on which I base my facts) 2. The structure of interest rates a. Origin of the pattern of rates b. Implications of the pattern c. Search for alternative methods of influencing credit condition* (1) Reserve requirements (2) Selective credit controls (3) Direct controls over economic activity B. The "Accord" of March 3, 1951 1. Background a. The Douglas inquiry of 1949 Report 1/23/50 b. Korean invasion c. August 18, 1950 Treasury-Fed dispute in the open (1) Treasury announces 1 1/4% - 13 month note (2) Fed increase discount rate from to 1 3/4 d. Snyder Bond Club speech 1/18/51 2. Terns of the Accord (Should have been warning) a. Exchange offer 2 3/4 - 29 year convertible into 5 year 1 1/2% note b. Purchase 2 l/2s on scale down Review daily c. Fed reduce or stop purchase of shorts Get banks to rely on discounting Discount rate remains at 1 3/4 to end of year d. Conferences of Fed and Treasury 3. Operations under the Accord a. Maintaining orderly conditions - including facilitating Treasury financing b. Preventing disorderly markets c. Correcting disorderly conditions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis u - - Joint announcement of full accord - 3/3/51 (New York Times - 3/4/51) The Treasury and the Federal Reserve system have reached full accord with respect to debt-management and monetary policies to be pursued in furthering their common purpose to assure the successful financing of the Government's requirements and, at the same time, to minimize the monetization of the public debt. C. A review of the past 18 months 1. The story in general - a favorable review a. The economic development (1) G.N.P. rose to peak of $371 billion in 2nd quarter of 1953 (2) Since then has slid off slowly, without acceleration, to $359 in first ouar. of 1954 b. Financial policies (1) Fiscal policy (a) Initial desire to balance budget (i) Cut expenditures (ii) Maintain most taxes (b) As weakness developed (i) More tax relief including excise cuts (2) Debt management (a) Lengthen the debt - April 8th announcement of the 3 l/4fs (b) Now don't want to absorb long-term funds from local Governments or private borrowers (3) Monetary policy (a) Requirement to report on actions taken (b) Successive directions of F.O.M.C. to Executive Committee: "Transactions for the System open market account should be with a view .... (i) March A-5 "to exercising restraint upon inflationary developments." (ii) June 11 "to avoiding deflationary tendencies without encouraging a renewal of inflationary developments (which in the near future will require aggressive supplying of reserves to the marked." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 5 - (iii) September 24 »«to avoiding deflationary tendencies.” (iv) December 15 "tto promoting growth and stability in the economy by actively maintaining a condi­ tion of ease in the money market.” 2. It doesn't work out so smoothly in detail - the 3 1/4 story a. Background (1) March 1953 - ascertaining the market - underwriting ? (2) April 8 - Preliminary announcement $1 billion + F + G (3) April 9 - Treasury announces it will need $2 billion through June 30 (4) April 11 - reactions Porter letter of April 11, 1953: "We believe this first issue of 30-25 year 3 1/4% bonds will move to a substantial premium in the open market." Goldsmith letter of April 11, 1953: "New 3 1/4* s expected to be heavily oversub­ scribed and to go to substantial premium." (5) April 13 - Circulars of terms Martin Detroit speech (6) April 14- - issue closed - open one day "Announcement of allotments will probably be made Friday, April 17 " Subscriptions $6 billion Padding 3/4 11 Accepted $5j " Selective vs. across the board allotment (Prime rate up?) (7) April 15 - F.N.M.A. halts buying of VA and FHA mortgages presaging higher rates - national finance companies increase rates offered on their paper. (8) April 22 - 20% allotment b. How fast can things change and why? (1) April 23 Treasury said receipts had not held up. It would need more than it had expected on April 9 - no estimate of amount. Would meet market terms. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 6 - (2) Possible supply: The allotments by classes (a) Individuals, partnerships, and corporations 254-6 (b) Dealers, brokers, investment houses 158.2 4.00 (c) F and G 400 (3) Possible demand for - or lack of it (a) Government investment account fully invested had bought 118 (b) Real investors annoyed with allocations (c) Fed ? No. Martin Detroit speech (U) Prime rate raised from 3 to 3 1/l& (April) (5) May 6 - Martin Boston speech (6) A. S. conversations Anticipatory borrowing - fearing still higher rates and perhaps rationing (7) Fed begins buying bills 2nd week in May (8) May 25 - Treasury announces $800 million TAB'S - a complete surprise (9) You have seen the worst on June 1 (10) Reduction in reserve requirement July (11) Overdo ease to correct misimpression D. A difference of opinion as to method (See p. 99 of 1953 Annual Report, Bd. of Gov. of Federal Reserve System) III. À. Objectives and Related Programs ^ Conditions calling Conditions calling Objective for or permitting an for or permitting a easing of credit tightening of credit 1. Convertibility High and/or rising Low and/or declining primary reserves primary reserves 2. Productive Increase in monetary Decrease in monetary credit volume of output volume of output 3. Stable price Declining prices Rising prices level A. Full employment Less than full Jobs in excess of employment workers 5. A fixed rate of When savings are When savings are interest inadequate excessive Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 7 - B. We have an excellent current illustration of problem June 9, June 10, Dec.31, 1954 1953 Differ. 1952 Differ. 