ECONOMIC

However, steps were taken to keep credit expansion within bounds. Thesupply of reserves through open market operations was kept at a level wherecommercial banks had to borrow heavily from the Federal Reserve discountwindow to acquire additional reserves. The Federal funds rate, a goodbarometer of money market conditions, rose to about 11 percent in Septemberfrom about 5/ 2 percent at the beginning of the year.Marginal reserve requirements on large CD's and on bank-related commercialpaper were also raised from 5 to 8 percent in May to increase theeffective cost of raising funds. As loans financed through large CD's continuedto accelerate, these marginal reserve requirements were raised againin September, this time to 11 percent. The new regulation meant an additional$465 million in required reserves for the banking system. Commercialbanks raised the prime lending rate to a record 10 percent in response to thehigher effective cost of large CD's and strong credit demand. The volumeof large CD's outstanding declined from $67 billion in August to about $63billion in December. The rapid rise of business loans at commercial bankscame to an end. As a result, there occurred in September and October asignificant rise in business borrowing by means of the placement of commercialpaper by dealers in the market.Recognizing these developments, the Federal Reserve Board lowered themarginal reserve requirement on large CD's and bank-related commercialpaper from 11 to 8 percent in December. The move lowered the effectivecost to banks of obtaining additional funds through the sale of large CD'sand bank-related commercial paper and prevented short-term interest ratesfrom rising even higher.Long-Term FinancingLong-term financing by corporations was lighter in 1973 than in 1972but showed a substantial increase in the final quarter (Table 19). Thereduction was partly a reflection of the large rise in internally generatedfunds. In the first 3 quarters of 1973 corporate profits after taxes plus capitalconsumption allowances were on average 16 percent greater than theannual average for 1972. Along with rising long-term rates, this contributedto the decline in bond market activity, while declining stock prices madefinancing through equity issues less attractive.With the rise in profits slowing down after midyear, and with requirementsfor new capacity continuing to increase, scheduled new bond offeringsrose substantially in the fourth quarter. These upward pressures on interestrates were counterbalanced when investors attempted to reshuffle theirportfolios in favor of longer-term securities in response to declining shorttermrates.Mortgage MarketsDuring the first 3 quarters of 1973 the sharp increase in short-term openmarket rates and the gap between those rates and yields on most types of85