182 MONTHLY REVIEW, noteworthy that the new figures show substantially the that become available only after some lapse of time. This same quarter-to-quarter movements in GNP that bad been year's revisions, however, are unusually extensive. They indicated previously. In particular, the pattern of GNP incorporate the results of using better data not only for growth during the current business expansion continues to the past few years but for earlier years as well, and they look very much as it did prior to the revisions. For the also reflect some changes in the definitions that determine earlier years of the postwar period, the net effect of the revi- which items are to be included in calculating the value of sions has been to reduce GNP slightly, while for more re- the economy's total output of goods and services. The last cent years GNP has been increased moderately. Since the time the national income accounts were given such an figure for 1964 has been scaled upward by about 1 per extensive overhaul was in 1958. The largest of the "statis- cent, from $622.6 billion to $628.7 billion, business tical" revisions— those reflectingthe use of better data— analysts will find it desirable to make a similar upward is in the estimated value received by homeowners from revision in their forecasts for 1965 as a whole. For ex- the houses in which they live. This "imputed rent", which ample, the frequently cited "standard" forecast has put is classed in GNP as consumption spending for a service, GNP this year at $660 billion, up by 6 per cent from has been increased because Government studies indicate the unrevised figure for 1964. The same percentage in- that the nation's stock of housing in the postwar years crease, applied to the revised figure for 1964, implies a has been of better quality than had previously been be- revised "standard" forecast for 1965 of roughly $667 lieved. Other "statistical" revisions resulted, among other billion. changes, in increases in outlays for residential construc- One result of the revisions which is of particular inter- tion and producers' durables. With regard to the "defini- est is that the new figures show a slightly higher rate of tional" revisions, the largest change is the removal from growth of "real" (INP during recent years. Thus, the GNP of interest payments by consumers. These payments previous estimates showed GNP, measured in dollars of were formerly counted as personal consumption of a scr- constant purchasing power, growing by an average of 4.1 vice but have now been excluded on the ground that they per cent annually in the 1960-64 period, while the re- do not reflect any production. This and other definitional vised figures put the average annual growth at 4.3 per revisions generally reduced GNP below the levels pre- cent. viously estimated. For recent years, however, the defini- The regular summer revisions of GNPfigures for the past tional revisions were more than offset by the increases few years have each reflected the use of more reliable data resulting from the use of betterdata.

The Money and Bond MarketsIn August

The money market was somewhat firmer during August, bill rates rose against a background of general market after having eased slightly in the latter part of July. Fed- uncertainty. eral funds traded mainly at 4¼ per cent, and the major Prices of Treasury notes and bonds declined irregularly reserve city banks were under reserve pressures as reserve in August, with prices of some issues dipping to their distribution swung in favor of the "country" banks. Treas- lowest levels in five years. Market participants warily ury bill rates moved higher in the early part of the month appraised the potential effects of recent international polit- when professional offerings outweighed a rather modest ical and economic developments, including those in Viet- investment demand. Subsequently, rates generally edged nam, as well as the possible consequences for interest lower through midmonth. In the latter part of the month, rates of the very strong summer performance of the econ- demand tapered off—as often happens in August—and omy. There was also some selling of long-term Govern- FEDERAL RESERVE BANK OF NEW YORK 183

ment bonds by institutional investors who were switching TableII into new issues as the in favor of RESERVEPOSI11ONS OF MAJOR RESERVE CV BANKS corporate yield spread the latter remained wide. A cautious relatively atmosphere In millionsof dollars was also evident in the corporate bond market during most of the period. The volume of new issues was larger than Daily evwa;es.—weei ended I Aim;.of usual for August and their yields rose above comparable Factorsallotting fourweeks basic townspositions ended July levels, while prices of recent issues were also marked Au;. Au;. AOL Au;. Aug.25 lower. In the tax-exempt sector, where a better tone had emerged in July, bond prices edged higher in early Au- Elgbl banks InNew YankClfl and then held until late in the month when a gust steady Reserve excess or drficiency(—) II 9 13 5 10 more Less borcowinjjs Front Reserve Banks. IIS 167 4 52 85 cautious tone developed. Lens net inlerbank Federal funds purchases or sale.(—) — 70 6 239 — 45 31 Gross purchases 753 771 857 668 763 Gross sales 1431 767 618 713 732 THE MONEY MARKETAND SANK RESERVES Equals net basic rserve surplus or det*cit(—) — 26 —I64 —230 — 2 —lt Net loans to Government Over-all net reserve availability fluctuated in a narrow securities dealers 684 372 531 459 512 range in August around the average level prevailing in the 11ulity-eIlslbanks outsIde New York Cfty

