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111 FEDERAL RESERVE BANK OF NEW YORK The Business Situation The most recent business statistics provide further evidence of a broadly based quickening in the pace of economic activity. Industrial production posted a pervasive and strong increase in March, and payroll employment continued to show upward momentum in April. Real gross national product (GNP) advanced at a healthy 5.3 percent annual rate in the first quarter as almost all sectors shared in the advance. Retail sales rose sharply in March, and scattered indications of an improvement in consumer attitudes suggest that some further gains may occur in this area during the months ahead. In spite of these signs of strengthening economic activity, business spending for inventories has remained cautious and un employment has remained at recent high levels. The latest readings on prices and wages have been somewhat mixed and do not yet provide a clear indication of the overall effectiveness of Phase Two policies. Cer tainly the most favorable price development in the Phase Two period thus far was the virtual stability displayed by consumer prices in March. On the other hand, the implicit GNP price deflator and compensation per hour of work in the private economy— the broadest measures of prices and wages, respectively—posted large increases in the first quarter. These rapid gains were in part a reflection of the bunching of wage and price increases in the aftermath of the freeze. Thus, neither of these advances is necessarily representative of the underlying inflationary situation with in the quarter. In April, industrial wholesale prices con tinued to rise at the same disappointingly rapid pace of the previous four months. price increases, as the GNP implicit price deflator advanced rapidly in the aftermath of the price freeze. After adjustment for changes in the price level, the first-quarter increase in real GNP was at a 5.3 percent annual rate, This gain, coming on the heels of the sizable advance in real GNP in the fourth quarter of 1971, brought growth in the six months ended in March to an annual rate of 5.6 percent. With the exception of the first half of 1971, C hart I CHANGES IN NOMINAL AND REAL GROSS NATIONAL PRODUCT S eason ally ad ju sted a n n u a l rates G N P IN CURRENT DOLLARS ■ 12 ■ 8 6 ■ 4 2 ill m GROSS NATIONAL PRODUCT AND RELATED DEVELOPMENTS According to preliminary estimates by the Department of Commerce, the market value of the nation’s output of goods and services rose by $30.3 billion during the first quarter to a seasonally adjusted annual rate of $1,103.2 billion. About half of this growth was accounted for by 10 1968 S o u rc e: 1969 1970 U n ited States D e p a rtm e n t of C o m m e rc e . J_L 112 MONTHLY REVIEW, MAY 1972 when activity was artificially boosted by the recovery from the automotive strike, this was the largest gain in real GNP over any two consecutive quarters since the middle of 1968 (see Chart I). The rapid growth in GNP in the first quarter was ac complished despite persistent sluggishness in inventory spending. Based on incomplete data, inventory accumula tion in GNP terms amounted to only $0.6 billion (annual rate) in the January-March period, compared with the already low $2.4 billion rate in the preceding quarter, thus causing a $1.8 billion drag on the overall advance of GNP. While available data do not provide evidence that the long-anticipated expansion in inventory investment has begun, the potential for an acceleration in inventory spend ing in the months ahead was enhanced by some develop ments in the first quarter. For example, the substantial gain in new orders for durable goods is expected to add to inventories of goods in process during the coming months as production of these goods progresses. More over, with inventory-sales ratios low in virtually every sector, further strengthening in capital spending should increase the demand for inventories. The first-quarter rise in current-dollar final expenditures — i.e., GNP net of inventory accumulation— amounted to a strong $32.2 billion, or 12.6 percent at an annual rate. In real terms, final spending rose at a rapid 6.5 percent annual rate, considerably above the pace of the three preceding quarters. The overall gain in final spending was paced by a significant expansion in business fixed invest ment spending and by large increases in outlays for new residential construction (see Chart II). Business fixed investment grew by $5.5 billion in the January-March period. The gain was concentrated almost exclusively in expenditures for producers’ durable equip ment, including trucks and aircraft. This exceptional ad vance in capital spending provides evidence of the stronger pace of investment outlays which had been anticipated for 1972. For example, the February survey of capital spending plans conducted by the Department of Com merce revealed that such investment was expected to rise by approximately IOV2 percent in 1972, and a more recent McGraw-Hill survey indicated an even stronger advance of about 14 percent. In comparison, plant and equipment expenditures rose by a small 1.9 percent in 1971. The improved outlook for business fixed investment spending is also seen in the recent strengthening in production of business equipment and in new orders for capital goods. Spending on residential construction expanded sharply in the first quarter, rising by $4.6 billion to a record level, as the upward momentum in the home-building boom con tinued. Moreover, despite the duration and intensity of the Chart II RECENT CHANGES IN GROSS NATIONAL PRODUCT AND ITS COMPONENTS Seasonally adjusted C h a n g e from th ird q u a rte r C h a n g e fro m fou rth q u a r te r 1971 I to fo u rth q u a rte r 1971 to first q u a rte r 1 972 GROSS NATIO NAL PRODUCT In v e n to ry in vestm en t Business fix e d in v e s tm e n t F e d e ra l G o v e rn m e n t p u rch ases S ta te a n d lo c a l g o vern m en t pu rch ases N e t e xp o rts o f goodsa n d services -5 0 5 10 15 20 25 30 35 Billions of d ollars Source: U n ite d S tate s D e p a rtm e n t o f C o m m erce . current upswing in the housing sector, there are indications that further— though smaller— gains in spending may yet materialize. For example, although housing starts eased somewhat in March from the record levels attained earlier in the quarter, over the January-March period as a whole starts averaged an unprecedented 2.5 million units at an annual rate. Furthermore, current and near-term condi tions in the mortgage markets remain favorable insofar as the availability of mortgage credit is concerned. This is suggested by the strong first-quarter flow of deposits to thrift institutions and the sharp rise in their mortgage com mitments. Personal consumption expenditures rose $13 billion in the first quarter to a seasonally adjusted annual rate of $690.2 billion. The rise in consumer spending was broadly based as outlays on durables, nondurables, and services all posted relatively good gains. The rise in durables was paced by a substantial gain in purchases of furniture and household equipment which was at least partially related 113 FEDERAL RESERVE BANK OF NEW YORK to the housing boom. The first-quarter rise in consumption spending, as measured in the GNP accounts, reflected the marked upsurge in retail sales activity that occurred to ward the end of the quarter. Retail sales expanded in Feb ruary and then posted a huge increase in March. Scat tered indications of improved consumer confidence, more over, enhance the possibility of further substantial expan sion in consumer spending. The underlying behavior of personal income, disposable income, and the savings rate in the first quarter was ob scured by a number of special factors. Personal income rose by a substantial $23.2 billion, a seasonally adjusted annual rate of gain of 11.0 percent. In part, this advance reflected the strong showing of employment as well as Federal civilian and military pay increases. Beyond this, the clustering of pay increases in the aftermath of the freeze, as well as the incorporation into the data of re troactive pay raises granted by the Pay Board, also con tributed to the first-quarter rise in personal income. While an exact calculation is not possible, it is estimated that these nonrecurring