Annual Report of the Federal Reserve Board, 1985

Report \O 1985 2; \W Board of Governors of the Federal Reserve System Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Letter of Transmittal BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., June 19, 1986 THE SPEAKER OF THE HOUSE OF REPRESENTATIVES Pursuant to the requirements of section 10 of the Federal Reserve Act, I am pleased to submit the Seventy-Second Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1985. Sincerely, Paul A. Volcker, Chairman Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Contents Part 1 Monetary Policy and the U.S. Economy in 1985 3 INTRODUCTION 5 THE ECONOMY IN 1985 5 Prices 8 Household sector 8 Business sector 9 Government sector 10 Foreign sector 10 Labor markets 12 MONETARY POLICY AND FINANCIAL MARKETS 12 Monetary aggregates 17 Aggregate credit flows 20 INTERNATIONAL DEVELOPMENTS 22 U.S. international transactions 24 Foreign currency operations 27 MONETARY POLICY REPORTS TO CONGRESS 27 Report on February 20, 1985 42 Report on July 16, 1985 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization 63 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 63 Regulation B (Equal Credit Opportunity) 64 Regulation D (Reserve Requirements of Depository Institutions) 64 Regulation G (Securities Credit by Persons Other than Banks, Brokers, or Dealers), Regulation T (Credit by Brokers and Dealers), and Regulation U (Credit by Banks for the Purpose of Purchasing or Carrying Margin Stocks) 65 Regulation G (Securities Credit by Persons Other than Banks, Brokers, or Dealers) and Regulation T (Credit by Brokers and Dealers) 65 Regulation J (Collection of Checks and Other Items and Wire Transfers of Funds) 66 Regulation K (International Banking Operations) 66 Regulation T (Credit by Brokers and Dealers) 66 Regulation U (Credit by Banks for the Purpose of Purchasing or Carrying Margin Stocks) 67 Regulation AA (Unfair or Deceptive Acts or Practices) 67 Policy statements and other actions 69 1985 discount rates 74 RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE 74 Authorization for domestic open market operations 76 Domestic policy directive 77 Authorization for foreign currency operations 79 Foreign currency directive 80 Meeting held on February 12-13, 1985 90 Meeting held on March 26, 1985 97 Meeting held on May 21, 1985 104 Meeting held on July 9-10, 1985 115 Meeting held on August 20, 1985 123 Meeting held on October 1, 1985 130 Meeting held on November 4-5, 1985 137 Meeting held on December 16-17, 1985 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

145 CONSUMER AND COMMUNITY AFFAIRS 145 Regulatory actions 149 Community affairs 150 Compliance with consumer regulations 152 Economic impact of Regulation E 153 Consumer complaints 155 Unregulated practices 155 Community Reinvestment Act 156 Consumer Advisory Council 157 Legislative recommendations 158 LEGISLATIVE RECOMMENDATIONS 158 Bank holding company legislation 159 Increasing the number of Class C directors 159 Federal Reserve Bank branches 159 Return check notification 160 Interstate banking 160 Emergency acquisition authority 162 LITIGATION 162 Bank holding companies—antitrust action 162 Bank Holding Company Act—review of Board actions 165 Other litigation involving challenges to Board procedures and regulations 168 BANKING SUPERVISION AND REGULATION 168 Supervision for safety and soundness 172 Program to strengthen supervision of banks and bank holding companies 173 Other supervisory guidelines 177 Regulation of the U.S. banking structure 182 Enforcement of other laws and regulations 185 Federal Reserve membership 186 REGULATORY SIMPLIFICATION 186 Periodic review 187 New regulatory actions 189 FEDERAL RESERVE BANKS 189 Developments in the pricing of Federal Reserve services and in the payment mechanism 192 Examination 192 Income and expenses 194 Federal Reserve Bank premises 194 Holdings of securities and loans 194 Volume of operations 195 BOARD OF GOVERNORS 195 Financial statements Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

201 STATISTICAL TABLES 202 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1985 204 2. Statement of condition of each Federal Reserve Bank, December 31, 1985 and 1984 208 3. Federal Reserve open market transactions, 1985 210 4. Federal Reserve Bank holdings of U.S. government and federal agency securities, December 31, 1983-85 211 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1985 212 6. Bank premises of Federal Reserve Banks and Branches, December 31, 1985 213 7.Income and Expenses of the Federal Reserve System, 1981—85 214 8.Income and expenses of Federal Reserve Banks, 1985 218 9.Income and expenses of Federal Reserve Banks, 1914-85 222 10.Revenue and expense of priced services at Federal Reserve Banks, 1985 and 1984 224 11.Operations in principal departments of Federal Reserve Banks, 1982-85 224 12.Federal Reserve Bank interest rates, December 31, 1985 225 13.Reserve requirements of depository institutions 227 14.Maximum interest rates payable on time and savings deposits at federally insured institutions, December 31, 1985 228 15.Margin requirements for Regulations T, U, G, and X 229 16.Principal assets and liabilities, and number of insured commercial banks, by class of bank, June 30, 1985 and 1984 230 17.Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-85, and month-end 1985 234 18.Changes in number of banking offices in the United States, 1985 235 19.Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1985 246 MAP OF FEDERAL RESERVE SYSTEM—DISTRICTS 247 FEDERAL RESERVE DIRECTORIES AND MEETINGS 248 Board of Governors of the Federal Reserve System 250 Federal Open Market Committee 251 Federal Advisory Council 252 Consumer Advisory Council 253 Thrift Institutions Advisory Council 254 Federal Reserve Banks, Branches, and Offices 275 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 1 Monetary Policy and the U.S. Economy in 1985 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction Nineteen eighty-five was a year of fur- est rates declined only a little over ther progress for the national econ- 1985, while long-term rates dropped 2 omy. Although growth in economic percentage points or more, partly reactivity was slower than it had been in flecting an improved outlook for inflathe earlier phase of the expansion, in- tion and expectations of greater fiscal creases in output were large enough to restraint. The Federal Reserve disreduce the unemployment rate to its count rate was reduced once, by onelowest level since 1980. Moreover, half percentage point. Stock prices even as the economic upswing moved rose substantially during the year. into its fourth year, inflationary pres- Meanwhile, debt growth was strong; sures remained in check. Prices gener- expansion of domestic nonfinancial ally rose less than in 1984, and wage debt for the year amounted to 14 pergains were restrained. cent, above the monitoring range of 9 Continued economic growth in 1985 to 12 percent set by the Federal Open was supported by a generally accom- Market Committee. The rapidity of modative monetary policy. The de- debt creation resulted, in part, from mand for narrow money was strong, borrowings to finance retirements of partly in lagged response to earlier de- corporate stock associated with merclines in interest rates and partly per- gers, buyouts, and share repurchases haps in response to more conservative and from the acceleration of state and cash management practices. Ml ex- local debt issuance in response to propanded relatively rapidly throughout posed tax law changes. the year, growing about 12 percent, While output of the U.S. economy and its velocity exhibited an unusual expanded only moderately in 1985, and large drop of nearly 6 percent; the domestic sectors increased their growth in Ml exceeded both the origi- purchases of goods and services rapnal target range set in February and idly. The difference was an increasing the wider, rebased range for the sec- volume of imports and decline in the ond half set in July. However, the volume of exports. Thus, not all segbroader monetary aggregates behaved ments of the economy shared equally more normally and ended the year in the expansion. Key sectors such as within their target ranges: M2 ex- manufacturing, mining, and agriculpanded about 8V2 percent compared ture continued to face strong competiwith its range of 6 to 9 percent, and tion from foreign producers. Sluggish M3 grew 73/4 percent compared with growth abroad also limited export its range of 6 to 9V2 percent. markets for U.S. producers. In finan- In credit markets, short-term inter- cial markets, a number of institutions had to cope with loan problems associated with the economic pressures and NOTE. This discussion of economic and finan- large debt burdens of certain borrowcial developments in 1985 is adapted from the ers, including less developed countries Monetary Policy Report to the Congress Pursuas well as energy and agricultural borant to the Full Employment and Balanced rowers in the United States. Growth Act of 1978 (Board of Governors, February 1986). Adjustments are in process that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction should help correct the imbalances markets. The efforts of many banks that have emerged in recent years. and other financial intermediaries to Passage of the Balanced Budget and bolster capital and reserves, together Emergency Deficit Control Act of with lower interest rates, should help 1985 has had salutary effects on ex- financial institutions to strengthen pectations in financial markets. As their ability to cope with financial budgetary deficits are reduced, in- strain. Questions remain, however, creasing amounts of domestic saving about other factors affecting the U.S. can be channeled into investment in economy, including the strength of the plant and equipment needed to im- economic expansion abroad, the influprove productivity and sustain eco- ence of a declining dollar on inflation nomic growth over the long term. The here, and the effect of reduced oil decline in the foreign exchange value prices on the financial health of doof the dollar should help create an en- mestic energy producers and of a vironment in which U.S. producers number of oil-exporting developing can compete more effectively in world countries. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1985 The economy completed a third con- a substantial clip, but they did so only secutive year of expansion in 1985, by borrowing at a pace that pushed with the real gross national product household debt burdens to still higher rising about 2 percent over the year. levels. This rise was sufficient to create 3 mil- While the nation as a whole experilion new payroll jobs, and the unem- enced continued growth, the serious ployment rate edged down. sectoral imbalances that had emerged An important achievement of the earlier in the recovery became more current recovery has been the sus- apparent when gains in activity modtained expansion of economic activity erated. Industrial output grew slowly without any relinquishing of the prog- in 1985, and manufacturing and minress achieved toward the goal of price ing employment actually declined durstability. Most broad measures of price ing much of the year. The agricultural increase indicate that inflation slowed sector remained under acute pressure; to about a 3lh to 33k percent rate in shrinking export markets and abun- 1985, somewhat less than the pace dant harvests pushed prices sharply registered over the previous two years. lower, and as a result, farmers faced The containment of inflation has been mounting difficulties in servicing the aided by the high exchange value of the large volume of debt they accumulated dollar and excess world supplies of in the 1970s. many basic materials, which have left To a considerable extent, these imprices unchanged or lower for a wide balances and stresses are related to range of imported goods, industrial fundamental disequilibria in the nacommodities, agricultural products, tion's finances: the continuing huge and petroleum. More fundamentally, federal budget deficit and the deteriowage increases in the aggregate have ration in the U.S. current account. been restrained, limiting upward pres- During the past year, however, policysure on costs. makers took important steps to address Although output and employment these problems. The Balanced Budget continued to grow in 1985, the rate of and Emergency Deficit Control Act expansion was slower than some had established a mechanism for deficit reanticipated and thus raised concerns duction, and the financial authorities about the sustainability of the recov- of the G-5 nations agreed that steps ery. Furthermore, the pattern of devel- should be taken that would bring about opments in the past year had some dis- exchange rates that would better reflect turbing aspects: domestic and foreign underlying economic relationships. demands continued to be diverted away from goods and services produced in the United States, draining Prices income from U.S. households and businesses and exacerbating an inven- The consumer price index advanced tory correction by U.S. firms as their 33/4 percent over 1985, compared with sales lagged; meanwhile, consumers the 4 percent increase of the previous continued to increase their spending at year. The GNP fixed-weight price in- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

6 The Economy in 1985 Indicators of Economic Performance Percent change, Q4 to Q4 Percent change, Q4 to Q4 Real GNP Real personal income and consumption Consumption expenditures Annual rate, millions of units Total private housing starts Percent of disposable income Personal saving rate Percent change, Q4 to Q4 Billions of 1982 dollars Real business fixed investment Change in real business inventories Producers' durable equipment li. 20 40 0 •««• Percent Percent change, Q4 to Q4 Unemployment rate GNP prices 10 1981 1983 1985 1981 1983 1985 All data are seasonally adjusted, and those that Labor; the other data are from the U.S. Department involve dollar amounts are in 1982 dollars. The un- of Commerce, employment data are from the U.S. Department of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1985 dex, which includes production for Prices businesses, government, and export, Percent change, Dec. to Dec. as well as for consumers, increased 3V2 percent, about V2 percentage point less than the average increase over the preceding two years. Producer prices of finished goods advanced I3/* percent last year, and prices of intermediate materials were essentially flat. Progress toward price stability has Producer finished goods been sustained by several factors, the most important of which have been subdued inflation expectations, moderate increases in wages, and the influence of the high value of the dollar on the prices of imports and goods that compete with imports. In addition, developments in the food and energy markets continued to restrain overall inflation in 1985. Energy prices showed little change last year; however, a substantial margin of unutilized productive capacity, continued conservation efforts, and the debt-servicing problems of several important oil producers all contributed to a surplus of oil and a sharp break in oil prices on t t 1 * i 1981 1983 1985 world markets at the end of the year. Crop prices at the farm remained de- The data are from the U.S. Department of Labor. pressed by diminished export demand and high levels of production. Lower prices for crude foods and small in- supplies of commodities on world creases in processing costs held the in- markets have remained plentiful. crease in retail food prices to 23/4 per- On balance, price increases outside cent last year. of the food and energy area held Prices for many basic industrial steady in 1985. Consumer prices other commodities fell during 1985. Weak than those for food and energy inexpansion of industrial production in creased about 4V2 percent, a bit less the United States and in other major than in 1984. The prices of retail industrial countries limited the growth goods excluding food and energy were in demand for raw and semiprocessed held to a gain of 2 percent last year, at materials. Furthermore, the high least in part because of small increases prices for many raw commodities that or declines in markets where import prevailed in the 1970s and early 1980s competition is substantial. Price ininduced a rapid expansion of capacity, creases for nonenergy services reparticularly in developing countries. mained at about a 53/4 percent annual With productive capacity in place and rate last year. Capital equipment with many of these countries facing prices rose 23k percent, somewhat massive debt-servicing requirements, more than in 1984. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 The Economy in 1985 Household Sector tion standards by lenders and mortgage insurers and higher mortgage in- Spending in the household sector resurance premiums may have offset mained strong in 1985, despite a sharp some of the effect of lower mortgage slowing in the growth of income. As rates. Construction of multifamily wage and salary gains slowed, interest housing remained at the relatively high income weakened, and farm income level of the two previous years, notplummeted, real disposable income withstanding high and rising vacancy rose only about VU percent, much rates for rental units. Rental housing less than the 4 percent increase of the construction was supported by heavy previous year. Meanwhile, real perissuance of debt by state and local ausonal consumption expenditures, thorities, partly in anticipation of conbuoyed by continued high levels of straints that would be imposed on such borrowing, advanced 3 percent—only debt by proposed tax reform legislaa little less than in 1984. As a result, tion. the personal saving rate fell to an average of about 4V2 percent in 1985, well below historical norms. Business Sector The strength in household spending in 1985 reflected further gains in out- Economic conditions in the business lays for consumer durables, especially sector were mixed in 1985. After-tax purchases of new automobiles. Sales economic profits of nonfinancial corof new cars totaled more than 11 mil- porations as a group increased sharply lion units, the strongest selling pace for a third consecutive year, to the since 1978. Sales of domestic autos highest percent of GNP since the late picked up to 8V4 million units in re- 1960s. Many firms in manufacturing sponse to the general downtrend in in- and mining industries, however, enterest rates, several rounds of price countered significant difficulties and financing concessions offered by brought about by the high value of the manufacturers, and increased avail- dollar. In addition to the influence of ability of some models that had been the exchange rate, pressure on prices in short supply in 1984. Sales of for- and profits in the agricultural and eneign cars climbed to a record level of ergy sectors was exacerbated by ample more than 23k million units for the supplies in world markets. year; a greater volume of exports to Business spending for equipment the United States was permitted under and structures rose 6V4 percent in real the Japanese voluntary restraint pro- terms in 1985, supported by falling ingram for 1985-86, and this accounted terest rates, declining relative prices for most of the pickup. for capital equipment, and continued Activity in the housing sector was efforts to modernize facilities in order flat in 1985. The number of new to meet intensified competition. Nevhomes started during the year re- ertheless, the growth in business fixed mained at about the l3k million unit investment was well below the extraorlevel of the preceding two years. Con- dinary pace of the preceding two struction of single-family housing years. Furthermore, the slowdown in showed no new strength despite favor- capital outlays was widespread and ocable demographic trends and a decline curred in many categories of highin mortgage rates to their lowest level technology equipment, heavy indusin six years. A tightening of qualifica- trial machinery, and structures. Some Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1985 deceleration of investment spending Government Surpluses and Deficits can be expected as an expansion prog- Billions of dollars resses and the growth of sales subsides Federal government to more sustainable rates. However, declining capacity utilization further slowed the pace of investment in 1985 in the industrial sector, and rising vacancy rates for office buildings contributed to slower growth in expenditures for nonresidential structures. Businesses accumulated inventories at a much reduced pace in 1985, par- 200 ticularly in the manufacturing sector. r \ i i In real terms, nonfarm business inventories rose $10V2 billion, after the State and local government large investment of $56 billion in 1984. In the manufacturing sector, sluggish orders and stable or falling prices induced a cautious approach to inventory accumulation; factory inventories declined over the second half of 1985 and were little changed on bal- 1981 1983 1985 ance for the year as a whole. Stocks in the trade sector increased over the The data on the federal government deficit are for year, boosted by a large rise in auto fiscal years and are on a budget basis; they are from the U.S. Department of the Treasury. inventories in the fourth quarter. Ex- The data on state and local governments are for cluding autos, inventories at retail es- operating budgets. They are on a national income accounts basis, and they come from the U.S. Detablishments increased about in line partment of Commerce. with the moderate rise in sales. held by the Commodity Credit Corpo- Government Sector ration (CCC), federal purchases were The federal budget deficit rose to $212 up 3V4 percent over the year, after adbillion in fiscal year 1985. Although justment for inflation. Defense outthe economic expansion continued to lays, which increased 6 percent over boost receipts, outlays rose even the year, continued to provide a major faster, with large increases in agricul- boost to federal purchases. CCC purtural support payments, interest pay- chases rose sharply as low market ments, and defense purchases. The prices encouraged farmers to shift deficit remained at a historically high massive inventories of grain to the fed- 5 percent of GNP, absorbing a large eral government. share of the net saving available to the State and local governments indomestic economy. creased their purchases of goods and Purchases of goods and services by services 2lh percent in 1985, a somethe federal government, which add di- what smaller rise than in the preceding rectly to GNP and constitute one-third year. Most of the growth in expendiof total federal expenditures, posted tures last year reflected strong inanother strong advance in 1985. Ex- creases in construction outlays as cluding changes in farm inventories states and localities continued their ef- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 The Economy in 1985 forts to improve and expand basic pub- moderate growth in other industrial lic facilities. With the rise in expendi- countries, on average, limited the extures exceeding the growth in receipts, pansion of markets for U.S. products. the fiscal position of state and local Furthermore, economic growth in degovernments weakened throughout the veloping nations recovered only a bit, year; aggregate operating and capital as many countries continued to face account surpluses, which had risen to difficult debt-servicing problems exsubstantial levels in 1984, were virtu- ternally and strong inflationary presally eliminated by the end of 1985. sures at home. Merchandise imports continued to rise in 1985, increasing about 3V2 per- Foreign Sector cent in real terms over the 1984 level. After registering particularly sharp Imports of consumer goods rose gains toward the end of 1984 and in the strongly while imports of capital first two months of 1985, the dollar equipment and industrial materials generally fell in international currency posted smaller increases, and oil imtrading throughout the remainder of ports declined. Although prices of imlast year. By the end of 1985 the trade- ported goods fell for the year as a weighted foreign exchange value of the whole, some firming in the prices of dollar had fallen nearly 25 percent manufactured imports became apparfrom its peak in February, retracing ent toward the end of the year, reflectabout half of the appreciation that had ing the effects of the decline in the occurred since the end of 1980. The value of the dollar. decline in the dollar in 1985 occurred against the backdrop of a narrowing of Labor Markets the differential between inflation-adjusted long-term interest rates in the With the economy continuing to ex- United States and those in other indus- pand, developments in labor markets trial countries, which at least in part remained generally favorable in 1985. reflected the slowing of economic Gains in employment exceeded the growth in the United States relative to growth of the labor force, causing the growth abroad. unemployment rate to drift down over With the dollar still relatively the year. Labor force participation strong, the external position of the maintained its upward trend; women United States continued to deteriorate continued to enter the workforce in last year. The widening gap between large numbers, in part responding to imports and exports boosted the cur- expanding job opportunities. Over all, rent account deficit to $118 billion, the number of persons employed relacompared with $107 billion in 1984. tive to the population rose to a record The volume of merchandise exports level. declined in 1985. With U.S. prices rel- Nonfarm payrolls expanded 3 milatively high and world supplies abun- lion in 1985, somewhat below the undant, agricultural exports fell abruptly. precedented hiring rate during the first Exports of nonagricultural goods were two years of the recovery. Although essentially unchanged as the continu- growth in aggregate employment coning effects of the dollar's earlier appre- tinued, the composition of the gains ciation, combined with relatively reflected the unevenness of the current Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1985 11 output in manufacturing resulted in Labor Market Conditions some trimming of employment over Millions of persons the first three quarters of the year. Al- Payroll employment though an upturn in manufacturing jobs began in the fall, employment in that sector was down about 180,000 over the year. Wage increases remained restrained in most segments of the labor market in 1985, despite a further reduction in the unemployment rate. Hourly compensation in the private sector, as measured by the employment cost index, rose about 4 percent, 1 percentage point less than in 1984. Nearly all of the deceleration of compensation per ;:20 hour last year reflected a slowing in i I \ i t 15 the growth of fringe benefits; wage Percent change, Q4 to Q4 rates increased at about the 1984 pace. To a large extent, the recent slowing in Compensation per hoar ,' - '> »*,' the growth of benefits has resulted '*? 10 from lower health care expenses for employers, as cost-sharing arrange- .«i .•-•*. 5 ments shifted greater responsibilities to employees and programs to contain hospital costs became more widespread. Meanwhile, labor productivity was •/.: 3 nearly unchanged in 1985, after increasing substantially earlier in the recovery. When viewed over a longer period, the underlying trend in productivity in recent years appears to 1981 1983 1985 have improved a little from the very low pace of the 1970s, but it has re- Payroll employment covers the total nonfarm sector; hourly compensation and output cover the non- mained well below the pace earlier in farm business sector. All data are from the U.S. De- the postwar period. Management and partment of Labor. workers have responded to a more competitive environment by modernexpansion. Employment in the trade izing plant and equipment, improving and service sectors accounted for operational efficiency, and making more than two-thirds of the growth in work rules more flexible. Unit labor payrolls last year. Government em- costs in the nonfarm business sector ployment rose nearly one-half million, rose 4 percent in 1985, a larger inprimarily because of increased pay- crease than during the previous two rolls of state and local governments. years but well under the growth of the By contrast, the weak expansion of early 1980s. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 Monetary Policy and Financial Markets At its meeting in February 1985 the even steeper decline. At the same Federal Open Market Committee es- time, the broader monetary aggregates tablished ranges for growth of money were growing generally within their and credit during the year, measured ranges, economic growth had slowed from the fourth quarter of 1984 to the to well below the pace of the year befourth quarter of 1985, of 4 to 7 per- fore, and upward price pressures recent for Ml, 6 to 9 percent for M2, mained muted. In the fall the FOMC and 6 to 9V2 percent for M3. The asso- determined that under these circumciated monitoring range for the debt of stances, growth in Ml above its range domestic nonfinancial sectors was set for the second half of the year would at 9 to 12 percent. These growth be acceptable. ranges were designed to be consistent In general, the FOMC in 1985 emwith further sustainable economic phasized the need to evaluate growth growth and progress toward reason- in all the aggregates in light of develable price stability over time. opments in the economy and in prices, In July the Committee reaffirmed and of conditions in financial and forthe ranges for M2, M3, and debt but eign exchange markets. Throughout established a new Ml growth range of the year, monetary policy remained 3 to 8 percent, measured at an annual generally accommodative to emerging rate, from the second to the fourth demands for money. Pressures on quarter of the year. Over the first half bank reserve positions were varied in a of the year, Ml had grown well above narrow range over the year, and the the upper end of its range, and velocity discount rate was reduced once, by had registered an unusually steep de- one-half percentage point. cline. These developments apparently reflected substantial additions to Monetary Aggregates money balances, especially interestearning transaction balances, that Ml increased at an annual rate of 12.8 were spurred by the sharp drop in in- percent from the second to the fourth terest rates since mid-1984. The Ml quarter of 1985, compared with its objective for the second half of the range of 3 to 8 percent for this period; year anticipated a considerable slow- growth for the year as a whole came to ing of money growth, on the assump- 11.9 percent. Much of the unusually tion that historically more normal be- strong growth in Ml and the accompahavior in the velocity of Ml would nying decline in velocity seemed to be reemerge. The Committee signaled attributable to lower interest rates, continued uncertainty about the behav- though expansion in the aggregate was ior of the aggregate, however, by wid- stronger, particularly in the second ening the Ml range 2 percentage half of the year, than historical evipoints. dence on its relationship to income The unusual behavior of Ml in fact and interest rates would have sugpersisted over the second half of the gested. Ml may have become more year: growth in the aggregate did not sensitive to changes in market rates in slow, and its velocity registered an recent years owing to the deregulation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 13 Monetary Aggregates, Nonfinancial of certain transaction accounts. By re- Sector Debt, and Reserves ducing the opportunity cost of holding Billions of dollars transaction balances, the creation of Ml NOW and Super NOW accounts has made Mia much more attractive sav- 600 ings vehicle for households. Moreover, with the rates on NOW accounts fixed and those on Super NOWs being 570 adjusted sluggishly to changing conditions, falling interest rates have led to relatively substantial reductions in incentives to economize on Ml balances, with accompanying declines in 2500 velocity. However, as both money holders and depository institutions 2400 adapt to the elimination of important regulatory constraints, considerable uncertainty unavoidably persists regarding the response of Ml to variations in interest rates or income. In 1985 the interaction of lower 3200 market interest rates with deregulated transaction deposit rates seemed to 3000 induce especially heavy inflows to interest-bearing checkable accounts. Spreads between offering rates on these deposits and interest rates on Total domestic nonfi&ancial debt time deposits and market instruments, 6500 narrow by the standards of recent decades, apparently diminished the incentives to keep savings in longer-term instruments as well as to separate savings from transaction balances. Demand deposits also contributed to the Reserves increase in Ml last year, registering unusually rapid growth, especially in Total ^ Z«LJ*£ 44 the second half. Business demand balances paced the rise, likely reflecting Notiborrowed not only the cumulative effect of lower '•'•••/ 40 interest rates on incentives to economize on demand deposits and on com- 1984 1985 pensating balance requirements, but also generally more cautious cash The ranges adopted by the FOMC for the monetary management practices, adopted possiaggregates and for total debt of the domestic nonfinancial sector were for the period from 1984:4 to 1985:4, bly in part because banks and corporaexcept for Ml, which was for 1985:2 to 1985:4. tions sought to reduce risk in response The reserve aggregates have been adjusted to remove to financial problems that had develdiscontinuities associated with changes in reserve requirements. Nonborrowed reserves include extended oped in certain areas of the market. credit. The shaded area is adjustment and seasonal borrowing. M2 grew 8.6 percent in 1985, a rate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 Monetary Policy and Financial Markets Reserves, Money Stock, and Debt Aggregates Annual rate of change based on seasonally adjusted data unless otherwise noted,inpercent1 1984 1985 Item 1983 1984 1985 Q4 Ql Q2 Q3 Q4 Depository institution reserves2 Total 6.5 6.6 15.3 3.8 17.4 12.2 16.4 12.1 Nonborrowed 5.9 4.0 26.8 36.3 57.3 14.1 18.2 9.9 Required ... ^ 6.3 6.1 15.1 3.0 16.9 12.3 17.1 11.1 Monetary base 9.3 7.1 8.8 4.6 8.8 7.5 9.7 8.1 Concepts of money4 Ml 10.4 5.4 11.9 4.5 10.1 10.5 14.5 10.6 Currency and travelers checks 10.3 7.2 7.5 5.1 6.8 6.7 8.3 7.4 Demand deposits 2.7 1.5 8.6 1.1 5.5 7.8 12.4 7.7 Other checkable deposits 28.8 10.8 22.2 10.0 21.1 18.7 23.9 18.8 M2 12.2 8.0 8.6 9.7 11.6 6.3 9.5 6.0 Non-Mi component 12.8 8.8 7.6 11.3 12.1 5.0 8.0 4.6 MMDAs (n.s.a.), savings, and small-denomination time deposits 18.0 8.0 7.1 9.5 11.8 6.1 6.3 3.3 General-purpose and brokerflealer money market mutual fund assets (n.s.a.) -26.3 17.0 9.3 28.3 32.7 -.7 4.1 .9 Overnight RPs and Eurodollars (n.s.a.) 31.7 4.7 18.5 -7.7 47.6 -17.8 18.7 23.6 M3 9.9 10.5 7.7 10.5 10.2 5.5 7.6 6.5 Non-M2 component 1.0 21.2 3.9 13.4 4.4 2.6 .2 8.2 Large-denomination time deposits -2.1 26.0 5.7 15.9 7.8 6.4 -2.7 10.8 Institution-only money market mutual fund assets (n.s.a.) -16.6 33.6 11.1 97.4 31.2 7.7 1.3 3.1 Large denomination term RPs (n.s.a.) 39.1 36.7 4.4 11.9 -42.1 -3.4 -7.6 39.2 Term Eurodollars (n.s.a.) .. 8.2 -8.4 3.7 -22.6 2.9 -9.2 -4.0 -4.5 Domestic nonfmancial sector debt 11.2 14.3 13.9 14.1 13.7 12.1 12.9 14.4 Federal 21.5 15.8 15.2 16.2 15.3 12.5 14.6 15.0 Nonfederal 8.5 13.8 13.6 13.5 13.2 12.0 12.3 14.2 1. Changes are calculated from the average amounts checkable deposits, which consist of negotiable orders outstanding in each quarter. Annual changes are of withdrawal and automatic transfer service accounts measured from Q4 to Q4. at depository institutions, credit union share draft 2. Data on reserves and the monetary base accounts, and demand deposits at thrift institutions. incorporate adjustments for discontinuities associated M2 is Ml plus money market deposit accounts with the implementation of the Monetary Control Act (MMDAs); savings and small-denomination time and other regulatory changes to reserve requirements. deposits at all depository institutions (including retail 3. The monetary base consists of total reserves plus repurchase agreements), from which have been required clearing balances and adjustments to subtracted all individual retirement accounts (IRAs) compensate for float at Federal Reserve Banks plus and Keogh accounts at commercial banks and thrift the currency component of the money stock less the institutions; taxable and tax-exempt general-purpose amount of vault cash holdings of thrift institutions that and broker/dealer money market mutual funds, is included in the currency component of the money excluding IRAs and Keogh accounts; overnight and stock plus, for institutions not having required reserve continuing-contract RPs issued by commercial banks; balances, the excess of current vault cash over the and overnight Eurodollars issued to U.S. residents by amount applied to satisfy current reserve foreign branches of U.S. banks worldwide. M3 is M2 requirements. plus large-denomination time deposits at all 4. Ml consists of currency in circulation; travelers depository institutions; assets of institution-only checks of nonbank issuers; demand deposits at all money market mutual funds; large-denomination term commercial banks other than those due to domestic RPs issued by commercial banks and thrift banks, the U.S. government, and foreign banks and institutions; and term Eurodollars held by U.S. official institutions, less cash items in the process of residents in Canada and the United Kingdom and at collection and Federal Reserve float; and other foreign branches of U.S. banks elsewhere. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 15 in the upper part of its range, as its flecting the drag from the relatively nontransaction (non-Mi) component high value of the dollar on exchange increased 7.6 percent. The shift to- markets. Growth of the broader aggreward more liquid assets evident in the gates had slowed appreciably after the rapid rise of Ml also affected the dis- early part of the year, though Ml retribution of deposits within the non- mained well above its range. On baltransaction portion of M2. Small time ance, over the first six months of the deposits declined, while some very year most market interest rates fell liquid components, such as money about 1 percentage point, leaving them market deposit accounts, showed very about 3 to 4 percentage points below large increases; even savings deposits their mid-1984 levels. The dollar, rose (by 4lk percent) after several which had risen sharply on exchange years of decline. However, growth of markets through February, declined M2 appears to have been restrained by thereafter and by midyear was 9 persome redirection of household portfo- cent below its February peak on a lios toward such non-M2 instruments trade-weighted basis, leaving it just as shares in stock and bond mutual under its level at the end of 1984. funds. When the FOMC at its July meeting M3 growth slowed to 7% percent reaffirmed its ranges for M2, M3, and last year—close to the midpoint of its debt and widened and rebased the Ml range—reflecting in part a slower pace range, the members anticipated that of credit expansion at depository insti- these ranges would be consistent with tutions and consequently a reduced continued subdued inflation and some need to raise funds through issuance of pickup in economic growth from the managed liabilities. Thrift institutions, sluggish pace of the first half. As the in particular, greatly reduced their net summer progressed, however, it beacquisition of assets, partly in re- came clear that the demand for Ml sponse to new regulations by the Fed- remained strong. After slowing someeral Home Loan Bank Board that what in July, Ml spurted again in Auraised capital requirements for rapidly gust and continued to rise at a doublegrowing institutions. The growth of digit annual rate in September. M2 large time deposits issued by thrift in- growth alsc was stronger during the stitutions slowed to less than 7 percent summer, climbing above its range. in 1985 from the nearly 50 percent In the summer also, market interest pace recorded in the preceding year. rates reversed a portion of their earlier In implementing monetary policy declines. With both Ml and M2 growduring 1985 the Federal Reserve basi- ing relatively rapidly, economic activcally accommodated the strong de- ity apparently picking up, and the dolmands for reserves by depository insti- lar having declined further, the tutions. In the early part of the Federal Reserve for a time was a bit year—when Ml expansion was very more cautious in providing reserves. rapid, and M2 and M3 growth was But beginning around mid-autumn, also strong—interest rates rose some- the Federal Reserve was seeking a what. However, these increases were slight easing in bank reserve condimore than reversed later in the first tions, as incoming data suggested that half, a movement influenced in part by increases in economic activity would a cut in the discount rate from 8 to 7V2 continue to be relatively moderate, percent in May, as economic activity and upward price pressures remained appeared more sluggish, partly re- subdued. Meanwhile, Ml growth was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 Monetary Policy and Financial Markets continuing strong on balance, but lar and by the ensuing coordinated ingrowth in the broader aggregates was tervention by the United States and slowing. other key industrial countries. On balance, over the second half of In long-term debt markets, interest the year most short-term rates were lit- rates generally fell 1 percentage point tle changed; they ended the year just or more on balance over the second slightly above their midyear lows and half, with most of the decline occurabout 1 percentage point below their ring during a fourth-quarter rally that levels when 1985 began. However, on accelerated as the year drew to a close. exchange markets the dollar declined The downward movement in long-term more than 15 percent over the second rates and the simultaneous explosion half, impelled largely by the G-5 an- in stock market prices were fueled in nouncement in September indicating part by legislation to mandate reducthe desirability of some appreciation tions in the federal deficit and pare the of other currencies relative to the dol- government's demands on credit mar- Interest Rates Percent per year m 15 1981 1983 1985 All the data are monthly averages. Their descrip- bonds, weighted averages of recently offered, 30tions and sources are as follows: Federal funds, year investment-grade bonds adjusted fo an A-fated from the Federal Reserve; three-month Treasury basis by the Federal Reserve; U.S. government bills, market rate on three-month issues, on a dis- bonds, market yields adjusted to 30-year constant counted basis, from the U.S. Department of the maturity by the U.S. Treasury; state and local gov- Treasury; conventional mortgages, weighted aver- ernment bonds, index based on 25 issues of 30-year ages of 30-year, fixed-rate, level-payment mortgages revenue bonds of mixed quality, from the Bond at savings and loan associations, from the Federal Buyer. Home Loan Mortgage Corporation; A-rated utility Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 17 kets. Declining world oil prices and each of the last two years. Spurred by the continued softness in markets for the drop in long-term rates to six-year other commodities, which promoted lows, corporate credit demands foexpectations of lower inflation among cused on the bond markets. Record market participants, also contributed amounts of securities were offered to the rally. publicly by nonfinancial firms in both the domestic and the Eurobond markets last year. On the other hand, short-term borrowing slowed, with Aggregate Credit Flows bank loans to businesses relatively Expansion in the debt of domestic low. nonfinancial sectors in 1985 moder- Tax-exempt borrowing was extraorated only a little from its elevated 1984 dinarily strong almost all of last year, pace and, at 14 percent, exceeded its and the surge in bond offerings late in monitoring range of 9 to 12 percent. the year lifted 1985 volume to a record Last year was the fourth consecutive high. While more favorable interest year in which debt expanded more rates stimulated borrowing generally, rapidly than GNP, after more than 20 the efforts to finance in advance of the years in which the ratio of debt to possible restrictions that were sched- GNP had been generally stable. One uled to take effect after year-end factor boosting debt growth relative to boosted advance refunding and prispending was the extraordinary pace vate-purpose issues in particular. of corporate borrowing to retire equity Households continued to borrow in mergers, buyouts, and stock repur- heavily in 1985. Consumer installment chases. In addition, borrowing surged debt climbed sharply again in 1985, at late last year in the tax-exempt market, a pace near the 20 percent rate rewhere issuance was accelerated into corded in 1984. But the growth of 1985 in anticipation of possible home mortgage borrowing, while near changes in the tax law. Even after al- its 1983-84 average, was probably relowance for these two factors, which strained somewhat by the tightening of together may have accounted for lending standards that accompanied roughly 2 percentage points of the the rise of mortgage loan delinquency 1985 growth in debt, the expansion of rates to record levels. the debt of domestic nonfinancial sec- Growth in the financial assets of tors remained very strong. Another households more than kept pace with important element in the continued the rapid rise in debt over the past two rapid growth of debt and the rise in its years. In particular, the sizable gains ratio to GNP has been the huge federal in the stock and bond markets in 1985 deficits. Although the growth of fed- raised household wealth substantially. eral debt has slowed since 1982, it Indications of debt-servicing difficulcontinued to exceed 15 percent last ties in the household sector have year. mounted, however. Delinquency rates Corporations reduced their demands on consumer installment loans have on credit markets in 1985 as strength- been on the rise since mid-1984 and ening profits and weaker capital ex- have reached relatively high levels for penditures narrowed the sector's fi- some categories such as bank credit nancing gap. Nevertheless, business cards. Moreover, mortgage loan delinborrowing to finance stock retirements quencies remain at the historically remained high—perhaps $80 billion in high levels that have prevailed since Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 Monetary Policy and Financial Markets the 1981-82 recession, associated with The thrift industry as a whole expethe influence of lingering high rates of rienced some improvement in earnings unemployment in some communities, and capital positions last year, alslow income growth, and weak hous- though many institutions remained ing prices in certain areas of the coun- heavily burdened with assets of low try. At the same time, surveys of quality or low yield. Lower interest households continue to show favorable rates lifted their profits from the dereadings on attitudes concerning fi- pressed levels of 1984 by reducing the nancial positions, which suggests that cost of funds and generating capital these financial strains are currently gains on sales of assets. limited to a small part of the popula- The profitability of commercial tion. banks also increased in 1985, breaking Strains in financial markets were ev- the downtrend of recent years. Asset ident at times in 1985 but did not quality remained a concern for some cause major disruptions in overall institutions, however, and was a major market conditions. Financial market factor in the sharp increase in the concern over credit quality was not se- number of bank failures. Banks again vere enough to be reflected in a broad- increased the rates at which they based widening of spreads between charged off bad loans and added to yields on corporate and Treasury debt, loan-loss reserves, responding to conor between yields on private-sector se- tinued financial strains in such sectors curities of different risk classes. Nev- as agriculture, energy, and real estate. ertheless, the agricultural sector of the Higher profits along with the rallies in economy continued to experience seri- the stock and bond markets helped ous financial distress and there were many banks improve their capital posioccasional pressures on some seg- tions in 1985, which facilitated their ments of the financial community. efforts to comply with more stringent In Ohio early in the year, and later capital adequacy guidelines. As part of in Maryland, privately insured savings its efforts to ensure the continand loan associations were closed or ued safety and soundness of the finanlimited to small withdrawals after runs cial system, the Federal Reserve also by depositors in both states. The prob- initiated a program to strengthen sulem in Ohio was triggered by news of pervision of commercial banking losses at one large thrift institution. operations. Problems developed in Maryland Agricultural finances drew special when heightened anxieties in the after- attention last year. Farm income remath of the Ohio crisis combined with mained depressed, and falling prices news of difficulties at a local savings for agricultural products left many and loan. As the problems emerged, farmers unable to meet their debtthe Federal Reserve advanced funds at servicing requirements. Moreover, dethe discount window to bolster the li- clining land prices eroded the value of quidity of the affected institutions. collateral behind many agricultural The loans—whose expansive effect on loans. Consequently, failures of banks reserves was offset through open mar- with relatively high proportions of agket operations—have been repaid in ricultural loans in their portfolios rose Ohio, where the troubled institutions to 68 in 1985, from 32 in 1984 and an have been restructured and reopened, average of only 6 in each of the prebut they remain outstanding at a num- ceding three years. The Farm Credit ber of Maryland thrift institutions. System, which holds about one-third Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 19 of U.S. farm debt, suffered mounting program and initiated a temporary losses and requested federal aid. Farm special seasonal program aimed at Credit securities, which had been making liquidity available to agriculpriced very close to Treasury issues of tural banks that might experience comparable maturity, yielded as much strong loan demand. Although total as 100 basis points more than Treasury seasonal borrowing fell short of the debt at one point in the fall. Rate unusually high level in 1984, evidence spreads narrowed in December, after suggests that these actions increased passage of legislation enabling the access to seasonal credit, boosting Farm Credit System to mobilize its re- borrowing somewhat above what sources more readily and providing for would otherwise have been expected the possibility of a backup source of given money market conditions and assistance once internal sources of overall slack loan demand by farmers. funds are exhausted. In early 1986 the Federal Reserve re- To ease possible constraints on the newed the temporary seasonal proavailability of credit at agricultural gram to assure that agricultural banks banks over the 1985 growing season, would not face liquidity constraints in the Federal Reserve in March liberal- accommodating the needs of their ized its regular seasonal borrowing farm borrowers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 International Developments The year 1985 was marked by a sub- growth that was faster than in the prestantial depreciation of the dollar on vious year. foreign exchange markets. After soar- Despite moderate economic growth, ing to new highs in January and Febru- unemployment rates abroad stayed ary, the dollar declined sharply close to the historically high levels of through the remainder of the year, recent years. In Germany and the though by year-end it was still nearly United Kingdom, unemployment rates 40 percent above its fourth-quarter remained about unchanged throughout 1980 level on a trade-weighted average the year, while in Japan the rate edged basis against major foreign currencies. up slightly during the second half of Although economic activity in ma- 1985. In Canada, and to a lesser extent jor industrial countries grew at a in France, some reduction in the rate stronger pace than in the United of unemployment did occur. States, and growth in developing coun- The rate of inflation in the major tries recovered somewhat, the United foreign industrial countries on balance States had record trade and current ac- fell further in 1985. In several councount deficits, reflecting the lagged effects of the dollar's earlier apprecia- GNP and Prices tion. By the fourth quarter, however, 1970=100 signs of an upturn in U.S. import Gross national product prices emerged, showing the first effects of the dollar's depreciation during 1985 and pointing toward a reduction of the external deficits expected to begin during the course of 1986. 135 Real economic activity abroad continued to expand at a moderate rate, but relative strength shifted significantly across the major industrial Percent change from previous year countries. In Japan, where growth Consumer price*.fetytafc: - •'.: J'. K; - ,-.•• ". ' _ ; during the recovery had been strongest among the major foreign industrial ;: "' ; " -' 10 countries, real GNP slowed somewhat from its pace in 1984. In contrast, economic activity in Germany recovered in the second quarter, from a decline earlier in the year that had resulted in part from a particularly severe winter, and then strengthened 1981 1983 1985 further during the rest of the year. The Foreign data are multilaterally weighted averages ending in March of a prolonged min- for 10 industrial countries, using 1972-76 total ers' strike in the United Kingdom con- trade weights. Data for the United States are from the U.S. Detributed importantly to U.K. economic partments of Commerce and Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 21 tries rates dropped to levels not experi- countries of Latin America and East enced in more than a decade. The Asia permitted some deterioration of moderate pace of the recovery, the ap- their international trade competitivepreciation against the dollar of the cur- ness early in the year but, following rencies of most of these countries, the downward trend of the dollar after weakness in world oil and other com- February, showed a dramatic net immodity prices, and continued slack in provement in their export competitivelabor markets, particularly in the Eu- ness over the year as a whole. ropean economies, were all factors Growth in developing countries recontributing to the deceleration of mained moderate in 1985. Inflation reprice increases. mained a problem in several countries, Money growth abroad remained with rates of inflation rising in Brazil generally moderate. With a few excep- and Yugoslavia and remaining high in tions, growth of specific aggregates Mexico. In contrast, Argentina instiwas within announced targets, which tuted a monetary reform in mid-1985, most often were equal to or slightly which facilitated a dramatic reduction below targets set for the previous year. in its inflation rate. Fiscal policy measures led to govern- The problems associated with the ment deficits that, as a fraction of large volume of external debt of devel- GNP, were about unchanged or further oping countries remained one of the reduced in the major foreign industrial most important issues in international countries. finance in 1985. Despite a significant Significantly larger current account decline in interest rates in 1985, a surpluses in several foreign industrial number of developing countries with countries corresponded in the aggre- large external debts found it difficult gate to the greater U.S. current ac- to implement consistently the ecocount deficit. The largest gain was in nomic adjustment programs begun in Japan, where the surplus rose from 1982-83 because levels of economic $35 billion in 1984 to about $50 bil- activity and living standards remained lion. The German current account sur- low compared with those of the late plus more than doubled from its level 1970s. Partly in response to these conof $6 billion in 1984, and that of the tinuing strains, U.S. Treasury Secre- United Kingdom also increased sub- tary Baker proposed a strengthening of stantially. the overall debt strategy at the annual The continued current account defi- meetings of the International Monecit of non-OPEC developing countries tary Fund and World Bank held in widened somewhat in 1985 as com- Seoul in October 1985. The initiative pared with 1984 but remained consid- retains the case-by-case approach to erably below the large imbalances of the debt problems of individual counthe 1980-82 period. The widening of tries that has been followed since the current account deficit last year re- 1982. Under the plan, commercial flected mainly a decline in export rev- banks and multilateral development enues, much of which can be traced to banks, especially the World Bank, an economic slowdown in industrial would provide significant additional countries and a substantial decline in external financing in the 1986-88 perprimary commodity prices from their iod. This additional financing would 1984 level. With exchange rates often facilitate and encourage new efforts by linked to the U.S. dollar, most major the participating developing countries Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 International Developments to implement structural reforms in higher than in 1984. Economic activtheir economies that would lead to ity in major industrial countries exhigher sustainable growth rates. Since panded at about the same 3 percent the emphasis would be on increased rate as in the previous few years, but medium-term structural reforms, the demand for U.S. goods was restrained World Bank would have a larger role by the cumulative effect of the dollar's to play than it had previously in the appreciation through early 1985 on the management of the debt problem of foreign-currency price of U.S. goods. developing countries. The Interna- In 1985 the volume of nonagricultural tional Monetary Fund would continue exports was about the same as in 1984; its role in the formulation and imple- the average price increased about 1 mentation of sound macroeconomic percent. policies. The small increase in the value of In early 1986, Argentina, Mexico, imports in 1985 reflected an expansion and several smaller countries were in volume that was almost entirely offworking closely with the IMF and the set by a decline in import prices for the World Bank to formulate programs year as a whole. The volume of imthat might attract the increased financ- ports increased 4 percent in 1985 ing envisaged by the Baker initiative. compared with a 25 percent increase For Mexico the sharp drop in oil in 1984. The volume of non-oil imprices that occurred during the first ports in 1985 responded to the slower two months of 1986 has made it more difficult to formulate policies in the longer-term context. U.S. International Trade Billions of dollars U.S. International Transactions US* balances on trade m4 current account The U.S. merchandise trade and current account deficits widened further in 1985. A $6 billion decline in merchandise exports and a small increase in merchandise imports yielded a trade deficit of $124 billion, compared with a deficit of $114 billion in 1984. The current account deficit was $118 billion, up from $107 billion in 1984. The decline of exports in 1985 largely reflected a sharp drop in the value of agricultural exports—25 per- Ratio scale, billions of 1982 dollars cent, about half in price and half in U.S. merchandise trade volume. Ample foreign supplies, relatively high U.S. price support levels for various crops, and the effect on prices of the high exchange value of the dollar seriously affected the ability of U.S. farmers to market their goods 1981 1983 1985 abroad. The value of nonagricultural Data are seasonally adjusted at annual rates and exports in 1985 was only marginally are from the U.S. Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 23 U.S. International Transactions1 Billions of dollars, seasonally adjusted Quarter Year Transaction 1984 1985 1984 1985 Q4 Ql Q2 Q3 Q4 Current account -107 -118 -32 -24 -28 -29 -37 Merchandise trade balance -114 -124 -31 -23 -28 -33 -39 Exports 220 214 56 55 54 52 53 Imports 334 338 87 78 82 85 92 Investment income (net) 19 25 4 3 5 9 8 Direct investment, net 13 26 3 2 6 9 9 Portfolio investment, net Other services (including military 6 -1 1 -1 transactions) -1 -1 Unilateral transfers, private and -1 -3 -1 -1 government -3 -3 -4 -11 -15 -4 -4 Private capital flows 26 17 20 Bank-reported capital, net 82 93 13 31 (outflows, -) 13 4 5 U.S. net purchases (—) of foreign 23 35 -1 12 securities -2 2 -2 Foreign net purchases (+) of -5 -8 -4 -1 U.S. Treasury securities 3 5 7 Foreign net purchases of 22 21 10 6 U.S. corporate bonds 11 7 10 Foreign net purchases of 14 46 10 18 U.S. corporate stocks 5 -1 1 4 U.S. direct investment abroad -1 -19 -1 2 -5 -7 -9 Foreign direct investment in -5 -5 United States 23 16 5 2 7 6 1 Other corporate capital flows, net . 11 n.a. -1 -1 1 -1 n.a. Foreign official assets in United States (increase, +).. -2 -11 -2 U.S. official reserve assets, net (increase, -) -3 -4 -1 -3 U.S. government foreign credits and other claims, net -6 -3 -1 -1 -1 * -1 Seasonal adjustment discrepancy 4 -1 -4 5 Statistical discrepancy 30 33 9 11 4 11 6 1. Details may not add to totals because of round- SOURCE. U.S. Department of Commerce, Bureau of ing. Economic Analysis. *Less than $50 million. rate of U.S. economic growth than in U.S. growth helped reduce demand for 1984 and the lagged effects of the ap- imported oil in 1985. The depreciation preciation of the dollar that occurred of the dollar from its February 1985 through early 1985. While imports of peak began to reduce the price comconsumer goods and automotive prod- petitiveness of foreign goods noticeucts increased fairly strongly in 1985, ably toward the end of the year. After a imports of industrial supplies (exclud- prolonged period of weakness, import ing oil) and capital goods increased prices turned up in the fourth quarter only fractionally and imports of oil de- of 1985, particularly for various types clined. Sagging prices in world oil of manufactured goods. markets early in the year, a potential Among the nontrade components of for further price declines, and slower the current account, increased net in- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 International Developments come receipts from U.S. direct invest- banks to improve capital adequacy led ment abroad were largely offset by a to efforts to reduce assets with low reduction in income from net portfolio profit margins; claims on foreigners in investments. During 1985, net portfo- the form of bankers acceptances delio income swung from net receipts to clined by $9 billion. In addition, bank steadily increasing net payments; this liabilities to private nonbanks, particudevelopment reflected the shift in the larly residents of Latin America, con- U.S. position from that of a net inter- tinued to grow. national creditor to that of a net debtor Foreign official assets in the United during the course of 1985 as a conse- States declined slightly in 1985. A dequence of cumulative large current ac- cline in holdings of OPEC countries count deficits over the past few years. was almost matched by increases by The recorded $118 billion current other countries. Despite large interaccount deficit for 1985 was balanced vention sales of dollars by the foreign by recorded net capital inflows of $85 G-10 countries in 1985, their holdings billion and a statistical discrepancy of of official assets in the United States $33 billion. While official transac- showed essentially no change. U.S. tions, both U.S. and foreign, resulted holdings of official reserve assets did in an outflow of $8 billion, private increase as a result of the intervention. capital transactions produced a net inflow of more than $93 billion. Net purchases of U.S. stocks and bonds by Foreign Currency Operations private foreign investors accounted for more than half of the inflow, with In early 1985 the dollar continued to Eurobonds accounting for most of this advance strongly, reaching a peak in share. Facing lower interest rates, late February that was about 85 per- U.S. corporations chose to restructure cent above its 1980 fourth-quarter their balance sheets and to issue debt level on a trade-weighted average bain large amounts in both the domestic sis. This surge prompted heavy sales and Eurobond markets. The propor- of dollars by foreign central banks. tion of all bonds publicly offered by U.S. monetary authorities also inter- U.S. corporations that were sold vened, selling a total of $660 million abroad was almost 25 percent in both from late January through early 1984 and 1985. March. From March through late Au- Net sales of U.S. Treasury securities gust the dollar declined fairly steadily, to private foreign investors continued reaching a point about 18 percent bestrong in 1985 although somewhat be- low its February peak. This decline relow the record 1984 level. Of the $21 flected a substantial decline in long billion purchased by private foreign term real interest rates in the United buyers, $17.5 billion was purchased States relative to those abroad, which by residents of Japan, up from $4.7 reflected, in turn, the disappointment billion in 1984. The Treasury sold of expectations of a lift in U.S. ecoonly $1 billion in the form of issues nomic activity and a relatively accomspecially targeted for foreigners in modative U.S. monetary policy. 1985. From late August through mid-Sep- Inflows reported by banks were also tember, however, the dollar rebounded substantial in 1985, totaling about $35 sharply on the basis of more favorable billion. Continuing pressure on U.S. U.S. economic statistics and revised Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 25 targets for the dollar. This initiative Weighted Average Exchange Value of the Dollar and Interest Rate Differential appeared to have a shock effect on the Percent per year March 1973 = 100 market, and the dollar resumed its downward trend. By year-end the dol- Weighted average lar had declined a further 12 percent exchange value of the on a weighted average basis. G-5 monetary authorities sold about $13 billion from September 23 through the end of November, including combined sales of $3,301 million by the Federal Re- Ldixg-tmm real serve and the U.S. Treasury. From its interest rate differential February 1985 peak to the end of De- 100 cember the dollar depreciated by 25 percent on a weighted average basis, by 24 percent against the Japanese yen, and by 29 percent against the 1981 1983 1985 Exchange value of the U.S. dollar is the index of the weighted average exchange value of the dollar Weighted Average Exchange Values against currencies of the other Group of Ten (G-10) and Dollar Exchange Rates countries plus Switzerland, using 1972-76 total trade weights. Index, December 1980 = 100 Differential is rates on long-term U.S. government or public authority bonds minus rates on comparable German mark , foreign securities, both adjusted for expected infla- ^ ' 100 tion estimated by a 36-month centered moving aver- Weighted averagFvalue age of actual inflation or by staff forecasts where needed. 80 Dollar/mark 60 expectations of the likelihood of a Federal Reserve tightening to curb rapid Ml growth. With this renewed Japanese yen strengthening of the dollar and in the context of swelling protectionist Weighted average value threats in Congress, officials of the G-5 countries met in New York on the weekend of September 21-22. The G-5 announcement of September 22 80 pointed to recent changes in economic Dollar/yen fundamentals—the convergence of ' i ' i economic performance and policies U.K. pound among major countries—which market participants seemingly had not yet taken into account in determining ex- 80 change rates. To underscore this view, the monetary authorities of the G-5 60 countries initiated a program of concerted intervention in the exchange 1981 1983 1985 markets to bring about the apprecia- The weighted average value for each currency is tion of nondollar currencies—without, its exchange value against the currencies of the other G-10 countries plus Switzerland, using 1972-76 tohowever, adopting any exchange-rate tal trade weights. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 International Developments German mark. The dollar's decline af- Holdings of foreign currencies by ter late February was consistent with a the Federal Reserve at year-end totaled sharp drop in the real long-term inter- $7,016 million equivalent, essentially est rate differential between assets de- all of which consisted of German nominated in dollars and those denom- marks, Japanese yen, and Swiss inated in foreign currencies. francs. The valuation gains on these For the year as a whole, U.S. mone- holdings, about $1,210 million for the tary authorities intervened to sell year, reflected the appreciation of for- $3,943 million—$1,488 million against eign currencies against the dollar. yen and $2,455 million against marks. There were no realizations of profits One-half of these amounts was for the during the year as the Federal Reserve account of the Federal Reserve, and did not sell any foreign currencies. one-half for the account of the Ex- There were no drawings or repaychange Stabilization Fund of the U.S. ments on the Federal Reserve Swap Treasury. Network during 1985. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

27 Monetary Policy Reports to the Congress Given below are reports submitted to during the year drew attention away the Congress by the Federal Reserve from a number of continuing probon February 20 and July 16, 1985, lems, but those problems are nonethepursuant to the Full Employment and less real and serious. The overall rate Balanced Growth Act of 1978. of unemployment is still uncomfortably high, and the joblessness among certain groups—for example, teenag- Report on February 20, 1985 ers and blacks—remains well above the average. Sectors of the economy The Outlook for the facing intense competition from Economy in 1985 abroad, such as agriculture and certain Nineteen eighty-four was another year mining and manufacturing industries, of substantial economic growth in the have not participated in the rapid eco- United States. Production and employ- nomic expansion overall and have been ment gains were large, making the ex- under strong financial stress. Strains pansion of the past two years—with also remain evident among financial growth in real gross national product institutions: a number of depository averaging 6 percent per year—the institutions have experienced a deteristrongest cyclical upswing since the oration in the quality of their loan early 1950s. Moreover, continued portfolios, and the earnings of thrift vigor of the economy was accompa- institutions remain constrained by lownied by signs of some further lowering yielding assets accumulated in earlier of inflationary expectations. Aggre- years. gate price measures rose around 4 per- While it has not been an impediment cent last year, about the same as dur- to economic expansion to date, growth ing the two preceding years. While in credit has been exceptionally rapid, prices of services continued to rise 5 to and many households and businesses 6 percent, prices of many goods were have accumulated substantial indebtrelatively flat, and underlying wage edness, often in short-term or variatrends seemed to be moderating. ble-rate forms that make them espe- Economic growth had been extraor- cially vulnerable to unexpected dinarily rapid in the first half of 1984 economic developments. Also, despite and then slowed abruptly around mid- the impetus from strong U.S. demand, year. Although some slowing in growth in economic activity has been growth was widely anticipated, the limited in a number of important inabruptness of the change raised some dustrialized countries; and many dequestion about the continuing strength veloping countries, in Latin America of expansionary forces. However, dur- and elsewhere, are still struggling to ing the last few months of the year, restore satisfactory growth. While output and employment were clearly progress was made in stabilizing the rising, though at a more moderate external finances of some of the largpace than earlier in the year. est of those countries, that progress The strong gains in overall activity can only be secure in the context of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 Monetary Policy Reports greater stability in their own econo- ing, and agriculture sectors and leadmies and of sustained growth in the ing to calls for protectionist measures. industrialized world. Moreover, the capital inflows lead to Many of the problems afflicting par- mounting financial claims of forticular industries have causes and eigners that the nation must be precomplications that, at least in part, pared to deal with in future years, must be dealt with in direct and spe- through reduced imports or increased cific ways. But it is also evident that exports, in either case lowering dothe enormous imbalances in our fed- mestic consumption. eral fiscal posture and in our trade and current account position have aggra- The Economic Projections vated the problems and made con- oftheFOMC structive solutions much more diffi- Notwithstanding the risks associated cult. In an expanding economy with the domestic and international requiring more private credit, the need problems just outlined, the weight of to finance the large federal deficits has the evidence points to reasonably facontributed to the pressures that have vorable near-term prospects for aggreheld real interest rates at historically gate economic performance. In recent high levels. The failure to deal with months, personal income growth has budgetary deficits also has sustained been strong, reflecting continuing subdoubts in the minds of the public about stantial gains in employment and helpthe ability of the government to con- ing to support consumer spending. tinue to curb inflation over the long Overbuilding of multifamily residenrun. tial units and offices in some parts of The large federal deficits are mir- the country may pose questions about rored in our external imbalance. Many the outlook in these areas, but the foreign investors have been attracted to lower interest rates that developed over the comparatively high real rates of re- recent months suggest that single-famturn offered on dollar-denominated as- ily homebuilding may strengthen. Sursets, and U.S. lending abroad has been veys of businesses indicate plans for reduced. Other forces stimulating cap- continued growth in plant and equipital inflows have been at work as well, ment spending in the coming months, including political and economic un- though at a slower pace than last year; certainties in other countries and the meanwhile, some imbalances in busirelative stability and vigor of our econ- ness inventories that developed during omy. The shift in capital flows has 1984 appear to be well along in the supplemented domestic saving and process of correction, and in some helped finance the federal government sectors inventories are quite lean reladeficit and private investment. But, at tive to sales. Many states and localities the same time, the strong demand for are experiencing an improvement in the dollar has driven its value on for- their finances, which portends further eign exchange markets to extremely support to the expansion from that sechigh levels. As the dollar has appreci- tor. And, at the federal level, there ated, the demand for our exports has continues to be a strongly stimulative suffered and our purchases of im- thrust from fiscal policy. ported goods have increased dramati- The smallest increases in nominal cally, resulting in strong competitive wages and compensation in more than pressures on the manufacturing, min- a decade have been accompanied by an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 29 Economic Projections for 1985 Percent FOMC members and other FRB Presidents Congressional Adminis- Item tration Budget Range Central Office tendency Change, fourth quarter to fourth quarter Nominal GNP 7to8V 7Vto8 8.5 7.7 Real GNP 31/4to41/ 2 3V2 2 to4 4.0 3.4 GNP deflator 3to43/4 4 3V 2 to4 4.3 4.2 Average unemployment rate in the fourth quarter 6Vto7V4 63/4to7 6.9 7.0 2 improvement in productivity and comes from farming have been low, downward pressures on energy and land prices are falling, and many procommodity prices. These develop- ducers face heavy debt burdens. In the ments help support the possibilities of household and business sectors, continuing restraint in price increases. higher levels of indebtedness are un- Also, in the context of an economy likely to forestall further gains in expanding at a sustainable rate, they spending, but unless moderated, they are consistent with continuing growth would in time add to financial presin average real income. sures. Taking account of these factors, the Favorable price performance has members of the Federal Open Market been encouraged by the strength of the Committee (as well as Federal Reserve dollar in the exchange markets. A Bank Presidents who are not at present sharp and large reversal of that FOMC members) now foresee the strength could be reflected in at least probable continuation of the economic temporarily stronger inflationary presexpansion through its third year, al- sures. Greater confidence in prospects though at a more moderate pace than for price stability is, of course, depenin the first two years. The central ten- dent over time on suitably restrained dency of the members' forecasts indi- growth in the money supply; and that cates the probability of an increase in necessary approach and more moderreal gross national product of between ate real interest rates would be facili- 3V2 and 4 percent this year. The unem- tated by effective action to reduce subployment rate is expected to decline in stantially the size of federal budget 1985 to a level of between 63/4 and 7 deficits in the upcoming and subsepercent by the fourth quarter. At the quent fiscal years. Action to restore same time, most members expect gen- balance in the government's fiscal poeral measures of price inflation to re- sition is important to the achievement main close to recent trends. of an environment conducive to stable, When considering the general out- strong economic growth. In their forelook for 1985, members of the FOMC casts, the Committee members asrecognized that persisting problems sumed that the exchange rate would recould become aggravated for particu- main within the range of recent lar sectors of the economy, and that months and that effective fiscal action there are risks for the economy as a is in prospect. whole. Clearly, there is growing dis- The "central tendency" forecast of tress in many farm communities. In- the FOMC members is broadly con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 Monetary Policy Reports sistent with that of the administration, for the year. Expansion within these as indicated in the Economic Report of ranges would represent a significant the President, and that of the Congres- deceleration in the actual growth of sional Budget Office. The Administra- M3 and debt from the experience of tion's projections for both real GNP last year when the target ranges were growth and inflation do fall, however, exceeded. toward the upper part of the ranges of In formulating these objectives, the Committee members' forecasts, while Committee assumed that no new statuthe CBO's estimate of real growth is a tory or regulatory developments would bit lower than the central tendency be enacted that would appreciably inrange of the FOMC. fluence the behavior of the monetary and credit aggregates in 1985. Although at the beginning of the year the The Federal Reserve's minimum denomination of super Objectives for NOW and money market deposit ac- Money and Credit in 1985 counts was reduced from $2,500 to At its meeting of February 12-13, the $1,000, to date the promotional activ- FOMC set monetary and credit growth ity accompanying this change has been ranges for 1985 designed to be consis- minor, and it appears that Ml and M2 tent with further sustainable economic have not been affected significantly. growth and progress toward reason- On average, the behavior of Ml veable price stability over time. Specifi- locity—nominal GNP divided by the cally, the Committee (1) set a growth money stock—during 1984 was range for Ml of 4 to 7 percent from broadly consistent with previous cyclithe fourth quarter of 1984 through the cal patterns. Together with other evifourth quarter of 1985, the same as dence, this development suggests that that tentatively selected last July; (2) the factors responsible for the highly established target ranges of 6 to 9 per- unusual velocity behavior over 1982 cent and 6 to 9lh percent for M2 and and early 1983 have receded. M3 respectively, V2 percentage point Nonetheless, a range of uncertainty higher at the upper end of the range inevitably remains about the trend of than that tentatively set in July; and (3) Ml relative to nominal GNP in light of set an associated monitoring range of 9 recent deposit deregulation and other to 12 percent for the debt of domestic financial innovations that have affected nonfinancial sectors, 1 percentage the funding policies of banks and the point higher than tentatively indicated. cash management practices of the pub- The upper end of the range for Ml is 1 lic. On balance, it appears likely that percentage point below that of 1984, the process of deposit deregulation and the range for M2 is the same as will lead to a trend rate of increase in last year's. The upper end of the target the velocity of Ml that may be somerange for M3 is slightly above that for what lower than in the period as a last year. That increase, as well as the whole since World War II. However, upward adjustment in the associated in view of the multiplicity of changes monitoring range for the debt of do- in financial instruments and practices mestic nonfinancial sectors, reflects that influence the behavior of all the analysis of developments during 1984 monetary measures, interpretation of suggesting that growth somewhat all the aggregates will continue to be greater than anticipated earlier may be made within the context of the outlook consistent with Committee objectives for economic activity, inflationary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 31 pressures, and conditions in domestic tutions on retail deposits and returns and international financial markets, on money market mutual funds. In adincluding the strength of credit de- dition, M3 growth has reflected submands. stantial issuance of large CDs by thrift The new target range of 4 to 7 per- institutions to support their lending in cent for Ml encompasses growth in mortgage and consumer loan markets. Ml consistent with velocity expansion Growth of the broader monetary agover the coming year approximating gregates is influenced, as well, by the that of last year, and also higher Ml pattern of international capital inflows growth than would be needed should associated with the huge current acvelocity grow at a rate approximating count deficit. Domestic banks may the reduced trend suggested above. continue to borrow sizable amounts of The movements in velocity during Eurodollar funds from their foreign 1984 occurred in a context of moder- branches and unaffiliated foreign ate increases in interest rates over banks; such borrowings are not inmuch of the year; however, velocity cluded in the measured monetary aghas slowed substantially in recent gregates. By reducing the need for months in the context of an apprecia- funding through other managed liabilible rise in money growth and follow- ties included in M2 and M3, these ining declines in interest rates. In all the flows tend to restrain measured monecircumstances, a somewhat higher rate tary growth in relation to growth of of money growth than implied by bank credit and of credit generally. straight-line projections from the Moreover, many domestic borrowers, fourth quarter 1984 base to the targets including the federal government and for the fourth quarter of 1985 may be private corporations, may continue to appropriate early in the year, but tap overseas securities markets digrowth of Ml would be expected to rectly, reducing the need for credit exslow, and velocity growth to rise, as pansion by U.S. intermediaries. the current adjustments are com- Given the federal budget deficit as pleted. Thus, as the year progresses, projected by the administration for growth of Ml would be expected to 1985—as well as a likely expansion of move gradually toward and into the spending by domestic sectors in excess FOMC's target range. Depending of nominal GNP growth, as part of upon developments with respect to ve- that spending flows abroad—the Comlocity and price behavior, growth of mittee contemplates that domestic Ml and of the other monetary aggre- nonfinancial debt may continue to ingates in the upper parts of their ranges crease more rapidly than nominal may be appropriate over the year as a GNP. Still, actual growth of debt in whole. Those developments will, of 1985 should be markedly less than in course, be closely monitored over the 1984, as nominal GNP growth and year. overall credit demands moderate. Like Ml, growth of M2 and M3 Growth within the debt range for 1985 have been particularly strong in recent assumes also a slowing in credit for months, reflecting the unusually favor- mergers, leveraged buyouts, and other able yield spreads in favor of monetary financial restructuring. Such credit led assets that emerged temporarily to- to some erosion in corporate equity ward the end of last year; open market cushions last year, and a more cauinterest rates dropped more swiftly tious approach is anticipated this year. than rates offered by depository insti- The outlook for financial conditions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 Monetary Policy Reports generally is again expected to be af- the year such spending rose about 63k fected importantly by current and pro- percent in real terms. Consumers and spective federal budget deficits, which businesses purchased greatly inwill remain enormous in comparison creased quantities of imported goods, with experience in previous economic whose relative prices were lowered by expansions. This massive federal bor- the appreciation of the dollar in exrowing will compete for available do- change markets, and the U.S. trade mestic savings with the strong private deficit reached record proportions. credit demands accompanying further Last year's economic gains were growth of economic activity, keeping achieved without a pickup in inflationinterest rates and exchange rates ary pressures, in part owing to the rise higher than they otherwise would be. in the exchange value of the dollar. Such relatively high interest rates and Aggregate indexes of prices rose about exchange rates limit expansion in those 4 percent or less, similar to rates of sectors that are most sensitive to the inflation recorded in 1983. Ample cost of credit and impair the competi- availability of industrial capacity here tive positions of domestic import-com- and abroad helped to contain price inpeting and export industries. Decisive creases. Labor cost pressures also and credible actions to reduce federal were limited, as wage increases actubudget deficits would have favorable ally were slightly lower than a year effects on investors' expectations and earlier. Labor markets continued to rehelp to lower interest rates, especially flect the still considerable unemploylonger-term rates, even before these ment in the economy as well as the reductions become fully effective. adjustments of wages in some sectors Such actions would work to relieve the to the realities of forces associated imbalances and strains within the with deregulation and foreign compeeconomy, contribute to further abate- tition. Wage changes also reflected the ment of inflationary expectations, and favorable feedback effect of lower inso reinforce the prospects for contin- flation on anticipatory or catch-up pay ued growth and stability. demands. Although the nation as a whole has made substantial progress in the past The Performance of the two years toward the goals of sustained Economy in 1984 growth and high employment along The economy recorded major gains in with price stability, important seg- 1984, with the real gross national ments of the economy have continued product up 5lk percent and the unem- to experience considerable difficulty. ployment rate down more than 1 per- One symptom of continuing imcentage point over the year. The balances has been interest rates that, growth in output and employment was relative to the prevailing rate of inflaexceptionally strong in comparison tion, have remained exceptionally high with experience in other post-Korean by historical standards. However, after War expansions. But even more strik- moving upward during the first half of ing, in terms of its departure from past the year when economic expansion norms, was the extraordinary rise in was especially brisk, interest rates redomestic spending, which again ap- traced their advances in the second preciably outstripped growth in do- half of the year. At year-end, they mestic production. Over the course of were, on balance, a little lower. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 33 Federal government tax and spend- unemployment, consumers had curing policies have provided substantial tailed discretionary purchases of stimulus to aggregate demands for household goods. Since the end of goods and services, but in credit mar- 1982, however, strong employment kets the deficits have added strongly to and income growth and rising conthe demands for funds and have been sumer confidence have been translated one important force keeping interest into an appreciable restocking of rates high. Moreover, there is general household durables. agreement that, unless legislative mea- The strength of automobile pursures are enacted, budget deficits are chases in 1984 was a part of this relikely to increase further, even in the stocking process. As the stock of existcontext of a reasonably growing econ- ing autos has aged, replacement omy. This prospect, with its implica- demand has grown. Most recently, retion of continuing pressures on the ductions in gasoline prices have lowsupply of savings, has been a factor in ered operating costs. Automobile sales the rise in the foreign exchange value in 1984 rose to IOV2 million units, the of the dollar and the attendant emer- highest level since 1979. The foreign gence of enormous deficits in our share of the market declined, owing in trade and current accounts with other large part to the impact of limitations nations. Although, as noted above, the on Japanese units during a period of sharply higher value of the dollar has expanding sales. Indeed, demand for been an important factor in the move- domestic autos proved to be so strong ment toward price stability, inflation- that producers had difficulty supplying ary pressures could become more ap- many of the more popular models, parent if the U.S. dollar were to even though auto companies operated decline sharply—a risk that could in- some factories at near full capacity crease as fundamentally unsustainable over most of the year. Total auto profiscal and external postures are ex- duction was up 14 percent from the tended. preceding year, despite brief strikes in the autumn. Spending for new homes slowed The Household Sector over the course of 1984, with rising The household sector continued to mortgage interest rates through midbenefit last year from the economic year a factor reducing housing activity. expansion. Adjusting for inflation, the However, there were some initial signs rise in disposable income from the of improvement in the housing sector fourth quarter of 1983 to the fourth at year-end, associated with earlier dequarter of 1984 was 53/4 percent, sur- clines in interest rates during the fall. passing the large gain in 1983. This From the fourth quarter of 1983 to the strong increase in income supported a fourth quarter of 1984, residential rapid rise in spending for consumer construction outlays, in real terms, goods even as the personal saving rate were up 3V2 percent after an exrose. tremely rapid advance in 1983. For Household sector outlays in this ex- 1984 as a whole, 1.7 million new pansion have been tilted more toward housing units were started. This was durable goods than has been typical. below the peak rates in the 1970s, but In the 1980-82 period, a time of rela- a marked improvement over the pertively slow income growth and high formance of the first years of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 Monetary Policy Reports 1980s, as housing demand continued linquencies to date appears attributto be supported by favorable demo- able not so much to adjustable-rate graphic factors and expanding in- loans as to a combination of unemcomes. Moreover, relatively stable ployment that is still high and real eshouse prices and the growing use of tate prices that are more stable than adjustable-rate mortgages made home some borrowers had anticipated. purchases more accessible for many households. The Business Sector The second year of strong growth in The increase in business spending for income and spending was accompa- plant and equipment was greater in nied by significant changes in house- 1984 than in 1983. In fact, the rise in hold balance sheets. Late in 1983 and gross business capital outlays over in the first half of 1984, financial as- these two years combined was much sets declined relative to income—ow- larger than in any other economic exing primarily to the sluggish perform- pansion since World War II. Profits in ance of stock prices—retracing a the nonfinancial corporate sector were portion of the strong gains made ear- up substantially in 1984, although by lier in the recovery. However, the sub- year-end the level had fallen back a bit sequent rise in equity prices helped to owing to the slowing in sales growth. restore household asset positions to Growth in business fixed investment their previous high levels, and since spending was strongest in the first half the turn of the year, with stock prices of the year, but continued at a doubleup sharply, asset positions have im- digit pace in real terms in the second proved farther. Meanwhile, growth of half. For the year as a whole, large household indebtedness picked up no- gains were registered for both equipticeably last year, and consumer in- ment and structures outlays. The ebulstallment debt as a share of disposable lience of total spending reflected a income moved to near its previous number of factors, including the more peak in the late 1970s. favorable tax laws enacted in 1981, the Despite the rise in indebtedness, desire to take advantage of technologithere were few signs of increased fi- cal advances, and the further narrownancial stress in the household sector. ing of the margin of unused factory The incidence of payment difficulties capacity under strong demand growth. on consumer installment debt re- Continued competitive pressure from mained historically low, and home foreign producers provided additional mortgage delinquency rates were impetus for rapid modernization. At about unchanged for the year as a the same time, many U.S. producers whole. Nonetheless, the proportion of of capital equipment, especially outproblem loans in the home mortgage side the "high tech" area, did not fully market has not receded from its reces- benefit from this spending. Instead, sion high, and there is some special foreign manufacturers captured an inconcern about future prospects in this creasing share of capital goods purarea owing to the added risk exposure chased by U.S. firms; for domestic of homeowners who took on mort- equipment spending, this share—apgages carrying adjustable features, es- proximately 25 percent—was nearly pecially those made with sizable initial twice that experienced in the late interest rate concessions. The sus- 1970s. tained high level of mortgage loan de- Businesses accumulated inventories Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 35 in 1984 after reducing stocks in the further, on average, and farm income preceding two years. In real terms, remained depressed. As a result, business inventories rose $24 billion, farmers with large volumes of debt rea historically large gain. Those gains maining from the late 1970s continue were concentrated largely in the first to face serious debt-servicing probhalf of the year, alongside the rapid lems. The metals, agricultural implepace of the expansion of final demand. ments, and some equipment industries When sales growth slackened in the also continue to face significant probsummer and autumn, businesses lems. quickly cut back on orders and production to avoid severe imbalances. The Government Sector In order to finance the combined in- The expanding economy lifted federal crease in capital spending and inven- government receipts in 1984. At the tory investment, businesses relied same time, outlay growth was limited heavily on external sources of credit. by further declines in recession-re- Nonetheless, gross issuance of new lated expenditures and by a drop in agequity weakened as stock prices de- ricultural support payments. Nonetheclined early in the year and then failed less, the federal budget deficit reto surpass earlier highs when they ral- mained enormous—more than 5 perlied in the summer. After accounting cent of GNP and larger than total dofor the retirement of equity associated mestic personal saving. Moreover, at with merger activity and share repur- the end of the year the deficit was chases, the net issuance of stock was again rising. decidedly negative. Shorter-term bor- Federal government purchases of rowing was favored by businesses in goods and services, the component of the first half of 1984, as firms elected the budget that directly adds to GNP to finance mergers initially through and accounts for about a third of total bank loans and commercial paper, and federal outlays, rose strongly last year. the high level of long-term interest Excluding changes in Commodity rates discouraged bond issuance. In Credit Corporation farm inventories, the second half of the year, merger fi- federal purchases were up nearly 5lk nancing slowed and the decline in in- percent, after adjustment for inflation. terest rates contributed to some move- A major thrust to federal purchases ment toward longer-term debt issu- came from defense spending, which ance. Even so, the traditional balance increased almost 7 percent in real sheet ratios used to assess aggregate terms. business financial strength worsened At the state and local government over the year: the ratio of loans and level, real purchases of goods and sershort-term paper to total debt of nonfi- vices rose 3V2 percent in 1984, follownancial corporations rose, as did the ing two years of no change. The reratio of debt to equity. newed growth in such spending Severe financial strains, in many followed an appreciable improvement cases related to the high exchange in this sector's fiscal position: state value of the dollar, persisted in some and local governments experienced a of the nation's basic industries. sizable operating and capital surplus in Farmers continued to face less favor- 1983 and early 1984 owing to the efable export conditions than in much of fects of the economic recovery as well the previous decade, land prices fell as to increases in tax rates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 Monetary Policy Reports The Foreign Sector pushed the volume of merchandise im- The appreciation of the dollar over the ports sharply higher. Consumer past four years directly contributed to goods, materials, and capital equipthe imbalance between exports and ment shared in the increase. The merimports in 1984. On a trade-weighted chandise trade deficit rose to about average basis, the dollar climbed a far- $110 billion. In addition to the growther 12 percent during the course of ing trade deficit, net service receipts the year, bringing the cumulative ap- were reduced, and the current account preciation since the end of 1980 to deficit was about $100 billion in 1984, about 65 percent, and the rise has con- compared with $42 billion in 1983. tinued into 1985. Part of the dollar's strength in the first half of last year Labor Market Developments may have been generated by a widen- Developments in labor markets coning of the differential between real in- tinued to be favorable during the secterest rates in the United States and ond year of expansion. Reflecting the real rates abroad; however, the influ- strength of activity and improved emence of this factor appears to have ployment prospects, growth of the labeen reversed in the second half of the bor force picked up last year. But the year. The relative dynamism of the number of new jobs expanded even U.S. economy and success in curbing more rapidly, and the unemployment inflation helped attract capital from rate was 7.2 percent in the fourth quarabroad. Conversely, relatively slow ter, more than a percentage point beeconomic growth elsewhere and eco- low the rate at the end of 1983. Innomic and political uncertainties in deed, since the recession low in late various countries also may have con- 1982, nonfarm payroll employment tributed to the dollar's appreciation has increased nearly 7 million, the throughout the year. largest two-year gain in three decades. Notwithstanding a farther weaken- In 1984, employment growth coning of the international competitive po- tinued to be widespread across indussition of U.S. firms owing to the dol- tries. The trade and service sectors lar's appreciation, and despite the each added more than one million sluggishness of foreign economies, the jobs. And there was a gain in convolume of U.S. merchandise exports struction employment, owing in large increased by 9 percent in 1984. Ex- part to a rise in nonresidential buildports to Canada, some of which are ing. Government employment was up reimported after farther fabrication, a quarter of a million, reflecting the accounted for about a third of the rise, rise in spending by state and local with Western Europe and Mexico re- units. The manufacturing sector, ceiving most of the remainder of the which has borne the brunt of increased increase in exports. Economic growth foreign competition, registered a large in many developing nations, oil-pro- increase of almost three-quarter milducing as well as others, was limited lion in 1984; even so, the level of manby their debt servicing problems, and ufacturing employment remained bedemand by those countries for U.S.