Open market operations during 1997.

This article is adapted from a report to the Federal Open Market Committee by Peter R. Fisher, Executive Vice President of the Federal Reserve Bank of New York and Manager of the System Open Market Account. Virginia Cheng, Spence Hilton, and Ted Tulpan were primarily responsible for the preparation of this report. Many other members of the Markets Group assisted in the preparation; Annemarie Gemma and David Parseghian provided invaluable research support.

IMPLEMENTATION OF MONETARY POLICY IN 1997

Operating Procedures and Practices

In 1997 the Trading Desk (Desk) at the Federal Reserve Bank of New York managed reserve conditions with the objective of maintaining the federal funds rate around the level desired by the Federal Open Market Committee. The FOMC tightened monetary policy at its March meeting, raising the intended federal funds rate from 5 1/4 percent to 5 1/2 percent, the level at which it was held over the remainder of the year (table 1). There was no associated change in the discount rate.

1. Federal Open Market Committee meeting dates and policy rates, December 17, 1996-December 16, 1997

                   Expected
                   federal funds   Discount rate
Date of meeting    rate            (percent)
                   (percent)

12/17/96               5.25            5.00
2/4 to 2/5/97          5.25            5.00
3/25/77                5.50            5.00
5/20/97                5.50            5.00
7/1 to 7/2             5.50            5.00
8/19/97                5.50            5.00
9/30/97                5.50            5.00
11/12/97               5.50            5.00
2/16/97                5.50            5.00

The Committee's directives instruct the Desk to maintain the federal funds rate on average around a specified level. Open market operations are used to provide a level of nonborrowed reserves that will allow the federal funds market to clear at the indicated rate. Each day, the Desk aims to keep the rate as close as possible to the targeted level with a minimum of volatility. But in deciding each day's operations, the Desk also considers how its flexibility for arranging operations in upcoming days might be affected by that day's course of action as well as how the behavior of the funds rate that day might influence rates in subsequent days.

At the start of each two-week maintenance period, a strategy for meeting reserve needs is developed that is consistent with the estimated demand for excess reserves and the expected reserve supply arising from discount window borrowing. These estimates are captured in the Desk's allowances for excess and borrowed reserves made each period.(1) The reserve management strategy also depends on the estimated daily pattern of reserve supply and demand. The approach must be flexible enough to allow for the inevitable revisions to the reserve estimates, and as a period unfolds, the Desk will also respond to the observed behavior of the federal funds rate, which may prompt some reassessment of daily or period needs. Each morning, this process of developing a strategy both for the day and for the remainder of the maintenance period is repeated.

In deciding on open market operations each day, the Desk takes account of the estimates of reserve supply; any special factors that may raise or lower the need for excess reserves, such as high or uncertain payment flows; cumulative excess holdings to that point in the period; the number of days remaining until the settlement day; and the risks seen in the reserve estimates. If the federal funds rate is trading away from its desired level at the time of the operation, the Desk may adjust the daily level of excess reserves it aims to provide to contain pressures in the financing markets and to steer the rate back toward its desired level in later trading. Responding inadequately to current rate pressures increases the likelihood that these pressures will become self-reinforcing and influence rates in upcoming days. The Desk also attempts to anticipate how the rate would trade over the entire day and recognizes that providing high or low levels of excess reserves could lead to elevated volatility.

Several changes were made to the Desk's usual operating practices during 1997. At the start of the year, the normal entry time for temporary operations was advanced one hour, to shortly after 10:30 a.m., and the par value of all accepted propositions on each market operation began being announced shortly after selections were completed. Over the year, the different tranches comprising a coupon pass were spread over longer periods of time. In November, the Desk also began making public each morning the standard deviation measuring the volatility of the federal funds rate on all trades arranged the previous day by the brokers surveyed by the Markets Group.(2)

Sweep Programs

The value of retail deposits affected by sweep programs continued to grow in 1997, further reducing the level of reserve balances maintained at the Federal Reserve Banks. In 1997, deposits initially affected by new or expanded sweep programs totaled $85 billion, bringing the cumulative value of these programs since their inception in 1994 to $252 billion (chart 1).(3) The increase in 1997 was less than the previous year's rise, which reflected a slowing in the spread of sweeps on NOW accounts. A larger proportion of the new programs implemented in 1997 was applied to retail demand deposits. New sweeps in 1997 more than explain the total drop of $3.2 billion in reserve requirements over the year (chart 2).

[CHARTS 1 & 2 OMITTED]

Required operating balances--which include the balances that banks must hold to meet clearing balance requirements and reserve requirements but exclude applied vault cash--fell somewhat less than required reserves, about $2.7 billion, reflecting a slight increase in the level of required clearing balances and a small drop in applied vault cash.(4) The rise in clearing balances was minor because many banks had already increased these balances to the maximum level warranted by their use of Federal Reserve priced services.(5) The decrease in applied vault cash was accompanied by an even greater drop in total vault cash, which includes surplus vault cash. Many banks that now have no required reserve balances have explored ways to economize on their vault cash holdings to minimize the opportunity cost associated with their surplus vault cash.

PERMANENT ACTIVITY FOR THE SYSTEM OPEN MARKET ACCOUNT

In 1997 the portfolio of domestic securities in the System Open Market Account (SOMA) expanded by a record $41 billion (excluding all temporary operations), ending the year at $448 billion (chart 3). Outright purchases of Treasury securities totaled $44 billion, offset to a small degree by redemptions of some Treasury and federal agency issues. The growth in the portfolio during 1997 was significantly higher than the $15 billion increase recorded in the preceding year. Movements in operating factors and reserve demands were important determinants of the size of the portfolio's expansion, but the shifts in strategies used by the Desk to address seasonal reserve shortages before year-end in each of the past two years also contributed to the increased level of purchases in 1997.

[CHART 3 OMITTED]

Reserve Patterns

Currency in circulation rose $31 billion from year-end to year-end and was the reserve factor that created the greatest need for a permanent expansion of the portfolio in 1997 (table 2).(6) Apart from the foreign repurchase agreement (RP) pool, which rose $3 billion, other factors affecting nonborrowed reserve supply did not change significantly on balance over the year. The decline in reserve requirements brought on by the further expansion of sweep accounts moderated the need for a permanent expansion of the portfolio. Currency growth was greater in 1997 than in 1996, although the absolute decline in reserve requirements was less. Altogether, movements in nonborrowed reserve factors and required reserves deepened underlying reserve shortages about $13 billion more in 1997 than in the previous year.

