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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 this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. 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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CONFIDENTIAL (FR) CLASS II - FOMC November 16, 1979 SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System TABLE OF CONTENTS Page THE DOMESTIC NONFINANCIAL ECONOMY Capacity Utilization . . . . . . . . .. . 1 THE DOMESTIC FINANCIAL ECONOMY FNMA Auction Results . . . .. . . . . . 2 ....... TABLES: . ... 3 . . 4 5 6 . . . 7 . . . . 8 8 FNMA Auction Results Home Mortgage Commitments Monetary Aggregates . . . Member Bank Reserves . . . Commercial Bank Credit . . . . . . . . . . . .. Selected Financial Market Quotations . .... . . .. * . .... * . . . * * .* . .. INTERNATIONAL DEVELOPMENTS Foreign Exchange Markets U.K. Monetary Policy .. . ERRATA . . . . . . . . . . . . . . . . . . . . . . . . ........ . . . . . . . . . .. . . . . 9 SUPPLEMENTAL NOTES Capacity Utilization Manufacturers operated at 85.0 percent of capacity in October, and producers of industrial materials operated at 86.8 percent of capacity, both about the same as the rates for the preceding two months, The 1973 peak utilization rate for manufacturing was 88.0 percent and for industrial materials, 92.6 percent. Within manufacturing, the utilization rate in primary processing industries eased further in October. In the advanced processing sector, strikes curtailed the output of nonelectrical machinery and were the main cause for a small decline in the overall operating rate. The manufacturing capacity utilization rate in October was down 1.7 percentage points from the first quarter average and 1.0 percentage point from the rate in October 1978. Utilization rates for most materials producers were little changed in October, but operating rates for energy materials rose 0.5 percentage point. The capacity utilization rate for producers of industrial materials in October was only a little below the third quarter average, and 1.2 percentage points below the first quarter average and 2.0 percentage points below the rate in December 1978. The Domestic Financial Economy FNMA Auction Results Bidding in FNMA's November 13 auction of 4-month commitments to purchase FHA/VA home mortgages declined sharply from the volume posted in the October auctions. The percentage of bids accepted by FNMA increased significantly from the October 29 auction, but the average yield on accepted bids fell by 36 basis points to 12.93 percent. The decline in bid volume and reduction in average yield largely reflected price increases in the market for GNMA-guaranteed securities--the other major marketing alternative for originators of FHA/VA mortgages. Bidding in the November 13 auction of commitments to purchase conventional home loans was about one-third below the pace of the two previous auctions. However, the percentage of bids accepted by FNMA rose sharply and the average yield on accepted bids increased by 17 basis points to 13.97 percent--about 2 percentage points above the yield in the October 1 auction. FNMA AUCTION RESULTS HOME MORTGAGE COMMITMENTS Government-Underwritten (millions of dollars) Accepted Offered 1979 - High 1,035 (10/29) Low 37 (7/9) 448 (10/15) 19 (7/9) Conventional Yield to FNMA (millions of dollars) Offered