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January 13, 1957, MMORAHDUM TO MR. U?HAH: In accordance with telephone conversation, I am heading you herewith three copies of a aew>randmm, "Prospect for Money Rates.* ks explained to you on the telephone, Hr* Eccles was under the impression that he had until noon today to get these meiaoranduas over to the Secretary, but in view of the fact that the meeting is being held now, the enclosed copies are being sent to you with the understanding that the memorandum has not been fully checked for changes, and that corrected copies will be furnished you later. Secretary to Mr. if* S. Eceles« January 12, 1937 FOR mmm BATES. Money rat#s hare been #xeeptl<»&lly low in regent years as a quence principally of two factors* (1) th© large supply of funds profitable use, and (2) the ssall demand from acceptable borrowers* Paring past year the ceasMreial dsmanei for funds has increased and a t the s«a»e fluids at the disposal of ba&ka bmve IHHRD r®Aiced by Federal le©«nr© aetioa. Further ei&nges is this direct!on may b© expected this y<s&r, tet the supply of funds in the hands of baaks mnd of investors l i pt large that tli© inereftaed- dMwad ean be aet without & aark®d adTaac® la rates* Farther r®ducti<m in excess reaerr^s of ta^ber basks, if i t ocears, will probably result in some stiffening of short-tera op©a*aarl:©t mom.ey rat^s, but €v®a after this advance the rates will b© b®low levels which in earlier y©ars would have be^^. coasicierad abneimelly low. I h i l e the deasad for capital fuada by corporation© ma/ be expected to increase, Treasury offerings will b# sa&ii and the supply of funds held by i n s t i tutions and individuals awaiting iavestseat i s large. I t is to be ex- pewted, therefore, that long-tera money rates, as reflected in/bond yields9 will show little or no increase in H M next ;mat V In r©ce»t y©ars the principal open-market @hQrt-~t®ra rates, as shown is the following table and on the chart, hav© been below 1 percent, with bankers* bills and Treasury bills generally at below \ of % percent* - 2 - lowest level readied by bankere'bills before 1S30 waa 2 percent in 1924. The rate on call loans with atock: ezeatoige collateral, until recent years the ax>st important open-market rate, declined to 1/4 of one percent in 1935, but has been pegged since l e s t itey by Hew York City b&n&s at one percent. "There were only six scattered years in the period from 1890 to 1930 w&®& thtfi rate aTer&ged below £ peyeeEt and i t was mever below one percent. Commercial paper, whien for more than h»lf a century has been a 'popular m&diivm for inTestmentof short fviads by eoimtry banks, now s e l l s at ft rate of 3/4 of on© percent; tne lowest qtiot©4 rate prior to lt30 was 5 1/8 percent in 1924* M Y0FJ1 COT Dec. 1936 Bills, $Q-day imendorsed Prltte ooaansroial f&pef, 4-6 nontka Stock exe&eng® f | | loans Federal Heserre funds (laterbaiHc loans) U. S. Government obligations - yields Treasury bills Treasury notes, 5-5 years Treasury bonis, long-term loans Federal Eeeerve bank SediseouBt rat© Buying rst© for 90-dsy endorsed bankers* bills Jan. 1934 3/16 1/8 5/4 1 1/8 1 1/4 - 0,21 1.04 0.67 3.11 5*50 £.43 3.58 I 1/2 1/2 1 1/8 z 1/2 m % m I t is clear that prevailing short-term open-market money rates are abaormlly low* These low rates have beea largely the result of the large folujae of excess reserves held by banks. Absorption of a large part of these reserves 'ad 11 eliminate this c&tise of low rates amd will probably result in a isoderate rise of opeiMsarket moueey rates. But the rise should sot b® large* Even after a& increase %M reserve requirements by the fell amotmt permitted usder t&e lav there id 11 s t i l l bd about 1700,000,0(XJ of excess reserves* I t is probable that the call money rate id.ll not rise above •mm^mr 1 1/2 pereest, because at swote rate^ outside f\mds ishich are plentiful b® attraoted* Tke plentiful swpplv of omtside funds will also act as a check oa the increase in eesamereial paper rates* fl3# rate om bsi-idters* aeceptanees, which is »ow 3/16 of one percent on 90-&ay b i l l s , will not ris® above tfee buying rate of the Federal Reserve bmnk which is l/t of one percent, lay higher market rate would »ake i t profitable to sell b i l l s to the leserve "basks• Treasury bills, ihicfa B O W provide the most important medima for liquid investment in the money sarket, are largely held by Mew lork City banks. The rate oa these bills sight be expected to rise above the prevailing extremely low level, A slight increase has already occurred in recent weeks, reflecting in part increased offerings by the Treasury sad la part anticipation