2. Required reserves and factors affecting nonborrowed reserves

                       Levels in maintenance
                       period ending

Item                     1/3/96      1/1/97    12/31/97

Required reserves          57.3        50.6        47.4

Factors affecting
nonborrowed reserves
Currency in
  circulation             423.4       448.1       479.4
Foreign currency           16.4        16.2        16.6
Foreign repurchase
  agreement pool           12.5        14.0        17.0
Gold and foreign
  deposits                 21.0        20.6        20.1
Float and
  float-related, as-
  of adjustments            1.0         2.0          .9
Treasury balance            6.7         6.0         4.9
Applied vault cash         37.4        38.1        37.7
Required clearing
  balances                  5.2         6.6         6.7
All other items            25.5        24.3        23.2
Net changes in              ...         ...         ...
  nonborrowed
  factors

Outstanding RPs
Par value                  11.4        16.3        10.1
Premium                      .7         1.4          .5

Item                     Changes(1)
                        1996     1997

Required reserves       -6.7     -3.2

Factors affecting
nonborrowed reserves
Currency in
  circulation          -24.7    -31.3
Foreign currency         -.2       .4
Foreign repurchase
  agreement pool        -1.5     -3.0
Gold and foreign
  deposits               -.4      -.5
Float and
  float-related, as-
  of adjustments         1.0     -1.2
Treasury balance          .7      1.1
Applied vault cash        .7       .4
Required clearing
  balances              -1.4      -.1
All other items         -1.2     -1.1
Net changes in
  nonborrowed
  factors              -27.0    -36.3

Outstanding RPs
Par value                4.9     -6.2
Premium                   .6       .8

(1.) Changes in factors affecting nonborrowed reserves are expressed in terms of the effect on reserve supply.

Impact of Year-End Reserve Management Strategies

Shifts in the Desk's year-end reserve management strategies also help explain why the total increase in the portfolio last year was so much larger than in the preceding year. As explained in last year's annual report, the Desk conducted relatively few outright purchases late in 1996 in order to place itself in a position of needing to add, rather than drain, reserves on a temporary basis when required reserve balances reached their seasonal low in early 1997. A relatively modest level of outright purchases made in late 1996 left a reserve shortage of nearly $16 billion in the maintenance period covering the 1996 year-end that was addressed with temporary RPs--about $5 billion more than was used to address shortages over the preceding year-end period.(7) After the seasonal low passed in early 1997 and as reserve needs began to grow again, the Desk bought nearly $6 billion of coupons outright in the market in the first quarter, adding relatively more on a permanent basis than is usually the case at this time of year and returning the underlying needs to more typical levels.

In planning for the lows in operating balances in early 1998, the Desk felt that this interval could be addressed with either moderate add or drain needs, given the banking system's successful management with declining reserve balances over the past year. Thus, its approach to the year-end buildup in reserve needs in 1997 was more typical to that of earlier years: The reserve shortage over the year-end maintenance period was reduced to about $10 billion through purchases of $19 billion of Treasury coupons and bills in the final two months of the year.

Outright Transactions Techniques

Most of the expansion of the portfolio was achieved by arranging outright purchases in the market (chart 4). However, nearly $3.6 billion of bills were purchased directly from foreign accounts, compared with only $88 million in 1996. The Desk bought most of these--$3 billion--on two separate occasions in December. The second of these purchases, totaling $2 billion, was made late in the month. This purchase further reduced temporary reserve shortages around the year-end, but the reserve effect was not long lasting because the Desk chose to purchase Treasury bills that matured in January and to redeem them at maturity.

[CHART 4 OMITTED]

The Desk continued to break out its purchases of coupon securities into separate tranches covering different portions of the yield curve. In late 1996, the SOMA Manager informed the FOMC and the primary dealers that coupon purchases might be spread over several weeks. Previously the tranches making up a pass had been more concentrated, generally falling within the span of a few days. The sets of tranches that made the passes in 1997 spanned intervals that ranged from five to twenty-four business days. The intention was to reduce the effect of the Desk's market entries on market prices; over the year, prices showed little reaction to open market coupon purchases.

SOMA Portfolio Management

The overall expansion of the portfolio was more concentrated in holdings of Treasury coupon securities than in the preceding year, largely because reduced Treasury issuance of bills deflected some of the Desk's outright purchases into the coupon sector. Altogether, the Desk bought $35 billion of coupon securities in 1997 in six passes in the market, compared with $7 billion purchased in two passes in 1996. Bill purchases totaled $9 billion, with about $5 1/2 billion bought in two passes in the market. These purchases were down a bit from the $10 billion purchased in 1996, almost all of which was acquired in two passes in the market. Given the relatively greater total of outright purchases needed in 1997, the Desk's preference would have been to purchase bills and coupon securities in more equal proportions. However, the Desk felt that the reduced bill issuance over much of 1997 would have made it difficult to purchase much supply in the secondary market without sharply affecting market prices. Thus, the Desk did not buy any bills in the market between April and November. In December, after a period of somewhat larger bill auctions and more liquid market conditions, the Desk bought bills in the market again but in relatively modest quantities; prices did not respond much to these purchases.

Because outright purchases were concentrated in the coupon sector, the average maturity of the SOMA holdings of Treasury securities increased to 42.6 months at the end of the year from 41.2 months one year earlier. As of the end of 1997, 13.0 percent of total marketable Treasury debt outstanding was held in the SOMA, up from 11.7 percent one year earlier. This increase reflected the high level of outright purchases made in an environment of shrinking federal government deficits.

At midyear, the Desk picked up the pace of its gradual runoff of federal agency securities that began in 1982 by redeeming all agency securities rather than exchanging them for new eligible issues as they matured. Holdings of these issues dropped $1.2 billion over the year. About $2 billion of Treasury coupon securities, a portion of the maturing original issue seven-year notes held by the SOMA, were also redeemed during 1997. The remaining seven-year notes that matured were rolled into the Treasury's inflation-indexed securities, and the Desk held $1.65 billion of these securities, about 5 percent of the total issuance, at the end of the year.

TEMPORARY ACTIVITY FOR THE SYSTEM OPEN MARKET ACCOUNT

Temporary Reserve Needs and Projections

The Desk arranges temporary operations to meet reserve needs that are not addressed by its outright operations. These temporary operations must be structured to allow for day-to-day variations in reserve supply and demand and for the possibility of revisions to reserve estimates within a maintenance period.

The initial reserve shortages estimated at the start of each period were somewhat larger in 1997 than in the preceding year (chart 5). When the Desk began to operate at an earlier time, it was more comfortable arranging larger temporary RPs. But large shortages were not viewed as a necessity for managing the funds market since the banking system successfully adapted to lower operating balances with a variety of underlying reserve needs. The larger reserve shortages help to explain the absence of matched sale-purchase transactions in 1997.

[CHART 5 OMITTED]

On balance, net revisions to nonborrowed reserve factors and required reserves made after a period had begun were somewhat greater in 1997 than in 1996--about $1.3 billion in absolute value per period compared with $900 million the previous year.(8) All of the increase reflected the unexpected inflow of tax receipts following the April 15 tax date. On the eve of this date, tax inflows were not expected to cause the Treasury balance to rise above its targeted level of $7 billion. During the May 7 period, the Treasury balance averaged $28 billion and peaked at $52 billion on one day. Even apart from this episode, however, the Treasury balance proved to be one of the more difficult factors to predict, as it had often been in preceding years.

