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Content last modified 6/05/2009.

CONFIDENTIAL (FR)

SUPPLEMENT

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

Prepared for the
Federal Open Market Committee

By the Staff
Board of Governors
of the Federal Reserve System

September 9, 1968

SUPPLEMENTAL NOTES
The Domestic Economy
Labor market.
in August.

Nonfarm payroll employment rose by 200,000

The pickup was concentrated entirely in the nonindustrial

sector, where there were increases of about 50,000 each in trade,
State and local government, and services.

Manufacturing showed no

increase for the second month in a row and construction showed no
change, remaining about 200,000 below the February figure.
NONFARM PAYROLL EMPLOYMENT
(In thousands, seasonally adjusted)

Total
Manufacturing
Durable goods
Nondurable goods

August
level

July to August
change

68,409

208

19,775

-7

11,610
8,165

-14
7

635

-2

Construction

3,186

4

Transportation and
public utilities

4,366

Mining

Wholesale & retail trade

14,171

Finance, insurance, and
real estate

3,381

Services

10,541

Government

12,354

Among manufacturing industries, as expected, there were
sizable declines in transportation equipment--where a later than usual
auto model introduction had inflated the July estimate--and in the

-2-

primary metals group.

Employment also dropped somewhat in the food

industry reflecting strike activity in some processing plants.

Other-

wise, there were widespread modest employment gains.
Weekly hours in manufacturing edged down o.1 hour over the
month.

There were work week reductions in both the transportation

equipment and primary metals industries, however, both were smaller
than expected and are likely to be revised downward.

Hourly earnings

averaged $2.99 in manufacturing, an increase of 6.0 per cent from a
year earlier.

Housing vacancy rates (confidential until release) changed
little in the second quarter of the year from the abnormally low rates
reached in the first quarter.

Rental vacancy rates, at 5.7 per cent of

all rental units available and fit for use, were the lowest for any
second quarter since 1957.

Home-owner vacancy rates, which are much

less sensitive than those for rental units, continued at only 1.0 per
cent in the second quarter of the year.

This compares with a second

quarter high of 1.4 per cent in 1966 and some other earlier years and
with 0.9 per cent in the second quarter of 1957.
RENTAL VACANCY RATES
(Per cent)

1957

Average for second quarter of:
1964
1965
1966
1967

All regions

4.9

7.4

7.5

6.8

6.3

5.7

Northeast

3.0

4.4

4.8

4.6

4.2

3.5

North Central

4.4

6.9

6.6

5.9

5.4

4.8

South

5.8

8.5

7.7

7.5

7.5

7.2

West

7.5

10.7

12.0

9.9

8.6

7.6

1968

-3The Domestic Financial Situation

Bond yields.

During the first week in September, the

expectations of corporate security investors apparently shifted rather
significantly.

In the corporate bond market,yields on new issues,

which had been relatively stable since early August, advanced sharply.
In addition, although inventory positions were relatively moderate,
corporate underwriters released from syndicate all previously offered
bonds which had yet to be placed.

The yields on these issues--originally

offered only one to two weeks earlier--advanced from 8 to 15 basis points
in free market trading.
BOND YIELDS
(Weekly averages, per cent per annum)
Corporate
ororae Aaa
aa
New

Seasoned

With call
protection

State and local Government
S&L High
Grade

Bond Buyer's
(mixed qualities)

1968
Low

6.12 (2/2)

5.97 (8/30)

4.15 (8/9)

4.07 (8/9)

High

6.83 (5/24)

6.29 (6/7)

4.68 (5/24)

4.71 (5/24)

6.36
-6.13
6.13
6.13

6.15
6.07
6.00
5.98
5.97

4.18
4.15
4.29
4.34
4.45

4.11
4.07
4.22
4.27
4.38

6.23*

5.95

4.48

4.44

Week ending:
Aug.

2
9
16
23
30

Sept. 6
*

Does not reflect issues released from syndicate during the week.

Stock market.

Meanwhile, in the stock market, prices and the

pace of trading advanced sharply.

By the close Friday, all price indices

had nearly regained their mid-July all-time peaks.

