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Confidential (FR) Confidential (FR) Class FOMC Class II FOMC Part 2 April 9, 1975 CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System CONFIDENTIAL (FR) April 9, 1975 CURRENT ECONOMIC AND FINANCIAL CONDITIONS By the Staff Board of Governors of the Federal Reserve System TABLE OF CONTENTS Section II DOMESTIC NONFINANCIAL SCENE Industrial production index.................................. Capacity utilization...... ....... ,........ Labor market............... Page ,................. ....................................... - 1 - 1 - 1 Auto sales............. ..................................... ...... - 2 Auto production................................................ - 3 Retail sales........................................................ Consumer surveys ..........,....,.................................. New orders......................................................... Contracts for commercial and industrial buildings.............. ............. ....................... ..... Business inventories............................................. Private housing starts.............................................. Federal spending................................................... Average hourly earnings............................................ Wholesale prices.................................................. Consumer prices................................................... DOMESTIC FINANCIAL DEVELOPMENTS - 3 - 3 - 3 - 4 4 4 5 6 6 7 III Short-term securities markets..................... ................. Long-term securities markets.... ................................ Monetary aggregates................................................ Loan developments................................................ - 1 - 3 - 7 -10 IV INTERNATIONAL DEVELOPMENTS Foreign exchange markets........................................... - 1 Euro-currency markets............................................... - 2 U.S. merchandise trade............................................ - 6 U.S. international capital transactions........ ..................................... - 8 Monetary conditions in major foreign industrial countries.............. .............................. -11 APPENDIX A A Brief Description of the "Tax Reduction Act of 1975"............. A-1 DOMESTIC NONFINANCIAL SCENE April 9, II -- 1975 T - 1 SELECTED DOMESTIC NONFINANCIAL DATA AVAILABLE SINCE PRECEDING GREENBOOK (Seasonally adjusted) Latest Data Period Release Date Data Per Cent Change From Three Year Periods Preceding Earlier Earlier Period (At Annual Rates) Civilian labor force Unemployment rate (per cent) Insured unemployment rate (%) Nonfarm employment, payroll (mil.) Manufacturing Nonmanu facturing Private nonfarm: Average weekly hours (hours) Hourly earnings ($) Manufacturing: Average weekly hours (hours) Unit labor cost (1967=100) Mar. Mar. Mar. Mar. Mar. Mar. 4-4-75 4-4-75 4-4-75 4-4-75 4-4-75 4-4-75 91.8 8.7 6.5 76.4 18.1 58.2 4.21/ 8.1/ 8.2-5.9-1 - 5.1 -10.2 - 3.5 Mar. Mar. 4-4-75 4-4-75 35.9 44.2 Mar. Feb. 4-4-75 3-29-75 38.7 143.8 36.1-1/ 5.5 1/ 38.-8-1 9.2 Industrial production (1967=100) Consumer goods Business equipment Defense & space equipment Materials Feb. Feb. Feb. Feb. 3-17-75 3-17-75 3-17-75 3-17-75 3-17-75 110.3 117.9 119.4 81.6 106.2 Consumer prices (1967=100) Food Commodities except food Services 2/ Feb. Feb. Feb. Feb. 3-20-75 3-20-75 3-20-75 3-20-75 157.4 171.9 145.5 162.6 7.7 .7 10.0 9.7 Wholesale prices (1967=100) Industrial commodities Farm products & foods & feeds Mar. Mar. Mar. 4-3-75 4-3-75 4-3-75 169.7 168.6 173.0 - 7.4 Feb. 3-19-75 1194.0 2.9 Feb. Feb. Feb. Feb. 4-1-75 4-1-75 4-1-75 4-1-75 37.0 12.1 9.9 2.1 Jan. Feb. Jan. 4-4-75 4-1-75 4-4-75 1.68 1.93 1.46 1/ 1.68-1/ 1.92 1.4 1.48- 1/ 1.54/ 1.7 1 -/ 1.43- 1/ 1.471.4' 1.34 Feb. 4-1-75 .812 .78& 81 .7221/ .721- Feb. Feb. 4-8-75 4-8-75 46.8 11.8 1.9 3.3 33/ (mil. units) Auto sales, total Domestic models Foreign models Mar. Mar. Mar. 4-4-75 4-4-75 4-4-75 7.7 6.0 1.6 -16.1 -15.6 -17.7 Housing starts, private (thous.)/Leading indicators (1967=100) Feb. Feb. 3-18-75 3-31-75 Personal income ($ billion) 3 / Mfrs. new orders dur. goods Capital goods industries: Nondefense Defense ($ bil.) Inventories to sales ratio: Manufacturing and trade, total Manufacturing Trade Ratio: Mfrs.' durable goods inventories to unfilled orders Retail sales, total (S bil.) GAF 1/ Actual data. Feb. 2/ Not seasonally adjusted. 977 156.6 -39.5 -22.0 -30.4 -28.7 -45.7 2.3 -30.4 1.6 5.; 3.3- 2.2 - 9.8 .4 - 6.9 -21.1 - 2.2 36.71 36 .4 3.7 8.1 39.4-- 40.3-1/ 16.8 13.7 -37.5 -26.6 -35.4 -11.5 - 8.1 - 6.2 .9 -17.2 1/ -10.0 -52.1 - 7.8 6.4 7.3 10.1 11.1 8.9 12.2 11.5 6.8 5.0 12.5 18.6 -33.1 3.2 - .7 7.2 (Not at Annual Rates) 2.5 2.9 -14.4 - 7.1 - 6.5 - 1.4 29.3 - 1.9 1.0 3/ At annual rate. .11/ 7.2-1/ -10.1 5.3 3.0 7.1 -. 2 -12.6 -10.6 -12.9 2.4 8.6 4.0 46.4 -13,0 -18.4 15.1 -3.9 -48.1 -4.0 - 8.0 / II - 1 DOMESTIC NONFINANCIAL DEVELOPMENTS Aggregate economic activity continued to contract in March although the decline was not as steep as in recent months. Production and employment both dropped less than in February, but the unemployment rate resumed its sharp climb. Business durable orders in February rose for the first time since last August, and there were further indications in March of a firming in consumer goods purchases. In addition, there were indications of a further lessening of inflationary pressures. The industrial production index is estimated to have declined about 1 per cent in March, well below the drop in each of the prior four months. Production of business equipment apparently fell further and output declined in the materials industries, especially in paper, chemicals, and basic materials. But consumer goods production stabilized as auto assemblies picked up somewhat, the decline in other durable goods output slowed and nondurable consumer goods production apparently leveled off. further. In April, auto assemblies are expected to rise somewhat Production in materials industries in March was down about 20 per cent from last September's peak, implying substantial liquidation of materials inventories. Capacity utilization for major materials declined further in March to about 68 per cent, the lowest operating rate since the stell strike in October 1959. The labor market weakened further in March but private nonfarm manhours dropped less than in most recent months. Nonetheless, the unemployment rate resumed its steep upward climb, rising from 8.2 to 8.7 per cent, as the civilian labor force increased by more than II - 2 300,000--entirely among adult women, whose number had declined in February. Unemployment increased among all labor force groups,with There was also blue collar workers hard hit by continued layoffs. a rise in the number of persons working part time for economic reasons in the first quarter, and a substantial increase in the number of discouraged workers who have given up looking for work. Nonfarm payroll employment also fell less sharply in March than in recent months. The 325,000 drop brought the total loss in payroll jobs to more than 2.5 million since last October's peak. Again in March much of the decline was in manufacturing, particularly in the metal and metal-using industries and in apparel. ment also dropped sharply. Construction employ- Employment in service-producing sectors continued to show little change, with an increase in State and local government offset by reductions in trade and the service industry. It would have been surprising if auto sales had not fallen back following the period of rebates which accelerated the timing of many purchases, and in March sales returned to about the December prerebate level. It is not clear as yet how much the rebate program may have added, on net, to auto demand. Sales of new domestic-type models were at a 6.0 million unit annual rate in March, 16 per cent below the February rate, with the decline entirely among small cars. Sales of foreign autos dropped by about the same percentage, to a 1.6 million unit rate, after rising quite sharply in the prior two months. During the month, Chrysler twice extended its rebate program on selected models while GM, AMC, and Ford announced substantial cost reductions through II - 3 equipment deletion. million unit rate. Auto production was increased in March to a 5.6 Including Canadian imports, this was about equal to sales, and stocks were about unchanged from February's level. Based on weekly data we estimate that retail sales, exclusive of autos and nonconsumer items, rise by about 1.5 per cent in March, following increases of 1.2 per cent (upward revised) in February and These sales had been showing pronounced weak- 1.3 per cent in January. ness late last year. Outlays for furniture and appliances rose about 1.2 per cent and expenditures for general merchandise were up for the second successive month. Total retail sales, including the declining auto component, are likely to have been essentially unchanged in March. The results of two consumer