Period-average revisions to the foreign RP investment pool rose from about $350 million in 1996 to about $500 million in 1997, reflecting a few instances when accounts placed a substantial amount of funds in the investment pool on relatively short notice. The need to complete daily projections sooner each morning to accommodate the Desk's earlier entry into the market may also have contributed to some of the decreased predictability of this factor. On the other hand, revisions to currency were generally smaller in 1997.

Revisions to applied vault cash made within a maintenance period averaged $230 million, similar in magnitude to the revisions in 1996 but considerably greater than the revisions in years before 1996. Sweep accounts have compounded the difficulties of estimating the amount of vault cash that could be used to meet reserve requirements. Required reserves proved to be modestly more difficult to forecast in 1997. Revisions to applied vault cash were often positively correlated with revisions to required reserves, thereby reducing their net effect on overall period need; but revisions to these two measures were not always made on the same day within a period.

Another source of uncertainty for reserve operations was the premium on RPs--measured by the difference between the par and the cash values of collateral on accepted propositions. The drop in Treasury coupon yields over the second half of the year was associated with an increase in the average premiums on RPs as market prices on many outstanding coupon issues rose further above their par values. The premium on RPs during the final quarter of the year averaged 8 percent, twice as high in percentage terms as during the first half of the year. Although changes in the underlying trend of the premium were readily recognized, the premium often varied significantly from one operation to the next and was difficult to anticipate for any single operation.

Temporary Open Market Operations

In 1997 the Desk greatly increased its use of overnight (one business day) RPs (chart 6). A trend toward increased use of overnight operations began in 1996 and largely reflected the Desk's perception that banks had less flexibility to absorb sizable imbalances between reserve supply and demand on any day when managing their accounts because of their reduced operating balances. In this environment, the Desk intervened more frequently to maintain a stable balance between daily reserve supply and demand. Relatedly, in structuring its temporary operations, the Desk was careful not to let the estimated level of operating balances fall too low on any day, a consideration that sometimes argued for overnight operations.

[CHART 6 OMITTED]

The Desk still frequently arranged term RPs to help meet large underlying reserve shortages that had to be addressed with temporary operations, although these operations were often supplemented by overnight RPs to smooth uneven daily excess patterns. The number of days that two operations--one term RP and one overnight RP--were announced simultaneously increased from five in 1996 to seventeen in 1997, most often occurring at the start of a maintenance period. The risk that subsequent reserve revisions would unexpectedly create a surplus was reduced because term RPs were used less frequently to meet an estimated reserve shortage in its entirety; for this reason the Desk did not find it necessary to make withdrawable any of the term RPs it arranged in 1997.

The Desk continued to adhere to its normal practice of arranging its temporary operations at a preset time each day--shortly after 10:30 a.m. On some occasions when large anticipated reserve shortages were estimated, the Desk conducted its operations before the normal entry time, usually around 10:00 a.m., after a full set of reserve estimates became available. But the number of instances when the Desk entered the market before the normal entry time was down from the preceding year--eleven compared with nineteen in 1996--largely because the usual entry time had been moved forward. The need to enter the market early was most pressing during the April tax season, when upward revisions to the estimated Treasury balance left large deficiencies at the same time that the pool of available collateral was dwindling because of the sizable amounts already held on outstanding RPs.

On three occasions in 1997 the Desk reentered the market shortly after having made its selections on a previously announced temporary operation. In all three cases, propositions on the earlier operations fell short of the amount needed to address the estimated reserve shortage on the day.

Reserve Management during the April Tax Season

During the second half of April, the Desk's activity was significantly influenced by unexpectedly large reserve shortages that resulted from tax receipts to the Treasury that far exceeded anticipated inflows. Most of the unexpected strength came from individual nonwithheld tax receipts. These receipts totaled $123 billion in April, about $30 billion more than expected and more than 20 percent higher than the corresponding flows in 1996. It was initially believed that the Treasury balance at the Federal Reserve could be maintained around a target level of $7 billion. However, tax receipts by April 22 left no further capacity in Treasury Tax and Loan accounts at commercial banks to absorb additional inflows, which consequently had to be maintained at the Treasury's account at the Federal Reserve. The Treasury's balance with the Federal Reserve peaked at a record high of $52 billion on April 30 (chart 7).

[CHART 7 OMITTED]

The rapid progression of daily upward revisions to tax flows, the Treasury balance, daily reserve deficiencies, and period-average reserve needs led the Desk to address huge daily reserve shortages with both sizable overnight and term RPs. Given the size of the daily needs, the Desk entered the market earlier than its normal operating time on six consecutive business days starting on April 23 in an attempt to garner sufficient propositions for its operations. On two occasions, propositions on an initial RP fell short of the Desk' s desired amount, and a second operation was arranged. Collateral became increasingly scarce as the value of securities already held by the Desk on outstanding RPs grew, and the spread on RP rates to the federal funds rate dropped well below normal levels. The total par amount of RPs outstanding reached a record peak of about $51 billion on April 30, coincident with the peak in the Treasury balance. Reserve shortages and RPs quickly receded when regular government outlays and principal and interest payments were made in early May.

EXCESS RESERVES AND THE FEDERAL FUNDS RATE

The Desk closely observed the behavior of the federal funds rate for any indication that the decline in operating balances associated with the spread of retail sweep programs or any other development was impeding its ability to control the funds rate or contributing to volatility in the rate. Excess reserve patterns were also examined to see whether banks were holding more excess reserves--either because they wished to protect themselves against end-of-day overdrafts or because they were less able to reduce large positive daily excess positions accumulated during a period. In general, excess reserve levels did rise over 1997, but the increase was concentrated at smaller institutions that have implemented sweep programs. Volatility in the federal funds rate did not increase from the previous year, but it remained above the levels that had characterized earlier years.

Excess Reserves

The period-average level of excess reserves rose gradually through much of the year and then jumped significantly higher in the final quarter, reflecting the Desk's accommodation of heightened bank demand (chart 8). Among the group of large institutions, which includes about 120 banks and thrift institutions having relatively large deposit liabilities, increases were concentrated at a small number of banks that had adopted sweep programs.

[CHART 8 OMITTED]

Sweep programs, however, have had some effect on the interperiod pattern of excess holdings at large institutions in general. Usable carryover levels of these banks fell sharply in 1997 because of lower levels of required reserve balances. This decline has dampened period-to-period volatility in excess holdings at the large banks, and aggregate excess levels for these institutions are now rarely negative (chart 9).

[CHART 9 OMITTED]

Much of the increase in excess reserves seen over the past year has been concentrated at smaller banks and thrift institutions, and specifically at those institutions that have implemented sweep programs, even though accumulated initial values of sweep programs at all depositories categorized as other than large accounted for less than one-third of the total.(9) The extent to which the smaller institutions have deliberately increased their excess reserves to cover clearing needs remains unclear. At least some of the increase in excess holdings at these smaller institutions could prove temporary: Among a small sample of institutions examined in this category, the level of excess reserves always rose sharply for a few maintenance periods immediately after a sweep program was launched but then fell back to a much lower level after the institution adapted to its new reserve requirement environment.(10) After this initial adjustment, about half of the banks examined showed levels of excess reserves remaining modestly above levels that were typical before the sweep program was implemented.

