Annual Report of the Federal Reserve Board, 1986

'[Report XL> 1986 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., May 18, 1987 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-Third Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1986. 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 1986 3 INTRODUCTION 5 THE ECONOMY IN 1986 5 Prices 8 Labor markets 9 Household sector 9 Business sector 10 Government sector 13 MONETARY POLICY AND FINANCIAL MARKETS 15 Monetary aggregates 20 Aggregate credit flows 25 INTERNATIONAL DEVELOPMENTS 28 U.S. international transactions 31 Foreign exchange operations 33 MONETARY POLICY REPORTS TO THE CONGRESS 33 Report on February 19, 1986 53 Report on July 18, 1986 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization 75 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 75 Regulation D (Reserve Requirements of Depository Institutions) and Regulation Q (Interest on Deposits) 76 Regulation D (Reserve Requirements of Depository Institutions) 76 Regulation G (Securities Credit by Persons Other than Banks, Brokers, or Dealers) 77 Regulation J (Collection of Checks and Other Items and Wire Transfers of Funds) 77 Regulation K (International Banking Operations) 78 Regulation Y (Bank Holding Companies and Change in Bank Control) 78 Regulation Z (Truth in Lending) 79 Rules regarding delegation of authority 80 Policy statements 81 1986 discount rates 87 RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE 88 Authorization for domestic open market operations 89 Domestic policy directive 90 Authorization for foreign currency operations 92 Foreign currency directive 93 Meeting held on February 11-12, 1986 103 Meeting held on April 1, 1986 110 Meeting held on May 20, 1986 119 Meeting held on July 8-9, 1986 130 Meeting held on August 19, 1986 138 Meeting held on September 23, 1986 145 Meeting held on November 5, 1986 153 Meeting held on December 15-16, 1986 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

161 CONSUMER AND COMMUNITY AFFAIRS 161 Regulatory and policy matters 163 Community affairs 164 Compliance examinations 165 Survey on delayed availability of funds 165 Compliance with consumer regulations 168 Economic impact of Regulation E 169 Complaints against state member banks 171 Unregulated practices 171 Community Reinvestment Act 171 Consumer Advisory Council 173 Legislative recommendations 177 LEGISLATIVE RECOMMENDATIONS 177 Bank holding company legislation 178 Emergency acquisition authority 179 Increasing the number of Class C directors 179 Funds for Reserve Bank Branches 179 Interstate banking 180 Improving check collection 181 LITIGATION 181 Bank holding companies—antitrust action 181 Bank Holding Company Act—review of Board actions 183 Other litigation involving challenges to Board procedures and regulations 187 BANKING SUPERVISION AND REGULATION 187 Supervision for safety and soundness 191 Supervisory policy 196 Regulation of the U.S. banking structure 198 Board policy decisions and developments in bank-related activities 202 Enforcement of other laws and regulations 204 Federal Reserve membership 205 REGULATORY SIMPLIFICATION 205 Regulation Q 205 Policy regarding risk on large-dollar wire transfer systems 206 Regulation Y 207 Regulation K 209 FEDERAL RESERVE BANKS 209 Developments in the pricing of Federal Reserve services and in the payments mechanism 212 Examinations 212 Income and expenses 213 Federal Reserve Bank premises 213 Holdings of securities and loans 214 Volume of operations Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

215 BOARD OF GOVERNORS 215 Financial statements 221 STATISTIC"AL TABLES 222 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1986 224 2. Statement of condition of each Federal Reserve Bank, December 31, 1986 and 1985 228 3. Federal Reserve open market transactions, 1986 230 4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 1984-86 231 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1986 232 6. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31, 1986 233 7. Income and Expenses of the Federal Reserve System, 1982-86 234 8. Income and expenses of Federal Reserve Banks, 1986 238 9. Income and expenses of Federal Reserve Banks, 1914-86 242 10. Priced services revenue and expenses at Federal Reserve Banks, 1986 and 1985 244 11. Operations in principal departments of Federal Reserve Banks, 1983-86 244 12. Federal Reserve Bank interest rates, December 31, 1986 245 13. Reserve requirements of depository institutions 246 14. Dates of removal of interest rate ceilings on deposits at federally insured institutions 246 15. Margin requirements for Regulations T, U, G, and X 247 16. Principal assets and liabilities, and number of insured commercial banks, by class of bank, June 30, 1986 and 1985 248 17. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end, 1918-86, and month-end, 1986 252 18. Changes in number of banking offices in the United States, 1986 253 19. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1986 262 MAP OF FEDERAL RESERVE SYSTEM DISTRICTS 263 FEDERAL RESERVE DIRECTORIES AND MEETINGS 264 Board of Governors of the Federal Reserve System 266 Federal Open Market Committee 267 Federal Advisory Council 268 Consumer Advisory Council 270 Thrift Institutions Advisory Council 271 Officers of Federal Reserve Banks, Branches, and Offices 293 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Parti Monetary Policy and the U.S. Economy in 1986 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction Economic activity continued to ex- percent, a rate unprecedented during pand moderately in 1986, at about the postwar years. In part, this rapid the average pace prevailing since money growth reflected the public's mid-1984. This growth was sufficient response to changes in interest rates to create a substantial number of that made holding NOW accounts new jobs and to produce another and demand deposits more attracsmall decline in the unemployment tive. However, the growth in Ml was rate. Further progress also was made well in excess of what would be toward the objective of overall price expected based on past relationships stability. Wage and price behavior among money, interest rates, and continued to be influenced by the income. Growth in the broader aganti-inflationary thrust of policies put gregates was more in line with past in place earlier and by the adjust- experience, taking account of interment of expectations to the new est rate movements. Both M2 and environment. Thus, while the plunge M3 expanded almost 9 percent and in world crude oil prices contributed ended the year just within the upper importantly to the marked slowing bound of their annual target ranges. in inflation in 1986, prices outside In the credit markets, short-term the energy area also decelerated on interest rates declined about 2 peraverage. Labor cost pressures re- centage points through the first three mained subdued, with nominal wage quarters of 1986, before backing up gains across a broad range of occu- somewhat in response to pressure pations and industries continuing to around the end of the year from a move toward rates more consistent huge volume of tax-related financial with trends in labor productivity. transactions. Longer-term bond rates The Federal Reserve encouraged fell more than 2 percentage points in continued economic expansion by 1986; most of the decline occurred supplying ample reserves for the in the first four months of the year banking system and reducing the in response to an improved inflation discount rate four times, by a total outlook and sluggish growth in ecoof 2 percentage points. A large nomic activity. After mid-April, portion of the reserves provided were Treasury bond rates fluctuated in a aimed at accommodating the strong relatively narrow range, but corpodemand for Ml-type deposits. Ml rate and municipal bond rates trended grew in excess of 15 percent in 1986, down and reached their lowest levels and its velocity declined more than 9 since the late 1970s. The declines in interest rates contributed to the vigorous pace of household spending last year by re- NOTE. This discussion of economic and fi- ducing borrowing costs and boosting nancial developments in 1986 is adapted from asset values. Housing starts, which the Monetary Policy Report to the Congress are particularly sensitive to interest Pursuant to the Full Employment and Balanced rate developments, rose a bit despite Growth Act of 1978 (Board of Governors, Feb- Digitized forr uFaRryA S1E98R7 ). the drag of a depressed economy in http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction regions heavily dependent on oil and other countries. At the same time, agriculture. In contrast, capital the volume of imports continued to spending declined over the course of rise rapidly through most of the year, the year, largely because of the in part because the pass-through into substantial cutback in oil drilling; import prices of the dollar's depremore broadly, investment was re- ciation against major foreign currenstrained by an overhang of office and cies was limited by the ability of other commercial space and the weak foreign exporters and U.S. distribupace of activity in major segments of tors to absorb much of the swing in the manufacturing sector. exchange rates in their profit mar- The disparity between household gins. Also, an increasing amount of spending and business investment is imports was coming from the newly indicative of the imbalances that industrialized and developing councharacterized the U.S. economy in tries whose currencies, as a group, 1986. Indeed, economic performance did not appreciate against the dollar. throughout the expansion has varied With import penetration remaining considerably across industries and on an uptrend, domestic production regions of the country. In some continued to expand less rapidly than cases, such as agriculture, special domestic demand. circumstances have played a role. The federal budget deficit also But more fundamentally, the imbal- remained huge, despite substantial ances are rooted in the enormous— deficit-reducing actions taken by the and partly related—deficits in the administration and the Congress. Ofcountry's external accounts and in ficial estimates suggest a deficit for the federal budget. fiscal 1987 of around $175 billion, a Although the foreign exchange good deal less than the record 1986 value of the dollar fell sharply through figure but still equal to a historically early 1987 from its peak in early high 4 percent of the gross national 1985, the nation's trade deficit deep- product. Further cuts in the federal ened. The increased price competi- deficit are essential, in the context tiveness of U.S. producers contrib- of movement toward better external uted to a sizable improvement in the balance, to ensure that an adequate growth of exports in 1986, but the flow of domestic saving is available pickup was limited by the sluggish- to support needed domestic investness of economic activity in many ment. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1986 The economy completed a fourth after early 1985 in the foreign exconsecutive year of expansion in change value of the dollar against 1986, with real gross national product the other Group of Ten currencies, increasing about 2 percent. The rise the country's trade balance continin overall activity resulted in 2V2 ued to deteriorate. Growth in the million new payroll jobs. The jobless volume of exports did pick up in rate for civilians continued to edge 1986 in response to the enhanced down and was 63A percent at year- international competitiveness of U.S. end. firms, but the rebound was damped Inflation slowed sharply in 1986: by the relatively slow growth of the virtually all broad measures of price economies of U.S. major trading trends showed their smallest in- partners. Import volumes continued creases in many years. Although the to expand rapidly through most of sharpness of the deceleration owed the year, in part because much of much to specific developments in the the swing in exchange rates apparmarkets for oil and other commodi- ently was absorbed in the profit ties, the favorable inflation perfor- margins of foreign exporters and mance also represented at a funda- U.S. distributors, and increases in mental level the continuation of trends the prices of imported goods were in wage and price behavior fostered thereby limited. As a result, the by policies in place since the early current account deficit continued to part of the decade. widen, to about $150 billion in 1986. The federal budget deficit also While output continued to grow in increased, hitting $221 billion in fis- 1986, the economy still was characcal 1986; the deficit vastly exceeded terized by pronounced imbalances. official targets, as underestimates of These were reflected in marked disprogram costs and shortfalls in reveparities in economic performance nues offset the deficit-reducing acacross industries and geographic areas. tions taken by the administration and In particular, domestic oil explorathe Congress. The much smaller tion and investment were cut back estimated deficit in the area of $175 severely, and only massive federal billion for fiscal year 1987 is still subsidies sustained many farm enterconsiderably above the Grammprises faced with sharply lower crop Rudman-Hollings target of $144 bilprices. In addition, major segments lion. of the industrial sector continued to struggle with intense foreign competition, and relatively low rates of Prices capacity utilization, along with a glut of office space, depressed capital The GNP fixed-weight price index spending. increased about 2V2 percent in 1986. The most serious imbalances con- This was the smallest yearly increase tinued to be in the external sector in more than two decades and foland in the federal budget. Despite lowed a rise of 3V2 percent in 1985. Digitized fotr hFeR AdSeEcRl ine of roughly 40 percent Some other popular measures of http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

6 The Economy in 1986 c Performance Percent change, Q4 to Q4 Percent change, Q4 to Q4 Real GNP Real personal income and consumption 6 Consumption u j expenditures Millions of units Percent of disposable income Total private housing starts Personal saving rate 2 Percent change, Q4 to Q4 Billions of 1982 dollars Real business fixed investment Change in real business inventories 50 10 • 25 10 25 Percent Percent change, Q4 to Q4 Unemployment rate GNP fixed-weight price index 10 J l li 1982 1984 1986 1982 1984 1986 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 1986 7 prices decelerated even more. The Consumer Prices consumer price index for goods and Percent change, Dec. to Dec. services rose only about 1 percent, Total 10 and the producer price index for I 1 • • • finished goods actually fell 2V2 percent. The greater deceleration in the Energy consumer and producer price indexes I than in the GNP price measure 10 reflects the greater importance of energy prices in those indexes. The movements in energy prices over the past year or so have been striking. World crude oil prices dropped from $26 per barrel in late 1985 to about $11 per barrel around midyear; they trended up over the second half of 1986 and rose to around $18 per barrel in early 1987 in the wake of 20 the agreement on production limits reached by the Organization of Petroleum Exporting Countries in late 15 I December. The drop in crude oil prices in the first half of 1986 was 10 reflected promptly in prices of gaso- Goods less food and energy III lib 1.1. line and home heating oil, which fell around 30 percent over the course of the year. Charges for electricity and 1982 1984 1986 natural gas also declined, but much The data are from the U.S. Department of Labor. less than those for refined petroleum products. On balance, retail energy prices declined 20 percent over the of home electronic and photographic year. equipment, and retail prices of such Price increases outside the energy goods accelerated. But there was area generally remained moderate in little evidence of any significant ag- 1986. Retail food prices rose 4 per- gregate impact on other consumer cent, a bit more than in 1985, reflect- goods. Prices for nonenergy services ing the effects of the summer's heat also slowed somewhat, but they still wave in the Southeast. However, rose around 5 percent, boosted by prices of retail goods excluding food continued large increases for medical and energy continued to slow and, services and higher premiums for on balance, were up only IV2 percent. various types of insurance. The influence of the depreciating Prices for many basic industrial dollar on consumer goods prices was commodities continued to decline highly variable across sectors and over most of the first three quarters relatively small overall. Sizable in- of 1986. Excess capacity in some creases occurred in dockside prices basic industries and the generally for foreign cars and for some types abundant world supplies of many Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 The Economy in 1986 primary commodities contributed Labor Market Conditions significantly to the weakness in these Millions of persons prices. Sluggish industrial activity in Payroll employment the United States and other large 100 economies also was a factor. Prices Total in a number of these markets turned up late in the summer, possibly in 90 response to the firming in U.S. industrial activity. Nonetheless, in- Nonmanufacturing dustrial commodity prices at year- 80 end were well below the peaks reached in mid-1984. 70 Labor Markets The increase of 2V2 million in nonfarm payroll employment in 1986 was about the same as the robust 1985 pace. Hiring in trade and ser- Percent change, Q4 to Q4 vices again was quite vigorous, with Compensation per hour especially large increases for business and health services. In contrast, man- 10 ufacturing employment contracted over the first three quarters of 1986. However, it picked up in the autumn in response to an apparent firming in industrial activity; in nondurable goods industries, where output had risen steadily, employment gains were Output per hour widespread, but hiring at firms producing durable goods remained spotty. The growth in the number of jobs in 1986 slightly exceeded the rise in 1982 1984 1986 the labor force. As a result, the Payroll employment covers the total nonfarm civilian unemployment rate edged sector; hourly compensation and output cover the nondown, to 63/4 percent at year-end. farm business sector. All data are from the U.S. Department of Labor. Labor force participation maintained its upward trend: women continued to enter the workforce in large num- as measured by the employment cost bers, in part responding to expanding index, rose about 3XA percent, 3A job opportunities; and participation percentage point less than in 1985. rates for adult men held steady. The deceleration in wages reflected Overall, the number of persons em- the continued slack in labor markets ployed relative to the working-age as well as the reduction in price civilian population reached 61 per- inflation, and was widespread across cent, a new high. industries and occupations. In the Wages continued on a path of unionized sector, wage increases were moderation in 1986. Hourly compen- especially small, and a number of sation in the nonfarm private sector, alternative, more flexible compensa- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1986 9 tion arrangements were adopted, in- spending on nondurable goods and cluding the substitution of lump-sum services increased at about the same payments for general wage increases. rate as in the preceding few years. The advance in compensation for Among durable goods, sales of new white-collar workers also moderated, cars rose to around IIV2 million although it remained more rapid than units. Effective prices of new cars that for other groups. were held down by incentive pro- Unit labor costs in the nonfarm grams of below-market financing for business sector were well contained domestic makes and by the introducin 1986, because of the relatively tion of low-priced imports from Komoderate increase in wages. Gains rea and Yugoslavia. At the same in output per hour, however, have time, sales of Japanese and Euroaveraged less than 1 percent per year pean models remained brisk, despite since 1984; through 1986 the under- sizable increases in their sticker prices. lying trend in productivity for the Total outlays for other durable goods business sector as a whole improved also rose substantially, as consumers only slightly from the very low pace greatly increased their purchases of of the 1970s, and it remains well home electronics products, and sales below the pace of earlier years in the of furniture and appliances were postwar period. In contrast, produc- supported in part by the robust pace tivity in manufacturing has increased of home sales in recent years. about 3V2 percent a year over the Housing activity continued to expast three years, in part because pand in 1986. Total housing starts intense foreign competition has in- edged up to 1.8 million units for the duced many producers to modernize year as a whole, their highest level their factories and streamline their since the late 1970s. Single-family operations. homebuilding increased about 10 percent, bolstered not only by a sizable decline in mortgage rates— Household Sector which brought rates on fixed-rate The household sector was the major loans back to single digits for the contributor to overall growth again first time since 1978—but also by in 1986. Consumer spending in- continuing favorable demographic creased a robust 4 percent in real trends. In contrast, multifamily activterms, even though income growth ity dropped off considerably over the was only moderate on average for course of the year; an important the second year in a row. Real factor in the decline was the restraindisposable income soared in the first ing influence of record-high vacancy half of the year because of the plunge rates on rental units, especially in in energy prices, but it dropped after key markets in the South. In addimidyear as wage and salary gains tion, several provisions of 1986 tax remained sluggish and farm and in- legislation have reduced the profitaterest income declined. Conse- bility of building rental housing. quently, the personal saving rate fell to around 4 percent, the lowest annual average in nearly 40 years. Business Sector The growth in consumption last year was paced by strong gains in Business spending on plant and Digitized fopr FuRrcAhSaEsRe s of durable goods, while equipment declined 4V2 percent in http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 The Economy in 1986 real terms in 1986. Much of the drop change over the course of the year; was attributable to the sharp cutback drops in inventories coincided mainly in oil and gas well drilling, which fell with the special incentive programs almost 50 percent over the year. But that pushed sales to record levels, investment outside of the energy and also with a burst in sales in sector also was generally lackluster December in anticipation of tax as many firms, especially in the changes in 1987. tradable goods sector, trimmed ex- After-tax economic profits in the pansion plans in light of relatively nonfinancial corporate sector, allow rates of capacity utilization and though at fairly high levels relative continuing uncertainty about future to GNP, were essentially unchanged sales trends. Investment in com- overall from 1985. There was considputers and other office machines erable diversity in the performance remained on the path of reduced of individual industries: the petrogrowth evident since the fading of leum industry experienced a marked the high-tech spending boom in 1985, decline in profits associated with the in part because of concerns about fall in oil prices, while petroleumthe productivity-enhancing potential using industries such as chemicals of some of these products. More and plastics fared relatively well. generally, the widely anticipated elimination of the investment tax credit prompted many firms to accel- Government Sector erate spending in late 1985; despite another tax-related speedup late last Even though the administration and year, the net effect of tax changes in the Congress have taken significant 1986 appears to have been to depress action in the past few years to reduce equipment spending. Outlays for it, the federal budget deficit has nonresidential structures outside of remained huge. In fiscal year 1986 the energy area, which had risen the imbalance hit a record $221 exceptionally fast over the first few billion, exceeding the previous year's years of the expansion, fell in 1986. deficit by more than $8 billion. Rev- The decline in office construction, enue growth in 1986 was restrained where vacancy rates reached extraor- by the relatively moderate rise in dinarily high levels, was especially nominal income, while demands on sharp. some programs were strong, espe- Inventory investment generally re- cially in the areas of agriculture and mained subdued in 1986. Faced with health. Although the budgetary prosluggish orders and stable or falling gram put in place for fiscal year 1987 prices, manufacturers continued to was nominally consistent with the trim their stocks. In the retail and Gramm - Rudman - Hollings deficit wholesale trade sector, inventories target of $144 billion by January of goods other than automobiles 1987, the published estimates of the increased moderately for the second administration and the Congressional year in a row; however, at year-end Budget Office were around $175 such stocks appeared to be roughly billion, equal to about 4 percent of in line with near-term sales pros- GNP—still a high ratio historically. pects. At auto dealers, stocks fluc- Excluding changes in farm inventuated widely but showed little net tories held by the Commodity Credit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1986 11 Corporation (CCC), federal purchases of goods and services rose Billions of dollars appreciably in 1986. Over the course Federal government of the year defense purchases in real ;- 0 terms grew about 7 percent, similar to the increases recorded since the early 1980s. Excluding CCC pur- 100 chases, real nondefense outlays, which have shown little net change in recent years, were essentially flat. Purchases of goods and services by 200 state and local governments rose briskly in 1986, mainly because of a surge in construction activity. An State and local government upswing in the school-age population 20 in recent years has led to a step-up in school building, and numerous 10 programs are under way to expand and improve the infrastructure. The growth in overall outlays has been sustained despite concerns about the financial condition of the sector. 1982 1984 1986 Excluding some special one-time in- The data on the federal government deficit are for flows, such as previously escrowed fiscal years and are on a budget basis; they are from the U.S. Department of the Treasury. oil-lease payments, the combined The data on state and local governments are for surplus of operating and capital acoperating budgets. They are on a national income counts for the sector as a whole fell accounts basis, and they come from the U.S. Department of Commerce. to near zero in 1986. Many states, The total 1986 surplus of $5.0 billion for state and including most of those in the energy local governments contained about $4.7 billion of nonrecurring inflows from settlements involving oil and agricultural regions, responded company overcharges, Outer Continental Shelf rents, to budgetary pressures by raising and stripper-well charges, as well as shifting of some taxes and cutting spending. revenue-sharing payments to fiscal 1986. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

13 Monetary Policy and Financial Markets The Federal Reserve faced continu- target range when the FOMC met in ing challenges in 1986, not only in July. The available evidence sugdiscerning the underlying trends in a gested that the rapid growth of Ml complex domestic and international reflected shifts in portfolios toward economic setting, but also in speci- liquid assets in the context of declinfying appropriate policy actions in a ing market interest rates, rather than financial environment marked by excessive money growth with potenrapid structural change. As in pre- tial inflationary consequence. Against vious years, and in keeping with the this background, the Committee con- Full Employment and Balanced cluded that Ml growth above the Growth Act, the Federal Reserve existing range would be acceptable, used money and credit aggregates as provided the broader aggregates exa means of assessing and character- panded within their target ranges, izing policy. At the same time, in price pressures remained in check, targeting these aggregates and in and the economy continued to exreaching operational decisions with pand at a moderate pace. respect to the degree of reserve The Committee reaffirmed the tarpressures and the discount rate, the get ranges for M2 and M3 at its July evaluation of signals provided by a meeting. According to data at that broad range of economic and finan- time, both of these aggregates had cial indicators played a large role. expanded at rates near the midpoints At its meeting in February 1986, of their ranges, and Committee the Federal Open Market Committee members believed that growth within established target growth ranges, those ranges for the year was still measured from the fourth quarter of consistent with the overall policy 1985 to the fourth quarter of 1986, objectives of reducing inflation furof 3 to 8 percent for Ml and 6 to 9 ther, promoting sustainable growth percent for both M2 and M3. The in output, and contributing to an associated monitoring range for improved pattern of international growth of domestic nonfinancial debt transactions. In the first half of the was set at 8 to 11 percent. In light of year, the growth of domestic nonfithe experience of recent years, the nancial debt exceeded both its mon- Committee recognized that the rela- itoring range and the growth of tionship between Ml and economic nominal GNP, as it had in previous activity was subject to especially years. The Committee was congreat uncertainty. Accordingly, the cerned about the burdens and poten- FOMC agreed to evaluate move- tial instabilities associated with the ments in Ml in light of their consist- persistence of rapid debt growth, and ency with the patterns in other mon- it felt that raising the monitoring etary aggregates, developments in range for debt would create an inthe economy and financial markets, appropriate benchmark for evaluatand potential inflationary pressures. ing long-term trends. The existing Ml was well above its annual range was maintained, but the FOMC Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 Monetary Policy and Financial Markets Monetar thought that debt growth could well Sect* - exceed its upper bound. Billions of dollars The growth of M2 quickened in the second half of the year, and M3 Ml expanded at a somewhat faster pace as well. Nevertheless, both of the broader aggregates ended the year within their target ranges, although near the upper bounds. Ml accelerated further in the second half of the year, resulting in a record postwar decline in velocity for 1986. The M2 growth of nonfinancial debt slowed slightly in the second half of the year, but still exceeded its monitoring range by nearly 2 percentage points. Pressure on reserve positions of depository institutions changed little over the course of 1986, as evidenced by a relatively low volume of borrow- 3400 ing at Federal Reserve Banks. The broadly accommodative thrust of 3200 policy also was manifest in the four reductions in the discount rate between March and August. In part, these cuts were intended to keep this Total domestic nonfinancial debt = 'ii rate in line with the yields on short- 7300 term market instruments, but they also were taken in the context of hesitant worldwide economic growth, 6900 an improved inflation outlook, and growth of the broader monetary aggregates within their annual target Reserves ranges. 55 In setting monetary policy the Total FOMC paid considerable attention to the country's trade deficit and the foreign exchange value of the dollar. 45 The Committee members generally viewed the narrowing in the trade 1985 1986 deficit as a key to achieving a sustainable and smooth expansion of The ranges adopted by the FOMC for the monetary aggregates and for total debt of the domestic nonfi- activity across the economy. At the nancial sector were for the period from 1985:4 to same time, the Committee was con- 1986:4. cerned that an unduly precipitous The reserve aggregates have been adjusted to remove discontinuities associated with changes in re- decline of the dollar against the serve requirements. Nonborrowed reserves include currencies of the country's major extended credit. The shaded area is adjustment and trading partners could contribute to seasonal borrowing. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 15 inflationary pressures here. To help were very strong while small time limit the effect on the value of the deposits ran off, marking the second dollar, the first reduction in the consecutive year of zero or negative discount rate was coordinated with growth. action by other major central banks; The weakness in small time depossimilarly, the reduction in April was its in 1985 and 1986 also could have accompanied by a cut in the Bank of reflected "rate shock." As existing Japan's discount rate. time deposits matured, savers with high-yielding deposits acquired several years earlier were unable to Monetary Aggregates reinvest the funds at comparable M2 expanded almost 9 percent in returns. A sizable portion of matur- 1986, placing this aggregate near the ing deposits evidently was placed in upper bound of its annual growth liquid instruments in M2 while savers target. Although in recent years M2 searched for other investment opporhas exhibited a tighter relationship tunities. Yield-conscious investors also with nominal GNP than Ml has, the may have been lured from time velocity of M2 still registered a de- deposits by attractive returns on cline of 4 percent last year and some nondeposit instruments. For reached its lowest level in decades. example, stock and bond mutual The buildup of M2 balances relative funds grew rapidly in 1985 and 1986 to income probably reflected incen- after stagnating during most of the tives to place savings in various 1970s and early 1980s, and the issucomponents of the aggregate whose ance of savings bonds was strong in offering rates were falling more slowly the summer and fall before their than market interest rates were. minimum yield was lowered from lxh Among rates on retail deposits, to 6 percent. the slowest to adjust in 1986 were M3 also ended 1986 near the upper those on short-term accounts. De- bound of its annual target range, pository institutions were reluctant increasing 8% percent over the year. to reduce rates on savings deposits Growth of M3 close to that of M2 is because many of these accounts had not surprising, inasmuch as M2 conrepresented a stable, profitable source stitutes four-fifths of the larger agof funds for many years. Rates on gregate. (The remaining share is NOW accounts also fell only slightly. dominated by large time deposits Much larger declines were registered and certain other managed liabilities on time deposits, reflecting not only of depository institutions.) Credit quicker adjustment to market rates growth at banks and thrift institubut also the pattern of rate move- tions remained quite strong last year; ments in the credit markets, where but, with the exception of the first long-term rates fell much more than quarter, the use of managed liabilishort-term rates in late 1985 and ties in M3 was light as growth of early 1986. The changing structure core deposits was largely sufficient of deposit rates at banks and thrift to fund asset expansion. Large cerinstitutions led to a pronounced shift tificates of deposit expanded only 3 in the composition of M2: inflows to percent on balance, with commercial transaction deposits, savings depos- banks paying down their outstanding its, money market deposit accounts, CDs during much of the year and and money market mutual fund shares thrift institutions also doing so in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 Monetary Policy and Financial Markets Reserves, Money Stock, and Debt Aggregates Annual rate of change based on seasonally adjusted data unless otherwise noted, in percent1 1985 1986 Item 1984 1985 1986 Q4 Ql 02 Q3 Q4 Depository institution reserves2 Total 7.6 15.2 20.4 12.4 13.1 18.1 23.5 21.5 Nonborrowed -2.9 26.6 22.5 10.3 19.1 17.9 23.8 22.4 Required 7.3 15.1 20.3 11.5 12.3 19.8 23.9 19.9 Monetary base3 7.3 8.8 9.7 8.2 8.3 9.0 10.1 10.3 Concepts of money4 Ml 5.4 12.1 15.3 10.9 8.8 15.5 16.5 17.0 Currency and travelers checks 7.1 8.0 7.5 7.2 7.3 6.7 7.5 7.8 Demand deposits 1.6 8.9 11.6 8.5 4.6 14.6 12.6 12.8 Other checkable deposits 10.5 22.2 28.6 18.1 16.8 25.5 30.6 31.1 M2 7.9 8.8 8.9 6.6 5.3 9.4 10.6 9.1 Non-Mi component 8.6 7.8 6.8 5.3 4.2 7.4 8.6 6.4 MMDAs (n.s.a.), savings, and small-denomination time deposits 8.0 7.3 5.5 4.5 5.2 5.7 6.1 4.7 General-purpose and broker/dealer money market mutual fund assets (n.s.a.) 17.0 9.2 17.3 0.5 11.3 27.3 14.0 12.7 Overnight RPs and Eurodollars (n.s.a.) 4.7 20.0 13.4 27.3 5.3 -2.3 30.7 18.1 M3 10.7 7.7 8.8 7.1 7.7 8.7 9.7 7.9 Non-M2 component 23.3 3.4 8.5 8.9 17.3 6.1 6.4 3.4 Large-denomination time deposits 29.2 4.8 3.0 10.0 12.6 1.6 -0.1 -2.2 Institution-only money market mutual fund assets (n.s.a.) 33.6 12.1 30.3 3.1 22.9 39.2 30.9 16.8 Large-denomination term RPs (n.s.a.) 36.7 -4.0 27.3 40.6 47.0 18.8 13.6 21.0 Term Eurodollars (n.s.a.) -8.5 -5.0 4.9 -3.1 8.2 6.1 -4.5 9.6 Domestic nonfinancial sector debt 13.9 13.5 12.9 13.6 15.4 10.3 12.0 11.5 Federal 16.0 15.2 14.6 13.7 17.0 11.6 14.5 12.6 Nonfederal 13.3 12.9 12.3 13.5 15.0 9.8 11.2 11.1 1. Changes are calculated from the average amounts withdrawal and automatic transfer service accounts outstanding in each quarter. Annual changes are at depository institutions, credit union share draft acmeasured from 04 to 04. counts, and demand deposits at thrift institutions. M2 2. Data on reserves and the monetary base incor- is Ml plus money market deposit accounts (MMDAs); porate adjustments for discontinuities associated with savings and small-denomination time deposits at all the implementation of the Monetary Control Act and depository institutions (including retail repurchase other regulatory changes to reserve requirements. agreements), from which have been subtracted all 3. The monetary base consists of total reserves plus individual retirement accounts (IRAs) and Keogh acthe currency component of the money stock (less the counts at commercial banks and thrift institutions; amount of vault cash holdings of thrift institutions taxable and tax-exempt general-purpose and broker/ that is included in the currency component of the dealer money market mutual funds, excluding IRAs money stock) plus, for institutions not having re- and Keogh accounts; overnight and continuingquired reserve balances, the excess of current vault contract RPs issued by commercial banks; and overcash over the amount applied to satisfy current re- night Eurodollars issued to U.S. residents by foreign serve requirements. branches of U.S. banks worldwide. M3 is M2 plus 4. Ml consists of currency in circulation; travelers large-denomination time deposits at all depository inchecks of nonbank issuers; demand deposits at all stitutions; assets of institution-only money market commercial banks other than those due to domestic mutual funds; large-denomination term RPs issued banks, the U.S. government, and foreign banks and by commercial banks and thrift institutions; and term official institutions, less cash items in the process of Eurodollars held by U.S. residents in Canada and the collection and Federal Reserve float; and other check- United Kingdom and at foreign branches of U.S. banks able deposits, which consist of negotiable orders of elsewhere. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 17 fourth quarter. The weakness in CDs between the first quarter of 1986, was widespread as institutions relied when interest rates on NOW acmore on other managed liabilities, counts were fully deregulated, and such as term repurchase agreements the fourth quarter of the year, the (included in M3) and advances from spread between the rate on three- Federal Home Loan Banks (not in- month Treasury bills and the average cluded in M3). rate on NOW accounts at commer- The broad shift to liquid assets cial banks shrank from 135 basis greatly affected the behavior of Ml. points to 53 basis points. Similarly, The narrow monetary aggregate ex- the average rate on NOW accounts panded more than 15 percent in in late 1986 was not far below that 1986, marking the second consecu- on six-month small time deposits. tive year of double-digit growth. Its Demand deposits also accelerated; velocity fell 9V2 percent compared they grew nearly 12 percent from the with a decline of 5% percent in 1985. fourth quarter of 1985 to the fourth Since 1981, the velocity of Ml has quarter of 1986. As with other checkdeclined 16 percent, a remarkable able deposits, lower short-term interdevelopment in view of its tendency est rates are an important influence to climb about 3 percent a year in on the growth of demand deposits the previous two decades. because they reduce incentives to Much of the rapid growth in nar- economize on transaction balances. row money over the past two years Also, some demand deposits are held appears to have been related to the by business firms in exchange for way the sharp decline in market services provided by banks, and these interest rates affected incentives to compensating-balance requirements hold NOW accounts and demand typically are enlarged as market rates deposits. Short-term market interest decline. Although these effects were rates fell about 5 percentage points important to the expansion of defrom their peak in the latter part of mand deposits throughout 1986, the 1984 to their lowest levels since 1977, apparent response to declining interwhile NOW account rates changed est rates was much larger than would much less. Although more rapid be expected from historical experimoney growth generally would be ence. expected in an environment of de- Another element in the growth of clining rates, the expansion of Ml in demand deposits apparently was the 1985 and 1986 was in excess of that large volume of financial transactions implied by the historical relationships in 1986. For example, because of among money, interest rates, and certain payment procedures—such income. as transferring funds held in escrow About half of the growth of Ml in accounts by officer's check rather both years occurred in interest-bear- than by wire—the massive volume ing checkable deposits. Because de- of mortgage originations and prepaypository institutions were slow in ments could have influenced the adjusting the rates paid on NOW movement of demand deposits. In accounts, the spreads between those addition, a flurry of financial transrates and rates on substitutes nar- actions around year-end induced in rowed substantially. For example, part by impending changes in the tax Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 Monetary Policy and Financial Markets law temporarily boosted demand de- discount rate were implemented beposits sharply. tween March and August. In implementing monetary policy Early in the year, all the monetary in 1986, the FOMC generally accom- aggregates slowed sharply, with M2 modated through open market op- dropping below its annual target erations the strong demand for re- range. Also, evidence suggested that serves associated with the rapid the economy was growing sluggishly, growth of transaction balances. In and the outlook for inflation imthe context of prospects for slow proved as oil prices fell. In this growth of real economic activity, environment, market interest rates disinflationary trends in wages and began to decline in mid-February, prices, and growth of the broader and the Federal Reserve reduced the monetary aggregates within their tar- discount rate l/i percentage point to get ranges, four reductions in the 7 percent in early March. At the Interest Rates Percent per year Short-term 20 State and local government bonds U.S. government bonds 1982 1984 1986 All the data are monthly averages. Their descrip- gage Corporation; A-rated utility bonds, weighted avtions and sources are as follows: Federal funds, from erages of recently offered, 30-year investment-grade the Federal Reserve; three-month Treasury bills, bonds adjusted to an A-rated basis by the Federal market rate on three-month issues, on a discounted Reserve; U.S. government bonds, market yields adbasis, from the U.S. Department of the Treasury; justed to 30-year constant maturity by the U.S. Treaconventional mortgages, weighted averages of 30-year, sury; state and local government bonds, index based fixed-rate, level-payment mortgages at savings and on 25 issues of 30-year revenue bonds of mixed qualloan associations, from the Federal Home Loan Mort- ity, from the Bond Buyer. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 19 time, there was concern that unilat- without similar action by foreign eral action to lower interest rates central banks. Unilateral action to might cause an excessive reaction in lower interest rates carried the risk the foreign exchange market, where of adding to the downward pressure the dollar had been under downward on the dollar and possibly feeding a pressure. Accordingly, the reduction source of inflationary pressure. Howwas timed to correspond with similar ever, the Federal Reserve thought actions by the central banks of West that prevailing economic and finan- Germany, Japan, and several other cial conditions warranted taking such industrialized nations. a risk, realizing that the provision of With the economy expanding slowly reserves could be tightened through and underlying price pressures con- open market operations if adverse tinuing to moderate, interest rates developments were to arise. fell further throughout March and Although the value of the dollar into April. By mid-April, most mar- fluctuated considerably after the reket interest rates had reached their duction in the discount rate in Aulowest levels since the late 1970s, gust, it showed no distinct downward and the Federal Reserve instituted movement until around year-end. another reduction in the discount Short-term interest rates declined rate to catch up with and to ratify about 1 percentage point over the the declines in market rates. summer months, moving either in After mid-April, interest rates rose anticipation of, or in response to, for a short time as market partici- the reductions in the discount rate. pants focused on an upturn in oil Long-term rates were about unprices, an acceleration in the growth changed on balance over the sumof the monetary aggregates, and a mer, but more concern about interest further decline in the foreign ex- rate prospects developed in early change value of the dollar. By the fall. Economic indicators began sigend of June, however, a steady flow naling a pickup in the pace of ecoof weak statistics began to reveal nomic activity, and rising prices of anemic growth in real economic ac- oil and precious metals, along with tivity in the second quarter. The the potential effects of the cumula- FOMC had expected an improve- tive decline in the value of the dollar, ment in activity in the second half of seemed to raise concerns about the the year, but the rebound now ap- outlook for inflation. Through the peared likely to be less vigorous than remainder of the year, the FOMC previously anticipated and perhaps attempted to keep a steady degree delayed because of continued disap- of reserve pressure, and market inpointing movements in the U.S. trade terest rates fluctuated within a fairly position and the effects of pending narrow range. tax reform legislation on business Even so, short-term interest rates investment. Accordingly, shortly after moved higher as the end of the year the July FOMC meeting, the Board approached, in part because of the approved another cut of a half point exceptional volume of tax-related in the discount rate to 6 percent. transactions. As firms rushed to com- The final reduction in the discount plete mergers and buyouts, and rate last year took place after the households stepped up their sales of August FOMC meeting. The last two assets to realize capital gains, the reductions in 1986 were adopted demand for business loans and trans- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 Monetary Policy and Financial Markets action balances surged. This heavy to a slowing in the overall growth of volume of financing also was re- household indebtedness. A continflected in unusually strong demand uation of corporate financial restrucfor reserves by depository institu- turings buoyed expansion of business tions. The System added reserves debt, despite the maintenance of a freely to accommodate this demand, moderate gap between capital spendbut the pressure nevertheless showed ing and internal funds. Growth of through short-term rates. Shortly after federal sector debt remained strong. the turn of the year, short-term rates Growth of consumer installment moved down toward their earlier credit receded last year to about 12 levels. The dollar, however, was percent from the 15 to 20 percent under substantial downward pressure pace of recent years. Nevertheless, in early 1987; disappointing figures installment debt continued to grow on the U.S. trade deficit prompted faster than income, and the ratio of selling of the dollar on exchange such debt to income established anmarkets, and this pressure intensified other record. With mortgage debt with reported suggestions by some expanding rapidly, the ratio of over- U.S. policymakers that, particularly all household debt to income also in the absence of more growth- reached a new high. oriented policies abroad, the dollar Assets of the household sector might need to depreciate further to have increased sharply in recent years; correct the nation's external imbal- rising stock prices alone added sevance. eral hundred billions of dollars to household wealth in 1986. At the same time, many families, especially Aggregate Credit Flows in parts of the country hard hit by Domestic nonfinancial debt ex- economic adversities, have experipanded almost 13 percent in 1986, a enced difficulty in meeting their fislightly slower pace than that in the nancial commitments. The number two previous years but still above of personal bankruptcies accelerated both the Committee's monitoring dramatically in 1985 and 1986, surgrange and the growth of nominal GNP.1 Debt issuance by the state and local sector dropped off substantially from the pace set in 1985, when Consumer Installment Debt it was boosted by borrowing in antic- Percent of disposable income ipation of tax reform restrictions. In the household sector, mortgage borrowing strengthened, but a marked 20 decrease in the expansion of consumer installment credit contributed 1. When measured from the end of December to the end of December, domestic nonfinancial debt expanded IIV2 percent. The growth from fourth quarter to fourth quarter cited in 1970 1975 1980 1986 the text is higher because of the surge in debt at the end of 1985 and the arithmetical effects Based on data from the Federal Reserve and from Digitized fo o r f F q R u A a S rt E er R ly averaging. the U.S. Department of Commerce. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 21 ing last year well beyond the histor- prove conventional measures of corical experience. Strains in managing porate balance-sheet strength. Howcredit card debt were particularly ever, massive volumes of outstanding evident as delinquency rates on re- equity were retired through mergers, volving-balance accounts increased acquisitions, buyouts, and other reappreciably. Delinquency rates on structurings, resulting in the third other categories of installment debt consecutive year of large net equity and on mortgage loans fell some last retirements. Reflecting the financing year, although they were much higher patterns in these years, the aggregate than in previous expansions. For debt-equity ratio of nonfinancial some households, debt-servicing bur- corporations swelled to a record level dens were reduced by the refinancing on a "book" basis. But when stated of high-rate mortgages or the decline at market values, the robust gains in in interest payments on their adjust- share prices kept debt-equity ratios able-rate mortgages. well below levels that generally pre- Internal funds in the aggregate vailed during the 1970s. As interest were nearly sufficient to meet the rates trended down after 1981, interbasic financing needs of nonfinancial est-coverage ratios crept up, suggestcorporations in 1986. However, some ing that the ability of firms in the firms continued to borrow heavily to aggregate to service their debt did fund massive retirements of equity not deteriorate. These modest gains, in association with mergers, buyouts, however, were achieved in relatively and share repurchases. At the same benign market and economic circumtime, the drop in long-term interest stances. rates afforded businesses the oppor- The large paydown of equity retunity to improve their financial po- duced the ability of some corporasitions. tions to weather economic shocks. As long-term interest rates de- The weak financial structures of some clined in the spring of 1986 to their firms, along with strains in certain lowest levels in eight years, corporate industries, led to more than $3 billion bond issuance surged to record lev- of corporate bond defaults in 1986, els. Indeed, the volume of domestic an amount that dwarfs experience in corporate bonds sold last year was nearly every other year of the postnearly twice the previous record set war period. Concern that other firms in 1985. Much of the proceeds from also might have problems in meeting bond issuance in 1986 was used to their financial obligations was rerefund higher-cost long-term debt or flected in the pace of bond downto pay down short-term debt. As the gradings, which in 1986 were more stock market continued to register than three times as numerous as in impressive gains, new equity issuance the late 1970s. also reached record levels; of the Firms with downgraded debt typigross proceeds from issues sold last cally find their securities trading at year, about 30 percent was raised by higher interest rates in the market. firms issuing stock in the public In general, however, quality spreads market for the first time. between private debt securities of The retirement of high-coupon different grades have been relatively bonds, the reduced dependence on stable in recent years, suggesting that short-term credit, and the issuance investors have not been alarmed Digitized foro FfR nAeSwER equity shares tended to im- about the credit quality of corporahttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 Monetary Policy and Financial Markets Ratio of Debt to Equity for Nonfinancial Corporations Percent 75 Debt (par) Equity (book) 50 A 1961 1966 1971 1976 1981 1986 Federal Reserve flow of funds accounts. and par values of loans and short-term paper; the The market value of debt is based on market prices market value of equity is based on market prices of of bonds traded on the New York Stock Exchange outstanding shares. tions in the aggregate and have not term obligations. A narrowing of attempted to limit their portfolios to these spreads early in 1987 reversed higher-rated issues.2 During the first much of the earlier increase. half of 1986, spreads between the While the economy had grown yields on corporate bonds and Trea- continuously for more than four years sury securities widened considerably, by the end of 1986, the expansion but this widening appeared to be was uneven and it left certain sectors related to the heavy volume of cor- under severe strains. The well-known porate issues and to a revaluation of problems faced by firms in the mincall and refunding provisions on longing, energy, agricultural, and many manufacturing industries, and by a number of heavily indebted developing countries, were feeding through 2. The interest rate spreads between invest- to the financial intermediaries supment-grade and speculative issues widened plying them credit. For example, 136 about 50 basis points for a short time after the commercial banks failed in 1986, bankruptcy filing by LTV Corporation in July compared with only 7 in 1981. Many 1986. Low-rated or unrated bonds also experienced substantial yield increases for a time of these institutions had heavy credit later in the year, further widening the spread, exposures to the oil industry, while when concerns about the liquidity of that mar- more than 40 percent of them held ket segment surfaced in connection with the relatively large amounts of agriculinsider-trading scandal. That widening was retural loans. versed in early 1987. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 23 The impact of the distress in the asset quality have become increasfarm sector also has been severe for ingly important for a sizable number the Farm Credit System, the govern- of these institutions. While some of ment-sponsored agency that holds these problems are associated with about 25 percent of outstanding farm the economic distress in some regions debt in the United States. The losses of the country, overly aggressive of the banks in the System totaled investment strategies of some instinearly $2 billion in 1986, largely tutions certainly have contributed reflecting provisions for loan losses, heavily. For 1986, about one-quarter and the System's capital surplus soon of the thrift industry will report will be exhausted if losses do not negative net income, and the longabate. The Congress approved regu- term prospects for many of these latory accounting procedures for the institutions are unfavorable. More- Farm Credit System in the fall of over, the resources of the Federal 1986 that will allow the banks to Savings and Loan Insurance Corporeport higher net income than gen- ration are inadequate to manage erally accepted accounting principles these problems effectively. would permit. The higher reported While the many stresses and finanincome may ease some of the prob- cial vulnerabilities are not amenable lems within the System relating to to correction through general monethe preservation of capital and help tary policy, they do influence the to justify charging borrowers more economic environment and represent competitive rates. By themselves, a potentially disruptive and destabihowever, the accounting procedures lizing element in financial markets. do not provide substantive relief. The Federal Reserve has been called The financial condition of the thrift upon to play a positive role through industry as a whole has improved its regulatory and supervisory funcmarkedly since the early part of the tions. For example, steps have been decade, but the difficulties of many taken to reduce the risks associated institutions have intensified. As in- with large payments made by wire terest rates fell from the elevated transfer, and several proposals have levels of 1981 and 1982, the average been made to ensure the capital cost of funds at thrift institutions adequacy of commercial banks. Many declined much more rapidly than the of the financial and sectoral stresses average yield on their assets. The will take considerable time to alleindustry as a whole returned to viate, and will require a stable monprofitability in 1983, and aggregate etary environment, redress of the earnings jumped thereafter. Net in- imbalances in the nation's federal come for the industry in 1986 prob- budget and international trade posiably was strong again, but lower than tions, and prudent private behavior, in 1985. encouraged as necessary by sound At the same time, problems of regulation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

25 International Developments The international scene in 1986 Exchange Value of the Dollar and brought a further substantial decline Interest Rate Differential in the dollar against the currencies Percentage points Ratio scale. March 1973 = 100 of major foreign industrial countries, and some evidence emerged that the 160 4 - Long-term real interest process of adjustment of external rate differential 140 balances among major industrial (U.S. minus foreign) countries may be under way. Al- 2 - 120 though domestic demand abroad accelerated, exceeding for the first time since 1982 the rate of growth of real domestic demand in the United States, 2 growth in real GNP in nearly all industrial countries remained slug- 4 gish and turned out to be below official forecasts at the start of the 1975 1980 1986 Exchange value of the U.S. dollar is its weighted year. The United States again posted average exchange value against currencies of the other record trade and current account G-10 countries using 1972-76 total trade weights addeficits for the year as a whole; but justed by relative consumer prices. Differential is rate on long-term U.S. government accelerating import prices during the bonds minus rate on comparable foreign securities, course of the year and an upturn in both adjusted for expected inflation estimated by a real net exports in the fourth quarter 36-month centered moving average of actual inflation or staff forecasts where needed. suggested that the effects of the dollar's decline since February 1985 against the dollar.) The dollar's dewere beginning to show through. The cline was associated with a further sharp drop in oil prices through the drop in the long-term real interest first three quarters of 1986 were a rate differential, as U.S. rates fell factor in the low rates of increase in more than foreign rates. Indeed, one general price levels in major indusmeasure of this differential showed trial countries. Although economic that it became negative during 1986, growth varied widely among nonafter having been as high as around OPEC developing countries, it con- 4 percentage points in favor of the tinued at a moderate pace for the dollar in mid-1984. Major foreign group as a whole. central banks purchased a total of The dollar's foreign exchange value $11V2 billion in exchange market dropped another \5l/i percent against intervention in 1986, as contrasted a weighted average of 10 currencies with sales of %\11A billion in 1985. of major foreign industrial countries, U.S. monetary authorities did not bringing its decline between Febru- intervene in foreign exchange marary 1985 and December 1986 to 33 kets at all in 1986. percent. (Over this period the Ger- After a further drop of 6lA percent man mark appreciated 66 percent in the dollar in early 1987, monetary and the Japanese yen 61 percent authorities of the United States and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 International Developments five other major countries met in GNP. Demand, and Prices Paris on February 22 to conduct Percent change from previous year multilateral surveillance of their Gross national product economies in the framework of the (Constant prices) May 1986 Tokyo summit. In their communique, they stated that the exchange rate changes over the past two years "have now brought their currencies within ranges broadly consistent with underlying economic fundamentals" and that further substantial exchange rate changes "could Total domestic demand (Constant prices) damage growth and adjustment prospects." Therefore, they "agreed to co-operate closely to foster stability of exchange rates around current levels." Real economic growth in the major foreign industrial countries was somewhat disappointing in 1986. In Consumer price index the first quarter, real GNP declined in several European economies and in Japan, partly as a result of unusually severe weather. A strong rebound of activity in the second quarter was followed by substantially slower United States growth during the remainder of the year. Weakness was particularly evi- 1982 1984 1986 dent in the manufacturing sector. In Foreign data are multilaterally wieghted averages the final quarter of 1986, industrial for the Group of Ten (G-10) industrial countries, using 1972-76 total trade weights, and are from foreign production in Germany was only official sources. slightly above its level at the end of Data for the United States are from the U.S. De- 1985; Japan's industrial production partments of Commerce and Labor. declined during the second half of 1986 to an average level in the fourth above its level at the beginning of quarter below that of a year earlier. 1986; in Germany the rate was slightly In contrast to the slowing in real lower, and in the United Kingdom it GNP, domestic demand expanded was about the same. somewhat faster abroad in 1986 than The rate of inflation in the major had been the case in 1985. In the foreign industrial countries dropped European economies especially, de- sharply in 1986, on average, from its mand strength shifted to the domes- already low 1985 level. In Japan tic sectors of the economy from the consumer prices were essentially unexport sector. changed during 1986, while in Ger- The pace of growth abroad was many consumer prices fell slightly. generally insufficient to lower un- Wholesale prices declined signifiemployment rates. In both Japan cantly in most foreign industrial and France the unemployment rate countries. Weakness in world oil at the end of the year was somewhat prices early in the year and further Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 27 appreciation relative to the dollar in imports by OPEC countries, whose the currencies of most of these coun- merchandise imports have now detries were the principal factors work- clined about $60 billion (or 40 pering to lower inflation rates abroad. cent) since 1981. However, the even In several major foreign countries, sharper decline in the oil export rates of money growth rose in 1986. revenue of OPEC countries resulted Target ranges announced for the in a net $30 billion increase in the growth of specific aggregates were aggregate current account deficit of exceeded in Germany and the United those countries during 1986. Kingdom. In Japan, money growth The exchange rate competitiveness remained fairly rapid, whereas growth on world markets of most non-OPEC of the monetary aggregates in France developing countries continued to slowed from its 1985 pace. Fiscal improve during 1986. The value of policy abroad was again generally their currencies again declined signifrestrained, and government deficits icantly in real terms, reflecting the as a fraction of GNP were either large declines against the Japanese about the same or down further in and European currencies and only most of the foreign industrial coun- little change against the U.S. dollar. tries. In most East Asian developing coun- The aggregate current account sur- tries, the continuing rapid growth of plus of the major foreign industrial manufactured exports combined with countries rose more than $60 billion declining costs of oil imports to in 1986. The largest gains were ex- produce strong increases in trade perienced by Japan, whose surplus surpluses. In the case of the highly rose more than $35 billion to reach indebted countries of Latin America, $86 billion, and by Germany, where external interest payments continued the gain of about $22 billion brought to fall in 1986, reflecting the downthe total surplus to $36 billion. In ward trend of world interest rates. contrast, in both the United King- However, declining oil and commoddom and Canada the current account ity prices along with domestic develdeclined in 1986, to near balance and opments led to reemergence in 1986 a significant deficit, respectively. of an overall current account deficit Increases in the dollar value of which, for Latin America, had althese current account surpluses most been eliminated in 1984-85. masked the adjustment of trade vol- Nevertheless, in some of these counumes that did occur in 1986 in several tries, particularly Mexico, Colombia, of the major foreign economies. In and Ecuador, the shifts toward mark- Japan the volume of exports declined edly more competitive exchange rates more than 4 percent from the fourth in 1985 and 1986 aided a strong quarter of 1985 to the fourth quarter expansion of nontraditional exports of 1986, while the volume of imports during 1986. rose more than 14 percent. German Efforts to provide additional fiexport volume in the final quarter of nancing for the heavily indebted 1986 was about unchanged from its developing countries faced growing level one year earlier, while import difficulties during 1986. The World volume was more than 6 percent Bank helped several of these counhigher than at the end of 1985. tries devise programs of structural Declining oil revenues induced a reform. In doing so, it contributed further $10 billion contraction of significantly both to the resolution of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 International Developments economic distortions affecting those U.S. International Trade countries and to sustainable eco- Billions of dollars nomic growth. World Bank financial Balances commitments for sectoral-adjustment programs also rose sharply. For Mexico and Nigeria, the international bank creditors assembled par- 100 allel new-money packages that were Merchandise trade linked to the borrowing countries' performance under World Bank and IMF-approved adjustment programs. Ratio scale, billions of 1982 dollars However, by the end of 1986, Merchandise trade bank creditors collectively were un- ^:^^ " 400 able to complete action on the pro- 300 posed new loans for Mexico—a failure representative of the tendency of the banks to act less rapidly and Total exports uniformly than during 1983-85 in the provision of new resources to Ratio scale, 1982=100 heavily indebted countries. On a net GNP fixed-weight price index basis, banks based in the industrial 105 countries appear to have provided Total exports no new lending in 1986 to the 15 heavily indebted countries that were identified in connection with the Program for Sustained Growth put forth by the U.S. Secretary of the Treasury in late 1985. 1982 1984 1986 Data are seasonally adjusted at annual rates and are from the U.S. Department of Commerce. U.S. International Transactions The U.S. merchandise trade and current account deficits widened fur- improvement in the price competither in 1986. A $7 billion increase in tiveness of U.S. products resulting exports and a $31 billion increase in from the decline in the dollar appears imports yielded a trade deficit of to have contributed heavily to this $148 billion; the deficit was $124 rise in export volume. The growth, billion in 1985. The current account spread over most major categories deficit was $141 billion in 1986, of trade, was concentrated in sales compared with $118 billion in 1985. of industrial supplies and capital The rise in the value of exports in goods, primarily to other industrial 1986 reflected a strong increase in countries but also to developing the volume of nonagricultural ex- countries in Asia. ports, which rose 14 percent from The value of agricultural exports the fourth quarter to the fourth fell by $3 billion in 1986, a drop due quarter, after having been flat in almost entirely to falling prices. Lower 1985. This strong recovery of exports support prices introduced during the came despite a slowing of economic year for major crops resulted in some growth in the rest of the world. The increase in price competitiveness. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 29 While ample foreign supplies have continued strength in imports of made marketing abroad increasingly consumer goods reflected in part the difficult for many commodities, strength of competition from abroad fourth-quarter demand for U.S. ex- as import prices were slow to adjust, ports of soybeans was augmented as and in part the relative strength of the result of a drought in Brazil, a U.S. domestic consumption over this major world supplier. period. Forty-five percent of U.S. The increase in the value of im- consumer goods imports come from ports for 1986 as a whole reflected developing countries in Asia whose mainly a rise in volume that covered currencies have not appreciated most trade categories. Increases were against the dollar in real terms. particularly pronounced in consumer Nonetheless, the average price of goods and business machines. The non-oil imports turned up during U.S. International Transactions1 Billions of dollars, seasonally adjusted Quarter Year Transaction 1985 1986 1985 1986 Q4 Ql Q2 Q3 Q4 Current account -118 -141 -34 -34 -34 -35 -37 Merchandise trade balance -124 -148 -37 -36 -36 -37 -38 Exports 214 222 53 54 55 56 57 Imports -339 -369 -90 -90 -91 -93 -96 Investment income (net) 25 23 9 7 5 6 5 Direct investment, net 26 33 10 8 8 8 Portfolio investment, net -1 -10 -1 -2 Other services (including military -2 -3 transactions) -3 -1 Unilateral transfers, private -1 1 and government -15 -15 -4 -4 -3 -4 Private capital flows 103 82 34 7 27 Bank-reported capital, net 22 26 (outflows, —) 40 20 12 -11 11 U.S. net purchases (—) of foreign 15 5 securities -1 _2 * Foreign net purchases (+) of -6 3 U.S. Treasury securities 21 9 6 4 1 Foreign net purchases of U.S. 8 -3 corporate bonds 46 53 18 16 13 Foreign net purchases of U.S. 13 12 corporate stocks 5 17 4 6 7 4 U.S. direct investment abroad -19 -32 -10 -10 -6 Foreign direct investment in United States 26 1 14 Other corporate capital flows, net -7 -5 n.a. Foreign official assets in United States (increase, +) 33 -1 15 15 U.S. official reserve assets, net (increase, -) -4 * -3 U.S. government foreign credits and other claims, net -3 -2 -1 -1 Seasonal adjustment discrepancy 4 1 -1 -4 4 Statistical discrepancy 23 27 5 10 13 -6 10 *Less than ± $500 million. SOURCE. U.S. Department of Commerce, Bureau of 1. Details may not add to totals because of round- Economic Analysis. Digitized fori nFgR. ASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 International Developments 1986 after nearly five years of de- Taiwan, also added substantially to cline. Prices of most major import their official holdings in the United categories showed a significant accel- States, while the OPEC countries eration during 1986. This general continued to draw down their assets. trend suggests that in aggregate terms Private capital flows were again the price competitiveness of domest- dominated by securities transactions. ically produced products has im- Attracted by expected gains in U.S. proved somewhat. stock prices, foreigners purchased, The value of oil imports dropped net, a record $17 billion of U.S. sharply in 1986. A nearly 50 percent stocks. Foreign purchases of corpodrop in price (year over year) was rate bonds remained strong, as U.S. only partly offset by a 25 percent corporations continued to take adincrease in volume. The volume rose vantage of relatively low long-term sharply, if irregularly, during much interest rates to restructure their of 1986, partly to rebuild stocks and balance sheets, issuing a large volpartly in response to the break in oil ume of bonds in both the domestic prices as OPEC oil production in- and Eurobond markets. However, creased during the year. In anticipa- the share of Eurobonds in new pubtion of the announcement in Decem- licly offered bond issues by U.S. ber of an agreement by OPEC to corporations fell sharply in 1986. limit production, oil prices re- Recorded net purchases of U.S. bounded and the volume of oil im- Treasury securities by private forports fell in the fourth quarter. eigners declined as well, but pur- Among nontrade components of chases of Treasuries by foreign offithe current account, net payments cial reserve holders increased as on foreign portfolio holdings in the foreign monetary authorities in- United States increased noticeably, vested the bulk of their intervention reflecting the growing stock of U.S. purchases of dollars in these instruportfolio liabilities to foreigners. This ments. increase was partly offset by higher Foreign direct investment in the net income receipts on U.S. direct United States reached record levels investments abroad. in 1986, swelled by mergers and The recorded $141 billion current takeovers bunched at the end of the account deficit for 1986 was balanced year, before the effective dates of by recorded net capital inflows of the new tax law. Direct investment $114 billion and a statistical discrep- abroad by U.S. residents was up ancy of $27 billion. Unlike the case sharply in 1986, largely because of in earlier years of current account the accounting effects of the sharp deficits, official reserve holders ac- depreciation of the dollar. counted for a significant part of the Inflows reported by banks were recorded capital inflow in 1986 (al- moderate in 1986, down substantially most $32 billion). A large part of the from 1985. Growth of liabilities to official inflow was associated with Latin American institutions other foreign exchange market interven- than banks dropped sharply from the tion by the G-10 countries, especially high 1984 and 1985 rates, and the Japan, to slow the depreciation of large 1985 decline in bankers acceptthe dollar. Several newly industrial- ances was followed by only a small ized countries in Asia, particularly decline in 1986. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 31 Foreign Exchange Operations The only activity on the Federal Reserve swap network involved a U.S. monetary authorities did not $210 million drawing by the Bank of intervene in foreign exchange mar- Mexico in August. This was part of kets in 1986. Because of the substan- an official bridge-financing package tial further appreciations of major provided by the monetary authorities foreign currencies against the dollar of the United States and 14 other in 1986, the Federal Reserve System countries, pending drawings by Mexexperienced valuation gains of $1,971 ico on more permanent financing million on its holdings of foreign facilities provided by the Internacurrency reserve assets. At year-end, tional Monetary Fund and the World System holdings of foreign currencies Bank. This drawing on the Federal were valued at $9,475 million. Essen- Reserve was completely repaid by tially all of these holdings consisted February 1987. of marks, yen, and Swiss francs. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

