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FEDERAL RESERVE BANK OF NEW YORK

243

On Fed Watching
By R ic h a r d A . D e b s
First Vice President, Federal Reserve Bank of New York
A n address before the Bond Club of Buffalo,
Buffalo, New York, on September 12,1 9 7 4

Over the years, participants in the financial markets
have avidly sought the touchstone of Federal Reserve
policy: some single, simple, and instant financial indicator
that could serve as an unfailing guide to the course of
monetary policy in general, and interest rates in particular.
In the 1960’s, the markets looked to the Fed’s figures
on net free or net borrowed reserves of commercial banks
as the crucial indicator. It took some time before there
was an understanding that changes in this measure, though
important, could not be relied upon exclusively as the one
unerring guide to monetary policy movements.
In the early years of the 1970’s, the market shifted
attention to the money supply, especially after the Federal
Reserve made it clear that greater emphasis would be
placed on the monetary aggregates as targets of policy.
When the System announced in 1972 that it would experi­
ment with the use of “reserves against private deposits”,
or “R PD ” , to guide open market operations, market ob­
servers found themselves a new favored indicator. And
during all of these years, one or another interest rate came
into— or receded from— popularity as the special key to
credit conditions or Fed policy.
Fed watchers have been particularly interested in m ea­
sures whose daily or weekly changes might yield fresh evi­
dence on a continuing basis. Indeed, as the markets came
under increasing strain this year, the search for clues be­
came more intense— and more uncritical. During the sum­
mer, for example, the market became highly sensitive to
the weekly business loan figures of New York banks re­
ported by the Federal Reserve Bank of New York each
Thursday.
During June the New York banks registered four
straight large increases in commercial and industrial loans,
the last of which was over $1 billion. In the following
week, when any further substantial increase in loans might




well have been grounds for stock market pessimism, a
small gain— because it was small— was viewed so opti­
mistically by the market that it was credited, in large part,
with sending the Dow Jones up nearly 30 points. It might
be useful to look more closely at this recent experience;
in a sense it underscores the hazards that can befall Fed
watchers.
Commercial and industrial loan demand during the first
half of 1974 increased substantially, but by June it had
slowed somewhat from the growth earlier in the year. At
the same time, there was a more than proportionate in­
crease in such loans at New York banks. In the first four
months of 1974, almost 30 percent of the nationwide in­
crease in commercial and industrial loans at large com­
mercial banks occurred at the twelve weekly reporting
New York banks, the balance in regional banks. From the
end of April until July, there was a shift away from the
regional banks to New York and Chicago banks— a shift
that may have reflected uncertainties that had developed
in the CD market in late spring and early summer, leading
investors to seek top-quality instruments from the large
money-center banks. New Y ork’s share of business loans
sharply increased to 60 percent of the total. W hat the
market did was to draw misleading conclusions by focus­
ing on what New York banks were doing, and assuming
that what happened in New York was happening nation­
wide.
The Fed has indeed been concerned with the rapid
growth of business and other lending in 1974, but was
well aware of the structural shift in lending away from
regional banks to New York and Chicago. It was also
cognizant that much of the lending represented a switch
of borrowers from the commercial paper and bond m ar­
kets to the banks, and some short-term financing of “petro”
payments by oil companies. In other words, the behavior

244

MONTHLY REVIEW, OCTOBER 1974

of business loans represented some special factors super­
imposed on the reactions of borrowers as they came under
increasing monetary restraint. We did not expect— and did
not seek— signs of policy success in a three- or four-week
period; and we certainly would not reconsider a policy
posture on the basis of one week, or one month even, of
comprehensive data, to say nothing of a single indicator
for a single week. If one is going to focus on business
loans (and I am not counseling that this be done to the
exclusion of other factors) a Fed watcher would much
better serve his interest if he focused more carefully on
the Federal Reserve’s weekly report covering the 330
large commercial banks around the country, which ac­
count for over 70 percent of all business loans. Even
though these figures are reported one week later than those
of New York, their comprehensive coverage makes them
a superior indicator of trends in business lending than the
New York figures.
Clearly, the market has often misread the System’s re­
sponse to unfolding developments and often has over­
reacted to its own convictions. The Federal Reserve re­
sponse is, of course, dictated by its public responsibility
for monetary policy and for helping to promote a healthy
economy. If Fed watching is to be successful from your
point of view, you should have a good understanding of
our motives and methods, and of the linkage between
central bank actions and the credit markets. Let me, then,
turn to what the Federal Reserve does respond to, and
how it responds, as it carries out monetary policy.
As you undoubtedly know, the Federal Reserve Bank
of New York carries out on behalf of the System the
directives issued monthly by the Federal Open Market
Committee (F O M C ), the key policy-making group in the
System. The Committee, chaired by Arthur Burns, is com­
posed of the seven Governors of the Federal Reserve Board
and five Reserve Bank presidents, four of whom serve for
only one year and then rotate with the other Reserve Bank
presidents. Alfred Hayes, President of the New York Re­
serve Bank, is Vice Chairman and a permanent member.
As First Vice President of the New York Fed, I serve as
an alternate member. Alan Holmes, Senior Vice President
of the New York Fed, is the M anager of the System Open
M arket Account and runs the Trading Desk at the New
York Bank.
The FOM C sets goals for monetary and bank credit
conditions a number of months ahead and indicates how
the Trading Desk should respond to new information on
such conditions in the period between meetings. Typically,
the FOM C specifies its monetary aggregate targets as
ranges of tolerance covering rates of growth for a twomonth period. These ranges of tolerance are selected to be




consistent with longer run financial objectives expressed
as growth rates for a period of six months or so. The Com­
mittee also specifies a range for the Federal funds rate
(the day-to-day interest cost of reserves borrowed by
banks from each other) until the next meeting.
The two-month targets and guidelines decided at each
FOMC meeting are published, together with the general
policy directive to the New York Federal Reserve Bank,
with a three-month lag. Despite the lag, every serious Fed
watcher reads these records carefully because they pro­
vide insight into how the FOM C views the economy and
clues to how the Committee may respond to economic
developments.
Greater emphasis has been placed in recent years by
the Committee on the monetary aggregates— principally
M 1? which is currency and demand deposits in public
hands. Nevertheless, the Federal Reserve continues to be
vitally interested in how interest rates and credit markets
behave, especially when coping with domestic and inter­
national financial difficulties.
The central bank cannot hit the monetary aggregate
targets directly. The direct influence we have is on the cost
and availability of bank reserves to commercial banks.
Through purchases and sales of securities in the open
market, the Federal Reserve can add to or subtract from
the level of bank reserves, and thus the base supporting
member bank deposits which constitute the major portion
of M l and the other monetary aggregates.
However, even while pursuing longer run policy targets,
the System must also cope with strong and often unpredict­
able short-run influences on reserves. These include Fed­
eral Reserve credit advanced in the check collection
process, called “float”, currency in circulation, and the
Treasury balance at the Federal Reserve, all of which can
vary substantially from week to week. And because of
changes in these market factors, the underlying trend of
financial developments may be obscured in the short run.
Another problem for the Account Manager is that the
information on credit outstanding and money supply at
nonmember banks is not as comprehensive or as timely as
it should be.
In order to implement the FO M C ’s instructions on a
day-to-day basis, the Trading Desk at the Federal Reserve
Bank of New York provides reserves which will keep the
Federal funds rate, member bank borrowings, and net
borrowed reserves within general objectives. Over the in­
terval of several weeks between meetings of the Federal
Open M arket Committee, new data each week on reserve
and money aggregates permit new estimates to be made
of monthly growth rates. These are compared with the
ranges set by the Committee. If we are coming out within

