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FEDERAL RESERVE
BANK
OF NEW YORK

M O N TH LY R E V IE W
MAY

1974

Contents
O pen M arke t O perations in 1973 ............................103
The Business Situation ................................................. 117
M o netary and Financial Developments
in the First Q u a rte r ..................................................122
The M oney and Bond Markets in A p ril .................. 127

Volume 56




No. 5

FEDERAL RESERVE BAN K OF NEW YORK

103

Open M arket Operations in 1973
Editor’s Note: The following is adapted from a report submitted to the
Federal Open Market Committee by Alan R. Holmes, Senior Vice President
of the Federal Reserve Bank of New York and Manager of the System Open
Market Account. Sheila Tschinkel, Manager, Securities Department, was
primarily responsible for preparation of the report.

The Federal Reserve implemented an active policy of re­
straint during 1973 to counter the powerful resurgence of
inflationary pressures in the economy. The System moved
forcefully to limit monetary growth through the conduct
of open market operations and through several regulatory
changes, bringing short-term rates of interest to unprece­
dented levels by the summer. The Federal Open Market
Committee (FOMC) continued to express its policy intent
in terms of quantitative objectives for the deposit and re­
serve aggregates, although these targets were frequently
qualified by concern for domestic financial markets and the
international financial situation. The
definition of the
money supply— demand deposits and currency in the
hands of the public— remained the central focus of policy
formulation and implementation. The Committee lowered
its longer run objective for Mt a number of times during
the year in response to the acceleration of demands on
the limited capacity of the economy.
The Committee’s quantitative objectives for the aggre­
gates continued to be framed with a view to the long-range
economic outlook. They are changed relatively infrequent­
ly, and reflect the leverage the Committee seeks to exert
on underlying economic forces. The FOMC’s operational
instructions to the Manager convey the thrust of its policy
intent and specify a response to emerging patterns of
monetary growth. In 1973, the Committee continued its
practice of using two-month tolerance ranges1 for the de­
posit and reserve aggregates to generate modifications in

1

Alan R. Holmes, “Open Market Operations in 1972”, Federal

Reserve Bulletin (June 1973), pages 405-16.




the Manager’s weekly nonborrowed reserve targets. The
tolerance range for growth in reserves to support private de­
posits (RPD) was designed to foster the desired growth of
Mj and M->— M: plus time and savings deposits other than
large negotiable certificates of deposit (CDs.) In prac­
tice, the relation between RPD and these two aggregates
often proved hard to predict, leading to somewhat more
emphasis on the underlying behavior of the aggregates
themselves.
The Committee’s instructions to the Manager involved
(1) specifying his response to incoming information on
the aggregates and (2) specifying a range within which
the Federal funds rate was allowed to move in the period
between meetings. When the aggregates were strong rela­
tive to their prescribed ranges, the Manager was to restrain
nonborrowed reserves so that the Federal funds rate would
rise, and conversely when the aggregates were weak. Un­
duly sharp fluctuations in money market conditions were
to be avoided.
The Committee’s operational strategy, as implemented
by the Manager, initiates a series of reactions in the bank­
ing system and in the financial markets. Market partici­
pants’ assessments of the economic outlook interact with
anticipations of monetary policy’s likely response to these
prospects. Participants have developed a heightened
awareness of the System’s use of quantitative targets in
recent years. They seek to anticipate System-engineered
changes in reserve availability and in the Federal funds
rate in making trading decisions and portfolio adjustments.
These expectations and reactions, together with the institu­
tional setting and underlying economic forces, act as major
determinants of monetary and credit flows.
The interplay between the various factors in the mone­
tary process rarely results in smooth growth of the
aggregates. In 1973, the narrow money supply (MO

104

MONTHLY REVIEW, MAY 1974

GRO W TH IN M ONETARY AGGREGATES
S e a s o n a lly a d j u s t e d a n n u a l r a te s
P e rc e n t

P e rc e n t

during part of the year by the feverish speculative activity
in the foreign exchange markets and shifts of borrowers
out of the commercial paper market. The adjusted credit
proxy, a more inclusive measure of member bank deposit
liabilities, registered a 10.6 percent gain as banks accom­
modated enormous loan demands over the first two thirds
of the year. Partly for this reason, RPD increased by 9.2
percent over the year, well above the growth in
Total
loans and investments at all commercial banks rose by
12.6 percent, just a bit below the 14.6 percent expansion
in 1972 (see Chart II).
1973—AN OVERVIEW

1971

1972

1973

M l - C u r r e 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 ,

t h e f o m c ’s p o l i c y o v e r t h e y e a r . In setting its longrun goals for the aggregates, the Committee initially sought
to offset the overly rapid monetary expansion of 1972. The
surge in spending and the bleak outlook for prices en­
couraged it to emphasize monetary restraint. At its March
meeting, the FOMC lowered its longer run objective for

le s s 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 o re .
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 n k d e p o s its s u b je c t to r e 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 r o w in g s a n d th e p r o c e e d 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 o r o th e r a f filia te s .
S o u rc e : B o a rd o f G o v e r n o r s o f th e F e d e r a l R e s e rv e System .

C h a r t II

CHANGES IN BANK CREDIT
S e a s o n a lly a d j u s t e d a n n u a l ra te s

increased by 5.7 percent (see Chart I ) . 2 While this re­
flects a moderation from growth in 1972, the quarterly
changes were remarkably diverse and often not indica­
tive of underlying economic trends. M 2 expanded at an
8.6 percent rate. The slower growth compared with the
previous year was mainly related to the deceleration in
Mi; an upward revision of Regulation Q ceilings in early
summer and a temporary suspension of the interest rate
constraint on four-year or longer time deposits in denomi­
nations of more than $ 1,000 sustained the inflow of such
deposits at commercial banks.
Of far greater import for both the pattern of interest
rates and credit flows was the absence of interest rate
ceilings on large CDs during a period of monetary strin­
gency. Demands on the banking system were bolstered

2 The data on the aggregates in this introductory section reflect
the annual revision of the series published in early 1974. The data
used subsequently in describing operations during the year are those
available at the time.




1971
S o u rc e :

1972

1973

B o a rd o f G o v e rn o rs o f th e F e d e ra l R es erv e S y stem .

FEDERAL RESERVE BANK OF NEW YORK

growth in M x, and it retained an objective of moderate
growth over the remainder of the year.
The Committee’s reaction to deviations in money supply
growth from the longer run path was influenced by its con­
sideration of shifts in the underlying economic situation.
Given continuing indications of a booming economy and
the strength shown by the broad measures of the aggre­
gates, it avoided a significant easing of money market
conditions after Mi decelerated in the first quarter.
In the spring, the FOMC moved promptly to resist the
renewal of rapid monetary growth, which brought expan­
sion in Mj to an unexpectedly strong 11.9 percent growth
rate in the second quarter from 3.8 percent in the first.
The Committee resisted accommodating the cumulation
of bank demands for reserves in the spring and summer
by permitting the Federal funds rate to rise more rapidly
and even further than originally contemplated at its meet­
ings. It maintained this posture and accepted an emerging
shortfall of M t growth toward the end of the summer as
inflationary pressures persisted.
The Committee began to temper its approach as the
cumulative impact of increasing restraint, including sharply
higher interest rates, was expected to keep monetary
growth weak. It appeared toward the end of the third
quarter that the “no growth” quarter just ended would
be followed by further sluggishness in the final quarter.
The staff suggested that delays in responding to this weak­
ness could require increasingly sharp short-run adjust­
ments to return M, to a longer run path of moderate ex­
pansion. The Committee’s desire to get back on this mod­
erate growth path was also a response to signs that ex­
pansion in real output would slow slightly in the fourth
quarter and slacken further in the first half of 1974. Con­
cern that the Mideast oil embargo would significantly
worsen these prospects mounted as the year drew to a
close. At the same time, growth in the money stock re­
bounded to a 7.5 percent rate in the final quarter of the
year and the Committee moved cautiously in light of
these contrary forces.
THE

FOMC’S OPERATIONAL

INSTRUCTIONS

TO

THE

MAN­

The FOMC stipulated explicit re­
sponses to the behavior of the aggregates during the year,
underscoring its basic policy intent by adjusting its tol­
erance ranges for RPD and the aggregates. At its first
three meetings of the year and again in June, the Com­
mittee reduced the lower ends of the ranges suggested by
the staff as consistent with longer run objectives. In this way,
the FOMC indicated its tolerance of relatively slow growth in
the near term and forestalled the possibility of a reduction in
the prevailing restraint on bank reserve growth. In August,
AGER

over the y ea r .




105

the Committee reduced the entire suggested range for
RPD to indicate its concern over the rapid pace at which
this measure had expanded in previous months. There­
after, given indications of rather weak money supply
growth in the months ahead, the FOMC generally raised
the upper ends of the tolerance ranges by modest amounts.
This increased the potential for some easing of reserve
pressures, an intention that the Committee made explicit
at its final meeting of the year.
In its instructions to the Manager, the Committee
usually indicated that potential divergence between growth
in RPD and the deposit measures be resolved to reflect
the higher priority given to the latter, particularly Mi. In
the event, a number of factors weakened the correlation
between these measures during the year. Since RPD
incorporates a weighting of the different types of private
deposits by their respective percentage reserve require­
ments, it is particularly sensitive to changes in the compo­
sition of deposits and to bank liability management. RPD
growth was stimulated relative to Mi over the first two
thirds of the year by the rapid rise in CDs which, in turn,
reflected the sharp rise in bank loans and the suspension
of Regulation Q ceilings in mid-May. The System acted
to curtail bank credit and monetary expansion by raising
reserve requirements on most demand deposits in early
July. It imposed marginal reserve requirements on large
CDs to take effect in June and increased them in September,
before reducing them to their initial level in early Decem­
ber. However, the momentum of bank credit expansion
was strong and this increase in reserve ratios bolstered
RPD growth in the summer. When monetary ex­
pansion subsequently decelerated, RPD growth slowed.
The regulatory amendments were thus a further source
of variation in the reserve-deposit multiplier over the year,
adding to the fluctuations which typically arose from shifts
in the distribution of deposits among the different cate­
gories of member banks and changes in bank holdings of
excess reserves. In view of the FOMC’s concern with
attaining its objectives for the deposit measures, the Man­
ager found RPD of lesser importance in the determination
of his response to the emerging patterns of monetary
growth.
THE MANAGER’S IMPLEMENTATION OF THE FOMC’S INSTRUC­

Open market operations in the first three months of
the year increased the pressure on bank reserves and
money market conditions in a continuation of the response
to overly rapid money supply growth in late 1972. In
establishing weekly targets for nonborrowed reserves, the
Manager was mindful of the Committee’s desire to see
an orderly movement in the Federal funds rate. The Fed­
TIONS.

106

MONTHLY REVIEW, MAY 1974

eral funds rate rose to 7 percent by mid-March, an increase
of about 150 basis points from the start of the year. The
Trading Desk acted to reduce nonborrowed reserve tar­
gets in relation to reserve requirements during this period.
Member bank use of the discount window climbed by
$800 million to $1.9 billion, on average, from December
to March. For a time, in March and early April, the
aggregates, and Mx in particular, began to weaken relative
to their tolerance ranges, leading to a pause in the move
toward restraint.
Shortly after the April FOMC meeting, growth in the
deposit measures appeared to be accelerating and open
market operations brought additional pressure on bank
reserve positions. Member bank borrowings changed rela­
tively little, on average, but the Federal funds rate re­
sponded sharply .3 The funds rate had reached 8 V2 percent
by the end of June, when another wave of excessive
monetary growth emerged and the Manager moved more
aggressively to curtail the expansion of nonborrowed re­
serves. Enlarged bank demands for reserves, combined
with some reluctance to increase use of the discount win­
dow, caused the Federal funds rate to rise abruptly to
over 10 percent at the beginning of July, a larger increase
than had been anticipated at the time. Actions to restrain
the availability of nonborrowed reserves continued with
little interruption over the summer, although the increase
in the average Federal funds rate slowed somewhat, bring­
ing it to 10V^ percent during most of August and 103A
percent near the end of that month. The aggregates moved
down within their tolerance ranges by early September,
and the Manager held his reserve objectives steady until
after the September FOMC meeting. While average mem­
ber bank borrowings rose by an additional $300 million
between June and August, it dropped back shortly after
the beginning of September, leading to fairly persistent
upward pressure on the Federal funds rate.
In response to the FOMC’s instructions and weakness
in the aggregates, the Manager adopted a more generous
approach to the provision of nonborrowed reserves toward
the end of September. The Desk provided reserves at a
growing pace, and the Federal funds rate, after showing

little tendency to decline, moved down to 10 percent in
mid-October. The funds rate rose a bit above 10 percent
in November as M} strengthened. But in December the
FOMC again voted for more generous reserve provision,
and the rate was just over 9Vi percent at the year-end.
While the decline in the Federal funds rate after Septem­
ber was rather modest, the Desk’s increased provision of
nonborrowed reserves enabled banks to reduce their bor­
rowing to an average of $1.3 billion in the last month of
the year from the peak level of $2.1 billion in August.

t h e s e c u r i t i e s m a r k e t s o v e r t h e y e a r . The intensifica­
tion of pressures on bank reserve positions in the early
part of the year quickly spilled over into the short-term
credit markets. Borrowers had strong inducement to
switch from open market paper to taking down bank loan
commitments as the rise in the bank prime rate was slowed
by the activities of the Committee on Interest and Divi­
dends (CID). To help finance loan demand, banks ag­
gressively issued a large volume of CDs.
The rise in CD rates often outdistanced the Federal
funds rate, and many banks were reportedly paying 11
percent for 60- to 89-day prime CDs over most of August
and September, more than double the rates offered at the
start of the year (see Chart III). Rates on longer CDs ad­
justed upward after the remaining applicable Regulation Q
ceilings were suspended in May, although banks rarely
showed inclination to commit themselves to pay high rates
for long periods of time. The introduction of a dual prime
rate structure in late April prompted a steady rise in the
prime loan rate charged large businesses in the months
that followed, bringing it to a record 10 percent by Sep­
tember. Commercial paper rates were also pushed higher,
but activity in this market receded sharply over the first
eight months of the year. Treasury bill rate increases were
damped until June by demand from foreign central banks,
which periodically depleted dealer inventories. Thereafter,
bill rates rose sharply in response to the accelerated rise
in the Federal funds rate. The rate on the three-month
issue stood at 9.05 percent in mid-September, an increase
of almost 4 percentage points from the beginning of the
year. A series of increases in the Federal Reserve discount
rate, which brought this rate to an unprecedented IV 2
percent by mid-August, confirmed the shift to a higher
rate structure.
Near the end of September, the Committee’s adoption
of
a less reluctant approach to reserve provision was fol­
3 In April, the Federal Reserve began to permit member banks
with particularly heavy seasonal reserve outflows to borrow a por­ lowed by a precipitous drop in short-term interest rates.
tion of their reserve needs at the discount window. Since this bor­
Thereafter, rates fluctuated dramatically in response to
rowing privilege is prearranged, it is not included with regular
borrowing in this report. Seasonal use of the discount window rose
conflicting economic developments and changing market
from $5 million to $163 million in August and then declined
assessments of the outlook for System policy. The initial
steadily to $41 million in December.




