The Money and Bond Markets in November 1972
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294 MONTHLY REVIEW, DECEMBER 1972 a The Money and Bond Markets in November The money market last month adjusted to revisions in nant of reserve requirements.1 Federal Reserve regulations governing member bank re- The amendments to Regulation J require all banks serves and the collection of checks, which were imple- served by the Federal Reserve check-collectionsystem to mented beginning November 9. In general, the revisions pay for checks in immediately available funds on the same lowered reserve requirements through a restructuring of day that the checks are presented to the banks. This such requirements against demand deposits; they also change resulted in a decline in reserves that was smaller speeded up the collection of checks, thereby reducing the than the reduction in requirements arising from the change Federal Reserve credit extended to member banks through in RegulationD. float. Federal funds rates fluctuated rather widely from In the statement week in which the regulation changes week to week, averaging about the same as in October. were made, it was difficult for the Federal Reserve to esti- Other short-term interest rates were generally unchanged mate accurately the resulting impact on reserve positions. or showed modest increases. In the Treasury bill market, It was realized that, for the banking system as a whole, rates declined initially against the background of the reserve positions would ease, but some banks could be relatively comfortable tone of the money market in recent adversely affected. Therefore, penalties for reserve defi- weeks. Some hesitancy developed at the lower rate levels ciencies up to a fixed amount are temporarilybeing waived in the face of increases in the supply of bills, however, and for certain banks during the transition period. These waiv- bill rates edged higher over the latter part of the month. ers amount to $450 million, and this figure has been In the capital markets, yields declined on balance de- added to reported excess reserves beginning with the week spite some increases late in the month. A generally op- ended November 15 (see Table I). timistic outlook for near-term stability of interest rates During that week, reserve positions turned out to be was encouraged by the prospects for a peace settlement easier than expected so that excess reserves (adjusted) in Vietnam as well as by indications that the Administra- increased, borrowings from the Federal Reserve fell off tion intends to impose strict restraints on Federal spend- from the high level of the previous week, and the Federal ing in the future. As the month wore on, investor demand funds rate declined, with funds trading as low as per- contracted and some participants sought to realize profits cent on the settlement day. in anticipation of substantial increases in the supplies of Despite the swings in reserve positions in the statement corporate and Federal agency securities. The resulting in- week ended November 15, most money market rates creases in yields, however, were generally modest relative moved little over the month. Even the average effective to the declines earlier in November. BANK RESERVES AND THE MONEY MARKET Money market conditions and the monetary and reserve I Under the new regulation, the following graduated scale of were influenced the of the reserve requirements applies: aggregates by implementation Amount of net demand deposits Reserve percentages applicable changes in Federal Reserve Regulations D and J begin- First $2 millionor less 8 percent November 9. These changes, originally Over $2 millionto $10 million 10 percent fling regulation Over $10 millionto $100 million 12 percent scheduled to go into effect on September 21 but delayed Over $100million to $400million 13 percent by court action, were described in this Review (July 1972, Over $400million 17½ percent the in makes To smooth the transition, reserve requirements on deposits be- page 154). Briefly, change Regulation D tween $100 million and $400 million were set at 16½ percent bank size rather than bank location the primary determi- during the first week of the new system. FEDERAL RESERVE BANK OF NEW YORK 295 rate on Federal funds, at 5.06 percent, was little changed Table I om the previous month's 5.04 percent rate. Rates on FACTORS TENDING TO INCREASE OR DECREASE most maturities of dealer-placed commercial paper moved MEMBER BANK RESERVES, NOVEMBER 1972 up percentage point around midmonth (see Chart I). in millions of dollars; (+) denotes increase (—) decrease In excess reserves On the other hand, rates on bankers' acceptances declined ______________________________________________ ______ 1/8 percentage point on November 3 and remained at the Changesin daily avcrases— lower level. Three-month Euro-dollar deposit rates drifted week ended Factors Net downward until late in the month