FEDERAL RESERVE BANK OF NEW YORK

the desired ranges, then there is no reason to change the
day-to-day reserve conditions that we had been aiming for
previously. But if the estimated growth rates in the ag­
gregates push up to, or beyond, the outer limits set by the
Committee, then the Desk will make some adjustments
in its attitude toward reserve provision. Typically, the
Desk will provide nonborrowed reserves grudgingly if the
reserve and money aggregates are growing more rapidly
than desired, or more willingly if the aggregates are grow­
ing too slowly. The Desk effectively monitors any such
short-term adjustments by shading the funds rates, bank
borrowings, and net borrowed reserve measures. These
adjustments are not entirely mechanical, however, and
can be and have been modified by interim Committee
reviews between regular meetings of the Committee.
Thus, sophisticated market observers have watched
carefully the growth rates of the reserve and money sup­
ply aggregates, the Desk’s management of the Federal
funds rates, the level of member bank borrowings, and
net borrowed positions. An increase in money growth
above longer term trends has been interpreted as a har­
binger of even higher interest rates. In the first place,
careful observers have understood that a rapid growth
of money and credit implies inflation; in such circum­
stances, lenders demand and get higher interest rates—
the so-called inflationary premium— in order to protect
themselves against having to lend expensive dollars and
be repaid in cheap ones. Second, as the Fed has adopted
a more resolute stance against inflation, an increase in
money growth over an extended period, above what was
deemed to be the money supply target, has also raised the
expectation that the Federal Reserve would act to offset
such growth, inducing— at least in the short run— a rise
in interest rates. In such circumstances, astute observers
have looked for a rise in the Federal funds rate as one sign
confirming that the FOM C has directed the Desk to man­
age bank reserves more strictly.
The day-to-day management of bank reserves must take
into account that there is a long and variable lag from
policy actions on bank reserves to the monetary aggre­
gates. While the Federal Reserve can directly control the
reserve base with some accuracy, it cannot exert direct
control over the use of reserves by banks and the public’s
preferences for different types of deposits. Thus when
banks vary the amount of their excess reserves, or the
public shifts its deposit preferences in response to such
things as the interest rate structure or transactions needs,
the money supply can be subject to considerable vari­
ation on a week-to-week, month-to-month, and even
quarter-to-quarter basis.
Because the demand for money can be highly volatile




245

in the short run, it is neither desirable nor possible to plot
a predetermined short-term course for money supply
growth. For if we did try to control rigidly the growth of
the reserve base— say on a week-to-week or even a
month-to-month basis— shifting demand for money would
produce excessive interest rate fluctuations which would
have highly destabilizing effects on financial markets.
In addition, short-run fluctuations in the money supply
have little or no significant impact on the economy. Fluc­
tuations within a half-year period seem to have little or
no discernible effect, and our research suggests that, even
if Mi growth somewhat overshot the desired growth path
for as long as six months, the ultimate economic effects
would be minor if money growth during the following six
months slowed enough to compensate.
These factors suggest the appropriateness of a longer
time frame for the execution of Federal Reserve policy.
In some ways, the nation’s economy can be viewed as a
giant ocean liner and its policy instruments as the con­
trols. The controls are set broadly to bring the ship to its
destination, and though there may be adjustments for cur­
rents or storms, the course is not changed from hour to
hour. Nor is any captain foolish enough to think that he
can turn the ship around sharply, as if it were a speedboat.
The credit and stock markets, by contrast, change their
courses frequently. The day-to-day volatility of interest
rates and share prices reflect primarily the volatility of the
markets’ expectations about profits, interest rates, and the
prices of the securities themselves. At times as monetary
policy is perceived as leaning toward a different posture—
let us say toward ease— the markets may respond, some­
times with great exaggeration. M arket participants, per­
haps misreading a shading of policy for a major shift, rush
to capitalize on what they fear may be only a fleeting
opportunity for profit. The initial rise in prices may stim­
ulate bullish expectations on the part of market bystanders
who join in, reinforcing the buying pressure. Lord Keynes
has pungently described the psychology of the financial
speculator as one “who tries to guess better than the crowd
how the crowd will behave” .
Thus, I warn you to be careful not to read Fed inten­
tions into short-run changes in securities prices and inter­
est rates; you may be staring into the m irror of your own
expectations. Even in the Fed funds and Treasury bill
markets, in which the Federal Reserve does indeed have
substantial influence, the volatile expectations of partici­
pants at times play a substantial role in determining the
level of rates.
Against this background, it might be useful to turn for
a few minutes to the current economic situation.
Needless to say, the most overriding factor in today’s

246

MONTHLY REVIEW, OCTOBER 1974

economic environment is inflation. Indeed, inflation isn’t
limited to our shores, it’s worldwide. In the past year,
United States consumer prices have risen nearly 12 percent. The take-home pay of the typical worker has declined
over 5 percent in real terms during the same period. And
wholesale prices have gone up over 20 percent.
A major reason for its current virulence was the dove­
tailing of very high levels of demand among the major
industrial nations during 1972 and 1973, especially for
industrial materials.
The decline in the value of the dollar in foreign ex­
change markets made our own situation acute because
the prices we pay for imported materials, as well as for
finished goods, rose. And a cheaper dollar made our ex­
ports increase sharply, which put further pressure on our
already strained industrial capacity.
Aggravating the price structure were worldwide short­
falls in agricultural production in 1972, which caused
food prices to rise in 1973. In addition, since last fall
there has been the staggering rise in the price of all petro­
leum products, as oil-producing countries restricted their
shipments and boosted prices. And last spring, many
wages and prices rose as direct controls were phased out.
More recently, there has been a further upward push in
agricultural prices due to drought conditions in our Mid­
west.
I don’t have to tell this group about what inflation has
done to financial markets. Interest rates have increased
sharply in 1974 and some firms have had difficulty raising
funds— to put it mildly. The equity markets have been
buffeted, with stock prices reaching a twelve-year low.
And high market rates caused net deposit outflows from
thrift institutions, with the result that residential building
starts are now averaging more than one-third below what
they were last year.
The distorting effects of inflation have complicated
business-investment decision making, as profit figures have
not reflected the fact that inventories and plant and equip­
ment must be replenished at substantially higher cost.
Consumer reaction to inflation has manifested itself in
lowered confidence and, in turn, in sluggish spending. The
result has been a diminution of overall economic activity,
although there are still shortages in key areas such as steel,
aluminum, fertilizers, and other petrochemicals.
The gross national product (G N P) in real terms de­
clined in the first half of this year. This decline cannot be
attributed entirely to a weakening in demand. There were
supply and technical factors at work as well.
In the first quarter, the energy shortage acted as a drag
on GNP. And the change in real GNP in the second
quarter would have been positive, instead of negative,




