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Reprinted from theFederal Reserve Bulletin, April 1963

Federal Reserve Open Market Operationsn 1962Thisreportdescribes the open market operations of the Federal ReserveSystemagainst the background of broad System policy objectives on the one side andmoney and capital market developmentson the oilier. It supplementsthe AnnualReport of the Boardof Governors of the Federal ReserveSystem, which tracedthe development of Open Market Committee policy over the year, with a reportfrom the particularvantagepointof the Trading Desk at the Federal ReserveBankof New York. This wss where actual tradingoperations were c/Jecied in order tocarryouttheSystem'sopenmarketpolicies onaday-to-day basis.Tue report wLr prepared by Robert W. Stone, Manager, System Open MarketAccount, and Vice Presidentof theFederal ReserveBankof New York. Ascociafeson the Trading Desk assisted in itspreparation.

Monetary policy in 1962 wasdirected toward providingstimulus to a somewhat sluggishdomesticeconomy, whileavoiding money market conditions conducive to outflowsof funds abroad. These objectivescontinued without ma-jor change throughout the year, as indeed they had con-tinued through 1961. There were some modest shifts inemphasis, however, including a slight movement towardless ease around midyear, and a similar shift during theclosingweeksof theyear. Thccontinuance of a generallyeasy monetary policy since the spring of 1960madc thisthe longest period of uninterrupted ease since 1951.In the background of open market operations during1962 was a domestic economy that gave rise to recurrenthopes butsomewhat disappointingresults. Althoughtherewas a moderate rise in business activity, it lacked vigorand atno time came near to utilizing fully eitherthe man-power or plant and equipment available to the economy.Unemployment remained above 5 per cent of the laborforceit averaged 5.6 per centeven though it was sig-nificantlybelow the average of 6.7 percent for 1961.At times, particularly in late summer and early fall, anumber of analysts suggested that the economy was indanger of slidingintoa recessionunless monetaryor fiscalmeasures, or both, were usedmore vigorouslyto promoteexpansion. Therewcrc severaljolts to businessconfidencc(luring the year. notably a conflict between the Adminis-

tration and the steel industry over prices, a sharp breakin the stock market in the spring, and international crisesoverLaos andparticularlyover Cuba.Therewas no evidence to suggest that theeconomy washeld back by an insufficient availability of credit, how-ever. On the contrary, credit seemed to be abundantlyavailable throughout the year. Long-term interest ratesmoved lower while short-term rates fluctuated within anarrow range, closing the year at levels slightly abovethose ut the endof 1961.

Although developmentsin the domesticeconomy calledfor a continued policy of monetary ease, the stubbornpersistenceof a sizable deficitin the United States balanceof internationalpayments was still a majorproblem. Thedeficit in 1962 was $2.2billlondownonly slightly fromthe $2.4 billion deficit of the previous year, and financedto the extent of $900 million through a further outflowof gold. Moreover, in both 1961 and 1962 the paymentsdeficits were reduced because of certain special trans-actions that could not be counted on to continue. It wasdifficult to measure the precise extent to which privatecapital outflowsenlarged the balance-of-paymentsdeficitand also difficult to assessthe exact role of relative levelsof interest rates in encouragingor discouragingsuch out-flows. But clearly without significant improvement in thebalance of payments, these considerations were important

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both in the formulation of policy and in the choice oftechniques to be used in pursuing such policy.Even though domestic and international objectivestended to exert different pulls on monetary policy, it waswidely recognized that the two sets of objectives havemuch incommon. Progresstoward balance in internationalpayments depends in no small degree on the achievementof a healthy, noninflationary, and increasinglyproductivedomestic economy. And domestic expansion depends inpart on the same factors that can bring a better balancein international paymentsincludingan increase in ourfavorable balance of trade and an attractive investmentclimate thatwould retain invest.able funds and even drawfunds into the United States from abroad. It was also rec-ognized that our adverse balance of payments casts a longshadow over domestic activity and that a solution to ourpayments problem would probably give an important psy-chologicallift tothedomesticeconomy.

SYSTEM OPERATIONSGiven the objectivesoutlined above, System policy wasdesignedto maintain reserveavailabilityata level sufficientto encourage expansion of bank credit and the moneysupply, yet not so abundant as to encourage an outflowoffunds by depressing interest ratesparticularly short-term interest rates.PROFILE OFPOLICYOVER THE TEAR. During the firsthalf of the year there was widespread concern over thesluggishnessof thedomesticeconomy,especiallyinthelatespring when there were signs of faltering in the already

slowrateofbusinessexpansionand whenthe stock marketsustained its sharpest break since 1929. The balance ofpayments also played a role in the formulation of policy,although the seriousncss of the country's payments situa-tion was somewhat obscured by the temporary benefitsaccruing to the United States from a major flow of fundsfrom Canada, which culminated in aspeculativeonslaughtagainst theCanadian dollarinJune.System policy in this period waseasy, as may be seenin various indicators of reserve availability. Weekly aver-ages of free reserves typically ranged from about $400million to $600 million from January through mid-June,and for the first 5 months of the year averaged about$440 million. Federal funds were in comfortable supply,trading most frequentlybelow the 3 percentdiscount rate,while member bank borrowing averaged in the neighbor-hood of $70 million.Toward midyear, while the economic advance remainedsluggishand hesitant, it became increasinglyapparent that2

while SHORT-TERMRATES moved narrowly.rt.nt PSI Co41-

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the balance-of-payments problem was further from solu-tion than many had hoped. Moreover, attention began tofocus on the size of the expansion in bank credit and totalliquiditythat hadalready occurred. It appeared that mone-tary policy might be reachingthe limit of its usefulness asa stimulus to economic activity, consequently, aftermid-June the System shifted the emphasis of monetary policytoward slightly less ease and toward maintaining a mod-erately firm tone in the money market. However, policyremained basically easy and encoutaging to credit expan-sion. This policy posture was maintained throughout thesummer and fall.In October and early November, at the time of theCuban crisis, particular emphasis was placed on main-tainingas steadya climateas possibleinthemoneymarket.In the closing weeks of the year, with business sentimentperceptibly improved,with bank reserves, bank credit, andmoney supply showing strength, and with the balance ofpayments still unsatisfactory, the System shifted creditpolicyonce more toward slightly less case.Indicative of the mildness of the shift in emphasis to-

Cisert IFREE RESERVES fluctuatedfrom weekto week

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3

O N D J F M A M J I A 0 ll C1961 1962Nat.: Manner bankI,,.rnorvas oreaccess reserves Lois borrowings(loin ike Federal Raise,.. Borrowingsor.borrowings learn thoFederal Rater,,.F.d.ral40d. rat. isab.rat,paidb, numb.,banksinborrowIng so,... ruler,.,learn ether rno,nbor bank.. Allat. w..klyavaregas at daily ligura,.Th, rate for ihr...enonrlsTreasur,bill.is ik.ovarag. issuing rot..

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ward less ease in June, weekly average free reserves mostoften moved in a range of about $350 million to $500million from mid-June to mid-December. This rangeIargcly overlapped the range of fluctuation earlier in theyearfree reserves averaged about $410 million, com-pared with $440 million in the first 5 months. Federalfunds traded mainly in a 2 to 3 per cent range frommid-June to mid-December,compared with 2 to 3 percent earlier. Member bank borrowing averaged around$100 million. In the latterpart of December, net reserveavailability was reduced somewhat further, and Federalfunds tcndcd to trade more steadilyat 3 per cent; memberbank borrowing increased.UIDELINES FOR OPERATIONS. During the course of1962, a good deal of consideration was given to thematterof appropriate guidelines for the conduct of open marketoperations.Continuingattention was paid to free reserves,butnot

to the extent of pursuing particular free reserve levels atthe expense of wide swings in the general tone of themoney market. Consequently, free reserve levels some-times fluctuated widelyfrom one week to another. Mean-while close attention was given to the location of reserves,the availabilityof Federal funds, dealer financingneeds,and trends in short-term rates. The general pattern ofcapital market developments,of credit expansion, and ofgrowth in the money supply was also followed carefully.Thus thc wide fluctuationsin measuresof reserve avail-ability during 1962 were usually accompanied by changesin the distribution of reserves between money centersand "country" banks, or by changes in the intensityof useof reserves and hence of the demands on the moneymarket. At times, it was appropriate for free reserves torise in order to accommodate temporarily enlarged de-mands for liquidity. At other times, when liquid fundswere in less demand and banks sought to employ theirreserves in the Federal funds market and the Treasurybill market, it was appropriate for free reservesto contractin order to avoid unduedownward pressureon short-termrates.With free reserves ranging rather widely, tendenciestoward excessive ease or restraint in the market werecushioned. Particularly during the second half of theyear,the rate for Federal funds seldom fluctuated sharply andmoney market conditions were relatively stable. On afew occasions, however, there were departures from thatgeneral stability when unusually high amounts of FederalReserve float provided reserves in greater than expectedvolume or when country banks shifted large amounts ofexcess reserves to the money centers on the final day or

twoof theirreservecomputation periods.In addition, various measures of total and requiredreserves were analyzed intensivelyduring the year. Attimes, especiallyduringthe summer months, total reservesand required reserves grew only moderately, if at all. inother periodsnotably toward the year endtotal andrequired reserves bulged sharply above earlier growthtrends. It was clear that such measures had to be con-sidered as part of the total picture that also included theother indicators noted above, particularly those bearingon the day-to-day condition of the money and securitiesmarkets.TECHNIQUESOF OPERATIONS. As in 1961, thedefenseof the short-term rate structure against fairly persistentdownward pressures was an important consideration notonly in shaping monetary policy but also in the choiceofthe techniques used to achievepolicyobjectives.Thus in order to supply reserves while exerting as little

