154 MONTHLY REVIEW, JULY 1970 The Money and Bond Markets in June The nation's financial markets coped successfully with BANKRESERVES AND THE MONEY MARKET a hcavy volume of new private securities flotations in June despite widespread concern about developments in the Rclativcly comfortable conditions prevailed in the Middle East and Cambodia and new apprehensions related money market during June. Cognizant of market con- to the commercial paper market. Although most securities cerns, the Federal Reserve System was careful to provide markets had rallied stronglynear the end of May, the bond amply for the liquidity of the money market, but System markets during most of June remained under the strong actions did not lead to rapid growth in the monetary prcssurc of heavy borrowing demands which pushed yields aggregates. Lenders in the money market were able to on new corporate and municipal issues to new highs dur- accommodate smoothly the buildup of short-term bor- ing thc month. Earlier fears of a general shortage of liquid- rowing pressures around the June corporate tax date. ity faded, as the Federal Reserve continued to insure that The Federal funds rate declined slightly to about 7¾ the money markets would function smoothly with minimal percent from 8 percent in late May, and bank reserve stress during the period of seasonal tax-date pressures. positions changed little (see Table 1). Average mem- Further indications of a slowing of the economy contrib- ber bank borrowings declined to $907 million from $924 uted to strong investor and dealer demand for bonds. As million in May, while the average basic reserve deficit o the period drew toward the close, investors were appar- the forty-six large money center banks rose slightly to ently becoming more hopeful that the slowdown would level of $5.3 billion in the four weeks ended on June 24 smother the Inflationary fires and interest rates would (see Table II). decline. The daily average money supply declined in June fol- Against this background the financial markets hardly lowing a rapid expansion in April and moderate growth faltered when the Penn Central Transportation Company, in May. The level of the daily average money supply for the nation's largest railroad, filed a petition in the third the four weeks ended on June 24 contracted at a season- week of the month for reorganization under the Federal ally adjusted annual rate of 5¼ percent from the level Bankruptcy Act. Market participants recognized that this recorded in May. On a week-to-week basis, the money event could lead many investors to reexamine the quality supply changed little in Junc until the week ended on and volume of commercial paper in their investment port- June 24, when there was a marked decline (see Charts I folios, but prompt action by the Federal Reserve Board and 11). The June performancecontrasted with the revised gave reassurance that the banking system would be in a 3½ percent growth rate posted in May, and was largely position to deal with any credit strains that might emerge accounted for by a moderate decline in demand deposits. as this reassessment proceeded. Effective June 24 the The currency component, which had experienced an espe- Board suspended Regulation 0 interest rate ceilings on cially large increase in May, continued to expand in June large certificates of deposit (CD's)—.thosc in denomina- but at a less rapid pace. tions of S100,000 or more—for 30- to 89-day maturities. The volatile character of the monetary aggregates often The Board stated that it was taking the action in recogni- makes interpretation of weekly or monthly movements tion that unusual demands upon commercial banks for difficult. Because longer term movements are calculated short-term credit could arise as a consequence of current from daily average figures for the first and last months uncertainties in the financial markets. The atmosphere in of the period under consideration, these values can also be the bond markets continued to improve in the wake of this exaggerated by the choice of particularly high or low action, with yields on most debt securities tending to de- months for comparison. If, for instance, the month of cline further. February, when the money supply was at a relatively low0 FEDERAL RESERVEBANK OF NEW YORK 155 el, is used as the first month of the comparison, the 'erage rate of growth through June is about 6¼ percent. ChartII THE MONEY SUPPLY ANDSEASONAL EFFECTS On the other hand, the growth rate would be about 3¾ March-Jane 1970 BillicotoF dollars percent if the first month were December, when the aver- age money supply level was little affected by a sharp increase at the end of the month. During June, time deposits held at commercial banks expanded at a 7½ percent annual rate, which approximates the average rate of growth achieved on balance thus far in 1970. The change in Regulation Q should lead to further increases in this aggregate, as reintermediation occurs and banks