had it not been for the partial take-over of Aramco by the
Saudis. The resultant decline in Aramco’s profits is re­
corded as a decline in net exports and thus a decline in
GNP.
Economic activity in the third quarter is sluggish, judg­
ing from the evidence. For example, industrial production,
a broad-gauge indicator, has stayed about unchanged in
recent months.
Yet, despite the slackening of real economic activity,
the number one problem facing us today is inflation, not
unemployment. Fortunately, the level of unemployment so
far has not risen significantly.
The Federal Reserve has had to bear the brunt of the
battle against inflation. Unfortunately, the Federal budget
remains in deficit. The nine-year inflation we have under­
gone can in no small measure be ascribed to a highly ex­
pansive fiscal policy, which occurred during a period when
the economy’s resources were being used rather intensively.
And I have to add that monetary policy was by no means
faultless during this period.
Last fiscal year’s $3.5 billion deficit seemed modest. But
if the spending of Government-sponsored agencies and
other outlays that did not show up in the regular budget
were included, that deficit was over $20 billion, exactly
the opposite of what was fiscally required. Needless to
say, the budget for fiscal 1975, with an expected deficit
of over $11 billion, is unsatisfactory. President Ford’s
dedication to greater fiscal discipline is most welcome
news, as was his initiative in organizing and participating
in a series of conferences focusing on inflation. It is heart­
ening to see a spreading conviction on the part of the
American public that the taming of inflation is an objec­
tive of the highest priority, that requires a determined
commitment by us all.
In addition to fiscal restraint, there will have to be, of
course, a sustained period of monetary restraint to reduce
inflationary pressure and wring out inflationary expec­
tations. Such a policy will contribute to a slowing in the
rate of economic growth for a while and undoubtedly
cause some hardships, such as rising unemployment, a
weak housing sector, and continued pressures in financial
markets. In the interest of social equity, we cannot let any
one group or economic sector suffer disproportionately in
the anti-inflationary battle. F or example, it would be de­
sirable, as Chairman Burns has suggested, to be prepared
to limit the extent of unemployment by establishing a
Government program of public-service employment should
the unemployment rate rise above 6 percent.
With respect to financial pressures, the Federal Reserve
is keenly aware of its responsibilities as lender of last
resort. We are prepared to meet those responsibilities as

FEDERAL RESERVE BANK OF NEW YORK

we have done in the past, whether difficulties arise in the
banking system, as they did this year in the case of F rank­
lin National Bank, or in the commercial paper market, as
in 1970. Also, as you may know, the Fed has the author­
ity to lend directly to institutions other than banks, in­
cluding thrift institutions, and for a number of years has
had contingency arrangements for supporting member
banks which might extend credit to a thrift institution
suffering unusual liquidity pressures.
At the present time, other financial intermediaries serv­
ing real estate markets, as well as corporations— such as
utilities— heavily dependent on capital market financing,
have also come under great pressure. In the present period,
for example, the cash flow of utilities has been squeezed be­
tween rising costs, especially for fuel, and controlled prices.
We in the System have been very much concerned with
the effects of these liquidity strains, and have kept our­
selves closely informed of developing problems. In partic­
ular, we have been in close touch with the banking com­
munity regarding potential problem areas. In this con­
nection, I might say that the commercial banking system
has been fulfilling its responsibilities in these circum­
stances, and has been extending credit to firms subject to
such liquidity strains, particularly in those cases where the
failure to obtain the necessary financing could have ad­
verse repercussions in the financial markets. In this respect,
the banking system has been playing an important role in
helping to avert potentially serious problems in the finan­
cial sector of the economy.
In general, I believe that a course of fiscal and monetary
restraint is the necessary precondition to achieving price
stability. Such policies, however, are not sufficient in them ­
selves in our present circumstances. They would be aided,
for example, if we could eliminate institutional rigidities,
some of which have been built in by government, that
shackle competitive price and wage determination. R e­
examination of antitrust laws and building codes to en­
courage more competition, and the modification of mini­




247

mum wage laws as they affect teen-agers are a few
examples that come to mind.
Restraint by business and labor in setting prices and
bargaining for wages would also help importantly. While
wage and price controls would be counterproductive, it
would be useful to reestablish guideposts, to give publicity
to fair standards, that might help end the self-defeating
alternation of wages-pushing-prices-pushing-wages.
I
know the markets would welcome some masterstroke
of policy, and each statement by a policy m aker that fails
to suggest a fresh new initiative has been met with visible
disappointment. However, it is unrealistic to expect a rapid
resolution of a problem that has been rooted so deeply for
so long.
A protracted period of moderate fiscal and monetary
restraint should not be considered bearish for the credit
and equity markets. As I suggested earlier, one of the
major factors contributing to high interest rates is the ex­
pectation that inflation will continue. Once the markets
are convinced of the long-range commitment of policy
makers to responsible restraint, and once the markets see
hard evidence of fiscal resolve to support monetary policy,
inflationary expectations should recede and set the stage
for a decline in interest rates and the recovery of financial
markets. I might add that, while realities of the 1975
Federal budget may well preclude large spending cuts,
expectations in the markets should respond favorably even
to moderate reductions if they testify to the dedication of
the Congress and the Administration.
The abatement of inflationary expectations would be
most welcome— not only for this group as participants in
the business and financial community, but for us all, and
our families, as citizens. It would mark meaningful prog­
ress in our long struggle to arrest what is now recognized
as public enemy num ber one— a deeply entrenched and
recalcitrant inflation which, if not brought under control,
can cause serious damage to the fabric of our society. L et’s
hope that we will see such progress over the coming year.