downward pressure on short-term rates as possible, theSystemcontinued to buy intermediate-term and some long-term obligations as an alternative to purchases of bills orshort-term coupon issues. Sometimes the System boughtlonger issues to offset the reserve effect of the bill salesmade to cushion downward pressures on short-term rates.These operations in intermediateand longerterm securitieswere in accordancewith thechange of procedures adoptedin early 1961. Compared with 1961, however, there werefew periods during 1962 when investors were seeking tosell intermediate-and long-term Treasury obligationson alarge scale. At the times when theSystemneeded tosupplyreserves, there was not alwaysa substantial availabilityofsuch obligations that could be purchased without pushingprices to unsustainablelevels.Systempurchasesof interniediatcand longer issueswereaccordinglysmaller and less frequent than in 1961, as theTrading Deskcontinued to make its purchases on a scaleand in a manner intended to exert minimum direct in-fluence on prevailing prices and yields. Typically, thismcant that the Desk did not solicit offeringsfrom dealersbut rather purchased some of the securities offeredat thedealers' initiative. Generally, an effort was madeto leavea portion of the offerings in the market rather than tocorral all or most of the available supply at any time.Prices and yields were thus establishedby themarket, withthe System being to a large extent a marginal, albeit sig-nificant, participant in the market. This method ofopera-tion would appear to have furthered the System's objec-tives more satisfactorilythan if prices had been pushed tounsustainable levels in an effort to buy more securitiesthanwere readily availableatcurrent prices.3

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In addition, instead of buying Treasury bills outrightand driving short-term rates down, the Systemoften usedrepurchase agreementsas a means of meeting temporaryreserve needs. Almost all of these agreements were madeat the discount rate of 3 per cent. That rate was usuallycompetitive with the rates of other lenders when the useof the repurchase agreement technique was particularlyimportant. However, sometimes the conduct of Systemoperations was complicated by the fact that securitiesacquired by the Federal Reserveunder repurchase agree-ments werewithdrawnonafairly largescalein advance oftheir maturities as dealersfound financingon more attrac-tive terms or as theymade outrightsales of the securities.Outright purchases of Treasury bills to meet reserveneeds were also necessary on many occasions. Indeed inthe first statement weeks of July, August, and October,System purchases of bills in the market rangedfrom about$500 million to $1.1 billion. These very large purchaseshad little downward impact on Treasury bill rates, how-ever, because theycoincided with periods of large dealerinventories and accompanying market pressures towardhigherrates.In making market purchases of Treasury bills, theSystem avoided as much as possible the maturity areaclosely surrounding the three-month bill because of theparticularimportanceof three-month rates asa focalpointin the short-term rate structure. Similarly the Systemfrequently concentrated salesof bills in this area. As theyear progressed,however, the yield curve for short-termissues flattened to the extent that purchases or sales ofany bills seemed to have almost as much effect on thethree-month rate as operations in issues of that maturity.Use was also madeof transactionsdirectly withofficialforeign accounts maintained with the Federal Reserve.The System made sizable purchases of securities,mostlyTreasury bills, from such accounts as a means of supply-ing reserves without injecting System buying directly intothemarket. On aneven larger scale, the System sometimessold bills to foreign accountsinorderto reduce the volumeof foreign account buying in the market. Even so, onlyabout 20 to 30 per cent of the volume of transactionsexecuted for foreign accounts at the Trading Desk wasarranged directly with the System;the greater share wasexecutedinthe market.A final important means of minimizing downward ratepressures was the October action of the Board of Gov-ernors of the Federal ReserveSystem in reducing from Sper cent to 4 per cent reserve requirements against timeand savingsdeposits. This release of reserves, amountingto about $780 million, satisfied a substantial part of theseasonal need for reserves in the last two months of the4

year. Open market purchases to meet seasonal reserveneeds were accordingly reduced.PORTFOLIO CHANGES. Over the year asa whole therewasa net increase of $1,939 million in the System's hold-ings of Treasury obligations, of which $1,756 million

represented outright purchases, and $183 million repur-chase agreements. Holdings of bankers' acceptances in-creased by $59 million, comprising an increase of $4million in outright holdings and a rise of $55 million inholdingsunder repurchaseagreements.In rough tcrmS, the System's total net purchases ofalmost $2 billion, together with a rise in member bankvault cash of about $370 million, offset the combinedeffect on reserves of a goldoutflowof about $900 millionand a $1,400 million rise in currency in circulation. Netchanges in other factors affecting reserves for the yearwere relatively small. The releaseof about $780 millionof reserves as a result of the lower requiredreserve ratioagainst time and savings deposits was approximatelymatchedby the rise in reserves needed to support increasesin total deposits.

(han IISYSTEMINCREASED ITS HOLDINGS of securitiesby$2 billion

F M AM I I1962No,.: Cu,nulaiir thong., in Sy,t.ns holding, oPTreasuryI,,,., andacceptances bothon an outtighi boil,and underrepurchaseogroenseol. W.de.sday .gurnand O.cen,b., 31.

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OutrightSystem holdings of Treasury securities matur-lug withinayear decreased by $65 millionas billholdingswere down by $751 million while short-termcoupon issueswere increasedby $686 million. Holdings of one- to five-year issues increasedby $2,070 million, mainly reflectingnet purchasesof nearly $1.5 billion of securities in thatmaturityrange. The System also bought $326 million and$37 million of securitiesmaturing in five to ten years andover ten years, respectively. But the System'sholdings inthese two maturity categoriesdecreased by $133 millionand $116 million because of the shortening effect of thepassage of time on issues held in the Account. At theclose of 1962 the average maturity of System Accountholdings was 20.4 months, compared with 20.9 months ayear earlierand 19.4 months at the endof 1960.In addition to its open market operations in Treasurysecuritiesthe Federal ReserveSystem continued toconductsome open market operations in bankers' acceptances.These operations, which are typically quite small com-pared with System operations in Treasury securities,aredesigned to maintain contact with, and encourage thefurther development of, this important market in thefinancing ofworld trade.Federal Reserveholdings ofacceptances on an outrightbasis varied between $30 million and $52 million during1962. In line with the practice of previous years,outrightholdings were reduced in the first half of the year byallowing maturities to exceed purchases and were in-creased in the second half by stepping up purchases.There wasa deviation from this pattern in July,however,when System holdings were temporarily increasedas themarketexperienced a sharp influx of acceptances. TheSystem'soutright holdings were at a peak at the end ofthe year, when market supplies were exceptionally largeunder the influenceof heavy seasonal pressures. The Sys-tcmalsoacquired acccptances under short-term repurchaseagreements from time to time during the year. Theseholdings also reacheda peak during the year-end period.

TREASURY DEBT MANAGEMENTThroughout the year, System open marketoperationswere closely meshed with Treasury debt managementoperations; both worked toward similardomesticand inter-national objectives.SRORT.TERM DEBT. In an effort to resist downwardpressures on short-term interest rates, the Treasury addedalmost continuously to the weekly offeringsof three- andsix-month bills. It sold a strip of $1 billion of regularbills. It increased the January and October quarterly

offerings of one-year bills by $500 million each. In addi-tion, it sought to include an attractively priced short-termanchor issue in each of its regular refundings.As a result, the volume of Treasury bills outstandingincreasedto $48.2 billion at the end of 1962 from $43.4billion a year earlierdespitea decline from $6 billion to$3 billion in the volume of outstanding tax anticipationbills. So strong was the market's appetite for bills thateven the strip of $1 billion of bills, offered in Novemberwithout the privilegeof bank payment through Tax andLoan Accounts, was readily absorbedafter an upwardadjustment in rates. In contrast,a similaroffering a yearearlierhad had a sharper impact on rate lcvcls and marketatmosphere.At the same time, partly because of a successfulpre-refunding operation, total coupon issues maturing withina year declined from $42.5 billion at the end of 1961to $39 billion at the closeof 1962. Asanet resultoftheseoperations, the amount of marketable Treasury issues duewithin one year increased by $1.4 billion over the year.But with bill issues increased so persistently during theyear and upsosharply fortheyear asa whole, the marketimpact of Treasury operations on the short-term debtstructure probablywas greater than this modest net in-crease might suggest.

DEBT EXTENSION. The Treasury also significantly ex-tended the maturity of the debt duringtheyear, partly byoffering intermediate and longertermoptions in its regularrefundingsbutmainly bymeansof twoadvancerefundings.in the first of the advance refundings, in February, about$5 billion of obligations maturing from 1964 to 1972 wasextended to longer maturities. In the second, in Septem-ber, $8 billion of early 1963 issues was prerefunded outto 1967 and 1972. As a result, the volume of marketabledebt maturing in over five years increasedby $9 billionduring 1962, while one- to five-year maturities declinedby $3 billion. The average maturityof the debt at theend of the year was four years eleven months, comparedwith four yearsseven months a year earlier.Toward the end of the year, market attention was di-rected to a prospective Treasury offering of a long-termbond through competitive bidding by syndicates. Thisexperiment was part of a long-standing Treasury effort tofind better techniques to sell long-term debtan effortthat was given further impetus by the market's initiallymediocre response to the 4 per cent bonds of 1987-92sold in the summerof 1962. Thefirstauction sale of $250million bonds was carried out successfullyin early 1963,with a net interest cost to the Treasury of under 4.01per cent for a 1993 maturitycallable in 1988.