In arranging its open market operations, the Desk gauges the pace at which banks prefer to accumulate reserves during the maintenance period to meet period-average requirements. Because of averaging, there can be considerable variability in the intraperiod pattern of excess reserves that banks can comfortably hold, and actual intraperiod excess does vary from period to period. But historical patterns suggest that for several years banks have had a preference for accumulating more excess balances over the second week of a maintenance period, which the Desk attempts to accommodate in its reserve-supplying operations to stabilize the federal funds rate (chart 10). Within the second week, however, banks accumulated somewhat more excess reserves in the days leading to the settlement day and somewhat less on the settlement day itself in 1997 than in the preceding year.

[CHART 10 OMITTED]

Federal Funds Rate

The federal funds rate averaged over two-week maintenance periods was generally as close to the intended funds rate in 1997 as it had been in earlier years.(11) The absolute values of the differences between the mean effective funds rate and the target rate for each maintenance period have averaged 4 or 5 basis points in each of the past four years (Chart 11). The period-average effective funds rates showed a slight upward bias of slightly more than 1 1/2 basis points relative to the intended rate in 1997. But although period-average levels of the funds rate have been as close to the target as before, deviations of the daily effective funds rate from target have increased modestly, coinciding with the large drop in operating balances beginning in 1996. The mean and median absolute values of deviations of the daily effective funds rate from target for all business days rose 5 and 3 basis points, respectively, in 1996 and did not fully return to the earlier levels in 1997 (chart 12). Daily deviations from target are generally greater than period average deviations because of some tendency for firm and soft daily effective funds rates to be partly offsetting within a maintenance period.(12)

[CHARTS 11-12 OMITTED]

Intraday volatility as measured by the daily standard deviation of the funds rate on all trades arranged during the day increased in 1996 and remained at a similar level in 1997. The median standard deviation for all business days increased from 5 basis points to 10 basis points in 1996 and declined only slightly, to 9 basis points, in 1997 (chart 13). The number of days when intraday volatility was especially high, defined as days marked by a standard deviation in excess of 50 basis points, jumped from eighteen in 1995 to twenty-eight in 1996 and then declined to twenty-five in 1997.(13) On most days, volatility is greatest in late trading, when the extremes on the daily trading range for the funds rate are typically reached. The lower operating balance environment of the past two years is seen as a principal cause of this increased volatility. It does appear, however, that the modifications that the Desk has made to its selection of operations and the provision of more excess reserves in 1997 prevented intraday volatility from worsening in 1997 despite the further decline in operating balance levels.

[CHART 13 OMITTED]

Another factor that may have helped cap volatility in the funds rate was an increase in adjustment credit borrowing in 1997. Although absolute levels of this borrowing remained relatively low, adjustment credit on nonsettlement business days averaged about $120 million in 1997 compared with slightly more than $50 million the preceding year. This increase in borrowing may have resulted from efforts to encourage banks to use the window when reserve markets tighten, although it could also reflect in part the banking system's reduced flexibility in adjusting to unanticipated shortfalls in reserves given the lower level of required operating balances.

Finally, intraperiod deviations of the daily effective funds rate from target showed some changes in 1997, although the changes do not appear to be directly linked to the level of operating balances (chart 14). The firm financing conditions that have long been associated with maintenance period settlement days were much less pronounced in 1997 than in the preceding two years. The higher period-average levels of excess and the provision of a greater portion of total excess holdings ahead of the settlement day in 1997 may have been contributing factors. Somewhat soft market conditions continued to prevail on Fridays, especially the second Friday of each period. The firm conditions that have characterized the market on many Mondays over the past two years to a large degree reflected a shift in calendar dates: Many more days characterized by high payment flows and the associated firm market conditions fell on a Monday in 1996 and 1997 than did so in 1995.(14)

(1.) In the December 3 maintenance period, the allowance for excess reserves was lifted from $1 billion, where it had been set for many years, to $1.4 billion and held there for the balance of the year. The change was made in recognition of a rising trend in excess reserve holdings. As had been the case for several years, adjustment and seasonal borrowing was expected to meet just a fraction of total reserve demand in all periods, although average levels of adjustment borrowing were somewhat higher in 1997 than in earlier years. Actual levels of excess and borrowed reserves sometimes differed substantially from the formal allowances as a result of errors in the reserve projections or temporary disruptions to the efficient distribution of reserves. The Desk made informal adjustments to these allowances as needed.

(2.) The daily standard deviation measures in basis points the dispersion of the federal funds rate around the daily effective or average rate. This measure of volatility accounts for the volume of trades arranged at different rates.

(3.) All estimates refer to deposits initially swept by depository institutions at the start of a program or when the coverage of a program is expanded. These figures are not updated to include any later changes in the underlying deposit balances affected by a sweep program.

(4.) This measure of required operating balances does not include the effect of as-of adjustments or carryins on the need to hold balances to meet all requirements.

(5.) Nonbound banks, which meet all their reserve requirements with vault cash, earn only 90 percent of the federal funds rate on any required clearing balances, and some nonbound institutions have indicated that this has made them less willing to increase their required clearing balances.

(6.) In percentage terms, currency grew 7 percent from year-end to year-end, modestly faster than in each of the preceding two years. Available data suggest that shipments abroad accounted for at least half of the increase in 1997, which was similar in proportion to other recent years.

(7.) These amounts represent the par values of the RPs arranged in the year-end maintenance periods. The cash values including premiums were modestly higher in each year.

(8.) This calculation compares the actual effect of factors and required reserves on reserve needs during a maintenance period with their estimated effect at the start of a period. It does not measure net or gross daily forecast misses.

(9.) At year-end, sweeps at institutions other than large banks totaled $77 billion.

(10.) In general, a similar pattern of sharply higher excess holdings after a new sweep program was implemented was not found among larger institutions.

(11.) The calculation of the average or mean effective federal funds rate for a maintenance period includes weekends and holidays.

(12.) In addition, the mean values of the period-average deviations capture the effects of weekends and holidays, but the mean values of the daily deviations consider only business days.

(13.) The daily data plotted in charts 12 and 13 include days when the targeted federal funds rate was changed. There were six such days in 1994, three in 1995, and one in both 1996 and 1997. Excluding these days reduces the mean value of the absolute difference between the effective and targeted funds rates 1 basis point in 1994, to 11 basis points (chart 12); other summary statistics for the mean and median values presented in charts 12 and 13 are unchanged.

(14.) Many financial payments and Treasury auction settlements that otherwise would fall on a weekend, according to calendar rules, are deferred to the next business day, increasing the likelihood that these payment flows would fall on a Monday.