FEDERAL RESERVE BAN K OF NEW YORK

declines were partly eroded by the year-end as the Sys­
tem’s moves toward a less restrictive policy stance proved
more measured than participants anticipated. Bank offer­
ing rates on large CDs fell to as low as 8 V2 percent for
three-month maturities by the end of October, but they
subsequently moved back to close the year at 9 Vi percent.
Bank willingness to permit CDs to run off toward the end
of the year, in anticipation of further interest rate declines,
was facilitated by a shift of borrowers back to the use of
commercial paper. Banks reduced the prime rate only
marginally, and it thus remained above commercial paper
rates in the last four months of 1973. Treasury bill rates
became particularly volatile, reflecting sensitivity to devel­
opments in the foreign exchange markets as well as to
domestic monetary influences. The bid rate on the threemonth issue dropped by nearly 200 basis points between
early September and early October. Thereafter it rose as
high as 8.62 percent but closed the year at 7.45 percent.
The long-term debt markets were partly insulated from




107

money market pressures, and yields never reached the
levels observed in late 1969 and 1970. The funneling of
business credit demands into the banks and sizable in­
ternal cash flows, aided by dividend restrictions, kept pub­
lic offerings of corporate bonds at a modest $13.6 billion
in 1973, down $5 billion from the previous year. Bond
yields rose moderately through June and then climbed
sharply, paralleling the escalation in short-term rates.
Yields peaked for the year in early August and then fell
sharply, as the view that monetary restraint had reached
a plateau set off an anticipatory buying spree. The impact
of the Mideast oil embargo on fuel costs and inflation
worries generally had stronger impact on long-term bonds
as the year drew to a close and yields rose again. The
yield on recent Aaa-utility issues was at 8.10 percent
near the end of December, around Vs percentage point
higher than one year earlier. Trends in the municipal bond
market were similar, but yields rose somewhat less toward
the year-end as bank interest in tax-exempt securities
reemerged. The Bond Buyer’s municipal index rose only 5
basis points over 1973 to 5.16 percent. Government cou­
pon yields generally moved in concert with corporate
issues although some additional upward adjustments were
related to the Treasury’s refinancing of a relatively larger
share of 1973 maturities in the long-term bond market.
The Treasury’s expanded use of long-term borrowing was
part of an overall plan to increase the viability of the long­
term Government market by increasing supplies. Over the
year, an improvement in the tradability of such issues
was apparent.
Treasury cash borrowing fell sharply from $15.3 billion
to $7.7 billion during 1973, but sales of Federally
sponsored agencies rose by over $10 billion to $14.4 bil­
lion. The housing-related agencies became particularly
heavy borrowers as the climb in short-term rates eroded
deposit flows at the thrift institutions. The steep rise in
mortgage commitments from 1970 to early 1973 led to a
continued expansion in mortgage lending over the first
half of the year. Mortgage rates rose steadily during most
of 1973, and rate limitations in a number of states, as well
as a drop in thrift institution commitments, limited the
growth in mortgage credit toward the end of the year.
JANUARY—M ID -A PRIL
t h e c o m m i t t e e ’s i n s t r u c t i o n s . At its first three meet­
ings of the year, the Committee voted for slower growth
in the aggregates over the months ahead than had occurred
in the previous six months. When the Committee met on
January 16, the staff’s analysis indicated that it would
take time for additional pressure on bank reserve positions

108

MONTHLY REVIEW, MAY 1974

Chart IV

WEEKLY FORECASTS OF QUARTERLY GROW TH
IN THE M ONETARY AGGREGATES, 1973 *

B R O A D M O N E Y STOCK (M2)
-

P ro jected

A c tu a l I

ADJUSTED CREDIT PROXY

\-

r~
P ro jec ted

m* w

X
10

s -• !i Ki
H

, ]

m ®L-i i f ! ! *
r u * p .u
h
!•- : .1
iH.Sr-i,;-.1,1 !

if

^

16

17
J a n u a ry

24

31

14

21

m

28

F e b ru a ry

M a rc h

A s o f tw o d a y s a fte r e n d -o f-s ta te m e n t w e e k sh o w n .
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 es erv e S y stem .

to reduce money supply growth from the excessive pace
of late 1972. While it was expected that intensified reserve
pressures would achieve the moderate expansion in Mi
desired over the months ahead, growth in the near term
was expected to remain rapid in view of the accelerated
pace of economic activity. The Committee chose toler­
ance ranges for M1? M2, and RPD that were at least as
restrictive as the alternatives presented by the staff and
reduced the lower ends of these ranges to indicate its
willingness to accept substantially slower growth in the
near term. The Committee agreed that open market oper­
ations should be directed at restraining reserve growth and
anticipated that the Manager would achieve the attendant
firming in the money market in advance of the Treasury’s
February refunding operation.
Money supply growth decelerated sharply in January,
but the outlook presented at the February 13 meeting con­
tinued to indicate considerable growth in the aggregates
over the months ahead. The FOMC again chose more re­




strictive two-month tolerance ranges for the aggregates
than presented by the staff and anticipated that some ad­
ditional firming of money market conditions would ensue.
Estimates made soon after the meeting indicated that M x
growth would remain strong while RPD was beginning to
accelerate and moved above its specified range. In view of
this, the Committee agreed on March 1 that the Federal
funds rate should be permitted to rise somewhat further
than had been contemplated earlier.
By the time of the March 19-20 FOMC meeting, growth
in Mi and M2 had moderated, although RPD and credit
proxy growth were well above levels previously indicated.
In view of recent sharp price increases and evidence sug­
gesting a continuation of overly rapid economic growth,
the Committee reduced its longer run objective for M l
While RPD growth was expected to remain rapid, the
FOMC chose the lowest two-month ranges suggested for
the money supply measures and reduced the bottom ends
of the tolerance ranges for all measures. When M x and
RPD growth decelerated even more because of weaker
than expected expansion in private demand deposits, a
majority of the Committee agreed, on April 11, to avoid
an easing of money market conditions in the days before
its April meeting.
t h e m a n a g e r ’s r e s p o n s e . The Manager moved promptly
after the January FOMC meeting to limit nonborrowed
reserve availability. By the end of January, the Federal
funds rate had risen to 6 3/s percent from 5% percent two
weeks earlier (see Chart V ). Estimates of M x growth
steadily moved lower, while RPD was within the range
specified for the two months ended February, and the Desk
acted to stabilize conditions in the money market during
the refunding operation. The Desk adopted a more reluc­
tant approach to reserve provision soon after the Commit­
tee’s February meeting, when estimates of Mxover February
and March indicated that growth would remain strong while
larger than anticipated time deposit expansion was adding
to M 2. At the same time, extraordinarily large gains in
negotiable CDs brought credit proxy growth well above
earlier expectations and pushed RPD up to a 5 percent
rate, well above the 2.5 percent top of the range specified
for February and March combined. Accordingly, the Man­
ager continued to hold back on the provision of nonbor­
rowed reserves, anticipating that trading in Federal funds
would average around 7 percent in the weeks leading up
to the Committee’s meeting in March.
The Manager initially continued with the same reserve
strategy after the March meeting, expecting the Federal
funds rate to remain around 7 percent. While record ex­
pansion in large CDs boosted credit proxy growth above

FEDERAL RESERVE BAN K OF NEW YORK

earlier expectations, a weakness in demand deposits be­
gan to moderate growth in the money supply measures
and in RPD. As a result, these measures began to
move below their tolerance ranges toward the end of
March. In response, Desk operations were directed at en­
couraging less money market tautness. While the Manager
would have ordinarily continued with this shading of re­
serve objectives, the Committee decided on April 11 to
avoid further modifications until the next meeting.
The Account Management encountered difficulty over
much of this period in avoiding unduly sharp fluctuations
in money market conditions. While member bank borrow­
ings rose considerably, on average, they sometimes varied
by as much as $700 million from week to week. Bank re­
sponse to anticipations of further increases in the Federal
funds rate caused them to build up excess reserves early
in a statement week, bidding aggressively for Federal funds
and using the discount window heavily over the weekend.
Substantially easier money market conditions would then
emerge when the hoarded reserves were pressed on the
market. The Desk often adapted its operations to this pat­
tern, supplying some reserves early in the week and, on
occasion, withdrawing them at the end of the statement
period.

C hart V

M O N E Y MARKET C O N D ITIO N S A N D WEEKLY
FORECASTS OF M l G R O W TH , 1973

r„

Percent

11.00

M illio n s of dollars
3000

F e d e r a l fu n ds

10.00

M e m b e r b a n k b o rro w in g s
2500

W eekly averag e effective rate
9 .0 0

8.00 f
7 .0 0

S c a le -— ►

K;::
m ^ f! ll § ;:;5

Wi
11 p ^
n m ug.
sis | | 111 ! |§ I I H i l i
Z ** 1 W pxi
U M tl m M M M m 1l:£:;j 1I d 11?:? liilliite i

•*—
3
'

'

6.00
5 .0 0

Scale

\
\
\

.....

15 0 0
100 0
500
0
" 16

16

N A R R O W M O N E Y STOCK (M l)
14 -T w o -m o n th gro w th rate

14

------ P ro je cte d

12

2000

12

10

10
N o v e m b e r -J a n u a ry

8

8
J a n u a ry -M a rc h
•
• V
Decent
D e c e m b e r-F e b ru a ry
\
F e b ru a ry -A p ril

6
H
4 -

4

I■^^Actual
°

2

2

h

0-

ii

>

0

-2 .
3

10

17

24

J a n u a ry
N o te :

31

7

14

21

28

F e b ru a ry

7

14

21

M a rc h

28

4

11

18

A p r il

S o lid b a rs a r e a c tu a l g ro w th ra te s fo r e a ch tw o -m o n th p e rio d a n d a re

p la c e d a t th e tim e o f F O M C m e e tin g s . Dots p re c e d in g e a ch b a r re p re s e n t
w e e k ly p ro je c tio n s o f th ese g ro w th ra te s.




6

109

t h e s e c u r i t i e s m a r k e t s . Developments in the credit
markets in the opening months of the year reflected
awareness that the System would respond to the persis­
tence of inflation and the strong pace of money supply
growth, leading to higher interest rates. Market partici­
pants were quick to note the Desk’s reluctance to supply
reserves as the Federal funds rate rose above previous
levels. Two Vi percentage point increases in the Federal
Reserve discount rate, bringing it to 5 Vi percent by the
beginning of March, underscored the System’s intent.
The emergence of strong loan demand at banks, bol­
stered by the low level of the prime rate in relation to
rising market rates, and the resulting pressures in the CD
market also had an impact on the structure of rates. By
mid-March rates paid by major banks on CDs maturing in
up to 89 days had risen by around 150 basis points to 7Vs
percent and Regulation Q ceilings constrained the avail­
ability of funds with a longer maturity. Treasury bill rate
increases were tempered by the strength of foreign central
bank demand, but still rates on most issues rose by well
over 100 basis points. The rate on the three-month issue
reached 6.55 percent in early April but then moved back
down to 6.19 percent when an easier climate emerged in
the money market.
In the long-term debt markets, the pull of short-term
interest rates and concern over inflation generated an up­
ward adjustment in yields. But expectations of light cor­
porate and Government borrowing demands kept the rise
in yields to modest proportions in the first few months of
the year. In its February refunding, the Treasury sold a
3 -year 6 V2 percent note priced to yield 6.60 percent
and auctioned $1 billion of a 6 % -year 6Vs percent note
which was awarded at an average yield of 6.74 percent.
Interest in the new issues was initially restrained as dealers
were anxious about burdensome financing costs. However,
demand from foreign central banks soon spilled over into
the Treasury coupon sector, and the market improved in
the weeks that followed.
Published data showing a deceleration in money supply
growth over the first quarter began to outweigh evidence of
continued rapid economic expansion in the formulation of
interest rate expectations. The less-than-2 percent growth
first reported in Mj over the three months ended March,
generated the view that the System could soon move to
stimulate more rapid expansion. The stability of the funds
rate around the 7 percent level was interpreted as an en­
couraging sign and when the Desk entered the market to
make outright purchases of Treasury bills on April 6 when
Federal funds were trading at 7 Vs percent— a rate previ­
ously thought to be acceptable— a major rally ensued in
the securities markets.

