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NOVEMBER 1969 Some Demographic Influences On the Future Market for Housing . page 3 Tenth District Banks In the Federal Funds Market . . . page 10 Subscriptions to the MONTHLY R EV I EW able to the public without charge . are availAdditional copies of any issue may be obtained from the Research Department, Federal Reserve Bank of Kansas City, Kansas City , Missouri 64198. Permission is granted to reproduce any material in this publicatio n. SOME DEMOGRAPHIC INFLUENCES ON THE FUTURE MARKET FOR HOUSING By G /e1111 H. Miller, .Ir. dynam ic factor affectin' th e 1 row1 h of demand for r sidcnti ,ll co nst ruction is new hou seho ld form ati n. In two recentl y publi shed sets of nati onal hou ing requirements for the upcom ing decade, full y half of the total need for new and rehabilitated housing unit was ascr ibed to net additional hou sehold for mat ion.' Household growth , in turn, depends on the size and age-sex distribution of the population as modi fi ed by various economic and social fo rces. The number of indepe ndent hou seho ld formed from a given popul ati on depends to a great extent on th e dec i ions of p rsons, single and married , to e tabli sh separate homes, and these dec isions are often heav il y influenced by the impact of labor market ( and hence , inco me) co nditi ons. The Federal Government, primari ly through th e Bureau of th e Census and th e Burea u of Labor Stati stics, has developed a large set of T II E Fl!ND/\M E N T/\L demograph ic proj ·c tion s, b;1sed lctr 1 ely on co nsist ' nl ;1ss ump lions and similar benchm ark dates ." Last year th Bur au or th e ensu. publ i heel project ion of the number of households and fami lies to 1985. a Preparat ion of the projecti ons move through three stages : popul ation proj ections, marriage ass umptions and projections, and, finally , household asum ptions and projections. Thi s art icle primarily provides a summ ary of ome of th e inform::ition on the household grow th projection s, placi ng emphas is on the fo un d~tt ions of th e future market for housing, rath er th an on specif ic co nclu sions ab ut ho using demand . All projections , of course, are subject to unce rta inty. The Burea u of the Census decribe its projections as " illustrative, " mea ning th ey a re des igned to indicate quantities which result from the adoption of certain reasonable ass umptions. The projections discussed 1 These projecti o ns a re by the D ep a rtment of Housin g and Urban D eve lo pm e nt a nd the K a ise r Committee. The for m e r ma y be found in U . S ., C o ng ress, " H o u in g and rb :111 Devel o pm e nt Leg isla ti n o f 1968," H ·arings before th e ubc ommill cc on I lo usin g and U rb a n Affa irs o f th e 0 111mit1 c o n Ba nkin g and urrc ncy, 90th C o ng .. 2 nd cs~ .. 1968 , pp. 1344-49; th e latt er in d gar . Ka ise r c t a l. The Re po rt o f th e P res id ent 's o mmittcc o n rban Hous in g, A n ece11r l/ 0 111 e, W a~ hin g1o n. D . C. , Dece mb e r 1968 . Fo r a di..,c uss io n o f these p rojec ti o ns a nd their im plic a t ion s. see M . F . ll io tt -Jon cs, ' 'R esid e nti a l C on structi o n ... a nd Obs tru c ti o n," Th e Co11/er e11ce /J oard R eco rd , N a ti ona l Indu strial o nfe rcncc Bo ard, Jun e 1969, Vo l. YI , No . 6, pp . 43 -5 0. Monthly Review • November· 1969 "Re la ted pro jec ti o ns arc drawn toge th er fo r co mm o n refere nce in U . ., Bureau o f th e c ns us, C 11rre11t P o pulatio n l< eporrs: Pop 11/Mio 11 l:'.l'ri111 a res, " ummary of D e m og ra ph ic P rojec t io ns,'' c ries P-25 , N o. 388 , M a rc h 14 , 1968. " . ., Burea u o f th e C e ns us, C11rre11t P op11 /at io11 R eports: Po p11/a tio 11 L f ti111ar es, " P rojec tio ns o f the umber of ll o usch lei s a nd F a milies , 1967 to I 985 ,' ' Se ries P -25 , N o . 394, June 6, 1968. stim a tes. projecti on , and quo ta tio ns attrib ut e d to the Bure au of the ensus in thi s a rti c le a re from the publ icat io ns ci ted in thi s foo tn o te a nd the prec ed ing o ne. 3 Some Demographic Influences Chart 1 ESTIMATES AND PROJECTIONS OF THE TOTAL POPULATION OF THE UNITED STATES, 1960 TO 1985 M i 11 ions of Persons 28 0 260 24 0 220 2 00 180 0 '----'--'----'-----'__.__.__.___._,_.__..__.__,___,__,'--'--'---'---'__.___.___,__,___.___.___, ' 75 '7 0 '65 '80 '85 19 6 0 SOURCE : U. S., Bureau of the Census, Current Population Re ports : Population Estimates, " Summary of Demographic Projec tions ," Serie s P- 25, No . 388 , March 14, 1968, p. 35. in thi s article a re, accord ing to the Burea u of the Censu s, " based on th e general ass umpti o n th at th e re wi ll be no la rge-sca le lo ses due to war a nd no wides pread ep idem ic, majo r econo mi c deprc s io n , o r simil ar catastrop he." POPULATION GROWTH AND MARRIAGE PROJECTIONS Population Growth Popul ation proj ections a re necessaril y bas ic to other types of demographic projections, such as number of marriages and number of hou seholds. P opulation growth de pends on births, deaths, a nd mi grat io n. lmmig rati o n is no lo nge r th e importa nt contributor to U. S. populati o n g rowth that it wa s ea rli er in our hi story, a nd the U . S. dea th rate has bee n low a nd relatively teady for some tim e; the e cond itio ns a re assum ed to be a bout the sa me for the projections period . Birth ra tes in th e Uni ted Sta tes, however, have fluctu ated w idely in the past 4 half century a nd m ay do so again . After a numbe r of factors were ta ke n into account, the Bureau of the Census made four ass umptions concerning future birth rates a nd four separate projections of pop ul at io n growth. T he projectio ns of ma rri ages a nd hou seholds to be discussed in thi s a rticl e a re based o n the populat io n project ions de ignated as Se ries B , wh ic h est im a te th a t th e rate of births pe r thou sa nd popul a tion will ri se from abo ut 20 in 1966 to 24.7 in I 980 , th en drop back to 23 .7 in 19 85. The projections to I 985 a re shown in Cha rt I. T a bl e I shows th e estim a ted a nd projected age d istr ibutio n of the pop ul a ti on a t five-year interva ls, 1965 to 1985 . F lu c tuat io ns of birth s in th e past h;ive ;111 important d te rm inin l influ e nce o n th e a 1 ~ di stributi < n of th ' popula ti o n in the f uturc, and produ ce so me si rni fica nt cha nges in the age di stributi o n o f the popula tion th at are a ppare nt in Tab le I . For exa mpl e, from 1965 to 1985 , the number of perso ns aged 18 to 24 will increase 42 pe r cent , a nd th e population 25 to 34 years of age will grow 82 per cent. On the other ha nd , the number of those in th e 45- to 54-year-old group will decline about I .5 pe r cent. The members of the third g roup were born in a pe riod of rel a tively few b irth s; those f th e first two g roups, when birth s we re mo re num ero us. Table 1 TOTAL POPULATION OF THE UNITED STATES IN SELECTED AGE GROUPS, 1965 (ESTIMATED) AND 1970-85 (PROJECTED) In Millions Age 18 -24 25-34 1965 1970 20.2 22.4 24 .6 27 .5 29 .6 28.8 25.3 23 .0 23 .3 18.5 19.6 31.4 37.0 40.7 22 .5 25.4 23 .5 22.1 21.0 23.1 31.4 21.7 21.2 25 .0 35-44 24.4 45 -54 22 .0 17.0 18.2 55 -64 65 and ove r 1975 19.8 21.2 1980 1985 NOTE : Refe rence date July 1. Data include arm ed forces over seas. SOURCE : U. S., Bureau of the Census, Current Population Reports : Population Estimates, " Summary of Demographic Projections," Series P-25, No. 388, Morch 14, 1968, pp . 