Reserve excess or deficiency(—l'. . . 29 20 IS 22 21 Less borrowinies from Reserve Banks 120 170 20') 192 17$ Less net interhank Federal fund,, purchases or salesi—) lIft' 548 441 433 485 Croci purchases , 1,250 1204 1,194 1.085 1,183 Table I Gross sales 734 657,' 754 652 699 Equals net basic eventsurplus ChANGESIN FACTORSTENDING TO INCREASEOR DECREASE or dr*Icit(—) —613 —698, —6'2 —603 — 637 Net loans to Goverametit MEMBER BANK RESERVES, AUGUST 1963 aecunties dealers 251 172 190 203 204 In millionsof dollass: (lI denotes increase. (—3 decrease inexcess reserves Note: Becauseob rounding, ligures do not necessarily add to totals. Reserves held after all adjustments applicableIrs the reportirtsj period tuna required reservesand catryuvcr reservedcliclenctes. Daily asws;es—.-weekendod

Factors Not chatuges Au;. Au;. Au;. Au;. 4 11 18 25

"Martut" farIna preceding several months, but the tone of the money mar- M',mIsc lnik reoulrrd r,'senøg. — 125 + at'; ± IjeratIflu tlsnSa,I11.113 inuljtue.sl) — '47 4 —27! — till + 3Xt 21.9 ket turned somewhat firmer than in the latter part of July. Fe.Jt'ral Thence Ilsat —, 2::4 + 40 + 290 —74 'flea3iaryojwratl cut;; — 27 — Its ± s In this reflected the fact that available reserves were 47<1,1 ar,'l t.,rclnu ac,:,'l;nt — CI — 44 ill! part, I9zrrnrv ,,uto,I,, hsru7.j. — I-IS —.554 at banks outside the main money centers (I:t,nr I'e'lrral ltccc,na lodged during .4— 211!) + ± 5)111 4- 141) most of Ihe period. The effective rate on Federal funds Total ''niaj et" fans.,. — :11'll -4.r.31.Hri nio was more consistently at 41/g per cent during August than Direct Federal Relics. credIt in earlier months. leFt-hand at the chart on tra.nsaatio,, (See panel Ogst'n niarket. taitnumonra 185.) rates for new time certificates of de- IlstrlW,t tinl1tIns page Offering ii.,c"it,rncst a,'nitltlea +104 --t$6 — 44 + 172 posit issued by leading New York City banks tended to llanku,ru' au'c..uarc.'.; —1 ± I — I — Itopv,rci,a.,c nfl,'r-.scer,rg: rise slightly, as did thc range of rates at which such cer- I-9v'fII,cts'. srctultle; + 203 — IC'S — 'I3 + 64 Itans,'rs' any usa's '1!' tificates traded in the secondary market. Rates posted by Merr,h,q I,a,,k turrcau log,. + 85 — 13.; + 43tj,,,r loan....Il'n.8,,11 ., 11)11 u,I'utics.. . . — 210 — I t ° the major New York City banks on new call loans to Gov- Total _f_ 71 :75 — 143 -i- 23 + 194 ernnlent securities dealers were generally in a 4¼ to 4½ Extras reawvn' 'I- 415 — '2 + 77 'TT per cent range,while rates on renewal call loans were most quoted in a 41/4 to 4¾ cent Dalig anon. les,I of member bank: frequently per range. Total rr,wrvrs,, Including 1-unit cnst1. . . 2I.7fl 21.8111 25,312 21,7tH 21,402; Investor demand for bankers' acceptances absorbed a Knitulutul 21.3.60 21,193 21.196 21.1 IS Focus5 reuu,rcnf 378 4111 220 4113 21j limited supply during most of the month at the lower rates jl.r,nwine; 714 '116 45' r..l6 Free resert-e,ø — 1611 — 100 — 103 — IL — prevailing since late July. However, when supply expanded Nnnrenrr,,,,',l 21.223 20.945 21,021 20.972 21.0538 sharply near the end of the month, dealers raised their Note: II"eaueeor ronn'linx. Ileuree do notnses',saruy add tu totslv rates by 1/ of a percentage point, making the rate on • Tlucas agtirea are estImated. f Includescl.aiueee lii Tteaossy currency and cash. ninety-day unendorsed acceptances 4¾ per cent (bid) * Incliul,n aius5 usrnortulnaltd In Curries esinu'acl,q. I Average (or bus w4e15 u-uide'l Aus,ast 25. lOSS. and 4½ percent (offered). 184 MONTHLY REVIEW,SEPTEMBER 1965 rose The money market had a firm tone during the first tem outright holdings of Government securities by statement week of the month, which included the sub- $172 million from the final statement week in July scription period for the Treasury's August refunding.1 through the last week in August, and average System market supplied a substantial holdings of Government securities under repurchase System open operations net volume of reserves (both through outright purchases and agreements decreased by $51 million. Average Sys- and agreements), largely offsetting the reserve tem holdings of bankers' acceptances, both outright repurchase on drains stemming from movements in "market" factors, under repurchase agreements, remained unchanged and nationwide net reserve availability was