33 Monetary Policy Reports to the Congress Given below are reports submitted to Economic and Financial the Congress by the Federal Reserve Background on February 19 and July 18, 1986, The past year was one of further pursuant to the Full Employment and progress in the national economy. Balanced Growth Act of1978. Although growth in economic activity was slower than that in the earlier phase of the expansion, increases in Report, on February 19, 1986 output were great enough to reduce the unemployment rate to its lowest Monetary Policy and the level since 1980. Moreover, even as Economic Outlook for 1986 the economic upswing moved into its While there are unusual uncertainties fourth year, inflationary pressures surrounding prospects for prices and remained in check. In 1985, prices economic activity in 1986—stem- generally rose less than they had the ming in part from questions about year before and wage gains were the timing and dimension of domestic restrained. adjustments to the weaker dollar on Continued economic growth last exchange markets, about oil price year was supported by a generally declines, and about the process of accommodative monetary policy. The fiscal restraint—the overall eco- demand for narrow money was strong, nomic outlook for the year appears partly in lagged response to earlier generally favorable. Real economic interest rate declines and partly pergrowth probably will pick up some- haps in response to more conservawhat from last year's pace, and tive cash management practices. Ml inflationary pressures should remain expanded relatively rapidly throughcontained. The recent weakness in out the year, growing about 12 peroil prices, though it has the potential cent, and its velocity exhibited an for causing dislocations in energy unusual and large drop of 5V2 permarkets and adding to the strains on cent; growth exceeded both the origsome heavily indebted oil-producing inal target range set in February and countries, should enhance real growth the wider, rebased range for the and work to offset the upward impact second half set in July. However, the on the price level this year from the broader monetary aggregates bedrop of the dollar on exchange mar- haved more normally and ended the kets. Over the course of the year, year within their target ranges. M2 the prospective movement toward expanded about 8V2 percent as comfiscal restraint, and also the more pared with its range of 6 to 9 percent, competitive exchange rate, should and M3 grew around 7V2 percent help correct imbalances that in recent compared with its range of 6 to 9V2 years have threatened the sustaina- percent. bility of economic expansion and In credit markets, most short-term affected domestic and international interest rates declined about a perfinancial markets. centage point over last year, while Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 Monetary Policy Reports longer-term rates dropped approxi- passing the Balanced Budget and mately 2 percentage points, partly Emergency Deficit Control Act of reflecting an improved outlook for 1985 has had salutary effects on inflation and expectations of greater expectation in financial markets. As fiscal restraint. Stock prices also rose budgetary deficits are reduced, more substantially during the year. Mean- and more domestic saving can be while, debt growth was strong, with channeled into investment in the expansion of domestic nonfinancial plant and equipment needed to imdebt for the year of 13V2 percent, prove productivity and sustain ecoabove the monitoring range of 9 to nomic growth over the long term. 12 percent set by the Committee. The decline in the dollar should help The rapidity of debt creation re- bring about an environment in which flected, in part, borrowings to fi- U.S. producers will be able to comnance retirements of corporate stock pete more effectively in world marassociated with mergers, buy-outs, kets. The efforts of many banks and and share repurchases and the accel- other financial intermediaries to eration of state and local debt issues bolster capital and reserves, together in response to proposed tax law with lower interest rates, should help changes. financial institutions to strengthen While output of the U.S. econ- their ability to cope with financial omy, measured by real gross national strain. Questions remain, however, product, expanded moderately in about other factors affecting the U.S. 1985, domestic sectors increased their economy—including the strength of purchases of goods and services more economic expansion abroad, the imrapidly. The difference was reflected pact of a declining dollar on inflation in an increasing volume of imports here, and the effect of reduced oil as the volume of exports declined. prices on the financial health of Thus, all segments of the economy domestic energy producers and of a did not share equally in the expan- number of oil-exporting developing sion. Key sectors such as manufac- countries. turing, mining, and agriculture continued to face strong competition from foreign producers. Sluggish Monetary Policy for 1986 growth abroad also limited export The Federal Open Market Commitmarkets for U.S. producers. In finan- tee framed its monetary policy plans cial markets, a number of institutions for 1986 in light of the fundamental had to cope with loan problems objectives of maintaining sustainable associated with the economic pres- growth of economic activity, making sures and large debt burdens of continued progress over time toward certain borrowers, including less de- price stability, and working toward veloped countries and energy and better balance in the nation's exteragricultural borrowers in the United nal transactions. As shown in the States. accompanying table, the Committee Adjustments are in process that set ranges for the monetary aggreshould help correct the imbalances gates for the period from the fourth that have emerged in recent years. quarter of 1985 to the fourth quarter The resolve demonstrated by the of 1986 of 3 to 8 percent for Ml and Congress and the administration in 6 to 9 percent for both M2 and M3; Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 35 Ranges of Growth for Monetary and will evaluate behavior of Ml in light Credit Aggregates of its consistency with the other Percent change, fourth quarter to fourth quarter monetary aggregates, economic and financial developments, and the po- Money or credit aggregate 1986 1 1985 tential for inflationary pressures. In Ml 3 to 8 3to82 sum, policy implementation will in- M2 6 to 9 6 to 9 M3 6 to 9 6 to 9Vi volve continuing appraisal of the Debt 8 to 11 9 to 12 relationships among the various 1. Annual rate, applied to period from second to measures of money and credit, their fourth quarter. velocity trends, and indicators of economic activity and prices, as well it established a monitoring range of as conditions in domestic credit and 8 to 11 percent for debt. These are foreign exchange markets. the same ranges that had been ten- The growth of the broader aggretatively set for 1986 in July of last gates in 1986 is not expected to be year, except that the Ml range has far different from last year, when been widened to reflect the uncer- their velocities declined somewhat. tainties about the behavior of that Last year's velocity experience was aggregate, as noted below. closer to the norm for these aggre- Compared with ranges that had gates than was the case for Ml. The most recently been in effect for 1985, final phase of deposit deregulation the new ranges involve a reduced this year—the removal of minimum upper limit for M3 and a generally balance requirements on money marlower range for debt. The ranges for ket deposit accounts at the beginning Ml and M2 are unchanged. The of the year and the elimination of width of the Ml range reflects con- ceiling rates on savings and regular tinuing uncertainties about the be- NOW accounts at the end of March— havior of Ml under varying economic is expected to have only minimal and financial circumstances, given effects on the broad aggregates as recent experience and the changed well as on Ml. Other ceiling-free composition of the aggregate over accounts have been widely available the past few years. In particular, the for a number of years, and minimum availability of interest-bearing check- balance requirements already have ing accounts that serve both trans- been reduced to a relatively low action and savings functions may level. have increased the sensitivity of this The Committee for some years has aggregate to changes in market rates had a monitoring range for the total as well as to other factors influencing debt of domestic nonfinancial secthe public's allocation of its savings tors. Historically, debt has expanded among various financial assets. While about as rapidly as GNP, but in the range for Ml is wide enough to recent years debt has grown more allow for some variation in behavior rapidly than the economy, raising of the aggregate's income velocity in some concern about the increasing response to changing conditions, the debt burden. The growth of debt is range was set on the assumption that expected to moderate somewhat in there would not be a large drop in 1986. A diminution of debt financing velocity, such as occurred in 1985. for purposes of stock retirement is In that connection, the Committee anticipated, and growth of state and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 Monetary Policy Reports local government debt is expected to crease in output are expected to slow from last year's exceptional lower the unemployment rate gradpace, absent further changes in the ually, although sluggish productivity proposed tax law that might prompt performance, if it should continue, a renewed acceleration in borrowing. would limit the nation's growth po- While the federal deficit is expected tential. to remain at a high level for much of Two key factors in the positive 1986, it should begin declining in the economic outlook are the recent course of the year as greater fiscal developments in energy and financial restraint takes hold and helps to curb markets. The decline in energy prices the rate of increase in U.S. govern- can be expected to raise the growth ment debt. of real disposable income and to bolster consumer spending in the months ahead. The marked increase Economic Projections in household financial wealth associ- The Committee felt that its monetary ated with the rise in stock and bond objectives were consistent with ex- prices also should provide the basis pectations for continued growth in for continued gains in consumer outoutput, further reductions in unem- lays. This should work to offset the ployment, and muted inflation in restraint in spending that could be 1986. While there clearly are a good exerted by the runup in household many uncertainties and risks in the indebtedness and the associated depresent environment—for instance, cline in the personal saving rate the actual outcome for the budget, during the past year. Nevertheless, behavior of the dollar, and oil prices— the high level of debt remains a risk the Committee members and non- in the outlook for consumer spendvoting Reserve Bank Presidents gen- ing. erally believe that prospects for the The rise in stock prices and the economy in the year ahead are rea- decline in interest rates have imsonably favorable. As indicated in proved prospects for domestic inthe table, their expectations center vestment in plant, equipment, and on real GNP growth of 3 to 3Vi housing. Moreover, while the federal percent and on inflation in the range deficit is not likely to drop signifiof 3 to 4 percent. The expanding job cantly for some months, as noted opportunities associated with the in- earlier, greater fiscal restraint, as it Economic Projections for 1986 Percent FOMC Members and other FRB Presidents Adminis- Congressional Measure tration Budget Office Range Central tendency Change, fourth quarter to fourth quarter Nominal GNP 5to8V2 61/2to71/4 8.0 7.6 Real GNP 23/4to41/4 3to3V£ 4.0 3.6 2VztoAVi 3 to 4 3.8 3.9 GNP implicit deflator 6y4to63/4 About 6I/2 6.7 6.71 Average unemployment rate in the fourth quarter Digitized for FRASER 1. Civilian unemployment rate. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 37 develops, should enhance the avail- cent years, even though the unemability of domestic saving for private ployment rate is declining. Disapinvestment and reduce the need to pointing productivity performance rely on foreign saving. Mortgage does raise questions about pressures rates are at their lowest levels since from the labor cost side, although 1979, and the greater affordability of some pickup in productivity improvehousing can be expected to buoy ment is assumed this year. A decline residential construction even in the in oil prices also should be a conface of some evident overbuilding in structive influence. Nevertheless, it the multifamily sector. Similarly, was recognized that a weaker dollar lower costs of capital should—along poses a clear risk of greater inflationwith some improvement in the com- ary pressures. petitiveness of U.S. industry owing The projections by FOMC memto the dollar's decline—help to sup- bers and nonvoting Reserve Bank port business investment despite likely Presidents of real GNP and prices weakness in the energy and office over 1986 generally are somewhat building sectors. In the near term, lower than the administration's prothe leanness of manufacturers' stocks jections, although the full range of suggests the likelihood of some pickup expectations does encompass the latin the rate of inventory accumula- ter. In any event, differences are not tion. large and economic growth at the The outlook for the external sector pace the administration anticipates is quite uncertain. The response of can be accommodated by the FOMC's U.S. industry, as well as of foreign targets. producers, to the decline of the dollar will take place only over time The Performance of the and will depend on a number of Economy during the Past Year factors, such as the extent to which it is believed the exchange rate change The economy completed a third sucis "permanent" and the strategies cessive year of expansion in 1985, firms pursue with respect to the with real gross national product inpotential trade-off between profit creasing 2V2 percent over the year. margin and market share. Perhaps The rise in economic activity was more important in the short run, our sufficient to create 3 million new trade and current account position payroll jobs and the unemployment also will depend on the pace of rate edged down; with a further economic growth abroad: if growth strong increase in employment in in other countries is relatively slow, January of this year, the jobless rate that would tend to limit near-term for civilians reached a six-year low improvement. of 6.7 percent. Meanwhile, most With regard to the outlook for broad measures of price increase inflation, wages in the aggregate indicate that inflation slowed to about have shown no tendency toward a 3V2 to 33/4 percent rate in 1985, acceleration, and recent settlements somewhat less than the pace regisin major collective bargaining agree- tered over the previous two years. ments indicate wage gains in manu- Though output and employment facturing, construction, and trans- continued to grow in 1985, the rate portation are likely to continue at of expansion was slower than some Digitized for t h F e R A m SE o R d erate pace registered in re- had anticipated, raising some conhttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 Monetary Policy Reports cerns about the sustainability of the authorities of the G-5 nations agreed recovery. Furthermore, the pattern that exchange rates should better of developments in the past year had reflect underlying economic relationsome disturbing aspects: domestic ships, which would enhance the prosand foreign demands continued to pects for some improvement in our be diverted away from goods and external balance. services produced in the United The federal budget deficit was of States, draining income from our record magnitude in fiscal year 1985. households and businesses and ex- The large federal deficit not only acerbating an inventory correction absorbed a significant portion of the by U.S. firms as their sales lagged; saving available to the domestic meanwhile, consumers continued to economy, but also continued to be a increase their spending at a substan- source of concern to investors with tial clip, but only by borrowing at a respect to longer-range potential for pace that pushed household debt inflationary pressures. Not surprisburdens to still higher levels. ingly, the prospect for some reduc- Although the nation as a whole tion in the deficit contributed to the experienced continued growth, the downward trend in interest rates late serious sectoral imbalances that had last year. emerged earlier during the recovery The importance of international became more apparent when gains economic developments for the perin activity moderated. Industrial out- formance of the U.S. economy has put grew slowly in 1985, and manu- become increasingly apparent during facturing and mining employment the current economic expansion. Alposted outright declines during much though the foreign exchange value of the year. The agricultural sector of the dollar declined over most of remained under acute pressure, as the year—encouraged at times by shrinking export markets and abun- coordinated official intervention acdant harvests pushed prices sharply tivity—changes in spending patterns, lower. As a result, farmers continued which typically lag movements in to face mounting difficulties in ser- exchange rates, were not yet evident vicing the large volume of debt that and imports made further inroads had accumulated in the 1970s. into domestic markets. Meanwhile, To a considerable extent, these slow growth, on average, in much of imbalances and stresses are related the rest of the world has failed to to fundamental disequilibria in the provide strong markets for U.S. exnation's finances: the continuing huge ports. The net result has been that federal budget deficit and the grow- domestic demands have increased ing deterioration in the U.S. current more rapidly than domestic producaccount. During the past year, how- tion throughout the course of the ever, policymakers took important expansion. steps to address these problems. The An important achievement of the Balanced Budget and Emergency current recovery has been the sus- Deficit Control Act was passed, es- tained expansion of economic activtablishing a mechanism for deficit ity without any relinquishing of progreduction and signaling the resolve ress toward the goal of price stability. of the Congress and the administra- The containment of inflation has tion to achieve meaningful progress been aided by the high exchange on this front. And the financial value of the dollar and excess world Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 39 supplies of many basic materials, gram for 1985-86, and this acwhich have left prices unchanged or counted for most of the pickup. lower for a wide range of imported Activity in the housing sector was goods, industrial commodities, agri- flat in 1985. The number of new cultural products, and petroleum. homes started last year remained at More fundamentally, wage increases about the same rate of 1% million in the aggregate have been re- units posted in the preceding two strained, limiting upward pressure on years. Construction of single-family costs. housing showed no new strength, despite a decline in mortgage rates The Household Sector to their lowest level in six years and Spending in the household sector favorable demographic trends. In remained strong in 1985, despite a part, some of the effect of lower sharp slowing in income growth. mortgage rates may have been offset Growth in real disposable income by a tightening of qualification stanrose about IV2 percent, much less dards by lenders and mortgage insurthan the increase of 4 percent of the ers and higher mortgage insurance previous year. Income growth was premiums. Construction of multifamlimited as wage and salary gains ily housing remained at the relatively decelerated, interest income weak- high level of the two previous years, ened, and farm income plummeted. notwithstanding high and rising va- Meanwhile, real personal consump- cancy rates for rental units. Rental tion expenditures advanced 3 percent housing construction was supported last year—only a little less than in by heavy issuance of debt by state 1984—buoyed by continued high and local authorities, partly in anticlevels of borrowing. As a result, the ipation of constraints imposed by tax personal saving rate fell to an aver- reform legislation. age of about 4V2 percent last year, Recent trends in consumer balance well below historical norms. sheets continued last year. Consumer The strength in household spend- installment debt, which had climbed ing last year reflected further gains sharply in 1984, did so again in 1985, in outlays for consumer durables, and the ratio of debt to disposable especially purchases of new automo- income reached a record high. Growth biles. Sales of new cars totaled more in financial assets of households has, than 11 million units, the strongest however, more than kept pace with selling pace since 1978. Sales of the rapid rise in debt over the past domestic autos picked up to 8V4 two years. In particular, the strong million units in response to the gen- gains posted by the stock and bond eral downtrend in interest rates, markets in 1985 provided a substanseveral rounds of price and financing tial boost to household wealth. concessions offered by manufactur- Indications of debt-servicing diffiers, and increased availability of culties in the household sector have some models that had been in short mounted. Delinquency rates on consupply in 1984. Sales of foreign cars sumer installment loans have been climbed to a record level of more on the rise since mid-1984, and for than 2% million units for the year; a some categories—such as bank credit greater volume of exports to the cards—have reached relatively high United States was permitted under levels. Moreover, mortgage loan dethe Japanese voluntary restraint pro- linquencies persist at the historically Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 Monetary Policy Reports high levels that have prevailed since as an expansion progresses and the the 1981-82 recession, associated growth of sales subsides to more with the influence of lingering high sustainable levels. However, the rerates of unemployment in some com- duced pace of investment last year munities, slow income growth, and was reinforced by declining capacity weak housing prices in certain areas utilization rates in the industrial secof the country. However, surveys of tor. Moreover, rising vacancy rates households continue to show favor- for office buildings contributed to able readings on attitudes concerning slower growth in expenditures for financial positions, suggesting that nonresidential structures. these financial strains are currently Businesses accumulated inventolimited to a small part of the popu- ries at a much reduced pace in 1985, lation. particularly in the manufacturing sector. In real terms, nonfarm business The Business Sector inventories rose $10 billion last year, Economic conditions in the business after the sharp $56 billion investment sector also were mixed last year. that occurred in 1984. In the manu- After-tax economic profits of nonfi- facturing sector, sluggish orders and nancial corporations as a group in- stable or falling prices have induced creased sharply for a third consecu- businesses to adopt a cautious aptive year and as a percent of GNP proach to inventory accumulation; stood at their highest level since the factory inventories declined over the late 1960s. Many firms in manufac- second half of 1985 and were little turing and mining industries, how- changed on net for the year as a ever, have encountered significant whole. In the trade sector, stocks difficulties brought about by the high increased over the year, boosted by value of the dollar. In addition to a large rise in auto inventories in the the influence of the exchange rate, fourth quarter. Excluding autos, indownward pressures on prices and ventories at retail establishments inprofits in the agricultural and energy creased about in line with the modsectors have been exacerbated by erate rise in sales over 1985. ample supplies in world markets. Financial strains have remained Business spending for equipment evident in several important sectors and structures advanced 6 percent in of the economy. The decline in the real terms in 1985, supported by exchange value of the dollar has yet falling interest rates, declining rela- to ease significantly the international tive prices for capital equipment, and trading problems of many industrial continued efforts to modernize facil- firms. Moreover, the activity and ities in order to meet intensified earnings of the domestic energy seccompetition. Nevertheless, the growth tor have been affected adversely by in business fixed investment was well the weakening of petroleum prices below the extraordinary pace of the on world markets. The financial conpreceding two years. Furthermore, dition of U.S. agriculture worsened the slowdown in capital outlays was further in 1985. A large portion of widespread, including many cate- the agricultural sector has continued gories of high technology equipment, to struggle with sharply lower prices, heavy industrial machinery, and diminished export markets, and destructures. Some deceleration of in- pressed land values. With farm investment spending may be expected comes plunging, debt-servicing prob- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 41 lems have created serious strains on risen to substantial levels in 1984, both farmers and farm lenders. were virtually eliminated by the end of last year. The Government Sector The federal budget deficit rose to The Foreign Sector $212 billion in fiscal year 1985. Al- After registering particularly sharp though the expanding economy con- gains toward the end of 1984 and in tinued to boost receipts, outlays rose the first two months of 1985, the even faster, with large increases reg- dollar generally fell in international istered for agricultural support pay- currency trading throughout the rements, interest outlays, and defense mainder of last year. By the end of purchases. As a percent of GNP, the 1985, the trade-weighted foreign exdeficit remained at a historically high change value of the dollar had fallen level of 5 percent, absorbing a large nearly 25 percent from its peak in share of the net saving available to February. This decline occurred the domestic economy. against the backdrop of a narrowing Federal government purchases of of the differential between inflationgoods and services, which add di- adjusted, long-term interest rates in rectly to GNP and constitute a third the United States and other indusof total federal expenditures, posted trial countries, which at least in part another strong advance last year. reflected the slowing of economic Federal purchases, excluding changes growth in the United States relative in farm inventories held by the Com- to growth abroad. modity Credit Corporation (CCC), It will take some time before the were up more than 3% percent over effects of the dollar's depreciation the year, after adjustment for infla- manifest themselves in the external tion. Defense outlays continued to position of the United States, which provide a major boost to federal continued to deteriorate last year. purchases, rising 6V2 percent over The widening gap between imports the year. Purchases by the CCC rose and exports boosted the current acsharply, as low market prices en- count deficit to about $120 billion, couraged farmers to shift massive up from $107 billion in 1984. inventories of grain to the federal Merchandise imports continued to government. rise in 1985, increasing about 3V2 State and local governments in- percent in real terms over the year. creased purchases of goods and ser- Consumer goods, capital equipment, vices about 3 percent in 1985, after and industrial materials posted moda similar increase in the preceding erate increases. Although prices of year. Most of the growth in expend- imported goods fell for the year as a itures last year reflected strong in- whole, some firming in the prices of creases in construction outlays as manufactured imports became apstates and localities continued efforts parent toward the end of the year, to improve and expand basic infra- in part attributable to the decline in structure. With the rise in expendi- the value of the dollar. tures exceeding the growth in receipts, The volume of merchandise exthe fiscal position of state and local ports declined in 1985; agricultural governments weakened throughout exports fell abruptly, while exports the year; aggregate operating and of nonagricultural goods were essencapital account surpluses, which had tially unchanged. The failure of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 Monetary Policy Reports growth in other industrial countries, sons employed relative to the popuon average, to pick up has limited lation rose to a record level. the expansion of markets for U.S. Nonfarm payrolls expanded 3 milproducts. Furthermore, economic lion in 1985, somewhat below the growth in developing nations slowed unprecedented hiring rate posted a bit in 1985, as many countries during the first two years of the continued to face difficult debt-ser- recovery. Although growth in emvicing problems externally and strong ployment in the aggregate continued, inflationary pressures at home. the composition of the gains reflected In this context, the Secretary of the unevenness of current expansion. the Treasury in October addressed Employment in the trade and service the economic and financial problems sectors accounted for more than twoconfronted by many of these coun- thirds of the growth in payrolls last tries. He urged the borrowing coun- year. Government employment rose tries to undertake comprehensive nearly one-half million, reflecting programs of economic adjustment primarily increased payrolls of state designed to promote efficiency and and local governments. In contrast, economic growth. At the same time, the weak expansion of output in the he called upon the international manufacturing sector resulted in some banking community, the World Bank, trimming of employment over the and the other multilateral develop- first three quarters of the year. Alment banks, working with the Inter- though an upturn in manufacturing national Monetary Fund, to provide jobs begain in the fall, employment the assurance that adequate external was down about 170,000 over the financing would be available to sup- year. port such programs during the next Wage increases remained reseveral years. The initial response to strained in most segments of the these proposals has been positive; all labor market last year, despite a parties generally accept that the pro- further reduction in the unemployposals represent a constructive ment rate. Hourly compensation in framework for dealing with the inter- the private sector, as measured by national debt problems of individual the employment cost index, rose countries and for promoting the about 4 percent in 1985,1 percentage growth and stability of the world point less than in the preceding year. economy. Nearly all of the deceleration of compensation per hour last year Labor Markets reflected a slowing in the growth of With the economy continuing to fringe benefits; wage rates increased expand, developments in labor mar- at about the same pace posted in kets remained generally favorable in 1984. To a large extent, the recent 1985. The unemployment rate drifted slowing in the growth of benefits has down over the year, as gains in resulted from lower health care exemployment exceeded the growth of penses for employers, as cost-sharing the labor force. Labor force partici- arrangements shifted greater responpation has maintained its upward sibilities to employees and programs trend; women continued to enter the for hospital cost containment became workforce in large numbers, in part more widespread. responding to expanding job oppor- Meanwhile, labor productivity was tunities. Overall, the number of per- nearly unchanged in 1985, after in- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 43 creasing substantially earlier in the energy markets continued to restrain recovery. When viewed over a longer the overall rate of inflation in 1985. period, the underlying trend in pro- Energy prices showed little change ductivity in recent years appears to last year; however, a substantial have improved a little from the very margin of unutilized productive calow pace of the 1970s, but remains pacity, continued conservation efwell below the pace earlier in the forts, and the debt-servicing probpostwar period. Management and lems of several important oil workers have responded to a more producers have all contributed to a competitive environment by modern- situation of surplus availability of oil izing plant and equipment, improv- and to a sharp break in oil prices on ing operational efficiency, and mak- world markets at the end of the year. ing work rules more flexible. Unit Crop prices at the farm have relabor costs in the nonfarm business mained depressed by diminished exsector rose 3% percent in 1985, port demand and high levels of higher than the increase during the production. Lower prices for crude previous two years but well under foods and small increases in prothe pace registered in the early 1980s. cessing costs held food prices at the retail level to an increase of 2% Price Developments percent last year. Most broad measures of prices indi- Prices for many basic industrial cate that inflation was unchanged or commodities fell during 1985. Weak perhaps moved a bit lower in 1985, expansion of industrial production in even as the economy was passing the United States and in other major through a third year of expanding industrial countries has limited the activity. The consumer price index growth in demand for raw and semiadvanced 3% percent over 1985, processed materials. Furthermore, the somewhat less than the 4 percent high prices for many raw commodiincrease posted the previous year. ties that prevailed over the 1970s and The GNP fixed-weight price index, early 1980s induced a rapid expanwhich includes production for busi- sion of capacity, particularly in denesses, government, and export, as veloping countries. With productive well as for consumers, increased 3V2 capacity in place and with many of percent, about V2 percentage point these countries facing massive debtless than the average increase over servicing requirements, supplies of the preceding two years. Producer commodities on world markets have prices of finished goods advanced 13A remained plentiful. percent last year, and prices of inter- On balance, price increases outmediate materials were essentially side the food and energy area held flat. steady last year. Consumer prices Progress toward price stability has other than food and energy increased been sustained by several factors, the about 4V2 percent, a bit less than in most important of which have been 1984. The prices of retail goods subdued inflation expectations, mod- excluding food and energy were held erate wage increases, and the influ- to a gain of 2 percent in 1985, at ence of the high value of the dollar least in part by small increases or on the prices of imports and goods declines in the prices of products in that compete with imports. In addi- markets in which import competition tion, developments in the food and is substantial. Price increases for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 Monetary Policy Reports nonenergy services remained at an aggregate did not slow, and its velocannual rate of about 5% percent last ity registered an even steeper deyear. Capital equipment prices rose cline. At the same time, the broader 23A percent in 1985, somewhat more monetary aggregates were growing than in 1984. generally within their ranges, while economic growth had slowed to well below the pace of the year before and upward price pressures remained Monetary Policy and Financial muted. In the fall, the FOMC deter- Markets in 1985 mined that, under these circum- At its meeting in February 1985, the stances, growth in Ml above its range Federal Open Market Committee for the second half of the year would established ranges for money and be acceptable. credit growth during the year, mea- In general, the FOMC last year sured from the fourth quarter of 1984 emphasized the need to evaluate to the fourth quarter of 1985, of 4 to growth in all the aggregates in light 7 percent for Ml, 6 to 9 percent for of developments in the economy and M2, and 6 to 9/2 percent for M3. prices, as well as conditions in finan- The associated monitoring range for cial and foreign exchange markets. the debt of domestic nonfinancial Throughout the year, monetary polsectors was set at 9 to 12 percent. icy remained generally accommoda- In July, the Committee reaffirmed tive to emerging demands for money. the ranges for M2, M3, and debt, Pressures on bank reserve positions but established a new Ml growth were varied in a narrow range over range of 3 to 8 percent, measured at the year, and the discount rate was an annual rate, from the second to reduced once, by Vi percentage point. the fourth quarter of the year. Over the first half of the year, Ml had Money, Credit, and Monetary Policy grown well above the upper end of Ml increased at an annual rate of its range and velocity had registered 12.7 percent from the second to the an unusually steep decline, apparfourth quarter of the year, compared ently reflecting substantial additions with its range of 3 to 8 percent for to money balances, especially interthis period; growth for the year as a est-earning transaction balances, whole came to 11.9 percent. Much spurred by the sharp drop in interest of the unusually strong growth in Ml rates since mid-1984. The Ml objecin 1985 and the accompanying detive for the second half of the year cline in velocity seemed to be attribanticipated a considerable slowing of utable to lower interest rates, though growth, on the assumption that hisexpansion in the aggregate was torically more normal behavior in stronger, particularly in the second the velocity of Ml would reemerge. half of the year, than historical evi- Continued uncertainty about the bedence on its relationship to income havior of the aggregate, however, and interest rates would have sugwas signaled in widening the Ml gested.1 The behavior of this aggrerange 2 percentage points. The unusual pattern of Ml behavior in fact persisted over the second 1. Appendix A reviews the behavior of vehalf of the year; growth in the locity in recent years. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 45 gate may have become more sensi- likely reflecting the cumulative effect tive to changes in market rates in of lower interest rates on incentives recent years owing to the deregula- to economize on demand deposits tion of certain transaction accounts. and on compensating balance re- By reducing the opportunity cost of quirements, as well as generally more holding transaction balances, the cre- cautious cash management practices, ation of NOW and Super NOW possibly in part because banks and accounts has made Ml a much more corporations sought to reduce risk in attractive savings vehicle for house- response to financial problems that holds. Moreover, with the rates on had developed in certain areas of the NOW accounts fixed and those on market. Super NOWs being adjusted slug- M2 recorded growth of 8.6 percent gishly to changing conditions, falling in 1985, in the upper part of its interest rates have led to relatively range, as its nontransaction composubstantial reductions in incentives nent increased 7.6 percent. The shift to economize on Ml balances, with toward more liquid assets evident in accompanying declines in velocity. the rapid rise of Ml also affected the However, considerable uncertainty distribution of deposits within the about the response of Ml to varia- nontransaction portion of M2. Small tions in interest rates or income time deposits declined last year, while unavoidably persists, as both money some very liquid components, such holders and depository institutions as money market deposit accounts, adapt to the elimination of important posted very large increases, and even regulatory constraints.2 In 1985, the interaction of lower market interest rates with deregu- Growth of Money and Credit1 lated transaction deposit rates seemed to induce especially heavy inflows to Percentage change interest-bearing checkable accounts. Domestic non- Spreads between offering rates on Period Ml M2 M3 financial these deposits and interest rates on sector debt time deposits and market instruments, low by the standards of recent Fourth quarter to fourth quarter decades, apparently diminished the 1979 7.5 8.1 10.3 12.4 incentives to keep savings in longer- 1980 7.3 9.0 9.6 9.6 1981 5.2 9.3 12.3 9.8 term instruments, as well as to sepa- (2-5)2 rate savings from transaction balances. 1982 8.7 9.1 10.0 9.1 1983 10.4 12.2 9.9 11.2 Demand deposits also contributed to 1984 5.4 8.0 10.5 14.1 1985 11.9 8.6 7.4 13.5 the increase in Ml last year, register- (12.7)3 ing unusually rapid growth, espe- Quarterly growth cially in the second half. Business rates demand balances paced the rise, 1985 1 10.1 11.7 10.1 13.5 2 10.5 6.3 5.6 11.9 3 14.5 9.5 7.6 12.2 4 10.6 5.9 5.7 13.7 2. Experimental alternative measures of 1. Ml, M2, and M3 incorporate eftects of benchmoney, which attempt to allow for the varying mark and seasonal adjustments made in February 1986. degree of "moneyness" in components of the 2. Ml figure in parentheses is adjusted for shifts to NOW accounts in 1981. monetary aggregates, are discussed in appen- 3. Ml figure in parentheses is the annualized growth dix B. rate from the second to the fourth quarter of 1985. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 Monetary Policy Reports savings deposits rose 4 percent after these two factors, which together several years of declines. However, may have accounted for roughly 2 growth of M2 appears to have been percentage points of debt growth in restrained to an extent by some 1985, the expansion of the debt of redirection of household portfolios domestic nonfinancial sectors retoward such non-M2 instruments as mained very strong. An important shares in stock and bond mutual element in the continued rapid growth funds. of debt and the rise in its ratio to M3 growth slowed to 7.4 percent GNP has been the huge size of last year—close to the midpoint of federal deficits. Although federal debt its range—reflecting in part a slower growth has slowed since 1982, it pace of credit expansion at deposi- continued to run at more than 15 tory institutions and consequently a percent last year. • reduced need to raise funds through In implementing policy during 1985, managed liability issuance. Thrift in- the Federal Reserve basically accomstitutions, in particular, greatly re- modated the strong demands for duced their net acquisition of assets, reserves by depository institutions. partly in response to new Federal In the early part of the year—when Home Loan Bank Board regulations Ml expansion was very rapid, and that raised capital requirements for M2 and M3 growth was also strong— rapidly growing thrifts. The growth interest rates backed up somewhat. of large time deposits issued by thrift However, these increases were more institutions slowed to less than 7 than reversed later in the first half, percent in 1985, down sharply from influenced in part by a cut of xh the pace of nearly 50 percent re- percentage point in the discount rate corded in the preceding year. from 8 to IV2 percent in May, as Expansion in debt of domestic economic activity appeared more nonfinancial sectors moderated only sluggish, partly reflecting the drag a little from its elevated 1984 pace from the relatively high value of the and, at 13.5 percent, exceeded its dollar on exchange markets. Growth monitoring range of 9 to 12 percent. of the broader aggregates had slowed Last year was the fourth consecutive appreciably after the early part of year in which debt expanded more the year, though Ml remained well rapidly than GNP, after more than above its range. On balance over the 20 years in which the ratio of debt first six months of the year, most to GNP had been generally stable. market interest rates fell about 1 One factor boosting debt growth percentage point, leaving them about relative to spending has been the 3 to 4 percentage points below their extraordinary pace of corporate bor- mid-1984 levels. On exchange marrowing to retire equity in mergers, kets, the dollar, which had risen buyouts, and stock repurchases. The sharply through February, declined volume of such borrowing appears thereafter and by midyear was 9 to have been as large in 1985 as in percent below its February peak on 1984. In addition, borrowing surged a trade-weighted basis, leaving it just late last year in the tax-exempt mar- under its level at the end of 1984. ket, when issuance was accelerated When, at its July meeting, the in anticipation of possible tax law FOMC reaffirmed its ranges for M2, changes. Even after allowance for M3, and debt, and widened and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 47 rebased the Ml range, the members by the ensuing coordinated intervenanticipated that these ranges would tion by the United States and other be consistent with continued subdued key industrial countries. inflation and some pickup in eco- In long-term debt markets, interest nomic growth from the sluggish first- rates generally fell a percentage point half pace. As the summer pro- or more on balance over the second gressed, however, it became clear half, with most of the decline occurthat the demand for Ml remained ring during a fourth-quarter rally that strong. After slowing somewhat in accelerated as the year drew to a July, Ml spurted again in August close. The downward movement in and continued to rise at a double- long-term rates and simultaneous digit annual rate in September. M2 surge in stock market prices were growth also picked up during the fueled in part by legislative initiatives summer, climbing above its range in to mandate reductions in the federal this period. deficit and to pare the government's In the summer, market interest demands on credit markets. Declinrates reversed a portion of their ing world oil prices and the continued earlier declines. With both Ml and softness in markets for other com- M2 growing relatively rapidly, eco- modities promoted expectations of nomic activity apparently picking up, lower inflation among market particand the dollar having declined fur- ipants, also contributing to the rally. ther, the Federal Reserve provided reserves a bit more cautiously for a Other Developments time. But beginning around mid- in Financial Markets autumn, the Federal Reserve was Corporations were able to reduce seeking a slight easing in bank re- their demands on credit markets in serve conditions, as incoming data 1985 as strengthening profits and suggested that relatively moderate weaker capital expenditures narincreases in economic activity contin- rowed the sector's financing gap. ued to be in prospect and upward Nevertheless, business borrowing to price pressures remained subdued. finance stock retirements remained Meanwhile, Ml growth was contin- high—perhaps $70 billion in each of uing strong on balance, but growth the past two years. Spurred by the in the broader aggregates was slow- drop in long-term rates, to six-year ing. lows, corporate credit demands fo- On balance over the second half cused on the bond markets. Record of the year, most short-term rates amounts of securities were offered were little changed, ending the year publicly by nonfinancial firms in both just slightly above their midyear lows the domestic and the Eurobond marand about a percentage point below kets last year. On the other hand, their levels when 1985 began. How- short-term borrowing slowed, with ever, on exchange markets, the dol- bank lending to businesses relatively lar declined more than 15 percent weak. over the second half, impelled in Tax-exempt borrowing was exlarge part by the G-5 announcement traordinarily strong last year; a surge in September indicating the desira- in bond offerings late in the year bility of some appreciation of other lifted 1985 volume to a record high. currencies relative to the dollar and While more favorable interest rates Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 Monetary Policy Reports stimulated borrowing generally, ef- at one large thrift institution. Probforts to finance in advance of possible lems developed in Maryland when restrictions under a proposed tax law heightened depositor anxiety in the scheduled to take effect after year- aftermath of the Ohio crisis comend boosted advance refunding and bined with news of difficulties at a private purpose issues in particular. savings and loan in Maryland. As Households continued to borrow the difficulties emerged, the Federal heavily in 1985. Their debt-servicing Reserve advanced funds at the disburden rose sharply as they contin- count window to the affected instiued to add to debt at a double-digit tutions to bolster their liquidity. Such rate at the same time that growth of lending—whose expansive reserve disposable income slowed. Signs of effect was offset through open marpotential strain appeared, as the ket operations—has been repaid in delinquency rate for consumer in- Ohio, where the troubled institutions stallment loans rose, although most have been restructured and remeasures of debt quality remained opened, but remains outstanding at well within past experience. Con- a number of Maryland thrift institusumer credit remained especially tions. strong, growing at nearly the 20 The thrift industry as a whole percent rate recorded in 1984. But showed some improvement in earnthe growth of home mortgage bor- ings and capital positions last year, rowing, while near its 1983-84 av- although many institutions remained erage, was probably restrained some- heavily burdened with low-quality or what by the tightening of lending low-yielding assets. Lower interest standards that accompanied the rise rates lifted profits from their deof mortgage loan delinquency rates pressed 1984 levels by reducing the to record levels. cost of funds and generating capital Strains were evident in financial gains on asset sales. The profitability markets at times in 1985 but did not of commercial banks also appears to cause major disruptions in overall have increased in 1985, breaking the market conditions. Financial market downtrend of recent years. Asset concern over credit-quality issues was quality remained a concern for some not severe enough to be reflected in institutions, however, and was a a broad-based widening of yield major factor in the sharp increase in spreads between corporate and the number of bank failures. Banks Treasury debt or between private- apparently again increased the rates sector securities of different risk at which they charged off bad loans classes. Nevertheless, the agricul- and added to loan-loss reserves, retural sector of the economy contin- flecting continued financial strains in ued to experience serious financial such industries as agriculture, endistress and there were pressures on ergy, and real estate. Higher profits some segments of the financial com- along with the rallies in stock and munity at times last year. bond markets helped many banks Early in the year, privately insured improve their capital positions in savings and loans in Ohio and, then, 1985, facilitating efforts to comply in Maryland were closed or limited with more stringent capital adequacy to small withdrawals after depositor guidelines. As part of its efforts to runs in both states. The problem in ensure the continued safety and Ohio was triggered by news of losses soundness of the financial system, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 49 the Federal Reserve also initiated a what would otherwise have been program to strengthen supervision of expected, given money market concommercial banking operations. ditions and overall slack loan de- Agricultural finances drew special mand by farmers. In early 1986, the attention last year. Farm income Federal Reserve renewed the temremained depressed, and falling prices porary seasonal program to assure for agricultural products left many that agricultural banks would not farmers unable to meet their debt- face liquidity constraints in accomservicing requirements. Moreover, modating the needs of their farm declining land prices eroded the value borrowers this year. of collateral behind many agricultural loans. Consequently, failures of Appendix A: Velocities banks with relatively high proporof the Monetary Aggregates tions of agricultural loans in their in the 1980s portfolios rose to 68 in 1985, from 32 in 1984 and an average of just 6 In 1985, the relationship between Ml in each of the preceding three years. and nominal GNP diverged substan- The Farm Credit System, which holds tially from historical patterns as Ml about one-third of U.S. agriculture's velocity registered a sharp drop of debt, experienced mounting losses 5V2 percent. In contrast to the inand requested federal aid. Farm creases that had doubled velocity Credit securities, which had been over the course of the 1960s and priced very close to Treasury issues 1970s, last year's decrease left Ml of comparable maturity, yielded as velocity about 8 percent below its much as 100 basic points more than 1981 peak level. Velocities of the Treasury debt at one point in the broader monetary aggregates also fall. Rate spreads narrowed in De- declined in 1985, but these declines cember, after passage of legislation were not so far off their historical enabling the Farm Credit System to norms. mobilize its resources more readily The downward trend of Ml velocand providing for the possibility of a ity so far in the 1980s differs markbackup source of assistance once edly from the annual rate of increase internal sources of funds are ex- of 3V4 percent averaged during the hausted. preceding two decades. Two devel- To ease possible constraints on the opments in recent years appear esavailability of credit at agricultural pecially pertinent to explaining the banks over the 1985 growing season, changed relationship between Ml the Federal Reserve in March liber- and income. First, interest rates at alized its regular seasonal borrowing the end of last year were substantially program and initiated a temporary below their peak levels in 1981. With special seasonal program aimed at such a decline, the earnings forgone making liquidity available to agricul- in holding money, with its liquidity tural banks that might experience advantage, were considerably restrong loan demand. Although total duced, and preferences for money seasonal borrowing fell short of the relative to other financial assets would unusually high level in 1984, evi- be expected to increase in response. dence suggests that these actions As this occurred, the velocity of Ml increased access to seasonal credit, would be expected to decline. Digitized fo b r o FR os A t S in E g R borrowing somewhat above Second, deposit rate deregulation http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 Monetary Policy Reports has changed the pricing behavior and The resulting higher interest rate yield comparisons between some Ml sensitivity of the public's demand for deposits and other deposits and fi- Ml relates to the fact that when nancial instruments. Whereas earlier market rates decline, the opportunity only non-interest-bearing assets— cost—the gap between those rates demand deposits and currency—di- and the fixed ceiling on NOWs— rectly served transaction needs, in declines in percentage terms much the 1980s individuals have had avail- more than do market rates themable for transaction purposes first selves. And the tendency of offering NOW accounts with a 5V4 percent rates on Super NOWs to lag changes ceiling and subsequently Super NOW in market rates has made their opaccounts with higher, competitively portunity costs also move like those set rates. on fixed-rate accounts in the short These institutional changes have run. Recent trends at depository reduced pressures for innovations institutions toward applying higher that would enable depositors to con- interest rates or lower fees to transserve on Ml holdings or use them action accounts with higher balances more intensively to support spend- have probably further changed oping. Such innovations had contrib- portunity cost calculations. This uted to the previous uptrend in Ml "tiering" can have the effect of velocity. But also, the proliferation providing a very high rate of reof interest-bearing checkable depos- turn—and thus a low opportunity its for individuals, nonprofit organi- cost—on funds added to an account zations, and governmental units has because, for example, per-check altered the balance of motives for charges or other fees may cease to holding Ml deposits, making them apply at the new larger balance. more attractive repositories for sav- Not only does the responsiveness ings as well as transaction funds and of Ml to interest rates and income probably increasing the sensitivity of seem to have changed in the 1980s, Ml demand to changes in market but the behavior of Ml also appears interest rates. This effect has grown to have become less predictable on in importance as interest-bearing other grounds. In part, the increased checkable deposits have grown. Such unpredictability of Ml demand is accounts have proven enormously due to the larger share of savings popular; at the end of last year, balances in Ml, which has made almost $180 billion in interest-bear- general portfolio-balance consideraing checkable accounts was outstand- tions a more important influence. ing, including more than $60 billion Over the past several years, deposit in Super NOWs, which have been rate deregulation has given instituavailable for only three years. The tions vastly increased freedom to set total figure compares with outstand- deposit rates and has provided their ing balances of less than $30 billion customers with a larger menu of when NOW accounts were first au- assets paying market-related rates. thorized on a nationwide basis at the With regulations progressively end of 1980. By the end of 1985 changing and depositors and deposiinterest-bearing checkable deposits tory institutions continually adapting had grown to about 30 percent of to the changes, uncertainty has in- Ml and 40 percent of the deposit creased concerning the impact on component of that aggregate. money demand of variations in eco- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 51 nomic and financial conditions, in- to foreshadow movements in GNP cluding changes in wealth of money has intensified. The narrow aggreholders. Moreover, since the process gate Ml has been affected most of deposit rate deregulation has oc- noticeably. This aggregate consists curred alongside a general decline in of currency, demand deposits, and inflation and market interest rates, checkable deposits paying interest, the reasons for permanence of ap- mainly NOW accounts. The share of parent shifts in Ml behavior often Ml balances paying interest has grown have been obscured. substantially and is held partly for The declines in the velocities of savings purposes. In 1982-83 and M2 and M3 last year were neither as again in 1985, growth of Ml was large as in that of Ml, nor as far unusually strong relative to GNP. from their longer-term trends. The Old Ml-A, which includes only curvelocity of M2 has declined in recent rency and demand deposits, was less years, but on balance has shown little affected in those years, but because change over recent decades. While it excludes NOWs, it understates last year's drop in the velocity of M2 transaction money. In 1981, Ml-A was about twice the average of the was considerably distorted as depast several years, its size was within mand deposits were shifted into historical experience. The decline of NOWs, which had been newly au- M3 velocity was somewhat smaller thorized nationwide. than in recent years and continued a In light of these developments, the long-term downtrend in that mea- Board's staff has investigated several sure. Nevertheless, the behavior of alternative measures of money. This the broader aggregates probably has appendix focuses mainly on the been altered by developments in the transaction money stock measure, 1980s. For example, the interest rate MQ. Its components encompass curresponsiveness of M2 probably has rency and all checkable instruments declined with deregulation, which that serve as means of payment, has permitted the yields on many of including money market deposit acits components to vary with market counts (MMDAs) and certain money rates. While this aggregate continues market funds, both of which have to show strong responses to rates limited check-writing features. In over short periods, over intervals of contrast to the conventional aggrea half year or more it has been far gates, though, MQ is an index numless affected than Ml. ber. In general, index numbers are used to combine items that have dissimilar characteristics; an example Appendix B: Experimental would be the differing economic Money Stock Indexes values of the various items in the Financial deregulation and innova- industrial production index. In MQ, tion since the mid-1970s have blurred components are treated conceptually distinctions between transaction and as differing in the volume of "GNP nontransaction balances. As busi- transactions" each finances per dolnesses and consumers have changed lar, notwithstanding their common their payment practices and portfo- unit of account of one dollar. lios of financial assets, uncertainty MQ and conventional narrow about the behavior of conventional monetary aggregates are alike in that Digitized fo m r F o R n A e S t E ar R y aggregates and their ability the growth rate of either can be http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 Monetary Policy Reports thought of as a weighted average of growth of Ml-A and Ml. Although, the growth rates of its components. in principle, MQ tends to adjust But the weights applied to the growth automatically for changes in payrates of components are not equal ments practices, the experience in for these different monetary aggre- 1981 with major shifts from demand gates. In conventional Ml and deposits to nationwide NOWs ex- Ml-A, the implied weights are sim- emplifies the practical difficulties in ply dollar shares of each component developing appropriate weighting in the total. In MQ, the weights on procedures. Still, Ml-A was even the growth rates of components re- more distorted than MQ in 1981. flect not only differences in dollar Over 1985, MQ growth was about amounts among components but also l3/4 percentage points slower than differences in the estimated intensity conventional Ml growth but around 2 with which the various components percentage points faster than Ml-A are used in carrying out GNP trans- growth. actions. Thus, instead of dollar quan- In 1983, M2 growth was distorted tity shares, MQ uses as weights the upward by the introduction of estimated share of GNP spending MMDAs, but otherwise it has been financed by each component. rather steady since the late 1970s. The implied quantity-share weight Annual velocity growth for MQ, on the growth rate of other checkable has been between the growth rates deposits in Ml growth was about 26 of VI and Vl-A since the late 1970s. percent in 1985, meaning that the 22 Over 1985, as over 1982, all three percent growth in this component velocities fell, with VI registering the last year contributed about 53A per- steepest declines in both years. Vecentage points (26 percent x 22 locities of the broader conventional percent = 53A percent) to the growth aggregates declined at about the rate of Ml. Because they are ex- same rate as VI in 1982 but by less cluded from Ml-A, these deposits than VI in 1985. receive a zero weight in Ml-A growth. The predictability of MQ's de- The weight on the growth of other mand, given interest rate spreads checkable deposits in MQ growth and GNP, has been roughly compawas about I2V2 percent in 1985, so rable with that of Ml and Ml-A the rapid growth in this component demand on average over the 1980s, contributed only about 2% percent- with all three narrow aggregates age points to MQ's growth rate over exhibiting unexpectedly large inlast year. creases in 1985 relative to economet- When applied to the component ric predictions. In 1982-83, howgrowth rates, these weights produce ever, MQ's demand was more the growth rates for MQ and the predictable than either Ml or Ml-A. conventional narrow aggregates. MQ None of the three has been apprecigrew somewhat faster in the mid- ably superior in its ability to presage 1970s than Ml. Over that period, movements in nominal GNP so far demand deposit growth, which was in the 1980s, on the basis of statistical relatively weak, received a lower relations that held on average over weight in MQ, and currency growth the 1970s; each signaled considerably a higher weight, than in Ml. Since more nominal GNP growth than then, MQ growth has been between actually occurred in 1982-83 and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 53 again in 1985. The broader conven- main to be solved for these other tional measures performed better experimental indexes, which thus far than MQ, as well as conventional do not appear to perform as well as narrow measures, in these relatively conventional aggregates. simple tests of their demand and indicator properties for the 1980s, Report on July 18, 1986 but they were less reliable indicators of GNP in the previous decade. Monetary Policy and Research is continuing on the dethe Economic Outlook for velopment of MQ and the assessment 1986 and 1987 of its demand and indicator properties. Efforts are under way to refine Sharp contrasts among sectors and the procedures used to estimate MQ's regions of the economy characterized weights, as well as to improve the economic developments during the basic method of weighting major first half of 1986. Reflecting in suboutflows from particular accounts, stantial part continuing strong comsuch as those distorting MQ in 1981. petitive pressures from abroad and At this time, however, understanding large spending cutbacks in the oil the significance of movements in MQ industry in response to sharply deis hampered not only by limited clining prices, industrial and investexperience with the aggregate but ment activity were restrained. In also by unresolved conceptual and contrast, activity continued to exmeasurement questions. pand rather strongly in housing, the In addition to MQ, several other financial sector, and the broad sermonetary indexes have been con- vice area of the economy. On balstructed experimentally. The trans- ance, real gross national product action money stock index, MT, is remained on a rather sluggish growth similar in concept to MQ but focuses path. on the way money is used for all Although there are substantial untransactions, including payments as- certainties about the degree and sociated with financial trading, inter- timing of a pickup in economic activmediate output, and so forth, instead ity, a number of positive economic of just GNP spending. In a different and financial developments have ocapproach to monetary indexes, these curred that should provide the basis monetary services indexes have been for somewhat faster economic growth constructed to reflect a broader view and some reduction in unemployof money as providing a range of ment over the year ahead. Interest services, such as liquidity, that goes rates have moved lower, and, reflectbeyond the means of payment, and ing the decline of the dollar on these indexes correspondingly en- foreign exchange markets, U.S. incompass broader collections of com- dustry is in a stronger competitive ponent assets; such indexes distin- position internationally. Also, inflaguish components by the estimated tion has remained subdued, reflectopportunity cost of holding each ing not only declines in the prices of monetary asset rather than investing energy and other basic commodities in the highest-yielding alternative but also continued restraint on wages financial asset. As with MQ, concep- in many sectors. Much of the uncertual and measurement problems re- tainty about a pickup in growth turns Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 Monetary Policy Reports on the strength of economic perfor- substantial number of new jobs this mance in other industrialized coun- year, but the labor force also has tries, and there is also some concern grown rapidly and the unemployover the transitional effects of tax ment rate has remained around 7 reform legislation. percent. What monetary policy has been Perhaps the most significant ecoable to do, during a period of greater nomic event in the first half of 1986 overall price stability and adequate was the plunge in world crude oil capacity relative to the demands prices. Despite the potential longeractually placed upon it, is to accom- term benefits from this development, modate demands for money and the initial impact on the U.S. econcredit, helping to facilitate further omy was negative as, with less of an declines in interest rates. Monetary incentive to search for new sources policy by itself cannot eliminate or of supply, oil exploration activity was deal with the sectoral imbalances cut back sharply. However, falling that are still troubling the economy. crude oil prices have been translated A reduction of the large deficit in quickly into lower rates of inflation the nation's external accounts is of for a time, and in addition, they critical importance over time, and have damped expectations about futhis reduction will be difficult to ture price increases. Consumer conachieve in an orderly way without fidence has been high, and with faster growth in key foreign econo- purchasing power boosted by the mies. Agreement on tax reform also decline in energy prices, consumer would remove a major source of spending has been strong. By dampuncertainty that probably has inhib- ing inflation expectations, the drop ited growth in the first half of the in world oil prices also spurred a year; over time, substantial progress rally in credit markets, further extoward eliminating federal budget tending the decline in interest rates deficits is essential to achieving bet- that began in mid-1984. ter balance in the U.S. and world Against the background of relaeconomies. Overall, prospects for tively slow economic growth and the economy appear to be favorable, little overall price pressure, monebut much will depend on the evolu- tary policy basically has accommotion of policy, both in this country dated strong demands for reserves to and abroad. back deposits thus far in 1986, while responding to and facilitating the Economic and Financial drop in market interest rates with Background three half-point cuts in the discount The first half of this year saw a rate. At the same time, with the continuation of the reduced pace of dollar under downward pressure in economic growth that has prevailed foreign exchange markets during most since the middle of 1984. Although of the period and the economies of the service industries have been other key industrial countries somestrong, manufacturing activity has what weak early in the year, interbeen relatively sluggish in the face national economic and financial deof strong foreign competition, and velopments remained an important some sectors, such as energy and consideration in the conduct of monagriculture, are under strong pres- etary policy. Similar official changes sure. The economy has generated a in interest rates in several major Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 55 foreign countries, where growth also lower interest rates on the balances has been slower than expected, took that businesses must hold to compenplace around the time of the first sate for banking services, as well as two discount rate reductions by the to a surge in financial market activ- Federal Reserve this spring. The ity. Even after taking account of coordinated cuts helped avoid the these factors, however, the strength potential for disturbing exchange of Ml appeared extraordinary in the market conditions. first half. Reductions in other short-term rates The broader aggregates grew more were generally in line with the total moderately, ending the first half near decline of IV2 percentage points in the middle of their respective target the discount rate since the end of growth ranges of 6 to 9 percent. last year. Yields on long-term credit Nevertheless, the strong demand for market instruments fell as much as liquid assets, generated by the rela- 2Vi percentage points, encouraged tively large declines in long-term not only by the revision of inflation rates, was evident not only in soaring expectations that seemed to be keyed Ml balances but also in the compoto falling energy prices but also by sition of the broader aggregates. For the sluggish performance of the econ- example, the more liquid compoomy and, early in the year, by the nents of M2 grew rapidly, while its restraining effect of the Gramm- time-deposit component increased Rudman-Hollings legislation on ex- only marginally. Over the same pepected federal budget deficits. riod, the debt of domestic nonfinan- These and earlier declines in mar- cial sectors is estimated to have ket rates had a particularly strong remained somewhat above its monieffect on the narrow monetary aggre- toring range, growing well in excess gate. By June, Ml had grown at an of GNP. annual rate of 12% percent from its The substantial decline in longfourth-quarter 1985 level, well in term interest rates since the middle excess both of its target range of 3 of last year has helped buoy interestto 8 percent and of the growth in the sensitive sectors of the economy. economy. Over the first half of the Activity in the housing market was year, the velocity of the aggregate quite strong in the first half of 1986, appears to have declined at a faster supported by the lowest level of rate than the postwar record decline mortgage rates in more than seven in 1985. The interaction of lower years. The reduction in interest rates interst rates with the changed com- also was a factor in the strength of position of Ml since deposit deregu- consumer spending, both by reducing lation explains a good portion of this the overall cost of credit and by rapid decline of velocity. The public raising the value of the household apparently has been shifting a consid- sector's security holdings. erable amount of its savings into the Although the foreign exchange negotiable order of withdrawal value of the dollar has fallen a third (NOW) account component of the from its 1985 peak, the depreciation aggregate in response to relatively apparently has not yet produced a large declines in rates on competitive substantial increase in the volume of outlets for liquid funds. Growth in exports or a reduction in the volume demand deposits also has been quite of imports. Adjustments of trading strong, likely related to the effect of patterns to exchange rate movements Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 Monetary Policy Reports take place over a number of years, quarter of 1987. Those ranges were and it is not surprising that a dra- felt to be consistent with a pickup in matic improvement in our large mer- economic growth. chandise trade deficit has yet to The rapid rise in Ml over the first occur. However, progress has been half of the year underscored the somewhat slower than might have degree of uncertainty surrounding been expected, partly because of the the behavior of the aggregate and, slow growth in other major indus- in particular, about its behavior reltrialized countries. The continuing ative to GNP. The nature of the appreciation of the dollar against the relationship among Ml, income, and currencies of many developing na- interest rates appears to have been tions also has been a factor. significantly altered by the changed The influence of strong foreign composition of the aggregate in recompetition remains pervasive. Ag- cent years, as well as by the prospects ricultural products are in ample sup- for greater price stability. The preply worldwide, reducing the export cise implications of these developopportunities of our producers. In ments for the future are not yet manufacturing, many industries con- clear, given the limited experience tinue to face weak foreign orders, to date. In these circumstances, the while an increasing portion of do- Committee decided that growth of mestic demand has been met from Ml in excess of the previously estababroad in spite of price increases on lished range of 3 to 8 percent for some competing foreign products. 1986 would be acceptable and growth With little observed pickup in de- in that aggregate over the balance of mand, many firms have scaled back the year would continue to be evaltheir expenditure plans, and capital uated in light of the behavior of the spending remains weak as a result. other monetary aggregates. Developments in all the aggregates will be judged against the background of Ranges for Money and Debt Growth developments in the economy and in 1986 and 1987 financial markets and potential price The FOMC reaffirmed the 1986 pressures. ranges of 6 to 9 percent that had With respect to 1987, the Commitbeen established in February for M2 tee expressed the preliminary view and M3; as noted above, the broader that the current range for Ml—3 to monetary aggregates ended the first 8 percent—should provide for adehalf of the year near the middle of quate money growth to support conthose target ranges. For 1987, the tinued economic expansion, assum- Committee tentatively decided that, ing that a greater stability reemerges consistent with its intention to achieve in the link between Ml and income money growth at a rate consistent in a more stable economic, price, with maintaining reasonable price and interest rate environment than stability and sustainable economic has existed in recent years. However, expansion, the target growth ranges in the context of the experience of for both M2 and M3 would be the past several years and keeping in lowered Vi percentage point, to 5V2 mind the exceptiona uncertainties in to 8V2 percent, measured from the predicting the behavior of Ml, the fourth quarter of 1986 to the fourth Committee at the end of this year Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 57 Ranges of Growth for Monetary dents is for growth of 2l/i to 3 percent and Debt Aggregates in real GNP this year. Such an Percent change, fourth quarter to fourth quarter increase in output would be expected to generate appreciable further gains Tentative Aggregate 1986 for 1987 in employment, but the unemployment rate might not drop below 7 Ml [3 to 8]1 [3 to 8]2 percent before year-end. With the M2 6 to 9 5Vi to 8V2 M3 6 to 9 5Vi to 8!/2 decline in energy prices more than Debt 8 to 11 8 to 11 offsetting effects from the deprecia- 1. While no new range was specified for 1986, growth tion of the dollar and with pressure in excess of the established range would be acceptable. from domestic labor and product 2. Indicative of likely range if more stable velocity markets restrained, the inflation rate behavior shows signs of reemerging. for the year is generally projected at between 2lA and 23A percent, as will review with particular care the measured by the implicit deflator for appropriate range and weight to be GNP. placed on Ml in 1987. In 1987, which would be the fifth As shown in the accompanying year of the current expansion, real table, the FOMC did not change the 1986 "monitoring" range for the Economic Projections credit market debt of domestic non- for 1986 and 19871 financial sectors and tentatively re- Percent tained the same range for next year. It was anticipated that the debt FOMC Members and other FRB Presidents aggregate might exceed the monitoring range of 8 to 11 percent for 1986 Range Central tendency as a whole, given its rapid growth around the beginning of the year, 1986 but as in the past, the Committee Change, fourth quarter to felt that raising the target would fourth quarter Nominal GNP 33/4 tO 6V2 43/4 tO 53/4 create an inappropriate benchmark Real GNP 2]/4 tO 3!/2 2Vi to 3 for evaluating longer-term trends in GNP implicit deflator ... V/i to 32/4 2VA to 23/4 debt growth. Average level in the fourth quarter Civilian unemployment 6.9 to 7.2 7 Economic Projections rate The Committee believes that the 1987 monetary objectives it has set are supportive of a strengthening of eco- Change, fourth quarter to nomic activity in the second half of fourth quarter the year. However, the uncertainties Nominal GNP 5 to SVA 6 to IVi Real GNP 2 to 4V4 3 to 31/2 associated with the economic outlook GNP implicit deflator ... IV2 to 4V4 3 to 4 appear to be quite large, and contin- Average level in the fourth quarter ued vigilance and flexibility in the Civilian unemployment 6V1 to 7 Around 63/4 conduct of policy clearly are needed. rate As summarized in the table on eco- 1. The administration has yet to publish its midnomic projections, the central-tend- session budget review document, but spokesmen have indicated that there will be revisions to earlier foreency forecast of Committee members casts. As a consequence, the customary comparison of FOMC forecasts and administration economic goals and nonvoting Reserve Bank Presihas not been included in this report. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 Monetary Policy Reports GNP is projected by most partici- prices rising as a result of the deprepants to increase 3 to 3V2 percent, ciation of the dollar, the growth in and unemployment is expected to imports is expected to slow, and the decline moderately. A significant increased price competitiveness of portion of the increase in production U.S. goods should bolster export next year is expected to come from growth. However, a substantial imthe external sector, with the lower provement in our trade performance value of the dollar expected to re- will require satisfactory growth of strain the growth of imports and to demand in other countries. Morestimulate exports. However, with over, such an improvement will reenergy prices leveling off, exchange- quire open access to foreign markets, rate-related increases in import prices which underscores the critical imporare expected to cause an acceleration tance of avoiding protectionist measin inflation to a range of 3 to 4 ures here and abroad. percent next year. The forecasts of the Committee The Performance members and nonvoting Reserve of the Economy Bank Presidents assume that the During the First Half of 1986 Congress will seek to achieve the Gr amm - Rudman - Hollings deficit The economy continued to expand reduction targets. Progress in reduc- in the first half of 1986, but apparing the federal deficit is seen as ently no more rapidly than in 1985. crucial in maintaining financial con- The overall increase in output during ditions conducive to balanced growth the first six months of the year and to an improved pattern of inter- generated slightly more than 1 milnational transactions. lion new jobs, and the civilian un- A number of factors point toward employment rate held near 7 pera reacceleration in growth, although cent. At the same time, the dramatic the exact degree and timing remain decline in world crude oil prices uncertain. Despite their initial effects caused a substantial slowing in inflaon investment, lower energy prices tion. should help support economic activ- The combination of the lingering ity, primarily by bolstering real con- effects of the high foreign exchange sumer income. The lower level of value of the dollar during 1984 and interest rates also is expected to give 1985, the slow growth abroad, and some impetus to consumption while, the initial impact of lower crude oil at the same time, maintaining the prices played a key role in inhibiting strength in the housing market. Busi- any acceleration in overall economic ness spending on new plant and activity. Industrial output declined equipment is projected to pick up noticeably over the first half, with somewhat over time, but the degree activity reflecting the continuing inof improvement will depend in part tense competition from foreign proon the character of tax reform legis- ducers in the manufacturing sector lation. and also the sharp cutbacks in en- A critical element in the expected ergy-related investment. U.S. agriimprovement in economic perform- culture confronts growing world supance is progress toward reducing the plies of many farm products, and size of the merchandise trade deficit. many farmers continue to be squeezed As previously noted, with import by a heavy debt-servicing burden and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 59 falling land values. The drop in oil Another factor affecting the econprices has caused substantial adjust- omy this year has been the changing ment problems in the short run. Oil fiscal-policy environment. It now apdrilling has been reduced drastically, pears that the deficit in the current and a number of high-cost wells have fiscal year may exceed earlier plans, been capped. More than 100,000 jobs but the Congress has moved to imhave been lost in the oil industry plement the spirit of the deficit since the beginning of the year. targets contained in the Gramm- At the same time, however, some Rudman-Hollings legislation in actof the benefits from the drop in oil ing on its fiscal 1987 budget. The prices did begin to emerge in the prospect of lower federal budget first half. The lower price of crude deficits in the years ahead, coupled oil was reflected fairly quickly in the with the drop in oil prices, encourprices of finished energy products, aged sizable reductions in long-term which caused consumer prices to interest rates at the beginning of register their largest three-month de- 1986, which have begun to stimulate cline since the beginning of 1949. the interest-sensitive sectors of the This lower price level has given a economy. The most notable result substantial boost to the purchasing has been in the housing sector in power of consumers and has helped which lower mortgage rates have led to support higher levels of spending. to substantial gains in building activ- Although the volume of oil imports ity. Investment in new plant and will rise, the sharper decline in price equipment has not shown a similarly is an aid in reducing the large deficit positive response to lower interest in our trade account. rates, however; apart from the neg- A potentially more significant ative effects of the oil drilling delonger-term influence on our balance cline, business spending has been of trade is the lower value of the damped by the existence of a sizable dollar. The prices of foreign goods overhang of office and factory space are rising in dollar terms and should and by continuing uncertainties about begin to shift expenditures from im- sales trends and tax reform. ports to domestic products. At the With the decline in energy prices, same time, U.S. goods are more further progress has been made in competitive on world markets, al- reducing the inflation rate. Continthough we have yet to experience a ued moderation in wage increases sustained improvement in exports. and abundant supplies of agriculture The rather moderate improvement commodities and industrial raw main export volume to date reflects, in terials also were important factors in part, the effects of the dollar's earlier restraining price increases in the first rise and the slow pace of economic half of 1986. These favorable develactivity abroad. Growth in the major opments worked to offset the inflaindustrialized nations was particu- tionary tendencies associated with larly weak in the first quarter of the depreciation of the dollar and 1986, although there appears to have the continued rapid rise in the prices been some rebound in the second of services. quarter. Meanwhile, the drop in oil revenues reduced import demand in The Household Sector some developing countries, most im- Consumer expenditures were quite Digitized forp FoRrtAaSnEtlRy Mexico. strong in the first half of 1986, http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 Monetary Policy Reports supported in part by rapid income tained in the multifamily sector by growth. Real disposable income in- the large volume of mortgage revecreased at about 5Vi percent at an nue bonds issued by many state and annual rate, boosted by high levels local governments at the end of last of farm subsidy payments and the year. However, as these tax-exempt energy-related slowdown in inflation. funds were depleted, activity in the In addition, survey information in- multifamily market began to taper dicates that consumer confidence re- off in the spring. In addition, conmains high, and many households cerns about the treatment of income consider it to be a good time to properties under tax reform may purchase big-ticket items such as a have begun to restrain the construccar or a new home. Under these tion of multifamily dwellings. circumstances, consumers have been Indicators of the financial position willing to spend the bulk of their of the household sector were mixed income gains, and the personal sav- in the first half of the year. Although ing rate has remained at a historically the growth in consumer credit slowed low level. from its rapid pace in 1985, the ratio The increase in consumer spending of consumer installment debt to diswas widespread. Purchases of non- posable income edged up to a new durable goods, such as apparel, were high. The rallies in the stock and particularly strong in the first quarter, bond markets strengthened the asset while outlays for services also grew side of the household sector balance briskly. The demand for new auto- sheet, and many homeowners took mobiles also remained quite high the opportunity presented by the after the large sales increase in 1985. decline in interest rates to ease their New cars sold at an annual rate of debt-servicing burdens by refinanc- 11 million units in the first six months ing mortgage loans. However, inof this year, with important support creased strains also were evident, as coming from a series of below-mar- personal bankruptcies rose to record ket finance incentive programs for levels and mortgage delinquency rates many domestic models. Foreign au- remained historically high. tomobiles continued to sell at a fast pace even though sticker prices gen- The Business Sector erally have increased more than 10 The financial position of the business percent in response to the exchange sector improved a bit in the aggrerate changes. gate during the early part of 1986, Activity in the housing sector also albeit with considerable diversity has been strong this year. Stimulated across industries. Economic profits by the decline in mortgage rates, in the corporate sector rose at an sales of new single-family homes hit $11 billion annual rate in the first a record high in March and remained quarter, and the share of after-tax generally strong throughout the sec- economic profits in GNP remained ond quarter. Production responded at the highest level since the lateto this increase in demand, and 1960s. Financial conditions in agriduring the first half, single-family culture and manufacturing remained units were begun at a rate of 1% weak, however. Agriculture continmillion units, the highest since 1979. ued to be hurt by excess supply Despite elevated rental vacancy rates, conditions worldwide, and farm loan construction apparently was main- delinquencies rose to a postwar high. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 61 In manufacturing, intense price com- trade. Manufacturers continued to petition from foreign sources squeezed trim their stocks, preferring to keep profit margins, and with little growth inventories lean until there was firm in demand, capacity utilization moved evidence of a resurgence in demand. lower. In contrast, inventory investment Business spending on plant and picked up at trade establishments, equipment was weak in the first half even though merchants continued to of the year. This poor performance hold a historically high level of stocks partly reflected a ''payback" after relative to sales. very strong capital spending in the With the declines in capital spendfourth quarter of 1985. Firms appar- ing and the slow pace of inventory ently accelerated their spending at investment, internal funds in the the end of last year to take advantage aggregate were adequate to meet of investment incentives that were almost all of the basic financing targeted for scaling back or elimina- needs of nonfinancial corporations. tion under proposed tax reform leg- However, the drop in long-term inislation; expenditures then dropped terest rates to the lowest levels since off in the first quarter of 1986. In 1978 prompted businesses to issue addition to these tax-anticipation ef- massive amounts of bonds; the profects, the demand for computers and ceeds were used not only to finance other high-technology equipment re- new investment but also to retire mained subdued, after increasing outstanding bonds and stocks and to rapidly in the first two years of the pay down short-term debt. recovery. Spending on nonresidential structures was down substantially, partly as a result of the cutback in The Government Sector oil and gas well drilling, which was Despite congressional action to slow large enough to reduce real GNP the growth of spending, the size of growth V2 percentage point in the the federal budget deficit in fiscal first quarter and perhaps more in the 1986 may match or exceed the record second quarter. However, a correc- $212 billion of fiscal 1985. Revenue tion also began in the construction growth has slackened in association of office buildings in response to past with the slower pace of nominal overbuilding and high vacancy rates. income growth. Expansion of cor- Much of the change in business porate tax receipts has slowed signifinventories in the first half of this icantly, while excise tax revenues year was associated with fluctuations also are down as lower oil prices in automobile dealers' stocks. Do- virtually have eliminated the receipts mestic car production outpaced sales from the "windfall profits" tax. in the first quarter, and this resulted Federal purchases of goods and in a substantial buildup of auto services fluctuated widely in the first inventories. Assembly schedules were half of 1986. They dropped substanscaled back in the spring, which tially in the first quarter, in part helped dealers reduce their excess reflecting a slowing in the purchases inventories, although stocks re- of farm products by the Commodity mained high. Outside the auto area, Credit Corporation (CCC), after a inventory investment remained mod- record increase in the fourth quarter erate overall, but the pattern differed of 1985. Excluding CCC purchases, markedly between manufacturing and real federal outlays were down Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 Monetary Policy Reports slightly, as a result of lower defense nation's current account deficit was spending. unchanged in the first quarter from Purchases of goods and services by the high rate of $135 billion in the state and local governments in real fourth quarter of 1985. This lack of terms increased at an annual rate of improvement was the result of large 2.8 percent in the first quarter of increases in nonpetroleum imports 1986, about the same pace as in while exports grew more slowly. The 1985. After a large increase in the failure to date of the dollar's decline first quarter, construction spending to slow import growth reflects, in remained strong in the spring, while part, the relatively slow pass-through employment rose further. However, of the depreciation into import prices. a number of states, particularly those Because profit margins of foreign dependent on agriculture and the oil exporters expanded during the peindustry, continued to experience a riod of dollar appreciation, they are substantial deterioration in their fi- able, for a time, to absorb the nancial condition. A significant por- reduced receipts without raising tion of tax revenues in many oil- prices; slack markets at home also producing states are tied directly to have held down price increases. In the value of oil output, and the drop addition, the dollar has continued to in oil prices has induced a concomi- rise against the currencies of many tant decline in receipts. In addition, developing countries, which account the secondary effects on energy- for about one-quarter of U.S. nonrelated businesses are tending to petroleum imports. However, nonreduce revenues further. To restore petroleum import prices now are fiscal balance, many states have an- increasing, led by large increases for nounced expenditure cuts or tax automobiles, other consumer items, increases. and capital equipment. The decline in the dollar also improved the price competitiveness The External Sector of U.S. goods in foreign markets. Continuing the decline that began However, exports have been slow to early last year, the dollar depreciated pick up, in important part because further against the currencies of for- of the sluggish pace of foreign ecoeign industrial countries during the nomic activity. Real gross national first half of 1986. On balance, the product declined in both Japan and trade-weighted value of the dollar West Germany in the first quarter, has fallen more than 30 percent from but economic growth appears to have its February 1985 peak, about one- been somewhat stronger in the spring. third of which has occurred this year. Economic growth also has been Associated with the depreciation was sluggish among many of our major a narrowing in inflation-adjusted in- trading partners in the developing terest rate differentials between the world. Like other oil-producing United States and the other major countries, Mexico is adjusting its industrialized countries, as interest spending to lower oil revenues, and rates declined both here and abroad. this adjustment has reduced the de- Although a substantial correction mand for U.S. products. Falling world has occurred in the dollar's value, at commodity prices also have aggraleast against the currencies of the vated the financial difficulties of major industrialized countries, the other developing nations, including Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 63 members of the Organization of Pe- In view of the continued slack in troleum Exporting Countries. labor markets as well as lower price Reflecting these influences, the inflation, wage growth remained volume of U.S. merchandise imports moderate. The employment cost inrose IV2 percent in the first quarter dex, a broad measure of overall of 1986, as nonpetroleum imports compensation trends, rose 33A percontinued to grow rapidly while oil cent in the 12 months ending in imports declined. The largest in- March, down from 4V2 percent over creases were in machinery, with the year ended in March 1985. Most smaller advances registered for some of the slowing was the result of consumer goods. The volume of smaller increases in the cost of emmerchandise exports was up some- ployee benefit programs, reflecting what in the first quarter, with a in part efforts to contain medical decline of 3V2 percent in exports of insurance expenses, while wages and agricultural products offset by in- salaries rose at about the rate of 4 creased U.S. nonagricultural ex- percent experienced in 1985. Continports. ued moderation in union wage gains also was evident in the collective bargaining agreements reached in the Labor Markets first half of 1986. Nonfarm payroll employment ex- After declining at the end of 1985, panded in the first half at an average labor productivity in the nonfarm pace of roughly 175,000 per month business sector rebounded in the first on a strike-adjusted basis, down from quarter of 1986. However, the gain 230,000 in 1985. Continuing the trend largely reflected erratic movements of the past few years, gains at trade in hours worked by self-employed and service establishments were quite workers, and productivity has been strong and accounted for most of the essentially flat over the past year overall employment increase. Hiring after rising substantially early in the also was brisk at construction sites recovery. Productivity in manufacthrough much of the period, buoyed turing has increased somewhat faster by the strength in homebuilding. during this expansion, as intense However, manufacturing payrolls import competition has forced many contracted somewhat, with weakness producers to modernize their factoin the motor vehicle, metals, and ries and streamline work rules. As a machinery industries. result of the first-quarter bounce The civilian unemployment rate back in productivity, unit labor costs averaged somewhat higher over the in the nonfarm business sector fell first half of the year than at the end during that period, but they were of 1985. The continued expansion of still up about 3 percent from a year job opportunities about matched the earlier. rise in the number of individuals entering or reentering the workforce, and labor force participation reached Price Developments a new high by midyear. However, Falling energy prices were largely the weakness in the industrial sector responsible for a significant slowing was reflected in a rise in the number in measures of aggregate inflation of workers separated from their last during the first half of 1986. A broad job. measure of prices—the fixed-weighted Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 Monetary Policy Reports price index for GNP—increased at a consumer price index (CPI), exclud- 2V2 percent annual rate in the first ing food and energy, to an annual quarter, down from a rise of 3V2 rate of increase of 3V2 percent from percent in 1985. Consumer prices its 4V2 percent rise during 1985. In actually declined over the February- contrast, the prices of nonenergy to-April period, but they still were services continued to increase at an up IV2 percent over the 12-month annual rate of 6 percent, boosted by period ended in May. The drop in rising housing costs and by higher prices was greater at the wholesale premiums for most types of insurlevel, where weakness in the indus- ance. trial sector added to the downward pressure from energy prices. Monetary Policy and Financial The speed and magnitude of the Markets in the First Half of 1986 decline in world crude oil prices this winter were dramatic. Over the Jan- The Federal Open Market Commituary-to-April period, crude oil prices tee at its meeting in February of this fell more than $15 per barrel to their year established target growth ranges, lowest level since 1978. Prices of measured from the fourth quarter of refined petroleum products re- 1985 to the fourth quarter of 1986, sponded quickly to the drop in crude of 3 to 8 percent for Ml and 6 to 9 oil prices, and retail gasoline prices percent for both M2 and M3. The fell 25 percent, or about 28 cents a associated monitoring range for gallon, over the January-to-May pe- growth of the debt of domestic nonriod. Charges for electricity and nat- financial sectors was set at 8 to 11 ural gas, which compete with fuel oil percent. As compared with the ranges as a power source, responded more for 1985, the M2 target was unslowly to the lower crude oil prices changed, the upper limit for M3 was but by the end of May had fallen reduced V2 percentage point, and the about 1 percent. debt range was lowered 1 full per- The prices of industrial raw mate- centage point; the Ml target rerials continued to decline in the first mained the same as that set last July half. Prices were depressed by abun- for the second half of 1985. It was dant world supplies of many primary expected that growth of money and commodities; debt-servicing obliga- credit within these ranges would be tions led many developing countries adequate to encourage sustainable to maintain or expand their output. economic expansion consistent with Sluggish industrial activity in the progress over time toward reasona- United States and other large econo- ble price stability and an improved mies contributed to the softness of pattern of international transactions. commodity markets. In retaining the comparatively wide Outside the energy area, further target range for Ml, the FOMC progress was made in reducing the recognized continuing uncertainties inflation rate during the first half of about the behavior of that aggregate. the year. Retail food prices rose at Moreover, the Committee agreed an annual pace of only 1 percent that, in view of these uncertainties through May, held down by falling and the unexpectedly rapid growth meat prices. A small decline in the of Ml relative to GNP in recent prices of consumer goods was re- years, the behavior of the narrow sponsible for the slowdown in the money stock would be evaluated in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 65 light of growth in the broader mon- of 1985 that above-target Ml growth etary aggregates, developments in would be acceptable. the economy and financial markets, In light of the uncertainties surand the potential for inflationary rounding the behavior of Ml, in pressures. February of this year the FOMC set In the event, rapid Ml growth a 1986 target range for the aggregate reemerged early this spring, and by that, while not providing for a drop June the aggregate was far above its in velocity as large as the 6 percent range. M2 and M3, however, ended decline posted in 1985, was wide the first half near the middle of their enough to allow for appreciable var- 1986 target ranges. This disparate iation in velocity relative to historical pattern of money growth, as well as trends. Nevertheless, the Committee the modest expansion in economic recognized that the relationship of output, ebbing inflation, and contin- Ml to income had become increasuing downward pressure on the dol- ingly difficult to predict, owing imlar in foreign exchange markets, portantly to the changing composiprovided the setting for policy during tion of Ml. An important share of the first six months of this year. In the aggregate now consists of intergeneral, monetary policy was accom- est-bearing deposits, which are pomodative. As an operational matter, tentially an attractive repository for the degree of pressure on reserve savings as well as transaction balpositions of depository institutions ances, introducing an additional remained limited, and the discount source of sensitivity to changes in rate was lowered twice in the first half of the year, V2 percentage point Growth of Money and Credit each time, in the context of sizable declines in market interest rates and Percentage change at annual rate similar actions by some other indus- Domestic trial countries. In early July, the non- Period Ml M2 M3 financial discount rate was cut another V2 sector point, to 6 percent. debt 1985:4 to 1986:2 11.9 7.3 7.9 13.0e 1985:4 Money, Credit, and Monetary Policy to June 1986 12.8 7.8 7.8 12.7e In 1985, Ml grew at a rate substan- Fourth quarter to tially above its target growth range fourth quarter 1979 7.5 8.1 10.3 12.3 in the first half, and it continued to 1980 7.3 9.0 9.6 9.6 do so over the remainder of the year, 1981 5.2 9.3 12.3 9.8 (2.5)1 even after the range had been re- 1982 .. 8.7 9.1 10.0 9.0 based and widened in July. Instead 1983 10.4 12.2 9.9 11.2 1984 5.4 8.0 10.5 14.3 of the return to more normal behav- 1985 11.9 8.6 7.6 14.0 ior that the FOMC had looked for, Quarterly Ml velocity—the ratio of nominal average GNP to Ml balances—fell even 1985.1 10.1 11.7 10.2 13.6 2 10.5 6.3 5.5 12.0 more rapidly in the second half of 3 14.5 9.5 7.6 12.9 4 10.7 6.0 6.5 14.6 the year than it had in the first. 1986:1 7.7 4.3 7.4 16.1 Taking the prevailing economic and 2 15.8 10.3 8.3 9.6e financial conditions into account, the 1. Ml figure in parentheses is adjusted for shifts Committee decided in the latter part to NOW accounts in 1981. Digitized for FRASER e Estimated. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 Monetary Policy Reports interest rates and other economic excessive reaction in the foreign exvariables. In these circumstances, the change markets, when the dollar Committee emphasized that policy remained under downward pressure implementation would involve a con- during much of the period. Ultitinuing appraisal of trends in all of mately, on March 7, the Federal the money and credit measures, as Reserve cut the interest rate charged well as of indicators of economic for discount window borrowings l/i activity and prices, and conditions in percentage point to 7 percent, and credit and foreign exchange markets. the central banks of Japan, Ger- Within this framework for policy and many, and several other industrial against a background of incoming nations took similar actions around data indicating moderation of infla- that time. tionary pressures and a relatively Short-term rates in U.S. markets slow pace of economic expansion— fell throughout March and much of including weakness in some impor- April. Interest rates in long-term tant goods-producing sectors—the markets continued to benefit from Federal Reserve basically accommo- the favorable effect of slumping oil dated the demands for reserves as- prices on inflation expectations, as sociated with strong Ml growth over well as improvements in the federal the first half of 1986. budget outlook, with the Gramm- Early in the year, reserves were Rudman-Hollings legislation beginprovided slightly more freely, contin- ning to bite and official projections uing the trend toward easier reserve of the deficit being revised sharply conditions that had developed late downward. To an extent, declining last year. In the initial months of rates also reflected the optimism 1986, growth of Ml dropped off present in the markets that, with sharply from its rapid 1985 pace, and economic growth remaining modergrowth of M2 also slowed substan- ate, there was potential for a further tially, to a rate below its annual easing of monetary policy. Ml acceltarget range. There were signs of erated markedly—moving above its some sluggishness in economic activ- target range in March—apparently ity, and steep declines in oil prices, in response to lower interest rates, which were improving the outlook but M2 and M3 growth were rather for inflation, contributed importantly restrained, with M2 remaining below to a rally in long-term credit markets the lower end of its range throughout that picked up momentum in mid- the first quarter. February. At the same time, short- On April 18, the Federal Reserve term interest rates edged a little announced another reduction in the lower, but the federal funds rate discount rate, to 6V2 percent. This remained significantly above the change served primarily to catch up Federal Reserve's discount rate. with and validate declines that al- In this context, a cut in the dis- ready had taken place in market count rate would complement the rates. Exchange rates and internathrust of open-market operations and tional interest rate considerations would accommodate the market again played a role, and our discount tendency toward lower interest rates. rate cut coincided with a rate cut by However, an important considera- the Bank of Japan. tion in the timing and extent of any By this time, market interest rates rate cut was the risk posed by an in the United States had fallen 1 to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 67 2 percentage points since December, Lower market interest rates have to their lowest levels in eight or nine been an important factor in the rapid years. Both short- and long-term growth of Ml this year. The strong rates then turned higher for a time, response of Ml to the decline in as some indications of stronger eco- rates has reflected in part the cumunomic growth seemed to be devel- lative effect of the deposit deregulaoping and prospects for a further tion of recent years. In the first half easing of monetary policy receded. of 1986, the final two installments of Supporting the market's changed deregulation—the removal of minioutlook were an acceleration in the mum balance requirements on money monetary aggregates, strength in some market deposit accounts and Super incoming economic indicators, and NOWs on January 1 and the lifting the dollar's slide on foreign exchange of the ceiling on passbook savings markets, which continued through rates on April 1—appear to have mid-May. The dollar subsequently had little immediate effect on the recovered a bit, but most of the growth of Ml or the other aggregates increase both in the exchange rate because relatively few institutions and in U.S. market interest rates was actually changed their deposit pricing reversed before the first half ended, practices. But the advent and expanas indications of an expected sion of interest-bearing checking acstrengthening of economic activity counts over the years have attracted failed to materialize. With market more savings-type balances and have interest rates falling, price pressures increased the responsiveness of Ml remaining subdued, and the econo- to interest rate changes. Since rates mies of the United States and other on the interest-bearing Ml accounts industrial countries growing rela- have adjusted sluggishly to changes tively slowly, the Federal Reserve in market rates, relatively wide swings again reduced the discount rate V2 in the incentives to hold these depospercentage point, to 6 percent, effec- its have resulted. tive July 11. Growth in NOW accounts surged On balance since the end of 1985, in the first half of 1986, reaching an the dollar has declined more than 10 annual rate of around 25 percent in percent, and short-term rates, about the second quarter, as it responded IV2 percentage points. Long-term to the lower overall level of market Treasury yields fell as much as 2V4 interest rates and the narrower spread percentage points, but yields on other between long- and short-term rates. long-term securities fell less; corpo- The latter development seemed to rate and tax-exempt bond yields spur shifts of funds from time deposdropped about 1 point, and fixed- its into shorter-term accounts, inrate mortgages fell just V2 percentage cluding NOW accounts. Demand depoint. The smaller declines in these posit growth also strengthened as other markets were due in part to interest rates declined. In part, lower the massive issuance of these obli- rates prompted increases in the comgations (including a large volume of pensating balances that businesses refinancings) elicited by the drop in needed to hold in the form of derates over recent quarters, to inves- mand deposits to pay for bank sertor desires for call protection, and in vices. In addition, deposit levels may the case of tax-exempt securities, to have been boosted to an extent by a concerns about tax reform. sizable increase in financial transac- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 Monetary Policy Reports tions in the first half of the year, posted very attractive returns as a especially soaring mortgage prepay- result of ongoing market rallies. Flows ments and originations, which was into such funds probably depressed stimulated by lower rates. M2 growth somewhat in the first half The velocity of Ml fell only mod- of this year, as they had in 1985. erately in the first quarter, but as Even so, lower market interest rates money growth picked up and nomi- and strong demands for short-term nal GNP apparently failed to accel- assets lifted M2 in excess of income, erate, velocity dropped at an extraor- leading to an appreciable further dinary pace in the second quarter, decline in M2 velocity over the first resulting in a first-half rate of decline two quarters of 1986. While M2 in Ml velocity that probably was showed a fair amount of volatility in somewhat faster than the average the first half, growth of M3 was over 1985. Although the rapid Ml comparatively steady from month to growth and falling velocity stemmed month, as banks varied their issuance in large measure from interest rate of managed liabilities to compensate declines, the size of the Ml increase for fluctuations in core deposit inwas distinctly larger than what would flows. have been expected based on histor- The debt of domestic nonfinancial ical relationships among money, in- sectors is estimated to have expanded come, and interest rates. at a more moderate rate over the In contrast to Ml, which grew at first six months of 1986 than it had an annual rate of 12% percent through in some time, although still well in June and exceeded its target by a excess of the growth in income.1 large margin, both M2 and M3 grew Bond issuance had surged in Decemmoderately in the first half of the ber in advance of the possible effective year and in June were near the date of some provisions of tax-reform middle of their respective ranges. legislation, lifting the first-quarter Some of the more liquid components level of the debt aggregate. Hence, of the broader monetary aggregates, when measured from its fourthhowever, increased very rapidly, as quarter-average base, the growth of part of the larger shift in investor domestic nonfinancial sector debt has portfolios toward short-term assets. remained above its monitoring range, This shift had much less effect on coming in at an annual rate of 123/4 M2 or M3 than on Ml, because the percent through June. Measured from reallocation of funds took place largely its level at the end of December, within these broader aggregates. In however, debt grew at an annual addition to transaction deposits, rate of 10V4 percent through the end money market deposit accounts, of June. money market mutual funds, and To an extent, the lower rate of ordinary savings deposits all ex- debt growth since the end of Decempanded strongly during the first half ber represented a reaction to the of the year, while small time deposits inflated borrowing just before the grew only slightly. end of last year, when special factors Investors looked not only to the applying to particular sectors comshorter-term components of the monetary aggregates, but also to stock and bond mutual funds (not 1. The appendix reviews some aspects of the included in the aggregates), which recent behavior of the debt aggregate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 69 bined to boost debt issuance tremen- those on bank credit cards have dously, far in excess of normal credit surged in the past two years, and needs. For example, the pronounced personal bankruptcy rates have slowdown of federal borrowing in soared. the first quarter reflected the draw- The smallest degree of deceleradown of substantial cash balances tion occurred in the debt of the built up by the government before nonfinancial business sector, which year-end. Indeed, federal borrowing continued to be boosted by the wave picked up again in the second quarter, of corporate mergers, acquisitions, and, for the year as a whole, the and share repurchases. While the huge federal deficit is likely to make stock market rally helped spur a a strong contribution to aggregate substantial rise in gross equity issudebt growth, as it has for the past ance, net stock issuance remained several years. decidedly negative because of the Following the surge in their bor- mergers and restructurings. Most norowing late last year, state and local table so far this year, however, was governments showed a sharp drop in the strength of long-term debt issudebt growth. This earlier borrowing ance by businesses in response to and continued uncertainty about tax steeply falling long-term rates; gross reform restrained tax-exempt debt issuance of corporate bonds, espegrowth in early 1986. Beginning in cially strong in March and April, ran March, however, public-purpose and far in excess of previous records. refunding issues increased again as Nonfinancial firms increased their rates declined further and views short-term debt only slightly, howchanged about the likely form and ever, and this was reflected in a effective date of restrictions pro- decline in their commerical paper posed in tax-reform legislation. outstanding, as well as in slow busi- Borrowing by the household sector ness loan growth at banks. also eased somewhat from the heavy The stresses evident in many parts pace of recent years. After a surpris- of the economy left their mark on ing slowdown early in the year, net the books of banks and other finanresidential mortgage borrowing ap- cial institutions. Asset quality deteparently expanded rapidly in the riorated as a consequence of the second quarter. Over the entire pe- sharp drop in oil prices and associriod, lower mortgage rates spurred a ated dislocations in the energy secsubstantial pickup in total mortgage tor, overbuilding in commercial real originations, but the high volume of estate, and the continuing distress in refinancings reportedly strained the agriculture. Banks with relatively large ability of lenders to process real amounts of farm loans outstanding, estate transactions. Consumer credit as well as other agricultural lenders, growth rates this year have been have been particularly hard hit resubstantially below those of last year, cently; loan losses at these instituthough still outpacing the growth of tions have soared and their profitaincome. An increasing number of bility has continued to slide. While consumers seem to be experiencing banks in regions with economies difficulty in making timely payments heavily dependent on energy producon outstanding credit; delinquencies tion were among the most strongly on consumer loans other than credit capitalized and profitable earlier, their cards have risen moderately, but financial position has eroded under Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 Monetary Policy Reports pressure of surrounding economic by Secretary of the Treasury Baker difficulties. Bank failures in the first in Seoul last fall. half of this year continued to run at about the rapid pace of 1985, with Appendix: Some Aspects agricultural banks again accounting of the Behavior of Domestic for a disproportionate share. Nonfinancial Sector Debt Overall bank earnings began to improve in 1985, and the industry After moving in rather close alignhas added significantly to its capital ment for about a quarter of a cenand loss reserves, although the explo- tury, debt growth in recent years has sion in off-balance-sheet commit- far outpaced expansion of nominal ments and the clouded outlook sur- GNP. The ratio of debt outstanding rounding the repayment of many to GNP began climbing late in 1981 bank loans may have made it more and subsequently soared well above difficult to assess the level of risk in the range that had prevailed since the banking industry. At savings and the early 1950s, a development that loan associations, overall profitabil- extended through the first half of ity appears to be improving as inter- 1986. est rates have declined and mortgage The debt aggregate is derived from origination activity has surged. How- the Federal Reserve's Flow of Funds ever, a substantial number of these accounts. It contains the credit marinstitutions continue to have severe ket debt of domestic nonfinancial problems owing primarily to losses sectors—households, nonfinancial on weak assets, prompting proposals businesses, state and local governto add to the financial resources of ments, and the federal governthe Federal Savings and Loan Insur- ment—whose spending accounts for ance Corporation. the vast bulk of income and produc- Concerns over loans to certain tion. It excludes debt of the financial developing countries came to the sector because funds raised by finanforefront again this year as Mexico cial intermediaries are already counted began to grapple with the additional in the debt aggregate at the point economic and financial problems they are channeled to nonfinancial brought on in large part by dramati- sectors. To include financial sector cally lower oil prices. Banks have debt would lead to double counting. remained cautious lenders in the face Nonfinancial sectors also behave of ongoing concerns about the eco- to a degree as financial intermedinomic and financial prospects of aries, raising funds in credit markets these countries. However, despite and using the proceeds, at least for the weakness of global demand, some a while, to acquire credit market progress has been made in imple- claims on other nonfinancial units. menting appropriate macroeconomic In such cases, "double counting" policies and policies of internal struc- may be said to exist, because the tural reform. Financial support for initial borrowing appears as debt of such policies both from multilateral a domestic nonfinancial unit, and the lending institutions and private cred- financial asset acquired has as its itors has been provided or is being counterpart, either directly or indinegotiated along the lines proposed rectly, debt of another nonfinancial Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 71 unit. For example, a substantial por- sharply relative to GNP in recent tion of the funds raised by state and years to well above the range prelocal governments in 1985 was used vailing since the 1950s. to acquire claims on the federal The adjusted debt measure can be government or mortgage claims on augmented by the accumulated net households. The federal government issuance of equity so that it encomalso issues debt and uses the pro- passes funds raised in all markets. ceeds to extend loans to private Although increasing less rapidly than borrowers—obligations that appear debt or adjusted debt—for example, elsewhere in the debt aggregate. it rose I2V2 percent in 1985 on an While nonfinancial sectors engage end-of-period basis, as compared with to some degree in these intermediary I4V2 percent for adjusted debt and functions on a regular basis, a marked 15 percent for debt—the augmented increase in such activity can act to measure also has risen rapidly in boost measured growth in the debt recent years in relation to GNP, aggregate. This was the case last indicating that borrowing to retire year, when the proceeds of a large equity explains only a small portion volume of debt issued by state and of the increase in the debt-GNP local governments with the intention ratio. From a longer perspective, this of retiring outstanding obligations at measure has remained within its a later time were placed largely in historical range, and its recent rise special nonmarketable securities of returns it, in relation to GNP, to the the federal government. In addition, levels prevailing in the 1950s and debt growth has been lifted in recent early 1960s. years by a wave of corporate merg- The evidence thus suggests that ers, acquisitions, and share repur- unusual behavior of the debt aggrechases that has resulted in a massive gate relative to GNP in recent years retirement of equity, financed with is related more to changes in undercredit. lying behavior than to the special To assess the degree to which this factors just discussed. The unusual double counting and corporate sub- rise in debt relative to GNP in recent stitution of debt for equity have acted years has been in both the federal to boost debt growth, the behavior and nonfederal components of the of an adjusted debt measure and of aggregate. Growth in federal debt an equity-augmented measure was strengthened in the early 1980s and examined. The adjusted debt meas- soared in 1982 with the widening of ure excludes readily identifiable dou- the budget deficit. After 1982, growth ble counting—in particular, that as- of federal debt slowed a bit in sociated with the aforementioned percentage terms while continuing to state and local and federal govern- increase in dollar amounts and relament borrowing as well as with credit tive to GNP. Rising federal budget extended by nonfinancial businesses deficits have been associated with to the household sector. The result- rising current account deficits and a ing measure of adjusted debt is growing gap between domestic purnoticeably smaller in relation to GNP, chases and output as net exports but it has behaved quite similarly to have contracted sharply. From one the regular debt measure, rising perspective, the growing federal def- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 Monetary Policy Reports icit can be viewed as being financed borrowing costs. The corresponding by an inflow of funds from abroad— narrowing of the spread between the counterpart to our current ac- borrowing and deposit rates adds to count deficit—which has enabled the the willingness of households to borfederal government to increase its row rather than draw down liquid borrowing without curbing private assets when spending rises relative spending and credit use to the extent to income. Demographic factors also that would be necessary in the ab- appear to have contributed to housesence of those external funds.2 How- hold debt growth as the baby boom ever, the erosion of our international generation has moved further into competitive position, which is re- the age bracket in which spending flected in the current account deficit, on housing and durables and borrowcertainly has greatly affected individ- ing tend to be high. In addition, ual industries. households have benefited from the Debt of each of the nonfederal runup in stock market prices in sectors—households, nonfinancial recent years, and this boost to their businesses, and state and local gov- net worth may have encouraged more ernments—also has increased rela- borrowing. Even so, household debt tive to economic activity, even after growth has outstripped increases in removing the types of double count- net worth. ing mentioned above. In the case of For nonf inancial corporations, most households, the exceptional growth of the advance in indebtedness relaof debt has been evident in both tive to output in recent years stems mortgage and consumer debt and has from the substitution of debt for been accompanied by a spectacular equity, previously discussed. The unbuildup of financial assets and a low evenness of the current economic personal saving rate. In other words, expansion also appears to have the household sector has been boosted corporate borrowing be- "grossing up" its balance sheet in cause some industries—especially recent years by heavy financial asset those dependent on export markets accumulation and borrowing. Finan- and those competing with imports— cial deregulation and competition for have experienced protracted weakhousehold assets likely have contrib- ness, even though overall cash flows uted to this process by expanding have been strong; thus, working access to market-related yields on capital and investment needs have deposits and other financial assets, been less closely matched with cash while growing competition among flows among firms than is typical, lenders for market share and the contributing to more rechanneling of trend toward securitization have funds through credit markets and added to sources of credit and put more corporate borrowing. Finally, downward pressure on household state and local government borrowing was especially heavy in 1985, even after removing the doublecounting factors already mentioned, 2. Not shown in the charts to the appendix as lower interest rates and the anticis the relation between debt measures and do- ipation of tax reform also fueled a mestic spending (GNP less net exports). In re- surge in tax-exempt bond issuance cent years, debt growth has been somewhat for purposes other than advance more in line with growth in domestic purchases Digitized fotrh FanR oAuStEpuRt , but this ratio, too, has risen sharply. refunding and mortgage acquisitions. 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