248

MONTHLY REVIEW, OCTOBER 1974

The Business Situation
The latest business statistics indicate little change in
the recent lackluster pace of economic activity. In Sep­
tember, domestic automobile sales declined, as the
August spurt attributed to consumers’ attempts to avoid
the announced higher prices on 1975 models apparently
ended. Also in September, the labor m arket weakened
as the unemployment rate rose from 5.4 percent to 5.8
percent. In August, the dollar value of new orders at
durable goods manufacturers rose sharply, and manufac­
turers’ shipments and inventories continued to advance.
Industrial production declined that month, however, and
nonauto retail sales were unchanged. Construction con­
tinued depressed as housing starts and permits fell further.
The most recent price statistics confirm a continuation
of steep inflation. Moreover, a widespread feeling that a
rollback in oil prices has become increasingly unlikely has
been a source of additional concern. Wholesale prices
exploded in August, and consumer prices posted their
largest increase in a year. The pervasiveness of inflation
was evident in price advances in all sectors of economic
activity. The prices of services, foods, and nonfood com­
modities skyrocketed. Furthermore, concern over frost
damage to the already weather-beaten Midwest corn and
soybean crops has reversed the recent declines in spot
prices of agricultural commodities.
INDUSTRIAL PRODUCTION AND
WORK S TOPPAGES

The Federal Reserve B oard’s index of industrial pro­
duction fell at a seasonally adjusted annual rate of 4.8
percent in August. This was the sharpest decline in indus­
trial output since last winter’s energy-related contraction,
leaving output 1 percent below the level of a year earlier.
Although the size of the August decline was magnified by
labor disputes in numerous industries, the pervasive slug­
gishness of economic activity suggested that production
would have edged downward even in the absence of these
disputes. Production of defense and space equipment, con­
struction materials, and durable consumer goods all fell,
in addition to the strike-related cutbacks in the production




of business equipment, coal, and iron mining. The housing
slump no doubt accounts for the decline in the output of
construction materials. Also, since the reduction in con­
sumer durable goods production was centered in house­
hold appliances and furniture, it too may reflect the de­
pressed state of housing activity. As fewer new housing
units are completed, correspondingly fewer new appliances
are needed. In contrast to most major market groups, pro­
duction of nondurable consumer goods and materials rose
in August.
Despite the relative calm in most major collective bar­
gaining negotiations, the number of work stoppages and
working time lost from labor disputes have jumped since
the end of wage controls in April. Thus, it appears that
the attempts by unions to recoup lost purchasing power
through wage increases and cost-of-living protection may
be meeting stiff management resistance at smaller con­
cerns. In the four months since wages were decontrolled in
April, the number of stoppages have spurted sharply, aver­
aging more than 660, compared with the 425 stoppages
averaged in the first four months of 1974. In August, how­
ever, labor disputes moderated, declining to 540 from over
700 in July (see Chart I). The percentage of total working
time lost by employees directly involved in these stoppages
fell to 0.34 percent in August from the three-year high of
0.46 percent reached in June and July. This measure,
which allows for the growth of the labor force, neglects
the indirect or secondary effects on other establishments or
industries where employees are idle as a result of material
or service shortages. Despite this recent decline in strike
activity, it is likely these strikes may have had greater
direct impact on industrial production, as it appears that
these disputes have shifted from construction to the man­
ufacturing sector.
Nevertheless, the bulk of this year’s heavy calendar of
major collective bargaining agreements (defined by the
Bureau of Labor Statistics as agreements covering 1,000
workers or more) that expire or contain wage reopening
provisions have been peacefully settled. M ajor accords
have been reached in the steel, telephone, aluminum, and
can industries, with few or no labor-management disputes.

FEDERAL RESERVE BANK OF NEW YORK

Chart I

W O R K STOPPA GES A N D TIME LOST RESULTING
F R O M L A B O R - M A N A G E M E N T DISPUTES
H u n d re d s

H u n dre d s

S o u rc e : U n ite d S t a t e s D e p a rtm e n t o f L a b o r, B u re a u o f L a b o r Statistics.

Even the volatile construction industry has had only rela­
tively minor labor stoppages. However, one major industry
settlement that could bear heavily on economic activity—
coal— has not yet come up for renegotiation. Coal is an
im portant energy source for the steel and electric utility
industries. Indeed, it accounts for almost half of all the
electricity produced in the United States. Coupled with
the prospective shortages of natural gas this winter, a sus­
tained nationwide strike by the United Mine Workers in
November could have a seriously deleterious impact on
the economy. Utilities’ inventories of coal, which were
already low in July, have been reduced further by August’s
“memorial” work stoppages. A t least one major utility,
the Tennessee Valley Authority, has already requested its
users to reduce voluntarily electricity consumption in an
attem pt to maintain its dwindling stock of coal.
R E TA IL S A L E S , NEW O R D E R S , AN D IN V E NT O RIE S

According to the advance report, retail sales in August
rose at a 6.8 percent annual rate. However, the bulk of
this increase was the result of the continued improvement




249

in sales of new domestic automobiles, which in large part
probably reflected the attempt by consumers to avoid the
announced higher prices on the forthcoming 1975 models.
Sales of nondurable goods rose in August but, excluding the
automotive sector, durable goods sales slipped slightly.
In September, sales of new cars weakened, although they
remained ahead of the pace of early summer. New car
inventories are down sharply from the peaks recorded in
the gasoline-short winter months.
Allowing for the impact of surging prices, both durable
and nondurable retail sales have shown little improvement
in recent months, after recovering from last winter’s lows.
Slackening retail sales to some extent reflect the continued
deterioration in real personal income that has character­
ized the twelve-month period ended in August. The most
recent survey of consumer sentiment and spending plans
suggests that little improvement is in the offing for real
retail sales. The Conference Board’s index of consumer
confidence in August was close to a four-year low.
New orders received by durable goods manufacturers
rose $1.73 billion, or 3.6 percent, in August. A sharp
spurt in defense equipment orders, especially for aircraft,
and a pickup in primary metals orders accounted for all
of the advance. Excluding the defense sector, new orders
registered a slight decline in August. Although new orders
have risen almost continuously in 1974, these data are
expressed in nominal terms and thus reflect the rapid rate
of inflation. Allowing for the effect of higher wholesale
prices of manufacturers’ durable goods, it appears that
the physical volume of new orders has advanced only
slightly in the past few months.
As measured by their book value, manufacturers’ inven­
tories rose by $31 billion at an annual rate in August, the
fourth consecutive month that the rate of inventory accu­
mulation equaled or exceeded $30 billion. The August
growth in manufacturers’ shipments equaled that of inven­
tories, leaving the inventory-sales ratio unchanged at 1.63
months of shipments. This apparent stability in the
inventory-sales ratio, however, tends to disguise real
accumulation since the value of sales reflects the rapid rate
of inflation more fully than the book value of inventories.
Despite this limitation, these inventory-sales ratios can
indicate relative accumulation in particular sectors. Exami­
nation of these ratios by market groups indicates marked
accumulation in the household durable and capital goods
industries, where inventories have jumped over the past
few months even though shipments have declined. Unlike
recent months, in which finished goods accounted for a
rising portion of the buildup in manufacturers’ inventories,
more than 80 percent of the August increase was in inven­
tories of materials and supplies and work in process. A t

250

MONTHLY REVIEW, OCTOBER 1974

the trade level, inventories at both wholesale and retail
rose sharply in July, with nondurables inventories
accounting for the bulk of the increase.
CONSTRUCTION