little changed balance during the month. From Wednesday, July 28, of Gov- from the preceding week. However, the basic reserve posi- through Wednesday, , System holdings tions of the major New York City banks swung from a ernment securities maturing in less than one year rose by sizable the week before to a deficit when these $1,868 million, while holdings of issues maturing in more surplus in the banks met a large portion of the expanded loan require- than one year declined by $1,899 million. This shift ments of Government securities dealers, businesses, and maturity structure of the System Account portfolio re- sales finance companies. These banks bid strongly for flected primarily a movement of issues into the shorter ma- Federal funds, largely at 4'i per cent, and also stepped turity area with the passage of time. This effect was only up their borrowings from the Federal Reserve Bank. partially offset by the exchange of Treasury re- During the statement period ended , re- funding issues, which decreased the amount of shorter serve distribution increasingly favored the country banks maturities while adding to the longer maturities in the at the start of their biweekly reserve computation period. System's portfolio. A large unsatisfied demand for Federal funds lcd to heavy member bank borrowings from the Federal Rcscrve Banks THE QOVERNMENT SECURITIES MARKET over the weekend. Partly as a result of the excess rc- serves built up in this way, the supply of Federal funds As the month opened, there was continuing disappoint- became somewhat more ample in the latter part of the mentamong Government securities dealers with the limited statement week. Subsequently,the money market readily reinvestment demand for bills arising from the Treasury's accommodated the flows of money and securities asso- August refunding of coupon issues. Bill demand from ciated with the August 13 settlement for the Treasury's other sources was also light and quite selective, and August reFunding. In addition, average member bank dealers sold at rising rates to reduce their bill positions. borrowings for the statement week declined Announcement of a large Federal Home Loan Bank when the availability of Federal funds increased toward flotation of short-term notes also contributed to the cau- the end of the period as the country banks worked down tious atmosphere, since these instruments were viewed their excess reserves. as potentially competitive with Treasury bills. Against this The money market remained quite firm over the rest background, bill rates edged irregularly upward through of the month. Federal funds were in limited supply be- . (See left-hand panel of the chart.) As higher rate fore the weekends beginning on and 27, and levels emerged, a fairly good investment demand appeared a modest volume of Federal funds traded at 4¼ per cent. —including some commercial bank and public fund buy- While there was only a limited willingnessto pay this rate, ing, dealer offerings contracted, and the tone of the bill its appearance also seemed to impede the flow of Federal market gradually improved. Some scarcities developed, funds as it reduced the inclination to sell below the 4¼ particularly in the shorter maturity areas, and bill rates per cent rate. This contributed to the tendency for bor- moved downward from through midmonth. rowings from the Reserve Banks to increase over both Subsequently, however, investment demand receded, as weekends and for Federal funds to be more readily avail- is often the case in August. Dealer concern over the able thereafter. future course of interest rates increased, professional of- Over the month as a whole, market factors absorbed ferings expanded, and bill rates edged irregularly upward SilO million of reserves, while System open market opera- during the remainder of the month. tions provided $121 million. The weekly average of Sys- At the last regular weekly auction of the month, held on , average issuingrates were 3.8 86 per cent for the new three-month issue and 3.991 per cent for the new six-month bills, about 8 and 12 basis points respectively above the average rates at the last weekly auction in July. 1 For the detailsof the refunding,see this RevIew, August 1965, p. 164. The auction of $1 billion of new one-year bills FEDERAL RESERVE BANK OF NEW YORK 185