75 Record of Policy Actions of the Board of Governors Regulation D (Reserve tinue to qualify for the zero or 3 Requirements of Depository percent reserve requirement if no Institutions) and more than three transfers are allowed Regulation Q (Interest on each month; MMDAs qualify if no Deposits) more than six transfers are allowed each month. March 12, 1986—Amendments Previously, businesses had been permitted to hold savings accounts The Board amended Regulations D up to a maximum of $150,000. The and Q in connection with the expiamendments remove the $150,000 ration of its authority to set interest limitation on business savings acrate ceilings and reserve requirecounts, making their treatment simiments for deposit instruments. lar to that of MMDAs. Any business Votes for these actions: Messrs. Volcker,account from which more than three Martin, Wallich, Rice, Ms. Seger, telephone transfers are permitted per Messrs. Angell, and Johnson. Govermonth, however, is considered a nor Seger dissented from the Board's demand deposit and is subject to the decision to establish early withdrawal penalties for small institutions. interest rate limitation and reserve requirement appropriate for demand The Depository Institutions De- deposits. regulation Act of 1980 called for The Board also decided to conphasing out over a six-year period tinue some early withdrawal penalinterest rate ceilings on all deposit ties to help preserve for reserve accounts except demand deposits. requirement purposes the distinc- The Board's authority under the act tions between transaction accounts to set interest rate ceilings expires and time deposits and among non- March 31, 1986, leaving only the personal time deposits of differing prohibition on the payment of inter- maturities. In addition, the Board est on demand deposits as a con- decided to extend the applicability straint on deposit interest rates. Stat- of early withdrawal penalties to cerutory authority for money market tain small institutions—primarily deposit accounts (MMDAs) also ex- credit unions—that had not had such pires on that date, as does the penalties under the 1980 act. The Board's authority to set penalties for Board agreed to allow these instituearly withdrawal of time deposits. tions a longer period for compliance The Board amended Regulations with this provision. Governor Seger D and Q to continue the existing dissented from the Board's decision exemptions of savings deposits and to apply early withdrawal penalties MMDAs from reserve requirements to small institutions. and from the prohibition against the Most of the amendments are effecpayment of interest on demand de- tive April 1, 1986. Credit unions and posits. Thus savings accounts con- other small institutions that had not Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 Board Policy Actions been subject to the early withdrawal the lower reserve requirement appenalties have until January 1, 1987, plies. to begin imposing penalties on time The Garn-St Germain Depository deposits opened, added to, or re- Institutions Act of 1982 established newed after that date. a zero percent reserve requirement on the first $2 million of an institution's reservable liabilities. It also Regulation D (Reserve provided for annual adjustments to Requirements of Depository that exemption based on deposit Institutions) growth nationwide. Recent growth in deposits indicated that the amount November 24, 1986— subject to a zero percent reserve Amendment requirement should be increased from The Board amended Regulation D, $2.6 million to $2.9 million, and the effective December 31, 1986 (1) to Board amended Regulation D acincrease the amount of transaction cordingly. account balances to which the lower reserve requirement applies; and (2) Regulation G (Securities Credit to increase the amount of reservable by Persons Other than Banks, liabilities subject to a zero percent Brokers, or Dealers) reserve requirement. Votes for these actions: Messrs. Volcker, January 8, 1986—Interpretation Johnson, Ms. Seger, Messrs. Angell, and Heller. Absent and not voting: The Board issued an interpretation Messrs. Wallich and Rice. of Regulation G, effective January 10, 1986, that clarifies the need for Under the Monetary Control Act margin requirements for certain debt of 1980, depository institutions, Edge securities issued by a company seekand agreement corporations, and U.S. ing to acquire another. agencies and branches of foreign banks are subject to reserve require- Votes for this action: Messrs. Volcker, Partee, and Rice. Votes against this acments set by the Board. Initially, tion: Mr. Martin and Ms. Seger. Abreserve requirements were set at 3 sent and not voting: Mr. Wallich.1 percent of an institution's first $25 million in transaction balances and The interpretation addresses debt 12 percent on balances above that securities issued by a shell corporalevel. The act directs the Board to tion in a takeover attempt. (A shell adjust the amount subject to the corporation is a firm that has no lower reserve requirement to reflect significant business operations, funcchanges in the amount of transaction tions primarily as a vehicle for acbalances nationwide. By the begin- quiring the stock of the target comning of 1986, this amount had been pany, and has virtually no assets raised to $31.7 million. Recent growth other than the margin stock.) The in such balances indicated that a further increase of $5 million was warranted. The Board, therefore, 1. On this and subsequent pages, footnote 1 amended Regulation D to increase indicates that there was a vacancy on the Board to $36.7 million the amount to which when this action was taken. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 77 interpretation states that debt secu- nonstandard holiday must pay for rities issued by such a shell company checks made available to it on that are presumed to be indirectly secured day or reimburse the Reserve Bank by the stock of the company being for the value of the resultant float. acquired and, therefore, are subject The Board also modified its ACH to the margin requirements of Reg- procedures, effective April 1, 1987, ulation G. If specific evidence exists to reduce and reallocate float that of collateral other than the margin results from nonstandard holidays. stock or of a guarantee by the parent In addition, the Board adopted a of the shell company, then the secu- schedule for Reserve Bank obserrities are not covered by the inter- vance of the 10 national holidays, pretation. effective January 1, 1987. Governors Martin and Seger be- In other amendments, the Board lieved that adoption of the interpre- established two-year limits for bringtation was unnecessary. They noted ing actions against a Reserve Bank that a process already exists whereby for mishandling a payment item (bethe staff provides advice on margin ginning January 1, 1990) and for stock matters, and they saw no rea- bringing action against a paying bank son for the Board to be involved in for failing to comply with the regusuch determinations. In addition, they lation's notification requirements preferred a longer comment period. (beginning August 1, 1986). The Board also authorized the Reserve Banks to collect instruments drawn Regulation J (Collection of on payors in foreign countries. Checks and Other Items and Wire Transfers of Funds) Regulation K (International May 28, 1986—Amendments Banking Operations) The Board amended Regulation J, effective January 1, 1987, to reduce June 23, 1986—Amendment and reallocate check float, to permit Effective July 8, 1986, the Board Reserve Banks to collect checks drawn revised the procedures governing inon banks in foreign countries, and to ternational investments by U.S. make other technical changes. The banking organizations. Board also modified its automated clearinghouse (ACH) procedures and Votes for this action: Messrs. Volcker, adopted a standard holiday schedule Wallich, Rice, Ms. Seger, Messrs. Angell and Johnson.1 for the Reserve Banks. Previously, the regulation's provi- Votes for these actions: Messrs. Volcker, Wallich, Rice, Ms. Seger, Messrs. sions on foreign investment had re- Angell and Johnson.1 quired a banking organization to obtain the Board's consent to invest The Board changed the procedures more than 10 percent of its capital for recovering check float arising and surplus in a foreign company. from the local or regional observance The amendment removes that reof a holiday not observed nationally. quirement and permits such an in- Effective January 1, 1987, a paying vestment with written notice to the bank that closes voluntarily on a Federal Reserve 45 days in advance. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 Board Policy Actions Regulation Y (Bank Holding The Board also redefined the scope Companies and Change in Bank of insurance activities permitted under Control) the Garn-St Germain Depository Institutions Act of 1982. The act June 25, 1986—Amendments prohibited some insurance activities that had been permissible under The Board amended Regulation Y, Regulation Y and permitted expaneffective December 15, 1986, to add sion of other activities. The act six activities to the list of nonbanking generally prohibited agency and unactivities permissible for bank holdderwriting activities, except as speing companies. cifically exempted. The Board re- Votes for this action: Messrs. Volcker, vised Regulation Y to incorporate Wallich, Rice, Ms. Seger, Messrs. exemptions that permit the following Angell and Johnson.1 activities: (1) selling credit-related life, accident, and health insurance The Board also revised the portion and insurance for involuntary unemof the regulation governing insurance ployment; (2) selling, through fiactivities. nance-company subsidiaries, property insurance on collateral of $10,000 Votes for this action: Messrs. Volcker, Rice, Ms. Seger, Messrs. Angell, and or less (or $25,000 for manufactured Johnson. Abstaining: Mr. Wallich.1 homes); (3) continuing and expanding certain agency activities author- The amendments to Regulation Y ized before specified grandfather permit bank holding companies to dates; (4) acting as a managing genengage in the following nonbanking eral agent for group insurance for activities: consumer financial coun- the holding company; (5) acting as a seling; tax preparation and planning; general insurance agent if the holding commodity trading and futures com- company has $50 million in assets or mission merchant advisory services; less; and (6) acting as a general check guarantee services; credit bu- insurance agent in towns with inadreau and collection agency services; equate insurance agency facilities or and personal property appraisal. The with fewer than 5,000 residents. The regulation stipulates the conditions Board determined that a bank holdunder which holding companies may ing company's authority to operate a engage in these activities. general insurance agency in small The Board eliminated a require- towns should be confined to those ment that holding companies that towns in which the company has underwrite credit-related insurance lending offices. provide rate reductions or other policy benefits to customers. The requirement had stipulated that hold- Regulation Z (Truth in Lending) ing companies must charge premiums lower than the maximum established December 10, 1986— by state rules. The Board found that Amendment this requirement put holding companies at a competitive disadvantage The Board amended Regulation Z, and that other safeguards exist to effective December 16, 1986, to readdress the possibility of adverse define what constitutes an advance Digitized foer fFfRecAtSsE Ron the public. of new money in a refinancing and, http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 79 thereby, to expand the exemptions posed, the complexity of an implefrom the right of rescission. menting rule, and several adverse comments received on the proposal. Votes for this action: Messrs. Volcker, Johnson, Ms. Seger, Messrs. Angell and Heller. Absent and not voting: Rules Regarding Delegation Messrs. Wallich and Rice. of Authority Under the Truth in Lending Act, consumers who use their homes as December 15, 1986— collateral for a loan have three days Amendment within which to rescind the transac- The Board amended its rules, effection. Creditors are required to protive immediately, to permit certain vide borrowers with a written notice System officials to waive the requireof their right to rescind such a ments to publish notice and seek transaction, and creditors cannot dispublic comment on a proposed change burse funds or otherwise perform in the control of a bank, if such services until the three-day rescission disclosures would seriously threaten period has expired. Regulation Z the bank. exempts refinancings from the right of rescission if the new credit is Votes for this action: Messrs. Volcker, extended by the same creditor who Johnson, Ms. Seger, Messrs. Angell, and Heller. Absent and not voting: made the original loan and if the Messrs. Wallich and Rice. transaction does not involve an advance of new money. Regulation Z Recent legislation amended the had defined new money as the dif- Change in Bank Control Act to ference between the new "amount require that public comment be sought being financed" and the outstanding on any proposed change in bank balance plus any earned unpaid fi- ownership. That legislation, hownance charges. The Board amended ever, permits a federal bank regulathe regulation to redefine what con- tor to dispense with the publication stitutes a new advance of money so and comment requirements if the that the right of rescission would not regulator determines that such disbe triggered if a consumer finances closure would seriously threaten the charges such as attorney's fees, title safety or soundness of the bank being search fees, and insurance premiums. acquired. The amendment to the The Board found that these charges Board's rules delegates authority to generally are not substantial relative determine whether to waive the noto the principal amount refinanced tice requirements either to the Board's and do not put the borrower's home Director of the Division of Banking at a significantly higher risk of loss. Supervision and Regulation, with the The Board decided to withdraw concurrence of the General Counsel, one other proposed amendment to or to the appropriate Reserve Bank, the right of rescission that had been with the concurrence of the Board's published for comment. The amend- Director of Banking Supervision and ment had pertained to refinancings the General Counsel. A waiver of by creditors other than those who these requirements would be appromade the original mortgage loans. priate, for instance, when prompt The Board's decision reflected the action is necessary to prevent the limited nature of the exemption pro- bank's failure. These System officials Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 Board Policy Actions already have comparable delegated against: Ms. Seger. Absent and not votauthority for applications filed under ing: Messrs. Wallich and Rice. the Bank Holding Company Act. The Board's Consumer Advisory Council had become concerned that Policy Statements changes in the financial services market might have an adverse effect on July 11, 1986—Revisions to lower-income households. After care- Capital Adequacy Guidelines ful study, the Council recommended The Board revised its guidelines for that the Board issue a policy statecapital adequacy to permit bank ment encouraging state member banks holding companies to count perpet- to offer the types of services most ual debt as primary capital and to needed by low- and moderate-inlimit the inclusion of certain sources come households. The Board agreed of equity as primary capital. with the need for such a statement but believed that the policy should Votes for this action: Messrs. Volcker, have broader applicability. The Board Wallich, Rice, Ms. Seger, Messrs. recommended that the Federal Fi- Angell and Johnson.1 nancial Institutions Examination Council propose such a statement for The revised guidelines establish all financial institutions. criteria for determining whether a After review, the council approved perpetual debt instrument qualifies a joint policy statement to be issued as primary capital. The guidelines by its member agencies that encournow permit qualifying perpetual debt, ages efforts by trade associations and perpetual preferred stock, and manindividual financial institutions to datory convertible stock to compose make basic banking services availup to one-third of an institution's able to all customers. Rather than primary capital. Also, 20 percent of identify particular accounts or servan institution's primary capital may ices that should be offered, the be in the form of mandatory constatement broadly defines the types vertible securities and perpetual debt. of services that institutions should Perpetual debt securities issued or in endeavor to provide and encourages the process of being issued on Notrade associations and financial instivember 20, 1985, when the proposed tutions to ensure availability of cerrevisions were published for comtain basic services, such as a safe and ment, are grandfathered and exaccessible place to keep money; a cluded from the limitations. way to obtain cash, including the cashing of government checks; and a means for making third-party pay- November 3, 1986—Basic ments. The Board adopted the policy Financial Services statement. Ms. Seger objected to The Board authorized issuance of a issuance of the policy statement bepolicy statement on the types of basic cause she believed that actions by services that financial institutions certain trade associations adequately should be encouraged to offer. addressed the concerns in the statement and that Board action, there- Votes for this action: Messrs. Volcker, Johnson, Angell and Heller. Vote fore, was not necessary. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 81 1986 Discount Rates By the latter part of February a majority of the Board Members be- The Board approved four reductions lieved that, on balance, the latest of V2 percentage point in the basic available information pointed to a discount rate during 1986. Those more sluggish expansion of business reductions served to lower the rate activity than they had anticipated from 7V2 percent in early March to earlier in the year. They also called 5V2 percent in the latter half of attention to the disinflationary ef- August. There were no increases in fects of falling oil prices, to declining the discount rate during the year. interest rates, and to recent evidence The reasons for the Board's deciof slower monetary growth. Other sions are reviewed below. Those Members observed that the weakendecisions were made in the context ing in some business indicators was of the policy actions of the Federal relatively recent and did not neces- Open Market Committee and of sarily portend a slower economic general economic and financial deexpansion. Moreover, the recent velopments that are covered in more moderation in monetary growth came detail elsewhere in this REPORT. A after an extended period of generally listing of the Board's actions on the rapid expansion. These Members also discount rate during 1986, including expressed concern about the potenthe votes on those actions, follows tially adverse influence that a reducthis review. tion in the discount rate might have on the foreign exchange value of the dollar unless it was associated with Actions on the Basic movements toward ease by at least Discount Rate some of the leading industrial countries abroad. January-February: No Change During the early weeks of the year, At a meeting held on February 24, the Board discussed but took no the Board by a vote of 4 to 3 action on a number of requests by approved a reduction of V2 percentindividual Federal Reserve Banks to age point in the basic discount rate reduce the basic discount rate by Vi to 7 percent. On the same day, the or V2 percentage point. A rate of IV2 Board rescinded that action by unanpercent had been in effect since mid- imous vote following a review of May 1985. The Board's ongoing re- prospective actions by key central view of economic and financial de- banks abroad to reduce their lending velopments, including the behavior rates. Members who favored a reof the monetary aggregates, resulted duction in the discount rate on doin decisions to defer action rather mestic grounds decided that a delay than to approve or deny the pending of limited duration would be acceptrate cuts. The Board also took ac- able, given the outlook for easing count of developments in foreign actions by at least some other major exchange markets and noted the risks central banks during the next couple to the dollar of a reduction under of weeks, if not within the next few the prevailing circumstances, partic- days. ularly if a lower discount rate were not accompanied by cuts in the lending rates of key central banks March-August: Basic Rate Reduced Digitized foar bFrRoAaSdE.R On March 6, by unanimous vote, the http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 Board Policy Actions Board approved a reduction from ing was likely and would contribute 7V2 to 7 percent in the basic discount to faster economic growth during rate. This action was taken in the the second half of the year. The outcontext of similar actions announced look for net exports also appeared or expected by central banks in a to be more positive. He concluded number of other major industrial that a further cut in the discount countries and in light of sizable rate was not warranted in these further declines in most domestic circumstances. interest rates in recent weeks. The On July 10, the Board unani- Members also noted that the expan- mously approved another reduction sion of the monetary aggregates had in the basic discount rate to 6 perbeen more limited thus far in 1986 cent. Such an action was judged to than earlier, and the latest business be consistent with the accommodainformation tended to confirm pre- tive monetary policy that had been vious indications of more sluggish implemented for some time through economic growth. In addition, a open market operations, and it took relatively favorable outlook for prices account of recent declines in a numhad been enhanced by the continuing ber of market interest rates. A lower decline in oil prices. discount rate also was deemed appro- On April 18, the Board approved priate in the context of relatively another reduction of V2 percentage slow growth in overall business activpoint in the basic discount rate. Most ity, relatively low prices for a number of the members believed that such of important commodities, and rean action was desirable to bring the duced pressures on the prices of rate into better alignment with short- goods fostered by an economy that term market rates, which had contin- was operating comfortably within ued to decline since March 6. A capacity limits and subject to strong reduction was also thought to be competition from abroad. Members consistent with prospective policy noted that while Ml had been groweasing in one or more of the major ing rapidly in recent months, the industrial nations abroad. Members broader aggregates, M2 and M3, noted that the latest indicators of were currently near the midpoints of business activity suggested on bal- their target ranges for 1986. The ance that economic growth would be Federal Open Market Committee relatively sluggish in the second had established those ranges in Febquarter, especially reflecting weak- ruary and had reaffirmed them at its ness in business investment. Among meeting on July 8-9. Some Members other factors an important influence commented on the risks to the dollar on such investment was the adverse of reducing the discount rate when effect of lower oil prices on the few, if any, of the major central energy industry. banks abroad were likely to ease Governor Rice dissented from this their policies, at least over the near action. In his view the economic term. In this situation the dollar outlook remained favorable despite might remain under downward presindications of slower expansion in sure in the foreign exchange market. the current quarter. He stressed that But it was noted that a reduction in consumer spending was being well the System's rate might encourage maintained, and he believed that easing measures abroad later, if not some turnaround in business spend- immediately. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 83 The last reduction in the discount sually strong loan demands. The rate during 1986, to 5V2 percent, was program was intended to compleapproved by unanimous vote on ment the longstanding regular sea- August 20. The Members agreed that sonal credit program and thereby to such an action was consistent with help assure that small- and mediumthe policy decision reached by the sized banks did not face liquidity Federal Open Market Committee at constraints in accommodating their its meeting on August 19 and with farm borrowers over the 1986 plantthe System's broad objective of sus- ing and production cycle. Under this taining orderly economic growth temporary program, eligible banks within a framework of progress to- could borrow at the discount window ward price stability. The Members to fund one-half of their loan growth recognized that there were risks of in excess of 2 percent over a base downward pressures on the dollar in level; such borrowing could not exthe foreign exchange market, given ceed 5 percent of their deposits. the prospect that key industrial na- For 1986, the Board modified the tions abroad were not likely to lower temporary program slightly to entheir discount rates in the near fu- hance the program's usefulness to ture. However, those risks were felt potential borrowers. The modificato be manageable and to be accept- tions (1) gave banks the option of able in light of prevailing and pro- borrowing at a fixed rate of V2 spective economic and financial con- percentage point over the basic disditions. count rate or at a variable rate that is the basic discount rate itself, and September-December: No Change (2) permitted banks added flexibility During the closing months of the in determining the base from which year, the Board made no further loan growth would be measured. changes in the discount rate. The Banks were allowed to borrow under Members took account of a pickup either the regular or the temporary in the growth of economic activity seasonal programs, but not under from the very sluggish pace in the both at the same time. second quarter. Prices tended to rise somewhat faster during the summer New Policy on Large Borrowings and fall months, reflecting developfrom the Discount Window ments in food and energy markets, but overall pressures on prices re- On May 19, 1986, the Board apmained limited during this period. proved a new policy to deal with exceptionally large borrowings from the discount window that arise from Renewal of Temporary computer breakdowns or other op- Seasonal Credit Program erating problems. Under the new On February 14, 1986, the Board policy, a rate higher than the basic approved the renewal for 1986 of its discount rate is applied to loans of temporary, simplified seasonal credit unusual size that result from a major program. This program was origi- operating problem at the borrower's nally approved and implemented in facility unless the problem clearly is 1985 as a means of making funds beyond the reasonable control of the available at the discount window to borrowing institution. The rate to be agricultural banks experiencing unu- charged is the highest rate estab- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 Board Policy Actions lished for loans to depository insti- or for a shorter period if they are tutions. The Board's objective was expected to be outstanding for an to ensure that, in such circumstances, unusually long time and in relatively credit extended by the Federal Re- large amounts, the Reserve Banks serve would be at rates as high as or may charge a flexible rate. The higher than those for short-term flexible rate, which has a floor that accommodation in the open market. is 1 percentage point above the basic The Board also wanted to encourage discount rate, takes account of the institutions to maintain or install rates on market sources of funds. appropriate measures and precau- The Board approved reductions in tions to reduce the chances that the flexible rate periodically during major problems might develop. the year, from 8V2 percent in mid- March to 6V2 percent in early September. Structure of Discount Rates As of December 31, 1986, the The basic discount rate noted in this structure of discount rates was as report is the rate charged on loans follows: a basic rate of 5V2 percent to depository institutions for short- for short-term adjustment credit and term adjustment credit. The basic for credit under the regular seasonal rate also applies to most seasonal program. No loans were outstanding credit, including the regular seasonal under the temporary seasonal proprogram; under that program, credit gram at year-end. Rates on extended may be provided for periods longer credit ranged from the basic rate of than those permitted under adjust- 5V2 percent for the first 60 days of ment credit to assist smaller institu- borrowing, to 6V2 percent for the tions in meeting regular needs for next 90 days of borrowing, and to funds arising from certain expected 7V2 percent after 150 days. The seasonal movements in their deposits flexible rate on extended credit was and loans. As noted above, credit is 6V2 percent at year-end and was also provided at the basic discount authorized for the Federal Reserve rate under the variable-rate option Banks of Richmond, Atlanta, Chiof the temporary seasonal program cago, Kansas City, Dallas, and San and at a rate h percentage point Francisco. above the basic rate under the fixedrate option of the temporary seasonal Votes on Reserve Bank program. Requests to Change the Another category of discount-win- Discount Rate dow credit relates to loans made over extended periods to depository insti- Under the provisions of the Federal tutions that are under sustained liq- Reserve Act, the boards of directors uidity pressure. Such extended credit of the Federal Reserve Banks are may also be provided when excep- required to establish rates on loans tional circumstances or practices ad- to depository institutions at least versely affect a particular depository every 14 days and to submit such institution. The interest rate on ex- rates to the Board of Governors for tended credit rises relative to the review and determination. The Board basic rate as the period of borrowing votes listed below are those that lengthens. For loans that have been involved changes in the basic disoutstanding for more than 150 days, count rate. Votes involving the re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 85 establishment of existing rates are approved actions taken by the direcnot shown. All of the latter were tors of the Federal Reserve Banks of unanimous. Boston, New York, Cleveland, Richmond, Chicago, Minneapolis, Kan- February 24, 1986 sas City, Dallas, and San Francisco Effective February 25, 1986, the to reduce the basic discount rate to Board approved actions taken by the 6V2 percent. directors of the Federal Reserve Votes for this action: Messrs. Volcker, Banks of Dallas and San Francisco Martin, Wallich, Ms. Seger, and Messrs. to reduce the basic discount rate Angell and Johnson. Vote against this from 7V2 percent to 7 percent. action: Mr. Rice. Votes for this action: Mr. Martin, Ms. The Board subsequently approved Seger, and Messrs. Angell and Johnson. Votes against this action: similar actions taken by the directors Messrs. Volcker, Wallich, and Rice. of the Federal Reserve Banks of Atlanta and St. Louis, effective April February 24, 1986 22, and Philadelphia, effective April The Board rescinded its approval of 23, 1986. a reduction in the basic discount rate from 7V2 percent to 7 percent at the July 10, 1986 Federal Reserve Banks of Dallas and Effective July 11, 1986, the Board San Francisco. approved actions taken by the directors of the 12 Federal Reserve Banks Votes for this action: Messrs. Volcker, to reduce the basic discount rate to Martin, Wallich, Rice, Ms. Seger, and Messrs. Angell and Johnson. Votes 6 percent. against this action: None. Votes for this action: Messrs. Volcker, Wallich, Rice, Ms. Seger, Messrs. Angell March 6, 1986 and Johnson. Votes against this action: Effective March 7, 1986, the Board None.1 approved actions taken by the directors of the Federal Reserve Banks of August 20, 1986 Boston, New York, Philadelphia, Effective August 21, 1986, the Board Richmond, Atlanta, Chicago, St. approved actions taken by the direc- Louis, Minneapolis, Kansas City, tors of the Federal Reserve Banks of Dallas, and San Francisco to reduce Boston, New York, Cleveland, Richthe basic discount rate to 7 percent. mond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Votes for this action: Messrs. Volcker, Francisco to reduce the basic dis- Martin, Wallich, Rice, Angell, and Johnson. Votes against this action: count rate to 5V2 percent. None. Absent and not voting: Ms. Seger. Votes for this action: Messrs. Volcker, Wallich, Rice, Ms. Seger, and Messrs. Angell, Johnson, and Heller. Votes The Board subsequently approved against this action: None. a similar action taken by the directors of the Federal Reserve Bank of The Board subsequently approved Cleveland, effective March 10, 1986. similar actions taken by the directors of the Federal Reserve Banks of April 18, 1986 Philadelphia and St. Louis, effective Effective April 21, 1986, the Board August 22, 1986. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