1. Monetary gold stock 21,924 22,537 - 613 23,187 - 1,263 TIGHTEN CREDIT? In las t year Latest Max. Min. 1947-1949 = 100 2. Prices a. Consumer Apr. 114.6 115.4 113.7 Apr. 1953 113.7 b. Wholesale June 1 110.8 111.0 109.3 June 2,1953 109.7 LEAVE ALONE - over whole year? May 1954 April 1954 May 1953 Unemployment: Total labor force 67,780 67,438 66,497 Civilian labor force 64,424 64,063 62,964 Employed - total 61,119 60,598 61,658 Non-agricultural 54,300 54,522 55,068 Agricultural 6,800 6,076 6,590 Unemployed - total 3,305 3,465 1,306 % of civilian labor force 5.1 5.4 2.1 EASE ? Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 8 - IV. INSTRUMENTS OF POLICY A. The means of accomplishing objectives 1. You want to keep our markets for consumption and investment in balance with production at high levels 2. By influencing credit conditions or the TONE of the money and capital markets a. Supply of money and credit b. Availability - mortgage money last May and June I c. Demand for credit d. Price of credit or interest rates B. Types 1. General - or "quantitative" affect supply, availability and cost - and demand 2. Selective - or "qualitative" relate to particular types Limit demand by requiring prospective borrower to meet specified conditions C. Analysis of general controls 1. Discount rate and administration a. Appropriate and inappropriate uses. Difference of opinion on relative weight to cost and rules Martin's Boston speech b. Limits to effectiveness of rate (1) To control expansion: when no one is borrowing high rate can't reduce (2) To induce expansion when no attractive loan and investment opportunities are available 2. Open market operations a. Developed to overcome defects of the rate (1) T0 control expansion - "making rate effective" by forcing market into central bank (2) To induce expansion - make funds freely available, supply more liquidity than the market wants Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 9 - b. Limits to effectiveness of open market operations (1) To control expansion Portfolio of Government securities e.g. Excess reserves Portfolio Dec. 1935 $3.3 bil. $2.4 Ml. Nov. 1940 6.9 " 2.2 « (2) To induce expansion eligible assets in market authority to buy - now $38 billion Canft push on a string - severe depression (This led to idea of compensatory fiscal policy - but that is another topic that I shall not discuss.) 3. Changes in Reserve Requirements - first suggested in 1917 a. Affects all members directly rather than through money market b. Limits on authority to change on effectiveness - contingent on willingness to see "tone" of market change - pushing on string 4. Interrelations of instruments Sale of securities may force banks to borrow Their attempts to repay will be reflected in reduced availability of credit and higher rates Change in reserve requirements not very effective unless allowed to affect tone and terms in credit market. (Ve still have much to learn about this.) But 1% = $1 billion - may offset part to prevent sudden spasm of tightness or sloppiness D. Analysis of selective controls 1. Margin requirements 2. Consumer credit regulation 3. Real estate credit regulation 4. Other? Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 10 - E. A basic issue of monetary policy - relative importance of general and selective 1. Extreme for general - Chicago 2. Extreme for selective - Keyserling, Clark - risk too great to use general 3. In between Council of Economic Advisers1 view on cheap credit (Hearings - January 1950 Economic Report - l/l7-20/50, p. 68) The value of cheap credit. - The difference in our position from that of the subcommittee arises in part from a somewhat different view of the desirability of low interest rates. In the report of the sub­ committee it is said, and repeated, that low interest rates are gener­ ally beneficial, but it is proposed to yield that principle in periods of inflation and to use central bank operations to induce an increase in the cost of money. Our view is that low interest rates are always desirable. In periods of inflation they have the undesirable collateral consequence of contributing to inflationary forces, but even then they have the economic advantage of facilitating the expansion of productive capacity which is the best road to stability. Where we differ with the subcom­ mittee is that we would not abandon the advantages of cheap money and use central bank operations to cause an anti-inflationaxy increase in interest rates. We would retain the advantages of cheap money and adopt other measures to curb the inflationary forces. In extreme cases as in 1947-48, we would tighten the availability of credit by pressure upon bank reserves under the plan proposed the Federal Reserve Board at that time, but would hold the resulting trend to higher interest rates within narrow limits. V. ORGANIZATION OF SYSTEM A. Relation to Government: Treasury B. Centralization vs. decentralization C. On differences of opinion within the System D. On errors in judgment 1. Looking back 2. Looking forward (Do not expect perfection in a human institution.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 11 - CONCLUSION A. Suggestions 1. Follow the statistics 2. Follow official statements 3. Follow reports B. Principles of War. General von Clausewitz "The conduct of war resembles the workings of an intricate machine with tremendous friction, so that combinations which are easily planned on paper can be executed only with great effort." "The results on which we count are never as precise as is imagined by someone who has not carefully observed a money market and beoame used to it." C. Qualities every student tries to achieve Technical competence - to recognize and always take into account - become part of our thinking: THE NECESSITIES Improved judgment with experience Courage and enthusiasm Humility Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1954, June 15). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19540616_karl_r_bopp

@misc{wtfs_regional_speeche_19540616_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1954},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19540616_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}