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CREDITMARKETSThe System'smonetarypolicy of moderate ease helpedto encourage substantial flows of funds through thecapitalmarkets during 1962, largely at steady or declining ratesof interest. Commercial bank credit played a key role inthis process, with total bank loans rising by $14 biffionduringtheyear. Bank investments increased by $5 billion,with holdings of tax-exempt securities up particularlysharply. Commercialbankholdingsof United States Gov-ernment securities actually declined slightly during theyear.The total bank creditincreaseof $19 billion, the largestin the postwar period, was associated with a very sharprisc in time and savings deposits. These grew with par-ticular rapidity in the first half of the year followingthepermitted increase in ceiling rates of interest; tune de-positswere up$15 billionfor theyear. Incontrast, privatedemand deposits changed relatively little. In fact they

edged slightly lower through August (seasonally adjusted),and then spurted up in the final monthsof the year. Theyrose only by about $1 billion for the yearas a whole.Although the money supplyas conventionallydefinedto include private demand deposits and currency outsidebanksrose by only about $2 billionduring the year, thevoLumeof closemoney substitutesexpanded sharply. Esti-mated total liquid assets held by the nonbank public in-creased by about $34 billion,or 8 per cent, over theye4r.And the ratio of such assets to gross nationalproductroseto 80.6per cent inthe final quarterof 1962 from 78.2percent a year earlier. This indication of ample and expand-ing liquidity in theeconomy agreed with a market impres-sion that the economy was not pinchedfor want of credit,and that credit was generally available to encourage andsupport further economicexpansion.

TREASURY BOND YIELDS. Thepattern ofmovementsinlong-term yields within theyear can be seen in the coursefollowedby Treasury bonds. In theopeningweeks of theyear participants in the Treasury bond market werecautious about the outlook for bond prices, particularlyinthe lightof fairly optimisticviewsabout business,concernover the balance of payments, and a related belief thatmonetary policy might have moved a little away from thedegreeof ease prevailing in 1961. Average yields on long-term Treasury bonds, which started the year at 4.07 percent reached a high of 4.14 percent in February.Through the rest of theyear, varyingmarket appraisalsof the factors mentioned above largely shaped the trendof prices and yields. Thus after the opening period ofcaution it became apparent that the business expansion6

was proceeding slowly at best, while the outlook for thbalance of payments seemed more promising.Bond pricesbegan to rise and the average yield declined, reaching alowof3.84percentin early May.Treasury bond yields moved generally higher throughJune and July in a market cautious for several reasons.The Canadian foreign exchange situation was consideredto have adverse implications for our own balance-of-payments problem. Discussion of a quick tax cut tostimulate the lagging economy produced expectations oflarger Federal budget deficits. And related to both ofthese developments,therewas a feeling in themarketthatFederal Reserve policy mightmove awayfrom ease. Underthese circumstances the market sensed the System's shifttoward slightly less ease in mid-June almost immediately.By the end of July, a number of longer term Treasuryissues were yieldingmore than4 per cent,and a new long-term Treasury bond elicited only limited interest whenoffered to yield4.19percent.Over the next three months yields again declined,approaching or attaining new lows for the year aroundmid-November.One factor that helped to initiate the risingprice trend was the President's decision to postpone a 'p

Unired Saios Go.ornmont

Chart IllINTEREST RATESON BONDS declinod during1962

P., c.ni Par.nl3.0 - 5.0

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ON Di FM AM .1 J A S ON 01961 1962Nob: Aco corporate and Aaa dot, and localban4ykTds or.MoodysInncbo,.S..yi..,.ri.,.Stel.and local band,.gene,elabl.atlonaonly.becod on Thc,doyl..,,ec.Co.po.oi.bands and UnitodStat.,Gowarn,n,ntbandi oreWodtr.ndoyI.gor.,.United StolesGo.,nn,nnlbend, nm av.rao., br i,,uas,00tacnu orcollabb. in Ion year,or mom..

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request for a tax cut. En addition, at theannual meetingsof the International Bank for Reconstruction and Devel-opment and the International Monetary Fund in Septem-ber, and in various discussionsand statements related tothese meetings, there was widespread comment to theeffectthat significantprogress was being made in reducingthe United States balance-of-paymentsdeficit. At the sametime, the domestic business situation still showedno par-ticular vigor. Indeed a number of analysts believed thatthe economy's next move might be downward rather thanacontinuation of the sluggishadvance.In these circumstances the Board of Governors' an-nouncement in late October of a reduction in reserverequirements against timeand savings depositswas initiallyregarded by some as heralding an easier credit policyrather than as a device to supply seasonal reserve needsby means other than open market operations. 1'his beliefprovided some further temporary strengthening to bondpricesalthough the market rcappraised the significanceof the move fairly soon thereafter. The Cuban crisis,occurring about that time, had remarkably little impacton bond prices.Later in November and intoearly December there wasmore confidence in the business outlook, which was re-flected in a slight rise in yields. This change in marketsentiment came when dealerholdingsof intermediate-termTreasury obligations were particularly large, followingTreasury refunding operations. The increased marketsupply of securities enabled the System to meet a largepart of the remainingseasonal reserve needs through pur-chases of securities outside the shod-term areaand thus tominimize downward pressure on short-term rates. TheSystem's buying, in turn, helped to improve the technicalpositionof the market by enabling dealers to reduce theirinventorics.The market then strengthened and in the week beforeChristmas a number of issues reached new high prices forthe year. The average yield on long-termissues returnedto the May low point of 3.84 per cent. Prices recededagain in the final Few days of theyearas the market begantotake some cognizanceof theSystem'sfurther slightshiftaway from easeundertaken in mid-December. At theyearend, the average yield on long Treasury bonds was 3.87per centdown 20 basis pointsfor the year as a whole.

OThER LONG-TERM MARKETS. An important pad ofthe flow of funds in 1962found itsway into the tax-exemptarea. For the second successive year, new offerings ofstate and local governmentsecurities aggregated over $8billion. During the first halfof the year these issues wereavidly sought by commercial banks striving to employ

time and savings deposits profitably. Yields declinedthrough early May. Yields then rose until early Augustas bank demand for tax-exempt bonds tapered off some-what. During the balance of the year, the demand re-mained sufficiently strong so that the continuing sizablevolume of new issues was floated at declining yields.Moody's index for Aaa-rated obligations of state andlocal governmentsfell to a low of 2.88 per cent in earlyNovember. a level not reached since mid-1958. Over theyear, yields on Aaa-rated tax-exempt issues declined by37 basispointsto 2.94percent.Corporate bond financing in 1962, although still a siz-able $9 billion for the year, was not so large as in either1958 or 1961. This lower borrowing reflected in part arise in internally generated corporate liquidity. Thisliquiditynot only lessened corporations' needs to borrowbutalso made them steady purchasersofshort-termobliga-tions, thereby accentuating the downward pressure onshort-term rates. Corporate bond yields declined untillate May from the levels prevailing in the latter half of1961. But the decline was gentler than that for tax-exempt bonds, which benefited from the heavy bank buy-ing. At the close of 1962 Moody's Aaa corporate bondindex, at 4.22 percent, was 22 basis points below a yearearlier.During much of the year, corporate underwriters bidaggressivelyfor new issues and rcotlcrcd them to investorsat yieldsaboutequal to or even a littlebelow the yieldson recently offered issues of similar quality. In the latterpart of 1962. high-grade corporate utility issues werebeing reoffered at yields of around 4.22 to 4.30 percent,compared with about 4.44 to 4.69 per centa yearearlier.In addition, there was a tendency for the spread betweentop-grade and lesser ratedsecurities to narrow as investorsreached for higher yields.Dwarfing the increases in municipal and corporateborrowing, the increase in mortgage debt was an un-precedented $24 billion during 1962 as a large share ofinstitutional savings found outlets in this area. Here, too,there wassome downwarddrift in yieldsover thecourseofthe year.

SHORT-TERM RATES. Therangeof fluctuationforshort-termmoneymarketrates was relativelynarrow throughoutthe year. The average issuing rate for three-month Treas-ury bills remained between about 2.65 and 3 percentandwas most often between 2.75 and 2.85 per cent.Throughout the year the combined influence of themoderately easy monetary climate fostered by the Systemand a steady demand forbills from corporations and othernonbank buyers exerted persistent downward pressure on7

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rates. This tendency was resisted by the coordinated useof System open market operations and Treasury debtmanagement techniques,however, inorderto keep UnitedStates rates competitive with yields in foreign moneymarkets. The availabilityof time certificatesof deposit asan alternative investment also tended torelieve downwardpressures on rates. On balance, short-term market ratesactually rose slightly over the year. Nevertheless, therewas no attempt to set rigid floors under rates, at whichthe authorities would make unlimited amounts of billsavailable. Ratesfluctuatedenough toprovidesome marketuncertaintiesand to require an appraisal of market forcesin themanagementofboth dealerpositionsandinvestmentportfolios.At the same time, the official actions in response todownward market pressures on bill rates probably con-tributed to the flatteningof yield curves, includingboth anarrowing of spreads between short- and long-term issuesand a narrowing of spreads within the short-term area.At times, the spreadbetween three-and six-month Treas-ury billsdecreased to as little as 2 or 3 basis points.Treasury bill ratesdropped to their lowest levelsof theyear in May, when large System purchases were super-imposed on vigorous bank and nonbank demands. Thisbrought the market rate for three-month bills down to2.63 per cent (bid) on May 11. Theyear's high rate levelfor three-month bills (2.98 per cent) was reached in Julyfollowing the slight firming in monetary policy and in-creased concern over the balance of payments.After their high point in July, bill rates declined untillate October as corporate and other nonbank demandabsorbed thealmost uninterrupted increasesinbill suppliesmarketedbytheTreasury. Rates urnedupagaininNovem-ber after the Treasury announced its plans to auctiona $1 billion stripof bills. Although the strip was readilyabsorbed, rates tended to remain at their higher level asthe money market atmosphere firmed somewhat. Thethree-month bill closed on December 31 at 2.93 percent(bid)about per cent above the comparable rate atthe end of 1961.The level and movement of short-term rates was suchthatafter allowance for thecost of forward cover in theforeign exchange marketthe spread between rates onthree-month Treasury bills of the United States and theUnited Kingdom favored the United Kingdombills by amaximumof about 70 basis pointsduringtheyear,ahighreached in late October. In 1961 the covered spread infavor of London had been as much as 105 basis points,and in 1960 it had ranged up to about 165 basis points.During most of 1962, the covered spread in favor ofLondon was no more than 25 or 30 basis points. At