but returned to October changes Nov. Nov. Nov. Nov. Nov. levels by the month end. Secondary market rates on large 1 8 15 22 29 certificatesof deposit edged up in the middle of the month fell off later. banks held rate "Market" factors but Most their prime at 5¾ Member bank required percent throughout the month. reserves — 94 — 71 +2.224 + 994 — 39 +3.014 The revision in Regulation J had the effect of increasing Operating transaction, (subtotai) + 193 —1,044 — 952 — 801 + 289 —2,395 demand as used the — deposits adjusted, in calculating money Federal Reserve float 234 — 539 —1.309 + 354 + 179 —1.549 — supply. However, the resulting increase has been elim- Treasury operatlonot 103 — 138 + 519 + 3 + 42 + 843 — — inated from current money supply figures in order to avoid 0014 anti foreignaccount + 37 — 3 — 2 9 14 + Currency outside hank, +150 — 270 — 412 —1.163 + 112 1,183 a discontinuity in the series. The upward adjustment of Other Federal Reserve — — — — — 15 the money supply as a result of the revision of Regulation liabilities anti capital 87 94 + 232 47 49 _____ J will be incorporated in the statistics at the time of the Total "market" ractoro + 99 —1,118 +1.272 + 133 + 230 ______+ 618 annual bench-mark and seasonal adjustment review. At that historical will be revised to the Direet Federal Reserve time, figures put credit transactions series on a consistent basis. Openmarket operations — — — To explain how the demand deposits in the money sup- (subtotal) +117 + 600 599 — 307 219 408 Outright holdlngn: ply were previously understated requires some examina- — — Treasury securities + 286 — 52 — 260 — 228 138 410 tion of the When one bank receives — — check-clearingprocess. Bankers' acceptances — 2 + 1 — 4 — 5 2 12 a check, drawn on a second bank, the first bank credits Federal agency obligations -'. - — 2 — 8 + 24 + 142 + 168 the account of its customer—a liability item—and also Repurchase agreements: Treasury securities — 146 + 563 — 278 — 112 — 178 — 149 increasescash items in the of collection — — process (CIPC)— Bankers' acceptances + 1 + 64 — 32 10 — 25 2 an asset item. Since the deposit is temporarily on the books Federal agency obligations ,. — 2 + 32 — 27 + 24 — 10 + 9 — of both banks, gross demand deposits overstate the true Member bank borrowings — 210 + 404 — 463 — 3 + 151 193 stock. CIPC are deducted from Other Federal Iteserre money Therefore, gross asoetst + 9 + 30 + 4 — 399 + 50 — 202 demand in the When deposits calculating money supply. Total — 44 +1.034 —1.080 777 — 10 — 865 the check is to be cleared the Federal Reserve — through Sys- Exeeso reserves + 55 — 81 + 662 644 + 212 + 204 tem, the first bank begins the process by sending the check ___________________ _________ _____ to its district Reserve which will in turn send the Bank, Moly check on to the second bank. If the actual transfer takes Daily ayerae levelo longer than is allowed for in a predetermined collection Member bank: ______ schedule, the Federal Reserve credits the first bank with Total reserves, including reserves. While that bank reduces CIPC, Federal Reserve vault cash 33.704 33.894 32.132 80.494 30,743 32.1546 reserves float increases. This float is also deducted in computing Required 33,499 33,870 31.346 80.362 30,391 31,8321 Excess reoerves 205 124 786 142 354 3225 demand deposits in the money supply to avoid double Borrowings 585 959 494 421 572 8005 counting. On the day the second bank does receive the Free, or net borrowed I—), reserves — — — — — check, it will normally write down the account of the cus- 550 835 292 279 218 2781 Nonborrowed reserves 33,149 32,733 31,638 80,073 30.173 31,5546 tomer who wrote the check. Before Regulation J was re- Net carry-over, excess or vised, however, the bank could often delay its payment for deficit (—)# 75 127 86 302 58 1246 check until the day after the check was presented. This turn the reduction in if the Note: Because of rounding, figures do notnecessarily add to totals. wouldn delay CIPC, clearing -Adjusted to include $480 million of certain reserve deficiencieson which penalties car' had taken within the collection be waived for a trannitlon period in connection with bank adaptation to Regulation place predetermined period, 3 as amended, beginning November 9, 1572. or float, if it had extended beyond that period. Inasmuch as Includes changes in Treasury currency and cash. the were written down on the before the CIPC S Includes ansets denominated In foreign currencies, deposits day OAverage for five week, endedNovember 29. or float that their transfer had generated, the money sup- * Not reflected in data above. 296 MONTHLY REVIEW, DECEMBER 1972 ply was being understated by the amount of the excess months. The adjusted bank credit proxy, on the other CIPC and float being deducted. Since the November 9 hand, has continued to expand at about the revision in the regulation requiring banks to pay on the generous pace over most of the year.