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Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d Authority E .6 . IBSfe r ~ i MEMORANDUM BY E« R, KENZEL. DEPUTY GOVERNOR, FEDERAL RESERVE BANK OF NEW YORK RE OPEN MARKET RATES FOR BILLS PURCHASED The minimum rate o f 4 l/Q% esta b lish ed fo r purchase by Federal reserve banks o f 90-day b i l l s has been in e f f e c t fo r about one yej.r* I t was advanced from 4^ in A p ril, 1923*^ At that time and sin ce, u n til within about one month, i t was also the p re v a ilin g rate fo r prime unindorsed b i l l s a v a ila b le t o in v estors in the market* While these rates seem high as compared with a 4 l/2% rediscount rate fo r promissory notes, the fa te was sustained in the market by reason o f the su bstan tial volume o f short Treasury paper a v a ila b le at or s lig h t ly under 4 1/3%. Figuring the ta x exemption on short Treasury paper, the y ie ld on them was equal to or h igher than the market rate fo r b i l l s * Under these circumstances the Federal reserve banks n a tu ra lly acquired a substantial proportion o f the t o t a l volume o f b i l l s current from time to tim e. With the changed money con d ition s since March 15, 1924, the flo a tin g supply o f Treasury paper has been m a teria lly reduced, with the re su lt that the demand by banks and other in v estors fo r b i l l s caused the rate fo r 9 0 -day un indorsed b i l l s to recede to 3 7/8^* The rate has since recovered to 4J and i t seems inprobable that i t w il l advance further in the near fu tu re; the contrary may be the fa c t. Since January 1 , 1924, the b i l l h old in gs o f Federal reserve banks have declined from $347,000,000 to $176,000,000 on A pril 16, 033,000,000 was held by New York under sa les contract* Of the la t t e r amount During the past month the market has been e n tir e ly out o f the Federal Reserve Bank o f New York as t o sales con tra cts on two occa sion s. The volume o f b i l l s outstanding at the present time is probably a l i t t l e le s s than it was at the f i r s t o f the year, when cotton shipping was heavy, but is not im portantly reduced* The discount market now holds about $67,000,000 Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d Authority E . 6 . 12354, - 2 o f unsold b i l l s , an increase o f 06, 00 0,000 over a week ago; th e ir sales during la s t week were $25,000,000 as compared with $40,000,000 the week previous. The d is trib u tio n during the past several weeks has been p r in c ip a lly through ou t-of-tow n banks, savings banks and foreig n banks, the l a t t e r have been the most important buyers in the past few days, and there are in q u irie s fo r su b sta n tia lly a d d ition a l amounts fo r account o f foreign c lie n t s to be f i l l e d during the balance o f t h is month* \7hile t h is represents a f a ir ly s a t is fa c t o r y con d ition in the market, there n everth eless is a lack o f temporary employment o f id le funds by the la rg e c it y banks in the b i l l market because of the certa in lo s s that would re su lt from t h e ir resa le t o Federal reserve banks o f b i l l s bought at 3 7/8 and 4J at the present minimum rates maintained by Federal reserve bankg, A spread of l / 8 to l/4/£ has always had the e f f e c t o f deterring the lo c a l employ ment o f id le funds in the b i l l market. In view o f t h is con d ition and the p rosp ective fu rth er ease in money, I would recommend a reduction in the minimum ra tes o f Federal reserve banks at th is time t o 4/C fo r three months* b i l l s and a corresponding reduction o f from l / 8 to l/4 ^ fo r short b i l l s , the short ra tes, however, not to be put into e f f e c t imme d ia te ly but in the d iscre tio n of the Federal reserve banks as conditions might a rise in which the lower short rate would best serve t h e ir operations in the market, e ith e r as a stimulant t o d is trib u tio n or fo r the purpose o f acquiring reasonable volume o f short paper. The sa le s contract ra te, I b e lie v e , might w e ll be l e f t at at the present time but with lib e r t y , without formal a ctio n , t o reduce it to rates current fo r the purchase o f short paper in the d iscre tio n o f the banks* A pril 18, 1924