APPENDIX A: AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS

Open market operations during 1997 were conducted under the Authorization for Domestic Open Market Operations. The standard authorized limit on intermeeting period changes in System Account holdings of U.S. government and federal agency securities was $8 billion. Four temporary changes were made to this leeway during 1997. The Committee raised the authorized limit on intermeeting period changes in System holdings to $12 billion at its February, March, and November meetings. The leeway was increased a second time during the November intermeeting period to $17 billion on December 8. The Authorization for Domestic Open Market Operations in effect for 1997, except when amended as above, is reprinted below:

Authorization for Domestic Open Market Operations

1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee:

(a) To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; provided that the aggregate amount of U.S. Government and Federal agency securities held in such Account (including forward commitments) at the close of business on the day of a meeting of the Committee at which action is taken with respect to a domestic policy directive shall not be increased or decreased by more than $8.0 billion during the period commencing with the opening of business on the day following such meeting and ending with the close of business on the day of the next such meeting;

(b) When appropriate, to buy or sell in the open market, from or to acceptance dealers and foreign accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the account of the Federal Reserve Bank of New York at market discount rates, prime bankers acceptances with maturities of up to nine months at the time of acceptance that (1) arise out of the current shipment of goods between countries or within the United States, or (2) arise out of the storage within the United States of goods under contract of sale or expected to move into the channels of trade within a reasonable time and that are secured throughout their life by a warehouse receipt or similar document conveying title to the underlying goods; provided that the aggregate amount of bankers acceptances held at any one-time shall not exceed $100 million;

(c) To buy U.S. Government securities, obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, and prime bankers acceptances of the types authorized for purchase under 1 (b) above, from dealers for the account of the Federal Reserve Bank of New York under agreements for repurchase of such securities, obligations, or acceptances in 15 calendar days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers; provided that in the event Government securities or agency issues covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, they shall be sold in the market or transferred to the System Open Market Account; and provided further that in the event bankers acceptances covered by any such agreement are not repurchased by the seller, they shall continue to be held by the Federal Reserve Bank or shall be sold in the open market.

2. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes and directs the Federal Reserve Banks to lend U.S. Government securities held in the System Open Market Account to Government securities dealers and to banks participating in Government securities clearing arrangements conducted through a Federal Reserve Bank, under such instructions as the Committee may specify from time to time.

3. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international accounts maintained at the Federal Reserve Bank of New York, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell U.S. Government securities to such foreign and international accounts on the bases set forth in paragraph 1(a) under agreements providing for the resale by such accounts of those securities within 15 calendar days on terms comparable to those available on such transactions in the market; and (b) for New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph 1(c), repurchase agreements in U.S. Government and agency securities, and to arrange corresponding sale and repurchase agreements between its own account and foreign and international accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate.

APPENDIX B

B.1. Operation in U.S. government securities and federal agency Securities by the Federal Reserve Bank of New York for the Year ended December 31, 1997

Type of issue                        Purchases              Sales
and maturity category

Government securities
Treasury bills                             ...                 ...
Outright                             9,146,900                   0
Matched transactions             3,577.951,533      -3,580,272,240
Total bills                      3,587.098,433      -3,580,272,240

Treasury notes and bonds
Maturing:
Within 1 year                        5,549,000                   0
1 to 5 years                        19,688,246(2)                0
5 to 10 years                       38,638,182(2)                0
More than 10 years                   5,897,100                   0
Total notes and bonds               34,998,164                   0

Total government securities
Including matched transactions   3,622,096,597      -3,580,272,240
Excluding matched transactions      44,145,064                   0

Federal agency issues
Maturing:                                  ...                 ...
Within 1 year                                0                   0
1 to 5 years                                 0                   0
5 to 10 years                                0                   0
More than 10 years                           0                   0
Total agency issues                          0                   0

Total System Account
Including matched transactions   3,622,096,597      -3,580,272,240
Excluding matched transactions      44,145,064                   0

Federal Reserve Bank of New
York
repurchase agreements              970,894,000        -968,637,000

Type of issue                      Redemptions         Exchanges
and maturity category

Government securities
Treasury bills                             ...         443,486,509
Outright                                     0        -443,836,509
Matched transactions                         0                   0
Total bills                                  0            -350,000

Treasury notes and bonds
Maturing:
Within 1 year                       -1,995,910         -27,498,311
1 to 5 years                                 0          20,273,311
5 to 10 years                                0           5,215,000
More than 10 years                           0           2,360,000
Total notes and bonds               -1,995,910             350,000

Total government securities
Including matched transactions      -1,995,910                   0
Excluding matched transactions      -1,995,910                   0

Federal agency issues
Maturing:                                  ...          -1,185,000
Within 1 year                       -1,540,150           1,185,000
1 to 5 years                                 0                   0
5 to 10 years                                0                   0
More than 10 years                           0                   0
Total agency issues                 -1,540,150                   0

Total System Account
Including matched transactions      -3,536,060                   0
Excluding matched transactions      -3,536,060                   0

Federal Reserve Bank of New
York
repurchase agreements                        0                   0

Type of issue                              Net          Holdings,
and maturity category                                   12/31/97

Government securities
Treasury bills                             ...                 ...
Outright                             8,796,000         214,149,444
Matched transactions                -2,230,707         -17,026,746
Total bills                          6,476,193         197,122,698

Treasury notes and bonds
Maturing:
Within 1 year                      -23,945,221(3)       49,369,485
1 to 5 years                        39,961,557(3)       95,028,355
5 to 10 years                        9,078,818(3)       40,906,736
More than 10 years                   8,257,100(3)       48,308,293
Total notes and bonds               33,352,254         233,612,869

Total government securities
Including matched transactions      39,828,447         430,735,567
Excluding matched transactions      42,149,154         447,762,313

Federal agency issues
Maturing:                                  ...                 ...
Within 1 year                       -1,540,150             252,000
1 to 5 years                                 0(4)          152,900
5 to 10 years                                0(4)          254,650
More than 10 years                           0(4)           25,000
Total agency issues                 -1,540,150             684,550

Total System Account
Including matched transactions      38,288,297         431,420,117
Excluding matched transactions      40,609,004         448,446,863

Federal Reserve Bank of New
York
repurchase agreements                2,257,000          23,840,000

Type of issue                         Holdings,
and maturity category                 12/31/97

Government securities
Treasury bills                             ...
Outright                            205,352,544
Matched transactions                -14,706,039
Total bills                         190,646,505

Treasury notes and bonds
Maturing:
Within 1 year                        29,045,221
1 to 5 years                         95,607,624
5 to 10 years                        33,781,913
More than 10 years                   41,825,857
Total notes and bonds               200,260,615

Total government securities
Including matched transactions      390,907,120
Excluding matched transactions      405,613,159

Federal agency issues
Maturing:                                   ...
Within 1 year                         1,223,050
1 to 5 years                            519,900
5 to 10 years                           456,750
More than 10 years                      250,000
Total agency issues                   2,224,700

Total System Account
Including matched transactions      393,131,820
Excluding matched transactions      407,837,859

Federal Reserve Bank of New
York
repurchase agreements                21,583,000

NOTE: Data are on a settlement-date basis. There were no customer Related repurchase agreements passed through to the market for the Year ended December 31, 1997. On December 31, 1997, and December 31, 1996, the matched sale-purchase transaction was $17,026,746,000 and $14,706,039,000 respectively. Loans of Treasury securities by the Federal Reserve Bank of New York to Primary dealers for the year ended December 31, 1997, were As follows:

