Author
The time is early afternoon on a Wednesday in mid-June. The place is the trading room on the eighth floor of the Federal Reserve Bank of New York. The manager of the Open Market Account for Domestic Operations gathers with his trading room officers to reaffirm the judgment reached earlier to buy about $1.25 billion of Treasury bills.
The banking system has a clear need for additional reserves to meet the increased public demand for currency and deposits expected as the end of the quarter and July 4 approach. The markets for bank reserves and Treasury securities are functioning normally with prices moving narrowly. After a brief discussion, the manager gives final approval to the planned operation.
The officer-in-charge at the Fed's Trading Desk turns to the 10 officers and securities traders who sit before telephone consoles linking them to three dozen primary dealers in U.S. government securities. "We're going to ask for offerings of all bills for regular delivery," she says. Each trader knows this means delivery and payment will take place the next day. Each picks up the vertical strips on which the offerings will be recorded for the four dealers he will call.
Bill, one of the group, presses a button on his telephone console, sounding a buzzer on the corresponding console of a government securities dealer.
"John," Bill says, "we are looking for offerings of bills for regular delivery."
John replies, "I'll be right back." He turns and yells, "The Fed is in, asking for all bills for delivery tomorrow." Moments later information screens around the country and abroad flash the news. Salesmen begin ringing their customers to see if they have bills they want to offer. Meanwhile, John checks with the trading manager of his firm to see how aggressive he should be in pricing the firm's own securities.
Twenty minutes later John rings back. "Bill, I can offer you $15 million of bills maturing August 9 at 9.20 percent, $40 million September 13 bills at 9.42, $25 million of September 20s at 9.46 and another 25 at 9.44. I'll sell $75 million December 13s at 10.12 percent and another 100 at 10.09. I can offer $20 million of March 21s at 10.25 and 50 May 16s at 10.28. All for delivery tomorrow."
Bill reads back each of the offerings to double check, then says, "Can I have those firm?"
"Sure."
Within 10 or 15 minutes each trader has written the offerings obtained from his calls on preprinted strips. The officer-in-charge arrays the individual dealer strips on an inclined board placed atop a stand-up counter. A quick tally shows that dealers have offered $7.8 billion of bills for regular delivery—that is, on Thursday.
The officer and a colleague begin comparing rates across the different maturities, seeking those that are high in relation to adjoining issues. She circles any special bargains with a red pencil. With an eye on heavy existing holdings, she circles other propositions that offer yields on or above a yield curve she draws mentally through the more heavily offered issues. Her associate keeps a running total of the amounts being bought. When the desired volume has been circled and cross-checked, the individual strips are returned to the traders, who quickly ring up the dealers.
Bills says, "John, we'll take the $25 million of September 20s at 9.46, the 75 of December 13s at 10.12 and the 50 of May 16s at 10.28 for regular delivery. A total of $150 million. No, thanks, on the others."
Forty-five minutes after the initial entry, the follow-up calls have been completed. The Trading Desk has bought $1,304 million of Treasury bills. Only the paper work remains. The traders write up tickets, which authorize the accounting section to instruct the Reserve Bank's Government Bond Department to receive and pay for the specific Treasury bills bought.
On Thursday the Federal Reserve will take delivery of the purchased securities from the banks that handle deliveries for the dealers—the clearing banks for nonbank dealers. As authorized by these banks, it will deduct these securities from the book entry list of their holdings at the Federal Reserve and add them to the System Open Market Account. In return, the banks will receive credit that day to the reserve accounts they maintain at their Federal Reserve Bank. The Federal Reserve's credits to these accounts will add about $1.3 billion to the reserves maintained by U.S. financial institutions at the Reserve Banks.
The Trading Desk's market entry sparks discussion immediately in dealer firms, the foreign exchange market and other financial markets. Within minutes money market analysts give their opinions over electronic information screens as to whether the bill "go-around" signifies any change in the outlook for monetary policy. Was the Federal Reserve just supplying reserves in anticipation of the seasonal demands ahead? Or did its purchases seem aggressive, suggesting it might be trying to encourage more rapid growth of money and credit in the country?
Such questions can rarely be answered by analyzing a single Federal Reserve market operation. But they underscore how important the current thrust of monetary policy is to bankers, businessmen and governments throughout the world. Open market operations can quickly affect the cost and availability of credit in the United States and foreign financial markets. Sustained Federal Reserve action can exert strong economic effects in the world economy.
Under the Federal Reserve Act, the System uses open market transactions in government and federal agency securities as its most flexible means of adding to, or reducing, the reserves which depository institutions maintain in relation to their deposits. Operations routinely seek to head off the stresses imposed on the monetary machinery by seasonal or sudden, and potentially reversible, shifts of funds. But the overriding longer term objective of such operations is to foster the monetary and credit conditions conducive to a healthy economy. Under the law the System establishes growth rates for various measures of money and credit over each calendar year. Its ultimate goals are sustainable economic growth, high employment, reasonable price stability and viability in the nation's international accounts.
Federal Reserve purchases of securities supply reserves to the banking system; sales withdraw reserves. When the manager purchased $1,304 million of Treasury bills on Wednesday, June 13, he paid the securities dealers by crediting the reserve accounts of the banks handling dealers' paper work, an action that created reserves that didn't exist before. Had he sold the Treasury bills instead, he would have reduced the System's open market account holdings and extinguished bank reserves.