8

times the spreadfavored United States billsasin April,shortly after the British bank rate had been reduced forthe third time inthe space of two months. However, partof the effect of these successive reductions tended to beoffset eitherby lower bill rates in the United States or byadecline in thediscountonforward sterling.Further assistance in keeping United States short-termratescompetitivewith those abroad came in Octoberwhennew legislationremoved for threeyears theceilinginterestrates on time deposits held in member banks by foreignofficial accounts.Along with the rise in market suppliesofTreasury bills,negotiable time certificates of deposit, introduced to themarket in early 1961, assumed greater importance as amoney market instrument during 1962. This was partlydue to the higher rates permitted on theseobligations andto the banks' aggressivenessin using the instruments toattractdepositsduring theyear.Total time certificates issued by New York City banksand outstanding at the year end were $1.8 billion, com-pared with $1 billion at the end of 1961. CertificatesofChicago banks increased by almost $300 million duringthe year to $545 million. Large increases also took placein the outstanding volume of certificates issued by banksin many other centers. In early December, the total vol-ume of outstandingcertificatesat weekly reporting mem-ber banks throughout the country was estimated to besomewhat over $6 billion. Active trading in certificatesdeveloped in the secondary market. The market tendedto broadenduringtheyear as new investorsappeared andas certificatesof lesser known banks gained wider accept-ability.

BANKERS' ACCEPTANCES. In contrast to the sizableincreases in the volumeof Treasury bills and time certifi-cates of deposit in 1962, the volume of bankers'accept-ances in the United States declined slightly. The netdecline of $33 million to a year-end total of $2,650mil-lion interrupted a period of almost steady growth since thefall of 1959. Marketactivity was also somewhat lighterduring theyear,with dealers' average weeklysales slippingto $110million from $130million in 1961.One reason for the slowdownofacceptance financingin1962 seemed to be a shift in the relative cost of suchcredits vis--vis other means of financing. Domestically,the previous cost advantage of acceptance credits overdirect bank loans apparently shrank to little or nothing.While clear-cut comparisons would involve analysis of anumber of variables, it seems significantthat in 1962 theeffective cost of three-month acceptance credits (the rateof discount plus the acceptance commission) never fell

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below the prime bank loan rate of 4 per cent, andoftenexceeded that rate by as much as to percent.In contrast,during1961 the costofacceptancecredits wasgenerallybelowtheprime loan rate,In addition, there seemed to be some narrowingof thecost advantage of United States acceptance credits overcreditfacilitiesavailable to borrowers in a number of for-eign countries. Again,precise comparisonsaredifficulttomake, but itcanbepointedoutthatwhileacceptancecreditcosts moved somewhat higher in the United States therewas an easing in commercial credit conditions in someforeign countries. In general, however, the cost of creditin the United States continued to be lower than that avail-able in a number of important foreign money markets.Another factor that apparently restrained thegrowth ofacceptance financing was the changing patternof UnitedStates exports. In previous years, increasing exports toJapanfinanced toa considerabledegree through accept-anceshad helped to account for the rapid rise inacceptance credits. In 1962, while total United Statesexports increased, exports to Japan declined. This declineprobably accounted for part of the nearly $200 milliondecline in acceptance financingof exports over the year.The basic demand for acceptances remained gooddur-ing most of 1962. Although the yield advantage ofacceptancesover Treasury bills was smaller than in 1961,it was high enough so that marketsuppliesofacceptanceswere readily absorbed during most of the year. However,the margin of unsatisfied demand was not strong enoughto pushratesdown. It may seem paradoxical that accept-ances yielded,for the investor,asmaller interest advantageover Treasury bills in 1962 than in 1961, while at thesame time from theborrower's standpoint acceptance ratestended to be a bit higher relative to alternative financingsources than a year earlier. This result seems to haveemerged out of the flatteningof the yicld curve in 1962.Whilefor the investoracceptance rates compete with ratcson Treasury bills and other short-term marketable paper,themore relevant comparison for the borrower is betweenacceptance ratesplus related feesand bank lendingrates tohigh-gradeborrowers.Reflectingthe general stability of short-term rates overthe year, there were only four general changes in accept-ance rates during 1962. The rates were reduced by ofa percentage point in May and were raised by a similaramount in late June; they were further increased by inJuly but reduced again by that amount in early October.As a result, rateswere at the same level at the beginningand end of theyear.Earlyin 1962, with demand exceeding supply, dealers'portfoliosdeclined rapidly from theirend-of-I961 level of

somewhat above $60 millionto around $10millionto $20million by late January. Inventories fluctuated close tothis range until the latterpartof June. The rate reductionin early May failed to produce substantially increasedsupplies, as other rates were alsodeclining. By late June,however, the supply reaching the market was augmentedby commercialbank sales in the somewhat firmer moneymarket, while demand tapered off with the rise inTreasurybill rates. As a result, dealers' inventories reached a highof $123 millionon July 16, despite a rate increase in lateJune. In thesecircumstancesanother increase in rate wasmade on July 17. Dealers' portfolios declined rapidlythereafter, andratesmoved loweragain in earlyOctober.However,inventoriesrose very sharply in theclosingweeksof theyearunderthe impact ofexceptionallylargeseasonalsupplies. Dealers'holdings reached $218 million on De-cember 31a level attained only once before, in January1930. Dealers refrained from increasingrates in theyear-end period, hoping that January 1963 reinvestment de-mand would relieve their swollen inventories. But suchdcmand, while good, was not up to expectations and didnot reduce dealerportfoliosappreciably. Shortly after theturn of theyear, rates were moved up again.

CHRONOLOGICAL REVIEWA more detailed description of System operations forthemajorperiodsof 1962 is given in thefollowingsection,along with more detail on relatedmoneyand capital marketdevelopments.Theconnections betweenSystem operationsand developments in the short-term money market wereparticularly close throughout the year, as the magnitude

and the techniques of System transactions were partlyguided by. and were in turn an important influence on,money market trends.The pattern of activity in the long-term capital markctswas also significant. For a continuingconcern of Systempolicy is the smooth functioning of the nation's capitalmarkets, so that savings and newlycreated credit can bechanneled efficiently in the directionsand at the prices setby the interplayofmarket forces.

JANUARY-FEBRUARY: SEASONAL. RESERVE ABSORP-TEON. In the opening weeks of 1962, the joint domesticand international objectives of System policy posed noseriousdifficulty to theconductofopen market operations.Partly as a result of Systemoperations, Treasury bill rateswere somewhat higher by mid-February than at the endof 1961, despite recurrent downward pressures.Guided by theneed to offsetthe usual refluxof reservesto the banking system, open market operations withdrew

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SYSTEM OPJtATIONS IN GOVERNMENT SECVRITIES DURING 1962Inmilhunofdollara

a net of $838 millionof reserves from January 2 throughFebruary 21. Salcs and redemptionsof some $1.3 billionof securities, including sales of about $700 million ofTreasury bills in the market, more than offset purchasesof $66() million of securities. Holdingsunder repurchaseagreements also declined.At the very start of the year, the System supplied amoderate amount of reserves to relieve lingering year-endpressures in the money market, primarily through re-purchase agreements and Treasury bill purchases fromforeign accounts. In addition, repurchase agreementswere made in moderate volumeon January 15, whensigns01 firmncssappeared in the moneymarket on thepaymentdate for $2 billion of new one-year bills. In late Januaryand early February reserves were suppliedas floatdroppedsharply. Apart from these three occasions, howevcr, re-serves were absorbed in sizable volume on most days ofthe January 2-February 21 period.In addition to System operations, several other factorshelped sustain Treasury bill rates during the first sevenweeks of 1962. Although there was bank and nonbankdemand for bills throughoutmost of theperiod, its impacton rates was blunted by the effect on market psychologyof the optimistic economic outlook that prevailed at theyear's start,by theprospect for increasedcompetitionwithbills from commercial bank time and savings depositsfollowing the revision in Regulation 0, and by market10

awareness of continuing official concern over the level ofshort-term rates. Debt management actions also con-tributed to sustainingthe rates, for theTreasury raised anadditional $500 million in the auction of one-year hillsmaturing on January 15 and sold $100 million of addi-tional three-month bills in the regular auctionson January29 and February 9and 19.In this setting, Treasury bill rates continued to edgeirregularly upward during the first severaldaysof the newyear, following a sharp rise in the last two months of1961 which had carried the three-month rate to 2.67 percent (bid) at the end of December. The $2 billion quar-terly issue of one-year bills was auctioned on January 9at an average issuing rate of 3.37 per cenlor about 39basis points higher than the previous one-year bill issueauctioned in October 1961. 13111 rates then moved lowerthrough early February, but rose again thereafter. Theaverage issuingrates for new three- and six-month bills inthe regular weekly auction on February 19 rose to 2.85and 3.03percent, respectively.Prices of intermediate- and long-term Governmentsecurities declined at thebeginningof theyear, continuingthe trend of late 1961. The decline reflected optimismabout the domestic economy, prospects for increased de-fense spending,concernover thebalance of payments,anda related feeling that a less easy credit policy might beunder wayparticularly in view of the strong surge of