factors added $8 billion to $9 bil lion to personal income in the first quarter. However, de spite the large increase in personal income, disposable (after-tax) income rose by only $10.7 billion. The large difference was the result of the substantial overwithholding of Federal personal income taxes which occurred in the quarter as a consequence of changes in withholding sched ules that took effect in January. It has been estimated that overwithholding increased Federal tax payments by $8 billion (annual rate) and thereby reduced disposable in come by a similar amount. Thus, insofar as disposable income is concerned, the overwithholding situation largely counterbalanced the impact of the nonrecurring gains in personal income noted above. Against this background, the first-quarter decline in the savings rate to 7.4 percent may be indicative of a greater willingness to spend on the part of consumers. Government purchases of goods and services contrib uted $9.6 billion to the first-quarter GNP advance. Federal spending increased by $5.0 billion, a little more than half of which reflected Federal civilian and military pay in creases. Even apart from the pay increases, however, de fense spending quickened in the first quarter. In combina tion, this brought Federal sector spending for defense back to its highest level since the first quarter of 1970. However, the recovery in defense spending still appears to be of modest proportions, as the industrial production index for defense goods has merely leveled out in recent months at a reading about 31 percent below the August 1968 peak. At the state and local level, spending rose $4.6 billion, a bit larger than the increase of the previous quarter. PRICES, WAGES, PRODUCTIVITY, AND EMPLOYMENT In Phase Two thus far, most of the broader price indexes have risen at about the same rates that had pre vailed over the eight-month period prior to the price freeze. To a considerable extent, however, these data overstate underlying inflationary forces, since increases that might otherwise have occurred in earlier months tended to be bunched in the post-freeze period. Certainly the most favorable price development in the Phase Two period has been the stability displayed by con sumer prices in March, when the index, seasonally ad justed, was virtually unchanged from its February level. Over the first four months of Phase Two, consumer prices moved up at a seasonally adjusted annual rate of 3.6 per cent, barely below the pace of the first eight months of 1971 but sharply below the advance during 1970 (see Chart III). Much of the recent rise reflected the surge in retail food prices, which climbed at a 7.3 percent annual rate from November through March. Food prices are in part exempt from controls and respond rather quickly to changes in agricultural supply conditions. Nonfood commodity prices, on the other hand, advanced at a more modest 2.0 percent rate during the first four months of Chart III RECENT CHANGES IN CONSUMER PRICES A n n u a l rates Percent Percent [ ^ x ^ ] A u g - N o v 1971 |1| ;■»■■■ ?| N ov 1 9 7 1 -M a r 1972 A u g 1 9 7 1 -M a r 1 9 7 2 Note: Data are seasonally adjusted with the exception of services. Source: United States Department of Labor, Bureau of Labor Statistics. 114 MONTHLY REVIEW, MAY 1972 Phase Two, thus continuing the improvement already evi dent in this category before the price freeze. At the wholesale level, the rise in prices over the fivemonth period ended in April was at about the same rate as during the first eight months of 1971. This is, to a con siderable extent, a manifestation of the catch-up bulge that had been expected as well as the net advance in agricultur al prices. In the industrial sector, wholesale price increases slowed only modestly during Phase Two relative to their pre-freeze pace, a disappointing result. At the same time, the farm products and processed foods and feeds com ponent rose sharply. However, over the eight months since August, covering the freeze and Phase Two, there has been perceptible improvement in the performance of industrial wholesale prices and of the index in general. A potentially favorable development was the mid-April announcement by major steel producers imposing a virtual freeze on prices of most steel mill products. Industrial wholesale prices could benefit directly from this action, and there may be spillover benefits as well since steel is an important intermediate product. The most comprehensive available measure of price behavior, the implicit GNP price deflator, increased at a 6.2 percent annual rate in the first quarter, according to preliminary estimates. Even after making allowance for a probable downward revision in the deflator in light of the March consumer price data (which were not available when the GNP estimates were prepared), the first-quarter rise represented a pronounced acceleration from the 1.7 percent rate of increase in the previous quarter. However, because of nonrecurring factors, including the post-freeze clustering of price increases and the Federal pay raises, the first-quarter showing of the deflator does not provide an accurate representation of the underlying inflationary situation during this period. For example, the Federal pay raises contributed approximately 1 percentage point to the first-quarter jump in the deflator. Beyond this, shifts in the composition of output in the first quarter toward relatively high-priced goods, such as residential structures, also contributed to the acceleration in the deflator because this index is a weighted average of component price indexes, with the weights determined by the composition of output in each quarter. Thus, the chain price index for the private economy—which eliminates price changes stemming from Government pay raises and changes in the composition of output—rose at a 4.6 percent annual rate in the first quarter. Even this index does not eliminate the bulge arising from the post-freeze clustering of price changes. Nevertheless, it is noteworthy that the rise in the private deflator for the four quarters ended in the first quarter of 1972 was 3.3 percent, a distinct slowing relative to the performance of the last several years. For example, the increase over the four quarters ended in the first quarter of 1971 amounted to nearly 5 percent. Recent data on wages and salaries also have been affected by a post-freeze clustering of increases. As ex pected, compensation per hour of work in the private economy rose rapidly in the first quarter, posting an 8.6 percent annual rate of increase. This advance was spurred both by the post-freeze clustering in pay raises and by increased employer contributions to social security. Average hourly earnings— one of the monthly sources for the series on compensation per hour of work— posted sharp gains in December and January, in part stemming from the concentration of increases after the termination of the freeze. All these factors contributed to the firstquarter rise in compensation per hour of work and, while there was a deceleration in the advance of average hourly earnings on balance over the February-April interval, gains remained large nevertheless. Productivity, as measured by the index of real output per hour of work, increased at a 3.7 percent annual rate in the private nonfarm economy in the first quarter. While this rise was somewhat slower than that posted in the pre ceding quarter, it was considerably more rapid than the corresponding productivity gain registered over the sixmonth period ended in September 1971. In contrast to the first-quarter advance in productivity in the private nonfarm economy, there was a decline in output per hour of work in the farm sector which resulted primarily from a decrease in real output. As a consequence, productivity in the private economy as a whole rose at a relatively sluggish 2.1 percent annual rate in the January-March interval. With the substantial gain in compensation per hour of work and small growth in productivity in the private economy, labor costs per unit of output climbed at a 6.3 percent annual rate, the fastest quarterly rise in unit labor costs in two years. However, over the six months ended in March, including much of the freeze and Phase Two, the advance in unit labor costs was at a 3.6 percent rate, a somewhat less disturbing