Open Market Operations During 1989 - Federal Reserve Bank of New York

MONETARY POLICY AND

OPEN MARKET OPERATIONS DURING 1989

A Report prepared for the Federal Open Market Committee by the Open Market Group

of the Federal Reserve Bank of New York, March 1990

THE 1989 ANNUAL REPORT OF THE SYSTEM OPEN MARKET ACCOUNT MANAGEMENT Monetary Policy and Open Market Operations in 1989 TABLE OF CONTENTS

I. Overview

Page 1

II. The Economy

4

III. Domestic Financial Markets

8

IV. The Monetary Aggregates

25

V. Policy Implementation

33

APPENDIX A - BANK RESERVES AND SYSTEM PORTFOLIO

A-1

APPENDIX B - SUMMARY OF POLICY GUIDES AND ACTIONS

B-l

APPENDIX C - CUSTOMER TRANSACTIONS AT THE TRADING DESK

C-l

APPENDIX D - DEALER SURVEILLANCE

D-1

APPENDIX E - STATISTICAL SUMMARY

Operations in United States Government Securities and

Federal Agency Securities

E-l

System Account Transactions - by Dealers - 1989

E-2

Temporary Transactions in U.S. Government and Federal

Agency Securities - with Dealers - 1989

E-3

U.S. Government and Federal Agency

Security Holdings in System Open Market Account

E-4

Holdings of Treasury Bills by the System Open

Market Account

E-8

Participation in the System Open Market Account

E-9

System Account Earnings

E-9

Market Value of Portfolio

E-10

Repurchase Agreements Against U.S. Government

and Federal Agency Securities-Federal Reserve Bank

of New York

E-ll

ii TABLE OF CONTENTS (Cont'd)

Matched Transactions System Open Market Account Customer-Related Transactions

Page

E-ll E-11

APPENDIX F - ORGANIZATION

Organization of, and Assignment of Responsibility

Within, the Open Market Group of

the Federal Reserve Bank of New York

F-l

APPENDIX G - BUDGET

Expense and Budget Data Relating to Open Market Group

Federal Reserve Bank of New York

G-1

CHARTS*

1

Long-term and Short-term Interest Rates

9

2

Change in Nonfarm Payroll Employment

12

3

Yield Curves for Selected U.S. Treasury Securities

15

4

Yield Spreads

20

5

M2: Levels and Targets

26

M3: Levels and Targets

Total Domestic Nonfinancial Debt: Levels and

Monitoring Ranges

Ml: Levels and Growth Rates

6

M2 Velocity Growth

32

M3 Velocity Growth

Total Domestic Nonfinancial Debt Velocity Growth

Ml Velocity Growth

7

Borrowing and Federal funds-Discount Rate Spread

40

8

Seasonal Borrowing

41

Federal Reserve Bank of New York Open Market Group

F-2

* Explanatory notes to charts appear on pages iv - vi

iii

TABLE OF CONTENTS (Cont'd)

TABLES

I Specifications from Directives of the

Federal Open Market Committee and Related Information

II Reserve Levels

A-1 Bank Reserves

A-2 System Portfolio: Summary of Holdings

A-3 System Portfolio of Treasury and Agency Securities

A-4 System Outright Operations

A-5 System Temporary Transactions A-6 Federal Reserve Lending of Treasury Securities

to Primary Dealers

A-7 Dollar Volume of Transactions Executed by Trading Desk 1989 and 1988

C-1 Dollar Volume of Transactions for Accounts Other Than System

C-2 Dollar Volume of Transactions in 1989 by Type of Issue

C-3 Securities Held by the Federal Reserve Bank of New York for Foreign and International

Accounts

C-4 Dollar Volume of Transactions in 1989 by Dealers and Brokers on Behalf of Customers of the Federal Reserve

C-5 Number of Transactions Processed for Customer Accounts

G-1 Expenses and Budgets for Open Market Group

Page

36 38 A-3 A-5 A-6 A-7 A-10 A-11 A-13 C-2 C-2

C-5

C-7 C-8 G-2

Chart 1:

Chart 2: Chart 3: Chart 4: Chart 5:

Notes to Cha cs

LONG-TERM AND SHORT-TERM INTEREST RATES LONG-TERM INTEREST RATES

Yields are weekly values of Moody's indexes of Aaa-rated corporate and municipal bond yields. The bonds used to derive the indexes have average maturities of 20 years. The two-year Treasury note and 30-year Treasury bond yields are constant maturity values.

SHORT-TERM INTEREST RATES

Three-month Treasury bill rates are bank discount rates in the secondary market (Wednesday weekly averages). Federal Reserve discount rates are those in effect on Wednesdays. Commercial paper rates are weekly averages of 90-day rates.

CHANGE IN NONFARM PAYROLL EMPLOYMENT

The top panel shows the change in total nonfarm payroll employment. Data are seasonally adjusted and reported in the monthly payroll employment survey of the U.S. Bureau of Labor Statistics. The manufacturing component is shown in the bottom panel.

YIELD CURVES FOR SELECTED U.S. TREASURY SECURITIES

Yields on issues due within one year are bond-equivalent yields on Treasury bills, based on offered prices. Longer maturity yields are constant maturity values.

YIELD SPREADS

The top panel shows the spreads between Donaldson, Lufkin & Jenrette's index of yields on actively traded, high-yield issues and their index of yields on Treasury securities with seven years to maturity (Friday observations).

The bottom panel presents the spreads between Moody's Aaa-rated corporate bond index and the ten-year Treasury constant maturities index, and those between Moody's Aaa-rated municipal bond index and the ten-year Treasury constant maturities index (Wednesday weekly averages).

M2: LEVELS AND TARGETS

M2 consists of Ml, overnight (and continuing contract) repurchase agreements (RPs) issued by all depository institutions and overnight Eurodollars issued to U.S. residents by foreign branches of U.S. banks worldwide, money market deposit accounts, savings and small denomination time deposits, and balances in both taxable and tax-exempt general purpose and broker/dealer money market mutual funds. Excludes individual

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