7, 40. Federal Reserve Bank of Kansas City On the Future Market for Housing Chart 2 ESTIMATES AND PROJECTIONS OF TOTAL MARRIAGES FOR THE UNITED STATES, 1960 TO 1985 T housands of Marriage s 270 0r-___;_-----'-'---,--'r-'------=-=-=--,-----.---------.--~ 17 HOUSEHOLD GROWTH Projections of future hou sehold formation res t fund a mentally on th e grow th of population in certain age gro ups, with modifications based on as urn ed changes in ho usehold hea d ·hip rates. A head hip ra te is de fin ed as " the proportion of th e population in a given de mogra phic group ( e.g., cl ass ifi ed by age a nd sex) who tHe hou se hold heads.'" On projection of ho use hold s mad e by the Burea u o f th e Census, des igna ted Se ries K , ho lds both marriage rate s a nd ho use hold head hip r ates con sta nt fo r future years. It th erefo re hows th e effect of expected futur e population c han re a lo n . Th r w re 58 . 1 milli o n ho us · ho ld s in th· Unit d St,1tcs in 1966; s~rics K res ult s in " projec te d 6 1. 7 milli o n in 1970, an in c r as o f 5.8 per cent, a nd 77 .9 million in 1985, a n increa e of 34. 1 pe r ce nt. SOURCE : U. S. , Bu rea u af the Ce nsus , Current Population Reports : Po~ulation Estimates , " Sum mary of De mographic Pro je ctions ," Series P-25, No . 388 , March 14, 1968, p . 57. Marriage Projections An inte rmediate stage in mov ing from populatio n projec tions to ho use ho ld projections i the projecti n o f marria g s. Fo ur diff rent m a rri age projection s se ri s have been publi shed by the Burea u o f the C nsus, a ll of whic h arc consistent w ith the Serie B popu lation projections. Th e m a rri age se ries des igna ted M - 1, which is base d on ass umptions th at generate the most marriages of the four series, approximates th e continu ation of th e recent trend in marriages . Only the M-1 projections a re presented here, a nd th e discu ssion o f ho use hold proj ect io ns is ba cd o n th a t series. Th e annual numb r o f marria ge. projected in th e M - 1 e ri es is show n in hart 2. Tota l marriage · inc rea. e rap idly to abo ut the mid I 970's, th e n mo re slowly for the res t of that deca de. Th e annual number o f ma rri ages is then projected to leve l o ff for th e first half of the I 980's . Monthly Rev1pw • November 1969 A second hou se hold p rojection , Series I , also is based on m a rriage projections Se ries M-1 , but on hou se hold ass umptions that extrapol a te headship ra te ch a nge ex perienced in th e pe riod 1957-64. Accordin g to this projecti o n o f ho use ho ld growth , th e total number of house ho lds in th e U nited State. is ex pected to advance from 58.1 milli o n in 19 66 to 63.3 milli o n in 1970, or n a rl y 9 per ce nt ; a nd to 84.4 million in 1985, or 45 per c nt. Y ear-by-yea r projection of th to tal numbe r o f ho use ho lds through ·19 85 for both e ries appear in Chart 3, and yearly increases in the tota l are shown in Cha rt 4. A compa rison of the two sets of projections indicates that more of the ri se in Series I results from th e change in popul ation size and structure than from ri sing hea d ship rate s. Any variation s in th e marri age a nd head _hip a ·umpti o n b yo nd th e e u ed in Se ries I would cau e, of co ur e, furth e r diffe re nces in the projections o f total ' Ric hard A. Easterl in , Pop11/(lfio11 , Labor Force, and Long 111 Eco11 olilic C rowrh: The A 111 erica11 Experience , Nati o na l Bu reau of Eco no mi c Resea rc h (New York: Colum bia University Pres, 1968) , p . 59. S 11•111gs 5 Some Demographic Influences Type. The projected number of house- Chart 3 ESTIMATES AND PROJECTIONS OF THE NUMBER OF HOUSEHOLDS, TOTAL AND BY TYPE, FOR THE UNITED STATES, 1965 TO 1985 Millions of Households 90 80 70 , ... ...... _... ...... ...... , ... ... - 60 Ser i es K 50 PRIMARY FAMILIES * 40 PRIMARY 20 INDIVIDUALS Series 1 Series K 10 * ~ ------------------- --------- * 1965 and 1966 holds, clas ified by type, are shown in Chart 3. Prim ary fami ly households--composed of a household head and one or more other persons related by blood, marriage, or adoptionnumbered 48 .2 million in 1966 . They are projected to increa se about 8 per cent to 1970 and about 4 1 per cent to 19 85 . Households headed by primary indi vidual - a hou sehold head of either · ex with no relative in the hou se hold- of which there were 9.9 million in 1966, arc expected to increase 13 per cent to 1970 and 64 per cent to 1985 . H eadship Rates. Series 1 is bu ilt upon the ass umption th at th proportion f th e popula ti on who ~,r he.ids of hou se hold s is in reas in g, or, as th· Bureau of th cnsus put s it, thes ' proj ecti ons represe nt ·111 "exp ctcd ontinuation of th e up wa rd tr nd in household headship rates. " In 1965 , 78 per cent of all married co upl e and unmarried persons, aged 20 years and older, had their own households , and there Est im ated , Morch 1 Doto 19 67-1985 Projected, July 1 Dat o 0 ..__.____.__,____.____.___..___,__.__.__,__.__.....__...,__...___.__J.........J~---1--' 1965 '70 '75 '80 Chart 4 '85 PROJECTED YEARLY INCREASES IN THE NUMBER OF HOUSEHOLDS FOR THE UNITED STATES, 1968 TO 1985 SOURCE : U. S., Bureau of the Census, Current Population Report s: Population Estimates , " Proj ec tion s of th e Number of Hou seholds and Families, 1967 to 19B5, " Series P-25, No . 394, June 6, 196B , p . 15. hou seholds and of th di stribution of hou seholds among the va ri ous class ification s. ~ Numbers of Households Type and Age of Head by Projections of the number of households are more releva nt to the future for housing markets than projections of population growth or the number of marriages, and changes in the number of households by type and by age of head are at lea st equa ll y pertinent. Only project ion s from hou ehold Serie I arc used in th e f !lowing di . cu ss ion of change in the number of house hold by type and by age of head. :; Fo r a cliscu s io n o f so m e o f th e~e p o ~s ibilitie ~. see " P rojec ti o ns of the ' um be r o f H o use ho ld s a n I F a m ili es, 1967 to 1985, " pp . 8- 1 1. 6 M i ll i on s of Hou sehold s 2.1 J uly 1 Doto 1. 8 TOTAL HOUSEHOLDS 1. 5 Series 1 I . 2 1-----' .9 .6 0 .__...,____.__.___,____.___._~ -'--~...,___.__~ __,____.____.___,_~ ' 75 '80 '85 1968 '70 SOURCE : U. S. , Bureau of the Census, Curren t Population Reports : Population Estimates, " Projections of the Number of Households and Famili e s, 1967 to 19B5," Seri e s P-25 , No. 394, June 6 , 196B, p . 15. Federal Reserve Bank of Kansas City On the Future Market for Housing wa s only a negli gibl e diffe rence between those ove r 65 a nd tho e unde r 65 . Ser ies 1 projections for 19 85 res ult in 86 per ce nt of a ll marr ied couples a nd unm a rried pe rsons 20 yea rs old and over hav ing the ir own hou seholds; the rela ti ve in c rease was g reater for those over 65. Little o f thi s cha nge in hea d ship ra te in the agg rega te is attribut a bl e to cha nge .in th e ma rri ed co upl es ca tego ry. But th e projected per cent o f unm arr ied pe rso ns with their ow n ho useho ld in 1985 is substantiall y g re ater tha n in 1965. For th e entire group , the propo rtion ri ses fro m 5 I per cent to 64 pe r ce nt , with th e propor ti o n of th ose unmarri cl pe rso ns ove r 65 wi th th e ir own househo lds show in 1 a lctr , ' r rel;1ti vc ri se th a n th ose under 65. NUMBER OF Table 2 ,...,..,, __ , LOS, SE ES 1, BY TYPE AND AGE OF HEAD, FOR THE UNITED STATES, 1966 ( STIMA 5 (PROJECTED) In Million.s Type of Ho usehold and Age of Head 1966 All Households Total Under 25 25-34 35-44 58 .1 3.6 10.0 11.9 45 -54 11.7 9.7 55-64 65 and older 11.2 Husband-wife Household s Tota l 42 .1 Under 25 2.8 25-34 8.4 35 -44 9.8 45-54 9.1 55-64 6.5 65 and older 5.4 Other Ho use ho lds Tota l 16.0 Under 25 0 .8 1.6 25-34 35-44 2.1 2.6 45-54 55-64 3 .2 65 and older 5 .8 1970 1975 1980 1985 63 .3 4.8 11.8 11.7 12. 