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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. 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August 15, 1975 CONFIDENTIAL (FR) CLASS II - FOMC SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System SUPPLEMENTAL NOTES The Domestic Nonfinancial Economy Retail trade inventories rose in June in book value terms at a $2.1 billion annual rate. Stocks of automotive goods declined further, while stocks at other stores, on balance, rose. The June rise in total inventories follows five months of steady decline: liquidation occurred at an annual rate of $2.9 billion in the second quarter (the April-May rate was $5.4 billion) and $10.4 billion in the first quarter of the year. Total manufacturing and trade inventories declined in June at a 7.7 billion rate in book value terms, down sharply from the $31.3 billion rate in May. The second quarter liquidation of manufacturing and trade inventories is now indicated at a $19.0 billion annual rate; in the first quarter liquidation was at a $11.4 billion annual rate. Merchant builder sales of new single-family homes, which had been rising steadily since last December, declined 6 per cent in June to a seasonally adjusted annual rate of 556,000 units. For the second quarter as a whole, sales averaged more than a third above the first quarter rate reflecting in part the 5 per cent tax credit enacted in late March, as well as improvements in the availability of mortgage credit. The stock of unsold new homes edged down further in June and by the end of the month represented about 8 month's supply at the current sales rate. The median price on the mix of units sold declined to $37,800--slightly above the rising median price of unsold units. - 2 Sales of existing homes continued to advance during June, and although only 1 per cent above May, the June level was less than 3 per cent below the peak in early 1973. The median price of used homes sold rose to $36,200--a tenth above a year earlier. HOME SALES New Home Sales and Stocks Sales Indexes of Unit Volume Median Prices of Homes Sold Months' (1972=100, seasonally adjusted) New Existing Homes Homes homes homes Existing New sold 1/ for sale 2/ supply homes 3/ (thousands of units) homes (thou. of dol.) 1974 QI 523 452 10.4 72 106 35.2 30.9 QII 550 436 9.5 76 105 35.6 32.2 QIII QIV 490 417 414 400 10.1 11.5 68 58 99 99 36.2 37.3 32.8 32.2 QI 426 396 11.2 59 95 38.1 33.8 QII (p) 572 376 7.9 79 108 39.0 35.4 Jan. 404 Feb. 411 Mar. 463 Apr. (r) 567 May (r) 592 June (p) 556 404 409 396 388 382 376 12.0 11.9 10.3 8.2 7.7 8.1 56 57 64 79 82 77 87 97 100 106 108 109 37.2 37.9 38.8 39.1 39.5 37.8 33.2 33.9 34.2 34.9 35.2 36.2 1975 Seasonally adjusted annual rate. Seasonally adjusted, end of period. Converted to 1972 index for comparison with existing home sales, which are not available on any other basis. -3 - The Domestic Financial Situation Mortgage market. According to the HUD (FHA) opinion survey, average interest rates on new commitments for conventional new- and existing-home mortgages remained unchanged in July at levels of 9.00 and 9.05 per cent, respectively. In the private secondary market, yields on FHA-insured new-home mortgages averaged 9.13 per cent at the end of July--7 basis points above the yield at the end of June. Recent movements in these series are generally consistent with the FHLMC series on primary market rates and the FNMA secondary market yields cited in the Greenbook. AVERAGE RATES AND YIELDS ON NEW-HOME MORTGAGES (HUD-FHA Field Office Opinion Survey) End of Month 1974 Low High 1975 Jan. Feb. Mar. Apr. May June July 1/ 2/ 3/ 4/ Primary market Conventional loans Spread 4/ Level 2/ (per cent) (basis points) 8.55 (Feb.) 9.80 (Sept.) 9.15 9.05 8.90 9.00 9.05 9.00 9.00 -66 (Sept.) 45 (Feb.) 15 11 -70 -66 -57 -37 -25 Level 3/ (Per cent) Secondary market 1/ FHA-insured loans Dis Discounts Spread 4/points) (basis points) - 8 (Sept.) 44 (Feb.) 2.3 (Feb.) 8.99 8.84 8.69 - 1 3.8 2.6 5.4 9.16 -46 9.06 9.13 -31 8.54 (Feb.) 10.38 (Sept.) -10 -91 -12 6.3 (July, Sept.) 5.0 4.3 4.8 Any gaps in data are due to periods of adjustment to changes in maximum permissible contract rates on FHA-insured loans. Average contract rates (excluding fees or points) on commitments for conventional first mortgage loans, rounded to the nearest 5 basis points. Average gross yield (before deducting servicing costs) to investors on 30-year minimum-downpayment FHA-insured first mortgages for immediate delivery in the private secondary market (excluding FNMA), assuming prepayment in 15 years. Average gross mortgage rate or yield minus average yield on new issues of Aaa utility bonds in the last week of the month. - 4 - New York City financing and municipal market developments. Once again, New York City narrowly averted defaulting on debt maturing in the latter part of August. By late July, it had become evident that unless the city took some substantial and visible steps to restore investor confidence, the Municipal Assistance Corporation (MAC) would be unable to raise the necessary funds. in Prices on the MAC bonds issued early July had fallen sharply upon release from syndicate price restrictions, the 15-year bond yielding nearly 11 per cent up from its offering yield of 9.5 per cent. Moreover, little interest in MAC bonds had been shown by investors outside the New York City area. In an effort to convince investors that the city's financial house was being put in order, MAC, the city, and the city labor unions came to an agreement in late July on a