- low its pre-recession peak. produced goods remained generally Wage developments in 1984 were depressed. more favorable to the control of infla- The vigorous expansion of the U.S. tion; even though labor market slack economy and the strength of the dollar was reduced substantially farther dur- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 37 ing the year, wage rates increased less services, rose less than 2 percent last than in 1983. The employment cost in- year; basic commodity prices, which dex, a comprehensive measure of had advanced more than 30 percent change in wages and benefits, rose just early in 1983, fell during most of 4 percent in 1984, nearly 1 percentage 1984. point less than the year earlier. More- The relative softness of demand in over, major collective bargaining worldwide markets and the strength of agreements during the year showed no the dollar against foreign currencies acceleration in nominal wage rates, played a large role last year in holding even in those industries with improved down prices of basic commodities. economic conditions. Importantly, energy prices, which These wage developments suggest have been a major factor in inflation that inflationary expectations contin- rate movements for more than a decued to moderate this past year; to an ade, moved down. The weakness of increasing degree, workers and man- demand during the recession and early agers now appear to be focusing on recovery period restrained energy improving job security and on enhanc- prices in 1981 and 1982; moreover, ing productivity, often in an attempt to conservation measures and additional remain competitive with foreign pro- oil production capacity in many counducers. Productivity increases in 1984 tries have continued to relieve energy were substantial in the first half of the price pressures. year, when output grew rapidly, and Food prices at the retail level rose helped keep overall cost pressures about in line with overall prices in down. Over the course of the year, la- 1984. Early in the year, food prices bor productivity increased 2lk per- jumped sharply because farm supplies cent, partly reflecting a cyclical ad- were limited by the 1983 summer justment to higher levels of output as drought and a winter freeze. However, well as some improvement apparently supplies again became plentiful as the in the underlying trend rate of growth year progressed, reflecting more fafrom the very low pace of the 1970s. vorable harvests and sagging export The combination of moderate com- volume. pensation increases and favorable pro- Apart from the food and energy ductivity developments held down cost areas, consumer price inflation was pressures on prices; unit labor costs little changed from a year earlier. The rose 2 percent over 1984, less than a rise in consumer goods prices slowed fifth of the rate experienced in 1979 appreciably, owing in part to the relaand 1980. tively small increase in prices of imported goods, as well as the accompanying competitive pressures on Price Developments domestic products. Service prices rose Over 1984 the consumer price index more rapidly over 1984 than in 1983, rose 4 percent and the implicit deflator although the rate of inflation in the for the gross national product 3V2 persector remained well below those recent. The increases in these broad incorded in the early 1980s. dexes represent little change from inflation rates that have prevailed since Monetary Policy and Financial the beginning of the expansion. The Developments in 1984 producer price index for finished goods, which excludes the prices of Monetary policy in 1984 aimed basi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 Monetary Policy Reports cally at supporting sustainable eco- outlook for the economy and domestic nomic growth within the context of and international financial markets. long-term progress toward price stability. The target ranges for the monetary Money, Credit, and Monetary Policy and credit aggregates chosen by the The actual growth rates of Ml and M2 Federal Open Market Committee last over 1984 were well within the target February, and reaffirmed in July, ranges established by the Federal Recalled for growth rates V2 to 1 percent- serve, with Ml expanding 5.2 perage point below those set for 1983. cent, somewhat below the midpoint of Measured from the fourth quarter of its range, and M2 increasing 7.7 per- 1983 to the fourth quarter of 1984, the cent, a bit above its midpoint. As had target ranges for the monetary aggre- been anticipated in the midyear policy gates were 4 to 8 percent for Ml, and report to the Congress, growth of M3 6 to 9 percent for M2 and M3. The and domestic nonfinancial debt, at associated monitoring range for the 10.5 percent and 13.4 percent respecdebt of domestic nonfinancial sectors tively, exceeded their ranges.1 The relwas fixed at 8 to 11 percent. atively wide divergence between M2 Underlying these objectives was the and M3 growth rates reflected mainly Committee's expectation that the spe- substantial issuance of large CDs and cial factors distorting monetary growth other managed liabilities by thrift inrates in 1982 and 1983 would be less stitutions and commercial banks in the important in 1984, and that relation- face of heavy credit demands. ships among the monetary aggre- Credit growth last year was the most gates—particularly Ml—and eco- rapid on record, and much stronger nomic activity and inflation would be relative to GNP expansion than histormore consistent with historical trends ical trends would suggest. An unusuand cyclical patterns. Portfolio adjust- ally large volume of mergers and rements associated with the previous in- lated activity, including "leveraged troduction of new deposit accounts buyouts," involving nonfinancial corand with the steep drop in interest porations accounted for about 1 perrates during the 1982 recession ap- centage point of the growth of overall peared to have ended. Furthermore, debt. Around $75 billion of equity was the economic expansion seemed to be liquidated in this process, with much reducing uncertainties about employ- of it replaced, at least for a time, with ment and income prospects that earlier short-term debt. In addition, more had boosted demands for liquid pre- than $10 billion of equity was retired cautionary balances. through corporate share repurchases, Over the year, increasing evidence frequently in defensive maneuvers to suggested that Ml was in fact behaving ward off unfriendly takeover attempts. more in line with historical experi- Even after allowance is made for the ence. As a result, this aggregate was unusually large volume of merger-regiven more weight in policy implementation than had been the case during the latter part of the cyclical down- 1. The figures cited herein for the monetary agswing and the early phase of the gregates are based on recent benchmarks and seaeconomic recovery. However, all of sonal; adjustment revisions. Before those revisions, the 1984 increases were measured at 5.0 the monetary and credit measures conpercent for Ml, 7.5 percent for M2, and 10.0 tinued to be evaluated in light of the percent for M3. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 39 Growth of Money and Credit1 some unwinding of the precautionary and other motives that had swelled de- Percent changes mands for liquid assets in 1982 and Domestic early 1983, as well as the rise of shortnon- Period Ml M2 M3 financial term interest rates in the first part of sector debt the year and, in the case of M2, the abatement of dramatic inflows to Fourth quarter to fourth quarter money market deposit accounts 1979 7.5 8.1 10.3 12.1 (MMDAs) associated with the initial 1980 7.5 9.0 9.6 9.6 1981 9.3 12.4 10.0 authorization of these accounts. (2'.5)2 Demands for Ml balances, and for 1982 8.8 9.1 10.0 9.1 1983 10.4 12.2 10.0 10.8 bank reserves to support deposit 1984 5.2 7.7 10.5 13.4 growth, were robust early in the year Quarterly growth as the economy expanded rapidly. rates 1984: 1 6.2 7.2 9.2 12.9 Credit demands also were very strong, 2 6.5 7.1 10.5 13.1 and market interest rates began rising 3 4.5 6.9 9.5 12.7 4 3.4 9.0 11.0 12.7 even as the Federal Reserve, through open market operations, was keeping 1. Ml, M2, and M3 incorporate effects of benchmark and seasonal adjustment revisions made in the degree of pressure on bank reserve February 1985. positions unchanged. In early spring, 2. Ml figure in parentheses is adjusted for shifts to NOW accounts in 1981. with credit and money demands continuing unabated and with economic growth continuing at an extraordinary lated borrowing, it is clear that total pace, the FOMC adopted a somewhat credit demands were exceptionally more restraining posture toward supstrong last year. Federal debt expan- plying reserves, and both short- and sion, at more than 16 percent, was un- long-term interest rates rose further as precedented for the second year of an banks relied more heavily on discount economic expansion, both in absolute window credit to meet their reserve terms and in relation to income. Pri- needs.2 Borrowing for adjustment and vate domestic nonfinancial debt grew seasonal purposes increased to around about IIV2 percent (abstracting from $1 billion in March and April after growth of merger-related debt issues), averaging about $650 million during also faster than, but much closer to, the first two months of the year. In comparable stages of previous recov- April, the discount rate was raised V2 eries. percentage point, to 9 percent, to The behavior of Ml velocity in 1984 bring this rate into better alignment was broadly consistent with past cycli- with short-term market rates. cal patterns. In contrast to the unusual Despite the absence of any further weakness of the previous two years, tightening of reserve availability by the Ml velocity in 1984 increased 4 per- Federal Reserve, pressures on private cent, only a little above the average rate of growth during the second year of previous economic expansions. M2 velocity increased 1V2 percent, revers- 2. Annual seasonal and benchmark revisions to ing two consecutive yearly declines. the monetary aggregates subsequently lowered The strengthening of velocity over somewhat the growth of Ml in the first half of 1984 relative to what was estimated during the 1984 apparently reflected, in part, period. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 Monetary Policy Reports short-term interest rates intensified Initially, the slowing in Ml was not around early May in reaction to the resisted, as it reversed a bulge that had well-publicized liquidity problems of brought Ml growth well above the Continental Illinois Bank.3 Uncertain- midpoint of the FOMC's target range. ties related to the international debt However, by late August and early situation also added to market con- September, as evidence appeared of cerns. In this environment, quality much slower economic growth, with differentials between yields on private financial tensions high and with the money market instruments and Trea- dollar rising rapidly on foreign exsury securities widened substantially. change markets, the Federal Reserve While Ml growth early in the year moved to lessen the degree of restraint remained in the upper part of the on bank reserve positions. That pro- FOMC's target range, M2 increased at cess continued through much of the a pace slightly below the midpoint of rest of the year. Borrowing at the disits range even as the economy ex- count window receded, reaching levels panded rapidly. Growth in M2 relative of around $575 million by late in 1984 to income may have been damped by and dropping further to around $340 substantial inflows to IRAs and Keogh million, on average, during January accounts, which are excluded from the 1985. Total reserves and nonborrowed monetary aggregates. Also, as market reserves, which had shown little exinterest rates firmed, sizable spreads pansion since June, increased markdeveloped between these rates and edly in the final two months of the year yields on retail deposits and money and into early 1985. market mutual funds, likely encourag- Mirroring the easing of reserve maring some investors to place funds di- ket conditions, short-term interest rectly in credit market instruments. rates dropped considerably from their M3, meanwhile, pushed above its late-summer highs. Moreover, quality longer-run range, as banks and thrift spreads on various money market ininstitutions issued large CDs and other struments returned to within normal managed liabilities to accommodate ranges as the strains related to the rapidly rising credit demands. problems of Continental Illinois Bank After midyear, economic expansion remained contained and progress was slowed markedly, particularly during made in Latin American debt negotiathe summer, tending to reduce transac- tions. Responding to the provision of tion demands for money. Growth in reserves and the reduced rates on al- M3, though remaining somewhat ternative outlets for liquid funds, Miabove the upper limit of its range, also type balances rose rather sharply in moderated as demands for short-term late 1984 and early 1985. Growth of business credit slackened and as some M2 also was very rapid, as open marbanks adopted more cautious lending ket interest rates fell below average and funding policies in light of the yields on MMDAs, small-denominastrains on financial markets. tion time deposits, and money market mutual fund shares. The easing in financial markets during the second half of 1984 was re- 3. Large discount window borrowing by Conti- flected in, and to an extent encouraged nental Illinois Bank, beginning in May, was offset by, two successive reductions in the in terms of its impact on overall reserve supplies through open market operations. discount rate, first to 8V2 percent in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 41 November and then to 8 percent in De- of runoffs. With strong loan demands cember. By year-end, short-term in- in business, real estate, and consumer terest rates were 2V2 to 3V2 percentage areas, total loans at commercial banks points lower than they had been during grew more than 14 percent. the summer, and 3k to 1V2 percentage Given only moderate inflows to core points below their levels at the begin- deposits in the face of this brisk loan ning of the year—in some cases near growth, commercial banks increased their cyclical lows of early 1982. their outstanding CDs in 1984 more Long-term interest rates also de- than 14 percent, after having allowed a clined in the second half of the year, in large volume of CDs to run off during part reflecting some moderation of in- 1983. Credit growth at banks was esflationary expectations. But for the pecially rapid during the first half of year as a whole, most long-term rates last year, reflecting a wave of bankdeclined less than V2 percentage point, financed mergers. The bulk of the CD and remained above their earlier cycli- issuance was concentrated in this percal lows. The still relatively high level iod and likely would have been even of long-term rates appears to be influ- greater had not banks also borrowed enced by the continuing budgetary un- heavily from their foreign offices. In certainties, current strong demands for the second half, loan expansion slacktotal credit, and lingering, though less- ened appreciably, and large time deened, fears of inflation. posit growth tapered off, as some earlier merger-related loans were repaid with the proceeds from issuance of Other Developments in commercial paper and other debt obli- Financial Markets gations and from selective sales of as- Foreign savings financed a large share sets of the merged companies. of the domestic borrowing in 1984. Strains on some sectors of the econ- Net inflows of capital from abroad omy, as well as the effects of overly were more than double the already ad- aggressive lending policies by some vanced pace of 1983, thus supplement- institutions, continued to be reflected ing domestic saving and enabling the in relatively high levels of nonperfinancing of the massive federal defi- forming and other troubled loans in a cits at the same time that private in- number of depository institutions. As vestment expanded rapidly. Banks the year wore on, there were signs of continued to intermediate substantial more forceful efforts to deal with these amounts of these inflows, and sales of problems and their consequences. Eurobonds by U.S. corporations Loan-loss provisions were signifireached record levels. Direct invest- cantly increased, and steps are being ment in the United States also was taken to correct weaknesses in credit very strong, reflecting several large standards. The largest bank holding takeovers of domestic firms by foreign companies generally improved their corporations. capital positions over the year, partly Much of the credit market borrow- in response to supervisory guidelines ing—particularly that related to mer- to raise capital ratios. These apger activity—was at short term. Com- proaches will take time to bear full mercial paper debt of nonfinancial fruit, and progress in strengthening businesses surged more than 50 per- balance sheets will be dependent on cent, offsetting two consecutive years reasonable profitability as well as on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 Monetary Policy Reports developments external to the banking compared with fixed-rate mortgages, system. In that connection, the strains as well as to other features that limited in agricultural areas, on heavily in- borrower exposure to higher future indebted foreign countries, and in sec- terest payments, at least for several tors of the energy industry pose con- years. Large initial rate discounts betinuing challenges. came less prevalent after the adoption In long-term markets, municipal of somewhat tighter standards both for bond offerings achieved new highs in purchases by federal credit agencies 1984. Tax-exempt offerings were rela- and for the underwriting of ARMs by tively light over the first half of the private mortgage insurers. Yet, despite year as authority to issue single-family the shift toward ARMs during 1984 housing revenue bonds lapsed and as and increased consumer and business the market anticipated the imposition lending, the assets of thrifts remained of retroactive ceilings on issuance of heavily concentrated in relatively lowindustrial development bonds (IDBs). yielding instruments. But volume rebounded in early summer after passage of the Deficit Re- Report on July 16, 1985 duction Act, which reauthorized housing bonds and stimulated a flood of Monetary Policy and the Economic issues toward year-end to avoid stricter Outlook for 1985 and 1986 rules for IDBs and student loan bonds, effective January 1, 1985. Financial The fundamental objective of the Fedand nonfinancial corporations also eral Reserve in charting a course for raised record amounts through bond monetary and debt expansion remains offerings; however, the maturities of unchanged—to foster a financial envinew issues tended to be much shorter ronment conducive to sustained than in previous years, and many of- growth of the economy, consistent ferings carried provisions that essen- with progress over time toward price tially transformed these obligations stability. In working toward those into short-term or variable-rate debt. goals, developments with respect to Variable-rate instruments exhibited the dollar and our external position increasing popularity within the home have necessarily assumed greater mortgage sector as well. Adjustable- prominence. More generally, while rate mortgages (ARMs) accounted for policy initiatives are stated in terms of almost two-thirds of the number of growth rates of certain monetary and conventional first mortgages on homes credit aggregates, the Federal Open at major institutional originators in Market Committee has emphasized 1984, up considerably from only one- the need to interpret those aggregates quarter of such originations the pre- in the light of other information about vious year. Thrifts, in particular, pre- the economy, prices, and financial ferred to acquire ARMs rather than markets. Moreover, the monetary tarfixed-rate mortgages in an attempt to gets for 1985 needed to be evaluated, reduce their already acute exposure to and in the case of Ml adjusted, in light interest rate risk. The widespread ac- of the unusual and unexpected behavceptance of ARMs by consumers was ior of gross national product relative to attributable partly to substantial initial money during the first half of this rate advantages offered on ARMs year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 43 Economic and Financial Background with a spike in its value early in the Economic activity continued to ex- year being subsequently reversed, the pand during the first half of 1985, but adverse effects on the U.S. trade posiat a relatively slow pace. Real gross tion of the appreciation of the precednational product probably increased at ing several years, together with slow an annual rate of less than 2 percent, economic growth abroad, were very falling short of the expectations of much in evidence. U.S. firms continmany forecasters and of the rate antici- ued to face severe competitive prespated for the year by members of the sures, and our exports fell while our Federal Open Market Committee imports rose. The widening current (FOMC) when they formulated their account deficit was mirrored in the annual monetary policy plans in Feb- continuing gap between the growth of ruary. While the economic environ- domestic spending and domestic proment was conducive to the contain- duction. Moreover, the effects of this ment of inflation within the 3V2 to 4 imbalance were felt with particular sepercent range of the past few years, verity in the manufacturing, mining, there has been no further progress to- and agricultural sectors of the econward full employment of the nation's omy, in which profitability was labor resources or industrial capacity. squeezed overall and employment de- Indeed, the unemployment rate has re- clined. mained at about llk percent, well be- The lagging growth of production, low the peak of the 1981-82 recession, relatively well contained inflationary but still a historically high level. pressures on resources, and the high The slowing of output growth, value of the dollar on exchange marwhich began in the middle of 1984, kets provided the backdrop for the has brought into sharper focus the un- conduct of monetary policy in the past evenness of this business expansion several months. Reserves available to and the significance of some basic the banking system expanded substanstructural imbalances in the economy. tially over the first half of the year, and The federal budget deficit has re- the discount rate was cut lh percentage mained in the neighborhood of $200 point in the spring. With the economic billion, rather than moving in the di- expansion slowing, interest rates— rection of balance as might normally which had declined sharply from the be expected in the course of an up- summer of 1984 to early 1985— swing in economic activity. The heavy dropped somewhat further on balance demands placed on the credit markets by midyear. by the Treasury's financing activities The declines in market interest rates have, in turn, been one factor helping in the latter part of last year and this to hold real interest rates at historically year had substantial effects, lasting for high levels. And those high rates have a number of months, on the demands contributed to the strong demand of for assets contained in Ml. Some savinternational investors for dollar-de- ings apparently were shifted into internominated assets and thus to the est-earning checking accounts (negostrength of the dollar on foreign ex- tiable order of withdrawal accounts) change markets. from other instruments, and demand Although the dollar was little deposits also rose, as the cost of holdchanged on balance over the first half, ing these accounts in terms of earnings Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 Monetary Policy Reports forgone was reduced. As a result of the to rise and the level of Ml velocity shifts of funds, Ml expanded at an an- could drop more or less "permanual rate of about 10 V2 percent over nently." However, there will be uncerthe first half of the year (measured tainty about such a conclusion until it from the fourth quarter of 1984 to the becomes apparent in the period ahead second quarter of 1985), well above whether velocity is returning toward the range of 4 to 7 percent established trend or whether it is tending to rise by the FOMC in February. At the rapidly because the public is reducing same time, however, the broader mon- its "excess" money balances by spendetary aggregates remained within their ing or investing them; in the latter designated ranges. Over the period, case, the drop in velocity in the past M2 and M3 expanded at annual rates two quarters could be reversed to some of 8 3/4 and 8 percent respectively, as extent. compared with their growth ranges of The recent developments affecting 6 to 9 and 6 to 9 V2 percent. Growth in Ml illustrate the still considerable undomestic nonfinancial sector debt over certainties about the shorter-run bethe first two quarters of the year was a havior and trend of its velocity. Over little above its monitoring range of 9 to the past three and one-half years, the 12 percent, as debt issued to finance income velocity of Ml actually has demergers and otherwise retire stock is- clined slightly on balance. In contrast, sues continued stronger than had been over the preceding three decades, veexpected earlier. locity had increased more than 3 per- The rapid growth of Ml in the first cent per year, on average. Velocity half of the year was accompanied by a changes are influenced by the behavior sharp drop in the velocity of the aggre- of interest rates, but the extent of intergate: Ml velocity—the ratio of nomi- est rate impact is variable and may be nal GNP to money—declined at an an- changing as the public and depository nual rate of about 5 percent. In some institutions adjust to the new deposit respects, that development is reminis- instruments and deregulation of decent of experience in 1982-83, when a posit ceiling rates of recent years. large drop in interest rates also was Moreover, the underlying trend of veaccompanied by a marked decline in locity will also be influenced by the Ml velocity, with the attractiveness of rate of financial innovation. While that Ml-type balances enhanced by the may slow down once the adjustment is availability of explicit interest on made to a deregulated environment NOW accounts. There is evidence and with lower interest rates, infrom recent experience, as well as creased computerization could also from research on the interest respon- work toward a rise in velocity over siveness of the demand for money, time as the efficiency of the payments suggesting that such episodes might be system increases. expected as the economy and financial markets adjust over time to further Ranges for Money and progress toward price stability and as Debt Growth in 1985 and 1986 the inflation premium in interest rates In reexamining its Ml range for 1985 consequently diminishes. As this oc- and in setting a tentative range for curs, probably in unpredictable spurts, 1986, the Committee expected that vethe public's demand for Ml will tend locity, after its sharp decline in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 45 Ranges of Growth for mittee recognized that uncertainties Monetary and Debt Aggregates about interest rates and other factors Percent changes that could affect velocity would require careful reappraisal of the range Tentative Aggregate 1985 for 1986 at the beginning of that year. In addition, it was noted that actual experi- Ml 3 to 8 J 4 to 7 M2 6 to 9 6 to 9 ence with institutional and depositor M3 6 to 9V2 6 to 9 behavior after the completion early Debt 9 to 12 8 to 11 next year of deposit-rate deregulation 1. Applies to period from second quarter to fourth would need to be taken into account in quarter. judging the appropriateness of the ranges. At the beginning of next year, first half of this year, would cease fall- regulatory minimum balance requireing rapidly—while recognizing that ments on Super NOW accounts and much of the recent decline may not be money market deposit accounts will be reversed. Allowance also needed to be removed, and at the end of March made for the high degree of uncer- 1986, deposit ceiling rates will be tainty surrounding the behavior of Ml lifted entirely, affecting savings develocity, given the experience of the posits and regular NOW accounts. past few years. To take account of The accompanying table summathese considerations, the base for the rizes decisions with respect to the range of Ml was shifted forward to the ranges of growth for the aggregates for second quarter of 1985, and the range 1985 and 1986. Except for Ml in was set to encompass growth at an an- 1985, the growth ranges apply to onenual rate of 3 to 8 percent over the year periods measured on a fourthsecond half of this year. This range quarter-to-fourth-quarter basis. The contemplates a substantial slowing in Ml range for 1985 applies to the secgrowth from the pace of the first half, ond half of the year, as noted above. and the lower part of the range implies With respect to the broader monea willingness to see relatively slow tary and credit aggregates, the Comgrowth should the recent velocity de- mittee reaffirmed the 1985 ranges for cline be reversed and economic M2, M3, and domestic debt that had growth be satisfactory. The appropri- been established in February. It is recateness of the new range will be under ognized, as at the start of the year, that continuing review in light of evidence actual growth over the four quarters of with respect to economic and financial 1985 might be toward the upper parts developments, including conditions in of the ranges, and it was felt that this foreign exchange markets. It was would be acceptable, depending on denoted that, because of the burst of velopments in the velocities of the varmoney growth in June, the current ious measures, as long as inflationary level of Ml is high relative to the new pressures remained subdued. range. The Committee expected that The tentative ranges for 1986 for the aggregate would move into the new M3 and total debt embody reductions range gradually over time as more from 1985—in the case of debt by a usual behavior of velocity emerged. full percentage point and in the case of For 1986 the Ml range was tenta- M3 by V2 percentage point on the uptively set at 4 to 7 percent. The Com- per limit. The range for M2 was left Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 Monetary Policy Reports unchanged. In the case of the monitor- the year, as long as inflationary presing range for debt, it was assumed sures remain contained. At the same that, while debt might well continue time, Committee members felt that the its tendency of recent years to grow present circumstances in the economy considerably fester than GNP, its ex- contain particular risks and uncertainpansion would be tempered by a drop- ties that can imperil progress toward off in the net redemption of equity either growth or price stability over shares that has boosted corporate the next year and a half. Clearly, the credit use dramatically in the past year serious imbalances referred to earlier or two. cannot be remedied through the actions of the central bank alone. Attainment of fully satisfactory economic Economic Projections performance and minimization of All the monetary ranges specified risks will require timely action in were felt to be consistent with some- other areas of policy, here and abroad. what more rapid economic growth The economic projections of the than has characterized the first half of members of the FOMC, as well as of the Reserve Bank Presidents who are not at present members of the Com- Economic Projections for 1985 and 1986 ] mittee, are summarized in the accompanying table. The central tendency of the forecasts for real GNP points to FOMC members and other FRB Presidents some pickup in the pace of expansion Item in the second half of this year. The Central Range tendency expected strengthening, given the slow 1985 growth in the first half, still would leave the GNP expansion for the year Percent change, fourth quarter to fourth as a whole short of the range reported quarter R N e o a m l i G na N l P GNP 6 2V V 4 4 t t o o 7 3 3 V /4 4 6 2 V 3/ 2 4 t t o o 7 3 b an y d th b e e lo F w ed t e h r e a l fo R r e ec se a r s v ts e p i u n b l F is e h b e r d u a b r y y Implicit deflator for GNP the administration to date. The FOMC members and the other Aver f a o g u e r th le ve q l u a in rt e th r, e 3V2 to 4V4 33/4 to 4 Reserve Bank Presidents expect percent growth in the range of 2 V2 to 3 lk Unemployment rate ... percent during 1986. Such a rise in 63/4 to 7V41 986 7 to 7V4 output is seen as entailing substantial Percent change, fourth gains in employment, enough to bring quarter to fourth quarter about a small decrease in the civilian Nominal GNP 5V2 to 8V2 7 to 7V2 unemployment rate to around 7 per- Real GNP 2 to 4 2V2 to 3V4 Implicit deflator for cent by the end of next year. With pres- GNP 3 to 5V2 33/4 to 43/4 sures in labor and product markets Average level in the limited, most FOMC members and fourth quarter, other Presidents foresee only a marpercent Unemployment rate ... 63/4 tO 7V2 63/4 tO 7V4 ginal increase, if any, in the rate of 1. The administration has yet to publish its mid- inflation in 1986. It should be noted, session budget review document, and conse- however, that these projections are quently the customary comparison of FOMC forebased on an assumption that the excasts and administration economic goals has not been included in this report. change value of the dollar will not de- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 47 viate substantially from its recent lev- jeopardize the sustainability of ecoels. nomic expansion, and the risks of eco- The projections for a pickup in GNP nomic and financial dislocations growth over the reduced rate of the would intensify. first half of this year are based in part The FOMC members and other on the expectation that the declines in Presidents also assumed in their policy interest rates (and concomitant rise in deliberations and in their projections stock prices) that have occurred over that the Congress and the administrathe past few quarters will be providing tion would achieve deficit reductions impetus to demand for goods and ser- in the range of those in the recent vices in the months ahead. Consumer House and Senate budget resolutions. attitudes toward spending appear fa- Failure to move forward with those vorable, and housing activity already proposals would run a serious risk of has shown improvement, although the reversing the favorable effects that FOMC members are somewhat con- congressional actions to date have had cerned by the rising debt burdens of on investor expectations and would households and the increasing pay- create a real impediment to the ment problems suggested by figures solution of the structural problems on consumer and mortgage loan delin- plaguing our economy today. quencies. In the business sector, inventory overhangs appear to be limited in scope and degree, and fixed invest- The Performance of the Economy in the First Half of 1985 ment seems to have picked up a little after exhibiting some weakness earlier After a year and a half of extraordinarthis year; the lower cost of capital and ily rapid growth, economic activity desires to cut costs and maintain com- decelerated abruptly in the middle of petitiveness are expected to keep in- 1984 and slowed somewhat further in vestment on a moderate uptrend, even the first half of 1985. Growth in real though pressures on capacity may not gross national product is estimated to be great. Spending by the federal gov- have averaged less than 2 percent at an ernment and by states and localities is annual rate so far this year; the unemexpected to grow rather slowly. ployment rate has remained flat at A key ingredient in many of the pro- about llk percent. Inflation has held jections is the expectation that there at the lower pace reached during the will be a tendency in the coming year 1981-82 recession. for our external position to stabilize, To some extent, the moderation in so that domestic production will more growth during the past year has refully reflect the expansion of domestic flected the slowing in household and demand. Developments in this area business spending that often occurs afwill, of course, depend in part on the ter the initial phase of cyclical recovcourse of economic expansion abroad. ery. Pent-up demand for housing and Were the U.S. external position to con- consumer durables generally fades as tinue deteriorating as it has been, the an expansion period lengthens, and sectoral imbalances in the economy growth in business fixed investment would be exacerbated, creating further often exhibits some cyclical deceleradifficulties for many companies, their tion over time. However, the recent employees, and their communities. slowing in growth also reflects factors The draining off of income would unique to this expansion. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 Monetary Policy Reports In particular, this expansion has 1985, and employment in the manutaken place in the context of a highly facturing sector declined. The strong stimulative federal fiscal policy. Real dollar also has exacerbated the eco- GNP grew more rapidly in 1983 and nomic problems of farmers, many of the first half of 1984 than in any pre- whom face difficult adjustments bevious recovery since the Korean War. cause of falling product prices and the Ultimately, some slowing in growth need to service a large volume of debt would have been required to avoid in- accumulated during the inflationary flationary overheating of the economy. period of the 1970s and early 1980s. However, even before that point was Thus far, however, the weakness in reached, the initial effect of the fiscal the manufacturing and agricultural stimulus began to wane, dissipated in areas has been more than offset by part through its contribution to a wors- strong gains in other sectors. Domesening U.S. competitive position in in- tic final demand rose at an annual rate ternational trade and diversion of de- of 3V2 percent in the first quarter of mand away from goods produced in 1985, about the same as in the second the United States. half of last year; second-quarter gains The pronounced increases in the also appear to have been substantial. merchandise trade and current account Spending in such interest-sensitive deficits have occurred as enormous areas as autos and housing was particfederal deficits and resultant heavy ularly strong in the first half of 1985, borrowing by the federal government reflecting in part lower credit costs have added to other factors helping to that have emerged since mid-1984. keep U.S. interest rates at high levels, The strength of the dollar also has relative both to historical experience had a restraining influence on inflaand to the rate of inflation. These tion, by reducing import prices and by credit demands have been met partly forcing U.S. producers to adopt more through a substantial inflow of foreign competitive pricing strategies. Inflacapital, which has been associated tionary pressures have been limited, with a large appreciation in the foreign too, by the lack of pressure on reexchange value of the U.S. dollar. The sources here and the slack abroad. strong dollar has encouraged U.S. Most measures of overall price inconsumers and businesses to increase crease remained in the 4 percent range greatly the portion of their expendi- in the first half of 1985, but prices of tures devoted to imports, and at the manufactured goods rose little and sigsame time has inhibited U.S. exports. nificant downward pressures on prices Exports also have been restrained by were evident in markets for oil and baslow growth in demand abroad. As a sic commodities. result, gains in domestic demand have outstripped those in domestic produc- The Household Sector tion by a wide margin throughout the Growth in real disposable income conexpansion period. tinued to slow in the first half of 1985, The effects of the weakening trade reflecting smaller increases in interest balance in the past few years have been income as well as weakness in manufelt keenly in the manufacturing sec- facturing payrolls and in farm income. tor. Industrial production, which be- Nonetheless, gains in household gan to level off in the summer of 1984, spending, especially in the interestremained stagnant in the first half of sensitive sectors, were sizable and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 49 supported by continued heavy borrow- adjustable-rate mortgages, on the afing. As a result, the personal saving fordability of homes. rate fell appreciably below last year's The strong gains in household level of 6 percent. spending over the past two and one- Consumer spending for new cars half years have been accompanied by was particularly strong in the first considerable alterations in balance half. Total auto sales averaged nearly sheets. The ratio of household debt to 11 million units at an annual rate, with income has increased rapidly and is sales of domestic models around their now well above its 1980 peak. Asset highest level for a six-month period growth has been strong as well, howsince 1979. The strength in auto sales ever, and the ratio of financial assets to was partly attributable to the improved income has risen sharply in the past availability of many popular domestic year, owing in part to the rapid rise in models since the strike-related disrup- stock prices. tions in production last fall. In addi- The incidence of payment difficultion, auto demand was bolstered by ties on consumer installment debt has generally lower interest rates com- risen somewhat in the past half year or pared with those of last year and by so from relatively low levels. Delinsome special financing programs of- quency and foreclosure rates on home fered by manufacturers. Sales of for- mortgages have been at high levels for eign cars were held down in the first some time, and they rose further in quarter because supplies of Japanese early 1985. The large number of demodels were limited at the end of the faulted mortgage loans partly reflects annual period for the voluntary export rates of unemployment that are still restraint program. Foreign car sales high and the weakness of home prices picked up in the spring and early sum- in many locales, which has left some mer, however, when Japanese cars homeowners with little equity to proshipped after the start of the new an- tect when they encounter financial difnual period began to arrive at U.S. ficulties. However, aggressive underdealerships. writing of some mortgages, including Meanwhile, activity in the housing loans carrying lower payments in the market has rebounded since last fall. first years, appears to be a contribut- Housing starts rose to an annual rate of ing factor. 1.8 million units on average in the first five months of 1985, retracing nearly The Business Sector all of the decline that occurred in the Conditions in the business sector were latter half of last year after rates on mixed in the first half of 1985. Many fixed-rate mortgages temporarily rose industrial firms experienced pressures to the 14 percent range. Housing ac- on profit margins in an environment of tivity generally has been quite robust intense price competition and declinin this expansion period despite high ing capacity utilization, and widereal interest rates. Demand for owner- spread financial strains continued to occupied units has been buoyed by the be present in the agricultural and enmovement of the "baby boom" gener- ergy sectors. At the same time, howation into its prime home-buying ever, some other sectors of the econyears, as well as by the beneficial omy recorded good gains in sales and effects of stable house prices and inno- income. Economic profits for corporavative financing techniques, such as tions in the aggregate remained at the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 Monetary Policy Reports higher level reached after the sharp trade sector—with the notable exceprunup earlier in the expansion, with tion of the car industry—inventoryafter-tax profits as a percent of GNP at sales ratios have remained a bit high, the highest levels seen for any sus- though, and selected efforts to pare tained period since the late 1960s. stocks have continued. Growth in business spending for With slower growth in investment in fixed capital began to slow in the latter the first half of 1985, the gap between half of 1984, after a period of extraor- capital expenditures and internal funds dinary expansion, and a further slow- of firms remained moderate. Nevering occurred in the first part of 1985. theless, businesses continued to bor- The weakening has been most pro- row heavily, reflecting a continued nounced in equipment outlays, affect- massive amount of equity retirements ing both the high-technology catego- by firms engaged in mergers and other ries and more traditional types of corporate restructurings. As a result, industrial equipment. Nevertheless, debt-equity ratios have risen for a surveys of capital spending intentions number of firms, especially in the petaken in the first half of the year indi- troleum industry in which a major recated that businesses still planned a structuring is currently taking place. healthy expansion in outlays for 1985 However, for most other firms, equity as a whole. A relatively large propor- additions through retained earnings or tion of these expenditures reportedly sales of new shares have been considwas earmarked for replacement and erable. With rising stock prices, debtmodernization rather than expansion equity ratios for these firms, when of capacity, reflecting a desire to cut their assets and liabilities are meacosts and improve competitiveness. sured at current market values, have Meanwhile, spending for nonresiden- shown some decline in recent months. tial construction, particularly offices Nonetheless, financial strains, in and stores, continued at strong rates in many cases related to the high foreign the first half of 1985, and construction exchange value of the dollar, persist in contracts rose further despite very some areas of the economy. In particuhigh vacancy rates in many parts of the lar, low capacity utilization rates in a country. number of import-sensitive manufac- The pace of inventory accumulation turing industries, including machine in the business sector has been moder- tools, steel, some types of chemicals, ate in recent months. In real terms, and textiles, have intensified pressures business inventories rose about $19 on profitability. In addition, large segbillion at an annual rate in the first ments of the farm sector continue to quarter of 1985, compared with an av- suffer greatly from reduced exports, erage gain of $25 billion in 1984; in- depressed land prices, and low inventory accumulation probably was comes; many farmers face serious still lower in the second quarter. Man- debt-servicing problems, causing ufacturers, especially those facing in- problems in turn for agricultural tense import competition, have contin- lenders. In the energy sector, continued to be cautious in adding to ued downward pressure on world oil inventories. Total stocks in this sector prices has caused petroleum drilling to declined in both April and May, and be curtailed, which has strained the inventory-sales ratios for the most part earnings of many oilfield equipment remain near historical lows. In the and servicing firms. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 51 The Government Sector mestic expenditures on goods in the Federal tax receipts continued to rise first half of 1985. The increase in imsubstantially in the first half of 1985, port penetration has been widespread, but so too did outlays, and the deficit occurring in both the consumer and for fiscal year 1985 likely will be capital goods sectors as well as in inaround $200 billion. This deficit rep- dustrial supplies. resents about 5 percent of total GNP Although U.S. exports increased in and more than half of net private do- 1983 and 1984, they grew much less mestic saving. Federal purchases of than imports and have not yet regained goods and services, the part of federal their previous peak. In the first half of spending that enters directly into GNP 1985, exports, particularly of agriculand constitutes about a third of total tural products, have declined someoutlays, rose comparatively moder- what. As a result of these trends, the ately in the first half of 1985; defense current account deficit has widened procurement, an area of rapid growth dramatically over the past few years, in spending over the past few years, reaching an annual rate of $120 billion grew at a reduced pace as outlays in the first quarter of 1985. lagged more than is typical relative to Part of this imbalance reflects the appropriations. Real nondefense pur- stronger growth of demand in the U.S. chases (excluding the Commodity economy since 1982 relative both to Credit Corporation) continued to be the other industrial countries and to relatively flat. the debt-burdened developing coun- Purchases by state and local govern- tries. Although this influence has lessments were essentially unchanged in ened with the slowing of the U.S. ecothe first quarter but evidently rose in nomic expansion since the middle of the second as construction outlays in- last year, there has been no acceleracreased significantly in the spring. tion in growth in the other industrial States and localities, many of which countries, and many developing counhad serious fiscal difficulties in the tries have continued to face financial last recession, generally have been constraints. The greater share of the cautious in raising spending through- imbalance, however, probably is atout this expansion period, though they tributable to the substantial appreciahave been endeavoring to address the tion of the dollar over the past few problem of an aging infrastructure. years. On average during the first half The combination of spending restraint of this year, the trade-weighted value and improved revenues, owing both to of the dollar was roughly 70 percent legislated tax increases and to rising above its level five years earlier. incomes, has resulted in a substantial The appreciation of the dollar and rise in the operating and capital ac- the underlying demand of investors for count surpluses of state and local gov- dollar-denominated assets and other ernments since 1982. claims on the United States have been partly associated with differentials be- The External Sector tween real rates of return on U.S. and The external sector has come to play foreign assets. The enormous federal an increasingly important role in the budget deficits have been an important U.S. economy. Merchandise imports factor contributing to these differenhave risen rapidly in this expansion, tials. The moderation in interest rates moving above 15 percent of real do- that has accompanied the slowing of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 Monetary Policy Reports the economic expansion in the United the employment cost index for wages States since mid-1984 appears to have and salaries, a relatively compreheneased some of the upward pressure on sive measure for the private nonfarm the dollar; after rising sharply through business economy, have held steady at the first two months of this year, the just over 4 percent for nearly a year. exchange value of the dollar has This is about 1 percentage point less trended downward and is now around than in 1983 and early 1984, and subthe level of late last summer. Never- stantially below the peak rate of about theless, the high level of the dollar 9 percent reached in 1980. The slowcontinues to limit the ability of U.S. ing in union wage increases over the producers to compete both at home past several years has been especially and abroad. large. Union wage gains both in and out of manufacturing have been below Labor Markets the increases posted in nonunionized Growth in labor demand generally re- sectors for the past year and a half, mained strong in the first half of 1985, causing a partial erosion of the differand the number of workers on non- ential that had built up over the years farm payrolls increased 1.4 million. before the last recession. Major col- The bulk of the job growth was in the lective bargaining agreements negotiservice and trade sectors, in which ated in early 1985 indicate continued employment in the past six months has moderate wage growth in the unionexpanded at rates similar to last year's ized sectors. rapid pace. Increases in the restaurant Productivity in the nonfarm busiand business services areas have been ness sector appears to have declined in especially large. Construction em- the first half of 1985, after increases ployment also showed a sizable gain in amounting to 4 percent in 1983 and the first half of 1985, along with sig- 2V2 percent in 1984. Both the recent nificant growth in both residential and slowing in productivity and the subnonresidential construction. In con- stantial gains earlier in the recovery trast, manufacturing employment largely reflect the fact that employdropped about 220,000, with cutbacks ment tends to respond more slowly in payrolls widespread among indus- than output to changes in demand. tries. However, improvements in productiv- Despite the substantial gains in over- ity appear to continue to be a major all payroll employment, the unemploy- priority of both workers and management rate has remained at about llk ment, as evidenced by widespread repercent, the level that has prevailed ports of modernization of facilities as since last June. The labor force partic- well as relaxation of work rules and ipation rate was up appreciably on av- other steps to enhance efficiency and erage during the first half; the rise oc- hold down costs. curred primarily among adult women, The combination of improved prowho evidently were responding to the ductivity growth and relatively reincrease in job opportunities in the strained wage gains in this expansion service and trade sectors in which 80 has resulted in a sizable deceleration percent of adult women are now em- in the average rate of increase in unit ployed. labor costs relative to the previous sev- Wage inflation has remained re- eral years. Although unit labor costs strained. Year-over-year changes in have risen this year in response to the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 53 downturn in productivity, they are still well, resulting in a spurt in prices in only about 3 percent above their year- the spring. However, gasoline prices ago level. appear to have stabilized more recently, as inventory levels have re- Price Developments turned to normal while crude oil sup- After slowing sharply in the recession, plies remain abundant. Food prices the broadest measures of inflation have have risen only a little this year, reheld fairly steady at about 4 percent flecting the moderate rate of increase during much of the expansion. While in processing costs as well as plentiful the stability of the inflation rate during agricultural supplies. this expansion partly reflects some Prices of basic industrial commodispecial factors, significant progress ties, which rose markedly in the initial appears to have been made in revers- stages of this upswing in business acing the underlying momentum of the tivity, have been trending downward inflationary process that sustained the for the past year and a half. The dewage-price spiral of previous years. mand for materials by U.S. manufac- Inflation expectations have been more turers has been weak, and world supsubdued, and both labor and manage- plies have been ample, owing in part to ment have exhibited a better apprecia- the expansion of capacity in many detion of the fact that gains in real in- veloping countries in the past decade comes cannot be achieved simply by and their need to maintain export revemarking up nominal wages or prices. nues. The strong dollar has reinforced other factors holding down inflation in Money, Credit, and Financial this expansion period, both directly by Markets in the First Half of 1985 reducing the prices of imported goods and indirectly by forcing U.S. manu- In February of this year the FOMC facturers to restrain price increases in established target growth ranges for order to remain competitive. Retail the year (measured from the fourth prices of goods excluding food and en- quarter of 1984 to the fourth quarter of ergy rose about 3V2 percent, at an an- 1985) of 4 to 7 percent for Ml, 6 to 9 nual rate, in the first half of 1985, percent for M2, and 6 to 9V2 percent about the same as the average rate of for M3. For domestic nonfmancial change in the two preceding years. In- sector debt, an associated monitoring creases in prices of nonenergy ser- range was set at 9 to 12 percent. The vices, which have not been affected Ml range for 1985 represented a renearly so much by import competi- duction of 1 percentage point at the tion, have continued to be substantial, upper end from the range of the preaveraging a 5lk percent rate in the past ceding year, while the range for M2 six months, the same as in 1984. was unchanged. To reflect changes in Energy prices have been quite vola- the pattern of financial flows, the 1985 tile over the past year, mainly reflect- range for M3 was raised V2 point at the ing movements in gasoline prices. upper end, and the whole range for the From the autumn of 1984 through debt aggregate was raised 1 percentage February of this year, gasoline prices point. It was expected that these fell about 3V2 percent, as refiners ranges would be adequate to encoursought to reduce excess inventories. age further real economic growth at a Production was adjusted downward as sustainable pace consistent with con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 Monetary Policy Reports tainment of inflationary pressures and the first half of the year had to be a movement over time toward reason- adapted to a further slowing in ecoable price stability. nomic growth as manufacturing activ- In implementing policy throughout ity was essentially flat and the agriculthe period, the FOMC emphasized the tural sector remained under pressure, need to evaluate growth in the mone- to a continued high value of die dollar tary aggregates in the context of infor- on exchange markets, and to a tenmation available on economic activity, dency for the velocity of money, parprices, and financial market condi- ticularly of Ml, to fall. Price and wage tions. Among other factors, the pressures remained relatively well strength of the dollar and the related contained; indications of some accelsluggishness of manufacturing activity eration in the early part of the year required attention. As an operational were followed by more moderate inmatter, the degree of pressure on re- creases in subsequent months. serve positions of depository institu- In that context, monetary policy tions was relatively unchanged during basically accommodated the strong the period, and the discount rate was demands for reserves by depository inreduced once. stitutions that emerged during the first half of the year. The total of adjust- Money, Credit, and Monetary Policy ment plus seasonal borrowing varied The unusually sharp drop in velocity within a generally narrow range over in 1982 and early 1983, when growth of Ml greatly exceeded that of nominal GNP, had led the FOMC to place Growth of Money and Credit less reliance on Ml as an operational Percent changes guide to policy. During the latter part of 1983 and in 1984, however, the pat- Domestic terns of Ml growth relative to other non- Period Ml M2 M3 financial economic variables proved more con- sector debt sistent with historical experience, and Ml was given more weight in the con- 1984:4 to duct of policy. Nonetheless, consider- 1985:2 10.5 8.8 7.9 12.8e 1984:4 to able uncertainty remained, in part be- June 1985 .. 11.6 9.3 8.2 12.7e cause of limited experience with the Fourth quarter to impact of deposit deregulation and fi- fourth quarter 1979 7.5 8.1 10.3 12.1 nancial market innovations on the be- 1980 7.5 9.0 9.6 9.6 havior of Ml under varying economic 1981 5.1 9.2 12.4 10.0 (2.5)' and financial circumstances. Similar 1982 8.8 9.1 10.0 9.1 concerns about possible changes in the 1983 10.4 12.2 10.0 10.8 1984 5.2 7.7 10.4 13.6 account offerings and pricing behavior of depositories and the asset demands Quarterly growth rates of households affect all the monetary 1984:1 6.2 7.2 9.2 13.0 aggregates to some extent. These fac- 2 6.5 7.1 10.5 13.0 3 4.5 6.8 9.5 12.6 tors accounted in part for the need to 4 3.2 9.1 11.0 13.4 1985:1 10.6 12.0 10.7 13.4 interpret movement in the aggregates 2 10.1 5.3 5.0 11.8e in the light of other information, in- 1. Ml figure in parentheses is adjusted for shifts cluding evidence on shifts in velocity. to NOW accounts in 1981. In the event, monetary policy during e Estimated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 55 the period, though increasing for a to accommodate shifts in the public's time in the spring as a result of special asset preference, reserves were prosituations affecting nonfederally in- vided somewhat more cautiously sured thrift institutions in Ohio and through open market operations dur- Maryland. Reserve positions had been ing the period of most rapid acceleraeased considerably in the latter part of tion of Ml growth in the first quarter. 1984 and the early weeks of 1985. By early spring, incoming economic With an easing of reserve pressures data made it clear that the rate of ecoand a slowing in economic growth, in- nomic expansion remained limited. Interest rates had declined sharply from flation rates continued generally low, their late summer peaks through the prospects for further oil price declines very early weeks of this year. helped damp inflation expectations, The decline of interest rates ap- and the market responded positively to peared to stimulate, with usual lags of signs of possible congressional action some months, a sizable increase in de- to reduce the budget deficit. Growth of mands for assets contained in Ml, Ml moderated substantially, and the principally interest-bearing checking aggregate began to decelerate toward accounts (NOW accounts). Shifts of its longer-run range in late winter and long-term savings and liquid funds out early spring. Interest rates reversed of market instruments and time de- their earlier rise as market expectaposits into these accounts in the early tions changed. Rate declines were also months of the year entailed a substan- influenced by a cut in the Federal Retial rise in total reserves to support serve's discount rate in May of xh perthem. As the public's asset preferences centage point to 7V2 percent, which shifted toward components of Ml, its took place in the context of continued income velocity declined sharply be- signs of economic weakness and cause holdings of these assets in- against the background of restrained creased relative to the GNP. Only min- inflationary pressures and a strong imal effects on Ml growth likely dollar on exchange markets. By midresulted from shifts of funds into Su- year, short-term rates were down to 3k per NOW accounts after the mini- to 1V4 percentage points from levels mum-balance requirement was re- around year-end, while long-term duced from $2,500 to $1,000 at the rates had declined about 1 to 1 lk perbeginning of the year because the bulk centage points. of the funds shifted appeared to come Growth in Ml spurted once again in out of regular NOW accounts. the late spring. To some extent, inter- Most market interest rates rose est rate decreases contributed to a about a full percentage point from strengthening of demand for Ml-type their January lows in the course of the assets during the latter part of the secwinter, though the level of rates re- ond quarter. Growth of NOW acmained well below the 1984 peaks. counts, which had moderated in late Demands for credit remained strong. winter, picked up as offering rates on Economic growth had picked up in the Super NOW accounts adjusted slugfourth quarter and early data for the gishly to the renewed decline in marfirst quarter, though mixed, seemed ket rates of interest. However, the generally consistent with moderate strength of Ml also reflected an unugrowth. While, as noted, reserve sual surge in demand deposit expangrowth was sizable during the quarter sion in May that extended into June at Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 Monetary Policy Reports an even more rapid pace. The rise changes is no easier to predict than is seems greater than is explainable by the timing of interest rate changes. Deusual reactions to the reduced oppor- posit deregulation may have contribtunity cost of holding such funds or to uted to the extent of velocity adjustadjustments in compensating balances ments by making the demand for the and may be partly related to sharp group of assets in Ml more responsive swings in U.S. Treasury balances. A to interest rate changes than it used to question has been raised as to whether be. corporate cash management practices While growth of Ml was quite high have become less aggressive in recent relative to its long-run range for 1985, months, but there is no clear evidence the broader aggregates remained genon the point. erally within their ranges. Growth of With the sharp late-spring expansion M2 from the fourth quarter of 1984 to of Ml, its velocity in the second quar- the second quarter of 1985, at an 8 3k ter again declined at about the same percent annual rate, was a little below rate as in the first. The decline in the the upper limit of its range, expressed velocity of Ml over the first half of graphically as a cone based in the this year—as well as the lesser de- fourth quarter of 1984. However, exclines in the velocity of M2 and M3— pansion of this aggregate in June is reminiscent of experience in 1982- brought its monthly average a little 83. Indeed, both in the first half of this above the upper end of the range. year and over the one-year period Given the deregulation of bank defrom mid-1982 to mid-1983 the in- posit rates, the growth of M2 should come velocity of Ml declined at an- be less affected over periods of as long nual rates of about 4 xli to 5 percent. as a half year by interest rate develop- The drop in Ml velocity in both peri- ments because offering yields on most ods appears to have reflected, to a con- of its components are adjusted in line siderable degree and with usual lags, with market rates and many of the declines in market interest rates, al- shifts of funds engendered by interest though the magnitude of the declines rate changes are among assets within was in both cases somewhat more than this broader aggregate. But because could be expected based on past rela- the adjustments in offering yields tend tionships of money, income, and inter- to lag market changes, M2 does show est rates. considerable short-term responsive- Episodes of velocity decline may be ness to interest rate changes. Deposit inherent in the disinflationary process. rates, especially on money market de- As interest rates adjust downward in posit accounts (MMDAs), fell much reflection of lowering inflation rates, less than market yields last fall, so M2 households and firms become increas- rose rapidly for several months. Then ingly less reluctant to tie up portions of rising market yields in February and their funds in lower-earning transac- March held back M2. The nontransaction balances. The adjustment has not tion portion of M2 actually declined in been steady. Yield declines have been April for the first time in 15 years, bunched in time, and the ensuing bun- although this may have been partly the ched additions to money balances have result of difficulties in seasonal adjustled to sudden drops in velocity. Unfor- ment owing to the limited experience tunately, the timing of such velocity with individual retirement accounts Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 57 (IRAs), which are excluded from M2, doubled in little more than 2 years, and with tax payments made out of while the amount of private issues in MMDAs and money market funds. that maturity range has shown little net After rates fell back, M2 picked up change. again strongly in late spring. Borrowing of state and local govern- M3 growth, meanwhile, was com- ments has been unexpectedly strong so fortably within its target range during far this year, but an unusually high the first half of the year. Issuance of proportion has been for advance relarge CDs has slowed substantially funding of existing issues, as governfrom last year at both banks and thrift ments have sought to take advantage of institutions. Core deposit flows have lower interest rates. Because the funds accelerated while the rate of loan ex- borrowed in such operations are reinpansion has held about steady. Fur- vested in financial instruments, they thermore, perhaps in response to new have little net impact on credit market Federal Home Loan Bank Board regu- pressures. Indeed, most of these funds lations raising net worth requirements are required by law to be invested in for fast-growing institutions, thrift in- specially issued Treasury debt, thus stitutions have reduced net acquisi- reducing the Treasury's need for pubtions of assets. In doing so, some insti- lic offerings. Single-family housing tutions have taken advantage of revenue bonds have slowed from the declining yields by using the capital second half of last year. But last year's gains from asset sales to boost re- issues were heavily concentrated in the ported earnings. later part of the year because of delays Growth in total debt remained ex- in the reauthorization of such bonds; tremely strong in the past two quar- recent volume has been close to the ters, averaging a bit above its monitor- 1984 average rate. ing range, though below the record Business credit demands have repace of 1984. Federal government mained strong this year. Slowing borrowing continued to absorb more growth of both profits and expendithan a fourth of total funds made avail- tures for fixed capital and inventories able to domestic nonfinancial sectors. has, on balance, had little effect on An increasing proportion of the Trea- total borrowing needs. Corporate borsury's debt carries distant maturity rowing has been heavier in the shortdates; 90 percent of net marketable term paper and loan categories than in borrowing this year has been in issues bonds, but not to the same extent as in of notes and bonds maturing in 2 to 30 the early part of 1984 when interest years. Issues of 20- and 30-year debt, rates were rising. In addition, while in particular, are increasing and now new-issue bond volume has picked up dominate the new-issue market for in response to the lowest long-term taxable long-term bonds, accounting yields in five years, maturities of new for more than two-thirds of new offer- bond issues have been concentrated in ings in that maturity class. This large the short- and intermediate-term volume of new long-term debt has areas, as they were last year. changed the makeup of the secondary An unusual portion of the borrowmarket as well. The supply of Treaing, also like last year, has been used sury issues outstanding with 15 or to finance equity retirements of one more years remaining to maturity has sort or another. Mergers, buyouts, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 Monetary Policy Reports share repurchases, and swaps with ment securities dealers caused losses, shareholders of new debt for stock sometimes substantial, for some of have continued on the same massive their customers. A number of local scale as last year. Borrowing initiated governments and savings and loans with the purpose of financing these were among those hurt, and losses by transactions may have accounted in one large thrift institution in Ohio had gross terms for more than a percentage further repercussions, threatening to point of the growth rate of total nonfi- bankrupt the statewide private insurnancial debt over the first half. But ance system and, for a time, generatsuch an estimate may overstate the net ing some concerns here and abroad effects of recent corporate recapital- about the safety of other financial inizations on debt growth. A number of stitutions. Runs on privately insured firms involved in mergers or restruc- savings and loans in Maryland, some turings this year and last have recently of which also lost money as a result of completed large asset sales, some for the failure of securities firms, followed the explicit purpose of repaying debt. the problems in Ohio. Privately in- Furthermore, merger activity may be sured savings and loans in both states indirectly responsible for some of the were closed or limited to small withincreased new equity offerings be- drawals for a time, causing serious incause of its generally stimulative effect convenience to some depositors, and on stock prices as funds paid to share- some institutions remain closed or reholders are reinvested. stricted. Household borrowing also has re- However, these various problems mained strong. Demand for mortgage have been relatively well contained, loans has been buoyed by declining in- without significant effects on other interest costs. At the lower rates, house- stitutions and markets. A number of holds have found adjustable-rate loans institutions have switched to federal less attractive than last year, reducing insurance. And the Federal Reserve, from two-thirds to about one-half the acting in its role as lender of last reproportion of new conventional mort- sort, made advances to nonfederally gages with these features. Installment insured thrift institutions in Ohio and debt continued to rise faster than in- Maryland to help facilitate adjustcome in the first half of the year, but ments in the face of large deposit outthe second-quarter data show some de- flows. For a while, the borrowing afceleration in line with signs of a slow- fected the amount of adjustment credit ing in the growth of consumption at the discount window but because of spending on large-ticket items. the special conditions did not add to reserve market pressures as perceived Other Developments in by other institutions. After a time the Financial Markets borrowings were classified as ex- Signs of strain in financial markets tended credit. have persisted this year, but without The thrift industry as a whole concausing major disruptions in general tinues to suffer from low net worth and credit market conditions. Although the mismatched balance sheets, but the regovernment securities market as a cent declines in interest rates are imwhole has been performing well, the proving earnings. The Federal Home failures of three secondary govern- Loan Bank Board (FHLBB) has taken Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 59 a number of steps, including increased modity prices can no longer be taken capital requirements for rapidly grow- for granted. ing institutions, to encourage the stabi- In light of strains relating to agricullization of the industry over time. Cap- tural credit, the Federal Reserve liberital requirements also have been raised alized its regular seasonal borrowing for banks, some of which have suf- program and initiated a temporary fered from a high incidence of nonper- special seasonal program. However, forming loans and loan losses in recent there has been only relatively limited quarters. The troubled loans are con- use of seasonal credit owing to the eascentrated in energy, agriculture, and ing of money market conditions as the real estate sectors and to borrowers of spring progressed. some foreign countries. Bad news With regard to conditions among about the loan portfolios of individual nonfinancial businesses, the prospects institutions and other reported losses of some of those in the weaker indushave produced some ripples in market tries—especially those most adversely rates generally, but spreads between affected by the high dollar—are subborrowing rates of financial institu- ject, of course, to considerable uncertions and the Treasury have been quite tainty. But, in addition, many firms low for the most part. To some extent, have deliberately chosen a more preloan losses reflect overly aggressive carious financial structure in order to lending decisions, but the problems of enhance current market valuations of borrowers in the hardest hit industries shares or to fend off undesired takeare partly a result of difficult adjust- over bids. Nevertheless, financial ment to a higher value of the dollar markets have not shown generalized and lower rates of inflation than were concern about corporate financial expected when the loans were made. structure; notably, spreads between In the agricultural as in other sectors, corporate and Treasury debt are uninvestors and borrowers have discov- usually narrow, having shrunk since ered that the inflation of land and com- the beginning of the year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

63 Record of Policy Actions of the Board of Governors Regulation B advising applicants of credit denials was (Equal Credit Opportunity) provided; (2) data notation requirements for certain mortgage loan applications November 7, 1985—Revision were changed; and (3) the definition of "applicant" was changed to give guaran- The Board revised Regulation B as tors legal standing in the courts when a part of its Regulatory Improvement violation of the signature provisions in Project, a continuing program to clarthe regulation is alleged. ify, simplify, and update regulations. With regard to the revisions affecting Votes for this action: Messrs. Volcker, data notation, Regulation B requires that Partee, and Rice. Vote against this action: creditors record—from observation or Mr. Martin. Absent and not voting: Mr. Wallich and Ms. Seger.1 reference to the applicant's surname— the race or national origin and the sex of an applicant seeking certain types of res- Regulation B implements the Equal idential mortgage credit if the applicant Credit Opportunity Act, which prohibits does not volunteer that information. The discrimination in credit transactions on requirement is intended to assist regulathe basis of race, color, religion, nators in detecting patterns of discriminational origin, sex, marital status, age, and other factors. The regulation also tion. Governor Martin, although not obsets out specific rules governing appro- jecting to the entire regulation, was priate credit application procedures, concerned that requiring creditors to maintenance of credit histories, proce- check visually an applicant's race or nadures for credit denials and termina- tionality would place too much importions, and the notation of race, national tance on those factors, and he preferred origin, and other characteristics for to give creditors the choice of whether to monitoring creditor compliance. The record such factors if an applicant omitmajor provisions of the regulation are ted them. The other members noted that unchanged in the revised format; they the provision aided in detection of unhave been rewritten in simpler, clearer lawftil credit discrimination and that allanguage. A revised official staff com- lowing creditors such a choice would mentary explains the new Regulation B impede detection. The Board adopted and offers guidance in applying its re- the revised Regulation B, including that quirements to an institution's opera- requirement, Governor Martin dissenttions. ing. These are the principal substantive The Board also considered whether changes: (1) procedures for incomplete credit for business or commercial purcredit applications were revised, and a poses should be subjected more fully to broader selection of sample forms for certain provisions of Regulation B than is currently the case. The Board decided to take no regulatory action at this time, 1. On this and subsequent pages, footnote 1 inbut to monitor developments and take dicates that there was a vacancy on the Board at the time the action was taken. appropriate action if necessary. In the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 Board Policy Actions meantime, an educational pamphlet is therefore, amended Regulation D to inbeing developed to inform women and crease to $31.7 million the amount to minority entrepreneurs of their rights which the 3 percent reserve requirement under the law in business credit transac- applies. tions. The Garn-St Germain Depository In- The revised Regulation B is effective stitutions Act of 1982 established a zero December 16, 1985; however, creditors percent reserve requirement on the first may continue to comply with the current $2 million of an institution's reservable regulation until October 1, 1986. liabilities. It also provided for annual adjustments to that exemption based on nationwide deposit growth. Recent Regulation D growth in deposits indicated that the (Reserve Requirements of amount subject to a zero percent reserve Depository Institutions) requirement should be increased from $2.4 million to $2.6 million, and the December 4, 1985—Amendments Board amended Regulation D accord- The Board amended Regulation D, ef- ingly. fective December 31, 1985, (1) to increase the amount of transaction ac- Regulation G (Securities Credit counts to which the lower reserve by Persons Other than Banks, requirement applies; and (2) to increase Brokers, or Dealers), the amount of reservable liabilities sub- Regulation T (Credit by ject to a zero percent reserve require- Brokers and Dealers), and ment. Regulation U Votes for these actions: Messrs. Volcker, (Credit by Banks for the Martin, Partee, Rice, and Ms. Seger. Purpose of Purchasing or Votes against these actions: None. Absent and not voting: Mr. Wallich.1 Carrying Margin Stocks) March 13, 1985—Amendments Under the Monetary Control Act of 1980, depository institutions, Edge and The Board amended Regulations G agreement corporations, and U.S. agen- and U to exclude face-amount certificies and branches of foreign banks are cates from the definition of margin sesubject to reserve requirements set by curities. In a companion action, the the Board. Initially, reserve require- Board amended Regulation T to clarments were set at 3 percent of an institu- ify that broker-dealers selling such tion's first $25 million in transaction certificates would not be considered to balances and 12 percent on balances be in violation of the regulation's proabove that level. The act directed the visions on arranging credit. The Board to adjust annually the amount amendments to the three regulations subject to the lower reserve requirement are effective April 19, 1985. to reflect changes in the amount of trans- Votes for these actions: Messrs. Volcker, action balances in the banking system Martin, Partee, Rice, Gramley, and Ms. nationwide. By the beginning of 1985, Seger. Votes against these actions: None. the amount had been raised to $29.8 Absent and not voting: Mr. Wallich. million. Recent growth in such balances indicated that a further increase of $1.9 Face-amount certificates are securimillion was warranted. The Board, ties issued by certain investment com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 65 panies that promise to pay investors a for such qualified plans on the same fixed amount at a specified date in re- good-faith basis. turn for a designated payment. Holders The second amendment to Regulation of these certificates may obtain loans T makes the initial margins required for from the issuers at interest rates of up to the writing of options on equity securi- 6 percent, the maximum set by law. Be- ties identical to the maintenance marcause the certificates function more like gins required by the rules of the exlife insurance policies than mutual change or association on which the funds, and because the certificates have options are traded, if those rules have limited investor appeal, the Board be- been approved by the Securities and Exlieved no useful purpose would be change Commission. The change will served by subjecting them to margin facilitate adoption by the SEC of a proregulations. posed new margin system under which the margins required for all types of options would be based on a premium plus Regulation G (Securities Credit a percentage of certain market variables. by Persons Other than Banks, Brokers, or Dealers) and Regulation T (Credit by Regulation J (Collection of Brokers and Dealers) Checks and Other Items and Wire Transfers of Funds) June 19, 1985—Amendments January 23, 1985—Amendment The Board amended Regulations G and T, effective July 22, 1985, to permit The Board amended Regulation J, effeclenders to extend credit on a good-faith tive October 1, 1985, to improve the basis to qualified employee stock-own- procedures for notifying banks that cerership plans. tain checks are being returned unpaid. The Board amended Regulation T, ef- Votes for this action: Messrs. Volcker, fective September 30, 1985, to permit a Partee, Rice, Gramley, and Ms. Seger. uniform, premium-based system of mar- Votes against this action: None. Absent gin requirements for all types of option and not voting: Messrs. Martin and Wallich. contracts. Votes for these actions: Messrs. Partee, The Board's existing procedures had Rice, Gramley, and Ms. Seger. Votes required a payor institution that returned against these actions: None. Absent and unpaid a check of $2,500 or more to not voting: Messrs. Volcker, Martin, and Wallich. provide notification of nonpayment. Typically, the payor institution notifies The amendment to Regulation G al- the institution that presented the check lows lenders, such as savings and loan to it, which usually is a Federal Reserve associations, finance companies, and in- Bank. This practice had proved unsatissurance companies, to extend credit, on factory for several reasons, and the the same basis that banks do, to trusts Board amended the regulation to incorfor employee stock-ownership plans that porate the following modifications: (1) qualify under section 401 of the Internal specifying an institution's liability for Revenue Code. The related amendment failing to provide notice; (2) requiring to Regulation T permits brokers and that the payor institution notify the dedealers to arrange and to extend credit positing institution; and (3) specifying a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 Board Policy Actions period within which the notification cedures. The Board also made several must be provided. Regulation J, as technical and clarifying amendments, amended, requires that notification be but deferred action on proposed capital provided directly to the institution of requirements for Edge corporations. first deposit by midnight of the second The revisions affecting permissible banking day after the day on which a activities allow Edge corporations to check of $2,500 or more is dishonored. provide full banking services to a class The notice must include certain infor- of companies that are restricted by their mation that allows the depositing institu- licenses to international business. The tion to identify the returned check. An regulation also was revised to require institution that fails to exercise ordinary that parties give the Board advance nocare in providing a timely and accurate tice before acquiring control of an Edge notification will be liable for losses in- corporation. This requirement will alcurred by the institution of first deposit, low the Federal Reserve to assess the up to the amount of the returned check. financial strength of proposed acquiring In connection with this action, the Re- organizations and will improve the serve Banks improved their procedures Board's supervision of Edge corporaso they could better assist payor institu- tions. Other revisions increase from $2 tions in providing the required notifica- million to $15 million the amount that a tion information. U.S. banking organization may invest in another company without prior Board approval, and permit some leeway in the Regulation K (International requirement that subsidiaries confine Banking Operations) their activities to those specified in Regulation K. August 14, 1985—Revision The revisions are effective October The Board revised Regulation K pursu- 24, 1985, except for the provisions afant to provisions in the International fecting investment procedures, which Banking Act of 1978 that require a re- are effective immediately. view of the regulation every five years. Votes for this action: Messrs. Volcker, Regulation T Wallich, Partee, Rice, Gramley, and Ms. (Credit by Brokers and Dealers) Seger. Votes against this action: None. Absent and not voting: Mr. Martin. March 13, 1985—Amendments June 19, 1985—Amendments The International Banking Act requires periodic review of Regulation K These actions are discussed under Reguto ensure that Edge and agreement cor- lation G. porations remain competitive with foreign-owned banking organizations in the Regulation U (Credit by Banks United States and abroad, under prevailfor the Purpose of Purchasing or ing economic conditions and banking Carrying Margin Stocks) practices. Having completed such a review, the Board revised Regulation K in March 13, 1985—Amendments the following areas: activities of Edge corporations in the United States, These actions are discussed under Reguchanges in control, and investment pro- lation G. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 67 Regulation AA (Unfair or sympathetic to this view; however, they Deceptive Acts or Practices) believed that the Board's rule and that of the FTC should be uniform, unless there April 22, 1985—Amendment were a compelling reason for the variance arising out of a basic difference The Board amended Regulation AA, efbetween banks and other types of credifective January 1, 1986, to adopt a rule tors. for banks substantially similar to the Credit Practices Rule recently adopted Policy Statements and by the Federal Trade Commission for Other Actions other types of creditors. Votes for this action: Messrs. Martin, March 1, 1985—Revisions to Capi- Wallich, Partee, and Rice. Votes against tal Adequacy Guidelines and Adoppart of this action: Mr. Gramley and Ms. Seger. Absent and not voting: Mr. tion of a Procedural Regulation Volcker. The Board revised its guidelines for capital adequacy for state member banks The new rule prohibits banks from and bank holding companies, and adoptentering into any contract for consumer ed a regulation that defines the procecredit that contains the following: a condures the Board may use to require fession-of-judgment clause; a limitation banking organizations to maintain apor waiver of exemption from attachpropriate capital levels. The guidelines ment, execution, or other process; an and the regulation are effective May 15, assignment of future wages to the credi- 1985. tor in the event of default; or a security interest in a consumer's household Votes for these actions: Messrs. Volcker, Martin, Wallich, Partee, Rice, and Ms. goods other than those purchased with Seger. Votes against these actions: None. the credit. The new rule also prohibits Absent and not voting: Mr. Gramley. the imposition of multiple late charges for a single late payment that is paid in The revisions, made in conjunction full before the next timely payment, and with new standards adopted by the it requires banks to provide to cosigners Comptroller of the Currency and the of a credit contract a notice of their obli- Federal Deposit Insurance Corporation, gation and potential liability. The notice establish uniform minimum capital remay be included in the loan contract or quirements for all banking organizations provided as a separate document. that are federally supervised. In adopt- Governors Gramley and Seger dis- ing the new standards, the Board resented from adoption of that portion of tained use of target ranges—called the rule that prohibits creditors from zones—for capital adequacy to indicate taking a security interest in household various levels of capitalization and to engoods. Although they did not object to able bank managers to plan for needed adoption of the rule in general, they be- additions to capital. lieved that consumers should have the The new guidelines raise the minioption of using certain household goods mum capital levels for multinational and as collateral for a loan, provided those regional banking organizations to the goods are specified in the contract. They levels already in place for smaller banks preferred not to prohibit such provi- and bank holding companies. All instisions. The other Board members were tutions supervised by the Federal Re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 Board Policy Actions serve should have a ratio of primary cap- Farmers Home Administration. The ital to total assets of at least 5.5 percent, new policy statement reminds instituand a ratio of total capital to total assets tions selling guaranteed loans that the of at least 6 percent. premiums received in lieu of servicing The Board made the following fees should be amortized over the life of changes in its capital standards for state the loans. Institutions purchasing such member banks to maintain consistency loans are reminded that any premium with the regulations adopted by the paid in excess of the face value of the Comptroller and the FDIC: (1) goodwill loan is not guaranteed and is not paid by is excluded from primary and total capi- the guaranteeing federal agency when tal; (2) equity commitment loans are ex- the loan is prepaid. cluded from primary capital; and (3) capital ratios are calculated on the basis October 30, 1985— of average assets over the reporting peri- Repurchase Agreements od rather than at the end of the period. The Board issued a policy statement The procedural regulation adopted by specifying prudential practices for instithe Board requires compliance with the tutions that transact repurchase agreeminimum capital ratios and the capital ments. guidelines in general. Banks and bank holding companies that do not meet the Votes for this action: Messrs. Volcker, minimum capital requirements must Partee, and Ms. Seger. Votes against this action: None. Absent and not voting: promptly submit plans indicating how Messrs. Martin, Wallich, and Rice.1 they intend to increase capital to the required level within a reasonable period. Under a repurchase agreement, an in- The regulation also describes adminis- stitution owning U.S. government or trative and judicial enforcement proce- agency securities temporarily transfers dures. the securities to another party in exchange for funds and agrees to repur- April 3, 1985—Revisions to the chase them at a later date. Policy on Guaranteed Loans The Board and the other member The Board revised its policy for super- agencies of the Federal Financial Instituvising institutions that purchase or sell tions Examination Council became inloans guaranteed by the U.S. govern- creasingly concerned that some finanment. cial institutions involved in repurchase agreements did not adopt sufficient safe- Votes for this action: Messrs. Wallich, guards to minimize risks. To address Partee, Gramley, Rice, and Ms. Seger. these concerns the agencies approved a Votes against this action: None. Absent and not voting: Messrs. Volcker and joint supervisory policy statement to Martin. provide financial institutions with minimum safety and soundness guidelines The revised statement, endorsed by for managing credit exposure. The statethe Federal Financial Institutions Exam- ment points out the need for full collatination Council, affirms the guidelines eralization of repurchase transactions, adopted in 1979 and incorporates maintenance of specified collateral marchanges since that time in the loan pro- gins, and frequent marking to market. In grams of agencies such as the Small addition, institutions doing business Business Administration and the with unregulated security dealers are Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 69 urged to verify that those dealers com- should not pay a cash dividend that ply with the minimum capital guidelines strains the capital of its bank subsidiary developed by the Federal Reserve Bank or that can be funded only by borrowof New York for government security ings or other measures that impair its dealers. The statement also advises on ability to remain a source of strength for appropriate standards for control of se- the bank. If a bank subsidiary is unable curities involved in repurchase agree- to pay dividends to its parent, either bements and notes that the Reserve Banks cause of statutory limitations, intervencan assist institutions seeking to obtain tion by its primary supervisor, or capital control of securities that are maintained adequacy requirements, the holding in the Federal Reserve's book-entry sys- company should seriously consider retem. ducing or eliminating its dividend to preserve its own capital base and to assist its bank subsidiary. November 7, 1985— Payment of Dividends 1985 Discount Rates The Board issued a policy statement on the payment of cash dividends by mem- The Board approved one change in the ber banks and bank holding companies. basic discount rate during 1985, a reduction from 8 to 7V2 percent in mid- Votes for this action: Messrs. Volcker, May. During the year the Board also Martin, Partee, and Rice. Votes against voted at 11 meetings to turn down rethis action: None. Absent and not voting: Mr. Wallich and Ms. Seger.1 quests for reductions submitted by individual Federal Reserve Banks. In The policy statement, part of a pro- March the Board approved modifigram to strengthen supervision of bank- cations in its seasonal credit program. ing organizations, encourages banks and The reasons for the Board's decitheir holding companies to adopt pru- sions are reviewed below. Those decident dividend policies that take into ac- sions were made in the context of count not only the organization's earn- broad economic and financial developings and financial condition but also its ments that are covered in greater detail capital level and growth prospects. The elsewhere in the REPORT. A listing of statement particularly urges institutions the Board's actions on the discount experiencing weak earnings or reduced rate during 1985, including the votes capital to consider reducing or eliminat- on those actions, follows this review. ing cash dividends on common stock if such dividend payments would not be Actions on the Basic Discount Rate covered by earnings; if borrowed funds would be used to make the dividend pay- January-April: No Change ment; or if the dividend payment was During January and February the possible because of an unusual or nonre- Board disapproved two requests by a curring profit, such as the sale of real Federal Reserve Bank to reduce the property or other assets. basic rate from 8 percent, the level in The policy statement reminds holding effect since late 1984, to 73/4 percent companies that they should serve as and to 7V2 percent. The other Federal sources of strength for their subsidiary Reserve Banks did not propose any banks. Therefore, a holding company changes in the basic rate during that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 Board Policy Actions period. In denying the two requests, stances, including the business outthe Board took account of business and look and price pressures, the strength financial developments, including the of the monetary aggregates, overall level of short-term market interest credit conditions, and developments rates and the recent rapid expansion of affecting the foreign exchange value of the monetary aggregates. In mid-April the dollar. a request by another Reserve Bank to lower the basic rate lk percentage Modifications in point was turned down for similar rea- Seasonal Credit Program sons. On March 8 the Board approved a two-part modification of its seasonal May: Reduction credit program. The changes were de- On May 17 the Board approved a designed to help small and medium-size crease of V2 percentage point in the agricultural banks meet temporary libasic rate to 7V2 percent. The Board's quidity needs that might arise as they action was taken against the backsought to accommodate agricultural ground of relatively slow growth in borrowers during the planting and prooverall economic activity; that pace duction period. The regular seasonal reflected especially the generally slugcredit program was modified to ingish performance of the industrial seccrease the availability of credit at the tor, which was experiencing the addiscount window to depository instituverse effects of a strong dollar and tions that lack effective access to the rising imports. Price pressures apnational money markets and that dempeared to be well contained in goodsonstrate recurring needs related to seaproducing industries, and sensitive sonal fluctuations in their deposit commodity prices had been trending flows and loan demands. In addition, a lower. The growth of the monetary agtemporary simplified program was gregates had slowed appreciably durcreated as an alternative to the regular ing previous weeks and market interest program for smaller banks that are acrates had declined. tive in agricultural lending. The rate under the special program was set at June-December: No Change V2 percentage point above the basic From the latter part of July to mid- rate and was to remain fixed over the October, the Board disapproved sev- term of a loan. Loans under this proeral requests by two Federal Reserve gram could be extended by the Re- Banks to reduce the basic rate V2 per- serve Banks through September 1985, centage point. Late in the year a num- but they had to be repaid as seasonal ber of Reserve Banks sought reduc- credit needs abated and could not be tions of V4 or V2 percentage point in outstanding beyond February 1986. the basic rate, but the Board tabled Apart from the seasonal loan program, those requests pending evaluation of the discount window remained availaemerging economic and financial con- ble to provide regular adjustment or ditions. In its assessment of discount extended credit when unusual derate proposals in the latter half of the mands developed in local areas as a year, the Board took account of vari- result of the agricultural credit situaous economic and financial circum- tion. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 71 Extended Credit Program submit such rates to the Board of Governors for review and determination. The interest rate on credit advanced to The Board votes listed below are those depository institutions for an exthat involved approval or disapproval tended period for other than seasonal of Reserve Bank actions to change the purposes rises relative to the basic rate basic discount rate. Votes involving as the period of borrowing lengthens. the reestablishment of existing rates During 1985 the schedule of fixed are not shown. rates for extended credit was reduced V2 percentage point when the basic January 28, 1985 rate was lowered by that amount in The Board disapproved an action taken mid-May. In addition, the Board reby the directors of the Federal Reserve tained the policy of allowing the Re- Bank of Dallas on January 24 to reserve Banks to charge a flexible rate duce the basic discount rate to l3k peron loans that have been outstanding for cent (from 8 percent). more than 150 days, or for a shorter period if they are expected to be out- Votes for this action: Messrs. Volcker, standing for an unusually long time Martin, Wallich, Partee, Rice, Gramley, and in relatively large amounts. The and Ms. Seger. Votes against this action: flexible rate, which has a floor that is None. 1 percentage point above the basic discount rate, takes account of the rates February 19, 1985 on market sources of funds and was The Board disapproved an action taken changed periodically during the year. by the directors of the Federal Reserve Bank of Dallas on February 14 to re- Rates at Year-End duce the basic discount rate to 7V2 percent. As of December 31, 1985, the structure of discount rates was as follows: a Votes for this action: Messrs. Volcker, basic rate of W2 percent for short- Wallich, Partee, Rice, and Gramley. term adjustment credit and for credit Votes against this action: None. Absent and not voting: Mr. Martin and Ms. under the regular seasonal program; Seger. and a rate on extended credit at the basic rate of 7V2 percent for the first April 15, 1985 60 days of borrowing, 8V2 percent for The Board disapproved an action taken the next 90 days of borrowing, and 9V2 by the directors of the Federal Reserve percent after 150 days. The flexible Bank of San Francisco on April 12 to rate on certain extended credit borrowreduce the basic discount rate to 73A ing was 8V2 percent at year-end. percent. Votes on Reserve Bank Requests to Votes for this action: Messrs. Volcker, Change the Discount Rate Martin, Gramley, and Ms. Seger. Votes against this action: None. Absent and Under the provisions of the Federal not voting: Messrs. Wallich, Partee, and Reserve Act, the boards of directors of Rice. the Federal Reserve Banks are required to establish rates on discounts May 17, 1985 for, and advances to, depository insti- Effective May 20, 1985, the Board aptutions at least every 14 days and to proved actions taken by the directors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 Board Policy Actions of the Federal Reserve Banks of Bos- by the directors of the Federal Reserve ton, New York, Richmond, Atlanta, Bank of Dallas on August 8 to reduce Chicago, Minneapolis, Kansas City, the basic discount rate to 7 percent. and Dallas to reduce the basic discount rate to llk percent, with correspond- Votes for this action: Messrs. Volcker, Wallich, Partee, Rice, and Gramley. ing reductions of xli percentage point Votes against this action: None. Absent in related rates, including the rate for and not voting: Mr. Martin and new loans under the special seasonal Ms. Seger. credit program and, when applicable, the flexible rate on extended credit. August 26, 1985 Votes for this action: Messrs. Volcker, The Board disapproved an action taken Martin, Wallich, Partee, and Gramley. by the directors of the Federal Reserve Votes against this action: None. Absent Bank of Dallas on August 22 to reduce and not voting: Mr. Rice and Ms. Seger. the basic discount rate to 7 percent. The Board subsequently approved Votes for this action: Messrs. Martin, Wallich, Partee, and Ms. Seger. Votes similar actions taken by the directors against this action: None. Absent and of the Federal Reserve Banks of Clevenot voting: Messrs. Volcker, Rice, and land, St. Louis, and San Francisco, ef- Gramley. fective May 21, and the Federal Reserve Bank of Philadelphia, effective May 24, 1985. September 9, 1985 The Board disapproved an action taken July 22, 1985 by the directors of the Federal Reserve The Board disapproved an action taken Bank of Dallas on September 5 to reby the directors of the Federal Reserve duce the basic discount rate to 7 per- Bank of Dallas on July 11 to reduce cent. the basic discount rate to 7 percent. Votes for this action: Messrs. Martin, Votes for this action: Messrs. Volcker, Partee, Rice, and Ms. Seger. Votes Martin, Partee, Rice, Gramley, and Ms. against this action: None. Absent and Seger. Votes against this action: None. not voting: Messrs. Volcker and Absent and not voting: Mr. Wallich. Wallich.1 July 29, 1985 September 16, 1985 The Board disapproved an action taken The Board disapproved an action taken by the directors of the Federal Reserve by the directors of the Federal Reserve Bank of Dallas on July 25 to reduce Bank of Dallas on September 12 to the basic discount rate to 7 percent. reduce the basic discount rate to 7 percent. Votes for this action: Messrs. Volcker, Martin, Wallich, Partee, Rice, and Ms. Votes for this action: Messrs. Volcker, Seger. Votes against this action: None. Martin, Wallich, Partee, Rice, and Ms. Absent and not voting: Mr. Gramley. Seger. Votes against this action: None.1 August 13, 1985 The Board disapproved an action taken 1. See footnote 1 on p. 63. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 73 October 7, 7985 October 15, 1985 The Board disapproved actions taken The Board disapproved an action taken by the directors of the Federal Reserve by the directors of the Federal Reserve Banks of Minneapolis and Dallas on Bank of Minneapolis on October 10 to September 26 to reduce the basic dis- reduce the basic discount rate to 7 percount rate to 7 percent. cent. Votes for this action: Messrs. Martin, Partee, Rice, and Ms. Seger. Votes Votes for this action: Messrs. Volcker, against this action: None. Absent and Martin, Partee, and Rice. Votes against not voting: Messrs. Volcker and this action: None. Absent and not vot- Wallich.1 ing: Mr. Wallich and Ms. Seger.1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 Record of Policy Actions of the Federal Open Market Committee The record of policy actions of the sons for the particular decision or as to Federal Open Market Committee is the precise operations in the open marpresented in the ANNUAL REPORT of the ket that were called for to implement Board of Governors pursuant to the re- the general policy. quirements of section 10 of the Federal During 1985 the policy record for Reserve Act. That section provides each meeting was released a few days that the Board shall keep a complete after the next regularly scheduled record of the actions taken by the meeting and was subsequently pub- Board and by the Federal Open Mar- lished in the Federal Reserve Bulletin. ket Committee on all questions of pol- Policy directives of the Federal icy relating to open market operations, Open Market Committee are issued to that it shall record therein the votes the Federal Reserve Bank of New York taken in connection with the determi- as the Bank selected by the Committee nation of open market policies and the to execute transactions for the System reasons underlying each such action, Open Market Account. In the area of and that it shall include in its ANNUAL domestic open market activities, the REPORT to the Congress a full account Federal Reserve Bank of New York of such actions. operates under two separate directives In the pages that follow, there are from the Open Market Committee: an entries with respect to the policy ac- Authorization for Domestic Open tions taken at the meetings of the Fed- Market Operations and a Domestic eral Open Market Committee held Policy Directive. (A new Domestic during the calendar year 1985, includ- Policy Directive is adopted at each ing the votes on the policy decisions regularly scheduled meeting.) In the made at those meetings as well as a foreign currency area, it operates resume of the basis for the decisions. under an Authorization for Foreign The summary descriptions of eco- Currency Operations and a Foreign nomic and financial conditions are Currency Directive. These four instrubased on the information that was ments are shown below in the form in available to the Committee at the time which they were in effect at the beginof the meetings, rather than on data as ning of 1985. Changes in the instruthey may have been revised later. ments during the year are reported It will be noted from the record of in the records for the individual policy actions that in some cases the meetings. decisions were made by unanimous vote and that in other cases dissents Authorization for Domestic were recorded. The fact that a decision Open Market Operations in favor of a general policy was by a large majority, or even that it was by unanimous vote, does not necessarily In Effect January 1, 1985 mean that all members of the Commit- 1. The Federal Open Market Committee tee were equally agreed as to the rea- authorizes and directs the Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 75 Bank of New York, to the extent necessary reasonable time and that are secured to carry out the most recent domestic pol- throughout their life by a warehouse reicy directive adopted at a meeting of the ceipt or similar document conveying title Committee: to the underlying goods; provided that the (a) To buy or sell U.S. Government se- aggregate amount of bankers acceptances curities, including securities of the Federal held at any one time shall not exceed $100 Financing Bank, and securities that are di- million; rect obligations of, or fully guaranteed as (c) To buy U.S. Government securities, to principal and interest by, any agency of obligations that are direct obligations of, the United States in the open market, from or fully guaranteed as to principal and inor to securities dealers and foreign and in- terest by, any agency of the United States, ternational accounts maintained at the Fed- and prime bankers acceptances of the eral Reserve Bank of New York, on a cash, types authorized for purchase under l(b) regular, or deferred delivery basis, for the above, from dealers for the account of the System Open Market Account at market Federal Reserve Bank of New York under prices and, for such Account, to exchange agreements for repurchase of such securimaturing U.S. Government and Federal ties, obligations, or acceptances in 15 calagency securities with the Treasury or the endar days or less, at rates that, unless individual agencies or to allow them to otherwise expressly authorized by the mature without replacement; provided that Committee, shall be determined by comthe aggregate amount of U.S. Government petitive bidding, after applying reasonable and Federal agency securities held in such limitations on the volume of agreements Account (including forward commitments) with individual dealers; provided that in at the close of business on the day of a the event Government securities or agency meeting of the Committee at which action issues covered by any such agreement are is taken with respect to a domestic policy not repurchased by the dealer pursuant to directive shall not be increased or de- the agreement or a renewal thereof, they creased by more than $6.0 billion1 during shall be sold in the market or transferred to the period commencing with the opening the System Open Market Account; and of business on the day following such provided further that in the event bankers meeting and ending with the close of busi- acceptances covered by any such agreeness on the day of the next such meeting; ment are not repurchased by the seller, (b) When appropriate, to buy or sell in they shall continue to be held by the Fedthe open market, from or to acceptance eral Reserve Bank or shall be sold in the dealers and foreign accounts maintained at open market. the Federal Reserve Bank of New York, on 2. In order to ensure the effective cona cash, regular, or deferred delivery basis, duct of open market operations, the Fedfor the account of the Federal Reserve eral Open Market Committee authorizes Bank of New York at market discount and directs the Federal Reserve Banks to rates, prime bankers acceptances with ma- lend U.S. Government securities held in turities of up to 9 months at the time of the System Open Market Account to Govacceptance that (1) arise out of the current ernment securities dealers and to banks shipment of goods between countries or participating in Government securities within the United States, or (2) arise out of clearing arrangements conducted through the storage within the United States of a Federal Reserve Bank, under such ingoods under contract of sale or expected to structions as the Committee may specify move into the channels of trade within a from time to time. 3. In order to ensure the effective conduct of open market operations, while as- 1. Pursuant to an action taken by the Com- sisting in the provision of short-term inmittee at its meeting on December 17-18, vestments for foreign and international 1984, the limit on changes between Committee accounts maintained at the Federal Remeetings in System Account holdings of U.S. serve Bank of New York, the Federal Open government and federal agency securities was Market Committee authorizes and directs set at $6.0 billion for the period through the the Federal Reserve Bank of New York (a) close of business on February 13, 1985, at for System Open Market Account, to sell which time it would revert to $4.0 billion, un- U.S. Government securities to such forless the Committee specifically authorized a eign and international accounts on the badifferent amount. sis set forth in paragraph 1 (a) under Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 FOMC Policy Actions agreements providing for the resale by mer; from the fourth quarter of 1983 such accounts of those securities within 15 through November, Ml grew at a rate in calendar days on terms comparable to the lower half of the Committee's range for those available on such transactions in the 1984. Growth in the broader aggregates market; and (b) for New Yjrk Bank ac- was especially rapid in November, bringcount, when appropriate, to undertake ing M2 to the midpoint of its longer run with dealers, subject to the conditions im- range and M3 a bit further above the upper posed on purchases and sales of securities limit of its range. Expansion in total doin paragraph l(c), repurchase agreements mestic nonfinancial debt is continuing in U.S. Government and agency securities, above the Committee's monitoring range and to arrange corresponding sale and for the year, reflecting very large governrepurchase agreements between its own ment borrowing and strong private credit account and foreign and international ac- growth. Interest rates have fallen further counts maintained at the Bank. Transac- since the November meeting of the Comtions undertaken with such accounts under mittee, with the largest declines concenthe provisions of this paragraph may pro- trated in short-term markets. On Novemvide for a service fee when appropriate. ber 21, the Federal Reserve approved a reduction in the discount rate from 9 to 8V2 percent. Domestic Policy Directive Since early November the foreign exchange value of the dollar against a In Effect January 1, 19852 tradeweighted average of major foreign currencies has appreciated substantially, reversing most of the previous decline The information reviewed at this meeting from its mid-October peak. The merchanindicates a mixed pattern of developments dise trade deficit in October was signifibut on balance suggests that economic accantly reduced from the rate in the third tivity is continuing to expand in the current quarter, mainly reflecting a sharp decline quarter at a rate approximating the considin non-oil imports. erably reduced pace recorded in the third The Federal Open Market Committee quarter. Nonfarm payroll employment rose seeks to foster monetary and financial consubstantially further outside of manufacditions that will help to reduce inflation turing in November, and the civilian unfurther, promote growth in output on a susemployment rate fell from 7.4 to 7.2 pertainable basis, and contribute to an imcent. After two months of decline, proved pattern of international transacindustrial production increased somewhat tions. In furtherance of these objectives in November, largely reflecting a rebound the Committee agreed at the July meeting in auto production from strike-reduced to reaffirm the ranges for monetary growth levels. Retail sales registered a large gain that it had established in January: 4 to 8 in November after changing little in Octopercent for Ml and 6 to 9 percent for both ber. Information on outlays suggests sub- M2 and M3 for the period from the fourth stantially slower expansion in business quarter of 1983 to the fourth quarter of fixed investment, following exceptionally 1984. The associated range for total dorapid growth earlier. Since the beginning mestic nonfinancial debt was also reafof the year, broad measures of prices genfirmed at 8 to 11 percent for the year 1984. erally have continued to rise at rates close It was anticipated that M3 and nonfinanto, or somewhat above, those recorded in cial debt might increase at rates somewhat 1983, and the index of average hourly above the upper limits of their 1984 earnings has risen somewhat more slowly. ranees, given developments in the first Growth of the monetary aggregates half of the year, but the Committee felt that strengthened markedly in November. The higher target ranges would provide inap- November expansion in Ml offset the depropriate benchmarks for evaluating cline in October, and this aggregate has longer term trends in M3 and credit grown little on balance since early sumgrowth. For 1985 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1984 to the fourth quarter of 1985, of 4 to 7 2. Adopted by the Committee at its meeting percent for Ml, 6 to 8V2 percent for M2, on December 17-18, 1984. and 6 to 9 percent for M3. The associated Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 77 range for nonfinancial debt was set at 8 to tions on the open market at home and 11 percent. abroad, including transactions with the The Committee understood that policy U.S. Treasury, with the U.S. Exchange implementation would require continuing Stabilization Fund established by Section appraisal of the relationships not only 10 of the Gold Reserve Act of 1934, with among the various measures of money and foreign monetary authorities, with the credit but also between those aggregates Bank for International Settlements, and and nominal GNP, including evaluations of with other international financial insticonditions in domestic credit and foreign tutions: exchange markets. In the implementation of policy in the Austrian schillings Italian lire short run, the Committee seeks to reduce Belgian francs Japanese yen pressures on reserve positions consistent Canadian dollars Mexican pesos Danish kroner Netherlands guilders with growth of Ml, M2, and M3 at annual Pounds sterling Norwegian kroner rates of around 7, 9, and 9 percent, respec- French francs Swedish kronor tively, during the period from November German marks Swiss francs to March. Somewhat more rapid growth of Ml would be acceptable in light of the currently estimated shortfall in growth for the fourth quarter relative to the Commit- B. To hold balances of, and to have tee's expectations at the beginning of the outstanding forward contracts to receive or period, particularly in the context of slug- to deliver, the foreign currencies listed in gish growth in economic activity and con- paragraph A above. tinued strength of the dollar in exchange C. To draw foreign currencies and to markets. Greater restraint on reserve posi- permit foreign banks to draw dollars under tions might be acceptable in the event of the reciprocal currency arrangements substantially more rapid monetary growth listed in paragraph 2 below, provided that and indications of significant strengthen- drawings by either party to any such aring of economic activity and inflationary rangement shall be fully liquidated within pressures. The Chairman may call for 12 months after any amount outstanding at Committee consultation if it appears to the that time was first drawn, unless the Com- Manager for Domestic Operations that mittee, because of exceptional circumpursuit of the monetary objectives and re- stances, specifically authorizes a delay. lated reserve paths during the period be- D. To maintain an overall open posifore the next meeting is likely to be associ- tion in all foreign currencies not exceeding ated with a federal funds rate persistently $8.0 billion. For this purpose, the overall outside a range of 6 to 10 percent. open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies. The net position in a single foreign currency is Authorization for Foreign defined as holdings of balances in that currency, plus outstanding contracts for future Currency Operations receipt, minus outstanding contracts for future delivery of that currency, i.e., as the In Effect January 1, 1985 sum of these elements with due regard to sign. 1. The Federal Open Market Committee 2. The Federal Open Market Committee authorizes and directs the Federal Reserve directs the Federal Reserve Bank of New Bank of New York, for System Open Mar- York to maintain reciprocal currency arket Account, to the extent necessary to rangements ("swap" arrangements) for the carry out the Committee's foreign cur- System Open Market Account for periods rency directive and express authorizations up to a maximum of 12 months with the by the Committee pursuant thereto, and in following foreign banks, which are among conformity with such procedural instruc- those designated by the Board of Govertions as the Committee may issue from nors of the Federal Reserve System under time to time: Section 214.5 of Regulation N, Relations A. To purchase and sell the following with Foreign Banks and Bankers, and with foreign currencies in the form of cable the approval of the Committee to renew transfers through spot or forward transac- such arrangements on maturity: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 FOMC Policy Actions propriate in connection with arrangements Amount to provide investment facilities for foreign Foreign bank (millions of dollars equivalent) currency holdings, U.S. Government securities may be purchased from foreign cen- Austrian National Bank 250 tral banks under agreements for repur- National Bank of Belgium 1,000 chase of such securities within 30 calendar Bank of Canada 2,000 National Bank of Denmark 250 days. Bank of England 3,000 6. All operations undertaken pursuant Bank of France 2,000 to the preceding paragraphs shall be re- German Federal Bank 6,000 Bank of Italy 3,000 ported promptly to the Foreign Currency Bank of Japan 5,000 Subcommittee and the Committee. The Bank of Mexico 700 Foreign Currency Subcommittee consists Netherlands Bank 500 of the Chairman and Vice Chairman of the Bank of Norway 250 Bank of Sweden 300 Committee, the Vice Chairman of the Swiss National Bank 4,000 Board of Governors, and such other mem- Bank for International Settlements bers of the Board as the Chairman may Dollars against Swiss francs 600 Dollars against authorized European designate (or in the absence of members of currencies other than Swiss francs .... 1,250 the Board serving on the Subcommittee, other Board Members designated by the Any changes in the terms of existing swap Chairman as alternates, and in the absence arrangements, and the proposed terms of of the Vice Chairman of the Committee, any new arrangements that may be author- his alternate). Meetings of the Subcommitized, shall be referred for review and ap- tee shall be called at the request of any proval to the Committee. member, or at the request of the Manager 3. All transactions in foreign currencies for Foreign Operations, for the purposes undertaken under paragraph 1 (A) above of reviewing recent or contemplated operashall, unless otherwise expressly author- tions and of consulting with the Manager ized by the Committee, be at prevailing on other matters relating to his responsibilmarket rates. For the purpose of providing ities. At the request of any member of the an investment return on System holdings Subcommittee, questions arising from of foreign currencies, or for the purpose of such reviews and consultations shall be readjusting interest rates paid or received in ferred for determination to the Federal connection with swap drawings, transac- Open Market Committee. tions with foreign central banks may be 7. The Chairman is authorized: undertaken at nonmarket exchange rates. A. With the approval of the Com- 4. It shall be the normal practice to ar- mittee, to enter into any needed agreement range with foreign central banks for the or understanding with the Secretary of the coordination of foreign currency transac- Treasury about the division of responsibiltions. In making operating arrangements ity for foreign currency operations bewith foreign central banks on System hold- tween the System and the Treasury; ings of foreign currencies, the Federal Re- B. To keep the Secretary of the Treaserve Bank of New York shall not commit sury fully advised concerning System foritself to maintain any specific balance, un- eign currency operations, and to consult less authorized by the Federal Open Mar- with the Secretary on policy matters relatket Committee. Any agreements or under- ing to foreign currency operations; standings concerning the administration of C. From time to time, to transmit the accounts maintained by the Federal Re- appropriate reports and information to the serve Bank of New York with the foreign National Advisory Council on Internabanks designated by the Board of Gover- tional Monetary and Financial Policies. nors under Section 214.5 of Regulation N 8. Staff officers of the Committee are shall be referred for review and approval to authorized to transmit pertinent informathe Committee. tion on System foreign currency opera- 5. Foreign currency holdings shall be tions to appropriate officials of the Treainvested insofar as practicable, consider- sury Department. ing needs for minimum working balances. 9. All Federal Reserve Banks shall par- Such investments shall be in liquid form, ticipate in the foreign currency operations and generally have no more than 12 for System Account in accordance with months remaining to maturity. When ap- paragraph 3G(1) of the Board of Gover- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 79 nors' Statement of Procedure with Respect international monetary institutions. to Foreign Relationships of Federal Re- 3. Transactions may also be underserve Banks dated January 1, 1944. taken: A. To adjust System balances in light of probable future needs for curren- Foreign Currency Directive cies. B. To provide means for meeting In Effect January 1, 1985 System and Treasury commitments in particular currencies, and to facilitate opera- 1. System operations in foreign curren- tions of the Exchange Stabilization Fund. cies shall generally be directed at counter- C. For such other purposes as may ing disorderly market conditions, provided be expressly authorized by the Committee. that market exchange rates for the U.S. 4. System foreign currency operations dollar reflect actions and behavior consis- shall be conducted: tent with the IMF Article IV, Section 1. A. In close and continuous consulta- 2. To achieve this end the System shall: tion and cooperation with the United States A. Undertake spot and forward pur- Treasury; chases and sales of foreign exchange. B. In cooperation, as appropriate, B. Maintain reciprocal currency with foreign monetary authorities; and ("swap") arrangements with selected for- C. In a manner consistent with the eign central banks and with the Bank for obligations of the United States in the In- International Settlements. ternational Monetary Fund regarding ex- C. Cooperate in other respects with change arrangements under the IMF Articentral banks of other countries and with cle IV. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 FOMC Policy Actions Meeting Held on cember and early January. In manu- February 12-13, 1985 facturing, employment rose moderately after a large gain in December, 1. Domestic Policy Directive and the length of the workweek edged The information reviewed at this meet- down but remained above the average ing suggested that the rate of economic level in the fourth quarter. Despite the expansion strengthened in late 1984. continued rise in employment, the ci- For the fourth quarter as a whole, vilian unemployment rate increased growth in real gross national product slightly to 7.4 percent, as the civilian picked up to an annual rate of about 4 labor force grew substantially. percent, according to the preliminary Retail sales rose 0.7 percent in Januestimate of the Commerce Depart- ary, continuing at about the same pace ment, from about IV2 percent in the as the average for November and Dethird quarter, and there was evidence cember. Much of the January rise was of continued moderate expansion in attributable to sales at automotive outearly 1985. The pickup in growth lets. Sales of new domestic automofrom the third to the fourth quarter was biles were at an annual rate of 8V2 milattributable in large part to stronger lion units, about 1 million units higher domestic final demand and a reduction than the average in the fourth quarter in the current account deficit with for- of 1984. Stores selling primarily diseign countries after a sharp further cretionary items such as general merwidening of that deficit in the third chandise, apparel, furniture, and apquarter. Broad measures of prices and pliances registered a marked decline wages generally continued to rise in in sales in January, after substantial in- 1984 at rates close to those recorded in creases in the final months of 1984. 1983. The decline in housing activity that Industrial production increased 1.0 had characterized the second half of percent in the November-December 1984 appeared to be ending as the year period, offsetting the declines in the drew to a close. Total private housing preceding two months, and prelimi- starts, though down about 6 percent in nary indications suggested a further the fourth quarter as a whole to an angain in January. The December rise nual rate below 1.6 million units, was broadly based, in contrast to the edged up in the November-December increase in November, which was con- period, and sales of existing homes centrated in the automotive category. rose somewhat over the final two The index of industrial capacity utili- months of the year. zation moved up to 81.9 percent in Business fixed investment spending December, but remained almost 1 per- continued to grow in the fourth quarcentage point below its recent high in ter, although at a less rapid pace than mid-1984. in the first three quarters of 1984. Nonfarm payroll employment, ad- Shipments of nondefense capital goods justed for strike activity, rose more increased moderately in the fourth than 300,000 further in January. The quarter, and spending on nonresidenlargest gain occurred at retail trade es- tial construction advanced substantablishments, but employment growth tially. In contrast, new orders for plant was also strong in services and in con- and equipment fell in December and struction, where unseasonably mild over the fourth quarter as a whole. weather boosted hiring in both De- Some imbalances in business inven- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 81 tories had developed during 1984, but third quarter. Nevertheless, the trade businesses appeared to have made sub- deficit for 1984 totaled nearly $108 stantial progress toward attaining de- billion, compared with $61 billion in sired inventory levels, and in some 1983. sectors inventories relative to sales At its meeting on December 17-18, were quite lean. Investment in busi- 1984, the Committee had adopted a ness inventories slowed markedly in directive that called for some farther late fall, largely in response to the ear- reduction in the degree of restraint on lier weakness in orders and sales. In reserve positions. The members ex- November, stocks at all manufacturing pected that such an approach to policy and trade establishments were little implementation would be consistent changed in real terms, after average with growth of Ml, M2, and M3 at monthly increases in the range of $20 annual rates of around 7, 9, and 9 perbillion to $25 billion at an annual rate cent respectively during the fourduring prior months in 1984. month period from November to In December, the producer price in- March.1 Given the estimated shortfall dex for finished goods and the con- in growth of Ml for the fourth quarter sumer price index edged up 0.1 per- relative to the Committee's expectacent and 0.2 percent respectively. tions at the beginning of the period, During 1984 the rise in producer the members agreed that somewhat prices was 1.8 percent, compared with more rapid growth would be accepta- 0.6 percent in 1983, while the in- ble, particularly if the faster growth crease of 4 percent in consumer prices occurred in the context of sluggish exwas about the same as that in the pre- pansion in economic activity and convious year. The advance in the average tinued strength of the dollar in foreign hourly earnings index was 3.0 percent last year, compared with 3.9 percent in 1983. 1. These growth rates and all subsequent data on the monetary aggregates reflect annual bench- The foreign exchange value of the marks and seasonal factors as published on Februdollar rose about 5lh percent to a new ary 14, 1985. high over the intermeeting period. Af- The monetary aggregates are defined as follows: ter the announcement on January 17 Ml comprises demand deposits at commercial banks and thrift institutions, currency in circulaby the G-5 Ministers of Finance and tion, travelers checks of nonbank issuers, negotia- Central Bank Governors regarding coble order of withdrawal (NOW) and automatic ordinated intervention in exchange transfer service (ATS) accounts at banks and thrift markets, and subsequent exchange institutions, and credit union share draft accounts. M2 contains M1 and savings and small-denominamarket operations, the dollar tended to tion time deposits (including money market destabilize. The rise resumed in early posit accounts (MMDAs) at all depository institu- February, apparently in association tions, overnight repurchase agreements (RPs) at with a perception that the outlook for commercial banks, overnight Eurodollars held at economic activity in the United States foreign branches of U.S. banks by U.S. residents other than banks, and money market mutual fund was improving without signs of a shares other than those restricted to institutions). strengthening in inflationary pres- M3 is M2 plus large-denomination time deposits sures. The U.S. merchandise trade at all depository institutions, large-denomination deficit declined sharply in December term RPs at commercial banks and savings and loan associations, institution-only money market and for the fourth quarter as a whole, mutual funds, and term Eurodollars held by U.S. primarily because imports dropped residents in Canada and the United Kingdom and substantially from the high rate in the at foreign branches of U.S. banks elsewhere. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 FOMC Policy Actions exchange markets. The Committee In the first part of the recent intermeetalso indicated that greater restraint on ing interval, open market operations reserve positions might be acceptable were directed toward achieving some if growth in the monetary aggregates further reduction in pressures on rewere substantially more rapid than ex- serve positions. Adjustment plus seapected and if there were indications sonal borrowing at the discount winthat economic activity and inflationary dow, after bulging around year-end, pressures were strengthening signifi- declined to the $250 million to $300 cantly. The intermeeting range for the million range over much of January. federal funds rate was set at 6 to 10 By the latter part of January, against percent. the background of continued rapid After growing little on balance since growth in the monetary and credit agearly summer, Ml expanded at esti- gregates and the relatively good permated annual rates of about IOV2 and 9 formance of the economy, the easing percent respectively in December and process came to an end; reserves were January. M2 and M3 also expanded provided more cautiously through rapidly over the two months, rising on open market operations, and borrowaverage at annual rates estimated to be ing rose somewhat, partly because of around 14 and 13V2 percent respec- unexpectedly large demands for excess tively, considerably above the short- reserves. Reflecting variations in acrun objectives for the November-to- tual pressures on bank reserve posi- March period established at the tions, but in part in anticipation of an December meeting. Relative to the easing in pressures, the federal funds Committee's longer-run objectives for rate declined in the early part of the the period from the fourth quarter of period from around 83/4 percent to the 1983 to the fourth quarter of 1984, Ml 8 to 8V4 percent area; subsequently it grew at a rate of about 5V4 percent, rose to around 8V2 percent or somesomewhat below the midpoint of its 4 what higher. Other short-term market to 8 percent range, and M2 increased interest rates generally rose somewhat at a rate of about 73/4 percent, a bit on balance over the intermeeting interabove the midpoint of its 6 to 9 percent val, while most long-term rates were range. M3 and domestic nonfinancial roughly unchanged or a little lower. sector debt expanded at rates of about The staff projections presented at IOV2 and 13V2 percent respectively, this meeting suggested that real GNP above the Committee's ranges of 6 to 9 would grow at a moderate pace in percent and 8 to 11 percent for the 1985. Business fixed investment was year. The rapid growth in total debt likely to expand further during the reflected very large government bor- year, and anticipated gains in real disrowing and strong private credit posable income were expected to supgrowth that was boosted in part by the port continued sizable advances in unusual size of merger-related credit consumption expenditures. The unemactivity. ployment rate was expected to edge Over the December-January peri- down over the period, and the rate of od, the average level of borrowing by increase in prices was projected to redepository institutions at the discount main close to, or slightly below, that window declined on balance, despite a experienced in 1984. bulge around the year-end statement In the Committee's discussion of the date, and both nonborrowed and total economic situation and outlook, the reserves expanded at very rapid rates. members agreed that continuing ex- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 83 pansion in business activity was a in money and credit established at this likely prospect for 1985, though at a meeting. The members also assumed more moderate rate than in the first that significant progress would be two years of the current cyclical up- made toward reducing future deficits swing. As they had at previous meet- in the federal budget, thereby helping ings, however, members referred to over the nearer term to moderate inflapersisting problems and financial tionary expectations and pressures on strains in various sectors of the econ- interest rates, and they assumed that omy that constituted threats to the sus- the foreign exchange value of the doltainability of the overall expansion, es- lar would fluctuate within the range pecially if substantial progress was not experienced in recent months. made toward reducing the massive def- While a number of members comicit in the federal budget. Moreover, mented during the discussion that acthe high level of the dollar and large tual growth in line with the forecasts trade deficit were increasingly being would represent a favorable developreflected in pressures on some sectors ment for the third year of an economic of the economy. Most of the members expansion, several observed that expected about the same rate of infla- growth might well be faster, especially tion in 1985 as that experienced in in the short run. This possibility was 1984, assuming that the dollar ex- raised by current indications of apprechange rate remained in the range of ciable strength in both consumer and recent months, but some saw the odds business spending and an expansive as tilted in the direction of some mod- fiscal policy. It was also pointed out est further progress toward price sta- that a large decline in the foreign exbility. change value of the dollar, should it At this meeting the members of the occur, would tend to stimulate domes- Committee and the Federal Reserve tic business activity while also adding Bank presidents not currently serving to inflationary pressures. Several as members presented specific fore- members noted their concern that casts of economic activity, the rate of strong growth in spending by the priunemployment, and average prices. vate sectors in the context of a stimula- For the period from the fourth quarter tive fiscal policy could lead to some of 1984 to the fourth quarter of 1985, inflationary pressures, particularly as the forecasts for growth of real GNP the margin of unutilized productive recentered on a range of 3V2 to 4 per- sources diminished, with adverse concent, with an overall range of 3lk to sequences for interest rates and inter- 4V4 percent. Forecasts of the rate of est-sensitive sectors of the economy inflation, as indexed by the GNP defla- and ultimately for the sustainability of tor, also centered on a range of 3lh to the expansion itself. 4 percent, and the central tendency of While the overall expansion in ecothe forecasts for growth in nominal nomic activity was currently display- GNP was a range of W2 to 8 percent. ing some momentum, the members Forecasts of the rate of unemployment also referred to the decidedly uneven in the fourth quarter of 1985 varied participation in the expansion of diffrom 6V2 to 7V4 percent, but most of ferent sectors of the economy or parts the members anticipated unemploy- of the country, including adverse conment rates ranging from 63k to 7 per- ditions in agriculture and in certain cent. These forecasts were based on sectors of industry. Circumstances and the Committee's objectives for growth problems varied from one industry or Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 FOMC Policy Actions region to another, but particular con- guine about the outlook for inflation cern was expressed about the damag- cited the favorable trend in wages, the ing impact that a rising dollar interna- strong competition from abroad in tionally was having on a number of many industries, the growth of promanufacturing and extractive indus- ductive capacity, and the widespread tries and on agriculture, with attendant efforts of businesses to improve profinancial difficulties for those sectors ductivity. The possibility of further deof the economy and related strains on clines in oil prices was also cited. The the financial institutions that serviced removal of quotas on imports of autothem. Reference was also made to the mobiles from Japan would also help to overbuilding of multifamily housing restrain the rise in average prices, aland office structures in some parts of though the extent of that effect was unthe country and to the problem loans certain. Members who were less optiassociated with such overbuilding. mistic about the outlook for inflation Some concern was expressed about the noted that unit labor costs could be rapid accumulation of debt by many expected to be under upward pressure households and businesses that ren- because productivity gains would tend dered these borrowers more vulnera- to diminish as the nation continued to ble to adverse economic develop- move toward fuller utilization of its ments. It was generally expected that productive resources during the third such problems would not significantly year of the current expansion. One retard overall economic expansion in member also raised the prospect of at the near term, but several members in- least some pressures from rising comdicated that they were more troubled modity prices in 1985. by the economic prospects for the At this meeting the Committee relonger run. The members agreed that viewed the 1985 growth ranges for the the odds of prolonging the expansion monetary and credit aggregates that it would be greatly enhanced by a sub- had tentatively set in July 1984 within stantial reduction in federal budgetary the framework of the Full Employdeficits and the emergence of a more ment and Balanced Growth Act of sustainable pattern of international 1978 (the Humphrey-Hawkins Act). transactions. Those tentative ranges included With regard to the outlook for infla- growth—measured from the fourth tion, most of the members anticipated quarter of 1984 to the fourth quarter of that continuing economic expansion in 1985—of 4 to 7 percent for Ml, 6 to line with their forecasts would proba- 8V2 percent for M2, and 6 to 9 percent bly be associated with little change in for M3. The associated range for total the rate of inflation during 1985. Some domestic nonfinancial debt had been members were more optimistic and provisionally set at 8 to 11 percent for viewed the prospects for some decline 1985. in inflation as relatively favorable. Al- The Committee's discussion focused though the members had assumed in on whether the tentative ranges for presenting their forecasts that the dol- 1985 remained appropriate in light of lar would remain within its recent developments since mid-1984 and range of fluctuation in foreign ex- foreseeable economic and financial change markets, they recognized that circumstances. There were a number the future performance of the dollar of proposals for small changes in the was in fact highly uncertain. ranges. With respect to Ml, a majority Members who were relatively san- of the members wanted to retain the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 85 tentative range of 4 to 7 percent, but near the upper limit of the tentative the remaining members expressed a range, or above it, would have inflapreference for raising the upper limit tionary implications. The members to 7V2 or 8 percent. In the majority agreed that the trend rate of increase in view, the tentative range provided ade- Ml velocity, as well as the velocity of quate room to accommodate a desir- the other monetary aggregates, reable and sustainable rate of economic mained subject to a considerable range expansion and retention of that range of uncertainty, given the still limited would also serve to underscore the experience with a relatively deregu- Committee's commitment to an anti- lated financial environment. Under inflationary policy. The members who these conditions, the Committee mempreferred a higher limit for the Ml bers indicated the need to continue to range gave considerable emphasis to judge the behavior of the monetary agthe uncertainties that surrounded both gregates in light of the flow of inforthe economic outlook and the relation- mation on business activity, inflationship between money growth and GNP. ary pressures, and conditions in They did not necessarily disagree that domestic credit and foreign exchange the tentative range might in fact prove markets. to be consistent with a satisfactory With regard to M2, most of the economic performance, but they be- members indicated that they could aclieved that some additional leeway was cept an increase of V2 percentage point desirable for use if needed. in the upper limit of the tentative In the course of their discussion, the range, although some expressed an members referred to evidence that the initial preference for no change in the income velocity of Ml—nominal GNP range. The small upward adjustment divided by the Ml stock—seemed to reflected the technical judgment, be returning to a more normal or pre- based upon an assessment of recent dictable pattern. Some analysis sug- developments, that growth in M2 for gested that the trend growth of Ml ve- the year could revert to its earlier patlocity might be somewhat lower than tern that was more in line with the that experienced over much of the growth in nominal GNP. postwar period, reflecting in part the Most of the members also supported deregulation of deposits and other fi- an increase of V2 percentage point in nancial changes in recent years and the the upper limit of the tentative range related prospect of a slower rate of fi- for M3 and an increase of 1 percentage nancial innovation in the future. A point in the provisional monitoring number of members emphasized that range for total domestic nonfinancial such a development would imply the debt. Growth within both ranges in need for Ml growth in the upper part 1985 would represent a considerable of the Committee's tentative range. It slowing from the actual pace in 1984. was also noted that the lagged effects Some members questioned the need of the interest rate declines during the for any increase in those ranges, both latter part of 1984 were likely to de- because of the anticipated moderation press velocity growth in the first part in the expansion of GNP and because of 1985. Other members raised the the higher ranges could convey a prospect that the growth in Ml veloc- wrong impression of the Committee's ity might not decline as much as ex- anti-inflationary policy. Nonetheless, pected from the rate experienced in total debt was expected to continue to 1984 and in that event growth of Ml grow at a faster rate than nominal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 FOMC Policy Actions GNP, reflecting further rapid expan- the start of the year were all above the sion in the federal debt, larger than target ranges under consideration, as normal growth in merger and other those ranges were conventionally illuscorporate restructuring activities, and trated, because monetary growth had the continuing need to finance in- been relatively rapid in late 1984 and creases in spending by domestic sec- early 1985. No member expressed tors that exceeded the rise in nominal concern about this development, since GNP, as reflected in the expected fur- it was contemplated that monetary ther widening of the nation's large def- growth would slow as the year proicit in its external trade balance. gressed and expansion for the year as a In the course of the Committee's whole would be consistent with the discussion, consideration was given to target ranges. With reference to the a proposal for using the midpoint of Humphrey-Hawkins testimony, the the previous year's fourth-quarter tar- pictorial representation of the targets get range, rather than the actual as "cones" would be supplemented by fourth-quarter outcome, as the base other lines to indicate that the Comfor the following year's target range. mittee was not concerned about varia- This issue had been discussed in some tions in money growth outside the reldetail at the previous meeting of the atively narrow portion of the cones Committee. No support was expressed early in the year. in favor of such an approach, although At the conclusion of the Committhe members recognized that in some tee's discussion, a majority of the circumstances such an alternative members indicated that they favored might be appropriate. In setting its ob- or found acceptable a policy that injectives for a current year, the Com- cluded retention of the tentative range mittee already took into account the for Ml, increases of V2 percentage prior year's monetary developments point in the upper limits of the tentaand their implications for the evolving tive ranges for M2 and M3, and an relationship between money and GNP. increase of 1 percentage point in the It was generally felt that employing the provisional monitoring range for total midpoint of the previous year's target domestic nonfinancial debt. The memrange as the base for the current year's bers indicated that it might be approtarget would have the disadvantage of priate for growth in the aggregates to introducing a degree of rigidity in the be in the upper part of their ranges for decisionmaking process; it would im- the year, depending on developments pose a base that was decided upon with respect to velocity and provided many months before under possibly that inflationary pressures remained quite different circumstances. In the subdued. In keeping with the Commitcurrent situation, such problems were tee's usual procedures under the Humparticularly evident for M3 and total phrey-Hawkins Act, the ranges would credit whose levels at the end of 1984 be reviewed at midyear against the were well above their long-run ranges; background of economic and financial use of a previously targeted fourth- developments. quarter base would therefore imply ei- The following paragraph relating to ther a wrenching slowdown in actual the longer-run ranges was approved: growth for 1985 or adoption of very high target ranges for growth in 1985. The Federal Open Market Committee seeks to foster monetary and financial condi- The members also noted that the tions that will help to reduce inflation furlevels of the monetary aggregates at ther, promote growth in output on a sustain- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 87 able basis, and contribute to an improved cated their support of an approach pattern of international transactions. In fur- directed toward maintaining the reserve therance of these objectives the Committee conditions characteristic of recent agreed at this meeting to establish ranges for monetary growth of 4 to 7 percent for Ml, 6 weeks. Such an approach was thought to 9 percent for M2, and 6 to 9V2 percent forlikely to be associated with reduced M3 for the period from the fourth quarter of growth in the monetary aggregates over 1984 to the fourth quarter of 1985. The assothe balance of the first quarter, although ciated range for total domestic nonflnancial debt was set at 9 to 12 percent for the year growth for the quarter as a whole would 1985. the Committee agreed that growth in probably exceed the Committee's the monetary aggregates in the upper part of longer-run ranges for the year. That aptheir ranges for 1985 may be appropriate, proach was reinforced by the current depending on developments with respect to strength of the dollar in the exchange velocity and provided that inflationary pressures remain subdued. markets and the sense that the outlook for the economy and prices did not ap- Votes for this action: Messrs. Volcker, pear to signal a need for a change. Corrigan, Boy kin, Gramley, Mrs. Horn, Messrs. Partee, Rice, Ms. Seger, and Mr. With regard to Ml, the members re- Balles. Votes against this action: Messrs. ferred to an analysis, which suggested Boehne, Martin, and Wallich. (Mr. Balles that expansion in this aggregate should voted as an alternate.) moderate as the lagged effects of earlier Messrs. Boehne and Martin dissented declines in market interest rates on the because they preferred a somewhat demand for money balances dissipated. higher upper boundary for the Ml range With respect to the outlook for the in order to provide enough leeway, if broader aggregates, the members needed, to accommodate a satisfactory viewed appreciably slower growth as a rate of economic expansion. In their reasonable expectation, partly because view, the additional leeway was desir- of the prospect that inflows of funds to able because of the uncertainties sur- money market deposit accounts and to rounding the outlook for velocity, and it money market mutual funds would modtook account of the favorable outlook for erate as the interest paid on such acinflation and the continuing financial counts was brought into better alignment strains in some sectors of the economy. with short-term market rates. Indeed, Mr. Boehne also noted that Ml growth evidence of such a development was alin 1984 was in the lower part of the ready apparent with respect to money Committee's range. market mutual funds. Additionally, the Mr. Wallich dissented because he expansion in M3 might be held down by wanted to retain the ranges for the broad continued moderation in the issuance of monetary aggregates that were tenta- large-denomination certificates of detively adopted in July 1984. In his view posit by commercial banks. those ranges provided adequate room for Despite the prospects for more modfostering a sustainable rate of economic erate growth in the monetary aggreexpansion. They were more consistent gates, some members were concerned with the Committee's long-run objective that such growth might not slow suffiof bringing down inflation, and raising ciently over the period ahead and that them might be misinterpreted by the some firming of reserve conditions market as a weakening of policy in that might be needed to foster a desirable regard. rate of monetary expansion. They found In the Committee's discussion of pol- the current approach to policy impleicy implementation for the weeks imme- mentation appropriate for the present, diately ahead, all of the members indi- but they did not want to rule out the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 FOMC Policy Actions possible need for some modest firming markets. The members also agreed that over the weeks ahead. Several members lesser restraint on reserve positions indicated that the degree of any firming would be acceptable in the event of subshould remain fairly limited even if stantially slower growth in the monetary money growth was above expectations aggregates, especially against the backfor a time because they were concerned ground of sluggish growth in economic about the adverse impact that a substan- activity and continued strength of the tial rise in market interest rates over the dollar in foreign exchange markets. It near term could have on the exchange was agreed that the intermeeting range market situation and on interest- or for the federal funds rate, which protrade-sensitive sectors of the economy vides a mechanism for initiating consuland ultimately on the economic expan- tation of the Committee when its boundsion itself. Members concluded that aries are persistently exceeded, should evaluation of the desirability for firming be left unchanged at 6 to 10 percent. should take account of the strength of The following directive, embodying the dollar in exchange markets as well as the Committee's longer-run ranges and the business outlook and inflationary its short-run operating instructions, was pressures and that any firming of reserve issued to the Federal Reserve Bank of conditions over the weeks ahead should New York: be undertaken in a limited and gradual The information reviewed at this meeting manner. Accordingly, relatively rapid suggests that real GNP expanded at a modermonetary growth would not automati- ate pace in the fourth quarter, reflecting cally call for more reserve restraint if it some strengthening in late 1984 after several occurred in the context of emerging months of considerably reduced growth, and there was evidence of continued moderate weakness in business conditions and a expansion in early 1985. Total retail sales strong dollar in the foreign exchange rose in January at about the same pace as the markets. The members also agreed on average for November and December, while the possibility of some easing in reserve the decline in housing starts appears to have ended. Industrial production and nonfarm conditions, but in the view of at least payroll employment increased appreciably in some of the members, any potential the November-December period and nonneed for easing seemed less likely, given farm payroll employment rose substantially the recent strength of the monetary ag- further in January. The civilian unemploygregates and the performance of the ment rate rose slightly in January to 7.4 percent. Information on business spending sugeconomy. gests less rapid expansion in outlays for fixed At the conclusion of the Committee's investment, following exceptional growth discussion, all of the members indicated earlier; businesses also appear to have made their acceptance of a directive that called substantial progress in adjusting their inventories. During 1984 broad measures of for maintaining the degree of reserve prices generally increased at rates close to pressure that had prevailed in recent those recorded in 1983, and the index of avweeks. The members agreed that mod- erage hourly earnings rose somewhat more est increases in reserve restraint would slowly. be sought if growth in Ml appeared to The foreign exchange value of the dollar against a trade-weighted average of major be exceeding an annual rate of about 8 foreign currencies has continued to apprecipercent and M2 and M3 a rate of around ate strongly since mid-December. After the 10 to 11 percent during the period from announcement of January 17 by the G-5 December to March, particularly if such Ministers of Finance and Central Bank Governors regarding coordinated intervention in monetary expansion was associated with exchange markets, and subsequent operasatisfactory growth in business activity tions, the dollar's rise modertes somewhat. and diminishing pressures in exchange The merchandise trade deficit declined Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 89 sharply in December and for the fourth quar- tainties in the business outlook, and the ter as a whole, primarily because of a large strength of the dollar in the exchange mardrop in imports from the high rate in the kets, the Committee seeks to maintain rethird quarter. Nevertheless, the deficit for the serve conditions characteristic of recent full year 1984 was substantially higher than weeks. Should growth in Ml appear to be in 1983. exceeding an annual rate of around 8 percent After growing little on balance since early and M2 and M3 a rate of around 10 to 11 summer, Ml expanded at a rapid pace in late percent during the period from December to 1984 and early 1985. The broader aggre- March, modest increases in reserve presgates also expanded rapidly in recent sures would be sought, particularly if busimonths. For the period from the fourth quar- ness activity is rising at a satisfactory rate ter of 1983 to the fourth quarter of 1984, Ml and exchange market pressures diminish. grew at a rate of about 5lk percent, some- Lesser restraint on reserve positions would what below the midpoint of the Committee's be acceptable in the event of substantially range for the year, and M2 increased at a rate slower growth in the monetary aggregates, of about 73/4 percent, a bit above the mid- particularly in the context of sluggish growth point of its longer-run range. Both M3 and in economic activity and continued strength total domestic nonfinancial debt expanded at of the dollar in foreign exchange markets. rates above the Committee's ranges for the The Chairman may call for Committee conyear, reflecting very large government bor- sultation if it appears to the Manager for Dorowing and strong private credit growth, mestic Operations that pursuit of the moneboosted in part by the unusual size of mer- tary objectives and related reserve paths durger-related credit activity. Short-term inter- ing the period before the next meeting is est rates have risen somewhat on balance likely to be associated with a federal funds since the December meeting of the Com- rate persistently outside a range of 6 to 10 mitte, but long-term rates are about un- percent. changed to a little lower. On December 21, the Federal Reserve approved a reduction in Votes for short-run operational paragraph: the discount rate from 8V2 to 8 percent. Messrs. Volcker, Corrigan, Boehne, The Federal Open Market Committee Boy kin, Gramley, Mrs. Horn, Messrs. seeks to foster monetary and financial condi- Martin, Partee, Rice, Ms. Seger, Messrs. tions that will help to reduce inflation fur- Wallich, and Balles. Votes against this acther, promote growth in output on a sustain- tion: None. (Mr. Balles voted as an alterable basis, and contribute to an improved nate.) pattern of international transactions. In furtherance of these objectives the Committee agreed at this meeting to establish ranges for monetary growth of 4 to 7 percent for Ml, 6 2. Authorization for Domestic to 9 percent for M2, and 6 to 9V2 percent for Open Market Operations M3 for the period from the fourth quarter of 1984 to the fourth quarter of 1985. The asso- At this meeting the Committee voted ciated range for total domestic nonfinancial to increase from $4 billion to $6 bildebt was set at 9 to 12 percent for the year lion the limit on changes between 1985. The Committee agreed that growth in Committee meetings in System acthe monetary aggregates in the upper part of their ranges for 1985 may be appropriate, count holdings of U.S. government depending on developments with respect to and federal agency securities specified velocity and provided that inflationary pres- in paragraph l(a) of the authorization sures remain subdued. for domestic open market operations, The Committee understood that policy implementation would require continuing ap- effective for the intermeeting period praisal of the relationships not only among ending with the close of business on the various measures of money and credit but March 26, 1985. also between those aggregates and nominal GNP, including evaluation of conditions in Votes for this action: Messrs. Volcker, domestic credit and foreign exchange mar- Corrigan, Boehne, Boy kin, Gramley, kets. Mrs. Horn, Messrs. Martin, Partee, Rice, In the implementation of policy for the Ms. Seger, Messrs. Wallich, and Balles. immediate future, taking account of the Votes against this action: None. (Mr. progress against inflation, remaining uncer- Balles voted as an alternate.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 FOMC Policy Actions This action was taken on the recom- ther strong job gains in February, but mendation of the Manager for Domestic employment in the manufacturing sec- Operations. The Manager had advised tor fell 75,000. The average length of that substantial net purchases of securi- the workweek in manufacturing also ties were likely to be necessary over the declined, partly because of adverse upcoming intermeeting interval in order weather during the survey week. The to offset the estimated absorption of re- civilian unemployment rate was 7.3 serves stemming from technical factors percent, little changed from its level at including changes in currency in circu- year-end, and within the range of 7.2 lation, vault cash, and required re- to 7.5 percent that has generally preserves. vailed since mid-1984. Industrial production declined 0.5 percent in February, and data for the three preceding months were revised Meeting Held on to show smaller increases than previ- March 26, 1985 ously had been estimated. The recent sluggishness in production apparently 1. Domestic Policy Directive reflected the continuing substitution of The information reviewed at this meet- imports for domestically produced ing suggested that real GNP, which goods and ongoing corrections of inhad grown at an annual rate of about ventory imbalances in some indus- 4V4 percent in the fourth quarter, was tries. expanding at a slower pace in the cur- The U.S. merchandise trade deficit rent quarter. Growth in domestic increased sharply in January, as nonspending appeared to be relatively oil imports rose by 16 percent from strong in early 1985, but an increased the reduced fourth-quarter rate. The share of the demand for goods appar- trade balance had deteriorated markently was being met by imports rather edly last year and was the principal than domestic production. Broad mea- contributor to a current account deficit sures of prices and wages generally in the balance of payments of $102 bilwere continuing to rise at rates close to lion inl984, as compared with $42 bilthose recorded in 1984. lion in the previous year. Total retail sales rose considerably Total private housing starts declined over the first two months of 1985; out- in February after a sharp rise in Janulays in February were more than 2 per- ary. Nevertheless, the average for the cent above the average in the fourth two months, at an annual rate of nearly quarter. Sales of new domestic auto- P/4 million units, was somewhat mobiles were at an annual rate of 8V2 higher than the rate in the fourth quarmillion units in January and February, ter. Issuance of residential building about 1 million units higher than the permits during the January-February average in the fourth quarter of 1984. period was also above the fourth-quar- Auto sales during the first 20 days of ter pace. Sales of new homes picked March remained strong, at a rate a lit- up slightly in January, according to tle below the January-February pace. preliminary data, but sales of existing Nonfarm payroll employment rose homes edged down in February after 120,000 in February after average in- posting four consecutive monthly creases of about 300,000 in the pre- gains. ceding four months. Retail trade and Information on business capital service establishments reported fur- spending suggested less rapid expan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 91 sion in early 1985. Shipments by do- ing at a rate close to that recorded in mestic producers of nondefense capital 1984. goods dropped sharply in January and Since the Committee's meeting in recovered only a little in February; im- mid-February, the trade-weighted ports of business equipment, however, value of the dollar in foreign exchange were especially strong in January. markets had fluctuated widely under Spending on nonresidential construc- often volatile market conditions. Durtion continued at a relatively brisk ing the early part of the intermeeting pace in both months. New orders for period, the dollar rose about 5 pernondefense capital goods fluctuated cent. At that time, especially during widely in January and February, but the last few days of February and the on balance were little changed from beginning of March, monetary authorthe average level in the second half of ities sold dollars on a large scale. 1984. With respect to broader indica- More recently, the dollar dropped tors of future business spending plans, sharply on exchange markets, more recent surveys of anticipated plant and than offsetting the earlier rise. The reequipment expenditures pointed to versal was attributed in part to indicacontinued, though moderating, gains tions of slower growth in U.S. ecoin 1985. nomic activity than many in the Overall investment in business in- market had anticipated and to conventories has remained moderate thus cerns abroad about the implications of far in 1985 though recent inventory problems with non-federally insured developments have varied considera- thrift institutions in Ohio. bly across industries. In the manufac- At its meeting on February 12-13, turing sector stocks fell in January for 1985, the Committee had adopted a the third month in a row, largely in directive that called for maintaining response to earlier weakness in orders the degree of reserve pressures that and sales. On the other hand, retail had characterized the weeks preceding trade inventories rose substantially, the meeting. The members agreed that primarily reflecting increased stocks modest increases in reserve restraint at automobile dealers to alleviate short would be sought if growth in Ml apsupplies of some popular models. peared to be exceeding an annual rate The producer price index for fin- of about 8 percent and growth in M2 ished goods, which was unchanged in and M3 was running above 10 to 11 January, edged down 0.1 percent in percent during the period from De- February. Petroleum prices fell cember to March. Lesser restraint on sharply in both months, and food reserve positions would be acceptable prices also declined as reductions for in the event of substantially slower meats and most livestock offset growth in the monetary aggregates. weather-related increases for fresh Such adjustments in the degree of fruits and vegetables. The consumer pressure on reserves would be considprice index rose 0.3 percent in Febru- ered in the context of developments in ary, about the same as its monthly av- the U.S. economy and conditions in erage over the past year; substantial foreign exchange markets. The interdeclines in prices of energy-related meeting range for the federal funds items tempered the increases in prices rate was set at 6 to 10 percent. of food and other commodities. Over Growth in Ml accelerated to an anthe first two months of the year, the nual rate of about 14 percent in Februaverage hourly earnings index was ris- ary from 9 percent in January, but par- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 FOMC Policy Actions tial data available for March indicated past two years, was likely to expand a considerable slowing. Growth in M2 further in 1985. Consumer spending and M3 moderated somewhat in Feb- was expected to remain relatively brisk ruary and averaged about 12 percent during the year, supported by gains in and 9 percent respectively over the real disposable income and in employ- January-February period. As with ment. Growth of real output, however, Ml, growth in the broader aggregates was expected to fall short of the rise in appeared to be slowing considerably in aggregate demand. The unemploy- March. Expansion in total domestic ment rate was projected to edge down nonfinancial debt remained relatively over the period and the rate of increase rapid over the first two months of the in prices was expected to remain close year, though somewhat below the pace to, or slightly below, that experienced of previous months. in 1984. The average level of adjustment plus During the Committee's review of seasonal borrowing by depository in- current economic and financial condistitutions at the discount window rose tions and the outlook for economic acsomewhat over the intermeeting inter- tivity, most of the members agreed val, averaging around $600 million in that continuing expansion at a moderthe two complete maintenance periods ate pace remained a reasonable expecafter the February meeting and $428 tation for 1985. However, consideramillion in the first half of the current ble concern was expressed about the statement period. The higher level of sensitive conditions in domestic finanborrowing for the most part reflected cial and foreign exchange markets, esunexpectedly large demands for excess pecially against the background of the reserves, but for a time was also influ- distortions and uncertainties stemming enced to an extent by more cautious from massive and persisting deficits in provision of reserves through open the federal budget and the record and market operations, given the strength still widening gap in the nation's balof the monetary aggregates, especially ance of trade. The members referred Ml. to the quite different trends in various Federal funds traded mainly be- sectors of the economy; in general, the tween 8% and 8% percent during the service industries were doing well intermeeting interval, averaging a little while industries related to agriculture, above 8V2 percent, about the same as mining, energy, and a number of manin the first half of February. Other ufacturing activities were experiencing short-term rates rose about lk to V2 a variety of problems and were subject percentage point while long-term to varying degrees of financial strain. yields generally increased V2 percent- With a number of lending institutions, age point or more. Several measures especially those associated with relaof interest rates on new commitments tively depressed industries and with for home mortgage loans also showed housing finance, also experiencing fiincreases of about V2 percentage point nancial pressures, the overall economy from their levels in mid-February. was vulnerable to adverse develop- The staff projections presented at ments. In this difficult set of circumthis meeting continued to suggest that stances several members commented real GNP would grow at a moderate that the risks of any deviation in the pace in 1985. Business fixed invest- economy from their current expectament, though slowing from the excep- tions were in the direction of slower tionally rapid rates of increase in the growth; a few members referred to the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 93 possibility of little or no expansion struction, including office structures, later in the year. was still showing considerable A good deal of concern was ex- strength, but some members quespressed during the meeting about the tioned the sustainability of such investadverse effects on domestic economic ment over time in the face of relatively activity stemming particularly from high vacancy rates and other factors. the rising tide of imports but also from While lower interest rates since last difficulties in export markets. With a summer were a supporting factor in large amount of domestic demand housing, reference was also made to continuing to be met through imports the possible vulnerability of multifamrather than domestic production, ad- ily housing construction, given the apjustments were beginning to be made parent overbuilding in some parts of in production and distribution facili- the country. Construction of singleties that would not easily be reversed family housing appeared to be rising, later. It was also noted that the grow- but this sector was not thought likely ing trade deficit appeared to be damp- to be the source of substantial further ing incentives to invest domestically in economic stimulus in the view of at a wide range of manufacturing indus- least some members. One member extries. More generally, the point was pressed a relatively pessimistic view made that, to a considerable extent, about the outlook for housing, partly foreign trade developments were tend- because many mortgage lenders and ing to offset the stimulus provided by private insurers were imposing stricter an expansive fiscal policy and the still credit standards after experiencing considerable upward momentum of losses, and incentives for investment private final demands. in housing clearly had dimmed in The prospective performance of many parts of the country. business fixed investment was cited as A number of members observed that a key element in the outlook for eco- consumer expenditures would probanomic activity. While the members bly remain a source of strength in the generally anticipated further expan- economic expansion, although some sion in investment spending, develop- commented that consumer sentiments over the course of recent ment—while still favorable—may have months together with the results of been negatively affected by the news surveys of business intentions sug- about the problems of some financial gested a pronounced deceleration from institutions. Members also took note the unusually rapid growth experi- of the rapid growth of consumer debt enced during the first two years of the and its potentially adverse implicacurrent expansion. Moreover, the de- tions for future retail sales. It was obmand for domestically produced busi- served that automobile sales had reness equipment was being inhibited to mained strong, but the prospects for an unusual extent by the level of the added economic thrust from this secdollar internationally and the competi- tor appeared limited, in part because tiveness of foreign substitutes. In addi- any farther expansion in the demand tion, the exception demand for techni- for automobiles might well be met cally advanced, computer-related, largely through imports. equipment might not be sustained at With regard to the outlook for inflathe earlier rate of increase, according tion, it was noted that prices of serto reports from various contacts vices were still tending to rise with around the country. Commercial con- some momentum, while prices of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 FOMC Policy Actions most goods were basically flat. Given might be associated with considerably the members' expectations for eco- slower growth in the second quarter nomic activity and assuming no major than over the first three months of the changes in the value of the dollar or year, a number of members expressed developments abroad, the members concern that such growth might resaw little basis for expecting signifi- main more rapid than was desirable. A cant deviations from recent price rate of growth in coming months trends. higher than seemed reasonably con- At its meeting in February the Com- sistent with the growth targets for the mittee had agreed on policy objectives year might raise questions about the that called for monetary growth ranges Committee's commitment to an antifor the period from the fourth quarter inflationary policy, with adverse efof 1984 to the fourth quarter of 1985 of fects on inflationary expectations and 4 to 7 percent for Ml, 6 to 9 percent possibly also on financial markets. for M2, and 6 to 9lk percent for M3. Conversely, if monetary growth over The associated range for total domes- the next few months were held within tic nonfmancial debt was set at 9 to 12 the Committee's ranges for the year, it percent for 1985. In keeping with was observed that the Committee the Committee's usual procedures un- would have more flexibility later in der the Humphrey-Hawkins Act, fostering monetary growth consistent these ranges would be reviewed at the with continuing economic expansion July meeting or sooner if warranted by and progress toward containing inflaunanticipated economic and financial tion. In any event, the members generdevelopments. ally felt that under prevailing circum- In the Committee's discussion of stances monetary growth might policy implementation for the inter- appropriately remain relatively high meeting period, the members did not within the ranges for the year, a prosdiffer greatly in their views regarding pect that the Committee also had conthe appropriate operational approach, templated at the previous meeting. and all indicated that they could sup- The members gave considerable atport an approach directed, at least ini- tention to the question of possible intially, toward maintaining about the termeeting adjustments in the degree current degree of restraint on reserve of reserve restraint. In keeping with positions. The members recognized past practice, the members agreed that that current uncertainties about the such adjustments should not be made economic outlook and the sensitive automatically in response to the beconditions in domestic credit and for- havior of the monetary aggregates eign exchange markets weighed alone, but needed to take account of against a significant increase in the de- emerging evidence on the business sitgree of reserve restraint. At the same uation, domestic credit conditions, time, several placed considerable em- and the foreign exchange value of the phasis on the desirability of fostering dollar. Nonetheless, there was some slower monetary expansion over the difference of views among the memperiod ahead to help assure growth bers with regard to their willingness to within the Committee's target ranges tolerate relatively rapid growth in the for the year. While growth in Ml and monetary aggregates, should it occur, M2 appeared to be decelerating appre- over the period ahead. While no memciably in March and a staff analysis ber contemplated the need for a subsuggest that current reserve conditions stantial move toward greater reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 95 restraint, some commented that a At the conclusion of the meeting, small but timely move might well avert the following domestic policy directive the necessity for a more vigorous, and was issued to the Federal Reserve potentially more disruptive, adjust- Bank of New York: ment later. On the other hand, a num- The information reviewed at this meeting ber of members felt that the current suggests that real GNP is currently expanding at economic uncertainties and related a slower pace than in the fourth quarter, with an volatility that appeared to pervade do- increased share of domestic spending apparmestic credit and foreign exchange ently being met out of imports. Total retail sales rose considerably for January and February markets would argue for more tolercombined and housing starts, though declining ance toward growth in the aggregates, in February, were above their fourth-quarter particularity to the extent that such pace. However, information on business capital growth might signify an increase in spending suggests less rapid expansion in early demands for liquidity. 1985. Business inventory investment continues at a moderate rate. Industrial production de- At the conclusion of the Commitclined on balance in January and February and, tee's discussion, a majority of the with employment falling in the manufacturing members favored and all could accept sector, total nonfarm payroll employment ina directive that called for no change in creased at a somewhat reduced pace. The civilian unemployment rate, at 7.3 percent in Februreserve conditions, though a few ary, was little changed from its level at members indicated some preference year-end. Broad measures of prices and the infor a directive that specified a slight dex of average hourly earnings appear to be increase in the degree of reserve re- continuing to rise at rates close to those recorded in 1984. straint. The members anticipated that the approach to policy implementation Since the Committee's meeting in mid-February, the foreign exchange value of the dollar adopted by the Committee would be has fluctuated widely in often volatile market consistent with growth of Ml, M2, conditions. Most recently, the trade-weighted and M3 at annual rates of around 6, 7, value of the dollar rose against major foreign and 8 percent respectively for the per- currencies has dropped sharply, more than offsetting its rise earlier in the intermeeting interiod from March to June. The members val. Monetary authorities sold dollars on a large agreed that somewhat lesser restraint scale during the period, especially in late Febmight be acceptable in the context of ruary and early March. The merchandise trade substantially slower growth in the deficit increased sharply in January from relatively low December and fourth-quarter rates. monetary aggregates, while somewhat The current account deficit for the full year greater restraint might be acceptable if 1984 was more than double that recorded in monetary growth were substantially 1983. faster. In either event, the need for Growth in Ml accelerated in February, folgreater or lesser restraint would also lowing relatively rapid expansion in other recent months, but information available through be appraised against the background mid-March indicates a considerable slowing. of developments relating to the Growth in the broader aggregates moderated in strength of the business expansion, February and appears to be slowing further in progress against inflation, and condi- March. In January and February expansion in total domestic nonfinancial debt remained relations in domestic credit and foreign tively rapid, though somewhat below the pace exchange markets. It was agreed that of previous months. Most interest rates have the intermeeting range for the federal risen somewhat since the February meeting of funds rate, which provides a mecha- the Committee. nism for initiating consultation of the The Federal Open Market Committee seeks to foster monetary and financial conditions that Committee when its boundaries are will help to reduce inflation further, promote in persistently exceeded, would be left output on a sustainable basis, and contribute to unchanged at 6 to 10 percent. an improved pattern of international transac- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 FOMC Policy Actions tions. In furtherance of these objectives the this first regular meeting of the Fed- Committee agreed at its meeting in February to eral Open Market Committee followestablish ranges for monetary growth of 4 to 7 ing the election of new members from percent for Ml, 6 to 9 percent for M2, and 6 to the Federal Reserve Banks to serve for 9V2 percent for M3 for the period from the fourth quarter of 1985. The associated range for the year beginning March 1, 1985. total domestic nonfinancial debt was set at 9 to The Committee reaffirmed the author- 12 percent for the year 1985. The Committee ization for foreign currency operaagreed that growth in the monetary aggregates tions, the foreign currency directive, in the upper part of their ranges for 1984 to the fourth quarter of 1985 may be appropriate, de- and the procedural instructions with pending on developments with respect to veloc- respect to foreign currency operations ity and provided that inflationary pressures re- in the forms in which they were curmain subdued. rently outstanding.1 The Committee understood that policy implementation would require continuing ap- Votes for these actions: Messrs. Volcker, praisal of the relationships not only among the Corrigan, Balles, Black, Forrestal, Gramley, various measures of money and credit but also Keehn, Martin, Partee, Rice, Ms. Seger, and between those aggregates and nominal GNP, in- Mr. Wallich. Votes against these actions: cluding evaluation of conditions in domestic None. credit and foreign exchange markets. In the implementation of policy for the im- 3. Authorization for Domestic mediate future, taking account of the progress Open Market Operations against inflation, uncertainties in the business outlook, and the exchange value of the dollar, On the recommendation of the Manthe Committee seeks to maintain the existing ager for Domestic Operations, System degree of pressure on reserve positions. This action is expected to be consistent with growth Open Market Account, the Committee in Ml, M2, and M3 at annual rates of around 6, amended paragraph l(a) of the author- 7, and 8 percent respectively during the period ization for domestic open market opfrom March to June. Somewhat lesser reserve erations to raise from $4 billion to $6 restraint might be acceptable in the event of substantially slower growth of the monetary ag- billion the limit on intermeeting gregates while somewhat greater restraint changes in System account holdings of might be acceptable in the event of substantially U.S. government and federal agency higher growth. In either case such a change securities. The Manager noted that the would be considered in the context of appraisals Committee had found it necessary to of the strength of the business expansion, progress against inflation, and conditions in domes- authorize temporary increases in the tic credit and foreign exchange markets. The limit with greater frequency, primarily Chairman may call for Committee consultation because of the increased size of the net if it appears to the Manager for Domestic Opervariation, especially from seasonal inations that pursuit of the monetary objectives and related reserve paths during the period be- fluences, in market factors such as the fore the next meeting is likely to be associated Treasury balance that affect reserves. with a federal funds rate persistently outside a range of 6 to 10 percent. Votes for this action: Messrs. Volcker, 1. Before this meeting, on March 6, 1985, cer- Corrigan, Balles, Black, Forrestal, Gramley, tain other routine authorizations of the Commit- Keehn, Martin, Partee, Rice, Ms. Seger, and tee, including various resolutions, rules, and pro- Mr. Wallich. Votes against this action: None. cedures, and the agreement with the U.S. Treasury to warehouse foreign currencies, were distributed 2. Review of Continuing to the Committee members and Reserve Bank Presidents for their review. It was agreed that these Authorizations authorizations would continue to stand as previ- The Committee followed its customary ously adopted and would not be placed on the agenda for consideration at this meeting unless any practice of reviewing all of its continumember so requested, and no such requests were ing authorizations and directives at received. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 97 In 1984 such temporary increases had indicated very large needs for reserves been authorized on six occasions, during the current intermeeting permore than in any other recent year. A iod, mainly because of sharply inpermanent increase in the limit to $6 creasing Treasury balances in April. billion would reduce the number of oc- Accordingly, effective April 16, 1985, casions requiring special Committee the Committee approved the recomaction, while still calling needs for mendation of the Manager that the particularly large changes to the Com- limit in paragraph l(a) be raised from mittee's attention. The Committee $6 billion to $9 billion for the interconcurred in the Manager's view that meeting period ending May 21, 1985. such an increase would be Votes for this action: Messrs. Volcker, appropriate. Balles, Black, Forrestal, Gramley, Keehn, Accordingly, effective immediately, Martin, Ms. Seger, and Mr. Timlen. Votes paragraph l(a) of the authorization for against this action: None. (Absent and not domestic open market operations was voting: Messrs. Corrigan, Partee, Rice, amended to read as follows: and Wallich. Mr. Timlen voted as alternate for Mr. Corrigan.) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry Meeting Held on out the most recent domestic policy directive May 21, 1985 adopted at a meeting of the Committee: (a) To buy or sell U.S. Government securities, including securities of the Federal Financ- Domestic Policy Directive ing Bank, and securities that are direct obliga- The information reviewed at this meettions of, or fully guaranteed as to principal and interest by, any agency of the United States in ing suggested only a modest pickup in the open market, from or to securities dealers real GNP in the current quarter from and foreign and international accounts mainthe 0.7 percent annual rate of growth tained at the Federal Reserve Bank of New reported for the first quarter. Spending York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at by domestic sectors has been relatively market prices, and, for such Account, to ex- well maintained, but a large share of change maturing U.S. Government and Federal the demand for goods apparently has agency securities with the Treasury or the indibeen met by imports rather than vidual agencies or to allow them to mature without replacement; provided that the aggre- through an expansion of domestic progate amount of U.S. Government and Federal duction. Broad measures of prices and agency securities held in such Account (includ- wages generally were continuing to ing forward commitments) at the close of busirise at rates close to those recorded in ness on the day of a meeting of the Committee 1984. at which action is taken with respect to a domestic policy directive shall not be increased or After declining in March, total retail decreased by more than $6.0 billion during the sales rebounded in April to a level period commencing with the opening of busi- nearly 3U percent above the average ness on the day following such meeting and for the first quarter. Gains were particending with the close of business on the day of the next such meeting. ularly strong at automotive outlets and at food and general merchandise Votes for this action: Messrs. Volcker, stores. Sales of new domestic automo- Corrigan, Balles, Black, Forrestal, Gramley, biles have been running at an annual Keehn, Martin, Partee, Rice, Ms. Seger, and Mr. Wallich. Votes against this action: None. rate of about 8V2 million units since the beginning of April, in line with the Subsequently, on April 15, 1985, strong pace posted in the first quarter the Manager advised that projections and considerably above last year's av- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 FOMC Policy Actions erage. Part of the recent strength in car continuing at a much less rapid rate sales was attributable to below-market than earlier in the economic expanfinancing incentives offered by major sion, though trends in business equipmanufacturers. ment orders placed with domestic pro- Total private housing starts in- ducers have been obscured lately by creased about 14V2 percent in March extreme volatility in monthly data for to an annual rate of 1.9 million units orders of office and computing equipand continued at that advanced level in ment. Imports apparently have contin- April. Newly issued permits for resi- ued to account for a sizable share of dential building fell somewhat in April outlays for equipment, but shipments but, at an annual rate of nearly 1.7 of capital goods by domestic promillion units, remained in the im- ducers picked up in February and proved range recorded in the first March. Spending on nonresidential quarter. Sales of new and existing construction has continued at a relahomes improved in March, the latest tively brisk pace in recent months. month for which data were available, Moreover, according to recent surveys as the general decline in mortgage of business spending plans, firms still credit costs continued to bolster de- expect to increase nominal outlays for mand. plant and equipment 8V2 to 11 percent The index of industrial production in 1985. declined 0.2 percent in April, after The producer price index for finrising little in the first quarter. Produc- ished goods rose 0.3 percent in April, tion of defense and space equipment somewhat more than in other recent continued to advance, but output in months. The rise was attributable to a most other major market sectors fell. surge in energy prices that apparently Reflecting these widespread declines reflected a temporary reduction in pein output, the capacity utilization rate troleum inventories; prices of other for total industry dropped xli percent- finished goods changed little or deage point to 80.6 percent in April, its clined. A sharp increase in prices of lowest level since January 1984. petroleum products was also the major The decline in industrial production factor in the 0.4 percent increase in in April was associated with further the consumer price index in April. reductions in manufacturing employ- Thus far in 1985 consumer prices had ment. The loss of 45,000 manufactur- risen at an annual rate of about 4V4 ing jobs in April brought the cumula- percent, close to the 4 percent rate in tive loss in that sector to 130,000 thus 1984. On balance, recent wage develfar in 1985. Outside of manufacturing, opments indicated little if any accelersizable job gains were reported for ation in wage costs from the pace in April in the services industry and in 1984. While the index of average construction. On balance, total non- hourly earnings increased at an annual farm payroll employment rose rate of 2V2 percent in the first four 215,000 in April compared with aver- months of this year compared with a age monthly gains of 285,000 since rise of about 3 percent in 1984, the last fall. The civilian unemployment increase in hourly compensation in the rate remained at 7.3 percent in April, nonfarm business sector thus far this little changed from the rates recorded year was running above its year-earlier over the previous three quarters. pace. The rise in compensation re- Information on business capital flected in part legislated changes in sospending suggested that expansion was cial security taxes and higher employ- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 99 ers' contributions for unemployment sion in Ml was about in line with the insurance. Committee's expectations for the Since the Committee's meeting in March-to-June period, growth in the late March, the trade-weighted value broader aggregates was running well of the dollar against major foreign cur- below the rates anticipated. Weakness rencies had continued to fluctuate in these aggregates stemmed in large widely in volatile market conditions part from a substantial reversal of earand had declined a little more than 4 lier increases in banks' managed liapercent on balance. The U.S. mer- bilities, as banks obtained funds from chandise trade deficit and the current a sharp rise in U.S. government deaccount deficit widened in the first posits after mid-April. Expansion in quarter as a rebound in non-oil im- total domestic nonfinancial debt conports from the low fourth-quarter level tinued relatively rapid at an annual extended the pattern of sharp quarter- rate of about H3/4 percent in April, to-quarter swings experienced since the same as in March. For the period the beginning of 1984. from the fourth quarter of 1984 At its meeting on March 26, 1985, through April, growth in Ml was runthe Committee had adopted a directive ning above the Committee's range for that called for maintaining the existing the year 1985 while M2 and M3 were degree of pressure on reserve posi- growing at rates within their long-term tions. That action was expected to be ranges; expansion in domestic nonficonsistent with growth in Ml, M2, nancial debt was somewhat above the and M3 at annual rates of around 6, 7, upper limit of its monitoring range for and 8 percent respectively during the the year. period from March to June. The mem- The level of adjustment plus seabers agreed that somewhat lesser re- sonal borrowing averaged about $475 straint might be acceptable in the event million over the three complete reof substantially slower growth in the serve maintenance periods between monetary aggregates while somewhat meetings, enlarged by borrowing by greater restraint might be acceptable some nonfederally insured thrift instiin the event of substantially higher tutions to meeting deposit withgrowth. In either case, adjustments in drawals. Over the last week or so, total the degree of reserve pressures would adjustment plus seasonal borrowing be considered in the context of ap- was running over $800 million, praisals of the strength of the business boosted in part by a further increase in expansion, progress against inflation, borrowing by thrifts and overnight and conditions in domestic credit and borrowing by a few large banks faced foreign exchange markets. The inter- with unexpected needs for funds. meeting range for the federal funds The federal funds rate had declined rate was retained at 6 to 10 percent. from the 8V2 percent rate prevailing at Growth in Ml, which had slowed the time of the March meeting and had markedly in March from the rapid averaged just over 8Vs percent in repace of earlier months, remained cent weeks. Other market rates had moderate in April at an annual rate of fallen about 3k to I1/* percentage about 6 percent. M2 and M3, after points over the period since the preslowing appreciably in March to an- vious Committee meeting until the annual rates of growth of about 33U and nouncement by the Federal Reserve on 5V2 percent respectively, were little May 17 of a reduction in the discount changed in April. Thus, while expan- rate from 8 to 7V2 percent. On the day Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 FOMC Policy Actions before this meeting, when the new dis- weak and considerably below the count rate went into effect, the federal economy's potential. funds rate moved lower, with trading A number of members expressed averaging around 13U percent, and particular concern about the depressmost other interest rates fell about 15 ing impact that the competition of forto 35 basis points further. The average eign goods was having on domestic rate on new commitments for fixed- production, and some commented that rate conventional home mortgage the outlook for the dollar in the exloans declined about 30 basis points change markets constituted the major over the intermeeting period. uncertainty in assessing economic The staff projections presented at prospects. While domestic final dethis meeting suggested that growth in mands were being reasonably well real GNP, after a modest pickup in the maintained, a strong dollar was divertcurrent quarter from the reduced pace ing these demands toward imports, in the first quarter, would be slightly which were growing rapidly, and holdfaster in the second half of the year. ing back domestic output. The The unemployment rate was projected strength of the dollar was also tending to edge down, and the rate of increase to curb the expansion of exports. in prices was expected to remain close Members cited examples of a wide to that experienced in 1984 and early range of manufacturing firms, includ- 1985. ing small firms, that along with some During their review of the economic agricultural and extractive businesses situation and outlook, the Committee were being severely affected by formembers focused with concern on evi- eign competition. The exchange value dence that the economy, despite ele- of the dollar also appeared to be curbments of strength, was expanding at a ing expansion in domestic plant and relatively sluggish pace; and they also equipment spending and fostering destressed the uncertainties that sur- cisions to establish or expand producrounded the prospects for some pickup tive facilities abroad rather than in the in the rate of economic growth. The United States. currently mixed pattern of develop- Members who were relatively optiments greatly complicated the fore- mistic about the economic outlook casting process, especially against the stressed the favorable impact that rebackground of the distortions and cent declines in interest rates were pressures associated with massive def- likely to have on interest-sensitive secicits in the federal budget and the bal- tors of the economy. Housing had alance of trade, together with persisting ready responded to earlier reductions strains in financial markets. While ac- in interest rates. Consumer spending knowledging the considerable risks of was holding up well, with automobile unexpected developments in these cir- sales continuing to display notable cumstances, several members com- strength, and consumer sentiment remented that improvement in the rate of mained favorable. Some members economic growth remained the most commented that the negative impact of reasonable expectation for the second growing imports might diminish over half of the year. Others gave more the quarters ahead, especially if the weight to the downside risks in the dollar fell further from its recent economy and were concerned that the highs. Reference was also made to expansion might well remain relatively continuing indications that businesses Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 101 were planning further, if more moder- concern, however, that current inflaate, increases in their investment tion rates were too high—with recent spending. One member expressed the tendencies in consumer prices worriview that rapid growth in Ml during some—especially in light of the inflalate 1984 and early 1985 would exert tionary implications of a possible dean expansive influence on the econ- cline over time in the foreign exchange omy over the months ahead. value of the dollar. Members who felt less comfortable At its meeting in February the Comwith economic developments referred mittee had agreed on policy objectives to the vulnerabilility of the manufac- that called for monetary growth ranges turing sector and also agriculture to for the period from the fourth quarter the high value of the dollar on ex- of 1984 to the fourth quarter of 1985 of change markets. Moreover, business 4 to 7 percent for Ml, 6 to 9 percent and consumer confidence could be ad- for M2, and 6 to 9V2 percent for M3. versely affected by ongoing problems The associated range for total domesin financial sectors of the economy. tic nonfinancial debt was set at 9 to 12 Other potential areas of vulnerability percent for 1985. In keeping with the in the economy included nonresiden- usual procedures under the Humtial construction and multifamily phrey-Hawkins Act, these ranges housing; as they had at previous meet- would be reviewed at the July meeting ings, members cited instances of ap- and provisional ranges would be estabparent overbuilding of office struc- lished for 1986. tures and of multifamily dwellings in In discussing policy implementation various parts of the country. In addi- for the weeks ahead, Committee memtion, problems in agriculture and re- bers, taking account of the recent related industries might worsen, with re- duction in the discount rate, generally tarding consequences for overall favored maintaining about the same economic activity. degree of pressure on bank reserve po- With regard to the outlook for infla- sitions as in recent weeks, abstracting tion, members commented on the from special situation borrowing by highly competitive pricing situation in thrift institutions. It was recognized many industries, and reference was that the recent decline in market rates also made to favorable developments and the lower discount rate would tend in recent labor negotiations. In gen- to increase the demands for money and eral, price pressures appeared to be credit under those circumstances as relatively well contained in goods-pro- compared with what they otherwise ducing sectors of the economy. Most would be. Most members found this commodity prices had fallen further to acceptable particularly in view of the their lowest levels in about 2 years. At recent weakness in the broader monethe same time, significant increases in tary aggregates and sluggishness in the prices and costs were continuing to oc- overall economy. cur in the service industries. Given In the course of discussion it was the relative low rates of capacity utili- noted that Ml had been growing about zation and the outlook for only limited as expected at the previous meeting, growth in economic activity, members but that some pickup in growth could indicated that the risks of an accelera- develop in the period ahead. A numtion in the rate of inflation appeared to ber of members indicated that they be low. Some members noted their were prepared to accept a little more Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 FOMC Policy Actions rapid expansion against the back- long-term interest rates over time, but ground of relatively weak economic felt that further monetary ease at this performance, strains in financial mar- point might work against that objective kets, and the recent behavior of the by fostering inflationary expectations. broader aggregates. It was also In keeping with the Committee's pointed out that much of the increase usual practice, the members contemin Ml thus far this year reflected ex- plated that operations might be adpansion in interest-bearing checking justed during the intermeeting period accounts. Banks and thrifts had re- toward implementing somewhat lesser duced interest rates on these accounts or somewhat greater restraint on reonly slowly in response to declines in serve positions if monetary growth market yields that had begun in the should appear to be substantially latter part of last year, thereby making slower or faster than was currently exit relatively more attractive for the pected for the quarter. While no mempublic to hold savings in such instru- ber wanted to rule out possible adjustments. Nonetheless, Ml was running ments in either direction, a majority above the path associated with its long- believed that policy implementation run target and some members stressed should be alert to the potential need the desirability of holding down near- for some easing of reserve conditions. term Ml growth, partly because a rate Other members, however, put more of growth that appeared unduly high stress on the desirability of moving could risk having an adverse impact on promptly, if necessary, to curb unduly inflationary sentiment. However, one rapid monetary expansion. It was unmember also questioned whether the derstood that any adjustment should behavior of Ml should be interpreted not be made automatically in response as in the past given the present institu- to the behavior of the monetary aggretional environment and taking account gates, but should be undertaken only of such other factors as the very high after an appraisal of the strength of level of the dollar in foreign exchange economic activity and inflationary markets. pressures and evaluations of condi- Given the strength of Ml relative to tions in domestic and international fiits long-run target for the year, mem- nancial markets. bers indicated that they were prepared In light of recent declines in market to accept slower growth in M2 and M3 interest rates and the reduction in the for the quarter than they had expected discount rate, it appeared likely that earlier. One member observed, how- the degree of reserve restraint contemever, that continued weakness in the plated by most of the Committee membroader aggregates would be a matter bers would be associated with a lower of some concern and that somewhat federal funds rate, on average, than faster growth than was now expected had prevailed until just before today's for the quarter should not be resisted. meeting. Nonetheless, the members A differing view emphasized that the anticipated that the rate would remain broader aggregates had less informa- well within the 6 to 10 percent federal tion content than Ml and that some funds range established earlier by the aberration in their behavior should be Committee, and no sentiment in favor tolerated. Another member high- of changing that range was expressed. lighted the desirability of a decline in At the conclusion of the Commit- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 103 tee's discussion, a majority of the in the current quarter from the reduced rate members indicated their acceptance of of growth in the first quarter. Total retail sales rose in April to a level somewhat above a directive that, against the backthe average for the first quarter, and housing ground of the recent reduction in the starts increased further after rising substandiscount rate, called for maintaining tially in the first quarter. Information on the current degree of reserve restraint, business capital spending suggests further growth, though at a much less rapid pace abstracting from special situation borthan earlier in the economic expansion. Inrowing by thrift institutions. The dustrial production declined slightly in April members expected such an approach after rising little over the first quarter. Total to policy implementation to be consis- nonfarm payroll employment increased at a tent with growth of Ml at an annual somewhat reduced pace in April with employment in manufacturing registering anrate of about 6 percent or a little other decline. The civilian unemployment higher for the period from March to rate remained at 7.3 percent in April. Broad June. Given the weakness in M2 and measures of prices and wages appear to be M3 in April, growth in these broader rising at rates close to those recorded in 1984. aggregates over the three-month per- Since the Committee's meeting in late iod was now expected to be slower March, the trade-weighted value of the dolthan had been anticipated at the time lar against major foreign currencies has conof the previous meeting. The members tinued to fluctuated widely in often volatile agreed that somewhat lesser restraint market conditions and has declined moderately on balance. The trade and current acon reserve conditions would be acceptcount deficits widened in the first quarter as able in the context of substantially a rebound in non-oil imports from their low slower growth in the monetary aggre- fourth-quarter level extended the pattern of gates, while somewhat greater re- sharp quarter-to-quarter swings experienced since the beginning of 1984. straint might be appropriate if mone- Growth in Ml slowed markedly in March tary growth were substantially faster. from the rapid pace of earlier months and It was understood that the need for remained moderate in April. The broader aglesser or greater restraint would be gregates showed little change in April after considered against the background of their growth had slowed appreciably in March. Expansion in total domestic nonfidevelopments relating to the strength nancial debt has remained relatively rapid. of the business expansion, inflationary Interest rates have declined considerably pressures, and conditions in domestic since the March meeting of the Committee. credit and foreign exchange markets. On May 17, the Federal Reserve Board ap- The members agreed that the inter- proved a reduction in the discount rate from 8 to 7V2 percent. meeting range for the federal funds The Federal Open Market Committee rate, which provides a mechanism for seeks to foster monetary and financial condiinitiating consultation of the Commit- tions that will help to reduce inflation furtee when its boundaries are persis- ther, promote growth in output on a sustainable basis, and contribute to an improved tently exceeded, should be left unpattern of international transactions. In furchanged at 6 to 10 percent. therance of these objectives the Committee At the conclusion of the meeting, agreed at its meeting in February to establish the following domestic policy directive ranges for monetary growth of 4 to 7 percent for Ml, 6 to 9 percent for M2, and 6 to 9V2 was issued to the Federal Reserve percent for M3 for the period from the fourth Bank of New York: quarter of 1984 to the fourth quarter of 1985. The associated range for total domestic nonfinancial debt was set at 9 to 12 percent for The information reviewed at this meeting the year 1985. The Committee agreed that suggests only a modest pickup in real GNP growth in the monetary aggregates in the up- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 FOMC Policy Actions per part of their ranges for 1985 may be ap- more promptly within the Committee's propriate, depending on developments with range for the year would help guard respect to velocity and provided that inflaagainst a possible worsening of inflationary pressures remain subdued. tionary expectations and would limit the The Committee understood that policy implementation would require continuing ap- risk of a potentially unsettling movepraisal of the relationships not only among ment in interest rates later in the year. the various measures of money and ccedit but also between those aggregates and nominal GNP, including evaluation of conditions Meeting Held on in domestic credit and foreign exchange mar- July 9-10, 1985 kets. In the implementation of policy for the immediate future, and against the back- Domestic Policy Directive ground of the recent reduction in the discount rate, the Committee seeks to maintain The information reviewed at this meetabout the same degree of pressure on bank ing indicated that expansion of ecoreserve positions. This action is expected to nomic activity has picked up in recent be consistent with growth in Ml at an annual months, following virtually no growth rate of around 6 percent or a little higher during the period from March to June, while in the first quarter of the year. Rates of M2 and M3, in the light of their weakness in increase in prices and wages had April, are expected to grow more slowly over slowed a bit recently after indication of the quarter than the 7 and 8 percent annual some acceleration early in the year, rates, respectively, anticipated earlier. Someand for the year to date inflation apwhat lesser reserve restraint would be acceptable in the event of substantially slower peared to be running at about the same growth of the monetary aggregates while pace as in 1984. somewhat greater restraint might be accepta- The nominal value of retail sales fell ble in the event of substantially higher in May after an extraordinary rise in growth. In either case such a change would be considered in the context of appraisals of April, but the average level of sales for the strength of the business expansion, prog- the April-May period was about 2lk ress against inflation, and conditions in do- percent above the average for the first mestic credit and foreign exchange markets. quarter. Over the two-month period, The Chairman may call for Committee consultation if it appears to the Manager for Do- sales of durable goods were especially mestic Operations that pursuit of the mone- strong, fostered by a surge in sales at tary objectives and related reserve paths automotive outlets in April and a sharp during the period before the next meeting is rebound in sales at furniture and applilikely to be associated with a federal funds rate persistently outside a range of 6 to 10 ance stores in May. In the automotive percent. sector, financing incentives on many domestic models and increased avail- Votes for this action: Messrs. Volcker, ability of imported cars boosted total Corrigan, Balles, Forrestal, Gramley, automobile sales to an annual rate of Keehn, Martin, Partee, Rice, Ms. Seger, 11.3 million units in May, the highest and Mr. Wallich. Votes against this action: monthly pace in six years. Many of the Mr. Black. special financing programs were phased out by the end of May, how- Mr. Black dissented because he pre- ever, and sales of domestic cars slowed ferred to direct policy implementation in substantially in June. the weeks immediately ahead toward Activity in the housing sector apachieving somewhat slower expansion in peared to be holding earlier gains. To- Ml. In his view, bringing Ml growth tal private housing starts averaged 1.8 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 105 million units at an annual rate in the 2V2 percentage points since July 1984. April-May period, the same as the ad- Nonfarm payroll employment rose vanced first-quarter pace, and newly 80,000 in June, after an advance in issued permits for residential building May that equaled the average monthly rose in May to their highest level in increase of 260,000 recorded in the nearly a year. Combined sales of new first four months of the year. Manufacand existing homes remained strong, turing employment continued to fall in as the general decline in mortgage both May and June, however, bringing credit costs apparently continued to the cumulative loss in factory jobs to bolster demand. 220,000 so far this year. The civilian Information on business capital unemployment rate remained at 7.3 spending suggested further growth in percent in June, unchanged since Febthat sector, though at a much less rapid ruary. pace than earlier in the economic ex- The producer price index for finpansion. Most of recent strength in ished goods and the consumer price business fixed investment has been index rose 0.2 percent in May. Over concentrated in expenditures for non- the first five months of the year, proresidential construction. Imports ap- ducer and consumer prices have risen parently have continued to account for at annual rates of about l3k percent a sizable share of outlays for equip- and 4 percent respectively, the same as ment; new orders for nondefense capi- in 1984. The index of average hourly tal goods and shipments by domestic earnings also has continued to increase producers have changed little on bal- at its 1984 pace, rising at an annual ance since last fall. The Commerce rate of about 3 percent for the year Department's survey of business through May. spending plans, conducted in late Over the period since the Commit- April and May, suggested that nominal tee's meeting in May, the tradeoutlays for plant and equipment would weighted value of the dollar had generbe roughly 9 percent above their 1984 ally moved within a relatively narrow average. range. But in days immediately pre- The index of industrial production ceding this meeting the value of the edged down in April and May, after dollar declined about 2 percent, to a rising little over the first quarter. Pro- level below its recent low in April, duction of defense and space equip- bringing its decline over the intermeetment continued to advance and output ing interval to around 3V2 percent. of construction supplies also in- The U.S. merchandise trade deficit creased. Production of other products widened in the April-May period and materials generally remained slug- from the rate in the first quarter, as gish: output of consumer goods had both agricultural and nonagricultural changed little from the level prevailing exports fell while imports remained a year earlier, and production of busi- close to their high first-quarter rate. ness equipment—a source of strength At its meeting on May 21, 1985, the throughout 1984—had declined thus Committee had adopted a directive far in 1985. The rate of capacity utili- that, against the background of the rezation for total industry fell 0.4 per- duction in the discount rate announced centage point further in May to 80.3 a few days before the meeting, called percent, a cumulative drop of nearly for maintaining the existing degree of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 FOMC Policy Actions pressure on reserve positions. The above its range. Expansion in total domembers expected that action to be mestic nonfinancial debt slowed a little consistent with growth in Ml at an an- in the second quarter, but remained nual rate of around 6 percent or a little high relative to the Committee's monihigher during the period from March toring range for the year. to June. Given the weakness in M2 Total reserves grew rapidly in May and M3 in April, growth in these and June, reflecting increases in rebroader aggregates over the three- quired reserves associated with the month period was expected to be growth in transaction accounts. The slower than the respective annual rates level of adjustment plus seasonal borof 7 and 8 percent anticipated at the rowing averaged around $550 million time of the previous meeting in late in the three complete maintenance per- March. The members agreed that iods between meetings and was runsomewhat lesser restrain would be ac- ning over $1.2 billion the week before ceptable in the event of substantially this meeting, as seasonal strains assoslower growth in the monetary aggre- ciated with the midyear statement date gates while somewhat greater restraint and the holiday period, together with might be acceptable in the event of massive swings in Treasury balances, substantially faster growth. It was un- complicated reserve management at derstood that the need for lesser or depository institutions and the Federal greater restraint would be considered Reserve. Throughout the intermeeting in the context of appraisals of the interval, borrowing was boosted by ocstrength of the business expansion, casional surges for a day or two near progress against inflation, and condi- the end of a reserve maintenance petions in domestic credit and foreign riod, apparently reflecting higherexchange markets. The intermeeting than-expected demands for excess rerange for the federal funds rate was serves, particularly around the midretained at 6 to 10 percent. year statement date. In May and June, Ml expanded very The federal funds rate centered on a rapidly, and its growth over the trading range of llk to l3k percent March-to-June interval was at an an- during much of the intermeeting internual rate of about 13V4 percent, well val. The rate fell below 7 percent above the rate expected at the time of briefly after mid-June and rose above the May meeting. The strength in Ml 8 percent for a time around the quarwas evident in all its major compo- ter-end statement date and July 4 holinents, particularly in demand de- day, when seasonal influences and posits. That strength, coupled with an sharply rising Treasury balances temacceleration in the nontransaction porarily increased pressures on recomponent of M2 in June, brought serves. Other market rates fluctuated growth in the broader aggregates to over relatively wide ranges in response rates somewhat higher than expected to incoming economic data, changing in May for the three-month period. expectations about the likelihood of a Nevertheless, for the period from the further cut in the discount rate, and at fourth quarter of 1984 through the sec- times, unanticipated money supply deond quarter of 1985, M2 and M3 ex- velopments. On balance, rates on most panded at rates within their long-term Treasury securities fell about 35 to 60 ranges, while Ml grew at a rate well basis points, while rates on commer- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 107 cial paper and certificates of deposit ing imbalances in the economy, notadeclined about 15 to 25 basis points, bly the massive deficits in the federal apparently reflecting emergence of budget and in the balance of trade, that slightly higher risk premiums in re- along with persisting strains in domessponse to some concerns about the tic and international financial markets health of some financial institutions. threatened the sustainability of the ex- Most commercial banks reduced their pansion. In these circumstances the "prime" rate lh percentage point to members recognized that their fore- 9lh percent. Corporate bond yields casts were subject to a great deal of fell about 60 to 70 basis points and uncertainty and several commented most broad stock price indexes that the risks of any deviation apreached record levels. The average peared to be on the downside. Other rate on new commitments for fixed- members were more optimistic, at rate conventional home mortgage least with respect to the next few quarloans declined about 80 basis points ters, and in one view the rapid growth over the intermeeting period. of Ml since the latter part of 1984 The staff projections presented at could presage significantly faster exthis meeting suggested that growth in pansion than generally was anticipated real GNP would pick up somewhat in currently. the second half of the year from the In keeping with the usual practice sluggish pace in the first half, and for meetings when the Committee conwould continue at a modest pace siders its long-run objectives for monthrough 1986. The unemployment rate etary growth, the members of the was expected to fall only slightly over Committee and the Federal Reserve the projection period, and the rate of Bank presidents not currently serving increase in prices was projected to re- as members had prepared specific promain close to that experienced in re- jections of economic activity, the rate cent years. of unemployment, and average prices. In the Committee's discussion of With regard to growth in real GNP, the current and prospective economic de- projections had a central tendency of velopments, the members agreed that 23/4 to 3 percent for 1985 as a whole some pickup in the rate of economic and 2V2 to 3V4 percent for 1986. The expansion from the slow growth of the tendency for the rate of unemployment first half of the year was a reasonable was an average rate of 7 to llk percent expectation for the second half. The for the fourth quarter of 1985 and outlook for 1986 was more uncertain, about the same or a bit lower for the but the members generally saw contin- fourth quarter of 1986. The projecuing expansion, though possibly at a tions for the implicit GNP deflator moderate pace, as the most likely centered on a rise of 33k to 4 percent prospect for the year. As they had at for the year 1985 and 33k to 4% for previous meetings, the members ex- the year 1986. These projections were pressed concern about the uneven par- considered to be consistent with the ticipation of various industries in the Committee's objectives for growth in economic expansion, including the money and credit established at this continuing and serious problems in the meeting. The projection also assumed agricultural sector. They also re- that the Congress and the administramained concerned about the underly- tion would achieve deficit reductions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 FOMC Policy Actions in the range of those contained in re- revive as some businessmen expected, cent House and Senate budget actions. and the high vacancy rates in many The projections were based on an as- parts of the country for multifamily sumption that the exchange value of housing and office space suggested the dollar would not deviate substan- that a marked slowdown in that type of tially from its recent trading range. construction. More generally, rela- In support of their expectation that tively low rates of capacity utilization the rate of economic expansion would would limit the need for investments in improve from the very sluggish pace many industries. Several members reexperienced in the first half of the ferred to the continuing drag on doyear, members referred to the favor- mestic production stemming from the able impact of reduced interest rates high value of the dollar and the associon interest-sensitive sectors of the ated intense foreign competition in economy, such as the construction and both domestic and export markets. automobile industries, and they also With regard to the outlook for inflanoted the buildup of liquidity in the tion, the members noted that wage and economy. Some members commented price pressures were relatively subthat consumer spending was likely to dued in domestic labor and product remain relatively robust, at least over markets. Inflationary pressures were the quarters immediately ahead, given greater in some of the service indusgenerally favorable consumer attitudes tries, but against the background of and the sizeable gains expected in em- generally low capacity utilization rates ployment and earnings. A number of and relatively high unemployment the members also referred to favorable members did not expect much change prospects for continuing growth in in the overall rate of inflation during business capital spending against the the year ahead, at least in the absence background of reduced borrowing of any sizeable decline in the foreign costs and strong competitive pres- exchange value of the dollar. Indeed, sures—both domestic and foreign—on one member observed that the perbusiness firms to enhance their pro- formance of prices might well prove to ductivity. In the latter connection one be better than was generally expected member reported on the expectation of unless the exchange value of the dollar some businessmen that the lull in de- were to fall substantially. A number of mands for high-technology equipment members commented that a limited might prove to be temporary. decline in the dollar might have little, On the negative side, apart from the if any, effect on domestic prices or in underlying imbalances that constituted the extent of import penetration. Many an ongoing threat to the economy, the foreign suppliers who enjoyed sizable members cited a number of factors profit margins would probably tend to that would tend to limit, if not arrest, absorb such a decline by maintaining the expansion. The growth of private current dollar prices in order to predebt and rising delinquency rates serve their market shares. On the could have an increasingly negative ef- other hand, a substantial decline in the fect on consumer spending and per- value of the dollar, if it were to occur, haps on housing demand. In the in- would pose a considerable risk of bevestment area, the demand for ing reflected in higher domestic high-technology equipment might not prices. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 109 At this meeting the Committee re- ized by large interest rate declines inviewed its ranges for growth of the dividuals and businesses tended to monetary and credit aggregates in shift into transaction-type balances 1985 and established tentative ranges from other assets because they sacrifor 1986 within the framework of the ficed less interest income in doing so. Full Employment and Balanced Moreover, it was possible that the Growth Act of 1978 (the Humphrey- availability of interest on certain types Hawkins Act).1 At its meeting on Feb- of checking accounts in recent years, ruary 12-13, 1985, the Committee together with the fact that the rates of had adopted monetary growth ranges interest on such accounts have tended of 4 to 7 percent for Ml, 6 to 9 percent to change more sluggishly than comfor M2, and 6 to 9xli percent for M3 peting market-oriented rates, has infor the period from the fourth quarter creased the interest sensitivity of Ml, of 1984 to the fourth quarter of 1985. particularly in the short run. It was The associated range for total domes- also noted, however, that a part of the tic nonfinancial debt was set at 9 to 12 rapid growth of Ml, notably in the percent. The Committee had agreed past two months, did not appear to be that growth in the monetary aggregates related to the interest rate adjustments in the upper part of their ranges might or to ongoing transaction demands, be appropriate for the year, depending raising questions about whether there on developments with respect to veloc- were special factors, such as changes ity and provided that inflationary pres- in corporate cash management pracsures remained subdued. tices or transitory responses to sharp The Committee's review of its declines in Treasury balances, that ranges for 1985 focused on the rapid also may have been influencing the degrowth of Ml during the first half of mand for money. the year, the factors that may have in- While acknowledging that both the fluenced the demand for money, and explanation and the implications of the the implications of Ml growth for the bulge in Ml growth were subject to a future course of economic activity and great deal of uncertainty, the members the rate of inflation. In their discussion generally concluded that faster-thanthe members took account of an analy- targeted expansion in Ml could be acsis that suggested that the strength of cepted for the first half of the year in Ml relative to the Committee's target light of the sluggish growth in ecorange appeared to reflect in part a one- nomic activity, relatively well contime response on a lagged basis to the tained price pressures, and a high sizeable declines in interest rates that value of the dollar on foreign exchange had occurred over the past year. The markets. Moreover, growth in the available evidence suggested, not only broader aggregates for the year to date on the basis of the recent experience had been consistent with the Commitbut also that of earlier periods such as tee's easier expectations. in 1982-83, that in periods character- Looking ahead to the balance of the year, the members differed to some extent on an appropriate Ml target, but they generally concluded that it 1. The Midyear Monetary Policy Report pursuwould not be desirable in the current ant to this legislation was transmitted to the Congress on July 16, 1985. economic and financial environment Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 FOMC Policy Actions to offset the recent spurt in Ml by a members preferred to rebase Ml on slowing in the second half sufficient to the second quarter. While they did not bring Ml into the existing 4 to 7 per- disagree that there were considerable cent long-run range. That would imply uncertainties about the prospective realmost no growth month by month on lationship between Ml and economic average over the balance of the year. performance, these members felt that While the prospective behavior of Ml a rebased range would better reflect would remain subject to continuing the current thrust of the Committee's uncertainties, the members believed policy and would be more consistent that Ml velocity would probably with a movement toward lower growth move gradually toward a more usual or ranges over time, as needed to attain predictable pattern and that mainte- the long-run objective of sustained, nance of the current degree of reserve noninflationary economic growth. pressure would be associated with a Because of the uncertainties surreduction in Ml growth during the rounding the behavior of Ml, one second half of the year to a moderate member proposed placing much less pace. Such growth was likely to be weight than usual on movements in consistent with a pickup in the rate of that aggregate, possibly by relegating economic expansion and continued it to a monitoring status for some pecontainment of inflationary pressures. riod of time. Other members opposed Accordingly, most of the members fa- such a course because they felt that vored either raising the Ml range that Ml, together with the other monetary had been established in February for aggregates, would continue to provide the year or rebasing the range from the a useful focus for the conduct of monefourth quarter of 1984 to the second tary policy even as their behavior had quarter of 1985, with a smaller in- to be evaluated in the context of ongocrease or no change in the actual nu- ing economic, financial, and exchange merical range. market developments. Members who expressed a prefer- With regard to the members' preference for a higher range over rebasing ences for a specific Ml range, a maemphasized that the degree of uncer- jority supported a proposal to establish tainty surrounding the future behavior a range of 3 to 8 percent, rebased on of Ml remained considerable, and a the second quarter. Such a range imhigher range would not carry an impli- plied a substantial slowing in growth cation that the velocity adjustment in from the pace in the first half. Other Ml was concluded. Moreover, to the members indicated a preference for a extent that changes in the composition rebased range of 4 to 7 percent, which of Ml toward interest-bearing ac- they believed was likely to prove more counts, shifts in cash management consistent with the Committee's practices, and generally lower interest longer-run objectives. Given the unrates implied a more slowly rising certainties surrounding the behavior of trend in Ml velocity, Ml growth rela- Ml, most of the members supported a tive to GNP would be higher over time relatively wide range for the second than the Committee had anticipated half, even though the prospects for exearlier and, in one view, should begin pansion at the low end of the range to be reflected in the Committee's Ml were viewed as somewhat remote. It ranges. However, a majority of the was recognized that because Ml Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 111 growth had been strong during the lat- established at an annual growth of 3 to 8 ter part of the second quarter, its level percent. The range takes account of expectations of a return of velocity growth toward was currently high in relation to the more usual patterns, following the sharp derebased range, and it was not likely to cline in velocity during the first half of the fall within that range until some time year, while also recognizing a higher degree had elapsed. Relatively low growth of uncertainty regarding that behavior. The with the range, should it occur, would appropriateness of the new range will continue to be reexamined in the light of evibe acceptable if the recent decline in dence with respect to economic and financial Ml velocity were substantially redevelopments including developments in forversed and economic performance eign exchange markets. More generally, the proved to be satisfactory. In summary, Committee agreed that growth in the aggrethe rebased range was based on expec- gates may be in the upper parts of their ranges, depending on continuing developtations of a return of velocity growth ments with respect to velocity and provided over time toward more usual patterns, that inflationary pressures remain subdued. but because of the many uncertainties that were involved the members Votes for this action: Messrs. Volcker, agreed on the desirability of continu- Corrigan, Balles, Forrestal, Keehn, ing to judge Ml developments against Partee, Martin, Rice, Ms. Seger, and Mr. Wallich. Vote against this action: Mr. the background of the other aggregates Black. (Absent and not voting: Mr. and evidence on the behavior of the Gramley.) economy, prices, and financial markets, both domestic and international. Mr. Black dissented because he pre- With regard to M2, M3, and debt all ferred a rebased range of 4 to 7 percent of the members supported a proposal for Ml, which he thought was more to reaffirm the current ranges for likely to be consistent with both sus- 1985, subject to the understanding that tained economic expansion and progress actual growth, as had been contem- toward price stability. In particular, he plated previously at the February was concerned that the higher 8 percent meeting, might appropriately be high top of the rebased range adopted by the within the ranges depending on devel- Committee might tend to prolong the opments with respect to velocity and process of reducing Ml growth to a nonprovided that inflationary pressures inflationary rate. remained subdued. Turning to the establishment of tenta- At the conclusion of its review of the tive ranges for 1986, several members ranges for 1985, the Committee voted emphasized the desirability of taking as follows to establish a rebased range further action, in line with previously for Ml and to reaffirm the ranges that stated Committee intentions, to reduce were set at the February meeting for growth in money and credit over time to the broader aggregates and for total rates that would be consistent with susdomestic nonfmancial debt: tainable economic expansion and reasonable price stability. In that context, a The Committee at this meeting reaffirmed majority of the members favored an Ml ranges for the year of 6 to 9 percent for M2 range of 4 to 7 percent for 1986. Howand 6 to 9lk percent for M3. The associated ever, with varying degrees of emphasis, range for total domestic nonfmancial debt a number of members questioned was reaffirmed at 9 to 12 percent. With respect to Ml, the base was moved forward to whether such a range would prove adethe second quarter of 1985 and a range was quate to sustain the economic expan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 FOMC Policy Actions sion, particularly in light of the possibil- at the beginning of 1986. In addition, ity that the trend in Ml velocity might actual experience with institutional and be shifting lower. Reference was also depositor behavior after the completion made to the uncertainties associated of deposit rate deregulation would need with the lifting of remaining Regulation to be taken into account in judging the Q interest rate ceilings early in 1986, as ongoing appropriateness of the ranges. provided for in current legislation. One At the conclusion of its discussion, member commented that the elimination the Committee took the following action of rate ceilings on savings accounts to establish the tentative ranges for could result in rate adjustments that fa- 1986: vored such accounts over Ml-type de- For 1986 the Committee agreed on tentaposits, thereby tending to restrain Ml tive ranges of monetary growth, measured growth in relation to that of M2. How- from the fourth quarter of 1985 to the fourth ever, the removal of ceilings on regular quarter of 1986, of 4 to 7 percent for Ml, 6 NOW accounts would work in the other to 9 percent for M2, and 6 to 9 percent for M3. The associated range for growth in total direction. domestic nonfinancial debt was provisionally With regard to the broader aggre- set at 8 to 11 percent for 1986. With respect gates, the members favored no change in to Ml particularly, the Committee recognized that uncertainties surrounding recent the tentative range for M2 and a V2 perbehavior of velocity would require careful centage point reduction in the upper reappraisal of the target range at the beginlimit of the M3 range compared with the ning of 1986. Moreover, in establishing 1985 ranges for those aggregates. There ranges for next year, the Committee also recognized that account would need to be taken was general agreement on the desirabilof experience with institutional and depositor ity of reducing the monitoring range for behavior in response to the completion of total domestic nonfinancial debt by 1 deposit rate deregulation early in the year. percentage point, partly reflecting an ex- Votes for this action: Messrs. Volcker, pectation that its expansion would be Corrigan, Balles, Black, Forrestal, Keehn, tempered by a drop-off in the net re- Partee, Rice, and Wallich. Votes against demption of equity shares that had this action: Mr. Martin and Ms. Seger. boosted corporate debt substantially (Absent and not voting: Mr. Gramley.) over the past several quarters. Moreover, credit needs to finance the expan- Mr. Martin dissented because he presion would tend to grow less than in ferred a somewhat higher growth range 1985 if, as a number of members antici- for Ml to provide for greater flexibility pated, the current account deficit did not if needed to accommodate sustained worsen further and the gap between the economic expansion, should velocity growth in domestic spending and do- continue to decline or increase very mestic production narrowed or disap- sluggishly. Ms. Seger dissented because peared. All of these ranges were be- she believed that higher growth ranges lieved to be consistent with sustained were desirable to foster an acceptable growth in the economy so long as infla- rate of economic expansion and help retionary pressures remained subdued. duce financial strains in the economy. However, the Committee recognized Both Mr. Martin and Ms. Seger saw litthat uncertainties about interest rates tle risk under current conditions that inand other factors that could affect the flation would intensify. velocity of the various aggregates would In the Committee's discussion of polrequire careful reappraisal of the ranges icy implementation, some divergence of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 113 views was expressed with regard to the justments in the degree of reserve reappropriate operational approach for the straint. They agreed as they had previweeks immediately ahead. A majority of ously that such adjustments should not the members were in favor of directing be made automatically in response to the operations, at least initially, toward behavior of the monetary aggregates maintaining the existing degree of pres- alone, but should take account of the sure on reserve positions, but others in- strength of economic activity and infladicated preference for somewhat firmer tionary pressures, domestic credit conor somewhat easier reserve conditions. ditions, and the foreign exchange value The members agreed that current re- of the dollar. In particular, the members serve conditions were likely to be asso- agreed that some shortfall in the growth ciated with a marked slowing in the of Ml from expectations, should it ocgrowth of Ml during the third quarter, cur for a month or two, should not be partly because the recent unusual surge resisted and might indeed be desirable in in demand deposits would appear to the context of acceptable economic perhave satisfied transaction needs for formance. Conversely, a tendency for some period ahead. Growth in the Ml growth to exceed expectations broader aggregates would also be ex- should be countered more promptly, at pected to slow from the pace in May and least in the view of some members, in June, partly because of the prospect of light of the rapid earlier growth in transsome moderation in the inflow of funds action balances. The members also felt to money market mutual funds and to that the behavior of the dollar in foreign money market deposit accounts as the exchange markets might well impose a interest paid on such accounts was significant constraint—potentially in eibrought into better alignment with ther direction—with regard to possible short-term market rates. adjustments in the degree of reserve re- Despite the outlook for more moder- straint over the weeks ahead. ate growth in the monetary aggregates, With regard to the intermeeting range notably Ml, compared with the second for the federal funds rate, which calls quarter, some members were concerned for Committee consultation when its that such growth might not slow suffi- boundaries are exceeded for a period, it ciently, and they proposed some modest was suggested in the course of discusfirming of reserve conditions to help as- sion that a rise in the average rate to sure that the expansion of Ml would around the upper end of the existing 6 to moderate within the Committee's range 10 percent monitoring range would imfor the second half of the year. A differ- ply reserve conditions that were inconing view, which placed less emphasis on sistent with the Committee's objectives the behavior of Ml because of the un- for monetary growth, and that accordcertainties that were involved, stressed ingly the upper end might be lowered to the desirability of some easing of re- 9 percent. On the other hand, some serve conditions against the background members were concerned that a further of ongoing financial strains in some sec- decline in the average level of the federal tors and the sluggish performance of the funds rate to near the lower end of the economy. present range might also prove inconsis- In keeping with the Committee's tent with monetary growth objectives usual practice, the members considered and would therefore provide a misleadthe question of possible intermeeting ad- ing signal of policy easing. On balance, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 FOMC Policy Actions most of the members preferred to retain the first quarter, and housing starts held earthe current range, which bracketed lier gains after rising substantially in the first quarter. Information on business capital fairly evenly with the existing federal spending suggests further growth, though at funds rate. a much less rapid pace than earlier in the At the conclusion of the Committee's economic expansion. Industrial production discussion, a majority of the members declined slightly in April and May after rising a little over the first quarter. Total nonindicated that they favored or could acfarm payroll employment increased at a cept a directive that called for maintainsomewhat reduced pace in May and June ing the current degree of pressure on with employment in manufacturing registerreserve positions, keeping in mind the ing further declines. The civilian unemploypossibility of some increases in those ment rate remained at 7.3 percent in June, unchanged since February. Broad measures pressures if growth of the monetary agof prices and wages appear to be rising at gregates exceeded intentions. The mem- rates close to those recorded in 1984. bers expected such an approach to pol- Since the Committee's meeting in May, icy implementation to be consistent with the trade-weighted value of the dollar against growth of both M2 and M3 at an annual major foreign currencies has generally rate of around llh percent for the period moved within a relatively narrow range but recently has declined to a level below its form June to September. Over the same April low. The merchandise trade deficit in period they expected the expansion of April-May widened from the first quarter Ml to slow substantially to an annual rate as both agricultural and nonagricultural exports fell, while imports remained close to rate of 5 to 6 percent. The members their high first-quarter level. agreed that somewhat lesser restraint on Ml expanded very rapidly in May and reserve positions might be acceptable in June after growing at a moderate pace in the the event of substantially slower-than- preceding two months. The broader aggreexpected growth in the monetary aggre- gates also grew more rapidly in May and June after slowing appreciably earlier. From gates, while somewhat greater restraint the fourth quarter of 1984 through June, Ml would be acceptable if monetary growth grew at a rate well above the Committee's were substantially faster. It was under- range for 1985; M2 increased at a rate stood that the need for lesser or greater around the upper end of its longer-run range; while M3 expanded at a rate in the upper half restraint would be considered against the of its range. Expansion in total domestic background of developments relating to nonfinancial debt slowed a little in the secthe strength of the business expansion, ond quarter but remained high relative to the inflationary pressures, and conditions in Committee's monitoring range for the year. Interest rates have declined somewhat further domestic credit and foreign exchange since the May meeting of the Committee. markets. The members agreed that the The Federal Open Market Committee intermeeting range for the federal funds seeks to foster monetary and financial condirate should be left at 6 to 10 percent. tions that will help to reduce inflation fur- At the conclusion of the meeting, the ther, promote growth in output on a sustainable basis, and contribute to an improved following domestic policy directive was pattern of international transactions. In furissued to the Federal Reserve Bank of therance of these objectives the Committee at New York: this meeting reaffirmed ranges for the year of 6 to 9 percent for M2 and 6 to 9V2 percent The information reviewed at this meeting for M3. The associated range for total dosuggests some pickup in the expansion of mestic nonfinancial debt was reaffirmed at 9 economic activity in recent months following to 12 percent. With respect to Ml, the base virtually no growth in the first quarter. Total was moved forward to the second quarter of retail sales rose on balance in April and May 1985 and a range was established at an anto a level appreciably above the average for nual growth rate of 3 to 8 percent. The range Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 115 takes account of expectations of a return of period before the next meeting is likely to be velocity growth toward more usual patterns, associated with a federal funds rate persistfollowing the sharp decline in velocity dur- ently outside a range of 6 to 10 percent. ing the first half of the year, while also recognizing a higher degree of uncertainty re- Votes for short-run operational paragraph: garding that behavior. The appropriateness Messrs. Volcker, Corrigan, Balles, of the new range will continue to be reexam- Forrestal, Keehn, Partee, Martin, Rice, ined in the light of evidence with respect to and Wallich. Votes against this action: Mr. economic and financial developments in- Black and Ms. Seger. (Absent and not votcluding developments in foreign exchange ing: Mr. Gramley.) markets. More generally, the Committee agreed that growth in the aggregates may be Mr. Black dissented because he bein the upper parts of their ranges, depending on continuing developments with respect to lieved some increase in the degree of velocity and provided that inflationary pres- reserve pressure was needed to help assures remain subdued. sure an adequate slowing of Ml growth For 1986 the Committee agreed on tenta- sented because she favored some easing tive ranges of monetary growth, measured of reserve conditions to help reduce curfrom the fourth quarter of 1985 to the fourth quarter of 1986, of 4 to 7 percent for Ml, 6 rent financial strains, moderate the to 9 percent for M2, and 6 to 9 percent for strength of the dollar in foreign ex- M3. The associated range for growth in total change markets, and promote faster ecodomestic nonfinancial debt was provisionally nomic expansion. set at 8 to 11 percent for 1986. With respect to Ml particularly, the Committee recognized that uncertainties surrounding recent behavior of velocity would require careful reappraisal of the target range at the begin- Meeting Held on ning of 1986. Moreover, in establishing August 20, 1985 ranges for the next year, the Committee also recognized that account would need to be taken of experience with institutional and de- Domestic Policy Directive positor behavior in response to the completion of deposit rate deregulation early in the The information reviewed at this meetyear. ing suggested that economic activity In the implementation of policy for the was probably expanding in the current immediate future, the Committee seeks to quarter at a moderately faster pace maintain the existing degree of pressure on than in the first half of the year. Broad reserve positions. This action is expected to be consistent with growth in M2 and M3 at measures of prices and wages continan annual rate of around 7V2 percent during ued to indicate that inflation was runthe period from June to September, and with ning at about the same pace, as in a substantial slowing of Ml growth to an 1984. annual rate of 5 to 6 percent. Somewhat The index of industrial production lesser reserve restraint might be acceptable in the event of substantially slower growth of rose 0.2 percent in July, about the the monetary aggregates while somewhat same increase as in each of the precedgreater restraint would be acceptable in the ing two months. Output of consumer event of substantially higher growth. In eigoods was relatively strong, reflecting ther case such a change would be considered gains in the production of automobiles in the context of appraisals of the strength of the business expansion, progress against in- and home goods. Production of conflation, and conditions in domestic credit struction supplies and of materials also and foreign exchange markets. The Chair- increased in July; but production of man may call for Committee consultation if business equipment fell, and output of it appears to the Manager for Domestic Operations that pursuit of the monetary objec- defense and space equipment declined tives and related reserve paths during the after several months of extraordinarily Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 FOMC Policy Actions rapid growth. Capacity utilization for activity in the near term: newly issued total industry was 80.8 percent in July, permits for residential building reunchanged since April and 1.2 per- mained at a high level relative to centage points below its year-earlier starts, consumer attitudes toward buylevel. ing houses were quite positive, and in- Total nonfarm payroll employment formal trade reports from homerose 240,000 in July, a little above the builders indicated heightened buyer average monthly increase during the interest and sales activity. first half of the year. Job gains re- Trends in business capital spending mained uneven across industries, as have been obscured lately by extreme employment in manufacturing de- volatility in monthly data, but availaclined slightly further while employ- ble information suggested further ment in service-producing industries growth over the period ahead, though continued to account for the bulk of probably at a relatively modest pace, the advance. The civilian unemploy- following the extraordinarily rapid ment rate remained at 7.3 percent in growth earlier in the economic expan- July, unchanged since February. sion. In June, the latest month for The nominal value of retail sales in- which data on business investment creased 0.4 percent in July after two were available, new orders and shipmonths of decline. Sales of general ments of nondefense capital goods remerchandise recovered somewhat af- bounded. On the other hand, outlays ter falling in May and June, and sales for nonresidential construction weakof furniture and appliances rose at ened. about the average pace of the preced- The producer price index for fining two months. In the automotive sec- ished goods rose 0.3 percent in July, tor, however, sales of domestic auto- after declining to 0.2 percent in June. mobiles dropped to an annual rate of The rise in July reflected in part a 7V2 million units—1 million below the surge in prices of fresh vegetables that average level earlier in the year when boosted the index for finished foods foreign cars were in short supply and 1.3 percent; other food prices generfinancing incentive programs for do- ally declined, however, and prices of mestic cars were prevalent. Sales crude foods fell in July for the seventh slipped still further in early August to consecutive month. The consumer an annual rate of around 7 million price index rose 0.2 percent in June, units, with some of the slowing per- the same as in May. Food prices haps attributable to the recent strike by changed little over the two-month peauto-haulers. The tentative settlement riod and consumer commodity prices of that strike and the reintroduction of declined, but service prices continued below-market-rate financing programs to rise at a comparatively rapid rate. pointed to a likely rebound in sales of Thus far in 1985, producer and condomestically produced autos. sumer prices and the index of average Total private housing starts fell hourly earnings had risen at rates close slightly in July to an annual rate of to those recorded in 1984. 1.65 million units. The lower pace re- Since the Committee's meeting in flected a drop in starts of multifamily July, the trade-weighted value of the units, as starts of single-family struc- dollar against major foreign currentures edged higher. Other indicators cies had fallen nearly 43/4 percent fursuggested some pickup in construction ther, to a level about 17 percent below Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 117 its peak in late February. Most of the May-June pace, Ml had shown relarecent decline was in the early part of tively strong growth since midyear; it the intermeeting period; since late July increased at an annual rate of about 9 the dollar's value had declined only percent in July and data for early Auslightly further on balance. The U.S. gust indicated the likelihood of merchandise trade deficit widened in stronger growth in the current month. the second quarter to a record annual Thus, its expansion appeared to be rate of nearly $134 billion. Both agri- well above the Committee's expectacultural and nonagricultural exports tions for the June-to-September pefell substantially, while imports regis- riod. The strength in Ml reflected an tered a small increase. The rise in im- acceleration in other checkable deports was attributable to a substantial posits while demand deposits, though increase in the volume of oil imports increasing a little on balance, reafter a sharp decline in the first quar- mained at high levels as the extraorditer. nary surge of late spring in such de- At its meeting on July 9-10, 1985, posits showed no signs of unwinding. the Committee had adopted a directive Expansion in the broader aggregates that called for maintaining the existing slowed in July from the average pace degree of pressures on reserve posi- over the previous two months, to antions, keeping in mind the possibility nual rates of about 8V2 percent for M2 of some increase in those pressures if and 4V2 percent for M3. For the pegrowth of the monetary aggregates ex- riod from the fourth quarter of 1984 ceeded intentions. That action was ex- through July, growth in M2 was pected to be consistent with growth of around the upper end of its range for both M2 and M3 at an annual rate of 1985, while the recent sluggish growth around W2 percent for the period in M3 had brought its growth to from June to September. Over the around the midpoint of its range. Exsame period the expansion of Ml was pansion in total domestic nonfmancial expected to slow substantially to an an- debt remained high relative to the nual rate of 5 to 6 percent. The mem- Committee's monitoring range for the bers agreed that somewhat lesser re- year. straint on reserve positions might be Early in the intermeeting interval acceptable in the event of growth in the open market operations were directed monetary aggregates that was substan- at maintaining the existing degree of tially slower than expected while pressures on reserves. By early Ausomewhat greater restraint would be gust, with Ml running well above the acceptable if monetary growth were Committee's expectations at the time substantially faster. In either case, ad- of the July meeting, and with M2 also justments in the degree of reserve on the high side, against the backpressures would be considered against ground of a weaker dollar and susthe background of developments relat- tained economic activity, desk operaing to the strength of the business ex- tions were conducted with a view pansion, progress against inflation, toward more cautious provision of reand conditions in domestic credit and serves. The level of adjustment plus foreign exchange markets. The inter- seasonal borrowing, which had been meeting range for the federal funds artificially high around the time of the rate was retained at 6 to 10 percent. July meeting because of seasonal Though slowing from the quite rapid strains associated with the midyear Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 FOMC Policy Actions statement date and July 4 holiday pe- economic and financial conditions. riod, averaged about $410 million in They noted with some concern the abthe two-week maintenance period end- sence of clear evidence that business ing July 31 and rose to $480 million in activity might be strengthening, as the first half of August. they had expected earlier, following The weekly average federal funds sluggish growth during the first half of rate was generally in the l3k to Tfe 1985. Nonetheless, with domestic fipercent area during the intermeeting nal demands remaining relatively interval, though average daily rates buoyant, most of the members agreed ranged from about 73/s percent to as that some pickup in the rate of ecohigh as 83/4 percent. Most other short- nomic expansion continued to be a term interest rates rose about 20 to 45 reasonable expectation for the second basis points over the intermeeting in- half of the year. They recognized that terval, mainly reflecting a reassess- various imbalances and financial ment by market participants of the out- strains in the economy constituted onlook for the economy and for going threats to the economic expanmonetary policy. Yields on intermedi- sion and raised the danger that growth ate- and long-term Treasury securities would be more sluggish than anticiincreased about 20 to 30 basis points, pated. Some members also observed while yields on corporate bonds gen- that unexpected developments stemerally rose somewhat more. The aver- ming from domestic or international age contract rate on new commitments financial problems or from other diffifor fixed-rate convetional home mort- culties in specific sectors of the econgage loans moved up slightly to around omy, if not contained, could interrupt 12V4 percent. the expansions itself. On the other The staff projections presented at hand, a few members remained relathis meeting suggested that growth in tively optimistic about the prospective real GNP would pick up somewhat in performance of the economy; it was the second half of the year from the also suggested that the rapid growth in sluggish pace in the first half, and Ml in recent months might well lead would continue at a modest pace with some lag to faster economic exthrough 1986. Although domestic fi- pansion than was currently anticinal demand was projected to rise less pated. rapidly than earlier this year, a larger Particular emphasis was given durshare of the increase was expected to ing the Committee's discussion to the be met out of domestic production prospect that domestic economic derather than from imports or reduced velopments would depend importantly inventory investment. The unemploy- on international conditions, including ment rate was projected to edge down the economic performance of industrionly slightly over the forecast horizon alized countries, the ability and willand the rate of increase in prices was ingness of developing countries to projected to remain close to that expe- manage their foreign debt problems, rienced in recent years. the global energy situation, and the In the Committee's discussion of the foreign exchange value of the dollar. economic situation and outlook, the The members continued to stress, as members focused on various uncer- they had at previous meetings, the tainties and risks inherent in current strongly adverse impact that foreign Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 119 competition, fostered by a high value strains in domestic and international of the dollar in foreign exchange mar- financial markets posed dilemmas that kets, was having on overall domestic were not amenable to a monetary poleconomic activity and in particular on icy solution. many manufacturing firms on agricul- As they had at earlier meetings, the ture. Some members commented that members commented on the uneven the prospects for near-term improve- pattern of developments in various ment in the balance of trade seemed to sectors of the economy. They gave be relatively remote. special emphasis to the problems in While a farther decline in the dollar agriculture but also cited other probwould tend with some lag to have a lem or lagging areas of the economy. favorable impact on the balance of In most parts of the country, however, trade, a sense of "free fall" in the dol- strength in a number of industries such lar would represent a major threat to as services and defense production progress toward price stability and to currently tended to outweigh the ecointerest rates. In general, while a de- nomic weaknesses. In the construction cline over time would not be disturb- area, one member called attention to ing, it was viewed as important to recent indications of reduced nonresimaintain a certain confidence in the dential building activity and other dollar, given the large net inflows of members commented that vacancy funds from abroad needed to bridge rates in office structures were relathe gap between the relatively limited tively high in several parts of the counavailability of domestic saving and the try. On the other hand, there were refunds required to finance the federal ports of growing buyer interest in budget deficit and private capital out- housing, although recent data on houslays. Without provision of such funds ing starts were weaker than expected. relatively willingly from abroad, pres- With regard to financial conditions, a sures on domestic interest rates would number of members referred to varibe greater than otherwise. The mem- ous financial practices and the buildup bers agreed that the transition to a or incautious use of debt that had renlower trade deficit and a more sustain- dered many borrowers and their able pattern of international transac- lenders more vulnerable to economic tions generally, presumably accompa- adversity. In the case of consumers, nied by a lower dollar, would be rising debt burdens together with the greatly facilitated by substantial prog- possibility of reduced income growth ress in reducing future deficits in the were viewed by at least some members federal budget and by the avoidance of as likely to restrain expansion in conprotectionist legislation that could sumer expenditures. have a highly unfavorable effect on in- At its meeting in July the Committee ternational trade, on the ability of de- had reviewed the basic policy objecveloping countries to resolve their ex- tives that it had established in Februternal debt problems, and on the ary for growth of the monetary and overall performance of the domestic credit aggregates in 1985 and had set economy. Several members noted that tentative objectives for expansion in the risks associated with the underly- 1986. For the period from the fourth ing distortions and problems in the do- quarter of 1984 to the fourth quarter of mestic economy and the persisting 1985, the Committee had reaffirmed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 FOMC Policy Actions the ranges for broader aggregates set influenced by the relatively low level in February of 6 to 9 percent for M2 of interest rates on market instruments and 6 to 9lk percent for M3. The asso- and also on small time certificates of ciated range for total domestic nonfi- deposit, and the velocity of money nancial debt was also reaffirmed at 9 seemed to be continuing to decline to 12 percent for 1985. With respect to sharply. Moreover, there had been no Ml, the base was moved forward to signs of increasing price pressures in the second quarter of 1985 and a range aggregate price indicators or in comof 3 to 8 percent at an annual growth modity markets. It was also argued rate was established for the period to that the objective of achieving Ml the fourth quarter of the year. For growth within the Committee's long- 1986 the Committee agreed on tenta- run range might receive somewhat retive monetary growth objectives that duced emphasis, at least for a time, included reductions of 1 percentage pending evaluation of further developpoint in the upper end of the Ml range ments including the performance of and V2 percentage point in the upper the broader aggregates. end of the M3 range. The provisional Other members expressed more range for total domestic nonfinancial concern that further Ml growth at debt was reduced by 1 percentage rates substantially above the Commitpoint for 1986. tee's long-run range would have infla- In the Committee's discussion of tionary consequences over time. They policy implementation for the weeks noted the persisting strength of Ml in immediately ahead, the members took recent weeks, and should that conparticular account of the disparate be- tinue, they felt that added reserve rehavior of Ml and the economy. Under straint would probably be desirable to the circumstances, a consensus em- bring Ml closer to the upper end, or erged against making a substantial within, the Committee's long-run change for the time being in the degree range by the fourth quarter. Continued of reserve restraint that had been strength in Ml could also raise quessought recently. The members recog- tions about the Committee's commitnized that the behavior of Ml was sub- ment to an anti-inflationary policy, ject to unpredictable fluctuations. with potentially adverse implications Nonetheless, they continued to expect for inflationary expectations. Some that the expansion in Ml would mod- members also commented that the erate appreciably over the months rapid growth in Ml had already built ahead, if something like the current up considerable liquidity that would degree of restraint on reserve positions tend to sustain the expansion over the was maintained. months ahead. In the course of the Committee's While there were shadings of opindiscussion, a number of members em- ion with regard to the appropriate dephasized the uncertainties surrounding gree of reserve pressure under the cirthe behavior of Ml and the downside cumstances, on balance a majority of risks they saw in the economy. Under the members indicated their accepprevailing circumstances, the surge in tance of a directive that called for Ml growth might not have the usual maintaining the slightly firmer degree inflationary implications. The demand of reserve restraint that had been for assets in Ml appeared to have been sought in recent weeks. The members Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 121 expected such an approach to policy cially alert to developments in the forimplementation to be consistent with eign exchange markets. The members growth of M2 and M3 at annual rates agreed that the intermeeting range for of around 8V2 and 6V2 percent respec- the federal funds rate, which provides tively for the period from June to Sep- a mechanism for initiating consultatember, not much changed from ex- tion of the Committee when its boundpectations at the time of the July aries are persistently exceeded, should meeting. Growth in Ml was expected be left unchanged at 6 to 10 percent. to slow from its recent pace, but given At the conclusion of the meeting, the rapid expansion since June, Ml the following domestic policy directive was now anticipated to grow at an an- was issued to the Federal Reserve nual rate of about 8 to 9 percent over Bank of New York: the three-month period, considerably above earlier expectations. Two mem- The infomation reviewed at this meeting bers argued for immediate adjustsuggests that economic activity is probably ments in the degree of reserve pres- expanding in the current quarter at a modersures—although in opposing direc- ately faster rate than in the first half of the tions—based on their differing evalua- year. In July, industrial production continued to move somewhat higher and total retail tions of the significance of recent sales rose modestly after two months of demonetary growth for inflation and eco- cline. On the other hand, housing starts fell nomic activity as against the risks to somewhat in July. Information on business sustained expansion stemming from capital spending suggests further growth, though at a much less rapid pace than earlier the financial vulnerabilities and the in the economic expansion. Total nonfarm underlying imbalances in the econ- payroll employment continued to increase in omy. July, although employment in manufacturing In keeping with the Committee's declined slightly further. The civilian unemployment rate remained at 7.3 percent in usual practice, the members contem- July, unchanged since February. Broad meaplated the possible need for some in- sures of prices and wages appear to be rising termeeting adjustment in the degree of at rates close to those recorded in 1984. reserve restraint. They agreed that Since the Committee's meeting in July, the somewhat greater restraint on reserve trade-weighted value of the dollar against major foreign currencies has depreciated furpositions would be acceptable if ther. The merchandise trade deficit widened growth in the monetary aggregates in the second quarter to the highest rate on were substantially faster than ex- record. Both agricultural and nonagricultural pected, while somewhat lesser re- exports fell substantially, while imports registered a small increase. straint would be acceptable if mone- Based on data for July and early August, tary growth were substantially slower. Ml has been growing relatively rapidly. De- As in the past, any such adjustment mand deposits have shown little change on should not be made automatically in balance, but other checkable deposits have expanded substantially. Growth in M2 has response to the behavior of the monecontinued at around the upper end of its 1985 tary aggregates alone, but should take range, while relatively sluggish growth in broader economic and financial devel- M3 recently has brought this aggregate to the opments into account, including con- midpoint of its range. Expansion in total doditions in domestic and international mestic nonfinancial debt has remained high relative to the Committee's monitoring range financial markets. For the period for the year. Most interest rates have risen ahead, several members believed that somewhat since the July meeting of the policy implementation should be espe- Committee. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 FOMC Policy Actions The Federal Open Market Committee given the rapid growth in recent weeks, exseeks to foster monetary and financial condi- pansion over the June-to-September period tions that will help to reduce inflation fur- may be at an 8 to 9 percent annual rate. ther, promote growth inputput on a sustain- Somewhat greater restraint would be acceptable basis, and contribute to an improved able in the event of substantially higher pattern of international transactions. In fur- growth in the monetary aggregates. Sometherance of these objectives the Committee at what lesser restraint would be acceptable in the July meeting reaffirmed ranges for the the event of substantially slower growth. In year of 6 to 9 percent for M2 and 6 to 9lk either case such a change would be considpercent for M3. The associated range for to- ered in the context of appraisals of the tal domestic nonfinancial debt was reaf- strength of the business expansion, developfirmed at 9 to 12 percent. With respect to ments in foreign exchange markets, progress Ml, the base was moved forward to the sec- against inflation, and conditions in domestic ond quarter of 1985 and a range was estab- and international credit markets. The Chairlished at an annual growth rate of 3 to 8 man may call for Committee consultation if percent. The range takes account of expecta- it appears to the Manager for Domestic Options of a return of velocity growth toward erations the pursuit of the monetary objecmore usual patterns, following the sharp de- tives and related reserve paths during the cline in velocity during the first half of the period before the next meeting is likely to be year, while also recognizing a higher degree associated with a federal funds rate persistof uncertainty regarding that behavior. The ently outside a range of 6 to 10 percent. appropriateness of the new range will continue to be reexamined in the light of evi- Votes for this action: Messrs. Volcker, dence with respect to economic and financial Corrigan, Balles, Forrestal, Keehn, developments including developments in for- Martin, Partee, Rice, and Wallich. Votes eign exchange markets. More generally, the against this action: Mr. Black and Ms. Se- Committee agreed that growth in the aggre- ger. (Absent and not voting: Mr. Gramley.) gates may be in the upper parts of their ranges, depending on continuing develop- Mr. Black dissented because he prements with respect to velocity and provided ferred to direct open market operations that inflationary pressures remained subpromptly toward a somewhat greater dedued. gree of reserve restraint and thereby im- For 1986 the Committee agreed on tentaprove the prospects of moderating Ml tive ranges of monetary growth, measured growth to within the Committee's range from the fourth quarter of 1985 to the fourth quarter of 1986, of 4 to 7 percent for Ml, 6 for the second half of the year. Ms. Seto 9 percent for M2, and 6 to 9 percent for ger dissented because she favored some M3. The associated range for growth in total reduction in the degree of reserve redomestic nonfinancial debt was provisionally straint in light of the financial vulneraset at 8 to 11 percent for 1986. With respect to Ml particularly, the Committee recog- bility of some sectors of the economy nized that uncertainties surrounding recent and in order to encourage sustained ecobehavior of velocity would require careful nomic expansion. reappraisal of the target range at the begin- At a telephone consultation on Sepning of 1986. Moreover, in establishing tember 23, the Committee discussed the ranges for next year, the Committee also recognized that account would need to be taken possible implications for intervention in of experience with institutional and depositor foreign exchange markets of the deliberbehavior in response to the completion of ation during the weekend of the Minisdeposit rate deregulation early in the year. ters of Finance and Central Bank Gover- In the implementation of policy for the immediate future, the Committee seeks to nors of the G-5 countries. In the course maintain the-degree of pressure on reserve of the discussion, it was indicated that positions sought in recent weeks. This action the likely potential for U.S. sales of dolis expected to be consistent with growth in lars and acquisitions of foreign curren- M2 and M3 at annual rates of around 8V2 cies over the near term fell generally and 6V2 percent, respectively, during the period from June to September. Ml growth within existing Committee authorizais expected to slow from its recent pace, but tions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 123 Meeting Held on Total nonfarm payroll employment October 1, 1985 expanded by about 300,000 in August, well above the average gain in the preceding four months. Hiring continued 1. Domestic Policy Directive to be brisk in service-producing indus- The information reviewed at this meet- tries and at finance and trade estabing suggested that economic activity lishments. Moreover, employment in expanded in the third quarter at an an- manufacturing rose for the first time nual rate of about 3 percent, compared since January, but the gains might have with a rate of about 1 percent in the been overstated because of seasonal first half of the year. While the in- adjustment difficulties associated with crease in total spending by domestic a shift in timing of the model changesectors was a little weaker than in the over period in the automotive industry. first half, growth in domestic output The civilian unemployment rate, was higher because the trade balance which had held steady at 7.3 percent in the third quarter apparently did not since February, fell to 7.0 percent in deteriorate further. Broad measures of August. prices and wages appeared to be rising Private housing starts picked up in at rates close to or somewhat below August but, at an annual rate of l3k those recorded earlier in the year. million units, were the same as the av- The index of industrial production erage recorded in the second quarter. increased 0.3 percent in August. Pro- Other indicators suggested an imduction gains were particularly strong proved tone in the housing sector. for consumer durable goods—mainly Sales of new homes continued to trend because of a spurt in assemblies of up through July, and sales of existing light trucks—and for defense and homes registered a sizable advance in space equipment. Estimates for the August. Moreover, newly issued perpreceding three months were revised mits for residential building remained down, however, and the level of output at relatively high levels, and consumer in August was about V2 percent above attitudes toward buying homes apparthe average for the second quarter. In- ently continued to be quite positive. dustrial capacity utilization edged up Incoming information suggested a to 8OV2 percent, little changed since leveling of business capital expendispring and about IV2 percentage tures. Spending for nonresidential points below its level a year earlier. structures has slowed in recent The nominal value of retail sales in- months. Shipments of nondefense capcreased nearly 2 percent in August, ital goods rebounded in August, about mainly reflecting a surge in auto sales offsetting the previous month's deafter the introduction of financing in- cline. New orders also rose somewhat centive programs in mid-August. Sales after a sharp drop in July, but that reof new domestic automobiles rose to flected a substantial rise in the volatile an annual rate of 9V2 million units for aircraft category; excluding such orthe month and accelerated further to a ders August showed an appreciable derate of 12 million units during the first cline. 20 days of September. Outlays for con- The U.S. merchandise trade deficit sumer goods other than autos also in July and August averaged somewhat posted gains in August, but have less than that recorded in the second shown little change on balance since quarter of the year, as a drop in imearly spring. ports was partly offset by a slight de- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 FOMC Policy Actions cline in exports. The drop in imports cent below its peak in late February. was widespread across all major com- At its meeting on August 20, 1985, modity categories, with especially the Committee had adopted a directive large declines in oil, industrial sup- that called for maintaining the slightly plies, capital goods, and consumer firmer degree of reserve restraint that goods. had been sought in previous weeks. Recent data on prices and wages That action was expected to be consissuggested that inflation has been hold- tent with growth of M2 and M3 at aning steady at rates somewhat lower nual rates of around 8V2 and 6V2 perthan those earlier in the year. The pro- cent respectively for the period from ducer price index for finished goods June to September. Growth of Ml was fell 0.3 percent in August, as prices expected to slow from its recent pace, for consumer foods and energy-related but given the rapid expansion since items declined and overall prices of June, Ml was anticipated to grow at an other consumer goods were un- annual rate of about 8 to 9 percent over changed. The consumer price index the three-month period, considerably rose 0.2 percent in August for the above earlier expectations. The memfourth consecutive month, less than bers agreed that somewhat greater rethe average monthly change in the Jan- straint on reserve positions would be uary-to-April period. During the first acceptable if growth in the monetary eight months of this year, producer aggregates were substantially faster and consumer prices and the index of than expected, while somewhat lesser average hourly earnings have risen at restraint would be acceptable in the rates somewhat below those recorded event of substantially slower monetary in 1984. growth. In either case, adjustments in Following the Committee's meeting the degree of reserve pressures would in August, the trade-weighted value of be considered in the context of apthe dollar against major foreign cur- praisals of the strength of the business rencies appreciated more than 5 per- expansion, developments in foreign cent through mid-September. The dol- exchange markets, progress against inlar subsequently declined sharply, flation, and conditions in domestic especially after the announcement on and international credit markets. The September 22 by the finance ministers intermeeting range for the federal and central bank governors of the G-5 funds rate was retained at 6 to 10 percountries that recent shifts in funda- cent. mental economic conditions had not Ml growth surged in August to an been reflected fully in exchange mar- annual rate just over 20 percent, rekets. It was noted in the announcement flecting exceptional strength in interby the G-5 countries that in view of the est-bearing checkable deposits and relpresent and prospective changes in atively rapid expansion in other fundamentals, some further orderly components. Data for the first half of appreciation of the main nondollar September suggested slower but still currencies against the dollar was de- substantial expansion in Ml. Thus, for sirable. By the time of this meeting the the period from June to September, value of the dollar had declined about Ml was expanding at a rate well above 3lk percent on balance since the Au- the Committee's expectations, and was gust meeting to a level nearly 20 per- at a level substantially higher than the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 125 path consistent with the Committee's meeting period, averaging close to 8 range for the second half of the year. percent in the week prior to this meet- Reflecting the surge in Ml, M2 accel- ing. For Treasury securities, most erated in August to an annual rate of short-term yields were unchanged to about IIV4 percent and M3 also down slightly, influenced by a large strengthened to a rate of about 8V2 paydown of Treasury bills because of percent; growth in these broader ag- debt ceiling problems, while longgregates was running slightly above term yields were up about 5 to 10 basis the rates anticipated for the June-to- points. Most other market interest September period. Relative to their rates also showed small, mixed long-run ranges for the year, M2 was changes over the period. But yields on close to the top of its range while M3 some federal agency securities adwas near the middle of its range. vanced relatively sharply in the wake Growth in total domestic nonfinancial of reports about financial difficulties debt remained relatively rapid in Au- of the Farm Credit System. gust, and thus far in 1985 was running The staff projections presented at somewhat above the upper end of its this meeting were little changed from growth range for the year. those prepared at the time of the Au- In the light of growth in the mone- gust meeting. Growth in real GNP was tary aggregates—especially Ml—con- projected to pick up somewhat in the tinuing to exceed expectations, and second half of the year from the slugwith indications of a somewhat gish pace in the first half and to constronger tone in the economy as the tinue at a modest pace throughout intermeeting period progressed, open 1986. The average unemployment rate market operations during the period was expected to change little over the were directed toward maintaining or period, and the rate of increase in slightly increasing the degree of re- prices was projected to remain close to serve restraint that had been sought that experienced in the past few years. shortly before the meeting on August In the Committee's discussion of the 20. As a result, the level of adjustment economic situation, the members genplus seasonal borrowing rose some- erally took the view that the latest inwhat on balance in the intermeeting formation was consistent with some interval, averaging about $515 million improvement in the rate of economic in the latest reserve maintenance pe- growth. They differed to some extent riod ending September 25. Borrowing in their assessments of the prospects had been running substantially higher for the economy, however. Several in recent days, however, because of thought that moderate growth in line technical market conditions associated with the staff projection, or perhaps a with a hurricane on the East Coast and bit faster, was a reasonable expectation the end-of-quarter statement date. for the quarters ahead. Growth could The small increase in reserve pres- pick up as domestic demands were sures, measured by the average level of maintained, given the large buildup in borrowings, was not reflected in a sig- liquidity over recent months, the big nificant change in money market inter- federal deficit, and the possibility that est rates, and the federal funds rate the international trade position of the generally moved in a narrow range of United States would stop worsening. 