Residential construction activity deteriorated further in
August, as mortgage market conditions became even
more stringent. Housing starts dropped to an annual rate
of 1.13 million units in August, down 44 percent from a
year earlier and the lowest level in more than four years.
While single-family starts were 26 percent below the level
of a year ago, multifamily starts, which have been espe­
cially hard hit, stood at a seven-year low of 302,000 units
in August. Building permits fell 10 percent in August to
an annual rate of 912,000, the first time since early 1967
that newly issued permits have fallen below the million
mark. Sales of single-family homes fell 15 percent at an
annual rate in July to a level of 518,000 units. The inven­
tory of unsold homes remained virtually unchanged and,

Chart II

VALUE OF NEW C O NSTR UC TIO N PUT IN PLACE
S e a so n a lly adjusted a nn ua l rates

at the current sales rate, represents a large ten months’
supply.
The mortgage market tightened further in August. De­
spite a slight pickup in the growth of thrift deposits,
which was concentrated at savings and loan associations,
deposit growth remained near July’s four-year low. In
August, mutual savings banks, which have been hard hit
by deposit outflows, suffered their fourth deposit loss in
the past five months. As a result of these deposit flows,
thrift institutions continued to curtail both their mortgage
lending and their commitments to lend in the future. Inter­
est rates on both new mortgage commitments and mort­
gage closings recently have climbed, with mortgage rates
reportedly exceeding 10 percent in many areas of the na­
tion in September.
After climbing to a peak in May, the value of new con­
struction has begun to decline in recent months. Thus, it
appears that the protracted decline in construction activity
not only has spread beyond the residential building sector,
but also has more than offset the effect of higher prices.
Real construction outlays have been falling over the
past eighteen months and dropped to a four-year low in
August (see Chart II ). In constant-dollar terms, private
residential construction outlays have declined almost $17
billion from their peak in February 1973. Furthermore,
spending on public construction, even though it has risen
in current dollars over the past year and a half, has shown
little real growth. Finally, private nonresidential construc­
tion activity, which edged upward in 1973 and early 1974,
has recently been declining under the weight of high inter­
est rates and construction costs.
PRICE D E V E L O P M E N T S

S o u rc e :

U n it e d S t a t e s D e p a r t m e n t o f C o m m e rc e , B u r e a u o f the C e n s u s .




Inflationary pressures remain intense. According to the
latest price statistics, almost all sectors of the economy
continue to be gripped by accelerating inflation. In August,
wholesale prices surged at a seasonally adjusted annual rate
of more than 45 percent for the second consecutive month.
As these wholesale price increases are likely to work their
way through the economy, there can be little hope for
near-term improvement in inflation at the retail level. The
August advance in consumer food prices was the sharpest
in six months, and the full impact of the drought-related
runup in farm product prices has yet to be felt by the
consumer. Moreover, the edging-down of agricultural spot
prices following their earlier sharp advance has recently
been reversed by concern over frost damage.
Consumer prices advanced at a 16 percent seasonally
adjusted annual rate in August, the largest increase in one
year. Also discouraging was the pervasiveness of the price

251

FEDERAL RESERVE BANK OF NEW YORK

rise. The prices of both food and nonfood commodities
rose at slightly more than a 17 percent annual rate, and
prices of services increased at an annual rate of more than
13 percent. Gasoline prices were one of the few consumer
prices that declined. Higher prices of meats, apparel,
and medical care services led the consumer price advance.
Propelled by continuing increases in industrial prices
and a large advance in the price of farm and food products,
wholesale prices rose at a seasonally adjusted annual rate
of 46.4 percent in August. Wholesale industrial prices
rose 30.3 percent at an annual rate in the month and have
advanced at a sizzling 32.9 percent annual rate thus far
this year. Even after allowance for the expected price bulge
due to the termination of controls, the magnitude and du­
ration of the upsurge in wholesale industrial prices has
sharply dimmed prospects of a near-term slowdown in the
rate of inflation. Among the many products for which
prices were higher in August, the increases in the prices of
chemicals and paper and pulp products were especially
large. In addition to the industrial price advance, prices of
farm products and processed foods and feeds, led by in­
creases in the prices of livestock and feed grains, sky­
rocketed for the second consecutive month, jumping at an
88.9 percent seasonally adjusted annual rate in August.
However, agricultural prices have moved erratically, and
earlier in the year wholesale farm and food prices declined
for four consecutive months.
Concern over recent frost damage to Midwest crops has
reversed earlier declines in spot prices of several agricul­
tural commodities. Most notably, the prices of corn,
soybeans, and other grains, which had begun to retreat
from their drought-related peak in mid-August, have
spurted in recent trading. For example, the spot price of
corn, after falling more than 30 cents per bushel in the
weeks following mid-August, has recently jumped above
its earlier peak. Soybeans, which because of their longer
growing period have been particularly hard hit by the frost,
have jumped about $ 1.20 per bushel in the last two weeks
of September.
LABOR MARKET DEVELOPMENTS

The sluggish pace of economic activity has resulted in
weakness in the labor market (see Chart III). The sea­
sonally adjusted unemployment rate rose 0.4 percentage
point to 5.8 percent in September, the highest level in
more than two years. Although the September jump in
the jobless rate was widespread among most major agesex groups, the burden fell more heavily on teen-agers,
especially men, and women 25 years of age and over.
The unemployment rate for male teen-agers jumped almost




Chart III

THE CIVILIAN L A B O R FORCE,
EM PLO YM ENT, A N D U N E M P L O Y M E N T
S e a s o n a lly adjusted
___________M illions of persons
92

M illio ns of persons
92

^

'

90
88

— 90
-

C ivilian labor force

--- ------------

86
84 —

S

82 ~

1 1 1 1 II

1 1 1

86
84

Em ployed
—

---- -----II

80

88

82

1 1 1 1 1 1 1 1 80

1 1 1 1 1 1 1 1 1 1 1

5.5

5.5

J -

5.0
U ne m p loye d

4.5 —
4 0 111
Percent
6.0

M

111111

111!

i i

T T T V ii

-

5.0
4.5

1 1 1 1 1 1 1 1 1 4.0
Percent
6.0
5.5

5.5 —
U nem ploym ent rate

^

— 5.0

5.0 —

f

4.5

1 i i i i i L i ..j— i4.5

.

i i i i i i i i i i. i 1 1 1 !
1972

So u rc e :

L jj" 1 1
1973

1974

U n it e d S ta te s D e p a r t m e n t o f L a b o r.