picture of cost pressures. Moreover, it is still too early at this stage to evaluate the overall effectiveness of the wage controls because of the special factors which have influenced recent data. The latest Bureau of Labor Statistics survey reveals some moderation in the rate of increase in wages and benefits under major collective bargaining agreements dur ing the first quarter relative to the performance of recent years. Perhaps the most promising development occurred in the manufacturing sector, where settlements approved during the first three months of this year provided for mean life-of-contract wage and benefit increases of 6.1 FEDERAL RESERVE BANK OF NEW YORK percent, down significantly from 7.7 percent for 1971 as a whole. Similarly, the average life-of-contract settlement for all industries slowed in the first quarter, although over all improvement was tempered by the large gains granted to railroad workers. The rail contract, which was nego tiated prior to the freeze but not approved by the Pay Board until January, weighed heavily in the first-quarter collective bargaining results because it covered more than one third of the total number of workers included in the settlement data. It might also be noted that there appar ently were a fairly sizable number of wage contracts in volving fewer than 1,000 workers that took effect in the quarter and provided for wage increases well below those experienced in the major contract settlement data referred to above. The underlying trend in employment continues to ex hibit strength. According to the Bureau of Labor Statistics survey of employers, seasonally adjusted nonfarm payrolls rose by 182,000 workers in April, after increasing by more than 800,000 workers during the first quarter. Over the six-month period ended in April, nonfarm payroll employ ment rose at an annual rate of 3.7 percent. Notably, em ployment in manufacturing industries climbed substantially over the first four months of 1972, after stagnating during most of 1971. These gains brought manufacturing employ ment in April to the highest level since September 1970. At the same time, the average factory workweek and hours of overtime have risen above the levels prevailing through out 1971. Nevertheless, the monthly household survey in dicated that the unemployment rate remained at a season ally adjusted 5.9 percent in April, little changed from the average for 1971 as a whole. Subscriptions to the m o n t h l y r e v i e w are available to the public without charge. Additional copies of recent issues may be obtained from the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, N.Y. 10045. Persons in foreign countries may request that copies of the m o n t h l y r e v i e w be sent to them by “air mail-other articles”. The postage charge amounts to approximately half the price of regular air mail and is payable in advance. Requests for this service and inquiries about rates should be directed to the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, N.Y. 10045. 115 116 MONTHLY REVIEW, MAY 1972 Monetary and Bank Credit Developments in the First Quarter The first quarter of 1972 was marked by substantial increases in the monetary and credit aggregates. The large rise in the narrowly defined money supply (M i), after several months of little growth, was particularly notable. Other measures of money and credit posted strong advanc es as well. The growth of the broadly defined money supply (M2) had already begun to pick up during the final three months of 1971, when time deposits other than large certificates of deposit (CDs) recovered from the weakness exhibited in July and August. The subsequent acceleration in the growth of M2 reflected a further step-up in the ex pansion of time deposits as well as the faster growth of private demand deposits and currency. Inflows of funds to thrift institutions also accelerated in the first quarter, to near-record rates. Bank credit gained strength in the early months of 1972, as loans expanded more rapidly than they had in late 1971. Business loans, in particular, achieved a healthy advance as the pace of economic activity quick ened. Short-term interest rates generally declined until about mid-February but rose thereafter, while long-term rates tended to drift slightly upward over the quarter. In general, however, interest rates closed the period below the levels that had prevailed before the inauguration of the new economic program on August 15, 1971. The substantial acceleration in the growth of Mx during the first quarter reflected a combination of demand and supply factors. On the demand side, the general quicken ing of economic activity as evidenced by the $30.3 billion advance in nominal gross national product in the first quarter, on the heels of the $19.5 billion rise of the previous quarter, probably increased the transactions de- C hart I CHANGES IN MONETARY AGGREGATES Seaso n ally ad justed a n n u a l rates Percent Percent THE MONETARY AGGREGATES The resurgence in the growth of Mx— adjusted demand deposits and currency held by the public—began late last year. After having advanced at a scant 0.4 percent season ally adjusted annual rate in the four months from July through November 1971, M 1 moved up at a 3 percent annual rate during the following two months. Then it leaped ahead at a 12 percent rate during February and March. As a result, rose at a 9.3 percent rate over the quarter (see Chart I). The advance in the first quarter tended to compensate for shortfalls in the second half of 1971. Thus, over the six months that ended in March, Mx expanded at a 5.2 percent annual rate, compared with an average growth rate of 6 percent over the years 1970 and 1971. ADJUSTED BANK CREDIT PROXY m m r7771 1 M 1970 i 19 71 1972 M l = C u rren c y plus a d ju s te d d e m a n d d e p o s its h e ld b y the p u b lic . M 2 = M I plus co m m e rc ia l b a n k savin gs a n d tim e d e p o s its h eld b y th e p u b lic , less n e g o tia b le c e rtific a te s o f d e p o s it is sued in d e n o m in a tio n s o f $ 1 0 0 ,0 0 0 o r m o re . A d ju s te d b a n k c r e d it p ro x y = T o ta l m e m b e r b a n k d ep o s its su b je ct to re s e rv e re q u ire m e n ts p lu s n o n d e p o s it sources o f fu nd s , such as E u ro -d o lla r b o rro w in g s a n d th e p ro c e e d s o f c o m m e rc ia l p a p e r is sued b y b a n k h o ld in g co m p a n ie s o r o th e r a f f ilia t e s . S ource: B o a rd o f G o v e rn o rs o f the F e d e ra l R es erv e System . 117 FEDERAL RESERVE BANK OF NEW YORK mand for money. This effect was reinforced by the general decline in interest rates, beginning in the latter part of 1971 and continuing into February 1972. Inasmuch as declines in interest rates reduce the cost of holding cash balances in the sense of income sacrificed, they tend to increase the demand for money. However, these effects often occur with considerable time lags. Hence, it is likely that the declines in interest rates that were touched off by the inauguration of the New Economic Policy last August were reflected to some extent in the demand for money in the first quarter. The pressures for expansion emanating from the de mand side were complemented by increased reserve avail ability— intended, in part, to promote more rapid growth in Mx in the wake of its persistent sluggishness over the latter half of 1971. The growth of nonborrowed reserves accelerated to a seasonally adjusted annual rate of 11 percent in the first quarter of 1972 from 6.8 percent in the previous quarter (see Chart II). The speedup in the growth of total reserves was even more pronounced. The increase in total reserves had been at an annual rate of only 2.3 percent in the closing quarter of last year, as member bank borrowings from the Federal Reserve Banks fell sharply. Such borrowings shrank from an aver age of $424 million in the final week of September to $14 million by the end of February. The discount rate was reduced from 5 percent to AVi percent in two stages in November and December but has remained unchanged since then. Meanwhile, the effective Federal funds rate declined by 138 basis points over the fourth quarter and by a further 71 basis points through the end of February. Under such circumstances, it is not surprising that banks made progressively less use of