Accepted 13.29 (10/29) 454 (10/29) 10.42 (3/19) 36 (7/9) 172 (9/4) 28 (7/9) Yield to FNMA 13.97 (11/13) 10.92 (3/19) 279 147 119 66 10.88 10.80 250 208 102 112 11.30 30 June 11 25 160 60 66 34 10.79 10.74 237 120 123 72 11.54 11.60 19 50 10.66 10.65 28 42 11.54 11.51 89 95 11.50 11.53 May 14 July 9 23 Aug. 6 20 10.64 10.69 1 15 29 Nov. 13 NOTE: 891 1,017 1,035 107 139 285 315 Sept. 4 17 Oct. 36 58 11.41 10.92 11.25 290 238 172 153 11.67 11.83 361 448 321 11.66 12.60 13.29 195 401 454 127 166 139 11.99 12.75 13.80 169 12.93 274 137 13.97 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 yields for home mortgages assuming a repayment period of 12 years for 30-year loans, without special adjustment for FNMA commitment fees and related stock requirements on 4-month commitments. Mortgage amounts offered by bidders relate to total bids received. MONETARY AGGREGATES (Seasonally adjusted annual rates of growth) 1/ Major monetary aggregates 1. M-1 7.9 2. Currency 9.6 3. Demand deposits 7.3 4. M-2 9.8 5. M-3 10.3 Bank time and savings deposits 11.3 6. Total 7. Other than large negotiable 11.0 CDs at weekly reporting banks 2.9 8. Savings deposits 4.1 9. Individuals 2/ -10.1 10. Other 3/ 17.9 Time deposits 11. 12.7 12. Small time 4/ 26.9 13. Large time 4/ 14. Time and savings deposits sub6.9 ject to rate ceilings (8+12) Deposits at nonbank thrift institutions 5/ 11.1 15. Total 16. Savings and loan associations 12.3 6.8 17. Mutual savings banks 18. Credit unions 13.7 MEMORANDA: Monthly changes in billions of $ 1.1 19. Total U.S. govt. deposits 6/ 2.9 20. Total large time deposits 7/ 21. Nondeposit funds 1.6 22. Other 8/ 0.9 23. Net due to related foreign institutions 0.7 Oct.e Oct. '78 to Oct. '79e 11.2 15.1 10.2 12.2 10.9 2.5 4.6 0.9 8.6 7.5 4.8 9.9 3.0 7.9 8.1 9.0 15.1 16.6 8.9 4.5 9.3 -9.6 -3.1 -9.4 -2.9 -13.0 -8.1 15.6 18.5 16.5 36.3 13.6 -12.1 13.6 5.5 6.3 -2.7 19.2 26.7 4.5 12.9 0.0 1.2 -8.3 21.2 17.4 27.0 12.8 -16.9 -15.7 -33.6 32.0 29.4 38.5 10.0 -3.7 -3.0 -12.0 20.9 27.3 9.6 QI QII 1979 QIII 4.1 10.6 1.7 7.6 9.3 -2.1 9.1 -6.2 1.8 4.7 7.6 8.1 7.5 8.6 7.9 9.7 11.1 9.2 12.0 10.5 12.3 8.4 1.2 1978 QIV QIII 10.2 0.2 0.0 0.0 18.2 15.8 22.4 Sept. 7.0 2.2 15.1 15.8 8.7 6.5 10.1 11.6 13.1 7.8 10.1 8.8 11.3 4.6 0.8 6.8 7.8 3.1 8.3 8.4 9.2 2.2 19.3 8.9 10.0 4.2 12.7 6.0 8.1 1.7 4.2 8.3 9.9 3.4 9.5 -0.4 4.7 2.2 1.6 -2.0 1.3 5.3 2.0 1.5 -6.3 5.0 1.3 0.7 2.5 7.6 2.2 -0.1 4.6 8.3 -1.6 -0.1 6.5 1.5 2.5 -0.4 1.0 4.6 1.6 0.6 3.3 3.7 5.4 9.8 -1.0 3.0 e--estimated. n.a.--not available. 1/ Quarterly growth rates are computed on a quarterly average basis. 2/ Savings deposits held by individuals and nonprofit organizations. 3/ Savings deposits of business, government, and others, not seasonally adjusted. 4/ Small time deposits are time deposits in denominations less than $100,000. Large time deposits are time deposits in denominations of $100,000 and above excluding negotiable CDs at weekly reporting banks. 5/ Growth rates computed from monthly levels are based on average of current and preceding end-of-month data. 6/ Includes Treasury demand deposits at commercial banks and Federal Reserve Banks and Treasury note balances. 