surveys indicate less pessimism than reported at year-end. The quarterly Michigan survey--taken in February--reports that its index of consumer sentiment has risen since last November and December, and that respondents now expect a lower inflation rate. The February Conference Board survey of attitudinal questions reports a pickup from a December low to somewhat above the October level. Both of these surveys were taken before the tax reduc- tion bill was enacted. Hence, the next few surveys will be watched with special interest. Total new orders for durable goods rose 2.5 per cent in February (p), the first increase following five consecutive months of decline in this series. Gains occurred in several categories, but orders for nondefense capital goods, which anticipate business expenditures on machinery and equipment, declined further--by 1.4 per cent in II - 4 current dollars and 1.8 per cent in constant dollars in February (p). During the previous six months, however, these orders had fallen much more rapidly, at an average monthly rate of 6-1/2 per cent. Unfilled orders also declined in February for both total durable and nondefense capital goods. These backlogs have been dropping continuously since last fall. After appearing to level off in January, contracts for commercial and industrial buildings weakened considerably further in February as floor space contracted declined 14 per cent to the lowest The decline, which was mainly in industrial level since the end of 1963. buildings, brought the February total to 42 per cent below the yearearlier level. A sizable liquidation of business inventories apparently occurred in the first quarter. off considerably in January. Inventories held by retailers were The book value of wholesalers' inven- tories declined at a $6.8 billion annual rate in February following a $4.5 billion liquidation the previous month. The book value of manu- facturers' inventories rose at only a $2.2 billion annual rate in February--sharply below the January rise of $14.6 billion--and the dollar value of stocks of both finished goods and work-in-progress actually declined in February. Given the continued rise in industrial commodity prices over recent months, these dollar value figures imply a substantial liquidation of physical stocks. Although private housing starts edged off in February, prospects for a housing recovery have improved as recent flows to thrift II - 5 institutions have greatly exceeded earlier anticipations and the volume of new mortgage commitments has continued to rise above the October low. Moreover, the recently enacted tax credit (5 per cent of the sale price, up to a limit of $2,000, on new units still in builders' inventories) should help clear a substantial part of the stock currently overhanging the market. This legislation should also aid in reducing mobile home inventories. The staff projection of Federal spending for FY 1975 has been revised upward by about $3-1/2 billion from the March Greenbook estimate to $320.9 billion (unified budget basis). This revision reflects the continuing strength of defense and nondefense purchases, as well as a one-time $1.7 billion cash payment of $50 to each of 34 million social security recipients. In addition, the Tax Reduction Act provides a 13 week extension of eligibility for unemployment compensation. For FY 1976, the staff is currently projecting unified budget outlays of $363.3 billion, $4-1/2 billion more than in the March Greenbook--due mainly to increases in transfer payments. Receipts estimates have also been revised, largely to incorporate the specific terms of the Tax Reduction Act of 1975, which differs in timing from our previous assumptions. The early passage of this legislation enables the cash impact of the rebates to be concentrated in the six weeks following May 12 and allows the withholding tax cuts to take effect May 1 of this year. Thus, a greater 1/ A more detailed discussion of the Act is provided in the Appendix. II downward impact on receipts occurs - 6 in FY 1975. While most of the provisions in the Tax Reduction Act do not extend into CY 1976, our projections assume that the new tax rates will be extended by subsequent legislation, except for the tax rebate, the housing tax credit, and the one-time $50 payment to social security beneficiaries. On the basis of the revised receipt and outlays estimates, the staff is currently projecting a unified budget deficit of $43.8 billion for FY 1975 and $77.3 billion for FY 1976. The high employ- ment budget shows a sharp shift toward fiscal stimulus in the second quarter of 1975 with continued but reduced stimulus thereafter. The average hourly earnings index--which adjusts for changes in manufacturing overtime and the interindustry distribution of employment--advanced at a 12.4 per cent annual rate in March. This is a departure from the slowing trend which had been evident in recent months, but seems to be due largely to a bunching of labor settlements. For the first quarter as a whole the increase was 7.4 per cent compared to 10.1 per cent in the fourth quarter. The largest wage increases in March were in the construction industry, where apparently many new contracts were negotiated during the month, and in the manufacturing and the transportation and public utilities sectors. In the less unionized sectors of services and trade, wage increases were more moderate--about a 6-1/2 per cent annual rate. Wholesale prices fell further in March--0.6 per cent, seasonally adjusted--as prices of farm and food products registered their fourth successive monthly decline. Lower prices were particularly evident in II - 7 grains, manufactured animal feeds, vegetable oils, and fresh vegetables. However, some farm prices, such as those for cattle, corn, and soybeans, have increased since mid-March. Prices of industrial commodities in March rose only 0.2 per cent, seasonally adjusted, the smallest advance in almost two years with the exception of last December. Prices rose further for most chemicals, machinery and equipment, crude and refined petroleum and electric power, but continued to decline for nonferrous metals and textile products. Prices of industrial materials on commodity markets appear to have leveled off since the fall, following the sharp drop recorded last spring. In February consumer prices, seasonally adjusted, rose at about the same rate as in January, which was well below the rate of advance recorded last year. The food index was almost unchanged follow- ing six months of large increases. Nonfood commodity prices did rise somewhat more in February than in January, but excluding used cars and houses the two monthly rates are about the same. Among service prices, utilities and medical care posted large gains in Februray and rents also rose sharply; however, there has been a marked slowing in the prices of other services, notably housekeeping and home maintenance costs. - II 8 SELECTED UNEMPLOYMENT RATES (Seasonally adjusted) March 1974 September 1975 February March 5.1 5.8 8.2 8.7 Men 20 years and over 3.4 3.9 6.2 6.8 Women 20 years and over 5.0 5.7 8.1 8.5 Total Teenagers 15.0 16.7 19.9 20.6 Household heads 3.0 3.4 5.4 5.8 White 4.6 5.3 7.4 8.0 Negro and other races 9.2 9.9 White collar workers 2.9 3.5 Blue collar workers 6.0 7.0 10.9 3.5 5.9 State insured unemployment* * Percent of covered workers 13.5 4.5 14.2 4.6 12.5 IICHANGES 9 IN NONFARM PAYROLL EMPLOYMENT (In thousands) Employment March 1975 Average Monthly Change March 1974- Oct. 1974- Feb. 1975March 1975* Mar. 1975 Mar. 1975 Total nonfarm 76,353 -135 -502 -325 Goods-producing Construction Manufacturing 22,332 3,489 18,136 -207 - 47 -164 -451 - 84 -369 -260 -108 -156 Service-producing Trade Services State and local government 54,021 16,804 13,735 12,069 72 6 33 57 - 52 - 71 6 57 - 65 - 37 - 26 31 * Not seasonally adjusted. - II - 10 AUTOS SALES (Seasonally adjusted annual rates) Domestic Imports Total Large Small 1974:QI QII QIII QIV 9.0 9.2 10.1 7.4 4.8 5.4 5.5 3.9 2.7 2.5 3.0 2.2 1.6 1.3 1.6 1.3 Oct. 8.0 3.9 2.5 1.6 Nov. 7.0 3.7 2.0 1.3 Dec. 7.2 4.0 2.1 1.1 8.3e 3.6 3.0 1.7e Jan. 8.1 3.7 2.9 1.5 Feb. Mar. 9.2 7.7e 3.6 3.6 3.6 2.4 2.0 1.6e 1975:QI II - 11 RETAIL SALES (Seasonally adjusted, percentage change from previous period) II-III Total sales Durable Auto Furniture and appliance Nondurable Food General 1974 III-IV 1974-IV1975-1** 1975 Feb. 1.9 2.2 6.3 6.1 4.6 3.4 7.6 -3.0 1.8 1.8 1.8 3.3 .2 -1.2 1.0 3.3 1.2 .0 -3.2 3.4 5.9 10,6 -10.9 -15.5 7.0 9,0 2.0 -7.0 .6 .4 1.6 Jan. 2.5 4.4 3.6 5.0 Dec. .8 .9 4.7 -1.5 -1.3 .6 1.0 - .5 .1 -1,5 1.9 3.7 - .5 Total, less auto and nonconsumption items 3.4 - .1 1.9 .0 1.3 1.2 GAF 1.6 -3.1 1.6 .1 3.3 Real* 1.5 -6.2 n.a. 1.9 1.4 merchandise Gasoline - .4 SDeflated by all commodities CPI, seasonally adjusted. ** March sales estimate based on weekly data. .1 II - 12 NEW ORDERS (Per cent change from prior month) Total Durable Real Current Nondefense Capital Goods Real Current 1974: July Aug. Sept. Oct. Nov. Dec. 1.8 3.7 - 6.2 - 2.8 - 4.2 -12.4 - .7 .9 -8.5 -4.6 -4.8 -13.3 6.6 -7.8 .2 -3.8 -6.7 -1.5 4.4 -11.1 - 2.4 - 6.8 - 9.7 - 2.9 1975: Jan. Feb. - 4.7 2.5 - 5.1 2.5 -3.7 -1.4 - 6.0 - 1.8 II - 13 BUSINESS INVENTORIES at annual rates in seasonally (Change adjusted book values, $ billions) Manufacturing and trade Manufacturing Durable Nondurable Trade, total Wholesale Retail Auto QII 1974 QIII QIV 42.8 28.2 17.4 10.8 59.2 37.7 23.3 14.5 52.9 29.7 19.1 10.6 0 14.6 13.9 .8 n.a. 2.2 10.8 -8.5 14.7 7.7 7.0 -1.0 21.4 8.6 12.8 4.0 23.2 8.3 14.9 11.8 -14.6 - 4.4 -10.2 - 4.6 n.a. -6.8 n.a. n.a. Jan. 1975 Feb.