the discount window. In March, however, the effective Federal funds rate increased by 75 basis points to an average of 4.09 percent in the final week, and borrowings increased to $155 million. As a result of this reversal, the growth rate of total reserves over the quarter as a whole was almost as great as that of nonborrowed reserves. The growth of M2— consisting of M l plus time deposits other than large CDs— also accelerated, reflecting in part the resurgence in growth. Over the quarter as a whole, M, advanced at a seasonally adjusted annual rate of 13 percent, more than double the rate of increase experi enced over the previous six months. Of course, the rise in M2 during the second half of 1971 had been restrained by the sluggishness in M1( Indeed, during that period, time deposits other than large CDs rose at a fairly strong 10 percent annual rate. Toward the end of 1971, time deposit growth accelerated appreciably as competing market rates fell relative to the yields on most time deposits. This Chart II MEMBER BANK RESERVES AND RELATED INTEREST RATES Percent Percent C H A N G E S IN TOTAL RESERVES S easonally ad ju sted a n n u a l rate M illio n s of dollars N o te : R eserve re q u ire m e n ts on tim e d e p o s its o v e r $ 5 m illio n w e re lo w e re d from 6 p e rc e n t to 5 p e rc e n t on O c to b e r 1 ,1 9 7 0 . Sources: B o ard o f G o v e rn o rs o f the F e d e ra l R eserve System a n d the F e d e ra l R eserve B ank o f N e w Yo rk. acceleration culminated in the extremely rapid 24 percent seasonally adjusted annual rate of growth in these deposits in January. A few large commercial banks cut their offering rates on passbook savings from AVi percent to 4 percent in late January and early February. Other short term interest rates leveled off and then began to rise in February and March. In part as a result of the narrowing of the yield differential in favor of time deposits, the growth of these deposits began to decelerate, first to a 15 percent rate in February and then to an 11 percent rate in March. The adjusted bank credit proxy rose at an annual rate of 11.3 percent during the first quarter, up from 8.8 per cent over the latter half of 1971. It followed a somewhat different pattern of growth over the quarter than either Mx or M2, growing moderately in January, slowing in Feb 118 MONTHLY REVIEW, MAY 1972 ruary, and speeding up substantially in March. The pat tern of fluctuation in seasonally adjusted Government deposits—which are included in the proxy but not in Mx or M2—was largely responsible for this divergent be havior. The Treasury was carrying high balances in De cember and early January in the wake of the tentative agreement on exchange rates reached at the Smithsonian conference on December 18. At the time, it had been widely expected that the agreement would precipitate a substantial return flow into dollars from abroad. Foreign central banks would then be expected to liquidate a large part of their holdings of Treasury securities to maintain the new exchange rates. By February, however, when it became apparent that the foreign demand for dollars was not imminent and the approach of the debt to the statutory ceiling restricted borrowing possibilities, the Treasury re duced its balances. The Treasury raised only $660 million in February through $300 million additions to the last two weekly bill auctions and from $60 million in bond sales to in dividuals in conjunction with the February refunding. That sum was considerably less than the $1.3 billion cash drain from the attrition in the refunding. The Treasury delayed any new cash offering until the beginning of March when it auctioned a $3 billion strip of Treasury bills. Moreover, the additions to the weekly bill auction were discontinued after March 23 because of greater than anticipated tax receipts arising from substantial overwith holding of personal income taxes. Nondeposit liabilities also dipped temporarily in Febru ary, but they have shrunk so much in magnitude that they no longer constitute a major part of the proxy. Large CDs, another component of the proxy, not included in M t or M2, declined in January and March, although they in creased sharply in February, thereby tending to mitigate the effects of the movements in Treasury balances on total member bank deposits. On balance, CDs outstanding were little changed over the quarter, after allowance for nor mal seasonal variation. The sluggishness of CDs appeared to be related in part to their extensive use to meet corpo rate tax payments in March. Banks did raise offering rates several times during March, indicating some effort to hold on to these funds as rates on competing market instru ments rose. BANK CREDIT AND INTEREST RATES Total bank credit and most of its major components showed considerable strength in the first quarter of 1972. Bank credit, including loans sold to affiliates, increased at a 15 percent seasonally adjusted annual rate over the Chart III CHANGES IN BANK CREDIT AND ITS COMPONENTS S e a s o n a lly ad ju sted a n n u al rates I IJ TOTAL BANK CREDIT11 TOTAL L O A N S * U N IT E D STATES G O V E R N M E N T SECURITIES n 1972 * , A d ju s te d fo r lo ans sold to a ffilia te s . Source: B o a rd o f G o v e rn o rs o f the F ed e ral Reserve System quarter (see Chart III). The acceleration from the 11 percent growth rate of the fourth quarter reflected a pick up in loans, as total loans, including loans sold to affili ates, advanced at a 15V2 percent pace, compared with a 9Vi percent rate in the fourth quarter. Increased purchases of Government securities also contributed to the resur gence, but the rate of increase in holdings of other securi ties slackened somewhat. A particularly noteworthy development was the strength ening of domestic business loan demand, which reflected the large advance in GNP. With the exception of the third quarter of 1971 when business loans had been inflated by borrowing related to international developments, busi ness loans had been relatively weak in most months since mid-1970. In the fourth quarter of 1971, for example, 119 FEDERAL RESERVE BANK OF NEW YORK seasonally adjusted business loans declined slightly. Interest rates on business loans declined along with other market rates. As the quarter began, the prevailing prime rate stood at 5V4 percent, but by the end of the first week in January most banks had lowered their prime rate to 5 percent. By the third week, declines in commercial paper rates spurred the majority of those banks that have adopted a floating prime rate to drop this rate to 43A percent. This move was soon followed by simi lar reductions at banks that still administer the rate. Fur ther decreases— to AV2 percent—by most of the banks with floating rates were not widely followed by others, and by mid-March most of these banks had returned to a 43A percent rate. By the end of the quarter the prime rate had generally been raised to the 5 percent level that had pre vailed in early January. Most other categories of loans were at least as strong seasonally in the first quarter of 1972 as they had been in the final quarter of 1971. Real estate and consumer loans, which had contributed most of the strength in total bank lending in the fourth quarter, continued their healthy ad vances, albeit with a slight slackening in consumer loans. Loans to nonbank financial institutions and securities loans staged dramatic turnarounds in the quarter, growing par ticularly rapidly in January. Increased loans to brokers to finance the buildup in their margin stock accounts played a part in the securities loan resurgence. Total margin credit to customers, which is financed in part by bank loans to brokers, increased substantially in each month of the quarter to a record $9,145 million at the end of March. Total investments of commercial banks grew at a 14 percent seasonally adjusted annual rate in the first quarter. Banks continued to acquire securities other than those is sued by the Federal Government at a rapid rate. In the first quarter, holdings of these securities increased at a 16 per cent rate, down from 20 percent in the previous quarter. United States Government securities holdings advanced sharply in February and March, after having fallen off in January, and grew at a seasonally adjusted annual rate of 10 percent