2 percentage points to 17.1 percent in September, and the
rate for women 25 years of age and over climbed a sub­
stantial 0.6 percentage point to 4.8 percent. The rate for
married men rose to 2.8 percent, the highest for that group
since October 1972. Most major industry groupings regis­
tered large increases in jobless rates; the 12.4 percent
rate for construction workers was the highest in four years.
Despite the sluggishness of economic activity following
the Arab oil embargo, the household survey indicates that
civilian employment has risen by about 870,000 over the
first nine months of this year. Employment increased by
a substantial 351,000 workers in September. However,
most of the September growth was the result of persons
who, although seeking full-time employment, were forced
to accept part-time employment. The number of these
involuntary part-time workers jumped 310,000 in Septem­
ber, accounting for almost nine tenths of the growth of
total employment. A t the same time, the rise in the number
of unemployed workers— 948,000 over the first nine
months of this year— has been primarily the result of
growth in the labor force rather than increased layoffs. The
civilian labor force rose sharply in September, continuing
the growth that began in May. The bulk of the recent ex­
pansion in the labor force has stemmed from a pronounced

252

MONTHLY REVIEW, OCTOBER 1974

rise in the number of women and teen-agers seeking
employment. Over the May-September period the number
of adult women in the labor force has risen at a 4 percent
annual rate and that of teen-agers surged at a 14.2 percent
annual rate.
The separate payroll survey, which differs from the
household survey in definition, coverage, and other factors,
indicates that employment has grown by 520,000 workers
over the first nine months of 1974, with most of the gain
in the service-producing sector of the economy. In contrast
to the similar employment growth recorded by these sur­
veys over extended periods, payroll employment in
September was considerably weaker than indicated by the
household survey. Payroll employment remained relatively
flat in that month, rising only 33,000 workers. This gain




was particularly small in light of the large number of
employees returning from strikes who did not appear on
company payrolls in August.
Although in real terms workers’ wages are probably
continuing to decline, it does appear that unions have been
successful to some extent in arresting the erosion in
purchasing power that has resulted from inflation. The
adjusted index of average hourly earnings for production
workers on private nonagricultural payrolls increased at an
11.2 percent seasonally adjusted annual rate in September.
Manufacturing earnings alone rose at a 12.9 percent rate
in that month. M anufacturing wage gains adjusted for
interindustry shifts and overtime have proceeded at a
double-digit pace over the past six months, considerably
above the pace of the earlier part of the year.

NEW PUBLICATION

The second booklet entitled Glossary: Weekly Fed­
eral Reserve Statements completes a pair of glossaries
describing five weekly banking statistical reports pub­
lished by the Board of Governors of the Federal R e­
serve System and the Federal Reserve Bank of New
York.
The 32-page, annotated booklet defines, line-by-line,
the meaning of, and relationships among, the terms
used in the weekly condition report of large com­
mercial banks, the weekly summary of banking and
credit measures, and the report covering the basic
reserve position, Federal funds, and related trans­
actions of eight major reserve city banks in New
York City.
Both glossaries are available without charge from
the Public Information Department, Federal Reserve
Bank of New York, 33 Liberty Street, New York,
N.Y. 10045.

FEDERAL RESERVE BANK OF NEW YORK

253

The Money and Bond Markets in September

Pressures in the financial markets, particularly in the
short-term sectors, eased in September after a summer
of record-high interest rates. M arket sentiment was
buoyed by a drop in the Federal funds rate, a temporary
reduction in the Treasury’s bill sales, and the elimination
of the marginal reserve requirement on large certificates
of deposit (CD s) with maturities of four months or more.
A t the same time, the decline reported in industrial pro­
duction for August reinforced judgments that the econ­
omy had cooled and that rapid growth would not re­
sume quickly. This prospect promoted expectations that
credit demands would moderate further and that the Fed­
eral Reserve might adopt a somewhat less restrictive
monetary policy in the months ahead. As a result, most
short-term rates fell sharply in September while yields on
long-term securities edged modestly lower.
The most dramatic decline in short-term rates occurred
in the Treasury securities market, where rates on Treasury
bills dropped by about 135 to 325 basis points over the
month. Contributing to these declines were a reduction in
the supply of new bills, coupled with a high volume of
noncompetitive tenders at the weekly auctions, and large
purchases of marketable Treasury debt by foreign official
institutions. Improvement in the long-term Treasury securi­
ties market was tempered, however, by investor hesitancy
about committing funds to long-term investments as sev­
eral rallies faltered for lack of investor enthusiasm.
In the corporate and municipal bond markets, the gloom
of August diminished somewhat, though the long-term m ar­
kets were still beset with the problem of rapid inflation.
Several new issues moved to substantial premiums in trading
in the secondary markets. Also, electric utility offerings im­
proved, as two Aa-rated companies were able to sell thirtyyear bonds at rates slightly below those on a similar issue
in August.
According to preliminary data, the sluggish growth of
most of the monetary aggregates of the last few months
continued in September. M x— private demand deposits
adjusted plus currency outside banks— actually declined in
the four-week period ended September 25. The growth of




M 2— Mx plus commercial banks’ time deposits other than
large CDs— decelerated sharply in the same period. In
contrast, the volume of CDs outstanding increased after
falling in August.
THE MONEY MARKET, BANK RESERVES, AND
THE M O N E T A R Y A G G R E G A T E S

Short-term interest rates declined across a wide front
in September (see Chart I) . The effective rate on Federal
funds averaged 11.34 percent, 67 basis points below the
August level and substantially below the record high of
12.92 percent reached in July. In the secondary market,
the rate on three-month CDs fell during the month by
about 1 percentage point to the 10% to 11 percent range.
Similarly, rates on 90- to 119-day commercial paper de­
clined from 12 percent at the end of August to 105/s per­
cent at the end of September. At the same time, dealers’
offering rates on bankers’ acceptances showed a drop of 2
percentage points to the 9 l/ i to \0V2 percent range in gen­
erally heavy trading.
For most of September, the commercial bank prime
lending rate remained at the record-high level of 12 per­
cent reached in July. At the end of the month, however,
two money market banks lowered their prime rate to
113A percent, owing in part to the declines in most short­
term rates and the relatively modest business loan demand
during the midmonth tax and international oil payment
dates. Although many banks did not reduce their prime
rate immediately, the 113A percent prime rate spread
through much of the banking system in early October.
Member bank borrowings from the Federal Reserve
continued relatively high in September, averaging $3.4
billion (see Table I) . Late in the month, the Board of
Governors of the Federal Reserve System announced
that it had amended Regulation A which governs member
bank borrowings. The amendment will allow Federal R e­
serve Banks to impose a special discount rate (higher
than the regular discount rate) on member banks requiring
exceptionally large, long-term assistance. The special rate