87 Record of Policy Actions of the Federal Open Market Committee The record of policy actions of the by a large majority, or even that it Federal Open Market Committee is was by unanimous vote, does not presented in the ANNUAL REPORT necessarily mean that all members of of the Board of Governors pursuant the Committee were equally agreed to the requirements of section 10 of as to the reasons for the particular the Federal Reserve Act. That sec- decision or as to the precise operation provides that the Board shall tions in the open market that were keep a complete record of the actions called for to implement the general taken by the Board and by the policy. Federal Open Market Committee on During 1986 the policy record for all questions of policy relating to each meeting was released a few days open market operations, that it shall after the next regularly scheduled record therein the votes taken in meeting and was subsequently pubconnection with the determination of lished in the Federal Reserve Bulletin. open market policies and the reasons Policy directives of the Federal underlying each such action, and that Open Market Committee are issued it shall include in its ANNUAL RE- to the Federal Reserve Bank of New PORT to the Congress a full account York as the Bank selected by the of such actions. Committee to execute transactions In the pages that follow, there are for the System Open Market Acentries with respect to the policy count. In the area of domestic open actions taken at the meetings of the market activities, the Federal Re- Federal Open Market Committee serve Bank of New York operates held during the calendar year 1986, under two separate directives from including the votes on the policy the Open Market Committee: an decisions made at those meetings as Authorization for Domestic Open well as a resume of the basis for the Market Operations and a Domestic decisions. The summary descriptions Policy Directive. (A new Domestic of economic and financial conditions Policy Directive is adopted at each are based on the information that regularly scheduled meeting.) In the was available to the Committee at foreign currency area, it operates the time of the meetings, rather than under an Authorization for Foreign on data as they may have been Currency Operations and a Foreign revised later. Currency Directive. These four in- It will be noted from the record of struments are shown below in the policy actions that in some cases the form in which they were in effect at decisions were made by unanimous the beginning of 1986. Changes in vote and that in other cases dissents the instruments during the year are were recorded. The fact that a deci- reported in the records for the indision in favor of a general policy was vidual meetings. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 FOMC Policy Actions Authorization for Domestic warehouse receipt or similar document Open Market Operations conveying title to the underlying goods; provided that the aggregate amount of bankers acceptances held at any one time In Effect January 1, 1986 shall not exceed $100 million; (c) To buy U.S. Government securi- 1. The Federal Open Market Committee ties, obligations that are direct obligations authorizes and directs the Federal Re- of, or fully guaranteed as to principal and serve Bank of New York, to the extent interest by, any agency of the United necessary to carry out the most recent do- States, and prime bankers acceptances of mestic policy directive adopted at a meet- the types authorized for purchase under ing of the Committee: l(b) above, from dealers for the account (a) To buy or sell U.S. Government of the Federal Reserve Bank of New York securities, including securities of the Fed- under agreements for repurchase of such eral Financing Bank, and securities that securities, obligations, or acceptances in are direct obligations of, or fully guar- 15 calendar days or less, at rates that, anteed as to principal and interest by, any unless otherwise expressly authorized by agency of the United States in the open the Committee, shall be determined by market, from or to securities dealers and competitive bidding, after applying reaforeign and international accounts main- sonable limitations on the volume of tained at the Federal Reserve Bank of agreements with individual dealers; pro- New York, on a cash, regular, or deferred vided that in the event Government sedelivery basis, for the System Open Mar- curities or agency issues covered by any ket Account at market prices, and, for such agreement are not repurchased by such Account, to exchange maturing U.S. the dealer pursuant to the agreement or Government and Federal agency securi- a renewal thereof, they shall be sold in ties with the Treasury or the individual the market or transferred to the System agencies or to allow them to mature with- Open Market Account; and provided furout replacement; provided that the ag- ther that in the event bankers acceptances gregate amount of U.S. Government and covered by any such agreement are not Federal agency securities held in such Ac- repurchased by the seller, they shall concount (including forward commitments) tinue to be held by the Federal Reserve at the close of business on the day of a Bank or shall be sold in the open market. meeting of the Committee at which action 2. In order to ensure the effective conis taken with respect to a domestic policy duct of open market operations, the Feddirective shall not be increased or de- eral Open Market Committee authorizes creased by more than $6.0 billion during and directs the Federal Reserve Banks to the period commencing with the opening lend U.S. Government securities held in of business on the day following such the System Open Market Account to meeting and ending with the close of busi- Government securities dealers and to ness on the day of the next such meeting; banks participating in Government se- (b) When appropriate, to buy or sell curities clearing arrangements conducted in the open market, from or to acceptance through a Federal Reserve Bank, under dealers and foreign accounts maintained such instructions as the Committee may at the Federal Reserve Bank of New York, specify from time to time. on a cash, regular, or deferred delivery 3. In order to ensure the effective conbasis, for the account of the Federal Re- duct of open market operations, while asserve Bank of New York at market dis- sisting in the provision of short-term incount rates, prime bankers acceptances vestments for foreign and international with maturities of up to nine months at accounts maintained at the Federal Rethe time of acceptance that (1) arise out serve Bank of New York, the Federal Open of the current shipment of goods between Market Committee authorizes and directs countries or within the United States, or the Federal Reserve Bank of New York (2) arise out of the storage within the (a) for System Open Market Account, to United States of goods under contract of sell U.S. Government securities to such sale or expected to move into the channels foreign and international accounts on the of trade within a reasonable time and that bases set forth in paragraph l(a) under are secured throughout their life by a agreements providing for the resale by such Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions accounts of those securities within 15 cal- end of its range for the year, and M3 exendar days on terms comparable to those panded at a rate near the mid-point of its available on such transactions in the mar- range for 1985. Treasury bill rates have ket; and (b) for New York Bank account, fallen somewhat while other short-term when appropriate, to undertake with market interest rates have changed little dealers, subject to the conditions imposed on balance since the November meeting on purchases and sales of securities in par- of the Committee; long-term rates have agraph l(c), repurchase agreements in U.S. moved appreciably lower over the period. Government and agency securities, and The trade-weighted value of the dollar to arrange corresponding sale and repur- against major foreign currencies has dechase agreements between its own ac- clined on balance since the Committee's count and foreign and international ac- meeting in early November, though the counts maintained at the Bank. dollar has tended to stabilize more re- Transactions undertaken with such ac- cently. counts under the provisions of this para- The Federal Open Market Committee graph may provide for a service fee when seeks to foster monetary and financial appropriate. conditions that will help to reduce inflation further, promote growth in output on a sustainable basis, and contribute to an improved pattern of international trans- Domestic Policy Directive actions. In furtherance of these objectives the Committee at the July meeting reaf- In Effect January 1, 19861 firmed ranges for the year of 6 to 9 percent for M2 and 6 to 9Vi percent for M3. The associated range for total domestic non- The information reviewed at this meeting financial debt was reaffirmed at 9 to 12 suggests that economic activity is expandpercent. With respect to Ml, the base was ing at a relatively modest pace in the curmoved forward to the second quarter of rent quarter. Total nonfarm payroll em- 1985 and a range was established at an ployment increased further in November, annual growth rate of 3 to 8 percent. The though less than in October, and the cirange takes account of expectations of a vilian unemployment rate edged down to return of velocity growth toward more 7.0 percent. Retail sales and industrial usual patterns, following the sharp deproduction picked up in November after cline in velocity during the first half of the declining in October. After strengthening year, while also recognizing a higher dein October, housing starts fell appreciably gree of uncertainty regarding that behavin November. Incoming information genior. The appropriateness of the new range erally suggests relatively sluggish business will continue to be reexamined in the light capital spending. Revised merchandise of evidence with respect to economic and trade data for the third quarter confirm financial developments including develthat the deficit widened further, as nonopments in foreign exchange markets. oil imports continued to increase and ex- More generally, the Committee agreed that ports fell somewhat. Broad measures of growth in the aggregates may be in the prices and wages appear to be rising at upper parts of their ranges, depending on rates close to those recorded earlier in the continuing developments with respect to year. velocity and provided that inflationary After declining in October, Ml grew pressures remain subdued. substantially in November while growth in M2 and M3 continued quite moderate. For 1986 the Committee agreed on ten- Expansion in total domestic nonfinancial tative ranges of monetary growth, measdebt has remained rapid. Through No- ured from the fourth quarter of 1985 to vember, Ml expanded at a rate well above the fourth quarter of 1986, of 4 to 7 perthe long-run range set by the Committee, cent for Ml, 6 to 9 percent for M2, and M2 grew at a rate a bit below the upper 6 to 9 percent for M3. The associated range for growth in total domestic nonfinancial debt was provisionally set at 8 to 11 percent for 1986. With respect to Ml partic- 1. Adopted by the Committee at its meeting ularly, the Committee recognized that unon Dec. 16-17, 1985. certainties surrounding recent behavior of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 FOMC Policy Actions velocity would require careful reappraisal actions on the open market at home and of the target range at the beginning of abroad, including transactions with the 1986. Moreover, in establishing ranges for U.S. Treasury, with the U.S. Exchange next year, the Committee also recognized Stabilization Fund established by Section that account would need to be taken of 10 of the Gold Reserve Act of 1934, with experience with institutional and deposi- foreign monetary authorities, with the tory behavior in response to the comple- Bank for International Settlements, and tion of deposit rate deregulation early in with other international financial instituthe year. tions: In the implementation of policy for the immediate future, the Committee seeks to decrease somewhat the existing degree Austrian schillings Italian lire Belgian francs Japanese yen of pressure on reserve positions. This ac- Canadian dollars Mexican pesos tion is expected to be consistent with Danish kroner Netherlands guilders growth in M2 and M3 over the period Pounds sterling Norwegian kroner French francs Swedish kronor from November to March at annual rates German marks Swiss francs of about 6 to 8 percent; while the behavior of Ml continues to be subject to unusual uncertainty, growth at an annual rate of B. To hold balances of, and to have 7 to 9 percent over the period is antici- outstanding forward contracts to receive pated. Somewhat greater reserve re- or to deliver, the foreign currencies listed straint might, and somewhat lesser re- in paragraph A above. serve restraint would, be acceptable C. To draw foreign currencies and to depending on behavior of the aggregates, permit foreign banks to draw dollars under the strength of the business expansion, the reciprocal currency arrangements listed developments in foreign exchange marin paragraph 2 below, provided that drawkets, progress against inflation, and conings by either party to any such arrangeditions in domestic and international credit ment shall be fully liquidated within 12 markets. The Chairman may call for months after any amount outstanding at Committee consultation if it appears to that time was first drawn, unless the Comthe Manager for Domestic Operations that mittee, because of exceptional circumreserve conditions during the period bestances, specifically authorizes a delay. fore the next meeting are likely to be as- D. To maintain an overall open posociated with a federal funds rate persistsition in all foreign currencies not exently outside a range of 6 to 10 percent. ceeding $10.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individ- Authorization for Foreign ual currencies. The net position in a single Currency Operations foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus In Effect January 1, 1986 outstanding contracts for future delivery of that currency, i.e., as the sum of these 1. The Federal Open Market Committee elements with due regard to sign. authorizes and directs the Federal Re- 2. The Federal Open Market Commitserve Bank of New York, for System Open tee directs the Federal Reserve Bank of Market Account, to the extent necessary New York to maintain reciprocal curto carry out the Committee's foreign cur- rency arrangements ("swap" arrangerency directive and express authorizations ments) for the System Open Market Acby the Committee pursuant thereto, and count for periods up to a maximum of 12 in conformity with such procedural in- months with the following foreign banks, structions as the Committee may issue from which are among those designated by the time to time: Board of Governors of the Federal Re- A. To purchase and sell the follow- serve System under Section 214.5 of Reging foreign currencies in the form of cable ulation N, Relations with Foreign Banks transfers through spot or forward trans- and Bankers, and with the approval of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 91 Committee to renew such arrangements 5. Foreign currency holdings shall be on maturity: invested insofar as practicable, considering needs for minimum working balances. Such investments shall be in liquid form, Amount and generally have no more than 12 months Foreign bank (millions of remaining to maturity. When appropriate dollars equivalent) in connection with arrangements to pro- Austrian National Bank 250 vide investment facilities for foreign cur- National Bank of Belgium 1,000 rency holdings, U.S. Government secu- Bank of Canada 2,000 rities may be purchased from foreign National Bank of Denmark 250 Bank of England 3,000 central banks under agreements for re- Bank of France 2,000 purchase of such securities within 30 cal- German Federal Bank 6,000 endar days. Bank of Italy 3,000 Bank of Japan 5,000 6. All operations undertaken pursuant Bank of Mexico 700 to the preceding paragraphs shall be re- Netherlands Bank 500 ported promptly to the Foreign Currency Bank of Norway 250 Bank of Sweden 300 Subcommittee and the Committee. The Swiss National Bank 4,000 Foreign Currency Subcommittee consists Bank for International Settlements of the Chairman and Vice Chairman of Dollars against Swiss francs 600 the Committee, the Vice Chairman of the Dollars against authorized European currencies other than Swiss francs 1,250 Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of mem- Any changes in the terms of existing swap bers of the Board serving on the Subcomarrangements, and the proposed terms of mittee, other Board Members designated any new arrangements that may be au- by the Chairman as alternates, and in the thorized, shall be referred for review and absence of the Vice Chairman of the approval to the Committee. Committee, his alternate). Meetings of the 3. All transactions in foreign curren- Subcommittee shall be called at the recies undertaken under paragraph 1(A) quest of any member, or at the request above shall, unless otherwise expressly of the Manager for Foreign Operations, authorized by the Committee, be at pre- for the purposes of reviewing recent or vailing market rates. For the purpose of contemplated operations and of consultproviding an investment return on System ing with the Manager on other matters holdings of foreign currencies, or for the relating to his responsibilities. At the repurpose of adjusting interest rates paid or quest of any member of the Subcommitreceived in connection with swap draw- tee, questions arising from such reviews ings, transactions with foreign central and consultations shall be referred for debanks may be undertaken at non-market termination to the Federal Open Market exchange rates. Committee. 4. It shall be the normal practice to ar- 7. The Chairman is authorized: range with foreign central banks for the A. With the approval of the Comcoordination of foreign currency trans- mittee, to enter into any needed agreeactions. In making operating arrange- ment or understanding with the Secretary ments with foreign central banks on Sys- of the Treasury about the division of retem holdings of foreign currencies, the sponsibility for foreign currency opera- Federal Reserve Bank of New York shall tions between the System and the Treasnot commit itself to maintain any specific ury; balance, unless authorized by the Federal B. To keep the Secretary of the Open Market Committee. Any agreements Treasury fully advised concerning System or understandings concerning the admin- foreign currency operations, and to conistration of the accounts maintained by the sult with the Secretary on policy matters Federal Reserve Bank of New York with relating to foreign currency operations; the foreign banks designated by the Board C. From time to time, to transmit of Governors under Section 214.5 of Reg- appropriate reports and information to the ulation N shall be referred for review and National Advisory Council on Internaapproval to the Committee. tional Monetary and Financial Policies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 FOMC Policy Actions 8. Staff officers of the Committee are B. Maintain reciprocal currency authorized to transmit pertinent infor- ("swap") arrangements with selected formation on System foreign currency op- eign central banks and with the Bank for erations to appropriate officials of the International Settlements. Treasury Department. C. Cooperate in other respects with 9. All Federal Reserve Banks shall central banks of other countries and with participate in the foreign currency oper- international monetary institutions. ations for System Account in accordance 3. Transactions may also be underwith paragraph 3 G(l) of the Board of taken: Governors' Statement of Procedure with A. To adjust System balances in light Respect to Foreign Relationships of Fed- of probable future needs for currencies. eral Reserve Banks dated January 1,1944. B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund. Foreign Currency Directive C. For such other purposes as may be expressly authorized by the Committee. In Effect January 1, 1986 4. System foreign currency operations shall be conducted: 1. System operations in foreign curren- A. In close and continuous consulcies shall generally be directed at count- tation and cooperation with the United ering disorderly market conditions, pro- States Treasury; vided that market exchange rates for the B. In cooperation, as appropriate, U.S. dollar reflect actions and behavior with foreign monetary authorities; and consistent with the IMF Article IV, Sec- C. In a manner consistent with the tion 1. obligations of the United States in the In- 2. To achieve this end the System shall: ternational Monetary Fund regarding ex- A. Undertake spot and forward pur- change arrangements under the IMF Archases and sales of foreign exchange. ticle IV. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 93 Meeting Held on capacity utilization for total industry February 11-12, 1986 rose in December for the second consecutive month, increasing 0.4 Domestic Policy Directive percentage point to 80.5 percent. Nevertheless, the year-end rate re- The information reviewed at this mained below the most recent peak meeting suggested that economic ac- of 82.0 percent recorded in the sumtivity was expanding at a moderate mer of 1984. pace. A number of major indicators Total retail sales rose 1.9 percent of production and spending had shown in December, after having declined improvement in late 1985 and early on balance over the previous two 1986. Underlying inflationary pres- months. Sales increased for all major sures appeared to be generally well categories, but most of the rise was contained. Prices in the latter part of attributable to sizable gains in outthe year were boosted by develop- lays for durable goods. Boosted by ments in markets for food and en- an expanded round of financing inergy, but oil prices declined substan- centive programs, sales of domestic tially in early 1986. automobiles registered a strong re- The labor market, one of the few bound toward the end of December areas for which data for early 1986 and were at an annual rate of 7.9 were available at the time of this million units for the month as a meeting, showed exceptional strength whole—about 1V2 million units above in January. Total nonfarm payroll the rate in each of the preceding two employment rose 566,000—about months. Sales advanced further in twice the average monthly increase January to a rate of 8.6 million units. in the fourth quarter of 1985—and Total private housing starts rose the unemployment rate declined to sharply in December, more than 6.7 percent, its lowest rate in six offsetting the appreciable decline in years. Hiring remained brisk at trade the previous month, and newly isestablishments and in finance and sued permits for residential building service industries, with those sectors also increased substantially. The accounting for about two-thirds of strength in housing activity during the rise. Employment gains in the the month was apparent in both the construction industry were also strong, single-family and the multifamily secapparently due in part to unusually tors. For the fourth quarter as a good weather throughout most of the whole, both housing starts and percountry during the month. In the mits were at annual rates of nearly manufacturing sector, employment l3/4 million units—close to the pace increased for the fourth consecutive recorded in earlier quarters and for month, and the average number of the year 1985. Sales of new homes hours in the factory workweek re- improved a bit around year-end, and mained at a high level. sales of existing homes in the final The index of industrial production quarter of 1985 registered their fifth rose an estimated 0.7 percent further consecutive quarterly increase. in December, after no change on Business capital spending strengthbalance over the preceding two ened somewhat in the fourth quarter. months. Available information for Growth in expenditures for produc- January suggested some additional ers' durable equipment was espe- Digitized forr iFsReA SinE R that month. The index of cially rapid, possibly reflecting firms' http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 FOMC Policy Actions attempts to realize tax benefits that the G-5 countries, exchange market might be eliminated for equipment movements reflected varying assessinstalled after 1985. New orders for ments of official attitudes toward the nondefense capital goods grew ap- dollar and differing views about the preciably in December but were likely effects of sharply declining oil essentially flat over the fourth quarter prices on various industrial and deas a whole. Shipments of such goods, veloping countries. Preliminary data however, rose about 3V2 percent in on merchandise trade for the fourth the quarter. Outlays for nonresiden- quarter suggested that the deficit tial construction rose about 5 percent widened further from the already in December after having changed high third-quarter level. Both oil and little on balance since August. non-oil imports rose, and exports In the final months of 1985, the were little changed. For the year rates of increase in consumer and 1985 the deficit was estimated at producer prices were somewhat higher about $120 billion, up from $107 than in the spring and summer, billion in 1984. reflecting mainly what appeared to At its meeting on December 16be a temporary spurt in prices for 17, 1985, the Committee had adopted food and energy-related items. In the a directive that called for some limagricultural component, prices of do- ited decrease in the degree of presmestically produced crude foods had sure on reserve positions. The memleveled off in December and appar- bers expected such an approach to ently fell in January. In the energy policy implementation to be consissector, prices of crude oil and other tent with growth of M2 and M3 at petroleum products tumbled dramat- annual rates of about 6 to 8 percent ically in early 1986, and the effects over the period from November to of these declines were likely to show March. Although the behavior of Ml through at the consumer level in continued to be subject to unusual coming months. Excluding the food uncertainty, the members expected and energy sectors, consumer prices expansion of that aggregate to slow rose in November and December at to an annual rate of 7 to 9 percent a pace close to that for the year as a over the four-month period.1 It was whole, and producer prices changed agreed that somewhat greater relittle on balance over the two-month straint might, and somewhat lesser period. For the year 1985 consumer restraint would, be acceptable over prices rose about 3% percent, compared with 4 percent in 1984; producer prices rose about 1% percent 1. These growth rates and all subsequent data in both years. The index of average on the monetary aggregates reflect annual hourly earnings of nonfarm produc- benchmarks and seasonal factors as published tion workers increased 3 percent last on February 13, 1986. year, about the same as in 1984. The monetary aggregates are defined as follows: Ml comprises demand deposits at com- The trade-weighted value of the mercial banks and thrift institutions, currency dollar against major foreign curren- in circulation, travelers checks of nonbank iscies had declined about 4 percent suers, negotiable order of withdrawal (NOW) further since the Committee's meet- and automatic transfer service (ATS) accounts at banks and thrift institutions, and credit union ing in mid-December. Throughout share draft accounts. M2 contains Ml and savthe period, and particularly around ings and small-denomination time deposits (in- Digitized fotr hFeR AtSimERe of the January meeting of cluding money market deposit accounts http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 95 the intermeeting period, depending expanded moderately in December, on the growth of the monetary ag- decelerated markedly in January, gregates, the strength of the business reflecting both the slowdown in Ml expansion, the performance of the and quite low growth in its nontransdollar on foreign exchange markets, action component. Expansion in M3 progress against inflation, and con- picked up somewhat in January as ditions in domestic and international banks issued a substantial volume of credit markets. The intermeeting large time deposits to support a range for the federal funds rate was further robust increase in bank credit; retained at 6 to 10 percent. its growth over the two-month period With respect to the Committee's was in line with the Committee's longer-run ranges for monetary expectations. growth during 1985, Ml expanded at Open market operations during a rate well above the range of 3 to 8 the intermeeting period were dipercent, at an annual rate, set for rected toward achieving a slight dethe second half of the year; M2 grew crease in pressures on reserve posiat a rate somewhat below the upper tions. Seasonal plus adjustment end of its range of 6 to 9 percent for borrowing from the discount winthe year; and M3 expanded at a rate dow, while rising sharply around near the midpoint of its range of 6 year-end when excess reserves were to 9V2 percent for 1985. Expansion particularly large, averaged only about in total domestic nonfinancial debt $260 million during the two full was above the upper end of its maintenance periods ending in Janmonitoring range of 9 to 12 percent uary. Open market operations were for the year. In early 1986, there was undertaken in an environment of evidence of a marked overall slowing large seasonal fluctuations in reserve in the monetary aggregates. Ml, needs, unusually high Treasury balwhich had increased at an annual ances, a weakening tendency for the rate of about 12V2 percent in Decem- dollar in foreign exchange markets, ber, grew only a little in January; on incoming economic data that were average over the two months, expan- somewhat stronger than had genersion in Ml was running near the ally been anticipated and, as the lower end of the short-run range period progressed, sharp further deanticipated by the Committee at its clines in oil prices. Under these previous meeting. M2, which had conditions the federal funds rate generally hovered around the 8 percent level during much of the intermeeting interval and was consider- (MMDAs) at all depository institutions, overably above that level for a few days night repurchase agreements (RPs) at commercial banks, overnight Eurodollars held at foreign around year-end. More recently, the branches of U.S. banks by U.S. residents other rate moved down to a range of 73A than banks, and money market mutual fund to 7% percent. Other short-term shares other than those restricted to institurates rose a little over the period, tions). M3 is M2 plus large-denomination time and intermediate- and long-term rates deposits at all depository institutions, large-denomination term RPs at commercial banks and were unchanged to somewhat lower. savings and loan associations, institution-only The staff projections presented at money market mutual funds, and term Eurothis meeting suggested that economic dollars held by U.S. residents in Canada and the United Kingdom and at foreign branches activity and employment would be Digitized foro fF RUA.SS.E bRa nks elsewhere. somewhat stronger over the near http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 FOMC Policy Actions term than had been anticipated at While they recognized the limitathe time of the previous meeting. tions of any forecasts under present For the year 1985, the third succes- circumstances, the members of the sive year of economic expansion, Committee and the Federal Reserve real GNP was estimated to have Bank presidents not currently serving increased about 2V2 percent, and as members presented at this meeting broad measures of inflation generally specific projections of economic achad risen at rates of around 3V2 to tivity, average prices, and the rate of 33/4 percent—close to, or somewhat unemployment. For the period from below, those recorded in the preced- the fourth quarter of 1985 to the ing two years. Real GNP was ex- fourth quarter of 1986, forecasts for pected to grow a little more this year growth of real GNP centered on a than in 1985 and the average unem- range of 3 to 3Vi percent, with a full ployment rate was projected to de- range of 23A to 41/* percent. Forecasts cline somewhat from the rate re- of growth in nominal GNP had a corded last year. The rate of increase central tendency of 6V2 to 7V4 percent in prices over the coming year was and an overall range of 5 to 8V2 expected to be little changed from percent. With regard to the rate of that experienced in 1985. It was inflation, as indexed by the GNP noted, however, that the sharp fur- deflator, the projections centered on ther declines in oil prices in the days rates of 3 to 4 percent and the range before this meeting had not been was 2V2 to 4V2 percent. Estimates of incorporated in the projections. the rate of unemployment in the In the Committee's discussion of fourth quarter of 1986 varied from the economic situation and outlook about 6V4 to 63/4 percent, with several the members differed somewhat in in the area of 6V2 percent. These their assessments of the prospects for forecasts were based on the Commitbusiness activity, but they generally tee's objectives for growth in money agreed that further expansion at a and credit that were established at somewhat faster pace than in 1985 this meeting. It was also assumed was a reasonable expectation for that federal budget deficits would be 1986. At the same time, several on a declining trend and that the members commented that the out- foreign exchange value of the dollar look remained subject to substantial would not change enough after its uncertainties. Changes in the inter- substantial fall during 1985 to exert national prices of crude oil were so a significant further impact on ecolarge and so recent that they were nomic activity and prices during 1986. particularly difficult to evaluate. In the course of the Committee's Members also referred to uncertain- discussion, members referred to the ties surrounding prospects for fiscal recent improvement in several key policy stemming from the legal chal- indicators of business activity. In lenge to the Gramm-Rudman-Holl- themselves these indicators augured ings legislation, the problems for well for continuing economic growth business investors associated with over the year ahead. On the other pending tax reform legislation, and hand some members commented that the difficulties of predicting and as- the current and prospective performsessing changes in the foreign ex- ance of several important sectors of change value of the dollar. the economy—such as agriculture # Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 97 and business fixed investment—did The fiscal policy outlook, despite not suggest a strengthening expan- current legal complications, was seen sion. However, the actual perfor- as pointing to declining budgetary mance of those sectors among others deficits. Members commented that would be influenced to an important the better prospects for action on the extent by a number of broad, over- federal budget had already helped to riding factors. reduce inflationary expectations and Among the positive factors cited had exerted a quite favorable impact by the members were the recent on domestic financial markets. The decline in oil prices, lower interest actual implementation of deficit-rerates, and higher stock prices. These ducing measures—in terms of their developments generally had favora- direct effects on government spendble implications for consumer spend- ing—would tend to restrain the ing, housing, and many types of growth of income and economic acbusiness investment. Some members tivity. However, those effects might also referred to the rapid growth in well be offset, at least in part, by Ml and to the ample availability of increased private spending that would liquidity as factors that would tend tend to be stimulated by downward to support the expansion over the adjustments in interest rates as maryear ahead. The decline in the for- kets anticipated or responded to eign exchange value of the dollar, reduced federal credit demands. while exerting upward pressures on In their discussion of the outlook prices, was seen as another positive for inflation, the members expressed development in terms of its impact somewhat differing views. These on economic activity, although views ranged from expectations of little differed considerably with regard to change, or perhaps some improvethe timing and extent of that impact. ment, from the recent trend to the On the negative side, members anticipation of some deterioration. mentioned the downside risks inher- In the context of the sizable decline ent in the debt problems faced by in unemployment and poor producmany consumers and a number of tivity performance, some members industries, including agriculture, and commented that the economy's the associated financial strains on growth potential might be more limsome of their institutional lenders. ited than they had thought earlier The recent decline in oil prices, while and that relatively rapid business a favorable development in terms of expansion might at some point, though its overall impact on the economy, not over the quarters immediately nonetheless had negative conse- ahead, be associated with increasing quences for energy producers and inflationary pressures. Other memtherefore for important parts of the bers, while also troubled by produccountry. Several members also tivity trends, nonetheless felt that the stressed the adverse repercussions of rate of unemployment was still suflower oil prices on a number of ficiently high and capacity utilization developing countries that were heav- rates sufficiently low to rule out such ily dependent on oil exports to ser- a concern for the conduct of policy vice their large debts to international for the time being. Views also diflending institutions, including major fered in emphasis with regard to the U.S. banks. inflationary impact of the decline in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 FOMC Policy Actions the foreign exchange value of the preferences regarding an appropriate dollar. The depreciation of the dol- range for Ml, the differences were lar, especially if it were to continue not very large. All of the members substantially further, could involve contemplated a marked slowing in significant upward pressures on im- Ml growth from that experienced in port prices at some point. Some 1985 as a likely development despite members emphasized their view that their expectations of some pickup in the inflationary impact of the dollar the expansion of nominal GNP. decline would be greatly dampened Nonetheless, the members gave conby efforts of foreign business firms siderable emphasis to the uncertainto retain market shares. Others, ties that continued to surround the while recognizing that the effects of outlook for the velocity of Ml—the the dollar's decline could be delayed relationship between Ml and GNP. and in the short run offset by reduced The sharp decline in Ml velocity oil prices, felt that the inflationary during 1985 was unexpected although potential would be significant over after the fact it could be explained time, depending in part on other to a considerable extent, though not economic policy developments. The entirely, by historical relationships members generally agreed that, in of money to income and interest addition to oil price and federal rates. Still, the changing composition budgetary developments, the strong of Ml, involving a growing share of price competition in many markets interest-bearing components, had inand restrained labor settlements were creased the proportion of Ml that factors currently tending to curb served both a transaction and a inflationary pressures. savings function and appeared to At this meeting the Committee have made the behavior of this agreviewed the 1986 growth ranges for gregate less predictable in comparithe monetary and credit aggregates son to earlier experience. Moreover, that it had tentatively set in July demand deposits had grown much 1985 within the framework of the more in 1985 than might have been Full Employment and Balanced anticipated and it was not clear Growth Act of 1978 (the Humphrey- whether that growth reflected more Hawkins Act). Those tentative ranges cautious cash management practices included growth, measured from the on the part of businesses or other fourth quarter of 1985 to the fourth perhaps transitory factors. quarter of 1986, of 4 to 7 percent for In the view of most, but not all, Ml and 6 to 9 percent for both M2 of the members it was desirable to and M3. The associated range for widen the tentative Ml range in total domestic nonfinancial debt had order to take account of the uncerbeen provisionally set at 8 to 11 tainty in the relationship between percent for 1986. Ml and economic activity and prices, Discussion of the tentative range but in general the suggested ranges for Ml focused on its appropriate involved approximately the same width and level in light of the eco- midpoints. The upper limits that nomic and financial circumstances were proposed generally assumed that appeared to be in prospect for there would not be as large a drop the year ahead and on its unusual in velocity this year as had occurred behavior in recent years. While the in 1985. But it was noted that in the Digitized form FeRmASbEeRrs expressed some differing absence of some reversal in the sharp http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 99 1985 drop in Ml velocity, growth to prove again to be a more useful toward the upper end of the range guide for policy implementation in a might well prove to be consistent variety of potential economic setwith satisfactory economic perform- tings. One member commented that ance. It might even be appropriate over time Ml would probably serve for Ml to run above the upper bound as a better indicator of future GNP of its range should recent velocity than the broader measures of money. trends persist. On the other hand, Alternatively, it was suggested that more moderate growth in Ml could while Ml might have become a less be indicated to the extent that its reliable guide, at least under recently velocity proved to be stronger than prevailing circumstances, it continexpected. In general, there was ued to have significant value as a agreement that the behavior of Ml policy indicator when considered in should be evaluated in light of its the context of the behavior of the consistency with M2 and M3 and broader aggregates. Collectively, the also in the context of broader eco- aggregates used by the Committee nomic and financial developments appeared to have more significance and the potential for inflationary than any one of them viewed sepapressures. rately. With regard to the broader mone- With respect to the monitoring tary aggregates, the members indi- range for total domestic nonfinancial cated that the tentative ranges estab- debt, a majority of the members lished in July for 1986 were still favored adopting the range of 8 to appropriate. Growth last year was 11 percent for 1986 that had been generally in line with expectations, tentatively established in July. A and on balance over the past few number of other members preferred years, the behavior of M2 and M3 somewhat higher ranges in the exseemed to have been less affected pectation that debt expansion, while than Ml by institutional and interest decreasing from its actual pace in rate changes. In part that develop- 1985, might still be around—or perment reflected the fact that the haps a bit above—the upper limit of broader aggregates include an array the tentative range. In the course of of deposit and money market instru- the discussion, it was suggested that ments that often exhibit offsetting the Committee drop its monitoring movements. range for debt, perhaps substituting In the course of the Committee's another measure such as total liquid discussion, consideration was given assets. It was pointed out, among to the appropriate degree of empha- other things, that the debt aggregate sis to be given to Ml in policy was subject to serious measurement implementation, at least until there problems, including a large amount was more evidence that the behavior of double counting—related for exof Ml velocity could be anticipated ample to financial activities such as with a greater degree of confidence. advance refundings and mortgage Most of the members felt that the financing by state and local govern- Committee's current procedures re- ments—and distortions arising from mained appropriate, taking account an extraordinary pace of share retireof the considerations underlying the ments financed by borrowing. It was range adopted and its interpretation. also noted that the debt measure had Some emphasized that Ml was likely been deviating substantially in recent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 FOMC Policy Actions years from past historical relation- sponsiveness to changes in interest rates. ships to GNP. A majority of the It agreed that an appropriate target range under existing circumstances would be 3 members, while acknowledging the to 8 percent, but it intends to evaluate difficulties with this aggregate and movements in Ml in the light of its conagreeing that further study was sistency with the other monetary aggreneeded, continued to feel that it gates, developments in the economy and financial markets, and potential inflationserved as a useful benchmark for ary pressures. It adopted a range of 6 to evaluating the growth of debt in the 9 percent for M2 and 6 to 9 percent for economy and that its behavior should M3. The associated range for growth in continue to be monitored, particu- total domestic nonfinancial debt was set larly in light of the Committee's at 8 to 11 percent for the year 1986. concern about the increasing debt Votes for this action: Messrs. Volcker, burden in the economy. Corrigan, Angell, Black, Forrestal, At the conclusion of the Commit- Johnson, Keehn, Martin, Parry, Rice, tee's consideration of the long-run Ms. Seger, and Mr. Wallich. Votes ranges, all of the members indicated against this action: None. that they favored or found acceptable monetary growth ranges for 1986 of In the Committee's discussion of 3 to 8 percent for Ml and 6 to 9 policy implementation for the weeks percent for both M2 and M3. A immediately ahead, a number of monitoring range of 8 to 11 percent members referred to the difficulty of was also accepted for total domestic clearly appraising the significance of nonfinancial debt. In keeping with the most recent economic and finanthe Committee's usual procedures cial developments. While monetary under the Humphrey-Hawkins Act, expansion had slowed in recent weeks, the ranges would be reviewed at the period of reduced growth was midyear, or sooner if deemed nec- brief and it followed a period of essary, in the light of their behavior substantial expansion. Strong emin relation to economic and financial ployment growth did not appear to developments. be fully matched by other current The following paragraph relating economic indicators. The needed to the long-run ranges was approved correction of the value of the dollar for the domestic policy directive: entailed risks of a more fundamental change in market attitudes and a The Federal Open Market Committee cumulating decline in the exchange seeks to foster monetary and financial rate that might discourage willingconditions that will help to reduce inflaness to hold dollars at declining tion further, promote growth in output on a sustainable basis, and contribute to an interest rates. In these circumstanimproved pattern of international trans- ces, nearly all participants agreed actions. In furtherance of these objectives that little or no change in reserve the Committee agreed to establish the folavailability was warranted. In that lowing ranges for monetary growth, connection, members also noted that measured from the fourth quarter of 1985 to the fourth quarter of 1986. With re- the recent slowing of the monetary spect to Ml, the Committee recognized aggregates was reasonably in line that, based on the experience of recent with the Committee's expectations at years, the behavior of that aggregate was the time of the December meeting subject to substantial uncertainties in relationship to economic activity and prices, for the November-to-March period. depending among other things on its re- In the course of the Committee's Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 101 discussion it was noted that while policy implementation, the members monetary policy had been relatively agreed that the appropriate degree accommodative for some time, short- of pressure on reserve positions should term rates had shown little tendency continue to be determined in light of to decline and the Federal funds rate the growth of the monetary aggreremained significantly above the dis- gates judged in the context of incomcount rate even though borrowing at ing information about the economy, the discount window had dropped to the outlook for prices, and conditions rather low levels last month. More- in domestic and international finanover, long-term rates had declined cial markets, including the value of substantially since early fall. In that the dollar in the foreign exchange context, and against the already ac- markets. A majority of the members commodative mode of open market agreed with the suggestion that there operations, the point was made that should be no presumptions about the the discount rate might need to be likely direction of any intermeeting reduced to permit or accommodate adjustments, given the many uncera market tendency toward lower tainties about prospective economic rates and that such a move would be and financial developments and the a desirable complement to open mar- behavior of the monetary aggregates. ket operations in the light of the However, some members believed risks of a slower rate of business that policy implementation should expansion. More generally, in pre- remain especially alert to developvailing circumstances, the members ments that might call for some easing wished to conduct open market op- of reserve conditions in light of the erations in a manner that would not considerable risks that they saw of in itself signal or encourage higher some weakening in the economic interest rates or impede the tendency expansion. for some market rates to decline. At At the conclusion of the Committhe same time, there was concern tee's discussion a majority of the that policy implementation be sensi- members indicated their acceptance tive to a situation in which a decline of a directive that called for mainin the dollar might tend to feed upon taining unchanged conditions of reitself, leading to an exaggerated fall serve availability. The members exwith disturbing implications for infla- pected such an approach to policy tion, financial markets, and the econ- implementation to be consistent with omy over time. In that connection it growth in M2 and M3 at annual rates was noted that the desirability of a of about 6 percent and 7 percent discount rate action would depend respectively for the period from Noon evolving economic and financial vember to March. Over the same circumstances; among other factors, period they expected Ml to expand in the light of the risks for the dollar at an annual rate of around 7 perin foreign exchange markets, such cent, although the behavior of Ml action would need to take account was seen as still subject to unusual of the willingness of major central uncertainty. The Committee indibanks abroad to take broadly similar cated that it might find somewhat actions. greater or somewhat lesser reserve In the Committee's discussion of restraint acceptable over the interpossible intermeeting adjustments in meeting period depending on the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 FOMC Policy Actions growth of the monetary aggregates, markedly, while growth in M3 picked up the strength of the business expan- as banks issued a substantial volume of large time deposits to support further rosion, the performance of the dollar bust growth in bank credit. Interest rates on foreign exchange markets, prog- have fluctuated considerably since the ress against inflation, and conditions December meeting of the Committee; on in domestic and international credit balance, short-term interest rates have risen a little while longer-term rates are markets. The members agreed that unchanged to somewhat lower. The tradethe intermeeting range for the fed- weighted value of the dollar against major eral funds rate, which provides a foreign currencies has declined further. mechanism for initiating consultation The Federal Open Market Committee of the Committee when its bounda- seeks to foster monetary and financial conditions that will help to reduce inflaries are persistently exceeded, should tion further, promote growth in output on be left unchanged at 6 to 10 percent. a sustainable basis, and contribute to an At the conclusion of the meeting, improved pattern of international transthe following domestic policy direc- actions. In furtherance of these objectives the Committee agreed to establish the foltive, embodying the Committee's lowing ranges for monetary growth, long-run ranges and its short-run measured from the fourth quarter of 1985 operating instructions, was issued to to the fourth quarter of 1986. With rethe Federal Reserve Bank of New spect to Ml, the Committee recognized that, based on the experience of recent York: years, the behavior of that aggregate was subject to substantial uncertainties in re- The information reviewed at this meet- lationship to economic activity and prices, ing suggests that economic activity is cur- depending among other things on its rerently expanding at a moderate pace. To- sponsiveness to changes in interest rates. tal nonfarm payroll employment increased It agreed that an appropriate target range substantially further in January, and the under existing circumstances would be 3 civilian unemployment rate declined to 6.7 to 8 percent, but it intends to evaluate percent. In December industrial produc- movements in Ml in the light of its contion rose further, and available informa- sistency with the other monetary aggretion suggests some additional rise in Jan- gates, developments in the economy and uary. Retail sales increased considerably financial markets, and potential inflationin December after declining on balance ary pressures. It adopted a range of 6 to over the previous two months, and hous- 9 percent for M2 and 6 to 9 percent for ing starts rebounded from their October- M3. The associated range for growth in November pace. Business capital spend- total domestic nonfinancial debt was set ing strengthened somewhat in the fourth at 8 to 11 percent for the year 1986. quarter. Merchandise trade data for the In the implementation of policy for the fourth quarter suggest that the deficit wid- immediate future, the Committee seeks ened further from the very high third- to maintain the existing degree of presquarter level. In late 1985 consumer and sure on reserve positions. This action is producer prices rose somewhat more than expected to be consistent with growth in earlier, but for the year as a whole broad M2 and M3 over the period from Novemmeasures of prices and wages increased ber to March at annual rates of about 6 at rates close to those recorded in 1984. percent and 7 percent, respectively; while With respect to the Committee's ranges the behavior of Ml continues to be subfor longer-term monetary growth, Ml ex- ject to unusual uncertainty, growth at an panded at a rate well above the range set annual rate of about 7 percent over the for the second half of 1985; M2 grew at period is anticipated. Somewhat greater a rate somewhat below the upper end of reserve restraint or somewhat lesser reits range for the year; and M3 expanded serve restraint might be acceptable deat a rate near the midpoint of its range pending on behavior of the aggregates, for 1985. Expansion in total domestic the strength of the business expansion, nonfinancial debt was above the upper developments in foreign exchange marend of its monitoring range for the year. kets, progress against inflation, and con- Digitized forI nF RJAanSuEaRr y growth in Ml and M2 slowed ditions in domestic and international credit http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 103 markets. The Chairman may call for tially in January, rose further in Committee consultation if it appears to February, but employment in manuthe Manager for Domestic Operations that facturing fell after four months of reserve conditions during the period begains. The average monthly rise in fore the next meeting are likely to be associated with a federal funds rate persist- employment for the two months was ently outside a range of 6 to 10 percent. about 325,000, somewhat higher than the average in the fourth quarter of Votes for the short-run operational par- 1985. Hiring was exceptionally brisk agraph: Messrs. Volcker, Corrigan, Angell, Black, Forrestal, Johnson, at retail trade and service establish- Keehn, Parry, Rice, and Wallich. Votes ments in both months. In contrast to against this action: Mr. Martin and Ms. the employment gains reported in Seger. the payroll survey, employment as measured by the household survey Mr. Martin and Ms. Seger disfell almost 400,000 in February, about sented because they preferred some offsetting the increase in January, easing of reserve conditions given and the civilian unemployment rate the risks they saw of unacceptably rose 0.6 percentage point to 7.3 sluggish economic expansion. Such percent. A sharp drop in agricultural risks would be reduced in their view employment, not measured by the by lower short-term interest rates, payroll survey, accounted for about which had not declined in line with half of the decline; job losses in recent reductions in long-term interenergy-related industries apparently est rates and in inflation expectaalso contributed to the decline. tions. They also believed some mod- The index of industrial production est easing could lead to market fell an estimated 0.6 percent in Febconditions that would facilitate a ruary after edging up only slightly in reduction in the discount rate. January. Although output of automotive goods was higher in February, production cutbacks were wide- Meeting Held on April 1, 1986 spread for most other categories of goods. In particular, petroleum drill- Domestic Policy Directive ing activity was curtailed sharply in The information reviewed at this response to the dramatic declines in meeting indicated a mixed pattern of oil prices. Limited information availdevelopments. On balance it ap- able for March, including reported peared that economic activity had cutbacks in motor vehicle assemblies picked up from the reduced fourth- and steel production and a further quarter pace, although spending re- decline in drilling activity, suggested mained sluggish in some key sectors. continued sluggishness in produc- Price developments thus far in 1986 tion. The index of capacity utilization had been dominated by sharp de- for total industry declined 0.6 perclines in oil prices. Energy prices fell cent to 80.0 percent; over the past substantially over the first two months year the index generally had flucof the year and food prices also tuated in a range of 80 to 81 percent. declined somewhat, while prices of Although retail sales changed little most other goods and services rose in January and February, they reat a moderate pace. mained about 1.0 percent above the Total nonfarm payroll employ- average in the fourth quarter, owing Digitized form FeRnAtS, EwR hich had increased substan- to a spurt in December. The rise http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 FOMC Policy Actions relative to the level of the fourth ing been essentially flat in the fourth quarter was attributable to gains in quarter, declined sharply in January outlays for durable goods, particu- but turned up in February. Outlays larly automobiles and furniture and for nonresidential structures probaappliances. Sales of domestic auto- bly fell in early 1986, as spending on mobiles, boosted by additional fi- petroleum drilling activity reportedly nancing incentive programs, rose to plummeted. an average annual rate of 8.3 million Largely reflecting declines in enunits over the January-February pe- ergy prices, the producer price index riod, about IV2 million units above for finished goods fell substantially the depressed fourth-quarter rate. in January and February, dropping However, sales slipped during the 0.7 percent and 1.6 percent respecfirst 20 days of March to a rate of 7 tively. Producer prices for consumer million units. foods and for crude food materials Total private housing starts surged also declined appreciably over the in the January-February period to two months. The consumer price an annual rate of more than 2 million index declined 0.4 percent in Februunits, compared with an average of ary—its first decline in more than about l3/4 million units for the fourth three years—more than offsetting a quarter and for the year 1985. The rise in January. A sharp drop in increase was concentrated in the prices for gasoline and fuel oil acsingle-family sector, though con- counted for most of the February struction of multifamily structures decline, but food prices also fell. remained at a relatively brisk pace Prices of other goods and services despite continued high rental va- generally rose moderately. The index cancy rates. Sales of new homes of average hourly earnings edged up declined somewhat in February to a on balance over the first two months level about equal to the fourth- of the year. quarter average, while sales of exist- The trade-weighted value of the ing homes remained at about their dollar against major foreign curren- January pace and a little lower than cies continued to fall through about in the fourth quarter. Over the pe- mid-March but recently rose someriod since the FOMC meeting in what; on balance the dollar had February, the average rate on com- declined about 1% percent over the mitments at savings and loan associ- period since the February meeting. ations for conventional fixed-rate Disappointment among market parhome mortgage loans had declined ticipants about data released on U.S. nearly 1 percentage point to about economic activity and concerns about 10 percent, the lowest level since potential adverse effects of the sharp 1978. declines in oil prices on U.S. banks Business capital spending appar- holding sizable loans to energy-reently weakened somewhat in early lated businesses and to oil-producing 1986 after a surge around the end of developing countries exerted downlast year. Shipments of nondefense ward pressure on the dollar, offset capital goods from domestic produc- to some extent by views that foreign ers rose 5 percent in February but authorities, especially the Japanese, remained well below the average in were reluctant to see further apprethe fourth quarter. New orders for ciation of their currencies. The mer- Digitized forn FoRnAdSeEfeRn se capital goods, after hav- chandise trade deficit in January http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 105 appeared to have been only slightly have slowed appreciably over the first smaller than in December; prelimi- quarter, after extraordinarily rapid nary data for February suggested growth around the end of last year. that exports increased and that the Open market operations during the price and quantity of oil imports intermeeting period were directed at declined. maintaining about the prevailing de- At its meeting on February 11-12, gree of pressure on reserve positions. 1986, the Committee had adopted a Seasonal plus adjustment borrowing directive that called for maintaining from the discount window averaged unchanged conditions of reserve avail- about $350 million during the three ability. The members expected such full reserve maintenance periods after an approach to policy implementation the February FOMC meeting. That to be consistent with growth in M2 level was inflated a bit by technical and M3 at annual rates of about 6 problems associated with wire transpercent and 7 percent respectively for fers early in the interval; more rethe period from November to March. cently, borrowing was running in the Over the same period they expected area of $225 million to $250 million. Ml to expand at an annual rate of Federal funds generally traded in around 7 percent, though the behavior the 7% to 8 percent area during the of Ml was viewed as still subject to first half of the intermeeting period. unusual uncertainty. The Committee After the announcement by the Fedagreed that somewhat greater or eral Reserve on March 7 of a reducsomewhat lesser reserve restraint might tion in the discount rate from iVi to 7 be acceptable over the intermeeting percent, the federal funds rate fell to period, depending on the behavior of around 7% percent and generally flucthe aggregates, the strength of the tuated around that level throughout business expansion, developments in the remainder of the period. Other foreign exchange markets, progress short-term interest rates declined about against inflation, and conditions in V2 to % percentage point over the domestic and international credit mar- intermeeting interval. Long-term rates kets. The intermeeting range for the dropped more sharply, falling by 1 to federal funds rate was retained at 6 to nearly 13A percentage points, against 10 percent. a background of further weakness in After growing little in January, Ml oil prices, mixed economic news, and expanded at an annual rate of about declines in some aggregate measures 1XA percent in February and was of prices. expected to grow at a rate of about During the Committee's discussion 14 percent in March—leaving this of the economic situation and outaggregate at a level somewhat above look, several members commented the upper end of the Committee's on the contrast between current inrange for the year. On the other hand, dications of some sluggishness in growth of M2 was generally sluggish economic activity and a number of over the first three months of the underlying developments that pointed year, and expansion in M3 remained to stronger expansion later in the moderate. As a result, M2 was run- year and perhaps in 1987 as well. ning below its long-run range while The incoming information on busi- M3 was near the midpoint of its range ness activity was mixed, but it was for 1986. The expansion in total do- thought that on balance such informestic nonfinancial debt appeared to mation suggested a pickup in eco- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 FOMC Policy Actions nomic growth in the first half of this Other members, while seeing some year from the very slow pace in the improvement as a likely prospect for fourth quarter. Several members ob- the second half of the year, nonetheserved, though, that the near-term less emphasized the uncertainties— outlook remained relatively weak, both domestic and international— particularly taking account of sub- that continued to trouble the busistantial cutbacks in oil company in- ness outlook and that could portend vestments associated with declining more restrained expansion than was oil prices. At the same time a com- currently anticipated. Consumer debt bination of developments—includ- burdens remained large and one ing reduced interest rates, higher member observed that sales of new stock prices, lower oil prices, and a automobiles currently appeared to decline in the dollar on exchange be inhibited to some extent by a markets—was likely to exert an in- reduced willingness or capacity of creasingly stimulative impact on the some consumers to borrow. In the economy as the year progressed. The business sector, while investment staff projection presented at this spending was likely to benefit considmeeting had suggested that the ex- erably from the reduced cost of pansion in real GNP would strengthen capital, its overall growth might well by the second half of the year, after be restrained by weak demands for relatively modest growth in the first business equipment in important sechalf. tors of the economy such as agricul- In evaluating the economic out- ture and energy, and by the impact look, some members referred to the over time of apparent overbuilding, apparent improvement in business notably of office structures, in some confidence over the course of recent parts of the country. One member weeks as the cost of capital declined also noted that uncertainties relating and international competitiveness to tax reform legislation were continimproved. It was thought that sub- uing to inhibit business investment stantial declines in interest rates would spending. Members also indicated have a stimulative impact on interest- that the improved conditions in fisensitive sectors of the economy; nancial markets stemmed to a large indeed, that impact was already being extent from expectations of future felt in the housing sector. Members reductions in federal budget deficits also reported that lower interest rates and a failure to implement such were leading to a large volume of reductions could have highly adverse mortgage debt refinancings. The lat- consequences for financial markets ter would reduce monthly servicing and the economy. costs and would therefore tend to With respect to exchange market support consumer spending over time. developments, the decline in the The rise in stock market prices and dollar was viewed as implying upthe decline in oil prices also were ward pressures on domestic prices viewed as favorable for consumer over time, but also as likely to spending. Taking account of these stimulate business activity. While various factors, a few members com- there were few actual indications to mented that potential deviations from date of directly induced increases in the staff projection were likely to be export sales, contacts with business in the direction of more rapid growth. suggested that export markets were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 107 improving. The members continued ble, one-time effects of lower oil to differ in their assessment of when prices. Members noted that the curand to what extent a lower dollar rent downward pressures on prices would exert its favorable effects on provided an opportunity for the more overall domestic economic activity or effective pursuit of policies designed begin to show through significantly to foster a continuing reduction in in prices. One emphasized that ef- the rate of inflation. It was observed forts by foreign firms to retain mar- in this connection that while considket shares, especially in the absence erable progress had been made in of strong economic growth abroad, curbing inflation in key industries would tend to reduce the expansion- such as manufacturing and construcary and price effects of the dollar's tion, the services industries appeared depreciation. to be particularly resistant to further Some members commented that anti-inflationary progress. Partly for the strength of the expansion in the that reason but also in light of the U.S. economy over the next few recent weakness in productivity, the quarters would depend to an impor- depreciation of the dollar, federal tant extent on the rate of economic budget uncertainties, and the possigrowth in key industrial nations bility of a reversal in oil prices, some abroad and the resulting increase in members expressed concern about their demands for U.S. exports. It the underlying inflationary potential was noted, however, that stronger in the economy. They also cited expansion in some major foreign recent price increases by a major countries might well be contingent automobile manufacturer as a woron their pursuit of more stimulative risome development in terms of its economic policies, and there was broader implications for inflationary question about the willingness of attitudes and future inflation. some key countries to undertake At its meeting in February the such policies at this time. A member Committee had agreed on policy also commented on the importance objectives for monetary growth for of world commodity prices in main- the period from the fourth quarter taining the international purchasing of 1985 to the fourth quarter of 1986 power of many developing countries, that included ranges of 3 to 8 percent in addition to those that exported for Ml and 6 to 9 percent for both oil, and the potentially adverse re- M2 and M3. The associated range percussions of lower commodity prices for total domestic nonfinancial debt on world trade and U.S. export was set at 8 to 11 percent. In keeping industries. with the Committee's usual proce- In their comments about the out- dures under the Humphrey-Hawklook for inflation the members gave ins Act, these ranges would be reconsiderable emphasis to the favor- viewed at the July meeting or sooner able impact of declining oil prices, if warranted by unanticipated develbut it was also noted that those opments. prices remained vulnerable to a re- In the Committee's discussion of versal. In the staffs economic pro- policy implementation for the weeks jections, the rate of increase in prices immediately ahead, all of the memwas projected to slow over the near bers favored directing open market term, largely because of the favora- operations at least initially toward Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 FOMC Policy Actions maintaining essentially unchanged ahead. Some members also stressed conditions of reserve availability. the desirability of focusing on the However, some shadings of opinion tendency for the velocity of Ml to were expressed. A few preferred to remain relatively weak and the astilt the provision of reserves toward sociated possibility that relatively rapid slightly easier reserve conditions or growth in Ml and in reserves might at least to retain flexibility in that be needed to help sustain the expandirection, depending on emerging sion. In general, the members agreed market conditions. Others expressed that the behavior of Ml should the view that current reserve pres- continue to be evaluated in light of sures should be well maintained, its consistency with M2 and M3 and recognizing the possibility that such also in the context of broader ecoan approach to policy implementa- nomic and financial developments, tion might involve some little tight- the potential for inflationary presening of market conditions since sures, and exchange market condimarket participants might be antici- tions. Over the next three months pating some easing. More generally, M2 was expected to strengthen from a number of members commented its reduced pace in the first quarter, that policy implementation needed while M3 was likely to continue to to take account of the already accom- expand at a moderate rate. modative posture of monetary policy With regard to possible intermeetand the favorable, though somewhat ing adjustments in policy implemenuncertain, prospects for stronger ex- tation, the members could foresee pansion over the intermediate term, potential developments that might if not in the period immediately call for either some easing or some ahead. tightening, given the uncertainties The members anticipated that, with about prospective economic and filittle or no change in reserve condi- nancial developments and the behavtions, the monetary aggregates would ior of the monetary aggregates. In tend to grow at rates that were these circumstances, most of the broadly consistent with the Commit- members felt that there should be no tee's target ranges for the year. Ml presumptions about the likely direcmight remain on the high side in the tion of any intermeeting adjustweeks ahead, but it was emphasized ments. However, some members bethat the behavior of Ml remained lieved that policy implementation subject to considerable uncertainty. should remain especially alert to According to an analysis prepared developments that might call for for this meeting, Ml growth over the some easing of reserve conditions, next three months might be close to given the risks that the expansion that experienced over the December- might prove to be significantly weaker to-March period, assuming un- than expected over the period imchanged conditions of reserve avail- mediately ahead. It was noted that a ability, somewhat slower expansion further reduction in the discount in nominal GNP, and no further rate, should market conditions here declines in short-term market rates. and policy developments abroad make However, demands for Ml balances such an action desirable, could have were likely to be boosted, possibly implications for monetary policy imsubstantially, if interest rates should plementation and, depending on the Digitized ford FeRclAiSnEe R further during the period circumstances, might require a conhttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 109 sultation of the Committee prior to quarter pace but with spending sluggish the next scheduled meeting on May in some key sectors. Total nonfarm payroll employment increased appreciably 20. further in February following a large rise At the conclusion of the Commitin January, but employment in manufactee's discussion, all of the members turing fell after four months of gains and indicated their acceptance of a direc- industrial production declined. The civilian unemployment rate rose sharply to 7.3 tive that called for maintaining about percent. Retail sales were little changed the existing degree of pressure on in January and February after rising over reserve conditions. The members ex- the previous two months, while housing pected such an approach to policy starts were well above their pace in late implementation to be consistent with 1985. Business capital spending apparently weakened somewhat in early 1986. growth of both M2 and M3 at an The merchandise trade deficit for January annual rate of about 7 percent for appears to have been only slightly smaller the period from March to June. Over than in December; preliminary data for the same period, Ml was expected February suggest that exports increased and that the price and quantity of oil imto expand at an annual rate of about ports declined. Largely reflecting declines 7 to 8 percent, but the members in energy prices, consumer prices edged recognized that the behavior of Ml down on balance over the first two months remained subject to unusual uncer- of 1986 and producer prices fell substantainty. The Committee indicated that tially. it might find somewhat lesser or Growth in Ml picked up considerably over the course of the first quarter, leavsomewhat greater reserve availability ing this aggregate by March somewhat acceptable over the intermeeting pe- above the upper end of its range for the riod depending on the growth of the year. On the other hand, growth of M2 monetary aggregates, the strength of was generally sluggish over the past 3 months and was running below its longthe business expansion, the performrun range. Expansion of M3 was modance of the dollar on foreign ex- erate during the winter months, with change markets, progress against in- growth around the midpoint of its range flation, and conditions in domestic for 1986. Interest rates have declined considerably since the February meeting of and international credit markets. The the Committee. On March 6, the Federal Committee agreed that the current Reserve Board approved a reduction in intermeeting range of 6 to 10 percent the discount rate from TA to 7 percent. for the federal funds rate should be The trade-weighted value of the dollar retained, although some members against major foreign currencies continued to decline through mid-March but has suggested that the current range risen somewhat more recently; on balance might be lowered as a technical the dollar has declined slightly since the adjustment that would bring the February meeting. present trading level of the federal The Federal Open Market Committee seeks monetary and financial conditions funds rate closer to the midpoint of that will foster reasonable price stability the range. over time, promote growth in output on At the conclusion of the meeting a sustainable basis, and contribute to an the following domestic policy direc- improved pattern of international transactions. In furtherance of these objectives tive was issued to the Federal Rethe Committee agreed at its February serve Bank of New York: meeting to establish the following ranges for monetary growth, measured from the fourth quarter of 1985 to the fourth quarter The information reviewed at this meet- of 1986. With respect to Ml, the Coming indicates a mixed pattern of devel- mittee recognized that, based on the exopments with evidence of a pickup in eco- perience of recent years, the behavior of Digitized forn FoRmAicS EaRct ivity from the reduced fourth- that aggregate was subject to substantial http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 FOMC Policy Actions uncertainties in relationship to economic and technical factors affecting the activity and prices, depending among other provision of reserves. At the concluthings on its responsiveness to changes in sion of the discussion the members interest rates. It agreed that an approagreed that no changes were needed priate target range under existing circumstances would be 3 to 8 percent, but it in the current directive adopted at intends to evaluate movements in Ml in the meeting on April 1. It was the light of its consistency with the other understood that in carrying out open monetary aggregates, developments in the market operations within the frameeconomy and financial markets, and powork of that directive, and recogniztential inflationary pressures. It adopted a range of 6 to 9 percent for M2 and 6 to ing that partial data suggested a 9 percent for M3. The associated range strengthening in all the monetary for growth in total domestic nonfinancial aggregates in recent weeks, a degree debt was set at 8 to 11 percent for the year of caution should be exercised to 1986. avoid an impression that a further In the implementation of policy for the immediate future, the Committee seeks change in the discount rate was to maintain the existing degree of pres- sought over the period immediately sure on reserve positions. This action is ahead. expected to be consistent with growth in M2 and M3 over the period from March to June at annual rates of about 7 percent; while the behavior of Ml continues to be subject to unusual uncertainty, growth at Meeting Held on May 20, 1986 an annual rate of about 7 to 8 percent over the period is anticipated. Somewhat 1. Domestic Policy Directive lesser reserve restraint or somewhat greater reserve restraint might be acceptable de- The information reviewed at this pending on behavior of the aggregates, meeting indicated a mixed pattern of the strength of the business expansion, economic developments. On balance, developments in foreign exchange markets, progress against inflation, and con- growth in real GNP, estimated by the ditions in domestic and international credit Commerce Department to have picked markets. The Chairman may call for up in the first quarter to an annual Committee consultation if it appears to rate of 3.7 percent, appeared to be the Manager for Domestic Operations that expanding at a relatively modest pace reserve conditions during the period before the next meeting are likely to be as- in the current quarter. Thus far in sociated with a federal funds rate persist- 1986, broad measures of prices, heavently outside a range of 6 to 10 percent. ily influenced by sharp reductions in petroleum prices, had shown declines Votes for this action: Messrs. Volcker, in energy and food prices and moder- Corrigan, Angell, Guffey, Horn, John- ate increases in prices of most other son, Melzer, Morris, Rice, Ms. Seger, goods and services. and Mr. Wallich. Votes against this action: None. Absent and not voting: Mr. Total nonfarm payroll employ- Martin. ment rose 200,000 further in April, after increasing about 3A million in On April 21, the Committee held the first quarter, but employment a conference by telephone after the trends continued to be unbalanced announcement of a reduction in the across industries. Employment in fidiscount rate from 7 to 6V2 percent nance and service industries reeffective on that date. The members mained strong, and hiring at conreviewed recent economic and finan- struction sites picked up substantially cial developments, including the be- after changing little in the first quarter. havior of the monetary aggregates In manufacturing, however, job losses Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 111 were recorded for the third consec- about l3/4 million units in each of the utive month, and the length of the previous three years. Issuance of average factory workweek slipped residential building permits also rose from the high levels registered at the somewhat in April, with the increase end of last year. Employment in the concentrated in the single-family secoil and gas industry plummeted dur- tor. Permits for multifamily strucing the first four months of the year, tures fell, apparently in response to as firms curtailed drilling activity in high rental vacancy rates, particuresponse to lower oil prices. The larly in the South, and perhaps to civilian unemployment rate edged heightened uncertainties about the down to 7.1 percent in April, close prospects for changes in tax legislato the level that had prevailed tion relating to certain types of real throughout 1985. estate investment. The index of industrial production Weakness in the energy sector has rose an estimated 0.2 percent in contributed to a slowing in business April after steep declines in the capital spending in recent months. preceding two months. The increase Outlays for nonresidential structures was attributable mainly to a rebound fell sharply as spending on petroleum in motor vehicle assemblies, but drilling activity plummeted. Expendthere were also some gains in steel itures for capital equipment dropped output and in production of equip- substantially, about reversing the rise ment for business and for defense in the previous quarter that was and space; these developments offset attributed to purchases of equipment a further plunge in oil and gas well in advance of potentially adverse tax drilling. The index of capacity utili- law changes. New orders for nondezation for total industry dropped 0.7 fense capital goods, which had been percent further in March to 79.3 flat in the fourth quarter, remained percent, its lowest level since Decem- lackluster through March. Recent ber 1983, and apparently changed surveys of capital spending plans little in April. point to no more than modest growth Total retail sales rose Vi percent in outlays for the year as a whole. in April, primarily reflecting a sub- Largely reflecting declines in enstantial increase in spending for au- ergy prices, the producer price index tomotive products and continued gains fell 0.6 percent in April, its fourth in outlays for general merchandise. consecutive monthly decline, and over Sales of domestic automobiles, the first four months of the year the sparked by a new series of sales and index was down about 11 percent at financing incentives, strengthened to an annual rate. The consumer price an annual rate of 8.0 million units index had fallen 0.4 percent in March from their sluggish pace of 6.9 mil- for the second month in a row, and lion units in March. Sales rose even had declined at an annual rate of further in early May to a rate of 8.8 about 2 percent over the first three million units. months of the year. Though move- Total private housing starts in- ments in these indexes were domicreased about 4 percent in April nated by the sharp drop in prices of from a relatively high level. During petroleum products, declines in food the first four months of 1986, starts prices at both the producer and averaged nearly 2 million units at an consumer levels also helped to hold annual rate, well above levels of down inflation in the first quarter. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 FOMC Policy Actions On the other hand, prices of goods over the intermeeting period dependother than food and energy items ing on the behavior of the aggregenerally have been rising in recent gates, the strength of the business months at about the same pace that expansion, developments in foreign prevailed last year, while prices of exchange markets, progress against services have been increasing a little inflation, and conditions in domestic faster than in 1985. and international credit markets. The The trade-weighted value of the intermeeting range for the federal dollar against major foreign curren- funds rate was retained at 6 to 10 cies rose somewhat in the week percent. before this meeting but on balance it Ml grew at an annual rate of 14V2 had declined about 43A percent fur- percent in April, close to its rapid ther over the period since the Com- pace in March, and data available mittee's meeting on April 1; the thus far for early May indicated largest decline was against the Japa- further strong expansion. Ml has nese yen. There was little net change expanded more rapidly than the over the period in the differential Committee expected at the time of between U.S. and a weighted aver- its April 1 meeting, and for the year age of foreign interest rates. to date has grown at a rate well Throughout the period, but espe- above the 8 percent upper limit of cially around the time of the Tokyo the Committee's range for 1986. M2 Summit in early May, statements of and M3 expanded in April at annual U.S. and foreign officials appeared rates of about 133A percent and IOV2 to influence trading behavior. The percent respectively, also outpacing U.S. merchandise trade deficit ap- the growth paths previously expected peared to have decreased somewhat for the second quarter. However, in the first quarter, as both the given its earlier weakness, M2 moved volume and average price of oil only into the lower part of its longimports fell and nonagricultural ex- run range in April, while M3 rose to ports picked up. a level slightly above the midpoint At its meeting on April 1, 1986, of its range for 1986. Expansion of the Committee had adopted a direc- total domestic nonfinancial debt, tive that called for maintaining about which had slowed appreciably over the existing degree of pressure on the first quarter, appeared to be reserve positions. The members ex- continuing at a relatively moderate pected such an approach to policy pace. implementation to be consistent with Open market operations during growth of both M2 and M3 at an the intermeeting period were diannual rate of about 7 percent for rected at maintaining about the prethe period from March to June. Over vailing degree of pressure on reserve the same period, Ml was expected positions. During the three full reto expand at an annual rate of about serve maintenance periods after the 7 to 8 percent, but the members April 1 meeting, seasonal plus adrecognized that the behavior of Ml justment borrowing from the disremained subject to unusual uncer- count window averaged about $275 tainty. The Committee agreed that million. Borrowing was exceptionally somewhat lesser or somewhat greater light in the days immediately precedreserve restraint might be acceptable ing the announcement on April 18 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 113 of a reduction in the discount rate year, but several members also stressed from 7 to 6V2 percent, but has the risks of a different outcome. It averaged a little more than $300 was generally noted that there was no million since then. firm evidence to date of a pickup from Federal funds generally traded in the currently sluggish rate of expanthe 63/4 to 7 percent area over most sion in overall economic activity and of the intermeeting period, down that weaknesses remained in key secabout xh percentage point from the tors of the economy such as energy rate prevailing around the time of and agriculture. However, a number the previous meeting. Most other of fundamental factors pointed to short-term rates also declined on faster growth later, though there was balance, though by less than the considerable uncertainty about both federal funds and discount rates, the timing and the magnitude of the while long-term rates moved some- prospective strengthening. These facwhat higher. After declining early in tors included substantially reduced inthe intermeeting period, interest rates terest rates, higher prices in equity subsequently rose against the back- markets, lower oil prices, and the ground of an upturn in oil prices, favorable effects of the dollar's deprestrong money supply growth, further ciation on the international competidepreciation of the dollar, and tiveness of U.S. products. At the same emerging views among market par- time, some members observed that ticipants that the scope for further inflationary pressures could increase easing in monetary policy was re- over the next several quarters, particduced. ularly if domestic demands for goods The staff projections presented at and services proved to be quite strong this meeting suggested that expan- at a time when the lagged price effects sion in real GNP, though relatively of the dollar's depreciation were being modest in the current quarter, would felt. It was noted in this connection likely strengthen over the second that progress toward reducing federal half of 1986 and would be at a budget deficits was urgently needed to moderate pace in 1987. The rate of improve prospects for balanced ecounemployment was expected to de- nomic growth and help protect against cline marginally over the projection renewed inflation. horizon. The general level of prices, With regard to specific indications as measured by the GNP implicit of prospective strengthening in ecodeflator, was projected to rise rela- nomic activity, members referred tively slowly in the near term, but to among other developments to the pick up later as the favorable effects apparent improvement in business of declining oil prices dissipated and confidence in many parts of the upward pressures on prices from the country. Housing activity was dedollar's depreciation tended to inten- scribed as strong in most areas, and sify. some members cited evidence of a In the Committee's discussion of pickup in sales of consumer durables the economic situation and outlook, related to housing. And although members commented that stronger activity in manufacturing industries economic expansion in line with the tended to remain sluggish, the servstaff forecast was a reasonable ex- ice industries generally were experipectation for the second half of the encing considerable growth, includ- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 FOMC Policy Actions ing notably the financial services and one member referred to the possibiltourism. While the staff forecast had ity of an inventory correction should indicated continuing growth of con- the currently positive business mood sumer spending and modest expan- begin to deteriorate. sion in business fixed investment and A number of members expressed inventories, one member referred to the view that the performance of the the possibility that expansion in these economy during the second half of key sectors might gather momentum the year would hinge to a consideras uncertainties about the actual able extent on foreign developments. strength of business were resolved Some felt that the main downside favorably, contributing to a greater risks in the nearer-term business acceleration in real economic growth. outlook were on the foreign trade Another member commented that side. To an important degree, rising the buildup of liquidity was seen by demands for U.S. exports would many observers as a positive factor depend on faster growth in key for the expansion, especially in the foreign industrial nations, and it was context of what was viewed as an observed that such growth had been accommodative monetary policy. disappointing and a pickup might not While broad measures of liquidity occur in the absence of more stimuhad not shown particular strength in lative economic policies in at least recent quarters, holdings of cash some of those countries. And while balances had been expanding rapidly a depreciated dollar could be exand were available to support a pected to have a favorable impact on considerable pickup in spending at U.S. foreign trade over time, that some point in the future. impact might well be delayed and On the other hand, several mem- muted in an environment of slow bers indicated that the possibility of growth abroad and of highly competthe expansion remaining weak could itive markets for internationally traded not be ruled out. In this regard, a goods. Further growth in protectionnumber of members indicated that ism in the United States might likethey viewed business fixed invest- wise have a strongly inhibiting effect ment as a major uncertainty in the on U.S. export markets as foreign overall economic outlook, noting that nations retaliated. current indicators of future invest- A number of members raised quesment remained weak and that there tions about the outlook for inflation. was considerable reluctance to un- It was pointed out that the recently dertake some investment activities favorable behavior of overall prices pending the passage of tax reform was the result of price declines in the legislation. Moreover, the apparent energy and food sectors. Those deoverbuilding of commercial and other clines would soon be in the past, and facilities in some parts of the country upward pressures on overall prices and weak investment demand in would reemerge, stimulated in part depressed sectors of the economy by the lagged inflationary effects of would tend to inhibit investment the dollar's depreciation. Indeed, spending over the quarters ahead. prices of nonfuel imports were al- Members also referred to shortfalls ready indicated to have turned up. in revenues of state and local govern- Even if oil prices were to stabilize ments in depressed areas of the near current levels, their favorable country as a negative factor. Finally, impact on overall prices would tend Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 115 to wane over the quarters ahead, tain extent the earlier declines that and the possibility of a reversal in oil had occurred in market interest rates prices could not be dismissed. Agri- in the context of subsiding inflationcultural prices also could not be ary expectations and softness in final expected to continue trending down- demands. From this viewpoint, the ward, and indeed some firming had relatively rapid growth in the deoccurred recently. On the more fa- mand for money balances needed to vorable side, members referred to be accommodated in order to assure the intense competition in many a satisfactory performance of the markets and to restrained wage set- economy. On the other hand, rapid tlements in a number of industries. monetary growth also might imply Basic cost pressures appeared to be an excessive buildup in liquidity, with well contained so far in manufactur- inflationary implications for the fuing industries although price and ture. In that context, several memwage pressures in the service indus- bers emphasized the need to gauge tries remained disturbing. In one the performance of Ml in light of view any intensification of inflation- whether behavior of other, broader, ary pressures might well be delayed monetary aggregates provided conuntil well into 1987. firming evidence of a rapid growth At its meeting in February the in liquid assets. Committee had agreed on policy Members noted that expansion of objectives for monetary growth for the broader aggregates, despite the the period from the fourth quarter more rapid growth in recent weeks, of 1985 to the fourth quarter of 1986 was well within the Committee's that included ranges of 3 to 8 percent ranges for 1986, and indeed near the for Ml and 6 to 9 percent for both lower end of the range in the case of M2 and M3. The associated range M2. The more moderate growth of for total domestic nonfinancial debt the broader aggregates this year, was set at 8 to 11 percent. In keeping along with relatively moderate growth with the Committee's usual proce- of L, an even more encompassing dures under the Humphrey-Hawkins measure of the public's liquid asset Act, these ranges would be reviewed holdings, raised questions as to at the July meeting when provisional whether the growth of Ml really ranges would also be established for represented a potentially excessive 1987. buildup in liquidity or was more of a The Committee's policy discussion shift in the composition of liquid focused to a considerable extent on holdings in response to relative the members' evaluation of the re- movements in interest rates. Howcent behavior of the monetary aggre- ever, continuing growth in M2 and gates, particularly Ml. With varying M3 at the relatively rapid rates exdegrees of emphasis, members ques- perienced recently could be a matter tioned the reliability of Ml develop- of increasing concern. One member ments as a guide for the conduct of expressed a somewhat differing asmonetary policy under prevailing cir- sessment of the behavior of the cumstances. It was noted in this broader aggregates this year in that connection that the rapid growth in the contingent liabilities of banks, Ml and the associated weakness in most of which back instruments that its velocity appeared to reflect to a are not included in M2 and M3, also considerable but nonetheless uncer- seemed to have grown rapidly. More- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 FOMC Policy Actions over, growth of M2 and M3 appeared members indicated that they were in to have been held back by investor favor of continuing to direct open portfolio shifts into bonds and equi- market operations at least initially ties, including mutual funds, and the toward maintaining the existing deunwinding of such shifts could result gree of reserve availability. In supin faster growth later. In this view, port of this view, members comtherefore, less comfort could be taken mented that the rapid growth of the from the relatively restrained growth monetary aggregates and the favorof the broader aggregates for the able conditions for a pickup in busiyear to date. ness activity had to be weighed According to an analysis prepared against the currently sluggish growth for this meeting, the maintenance of in overall business activity and the the current degree of pressure on consequent uncertainties surroundreserve positions could be expected ing the economic outlook. One memto be associated with slower mone- ber felt, however, that the rapid tary growth over the balance of the growth in Ml and the potential for quarter. Even so, because of the increased inflationary pressures later substantial expansion in April and in the year and in 1987 argued for early May, growth for the quarter as some firming. a whole would be considerably faster With regard to possible adjustthan was expected at the time of the ments during the intermeeting peprevious meeting, notably in the case riod, a majority of the members felt of Ml. According to this analysis, that policy implementation should be the unusual surge in demand deposits alert to the potential need for some was likely to subside over the course firming of reserve conditions, espeof coming weeks, while some mod- cially if business indicators gave a eration could also be expected in the clear signal of a pickup in the rate of growth of NOW accounts as both economic expansion and monetary depositors and depository institu- growth did not slow in line with tions completed their adjustments to expectations. Generally, these memthe lower market interest rates that bers did not want to rule out the had emerged. Members indicated possibility of some easing in the broad agreement with this analysis, weeks immediately ahead, but they but they questioned the timing and foresaw the potential desirability of extent of the slower growth. In light such a course only in the context of of the uncertainties that were in- appreciably more sluggish economic volved, some proposed omitting nu- performance than was now expected. merical references in the directive to In this connection, one member emthe Committee's expectations for phasized that continuing declines in monetary growth in the second the velocity of money in combination quarter. However, despite the greater with a sluggish economic performthan usual uncertainties, a majority ance might warrant some easing of of the members preferred to retain reserve conditions. Other members the customary procedure of specify- believed that there should be no ing numerical growth expectations in presumptions about the likely directhe directive. tion of any intermeeting adjust- In the Committee's discussion of ments, given the prevailing uncerpolicy implementation for the period tainties about the performance of the Digitized fori mFRmAeSdEiRa tely ahead, most of the economy, possible developments in http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 117 domestic and international financial somewhat lesser reserve restraint markets, and the behavior of the might be acceptable in the event of monetary aggregates. Some mem- pronounced sluggishness in the perbers also expressed the view that the formance of the economy in associ- Committee should be tolerant of a ation with a marked slowing in monshortfall of Ml growth below current etary growth. expectations in light of the rapid The Committee agreed that the expansion of Ml recently and for the current intermeeting range for the year-to-date. It was noted that ac- federal funds rate should be reduced count needed to be taken of the by 1 percentage point to 5 to 9 behavior of the dollar on foreign percent. The reduction was intended exchange markets in any intermeet- as a purely technical adjustment in ing adjustments. the context of an unchanged degree At the conclusion of the Commit- of reserve availability and its purpose tee's discussion, all but one member was to provide a more symmetrical indicated their acceptance of a direc- range around the lower federal funds tive that called for no change in the rate that had prevailed for some existing degree of pressure on re- time. The members regard the fedserve positions. The members ex- eral funds range as a mechanism for pected such an action to be associ- initiating Committee consultation ated with a deceleration in monetary when its boundaries are persistently growth over the balance of the sec- exceeded. ond quarter. Because such growth At the conclusion of the meeting had been rapid thus far in the quarter, the following domestic policy directhe members anticipated faster growth tive was issued to the Federal Reof the monetary aggregates, espe- serve Bank of New York: cially Ml, than was expected at the time of the April 1 meeting. The The information reviewed at this meeting indicates a mixed pattern of develmembers recognized that the behavopments but suggests on balance that ecoior of Ml remained subject to ununomic activity is expanding at a relatively sual uncertainty, but they agreed that modest pace in the current quarter. Total its growth might be in the area of 12 nonfarm payroll employment increased to 14 percent for the period from moderately further in April following a considerable rise in the first quarter, but March to June, assuming some deemployment in manufacturing fell for the cline over the balance of the quarter. third consecutive month. The civilian un- For the same period, M2 and M3 employment rate edged down to 7.1 perwere now expected to expand at cent. Industrial production and total retail sales turned up in April following earlier annual rates of around 8 to 10 declines, while housing starts rose somepercent. The members agreed that if what further from a relatively high level. the anticipated slowing in monetary Weakness in the energy sector has congrowth did not occur, somewhat tributed to a slowing of business capital greater reserve pressure would be spending. The merchandise trade deficit appears to have decreased somewhat in acceptable in the context of a pickup the first quarter, as the volume and avin the expansion of economic activ- erage price of oil imports fell. Largely reity, with account being taken of flecting declines in energy prices, conconditions in domestic and interna- sumer prices have declined somewhat since late 1985 and producer prices have fallen tional financial markets and the besubstantially. havior of the dollar on foreign ex- In April Ml continued to grow at a rapid Digitized for c F h R an A g S e E R m arkets. On the other hand, pace, leaving this aggregate above the uphttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 FOMC Policy Actions per end of its range for the year. Growth Ml, than expected at the last meeting. M2 of the broader aggregates, especially of and M3 are expected to expand over the M2, strengthened considerably in April, period from March to June at annual rates bringing M2 into the lower part of its long- of about 8 to 10 percent. While the berun range and M3 slightly above the mid- havior of Ml continues to be subject to point of its range for 1986. Most short- unusual uncertainty, growth at an annual term interest rates have declined on bal- rate of about 12 to 14 percent over the ance since the April 1 meeting of the period is now anticipated. If the antici- Committee, while long-term rates are pated slowing in monetary growth does somewhat higher. On April 18, the Fed- not develop, somewhat greater reserve eral Reserve Board approved a reduction restraint would be acceptable in the conin the discount rate from 7 to 6!/2 percent. text of a pickup in growth of the economy, The trade-weighted value of the dollar taking account of conditions in domestic against major foreign currencies has risen and international financial markets and somewhat recently but on balance the the behavior of the dollar in foreign exdollar has declined further since the April change markets. Somewhat lesser reserve meeting, particularly against the Japanese restraint might be acceptable in the conyen. text of a marked slowing in money growth The Federal Open Market Committee anid pronounced sluggishness in economic seeks monetary and financial conditions per rformance. The Chairman may call for that will foster reasonable price stability Committee consultation if it appears to over time, promote growth in output on the Manager for Domestic Operations that a sustainable basis, and contribute to an reserve conditions during the period beimproved pattern of international trans- fore the next meeting are likely to be asactions. In furtherance of these objectives sociated with a federal funds rate persistthe Committee agreed at its February ently outside a range of 5 to 9 percent. meeting to establish the following ranges for monetary growth, measured from the Votes for this action: Messrs. Volcker, fourth quarter of 1985 to the fourth quarter Corrigan, Angell, Guffey, Mrs. Horn, of 1986. With respect to Ml, the Com- Messrs. Johnson, Melzer, Morris, Rice, mittee recognized that, based on the ex- and Ms. Seger. Vote against this action: perience of recent years, the behavior of Mr. Wallich. Absent and not voting: that aggregate was subject to substantial None. uncertainties in relationship to economic activity and prices, depending among other Mr. Wallich dissented because he things on its responsiveness to changes in interest rates. It agreed that an appro- preferred to direct open market oppriate target range under existing circum- erations toward somewhat greater stances would be 3 to 8 percent, but it restraint. He was concerned about intends to evaluate movements in Ml in the implications of rapid monetary the light of its consistency with the other monetary aggregates, developments in the expansion for inflation and wanted economy and financial markets, and po- to take action promptly to help tential inflationary pressures. It adopted assure slower monetary growth. a range of 6 to 9 percent for M2 and 6 to 9 percent for M3. The associated range for growth in total domestic nonfinancial debt was set at 8 to 11 percent for the year 2. Authorization for Domestic 1986. Open Market Operations In the implementation of policy for the immediate future, the Committee seeks On June 18, 1986, the Committee to maintain the existing degree of presapproved a temporary increase of $3 sure on reserve positions. This action is billion, to $9 billion, in the limit expected to be consistent with a deceleration in money growth over the balance between Committee meetings on of the quarter. However, in view of the changes in System Account holdings rapid money growth thus far in the quarter of U.S. government and federal and the apparent weakness in velocity, agency securities specified in parathe Committee anticipates faster growth Digitized fofro FrR tAhSe EmRo netary aggregates, particularly graph l(a) of the authorization for http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 119 domestic open market operations. rising about 80,000 after adjusting The increase was effective immedi- for strike activity. Employment conately for the intermeeting period tinued falling in manufacturing, parending with the close of business on ticularly in the metals and machinery July 9, 1986. industries, and more jobs were lost in oil and gas extraction. Hiring in Votes for this action: Messrs. Volcker, construction, which had surged in Corrigan, Angell, Guffey, Mrs. Horn, Messrs. Johnson, Morris, Rice, and April, levelled off in May and fell in Boykin. Votes against this action: None. June. Service industries continued to Absent and not voting: Mr. Melzer, Ms. post large gains in employment in Seger and Mr. Wallich. (Mr. Boykin June; however, hiring at retail estabvoted as alternate for Mr. Melzer.) lishments was markedly slower than earlier in the year. The civilian un- This action was taken on the recemployment rate declined to 7.1 ommendation of the Manager for percent from 7.3 percent in May. Domestic Operations. The Manager The index of industrial production had advised that through June 17, fell 0.6 percent in May and has outright purchases of securities thus declined 1% percent since Decemfar in the intermeeting interval had ber, erasing the gains that occurred reduced the leeway under the usual $6 billion limit to about %2lA billion. at the end of 1985. The decrease in output in May was related in part to It was anticipated that substantial a further contraction in oil and gas additional purchases of securities in drilling and to a decline in auto excess of that leeway would be necassemblies. Output elsewhere genessary over the remainder of the erally was lower with notable weakintermeeting period. Currency in cirness in the production of business culation was expanding rapidly, as equipment and selected materials for expected, while required reserves durable goods. Available indicators were growing considerably faster than of industrial activity in June are had been anticipated earlier. mixed; auto assemblies are expected to have increased, but the output of steel decreased and strike activity Meeting Held on July 8-9, 1986 hampered production in the lumber, aluminum, and communication Domestic Policy Directive equipment industries. Capacity utili- The information reviewed at this zation in manufacturing was 78.6 meeting indicates that economic ac- percent in May, off 0.6 percentage tivity has expanded at a relatively point from April and more than 2 slow pace recently. Consumer spend- percentage points from January. ing and housing activity have been Total retail sales were about unstrong, reflecting large gains in real changed in May; however, sales at income and lower interest rates. the retail control group of stores, However, business investment has which excludes outlets for autos, remained sluggish, and the trade gasoline, and building materials, rose balance has continued to deteriorate. somewhat and were stronger in the At the same time, wage and price previous two months than originally increases have been moderate. reported. Total car sales in May were Total nonfarm payroll employ- at an annual rate of llVi million Digitized form FeRnAtS EgRr ew slowly again in June, units, up from the 10% million unit http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 FOMC Policy Actions pace registered in the first quarter. after declining in the previous four Sales of domestic automobiles have months. Consumer prices were up held at around a rate of 8V4 million 0.2 percent; retail gasoline prices units since the expansion of incentive rose 2l/i percent, after falling around financing programs in late April, up 25 percent from January to April. from the 73A million unit pace earlier Excluding food and energy, the CPI in the year. has risen at an annual rate of about Housing activity generally has been 3V2 percent so far this year, somebrisk. Starts fell a little in May but what less than in 1985. Prices of still were at a 1.9 million unit annual goods have been essentially flat, rate. Single-family starts held steady while some types of services have at a level that was fractionally above registered large increases. the first-quarter average, while the The trade-weighted value of the pace of house sales, although down dollar against major foreign currenin May, has remained relatively ro- cies has declined almost T}h percent bust. At the same time, home prices on balance since the FOMC meeting have risen sharply. Multifamily starts on May 20; the largest decline was fell sharply in May, owing in part to registered against the yen. In the the depletion of tax-exempt funds first two weeks of the intermeeting raised by huge issues of mortgage period, the dollar appreciated somerevenue bonds in late 1985 and to what in response to data indicating a overbuilding in a number of major possible strengthening of U.S. ecomarkets. nomic activity. This rise was subse- Business investment probably de- quently reversed when additional inclined again in the second quarter, formation on the economic reflecting weakness in the energy performance in the United States sector, the availability of unutilized disappointed market expectations. capacity, and concerns about tax The differential between U.S. interreform. Shipments of nondefense est rates and a weighted average of capital goods have been sluggish in foreign short-term interest rates recent months. In the construction changed little on balance over the area, drilling activity has fallen sharply period. Preliminary data for the U.S. further, and spending for office and merchandise trade deficit showed a other commercial projects also has somewhat larger deficit in April than weakened. Moreover, advance indi- the average for the first quarter, cators of investment spending have because a decline in the value of oil been weak. New commitments for imports was more than offset by an nonresidential building have fallen increase in imports of other goods; since late last year, and new orders exports in April-May combined seem for nondefense capital goods were to have been no higher than the firstflat in May after two months of quarter rate. declines. In addition, according to At its meeting on May 20, 1986, the latest surveys, businesses are the Committee had adopted a direcplanning little, if any, increase in tive that called for maintaining the nominal spending for 1986 as a whole. existing degree of pressure on re- The producer and consumer price serve positions. The members exindexes turned up in May, as the pected such an approach to policy to steep decline in energy prices ended. be consistent with a deceleration in Digitized foPr FrRodAuScEeRr prices rose 0.6 percent, money growth over the balance of http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 121 the quarter. However, because such the midpoint of its range for the growth had been rapid in April and year. M3 continued to increase at early May, the Committee antici- rates around the middle of its longpated faster growth for the quarter run range in May and June. as a whole, particularly for Ml, than However, in the light of the clear was expected at the time of the April indications that business activity, meeting. M2 and M3 were expected rather than picking up momentum, to expand over the period from was growing at a slower pace, open March to June at annual rates of 8 market operations during the interto 10 percent. Over the same period, meeting period continued to be di- Ml was anticipated to grow at an rected at maintaining the prevailing annual rate of 12 to 14 percent, degree of pressure on reserve posialthough the members acknowledged tions. In the three complete maintethat the behavior of Ml continues to nance periods since the May meetbe subject to unusual uncertainty. ing, adjustment plus seasonal The Committee agreed that if money borrowing at the discount window growth did not slow as anticipated, averaged $285 million. Excess resomewhat greater reserve restraint serves averaged around $830 million would be acceptable in the context in the first two maintenance periods of a pickup in the economic expan- after the meeting, but then rose to sion, while also taking account of $1.3 billion in the most recent period, conditions in domestic and interna- which included the quarter-end statetional financial markets and the be- ment date. havior of the dollar on foreign ex- Federal funds generally traded in change markets. On the other hand, a narrow range around 67/s percent they agreed that somewhat lesser over the intermeeting period, aside restraint might be acceptable if the from some firming around the quarter expansion weakened noticeably in end. Other interest rates rose early conjunction with a marked slowing in the period but then retreated amid in monetary growth. The intermeetsigns of weakness in the economies ing range for the federal funds rate of the United States and some of its was reduced to 5 to 9 percent. major trading partners, renewing ex- In the circumstances, Ml contin- pectations of a discount rate cut in ued to expand rapidly over the past the near future. Since the May meettwo months, with growth surging to ing short-term market rates had dean annual rate of around 23 percent clined 10 to 40 basis points on in May before decelerating to a rate balance. In long-term markets, yields of about 15 percent in June. Conse- on Treasury securities were down quently, growth in Ml from March about 35 to 45 basis points, while to June, at an annual rate of almost rates on corporate and municipal 18 percent, substantially exceeded bonds were about unchanged and the Committee's short-run expecta- those on fixed-rate mortgages were tions and so far this year has been up around V2 of a percentage point. well above the Committee's 3 to 8 The widening spread between rates percent range for 1986. Growth in on long-term private securities and M2 slowed in both May and June Treasury issues appeared to reflect but was still somewhat above earlier strong foreign demand for recently expectations for the quarter and issued long-term Treasuries, large Digitized forb FroRuAgShEtR this aggregate up to around supplies of private securities, and http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 FOMC Policy Actions increased focus on the value of the bers saw as the key to stronger greater call protection for Treasury economic expansion. The members issues. continued to view the outlook for The staff projections presented at inflation as relatively favorable, althis meeting continued to suggest though they anticipated that, in the that growth in real GNP, though context of a growing economy, the relatively slow in the second quarter, lagged impact of the dollar's deprewas likely to strengthen somewhat in ciation was likely to boost prices the second half of the year. How- somewhat. ever, growth over the next two quar- In keeping with the usual practice ters probably would be at a slower at meetings when the Committee pace than had been expected earlier considers its long-run objectives for in part because news on business monetary growth, the members of investment and foreign trade was the Committee and the Federal Redisappointing. Growth was projected serve Bank presidents not currently to continue at a moderate pace in serving as members prepared specific 1987. The civilian unemployment rate projections of economic growth, the was forecast to decline somewhat rate of unemployment, and changes over the projection horizon. Inflation in the overall price level. With regard was expected to pick up a bit over to the rate of expansion in real GNP, the next six quarters, as the favorable the projections had a central tendeffects of declining energy prices ency of 2V2 to 3 percent for 1986 as diminished while upward pressure on a whole and 3 to 3V2 percent for prices from the effects of the dollar's 1987. Forecasts of growth in nominal depreciation tended to intensify. GNP centered on ranges of 43A to In their discussion of the economic 53/4 percent for 1986 and 6 to IV2 situation and outlook, Committee percent for 1987. The central tendmembers generally agreed that some ency for the rate of unemployment strengthening in the economic expan- was an average of 7 percent in the sion was a reasonable expectation fourth quarter of 1986 and around for the second half of the year and 63/4 percent in the fourth quarter of that, on the whole, the prospects 1987. With respect to the rate of were favorable for continuing growth inflation, as indexed by the GNP at a moderate pace in 1987. At the deflator, the projections centered on same time, members emphasized the rates of 2lA to 2% percent for 1986 uncertainties that surrounded the and 3 to 4 percent for 1987. In economic outlook and a number making these forecasts, the members commented that the improvement in took account of the Committee's economic activity might well be more objectives for monetary growth that delayed or less pronounced than they were established at this meeting. The had anticipated earlier. In this con- projections were based on the asnection, some members expressed sumption that fluctuations over the concern about the lack of firm evi- projection period in the foreign exdence to date of a prospective pickup change value of the dollar would not in the rate of economic growth and, be of sufficient magnitude to have a in particular, the absence thus far of significant effect on economic activany apparent improvement in the ity or prices during the period. The balance of trade, which many mem- members also assumed that the Con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 123 gress would seek to achieve the influences on economic activity that deficit reductions contemplated by could persist. the Gramm-Rudman-Hollings legis- Such developments were reflected lation. In the members' views, signif- in sharp contrasts in the economic icant progress in reducing the federal performance of different sectors and deficit was essential in order to regions of the country and in strains maintain financial conditions that on financial institutions that serviced were conducive to sustained eco- the depressed industries. Moreover, nomic expansion and an improved members expressed concern about pattern of international transactions. the continuing rapid growth in total In their assessment of the factors debt and its negative implications for pointing to somewhat faster eco- sustained business expansion. nomic growth over the balance of The members gave particular emthe year and in 1987, members re- phasis during the discussion to the ferred as they had at earlier meetings key role of foreign trade developto a number of favorable underlying ments, which were seen as a major developments including reduced in- source of uncertainty in shaping the terest rates, higher stock market economic outlook. The substantial prices, lower energy costs, and the depreciation of the dollar against the positive impact of the dollar's depre- currencies of several large industrial ciation on the competitive position countries had strengthened the interof U.S. businesses. Members also national competitiveness of U.S. made reference to the stimulative businesses, notably in the industrial impact of a broadly accommodative sector, and pointed to eventual immonetary policy, as evidenced by provement in the U.S. trade balance. rapid growth in money and credit Unfortunately, evidence of such imand several decreases in the discount provement had proved elusive to rate. One member suggested that date and several members comstimulative financial conditions prob- mented that significant progress in ably helped to account for the rela- reducing the nation's trade deficit tive longevity of the current business was unlikely in the absence of faster expansion in the face of a variety of economic growth in key industrial unfavorable factors. The latter in- nations abroad. Indications of such cluded the negative impact that the growth were mixed, with several decline in oil prices and the uncer- countries having experienced relative tainties associated with pending tax weakness earlier in the year. The reform legislation were currently ex- absence of more robust growth erting on investment activity; some abroad—and an improvement in the members commented that both of U.S. trade balance—would constithese factors were likely to have a tute a major risk to the realization less inhibiting impact on the econ- of stronger domestic economic exomy over the course of the next pansion. several quarters. On the other hand, At this meeting the Committee the overbuilding of various commerreviewed its ranges for growth of the cial facilities, notably of office strucmonetary and debt aggregates in 1986 tures, in several parts of the country and established tentative ranges for and severe problems in agriculture 1987 within the framework of the were deemed likely to have retarding Full Employment and Balanced Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 FOMC Policy Actions Growth Act of 1978 (the Humphrey- sistent with somewhat faster eco- Hawkins Act).1 At its meeting on nomic growth in 1987 and, in that February 11-12, 1986, the Commit- context, with some decline in velocity tee had adopted monetary growth should that develop. Some members ranges of 3 to 8 percent for Ml and suggested maintaining the 6 to 9 6 to 9 percent for both M2 and M3 percent range for 1987 because it for the period from the fourth quarter would provide a little extra leeway of 1985 to the fourth quarter of 1986. that might prove useful in support of The associated range for growth in continuing growth in nominal GNP, total domestic nonfinancial debt was given the possibility of some further set at 8 to 11 percent. With respect decline in the velocity of the broader to Ml the Committee had recognized aggregates. However, the slightly that, based on the experience of lower range favored by the majority recent years, the behavior of that was considered acceptable by most aggregate was subject to substantial members. uncertainties in relation to economic In the discussion of appropriate activity and prices. The Committee ranges for Ml growth in 1986 and had indicated its intention to evalu- 1987, the members gave considerable ate Ml behavior in the light of its emphasis to the exceptional uncerconsistency with the other monetary tainties that continued to affect Ml aggregates, developments in the velocity. Over the course of recent economy and financial markets, and years, the relationship of Ml to potential inflationary pressures. income appeared to have been sig- In the Committee's discussion of nificantly altered by changes in the its long-run ranges at this meeting, composition of the aggregate, resultall of the members supported a ing in part from the deregulation of proposal to retain the range of 6 to interest rate ceilings and the rela- 9 percent for growth in M2 and in tively rapid growth of its interest- M3 for the year 1986. Both aggre- bearing components. In the process, gates had expanded at rates that left the demand for Ml balances has them close to the midpoint of their become much more sensitive to ranges at midyear. Growth within movements in interest rates. Given these ranges for the year as a whole the evolving nature of that demand, was still deemed to be consistent it had become very difficult to assess with the Committee's overall policy or predict the implications of Ml objectives. A majority of the mem- growth for the future course of ecobers preferred a slightly lower range nomic activity and the rate of inflafor 1987. In their view, a modest tion. As a consequence, a number of reduction would be consistent with members questioned the usefulness the Committee's long-term objective of Ml as a guide for the conduct of of achieving a rate of monetary monetary policy under present cirgrowth compatible with price stabil- cumstances. A few proposed dropity. They also believed that the lower ping the Ml range, at least pending range was likely to prove fully con- the reestablishment of a more predictable relationship with overall measures of economic performance. A majority, however, preferred to 1. The midyear Monetary Policy Report preretain an Ml range even though they pared pursuant to this legislation was trans- Digitized form FiRttAedS EtoR t he Congress on July 18, 1986. believed its operational significance http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 125 could only be judged in the perspec- agreed that after taking account of tive of concurrent economic and those factors Ml growth above the financial developments, including the existing range would be acceptable behavior of M2 and M3. It was noted for the year. in this discussion that even under With regard to 1987, some memcurrent circumstances Ml continued bers argued that the uncertainties to have some information value for precluded setting a meaningful range policy and that retention of some for Ml so far in advance, but a range for Ml, even if used only as a majority preferred to retain this year's benchmark for measuring deviations, range of 3 to 8 percent. The members might well assist judgments about noted that this range should be monetary policy. Moreover, the im- considered even more tentative than portance of Ml could again become usual. Such a range assumed that the greater in the future. velocity of Ml would not change as After reviewing the available evi- much as in the recent period under dence, the members concluded that conditions of greater economic, price, much of the rapid growth of Ml in and interest rate stability. In any recent months probably reflected shifts event the members agreed that dein holdings of liquid assets in re- velopments over the balance of this sponse to declining interest rates and year would provide a better basis for subsiding inflationary expectations judging the prospects for Ml behavrather than excessive money creation ior in 1987 and that careful appraisal with potentially inflationary conse- of the range—including the weight quences. Tending to reinforce that that Ml should receive as a guide to judgment was the moderate growth policy—would be required at the in overall economic activity, the be- start of next year. havior of broad measures of infla- Turning to the Committee's montion, and the expansion of M2 and itoring range for total domestic non- M3 at rates well within their ranges financial debt, most of the members for the year. As events unfolded, indicated that they were in favor of relatively rapid growth in Ml had retaining the 8 to 11 percent range been needed to accommodate contin- adopted in February for 1986 even uing economic expansion. Given de- though growth in excess of that range velopments for the year to date, now appeared likely for the year. growth in excess of the 3 to 8 percent Members expressed concern about range established in February ap- the persistence of rapid growth of peared likely for 1986 as a whole, total debt in the context of already but most of the members did not large debt burdens. As in the past, want to raise or to rebase the existing they felt that raising the Committee's range; such an adjustment might range for debt would create an inimply greater certainty about future appropriate benchmark for evaluatperformance than in fact existed. ing long-term trends in debt expan- Since they believed that the signifi- sion. One member proposed dropping cance of changes in Ml could only be the range for total debt and substievaluated in the context of the be- tuting a measure for total liquid havior of the broader aggregates and assets, which, at least in the past against the background of economic year or two, had had a closer relaand financial developments, includ- tionship to developments in nominal Digitized fori nFgR AStrEeRn ds in interest rates, they GNP. Other members preferred to http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 FOMC Policy Actions continue to monitor debt trends ex- over the remainder of the year will deplicitly in light of their concerns pend on the behavior of velocity, growth in the other monetary aggregates, develabout the implications of overall debt opments in the economy and financial levels. For 1987, the members genmarkets, and price pressures. Given its erally felt that a range of 8 to 11 rapid growth in the early part of the year, percent for total debt growth would the Committee recognized that the inremain appropriate, though that range crease in total domestic nonfinancial debt in 1986 may exceed its monitoring range would need to be reviewed early next of 8 to 11 percent, but felt an increase in year. that range would provide an inappro- At the conclusion of the Commit- priate benchmark for evaluating longertee's review, all of the members term trends in that aggregate. indicated that they favored, or could Votes for this action: Messrs. Volcker, accept, a proposal to reaffirm the Corrigan, Angell, Guffey, Mrs. Horn, Messrs. Johnson, Melzer, Morris, Rice, ranges for monetary and debt growth Ms. Seger, and Mr. Wallich. Votes that had been established in Februagainst this action: None. Absent and ary for the year 1986. The behavior not voting: None. of all of the monetary aggregates would continue to be judged against With respect to the tentative ranges the background of developments in for 1987, most of the Committee the economy and financial markets members supported a reduction of xh and potential price pressures. Growth percentage point in the ranges for of Ml in excess of its range would M2 and M3. For Ml and total debt be acceptable and would be evalu- the members agreed that with the ated in the light of the behavior of reservations noted above, the 1986 the broader aggregates. The Com- ranges should be retained for 1987; mittee recognized that expansion in those ranges implied considerable total debt also might exceed its range reductions from the rates of growth for the year. that now seemed likely for 1986. It The following paragraph relating was understood that all the ranges to the long-run ranges for 1986 was were provisional and that, notably in approved for the domestic policy the case of Ml, they would be directive: reviewed in early 1987 in the light of intervening developments. The Committee agreed at this meeting to reaffirm the ranges established in Feb- The following paragraph relating ruary for growth of 6 to 9 percent for both to the ranges for 1987 was approved M2 and M3, measured from the fourth for inclusion in the domestic policy quarter of 1985 to the fourth quarter of directive: 1986. With respect to Ml, the Committee recognized that, based on the experience For 1987 the Committee agreed on tenof recent years, the behavior of that ag- tative ranges of monetary growth, measgregate is subject to substantial uncer- ured from the fourth quarter of 1986 to tainties in relation to economic activity the fourth quarter of 1987, of 5^2 to 8V2 and prices, depending among other things percent for M2 and M3. While a range of on the responsiveness of Ml growth to 3 to 8 percent for Ml in 1987 would apchanges in interest rates. In light of these pear appropriate in the light of most hisuncertainties and of the substantial de- torical experience, the Committee reccline in velocity in the first half of the ognized that the exceptional uncertainties year, the Committee decided that growth surrounding the behavior of Ml velocity of Ml in excess of the previously estab- over the more recent period would relished 3 to 8 percent range for 1986 would quire careful appraisal of the target range be acceptable. Acceptable growth of Ml at the beginning of 1987. The associated Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 127 range for growth in total domestic non- omy, particularly in light of what financial debt was provisionally set at 8 could be viewed as still relatively to 11 percent for 1987. high real interest rates. It was also Votes for this action: Messrs. Volcker, suggested that a reduction in the Corrigan, Angell, Guffey, Mrs. Horn, discount rate might encourage over Messrs. Johnson, Melzer, Morris, Rice, and Wallich. Vote against this action: time similar actions by a number of Ms. Seger. Absent and not voting: None.major countries abroad, although such actions were not expected over Ms. Seger dissented because she the near term, at least in the case of preferred to retain—at least for some of the key industrial nations. now—this year's range of 6 to 9 While nearly all the members inpercent for growth in both M2 and dicated their acceptance of the policy M3 in 1987. In her view, the higher approach in question, a few referred range might be needed to accom- to the risks of easing under present modate an acceptable rate of eco- circumstances, particularly the risk nomic expansion, especially in light under current conditions of sharp of the possibility that the velocity of further depreciation of the dollar in these aggregates might remain weak foreign exchange markets. Concern next year. At the same time she did also was expressed about the absence not want to rule out the possibility of clearer indications of a reduction that interim developments might jus- in federal budgetary deficits. In one tify reductions in the M2 and M3 view, a cut in the discount rate might ranges when the latter were reconsi- need to be accompanied by some dered early next year. She also pre- increase in the degree of pressure on ferred not to specify a tentative range reserve positions, pending evaluation for Ml at this time because of the of further economic and financial substantial uncertainties currently developments. surrounding the relationship between With respect to the outlook for Ml growth and broad measures of monetary growth, the members execonomic activity. pected that M2 and M3 might con- In their discussion of policy imple- tinue to expand at rates around their mentation for the weeks immediately 1986 ranges over coming months, ahead, Committee members took even assuming some pickup in the account of the likelihood that the rate of business activity and some discount rate would be reduced within easing in overall conditions of rea few days after the meeting. Against serve availability. In their evaluation the background of sluggish expansion of the outlook for growth in Ml, the in economic activity and a subdued members took account of an analysis rate of inflation, most of the mem- that indicated that appreciably slower bers believed that some easing was growth might be expected over the desirable and they indicated a pref- months ahead even if interest rates erence for implementing the easing, were to fall somewhat further. Howat least initially, through a lower ever, the members recognized that discount rate rather than through the timing and extent of any slowing open market operations. Some mem- in Ml growth continued to be subject bers commented that further easing to unusual uncertainty. In the circould have a favorable impact on cumstances and taking account of interest-sensitive sectors of the econ- their willingness to accept Ml growth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 FOMC Policy Actions in excess of the 3 to 8 percent range, same period growth in Ml was exespecially if growth of the broader pected to moderate from the excepaggregates remained within their tionally large increase during the ranges, a majority of the members second quarter. The specific rate of expressed a preference for not indi- Ml growth remained subject to uncating a specific rate of expected usual uncertainty and the Committee growth for Ml in the short-run op- agreed that this aggregate should erational paragraph of the Commit- continue to be judged in the light of tee's directive. the behavior of the broader aggre- In the Committee's discussion of gates and other factors. The Compossible intermeeting adjustments in mittee indicated that it might find policy implementation, the members somewhat greater or somewhat lesser generally agreed that there should reserve restraint acceptable over the be no presumptions about the likely intermeeting period depending on direction of any such adjustments, the growth of the monetary aggregiven the current uncertainties about gates, the strength of the business prospective economic and financial expansion, the performance of the developments and the behavior of dollar on foreign exchange markets, the monetary aggregates. A majority progress against inflation, and conof the members also indicated a ditions in domestic and international preference for reducing the existing credit markets. intermeeting range for the federal At the conclusion of the meeting, funds rate by 1 percentage point to the following domestic policy direc- 4 to 8 percent. The reduction was tive, embodying the Committee's viewed as a technical adjustment that long-run ranges and its short-run would provide a more symmetrical operating instructions, was issued to range around a lower federal funds the Federal Reserve Bank of New rate that could be expected to emerge York: following the anticipated reduction in the discount rate. The Committee The information reviewed at this meetregards the federal funds range as a ing indicates a mixed pattern of develmechanism for initiating Committee opments but suggests on balance that ecoconsultation when its boundaries are nomic activity expanded slowly in the second quarter. In June total nonfarm persistently exceeded. payroll employment grew little after ac- At the conclusion of the Commit- counting for striking workers, with contee's discussion, all but one member tinued weakness in the industrial sector indicated their acceptance of an op- reflected in further declines in employment in manufacturing and mining. The erational paragraph for the directive civilian unemployment rate moved down that called for some decrease in the to 7.1 percent from 7.3 percent in May. existing degree of reserve pressure, Industrial production declined in May. recognizing that that relaxation could Total retail sales were about unchanged during the month, although consumer be accomplished in the first instance spending rose considerably for the second by a reduction in the discount rate. quarter as a whole. Housing starts fell The members expected such an ap- somewhat in May from a relatively high proach to policy implementation to level. Weakness in the energy sector has contributed to a slowing of business capbe consistent with growth in M2 and ital spending. Preliminary data for the U.S. M3 at annual rates of about 7 to 9 merchandise trade balance in April show percent over the three-month period a somewhat larger deficit than the rate from June to September. Over the recorded in the first quarter. Both con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 129 sumer and producer prices turned up in that range would provide an inappro- May but have fallen on balance since late priate benchmark for evaluating longer- 1985, largely reflecting declines in energy term trends in that aggregate. prices. For 1987 the Committee agreed on ten- Ml growth in June, though less than in tative ranges of monetary growth, meas- May, was still rapid; through June, Ml ured from the fourth quarter of 1986 to grew at a rate well above the Committee's the fourth quarter of 1987, of 5Vi to $V 2 range for 1986. Growth of M2 slowed percent for M2 and M3. While a range of somewhat and expansion of M3 remained 3 to 8 percent for Ml in 1987 would aprelatively moderate in June, keeping these pear appropriate in the light of most histwo aggregates close to the middle of their torical experience, the Committee recrespective ranges for the year. Expansion ognized that the exceptional uncertainties in total domestic nonfinancial debt re- surrounding the behavior of Ml velocity mains appreciably above the monitoring over the more recent period would rerange for 1986. Most short-term interest quire careful appraisal of the target range rates have declined on balance since the at the beginning of 1987. The associated May 20 meeting of the Committee. Rates range for growth in total domestic nonon Treasury bonds also have moved lower financial debt was provisionally set at 8 while rates on private long-term obliga- to 11 percent for 1987. tions are about unchanged to somewhat In the implementation of policy for the higher. The trade-weighted value of the immediate future, the Committee seeks dollar against major foreign currencies has to decrease somewhat the existing degree declined somewhat on balance since the of pressure on reserve positions, taking May meeting. account of the possibility of a change in The Federal Open Market Committee the discount rate. This action is expected seeks monetary and financial conditions to be consistent with growth in M2 and that will foster reasonable price stability M3 over the period from June to Septemover time, promote growth in output on ber at annual rates of about 7 to 9 percent. a sustainable basis, and contribute to an While growth in Ml is expected to modimproved pattern of international trans- erate from the exceptionally large inactions. In furtherance of these objectives crease during the second (quarter, that the Committee agreed at this meeting to growth will continue to be judged in the reaffirm the ranges established in Feb- light of the behavior of M2 and M3 and ruary for growth of 6 to 9 percent for both other factors. Somewhat greater or lesser M2 and M3, measured from the fourth reserve restraint might be acceptable dequarter of 1985 to the fourth quarter of pending on the behavior of the aggre- 1986.With respect to Ml, the Committee gates, the strength of the business expanrecognized that, based on the experience sion, developments in foreign exchange of recent years, the behavior of that ag- markets, progress against inflation, and gregate is subject to substantial uncer- conditions in domestic and international tainties in relation to economic activity credit markets. The Chairman may call and prices, depending among other things for Committee consultation if it appears on the responsiveness of Ml growth to to the Manager for Domestic Operations changes in interest rates. In light of these that reserve conditions during the period uncertainties and of the substantial de- before the next meeting are likely to be cline in velocity in the first half of the associated with a federal funds rate peryear, the Committee decided that growth sistently outside a range of 4 to 8 percent. of Ml in excess of the previously established 3 to 8 percent range for 1986 would Votes for the short-run operational parbe acceptable. Acceptable growth of Ml agraph: Messrs. Volcker, Corrigan, over the remainder of the year will de- Angell, Guffey, Mrs. Horn, Messrs. pend on the behavior of velocity, growth Johnson, Morris, Rice, Ms. Seger, and in the other monetary aggregates, devel- Mr. Wallich. Vote against this action: opments in the economy and financial Mr. Melzer. Absent and not voting: markets, and price pressures. Given its None. rapid growth in the early part of the year, the Committee recognized that the increase in total domestic nonfinancial debt Mr. Melzer preferred to direct in 1986 may exceed its monitoring range open market operations toward Digitized foro FfR 8A tSoE 1R1 percent, but felt an increase in maintaining the existing degree of http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 FOMC Policy Actions pressure on reserve conditions. He ufacturing employment registered was concerned that easing under another drop, bringing the cumulacurrent circumstances could foster tive decline since January to 175,000. inflationary expectations, especially The civilian unemployment rate dein light of the uncertain outlook for clined 0.2 percentage point to 6.9 reductions in the federal deficit, and percent, toward the lower end of the have adverse repercussions on the range that has prevailed over the dollar in foreign exchange markets. past year. In addition, he noted that the out- The index of industrial production look for the balance of 1986 and edged down 0.1 percent in July after 1987 appeared to be in line with the declining 0.3 percent in June. Since economy's long-run potential and, in reaching its most recent peak in any event, he believed that further January, the index has dropped about accommodation would have little 2 percent. Despite increased producpositive impact on real output in the tion in July in industries affected by short run and would be accompanied the settlement of strikes, particularly by greater price pressures in the long the communication equipment indusrun. try, output has remained generally sluggish. Weakness has persisted in the output of business equipment and consumer goods, although the Meeting Held on August 19, 1986 direct effects of declines in petroleum drilling are beginning to wane; au- Domestic Policy Directive tomobile assemblies were down The information reviewed at this 400,000 in July, but the decline was meeting indicated an uneven pattern largely offset by gains in the producof developments in different sectors tion of light trucks. Capacity utilizaof the economy but suggested on tion in manufacturing, mining, and balance that economic activity was utilities decreased 0.2 percentage point expanding at a moderate pace in the further in July to 78.2 percent; during current quarter. Consumer spending the past six months the overall rate and housing activity have been rela- of capacity utilization has fallen 2.6 tively robust, while business invest- percentage points. ment has remained sluggish and the Total retail sales were about untrade balance does not appear to changed in June and July; however, have improved. On average, prices excluding automobiles, gasoline, and and wages have risen more slowly nonconsumption items, retail sales this year than in 1985, although increased 0.7 percent in July after an fluctuations in energy costs have upward-revised increase of 0.4 perresulted in some month-to-month cent in June. Sales remained particvolatility. ularly strong at furniture and appli- Total nonfarm payroll employ- ance stores. Total car sales slipped ment grew strongly in July, rising to a 10.9 million unit annual rate in nearly VA million after adjustment for July, as a drop in sales of domestic strikes, well above the average models more than offset an increase monthly gains during the first half of in foreign car sales. the year. Hiring was up in construc- Residential construction activity has tion and remained robust in the trade continued to expand, reflecting the and service sectors. However, man- rise in housing starts earlier in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 131 year. However, the level of starts the second quarter as a whole, the has tapered off recently from the CPI excluding energy rose at an exceptional pace of the early spring, annual rate of about 3 percent, down reflecting in part high vacancy rates almost a full percentage point from and tax law changes that have damped the first quarter. In the commodity multifamily construction. In June, markets, the price of crude oil on total private starts were at an annual spot markets fell through much of rate of 13A million units. Sales of July, but then rose sharply following single-family homes also weakened an accord by OPEC to restrain proin May and June, but from a very duction. At the same time, livestock high April peak. and poultry prices have moved higher Business fixed investment appar- while gold and platinum prices have ently remained sluggish with the soared, apparently largely reflecting weakness concentrated in nonresi- expectations of reduced supplies. dential structures. The sharp curtail- Since the July FOMC meeting, the ment of petroleum drilling contrib- weighted-average foreign exchange uted to a further decline in the value of the dollar declined a further nonresidential structures component, 3V2 percent on balance; the dollar although commercial and industrial depreciated almost 5V2 percent against construction also fell. Moreover, new the mark and somwhat less against commitments for nonresidential con- the yen. The reduction in the disstruction have fallen sharply since count rate by the Federal Reserve late last year, suggesting that outlays announced on July 10 and the failure may retreat further during the third of other central banks to follow quarter. In contrast to structures, apparently contributed to the dollar's outlays for equipment rose markedly weakness. Short-term interest rates in the second quarter, led by a abroad were little changed during rebound in office and computer the intermeeting period while comequipment; however, this gain only parable U.S. rates declined about xh partly reversed a sharp decline in the of 1 percentage point. The differenfirst quarter. New orders for nonde- tials between long-term interest rates fense capital goods fell for three in the United States and comparable consecutive months before posting a rates in Germany and Japan were small gain in June. Inventory data about unchanged on balance. The for the second quarter, though in- U.S. merchandise trade deficit in the complete, suggested a marked slow- second quarter appeared unchanged down in the rate of accumulation, as from the first quarter. The value of auto dealers pared stocks slightly oil imports continued to fall, while after two quarters of rapid accumu- that of non-oil imports rose further. lation. About one-half of the increase in the Wage increases appear to have value of non-oil imports apparently slowed further this year, and, except reflected rising import prices. for *a June rebound in consumer At its meeting on July 8-9, the energy prices, recent price data have Committee adopted a directive that reflected continued restraint through called for decreasing somewhat the midyear. The producer price index existing degree of pressure on refell 0.4 percent in July, and the serve positions, taking account of the consumer price index excluding en- possibility of a change in the discount ergy was up 0.2 percent in June. For rate. The members expected such an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 FOMC Policy Actions approach to policy to be consistent Federal funds generally traded in with growth in M2 and M3 over the the 6V4 to 63/s percent area after the period from June to September at l/i percentage point cut in the disannual rates of 7 to 9 percent. Over count rate announced on July 10, the same period growth in Ml was down from the 6% percent rate expected to moderate from the rapid prevailing at the time of the July pace in the second quarter. The meeting. With the reduction in the Committee agreed that it would con- discount rate widely anticipated, tinue to evaluate Ml in light of the however, other interest rates generbroader aggregates and other factors. ally did not post comparable de- The members also acknowledged that clines. While rates on short-term somewhat greater or lesser reserve securities have fallen 25 to 50 basis restraint might be acceptable de- points over the intermeeting period, pending on the behavior of the ag- yields in the longer-term markets gregates, the strength of the business have been about unchanged to only expansion, developments in foreign slightly lower on balance. The recent exchange markets, progress against behavior of longer-term interest rates inflation, and conditions in domestic has reflected in part uncertainty about and international credit markets. The the prospects for further rate declines intermeeting range for the federal in light of the absence of policy funds rate was reduced 1 percentage actions abroad to reduce interest point to 4 to 8 percent. rates as well as a cautious interpre- An easing in reserve conditions tation of incoming economic and was implemented shortly after the price news, including the possibility July meeting through a V2 point of some increase in inflationary presreduction in the discount rate to 6 sures over time. percent. In the two complete reserve The staff projections presented at maintenance periods since the meet- this meeting suggested that growth ing, adjustment plus seasonal bor- in real GNP likely would pick up rowing at the discount window aver- somewhat in coming months. Growth aged just under $400 million, was forecast to continue at a modsomewhat higher than in the previous erate pace in 1987. A projected intermeeting period. A portion of improvement in the U.S. trade posithis borrowing, however, reflected tion was anticipated to be a key adjustment credit to depository insti- element supporting growth in domestutions facing special situations. In- tic production over the next year and coming data during the intermeeting a half. Over the same time period, period indicated that growth of all of growth in domestic demand was exthe monetary aggregates accelerated pected to be relatively sluggish. The in July. M2 and M3 were estimated rate of inflation was anticipated to to have expanded at annual rates of edge up in coming quarters, partly 123/4 and 13 percent respectively. The reflecting upward pressure on prices rapid growth in the broader aggre- from the effects of the dollar's depregates pushed them into the upper ciation as well as the diminishing portions of their ranges for 1986. At impact of oil price declines, which the same time growth in Ml in July had served to hold down price inwas close to the extraordinary pace dexes thus far in 1986. The civilian of the second quarter. unemployment rate was forecast to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 133 drop somewhat over the projection rience in combination with current horizon. circumstances provided reasons for In the Committee's discussion of remaining optimistic that a substanthe economic situation and outlook, tial turnaround in trade would occur members focused considerable atten- later, perhaps toward the end of this tion on the uncertain prospects for year or in early 1987. the nation's foreign trade deficit. The members differed to some They saw trade developments as a extent in their assessment of domeskey element in the outlook for do- tic developments bearing on the ecomestic business activity, and several nomic outlook. While economic percommented that the business expan- formance remained uneven in sion might well remain relatively different sectors of the economy and weak if the trade balance did not parts of the country, overall conshow significant improvement over sumer spending and the demand for the quarters ahead. The substantial housing were being well maintained depreciation of the dollar against in association with continuing gains major foreign currencies was still in employment and incomes and expected to foster a turnaround in reduced interest rates. One member net exports at some point, but the observed that, given generally lean absence of progress to date could be inventories outside the automobile read as auguring a muted as well as industry, further gains in consumer a further delayed response to the spending were likely to stimulate dollar's depreciation. increasing domestic production at During the discussion, a number some point. A number of members of members emphasized that im- also referred to the relatively rapid provement in the trade balance was growth in money balances as a factor being inhibited by relatively sluggish that would tend to support business economic activity in several key in- activity over the quarters ahead. On dustrial nations abroad. Other devel- the negative side, rising consumer opments working in the same direc- debt burdens were likely to restrain tion included the lack of dollar the expansion in consumer spending depreciation against the currencies and business investment showed no of a number of developing countries evidence of an appreciable pickup. that had important trading relation- The members recognized that a ships with the United States, the number of developments, in addition severe debt problems of several less to the uncertainties surrounding the developed nations, and the competi- outlook for trade, were currently tion in agricultural export markets clouding economic prospects. These stemming from large grain harvests included the tax reform legislation in many parts of the world. On the whose overall impact was very diffimore positive side, members referred cult to predict, especially for the next to the apparently more favorable several quarters, because of the very prospects for economic expansion in comprehensive and complex changes a major European country. Some incorporated in the legislation. In the members also commented that while consumption area, for example, the improvement in the trade balance loss of deductibility for sales taxes had been more delayed than many starting in 1987 and the phase-out of had expected, some historical expe- interest deductions on consumer debt Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 FOMC Policy Actions might tend to restrain spending on were rising less rapidly this year than consumer durables over time, but in 1985. some members noted that it might At its meeting in July the Comalso stimulate such spending over the mittee had reviewed the basic policy balance of the year. The impact of objectives that it had established in the new legislation on business in- February for growth of the monetary vestment was especially hard to as- and credit aggregates in 1986 and sess. It was suggested that on balance had set tentative objectives for exthe impact might tend to be negative pansion in 1987. For the period from for some time, but many business- the fourth quarter of 1985 to the men apparently saw the removal of fourth quarter of 1986, the Commituncertainties about the legislation as tee had reaffirmed the ranges estaba positive development for the nearer lished in February for growth of 6 to term. Members also commented that 9 percent for both M2 and M3. The the outlook for the federal budget associated range for expansion in deficit and its consequent impact on total domestic nonfinancial debt also the economy remained unclear. was reaffirmed at 8 to 11 percent for With regard to the prospects for 1986. With respect to Ml, the Cominflation, the members generally were mittee decided that growth in excess not concerned about a resurgence in of the 3 to 8 percent range set in the nearer term, but several ex- February would be acceptable and pressed uneasiness about the longer- would be evaluated in the light of run outlook. Members referred to the behavior of Ml velocity, the the inflationary implications of rela- expansion of the broader aggregates, tively rapid monetary growth, espe- developments in the economy and cially if it continued, and to the financial markets, and price presfurther impact of the dollar's depre- sures. For 1987 the Committee agreed ciation on prices of imports and on tentative monetary growth objeccompeting domestic products. In the tives that included a reduction of V2 latter connection one member ob- percentage point to a range of 5V2 to served that, despite relatively large 8V2 percent for both M2 and M3. In inventories, domestic producers of the case of Ml the Committee exautomobiles were raising their prices pressed the preliminary view that in response to increases in the prices retention of the 1986 range of 3 to 8 of competing imports. One member percent, which implied a consideraalso expressed concern that the new ble reduction from the actual rate of tax reform legislation, to the extent growth that now seemed likely for that it shifted tax burdens to busi- 1986, appeared appropriate for 1987 nesses, could put upward pressures in the light of most historical expeon prices, at least initially. The rience. The Committee also retained favorable direct effects of large de- the range of 8 to 11 percent for clines in oil prices now appeared to growth in total domestic nonfinancial be in the past, and one member debt in 1987. It was understood that observed that commodity prices more all the ranges were provisional and generally might be poised for an that, notably in the case of Ml, they upturn. Some members saw indica- would be reviewed in early 1987 in tions that inflationary expectations the light of intervening developwere starting to intensify, even though ments. Digitized fo a r c F t R u A a S l ER p rices and wages generally In the Committee's discussion of http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 135 policy implementation for the weeks tential inflation later. The members immediately ahead, a number of recognized that much of the rapid members suggested that any further growth, especially in Ml, probably easing might be accomplished through reflected increasing demands for liqa further xh percentage point reduc- uid assets in response to declining tion in the discount rate, while open interest rates and subsiding inflation market operations would be directed rather than excessive money creation toward maintaining an essentially with potentially inflationary conseunchanged degree of reserve availa- quences. They also felt that Ml bility. Some members expressed res- growth should continue to be evaluervations about such a reduction, ated in the context of a relatively especially in the absence of indica- sluggish economy and in light of the tions that it would be followed fairly expansion in the broader aggregates. promptly by policy easing actions in While a sluggish economic performmajor industrial nations abroad. In ance would dampen inflationary risks, this view a unilateral decrease in the continuing growth in M2 and M3 at discount rate might foster substantial the relatively rapid rates experienced additional depreciation in the dollar, recently might be a matter of growing with adverse repercussions on inves- concern, especially if such expansion tor willingness to hold dollars. Sev- tended to coincide with indications eral members, however, saw a lesser of stronger business activity. risk to the dollar or one that needed In their evaluation of the outlook to be accepted. Some wanted to for monetary growth, the members reduce the risks of rapid dollar de- took into account an analysis which preciation by a small increase in the indicated that much slower expandegree of reserve pressure in the sion, especially in the broader aggreevent of a reduction in the discount gates, was likely to develop over the rate. Several other members indi- next few months if short-term intercated that they did not agree. While est rates stayed around their current some firming should not be ruled out levels. On the other hand, monetary in their view, it should be made growth might remain relatively rapid contingent on an adverse move in over the period ahead if short-term the exchange rate and other potential rates were to drop somewhat further. developments such as evidence of The members recognized that the greater inflationary danger and timing and extent of any slowing in stronger business activity. One mem- monetary growth remained subject ber also commented that any in- to a great deal of uncertainty. crease in the degree of reserve pres- In the discussion of possible intersure had to be weighed against the meeting adjustments in the degree risk of triggering a rise in long-term of reserve pressure, the members interest rates; such a rise, if it oc- agreed that a degree of flexibility curred, would weaken the prospects would be useful, taking into considfor a pickup in the rate of economic eration whether or not the discount expansion. rate was reduced and subsequent In further discussion, Committee developments in domestic financial members expressed some concern markets and especially in foreign about the continuation of rapid growth exchange markets. If the discount in the monetary aggregates and the rate were not reduced, a slight easing implications of such growth for po- in pressure on reserve positions might Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 FOMC Policy Actions be appropriate. Alternatively, if the of the business expansion, the perdiscount rate were reduced and the formance of the dollar in foreign reduction was followed by a substan- exchange markets, progress against tial weakening of the dollar in foreign inflation, and conditions in domestic exchange markets, a little greater and international credit markets. The caution in the provision of reserves members agreed that the intermeetthrough open market operations ing range for the federal funds rate, would be appropriate. In keeping which provides a mechanism for with the Committee's usual practice, initiating consultation of the Comconsideration also would need to be mittee when its boundaries are pergiven to ongoing economic and finan- sistently exceeded, should be left cial developments and the growth of unchanged at 4 to 8 percent. the monetary aggregates. Such de- At the conclusion of the meeting, velopments might warrant an adjust- the following domestic policy direcment in either direction. tive was issued to the Federal Re- At the conclusion of the Commit- serve Bank of New York: tee's discussion, all but two members The information reviewed at this meetindicated that they favored or could ing indicates a mixed pattern of develaccept a directive that called for opments but suggests on balance that economic activity is expanding moderately in some slight easing in the degree of the current quarter. In July total nonfarm reserve pressure, taking account of payroll employment grew strongly, boosted the possibility that such easing might in part by the return of striking workers. be accomplished through a reduction However, continued weakness in the industrial sector was reflected in further dein the discount rate. The members clines in employment in manufacturing and expected this approach to policy mining. The civilian unemployment rate implementation to be consistent with moved down to 6.9 percent from 7.1 pergrowth in M2 and M3 at annual rates cent in June. Industrial production deof about 7 to 9 percent over the clined slightly further in July. The nominal value of total retail sales was about June-to-September period. Over the unchanged during the month, as sales of same interval, growth in Ml was new autos declined somewhat but spendexpected to moderate from the ex- ing on other consumer goods remained ceptionally large increase during the strong. Housing starts fell somewhat in May and June from a relatively high level second quarter. With the prospective earlier in the year. Business capital spendbehavior of Ml remaining subject to ing appears to have remained weak, partly unusual uncertainty, the Committee reflecting continuing declines in the enagain decided not to specify a rate ergy sector. While fluctuations in energy of expected growth in the operational prices have caused some month-to-month volatility, on average prices and wages are paragraph of the directive but to rising more slowly this year than in 1985. continue to evaluate this aggregate The trade-weighted value of the dollai in the light of the performance of against major foreign currencies has conthe broader aggregates and other tinued to decline since the July 8-9 meetfactors. The Committee indicated ing of the Committee. The U.S. merchandise trade deficit in the second quarter that it might find somewhat greater appears to have been about unchanged or somewhat lesser reserve restraint from the first quarter. The value of total acceptable over the intermeeting pe- exports and of total imports remained riod depending on the decision with about the same in the two quarters, although the value of oil imports continued respect to the discount rate and on to fall in the second quarter while that of such other factors as the behavior of non-oil imports rose further. Digitized fo t r h F e R A m S o E n R e tary aggregates, the strength Growth of M2 and especially of M3 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 137 picked up in July, lifting expansion of these percent for M2 and M3. While a range of two aggregates for the year through July 3 to 8 percent for Ml in 1987 would apwell into the upper portion of their re- pear appropriate in the light of most hisspective ranges established by the Com- torical experience, the Committee recmittee for 1986. In July Ml continued to ognized that the exceptional uncertainties grow at a rate close to the very rapid pace surrounding the behavior of Ml velocity of the second quarter. Expansion in total over the more recent period would redomestic nonfinancial debt remains ap- quire careful appraisal of the target range preciably above the Committee's moni- at the beginning of 1987. The associated toring range for 1986. Short-term interest range for growth in total domestic nonrates have declined somewhat since the financial debt was provisionally set at 8 July meeting of the Committee, while most to 11 percent for 1987. long-term interest rates are about un- In the implementation of policy for the changed to slightly lower on balance. On immediate future, the Committee seeks July 10, the Federal Reserve Board ap- to decrease slightly the existing degree of proved a reduction in the discount rate pressure on reserve positions, taking acfrom 6V2 to 6 percent. count of the possibility of a change in the The Federal Open Market Committee discount rate. This action is expected to seeks monetary and financial conditions be consistent with growth in M2 and M3 that will foster reasonable price stability over the period from June to September over time, promote growth in output on at annual rates of about 7 to 9 percent. a sustainable basis, and contribute to an While growth in Ml is expected to modimproved pattern of international trans- erate from the exceptionally large inactions. In furtherance of these objectives crease during the second quarter, that the Committee agreed at the July meeting growth will continue to be judged in the to reaffirm the ranges established in Feb- light of the behavior of M2 and M3 and ruary for growth of 6 to 9 percent for both other factors. Somewhat greater or lesser M2 and M3, measured from the fourth reserve restraint might be acceptable dequarter of 1985 to the fourth quarter of pending on the behavior of the aggre- 1986. With respect to Ml, the Committee gates, the strength of the business expanrecognized that, based on the experience sion, developments in foreign exchange of recent years, the behavior of that ag- markets, progress against inflation, and gregate is subject to substantial uncer- conditions in domestic and international tainties in relation to economic activity credit markets. The Chairman may call and prices, depending among other things for Committee consultation if it appears on the responsiveness of Ml growth to to the Manager for Domestic Operations changes in interest rates. In light of these that reserve conditions during the period uncertainties and of the substantial de- before the next meeting are likely to be cline in velocity in the first half of the associated with a federal funds rate peryear, the Committee decided that growth sistently outside a range of 4 to 8 percent. of Ml in excess of the previously established 3 to 8 percent range for 1986 would be acceptable. Acceptable growth of Ml Votes for this action: Messrs. Volcker, over the remainder of the year will de- Corrigan, Angell, Guffey, Heller, Mrs. pend on the behavior of velocity, growth Horn, Messrs. Johnson, Morris, Rice, in the other monetary aggregates, devel- and Ms. Seger. Votes against this acopments in the economy and financial tion: Messrs. Melzer and Wallich. Abmarkets, and price pressures. Given its sent and not voting: None. rapid growth in the early part of the year, the Committee recognized that the in- Messrs. Melzer and Wallich were crease in total domestic nonfinancial debt in favor of maintaining the existing in 1986 may exceed its monitoring range of 8 to 11 percent, but felt an increase in degree of reserve pressure. Mr. Melthat range would provide an inappro- zer continued to be concerned about priate benchmark for evaluating longer- the impact of further easing on inflaterm trends in that aggregate. tionary expectations and the value of For 1987 the Committee agreed on ten- the dollar in foreign exchange martative ranges of monetary growth, measkets. In addition, he noted that ured from the fourth quarter of 1986 to Digitized fotr hFeR fAoSuErRth quarter of 1987, of 5Vi to SVi during the intermeeting period the http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 FOMC Policy Actions outlook for real economic activity in point below the second-quarter avthe second half of 1986 and in 1987 erage. had not deteriorated and perhaps After declining on balance over even had improved slightly. Mr. the first half of the year, industrial Wallich emphasized that the imple- production has picked up recently. mentation of unchanged reserve con- According to revised data, output ditions would improve the prospects was flat in June and rose 0.3 percent for significant slowing in monetary in July, rather than declining in both growth, thereby reducing the poten- months as previously reported. In tial for inflation. August industrial production edged up 0.1 percent. Gains in output in July and August were particularly Meeting Held on large for defense and space equip- September 23, 1986 ment. Production of business equipment, consumer goods, and construc- Domestic Policy Directive tion supplies also registered strong The information reviewed at this increases. Capacity utilization in meeting suggested a moderate pickup manufacturing, mining, and utilities in economic growth from the slow fell 0.1 percentage point in August pace in the second quarter. Payroll to 79 percent, about the same as the employment expanded further in Au- rate in the preceding three months gust with gains widespread by indus- but 1.6 percentage points below a try. Consumer spending has contin- year ago. ued to increase at a relatively rapid Retail sales rose 0.8 percent in pace, and construction of single- August, after a July increase of 0.3 family homes has remained at a high percent. Sales in the automotive level. Business capital spending, group strengthened noticeably in rehowever, has been sluggish, particu- sponse to incentive plans offered at larly for new structures. Wage rates the end of the month by domestic have continued to increase slowly in auto producers. Total car sales rose recent months, while producer and to an annual rate of 12.2 million consumer prices have tended to firm units in August, compared with 10.9 reflecting developments in food and million units in July. In the early energy markets. part of September, sales of domesti- Total nonfarm payroll employ- cally produced autos soared to an ment continued to expand in August, annual rate of 17 million units. Outrising about XA million further after lays for durable goods other than adjusting for strike activity, some- autos, which were strong earlier in what faster than the average gain so the year, dropped back in August, far this year. Hiring at service estab- but sales at general merchandisers lishments accounted for two-thirds posted another large gain. of the increase, but construction Residential construction activity employment also was up substan- remained relatively high through the tially, and manufacturing employ- summer. Housing starts totaled 1.8 ment rose for the first time since million units at an annual rate in January. The civilian unemployment July and August. Single-family starts rate edged down again in August to remained close to the vigorous pace 6.8 percent, nearly xh percentage of the first half of the year, while Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 139 multifamily starts were appreciably index had risen on balance in other below their average level in that recent months after falling somewhat period. In July sales of new homes during the first four months of the dropped below the extraordinary lev- year. In the commodity markets, els recorded earlier in the year, but spot prices for precious metals rose sales of existing homes remained at sharply during August, reflecting about the advanced pace of the supply disruptions and, perhaps, resecond quarter. newed inflationary expectations. The Business capital spending has re- latter appeared to be associated in mained sluggish, reflecting continued part with oil price developments and weakness in nonresidential construc- the lower foreign exchange value of tion. Although the contraction in oil the dollar. Lumber prices also rose and gas-well drilling appears to be significantly during August. subsiding, the downtrend in commer- The trade-weighted value of the cial and industrial building has con- dollar against major foreign currentinued partly because of high vacancy cies had changed very little on balrates and the impact of the tax ance since the August 19 meeting of reform legislation. The value of non- the Committee, although it flucresidential construction put in place tuated over a fairly wide range. fell in July for the fifth time in six Exchange rates appeared to be afmonths. Business outlays for equip- fected mainly by news about prosment, however, have expanded pects for economic activity in the somewhat in recent months; ship- United States and abroad. Germany ments of nondefense capital goods in and Japan did not follow the Federal August were lVi percent above the Reserve's reduction in the discount second-quarter average. New orders rate, and short-term interest rates fell in August, partially reversing abroad were little changed while gains in the previous two months, money market rates in the United largely because orders for aircraft States were somewhat lower. At the and parts dropped. Bookings for same time, long-term rates in the office and computing equipment, United States moved up sharply relhowever, have rebounded from their ative to comparable foreign interest level earlier this year. rates. Preliminary data for the U.S. Wage rates have continued to rise merchandise trade deficit in July moderately over the past few months, indicated a substantially larger deficit while producer and consumer prices than on average in the first half of have firmed somewhat on balance the year as non-oil imports surged. due to developments in food and Real economic growth appeared to energy markets. Prices other than have picked up on balance in the those for food and energy, however, foreign industrial countries during have risen at about the same pace as the second quarter after a weak earlier in the year. In August, the performance in the first quarter. producer price index advanced 0.3 At its meeting in August, the percent, after changing little on bal- Committee adopted a directive that ance over the previous three months called for decreasing slightly the and declining sharply earlier in the existing degree of pressure on reyear. The consumer price index in- serve positions, taking account of the creased 0.2 percent in August. The possibility of a change in the discount Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 FOMC Policy Actions rate. The members expected such an around 57/s percent since the reducapproach to policy to be consistent tion in the discount rate shortly after with growth in M2 and M3 over the the August 19 meeting of the Comperiod from June to September at mittee. Other short-term interest rates annual rates of about 7 to 9 percent. fell about 30 basis points following Over the same period growth in Ml the discount rate cut. Longer-term was expected to moderate from the bond yields changed little immedirapid pace during the second quarter. ately after the discount rate action The Committee agreed that it would but have increased noticeably in continue to evaluate growth of Ml recent weeks, with rates on Treasury in light of the expansion of the securities rising as much as 60 basis broader aggregates and other factors. points. The recent behavior of long- The members also decided that term rates apparently has reflected, somewhat greater or lesser reserve at least in part, some concerns by restraint might be acceptable de- market participants about whether pending on the behavior of the ag- inflationary pressures could develop gregates, the strength of the business in the context of some strengthening expansion, developments in foreign in economic activity, the declining exchange markets, progress against dollar, firmer oil prices, and rapid inflation, and conditions in domestic monetary growth in the United States and international credit markets. The and abroad. intermeeting range for the federal The staff projections presented at funds rate was maintained at 4 to 8 this meeting suggested that growth percent. in real GNP likely would pick up a The discount rate was reduced V2 bit further in coming months. Growth percentage point shortly after the was forecast to continue at a mod- August meeting. In the two complete erate pace in 1987. Through 1987, reserve maintenance periods ending the key element supporting expanafter the meeting, adjustment plus sion in domestic production was a seasonal borrowing at the discount projected improvement in the U.S. window averaged close to $460 mil- trade position. Growth in domestic lion, somewhat higher than in the spending was forecast to slow over previous intermeeting period. In the the next several quarters. The staff first week of the current maintenance outlook for inflation indicated a limperiod, borrowing dropped back to ited increase from the current pace about $280 million. due to some firming in world oil Growth in the broader monetary prices and the effects of the dollar's aggregates slowed in August; M2 depreciation. The civilian unemployand M3 grew at annual rates of about ment rate was expected to decline 103/4 percent and 8V2 percent, respec- slightly over the projection horizon. tively. In August, both aggregates In the Committee's discussion of were close to the upper limits of the economic situation and outlook, their longer-run ranges. In contrast the members expressed general to the broader aggregates, growth in agreement with the staff projection Ml accelerated, but it appeared to that moderate growth through the have slowed considerably in the early forecast horizon was the most likely weeks of September. outcome. However, the outlook re- Federal funds generally have traded mained subject to substantial uncer- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 141 tainties relating to both domestic and ing, if achieved, would tend to have international factors. On the favora- a favorable impact on financial marble side, consumer spending and kets and thus on the economy genconstruction of single-family housing erally. remained elements of strength in the On balance, while a few members domestic economy, and members supported the view that some pickup reported that business sentiment ap- in domestic demand was a reasonable peared to have improved recently in expectation, most believed that several, but not all, parts of the growth in domestic demand would country. One member noted that probably taper off over the next reduced personal income taxes could several quarters. In their view, therehelp to sustain consumer expendi- fore, the prospects for sustained tures next year. Another commented economic growth depended on an that the emergence of apparently improvement in the foreign trade more stable conditions in agriculture balance. The members generally and energy would tend to remove agreed that the substantial depreciathe retarding influences that those tion of the dollar against several key sectors had been exerting on major foreign currencies provided a overall economic activity. On the basis for anticipating a reduction in negative side, the demand for auto- the trade deficit in real terms, but mobiles undoubtedly would weaken the timing of such a reduction still after the currently attractive incen- was subject to a great deal of uncertive programs expired, and the ap- tainty. Moreover, several expressed parent overbuilding of multifamily concern that the improvement might housing in many areas would tend to well be relatively modest, especially restrain overall residential construc- in the absence of stronger economic tion. Business fixed investment was growth in key industrial nations not expected to provide much, if abroad; and some members also any, impetus to the expansion de- commented on the inertia on both spite indications of improvement re- the import and export sides associcently in the demand for equipment. ated with long-term contracts and Adverse factors bearing on the in- established marketing relationships. vestment outlook included the cur- It also was noted that the currencies rent oversupply of office buildings of a number of developing countries and other commercial facilities in had changed relatively little vis-a-vis many parts of the country and the the dollar over the past year or so, negative effects of the tax reform raising a question as to the speed of legislation on investment incentives adjustment in the trade balance. that many businessmen were report- With regard to currently available ing. The outlook for fiscal policy information on trade developments, remained uncertain; several mem- a few members referred to limited bers noted that some of the proposed indications in reports from firms in measures for reducing the deficit in their Districts that tended to suggest 1987 did not deal with underlying some gains in the international comimbalances and that the prospects petitive position of U.S. firms and beyond 1987 were especially unclear. better prospects for greater stability, However, one member observed that if not some improvement, in the a reduction in government borrow- overall trade balance. However, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 FOMC Policy Actions broadly confirming evidence of such acceptable and that such growth a development had not materialized would be evaluated in the context of thus far. the velocity of Ml, the expansion of Against the background of the the broader aggregates, developdollar's depreciation, the members ments in the economy and financial agreed that some upward pressure markets, and price pressures. For on prices could be expected over the 1987 the Committee agreed on tennext several quarters, a tendency tative monetary growth objectives that would be reinforced if world oil that included a reduction of Vi perprices continued to rise. Moreover, centage point to a range of 5V2 to most commodity prices appeared to 8^2 percent for both M2 and M3. In have stabilized recently, after declin- the case of Ml the Committee exing earlier, while prices of precious pressed the preliminary view that metals had increased considerably retention of the 1986 range of 3 to 8 and these developments along with percent, which implied a consideraconditions in financial markets sug- ble reduction from the likely rate of gested increased concern about the growth in 1986, appeared appropripossibility of a pickup in inflation. ate for 1987 in the light of most On the other hand, a number of historical experience. The Commitmembers observed that wages gen- tee also retained the range of 8 to 11 erally were rising somewhat less this percent for growth of total domestic year than in 1985 and some members nonfinancial debt in 1987. It was also commented on the continuing understood that all the ranges were efforts of many business firms to provisional and that, notably in the hold down their costs. And while case of Ml, they would be reviewed productivity gains had been relatively in early 1987 against the background limited in recent quarters, many of intervening developments. labor contracts incorporated provi- In the Committee's discussion of sions on work rules that should help policy implementation for the weeks to improve efficiency and moderate immediately ahead, nearly all the pressures on costs. members were in favor of directing At its meeting in July the Com- open market operations, at least mittee reviewed the basic policy ob- initially, toward maintaining unjectives that it had established in changed conditions of reserve avail- February for growth of the monetary ability. Several emphasized that and credit aggregates in 1986 and set monetary policy had moved toward tentative objectives for expansion in an increasingly accommodative pos- 1987. For the period from the fourth ture over the course of recent months quarter of 1985 to the fourth quarter and that it was now time to pause of 1986, the Committee reaffirmed and observe developments, given the the ranges established in February rapid growth in the broad as well as for growth of 6 to 9 percent for both the narrow monetary aggregates, a M2 and M3. The associated range few indications of more strength in for expansion in total domestic non- the economy, and some signs of financial debt also was reaffirmed at increasing inflationary expectations. 8 to 11 percent for 1986. With respect One member expressed the view, to Ml, the Committee decided that however, that some tightening of growth in excess of the 3 to 8 percent reserve conditions was desirable at range set in February would be this time against the background of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 143 recent economic and financial devel- phasized the potential for inflation opments, notably the persistence of stemming from the buildup in money rapid growth in the monetary aggre- balances, and in liquid assets more gates. generally, and these members at- In their discussion of policy imple- tached considerable importance to mentation over the near term, the constraining the growth of the broader members took into account an anal- monetary aggregates to within the ysis that suggested that if current Committee's ranges for the year, A conditions of reserve availability were slightly different view acknowledged maintained and if short-term interest that the Committee's objectives for rates did not deviate significantly M2 and M3 appeared to remain from their existing levels, the growth appropriate for the year, but in this of the monetary aggregates could be view actual growth marginally in expected to slow over the months excess of those ranges should be ahead, relative to the very rapid pace tolerated—and the added risks of over the summer months, even as- some future inflation accepted—if suming somewhat stronger expansion such growth occurred in the context in economic activity. The most recent of continuing sluggish economic exbehavior of the monetary aggregates pansion. One member stressed that lent some weight to such an expec- if the velocity of money continued to tation. However, the anticipated decline, further rapid expansion might slowing still would result in growth indeed be needed to sustain an acof the broad aggregates around the ceptable rate of economic growth. upper bound of their long-term Turning to the question of possible ranges. Also, the members recog- adjustments in the degree of reserve nized that the extent of any slowing pressure during the intermeeting pein monetary growth was subject to riod, the members did not foresee as perhaps more than the usual uncer- likely any developments that might tainties, reflecting for example ques- call for more than a slight change, if tions about the pace of further ad- any, in the availability of reserves justments in offering rates on various during the weeks ahead. In this types of interest-bearing deposits as context, however, a number believed depository institutions continued to that policy implementation should be respond to earlier declines in short- especially alert to the potential need term market rates. The members for some slight firming of reserve also noted that the monetary aggre- conditions, particularly if monetary gates might well continue to grow growth did not slow in line with very rapidly if short-term interest expectations, though this growth rates were to decline appreciably would continue to be viewed in the further. context of other economic and finan- In the course of the discussion, a cial developments. Most of these number of members expressed con- members did not want to rule out cern about the potential for the the possibility of some easing in the broad monetary aggregates to exceed weeks immediately ahead, but they their longer-term ranges. While rec- saw the prospects for such a move as ognizing the need to evaluate the less likely, and two favored a direcaggregates in the context of eco- tive that would not contemplate any nomic and financial developments easing. Other members felt that there more generally, these members em- should be no presumptions about the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 FOMC Policy Actions likely direction of any intermeeting initiating consultation of the Comadjustments, given the many uncer- mittee when its boundaries are pertainties that existed about the behav- sistently exceeded, should be left ior of the monetary aggregates and unchanged at 4 to 8 percent. about prospective economic and fi- At the conclusion of the meeting, nancial developments. The members the following domestic policy direcagreed that the behavior of the dollar tive was issued to the Federal Reon foreign exchange markets could serve Bank of New York: be an important factor influencing any small intermeeting adjustments. The information reviewed at this meeting suggests some pickup in the growth of At the conclusion of the Commiteconomic activity from the slow pace in tee's discussion, all but one member the second quarter. In August total nonindicated that they favored a direc- farm payroll employment grew considtive that called for no change in the erably further, with employment in manufacturing rising for the first time since current degree of pressure on reserve January. The civilian unemployment rate positions. The members expected edged down further to 6.8 percent. Inthis approach to policy implementa- dustrial production rose slightly in July tion to be consistent with some and August after declining on balance reduction in the growth of M2 and during the first half of the year. Consumer spending has remained relatively strong M3 to annual rates of 7 to 9 percent in recent months, with gains in retail sales over the four-month period from in August paced by a sharp rise in auto August to December. Over the same sales. Housing starts in July and August interval, growth in Ml was expected stayed at a relatively high level. Business capital spending appears to have reto moderate from the exceptionally mained sluggish, reflecting weakness in large increase during the past several nonresidential construction. A more months. Because the prospective be- moderate rate of wage increases has been havior of Ml remained subject to sustained in recent months, while broad unusual uncertainty, the Committee measures of prices have firmed somewhat due to developments in food and energy again decided not to specify a rate markets. of expected growth for this aggregate The trade-weighted value of the dollar in the operational paragraph of the against major foreign currencies is essendirective but to continue to evaluate tially unchanged on balance since the Au- Ml in the light of the performance gust 19 meeting of the Committee. Preliminary data for the U.S. merchandise of the broader aggregates and other trade deficit in July indicate a larger deffactors. The members indicated that icit than in previous months. slightly greater reserve restraint Growth of M2 and especially of M3 would, or slightly lesser restraint moderated in August, but expansion of these two aggregates for the year through might, be acceptable over the inter- August has been at the upper end of their meeting period depending on the respective ranges established by the Combehavior of the monetary aggregates, mittee for 1986. In August Ml continued taking into account the strength of to grow very rapidly. Expansion in total the business expansion, the perform- domestic nonfinancial debt remains appreciably above the Committee's moniance of the dollar in foreign exchange toring range for 1986. Short-term interest markets, progress against inflation, rates have declined further since the Auand conditions in domestic and inter- gust meeting of the Committee while longnational credit markets. The mem- term market rates have risen on balance. On August 20, the Federal Reserve Board bers agreed that the intermeeting approved a reduction in the discount rate range for the federal funds rate, from 6 to 5V2 percent. which provides a mechanism for Digitized for FRASER The Federal Open Market Committee http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 145 seeks monetary and financial conditions to December at annual rates of 7 to 9 that will foster reasonable price stability percent. While growth in Ml is expected over time, promote growth in output on to moderate from the exceptionally large a sustainable basis, and contribute to an increase during the past several months, improved pattern of international trans- that growth will continue to be judged in actions. In furtherance of these objectives the light of the behavior of M2 and M3 the Committee agreed at the July meeting and other factors. Slightly greater reserve to reaffirm the ranges established in Feb- restaint would, or slightly lesser reserve ruary for growth of 6 to 9 percent for both restraint might, be acceptable depending M2 and M3, measured from the fourth on the behavior of the aggregates, taking quarter of 1985 to the fourth quarter of into account the strength of the business 1986. With respect to Ml, the Committee expansion, development in foreign exrecognized that, based on the experience change markets, progress against inflaof recent years, the behavior of that ag- tion, and conditions in domestic and ingregate is subject to substantial uncer- ternational credit markets. The Chairman tainties in relation to economic activity may call for Committee consultation if it and prices, depending among other things appears to the Manager for Domestic Opon the responsiveness of Ml growth to erations that reserve conditions during the changes in interest rates. In light of these period before the next meeting are likely uncertainties and of the substantial de- to be associated with a federal funds rate cline in velocity in the first half of the persistently outside a range of 4 to 8 peryear, the Committee decided that growth cent. of Ml in excess of the previously established 3 to 8 percent range for 1986 would Votes for this action: Messrs. Volcker, be acceptable. Acceptable growth of Ml Corrigan, Angell, Guffey, Heller, Mrs. over the remainder of the year will de- Horn, Messrs. Johnson, Melzer, Morpend on the behavior of velocity, growth ris, Rice, and Ms. Seger. Vote againstin the other monetary aggregates, devel- this action: Mr. Wallich. opments in the economy and financial markets, and price pressures. Given its Mr. Wallich dissented because he rapid growth in the early part of the year, the Committee recognized that the in- preferred a slight tightening of recrease in total domestic nonfinancial debt serve conditions. He was concerned in 1986 may exceed its monitoring range about the persistence of rapid monof 8 to 11 percent, but felt an increase in etary expansion and the associated that range would provide an inappropriate benchmark for evaluating longer- potential for inflation. In his view term trends in that aggregate. some reduction in the availability of For 1987 the Committee agreed on ten- reserves was needed to increase the tative ranges of monetary growth, meas- likelihood of significant slowing in ured from the fourth quarter of 1986 to monetary growth over the months the fourth quarter of 1987, of 5Vi to SVi ahead. percent for M2 and M3. While a range of 3 to 8 percent for Ml in 1987 would appear appropriate in the light of most historical experience, the Committee recognized that the exceptional uncertainties surrounding the behavior of Ml velocity Meeting Held on over the more recent period would require careful appraisal of the target range November 5, 1986 at the beginning of 1987. The associated range for growth in total domestic non- 1. Domestic Policy Directive financial debt was provisionally set at 8 to 11 percent for 1987. The information reviewed at this In the implementation of policy for the meeting suggested that economic acimmediate future, the Committee seeks tivity grew at a moderate rate in the to maintain the existing degree of presthird quarter, after rising only slightly sure on reserve positions. This action is expected to be consistent with growth in in the previous quarter. Payroll em- Digitized foMr F2R AanSdER M 3 over the period from August ployment expanded somewhat furhttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 FOMC Policy Actions ther in September, although manu- rapid rate than in earlier months of facturing jobs declined following little the year. The civilian unemployment change in August. Consumer spend- rate moved back up to 7 percent in ing, which had been quite robust in September, close to its average level the first half of the year, strength- earlier in the year. ened further in the third quarter. Total retail sales increased 4.6 Business capital spending, however, percent in September because of a remained sluggish, reflecting declines substantial jump in auto sales followin outlays for nonresidential con- ing the expansion of sales incentive struction; new orders rose in Septem- programs by domestic automakers in ber and equipment spending picked late August. During September, doup. Residential constuction expendi- mestic cars sold at a record 11% tures advanced further in the third million unit annual rate, compared quarter, but housing starts fell in with an average 8% million unit pace September. Wage increases have in the preceding five months. Light continued to moderate, while prices trucks and foreign cars also sold at have increased a bit because of record monthly rates in September. developments in food and energy Outside of the auto group, sales markets. were virtually unchanged from Au- Industrial production rose another gust levels. 0.1 percent in September. The gain In the business sector, spending partly reflected a surge in the pro- has remained sluggish. Business purduction of cars and light trucks. chases of motor vehicles were up Other production was unchanged on sharply in the third quarter, but balance; production of defense spending for other equipment deequipment rose, but output of non- clined, and outlays for nonresidential defense goods edged down and ma- structures dropped substantially furterials production remained sluggish. ther. However, new orders for non- Domestic automakers apparently cut defense capital goods rose sharply in back assemblies during October, but September; although aircraft orders still were planning relatively large accounted for half of the increase, production for the fourth quarter as bookings for many other types of a whole. Capacity utilization in man- equipment also posted sizable gains. ufacturing, mining, and utilities was For structures, data on new commitunchanged in September at 79.2 ments have continued to point to percent. The utilization rate in min- further declines in office building, ing continued to decline, while the but the drop in oil- and gas-well rate in manufacturing edged up, drilling appears to have ended. reflecting the pickup in motor vehicle Housing starts have declined since production. earlier in the year but residential Total nonfarm payroll employ- construction expenditures rose ment grew somewhat further in Sep- through the summer. Total private tember. The sluggish pace of indus- housing starts dropped in September trial production was reflected in a to an annual rate of 1.68 million decline in manufacturing jobs that units from a rate of about 1.8 million more than offset the increase re- units during July and August. Single ported for August. Employment in family starts fell somewhat in Septrade, finance, and services advanced tember, registering the lowest monthly Digitized fofru FrRthAeSrE Rin September, but at a less reading since December, but sales of http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 147 new and existing homes increased ery in real economic activity in most during the month. Multifamily hous- major foreign industrial countries in ing starts declined further apparently the second quarter, available data reflecting in part record high vacancy for the third quarter indicate further rates and prospectively diminished moderate expansion in Germany, rates of return on rental properties France, the United Kingdom and to as a result of tax reform. a lesser extent in Japan. Labor cost increases have moder- At its meeting in September, the ated further over the past year, but Committee adopted a directive that price increases have been a bit higher called for maintaining the existing in recent months than earlier in the degree of pressure on reserve posiyear due mainly to developments in tions. The members expected such food and energy markets. Consumer an approach to policy to be consistfood prices rose sharply during the ent with growth in M2 and M3 from summer, reflecting in part weather- August to December at annual rates related disruptions in some supplies. of 7 to 9 percent. Growth in Ml over By September conditions had im- the same period was expected to proved, and increases in retail food moderate from the exceptionally large prices slowed noticeably. In the en- increase during the previous several ergy sector, petroleum prices moved months. The Committee agreed that up at the wellhead and refinery levels the growth in Ml would continue to in the September PPI, reflecting the be evaluated in view of the behavior OPEC agreement in early August to of the broader aggregates and other curtail production. This increase in factors. The members also decided crude oil costs apparently has already that slightly greater reserve restraint reached the retail level as gasoline would, or slightly lesser reserve reand heating oil prices turned up in straint might, be acceptable dependthe September CPI, after steep de- ing on the behavior of the monetary clines throughout much of the year. aggregates, taking into account the Excluding food and energy, con- strength of the business expansion, sumer prices have risen recently at developments in foreign exchange about the same pace as earlier in the markets, progress against inflation, year. and conditions in domestic and inter- The trade-weighted value of the national credit markets. The interdollar against major foreign curren- meeting range for the federal funds cies continued to decline for several rate was maintained at 4 to 8 percent. weeks after the September 23 FOMC M2 and M3 increased at annual meeting, but it subsequently re- rates of 83A and 7V2 percent respeccovered and has risen somewhat on tively, on average over September balance. Short-term and long-term and October, well below their rates interest rate differentials increased a of growth since early spring. Through bit during the intermeeting period; October, both aggregates were very foreign rates moved up, particularly close to the upper ends of their 6 to at the short end, while rates in the 9 percent annual growth ranges es- United States eased slightly. Real tablished by the Committee for 1986. net exports of goods and services Growth in Ml still was quite strong dropped further in the third quarter, over September and October, but mainly reflecting a surge in the vol- down substantially from its average ume of oil imports. After the recov- over the previous several months. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 FOMC Policy Actions Adjustment plus seasonal borrow- tries were broadly consistent with the ing at the discount window averaged staff forecast of continuing expansion about $325 million in the two com- at a moderate pace. There were plete maintenance periods after the uncertainties nonetheless about the September meeting. Federal funds prospective performance of individgenerally continued to trade close to ual sectors of the economy and thus 5% percent over the intermeeting of the economy generally. In the period. Most other interest rates view of most members the risks of a eased somewhat on balance, with deviation from the staff projection short-term rates about unchanged to appeared to be evenly balanced, but down 15 basis points and long-term a few felt the risks were greater in rates off as much as 35 basis points. the direction of less growth. Bond prices increased in the days As they had at several previous just before the meeting in part re- meetings, the members focused on flecting perceptions of stronger for- the performance of net exports as a eign demand for dollar assets, key factor in the outlook for ecoprompted to some extent by the cut nomic activity. The most recent data in the Japanese discount rate on could be interpreted as suggesting October 31. In addition, market that the trade balance was no longer participants reportedly interpreted the worsening. However, clear evidence cut in the Japanese rate as giving the of an actual turnaround in the trade Federal Reserve more leeway to ease balance had not yet emerged and it domestic monetary policy. was far from certain that there would The staff projections presented at be significant improvement during this meeting suggested that real GNP the months ahead. Some members would continue to grow at a moder- reported that a growing number of ate rate through the end of 1987. firms were experiencing increases in Anticipations of sustained growth in orders from abroad, a development real exports, reflecting the improve- that lent support to expectations of ment in the price competitiveness of a significant pickup in export sales U.S. goods, continued to be a key over the next few quarters. To an element supporting the expected ex- important degree, the outlook for pansion in domestic production. U.S. exports remained contingent on Growth in domestic spending was growing demands from major indusprojected to be relatively sluggish trial nations. In that regard it was over the forecast horizon. The staffs noted that the evidence was mixed. projection for inflation continued to Domestic expansion—and also the show some step-up early next year demand for foreign goods—apassociated with the effects of rapidly peared to be strengthening in some rising import prices on the prices of major countries, but the outlook was U.S. goods and with the turnaround less promising in others. On the in energy prices. import side, members observed that In the Committee's discussion of foreign competition remained inthe economic situation and outlook, tense, notably from countries whose the members agreed that incoming exchange rates had not appreciated data on business activity and reports against the dollar. Nonetheless, there on specific conditions in many indus- were reports that rising import prices Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 149 were improving the competitive po- indicators pointed to a strengthening sition of at least some domestic in the demand for business equipproducers. ment. One member also commented In the Committee's review of the that the prospects for improvement outlook for spending by domestic in the nation's balance of trade, if sectors of the economy, the members realized, would require more investgenerally expected demand to con- ment in domestic productive facilities tinue to increase, but at a slower over time. In regard to agriculture pace than in recent quarters. Individ- current conditions were mixed, but ual members again highlighted the one member indicated that the overuneven conditions in different indus- all situation in that industry and also tries and parts of the country. One in energy no longer appeared to be member commented that the com- worsening and accordingly those key plex tax reform legislation consti- sectors of the economy had probably tuted a major source of uncertainty. ceased to exert a negative influence The members agreed that total con- on general economic activity. Likesumer spending would tend to be wise, the outlook for reduced govheld down in the current quarter by ernment deficits, including surpluses reduced purchases of automobiles for state and local governments, and following the bulge associated with the apparently favorable prospects attractive incentive programs. One for foreign trade implied a reduction member observed, however, that in major structural imbalances and some offsetting expenditures on high- an improved basis for sustained ecopriced items might be induced before nomic expansion. year-end because the deductibility of With regard to the outlook for sales taxes in computing personal inflation, the members agreed that income taxes would be terminated the lagged impacts of the dollar's starting in 1987. On the negative depreciation along with developside, one member suggested that the ments in energy markets were likely adjustment in automobile sales might to contribute to somewhat faster take longer than many observers price increases during the year ahead. currently expected and also stressed Many domestic businesses reportedly that consumer debt burdens were an continued to look for competitive important inhibiting factor on spend- opportunities to raise prices and ing. In the area of business invest- widen profit margins. One member ment, members noted that construc- observed that a potential inflation tion activity would probably be held risk, and one for business activity down by relatively high vacancy rates generally, would be the emergence in office buildings, multifamily hous- of new protectionist measures in ing, and other commercial facilities response to unsatisfactory progress such as hotels, especially in the in reducing the nation's trade deficit. context of the reportedly adverse On the favorable side, wages generimpact of the tax reform legislation ally appeared to be continuing to rise on such investments. Members also more slowly than earlier and busireferred to a number of plant closings nesses were continuing to devote in the manufacturing sector. On the considerable attention to paring costs other hand, some current economic and improving their productivity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 FOMC Policy Actions Some food prices might also tend to nonfinancial debt in 1987. It was decline following increases in recent understood that all the ranges were months. More generally, the pros- provisional and that, notably in the pect that capacity utilization rates case of Ml, they would be reviewed were likely to remain relatively low in early 1987 against the background in most industries over the year of intervening developments. ahead implied that inflationary pres- The Committee's discussion of polsures would be muted during that icy implementation for the weeks period. immediately ahead reflected the sense At its meeting in July the Com- that the economy was continuing to mittee reviewed the basic policy ob- expand at a moderate rate and that, jectives that it had established in while price pressures could be February for growth of the monetary strengthening somewhat in response and credit aggregates in 1986 and it to higher import prices, those price set tentative objectives for expansion increases should be well contained. in 1987. For the period from the Externally, some signs of greater fourth quarter of 1985 to the fourth stability seemed to be emerging in quarter of 1986, the Committee re- exchange markets. In those circumaffirmed the ranges established in stances, all of the members indicated February for growth of 6 to 9 percent that they were in favor of continuing for both M2 and M3. The associated to direct open market operations range for expansion in total domestic toward maintaining unchanged connonfinancial debt also was reaffirmed ditions of reserve availability. That at 8 to 11 percent for the current conclusion was also warranted by year. With respect to Ml, the Com- indications that monetary growth had mittee decided that growth in excess moderated somewhat over Septemof the 3 to 8 percent range set in ber and October, and an expectation February would be acceptable and that the broad aggregates might stay that such growth would be evaluated close to the Committee's earlier exin relation to the velocity of Ml, the pectations for growth near the upper expansion of the broader aggregates, ends of their long-term ranges in the developments in the economy and closing months of the year, assuming financial markets, and price pres- no significant changes in reserve sures. For 1987 the Committee agreed conditions and in short-term interest on tentative monetary growth objec- rates. tives that included reductions of xh In the Committee's discussion of percentage point to ranges of 5V2 to possible intermeeting adjustments in 8^2 percent for both M2 and M3. In the degree of reserve pressure, the the case of Ml the Committee ex- members suggested that developpressed the preliminary view that ments calling for more than a slight retaining the 1986 range of 3 to 8 change in reserve conditions would percent, which implied a considera- be unlikely during the weeks ahead. ble reduction from the likely rate of Although a few members felt that growth in 1986, appeared appropri- policy implementation should remain ate for 1987 in the light of most especially alert to the potential need historical experience. The Commit- for some easing of reserve conditee also retained the range of 8 to 11 tions, notably the need to respond percent for growth of total domestic to emerging indications, if any, of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 151 relatively weak business activity, most slightly lesser reserve pressures might felt that there should be no presump- be acceptable over the intermeeting tions about the likely direction of period depending on the behavior of any small intermeeting adjustments, the monetary aggregates, taking into should they be desirable. With re- account the strength of the business spect to the monetary aggregates, expansion, the performance of the some members commented that a dollar in foreign exchange markets, shortfall from current expectations progress against inflation, and conwould be a welcome development, ditions in domestic and international given the rapid growth earlier in the credit markets. The members agreed year, and within limits a shortfall that the intermeeting range for the should be tolerated provided it oc- federal funds rate, which provides a curred in the context of satisfactory mechanism for initiating consultation economic performance and did not of the Committee when its boundaappear to be associated with upward ries are persistently exceeded, should pressures on market interest rates. be left unchanged at 4 to 8 percent. One member commented, however, At the conclusion of the meeting, that a sharp and abrupt slowdown in the following domestic policy direc- Ml growth might well signal a weaker tive was issued to the Federal Reeconomy and, depending on the serve Bank of New York: circumstances, might require more than a slight adjustment in policy The information reviewed at this meetimplementation. ing indicates that economic activity grew at a moderate pace in the third quarter. At the conclusion of the Commit- In September total nonfarm payroll emtee's discussion, all of the members ployment grew somewhat further, alindicated that they favored a direc- though employment in manufacturing fell tive that called for no change in the after changing little in August. The civilian unemployment rate moved back up to current degree of pressure on reserve 7.0 percent in September, close to its avpositions. The members expected erage level earlier in the year. Industrial this approach to policy implementa- production rose slightly further in Seption to be consistent with growth of tember and posted a moderate gain over the third quarter. Consumer spending has M2 and M3 at annual rates of 7 to 9 remained strong in recent months, with percent over the fourth quarter from gains in retail sales in August and espea September base. Over the same cially in September paced by a sharp rise period, growth in Ml was expected in auto sales. Housing starts fell in Septo moderate from its exceptional tember, but residential investment increased further in the third quarter as a pace during most of the period since whole. Business capital spending appears early spring. Because the behavior to have remained sluggish; equipment of Ml remained subject to unusual spending picked up in the third quarter uncertainty, the Committee decided and new orders were strong in September, but outlays for nonresidential constructo continue its recent practice of not tion continued to decline. Real net exspecifying a rate of expected growth ports of goods and services dropped furfor purposes of short-run policy im- ther in the third quarter, reflecting in large plementation but to evaluate this part a surge in the volume of oil imports. Increases in labor compensation have aggregate in the light of the performslowed over the course of the year, while ance of the broader monetary aggrebroad measures of prices have firmed gates and other factors. The mem- somewhat recently due to developments bers indicated that slightly greater or in food and energy markets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 FOMC Policy Actions Growth of M2 moderated further in For 1987 the Committee agreed on ten- September, but appears to have picked tative ranges of monetary growth, measup in October, while growth of M3 has ured from the fourth quarter of 1986 to tended to slow. Expansion of these two the fourth quarter of 1987, of 5Vi to %Vi aggregates for the year through Septem- percent for M2 and M3. While a range of ber has been at the upper end of their 3 to 8 percent for Ml in 1987 would aprespective ranges established by the Com- pear appropriate in the light of most hismittee for 1986. Growth of Ml slowed in torical experience, the Committee recthe September-October period from the ognized that the exceptional uncertainties very rapid pace experienced since early surrounding the behavior of Ml velocity spring. Expansion in total domestic non- over the more recent period would refinancial debt remains appreciably above quire careful appraisal of the target range the Committee's monitoring range for at the beginning of 1987. The associated 1986. Most interest rates have declined range for growth in total domestic nonsomewhat since the September 23 meet- finanical debt was provisionally set at 8 ing of the Committee. Although the trade- to 11 percent for 1987. weighted value of the dollar against major In the implementation of policy for the foreign currencies continued to decline for immediate future, the Committee seeks several weeks after the September meet- to maintain the existing degree of presing, it subsequently recovered and has risen sure on reserve positions. This action is somewhat on balance. expected to be consistent with growth in The Federal Open Market Committee M2 and M3over the period from Septemseeks monetary and financial conditions ber to December at annual rates of 7 to that will foster reasonable price stability 9 percent. While growth in Ml over the over time, promote growth in output on same period is expected to moderate from a sustainable basis, and contribute to an its exceptional pace during the previous improved pattern of international trans- several months, growth in this aggregate actions. In furtherance of these objectives will continue to be judged in the light of the Committee agreed at the July meeting the behavior of M2 and M3 and other to reaffirm the ranges established in Feb- factors. Slightly greater reserve restraint ruary for growth of 6 to 9 percent for both or slightly lesser reserve restraint might M2 and M3, measured from the fourth be acceptable depending on the behavior quarter of 1985 to the fourth quarter of of the aggregates, taking into account the 1986. With respect to Ml, the Committee strength of the business expansion, derecognized that, based on the experience velopments in foreign exchange markets, of recent years, the behavior of that ag- progress against inflation, and conditions gregate is subject to substantial uncer- in domestic and international credit martainties in relation to economic activity kets. The Chairman may call for Comand prices, depending among other things mittee consultation if it appears to the on the responsiveness of Ml growth to Manager for Domestic Operations that changes in interest rates. In light of these reserve conditions during the period beuncertainties and of the substantial de- fore the next meeting are likely to be ascline in velocity in the first half of the sociated with a federal funds rate persistyear, the Committee decided that growth ently outside a range of 4 to 8 percent. of Ml in excess of the previously established 3 to 8 percent range for 1986 would Votes for this action: Messrs. Volcker, be acceptable. Acceptable growth of Ml Corrigan, Angell, Guffey, Heller, Mrs. over the remainder of the year will de- Horn, Messrs. Johnson, Melzer, pend on the behavior of velocity, growth Morris, Rice, and Ms. Seger. Votes in the other monetary aggregates, devel- against this action: None. Absent and opments in the economy and financial not voting: Mr. Wallich. markets, and price pressures. Given its rapid growth in the early part of the year, the Committee recognized that the increase in total domestic nonfinancial debt in 1986 may exceed its monitoring range 2. Authorization lor Domestic of 8 to 11 percent, but felt an increase in Open Market Operations that range would provide an inappropriate benchmark for evaluating longer- Effective December 3, 1986, the Digitized fort eFrRmA StrEeRn ds in that aggregate. Committee approved a temporary http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 153 increase of $1 billion, to $7 billion, vehicles, which dropped off with the in the limit between Committee end of financing incentive programs, meetings on changes in System Ac- consumer spending has posted sizacount holdings of U.S. government ble gains in recent months. Business and federal agency securities speci- investment spending, however, has fied in paragraph l(a) of the author- remained sluggish, while housing starts ization for domestic open market have weakened. At the same time, operations. The increase was effec- the trade balance has shown only tive for the intermeeting period end- limited indications of improvement. ing with the close of business on Increases in labor costs still were December 16, 1986. moderate, but price increases have been somewhat higher than earlier Votes for this action: Messrs. Volcker, in the year because of developments Corrigan, Angell, Guffey, Heller, Mrs. Horn, Messrs. Johnson, Melzer, in food and energy markets. Morris, Rice, and Ms. Seger. Votes Total nonfarm payroll employagainst this action: None. Absent and ment rose about Vi million in both not voting: Mr. Wallich. October and November. Much of the This action was taken on the rec- gain was in the private service-proommendation of the Manager for ducing sector, but factory employ- Domestic Operations. The Manager ment also rose moderately, and the had advised that outright purchases workweek lengthened. Aggregate of securities in the intermeeting in- hours for production and nonsuperterval through December 1, 1986, visory workers in November were a had reduced the leeway under the full percentage point above the thirdusual $6 billion limit to about $3.5 quarter average. The civilian unembillion. Additional purchases of se- ployment rate stayed at 7 percent in curities in excess of that leeway likely November for the third consecutive would be necessary over the remain- month. der of the intermeeting period, chiefly Gains in employment and hours reflecting seasonal increases in cur- worked were associated with a sizarency in circulation and required ble pickup in industrial production reserves. in November. The industrial production index rose 0.6 percent last month, after essentially no change over the previous three months. Increases in Meeting Held on output were evident in most major December 15-16, 1986 marketing groups, with only energy materials showing a marked decline, Domestic Policy Directive although auto assemblies were about The information reviewed at this unchanged from October. Capacity meeting suggested that economic ac- utilization in manufacturing, mining, tivity was continuing to expand at a and utilities rose 0.3 percentage point moderate pace in the current quarter. in November to 79.3 percent. None- Payroll employment increased con- theless, utilization has changed little siderably in October and November; on balance since March and is 2*/2 hiring in manufacturing rose some- points below its most recent peak in what in both months after declining the summer of 1984. on balance since the beginning of the Sales of domestic cars fell sharply Digitized for y F e R a A r. S E A R part from sales of motor after the expiration of cut-rate fihttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 FOMC Policy Actions nancing incentive programs in early response to high vacancy rates and October. These sales averaged less adverse changes in tax laws. than 7 million units at an annual rate Price increases, although still modover the October-November period, erate, have been somewhat higher compared with the strong 9*/2 million than earlier in the year partly beunit pace for the third quarter as a cause of developments in food and whole. Excluding autos, gasoline, energy markets. The consumer price and nonconsumer items, retail sales index rose 0.2 percent in October in November rose 0.9 percent paced and the producer price index was up by continued strength in purchases 0.2 percent in November. In the food of furniture and appliances and in sector, some upward price pressure other nonauto durables. In addition, continued to be evident, although data for earlier months were revised increases in food prices slowed from upward slightly. the rapid pace during the summer. Business investment appears to In addition, energy prices turned have remained sluggish. Shipments down a bit at both the retail and of nondefense capital goods in- refinery levels, despite the firming of creased in October, and construction crude oil prices in spot markets since spending has firmed in recent months midsummer. Excluding food and enbut prospects for such spending have ergy, the CPI rose 0.4 percent in continued to be affected adversely October, somewhat faster than earby high vacancy rates and reactions lier in the year as new car prices to tax reform. In contrast, sales of increased sharply. Wage inflation has heavy-weight trucks fell markedly in picked up a bit recently, but has October, and business purchases of continued at a moderate pace. cars and light trucks also probably The trade-weighted value of the declined sharply after the sales incen- dollar against other G-10 currencies tive programs ended. At the same has declined somewhat on balance time, new orders for nondefense since the November 5 meeting of the capital goods fell 5 percent. Initial Committee. Exchange rates have been surveys of capital spending plans for affected by news about the pace of 1987 suggested that overall nominal economic activity, developments in spending on plant and equipment is the U.S. trade balance, and proslikely to change little from the 1986 pects for monetary actions in the level. United States and in key industrial Housing starts continued to de- nations abroad. Short-term interest cline in November. During the month rates rose moderately abroad, about total private housing starts, at 1.6 in line with movements in U.S. rates, million units, were a bit below the while differentials in long-term interreduced pace of September and Oc- est rates moved slightly against dollar tober. Single-family starts were vir- assets. Over the period, the dollar tually unchanged from their rate declined about 2 percent against the during the preceding two months, mark and was essentially unchanged but were below their level earlier in against the yen, but the dollar's the year; new home sales also have depreciation had been somewhat remained below their previous pace larger in early December. As of midin recent months. Multifamily starts December, the value of the dollar in declined further in November in relation to other major currencies Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 155 was little changed on balance from rate, and M3 growth moderated furthe level prevailing in August. Eco- ther to a 5V2 percent annual rate; nomic activity in major foreign in- through November both M2 and M3 dustrial countries was mixed in the were just inside the upper bounds of third quarter. The U.S. merchandise their 6 to 9 percent growth ranges trade deficit was estimated to be established by the Committee for about the same in the third quarter 1986. Ml accelerated again in Noas in the previous three quarters. vember, reaching a rate of 21 per- Exports were flat in the quarter, cent, as growth in demand deposits while the value of oil imports was surged. Ml growth has remained far close to that in the second quarter as in excess of GNP growth so far this price declines about offset volume year and its velocity is expected to increases. Very preliminary data in- fall at a historically high rate. dicated that the deficit in October Growth of total reserves picked up was the smallest in recent months as sharply over the intermeeting period exports of agricultural products rose largely because of a surge in required somewhat and imports declined mod- reserves against transaction deposits. erately. In addition, excess reserves increased At its meeting on November 5, from almost $750 million in the the Committee adopted a directive previous three months to around $1 that called for maintaining the exist- billion on average in November, ing degree of pressure on reserve reflecting mainly the usual patterns positions. This action was expected around holidays and social security to be consistent with growth in both payment dates. Adjustment plus sea- M2 and M3 at annual rates of 7 to 9 sonal borrowing in the two complete percent from September to Decem- maintenance periods since the Nober. Growth in Ml over the same vember FOMC meeting averaged period was expected to moderate about $300 million, down somewhat from its exceptional pace during the from the average over the previous previous several months. The Com- intermeeting period. Even so, the mittee agreed that the growth in Ml funds rate firmed from around 57/s would continue to be evaluated in percent at the time of the last meetlight of the behavior of the broader ing to well above 6 percent in early monetary aggregates and other fac- December. More recently, the fedtors. The members also decided that eral funds rate has averaged close to slightly greater or slightly lesser re- 6 percent. serve restraint might be acceptable With the federal funds rate firmer depending on the behavior of the through much of the intermeeting monetary aggregates, taking into ac- period, other short-term market rates count the strength of the business rose 15 to 50 basis points. However, expansion, developments in foreign bond yields generally were about exchange markets, progress against unchanged to down 25 basis points. inflation, and conditions in domestic Rates on commitments for fixed-rate and international credit markets. The home mortgages dropped about V2 intermeeting range for federal funds percentage point, moving toward a was maintained at 4 to 8 percent. more normal alignment with Treas- M2 growth slowed substantially in ury bond yields. Although stock November to a 6V2 percent annual prices fell initially on the announce- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 FOMC Policy Actions ment of insider trading violations substantial strength in 1987, the related to takeover activity, on bal- members read current economic inance they showed little change over dicators and other business informathe period. tion as pointing to a fifth year of The staff projections presented at moderate expansion. Such expansion this meeting suggested that real GNP might be accompanied by some rise would continue to grow at a moder- in the rate of inflation, primarily ate rate through the end of 1987. reflecting the effects of the dollar's Prospects for an improvement in real depreciation and energy-sector denet exports of goods and services velopments. continued to be a key element shap- The members again gave considing the 1987 forecast; export growth erable attention to the outlook for was expected to accelerate next year foreign trade. An improvement in and import growth to moderate as trade generally was viewed as an world trade flows adjusted to in- essential factor in sustaining a modcreased U.S. competitiveness. Gross erate rate of business expansion in domestic purchases were projected the context of perhaps diminishing to be relatively sluggish through the growth in overall domestic demands. end of 1987, reflecting mainly a shift Unfortunately, there was no convinctoward fiscal restraint, the likely ing evidence thus far of a turnaround weakness in multifamily housing and in the trade balance, and a number nonresidential construction, and the of members commented that the damping influence of higher import expected improvement could be relprices on the growth of real income atively limited next year. On the and consumption. Inflation was ex- favorable side, the depreciation of pected to pick up a bit in early 1987 the dollar evidently had enhanced as a consequence of the dollar's the competitive position of U.S. depreciation and higher energy prices. firms, and individual reports of ex- In the Committee's discussion of panding export opportunities apcurrent and prospective economic peared to be multiplying as well as developments, members generally indications of an improved ability of agreed that continuing expansion at many U.S. firms to compete domesta moderate pace remained a reason- ically with imports. As they had at able expectation for the year ahead, earlier meetings, the members rebut a number of members empha- ferred to a number of factors that sized the risks of a shortfall from were inhibiting an overall improvecurrent projections, especially in the ment in net exports, including limited early part of 1987. In particular, expansion in many industrial nations members mentioned the risks that abroad and strong competition from the expected improvement in the a number of countries whose currennation's foreign trade might be rela- cies had not appreciated against the tively disappointing next year and dollar. One member also stressed that overall business spending might that persisting debt problems in sevremain sluggish. A few members also eral developing countries constituted referred to the possibility of slower an element of vulnerability for intergrowth in consumer spending. On national financial markets and interbalance, however, while no impor- national trade and also for the U.S. tant sector of the domestic economy economy. Digitized fo s r e F e R m A e S d E R likely to be a source of With regard to the domestic econhttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 157 omy, a number of members com- and product markets suggested that mented that consumer expenditures strong wage pressures were not likely on durables, especially automobiles, over the year ahead. One member and some business spending ap- observed that agricultural conditions peared to have been accelerated into worldwide suggested an absence of 1986 in reaction to provisions of the pressure on food prices. Moreover, tax reform legislation. Compensating generally limited growth in key inadjustments in such spending later dustrial nations together with an could have a restraining effect on ample availability of productive reeconomic growth, notably during the sources abroad implied continuing first part of 1987. Nonetheless, a few strong competitive pressures and remembers referred to the possibility strained advances in prices of U.S. that consumer spending might be imports. Even so, a somewhat higher well maintained during 1987 as a rate of inflation appeared to be in whole. The latter acknowledged the prospect for next year. inhibiting effects of the growth in At its meeting in July, the Comconsumer debt, but they stressed the mittee had agreed on tentative ranges favorable implications of cumulative of 5V2 to 8V2 percent for growth in increases in the total assets and net both M2 and M3 during the period worth of consumers and the positive from the fourth quarter of 1986 to impact of reductions in personal the fourth quarter of 1987. The income tax rates. The outlook for associated range for growth in total business spending continued to be domestic nonfinancial debt was set uncertain and in some respects un- at 8 to 11 percent for 1987. In the promising, especially with regard to case of Ml the Committee had indimultifamily housing and nonresiden- cated on a more tentative basis than tial construction; both areas would usual that it might retain the 1986 be adversely affected by high vacancy range of 3 to 8 percent for 1987. rates and negative reactions to the Such a range implied a marked tax reform legislation. There were reduction from the Ml growth exfurther reports of plant closings, perienced in 1986 and provisionally notably in the Midwest. However, assumed that the relationship of Ml one member observed that business to income, interest rates, and other spending for plant and equipment economic variables next year would might well hold up in response to be broadly consistent with earlier continuing growth in overall eco- historical experience. nomic activity. As usual, the pros- At this meeting the Committee pects for inventory accumulation were held a preliminary discussion of the uncertain and would be affected by factors bearing on appropriate ranges the outlook for prices. for the various monetary aggregates With regard to the outlook for in 1987. Most of the attention was prices and wages, members generally devoted to the issue of whether a agreed that increases might be some- range should be established for Ml, what larger in 1987, reflecting the given the uncertainty surrounding impact of rising import prices and behavior of that aggregate and its indications of a turnaround in oil velocity in recent years. While most prices. However, the prospect of members currently did not favor only moderate economic growth and establishing a formal target range for continued margins of slack in labor Ml growth in 1987, many of them Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 FOMC Policy Actions believed that this aggregate should of such a slowing to occur and the continue to be monitored or evaluated associated large provision of reserves in light of information about the could eventually have inflationary economy, prices, and the broad mon- consequences. Even with some modetary aggregates and other financial eration over coming months, Ml variables. The Committee will com- might continue to expand at rates plete its review of the role of Ml and markedly in excess of the growth in the ranges for the broad aggregates nominal GNP. In view of the uncerfor 1987 at its February meeting. tainties that were involved and in In the Committee's discussion of keeping with the Committee's pracpolicy implementation for the period tice since mid-1986, the members did immediately ahead, all of the mem- not want to indicate specific expecbers indicated that they were in favor tations with regard to Ml growth in of directing open market operations, the operational paragraph of the at least initially, toward maintaining Committee's directive. Nonetheless, unchanged conditions of reserve it was understood that growth of this availability. For now, monetary pol- aggregate would continue to be evalicy was deemed to be exerting an uated in light of the behavior of the appropriate degree of pressure on broader monetary aggregates and reserve positions in light of the growth other economic and financial develof the broader monetary aggregates opments. within—though at the upper ends In their discussion of possible inof—their longer-run ranges, and the termeeting adjustments in the degree generally favorable prospects for sus- of reserve pressure, the members tained, albeit moderate, economic thought it unlikely that developments growth. would warrant more than a minor, if The members recognized that the any, change in reserve conditions outlook for the monetary aggregates during the weeks ahead. All of the remained uncertain, notably in the members understood that some small case of Ml. According to an analysis adjustment in either direction might presented at this meeting, a moder- be appropriate under certain circumate trend in the growth of M2 and stances. However, in the context of M3 might be anticipated, given the what they perceived as greater downoutlook for fairly limited growth in side risks in the outlook for economic economic activity and an abatement activity, several believed that policy of the effects of earlier interest rate implementation should remain espedeclines. For the months ahead, cially alert to developments that growth in the broader aggregates might call for somewhat easier remight be well within the Committee's serve conditions. It was noted in this tentative ranges for 1987 on the connection that the relative stability assumption that there would be no of the dollar in foreign exchange significant changes in market interest markets over the past few months rates. The outlook for Ml growth provided greater flexibility for potenremained highly uncertain, although tial easing actions. underlying forces seemed consistent At the conclusion of the Commitwith a considerable slowing over time tee's discussion, all of the members from the extraordinary expansion indicated that they favored a direcexperienced during 1986. Some con- tive that called for no change in the Digitized for c e F r R n A S w E a R s expressed that the failure degree of pressure on reserve posihttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 159 tions. The members expected this generally appears to have remained slugapproach to policy implementation gish. Preliminary data for the U.S. merchandise trade deficit in October suggest to be consistent with growth of both a moderate narrowing. Broad measures M2 and M3 at an annual rate of of prices have firmed somewhat in recent about 7 percent over the four-month months due to developments in food and period from November to March. energy markets. Labor cost increases this year have remained moderate compared Because the behavior of Ml rewith other recent years. mained subject to unusual uncer- Growth of M2 slowed substantially in tainty, the members decided they November, while growth of M3 remained would continue to evaluate this ag- moderate. Expansion of these two aggregregate in the light of the perform- gates for the year through November has been just below the upper end of their ance of the broader monetary aggrerespective ranges established by the Comgates and other factors. The members mittee for 1986. In November growth of indicated that slightly greater reserve Ml accelerated to a very rapid rate. Exrestraint or somewhat lesser reserve pansion in total domestic nonfinancial debt remains appreciably above the Commitrestraint would be acceptable over tee's monitoring range for 1986. Shortthe intermeeting period depending term interest rates have risen somewhat on the behavior of the monetary since the November 5 meeting of the aggregates, taking into account the Committee, while long-term rates have strength of the business expansion, declined on balance. In foreign exchange markets the trade-weighted value of the the performance of the dollar in dollar against other G-10 currencies has foreign exchange markets, progress declined moderately on balance since the against inflation, and conditions in November meeting. domestic and international credit The Federal Open Market Committee markets. The members agreed that seeks monetary and financial conditions that will foster reasonable price stability the intermeeting range for the fedover time, promote growth in output on eral funds rate, which provides a a sustainable basis, and contribute to an mechanism for initiating consultation improved pattern of international transof the Committee when its bounda- actions. In furtherance of these objectives the Committee agreed at the July meeting ries are persistently exceeded, should to reaffirm the ranges established in Febbe left unchanged at 4 to 8 percent. ruary for growth of 6 to 9 percent for both At the conclusion of the meeting, M2 and M3, measured from the fourth the following domestic policy direc- quarter of 1985 to the fourth quarter of 1986. With respect to Ml, the Committee tive was issued to the Federal Rerecognized that, based on the experience serve Bank of New York: of recent years, the behavior of that aggregate is subject to substantial uncer- The information reviewed at this meet- tainties in relation to economic activity ing suggests that economic activity con- and prices, depending among other things tinues to grow at a moderate pace in the on the responsiveness of Ml growth to current quarter. Total nonfarm payroll changes in interest rates. In light of these employment grew appreciably further in uncertainties and of the substantial de- October and November, and employment cline in velocity in the first half of the in manufacturing also rose after declining year, the Committee decided that growth on balance in previous months. The ci- of Ml in excess of the previously estabvilian unemployment rate remained at 7.0 lished 3 to 8 percent range for 1986 would percent in November for the third con- be acceptable. Acceptable growth of Ml secutive month. Industrial production over the remainder of the year would depicked up considerably in November. To- pend on the behavior of velocity, growth tal retail sales rose moderately last month in the other monetary aggregates, develafter changing little on balance over Sep- opments in the economy and financial tember and October. Housing starts have markets, and price pressures. Given its Digitized forw FeRaAkSenEeRd and business capital spending rapid growth in the early part of the year, http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 FOMC Policy Actions the Committee recognized that the in- M2 and M3 over the period from Novemcrease in total domestic nonfinancial debt ber to March at an annual rate of about in 1986 may exceed its monitoring range 7 percent. Growth in Ml will continue to of 8 to 11 percent, but felt an increase in be appraised in the light of the behavior that range would provide an inappro- of M2 and M3 and the other factors cited priate benchmark for evaluating longer- below. Slightly greater reserve restraint term trends in that aggregate. or somewhat lesser reserve restraint would For 1987 the Committee agreed on ten- be acceptable depending on the behavior tative ranges of monetary growth, meas- of the aggregates, taking into account the ured from the fourth quarter of 1986 to strength of the business expansion, dethe fourth quarter of 1987, of 5Yi to 8x/2 velopments in foreign exchange markets, percent for M2 and M3. While a range of progress against inflation, and conditions 3 to 8 percent for Ml in 1987 would ap- in domestic and international credit marpear appropriate in the light of most his- kets. The Chairman may call for Comtorical experience, the Committee rec- mittee consultation if it appears to the ognized that the exceptional uncertainties Manager for Domestic Operations that surrounding the behavior of Ml velocity reserve conditions during the period beover the more recent period would re- fore the next meeting are likely to be asquire careful appraisal of the target range sociated with a federal funds rate persistat the beginning of 1987. The associated ently outside a range of 4 to 8 percent. range for growth in total domestic nonfinancial debt was provisionally set at 8 to 11 percent for 1987. Votes for this action: Messrs. Volcker, In the implementation of policy for the Corrigan, Angell, Guffey, Heller, Mrs. immediate future, the Committee seeks Horn, Messrs. Johnson, Melzer, to maintain the existing degree of pres- Morris, and Ms. Seger. Votes against sure on reserve positions. This action is this action: None. Absent and not votexpected to be consistent with growth in ing: Mr. Rice. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