1 10.6 12.3 70.0 5.6 15.3 11.7 12.2 11.4 13.6 77.3 6.4 18 .6 13.5 11.5 12.1 15.2 84.4 45.6 3.6 9.8 9.7 9.5 7 .2 5.8 50.0 4.1 12.4 9.7 9.6 7.8 6.4 55.0 4.6 14.7 11.1 9.2 8.3 7 .0 59.8 4. 5 16.2 13.8 9.1 8.5 7.6 17.7 1.2 2.0 2.0 2.7 3.4 6.4 20.0 1.5 2.9 2.0 2.6 3.6 7 .3 27.3 1.8 3.8 2.4 2.3 3.7 8.2 24 .6 1.9 4.5 3.2 2.2 3.7 9.0 6.5 20 .8 17.0 11.3 12.2 16.6 NOTE : Reference dote July 1, except for 1966, which is Morch l. SOURCE : U. S., Bureau of the Census, Current Popu lation Reports: Populati on Estimates, " Summary of Demographic Projections," Series P-25, No. 388, Morch 14, 1968, p. 62. Monthly Revi w 0 November 1969 Table 3 AVERAGE ANNUAL NET CHA NGE IN THE NUMBER OF HOUSEHOLDS, SERIES 1, BY TYPE AND AGE OF HEAD, FOR THE UNITED STATES: 1960 TO 1966 (ESTIMATED) AND 1966 TO 1985 (PROJECTED} In Thousands Under Year and Type of Househo ld Tota l 25 All Ho use holds 1960 to 1966 882 177 1966 to 1970* 1,203 279 1970 to 1975 1,340 177 1975 to 1980 1,461 146 23 1980 to 1985 1,423 Husband -wife Households 1960 to 1966 468 122 1966 to 1970* 807 189 1970 to 1975 893 111 87 1975 to 1980 987 967 - 6 1980 to 1985 Oth er Households 1960 to 1966 414 55 1966 to 1970* 396 90 66 1970 to 1975 447 474 59 1975 ta 1980 1980 to 1985 456 29 Aae of Head (Years) 25to 35to 45to 55to 65and 64 O ver 34 44 54 61 176 51 412 - 40 93 701 20 3 655 358 - 145 - 51 436 692 185 215 159 131 19 232 244 278 316 305 2 11 310 - 24 - 2 521 478 277 294 540 158 80 34 - 89 - 20 110 158 122 104 33 64 94 106 131 125 59 40 102 - 16 180 5 81 177 142 152 75 57 37 - 14 - 56 27 - 31 -14 168 150 172 185 180 18 13 *Four and one-third years. NOTE : Reference date July 1, except for 1960 and 1966, which is March 1. SOURCE: U. S., Bureau of the Census, Current Popula tion Reports: Populati o n Estimates, " Projections of the Number of Households and Families, 1967 to 1985," Series P-25, No. 394, June 6, 1968, p. 3. A ge of H ead. Est im a tes a nd projections of th e numbe r o f hou s hold s by type a nd age of head , a nd of averag a nnu al net c ha nge therein, are shown in Tables 2 a nd 3 , respectively . The tota l number of ho useholds in the Unite d States is projected in Series 1 to rise from 58 .1 million in I 966 to 63.3 million in 1970 a nd 84.4 miIJion in 1985. A number of facts about projected hou se hold growth may be gained from scanning T able 2's distribution of the total by age, a nd then by age and type of hou seho ld . Fo r example, more than half of the tota l ga in to 19 85 will be in hou se holds with hea ds aged 34 a nd yo unger. In additi o n, sizable ga ins in ho use hold s with heads aged 65 yea rs o ld a nd o lder a l o will be registered ove r th e 20-year pe riod. Husband-wife hou se holds, though still making up by far the la rgest share of the total , 7 Some Demographic Influences will b e a sli ghtly sm aller proportion of a ll hou seholds in 19 85 th a n in 196 6 ; th e " othe r hou se holds" cl ass-m a inly, per so ns Jiving alone - thu s will g row relative ly. E spec ially la rge rela tive ga ins in th e "oth e r ho use ho ld s" cl ass appea r in th e age g roup 25 to 34 yea rs a nd in the 65-yea rs-a nd-old e r catego ry . D ata on th e a verage yea rly ch a nges in numbe rs by age a nd type of hea d a rc sho wn in T a bl e 3 . The a ve rage a nnu a l increase in th e to ta l numbe r of hou seho ld s in the United Sta tes fr o m 1960 to 1966 was 882, 000 . Th e hi ghes t yea rl y a verage rise in thi s p rojec tio n pe ri od- I ,46 1,000- is reco rde d fo r the fi ve yea rs fro m 1975 to 1980, a nd is fo ll owe d by a so111 cw h . 1t s ma ll e r a nnu ..tl inc rease in th e fin :tl fiv c-yc;i r pe ri od . A ve rn gc a nnu ,tl ne t ho use ho ld fo rm ati o ns, by age o f hea d , th ro ug ho u t thi s projec ti o n period re fl ect stro ngly birth pa tte rn s th at have a lre ady occ urred, prim a rily the low ra te o f birth s in the de pressio n yea rs of th e ea rly l 930's and th e hi gh ra te of birth s in the p ostw a r b aby boo m . C onsequ ently , in th e 19 70's nea rl y half of th e average yea rl y increase in a ll hou sehold s will be found in hou seh o lds with hea d s in th e 25- to 34 -yea r-old gro up. Po pul a tio n in th e ove r-65 age gro up is not a ffected by flu c tu a ti o ns in birth a fte r 1920, a nd th a t age gro up 's ave rage a nnu a l ho u c ho ld projec ti o ns show g rea te r regul a rity th a n do th e o th e rs. But th e re la tive co ntributi o n o f this age group , es pec ially in the "oth er ho use ho ld s" cl ass, to net hou sehold form ati o n may have specia l significa nce for the type of shelter th a t will b e in dem a nd in the projection p eriod. Both ho use ho ld s with hea d s in th e younger age g rou ps a nd e lde rl y p e rson s livin g a lo ne are mo re li ke ly to require ho usin g units o th e r th a n th e tra diti o na l sin gle-fa mil y dwe llin gs. CONCLUDING COMMENTS T he future pa tte rn o f ho use ho ld grow th p rese n ted in H o use ho ld Se ri es I is b ased o n projec ted hea dship ra tes th at a re a n ex tra pola ti o n o f th e ri sing trend o f 1957-64 . Since 8 po pul ation g rowth in th e important hou seholdformin g age gro ups ca n be well esta blish ed, projected hea d ship ra tes a re ve ry important in es tim ating th e overall growth in th e number of ho use ho ld s a nd its impact o n th e futur e ma rke t for ho using. B eca use o f th e impo rta nce of p rojected hea dship ra tes a nd o f th e e mph as is o n H o use ho ld Se ri es I in thi s a rticl e, it sho uld be reme mbe red th a t H o use ho ld Se ri es I is a n illu st rative proj ecti o n, res ting o n a pa rtic ul a r ass um pt ion co nce rnin g th e mo veme nt in hea dshi p rates. It may well be that the actu al perfor ma nce o f hea dshi p ra tes (a nd hence hou seho ld g row th ) w ill not be as pro jec ted . A lte rn ative p ro jec ti o ns o f ho use ho ld g row th- suc h as Se ri es K (w hi c h ho ld s hct1 d shi p r;1tcs co nst;1nt thro u gh the projec ti o n per io d ) c1 nd othe rs p repared by th e Burea u o f th e Ce nsus b ut not prese nted he re- a re a va il a bl e ." In a ny case, al tho ugh varying hea dship ra tes produce signifi ca nt d iffe re nces in inc reases in the numbe r of ho use ho lds, po pul ation growth rem ains the do mina nt fa ctor. Jn Hou sehold Series 1, growth of the a dult p op ul ati o n accounts for 71 per ce nt of the in c rease in th e number o f h o useho ld s fr o m 1966 to 19 70 , a nd 85 pe r ce nt of th e in crease fr o m 1966 to 1985. Thu s, th e Bur a u o f th e Ce nsus summ a ri zes as fo ll o ws: Th e grow th o f th e adult popu la tio n in the U nil ed tates ove rshadows inc reases in ma rriage ra tes a nd in house ho ld heads hip rates in its e ffec ts o n the growth in th e number of ho use ho lds. A number of fac to rs b es ides new household fo rm ation affect the de ma nd for hou sing. D em a nd is positively influenced by high and