73/4 to 8 percent throughout the inter- On the other hand, a few members Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 FOMC Policy Actions stressed the downside risks in various lation would aggravate the potential sectors of the economy, such as poten- difficulties. Consequently, it would be tial restraint on consumer spending important that shifts in the value of the because of the large buildup in debt, dollar be orderly. the weak performance in manufactur- Several members referred to the ing attributable in part to competitive generally favorable trends in wages pressures from abroad, and the contin- and prices over the course of recent ued signs of deterioration in the agri- months. Some concern was expressed, cultural sector. They expressed the however, that inflationary expectations view that continued sluggish expan- for the longer term might be increassion was the more likely course for the ing in the context of the large increase economy. As had been the case at pre- in Ml and total debt, disappointment vious meetings, the members empha- over the limited progress made thus far sized that a variety of problems and in reducing federal budget deficits, financial strains in some sectors of the and against the background of recent economy, stemming to a substantial and possible further declines in the extent from the massive imbalances in foreign exchange value of the dollar. the federal budget and in foreign trade, Some members also suggested that a represented ongoing threats to the sus- view may be becoming more widetainability of the expansion. spread—encouraged perhaps by the Considerable attention was focused continued rapid expansion in Ml— on the performance of the dollar in that an effective monetary policy diforeign exchange markets and the im- rected at maintaining and reinforcing plications of possible changes in ex- progress toward price stability might change rates for the balance of trade be inhibited by sensitive conditions in and the domestic economy. The mem- some business and financial sectors of bers also reviewed developments relat- the domestic economy and in internaing to the foreign debt problems of less tional financial markets, particularly developed countries. In the course of as long as the federal budget deficit discussion members recognized, as in remained so large. previous meetings, that the extraordi- At its meeting in July the Committee nary strength of the dollar earlier had had reviewed the basic policy objeccontributed to the size of the trade def- tives that it had established in Februicit, but they also emphasized the im- ary for growth of the monetary and portance of maintaining underlying credit aggregates in 1985 and had set confidence in the dollar, given the de- tentative objectives for expansion in pendence of the United States for the 1986. For the period from the fourth time being on large capital inflows. It quarter of 1984 to the fourth quarter of was noted that the possibility, while 1985, the Committee had reaffirmed perhaps remote, of a precipitate con- the ranges for the broader aggregates tinuing decline in the value of the dol- set in February of 6 to 9 percent for lar would present a threat to the finan- M2 and 6 to 9lk percent for M3. The cial system and the economy because associated range for total domestic of its potential implications for higher nonfinancial debt was also reaffirmed interest rates and inflationary pres- at 9 to 12 percent for 1985. With resures, particularly in the absence of spect to Ml, the base was moved forstronger budgetary restraint than had ward to the second quarter of 1985 and yet been achieved. Protectionist legis- a range of 3 to 8 percent at an annual Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 127 growth rate was established for the of the year as a whole could be period to the fourth quarter of the year. reached without an inappropriately For 1986 the Committee had agreed abrupt increase in reserve pressures on tentative monetary growth objec- and in interest rates. Growth in M2 tives that included reductions of 1 per- and M3 was expected to remain centage point in the upper end of the roughly consistent with the target Ml range and 1k percentage point in ranges for 1985, and much slower the upper end of the M3 range. The growth in Ml—consistent with the upprovisional range for total domestic per end of its target—would in the nonfinancial debt was reduced by 1 view of many members be acceptable percentage point for 1986. At this and desirable, depending upon develmeeting, there was some further dis- opments in the economy and financial cussion of the 1985 range for Ml and markets. its role, but no change was made at As they had at the previous meeting, this time. the members agreed that in prevailing In the Committee's discussion of circumstances, including a relatively policy implementation for the weeks strong dollar, the surge in Ml did not immediately ahead, the continuing appear in itself to have inflationary imstrength of Ml was assessed against plications for the time being. Nonethethe background of relatively modest less, while relatively rapid growth in expansion in economic activity and the Ml might be tolerated for a time, conabsence of indications that inflation cern was expressed that the longer was increasing. According to an analy- such growth persisted, the greater sis prepared for this meeting, Ml would be its potential for translation growth could be expected to moderate into inflationary demand pressures. A substantially over the months ahead, number of members also emphasized even as the economy continued to ex- that the recent strength in Ml could pand, following its exceptionally rapid not be explained fully by such factors rate of growth since late spring and the as institutional changes and financial resulting large buildup in liquidity. innovations or by shifts of funds to The most recent data on Ml lent some NOW accounts in response to earlier weight to the outlook for considerable declines in market interest rates. slowing in this aggregate. Moreover, The members placed considerable given the volatility of the Ml data and emphasis on the need to judge the bethe difficulties of making seasonal ad- havior of Ml in the context of the perjustments, a decline in Ml for a time formance of the economy and the relacould not be ruled out. In general, tively moderate growth in the broader however, growth in Ml could be ex- aggregates. Currently sensitive condipected to be sustained over the fourth tions in domestic and international fiquarter as a whole in part by the pros- nancial markets and debt problems in pect that inflows of savings funds into some sectors of the economy such as NOW accounts were likely to con- agriculture were themselves a restraintinue, at least at a moderate rate, un- ing force on the economy and argued less market interest rates rose quite against a policy course that might ensubstantially from current levels. In tail appreciably higher interest rates in the circumstances, it appeared in- the short run. On the other hand, sigcreasingly doubtful that the targeted nificant easing under immediately prerate of Ml growth for the second half vailing market circumstances would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 FOMC Policy Actions incur too much risk of prolonging un- ticularly sensitive conditions in the due growth in money and debt, possi- foreign exchange and other markets. bly triggering an abrupt and exagger- The members agreed that the interated decline in the foreign exchange meeting range for the federal funds value of the dollar with disturbing im- rate, which provides a mechanism for plications for inflation and financial initiating consultation of the Commitmarkets over time. tee when its boundaries are persis- While individual members ex- tently exceeded, should be left unpressed some shadings of opinion re- changed at 6 to 10 percent. garding policy implementation over At the conclusion of the meeting, the weeks ahead, it was generally the following domestic policy directive agreed that the balance of consider- was issued to the Federal Reserve ations bearing on the Committee's de- Bank of New York: cision argued for little or no change from the recently prevailing degree of The information reviewed at this meeting suggests that economic activity expanded in pressure on reserve positions. At the the third quarter at a moderately faster rate conclusion of the Committee's discusthan in the first half of the year. In August, sion, a directive that called for main- industrial production increased somewhat. taining the degree of reserve pressure Total retail sales rose considerably, boosted sought in recent weeks was favored by by a surge in auto sales. Housing starts, while increasing in August, were still no most members. They expected such an higher than their average level in the second approach to policy implementation to quarter. Incoming information generally sugbe consistent with growth of both M2 gested a leveling of business capital spendand M3 at annual rates of around 6 to ing. The merchandise trade deficit in July and August averaged somewhat less than in 7 percent for the period from Septemthe second quarter as a drop in imports was ber to December. Over the same per- partly offset by a slight decline in exports. iod, growth in Ml was expected to Total nonfarm payroll employment rose slow markedly—also to an annual rate somewhat more in August than in most other recent months. The civilian unemployment of 6 to 7 percent—and even slower rate fell from 7.3 percent in July—its level growth would be acceptable in the since February—to 7.0 percent in August. context of satisfactory economic per- Broad measures of prices and wages appear formance, given the very rapid expan- to be rising at rates close to or somewhat sion experienced in recent months. below those recorded earlier in the year. Following the Committee's meeting on The members agreed that somewhat August 20, the trade-weighted value of the greater or lesser reserve restraint dollar against major foreign currencies apwould be acceptable over the inter- preciated through mid-September. The dolmeeting period, depending on the be- lar subsequently declined sharply, especially after the announcement on September 22 by havior of the monetary aggregates and the Finance Ministers and Central Bank taking account of appraisals of the Governors of the G-5 countries that exchange strength of the business expansion, the rates have not fully reflected economic funperformance of the dollar in foreign damentals. exchange markets, progress against in- Ml growth surged in August, reflecting exceptional strength in interest-bearing flation, and conditions in domestic checkable deposits and relatively rapid exand international credit markets. It pansion in other components; data for the was also understood that policy might first half of September suggest slower but be implemented with somewhat more still substantial expansion. Reflecting the flexibility than usual over the rela- surge in Ml, M2 accelerated in August, and M3 also strengthened somewhat. Expansion tively short intermeeting period, given in total domestic nonfinancial debt has rethe uncertainties associated with par- mained relatively rapid. Most market inter- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 129 est rates have changed little on balance since to 7 percent is also anticipated; slower the August meeting of the Committee. growth over the next three months would be The Federal Open Market Committee acceptable in the context of satisfactory ecoseeks to foster monetary and financial condi- nomic performance, given recent very rapid tions that will help to reduce inflation fur- growth in Ml. Somewhat greater or lesser ther, promote growth in output on a sustain- reserve restraint would be acceptable deable basis, and contribute to an improved pending on behavior of the aggregates, takpattern of international transactions. In fur- ing account of appraisals of the strength of therance of these objectives the Committee at the business expansion, developments in forthe July meeting reaffirmed ranges for the eign exchange markets, progress against inyear of 6 to 9 percent for M2 and 6 to 9V2 flation, and conditions in domestic and interpercent for M3. The associated range for to- national credit markets. The Chairman may tal domestic nonfinancial debt was reaf- call for Committee consultation if it appears firmed at 9 to 12 percent. With respect to to the Manager for Domestic Operations that Ml, the base was moved forward to the sec- reserve conditions during the period before ond quarter of 1985 and a range was estab- the next meeting are likely to be associated lished at an annual growth rate of 3 to 8 with a federal funds rate persistently outside percent. The range takes account of expecta- a range of 6 to 10 percent. tions of a return of velocity growth toward more usual patterns, following the sharp de- Votes for this action: Messrs. Volcker, cline in velocity during the first half of the Corrigan, Balles, Forrestal, Keehn, year, while also recognizing a higher degree Martin, Partee, Rice, Ms. Seger, and Mr. of uncertainty regarding that behavior. The Wallich. Vote against this action: Mr. appropriateness of the new range will con- Black. tinue to be reexamined in the light of evidence with respect to economic and financial developments including developments in for- Mr. Black dissented because he beeign exchange markets. More generally, the Committee agreed that growth in the aggre- lieved some increase in the degree of gates may be in the upper parts of their reserve pressure was needed at this ranges, depending on continuing develop- time to ensure adequate slowing of Ml ments with respect to velocity and provided growth in the period ahead. that inflationary pressures remain subdued. For 1986 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1985 to the fourth 2. Authorization for Foreign quarter of 1986, of 4 to 7 percent for Ml, 6 Currency Operations to 9 percent for M2, and 6 to 9 percent for M3. The associated range for growth in total At this meeting the Committee also domestic nonfinancial debt was provisionally considered the need for adjustment in set at 8 to 11 percent for 1986. With respect the limit on holdings of foreign currento Ml particularly, the Committee recognized that uncertainties surrounding recent cies in the System Open Market Acbehavior of velocity would require careful count. At present, Paragraph ID of the reappraisal of the target range at the begin- Committee's authorization for foreign ning of 1986. Moreover, in establishing currency operations authorized the ranges for next year, the Committee also rec- Federal Reserve Bank of New York, ognized that account would need to be taken of experience with institutional and depositor for the System Open Market Account, behavior in response to the completion of to maintain an overall open position in deposit rate deregulation early in the year. all foreign currencies not exceeding In the implementation of policy for the im- $8.0 billion. System holdings of formediate future, the Committee seeks to maintain the degree of pressure on reserve eign currencies currently totaled about positions sought in recent weeks. This action $5V2 billion, based on historical costs. is expected to be consistent with growth in In light of the potential for foreign ex- M2 and M3 over the period from September change operations by the United States to December at annual rates of about 6 to 7 and other countries following the repercent. A marked slowing of Ml growth over the period to an annual rate of around 6 cent G-5 announcement, the Commit- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 FOMC Policy Actions tee agreed to raise the limit in Para- increase of 225,000 posted over pregraph ID of the authorization to $10.0 ceding months of the year. To some billion, effective immediately. extent, however, the October gain balanced out a weaker-than-usual ad- Votes for this action: Messrs. Volcker, vance in September; the average in- Corrigan, Balles, Black, Forrestal, Keehn, Martin, Partee, Rice, Ms. Seger, and Mr. crease over the two months was Wallich. Votes against this action: None. 275,000. Service industries and finance and trade establishments continued to record job gains during the two- Meeting Held on month period, while manufacturing November 4-5, 1985 employment edged down further. In October, the length of the factory 1. Domestic Policy Directive workweek remained relatively high at The information reviewed at this meet- 40.7 hours, and factory overtime rose ing indicated that growth in real GNP, slightly. The civilian unemployment which had picked up in the third quar- rate was unchanged at 7.1 percent. ter from the relatively slow pace in the The index of industrial production first half, appeared to be continuing at edged down in September and ina relatively modest rate. Broad mea- creased at an annual rate of only 1.1 sures of prices and wages appeared to percent during the third quarter. be rising at rates close to or somewhat Nearly two-thirds of that rise was atbelow those recorded earlier in the tributable to production of motor vehiyear. cles. Output of defense and space Total retail sales increased consider- equipment and of construction supably further in September, after a plies remained strong while producstrong rise in August. But the gains in tion of durable goods materials and both months were attributable primar- energy materials declined over the ily to a surge in auto sales occasioned period. The capacity utilization rate by financing incentive programs dur- for total industry fell 0.3 percentage ing the period. As expected, the surge point in September, reversing the Auproved temporary, and sales of domes- gust increase. At 80.2 percent, the tic automobiles dropped to an annual rate was about IV2 percentage points rate of 6lk million units in October below its year-earlier level and its avfrom 11V4 million in the preceding erage for the 1967-84 period. month. Outlays for discretionary pur- Total private housing starts fell in chases other than autos were generally September and in the third quarter as a lackluster in recent months; spending whole, with declines registered in both at general merchandise and apparel the multifamily and singlerfamily secstores and at furniture and appliance tors. But sales of new homes were outlets, for example, changed little on higher during the quarter and sales of balance in the third quarter. But with existing homes were up more than 10 overall spending boosted by the transi- percent on average. Moreover, newly tory spurt in auto sales, the personal issued permits for residential consaving rate dropped to less than 3 per- struction rose for the fourth consecucent in the third quarter—an extraordi- tive quarter and a recent survey of connarily low rate historically. sumer sentiment showed that favorable Total nonfarm payroll employment attitudes toward homebuying reached rose about 415,000 in October, sub- their highest level on record. stantially above the average monthly Incoming information generally Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 131 suggested a leveling of business capital the G-5 announcement on September spending. Shipments of nondefense 22 to nearly 8 percent. Intervention capital goods fell in September and sales of dollars by U.S. and foreign were essentially flat for the third quar- authorities were relatively large. With ter as a whole. However, business respect to individual currencies, the spending for motor vehicles advanced dollar's depreciation had been considsharply in the quarter and, on balance, erably greater against the Japanese yen has accounted for virtually all of the than against major European currenrise in business equipment expendi- cies. Preliminary data on U.S. mertures this year. New orders for nonde- chandise trade for the third quarter, fense capital goods, excluding the vol- which need to be interpreted with an atile components of aircraft and parts, extra amount of caution in light of unrose about I3/* percent in the quarter certainties in the statistical reports, but on balance have shown little suggested that imports rose somewhat change thus far in 1985. more than had been estimated earlier Over the first three quarters of and that the trade deficit may have 1985, most aggregate measures of in- widened slightly in the quarter. flation have evidenced some slowing At its meeting on October 1, 1985, from the rates posted in 1984, mainly the Committee had adopted a directive reflecting downward pressures on that called for maintaining the degree prices of food and energy items. In of pressure on reserve positions sought September, the producer price index in the weeks before the meeting. That for finished goods fell 0.6 percent, action was expected to be consistent leaving the index about unchanged on with growth of both M2 and M3 at balance since the beginning of the annual rates of around 6 to 7 percent year. The consumer price index rose for the period from September to De- 0.2 percent in September for the fifth cember. Over the same period, growth consecutive month, down somewhat in Ml was expected to slow markfrom the average monthly increase edly—also to an annual rate of 6 to 7 earlier this year and during 1984. On percent—and even slower growth the wage side, the index of average would be acceptable in the context of hourly earnings rose at an annual rate satisfactory economic performance, of only 1 percent in the third quarter given the very rapid expansion in Ml and 2V2 percent over the first nine in other recent months. The members months of the year, compared with an agreed that somewhat greater or lesser increase of about 3 percent in 1984. reserve restraint would be acceptable However, the employment cost index, over the intermeeting period, dependwhich takes account of nonwage bene- ing on the behavior of the monetary fits and salaries of white-collar work- aggregates and taking account of apers as well as hourly wage earners, has praisals of the strength of the business risen at an annual rate of about 43/4 expansion, the performance of the dolpercent thus far this year, a little above lar in foreign exchange markets, proglast year's rate. ress against inflation, and conditions The trade-weighted value of the dol- in domestic and international credit lar against major foreign currencies markets. It was understood that policy had declined about 1V2 percent further might be implemented with somewhat on balance since the Committee's more flexibility than usual over the meeting on October 1, bringing its net relatively short intermeeting period, depreciation during the period after given the uncertainties associated with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 FOMC Policy Actions particularly sensitive conditions in the securities were up about 10 to 20 basis foreign exchange and other markets. points over the period since the Octo- The intermeeting range for the federal ber 1 meeting of the Committee, while funds rate was retained at 6 to 10 per- rates on private short-term market incent. struments were little changed to down Ml appeared to have changed little somewhat. Most long-term rates fell on balance in October and may have about 25 to 35 basis points. The averdeclined slightly after several months age rate on new commitments for of rapid expansion; but it remained fixed-rate conventional home mortwell above the range set by the Com- gage loans declined about 15 basis mittee in July of 3 to 8 percent at an points to around 12 percent. annual rate for the period from the The staff projections presented at second quarter to the fourth quarter of this meeting suggested that growth in the year. M2 and M3 apparently grew real GNP would continue at a relasluggishly during the month, reflect- tively modest pace for the remainder ing a moderation in their nontransac- of this year and throughout 1986. The tions components as well as the weak- staff continued to expect the average ness in Ml. As a result, by October unemployment rate to change little M2 apparently had moved to a level a over the projection horizon, and the bit below the upper end of its annual rate of increase in prices to remain range, while M3 was still near the close to that experienced in the past middle of its long-run range. Expan- few years. sion in total domestic nonfinancial During the Committee's discussion debt had remained relatively rapid and of the economic situation and outlook, continued to be somewhat above the members commented that, on the upper end of its monitoring range for whole, the latest information sugthe year. gested a more sluggish economic per- Growth of total reserves slowed in formance than had been indicated ear- October to an annual rate of about 4lh lier. Nonetheless, several members percent, in association with the felt that further economic expansion marked deceleration in transactions broadly in line with the staff forecast accounts. Nonborrowed reserves rose remained a reasonable expectation for somewhat more rapidly than total re- the year ahead. In general, the memserves, however, as borrowing from bers did not anticipate that any major the discount window fell from a tem- sector of the economy would provide a porarily inflated level at the end of strong fillip to the expansion, but they September that was related to disrup- thought further growth was likely to be tions from the hurricane on the East sustained by at least modest gains in Coast and to end-of-quarter statement several key sectors of the economy. At date pressures. Over the full reserve the same time, a number of members maintenance period ending October gave considerable emphasis to possi- 23, the level of adjustment plus sea- ble harbingers of a very sluggish econsonal borrowing averaged $470 mil- omy. One member referred to the risk lion. that the expansion itself might falter if The weekly federal funds rate gen- persisting problems and financial erally moved in a range of about T/s to strains in some sectors of the economy 8V8 percent and averaged 8 percent for were not contained. The members recthe five weeks preceding this meeting. ognized that under current circum- Interest rates on short-term Treasury stances their forecasts were subject to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 133 a great deal of uncertainty, and partic- cern. A reduced value of the dollar ular reference was made to the outlook could be expected to foster improvefor legislation to reduce the federal ment in the trade balance over time, budget deficit and to the behavior of with favorable repercussions on dothe dollar in foreign exchange mar- mestic economic activity and lessened kets. incentives to close domestic produc- In the course of the Committee's tion facilities or to relocate them discussion, a number of members ob- abroad. The extent of progress in lowserved that consumer spending was ering the trade deficit over the year likely to continue to expand but that its ahead was highly uncertain, however, growth would be constrained by pro- and would depend not only on the perspectively limited increases in real dis- formance of the dollar but importantly posable income, relatively high con- also on appropriate economic policies, sumer debt burdens, and a possible including satisfactory progress in rerise in the saving rate from its abnor- ducing federal budgetary deficits. mally low third-quarter level. Views Over time, stronger economic growth on the outlook for housing differed to in other industrialized countries and some extent, with some members em- more open markets abroad would also phasizing the reduced levels of mort- be needed. gage rates and current activity in re- While it was believed that the drop sale markets while others stressed the in the dollar since the G-5 meeting negative implications of generally would tend to exert a positive effect on tighter lending standards. Growth in the economy by relieving pressures on business fixed investment had already export and on import-sensitive indusslowed markedly and the possibility of tries, it was also pointed out that an further weakening was suggested by a unduly large and rapid depreciation number of current indicators, includ- could have the potential for unsettling ing recent surveys of business spend- economic consequences under present ing plans and reports of deteriorating circumstances. One member combusiness sentiment in some parts of mented that rising prices were already the country. With a ready availability being reported for a few imported maof financing, commercial construction terials, apparently as a consequence of remained strong in many areas and earlier reductions in the value of the might continue to hold up for a time. dollar. The members were also con- However, at least some types of con- cerned that, at a time when the deficit struction such as office buildings ap- in the U.S. current account continued peared to be vulnerable to excess ca- to require large net inflows of funds pacity and to possible changes in tax from abroad, any considerable reduclaws relating to real estate invest- tion in the willingness of investors to ments. Though agricultural conditions accumulate dollar assets could exert varied in different parts of the country, upward pressure on domestic interest members commented that there were rates as well, with damaging implicafew, if any, signs of general improve- tions for interest-sensitive sectors of ment, and growth of income in agri- the domestic economy and for several culture and associated industries was developing countries burdened by inconsidered likely to be weak over the ternational debt problems. Time was next few quarters. required to make, in an orderly way, The outlook for foreign trade was the adjustments in domestic spending viewed as especially difficult to dis- and production that would be needed if Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 FOMC Policy Actions the balance of trade were to move to- pressure was likely to be associated ward a more sustainable level. Those with some pickup in growth of all the adjustments would be greatly facili- monetary aggregates over the remaintated by a substantial reduction over der of the quarter from the reduced time in the federal budget deficit and October pace. For the three-month could be disruptive without it. period as a whole, their rates of expan- At its meeting in July the Committee sion would probably be close to, poshad reviewed the basic policy objec- sibly a bit below, those anticipated at tives that it had established in Febru- the time of the October meeting. ary for growth of the monetary and If these expectations for the fourth credit aggregates in 1985 and had set quarter were realized, they would reptentative objectives for expansion in resent less monetary growth than had 1986. For the period from the fourth occurred in the third quarter—substanquarter of 1984 to the fourth quarter of tially less in the case of Ml. Even so, 1985, the Committee had reaffirmed growth in Ml would remain well the ranges for the broader aggregates above the rebased range for the second set in February of 6 to 9 percent for half of 1985. The Committee had es- M2 and 6 to 9V2 percent for M3. The tablished that range at the July meeting associated range for total domestic on the presumption that the relationnonfinancial debt was also reaffirmed ship between Ml and broad measures at 9 to 12 percent for 1985. With re- of economic activity would move tospect to Ml, the base was moved for- ward a more normal pattern following ward to the second quarter of 1985 and the sizable and unusual decline in Ml a range of 3 to 8 percent at an annual velocity in the first and second quargrowth rate was established for the ters. But Ml velocity dropped even period to the fourth quarter of the year. more in the third quarter. While the For 1986 the Committee had agreed expansion of Ml was expected to slow on tentative monetary growth objec- considerably in the fourth quarter to a tives that included reductions of 1 per- rate much closer to that of nominal centage point in the upper end of the GNP, even a substantial tightening of Ml range and lh percentage point in reserve conditions and a sharp rise in the upper end of the M3 range. The interest rates might not bring this agprovisional range for total domestic gregate within the Committee's range nonfinancial debt was reduced by 1 for the second half as a whole. As they percentage point for 1986. had at previous meetings, the mem- The Committee turned to a discus- bers agreed that the behavior of Ml sion of policy implementation for the needed to be judged in the context of forthcoming intermeeting period, and the performance of the economy and most of the members indicated that the fact that the broader aggregates they were in favor of maintaining re- were growing at rates within their serve conditions essentially un- ranges. Under prevailing circumchanged, at least initially following to- stances, and unless the dollar declined day's meeting. The members took sharply further, the strength of Ml account, among other things, of an thus far did not appear to suggest analysis, which suggested that, given strong inflationary consequences. the prospect of modest expansion in Thus, aggressive efforts to reduce its economic activity during the fourth growth beyond the slower pace that quarter, a steady degree of reserve was already expected were deemed to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 135 be unwarranted, especially in light of growth of both M2 and M3 at an anthe financial strains and other prob- nual rate of about 6 percent for the lems in some sectors of the economy period from September to December. and the attendant risks to the expan- Over the same period, Ml was also sion itself. Accordingly, the members expected to expand at an annual rate of concluded that growth of Ml above its around 6 percent, but in light of its target range would be acceptable for very rapid growth in the third quarter, the second half of the year. Growth of slower growth in this aggregate would M2 and M3 within their long-run be acceptable. Somewhat greater reranges continued to be appropriate. serve restraint might, and somewhat In the Committee's discussion of lesser restraint would, be acceptable possible intermeeting adjustments in depending on the behavior of the monthe degree of reserve restraint, mem- etary aggregates over the intermeeting bers could foresee conditions that period and taking account of appraiswould call for either some easing or als of the strength of the business exsome tightening. Most of the members pansion, the performance of the dollar felt that policy implementation should on foreign exchange markets, progress be particularly alert to opportunities against inflation, and conditions in dofor some easing in light of the rela- mestic and international credit martively sluggish growth in domestic kets. The members agreed that the ineconomic activity and the favorable termeeting range for the federal funds price performance, subject to the con- rate, which provides a mechanism for straint imposed by a desire to mini- initiating consultation of the Commitmize the risk of inducing unacceptably tee when its boundaries are persisfaster growth in money and credit. It tently exceeded, should be left unwas also emphasized that account changed at 6 to 10 percent. needed to be taken of the behavior of At the conclusion of the meeting, the dollar on foreign exchange markets the following domestic policy directive in any policy adjustments. One mem- was issued to the Federal Reserve ber urged giving considerable weight Bank of New York: to the behavior of Ml in relation to expectations, with no presumptions re- The information reviewed at this meeting suggests that economic activity is continuing garding the direction of any intermeetto expand at a relatively modest pace. In ing adjustment in the degree of reserve September, total retail sales rose considerarestraint. bly further, but the gain was boosted by a At the conclusion of the Commit- temporary surge in auto sales that was reversed in October. Total nonfarm payroll emtee's discussion, most of the members ployment increased considerably in October, indicated their acceptance of a direc- following a much slower advance in Septemtive that called for maintaining about ber, and the civilian unemployment rate was the current degree of reserve restraint. unchanged at 7.1 percent. In recent months industrial production has increased only Given the sensitivity of economic and slightly on balance. Housing starts fell in financial conditions and exchange September, but sales of new and existing market developments, it was under- homes remained at a relatively high level on stood that policy would be imple- average. Incoming information generally mented with some added degree of suggests a leveling of business capital spending. Merchandise trade data for the third day-to-day flexibility. The members quarter indicate that the deficit widened expected such an approach to policy slightly, as imports continued to increase. implementation to be consistent with Broad measures of prices and wages appear Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 FOMC Policy Actions to be rising at rates close to or somewhat behavior of velocity would require careful below those recorded earlier in the year. reappraisal of the target range at the begin- Ml appears to have shown little net ning of 1986. Moreover, in establishing change in October following several months ranges for next year, the Committee also recof rapid expansion. Largely reflecting the ognized that account would need to be taken weakness in Ml, growth in M2 and M3 ap- of experience with institutional and deposiparently was quite moderate in October. Ex- tory behavior in response to the completion pansion in total domestic nonfinancial debt of deposit rate deregulation early in the year. has remained relatively rapid. Most short- In the implementation of policy for the term market interest rates have changed little immediate future, the Committee seeks genon balance since the October 1 meeting of erally to maintain about the existing degree the Committee, while long-term rates have of pressure on reserve positions. This action declined somewhat. The trade-weighted is expected to be consistent with growth in value of the dollar against major foreign cur- M2 and M3 over the period from September rencies has dropped slightly further on bal- to December at annual rates of about 6 perance since October 1, following a substantial cent. Ml growth over the period at an annual decline after the September 22 meeting of rate of around 6 percent is also anticipated; the Finance Ministers and Central Bank slower growth for that aggregate would be Governors of the G-5 countries. acceptable in the context of satisfactory eco- The Federal Open Market Committee nomic performance, given the very rapid seeks to foster monetary and financial condi- growth in Ml over the summer. Somewhat tions that will help to reduce inflation fur- greater reserve restraint might, and somether, promote growth in output on a sustain- what lesser reserve restraint would, be acable basis, and contribute to an improved ceptable depending on behavior of the aggrepattern of international transactions. In fur- gates, taking account of appraisals of the therance of these objectives the Committee at strength of the business expansion, developthe July meeting reaffirmed ranges for the ments in foreign exchange markets, progress year of 6 to 9 percent for M2 and 6 to 9V2 against inflation, and conditions in domestic percent for M3. The associated range for to- and international credit markets. The Chairtal domestic nonfinancial debt was reaf- man may call for Committee consultation if firmed at 9 to 12 percent. With respect to it appears to the Manager for Domestic Op- Ml, the base was moved forward to the sec- erations that reserve conditions during the ond quarter of 1985 and a range was estab- period before the next meeting are likely to lished at an annual growth rate of 3 to 8 be associated with a federal funds rate perpercent. The range takes account of expecta- sistently outside a range of 6 to 10 percent. tions of a return of velocity growth toward more usual patterns, following the sharp de- Votes for this action: Messrs. Volcker, cline in velocity during the first half of the Corrigan, Balles, Black, Forrestal, Keehn, year, while also recognizing a higher degree Partee, Martin, and Rice. Vote against this of uncertainty regarding that behavior. The action: Ms. Seger. Absent and not voting: appropriateness of the new range will con- Mr. Wallich. tinue to be reexamined in the light of evidence with respect to economic and financial Ms. Seger dissented because she bedevelopments including developments in forlieved that some reduction in the deeign exchange markets. More generally, the gree of reserve restraint was needed to Committee agreed that growth in the aggregates may be in the upper parts of their help relieve financial strains in the ranges, depending on continuing develop- economy, and to promote a more acments with respect to velocity and provided ceptable rate of economic expansion that inflationary pressures remain subdued. closer to the faster growth expected by For 1986 the Committee agreed on tenta- Committee members early this year. tive ranges of monetary growth, measured from the fourth quarter of 1985 to the fourth quarter of 1986, of 4 to 7 percent for Ml, 6 2. Authorization for Domestic to 9 percent for M2, and 6 to 9 percent for M3. The associated range for growth in total Open Market Operations domestic nonfinancial debt was provisionally On December 9, 1985, the Committee set at 8 to 11 percent for 1986. With respect to Ml particularly, the Committee recog- approved a temporary increase of $1 nized that uncertainties surrounding recent billion, to $7 billion, in the limit be- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 137 tween Committee meetings on changes percent. Over the two-month period in System Account holdings of U.S. employment gains averaged 270,000, government and federal agency securi- about equal to the average monthly inties specified in paragraph l(a) of the crease in the third quarter. Most of the authorization for domestic open mar- growth in employment continued to be ket operations. The increase was ef- in service industries and at financea nd fective immediately for the intermeet- trade establishments. But manufacturing period ending with the close of ing employment, after contracting business on December 17, 1985. during the first three quarters of the year, rose substantially in October and Votes for this action: Messrs. Volcker, moved up further in November. More- Balles, Black, Forrestal, Keehn, Martin, Partee, Rice, Ms. Seger, and Mr. Timlen. over, the length of the factory work- Votes against this action: None. Absent week remained at a relatively high and not voting: Messrs. Corrigan and level. Wallich. (Mr. Timlen voted as alternate for The index of industrial production Mr. Corrigan.) rose an estimated 0.4 percent in November, reversing the drop in October. This action was taken on the recommendation of the Manager for Domes- Output of defense and space equiptic Operations. On December 9, the ment continued at a brisk pace over Manager had advised that outright the two-month period. For most other purchases of securities thus far in the broad categories of products and intermeeting interval had reduced the equipment, gains in November leeway under the usual $6 billion limit roughly retraced the declines posted in to slightly over $1.2 billion. Addi- October. tional purchases of securities in excess Total retail sales rose in November of that leeway were likely to be neces- and gains were recorded at most major sary over the remainder of the inter- types of stores, with particularly large meeting period, largely to offset re- increases registered at general merserve drains associated with seasonal chandise outlets. But sales had increases in currency in circulation. dropped sharply in October—attributable largely to a reduction of more than 17 percent in sales at automotive outlets that was associated with the Meeting Held on ending of financing and price conces- December 16-17, 1985 sions on 1985 automobiles—and the November increase only partially off- Domestic Policy Directive set that decline. For the two-month The information reviewed at this meet- period sales were 1 percent below the ing suggested that economic activity average for the third quarter. Sales of was expanding at a relatively modest domestic automobiles remained relapace. The underlying trend in inflation tively sluggish in November, and manappeared to have changed little, as ufacturers reintroduced some limited broad measures of prices and wages financing incentives. In early Decemwere rising at rates close to those re- ber domestic auto sales picked up to corded earlier in the year. an annual rate of nearly llli million Total nonfarm payroll employment units, about 1 million units above the increased further in November, though sales pace in October and November less than in October, and the civilian but still below recent and planned prounemployment rate edged down to 7.0 duction levels. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 FOMC Policy Actions In November, total private housing ing in three of the preceding four starts fell substantially, more than re- months. Thus far in 1985, the index versing the appreciable gain in the pre- had increased at an annual rate of vious month. An especially sharp drop about IV2 percent, slightly below the in starts of single-family homes ac- rate in 1984. The consumer price incounted for most of the decline. Over dex rose 0.3 percent in October, the two-month period total starts were slightly above the 0.2 percent monthly at an average annual rate of 1.65 mil- increase recorded from May through lion units, about the same as in the September. Over the first 10 months of third quarter. Newly issued permits the year, consumer prices increased at for residential construction averaged an annual rate of about 3lk percent, somewhat below the rate recorded for compared with a rise of 4 percent in the third quarter. Sales of existing 1984. The rate of increase in the index homes picked up in October (the latest of average hourly earnings through month for which data were available) November of this year remained close from their third-quarter pace, but sales to the 3 percent pace posted over the of new homes dropped. Interest rates course of 1984. at savings and loan associations on The trade-weighted value of the dolnew commitments for fixed-rate con- lar against major foreign currencies ventional home mortgage loans had had declined about 2V2 percent on balstabilized in the 12Vs to 12V4 percent ance since the Committee's meeting range from August through most of on November 4-5, though in recent October, but declined considerably in weeks the dollar's value had tended to recent weeks: the average contract rate stabilize. Revised data on merchandise fell from about 12 percent in early No- trade for the third quarter confirmed vember to a bit above 11 lk percent by that the deficit had widened further, to mid-December. an estimated annual rate of $133 bil- Incoming information generally lion, as non-oil imports rose and exsuggested sluggishness in business ports fell somewhat. capital spending. In October ship- At its meeting on November 4-5, ments of nondefense capital goods 1985, the Committee had adopted a picked up after changing little in the directive that called for maintaining third quarter, but new orders for such generally the existing degree of presgoods fell appreciably. Outlays for sure on reserve positions. That action nonresidential construction have been was expected to be consistent with essentially flat over recent months. growth of both M2 and M3 at an an- Moreover, recent surveys of business nual rate of about 6 percent for the capital spending plans suggested little period from September to December. real growth in that sector for next year. Over the same period, Ml also was Recent monthly data on prices have expected to expand at an annual rate of shown higher rates of increase than around 6 percent, but in light of its those recorded in the spring and sum- very rapid growth in the third quarter, mer, reflecting what was expected to the members indicated that slower be a temporary spurt in prices of food growth in that aggregate would be acand energy-related items. The pro- ceptable. The members agreed that ducer price index for finished goods somewhat greater reserve restraint rose 0.9 and 0.8 percent in October might, and somewhat lesser restraint and November respectively, after fall- would, be acceptable depending on the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 139 behavior of the monetary aggregates conditions of reserve availability. Reover the intermeeting period and tak- serve management was complicated by ing account of appraisals of the the concentrated settlement of large strength of the business expansion, the Treasury security issues delayed by performance of the dollar on foreign debt ceiling problems and by a comexchange markets, progress against in- puter breakdown at a major bank that flation, and conditions in domestic led to an overnight loan from the Fedand international credit markets. It eral Reserve discount window in exwas understood that policy might be cess of $22 billion—an unprecedented implemented with somewhat more amount. Excluding that borrowing, flexibility than usual, given the sensi- seasonal plus adjustment credit from tivity of economic and financial condi- the discount window averaged around tions and exchange market develop- $725 million during the two complete ments. The intermeeting range for the reserve maintenance periods after the federal funds rate was retained at 6 to Committee's meeting in early Novem- 10 percent. ber. During that period, excess re- After declining slightly in October, serves were unusually large, affected Ml expanded at an annual rate of for a time by a maldistribution of reabout 13 percent in November. serves in the wake of the $22 billion Growth in M2 and M3 continued quite borrowing. Thus far in the current moderate in November, at annual rates maintenance period, borrowing was of about 6V2 and 5 percent respec- running about $175 million. tively. Through November, Ml ex- The federal funds rate averaged panded at a pace well above the range around 8 percent during the intermeetset by the Committee in July of 3 to 8 ing period, but exhibited considerable percent at an annual rate over the pe- day-to-day and week-to-week volatility riod from the second quarter to the associated with the extraordinary level fourth quarter of the year; M2 grew at of borrowing noted above and presa rate a bit below the upper limit of its sures related to the need to finance a range of 6 to 9 percent for the year and very large volume of Treasury issues. M3 expanded at a rate near the mid- Rates on Treasury bills generally fell point of its range of 6 to 9V2 percent about 20 to 35 basis points over the for 1985. Expansion in total domestic intermeeting interval, while other nonfinancial debt apparently was quite short-term rates typically moved down rapid in November, and growth in that about 10 to 15 basis points. Long-term aggregate remained somewhat above interest rates dropped appreciably furthe upper end of its 9 to 12 percent ther over the period, falling about V2 monitoring range for the year. to 3/4 percentage point. Given expansion in the broader In the Committee's discussion of the monetary aggregates at a pace close to economic situation and outlook, indithe Committee's expectations for the vidual members expressed somewhat September-to-December period and differing views regarding prospects within their longer-run ranges as well, for economic growth in 1986. The staff and with account taken of economic projections presented at this meeting and financial developments, open had suggested that growth in real GNP market operations during the inter- would continue at a relatively modest meeting interval were directed toward pace in 1986, with the average unemmaintaining approximately unchanged ployment rate and the rate of increase Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 FOMC Policy Actions in prices during the coming year ex- fluence on economic activity, although pected to change little from the rates in such legislation was urgently needed 1985. While the staff projection was to foster the longer-run health of finanseen as a plausible assessment of the cial markets and the economy. outlook, several members emphasized Turning to particular sectors of the that any current forecast was subject to economy, the members again undera great deal of uncertainty. They re- scored the variation in conditions ferred, for example, to the difficulty of among industries and their uneven evaluating the potential impact of defi- contribution to current and prospeccit reduction and tax reform legisla- tive economic activity. Moderate tion, and to the uncertainties sur- growth was considered to be a reasonrounding the outlook for the U.S. able expectation for many sectors of trade balance. Some members con- the economy. At the same time, the cluded that the economy might prove members expressed concern about the to be somewhat stronger than the staff persisting problems and financial was projecting, but several stressed the strains in some industries such as agripossibility of appreciably slower culture and a number of manufacturgrowth. In this connection, one mem- ing and extractive businesses, notably ber cautioned that a sluggish expan- those that competed actively with forsion would be vulnerable to an actual eign producers. In agriculture, prices downturn in the event of adverse de- remained generally depressed despite velopments in particular sectors of the recent increases in some crop and eseconomy. pecially in livestock prices, and many In the course of the discussion, producers and lenders continued unsome members commented that a sec- der severe financial pressure. Refertor-by-sector review of the economy ence was also made to the loss of motended to suggest a relatively weak ex- mentum in investment spending, pansion in 1986, and one clearly sub- associated in part with the aging of the ject to downside risks, but several business expansion but also reflecting members also cited a number of broad uncertainties about still pending tax factors that they felt would tend to sus- reform legislation. Consumer spendtain overall economic growth. These ing was thought likely to expand furfactors included the appreciable fall in ther, but its growth would probably be longer-term interest rates, including inhibited by the buildup in consumer mortgage rates, and the rise in stock debt that had already taken place. In market prices over the course of recent the housing market, starts had been weeks, the decline in the foreign ex- lower than many expected, given the change value of the dollar, and the reductions in mortgage interest rates. substantial growth in money. On the The reduced value of the dollar negative side, members referred to the could be expected to foster some imrapid rise in debt burdens, the expo- provement in the trade balance over sure of financial institutions to domes- time, with favorable implications for tic and international debt problems, domestic economic activity, though and the difficulties in some sectors of with the potential for adding to upward the economy. Also mentioned was the price pressures. Export demand might possibility that as legislation to reduce also be enhanced by somewhat faster future federal deficits became effective growth in some major European econit would tend to exert a dampening in- omies. Some members suggested, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 141 however, that the prospective improve- the Full Employment and Balanced ment in the trade balance might be re- Growth Act of 1978 (the Humphreystrained in the event of foreign retalia- Hawkins Act). tion to any new protectionist measures In the Committee's discussion of adopted by the United States. The dol- policy implementation for the period lar had tended to stabilize in recent ahead, the members differed to some weeks, but members remained con- extent in their views concerning an apcerned that a renewed decline, particu- propriate degree of pressure on relarly if it should be precipitate, would serve positions. Some favored directhave disruptive repercussions. ing open market operations, at least With regard to the outlook for infla- initially, toward maintaining approxition, the members saw little reason at mately unchanged conditions of rethis time to expect significant changes serve availability. A majority, howfrom the rates of increase experienced ever, indicated a preference for in 1985. The reduced value of the dol- moving toward implementing some lar in foreign exchange markets would slight easing of reserve conditions. tend to exert some upward pressure on Several also commented that decisions prices, but continued softness in world about the precise degree of reserve commodity prices, especially oil, pressure should depend in part on could have offsetting effects. Inflation- whether the discount rate was reary sentiment appeared to have dimin- duced, and if so by how much. ished, as evidenced by the recent per- Members who leaned toward mainformance of the stock and bond taining prevailing reserve conditions markets, and with continuing competi- expressed particular concern about the tion from abroad, price competition rate of growth in money and credit and could be expected to remain intense in the inflationary implications of further many markets. Moreover, the general rapid growth. They agreed that the pattern of labor settlements so far did outlook for economic expansion renot suggest any substantial accelera- mained uncertain, but in their view tion of cost pressures during the year business activity was likely to be satisahead. factory, given current reserve condi- At its meeting in July the Committee tions, especially in view of recent dehad agreed on tentative growth ranges velopments in financial markets, the of 4 to 7 percent for Ml and 6 to 9 lower dollar, and the buildup in money percent for both M2 and M3 for the and liquidity. Other members, while period from the fourth quarter of 1985 recognizing the risks of unduly rapid to the fourth quarter of 1986. The as- monetary growth, were more consociated range for growth in total do- cerned that the rate of economic exmestic nonfinancial debt was set at 8 to pansion might remain inadequate. In 11 percent for 1986. At this meeting that context, some thought that the rethe Committee reviewed background cent declines in longer-term interest technical factors bearing on the ranges rates, which would help sustain the for 1986, including the implications of economy, were premised to an extent the final phase of deposit deregulation on expectations of an easier monetary early in the year. It was anticipated policy. One member commented that that at its next meeting the Committee real interest rates were still relatively would reassess the tentative ranges and high in any event and were exerting a establish definite ranges as required by restraining influence on economic ac- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 FOMC Policy Actions tivity. It was also noted that reduced In keeping with past practice, the interest rates would lessen, though by members considered the question of no means eliminate, the financial possible intermeeting adjustments in strains in some sectors of the economy the degree of pressure on reserve posiand the external debt problems of sev- tions. While no member wanted to eral developing countries. rule out possible adjustments in either The members agreed that the extent direction, most believed that policy of any easing was constrained by a implementation should be especially number of considerations, including alert to the potential need for some the need to avoid unduly rapid expan- further easing in light of the relatively sion in money and credit and the po- sluggish performance of the economy tential vulnerability of the dollar to a and the generally favorable outlook for relative decline in U.S. interest rates. prices and wages. Policy implementa- It was also suggested that a sharp move tion also needed to take account of the toward ease under present circum- behavior of the monetary aggregates, stances might well foster a resurgence conditions in domestic and internaof inflationary expectations, with ad- tional financial markets, and developverse repercussions over time on fi- ments in foreign exchange markets, as nancial markets and the sustainability well as the impact of a reduction in the of the economic expansion. discount rate, should one take place. It According to an analysis prepared was also suggested that the Commitfor this meeting, the degree of pres- tee's expectations with regard to the sures on reserve positions being con- short-run growth of the aggregates be sidered by the members was likely to stated with less precision than in the be associated with some slowing in past and that the behavior of Ml, in Ml growth during the early months of particular, be evaluated in the context 1986, while the broader aggregates of other economic and financial develmight continue to expand at moderate opments, including the growth of the rates. While the final phase of deposit broader aggregates. In one view, howderegulation was expected to have lit- ever, any substantial deviation of Ml tle net impact on monetary growth growth from expectations should be during the first quarter, the members resisted—in either direction—by an recognized that the relationship be- appropriate adjustment in the degree tween money and GNP remained sub- of reserve pressure. ject to a great deal of uncertainty. They At the conclusion of the Commitnoted that the demand for Ml had de- tee's discussion, most of the members viated considerably from historical ex- indicated that they favored or could acperience and that it was very difficult cept a directive that called for some to predict when the unusual weakness limited decrease in the degree of presin Ml velocity, which had been evi- sure on reserve positions. The memdent for several quarters, would be re- bers expected such an approach to polversed and a more normal pattern icy implementation to be consistent would emerge. In the circumstances, with growth of M2 and M3 at annual some sentiment was expressed for fur- rates of 6 to 8 percent for the fourther reducing the emphasis on Ml, but month period from November to a majority of the members agreed that March. Over the same period they exit should be retained as one guide pected the expansion of Ml to slow to among others for the conduct of mone- an annual rate of 7 to 9 percent, tary policy. though the outlook for Ml growth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 143 continued to be subject to unusual un- appreciably lower over the period. The certainty. Somewhat greater reserve trade-weighted value of the dollar against restraint might, and somewhat lesser major foreign currencies has declined on balance since the Committee's meeting in restraint would, be acceptable over the early November, though the dollar has intermeeting period depending on the tended to stabilize more recently. growth of the monetary aggregates, The Federal Open Market Committee the strength of the business expansion, seeks to foster monetary and financial conditions that will help to reduce inflation furthe performance of the dollar on forther, promote growth in output on a sustaineign exchange markets, progress able basis, and contribute to an improved against inflation, and conditions in do- pattern of international transactions. In furmestic and international credit mar- therance of these objectives the Committee at kets. The members agreed that the in- the July meeting reaffirmed ranges for the year of 6 to 9 percent for M2 and 6 to 9V2 termeeting range for the federal funds percent for M3. The associated range for torate, which provides a mechanism for tal domestic nonfinancial debt was reafinitiating consultation of the Commit- firmed at 9 to 12 percent. With respect to tee when its boundaries are persis- Ml, the base was moved forward to the second quarter of 1985 and a range was estabtently exceeded, should be left unlished at an annual growth rate of 3 to 8 changed at 6 to 10 percent. percent. The range takes account of expecta- At the conclusion of the meeting, tions of a return of velocity growth toward the following domestic policy directive more usual patterns, following the sharp decline in velocity during the first half of the was issued to the Federal Reserve year, while also recognizing a higher degree Bank of New York: of uncertainty regarding that behavior. The The information reviewed at this meeting appropriateness of the new range will consuggests that economic activity is expanding tinue to be reexamined in the light of eviat a relatively modest pace in the current dence with respect to economic and financial quarter. Total nonfarm payroll employment developments including developments in forincreased further in November, though less eign exchange markets. More generally, the than in October, and the civilian unemploy- Committee agreed that growth in the aggrement rate edged down to 7.0 percent. Retail gates may be in the upper parts of their sales and industrial production picked up in ranges, depending on continuing develop- November after declining in October. After ments with respect to velocity and provided strengthening in October, housing starts fell that inflationary pressures remain subdued. appreciably in November. Incoming infor- For 1986 the Committee agreed on tentamation generally suggests relatively sluggish tive ranges of monetary growth, measured business capital spending. Revised merchan- from the fourth quarter of 1985 to the fourth dise trade data for the third quarter confirm quarter of 1986, of 4 to 7 percent for Ml, 6 that the deficit widened further, as non-oil to 9 percent for M2, and 6 to 9 percent for imports continued to increase and exports M3. The associated range for growth in total fell somewhat. Broad measures of prices and domestic nonfinancial debt was provisionally wages appear to be rising at rates close to set at 8 to 11 percent for 1986. With respect those recorded earlier in the year. to Ml particularly, the Committee recog- After declining in October, Ml grew sub- nized that uncertainties surrounding recent stantially in November while growth in M2 behavior of velocity would require careful and M3 continued quite moderate. Expan- reappraisal of the target range at the beginsion in total domestic nonfinancial debt has ning of 1986. Moreover, in establishing remained rapid. Through November, Ml ex- ranges for next year, the Committee also recpanded at a rate well above the long-run ognized that account would need to be taken range set by the Committee, M2 grew at a of experience with institutional and deposirate a bit below the upper end of its range for tory behavior in response to the completion the year, and M3 expanded at a rate near the of deposit rate deregulation early in the year. mid-point of its range for 1985. Treasury bill In the implementation of policy for the imrates have fallen somewhat while other short- mediate future, the Committee seeks to determ market interest rates have changed little crease somewhat the existing degree of preson balance since the November meeting of sure on reserve positions. This action is the Committee; long-term rates have moved expected to be consistent with growth in M2 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 FOMC Policy Actions and M3 over the period from November to sistently outside a range of 6 to 10 percent. March at annual rates of about 6 to 8 percent; while the behavior of Ml continues to Votes for this action: Messrs. Volcker, be subject to unusual uncertainty, growth at Corrigan, Forrestal, Guffey, Keehn, an annual rate of 7 to 9 percent over the Martin, Partee, Rice, and Ms. Seger. Vote period is anticipated. Somewhat greater re- against this action: Mr. Black. Absent and serve restraint might, and somewhat lesser not voting: Messrs. Balles and Wallich. reserve restraint would, be acceptable de- (Mr. Guffey voted as alternate for Mr. pending on behavior of the aggregates, the Balles.) strength of the business expansion, developments in foreign exchange markets, progress against inflation, and conditions in domestic Mr. Black dissented because he was and international credit markets. The Chair- concerned about the rapid growth of man may call for Committee consultation if Ml and he did not think a decrease in it appears to the Manager for Domestic Opthe degree of pressure on reserve posierations that reserve conditions during the period before the next meeting are likely to tions was desirable under present cirbe associated with a federal funds rate per- cumstances. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

145 Consumer and Community Affairs Through its rulewriting and enforce- tion Z and Regulation E (Electronic ment responsibilities, the Board in Fund Transfers). For the first time, it 1985 sought to maintain the intended issued a commentary for Regulation B level of protection for consumers in and published staff guidelines to assist their financial affairs while easing reg- creditors in complying with the new ulatory burdens. Following similar ac- Credit Practices Rule. tion by the Federal Trade Commission In addition to describing the above applying to nonbank lenders, the regulatory changes, this report sum- Board amended Regulation AA (Un- marizes the data on consumer comfair or Deceptive Acts or Practices) to plaints handled by the Board and deimplement the Credit Practices Rule scribes the way the Board monitors for banks. The Board also amended practices by banks that may be unfair Regulation J (Collection of Checks or deceptive. Also discussed are inand Other Items and Wire Transfers of creased activities by the Federal Re- Funds) to encourage banks to speed serve System in the area of community the availability to consumers of ftinds affairs; compliance with Regulations deposited by check. The Board pro- B, E, and Z; the economic impact of posed an amendment to Regulation Z Regulation E; the System's implemen- (Truth in Lending) to require creditors tation of the Community Reinvestment to make available to consumers addi- Act; the activities of the Consumer tional information about mortgages Advisory Council; and legislative recwith adjustable rates; and it proposed ommendations from the Board and to amend the provisions of Regulation other agencies with enforcement re- Q (Interest on Deposits) concerning sponsibility under the Truth in Lendadvertising of interest on deposits. The ing, Equal Credit Opportunity, and Board amended Regulation B (Equal Electronic Fund Transfer acts. Credit Opportunity) to simplify it and reduce the burdens of compliance on creditors while maintaining protection Regulatory Actions for credit applicants; Regulation B was The Board addressed several regulareviewed under the Board's Regulatory issues in 1985. It considered tory Improvement Project, which inwhether to adopt banking versions of volves a periodic review of all the the Used Car Rule and the Credit Board's regulations. Practices Rule corresponding to those The Board continued to maintain of- the Federal Trade Commission applies ficial staff commentaries for Regula- to nonbank lenders. In addition, the Board amended Regulation B (Equal Credit Opportunity) and Regulation J NOTE. This section fulfills the statutory re- (Collection of Checks and Other Items quirements for annual reports under the Truth and Wire Transfer of Funds) and proin Lending Act, the Equal Credit Opportunity posed amendments to Regulation Q Act, the Electronic Fund Transfer Act, the (Interest on Deposits) and Regulation Community Reinvestment Act, and the Federal Trade Commission Improvement Act. Z (Truth in Lending). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 Consumer and Community Affairs Used Car Rule ments to Regulation AA (Unfair or Deceptive Acts or Practices), effective In 1985 the Board considered whether January 1, 1986, to include the Credit to adopt a rule for banks on the sale of Practices Rule previously adopted by used motor vehicles following adopthe FTC for nonbank creditors. (The tion by the Federal Trade Commission Federal Home Loan Bank Board did of the Used Car Rule for nonbank the same for its member institutions.) lenders. The Federal Trade Commis- As adopted by the Board, the rule prosion Improvement Act requires the hibits banks from entering into a con- Board to adopt a rule substantially sumer credit obligation that contains similar to that of the FTC unless the any of the following items: Board finds that the governed practices as engaged in by banks are not • A "confession of judgment" unfair or deceptive or that a similar clause, by which the consumer agrees rule for banks would seriously conflict to permit the creditor to obtain a judgwith essential monetary or payments ment in the event of default without policies of the Federal Reserve. In giving the debtor notice or an opportu- March, after careful review of the is- nity to be heard in court. sues involved, the Board decided not • A "waiver of exemption," by to adopt a Used Car Rule. The rule which the consumer waives or limits adopted by the FTC includes a list of state law exemptions sheltering the acts or practices that the commission consumer's home or other necessities views as unfair or deceptive; requires from attachment, unless the waiver redealers to prepare and display a sticker lates to property specifically given as (referred to as the "Buyer's Guide") security for the obligation. on used vehicles; prohibits dealers from making any statements or taking • The debtor's assignment of future any actions that alter or contradict the wages to the creditor in the event of Buyer's Guide; and requires dealers default. conducting sales in Spanish to make • Permission for the creditor to take the required disclosures in that lan- a security interest in any of the conguage. In adopting the Used Car Rule, sumer's household goods beyond those the commission specifically excluded for which the credit in question is bebanks and other financial institutions ing extended. from the rule's definition of a dealer; it The amendment also bans the "pyrdid so on the grounds that banks and amiding of late charges." Under this other financial institutions do not sell practice, a charge arising from the deused motor vehicles in the usual retail lay of one payment is taken out of a environment, and thus the risk of subsequent timely payment, causing a banks using the deceptive practices series of subsequent payments to be found to be characteristic of used car incomplete and therefore subject to sales presentations was small. When late charges. Finally, the amendment the Board's investigation supported prohibits a creditor from misreprethe commission's conclusion, it found senting a cosigner's liability and rethat a companion rule applicable to quires the creditor to give the cosigner banks was not necessary. a notice, either in the contract extending credit or in a separate document, Credit Practices Rule that explains the cosigner's obligation In April the Board adopted amend- and potential liability. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 147 Adjustable-Rate Mortgages depository institution that fails to provide timely and accurate notification In May the Board issued for public may be held liable for the loss incurred comment proposed amendments to by the institution of first deposit. This Regulation Z (Truth in Lending) that procedure should reduce the risk of would require creditors to provide loss to depository institutions and their more information to consumers if the customers and permit earlier availabilinterest rate on their mortgage is adity of funds. It applies, however, only justable. The amendments were also to checks collected through the Feddesigned to make uniform the discloeral Reserve System; legislation would sure rules of several federal agencies. be necessary to apply it to all checks. Under the proposal, creditors would be required to make available to consumers certain information about ad- Revised Regulation B justable-rate mortgages; a pamphlet, In November the Board issued revithe "Consumer Handbook to Adjustasions to Regulation B (Equal Credit ble Rate Mortgages," which was pub- Opportunity) and published an official lished jointly in January by the Federal staff commentary to assist creditors in Reserve Board and the Federal Home complying with the regulation. This Loan Bank Board, could be used to action was taken as part of the Regulafulfill this requirement. Furthermore, tory Improvement Project, under creditors would be required to give which the Board is reviewing and reconsumers, at the time disclosures are vising all of its regulations to update made, more details about rate and payand simplify their language and elimiment caps, negative amortization, nate unneeded provisions. The revimargins, discount rates, and the like. sions are designed to assist creditors in The proposal also would eliminate a complying with the regulation while provision that permits creditors to submaintaining the protection for credit stitute the disclosure required by other applicants envisioned by the underlyfederal agencies for the variable-rate ing statute. The revisions include new disclosure required by the Board's procedures for dealing with incom- Regulation Z. In light of the comments plete applications; a broader selection on the proposal, additional review is of sample forms for informing appliunder way to improve uniform requirecants of the reasons for credit denial, ments for disclosure. requirements for data notation designed to reveal illegal discrimination Availability of Funds against applicants for mortgage loans, As part of its effort to encourage banks and a change in the definition of "apto speed the availability of funds that plicant" to give guarantors legal standconsumers deposit by check, the ing in the courts when they allege that Board in February amended Regula- a creditor improperly required their tion J (Collection of Checks and Other signatures. Items and Wire Transfer of Funds). The amendment, effective October 1, Business Credit and Regulation B 1985, requires a depository institution In its review of Regulation B, the upon which a check of $2,500 or more Board also considered the regulation's is drawn to provide prompt notifica- treatment of business credit transaction of nonpayment to the institution at tions. The regulation continues to afwhich the check was first deposited. A ford business applicants the basic pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 Consumer and Community Affairs tections against illegal discrimination Consumer Credit Protection Act. In under the Equal Credit Opportunity addition, there is little evidence to sug- Act while also continuing certain mod- gest that lessors discriminate on the ifications of the technical require- basis of the lessee's personal characments of Regulation B for business teristics. Consequently the Board delenders. The Board believes that the cided not to extend coverage of the personal contact involved in applica- regulation to lease transactions but to tions for business credit obviates the monitor industry practices and make need for some of the mechanical re- rules or recommend legislation to quirements that ensure compliance in remedy any problems. the relatively nonpersonal arrangements for consumer credit. For exam- Regulation Q ple, a written notice of the right to In December the Board proposed revireceive a statement of the reasons for a sions to Regulation Q (Interest on Decredit denial would be redundant beposits) designed to clarify, simplify, cause lenders commonly tell business and update its requirements applicable applicants why their requests for credit to advertising interest on deposits. The were denied. Board asked for comment on whether member banks should be required to Business Credit Pamphlet state the annual percentage yield, the The Board is preparing a pamphlet annual rate of simple interest, or both, about the Equal Credit Opportunity in advertisements for deposits. In ad- Act and business credit transactions dition, the proposals would require for distribution through government that advertisements by member banks agencies, women's groups, and other for accounts subject to service charges organizations. The pamphlet is demust state that the charges are imsigned to increase public awareness, posed. particularly among women and minority entrepreneurs, of the rights of busi- Interpretations ness credit applicants and of the responsibilities of business credit In 1985 the Board continued to offer lenders. It should prove to be a cost- legal interpretations and guidance effective means of informing business through the official staff commentaries persons of their rights to equal credit on Regulation E and Regulation Z. In opportunity. addition the Board published in November the first official staff commen- Regulation B and Leasing tary on Regulation B along with its fi- The Board considered whether to ex- nal revisions to the regulation. These tend the coverage of Regulation B to commentaries guide financial institulease transactions. A 1984 judicial de- tions in applying the regulations to cision, which is binding in California specific situations; updates to them are and other states in the Ninth Circuit, generally published by April 1 each holds that the Equal Credit Opportu- year. nity Act applies to consumer leases. In November the Board issued staff The Board noted that the Congress has guidelines to help banks comply with consistently viewed lease and credit the Credit Practices Rule. The guidetransactions as distinct and mutually lines, which are in the form of quesexclusive financial transactions and tions and answers, will also be uphas treated them separately under the dated annually. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 149 Determination of Preemption (CRA) by fostering communication among borrowers, local governments, In June the Board determined that a development organizations, and finandisclosure provision of the law of Arcial institutions in communities served izona is preempted by the Truth in by state member banks. The CAOs Lending Act and Regulation Z. The also give community and neighbor- Truth in Lending Act provides that the hood organizations general informafederal law preempts a state law when tion about the CRA and the procethey are inconsistent. In the case of the dures of the Federal Reserve System Arizona law, the Board preempted a for handling bank and holding comportion of a disclosure notice informpany applications and protests of those ing consumers of their total debt beapplications. Finally, the CAOs inform cause the state law requires the use of a and assist bank holding companies interm different from that used in fedterested in forming community develeral law to describe the same item. As opment corporations. of October 1, 1986, creditors in Ar- CAOs in 1985 sponsored 43 meetizona are prohibited from using that ings and conferences in 20 states on disclosure; they also have the option of various development topics ranging complying with the federal, rather from the use of the secondary market than the state, law before that date. in small business lending programs to community development corporations. Bankers, other lenders, state and local Community Affairs government representatives, commu- During 1985 the Board and the Re- nity groups, and examiners attended. serve Banks increased their activities In addition, CAOs have distributed litin community affairs. The Board had erature on reinvestment and have rereaffirmed its support early in 1984 sponded to individual requests for infor the community affairs fiinction in formation and assistance. the Federal Reserve System and asked In many of the 17 formal CRA prothe Federal Reserve Banks to provide tests received by the System in 1985, the necessary resources to implement the CAOs assisted in bringing about an effective program. negotiated settlements. In 5 other With support from the Board, the cases, the CAOs brought the parties Community Affairs Officers (CAOs) together to avert formal protests. and staffs of the Reserve Banks carry The CAOs continued to educate conout educational activities furthering sumer examiners about community public-private partnerships and pri- contacts and community development vate sector initiatives for community programs and strategies. They also asdevelopment. They are responsible for sisted banks by providing information gathering information about the devel- through the examiners and counseled opment needs of communities served banks with CRA problems. Some by state member banks and bank hold- CAOs have begun to visit community ing companies in the CAO's district; organizations and economic developfor offering information to state mem- ment groups in their districts to ascerber banks and bank holding companies tain housing and economic needs. about government and other programs The community affairs staff at the designed to assist community develop- Board supports the efforts of the Rement; and for promoting the goals of serve Banks by helping to train conthe Community Reinvestment Act sumer and commercial examiners in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 Consumer and Community Affairs community development. The Board's troller of the Currency (OCC), the staff also attends and speaks at meet- Federal Deposit Insurance Corporaings and conferences on community tion (FDIC), the Federal Home Loan development. During the year, the Bank Board (FHLBB), and the Na- Board prepared a pamphlet, "Commu- tional Credit Union Administration nity Development Corporations and (NCUA) reported that 63 percent of the Federal Reserve," surveyed the ac- the institutions they examined were in tivities of the various community de- full compliance with Regulation Z, a velopment corporations approved by substantial improvement over the 1984 the Board, and assisted in planning a figure of 40 percent. This improvenational conference for community ment is probably a function of experidevelopment corporations. ence with the revised Regulation Z the A major topic for banks, consumer Board adopted in 1980. The agencies groups, and regulators in 1985 was ba- that were able to supply data on the sic banking. Basic, or "lifeline," bank- frequency of violations (the Board, the ing refers to a minimum level of finan- OCC, and the NCUA.) reported that 81 cial services offered by banks at low or percent of the institutions that were not no cost to individuals with limited in full compliance had no more than funds. The Board and the CAOs spon- five violations per institution. This stasored four meetings and seminars on tistic indicates that even those institubasic banking for both bankers and tions that were not in full compliance consumer organizations. These meet- were making a satisfactory effort toings also considered issues such as ward compliance in general. branch closings, fees, delayed avail- Summaries of examination findings ability of funds, and truth in savings. compiled by the Board, the OCC, the FDIC, the FHLBB, and the NCUA show the following items to be the Compliance with most frequent violations of Regulation Consumer Regulations Z: Data from the five federal agencies • Failure to disclose the number, that supervise financial institutions amounts, and timing of payments and other supervisory agencies indi- scheduled to repay the obligation. cate that compliance with the Truth in • Failure to disclose accurately the Lending Act, the Equal Credit Oppor- annual percentage rate. tunity Act, and the Electronic Fund • Failure to disclose accurately the Transfer Act improved in 1985. This finance charge. section summarizes the data on com- • Failure to disclose the fact that pliance with these acts in the period the creditor has or will acquire a secufrom July 1, 1984, to June 30, 1985.l rity interest in the property purchased. • Failure to make the disclosures Truth in Lending clearly and conspicuously, in writing, (Regulation Z) and in a form that the consumer may keep. The Board, the Office of the Comp- The FDIC, the OCC, and the FHLBB issued 13 cease-and-desist orders for violations of Regulation Z. 1. Not all the federal agencies that regulate fi- The Board assessed civil money penalnancial institutions use the same method to comties against one bank for failing to pile information on compliance; however, the data support the general conclusions presented here. comply with an outstanding cease- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 151 and-desist order with provisions that air carrier since 1983 for repeated vioaddressed Regulation Z. There were lations of the rules governing credit re- 235 institutions that reimbursed ap- funds; the agency filed a suit against proximately $2 million to 29,823 ac- the carrier in 1985 through the Decounts as a result of understated an- partment of Justice. nual percentage rates or finance Equal Credit Opportunity charges. This amount is approxi- (Regulation B) mately the same as it was in both 1984 and 1983. The five federal agencies that super- The Federal Trade Commission vise financial institutions reported that continued its program to increase vol- 81 percent of all institutions examined untary compliance with the Truth in were in full compliance with the Equal Lending Act as it applies to advertisers Credit Opportunity Act (ECOA) in of credit for real estate and automo- 1985, compared with 76 percent rebiles. In advertising of real estate ported in both 1983 and 1984. The folcredit, the FTC monitored more than lowing items were the most frequent 4,000 companies in 42 cities and violations of Regulation B by the fedfound an overall compliance rate of 90 erally supervised financial institupercent. The commission took en- tions: forcement actions against one real es- • Failure to provide on each statetate developer, who agreed to pay ment in an identifiable fashion the $300,000 in civil penalties. The FTC amount, date, and type of the transfer, made a similar effort in 1985 to moni- the type of account to or from which tor the credit programs of more than funds were transferred, or the name of 850 automobile dealers in 16 cities. Its any third party to or from whom funds staff also pursued several nonpublic were transferred. investigations of compliance with the sons for the adverse action. Fair Credit Billing Act. The commis- • Failure to notify the applicant of sion continued to receive numerous in- action taken within 30 days after requiries concerning proper disclosures ceiving a completed application. for variable-rate mortgages and other • Illegally requiring the signature types of mortgage financing. It re- of an applicant's spouse or other perported that such questions may suggest son. further staff inquiry to see whether ad- • Illegally requesting the sex of an ditional consumer education or other applicant. actions are necessary. The FTC pub- The FDIC, the OCC, and the lished a consumer brochure entitled FHLBB issued four cease-and-desist "Solving Credit Problems" and re- orders that included provisions relatprinted "How to Advertise Consumer ing to the requirements of Regulation Credit," its manual for businesses. B. The other agencies with responsibil- The FTC reported that most crediity for enforcing the Truth in Lending tors subject to its supervision appear Act—the Packers and Stockyards Ad- to comply with the act. It took enministration of the Department of Ag- forcement action against three crediriculture, the Department of Transpor- tors during the reporting period. Two tation (DOT), and the Farm Credit of these actions arose from a project in Administration—report no difficulties which auditors posed as applicants for with enforcement. The DOT has had credit; among other things, these cases an enforcement proceeding against an resulted in the assessment of $360,000 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 Consumer and Community Affairs in civil penalties. The FTC also en- full compliance in 1985. This ratio tered into a consent agreement with a compares with 87 percent in 1984 and retail creditor for the correction of al- 84 percent in 1983. The following leged violations of the ECOA's re- were the most frequent violations of quirements regarding notification of Regulation E: an adverse action; the agreement re- • Failure to provide to the consulted in a civil penalty of $65,000, sumer, at the time of contract or before injunctive relief, and renotification to the first transfer is made, a written consumers. In addition, the FTC is statement outlining the terms and conconducting investigations that address ditions of the electronic fund transfer discriminatory practices such as dis- service. couraging applicants who rely on pro- • Failure to provide a notice annutected income, like public assistance; ally on procedures for resolving disdiscriminating on the basis of sex or putes or to mail a notice with each marital status by discounting income statement. earned by married women; and requir- • Failure to provide on each stateing the signature of an applicant's ment the location or identification of spouse. the electronic terminal involved in The FTC currently has two ECOA each transfer. cases in litigation. In the first, dealing • Failure to provide on each statewith age discrimination, the court up- ment in an identifiable fashion the held the FTC's authority to obtain civil amount, date, and type of the transfer, penalties for violations of the ECOA. the type of account to or from which The second case, which is being ap- funds were transferred, or the name of pealed through the Department of Jus- any third party to or from whom funds tice, involves requiring the signature were transferred. of an applicant's spouse when the ap- • Failure to provide a statement of plicant relied on community property. the consumer's liability for unauthor- Other agencies with enforcement re- ized transfers. sponsibility for the ECOA—the Inter- Other agencies responsible for enstate Commerce Commission, the forcement of the Electronic Fund Small Business Administration, the Transfer Act report satisfactory com- Department of Transportation, and the pliance. Packers and Stockyards Administration of the Department of Agriculture Economic Impact of —report no significant problems with Regulation E compliance. The Farm Credit Admin- The Electronic Fund Transfer Act reistration and the Securities and Exquires the Board to monitor the costs change Commission reported minor and benefits of the act to financial inviolations that did not require formal stitutions and consumers. The ecoenforcement action. nomic impact of the act increased during 1985 as more financial institutions Electronic Fund Transfer Act offered electronic fund transfers (Regulation E) (EFTs) and more consumers used The regulatory agencies responsible them. Approximately two thirds of the for enforcing the Electronic Fund nation's depository financial institu- Transfer Act reported that 93 percent tions now provide EFT services that of the institutions examined were in are covered by the act. A large per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 153 centage of depository institutions in costs of industry practices that would each size class offer services to which have evolved in the absence of statuthe act applies; these include auto- tory requirements are unknown. The mated clearinghouse transfers, pre- cost of compliance for an EFT transauthorized electronic transfers, and action is probably not high enough to access to automated teller machines compromise the cost advantage EFT (ATMs). Approximately 65,000 transactions may otherwise have over ATMs are in use throughout the na- check transactions. As EFT systems tion. Larger institutions are more mature, as transaction volume builds, likely to operate ATMs and offer a full and as start-up costs for compliance range of consumer EFT services than are amortized, the costs of compliance are smaller ones; smaller institutions imposed by the act per transaction and are able to offer most kinds of EFT per dollar of transferred funds are services to consumers through shared likely to decline. networks and other joint ventures. Consumer demand for EFT services Consumer Complaints continued to grow during 1985. The evidence indicates that at least 70 per- The Board and the Federal Reserve cent of households have a savings or Banks investigate and resolve comtransactions account with an EFT fea- plaints against state member banks ture that is used at least occasionally. and forward to appropriate enforce- The number of transactions conducted ment agencies any complaints received through ATMs has increased, and so that involve other creditors or busihas the number of consumers electing nesses. In 1985 the System received to receive payroll or government trans- 2,138 complaints against state memfer payments by electronic direct de- ber banks, nonmember banks, and posit. The development of point-ofsale EFT systems accelerated in 1985. Consumer Complaints Received by the The benefits to consumers from the Federal Reserve System, by Subject, Electronic Fund Transfer Act are diffi- 1985 cult to measure because they cannot be isolated from consumer protections Subject Number that would have been provided otherwise. Examination reports do not sug- Regulation B (Equal Credit Opportunity) 128 gest any widespread violations of the Regulation C consumer rights established by the act. (Home Mortgage Disclosure) 7 Regulation E Data from the Board's Consumer (Electronic Fund Transfers) 97 Regulation M (Consumer Leasing) 4 Complaint Control System offer fur- Regulation Q (Interest on Deposits) 95 ther evidence that consumers have no Regulation Z (Truth in Lending) 428 Regulation BB serious problems with EFTs. Of the (Community Reinvestment) 3 2,138 complaints processed in 1985, Fair Credit Reporting Act 51 Fair Debt Collection Practices Act 7 97 involved EFTs. The Federal Re- Fair Housing Act 1 Real Estate Settlement serve System forwarded 36 of these Procedures Act 1 complaints to other agencies for reso- Transfer Agents 5 lution; of the remaining 61, none in- Unregulated bank practices 1,261 volved a possible violation of the regu- 50 lation. Total 2,138 Costs associated with the act are 1. Primarily miscellaneous complaints against business enalso difficult to quantify because the tities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 Consumer and Community Affairs Consumer Complaints Received by the Federal Reserve System, by Function and Resolution, 1985 Type of complaint Total Loan functions Elec- Type of resolution com- tronic plaints Dis- Deposit fund Trust Other function crimi- Other transnation fers Total complaints 2,138 139 877 549 97 15 461 Total concerning state member banks ... 863 84 351 200 56 15 157 Insufficient information1 30 2 12 7 0 0 9 Information furnished to complainant2 112 15 44 22 5 2 24 Bank legally correct No accommodation 317 33 127 67 34 7 49 Accommodation made 107 11 46 27 3 2 18 Clerical error, corrected 115 4 50 27 6 1 27 Factual dispute4 37 0 13 14 1 1 8 Bank violation, resolved 17 2 9 5 0 0 1 Possible bank violation, unresolved .. 2 0 1 1 0 0 0 Customer error 10 2 3 4 0 0 1 Pending, December 31 116 15 46 26 20 1. The staff has been unable, after follow-up corre- eral Reserve System and contractual disputes that can spondence with the consumer, to obtain sufficient in- be resolved only by the courts. Consumers wishing to formation to process the complaint. pursue the matter may be advised to seek legal coun- 2. When it appears that the complainant does not sel or legal aid, or to use small claims court. understand the law and that there has been no viola- 5. The bank appears to have violated a law or regution on the part of the bank, the Federal Reserve Sys- lation and has taken corrective measures voluntarily tem explains the law in question and provides the com- or as requested by the Federal Reserve System. plainant with other pertinent information. 6. Customers are advised to seek civil remedy 3. The bank appears to be legally correct but through the courts. Cases that appear to involve crimichooses to make an accommodation. nal irregularity are referred to the appropriate law 4. Factual disputes not resolvable by the Fed- enforcement agency. creditors and businesses: 1,744 by their perceptions of how well the Sysmail, 369 by telephone, and 25 in per- tem handled their cases. In 1985, conson (see the accompanying table). The sumers returned 49 percent of these Board also received 152 written inqui- questionnaires. Approximately 82 perries requesting specific explanations cent reported that the explanations reabout consumer credit laws, regula- ceived were clear and understandable; tions, and banking policies and prac- 84 percent reported that they were sattices. In responding to both the com- isfied with the promptness in hanplaints and die inquiries, members of dling; 95 percent reported that they the Board's staff provided consumers were treated courteously by Federal with specific explanations of laws, Reserve staff; 92 percent reported that regulations, and banking practices, they would contact the Federal Reand with printed explanatory material. serve again if they had another prob- The Board's Division of Consumer lem with a bank; and 63 percent reand Community Affairs reviews regu- ported that the resolutions of their larly a sample of the complaints re- complaints were acceptable. The prosolved by the Reserve Banks to evalu- portion of those satisfied with the outate their actions for compliance with come is relatively lower than the pro- System procedures and guidelines. portion of those satisfied with the The Board sends follow-up ques- System's handling of complaints betionnaires to complainants to assess cause many of the complaints involved Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 155 practices that, although of concern to factors, such as the lack of sufficient consumers, are permissible banking assets (52, or 4 percent). practices that cannot be changed un- Many of the complaints about credit less the bank agrees. denials based on credit history indi- The accompanying table summa- cated that the applicant for credit unrizes the nature and resolution of com- derestimated the importance lenders plaints against state member banks in give to a poor credit history or a lack 1985. Of the 863 complaints concern- of borrowing experience when considing state member banks, about 50 per- ering the applicant's creditworthiness. cent involved loan functions: 10 per- Complaints about discrepancies in accent alleged discrimination on a counts, the second largest category, prohibited basis and 41 percent con- generally involved factual disputes recerned a credit denial on a nonprohibi- garding the amount or the timing of a ted basis (such as length of residency), deposit. Each of these categories repdisclosures of credit costs, and other resent 5 percent or less of all conunregulated lending practices (such as sumer complaints received by the Systhe release or use of credit informa- tem. tion). Approximately 23 percent of the complaints filed against state member banks involved disputes concerning in- Community Reinvestment Act terest on deposits and general prac- The Board is required by the Commutices concerning deposit accounts. nity Reinvestment Act (CRA) to encourage institutions under its jurisdiction to help meet the credit needs in their communities—including low- Unregulated Practices and moderate-income neighbor- The Board continued to monitor com- hoods—in a manner consistent with plaints about banking practices that the safety and soundness of the instituare not subject to existing regulation to tions. The CRA requires the Board to focus on those that may be unfair or assess the record of state member deceptive. As in the past, the Board banks in meeting such needs as part of identified the unregulated practices its examinations and to take the instituthat were the subject of 15 or more tion's record into account in deciding complaints per quarter or 50 for the certain applications. year as a whole. During the 1985 reporting period Of the 1,261 complaints about un- (July 1, 1984, through June 30, 1985), regulated banking practices, 318 fell Federal Reserve System personnel exinto one of the following five biggest amined 669 state member banks for categories: complaints about credit de- compliance with the CRA, ranking nial based on credit history (100, or 8 them on a scale of 1 through 5. A percent of the complaints about unreg- score of 1 represents the highest level ulated practices); discrepancies in ac- of compliance; a score of 3 is less than counts (58, or 5 percent); excessive satisfactory. No bank fell into the lowtime to clear checks, including delayed est category, and less than 1.6 percent availability of funds (55, or 4 percent); failed to achieve at least a satisfactory improper crediting of deposits to ac- performance. counts (53 or 4 percent); and credit In 1985, 17 of the applications redenial based on other nonprohibited ceived by the Federal Reserve were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 Consumer and Community Affairs protested under the CRA. Of the 14 parable policy statements. In addition, protests that were carried to a decision the council recommended that the by year-end, 10 were withdrawn after Board develop education programs agreements were reached as a result of and examination procedures to determeetings facilitated by the Federal Re- mine whether state member banks are serve Banks. One application was offering basic banking services and withdrawn for reasons not related to encourage the other agencies to do the CRA, and 1 was pending at year- likewise. (The Board's staff has been end. monitoring developments in the area of basic banking services for some Consumer Advisory Council time. To discuss the issue the Board sponsored a conference of bankers in The Consumer Advisory Council met November 1984 and a similar conferin March, June, and October of 1985 ence of consumer representatives in to advise the Board on System respon- April 1985.) sibilities under the consumer credit The council considered issues reprotection laws and to discuss other lated to the Home Mortgage Discloissues relating to financial services to sure Act at its March and June meetconsumers. The council has 30 memings. In June the council adopted a bers, some representing consumers resolution urging the Board to conand financial institutions and others sider a recommendation for the perfrom the academic and governmental manent extension of the act, which sectors. The council's meetings are was scheduled to expire on October 1, open to the public. 1985. At its March meeting the Board's In 1985 the council also considered staff briefed the council on the highthe following issues: lights of a staff study it had requested • Proposed revisions to the Board's on service charges and fees (issued in Regulation Z (Truth in Lending) that January 1985). In general, the study would establish uniform requirements showed that although service charges for all lenders in disclosing the terms imposed on checking accounts had on adjustable-rate mortgages. risen in recent years, bank costs for • The Board's review of Regulation providing checking accounts had in- B, (Equal Credit Opportunity). creased even more rapidly. • Tie-ins between credit insurance Council members were concerned and extensions of credit. in 1985 about basic banking services. • The Board's proposed revisions The council's Committee on Service of the advertising rules of Regulation Charges formed in 1984 to study the Q (Interest on Deposits). issue of rising fees for consumer fi- The closing of branch offices and nancial services was also asked to fothe Community Reinvestment Act. cus on this issue. At its October meeting the council recommended that the • Deregulation of financial ser- Board issue a policy statement to en- vices. courage state member banks to offer a • Potential effects of interstate program of basic banking services ac- banking on the delivery of financial cessible to low- and moderate-income services to consumers. consumers, and it suggested that the Finally, in a year-end assessment of Board encourage other federal finan- their council experience, members excial regulatory agencies to issue com- pressed strong support for the wider Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 157 use by other regulatory agencies of ad- In October the Board testified before visory groups such as the council. the House Committee on Banking, Finance and Urban Affairs in opposition to a proposed federal ceiling on the Legislative Recommendations interest rate charged on credit card In September the Board recommended debt. The Board believes that financial that the Congress extend the Home markets distribute credit most effi- Mortgage Disclosure Act of 1975 for ciently and productively when interest four years. The Board believes that the rates are determined in markets that data required by the act are useful in are as free as possible from artificial monitoring compliance with the Com- restraints. Evidence suggests that the munity Reinvestment, Equal Credit credit card business is reasonably Opportunity, and Fair Housing acts. competitive, notwithstanding the lack Moreover, although the public does of much variation in interest rates. not appear to use the data extensively, Furthermore, credit card rates have community groups rely heavily upon it tended to decline recently. Efforts to to monitor the response of financial in- constrain rates through federal regulastitutions to community needs for tion are likely to reduce the availability mortgage credit. of credit or generate less efficient The Board also recommended that means of recapturing credit costs. the asset size below which banks are Also in October the Board told the exempt from the act be increased from House Committee on Banking, Fi- $10 million to perhaps $25 million, nance and Urban Affairs that it would and it recommended that the Congress support legislation on disclosure and enable the Board to make future ad- on expediting return items in order to justments to the asset size exemption if increase the speed with which check the act is extended permanently. deposits are made available. The Largely because of the effects of infla- Board does not, however, favor legistion, the percentage of the commercial lation that would set schedules of banks in metropolitan areas covered by availability. the act has increased from 78 percent Each year, the Board asks the agenin 1976 to 94 percent in 1985. Increas- cies with enforcement responsibilities ing the asset size would reduce the under Regulations B, E, and Z for recpercentage of banks covered to a level ommendations concerning the undercloser to that when the law was first lying acts. The Office of the Compadopted. troller of the Currency reiterated its Finally, the Board recommended the support for certain changes to the experimental use of city and county Electronic Fund Transfer Act that data on title-lien transfers as an alter- were described in the Board's ANNUAL native source of information about REPORT of 1983 and of 1984. The OCC mortgage lending. The advantages of recommends a review of section 909 this alternative source are that data can of the act, which governs consumer be collected on a more timely basis, liability for unauthorized electronic the information is more reliable, and fund transfers, and clarification of the overall cost may be lower than un- congressional intent with regard to this der the present system. section of the act. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 Legislative Recommendations The Board of Governors has made the form a unique and critical role in the following recommendations for legis- financial system and the economy—as lation to the Congress of the United operators of the payments system, as States. custodians of the bulk of liquid savings, as key and impartial suppliers of short-term credit, and as the link be- Bank Holding Company tween monetary policy and the Legislation economy. The Federal Reserve believes that re- The Board believes that all instituform of the existing statutory frame- tions having the unique character of work is urgent to accommodate the banks should be subject to the rules constructive evolution of the banking applicable to banking institutions— system and to channel the forces of that is, the limitations on the range of change in a manner consistent with activities and ownership, as well as the continuing public policy objectives. protections against conflict of interest, The Federal Reserve has recom- concentration of resources, and excesmended that the framework for legisla- sive risk. To achieve that end and to tive action should include the follow- close the so-called "nonbank bank" ing essential elements: loophole, the Board has recommended • New statutory definitions to clar- clarifying the definition of "bank" in ify what is a bank, what is a thrift the Bank Holding Company Act by, institution, and what is the proper among other changes, extending the scope of powers for state-chartered definition to cover all institutions that banks. are insured by the Federal Deposit In- • Expansion of the powers of bank surance Corporation. holding companies. The Board has also recommended • Streamlining of the procedures of that thrift institutions meet a minimum the Bank Holding Company Act. residential mortgage test to remain eligible for the special benefits provided by law for such institutions. The hold- Definitions ing companies of thrift institutions not New definitions of the terms "bank" meeting the test would be limited so and "thrift institution" are urgent to that the scope of their permissible nonassure an orderly framework for the banking activities would be similar to development of the financial system, those of bank holding companies. to promote competitive equity, and to The Board has also recommended establish clearly the competitive rules that the Congress establish limits with for the various segments of the finan- respect to the ability of states to authocial service industry. The Board takes rize state-chartered institutions to enas its point of departure the basic prop- gage in certain activities that may afosition that banks, and depository in- fect the safety and soundness of the stitutions generally, continue to per- financial system. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislative Recommendations 159 Powers sumers, labor, and services, in addition to agriculture, commerce, and in- The Board has supported proposed dustry, on the boards of the Reserve legislation that would permit bank Banks. holding companies to engage in a The Board also has recommended broader range of activities including that thrift institutions be added to the securities underwriting and brokerage groups that should be considered in seactivities, operation of thrift institulecting Class C directors in view of the tions, and other activities of a financial nature. changes made by the Monetary Control Act of 1980. That act applied reserve requirements to such institutions Procedures and made Federal Reserve credit and services available to them. The Board favors streamlining the procedures for dealing with bank holding company applications. By recent Federal Reserve Bank Branches changes in the regulation governing holding company activities, the Board The Board has recommended that the has gone as far as it believes it can, Federal Reserve Act be amended with respect to the limit on the cumulative consistent with present law, to speed dollar amount that may be spent on up procedures and lessen regulatory construction of Federal Reserve Bank burdens. The Board has recommended branch buildings. The System incurs legislation eliminating the "benefits expenses for branch construction prinand burdens" test of present law, limitcipally for additions to, or replaceing bank holding company examinaments for, existing branch facilities. tions and reports, providing for expe- The current limitation, set in 1974, dited notice procedures for approval of will be exhausted by projects that are new activities, and setting out new and under way or that are currently at an simplified criteria for determining advanced planning stage. Branches of the permissibility of new activities Federal Reserve Banks provide imporgenerally. tant services to the financial system and the public, including the distribution of coin and currency, the clearing Increasing the Number of of checks, and the processing of elec- Class C Directors tronic payments. The current statutory The Board has recommended that the limitation will prevent needed renova- Federal Reserve Act be amended to in- tion and new construction at branch crease the number of Class C directors buildings. at each Federal Reserve Bank from three to five. The proposal aims to di- Return Check Notification versify further the backgrounds and interests represented on the boards of The Board has recommended that the directors of the Reserve Banks as a Federal Reserve Act be amended to esway of accomplishing one of the objec- tablish a procedure that would help retives of the Federal Reserve Reform duce the risk associated with return Act of 1977. That act provides for the checks and help shorten holding perirepresentation of the interests of con- ods on checks. The procedure would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 Legislative Recommendations require that when a check of $2,500 or The Board recognizes that regional more is returned unpaid, the institu- arrangements provide a possible trantion upon which the check is drawn sitional approach to full interstate must provide timely notice to the insti- banking. Viewed as a permanent solutution at which the check was origi- tion, however, regional compacts nally deposited. The Board adopted would tend to balkanize banking, with the procedure as an amendment to a tendency toward regional concentra- Regulation J (Collection of Checks tions. The potential weaknesses of reand Other Items and Wire Transfers of gional compacts could be substantially Funds). The proposed legislative rec- ameliorated if states entering into such ommendation is that the procedure be regional arrangements were also reextended beyond checks covered under quired after a period of a few years to Regulation J to those not originally permit reciprocal entry by banks in collected through the Federal Reserve. any state that has enacted a regional The Board believes that the notifica- arrangement or otherwise provides for tion procedure for returned checks entry of banks of any other states. will reduce the risk to depository insti- To forestall large concentrations of tutions and their customers because domestic banking resources, the the institutions will receive notice Board has recommended that certain more rapidly that a large-denomina- safeguards be included in legislation tion check is being returned. Also, the liberalizing interstate banking. The procedure should make it easier for Board has suggested the following apdepository institutions to make funds proaches: the very largest holding available sooner to their customers be- companies might be prohibited from cause the institutions will not need to merging with one another; institutions impose extended holds on all checks to could be prohibited from obtaining by protect themselves from loss. acquisition more than some fixed share of banking assets, although de novo or small acquisitions could still Interstate Banking be permitted; and states could set lim- The Board believes that the time has its on the percentage of banking assets come for the Congress to review and within their own boarders that could clarify national policy toward inter- be acquired through acquisitions or state banking. A legislative resolution mergers. should recognize the desirability of The Board has also recommended transitional arrangements before mov- that Congress authorize interstate ing to more general interstate banking, branching within metropolitan areas the need to avoid undue concentration and within neighboring areas of conof banking resources and to maintain a tiguous states. climate in which small institutions can flourish, and the desirability of retaining a role for the states in the evolution Emergency Acquisition Authority of the banking structure within a state. Interstate acquisitions generally Congress has temporarily extended the should take the form of a holding com- provisions contained in Title I of the pany affiliate rather than interstate Garn-St Germain Depository Institubranching. tions Act that permit the FDIC and the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislative Recommendations 161 FSLIC to arrange for emergency inter- rangements for failing institutions in state mergers and acquisitions of fi- the Garn-St Germain Act be extended nancially troubled thrift institutions and liberalized in the following ways: and failed insured commercial banks (1) reduce or eliminate the $500 milwith assets of $500 million or more. lion asset size cutoff for insured com- In light of the continuing strains evi- mercial banks, (2) permit the use of dent in some sectors of the thrift and the emergency procedures not only for banking industries, including difficul- a failed bank but for a bank in danger ties experienced by some banks en- of failing, and (3) authorize the intergaged in lending to the agricultural state acquisition of a bank holding and energy sectors, the Board has rec- company in which a subsidiary bank is ommended that the emergency ar- in danger of failing. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 Litigation During 1985 the Board of Governors (10th Circuit, filed January 5, 1984); was named in SS pending lawsuits, Colorado Industrial Bankers Associacompared with 40 in 1984. Of the 25 tion et al. v. Board of Governors, No. new lawsuits filed in 1985, 4 raised 84-1122 (10th Circuit, filed January questions under the Bank Holding 27, 1984); Financial Institutions As- Company Act, compared with 17 in surance Corporation v. Board of Gov- 1984. As of December 31, 1985, 31 ernors, No. 84-1407 (10th Circuit, cases were pending, 7 of which in- filed January 27, 1984); Ohio Deposit volve questions under the Bank Hold- Guarantee Fund v. Board of Govering Company Act. The sections below nors, No. 84-1257 (10th Circuit, filed briefly describe each of these cases. January 28, 1984); and State of Ohio et ah v. Board of Governors, No. 84- 1270 (10th Circuit, filed January 30, Bank Holding Companies— 1984), petitioners challenge the defini- Antitrust Action tion of "commercial loan" and "de- In 1985 no bank holding company ac- mand deposit" in a revision of the quisitions or mergers that had been ap- Board's Regulation Y that was approved by the Board were challenged proved by the Board on December 14, by the U.S. Department of Justice un- 1983 {Federal Reserve Bulletin, vol. der antitrust laws, and no such cases 70, February 1984, p. 121). The court were pending from previous years. of appeals set aside the definitions challenged in Regulation Y on September 24, 1984 (744 F.2d 1402). A Bank Holding Company Act— petition for writ of certiorari (No. 84- Review of Board Actions 1274, filed February 6, 1985) was In Oklahoma Bankers Association v. granted by the Supreme Court on Federal Reserve Board, No. 83-2591 April 29, 1985 (105 S. Ct. 2137). By (10th Circuit, filed December 13, letters in 1985 dated June 25, June 28, 1983), plaintiff sought judicial review and July 10 respectively, the Financial of a Board order dated November 17, Institutions Assurance Corporation, 1983, approving the application of the Ohio Deposit Guarantee Fund, and Citicorp, New York, New York, to ac- the State of Ohio withdrew from the quire de novo Citicorp Savings and case. The case is pending. Trust Company, T\ilsa and Oklahoma In Huston v. Board of Governors, City, Oklahoma, a limited-purpose No. 84-1084 (8th Circuit, filed Janutrust company that will engage in in- ary 17, 1984), petitioner sought redustrial bank activities. On July 9, view of a Board order dated November 1985, the court affirmed the Board's 8, 1983, approving an application by order (766 F.2d 1446). KSAD, Inc., Council Bluffs, Iowa, to In Dimension Financial Corpora- become a bank holding company {Fedtion et al. v. Board of Governors, No. eral Reserve Bulletin, vol. 70, January 83-2696 (10th Circuit, filed Decem- 1984, p. 44). On March 26, 1985 the ber 30, 1983); First Bancorporation v. court upheld the Board's action (758 Board of Governors, No. 84-1011 F.2d 275). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 163 In Huston v. Board of Governors, letin, vol. 70, April 1984, p. 371). On No. 84-1361 (8th Circuit, filed March May 20, 1985, the court reversed the 20, 1984), petitioner sought review of Board's order of approval (760 F.2d a Board letter issued on February 21, 1135). Intervenor U.S. Trust Compa- 1984, in which the Board declined to ny's petition for certiorari (No. 85issue control proceedings with respect 193) was filed with the Supreme Court to a nonvoting investment by First on August 5, 1985. Bank System, Minneapolis, Minne- In Citicorp v. Board of Governors, sota, in Banks of Iowa, Des Moines, No. 84-4081 (2d Circuit, filed May Iowa. On March 26, 1985, the court 22, 1984), petitioner challenged the upheld the Board's action (758 F.2d constitutionality of the Connecticut In- 275). terstate Banking Act and the Board's In Northeast Bancorp, Inc., etal. v. approval of the application of Board of Governors, Nos. 84-4047, Bank of Boston Corporation, Boston, 84-4051, and 84-4053 (2d Circuit, Massachusetts, to acquire Colonial filed March 27, 1984), petitioners Bancorp. Inc., Waterbury, Connectisought review of the Board orders cut (Federal Reserve Bulletin, vol. 70, dated March 26, 1984, approving the June 1984, p. 524). On June 18, 1984, merger of Bank of New England Cor- the court consolidated the case with poration, Boston, Massachusetts, and Northeast Bancorp, Inc., et al. v. CBT Corporation, Hartford, Connect- Board of Governors. By order dated icut, and the acquisition by Hartford July 11, 1984, the court upheld the National Corporation, Hartford, Con- Board's order. The decision was afnecticut, of Arltru Bancorporation, firmed by the Supreme Court on July Lawrence, Massachusetts (federal Re- 10, 1985 (105 S. Ct. 2545). serve Bulletin, vol. 70, April 1984, In Bank of New York Company, Inc. pp. 374 and 353 respectively). On Au- v. Board of Governors, No. 84-4091 gust 1, 1984, the court of appeals up- (2d Circuit, filed June 14, 1984), petiheld the Board's orders (740 F.2d tioner sought review of a Board order 203). A petition for writ of certiorari denying the interstate acquisition of (No. 84-363, filed September 6, Northeast Bancorp, Inc., New Haven, 1984) was granted by the Supreme Connecticut, by Bank of New York Court on January 7, 1985 (53 Company, Inc., New York, New York. U.S.L.W. 3367). By order dated June The case was dismissed with preju- 10, 1985, the Court affirmed the dice, pursuant to stipulation, for fail- Board's orders (105 S. Ct. 2545). ure to reactivate the case within 30 In Florida Bankers Association et days of the Supreme Court's decision al. v. Board of Governors, Nos. 84- in Northeast Bancorp. 3269 and 84-3270 (11th Circuit, filed In Seattle Bancorporation et al. v. April 20, 1984), petitioners seek re- Board of Governors, No. 84-7535 view of a Board order dated March 23, (9th Circuit, filed August 15, 1984), 1984, approving an application by petitioner sought review of a Board or- U.S. Trust Corporation, New York, der dated July 16, 1984, denying peti- New York, to expand the activities of tioners' application to acquire Alaska its subsidiary, U.S. Trust Company of Pacific Bancorporation, Anchorage, Florida, N.A., Palm Beach, Florida, Alaska (Federal Reserve Bulletin, vol. to include the acceptance of time and 70, August 1984, p. 667). On Septemdemand deposits and the making of ber 27, 1985, the case was dismissed consumer loans (Federal Reserve Bul- as moot. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 Litigation In Citicorp v. Board of Governors, rari in Florida Bankers Association v. No. 84-4121 (2d Circuit, filed August Board of Governors. 27, 1984); No. 84-4145 (2d Circuit, In The Broad Street National Bank filed October 12, 1984); No. 84-4173 of Trenton v. Board of Governors, No. (2d Circuit, filed December 31, 85-3387 (3d Circuit, filed July 17, 1984); No. 85-4009 (2d Circuit, filed 1985), petitioner sought review of the January 15, 1985); and David Bolger Board's order dated June 17, 1985, Revocable Trust v. Board of Gover- approving the application by First Jernors, No. 84-3550 (3d Circuit, filed sey National Corp., Jersey City, New August 31, 1984), petitioners sought Jersey, to acquire 8.8 percent of the review of several Board orders approv- voting shares of The Broad Street Naing the interstate acquisition of banks tional Bank of Trenton (Federal Reby bank holding companies (Federal serve Bulletin, vol. 71, August 1985, Reserve Bulletin, vol. 70, September p. 638). The case was dismissed on 1984, p. 737, and November, p. 834; November 14, 1985, by stipulation of vol. 71, January 1985, p. 43, and the parties. March, p. 176). The cases were dis- In Independent Community Bankers missed by stipulation of the parties on Association of South Dakota v. Board the basis of the decision of the Su- of Governors, No. 85-1496 (D.C. preme Court in Northeast Bancorp, Circuit, filed August 7, 1985), peti- Inc. v. Board of Governors. tioner seeks review of the Board's or- In Florida Department of Banking v. der dated July 12, 1985, approving the Board of Governors, Nos. 84-3831 application of First City Bancorporaand 84-3832 (11th Circuit, filed No- tion of Texas, Inc., Houston, Texas, to vember 30, 1984), and Florida Bank- acquire First City Bank-Sioux Falls, ers Association v. Board of Governors, N.A., Sioux Falls, South Dakota (Fed- Nos. 84-3883 and 84-3884 (11th Cir- eral Reserve Bulletin, vol. 71, Septemcuit, filed December 21, 1984), peti- ber 1985, p. 716). The case is pendtioners seek review of Board orders ing. dated November 1, 1984, approving In First National Bancshares Corp. the applications by Bank of Boston II v. Board of Governors, No. 85- Corporation, Boston, Massachusetts, 3702 (6th Circuit, filed September 4, and Bankers Trust New York Corpora- 1985), petitioner seeks review of the tion, New York, New York, to expand Board's order dated August 5, 1985, the activities of their subsidiaries- denying the application of First Na- Bank of Boston Trust Company of tional Bancshares Corporation II, Southeast Florida, N.A., Dearfield Lexington, Tennessee, to become a Beach, Florida; Bank of Boston Trust bank holding company by acquiring Company of Southwest Florida, N. A., First National Bancshares Corpora- Sarasota, Florida; and Bankers Trust tion, Lexington, Tennessee, and, indi- Company of Florida, N.A., Palm rectly, its subsidiary, First National Beach, Florida—to include the accep- Bank of Lexington, Lexington, Tentance of time and demand deposits and nessee (Federal Reserve Bulletin, vol. the making of consumer loans (Federal 71, October 1985, p. 793). The case is Reserve Bulletin, vol. 71, January pending. 1985, pp. 55 and 51 respectively). In First National Bank of Blue Is- Proceedings in the cases have been land Employee Stock Ownership Plan stayed pending a determination by the v. Board of Governors, No. 85-2615 Supreme Court of a petition for certio- (7th Circuit, filed September 23, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 165 1985), petitioner seeks review of the ties. The parties' cross-motions for Board's order dated August 22, 1985, summary judgment are pending. denying the application of First National Bank of Blue Island Employee Freedom of Information Act Stock Ownership Plan, Blue Island, Il- In 9 to 5 Organization for Women Oflinois, to become a bank holding comfice Workers v. Board of Governors, pany by acquiring Great Lakes Finan- No. 80-2905-C (D. Mass., filed Decial Resources, Inc., Blue Island, cember 30, 1980), plaintiff sought dis- Illinois (Federal Reserve Bulletin, vol. closure under the Freedom of Infor- 71, October 1985, p. 804). The case is mation Act of records containing pending. information regarding a wage survey conducted by a consortium of employers in Massachusetts and used by the Other Litigation Involving Board in approving salaries of the Fed- Challenges to Board eral Reserve Bank of Boston. On No- Procedures and Regulations vember 2, 1983, the U.S. Court of Appeals for the First Circuit vacated The Glass-Steagall Act the decision of the district court that certain of the requested data was not inA.G. Becker Inc. v. Board of Goverexempt from disclosure under the act nors et al., No. 80-2614 (D.D.C., and remanded the case to the district filed October 14, 1980), and Securicourt (721 F.2d 1). The parties entered ties Industry Association v. Board of into a stipulation settling the case. On Governors et al., No. 80-2732 February 28, 1985, the court entered a (D.D.C., filed October 24, 1980), dismissal order consistent with the plaintiffs sought review of a Board stipulation. statement dated September 26, 1980, denying in part plaintiffs' petition that Financial Institutions the Board prohibit Bankers Trust Supervisory Act Company, a state member bank, from selling third-party commercial paper In Calhoun et al. v. Board of Goveras an agent of the issuer, pursuant to nors, No. 85-1750 (D.D.C., filed the Glass-Steagall Act. On June 28, May 30, 1985), plaintiffs sought to en- 1984, the Supreme Court overruled join certain temporary cease-and-dethe Board's decision and remanded the sist orders and removal orders entered case to the court of appeals (104 S. Ct. against them by the Board of Gover- 2979), which remanded it to the dis- nors. On September 3, 1985, the case trict court. On October 19, 1984, the was dismissed by stipulation of the district court remanded the case to the parties. Board to determine whether the meth- In Carter v. Board of Governors et ods that Bankers Trust uses to place al, No. 85-4021 (6th Circuit, filed commercial paper constitute under- December 9, 1985), plaintiff seeks rewriting or similar activities within the view of the Board's order dated Nomeaning of the act. On June 4, 1985, vember 18, 1985, removing him as an the Board determined that the current officer of First National Bank of Clinplacement methods of Bankers Trust ton, Clinton, Kentucky. The case is are consistent with the act. On June pending. 28, 1985, A.G. Becker was dismissed In a case filed in the U.S. District as a plaintiff by stipulation of the par- Court for the District of Minnesota, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 Litigation No. 4-83-995 (filed November 16, of the nation's money supply. The 1983), which was placed under seal by court granted the defendant's motion court order, plaintiff alleges that the to dismiss for lack of standing on Oc- Board reviewed and copied his records tober 26, 1983. By an opinion dated at a national bank in violation of the June 28, 1985, the court of appeals Right to Financial Privacy Act. The affirmed the dismissal by the district case is pending. court (766 F.2d 538). In Melcher v. Federal Open Market Farm Credit Act Committee, No. 84-1335 (D.D.C., filed April 30, 1984), plaintiff chal- Several cases have been filed in varilenges the constitutionality of the Fedous district courts seeking injunctive eral Open Market Committee. Plaintiff relief and damages relating to loans filed a motion for summary judgment, made to plaintiff farmers by commerand the Federal Open Market Comcial banks and the Farm Credit Sysmittee filed a motion to dismiss. The tem. A motion by the federal defencase is pending. dants to dismiss will be filed in each of In Lamb v. Pioneer First Federal the following cases: Populist Party of Savings and Loan, No. 84-2-01551-7 Iowa v. Federal Reserve Board, No. (Snohomish County Superior Court, 85-626-B (S.D. Iowa, filed August 2, Washington, filed May 8, 1984), 1985); Silkman v. Volcker et al, No. plaintiff challenges the issuance of 85-2083 (D. Colo., filed September U.S. currency in the form of Federal 10, 1985) and related cases; Alfson v. Reserve notes. On February 20, 1985, Wilkinson et al., No. Al-85-267 the case was dismissed as to the Fed- (D.N.D., filed October 8, 1985); Jeneral Reserve for lack of jurisdiction. sen v. Wilkinson etal., No. 85-4436-S In Brown v. United States Congress (D. Kan., filed October 10, 1985), etal No. 84-2887-6 (IG) (S.D. Cal., and related cases; Kurkowski v. filed December 7, 1984), plaintiff Wilkinson et al, No. CV-85-0-916 seeks damages resulting from discrim- (D. Neb., filed October 16, 1985); ination in home financing and manda- Farmer v. Wilkinson et al., No. 4-85tory injunctions regarding the Board's CIVIL-1448 (D. Minn., filed October monetary policy. The court dismissed 21, 1985); Kalb v. Wilkinson et al, the case on September 17, 1985. No. 085-4184 (N.D. Iowa, filed Oc- Plaintiff filed a notice of appeal on tober 22, 1985); Podolak v. Volcker et September 20, 1985, No. 85-6313 al, No. C85-0456 (D. Wyo., filed (9th Circuit), then voluntarily dis- October 28, 1985), and related cases; missed the appeal on November 12, Myers et al v. Federal Reserve Board, 1985. On September 27, 1985, plain- No. 85-1427 (D. Ida., filed Novemtiff filed a motion for reconsideration ber 18, 1985). with the district court. The case is pending. Other Actions In Harvey v. President of the United In The Committee for Monetary Re- States et al, No. C-84-20797-RPA form et al v. Board of Governors, No. (N.D. Cal., filed December 20, 83-1730 (D.D.C., filed June 16, 1984), plaintiff sought dissolution of 1983), plaintiffs challenged the consti- the Federal Reserve System, alleging tutionality of the Federal Open Market that the Congress acted in an arbitrary Committee and the Board's regulation and capricious manner in enacting the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 167 Federal Reserve Act. The case was that the sixteenth amendment to the dismissed by memorandum order of Constitution was not properly ratified the court. and that the use of Federal Reserve In Lewis v. Volcker et al, No. C-l- notes constitutes illegal gambling. The 85-0099 (S.D. Ohio, filed January Board's motions to dismiss the cases 14, 1985), plaintiff seeks damages re- were granted by the district court. The sulting from alleged violations of fed- cases have been appealed to the U.S. eral monetary credit and bankruptcy Court of Appeals for the Ninth Circuit statutes by the Board and BancOhio and are pending. National Bank. On November 20, In Johnson v. Federal Reserve Sys- 1985, the U.S. magistrate recom- tem et al, Nos. S85-0958(R) and mended dismissal of the action. S85-1269(N) (S.D. Miss., filed July In White v. State of California, 16, and October 21, 1985), plaintiff United States of America, et al. No. seeks injunctive relief and damages 85-5624 (9th Circuit, filed February against defendants relating to foreclo- 12, 1985), plaintiff alleges that de- sure on plaintiff's property. The cases fendants are in error in their valuation are pending. of Federal Reserve notes and of coins In McHuin v. Volcker et al., No. 85as currency of the United States and 2170 WARB (W.D. Okla., filed Authat plaintiff was wrongfully penalized gust 29, 1985), plaintiff seeks reinfor nonpayment of taxes. The Board's statement as an employee at the motion to dismiss was granted by the Federal Reserve Bank of Kansas City. district court on December 26, 1984. The case is pending. Plaintiff's motion for reconsideration In Cannon v. Bank of America et was denied on February 8, 1985, and a al, No. 85-1481 (E.D. Cal., filed notice of appeal was filed. The Board October 17, 1985), and Ouperv. First is awaiting a decision on its motion to Interstate Bank et al, No. 85-2109 dismiss. (D. Oregon, filed December 13, In Cook v. Spillman et al., No. 1985), plaintiffs seek damages against CIV-S-85-0953 EJG (E.D. Cal., defendants, alleging check kiting, mail filed July 10, 1985), Wight et al. v. fraud, antitrust violations, and racke- Internal Revenue Service et al., No. teering. The cases are pending. CIV-S-85-0012 MLS (E.D. Cal., In Howe v. United States et al., No. filed July 12, 1985), and Urwyler et 85-4504-C (D. Mass., filed Decemah v. Internal Revenue Service et al., ber 6, 1985), plaintiff challenges the No. CV-F-85-402 REC (E.D. Cal., constitutionality of the current monefiled July 18, 1985), plaintiffs allege tary system. The case is pending. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 Banking Supervision and Regulation The Board of Governors in 1985 be- and soundness of financial institugan a major new program to tions: on-site examinations and inspecstrengthen supervision of state mem- tions, surveillance and monitoring acber banks and bank holding compan- tivities, and enforcement and other ies. The Board's action, which was supervisory actions. taken in light of developments and trends within the banking system over Examinations and Inspections the past several years, was aimed at The on-site review of operations is the two broad areas of Reserve Bank suprimary means for ensuring the safety pervision: (1) the early identification and soundness of financial instituof problems in banking organizations tions. Examinations or inspections of through more frequent and thorough these operations entail (1) an appraisal on-site examinations and inspections, of the quality of the institution's asand (2) more frequent and clearer sets; (2) an evaluation of management, communications of findings to bank along with internal policies, operamanagement and boards of directors. tions, and procedures; (3) an assess- As part of this overall effort, the Board ment of the key financial factors of has also taken steps to prevent supervicapital, earnings, asset and liability sory problems through tighter prudenmanagement, and liquidity; and (4) a tial standards and improved coordinareview for compliance with applicable tion and cooperation with other federal laws and regulations.1 and state banking departments. The Board also put in place a num- State Member Banks ber of supervisory guidelines. Princi- The Federal Reserve is the primary pal among these was a revision of the federal supervisor and regulator of Board's capital adequacy guidelines, state-chartered commercial banks that which specify capital ratios that banks are members of the System. At the end and bank holding companies are genof 1985 there were 1,080 state memerally expected to exceed. The Board ber banks, accounting for about 7 per also issued for comment a proposal for cent of all insured commercial banks. a supplemental adjusted measure of capital. The Board also adopted guidelines on the payment of dividends by troubled banking organizations. These 1. The Board's Division of Consumer and measures are described below under Community Affairs is responsible for reviewing "Program to Strengthen Supervision compliance with consumer and civil rights laws. of Banks and Bank Holding Compan- The responsibility is accomplished mainly through examinations by specially trained Reserve Bank ies." examiners. These regulatory responsibilities are described in the "Consumer and Community Affairs" section of this REPORT. Compliance with Supervision for other statutes and regulations, which is treated in Safety and Soundness this secion, is the responsibility of the Board's Division of Banking Supervision and Regulation The Federal Reserve conducts the foland of the Reserve Banks, whose examiners check lowing activities to ensure the safety for safety and soundness. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 169 Because these banks typically were Governors has the authority to enter larger than the average, they held into written agreements with, or issue about 20 percent of total assets of in- cease-and-desist orders against, state sured commercial banks. member banks, bank holding compan- As stated above and detailed in the ies, and persons associated with such section on the program to strengthen organizations that engage in unsafe or the supervision of banks and bank unsound practices or that violate appliholding companies, the Board has in- cable laws or regulations. The Board creased the frequency of examinations may also assess civil money penalties and inspections of state member banks for violations of a cease-and-desist orand bank holding companies. In gen- der, of the Bank Holding Company eral, banking organizations for which Act, or of certain provisions of the the Federal Reserve is primary super- Federal Reserve Act. visor will be examined or inspected at In 1985, the Reserve Banks recomleast annually. In 1985, System exam- mended and the Board's staff initiated iners conducted 744 examinations, and worked on 261 enforcement acmany jointly or concurrently with ex- tions, most dealing with unsafe or unaminers from state regulatory agen- sound banking practices; 144 were cies. completed by year-end. Also, the Board assessed or collected 15 civil Bank Holding Companies money penalties, which totaled During 1985, the number of bank $96,000; 1 was paid by a company and holding companies increased by 307 to 14 by individuals. a total of 6,453. These organizations The Board made available to the control commercial banks that hold public a description of all formal suabout 92 percent of the total assets of pervisory actions during the year and insured commercial banks in the the reasons for them. This step was United States. taken to achieve the fullest public dis- Most large bank holding companies, closure of information consistent with as well as small companies with sig- confidentiality. nificant nonbank assets, will be inspected annually under the new in- International Activities spection policy. Others are inspected The Federal Reserve oversees several at least every three years or in the case international banking activities. of the smallest companies that do not Edge and agreement corporations. have nonbank assets, on a sample ba- Edge corporations are international sis. The inspection focuses on the op- banking organizations chartered by the erations of the parent holding com- Board to provide all segments of the pany and its non-bank subsidiaries; U.S. economy with a means of financthe subsidiary banks are examined by ing international trade, exports in parthe appropriate federal banking regu- ticular. An agreement corporation is a latory agency. During 1985, System company that enters into an agreeexaminers conducted 1,779 inspec- ments with the Board not to exercise tions of bank holding companies. any power that is impermissible for an Edge corporation. During 1985 the Enforcement Actions and Federal Reserve conducted examina- Civil Money Penalties tions of 136 Edge and agreement cor- Under the Financial Institutions Su- porations and their branches. pervisory Act of 1966, the Board of Foreign office operations of U.S. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 Banking Supervision and Regulation banking organizations. Examinations cising this authority, the Federal Reof the international operations of state serve relies on examinations conmember banks, Edge corporations, ducted by the appropriate regulatory and bank holding companies are con- agency, whether on the federal or state ducted principally at the banking or- level. Although the states have priganizations' head offices in the United mary authority for examining state-li- States, where the ultimate responsibil- censed, uninsured branches and agenity for foreign offices lies. To verify cies, the Federal Reserve participated and supplement the results of the in the examination of 101 such offices head-office examinations, on-site re- during the past year. views of important foreign offices are During 1985 several new reporting performed at least every three years. requirements for branches and agen- In 1985 the Federal Reserve examined cies of foreign banks were developed, 11 foreign branches of state member including a revised quarterly call rebanks and 16 foreign subsidiaries of port that will collect data on past-due Edge corporations and bank holding and nonaccrual loans. Another new companies. All the examinations report will require branches and agenabroad were coordinated with the for- cies to report quarterly on exposure to eign supervisory authorities of the their home country—percentage of countries in which the examinations bank loans to their home country relatook place. tive to bank capital—and the next five U. S. activities of foreign banks. For-largest exposures to foreign countries. eign banks continue to expand their operations in the United States and are Specialized Examinations significant participants in the U.S. banking system. As of December 31, The Federal Reserve conducts special- 1985, 255 foreign banks operated 420 ized examinations in the following state-licensed branches and agencies, areas of bank activity. of which 48 are insured by the Federal Deposit Insurance Corporation, and Electronic Data Processing 82 branches and agencies licensed by Under the Interagency EDP Examinathe Office of the Comptroller of the tion Program, the Federal Reserve ex- Currency, of which 3 have FDIC in- amines the electronic data processing surance. Foreign banks also directly (EDP) activities of state member owned 22 Edge corporations and 10 banks, Edge and agreement corporacommercial lending companies. In ad- tions, and independent centers that dition, foreign banks held a majority provide EDP services to these instituinterest in 71 U.S. commercial banks. tions. During the year, System exam- Together, these foreign banks con- iners conducted 311 on-site EDP retrolled approximately 17 percent of views. In addition, the Federal U.S. banking assets as of June 30, Reserve reviews EDP examination re- 1985. ports issued by other bank regulatory The Federal Reserve has broad re- agencies on organizations that provide sidual and oversight authority for the data processing services to state memsupervision and regulation of foreign ber banks. banks that engage in banking in the United States through branches, agen- Trust Activities cies, commercial lending companies, The Federal Reserve examines trust Edge corporations, or banks. In exer- departments of state members banks, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 171 trust companies that are members of member banks quarterly and that of the Federal Reserve System, and cer- bank holding companies semiannually. tain foreign and domestic trust com- This program supplements the examipany subsidiaries of bank holding nation process through computerized companies. These examinations re- screening systems that trigger finanview the trust functions to ensure that cial analyses of institutions judged to they are conducted in accordance with have poor or deteriorating financial law, regulations, and applicable fidu- profiles. It further aids in the allocaciary principles. During the year, the tion of the System's examination re- Federal Reserve conducted 279 such sources by focusing on banking instiexaminations. tutions that have serious financial problems and that may be subject to Municipal Securities Dealers and accelerated examinations or warrant Clearing Agents closer supervision. During 1985 the Under the Securities Act Amendments System strengthened its surveillance of 1975, the Board is responsible for program by adopting a new computer supervising state member banks and screening program and implementing bank holding companies that act as the electronic transmission of surveillance results between the Reserve municipal securities dealers or as Banks and the Federal Reserve Board. clearing agencies. In 1985 the Board The Board adopted changes to the examined 30 of the 51 state member reporting requirements for large bank banks registered with the Board that holding companies and a new report deal in municipal securities for their form for smaller bank holding comtrading accounts. panies. These changes enhanced the A clearing agency acts as a custosystem for evaluating the financial dian of securities for the settlement of condition of these institutions by exsecurity transactions by bookkeeping panding coverage to all bank holding entries. The four agencies registered companies and by increasing the frewith the Board were examined in quency of monitoring smaller organ- 1985. izations to twice a year. Under way is the development of a new surveillance Transfer Agents screening system and a new perform- System examiners conduct separate reance report for small bank holding views of state member banks and bank companies. holding companies that act as transfer agents. Transfer agents countersign and monitor the issuance of securities, Staff Training register the transfer of securities, and exchange or convert securities. During System staff training emphasizes ana- 1985 the Board examined 102 such lytical and supervisory themes combanks and bank holding companies. mon to the four areas of supervision and regulation—examinations, inspections, applications, and surveillance— Surveillance and and stresses the interdependence Monitoring Program among these areas. During 1985 the In line with the overall supervisory ob- Federal Reserve conducted nineteen jective of maintaining a safe and sound schools, ten of which offered core banking system, the Federal Reserve banking courses—three introductory, monitors the financial condition of four intermediate, and three advanced. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 Banking Supervision and Regulation Other programs included two schools constituent agencies, which were then dealing with credit analysis, two with adopted by the Federal Reserve. As bank holding company applications, discussed in greater detail below, the three with consumer compliance ex- council formulated policy statements aminations (two introductory and one on repurchase agreements of deposiadvanced), and one seminar for senior tory institutions with securities dealers examiners on early detection and pre- and others and on securities lending. vention of criminal activity. A work- In adopting these policies, the Federal shop on the use of microcomputers in Reserve said it did so to assure that supervisory work was conducted as financial institutions sufficiently colwell. In addition to the two sessions of lateralize their exposure and that their the credit analysis school held in collateral is secure. Washington, regional sessions were The council also approved new and conducted at two Reserve Banks. revised reporting requirements. The Courses in specialized areas, in- report "Assets and Liabilities of U.S. cluding lending on income property, Branches and Agencies of Foreign trust activities, international banking, Banks" was revised to make it compaelectronic data processing, payment rable to the report filed by U.S. banks. system risks, activities of municipal The "Country Exposure Report for securities dealers, management, con- U.S. Agencies and Branches of Forducting meetings with management, eign Banks" was introduced and is to and instructor training, were con- be implemented early in 1986, and reducted by the Federal Financial Insti- visions were made to the "Country tutions Examination Council.2 In addi- Exposure Report" filed by U.S. banks. tion, staff attended two schools During 1985 the Federal Reserve conducted by the Federal Bureau of In- tested and then adopted the uniform vestigation on white-collar crime and "Commercial Bank Report of Examibank failures. nation." The report had been approved In 1985 the Federal Reserve trained by the council in 1984 for use by the 590 persons, including 36 from state three federal bank regulatory agenbanking departments and foreign cen- cies. tral banks, and trained 373 persons in FFIEC schools. Program to Strengthen Supervision of Banks and Federal Financial Institutions Bank Holding Companies Examination Council During 1985 the Federal Reserve initi- During 1985 the Federal Financial Inated a program to strengthen its overall stitutions Examination Council made supervision of state member banks and several policy recommendations to its bank holding companies. The program includes greater frequency in examinations and inspections; enhanced communications with boards of direc- 2. The Federal Financial Institutions Examination Council consists of representatives of the tors; increased surveillance and moni- Board of Governors of the Federal Reserve Sys- toring through the use of expanded retem, the Federal Deposit Insurance Corporation, porting requirements; and guidelines the Federal Home Loan Bank Board, the National on capital adequacy, cash dividends, Credit Union Administration, and the Office of the Comptroller of the Currency. and large-dollar transfers. The Re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 173 serve Banks are expected to add to port of examination findings. Directheir examination and supervision tors must sign the report as evidence staffs to carry out this program. that they have read it. Senior Reserve Bank officials are to Examinations and Inspections become more involved in communi- To aid in the early identification of cating and presenting adverse findings problems in banking organizations, to the boards of directors. The policy the Board in October 1985 announced is intended to give each director of a an increase in the frequency of exami- state member bank or bank holding nations of state member banks and in- company considered to be a "probspections of all but certain relatively lem" a clear understanding of their orsmall bank holding companies. The ganization's weaknesses and the repolicy requires that, in general, bank- sponsibilities of its board of directors ing organizations for which the Fed- to correct them. The summary report eral Reserve is the primary supervisor will specifically emphasize matters reare to be examined or inspected at quiring the attention of the board of least annually; the largest of such or- directors and its obligation to ensure ganizations and those with significant that corrective actions are taken to adproblems are to be examined or in- dress all the deficiencies noted. spected semiannually. The Federal Reserve will place greater reliance on Other Supervisory Guidelines state banking agencies for the exami- Also in 1985 the Board put in place nation of smaller, healthy organizaseveral additional supervisory guidetions, to the extent the states are willlines to improve the safety and sounding to assume these responsibilities ness of banking organizations. and have the resources to take them on. The greater frequency of examina- Supervisory Reporting tions is intended to help prevent the Requirements development or intensification of problems at banking organizations. During 1985 the Federal Reserve approved major revisions to the supervi- Communication with Directors sory reporting requirements for bank The Federal Reserve has had a long- holding companies. Over the past standing practice of communicating year, the Federal Reserve has made examination or inspection findings re- considerable efforts to strengthen progarding organizations with significant cedures for monitoring risk-taking beproblems to the bank management and tween on-site examinations and for boards of directors of those organiza- identifying supervisory problems at an tions. As part of its intensified super- earlier stage. An important aspect of visory initiatives announced in Octo- these efforts has been the development ber, the Board approved the formaliza- of proposals to revise the supervisory tion and intensification of such com- reports filed by bank holding companmunications. The new policy requires ies with the Federal Reserve. Reserve Bank officials to meet with Bank holding companies with total the management and directors of or- consolidated assets of $150 million or ganizations with significant problems more (large bank holding companies) and to provide each member of the will report quarterly standardized conboard of directors with a summary re- solidated and parent-company-only fi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 Banking Supervision and Regulation nancial statements. Multibank holding The new combined nonbank financompanies, regardless of size, will be cial statements (FR Y-11Q) will be required to submit consolidated and collected quarterly from all bank holdparent-company-only financial state- ing companies with total consolidated ments. Beginning in June 1986, the assets of $1 billion or more and from consolidated and parent-only financial bank holding companies with total statements will be submitted on the consolidated assets of at least $150 "Consolidated Financial Statements million but less than $1 billion that for Bank Holding Companies with To- have significant nonbank subsidiary tal Consolidated Assets of $150 Mil- activities. An annual supplement lion or More, or with More Than One (FR Y-11AS), which requires the re- Subsidiary Bank" (FR Y-9C) and on porting of nonbank financial informathe "Parent-Company-Only Financial tion by the primary type of business Statements for Bank Holding Com- activity of the nonbank subsidiary, will panies with Total Consolidated Assets also be collected from these bank of $150 Million or More, or with holding companies, beginning in De- More Than One Subsidiary Bank" cember 1986. (FR Y-9LP). Beginning in June 1986, one-bank Revisions to holding companies with total consoli- Capital Adequacy Guidelines dated assets of less than $150 million will submit semiannual financial state- In April 1985 the Federal Reserve rements in a standard format on the re- vised its capital adequacy guidelines port "Parent-Company-Only Financial for state member banks and bank hold- Statements for Bank Holding Com- ing companies, guidelines that were panies with Total Consolidated Assets originally adopted in 1981. The prinof Less Than $150 Million" (FR cipal revisions raise the minimum cap- Y-9SP). ital levels for multinational and re- The "Annual Report of Domestic gional banking organizations and Bank Holding Companies" (FR Y-6) eliminate the disparity in minimum was divided into separate reports: capital requirements between larger (1) "Annual Report of Bank Holding and smaller institutions. In particular, Companies" (FR Y-6), implemented in the revised guidelines establish a uni- December 1985; (2) "Bank Holding form minimum primary capital ratio Company Report of Changes in Invest- of 5.5 percent and a minimum total ments Activities" (FR Y-6 A), to be capital ratio of 6 percent for all state implemented in June 1986; and member banks and bank holding com- (3) "Annual Report of Selected Fi- panies, regardless of size. These revinancial Data for Nonbank Subsidiaries sions parallel actions taken by the Ofof Bank Holding Companies" fice of the Comptroller of the Cur- (FR Y-11I), implemented in Decem- rency and the Federal Deposit Insurber 1985. These divisions in the cur- ance Corporation, thereby establishing rent annual report were made to sim- uniform minimum capital ratios for all plify and reduce the burden of the federally supervised banking organreporting now required because only izations. changes in bank holding company in- Banking organizations are generally vestments or activities will be reported expected to maintain at least the miniinstead of all investments. mum capital ratios. However, institu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 175 tions with excessive amounts of on- or Policy on Repurchase Agreement off-balance-sheet risks are expected to Transactions support their activities with capital Events in 1985 demonstrated the imthat substantially exceeds the miniportance to financial institutions of mum requirements. To enforce these monitoring the value of, and exercisexpectations, the Board adopted a reging appropriate control over, collateral ulation under which it may require a involved in repurchase transactions. banking organization to maintain min- For this reason, the Federal Reserve imum or higher capital levels as deadopted a policy statement on repurfined by the revised guidelines. chase transactions recommended by The Board has also considered a the Federal Financial Institutions Exproposal that relates primary capital amination Council. The statement promore closely to the on- or off-balancevides financial institutions with guidesheet risk profiles of banking organlines for prudently managing credit izations. This risk-based measure risk exposure and provides guidance would aid in setting above-minimum on the possession or control of securicapital ratios for high-risk banks. ties involved in repurchase agreements. In addition, the policy points Policy on Cash Dividends out the need for full collateralization, As part of its ongoing program to im- maintenance of agreed collateral marprove the capital adequacy of banking gins, and frequent mark-to-market organizations, the Federal Reserve procedures (changing the valuations of Board in November 1985 issued a pol- securities as their market value icy statement on the payment of cash changes). dividends by state member banks and Depository institutions doing busibank holding companies. The state- ness with unregulated government sement addresses the payment of divi- curities dealers are urged to verify dends that are not covered by earnings, compliance by these dealers with the that are funded by borrowings, or that minimum capital guidelines of the come from unusual or nonrecurring Federal Reserve Bank of New York. gains such as the sale of property or Depository institutions are advised to other assets. consult their counsel about state law The statement expresses the Federal governing control of securities and Reserve's view that an organization custodial agreements, and to ask their with weak earnings or under other fi- District Federal Reserve Banks about nancial pressures should not pay cash the procedures for obtaining control dividends that exceed its net income, of repurchase agreement securities that are inconsistent with the organiza- through the Federal Reserve's booktion's capital position, or that can be entry system. funded only in ways that may weaken the organization's financial health. In Policy on Securities Lending some instances involving extreme financial pressures or constraints upon In May 1985 the Board adopted a susubsidiaries, a banking organization pervisory policy on securities lending should give serious consideration to to guide financial institutions engaging reducing or eliminating dividends to in securities lending activities. The conserve its capital base and improve policy, also recommended by the Fedits financial condition. eral Financial Institutions Examina- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 Banking Supervision and Regulation tion Council, covers the securities on the efforts of depository institutions lending of a bank or trust company for to reduce their own exposures through its own account, as well as the lending the use of bilateral net credit limits on of customers' securities held in cus- private wire systems and the use of tody or trust accounts. Matters ad- sender net debit caps—a ceiling on the dressed included the need for full col- value of all "sends" in excess of the lateralization and daily mark-to-mar- value of all "receives" in a given interket procedures, formal approvals and val—across all wire systems; the polcredit analyses in selecting borrowers, icy also relies on examination, moniwritten agreements with borrowing toring, and counseling by the Federal and lending customers, and written in- Reserve and other supervisors of fiternal safeguards and review proce- nancial institutions. dures. Also provided are guidelines Effective March 27, 1986, no prifor recordkeeping and regulatory re- vate large-dollar payment network will porting. be eligible for Federal Reserve net settlement services unless it (1) requires each participant to establish bilateral net credit limits with each other partic- Policy on Reducing Risks on ipant on that network, (2) establishes a Large-Dollar Electronic Fund sender net debit cap that is reasonably Transfer Systems designed to reduce risks to partici- Over the past several years the Board pants in that network, (3) rejects or has become increasingly concerned holds any payment that would breach about the risks that participation in bilateral net credit limits or the netlarge-dollar payment networks present work's sender net debit cap, and to depository institutions, the banking (4) agrees to provide transaction data system, and other sectors of the econ- to its Reserve Bank on request. omy. Because private wire networks The policy statement also strongly transmit payment messages through- encourages each institution that incurs out the day, with settlement of net po- daylight overdrafts on Fedwire or that sitions at the close of business, the net- participates on a private large-dollar work faces the possibility that a wire network to adopt voluntarily a participant will be unwilling or unable sender net debit cap across all wire to settle a large net debit position. A systems. Examiners will review caps failure to settle by one participant to see whether they are consistent with could seriously jeopardize the finan- the established guidelines. Adherence cial positions of its net creditors on to these caps will be monitored and that network, with serious repercus- institutions with overdrafts in excess of sions for other depository institutions their caps will be counseled. and their customers. Failures of de- Under the policy, the Board's regupository institutions while in net debit latory options are (1) to contact an inon Fedwire during the day would stitution whose level of aggregate dayresult in a loss to the Federal Reserve. light credit exposure is deemed by the In May 1985 the Board issued a pol- institution's examiner to be unsafe or icy statement to control and reduce the unsound, (2) to eliminate access to risks to depository institutions partici- daylight overdrafts on Fedwire by inpating in large-dollar wire transfer stitutions not engaging in the self-evalsystems—both on private systems and uation process, and (3) to control on Fedwire. In part the policy relies Fedwire overdrafts of an individual in- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 177 stitution that are determined by a Re- organizations and the U.S. operations serve Bank to expose that institution to of foreign banks that engage in bankexcessive risk. If events demonstrate ing in the United States, either directly that the senior management and the through a branch or agency or indiboards of directors of depository insti- rectly through a subsidiary commertutions are not taking seriously the cial lending company. In addition, the proposed guidelines and procedures, Board has established regulations for the Board will consider other options, the interstate banking activities of including the imposition of explicit these foreign banks and for foreign limits on daylight credit exposure. banks that control a U.S. subsidiary commercial bank. Bank Holding Company Act Regulation of the By law, a company must obtain the U.S. Banking Structure Board's approval to form a bank hold- The Board of Governors administers ing company through securing control the Bank Holding Company Act, the of one or more banks. Moreover, once Bank Merger Act, and the Change in formed, a bank holding company must Bank Control Act for state member receive the Board's approval before acbanks and bank holding companies. In quiring additional banks or nonbankdoing so, the Federal Reserve acts on a ing companies. variety of proposals that directly or in- In reviewing an application filed by directly affect U.S. banking structure a bank holding company, the Board at the local, regional, and national lev- considers the convenience and needs els. The Board also has primary re- of the community, the applicant's fisponsibility for regulating the interna- nancial and managerial resources, the tional operations of domestic banking prospects of both the applicant and the Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1985 Action under delegated authority Direct action by the Director of the Board of Division of Banking Office Federal Total Proposal Governors Supervision and of the Reserve Banks Secretary Regulation Approved Denied Approved Denied Approved Approved Permitted Formation of holding company 61 7 ... ... 4 583 ... 655 Merger of holding company 18 ... ... ... 5 29 ... 52 Retention of bank... Acquisition Bank 81 13 ... ... 37 360 ... 491 Nonbank 115 3 ... ... 13 141 305 577 Acquisition of bank service corporation1 2 13 Other 2 1 3 ... ... 4 ... 10 Total 277 24 3 ... 59 1,119 306 1,788 1. Approved under the Bank Service Corporation of the Bank Holding Company Act. Act, which contains standards patterned after those Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 Banking Supervision and Regulation firm to be acquired, and the competi- ler of the Currency (OCC) or the Fedtive effects of the proposal. eral Deposit Insurance Corporation In 1985 the Board—and, under dele- (FDIC) has jurisdiction over a merger, gated authority, the Federal Reserve the Board is asked to comment on the Banks, the Director of the Board's Di- competitive factors to assure comparavision of Banking Supervision and ble enforcement of the antimonopoly Regulation, and the Board's Office of provisions of the act. On behalf of the the Secretary—acted on 1,788 bank Board, the Reserve Banks submitted holding company applications. The 627 reports on competitive factors to System approved 648 proposals to or- the OCC and the FDIC in 1985. The ganize holding companies and denied Board and those agencies have adopted 7, approved 478 bank acquisitions by standard terminology for assessing existing bank holding companies and competitive factors in bank merger denied 13, and approved 574 requests cases to assure consistency in administo acquire nonbank companies that are tering the Bank Merger Act. closely related to banking and denied 3. Data on holding company decisions Change in Bank Control Act are shown in the accompanying table. The Change in Bank Control Act of Bank Merger Act 1978 gave the federal banking agencies the authority to disapprove The Bank Merger Act requires that all changes in the control of banks and proposed bank mergers receive the bank holding companies. The Federal prior approval of the appropriate fed- Reserve is the agency responsible for eral bank regulatory agency. If the changes in the control of state member bank surviving the merger is a state banks and of bank holding companies. member bank, the Federal Reserve has Factors to be considered in determinprimary jurisdiction. Before approving ing whether a transfer of control a bank merger, the Federal Reserve should be disapproved include the ficonsiders the community's conven- nancial condition, competence, expeience and needs, the financial and rience, and integrity of the acquiring managerial resources and prospects of person, and the effect on competition. the existing and proposed institutions, In 1985, 188 changes in ownership of and the competitive effects of the pro- the stock of state member banks and posal. The Board must also consider holding companies were reported; 16 the views of certain other agencies on were processed by the Board and 172 the competitive factors involved in the by the Reserve Banks. There was one transaction. disapproval. During 1985 the Federal Reserve approved 77 merger applications: 5 International Activities of were approved by the Board, 4 by the U.S. Banking Organizations Secretary of the Board under delegated authority, and 68 by the Reserve The Board has four principal statutory Banks under delegated authority. One responsibilities in supervising the inapplication was denied. As required by ternational operations of U.S. banking law, each merger is described in table organizations: to approve the estab- 19 in the Statistical Tables section of lishment of foreign branches of memthis REPORT. ber banks and regulate the scope of When the Office of the Comptrol- their activities; to charter and regulate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 179 Edge corporations and their invest- ber banks were operating the remainments; to authorize and regulate over- ing 133 branches. seas investments by member banks, Edge corporations, and bank holding International Banking Facilities companies; and to authorize and regu- The Board amended its Regulations D late investments by bank holding comand Q to permit the establishment of panies in export trading companies. international banking facilities (IBFs) In September 1985 the Board rein the United States as of December 3, vised its Regulation K, which governs 1981. An IBF is essentially a set of the international activities of U.S. asset and liability accounts that is segbanking operations. The revision was regated from other accounts of the esmade under the directive in the Intertablishing office. In general, deposits national Banking Act of 1978 that the from and credit extended to foreign Board review and revise its regulations residents or other IBFs can be booked regarding the international operations at these facilities free from domestic of U.S. banks every five years. The reserve requirements and interest rate most significant changes allowed Edge limitations. Subject to conditions corporations to provide full banking specified by the Board, IBFs may be services to a limited class of customers established by U.S. depository instituthat are restricted by their charters or tions, by Edge and agreement corporalicenses to international business; retions, and by U.S. branches and agenquired any party purchasing 25 percies of foreign banks. By the end of cent or more of the voting shares of an 1985, 540 IBFs had been established. Edge corporation to give the Board 60 days notice before the acquisition; and increased the limitation on general Edge and Agreement Corporations consent investments from $2 million Under sections 25 and 25 (a) of the to $15 million. Federal Reserve Act, Edge and agreement corporations may engage in in- Foreign Branches of Member Banks ternational banking and foreign finan- Under provisions of the Federal Re- cial transactions. These corporations, serve Act and Regulation K, member which are usually subsidiaries of banks may establish branches in for- member banks, provide their owner eign countries subject, in most cases, organizations with additional powers to the Board's review. In reviewing in two areas: (1) they may conduct a proposed foreign branches, the Board deposit and loan business in states considers the requirements of the gov- other than that of the parent, provided erning statute, the condition of the that the business is strictly related to bank, and the bank's experience in in- international transactions; and (2) they ternational business. In 1985 the have broader powers to make foreign Board approved the opening of 15 for- investments than member banks do eign branches. because they can invest in foreign fi- By the end of 1985, 163 member nancial organizations, such as finance banks were operating 967 branches in companies and leasing companies, as foreign countries and overseas areas of well as in foreign banks. By the end of the United States. One hundred thirty- 1985 there were 140 Edge corporatwo national banks were operating 834 tions, which had 124 branches. The of these branches, while 31 state mem- Board requires each Edge corporation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 Banking Supervision and Regulation that is engaged in banking to maintain applications area, the Board has delea ratio of equity to risk assets of at gated certain regulatory functions—inleast 7 percent. At midyear, two-thirds cluding the authority to approve, but of the banking corporations had ratios not the authority to deny, certain types that were more than twice this mini- of applications—to the Reserve Banks, mum. and to the Director of the Board's Division of Banking Supervision and Foreign Investments Regulation and the Secretary of the Under authority of the Federal Re- Board. serve Act and the Bank Holding Com- The delegation of responsibility for pany Act, in 1985 the Board author- applications permits a more efficient ized 83 foreign investments by use of staff resources at both the Board member banks, Edge and agreement and the Reserve Banks by removing corporations, and bank holding com- routine cases from the Board's panies. In most cases, the applicant agenda. During 1985, 85 percent of requested permission to increase an the applications were acted upon unexisting investment. der delegated authority. This proportion was similar to that for 1984 but still somewhat smaller than that for Export Trading Companies earlier years, reflecting the continuing In 1982 the Bank Export Services Act complexity of applications. amended section 4 of the Bank Holding Company Act to permit bank holding companies, their subsidiary Edge or agreement corporations, and bank- Timely Processing of Applications ers' banks to invest in export trading On January 1, 1984, the System imcompanies, subject to certain limitaplemented revised procedures and tions and after Board review. The purschedules for applications, which repose was to allow effective participaduced internal processing targets by tion by bank holding companies in the one-third. The processing time was financing and development of export shortened from 90 days to 60 days for trading companies. On June 2, 1983, applications decided by the Board and the Board adopted regulations to from 45 days to 30 days for applicaachieve the objectives set forth in the tions handled under delegated authorlaw: to facilitate the export of goods ity. These changes served to reduce the and services produced in the United burden on applicants and to make States and to minimize potential admore efficient use of the staff at the verse effects on the subsidiary banks Board and the Reserve Banks. In addiof the bank holding companies intion, the number of nonbanking provolved. In 1985 the Board acted afposals declined 25 percent during firmatively on the 7 notifications re- 1985, largely as a result of the elimiceived for the establishment of export nation of filing requirements for many trading companies. At year-end, 35 de novo notifications. This decline folbank holding companies had investlowed one of 24 percent in 1984. Of ments in export trading companies. the applications in 1985, the System acted on 96 percent within the time Delegation of Applications allowed for processing. In exercising its responsibility to for- In 1985, 74 of the 78 applications mulate policies and procedures in the for bank mergers were processed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 181 within 60 days. The System also pre- vestment advice in connection with pared 627 reports on the competitive securities brokerage activities. factors of proposed mergers for the In addition, during 1985 the Board other two banking agencies; all but a published for comment a proposal to few were completed within 30 days. allow bank holding companies to in- Of the 188 change-of-control notices, vest directly in real estate to a limited 161 were handled within 60 days. extent. Among the issues presented The System also measures its per- was the riskiness of the activity and formance in processing international the role of such investments in the applications against a 60-day standard. crises of certain thrift institutions in During 1985, 93 percent of the 165 Ohio and Maryland. international applications on which the The Federal Reserve approved dur- Federal Reserve acted were handled ing 1985 several applications by outwithin the time allowed. of-state banking organizations to acquire financially distressed, uninsured thrift institutions that had lost capital and the confidence of depositors. Board Policy Decisions and These acquisitions helped restore fi- Developments in nancial stability to the affected com- Bank-Related Activities munities and provided depositors with During 1985 the Board for the first better access to their funds. Because of time approved the following activities the significant public interest infor individual bank holding compan- volved, the Board approved the acquiies: tax preparation services per- sitions despite its general prohibition formed in a nonfiduciary capacity; ex- on affiliations between bank holding ecution and clearance of futures companies and thrift institutions. contracts on stock indexes and of op- In other matters, the Board upheld tions on the futures contracts; author- several interstate bank holding comization services on credit cards and re- pany applications based on state laws porting services for lost or stolen that permit interstate banking on a recredit cards; consulting activities on gional basis. The U.S. Supreme Court employee benefits; expanded servicing upheld the constitutionality of such of student loans; and the issuance and laws. The Court also agreed with the sale of official checks with no limita- Board that these laws satisfied the retion on the maximum face amount, quirements of the Douglas amendsubject to certain limitations. The ment. The Board approved subsequent Board denied an application by a bank proposals for interstate acquisitions by holding company to act as specialist in holding companies in New England foreign currency options traded on a and in the Southeast and Midwest. securities exchange. A federal court ruled that nonbank At year-end the Board also had un- banks are not permitted to be acquired der consideration applications to en- by out-of-state banking institutions begage in the following new nonbank ac- cause the resulting organizations contivities: underwriting and dealing in stitute an interstate banking presence certain securities, subject to limita- in violation of the Bank Holding Comtions; acting as issuer's agent in the pany Act. The Supreme Court vacated placement of commercial paper; act- and remanded the decision in January ing as advisor in the placement of mu- 1986 following its ruling that nonbank nicipal debt securities; and offering in- banks are not "banks" for purposes of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 Banking Supervision and Regulation the Bank Holding Company Act. After not yet acted on are also made in the another federal court enjoined the H.2 release. Comptroller of the Currency from chartering nonbank banks, the Board Enforcement of suspended the processing of applications by bank holding companies to ac- Other Laws and Regulations quire de novo nationally chartered The preceding sections have discussed nonbank banks. Before these court the Board's activities in carrying out rulings, the Board had reluctantly ap- its statutory responsibilities for the suproved several nonbank bank pro- pervision of bank safety and soundposals after they received chartering ness and the regulation of banking approval and after a congressionally structure. This section describes the imposed moratorium had expired. enforcement of other laws, rules, and The Board turned down a request by regulations. a banking organization to conduct insurance activities in a large geographic Compliance with the area through a bank subsidiary. The Bank Secrecy Act bank's chartering authority had ap- Through the examination process, the proved the proposal for implementa- Federal Reserve monitors whether the tion outside the bank's home state, but institutions it supervises are complythis activity would have represented a ing with the Currency and Foreign circumvention of the Bank Holding Transactions Reporting Act (the Bank Company Act. Proposals by applicants Secrecy Act). To deter unlawful activito engage in similar activities within ties, the act, among other things, retheir home states were approved. quires financial institutions and couriers to report to the Internal Revenue Public Notice of Service cash transactions and ship- Board Decisions ments of more than $10,000. In order to strengthen its monitoring Each action by the Board that involves under the act, the Board in 1985 supa bank holding company, bank merger, plemented examination procedures change in control, or international and emphasized the importance of the banking proposal is effected by an oract in its training courses. In addition, der or announcement. Orders state the the Board staff participated in an interdecision along with the essential facts agency task force intended to improve of the application and the basis for the compliance with the act. decision. Announcements state only the decision. All orders and announce- Securities Regulation ments are released immediately to the public and are reported in the Board's Under the Securities Exchange Act of weekly H.2 statistical release, "Ac- 1934, the Board is responsible for tions of the Board; Applications and regulating credit in certain trans- Reports," and in the monthly Federal actions involving the purchase or car- Reserve Bulletin. Actions taken by the rying of securities. In fulfilling its re- Reserve Banks are also reported in the sponsibility under the act, the Board H.2 statistical release and in the Bulle- limits the amount of credit that may be tin. Announcements of applications provided by securities brokers and and notices received by the System but dealers (Regulation T), by banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 183 (Regulation U), and by other lenders national securities exchanges, of cer- (Regulation G). Regulation X extends tain over-the-counter (OTC) stocks these credit limitations, or margin re- that the Board designates as having quirements, to certain borrowers and characteristics similar to those of certain credit extensions, such as stocks listed on national exchanges, or credit obtained from foreign lenders of bonds meeting certain requireby U.S. citizens. ments. The Securities and Exchange Com- The Board published revised lists of mission, the National Association of over-the-counter stocks subject to its Securities Dealers, and the national margin regulations on February 12, securities exchanges examine brokers May 14, August 13, and November and dealers for compliance with Regu- 12, 1985. The current "List of lation T. The three bank supervisory Marginable OTC Stocks" consists of agencies examine banks for compli- 2,520 stocks. The Board's Division of ance with Regulation U, with the Banking Supervision and Regulation Board being responsible for state monitors the market activity of all member banks that extend margin over-the-counter stocks to determine credit secured by margin stock. what stocks to place on this list. In The Board, the National Credit Un- 1986 the Board will publish the list in ion Administration, the Farm Credit the same months. Administration, and the Federal Home In 1985 the Board amended Regula- Loan Bank Board examine other tion G to permit extensions of credit to lenders under their respective jurisdic- trusts for employee stock ownership tions for compliance with Regulation plans (ESOPs). The amendment al- G. At the end of 1985 there were 537 lows savings and loan associations, insuch lenders, of which 291 were sub- surance companies, and finance comject to the Board's supervision. Of panies to extend credit on margin these 291, 184 are subject to regular stock on the same basis as banks. At inspection by the Federal Reserve Sys- the same time the Board amended tem. During the year Federal Reserve Regulation T to permit broker-dealers examiners inspected 64 G-lenders for to extend and arrange credit for compliance with the Federal Reserve's ESOPs. Regulation T was also margin requirements (these lenders amended to permit a uniform, preare inspected on either a biennial or mium-based system of margin requiretriennial basis, according to the type of ments for all types of option contracts. credit extended). The system will incorporate the main- Regulations U and G, in general, tenance margin required by the naimpose credit limitations on banks and tional securities exchanges or associaother lenders on loans whose purpose tions under rules approved by the is purchasing or carrying publicly held Securities and Exchange Commission. equity securities and that are secured The Board also adopted technical by such securities. amendments to Regulations G and U Regulation T limits the amount of to exclude face-amount certificates credit that brokers and dealers may ex- from the definition of margin security. tend when securities serve as collateral A face-amount certificate is a security, for credit that is used to purchase or issued by an investment company regcarry securities. This collateral must istered under the Investment Company consist of stocks and bonds traded on Act of 1940, that promises to pay an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 Banking Supervision and Regulation investor a fixed sum of money at a change Act of 1934. Thirty-one state fixed future date in return for a desig- member banks, most of which are of nated payment. As permitted by the In- small or medium size, were registered vestment Company Act, face-amount with the Board under this regulation. certificates have built-in credit fea- These institutions must file certain tures. In addition, the Board amended materials, such as financial reports Regulation T to allow broker-dealers and proxy statements, that are of interto sell these instruments without being est to investors. The Board's staff reconsidered in violation of the margin views these filings for compliance regulations. with the regulation. Under section 8 of the Securities The disclosure rules under Regula- Exchange Act, a broker or dealer may tion F are similar to those issued by not borrow from a bank on the collat- the Securities and Exchange Commiseral of registered securities unless the sion. bank is either a member of the Federal Reserve System or has filed an agree- Loans to Executive Officers ment with the Board undertaking to comply with all the statutes, rules, and Under section 22(g) of the Federal Reregulations applicable to member serve Act, each state member bank banks with respect to credit on securi- must include with each quarterly reties. Domestic and foreign nonmem- port of condition a report of all extenber banks must file these agreements, sions of credit made by the bank to its designated T-l and T-2 respectively, executive officers since the date of the before they can lend to brokers or bank's previous report of condition. dealers on the collateral of registered The accompanying table summarizes securities. During the year the Board these data for the last quarter of 1984 processed three T-l and T-2 agree- and the first three quarters of 1985. ments. In 1985 the Securities Regulation Applications by Section of the Board's Division of State Member Banks Banking Supervision and Regulation issued 51 interpretations of the margin The Board's authority over state memregulations. Those that presented suf- ber banks covers permission to open ficiently important or novel issues new domestic branches, to make inwere published in the "Securities vestments in bank premises that ex- Credit Transactions Handbook," ceed 100 percent of capital stock, and which is part of the Federal Reserve to add to the capital base from sales of Regulatory Service. These interpreta- subordinated debt; it also covers the tions serve as a guide to the margin waiver of six months' notice of intenregulations. tion to withdraw from membership in the System. The Federal Reserve employs the application or notification Financial Disclosure by process to administer these statutory State Member Banks provisions. The Board's Regulation F deals with With few exceptions, these matters the disclosure requirements for state are handled under delegated authority member banks that have securities by the Federal Reserve Banks or, in registered under the Securities Ex- the case of proposed sales of subordi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 185 State Member Bank Loans to Executive Officers, 1984-85 Loans to executive officers Range of interest rates Period Number Amount (dollars) charged (percent) October 1-December 31, 1984 1,153 14,500,258 7-23 January 1-March 31, 1985 1,361 16,437,020 6-21 April 1-June 30, 1985 1,322 21,051,810 7-21 July 1-September 30, 1985 1,284 19,211,668 7-22 nated debt, by the Director of the pany that files the notice fails to meet Board's Division of Banking Supervi- the standards that the Board applies in sion and Regulation. the applications process, including the Board's capital guidelines. Stock Repurchases by The Federal Reserve reviewed 119 Bank Holding Companies such notifications during 1985, all but 6 of which were acted on by the Re- A bank holding company sometimes serve Banks on the Board's behalf. purchases its own shares from its shareholders. Often such stock repurchases are financed through borrowings, so that the net effect of the trans- Federal Reserve Membership action is to increase the debt of the bank holding company at the very time At the end of 1985, 6,050 banks were that its equity decreases. Because rela- members of the Federal Reserve Systively large repurchases may adversely tem, a net increase of 68 from the preaffect the financialc ondition of a bank vious year. Member banks operated holding company and its bank subsidi- 27,595 branches on December 31, ary, the Board, by regulation, requires 1985, a net increase of 1,557 for the holding companies to give advance no- year. tice of repurchases that retire 10 per- Members banks accounted for 40 cent or more of their consolidated eq- percent of all commercial banks in the uity capital. The Board may object to United States, and for 60 percent of stock repurchases if the holding com- commercial banking offices. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 Regulatory Simplification The Board of Governors established Edge corporations. Four alternative the Regulatory Improvement Project proposals had been offered in 1984 for to minimize die burdens imposed by expanding the ability of an Edge corregulation; to ensure that consider- poration to provide a broad range of ation is given to minimizing the eco- services in die United States. In 1985 nomic impact of regulation on small the Board adopted an alternative that business; to see that interested parties will allow Edge corporations to prohave the opportunity to participate in vide full banking services to a limited the design of proposed regulations and class of companies, such as foreign to comment on them; and to ensure airlines and shipping companies, that regulations are written in simple whose charters or licenses restrict language. In addition to monitoring them to international business. The rethe creation of new regulations, the vised regulation also increases the program periodically reviews all exist- lending limit of Edge corporations and ing regulations for adherence to these relaxes the limits on their investments objectives. in foreign companies. The language of To improve its regulatory process the revised regulation has been simpliand increase the effectiveness of the fied and its organization improved. Regulatory Improvement Program, the Board took preliminary steps this year Equal Credit Opportunity toward establishing a regulatory policy In 1983 the Board announced that it and planning committee. Chaired by a intended to review its regulation immember of the Board and comprising plementing the Equal Credit Opportusenior staff, the committee is to deternity Act (Regulation B), and in 1985 it mine priorities and schedule and coorproposed and adopted a revised Regudinate regulatory actions. lation B. The Board's review considered ways to simplify the regulation so Periodic Review as to ease the burdens imposed on creditors and to carry out more effec- The following section reports actions tively the purposes of the Equal Credit resulting from the periodic review of Opportunity Act. To improve the data existing regulations under the Regulafor monitoring compliance, the retory Improvement Program. vised regulation requires that applications be in writing for loans secured by International Banking Operations an applicant's principal dwelling and In 1985 the Board revised its regula- that creditors provide the race or nation governing the international opera- tional origin and sex of an applicant tions of U.S. banking organizations from visual observation or from sur- (Regulation K). Because of a statutory name when the applicant does not prorequirement, the review had been un- vide that information. The revised regdertaken to determine whether ulation also sets forth new procedures changes were desirable to ensure or for dealing with incomplete applicaimprove the competitive position of tions and offers a broader selection of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 187 sample forms for informing applicants ions in conflict with any amendments of the reasons for denials of credit. would be rescinded, and the remaining Some provisions were rewritten to im- interpretations and opinions would be prove clarity. In addition the Board consolidated and keyed to regulatory adopted an official staff commentary provisions. The Board deferred the on Regulation B, similar to those on consideration of regulating disclosure other consumer regulations; these of account information pending discommentaries provide regulated enti- cussion with other agencies and furties with official guidance and inter- ther study of the issue. pretation on the regulations. New Regulatory Actions Interest on Deposits This section reports on significant fi- In preparation for the end of the De- nal regulatory actions taken by the pository Institutions Deregulation Board in 1985, and on related pro- Committee and of the authority for in- posed actions. terest rate ceilings on March 31, 1986, the Board in 1985 issued for comment Reserve Requirements a revised and greatly simplified regu- Statutory authority mandating money lation for interest on deposits (Regulamarket deposit accounts (MMDAs) tion Q). Most of the existing proviends on March 31, 1986. In order to sions of Regulation Q have been ensure that MMDAs continue to be deleted, including those governing subject to a 3 percent reserve requirewithdrawals and early withdrawal penment after that date, rather than the 12 alties, various account characteristics, percent imposed on transaction acall interest rate ceilings, and the counts, the Board proposed amending $150,000 limit on business savings acits regulation on reserve requirements counts. The revised regulation con- (Regulation D). The amendment extinues to prohibit the payment of interplicitly treats the MMDA as a nonperest on demand deposits and specifies sonal savings deposit, which will be that any money market deposit acpermitted six withdrawals per month, count of a business will be considered of which no more than three may be by to be a demand deposit if it permits check, draft, or similar order. In addimore than six withdrawals per month. tion, the Board proposed eliminating The review consolidated the regulathe current $150,000 limit on business tion on the advertising of interest on savings accounts to permit consistent deposit accounts with the miscellanetreatment of such accounts with ous interpretations, rulings, and policy MMDAs. statements on the subject, simplified them, and rewrote them as one clear Collection of Checks and comprehensive section. Public comment was requested on whether to To reduce uncertainty about whether require a bank that advertises interest certain checks would be honored, the rates to continue to state rates for sim- Board amended its regulation on colple interest, or to substitute a state- lection of checks (Regulation J) to rement of the annual percentage yield, quire payor institutions to provide dior to require both. When the final reg- rect notification to the bank of first ulation is adopted, current Board rul- deposit when the payor institution ings, interpretations, and staff opin- plans to return a check of $2,500 or Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 Regulatory Simplification more that has been collected through regulations (Regulations G and T) to the Federal Reserve System. Previ- permit broker-dealers and G-lenders ously, payor institutions were required to extend credit to trusts for employee to notify the immediately preceding stock option plans that are qualified endorser, which meant many institu- under section 401 of the Internal Revetions may have been involved in the nue Code. The amount of such credit chain of notification, with the frequent would not be subject to the limitations result that returned checks would ar- normally applicable under these regurive before the notice. Direct notifica- lations. These amendments will pertion was adopted in part to enable de- mit broker-dealers, savings and loan pository institutions to reduce their institutions, and other G-lenders to exholding period on check deposits with- tend such credit on margin stock on out incurring substantial new risk of the same basis currently allowed banks losses. The new procedures are ex- under a special exemption in Regulapected to reduce the number of re- tion U. Thus, as employers, all lenders quired notifications by half and to de- subject to the margin regulations will crease processing costs for both payor be treated equally. and intermediary institutions. A payor The Board also amended Regulation institution will have to provide notice T to change the structure of the initial only when it expects the notice to ar- margin requirements for the writing of rive at the bank of first deposit before options on equity securities and to the check; and the intermediary insti- consolidate many provisions covering tutions will no longer be involved in different option products into a single the notification chain. To assist depos- rule. The amended regulation proitory institutions in complying with the vides a uniform premium-based sysnew requirement, the Federal Reserve tem of margin requirements for all enhanced the notification service it types of option contracts. An initial provides to payor banks and extended margin now will be the amount specithe service to other depository institu- fied by the rules of the national securitions for checks that are collected out- ties exchange or of the association auside the Federal Reserve System. thorized to trade the option if the Securities and Exchange Commission has approved such rules. Previously, Margin Regulations the Board specified the actual amount The Board amended two of its margin of the initial margin. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

