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F ederal


Ba n k



D allas


Circular No. 79-169
October 10, 1979

Increase in Discount Rate and
Establishment of Marginal Reserve Requirement
On Increases in "Managed Liabilities1

T h e re is enclosed the text of a p r e s s release issued on October 6, 1979,
by the Board of Governors of the Federal Rese rv e System announcing a 1-per cent
incr ease in the discount rate, from 11 p e r c e n t to 12 p e rcent, and the establishment
of an 8 -p e r c e n t marginal r e s e r v e requirement on inc rea se s in "managed liabili­
ties" — liabilities that have been actively used to finance rapid expansion in bank
cr ed it. The discount rate change was effective on Monday, October 8, 1979. The
chan ge in Regulation D r e g a rd in g the marginal r e s e r v e r eq uirem en t will be ef­
fective on the increase in managed liabilities (over the established base) in the
statement week beginning October 11, 1979, on which related r e s e r v e s will be
maintained in the sev en -d ay period beginning October 25, 1979. Because U . S .
Agencies and b r a n c h e s of foreign ban ks will be maintaining r e s e r v e s with the
Federal Reserve System for the f ir s t time, they will begin maintaining r e s e r v e s
the week beginning November 8, 1979.
Supplement A to Bulletin 2 has been fu rn ished to you in a sep arate
c i r c u l a r . Th e ap p r o p ri a te changes to Regulation D will be forwarded in the near
Any questions r e g a rd i n g the following material should be dire cted to
Allan Y. Neale of the Accounting Department, Ext. 6334.
Sincerely y o u r s .

Robert H. Boykin
F irs t Vice Pre siden t

Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (




For immediate release

October 6 , 1979

The Federal Reserve today announced a series of complementary actions
that should assure better control over the expansion of money and bank credit,
help curb speculative excesses in financial, foreign exchange and commodity
markets and thereby serve to dampen inflationary forces.
Actions taken are:

A 1 percent increase in the discount rate, approved unanimously

by the Board, from 11 percent to 12 percent.

Establishment of an 8 percent marginal reserve requirement

on increases in "managed liabilities" —

liabilities that have been actively

used to finance rapid expansion in bank credit.

This was also approved

unanimously by the Board.

A change in the method used to conduct monetary policy to

support the objective of containing growth in the monetary aggregates over
the remainder of this year within the ranges previously adopted by the Federal



over the months ahead.

are consistent with moderate growth in the aggregates
This action involves placing greater emphasis in day-

to-day operations on the supply of bank reserves and less emphasis on confining
short-term fluctuations in the federal funds rate.

It was approved unanimously

by the Federal Open Market Committee, which is comprised of all members of
the Board of Governors and five of the 12 Presidents of the Federal Reserve
In announcing these changes, the Board issued the following statement:


"Inflation has continued at an exceptionally high rate over recent

In part, the inflation rate reflects sharply rising energy

prices, and those pressures should be subsiding in the months to

However, appropriate restraint on the supply of money and

credit is an essential part of any program to achieve the needed
reduction in inflationary momentum and in inflationary expectations.
Such restraint should help to avoid new uncertainties about the
outlook for prices and distortions in markets that could aggravate
the process of economic adjustment that is underway.

It will help

to restore a stable base for financial, foreign exchange and commodity
"Under the provisions of the Humphrey-Hawkins Act, the Federal
Reserve sets yearly targets for the monetary aggregates and bank
credit, and reports these targets to the Congress.

At mid-year,

the targets for 1979, encompassing the period from the fourth
quarter of 1978 to the fourth quarter of 1979, were reviewed and
reaffirmed at 1 1/2 to 4 1/2 percent for Mj, 5-8 percent for M2 ,
and 6-9 percent for M3 . *

These targets, after allowance for

the smaller shift of demand deposits to ATS and NOW accounts, still
seem broadly appropriate.
*The Mi target had assumed a shift of about 3 percent of demand
deposits to automatic transfer service accounts (ATS) and NOW accounts;
that shift now appears to be about 1 1/2 percent so that the equivalent
adjusted target is 3-6 percent for Mj.

"However, growth over recent months in these aggregates
and in bank credit has been more rapid than is consistent with
those targets, and if unrestrained, would clearly be excessive
in terms of our basic economic objectives.

Recent Federal Reserve

actions, taking account of inevitable lags, should work to contain
money and credit growth in the months immediately ahead, consistent
with the targeted objectives.