161 Consumer and Community Affairs In 1986 the Federal Reserve Board and promote widespread use of EFTs used its rulewriting and enforcement (electronic fund transfers). authority to maintain statutory protections for consumers while easing Regulation Z regulatory burdens on institutions. (Truth in Lending): This report examines in detail the Adjustable-Rate Mortgages activities of the Federal Reserve System in support of those goals. In November 1986 the Board issued for public comment proposed amendments to Regulation Z (Truth in Lending) on disclosure of infor- Regulatory and Policy Matters mation about adjustable-rate mortgages (ARMs). Under the proposal, The Board issued and proposed recreditors would be required to give visions to regulations and adopted a consumers general information about policy statement encouraging depos- ARMs; the Consumer Handbook on itory institutions to provide basic Adjustable Rate Mortgages, by the services to low- and moderate-income Federal Reserve Board and the Fedconsumers. Also, the Board puberal Home Loan Bank Board, could lished a pamphlet, A Guide to Busifulfill this requirement. In addition, ness Credit and the Equal Credit Opcreditors would give a more detailed portunity Act, to advise applicants for description of the variable-rate feabusiness credit of their rights under ture, along with an example of the the act and help them prepare an efway changes in the index rate affect fective loan presentation. payments, with the application form or before the consumer pays a non- Regulation E refundable fee. These revisions would (Electronic Fund Transfers) permit consumers to shop for credit In July the Board proposed revisions and would conform the Board's disto Regulation E (Electronic Fund closure rules with those of several Transfers) to eliminate the require- other federal agencies. The Board ment that service providers, such as developed this proposal after reviewretailers, that offer electronic fund ing the comments on a proposal transfer services but do not hold published in May 1985 and after consumers' accounts send periodic consulting with these other agencies. statements to their customers. Instead, those providers would be re- Regulation Z: quired to furnish information for Refinancings and Rescission inclusion on the periodic statements of the account-holding institutions. In December the Board issued revi- The changes were intended to elimi- sions to Regulation Z that exempted nate duplication of information, re- certain refinancings by> original credduce the risk of confusion to con- itors from the right of rescission. The sumers from duplicative statements, rule, which was effective immedi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 Consumer and Community Affairs ately, provides that the right of transactions will constitute complirescission will not apply if the only ance with the federal requirements. items included in the refinancing, The exemption does not apply to other than the unpaid principal, are transactions in which the creditor is closing costs such as attorney's fees, a federally chartered institution. title examination fees, and insurance The Board also received applicapremiums. At the same time, the tions from California and New York Board withdrew a proposal that would for exemptions from the Credit Prachave excluded from the right of tices Rule. It will take final action rescission certain refinancings by a on these requests in early 1987. creditor other than the original creditor. Consumer groups had opposed any expansion of the exemption from Interpretations the right of rescission, and creditors In 1986 the Board continued to were dissatisfied with the limited provide legal interpretations through nature of the proposed exemption. the official staff commentaries on The Board withdrew the proposal Regulation B (Equal Credit Opporbecause a rule that might accommotunity), Regulation E (Electronic date both those concerns would be Fund Transfers), and Regulation Z complex and perhaps beyond the (Truth in Lending). These commen- Board's statutory authority. taries help financial institutions and others apply the regulations to spe- Regulation AA cific situations; updates generally are (Credit Practices Rule) published by April 1 each year. In November the Board also issued an In November the Board granted a update to its staff guidelines on the request from the state of Wisconsin Credit Practices Rule. for an exemption from the Credit Practices Rule (Regulation AA). That Business Credit Pamphlet rule prohibits banks and their subsidiaries from using certain remedies In July the Board published A Guide to enforce consumer credit obliga- to Business Credit and the Equal tions and from "pyramiding" late Credit Opportunity Act for distribucharges; it also provides protections tion through government agencies, for cosigners. It covers all consumer women's groups, and other organicredit transactions except those for zations. It describes the credit applithe purchase of real property. cation process from the lender's per- To qualify for an exemption, a spective, offers guidance on the prepstate must have a requirement or a aration of effective loan proposals, and prohibition that protects consumers discusses protections the act affords at least as well as the corresponding as they apply to business credit. The federal provision does. Because the pamphlet is designed to increase pub- Wisconsin law covers only transac- lic awareness, particularly among tions up to $25,000, transactions women and minority entrepreneurs, above that amount remain subject to of the rights of business credit applithe federal rule; however, compli- cants and the responsibilities of busiance with Wisconsin law for such ness credit lenders. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 163 Basic Financial Services Cited as a goal in the joint policy statement, a free or low-cost method In September the Board approved a to cash government checks is fredraft policy statement on the need quently mentioned in discussions of to make basic financial services acbasic financial services. The Board cessible to low- and moderate-inhas been exploring this issue and in come consumers. The Board for- December held a conference with warded the statement to the Federal representatives from government, in- Financial Institutions Examination dustry, and consumer groups to dis- Council (FFIEC) with the recomcuss alternatives to government checks mendation that the council's constitand to address other concerns about uent agencies—the Board, the Office the present system. One alternative of the Comptroller of the Currency is direct delivery of payments, such (OCC), the Federal Deposit Insuras welfare or social security, through ance Corporation (FDIC), the Fedelectronic terminals or special distrieral Home Loan Bank Board bution outlets, involving neither pa- (FHLBB), and the National Credit per instruments nor accounts at fi- Union Administration (NCUA)— nancial institutions. The conferees consider issuing it jointly. The policy believed that direct delivery might statement encourages voluntary efwork for state and local benefits but forts by industry groups and individwere less certain that it would be ual depository institutions to offer economic for federal payments. Some basic services. The statement gives conferees supported testing the idea institutions maximum flexibility, conby adding federal payments to a local sistent with safe and sound business direct-delivery system already in place. practices, in designing the services. It asks that institutions consider providing a safe place to keep money, a way to get cash (including the cashing Community Affairs of government checks), and a way to make payments to third parties. In During 1986 the Federal Reserve October the FFIEC approved the System continued to encourage comdraft statement for submission to munity and economic development, member agencies, and by year-end it in keeping with its responsibilities had been adopted by the Board, the under the Community Reinvestment OCC, the FDIC, and the NCUA. Act (CRA). At the Reserve Banks, The policy statement recognizes the Community Affairs Officers the role of trade groups in this effort (CAOs) and their staffs carry out and recommends that they encourage educational activities to further pubmember institutions to offer and lic-private partnerships and private publicize low-cost basic financial sector initiatives for community deservices, survey the availability of velopment. The aim is to gather and such services among member insti- disseminate information and to foster tutions, and make available to their communication among those inmembers material on the successful volved in community development, experiences of institutions with basic including banks and bank holding financial services. companies, borrowers, local govern- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 Consumer and Community Affairs ments, and development organiza- lanta publish community affairs tions. The CAOs increased their newsletters that feature development activities in 1986 toward these ends. activities in their districts. Other As federal funding decreased, Reserve Banks publish lists of succommunity organizations relied less cessful strategies and programs to on federal programs to support com- help bankers extend their involvemunity development and more on ment in community development. those at the local level. In pursuing During the year, the Federal Reits educational goal, the community serve held approximately 100 meetaffairs program helped banks and ings on community development isother organizations involved in com- sues with bankers, holding company munity development to learn about officers, and community groups. At successful programs and strategies these meetings the System's staff they might duplicate. The commu- learned about developments in banknity affairs program also brought ing and in local communities, and these groups together to help them bankers and community developers take full advantage of available re- learned about the services availsources and opportunities in devising able through Reserve Banks. Andevelopment strategies. In other cases, other result was that some banks the program enabled the parties to have combined their efforts to adimprove communication and to iden- dress specific credit needs. tify common purposes, sometimes in The Board continued to support connection with protests of applica- the Reserve Banks' community aftions under the Community Rein- fairs activities with its quarterly vestment Act. These meetings often newsletter, Communique, with lists helped promote understanding be- of knowledgeable individuals and tween applicants and community rep- organizations, and with presentaresentatives and avoid protests of tions. It also gave information to applications altogether. national community organizations, The staff members of the Board bankers' associations, and individand of the Reserve Banks developed uals about the community affairs and participated in more than 50 program, the community developpresentations on economic and hous- ment corporations that are subsidiing development topics such as co- aries of bank holding companies, operative housing, commercial revi- community economic development talization, investment in black-owned programs, and community reinvestbusinesses, employee ownership of ment. A member of the Board also businesses, and community develop- continued to serve on the board of ment corporations. Presentations fo- directors of the Neighborhood Reincused on the formation of bank- vestment Corporation. community and bank-public sector partnerships that would foster private sector initiatives. Compliance Examinations To facilitate the exchange of information among community develop- State member banks are examined ment participants, the Federal Re- regularly by the consumer affairs serve Banks of Minneapolis, Dallas, examiners of the Reserve Banks for Philadelphia, Richmond, and At- compliance with the consumer credit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 165 protection laws and the Community • Few state member banks placed Reinvestment Act. In 1986 the Board automatic holds on all deposits or on lengthened the examination cycle for particular types of deposits. some institutions. Effective January • Most state member banks with 1, 1987, a small percentage of the hold policies disclosed those policies banks with highly satisfactory records to depositors when an account was of compliance with consumer protec- opened, the majority of them in tion and CRA laws will be examined writing. only every 24 months, instead of the • Most state member banks did 18 months specified for banks with not hold funds beyond the proviratings of satisfactory or better. Banks sional crediting period. that perform poorly will continue to receive closer supervisory attention Compliance with and be examined at least every 12 Consumer Regulations months. Data received from the five federal agencies that supervise financial in- Survey on Delayed stitutions and from other federal Availability of Funds supervisory agencies indicate that In March 1984 the Board joined the compliance with the Truth in Lend- Comptroller of the Currency, the ing Act (implemented through Reg- Federal Deposit Insurance Corpora- ulation Z), the Equal Credit Opportion, and the Federal Home Loan tunity Act (Regulation B), and the Bank Board in adopting an inter- Electronic Fund Transfer Act (Regagency policy statement on delayed ulation E) remained substantially the availability of funds. The statement same as in 1985. This section sumasked financial institutions that delay marizes data covering the reporting availability on paper-check deposits period July 1, 1985, to June 30, to review their policies and consider 1986.x reducing the delays, consistent with prudent business practices; to dis- Truth in Lending Act close their policies to depositors at (Regulation Z) the time an account is opened and, The Board, the Federal Deposit when practical, at the time a deposit Insurance Corporation, the Office of is made; and to refrain from imposthe Comptroller of the Currency, the ing unnecessary delays on all checks, Federal Home Loan Bank Board, particularly social security and other and the National Credit Union government checks. Administration reported that 62 per- Between 1984 and mid-1986 the cent of the institutions examined System surveyed the policies and were in full compliance with the practices on delayed availability of requirements of Regulation Z, comall state member banks. The findings pared with 63 percent in 1985. The suggest that state member banks are agencies that provide data on the addressing appropriately the provisions of the policy statement: • Most state member banks that 1. Not all the federal agencies that regulate financial institutions use the same method to placed holds on check deposits did compile compliance data. However, the data so only in special cases. support the general conclusions presented here. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 Consumer and Community Affairs frequency of violations (the Board, vertisers in its real estate credit the OCC, and the NCUA) reported program were in compliance, the that 48 percent of the institutions same as in 1985. This program has that were not in full compliance had enabled the FTC to monitor compano more than five violations. These nies nationwide and, in most cases, data suggest that many institutions has resulted in voluntary compliance not in full compliance are making a with the law. The FTC follows up on satisfactory effort toward compli- its monitoring program through enance. forcement action against companies From the findings of the five finan- that continue to violate the law. cial regulatory agencies, the most During this reporting period, four frequent violations of Regulation Z real estate companies agreed to pay appear to be the following: $375,000 in civil money penalties for • Failure to disclose the annual advertising violations, such as adverpercentage rate accurately. tising only a reduced, first-year rate • Failure to disclose the number, of interest for a mortgage without amounts, and timing of payments disclosing the much higher annual scheduled to repay the obligation. percentage rate, and advertising spe- • Failure to disclose the amount cific credit terms without providing financed accurately. all the required disclosures. • Failure to disclose the finance Since it began in 1983, the FTC's charge accurately. compliance program aimed at auto- • Failure to make the disclosures mobile credit advertising has brought clearly and conspicuously in writing numerous automobile dealers into in a form that the consumer may voluntary compliance. In the past keep. year, enforcement efforts were con- The OCC and the FHLBB issued centrated on the relatively small five cease-and-desist orders for vio- number of dealers that continued to lations involving Regulation Z; the violate the law. The FTC filed four Board issued three formal enforce- complaints. Three of these cases ment actions that included provisions currently are in litigation; in the relating to Regulation Z. The Board, fourth, the dealer agreed to pay the OCC, the FDIC, and the FHLBB $70,000 in civil money penalties. reported reimbursements of $1.3 mil- The other agencies that enforce lion (involving 243 institutions and the Truth in Lending Act—the Pack- 12,252 customer accounts) under the ers and Stockyards Administration Regulation Z Interagency Enforce- of the Department of Agriculture, ment Policy Guide. These numbers the Farm Credit Administration, and compare with a total of $2 million in the Department of Transportation— 1985 that involved 235 institutions reported satisfactory levels of comand 29,823 customer accounts. pliance. The Department of Trans- The Federal Trade Commission portation concluded an enforcement (FTC) continued its special efforts to action against an air carrier for vioenforce the credit-advertising provi- lations of the rules governing credit sions of the Truth in Lending Act, refunds. with particular attention to the sale To heighten consumer and creditor of homes and automobiles. The FTC awareness of the rights and responreported that 90 percent of the ad- sibilities established by the act, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 167 Board, the FTC, and the FHLBB • Failure to provide the specific issued or distributed several publi- reasons for adverse action. cations. The FTC issued new bro- • Failure to request information chures entitled "Second Mortgage for monitoring purposes as part of Financing," "Refinancing Your an application for credit primarily Home," "Escrow Accounts," and for the purchase or refinancing of a "A Consumer Guide to Vehicle dwelling. Leasing," and revised editions of its • Illegally inquiring about the sex "Money Mortgage Guide" and "Hol- of an applicant. iday Shopping Tips." The Board The OCC and the FHLBB, in issued four compliance brochures conjunction with the Department of entitled "Construction Loan Disclo- Justice, issued two cease-and-desist sures and Regulation Z," "Com- orders involving violations of Regubined Construction/Permanent Loan lation B. The Board issued five Disclosures and Regulation Z," formal enforcement actions that in- "Regulation Z: The Right of Rescis- cluded provisions relating to Regusion," and "Regulation Z: Under- lation B. standing Prepaid Finance Charges." Most creditors that were subject As of August 1, 1985, the FHLBB to the FTC testing program, in which required all institutions insured by auditors pose as credit applicants, the Federal Savings and Loan Insur- appeared to be complying with the ance Corporation to distribute the nondiscrimination provisions of the Consumer Handbook on Adjustable act. However, some creditors con- Rate Mortgages, as a way of giving tinue to discourage or disfavor credit early and uniform information about applicants because of their age or these mortgages. because they rely on alimony or other protected income. During this reporting period, the FTC took en- Equal Credit Opportunity Act forcement action against three cred- (Regulation B) itors, two of which were found through The five federal agencies that super- the FTC's testing program. The FTC vise financial institutions reported is conducting several other investithat 79 percent of the institutions gations to identify illegal discriminaexamined were in full compliance tion. with the Equal Credit Opportunity Other agencies responsible for en- Act (ECOA), compared with 81 forcing the ECOA—the Department percent in 1985. These are the most of Transportation, the Interstate frequent violations of Regulation B: Commerce Commission, and the • Failure to provide a written no- Packers and Stockyards Administratice of adverse action that includes a tion—reported satisfactory levels of statement of the action taken, the compliance. The Farm Credit name and address of the creditor, Administration, the Securities and the ECO A notice, and the name and Exchange Commission, and the Small address of the federal agency that Business Administration reported vienforces compliance. olations, but none required formal • Failure to notify the applicant of enforcement action. the action taken within 30 days after The FTC prepared a film for receiving a completed application. distribution to credit unions on the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 Consumer and Community Affairs requirements of the act and issued a consumers. The economic effects of brochure entitled "Scoring for the act spread during 1986 as more Credit." As noted earlier, the Board financial institutions offered EFTs distributed "A Guide to Business and more consumers used them. Credit and the Equal Credit Oppor- Approximately two-thirds of the natunity Act." tion's depository financial institutions, representing every class size, now provide EFT services that are Electronic Fund Transfer Act covered by the requirements of the (Regulation E) act and Regulation E. These services The federal regulatory agencies re- include direct deposits, preauthorsponsible for enforcing the Elec- ized electronic transfers, and access tronic Fund Transfer Act reported to automated teller machines (ATMs). that 91 percent of the institutions Although the number of ATMs reexamined were in full compliance, mained about the same in 1986 as in compared with 93 percent in 1985. 1985, the use of the machines contin- The most frequent violations of Reg- ued to increase. Moreover, conulation E were the following: sumers gained wider access to EFT • Failure to provide, in a timely services through the expansion of manner, a written statement outlin- shared ATM networks. The volume ing the terms and conditions of the of fund transfers made at electronic EFT service. point-of-sale terminals grew, and • Failure to provide a periodic point-of-sale transactions appeared notice on procedures for resolving poised for rapid expansion in coming disputes. years. • Failure to provide a written re- Consumer demand for EFT serceipt at the time of an electronic vices has continued to grow. The fund transfer. evidence indicates that at least 70 • Failure to provide a statement percent of households have a savings of the consumer's liability for unau- or transaction account with an EFT thorized transfers. feature that they use at least occa- According to the FTC, the fact sionally. The number of transactions that complaints regarding Regulation conducted through ATMs has in- E were so few suggests that there is creased, and the number of conno special compliance problem. The sumers electing to receive payroll or other agencies responsible for en- government transfer payments by forcing the EFT act, the Department electronic direct deposit has also of Transportation and the Securities risen. and Exchange Commission, reported The benefits to consumers from a satisfactory level of compliance. the EFT act are difficult to measure because they cannot be isolated from consumer protections that would have Economic Impact of Regulation E been provided in any case. Statistics In accordance with statutory require- from examination reports do not ments, the Board monitors the ef- suggest widespread problems or viofects of the Electronic Fund Transfer lations of the consumer rights estab- Act on the costs and benefits of EFT lished by the act. The federal agenservice to financial institutions and cies that regulate financial institutions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 169 reported little change from 1985 in Complaints against the percentage of institutions not in State Member Banks full compliance. The most frequent In 1986 the Federal Reserve System violation was failure to provide one received a total of 2,400 complaints or more disclosures to consumers. (see the accompanying table). Within The majority of institutions cited for this total, 930 were complaints against noncompliance had one to five viostate member banks, which the Fedlations, a small number in light of eral Reserve investigates and rethe volume of consumer EFT transsolves. The System referred the reactions. maining 1,470 complaints, involving Data from the Board's Consumer other creditors or businesses, to the Complaint Control System confirm appropriate enforcement agencies. that consumers have no serious prob- Most of the complaints (1,909) were lems with EFT. Of the 2,400 commade in letters; 478 came by teleplaints processed in 1986,94 involved phone, and 13 were made in person. EFTs. The Federal Reserve System The Board also received 181 written forwarded 32, which did not pertain inquiries concerning consumer credit to state member banks, to other laws and regulations, and banking agencies for resolution. Of the repolicies and practices. In responding, maining 62 complaints, only 2 inthe Board's staff gave consumers volved a possible violation of the brochures on the general issues plus regulation. explanations of laws, regulations, The costs of industry practices that would have evolved in the absence of statutory requirements are un- Consumer Complaints Received known. Consequently, the incremen- by the Federal Reserve System, tal costs associated with the act, as by Subject, 19861 in the case of consumer benefits, are Subject Number difficult to quantify. But the compliance cost of an EFT transaction is Regulation B (Equal Credit Opportunity) 144 probably not high enough to compro- Regulation C mise the cost advantage such trans- (Home Mortgage Disclosure) 9 Regulation E actions have over check-based trans- (Electronic Fund Transfers) 94 Regulation M (Consumer Leasing) 8 actions. Regulation Q (Interest on Deposits) 100 As EFT systems mature, as trans- Regulation Z (Truth in Lending) 494 Regulation BB action volume builds, and as start-up (Community Reinvestment) 2 costs for compliance are amortized, Fair Credit Reporting Act 118 Fair Debt Collection Practices Act 34 compliance costs per EFT transac- Holder in due course 1 Real Estate Settlement tion and per dollar of transferred Procedures Act 1 funds are likely to decline. As noted Transfer agents 3 earlier, the Board has proposed to Unregulated bank practices 1,329 amend Regulation E to eliminate the Other2 .... . . 63 statement requirement for providers Total 2,400 of point-of-sale services. The Board 1. Includes 930 complaints about state member expects this proposal, if adopted, to banks, over which the Federal Reserve has jurisdiction, and 1,470 complaints about other lenders, which lower costs substantially for these the Federal Reserve referred to the appropriate agen- EFT transactions and promote wider cies. 2. Primarily miscellaneous complaints against busiuse of the system. ness entities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 Consumer and Community Affairs and banking practices specific to plaints; 97 percent felt that the Fedtheir complaints or inquiries. eral Reserve staff treated them cour- The Board's staff continues regu- teously; 92 percent said they would larly to review and assess the Sys- contact the Federal Reserve again if tem's handling of complaints. The they had another problem with a staff reviews a sample of complaints bank; and 55 percent found the about state member banks for adher- resolutions of their complaints acence to System policies; and, through ceptable. The proportion of those follow-up questionnaires, it attempts satisfied with the System's handling to gauge complainants' perceptions of their complaints is higher than the of the System's handling of com- proportion of those satisfied with the plaints. Approximately 66 percent of outcome because some complaints the respondents found the System's involved banking practices that are explanations clear and understanda- permissible and that cannot be ble; 79 percent were satisfied with changed unless the bank does so the speed in handling their com- voluntarily or the law is changed. Consumer Complaints about State Member Banks Received by the Federal Reserve System, by Function and Resolution, 1986 Type of complaint Total Loan function Elec- Type of resolution com- Deposit tronic Trust plaints Dis- function fund Other crimi- Other transnation fers Total complaints about state member banks Number 930 72 432 216 57 144 Percent 100 8 46 23 6 15 By type Insufficient information1 34 4 10 7 0 0 13 Information furnished to complainant2 117 15 50 26 2 0 24 Bank legally correct No accommodation 355 21 173 77 34 7 43 Accommodation made3 90 9 43 18 1 1 18 Clerical error, corrected 164 5 76 52 10 0 21 Factual dispute4 40 1 21 10 2 0 6 Bank violation, resolved5 15 3 4 4 2 1 1 Possible bank violation, unresolved6 ... 3 1 2 0 0 0 0 Customer error 0 0 0 9 4 5 0 Pending, December 31 13 6 0 103 49 17 18 Complaints referred to other agencies 72 37 3 1,470 741 360 257 Total, all complaints 144 1,173 94 12 2,400 576 401 1. The staff has been unable, after follow-up cor- sumers wishing to pursue the matter may be advised respondence with the consumer, to obtain sufficient to seek legal counsel or legal aid or to use small claims information to process the complaint. court. 2. When it appears that the complainant does not 5. In these cases a bank appears to have violated understand the law and that there has been no vio- a law or regulation and has taken corrective measures lation on the part of the bank, the Federal Reserve voluntarily or as indicated by the Federal Reserve System explains the law in question and provides the System. complainant with other pertinent information. 6. When a bank appears to have violated a law or 3. In these cases the bank appears to be legally regulation, customers are advised to seek civil remedy correct but has chosen to make an accommodation. through the courts. Cases that appear to involve crim- 4. These cases involve factual disputes not resolv- inal irregularity are referred to the appropriate law able by the Federal Reserve System and contractual enforcement agency. disputes that can be resolved only by the courts. Con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 171 The accompanying table summa- denials based on credit history indirizes the nature and resolution of cated that the applicant did not complaints filed against state mem- realize the implications of a poor ber banks in 1986, classified accord- credit history or of a lack of borrowing to bank functions: loans, depos- ing experience on the decision about its, electronic fund transfers, trust creditworthiness. services, and others. Of the 930 complaints received about state member banks, just over half con- Community Reinvestment Act cern loan functions, including alleged discrimination on a prohibited basis, The Board is required by the Comdisclosure of credit costs, and credit munity Reinvestment Act to encourdenial on a nonprohibited basis; age institutions under its jurisdiction another quarter involved practices to help meet the credit needs of their concerning deposit accounts, includ- communities—including low- and ing disputes about interest. moderate-income neighborhoods—in a manner consistent with the safety and soundness of the institutions. Unregulated Practices The Board assesses the record of Under section 18(f) of the Federal state member banks in meeting these Trade Commission Act, the Federal needs as part of its examinations and Reserve Board is authorized to iden- takes an institution's CRA perfortify unfair or deceptive banking prac- mance into account when acting on tices and adopt regulations that pro- certain applications filed by banks hibit them. The Board has a system and bank holding companies. to monitor complaints about banking During the 1986 reporting period practices that are not subject to (July 1, 1985, through June 30, existing regulation but that may be 1986), Federal Reserve personnel unfair or deceptive. The Board iden- examined 761 state member banks tifies unregulated practices that are for compliance with the CRA. The the subject of 15 or more complaints records of almost all of these banks per quarter, or 50 or more for the were deemed satisfactory or better. year. Of the 1,329 complaints about During calendar year 1986, 20 unregulated practices received in 1986, applications filed by banks or bank the 398 identified by this system fell holding companies with the Federal into the following categories: credit Reserve System were protested under denial based on credit history (109); the CRA; 13 were decided by yearother unregulated lending practices end. Seven of these protests were (96); credit denial based on other withdrawn after the applicants and nonprohibited factors, such as the protestants reached agreement, often lack of sufficient assets (77); exces- as a result of meetings facilitated by sive time taken to clear checks, the Federal Reserve Banks. including delayed availability of funds (60); and crediting of deposits to accounts (56). Each of these cate- Consumer Advisory Council gories accounts for less than 5 percent of all consumer complaints re- November 1986 marked the tenth ceived. Many of the complaints about anniversary of the Federal Reserve's Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 Consumer and Community Affairs Consumer Advisory Council (CAC). the Board approved a policy state- Created by the Congress and repre- ment on basic financial services, senting a wide spectrum of interests, which it sent to the FFIEC in Octothe 30-member CAC advises the ber (described above). Board on the implementation of The council expressed views on federal laws governing consumers' disclosures about funds availability rights and responsibilities in their and on the general improvement of dealings with the financial services the check-clearing process. It adopted industry. In 1986 the council met in resolutions recommending the man- March, June, and October. datory disclosure of hold periods by Throughout 1986 a study group of all financial institutions, the adoption the CAC focused on reduced-rate of a uniform system for counting the financing offered by automakers. The days that checks are held, and the CAC was concerned that these pro- continuation of industry efforts to grams, which offer rates far below streamline check-clearing. the market, might undermine the Uniformity in the required disclousefulness of the annual percentage sures for adjustable-rate mortgages rate (APR) for comparing the cost was another issue the CAC adof credit offered by different credit dressed in 1986. In March and Ocproviders. In some reduced-rate pro- tober the council urged the federal grams, a purchaser has the choice of agencies to adopt uniform disclosure financing the vehicle through the requirements, supported the use of automaker's subsidiary at a reduced an ARMs brochure, and encouraged rate of interest or receiving a cash early disclosures. It also adopted a rebate from the manufacturer. Some resolution calling for the Board's critics believe that the rebate should approval of consumer financial counbe treated as part of the financing seling as an activity of bank holding cost and taken into account in com- companies. puting the APR, a required dis- In 1986 the council also considered closure under truth in lending. The the following issues: act, however, does not require such • A Board proposal for amending adjustments. The CAC was unable Regulation E that would eliminate to reach consensus on appropriate the periodic statement requirements disclosures for reduced-rate financ- for institutions that issue debit cards ing; it will continue to study the but do not hold accounts. issue. • Protests by community groups In June 1986 the CAC unani- in connection with holding company mously reiterated its support, first applications under the Community voiced in October 1985, for the Reinvestment Act. Board's issuing a policy statement • Projected increases in secondthat would encourage state member mortgage debt. banks to offer basic financial services • The effect that proposed ceilings for low- and moderate-income con- on credit card interest rates might sumers. It also asked the Board to have on creditors and consumers. encourage other financial regulatory • The effect of interstate banking agencies to join in a statement. After on consumers, small businesses, and considering the council's strong views, the financial industry. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 173 Legislative Recommendations tutions and Consumer Affairs of the Senate Committee on Banking, In 1986 the Board testified before Housing, and Urban Affairs on sevvarious subcommittees of the Senate eral bills dealing with credit card and the House on legislation dealing disclosures. The proposed legislation with credit card interest rates and covered issues such as early disclodisclosures, truth in savings, and sures of the cost of a credit card business credit. plan, additional disclosures of the conditions under which a finance charge may be imposed, a mandated Credit Card Interest Rates method for computing balances, and In January the Board testified before quarterly reports to the Board by the Subcommittee on Financial Insti- credit card issuers about costs. The tutions and Consumer Affairs of the Board endorsed full disclosure both Senate Committee on Banking, as the fair way to deal with customers Housing, and Urban Affairs on leg- and as an aid in the competitive islation that would establish a federal process. At the same time, the Board ceiling on the interest rates that could pointed out that the costs of requirbe charged on credit card debt. The ing additional disclosures in all ap- Board opposed the legislation in the plications (rather than only in mail belief that credit is most efficiently solicitations, as one of the bills proand productively distributed when vided) may not be justified. interest rates are determined in mar- The Board believed that a mankets free from artificial restraints. dated method for computing bal- The Board noted that on average, ances would depart from the apfor the period 1972 through 1984, proach of the Truth in Lending Act, the rate of return earned on credit which is to leave the regulation of card operations was below that earned substantive terms to the states. The on other types of lending. While the Board acknowledged that a uniform Board noted that returns on credit method might eliminate the consumcards had increased in recent years, er's need to understand how one it also pointed out that credit card creditor's method differs from anothfinance rates had tended to decline er's, but it noted that this approach in the months before the hearing. had several drawbacks. Often the The Board stated that efforts to timing of a consumer's purchases and constrain rates through federal reg- payments determines which method ulation are likely to reduce credit yields the lowest finance charge. In availability, particularly for less afflu- addition, if regulating the method ent borrowers, or encourage less causes an increase in operating costs efficient means of recapturing credit or a reduction in revenues, creditors costs. might seek to make up the difference by restricting credit availability, eliminating grace periods, or imposing annual fees or higher interest rates. Credit Card Disclosures The Board also believed that states, In May the Board testified before with their experience in regulating the Subcommittee on Financial Insti- yield-producing terms of accounts, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 Consumer and Community Affairs were in a better position to regulate deposit accounts evolve while minithis area. In addition, the Board mizing the burden on depository pointed to ongoing efforts by the institutions. The Board noted its Federal Reserve System and others proposal to amend Regulation Q to to increase consumer awareness of update and clarify its rules on adverthis and other aspects of credit card tising of accounts and its work totransactions. ward a policy statement on disclo- The Board suggested postponing sures of terms on deposit accounts. action on requiring creditors to re- As these measures would be limited port information on credit card costs to member banks, the Board is until it had evaluated an APR dem- consulting with the other regulatory onstration project then under way. agencies so that these requirements This study was conducted at the would be applied uniformly to all request of the Congress in three test depository institutions. cities to measure the benefits of providing consumers with comparative information, through newspaper Regulation B charts, about the closed-end credit and Business Credit charges of lenders. In August the Board testified before the Subcommittee on Consumer Affairs and Coinage of the House Truth in Savings Committee on Banking, Finance and In June the Board testified before Urban Affairs on proposed changes the Subcommittee on Financial Insti- to the Equal Credit Opportunity Act tutions Supervision, Regulation and with respect to business credit trans- Insurance of the House Committee actions. The proposal would extend on Banking, Finance and Urban to business transactions certain tech- Affairs on proposed truth-in-savings nical requirements of Regulation B legislation. This legislation would that currently relate only to conestablish uniform requirements for sumer transactions, would require all depository institutions regarding public hearings on any exemptions, advertisements of interest rates and and would put a five-year limit on disclosures. Among other things, it exemptions. The Board believed that would require the disclosure of an the ECOA and Regulation B in their annual percentage yield, an annual present form provide adequate legal rate of simple interest, and a sched- protection against discrimination. The ule of fees and charges. The Board exceptions established for business supported providing bank customers credit are narrowly drawn and rewith clear and complete information spond directly to the distinctions when they open accounts, but ques- between consumer and business tioned whether legislation is neces- credit. The Board stated that the sary. Should the Congress decide it legislation would not significantly is necessary, the Board believed, the improve the Board's rulewriting legislation should provide for a flex- processes. Although a public hearing ible structuring of rules to enhance before granting or continuing any consumer benefits as new types of exception for business credit would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 175 afford an extra oppprtunity to gather giving them practical assistance in information, the Board has found obtaining credit. written public comment to be adequate. And the Board already pe- Recommendations riodically evaluates regulatory proof Other Agencies visions under its Regulatory Improvement Project, a program Each year the Board asks the agencalling for the review of regulations cies with enforcement responsibilities every five years or so. Finally, the under Regulations B, E, and Z for Board expects that the business credit recommendations concerning changes pamphlet developed with industry to the regulations or the underlying and minority group organizations will acts. In 1986 the agencies submitted inform business credit applicants of no suggestions or recommendations their rights under the ECOA, besides for changes. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

