The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
May 25, 1973 =5=9 E@®m Business statistics recently have been just about as overpowering as those of earlier months, so policy makers acted to put further curbs on the boom with the announce ment of a complex series of mone tary measures last week. Among other things, the Federal Reserve Board of Governors shifted reserve requirements on Eurodollars and large certificates of deposit (CD's), and suspended interest-rate ceilings on the latter instruments. These Board actions were “designed to curb the rapid expansion in bank credit and help moderate inflation ary pressures, and at the same time to assure the availability of credit on a reasonable scale." This week Federal Reserve Chairman Burns followed up with a letter to member banks requesting their cooperation in assuring that the rate of bankcredit extension “ is appropriately disciplined." Strength of the boom The strength of real economic activity is apparent in the latest industrial-production index, which jumped 1.0 percent in April— a much larger gain even than the substantial increases reported in the several preceding months. Gains in output were not only strong, pushing the index 9.0 percent above the year-ago level, but were also widely distributed across the entire range of production. Another sign of strength is a sharp first-quarter jump in corporate profits; during this period, after-tax profits reached a $62.3-billion annual rate, for a 26-percent year to-year gain. The boom also brought about a sharp improvement in the Treasury's finances; last winter, the Treasury had forecast deficits of $25 billion for fiscal 1973 and $13 billion for fiscal 1974, but Secretary Shultz now suggests that the deficit will be "substantially less" than $20 billion this year and that the budget will be “ moving strongly toward balance" in fiscal 1974. Unfortunately, a substantial chunk of the growth in corporate profits and federal revenues happened as the result of continued inflation. During the first quarter, the general price index rose at a 6.6-percent annual rate— considerably higher than the preliminary 6.0-percent figure reported a month ago. That first-quarter figure was bad enough, but it was followed in April by another substantial increase in consumer prices and by the worst upsurge in wholesale industrial prices since the panic buying of the early Korean War days. Headlong pace Banking statistics continued to indi cate the headlong pace of the credit-fed boom. During the January-February period, total loans of large commercial banks increased 2.4 percent, compared with a 2.2percent gain in the comparable period of 1972. Then, in March and April, total loans increased 4.0 per cent, as against a 1.0-percent gain in the year-ago period. Despite minor monthly fluctuations, all major lending categories were con siderably stronger than in fast-paced 1972. In addition to a phenomenal (continued page 2) business-loan pace, surprising strength was shown by mortgage and consumer loans, as well as loans to nonbank financial institutions. Large banks continued to meet this very heavy loan demand in part by selling securities. After a 4.4percent reduction in January and February, they reduced their holdings another 1.4 percent in March and April. (In the year-ago period, they actually added to their holdings, especially Treasury securities.) However "liability management" was by far the more important source of funds. Bidding for corporate funds with large CD's was brisk, and altogether, banks increased their outstanding CD's by 12.8 percent in January and February and by 11.0 percent more in March and April. Thus, through April of this year, large banks met their loan demand with a $4.8billion reduction in security holdings and a $11.3-billion issuance of CD's. From all indications, business bor rowing will remain very strong as the year progresses. The latest plant-equipment spending survey (McGraw Hill) suggests that corporations will require substantial amounts of funds this year, both for modernization of existing facilities, and for new facilities to meet the capacity overload now evident in many industries. In addi tion, they will need funds to rebuild their inventories, since shelves are now being swept clean in many industries by the very rapid pace of consumer and business demand. Countermeasures In earlier attempts to counter the inflationary boom some months ago, the Federal Reserve tightened open-market policy. The flavor of these actions is reflected in the published minutes of the January and February meetings of the Federal Open Market Committee. In its latest actions, the System directed its attention to commercialbank reliance on money-market sources of funds, such as CD's and Eurodollars. To begin with, the Board of Gov ernors imposed an 8-percent marginal reserve requirement— the regular 5 percent plus a supple mental 3 percent— on further increases in total outstanding funds obtained by a bank through the issuance of large CD's or through an affiliate's issuance of obligations subject to time-deposit reserve requirements. The Board also proposed including finance bills (working capital acceptances) as part of the total obligations subject to the 8-percent marginal reserve requirement. Those finance bills currently outstanding would be subject to a 5-percent reserve requirement, instead of zero as at present. The Board also reduced, from 20 percent to 8 percent, the reserve requirement on certain foreign bor rowings of U.S. banks, primarily Eurodollars, thus affording roughly parallel treatment with the marginal reserve requirement on large CD's and bank-related commercial paper. The Board also acted to eliminate gradually the reserve-free bases still held by some banks subject to this measure. Federal Reserve Chairman Burns attempted to broaden the effective ness of this reserve-requirement ruling by appealing to the largest nonmembers— about 190 banks— to adhere to the ruling affecting Federal Reserve member banks. "The reserve-requirement action was taken by the Board in an effort to restrain bank-credit as part of the nation's anti-inflationary program. The effectiveness of this proposal in the essential task of combating inflation would be enhanced if it applied generally throughout the banking community. Accordingly, I very much hope you will see fit to conform to the additional 3-per cent marginal requirement." Lifting ceilings The Board also suspended interestrate ceilings on large CD's maturing in 90 days or more, "in order to permit member commercial banks to maintain a balanced structure of deposits." Ceilings had been sus pended almost three years ago on shorter maturities, but they had been kept in place on longermaturity deposits of $100,000 and over, with a range of 63A to 71/2 percent. "Because of recent ad vances in market rates, the ceiling rates on longer-maturity deposits now practically preclude banks from using long-term CD's, and the great bulk of large CD's being issued mature in less than 90 days. . . . With market interest rates relatively high, the suspension of ceilings across the board will enable banks to compete in all maturity sectors of the short-term market and thereby permit them to estab lish a balanced maturity structure for outstanding large certificates of deposit." In parallel actions, the Federal Deposit Insurance Corporation sus pended rate ceilings on large CD's for insured banks that aren't Federal Reserve members, and the Federal Home Loan Bank Board removed rate ceilings on large savings cer tificates ($100,000 and over) issued by member savings-and-loan associations. Both regulatory agen cies, like the Federal Reserve, kept rate ceilings in place for all other types of deposits, such as passbook savings and "consumer type" cer tificates of less than $100,000. These actions on rate ceilings show certain similarities to last month's action by the Committee on Interest and Dividends regarding businessloan rates. In each case, policy makers attempted to have the marketplace govern bank's dealings with large firms in regard to the rates banks charge big corporations for loans, and in regard to the rates they pay corporate treasurers for the use of funds. In addition, policymakers showed their intent to maintain rate stability for households and small businesses, with the rates charged such bor rowers kept "under special restraint," and with the rates paid them for consumer-type deposits kept under rate ceilings. William Burke uoiSujqsE/w • i|e;n • uo S b j o • EpEAaN . oqepi M EM EH . B m JO p | E 3 • EU O ZU y . BANKING DATA— TWELFTH FEDERAL RESERVE DISTRICT (D o llar amounts in m illions) Selected Assets and Liabilities Large Com m ercial Banks Loans adjusted and investments* Loans adjusted— total* Com m ercial and industrial Real estate Consum er instalm ent U.S. Treasury securities O ther securities Deposits (less cash items)— total* Dem and deposits adjusted U.S. Governm ent deposits Tim e deposits— total* Savings O ther tim e I.P.C. State and political subdivisions (Large negotiable C D 's) W eekly Averages of D aily Figures M em ber Bank Reserve Position Excess reserves Borrow ings Net free ( + ) / Net borrow ed (— ) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases ( + ) / Net sales (— ) Transactions: U.S. securities dealers Net loans ( + ) / Net borrow ings (— ) Am ount O utstanding 5/9/73 Change from 5/2/73 72,690 55,033 19,997 15,897 8,147 6,190 11,467 70,668 20,486 1,165 47,777 17,981 19,569 7,611 9,137 +134 + 30 — 114 + 49 — 7 — 72 +176 +124 + 63 — 192 +436 + 58 +444 — 91 +355 W eek ended 5/9/73 Change from year ago D o llar Percent + 9 ,8 0 1 + 9 ,7 9 9 + 3 ,2 4 4 + 2 ,6 1 4 + 1 ,3 6 6 — 487 + 489 + 8 ,5 8 7 + 1 ,3 6 4 — 5 + 6 ,9 0 6 + 13 + 4 ,7 9 2 + 1 ,1 6 2 + 4 ,1 8 3 Week ended 5/2/73 + 1 5 .5 8 + 2 1 .6 6 + 1 9 .3 6 + 1 9 .6 8 + 2 0 .1 4 — 7.29 + 4.45 + 1 3 .8 3 + 7.13 — 0.43 + 1 6 .9 0 + 0.07 + 3 2 .4 3 + 1 8 .0 2 + 8 4 .4 4 Com parable year-ago period — 6 74 — 80 6 296 — 290 0 0 0 +206 +433 — 1,329 + + + 79 57 50 ♦ Includes items not shown separately. Inform ation on this and other p ublications can be obtained by callin g or w riting the A dm inistrative Services Departm ent. Federal Reserve Bank of San Francisco, P.O . Box 7702, Digitized for F R A S E R rancisco, C alifo rn ia 94120. Phone (415) 397-1137. E>|SE|V
@FedFRASER