(p) INVENTORY RATIOS Jan. 1974 Feb. 1975 .Tan. Feb. 1.47 1.60 1.47 1.62 1.68 1.92 n.a. 1.93 Durable Nondurable 2.01 1.15 2.04 1.16 2.47 1.35 2.52 1.33 Trade, total Wholesale Retail 1.34 1.12 1.52 1.33 1.10 1.52 1.46 1.26 1.61 n.a. 1.23 n.a. Inventory to sales: Manufacturing and trade Manufacturing, total Inventories to unfilled orders Durable manufacturing .723 .721 .787 .812 II - 14 NEW PRIVATE HOUSING UNITS (Seasonally adjusted annual rates, in millions of units) Per cent change in 1970/1 QI 1974 QIV QIII 1975 Feb. (p) Jan. (r) February from: Month ago Year ago Permits 1.10 .91 .78 .68 .67 1 -49 Starts 1.24 1.21 1.00 1.00 .98 2 -48 .69 .55 .86 .35 .76 .24 .74 .25 .72 .26 3 + 2 -31 -69 .89 1.37 1.23 1.18 n.a. - 4 3/ -27 3/ 1.39 1.60 1.63 1.50 n.a. 7 3/ .36 .23 .19 1-family 2- or more-family mily 2/ Under constructionnCompletions MEMO: Mobile home sh:ipments 1/ 2/ 3/ Previous cyclical trough. Seasonally adjusted, end of period. Per cent changes based on January. -20 3/ FEDERAL BUDGET AND FEDERAL SECTOR IN NATIONAL INCOME ACCOUNTS (In billions of dollars) I Fiscal 1975 V' F.R. Budget Document Board Fiscal 1976 .e F.R. Budget Document Board Calendar Years 1975 1974 Actual F.R.B. / 1974 IV* Federal Budget Means of financing: Net borrowing from the public Decrease in cash operating balance Other 1/ Cash operating balance, Memo: -43.8 277.1 320.9 -51.9 297.5 349.4 43.5 3.1' 51.4 5.0 63.5 -. 4 -11.92' -12.6 -34.7 278.8 313.4 Surplus/deficit Receipts Outlays end of period sponsored agency borrowing / 6.0 2 14.0 / -11.2 2 4.2 6.4 11.6 7.8 -77.3 286.0 363.3 -10.9 280.5 291.4 -72.4 273.3 345.7 -12.0 66.8 78.9 -16.7 66.4 83.1 -13.5 70.9 84.4 -17.5 70.8 88.3 / 87.6 -. 8 11.8 4.5 86.4 .9 10.3 2.8 19.3 -. 7 17.3 2.4 21.9 -. 8 27.9 / -9.5 -5.4 -14.9 -1.1 -1.9 -6.2 -3.6 -3.2 5.0 5.9 5.0 5.9 6.6 4.2 5.0 5.0 n.e. 16.6 n.e. 3.4 -- .6 n.e. n.e. 2/ High Employment surplus/deficit (NIA basis) 2/5/ -36.1 287.6 323.7 -50 .1 278.6 4 / 328.7 -55.9 305.1 361.0 n.a. 3.7 n.a. -77.24/ 297.7/ 374.9 -16.6 -7.8 291.3 299.1 -83.6 272.3 355.9 -23.7 295.6 319.3 -59.1 278.4 337.5 -113.3 240.1 353.4 -81.9 278.9 360.8 19.0 -12.6 17.6 10.2 -37.7 -9.1 p--preliminary n.a.--not available n.e.--not estimated e--projected Actual Outlays of off-budget Federal agencies, checks issued less checks paid, accrued items, and other transactions. Estimated by F.R. Board Staff. Federally-sponsored credit agencies, i.e., Federal Home Loan Banks, Federal National Mortgage Association, Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives. 4/ Quarterly average exceeds fiscal year total by $.6 billion for fiscal 1975 and $.9 billion for fiscal 1976 due to spreading of wage base effect over calendar year. 5/ The high-employment budget estimates now fully incorporate taxes on inventory profits beginning in 1973. * 1/ 2/ 3/ -24.7 65.2 89.9 Seasonally adjusted, annual rates National Income Sector Surplus/deficit Receipts Expenditures F.R.B. Staff Estimates Calendar quarters 1975 I II III IV Unadjusted data -80.2 291.8 372.0 -13.6 II - 16 HOURLY EARNINGS INDEX 1/ (Seasonally adjusted annual rate; percentage change) Feb. 1975Mar. 1975 Mar. 1974Mar. 1975 1974-III1974-IV 2/ 1974-IV1975-I 2/ 12.4 9.8 10.1 7.4 Manufacturing 12.7 11.3 11.7 9.1 Construction 31.3 8.6 6.2 4.4 Trade 6.0 9.5 8.1 8.4 Services 6.7 8.4 8.8 9.1 Total private nonfarm 1/ Excludes the effects of fluctuations in overtime premium in manfacturing and shifts of workers between industries. 2/ Compound annual rate. II - 17 PRICE BEHAVIOR (Percentage changes, seasonally adjusted annual rates) 1/ Relative importance Dec. 1974 Dec. 1973 to June 1974 June to Sept. 1974 Sept. to Dec. 1974 Dec. 1974 to Mar. 1975 Feb. to Mar. 1975 WHOLESALE PRICES 100.0 18.2 35.2 13.4 -6.7 -7.4 Farm and food products 29.1 -11.5 59.2 21.9 -29.2 -30.4 Industrial commodities2/ Materials, crude and intermediate 70.9 34.0 28.3 8.2 5.1 2.2 46.0 38.7 31.7 6.3 3.2 1.3 17.5 8.6 26.8 20.0 18.5 31.8 10.6 18.7 4.9 11.6 4.0 12.2 13.4 -1.1 29.4 29.1 -13.2 Dec. 1973 to June 1974 June to Sept. 1974 Sept. to Dec. 1974 All commodities Finished goods: Consumer nonfood Producer Consumer foods Relative importance Dec. 1974 Dec. 1974 to Jan. 1975 -19.3 Jan. to Feb. 1975 CONSUMER PRICES 100.0 12.3 14.2 10.1 7.7 7.7 Food Commodities (nonfood) Services 24.8 39.0 36.2 10.9 14.9 10.1 12.3 16.2 13.9 14.6 7.3 10.9 9.9 6.7 9.8 0.7 10.0 9.7 Addendum All items less food and energy3/4/ Petroleum products3/ Gas and electricity 68.3 4.4 2.5 10.2 58.8 22.0 15.3 -4.1 20.2 9.6 -5.9 14.2 8.0 7.7 22.2 10.4 4.2 17.3 All items Not compounded for one-month changes. Stage of processing components do not add to the total because they include some items found in farm and food products group. Confidential -- not for publication. Energy items excluded: gasoline and motor oil, fuel oil and coal and gas and electricity. DOMESTIC FINANCIAL SITUATION III-T-1 SELECTED DOMESTIC FINANCIAL DATA (Dollar amounts in billions) Indicator Monetary and credit aggregates Total reserves Reserves available (RPD's) Money supply M1 M2 M3 Time and savings deposits (Less CDs) CDs (dollar change in billions) Savings flows (S&Ls + MSBs) Bank credit (end of month) Market yields and stock prices wk. endg. Federal funds " Treasury bill (90 day) " Commercial paper (90-119 day) " New utility issue Aaa 1 day Municipal bonds (Bond Buyer) FNMA auction yield (FRA/VA) Dividends/price ratio (Common wk. endg. stocks) end of day NYSE index (12/31/65=50) Latest data Level Period Net change from Three Month ago months ago SAAR (per cent) -4.9 -4.4 March March 34.9 33.1 March March March 287.0 627.2 1007.3 13.5 12.0 13.6 March March March March 340.2 90.0 351.7 696.0 10.7 -2.2 16.6 6.6 4/4/75 4/6/75 Percentage or index -.29 5.59 .04 5.58 -.22 6.03 9 83 .92 . p .39 6.93 .20 8.98 3/31/75 4/2/75 4.42 43.27 4/2/75 4/2/75 4/2/75 4/5/75 -.16 -.56 Net change Credit demands or gross Current month 1974 1975 Business loans at commercial banks Consumer instalment credit outstanding Mortgage debt outst. (major holders) Corporate bonds (public offerings) Municipal long-term bonds (gross offerings) Federally sponsored Agcy. (net borrowing) U.S. Treasury (net cash borrowing) Total of above credits e - Estimated p - Preliminaiy. Year ago March February January March March March April -8.1 -4.2 3.8 8.4 10.1 12.4 -. 3 12.8 5.8 points -1.76 -1.44 5.2 -4.34 -2.83 -3.42 1.05 .15 -. 39 1.20 .03 -1.08 .71 -7.00 5.92 offerings Year to date 1975 1974 5.7 3.5 2.0 -1.7 6.7 1.7 10.4e 2.0e .le 7.le 2.0 .6 -2.5 6.5e .7e 26.4e 12.0 50.7 13.6 6.8 -3.31 -1.0 .2 1.7 3.6e .7 9.6 22.0 9.5 17.7 3.5 5.8 6.3 .9 43.7 III - 1 DOMESTIC FINANCIAL DEVELOPMENTS Private short-term market interest rates most recently have edged up from levels prevailing at the time of the March FOMC meeting. In the Treasury market, bill rates have backed up sub- stantially. Conditions in bond markets have also deteriorated further over the inter-meeting period, causing yields in all sectors to rise sharply. The back-up in bond yields has been reflected in higher secondary mortgage market yields, and rates in the primary mortgage market have virtually stopped declining. All deposit aggregates increased substantially in March, not only the narrow M1 but also those reflecting inflows of time and savings deposits to banks and nonbank thrift institutions. Instead of aggressively easing credit terms in the face of generally slack loan demands, however, the depositary institutions--both bank and non-bank--continued mainly to build liquid assets and/or repay debts. Short-term securities markets. In addition to an expanding volume of short-term Treasury borrowing, the abatement of downward pressure on short-term market rates has reflected the marked further acceleration in monetary growth and the absence of any further significant decline in the Federal funds rate. These developments, together with strengthened market expectations about a near-term rise in economic activity, have encouraged a belief that future System policy moves will not encourage further reductions in shortterm rates. III - 2 SELECTED SECURITY MARKET QUOTATIONS (one day quotes-in per cent) Aug. FOMC Aug. 20 Jan. FOMC Jan. 21 Feb. FOMC Feb. 19 Mar. FOMC Mar. 18 Apr. 1 Apr. 8 Short-term I Federal fundsF 12.23 7.17 6.29 5.38 5.59 5.29-4/ Treasury bills 3-month 6-month 1-year 9.05 9.13 8.86 6.24 6.24 6.25 5.30 5.40 5.42 5.42 5.53 5.63 5.64 5.85 6.02 5.70 6.12 6.47 Commercial paper 1-month 3-month 12.00 11.88 7.00 7.00 6.38 6.38 5.88 6.00 5.88 6.00 6.00 6.13 Large neg. CD's 3-months 6-months 12.35 12.15 7.00 7.15 6.30 6.30 6.05 6.25 6.10 6.30 6.25 6.88 9.65 7.11 6.04 6.23 6.44 n.a. 12.00 9.75 8.75 7.75 7.50 7.50 10.10 10.02 9.38 9.55 9.02 9.10 9.27 9.31 9.60 9.62 9.83 9.7Up Municipal 31 (Bond Buyer)- 6.61 6.90 6.27 6.65 6.95 6.93 U.S. Treasury (20-year constant maturity) 8.58 7.86 7.64 7.97 8.28 8.44p 726.85 39.32 641.90 37.71 736.39 43.13 779.41 45.10 761.58 42.84 Federal agencies 1-year Bank prime rate Long-term Corporate New AAA Recently offered/ Stock prices Dow-Jones N.Y.S.E. 1/ Weekly average. 