110

MONTHLY REVIEW, MAY 1974

The change in attitudes had the most impact on longer
term securities amid dealer efforts to cover short positions.
Expectations of continued modest calendars of bond offer­
ings also helped yields retrace earlier increases. The yield
on recently offered Aaa-utility issues was 7.47 percent in
mid-April, around 20 basis points above its level at the
start of the year. The Bond Buyer’s index, at 5.07 percent,
was around its early-January average and down 27 basis
points from the level of one month earlier. At the same
time, the confluence of business demands for short-term
credit kept money market rates under some pressure.
Rates on large CDs and commercial paper thus increased
by another 25 to 35 basis points between the March and
April meetings. The three-month Treasury bill rate rose
but then fell back to 6.20 percent, while rates on longer
issues began to experience modest declines.

ChartVI

WEEKLY FORECASTS OF QUARTERLY GROW TH
IN THE M ONETARY AGGREGATES, 1973 *
Percent

12

10

Percent

N A R R O W M O N E Y ST<OCK (Ml)

A c tu a l

|

-||f|If Bill
IIU
P
P
P
I
III11111till
iilJM
Si®
1I1
H«I

__

P ro jected

■

1i i

M

i

1 1 1 1 1i i

A c tu a ll

BR O A D M O N E Y STOC: k (m 2)

_

P ro jected

* 1

-

l

i

j

j

f

n

1

I

l

=

ADJUSTED CREDIT PRC3XY

MID-APRIL TO JUNE

At the Committee’s
April 17 meeting, demands for money were expected to
strengthen in the near term, given the transactions needs
of a booming economy. At the same time, the staff thought
that the previous rise in interest rates would continue to
limit money growth so that the reserve conditions consis­
tent in the near term with the FOMC’s longer run objec­
tive for Mx could be achieved without further money mar­
ket pressure. The broad money supply (M2) and RPD
were anticipated to slow, and the extraordinarily rapid
bank credit expansion of previous months also seemed
likely to taper off. Against this background, the Com­
mittee voted to seek moderate growth in the aggregates
over the months ahead, anticipating that the two-month
expansion rates indicated for the reserve and deposit
measures would be associated with little change in the
Federal funds rate.
In the months that followed, most aggregates measures
exhibited excessive strength. The Committee voted in May
to seek slower growth in the aggregates over the months
ahead than had occurred in the previous half year. It re­
sponded to signs of further acceleration by raising the
upper limit of its constraint on the Federal funds rate at
its May meeting and twice in the weeks that followed.
the

c o m m i t t e e ’s

in s t r u c t io n s .

t h e m a n a g e r ’s r e s p o n s e . The Manager moved almost
immediately after the April FOMC meeting to adopt a
more reluctant approach to reserve provision when it was
projected that Mx and M2 growth over April and May
would move above acceptable ranges. RPD growth, how­
ever, fell below its tolerance range, given a shift in the
multiplier. The Desk was soon anticipating that the Fed-




—

A c tu a l

P rojected

-

/

_

i? i

p

M

!

' V i

|

1 J

j
!
1
1
1 f ’\
1 1
'M i liiv
1,ji/ ) 1 „-#! I \ 1 I
11?**]

I

] r .tl

1

| ! ; i j . i jX i!

-

i

-

! v i i- A
!•
r?
J
j !
<" j
*
1
r *i
. ’
1

-

i

11

i

18

A p ril

^

j

25

i

m

! & j

n

m

! ;i

i f j

1 1
!

] ! * i

] [ 1

1 -1

!
'4 1
1 1' ' ! | 1 ! i v .i
| j'fir j | ; * 1 1 j « f \ | }$** \
16

23

M ay

13

20

June

A s o f two d a y s a f t e r e n d -o f-s ta te m e n t w e e k sh o w n .

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 es erv e S y stem .

eral funds rate would rise to around IV 2 percent, com­
pared with about 7 percent prevailing just prior to the
meeting (see Chart V II). The success of the Treasury
refunding in early May gave no cause for modifying this
approach, although the Committee had provided for this
possibility in its directive.
At its May 15 meeting, the Committee retained close
to the same two-month acceptable range for M 1 but the
range for RPD was lowered somewhat from the interval
specified the month before, given recent experience and
the expectation that higher interest rates would soon curb
deposit growth. The upper limit placed on the Federal
funds rate was raised.
The Account Manager soon found himself pressing
against the Federal funds rate constraint as projected Mx
growth accelerated to a 10 percent rate over May and
June. The expansion in M2 was well above acceptable
growth, although shifts in the distribution of deposits

FEDERAL RESERVE BANK OF NEW YORK

worked to keep RPD just a bit above the 11 percent upper
end of the range established for this measure. In view of
these developments, the Committee decided on May 24
and again on June 8 to raise the upper limitation on the
Federal funds rate. By the June 18 Committee meeting,
the Manager was anticipating reserve conditions consis­
tent with a funds rate of around 8 Vi percent.
The Manager’s growing reluctance to supply nonbor­
rowed reserves over the period starting with the April
meeting became readily apparent in the money market.
Member banks became less willing to increase borrowing
much above the $1,850 million level reached in March.
In this situation, and with deposit levels rising steadily,
enlarged demands for reserves pushed the Federal funds
rate progressively higher over the two months with little
interruption.
t h e s e c u r it ie s m a r k e t s .
The emergence of more rapid
money supply growth during April quickly generated bond
market expectations of increased monetary restraint. These
were confirmed by the rise in the Federal funds rate and
three rounds of increases in the Federal Reserve discount

C hart V II

M O N E Y MARKET C O N D ITIO N S A N D WEEKLY
FORECASTS OF M l G R O W TH , 1973
Percen*

------------------------------------------------ ,--------------

M illio n s o f d o llars
3000

'

F e d e r a l funds

M e m b e r b a n k b o rro w in g s
S c a le -

W e ek ly a verag e effective rate
------- ScaU




15

M ay

22

29

5

12

19

June

26

111

rate, which brought the rate to 6 V2 percent at all Reserve
Banks by June 15. Rates in the CD market, spurred by
bank demands, led rate increases on other instruments,
even though the cost of increasing such liabilities had been
stepped up by the Board’s action on May 16 to subject
them to marginal reserve requirements, a move taken to
brake the rapid expansion in bank loans. Although the
outlook in the bill market had been improved by sub­
stantial Treasury redemptions of maturing issues, it was
outweighed by the spreading impact of monetary restraint,
and the rate on the three-month issue rose another 100
basis points to 7.20 percent by mid-June.
Interest rate expectations began to be affected in June
by the belief that the pace of economic activity would
soon begin to moderate. In fact, many observers began to
suggest that a recession would emerge by the year-end
and that the System would move to counter such a devel­
opment. The response to the growing monetary stringency
was thus tempered by some feeling that it could well turn
out to be of fairly short duration. For a while, anticipa­
tions of stronger Administration wage-price control mea­
sures also convinced many that the need for prolonged
monetary restraint would be reduced. Although the Sys­
tem had suspended the remaining Regulation Q ceilings
on large CDs, as part of the broad regulatory package
adopted on May 16, banks showed little interest in extend­
ing the maturity of these liabilities. Rates on longer term
Treasury bills were still below 7 percent by mid-June and
price declines in the long-term bond markets were mod­
erate despite the further tightening of money market con­
ditions.
Yields on intermediate-term Treasury issues rose prior
to the May refunding operation but declined afterward as
dealers made good progress in distributing the new issues.
The Treasury redeemed $1.65 billion of maturing issues
for cash, auctioned $2 billion of 6% percent seven-year
notes at 7.01 percent, and $650 million of 7 percent 25year bonds at 7.11 percent. The bonds were sold at the
lowest accepted bid price, the second time that the
Treasury had utilized this technique. (In early January,
$625 million of a twenty-year bond had been sold at a
price to yield 6.79 percent.) Subsequent yield increases
were modest, as banks remained generally unwilling to
reduce holdings of coupon issues. Over the two-month
period ended in mid-June, the yield on United States Gov­
ernment securities maturing in ten years rose from around
6.70 percent to 6.90 percent. The returns on recently
offered Aaa-rated corporate utility issues increased by a
similar amount to around the 7.60 percent level reached
in mid-March. Reflecting hopes that banks might again
become more active participants in the tax-exempt mar­

112

MONTHLY REVIEW, MAY 1974

ket, the Bond Buyer’s index, at 5.13 percent over the first
two weeks of June, was essentially unchanged from its
average in the first half of ApriK Mortgage yields con­
tinued to creep up, and the rates established in the bi­
weekly Federal National Mortgage Association auction
rose 15 basis points to 8.04 percent.
JULY— MID-SEPTEMBER
t h e c o m m i t t e e ’s i n s t r u c t i o n s .
When the Committee
met on June 18-19, money supply growth estimated for
the second quarter was rapid. The Committee voted to
seek somewhat slower growth in the aggregates over the
months ahead and underscored the need for monetary
restraint by adopting a range for Mx growth in June and
July with a midpoint that was below the expansion then
projected. The ranges adopted for M2 and RPD implied
similar restraint. New estimates soon indicated another

C h a r t V III

WEEKLY FORECASTS OF QUARTERLY GROW TH
IN THE MONETARY AGGREGATES, 1973*
P ercent

Percent

5

12

19

S e p te m b e r

* A s o f two d a y s a fte r en d -o f-s ta te m e n t w e e k sh o w n .
S o u rc e :

B o ard o f G o v e rn o rs o f the F e d e ra l R es erv e S ystem .




26

wave of excessive Mx growth. On July 6, the Committee
agreed to raise the upper constraint on the Federal funds
rate from the limit adopted at the June meeting.
The FOMC was willing to see a further intensification
of reserve pressures as the summer progressed. At its
July 17 meeting, the Committee again voted for slower
growth in the aggregates and raised the upper constraint
on the Federal funds rate from the limit agreed upon
earlier that month. The members agreed on August 3 that
the funds rate could rise even further if necessary. By the
time of the August 21 meeting it was expected that the
prior rise in short-term rates would continue to limit
money demand in the months ahead following a marked
deceleration in July. The Committee became willing to
accept slow growth for a while, especially because RPD
showed no such tendency and even strengthened. At its
August meeting, the Committee placed emphasis on bring­
ing expansion in this measure below the range thought
consistent with its near-term objectives for the money
supply measures.
t h e m a n a g e r ’s r e s p o n s e . The System moved to adopt
a substantially more restrictive posture at the end of June
when incoming data showed more rapid than acceptable
growth in the aggregates. It was expected that this shift
in reserve strategy would raise the Federal funds rate to
9 lA percent from the 8 V2 percent average then prevail­
ing, although a much larger increase developed. After the
July 17 meeting, M 1 moved within an acceptable range,
but M2 and RPD continued to increase at overly rapid
rates following enlarged inflows of time deposits to com­
mercial banks. Actions to restrain the availability of non­
borrowed reserves thus continued without interruption
until early August, although the anticipated weekly rise in
the Federal funds rate became more gradual. The weekly
average Federal funds rate had risen to about IOV2 per­
cent by late July (see Chart IX ). Subsequently, data indi­
cated a further slowing in monetary growth and RPD
moved within its specified range. The Desk sought no
further intensification of pressures in the weeks leading
up to the August 21 meeting. Shortly after this meeting,
the Manager raised his sights for the Federal funds rate a
shade in view of the emphasis placed by the Committee
on limiting the rapid growth in RPD. A further decelera­
tion of demand deposit growth helped bring RPD within
its 11 to 13 percent range for August and September com­
bined, and the Desk sought no additional pressure on
bank reserve positions. The Federal funds rate stabilized
at around 10% percent in the weeks leading up to the
September 18 meeting.
The move toward further restraint initiated at the end

FEDERAL RESERVE BANK OF NEW YORK

C h a r t IX

M O N E Y MARKET C O N D ITIO N S A N D WEEKLY
FORECASTS OF M l G R O W TH , 1973
M i l l i o n s o f d o lla r s

1 6 " N A R R O W M O N E Y S T O C K (M l)
1 4 - T w o - m o n t h g r o w th ra te
12-

M a y -J u ly

108-

6

J u n e-A u g u st

-

4 -

J u ly -S e p te m b e r

2

-

0—
2

J__ I__ I__ 1__L

_

20

27

Ju n e

4

11

18

July

J ___ I___ I , .1.
3

15

A ugust

22

29

5

12

19

26

S e p te m b e r

of June attracted widespread attention. Bank avoidance
of both Federal funds and discount window borrowings
over the quarterly statement publishing date led to a sharp
convergence of reserve demands in the two days before the
July 4 holiday on Wednesday. The Desk pumped in
$3,314 million of reserves in the two days, but the cumu­
lative deficiencies of the banks proved too large to head
off the extraordinary strain. The average Federal funds rate
climbed sharply to 10.21 percent from 8.59 percent the
week before, and trading took place at rates as high as 15
percent for the first time.
This episode complicated operations for a number of
weeks. Expectations that the System would continue and
possibly intensify restraint led to a concentration of de­
mands for funds at the start of a statement week. This
reflected a continuation of the pattern that had emerged
with the onset of restraint; only the pressures in the money
market were often more difficult to temper given the en­
larged demands for nonborrowed reserves.
t h e s e c u r i t i e s m a r k e t s . There was a sharp and dra­
matic response in the securities markets to the implemen­
tation of a clearly more restrictive monetary policy. The
Board reaffirmed the System’s intent on July 2 by approv­
ing requests by all Federal Reserve Banks to raise their