ri sing leve ls of e mpl oy ment a nd in co me. A defi c ie ncy in res ide nti a l co nstru ct io n in a n ea rli e r pe ri o d , suc h as th e und e rb uildin g of recent yea rs, ge ne ra ll y res ults in a buildup o f un sa ti sfi ed de m a nd fo r ho usin g th ::i t u sua lly strength " Fo r a n a n a lys is o f rece nt a n d ex pec ted c h a nges in h ead s h ip ra tes by an eco no mi st w ho has s tu d ied inte n s ive ly the int e rre la tions h ips be twee n popu la t io n , labo r for ce , and ho use h o ld grow th ; co ns truc ti o n ac ti vity; a nd eco nomic grow th in ge nera l, see Easte rli n , espec ia ll y p p. 47-72 . Federal Reserve Bank of Kansas City On the Future Market for Housing ens the overall market for shelter for some time. Internal migration may create excess vacancies or actu al abandonments of housing units in some areas , while leadin g to additi onal building el ew herc and to large r overall demand. In our increas ingly afflu ent society, the market for second homes recently has been growin g and probably will continue to do so in the years ahead. At th e sa me tim e, at the oth er end of the income . ca le there is an apparent la rge defi c iency of housing, c pccially ( but not so lely) in the central cities. The two projections of nat ional housing needs th at were cited at the beginning of this articl e stim at tot.ii requirements of more than 26 millio n :1ddition,tl housin 1 units clurin r th e nex t decade, with abo ut half th <1t num ber attributed to net additional household formation. The remaining increase in requirements comes from several sources : to permit Monthly Review • November 1969 an increase in vacant units, to compensate for Loss of ex istin g stand ard housing units, and to repl ace or rehabilitate ex isting substand ard units and those th at will become substandard durin g the period. lf the requirements projections a rc to be fulfill ed, th e tas k facing the hou ing industry i a large one- producing an average of 2.6 million new and rehabilitated hou ing units per year. From 1960 through 19 68, the residenti al construction industry ave raged abo ut 1.4 million new private housing units started per year; mobile homes shipments are now running at about 400,000 per yea r. But if th e proper ince ntives arc prese nt , and if th e n cc. sary reso urces ( including fi nan cin •) ;in.: av;i ilabl ' , ii is hop d that th indu stry will .ig:1in di sp l,1y th e kind o f fl exi bility and elu sti city th:it provided th e )rea l surge of production of new res identi al units fro m the end of Wo rld War II to 1950. 9 banks have e~perienccd so me far-reachin g changes durin g th e postwar years. One important development has been th e growth of th e Federa l fund s market- a gro wth that ha s bee n cs pcc i~lll y ev ident in th e past three years. The Federal funds market is disc ussed in thi s article, and th e var ious ways that Tenth Di strict b,rnk s arc in vo lved in th e market me exa mined . OMM E RC l ~L C Tenth District Banks the Federal Funds Market By .I. A. Cacy 10 ROLF OF FEDERAL FUNDS MARKET 'I h Federa l l'un Is 111;1rk ct s ·rvcs th e co mmercial bank ing indu stry as a r se rve ad ju stment mcchani m. Such a market is needed beca use banks co ntinuou sly make a nd rece ive cas h paym ents and , durin g a ny period , th e volume of di sbursements and of receipts is seldom in balance. On th e contrary, cash fl ow deficits or surplu ses occur. Deficits may be covered by drawing down cash reserves , selling noncash asse ts, or by borrowing. Surplu ses may be used to augment cas h reserves, buy ,1sscts, or reduce borrowings. Not all of ;1 bank's cas h reserves arc avail ab le fo r use at the bank's di screti on, howeve r, since ba nks a rc required by law to maintain a specified vo lume of rese rves at all tim es. For members of th e Federal R ese rve System, the volume of required rese rves is determin ed by th e Board of Governors of th e Syste m, within limits established by Federal law. For nonmember banks, the requirement is determin ed by state bankin g laws and authorities. Banks ca nnot empl oy cash reserves to cover cu rrent cas h fl ow deficits unl ess their ca sh rese rves exceed required reserves- th at is, un less they have excess reserves. Likewise, o nl y excess cas h reserves may be used to bu y asse ts o r reduce borrowings. The ac tion s taken by banks-buying and selling asse ts, drawing down and building up Fede, al Reserve Bonk of Kansas City Tenth District Banks in the Federal Funds Market excess rese rves, bo rrow ing and repay ing obliga ti ons -in res ponse to cas h fl ow defi cit and surplu se are refer red to as rese rve adju stments or as manag ing the reserve po ition. In making reserve ad justments, members o f th e Federal Reser ve System may bo rrow from th eir Fede ral Rese rve Ba nks . O ne adva ntage of thi meth od is that the borrowed funds a rc " imm edi ate ly ava il ab le "- the reserve acco unt of th e membe r bank can be increased on th e . ame day the ba nk dec ides re. erves arc needed . lf a ba nk ca nnot arrnngc to have its ca h reserves a ugmented on the day th at a cas h fl ow d fic it occu rs, bu t mus t wa it for the trans,1c ti on to be processed thro uQh th clearin m ·h;1n ism , the ·:1sh fl ow de ficit will res ult in " r ·serv' defici t (;ic lu ,tl reserves fa ll in below requir d rese rves) unless th t.: Lx,n k hold s ex ess r s ' rves. Since intcrc t inco m 1s los t when exc s rese rve arc he ld, accc s to immedi ately ava il able fun ds is impo rt ant. A s a n a lternative to obtaini ng im medi ately ava il abl e rese rves by bo rrowi ng from the Federal R eserve Bank , member banks may borro w in th e Federa l fu nds market. Federa l fund s arc immed iately available loans made mos tl y by commercia l banks to othe r co mme rcial bank s. B,1 nks that do not hold excess r se rves nee I nol depe nd o n cred it fro m th eir fe der.. tl Rese rve Ba nks in makin g re se rve adj ustments. T hey may borrow or buy Fede ral fun ds. Also, banks with current cash flow surp lu ses may ea rn a return by lending or selling Federa l fund s rath er than holding excess re erves. Federal fun ds are immed iate ly ava il able beca use th e Federa l Reserve Ba nks will adjust th e reserve accoun ts of member ba nks upo n rece ivi ng proper instructions by wi re o r oth e r me-111s. T he accou nt or th e ba nk bo rrowi ng F deral fund s is imm edi ately increased and th e account o f th le nding ba nk is imm ed iately redu ced. T he loca ti on of selling and buying banks make no d iffere nce. La rge ba nks in New York and oth er fin anc ia l ce nters act as bro ke rs and / o r dea lers in Fede ral fund s. l 1 Monthly RPv1ew • Nov mb( r 1969 An y bank wi shing to buy or sell may make a rra ngeme nts with o ne of th ese acco mm odating banks. Or, banks may dea l direc tl y with one a noth er. T he leading ba nk s in reg io nal fin ancial centers usuall y se rv as acco mm odato rs fo r banks in th eir a reas and , in turn , a rc linked to th e N ati o n's majo r fin ancial centers. Thu s, banks anyw here in th e Nati on may deal in Federa l fun ds. No nm embe r bank and no nb a nks may a nd do pa rtic ipa te, a ltho ugh a member ba n k will a lway be in vo lved either as bu ye r, sell er, -o r in te rmedi ary. Federal fund s loa ns may take var io us fo rms, the most com mon fo rm be ing th e simple un sec ured ovcrni tht