2/ Highest quoted new issues. 3/ One day quotes for preceding Thursday. 4/ Average for first 6 days of statement week ending April 9. 749.22 42.98 III - 3 Private short-term market rates showed little change over the early part of the inter-meeting period, but most recently have edged higher. Although commercial paper rates have remained low relative to the bank prime rate (the spread is still about 140 basis points), outstanding commercial paper of nonfinancial corporations expanded only slightly in March, due to the generally depressed business demand for short-term credit. With the Treasury raising as much as $800 million of net new money in recent bill auctions, however, bill rates have come under substantial upward pressure, particularly on longer maturities. Inter-meeting bill rate advances have ranged to as much as 80 basis points. In addition to the expanded volume of new bills and short notes emanating from the Federal deficit, demands for bills by foreign official institutions have been cut-back, as exchange market intervention has subsided and oil payments have stretched out. However, demands for bills from commercial banks and thrift institutions have remained strong. Long-term securities markets. Considerable upward pressure on bond yields has developed in recent weeks as new issue volume has remained extremely large. With the tax bill now enacted and with most analysts predicting an upturn in economic activity around midyear, investors increasingly have come to expect upward rate pressures over the rest of the year and have, therefore, showed III - 4 considerable reluctance to commit funds to long-term instruments without higher rate premiums. In the process, inventories of un- distributed corporate bonds have mounted, planned offerings have been delayed, and price-cutting has intensified. Corporate bond yields have backed up about 55 basis points since the March FOMC meeting, returning to levels prevailing last October. New issues have been offered at a near-record pace as corporations--particularly industrial firms--have continued to fund short-term debt, to build working capital, and to finance some of their planned capital expenditures in the face of deteriorating profits. Upward rate pressures have persisted despite a large volume of cancellations and postponements of debt issues and heavier equity financing. Even allowing for some additional postponements, the expected volume of corporate bond offerings in April and May remains quite large. The weakening in corporate bond prices has stemmed in part for the impact of heavy Treasury demands on the capital markets. Yields on intermediate- and long-term Treasury coupon issues moved unusually close to yields on corporate bonds in March, and have risen by about 35-70 basis points since the last FOMC meeting. In the course of providing reserves to the banking system during the past few weeks, the System helped to ameliorate pressures on note and bond markets by purchasing over $1.5 billion of Treasury and III - 5 SECURITY OFFERINGS (Monthly or monthly averages, in millions of dollars) 1974 Year QIV QIe/ 1975 Mar.e/ Feb.e/ Apr.f/ May f/ Gross offerings Corporate securities: Total 3,146 3,929 5,113 4,560 5,524 5,650 4,850 Public bonds Privately placed bonds Stocks 2,122 501 523 2,913 460 556 3,477 900 736 3,175 800 585 3,600 1,000 924 3,600 750 900 3,200 750 900 98 323 418 610 175 295 250 1,894 2,454 1,958 2,474 2,117 2,377 2,300 2,270 2,000 2,825 2,400 2,800 2,200 2,400 Foreign securities 1/ State and local govt. securities Long-term Short-term Net offerings U.S. Treasury 2Sponsored Federal agencies 1/ 2/ e/ f/ 982 3,433 0,434 4,535 11,100 7,200 7,700 1,394 1,115 4 -966 517 713 -1,134 Includes issues of foreign private and official institutions. Total Treasury issues,including Federal Financing Bank. Estimated. Forecasted. III - 6 Federal agency coupon issues of longer maturity. These purchases relieved some market congestion by paring dealer inventories. Another factor putting upward pressure on market rates generally is the widespread awareness that the budget deficit implies an extraordinarily heavy volume of Treasury offerings throughout the remainder of this year. The current staff projection of total Treasury borrowing during the second quarter is $17.7 billion--about $8 billion higher than earlier projections, due mainly to the quick passage of the tax bill and the consequent earlier processing of tax rebates. Yields in municipal bond markets have backed up about 30 basis points further since the March meeting and are approaching the record levels of late last year. While the volume of new issues has been rising somewhat as State and local government revenues have declined, the deterioration in municipal bond prices is attributable mainly to weakness in demands for this type of security. Investors have been deterred by concern over the fiscal positions of State and local governments, uncertainty created by defaults of the New York State Urban Development Corporation, and the widely-publicized financial problems of some major cities--particularly New York. Furthermore, commercial bank holdings of municipals declined in March and purchases of new issues reportedly have remained quite modest, reflecting reduced need for tax-exempt income on the part of many large banks because of loan losses, foreign tax credits, and leasing activities. III - 7 Stock prices moved moderately higher on heavy trading during March, extending the recovery begun early this year, although prices eased off somewhat in early April. With the reduced cost of equity financing, stock issuance increased by about 60 per cent in March. Utility companies accounted for most of the volume of new issues. Monetary aggregates. The monetary aggregates have rebounded recently as demand and consumer-type time and savings deposits have both risen strongly. In March, growth of the narrowly defined money stock moved up further to an annual rate over 13 per cent, due primarily to rapid increases in demand deposits throughout the country. However, a significant proportion of the February-March expansion of private demand deposits probably is attributable to larger-than-normal personal income tax refunds resulting from IRSTreasury efforts to accelerate check distribution, and may prove transitory. Meanwhile, with growth in money income still low, the demand for transactions balances is probably still depressed. At commercial banks, inflows of time and savings accounts-- other than money market CD's--remained large on average in March, and growth in M 2 accelerated further. 1/ Also, deposit inflows at nonbank thrift institutions are estimated to have expanded at a record 1/ Although inflows of the time deposit component of M2 slowed in late March, this appears to reflect run-offs of large-denomination time deposits other than negotiable CD's; inflows of passbook savings and consumer-type time deposits remained as large as earlier in the month. III - 8 MONETARY AGGREGATES (Seasonally adjusted changes) 1974 IV QIII 1975 QI Jan. 1975 Feb. Mar.p Per cent at annual rates 1.6 4.6 3.7 -8.9 6.8 13.5 M2 4.5 7.0 8.7 3.3 9.7 12.0 M3 1/ 4.0 6.9 10.1 6.1 10.3 12.8 Adjusted bank credit proxy 6.6 4.3 3.6 - .5 5.6 9.1 7.1 12.6 9.0 9.7 13.0 18.3 13.8 7.6 12.2 2.2 10.7 3.3 .4 6.1 9.3 4.8 12.0 16.5 9.2 13.4 12.1 4.5 17.5 14.8 8.4 11.1 22.0 14.4 12.8 Time and savings deposits at commercial banks: a. b. Total Other than large CD's Deposits at nonbank thrift 2/ institutions: Savings and loans Mutual savings banks Credit unions 3/ Billions of dollars 3/ Memoranda: a. b. c. U.S. Government demand deposits Negotiable CD's Nondeposit sources of funds .3 1.2 -1.5 1.8 - .4 - .2 .1 .1 - .6 -1.2 2.6 -.8 - .1 .7 -2.2 -1.2 1/ M3 is defined as M2 plus credit union shares, mutual savings bank deposits, and shares of savings and loan associations. 2/ Based on month-end series. 3/ Change in average levels month-to-month or average monthly change for the quarter, measured from last month in quarter to last month in quarter, not annualized. p - Preliminary. III - 9 pace during March--over 20 per cent at S&L's. Although the strength of time and savings deposit flows is due primarily to the attractiveness of yields on depositary claims relative to alternative market instruments, the placement of funds in certificate and passbook accounts may be associated to some extent with the accelerated tax refunds. As has been the case since the turn of the year, banks permitted their outstanding CD's to run off in March as other deposit inflows rose and loan demands remained weak. However, the decline in CD's slowed, on average, in March and most recently these deposits have increased somewhat. 