113

discount rates to 7 percent and by announcing the adop­
tion of a V2 percent increase in reserve requirements on
the bulk of demand deposits at member banks. Market
participants soon began to project that tightening would
continue indefinitely. The upward pressure spread quickly
from the Federal funds rate to dealer financing costs and
Treasury bill rates. The rate on the three-month issue
rose from about l lA percent to a high of 9.05 percent
on August 14, the day that another V2 point increase in
the discount rate, to a record IV 2 percent, was announced.
The bill rate subsequently fell by 60 basis points but rose
again to around the same peak after the Board’s announce­
ment in early September of an increase in the marginal
reserve requirement on large CDs to 11 percent. Aggres­
sive competition continued in the CD market, raising yields
on ninety-day CDs by 63 basis points to around 11 percent
over the same interval.
The influence of higher short-term rates spilled over
to the markets for long-term debt, given expectations that
banks would abstain from buying new issues and/or
liquidate holdings as monetary restraint persisted. The
climb in long-term rates intensified with the approach of
the August refunding. The Treasury announced on July
25 that it would auction $2 billion of additional 73A
percent four-year notes and $500 million of 7 V2 percent
twenty-year bonds, the latter using the uniform-price tech­
nique adopted at the start of the year. The remaining $2
billion financing need would be met through an auction
of 35-day tax anticipation bills.
Dealers soon became concerned that investor demand
would be insufficient to permit them to distribute issues
before they had to be financed at burdensome costs. En­
larged demands by Federal agencies, as they moved to
preserve mortgage flows, added to the gloomy outlook. A
precipitous drop in note and bond prices emerged prior
to the auctions, which were scheduled for July 31 and
August 1, amid large-scale short selling. Desk purchases
of intermediate-term coupon issues on behalf of Govern­
ment investment accounts helped impart some stability
to the market. Even so, only $2.1 billion of acceptable
bids were received for the $2 billion of 73A percent notes,
and these came under heavy selling pressure shortly there­
after. Public bids for the twenty-year bonds at the lowest
acceptable price amounted to only $260 million. The tax
anticipation bills sold on August 8 were issued at a sub­
stantial average rate of 10.03 percent— on a bond equiva­
lent basis— even though banks were permitted to pay for
50 percent of subscription by crediting Treasury Tax and
Loan Accounts.
The decline in bond prices ended quite suddenly. Evi­
dence of a deceleration in money supply growth during

114

MONTHLY REVIEW, MAY 1974

July and August convinced many participants that the
next move in System policy would be in the direction of
less restraint. Thus, despite the slight edging up of the
daily level of Federal funds trading after the August
FOMC meeting, securities dealers began to cover some
short positions in notes and bonds. An explosive rally
emerged in the debt markets as it became apparent how
short aggregate trading positions had become and as in­
vestors sought to capture the prevailing yields on securities
rather than risk missing a turn in rates. Prices rose sharply
over the rest of August and in September so that, by the
time of the September FOMC meeting, the increase in
yields on notes and bonds that had occurred over the
summer had been largely eradicated. The index of Gov­
ernment securities maturing in ten years averaged 7.09
percent, close to its level of mid-July and well below its
August 8 peak of 7.54 percent. Recently offered Aaa-rated
utility issues were yielding 8.03 percent, reflecting a de­
cline of around 27 basis points in six weeks. The Bond
Buyer’s index of yields on twenty-year municipal bonds
had fallen over 50 basis points to 5.05 percent, merely 5
basis points above its lowest level of the year.
MID-SEPTEMBER-DECEMBER
t h e c o m m i t t e e ’s i n s t r u c t i o n s . Starting with its Septem­
ber 18 meeting, the FOMC voted to seek moderate growth
in the aggregates over the months ahead. The cumulative
increases in interest rates over the year and the sharp de­
celeration of money supply growth in the late summer led
the staff to reduce its estimates of the demands for money
that were likely to emerge in the months ahead. It ap­
peared that a delay in a move toward easing could require
a much more substantial move at a later time to achieve
moderate M 1 growth. At its September 18 and October 16
meetings, the FOMC raised the upper ends of the twomonth tolerance ranges for the aggregates a bit above
those suggested by the staff, expecting that reserves would
be provided more readily as the period unfolded and that
the Federal funds rate could decline.
In fact, Mj became considerably stronger in the closing
months of the year, and it appeared that growth in pre­
vious months would be revised upward. While inflation
remained a disturbing problem, the pace of real economic
activity decelerated and it appeared that the curtailment
of oil supplies from abroad could have significantly ad­
verse effects. The Committee at its November 20 meeting
retained the objective of moderate growth in the long run.
Mx growth continued to strengthen, and by the end of
November appeared to be moving above an acceptable
range for the last two months of the year. On Novem­




ber 30, however, the Committee agreed to forestall a tighten­
ing of money market conditions because of current un­
certainties with respect to the economic outlook and the
sensitive state of market psychology. At its final meeting
of the year, on December 17-18, the FOMC moved further
in the direction of less restraint and decided to seek some
easing of bank reserve and money market conditions, pro­
vided that the aggregates did not appear to be growing
excessively.
t h e m a n a g e r ’s r e s p o n s e . After the September meeting,
estimated money supply growth over the two months
ended October fell below an acceptable range and the
Manager moved to provide reserves more readily. While
the Manager was careful in light of the FOMC’s desire
to avoid generating market impressions that monetary re­
straint was being relaxed significantly, the securities mar­
kets responded dramatically to the first sign that the Sys­
tem was changing its reserve and money market objectives.
Three-month bill rates plummeted from 8.68 percent on
the day of the meeting to 6.96 percent by September 27.
At the same time, a downward shift in member bank bor­
rowings and enlarged demands for Federal funds by major
banks seeking to avoid issuing CDs until rates fell further
kept the money market under constant pressure. The Man­
ager asked for guidance in resolving the inconsistency be­
tween the indicated response to the aggregates, which were
expected to fall below the FOMC’s objectives for the
September and October period, and the state of the credit
markets. The Committee agreed at a telephone meeting on
October 2 that money market conditions should be al­
lowed to ease somewhat if this easing did not threaten to
reinvigorate the sharp rally in the markets for short-term
securities. While the Manager became more aggressive in
his efforts to supply nonborrowed reserves, the money
market remained under pressure and the Federal funds
rate showed no tendency to move below 103A percent. At
the same time, M t growth weakened further and the other
measures moved well below their specified ranges. On Oc­
tober 10, the Committee held a second telephone meeting
and directed the Manager to supply reserves consistent
with some easing of money market conditions beyond that
indicated eight days earlier. The Desk redoubled its efforts
to achieve this and, following substantial additions to non­
borrowed reserves, the funds rate had declined to 10 per­
cent by the October FOMC meeting.
In the weeks after the October 16 meeting, estimates of
money supply growth initially remained within the range
indicated as acceptable for the two months ended Novem­
ber while bank willingness to permit CDs to run down
pulled RPD below its range. The Account Manager re­

FEDERAL RESERVE BANK OF NEW YORK

tained a somewhat more generous approach to the pro­
vision of nonborrowed reserves and began permitting
doubts about reserve availability to be resolved on the side
of a bit less tautness, with the Federal funds rate settling
a shade under 10 percent (see Chart X I). This process
was halted shortly thereafter when estimates of
growth
strengthened, reaching 8 percent over the two months.
While the Desk adopted a more grudging approach
and the Federal funds rate rose to around 10% percent,
efforts to restrict reserve supplies more noticeably were
tempered by the Treasury refunding that was in process
and by the unsettled conditions that developed in the
securities markets.
The surge in
growth during November and the un­
certainties attributable to the oil shortage led the staff to
conclude that demands for
in the near term could in­
crease, while the economic outlook became more uncer­
tain. The Committee established tolerance ranges for the
aggregates over the two months ended December that were

115

C h art X I

M O N E Y MARKET CONDITIONS A N D WEEKLY
FORECASTS OF M l G R OW TH, 1973
Percent

M illio n s o f d o lla rs

N A R R O W M O N E Y STOCK (M l)
— T w o-m onth gro w th rate

—

O c to b e r -D e c e m b e r
S e p te m b e r-N o v e m b e r

P ro jected

Q 1
1
■

-

\

•
A c tu a l

■
E

°

o
A u g u s t-O c to b e r

—

\

1
1

____ r

L

•
I
19

1 . 1 * 1
26

S e p te m b e r

3

10

1
17

1
24

1
31

O c to b e r

. 1
7

!
14

1
21

1.
28

N ovem ber

1
5

1-------1—
12

1 9 *2 6 *

D ecem ber

* R e f le c t s a n n u a l b e n c h -m a rk revisions.

C h art X

WEEKLY FORECASTS OF QUARTERLY GROW TH
IN THE M ONETARY AGGREGATES, 1 9 7 3 *
Percent

Percent

12

12

N A R R O W M O N E Y STOCK (Ml)

A c tu a l - 10

10
8

8

6

P ro je c te d

4

H pi

2

111

0

^

r>x

jmiiL

&lf Wi

8:1 111

I:

m

p

I®

!:?Si

B

1

■
:

I

:

1
1 lo

liiS llti: :.Ij

1

B RO AD M O N E Y STOCK

m
r -1f? ill
I'J sj VA
ry
ill ll= \vA

r o je c t e d

ADJUSTED CREDIT PROXY

P ro je c te d

A c tu a l

_L 1 1
3

10

17
O c to b e r

O ir in i i C i
24

31

7

14

21

28

*

A s o f tw o d ay s a fte r e n d -o f-s ta te m e n t w e e k shown,

t

R efle cts a n n u a l b en ch m a rk revisions.

S o u rc e :

m
5

N ovem ber

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 .




12

6

19+

D ecem ber

26+

4

likely to be consistent with little change in money market
conditions. Soon after the meeting, however, incoming data
suggested that growth in
and also M2 might be stronger
than acceptable over the two months. While these condi­
tions ordinarily would have called for limiting reserve
availability and thus generating a rise in the Federal funds
rate, the Manager sought to maintain prevailing money
market conditions until the December meeting following
the Committee’s concurrence on November 30 with the
Chairman’s recommendation of this course of action.
At its December 17-18 meeting, the Committee con­
cluded that the economic situation and outlook called for
a modest easing of monetary policy. The FOMC also de­
cided to place somewhat more emphasis on money market
conditions until its next meeting and directed the Manager
to seek some easing of these conditions provided that the
aggregates did not appear to be growing excessively. Ac­
cordingly, the Desk moved promptly after the meeting to
provide nonborrowed reserves at a more generous pace.
But the process was delayed again just before the yearend when estimates of the aggregates turned out stronger
than anticipated and it appeared that Mi was moving
above an acceptable range for December and January
combined. The Manager was providing reserves consis-

116

MONTHLY REVIEW, MAY 1974

tent with Federal funds trading in a 9% to 10 percent
range as the year drew to a close. While this was below
the level in November, the faster growth in the aggregates,
with M 1 increasing at a IV 2 percent rate over the fourth
quarter, had forestalled the emergence of a more signifi­
cant easing in conditions of reserve availability.
t h e s e c u r i t i e s m a r k e t s . There was an ebullient re­
action in the securities markets in late September when
participants sensed the System’s response to the deceler­
ation of money supply growth to a 0.3 percent rate over
the third quarter. A spectacular decline in short-term rates
occurred shortly after the September meeting when the
Desk purchased a small volume of Treasury bills at a time
when the money market was not particularly firm in com­
parison with previous weeks. Banks reduced offering rates
on CDs by over 2 percentage points to around 8 V2 per­
cent between September and the end of October. Dealers
in prime commercial paper reacted similarly, with rates
on 90- to 119-day paper falling to 8% percent from close
to 11 percent. Treasury bill rates plummeted, with the
three-month issue dropping by about 2 percentage points
to around 7 percent. L,ater, when M 1 growth acceler­
ated and the funds rate failed to decline significantly, the
reaction was almost as sharp.
The Treasury bill market was especially volatile toward
the end of the year. Expectations that the System would
ease to ward off an economic slowdown generated by fuel
scarcities were dampened by signs of accelerated Mt
growth. Increased bill sales by foreign central banks,
due to the improved international position of the dollar,
added to market caution. A significant increase in rates
occurred after the Treasury announced, in early Novem­
ber, the sale of bills to raise new cash. In all, the Treasury
raised an additional $8 billion of cash in the bill market
in the last three months of the year, as its needs were
enlarged by redemptions of nonmarketable issues held by
foreign central banks. The central banks also liquidated
a substantial volume of marketable coupon issues toward
the end of the year as the dollar improved against other
currencies. By the year end, bill rates were still 40 to 50
basis points above the low points reached in late Septem­




ber and early October. Short-term bill rates remained
above rates on longer maturities, with the three-month
issue bid at 7.45 percent and the one-year issue at 6.86
percent. The continued moderation of business credit de­
mands at banks, reflecting in part a shift of borrowers to
the commercial paper market, led to modest CD growth
in the final months of the year. Offering rates retraced
part of the earlier declines, with the ninety-day maturity
closing the year at 9 Vi percent.
The long-term debt markets were also highly responsive
to expectations of a change in System policy and to chang­
ing assessments about prospects for the economy. Yields
declined in late September and early October. The terms
of the Treasury’s refunding, announced on October 24,
were greeted favorably, but the emerging pressures on
short-term rates soon began to dampen market sentiment.
The Treasury auctioned $3.8 billion of issues to replace
maturing securities, and the package included $1.5 billion
of 25 Vi -month notes, $2 billion of six-year notes, and
$300 million of additional IV 2 percent bonds due in 1993.
Coupon rates of 7 percent were established for both notes.
The October 30 auction of the six-year notes at an average
yield of 6.82 percent was disappointing, and yields ad­
justed higher before the two auctions held on the next
day. The 2 5 ^ -month notes were sold at 6.91 percent, and
the long-term bonds were awarded at 7.35 percent with all
bonds awarded at the price of the lowest accepted tenders.
Dealers were unable to reduce inventories significantly
in the weeks that followed, and coupon prices declined
quite steadily. The rounds of price increases expected to
result from potential fuel scarcities deepened concern over
inflation and had particular impact in the long-term mar­
kets. By the last week in December, the yield on ten-year
Government securities reached 6.87 percent, little changed
from its early-October level. Corporate bond yields ex­
perienced more pronounced increases, reflecting expec­
tations of enlarged financing demands in 1974. The yield
on recently offered Aaa-rated utility issues rose to 8.10
percent, 20 basis points below its August high. Stronger
bank interest in municipal issues benefited the tax-exempt
market, and the Bond Buyer’s index stood at 5.16 percent,
43 basis points below its August high.