7/ All large time certificates, negotiable and nonnegotiable, at all CBs. 8/ Other nondeposit borrowings of commercial banks from nonbank sources include Federal funds purchased and security RPs plus other liabilities for borrowed money (including borrowings from the Federal Reserve), and loans sold, less interbank borrowings. -5- MEMBER BANK RESERVES 1979 QI QII QIII Sept. Oct.p/ 1/ Seasonally adjusted annual rates of growth1. Required reserves -2.9 -4.8 6.0 12.5 18.2 2. Total reserves -3.0 -5.0 6.3 11.5 20.7 3. Nonborrowed reserves -3.4 -8.8 8.2 4.2 1.1 4. Monetary base 5.6 4.0 9.8 13.9 10.6 2/ Monthly average levels, millions of dollars 2 / 5. Borrowed reserves 989 1,367c/ 1,199c/ 6. Excess reserves 194 179 208 1,341 2,024 190 279 1/ Includes required reserves of Edge Act corporations. Reserve series have been adjusted to remove discontinuties associated with regulatory changes in reserve requirement ratios. 2/ Monthly averages are prorated averages of weekly data. p/ Preliminary. c/- Corrected. COMMERCIAL BANK CREDIT cent changes at annual rates, based on seasonally adjusted data) 1/ (Per QIII 1978 QIV QIP 12 months ending Oct.e Oct.e QIIP 1979 QIII e Sept.P 15.8 21.7 7.6 13.5 5.3 13.3 12.7 13.3 11.9 6.4 -1.9 7.6 5.4 8.5 14.2 5.9 Treasury securities 1.2 -21.1 2.1 3.8 1.7 14.0 1.3 -2.9 Other securities 9.4 9.2 10.5 6.2 12.1 14.2 8.3 10.0 15.9 18.2 15.2 14.2 18.2 24.2 8.1 16.5 Business loans 12.7 14.2 20.5 16.6 22.7 25.9 12.5 19.3 Security loans -16.7 -23.3 33.0 38.1 8.7 26.1 -137.9 6.1 15.7 Total loans and investments 2/ Investments Total loans 2/ Real estate loans 20.4 17.7 14.6 13.0 14.7 14.5 15.4 Consumer loans 17.9 15.9 16.3 12.4 7.5 9.4 n.a. Business loans net of bankers acceptances 12.6 14.4 20.4 16.6 21.7 24.0 16.3 19.4 Commercial paper issued by nonfinancial firms 3/ 23.1 17.5 33.5 65.7 69.7 48.5 12.7 51.3 12. Sum of items 6 & 11 13.3 14.2 21.4 20.2 26.5 27.9 12.5 21.6 13. Finance company loans to business 4/ 5.5 25.0 16.6 17.7 9.4 -15.3 n.a. n.a. 11.8 16.3 20.6 19.7 23.3 19.9 n.a. n.a. n.a. MEMORANDA: 10. 11. 14. 1/ 2/ 3. 4/ Sum of items 12 and 13 e-estimated. p--preliminary. n.a.-not available. Average of Wednesdays for domestic chartered banks and average of current and preceding ends of months for foreign-related institutions. Loans include outstanding amounts of loans reported as sold outright to a bank's own foreign branches, unconsolidated nonbank affiliates of the bank, the bank's holding company (if not a bank), and unconsolidated nonbank subsidiaries of the holding comny. erage of Wednesdays. Based on average of current and preceding ends of months. SELECTED FINANCIAL MARKET QUOTATIONS (percent) 1974 High - 1979 1978 1/ Jan.3 1 Jan.4- 1979 2/ FOMC FOMC 1Oct. 5 23 Oct. Nov. 15 Change from: Oct. Oct. 23 FOMC Short-term rates Federal funds 1/ 13.55 6.69 10.59 11.91 15.14 13.43 1.52 -1.71 Treasury bills 1-month 3-month 6-month 1-year 9.88 9.63 9.75 9.54 5.81 6.16 6.45 6.55 8.93 9.30 9.49 9.68 10.40 10.70 10.63 10.28 12.60 13.01 12.76 12.19 11.62 11.70 11.80 11.00 1.22 1.00 1.17 .72 -. 98 -1.31 -.96 -1.19 Commercial paper 1-month 3-month 6-month 12.25 12.25 12.00 6.62 6.68 6.70 10.32 10.57 10.62 11.73 11.86 11.84 13.91 14.13 14.14 13.39 13.62 13.25 1.66 1.76 1.41 -.52 -.51 -.89 Large negotiable CDs 3/ 1-month 3-month 6-month 12.58 12.64 12.30 6.62 6.76 7.01 10.37 10.93 11.51 12.09 12.50 12.80 14.51 14.89 15.07 13.83 14.13 14.14 1.74 1.63 1.34 -.68 -.76 -.93 13.78 14.01 6.89 7.25 11.14 11.81 12.45 12.79 14.74 15.14 14.58 15.43 2.13 2.64 -.16 .29 12.00 7.75 11.75 13.50 15.00 15.50 2.00 8.84 8.52 8.69 7.38 7.72 8.00 9.61 9.23 9.00 10.01 9.67 9.44 11.98 11.19 