The actions announced today are

designed to provide further assurance that those objectives will
be reached."

The Board also stressed that banks should avoid loan activity that
supports speculative activity in gold, commodity and foreign exchange markets
Discount Rate
In announcing the change in the discount rate, the Board acted on
requests from directors of the Federal Reserve Banks of New York, Philadelphi
Cleveland, Richmond, Minneapolis and San Francisco.
The discount rate is the rate that member banks are charged when they borrow
from their district Federal Reserve Bank.

The change is effective on

The Board indicated that, within the general framework of existing
policies regarding the admini:,fration of the discount window, the discount
rate would be managed flexibly to discourage excessive member bank borrowing.
Marginal Reserve Requirement
The marginal reserve requirement adopted by the Board will apply to
all increases in managed liabilities of member banks, Edge corporations, and
U.S. agencies and branches of foreign banks.


This means that these institutions will be required to put up an
additional 8 percent reserve against their deposits to the extent that
they increase the aggregate level of their managed liabilities above a
base amount.

These liabilities include large time deposits ($100,000

and over with maturities of less than a year), Eurodollar borrowings,
repurchase agreements against U.S. Government and federal agency securities,
and federal funds borrowings from a nonmember institution.

(Federal funds

borrowings from member banks, Edge corporations, and U.S. agencies or
branches of foreign banks are exempt in order to avoid a double counting
of reserve requirements.)
The marginal reserves will be an addition to any reserve requirement
already in place for member banks and Edge corporations.

Large time deposits,

for example, are already subject to a supplemental reserve requirement of
2 percent that was put in place last November, plus a basic reserve ranging
from 1 percent to 6 percent depending on maturity.
The current reserve requirement on Eurodollar borrowings is zero while
federal fund transactions and repurchase agreements against U.S. Government
and federal agency securities are currently exempt from reserve requirements.
The marginal reserve will also apply to loans made by foreign offices of member
banks to U.S. residents and to assets sold by member banks, Edge corporation
and U.S. branches and agencies to related foreign offices.
The base for the marginal reserve will be $100 million or the average
amount of managed liabilities held by a member bank, Edge corporation or by
a family of U.S. branches or agencies of a foreign bank, as of the two statement


weeks ending September 26, whichever is larger.

Any increase in managed

liabilities above that point will be subject to the 8 percent marginal
Since the marginal reserve will apply to the total aggregate level
of managed liabilities for each bank, an increase in one component —
CDs for example —


may be offset by a decrease in another without any overall

increase in reserve requirements.
This action is directed toward sources of funds that have been actively
used by banks in recent months to finance the expansion of bank credit.
Member banks are presently estimated to hold over $240 billion in such
managed liabilities.
last three months.

They have increased by about $17 billion over the
About half of the increase in bank credit over that period

has been financed by such managed liabilities.
The marginal reserve requirement will also apply to marginal increases
in all repurchase agreements on U.S. Government and agency securities entered
into by member banks, Edge corporations, and U.S. branches and agencies except
those entered into with other member banks, Edge corporations and U.S. branches
and agencies.

A deduction, however, will be permitted for U.S. Government and

agency securities held in an institution's trading account -- securities held
for the purpose of resale.

The Board expects that affected institutions will

not reclassify securities held in their investment accounts to their trading
accounts for the purpose of avoiding the marginal reserve requirement.
The marginal reserve requirement will be effective on the increase in
managed liabilities in the statement week beginning October 11 and maintained
in the seven-day period beginning October 25.

Because U.S. agencies and

branches of foreign banks will be maintaining reserves with the Federal
Reserve for the first time, they will begin maintaining reserves the week
beginning November 8.


FOMC Action
Under the

new procedures adopted by the FOMC for the conduct of open

market operations -- the major tool used by the Federal Reserve in its operations
wider day-to-day or week-to-week fluctuations in the federal funds rate may

The federal funds rate is the rate that commercial banks pay to borrow

short-term funds generally on an overnight basis.
Over recent years, the FOMC has fixed a relatively narrow range for the
federal funds rate.

To help achieve better control over the reserve base, it

will now be necessary -- within broad limits -- to permit wider fluctuations
of that rate if so determined by market forces.
In its open market operations, the Federal Reserve, through its trading
desk at the Federal Reserve Bank of New York, buys or sells government securities
in the open market.

In simple terms, a purchase of securities increases the

level of bank reserves while a sale of securities decreases bank reserves.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102