FEDERAL RESERVE BANK OF NEW YORK

117

Th e Business Situation
Economic activity posted a sizable decline during the
first quarter of 1974, as real gross national product
(GNP) fell at a 5.8 percent seasonally adjusted annual
rate, the largest quarterly decline since 1958. However, it
appears that practically all of this drop reflected the im­
pact of the Arab oil embargo which ended in mid-March.
Moreover, the data suggest that the weakness in business
activity did not spread widely throughout the economy but
was confined largely to the automotive sector, which bore
the brunt of the embargo’s direct and indirect effects. Dur­
ing the first quarter, the decline in real gross auto product
accounted for 95 percent of the drop in total real GNP.
Subsequently, auto sales have apparently bottomed out
and may even be on an uptrend. In addition, automobile
producers have revised upward, by better than 4 percent,
their second-quarter production schedules in response to
the improved outlook.
On the other hand, the price situation has deteriorated
even further in recent months. During the first quarter,
the GNP deflator, which is the broadest available measure
of price movements, soared at a 10.8 percent annual rate,
the fastest climb since the Korean war, and the fixedweight price index for GNP increased at an even more
rapid rate. While skyrocketing food and fuel prices have
had a very substantial impact on price data, the upward
march of prices is currently taking place along a very
broad front. Consumer prices rose at nearly a 13 percent
rate in March, the third consecutive month of inflation in
excess of 10 percent at the retail level.
The first-quarter rise in compensation per hour of work
was modest in comparison with the surge in consumer
prices. As a result, real wages declined for the fourth con­
secutive quarter. Moreover, the decline in real wages
experienced over the year ended in March is bound to
escalate wage demands during the latter part of the year
unless labor shows remarkable restraint.
GNP AND RELATED DEVELOPMENTS

Preliminary estimates indicate that the seasonally ad­
justed market value of the nation’s output of goods and




services rose only $14.3 billion at an annual rate during
the first quarter of 1974. This constitutes a 4.4 percent an­
nual rate of increase, the smallest percentage advance in
nominal GNP in about three years. Moreover, when ad­
justed for the enormous rise in prices that occurred during
the quarter, GNP actually declined at a 5.8 percent annual
rate, the largest drop in real output since the first quarter
of 1958. Reflecting the impact of pervasive shortages, the
growth of real GNP had slowed noticeably during the two
middle quarters of 1973, well in advance of the start of the
Arab oil embargo (see Chart I). While the embargo had
some effect on GNP during the fourth quarter of last year,
its major impact was experienced during the first quarter of
this year. The embargo weighed most heavily on the
automotive sector. The reduction in gross auto product,
which is the portion of GNP directly attributable to the
production and sale of passenger cars, represented 95
percent of the overall decline in real GNP during the first
quarter. Furthermore, real farm output decreased consid­
erably during the first quarter after rising sharply in the
October-December period. Excluding both the auto and
farm sectors, real GNP edged down by less than 1 percent
in the January-March interval.
A number of factors have probably helped to keep
the economic decline precipitated by the oil embargo
from spreading widely throughout the economy. A sizable
portion of the impact to date has fallen on the automotive
sector, where many workers have had their spendable in­
comes protected to a degree by supplementary unemploy­
ment benefit programs. Payments from privately sponsored
plans, which have been incorporated into the collective
bargaining contracts covering the rank and file workers at
the major auto-producing firms, are combined with state
unemployment insurance benefits to maintain temporarily
take-home pay for eligible workers close to that earned on
the production lines. More broadly, the persistence of the
shortages which developed during 1973 has probably meant
that some of the easing in demand that became apparent
in certain sectors toward the end of last year and early in
1974 had relatively little impact on output and income.
The modest growth of nominal GNP in the first quarter

MONTHLY REVIEW, MAY 1974

118

C h a rt I

PERCENTAGE C H A N G E S IN REAL GROSS N A T IO N A L P R ODUCT
From p re v io u s q u a rte r; s e a s o n a lly a d ju s t e d a n n u a l ra te s

Note-. S h a d e d a reas represent recession p e rio d s , in d ic a te d by the N a tio n a l Bureau of Research c h ro n o lo g y.
The dates of the 1 969-70 recession a re te n ta tiv e .
Source: U nited States D e p a rtm e n t of Com m erce, Bureau of Economic A nalysis.

was accompanied by a sharp slowing in the rate of inven­
tory accumulation (see Chart II). However, huge swings in
dealer holdings of new passenger cars have obscured the ex­
tent to which inventory investment has strengthened in non­
automotive sectors. Excluding the change in dealer new car
stocks, the rate of real inventory accumulation was actually
somewhat stronger in the first quarter than during the pre­
vious three-month period. The change in overall business
inventories, which dropped abruptly from the large $18 bil­
lion annual rate of accumulation registered during the
fourth quarter to a $7.8 billion seasonally adjusted annual
rate in the January-March 1974 period, does not of course
reflect this. Further, while book value inventories posted
very large gains during the first two months of the quarter,
most of this was the result of price increases and is not in­
cluded in the national income accounts estimate of inventory
spending. The inventory valuation adjustment, which re­
moves that part of the book value change due only to infla­
tion, was huge in the first quarter.
The first-quarter increase in current-dollar final expen­




ditures— that is, GNP net of inventory accumulation—
amounted to a 7.7 percent increase at an annual rate, up
from the pace of the previous quarter. In real terms, final
sales actually declined at a 2.4 percent rate in the JanuaryMarch period, a bit less than the 2.9 percent drop recorded
over the preceding three-month interval.
Measured in current-dollar terms, consumer spending
strengthened during the first quarter. Consumption rose
$19.4 billion in the January-March interval, compared
with the very small $9.2 billion increase of the preceding
quarter. In real terms, however, consumer spending de­
clined for the second successive quarter, although the
decrease was noticeably smaller than that of the fourth
quarter.
Current-dollar spending on consumer durables, which
had declined by a sustantial $7.2 billion in the fourth quar­
ter, fell an additional $1.1 billion in the first quarter of
1974. While this latest decrease continued to reflect weak­
ness in spending on automobiles, there are tentative signs
that the decline in auto sales may have bottomed out and

FEDERAL RESERVE BANK OF NEW YORK

perhaps even reversed itself. Sales of new domestic-type
passenger cars reached a three-year low of 7.4 million
units (seasonally adjusted annual rate) in February, re­
mained at that pace in March, but rose to 7.8 million
units in April. The more favorable automobile sales pic­
ture can be attributed, at least in part, to the increased
availability of gasoline as well as to the general improve­
ment in the fuel outlook that has accompanied the an­
nounced termination of the oil embargo.
Consumer spending on nondurable goods picked up in
current-dollar terms during the first quarter, with large in­
creases in outlays for food, beverages, clothing, and shoes.
After adjustment for price increases, however, spending
on nondurables edged down. At the same time, real ex­
penditures for services showed no change, the first quarter
in twenty years that spending for services failed to ex­
pand in real terms.
During the first quarter, the rate of personal saving out
of disposable income dropped sharply to 6.5 percent, after
climbing from 5.7 percent to 7.3 percent in the last half
of 1973. This decline in the personal saving rate may
reflect attempts on the part of consumers to preserve
consumption levels in the face of the diminution in real
personal disposable income. Real disposable income fell
in the January-March quarter for the first time since the
fourth quarter of 1970. With declines in payroll employ­
ment and the average workweek during the first quarter,
wage and salary disbursements grew slowly in nominal
terms and dropped considerably after adjustment for the
upsurge in consumer prices. Higher social security taxes
resulting from the increase in the taxable wage and salary
base also contributed to the fall in after-tax personal in­
come.
Business fixed investment, an area expected to contribute
substantial strength to the economy in 1974, advanced only
modestly in the first quarter. The gain of $2.6 billion was
the smallest in more than a year and, in real terms, firstquarter fixed investment experienced a slight decline. All of
the most recent rise in nominal outlays for fixed investment
was in stuctures; the leveling-off of spending on durable
equipment may reflect the impact of capacity constraints
and shortages on the capital goods industries. Backlogs of
unfilled orders on the books of nondefense capital goods
producers have grown at about a 30 percent annual rate over
the first three months of this year. Furthermore, the latest
McGraw-Hill survey of capital spending intentions reveals
that businesses are still planning a large increase in such
spending in 1974. In addition, most of the first-quarter
slowdown in business fixed investment reflects the decline
in business purchases of passenger cars and trucks. This
decline is at least partly in response to the energy situation.




119

During the first quarter, residential construction spend­
ing dropped $4.5 billion. Since the peak reached in the
January-March quarter of 1973, expenditures on residential
structures have fallen almost $10 billion in current dollars
and more than 20 percent in real terms. Seasonally ad­
justed housing starts dropped in March to 1.46 million
units at an annual rate, the same as the January pace,
suggesting that the sharp rise in starts in February was
largely a statistical aberration. Permits for new construc­
tion, on the other hand, rose smoothly during the first
quarter and, by March, had climbed 15 percent above the
3 V2 -year low reached last December. However, the recent
upswing in market interest rates and signs of renewed dis­
intermediation at thrift institutions make the housing
outlook highly uncertain.
Federal Government purchases of goods and services
increased by $4.5 billion in the first quarter, reflecting gains

C h art II

RECENT CHANGES IN GROSS N A TIO N A L PRODUCT
A N D ITS COM PONENTS
Season ally a d ju sted

^ C h a n g e from th ird q u a rte r

IC h a n g e fro m fourth q u a rte r 1973

^ to fourth q u a rte r 1973

^ to first q u a rte r 1974

F e d e ra l G o v e rn m e n t pu rchases
S ta te a n d lo c a l g o v e rn m e n t
purch ases
N e t exports o f goods
a n d services

J__ I__ I__ I__ L
-1 0

-5

0

5

10

15

20

25

30

B illions o f d o lla rs
S o u rc e:

U n ite d S ta te s D e p a rtm e n t o f C o m m e rc e , B u rea u o f Eco n om ic A n a ly s is .

35

120

MONTHLY REVIEW, MAY 1974

of $3.2 billion in defense spending and $1.3 billion in non­
defense outlays. At the same time, state and local govern­
ment outlays rose $5.8 billion. During the January-March
period, spending by all levels of government expanded to
$296 billion, approximately 22 percent of total GNP.

C h a r t III

INCREASES IN PRIVATE N O N FA R M PRICES A N D W AGES
S e a s o n a l l y a d j u s t e d a n n u a l r a te s
P e rc e n t

P e rc e n t

PRICES

The price situation deteriorated further during the first
quarter. According to preliminary data, the implicit GNP
deflator rose at a 10.8 percent annual rate, 2 percentage
points faster than in the fourth quarter of 1973 and the
most rapid quarterly price increase in over two decades.
Over the four quarters ended March 1974, the deflator
climbed by an extraordinary 8 V2 percent. The severity of
the acceleration in the rate of inflation is underscored by
the fact that, during each of the preceding two years, the
GNP deflator rose only about 3 V2 percent. A number of
factors have contributed to the recent, sustained explosion
in prices. Food prices continued to rise at extremely rapid
rates through the first quarter. Nevertheless, the private
nonfarm deflator still rose at a rate in excess of 10 percent
in the same interval (see Chart III). The Arab oil embargo
put very substantial upward pressure on prices of domestic
energy supplies since they can serve, in varying degrees, as
substitutes for imported fuels. Moreover, there is some indi­
cation that the process of gradually eliminating wage and
price controls, which gathered momentum in recent
months, may have contributed to the first quarter’s dis­
tressing rate of inflation.
Consumer prices rose at a 12.9 percent seasonally ad­
justed annual rate in March, marking the third consecutive
month of inflation in excess of 10 percent at the consumer
level. During the three months ended in March, consumer
prices increased at a spectacular 13.8 percent annual rate,
on top of the already very rapid 9.4 percent increase dur­
ing the last half of 1973. The March increase brought the
consumer price index to a level of 10.2 percent above that
of a year earlier, the largest yearly surge since 1948. Al­
most half of the February leap in consumer prices reflected
steep increases in food prices, but the March jump was
more broadly based. In March, consumer food prices in­
creased at a 9.1 percent rate, substantially slower than the
February climb of 30 percent. Skyrocketing energy prices
have contributed heavily to the current bout of inflation. In
March, consumer power and fuel prices rose at a 47 per­
cent annual rate, bringing the climb during the first quar­
ter to a 57 percent pace. Nevertheless, surging prices of
food and energy-related items have obscured in recent
months the inflationary pressures in other areas of the
economy. For example, excluding food and consumer




S o u rc e s :

U n ite d S ta te s D e p a r tm e n t o f C o m m e rc e , B u re a u o f E c o n o m ic A n a ly s i

a n d th 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 .

power and fuel, consumer prices still advanced at a 7.4
percent rate during the three months ended in March, com­
pared with a 4.6 percent .rise in 1973.
WAGES, PRODUCTIVITY, AND EMPLOYMENT