10.44 11.04 10.77 10.36 1.03 1.10 .92 -.94 7.15 5.64 6.58 6.64 7.18 7.31 .67 .13 Corporate Aaa New issue 5/ Recently offered 6/ 10.61 10.52 10.22 11.05 ll.51p 1.29 8.48 9.51 10.25 11.00 11.45p 1.20 Primary conventional mortgages 6/ 10.03 9.00 10.38 11.35 11.75 12.85 1.50 1.10 FOMC Oct. 23 Nov. 15 Oct. Oct. 806.83 56.70 195.76 132.61 821.33 59.27 218.14 138.92 -76.28 -4;12 -17.01 -13.37 Eurodollar deposit 1-month 3-month /' Bank prime rate -mediate- and longm rates U.S. Treasury (constant maturity) 3-year 7-year 20-year Municipal (Bond Buyer) 4/ 1974 Low Stock prices Dow-Jones Industrial NYSE Composite AMEX Composite NASDAQ (OTC) 7 / 577.60 32.89 58.26 54.87 - 1978 7/ 1979 7/ Jan.6- Jan.5- 807.43 51.34 125.20 103.13 821.42 54.74 154.98 119.92 Oct. 5 897.61 63.39 235.15 152.29 Daily averages for statement week except where noted. One-day quotes except as noted. lecondary market. Jne-day quotes for preceding Thursday. 5/ Averages for preceding week. 6/ One-day quotes for preceding Friday. 7/ Calendar week averages. 1/ 2/ -.42 -.08 .46 .45 23 23FOMC 14.50 2.57 22.38 6.31 International Developments Foreign exchange markets. Since the November 14 U.S. decision to freeze all Iranian dollar assets, exchange markets have been somewhat unsettled by the political and legal uncertainties of the current situation but an atmosphere of chaos has not developed. Exchange rates have moved in a fairly broad range as each new announcement by Iranian spokesmen or by officials in other countries is evaluated. As of the morning of November 16, the weighted-average value of the dollar was about 1 percent below its high reached early in the week as the dollar weakened following the Iranian statement that it would not accept payment for oil in dollars but only in Swiss franc, German marks, and French francs and in some cases yen. The dollar remained about 3 percent higher than it had been in early October. U.K. Monetary Policy The Bank of England raised its Minimum Lending Rate from 14 to a record 17 percent, effective November 16. Restrictions on the growth of the banking system's interest-bearing eligible liabilities (the "corset"), which were scheduled to expire in mid-December, will be retained for an additional six months until mid-June, 1980. These actions, announced on November 15, were taken to reduce the growth in sterling M3. During the four weeks ended October 17, the sterling M3 money supply rose by 2 percent compared -9with a rise of only 0.6 percent in the month to mid-September. During the four months since mid-June, sterling M3 rose by 4-1/2 percent, which corresponds to an annual rate of growth of 14-1/4 percent (all the above are seasonally adjusted figures). This compares with the government's target range for sterling M3 growth of between 7 and 11 percent for the ten months from mid-June. It was also announced that the 7-to-11 percent growth rate range will be continued through next October, but that the base would remain the mid-June 1979 level; keeping the base unchanged avoids building the excessive monetary growth since June into the level of sterling M3 over the next 12 months. ERRATA: Part 2 of the Greenbook dated November 14, 1979, contains a paging error. Page II-21 is out of place; it contains the remainder of the discussion of the government sector that begins on page 11-15.
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