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FEDERAL RESERVE BANK O F N E W YORK P L J “1 C ircu la r N o. 6882 Jan uary 21, 1972 2 J COMMITTEE ON INTEREST AND DIVIDENDS Statement on Interest Rate Program To A ll Banks and Other Financial Institutions in the Second Federal R eserv e D istrict: Following is the text of a statement, issued January 19 by the Committee on Interest and Dividends, announcing a program for voluntary restraint of interest rates: Since inauguration of the President’ s stabilization program in mid-August, interest rates in money and capital markets have declined substantially. This decline represents a reversal of the uptrend that had prevailed during the spring and early summ er, when inflationary expectations were having a renewed impact on interest rate levels. On balance over the past 15 months, long-term rates have dropped about 1 -1 /2 percentage points while short-term rates have declined by up to 3 percentage points. Market rates typically fluctuate widely. They are established from day to day through a highly competitive process in which many knowledgeable market participants are bidding against each other on an impersonal basis. The rate on short-term com m ercial paper, for instance, fell from a high of 9 per cent in the spring of 1970 to a low of 4 per cent a year later. It subsequently rose to almost 6 per cent in August of 1971, and has since declined to 4 per cent. Rates on seasoned long-term corporate bonds of high grade, another "m arket” instrument, fluctuated from 8.60 per cent in 1970 to 7.06 per cent in early 1971. This rate is currently about 7.20 per cent. Yields on seasoned municipal securities fluctuated even more widely — from a high of 7.12 per cent in 1970 to a low of 4.97 per cent in October, and were about unchanged from that level in mid-January. Since last summer a substantial part of the inflation premium has been wrung out of the interest rate structure. Continued progress in reducing the premium depends on the further reduction of inflationary expectations. While the Committee is mindful that market conditions may change as business expands and demands for funds increase, the Committee expects the President’ s program will succeed in further moderating inflation ary expectations in the months ahead. Interest rates on borrowings by households, such as on home mortgages, automobiles, and personal loans, are less sensitive than market rates to changes in underlying condi tions. They have tended to move in the same direction as rates on open market instru ments of comparable maturity. But these movements generally have followed market rate fluctuations with a considerable lag and have fluctuated within a much narrower range. In part, this sluggishness reflects the heavy cost of administering such loans. (Over) Since late 1970, home mortgage rates have declined by 3 /4 to 1 -1 /2 percentage points, with a significant part of the decline occurring since August 1971. In recent months a num ber of lending institutions have announced reductions in consumer loan rates. The Com mittee on Interest and Dividends expects lenders to be aggressive in passing on promptly to the borrower the benefits of reduced costs of funds available in the credit markets. The Committee will maintain close surveillance of these markets and will discuss develop ments with lenders as circumstances warrant. All lenders should be mindful of the proba ble repercussions of their rate actions on other aspects of the stabilization program. On August 19, 1971, Secretary of the Treasury John B. Connally, in a communication to financial institutions, urged lenders to do what they can to keep interest rates low. On October 20 the Committee on Interest and Dividends announced that it expected all lenders to assemble and maintain records of their rates for various types of loans made since August 15, 1971. For purposes of its statistical and surveillance program, the Committee is in the process of obtaining interest rate information on a sample basis from banks, savings institutions, finance companies, and mortgage companies. Results of these various interest rate surveys will be reported to the Cost of Living Council and to the public as they become available. Additional copies of this circular will be furnished upon request. Alfred Hayes, President.
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