                          Securities   Maturities   Net change
                          loans
Loans agreements
 (thousands of dollars)   25,456,165   25,058,165   398,000

Loan outstanding
                          Dec. 31, 1997   Dec. 31, 1997

Loan agreements
 (thousands of dollars)   887,200         489,200

1. Bills in the amount of $350,000,000 were exchanged for Inflation Index Notes on February 6, 1997.

2. Includes inflation compensation on Inflation Index Notes of $22,963,500.

3. For Treasury notes and bonds, figures do not include the following maturity shifts (thousands of dollars):

                          Within 1 year   1 to 5 years

Treasury notes and bond   44,269,485      -40,540,826

                           5 to 10 years   More than 10 years

Treasury notes and bonds   -1,953,995      -1,774,664

4. For federal agency issues, figures do not include the following maturity shifts (thousands of dollars):

                        Within 1 year   1 to 5 years

Federal agency issues   569,100         -367,000

                        5 to 10 years   More than 10 years

Federal agency issues   -202,100        0

APPENDIX C

C.1. Total U.S. Treasury and federally sponsored agency Securities held in the System Open Market Account, December 3, 1997

Thousands of dollars

Item                           Holdings,      Net change
                               12/31/97          since
                                               12/31/96

Total agency issues             684,550       -1,540,150

U.S. Treasury issues
Bills                       197,122,698(1)     6,476,173
Notes                       172,533,011       21,611,290
Bonds                        59,406,894       10,068,000
Inflation Index Notes         1,650,000(2)     1,650,000

Total U.S. Treasury and
  agency issues             431,397,153       38,265,333

(1.) Holdings were reduced $13,600,000 of January 8, Treasury bill and $3,426,746 of January 15, Treasury bills that were sold under matched sale-purchase agreements, which are returned the following day.

(2.) Does not reflect inflation compensation on Inflation Index Notes of $22,963,500.

C.2. U.S. Treaty bills in the System Open Market Account, December 31, 1997

Thousands of dollars, except as noted

                                   Percentage      Net change
Maturity date       Holding         of total          since
issue outstanding   12/31/97         issues         12/31/96
                                   outstanding

 1/02/98            6,966,430          30.4         6,966,430
 1/08/98              194,320(1)        0.4           194,320
 1/15/98            4,920,114(1)       21.0         4,920,110
 1/22/98            7,450,500          17.1         7,450,500
 1/29/98            6,812,815          30.0         6,812,815
 2/05/98           14,158,010          31.3        14,158,010
 2/12/98            7,324,485          30.9         7,324,485
 2/19/98            7,219,564          32.0         7,219,564
 2/26/98            6,793,180          30.1         6,793,180
 3/05/98           13,664,955          30.7        13,664,955
 3/12/98            7,371,780          31.8         7,371,780
 3/19/98            6,859,310          31.5         6,859,310
 3/26/98            6,129,235          29.3         6,129,235
 4/02/98            9,011,000          30.9         9,011,000
 4/09/98            3,235,000          30.1         3,235,000
 4/16/98            3,605,000          32.3         3,605,000
 4/23/98            3,165,000          29.6         3,165,000
 4/30/98            9,220,000          28.6         9,220,000
 5/07/98            3,445,000          31.4         3,445,000
 5/14/98            3,360,000          30.9         3,360,000
 5/21/98            3,425,000          31.7         3,425,000
 5/28/98            9,985,000          31.1         9,985,000
 6/04/98            3,090,000          28.2         3,090,000
 6/11/98            3,420,000          30.3         3,420,000
 6/18/98            3,365,000          29.8         3,365,000
 6/25/98            8,750,000          29.3         8,750,000
 7/23/98            5,695,000          30.3         5,695,000
 8/20/98            5,797,000          30.9         5,797,000
 9/17/98            5,545,000          30.3         5,545,000
10/15/98            6,010,000          32.0         6,010,000
11/12/98            5,475,000          29.7         5,475,000
12/10/98            5,660,000          31.5         5,660,000
Total that
matured
in 1997                     ...             ...      -190,646,505

Total             197,122,698             ...         6,476,193

NOTE: Data are on a statement-date basis.

(1.) Holdings were reduced $13,600,000 of January 8, Treasury bills and $3,426,746 of January 15, Treasury bills that were sold under matched sale-purchased agreements, which are returned the following day.

C.3. U.S. Treasury notes and Iflation Index Notes in the Federal Reserve System Open Market Account. December 31, 1997

Thousands of dollars, except as noted

Issues outstanding
                          Holdings,   Percentage     Net change
Coupon       Maturity      12/31/97    of total        since
              date                      issue         12/31/97
                                      outstanding