177 Legislative Recommendations The Board of Governors has made The Federal Reserve recommends that the following recommendations for the Congress recognize the competilegislation to the Congress of the tive, technological, and international United States. forces operating in the banking and financial marketplace and expand the authorized role for bank holding Bank Holding Company companies. Legislation Plainly, the time has arrived to The Federal Reserve believes that clarify and expand certain securities reform of the existing statutory powers of bank holding companies, framework is urgently needed to a matter that cannot be dealt with maintain a strong, stable, and com- reasonably and rationally without petitive banking system. The forces congressional action. of change—technological, eco- The Board believes that it would nomic, and competitive—at work on be appropriate, as a matter of good an international scale need to be public policy, to permit bank holding channeled constructively if the broader companies to underwrite municipal public interests are to be served. revenue bonds, mortgage-backed se- Clearly, areas exist in which market curities, commercial paper, and mucompetition should be freed and tual funds. The Board would also efficiency promoted. At the same encourage the Congress to consider time, there are areas in which insti- other financial areas appropriate for tutional stability and public policy bank holding companies, including objectives need to be protected by insurance and real estate brokerage, maintaining an appropriate legisla- and insurance underwriting. tive and regulatory framework. The Federal Reserve would also To these ends, the Federal Re- urge the Congress to undertake hearserve has recommended that the ings of other studies in the area of Congress include in any legislative corporate underwriting—a process reform these features: that the Board would be pleased to • Expansion of the powers of bank support. The issues in this area are holding companies. more complicated because of the • Clarification of the definition of greater potential for conflict of inter- "bank" to resolve the "nonbank est. However, a substantial amount of bank" issue and clarification of the such activity is already conducted by proper scope of powers for state- bank holding companies abroad, and chartered institutions. the increased securitization of financial • Streamlining of the procedures assets by banks and others requires of the Bank Holding Company Act. fresh consideration of how banks may participate in that process. Powers Definitions The legitimate boundaries of activities permitted to banking organizations New definitions of the terms "bank" Digitized forn FeRedA SEtoR be reviewed and enlarged. and "thrift institution" are necessary http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 Legislative Recommendations to assure an orderly framework for may affect the safety and soundness the development of the financial of the financial system with adverse system, to promote competitive consequences for the federal insurequity, and to maintain the basic ance funds. separation of banking and commerce. The Board believes that banks Procedures continue to perform a unique and critical role in the financial system The Board favors streamlining the and the economy—as operators of procedures for dealing with bank the payments system, as custodians holding company applications. By of liquid savings, as key and impartial recent changes in the regulation govsuppliers of short-term credit, and as erning holding company activities, the link between monetary policy the Board has gone as far as it and the economy. believes it can, consistent with pres- The Board believes that all insti- ent law, to speed up procedures and tutions having the unique character lessen regulatory burdens. The Board of banks should be subject to the has recommended legislation elimirules applicable to banking institu- nating the "benefits and burdens" tions—that is, the limitations on the test of present law, providing for range of activities and ownership, as expedited notice procedures for apwell as the protections against con- proval of new activities, and setting flict of interest, concentration of out new and simplified criteria for resources, and excessive risk. To determining the permissibility of new achieve that end and to close the so- activities generally. called "nonbank bank" loophole, the Board has recommended clarifying Emergency Acquisition Authority the definition of "bank" in the Bank Holding Company Act by, among The Board favors an extension and other changes, extending the defini- modification of the provisions contion to cover all institutions that are tained in title I of the Garn-St insured by the Federal Deposit In- Germain Depository Institutions Act surance Corporation. that permit the FDIC and the FSLIC The Board has also recommended to arrange for emergency interstate that thrift institutions meet a mini- mergers and acquisitions of finanmum residential mortgage test to cially troubled thrift institutions and remain eligible for the special bene- failed insured commercial banks with fits provided by law for such institu- assets of $500 million or more. tions. The holding companies of In light of the continuing strains thrift institutions not meeting the test evident in some sectors of the thrift would be limited so that the scope and banking industries, including difof their permissible nonbanking ac- ficulties experienced by some banks tivities would be similar to those of engaged in lending to the agricultural bank holding companies. and energy sectors, the Board has The Board has recommended that recommended that the emergency the Congress establish limits with arrangements for failing institutions respect to the ability of states to in the Garn-St Germain Act be authorize state-chartered institutions extended and liberalized in the folto engage in certain activities that lowing ways: (1) reduce the threshold Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislative Recommendations 179 amount for interstate emergency ac- with respect to the limit on the quisitions from $500 million to $250 cumulative dollar amount that may million; (2) permit interstate acqui- be spent on construction of Federal sition of banks in danger of closing Reserve Bank branch buildings. The as well as of closed banks; and (3) System incurs expenses for branch allow for acquisition of a holding construction principally for additions company and its affiliated banks if to, or replacements for, existing the holding company has a bank or branch facilities. The current limitabanks in danger of closing with total tion, set in 1974, will be exhausted assets of $250 million or more and by projects that are under way or which represent at least 33 percent that are currently at an advanced of its banking assets. planning stage. Branches of Federal Reserve Banks provide important services to the financial system and Increasing the Number of the public, including the distribution Class C Directors of coin and currency, the clearing of The Board has recommended that checks, and the processing of electhe Federal Reserve Act be amended tronic payments. The current statuto increase the number of Class C tory limitation will prevent needed directors at each Federal Reserve renovation and new construction at Bank from three to five. The pro- branch buildings. posal aims to diversify further the backgrounds and interests represented on the boards of directors of Interstate Banking the Reserve Banks as a way of accomplishing one of the objectives The Board believes that the Congress of the Federal Reserve Reform Act should review and clarify national of 1977. That act provides for the policy toward interstate banking. It representation of the interests of recognizes that regional arrangeconsumers, labor, and services, in ments provide a possible transitional addition to agriculture, commerce, approach to full interstate banking. and industry, on the boards of the Viewed as a permanent solution, Reserve Banks. however, regional compacts would The Board also has recommended tend to balkanize banking, with a that thrift institutions be added to tendency toward regional concentrathe groups that should be considered tions. The potential weaknesses of in selecting Class C directors in view regional compacts could be substanof the changes made by the Monetary tially ameliorated if states entering Control Act of 1980. That act applied into such regional arrangements were reserve requirements to such institu- also required after a few years to tions and made Federal Reserve permit reciprocal entry by banks in credit and services available to them. any state that has enacted a regional arrangement or otherwise provides for entry of banks of any other states. Funds for Reserve Bank To forestall large concentrations Branches of domestic banking resources, the The Board has recommended that Board has recommended that certain the Federal Reserve Act be amended safeguards be included in liberalizing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 Legislative Recommendations interstate banking. The Board has depository institutions of making funds suggested the following approaches: available more promptly. the very largest holding companies The Board has felt primary emmight be prohibited from merging phasis should be placed on efforts to with one another; institutions could alleviate the problem of funds availbe prohibited from obtaining by ac- ability through disclosure and imquisition more than some fixed share provements to the check collection of banking assets, although de novo and return process. However, the or small acquisitions could still be Board is aware that some states have permitted; and states could set limits enacted mandatory schedules that on the percentage of banking assets appear to be operating reasonably within their own boarders that could well. The Board believes that manbe acquired through acquisitions or datory schedules could be workable mergers. provided the Federal Reserve is given The Board has also recommended authority to determine those schedthat Congress authorize interstate ules in the light of anticipated imbranching within metropolitan areas provements to the check system. and within neighboring areas of con- Such schedules should be based on tiguous states. the times in which most checks can reasonably be expected to be collected and returned to the depository institution in which they were first Improving Check Collection deposited in the event of dishonor. The Board believes that depository The Board believes that, after a institutions should clearly disclose to relatively short transition period, customers their policies with respect schedules of from two to six business to the availability of deposited funds days or even less are feasible deat the time an account is opened and pending on where the check is drawn. when such policies are changed. The Board also believes that man- Moreover, authority to override in- datory schedules should contain exdividual state statutes is necessary if ceptions to permit depository instithe process of collection and return tutions to place holds on deposits of of checks is to be speeded, thus accounts presenting unusually high reducing or eliminating the risk to risks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