loa n. A not h r fr qu nt ~1rra n cment is th e re pur ·h,1sc ,1grcc 111 cn t, whcr 'by I h ' le nckr or l·ed ' r,d fun Is agr cs l o pur ·hase sec urit i 's fro m th e borrowe r of fun ds with th e co nditi o n th at th e bor rower will repur hase th e securitie a t a la ter date. CHANGING ROLE OF MARKET The import a nce of th e Federal funds ma rket as a reserve adju stm ent mechani sm has increas d co nsidera bl y in recent yea rs. Prio r to 1965, the ma rke t functi oned largely as an altern ati ve to Federa l Rese rve credit fo r borrow ing ba nks a nd as an oppo rtunity for se llin g ban ks to in vest fund s th ..1t wo uld oth erwise be held a. exc ss re rves. T hi s limited role of the ma rket re. ul tcd in th e Federa l fun d ra te rema inin g at all tim es below th e di sco un t rate. As b uying banks wo uld bo rrow fro m th eir Federa l Reserve Banks ra th er th an pay th e higher Federa l funds ra te, th e re were no bid s at ra tes higher than th e di sco unt rate. F or bo rrow ing ba nks, th e Federal fund s market was a d irec t substit ute fo r Re ervc Bank credits. Eve n prior lo 1965, howev r, so me ba nk s th at purchased Federal fund s pro bab ly wo uld not have borrow d fro m th e Fede ral R ese rve Bank, but wo uld have sold as cts in o rde r to cover rcse rv de fi cit . By th e amc to ken, so me banks sold fun d ra th er than purchased ot her as ets. ll Te nth D istr ict Bank s Table 1 GROSS SALES AND GROSS PURCHASES OF FEDERAL FUNDS BY FEDERAL RESERVE DISTRICTS December 31, 1965, and December 31, 1968 Sales Purchases Dec. 31 , 1965 Dec. 31, 1965 Dec. 3 1, 1968 Per (In Millions of Dollars) (In Millions of Dollars ) Cent Change from Dec. 31, 1965 Per Cent of Member Dec. 31, 1968 Per (In Millions of Dollars) (In Millions of Dollars ) 4 20 7 150 1,281 9 4 7 Bank Total Cent Change from Dec. 31 , Per Cent of Member Bank 1965 Total 306 2,417 105 89 33 64 340 431 5 81 407 402 6 29 51 294 93 16 52 198 93 221 302 3 4 957 300 146 123 607 668 496 226 222 826 136 207 1,190 1, 177 16 2,401 39 7,316 156 205 297 100 2,440 7,472 206 Member Banks Baston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 106 572 154 199 95 126 279 51 18 74 91 99 Total Member Banks Nonmember Banks 1,861 242 Total Commercial Banks 2,103 247 1,108 405 507 237 372 862 236 89 254 368 866 134 94 163 156 150 197 210 363 396 245 16 4 2 5 307 7 774 16 100 ~ 198 395 6,747 221 5,551 4 13 4 2 2 8 SOURCE : Board of Governors of the Federal Rese rve System and Federal Deposi t Insurance Corporation . At a ny rate, the market has c hanged co nside rab ly since 1965. It ha s dev loped into a full-fledged mechani sm for re erve adjust me nt purposes. The c lo e link with membe r ba nk borrowing from Federal Reserve Banks and with the discount rate has been broken . The Federal funds rate has been above the discount rate most of th e tim e s ince 1965. Buying banks view th e market as a primary so urce of fund s fo r covering c urre nt cas h fl ow deficits o r reple ni shing excess r se rves . Selling ba nk s, a a who le, view Federa l funds as o ne type of secondary rese rve asset rather than a fund s that would ot herw is be held ' IS excess re se rves. Along w ith th ese qu a litat ive changes, the growth of th e volume of Federal fund s tran s12 actions has been especia ll y mark ed in th e pa st few years.' The total amo unt borrowed in the Federa l fund s mar ket by commercial banks increased from $2.4 billion in Dece mber 1965 to $7 .5 billion in December 1968 . (See Table 1.) Federal fund s sold by b a nk s totaled $6. 7 billion in D ece mber 1968 , compared with $2 . l billion in 1965 . Note that alm ost a ll borrowings are acco unted for by membe r banks, while ' ' a uti o n must be exe rcised w hen drawin g cond us io ns from ava ilabl e ed e ral fund s data . In th e first p lace , th e inform a ti o n o n the ecl era l fund s t ra nsa ti o ns o f m e m ber a nd no nm e mber ba nk s is avail a b le on ly for 1he Jun e and Dece mber ca ll dat es s tartin g with D ece mb er 1965. Seco nd , pri o r to June 1967, th e repo rt ed fi g ures exc lu ded tra nsac li ons occurri ng und e r re purc ha se ag ree m e nts. Finally , th e ca ll repor t fi g ures a re probab ly mi lea ding b eca u se bank s tr:icl ition a ll y a tt e mpt to a void re porting a b orrowed pos iti o n. Federal Reserve Bank of Kansas City in the Federal Funds Market nonm embe r ba nk s acco unt for a significa nt portion of th e le ndin g. Also, note th at on each of the da tes for which data are ava il able, comme rcial ba nk s as a gro up were net borrowe rs of Federal fund s- that is, gross borrowing exceeded gross le ndin g. In othe r words , those nonb a nk s th at participate in the ma rk et arc net se llers to th e ba nking syste m. Federa l funds activity accelera ted sharply in th e first half o f 1969 , as show n by th e fi gures o n week ly reporting banks. On Dece mber 31, 19 68, purchases of funds by these ba nks totaled $7.0 bi lli o n. By July 2, 1969, purc hases had increased to $ 12 .9 billion. On the latter date , sa les to ta led $5 .4 billion, compa red with $3.8 billion on Dece mber 3 1, 1968. The recent growt h in th Federa l funds market has bee n a widespread I he nomeno n, affect ing a ll sectio ns of th e Nation. (See Table I .) Over the 3-yea r period from D ecember 1965 to D ece mbe r 1968 , both sales and purchases of member ba nk s increased most rapidly in th e San Francisco a nd Minn ea polis F ederal R eserve Districts, while grow th was slowest in th e Boston a nd New York Districts . At T e nth Di strict member banks, loa ns of Federa l fund s increased from $74 million in 19 65 to $254 milli on in 1968, o r 245 pe r cent- o ne o f the more rapid ga in s. Borrowings adva nced fro m $52 million to $ 123 million, o r a n in crease o f 136 per ce nt- one of the sma ll e r advances. A s shown by Chart I , purchases at Tenth District member banks advanced sharply in the first half of 1969 and sales decl ined , placing purchases above sales for the first time on reco rd. This development is confirmed by othe r da ta. Starting with the week e nding Septe mber 18, 1968, member bank began reporting th eir da il y Fede ra l funds tra nsactio ns to th e Fede ra l Reserve Bank o f Ka nsas City. Th ese repo rts show that gross purchases of Federa l funds by District banks began increasing in ea rl y January 1969, whi le gross sa les declined . Monthly Review • Novernber 1969 Chart 1 TENTH DISTRICT FEDERAL FUNDS TRANSACTIONS December 1965- June 1969 Mi 11 ions of Do 11 ors 350 300 Gross Sales Member Banks 250 200 150 100 50 ,, ," ______ ,,,,, ,," 0 .___ __.___ _.___ ,,,' ,-.._ ...... ..,I ...... "" Gross Purchases Member Banks __._______~ - ~ - - - ' - ~ M i 11 ions of Do II ors +15 0 +100 Net Pure hases Member Banks -200.___ _..__ _...__ __.__ _.__ _.__ _...__ ___.