254

MONTHLY REVIEW, OCTOBER 1974

Chart I

SELECTED INTEREST RATES
July - Septem ber 1974
B O N D M A R K E T YIELD S

M O N E Y M ARK ET RATES

July

A u g u st

July

Se pte m be r

A u g u st

Septe m be r

1974

1974

Note: D ata are shown for business days only.
M O N E Y M ARKET RATES Q UO TED: Prime commercial loan rote at most major banks,offering rates (quoted in terms of rate of discount) on 90- to 119-day prime commercial
p ap e r quoted by three of the five dealers that report their rates, or the midpoint of
the range quoted if no consensus is available; the effective rate on Federal funds
(the rate most representative of the transactions executed); closing bid rates (quoted
in terms of rate of discount) on newest outstanding three-month Treasury bills.
B O N D M ARKET YIELDS Q UO TED: Yields on new Aa a-rated public utility bon d s are based
on prices a ske d by underwriting syndicates, adjusted to make them equivalent to a

will not exceed the rate established for emergency loans
to nonmember banks (currently 10 percent). The special
discount rate, which can be waived in individual cases,
may be applied to a bank borrowing exceptionally large
amounts (such as more than the bank’s average required
reserves) for prolonged periods (such as more than eight
weeks).
According to preliminary estimates, most monetary
aggregates displayed little, if any, growth in September.
Mi declined at a 1.4 percent seasonally adjusted annual
rate from its average level over the four weeks ended
August 28 to the average level for the four weeks ended
September 25. With the growth of other time deposits
advancing at a 3.6 percent rate over the same period, M 2




standard Aaa-rated bond of at least twenty ye ars' maturity; daily averages of
yields on seasoned A aa-rated corporate b o n d s; d aily a ve rag e s of yields on
long -term Governm ent securities (bonds due or callable in ten ye ars or more)
and on Governm ent securities due in three to five ye ars, computed on the basis
of closing bid prices; Thursday averages of yields on twenty seasoned twentyyear tax-exempt b onds (carrying M o o d y 's ratings of A a a, A a, A, and Baa).
Sources: Federal Reserve Bank of New York, Board of G overnors of the Federal
Reserve System, M o o d y 's Investors Service, Inc., and The Bond Buyer.

grew at a 1.3 percent rate. The growth of M 2 from the
corresponding period ended thirteen weeks earlier to the
four weeks ended September 25 fell to a 4.6 percent rate,
the lowest such growth rate thus far this year (see
Chart II). The adjusted bank credit proxy increased at a
4.3 percent annual rate in the four weeks ended Septem­
ber 25 over the four statement weeks in August, with CDs
advancing at an 18.4 percent rate over the same period.
On September 4, the Federal Reserve Board revised
Regulation D to remove the 3 percent marginal reserve
requirement on large-denomination CDs with maturities
of four months or longer. The action lowered the effective
cost to the banks of the longer CDs by about 40 basis
points and was designed primarily to encourage member

255

FEDERAL RESERVE BANK OF NEW YORK
Table I

banks to lengthen the maturities of their CDs. The re­
moval applied to roughly one sixth of the large CDs out­
standing and reduced required reserves by about $400
million in the statement week ended September 25. The
regular 5 percent time deposit reserve requirement will
still be placed on all CDs, while the marginal 3 percent
will now apply to the shorter CDs in excess of the amount
held in May 1973. In addition to CDs, Regulation D also
covers bank-related commercial paper and finance bills.
THE GOVERNMENT SECURITIES MARKET

Yields on all maturities of Treasury securities fell during
the month, with the largest declines occurring in the short­
est maturities. Long-term interest rates edged down only
slightly. Early in the month, Treasury bill rates declined
moderately before dropping sharply at midmonth. M ar­
ket participants concluded that the removal of the marginal
reserve requirement on CDs with more than four months’
maturity, together with the decline in the Federal funds
rate, indicated that monetary policy was becoming less
restrictive. In addition, the slow growth of
prom pted
the hope that further easing of monetary policy would be
possible. Also contributing to the midmonth decline in bill
rates was the purchase of a sizable volume of Treasury
securities in one week by the Federal Reserve for its cus­
tomer accounts. By the month end, the drop in the threemonth bill rate had exceeded by far the declines in rates
on commercial paper and CDs with the same maturity.
The rates at the weekly auctions of Treasury bills fell
in September by about 3 percentage points from the
record-high rates set in late August. Contributing to this
decline was the reduction in the Treasury’s bill sales in
September. At each of the last two weekly auctions in
August, the Treasury raised an additional $400 million in
new cash. In September, the Treasury merely refunded the
maturing bills at the first and last weekly auctions and
paid down $200 million in each of the two weekly auctions
in the middle of the month. While the Treasury was reduc­
ing its demands, noncompetitive tenders from the public
at the weekly auctions early in the month were unusually
high. In addition, after allowing for the rolling-over of bills
by the Federal Reserve for its own and its customer ac­
counts, the supply of new bills for competitive bidding in
September was only about half the amount available in
August. A t the first auction on September 9, noncompeti­
tive bids from the public reached a total of $1 billion of
the $4.4 billion of three- and six-month bills sold; these
issues were auctioned at rates of 9.10 and 8.98 percent,
respectively (see Table II ). Demand was also high at the
next weekly auction, when noncompetitive tenders




FACTORS TEN D IN G TO INCREASE OR DECREASE
MEMBER BANK RESERVES, SEPTEMBER 1974
In millions of dollars; (+ ) denotes increase
and (—) decrease in excess reserves

Changes in daily averages—
week ended

Net
changes

Factors
Sept.
4

Sept.
11

Sept.
25

Sept.
18

“ Market” factors

Member bank required reserves ..................

— 26 - f

287

— 378 4 - 126

+

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

— 336 -f-2,518

— 221 —2,121

— 160

F ederal Reserve float ................................

— 62 4-1,007

— 213 — 363

4-369

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

- f 64 4-1,263

4- 422 —1,674

4- 75

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

— 64 +

— 163

87

—

305

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

— 142 — 203

— 125 - f 351

_

119

9

—

9

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

—

132 4- 442

— 142 — 348

— 180

Total “ m arket" factors ............................

— 362 4-2,805

— 599 —1,995

— 151

2,223

702 4-1,273

— 191

— 311

Direct Federal Reserve credit
transactions

Open market operations (subtotal) ............

+

57

—

Outright holdings:
Treasury securities

+ 181 —1,923

4- 96 4-1,335

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

+

— 18 4-

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

+ 234 1

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

Repurchase agreements:

7 —

8

Treasury securities ....................................

— 116

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

— 78 —

Federal agency obligations

—

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

Member bank borrow ings..............................
Seasonal borrowings!

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

Other Federal Reserve assets^
Total

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

171

— 186

—

-f

9
92

-f

4- 16

59

4 - 281

4- 434 — 174

— 42

37

4- 55 4-

47

— 13

57

4- 135 —

29

— 122

- f 373 — 821
—

-

12

35

—

20

;+

40

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

+ 522 —3,004

Excess reservest ..................................

+ 160 — 199

— 164 4- 610

—

2

+

—

20

2

+

4- 33 4-

7
90

4- 571 4-1,974
— 28

—

21

4- 255
4- 63
—

88

Monthly
averages!

Daily average levels

Member bank:

Total reserves, including vault c a s h ? ........