-4KEY INTEREST RATES
1967
High

1968
Aug. 12

High

Federal funds (weekly average)

5.25 (1/11)

6.38 (5/15)

6.08 (8/7)

5,94 (9/4)

3-months
Treasury bills (bid)
Bankers' acceptances
Euro-dollars
Federal agencies
Finance paper

5.07
5.63
6.88
5.30
5.88

(12/5)

5.92 (5/21)

5.05

(12/29)
(11/28)
(12/29)
(1/6)

6.13
7.19
6.11
6.13

5.62

5.23
5.62

Sept. 6

Short-Term Rates

CD's (prime NYC)
Highest quoted new issue
Secondary market

(5/24)
(6/4)

5.94
5.45
5.75

5.94

5.75
5.88

5.75
5.85

(5/21)
(5/24)
(7/25)
(5/24)

5.25
5.75

5.24
5.75

5.88

5.88

5.49

5.56

(5/17)
(6/25)

5.50 (12/29)
5.70 (12/29)

6.00 (7/18)

5.60 (12/1)
5.88 (12/29)

6.20 (5/31)

5.45
5.62

6-months

Treasury bills (bid)
Federal agencies

6.00 (1/16)
5.55 (12/29)

6.08
6.25
6.25
6.25

CD's (prime NYC)
Highest quoted new issue
Secondary market

5.50 (12/29)
6.00 (12/29)

6.25 (7/11)
6.40 (5/31)

5.75

5.75

6.00

5.90

5.71 (12/29)
5.95 (12/29)
4.00 (12/29)

6.03 (5/21)
6.01 (5/31)
3.90 (5/31)

5.19

5.19
5.60
2.90

Treasury coupon issues
5-years
20-years

5.91 (11/13)
5.81 (11/20)

6.21 (5/21)
5.77 (3/14)

5.52
5.22

5.49

Corporate
Seasoned Aaa
Baa

6.25 (12/28)
6.98 (12/28)

6.29 (6/6)
7.10 (6/3)

6.01
6.81

5.95

6.55 (12/7)
6.70 (12/1)

6.83 (5/24)
6.99 (6/3)

6.46

6.53

4.45 (12/7)
4.15 (12/28)

4.71 (5/24)
4.42 (5/31)

4.07
3.80

4.44

7.72 (6/10)

7.31 (7/12)

7.23 (9/3)

Bankers' acceptances
Commercial paper

1-year
Treasury bills (bid)
Federal agencies
Prime municipals

5.55
3.00

Intermediate and Long-Term

5.26

6.79

New Issue Aaa

With call protection
Without call protection
Municipal
Bond Buyer Index
Moody's Aaa
Mortgage--Implicit yield
in FNMA weekly auction 1/

6.23

4.25

1/ Yield on 6-month forward commitment after allowance for commitment fee and
required FNMA stock purchase. Assumes discount on 30-year loan amortized
over 15 years.

-5International Developments
France removes exchange controls.

Late on Wednesday,

September 4, the French Government unexpectedly announced the abolition
of exchange controls imposed on May 31 at the height of the unrest.

We

have as yet very little official information on this move beyond confirmation of press reports, but it appears that the abolition was across
the board and included restoration of gold transactions with foreign
countries.
This daring policy step clearly seems to have been intended
by the French to speed up the return of confidence in the franc.

The

exchange controls were far from being really effective; reserve losses
continued at a moderate pace through most of August, but there was a
marked acceleration during the last week of that month, probably
connected with rumors of a mark revaluation.

Frenchmen, vacationing

abroad during August, were smuggling out large quantities of French
banknotes either to supplement the meager official travel allowance of
Fr. 1,000 ($200), or to get capital out of France.

Consequently, an

embarrassing black market in franc notes developed in several centers
abroad with francs selling at discounts of up to 20 per cent.

This

development was caused by the refusal of the Bank of France to purchase
French banknotes automatically from foreign banks.
It seems to us that the French authorities felt that they
would be losing little of real value in removing exchange controls and
that the move should accelerate the return of confidence in the franc.
Concurrently with last Wednesday's announcement, the preliminary budget

-6-

estimates for calender 1969 were also made public.

The estimated

budget deficit is Fr. 11.6 billion ($2.3 billion) and the budget offers
strong incentives for private investment.

The timing of the two

announcements indicates that the strongly reflationary budget was
designed to support the avowed official confidence that the franc is
strong enough to remain at its present parity.
The announcement of exchange controls removal appears to
have come as a complete surprise to the markets.

On Wednesday,

September 4, the franc moved sharply from the floor and at the close
settled comfortably above the support level.

The Bank of France did

On Thursday, September 5, the franc remained

not intervene on that day.

just above the floor, but the Bank of France reported a loss of $18
million.