7.875         1/15/98       877,800       9.6                 0
5.000         1/31/98     1,094,730       5.7           138,000
5.625         1/31/98       756,000       6.1           110,000
8.125         2/15/98       440,000       4.8                 0
7.250         2/15/98     3,837,560      18.4           549,000
5.125         2/28/98     2,592,320       8.4         1,235,000
5.125         3/31/98     1,295,000       9.9                 0
6.125         3/31/98     1,848,220       8.5           250,000
7.875         4/15/98       634,500       7.2            50,000
5.125         4/30/98       610,000       5.0           115,000
5.875         4/30/98       951,000       4.5            25,000
9.000         5/15/98       863,000       9.4           385,000
6.125         5/15/98     4,092,117      19.3           640,600
6.000         5/31/98     1,106,000       5.2           435,000
5.375         5/31/98       855,000       6.9            50,000
5.125         6/30/98     1,471,000      11.7                 0
6.250         6/30/98     1,177,000       5.4                 0
8.250         7/15/98     1,711,140      17.7           436,000
6.250         7/31/98     1,156,750       5.4           290,000
5.250         7/31/98       685,000       5.9           213,000
5.875         8/15/98     4,489,808      20.1                 0
9.250         8/15/98     1,480,000      13.0           469,000
6.125         8/31/98     1,970,300       9.0         1,186,000
4.750         8/31/98       648,000       5.0            57,000
4.750         9/30/98       972,500       7.7            28,500
6.000         9/30/98     1,219,000       5.7           288,000
7.125        10/15/98     1,001,593       9.8            33,000
5.875        10/31/98       995,000       4.7           170,000
4.750        10/31/98       937,900       7.2            80,000
5.500        11/15/98     2,721,635      13.2           202,000
8.875        11/15/98       546,000       5.5            11,000
5.625        11/30/98       819,200       4.0           534,200
5.125        11/30/98       929,000       7.7                 0
5.125        12/31/98     1,679,662      13.5           100,000
5.750        12/31/98       875,000       4.3                 0
6.375         1/15/99       892,045       8.5                 0
5.875         1/31/99       745,000       3.8           745,000
5.000         1/31/99       757,000       5.9           380,000
5.000         2/15/99     3,644,140      16.6           172,000
8.875         2/15/99       951,600       9.8           106,600
5.875         2/28/99     1,199,000       6.0         1,199,000
5.500         2/28/99       715,000       6.0           280,000
5.875         3/31/99     1,875,000      14.7                 0
6.250         3/31/99     1,420,000       7.2         1,420,000
7.000         4/15/99     1,073,700      10.6                 0
6.500         4/30/99     1,219,620       9.9                 0
6.375         4/30/99     1,225,000       6.4         1,225,000
6.375         5/15/99     2,869,124      12.3           267,000
9.125         5/15/99     1,637,500      16.3           510,000
6.250         5/31/99       738,000       4.0           738,000
6.750         5/31/99       686,990       5.6           100,000
6.750         6/30/99     1,644,820      12.5                 0
5.000         6/30/99       644,435       3.6           644,435
6.375         7/15/99       349,000       3.5                 0
6.875         7/31/99     1,531,400      12.4           385,000
5.875         7/31/99     1,096,970       6.5         1,096,970
6.000         8/15/99     2,232,110       9.8           452,000
8.000         8/15/99       858,600       8.4            61,000
5.875         8/31/99     1,304,630       7.6         1,304,630
6.875         8/31/99       951,480       7.7           250,000
7.125         9/30/99     1,078,752       7.4                 0
5.750         9/30/99       642,380       3.7           642,380
6.000        10/15/99       406,115       3.9                 0
7.500        10/31/99       558,315       4.6            50,000
5.625        10/31/99       502,000       3.0           502,000
7.875        11/15/99       814,000       7.6           127,000
5.875        11/15/99     2,790,968      12.2            75,000
7.750        11/30/99     1,176,145      10.0           764,000
5.625        11/30/99       548,175       3.2           548,180
5.625        12/31/99       795,780       4.8           795,780
7.750        12/31/99     1,379,665      11.1            25,000
6.375         1/15/00       689,545       6.8                 0
7.750         1/31/00       864,440       7.1           252,000
8.500         2/15/01       986,000       9.2           154,000
5.875         2/15/00       846,796       4.2           846,796
7.125         2/29/00     1,322,290      10.7           387,000
6.875         3/31/00     1,341,510      10.2           136,000
5.500         4/15/00       360,000       3.4                 0
6.750         4/30/00     1,024,250       8.3           256,500
6.375         5/15/00     2,807,000      13.5         2,807,000
8.875         5/15/00       480,000       4.6                 0
6.250         5/31/00       843,460       6.6           201,000
5.875         6/30/00       740,100       5.9                 0
6.125         7/31/00       455,000       3.7            70,000
6.000         8/15/00     1,309,945       7.3         1,309,945
8.750         8/15/00     1,158,400      10.5           314,000
6.250         8/31/00       650,000       5.5           135,000
6.125         9/30/00     1,009,000       8.4           285,000
5.750        10/31/00       537,430       4.5                 0
5.750        11/15/00     1,651,200      10.3         1,651,200
8.500        11/15/00       881,000       7.7            40,000
5.625        11/30/00       646,200       5.2           266,200
5.500        12/31/00       891,000       7.0            91,000
5.250         1/31/01       800,000       6.2                 0
7.750         2/15/01       929,500       8.2           252,000
5.625         2/28/01       901,000       7.0           101,000
6.375         3/31/01     1,600,000      11.3           100,000
6.250         4/30/01       938,500       6.8            73,500
8.000         5/15/01     1,157,000       9.4           265,000
6.500         5/31/01       911,900       6.7           256,900
6.625         6/30/01     1,175,000       8.2            75,000
6.625         7/31/01       873,000       6.2           173,000
7.875         8/15/01     1,375,000       1.1           260,000
6.500         8/31/01       860,300       6.2           335,300
6.375         9/30/01     1,037,000       7.2           387,000
6.250        10/31/01       883,000       6.0           313,000
7.500        11/15/01     2,441,000      10.1           898,000
5.875        11/30/01       476,000       3.4           286,000
5.750        10/31/02       625,000       4.5            25,000
6.250         1/31/02       777,000       5.8           777,000
6.250         2/28/02       803,000       5.8           803,000
6.625         3/31/02       980,900       6.9           980,900
6.625         4/30/02     1,035,000       7.2         1,035,000
7.500         5/15/02     1,016,009       8.7            35,000
6.500         5/31/02       949,000       7.0           949,000
6.250         6/30/02       786,000       6.0           786,000
6.000         7/31/02       295,000       2.4           295,000
6.375         8/15/02     2,247,000       9.4            57,000
6.250         8/31/02       701,000       5.5           701,000
5.875         9/30/02       460,000       3.6           460,000
5.750        10/31/02       390,000       3.3           390,000
5.750        11/30/02       400,000       3.3           400,000
5.625        12/31/02       585,000       4.9           585,000
6.250         2/15/03     2,145,000       9.1            50,000
5.750         8/15/03     3,685,000      13.2            65,000
5.875         2/15/04       650,000       5.0           100,000
7.250         5/15/04     1,905,550      13.2            25,000
7.250         8/15/04       810,000       6.1                 0
7.875        11/15/04     1,753,040      12.3           140,000
7.500         2/15/05     1,150,000       8.3                 0
6.500         5/15/05     2,000,000      13.6                 0
6.500         8/15/05     1,800,000      12.0                 0
5.875        11/15/05     1,700,000      11.2                 0
5.625         2/15/06     1,500,000       9.7                 0
6.875         5/15/06     2,075,000      13.0           375,000
7.000         7/15/06     2,265,752      10.0           645,000
6.500        10/15/06     2,432,800      10.8           588,000
6.250         2/15/07       540,000       4.1           540,000
6.625         5/15/07     1,750,000      12.5         1,750,000
6.125         8/15/07     2,175,000       8.5         2,175,000
Total that
matured           ...           ...       ...       -29,045,221
in 1997

Total
Treasury
notes            ...    172,533,011       ...         21,611,290

Inflation
index
Notes (IIN)
  3.625       7/15/02      900,000        5.4           900,000
  3.375       1/15/07      750,000        4.8           750,000

Total that
matured           ...          ...        ...                 0
in 1997

Total IIN         ...    1,650,000(1)     ...         1,650,000

NOTE. Data are on a statement-date basis.

(1.) Does not reflect inflation compensation on Inflation Index Notes of $22,93,500.