over the quarter. This acceleration repre sented an important recovery in these holdings, which had declined in each of the five months, July through Novem ber 1971. The last time bank holdings of Government securities had sustained such a lengthy decline was in late 1969, when heavy loan demand in a period of tight credit conditions precipitated the runoff in bank investments. The decline in 1971, however, appears to have been re lated to the peculiarities of the international situation. Foreign central banks were absorbing dollars and buying Treasury bills as well as special nonmarketable Treasury issues with the proceeds, driving bill rates to unusually low levels. Although foreign central banks continued to purchase Treasury securities in the first quarter, bill rates moved up beginning in mid-February (see Chart IV) un der the pressure of an increased supply of Treasury bills and firmer conditions in the money market. Other short-term interest rates also generally declined until mid-February. After that, most rates turned around and by the end of March were about back to where they had been when the quarter began. Nevertheless, short-term interest rates at the end of March were about 1V2 percent age points below those prevailing before August 15. Intermediate- and long-term rates, on the other hand, dipped early in January, then climbed through the rest of the quarter. Interest rates on intermediate-term Treasury notes rose about 70 basis points over the quarter. Long term Government bond yields advanced much less— by an average of about 10 basis points. Even so, rates on threeto five-year notes remained more than 80 basis points be low their pre-August 15 level, while long-term rates were only about 20 basis points lower than they were before price and wage controls were introduced. Of course, long term rates are typically less volatile than are shorter term rates, as expectations are revised for the near future more easily than for the distant future. The sharper advance in Chart IV SELECTED INTEREST RATES Percent Percent S o u rc es : B o ard o f G o v e rn o rs of th e F e d e ra l R e s e rv e System a n d the F e d e ra l R es erv e B a n k o f N e w York. MONTHLY REVIEW, MAY 1972 120 intermediate maturity rates was spurred by aggressive liquidation of dealers’ positions in March, in part because of concern about the projections of a large Federal bud getary deficit and expectations that much of the financing of that deficit would probably involve new note issues in the intermediate maturity range.1 THRIFT INSTITUTIONS Deposits flowed into thrift institutions during the first quarter at close to a 21 percent seasonally adjusted an nual rate. Although this fell short of the record 22 Vi percent pace of the corresponding quarter last year, it was still extraordinarily rapid by historical standards. At savings and loan associations, the expansion was great est in January when, spurred by reductions in interest rates on competing instruments, these deposits grew by a seasonally adjusted $4.1 billion, a record for the month. Deposit inflows remained high in February and March, 1 The Treasury’s announcement on April 26 of its plans for the May refunding caused some revision in these expectations and sparked a rally in the market for Government securities. For de tails see this Review, page 124. however, even though market interest rates edged back up. Although there were scattered reductions in interest rates offered on certain classes of time deposits, the pre ponderance of passbook rates remained at the 5 percent ceiling level. Mutual savings bank deposit advances were spread more evenly through the quarter, with the most rapid advance coming in March. Mortgage holdings did not keep pace with the deposit inflows in early 1972. The growth in mortgage loans at mutual savings banks actually decelerated slightly in the first quarter of 1972 in spite of an increase in the rate of deposit inflows. Mortgage growth has lagged deposit ad vances for some time at these institutions, so that this behavior is not at all unusual. At savings and loan associ ations, mortgages advanced at about the same 15 percent annual pace as in late 1971 notwithstanding much greater inflows of funds and decreases in the effective rates on conventional and Federal Housing Administrationinsured mortgages. The savings and loan associations took advantage of these deposit inflows to pay off some of their indebtedness to the Federal Home Loan Banks. Neverthe less, mortgage loan commitments of all savings and loan associations rose strongly over the quarter to a record $10 billion, suggesting that there will be considerable advances in mortgage lending by these institutions in the future. FEDERAL RESERVE BANK OF NEW YORK 121 The Money and Bond Markets in April Interest rate movements in the money and bond mar kets were mixed during April, as yields on most United States Government securities, municipal bonds, and Euro dollars declined on balance while those on corporate bonds and most money market instruments rose. The increases in money market rates were not so sharp as in March, however, and were partially reversed late in April. In vestors displayed little interest in the bond market during the first half of the month, and prices declined fairly sharp ly as dealers sought to lighten their positions. Sizable amounts of dealer inventories of corporate and municipal issues were released from syndicate price restrictions to clear the shelves for the new issues which were scheduled for sale. Despite the fact that yields on many bonds climbed to their highest levels since last fall, investors re mained quite selective during this time. After midmonth, however, a better tone developed in all sectors of the bond market and a number of new issues were quickly sold. The Government securities market responded exuber antly to the April 26 announcement of the Treasury’s plans for its May refunding. Not only did the Treasury decide against raising any new money in conjunction with the refunding of its notes maturing on May 15, but it actually planned to redeem in cash a substantial portion of those securities. Even more significantly, the Treasury indicated that its revenue outlook was so strong that it expected to raise less cash in the money and capital mar kets in the second half of the calendar year 1972 than in the similar period of last year. The strong rally that was touched off by this announcement accounted for the bulk of the price gains on intermediate-term Treasury securities in April. THE MONEY MARKET Short-term interest rates— other than those on United States Government securities— generally rose during April, although some decreases were posted toward the end of the month. Over about the first three weeks in April, rates on all maturities of dealer-placed prime commercial paper were raised by V* percentage point while the rate on ninety-day bankers’ acceptances was increased 3/s per centage point. These rates were subsequently lowered by Vs and Va percentage point, respectively, resulting in overthe-month increases of Vs percentage point in each case. The net increases on directly placed paper ranged be tween Vs and Vi percentage point. Several commercial banks raised their rates on negotiable certificates of deposit by Vs to 3/s percentage point, and the outstanding volume of these certificates climbed to a new high at the New York City weekly reporting banks. In addition, several major banks raised their prime rate to 5V4 percent from the 5 percent rate which most banks adopted early in April. In the wake of declines in other market rates late in the month, most of these banks reduced their rates to 5 per cent or 5 Vs percent early in May. Federal funds rates, after having moved decisively higher during March, fluctuated around the levels estab lished at the end of March (see Chart I). Consequently, the effective rate on Federal funds averaged 4.18 percent in April, 35 basis points above the average for March. With Federal funds rates still generally below the 4 Vi per cent discount rate, member bank borrowings from the Fed eral Reserve Banks were negligible on most days. Such bor rowings were relatively heavy at the beginning of the month, however, as major banks managed their reserve positions conservatively. In consequence, banks ended