Evening star., 1961-03-06

One treasury department
Reserve with brilliant" handl
which involves buying Govern
ment bonds instead Of limiting
purchases to short-term
securities.
Good feeling between the ad-
ministration and the, Federal
Reserve on the question of in
tereSt rates is significant be-
cause William McChesney Mar
tin, jr., chairman of the Federal
Reserve Board, is dubious about
President Kennedy's policies.
The President hopes to re-
duce long-term interest rates to
spur the domestic economy,
while preventing declines in
short-term interest rates. Low
short-term rates, he fears, drive
dollars abroad and thus worsen
the deficit in the United States
balance Of payments. increas-
ing the loss of gold from Gov
ernment reserves.
Sees Reserve in Key Role
AS the President sees the
problem. the Federal Reserve
must play a key role in adjust
ing interest rates by buying
Government bonds and other
relatively long-term Federal
securities. Such purchases the
oretically tend to stabilize or
raise market prices Of bonds, |
thus lowering their yield or ef-
fective interest rate.
Mr.. Martin through the
years has preferred to have the |
Federal Reserve buy short
term Government securities ra7
ther than bonds, and this ap-
proach became fairly firm pol
icy. The Federal Reserve in
creases the supply of money
and credit partly by purchas-
ing Government securiti es
through its open market COM
mittee.
Despite Mr.. Martins prefer
ence for short-term securities.
the Federal Reserve modified
its policy before the election
by purchasing some securities
with IL to Is months remaining
until maturity. After the elec-
ton, Mr.. Martin let it be known
that the Federal Reserve might
go further and buy bonds-if
this could be done within the
framework of sound policy.
Sterilization Desirable
Without conceding any sur
render on principle, he indica-
ted a desire to give the Presi-
dents theories a fair test. Mr..
Martin agrees generally that
reduction Of long-term inter-
est rates and stabilization of
Short-term rates would be de-
sirable. but he questions the
Governments ability to achieve
much in this area through
techniques advocated by the
President.
The test of Mr.. Kennedy's
theories started February 20,
when the Federal Reserves J.
open market committee an
nounced it was buying notes
and bonds of varying maturi-
ties, including some in a range
beyond five years. Bond buy
ing has continued since then.
Treasury officials admire the
way the Federal Reserve has
accomplished its policy switch.
and believe that the risky tram
sitional phase has been nearly
completed without damage.
Some Observers feared that
the switch would give rise to
expectations that the Federal
Reserve intended to peg"
market prices Of Government
bonds, as it had done before
1851. Pegging involves a COM
nitment to prevent bond prices
from declining below specific
levels by purchasing enough
bonds to keep the prices up.
Both the Federal Reserve
and the administration have
disavowed any intention to peg
bond prices, and actions since
February 20 have demonstrated
that the disavowals are not
just talk. Traders on several
days have tested the Federal
Reserves resolve by selling
bonds and thus depressing
prices.
Keeping cool, the Federal
Reserve has simply stood by
and let the prices drop without
jumping into the market to
push the prices up. The price
losses have been recovered
promptly in subsequent trading.
Administration officials en-
phasize that they are not try
ing to reverse natural trends
Of interest rates. but want only
to nudge rates in the direction
they would go anyway. There
is fairly general agreement that
long-term interest rates are too
high for current economic cir
cumstances and are bound to
decline.
When the economy starts re-
covering vigorously from the
recession, a Treasury official
said, interest rates will rise no
matter what the Government
does. But he hopes the Federal