1 / Smaller commercial banks, savings banks, and savings and loan associations apparently have shifted from selling Federal funds to purchasing negotiable CD's in order to obtain higher yields at a time when their liquidity is rising rapidly. At the same time, large commercial banks, reportedly expecting interest rates to rise, have become more willing to substitute longer-term CD's for purchases of Federal funds. 2/ 1/ The larger run-off in CD's in March than in February, shown in the monetary aggregates table, reflects run-offs in late February and early March that affect the daily average for the month of March relative to the daily average for the entire month of February. 2/ Net Federal funds purchases of weekly reporting banks declined by $3.3 billion on average in March, with most of the drop-off at large banks outside of New York. III - 10 Loan developments. Virtually all of the increase in commercial bank credit in March reflected bank participation in Treasury security offerings and loans to security dealers. All other loan categories remained weak, with credit demands generally modest and lending policies remaining restrictive as banks continued to emphasize credit quality.1 / Outstanding business loans declined again in March, with essentially every industry category of borrowing showing reductions. The general weakness in business demands for short-term credit reflects inventory liquidation, the general reduction in economic activity, and the continued large volume of capital market financing. But even with the prime rate still high relative to the cost of commercial paper, the modest increase in outstanding commercial paper issued by nonfinancial corporations did not offset the decline in business loans, and total short-term business credit declined for the second consecutive month. S&L's in all FHLBank Districts have been reporting adequate supplies of funds for mortgage lending, although they have continued to devote a substantial portion of their improved deposit flows to the rebuilding of liquidity and the repayment of debt. S&L's reduced outstanding FHLBank advances by $1.2 billion in March, bringing the first quarter paydown to a record $3.6 billion. 1/ The supplement will contain an analysis of bank policies toward, and demand for, construction loans based on a special FR Bank survey. III - 11 COMMERCIAL BANK CREDIT (Seasonally adjusted changes at annual percentage rates) Total loans and investments 2/ U.S. Treasury securities Other securities Total loans 2/ Business loans 2/ Real estate loans Consumer loans Memo: Business loans plus nonfinancial commercial paper 3/ (per cent) QIII 1974 QIV 5.6 -29.8 1/ 1975 QI Jan. 1975 Feb. Mar. p -2.8 5.8 8.2 3.0 6.2 -26.1 77.9 2.5 110.4 110.1 -- 6.5 .6 5.2 4.3 -7.7 11.2 -2.9 .2 9.6 -7.9 -1.0 14.0 6.0 7.2 .4 5.0 -3.3 -3.5 3.4 -1.4 7.2 5.6 -1.4 -11.7 1.8 -1.4 -5.9 2,8 -1.4 18.1 1.4 -1.0 12.8 -11.5 -4.3 Last-Wednesday-of-month series except for June and December, which are adjusted to the last business day of the month. 2/ Includes outstanding amounts of loans reported as sold outright by banks to their own foreign branches, nonconsolidated nonbank affiliates of the bank holding companies (if not a bank), and nonconsolidated nonbank subsidiaries of holding companies. / Measured from end-of-month to end-of-month. / p - Preliminary. III - 12 New and outstanding mortgage commitments at S&L's rose further in February, and field reports have indicated increasing interest by these institutions in mortgage lending. Over the past few weeks, however, the thrift institutions have placed more of their funds in seasoned GNMA-guaranteed mortgage-backed securities, as yields on these instruments have followed bond rates upward.1/ Indeed, with long-term security yields in general rising, the thrifts-- as well as the more diversified lenders--have not been aggressive mortgage lenders. As a result, average interest rates on new commitments for home mortgages in the primary market, which have declined about 120 basis points since October, virtually ceased falling around mid-March. In the secondary mortage market, offerings were up sharply in FNMA's March 24 and April 7 auctions of commitments to purchase home mortgages, and the average yields rose for the first time since last September. The surge in demand for FNMA commitments was due primarily to the decline in price of GNMA mortgage-backed securities, which for several months had been a more attractive marketing alternative for FHA/VA mortgage originators than FNMA. Furthermore, the rise of long-term market rates in general has dampened market 1/ These GNMA-guaranteed securities are instruments of high quality and marketability which qualify as mortgages for tax purposes even though they do not show up in the mortgage statistics of the thrifts. III - 13 CONVENTIONAL HOME MDRTGAGES AT SELECTED S&L's 1974--High Average going rate on 80% loans Basis point change from month or week (per cent) earlier 10.03 (9/27, 10/18) Low 8.40 (3/15, 3/22) --- Rate spread 1/ (basis points) 97 (11/15) -106 (7/12) Federal Home Loan Bank districts with funds in short supply 12 (May, July-Nov.) 0 (Feb.-Mar.) 1975--Jan. 3 9.29 -30 29 3 Feb. 7 14 21 28 9.19 9.14 9.04 9.02 -10 - 5 -10 - 2 30 12 0 8 2 2 2 1 Mar. 7 14 21 28 8.99 8.89 8.85 8.85 - 3 -10 - 4 0 8 - 38 - 75 - 76 0 0 0 0 Apr. 4 8.82 - 3 -101 0 1/ Average mortgage return, before deducting servicing costs, minus average yield on new issues of Aaa utility bonds paying interest semi-annually and with 5-year call protection. III - 14 expectations of further mortgage rate declines, and has encouraged some mortgage companies to cover their loan inventories and current loan production with FNMA's short-term commitments. After 3 months of decline, short- and intermediate-term consumer credit outstanding rose somewhat in February, due largely to an increase in auto loans at finance companies. However, the fall- off in new-car sales after February--following the termination of the major rebate programs--suggests that consumer credit may show little further increase, if any, in March. Rates on most types of instalment credit contracts have edged down from the peak October-January levels. At commercial banks, new-car loan rates declined 11 basis points from January to February, and rates on other types of credit, except mobile home loans, showed reductions of similar magnitude. At finance companies, the easing of rates for new-car purchasers has been accompanied by a further lengthening of average maturities as more contracts are being financed for over 36 months. III - 15 FNMA AUCTION RESULTS HOME MORTGAGE COMMITMENTS _ Government-underwritten Amount Average (In $ millions) Offered Accepted yield Date of auction 1,155 (3/25) 333 (3/25) 10.59 (9/9) 26 (11/18) 18 (11/18) 8.43 (2/25) 1974--High Low __ Conventional Amount (In $ millions) Offered Accepted 164 (4/18) 14 (10/21) Average yield 10.71 (9/9) 63 (4/8) 7 (11/18) 8.47 (3/11) 1975--Jan. 13 27 25.3 41.4 21.2 28.6 9.37 9.12 17.9 11.1 14.9 10.6 9.50 9.39 Feb. 10 24 24.6 36.2 18.1 23.8 8.98 8.87 14.8 20.0 9.1 9.1 9.20 9.04 Mar. 10 24 99.2 460.5 60.1 321.4 8.78 8.85 34.4 60.7 22.1 35.8 8.96 9.00 7 551.6 277.2 8.98 99.8 44.6 9.13 Apr. NOTE: Average secondary market yields are gross before deduction of the fee of 38 basis points paid for mortgage servicing. They reflect the average accepted bid yield for home mortgages assuming a prepayment period of 12 years for 30-year loans, without special adjustment for FNMA commitment fees and FNMA stock purchase and holding requirements on 4-month commitments. Mortgage amounts offered by bidders relate to total bids received. III - 16 CONSUMER INSTALMENT CREDIT Credit flows Net change in outstandings (SAAR, $ billions) New car finance rates Extensions Total (SAAR, $ billions) Bank share (Per cent) Open-end share* (Per cent) New car APR Finance companies (Per cent) 1973 - I II III IV 23.7 20.2 21.0 15.3 162.4 164.2 170.1 164.4 42.5 41.8 42.3 42.3 25.9 27.3 27.1 28.5 11.85 11.94 12.28 12.42 1974 - I II III IV 8.8 14.0 14.1 -3.2 154.3 172.9 172.5 155.7 41.9 41.5 42.3 41.1 29.2 30.0 30.6 33.2 12.29 12.50 12.84 13.10 1975 - Jan. Feb. -4.8 2.8 154.3 161.6 41.7 42.0 32.4 32.0 13.08 13.07e *Open-end credit consists of extensions on bank credit-card and check credit plans, retail "other consumer goods" credit extensions. and April 9, 1975 Note to Reader On page IV-9 (Part II) of this Greenbook certain information has been deleted that pertains to financial transactions of named foreign central banks, governments, or other official entities. That information was supplied to the Federal Reserve on a confidential basis. INTERNATIONAL DEVELOPMENTS CONFIDENTIAL (FR) IV -- T - 1 4/9/75 U.S. International Transactions (in millions of dollars; seasonally adjusted) 1974 YEAR Imports Net service transactions 3,191 -5,881 97,081 102,962 9,072 Remittances and pensions Gov't grants and capital, net -1,775 -4.398 Goods and services, net 1/ Trade balance Exports Bank-reported private capital, net change Claims on foreigners (inc. -) Liquid Other Liabilities to foreigners (inc. +) Liquid liabilities to: Commercial banks abroad (of which liab. to branches)2/ Other private foreigners Int'l & regional organizations Long-term liabilities Private transactions in securities, net U.S. purchases (-) of foreign securities (of which: New bond issues) Foreign purchases (+) of U.S. securities Stocks Bonds U.S. direct investment abroad, (inc. -) Foreign direct investment in U.S., (inc. -+) Nonbank-reported: liquid claims, (inc. -) : other claims, (inc. -) : liabilities, (inc. +) Changes in liab. to foreign official agencies OPEC countries (inc. +) 2/3/ Other countries (inc. +) Changes in U.S. reserve assets (inc. -) Gold Special drawing rights Reserve position in the IMP Convertible currencies Errors and omissions 1r 1975R 3Qr 4 Jan.