the April 5 statement week with unusually large holdings of excess reserves. The large banks grew less cautious in managing their reserve positions thereafter and in some cases found themselves short of reserves on settlement dates. For example, on April 19 the supply of Federal funds dried up late in the afternoon after trading pre dominantly at 3 Vz percent during most of the day. As a result, member banks turned to the Federal Reserve for $245 million of borrowings that night, after having bor rowed less than $12 million on average earlier in the week. In spite of this experience, banks were again slow in covering their reserve requirements in the following statement week. In the scramble to meet these require ments on the settlement day, April 26, Federal funds were bid up as high as 7 percent—the effective rate was set at 5 percent— and member bank borrowings from the Fed eral Reserve surged to nearly $1.8 billion. For the four 122 MONTHLY REVIEW, MAY 1972 weeks that ended April 26, member bank borrowings from the Federal Reserve Banks averaged $120 million (see Table I), compared with an average of $90 million during the five statement weeks ended in March. In seeking to counter the undue tautness emerging in the Federal funds market toward the end of the April 26 statement week, the Federal Reserve Bank of New York injected reserves through repurchase agreements with non bank dealers in Government securities and bankers’ ac ceptances. Under a newly authorized procedure, the rates on the contracts were determined competitively. That is, this Bank indicated to the nonbank dealers the maturity of the agreements sought and asked how much they wished to do at what rates. Offerings were accepted on a com petitive basis up to the amount of reserves to be injected. The new procedure is analogous to that used in absorbing reserves through matched sale-purchase transactions. In the past, when this Bank had elected to supply reserves through repurchase agreements, it would specify the rate at which it would enter into contracts. Based on preliminary estimates, there was a decided deceleration in the growth of all the monetary aggregates during April, but the pace continued strong. The narrow money supply (M x) — adjusted demand deposits and cur rency held by the public— grew at a seasonally adjusted annual rate of about 1X A percent in April, compared with an 11.9 percent rate of increase in March (see Chart II). Over the three months ended in April, the annual growth C h a rt I SELECTED INTEREST RATES P e rc e n t M O N E Y M A R K E T RATES February March F e b r u a r y -A p r il 1 9 7 2 April B O N D M A R K E T YIELDS February March P e rc e n t April N o te : D a ta a re shown for business days only. M O N E Y MARKET RATES QUOTED: Bid rates for three-m onth Euro-do llars in London; o fferin g rates (quoted in terms of rate of discount) on 90- to 119-day p rime com m ercial g a p e r q uoted by three of the four dealers th at report their rates, or the m idpoint o f the range q uoted if no consensus is a v a ila b le ; the effective rate on Federal funds (the rate most rep resen tative o f the transactions executed); closing bid rates (quoted in terms of rate of discount) on new est outstanding three-m onth Treasury bills. B O N D MARKET YIELDS QUOTED: Yields on new A a -ra te d public utility bonds (arrows point from u n d e rw ritin g syndicate reoffering yield on a given issue to m arket yield on the same issue im m ediately a fte r it has been released from syndicate restrictions); d aily av erag es o f yield s on seasoned A a a -ra te d co rporate bonds; d a ily averag es of yields on long -term G o vern m en t securities (bonds due or c a lla b le in ten years or more) and on G o vernm ent securities due in three to five years, com puted on the basis of closing bid prices; Thursday a verag es of yields on tw enty seasoned tw enty -y e a r tax -exem pt bonds Icarrvina M o o d y ’s ratings of A a a , A a , A, and Baa). Sources: Fe d e ra l Reserve Bank of N e w York, Board of G overnors o f the Federal Reserve System, M oody's Investors Service, and The W e e k ly Bond Buyer. FEDERAL RESERVE BANK OF NEW YORK rate was about 103A percent, reflecting the more rapid growth in February and March. Since the monetary aggre gates tend to fluctuate widely during short-run periods, their growth rate over longer intervals is often more relevant. In this connection the growth of Mt over the twelve-month period ended in April was about 6 lA percent. The growth of the broader money supply (M2) also slowed during April to a seasonally adjusted annual rate of about IV 4 percent from 11.6 percent in March. The deceleration in this aggregate resulted from the fact that both of its components— consumer-type time and savings deposits at commercial banks as well as Mx— grew less rapidly than in the preceding month. In the three months ended in April, M2 grew at an annual rate of about 11V* percent, while since April a year ago the gain amounted to approximately 9 V2 percent. Largely because of a substantial slowdown in the increase in United States Government deposits at member banks, coupled with an actual decline in their nondeposit liabilities, the adjusted bank credit proxy rose at about a 1 3 ^ percent seasonally adjusted annual rate in April, down from the very rapid 17.7 percent rate in March. The absolute gain in the time deposit component of the adjusted credit proxy was larger than in March, but the increase in demand deposits was slightly less. Because of its rel atively slow growth rate in February which offset the fast pace in March, the growth in the proxy for the three months ended in April is estimated at a H V 2 percent sea sonally adjusted annual rate. For the twelve-month period that ended in April, the proxy rose only slightly more rapidly than did Mz, by about 10 percent. THE GOVERNMENT SECURITIES MARKET Table I FACTORS TENDING TO INCREASE OR DECREASE MEMBER BANK RESERVES, APRIL 1972 In millions of dollars; (-f) denotes increase (—) decrease in excess reserves Changes in daily averagesweek ended Net Factors changes A p ril 5 A p ril A p ril 19 A p ril 26 + — + — — — — 454 + 119 + 423 — 258 + 78 — 322 — 224 — 721 — 159 — 853 4- 25 + 319 4 — 53 12 “ M a rke t” factors Member bank required reserves .. Operating transactions (subtotal) Federal Reserve float .................. Treasury operations* .................. Gold and foreign account .......... Currency outside banks .............. Other Federal Reserve liabilities and capital .................................... — — + — 294 650 155 350 51 168 53 4 49 163 171 Total “ m arket” factors .............. 200 944 — 921 — 1,420 + 472 — 1.465 + 26 — 421 — 30 — 2,341 Direct Federal Reserve credit transactions Open market operations (subtotal) Outright holdings: Treasury securities .................. Bankers’ acceptances .............. Federal agency obligations Repurchase agreements: Treasury securities ................... Bankers’ acceptances .............. Federal agency obligations ___ Member bank borrowings .............. . Other Federal Reserve assetsf . . . . . 4 1,006 Total ................................................ + 1,035 Excess reserves ....................................... + + 76 + 524 4- 1,590 4- 255 4 175 4 144 4 1,371 4 12 4- 144 - f 184 4 - 17 44- 4 494 + 447 11 + 1 + + + 436 42 23 — 432 — 24 — 12 + 41 — 127 + 52 — 8 + 1 — — — 4 4 132 31 16 31 53 -(- 234 4 - 49 44- 4 - 160 4 807 4- 1.911 4 310 4 + 91 56 4 + 3 + 2 126 195 18 M onthly averages D a ily average levels Member bank: Total reserves, including vault c a s h .......... Required reserves .......................................... Excess reserves .............................................. Free, or net borrowed ( ), reserves ........ Nonborrowed reserves .................................. Net carry-over, excess or deficit (—) § . . . 