SELECTED INTEREST T Jvne.Auust 1965 Poicant Per cent

MONEY MARKETRATES BOND MARKET YIELDS 480- - —4.0 Yiolds on now public utility bonds RcøFferirs9 yueld—' Marliotyicld Aao . -. Ao o •0 4.60 III - 60 9111111 Coil loans Jil Ii i IIii Aao-roted seasonedcorporate bonds

1'° 4 Federal funds 20 90.dcsy financo company paper

—————,.———-— .J.——.—-.—————————— I ° 3.5year Governmentsecuritici 4.00

3.80 rtox-oxempt 3.20 6-month Treasury blf 200 3-nronihl,eo,urybilis

3.6 Ui ni iii h is hiti 1i 1III1II lJ[LWl iJ.i.iii.lij..ij.Li.jj.j.I_i.iji tisitirililIliltrIls 'jiiji ii''siuu.ti_u 2 9 16 23 30_ 7 I 21 28 4 Ii 18 25 2? 16 23 30 7 14 21 28 4 11 lB 25 June July Augvsl June July Aug uCt tint. Qvk.a,. cho.nfnr5.anini;dynonty. fmcmnnd.mmm:Sin,.,ndic,tvm.aIf.ring yi.lJcl a gr..n ittocto m,rI.ttieidoflhe some .,iue 1MONY A5CU SATLSOUOTSD Oa3y.an. alreir.spost,d byrnløNi.Yoh C b.anksanna Immediately aftmit satbon released from .Tnd.aat. m.tI,ktiansl: daslyon.rcg.mofyi,idn of mu Inn,,I' d,mntfsndnlsecned byUniP..IS5n!..Ona,nP,,cvnh,Iopon!;ndcoteith. longisimGovernment taturito. Ibandidu.or coI1.nbi. int•n ypr5 or moral qndfG.oo.rnm.np absenceof On? anal;ofIa.nnroi..fer dira.iypIoc.d tnnnr. compQyyepih.eIfenpn. tecu.i'o. du in bra.Sn Iiv.pj. coraputedontine boil. of dual,4 bid prices; Iheridny ,oleonFedr,o' lsndi iSotat. matS t.pr.s..ntctiv,cIthet.on,oction,e.ecvladI;ciosin bdsote, on.ma5.aatyi.idiol tweOty ,eoio,e.d y.yeor 'a. e.erpCndilca,ryin.Q Mood-ye lu-.,oted !.,mtoI,nt f d,..cnuntJ OOvO..*IPOPik.nding(hj,,-.n4ajornc?f, Tmeanarybjilt. misting,of Aau. Aa,A.and Ousol. DONDMA5KLIYiLLCOU0TtD ..ld,at ngm Ape. ynAp.rct,pvbI,cymjijjy.4.Ioreptor1ed Souscet:I.d.rai Re,cr.. BønbalNwYorS. OcardcIGooarnncaIIhs Sqâ.,oI A,,.r.. Syite., around a C.c. tSu.i,9doilyen...5. yi.Idu.l.,..en,d A.y 'c't,d comatoSeb*sdt(arroaspeint Moedysit.ne,toriSernice. andThe W.eIfy5s.4.5jcyej.