37,255

36,769

37,119

36,972

37,029

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

36,919

36,632

37,010

36,884

36,861

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

336

137

109

88

168

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

3,906

3,085

2,921

3.531

3,361

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

152

132

134

141

140

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

33,349

33,684

34,198

33,441

33,668

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

155

144

102

55

114

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

256

MONTHLY REVIEW, OCTOBER 1974

amounted to nearly $900 million and the rates on the
auctioned bills were well below those on outstanding issues
of comparable maturity. By the last auction of the month,
the rate for three-month bills had dropped to the lowest
level since May 1973. In the auction of the 52-week
bill on September 18, the average issuing rate was set at
8.34 percent, 122 basis points below the record rate estab­
lished at the preceding monthly auction.
Yields on Treasury coupon securities also fell over the
month in response to the sharp rate declines in the short
end of the market. However, the market for Treasury
notes and bonds continued to be somewhat depressed by
the high rate of inflation, and the market sagged after
the report of the surge in wholesale prices in August. By
the end of the month, most other developments had
strengthened the market, and yields on intermediate-term
securities were 31 to 62 basis points lower, while yields
on longer term securities declined by about 7 to 33 basis
points. On September 24, the Treasury auctioned $2 bil­
lion of two-year notes to replace a like amount maturing
at the end of the month. The bidding was on a yield basis
and the minimum denomination on the notes was in­
creased to $10,000 from the usual $1,000 to reduce the
likelihood of a shift of funds from the nation’s thrift
institutions. The auction attracted good interest from both
dealers and investors, and the average yield was set at
8.34 percent.
Prices of United States Government agency securities
moved up during the month, and new issues were gen­
erally well received. In the first offering of the month,
the Federal Home Loan Banks raised $1.7 billion of new
capital. The bonds due in August 1976 carried a yield of
9.55 percent, the bonds maturing in February 1978 re­
turned 9.38 percent, and the February 1979 bonds paid
9.45 percent. The monthly offering of Banks for Coopera­
tives six-month and the Federal Intermediate Credit Bank
nine-month issues produced rates that were 30 and 20
basis points lower, respectively, than those on comparable
issues sold in August. At the end of the month, the Tennes­
see Valley Authority (TV A ) resumed its monthly note
auction after a two-month absence because of high interest
rates. The TVA sold $50 million of four-month notes at an
average interest cost of 9.07 percent, about 1 percentage
point below the rate paid on similar notes in June.

also served to bolster the market. However, the continuing
high rate of inflation as well as an unusually heavy calen­
dar of new offerings scheduled for October provided a
sobering influence.
Early in the month, the corporate calendar was domi­
nated by electric utility issues. During the first two weeks,
two electric utilities each marketed $50 million of thirtyyear Aa-rated first-mortgage bonds. Both issues were well
received; one issue was priced to yield IOV2 percent, and
the other was priced to yield 10.40 percent. These yields
were 25 to 35 basis points lower, respectively, than on a
similar long-term Aa-rated utility issue sold in August.
In the middle of the month, Duke Power Company m ar­
keted $100 million of Baa-rated five-year notes, which
were priced to yield a very high 13 percent and proved
attractive to individual investors. The issue sold out on
the first day and traded at a premium in the secondary
market.

Chart II

C H A N G E S IN M O N E T A R Y A N D CREDIT A G G RE G A TES
S e a so n a lly adjusted annual rates
Percent

N o te :

Percent

G ro w th ra te s a re c o m p u t e d o n the b a s is of f o u r- w e e k a v e r a g e s of d a ily

fig u re s for p e r io d s e n d e d in the state m e n t w e e k p lo tted , 13 w e e k s e a rlie r a n d
5 2 w e e k s e a rlie r. The late st sta te m e n t w e e k p lo tte d is S e p t e m b e r 25, 1 974.

THE OTHER SECURITIES M A R K E T S

Ml = C u rre n c y p lu s a d ju ste d d e m a n d d e p o s it s h e ld b y the public.
M 2 = Ml p lu s c o m m e rc ia l b a n k sa v in g s a n d time d e p o sit s h e ld b y the pub lic, loss
n e g otia b le certificates of d e p o sit is s u e d in d e n o m in a tio n s of $ 1 0 0 ,0 0 0 or more.

The atmosphere in the corporate and municipal bond
markets improved somewhat in September in response
to the sharp drop in short-term interest rates. A relatively
modest volume of new issue activity during the month




A d ju st e d b a n k credit p ro x y = Total m em b er b a n k d e p o sits su b je ct to re se rve
requirem ents p lu s n o n d e p o s it so u rc e s of funds, such a s Euro-dollar
b o rro w in g s a n d the p ro c e e d s of com m ercial p ap e r issue d b y b a n k h o ld in g
c om p anie s or other affiliates.
So u rce:

B o a r d o f G o v e r n o r s of the F e d e ra l R e s e rv e Sy st e m .

257

FEDERAL RESERVE BANK OF NEW YORK

The largest corporate bond issue of the month was the
$225 million of South Central Bell Telephone Company
debentures. In a negotiated sale in mid-September, the Aaarated forty-year debentures were priced to yield 10.05
percent, 5 basis points above a Bell issue in August and a
new record-high interest rate for Bell System debt. The issue
sold only moderately well at first, but was down to tag ends
at the end of the second day. Three non-Bell telephoneutility issues, all of which were A-rated thirty-year firstmortgage bonds, were also sold at midmonth. The range of
yields on these securities was 10.82 to 11.25 percent, and
the issues generally received only fair receptions. The yield
spread of roughly 100 basis points between the Aaa-rated
and the A-rated utility issues was still wider than usual—
although the spreads were far wider this summer— reflecting
investors’ lingering preference for high-quality debt.
In the tax-exempt sector, the bulk of new financing was
concentrated in the short-term area, with two of the largest
short-term offerings being sold by New York City. On
September 9, New York City awarded $600 million of
revenue anticipation notes at a net interest cost of 8.43
percent. Near the end of the month, after short-term
rates had dropped sharply, a second note issue of $800
million sold at a net interest cost of 7.31 percent, more
than 100 basis points lower than the earlier issue.
The volume of long-term tax-exempt securities was
rather light early in the month, but became heavier as the
m onth progressed. Toward the end of the month a sharp
drop in the net interest costs of some new issues prompted
apprehension that the heavy fourth-quarter calendar might
become even larger. Consequently, the aggressively priced
issues of the states of Oregon and California sold fairly




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

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

Sept.
9

Sept.
16

Sept.
23

Sept.
30

9.099

8.185

7.002

6.385

8.980

8.203

7.928

7.439

Monthly auction dates— July-September 1974

Fifty-two weeks ..................................

July
24

Aug.
21

Sept.
IS

7.836

9.564

8.341

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

slowly during the last week of the month. The Oregon
bonds, rated Aaa by Moody’s and AA by Standard and
Poor’s, were reoffered at yields of 5.25 percent for the
five-year bonds to 5.95 percent for the sixteen-year bonds.
The Aaa-rated California issue was reoffered at yields of
5.10 percent for bonds due in 1975-76 to 6.10 percent
for bonds due in 1993-94. On September 26, The Bond
Buyer index of twenty municipal bond yields stood at 6.62
percent, 29 basis points below the level at the end of
August. The Blue List of dealers’ advertised inventories
rose by $221 million to $580 million.