32,604 32,230 374 141 233 32,463 123 32,345 32.179 166 14 152 32,331 216 32,624 32,633 — 9 45 — 54 32,579 166 32.710 32,409 301 279 22 32.431 — 22 32,571+ 32,3631 208 + 120t OO A gloomy atmosphere pervaded the market for Govern ment coupon securities during the first half of April. Ex pectations of higher interest rates were encouraged by the multiplying indications of a quickening in the pace of the economic recovery, with its implications for eventual stronger demands for credit, and by the generally upward trend of the Federal funds rate throughout March. The de terioration in the corporate bond market also tended to depress prices of longer term Government issues, since it increased the inducement for investors to switch out of Government bonds into higher yielding corporate se curities. The intensification of hostilities in South Vietnam further contributed to the nervousness in the market. Against this background, investor demand for Govern ment coupon issues was weak and dealers continued to lighten their positions aggressively. Dealer inventories 123 32.451J 12 1t Note: Because of rounding, figures do not necessarily add to totals. * Includes changes in Treasury currency and cash, t Includes assets denominated in foreign currencies, t Average for four weeks ended April 26. § Not reflected in data above. had been reduced sharply during March and, by early April, dealers who report their inventories and trading activity daily to the Federal Reserve Bank of New York 124 MONTHLY REVIEW, MAY 1972 had negative net positions in Treasury issues maturing in more than five years. The persistent downward drift of prices of Government coupon securities halted about midmonth, however, and prices generally rose during the latter half of April. The leveling-off of the Federal funds rate, together with news of the virtual stability of consumer prices in March and the calm in the foreign exchange markets, encouraged more optimistic expectations of the near-term outlook for lower interest rates. The strengthening of corporate bond prices was also reflected in the market for long-term Treasury bonds. Furthermore, the market’s strong technical position was seen as enhancing its capacity to absorb without sig nificant pressure whatever issues the Treasury might offer in the May refunding. After the close of business on April 26, the Treasury announced the terms of the refinancing. To refund in part the $2.45 billion of publicly held notes maturing May 15, it would auction $1.75 billion of securities on May 2. The remaining $700 million of the publicly held notes would be redeemed through use of the Treasury’s avail able cash. The new offerings to the public included $1.25 billion of 43A percent one-year notes and an additional amount of up to $500 million of the 63/s percent bonds originally marketed in February. The bonds have a cur rent maturity of nine years and nine months. Any qual ified depository bank would be permitted to make settle ment for the securities allotted to itself and to its cus tomers by credit to its Treasury Tax and Loan Account. Additional amounts of these notes and bonds would be allotted to Government accounts and the Federal Reserve Banks in exchange for their holdings of $2.5 billion of maturing notes. The May financing operation was particularly note worthy in two respects. First, the $700 million repayment is highly unusual in a cash refinancing. It was made pos sible by the Treasury’s persistently strong revenue position, which has stemmed in large part from the sizable over withholding of personal income taxes under the revised withholding schedules that went into effect in January 1972. Beyond this, larger than expected tax receipts have also been stimulated by the strengthening economic re covery. Second, the nine-year nine-month issue is the longest maturity that the Treasury has sold at public auction since it resumed auctioning coupon-bearing secu rities in November 1970. The Treasury’s financing announcement touched off an explosive rally in the Government securities market. En couragement was derived not only from the relatively small size of the May offering but also from the optimistic forecast of relatively moderate Treasury cash needs for the Chart II CHANGES IN MONETARY AND CREDIT AGGREGATES Percent S e a s o n a lly adjusted a n n u a l rates Percent 15 10 5 0 -5 25 20 15 10 5 0 -5 25 20 15 10 5 0 -5 -10 1970 N o te : 1971 1972 D a ta fo r A p ril 19 72 a r e p r e lim in a r y e s tim a te s . M l = C u rren c y p lu s a d ju s t e 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 savings 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 t ia b le c e rtific a te s o f d e p o s it issu ed in d e n o m in a tio n * o f $ 1 0 0 ,0 0 0 or more. A d ju s t e d b a n k c re d it p ro x y = T o tal m e m b er b a n k d e p o s its s u b je c t to re s e rv e re q u irem e n ts p lu s n o n d e p o s it so urces of 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 ce ed s o f c o m m e rc ia l p a p e r is s u e d b y b a n k h o ld in g c o m p a n ie s or o th e r a f filia te s . S o u rc e: B oard o f G o v e rn o rs o f th e F e d e r a l R es erv e System . second half of 1972. Prices of intermediate-term issues rose especially sharply because of the absence of an in termediate maturity among the Treasury’s offerings. Over the month as a whole, yields on Treasury securities matur ing in three to seven years generally declined 20 to 30 basis points. Yields on shorter term issues dropped even more sharply, by about 25 to 75 basis points. In contrast, yields on long-term Treasury bonds were little changed on balance, ranging from 4 basis points lower to 2 basis points higher. In the auction on May 2, the one-year notes were sold at an average yield of 4.44 percent and the FEDERAL RESERVE BANK OF NEW YORK nine-year nine-month bonds at an average yield of 6.29 percent. Sentiment in the Treasury bill market was affected by many of the same factors placing upward pressure on yields of coupon securities during the first half of April. However, sizable investor demand for bills outweighed selling pressure, and bill rates actually edged lower. To a considerable extent, the early April demand for bills was seasonal, including the investment of tax receipts by public authorities. With investor demand continuing strong and dealer inventories becoming relatively depleted, most mar ket participants expected aggressive bidding in the regular weekly Treasury bill auction on April 10. Indeed, the average issuing rates of 3.731 percent on the three-month issue and 4.223 percent on the six-month issue were 12 and 13 basis points, respectively, below the rates that had been established in the last auction of March. However, the range of prices at which tenders were accepted was somewhat wider than most participants had anticipated, and the tone of the market weakened temporarily. Some concern developed over the sustainability of the level of bill rates, which were low in relation to other short-term rates. The market’s hesitancy was short-lived, however, as persistently strong investor demand pressed against a rela tively thin market supply of bills. Demand from other sources was augmented by reinvestment demand from some holders of the maturing April 21 tax anticipation bills. Rates declined sharply after midmonth, and the Table II AVERAGE ISSUING RATES* AT REGULAR TREASURY BILL AUCTIONS In percent W eekly auction dates— A p ril 1972 Maturities Three-month ........................................ Six-month ............................................ A p ril 3 A p ril 10 A p ril 17 A p ril 24 3.798 4.367 3.731 4.223 3.849 4.278 3.513 4.004 M onthly auction dates— F e b ru a ry-A p ril 1972 February Nine-month One-year . . . 22 March 24 A p ril 25 3,862 4.091 4.511 4.661 4.234 4.362 * 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 actually invested, would be slightly higher. 125 final weekly auction and the regular monthly auction elicited aggressive interest. In the weekly auction held on April 24, the average issuing rates on the three- and sixmonth bills were 3.513 percent and 4.004 percent, re spectively, the lowest such rates since the first week in March. On April 25 the new nine- and twelve-month issues were auctioned at average issuing rates of 4.234 percent and 4.362 percent, respectively, about 28 and 30 basis points below the rates established in the previous month’s auction (see Table II). Over the month of April, rates on most Treasury bills maturing within three months declined by about 20 to 25 basis points and rates on longer maturities were generally about 25 to 40 basis points lower. OTHER SECURITIES MARKETS There was a considerable amount of investor apathy toward corporate bonds during the first half of April, as the cautious atmosphere which had begun in mid-March continued. During the final week in March, two highly rated utility company bonds had encountered strong in vestor resistance, and the forward calendar for April— which, though relatively light overall, included the largest volume of utility issues in more than a year— threatened further downward pressure on prices. At the beginning of April, the remaining $120 million balance of four recently offered bonds was released from syndicate and allowed to trade without price restriction. The resultant yield increases ranged between 10 and 28 basis points. At the same time, a new Aa-rated utility issue of $125 million of thirty-year bonds sold slowly even though it bore the highest rate on such an offering since early December. The return of 7.50 percent on these bonds was 10 basis points greater than that on a similar issue a week earlier and 50 basis points above the year’s low in January. Although some buying interest was aroused by the lowered prices on the issues released from syndicate, the purchases were not enough to change the tone of the mar ket and yields continued to rise. On April 10, two issues of Bell System securities totaling $150 million were mar keted and, while the seven-year notes sold well, the $100 million of 33-year debentures ran into difficulty despite the fact that their 7.46 percent return was the highest of fered on such securities in six months. Two days later, much the same fate befell a $150 million offering of Arated utility bonds. Disappointed by the lack of investor interest, the underwriters freed the issue from price restric tions on the very next day, and in free market trading the yield climbed to 8.06 percent from the 7.90 percent at which it was originally priced. Over the next few days, sev- 126 MONTHLY REVIEW, MAY ^1972 eral other issues were also released from syndicate with upward yield adjustments in each case. Market sentiment improved around midmonth, and prices of seasoned corporate bonds began to rise. New issues generally encountered enthusiastic receptions at de clining yields. For example, new long-term A-rated utility issues were successfully marketed at yields of 7.85 per cent on April 19 and 7.73 percent on April 24. A com parably rated issue encountered some investor resistance, however, when offered on April 26 to yield 7.65 percent. The market for tax-exempt securities was also in the doldrums during the first half of April, but investors showed some selective interest in new issues throughout the period. Thus, on April 4, two issues totaling $110 million sold very well but a third one from a city that recently had its credit rating downgraded was apparently overpriced and did not move. To elicit investor interest in some of the seasoned bonds, dealers reduced prices on several days and freed some small balances from syndicate price restrictions. Reflecting this situation, The Weekly Bond Buyer’s index of yields on twenty municipal bonds rose to 5.54 percent on April 13, its highest level since last August. By far the largest issue marketed in April was the $255 million issue of medium-grade New York City bonds sold on April 11. Despite the size of the offering and its rating, these bonds, which are exempt from the high in come taxes in New York City and State as well as from Federal taxes, sold very well. The bonds were priced to yield between 4.00 percent and 6.90 percent, depending upon maturity, and cost the city an average of 6.28 percent. Again in illustration of the selectivity that was shown, on the same day a $90 million Aa-rated Massa chusetts issue was offered with yields about 15 to 25 basis points higher than a similar issue two weeks earlier, but the bonds sold slowly and the prices had to be lowered a few days later. Another large issue, Connecticut’s $105 million of Aaarated bonds, was marketed on April 18 at yields some 10 to 15 basis points higher than those on Aa-rated bonds the week before and, after the success of these bonds, the municipal market began to firm. On the following day, two smaller new issues were swift sellouts at somewhat higher prices than had originally been planned, and prices on several outstanding issues were raised. As a conse quence, the Bond Buyer’s index declined on April 20, for the first time in six weeks, to 5.50 percent from 5.54 per cent the previous Thursday. The better tone continued into the final week when a $147 million issue of New York State bonds was quite successfully marketed and moved to a premium on the second day. The Treasury’s financing announcement contributed to the improved climate in the tax-exempt market as the month closed. During the week ended April 27, the Bond Buyer’s index fell an unusually sharp 30 basis points to 5.20 percent, its lowest level since March 9. FEDERAL RESERVE BANK OF NEW YORK Publications of the Federal Reserve Bank of New York Distribution and charge policy: The following selected publications are available from the Public Information Department. Except for periodicals, mailing lists are not maintained for these publications. The first 100 copies of the Bank’s general publications and the first copy of its special publications are free on reasonable requests. Additional copies of general and special publications are free on reasonable requests for educational purposes to certain United States and foreign organizations. United States: schools (including their bookstores), commercial banks, public and other nonprofit libraries, news media, and Fed eral Government departments and agencies; foreign: central government departments and agencies, central banks, and news media. (Such additional free copies will be sent only to school, business, or government addresses.) Other organizations are charged for copies exceeding normal limits on free quantities (prices are listed with the publications). Remittances must accompany requests if charges apply. Delivery is postpaid and takes two to four weeks. Remittances must be payable on their faces to the Bank in United States dollars collectible at par, that is, without a collection charge. GENERAL PUBLICATIONS m o n e y : m a s t e r o r s e r v a n t ? (1971) by Thomas O. Waage. 45 pages. A comprehensive discussion of the roles of money, commercial banks, and the Federal Reserve in our economy. Explains what money is and how it works in a dynamic economy. (15 cents each if charges apply) o p e n m a r k e t o p e r a t i o n s (1969) by Paul Meek. 48 pages. A basic explanation of how the Federal Reserve uses open market purchases and sales of Government securities to influence the cost and availability of money and credit. Recent monetary actions are discussed. (11 cents each if charges apply) p e r s p e c t i v e . Published each January. 9 pages. A nontechnical review of the major domestic and in ternational economic developments of the previous year. Sent to all Monthly Review subscribers. (6 cents each if charges apply) SPECIAL PUBLICATIONS e s s a y s i n d o m e s t i c a n d i n t e r n a t i o n a l f i n a n c e (1969) 86 pages. A collection of nine articles dealing with a few important past episodes in United States central banking, several facets of the relationship between financial variables and business activity, and various aspects of domestic and international financial markets. (70 cents each if charges apply) t h e v e l o c it y o f m o n e y (1970, second edition) by George Garvy and Martin R. Blyn. 116 pages. A thorough discussion of the demand for money and the measurement of, influences on, and the implications of changes in the velocity of money. ($1.50 each if charges apply) c e n t r a l b a n k c o o p e r a t i o n : 1924-31 (1967) by Stephen V. O. Clarke. 234 pages. A documented discussion of the efforts of American, British, French, and German central bankers to reestablish and main tain international financial stability between 1924 and 1931. ($2.00 each if charges apply) m o n e y , b a n k i n g , a n d c r e d i t i n e a s t e r n e u r o p e (1966) by George Garvy. 167 pages. A re view of the characteristics, operations, and changes in the monetary systems of seven communist countries of Eastern Europe and the steps taken toward greater reliance on financial incentives. ($1.25 each if charges apply)
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