The Rates On Reserves, Open Market Operations, And So On

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Fed, the rates on reserves, open market operations, and so on. In 1950, inflation related to the Korean War convinced the FOMC that the rates being pegged on Treasury securities were too low. The Trading Desk attempted to discourage securities dealers from offering it Treasury issues. The Desk often delayed processing offers for several hours to induce dealers to find another purchaser. In the end, however, if the dealers could not obtain reasonable bids from other sources, the Fed generally bought the securities at the pegged rates. The Treasury was reluctant to give up the ability to finance the debt cheaply, and the Federal Reserve negotiated with the Treasury for an extended period to gain the right to make its own monetary policy decisions. By March 1951, an “Accord” was reached that allowed the Federal Reserve to resume an active and independent monetary policy. William McChesney Martin, who was soon to become Chairman of the Board of Governors of the Federal Reserve, handled the final stages of the negotiation for the Treasury. After the Accord, the FOMC created a subcommittee, headed by Chairman Martin, to investigate how best to carry out an active monetary policy and to encourage the return of an efficiently functioning government securities market.30 The FOMC adopted most of the key recommendations of the subcommittee and gradually withdrew its support of interest rates. Between 1953 and 1960, it pursued what came to be known as a “bills only” policy, generally confining open market operations to short-maturity Treasury securities—bills and certificates of indebtedness. The approach left longer maturity coupon securities free to trade without Federal Reserve interference, helping the market-clearing mechanism to functio... ... middle of paper ... ...nding bank credit since banks would perpetually have more excess reserves than they wanted and would keep increasing their lending. High net borrowed reserve levels would, in a parallel manner, encourage persistent loan contraction. Research staff members developed and refined techniques during the 1950s and 1960s for estimating each day what free reserves would be for the reserve maintenance period by forecasting both non-borrowed and required reserves. The reserve factor estimates, which affected non-borrowed reserves, were subject to sizable errors, even though considerable resources were devoted to obtaining timely information about the past and likely future behavior of the more volatile factors. The reserve estimates and market conditions were reviewed at a daily conference call held with senior Board staff officials and a president who was a voting FOMC member

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