issue a larger volume of the shorterterm CD's. The adjusted bank credit proxy moved upward in June at a 7 percent seasonally adjusted annual rate as con- trasted with a 1½ percent rate of decline experienced in May. Most of the strength in this aggregate resulted from continuing rapid time deposit growth and an upsurge of United States Government deposits held at commercial 4 11 18 25 8 15 22 29 6 banks. Over the past six months, the adjusted bank credit March April May June has at an annual rate of 31/2 percent, or *This lina is ritaavacage at tIre seasonally adjusted weeklyligccas lot FeSrcvy proxy grown nroltiplied by seasonat actorstar March, April,May.and June, bagrncingwitlr the weahof March4. It indicates what the unadjustedmaney supply would hone been itjust rhe intluence al the sensanat Factors .— which are drawn from the behavior0t the moneysupply doting camparable weeks at preanau: years — hud been operatice. Chart CREDIT AND MONETARYAGGREGATES Seasonally adjusted weekly averages March-June 1070 Briliont ut dollurs Billions at dollars less than the rate of of the 20o Ratio ucale 208 slightly growth money supply during the same period. THE GOVERNMENT SECWUTIESMARKETr 200 E,±MonoonoPPlYl '00 The market for United States Government securities ato scale Jt4 stabilized in although participants remained some- 1 June, what uneasy. Market sentiment improved at midmonth, when President Nixon gave a reassuring address on the state of the economy. This improvement continued with mA the growing belief that the Federal Reserve would not 203 8 I 202 allow a liquidity crisis to develop and impair the func- tioning of the markets. Yields on Govermnent notes and bonds fluctuated in a narrow range during the early part of the month, but declined after midmonth (see Chart III). The ability of the money and capital markets to withstand heavy corporate demands for funds appears 197 j I I I I i__I__i 92 4 II 1825 1 815 22296 1320 273101724 to have had a salutary effect on this market, especially March April Mny Juan in the longer term area. During the month, most bill rates Nota Data tot Janeare preliminary. sizable as * experienced declines, heavy demand pressed Total member heels depositssubject to resercerequirements plus eandeposit a rather thin market Part the liabilities, including Eoro.dollarbnrraroiegs and rarrrmercial paper issuedhy against supply. of demand bank holding numponins or other nttiliates. for bills was apparently from investors switching from At all commercialhonks. commercialpaper. Yields on coupon securities which had declined in 156 MONTHLY REVIEW,JULY 1970 Table I TABLE H FACTORS TENDING TO INCREASE OR DECREASE RESERVE POSITIONS OF MAJOR RESERVE CITY BANKS MEMBER BANK RESERVES, JUNE 1970 JUNE 1970 In millions of dollars; (+) denotes increase In millions of dollars (—) decrease tn excess reserves Daily averages—weekended en Aseragenef Changesin dailyaverages— Factors altectieg four weeks weekceded en Net hasic reeervn positions ended en Jane Jane Jove Jane Jane 24 Factsrs changes 3 10 17 24 Jsee June Jane Jane 3 10 17 24 Eight banks In New Ynrk CIty — 22 47 58 laster, Reserve excess or deficiency I— 54 34 "Market" Leas bsrrewl.nga from Beaerve Banks... 269 195 — 97 t41 — Less net Interbank Federal funds Member bank required reserves —151 + +210 ± 97 — — purcbaaea or oaleo I—) ..,,,.,.,,,... 847 1,770 1.984 1,300 1,447 Operating transactions (subtotal) —258 + 25 —111 66 410 — Gross purchases ,.............,.... 2,174 2,818 2,642 2,540 2.344 Federal Reserve float 89 —192 ±371 ±290 ± 310 Gross sales ...........,...,..,,,.. 1,227 1,048 1,078 1,012 5,09e Treassary operatlons ± 94 —189 —162 —f— 194 Equals net baale reserve surplus Gold and fsreien account — 15 — 11 — 12 — 50 — 88 or dsficlt (—I ....................... —1,163 —1,988 —1,517 —1.547 —1.554 —137 —133 —447 — 79 — 799 Net loans to Government Currency oul.nlde banks securities dealers ..........,,,,,,.,,. 429 381 311 445 394 GIber Federal Reserve liabilities Net carry-over,excess or deficit I—It.. — 3 35 3 17 19 and capital — 90 — 69 +147 ± 28 14 Talol market" factora —409 ±123 —ala ±184 — 310 Thirty-eight banks outelde New York CIty Direct Federal Reserve credit tn'annattlens Reserve excess or deficiency (_ 70 97 — 13 38 247 Less borrowings rrsm Reserve Banks... - 349 237 251 396 236 Open market operations (subtotal) ±134 ±423 —678 ± Less net tolerhank Federal funds Ousrlcht holdings: purchaacs or sales (—I 1.292 3,637 3.849 3.401 3.537 Government aecucitles +235 ±143 —678 ± 259 Gross purchaaes 5.247 3,722 5.845 5,278 5.526 — 1.877 1,989 Bankers' acceptances — 7 — 2 — 3 — 12 Gross eales 1,985 2,098 1,996 agreements: Equals net basinreserve aurplue Itepurcbase — or dcficlt I—) —3,541 —1,877 —4.004 —3,720 —3.786 Government aeeuritlea 71 15 — 88 — ± ± — — Net loans to Government Bankers' anceptancea 4 —51 aecsrltlcs dealers 191 109 10 101 Ion ± ± — — 23 15 13 46 22 Federal agency obligations +22 —6 —16 Net carry-over, excess or deficIt (—It.