Out,lltt purthasu

Period

Outriijhtmiss

Treaturyhuh

FromIn fcrriqnmarket accolaitsCouponIssues

TrraemybillsTipIn tcrrimarket assowtts

Re.dimptionsCouponlouise

Reeuelioaeutrericnti

Put-ducesNetcfisr;e

January 2February21Febnuazy22March 2.8March 29May 2May 3June 6June 7July 25 July 26September26September27November 28November 29December 31

Total

361.2733.2649.6593.0853.7856.3

1,107.8156.1)

200.3101.2135.6124.1200.3323.6302.0

8.6

92.5452.7140.0599.5410.0315.6618.7327.4

697.1224.0260.0329.0

1,151.4679.5503.0

231.3222.673.3

321.1562.0573.3330.952.7

I77.0

160.0

63.0109J

5,417.0 1,395.7

234.1156.3

338.0496,4

36.3 1,150.5 229.0

359.4 706.2311.0 552.0114.8 1,346.210.7 1,097.0

1,352.6 6,115.33,016.4

497.5)444.4

1,129.5302.0706.2552.0

1,546.2755.0

93.33,844.0

.. 5766+ 593.5 768.8

'78.1 956.8 761.1+5,938.82,367.2 SIAS

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creditdemand inthe final weeksof 1961.Dcspite this bearish atmospherein thebondmarket theTreasury's cash offering in January of $1 billion 4 percent bonds of 1969 was accorded a reasonably good mar-ket reception. The 60 per cent allotment was somewhatlarger thanexpected, and the issue initially traded slightlybelow theTreasury's offering price. Butitsoon recovered,and the entire operation appeared to have little priceimpact on other outstanding Treasury issues.By the end of January, bondmarketexpectations beganto shift toward the view that significantincreases in inter-est rates were unlikely. The President's proposal of abalanced budget for fiscal 1963, the failure of the strongcredit demands that appeared in late 1962 to continue,and the weaknessin the stock market lent support to thoseviews. These expectations were reinforced in early Feb-mary as reports on several key economic indicators forJanuary raised doubts about the strength of the domesticeconomy. Although the immediate effectof these develop-ments on bond prices was muted by large-scale Treasuryrefunding operations in February, the increasinglyfavor-able outlook for the bond market contributed to the suc-cess of theoperations.The first of the refundings provided holders of $12billion of maturing issues the option of exchanging intoeither a 3 per centone-year certificateor a 4 percent4-year note. Holdingsby the publicthat is, holdingsby others than the Federal Reserve and Government in-vestment accountsamounted to $7 billion.Investor response was excellent. The public acquired$3.4 billion of certificates and $2.9 billion of notes, andattrition was only about 6 per cent of public holdings.

(The System exchanged its $4.8 billionof maturing issuesfor $3.3 billionof new certificatesand $1.5 billionofnewnotes.) The good demand for the 4-year notes high-lighted the attractivcncss of a 4 per cent returnpar-ticularly for commercial banks that were paying higherrates on time deposits.On February 15, the Trcasury announced an advancerefunding operation. Holders of nearly $19 billionof out-standing bonds, of which $17 billion was held by thepublic, could exchange into longer maturities at higheryiclds. This offering also won a favorable market recep-tion. Holders of $2.8 billion of 1964 and 1965 maturitiesexchanged intoa new 4 per cent bonddue in 1971, whileholdersof a 1965 issueexchanged into $563millionof thereopened 4 per centbonds of 1980. In addition, holdersof 2 per cent bonds of 1967-72 exchanged into $900million and $933 million of the 3 per cent bonds of1990 and 1998, respectively. In all, $5.2 billion of thesecuritieseligibleforexchangewasconverted.

By theend ofFebruary, aftera good deal ofdebtexten-sion had been accomplished, yields of long-term issueswere only slightly above end-of-1961 levels. The averageyield on long-term Treasury issueswas 4.08percent, com-pared with4.07 per cent at the end of 1961.Othersectors of the long-term capital market were morebuoyant in price than theTreasury bondmarketduringthefirst weeksof 1962,and this helped tomoderate thedown-wardprice tendenciesinthe Treasury market. Themarketin tax-exempt issues was particularly strong, reflectingheavy commercialbank buyingas banks sought toemploytheir rapidly rising time deposits profitably. New state andlocal issues totaled about $2 billion in January and Feb-ruary, or nearly half again as much as in the first twomonths of 1961. This enormous flow was absorbed at de-cliningrates of interest. Bythe end of February, Moody'syield index for Aaa-ratedtax-exempt issues was down to3.08 per cent from 3.31 percent at the end of 1961.The rise in corporate bond prices was less pronouncedthan for municipalsat the startof theyear, and therewassome decline in corporate bondprices in February. Never-theless, at the end of February, yields on corporate issueswere still a shade lower than at the end of 1961, with theaverage yield on Moody's Aaa corporate bonds at 4.42percentcompared with 4.44 percent two months earlier.corporate bond flotations aggregated $1.2 billion duringJanuary-February 1962, compared with $1 billion a yearearlier.

FEflRUARY.JVNE: RESERVE EXPANSION. After com-pleting the seasonal absorption of reserves during theopening weeks of the year, the System Open MarketAccount turned in late February to the more difficult taskofprovidingfunds to maintainan adequate level of reserveavailability for continued credit growth during a periodwhen Treasury bill rates were subject to persistent down-ward pressures. These pressures became particularly pro-nounced as the impact ofcontinuous investordemand wasreinforced by the psychologicaleffectsof three reductionsof percent each in theBritishbank rate thattookplacebetweenMarch 8 and April 26.System open market operations on balance providednearly $2 billion of reserves to the banking System overthe February 22-June 6 interval. The injectionofso largea volume of reserves without unduly depressing rates Inthe short-term area called for particular attention to thetechniquesand timingofoperations.Thus the Account Management sought to minimizepurchases of Treasury bills in the market and suppliedreserves whenever feasible by buying bills directly fromforeign accounts, by buying coupon securities, and by

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making short-term repurchase agreements. Purchases ofTreasury bills from foreign accounts amounted to about$360 million duringthe February 22 to June 6 interval,andpurchases of coupon securitiesto $1.2billion.In addi-tion, almost $1.9 billion of new repurchase agreementswasmade, and terminated,duringtheperiod.On occasions when these alternate avenues (or supply-ing reserves were not available anditwas necessaryto buyTreasury bills in themarket,theSystem generallyavoidedthe three-month area. Moreover, during the midmonthperiods, when reserves were temporarily provided by floatand othermarket factors, offsettingSystem sales were de-signed to have maximum impact on the three-month billrate. In addition to System sales of $813 millionof billsin the market during the February 22 to June 6 period,$617 millionof Treasury bills was sold directly to foreignaccounts, thereby avoiding the direct impact of these for-eign purchase orders onbill rates.The opening week of this interval (the week endedFebruary 28) proved to be difficultforSystem operations.Statistical indicators pointed to a sizable reserve need, butTreasury bill rates, after having risen in the auction onFebruary 19, were declining rapidly in response to astrong and broadly based demand; the three-month ratedropped 14 basis points to 2.66 per cent (bid) by Feb-ruary 26. With only limitedopportunities to supply fundsthrough purchases of coupon issuesor through repurchaseagreements, the System purchased almost $300 million ofTreasury bills in the market. In the latter part of thatweek, the Systemsold some bills in the three-month area,thus moderating the downward rate pressure still evidentin the market, and partially offset the reserve effect ofthese sales through purchases of coupon issuesby thenin largersupply. After this action, bill rates steadied andthen edged upward, with the three-month bill closingtheweek at 2.71 percent.The increased availabilityofcoupon securitiespersistedfor some time, enabling the System Account to meet agood portion of the reserve needsof succeeding weeksthrough purchases of these issues. Thus, from February22 through March 28, $453 million of reserveswas sup-plied through purchases of coupon issues, mostly maturingwithin one to three years. In addition. $496 million ofrepurchase agreements was arranged with Governmentsecurities dealers.