produced an average issuing rate of 4.006 per cent, as and the status of the pound sterling. In addition, the against 3.875 per cent on the comparable issue sold a persistence of a relatively wide yield spread between month earlier. The newest outstanding three- and six-month Treasury and corporate bonds restrained investment bills closed the month at bid rates of 3.90 per cent and interest in longer term Government securities and led 4.00 percent, respectively. to some switching into corporate issues. In this environ- In the market for Treasury notes and bonds, a heavy ment dealers sought aggressively to reduce their consid- atmosphere prevailed throughout the month. Prices of erable inventories and prices moved lower, especially many outstanding issues slipped to their lowest levels of in the long-term sector of the market. However, there the year, and in some cases to new five-year lows. (The was little selling by banks and other investors of in- right-hand panel of the chart shows the rise in yields termediate issues until late in the month when some which accompanied this decline in bond prices.) Uncer- such sethng did materialize. As the month progressed, tainty over the viability of prevailing interest rate levels the lower prices attracted some institutional buying which, heightened, as market participants focused upon the together with official account buying, produced a significant Vietnamese situation, the related possibility of increased decline in bond inventories over the course of the month. defense spending, the strong domestic economic outlook, Results of the Treasury's August refunding operation, 186 MONTHLY REVIEW, SEPTEMBER 1965 announced after the close of business on August 6, indi- able securities in July. Prices of seasoned corporate bonds cated that about $7.0 billion of the maturing Treasury declined irregularly in response to many of the same fac- Several notes eligible for exchange would be converted on the tors aflecting the Government securities market. August 13 payment dale into the two refunding issues slow-moving recent issues were released from syndicate offered the totaled about $5.1 price restrictions and adjusted upward in yield by approxi- by Treasury. Subscriptions of the billion (includingabout $2.1 billion from public subscribers) mately 3 to 7 basis points. (See right-hand panel for the new 4 per cent notes of February 11967 and ap- chart.) Over the month as a whole, the average yield on bonds rose 3 proximately $1.9 billion (including about $0.8 billion from Moody's seasoned Aaa-rated corporate by subscribers) for the reopened 4 per cent bonds of basispoints to 4.51 percent. public the . Approximately 7.4 per cent of the matur- In the tax-exempt sector, on the other hand, steady of carried ing securities held by the public was not exchanged. Al- tone which had emerged in the latter part July bonds were though the attrition was less than had been anticipated, over into early August. Prices of tax-exempt the results had virtually no effect on prices of unchanged to slightly higher, and dealers made some refunding bonds outstandingcoupon issues. further headway in cutting the volume of unsold of the month. Later in Bond prices steadied temporarily on , when on their shelves in the early part undertone to when reportsthat the British trade gap had narrowed in July en- the month an easier began appear active couraged the marketand sparked limited professional short commercial banks reportedly became less buyers calen- Investment demand did not expand significantly, and when participants contemplated a fairly heavy covering. marketed in however, and a cautious tone quickly reappeared. The dar of high-grade issues scheduled to be market was also adversely affected by the cancellation of a September. Over the month as a whole, the average yield on tax- large scheduled tax-exempt flotation, the proceeds of The Weekly Ilond Buyers series for twenty seasoned which were to have bccn reinvested in Treasury bonds, exempt issues (carrying ratings ranging from Aaa to Baa) and by the increase in the German Federal Bank's dis- remained unchanged at 3.25 per cent. (See right-hand panel count rate from 3½ per cent to 4 pcr cent. Thus, prices of the chart.) resumed their downward trend from August 11 through The volume of new corporate bonds publicly floated com- . in August amounted to an estimated $410 million, mil- Market sentiment improved slightly over the next sev- pared with $535 million in and only $175 eral days. The Government's August 17 announcement lion in . The largest publicly offered new of a small surplus in the United States balance of pay- corporate bond issue of the month consisted of $75 — of convertible debentures ments during the second quarter of 1965 the first million A-rated utility company quarterly surplus since 1957— wa favorably received. maturing in 1980. The debentures were reoffered to yield Market participants also began to recognize that measures 2.89 per cent and were accorded only a fair reception. undertaken by the United Kingdom to defend the pound The syndicate marketing this issue terminated late in the sterling were beginning to take effect. Investment demand month, and the price subsequently declined about 2 points for issues expanded moderately, some professional —increasing the yield to about 3.08 per cent. New coupon as short covering took place, and offerings were more read- tax-exempt flotationstotaled about $645 million, against ily absorbed. A weaker tone reappeared in the latter $980 million in July 1965 and S705 million in August part of the month, however, and prices again moved lower 1964. The Blue List of tax-exempt securities advertised month at with in response to expanded offerings from professional and for sale closed the $768 million, compared investmentsources. the revised level of $746 million at the end of July. The largest new tax-exempt bond flotation during the month of million of Aaa-rated OTHER SECURITIES MARKETS consisted $132 housing authority bonds. The bonds were reoffered to yield from 2.30 per Caution was also the watchword in the corporate bond cent in 1966 to 3.40 per cent in 2006 and were accorded market in August. The volume of new flotations was fairly a good reception. Other new corporate and tax-exempt the large for a month that is normally very quiet, and yields bonds publicly offered during period were accorded on new issues rose above the levels available on compar- mixed investor receptions.