* 826 -247 2,10 -1,849 -2,474 -1,558 -675 46,133 24,731 26,217 9,468 47,982 27,205 27,775 10,138 4,459 2,227 2,384 -857 -2,062 Feb.* 836 8,653 7,817 -463 -456 -769 -1,568 -3.122 -4.861 1.994 -255 -1,261 -2.126 -146 -767 -18,838 -12,852 -1,996 -3.990 -582 -431 -1,385 -1,498 -5,445 -3,629 -13,393 -9,223 -1,565 -2,605 1,352 -185 15,716 7.991 3,990 3.735 -1.115 -1,359 15.732 7,819 4.010 3.903 -1.100 -1.255 12,655 6,824 2,896 2,935 -874 -1,730 (1,950 (2,635 (-50) (-18) (34 (1,272) 421 -70 805 893 1,228 2,926 151 -233 221 163 -156 54 -16 172 -20 -168 -15 -104 147 -752 -959 -1,951 (-2,330 (-1,15C 1,199 1,106 447 388 718 752 -138 -306 (-416 168 82 86 -6,801 -2.154 -2,047 2,308 2,958 -89 -19 -2,946 1,047 -300 -2390 665 564 -324 354 9.507 9,772 -265 -1.434 4,044 1.323 3,357 3,934 687 -2,611 -568 -1.003 -995 -761 -686 -1.085 (-770 1-,07 -75 90 -23 190 -100 .-52 -264 -476 (-373) 212 534 -322 -2,600 -561_ -283 -232 28 4,140 -802 2,481 355 1,659 -1,157 137 -31 2.548 -121 -29 -123 -20 -- -- -1,265 3 -453 -86 -728 -152 -84 241 -34 3 -121 -- 5,198 2,768 838 1,592 -172 Memo: Official settlements balance, S.A. N.S.A. 0/S bal. excluding OPEC, S.A. N.S.A. -8,070 1,702 -3,476 -320 -4,277 -2,610 -1,609 -3,851 -119 3,614:-1,796 747 2,325 -1,370 8331-2,427 1,188 * For monthly data, only exports and imports are scasonally adjusted. 1/ Differs from "net exports" in the GNP account by the amount of special military shipments to Israel (excluded from GNP net exports). 2/ Not seasonally adjusted. 3/ Partly estimated. INTERNATIONAL DEVELOPMENTS Foreign exchange markets. In recent weeks, the dollar has staged a sharp recovery in the exchange markets. Against a weighted average of major foreign currencies it is currently around 2 per cent above its early March lows. And against the mark and the Swiss franc it is up by more than 3 and more than 5 per cent, respectively, over the same period. The chief factor behind the dollar's turnaround seems to have been the movement in relative interest rates. U.S. short term rates have apparently bottomed out while rates in many foreign countries, most notably Germany, have continued to decline. Favorable U.S. price and trade figures have also contributed to a firmer tone for the dollar. In addition, net intervention purchases of dollars by major central banks, amounting to $1.2 billion in the past four weeks have tended to strengthen the dollar's average exchange value. The chief purchasers of dollars in the past four weeks have been the U.K., Italy, and France, whereas the Bundesbank and the System have been net sellers of dollars and the Swiss National Bank has purchased only small amounts of dollars. The Bundesbank sold $145 million and additional amounts of guilders and Belgian francs to support the mark against snake currencies. The System's purchases of marks in the market and from correspondent central banks enabled the Desk to repay $47 million equivalent of mark swap drawings during the period. The System also repaid $70 IV -2 million equivalent of swap drawings on the BNS using francs purchased directly from the BNS, who preferred to sell directly to the System to avoid any upward pressure on the franc's exchange value. Early in the period the dollar had suffered somewhat from moves by a few OPEC countries to peg their currencies against the SDR or some other basket of currencies. The market feared that this was a prelude to a drastic reduction of the dollar's role as the currency of denomination of oil prices and the primary currency of oil payments and investment. These fears were somewhat allayed later when the OPEC experts recommended that oil prices be denominated in some currency basket but that the dollar be maintained as the primary currency of payment. Euro-currency market. Euro-dollar deposit rates in maturities other than overnight show increases compared with four weeks ago, most of the rises occurring in the past week or so. The average 3-month rate of 7.44 per cent in the latest week was 63 basis points higher than the average for the week of March 12. With U.S. CD rates showing small net declines since mid-March and with European money market rates mostly unchanged or lower, the rise in Euro-dollar rates would appear to reflect expectations of higher borrowing costs in the Euro-market and deposit drawdowns by some OPEC countries that recently lengthened their credit terms for oil companies. Since the end of January the Euro-dollar yield curve has been upward sloping throughout the maturity range from 1 month to 12 months, compared with a downward sloping or humped curve over that range for most of the preceding 12-month period. IV -3 SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES Average for month or (1) Over- (2) week ending night Federal ential Funds (1)-(2)(*) Wednesday Euro-$ (3) Differ- (4) 3-month (5) Euro-$ 60-89 day ential Deposit CD rate (4)-(5)(*) (6) Differ- 1974-Dec. 1975-Jan. Feb. 8.48 7.16 6.02 8.53 7.13 6.24 -0.05 (0.69) 0.03 (0.65) -0.22 (0.30) 10.28 8.49 7.26 8.96 7.45 6.10 1.32 (1.64) 1.04 (1.78) 1.16 (1.40) Mar. 5.77 5.54 0.23 (0.73) 6.85 5.86 0.99 (1.22) 5.91 5.89 5.70 5.46 5.57 6.15 5.88 5.44 5.38 5.53 (0.27) (0.52) (0.76) (0.55) (0.52) 7.33 7.35 6.81 6.61 6.84 6.13 6.05 5.88 5.75 5.75 1.20 1.30 0.93 0.86 1.09 6.29 5.44 5.59 5.30 0.70 (1.25) 0.14 (0.61) 6.98 7.44 5,75 5.75 1,23 (1.47) 1.69 (1.97) Feb. Mar. Apr.. 26 5 12 19 26 2/ 9 -0.24 0.01 0.26 0.08 0.04 (1.45) (1.55) (1.14) (1.06) (1.31) */ Differentials in parentheses are adjusted for the cost of required reserves, p/ Preliminary. SELECTED EURO-DOLLAR AND U.S. COSTS FOR PRIME BORROWERS (1975; Friday dates) Apr. 4 Apr. 8 d 8.44 6.38 7.75 6.00 8.75 6.25 8.25 9.70 7.75 9.12 7.50 8.82 10.31 9.69 9.38 1.43 1.75 0.00 2.31 0.94 -1.37 -1,94 -0.38 1.25 -0.07 -0.94 -0.63 Mar. 1) 3-mo. Euro-$ loan/ b 2) 90-119 day com'l. paper3) U.S. bank loan: a) predominant prime rate b) with 15% comp. bal's.S/ c) with 20% comp. bal's.c 7 7.81 Mar. 21 6.13 7.50 8;82 9.38 Differentials: (1) (1) (1) (1) - (2) (3a) (3b) (3c) -0.44 -1.89 -2.50 1-1/8 per cent over deposit bid rate. offer rate plus 1/8 per cent. prime rate adjusted for compensating balances. Tuesday. 2.50 IV -4 U.S. banks' daily average gross liabilities to their foreign branches rose $200 million from the week of March 5, to $2.1 billion in the week of April 2.. The rise in Euro-dollar rates has occurred in the face of declines in the U.S. prime rate and commercial paper rates. Consequently, from March 7 to April 8 the cost of short-term Euro-dollar bank loans increased about 1-3/4 percentage points relative to the cost of bank loans in the United States, and rose by around 1 percentage point in relation to U.S. commercial paper rates. In the London Euro-currency market, total nonresident deposits increased sharply from $111.1 billion on December 31 to $114.2 billion on January 15, then rose little further to $114.5 billion on February 19. These changes closely paralleled the changes in OPEC countries' London Euro-currency deposits, which were swelled by large oil receipts in midJanuary. Activity in the market for medium-term Euro-currency loans increased in January-February but appears to have contracted sharply in March, so that the first quarter total for loan completions was probably less than in the third and fourth quarters of 1974. Loan spreads have not widened significantly further in 1975, but there have been further increases in management and participation fees on syndicated loans. The revival of the Euro-bond market in the last two months of 1974 carried over to the first quarter of 1975, when new issue volume was about 75 per cent of that for the entire year 1974. of new issues increased. Average maturities Flotations in the first quarter continued to IV - 5 be sustained by the much higher level of Arab Euro-bond purchases in evidence since late 1974, and by the caution of Euro-banks in extending medium- and long-term loans. About one-half of the new issues in the first quarter were denominated in German marks and only about one-fifth in dollars, more or less the reverse of earlier