Treasury bill ratesheld within a narrow range from lateFebruary through March, with the three-monthrateusuallyat 2.70 to 2.75 per cent. The Treasury's announcementon March 8of an offeringof $1.8billionofSeptembertaxanticipation bills, coupled as itwaswith thenewsofa$60milliongoldoutflow in theweek ended March 7, helped to12

offset the psychological impact on bill rates of a percent reduction in the British bank rate. While theauctionof the tax bills on March 20 generated a good interest,dealers' positions were sharply increased as they receivednearly half of the issue. This increase in dealers' inven-tories enlarged the dealers' financing requirements andthus enabled theSystemto make greater use ofrepurchaseagreements in meeting subsequent reserve needs.Such needs increased sharply in late March and earlyApril becauseof a large decline in float and a sizablegoldoutflow. Although the System provided funds through re-purchase agreements and purchases of coupon issues, theneed for reserves also requiredsubstantial purchases ofTreasury bills in the market. The System again cushionedthe rate impact of this buying, however,by confiningpur-chases to shorter maturities, which were offered in thefirmer money market that developed around the end ofMarch. The three-month bill rate thus remained close toor above 2.70 percent through April and intoearly May.Meanwhile the spread between United States and Britishbill rates,afterallowingforCost of foreign exchange cover,reached 39 basis points in favorof the United Statesthewidestfor the yearfollowinganother per cent reduc-tion in the Britishbank rateon April 26.The Treasury was in the marketagain in early April torollover $2 billionof one-year bills maturing April 15, atan averagerate of 2.94percent. Thisoperation tended tokeep dealers' inventories ata high level. Thusthe Systemcould continue to rely heavilyon repurchase agreements inmeeting reserve needs over the balance of April and inearly May.Renewed downward pressures on short-term rates ap-peared in May as the money market turned easier. Anaccumulation of large Treasury deposits in commercialbanks contributed to a surplus of reservesin moneycenterbanks. Trading in Federal funds moved down from itsprevious range of 2 to 3 per cent to a rangeof2 to 2per cent on most days, and even lower on several daysin May.At the same time, the System again found it necessaryto meet a sizable portion of reserve needs through marketpurchases of bills. As this buying was superimposed onstrong demand from both bank and nonbank sources, thethree-month rate dropped to a low for the year of 2.63per cent (bid) on May 11. Then, although the additionsto the weekly auctions by the Treasury were increasedfrom $100millionto$200millionbeginningwith the June4 auction, the bill rate generally fluctuated between 2.64and 2.70percent through June 6. TheSystemwasabletoabsorb reserves in the week ended May 23. but sizableSystem purchases of Treasury bills were made duringthe

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two weeks ended June 6. These purchases were designedto offset reserve drainsstemmingfrommarket factorsandthus to help assure a steady supply of reserves after thesharpbreak in stockprices inlate May.Meanwhile, the prices of intermediate- and long-termobligationstended to move higher, particularly in the firstpart o the late February-early June pcroid. For Treasurynotes and bonds, this tendency was already developingtoward the end of February. Marketconfidence was re-inforced by the reductions in the British bank rate, byofficial statements indicating an improvement in the na-tion's balance of payments (over the poor figures for thefourth quarter of 1961), by the relativelynoninflationarylabor contractnegotiated in the steel industry in March,andbytheweaknessinthe stock market.By early April,prices of Treasury notes andbonds hadreached new high levels for the year, with yields on allTreasury issues below 3.95percent,and average yieldsonlong-termTreasury issuesat 3.87 per centcompared with4.14 percenton February 20. The Treasury's $1 billioncash offeringof 3 per centbonds of 1968 inearlyAprilwas consideredquiteattractive. Withsubscriptionsfor thenew issuetotaling $6.8billion,an allotmentofonly 15 percentwasmade,and thebonds quicklymovedtoapremiumquotation.The market reacted sharply after the newson April 11that most major steel companies had increased pricesadevelopment regarded in the market as possibly settingthe stagefora new roundof inflation. Bondpricedeclinesranged to about point following the announcement.These declines were quickly reversed when the steel com-panies, partlybecauseofcriticism from the Administration,rescinded the price increase. Indeed, expectations aboutbond prices appeared to be more buoyant after the steelprice episode than before. This reflected renewed con-fidence in theoutlook for over-all pricestability,and alsothe view of some market observers that the steel situationmight affect business sentiment and capital spending ad-versely, and thus affect credit demands and monetarypolicy.Thus the market background was favorable for theTreasury's May refunding. In this offering, holders ofclose to $12 billion of maturingsecurities$9billion heldby the publicwere given the opportunity to exchangeinto3 per centone-year certificates.3% percentTreas-ury notes maturing in February 1966, or 3 per centTreasury bonds maturing in November 1971. Despitesome initialdisappointmentthat a 4 per cent issuehad notbeen included in the offering, there was a strong investorand professional demand for the maturing rights. Theexchange was $6.7 billion for the certificates (including

the System's $2.2 billion holding), $3.1 billion for thenotes, and $1.2 billion for the bonds. Attrition on thepublic holdingsof rights wasonly 7 percent.Prices of new and outstanding issues continued to movehigher after the results of the financingwere announcedin early May. The already favorable outlook for bondprices, which reflected expectations of only a moderateeconomicexpansionand a continued policyof creditease,was reinforced during this period by further declinesin stock prices. By the second week of Ma)', mostintermediate- and long-term issues had reached new lowyields for the year; the average on long-term Treasurybonds was 3.84 per centthe lowest since June 1961.Toward the middle of May a technical reaction set infollowing the prolonged rise in Treasury bond prices.Demand tapered off at the price levels that had beenreached, and the market softened further because of in-creased offerings related to the settlement of the Mayrefunding. In addition, thedeteriorating situation in Laos,somewhat better news about the domestic economy, andreports of a fastergold outflow contributed to the heaviermarket atmosphere, as did the relatively congested stateof the corporate and municipal bond markets. Prices ofintermediate- and long-term Treasury issues thus movedlowerfromMay11 to May 21.LaterinMay,investment demandexpanded atthe lowerprice levels that had been reached, which enabled dealersto reduce their large inventoriesconsiderably. The bondmarketwas also strengthened in late May and early Juneby the accelerated decline in stock prices. However, ondays when the stock market had its worst sinking spells,bondprices also declined as some holders sold bonds hur-riedly inorderto raise funds tocover undermarginedstockpurchase accounts. Under the influence of these variousfactors, prices of Treasury issues edged irregularly higherfrom late May through mid-June, although prices failedto recover thehigh levelsofearlyMay.The markets in corporate and municipal bonds alsostrengthened after late February. Yields on tax-exemptissues reached a low of 2.92 per cent (Moody's Aaaindex) in earlyMay. As a record paceof offeringscon-tinued (averaging about $800 million monthly fromMarch through June) and demand began to taper off,dealers' inventoriesmountedand yields began to risefairlysharply in mid-May. The "Blue List" of dealers' adver-tised inventoriesrosetoa record $680millionon May 17and, although thevolume ofnew issues declined toward theend of June, yields continued to climb, with Moody'sindex for Aaa-rated municipal bonds reaching 3.09 percentby earlyJuly. The reception of most new issues wasvery goodfromlate February through March and April,

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but after mid-May bonds wcre sold partlyat concessionsfrom theiroriginal offering prices.Price movements in the corporate bond market werefairly narrow in comparison with those in the municipalsector. New bond sales were at a monthly average ofabout $800 million from March through June. Corporatebond yields moved lower from March through late May,with Moody's index for Aaa-rated corporate bonds de-cliningfrom 4.42 per cent at the end of February to 4.27percent on May21. Yieldsedged up only slightly to 4.29per centatthe end ofJune.JUNE-JULY: POLICY SHIFT TO SLICIITLYLESS EASE.System operations from June7 through July 25on balanceabsorbed about $770millionof reserves to offset seasonalfactors and, in the latter part of the interval, to helpachieve the moderately firm money market tonecalled forby the Open Market Committee's directive of June 19.Grosssales and redemptionsofTreasury bills totaled some

$2 billion during the period, including $1.2 billion ofTreasury bills sold in the market. Partly offsettingpar-chases of securities included $1.1 billion ofTreasury hills(of which $854 million was bought in the market) and$4t0millionof coupon securities. Tn addition, S706 mil-lion of new repurchase agreements was made and ter-minated to meet temporary reserve needs.With market factors supplyingreservesin theearlypartof the period, the System made heavy sales of Treasurbills to the market. The securities thus sold added to amarket supply already swollen by the return of securitiesto dealers from corporations with the approach of mid-June dividend and tax dates. The accompanying sharpincrease in dealer financingneedstended to converge onthe moneycenterbanks. Themoney market consequentlyfirmed, with Federal funds moving up to a 24 to 3 percent range.In addition to the increased market supply of bills andthehighercostsofdealerfinancing,market psychologywasadversely affected in late June by the announcement ofthe measures being takenby Canada to dealwith its inter-national payments problem. which served also to focusattention on the United States payments situation. Ascommercial bank and dealer offerings of bills expanded.while nonbank demand remained seasonally light,rates forTreasury bills moved sharply higher. The three-monthissue reached 2.90 per cent by the end of June, afterhaving moved ina 2.65to 2.70percent range inthe earlypart of the month.The System entered the market as a large buyer ofsecurities just before the July 4 holiday to offset thecom-bined month-end and holiday reserve drains. It met part14

of the reserve need through the purchase of $288 millionof coupon securities and by arranging $197 million ofrepurchase agreements. The System also purchased over$600 million of Treasury bills in the market.Despite these large purchases, short-term rates con-tinued to edge higher as a note of caution continued tocharacterize the market. This caution reflectednot onlyconcern over the balance of payments, but now also arelated concern about creditpolicy,as recent reserve statis-tics appeared to confirm market views that policy hadbecome somewhat less easy. Moreover, in the two weeksafter July 4, largeSystem sales of bills were made in themarket to absorb the post-holiday reflux of currency andto offset a midrnonth expansion of float. Finally, theTreasury continued to add $200 million to the regularweekly bill auctionsthrough Juneand July.and also rolledover $2 billionof one-year billsonJuly 10at an averagerate of 3.26 percent, up from 2.94 per cent in April.Rates on other bill issues movedup to theirhighest levelfor the year, with the three-month rate reaching 2.98 percent in mid-July. Bill rates declined toward the end ofJuly as investor demand strengthened again and as moder-ate System purchaseswere made. Thethree-month bill rate,however,did not fall below a 2.86 to 2.89per cent range.A heavier atmosphere also emerged in the market forTreasury notes and bonds aftermid-June. As in the short-term area, attitudes of market participants reflected wide-spread discussion of the persisting balance-of-paymentsproblem and the related prospect of a somewhat less easycredit policy to curb capital outflows. Moreover, manymarketobservers felt that, in view of the lack of vigor ofthe domesticeconomy,any move toward aless easy creditpolicy for balance-of-payments purposes was likely to beaccompaniedby a more expansive fiscalpolicy, leading tolarger budget deficitsand additional Treasury borrowing.In particular, there was widespreaddiscussionof thepos-sibilityofan immediatetaxcut.Demand for bonds slackened aftermid-June. Althoughliquidationofsecuritiesby investors wasnot heavy, dealerssought to lighten theirinventoriesby reducing prices. Onthe two days following newsof the Canadian balance-of-payments measures, prices fell by to I full point, andprices edged irregularly downward thereafter. By the endof July some issues were as much as 2 points belowearly June levels. Yields on most long-term Treasuryissues were above 4 per centonce again, with theaverageyield reaching 4.04 percent on July 31. The July 9 an-nouncement by the Board of Governors of the FederalReserve Systemof a reduction in margin requirements onstock purchaseshad little impact on the market forTreas-ury issues or for other fixed income securities.