189 Federal Reserve Banks Developments in the Pricing of Banks cost the System $526.2 million Federal Reserve Services and in in 1985. This amount includes the cost the Payment Mechanism of float and of the private sector adjustment factor. The check operations In 1985 the Reserve Banks fully recovgenerated $555.8 million in revenue, ered their costs of providing priced for a surplus of $29.6 million. The services, as required by the Monetary fees implemented in January 1985 Control Act of 1980. The System as a were lowered at midyear in an attempt whole recovered 105.6 percent of its to reduce this surplus. The number of operating expenses and imputed costs, checks processed by Federal Reserve compared with 103.9 percent in 1984. Banks increased 4.8 percent in 1985, Table 10, in the Statistical Tables secto 15.5 billion. tion of this REPORT, presents revenue A major goal of Federal Reserve and expenses by major category of sercheck operations in 1985 was to revice for 1985 and 1984. duce the risk to depository institutions Total revenue at Reserve Banks from associated with return items and all priced services was $733.0 million thereby to allow institutions to make and total cost was $699.4 million. funds available to their depositors These figures include the income and sooner. A step toward this goal came expenses related to clearing balances, in January, when the Board approved the private sector adjustment factor an amendment to Regulation J. The (the taxes and costs of capital the Fedamendment, which became effective eral Reserve would incur if it were a on October 1, requires an institution private firm), and the value of priced that returns a check of $2,500 or more float. With allowance for a temporary drawn on it and collected through the support program for the automated Federal Reserve to notify promptly the clearinghouse service, the Federal Reinstitution at which the check was first serve had a net revenue of $38.6 mildeposited. lion. The System also pursued several The Federal Reserve made signifiother initiatives to speed up the return cant strides toward stabilizing the pricof unpaid checks. A pilot program uning of services in 1985. Except for a dertaken by the Federal Reserve Bank midyear lowering of check fees, prices of Dallas, in which checks are rewere held constant for the year. The turned directly to the institution of first System installed better operating sysdeposit, continued through 1985. The tems for the electronic payment ser- Federal Reserve Bank of St. Louis exvices at many of the Reserve Banks panded its return item reclearing pilot and also improved the process of hanin 1985, in which the Reserve Bank dling return items—checks not honpresents certain return items to the ored by the institution on which they payor bank a second time rather than are drawn. returning the items to the bank of first deposit. Another program, which be- Check Collection gan on November 1, automates the re- Check operations by Federal Reserve turn item process by making it part of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 Federal Reserve Banks the normal check collection stream. the year amounted to $22.4 million, A pilot project to explore check offset by revenue of $23.1 million. truncation, in which the necessary in- The System processed 280 million formation on a check is converted to commercial transactions during the electronic form, was launched in 1985 year, 31.8 percent more than in 1984. in four Districts; the aim is to improve In 1985, 10 Districts installed the Fedthe efficiency of the forward collection eral Reserve's new ACH operating process. Plans also call for Reserve system. This system enables faster, Banks to participate in the National more efficient processing of ACH Association of Check Safeguarding transactions. program in 1986. In February the Reserve Banks be- As a result of public comments, the gan automating the ACH return item Federal Reserve modified its proposed process by converting the paper return test of a two-tier fee schedule for items to electronic form at the Federal check prices, which permits closer Reserve office of first deposit. Conmatching of fees and collection costs current with this change the System within a single check service. The pi- instituted the pricing of ACH paper relot program, initiated in April, is a turn items. voluntary option for depositors in the The Federal Reserve made several two territories where the pricing con- changes to its ACH service in 1985 to cept is being tested. accommodate increased participation In January the Board voted to dis- by private-sector processors. continue as of September 1, 1986, the fractional availability option for the re- Wire Transfer of Funds covery of certain types of check float. and Net Settlement Service Fractional availability, which reflects The fund transfers volume grew 8.4 historical, rather than current, collecpercent in 1985, for a total of 45.1 tion experience, was eliminated bemillion transactions. This service and cause of its potential for not fully rethe net settlement service incurred covering the costs of float. costs of $73.0 million and earned Several amendments to Regulation J $77.4 million, for a net surplus of were published for comment in March $4.3 million. 1985 including a proposal to permit A new operating system for wire Reserve Banks to collect checks drawn transfers was installed in eight Dison payors located in foreign countries. tricts during 1985, thereby improving No final action was taken on the the Fedwire's efficiency and permitamendments in 1985. ting the Federal Reserve to provide more uniform service. To improve se- Automated Clearinghouse Service curity for electronic payments and for The System's incentive pricing pro- computer-based information services, gram for automated clearinghouse the Reserve Banks plan to encrypt the (ACH) services expired at the end of communications lines to depository 1985. The 1985 fee structure was set institutions by the end of 1987. to recover 80 percent of commercial In October the Federal Reserve ACH costs, including the PSAF and Board authorized new operating hours certain categories of float. Taking this for Fedwire, to begin January 1, 1986. adjustment into account, total costs for The deadline for interdistrict, third- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 191 party wire transfers was extended Definitive Securities and from 4:30 p.m. to 5:00 p.m., Eastern Noncash Collection Services time, to accommodate institutions in The System received $25.0 million in the West. In addition, to enable banks revenue for definitive safekeeping and to operate more efficiently and better noncash collection in 1985; the total manage their intraday funds, the cost of these services, including the Board set a uniform opening time for PSAF, was $25.3 million. The volume the Fedwire of no later than 9:00 a.m., of definitive securities issues and de- Eastern time. posits increased 4.7 percent in 1985 to The net settlement arrangement for 158.6 thousand. Noncash collection the CHESS service of the Chicago volume increased 7.8 percent to 4.6 Clearing House Association was modmillion. ified from next-day to same-day final- In October public comment was soity under terms and conditions similar licited on the general concept of conto those already in place between the solidating priced-service activities Federal Reserve and other privately across district lines. Comment was operated large-dollar networks. Net specifically requested on a proposal to settlement based on same-day finality consolidate the noncash collection serwas also approved for the PRESS services of the Ninth and Twelfth Disvice of the California Bankers Cleartricts because of difficulties in collecting House Association. In addition, ing coupons in the Twelfth District, net settlement services based on nextand to maintain an appropriate level of day finality were approved for the Calservice nationwide. No action was ifornia Automated Clearing House Astaken in 1985. sociation and for two automated teller During 1985 deposits of immobimachine networks and one point-oflized securities were received from sale network. two regional depository trust companies. Coin and Currency Services In 1985 the Federal Reserve sought to Book-Entry Securities improve controls over its coin and currency services, increase efficiency in The book-entry service incurred processing currency, and improve the costs, including the PSAF, of $24.9 quality of currency in its cash opera- million and earned revenue of $28.8 tions. million. For the year, there were 7.9 Four Reserve Banks provided trans- million on-line book-entry transfers. portation of cash in 1985, compared As of October 1, book-entry serwith five in 1984. In 1985, as in 1984, vices for U.S. Treasury securities befive Reserve Banks wrapped coins for came a nonpriced fiscal service, at the depository institutions. Also, the Sys- direction of the Department of the tem tested a prototype of second- Treasury. generation equipment intended to im- The Federal Reserve is developing a prove the processing of currency. system on behalf of the U.S. Treasury The Federal Reserve continued to that will offer limited book-entry serwork with the U.S. Department of the vices primarily to individual investors Treasury to develop measures to deter starting in mid-1986. This service, rethe counterfeiting of U.S. currency. ferred to as Treasury Direct, will re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 Federal Reserve Banks place the current practice of issuing Examination registered Treasury securities. The Division of Federal Reserve Bank In 1985 the Federal Reserve added Operations examines the 12 Reserve mortgage-backed securities of Federal Banks and their 25 branches each agencies to its system of book-entry year, as required by section 21 of the securities transfers. The book-entry Federal Reserve Act. The results of system is a more secure and efficient the audits are communicated to the means of maintaining securities, and it management and directors of the reaffords the secondary securities marspective Banks and to the Board of ket with settlement that is simultane- Governors. Also, the Division annuous with the transfer of the securities. ally audits the accounts and holdings of the Federal Reserve System Open Float Market Account at the Federal Re- Federal Reserve float increased to a serve Bank of New York and the fordaily average of $440 million in 1985, eign currency operations conducted by up from $400 million in 1984. The the Bank for their conformance with costs of all Federal Reserve float are the policies issued by the Federal recovered each year. Open Market Committee. The Divi- In November the Board requested sion furnishes copies of these reports comment on a proposed amendment to to the Committee. The examination Regulation J to reduce float caused by procedures used by the Division are the closing of depository institutions reviewed each year by a private firm of on local holiday schedules. The pro- certified public accountants. posal would modify procedures used by Reserve Banks to recover the value Income and Expenses of float generated by local holidays, would reduce certain financial risks, The accompanying table summarizes and would establish a uniform holiday the income, expenses, and distribution schedule to be followed by the Reserve of net earnings of the Federal Reserve Banks. Banks for 1985 and 1984. Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1985 and 1984 ] Thousands of dollars Item 1985 1984 Current income 18,131,983 18,068,820 Current expenses 1,127,744 1,102,444 Operating expenses 1,022,527 983,731 Earnings credits granted 105,217 118,713 Current net income 17,004,238 16,966,376 Net addition to (deduction from) current net income 1,301,624 (412,943) Assessments by the Board of Governors 251,116 244,722 For expenditures of Board 77,378 82,116 For cost of Federal Reserve currency 173,739 162,606 Net income before payments to U.S. Treasury 18,054,746 16,308,711 Dividends paid 103,029 92,620 Payments to U.S. Treasury (interest on Federal Reserve notes). 17,796,464 16,054,095 Transferred to surplus 155,253 161,996 1. Details may not add to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 193 Income was $18,132 million in This sum consists of all net income 1985, approximately the same as in after dividends and the amount neces- 1984. Total expenses were $1,205 mil- sary to bring the surplus of the Banks lion ($1,023 million in operating ex- to the level of their paid-in capital. penses, $105 million in earnings In the Statistical Tables section of credits granted to depository institu- this REPORT, table 7 gives a summary tions, and $77 million in assessment statement of the income and expenses for expenditures by the Board of Gov- of the Federal Reserve System for ernors). The cost of Federal Reserve 1981-85; table 8 details income and currency was $174 million. Income expenses of each Federal Reserve from financial services was $614 mil- Bank for 1985, and table 9 shows a lion. condensed statement for each Bank for The profit and loss account showed 1914-85. A detailed account of the asa net addition of $1,302 million, due sessments and expenditures of the primarily to a $1,210 million increase Board of Governors appears in the in the value of assets denominated in next section, Financial Statements. foreign currencies and revalued at In its ANNUAL REPORT covering market exchange rates and a net gain 1984, the Board included, for the first of $99 million on sales of U.S. govern- time, a chapter on the current (1985 ment securities. Statutory dividends to calendar year) System budget. The member banks totaled $103 million, chapter consolidated public informa- $10 million more than in 1984. This tion available from other sources in orrise reflected an increase in the capital der to provide a single, comprehensive and surplus of member banks and a view of the System's budget and budconsequent increase in the paid-in cap- getary process. In early 1986 the ital stock of the Reserve Banks. Board expanded the treatment in last Payments to the U.S. Treasury in the year's REPORT and produced a new form of interest on Federal Reserve document, Annual Report: Budget notes totaled $17,796 million, com- Review. The new publication, a compared with $16,054 million in 1984. panion to this REPORT, covers 1984-86 Securities and Loans of Federal Reserve Banks, 1983-85 Millions of dollars, except as noted U.S. Item and year Total1 government Loans securities2 Average daily holdings3 152,526 151,429 1,038 1984 . 165,002 161,247 3 726 1985 176,688 175,359 1,329 Earnings 1983 15,250 15,150 94 1984 17,080 16,688 389 1985 16,954 16,843 111 Average interest rate (percent) 1983 10.00 10.00 9 05 1984 10.35 10.35 10.44 1985 9.60 9.60 8.38 1. Includes acceptances. 3. Based on holdings at opening of business. 2. Includes federal agency obligations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 Federal Reserve Banks in detail and trends since 1977; it gives Federal Reserve Banks for the years the most detailed picture ever made of 1983, 1984, and 1985. expenses incurred by the Federal Re- Average daily holdings of securities serve. and loans during 1985 amounted to $176,688 million, an increase of $11,686 million over 1984. Holdings Federal Reserve Bank Premises of U.S. government securities in- During 1985 the Board of Governors creased $14,112, and loans decreased authorized the constructioh of an addi- $2,397 million. tion to the Federal Reserve Bank of From 1984 to 1985 the average rate Chicago. Table 6, in the Statistical Ta- of interest on all types of holdings debles section of this REPORT, shows the creased: on U.S. government securicost and book values of premises ties, from 10.35 to 9.60 percent, and owned or occupied by the Federal Re- on loans, from 10.44 to 8.38 percent. serve Banks and Branches and of real estate acquired for future bankinghouse purposes. Volume of Operations Table 11, in the Statistical Tables sec- Holdings of Securities and Loans tion of this REPORT, shows the volume The accompanying table presents of operations in the principal departholdings, earnings, and average inter- ments of the Federal Reserve Banks est rates on securities and loans of the for the years 1982-85. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

195 Board of Governors Financial Statements The financial statements of the Board amined by Price Waterhouse, indepenfor the years 1985 and 1984 were ex- dent public accountants. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Governors of the Federal Reserve System In our opinion, the accompanying balance sheets and the related statements of revenues and expenses, fund balance and of changes in financial position present fairly the financial position of the Board of Governors of the Federal Reserve System at December 31, 1985 and 1984, and the results of its operations and the changes in its financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis after restatement for the change, with which we concur, in the method of accounting for capital assets as described in Note 2 to the financial statements. Our examinations of these statements were made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. Washington, D.C. February 14, 1986 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 Financial Statements BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEETS As of December 31 ASSETS 1985 1984 CURRENT ASSETS Cash $ 8,144,767 $10,297,732 Accounts receivable 1,542,680 461,264 Stockroom and cafeteria inventories, at cost 290,475 371,434 Prepaid expenses and other assets 151,851 1,230,060 Total current assets 10,129,773 12,360,490 PROPERTY, BUILDINGS AND EQUIPMENT, at cost Land and improvements 1,301,314 1,301,314 Buildings 61,851,962 61,452,867 Furniture and equipment 24,799,885 20,861,213 87,953,161 83,615,394 Less accumulated depreciation 31,777,004 26,949,388 Total property, buildings and equipment 56,176,157 56,666,006 Total assets $66,305,930 $69,026,496 LIABILITIES AND FUND BALANCE LIABILITIES Accounts payable $ 6,508,435 $ 6,355,224 Accrued annual leave 3,807,048 3,664,308 Accrued payroll and related taxes 2,611,001 1,912,794 Other liabilities 440,831 233,253 Total liabilities 13,367,315 12,165,579 Commitments and Contingencies (Notes 4 and 6) FUND BALANCE 52,938,615 56,860,917 Total liabilities and fund balance $66,305,930 $69,026,496 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Statements 197 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF REVENUES AND EXPENSES AND OF CHANGES IN FUND BALANCE For the years ended December 31 1985 1984 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $ 77,377,700 $ 82,115,700 Other revenues Sale of publications 1,104,154 1,131,472 Contingency Processing Center fees 981,573 Miscellaneous 445,954 624,264 Total other revenues 2,531,681 1,755,736 Total operating revenues 79,909,381 83,871,436 BOARD OPERATING EXPENSES Salaries 53,179,014 51,131,637 Retirement and insurance contributions 6,052,103 5,969,776 Depreciation 4,958,242 3,615,200 Equipment, office space, and other rentals . 2,943,864 2,040,887 Contractual services 2,480,028 2,042,945 Travel 2,230,242 2,071,769 Printing and binding 2,000,230 2,309,346 Repairs and maintenance 1,928,506 1,519,417 Stationery, office and other supplies 1,776,043 1,168,282 Heat, light and power 1,504,375 1,310,682 Telephone and telegraph 1,370,313 1,496,158 Postage 1,213,322 1,077,300 Subsidies and contributions 794,611 772,167 Cafeteria operations, net 531,411 549,330 Tuition, registrations, and membership fees 495,694 450,292 Books and subscriptions 352,094 352,301 Professional fees 242,421 285,491 Other 219,070 234,421 Total operating expenses 84,271,583 78,397,401 BOARD OPERATING REVENUES (UNDER) OVER EXPENSES . (4,362,202) 5,474,035 ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 173,738,745 162,606,410 Expenses for currency Printing, issuance, retirement and shipping costs 167,015,655 150,370,184 Advanced counterfeit deterrence research costs (Note 5) 6,283,190 12,236,226 Total currency expenses 173,298,845 162,606,410 CURRENCY ASSESSMENTS OVER EXPENSES 439,900 TOTAL REVENUES (UNDER) OVER EXPENSES . .. (3,922,302) 5,474,035 FUND BALANCE, Beginning of year 56,860,917 77,411,316 Less: Cumulative effect on prior years (to December 31, 1983) of change in accounting (Note 2) 26,024,434 ADJUSTED FUND BALANCE, Beginning of year 56,860,917 51,386,882 FUND BALANCE, End of year $ 52,938,615 $ 56,860,917 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 Financial Statements BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF CHANGES IN FINANCIAL POSITION For the years ended December 31 SOURCES OF CASH 1985 1984 Board operations Net revenues (under) over expenses $(3,922,302) $ 5,474,035 Add (deduct) items not requiring outlays of cash Depreciation 4,958,242 3,615,200 Accrued annual leave 142,740 306,286 (Gains) on disposals of equipment (3,628) (15,739) (Increase) decrease in accounts receivable (1,081,416) 662,971 Decrease (increase) in inventories 80,959 (105,006) Decrease (increase) in prepaid expenses and other assets 1,078,209 (1,062,365) Increase in accounts payable 153,211 3,172,398 Increase in accrued payroll and related taxes 698,207 326,358 Increase (decrease) m other liabilities 207,578 (71,558) Funds provided by operations 2,311,800 12,302,580 Proceeds from sales of equipment 3,628 15,739 Total sources 2,315,428 12,318,319 USES OF CASH Capital expenditures for Buildings 399,094 240,783 Furniture and equipment 4,069,299 7,622,137 Total uses 4,468,393 7,862,920 (DECREASE) INCREASE IN CASH (2,152,965) 4,455,399 CASH BALANCE, Beginning of year 10,297,732 5,842,333 CASH BALANCE, End of year $ 8,144,767 $10,297,732 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Statements 199 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS prior to January 1, 1984, who did not come directly from positions in the Federal government are covered DECEMBER 31, 1985 AND 1984 by the Board Plan. Employees who held previous positions in the Federal government prior to January 1, (1) SIGNIFICANT ACCOUNTING POLICIES 1984, and immediately prior to their employment by the Board are covered by the Civil Service Plan. Em- Board Operating Revenues and Expenses—Assess- ployees hired subsequent to January 1, 1984, who did ments made on the Federal Reserve Banks for Board not hold Federal government positions prior to that operating expenses are calculated based upon ex- date participate in the Bank Retirement Plan. Almost pected cash needs. These assessments, other operat- all employees are covered by either the Board Plan or ing revenues, and operating expenses are recorded on the Civil Service Plan. the accrual basis of accounting. Employee contributions are the same percentage of Issuance and Redemption of Federal Reserve salary under both the Board Plan and the Civil Service Notes—The Board incurs expenses and assesses the Plan. Benefits are similar under both plans. Under the Federal Reserve Banks for the cost of printing, issu- Civil Service Plan, the Board's contributions directly ing, shipping, and retiring Federal Reserve notes. match employee payroll deductions. Under the Board These assessments and expenses are separately re- Plan, the Board's contributions for active employees ported in the statements of revenues and expenses are actuarially determined and are funded in the curbecause they are not Board operating transactions. rent period. Costs associated with annual cost-of-liv- Property, Buildings and Equipment—The Board's ing adjustments (COLA) for retirees are actuarially property, buildings and equipment are capitalized at determined. One-half of the cost of the COLA supplecost less accumulated depreciation. Depreciation is ment is funded by a lump sum payment at the time the calculated on a straight-line basis over the estimated supplement is granted. The remaining one-half of the useful lives of the assets, which range from 3 to 10 cost of each supplement is funded over fifteen years years for furniture and equipment and from 10 to 50 and is reflected in the normal contributions to the years for building equipment and building structures. Board Plan. The lump sum payment for the 1985 sup- Contingency Processing Center—The Board oper- plement to retirees' benefits was $759,500. There was ates on behalf of the Federal Reserve System a contin- no COLA supplement assessed in 1984. gency processing center to handle data processing re- Board contributions to the retirement plans totaled quirements during emergency situations. The Board approximately $1,960,000 in 1985 and $2,050,000 in recovers from the Federal Reserve Banks a propor- 1984. tionate amount of the operating expenses of the center As of January 1, 1985 and 1984 (the dates of the in the form of fees. most recent actuarial valuations), the accumulated plan benefits for the Federal Reserve Board Plan, in- (2) CHANGE IN ACCOUNTING FOR CAPITAL ASSETS cluding those arising from COLA supplements, were Beginning January 1, 1985, the Board adopted de- as follows: preciation accounting for its capital assets (buildings, furniture and equipment), and concurrently changed As of January 1 its basis of reporting from a multi-fund approach to 1985 1984 the commercial approach used by the Federal Reserve Banks. In prior years the Board recognized the full Actuarial present value cost of capital asset additions as an expense at the time of accumulated of acquisition and maintained the full historic cost in a plan benefits separate property fund. Under the Board's new policy, Vested $57,167,000 $56,197,000 furniture and equipment items having a cost of $1,000 Nonvested 3,691,000 3,552,000 or more are capitalized and the cost is depreciated $60,858,000 $59,749,000 over estimated useful lives using the straight-line method. Major additions to the buildings are capitalized and depreciated in a similar manner. This change The assumed rate of return used in determining the was made to more accurately distribute capital asset present value of accumulated plan benefits was 9.5 expense to the periods in which use actually occurs. percent in 1985 and 9.0 percent in 1984. The effect of this accounting change on net revenues As of January 1, 1985 and 1984, net assets available over expenses for 1984 as previously reported is for plan benefits exceeded the actuarial present value $4,247,720. The January 1, 1984, operating and of accumulated plan benefits. property funds have been combined and adjusted for Employees of the Board may also participate in the the cumulative effect of the change as though the new Federal Reserve System's Thrift Plan. Under the basis of accounting was followed in prior years. Thrift Plan, members may contribute up to a fixed percentage of their salary. Board contributions are (3) RETIREMENT PLANS based upon a fixed percentage of each member's basic There are two major retirement plans for employees contribution and were $877,000 in 1985 and of the Board. Staff members employed by the Board $864,000 in 1984. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 Financial Statements (4) LEASED EQUIPMENT $1,100,000 in 1984); and 5) sponsored research into methods for detecting counterfeit currency during The Board has acquired certain office automation sorting processes by the Federal Reserve Banks. equipment under capital lease agreements. Accord- This project was a research and development effort ingly, the equipment and the associated liability have and, accordingly, all costs were expensed as incurred. been recorded in the Board's financial statements. Furniture and equipment and accumulated depreciation thereon include $195,340 and $3,450, respec- (6) CONTINGENCIES tively, at December 31, 1985. There were no capital The major research contract associated with the leases at December 31, 1984. counterfeit deterrence program discussed in Note 5 The following is a summary by year of future schedexpired on January 31, 1985. The contractor has subuled lease payments under capital leases together with mitted a contract termination claim of approximately the present value of lease payments which is included $4 million in connection with this expiration. Board in other liabilities at December 31, 1985: counsel believes that the contract properly expired, the claim for termination is without merit, and addi- Year ended December 31 tional costs, if any, to the Board will not be material. 1986 $ 91,200 The Board has been named as a defendant in various litigation involving challenges to, or appeals from, 1987 80,900 actions or proposed actions of the Board pursuant to 1988 60,200 statutory requirement or authorization. Such lawsuits Total scheduled lease payments 232,300 generally seek injunctive or declaratory relief against Less - amount representing interest .... 48,000 the Board rather than monetary awards. It is the opin- Present value of net scheduled lease ion of Board counsel that lawsuits involving monetary payments $184,300 awards do not represent a material liability to the Board. In January 1986 the Board entered into a capital lease agreement for computer equipment. The com- (7) FEDERAL FINANCIAL INSTITUTIONS mitment payable through 1989 is approximately EXAMINATION COUNCIL $11,600,000. The Board also leases office and computer equip- The Board is one of the five member agencies of the Federal Financial Institutions Examination Council ment and office and storage space under operating (the Council). During 1985 and 1984, the Board paid leases which may be terminated within one year. $131,000 and $114,000, respectively, in assessments for operating expenses of the Council. These amounts (5) ADVANCED COUNTERFEIT DETERRENCE RESEARCH are included in subsidies and contributions for 1985 During the period 1983 through 1985, the Board and 1984. sponsored programs to develop technology to deter The Board serves as custodian for the Council's counterfeiting of U.S. currency and to detect counter- cash account. This cash is not reflected in the accomfeit currency in circulation. In connection with this panying financial statements. It also processes acprogram, the Board: 1) sponsored basic research into counting transactions, including payroll for most of applying a deterrent device to currency; 2) sponsored the Council employees, and performs other administhe prototyping of production equipment and pro- trative services for which the Board is reimbursed by cesses; 3) purchased certain equipment required for a the Council. contractor to make test production runs ($715,000 in The Board is not reimbursed for the costs of person- 1984); 4) purchased application machines for use in nel who serve on the Council and on the various task the production of currency ($2,000,000 in 1985 and forces and committees of the Council. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 Tables 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 1985 Thousands of dollars ASSETS Gold certificate account 11,089,825 Special drawing rights certificate account 4,718,000 doin 484,793 Loans and securities Loans to depository institutions 3,059,157 Federal agency obligations Bought outright 8,227,440 Held under repurchase agreement 1,693,395 U.S. government securities Bought outright Bills 85,425,185 Notes 67,646,590 Bonds 24,726,374 Total bought outright 177,798,149 Held under repurchase agreement 3,528,905 Total U.S. government securities 181,327,054 Total loans and securities 194,307,046 Items in process of collection Transit items 9,824,724 Other items in process of collection 1,847,025 Total items in process of collection 11,671,750 Bank premises Land 108,732 Buildings (including vaults) 442,816 Building machinery and equipment 156,139 Construction account 73,598 Total bank premises 672,553 Less depreciation allowance 174,000 498,552 Bank premises, net 607,284 Other assets Furniture and equipment 455,756 Less depreciation 205,191 Total furniture and equipment, net 250,564 Denominated in foreign currencies1 7,015,557 Interest accrued 2,618,227 Premium on securities 641,707 Due from Federal Deposit Insurance Corporation 3,530,636 Overdrafts 397,838 Prepaid expenses 26,536 Suspense account 105,365 Real estate acquired for banking-house purposes 4,838 All other 108,383 Total other assets 14,699,651 Total assets 237,578,349 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 203 1.—Continued LIABILITIES Federal Reserve notes Outstanding (issued to Federal Reserve Banks) 208,427,078 Less held by Federal Reserve Banks 26,978,874 Total Federal Reserve notes, net 181,448,204 Deposits Depository institutions 28,630,668 U.S. Treasury, general account 9,350,979 Foreign, official accounts 480,027 Other deposits Officers' and certified checks 27,452 International organizations 104,454 All other2 911,245 Total other deposits 1,043,150 Deferred credit items 10,682,472 Other liabilities Discount on securities 2,244,007 Sundry items payable 40,633 Suspense account 81,695 All other 13,792 Total other liabilities 2,380,127 Total liabilities 234,015,627 CAPITAL ACCOUNTS Capital paid in 1,781,361 Surplus 1,781,361 Other capital accounts3 0 Total liabilities and capital accounts 237,578,349 1. Of this amount $2,075.8 million was invested in 3. During the year, this item includes undistributed securi:t*i:e_s i:s suedA bUy.. Cfo—rei:g n governmen^ts, and the bj_al- nient cionmcoem, we7hwichhi cihs cislo csleods eodu to ount oDne Dc.e 3c.1 ;3 s1e;e s eev t^a'ble ance was invested with foreign centralI bbaaa nnn kkd ss m aae n nb dda tthh ee net 88 iinn tthhee SSttaattiissttiiccaall TTaabblleess sseeccttiioonn ooff tthhiiss RREEPPOORRTT.. Blaannkk ffoorr IInntteerrnnaattiioonnaall SSeettttlleemmeennttss.. NoTE . Amounts in boldface type indicate items in 2. In closing out the other capital accounts at year- ' statement of condition of the Fedthe Boards weekly end, the Reserve Bank earnings that are payable to the j Reserve Banks. era Treasury are included in this account pending payment. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 Tables 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1985 and 1984 Millions of dollars Total Boston Item 1985 1984 1985 1984 ASSETS Gold certificate account 11,090 11,096 658 599 Special drawing rights certificate account 4,718 4,618 281 241 (Join 487 436 26 23 Loans To depository institutions 3,060 3,577 24 26 Other 0 0 0 0 Acceptances held under repurchase agreements ... Federal agency obligations Bought outright 8,227 8,389 481 422 Held under repurchase agreements 1,694 388 0 0 U.S. government securities Bought outright1 177,798 159,223 10,386 8,013 Held under repurchase agreements 3,529 1,627 0 0 Total loans and securities 194,308 173,204 10,891 8,461 Items in process of collection 11,667 6,837 529 205 Bank premises 607 568 93 95 Other assets Denominated in foreign currencies2 7,016 3,597 196 97 All other 7,679 8,167 201 168 Interdistrict Settlement Account 0 0 + 449 + 1,431 Total assets 237,572 208,523 13,324 11,320 LIABILITIES Federal Reserve notes 181,450 168,327 11,349 9,960 Deposits Depository institutions 28,631 21,818 1,178 932 U.S. Treasury, general account 9,351 5,316 0 0 Foreign, official accounts 480 253 4 4 Other 1,041 865 36 25 Total deposits 39,503 28,252 1,218 961 Deferred credit items 10,679 5,992 521 177 2,378 2,700 130 132 Other liabilities and accrued dividends3 234,010 205,271 13,218 11,230 Total liabilities CAPITAL ACCOUNTS Capital paid in 1,781 1,626 53 45 Surplus 1,781 1,626 53 45 Other capital accounts 0 0 0 0 Total liabilities and capital accounts 237,572 208,523 13,324 11,320 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 208,427 193,867 13,504 11,539 26,977 25,540 2,155 1,579 LESS: Held by Bank 181,450 168,327 11,349 9,960 Federal Reserve notes, net Collateral for Federal Reserve notes Gold certificate account 11,090 11,096 Special drawing rights certificate account 4,718 4,618 Other eligible assets 0 0 U.S. government and agency securities 165,642 152,613 Total collateral 181,450 168,327 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 205 2.—Continued New York Philadelphia Cleveland Richmond 1985 1984 1985 1984 1985 1984 1985 1984 3,277 3,357 483 515 635 617 969 969 1,354 1,335 195 225 270 302 426 408 16 18 23 12 33 35 88 61 2,060 78 155 91 153 1 312 234 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,744 2,816 288 282 481 465 726 699 1,694 388 0 0 0 0 0 0 59,305 53,453 6,226 5,349 10,394 8,816 15,682 13,270 3,529 1,627 0 0 0 0 0 0 69,332 58,362 6,669 5,722 11,028 9,282 16,720 14,203 1,338 725 533 203 432 193 682 242 31 26 48 49 28 28 101 103 1,712 878 344 176 449 248 344 183 1,521 1,112 128 111 212 174 365 280 -3,210 -2,008 -651 -218 +215 +707 -417 + 1,104 75,371 63,805 7,772 6,795 13,302 11,586 19,278 17,553 53,848 51,096 5,870 5,687 11,341 10,125 16,656 15,428 8,153 4,392 1,136 726 1,126 883 1,584 1,413 9,351 5,316 0 0 0 0 0 0 367 140 7 7 10 10 7 8 495 480 28 15 43 24 69 63 8,366 10,328 1,171 748 1,179 917 1,660 1,484 1,486 688 485 111 434 189 584 265 793 899 80 89 134 147 196 216 74,493 63,011 7,606 6,635 13,088 11,378 19,096 17,393 439 397 83 80 107 104 91 80 439 397 83 80 107 104 91 80 0 0 0 0 0 0 0 0 75,371 63,805 7,772 6,795 13,302 11,586 19,278 17,553 57,138 55,369 7,999 8,004 12,543 11,082 18,176 17,501 3,290 4,543 2,129 2,317 1,202 957 1,520 2,073 53,848 51,096 5,870 5,687 11,341 10,125 16,656 15,428 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 Tables 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1985 and 1984—Continued Millions of dollars Atlanta Chicago Item 1985 1984 1985 1984 ASSETS Gold certificate account 413 360 1,451 1,510 Special drawing rights certificate account 192 161 620 646 (Join 53 50 29 26 Loans To depository institutions 38 38 32 2,969 Other 0 0 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 252 199 906 1,145 Held under repurchase agreements 0 0 0 0 U.S. government securities Bought outright1 5,446 3,782 19,588 21,738 Held under repurchase agreements 0 0 0 0 Total loans and securities 5,736 4,019 20,526 25,852 Items in process of collection 909 541 958 593 Bank premises 48 39 22 21 Other assets A D l e l n o o t m he in r ated in foreign currencies2 2 5 2 8 0 2 2 1 9 3 9 8 3,6 9 5 8 9 2 4, 4 3 7 7 1 54. Interdistrict Settlement Account + 3,476 + 2,277 -263 -5,427 Total assets 11,629 7,884 27,984 28,067 LIABILITIES Federal Reserve notes 7,341 5,217 23,724 23,873. Deposits Depository institutions 2,893 1,738 2,545 2,797 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 12 12 21 20 Other 31 6 109 113 Total deposits 2,936 1,756 2,675 2,930 Deferred credit items 914 546 849 446 Other liabilities and accrued dividends3 144 97 254 362 11,335 7,616 27,502 27,611 Total liabilities CAPITAL ACCOUNTS 147 134 241 228 Capital paid in 147 134 241 228 Surplus 0 0 0 0 Other capital accounts 11,629 7,884 27,984 28,067 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 10,558 7,897 25,553 25,469 3,217 2,681 1,829 1,596 Federal Reserve notes outstanding (issued to Bank) . 7,341 5,216 23,724 23,873 LESS: Held by Bank 3. Includes exchange-translation account reflecting Federal Reserve notes, net the monthly revaluation at market exchange rates of 1. Includes securities loaned—fully guaranteed by foreign-exchange commitments. U.S. government securities pledged with Federal Re- 4. Includes special investment account at the Fedserve Banks—and excludes (if any) securities sold and eral Reserve Bank of Chicago in Treasury bills maturscheduled to be bought back under matched sale-pur- ing within 90 days. chase transactions. 2. Assets shown in this line are valued monthly at market exchange rates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 207 2.—Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1985 1984 1985 1984 1985 1984 1985 1984 1985 1984 357 357 156 160 617 608 713 726 1,361 1,318 157 170 63 61 263 241 307 310 590 518 26 24 22 16 48 43 39 34 84 94 15 34 3 7 207 52 19 23 42 24 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 239 241 108 113 367 400 532 531 1,103 1,076 0 0 0 0 0 0 0 0 0 0 5,162 4,568 2,343 2,144 7,930 7,588 11,492 10,086 23,844 20,416 0 0 0 0 0 0 0 0 0 0 5,416 4,843 2,454 2,264 8,504 8,040 12,043 10,640 24,989 21,516 828 688 654 421 1,840 1,520 1,358 814 1,606 692 18 17 25 25 46 36 19 19 128 110 197 97 232 126 316 166 561 266 1,101 590 114 106 92 52 156 151 540 778 471 726 +487 +357 -39 -84 -769 -228 -612 +720 + 1,334 + 1,369 7,600 6,659 3,659 3,041 11,021 10,577 14,968 14,307 31,664 26,929 5,796 5,245 2,391 2,065 7,823 7,775 11,100 10,807 24,211 21,049 896 576 All 451 1,055 1,017 2,615 2,480 4,979 4,413 0 0 0 0 0 0 0 0 0 0 4 4 5 5 7 7 12 11 24 25 21 13 13 5 37 28 51 35 108 58 921 593 489 461 1,099 1,052 2,678 2,526 5,111 4,496 709 653 630 363 1,837 1,485 751 552 1,479 517 66 76 33 44 102 117 143 164 303 357 7,492 6,567 3,543 2,933 10,861 10,429 14,672 14,049 31,104 26,419 54 46 58 54 80 74 148 129 280 255 54 46 58 54 80 74 148 129 280 255 0 0 0 0 0 0 0 0 0 0 7,600 6,659 3,659 3,041 11,021 10,577 14,968 14,307 31,664 26,929 7,091 6,475 2,999 2,585 11,100 10,806 13,043 12,640 28,723 24,230 1,295 1,230 608 520 3,277 3,030 1,943 1,833 4,512 3,181 5,796 5,245 2,391 2,065 7,823 7,776 11,100 10,807 24,211 21,049 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 Tables 3. Federal Reserve Open Market Transactions, 1985 Millions of dollars T/pe of transaction Jan. Feb. Mar. Apr. U.S. GOVERNMENT SECURITIES Outright transactions (excluding matched transactions) Treasury bills Gross purchases 0 2,976 916 6,026 Gross sales 2,668 214 554 0 Exchange 0 0 0 0 Redemptions 1,600 400 500 0 Others within 1 year Gross purchases 0 0 961 245 Gross sales 0 0 0 0 Maturity shift 596 1,987 1,299 1,129 Exchange -625 -2,739 0 -1,463 Redemptions 0 0 0 0 1 to 5 years Gross purchases 0 0 465 846 Gross sales 0 0 0 0 Maturity shift -596 -1,902 -1,299 -1,114 Exchange 625 1,645 0 1,463 5 to 10 years Gross purchases 0 0 108 Gross sales 100 0 0 Maturity shift 0 -54 -16 Exchange 0 600 0 More than 10 years Gross purchases 0 96 Gross sales 0 0 Maturity shift -30 0 Exchange 493 0 All maturities Gross purchases 0 2,976 2,343 7,321 Gross sales 2,768 214 554 0 Redemptions 1,600 400 500 0 Matched transactions Gross sales 66,668 57,076 54,718 65,845 Gross purchases 66,367 57,283 57,288 64,001 Repurchase agreements Gross purchases 20,225 19,584 4,922 11,540 Gross sales 21,852 17,077 7,429 4,088 Net change in U.S. government securities -6,295 5,077 1,351 12,931 FEDERAL AGENCY OBLIGATIONS Outright transactions Gross purchases 0 Gross sales 0 Redemptions 17 Repurchase agreements Gross purchases 1,463 2,428 445 983 Gross sales 1,851 2,048 825 452 Net change in federal agency obligations -388 363 -380 531 BANKERS ACCEPTANCES Repurchase agreements, net 0 0 0 0 Total net change in System Open Market Account -6,683 5,440 971 13,462 NOTE. Sales, redemptions, and negative figures re- all other figures increase such holdings. Details may duce holdings of the System Open Market Account; not add to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 209 3.—Continued May June July Aug. Sept. Oct. Nov. Dec. Total 274 2,099 417 0 0 0 800 0 0 0 0 0 2,443 1,312 -2,945 0 0 0 0 0 0 0 -2,101 -1,312 1,940 0 0 0 0 0 42 0 600 0 0 0 0 0 -384 0 405 0 274 2,099 417 0 800 0 78,870 81,016 77,597 83,782 21,716 2,801 29,168 2,801 oooo 3,056 1,171 0 1,180 4,515 22,214 0 0 265 0 0 4,118 0 350 0 -350 0 0 0 0 0 0 0 3,500 0 0 0 0 0 143 1,349 0 0 0 0 0 0 0 1,238 4,895 1,028 529 2,363 943 19,763 -1,778 -3,275 -1,807 -942 -615 -1,529 -17,717 0 0 0 0 0 0 0 0 6 0 0 0 868 2,185 0 0 0 0 0 0 0 -1,153 -3,760 -1,028 -520 -1,731 -943 -17,459 1,778 1,825 1,457 942 650 1,529 13,853 0 6 0 0 0 345 458 0 0 0 0 0 0 100 -85 -1,136 0 -10 -600 0 -1,857 0 800 0 0 184 0 2,184 0 0 0 0 0 197 293 0 0 0 0 0 0 0 0 0 0 0 -32 0 -447 0 650 0 0 131 0 1,679 0 3,068 1,171 0 1,180 6,068 26,499 0 0 0 265 0 0 4,218 200 0 0 0 0 0 3,500 60,980 64,263 73,925 100,929 85,486 76,399 866,175 59,165 64,209 72,347 100,197 84,769 78,962 865,968 10,486 1,928 14,029 0 3,684 23,338 134,253 10,486 1,928 14,029 0 3,684 19,809 132,351 -9,668 4,865 -2,015 3,014 -408 -997 463 12,159 20,477 OOOO 0 0 0 0 60 46 1,336 120 2,439 1,867 120 2,439 ooo 354 354 ooo 3,522 3,522 ooo 0 0 ooo 1,454 1,454 ooo 0 0 162 7,640 22,183 5,947 20,877 -540 -60 -46 -30 1,693 1,144 0 0 0 0 0 0 0 0 0 -10,208 4,805 -2,061 2,984 -408 -997 463 13,853 21,621 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 Tables 4. Federal Reserve Bank Holdings of U.S. Government and Federal Agency Securities, December 31, 1983-85 Millions of dollars Increase or December 31 Description decrease (-) 1985 1984 1983 1985 1984 U.S. government securities, total 181,327 160,850 151,942 20,477 8,908 1-15 days1 9,307 4,255 2,700 5,052 1,555 16-90 days 43,462 37,396 38,248 6,067 -852 91 days to 1 year 56,364 47,795 45,475 8,568 2,320 1-5 years 35,650 37,072 34,021 -1,421 3,051 5-10 years 14,785 14,100 13,485 685 615 More than 10 years 21,759 20,233 18,014 1,526 2,219 Held outright2 Treasury bills 85,425 71,035 65,811 14,390 5,224 Treasury notes 67,647 65,237 63,934 2,410 1,303 Treasury bonds 24,726 22,951 20,814 1,775 2,137 Held under RPs 3,529 1,627 1,384 1,902 243 Federal agency obligations, total 9,921 8,777 8,853 1,144 -76 1-15 days 1,836 575 386 1,261 189 16-90 days 961 521 597 440 -76 91 days to 1 year 1,471 1,665 1,937 -193 -272 1-5 years 4,056 4,350 4,196 -294 154 5-10 years 1,187 1,267 1,333 -80 -66 More than 10 years 409 399 403 10 -4 Held outright Banks for Cooperatives 21 21 21 0 0 Federal Farm Credit Banks 2,477 2,363 2,420 114 -57 Federal Home Loan Banks 2,260 2,260 2,272 0 -12 Federal Home Loan Mortgage Corporation 0 0 5 0 -5 Federal Intermediate Credit Banks 50 50 50 0 0 Federal Land Banks 236 350 350 -115 0 Farmers Home Administration 101 147 147 -46 0 Federal National Mortgage Association 2,847 2,962 3,144 -115 -182 Government National Mortgage Association PCs . 67 67 67 0 0 U.S. Postal Service 37 37 37 0 0 Washington Metropolitan Area Transit Authority.. 117 117 117 0 0 General Services Administration 14 14 14 0 0 Held under RPs 1,693 388 208 1,306 180 1. Includes securities held under repurchase agreements. agreements. NOTE. Details may not add to totals because of 2. Excludes securities sold under matched rounding. agreements and securities held under repurchase Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 Tables 6. Bank Premises of Federal Reserve Banks and Branches, December 31, 1985 Dollars Costs Federal Reserve Net Other Bank or Buildings Building ma- book real Branch Land (including chinery and Total2 value estate3 vaults)1 equipment BOSTON . 22,036,681 79,874,932 5,425,128 107,336,740 93,265,260 Annex , 27,840 89,202 44,538 161,580 130,863 NEW YORK 3,436,277 18,432,390 21,690,030 43,558,697 26,377,899 Annex 477,863 1,136,219 745,855 2,359,936 825,591 Buffalo 887,844 2,693,268 2,257,787 5,838,900 3,342,590 PHILADELPHIA 1,876,601 52,997,235 5,903,704 60,777,540 48,284,412 CLEVELAND 1,074,281 6,707,150 4,688,060 12,469,490 6,116,205 1,224,363 Cincinnati 2,246,599 13,537,723 7,528,477 23,312,798 14,726,307 Pittsburgh 1,658,376 5,386,190 3,072,948 10,117,514 7,525,418 RICHMOND . 3,912,575 56,166,758 14,314,313 74,393,645 60,812,675 Annex 522,733 3,725,466 3,513,044 7,761,243 3,825,158 Baltimore .... 6,472,984 26,826,903 3,842,189 37,142,076 34,773,971 Charlotte 347,071 1,517,751 946,943 2,811,765 1,581,212 1,675,934 ATLANTA .. 1,202,255 5,882,585 3,558,580 10,643,421 5,562,026 Birmingham , 2,363,463 1,905,770 1,046,244 5,315,476 3,649,992 608,243 Jacksonville . 1,066,862 15,995,449 778,381 17,840,692 15,960,089 48,365 Annex 107,925 76,236 15,843 200,003 151,252 Miami 3,607,531 11,975,513 2,107,796 17,690,841 15,882,505 Nashville 592,342 1,474,678 1,287,430 3,354,451 1,543,328 New Orleans . 3,087,693 2,782,464 1,476,396 7,346,553 4,902,272 283,753 CHICAGO 4,511,942 17,053,899 12,195,547 33,761,388 17,621,353 Annex .. 53,066 548,119 215,796 816,981 791,912 Detroit 797,734 3,164,517 2,004,896 5,967,147 3,587,680 ST. LOUIS 700,378 8,451,682 4,599,479 13,751,539 7,408,819 Little Rock 1,148,492 2,082,669 1,023,475 4,254,636 2,769,487 Louisville . 700,075 3,242,651 1,131,238 5,073,964 2,684,809 Memphis .. 1,135,623 4,216,382 2,126,755 7,478,760 5,190,642 MINNEAPOLIS 1,394,384 26,664,805 7,692,189 35,751,378 24,242,459 Helena 289,619 104,184 66,777 460,579 328,105 KANSAS CITY 7,736,543 25,288,256 8,028,418 41,053,217 34,948,683 517,802 Denver 2,997,746 3,667,071 2,610,017 9,274,834 6,390,671 Oklahoma City . 646,386 2,517,100 1,672,442 4,835,928 3,249,838 Omaha 1,030,226 1,550,902 817,215 3,398,342 1,747,288 479,076 DALLAS ... 3,729,268 5,413,552 3,737,706 12,880,525 9,643,543 El Paso 262,477 1,348,665 393,301 2,004,443 1,763,099 Houston 2,049,064 2,540,968 898,037 5,488,069 4,885,317 San Antonio 449,813 2,269,405 574,346 3,293,564 2,776,775 SAN FRANCISCO 15,541,937 87,124,147 16,396,852 119,062,937 112,019,287 Los Angeles 5,588,659 4,339,942 2,494,074 12,422,676 8,943,488 Portland 207,381 1,678,512 649,432 2,535,324 1,997,940 Salt Lake City 480,222 1,972,068 1,129,591 3,581,881 2,643,648 Seattle 274,772 2,236,163 1,437,648 3,948,583 2,410,199 Total 108,731,601 516,659,539 156,138,917 781,530,056 607,284,066 4,837,534 1. Includes expenditures for construction at some and Bank premises formerly occupied and being held offices pending allocation to appropriate accounts. pending sale. 2. Excludes charge-offs of $17,698,968 before 1952. NOTE. Details may not add to totals because of 3. Includes acquisitions for banking-house purposes, rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 211 5. Number and Salaries of Officers and Employees of Federal Reserve Banks, December 31, 1985 President Other officers Employees Total Federal Reserve Annual Num- Annual Number Annual Num- Annual Bank (including salary ber salaries salaries ber salaries Branches) (dollars) (dollars) Full- Part- (dollars) (dollars) time time Boston 145,600 54 3,250,100 1,286 232 32,436,474 1,573 35,832,174 New York 159,600 160 11,256,400 3,775 62 95,575,360 3,998 106,991,360 Philadelphia ... 126,000 49 2,902,600 1,062 77 24,537,668 1,189 27,566,268 Cleveland 130,000 56 3,169,300 1,274 53 26,971,834 1,384 30,271,134 Richmond 127,200 78 4,355,450 1,795 168 35,402,920 2,042 39,885,570 Atlanta 127,000 68 3,969,000 2,032 85 42,785,176 2,186 46,881,176 Chicago 150,600 84 4,895,100 2,694 164 62,573,446 2,943 67,619,146 St. Louis 121,000 55 3,037,396 1,177 87 24,340,218 1,320 27,498,614 Minneapolis ... 101,000 41 2,303,800 972 177 21,960,027 1,191 24,364,827 Kansas City ... 126,000 56 3,376,000 1,540 59 32,372,333 1,656 35,874,333 Dallas 123,700 57 3,394,004 1,437 55 30,872,268 1,550 34,389,972 San Francisco .. 160,100 88 5,291,999 2,206 82 54,552,649 2,377 60,004,748 Total 1,597,800 846 51,201,149 21,250 1,301 484,380,373 23,409 537,179,322 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 213 7. Income and Expenses of the Federal Reserve System, 1981-85 Millions of dollars Item 1981 1982 1983 1984 1985 CURRENT INCOME Loans 196.3 174.6 132.9 569.5 427.9 Acceptances 18.7 18.3 6.0 3.2 0 U.S. government securities . 14,551.1 15,492.9 15,150.2 16,687.5 16,843.1 Foreign currencies 577.4 432.5 273.8 217.1 228.7 All other 10.7 12.3 9.3 16.9 17.3 Total 15,354.2 16,130.7 15,572.1 17,494.2 17,517.1 CURRENT EXPENSES Monetary and economic policy 123.3 138.4 148.3 152.0 148.3 Supervision and regulation 118.0 140.3 155.0 163.3 175.7 Services to financial institutions and the public 614.0 648.8 678.4 704.6 746.2 Services to U.S. Treasury and government agencies 93.4 115.1 120.3 126.3 131.5 Total 948.6 1,042.6 1,102.1 1,146.1 1,201.6 LESS: Reimbursements 72.6 77.3 78.1 85.8 97.4 Priced services revenue 154.1 386.7 496.2 574.7 614.9 Net expenses 721.9 578.6 527.7 485.6 489.4 Federal Reserve currency costs 82.9 98.4 152.1 162.6 173.3 Net expenses including currency costs 804.9 677.0 679.8 648.2 662.7 Cost of earnings credits1 4.0 28.3 71.8 118.7 105.2 Current net income 14,545.4 15,425.4 14,820.5 16,727.2 16,749.2 ADDITIONS TO AND DEDUCTIONS FROM CURRENT NET INCOME Unrealized gains (losses) on the revaluation of foreign currency assets (306.0) (149.6) (456.3) (454.8) 1,210.0 Gains (losses) on sales of U.S. government securities (124.0) 85.2 21.0 48.6 99.4 Other additions to or deductions from current net income 61.1 (4.5) 34.9 (6.7) (7.9) Total (368.9) (68.8) (400.4) (412.9) 1,301.6 Net income before distributions .... 14,176.5 15,356.6 14,420.2 16,314.3 18,050.8 DISTRIBUTIONS Dividends paid 74.6 79.4 85.2 92.6 103.0 Transfers to surplus 76.9 78.3 106.7 162.0 155.3 Net transfers to Board account 1.3 (5.7) 5.5 (3.9) Interest on Federal Reserve notes .... 14,023.7 15,204.6 14,228'.8 16,054.1 17,796.5 Total 14,176.5 15,356.6 14,420.2 16,314.3 18,050.8 1. The amount of the credits granted to depository The clearing balances are invested in U.S. governmer institutions on clearing balances maintained with the securities, the earnings on which are reflected in th Reserve Banks. These earnings credits may be used to current income section of this table. offset charges for Federal Reserve priced services. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 Tables 8. Income and Expenses of Federal Reserve Banks, 1985 Item Total New York Philadelphia Cleveland CURRENT INCOME Loans 427,937,199 1,653,288 14,331,208 2,067,951 2,106,227 Acceptances 0 0 0 0 0 U.S. government securities 16,843,078,347 937,862,068 5,672,308,476 580,130,971 964,682,089 Foreign currencies 228,705,105 6,420,037 55,804,046 11,262,217 14,566,789 Priced services 613,829,990 37,102,796 99,676,286 25,021,005 36,425,345 All other 18,432,145 587,982 9,243,142 252,755 498,154 Total 18,131,982,786 983,626,171 5,851,363,158 618,734,899 1,018,278,604 CURRENT EXPENSES Salaries and other personnel expenses 563,144,289 37,049,000 116,059,976 29,639,535 32,437,523 Retirement and other benefits .. 134,266,707 8,502,750 26,001,782 7,291,701 8,553,803 rees 14,329,746 2,134,788 1,047,236 575,672 3,696,339 Travel 20,876,804 966,260 2,575,447 833,999 1,759,190 Postage and other shipping costs 82,769,382 3,427,180 9,127,380 4,507,415 5,927,753 Communications 15,395,947 1,182,943 3,571,634 705,961 757,623 Materials and supplies 45,036,644 2,524,6% 8,404,075 2,512,217 2,835,715 Building expenses Taxes on real estate 21,079,390 3,573,455 3,705,394 1,484,083 970,760 Property depreciation 21,088,018 2,396,542 2,175,324 1,720,426 1,200,985 Utilities 22,945,483 2,284,942 3,761,098 2,276,402 1,476,419 Rent 13,100,040 487,335 7,720,260 44,621 218,944 Other 13,818,941 774,356 3,263,534 1,114,043 465,664 Eauipment Purchases 2,572,078 84,637 0 106,788 122,429 Rentals 46,279,650 1,644,920 8,351,104 961,947 4,359,469 Depreciation 60,308,821 3,512,313 10,598,470 3,126,515 3,128,266 Repairs and maintenance 34,261,077 2,023,059 5,741,991 1,844,293 1,150,071 Cost of earnings credits 105,217,382 6,133,438 12,446,864 8,966,615 8,534,049 All other 38,639,924 2,266,234 6,327,265 2,210,109 2,741,554 Shared costs, net * 0 (1,810,864) 2,562,792 2,436,204 (3,692,672) Recoveries (30,559,981) (6,218,751) (2,522,880) (1,993,509) (2,987,434) Expenses capitalized 2 (1,976,961) (141,087) (7,457) (21,151) (205,609) Total 1,222,593,382 72,798,146 230,911,289 70,343,886 73,450,841 Reimbursements 94,848,892 4,259,968 22,344,412 10,621,241 5,955,043 1,127,744,490 68,538,178 208,566,877 59,722,645 67,495,798 Net expenses Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 215 8. —Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 22,552,116 1,900,356 318,485,481 2,816,574 2,413,372 16,672,254 38,832,490 4,105,881 0 0 0 0 0 0 0 0 1,454,471,378 477,961,822 1,986,309,592 485,322,928 222,589,785 764,335,125 1,077,764,155 2,219,339,959 11,173,962 19,015,924 32,009,495 6,397,770 7,525,813 10,286,569 18,383,040 35,859,443 50,116,744 64,856,993 81,575,186 28,017,848 34,279,665 42,813,820 44,420,512 69,523,790 756,265 1,690,626 1,599,041 438,336 298,372 260,365 1,067,391 1,739,717 1,539,070,465 565,425,721 2,419,978,795 522,993,456 267,107,007 834,368,133 1,180,467,588 2,330,568,790 41,684,787 48,483,889 67,621,635 28,133,297 25,621,374 36,959,981 36,182,616 63,270,676 10,329,407 11,675,035 16,005,616 7,139,410 6,015,610 9,094,835 7,782,123 15,874,635 543,146 1,973,778 1,857,710 394,111 449,920 653,653 299,296 704,097 1,818,187 1,993,065 2,838,694 989,314 1,054,530 1,642,435 1,503,150 2,902,533 6,774,101 9,031,066 8,490,569 4,691,478 5,584,910 6,265,739 5,989,674 12,952,117 1,020,115 1,652,323 1,535,986 623,430 672,176 1,158,700 955,037 1,560,019 4,143,807 4,477,114 5,113,900 2,699,443 1,865,836 3,312,113 3,058,517 4,089,211 1,758,864 1,131,414 2,499,317 422,929 2,294,395 745,987 717,718 1,775,074 3,618,464 1,121,996 1,148,291 710,618 1,040,916 1,293,444 1,051,605 3,609,407 1,971,127 1,931,580 2,496,765 1,160,585 857,354 1,224,287 1,222,198 2,282,726 442,657 144,800 2,105,921 344,768 119,459 68,703 1,039,335 363,237 1,577,317 981,247 2,283,172 667,217 572,815 528,094 528,004 1,063,478 307,391 259,608 504,150 466,516 336,111 94,620 100,799 189,029 2,195,985 6,551,898 7,867,337 1,347,458 1,761,330 1,514,938 4,548,328 5,174,936 5,993,679 4,187,252 7,836,849 2,754,188 3,264,501 3,752,881 4,230,862 7,923,045 3,454,372 2,770,306 5,851,054 1,705,126 1,578,605 2,269,093 2,162,430 3,710,677 8,117,291 11,295,260 21,098,453 4,988,184 6,176,634 5,374,044 4,375,980 7,710,572 3,466,788 3,144,894 5,155,094 1,686,730 1,858,527 1,845,582 3,166,908 4,770,239 755,018 1,297,915 (5,691,388 1,305,087 1,638,359 877,459 (88,836) 410,927 (3,991,663 (1,347,122) (2,242,115 (1,340,166) (679,781) (1,065,680) (1,996,327) (4,174,553) (300,713 (170,892) 243,822 (42,511) (57,390) (878,692) (334,759) (60,522) 95,680,127 112,586,426 154,620,832 60,847,212 62,026,191 76,732,216 76,494,658 136,101,560 6,121,099 6,196,615 10,751,371 6,067,436 2,803,977 5,073,659 4,065,245 10,588,826 89,559,028 106,389,811 143,869,461 54,779,776 59,222,214 71,658,557 72,429,413 125,512,734 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 Tables 8. Income and Expenses of Federal Reserve Banks, 1985—Continued Dollars Item Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 17,004,238,298 915,087,993 5,642,796,281 559,012,254 950,782,806 Additions to current net income Profits on sales of U.S. government securities 99,435,343 5,384,507 33,056,598 3,391,633 5,627,610 All other 1,211,263,619 33,889,682 295,272,609 59,296,990 77,448,009 Total additions 1,310,698,962 39,274,189 328,329,207 62,688,622 83,075,619 Deductions from current net income 9,074,668 560,577 1,160,787 297,516 434,823 Net additions to or deductions (-) from current net income 1,301,624,294 38,713,612 327,168,421 62,391,106 82,640,795 Assessments by Board Board expenditures3 77,377,700 2,116,000 19,025,200 3,747,700 4,902,500 Cost of Federal Reserve currency 173,738,745 10,280,468 52,739,089 5,869,244 10,450,559 Net income before payments to U.S. Treasury 18,054,746,147 941,405,138 5,898,200,412 611,786,416 1,018,070,543 Dividends paid 103,028,905 2,844,470 25,607,748 4,852,310 6,349,649 Payments to U.S. Treasury (interest on Federal Reserve notes) 17,796,464,292930,560,317 5,829,661,765 604,330,206 1,008,680,244 Transferred to surplus 155,252,950 8,000,350 42,930,900 2,603,900 3,040,650 Surplus, January 1 1,626,108,200 44,798,550 396,509,800 79,942,000 103,959,650 Surplus, December 31 1,781,361,150 52,798,900 439,440,700 82,545,900 107,000,300 1. Includes distribution of costs for projects per- 3. For additional details, see the last four pages of formed by one Bank for the benefit of one or more the preceding section Board of Governors, Financial other Banks. Statements in this REPORT. 2. This item includes expenses for labor and materials temporarily capitalized and charged to activities NOTE. Details may not add to totals because of when the products are consumed. rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 217 8.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,449,511,437 459,035,910 2,276,109,333 468,213,680 207,884,793 762,709,577 1,108,038,175 2,205,056,057 8,481,391 2,697,273 12,144,614 2,851,799 1,315,504 4,552,538 6,964,270 12,967,606 59,401,124 100,942,474 169,447,271 33,886,147 39,932,238 54,489,487 96,945,102 190,312,486 67,882,515 103,639,747 181,591,886 36,737,946 41,247,742 59,042,025 103,909,371 203,280,092 571,149 547,206 736,742 584,438 246,903 852,004 1,478,353 1,604,169 67,311,366 103,092,542 180,855,144 36,153,507 41,000,839 58,190,021 102,431,018 201,675,923 3,849,200 6,373,600 10,775,500 2,188,000 2,572,100 3,499,700 6,177,900 12,150,300 15,923,504 5,384,164 24,640,150 5,414,222 2,131,426 8,025,341 11,154,896 21,725,682 1,497,050,099 550,370,688 2,421,548,827 496,764,966 244,182,106 809,374,557 1,193,136,397 2,372,855,999 5,149,817 8,445,546 14,199,298 2,935,559 3,390,797 4,657,283 8,359,610 16,236,818 1,481,448,482 529,535,842 2,393,780,879 486,053,607 236,601,859 798,313,374 1,165,861,687 2,331,636,030 10,451,800 12,389,300 13,568,650 7,775,800 4,189,450 6,403,900 18,915,100 24,983,150 80,360,450 134,156,200 227,612,600 45,947,100 54,303,950 73,731,900 129,296,150 255,489,850 90,812,250 146,545,500 241,181,250 53,722,900 58,493,400 80,135,800 148,211,250 280,473,000 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 Tables 9. Income and Expenses of Federal Reserve Banks, 1914-85 Dollars Assessments by Net additions Board of Governors Period, or Federal Current Net or Reserve Bank income expenses deductions (-) Board Federal Reserve expenditures currency costs All Banks 1914-15 . 2,173,252 2,018,282 5,875 302,304 1916 .... 5,217,998 2,081,722 -193,001 192,277 1917 .... 16,128,339 4,921,932 -1,386,545 237,795 1918 .... 67,584,417 10,576,892 -3,908,574 382,641 1919 .... 102,380,583 18,744,815 -4,673,446 594,818 1920 . 181,296,711 27,548,505 -3,743,907 709,525 1921 . 122,865,866 33,722,409 -6,314,796 741,436 1922 . 50,498,699 28,836,504 -4,441,914 722,545 1923 . 50,708,566 29,061,539 -8,233,107 702,634 1924 . 38,340,449 27,767,886 -6,191,143 663,240 1925 . 41,800,706 26,818,664 -4,823,477 709,499 1926 . 47,599,595 24,914,037 -3,637,668 721,724 1,714,421 1927 . 43,024,484 24,894,487 -2,457,792 779,116 1,844,840 1928 , 64,052,860 25,401,233 -5,026,029 697,677 805,900 1929 70,955,496 25,810,067 -4,861,642 781,644 3,099,402 1930 36,424,044 25,357,611 -93,136 809,585 2,175,530 1931 29,701,279 24,842,964 311,451 718,554 1,479,146 1932 , 50,018,817 24,456,755 -1,413,192 728,810 1,105,816 1933 49,487,318 25,917,847 -12,307,074 800,160 2,504,830 1934 48,902,813 26,843,653 -4,430,008 ,372,022 1,025,721 1935 , 42,751,959 28,694,965 -1,736,758 ,405,898 1,476,580 1936 37,900,639 26,016,338 485,817 ,679,566 2,178,119 1937 41,233,135 25,294,835 -1,631,374 ,748,380 1,757,399 1938 36,261,428 25,556,949 2,232,134 ,724,924 1,629,735 1939 38,500,665 25,668,907 2,389,555 ,621,464 1,356,484 1940 43,537,805 25,950,946 11,487,697 ,704,011 1,510,520 1941 41,380,095 28,535,547 720,636 ,839,541 2,588,062 1942 52,662,704 32,051,226 -1,568,208 ,746,326 4,826,492 1943 69,305,715 35,793,816 23,768,282 2,415,630 5,336,118 1944 104,391,829 39,659,496 3,221,880 2,296,357 7,220,068 1945 142,209,546 41,666,453 -830,007 2,340,509 4,710,309 1946 150,385,033 50,493,246 -625,991 2,259,784 4,482,077 1947 158,655,566 58,191,428 1,973,001 2,639,667 4,561,880 1948 304,160,818 64,280,271 -34,317,947 3,243,670 5,186,247 1949 316,536,930 67,930,860 -12,122,274 3,242,500 6,304,316 1950 275,838,994 69,822,227 36,294,117 3,433,700 7,315,844 1951 394,656,072 83,792,676 -2,127,889 4,095,497 7,580,913 1952 456,060,260 92,051,063 1,583,988 4,121,602 8,521,426 1953 513,037,237 98,493,153 -1,058,993 4,099,800 10,922,067 1954 438,486,040 99,068,436 -133,641 4,174,600 6,489,895 1955 412,487,931 101,158,921 -265,456 4,194,100 4,707,002 1956 595,649,092 110,239,520 -23,436 5,339,800 5,603,176 1957 763,347,530 117,931,908 -7,140,914 7,507,900 6,374,195 1958 742,068,150 125,831,215 124,175 5,917,200 5,973,240 1959 886,226,116 131,848,023 98,247,253 6,470,600 6,384,083 1960 1,103,385,257 139,893,564 13,874,702 6,533,700 7,455,011 1961 941,648,170 148,253,719 3,481,628 6,265,100 6,755,756 1962 1,048,508,335 161,451,206 -55,779 6,654,900 8,030,028 1963 1,151,120,060 169,637,656 614,835 7,572,800 10,062,901 1964 1,343,747,303 171,511,018 725,948 8,655,200 17,229,671 1965 1,559,484,027 172,110,934 1,021,614 8,576,396 23,602,856 1966 1,908,499,896 178,212,045 996,230 9,021,600 20,167,481 1967 2,190,403,752 190,561,166 2,093,876 10,769,596 18,790,084 1968 2,764,445,943 207,677,768 8,519,996 14,198,198 20,474,404 1969 3,373,360,559 237,827,579 -557,553 15,020,084 22,125,657 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 219 9.—Continued Payments to U.S. Treasury Dividends Interest on T t r o a n su sf r e p r l r u e s d T t r o a n su sf r e p r l r u e s d paid Franchise Under Federal Reserve (section 13b) (section 7) tax section 13b notes 217,463 1,742,775 6,804,186 1,134,234 1,134,234 5,540,684 48,334,341 5,011,832 2,703,894 70,651,778 5,654,018 60,724,742 82,916,014 6,119,673 59,974,466 15,993,086 6,307,035 10,850,605 -659,904 6,552,717 3,613,056 2,545,513 6,682,496 113,646 -3,077,962 6,915,958 59,300 2,473,808 7,329,169 818,150 8,464,426 7,754,539 249,591 5,044,119 8,458,463 2,584,659 21,078,899 9,583,911 4,283,231 22,535,597 10,268,598 17,308 -2,297,724 10,029,760 -7,057,694 9,282,244 2,011,418 11,020,582 8,874,262 -916,855 8,781,661 -60,323 6,510,071 8,504,974 291,661 27,695 607,422 7,829,581 227,448 102,880 352,524 7,940,966 176,625 67,304 2,616,352 8,019,137 119,524 -419,140 1,862,433 8,110,462 24,579 -425,653 4,533,977 8,214,971 82,152 -54,456 17,617,358 8,429,936 141,465 -4,333 570,513 8,669,076 197,672 49,602 3,554,101 8,911,342 244,726 135,003 40,327,362 9,500,126 326,717 201,150 48,409,795 10,182,851 247,659 262,133 81,969,625 10,962,160 67,054 27,708 81,467,013 11,523,047 35,605 75^233,818 86,772 8,366,350 11,919,809 166,690,356 18,522,518 12,329,373 193,145,837 21,461,770 13,082,992 196,628,858 21,849,490 13,864,750 254,873,588 28,320,759 14,681,788 291,934,634 46,333,735 15,558,377 342,567,985 40,336,862 16,442,236 276,289,457 35,887,775 17,711,937 251,740,721 32,709,794 18,904,897 401,555,581 53,982,682 20,080,527 542,708,405 61,603,682 21,197,452 524,058,650 59,214,569 22,721,687 910,649,768 -93,600,791 23,948,225 896,816,359 42,613,100 25,569,541 687,393,382 70,892,300 27,412,241 799,365,981 45,538,200 28,912,019 879,685,219 55,864,300 30,781,548 1,582,118,614 -465,822,800 32,351,602 1,296,810,053 27,053,800 33,696,336 1,649,455,164 18,943,500 35,027,312 1,907,498,270 29,851,200 36,959,336 2,463,628,983 30,027,250 39,236,599 3,019,160,638 39,432,450 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 Tables 9. Income and Expenses of Federal Reserve Banks, 1914-85—Continued Dollars Assessments by Net additions Board of Governors Period, or Federal Current Net or Reserve Bank income expenses deductions (-) Board Federal Reserve expenditures currency costs 1970 3,877,218,444 276,571,876 11,441,829 21,227,800 23,573,710 1971 3,723,369,921 319,608,270 94,266,075 32,634,002 24,942,528 1972 3,792,334,523 347,917,112 -49,615,790 35,234,499 31,454,740 1973 5,016,769,328 416,879,377 -80,653,488 44,411,700 33,826,299 1974 '6,280,090,965 476,234,586 -78,487,237 41,116,600 30,190,288 1975 6,257,936,784 514,358,633 -202,369,615 33,577,201 37,130,081 1976 6,623,220,383 558,128,811 7,310,500 41,827,700 48,819,453 1977 6,891,317,498 568,851,419 -177,033,463 47,366,100 55,008,163 1978 8,455,390,401 592,557,841 -633,123,486 53,321,700 60,059,365 1979 10,310,148,406 625,168,261 -151,148,220 50,529,700 68,391,270 1980 12,802,319,355 718,032,836 -115,385,855 62,230,800 73,124,423 1981 15,508,349,653 814,190,392 -372,879,185 63,162,700 82,924,013 1982 16,517,385,129 926,033,957 -68,833,150 61,813,400 98,441,027 1983 16,068,362,117 1,023,678,474 -400,365,922 71,551,000 152,135,488 1984 18,068,820,742 1,102,444,454 -412,943,156 82,115,700 162,606,410 1985 18,131,982,786 1,127,744,490 1,301,624,294 77,377,700 173,738,745 Total, 1914-85 183,886,513,300 14,232,097,675 -2,557,978,043 1,007,396,908 1,451,811,705 Aggregate for each Bank, 1914-85 Boston 8,803,617,629 947,943,847 -47,543,082 37,333,086 83,235,321 New York 51,829,910,006 2,925,334,810 -269,839,431 261,711,586 330,930,193 Philadelphia .... 8,136,548,394 752,747,865 -52,926,799 49,834,118 75,488,535 Cleveland 13,135,554,453 977,186,737 -128,864,534 82,813,890 92,087,896 Richmond 14,351,925,436 1,109,657,326 -78,391,941 52,019,976 140,751,601 Atlanta 7,468,018,891 1,181,730,325 -92,893,931 71,936,360 99,947,294 Chicago 27,968,230,990 1,876,217,691 -218,227,706 145,473,172 204,636,012 St. Louis 6,587,374,227 776,757,094 -50,960,464 31,846,172 58,931,510 Minneapolis .... 3,427,542,010 629,740,114 -39,241,014 29,390,115 27,095,620 Kansas City 8,126,042,728 884,742,629 -56,048,651 42,996,509 73,443,369 Dallas 10,290,905,326 779,031,666 -63,755,820 60,520,873 86,232,774 San Francisco .. 23,760,843,212 1,391,007,569 -157,660,377 141,521,051 179,031,580 Total 183,886,513,300 14,232,097,675 -2,557,978,043 1,007,396,908 1,451,811,705 1. The $1,910,033,349 transferred to surplus was $11,131,013 transferred from reserves for contingenreduced by direct charges of $500,000 for charge-off cies (1945), leaving a balance of $1,781,361,148 on on Bank premises (1927), $139,299,557 for contribu- Dec. 31, 1984. tions to capital of the Federal Deposit Insurance Cor- NOTE. Details may not add to totals because of poration (i934), and $3,657 net upon elimination of rounding. sec. 13b surplus (1958); and was increased by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 221 9.—Continued Payments to U.S. Treasury Transferred Transferred Dividends Interest on to surplus to surplus paid Franchise Under Federal Reserve (section 13b) (section 7) tax section 13b notes 41,136,551 ... ... 3,493,570,636 ... 32,579,700 43,488,074 ... ... 3,356,559,873 ... 40,403,250 46,183,719 ... ... 3,231,267,663 ... 50,661,000 49,139,682 ... ... 4,340,680,482 ... 51,178,300 52,579,643 ... ... 5,549,999,411 ... 51,483,200 54,609,555 ... ... 5,382,064,098 ... 33,827,600 57,351,487 ... ... 5,870,463,382 ... 53,940,050 60,182,278 ... ... 5,937,148,425 ... 45,727,650 63,280,312 ... ... 7,005,779,497 ... 47,268,200 67,193,615 ... ... 9,278,576,140 ... 69,141,200 70,354,516 ... ... 11,706,369,955 ... 56,820,950 74,573,806 ... ... 14,023,722,907 ... 76,896,650 79,352,304 ... ... 15,204,590,947 ... 78,320,350 85,151,835 ... ... 14,228,816,297 ... 106,663,100 92,620,451 ... ... 16,054,094,674 ... 161,995,900 103,028,905 ... ... 17,796,464,292 ... 155,252,950 1,807,327,389 149,138,300 2,188,893 162,070,168,999 -3,657 1,910,033,349l 77,347,685 7,111,395 280,843 7,539,793,233 135,411 62,893,725 495,324,496 68,006,262 369,116 47,002,130,252 -433,412 476,697,271 100,394,242 5,558,901 722,406 7,001,708,746 290,661 96,876,122 155,655,819 4,842,447 82,930 11,573,796,017 -9,906 120,234,093 89,562,799 6,200,189 172,493 12,778,548,569 -71,517 96,692,058 116,220,097 8,950,561 79,264 5,744,443,527 5,491 151,812,040 252,043,469 25,313,526 151,045 24,989,646,682 11,682 265,510,004 58,401,790 2,755,629 7,464 5,548,898,095 -26,515 58,842,528 49,572,086 5,202,900 55,615 2,584,809,063 64,874 62,370,613 75,099,139 6,939,100 64,213 6,902,442,043 -8,674 84,275,750 102,393,511 560,049 102,083 9,045,764,482 55,337 152,488,728 235,312,256 7,697,341 101,421 21,358,188,291 -17,089_ 290,340,417 1,807,327,389 149,138,300 2,188,893 162,070,168,999 -3,657 1,910,033,349 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 Tables 10. Revenue and Expenses of Priced Services at Federal Reserve Banks, 1985 and 1984 Millions of dollars Service Wire Total Commercial transfer Item check and net collection settlement 1985 1984 1985 1984 1985 1984 Revenue 733.0 697.0 555.8 529.6 77.4 75.2 Expenses1 , 617.2 602.3 464.6 450.2 62.4 61.1 Net revenue 115.7 94.7 91.2 79.5 14.9 14.1 Private sector adjustment2 82.2 75.3 61.6 57.4 10.6 10.6 Net revenue after private sector adjustment 33.6 19.4 29.6 22.1 4.3 3.5 MEMO: Net revenue after private sector adjustment, with allowance for ACH program3 38.6 26.3 1. Total System revenue for 1985 and 1984 respec- Commercial check collection, commercial ACH, tively comprises $613.8 million and $574.7 million of book-entry securities, and definitive safekeeping and income from fees for services, and $119.1 million and noncash collection expenses include float costs for $122.3 million of income related to clearing balances 1985 and 1984. Wire transfer and net settlement exestablished by depository institutions. Total System penses include float costs for 1985. expenses include $105.6 million and $118.7 million 2. This adjustment is an imputed cost intended to of earnings credits granted to depository institutions reflect the taxes that would have been paid and the on clearing balances. return on capital that would have been provided had a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 223 10.—Continued Service Definitive Book- Commercial safekeeping Cash ACH3 and noncasn entry services securities collection 1985 1984 1985 1984 1985 1984 1985 1984 27.5 13.8 25.0 23.0 28.8 29.2 18.5 26.2 29.1 19.7 23.0 22.7 20.1 23.2 18.0 25.4 (1.6) (5.9) 2.0 .3 .7 6.0 .5 .7 2.5 1.2 2.3 1.8 4.8 3.9 .3 .5 (4.1) (7.1) (.3) (1.5) 3.9 2.1 .9 private firm furnished the services. NOTE. Revenue and expenses of priced services of- 3. The Board established an incentive pricing pro- fered by the Federal Reserve Banks are derived from gram for the commercial ACH service that provides the income and expense data shown in table 8. Exfor fee structures designed to recover an increasing penses for priced services are based primarily on the share of expenses over a period of several years. Reve- Federal Reserve Planning and Control System, which nue for the commercial ACH service was expected to provides for the allocation of expenses to the principal represent approximately 80 percent and 60 percent of areas of activity of the Banks. expenses plus the private sector adjustment for 1985 and 1984 respectively. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 Tables Operations in Principal Departments of Federal Reserve Banks, 1982-85 Operation 1985 1984 1983 1982 Millions of pieces (except as noted) Loans (thousands) 24 33 22 24 Currency received and counted 14,655 13,422 11,464 10,679 Currency verified and destroyed 5,744 5,329 4,403 4,147 Coin received and counted 19,691 19,201 17,712 16,859 Checks handled U.S. government checks 592 598 612 655 Postal money orders 130 135 115 126 All other' 15,965 15,178 14,650 14,278 Issues, redemptions, and exchanges of U.S. government securities 171 168 168 156 Transfer of funds2 45 42 38 35 Food stamps redeemed 2,322 2,536 2,684 2,565 Millions of dollars Loans 307,856 852,777 214,190 184,997 Currency received and counted 182,095 183,419 141,684 128,803 Currency verified and destroyed 51,081 50,164 36,224 31,258 Coin received and counted 3,226 3,624 2,795 2,714 Checks handled U.S. government checks 538,261 529,895 552,493 628,639 Postal money orders 9,486 9,085 7,854 6,645 Allother1 9,557,753 9,553,515 9,854,112 8,205,164 Issues, redemptions, and exchanges of U.S. government securities 65,866,333 50,327,014 51,352,275 26,550,780 Transfer of funds 2 109,126,369 98,003,445 87,754,086 73,997,823 Food stamps redeemed 10,195 9,941 10,861 9,869 1. In previous Annual Reports data included checks 2. In previous Annual Reports data included handled by more than one Federal Reserve office. transfers processed by both sending and receiving Federal Reserve offices. 12. Federal Reserve Bank Interest Rates, December 31, 1985 Percent per year Loans to depository institutions Federal Reserve Short-term Extended credit2 Bank adjustment credit and First 60 days Next 90 days After 150 credit1 of borrowing of borrowing days Boston 7V 2 7V 2 8V2 New York .. Philadelphia . Cleveland ... Richmond .. Atlanta Chicago St. Louis ... Minneapolis . Kansas City . Dallas > i San Francisco 7V2 Vh 8V2 9V 2 1. Rates applied to short-term advances for the institution is under sustained liquidity pressures. As purpose of meeting temporary funding requirements an alternative, for loans outstanding for more than 150 and to longer-term advances made to smaller days, a Federal Reserve Bank may charge a flexible institutions tor the purpose of meeting seasonally rate that takes into account rates on market sources of recurring needs for funds. A temporary simplified funds, but in no case will the rate charged be less than seasonal program was established on Mar. 8, 1985, the basic rate plus one percentage point. Where credit and the interest rate was set at 8V2 percent at that provided to a particular depository institution is time. On May 20, this rate was lowered to 8 percent. anticipated to be outstanding for an unusually See sections 201.3(a) and 201.3(b)(l) of Regula- prolonged period and in relatively large amounts, the tion A. time period in which each rate under this structure is 2. Applicable to advances when exceptional applied may be shortened. See section 201.3(b)(2) of circumstances or practices involve only a particular Regulation A. depository institution and to advances when an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 225 13. Reserve Requirements of Depository Institutions' Member bank requirements before implementation of the Type of deposit, and Monetary Control Act deposit interval Percent of deposit Effective date Net demand (millions of dollars) 2 $0-$2 7 12/30/76 $2-$10 9'/2 12/30/76 $10-$100 113/4 12/30/76 $100-$400 123/4 12/30/76 More than $400 16'/4 12/30/76 Time and savings 23 Savings 3/16/67 Time4 $0 million-5 million, by maturity 30-179 days 3 3/16/84 180 days to 4 years V/2 1/8/76 4 years or more 1 10/30/75 More than $5 million, by maturity 30-179 days 6 12/12/74 180 days to 4 years 2'/2 1/8/76 4 years or more 1 10/30/75 1. Reserve requirements in effect on Dec. 31, 1984. The average reserve requirement on savings and For information regarding previous reserve require- other time deposits before implementation of the ments, see earlier editions of the ANNUAL REPORT and Monetary Control Act had to be at least 3 percent, the of the Federal Reserve Bulletin. Under provisions of minimum specified by law. the Monetary Control Act, depository institutions in- 4. Effective Nov. 1, 1978, a supplementary reserve clude commercial banks, mutual savings banks, sav- requirement of 2 percent was imposed on large time ings and loan associations, credit unions, agencies and deposits of $100,000 or more, obligations of affilibranches of foreign banks, and Edge corporations. ates, and ineligible acceptances. This supplementary 2. Requirement schedules are graduated, and each requirement was eliminated with the maintenance perdeposit interval applies to that part of the deposits of iod beginning July 24, 1980. each bank. Demand deposits subject to reserve re- Effective with the reserve maintenance period bequirements were gross demand deposits minus cash ginning Oct. 25, 1979, a marginal reserve requireitems in process of collection and demand balances ment of 8 percent was added to managed liabilities in due from domestic banks. excess of a base amount. This marginal requirement The Federal Reserve Act as amended through 1978 was increased to 10 percent beginning Apr. 3, 1980, specified different ranges of requirements for reserve was decreased to 5 percent beginning June 12, 1980, city banks and for other banks. Reserve cities were and was eliminated beginning July 24, 1980. Mandesignated under a criterion adopted effective Nov. 9, aged liabilities are denned as large time deposits, 1972, by which a bank having net demand deposits of Eurodollar borrowings, repurchase agreements more than $400 million was considered to have the against U.S. government and federal agency securicharacter of business of a reserve city bank. The pres- ties, federal funds borrowings from nonmember instience of the head office of such a bank constituted tutions, and certain other obligations. In general, the designation of that place as a reserve city. Cities in base for the marginal reserve requirement was origiwhich there were Federal Reserve Banks or branches nally the greater of (a) $100 million or (b) the average were also reserve cities. Any banks having net de- amount of the managed liabilities held by a member mand deposits of $400 million or less were considered bank, Edge corporation, or family of U.S. branches to have the character of business of banks outside of and agencies of a foreign bank for the two reserve reserve cities and were permitted to maintain reserves computation periods ending Sept. 26, 1979. For the at ratios set for banks not in reserve cities. computation period beginning Mar. 20, 1980, the Effective Aug. 24, 1978, the Regulation M reserve base was lowered (a) 7 percent or (b) the decrease in requirements on net balances due from domestic an institution's U.S. office gross loans to foreigners banks to their foreign branches and on deposits that and gross balances due from foreign offices of other foreign branches lend to U.S. residents were reduced institutions between the base period (Sept. 13-26, to zero from 4 percent and 1 percent respectively. The 1979) and the week ending Mar. 12, 1980, whichever Regulation D reserve requirement of borrowings from was greater. For the computation period beginning unrelated banks abroad was also reduced to zero from May 29, 1980, the base was increased 7>/2 percent 4 percent. above the base used to calculate the marginal reserve Effective with the reserve computation period be- in the statement week of May 14-21, 1980. In addiginning Nov. 16, 1978, domestic deposits of Edge tion, beginning Mar. 19, 1980, the base was reduced corporations were subject to the same reserve require- to the extent that foreign loans and balances declined. ments as deposits of member banks. 5. The Garn-St Germain Depository Institutions 3. Negotiable order of withdrawal (NOW) accounts Act of 1982 (Public Law 97-320) provides that $2 and time deposits such as Christmas and vacation club million of reservable liabilities (transaction accounts, accounts were subject to the same requirements as nonpersonal time deposits, and Eurocurrency liabilisavings deposits. ties) of each depository institution be subject to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 Tables 13. Reserve Requirements of Depository Institutions —Continued Depository institution requirements after implementation of the Ty d p e e p o o f s i d t e i p n o te s r i v t, a l a 5 nd Monetary Control Act6 Percent of deposits Effective date Net transaction accounts78 $0 million-$28.9 million 3 12/29/83 Over $28.9 million 12 12/29/83 Nonpersonal time deposits9 By original maturity Less than 1 XIT. years 0 10/6/83 1V2 years or more 0 10/6/83 Eurocurrency liabilities All types 3 11/13/80 a zero percent reserve requirement. The Board is to 7. Transaction accounts include all deposits on adjust the amount of reservable liabilities subject to which the account holder is permitted to make withthis zero percent reserve requirement each year for drawals by negotiable or transferable instruments, the next succeeding calendar year by 80 percent of the payment orders of withdrawal, and telephone and prepercentage increase in the total reservable liabilities of authorized transfers (in excess of three per month) for all depository institutions, measured on an annual ba- the purpose of making payments to third persons or sis as of June 30. No corresponding adjustment is to others. However, MMDAs and similar accounts ofbe made in the event of a decrease. Effective Dec. 9, fered by institutions not subject to the rules of the 1982, the amount of the exemption was established at Depository Institutions Deregulation Committee that $2.1 million. Effective with the reserve maintenance permit no more than six preauthorized, automatic, or period beginning Jan. 12, 1984, the amount of the other transfers per month of which no more than three exemption was increased to $2.2 million, and on can be checks—are not transaction accounts (such ac- Jan. 1, 1985, to $2.4 million. Effective with the re- counts are savings deposits subject to time deposit serve computation period beginning Dec. 31, 1985, reserve requirements). the exemption was increased to $2.6 million. In deter- 8. The Monetary Control Act of 1980 requires that mining the reserve requirements of depository institu- the amount of transaction accounts against which the 3 tions, the exemption shall apply in the following or- percent reserve requirement applies be modified ander: (1) nonpersonal money market deposit accounts nually by 80 percent of the percentage increase in (MMDAs) authorized under 12 CFR section transaction accounts held by all depository institutions 1204.122; (2) net NOW accounts (NOW accounts less determined as of June 30 each year. Effective Dec. allowable deductions); (3) net other transaction ac- 31, 1981, the amount was increased accordingly from counts; and (4) nonpersonal time deposits or Eurocur- $25 million to $26 million; effective Dec. 30, 1982, to rency liabilities starting with those with the highest $26.3 million; effective Dec. 29, 1983, to $28.9 milreserve ratio. With respect to NOW accounts and lion; effective Jan. 1, 1985, to $29.8 million; and other transaction accounts, the exemption applies only effective Dec. 31, 1985, to $31.7 million. to such accounts that would be subject to a 3 percent 9. In general, nonpersonal time deposits are time reserve requirement. deposits, including savings deposits, that are not 6. For nonmember banks and thrift institutions that transaction accounts and in which a beneficial interest were not members of the Federal Reserve System on is held by a depositor that is not a natural person. Also or after July 1, 1979, a phase-in period ends included are certain transferable time der>osits held by Sept. 3, 1979. For banks that were members on or natural persons and certain obligations issued to deafter July 1, 1979, but withdrew on or before pository institution offices located outside the United Mar. 31, 1980, the phase-in period established by States. For details, see section 204.2 of Regulation D. Public Law 97-320 ended on Oct. 24, 1985. For exist- NOTE. Required reserves must be held in the form of ing member banks the phase-in period of about three deposits witn Federal Reserve Banks or vault cash. years was completed on Feb. 2, 1984. All new institu- Nonmembers may maintain reserve balances with a tions will have a two-year phase-in beginning with the Federal Reserve Bank indirectly on a pass-through date that they open for business, except for those insti- basis with certain approved institutions. tutions that have total reservable liabilities of $50 million or more. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 227 14. Maximum Interest Rates Payable on Time and Savings Deposits at Federally Insured Institutions, December 31, 19851 Percent per annum Savings and loan associations and Commercial banks mutual savings banks (thrift institutions)1 Type and maturity of deposit Effective Effective Percent Percent date date Savings 5V2 1/1/84 5V2 7/1/79 Negotiable order of withdrawal accounts 5V4 12/31/80 5V2 12/31/80 Negotiable order of withdrawal accounts of $1,000 or more .... 1/5/83 ... 1/5/83 Money market deposit account 2'3 ... 12/14/82 ... 12/14/82 Time accounts 7 7 - - 3 3 1 1 d d a a y y s s o o f f l $ e 1 s , s 0 t 0 h 0 a n o r $ m l,0 or 0 e 0 2 4 .... 5V2 1 1 / / 1 5 / / 8 8 4 3 5 . V .. 2 1 9 / / 5 1 / / 8 8 3 2 More than 31 days 10/1/83 ... 10/1/83 1. Effective Oct. 1, 1983, restrictions on the maxi- ments were lowered to $1,000. No minimum maturity mum rates of interest payable by commercial banks period is required for this account, but depository inand thrift institutions on various categories of deposits stitutions must reserve the right to require seven days' were removed. For information regarding previous in- notice before withdrawals. When the average balance terest rate ceilings on all categories of accounts, see is less than $1,000, the account is subject to the maxiearlier issues of the Federal Reserve Bulletin, the Fed- mum ceiling rate of interest for negotiable order of eral Home Loan Bank Board Journal, and the Annual withdrawal accounts; compliance with the average Report of the Federal Deposit Insurance Corporation. balance requirement may be determined over a period 2. Effective Dec. 1, 1983, IRA/Keogh (H.R. 10) of one month. Depository institutions may not guaran- Plan accounts are not subject to minimum deposit re- tee a rate of interest for this account for a period quirements. Effective Jan. 1, 1985, the minimum de- longer than one month or condition the payment of a nomination requirement for all other NOW accounts rate on a requirement that the funds remain on deposit was lowered from $2,500 to $1,000. for longer than one month. 3. Effective Dec. 14, 1982, depository institutions 4. Effective Jan. 1, 1985, the minimum denominaare authorized to offer a new account with a required tion requirement was lowered from $2,500 to $1,000. initial balance of $2,500 and an average maintenance Deposits of less than $1,000 issued to governmental balance of $2,500 not subject to interest rate restric- units continue to be subject to an interest rate ceiling tions. Effective Jan. 1, 1985, the minimum denomina- of 8 percent. tion and average balance maintenance require- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 Tables 15. Margin Requirements for Regulations T, U, G, and X Percent of market value Margin Convertible Short sales Effective date stocks bonds T only 2 1934, Oct. 1 . 25-45 1936, Feb. 1 . 25-55 Apr. 1 . 55 1937, Nov. 1 . 40 '50 1945, Feb. 5 . 50 50 July 5 . 75 75 1946, Jan. 21 100 100 1947, Feb. 21 75 75 1949, Mar. 3 . 50 50 1951, Jan. 17 75 75 1953, Feb. 20 50 50 1955, Jan. 4 . 60 60 Apr. 23 70 70 1958, Jan. 16 50 50 Aug. 5 . 70 70 Oct. 16 90 90 1960, July 28 70 70 1962, July 10 50 50 1963, Nov. 6 . 70 70 1968, Mar. 11 70 50 70 June 8 . 80 60 80 1970, May 6 . 65 50 65 1971, Dec. 6 . 55 50 55 1972, Nov. 24 65 50 65 1974, Jan. 3 . 50 50 50 1977, Jan. 1 3. 50 50 50 1. These regulations, adopted by the Board of Gover- tion G, effective Mar. 11, 1968; and Regulation X, nors pursuant to the Securities Exchange Act of 1934, effective Nov. 1, 1971. limit the amount of credit to purchase and carry "mar- 2. From Oct. 1, 1934, to Oct. 31, 1937, the requiregin securities" and "margin stock" (as defined in the ment was the margin "customarily required" by the regulations) when such credit is collateralized by se- brokers and dealers. curities. Margin requirements are the difference be- 3. The margin required for writing options (Regulatween the market value (100 percent) and the maxi- tion T only) was set at 30 percent; it is expressed as a mum loan value of collateral as prescribed by the percent of the current market value of the stock under- Board. Regulation T was adopted effective Oct. 15, lying the option. 1934; Regulation U, effective May 1, 1936; Regula- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 229 16. Principal Assets and Liabilities, and Number of Insured Commercial Banks, by Class of Bank, June 30, 1985 and 1984 ' Asset and liability items shown in millions of dollars Insured commercial banks Insured Item Member banks nonmember Total banks Total National State June 30, 1985 Loans and investments, total .. 1,684,424 1,224,893 980,577 244,317 459,530 Loans Gross 1,300,233 979,049 784,853 194,196 321,184 Net 1,283,513 967,750 776,062 191,688 315,762 Investments 384,191 245,845 195,723 50,121 138,346 U.S. government securities 251,538 157,285 127,029 30,256 94,253 Other 132,653 88,559 68,694 19,865 44,094 Cash assets, total 202,942 157,733 121,455 36,277 45,210 Deposits, total 1,648,874 1,171,900 948,920 222,980 476,974 Interbank 55,796 50,161 35,027 15,134 5,635 Other transaction ... 462,375 339,136 267,601 71,535 123,239 Other nontransaction 1,246,117 858,804 711,067 147,737 387,314 Total equity capital 158,769 116,331 91,187 25,144 42,438 Number of banks 14,351 5,970 4,904 1,066 8,381 June 30, 1984 Loans and investments, total ... 1,549,575 1,121,469 897,670 223,799 428,106 Loans Gross 1,177,609 885,002 707,863 177,140 292,607 Net 1,160,638 873,670 698,963 174,707 286,968 Investments 371,965 236,467 189,807 46,660 135,499 U.S. government securities . 241,689 149,006 121,215 27,791 92,684 Other 130,276 87,461 68,593 18,868 42,815 Cash assets, total 192,962 149,751 114,234 35,518 43,210 Deposits, total 1,523,606 1,078,892 867,967 210,925 444,714 Interbank 53,307 48,787 32,210 16,577 4,520 Other demand 436,637 317,610 249,676 67,933 119,027 Other time and savings . 1,033,663 712,495 586,080 126,415 321,167 Total equity capital 144,329 105,011 82,040 22,970 39,318 Number of banks 14,373 5,825 4,774 1,051 8,548 1. All insured commercial banks in the United NOTE. Details may not add to totals because of States. rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 Tables 17. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—Year-End 1918-85, and Month-End 1985 Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. government cial Treasecurities draw- sury Period Total Bo o u u g t- ht r u c H e h n p e a d u l s e d r e r - Loans Float1 ot A h l e l r2 F R a O e s e d s t s h e e e t e r r s r a v 3 l e Total s G to o c l k d 4 c r i e i c i a g r n a c h t g t - i t e f s - s r c t o i e a n u u n n g r t c d - - y right agree- count ment 1918 .... 239 239 0 1,766 199 294 0 2,498 2,873 1,795 1919 .... 300 300 0 2,215 201 575 0 3,292 2,707 1,707 1920 .... 287 287 0 2,687 119 262 0 3,355 2,639 1,709 1921 .... 234 234 0 1,144 40 146 0 ,563 3,373 1,842 1922 .... 436 436 0 618 78 273 0 ,405 3,642 1,958 1923 .... 134 80 54 723 27 355 0 ,238 3,957 2,009 1924 .... 540 536 4 320 52 390 0 ,302 4,212 2,025 1925 375 367 643 63 378 0 ,459 4,112 1,977 1926 315 312 3 637 45 384 0 ,381 4,205 1,991 1927 617 560 57 582 63 393 0 1,655 4,092 2,006 1928 228 197 31 1,056 24 500 0 1,809 3,854 2,012 1929 511 488 23 632 34 405 0 1,583 3,997 2,022 739 686 43 251 21 372 0 1,373 4,306 2,027 817 775 42 638 20 378 0 1,853 4,173 2,035 1,855 1,851 4 235 14 41 0 2,145 4,226 2,204 2,437 2,435 2 98 15 137 0 2,688 4,036 2,303 2,430 2,430 0 7 5 21 0 2,463 8,238 2,511 2,431 2,430 1 5 12 38 0 2,486 10,125 2,476 2,430 2,430 0 3 39 28 0 2,500 11,258 2,532 2,564 2,564 0 10 19 19 0 2,612 12,760 2,637 2,564 2,564 0 4 17 16 0 2,601 14,512 2,798 2,484 2,484 0 7 91 11 0 2,593 17,644 2,963 1940 2,184 2,184 0 3 80 8 0 2,274 21,995 3,087 1941 .... 2,254 2,254 0 3 94 10 0 2,361 22,737 3,247 1942 6,189 6,189 0 6 471 14 0 6,679 22,726 3,648 1943 11,543 11,543 0 5 681 10 0 12,239 21,938 4,094 1944 18,846 18,846 0 80 815 4 0 19,745 20,619 4,131 1945 24,252 24,262 0 249 578 2 0 15,091 20,065 4,339 1946 23,350 23,350 0 163 580 1 0 24,093 20,529 4,562 1947 22,559 22,559 0 85 535 1 0 23,181 22,754 4,562 1948 23,333 23,333 0 223 541 1 0 24,097 24,244 4,589 1949 18,885 18,885 0 78 534 2 0 19,499 24,427 4,598 20,778 20,725 53 67 1,368 3 0 22,216 22,706 4,636 23,801 23,605 196 19 1,184 5 0 25,009 22,695 4,709 24,697 24,034 663 156 967 4 0 25,825 23,187 4,812 25,916 25,318 598 28 935 2 0 26,880 22,030 4,894 24,932 24,888 44 143 808 1 0 25,885 21,713 4,985 1955 24,785 24,391 394 108 1,585 29 0 26,507 21,690 5,008 1956 24,915 24,610 305 50 1,665 70 0 26,699 21,949 5,066 1957 24,238 23,719 519 55 1,424 66 0 25,784 22,781 5,146 1958 26,347 26,252 95 64 1,296 49 0 27,755 20,534 5,234 1959 26,648 26,607 41 458 1,590 75 0 28,771 19,456 5,311 27,384 26,984 400 33 1,847 74 0 29,338 17,767 5,398 28,881 30,478 159 130 2,300 51 0 31,362 16,889 5,585 30,820 28,722 342 38 2,903 110 0 33,871 15,978 5,567 33,593 33,582 11 63 2,600 162 0 36,418 15,513 5,578 37,044 36,506 538 186 2,606 94 0 39,930 15,388 5,405 For notes see last two pages of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 231 17.—Continued Factors absorbing reserve, funds Deposits, other Member bank than reserves, with Federal Reserve Banks Other reserves Cur- Rerency Trea- Other quired Federal in sury Federal clear- Reserve cash Reserve liacir- hold- ing bilities With Curcula- ings6 Trea- For- Other co a u c n" ts3 baf- and Federal rency Re- Extion sury eign ances capital3 Reserve and quired9 cess9 Banks coin8 4,951 288 51 96 25 118 0 0 1,636 0 1,585 51 5,091 385 31 73 28 208 0 0 1,890 0 1,822 68 5,325 218 57 5 18 298 0 0 1,781 0 0 0 4,403 214 96 12 15 285 0 0 1,753 0 1,654 99 4,530 225 11 3 26 276 0 0 1,934 0 0 0 4,757 213 38 4 19 275 0 0 1,898 0 1,884 14 4,760 211 51 19 20 258 0 0 2,220 0 2,161 59 4,817 203 16 8 21 272 0 0 2,212 0 2,256 -44 4,808 201 17 46 19 293 0 0 2,194 0 2,250 -56 4,716 208 18 5 21 301 0 0 2,487 0 2,424 63 4,686 202 23 6 21 348 0 0 2,389 0 2,430 -41 4,578 216 29 6 24 393 0 0 2,355 0 2,428 -73 4,603 211 19 6 22 375 0 0 2,471 0 2,375 96 5,360 222 54 79 31 354 0 0 1,961 0 1,994 -33 5,388 272 8 19 24 355 0 0 2,509 0 1,933 576 5,519 284 3 4 128 360 0 0 2,729 0 1,870 859 5,536 :>,029 121 20 169 241 0 0 4,096 0 2,282 1,814 5,882 2,566 544 29 226 253 0 0 5,587 0 2,743 2,844 6,543 :>,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 :5,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 :>,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 :>,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 :>,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 :>,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 :> 193 799 793 485 256 0 0 13,117 0 11,129 1,988 20,499 2,303 579 1,360 356 339 0 0 12,886 0 11,650 1,236 25,307 :>,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 :>,287 977 862 446 495 0 0 15,915 0 14,457 1,458 28,952 :>,272 393 508 314 607 0 0 16,139 0 15,577 562 28,868 1,336 870 392 569 563 0 0 17,899 0 16,400 1,499 28,224 ,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 ,312 821 767 750 106 0 0 16,568 0 15,550 1,018 27,741 ,293 668 895 565 714 0 0 17,681 0 16,509 1,172 29,206 1,270 247 526 363 746 0 0 20,056 0 19,667 389 30,433 1,270 389 550 455 111 0 0 19,950 0 20,520 -570 30,781 761 346 423 493 839 0 0 20,160 0 19,397 763 30,509 796 563 490 441 907 0 0 18,876 0 18,618 258 31,158 767 394 402 554 925 0 0 19,005 0 18,903 102 31,790 775 441 322 426 901 0 0 19,059 0 19,089 -30 31,834 761 481 356 246 998 0 0 19,034 0 19,091 -57 32,193 683 358 272 391 1,122 0 0 18,504 0 18,574 -70 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 33,918 422 465 279 320 1,044 0 0 17,387 2,544 18,988 96 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471 39,619 612 820 229 321 1,036 0 0 18,086 4,151 21,663 574 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 Tables 17. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—Year-End 1918-85, and Month-End 1985—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S s . e c g u o r v i e t r ie n s m 10 ent d c r i a a w l - T su re r a y - Period Other Gold ing cur- Total B ri o o g u u h g t t - h 11 t a r u c n e g h n c p r a d J u e s U e e r e r - - Loans Float1 ot A h l e l r F R a e s e d s s e e e t r r s a v 3 l e Total stock4 c r c i e i o c a g r a u c h t t - n i t e f s t - s r t o i e a n u n n g t c d - y ment 1965 .... 40,768 40,478 290 137 2,248 187 0 43,340 13,733 5,575 1966 .... 44,316 43,655 661 173 2,495 193 0 47,177 13,159 6,317 1967 .... 49,150 48,980 170 141 2,576 164 0 52,031 11,982 6,784 1968 .... 52,937 52,937 0 186 3,443 58 0 56 6^4 10,367 6 795 1969 .... 57,154 57,1542 0 183 3,440 64 2,743 64,584 10,367 6,852 1970 .... 62,142 62,142 0 335 4,261 57 1,123 67,918 10,732 400 7,147 1971 .... 70,804 69,481 1,323 39 4,343 261 1,068 76,515 10,132 400 7,710 1972 .... 71,230 71,119 111 1,981 3,974 106 1,260 78,551 10,410 400 8,313 1973 .... 80,495 80,395 100 1,258 3,099 68 1,152 86,072 11,567 400 8,716 1974 .... 85,714 84,760 954 299 2,001 999 3,195 92,208 11,652 400 9,253 1975 .... 94,124 92,789 1,335 211 3,688 1,126 3,312 102,461 11,599 500 10,218 1976 .... 104,093 100,062 4,031 25 2,601 991 3,182 110,892 11,598 1,200 10,810 1977 .... 111,274 108,922 2,352 265 3,810 954 2,442 118,745 11,718 1,250 11,331 1978 .... 118,591 117,374 1,217 1,174 6,432 587 4,543 131,327 11,671 1,300 11,831 1979 .... 126,167 124,507 1,660 1,454 6,767 704 5,613 140,705 11,172 1,800 13,083 1980 .... 130,592 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 13,427 1981 .... 140,348 136,863 3,485 1,601 1,762 195 9,230 153,136 11,151 3,318 13,687 1982 .... 148,837 144,544 4,293 717 2,735 1,480 9,890 63,659 11,148 4,618 13,786 1983 .... 160,795 159,203 1,592 918 1,605 418 8,728 172,464 11,121 4,618 15,732 1984 .... 169,627 167,612 2,015 3,577 833 0 12,347 186,384 11,096 4,618 16,418 1985 .... 191,248 186,025 5,223 3,060 988 0 15,302 210,598 11,090 4,718 17,075 1985 Jan. ... 162,944 162,944 0 2,139 502 0 12,305 177,890 11,095 4,618 16,476 Feb. ... 165,384 165,496 2,888 2,329 -56 0 11,129 181,786 11,093 4,618 16,531 Mar. .. 169,355 169,355 0 2,582 298 0 12,476 184,711 11,093 4,618 16,601 Apr. .. . 182,816 174,832 7,984 1,525 254 0 13,057 197,652 11,091 4,618 16,673 May ... 172,608 172,608 0 1,765 -816 0 11,705 185,262 11,091 4,618 16,726 June ... 177,413 177,413 0 1,338 262 0 12,429 191,442 11,090 4,618 16,770 July ... 175,352 175,352 0 1,567 -571 0 14,575 190,923 11,090 4,618 16,817 Aug. .. 178,336 178,336 0 2,068 -152 0 12,441 192,693 11,090 4,618 16,868 Sept. .. 177,929 177,929 0 2,520 69 0 13,630 194,148 11,090 4,618 16,971 Oct. ... 176,932 176,932 0 886 335 0 14,731 192,884 11,090 4,718 16,971 Nov. ... 177,395 177,395 0 1,602 909 0 14,823 194,729 11,090 4,718 17,019 Dec. .. 191,248 186,025 5,223 3,060 988 0 15,302 210,598 11,090 4,718 17,075 1. Beginning with 1960, figures reflect a minor 6. This category consists of the coin and paper curchange in concept; see Federal Reserve Bulletin, vol. rency held by the Treasury, as well as any gold in 47 (February 1961), p. 164. excess of the gold certificates issued to the Reserve 2. Data consist principally of acceptances and, until Bank. Aug. 21, 1959, industrial loans, authority for which 7. Beginning in November 1979, includes reserves expired on that date. of member banks, Edge corporations, and U.S. agen- 3. For the period before Apr. 16, 1969, this category cies and branches of foreign banks. Beginning on includes the total of Federal Reserve capital paid in, Nov. 13, 1980, includes reserves of all depository surplus, other capital accounts, and other liabilities institutions. and accrued dividends, less the sum of bank premises 8. Between Dec. 1, 1959, and Nov. 23, 1960, part of and other assets, and was reported as "Other Federal the amount was allowed as reserves; thereafter all was Reserve accounts"; thereafter, "Other Federal Re- allowed. serve assets" and "Other Federal Reserve liabilities 9. These figures are estimated through 1958. Before and capital" are shown separately. 1929, they were available only on call dates (in 1920 4. For the period before Jan. 30, 1934, data include and 1922 the call dates were Dec. 29). Beginning on gold held in Federal Reserve Banks and in circulation. Sept. 12, 1968, the amount is based on close-of-busi- 5. These figures include currency and coin (other ness figures for the reserve period two weeks before than gold) issued directly by the Treasury. The largest the report date. components are fractional and dollar coins. For de- 10. Beginning on Dec. 1, 1966, these securities tails see the regular table, "Currency and Coin in include rederal agency obligations held under repur- Circulation," in the Treasury Bulletin. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 233 17.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with Other reserves7 Cur- Federal Reserve Banks Re- Trea- Other Federal rency sury Federal quired Reserve in cash Reserve clear- liacir- hold- ac- ing bilities With Curcula- ings6 Trea- For- Other counts3 bal- and Federal rency Re- Extion sury eign ances capital3 Reserve and quired9 cess9-12 Banks coin 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 -238 44,663 1,176 416 174 588 -147 0 0 19,779 4,310 24,321 -232 47,226 1,344 1,123 135 563 -773 0 0 21,092 4,631 25,905 -182 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 27,439 -700 53,950 596 1,312 134 807 0 0 0 22,085 5,187 28,173 -901 57,903 431 1,156 148 1,233 0 0 1,986 24,150 5,423 30,033 -460 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 9812 72,497 317 2,542 251 1,419 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 2,113 418 l,27513 0 0 2,935 25,843 7,370 37,011 -3,798 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 -l,10314 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328 171,935 479 3,661 191 851 0 1,013 5,392 20,413 17,821 39,179 -945 183,796 513 5,316 253 867 0 1,126 5,952 20,693 n.a. n.a. n.a. 197,488 550 9,351 480 1,041 0 1,490 5,940 27,141 n.a. n.a. n.a. 177,569 535 5,349 244 560 0 1,164 5,964 18,694 n.a. n.a. n.a. 178,416 557 3,308 332 461 0 1,226 5,863 23,866 n.a. n.a. n.a. 179,210 554 3,063 253 347 0 1,359 6,600 25,638 n.a. n.a. n.a. 180,858 586 19,305 348 324 0 1,302 6,652 20,660 n.a. n.a. n.a. 184,691 602 1,933 205 557 0 1,337 6,242 22,131 n.a. n.a. n.a. 185,886 588 3,288 310 321 0 1,348 6,291 25,888 n.a. n.a. n.a. 187,040 577 2,656 274 323 0 1,395 6,325 24,858 n.a. n.a. n.a. 188,548 548 3,656 223 389 0 1,435 6,240 24,230 n.a. n.a. n.a. 187,325 546 4,174 535 497 0 1,444 6,530 25,718 n.a. n.a. n.a. 189,490 547 1,528 268 372 0 1,469 6,339 25,650 n.a. n.a. n.a. 193,463 556 2,294 340 598 0 1,483 6,475 22,347 n.a. n.a. n.a. 197,488 550 9,351 480 1,041 0 1,490 5,940 27,141 n.a. n.a. n.a. chase agreements and beginning on Sept. 29, 1971, member banks and redeposited in full with Federal federal agency issues bought outright. Reserve Banks in connection with voluntary participa- 11. Includes, beginning in 1969, securities tion by nonmember institutions in the Federal Reserve loaned—fully guaranteed by U.S. government securi- System's program of credit restraint. ties pledged with Federal Reserve Banks—and ex- As of Dec. 12, 1974, the amount of voluntary noncludes (if any) securities sold and scheduled to be member bank and foreign-agency and branch deposits bought back under matched sale-purchase transac- at Federal Reserve Banks that are associated with tions. marginal reserves are no longer reported. However, 12. Beginning with the week ending Nov. 15, 1972, two amounts are reported: (1) deposits voluntarily figures include $450 million of reserve deficiencies on held as reserves by agencies and branches of foreign which Federal Reserve Banks are allowed to waive banks operating in the United States and (2) Eurodolpenalties for a transition period in connection with lar liabilities. bank adaptation to Regulation J as amended, effective 14. Beginning with the week ending Nov. 19, 1975, Nov. 9, 1972. Allowable deficiencies are as follows figures are adjusted to include waivers of penalties for (beginning with first statement week of quarter, in reserve deficiencies, in accordance with the change in millions): 1973—Ql, $279; Q2, $172; Q3, $112; Q4, Board policy that became effective Nov. 19, 1975. $84; and 1974—Ql, $67, and Q2, $58. The transition period ended after the second quarter of 1974. NOTE. For a description of figures and discussion of 13. For the period before July 1973, this item in- their significance, see Banking and Monetary Statiscludes certain deposits of domestic nonmember banks tics, 1941-1970 (Board of Governors of the Federal and foreign-owned banking institutions held with Reserve System, 1976), pp. 507-23. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 Tables 18. Changes in Number of Banking Offices in the United States, 1985P Commercial banks (including stock savings Mutual banks and nondeposit trust companies) savings banks type of office All Member Nonmember and change banks Total Na- Non- Non- Total State Insured Insured tional insured insured Banks, Dec. 31, 1984 15,489 15,126 5,982 4,910 1,072 8,530 614 267 96 Changes during 1985 New banks 347 345 226 178 48 92 27 2 0 Ceased banking operation.... -31 -31 -16 -12 -4 -10 -5 0 0 Banks converted into branches -318 -313 -142 -111 -31 -167 -4 -5 0 Other2 -45 -59 0 2 -6 94 -80 -2 -53 Net change ... -47 -58 68 57 12 91 11 -138 Dec. 31, 1985 . 15,442 15,068 6,050 4,967 626 358 16 1,083 8,392 Branches and additional offices, Dec. 31, 1984 \ . 43,128 40,808 26,038 21,222 4,816 14,666 104 2,088 232 Changes during 1985 De novo 1,321 1,249 650 493 157 587 12 65 7 Banks converted 318 313 142 111 31 167 4 5 0 Discontinued -553 -533 -380 -315 -65 -153 0 -20 0 Sale of branch -1 -29 -32 3 28 0 1 0 Other2 1,138 1,256 1,174 1,182 -8 114 -32 80 -198 Net change ... 2,224 2,284 1,557 1,439 118 743 -16 131 -191 Dec. 31, 19853 45,352 43,092 27,595 22,661 4,934 15,409 88 2,219 41 1. As of Dec. 31, 1985, includes 14 noninsured 3. Excludes banking facilities, state member banks and 2 noninsured national trust p Preliminary. Final data will be available in the companies. Annual Statistical Digest, 1985, forthcoming. 2. Includes interclass changes. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 235 19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1985 Bank of Virginia, Richmond, Virginia, to venience and needs of the community are conmerge with Citizens Trust Bank, Portsmouth, sistent with approval. Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Chemical Bank, Cass City, Michigan, to ac- (11/30/84) quire the assets and assume the deposit liabili- The proposed transaction would not be signifi- ties of the Marlette Branch of Peoples State cantly adverse to competition. Bank of Caro, Marlette, Michigan BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL BANK (1/22/85) (2/8/85) Bank of Virginia (Applicant), with assets of The proposed transaction would not be signifi- $2.8 billion, proposes to merge with Citizens cantly adverse to competition. Trust Bank (Bank), with assets of $124 million. Applicant is a subsidiary of the Bank of Vir- BASIS FOR APPROVAL BY THE FEDERAL RESERVE ginia Company (BVA), which controls 7.5 per- BANK (2/26/85) cent of deposits in the Norfolk-Portsmouth Chemical Bank (Applicant), with assets of $25 banking market. If the proposed merger were million, proposes to acquire the Marlette consummated, BVA would control 11.7 percent Branch (Branch) of Peoples State Bank of Caro. of commercial bank deposits in that market. Deposits at Branch amount to $2 million. The proposal would have no significantly ad- The relevant market in the proposal is the verse effect on competition. Sanilac market, in which Branch is located. The proposed merger would not alter the sat- Applicant is not presently represented there. isfactory financial condition of Applicant and The acquisition would have no significant effect BVA. Considerations relating to the conve- on competition because Applicant would have a nience and needs of the community are consist- small share of area deposits. ent with approval. The banking factors and considerations relating to the convenience and needs of the commu- Bank of New York, New York, New York, to nity are consistent with approval. acquire the assets and assume the deposit liabilities of the Great Neck Branch of Hamburg Merchants & Farmers Bank, Columbus, Savings Bank, Brooklyn, New York Mississippi, to merge with Tombigbee Bank & Trust Company, Fulton, Mississippi SUMMARY REPORT BY THE ATTORNEY GENERAL (12/21/84) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (2/15/85) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (2/1/85) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Bank of New York (Applicant), with assets of BANK (3/3/85) $13.2 billion, proposes to acquire the Great Merchants & Farmers Bank (Applicant), with Neck Branch of Hamburg Savings Bank assets of $68 million, proposes to merge with (Branch), with deposits of $29 million. Tombigbee Bank & Trust Company (Bank), Applicant is a subsidiary of the Bank of New with assets of $24 million. York Company (BONY), which currently con- Applicant does not currently operate offices trols 2.2 percent of commercial bank deposits in the Itawamba County and Tbpelo markets, in the New York banking market. If the pro- where Bank's offices are situated, and there posed merger were consummated, BONY would be no significant effect on competition. would continue to control 2.2 percent of the Applicant plans to offer a higher lending limit market deposits. The proposal would have no at the offices now operated by Bank. The consignificantly adverse effect on competition. siderations relating to the convenience and The proposed merger would not alter the sat- needs of the community therefore lend weight isfactory financial condition of Applicant and to approval. Financial factors are consistent BONY. The considerations relating to the con- with approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 Tables 19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1985—Continued Central Bank of the South, Birmingham, Farmers & Merchants Bank of Long Beach, Alabama, to acquire certain assets and assume Long Beach, California, to acquire certain ascertain deposits and other liabilities of sets and assume substantially all of the liabilibranches of First National Bank of Mobile, ties of Capistrano National Bank, San Juan and AmSouth Bank, Mobile, Alabama Capistrano, California SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (3/8/85) No report received. Requests for reports on the The proposed transaction would not be signifi- competitive factors were dispensed with, as aucantly adverse to competition. thorized by the Bank Merger Act, to permit the Reserve Bank to act immediately to safeguard BASIS FOR APPROVAL BY THE FEDERAL RESERVE depositors of Capistrano National Bank. BANK (3/22/85) Central Bank of the South (Applicant), with as- BASIS FOR APPROVAL BY THE FEDERAL RESERVE sets of $3 billion, proposes to acquire certain BANK (4/8/85) assets and assume certain deposits and other Farmers and Merchants Bank of Long Beach liabilities of certain branches (Branches) of (Applicant), with assets of $691 million, pro- First National Bank of Mobile and AmSouth poses to acquire Capistrano National Bank Bank, N.A. total deposits of branches to be ac- (Bank), with assets of $49 million. quired are $113 million. Branches are situated In view of the financial condition of Bank, the in the Mobile banking market, and Applicant, Comptroller of the Currency has recommended which now ranks fifth of nine organizations in immediate action by the Federal Reserve Systhat market, with 7.4 percent of market de- tem to prevent the probable failure of Bank. posits, would rank fourth, with 13.7 percent of market deposits. The proposal would have no significantly adverse effect on competition. The banking factors and considerations relat- Central Fidelity Bank, Richmond, Virginia, ing to the convenience and needs of the commu- to merge with First National Bank of Poquonity are consistent with approval. son, Poquoson, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Farmers & Merchants Bank of Central Cali- (3/29/85) fornia, Ledi, California, to acquire certain The proposed transaction would not be signifiassets and assume substantially all of the lia- cantly adverse to competition. bilities of Golden Valley Bank, Turlock, California BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (4/10/85) SUMMARY REPORT BY THE ATTORNEY GENERAL Central Fidelity Bank (Applicant), with assets No report received. Requests for reports on the of $2.9 billion, proposes to merge with First competitive factors were dispensed with, as au- National Bank of Poquoson (Bank), with assets thorized by the Bank Merger Act, to permit the of $30 million. Applicant is the sole banking Reserve Bank to act immediately to safeguard subsidiary of Central Fidelity Banks, Inc. (Cordepositors of Golden Valley Bank. poration). BASIS FOR APPROVAL BY THE FEDERAL RESERVE The relevant market in this proposal is the BANK (3/22/85) Newport News-Hampton market, in which Farmers & Merchants Bank of Central Califor- Corporation controls 8.1 percent of deposits. If nia (Applicant), with assets of $301 million, the proposed merger took place, Corporation proposes to acquire Golden Valley Bank would control 10.3 percent of market deposits. (Bank), with assets of $73 million. Ten thrift institutions operate offices in this In view of the financial condition of Bank, the market. Overall, the proposal would have no California superintendent of banks has recom- significant competitive effects. mended immediate action by the Federal Re- The banking factors and considerations relatserve System to prevent the probable failure of ing to the convenience and needs of the commu- Bank. nity are consistent with approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 237 19.—Continued Blue Ridge Bank, Floyd, Virginia, to acquire The banking factors and considerations relatcertain assets and assume certain deposit liabil- ing to the convenience and needs of the commuities of the Christiansburg Branch of Jeffer- nity are consistent with approval. son National Bank, Winchester, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL (4/26/85) Peoples Bank and Trust Company, Cedar The proposed transaction would not be signifi- Rapids, Iowa, to acquire certain assets and cantly adverse to competition. assume substantially all the liabilities of Urbanna Savings Bank, Urbanna, Iowa BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (4/16/85) SUMMARY REPORT BY THE ATTORNEY GENERAL Blue Ridge Bank (Applicant), with assets of No report received. Requests for reports on the $12 million, proposes to acquire a branch competitive factors were dispensed with, as au- (Branch) of Jefferson National,Bank. Deposits thorized by the Bank Merger Act, to permit the at Branch amount to $3 million. Reserve Bank to act immediately to safeguard The relevant market in the proposal is ap- depositors of Urbanna Savings Bank. proximated by the counties of Montgomery and BASIS FOR APPROVAL BY THE FEDERAL RESERVE Pulaski plus the independent city of Radford, BANK (6/21/85) where Branch holds the smallest share of de- Peoples Bank and Trust Company (Applicant), posits held by 11 commercial banking organiza- with assets of $211 million, proposes to acquire tions. Because Applicant is not now represented Urbanna Savings Bank (Bank), with assets of in this market, the proposal would have no sig- $7 million. nificant effect on competition. In view of the financial condition of Bank, the The considerations relating to the conven- Iowa Department of Banking recommended imience and needs of the community furnish some mediate action by the Federal Reserve System support for approval because after the acquisi- to prevent the probable failure of Bank. tion Applicant will provide new or enhanced banking services at Branch. Financial factors are consistent with approval. Pacific Inland Bank, Anaheim, California, to acquire the assets and assume the liabilities of Johnstown Bank and Trust Company, John- Town and Country Bank, Seal Beach, Calistown, Pennsylvania, to acquire the assets and fornia assume the deposit liabilities of two branches SUMMARY REPORT BY THE ATTORNEY GENERAL of Equibank, Pittsburgh, Pennsylvania (3/29/85) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (5/24/85) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. BANK (6/28/85) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Pacific Inland Bank (Applicant), with assets of BANK (6/10/85) $29 million, proposes to acquire Town and Johnstown Bank and Trust Company (Appli- Country Bank (Bank), with assets of $35 milcant), with assets of $370 million, proposes to lion. acquire two branches (Branches) of Equibank. The relevant market in the proposal is the Branches have deposits of $24 million. Metropolitan Los Angeles area, in which Appli- Branches are in the Greensburg/Latrobe cant and Bank are located. Because Applicant banking market, where they hold 2.2 percent of would hold less than 1 percent of deposits in the market deposits. Applicant controls 0.5 percent market following the acquisition, the proposal of market deposits held by 14 banking organiza- would have no significant effect on competitions in this market. Because Applicant would tion. control less than 3 percent of market deposits The banking factors and considerations relatfollowing the acquisition, the proposal would ing to the convenience and needs of the commuhave no significant effect on competition. nity are consistent with approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 Tables 19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1985—Continued Glenwood State Bank, Glenwood, Iowa, to SUMMARY REPORT BY THE ATTORNEY GENERAL acquire certain assets and assume certain lia- (8/22/85) bilities 0/Mineola State Bank, Mineola, Iowa The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Requests for reports on the BASIS FOR APPROVAL BY THE SECRETARY OF THE competitive factors were dispensed with, as au- BOARD (9/23/85) thorized by the Bank Merger Act, to permit the United Counties Trust Company (Applicant), Reserve Bank to act immediately to safeguard with assets of $910 million, proposes to acquire depositors of Mineola State Bank. certain assets and assume certain liabilities of the Keensburg Branch (Branch) of United Jer- BASIS FOR APPROVAL BY THE FEDERAL RESERVE sey Bank/Mid State. Branch has deposits of $6 BANK (8/6/85) million. Glenwood State Bank (Applicant), with assets of $48 million, proposes to acquire certain as- The relevant market in the proposal is the sets and assume certain liabilities of Mineola Asbury Park market, where Applicant ranks State Bank (Bank), which has assets of $5.1 fourth among 14 banking organizations, with million. In view of the financial condition of 8.9 percent of market deposits. Because Branch Bank, the Iowa superintendent of banks recom- holds less than 1 percent of market deposits, the mended immediate action by the Federal Re- acquisition would have no significant effect on serve System to prevent probable failure of competition. Bank. The banking factors and the considerations The banking factors and considerations relat- relating to the convenience and needs of the ing to the convenience and needs of the commu- community are consistent with approval. nity are consistent with approval. Bayshore Bank of Florida, Miami, Florida, Buffalo Bank, Eleanor, West Virginia, to to acquire certain assets and assume substanmerge with First Community Bank-Winfield, tially all of the liabilities ofTower Bank, N.A., Winfield, West Virginia Hialeah Gardens, Florida SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (8/2/85) No report received. Requests for reports on the The proposed transaction would not be signifi- competitive factors were dispensed with, as aucantly adverse to competition. thorized by the Bank Merger Act, to permit the BASIS FOR APPROVAL BY THE FEDERAL RESERVE Reserve Bank to act immediately to safeguard BANK (8/12/85) depositors of Tower Bank, N.A. The Buffalo Bank (Applicant), with assets of BASIS FOR APPROVAL BY THE FEDERAL RESERVE $28 million, proposes to merge with First Com- BANK (10/3/85) munity Bank-Winfield (Bank), with assets of Bayshore Bank of Florida (Applicant), with as- $6 million. sets of $35 million, proposes to acquire Tower The relevant market in this proposal is ap- Bank, N.A. (Bank), with assets of $16 million. proximated by Kanawha and Putnam counties, In view of the financial condition of Bank, the in which the bank resulting from the merger Comptroller of the Currency has recommended would rank 11th among 19 banking organiza- immediate action by the Federal Reserve Systions. The proposal would have no significant tem to prevent the probable failure of Bank. effect on competition. The banking factors and considerations relating to the convenience and needs of the commu- Farmers and Merchants Bank of Long nity are consistent with approval. Beach, Long Beach, California, to merge with Town and Country Bank, Seal Beach, California United Counties Trust Company, Elizabeth, New Jersey, to acquire certain assets and as- SUMMARY REPORT BY THE ATTORNEY GENERAL sume certain liabilities of the Keensburg (10/18/85) branch of United Jersey Bank/Mid State, The proposed transaction would not be signifi- Hazlet, New Jersey cantly adverse to competition. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 239 19.—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE gia (Company). Company is the 6th largest of BANK (10/25/85) 26 banking organizations in the Atlanta banking Farmers and Merchants Bank of Long Beach market, and controls 3.5 percent of market de- (Applicant), with assets of $764 million, pro- posits. Bank ranks 10th, with 0.7 percent of poses to merge with Town and Country Bank market deposits. In view of the relatively small (Bank), with assets of $33 million. size of Bank in the market, there would be no In view of the financial condition of Bank, the significant competitive effects. California superintendent of banks has recom- The banking factors and considerations relatmended immediate action by the Federal Re- ing to the convenience and needs of the commuserve System to prevent the probable failure of nity are consistent with approval. Bank. Central Trust Company, Rochester, New Banco de Ponce, Hato Rey, Puerto Rico, to \brk, to acquire the assets and assume the liaacquire certain assets and assume certain lia- bilities of the Hilton, New York, Branch of bilities of the Pitkin Avenue Branch of East Chemical Bank, New York, New York New York Savings Bank, New York, New SUMMARY REPORT BY THE ATTORNEY GENERAL York (11/8/85) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (9/20/85) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. BANK (12/31/85) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Central Trust Company (Applicant), with assets BANK (11/1/85) of $658 million, proposes to acquire the assets Banco de Ponce (Applicant), with assets of $2 and assume the deposit liabilities of the Hilton, billion, proposes to acquire a branch (Branch) New York branch (Branch) of Chemical Bank, of East New York Savings Bank. Deposits at with deposits of $17 million. Branch amount to $26 million. The relevant Applicant is a subsidiary of Irving Bank Cormarket in the proposal is the Metropolitan New poration, New York, New York (Company). York area, in which Branch is located and in Company is the fifth largest of 13 banking orwhich Applicant is represented. The acquisition ganizations in the Rochester banking market would not have a significant effect on competi- and as a result of the acquisition would increase tion because Applicant would have a small its market share from 6.0 percent to 6.4 pershare of area deposits. cent. The proposal would have no significant The banking factors and considerations relat- competitive effects. ing to the convenience and needs of the commu- The banking factors and considerations relatnity are consistent with approval. ing to the convenience and needs of the community are consistent with approval. First Georgia Bank, Atlanta, Georgia, to merge with Gwinnett Bank & Trust Com- Bank of New York, New York, New York to pany, Norcross, Georgia acquire the assets and assume the liabilities of Fidata Trust Company, New York, New York SUMMARY REPORT BY THE ATTORNEY GENERAL (11/1/85) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (12/13/85) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (11/27/85) BASIS FOR APPROVAL BY THE FEDERAL RESERVE First Georgia Bank (Applicant), with assets of BANK (12/31/85) $649 million, proposes to merge with Gwinnett Bank of New York (Applicant), with assets of Bank & Trust Company (Bank), which has as- $15 billion, proposes to acquire the assets and sets of $123 million. liabilities of Fidata Trust Company (Bank), Applicant is a subsidiary of First Railroad & with assets of $592 million. Applicant is a sub- Banking Company of Georgia, Augusta, Geor- sidiary of the Bank of New York Company, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 Tables 19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1985—Continued in view of the size and number of banking alter- are subsidiaries of the same bank holding comnatives in the Metropolitan New York market, pany. In each case the summary report by the competitive considerations with respect to this attorney general indicates that the transaction application are consistent with approval. would not have a significantly adverse effect on The banking factors and considerations relat- competition because the proposed merger is esing to the convenience and needs of the commu- sentially a corporate reorganization. The Board nity are consistent with approval. of Governors, the Federal Reserve Bank, or the Secretary of the Board of Governors, whichever approved the application, determined that the competitive effects of the proposed transaction, Mergers Approved Involving Wholly Owned the financial and managerial resources and the Subsidiaries of the Same Bank Holding prospects of the banks concerned, and the con- Company venience and needs of the community to be The following transactions involve banks that served were consistent with approval. Assets Name of bank, type of transaction, Date of (millions of and other banks involved ' approval dollars) Norstar Bank of Upstate New York, Albany, New York 1,488 2/25/85 Merger Oneida National Bank, Utica, New York 939 Ohio Citizens Bank, Toledo, Ohio 744 2/28/85 Merger Two branches of BancOhio National Bank, Columbus, Ohio... 43 Gravois Bank, St. Louis County, Missouri 245 3/21/85 Merger Gravois Bank at Mehlville, St. Louis County, Missouri 14 Valley Bank and Trust Company, Salt Lake City, Utah 636 3/25/85 Merger Bountiful Valley Bank, Bountiful, Utah 16 Weber Valley Bank, Ogden, Utah 24 Colonial Bank, Montgomery, Alabama 4/19/85 Merger 75 Colonial Bank of Opp, N.A., Opp, Alabama 18 First Virginia Bank of Tidewater, Norfolk, Virginia 6/4/85 Merger 249 First Virginia Bank-Eastern Shore, Onancock, Virginia 60 First Georgia Bank, Atlanta, Georgia 6/11/85 Merger 448 First Georgia Bank, Cobb County, Marietta, Georgia Commercial & Exchange Bank, Bremen, Georgia 125 Peoples Bank of Leslie, Leslie, Michigan 25 6/20/85 Merger Independent Bank-South Michigan, Olivet, Michigan 34 10 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 241 19.—Continued Assets Name of bank, type of transaction, Date of (millions of and other banks involved ' approval dollars) Wheeling Dollar Savings and Trust Company, Wheeling, West Virginia 209 6/21/85 Merger Wheeling Dollar Bank, Wheeling, West Virginia 21 M&I Marshall & Ilsley Bank, Milwaukee, Wisconsin 1,896 8/7/85 Merger Heritage Bank, Wauwatosa, Wisconsin 464 First Interstate Bank of California, Los Angeles, California .... 17,481 8/28/85 Merger Warner Center Branch of First Interstate Bank, Ltd., Los Angeles California 3 Fifth Third Bank, Cincinnati, Ohio 1,875 9/18/85 Merger Fifth Bank of Miami Valley, Kettering, Ohio 49 Toledo Trust Company, Toledo, Ohio 1,863 9/26/85 Merger Society National Bank of Northwest Ohio, Fostoria, Ohio 277 Trustcorp Company, Columbus, Ohio 48 9/26/85 Merger Society National Bank of Mid-Ohio, Bucyrus, Ohio 69 1st Source Bank, South Bend, Indiana 809 10/4/85 Merger 1st Source Bank of Marshall County, Plymouth, Indiana 153 Fifth Third Bank of Columbus, Columbus, Ohio 20 10/22/85 Merger Fayette County Bank, Jeffersonville, Ohio 34 Princeton Bank, Princeton, New Jersey 421 10/22/85 Merger Bank of New Jersey, N.A., Moorestown, New Jersey 615 Manufacturers Hanover Trust Company, New York, New York.. 61,000 10/30/85 Merger Manufacturers Hanover, N.A., Rochester, New York 595 Citizens State Bank, Silverton, Ohio 39 11/22/85 Merger C.S. Bank, Silverton, Silverton, Ohio (2 Georgia Railroad Bank & Trust Company, Augusta, Georgia ... 607 11/27/85 Merger Georgia State Bank, Martinez, Georgia 57 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 Tables 19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1985—Continued Assets Name of bank, type of transaction, Date of and other banks involved1 (millions of approval dollars) Georgia Railroad Bank & Trust Company, Augusta, Georgia ... 607 11/27/85 Merger Washington Loan & Banking Company, Washington, Georgia... 48 Comerica Bank, Detroit, Michigan 7,115 11/27/85 Merger Comerica Bank, N.A., Grosse Pointe, Michigan 46 Continental Bank and Trust Company, Salt Lake City, Utah 281 11/27/85 Merger Moore Financial of Utah, Salt Lake City, Utah (2) 1. Each proposed transaction was to be effected 2. A newly organized bank, not in operation. under the charter of the first-named bank. The entries are in chronological order of approval. Mergers Approved Involving a Nonoperating company, the merger would have no effect on Institution with an Existing Bank competition. The Board of Governors, the Fed- The following transactions have no significant eral Reserve Bank, or the Secretary of the effect on competition: they merely facilitate the Board of Governors, whichever approved the acquisition of the voting shares of a bank or application, determined that the proposal banks by a holding company. In such cases the would, in itself, have no adverse competitive summary report by the attorney general indi- effects and that the financial factors and considcates that the transaction will merely combine erations relating to the convenience and needs an existing bank with a nonoperating institu- of the community were consistent with aption; in consequence, and without regard to the proval. acquisition of the surviving bank by the holding Assets Name of bank, type of transaction, Date of and other banks involved1 (m d i o ll l i l o a n r s s ) of approval Cortland Interim Bank, Cortland, Ohio (2) 2/28/85 Merger Cortland Savings & Banking Company, Cortland, Ohio 162 Wheeling Interim Bank (2) 4/1/85 Merger Half Dollar Trust and Savings Bank, Wheeling, West Virginia .. 67 New Bank of Hartsville, Hartsville, South Carolina (2) 4/12/85 Merger Bank of Hartsville, Hartsville, South Carolina 56 Metamora Interim Bank, Metamora, Ohio (2) 4/16/85 Merger Metamora State Bank, Metamora, Ohio 13 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 243 19.—Continued Assets Name of bank, type of transaction, Date of and other banks involved1 (m d il o l l i l o a n rs s ) of approval New Belknap Bank, Belmont, New Hampshire 4/26/85 Merger Belknap Bank & Trust Company, Belmont, New Hampshire 42 Ponce Interim Bank, Ponce, Puerto Rico 5/6/85 Merger Banco de Ponce, Ponce, Puerto Rico 1,952 Farmers Interim Bank, Pomeroy, Ohio 5/14/85 Merger Farmers Bank and Savings, Pomeroy, Ohio 44 First Virginia Bank-South Hill, South Hill, Virginia 5/15/85 Merger Citizens Bank, Inc., South Hill, Virginia 146 First Interim Bank, Arlington, Virginia 5/28/853 Merger First Commercial Bank, Arlington, Virginia 46 First Virginia Bank-Hanover, Ashland, Virginia 6/4/85 Merger First Virginia Bank-Colonial, Richmond, Virginia 148 George Mason Interim Bank, Fairfax, Virginia 6/17/85 Merger George Mason Bank, Fairfax, Virginia 86 Mobile County Bank, Grand Bay, Alabama 7/25/85 Merger First National Bank of Mobile, Grand Bay, Alabama 168 ATS State Bank, Dubuque, Iowa 8/9/85 Merger American Trust and Savings Bank, Dubuque, Iowa 203 Shawsville Interim Bank, Inc., Shawsville, Virginia 8/12/85 Merger Bank of Shawsville, Shawsville, Virginia 28 LSB Bank, Linden, Indiana 8/20/85 Merger Linden State Bank, Linden, Indiana 20 Fidelity Bank Northeast, Minneapolis, Minnesota 8/29/85 Merger Fidelity Bank and Trust Company, Minneapolis, Minnesota 159 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 Tables 19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1985—Continued Assets Name of bank, type of transaction, Date of and other banks involved ! (m d il o l l i l o a n rs s ) of approval Society Bank of Northwest Ohio, Port Clinton, Ohio 9/26/85 Merger Three branches of Society National Bank of Northwest Ohio, Fosteria, Ohio 55 CBT Interim Bank, Fruit Heights, Ohio 9/27/85 Merger Continental Bank and Trust Company, Salt Lake City, Utah ... 2,722 Apple Country Bank, Charlottesville, Virginia 10/2/85 Merger Albemarle Bank and Trust Company, Charlottesville, Virginia . 17 Bibb Interim Bank, West Blocton, Alabama 10/4/85 Merger First State Bank of Bibb County, West Blocton, Alabama 11 New Independence Bank, Piano, Texas 10/21/85 Merger Independence Bank, Piano, Texas 42 Green Valley Bank, Inc., Bluefield, West Virginia 10/25/85 Merger Valley Bank and Trust Company, Bluefield, West Virginia. 13 M.B. Bank, Minerva, Ohio 10/25/85 Merger Minerva Banking Company, Minerva, Ohio. 35 First Virginia Bank-Southside, Farmville, Virginia ... 10/30/85 Merger First National Bank of Farmville, Farmville, Virginia , 96 First Virginia Bank-Middle Peninsula, Urbanna,Virginia 10/30/85 Merger Bank of Middlesex, Urbanna, Virginia 68 Citizens Interim Bank, Ocala, Florida 11/13/85 Merger Citizens First Bank of Ocala, Ocala, Florida. 51 ONB Merger Bank, Greencastle, Indiana 11/29/85 Merger First Citizens Bank and Trust Company, Greencastle, Indiana 78 Peoples Interim Bank, Van Wert, Ohio 12/10/85 Merger Peoples Bank and Trust Company, Van Wert, Ohio 56 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 245 19.—Continued Name of bank, type of transaction, Assets Date of and other banks involved l (m d il o l l i l o a n rs s ) of approval Monroe County Bank, Monroeville, Alabama 43 12/12/85 Merger First National Bank of Monroeville, Monroeville, Alabama .... 19 Gassaway Interim Bank, Inc., Gassaway, West Virginia ( 2 ) 12/12/85 Merger Bank of Gassaway, Gassaway, West Virginia 47 Boca Interim Bank, Boca Raton, Florida (2) 12/16/85 Merger Boca Bank, Boca Raton, Florida 38 Beaver Trust Company Interim Bank, Beaver, Pennsylvania .... ( 2 ) 12/18/85 Merger Beaver Trust Company, Beaver, Pennsylvania 152 Sun Bank/Suncoast, N.A., St. Petersburg, Florida 541 12/19/85 Merger Sun Bank of Tampa Bay, Florida 506 1. Each proposed transaction was to be effected under 2. A newly organized bank, not in operation. the charter of the first-named bank. The entries are in 3. Application denied by the Board. chronological order of approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 The Federal Reserve System Boundaries of Federal Reserve Districts and their Branch Territories o HAWAII Legend Boundaries of Federal Reserve Districts Boundaries of Federal Reserve Branch Territories o Board of Governors of the Federal Reserve System ® Federal Reserve Bank Cities • Federal Reserve Branch Cities • Federal Reserve Bank Facilities Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Directories and Meetings Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 Directories and Meetings Board of Governors of the Federal Reserve System December 31, 1985 Term expires PAUL A. VOLCKER of New Jersey, Chairman} January 31, 1992 PRESTON MARTIN of California, Vice Chairman1 January 31, 1996 HENRY C. WALLICH of Connecticut January 31, 1988 J. CHARLES PARTEE of Virginia January 31, 1986 EMMETT J. RICE of New York January 31, 1990 MARTHA R. SEGER of Michigan January 31, 1998 Vacant January 31, 1994 OFFICE OF BOARD MEMBERS OFFICE OF COMPUTING AND JOSEPH R. COYNE, Assistant to the Board INFORMATION SERVICES DONALD J. WINN, Assistant to the Board ALLEN E. BEUTEL, Executive Director STEVEN M. ROBERTS, Assistant to the Chairman ANTHONY F. COLE, Special Assistant to OFFICE OF THE SECRETARY the Board WILLIAM W. WILES, Secretary BOB S. MOORE, Special Assistant to the BARBARA R. LOWREY, Associate Secretary Board JAMES MCAFEE, Associate Secretary NAOMI P. SALUS, Special Assistant to the Board LEGAL DIVISION MICHAEL BRADFIELD, General Counsel OFFICE OF STAFF DIRECTOR J. VIRGIL MATTINGLY, JR., Deputy General FOR MONETARY AND Counsel FINANCIAL POLICY RICHARD M. ASHTON, Associate General STEPHEN H. AXILROD, Staff Director Counsel DONALD L. KOHN, Deputy Staff Director OLIVER IRELAND, Associate General STANLEY J. SIGEL, Assistant to the Board Counsel NORM AND R. V. BERNARD, Special Assis- RICKI R. TIGERT, Assistant General tant to the Board Counsel MARYELLEN A. BROWN, Assistant to the General Counsel OFFICE OF STAFF DIRECTOR FOR MANAGEMENT S. DAVID FROST, Staff Director EDWARD T. MULRENIN, Assistant Staff DIVISION OF RESEARCH Director AND STATISTICS CHARLES L. HAMPTON, Senior Technical JAMES L. KICHLINE, Director Adviser EDWARD C. ETTIN, Deputy Director PORTIA W. THOMPSON, Equal Employment MICHAEL J. PRELL, Deputy Director Opportunity Programs Officer JOSEPH S. ZEISEL, Deputy Director JARED J. ENZLER, Associate Director DAVID E. LINDSEY, Associate Director OFFICE OF STAFF DIRECTOR ELEANOR J. STOCKWELL, Associate Direc- FOR FEDERAL RESERVE BANK tor ACTIVITIES THOMAS D. SIMPSON, Deputy Associate THEODORE E. ALLISON, Staff Director Director JOSEPH W. DANIELS, SR., Adviser, Federal LAWRENCE SLIFMAN, Deputy Associate Reserve System Equal Employment Director Opportunity Program HELMUT F. WENDEL, Deputy Associate Director 1. The designations as Chairman and Vice Chairman expire on August 6, 1987, and March 31, 1986, respectively, unless the services of these members of the Board shall have terminated sooner. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 249 DIVISION OF RESEARCH DIVISION OF BANKING AND STATISTICS—Continued SUPERVISION AND MARTHA BETHEA, Assistant Director REGULATION-Continued ROBERT M. FISHER, Assistant Director HERBERT A. BIERN, Assistant Director DAVID B. HUMPHREY, Assistant Director ANTHONY CORNYN, Assistant Director SUSAN J. LEPPER, Assistant Director JAMES I. GARNER, Assistant Director RICHARD D. PORTER, Assistant Director JAMES D. GOETZINGER, Assistant Director PETER A. TINSLEY, Assistant Director ROBERT S. PLOTKIN, Assistant Director LEVON H. GARABEDIAN, Assistant Director SIDNEY M. SUSS AN, Assistant Director (Administration) LAURA M. HOMER, Securities Credit Officer DIVISION OF INTERNATIONAL FINANCE DIVISION OF CONSUMER EDWIN M. TRUMAN, Director AND COMMUNITY AFFAIRS ROBERT F. GEMMILL, Staff Adviser GRIFFITH L. GARWOOD, Director LARRY J. PROMISEL, Senior Associate JERAULD C. KLUCKMAN, Associate Director Director CHARLES J. SIEGMAN, Senior Associate GLENN E. LONEY, Assistant Director Director DOLORES S. SMITH, Assistant Director DAVID H. HOWARD, Deputy Associate Director PETER HOOPER III, Assistant Director DIVISION OF PERSONNEL KAREN H. JOHNSON, Assistant Director DAVID L. SHANNON, Director RALPH W. SMITH, JR., Assistant Director JOHN R. WEIS, Assistant Director CHARLES W. WOOD, Assistant Director DIVISION OF FEDERAL RESERVE BANK OPERATIONS DIVISION OF SUPPpRT SERVICES CLYDE H. FARNSWORTH, JR., Director ROBERT E. FRAZIER, Director ELLIOTT C. MCENTEE, Associate Director WALTER W. KREIMANN, Associate Director DAVID L. ROBINSON, Associate Director GEORGE M. LOPEZ, Assistant Director C. WILLIAM SCHLEICHER, JR., Associate Director WALTER ALTHAUSEN, Assistant Director OFFICE OF THE CONTROLLER CHARLES W. BENNETT, Assistant Director GEORGE E. LIVINGSTON, Controller ANNE M. DEBEER, Assistant Director BRENT L. BOWEN, Assistant Controller JACK DENNIS, JR., Assistant Director EARL G. HAMILTON, Assistant Director DIVISION OF COMPUTING JOHN H. PARRISH, Assistant Director SERVICES FLORENCE M. YOUNG, Adviser BRUCE M. BEARDSLEY, Director ELIZABETH B. RIGGS, Assistant Director DIVISION OF BANKING ROBERT J. ZEMEL, Assistant Director SUPERVISION AND REGULATION THOMAS C. JUDD, Assistant Director WILLIAM TAYLOR, Director (Contingency Processing Center) THOMAS E. CIMENO, JR., Deputy Director 2 DIVISION OF INFORMATION FREDERICK R. DAHL, Associate Director DON E. KLINE, Associate Director SERVICES FREDERICK M. STRUBLE, Associate WILLIAM R. JONES, Director Director STEPHEN R. MALPHRUS, Assistant Director STEPHEN C. SCHEMERING, Deputy Associ- WILLIAM C. SCHNEIDER, JR., Assistant ate Director Director RICHARD SPILLENKOTHEN, Deputy Associ- RICHARD C. STEVENS, Assistant Director ate Director 2. On loan from the Federal Reserve Bank of Boston. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 Directories and Meetings Federal Open Market Committee December 31, 1985 Members PAUL A. VOLCKER, Chairman, Board of Governors E. GERALD CORRIGAN, Vice Chairman, elected by Federal Reserve Bank of New York JOHN J. BALLES, elected by Federal Reserve Banks of Minneapolis, Kansas City, and San Francisco ROBERT P. BLACK, elected by Federal Reserve Banks of Boston, Philadelphia, and Richmond ROBERT P. FORRESTAL, elected by Federal Reserve Banks of Atlanta, St. Louis, and Dallas SILAS KEEHN, elected by Federal Reserve Banks of Cleveland and Chicago PRESTON MARTIN, Board of Governors J. CHARLES PARTEE, Board of Governors EMMETT J. RICE, Board of Governors MARTHA R. SEGER, Board of Governors HENRY C. WALLICH, Board of Governors Officers STEPHEN H. AXILROD, RICHARD G. DAVIS, Staff Director and Secretary Associate Economist NORMAND R.V. BERNARD, DONALD L. KOHN, Assistant Secretary Associate Economist NANCY M. STEELE, DAVID E. LINDSEY, Deputy Assistant Secretary Associate Economist MICHAEL BRADFIELD, MICHAEL J. PRELL, General Counsel Associate Economist JAMES H. OLTMAN, KARL A. SCHELD, Deputy General Counsel Associate Economist JAMES L. KICHLINE, CHARLES J. SIEGMAN, Economist Associate Economist EDWIN M. TRUMAN, SHEILA L. TSCHINKEL, Economist (International) Associate Economist J. ALFRED BROADDUS, Associate Economist PETER D. STERNLIGHT, Manager for Domestic Operations, System Open Market Account SAM Y. CROSS, Manager for Foreign Operations, System Open Market Account During 1985, the Federal Open Market the Federal Open Market Committee Committee held eight regularly scheduled in this REPORT.) meetings (See Record of Policy Actions of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 251 Federal Advisory Council December 31, 1985 Members District 1—ROBERT L. NEWELL, Chairman and Chief Executive Officer, Connecticut National Bank, Hartford, Connecticut District 2—LEWIS T. PRESTON, Chairman of the Board and Chief Executive Officer, Morgan Guaranty Trust Company of New York, New York, New York District 3—GEORGE A. BUTLER, Chairman, First Pennsylvania Bank, N.A., Philadelphia, Pennsylvania District 4—JULIEN L. MCCALL, Chairman and Chief Executive Officer, National City Corporation, Cleveland, Ohio District 5—JOHN G. MEDLIN, JR., Chairman of the Board and Chief Executive Officer, Wachovia Bank and Trust Company, N.A., President and Chief Executive Officer, The First Wachovia Corporation, Winston-Salem, North Carolina District 6—PHILIP F. SEARLE, Chairman of the Board, Sun Banks, Inc., Orlando, Florida District 7—HAL C. KUEHL, Chairman of the Board and Chief Executive Officer, First Wisconsin National Bank of Milwaukee, Milwaukee, Wisconsin District 8—WILLIAM H. BOWEN, Chairman of the Board and Chief Executive Officer, First Commercial Bank, N.A., Little Rock, Arkansas District 9—LLOYD P. JOHNSON, Chairman, President, and Chief Executive Officer, Norwest Corporation, Minneapolis, Minnesota District 10—N. BERNE HART, Chairman of the Board, President, and Chief Executive Officer, United Banks of Colorado, Inc., Denver, Colorado District 11—NAT S. ROGERS, Consultant and Director, First City Bancorporation of Texas, Inc., Houston, Texas District 12—G. ROBERT TRUEX, JR., Chairman, Rainier Bancorporation and Rainier National Bank, Seattle, Washington Officers LEWIS T. PRESTON, President PHILIP F. SEARLE, Vice President HERBERT V. PROCHNOW, Secretary WILLIAM J. KORSVIK, Associate Secretary Directors WILLIAM H. BOWEN N. BERNE HART Meetings of the Federal Advisory Coun- sentatives of the banking industry, one cil were held on February 7-8, May 2-3, from each Federal Reserve District, is re- September 5-6, and October 31-Novem- quired by law to meet in Washington at ber 1, 1985. The Board of Governors met least four times a year and is authorized by with the council on February 8, May 3, the Federal Reserve Act to consult with September 6, and November 1, 1985. The and advise the Board on all matters within council, which is composed of 12 repre- the jurisdiction of the Board. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 Directories and Meetings Consumer Advisory Council December 31, 1985 Members RACHEL G. BRATT, Assistant Professor, Department of Urban and Environmental Policy, T\ifts University, Medford, Massachusetts JONATHAN BROWN, Director, BankWatch, Washington, D.C. THOMAS L. CLARK, JR., Deputy Superintendent of Banks, New York State Banking Department, New York, New York JEAN A. CROCKETT, Professor of Finance, Wharton Graduate School, University of Pennsylvania , Philadelphia, Pennsylvania THERESA FAITH CUMMINGS, Executive Director, Springfield/Sangamon County Action, Inc., Springfield, Illinois STEVEN M. GEARY, Associate General Counsel, Missouri Division of Finance, Jefferson City, Missouri RICHARD F. HALLIBURTON, Deputy Director, Legal Aid of Western Missouri, Kansas City, Missouri CHARLES C. HOLT, Professor of Management, University of Texas at Austin, Austin, Texas EDWARD N. LANGE, Partner, Davis, Wright, Todd, Riese & Jones, Seattle, Washington KENNETH V. LARKIN, Director of Development, Earl Warren Legal Institute, Boalt School of Law, University of California at Berkeley, Berkeley, California TIMOTHY D. MARRINAN, Senior Corporate Counsel, First Bank System, Inc., Minneapolis, Minnesota FRED S. MCCHESNEY, Assistant Professor of Law, Emory University, Atlanta, Georgia FRED H. MILLER, Professor of Law, University of Oklahoma, Norman, Oklahoma MARGARET M. MURPHY, Associate Professor and Director, Columbia Center, Johns Hopkins University, Columbia, Maryland ROBERT F. MURPHY, President, General Motors Acceptance Corporation, Detroit, Michigan HELEN E. NELSON, President, Consumer Research Foundation, Mill Valley, California LAWRENCE S. OKINAGA, Partner, Carlsmith, Carlsmith, Wichman & Case, Honolulu, Hawaii JOSEPH L. PERKOWSKI, Chief Executive Officer, Minneapolis Federal Employees Credit Union, Minneapolis, Minnesota ELVA QUIJANO, Vice President and Executive Professional Officer, Republic Bank of San Antonio, San Antonio, Texas BRENDA L. SCHNEIDER, Director of Community Relations, Manufacturers National Bank, Detroit, Michigan PAULA A. SLIMAK, Director of Consumer Affairs, City of Cleveland, Cleveland, Ohio GLENDA G. SLOANE, Director, Housing and Community Development, Center for National Policy Review, Catholic University School of Law, Washington, D.C. HENRY J. SOMMER, Supervising Attorney, Community Legal Services, Inc., Philadelphia, Pennsylvania TED L. SPURLOCK, Vice President and Director of Credit and Consumer Banking Services, J.C. Penney Company, Inc., New York, New York MEL STILLER, Executive Director, Consumer Credit Counseling Service of Eastern Massachusetts, Boston, Massachusetts CHRISTOPHER J. SUMNER, President and Chief Executive Officer, Western Savings & Loan Company, Salt Lake City, Utah WINNIE F. TAYLOR, Professor of Law, Holland Law Center, University of Florida, Gainesville, Florida MICHAEL M. VAN BUSKIRK, Assistant Vice President, Corporate Affairs, Bane One Corporation, Columbus, Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 253 MERVIN WINSTON, Vice President, First Bank System, Inc., Minneapolis, Minnesota MICHAEL ZOROYA, Senior Vice President of Credit, The May Department Stores, St. Louis, Missouri Officers TIMOTHY D. MARRINAN, Chairman THOMAS L. CLARK, JR., Vice Chairman Meetings of the Consumer Advisory interests, as well as academics. It was estab- Council with members of the Board of Gov- lished pursuant to the 1976 amendments to ernors were held on March 13-14, June 20- the Equal Credit Opportunity Act to advise 21, and October 24-25, 1985. The council is the Board on matters related to consumer composed of representatives of the financial financial services, industry, and of consumer and community Thrift Institutions Advisory Council December 31, 1985 Members THOMAS R. BOMAR, President, AmeriFirst Federal Savings and Loan Association, Miami, Florida ELLIOTT G. CARR, President and Chief Executive Officer, The Cape Cod Five Cents Savings Bank, Harwich Port, Massachusetts M. TODD COOKE, Chairman and Chief Executive Officer, PSFS, Philadelphia, Pennsylvania J. MICHAEL CORNWALL, Chairman and Chief Executive Officer, First Texas Savings Association, Dallas, Texas RICHARD H. DEIHL, Chairman of the Board and Chief Executive Officer, Home Savings of America, Los Angeles, California HAROLD W. GREENWOOD, JR., Chairman, President, and Chief Executive Officer, Midwest Federal Savings & Loan Association, Minneapolis, Minnesota JOHN A. HARDIN, Chairman and President, First Federal Savings Bank, Rock Hill, South Carolina FRANCES LESNIESKI, President, Michigan State University Federal Credit Union, East Lansing, Michigan JOHN T. MORGAN, Chairman and Chief Executive Officer, American Savings Bank of New York, New York, New York SARAH R. WALLACE, President, First Federal Savings and Loan Association of Newark, Newark, Ohio MICHAEL R. WISE, Chairman and Chief Executive Officer, Silverado Banking, Denver, Colorado Officers THOMAS R. BOMAR, President RICHARD H. DEIHL, Vice President The members of the Thrift Institutions Ad- credit unions, savings and loan associations, visory Council met with the Board of Gover- and savings banks, consults with and advises nors on February 28, June 18, September the Board on issues pertaining to the thrift 19, and November 21, 1985. The council, industry and on various other matters within which is composed of representatives from the Board's jurisdiction. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 Directories and Meetings Officers of Federal Reserve Banks, Branches, and Offices December 31, 19851 BANK, Chairman2 President Vice President Branch, or facility Deputy Chairman First Vice President in charge of Branch BOSTON3 Joseph A. Baute Frank E. Morris Thomas I. Atkins Robert W. Eisenmenger NEW YORK3 John Brademas E. Gerald Corrigan Clifton R. Thomas M. Timlen Wharton, Jr. Buffalo M. Jane Dickman John T. Keane PHILADELPHIA ... Robert M. Landis Edward G. Boehne Nevius M. Curtis Richard L. Smoot CLEVELAND3 .... William H. Knoell Karen N. Horn E. Mandell William H. de Windt Hendricks Cincinnati Robert E. Boni Charles A. Cerino4 Pittsburgh Robert S. Kaplan Harold J. Swart4 RICHMOND3 Leroy T. Canoles, Jr. Robert P. Black Robert A. Georgine Jimmie R. Monhollon Baltimore Robert L. Tate Robert D. McTeer, Jr.4 Charlotte Wallace J. Albeit D. Jorgenson Tinkelenberg4 Culpeper John G. Stoides 4 ATLANTA John H. Robert P. Delmar Harrison Weitnauer, Jr. Forrestal Bradley Currey, Jr. Jack Guynn Birmingham Martha A. Mclnnis Fred R. Hen- Jacksonville E. William Nash, Jr. James D. Hawkins Miami Eugene E. Cohen Patrick K. Barron Nashville Condon S. Bush Jeffrey J. Wells New Orleans Leslie B. Lampton Henry H. Bourgaux CHICAGO3 Stanton R. Cook Silas Keehn Robert J. Day Daniel M. Doyle Detroit Russell G. Mawby Roby L. Sloan4 ST. LOUIS WL. Hadley Griffin Thomas C. Melzer Mary P. Holt Joseph P. Garbarini Little Rock Sheffield Nelson John F. Breen Louisville Henry F. Frigon James E. Conrad Memphis Donald B. Weis Paul I. Black, Jr. MINNEAPOLIS .... John B. Davis, Jr. Gary H. Stern Michael W Wright Thomas E. Gainor Helena Gene J. Etchart Robert F. McNellis KANSAS CITY .... Irvine O. Roger Guffey Hockaday, Jr. Robert G. Lueder Henry R. Denver James E. Nielson Czerwinski Wayne W. Martin4 Oklahoma City Patience S. Latting William G. Evans Omaha Kenneth L. Morrison Robert D. Hamilton Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 255 BANK, Chairman2 President Vice President Branch, or facility Deputy Chairman First Vice President in charge of Branch DALLAS Robert D. Rogers Robert H. Boy kin Bobby R. Inman William H. Wallace El Paso John Sibley Joel L. Koonce, Jr. Houston Robert T. Sakowitz J.Z. Rowe4 San Antonio Robert F. McDermott Thomas H. Robertson SAN FRANCISCO .. Alan C. Furth John J. Balles Fred W. Andrew Richard T. Griffith Los Angeles Richard C. Seaver Robert M. McGill4 Portland Paul E. Bragdon Angelo S. Carella4 Salt Lake City Don M. Wheeler E. Ronald Liggett Seattle John W. Ellis Gerald R. Kelly4 1. A current list of these officers appears each Cranford, New Jersey; Jericho, New York; Utica at month in the Federal Reserve Bulletin. Oriskany, New York; Columbus, Ohio; Columbia, 2. The Chairman of a Federal Reserve Bank, by South Carolina; Charleston, West Virginia; Des statute, serves as Federal Reserve Agent. Moines, Iowa; Indianapolis, Indiana; and Milwaukee, 3. Additional offices of these Banks are located at Wisconsin. Lewistown, Maine; Windsor Locks, Connecticut; 4. Senior Vice President. Conference of Chairmen to consult with and advise the Board of Governors. On October 29, 1984, Robert The chairmen of the Federal Reserve H. Boy kin, President of the Federal Re- Banks are organized into the Conference serve Bank of Dallas, was elected Chairof Chairmen that meets to consider matters man, and Edward G. Boehne, President of of common interest and to consult with and the Federal Reserve Bank of Philadelphia, advise the Board of Governors. Such was elected Vice Chairman of the confermeetings, attended also by the deputy ence for 1985. Lyne H. Carter of the Fedchairmen, were held in Washington on eral Reserve Bank of Dallas was appointed June 6-7 and December 4-5, 1985. Secretary, and Joanna H. Frodin of the The Executive Committee of the Con- Federal Reserve Bank of Philadelphia was ference of Chairmen during 1985 comappointed Assistant Secretary. prised William H. Knoell, Chairman, Robert D. Rogers, Vice Chairman, and Alan C. Furth, member. Conference of On December 5, 1985, Robert D. Rog- First Vice Presidents ers was elected Chairman of the conference and of its Executive Committee to The Conference of First Vice Presidents of serve for the succeeding year; John H. the Federal Reserve Baks was organized in Weitnauer, Jr. was elected Vice Chairman 1969 to meet periodically for the considerof the conference and a member of the ation of operational and other matters. On Executive Committee; and Joseph A. November 23, 1984, William H. Wallace, Baute was elected as the other member of First Vice President of the Federal Reserve the Executive Committee. Bank of Dallas, was elected Chairman, and Richard L. Smoot, Fist Vice President of the Federal Reserve Bank of Philadelphia, was elected Vice Chairman of the Conference of Presidents conference for 1985. Lyne H. Carter of The presidents of the Federal Reserve the Federal Reserve Bank of Dallas was Banks are organized into the Conference appointed Secretary, and Joanna H. Frodin of Presidents, which meets periodically to of the Federal Reserve Bank of Philadelconsider matters of common interest and phia was appointed Assistant Secretary. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 Directories and Meetings Directors fies the member banks of each Federal Reserve District into three groups; each The following list of directors of Federal group comprises banks with similar capi- Reserve Banks and Branches shows the talization. Each group then elects one class of directorship, the principal busi- Class A and one Class B director. The ness affiliation, and the date the term ex- Board of Governors designates one Class pires for each director. Each Federal Re- C director as chairman of the board of diserve Bank has nine members on its board rectors and Federal Reserve Agent of each of directors: three Class A and three Class District Bank and appoints an other as B directors, who are elected by the stock- deputy chairman. holding member banks, and three Class C Federal Reserve Branches have either directors, who are appointed by the Board five or seven directors, a majority of of Governors of the Federal Reserve Sys- whom are appointed by the parent Federal tem. Directors are chosen without dis- Reserve Bank; the others are appointed by crimination as to race, creed, color, sex, the Board of Governors. One of the direcor national origin. tors appointed by the Board is designated Class A directors represent the stock- annually as chairman of the board of that holding member banks in each Federal Re- Branch in a manner prescribed by the parserve District. Class B and Class C direc- ent Federal Reserve Bank. tors represent the public and are chosen See the preceding table, "Officers of with due, but not exclusive, consideration Federal Reserve Banks, Branches, and Ofto the interests of agriculture, commerce, fices" for the name of the chairman and industry, services, labor, and consumers; deputy chairman of the board of directors they may not be officers, directors, or em- of each Reserve Bank and of the chairman ployees of any bank. In addition, Class C of each Branch. directors may not be stockholders of any A list of the current directors of the Fedbank. eral Reserve Banks and Branches appears For the election of Class A and Class B each spring in the Federal Reserve Bulledirectors, the Board of Governors classi- tin. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 257 Term expires District 1—BOSTON Dec. 31 Class A William W. Treat President, Bank Meridian, N.A., Hampton, New Hampshire 1985 William S. Edgerly Chairman and President, State Street Bank and Trust Company, Boston, Massachusetts 1986 Homer B. Ellis, Jr President, Factory Point National Bank, Manchester Center, Vermont 1987 Class B Matina S. Horner President, Radcliffe College, Cambridge, Massachusetts 1985 Richard M. Oster President and Chief Executive Officer, Cookson America, Inc., Providence, Rhode Island 1986 George N. Hatsopoulos .. .Chairman of the Board and President, Thermo Electron Cprporation, Waltham, Massachusetts 1987 Class C Thomas I. Atkins Attorney, Brooklyn, New York 1985 Michael J. Harrington Harrington Company, Peabody, Massachusetts 1986 Joseph A. Baute Chairman and Chief Executive Officer, Markem Corporation, Keene, New Hampshire 1987 District 2—NEW YORK Class A Alfred Brittain III Chairman of the Board, Bankers Trust Company, New York, New York 1985 T. Joseph Semrod Chairman of the Board, United Jersey Bank, Hackensack, New Jersey 1986 Robert W. Moyer President and Chief Executive Officer, Wilber National Bank, Oneonta, New York 1987 Class B William S. Cook President and Chief Executive Officer, Union Pacific Corporation, New York, New York . 1985 John R. Opel Chairman of the Board, International Business Machines Corporation, Armonk, New York 1986 John F. Welch, Jr Chairman of the Board, General Electric Company, Fairfield, Connecticut 1987 Class C John Brademas President, New York University, New York, New York 1985 Clifton R. Wharton, Jr. . . .Chancellor, State University of New York System, Albany, New York 1986 Virginia A. Dwyer Senior Vice President—Finance, American Telephone and Telegraph Company, New York, New York.. 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 Directories and Meetings Term expires BUFFALO BRANCH Dec. 31 Appointed by Federal Reserve Bank William Balderston III President and Chief Executive Officer, Chase Lincoln First Bank, N.A., Rochester, New York 1985 Donald I. Wickham President, Tri-Way Farms, Inc., Stanley, New York 1985 Herbert Fort President, The Bath National Bank, Bath, New York 1986 Ross B. Kenzie Chairman of the Board, Goldome FSB, Buffalo, New York 1987 Appointed by the Board of Governors M. Jane Dickman Partner, Touche Ross & Co., Buffalo, New York 1985 Matthew Augustine President and Chief Executive Officer, Eltrex Industries, Inc., Rochester, New York 1986 Joseph Yantomasi Consultant, United Auto Workers, Buffalo, New York 1987 District 3-PHILADELPHIA Class A Jo Anne Brinzey Chief Executive Officer and Cashier, The First National Bank at Gallitzin, Gallitzin, Pennsylvania 1985 John H. Walther Chairman of the Board, New Jersey National Bank, Pennington, New Jersey 1986 Ronald H. Smith President and Chief Executive Officer, CCNB Bank, N.A., New Cumberland, Pennsylvania 1987 Class B Eberhard Faber IV Chairman of the Board and Chief Executive Officer, Eberhard Faber, Inc., Wilkes- Barre, Pennsylvania 1985 Carl E. Singley Dean and Professor of Law, Temple University Law School, Philadelphia, Pennsylvania 1986 Charles F. Seymour Chairman and Chief Executive Officer, Jackson-Cross Company, Philadelphia, Pennsylvania 1987 Class C Nevius M. Curtis Chairman and Chief Executive Officer, Delmarva Power & Light Company, Wilmington, Delaware 1985 Robert M. Landis Partner, Dechert, Price and Rhoads, Philadelphia, Pennsylvania 1986 George E. Bartol III Chairman of the Board, Hunt Manufacturing Company, Philadelphia, Pennsylvania 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 259 Term District 4-CLEVELAND Class A William A. Stroud President, First-Knox National Bank, Mount Vernon, Ohio 1985 J. David Barnes Chairman and Chief Executive Officer, Mellon Bank, Pittsburgh, Pennsylvania .... 1986 Raymond D. Campbell. .. .Chairman, President, and Chief Executive Officer, Independent State Bank of Ohio, Columbus, Ohio 1987 Class B John W. Kessler President, John W. Kessler Company, Columbus, Ohio 1985 John R. Hall Chairman of the Board and Chief Executive Officer, Ashland Oil, Inc., Ashland, Kentucky 1986 Richard D. Hannan Chairman of the Board and President, Mercury Instruments, Inc., Cincinnati, Ohio... 1987 Class C Lewis R. Smoot, Sr President and Chief Executive Officer, The Sherman R. Smoot Company, Columbus, Ohio 1985 W.H. Knoell President and Chief Executive Officer, Cyclops Corporation, Pittsburgh, Pennsylvania 1986 E. Mandell de Windt Chairman of the Board, Eaton Corporation, Cleveland, Ohio 1987 CINCINNATI BRANCH Appointed by Federal Reserve Bank Clement L. Buenger President and Chief Executive Officer, The Fifth Third Bank, Cincinnati, Ohio 1985 Vernon J. Cole Executive Vice President and Chief Executive Officer, Harlan National Bank, Harlan, Kentucky 1986 Sherrill Cleland President, Marietta College, Marietta, Ohio.. 1987 Jerry L. Kirby Chairman of the Board, President, and Chief Executive Officer, Citizens Federal Savings and Loan Association, Dayton, Ohio 1987 Appointed by the Board of Governors Vacancy 1985 Robert E. Boni President and Chief Executive Officer, Armco Inc., Middletown, Ohio 1986 Don Ross Owner, Dunreath Farm, Lexington, Kentucky 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 Directories and Meetings Term expires PITTSBURGH BRANCH Dec. 31 Appointed by Federal Reserve Bank A. Dean Heasley President and Chief Executive Officer, Century National Bank and Trust Company, Rochester, Pennsylvania 1985 G.R. Rendle President and Chief Executive Officer, Gallatin National Bank, Uniontown, Pennsylvania 1986 Charles L. Fuellgraf, Jr. . .Chief Executive Officer, Fuellgraf Electric Company, Butler, Pennsylvania 1987 James S. Pasman, Jr Vice Chairman, Aluminum Company of America, Pittsburgh, Pennsylvania 1987 Appointed by the Board of Governors Robert S. Kaplan Professor of Industrial Administration, Graduate School of Industrial Administration, Carnegie-Mellon University, Pittsburgh, Pennsylvania 1985 Vacancy 1986 Milton A. Washington ... .President and Chief Executive Officer, Allegheny Housing Rehabilitation Corporation, Pittsburgh, Pennsylvania 1987 District 5-RICHMOND Class A Willard H. Derrick President and Chief Executive Officer, Sandy Spring National Bank and Savings Institution, Sandy Spring, Maryland 1985 Robert S. Chiles, Sr President and Chief Executive Officer, Greensboro National Bank, Greensboro, North Carolina 1986 Robert F. Baronner Chairman of the Board and Chief Executive Officer, One Valley Bancorp of West Virginia, Inc. and Kanawha Valley Bank, N.A., Charleston, West Virginia 1987 Class B George Dean Johnson, Jr. .Partner, Johnson, Smith, Hibbard, Cleveland, Wildman, and Dennis, Spartanburg, South Carolina 1985 Thomas B. Cookerly President, Broadcast Division, Allbritton Communications, Washington, D.C 1986 Floyd D. Gottwald, Jr Chairman of the Board and Chief Executive Officer, Ethyl Corporation, Richmond, Virginia 1987 Class C Robert A. Georgine President, Building & Construction Trades Department, AFL-CIO, Washington, D.C.. 1985 Leroy T. Canoles, Jr President, Kaufman & Canoles, Norfolk, Virginia 1986 Hanne Merriman President, Garfinckel's, Washington, D.C. ... 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 261 Term expires BALTIMORE BRANCH Dec. 31 Appointed by Federal Reserve Bank Howard I. Scaggs Chairman of the Board, American National Building and Loan Association, Baltimore, Maryland 1985 Hugh D. Shires Senior Vice President (retired), The First National Bank of Maryland, Baltimore, Maryland 1985 Charles W. Hoff III President and Chief Executive Officer, Farmers and Mechanics National Bank, Frederick, Maryland 1986 Raymond V. Haysbert, Sr. .President and Chief Executive Officer, Parks Sausage Company, Baltimore, Maryland ... 1987 Appointed by the Board of Governors Edward H. Covell President, The Covell Company, Easton, Maryland 1985 Robert L. Tate Chairman, Tate Industries, Baltimore, Maryland 1986 Gloria L. Johnson President, Hutzler Brothers Company, Baltimore, Maryland 1987 CHARLOTTE BRANCH Appointed by Federal Reserve Bank J. Donald Collier President and Chief Executive Officer, First National Bank, Orangeburg, South Carolina 1985 James G. Lindley President and Chief Executive Officer, South Carolina National Corporation, and Chairman and Chief Executive Officer, The South Carolina National Bank, Columbia, South Carolina 1985 John A. Hardin Chairman of the Board and President, First Federal Savings Bank, Rock Hill, South Carolina 1986 James M. Culberson, Jr. . .Chairman and President, The First National Bank of Randolph County, Asheboro, North Carolina 1987 Appointed by the Board of Governors G. Alex Bernhardt President, Bernhardt Industries, Inc., Lenoir, North Carolina 1985 Wallace J. Jorgenson President, Jefferson-Pilot Communications Co., Charlotte, North Carolina 1986 James E. Bostic, Jr General Manager, Convenience Products Division, Georgia-Pacific Corporation, Aiken, South Carolina 1987 District 6—ATLANTA Class A Dan B. Andrews President, First National Bank, Dickson, Tennessee 1985 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 Directories and Meetings Term expires Mary W. Walker President, The National Bank of Walton Dec. 31 County, Monroe, Georgia 1986 E.B. Robinson, Jr Chairman and Chief Executive Officer, Deposit Guaranty National Bank, Jackson, Mississippi 1987 Class B Bernard F. Sliger President, Florida State University, Tallahassee, Florida 1985 Harold B. Blach, Jr President, Blach's Inc., Birmingham, Alabama 1986 Horatio C. Thompson President, Horatio Thompson Investment, Inc., Baton Rouge, Louisiana 1987 Class C John H. Weitnauer, Jr Chairman and Chief Executive Officer, Rich way, Atlanta, Georgia 1985 Bradley Currey, Jr President, Rock-Tenn Company, Norcross, Georgia 1986 Jane C. Cousins President and Chief Executive Officer, Merrill Lynch Realty /Cousins, Miami, Florida 1987 BIRMINGHAM BRANCH Appointed by Federal Reserve Bank G. Mack Dove President, AAA Cooper Transportation Company, Dothan, Alabama 1985 Grady Gillam Chairman, AmSouth Bank, N.A., Gadsden, Alabama 1985 Charles L. Peery Chairman, The First National Bank of Florence, Florence, Alabama 1986 Willard L. Hurley Chairman and Chief Executive Officer, First Alabama Bancshares, Inc., Birmingham, Alabama 1987 Appointed by the Board of Governors Martha A. Mclnnis President, EnviroSouth, Inc., Montgomery, Alabama 1985 Margaret E.M. Tolbert. .. .Director, Carver Research Foundation, Tuskegee Institute, Tuskegee, Alabama 1986 A.G. Trammell President, Alabama Labor Council, AFL- CIO, Birmingham, Alabama 1987 JACKSONVILLE BRANCH Appointed by Federal Reserve Bank George C. Boone, Jr President and Chief Executive Officer, Security First Federal Savings and Loan Association, Daytona Beach, Florida 1985 E.F. Keen, Jr Vice Chairman, NCNB Bancorporation, Inc., Bradenton, Florida 1985 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 263 Term expires John D. Uible Chairman and Chief Executive Officer, Dec. 31 Florida National Banks of Florida, Inc., Jacksonville, Florida 1986 Buell G. Duncan, Jr Chairman and Chief Executive Officer, Sun Bank, N.A., Orlando, Florida 1987 Appointed by the Board of Governors E. William Nash, Jr President, South-Central Operations, The Prudential Insurance Company of America, Jacksonville, Florida 1985 Jo Ann Doke Smith Co-owner, Smith Brothers, Micanopy, Florida 1986 Andrew A. Robinson Dean, College of Education and Human Services, University of North Florida, Jacksonville, Florida 1987 MIAMI BRANCH Appointed by Federal Reserve Bank D.S. Hudson, Jr Chairman, First National Bank and Trust Company of Stuart, Stuart, Florida 1985 Robert L. Kester Vice Chairman, Barnett Bank of South Florida, N.A., Pompano Beach, Florida ... 1986 Robert D. Rapaport Chairman, Royal Palm Savings Association, Palm Beach, Florida 1987 Robert M. Taylor Chairman and Chief Executive Officer, The Mariner Group, Inc., Fort Myers, Florida . 1987 Appointed by the Board of Governors Sue McCourt Cobb Attorney, Greenberg, Traurig, Askew, Hoffman, Lipoff, Rosen, and Quentel, P.A., Miami, Florida 1985 Eugene E. Cohen Chief Financial Officer and Treasurer, Howard Hughes Medical Institute, Coconut Grove, Florida 1986 Robert D. Apelgren President, Apelgren Corporation, Pahokee, Florida 1987 NASHVILLE BRANCH Appointed by Federal Reserve Bank Samuel H. Howard Senior Vice President of Public Affairs, Hospital Corporation of America, Nashville, Tennessee 1985 Owen G. Shell, Jr President and Chief Executive Officer, First American National Bank of Nashville, Nashville, Tennessee 1985 Robert W. Jones Chairman and President, First National Bank, McMinnville, Tennessee 1986 Will A. Hildreth President and Chief Executive Officer, First National Bank of Loudon County, Lenoir City, Tennessee 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 Directories and Meetings Term expires Appointed by the Board of Governors Dec. 31 Condon S. Bush President, Bush Brothers & Company, Dandridge, Tennessee 1985 Patsy R. Williams Partner, Rhyne Lumber Company, Newport, Tennessee 1986 C. Warren Neel Dean, College of Business Administration, The University of Tennessee, Knoxville, Tennessee 1987 NEW ORLEANS BRANCH Appointed by Federal Reserve Bank Philip K. Livingston Vice Chairman, President, and Chief Executive Officer, Citizens National Bank, Hammond, Louisiana 1985 Tom Burkett Scott, Jr President and Chief Executive Officer, Uniflrst Bank for Savings, F.A., Jackson, Mississippi 1985 Carl E. Jones, Jr Chairman, President, and Chief Executive Officer, Merchants National Bank of Mobile, Mobile, Alabama 1986 James G. Boyer Chairman, President, and Chief Executive Officer, Gulf National Bank at Lake Charles, Lake Charles, Louisiana 1987 Appointed by the Board of Governors Sharon A. Perlis President, Sharon A. Perlis, Law Corporation, Metairie, Louisiana 1985 Leslie B. Lampton President, Ergon, Inc., Jackson, Mississippi . 1986 Roosevelt Steptoe Professor of Economics, Southern University, Baton Rouge Campus, Baton Rouge, Louisiana 1987 District 7-CHICAGO Class A Patrick E. McNarny President, First National Bank of Logansport, Logansport, Indiana 1985 Ollie Jay Tomson President, The Citizens National Bank of Charles City, Charles City, Iowa 1986 Barry F. Sullivan Chairman of the Board, First National Bank of Chicago, Chicago, Illinois 1987 Class B Mary Garst Manager, Cattle Division, Garst Company, Coon Rapids, Iowa 1985 Leon T. Kendall Chairman and Chief Executive Officer, Mortgage Guaranty Insurance Corporation, Milwaukee, Wisconsin 1986 Edward D. Powers President and Chief Executive Officer, Mueller Company, Decatur, Illinois 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 265 Term expires Class C Dec. 31 Stanton R. Cook President, Tribune Company, Chicago, Illinois 1985 Robert J. Day Chairman and Chief Executive Officer, USG Corporation, Chicago, Illinois 1986 Marcus Alexis Dean, College of Business Administration, University of Illinois at Chicago, Chicago, Illinois 1987 DETROIT BRANCH Appointed by Federal Reserve Bank Charles T. Fisher III Chairman and President, National Bank of Detroit, Detroit, Michigan 1985 Ronald D. Story President, The Ionia County National Bank of Ionia, Ionia, Michigan 1986 Richard M. Gillett Chairman of the Board, Old Kent Financial Corporation, Grand Rapids, Michigan 1987 Thomas R. Ricketts Chairman of the Board and President, Standard Federal Bank, Troy, Michigan 1987 Appointed by the Board of Governors Russell G. Mawby Chairman of the Board and Chief Executive Officer, W.K. Kellogg Foundation, Battle Creek, Michigan 1985 Karl D. Gregory Professor of Economics and Management, School of Economics and Management, Oakland University, Rochester, Michigan .. 1986 Robert E. Brewer Senior Vice President—Finance and Director, K Mart Corporation, Troy, Michigan 1987 District 8—ST. LOUIS Class A Donald L. Hunt President, First National Bank of Marissa, Marissa, Illinois 1985 Clarence C. Barksdale .. . .Chairman of the Board, Centerre Bank, N.A., St. Louis, Missouri 1986 H.L. Hembree III Chairman of the Board and Chief Executive Officer, Arkansas Best Corporation, Fort Smith, Arkansas 1987 Class B Robert J. Sweeney President and Chief Executive Officer, Murphy Oil Corporation, El Dorado, Arkansas 1985 Frank A. Jones, Jr President, Dietz Forge Company, Memphis, Tennessee 1986 Jesse M. Shaver, Jr President, JMS Corporation, Louisville, Kentucky 1987 Class C Robert L. Virgil, Jr Dean, School of Business, Washington University, St. Louis, Missouri 1985 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 Directories and Meetings Term expires Mary P. Holt President, Clothes Horse, Little Rock, Dec. 31 Arkansas 1986 W.L. Hadley Griffin Chairman of the Executive Committee, Brown Group, Inc., St. Louis, Missouri ... 1987 LITTLE ROCK BRANCH Appointed by Federal Reserve Bank D. Eugene Fortson President, The Southwestern Company, Little Rock, Arkansas 1985 William H. Kennedy, Jr. . .Chairman of the Board, Worthen Banking Corporation, Pine Bluff, Arkansas 1986 Wilbur P. Gulley, Jr Chairman of the Board and Chief Executive Officer, Savers Federal Savings and Loan Association, Little Rock, Arkansas 1987 W. Wayne Hartsfield President and Chief Executive Officer, First National Bank, Searcy, Arkansas 1987 Appointed by the Board of Governors Shirley J. Pine Professor, Department of Communicative Disorders, University of Arkansas at Little Rock, Little Rock, Arkansas 1985 Richard V. Warner Group Vice President, Wood Products Group, Potlatch Corporation, Warren, Arkansas ... 1986 Sheffield Nelson Partner, House, Wallace, Nelson, and Jewell, P.A., Little Rock, Arkansas 1987 LOUISVILLE BRANCH Appointed by Federal Reserve Bank Allan S. Hanks President, The Anderson National Bank of Lawrenceburg, Lawrenceburg, Kentucky ... 1985 Frank B. Hower, Jr Chairman and Chief Executive Officer, Liberty National Bank and Trust Company of Louisville, Louisville, Kentucky 1986 John E. Darnell, Jr Chairman of the Board, The Owensboro National Bank, Owensboro, Kentucky 1987 R.I. Kerr, Jr Chairman of the Board, President, and Chief Executive Officer, Great Financial Federal, Louisville, Kentucky 1987 Appointed by the Board of Governors Henry F. Frigon President and Chief Executive Officer, BATUS, Inc., Louisville, Kentucky 1985 William C. Ballard, Jr. .. .Executive Vice President, Finance and Administration, Humana, Inc., Louisville, Kentucky 1986 Raymond M. Burse President, Kentucky State University, Frankfort, Kentucky 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 267 Term expires MEMPHIS BRANCH Dec. 31 Appointed by Federal Reserve Bank William H. Brandon, Jr... .President, First National Bank of Phillips County, Helena, Arkansas 1985 Wayne W. Pyeatt President, Memphis Fire Insurance Company, Memphis, Tennessee 1986 Edgar H. Bailey Chairman and Chief Executive Officer, Leader Federal Savings and Loan Association, Memphis, Tennessee 1987 John P. Dulin President, First Tennessee Bank, N.A., Memphis, Tennessee 1987 Appointed by the Board of Governors Vacancy 1985 Donald B. Weis President, Tamak Transportation Corporation, West Memphis, Arkansas 1986 G. Rives Neblett Neblett, Fortier, and Havens, Attorneys at Law, Shelby, Mississippi 1987 District 9—MINNEAPOLIS Class A Curtis W. Kuehn President, The First National Bank in Sioux Falls, Sioux Falls, South Dakota 1985 Burton P. Allen, Jr President, First National Bank, Milaca, Minnesota 1986 Thomas M. Strong President and Chief Executive Officer, Citizens State Bank, Ontonagon, Michigan . 1987 Class B Richard L. Falconer District Staff Manager, Northwestern Bell, St. Paul, Minnesota 1985 Harold F. Zigmund Chairman (retired), Blandin Paper Company, Duluth, Minnesota 1986 William L. Mathers President, Mathers Land Company, Inc., Miles City, Montana 1987 Class C Sister Generose Gervais .. .Consultant, Saint Mary's Hospital, Rochester, Minnesota 1985 John B. Davis, Jr Executive Director, Children's Theatre Company and School, Minneapolis, Minnesota 1986 Michael W. Wright Chairman, President, and Chief Executive Officer, Super Valu Stores, Inc., Minneapolis, Minnesota 1987 HELENA BRANCH Appointed by Federal Reserve Bank Roger H. Ulrich President, First State Bank, Malta, Montana . 1985 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 Directories and Meetings Term expires Dale W. Anderson President and Chief Executive Officer, Dec. 31 Norwest Bank Great Falls, N.A., Great Falls, Montana 1986 Seabrook Pates President and General Manager, Midland Implement Company, Inc., Billings, Montana 1987 Appointed by the Board of Governors Gene J. Etchart Past President, Hinsdale Livestock Company, Glasgow, Montana 1985 Marcia S. Anderson President, Bridger Canyon Stallion Station, Inc., Bozeman, Montana 1986 District 10-KANSAS CITY Class A Howard K. Loomis President, The Peoples Bank, Pratt, Kansas .. 1985 Wayne D. Angell Chairman of the Board, The First State Bank of Pleasanton, Pleasanton, Kansas 1986 Donald D. Hoffman Chairman of the Board, Central Bank of Denver, Denver, Colorado 1987 Class B Vacancy 1985 Richard D. Harrison Chairman and Chief Executive Officer, Fleming Companies, Inc., Oklahoma City, Oklahoma 1986 Duane C. Acker President, Kansas State University, Manhattan, Kansas 1987 Class C Irvine O. Hockaday, Jr. .. .Executive Vice President and Member of the Office of the Chairman, Hallmark Cards, Inc., Kansas City, Missouri 1985 Frederick W. Lyons, Jr. .. .President and Chief Executive Officer, Marion Laboratories, Inc., Kansas City, Missouri 1986 Robert G. Lueder Chairman of the Board, Lueder Construction Company, Omaha, Nebraska 1987 DENVER BRANCH Appointed by Federal Reserve Bank George S. Jenks President and Chief Executive Officer, Sunwest Financial Services, Inc., Albuquerque, New Mexico 1985 Kenneth C. Naramore ... .Chairman of the Board and Chief Executive Officer, Stockmen's Bank and Trust Company, Gillette, Wyoming 1985 Roger L. Reisher Co-Chairman, FirstBank Holding Company of Colorado, Lakewood, Colorado 1986 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 269 Term expires Junius F. Baxter Chairman of the Board and Chief Executive Dec- 31 Officer, Bank Western Federal Savings Bank, Denver, Colorado 1987 Appointed by the Board of Governors Anthony W. Williams President, Williams, Turner, & Holmes, P.C., Grand Junction, Colorado 1985 James C. Wilson President and Chief Executive Officer, Rocky Mountain Energy, Broomfield, Colorado... 1986 James E. Nielson President and Chief Executive Officer, JN Incorporated, Cody, Wyoming 1987 OKLAHOMA CITY BRANCH Appointed by Federal Reserve Bank William H. Crawford Chairman and Chief Executive Officer, First National Bank and Trust Company, Frederick, Oklahoma 1985 William O. Alexander President and Chief Executive Officer, Continental Federal Savings & Loan Association, Oklahoma City, Oklahoma 1986 Marcus R. Tower Tulsa, Oklahoma 1986 Appointed by the Board of Governors Patience S. Latting Oklahoma City, Oklahoma 1985 John F. Snodgrass President and Trustee, Samuel Roberts Noble Foundation, Inc., Ardmore, Oklahoma 1986 OMAHA BRANCH Appointed by Federal Reserve Bank William W. Cook, Jr President, The Beatrice National Bank and Trust Company, Beatrice, Nebraska 1985 Charles H. Thorne Chairman of the Board and Chief Executive Officer, First Federal Savings and Loan Association of Lincoln, Lincoln, Nebraska . 1985 Donald J. Murphy Father Flanagan's Boys' Home, Boys Town, Nebraska 1986 Appointed by the Board of Governors Kenneth L. Morrison President, Morrison-Quirk Grain Corporation, Hastings, Nebraska 1985 Janice D. Stoney Executive Vice President and Chief Operating Officer, Northwestern Bell Telephone Company, Omaha, Nebraska 1986 District 11—DALLAS Class A John P. Gilliam Chairman of the Board and Chief Executive Officer, First National Bank in Valley Mills, Valley Mills, Texas 1985 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 Directories and Meetings Term expires Miles D. Wilson Chairman of the Board and Chief Executive Dec. 31 Officer, The First National Bank of Bellville, Bellville, Texas 1986 Gene Edwards Chairman of the Board, First Amarillo Bancorporation, Inc., Amarillo, Texas 1987 Class B Robert Ted Enloe III President, Lomas & Nettleton Financial Corporation, Dallas, Texas 1985 Kent Gilbreath Associate Dean, Hankamer School of Business, Baylor University, Waco, Texas 1986 Robert L. Pfluger Rancher, San Angelo, Texas 1987 Class C Robert D. Rogers President and Chief Executive Officer, Texas Industries, Inc., Dallas, Texas 1985 Hugh G. Robinson President, Cityplace Development Corporation, Dallas, Texas 1986 Bobby R. Inman Chairman of the Board, President, and Chief Executive Officer, Microelectronics and Computer Technology Corporation, Austin, Texas 1987 EL PASO BRANCH Appointed by Federal Reserve Bank Hector Holguin Founder and Chairman, Holguin Corporation, El Paso, Texas 1985 David L. Stone President, The Portales National Bank, Portales, New Mexico 1986 Tony A. Martin Chairman of the Board, First City National Bank of Midland, Midland, Texas 1987 Gerald W. Thomas President Emeritus and Professor of Animal Range Science, Center for International Programs, New Mexico State University, Las Cruces, New Mexico 1987 Appointed by the Board of Governors Peyton Yates President, Yates Drilling Company, Artesia, New Mexico 1985 John Sibley President, Delaware Mountain Enterprises, Carlsbad, New Mexico 1986 Mary Carmen Saucedo Associate Superintendent, Central Area Office, El Paso Independent School District, El Paso, Texas 1987 HOUSTON BRANCH Appointed by Federal Reserve Bank Will E. Wilson Chairman of the Executive Committee, First City National Bank of Beaumont, Beaumont, Texas 1985 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 271 Term expires Marcella D. Perry Consultant, Heights Savings Association, Dec- 31 Houston, Texas 1986 Thomas B. McDade Vice Chairman, Texas Commerce Baneshares, Inc., Houston, Texas 1987 David E. Sheffield President and Chief Executive Officer, First Victoria National Bank, Victoria, Texas 1987 Appointed by the Board of Governors Robert T. Sakowitz Chairman of the Board and President, Sakowitz, Inc., Houston, Texas 1985 Walter M. Mischer, Jr President, The Mischer Corporation, Houston, Texas 1986 Andrew L. Jefferson, Jr. . .Attorney, Jefferson, Mims, and Plummer, Houston, Texas 1987 SAN ANTONIO BRANCH Appointed by Federal Reserve Bank George Brannies Chairman of the Board and President, The Mason National Bank, Mason, Texas 1985 C. Ivan Wilson Chairman of the Board and Chief Executive Officer, First City Bank of Corpus Christi, Corpus Christi, Texas 1986 Joe D. Barbee President and Chief Executive Officer, Barbee-Neuhaus Implement Company, Weslaco, Texas 1987 Robert T. Rork Chairman of the Board and Chief Executive Officer, RepublicBank San Antonio, N.A., San Antonio, Texas 1987 Appointed by the Board of Governors Robert F. McDermott Chairman of the Board and President, United Services Automobile Association, San Antonio, Texas 1985 Lawrence L. Crum Professor of Banking and Finance, The University of Texas at Austin, Austin, Texas 1986 Ruben M. Garcia President, Modern Machine Shop, Inc., Laredo, Texas 1987 District 12-SAN FRANCISCO Class A Spencer F. Eccles Chairman, President, and Chief Executive Officer, First Security Corporation, Salt Lake City, Utah 1985 Rayburn S. Dezember Chairman, Central Pacific Corporation, Bakersfield, California 1986 Donald J. Gehb President and Chief Executive Officer, Alameda Bancorporation and Alameda First National Bank, Alameda, California 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 Directories and Meetings Term expires Class B Dec. 31 Togo W. Tanaka Chairman, Gramercy Enterprises, Inc., Los Angeles, California 1985 John C. Hampton Chairman and President, Willamina Lumber Company, Portland, Oregon 1986 George H. Weyerhaeuser . .President and Chief Executive Officer, Weyerhaeuser Company, Tacoma, Washington 1987 Class C Carolyn S. Chambers President, Chambers Cable Co., Inc., Eugene, Oregon 1985 Fred W. Andrew Chairman, President, and Chief Executive Officer, Superior Farming Company, Bakersfield, California 1986 Alan C. Furth Vice Chairman, Santa Fe Southern Pacific Corporation and President, Southern Pacific Company, San Francisco, California 1987 LOS ANGELES BRANCH Appointed by Federal Reserve Bank Bram Goldsmith Chairman and Chief Executive Officer, City National Bank, Beverly Hills, California... 1985 William L. Tooley Chairman, Tooley and Company, Investment Builders, Los Angeles, California 1985 Harvey J. Mitchell President and Chief Executive Officer, Escondido National Bank, Escondido, California 1986 Robert R. Dockson Chairman and Chief Executive Officer, CalFed, Inc., Los Angeles, California 1987 Appointed by the Board of Governors Thomas R. Brown, Jr Chairman of the Board, Burr-Brown Corporation, Tucson, Arizona 1985 Lola M. McAlpin-Grant.. .Attorney, Inglewood, California 1986 Richard C. Seaver President, Hydril Company, Los Angeles, California 1987 PORTLAND BRANCH Appointed by Federal Reserve Bank Herman C. Bradley, Jr. . . .President and Chief Executive Officer, Tri- County Banking Company, Junction City, Oregon 1985 William S. Naito Vice President, Norcrest China Company, Portland, Oregon 1986 John A. Elorriaga Chairman of the Board and Chief Executive Officer, United States National Bank of Oregon, Portland, Oregon 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 273 Term expires G. Dale Weight Chairman of the Board and Chief Executive Dec. 31 Officer, Benjamin Franklin Federal Savings and Loan Association, Portland, Oregon . .. 1987 Appointed by the Board of Governors G. Johnny Parks Former Northwest Regional Director, International Longshoremen's & Warehousemen's Union, Portland, Oregon 1985 Paul E. Bragdon President, Reed College, Portland, Oregon... 1986 Sandra A. Suran Partner-in-Charge, Peat Marwick Mitchell & Co., Beaverton, Oregon 1987 SALT LAKE CITY BRANCH Appointed by Federal Reserve Bank John A. Dahlstrom Chairman of the Board, Tracy-Collins Bank and Trust Company, Salt Lake City, Utah .. 1985 Fred C. Humphreys Chairman, President, and Chief Executive Officer, The Idaho First National Bank and Moore Financial Group, Boise, Idaho 1985 Albert C. Gianoli Chairman of the Board and President, First National Bank of Ely, Ely, Nevada 1986 Lela M. Ence Executive Director, University of Utah Alumni Association, Salt Lake City, Utah .. 1987 Appointed by the Board of Governors D.N. Rose President and Chief Executive Officer, Mountain Fuel Supply Company, Salt Lake City, Utah 1985 Robert N. Pratt President, Moriah Enterprises, Inc., Bountiful, Utah 1986 Don M. Wheeler President, Wheeler Machinery Company, Salt Lake City, Utah 1987 SEATTLE BRANCH Appointed by Federal Reserve Bank William W. Philip Chairman of the Board and President, Puget Sound National Bank, Tacoma, Washington 1985 H.H. Larison President, Columbia Paint Company, Spokane, Washington 1986 John N. Nordstrom Co-Chairman of the Board, Nordstrom, Inc., Seattle, Washington 1987 William S. Randall President and Chief Executive Officer, First Interstate Bank of Washington, N.A., Seattle, Washington 1987 Appointed by the Board of Governors Byron I. Mallott President and Chief Executive Officer, Sealaska Corporation, Juneau, Alaska 1985 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 Directories and Meetings Term expires Dec. 31 Carol A. Birkholz Managing Partner, Laventhol & Horwath, Seattle, Washington 1986 John W. Ellis President and Chief Executive Officer, Puget Sound Power & Light Company, Bellevue, Washington 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

211 Index Acceptances, bankers (See Bankers Bank holding companiesacceptances) Continued Adjustable-rate mortgages, 147, 151, 156 Number and assets, 169 Advertising of interest on deposits, Stock repurchases by, 185 proposed revisions to Regulation Q, Surveillance and monitoring program, 148, 187 171 Agriculture Bank Holding Company Act Seasonal credit program, Legislative recommendations and modification, 70 litigation, 158-61, 162-67 Assets and liabilities Provisions, 169, 177, 180-81 Banks, by class, 229 Bank Merger, Act, 178 Board of Governors, 196 Bank mergers and consolidations, 161, Federal Reserve Banks, 202-07 178, 180-82 Audits (See Examinations, inspections, Bankers acceptances regulation, and audits) Authority to purchase and to enter into Automated clearinghouse service, 153, repurchase agreements, 74-76 189, 190 Federal Reserve Banks Automated teller machines, 153 Holdings, 194, 202, 204, 206 Automobile credit, 146, 151 Income, 193, 214-17 Open market transactions, 208 Repurchase agreements, 74-76, 202, Balance of payments (See International 204, 206, 208 developments, review of 1985) Banking offices, changes in number, 234 Bank, new definitions, legislative recom- Banking supervision and regulation by mendation, 158 Federal Reserve System, 69, 168-85 Bank Export Services Act, 180 Board of Governors (See also Federal Bank holding companies Reserve System) Activities approved, pending, and Cash, sources, uses, and balance at denied, 181-82 end of 1985, 198 Applications by, processing and notice Consumer Advisory Council (See of Board decisions, 180-82 Consumer Advisory Council) Capital-adequacy guidelines, 68-69, Delegated authority, 178, 180, 185 174-75, 185 Financial statements, 195-200 Community Reinvestment Act relative Interpretations (See Interpretations) to, 149 Legislative recommendations, 156, Control of, change, 178 158-61 Dividends paid by, Board policy Litigation, 162-67 statement, 69 Members and officers, 248 Examination, inspection, and Policy actions (See Policy actions) regulation, 168, 170-78 Pricing of Federal Reserve services Financial statements, revisions and and in the payment mechanism additions, 173 (See Fees) International activities, 169, 178 Publications (See Publications) Investments, 179-80 Regulations (See Regulations) Legislative recommendations, 158-60 Regulatory simplification, 186-88 Litigation, 162-67 Salaries, 197 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 Index Board of Governors—Continued Comptroller of the Currency Training (See Training) Conformity with, 67-68 Branch banks Jurisdiction, 170, 172, 178 Federal Reserve Reports, orders, and legislative recom- Bank premises, 159, 193, 212 mendations by, 150-51, 157 Directors, 256-74 Condition statements of Federal Reserve Vice presidents in charge, 254-55 Banks, 202-07 Foreign, of U.S. banking organiza- Consumer Advisory Council, 156, 252 tions, 64, 170, 178 Consumer and community affairs, 145- Foreign banks, 64, 170 57 Budget review, Federal Reserve Consumer Credit Protection Act, 148 System, 193 Credit (See also Loans) Business credit transactions, educational Automobile, 146, 151 pamphlet planned, 148 Equal Credit Opportunity (See Equal Credit Opportunity Act and Regulation B) Real estate (See Mortgage loans) Call reports (See Condition statements) Seasonal credit program, Capital accounts modification, 76 Banks, by class, 229 Securities, 64-65, 182-84, 188 Federal Reserve Banks, 203, 204, 206 Truth in Lending (See Truth in Capital-adequacy guidelines, 67-68, Lending Act) 174-75, 185 Credit cards, 157, 181 Change in Bank Control Act of 1978, Credit Practices Rule, adoption of 178 similar rule, and staff guidelines for, Check clearing and collection 67, 146 Availability of funds, speedup, 157, Currency and coin services, 191 189 Fees for Federal Reserve services, 189 Float (See Float) Nonpayment of certain checks, improved procedures for notification, Depository institutions 65, 147, 159, 187-88 Checks (See Check clearing and Volume of operations, 224 collection) Coin and currency services, 191 Interest on deposits (See Interest on Community affairs officers, 149-50 deposits) Commercial banks (See also Insured Repurchase agreement transactions by, commercial banks) joint policy statement, 68, 175 Banking offices, changes in Reserve requirements (See Reserve number, 234 requirements of depository Supervision and regulation by Federal institutions) Reserve System, 69, 168-85 Reserves and related items, 230-33 Transfers of funds (See Services to (See Fees) Transfers of funds) Depository Institutions Deregulation Community Reinvestment Act Committee, 187 Annual report to Congress, 145 Deposits Examination under, 149, 155 Banks, by class, 229 Issue considered by Consumer Advi- Checks (See Check clearing and sory Council related to, and collection) usefulness of data from, 156-57 Federal Reserve Banks, 203, 204, 206, Promotion of goals, 149 231, 235 Publication regarding, 150 Interest rates (See Interest on deposits) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 279 Deposits—Continued Examinations, inspections, regulation, Reserve requirements (See Reserve and audits—Continued requirements of depository Program to strengthen, 172-77 institutions) Specialized, 170 Directors, Federal Reserve Banks and State member banks, 155-56, Branches 168-69, 171-77 Legislative recommendation, 159 Surveillance and monitoring program, List, 256-74 relation to, 171 Discount rates at Federal Reserve Banks System Open Market Account, 192 (See Interest rates) Expenses Dividends Board of Governors, 195-200 Federal Reserve Banks, 192-93, 216, Federal Reserve Banks, 192, 218-21 219, 221 Federal Reserve System, 1981-85, 213 Federal Reserve System, 1981-85, 213 Export trading companies, 179-80 Payment of, Board policy statement, 67 Fair Credit Billing Act, 151 Fair Housing Act, usefulness of Earnings of Federal Reserve Banks data from, 156 (See Income of Federal Reserve Farm Credit Act, 166 Banks) Farm Credit Administration, 151-52, Economy in 1985, 5-11 183 Edge and agreement Farmers Home Administration, 68 corporations, 169-70 Federal Advisory Council, 251 Educational activities (See Training) Federal agency securities Electronic data processing activities, Authority to purchase and to enter into examination, 170 repurchase agreements, 74-76, Electronic Fund Transfer Act 89, 96, 135 Annual report to Congress, 145 Federal Reserve Bank holdings and Compliance with, 150-52 earnings, 194, 202, 204, 206, Economic impact, 152-53 210, 232 Legislative recommendation, 157 Federal Reserve open market transac- Electronic fund transfers (See Transfers tions, 1985, 208 of funds and Regulation E) Repurchase agreements, 67, 74-76, Electronic fund transfer systems, policy 202, 204, 206, 208, 210 of reducing risks on large-dollar Authorization for, 74-76 transfers, 176 Board policy statement, 67 Equal Credit Opportunity Act Tables, 202, 204, 206, 208, 210 Annual report to Congress, 145 Transfer, by Reserve Banks, 191 Compliance with, 148, 150-51 Federal Bureau of Investigation, training Regulation B (See Regulations) by, 172 Usefulness of data from, 156 Federal Deposit Insurance Corporation, Examinations, inspections, regulation, 67-68, 150-51, 158, 160, 170, 172, and audits 178 Bank holding companies, 159, 169, Guidelines and reports, 67, 150-51 171-78 Provisions involving, and jurisdiction, Federal Reserve Banks, 192 158, 160, 170, 178 International activities, 170 Federal Financial Institutions Examina- Large-dollar electronic fund tion Council, 68, 172, 175 transfers, 176 Federal Financing Bank, 75 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 Index Federal Home Loan Bank Board Federal Reserve Board (See Board of Actions taken, 146, 150-51, 172, 183 Governors) Publication, 147 Federal Reserve Bulletin, 182 Federal Open Market Committee Federal Reserve notes Audit of System Open Market Condition statement data, 202-07 Account, 192 Cost of issuance and redemption, Continuing authorizations, review, 96 193, 197 Litigation, 166 Interest paid to U.S. Treasury on, Meetings, 74 193, 213 Members and officers, 250 Litigation, 166-67 Policy actions, 74-143 Federal Reserve Reserve Reform Act of Federal Reserve Act 1977, 159 Legislative recommendations and Federal Reserve System (See also Board litigation, 159, 166 of Governors) Provisions, 169, 179, 184, 192 Federal Reserve Agents, 255 Banking supervision and regulation by, Federal Reserve Banks 69, 168-85 Assessments for expenses of Board of Budget review, 193 Governors, 197, 216, 218, 220 Consumer affairs (See Consumer and Bank premises, 159, 193, 202, 204, community affairs) 206, 212 Costs of certain services, 191 Branches (See Branch banks) Foreign currency operations (See Capital accounts, 203-04, 206 Foreign currencies) Chairmen and deputy chairmen, Income and expenses, 1981-85, 213 254-55 Map of Federal Reserve Districts, 246 Coin and currency services, 191 Membership, 185 Condition statement, 202-07 Pricing of services and in the payment Dallas Bank, pilot program, 189 mechanism, 189-94, 214, 222 Delegated authority, 178, 180, 185 Training (See Training) Deposits, 203-04, 206, 231, 233 Federal Savings and Loan Insurance Directors, 159, 256-74 Corporation, 160 Dividends paid, 193, 216, 219, 221 Federal Trade Commission, 67, 146, Examination or audit, 192 151-52 Income and expenses, 192, 214-21 Federal Trade Commission Interest rates, 69-73, 224 Improvement Act Loans and securities, 193, 202, 204, Annual report to Congress, 145 206, 210, 212, 230, 232 Responsibilities under, 146 New York Bank, 69, 74, 128, 175, Fedwire, 176, 190-91 192 Fees Officers and employees, number and Federal Reserve services to depository salaries, 211 institutions Operations, volume, 224 Automated clearinghouse service, Presidents and first vice presidents, 189-90 211, 254-55 Check clearing and collection, 189 Pricing of services and in the payment Pricing of, and in the payment mechanism, 189-94, 214, 222 mechanism, 189-94, 214, 222 Profit and loss, 216 Securities and noncash collection St. Louis Bank, pilot program, 189 services, 191 Seasonal credit program, U.S. Treasury securities, 191 loans under, 76 Financial Institutions Supervisory Act of Training, 149, 171 1966, 165, 169 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 281 Financial markets and monetary Interest on deposits—Continued policy, 12-19 Payment on demand deposits, prohibi- Foreign banking and financing (See tion, 187 Regulations: K) Regulation Q (See Regulations) Float (See also Check clearing and Interest rates (See also Interest on collection), 189-90, 192 deposits) Foreign banks, 64, 170, 179 Credit cards, 156 Foreign branches of U.S. banking Federal Reserve Banks organizations (See Branches) Changes, 69-73 Foreign currencies Table, 224 Authorization and directive for opera- Mortgage loans, 147 tions in, and review of documents, International Banking Act of 1978, 74, 77-79, 96, 128 66, 179 Federal Reserve income on, 214 International banking activities, 169, 178 Warehousing, agreement with U.S. International banking facilities, 179 Treasury, 96 International banking operations (See Freedom of Information Act, 165 Regulations: K) Full Employment and Balanced Growth International developments, review of Act of 1978, 3, 27 1985, 20-26 Interpretations Regulations B, E, and Z, 148 Garn-St Germain Depository Institu- Margin regulations (G, T, U, and X), tions Act of 1982, 64, 160-61 182-84 Glass-Steagall Act, 165 Regulation Q, 187 Gold certificate accounts of Reserve Interstate banking, 156, 160-61, 181 Banks and gold stock, 202, 204, Interstate Commerce Commission, 152 206, 230, 232 Investment Company Act of 1940, 183 Investments Bank holding companies, 179, 180 Banks, by class, 229 Home Mortgage Disclosure Act Federal Reserve Banks, 202, 204, 206 of 1975, 156 Foreign, by U.S. banking organizations, 180 State member banks, 184, 229 Income Federal Reserve Banks, 192, 214-21 Federal Reserve System, 1981-85, 213 Insured commercial banks (See also Commercial banks) Labor market developments, 10 Acquisition authority in emergency, Leasing, consumer, 148 legislative recommendation, 161 Legislative recommendations Assets and liabilities, 229 Board of Governors, 156, 158-61 Banking offices, changes in number, Other agencies with enforcement 234 responsibilities, 156-57 Number, by class of bank, 229 Litigation Interest on deposits (See also Interest Bank holding companies, 162-67 rates) Board procedures and regulations, Advertising, proposed revisions to challenges, 165-67 Regulation Q, 148, 187 Loans (See also Credit) Maximum rates payable on time and Agricultural (See Agriculture) savings deposits, 227 Banks, by class, 229 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 Index Loans—Continued Monetary policy Executive officers of state member Financial markets relative to, 12-19 banks, 184 Reports to Congress, 27-59 Federal Reserve Banks Review of 1985, 3-11 Holdings and income, 194, 202, Money market deposit accounts, 204, 206, 210, 214, 216, 230, proposed amendment of 232 Regulation D, 187 Interest rates, 69-73, 224 Mortgage loans, 64, 147, 151, 156, 186 To depository institutions, 202, 204, Mutual savings banks, 234 206, 214, 230, 232 Guaranteed by U.S. government, revisions to Board policy, 68 National Association of Securities Real estate (See Mortgage loans) Dealers, 183 Volume of operations, 224 National banks (See also Member banks) Assets, liabilities, and capital accounts, 229 Banking offices, changes in Margin credit regulations (See Regula- number, 234 tions: G, T, U, and X) Capital-adequacy guidelines (See Margin requirements Capital-adequacy guidelines) Option contracts, Board policy actions, Foreign branches, 179 65, 181, 183, 188 Number, 229 Table, 228 National Credit Union Administration, Member banks (See also Depository 150, 172, 183 institutions and National banks) Nonbank banks, 158, 181 Assets, liabilities, and capital accounts, Nonmember depository institutions 229 Assets and liabilities, 229 Banking offices, changes in number, Banking offices, changes in 234 number, 234 Borrowings and loans (See Loans) Number, 229 Branches, 178-79 Capital-adequacy guidelines (See Capital-adequacy guidelines) Control of, changes, 178 Option contracts, Board policy actions, Dividends paid by, Board policy, 69 65, 181, 183, 188 Investments, 179, 180 Over-the-counter marginable stocks, 183 Membership in Federal Reserve System, 185 Number, 229 Reserve requirements, 225 Payment mechanism (See Fees) Reserves and related items, 230-33 Policy actions State member banks (See State mem- Board of Governors ber banks) Discount rates at Federal Reserve Surveillance and monitoring Banks, 69-73 program, 171 Regulations, 63-67 Transfers of funds (See Transfers Statements and other actions, 67-68 of funds) Federal Open Market Committee Mergers and consolidations, 161, 177- Authority to effect transactions in 78, 180-82, 235-45 System Open Market Account Monetary Control Act of 1980, 64, 159, Continuing authorizations and 187, 189 directives, review, 96 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 283 Policy actions—Continued Regulations—Continued FOMC—Continued B, Equal Credit Opportunity, 63, Authority—Continued 147-48, 151, 156, 186 Domestic operations, 74-77, D, Reserve Requirements of Deposi- 89-90, 96-97, 104, 115, tory Institutions, 64, 179, 187 122, 135 E, Electronic Fund Transfers, 67, 148, Foreign currency operations, 74, 152-53 77-79, 128-29, 136 F, Securities of State Member Presidents and vice presidents of Federal Banks, 184 Reserve Banks G, Securities Credit by Persons Other Conferences, 255 than Banks, Brokers, or Dealers, List, 254-55 64-65, 182-83, 188 Salaries of presidents, 210 J, Collection of Checks and Other Prices, 5 Items and Wire Transfers of Pricing of Federal Reserve services and Funds, 65, 147, 160, 187, in the payment mechanism, 189-94, 190, 192 214, 222 K, International Banking Operations, Private sector adjustment factor, 189-91 66, 179, 186 Profit and loss, Federal Reserve Q, Interest on Deposits, 148, 156, Banks, 216 179, 187 Publications T, Credit by Brokers and Dealers, Annual Report: Budget Review, 193 64-65, 182-83 Business credit transactions, educa- U, Credit by Banks for the Purpose of tional pamphlet planned, 64, 148 Purchasing or Carrying Margin "Community Development Corpora- Stocks, 64, 182-83, 188 tions and the Federal X, Borrowers of Securities Credit, 182 Reserve," 150 Z, Truth in Lending, 147-50, 156 "Consumer Handbook to Adjustable Regulatory Improvement Project, Rate Mortgages," by Federal 63, 186 Reserve Board and Federal Home Regulatory simplification, 186-88 Loan Bank Board, 147 Repurchase agreements Federal Reserve Bulletin, 182 Authority to purchase and to Federal Reserve Regulatory enter into, 74-76 Service, 184 Bankers acceptances {See Bankers Federal Trade Commission, 151 acceptances) Marginable over-the-counter stocks, Federal agency securities {See Federal list, 183 agency securities) Regulations B, E, and Z, official staff Transactions, joint policy statement, commentaries, 148 67, 175 U.S. government securities {See U.S. government securities) Reserve requirements of depository Real estate loans {See Mortgage loans) institutions Regulation of banking organizations {See Changes, 64 Banking supervision and regulation Regulation D {See Regulations) by Federal Reserve System) Money market deposit accounts, Regulations {See also Regulatory Im- proposed amendment of provement Project) Regulation D, 187 AA, Unfair or Deceptive Acts or Table, 225 Practices, 67, 146 Reserves and related items, 230-33 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 Index Salaries State member banks—Continued Board of Governors, 197 Mergers and consolidations (See Bank Federal Reserve Banks, 211 mergers and consolidations) Savings and loan associations, 65, Number, 168, 229 183, 188 Reserve requirements (See Reserve Schools (See Training) requirements of depository Securities (See also specific types) institutions) Credit, 64-65, 182-84, 188 Stock market credit (See Lending, Board policy, 175 Securities credit) Municipal securities dealers, clearing Stock repurchases by bank holding agents, and transfer companies, 185 agents, 171-72 Supervision of banking organizations Over-the-counter, 183 (See Banking supervision and regula- Regulation, 182-84 tion by Federal Reserve System) Repurchase agreement transactions, System Open Market Account joint policy statement, 65, 175 Audit, 192 Services by Federal Reserve, 191 Authority to effect transactions in Securities Acts Amendments of 1975, Continuing authorizations, review, 171 96 Securities and Exchange Commission, Domestic operations, 80, 90, 97, 65, 152, 182-84, 188 104, 115, 122, 129, 136 Securities Exchange Act of 1934, 182-84 Authorization for, 74-77, 89, 96, Small Business Administration, 68, 152 135 Special drawing rights, 202, 204, 206, Domestic Policy Directive, 76, 80, 230, 232 90, 97, 104, 115, 122, State member banks (See also Member 129, 136 banks) Foreign currency operations, 74, Advertising interest on deposits, 77-79, 128 proposed revisions to Regulation Q, 148, 187 Applications by, 184 Thrift institutions, legislative recom- Assets and liabilities, 168, 229 mendations and approval of acqui- Banking offices, changes in sitions, 158-60, 181 number, 234 Thrift Institutions Advisory Council, 253 Basic banking services, recommenda- Training, 149, 156, 172 tions concerning, 156 Transfer agents, 171 Capital-adequacy guidelines, 67, Transfers of funds (See also Fees) 174-75, 185 Check clearing and collection (See Consumer complaints against, 153-55 Check clearing and collection) Control of, change, 178 Federal Reserve operations, Examinations and inspections, 155, volume, 224 168-69, 170-77, 183 Large-dollar transfers, policy on Fees (See Fees) reducing risks, 176 Financial disclosures, 184 Pricing of Federal Reserve services Foreign branches, 179 and in the payment mechanism, Interest on deposits (See Interest on 189-94, 214, 222 deposits) Trust activities, examination, 170-71 Loans to executive officers, 184 Truth in Lending Act Membership in Federal Reserve Annual report to Congress, 145 System, 185 Compliance with, 150-51 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 285 Truth in Lending Act—Continued U.S. government securities- Preemption, 149 Continued Regulation Z (See Regulations) Bank holdings, by class of bank, 229 Federal Reserve Banks Holdings, 194, 202, 204, 206, United States Department of 210, 230, 232 Agriculture, 151-52 Income, 193, 214-17 U.S. Department of Justice, 152, 162 Transfers by, 191 U.S. Department of Open market transactions, 208 Transportation, 151-152 Repurchase agreements U.S. Department of the Treasury, 191-93 Authorization for, 74-76 U.S. government securities Board policy statement, 67 Authority to buy, to enter into repur- Tables, 202, 204, 206, 208, 210, chase agreements, and to lend, 230, 232 74-76, 89, 96, 135 U.S. Supreme Court, 181 FRB 1-10,000-0686 C Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis