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FEDERAL RESERVE BANK OF NEW YORK

3

The Business Situation

Signs of weakness in the United States economy have
multiplied in recent weeks. Industrial production fell
sharply again in November, with the decrease extending
far beyond the constricting effects of the coal strike, and
home building weakened further. Moreover, both business
and consumer demand have continued to slacken. New or­
ders for durable goods and retail store sales dropped for
the third consecutive month, and single-family home sales
declined as well. With both production and demand declin­
ing, labor market conditions have deteriorated rather
sharply. The unemployment rate rose in December to 7.1
percent of the civilian labor force, the highest rate in
over thirteen years.
Prices have continued to increase at annual rates in the
double-digit range, although at the wholesale level the
recent rates have been significantly lower than earlier in
1974. Wholesale industrial prices rose at an annual rate
of 10.3 percent in November, confirming the deceleration
that began in the fall of 1974; earlier in the year, the index
of wholesale industrial prices had climbed at a 32.9 percent
annual rate. The consumer price index rose at a 10.8 per­
cent annual rate in November, down slightly from the aver­
age over the previous ten months. In December, there were
several hopeful signs in the price picture. The percentage of
purchasing managers reporting higher prices continued to
move lower, and at the retail level there were widespread
reports of unusual pre-Christmas sales.
IN D U S T R IA L P R O D U C T IO N , IN V E N T O R IE S ,
AND DURABLES ORDERS

The industrial production index of the Board of Gov­
ernors of the Federal Reserve System registered a 2.3 per­
cent drop in November. Following a sizable decline in
October, the November fall pushed the index to a level 4.3
percent below its peak in November 1973. Nevertheless,
the total reduction in the output of the industrial sector since
November 1973 has amounted to only about half of the de­




cline registered in the last two recessions.
The November drop in industrial production reflected,
in part, the effects of the coal strike and the cut­
backs in automobile assemblies. The strike by members
of the United Mine Workers union accounted for
most of the 5.2 percent drop in output at the nation’s
mines. In addition, the strike hampered those industries
dependent on coal. Domestic coal is used to produce
coke, a material required for pig iron production and,
therefore, steel production. Thus, a good part of the 4.1
percent decline in the iron and steel production index is
probably attributable to the strike. Another major user
of domestic coal is the electric utility industry which ac­
counts for almost two thirds of total coal usage. Therefore,
some part of the 1 percent fall in the output of utilities,
which includes electricity production, probably also re­
flects the coal strike.
During the past several weeks the automobile manu­
facturers have tried to bring production into line with
sagging sales. Layoffs, beginning in late November, cut
domestic auto assemblies for that month as a whole to
an annual rate of 7 million units, down from an 8.3 mil­
lion unit rate in October. (During 1973, a record year,
the production rate averaged 9.6 million cars.) Neverthe­
less, production continued to outpace sales of domestictype autos, which fell further during November to an
annual rate of 5.7 million. This was the lowest sales rate
since December 1970 when dealers’ stocks were depleted
in the wake of the two-month General Motors strike. Con­
sequently, inventories of unsold new cars rose further in
November to 1.97 million units. In relation to sales, in­
ventories in November amounted to 106 days’ supply, the
highest inventory-sales ratio in more than ten years. Auto
manufacturers have cut production further by temporary
plant closings, reduced assembly-line speeds, and largescale layoffs. As a result, production of passenger cars in
December dropped to an annual rate of only 5.3 million
units.

MONTHLY REVIEW, JANUARY 1975

4

C h a rt

I

O R D ERS A N D SH IPM EN TS OF M A N U F A C T U R ED
DU RABLE G O O D S
S e a s o n a lly a d ju s te d
B illio n s o f d o lla rs

B illio n s o f d o lla rs

show that production remained weak in December partly
because of the lingering effects of the coal strike. In addi­
tion, the decline in new orders and the large overhang
in inventories are likely to dampen the level of output.
Total business inventories rose by $5.6 billion in October,
the largest increase so far this year; about one third
of the advance was attributable to an increase in auto­
mobile dealer inventories. With overall business sales
rising by less than $ 1 billion in October, the ratio of inven­
tories to sales increased substantially. At 1.54 months of
sales, the ratio was the highest in almost two and a half
years and represents a significant increase from rates of
1.51 months in September and 1.48 in August. Moreover,
the strong advance in the ratio occurred despite recent
changes in accounting practices that effectively lowered
book-value estimates of inventories at some firms.
P E R SO N A L . IN C O M E , R E T A IL S A L E S , A N D
R E SID E N T IA L C O N ST R U C TIO N

Source:

U n ite d States D epartm ent o f Commerce, Bureau o f the Census.

While the coal strike and the automobile industry slump
contributed to the November decline, production in
other sectors dropped as well. Large declines occurred in
the output of nonautomotive consumer durables, and busi­
ness equipment production, which had remained strong
through October, fell 1.1 percent. Output of construction
products dropped 2.8 percent in November, the sixth
straight monthly decline, and production of most other
durable and nondurable industrial materials also moved
lower. As of November, business equipment output was
one of the few components of industrial production that
was still above the level of a year earlier.
The continued deterioration in the economy was also
evident from the third consecutive monthly decline in new
orders for durable goods received by manufacturers (see
Chart I). The 3.8 percent drop in November brought new
orders to $43.4 billion at an annual rate, 12.3 percent
below the peak August pace. The latest decline in book­
ings was mainly in primary metals, machinery, and trans­
portation equipment. For nondefense capital goods as a
whole, bookings were down 4.8 percent over the month
to $10.8 billion, the lowest level since September 1973.
Unfilled orders declined for the second consecutive month,
after rising steadily for three and a half years.
It is expected that the figures, when available, will




Personal income fell $2.2 billion, or 0.2 percent in
November, as mounting layoffs and the coal strike re­
duced factory payrolls over the month. Wage and salary
disbursements in manufacturing declined by $5.2 billion,
the largest drop since the General Motors strike in
October 1970. Over the year ended in November, per­
sonal income rose by 7.5 percent, substantially less than
the price level.
Consumer demand has weakened materially in recent
months, reflecting the decline in real income and grow­
ing employment uncertainties. Retail sales dropped by
$0.6 billion in November, an amount equal to the average
decline in the previous two months. Slow sales at auto­
mobile dealers accounted for much of the November de­
crease, but business was down as well in furniture and
appliance stores, apparel shops, gasoline stations, and
equipment supply shops, on a not seasonally adjusted
basis. Compared with a year ago, total retail sales were
up only 5.3 percent, indicating a substantial decline in real
terms (see Chart II which shows retail sales deflated by
the consumer price index).
The home-building slump worsened in November.
Housing starts dipped to 990,000 units at an annual rate,
an eight-year low, and new building permits were issued
at the lowest rate since the Department of Commerce
began collecting the data in 1959. The seasonally ad­
justed pace of housing starts in November was 10.5 per­
cent below the previous month and down 40.9 percent
from a year earlier. A sharp drop in the construction of
rental apartments and condominiums accounted for most
of the latest decline. In sum, new construction of buildings

FEDERAL RESERVE BANK OF NEW YORK

with two or more units has fallen to 28 percent of its
November 1973 level and is at the lowest rate since March
1960.
Conditions in the market for new one-family homes
remained depressed also. Single-unit housing starts in No­
vember were 16.4 percent below the rate of a year ago.
The slowing in the pace of new home buying has con­
tributed to the recent declines. In October, the number of
new one-family homes sold fell to 410,000 units at an an­
nual rate, 18.8 percent below October 1973. While the
inventory of new homes for sale declined in October to
the lowest level since December 1972, the ratio of homes
for sale to homes sold remained at historically high levels.
P R IC E S

Severe inflation persists at the retail level, as the prices
of commodities and services continue to advance on a
broad front. In November, total consumer prices, adjusted
for seasonal variations, rose 10.8 percent at an annual
rate. Food prices jumped at a 16.5 percent annual rate
over the month, largely as a result of soaring sugar costs.
In the past year, the retail price of sugar has increased by
about 185 percent, reflecting growing world demand and
poor harvests. Since the November price survey, however,

Chart II

RETAIL SALES
S e a s o n a lly a d ju s te d

Source: U nited State* Departm ent o f Commerce, Bureau of the Census.




5

retail sugar prices have reportedly stabilized and even
declined slightly.
Price increases were widespread among other consumer
goods in November. The index of all commodities less
food rose at a 9.3 percent rate. Although faster than the
6.8 percent annual-rate advance in October, the Novem­
ber pace was significantly below the 15 percent rise in the
first nine months of the year. Higher clothing prices ac­
counted for about one fourth of the November increase,
with prices for appliances, coal and fuel oil, and other
nondurables continuing to move ahead rapidly. Gasoline
prices fell for the fourth consecutive month but were still
26 percent above a year ago. There were widespread
reports of unusual pre-Christmas sales at retail stores
during December, which should have a favorable impact
on the December price figures. However, it remains to be
seen whether this signals a trend toward more moderate
price behavior at the retail level.
Wholesale prices advanced at a 14.6 percent annual
rate in November, about half the October pace, as the
rate of increase in prices of farm and food products slowed
from the very rapid 61.5 percent annual rate recorded in
October. Despite the slowdown, the index of farm prod­
ucts and processed foods and feeds continued to soar,
advancing at almost a 30 percent annual rate. The Novem­
ber increase was attributable largely to sugar and con­
fectionery price rises.
The November wholesale price statistics for nonfood
commodities showed further tentative evidence of a de­
celeration in inflation. Wholesale industrial prices rose at
a 10.3 percent annual rate in November, less than the
September and October rates and one third the rate of
advance in the preceding eight months of the year. More­
over, price increases have become less widespread, espe­
cially for goods at the beginning stages of fabrication.
After rising 47.1 percent at an annual rate in the first
seven months of the year, the index of crude materials
has declined by 0.7 percent at an annual rate in the last
four months. More recently, the rate of advance in prices
of intermediate materials has slowed. In the three months
ended in November, the index of intermediate materials
less materials for food manufacturing and manufactured
animal feeds moved up 10.6 percent, compared with a
37.4 percent pace in the preceding eight months. However,
finished goods prices continued to advance rapidly, in­
creasing at an average annual rate of over 20 percent in
the last three months.
During a period of general inflation, many prices rise
in any month, but as inflation subsides the percentage of
prices rising generally declines. In this regard, it is inter­
esting to note that in recent months increasingly fewer

MONTHLY REVIEW, JANUARY 1975

6

purchasing managers have been reporting higher prices on
purchased materials. Each month, the National Associa­
tion of Purchasing Management, Inc., surveys its members
on purchased materials prices, among other things. In
November, only 49 percent reported higher prices, where­
as 95 percent had reported higher prices in March 1974.
According to the latest report, the proportion dropped
further in December to 43 percent.

R EA SO N FOR U N EM P LO Y M EN T
AS PERCENTAGE O F UNEMPLOYMENT
p erCe n t

S e a s o n a lly A d ju s te d

Per£ent

EM PLOYM ENT

The unemployment rate jumped 0.6 percentage point
to 7.1 percent in December, the highest rate in over thir­
teen years. The latest spurt in the unemployment rate was
widespread, with the jobless rate for adult men and adult
women increasing by 0.5 percent and 0.6 percent, respec­
tively. White collar workers had an unemployment rate of
4.1 percent in December, up from 3.7 percent in Novem­
ber and the highest rate since 1958 when the statistics
were first collected. The jobless rate for blue collar work­
ers increased to 9.4 percent in December from 8.2 percent
a month earlier.
In December, the civilian labor force remained virtually
unchanged; civilian employment dropped by 550,000 per­
sons to the lowest level since September 1973. Over the
last two months, the number of unemployed has risen by
a substantial 1,022,000 persons, with job losers— those
leaving their jobs involuntarily and persons on layoff—
accounting for over 75 percent of the increase. As a re-




S o u rc e : U n ite d S ta te s D e p a r tm e n t o f L a b o r, B u re a u o f L a b o r S ta tis tic s .

suit, the number of job losers as a percentage of the total
number unemployed has risen from 43.2 percent in Octo­
ber to 48.8 percent in December, similar to rates resulting
from the 1969-70 recession (see Chart III).

FEDERAL RESERVE BANK OF NEW YORK

The Money and Bond Markets in December
Most short-term interest rates fell during December,
although this trend was interrupted at times. The Federal
funds rate fell to its lowest level since early in the year, and
Treasury bill rates also declined. Signs of a further weak­
ening economy encouraged many investors to expect a
continued moderation in credit demands in the months
ahead. In addition, market sentiment was also bolstered
by the Federal Reserve System’s more generous provision
of nonborrowed reserves as well as the reduction in the
Federal Reserve Banks’ discount rates in December from
8 percent to 73 percent, the first reduction in three years.
A
Early in January, the Board of Governors of the Federal
Reserve System approved a further reduction of V2 per­
centage point in the discount rate to IVa percent at six
Federal Reserve Banks effective January 6.
During December, yields in the intermediate- and long­
term debt markets were mixed. In the Government securi­
ties market, despite a sizable volume of current and pro­
spective issues, yields on some coupon issues posted siz­
able declines. New offerings in the corporate sector con­
tinued heavy, and corporate yields generally edged upward
over the month, although demand for these securities re­
mained strong. In the municipal bond market, yields rose
sharply for the second month in a row as demand from
commercial banks and insurance companies, which are
traditionally heavy purchasers of these securities, was
largely absent from the market. By midmonth, the widely
followed indexes of tax-exempt bond yields reached record
highs. Some cancellations in new offerings occurred as the
month progressed, and yields retraced part of their move­
ment by the close of the period.
At the end of December, Americans were again per­
mitted to hold gold for the first time since April 1933.
With the expiration of the gold regulations, trading in gold
futures also became legal and member banks were per­
mitted by the Board of Governors of the Federal Reserve
System to buy and sell gold for their customers. Gold,
however, was not returned to the status of legal tender
and hence will not be accepted as part of a bank’s re­
quired reserves nor as collateral for advances from the
discount window. On December 3, the Treasury an­
nounced the sale in January of up to two million troy




ounces from its gold stockpile to help satisfy any pent-up
demand by individuals and to prevent a serious outflow of
dollars as Americans attempt to satisfy this demand by
purchasing from foreign gold suppliers. The initial re­
sponse on the part of American investors to gold owner­
ship was restrained, however, and, in early January trad­
ing, gold experienced sharp price declines on several
major markets.
Preliminary data through the week ended December 25
show a mixed pattern in the growth of the monetary
aggregates in the fourth quarter of the year. Both the
narrowly defined money supply (M i) and the more
broadly defined money supply (M 2) advanced at a moder­
ate pace, after showing little growth in the third quarter.
A sharp drop in the level of Government deposits, how­
ever, was at least partially responsible for a slow rate of
growth in the adjusted bank credit proxy during the fourth
quarter. Taking a longer view, the growth of the money
supply measures in 1974 as a whole was substantially
below the gains registered in 1973 and 1972, while the
rate of increase in the proxy was only slightly lower than
its growth over these two years.
THE M ONEY M ARKET, BANK RESERVES, A ND
THE M ONETARY AGGREGATES

Most money market rates declined further in Decem­
ber, continuing the trend which began late in the third
quarter, but some rates were under upward pressure at
times (see Chart I). During the month, the effective rate
on Federal funds averaged 8.53 percent, 92 basis points
below its average over the preceding month and the low­
est level since June 1973. Rates on bankers’ acceptances
fell about 50 basis points over the month, while rates on
three-month CDs in the secondary market declined about
28 basis points. Rates on shorter maturities generally rose
as major banks sought to raise funds in this market. Sev­
eral commercial banks lowered their prime lending rate to
10V\ percent. By the close of the period, the number of
major banks was about evenly divided between those post­
ing a 1 0 ^ percent prime rate and a 10V2 percent rate,
while one major bank maintained a 10 percent rate until

8

MONTHLY REVIEW, JANUARY 1975

Chart I

SELECTED INTEREST RATES
MONEY MARKET RATES

N o te :

October - December 1974
BOND MARKET YIELDS

D a ta a re show n fo r b u siness d a y s o n ly .

M O N E Y MARKET RATES Q UO TED: P rim e c o m m e rc ia l loan rate a t m ost m a jo r b a n k s ;
o ffe r in g ra te s (q u o te d in term s o f ra te o f d is c o u n t) on 90- to 1 19-day p rim e c o m m e rc ia l
p a p e r q u o te d by th re e o f the five d e a le rs th a t r e p o r t th e ir ra te s , o r the m id p o in t o f
th e ra n g e q u o te d if no consensus is a v a ila b le ; the e ffe c tiv e ra te on F e d e ra l fu n d s
(the ra te m ost re p re s e n ta tiv e o f th e tra n s a c tio n s e x e c u te d ); c lo sin g b id ra te s (q u o te d
in te rm s o f ra te o f discount) on new e st o u ts ta n d in g th re e -m o n th T re a su ry b ills.
B O N D M A R K E T Y IE LD S Q U O T E D :

Y ie ld s o n n e w

o t e d p u b l ic u t i l i t y b o n d s a r e b a s e d

on p ric e s a s k e d by u n d e r w ritin g s y n d ic a te s , a d ju ste d to m ake th e m e q u iv a le n t to a

early January when it raised its rate to 10V4 percent. In
contrast to interest rates on other money market instru­
ments, commercial paper rates generally edged upward
in December. Rates on 90- to 119-day dealer-placed
commercial paper advanced V* percentage point to close
at 93 percent.
/s
Businesses continued to borrow heavily from major
money center banks during the month. At New York City
weekly reporting banks, business loans, including loans
sold to affiliates, rose over the four-week period ended
December 25 by $1,016 million, a much larger gain than
experienced over comparable periods during the last sev­
eral years. Part of this rise reflected a sharp increase in
utility borrowings at money center banks. Faced with




s ta n d a rd A a a - ra te d b o n d o f a t le a s t tw e n ty y e a rs ' m a tu rity ; d a ily a v e ra g e s o f
y ie ld s on se a so n e d A a a - ra te d c o rp o ra te b o n d s ; d a ily a v e ra g e s o f y ie ld s on
lo n g -term G o v e rn m e n t s e c u ritie s (b o n d s d u e o r c a lla b le in ten y e a rs o r m ore)
a n d on G o v e rn m e n t s e c u ritie s d u e in th re e to fiv e y e a rs , co m p u te d on the b a s is
o f c lo s in g b id p ric e s ; T h u rsd a y a v e ra g e s o f y ie ld s on tw e n ty se a s o n e d tw e n tyy e a r ta x -e x e m p t b o n d s (c a rry in g M o o d y 's ra tin g s o f A a a , A a , A , a n d B aa).
Sources: F e d e ra l R eserve B a n k o f N e w Y ork, B o a rd o f G o v e rn o rs o f the F e d e ra l
Reserve System , M o o d y 's In ve sto rs S e rvice , Inc., a n d The B ond B uye r.

strong business loan demand in December, as well as
a substantial volume of maturing CDs, New York City
weekly reporting banks were quite aggressive in bidding
for CDs and Euro-dollar borrowings. Over the four state­
ment weeks of the month, the volume of CDs outstanding
at these banks rose $1,930 million while Euro-dollar lia­
bilities increased $930 million. Businesses shifted their bor­
rowing away from the commercial paper market, resulting
in the volume of nonfinancial commercial paper decreas­
ing substantially over the month by $554 million.
According to preliminary estimates,
— demand de­
posits adjusted plus currency outside banks—for the four
weeks ended December 25 was up at an annual rate of
5 percent from its average level in the corresponding

9

FEDERAL RESERVE BANK OF NEW YORK

four weeks of September. Similarly, M2 which consists
—
of Mi plus time deposits excluding large CDs— grew at a
rate of 7.2 percent over the same period, while the
adjusted bank credit proxy—which includes deposits of
member banks plus certain other liabilities— grew at a
rate of 4.3 percent. When measured from the correspond­
ing four-week period in December 1973, growth of the
money supply measures closely resemble the three-month
figures (see Chart II), with M x growing at 4.7 percent
and M2 at 7.5 percent. The credit proxy grew at a rate of
10.2 percent over the same period. Member bank bor­
rowings from the Federal Reserve Banks averaged $801
million during the month (see Table I), a decline of $467
million from November’s average and the lowest level
since November 1972. The reduction in borrowings prob­
ably resulted, in part, from the increased availability of
nonborrowed reserves.
On December 6, the Board of Governors of the Federal
Reserve System announced a change in Regulation Q,
effective December 23, providing for the establishment of
investment certificates, a new category of long-term
consumer-type time deposits. Under the new regulations,
member banks are allowed to pay up to 7Vi percent an­
nual interest on these certificates which can be issued in
maturities of six years or more and in amounts of $ 1,000
or greater. The certificates can be issued in either nego­
tiable or nonnegotiable form. The negotiable certificates
may not be redeemed prior to maturity, while the non­
negotiable certificates may be redeemed under the Board’s
existing rules for early withdrawal of time deposits. In
announcing the change, the Board said that the action was
intended to permit member banks to offer longer term
time deposits to small savers at more competitive rates of
interest. Similar actions were taken during December by
the Federal Deposit Insurance Corporation (FDIC) and
the Federal Home Loan Bank (FHLB) Board. Under their
new regulations, FDIC-insured nonmember commercial
banks also will be permitted to pay 7.5 percent annual in­
terest on these certificates, while FDIC-insured mutual sav­
ings banks and savings and loan associations that are mem­
bers of the FHLBs will be allowed to offer 7.75 percent.

Table I
FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, DECEMBER 1974
In millions of dollars; (-f) denotes increase
and 0—) decrease in excess reserves

Changes in daily averages—
week ended

Net
changes

Factors
Dec.
4

Dec.
11

Dec.

Dec.

IS

25

“ M arket" factors
Member bank required reserves ..................

— 221

+ 236

— 141 4- 174

+

Operating transactions (subtotal) ............

— 386

— 31

— 132 —2,484

—3,033

48

Federal Reserve float ................................

+ 750

— 289

— 62 — 217

4- 182

Treasury operations* ................................

— 119

+ 215

4- 469 —1,529

— 964

Gold and foreign account ........................

— 150

+ 169

— 38 4 -

+

Currency outside banks ............................

— 542

— 428

— 513 — 620

62

43

—2,103

Other Federal Reserve liabilities
and capital ..................................................

— 325

+ 302

+

12 — 180

— 191

Total “ market” factors ..........................

— 607

+ 205

— 273 —2,310

—2,985

- f 532

— 243

4- 432 4-2,612

4-3,333

— 109

+ 958

4 - 78 4- 398

4-1,325

-f

4- 67

Direct Federal Reserve credit
transactions

Open market operations (subtotal) ..........
Outright holdings:
Treasury

securities

..................................

Bankers’ acceptances ................................
Federal agency obligations ......................

69
-

33

4- 179

4- 154 4- 206

-

4 - 360

+

io

4-

Repurchase agreements:
Treasury securities ....................................

+ 287

— 746

4- 118 4-1,255

4- 914

Bankers' acceptances ................................

- f 116

— 196

4- 25 4- 179

4- 124

Federal agency obligations ......................

- f 169

— 326

+

47 4- 541

4- 431

Member bank borrowings ............................

— 411

— 425

4- 174 — 159

— 821

Seasonal borrowings! ................................

— 14

— 17

_

4

Other Federal Reserve assets t ....................

198

—

—

6 4-

60

—

1
94

—

36

4- 226

-f- 319
Excess

reserves:):

............................................

— 728

4- 601 4-2,547

4-2,739

288

— 523

4- 328 4 - 237

— 246

Monthly
averages?

Daily average levels

Member bank:

37,051

36,292

36,761

36,824

36,732

Required reserves ............................................

36,696

36,460

36,601

36,427

36,546

Excess reserves ................................................

TH E G O V E R N M E N T S E C U R IT IE S M A R K E T

Total reserves, including vault cashj . . . .

355

— 168

160

397

186

Total borrowings ............................................

1,072

647

821

662

801

Seasonal borrowings! ................................

Rates on all types of Government securities fell during
most of the month of December. Investors were encour­
aged by the reduction in the discount rate and the con­
tinued decline in the Federal funds rate. Over the month,
Treasury bill rates in the secondary market fell 33 to
61 basis points. Yields on intermediate-term coupon
issues declined 10 to 38 basis points, while long-term




51

34

30

29

36

Nonborrowed reserves ....................................

35,979

35,645

35,940

36,162

35,932

Net carry-over, excess or deficit (—) || . . .

200

221

— 50

25

99

N ote: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
t Included in total member bank borrowings.
t Includes assets denominated in foreign currencies.
§ Average for four weeks ended December 25, 1974.
|| Not reflected in data above.

10

MONTHLY REVIEW, JANUARY 1975

bond yields dropped about 4 to 31 basis points.
Yields at the first weekly bill auction of the month (see
Table II) were higher than those at the last auction in
November. The average yields on the three- and six-month
bills were set at 7.52 and 7.56 percent, respectively, each
about 20 basis points above the rates established at the
previous auction. When expectations of interest rate de­
clines strengthened, rates fell 35 and 65 basis points at
the next auction of three- and six-month bills. The Trea­
sury announced that the third weekly bill auction of the
month would not raise any new cash for the first time in
ten weeks. Following this news, bidding became more
aggressive and, in that auction, rates fell to 7.06 percent
for three-month bills and 6.86 percent for six-month bills.
Interest faded somewhat toward the end of the month, and
higher rates were set in the next two auctions. The Trea­
sury used the last auction of the month as a means of again
raising new cash in the amount of $200 million. In the
regular monthly auction of 52-week bills, the average issu­
ing rate was set at 6.63 percent, down from 7.36 percent in
the previous month’s sale and the lowest issuing rate since
March.
Treasury note financing consisted of two auctions, one
on December 23 of $2.3 billion in two-year notes ($0.3
billion of which was sold to official accounts) and the
other on December 30 of $1.25 billion in additional 77s
/
percent notes maturing in May 1979. Proceeds from the
sales were used to redeem $1.9 billion of debt maturing
at the year-end and to provide additional cash. Bidding at
the first auction resulted in an average yield of 7.32 per­
cent, while the second auction produced an average yield of
7.33 percent. The Treasury also auctioned $750 million on
January 2 of additional 8 percent notes due in March 1976
at an average yield of 7.24 percent.
A modest volume of new agency issues and investor
expectations about future interest rate movements both
contributed to agency financing during December at
lower yields than in the previous month. On December 11,
the FHLBs sold $500 million of five-year bonds for
new cash at a yield of 7.5 percent. This compared
quite favorably with a similar sale in the previous month
by the same agency at a yield of 8.15 percent. At
midmonth, the Federal Intermediate Credit Banks raised
$19.5 million in new money by selling $457.5 million of
nine-month bonds at a yield of 7.35 percent and $410.2
million of five-year bonds at a yield of 7.4 percent. On
the same day, the Banks for Cooperatives raised $19.7
million in new money in a sale of $439.7 million of sixmonth bonds at a rate of 7.4 percent. Both issues were
well received at yields ranging about 65 to 70 basis points
below similar offerings in the previous month.




C hart II

C H A N G E S IN M O N E T A R Y A N D CREDIT A G G R E G A T E S
S e a s o n a lly a d ju s te d a n n u a l rates
P ercent
15

Percent

10

5

0
-5
15

10
5

0

25
20

15
10

5
0
1 973

1974

N o te : G r o w th ra te s a re c o m p u te d on th e b a s is o f fo u r -w e e k a v e r a g e s o f d a ily
fig u r e s fo r p e r io d s e n d e d in th e s ta te m e n t w e e k p lo tte d , 13 w e e k s e a r lie r a n d
5 2 w e e k s e a r lie r .

The la te s t s ta te m e n t w e e k p lo tt e d is D e c e m b e r 2 5 , 1974.

M l = C u rre n c y p lu s a d ju s te d d e m a n d d e p o s its h e ld b y th e p u b lic .
M 2 = M l p lu s c o m m e rc ia l b a n k s a v in g s a n d tim e d e p o s its h e ld b y th e p u b lic , less
n e g o tia b le c e r tific a te s o f d e p o s it is s u e d in d e n o m in a tio n s o f $ 1 0 0 ,0 0 0 o r m ore.
A d ju s te d b a n k c r e d it p r o x y = T o ta l m e m b e r b a r U d e p o s its s u b je c t to re s e rv e
re q u ir e m e n ts p lu s n o n d e p o s it s o u rc e s o f fu n d s , such as E u ro d o lla r
b o r ro w in g s a n d th e p ro c e e d s o f c o m m e r c ia l p a p e r issu e d b y b a n k h o ld in g
c o m p a n ie s o r o th e r a ffilia te s .
S o u rc e :

B o a rd o f G o v e rn o rs o f th e F e d e ra l R ese rve S ystem .

T H E O TH E R SE C U R IT IE S M A R K E T S

Investor demand for corporate securities remained
strong in December, as further evidence of an economic
slowdown encouraged investors to expect a decline in inter­
est rates. With a heavy calendar of new offerings, however,
underwriters were required to post slightly higher yields on
issues, compared with the previous month. Investor concern
over issue quality, which became evident earlier in the year,
continued into December, and yield spreads between issues
of different quality ratings remained unusually wide. The
tax-exempt market continued to be characterized by light
investor demand and concern over quality. The Bond
Buyer index of twenty municipal bond yields reached a
new record high during midmonth. The unfavorable mar­
ket conditions in the tax-exempt market caused many
offerings to be withdrawn, and the light new issue supply
aided in selling high-quality debt later in the month.

FEDERAL RESERVE BANK OF NEW YORK

The market for industrial offerings was typified by two
25-year issues. An Aa-rated pharmaceutical firm’s $60
million in bonds was priced to yield 8.85 percent at mid­
month, while an A-rated manufacturer offered $50 million
in bonds at 9.45 percent. These yields were 10 to 12 basis
points above similar offerings of the previous month.
Utilities were forced also to post higher yields during the
month. An Aa-rated Bell Telephone subsidiary offered 9.63
percent on $80 million in bonds due in the year 2010.
This was 48 basis points above the yield on similarly rated
issues of the previous month. The International Bank for
Reconstruction and Development offered $300 million of
six-year notes at a yield of 7.93 percent and $200 million
of eleven-year notes at a yield of 8.15 percent. The Aaarated issues were very well received.
Well-publicized budget difficulties afflicting New York
City constituted an important contributing factor to the rec­
ord high of 7.15 percent in The Bond Buyer index of taxexempt yields posted at midmonth. Other components of the
index, however, were actually lower than they had been
earlier in the year. Dealers in tax-exempt issues who held
large inventories of depreciating city debt obligations be­
came increasingly reluctant to underwrite a large volume of
new issues. These conditions caused several issues to be
withdrawn, and the resulting light supply of new municipals
contributed to some improvement in selling conditions to­
ward the latter half of the month. For example, early in the
month an Aaa-rated county government sold competitively
$35 million in various-purpose bonds at yields ranging from
4.7 percent to 7.25 percent for maturities in 1976 and 1990,
respectively. After midmonth, however, the state of Ohio
experienced a swift sellout of its $60 million in Aaa-rated




11

bonds at the slightly lower yields of 4.6 percent and 6
percent for maturities in 1975 and 1988, respectively.
New York City again brought into the market a sizable
offering of $600 million in short-term notes in early
December. The offering provided yields of 8.5 percent on
$200 million in six-month notes and 9 percent on $400
million in one-year notes. By the close of the period, The
Bond Buyer index stood at 7.08 percent, 37 basis points
above its level at the end of November. The Blue List of
dealers’ advertised inventories declined over the month
by $316 million to a level of $720 million on December 31.

Table II
AVERAGE ISSUING RATES
AT REGULAR TREASURY BILL AUCTIONS*
In percent
Weekly auction dates— December 1974

Maturity

Dec.
2

Dec.
9

Dec.
16

Dec.
20

7.172

7.058

6.963

7.113

6.911

6.858

7.032

7.101

Dec.
27

i

Three-month ........................................

7.524
7.564

j

Monthly auction dates— October*December 1974

Oct.
16
Fifty-two weeks ..................................

Nov.
13

Dec.
11

7.629

7.362

6.625

* Interest rates on bills are quoted in terms of a 360-day year, with the discounts
from par as the return on the face amount of the bills payable at m aturity. Bond
yield equivalents, related to the amount invested, would be slightly higher.