Although recent information indicates a moderate in­
crease in wages in the first quarter, cost pressures neverthe­
less intensified. Compensation per hour of work—the
broadest available measure of wages and benefits— rose at
a 7.1 percent seasonally adjusted annual rate in the
private nonfarm sector of the economy during the open­
ing quarter of this year. Including the farm sector,
the advance in compensation was somewhat slower. In
any event, because of the rapid escalation in the rate of
consumer price increases, real hourly compensation de­
clined in the January-March period for the fourth con­
secutive quarter to reach a level 2 V2 percent below that
of a year earlier. According to the separate survey of col­
lective bargaining agreements covering 1,000 or more
workers, contracts settled during the first quarter of the
year provided, on average, for first-year wage and benefit
gains of 6.9 percent and for improvements over the life of
the contract of 5.9 percent. While seemingly on the modest
side, it should be noted that these figures do not include

FEDERAL RESERVE BANK OF NEW YORK

those payments made under escalator clauses contingent
on movements in the consumer price index. About half the
workers for whom major agreements were concluded dur­
ing the first quarter had such clauses in their contracts.
Moreover, the collective bargaining data for the first
three months of the year encompassed only 466,000 of
the more than 5 million workers covered by major con­
tracts for which wages can be negotiated this year.
As measured by real output per hour of work, private
nonfarm productivity declined at a 3.4 percent annual
rate in the first quarter. This dip in productivity, coupled
with the rise in compensation, resulted in an increase in
private nonfarm unit labor costs during the period of 11.1
percent at an annual rate. Short-term movements in out­
put per hour of work typically reflect variations in the
rate of real economic growth. For example, over the four
quarters ended in March 1973, real private nonfarm out­
put rose a substantial 9 percent and productivity grew by
a healthy 5.3 percent. During the next three quarters,
when real output increased at a much slower 2.7 percent
pace, output per hour of work actually edged down. The
sharp productivity drop in the first quarter of this year,
doubtless related to the Arab oil embargo, stems from the
fact that the decrease in real output was considerably
larger than the decline in hours worked. One possible rea­
son for the disparity between the declines in output and
hours is that firms were reluctant to make commensurate
reductions in employment and hours in the face of what
was viewed as a largely temporary situation.
After climbing from 4.6 percent last October to 5.2
percent in January, the unemployment rate subsequently
steadied in February and then edged lower in the two
succeeding months. The seasonally adjusted unemployment




121

rate dropped to 5 percent in April, the same level that
prevailed in the corresponding month last year. The recent
declines in unemployment occurred largely as a result of
contractions in the labor force amounting to 60,000 per­
sons in March and a further 180,000 in April. It is impor­
tant to note, however, that these reductions were preceded
by sizable increases, so that the labor force was 2.3
percent larger in April 1974 than it was twelve months
earlier. Over the two months ended in April, the teen-age
labor force fell by 280,000 and the adult male work force
by 247,000, but the adult female labor force jumped by
283,000 persons. While the modest decline in the unem­
ployment rate was unexpected in light of the slowdown
in business activity, it should be noted that the cyclically
more meaningful unemployment rate for married men
edged up in April, reaching a level last recorded in March
1970. Since November, the unemployment rate for mar­
ried men has inched slowly upward.
In the April payroll survey of nonfarm establishments,
seasonally adjusted employment increased by 126,000,
bringing the rise since the end of 1973 to a total of
285,000. Manufacturing employment, which had fallen
steadily since November, rose significantly and accounted
for 75,000 of the April advance. About two thirds of the
rise in manufacturing employment was centered in the
transportation equipment sector, where recalls of auto­
motive workers boosted employment during the month.
Although there was a sharp drop in the average workweek
and, particularly, in manufacturing overtime hours in
April, this may largely reflect the fact that the Friday and
Saturday preceding Easter, when many employees tradi­
tionally work reduced hours, were included in the survey
week.

MONTHLY REVIEW, MAY 1974

122

M onetary and Financial Developments in the First Quarter
Business demand for short-term financing continued growth at thrift institutions appeared to reflect the rise in
strong during the first quarter of 1974. At commercial short-term rates on competing market instruments, as
banks, the growth of business loans surged at a 23.2 per­ evidenced by the sharp increase in the volume of non­
cent seasonally adjusted annual rate. The rise in business competitive tenders at the weekly Treasury bill auctions.
loans at commercial banks did not appear to come at the Thrift institutions increased their mortgage holdings con­
expense of other short-term business borrowings since the siderably over the quarter, but their commitments to make
volume of dealer-placed commercial paper also increased new mortgages showed virtually no change.
substantially. Along with the burgeoning demand for short­
term funds, the growth of the money supply measures
THE MONETARY AGGREGATES
remained excessive in the first quarter. The narrowly de­
Mx— private demand deposits adjusted plus currency
fined money supply (M x) expanded at a seasonally ad­
justed annual rate of 6.7 percent over the January-March outside commercial banks— expanded in the first quarter
interval, an acceleration over the pace of 1973. The more at a 6.7 percent seasonally adjusted annual rate (see
broadly defined money supply (M 2) rose almost as rapidly Chart I). This represents a 1 percentage point increase in
in the first quarter as in the fourth quarter of 1973. The growth from that experienced in all of 1973. As usual, the
outstanding volume of large negotiable certificates of individual monthly growth rates of Mx exhibited wide fluc­
deposit (CDs) at weekly reporting banks increased sharp­ tuations. In January, Mj actually declined at an annual rate
ly, after declining on balance over the preceding three- of about 3 V2 percent, and then it increased sharply at an­
month period. Consequently, the growth in the bank credit nual rates of about 13 percent in February and IOV2 percent
proxy accelerated in the January-March quarter.
in March. Some of the pronounced increase in Mx in Febru­
The huge demand for short-term credit, along with a ary can be attributed to relatively large refunds of
change in market participants’ expectations of the future individual income taxes, which served to reduce United
course of monetary policy, prompted a turnaround States Government balances and increase private demand
in short-term interest rates during the quarter. After deposits. Since Government deposits are not included in
falling through mid-February, most short-term rates rose M, while private deposits are, this transfer works to in­
over the remainder of the period, experiencing little net crease the money stock.
change over the quarter as a whole. Short-term interest rates
Over the January-March period, the currency compo­
subsequently rose sharply in April.* Meanwhile, long-term nent of M x rose at a seasonally adjusted annual rate of
bond yields increased rather steadily throughout the quar­ 11 percent, more than double the rate of increase in de­
ter. By the end of March, yields in the corporate sector mand deposits. Since mid-1972, the expansion of cur­
rency has been rapid relative to both its own historical
were at their highest levels in more than three years.
Deposits at thrift institutions continued to expand at a trend and to the growth of demand deposits. Much of the
moderate pace over the quarter, but inflows appeared to substantial advance of currency during recent months
slacken considerably early in April. The slowing of deposit probably reflects large increases in expenditures on items
that are exchanged for currency rather than demand de­
posits. Typically, these items include nondurable goods and
services purchased by consumers. These expenditures in the
gross national product (GNP) accounts grew sharply in the
first quarter, rising by 12 percent as compared with a gain
* Interest rate developments in April are discussed in “The
of only 4 V2 percent in total GNP.
Money and Bond Markets in April”, this Review, pages 127-31.




FEDERAL RESERVE BAN K OF NEW YORK

M 2— defined as Mx plus time deposits other than large
CDs— advanced in the first quarter at a seasonally ad­
justed annual rate of 9.4 percent, compared with a gain
of 10.1 percent in the preceding quarter. Over the quarter
as a whole, the time deposit component of M2 continued
to rise rapidly— although not quite by so much as in the
previous quarter—but its rate of growth decelerated in
each succeeding month. In part, the slowdown in the ex­
pansion of time deposits less large CDs over the quarter
may have reflected the rise in market rates on instruments
that compete for consumer funds. It should also be recog­
nized that the time deposit component of M2 includes
some corporate deposit holdings as well. In deriving M 2,
only negotiable CDs issued in amounts of $100,000 or
more at weekly reporting banks are subtracted from total
time deposits. Thus, the time deposit component of M2,
as it is currently measured, includes nonnegotiable CDs
in amounts of $100,000 or more at large weekly reporting
banks as well as large negotiable and nonnegotiable CDs
at other banks.
In contrast to the behavior of the time deposit com-

C h a rt I

G R O W TH IN MONETARY AGGREGATES
S e a s o n a lly a d j u s t e d a n n u a l ra te s

123

ponent of M2, the growth in large CDs accelerated sharply
in the first quarter to a seasonally adjusted annual rate
of 31.2 percent, after declining at a 23 percent annual rate
in the fourth quarter of 1973. With short-term interest
rates generally falling early in the quarter, banks were able
to reduce their offering rates and still attract a large vol­
ume of funds with this instrument. Moreover, CDs be­
came a less expensive source of bank funds after the Board
of Governors of the Federal Reserve System lowered its
marginal reserve requirement on CDs and certain other
bank liabilities from 11 percent to 8 percent in December.
As the quarter progressed, CD rates rose substantially,
since banks were marketing such instruments aggressively in
an effort to attract sufficient funds to accommodate the
tremendous demands for credit and to roll over the large
volume of CDs maturing in March.
The rapid growth of large CDs during the first quarter
contributed to the expansion of the bank credit proxy.
The adjusted bank credit proxy— member bank deposits
subject to reserve requirements plus certain nondeposit
liabilities— advanced at a seasonally adjusted annual rate
of 8.5 percent during the January-March period, a sub­
stantial acceleration over the pace of the previous quarter.
Aside from the decline in Government deposits, all com­
ponents of the proxy added to its growth. Reserves avail­
able to support private nonbank deposits (RPD) exhibited
some renewed vigor in the first quarter; after adjustment
for seasonal variation, RPD expanded at an annual rate
of 6.2 percent over the period, still not so rapid as the
growth experienced overall in 1973.
BANK CREDIT, INTEREST RATES, AND THE
CAPITAL MARKETS

L A R G E N E G O T IA B L E : C E R T IF IC A T E S O F DEP O S I T

H

F -i
i

m
I

^ lai
.... .
p i

.i

i

H

■

i

A D J U S T E D B A N K C R E D IT P R O X Y

i

m

1 El
.

1.

1

1

VA m

\vA1
1971

1972

1973

1974

M l = C u r r e 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 1 p lu s c o m m e r c 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 ,
le s s n e g o t ia 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 o re .
A d ju s te d b a n k c r e d it p r o x y - T o t a l m e m b e r b a n k d e p o s its s u b je c t to re s e rv e
r e q u ir e m e n ts p lu s n o n d e p o s it s o u r c e s o f fu n d s , s uch a s E u ro d o lla r
b o r r o w in g s a n d th e p r o c e e d s o f c o m m e r c 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 o r o th e r a f filia te s .
S o u rc e :

B o a r d o f G o v e r n o r s o f th e F e d e ra l R e s e rv e S y s te m .




Following four consecutive months of sluggish growth,
bank credit expanded sharply over the January-March
period. Total bank credit, adjusted for net loan sales to
affiliates, rose at a seasonally adjusted annual rate of 16.2
percent in the first quarter of 1974, nearly matching the
extraordinary gain experienced over the first eight months
of 1973.
An exceptionally large increase in business loans over
the quarter provided the major thrust to the rapid expan­
sion in bank credit. When adjusted for net loan sales to
affiliates and normal seasonal variation, the growth of
business loans spurted at a 23.2 percent annual rate in the
January-March period (see Chart II). Business loan de­
mand was broadly based among the manufacturing, whole­
sale, and retail sectors, although metal firms and com­
modity dealers were especially heavy borrowers. The huge
first-quarter bulge in business loans was probably due in

124

MONTHLY REVIEW, MAY 1974

part to the need to finance larger inventories at higher
prices. In turn, the inventory building may have reflected
fears of rising material prices, raw material shortages, and
expectations of future inflation.
The rapid expansion in business loans at commercial
banks during the first quarter did not reflect a pronounced
slowing in other short-term business borrowing. The vol­
ume of nonbank dealer-placed commercial paper out­
standing expanded substantially in the first two months of
the period, although it declined in March. For the quar­
ter as a whole, business loans plus nonbank dealer-placed
commercial paper grew at about the same pace as business
loans alone. In contrast, during 1973 the growth in these
two series differed substantially. Business loans at com­
mercial banks surged over the first eight months of that
year, when pressure from the Committee on Interest and
Dividends kept the bank prime lending rate to large
business borrowers artificially low relative to other short­
term interest rates. The prime rate averaged about 20
basis points below the rate on 90- to 119-day commercial

C h a r t II

SHORT-TERM BUSINESS BORROW INGS A N D
RELATED INTEREST RATES
P e rc e n t

P e rc e n t

N o te : Business lo a n s a r e a d ju s te d fo r lo ans sold to a ffilia te s . Y ie ld s on 9 0 - to
11 9 -d a y p rim e co m m e rc ia l p a p e r a r e m o n thly a v e r a g e s o f d a ily fig u res .
The p rim e ra te is the in tere st ra te p o sted by m a jo r co m m ercial b an k s on s h o rt­
term lo a n s to th eir most c re d itw o rth y la rg e b usiness b o rro w e rs .
Sources:

B o a rd o f G o v e rn o rs o f the F e d e ra l R eserve System a n d th e

F e d e r a l R eserve Bank of N e w Y o rk .