of higher ®&n%j rates in cage of increased reserve requirements. It is doubtful, however, whether this rate would rise above 3/4 of 1 percent, in vlen of the popularity of the bills aa a short-tiae investment, especially in view of the fact that bankers* bill© canaot go above J of 1 percent. Some increase in yields on treasury aotes has occurred in recent week®, partly bee«u©@ of the likelihood that exchange rights on futar© issues * i H be smaller in coming je&ru thaa they have been in the past and perhaps partly because of adjustments of reserve positions. The shorter-tern Treasury boads, which have been selling on a yield basis of about 1 percent, have also been affected somewhat, bat In view of the large amount of liquid funds that will still be held by banks outside of New lork and by others than banks, no substantial rise in these rates is anticipated. Bates charged customers by banks should not be in th® least effected by increased reserve requirements, these rateg have been slom in cosing doim and say continue to show a domw&rd tendency, notwithstanding increased borrowing by customers. - 5 I t appears, therefore, that only moderate advances In short-time rates say be e j e c t e d ia the near future, even if reserve retjuireaents are further advanced. Beyond the next six months fee course of rates will dep«ad chiefly on the rate of business activity and the need for further restraining action by monetary authorities* Longf-term rates Yields oa hlgb~grsde long-term bonds have ia recent years been- a t the lowest levels of this century. Long-»terta United States Government bonds have sold on a yield basis of less thaa 2 ^ percent, not»ithstaniag tii© largest volume of Goverriaent debt on record* Ifee lowest level reached by these bonds in the ' t r e a t i e s was 3 f percent; pr®*war rate© ar© not comparable because a l l boads then bore the- circulation jjarivllege, which was of considersble value• selling on a 3 1/8 percent The highest grade corporate boads are basis, compared with a low level for the 'twenties of i*fc«ul 4 1/2 percent, and afe#ni*»4 percent in the years around the turn of the century. Long-terra rates have been affected in recent years by the volume of excess reserves held bj banks. l i t h the abundant supply of available funds and the saiall demand for loans banks have bought large amounts of securities, particularly Government o b l a t i o n s , m& bank holdings af securities are BOW the largest cm record not only in total &aouni but also in proportion of total bank assets. Member bank holdings of Treasury bonds and other securities amount to about 40 percent of their total loans mid investments* - 6 Reduction in excess reserves, together mitk increased demands for bank loans, might be expected, therefor®, to lead to son® sale of securit i e s by banks and this nsotild ta&d to depress their price and. increase the yield, fhere are, however, other factors i s the situation which might offset this influence. The first of these Is the abundant supply of investment funds s t i l l ssv&llftbl© outside of banks. Insurance companies, other institutional investors, corporations, SLB.3 individuals are holding large idle deposits ©waiting investment. Restoration of confidence aad improved corporate earnings resulting from, continued business recovery s&oald leed to active investment of these £tt£s» Many investors, «fco have be«o sivaitiftg the return of Ifefct they might consider a* aoraal interest rat®st are gradually deeidiag th«t i t i s better to put MMfal to use M x^revailing rates than to hold them idle. Another factor tending to prolong low bead yields is the likelihood of • reduction, in the supply of United States Government obligations available in the market, because of purchaser by the Treasury for lnvestcient of special funas, especially the social security fuad©, aad eventually because of debt retirement* I t i s not likely thst long«te:TO rates will rise substantially until short-teim rates approzinate or exceed long-tera rates. So long as banks c&n obtain larger yields on long-tens obligations than on sJaort-tsira ^aper they will aot b® saxious to switch, Kecords of the past indicate tiist long- term rates may declift© or snow littl® change wr.il© &hox4h*tem rates sre in-creasing. Since- a substantial rise in ehort-tena rat^s i s sot sntieipated in t i e next few months sad a rise to tii© present level of long-term rates i s sot to be expected until the credit situation requires vtgosswiB action by the Federal .Reserve authorities, l i t t l e *ijicr©&se in long-terra rates may be expected wlthia tiie next 4&if*
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