periods. Contrary to U.S. bond yields, the decline in Euro-bond yields persisted through the end of March, but higher yields and reduced new-issue volume are now expected. IV - 6 U.S. Merchandise Trade. In February the trade balance was in surplus by $10.0 billion (seasonally adjusted, annual rate) compared with an $8.1 billion deficit rate in January and a $5.9 billion deficit rate for the fourth quarter of last year. For January and February combined the trade balance showed a small surplus, as agricultural exports rose $4.2 billion from their fourth quarter rate, while nonagricultural exports fell less sharply in volume, and rose slightly more in price, than imports (see Table). is likely to move back into deficit in stantial swing in The balance of trade the months ahead. The sub- the trade balance between January and February primarily reflects abnormally small declarations of oil imports in February, following abnormally large declarations at the end of January, when importers rushed to beat the additional import fees that became effective on February 1. February are If recorded fuel imports in January and divided equally between the two months, the trade balance shows a deficit rate of $0.7 billion in January and a surplus rate of $2.6 billion in February. The accompanying table illustrates the composition of recent changes in U.S. merchandise trade. Exports increased 3.6 percent in value between the fourth quarter of 1974 and January-February of this year, owing to an 18.8 percent increase in the value of agricultural exports. This large expansion of agricultural exports was entirely in volumes, which exceeded the fourth-quarter volume by 31.5 percent in January and 6.4 IV - 7 U. S. MERCHANDISE TRADE Percentage Change from Value (billion $, annual rate) EXPORTS Agricultural products Non-agricultural Capital goods Non-ag.industral supplies Automotive products Consumer goods excluding foods, autos IMPORTS Fuels Nonfuels Nonfuel industrial supplies Capital goods Foods, feeds, beverages Automotive products Consumer goods excluding foods, autos percent in February. 1974Q4 104.9 22.4 82.5 34.1 28.8 9.3 6.3 Jan-Feb 108.7 26.6 82.1 33.6 28.3 8.2 6.2 110.8 31.2 79.6 29.4 9.8 10.3 11.5 15.1 107.7 32.3 75.4 29.9 9.4 9.3 9.3 13.9 1974Q4 to Jan-Feb in Value 3.6% 18.8% -0.5% -1.5% -1.7% -11.8% -1.6% Volume 0.67. 19.0% -4.4% -6.7% -4.4% -12.67 4.8% Price 3.1% -0.4% 4.1% 5.5% 2.8% 0O9% 4.4 -2.8% 3.5% -5.3% 1.7% -4.1% -9.7% -19.1% -7.9% -5.9% 3.47. -6.7% 0.37. 2.5% -4.67. -26.1% -13.1% 3.1% 0.4% 1.5% 1.2% -5.3% -4.6% 9.5% 5.6% Spot prices for basic foodstuffs have shown a sharp downward trend since mid-November, however, which is expected to become more heavily reflected in export declarations in coming months. Consequently, the value of agricultural exports is likely to continue to decline from its January peak. Each major category of nonagricultural exports declined in value between the fourth quarter and January-February. Total non- agricultural exports declined in volume by 4.4 percent during this period, while increasing 4.1 percent in price. Data on export orders suggest that exports of capital goods will also continue to decline in IV - 8 value in the months ahead. New export orders for machinery, which on average lead actual exportation by about four months, have declined significantly in value since their peak last October. Imports declined in quarter and January-February, value by 2.8 percent between the fourth led by sharp declines for foods, motive products and other consumer goods. auto- Nonfuel imports as a group declined in volume by 6.7 percent during this period, while increasing 1.5 percent in price. Although imports of industrial supplies other than fuels were higher in January-February than in the fourth quarter, such imports were almost 10 percent lower in February than in the fourth quarter. Petroleum imports averaged 7.8 million barrels per day (not seasonally adjusted) in January-February, compared with 7.4 million in December and 6.8 million for the second half of 1974. in The high volumes advance of the import fee imposed on February 1 suggest more stock- piling than was apparently offset in February, so petroleum imports may continue to be less than is seasonally normal in the next few months. The unit value of petroleum imports in February was $11.53, essentially unchanged since last September. U.S. International Capital Transactions. Bank-reported private capital transactions in February showed a net outflow of billion, following an outflow of $1.2 billion in January. $2.0 Bank-reported claims on foreigners increased by nearly $0.8 billion in February, as claims on the Bahamas rose $1.1 billion while claims on the rest of the IV - 9 world declined. Bank-reported liabilities to private foreigners, primarily to commercial banks abroad, declined by $1-1/4 billion in During 1974, short-term claims on foreigners reported by February. U.S. banks almost doubled, with roughly two-thirds of the $18 billion increase.occurring in the first half of the year, and another $4 billion in the fourth quarter. Preliminary estimates for the first quarter of this year indicate a slow-down in lending to less than half the fourth quarter rate. Bank-reported liquid liabilities to private foreigners have increased by roughly $14 billion since the beginning of 1974. Transactions in securities with foreigners in February resulted in a net outflow of $0.3 billion, compared with an outflow of $1.0 billion in January. Foreign net purchases of U.S. stocks were a record $534 million in February, compared with $190 million in January and the previous high of $490 million in November 1972. Roughly one-fourth of the February purchases can be directly attributed to Saudi Arabia and Kuwait. Brokers have reported a continuing foreign interest in purchasing U.S. stocks during March, but March purchases are expected to show a decline from the February level. Net sales of U.S. bonds by foreigners resulted in an outflow of $0.3 billion in February, while U.S. net purchases of foreign bonds (and a small amount of stocks) resulted in an outflow of $0.5 billion. Net foreign bond issues in the United States during the first quarter of this year are estimated at roughly $2 billion, close to the yearly total for 1974. IV - 10 U.S. liabilities to foreign official agencies increased in February by $2.5 billion, due in large part to exchange-market intervention by foreign authorities, along with swap drawings to finance intervention by the Federal Reserve System. Official holdings of OPEC countries in the United States increased by an estimated $0.5 billion in February, all at the Federal Reserve Bank of New York. In March, OPEC funds at the New York Bank declined by $1.3 billion; there are indications that this decline was not offset by increases in OPEC holdings at commercial banks. IV - 11 Monetary conditions in major foreign industrial countries. Short-term interest rates, which by December had already fallen significantly from last year's peaks, continued to fall during the first several months of this year. (See Table 1.) The decline in German short-term rates, from a peak of 12.9 per cent in 1974 to 4.7 per cent in early April, is the most striking example. Declines of comparable magnitude also occurred in the United Kingdom and Italy, althoughthe peak rates in those countries were exceptionally high. Japan is the only major country where short-term rates have fallen only slightly from their high levels. The decline in long-term rates typically has not been as great as in short-term rates. (See Table 2.) Indeed, there is some evidence of a pause recently in the recovery of the bond markets. A spate of new issues in several national capital markets (notably in France and Germany) -- following a year in which virtually no net borrowing in that form took place -- has tended to limit the decline in yields. In addition, despite considerable easing of price pressures in most countries, the rates of inflation expected during 1975 in a number of foreign countries remain sufficiently high that they may inhibit significant further reductions in long-term rates. This is particularly the case for the United Kingdom, where the yield on the British War Loan fell nearly 4 percentage points since December but still remains at 13.6 per cent. Some recovery can be observed in equity markets, as well. rise in The the indexes of industrial stock prices, which has been associated Table 1 SHORT-TERM INTEREST RATES (per cent per annum or percentage points) 1974 peak Level end-Dec. '74 Level Change during month: Jan. '75 Feb. '75 Mar.'75 Latest Latest United Kingdom 17.50 (Mar.) 12.44 -0.81 -0.69 -1.06 -0.32 9.56 (4/9) Germany 12.88 (Jan.) 8.30 -0.80 -1.15 -1.15 0.50 4.70 (4/9) France 15.00 (Jan.) 11.88 -1.13 -0.87 -1.00 -0.38 8.50 (4/9) Italy 20.00 (June) 17.50 -3.37 -2.44 +0.24 -0.05 11.88 (4/8) Belgium 12.00 (Oct.) 11.00 -1.00 -1.00 -1.60 7.40 (4/1) Netherlands 7.50 (Aug.) 6.69 -0.13 0 -0.87 5.69 (4/1) Switzerland 7.00 (Dec.) 7.00 0 Japan 13.75 (Aug.) 13.50 -0.50 -0.25 Canada 11.92 (Sept.) 10.50 -3.50 -0.25 7.06 -1.38 -0.28 United States 8.93 (Aug.) 0 -0.25 +0.13 -0.50 n.a. 6.50 (4/1) 12.50 (3/28) 0 6.75 (4/8) +0.17 5.70 (4/8) Rotes: Short-term rates: U.K. - 90-day interbank sterling rate; Germany - 3-month interbank loan rate; France - call money rate against private paper; Italy - 3-month interbank rate; Belgium - rate on 4-month Treasury Bills; Netherlands - 3-month Treasury Bills at mid-month; Switzerland - 3-month deposit rate; Japan - call money rate, unconditional; Canada - 3-month finance company paper; U.S. 3-month Treasury bill. Table 2 LONG-TERM GOVERNMENT BOND YIELDS a/ (per cent per annum or percentage points) Level SChange during month: Feb. '75 Mar. '75 Jan. '75 Level 1974 peak end-Dec. '74 United Kingdom 17.44 (Dec.) 17.44 -2.39 -0.64 -0.80 -0.04 13.57 (4/4) Germany 10.37 (Oct.) 9.43 -0.81 -0.51 -0.04 -0.02 8.05 (4/4) France 11.13 (July) 10.93 -0.18 -0.40 Latest Latest 10.08 (3/21) n.a. Belgium 9.26 (Aug.) 9.03 +0.21 -0.45 8.79 (2/28) n.a. n.a. Netherlands 10.11 (July) 8.72 -0.32 +0. 