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LATE JULY To LATE SEPTEMBER: OFFSETTINGSEA-SONAL FACTORS IN STEADY MONEY MARKET. Systemoperations from late July through late September alter-nateiy provided and absorbed reserves in response to sea-sonal forces. There was little net change in System hold-ings over the two-month interval, while operations weredesigned to preserve the money market atmosphere andmoderate expansion of the reserve base sought by theOpen Market Committee after mid-June. Market salesand redemptions of Treasury bills exceeded market pur-chases of these obligations by about $200 million duringthis period. The System also sold a net of $250 millionof bills to foreign accounts. These net sales and redemp-tions of bills were largely offsetby net purchasesof about$375 million of interest-bearing securities, in addition.$552 million of repurchase agreements was made andterminated within the period.The System supplied aboutSi billionof reservesin thctwo statement weeks ended August 8 to offset a sizableabsorption of reservesthrough market factors. Therewerefew offeringsof coupon securities to the Trading Deskthe bond market was just in the process of strengtheningand the low level of dealer fi.i:iancingneeds providedlittle opportunity to make repurchase agreements. Con-sequently, the System purchased $760 millionof Treasurybills in the market and another $226 million of bills fromforeignaccounts. At the same time, reserves tended to beconcentratedatmoneycenterbanks,andthemoneymarketwas slightly easier. This gave rise to commercial bankbuying that augmented nonbank demand for bills, andTreasury bill rates declined moderately in early August.Later in August, the distribution of reserves shifted infavor of country banks and a somewhat firmer tone re-emerged in the money market. This firmness increasedwhen the System sold or redeemed a net of about $270millionof bills during the weck ended August 22 to offseta midmonth expansion of reserves from market factors.The System reversed direction in late August and earlySeptember to meet large seasonal reserve needs aroundLabor Day. These reserves were provided mainly throughpurchases of $266 million of coupon securitiesduring thetwo weeks ended September 5 and through making re-purchase agreements.With System purchases of bills thus minimal, bill ratesmoved irregularly alter the declines of early August de-spite the persistence of generally good investor demand.Rates then rose slightly in early Septenther, when cor-porate demand contracted with the approach of the mid-Septembertax anddividend dates.System sales and redemptionsof Treasury bills duringthe three weeks ended September 26 amounted to $1.2II

billion, as the post-Labor Day reflux of funds wasaugmented by an exceptionally large midmonthexpansionin float. Some repurchase agreements were made duringthis period, however, when the New York banks cameunder strong reserve pressures as a result of heavy dealerborrowings. After the September dividend and tax datesthese repurchase agreementsterminated. The Systemthenmoved to absorb funds more actively as reserve avail-ability frequently turned out to be higher than anticipatedand bill rates came underrenewed downward pressure.These downwardpressuresonbill rates persisteddespitethe fixmness of themoneymarketin whichFederal fundstraded at 3 percen during most of September. The de-mand for bills was enlarged by investors purchasing billsalter selling rights to the Treasury's September prerefund-ing, and by a resurgenceof outright nonbank investmentbuying. Another SOUCC of strength to the bill market inSeptemberwas thegenerally optimistictone of discussionsaround the time of theannual meeting of the InternationalRank and the International Monetary Fund regardingprospects for the United States balance of payments.Dealers consequently bid aggressivelyfor new bills inthe weekly auctions, particularly for the attractive Decem-ber maturities. The Treasury's offering of $3 billion ofMarch tax anticipation bills or: September 26 was stronglybid for and sold atan average issuingrate of2.62percent,as commercial banks sought to gain the accompanyingTax and Loandeposits.As to capital market developments in the late July-September period, after two months of increase in long-terni yields the Treasury announced on July 26 the termsof acash financingto refund $7.5billionofAugust maturi-ties and to raise about $1 billion of new money. Publicholdings of the maturing issues were about $3.7 billion.Three issues were offered, including $6.5 billion of 3per cent one-year ccriificaies, S1.5 billion of 4 pcr centbonds of February 1969, and "up to $750million"of 4per cent bonds of 1987-92. Except for the 4 per centbond, interest in the new issues was excellent. In factthe reaction to the offering seemed to be a turning pointin market psychology as a feeling grew that the recentupward yield adjustments might have been overdone. Theallotmentsof only 12 per centand 22 percent on sub-scriptions for the new 3 and 4 percent issues, respec-tively, proved to be even smaller than had been expected,and tended further to strengthenthe market.Public subscriptions for the 41/4 per cent bond wereonly $316 million. While there had been no expectationthat the public would want as much as $750 million, therelativelysmall volumeof subscriptionswas disappointing.However, rather than interpreting this result as a sign of

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weak demandforlong-term bonds, a number ofobserversascribed it to other factors. These factors included theinability of some long-term investors to reach a decisionin the shortspace of time provided, and the relativelynar-rowyicldspread between the 1969 and 1992 issues.The stronger market generated bythe successfulfinanc-ing operation was reinforced during August by the Presi-dent's decisionnot to request animmediate tax cutandbythe simultaneousimprovementin thecorporateand munic-ipal bond markets. Some further impetus was providedby the Treasury's announcement on August 13 that itwouldcall forredemption,on December 15,$1.5billionof2 per cent partially tax-exempt bonds of 1960-65, amove which was interpreted by the market as indicatingTreasury confidence that yields wouldgo no higher in themonths just ahead. Price gains for the month of Augustranged to as much as 2 points, and theaverage yieldonlong-term Treasury bonds receded by 10 basis points fromthe end-of-July high point to 3.94per cent in late August.

The strength in the bondmarketcontinued intoSeptem-ber, providing a favorable atmosphere for the Treasury'sprerefunding in that month. In this offering, holders ofsix issues ($19 billion of public holdings) maturing inFebruary andMay 1963 could exchangeup to $9 billionof these securities for a 3 per cent note maturing inAugust 1967 or a 4 per cent bond maturing in August1972. The offering was well received with little net pricereaction in the market and with a substantial$7.5 billionof the eligiblematurities exchangedfor thenew issues.Prices continued to edge higher over the rest of Sep-tembcr, withonly temporary hesitancyfollowingtheTreas-ury's announcement that it was considering an experi-mentalofferingof $250millionof long-termbonds throughcompetitive bidding by underwriting syndicates and thenews that the American Telephone and Telegraph Com-pany would offer $250 million of long-term bonds in lateOctober. A continued upward stimulus to bond priceswas pmvided by the international financial meetings inWashington, with their aura of optimism regarding theUnited States balance of payments. Moreover, continueduncertainty regarding the business outlook caused someobservers to suggestthat the next shift in monetary policymight betowardgreater ease.By the endofSeptemberthe average yield on long-termTreasury issues was 3.92percent,compared with4.04 percent in late July. The new 4 per cent bonds, whichhad elicited only limited interest when offered two monthsearlier at a priceof 101 to yield 4.19 per cent,were trad-ing at about 102, equivalentto a yieldof4.08 percentto maturity.The markets for corporate and municipal bonds also16

strengthened during August and September, influencedbymany of the same factors that acted upon the Treasumarket. The calling for redemption of the 2 per centpartially tax-exempt Treasury bonds had a particularlybullishimpact in the municipalmarket, wherea good partof the reinvestment demand by holders of thecalled bondswas expected to center. In addition, the volume of newcorporate and municipal bondofferingsdeclined by abouta third in the third quarter, to about $1.9 billion of cor-porateand $1.6 billion of municipal flotations. A steadydemand was evident through the period and new issueswere generally well received. By the end of SeptemberMoody's indexes on high-grade corporate and municipalobligations were down to 4.31 and 3.00 per cent, 6 and15 basis points, respectively,below the inidsummcr highlevels, although still above the levels reached in May.OCTOBER-NOVEMRER: SEASONAL PROVISION OF RE-

SERVES IN PERIOD OF INTERNATIONALCRISIS. By lateSeptember, the System turned to meeting the seasonal re-serve needs that develop as the economy moves into thetypical fourth-quarter rise in activity.Openmarketopera-tionson balancesupplied about $1 billionof reserves fromSeptember 27 through November 28. In addition, thereduction in reserve requirements against time and savingsdeposits, effective October 25 for reserve city banks andon November 1 for country banks, released an estimated$780 million of additional reserves. This reduced theSystem'sneed to purchasesecuritiesandthereby minimizeddownward pressures on short-term ratesbecause a goodpart of the securities that it would otherwise have beennecessary to purchase would have had to be short-termissues, if distorting effects on long-term markets were tobe avoided. Apart from the first week of the period, whenSystem purchases of Treasury bills totaled $1.1 billion,there was no further need to buy bills inthe market.The balance of the reserve need was supplied throughthe purchase of $619 million of coupon issues, through$1.5 billion of repurchase agreements, and through pur-chasesof $302millionofbillsfrom foreignaccounts. Salesand redemptions of Treasury bills during the periodamounted to about SI billion, so that on balance theseasonal provisionof reserves was accomplishedwith onlya moderate rise inSystembill holdings.The Cuban crisis, at its height from October 23 untilearly November, did not require any unusual responsesin terms of open market operations as the market reactedto the tense situation with remarkable calmness.The Sys-tem maintained as steady a posture as possible in themarket, looking both to the continued normal functioningof the economy and to the atmosphere surrounding theo