number of reform measures, the most significant being a freeze on wages of city workers at the preJuly 1 level. In addition, the City agreed to limit increases in certain budget items and to raise transit fares. At the same time, a financing package to meet the City's obligations was put together by MAC and the NYC banks. If $275 million of MAC bonds could be sold to the public, the banks agreed to purchase $350 million bonds at 6 per cent, the New York State and city pension funds would purchase $215 million bonds, and the state would advance the city $120 million. Initial investor response to the $275 million public offering, however, was poor, despite yields ranging between 9.50 and 10.25 per -5- cent being offered on bonds maturing between 5 and 8 years. By August 13, only about $150 million of orders had been placed, more than half of those from one insurance company. In order to complete the package a group of banks and broker-dealers had to agree to purchase any unsold bonds and the issue had to be repriced with bonds coming due in eight years carrying a yield of 11 per cent. The prolonged New York City crisis continues to affect the ability of other governmental units to raise funds in the municipal securities market, especially those located in New York State. The New York State Housing Finance Agency paid 10.85 per cent on a reduced offering of $92 million of notes, almost 2 percentage points above a similar offering in mid-July. The Massachusetts Housing Finance Agency also refused an unacceptably high bid of 8.6 to 9 per cent on $63 million of notes. Notes offered by this agency in late July carried rates nearly 3 percentage points lower. CORRECTIONS: Part II - Section II, page 18, Table - Federal Budget and Federal Sector in National Income Accounts - The figure should be corrected as follows: Fisal Year 1975 National Income Sector Surplus/deficit Original 5/ 5 - 47.0: 5/ 282.4-/ Receipts Part II Fiscal Year 1976 Corrected / - 47.6- 5/ 281.8- Original Corrected 5/ 5/ - 66.55 - 65.6310.2 5/ 309.3 - Section III, page 13, Table - Consumer Instalment Credit - "outstandings (SAAR)" in outstandings (SAAR)". in table heading should read "change 5/ -6INTEREST RATES (One day quotes - in per cent) 1975 Lows July 14 Aug. 14 5.13(5/21) 5.93(7/16) 6.08(8/13) 4.88(6/16) 5.38( 6/2) 5.40(5/30) 5.69(5/21) 6.03 6.25 6.30 7.25 6.45 6.63 6.80 6.94 9.00( 1/1) 5.33(6/11) 6.13( 7/9) 6.63(8/13) 6.97( 1/2) 8.75( 1/2) 7.67( 1/2) 5.18(5/11) 5.38(5/23) 5.68(6/12) 6.35 6.38 6.97 6.63 6.81 7.42p(8/13) 8.38( 1/1) 5.75(6/18) 6.63( 7/9) 7.00(8/13) 6.69( 1/2) 8.00(8/13) 5.37( 2/5) 6.03(2/20) 6.45 7.25 7.24 8.00p(8/13) 8.00( 1/1) 4.35(8/15) 6.00(3/12) 6.63(7/9) 4.00(7/11) 7.00(8/13) 4.35(8/15) 8.40(C/7) 6.93(2/19) 8.54(8/7) 7.58(2/21) 7.77 3.12 3.33(8/13) 8.49(8/13) 8.82 10.34 10.35(8/13) Highs Short-Term Rates Federal funds (wkly. avg.) 3-month Treasury bills (bid) Comm. paper (90-119 day) Bankers' acceptances Euro-dollars CD's (NYC) 90-119 day Most often quoted new 7.70( 1/8) 6.90( 9.00( 9.00( 10.25( 1/2) 1/2) 1/1) 1/3) 6-month Treasury bills (bid) Comm. paper (4-6 mo.) Federal agencies CD's (NYC) 180-269 day Most often quoted new 1-year Treasury bills (bid) Federal agencies CD's (NYC) Most often quoted new Prime municipals 3.40(2/7) Intermediate and Long-Term Treasury coupon issues 5-years 20 -years Corporate Seasoned Aaa Baa 9.02(4/30) 10.63(1/20) 8.57(2/26) 10.27(4/3) 8.94(8/13) 9.80(4/3) 8.89(2/6) 9.53(7/16) 9.43p(8/13) Municipal Bond Buyer Index 7.22(7/23) 6.27(2/13) 7.39(7/16) 7.17(8/13) Mortgage--average yield in FNMA auction 9.47(1/13) 8.78(3/10) 9.10 9.32(8/11) 9.47(1/13) 8.78(3/10) 9.10 9.32(8/11) New Issue Aaa Utility - 7The International Developments Monetary policy announcements in Germany and the Netherlands. At its meeting of August 14, the Central Bank Council of the Deutsche Bundesbank announced that the bank's discount and lombard rates would be further reduced, with effect from Friday, August 15. The discount rate was decreased by 0.5 percentage point to a new level of 4 per cent, and the lombard rate was cut by the same amount to a new level of 5 per cent. These reductions mark the sixth time since last October that the Bundesbank has cut its discount rate, and the seventh time it has decreased the lombard rate. The Bundesbank also announced on August 14 that it had reached an agreement with the Finance Ministry to abolish the authorization requirement for the payment of interest by German banks on credit balances on accounts held by non-residents. This requirement, one of several measures taken at various times to discourage capital inflows into Germany, was one of the few such measures not dismantled early in 1974. The approval of the German cabinet will be required before this regulation is actually lifted, but this is expected to be forthcoming. Following the Central Bank Council meeting, Bundesbank officials indicated that the authorities were willing to accept such additional capital outflows as might result from the decrease in rates, in system. view of the highly liquid condition of the German banking Partly in response to such outflows, the Bundesbank in late July entered the market forcefully to support prices of public authority debt issues. The Netherlands Bank on August 14 also announced rate decreases with effect from August 15. Authorities reduced the bank rate from 6 per cent to a new level of 5.5 per cent, and indicated that the bank's other major rates would likewise be cut by 0.5 percentage point each.
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