02 -0.16 Switzerland 7.43 (Sept.) 7.17 -0.34 -0.17 .. 03 8.26 (3/28) n.a. 6.69 (3/7) Japan 10.88 (Oct.) 10.85 -0.21 -1.02 n.a. n.a. 9.62 (2/28) Canada 9.84 (Aug.) 8.85 -0.55 -0.13 -;0.29 n.a. 8.46 (3/28) United States 8.14 (Aug.) 7.37 +0.04 +0.03 40.61 +0.07 8.12 (4/4) Notes: Long-term rates: U.K. - 3-1/2% war loan; Germany - 6% public authority bond; France - public sector bonds; Belgium-- long-term government bonds, composite yield; Netherlands - average of three 4-1/4-4-1/2% goverment loans; Switzerland - government composite yield; Japan - 7 year industrial bonds; Canada - government longterm average yield; U.S. - government 10-year constant maturity bond yields. a/ The yields shown for Japan are industrial bond yields. IV - 14 with the parallel rise in the prices for fixed-interest securities, has occurred in all the major countries. The most dramatic increase took place in the United Kingdom, where the Financial Times Industrial index has more than doubled since its 1974 low. In other countries, equity prices have increased 20-25 per cent from their lows. The coincidence of the decline in interest rates in all the major countries reflects several factors. Most importantly, it reflects the considerably deeper cut in output and concomitantly larger rise in unemployment than had been anticipated. The associated weakness of aggregate demand (especiallyinvestment demand and demand for consumer durables) has resulted in reduced demand for credit and increasingly more prevalent expectations of lower -- even if still high -- rates of inflation. The coincidence of the decline in interest rates, particularly short-term rates, also reflects the decline in rates on dollar-denominated assets both in the United States and abroad. Because of the interdependence of financial markets, some funds have flowed among the various markets in response to changing interest-rate differentials (although some flows of funds are motivated by other considerations). These flows tend in them- selves to narrow the differentials or to prevent differentials from emerging. -- However, the existence of barriers to the free flow of funds and the existence of floating exchange rates -- rate differentials will not be eliminated entirely. means that interest IV - 15 Another manifestation of a high degree of interdependence is the response of policymakers abroad to the decline in interest rates on dollar-denominated assets. In those countries where a continued inflow of foreign funds is considered essential to help finance an underlying balance-of-payments deficit (the United Kingdom) or where capital outflows are discouraged (Italy), the decline in dollar interest rates enabled central banks to permit domestic rates to fall and still retain a suf- ficient differential. In other countries, where upward pressure on the exchange rate was not especially welcome (Germany), the decline in dollar interest rates provided another reason for the central bank to push domestic rates down. Of course, the fact that all the major countries are simultaneously experiencing weak aggregate demand provides sufficient motivation for policy in all countries to move toward lower interest rates. Thus, monetary authorities in all the major foreign countries have taken further measures in the past several months to ease monetary conditions. Discount rate reductions have been made one or more times in France, Germany, Italy, Belgium, Denmark, Switzerland, the Netherlands, and Canada; the Bank of England's minimum lending rate has fallen several times. In order to enhance bank liquidity, reserve requirements were reduced in France, Belgium, and Canada, and rediscount quotas were raised in Germany. The import deposit arrangement in Italy, which had been designed in large part as a means of reducing liquidity, was terminated. In Japan, the quarterly credit ceilings for the large city banks have been IV - 16 eased moderately for both the first and second quarters of this year; in addition, there has been a selective increase in credits from specialized financial institutions to the housing industry and to firms experiencing particularly severe financial difficulties. raised in Belgium and removed in Italy. Credit ceilings were also In other countries where ceilings exist -- and maybe in Belgium and Italy as well -- the ceilings generally do not appear to be binding in any case, given the weak demand for credit. Further easing actions are expected in some countries. French Finance Minister Fourcade announced plans to lower interest rates and to extend the system of special credit facilities for specific sectors; the Bank of France's discount rate will be lowered again, he said, to provide a psychological backdrop for a fall in other interest rates. Bank of Japan Governor Morinaga said recently that the Bank of Japan's policies will also be eased sometime in the future (probably in May, after the results of the wage negotiations can be assessed); on the other hand, he also said that controls on capital inflows may be imposed if excessive liquidity is being created. The British Budget for 1975/76 will be announced on April 15; some measures to ease further the liquidity position of the corporate sector are generally expected. In contrast to the broad similarity across countries of the pattern of interest rate movements, the behavior of the money stock in the various countries has been quite diverse. (See Table 3.) Moreover, the growth of the money stock does not appear -- on the surface at least -to have been consistent with the official characterization of the stance IV- 17 Table 3 MONEY STOCK a/ (percentage changes; SAAR) 3-months ending in: Sept. '74 Dec. '74 Feb. '75 1972 year 1973 year 1974 year France 14.5 9,0 15.9 -7.8 51 Germany 14.0 1.8 11.7 11.7 21.5 Japan 24.5 16.7 11.5 -6.9 9.5 United Kingdom 13.8 4.5 7.2 11.1 17.0 19.1 Canada 13.1 11.9 6.1 -4,4 4.7 25.8 8.7 6.1 4.7 1.6 4.6 0 France 18.4 15.0 18.4 8.2 34.4 b / n.a. Germany 16.7 13.9 5.7 0.5 9.8 0.5e Japan 24.6 16.8 11.5 5.1 11.8 14.1 c / United Kingdom 27.7 28.8 11.4 18.6 10.1 8.2 Canada 15.9 18.5 16.9 23.6 14.7 20.1 United States 11.1 8.8 7.4 4.6 7.1 M1 United States . 7h/ n.a. 7.0e 15 .2c/ M2 (M3) 5.3 a/ Calculated to end of period from end of preceding period, at compound annual rates. b/ The French money stock data is severely distorted by the postal strike, which caused a sharp increase in deposits in postal accounts in the fourth quarter. c/ Calculated for the 3 months ending in January. e/ Seasonal adjustment estimated by FRB staff. IV - 18 of monetary policy in some countries. For example, in Japan, where monetary policy is still characterized as restrictive, growth in M1 especially has been accelerating in recent months, as has growth in M2. But in Germany, where the Bundesbank claims to be easing its policy, the growth of the money supply,has slowed recently; in January and February combined, the German money stock, both narrowly and broadly defined, remained virtually unchanged. On the other hand, the avowed target of Bundesbank policy -- "central bank money," a concept associated with the monetary base -- has actually been rising slightly faster than the targeted 8 per cent annual rate announced last December. The movements of the various money stock measures abroad prompted the staff to make some calculations comparing the variability of the monthly growth rates of the money stock in different countries. Since the beginning of 1973 -- the period roughly corresponding to the latest restrictive phase of monetary policy -- the volatility of monetary growth rates abroad (as measured by the coefficients of variation) is everywhere higher than in the United States; it has been significantly higher in the cases of Germany, the United Kingdom, and Japan. This finding tends to substantiate the belief that the monetary aggregates really are dominated by interest rates as a target of foreign central banks' policies.
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