__ ___, 12/65 6/66 12/66 6/67 12/67 6/68 12/68 6/69 SOURCE : Board of Gov e rnors of the Fe d era l Res er ve Sy s te m a nd Federa l Deposi t Insurance Corporation. MEASURES OF MARKET ACTIVITY The figures on gross purch ases and sales in Table I a nd C hart I include transacti o ns undertaken by accom modating ba nks that sta nd 13 Tenth District Banks ready to buy and sell funds in acco rdance with a rrange me nts. These banks commonly record both sales and purchases during each wee k . Offsetting sales a nd purchases a re referred to as two-w ay transactions, and gross sales or purc hases less two-way transactions a re re ferred to as " net Federa l fund s sold or purchased. " The difference betwee n gross sa les a nd gross purchases is referred to simply as " net sa les or purcha ses of F ede ral fund s." To illustrate , suppose th at in eac h wee k during so me specifi ed period , B ank A buys a daily average of $5 00 ,000 a nd se ll s an ave rage o f $400,000, whil e Bank B se ll s $200,000 a nd mak es no purc h,1scs. For these tw o bank s, th e v,1rio us m easures of h ~dc rnl fund s ac tivit y wou ld be as fo ll ows: Ba nk A Ba nk B Total ( In tho usa nds of doll a rs) Gross Federal funds 400 sold Gross Federal fund s purchased 500 N et Federal fund s sold 0 Net Federa l fund s purchased 100 N et sa les ( + ) or purchases ( - ) o f Federa l fund s - I 00 Two-way transactions 400 200 600 0 500 200 200 0 100 + 200 + 100 0 400 The net Fede ra l fund s figures a re intended to measure the gross amounts th a t would have been reported if ba nks did not unde rtake twoway transactions . ARGf BANKS DOMINAT MARKF Most o f th e act ivity in th e Federa l fund s ma rk et is accounted for by thr e Fede ral R ese rve Di stri cts. Thu s, in D ecembe r 1968, 62 pe r cent of gross purchases of F ede ral fund s underta ken by membe r bank s we re made by me mber ba nks in the N ew Y ork C hicago a nd ' 14 ' San Francisco District . Furthermore, ba nks in the se three Districts are more important as gross buyers of F ederal funds th an in te rm s of total deposits, ho lding o nly 55 per ce nt of all membe r bank depos its. One reason for thi s is th at th e largest me mber banks are located in these Districts. B a nks in th ese three Di strict s ha ving de pos its in excess of $500 million ho ld 70 per ce nt o f tota l deposits held by all member ba nk s in thi s size gro up. Th e impo rtance of la rge banks in th e Federa l fund s ma rket is even grea te r t han th e ir depos it size wo uld indicate. In th e Te nth Di stri c t, th e larges t banks acco unt fo r mos t or th ,1ctivity in th e Fcdcr,il fund s mark ' l. From . c ple mbc r 1968 through .J unc 1969, th e lar •es t bank s- th os with deposits exceeding $ I 00 milli o n- acco unt d for be twee n 85 and 90 per ce nt of th e dollar vo lum e of gross purch ases of Federal fund s, of net purchases of F ede ral fund s, and of twoway transaction s. (See T able 2.) About oneha lf of gross sales of Federal funds were accounted for by the la rgest ba nks. Th ese percentages , somewhat surpri sing conside ring th a t these largest District b a nks accou nt for o nl y 42 per ce nt of tot a l deposit , indicate th e exte nt to which la rge bank s do minate mos t aspects o f th e Federa l fund s m a rket. In o ne important a pec t, however, th e sm all er bank s participate acco rding to th e ir impo rta nce in te rm s o f to ta l depos its. Except for ba nk s with deposits of less th a n $IO milli o n, the sm alle r District me mber ba nks account for about th e same percentage of total deposits as of net Federal fund s sold , th at is, sales of funds after adju sting for two-way tra nsaction s. (See Table 2.) The largest banks, on th e o the r ha nd , were sli ghtl y less important in te rm s of ne t sa les o f Federal fund th a n in te rm s of total deposits. NET SELLFPS AND NET BUYER .Judging fr o m call repo rt d ata, me mbe r ba nk s in so me F ede ral R ese rve Districts a re typ icall y net buye rs or net sell e rs o f Federal fund s, Feder al Reserve Bank of Kansm, City in the Federal Funds Market Table 2 FEDERAL FUNDS TRANSACTIONS BY BANK SIZE AS PER CENT OF DISTRICT TOTAL T NTH DISTRICT MEMBER BANKS September 1968 to June 1969 Daily Ave rage for District Under $5 $5-$10 (Mi llions of Dollars) Deposit Size in Millions of Dollars $10-$25 $25-$ 50 $50-$ 100 Over $100 Per Cent of District Gross Fed era I funds sold 222 .8 1.1 5.8 17.9 12 .6 11.6 50 .9 Gross Federal funds purchased 197.7 .l .5 3.4 5.0 5.5 85 .6 Net Federal funds sold 170.6 1.4 7 .5 22.1 15 .6 14 .3 39 .1 Net Federal funds purchased 145.5 .l .5 3.1 5 .8 6.4 84 . 1 52.2 .1 .3 4.2 2.9 2.8 90 .0 14,331 .5 6.7 12 .3 19.0 10.2 9.4 42.4 1· 15.0 - 55 .7 Two -way transactions Total deposits Daill Avera 2e in Millions of Dolla rs N tsal s( I ) orpu rchas SO URC E: Fed rol Ro rv s( - ) I 25 .o I 2.3 33 .1 18 .2 Bonk of Kansas City . whi le in oth er Di stricts th ere is no sy tematic pattern . The New York a nd Dallas Di strict bank s were net buyers on each of the seve n call dates from Dece mber 1965 throu gh December 1968 , whil e banks in the San Francisco, Ch icago, a nd St. Loui s Di stricts were net buye rs o n six date s. The Kansas City and levc l.:lnd Districts we re net se ll ers on al l of th e dat s, whil Ri ch mond and At lanta were net se ll rs on eac h elate excep t o ne. Boston had net sa les on fo ur dat es, Phil adelphia on five, and Minnca poli o n two . The net Federal funds positio n of a Di strict depend s to so me ex tent on the struct ure of banking in the Di strict, since la rge banks tend to be net bu yers a nd small bank s net sellers. Thu s. in the New York a nd San Fra ncisco Di stri cts a relati vely la rge perce ntage of tota l deposit s is held by ve ry la rge bank s, whil e in th e Atlanta a nd Kans,1 s City Di st ricts th e lar 'Cr bank s ,1cco unt for a relat ive ly small propo rti on of tota l depos it s. The banking structure, howeve r. is not th e only dete rminant of th e net Federa l fund s pos itio n of the different Di strict . Fo r exa mple, the Dalla s District is typically a net bo rrower and Cleveland Monthly Review • j 12 .1 November 1969 a net le nder, eve n though deposits are di stributed much mo re eve nly among ba nks in th e Dall as th a n in the Cleveland District. Even so, the flow from small to large banks accou nts for a large portion of th e total Federa l fu nds act ivity. The size and importance of th e ma rket depends to a igni ficant deg ree on th e fact that a re lat ively la rge number of small banks loan Federa l funds to a rcl,1tivcly small num be r of large bank s. Refl ec ting th e structure o f th e indu try in thi s a rea, Tenth Di stri ct bank s as a gro up arc u uall y net sell er. of Federal fund s. Even in the fir st half of 1969, when Di trict member bank s as a gro up were net buye rs of Federal funds , 76 per cent of the banks th at participated in the mark et we re net sellers. For th e Septe mber 1968-Dcccmbe r 1968 peri od, 78 pe r ce nt maintained a net lending pos itio n. (Sec Table 3.) Most of th e banks that wcr sell ers in the S ptcmber- D cc mbc r peri od maintained this po itio n in th e J anu ary 1969-J un c I 969 p ri od. By the amc toke n, onl y a few of th e net purch::isc rs of th e ea rlie r period became net lende rs in th e J anuary-J un c peri od. Some ba nk s th at did not partic ipate in th e market 15 Tenth District Banks in th e September-December period did so in the January-June period. Most of these became net sellers. It may be noted th at a majority of Tenth Di strict member bank s-60 per cent for th e entire September-] un e period- did not partici pate in th e Federal fund s mark et in any way . (Sec Table 3.) Furth erm o re, of those that parti cip c1 ted, a signifi ca nt numbcr- 43 per cent - made no purch ases, entering th e mark et on th e se lling side onl y. Althou gh alm ost twice as many bank s parti cipated in th e Federal fund s market durin g th e September-June peri od as