181 Litigation During 1986 the Board of Governors the definitions challenged in Reguwas named in 47 pending lawsuits, lation Y on September 24, 1984 (744 compared with 55 in 1985. Of the 12 F.2d 1402). A petition for writ of new lawsuits filed in 1986, 9 raised certiorari (No. 84-1274, filed Februquestions under the Bank Holding ary 6, 1985) was granted by the Company Act, compared with 4 in Supreme Court on April 29, 1985 1985. As of December 31, 1986, 29 (105 S. Ct. 2137). By decision dated cases were pending, 14 of which January 22,1986, the Court affirmed involve questions under the Bank the court of appeals decision (106 S. Holding Company Act. The sections Ct. 681). below briefly describe each of these In Florida Bankers Association et cases. al. v. Board of Governors, Nos. 84- 3269 and 84-3270 (11th Circuit, filed on April 20, 1984), petitioners seek Bank Holding Companies— review of a Board order dated March Antitrust Action 23, 1984, approving an application In 1986 no bank holding company by U.S. Trust Corporation, New acquisitions or mergers that had been York, New York, to expand the approved by the Board were chal- activities of its subsidiary, U.S. Trust lenged by the U.S. Department of Company of Florida, N.A., Palm Justice under antitrust laws, and no Beach, Florida, to include the acsuch cases were pending from pre- ceptance of time and demand deposvious years. its and the making of consumer loans (Federal Reserve Bulletin, vol. 70, April 1984, p. 371). On May 20, Bank Holding Company Act— 1985, the court reversed the Board's Review of Board Actions order of approval (760 F.2d 1135). In Dimension Financial Corporation By order dated January 27,1986, the etal. v. Board of Governors, No. 83- Supreme Court granted intervenor 2696 (10th Circuit, filed December U.S. Trust Company's petition for 30, 1983); First Bancorporation v. certiorari (No. 85-193), vacated the Board of Governors, No. 84-1011 court of appeals judgment, and re- (10th Circuit, filed January 5, 1984); manded the case back to the court and Colorado Industrial Bankers As- of appeals (106 S. Ct. 875). In an sociation et al. v. Board of Gover- opinion dated October 6, 1986, that nors, No. 84-1122 (10th Circuit, filed court upheld the Board's order (800 January 27, 1984), petitioners chal- F.2d 1534). A petition for certiorari lenged the definition of "commercial filed December 23,1986, by petitionloan" and "demand deposit" in a ers is pending (No. 86-1023). revision of the Board's Regulation Y In Florida Department of Banking that was approved by the Board on v. Board of Governors, Nos. 84-3831 December 14, 1983 (Federal Reserve and 84-3832 (11th Circuit, filed No- Bulletin, vol. 70, February 1984, p. vember 30, 1984), and Florida Bank- 121). The court of appeals set aside ers Association v. Board of Gover- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 Litigation nors, Nos. 84-3883 and 84-3884 (11th tion, Lexington, Tennessee, and, in- Circuit, filed December 21, 1984), directly, its subsidiary, First National petitioners seek review of Board Bank of Lexington, Lexington, Tenorders dated November 1, 1984, nessee (Federal Reserve Bulletin, vol. approving the applications by Bank 71, October 1985, p. 793). By order of Boston Corporation, Boston, dated October 28, 1986, the court Massachusetts, and Bankers Trust affirmed the Board's order (804 F.2d New York Corporation, New York, 54). New York, to expand the activities In First National Bank of Blue of their subsidiaries—Bank of Bos- Island Employee Stock Ownership ton Trust Company of Southeast Plan v. Board of Governors, No. 85- Florida, N.A., Dearfield Beach, 2615 (7th Circuit, filed September Florida; Bank of Boston Trust Com- 23, 1985), petitioner sought review pany of Southwest Florida, N.A., of the Board's order dated August Sarasota, Florida; and Bankers Trust 22, 1985, denying the application of Company of Florida, N.A., Palm First National Bank of Blue Island Beach, Florida—to include the ac- Employee Stock Ownership Plan, ceptance of time and demand depos- Blue Island, Illinois, to become a its and the making of consumer loans bank holding company by acquiring (Federal Reserve Bulletin, vol. 71, Great Lakes Financial Resources, January 1985, pp. 55 and 51, respec- Inc., Blue Island, Illinois (Federal tively). Proceedings in the cases have Reserve Bulletin, vol. 71, October been stayed pending a final disposi- 1985, p. 804). By order dated Octotion by the Supreme Court in Florida ber 1, 1986, the court affirmed the Bankers Association v. Board of Board's order (802 F.2d 291). Governors. In CBC, Inc. v. Board of Gover- In Independent Community Bank- nors, No. 86-1001 (10th Circuit, filed ers Association of South Dakota v. January 2, 1986), petitioner seeks Board of Governors, No. 85-1496 review of the Board's order dated (D.C. Circuit, filed August 7, 1985), December 15, 1985, requiring that petitioner seeks review of the Board's bank holding companies with assets order dated July 12, 1985, approving of $150 million or more must file the application of First City Bancor- certified financial statements with poration of Texas, Inc., Houston, their annual reports. The case is Texas, to acquire First City Bank- pending. Sioux Falls, N.A., Sioux Falls, South In St. James Bancorp v. Board of Dakota (Federal Reserve Bulletin, Governors, No. 86-1224 (8th Circuit, vol. 71, September 1985, p. 716). filed February 19, 1986), petitioner The case is pending. sought review of the Board's order In First National Bancshares Corp. dated January 21, 1986, denying the II v. Board of Governors, No. 85- application of St. James Bancorp, 3702 (6th Circuit, filed September 4, Inc., St. James, Minnesota, to be- 1985), petitioner sought review of come a bank holding company by the Board's order dated August 5, acquiring Roseville Bancorp, Inc., 1985, denying the application of First Minneapolis, Minnesota, and thereby National Bancshares Corporation II, to indirectly acquire Mid America Lexington, Tennessee, to become a National Bank of Roseville, Rosebank holding company by acquiring ville, Minnesota (Federal Reserve Digitized foFr FirRsAt SNEaRt ional Bancshares Corpora- Bulletin, vol. 72, March 1986, p. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 183 199). On April 15, 1986, petitioner's fering of securities in violation of the motion for dismissal of the case was Bank Holding Company Act. On granted by the court. October 27, 1986, the court dis- In Securities Industry Association missed the case for lack of jurisdicv. Board of Governors, No. 86-1412 tion, and on October 30, 1986, peti- (D.C. Circuit, filed July 14, 1986), tioner appealed. The case is pending petitioner seeks review of the Board's (No. 86-5667). order dated June 13,1986, approving In Independent Insurance Agents the application of National West- of America, Inc., et al. v. Board of minster Bank PLC, London, Eng- Governors, Nos. 86-1572, 86-1573 land, and its U.S. subsidiary, NatWest and 86-1576 (D.C. Circuit, filed Oc- Holdings, Inc., New York, New tober 24, 1986), petitioners seek York, to offer investment advice and review of the Board's order dated securities brokerage services to insti- October 3, 1986, amending the protutional customers through a single visions of Regulation Y that deal subsidiary (Federal Reserve Bulletin, with permissible insurance activities vol. 72, August 1986, p. 584). The for bank holding companies. The case is pending. case is pending. In Jenkins v. Board of Governors et al, No. 86-1419 (D.C. Circuit, filed July 18, 1986), petitioner seeks Other Litigation Involving review of the Board's action of May Challenges to Board Procedures 21, 1986, approving the application and Regulations of First Security Financial, Salt Lake In 1986 actions were taken or were City, Utah, for membership in the pending, including those under the Federal Reserve System. The Board Financial Institutions Supervisory Act, filed a motion to dismiss on August the Glass-Steagall Act, and the Farm 14, 1986. The case is pending. Credit Act. In Independent Community Bankers Association of South Dakota v. Financial Institutions Board of Governors, No. 86-5373 Supervisory Act (8th Circuit, filed October 3, 1986), petitioner seeks review of the Board's In Carter v. Board of Governors et order dated September 15, 1986, al, No. 85-4021 (6th Circuit, filed approving the application of Michi- December 9, 1985), plaintiff sought gan National Corporation, Bloom- review of the Board's order dated field Hills, Michigan, to acquire In- November 18, 1985, removing him dependence One Bank, N.A., Rapid as an officer of First National Bank City, South Dakota (Federal Reserve of Clinton, Clinton, Kentucky. On Bulletin, vol. 72, November 1986, p. February 13, 1986, the case was 792). The case is pending. voluntarily dismissed by the peti- In Securities Industry Associationtioner. v. Board of Governors, No. 86-2768 In Adkins v. Board of Governors, (D.C. Circuit, filed October 7,1986), No. 86-3853 (4th Circuit, filed May petitioner seeks a declaration from 8, 1986), petitioner seeks review of the court that Charles Schwab & the Board's order dated April 24, Co., Inc., a discount broker that is a 1986, assessing civil money penalties subsidiary of a bank holding com- against him. The case is pending. Digitized forp FaRnAyS, EpRa rticipated in the public of- In a case filed in the U.S. District http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 Litigation Court for the District of Minnesota, decision and permanently enjoined No. 4-83-995 (filed November 16, Bankers Trust from their current 1983), which was placed under seal placement methods (627 F.Supp. 695, by court order, plaintiff alleges that 628 F.Supp. 1438). The injunction the Board reviewed and copied his was subsequently stayed by the court records at a national bank in viola- of appeals. By order dated Decemtion of the Right to Financial Privacy ber 23, 1986, the court of appeals Act. The case is pending. reversed the district court and rein- In a case filed in the U.S. District stated the Board's decision (Nos. 86- Court for the District of Columbia, 5089, 86-5090, 86-5091, 86-5139). No. 86-2868 (filed October 20,1986), which was placed under seal by court Farm Credit Act order, plaintiff seeks injunctive relief from a Temporary Order of Cease Several cases have been filed in and Desist issued against him by the various district courts seeking injunc- Board. The case is pending. tive relief and damages relating to loans made to plaintiff farmers by commercial banks and the Farm The Glass-Steagall Act Credit System. Populist Party of In Securities Industry Association v. Iowa v. Federal Reserve Board, No. Board of Governors, Nos. 80-2614 85-626-B (S.D. Iowa, filed August 2, and 80-2730 (D.D.C., filed October 1985), was dismissed on December 24, 1980), plaintiffs sought review of 11, 1985, for lack of jurisdiction. a Board statement dated September Alfson v. Wilkinson et al., No. Al- 26, 1980, denying in part plaintiff's 85-267 (D.N.D., filed October 8, petition that the Board prohibit 1985), was dismissed by court order Bankers Trust Company, a state on November 17, 1986. Jensen v. member bank, from selling third- Wilkinson et al, No. 85-4436-S (D. party commercial paper as an agent Kan., filed October 10, 1985), and of the issuer, pursuant to the Glass- related cases, were dismissed by Steagall Act. On June 28, 1984, the court order on October 7, 1986. Supreme Court overruled the Board's Souser et al. v. Volcker et al., No. decision and remanded the case to 85-C-2370 (D. Colo., filed November the court of appeals (104 S. Ct. 1, 1985), and related cases, were 2979), which remanded it to the dismissed by court order on Decemdistrict court. On October 19, 1984, ber 4, 1985. the district court remanded the case Kurkowski v. Wilkinson et al., No. to the Board to determine whether CV-85-0-916 (D. Neb., filed October the methods that Bankers Trust uses 16, 1985) was dismissed on April 22, to place commercial paper constitute 1986, and plaintiff appealed to the underwriting or similar activities eighth circuit. The case is pending. within the meaning of the Act. On Podolak v. Volcker et al., No. C85- June 4, 1985, the Board determined 0456 (D. Wyo., filed October 28, that the current placement methods 1985), and related cases were disof Bankers Trust are consistent with missed on February 24, 1986, and the Act. By memorandum orders plaintiffs appealed to the tenth cirdated February 4 and 18, 1986, the cuit. The cases are pending. district court invalidated the Board's A motion by the federal defend- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 185 ants to dismiss has been filed in each federal monetary credit and bankof the following cases: Farmer v. ruptcy statutes by the Board and Wilkinson et al., No. 4-85-CIVIL- BancOhio National Bank. On No- 1448 (D. Minn., filed October 21, vember 20,1985, the U.S. magistrate 1985); Kolb v. Wilkinson et al, No. recommended dismissal of the ac- C85-4184 (N.D. Iowa, filed October tion. Plaintiff filed a notice of appeal 22, 1985); Myers et al. v. Federal on March 5, 1986, No. 86-3210 (6th Reserve Board, No. 85-1427 (D. Ida., Circuit). The case is pending. filed November 18, 1985). In Cook v. Spillman et al., No. CIV-S-85-0953 EJG (E.D. Cal., filed July 10,1985); Wight etal. v. Internal Other Actions Revenue Service et al., No. CIV-S- In Melcher v. Federal Open Market 85-0012 MLS (E.D. Cal., filed July Committee, No. 84-1335 (D.D.C., 12, 1985); and Urwyler et al. v. filed April 30, 1984), plaintiff chal- Internal Revenue Service et al, No. lenges the constitutionality of the CV-F-85-402 REC (E.D. Cal., filed Federal Open Market Committee. July 18, 1985), plaintiffs allege that On June 5, 1986, the court denied the sixteenth amendment to the Conthe defendant's motion to dismiss stitution was not properly ratified (644 F.2d 510). By order dated and that the use of Federal Reserve September 26,1986, the court upheld notes constitutes illegal gambling. the constitutionality of the Federal The Board's motions to dismiss the Open Market Committee and dis- cases were granted by the district missed the case (Id.). The court court. The plaintiff in Cook filed a denied plaintiffs motion to alter or notice of appeal on January 10,1986, amend judgment on November 18, No. 86-1642 (9th Circuit), and by 1986, and plaintiff filed a notice of order dated December 22, 1986, the appeal. The case is pending. court dismissed the appeal. The In Brown v. United States Congressplaintiffs in Wight and Urwyler filed etal,No. 84-2887-6 (IG) (S.D. Cal., notices of appeal on December 22, filed December 7, 1984), plaintiff 1985, No. 85-2826, and December 3, seeks damages resulting from alleged 1985, No. 85-2877, respectively (9th discrimination in home financing and Circuit). These cases are pending. mandatory injunctions regarding the In Johnson v. Federal Reserve Board's monetary policy. The court System et al., Nos. S85-0958(R) and dismissed the case on September 17, S85-1269(N) (S.D. Miss., filed July 1985. Plaintiff filed a notice of appeal 16 and October 21, 1985), plaintiff on September 20, 1985, No. 85-6313 sought injunctive relief and damages (9th Circuit), then voluntarily dis- against defendants relating to foremissed the appeal on November 12, closures on plaintiffs property. By 1985. On September 27, 1985, plain- order dated June 23, 1986, the court tiff filed a motion for reconsideration dismissed the complaint. Plaintiff filed with the district court. The case is a notice of appeal on July 23, 1986, pending. No. 86-4536 (5th Circuit). On Sep- In Lewis v. Volcker et al., No. C- tember 29, 1986, the court dismissed 1-85-0099 (S.D. Ohio, filed January the appeal for failure to prosecute. 14, 1985), plaintiff seeks damages In McHuin v. Volcker et al., No. resulting from alleged violations of 85-2170 WARB (W.D. Okla., filed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 Litigaton August 29, 1985), plaintiff sought July 30, 1986, the court affirmed the reinstatement as an employee at the district court's dismissal of the ac- Federal Reserve Bank of Kansas tion, and plaintiff filed a petition for City. By order dated December 9, rehearing. By order dated August 1986, the complaint was dismissed 29, 1986, the court denied the petiby the court. tion. Appellant filed a petition for In Howe v. United States et ai, writ of certiorari on November 26, No. 85-4504-C (D. Mass., filed De- 1986 (No. 86-889). The case is pendcember 6, 1985), plaintiff challenges ing. the constitutionality of the current In Optical Coating Laboratory, monetary system. By order dated Inc. v. United States, No. 288-86C April 18, 1986, the court dismissed (Ct. Cl., filed May 6, 1986), plaintiff the complaint. Plaintiff filed a notice seeks damages based upon the expiof appeal on April 28, 1986, No. 86- ration of its contract with the Federal 1430 (1st Circuit). By order dated Reserve Board. The case is pending. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

187 Banking Supervision and Regulation In 1986 the Board of Governors In recognition of the unique probcontinued its program to strengthen lems currently facing banks with the supervision and regulation of the substantial exposure to the agriculbanking organizations under its juris- tural and energy sectors of the econdiction. The Board initiated the pro- omy, the Board in 1986 adopted gram in the fall of 1985 in light of policies to assist these banks. The developments within the banking sys- policy allows such banks to operate tem over the past several years, and with reduced levels of capital if they it is aimed at three broad areas of have the ability to improve their supervision: (1) preventing the emer- capital position over a reasonable gence of problems in banking orga- period of time and if they have nizations through strengthened poli- instituted reasonable plans to correct cies designed to encourage sound their financial or operating deficienbanking practices, (2) the early iden- cies. In addition, the policy makes tification of problems that do emerge clear that problem loans need not through more frequent and thorough necessarily be written down if they on-site examinations and inspections, are restructured in line with Financial and (3) improved communication of Accounting Standard 15 so that the findings to bank management and sum of future interest and principal boards of directors so that they will payments equals at least the face move quickly to correct problems. amount of the loan. The new program resulted in a 21 percent increase over 1985 in on-site examinations and inspections and a Supervision for Safety substantial expansion in the number and Soundness of meetings with boards of directors. The Board took several steps in The Federal Reserve conducts the 1986 to further strengthen its super- following activities to ensure the visory program. The principal step safety and soundness of financial was its proposal in early 1986 for a institutions: on-site examinations and risk-adjusted measure of capital ad- inspections, surveillance and moniequacy. The plan has been revised toring, and enforcement and other and issued jointly for public com- supervisory actions. ment with the other federal banking regulators and the Bank of England. The Board also revised its guidelines Examinations and Inspections on capital adequacy, specifying that The on-site review of operations is perpetual debt, properly structured, an integral part of ensuring the safety could qualify as a noncommon equity and soundness of financial instituform of primary capital and respeci- tions. Examinations of state member fying the percentages of these forms banks and Edge corporations and of capital that can qualify as primary inspections of bank holding compacapital. nies and their subsidiaries entail (1) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 Banking Supervision and Regulation an appraisal of the quality of the ments. System examiners conducted institution's assets; (2) an evaluation 811 examinations, many jointly or of management, including internal concurrently with examiners from policies, operations, and procedures; state regulatory agencies. (3) an assessment of the key financial factors of capital, earnings, asset and Bank Holding Companies liability management, and liquidity; In 1986 the number of bank holding and (4) a review for compliance with companies increased by 12 to a total applicable laws and regulations.1 of 6,465. These organizations control 9,409 commercial banks, which hold State Member Banks about 92 percent of the total assets The Federal Reserve is the primary of insured commercial banks in the federal supervisor and regulator of United States. state-chartered commercial banks that Most large bank holding compaare members of the Federal Reserve nies, as well as small companies with System. At the end of 1986 there significant nonbank assets, are inwere 1,110 state member banks, spected annually under the new polaccounting for about 8 percent of all icy. Others are inspected at least insured commercial banks. These every three years or, in the case of banks held about 18 percent of total the smallest companies that do not assets of insured commercial banks. have nonbank assets, on a sample As stated above, the Federal Re- basis. The inspection focuses on the serve in 1986 increased the frequency operations of the parent holding of scheduled examinations and in- company and its nonbank subsidispections of state member banks and aries; the subsidiary banks are exbank holding companies. In general, amined by the appropriate federal the new guidelines, established by banking regulatory agencies. In 1986, the Board in the fall of 1985, call for System examiners made 2,242 onstate member banks to be examined site inspections of bank holding comat least annually. Except for large or panies. An additional 96 off-site troubled banks, examination by either inspections were conducted, and state a Reserve Bank or a state banking examiners made 87 inspections. agency will meet that requirement. In 1986, 1,016 state member banks were examined, 298 of which were Enforcement Actions examined by state banking depart- and Civil Money Penalties Under the Financial Institutions Supervisory Act of 1966, the Board of 1. The Board's Division of Consumer and Governors has the authority to enter Community Affairs is responsible for reviewing compliance with consumer and civil rights into written agreements with, or laws. The responsibility is accomplished mainly issue cease and desist orders against, through examinations by specially trained Re- state member banks and bank holdserve Bank examiners. These regulatory reing companies, and persons associsponsibilities are described in the section of this ated with such organizations that REPORT covering consumer and community affairs. Compliance with other statutes and reg- engage in unsafe or unsound praculations, which is treated in this section, is the tices or that violate applicable laws responsibility of the Board's Division of Bank- or regulations. The Board may also ing Supervision and Regulation and of the Reassess civil money penalties for vioserve Banks, whose examiners check for safety Digitized foar nFdR AsoSuEnRdn ess. lations of a cease-and-desist order, http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 189 of the Bank Holding Company Act, Edge corporations, and bank holding or of certain provisions of the Fed- companies are conducted principally eral Reserve Act. at the banking organizations' head In 1986 the Reserve Banks rec- offices in the United States, where ommended and the Board's staff the ultimate responsibility for foreign initiated and worked on 260 enforce- offices lies. To verify and supplement ment cases that involved 481 separate the results of the head-office examiactions, such as cease and desist nations, on-site reviews of important orders, removals, and civil money foreign offices are performed at least penalties, most dealing with unsafe every three years. In 1986 the Fedor unsound banking practices; 125 eral Reserve examined 16 foreign cases involving 178 actions were com- branches of state member banks and pleted by year-end. Also, the Board 15 foreign subsidiaries of Edge corassessed or collected 12 civil money porations and bank holding compapenalties, totaling $625,000, paid by nies. All the examinations abroad 1 state member bank, 1 bank holding were coordinated with the supervicompany, and 10 individuals. A de- sory authorities of the countries in scription of all formal supervisory which the examinations took place. actions during the year and the reasons for them were made available to the public in the Board's U.S. Activities of Foreign Banks twice-yearly "Report on Formal En- Foreign banks continue to expand forcement Actions." their operations in the United States and are significant participants in the U.S. banking system. As of Decem- International Activities ber 31, 1986, 259 foreign banks The Federal Reserve is responsible operated 398 state-licensed branches for supervising several international and agencies, of which 32 are insured banking activities. by the Federal Deposit Insurance Corporation; at year-end these for- Edge and Agreement Corporations eign banks also operated 89 branches Edge corporations are international and agencies licensed by the Office banking organizations chartered by of the Comptroller of the Currency, the Board to provide all segments of of which 3 have FDIC insurance. the U.S. economy with a means of Foreign banks also directly owned 19 financing international trade, espe- Edge corporations and 11 commercially exports. An agreement corpo- cial lending companies. In addition, ration is a company that enters into foreign banks held a majority interest an agreement with the Board not to in 72 U.S. commercial banks. Toexercise any power that is impermis- gether, these foreign banks at yearsible for an Edge corporation. In end controlled approximately 12 per- 1986 the Federal Reserve conducted cent of U.S. banking assets. examinations of 124 Edge and agree- The Federal Reserve has broad ment corporations. authority to supervise and regulate foreign banks that engage in banking Foreign-Office Operations in the United States through branches, of U.S. Banking Organizations agencies, commercial lending com- Examinations of the international panies, Edge corporations, or banks. Digitized foro FpReAraStEioRn s of state member banks, In exercising this authority, the Fedhttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 Banking Supervision and Regulation eral Reserve relies on examinations certain foreign and domestic trust conducted by the appropriate federal company subsidiaries of bank holdor state regulatory agency. Although ing companies. These examinations states have primary authority for review the trust functions to ensure examining state-licensed, uninsured that they are conducted in accordbranches and agencies, the Federal ance with laws, regulations, and ap- Reserve participated in the exami- plicable fiduciary principles. During nation of 98 such offices during the the year, the Federal Reserve conpast year. ducted 250 such examinations. Municipal Securities Dealers Specialized Examinations and Clearing Agents The Federal Reserve conducts spe- The Securities Act Amendments of cialized examinations in the follow- 1975 made the Board responsible for ing areas of bank activity: electronic supervising state member banks and data processing, trust activities, mu- bank holding companies that act as nicipal securities dealing and clear- municipal securities dealers or as ing, and securities transferring. In clearing agencies. In 1986 the Board 1986, guidelines for the frequency of examined 32 of the 50 state member specialized examinations were banks registered with the Board that adopted, and in conformance with deal in municipal securities. the System's program for strength- A clearing agency acts as a custoening Reserve Bank supervision, the dian of securities involved in transfrequency of specialized examina- actions settled by bookkeeping entions for problem institutions was tries. The four agencies registered increased. with the Board were examined in 1986. Electronic Data Processing Under the Interagency EDP Exami- Transfer Agents nation Program, the Federal Reserve System examiners conduct separate examines the electronic data pro- reviews of state member banks and cessing (EDP) activities of state bank holding companies that act as member banks, Edge and agreement transfer agents. Transfer agents corporations, and independent cen- countersign and monitor the issuance ters that provide EDP services to of securities, register the transfer of these institutions. In 1986, System securities, and exchange or convert examiners conducted 334 on-site EDP securities. During 1986 the Board reviews. In addition, the Federal examined 91 such banks and bank Reserve reviews reports of EDP holding companies. examinations issued by other bank regulatory agencies on organizations Surveillance and Monitoring that provide data processing services to state member banks. In line with the overall supervisory objective of maintaining a safe and Trust Activities sound banking system, the Federal The Federal Reserve examines trust Reserve monitors quarterly the fidepartments of state member banks, nancial condition of member banks trust companies that are members of and bank holding companies. The Digitized fotr hFeR AFSEedRe ral Reserve System, and surveillance program supplements the http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 191 examination process through com- bank holding companies with consolputerized screening systems that idated assets of $150 million or more identify institutions with poor or or with more than one subsidiary deteriorating financial profiles. It bank (FR Y-9C) and the parentfurther aids in the allocation of the company-only financial statements for System's examination resources by these bank holding companies (FR focusing on banking institutions that Y-9LP), both filed quarterly; the have serious financial problems and parent-company financial statements that may be subject to accelerated for one-bank holding companies with examinations or may warrant closer less than $150 million (FR Y-9SP), supervision. In 1986 the System filed semiannually; and the combined strengthened its surveillance pro- financial statements for nonbank gram by revising its screening pro- subsidiaries (FR Y-11Q), filed quargram while continuing the electronic terly, with a supplement (FR Ytransmission of surveillance results 11AS) filed annually by type of between the Reserve Banks and the nonbank subsidiary. Under these re- Board of Governors. visions, the Federal Reserve signifi- The Board revised the reporting cantly improved the overall quality requirements for large and small of the financial data needed for the bank holding companies and intro- timely supervision and monitoring of duced new requirements for report- bank holding companies. ing of data on nonbank subsidiaries. These changes enhanced the Federal Supervisory Policy Reserve System's ability to evaluate the financial condition of these insti- In 1986 the Board of Governors tutions. Also, the performance re- made or initiated major changes in port for bank holding companies has its supervisory guidelines. The folbeen revised and now includes infor- lowing sections summarize these mation on nonbank activities. changes and review other activities during the year to strengthen the supervisory program. Supervisory Reporting Requirements Capital Adequacy In 1986 the Federal Reserve com- In November 1986 the Board of pletely revised the Bank Holding Governors issued revisions to its Company Supervision Manual to in- capital adequacy guidelines for bank corporate amendments to Regulation holding companies. These revisions Y and the programs to strengthen (1) allowed certain perpetual debt the overall supervision of bank hold- securities to be treated as primary ing companies. The Commercial Bank capital and (2) placed a combined Examination Manual, which covers limit on the amount of perpetual state member banks, was similarly debt, perpetual preferred stock, and updated to incorporate the strength- mandatory convertible debt securiened program of supervision and ties that may qualify as primary regulation. capital. The combined amount of In 1986 the Federal Reserve made such securities that may qualify as major revisions to the following re- primary capital was limited to oneports required of bank holding com- third of total primary capital. In Digitized forp FaRnAieSsE: Rt he financial statements for addition, the revisions limited the http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 Banking Supervision and Regulation amount of mandatory convertible of capital adequacy. In January 1987 securities and perpetual debt that the Board of Governors issued the may qualify as primary capital to 20 risk-based measure for public compercent of total primary capital. ment. Supplemental Measure Problem Loans of Adjusted Capital in Agriculture and Energy In January 1986 the Federal Reserve In 1986 the three federal bank reguissued for public comment a proposal latory agencies agreed to employ a to supplement its capital adequacy common general supervisory policy guidelines for state member banks to assist banks that are essentially and bank holding companies. The sound and well-managed yet are supplemental adjusted capital mea- experiencing difficulty with their capsure was designed to relate capital ital ratios because of problems with requirements more closely to the risk their loans in the agriculture and profiles of banking organizations. energy sectors. The policy calls for The goals of the proposal are to (1) the Reserve Banks to exercise approaddress off-balance-sheet exposures, priate forbearance in applying capital which have expanded rapidly at many adequacy guidelines for such banks large banking organizations for the if they demonstrate a clear potential past several years; (2) temper the for restoring their capital position disincentives, inherent in the existing over a reasonable period of time. guidelines, to hold low-risk, rela- Banks seeking such "capital forbeartively liquid assets; and (3) move ance" are required to notify their capital requirements of state member Reserve Bank immediately when loan banks and bank holding companies losses have caused their capital ratios into closer alignment with capital to fall to levels materially below the adequacy policies in use or under minimum regulatory standards. Nodevelopment in other major indus- tification is to be followed by a trial countries. comprehensive operating plan for Similar proposals were issued by restoring capital to normal levels. the Office of the Comptroller of the This policy does not discourage Currency (for national banks) and banks from forbearance on agriculby the Federal Deposit Insurance tural and energy loans in instances Corporation (for federally insured where it will work to the benefit of nonmember banks). After most of the bank as well as the borrower. the public comments that were to be Restructured loans do not require an received were in hand, the three automatic charge-off when future U.S. bank regulatory authorities dis- payments of principal and interest cussed with representatives of the will at least equal the face amount Bank of England ways to bring into of the loan under the criteria of closer alignment the capital require- Financial Accounting Standard 15 ments of regulators in their respec- (Accounting by Debtors and Creditive countries. Those discussions pro- tors for Troubled Debt Restructurduced a risk-based measure of capital ings). In a related action effective that would create for the two coun- June 30, 1986, the Federal Financial tries a single definition of primary Institutions Examination Council Digitized focr aFpRiAtaSlE Ra nd a single set of standards amended the regulatory reports for http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 193 banks. These revised reports permit possible, differences between regusuch restructured, performing loans latory reporting requirements and to be reported separately from re- generally accepted accounting prinstructured but troubled loans. ciples. Board staff members have served on various advisory commit- Fees for Processing Applications tees of the Financial Accounting and for Examining Standards Board (FASB) and are Edge Corporations participating in that group's project on financial instruments. Staff mem- In 1986 the Board's staff studied the bers also provide commentary on various methods the Federal Reserve proposals affecting banking organi- System might use to recover some or zations that are issued by FASB and all of the expenses involved in exby the American Institute of Certiamining Edge corporations and in fied Public Accountants. processing various types of applications. The Board has received, and at year-end was analyzing, public comments on its proposal to charge Reducing Risks in Large-Dollar fees for these activities. Electronic Payment Systems Relations with the States In March 1986 the Board implemented a policy to reduce the risks The Board approved a policy, adopted associated with large-dollar payment by the Federal Financial Institutions systems. The Board strongly encour- Examination Council, to share conaged depository institutions using fidential information with state agen- Fedwire or one of the private, largecies regulating banks and thrift instidollar wire networks to adopt voltutions. This policy was adopted to untary limits on their own overdrafts. better supervise the growing inter- The Board announced that institustate activities of financial institutions not complying with the policy tions. would not be permitted to incur The Board in 1986 provided daylight overdrafts on Fedwire. $100,000 to the Education Founda- The program has reduced the risk tion of State Bank Supervisors. Esassociated with daylight overdrafts in tablished by the Conference of State several ways. First, the number of Bank Supervisors, the foundation depository institutions incurring ovoffers technical courses to state bank erdrafts during a typical monitoring examiners. The Board also authorperiod decreased from about 4,000 ized the Federal Reserve Banks to to about 3,200 between 1985 and provide scholarships to examiners 1986. Second, average cross-system employed by state banking agencies funds overdrafts (to be distinguished to help them cover expenses in atfrom book-entry security overdrafts) tending training courses offered by remained approximately constant the Federal Reserve and by the during this period, at about $80 Federal Financial Institutions Exambillion, while the dollar volume of ination Council. wire funds transfers increased more than 30 percent. Thus, overdrafts as Work on Accounting Standards a portion of gross payments volume The Board and its staff are working declined markedly. Finally, virtually Digitized fort oFR eAlSimERi nate, to the greatest extent no institutions exceeded their overhttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 Banking Supervision and Regulation draft caps. Together, these facts incur large or frequent daylight overindicate that the program has con- drafts. This cap would be the lesser tained the growth of overdrafts with- of 10 percent of capital or $500,000 out disrupting the payments systems and would be available to institutions and thereby has lowered the risks to that do not wish to undergo the selfthe Federal Reserve, to the deposi- assessment currently required for estory institutions, and to the wider tablishing a regular cap. economy. • Amend its policy statement re- In December 1986 the Board is- garding consolidation of payments sued for comment a series of propos- activities by affiliated institutions. als to further reduce payments sys- Under one option, holding compatem risk. The most significant of nies might consolidate payment acthese would include in the total tivities at one subsidiary through overdraft subject to voluntary ceil- affiliate transfers over Fedwire, proings those overdrafts due to book- vided that the board of directors of entry security transactions. Deposi- the sending institution approved such tory institutions would have two transfers periodically. Under the secoptions for including book-entry ond approach, transfers that create a overdrafts in their total net debits pattern of overdrafts at the sending subject to a cap: (1) depository institution would be prohibited. institutions could include all of these In addition, the Board proposed overdrafts in their current net debit several changes affecting automated cap, or (2) institutions could collater- clearinghouse (ACH) procedures: (1) alize the overdrafts caused by the for purposes of calculating daylight book-entry transfers with book-entry overdraft levels only, post all entries securities that are eligible for pledg- for ACH debit payments and checks ing. Under the second option, only as of 1:00 p.m. Eastern time; (2) the uncollateralized portion of book- grant finality for ACH credit payentry overdrafts would be added to ments of $5,000 or less at 1:00 p.m. the net debit subject to the cap. local time; (3) treat as provisional The Board is also seeking com- credit all ACH debit items and those ment on whether there should be a ACH credit items greater than $5,000 book-entry transfer limit and whether until the Reserve Banks have rethat limit should be $25 million or ceived the funds; (4) accelerate the $50 million per transaction. Such a deadline for the return of debit limit would induce market partici- transactions larger than $2,500 to the pants to deliver securities earlier in nighttime deposit deadline on the the day rather than "building" posi- banking day following settlement or tions of securities until late in the receipt; and (5) require notification day. Position-building by securities of returns of $100,000 or more by dealers is a major source of book- 3:00 p.m. Eastern time on the bankentry overdrafts. ing day following settlement of re- The Board proposed the following ceipt. additional changes: The Board will review the public • Reduce the levels for the sender comments on these proposals in the net debit cap in the present policy spring and summer of 1987. Final by 25 percent. actions that may be taken are likely • Establish a new de minimis cap to have effective dates in both 1987 Digitized focr aFtReAgSoEryR for institutions that do not and 1988. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 195 Staff Training eral Reserve courses and 38 in FFIEC courses. System staff training emphasizes analytical and supervisory themes com- Federal Financial Institutions mon to the four areas of supervision Examination Council and regulation—examinations, inspections, applications, and surveil- In 1986 the Federal Financial Instilance—and stresses the interdepend- tutions Examination Council made ence among these areas. In 1986 the several policy recommendations to Federal Reserve conducted forty-two its constituent agencies; all the recschool sessions covering a wide vari- ommendations were adopted by the ety of topics. Federal Reserve's Board of Gover- Programs included twelve banking nors.2 The Federal Reserve endorsed sessions split into three levels—core, guidelines on uniform disclosure for intermediate, and advanced—plus a adjustable-rate mortgages; and it enseminar for senior examiners on dorsed a policy statement dealing energy lending, six sessions of a with the provision of basic financial credit analysis course, two sessions services, both of which are discussed of a bank holding company applica- in detail in the chapter on consumer tions school, and three consumer and community affairs. compliance schools. The Federal Reserve also en- New courses were held on bank dorsed the sharing of confidential holding company inspections, parent supervisory information with state cash flow and liquidity analysis, and banking agencies, thereby formally effective writing for banking super- adopting a policy in place at the vision staff. In addition, some staff Federal Reserve since the advent of members attended two schools con- regional interstate compacts. The ducted jointly with the Federal Bu- new policy calls for the signing of reau of Investigation on white-collar formal agreements between federal crime and bank failures. and state regulatory agencies to as- The Federal Financial Institutions sure uniform treatment of the infor- Examination Council (FFIEC), of mation among the sharing agencies which the System is a member, and to provide increased security. conducted approximately 78 courses The council also approved new covering off-balance sheet risks, in- and revised reporting requirements: ternational banking, income prop- • The Reports of Condition and erty lending, securities dealers, white- Income (Call Reports) were modicollar crime, management, conduct- fied to reflect adoption of new reguing meetings with management, and latory policies toward agricultural instructor training. lenders, which were announced by Overall, the Federal Reserve and the FFIEC in 1986 trained 1,433 persons: 830, including 33 from for- 2. The Federal Financial Institutions Exeign central banks, in System schools; amination Council consists of representatives and 603 in FFIEC schools. In addi- of the Board of Governors of the Federal Retion, 122 state examiners received serve System, the Federal Deposit Insurance training under the scholarship pro- Corporation, the Federal Home Loan Bank Board, the National Credit Union Administragram for states provided by the tion, and the Office of the Comptroller of the Federal Reserve Banks—84 in Fed- Currency. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 Banking Supervision and Regulation the banking constituency of the coun- structure of U.S. banking at the cil. local, regional, and national levels. • New reporting requirements for The Board also has primary responthe sale of assets permit banks to sibility for regulating the internatreat loans transferred "without re- tional operations of domestic bankcourse" as sales in certain situations ing organizations and the U.S. where banks retain residual interests banking operations of foreign banks, in related escrow accounts. The new whether conducted directly through rule provides guidance for banks a branch or agency or indirectly desiring to transfer assets and have through a subsidiary commercial the transactions qualify as sales rather lending company. In addition, the than as borrowings. Board has established regulations for • The Uniform Bank Performance the interstate banking activities of Report was revised in several re- these foreign banks and for foreign spects to make the presentation in it banks that control a U.S. subsidiary identical to that in the Call Report. commercial bank. Regulation of the U.S. Bank Holding Company Act Banking Structure By law, a company must obtain the The Board of Governors administers Board's approval if it is to form a the Bank Holding Company Act, the bank holding company by acquiring Bank Merger Act, and^ the Change control of one or more banks. Morein Bank Control Act for state mem- over, once formed, a bank holding ber banks and bank holding compa- company must receive the Board's nies. In doing so, the Federal Re- approval before acquiring additional serve acts on a variety of proposals banks or nonbanking companies. that directly or indirectly affect the In reviewing an application filed Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1986 Action under authority delegated by Board of Governors Direct action by the Director of Board of Office Proposal Division of Banking Federal Total Governors of the Su R pe e r g v u i l s a io ti n o n a 1 nd Secretary1 Reserve Banks Approved Denied Approved Denied Approved Approved Permitted Formation of holding company ... 57 3 0 0 3 457 0 520 Merger of holding company 23 0 0 0 6 71 0 100 Acquisition Bank 76 2 0 0 28 405 0 511 Nonbank 117 0 0 0 14 171 240 542 Acquisition of bank service corporation2 ... 0 0 0 02 30 5 Other 1 1 10 0 0 0 3 Total 274 6 1 0 53 1,107 240 1,681 1. Official staff of the Board of Governors. Act, which contains standards patterned after those Digitized for F2R. AASpEprRov ed under the Bank Service Corporation of the Bank Holding Company Act. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 197 by a bank holding company, the Office of the Secretary approved 4 Board considers factors relating to and the Reserve Banks approved 56. the convenience and needs of the As required by law, each merger is community to be served, the appli- described in this REPORT, in table cant's financial and managerial re- 19 of the Statistical Tables section. sources, the prospects of both the When the Office of the Comptrolapplicant and the firm to be ac- ler of the Currency or the Federal quired, and the competitive effects Deposit Insurance Corporation has of the proposal. jurisdiction over a merger, the Board In 1986 the Federal Reserve Sys- is asked to comment on the compettem acted on 1,681 bank holding itive factors to assure comparable company and related applications. enforcement of the antitrust provi- The System approved 517 proposals sions of the act. The Board and those to organize bank holding companies agencies have adopted standard terand denied 3; approved 509 bank minology for assessing competitive acquisitions by existing bank holding factors in bank merger cases to companies and denied 2; and ap- assure consistency in administering proved 542 requests to acquire non- the act. On behalf of the Board, the bank companies that are engaged in Reserve Banks submitted 722 reports activities closely related to banking on competitive factors to the OCC and denied none. Data on these and and the FDIC in 1986. related bank holding company decisions are shown in the accompanying table. Change in Bank Control Act The Change in Bank Control Act of Bank Merger Act 1978 requires persons seeking control The Bank Merger Act requires that of a bank or bank holding company all proposed bank mergers be acted to obtain approval from the approupon by the appropriate federal bank priate federal banking agency before regulatory agency. If the bank sur- the transaction occurs. The Board is viving the merger is a state member responsible for reviewing changes in bank, the Federal Reserve has pri- the control of state member banks mary jurisdiction. Before acting on a and of bank holding companies. In proposed bank merger, the Federal evaluating a transfer of control under Reserve considers factors relating to the Change in Bank Control Act, the community's convenience and the Board must review the financial needs, the financial and managerial condition, competence, experience, resources and prospects of the exist- and integrity of the acquiring person; ing and proposed institutions, and it must consider the effect on the the competitive effects of the pro- financial condition of the bank or posal. The Board must also consider bank holding company to be acthe views of certain other agencies quired; and it must determine the on the competitive factors involved effect on competition in any relevant in the transaction. market. In October 1986 the Con- During 1986, the Federal Reserve gress amended the act, requiring the approved 61 merger applications: 1 federal banking agencies to publish was approved by the Board; under notice of each proposed change in authority delegated by the Board, its control and to invite public com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 Banking Supervision and Regulation ment, particularly from persons lo- In 1986, all of the 61 applications cated in the markets served by the for bank mergers were processed institution to be acquired. The within 60 days. The System also amendments also require the federal prepared 722 reports on the competbanking agencies to investigate the itive factors of proposed mergers for qualifications of each person seeking the other two banking agencies; nearly control; the Board routinely con- all of these reports were processed ducts such an investigation under the within 30 days. Of the 217 change- Change in Bank Control Act. In of-control notices involving state 1986, the Federal Reserve System member banks or bank holding comacted on 217 proposed changes in panies, 201 were handled within 60 control of state member banks and days. bank holding companies. The Re- The System measures its perforserve Banks processed 208 cases, and mance in processing international the Board processed 9; the Board applications against a 60-day standdisapproved 1 proposal. ard. In 1986 the Federal Reserve acted on 119 international applications, 87 percent of which the System Delegation of Applications handled within the time allowed. The Board has delegated certain regulatory functions—including the Board Policy Decisions authority to approve, but not the and Developments authority to deny, certain types of in Bank-Related Activities applications—to the Reserve Banks, In 1986 the Board approved a numto the Director of the Board's Diviber of new nonbanking activities, sion of Banking Supervision and including several for individual bank Regulation, and to the Secretary of holding companies. It also had under the Board. consideration other proposed non- The delegation of responsibility for banking activities, including those applications permits staff members involving securities underwriting and to work more efficiently at both the real estate investment. In addition, Board and the Reserve Banks by the Board approved several acquisiremoving routine cases from the tions involving interstate banking. Board's agenda. During 1986, 85 percent of the applications were acted Approval of Permissible upon under delegated authority. Nonbanking Activities In 1986 the Board for the first time Timely Processing approved the following activities for of Applications individual bank holding companies: The System maintains target dates (1) printing and selling checks and and procedures for the processing of related documents that carry coded applications. These target dates pro- information for depository institumote efficiency at the Board and the tions; (2) providing investment ad- Reserve Banks and reduce the bur- vice in connection with securities den on applicants. The time allowed brokerage, subject to certain condifor a decision is 60 days; during 1986, tions; and (3) placement of commer- 93 percent of the applications met cial paper to a limited extent. this standard. In addition, the Board permitted Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 199 the formation of limited-purpose in- struments without a limit on face surance companies, owned coopera- value when such instruments are sold tively by bank holding companies; or issued by nonaffiliated third parthe insurance firms would underwrite ties. directors' and officers' blanket bond At year-end, applications were also insurance for the shareholder bank pending that would allow affiliates holding companies. that already underwrite U.S. govern- The Board approved the addition ment securities to underwrite and to Regulation Y of six nonbanking deal in commercial paper, mortgageactivities for bank holding compa- backed securities, municipal revenue nies; the action means that applica- bonds and consumer-related receivtions for these activities, some of ables. The Board held a hearing in which had been approved previously February 1987 on the complex facin individual cases, are simplified tual and legal issues involved in these and action on them is quickened. applications. The new activities are: consumer In 1986 the Board solicited public financial counseling; tax planning comment on whether to permit bank and tax preparation; futures and holding companies to engage in real options advisory services; check estate investment activities under guaranty services; collection and credit specific conditions. The conditions bureau services; and appraisals of are designed to ensure that the conpersonal property. The Board also duct of the activity does not result in revised the portion of Regulation Y unsafe or unsound banking practices, dealing with permissible insurance unfair competition, conflicts of interactivities for bank holding compa- est, or other adverse effects. nies. The Board approved the applica- Interstate Banking tion of a bank holding company to The Federal Reserve during 1986 acquire a firm that electronically approved applications by out-of-state processes and transmits banking and banking organizations to acquire fieconomic data, a service permitted nancially troubled thrift institutions. in Regulation Y. The Board deter- In one case the institution was uninmined, however, that the portion of sured; in two others the institutions the firm that designs and assembles were federally insured. These acquithe hardware for the data services sitions helped restore financial stawas not incidental to the provision bility to the affected communities of those services. Therefore the Board and provided depositors with better disapproved the acquisition of the access to their funds. Because of the hardware portion of the firm. significant public benefits resulting from the proposed transactions, the Applications to Engage in New Board approved the acquisitions de- Nonbanking Activities spite its general prohibition on affil- At year-end the Board also had iations between bank holding comunder consideration applications to panies and thrift institutions. engage in two new nonbank activi- In other matters, the Board continties: providing advisory services with ued to approve interstate bank holdrespect to futures contracts on stock ing company applications based on indexes; and acting as drawee for state laws that permit regional intervariably denominated payment in- state banking. The U.S. Supreme Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 Banking Supervision and Regulation Court has upheld the constitutional- consolidated equity capital. The Board ity of such laws, and the Board has may object to stock repurchases by found in individual instances that holding companies that fail to meet these laws satisfy the requirement of certain standards, including the the Bank Holding Company Act that Board's capital guidelines. During each state's laws must allow the 1986 the Federal Reserve reviewed acquisition. 142 proposed stock repurchases by bank holding companies, 139 of which Applications were acted on by the Reserve Banks by State Member Banks on behalf of the Board. State member banks must obtain the Public Notice permission of the Board to open new of Board Decisions domestic branches, to make investments in bank premises that exceed Each action by the Board that in- 100 percent of capital stock, and to volves a bank holding company, add to the capital base from sales of bank merger, change in control, or subordinated debt. State member international banking proposal is efbanks must also give six months' fected by an order or announcement. notice of their intention to withdraw Orders state the decision along with from membership in the System, the essential facts of the application although the Board may shorten or and the basis for the decision; aneliminate the notice period in specific nouncements state only the decision. cases. These matters are normally All orders and announcements are handled under delegated authority released immediately to the public; by the Federal Reserve Banks or, in they are also reported in the Board's the case of bank premises or pro- weekly H.2 statistical release and in posed sales of subordinated debt, by the monthly Federal Reserve Bulletin. the Director of the Board's Division Actions taken by the Reserve Banks of Banking Supervision and Regula- are also reported in the H.2 statistical tion. release and in the Bulletin. Announcements of applications and no- Stock Repurchases tices received by the System but not by Bank Holding Companies yet acted on are made in the H.2 release. A bank holding company sometimes purchases its own shares from its International Activities shareholders. When the company of U.S. Banking Organizations borrows the money to buy the shares, the transaction increases the debt of The Board has four principal statuthe bank holding company and si- tory responsibilities in supervising multaneously decreases its equity. the international operations of U.S. Relatively large repurchases may un- banking organizations: it must prodermine the financial condition of a vide authorization and regulation of bank holding company and its bank foreign branches of member banks; subsidiaries. The Board's regulations of overseas investments by member require holding companies to give banks, Edge corporations, and bank advance notice of repurchases that holding companies; and of investretire 10 percent or more of their ments by bank holding companies in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 201 export trading companies; and it branches and agencies of foreign must charter and regulate Edge cor- banks. By the end of 1986, 540 IBFs porations and their investments. had been established. Foreign Branches Edge and Agreement of Member Banks Corporations Under provisions of the Federal Re- Under sections 25 and 25 (a) of the serve Act and of Regulation K, Federal Reserve Act, Edge and member banks in most cases must agreement corporations may engage seek Board approval to establish in international banking and foreign branches in foreign countries. In financial transactions. These corporeviewing proposed foreign branches, rations, which are usually subsidithe Board considers the require- aries of member banks, provide their ments of the law, the condition of owner organizations with the followthe bank, and the bank's experience ing powers: (1) they may conduct a in international business. In 1986 the deposit and loan business in states Board approved the opening of three other than that of the parent, proforeign branches. vided that the business is strictly By the end of 1986, 158 member related to international transactions; banks were operating 952 branches and (2) their powers to make foreign in foreign countries and overseas investments are broader than those areas of the United States; 131 na- of member banks because they can tional banks were operating 822 of invest in foreign financial organizathese branches, and 27 state member tions, such as finance companies and banks were operating the remaining leasing companies, as well as in 130 branches. foreign banks. By the end of 1986 there were 137 Edge corporations, International which had 104 branches. The Board Banking Facilities requires each Edge corporation that is engaged in banking to maintain a The Board amended its Regulations ratio of equity to risk-assets of at D and Q to permit the establishment least 7 percent. of international banking facilities (IBFs) in the United States as of December 3, 1981. An IBF is essen- Foreign Investments tially a set of asset and liability accounts that is segregated from the Under authority of the Federal Reother accounts of the office establish- serve Act and the Bank Holding ing the IBF. Deposits from, and Company Act, U. S. banking orgacredit extended to, foreign residents nizations may engage in activities or other IBFs generally can be booked overseas with the authorization of at these facilities free from domestic the Board. To a significant extent, reserve requirements and interest the Board's Regulation K permits rate limitations. Subject to condi- such investments without prior Board tions specified by the Board, IBFs review. In 1986 the Board reviewed may be established by U.S. deposi- and permitted 64 foreign investments tory institutions, by Edge and agree- by member banks, Edge and agreement corporations, and by U.S. ment corporations, and bank holding Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 Banking Supervision and Regulation companies. In most cases, the appli- the institutions it supervises are comcant requested permission to increase plying with the recordkeeping and an existing investment. reporting requirements of the Currency and Foreign Transactions Re- Export Trading Companies porting Act (the Bank Secrecy Act). Among the stipulations in the act to In 1982 the Bank Export Services combat unlawful currency transac- Act amended section 4 of the Bank tions is the requirement that financial Holding Company Act to permit institutions and selected other busibank holding companies, their subnesses report to the Internal Revesidiary Edge or agreement corporanue Service certain cash transactions tions, and bankers' banks to invest and shipments of more than $10,000. in export trading companies, subject As mandated by the passage of to certain limitations and after Board the Anti-Drug Abuse Act of 1986, review. The purpose was to allow Board staff members worked with effective participation by bank holdthe other federal financial instituing companies in the financing and tions to develop regulations to ensure development of export trading comcompliance with the Bank Secrecy panies. On June 2, 1983, the Board Act. The regulations took effect adopted regulations to achieve the January 27, 1987. objectives set forth in the law: to facilitate the export of goods and In 1986 the Board also strengthservices produced in the United States ened its examination procedures to and to minimize potential adverse emphasize the provisions of the Bank effects on the subsidiary banks of the Secrecy Act that federal law enforcebank holding companies involved. In ment authorities consider to be crit- 1986 the Board acted affirmatively ical. Board staff members continue on the 2 notifications received for to serve as active participants on the the establishment of export trading Bank Secrecy Act interagency workcompanies. At year-end, 33 bank ing group headed by the Department holding companies had investments of the Treasury. in export trading companies. Securities Regulation Under the Securities Exchange Act Enforcement of Other Laws of 1934, the Board is responsible for and Regulations regulating credit in certain transactions involving the purchase or car- The preceding sections have disrying of securities. In fulfilling its cussed the Board's activities in carresponsibility under the act, the Board rying out its statutory responsibilities limits the amount of credit that may for the supervision of bank safety be provided by securities brokers and soundness and the regulation of and dealers (Regulation T), by banks the banking structure. This section (Regulation U), and by other lenders describes the enforcement of other (Regulation G). Regulation X exlaws, rules, and regulations. tends these credit limitations, or margin requirements, to certain bor- Bank Secrecy Act rowers and to certain credit exten- Through the examination process, sions, such as credit obtained from Digitized fotrh FeR AFSeEdRer al Reserve monitors whether foreign lenders by U.S. citizens. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 203 Brokers and dealers are examined the market activity of all over-thefor compliance with Regulation T by counter stocks to determine what the Securities and Exchange Com- stocks are subject to the Board's mission, the National Association of margin regulations. In 1986 the Board Securities Dealers, and the national published the resulting "List of Marsecurities exchanges. The three fed- ginable OTC Stocks" in February, eral bank supervisory agencies ex- May, August, and November. The amine banks under their respective November list consisted of 2,887 jursidictions for compliance with stocks. Regulation U. Other lenders are In January 1986 the Board adopted examined for compliance with Reg- an interpretive rule regarding the ulation G by the Board, the National margin requirements under Regula- Credit Union Administration, the tion G. The interpretation declares Farm Credit Administration, or the that debt securities issued by a shell Federal Home Loan Bank Board corporation set up to acquire and according to the jurisdiction in- hold the stock of a target company volved. At the end of 1986 there in a takeover attempt are presumed were 533 "G-lenders," of which 297 to be secured indirectly by the target were subject to the Board's supervi- stock and thus subject to the margin sion. Of these 297, 180 are subject restrictions of Regulation G. The to regular inspection by the Federal interpretation indicates that the pre- Reserve System. During the year, sumption would not apply to certain Federal Reserve examiners inspected transactions if the lenders could rely 52 G-lenders for compliance with the on assets other than the target stock Federal Reserve's margin require- as collateral or look to a guaranty of ments (these lenders are inspected the parent of the shell corporation on either a biennial or triennial basis, for repayment. according to the type of credit ex- Under section 8 of the Securities tended). Exchange Act, a nonmember domes- Regulations U and G in general tic or foreign bank may lend to impose credit limits on loans whose brokers or dealers posting registered purpose is the purchasing or carrying securities as collateral only if the of publicly held equity securities and bank has filed an agreement with the that are secured by such securities. Board that it will comply with all the Regulation T limits the amount of statutes, rules, and regulations applicredit that brokers and dealers may cable to member banks regarding extend when securities serve as col- credit on securities. During the year, lateral for credit that is used to the Board processed 17 such agreepurchase or carry securities. This ments. collateral must consist of stocks and In 1986 the Securities Regulation bonds traded on national securities Section of the Board's Division of exchanges, of certain over-the-counter Banking Supervision and Regulation (OTC) stocks that the Board desig- issued 43 interpretations of the marnates as having characteristics similar gin regulations. Those that presented to those of stocks listed on national sufficiently important or novel issues exchanges, or of bonds meeting cer- were published in the "Securities tain requirements. Credit Transactions Handbook," The Board's Division of Banking which is part of the Federal Reserve Supervision and Regulation monitors Regulatory Service. These interpre- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 Banking Supervision and Regulation Loans by State Member Banks to their Executive Officers, 1985-86 Range of Period Number Amount (dollars) interest rates charged (percent) October 1-December 31, 1985 1,111 23,869,607 6.25-21 January 1-March 31, 1986 1,199 21,566,130 1.0-21 April 1-June 30, 1986 1,356 23,509,393 6.0-21 July 1-September 30, 1986 1,410 26,715,716 6.5-30.53 tations serve as a guide to the margin simplified quarterly reports. The proregulations. posal would ease compliance with the regulation. Financial Disclosure by State Member Banks Loans to Executive Officers Under the Board's Regulation F, Under section 22(g) of the Federal state member banks must disclose Reserve Act, each state member certain information of interest to bank must include with each quarinvestors, including financial reports terly report of condition a report of and proxy statements, if they issue all extensions of credit made by the securities registered under the Secu- bank to its executive officers since rities Exchange Act of 1934. Board the date of the bank's previous report staff members review the informa- of condition. The accompanying table tion for compliance with the regula- summarizes these data for the last tion. At the end of 1986, 31 state quarter of 1985 and the first three member banks, most of which are of quarters of 1986. small or medium size, were registered with the Board under Regulation F. Federal Reserve Membership The disclosure rules of Regulation F are required by statute to be At the end of 1986, 5,995 banks substantially similar to those issued were members of the Federal Reby the Securities and Exchange Com- serve System, a decrease of 55 from mission. In 1986 a comprehensive the previous year. revision of Regulation F was under Member banks operated 28,456 consideration by the Board's staff. branches on December 31, 1986, a That revision would require banks net increase of 861 for the year. subject to Regulation F to use the Member banks accounted for 40 forms prescribed by the Securities percent of all commercial banks in and Exchange Commission. Small the United States and for 64 percent banks would have the option of filing of all commercial banking offices. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

205 Regulatory Simplification The Board of Governors established of the term was incorporated in the Regulatory Improvement Project Regulation D. Together, these in 1978 and reaffirmed its commit- changes removed the $150,000 limiment to regulatory improvement by tation on business savings accounts. creating a Regulatory Policy and The provisions of Regulation Q Planning Committee in 1986. The dealing with the advertising of interprogram was established to minimize est on deposits were not amended in the burdens imposed by regulation; final form in March; however, the to ensure that consideration is given Board has issued for comment in a to minimizing the economic impact separate rulemaking a consolidation of regulation on small business; to of the various provisions regarding see that interested parties have the advertising that will be included in opportunity to participate in the the final version of Regulation Q. design of proposed regulations and To promote equity of treatment to comment on them; and to ensure among financial institutions and to that regulations are written in simple promote consumer understanding, the and clear language. In addition to Board is attempting to develop admonitoring the creation of new reg- vertising provisions that will be ulations, the program periodically adopted by all the financial regulareviews all existing regulations for tory agencies. adherence to these objectives. Published interpretations of Regulation Q that are obsolete will be rescinded; viable interpretations of it Regulation Q will be revised in line with the The statutory authority to set interest simplification of that regulation. rate ceilings on time and savings deposits and to prescribe rules regarding early withdrawals from time Policy Regarding Risk on deposits expired on March 31, 1986. Large-Dollar Wire Transfer In anticipation of that date, the Systems Board of Governors in early 1986 revised and simplified its Regulation In December 1986 the Board issued Q, which governed the payment of for comment several refinements to interest on deposits. Following that its policy regarding large-dollar action, the major substantive provi- transfers. One of the proposals would sion of Regulation Q that remains, establish a de minimus cap for instias authorized by section 19(i) of the tutions that do not incur large or Federal Reserve Act, prohibits a frequent daylight overdrafts. This member bank from paying interest cap would be the lesser of 10 percent on a demand deposit. As part of the of capital or $500,000 and would be revision, the definition of "savings available to institutions that do not deposit" was deleted from Regula- undergo the self-assessment required tion Q, and an amended definition for establishing a positive limit or Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 Regulatory Simplification cap on the amount of daylight over- of 1982, bank holding companies are drafts that can be accumulated on prohibited from allowing their thrift Fedwire. subsidiaries and other affiliates to Under the Board's current policy, conduct joint marketing and sales a bank must submit a formal cap to operations; from cross-advertising the Federal Reserve for incurring through thrift subsidiaries the serdaylight overdrafts or else the Fed- vices and products offered by other eral Reserve imposes a limit of zero. affiliates; and from engaging in cer- This part of the policy has proved tain transactions, such as the transdifficult to administer. In any two- fer, purchase, sale, or loan of any week period, almost half of the 3,400 assets or liabilities between the thrift institutions incurring an overdraft institution and other affiliates of the have either not filed a cap or have bank holding company. filed a cap of zero. These 1,600 These limitations were developed institutions are mainly small and in the context of specific applications account for about 0.4 percent of all pending before the Board and after overdrafts. The managements of these informal public hearings and public institutions find either the self-eval- comment. uation or the absolute avoidance of The conditions were designed to overdrafts excessively burdensome, assure that the thrift institution conand many Reserve Banks have found tinued to be operated as a separate the resources required to monitor and independent institution engaged and counsel these institutions to be primarily in mortgage lending activiunusually high relative to the risks ties and did not operate in fact as a involved. The proposed de minimus bank in violation of the interstate cap is intended to alleviate these banking prohibitions of the Bank burdens and costs. Holding Company Act. The condi- In order to further reduce the tions were also designed to prevent burden on participating institutions, the acquiring bank holding company the Board amended its policy state- from obtaining an unfair competitive ment in December to provide that advantage over other banks and thrift depository institutions that perform institutions. a self-assessment need do so only In light of the deregulation of once each year rather than every six interest rate differentials, the inmonths as provided in the original creasing similarity in the powers of policy statement. banks and thrift institutions, and the spread of interstate deposit-taking in both the thrift and banking indus- Regulation Y tries, the Board believes that the In May 1986 the Board requested recent requests for relief from the comment on whether it should ease restrictions in Regulation Y present the conditions it imposes through an appropriate framework for re- Regulation Y on the acquisition of evaluating them. thrift institutions by bank holding In October 1986 the Federal Recompanies. Currently, under regula- serve Board expanded the list of tions implementing the Bank Hold- permissable nonbanking activities for ing Company Act and the Garn-St bank holding companies; it also elim 7 Germain Depository Institutions Act inated a 1972 limit on the premiums Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 207 that could be charged by bank hold- benefit. This may be inappropriate ing companies engaging in credit life at a time when the states have insurance underwriting. The require- become increasingly active in reviewment had stipulated that premiums ing and setting credit life insurance must be set on a sliding scale 2 to 5 rate ceilings. percent lower than the maximum allowed by the state where the company is located. In its decision, the Regulation K Board determined that this requirement put bank holding companies at In July the Board amended the an unfair disadvantage with respect portion of Regulation K (Internato competing insurance providers. tional Banking Activities) requiring During the past 14 years the un- that a banking organization apply to derwriting of credit life insurance has the Board when it proposes to invest remained the only permissible non- more than 10 percent of its capital banking activity for which the Board and surplus in a foreign organization. has imposed a requirement or con- After several years' experience with dition that effectively determines the these procedures, the Board has fee structure for the activity. This is found that the investments do not a matter of concern to the Board always raise issues that require Board because, under authorization of a consideration. The July amendment federal statute, credit insurance rate permits the bank to make an addiceilings are set by the individual tional investment after giving 45 states. Moreover, the rate reduction days' notice to the Board, a change requirement can give the appearance that will shorten the time that bankthat only lower rates than those ing organizations must wait before permitted by the states are in the making additional foreign investpublic interest or create a public ments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