paper over the January-August period. This contrasted
with the usual relationship during recent years, when the
prime rate had averaged about 50 basis points above the
commercial paper rate. With the prime rate relatively low
over the first two thirds of 1973, businesses switched some
of their borrowing from the commercial paper market to
commercial banks. During the last four months of 1973,
when commercial paper rates dropped below the prime
rate, by about 35 basis points, on average, businesses
rechanneled their borrowings to the commercial paper mar­
ket and business loans at banks grew sluggishly.
Not all components of bank loans advanced at an accel­
erated pace in the first quarter, however. Notably, the
growth of consumer loans and real estate loans slackened,
while securities loans continued to decline. At the same
time, banks increased their securities holdings substan­
tially. Total investments rose at a seasonally adjusted
annual rate of nearly 12 percent, after showing virtually
no change in all of 1973.
During the first quarter, most short-term interest rates
moved in a seesaw pattern, declining in the first half of
the period and then rising in the latter half, with little
net change over the period as a whole. The Federal funds
rate, for example, fell in late January through early Febru­
ary and then began rising around mid-March. By the end
of the quarter, the effective rate on Federal funds stood at
about 10 percent, almost the same level that prevailed in
late December. Subsequently, the Federal funds rate ad­
vanced in April well above the levels of December. Offer­
ing rates on 90- to 119-day dealer-placed commercial
paper dropped 125 basis points from the end of December
to mid-February and then rose 163 basis points over the
remainder of the quarter. The commercial bank prime
lending rate for large business borrowers followed the same
general pattern but with a lag. The tendency for changes
in the prime rate to lag behind movements in other short­
term rates is not a new phenomenon. Since early 1973,
however, several banks have tied their lending rates directly
to past market rates, thus reinforcing this tendency.
Movements in short-term rates during the quarter were
especially sensitive to market participants’ perceptions of
apparent changes in monetary policy. The decline in the
Federal funds rate late in January was perceived as a
sign of some relaxation in monetary restraint, and market
rates dropped sharply. The rally halted in mid-February in
the wake of Chairman Burns’s Congressional testimony
emphasizing the System’s concern with the ongoing rate
of inflation. Then in March, when available data suggested
that inflation was continuing unabated, Mi was rising
rapidly, and economic indicators were pointing to under­
lying strength in the economy, many market participants

125

FEDERAL RESERVE BANK OF NEW YORK

THRIFT INSTITUTIONS

C h a r t III

SELECTED INTEREST RATES
P e rc e n t

N o te :

P e rc e n t

R ates fo r F e d e ra l fu n d s (e ffe c tiv e ra te ) a n d th re e - m o n th T re a s u ry b ills

( m a rk e t y ie ld ) a re m o n th ly a v e ra g e s o f d a ily fig u r e s . Y ie ld s on r e c e n tly o f fe r e d

Over the first quarter as a whole, deposits at thrift institu­
tions continued to grow at a moderate pace (see Chart IV).
Combined deposits at savings and loan associations and
mutual savings banks advanced at a seasonally adjusted
annual rate of 816 percent, the same as the percentage
gain experienced in the preceding quarter. However, with
the sharp rise of market interest rates experienced in the
latter half of March and in April, deposit flows to thrift
institutions apparently weakened substantially in April.
There was some indication of this in the magnitude of de­
posit outflows experienced at New York State mutual sav­
ings banks in early April. The attraction of market rates to
individual savers was also illustrated by the expansion in
the noncompetitive tenders at the weekly Treasury bill
auctions. In the April 1 auction, the volume of noncom­
petitive tenders rose to its highest level since July 1970.
Thrift institutions maintained a relatively high volume
of borrowings during the first quarter. Net Federal Home
Loan Bank Board (FHLBB) advances to savings and
loan associations, for example, rose $100 million on aver­
age over the January-March interval from the average

A a a - r a te d u t ilit y a n d tw e n ty - y e a r ta x -e x e m p t b o n d s a re m o n th ly a v e r a g e s o f
w e e k ly fig u re s .
S o u rc e s :

B o a rd o f G o v e r n o rs o f th e F e d e ra l R ese rve System a n d The B o n d B u y e r.

apparently reasoned that some tightening of policy was
likely. The higher levels at which the Federal funds rate
traded in mid-March seemed to confirm these expectations,
and market rates increased substantially.
In contrast to the behavior of short-term interest rates,
yields on long-term bonds increased rather steadily
throughout the quarter (see Chart III). Rates on recently
offered corporate bonds— as measured by the Federal Re­
serve Board index— ended the first quarter 57 basis points
above their 1973 year-end levels, while rates in the munic­
ipal bond market— according to The Bond Buyer index of
twenty municipal bond yields— advanced 41 basis points
over the period. Since early 1973, corporate bond rates
have increased substantially, and by the end of March 1974
they were at the highest levels in over three years. By
comparison, rates on municipal bonds have not risen so
noticeably. One of the factors contributing to the divergent
behavior between corporate and municipal bond rates over
this period has been the sharp rise in the price level. This
has pushed individuals into higher marginal tax brackets,
thus making tax-exempt securities relatively more attrac­
tive.




GROW TH IN THRIFT INSTITUTION DEPOSITS
A N D M OR TGA GE LOANS
P e rc e n t

P e rc e n t

N o te : G r o w th in t h r i f t in s titu tio n d e p o s its a n d h o m e m o r tg a g e lo a n s a re
e x p re s s e d a t s e a s o n a lly a d ju s te d a n n u a l ra te s .
M u tu a l s a v in g s b a n k m o r tg a g e s fo r th e fir s t q u a r te r o f 19 74 a r e b a s e d on
J a n u a r y a n d F e b ru a r y d a ta .
S o u rc e s : F e d e r a l H o m e L o an B a n k B o a r d a n d N a tio n a l A s s o c ia tio n o f M u tu a l
S a v in g s B a n k s .

126

M ONTHLY REVIEW, MAY 1974

level sustained in the previous quarter, although borrow­
ings from other sources decreased somewhat. Savings and
loan associations seemed to be taking advantage of the rel­
atively low rate on FHLBB advances to pay down their
more costly indebtedness. On April 19, the FHLBB an­
nounced an increase in the ceiling rate that applies to ad­
vances to bring it in closer alignment with other interest
rates.
Thrift institutions increased their mortgage holdings
considerably over the first quarter, reflecting the heavy
volume of commitments made during the first half of 1973,
when housing demand was very strong. Thrift institution
commitments to make new mortgages, however, remained
at virtually the same level as in the final quarter of 1973.




After declining for five consecutive months, rates on mort­
gage commitments for conventional homes in the primary
market and insured new homes in the secondary market, as
measured by the United States Department of Housing and
Urban Development survey, edged upward in March by
5 and 12 basis points, respectively. The final March
Federal National Mortgage Association (FNMA) auction
of four-month commitments on insured mortgages pro­
vided additional evidence of firming in the mortgage mar­
ket. Moreover, the volume of offerings to FNMA in the
final March auction exploded to $1.2 billion, compared
with $351 million in the previous auction and an average
of $36 million offered in the auctions held in the past
five months.

FEDERAL RESERVE BANK OF NEW YORK

127

Th e M oney and Bond M arkets in April
Interest rates continued to move higher during April.
The firm stance of monetary policy, coupled with excep­
tionally rapid inflation and substantial credit demands,
exerted upward pressure on a broad spectrum of rates
and led to expectations that rates might climb even
further over the near term. In the money market, the rate
on four- to six-month commercial paper rose about 1Vi
percentage points, and the rate on bankers’ acceptances
also increased. The average effective rate on Federal funds
rose to 10.51 percent from its average of 9.35 percent in
March, and most commercial banks raised their prime
lending rates on loans to large business borrowers to a
record \ 0 V2 percent during the month. Early in May,
most major banks boosted their prime rates further in two
lA percentage point steps to 11 percent. In recognition
of the increases that had already occurred in other short­
term rates and in light of a recent rapid rise in money and
bank credit, the Board of Governors of the Federal Re­
serve System approved an increase in the discount rate
at seven Federal Reserve Banks, including New York.
Effective April 25, the rate at these banks rose to 8 per­
cent from its previous record high of IVi percent. By
April 30, all twelve Reserve Banks had established an 8
percent discount rate.
Bond yields also increased over the month in the face of
heavy corporate and municipal calendars and an approach­
ing Treasury refunding. In addition, since the latest eco­
nomic data showed no letup in inflation and no widespread
softening in the economy, hopes for a near-term easing
of monetary policy faded. Two statements by Federal
Reserve Board Chairman Burns emphasizing the System’s
determination to curb inflation by moderating the growth
of money and credit served to confirm this view. Over the
month, the yield on three- to five-year Treasury coupon
issues registered about a 50 basis point increase while the
increase in the yield on long-term Government issues was
somewhat smaller. Rates on Treasury bills were mixed dur­
ing much of April, but yields on all maturities rose sharply
in the final week. In the corporate market, yields on newly
issued Aaa-rated utility bonds climbed above 9 percent,
reaching their highest level since June 1970. By the end of




April, The Bond Buyer index of municipal bond yields
stood at its highest level since August 1971.
Preliminary data indicate that the seasonally adjusted
narrow money stock (M x) —private demand deposits ad­
justed plus currency outside commercial banks— grew at
a rapid rate in the four statement weeks ended April 24
following very large increases in both February and March.
However, the growth of time and savings deposits at com­
mercial banks, other than large negotiable certificates of
deposit (CDs), was more moderate, and the broad money
stock (M 2) —Mx plus consumer-type time and savings
deposits at commercial banks— rose less rapidly than M!
in April. Primarily as a result of a substantial increase in
CDs, the adjusted bank credit proxy, which includes de­
posits of member banks plus certain nondeposit liabilities,
rose sharply in the four-week period ended April 24. On
April 22, Chairman Burns announced that the Board of
Governors would begin to publish, together with the policy
record of the Federal Open Market Committee, the nu­
merical specifications that guide open market operations
in the period between Committee meetings. (The policy
record continues to be published with a three-month lag,
and hence publication of the numerical specifications in­
volves a similar lag.) The data cover specifications for M1}
M2, reserves available to support private nonbank deposits
(RPD ), and the Federal funds rate. Earlier records had
contained specifications only for RPD. In an accompany­
ing staff paper, it was pointed out that, while these
short-run specifications are guides in the conduct of
open market operations between Committee meetings,
they in turn are determined in the context of the
Committee’s longer run objectives for monetary aggre­
gates and credit conditions generally.
THE MONEY MARKET, BANK RESERVES, AND
THE MONETARY AGGREGATES

Rates on most money market instruments rose further
during April, as the firm stance of monetary policy
contributed upward pressure on most short-term interest
rates (see Chart I). The effective rate on Federal funds

128

MONTHLY REVIEW, MAY 1974

C h a rt I

SELECTED INTEREST RATES
F e b r u a r y - A p r il 1 9 7 4
M O N E Y M A R K E T RA TES

B O N D M A R K E T Y IE L D S

1974
N o te :

D a ta a r e s h o w n f o r b u s in e s s d a y s o n ly .

M O N E Y M A R K E T RATES Q U O T E D :

B id r a te s f o r th r e e - m o n t h E u ro d o lla r s in L o n d o n ; o f f e r in g

s t a n d a r d A a a - r a t e d b o n d o f a t le a s t tw e n ty y e a r s ’ m a t u r it y ; d a ily a v e r a g e s o f

r a te s ( q u o te d in te rm s o f r a te o f d is c o u n t) o n 9 0 - to 1 1 9 -d a y p r im e c o m m e r c ia l p a p e r

y ie ld s o n s e a s o n e d A a a - r a t e d c o r p o r a te b o n d s ,- d a ily a v e r a g e s o f y ie ld s o n lo n g ­

q u o t e d b y th r e e o f th e fiv e d e a l e r s t h a t r e p o r t t h e ir r a te s , o r th e m id p o in t o f th e r a n g e

te rm G o v e r n m e n t s e c u r itie s ( b o n d s d u e o r c a l la b le in te n y e a r s o r m o re ) a n d

q u o te d if no c o n s e n s u s

o n G o v e r n m e n t s e c u r itie s d u e in t h r e e to fiv e y e a r s , c o m p u te d o n th e b a s is o f

is a v a ila b l e ; th e e f f e c t iv e r a te o n F e d e r a l fu n d s (th e r a te m o s t

r e p r e s e n t a t iv e o f th e tr a n s a c t io n s e x e c u t e d ) ; c lo s in g b id r a te s ( q u o te d in te rm s o f r a te o f
d is c o u n t) o n n e w e s t o u t s t a n d in g t h r e e - m o n th T r e a s u r y b i l l s .
B O N D M A R K E T YIELD S Q U O T E D :

Y ie ld s o n n e w A a a - r a t e d p u b lic u t i l i t y b o n d s a r e b a s e d

o n p r ic e s a s k e d b y u n d e r w r it i n g s y n d ic a te s , a d ju s t e d to m a k e th e m e q u i v a le n t to a

climbed to an average of 10.51 percent in April, 116 basis
points higher than in March and 154 basis points above the
February level. Commercial paper rates registered increases
during the month ranging from 5/s to 1V2 percentage points,
while rates on bankers’ acceptances rose IV4 percentage
points. In line with the rise in other money market rates,
most major commercial banks raised their prime lending rate
for large business borrowers in several steps during April to
a record IOV2 percent, up from 9Va percent at the end of
March. As in the preceding two months, commercial banks
also increased their reliance on the discount window in
April. The average level of borrowings rose $333 million
during the month to $1,611 million (see Table I). Effec­
tive April 25, the Board of Governors of the Federal Re­




c lo s in g b id p r ic e s ; T h u r s d a y a v e r a g e s o f y ie ld s o n t w e n ty s e a s o n e d t w e n ty - y e a r
ta x - e x e m p t b o n d s ( c a r r y in g M o o d y 's r a tin g s o f A a a , A a , A , a n d B a a ).
S o u rc e s :

F e d e r a l R e s e rv e B a n k o f N e w Y o rk , B o a r d o f G o v e r n o r s o f th e F e d e r a l

R e s e rv e S y s te m , M o o d y 's In v e s to r s S e r v ic e , In c ., a n d T h e B o n d B u y e r .

serve System approved an increase in the discount rate at
seven of the Federal Reserve Banks, including New York,
from IV 2 percent to 8 percent. This was the first increase in
the discount rate since August 1973; the 8 percent rate
became uniform throughout the Federal Reserve System by
the end of the month.
According to preliminary data, M x continued to expand
rapidly in the four statement weeks of April. As a result,
seasonally adjusted daily average M 1 rose at a substantial
IOV2 percent annual rate in the four weeks ended April 24
relative to its average of the four weeks ended thirteen
weeks earlier (see Chart II). From its four-week average
of a year earlier, Mi grew a sizable 6.9 percent. The
growth of commercial bank time and savings deposits

129

FEDERAL RESERVE BAN K OF NEW YORK

other than large CDs was moderate in April, and the ad­
vance of M2 was less rapid than that of Mi. However,
growth of M2 in the four weeks ended April 24 relative to
its average of the four-week period ended a year earlier was
in excess of 9 percent.
Faced with heavy loan demand and rising rates on other
short-term instruments, commercial banks raised their
offering rates on large negotiable CDs and attracted a sub­
stantial volume of funds through this instrument in April.
At the end of the month, the secondary market rate on
CDs of three months’ maturity was 11.03 percent, a rise of
143 basis points over the period. Over the four statement
weeks in April, the volume of CDs outstanding increased
by about $7 billion. Primarily as a result of this large ex­
pansion in CDs, the adjusted bank credit proxy also rose
sharply over the four statement weeks in April. Relative
to its four-week average level in the period ended thirteen
weeks earlier, the proxy grew at a seasonally adjusted
annual rate of 14.4 percent in the four-week interval
ended April 24. The proxy advanced 10.2 percent from
its average level a year earlier.