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Treasury's November refunding operation, the terms ofwhichhad to be decided in the midst of thecrisis.The largest System operations during the October-November interval were undertaken in the statement weekended October 3, whenan all-timeweeklyrecord ofalmost$1.5 billion of Treasury securities was purchased tocounteract a precipitousdecline in float from itsprolongedhigh level in Septemberand to offset reserve losses stem-ming from other market factors. In spitc of thisenormousinjection of reserves, which included market purchasesof over $1.1 billion of Treasury bills, there was only asmall decline in bill rates as dealers sold bills willinglyout of their large inventories.To some extent, impact onthree-month bill rates was moderated by avoiding pur-chases in that maturity area. Moreover, the Treasury of-fered an additional $500 million of one-year bills in theauction on October 9, selling $2.5 billionof new bills toreplace $2 billion of bills maturing October 15.During the next three statement weeks in October theSystem sold or redeemed $750 million of Treasury billsto oliset reserve gains through market factors. Reserveneeds over thebalanceof theperiod through November 28were met by purchases of $306 millionof coupon issues,by purchasing$242millionof bills from foreign accounts,and through an extensive use of repurchase agreements(amountingto about $1,260million during the fourweeksended November 21). The availabilityof these alternatemeans of supplyingreserves was particularly usefulduringthe first week of November, when concern over the levelof bill rates heightenedas the covered rate advantage ofUnited Kingdom Treasury bills over United States Treas-ury bills exceeded 70 basis pointsthe widest spread ofthe year. On someoccasionsduring November,theSystemsold bills to moderate downwardpressureon bill rates, andoffset the rcscrvc impact of such sales by purchases ofcoupon issues. Coupon issues were readilyavailable in thisperiod because dealers were attemptingto lighten the rela-tivelylarge inventoriestheyhad builtup during theTreas-ury's November refunding.While flexibility in the conduct of open market opera-tions was thus afforded by the ability to provide reserveswithout resortto the Treasury bill market, System opera-tions both in October and November were complicatedbythe erratic behavior of market factors affecting reserves.At times these departed substantiallyfrom seasonal norms.In the latterpart of the interval, theconduct ofoperationswas further complicated by uncertainties regarding theextent to which member banksespecially country bankswould use the funds gained through the reduction in re-serve requirementsagainst their time and savings deposits.As it worked out, the money market remained quite

steady in October and Novembermoderately firm butwithout significant strain., as Federal funds traded con-sistently in a 234 to 3 percent range. It temporarily be-came somewhatfirmer in mid-October as dealerborrowingneeds, which were increased in connection with the pay-ment for the new one-year bills, convergedon New YorkCity banks.The release of funds to reserve city banks on October25 through the reduction in reserve requirements tempo-rarily eased the positions of money center banks, butFederal funds traded mainly at 3 percent after November1. While the level of freereserves was somewhathigher inNovember than in October, reserve availability tended tobe concentrated at country banks followingthe reductionin their reserve requirements. Moreover, heavy churningdeveloped in the money market around the midmonthsettlement date for the Treasury's November refunding.Therewas no undue tightness,however, andcountry-wideborrowingfrom the System remained moderate.In the Treasury bill market, the three-month rate de-clined only slightly at the start of October despite theSystem's huge purchases, and the rate held within a 2.69to 2.77 percent range throughout October. As had beentrue earlier in the year, an expanded demand for longermaturities resulted in narrowing thespreadbetween three-and six-monthbills, at times to only a few basis points.Theauctionofone-year bills in October attracted stronginterest despite the fact that the Treasury raised an extra$500 million in the operation. The average issuing ratewas 2.97 per cent, compared with 3.26 per cent in theJuly auction of one-year bills, when the amount was only$2 bfflion. By the endofOctober,three-andsix-monthbills

were quoted at 2.72 and 2.80 per centbid, respectively.Although the three-month rate was little changedfrom thelevel at the start of the month,it appeared low in relationto competitive rates abroad. I...argely reflectinga declinein the cost of forward cover in the foreignexchange mar-ket, United Kingdom Treasury bills at the end of Octoberprovided a covered yield advantage of more than 70basis points over United States bills.It waspartlythis factor that prompted theTreasury, inraising money in early November, to choose the deviceofa stripof $1 billionofbills. In theoperation, theTreasuryadded $100 million to each of ten outstandingbill issuesmaturingfrom January 17 through March21, 1963. Com-mercial banks were not permitted to make paymentsthrough credits to Treasury Tax and Loan Accounts.As expected, there was a strong initial rate reaction tothe Treasury's announcement. The market saw the movenot only as a means of adding to the supply of bills in amanner that tends to have maximum upward impact on17

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ratesbutalso asan indicationofcontinuedofficial concernovershort-term rates.System salesofTreasuty billson thedayafterthe announcementof thebillstriptended torein-force this belief. The outstandingthree-monthTreasurybill ratejumpedfrom 2.72 per cent to 2.83 per cent fol-lowing the news,but then heldsteadyasdemand expandedat the higher rate level. The auction of the strip of billson November 7 attracted a good interest at an averageissuing rate of 2.87 per cent, and rates edged downwardafter the auction. Before any significantdecline occurred,however, the Treasury moved to increase its additions inthe regular weeklybill auction from $100 millionto $200million in the final two weeksof November.OnNovember26, three- and six-month bills were auctioned at rates of2.85 and 2.94 per cent, respectively, 17 and 16 basispointsabove the late October levels.In the long-term bond market, underlying confidencein the outlook for stable or slightly lower interest ratesremained in evidence throughout October and into earlyNovember. This confidence was based on persisting evi-dence of sluggishness in domestic economic conditions,coupled with a belief in the market that reasonably goodprogress was being made with the balance of payments.There was a continuing investment demand, augmentedby purchases of dealers who sought toexpandtheirinven-tories in expectation of further demand. The marketalsoderiveda temporary boost from theOctober 18 announce-ment of a I per cent reduction in reserve requirementsagainst member bank time and savings deposits, whichsome press reports interpreted as a move toward an easiercreditpolicy.All of these influenceswere overshadowedon Monday,October 22, and for several days thereafter, by the Cubancrisisa period in which the market's behavior was im-pressively calm. Inevitably there was a downward priceadjustment, hut investorsellingof sccuriticswas very lightand the pricemarkdownswcrcminimal.The$250millionAmericanTelephoneandTelegraph issue was bid for onOctober 23, the day after the President's urgent Cubanmessage, and was successfullysold at a 4.30 percent re-offering yieldonly slightly above the yield expectedbefore thecrisis.This performance gave aliftto thewholemarket. Investor demand soon expanded again at theslightly lower price levels that haddeveloped, and withina few days a confident tone had returned to the market.In the crisis atmosphere of late October, the Treasuryfaced unusual difficulties in setting terms forits $1I billionNovember refunding, including also $3.8 billion of issuesmaturingorcalled for December 15. Holdersofthematur-ing or called issues were given a choice of a 3 percentone-year certificate,a 3 percent notematuring Novem-18

ber1965,ora4 percentbond dueinFebruary 1972.The market's response was favorable, particularly forthe two longer issues, as the crisis atmosphere began towane. Of the public holdingsof $7.2 billionof the rights,$3.3 billion was exchanged for the 3 per cent notes,$2.3 billion for the 4 percent bonds, and only about $1billion for thecertificates. Attrition amounted to about 7per cent. System holdings of $3.7 billion of rights wereexchanged for thecertificate.After the successful refunding, prices of intermediate-and long-term Treasury securities continued to movehigher, with several issues reaching new 1962 highs. Theaverage yield on long-term Treasury bonds declined to3.85 percent by November 919 basis points belowtheend-of-July level and close to the May low point.As mid-November approached, the intermediate- andlong-termsectorsof the Treasury market began to experi-ence the lessening of demand that was already pushingshort-term yields somewhathigher. Market confidencewasreduced by the emergenceof a more optimistic appraisalof theeconomicoutlookhighlighted by areboundingstockmarket, by concern over the budget impact of a widelydiscussedtaxcut,andby renewedconcern over thebalanceof payments as disappointing third-quarter results becameknown.Dealersconsequentlysought to reduce inventorieswhichhad been swollen by substantialholdingsof theNovemberrefunding issues, and in addition some investor sellingappeared with thc approach of the November 15 settle-ment date for that refunding. The price declines weremoderated by a continuing demand, however, includingsizable System purchases and a large volumeof maturity-lengthening swaps undertaken by banks and other inves-tors. Under these influences, the market steadied in lateNovember.

DECEMBER; A FURTHER SLIGHT SIHIF TOWARD ALESS EAST POLICY. System open marketoperations sup-plied some $760 million of reserves to the market in theperiod from November 29 through December 31. Onceagain the System was able to meet the largest portionofthese needs without resort to the Treasury bill market.In fact., market purchases ofbills were undertaken on onlyone day, December 7, when purchases totaled $256 mil-lion. Gross purchases of coupon issues amounted to $327million, including $15 million of bonds maturing in overtenyears.About$1.1 billionof new repurchase agreementswas made during the period, of which $342 million wasouts