borrowed at th e Federa l Rese rve Bank , th e numbe r of b;ink s that bo rrowed fro m th e Feder;\! Rese rve 13;1nk exceeded co nsiderabl y th number o f banks that were net buyers of Federal fund s. Both th e low degree of mark et participation and the large percenta ge of sell ers among participants refl ect the fact th at most District member bank s are very small. Most small banks do not undertake Federal fund s transactions and most of those that do are net sellers. For the Se ptember-I un e period , onl y 15 per cent of member bank s with deposits of less th an $5 million and 36 per ce nt of the bank s in th e $5-$ 10 million deposit catego ry participated in the market. (See T able 3.) These two catego ri es of bank s acco unt for 69 per cent of Di stri ct member bank s. A large majority of bank s with total deposits betwee n $ IO million and $50 milli on pa rticip ated in th e mark et at so me tim e durin g each of th e peri ods studi ed, whi le all banks with deposits of $50 million o r mo re entered the mark et at leas t once in eac h period . Sm all bank s th at participate in th e market arc much more lik ely to be net sell ers than large bank s. Excep t for banks with deposits of $ I 00 milli on or more, a large pe rce nta ge of th e banks in e;ic h o f th e size c;1te 1 o ri es th ;1t parti ·ip;itcd in th e mark et were net se llers of fund s in both th e Scptembcr-D cc mber and th e .I anuary-.1 un e pe ri ods . During the Septem ber-Dece mber period, a slight majority of th e larges t Di strict member banks were net seIJ ers of fund s, but for th e J anu ary-Jun e period and for the enti re period most of th e $ I00 million bank s were net buyers. For each of the periods exa mined , most banks in the smaller size catego ri es ( with deposits of $2 5 million or less) th at participated in th e fund s market made no purchases, whereas a large majority of banks Table 3 NUMBER OF BANKS PARTICIPATING IN FEDERAL FUNDS MARKET AS PER CENT OF TOTAL MEMBER BANKS - TENTH FEDERAL RESERVE DISTRICT September 1968 to June 1969 Per Cent of Total Number of Member Banks in District Size of Bank (In millions of dollars) Per Cent of Member Banks with Federal Funds Transactions Borrowers from F.R.B. With Federal Funds Transactions Net Sellers Sellers with no Purchases Net Buyers 14.9 75.0 58.3 20.8 Under $5 11.2 $5 to $10 17 .1 35.7 84.4 50.0 14.4 $10 to $25 30. 1 64 .8 84.2 51.8 14.9 $25 to $50 45 .5 88 .6 79.5 23 .1 20 .5 $50 to $100 75.0 100.0 70.0 5.0 30.0 Over $100 82.6 100.0 39.1 0 60.9 All Banks 22.2 39.9 78.4 42.5 20.4 SOURCE : Federal Reserve Bank of Kansas City . 16 Federal Reserve Bank of Kansas City in the Federal Funds Market th $25-$ 100 milli o n category, a nd a ll of th e la rges t bank s, e nte red the mark et on both th e se llin g and buying side . in CHARACTERISTICS OF PARTICIPATING BANKS Member ba nk s that pa rticipa te in the Federa l fund s mark e t differ in o th e r im portant way. from bank s that do no t pa rti c ipa te. Thi s was tru e , at least, in the Tenth Fede ra l Rese rve Di strict durin g th e S pte mber-J une pe ri o d . Partic ipa ting banks held a lowe r volume of excess re serves and of co rres po nd ent b alances. and borrowed mo re from their Federa l Rese rve Ba nk s. For a ny size gro up exa min ed , th e ratios o f excess rese rves to required re se rvcs and o f co rrespo nd e nt b:dances to required rese rves were sm,tll 'r for p:1rti ·ipatin, banks . ( e T,_1ble 4 . ) The rntio o f amounts borrowed from th e edera l Reserve Ba nk to required re e rves wa s g rea te r for participating banks for each of th e size gro ups, exce pt o ne . For bank s in th e $5-$ IO million de posit ca tegory, thi s ra tio was the sa me for participating as for nonp articipating ba nks. Among banks that participate in the market, th e re see ms to be littl e sys te ma tic difference betwee n net se ll e rs a nd ne t buye rs wit h rega rd to holdin g correspon lent ba la nces and excess r se rves. 'o mparecl w ith no nparti c ipants, n t sellers as we ll as ne t bu ye rs he ld lowe r volum es of excess rese rves a nd co rrc. po nd ent ba la nces. A mi g ht be ex pected , net buye rs o f fund borrowed more fr o m the F ederal R e e rve Bank than net se ll e rs. N everthel ess, even net sell ers obtained more Federal R ese rve credit than ba nks that did not participate in the m a rket. Amon g ne t sell e rs, th e re was so me te ndency for those banks th a t e nte r th e ma rket o n th e se llin g sid e o nl y to hold mo re co rrespondent balance. a nd exec s rese rves a nd to bo rrow les. from th e Federa l Rese rve B a nk than th ose banks that both buy a nd se ll Federa l fund s. The fact th a t banks participating in th e Fede ral fund s ma rket ho ld a small e r volume of corresponde nt b a la nces may indi cate that corMonthly Review • November 1969 respo nd e nt balances are used by p a rticip at ing ba nk to le nd in th e F e dera l fund s market. A s o ne te t of thi s possib ility, co nsid e r wh e ther or not the ne t sa les of Federa l fund s by part1 c1pa tin g ba nk s plu s th e correspondent bal a nces o f th ese bank s is equ a l to the corresponde nt ba la nces of no npa rticip a tin g bank s. Thi s i. act ua ll y tru e for th e ve ry small banks durin g th e Septembe r-Jun e pe riod. Fo r banks w ith tota l depos its o f le. s than $5 million , the rati o of ne t a les o f F ede ral fund . plus cor r sponcle nt ba la nces to required reserves for p a rticipatin g bank s wa s practica ll y th e sa m e as th e ratio of correspo nde nt balances to required r 'se rvcs fo r no n pmtic ipants. For a ll o th e r size 1 roup s cx;1mined , how ·vc r, r.1rli c ip atin g banks he ld n10r in ne t s,tl es of r e d ' ml fund s <1nd o rre. po nd e nt b,tl a nces co mbin ed than no npart ic ip a ting banks he ld in co rre ponclent b a la nces a lone . For ne t se ll e rs , es pec ia ll y non purch ase rs, thi te ndency was quite pronounced. An ad diti o n a l indicat ion of the e xtent to which funds th a t wo uld o therwise be held in cor respondent bal a nces are sold as Federal fund s may be found by comparing th e changes in these accou nts in . th e January-June period w ith th e Septembe r-D ecember pe riod . Di strict membe r banks in ach of th e size gro ups exp ri e nc d decreas s in n t s;_tl es o f Federal fund s. ( Bank s with depo sits in excess o f $ I 00 million we re net se ll e rs in th e Se ptemberDece mbe r per iod a nd net buyers in the January-Jun e period.) At th e ame time , declines occurred in th e correspondent balances of th e small er banks and in demand balances due banks of the larger banks. For banks with deposits in excess of $ I 00 million , for e xample, the decline in de ma nd balances due banks amou nted to a ro und o ne- ha lf of the change in n t sa le o f F deral fund ' . Th e a n a lys is of th e precedin g paragraph s points to th e lendin g res ul ts de nt bal a nces, as the volum e conclu sio n that Federal fund s in some red uction in co rres ponbut th e reduction i not as la rge of net F ede ral fund s sold. 17 Tenth District Banks Table 4 SELECTED RATIOS BY BANK SIZE - TENTH DISTRICT MEMBER BANKS September 1968-June 1969 Size of Bank in Millions of Dollars With Federal Funds Transactions Without Federal Funds Transactions Net Buyers Net Selle rs No Pu rchases Correspondent Bala nces a s Per Ce nt of Reguired Rese rve s Les s than $5 $5 to $10 $10to$25 $25 to $50 $50 to $100 Ov er $100 136.7 108.2 100.0 87.7 116.5 95.6 93.7 84.5 75.1 47.3 118.0 107.1 93 .0 89.7 76.9 44.2 116.0 116.9 94 .0 98 .4 93.9 83 .2 74.3 52 .1 105.9 78 .4 127.9 Excess Reserves a s Pe r Ce nt of Requi re d Reserves Les s th a n $5 $5 to $ 10 $ 10to$ 25 $25 to $50 $50 to $ 100 Ove r $100 13.2 7 .9 7 .1 10.2 5 .9 3.7 1.8 .8 .6 4.9 11.8 8.6 2.0 1.3 .9 .4 9.7 5.4 4.0 1.9 .8 1.0 10.4 6.1 4 .3 2.2 Borrowings from Fe d era l Reserve Bank s as Pe r Ce nt of Re guired Reser ves Less than $5 $5 to $10 $ 10 to $25 $25 to $50 $50 to $100 Over $100 .8 1.0 1.4 .6 1.6 1.0 2.2 2.5 5.1 2.1 2 .8 3 .8 3 .5 6.3 4 .9 5 .5 1.5 .8 2.0 2.2 1.6 .8 .7 1.2 4.6 4 .0 Time and Savinf!s Deposits as Per Cent of Total Deeosits Less than $5 $5 to $10 $10 to $25 $25 to $50 $50 to $100 O ve r $100 41.7 48 .3 50.6 50 .5 47.2 48.4 48 .3 48 .0 45.2 39.5 46.2 52.9 49.2 49.1 48 .2 47.8 48 .1 47 .8 46.4 44 .6 40.2 38.4 48.7 46.3 47.2 51.4 Loa ns (Exclud inf! Federal Fund s So ld) a s Per Cent of Total Deeosits Less than $5 $5 to $10 $10 to $25 $25 to $50 $50to. $100 Over $100 54 .8 53 .6 56.3 56.7 57 .0 64.1 54 .2 58.3 53.2 55.7 56.0 59.8 58.4 63 .0 58 .2 62.7 56 .8 55 .6 52 .1 53 .5 55 .1 53.8 n. a. n.a . n.a. n.a . n.a . not ava ilable. SOURCE : Federal Reserve Bank of Kansas City. A sim il ar co ncl usion is wa rnn ted in co nnection with exec s re. rvcs. A lthough part icipat ing ba nks hold a lower vo lum e f excess rese rve s th an nonpart icipa tin g ba nks, it i clea r that participa tin g ba nk s arc no t merely placin g fun ds in Fede ral fun ds loa ns th at th e nonpart1c1pants arc hold ing in excess reserves. T he rat io of th e sum of exce s re crves plus net 18 sa les of funds to rcc.i ui red rese rves fo r participating banks is co n iderab ly larg r than the ratio of xccss re crvcs to requ ired r rvcs fo r nonpart icipa ting ba nks. T he diffe rences betwee n part icipatin g and nonpa rticipa ting ba nk s sugge t t hat ba nks that pa rticipate in the Federa l funds market may be so mewhat more aggre ssive and less co nFederal Reserve Bank of Kansas City in the Federal Funds Market se rvative th an nonparticipant . Th at the fund s loaned by th pa rticipatin g bank s are not entirely offset by lower holdings of excess rese rves and corre spondent balances suggests that participating in the Federa l fund s market is a part of a broader behav ior pa ttern- a pattern th at emph a izes th e utili za ti on of profitab le outlet for lendin g .1 nd borrow in g. Thi s suggesti on is strength ened by the finding th8t parti cipating bank s tend to borrow more fro m th eir Federa l Reserve Ba nks. ECONOMIC IMPACT OF THE FEDERAL FUNDS MARKET Lik e oth ' r re~crve :,d juslmc nt 111 .i rk ts, th e h .: de r~tl fund s 111:,rk ·1 L1ci lil:1t ·s th e di ~lrih11 ti o n of res ' rvcs amon g b<1nk s, ,1n d th ereby co ntributes to th e effi cie nt all oca ti on of bank credit in the eco nomy. Furthermore, th e wo rk ings of th e Federa l fund s market tend to encourage bank cred it ex pansion. This potential impact on bank cred it may be offset by th e Federal R ese rve System. If the Federal R eserve does not offset th e impact of the Federal fund s market on the volume of credit extend ed by th e bankin g indu st ry, the opera tio n of the Fede ral fund s market probably results in an ex pan ion o f ba nk credit in part at lea t at th cxpc ns · of oth er types of credit. In this context, th Federa l fund s mark et is a part of th e et o f innovat ions whi ch th e bank ing system has evo lved in th pa t decade that has bee n in st rum ental in enh ancing th e position of the banking industry as a suppli er of credit in the economy. The Federal fu nds market has a dim ensio n not fully encompassed by the concept of a reserve adju stm ent mec hani sm. Thi s additional dim en ion ar i cs from the fact th at, ove r extended time period , omc banks arc net buyers of Federa l fund s while ot hers arc net sell ers. It wa s noted th at the all ocati on of rese rves is affected as bank s use the mark et to adj ust their reserve pos itions. Allocational effects of rese rve adjustm ents, however, are usuall y Monthly Review • November 1969 thou ght of as temporary, as th e direction of credit fl ows ch anges and different banks expe ri ence cash fl ow deficit s and surplu se in turn . H owe ver, when some banks adop t a perm anent net borrowing and oth ers a net lending po iti on, th e Federal fund s mark et becomes invo lved in a more bas ic way in th e allocation of cred it in th e econo my. In ge nera l, th e direc tion of any fl ow of fund s re fle ct cred it demand s. Cred it flow s to area , of relati ve ly strong demand from area. of relati vely weak demand. In th e case of Federa l fund s, howeve r, the structure of th e bankin g in lu stry affec ts th e direc ti on of fund movcm ' nts. That is, sm:tll b,111k s ten d to be se ll ers o f fund s and l:1r c b;i nks tend to he bu ye rs. Th e fl ow ()f Fcdc r,tl fund s from sm;1II to large b,ink s i~ not ncccss,1rily a rcfle ti on of re lative cred it dema nd s. It do not ncccs arily mea n th at th e dema nd fo r cred it at small banks relat ive to th e reso urces of small bank s is less th an at larger banks. Sm all bank , to some ex tent because th ey are small , have traditionally held relatively large r volumes of cash and secondary rese rves, so they would natu rall y be expected to sell' fund s. To some extent, Federa l funds loa ns arc simpl y another econd ary re erve in str um nt which small er banks have emp loy d as th ey lowered their excess re erves in response to the high and ri sing interc t rate leve ls in the postwar period. Smaller banks would undoubtedly have placed om of th eir F ede ra l funds loan s into other secondary reserve instruments if the funds market had not been developed. An important question with rega rd to the small bank-l arge bank flow is the impact on th e availabi lity o cred it to th e local customers of small ba nks. A · long as Federa l fund s loa n se rve as an altern ative to cas h or cco nd ary rese rves , th ere will be no impact. But it is possibl e th at, in so me ca ses , banks pl ace reso urces into Federal fund s loans th at would otherwise be used to make loans to local customers or to purchase locally iss ued sec urities. 1 19 Tenth District Banks in the Federal Funds Market The data ex a min ed here do not provide a ba. is for a straightfonva rd comm ent on thi · matte r. It wa . ea rli e r rated th at th e difference betwee n I a rt1 c1pa tin g and nonpa rti cipatin g ba nk . with r ga rd to r ervc pos itio n 111 a n,1!!emcnt sLw:ge t th a t pa rti cipatin g bank may be relati vel y agr: rcss ivc and al e rt t pro fil c1bl e opportunit ies. If thi s is tru e. it i. reaso nable to expec t that thi s t pc o f b,ink would bee. pc i,tl ly concern ed to d vc lo p and nrnint ain I ,ii 20 bu. incss. Howev r, Ta bl e 4 shows th at, for o mc size gro up . c p ciall y th e 25- 50 mil lion depo. it ca tego ry. no np a rti cipating ba nk s hold mo re loa ns relati ve to depos iL th an pa rti cipa nts. In th c r size gr up . . c. pcc i,111 th e . mcdl cr ca tego ri c . th e o ppos ite hold . . Additi on,1 1 re. ca rch is und er way th ,1 t may all ow mo re definit e sU1tcments on thi qu es ti on. Th e res ults of thi s resecirch wi ll a ppea r in th e M o11tlily R el'ie11 · in th e fir st part of 1970. Federal Reserve Bank of Kansas City
@FedFRASER