The French stock market reacted to the official moves by

bidding up prices of domestic shares by some 3 to 4 per cent, while
quotations for foreign stocks declined sharply, by nearly 10 per cent.
Turnover on the Paris gold market on Thursday was $26 million compared
with only $7 million on Wednesday.

The gold price in Paris declined

rapidly and settled down at approximately the London level of $40.27
per ounce.
On Friday, September 6, the French reported reserve losses
of $166 million for the day.

Most of this loss appears to reflect

capital movements into the German mark, but some may have been due to
gold purchases abroad and to purchases of French banknotes from foreign
banks.

The French reserve losses on Friday, though admittedly large,
need not prejudice the success of the French move.

Some losses may

have been a non-recurring variety (e.g., banknote redemption), while
some were clearly connected with speculation on a German revaluation
and thus do not reflect speculation against the franc--in fact the
forward discount on the franc narrowed sharply on Friday.

Finally, an

acceleration of adverse capital flows in the now virtually free exchange
market must have been expected by the French.

It is quite possible

that, as a further show of confidence, the French may remove import
quotas in the very near future, and may even abandon the controversial
export subsidies before September 14, the date on which U.S. countervailing duties go into effect.
However, should the move backfire and reserve losses continue
to be large, the result may be a strengthening of the hand of those
many Frenchmen, including former Finance Minister Giscard d'Estaing, who
argue that the franc should be devalued.
Exchange Market Developments since September 5.

On Thursday

(September 5) and Friday of last week the speculative flow of funds to the
German mark continued at a very heavy rate; the pressure on Friday,
however, was somewhat diminished relative to Thursday.

Thursday's spot

market purchases of $426 million and Friday's purchases of $216 million
raised total Bundesbank spot intervention, from August 26 to September 6,
to about $1.7 billion.

In the last two days of last week the Bundesbank

engaged in over $500 million in "swaps" (spot sales of dollars against
forward repurchase) with German commercial banks, raising total "swap"

business since August 26 to about $1.2 billion.

Thus the net increment

to Bundesbank reserves (spot purchases less swaps) in the two-week
period amounted to about $500 million.
As of Monday, September 9, the speculative atmosphere in
marks has (at least for the moment) subsided.

The mark rate is now

well below the Bundesbank's current intervention point although the
Bundesbank will probably continue to reduce its current dollar balances
by offering "swaps" to the German banks.
On Thursday and Friday of last week selling pressure against
sterling and the French franc (which had been very light earlier in the
week) intensified and in those two days the Bank of England sold over
$100 million while the Bank of France sold about $185 million.

However,

as of Monday of this week the spot sterling market has been bolstered
significantly by the news coming out of Basle this past weekend that
negotiations had been successful in setting up the $2 billion "sterling
balances" assistance package for the British.

On Monday, spot sterling

moved up to about 238.68 after having been quoted at approximately
238.30 on Thursday and Friday of last week.

The French franc is now

quoted modestly above its lower support limit, presumably reflecting the
current cessation of speculative purchases of marks.
The Euro-dollar

market has remained remarkably stable through-

out this recent period of pronounced instability in exchange markets.
Euro-dollars rates advanced modestly toward the end of the last week of
August but declined by a roughly equal amount the following week and are
little changed as of the first day of the current week.

The "swap"

activities of the Bundesbank appear to have returned as much, or more,
money to the Euro-dollar market as had been withdrawn by parties moving
The foreign branches of U.S. banks apparently experi-

funds to marks.

enced no large scale net change in the demand for their deposit liabilities.

They did reduce their credits to U.S. head offices by about

$100 million between August 28 and September 4, but this represents a
relatively small decline from the record outstanding level of about
$7.1 billion on August 28.

The New York banks, in fact, increased their

Euro-dollar use by about $50 million during the week ended September 4,
while banks outside New York reduced these takings by about $150 million.

Corrections
Page II - 4, lines 6-8 should read:

"Housing starts, accord-

ing to revised Census reports, have been at a somewhat faster rate in
the second quarter than the preliminary figures had shown.
a sharp ...

This plus

"

Page III - 16, line 9 should read "2 to 4 basis points".
Page IV - 16.

Short-term interest rates
1968 Low

United Kingdom:
Treasury bill

6.88 (August 23)

Canada:

91-day Treasury bill
Page IV - 17.

5.31 (August 30)

Long-term interest rates
1968 Low

Euro-bonds:
Foreign governments

7.38 (February 23)

Canada:
4-1/2% 1972
4-1/2% 1983

6.24 (August 28)
6.45 (August 28)