Table I
FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, APRIL 1974
In millions of dollars; (+ ) denotes increase
and (—) decrease in excess reserves
Changes in daily averages—
week ended
Net
changes

Factors
A pril
10

! A pril
3

A pril
24

A pril
17

|
1
“ M arket” fa c to rs

Member bank required reserves

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

— 612

+

277

974

—

Operating transactions (subtotal)

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

+ 338

+

607

-

309

— 524

+

112

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

+

35

+

233

+

660

— 198

+

730

Treasury operations*

- f 435

+

505

+

SI

— 343

+

738

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

—

05

+

72

-

139

+ 170

+

38

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

—

23

-

494

-

787

— 158

— 1,402

and capital .......................................................

—

44

+

232

+

+

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

— 274

+

884

7S5

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

5

— 1,314

Other Federal Reserve liabilities
120

5

07

— 1,283

— 529

— 1,202

+

902

+ 158

+

830

+ 198

+

523

+

5

+

4

+ 147

+

171

D irect F ed eral Reserve cr ed it
tr a n sa c tio n s

Open market operations (subtotal)

...........

+ 495

Outright holdings:

THE GOVERNMENT SECURITIES MARKET

Yields on Treasury securities increased during April.
There was a cautious atmosphere prevailing in the coupon
market at the beginning of the month, as a result of the
relatively firm conditions in the money market and the an­
nouncement of a fairly sizable Federal agency offering.
Prices initially drifted lower in light activity, but then the
decline accelerated in response to several factors which
seemed to preclude any near-term easing of monetary
policy. The release of economic data revealed a further
rapid rise in wholesale prices and a slight decline in the
unemployment rate during March. In addition, Chairman
Burns stated that the Federal Reserve System was deter­
mined to permit only moderate growth of money and
credit in view of the high domestic rate of inflation. Prices
subsequently improved briefly, as participants became
hopeful that the 10 percent prime rate established by most
major commercial banks would reduce credit demands
and help to slow the upward spiral of interest rates.
Prices on Government notes and bonds resumed their
downtrend after midmonth in the face of only modest in­
vestor demand and rising costs of financing inventories.
An increasingly cautious tone developed as the month
progressed, in part because of the proximity of the May
Treasury refunding. Further statements by Chairman
Burns to the effect that the System was determined to
subdue inflation reinforced concern, since such a course
for monetary policy was seen as resulting in higher inter-




+ 157

+

2

+

100

Bankers’ acceptances ....................................

—

1

+

1

-

1

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

+

24

Treasury securities

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

Repurchase agreements:
Treasury securities

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

Bankers’ acceptances ...................................
Federal agencv obligations ........................
Member bank borrowings .................................

4 - 140
-f

so

+

S3

55 S +
131

-

— 247

+

15

32

+

70

+

57

—

90

+

91

+

G22

-

7

+

+

40

+

—

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

+

4

Other Federal Reserve a ssetst ......................

-f

50

+ 331

— 1,048

+

-

57

674

309

-

— 210

E xcess reserves:): .......................................................

+

164

15

+

60

+ 111

+

214

6

+

7

+

10

31

+

50

+

189

+1*615 ■ + 325

+

332

— 204

+ 1 ,2 2 3

+

21

Monthly
averages||

Daily average levels

M em b er b a n k :

Total reserves, including vault cash j . . . .

35,443

35,002

30,308

30,109

35,716

Hequired reserves .............

35,217

34,940

35,914

35,919

35,498

Excess reserves§ ...............

220

62

394

190

218

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

1.503

1,194

1,817

1,928

1,611

Seasonal borrowings!

48

Non borrowed reserves
Net carry-over, excess or deficit ( — )J . . .

105

41

47

54

48

33,808

34,491

34,181

34,105

143

38

173

115

Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
t Included in total member bank borrowings.
J Includes assets denom inated in foreign currencies.
§ Adjusted to include $58 m illion of certain reserve deficiencies on which penalties can
be waived for a transition period in connection with bank adaptation to Regulation J
as amended effective November 9, 1972. The adjustm ent am ounted to $07 million
from January 2 to March 27, 1974.
I! Average for four weeks ended April 24, 1974.
it Not reflected in data above

130

M ONTHLY REVIEW, MAY 1974

est rates and heavy borrowing by Federal agencies to Offered at par, these included $300 million of 8.30 per­
support housing. Over the month as a whole, yields on cent fifteen-month bonds, $400 million of 8.25 percent
securities maturing within five years were generally 40 two-year bonds, and $565 million of 8.25 percent threeto 88 basis points higher, while those on most longer year bonds. Demand for the two shorter maturities was
good, but there was less enthusiasm for the three-year
term issues rose 5 to 59 basis points.
After the close of business on May 1, the Treasury an­ bonds. Around the middle of April, the two other major
nounced the terms of its refinancing of the $5.6 billion of farm credit agencies marketed new issues which en­
publicly held securities which mature May 15. The Trea­ countered mixed receptions. Specifically, the Banks for
sury will provide funds for retiring some $4.1 billion of Cooperatives offered $211.7 million of six-month 8.65
the maturing notes and bonds by auctioning three issues to percent bonds which sold quite well. The initial response
the public. These consist of up to $2 billion of 25 Vi -month was somewhat less favorable to $674 million of 8.80 per­
notes, up to $1% billion of 4 V^-year notes, and up to cent nine-month bonds offered by the Federal Intermediate
$300 million of 25-year bonds. The coupon rate on the Credit Banks.
notes was set at 8 3A percent, while the rate on the bonds
was placed at 8 V2 percent. The Treasury will use available
THE OTHER SECURITIES MARKETS
cash to handle the balance of the maturing issues.
Yields on corporate and municipal bonds rose substan­
Rates on Treasury bills also rose early in April. In­
vestor demand was light, and the market reacted un­ tially during the first two weeks of April, as both markets
favorably to news of underlying strength in the economy were confronted with the largest calendars in recent
and burgeoning growth in money and credit. A limited
supply of bills in the six-month maturity range resulted
in strong bidding for such bills in the first two weekly
auctions of the month, however (see Table II). Rates sub­
sequently fluctuated in a narrow range until shortly after
CHANGES IN M O N ETARY A N D CREDIT AGGREGATES
midmonth. Substantial demand, particularly for shorter
term bills, emerged when a sizable volume of Treasury
tax anticipation bills matured on April 19, and a sharp
drop in rates ensued. However, following the increase in
the discount rate on April 25, bill rates began moving
higher. Rates continued rising over the remainder of the
month in response to lackluster demand and concern on
the part of some participants that the Treasury would
offer additional bills either as part of the May refunding
or shortly after the conclusion of that operation. For the
month as a whole, bill rates rose 25 to 70 basis points.
On April 23, the Treasury announced that, beginning
0 M i l __L I 1 J 1
with the regular weekly auction the following Monday,
the Federal Reserve System may exchange the maturing
bills it holds for System and official customer accounts for
new issues at the average issuing price rather than having
to bid competitively for the bills. The amount of maturing
bills held in such accounts and eligible for exchange on a
noncompetitive basis will also be disclosed each week in
the regular auction announcements. On May 1, the Trea­
sury announced that from May 16 through June 13 it will
increase the amount of the regular weekly offering of Trea­
sury bills by $200 million each week.
Yields on Federal agency issues moved higher in April,
in concert with yields in the Treasury coupon and cor­
porate bond markets. Early in the period, the Federal
Land Banks issued three bonds totaling about $1.3 billion.




C h a r t II

S e a s o n a lly a d ju s t e d a n n u a l r a te s

F ro m 5 2

5 ~

w e e k s e a r lie r

Note-.

G r o w t h rates a r e c o m p u t e d on t he b as i s of f o u r - w e e k a v e r a g e s of d a i l y

f i g u r e s for p e r i o d s e n d e d in t he st a te me nt w e e k p l o t t e d , 13 w e ek s ea rl i er,

a n d 5 2 w e e k s e a r li e r. The la te st s t a te m en t w e e k p l o t t e d is A p r i l 24, 1974.

M l = C ur re nc y plus a d j u s t e d d e m a n d d ep o si ts h el d by the public.

M 2 = M l p lu s c o mm e r ci a l b a n k sa vi ngs a n d t ime d e p o s i t s h e l d by the public,

less n e g o t i a b l e c e rt i f i c a t e s of d e p o s i t issued in d e n o m i n a t i o n s of $ 1 0 0 , 0 0 0
or mo re .

A d j us te d b a n k c r ed i t p r o x y = T ot al m e m b e r b a n k d ep os it s subject to r eserve
r e q u i r e m e n t s plus n o nd e p o s i t sources of f unds, such as E u r o - d o l l a r

b o r r o wi n g s a n d the p r o ce e ds o f c o m m e r c i a l p a p e r issued by b a n k h ol di ng
c o m p a n i e s or o t h e r aff il ia tes .

So urc e:

B o a r d of G o v e r n o r s of the F ed e ra l R es erv e Sy st em.

131

FEDERAL RESERVE BANK OF NEW YORK

months. Investor response to the higher rate levels was
generally favorable, particularly in the tax-exempt sector,
and the markets steadied somewhat until the final week of
the period when prices weakened again. On April 25 the
Federal Reserve Board’s series on recently offered Aaarated utility bond yields reached 9.08 percent, its highest
level since June 1970, and The Bond Buyer index of
twenty municipal bond yields climbed to a 2 % -year high
of 5.82 percent.
As the month began, investors showed little interest in
the first large corporate offering, $100 million of Bell
System debentures. Despite the fact that this Aaa-rated
issue maturing in thirty-five years carried a yield of 8.65
percent, the bonds sold slowly and, when freed from syn­
dicate price restrictions, the yield adjusted upward by some
10 basis points. A much more enthusiastic reception was
afforded to the next large taxable issue, $150 million of
A-rated debentures. This issue was priced to yield 9.20
percent in thirty years and also had a provision for de­
ferred payment for large investors and an unusually long
call protection period. Shortly after this issue was sold,
investors evidenced some indifference to an Aa-rated util­
ity company offering yielding 9 percent. However, the fol­
lowing day, in the wake of the successful sales of several
new issues which were very attractively priced, additional
demand developed for these thirty-year utility bonds, and
they also moved well.
The tone in the corporate bond market remained good
following the Easter weekend, and three large issues total­
ing $300 million were first-day sellouts. These included
$100 million of debentures of one of the few industrial
corporations with an Aaa rating; the debentures provide
a yield of 8.44 percent in thirty years. In addition, $125
million of Aa-rated industrial bonds yielding 8.57 percent
in twenty-five years sold quickly, as did $75 million of
Aa-rated utility bonds paying 8.90 percent in thirty years.
Several large corporate issues were marketed during the
last week in April and encountered favorable receptions.
The largest of these— $300 million of Aaa-rated industrial
bonds— was priced to yield 8Vi percent in thirty years, an
exceptionally high return for such an issue.
There was good demand for most of the new tax-exempt
issues which were marketed during April. Yields on the




Table II
AVERAGE ISSUING RATES
AT REGULAR TREASURY BILL AUCTIONS*
In percent
!
Maturity

I
j

T h r e e -m o n th ............................................ j
Six-m onth .................................................I

Weekly auction dates— April 1974

1

April
S

April
12

April
22

April
29

8.358
8.211

8.648
8.393

8.051
8.084

7.857
7.995

8.909
8.796

April

Monthly auction dates— February-April 1974
February
6
two w<? e k s ......................

1

March
6

April
3

6.897

7.886

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

first two large offerings of the month were some 20 to 35
basis points higher than on preceding comparable issues,
and investors responded well. On April 10, New York
City sold a $436.6 million issue, reportedly the largest
offering ever marketed by a local government. The bonds
attracted sizable interest, particularly from small investors.
The average cost to the city of 6.18 percent was 1 per­
centage point higher than at its previous sale in January.
The A-rated bonds, which are exempt from New York
City, New York State, and Federal taxes, were successfully
marketed at yields ranging from 5.5 percent in 1975 to 6.5
percent in 2003-14. Their warm reception buoyed the
market generally, and several large issues sold well the fol­
lowing week. One of these was a $110 million offering of
Aaa-rated tax-exempt securities scaled to return about
25 basis points less than a comparable issue sold eight days
earlier. Over the remainder of the period, however, rates
on municipal bonds resumed their rise and closed the month
some 25 basis points higher, on balance. The Blue List of
dealer inventories fell $183 million to a level of $474 mil­
lion in April.