C.4. U.S. Treasury bonds held in the System Open Market Account, December 31, 1997

Thousands of dollars, except as noted

  Issue outstanding                  Percentage
                        Holdings,     of total      Net change
Coupon       Maturity   12/31/97       issues          since
               date                  outstanding     12/31/97

 3.500       11/15/98       30,750       10.2               0
11.750        2/15/01      160,803       10.7               0
13.125        5/15/01      165,726        9.5               0
13.375        8/15/01      256,092       14.6               0
15.750       11/15/01      172,904        9.9               0
14.250        2/15/02      159,800        9.1               0
11.625       11/15/02      347,850       12.6               0
10.750        2/15/03      739,250       24.6               0
10.750        5/15/03      331,000       10.2          75,000
11.125        8/15/03      514,300       14.7          81,800
 0.013       11/15/03      751,340       10.3         246,100
12.375        5/15/04      769,786       20.5               0
13.750        8/15/04      528,000       13.2         161,000
11.625       11/15/03      947,200       11.4         428,000
12.000        5/15/05      728,476       17.1         514,000
 8.250        5/15/05    1,513,660       35.8               0
10.750        8/15/05    1,187,000       12.8         305,000
 9.375        2/15/06       20,000        0.4               0
 7.625        2/15/07    1,396,164       33.0               0
 7.875       11/15/07      378,500       25.3               0
 8.375        8/15/08      788,500       37.5               0
 8.750       11/15/08    1,588,500       30.4               0
 9.125        5/15/09      921,205       20.0          30,000
10.375       11/15/09    1,075,939       25.6               0
11.750        2/15/10      717,400       28.8               0
10.000        5/15/10    1,176,556       39.4               0
12.750       11/15/10    1,260,865       26.6               0
13.875        5/15/11    1,073,542       23.3               0
14.000       11/15/11      975,091       19.9          90,000
10.375       11/15/12    1,611,741       14.6               0
12.000        8/15/13    3,040,772       20.6               0
13.250        5/15/14      869,450       17.4               0
12.500        8/15/14      905,720       17.7               0
11.750       11/15/14    1,195,000       19.9               0
11.250        2/15/15    1,335,733       10.5               0
10.625        8/15/15    1,167,400       16.3         262,400
 9.875       11/15/15      941,500       13.6         440,000
 9.250       12/15/16      880,000       12.1         100,000
 7.250        5/15/16      995,000        5.3               0
 7.500       11/15/16    1,263,000        6.7          78,000
 8.750        5/15/17    1,450,000        8.0         706,000
 8.875        8/15/17      909,000        6.5          89,000
 9.125        5/15/18      496,900        5.7         200,000
 9.000       11/15/18      256,000        2.8               0
 8.875        2/15/19      933,000        4.8         350,000
 8.125        8/15/19    1,690,900        8.4         116,000
 8.500        2/15/20      960,879        9.4         370,000
 8.750        5/15/20    1,066,600       10.5         461,600
 8.750        8/15/20    1,366,600       12.5         253,600
 7.875        2/15/21      775,500        7.0         312,500
 8.125        5/15/21      938,000        7.8         328,000
 8.125        8/15/21      680,000        5.6         320,000
 8.000       11/15/21    1,150,000        3.5         295,000
 7.250        8/15/22      460,000        4.4          15,000
 7.625       11/15/22      660,000        6.2         190,000
 7.125        2/15/23    1,413,000        7.7         431,000
 6.250        8/15/23    1,035,000        4.5          55,000
 7.500       11/15/24      505,000        4.4          55,000
 7.625        2/15/25      815,000        7.0         115,000
 6.875        8/15/25    1,205,000        9.6         105,000
 6.000        2/15/26      934,000        7.2          34,000
 6.750        8/15/26      965,000        8.9          65,000
 6.500       11/15/26    1,470,000       12.8               0
 6.625        2/15/27      480,000        4.6         480,000
 6.375        8/15/27      730,000        6.8         730,000
 6.125       11/15/27    1,180,000       10.6       1,180,000
Total that
matured
in 1997

Total
Treasury
bonds              ...    59,406,940          ...      10,068,000

NOTE. Data are on a statement-date basis. C.5. U.S. federal agency holdings in the System Open Market Account, December 31, 1997

Thousands of dollars, except as noted

  Issues outstanding                   Percentage
                           Holdings,    of total     Net change
Coupon        Maturity      12/31/97     issue         since
                date                   outstanding    12/31/97

Federal Home
Loan Bank

5.260          4/27/98        14,000       4.7               0
9.250         11/25/98         5,000       1.0               0
9.300          1/25/99         2,000       0.4               0
8.600          6/25/99         3,900       1.2               0
8.450          7/26/99         5,000       1.4               0
8.600          8/25/99        11,000       2.9               0
8.375         10/25/99        10,000       2.7               0
8.600          1/25/00         6,000      20.0               0
Total that
matured
in 1997           ...            ...       ...         -57,700

Total             ...         56,900       ...         -57,700

Federal
National
Mortgage
Association

 8.650         2/10/98        10,000       1.5                0
 5.300         3/11/98        50,000       6.3                0
 9.150         4/10/98        30,000       5.0                0
 9.400         8/10/98        50,000      10.0                0
 7.850         9/10/98        48,000       7.4                0
 5.300        12/10/98        15,000       1.5                0
 7.050        12/10/98        30,000       4.1                0
 9.550         3/10/99        25,000       3.6                0
 8.700         6/10/99        23,000       2.7                0
 8.450         7/12/99         5,000       0.7                0
 7.000         8/11/99             0       0.0          -15,000(1)
 6.450        10/14/99             0       0.0         -100,000
 8.350        11/10/99         7,000       0.4                0
 6.100         2/10/00        25,000       5.0                0
 9.050         4/10/00        10,000       1.3                0
 9.200         9/11/00        10,000       2.5                0
 7.200         1/10/02             0       0.0          -10,000(1)
 7.900         4/10/02             0       0.0          -10,000(1)
 7.800         6/10/02             0       0.0          -40,100
 7.300         7/10/02             0       0.0          -12,000(1)
 6.950         9/10/02             0       0.0          -35,000(1)
 6.625         4/10/03        30,000       4.3                0
 6.450         6/10/03        25,000       5.0                0
 6.200         7/10/03        15,000       3.0                0
 5.800        12/10/03        10,000       1.3                0
 7.600         4/14/04             0       0.0         -100,000(1)
 7.550         6/10/04        24,650       3.1                0
 8.050         7/14/04             0       0.0           -5,000
 8.250        10/12/04        30,000       7.5                0
 6.850         9/12/05        20,000       5.0                0
 6.700        11/10/05       100,000      25.0                0
10.350        12/10/15        10,000       4.0                0
 8.200         3/10/16        15,000       3.8                0
Total that
matured
in 1997            ...           ...       ...         -236,700

Total              ...       617,650       ...         -563,800

Farm Credit
Systemwide
Bonds

8.650         10/01/99        10,000       2.3                0

Total that
matured            ...           ...       ...         -902,000
in 1997

Total              ...        10,000       ...         -902,080

Federal
Land Bank

Total that
matured
in 1997            ...           ...        ...         -16,650

Total              ...             0        ...         -16,650

Total
agency
issues             ...       694,550       ...       -1,540,150

Total
Treasury
and agency
issues             ...   431,971,532(2)    ...       38,265,333(2)

NOTE. Data are on a statement-date basis.

(1.) Called issue.

(2.) Holdings were reduced $13.600.000 of January 8. Treasury bills and $3.426.746 of January 15. Treasury bills that were sold under matched sale-purchase agreements, which are returned the next day.