209 Federal Reserve Banks Developments in the Pricing Check Collection of Federal Reserve Services Check operations of the Federal and in the Payments Mechanism Reserve Banks cost the System $547.9 In 1986 the Federal Reserve Banks million in 1986, including the cost of fully recovered their costs of provid- float and the PSAF. Check operaing priced services, as required by tions generated $572.5 million in the Monetary Control Act of 1980. revenue, for a surplus of $24.6 mil- The System as a whole recovered lion. The number of checks proc- 104.3 percent of its operating ex- essed by Federal Reserve Banks rose penses and imputed costs, compared 5 percent in 1986, to 16.2 billion. with 105.6 percent in 1985. Table 10, In May the Board adopted amendin the Statistical Tables section of ments to Regulation J, which governs this REPORT, presents revenue and check collection and wire transfers. expenses by major category of ser- One change permits the Reserve vice for 1986 and 1985. Banks to collect checks drawn on Revenue at the Reserve Banks banks located in foreign countries. from all priced services totaled $742.0 This service will be limited, and the million and costs were $711.7 mil- checks will be collected through corlion. These figures include the in- respondent banks. The other amendcome and expenses related to clear- ments relate primarily to a Reserve ing balances, the value of priced Bank's liabilities regarding check colfloat, and the PSAF (the private lection and funds transfers. sector adjustment factor—the taxes In July the Board requested public and costs of capital that the System comment on proposals to make perwould have incurred if it were a manent the two-tiered pricing strucprivate firm). The Federal Reserve ture being tested at the head offices System had a net revenue of $30.3 of the Federal Reserve Banks of million from priced services. Minneapolis and Kansas City and to In March 1986 the Board imple- establish criteria for determining the mented a policy to reduce risk on conditions under which a tiered fee networks used to transfer large-dol- structure would be extended to other lar payments. Proposals to further Federal Reserve offices. A tiered reduce risk on funds transfer sys- pricing structure can reflect the costs tems, on the book-entry securities of check processing more accurately system, and on automated clearing- because it permits setting fees for house systems, were published in sending institutions according to the December. See the chapter in this costs associated with the presentment REPORT on banking supervision and point. The Board approved the proregulation for a discussion of the posals in November. Board's policy and proposals on re- The Federal Reserve System in ducing and controlling risks in the 1986 continued its efforts to improve payments system. the handling of return items (checks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 Federal Reserve Banks not honored by the institution on tablish a float factor that would be which they were drawn). In one applied to the value of ACH debit initiative, the Federal Reserve and transactions processed at night. No the financial industry conducted a final action was taken in 1986 on this test in which they learned that the proposal. forward collection process had the potential to speed the return of many items to the institution of first de- Wire Transfer of Funds posit. The Federal Reserve and the and Net Settlement Service financial industry will continue to The number of funds transfers over pursue this initiative. Fedwire grew 10.6 percent in 1986, In November the Board issued for for a total of 49.9 million transacpublic comment a proposal to protions. This service and the net settlevide a redeposit service for lowment service incurred costs of $79.6 dollar checks that are returned bemillion and earned $82.7 million, for cause of insufficient or uncollected a net surplus of $3.1 million. funds. Under this service, which is In June the Board published for being tested in the St. Louis, Atpublic comment a proposal to require lanta, and Cleveland Districts, Rethat information in third-party Fedserve Banks would intercept diswire messages be in a standard forhonored checks and redeposit them mat to facilitate the automated hanon behalf of the collecting institution. dling of transfers. In November, the This practice would speed processing Board approved a 25-cent surcharge times and reduce costs. No final to be imposed beginning April 1, action was taken in 1986 on this 1988, for Fedwire funds transfers not proposal. conforming to the format; it set April 3, 1989, as the date on which use of Automated Clearinghouse the standard format will be manda- In 1986, for the first time, the prices tory. of automated clearinghouse (ACH) In March the Board approved a services were established to recover modification to the interim terms for 100 percent of costs. Previously, an treating ACH net settlement entries incentive pricing program had been for credit transactions. Pending in effect. The cost of providing com- adoption of policies to address the mercial ACH services in 1986 was risk involved in these transactions, $35.3 million; revenue was $36.5 net settlement entries for ACH credit million. The System processed 363 transactions will be treated as final million commercial transactions, 28 at 6:00 p.m. Eastern time on the percent more than in 1985. settlement date. Net settlement en- In September the Board issued for tries for ACH debit transactions are public comment a proposal for re- treated as provisional until the busicovering the cost of float generated ness day following the settlement by ACH transactions processed dur- date. ing the night cycle and for a corre- Net settlement services based on sponding reduction of the per-item next-day finality were approved for surcharge on such transactions. Spe- one network of automated teller cifically, the Board proposed to es- machines in 1986. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 211 Coin and Currency Services public comment a list of factors to be considered when the Reserve In its coin and currency operations Banks propose to consolidate in one the Federal Reserve continued to District the priced services offered focus on controls, on efficiency in by one or more other Districts. No processing currency, and on the action was taken on this proposal in maintenance of high quality in cir- 1986. culating currency. Four Federal Reserve Districts provided transportation of cash in Book-Entry Securities 1986, and five Districts provided wrapped coins for depository insti- The Federal Reserve provides booktutions. Two other priced services— entry securities services for the special packaging and more frequent Treasury and for certain federally access—were approved by the Board sponsored agencies, such as the Fedin December. These services are now eral National Mortgage Association covered by the uniform standards for and the Federal Home Loan Mortcash services. In addition, the System gage Corporation. Since October 1985 tested and evaluated prototype sec- the Treasury has established the fees, ond-generation equipment intended and the Reserve Banks have charged to improve the processing of cur- institutions for these transfers. The rency. Treasury component of the book- The Federal Reserve continued to entry service incurred costs, excludwork with the Treasury to develop ing the PSAF, of $11.9 million in measures to deter the counterfeiting 1986. For the year, the Federal of U.S. currency. Reserve processed 6.0 million transfers of Treasury securities, 98 percent of which were on line. Book-entry Definitive Securities services for federal agency securities and Noncash Collection Services incurred costs, including the PSAF, The System received $24 million in of $7.9 million and earned revenue revenue for definitive safekeeping of $9.4 million in 1986. The Federal and noncash collection services in Reserve processed 1.8 million such 1986; the total cost of these services, transfers during the year, 98 percent including the PSAF, was $24.4 mil- of which were on line. lion. The number of definitive secu- In July 1986 the Federal Reserve rities issues and deposits increased 4 implemented the Treasury Direct percent in 1986 to 165,000. The book-entry securities system. This number of items for noncash collec- system, which was developed on tion decreased 7 percent to 4.3 mil- behalf of the Treasury, is used prilion. marily by individual investors. Treas- In November the Board approved ury bonds and notes were converted the consolidation at the Federal Re- to Treasury Direct in 1986; Treasury serve Bank of Minneapolis of the bills will be phased into the system collections involving municipal bonds in 1987. and coupons that were being carried Book-entry safekeeping and transout by the Federal Reserve Bank of fer of mortgage-backed securities is- San Francisco. It also published for sued by federal agencies were ex- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 Federal Reserve Banks panded from the Federal Reserve assess conformance with the policies Bank of New York to all Districts issued by the Federal Open Market during 1986. Committee, the Division annually audits the accounts and holdings of Float the Federal Reserve System Open Market Account at the Federal Re- Federal Reserve float increased to a serve Bank of New York and the daily average of $446 million in 1986, foreign currency operations concompared with $440 million in 1985. ducted by that Bank. The Division The costs of all Federal Reserve float furnishes copies of these reports to associated with priced services are the Committee. The examination recovered each year. procedures used by the Division are In May the Board approved a reviewed each year by a private firm standard holiday schedule to be folof certified public accountants. lowed by the Federal Reserve Banks, effective January 1, 1987. At that time, it also adopted proposals to Income and Expenses modify the procedures that the Federal Reserve Banks use to recover The accompanying table summarizes the cost of float generated by ACH the income, expenses, and distribudebit and check transactions associ- tion of net earnings of the Federal ated with nonstandard holiday and Reserve Banks for 1986 and 1985. midweek closings. The allocation of Income was $17,465 million in check float, which was adopted as an 1986, $667 million less than in 1985, amendment to Regulation J, is effec- reflecting the decrease in interest tive January 1, 1987. The modifica- rates on securities. Total expenses tions to the procedures for recover- were $1,254 million ($1,049 million ing the cost of ACH float take effect in operating expenses, $108 million on April 1, 1987. in earnings credits granted to depository institutions, and $97 million in In conjunction with proposals isassessment for expenditures by the sued in December to reduce risk in Board of Governors). The cost of the ACH system, the Board procurrency was $181 million. Income posed procedures to recover the cost from financial services was $628 milof float generated by ACH credit lion. transactions. No final action was The profit-and-loss account showed taken in 1986 on this proposal. a net addition of $1,976 million, due primarily to a $1,971 million increase in the value of assets denominated Examinations in foreign currencies and revalued at The Board's Division of Federal market exchange rates. Statutory Reserve Bank Operations examines dividends to member banks totaled the 12 Reserve Banks and their 25 $110 million, $7 million more than branches each year, as required by in 1985. The rise reflected an insection 21 of the Federal Reserve crease in the capital and surplus of Act. The results of the audits are member banks and a consequent given to the management and direc- increase in the paid-in capital stock tors of the respective Banks and to of the Reserve Banks. the Board of Governors. Also, to Payments to the U.S. Treasury in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 213 Income. Expenses, and Distribution of Net Earnings of Federal Re* rve Banks. 1986 and 1985 Thousands of dollars Item 1986 1985 Current income 17,464,528 18,131,983 Current expenses 1,156,868 1,127,744 Operating expenses 1,049,159 1,022,527 Earnings credits granted 107,709 105,217 Current net income 16,307,661 17,004,238 Net addition to (deduction from) current net income 1,975,893 1,301,624 Assessments by the Board of Governors 278,118 251,116 For expenditures of Board 97,338 77,378 For cost of currency 180,780 173,739 Net income before payments to U.S. Treasury 18,005,437 18,054,746 Dividends paid 109,588 103,029 Payments to U.S. Treasury (interest on Federal Reserve notes) 17,803,895 17,796,464 Transferred to surplus 91,954 155,253 Details may not add to totals because of rounding. the form of interest on Federal Re- Federal Reserve Bank Premises serve notes totaled $17,804 million, During 1986 the Board of Governors compared with $17,796 million in authorized the construction of an 1985. This sum consists of all net addition to the Federal Reserve Bank income after dividends and the of Atlanta and a new building for amount necessary to bring the surthe Charlotte Branch in North Carplus of the Banks to the level of olina. With Board approval the their paid-in capital. Helena Branch acquired two prop- In the Statistical Tables section of erties adjacent to the existing buildthis REPORT, table 7 provides a ing for future expansion. Table 6, in summary statement of the income the Statistical Tables section of this and expenses of the Federal Reserve REPORT, shows the cost and book System for 1982-86; table 8 details values of premises owned or occuincome and expenses of each Federal pied by the Federal Reserve Banks Reserve Bank for 1986, and table 9 and Branches and of real estate shows a condensed statement for acquired for future banking-house each Bank for 1914-86. A detailed purposes. account of the assessments and expenditures of the Board of Governors appears in the next section, Financial Statements. Holdings of Securities and Loans In early 1986 the Board produced a new document, Annual Report: The accompanying table presents Budget Review, which consolidated holdings, earnings, and average inpublic information available from terest rates on securities and loans other sources in order to provide a of the Federal Reserve Banks for the single, comprehensive view of the years 1984-86. System's 1986 calendar year budgets Average daily holdings of securiand its budgetary processes. That ties and loans during 1986 were publication has been produced again $193,354 million, an increase of to cover the budgets of the Board $16,666 million over 1985. Holdings and the Banks for 1987. of U.S. government securities in- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 Federal Reserve Banks Securities and Loans of Federal Reserve Banks, 1984-86 Millions of dollars, except as noted U.S. Item and year Total1 government Loans securities2 Average daily holdings2 1984 165 002 161 247 3 726 1985 176,688 175,359 1,329 1986 193,354 192,514 840 Earnings 1984 17,080 16,688 389 1985 16,954 16,843 111 1986 16 199 16 142 57 Average interest rate (percent) 1984 10.35 10.35 10.44 1985 9.60 9.60 8.38 1986 8.38 8.38 6.84 1. Includes acceptances. 3. Based on holdings at opening of business. 2. U.S. Treasury securities and obligations of federal agencies. creased $17,155 million, and holdings Volume of Operations of loans decreased $489 million. From 1985 to 1986 the average Table 11, in the Statistical Tables rate of interest on all types of hold- section of this REPORT, shows the ings decreased—from 9.60 percent volume of operations in the principal to 8.38 percent on U.S. government departments of the Federal Reserve securities and from 8.38 percent to Banks for the years 1983-86. 6.84 percent on loans. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

215 Board of Governors Financial Statements The financial statements of the Board examined by Price Waterhouse, infor the years 1986 and 1985 were dependent 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 and 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, 1986 and 1985, 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 consistently applied. 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 18, 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 Financial Statements BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEETS As of December 31 1986 1985 ASSETS CURRENT ASSETS Cash $ 8,646,210 $ 8,144,767 Accounts receivable 2,045,873 1,542,680 Stockroom and cafeteria inventories, at cost 285,843 290,475 Prepaid expenses and other assets 627,054 151,851 Total current assets 11,604,980 10,129,773 PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3) 64,827,375 56,176,157 OTHER ASSETS 1,708,506 — Total assets $78,140,861 $66,305,930 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable $ 4,655,794 $ 6,508,435 Accrued payroll and related taxes 2,861,053 2,611,001 Accrued annual leave 3,896,398 3,807,048 Other liabilities 478,716 440,831 Total current liabilities 11,891,961 13,367,315 COMMITMENTS AND CONTINGENCIES (Note 6) FUND BALANCE 66,248,900 52,938,615 Total liabilities and fund balance $78,140,861 $66,305,930 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 217 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31 1986 1985 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $ 97,337,500 $ 77,377,700 Other revenues (Note 4) 3,169,567 2,531,681 Total operating revenues 100,507,067 79,909,381 BOARD OPERATING EXPENSES Salaries 53,259,376 53,179,014 Retirement and insurance contributions 5,401,797 6,052,103 Depreciation and losses (gains) on disposals 6,156,450 4,954,614 Contractual services and professional fees 4,085,161 2,722,449 Postage and supplies 3,490,423 3,341,459 Utilities 2,970,714 2,874,688 Equipment and facility rentals 2,598,055 2,943,864 Travel 2,537,670 2,230,242 Repairs and maintenance 2,083,894 1,928,506 Printing and binding 2,022,535 2,000,230 Other (Note 4) 2,150,807 2,044,414 Total operating expenses 86,756,882 84,271,583 BOARD OPERATING REVENUES OVER (UNDER) EXPENSES 13,750,185 (4,362,202) ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 180,779,673 173,738,745 Expenses for currency printing, issuance, retirement, shipping and research costs (Note 5) 181,219,573 173,298,845 CURRENCY ASSESSMENTS (UNDER) OVER EXPENSES (439,900) 439,900 TOTAL REVENUES OVER (UNDER) EXPENSES 13,310,285 (3,922,302) FUND BALANCE, Beginning of year 52,938,615 56,860,917 FUND BALANCE, End of year $ 66,248,900 $ 52,938,615 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 Financial Statements BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF CHANGES IN FINANCIAL POSITION For the years ended December 31 1986 1985 SOURCES OF CASH Board operations Net revenues over (under) expenses $13,310,285 $(3,922,302) Add (deduct) items not affecting cash Depreciation and losses (gains) on disposals 6,156,450 4,954,614 Accrued annual leave 89,350 142,740 (Increase) decrease in accounts receivable, inventories, and prepaid expenses and other assets (973,764) 77,752 (Decrease) increase in accounts payable, accrued payroll and related taxes, and other liabilities (1,564,704) 1,058,996 Funds provided by operations 17,017,617 2,311,800 Proceeds from disposals of furniture and equipment 2,277,264 3,628 Total sources 19,294,881 2,315,428 USES OF CASH Capital expenditures for Buildings 303,557 399,094 Furniture and equipment : 16,781,375 4,069,299 Increase in other non-current assets 1,708,506 — Total uses 18,793,438 4,468,393 INCREASE (DECREASE) IN CASH 501,443 (2,152,965) CASH BALANCE, Beginning of year 8,144,767 10,297,732 CASH BALANCE, End of year $ 8,646,210 $ 8,144,767 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 219 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS plan benefits for the Federal Reserve Board Plan, including those arising from COLA supplements, were DECEMBER 31, 1986 AND 1985 as follows: As of January 1 (1) SIGNIFICANT ACCOUNTING POLICIES Board Operating Revenues and Expenses—Assess- 1986 1985 ments made on the Federal Reserve Banks for Board operating expenses are calculated based on expected Actuarial present value cash needs. These assessments, other operating reve- of accumulated nues, and operating expenses are recorded on the ac- plan benefits crual basis of accounting. Vested $65,003,000 $57,167,000 Issuance and Redemption of Federal Reserve Notes— Nonvested 4,625,000 3,691,000 The Board incurs expenses and assesses the Federal $69,628,000 $60,858,000 Reserve Banks for the cost of printing, issuing, shipping and retiring Federal Reserve Notes. These assessments and expenses are separately reported in the The assumed rate of return used in determining the statements of revenues and expenses because they are present value of accumulated plan benefits was 8.5% not Board operating transactions. in 1986 and 9.5% in 1985. Property, Buildings and Equipment—The Board's As of January 1,1986 and 1985, net assets available property, buildings and equipment are stated at cost for plan benefits were approximately $165 million and less accumulated depreciation. Depreciation is cal- $135 million, respectively. culated on a straight-line basis over the estimated As of January 1, 1987, the Board will implement useful lives of the assets, which range from 3 to 10 Statement of Financial Accounting Standards No. 87, years for furniture and equipment and from 10 to 50 Employers Pension Accounting. This implementation years for building equipment and structures. will require changes in the accounting principles for Other Assets—The Board has made prepayments the Board Plan and the Bank Plan. Because of the for computer equipment to be received over the next overfunded status of the plans, it is presently estitwo years. In addition, maintenance on this and other mated that implementation of FAS 87 will result in a computer equipment received during 1986 has been reduction of operating expense (pension income) and prepaid through January 1989. Other Assets includes the recording of prepaid pension cost. the equipment prepayments and the portion of the Employees of the Board may also participate in the prepaid maintenance services which will be received Federal Reserve System's Thrift Plan. Under the Thrift during 1988 and 1989. As the equipment is received Plan, members may contribute up to a fixed perand maintenance service provided the furniture and centage of their salary. Board contributions are based equipment account and the appropriate expense ac- upon a fixed percentage of each member's basic concount will be charged accordingly. tribution and were $1,337,000 in 1986 and $877,000 Contingency Processing Center—The Board oper- in 1985. ates on behalf of the Federal Reserve System a con- The Board also provides certain health care bentingency processing center to handle data processing efits for retired employees. The cost of providing the requirements during emergency situations. The Board benefits is recognized by expensing the insurance prerecovers from the Federal Reserve Banks a propor- miums which were $98,300 in 1986 and $54,200 in tionate amount of the operating expenses of the cen- 1985. ter in the form of fees. (3) PROPERTY, BUILDINGS AND EQUIPMENT The following is a summary of the components of (2) RETIREMENT BENEFITS the Board's fixed assets, at cost, net of accumulated Substantially all employees of the Board participate depreciation. in either the Retirement Plan for Employees of the Federal Reserve Board (Board Plan), the Retirement As of December 31 Plan for Employees of the Federal Reserve System 1986 1985 (Bank Plan) or the Civil Service Plan. The Board Plan, the Bank Plan and the Civil Service Plan are a Land and contributory defined benefit plan, a non-contributory improvements $ 1,301,314 $ 1,301,314 defined benefit plan, and a defined contribution plan, Buildings 62,062,311 61,851,962 respectively. Furniture and Board contributions to the Board Plan and the Bank equipment 31,955,505 24,799,885 Plan are actuarially determined and funded in the 95,319,130 87,953,161 current period. Board contributions to the Civil Serv- Less accumulated ice Plan directly match employee contributions. The depreciation 30,491,755 31,777,004 Board contributions to the retirement plans totaled Total property, $719,000 in 1986 and $1,960,000 in 1985. buildings and As of January 1, 1986 and 1985 (the dates of the equipment ... $64,827,375 Digitized form FoRst ArSecEeRnt actuarial valuations), the accumulated http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 Financial Statements (4) OTHER REVENUES AND OTHER EXPENSES The Board's programs were research and development efforts and, accordingly, all costs were ex- The following are summaries of the components of pensed as incurred. Board costs associated with this Other Revenues and Other Expenses. program were $728,964 and $6,734,590 for 1986 and 1985, respectively, and are included in currency ex- As of December 31 penses. Certain equipment was sold for $750,000 in 1986 1985 1986 and $451,400 in 1985. The sale proceeds were credited to currency costs. Other Revenues Contingency (6) CONTINGENCIES Processing The major research contract associated with the Center fees $1,543,761 $ 981,573 Sale of counterfeit deterrence program discussed in Note 5 publications 1,124,482 1,104,154 expired on January 31,1985. The contractor has filed a lawsuit for contract termination costs of approxi- Miscellaneous 501,324 445,954 mately $4 million. Board counsel believes that the Total other contract properly expired, the claim for termination revenues $3,169,567 $2^531,681 costs is without merit, and additional costs, if any, to Other Expenses the Board will not be material. Subsidies and The Board has been named as a defendant in varcontributions .. $ 703,213 $ 794,611 ious litigation involving challenges to, or appeals from, Tuition, registrations actions or proposed actions of the Board pursuant to and membership statutory requirement or authorization. Such lawsuits fees 587,670 495,694 generally seek injunctive or declaratory relief against Cafeteria operations, the Board rather than monetary awards. It is the opinnet 520,450 531,411 ion of Board counsel that such lawsuits involving Miscellaneous 339,474 222,698 monetary awards do not represent a material liability Total other to the Board. expenses $2^150,807 $2,044,414 (7) FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL (5) ADVANCED COUNTERFEIT DETERRENCE The Board is one of the five member agencies of RESEARCH the Federal Financial Institutions Examination Coun- During the period 1983 through 1986, the Board cil (the "Council"). During 1986 and 1985, the Board sponsored programs to develop technology to deter paid $137,000 and $131,000, respectively, in assesscounterfeiting of U.S. currency and to detect coun- ments for operating expenses of the Council. These terfeit currency in circulation. In connection with this amounts are included in subsidies and contributions program, the Board: 1) sponsored basic research into for 1986 and 1985. applying a deterrent device to currency; 2) sponsored The Board serves as custodian for the Council's the prototyping of production equipment and proc- cash account. This cash is not reflected in the accomesses; 3) purchased certain equipment required for a panying financial statements. It also processes accontractor to make test production runs; 4) purchased counting transactions, including payroll for most of application machines for use in the production of cur- the Council employees, and performs other adminrency; and 5) sponsored research into methods for istrative services for which the Board is reimbursed detecting counterfeit currency during sorting proc- by the Council. esses by the Federal Reserve Banks. The Board's The Board is not reimbursed for the costs of perparticipation in this program was substantially com- sonnel who serve on the Council and on the various plete by the end of 1985. task 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

222 Tables 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31,1986l Thousands of dollars ASSETS Gold certificate account 11,083,947 Special drawing rights certificate account 5,018,000 Coin 485,827 Loans and securities Loans to depository institutions 1,564,797 Federal agency obligations Bought outright 7,829,312 Held under repurchase agreement 2,313,535 U.S. Treasury securities Bought outright Bills 103,774,920 Notes 68,125,600 Bonds 25,723,814 Total bought outright 197,624,334 Held under repurchase agreement 13,691,465 Total securities 211,315,799 Total loans and securities 223,023,443 Items in process of collection Transit items 8,063,084 Other items in process of collection 2,211,741 Total items in process of collection 10,274,825 Bank premises Land 105,638 Buildings (including vaults) 452,363 Building machinery and equipment 157,448 Construction account 127,236 Total bank premises 737,047 Less depreciation allowance 182,516 554,531 Bank premises, net ' 660,169 Other assets Furniture and equipment 515,885 Less depreciation 249,460 Total furniture and equipment, net 266,425 Denominated in foreign currencies2 9,474,797 Interest accrued 2,601,442 Premium on securities 1,206,675 Due from Federal Deposit Insurance Corporation 2,904,299 Overdrafts 190,096 Prepaid expenses 26,159 Suspense account 17,483 Real estate acquired for banking-house purposes 6,368 Other 126,488 Total other assets 16,820,232 Total assets 267,366,443 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 223 — Continued LIABILITIES Federal Reserve notes Outstanding (issued to Federal Reserve Banks) 231,612,805 Less held by Federal Reserve Banks 36,252,042 Total Federal Reserve notes, net 195,360,763 Deposits Depository institutions 48,107,361 U.S. Treasury, general account 7,587,759 Foreign, official accounts 286,709 Other deposits Officers' and certified checks 54,673 International organizations 198,757 Other3 669,890 Total other deposits 923,320 Deferred credit items 9,012,278 Other liabilities Discount on securities 2,247,837 Sundry items payable 49,437 Suspense account 30,228 All other 14,121 Total other liabilities 2,341,623 Total liabilities 263,619,813 CAPITAL ACCOUNTS Capital paid in 1,873,315 Surplus 1,873,315 Other capital accounts4 0 Total liabilities and capital accounts 267,366,443 1. Amounts in boldface type indicate items in the 3. In closing out the other capital accounts at year- Board's weekly statement of condition of the Federal end, the Reserve Bank earnings that are payable to Reserve Banks. the Treasury are included in this account pending 2. Of this amount $3,028.1 million was invested in payment. securities issued by foreign governments, and the bal- 4. During the year, includes undistributed net inance was invested with foreign central banks and the come, which is closed out on Dec. 31; see table 8. Bank for International Settlements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 Tables 2. Statement of Condition of Each Federal Reserve Bank, December 31,1986 and 1985 Millions of dollars Total Boston Item 1986 1985 1986 1985 ASSETS Gold certificate account 11,084 11,090 703 658 Special drawing rights certificate account 5,018 4,718 314 281 Coin 485 487 26 26 Loans To depository institutions 1,565 3,060 43 24 Other 0 0 0 0 Acceptances held under repurchase agreements .. Federal agency obligations Bought outright 7,829 8,227 464 481 Held under repurchase agreements 2,314 1,694 0 0 U.S. Treasury securities Bought outright1 197,625 177,798 11,702 10,386 Held under repurchase agreements 13,691 3,529 0 0 Total loans and securities 223,024 194,308 12,209 10,891 Items in process of collection 10,273 11,667 621 529 Bank premises 661 607 92 93 Other assets Denominated in foreign currencies2 9,475 7,016 284 196 All other 7,345 7,679 209 201 Interdistrict Settlement Account 0 0 +1,444 + 449 Total assets 267,365 237,572 15,902 13,324 LIABILITIES Federal Reserve notes 195,360 181,450 12,260 11,349 Deposits Depository institutions 48,107 28,631 2,870 1,178 U.S. Treasury, general account 7,588 9,351 0 0 Foreign, official accounts 287 480 5 4 Other 923 1,041 21 36 Total deposits 56,905 39,503 2,896 1,218 Deferred credit items 9,012 10,679 497 521 2,342 2,378 127 130 Other liabilities and accrued dividends3 63,619 234,010 15,780 13,218 Total liabilities CAPITAL ACCOUNTS 1,873 1,781 61 53 Capital paid in 1,873 1,781 61 53 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 267,365 237,572 15,902 13,324 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 231,603 208,427 14,393 13,504 LESS: HeldbyBank 36,243 26,977 2,133 2,155 Federal Reserve notes, net 195,360 181,450 12,260 11,349 Collateral for Federal Reserve notes Gold certificate account 11,084 11,090 Special drawing rights certificate account 5,018 4,718 Other eligible assets 0 0 U.S. Treasury and federal agency securities 179,258 165,642 Digitized foTro FtaRl cAoSllaEtRer al 195,360 181,450 http://fraser.stlouisfed.org/ Federal ReseFrovr en oBteasn ske eo efn Sd to. fL toabulies.

Tables 225 2.- ('ontinued New York Philadelphia Cleveland Richmond 1986 1985 1986 1985 1986 1985 1986 1985 3,146 3,277 431 483 650 635 959 969 1,489 1,354 162 195 314 270 461 426 14 16 20 23 33 33 81 88 2,060 178 155 206 153 231 312 134 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,539 2,744 251 288 460 481 673 726 2,314 1,694 0 0 0 0 0 0 64,079 59,305 6,328 6,226 11,605 10,394 16,985 15,682 13,691 3,529 0 0 0 0 0 0 82,757 69,332 6,757 6,669 12,271 11,028 17,889 16,720 1,311 1,338 595 533 375 432 701 682 32 31 47 48 32 28 100 101 2,341 1,712 436 344 569 449 483 344 2,038 1,521 115 128 203 212 280 365 -5,576 -3,210 -466 -651 + 247 + 215 -158 -All 87,552 75,371 8,097 7,772 14,694 13,302 20,796 19,278 61,693 53,848 5,513 5,870 12,482 11,341 17,150 16,656 14,639 8,153 1,945 1,136 1,528 1,126 2,645 1,584 7,588 9,351 0 0 0 0 0 0 174 367 7 7 9 10 8 7 516 495 8 28 27 43 45 69 22,917 18,366 1,960 1,171 1,564 1,179 2,698 1,660 1,158 1,486 381 485 298 434 564 584 852 793 71 80 128 134 182 196 86,620 74,493 7,925 7,606 14,472 13,088 20,594 19,096 466 439 86 83 112 107 101 91 466 439 86 83 112 107 101 91 0 0 0 0 0 0 0 0 87,552 75,371 8,097 7,772 14,694 13,302 20,796 19,278 65,671 57,138 7,908 7,999 13,896 12,543 19,955 18,176 4,068 3,290 2,395 2,129 1,414 1,202 2,805 1,520 61,693 53,848 5,513 5,870 12,482 11,341 17,150 16,656 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 Tables 2. Statement of Condition of Each Federal Reserve Bank, December 31,1986 and 1985—Continued Millions of dollars Atlanta Chicago Item 1986 1985 1986 1985 ASSETS Gold certificate account 507 413 • 1,394 1,451 Special drawing rights certificate account 203 192 656 620 Coin 47 53 29 29 Loans To depository institutions 73 38 89 32 Other 0 0 0 0 Acceptances held under repurchase agreements 0 0 ,0 0 Federal agency obligations Bought outright 312 252 873 906 Hela under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright1 7,885 5,446 22,040 19,588 Held under repurchase agreements 0 0 0 0 Total loans and securities 8,270 5,736 23,002 20,526 Items in process of collection 815 909 1,013 958 Bank premises 51 48 43 22 Other assets Denominated in foreign currencies2 777 582 1,279 982 Allother 158 220 3,319 3,659 Interdistrict Settlement Account +1,489 + 3,476 + 2,975 -263 Total assets 12,317 11,629 33,710 27,984 LIABILITIES Federal Reserve notes 7,557 7,341 27,064 23,724 Deposits Depository institutions 3,430 2,893 5,008 2,545 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 12 12 20 21 Other 28 31 103 109 Total deposits 3,470 2,936 5,131 2,675 Deferred credit items 867 914 752 849 87 144 261 254 Other liabilities and accrued dividends3 11,981 11,335 33,208 27,502 Total liabilities CAPITAL ACCOUNTS 168 147 251 241 Capital paid in 168 147 251 241 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 12,317 11,629 33,710 27,984 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 12,545 10,558 29,158 25,553 LESS: Held by Bank 4,988 3,217 2,094 1,829 Federal Reserve notes, net 7,557 7,341 27,064 23,724 1. Includes securities loaned—fully guaranteed by 3. Includes exchange-translation account reflecting U.S. Treasury securities pledged with Federal Reserve the monthly revaluation at market exchange rates of Banks—and excludes securities sold and scheduled to foreign-exchange commitments. be bought back under matched sale-purchase trans- 4. Includes special investment account at the Fedactions. eral Reserve Bank of Chicago in Treasury bills matur- 2. Valued monthly at market exchange rates. ing within 90 days. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 227 onli;Hied 2.--•("• St. Louis Minneapolis Kansas City Dallas SanFrancisco 1986 1985 1986 1985 1986 1985 1986 1985 1986 1985 366 357 168 156 598 617 692 713 1,470 1,361 160 157 66 63 216 263 307 307 670 590 26 26 20 22 43 48 40 39 106 84 37 15 206 3 152 207 195 19 21 42 0 0 0 0 0 0 0 0 0 0 230 239 113 108 321 367 501 532 1,092 1,103 0 0 0 0 0 0 0 0 0 0 5,816 5,162 2,856 2,343 8,118 7,930 12,655 11,492 27,556 23,844 0 0 0 0 0 0 0 0 0 6,083 5,416 3,175 2,454 8,591 8,504 13,351 12,043 28,669 24,989 568 828 492 654 1,527 1,840 710 1,358 1,545 1,606 20 18 24 25 46 46 20 19 154 128 284 197 313 232 426 316 786 561 1,497 1,101 104 114 60 92 162 156 214 540 483 471 -1 + 487 + 78 -39 -106 -769 -80 -612 + 154 + 1,334 7,610 7,600 4,396 3,659 11,503 11,021 16,040 14,968 34,748 31,664 5,889 5,796 2,838 2,391 8,293 7,823 11,250 11,100 23,371 24,211 1,021 896 884 471 1,425 1,055 3,675 2,615 9,037 4,979 0 0 0 0 0 0 0 0 0 0 4 4 5 5 7 7 12 12 24 24 12 21 12 13 28 37 41 51 82 108 1,037 921 901 489 1,460 1,099 3,728 2,678 9,143 5,111 504 709 495 630 1,495 1,837 610 751 1,391 1,479 64 66 40 33 93 102 136 143 301 303 7,494 7,492 4,274 3,543 11,341 10,861 15,724 14,672 34,206 31,104 58 54 61 58 81 58 54 61 58 81 0 0 0 0 0 7,610 7,600 4,396 3,659 11,503 7,467 7,091 3,383 2,999 11,665 1,578 1,295 545 608 3,372 5,889 5,796 2,838 2,391 8,293 oooo ooo 158 148 271 280 158 148 271 280 0 0 0 0 11,021 16,040 14,968 34,748 31,664 11,100 14,236 13,043 31,236 28,723 3,277 2,986 1,943 7,865 4,512 7,823 11,250 11,100 23,371 24,211 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 Tables 3. Federal Reserve Open Market Transactions. 1986' Millions of dollars Type of transaction Jan. Feb. Mar. I Apr. U.S. TREASURY SECURITIES Outright transactions (excluding matched transactions) Treasury bills Gross purchases 286 0 396 2,988 Gross sales 225 2,277 0 0 Exchange 0 0 0 0 Redemptions 0 1,000 0 0 Others within 1 year Gross, purchases 0 0 0 0 Gross sales 0 0 0 0 Maturity shift 725 4,776 1,152 447 Exchange -596 -2,148 -1,458 -1,129 Redemptions 0 0 0 0 1 to 5 years Gross purchases 0 0 0 0 Gross sales 0 0 0 0 Maturity shift -703 -4,776 -1,152 -447 Exchange 596 1,548 1,458 1,134 5 to 10 years Gross purchases 0 0 0 Gross sales 0 0 0 Maturity shift -22 0 -5 Exchange 0 350 0 More than 10 years Gross purchases 0 Gross sales 0 Maturity shift 0 Exchange 250 All maturities Gross purchases 286 0 396 2,988 Gross sales 225 2,277 0 0 Redemptions 0 1,000 0 0 Matched transations Gross sales 63,109 90,459 88,917 109,253 Gross purchases 61,156 94,368 88,604 103,957 Repurchase agreements1 Gross purchases 24,257 0 6,748 21,156 Gross sales 24,699 3,087 6,748 13,634 Net change in U.S. Treasury securities -2,335 -2,456 83 5,214 FEDERAL AGENCY OBLIGATIONS Outright transactions Gross purchases Gross sales Redemptions Repurchase agreements2 Gross purchases Gross sales Net change in agency obligations Total net change in System Open Market Account ... *Less than $500,000 in absolute value. 1. Sales, redemptions, and negative figures reduce holdings of the System Open Market Account; all other figures increase such holdings. Details may not add to totals because of rounding. ooo 5,384 6,454 1,070 3,405 ooo 0 623 -663 -3,119 ooo 1,821 1,821 0 83 ooo 3,387 1,955 1,432 6,647 2. In July 1984 the Open Market Trading Desk discontinued accepting bankers acceptances in repurchase agreements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 229 3. -Continued May June July Aug. Sept. Oct. Nov. Dec. Total 3,196 0 0 0 0 0 1,847 -1,819 0 0 0 -1,532 1,019 0 0 -315 500 oooo 1,402 867 2,940 861 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,152 579 1,715 1,053 -1,957 -1,253 -4,087 -1,892 0 0 0 0 * 0 0 0 0 0 0 0 0 -1,152 -386 -1,194 -1,053 1,957 1,253 2,587 1,892 0 0 0 0 0 0 0 0 0 -193 -520 0 0 0 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 500 0 3,196 1,402 867 2,940 861 0 0 0 0 0 0 0 0 0 0 62,663 80,219 70,928 60,460 73,179 67,147 80,674 69,659 60,011 70,817 12,395 5,640 18,657 0 14,717 19,917 5,640 18,657 0 8,403 ooooo 3,318 5,422 22,602 0 0 2,502 0 0 0 0 0 1,000 0 190 0 190 0 0 0 0 974 2,974 1,280 18,673 -529 -1,810 -1,502 -20,179 0 0 0 0 0 893 0 893 0 0 0 0 -969 -2,414 -1,280 -17,058 529 1,510 1,502 16,984 0 236 0 236 0 0 0 0 -5 -560 0 -1,620 0 200 0 2,050 0 158 0 158 0 0 0 0 0 0 0 0 0 100 0 1,150 928 4,795 5,422 24,078 0 0 0 2,502 0 0 0 1,000 77,262 60,146 91,404 927,997 81,892 60,232 88,730 927,247 5,670 16,888 44,303 170,431 11,984 15,471 32,028 160,268 158 1,857 -403 2,491 4,814 -756 6,298 15,023 29,989 0 0 50 3,135 4,567 -1,482 -1,324 ooo 0 0 1,691 4,984 1,691 4,984 0 * 1,857 -403 ooo 0 0 -90 2,401 oo* 0 0 0 0 93 125 2,678 952 1,622 869 2,761 1,274 1,809 -1,902 223 6,623 -2,658 6,522 ooo 0 0 398 5,488 31,142 3,522 30,522 1,965 222 16,988 30,211 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 Tables 4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1984-861 Millions of dollars Increase or December 31 decrease (-) Description 1986 1985 1984 1986 1985 U.S. Treasury securities, total 206,520 177,281 157,010 29,239 20,271 By term 1-15 days2 15,684 5,261 415 10,423 4,846 16-90 days 53,611 43,462 37,396 10,148 6,067 91 days to 1 year 62,239 56,364 47,795 5,875 8,568 1-5 years 36,469 35,650 37,072 818 -1,421 5-10 years 15,451 14,785 14,100 666 685 More than 10 years 23,066 21,759 20,233 1,308 1,526 By type of holding Held outright3 Treasury bills 103,775 85,425 71,035 18,350 14,390 Treasury notes 68,126 67,647 65,237 479 2,410 Treasury bonds 25,724 24,726 22,951 997 1,775 Held under RPs 13,691 3,529 1,627 10,163 1,902 Federal agency obligations, total 10,143 9,921 8,777 222 1,144 By term 1-15 days2 2,704 1,836 575 868 1,261 16-90 days 808 961 521 -153 440 91 days to 1 year 1,224 1,471 1,665 -247 -193 1-5 years 3,854 4,056 4,350 -202 -294 5-10 years 1,178 1,187 1,267 -9 -80 More than 10 years 374 409 399 -35 10 By type of holding Held outright Banks for Cooperatives 0 21 21 -21 0 Federal Farm Credit Banks 2,486 2,477 2,363 8 114 Federal Home Loan Banks 2,252 2,260 2,260 -8 0 Federal Home Loan Mortgage Corporation 0 0 0 0 0 Federal Intermediate Credit Banks 30 50 50 -21 0 Federal Land Banks 236 236 350 0 -115 Farmers Home Administration 101 101 147 0 -46 Federal National Mortgage Association 2,490 2,847 2,962 -357 -115 Government National Mortgage Association participation certificates 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 2,314 1,693 388 620 1,306 1. Details may not add to totals because of round- 3. Excludes the effects of temporary transactions ing. (repurchase agreements and matched sale-purchase 2. Includes the effects of temporary transactions agreements). (repurchase agreements and matched sale-purchase agreements). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 231 Number and Salaries of Officers and Employees of Federal Reserve Banks, December 3), 1986 President Other officers Employees Total Federal Reserve Number Bank (including Annual Num- Annual Annual Num- Annual Branches) (d s o al l a la r r y s) ber ( s d a o la ll r a i r e s s ) Full- Part- ( s d a o la ll r a ie rs s ) ber ( s d a o la ll r a i r e s s ) time time Boston 150,300 53 3,410,600 1,267 242 33,767,315 1,563 37,328,215 New York 170,800 161 11,949,050 3,695 57 98,737,087 3,914 110,856,937 Philadelphia 131,200 52 3,473,550 1,096 81 26,130,930 1,230 29,735,680 Cleveland 135,300 57 3,529,300 1,263 62 28,421,330 1,383 32,085,930 Richmond 131,300 79 4,798,000 1,744 153 37,015,168 1,977 41,944,468 Atlanta 141,600 66 4,098,650 2,037 81 44,564,265 2,185 48,804,515 Chicago 155,900 80 4,974,300 2,589 32 63,141,844 2,702 68,272,044 St. Louis 128,500 57 3,246,600 1,204 86 26,000,824 1,348 29,375,924 Minneapolis 110,000 43 2,550,600 942 152 22,400,458 1,138 25,061,058 Kansas City 130,000 60 4,333,600 1,512 61 33,762,405 1,634 38,226,005 Dallas 127,700 60 3,627,403 1,457 47 32,746,058 1,565 36,501,161 San Francisco ... 146,500 98 6,146,314 2,239 82 55,969,264 2,420 62,262,078 Total 1,659,100 866 56,137,967 21,045 1,136 502,656,948 23,059 560,454,015 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 Tables 6. Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks and Branches, December 31, 19861 Dollars Acquisition costs Federal Reserve Net Other Bank or Buildings Building ma- book real Branch Land (including chinery and Total3 value estate4 vaults)2 equipment BOSTON 22,036,681 80,543,612 5,360,169 107,940,462 92,447,624 Annex . 27,840 89,202 44,538 161,580 125,652 NEW YORK 3,436,277 21,160,038 21,735,584 46,331,899 28,217,354 Annex 477,863 1,136,219 745,855 2,359,936 788,472 Buffalo 887,844 2,693,864 2,258,313 5,840,022 3,241,643 PHILADELPHIA 1,876,601 52,413,293 5,903,704 60,193,598 46,842,992 CLEVELAND 1,074,281 7,409,713 4,697,832 13,181,825 7,564,641 1,224,363 Cincinnati 2,246,599 13,537,723 7,528,477 23,312,798 14,177,766 Pittsburgh 1,658,376 7,717,686 3,287,248 12,663,310 9,798,480 RICHMOND 3,912,575 55,727,664 14,314,313 73,954,552 58,785,695 Annex 522,733 3,725,466 3,924,584 8,172,784 4,041,391 Baltimore .... 6,472,984 26,826,903 3,842,189 37,142,076 34,045,323 Charlotte .... 347,071 2,758,209 946,943 4,052,223 2,767,990 1,675,934 ATLANTA .. 1,202,255 6,375,901 3,558,580 11,136,737 5,874,793 Birmingham . 2,363,463 1,905,770 1,046,244 5,315,476 3,588,824 608,243 Jacksonville .. 1,066,862 19,192,963 778,381 21,038,206 19,106,106 48,365 Annex 107,925 76,236 15,843 200,003 149,727 Miami 3,607,531 11,965,974 2,107,796 17,681,302 15,587,112 Nashville 592,342 1,474,678 1,252,346 3,319,367 1,488,340 New Orleans . 3,087,693 2,782,464 1,477,946 7,348,103 4,843,229 283,753 CHICAGO .. 4,511,942 38,084,306 12,203,707 54,799,956 38,036,406 Annex 53,066 548,119 215,796 816,981 762,364 Detroit 797,734 3,154,226 2,798,874 6,750,834 4,366,443 ST. LOUIS 700,378 10,601,614 4,634,979 15,936,971 9,320,327 Little Rock 1,148,492 2,082,669 1,010,869 4,242,031 2,689,032 Louisville .. 700,075 3,182,471 1,131,238 5,013,784 2,574,551 Memphis ... 1,135,623 4,216,382 2,126,755 7,478,760 5,015,257 MINNEAPOLIS . 1,394,384 26,681,737 7,692,189 35,768,310 23,533,226 157,115 Helena 289,619 106,380 66,777 462,775 342,040 KANSAS CITY 1,798,804 11,609,885 8,450,928 21,859,617 16,646,625 149,948 Denver 2,997,746 4,321,485 2,610,017 9,929,248 7,203,281 Oklahoma City . 646,386 3,245,825 1,672,442 5,564,653 3,892,965 Omaha 6,534,083 12,382,609 0 18,916,692 18,675,728 2,220,765 DALLAS ... 3,738,290 5,137,194 3,738,335 12,613,819 9,816,367 El Paso 262,477 1,348,665 393,301 2,004,443 1,692,162 Houston 2,049,064 2,722,066 898,037 5,669,167 5,153,564 San Antonio 459,635 2,293,818 574,346 3,327,799 2,699,718 SAN FRANCISCO . 15,541,937 117,592,789 16,434,132 149,568,859 140,287,078 Los Angeles 2,910,659 4,353,961 2,494,074 9,758,695 6,030,890 Portland 207,381 1,683,361 649,432 2,540,173 2,116,864 Salt Lake City 480,222 1,972,068 1,137,923 3,590,213 2,779,171 Seattle 274,772 2,184,342 1,686,734 4,145,847 2,567,210 Total 105,638,563 579,019,548 157,447,772 842,105,883 659,684,425 6,368,485 1. Details may not add to totals because of round- 3. Excludes charge-offs of $17,698,968 before 1952. ing. 4. Covers acquisitions for banking-house purposes 2. Includes expenditures for construction at some and Bank premises formerly occupied and being held offices, pending allocation to appropriate accounts. pending sale. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 233 Millions of dollars Item 1982 1983 1984 1985 1986 CURRENT INCOME Loans 174.6 132.9 569.5 427.9 279.2 Acceptances 18.3 6.0 3.2 0 0 U.S. Treasury and federal agency securities 15,492.9 15,150.2 16,687.5 16,843.1 16,141.5 Foreign currencies 432.5 273.8 217.1 228.7 393.9 Other 12.3 9.3 16.9 17.3 22.1 Total current income 16,130.7 15,572.1 17,494.2 17,517.1 16,836.8 CURRENT EXPENSES Monetary and economic policy 138.4 148.3 152.0 148.3 145.8 Supervision and regulation 140.3 155.0 163.3 175.7 189.1 Services to financial institutions and the public 648.8 678.4 704.6 746.2 773.2 Services to the U.S. Treasury and other government agencies 115.1 120.3 126.3 131.5 136.8 Total current expenses 1,042.6 1,102.1 1,146.1 1,201.6 1,244.9 LESS Reimbursements 77.3 78.1 85.8 97.4 112.1 Revenue from priced services 386.7 496.2 574.7 614.9 627.7 EQUALS Net expenses 578.6 527.7 485.6 489.4 505.0 PLUS Currency costs . 98.4 152.1 162.6 173.3 181.2 EQUALS Net expenses including currency costs 677.0 679.8 648.2 662.7 686.2 PLUS Earnings-credit costs1 28.3 71.8 118.7 105.2 107.7 Current net income 15,425.4 14,820.5 16,727.2 16,749.2 16,042.9 ADDITIONS TO AND DEDUCTIONS FROM CURRENT NET INCOME Unrealized gains or losses (-) on the revaluation of foreign currency assets -149.6 -456.3 -454.8 1,210.0 1,970.6 Gains or losses (-) on sales of U.S. Treasury and federal agency securities 85.2 21.0 48.6 99.4 66.8 Other -4.5 34.9 -6.7 -7.9 -61.6 Total -68.8 -400.4 -412.9 1,301.6 1,975.9 Net income before distributions 15,356.6 14,420.2 16,314.3 18,050.8 18,018.7 DISTRIBUTIONS Dividends paid 79.4 85.2 92.6 103.0 109.6 Transfers to surplus 78.3 106.7 162.0 155.3 92.0 Net transfers to or deductions from (-) Board account -5.7 -.5 5.5 -3.9 13.3 Interest on Federal Reserve notes 15,204.6 14,228.8 16,054.1 17,796.5 17,803.9 Total distributions 15,356.6 14,420.2 16,314.3 18,050.8 18,018.7 1. The amount of the credits granted to depository The clearing balances are invested in U.S. Treasury institutions on clearing balances maintained with the securities, the earnings on which are reflected in the Reserve Banks. These earnings credits may be used current-income section of this table. to offset charges for Federal Reserve priced services. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 Tables 8. Income and Expenses of Federal Reserve Banks, 1986 Dollars Item1 Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 279,190,611 1,120,763 4,896,983 2,018,391 674,180 U.S. Treasury and federal agency securities 16,141,544,144 945,814,646 5,349,330,871 532,591,184 941,194,643 Foreign currencies 393,563,826 11,816,759 97,225,032 18,089,170 23,594,141 Priced services 627,736,431 40,112,790 91,705,355 27,488,236 38,173,956 Other 22,116,636 718,137 12,202,190 416,697 415,209 Total 17,464,151,647 999,583,095 5,555,360,431 580,603,678 1,004,052,128 CURRENT EXPENSES Salaries and other personnel expenses 596,170,328 37,836,420 121,402,742 31,833,173 33,961,449 Retirement and other benefits 133,360,309 8,309,368 24,926,134 7,455,196 8,233,284 Fees 11,206,609 3,115,473 1,410,355 544,866 1,586,532 Travel 19,775,226 895,990 2,608,710 781,103 1,642,322 Postage and other shipping costs 81,879,848 3,689,087 9,081,204 4,700,356 5,996,838 Communications 15,254,693 1,032,847 3,485,763 659,592 734,643 Materials and supplies 46,004,715 2,647,573 8,607,238 2,702,203 2,958,404 Building expenses Taxes on real estate 22,213,256 4,049,382 3,942,496 1,484,083 1,032,263 Property depreciation 23,549,010 2,451,201 2,266,744 1,699,042 1,336,295 Utilities 22,809,177 2,024,412 3,473,847 2,339,572 1,572,713 Rent 14,975,977 491,003 9,019,992 44,964 238,568 Other 14,217,178 831,804 3,097,100 1,121,352 683,830 Equipment Purchases 3,095,811 144,496 0 181,191 124,568 Rentals 40,665,348 1,575,224 6,911,418 905,877 4,298,098 Depreciation 68,000,516 4,122,377 11,178,992 4,085,222 3,887,739 Repairs and maintenance 38,997,781 2,310,667 6,299,082 2,199,042 1,348,496 Earnings-credit costs 107,709,013 6,285,764 13,328,823 8,790,331 9,581,389 Other 42,977,117 2,709,019 7,104,336 1,962,449 3,274,418 Shared costs, net2 (0) (3,026,998 1,492,712 2,519,609 (1,148,176) Recoveries (31,379,530) (6,460,239 (3,283,543) (2,165,453) (3,014,681) Expenses capitalized3 (2,484,527) (107,054 (5,734) (55,564) (234,019) Total 1,268,997,855 74,927,816 236,348,411 73,788,206 78,094,973 Reimbursements (112,130,141) (5,318,162) (23,720,410) (13,028,800) (7,215,209) Net expenses 1,156,867,714 69,609,654 212,628,001 60,759,406 70,879,764 For notes see end of table Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 235 8.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 8,683,419 1,758,728 206,123,740 1,553,429 1,155,916 19,203,921 29,553,875 2,447,266 1,393,795,932 583,449,314 1,782,213,012 470,078,035 224,144,963 681,240,909 1,031,823,291 2,205,867,344 20,081,599 32,267,312 53,106,506 11,816,759 12,987,606 17,710,372 32,680,564 62,188,006 52,082,123 69,092,954 84,722,988 28,079,122 35",415,830 41,805,226 46,291,219 72,766,632 795,769 1,650,635 1,712,351 370,493 390,753 351,111 1,096,215 1,997,076 1,475,438,842 688,218,943 2,127,878,597 511,897,838 274,095,068 760,311,539 1,141,445,164 2,345,266,324 44,080,072 51,549,126 72,064,506 30,525,105 26,434,759 39,562,626 38,673,184 68,247,166 10,038,418 11,539,975 16,365,777 7,139,832 5,724,870 9,171,739 8,274,539 16,181,177 349,272 513,462 1,137,153 482,665 472,366 526,234 341,835 726,396 1,665,257 1,619,936 3,242,904 1,009,051 787,209 1,469,358 1,352,176 2,701,210 6,576,593 8,825,877 8,763,448 4,514,170 5,681,792 6,398,070 4,643,382 13,009,031 999,950 2,004,836 1,560,278 553,216 524,644 1,110,055 911,626 1,677,243 4,117,490 4,500,592 5,348,490 3,017,772 1,864,426 3,075,365 2,912,327 4,252,835 1,798,916 1,192,616 2,467,453 439,828 2,499,795 822,327 576,649 1,907,448 3,584,287 1,221,876 1,253,534 807,715 1,049,995 1,807,786 1,239,587 4,830,948 1,990,046 1,901,214 2,582,728 1,275,662 842,796 1,378,799 1,097,629 2,329,759 471,346 331,446 2,344,884 374,633 120,392 57,265 1,090,216 391,268 1,505,402 840,507 2,503,667 658,529 579,423 635,011 679,652 1,080,901 398,444 267,476 508,815 488,684 340,332 62,221 185,795 393,789 2,236,631 4,460,076 6,340,781 914,504 1,014,199 1,551,465 4,706,426 5,750,649 6,502,505 6,457,395 7,860,609 3,150,813 3,955,537 3,756,425 5,857,989 7,184,913 3,660,276 3,871,991 6,331,553 1,891,150 1,914,523 2,410,548 2,247,760 4,512,693 7,809,201 11,555,130 21,705,770 4,423,451 5,576,544 6,387,245 4,412,349 7,853,016 4,538,660 3,642,064 5,992,257 1,718,082 2,098,738 2,087,056 2,462,461 5,387,577 (167,450 2,295,570 (5,718,346) 1,016,171 1,889,536 739,942 605,203 (497,773) (4,092,201 (1,408,749) (2,438,685) (1,224,932) (635,004) (1,061,559) (2,281,496) (3,312,988) (201,859 (228,960) (546,832) (29,033) (58,479) (482,825) (423,006) (111,162) 97,861,256 116,953,456 159,670,744 63,147,068 62,678,393 81,465,153 79,566,283 144,496,096 (7,619,873^ (8,052,423) (12,795,133) (7,293,892) (3,587,127) (5,751,432) (5,433,355) (12,314,325) 90,241,383 108,901,033 146,875,611 55,853,176 59,091,266 75,713,721 74,132,928 132,181,771 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 Tables 8. Income and Expenses of Federal Reserve Banks. 1986—Continued Dollars Item1 Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 16,307,283,932 929,973,442 5,342,732,429 519,844,271 933,172,362 Additions to and deductions from current net income Profits on sales of U.S. Treasury and federal agency securities 66,836,210 3,938,872 21,891,327 2,210,987 3,918,560 Other additions 2,015,616,683 59,127,102 486,783,891 90,652,224 118,246,959 Total additions .... 2,082,452,893 63,065,974 508,675,217 92,863,212 122,165,518 Deductions from current net income Net additions to or 106,559,537 3,070,996 12,535,159 5,913,742 5,032,520 deductions (-) from current net income 1,975,893,356 59,994,978 496,140,058 86,949,469 117,132,998 Assessments by Board Board expenditures4 97,337,500 2,912,600 24,112,100 4,522,900 5,865,800 Cost of currency 180,779,673 11,306,558 53,649,878 5,848,170 11,299,418 Net income before payment to U.S. Treasury 18,005,060,114 975,749,262 5,761,110,509 596,422,670 1,033,140,142 Dividends paid 109,587,968 3,346,081 27,204,022 4,964,655 6,590,413 Payments to U.S. Treasury (interest on Federal Reserve notes) 17,803,517,996 964,288,881 5,707,345,837 587,538,416 1,022,235,729 Transferred to surplus 91,954,150 8,114,300 26,560,650 3,919,600 4,314,000 Surplus, January 1 1,781,361,150 52,798,900 439,440,700 82,545,900 107,000,300 Surplus, December 31 1,873,315,300 60,913,200 466,001,350 86,465,500 111,314,300 1. Details may not add to totals because of round- porarily capitalized and charged to activities when the ing. products are consumed. 2. Includes distribution of costs for projects per- 4. 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. 3. Includes expenses for labor and materials tem- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 237 8, Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,385,197,458 579,317,913 1,981,002,986 456,044,663 215,003,799 684,597,818 1,067,312,237 2,213,084,554 5,797,536 2,447,617 7,421,767 1,957,658 935,655 2,828,720 4,294,070 9,193,441 100,693,533 161,618,945 266,049,513 59,122,161 65,044,501 88,680,559 206,670,303 312,926,994 106,491,069 164,066,562 273,471,280 61,079,819 65,980,156 91,509,279 210,964,372 322,120,434 4,346,605 5,232,023 7,555,952 3,699,975 1,975,070 3,419,573 46,518,066 7,259,856 102,144,465 158,834,539 265,915,328 57,379,844 64,005,086 88,089,706 164,446,306 314,860,578 5,019,100 8,066,900 13,217,900 2,959,100 3,191,300 4,395,000 8,137,900 14,936,900 16,595,018 7,312,579 23,637,227 5,774,394 2,381,509 7,794,959 11,059,110 24,120,852 1,465,727,805 722,772,973 2,210,063,188 504,691,013 273,436,076 760,497,564 1,212,561,533 2,488,887,379 5,798,975 9,472,564 14,838,725 3,373,526 3,554,079 4,878,187 9,223,358 16,343,385 1,449,589,630 691,586,059 2,185,033,713 497,265,437 267,240,546 755,101,827 1,194,015,275 2,482,276,645 10,339,200 21,714,350 10,190,750 4,052,050 2,641,450 517,550 9,322,900 (9,732,650) 90,812,250 146,545,500 241,181,250 53,722,900 58,493,400 80,135,800 148,211,250 280,473,000 101,151,450 168,259,850 251,372,000 57,774,950 61,134,850 80,653,350 157,534,150 270,740,350 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 Tables 9. Income and Expenses of Federal Reserve Banks, 1914-861 Dollars Assessments by Net additions Board of Governors Period, or Federal Current Net or Reserve Bank income expenses deductions (-) Board Costs expenditures of currency 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 1,372,022 1,025,721 1935 42,751,959 28,694,965 -1,736,758 1,405,898 1,476,580 1936 37,900,639 26,016,338 485,817 1,679,566 2,178,119 1937 41,233,135 25,294,835 -1,631,274 1,748,380 1,757,399 1938 36,261,428 25,556,949 2,232,134 1,724,924 1,629,735 1939 38,500,665 25,668,907 2,389,555 1,621,464 1,356,484 1940 43,537,805 25,950,946 11,487,697 1,704,011 1,510,520 1941 41,380,095 28,535,547 720,636 1,839,541 2,588,062 1942 52,662,704 32,051,226 -1,568,208 1,746,326 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 -2,12?,! 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 239 9.—Continued Payments to U.S. Treasury Transferred Transferred jjiviaenus Franchise Under Interest on to surplus to surplus paid tax section 13b Federal Reserve (section 13b) (section 7) 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,bil,418 11,020,582 8,874,262 -916,855 8,781,661 -60,323 6,510,071 8,504,974 297,667 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

240 Tables 9. Income and Expenses of Federal Reserve Banks, 1914-861—Continued Dollars Assessments by Net additions Board of Governors Period, or Federal Current Net or Reserve Bank income expenses deductions (-) Board Costs expenditures of currency 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 12,802,319,335 718,032,836 (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 1986 17,464,528,361 1,156,867,714 1,975,893,356 97,337,500 180,779,673 Total, 1914-86 ... 201,351,041,661 15,388,965,389 719,539,608 1,104,734,408 1,632,591,378 Aggregate for each Bank, 1914-86 Boston 9,803,200,724 1,017,553,501 12,451,897 40,245,686 94,541,879 New York 57,385,270,437 3,137,962,811 226,300,627 285,823,686 384,580,071 Philadelphia 8,717,528,786 813,507,271 34,022,670 54,357,018 81,336,705 Cleveland 14,139,606,581 1,048,066,501 (11,731,536) 88,679,690 103,387,314 Richmond 15,827,364,278 1,199,898,709 23,752,524 57,039,076 157,346,619 Atlanta 8,156,237,834 1,290,631,358 65,940,608 80,003,260 107,259,873 Chicago 30,096,109,587 2,023,093,302 47,687,622 158,691,072 228,273,239 St. Louis 7,099,272,065 832,610,270 6,419,380 34,805,272 64,705,904 Minneapolis 3,701,637,078 688,831,380 24,764,072 32,581,415 29,477,129 Kansas City 8,886,354,267 960,456,350 32,041,055 47,391,509 81,238,328 Dallas 11,432,350,490 853,164,594 100,690,486 68,658,773 97,291,884 San Francisco 26,106,109,536 1,523,189,340 157,200,201 156,457,951 203,152,433 Total 201,351,041,661 15,388,965,389 719,539,608 1,104,734,408 1,632,591,378 1. Details may not add to totals because of round- Corporation (1934), and $3,657 net upon elimination ing. of sec. 13b surplus (1958); and was increased by trans- 2. The $2,001,987,499 transferred to surplus was fer of $11,131,013 from reserves for contingencies reduced by direct charges of $500,000 for charge-off (1945), leaving a balance of $1,873,315,298 on Dec. on Bank premises (1927), $139,299,557 for contri- 31, 1986. butions to capital of the Federal Deposit Insurance Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 241 .—Continued Payments to U.S. Treasury Transferred Transferred Dividends paid Franchise Under Interest on to surplus to surplus tax section 13b Federal Reserve (section 13b) (section 7) 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 17,796,464,292 155,252,950 109,587,968 17,803,894,710 91,954,150 1,916,915,357 149,138,300 2,188,893 179,874,063,709 (3,657) 2,001,987,4992 80,693,766 7,111,395 280,843 8,504,082,114 135,411 71,008,025 522,528,517 68,006,262 369,116 52,709,476,089 (433,412) 503,257,921 105,358,897 5,558,901 722,406 7,589,623,877 290,661 100,795,722 162,246,232 4,842,447 82,930 12,596,031,746 (9,906) 124,548,093 95,361,774 6,200,189 172,493 14,228,138,199 (71,517) 107,031,258 125,692,661 8,950,561 79,264 6,436,029,586 5,491 173,526,390 266,882,194 25,313,526 151,045 27,174,680,395 11,682 266,700,754 61,775,316 2,755,629 7,464 6,046,163,532 (26,515) 62,894,578 53,126,165 5,202,900 55,615 2,852,049,609 64,874 65,012,063 79,977,326 6,939,100 64,213 7,657,543,870 (8,674) 84,793,300 111,616,868 560,049 102,083 10,239,779,757 55,337 161,811,628 251,655,641 7,697,341 101,421 23,840,464,936 (17,089) 280,607,767 1,916,915,357 149,138,300 2,188,893 179,874,063,709 (3,657) 2,001,987,499 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 Tables 10. Priced Services Revenue and Expenses at Federal Reserve Banks, 1986 and 19851 Millions of dollars Service Total Commercial Wire Item check transfer collection and net settlement 1986 1985 1986 1985 1986 1985 Revenue2 742.0 733.0 572.5 555.8 82.7 77.4 Expenses2 625.8 617.2 481.3 464.6 68.8 62.4 Net revenue 116.2 115.7 91.2 91.2 13.9 14.9 Private sector adjustment3 85.9 82.2 66.6 61.6 10.8 10.6 Net revenue after private sector adjustment 30.3 33.6 24.6 29.6 3.1 4.3 MEMO Net revenue after private sector adjustment, with allowance for ACH program4 38.6 1. Derived from the income and expense data shown of income from fees for services, and $114.2 million in table 8. Expenses for priced services are based and $119.1 million of income related to clearing balprimarily on the Federal Reserve Planning and Con- ances established by depository institutions. Total trol System, which provides for the allocation of ex- System expenses for 1986 and 1985 respectively inpenses to the principal areas of activity of the Banks. clude $106.3 million and $105.6 million of earnings 2. Total System revenue for 1986 and 1985 re- credits granted to depository institutions on clearing spectively comprises $627.7 million and $613.8 million balances. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 243 10.—-Continued Service Definitive Book- Com A m CH er 4 cial a s n a d fe k n e o e n p c i a n s g h se e cu n r tr it y ies se C rv a i s c h es collection 1986 1985 1986 1985 1986 1985 1986 1985 36.5 27.5 24.0 25.0 9.4 28.8 16.8 18.5 31.2 29.1 21.9 23.0 6.3 20.1 16.3 18.0 5.4 (16) 2.1 2.0 3.1 8.7 .5 .5 4.1 2.5 2.5 2.3 1.6 4.8 .4 .3 1.3 (4.1) (.4) (.3) 1.5 3.9 Expenses for commercial check collection, wire 4. The Board established an incentive pricing protransfer and net settlement, commercial ACH, book- gram for the commercial ACH service that provided entry securities, and definitive safekeeping and non- for fee structures designed to recover an increasing cash collection include costs of float. share of expenses over a period of several years. Rev- 3. An imputed cost intended to reflect the taxes enue for the commercial ACtl service was expected that would have been paid and the return on capital to represent approximately 80 percent of expenses that would have been provided had a private firm plus the private sector adjustment in 1985 and 100 furnished the services. percent of expenses plus the private sector adjustment in 1986. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 Tables 11. Operations in Prmeipal Departments of Federal Reserve Banks, 1983-86 Operation 1986 1985 1984 1983 Millions of pieces (except as noted) Loans (thousands) 19 24 33 22 Currency received and counted 15,408 14,655 13,422 11,464 Currency verified and destroyed 5,584 5,744 5,329 4,403 Coin received and counted 20,461 19,691 19,201 17,712 Checks handled U.S. government checks 584 592 598 612 Postal money orders 140 130 135 115 All other1 16,226 15,965 15,178 14,650 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities 204 171 168 168 Transfer of funds2 50 45 42 38 Food stamps redeemed 2,216 2,322 2,536 2,684 Millions of dollars Loans 193,424 307,856 852,777 214,190 Currency received and counted 195,515 182,095 183,419 141,684 Currency verified and destroyed 47,842 51,081 50,164 36,224 Coin received and counted 3,088 3,226 3,624 2,795 Checks handled U.S. government checks 606,029 538,261 529,895 552,493 Postal money orders 11,103 9,486 9,085 7,854 All otheri 11,137,202 9,557,753 9,553,515 9,854,112 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities 75,447,899 65,866,333 50,327,014 51,352,275 Transfer of funds2 125,028,070 109,126,369 98,003,445 87,754,086 Food stamps redeemed 10,475 10,195 9,941 10,861 1. In the REPORT for 1983 and for 1984, data in- 2. In the REPORT for 1983 and for 1984, data included checks handled by more than one Federal Rer cluded transfers processed by both sending and reserve office. ceiving Federal Reserve offices. 12. Federal Reserve Bank Interest Rates, December 31, 1986 Percent per year Loans to depository institutions Bank Short-term Extended credit2 adjustment credit and seasonal First 60 days Next 90 days After 150 credit2 of borrowing of borrowing days All Federal Reserve Banks 51/2 51/2 61/2 71/2 1. Rates applied to short-term advances for the pository institution and to advances when an instipurpose of meeting temporary funding requirements tution is under sustained liquidity pressures. As an and to longer-term advances made to smaller insti- alternative, for loans outstanding for more than 150 tutions for the purpose of meeting seasonally recur- days, a Federal Reserve Bank may charge a flexible ring needs for funds. A temporary simplified seasonal rate that takes into account rates on market sources program was established on Mar. 8, 1985, and the of funds, but in no case will the rate charged be less interest rate was a fixed rate Yi percent above the rate than the basic rate plus one percentage point. Where on adjustment credit. The program was reestablished credit provided to a particular depository institution on Feb. 18, 1986; the rate may be either the same as is anticipated to be outstanding for an unusually prothat for adjustment credit or a fixed rate V2 percent longed period and in relatively large amounts, the higher. See sections 201.3(a) and 201.3(b)(l) of Reg- time period in which each rate under this structure is ulation A. applied may be shortened. See section 201.3(b)(2) of 2. Applicable to advances when exceptional cir- Regulation A. cumstances or practices involve only a particular de- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 245 13, Reserve Requirements of Depository Institutions1 Depository institution requirements after implementation of the Type of deposit, and deposit interval2 Monetary Control Act Percent of deposits Effective date Net transaction accounts34 $0 million-$36.7 million 3 12/30/86 More than $36.7 million 12 12/30/86 Nonpersonal time deposits5 By original maturity Less than IV2 years 3 10/6/83 Vh years or more 0 10/6/83 Eurocurrency liabilities All types 3 11/13/80 1. Reserve requirements in effect on Dec. 31,1986. with the highest reserve ratio. With respect to NOW Required reserves must be held in the form of de- accounts and other transaction accounts, the exempposits with Federal Reserve Banks or vault cash. Non- tion applies only to such accounts that would be submembers may maintain reserve balances with a Fed- ject to a 3 percent reserve requirement. eral Reserve Bank indirectly on a pass-through basis 3. Transaction accounts include all deposits on which with certain approved institutions. the account holder is permitted to make withdrawals For previous reserve requirements, see earlier edi- by negotiable or transferable instruments, payment tions of the ANNUAL REPORT and of the Federal Re- orders of withdrawal, and telephone and preauthorserve Bulletin. Under provisions of the Monetary ized transfers in excess of three per month for the Control Act, depository institutions include commer- purpose of making payments to third persons or others. cial banks, mutual savings banks, savings and loan However, MMDAs and similar accounts subject to associations, credit unions, agencies and branches of the rules that permit no more than six preauthorized, foreign banks, and Edge corporations. automatic, or other transfers per month, of which no 2. The Garn-St Germain Depository Institutions more than three can be checks, are not transaction Act of 1982 (Public Law 97-320) requires that $2 accounts (such accounts are savings deposits subject million of reservable liabilities (transaction accounts, to time deposit reserve requirements). nonpersonal time deposits, and Eurocurrency liabil- 4. The Monetary Control Act of 1980 requires that ities) of each depository institution be subject to a the amount of transaction accounts against which the zero percent reserve requirement. The Board is to 3 percent reserve requirement applies be modified adjust the amount of reservable liabilities subject to annually by 80 percent of the percentage increase in this zero percent reserve requirement each year for transaction accounts held by all depository instituthe succeeding calendar year by 80 percent of the tions, determined as of June 30 each year. Effective percentage increase in the total reservable liabilities Dec. 30, 1986, the amount was increased from $31.7 of all depository institutions, measured on an annual million to $36.7 million. basis as of June 30. No corresponding adjustment is 5. In general, nonpersonal time deposits are time to be made in the event of a decrease. On Dec. 30, deposits, including savings deposits, that are not 1986, the exemption was raised from $2.6 million to transaction accounts and in which a beneficial interest $2.9 million. In determining the reserve requirements is held by a depositor that is not a natural person. of depository institutions, the exemption shall apply Also included are certain transferable time deposits in the following order: (1) net NOW accounts (NOW held by natural persons and certain obligations issued accounts less allowable deductions); (2) net other to depository institution offices located outside the transaction accounts; and (3) nonpersonal time de- United States. For details, see section 204.2 of posits or Eurocurrency liabilities starting with those Regulation D. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 Tables 14. Dates of Removal of Interest Rate Ceilings on Deposits at Federally Insured Institutions1 Type of deposit Effective date Savings 4/1/86 Negotiable order of withdrawal 1/1/86 Money market deposit account 1/1/86 Time accounts 7-31 days 1/1/86 More than 31 days 10/1/83 1. All restrictions on the maximum rates of interest various times, see the Federal Reserve Bulletin, the payable on various categories of deposits were re- Federal Home Loan Bank Board Journal, and the moved over a period beginning on Dec. 14,1982, and Annual Report of the Federal Deposit Insurance ending on Apr. 1, 1986. For information on the max- Corporation. imum rates payable on specific types of accounts at 15. Initial Margin Requirements under Regulations T, U, G, and X 1 Percent of market value Effective date Short sales, 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 1. These regulations, adopted by the Board of it at 30 percent of the current market value of the Governors pursuant to the Securities Exchange Act stock underlying the option. On Sept. 30, 1985, the of 1934, limit the amount of credit to purchase and Board changed the required initial margin, allowing carry "margin securities" (as defined in the regula- it to be the same as the option maintenance margin tions) when such credit is collateralized by securities. required by the appropriate exchange or self-regu- Margin requirements on securities other than options latory organization; such maintenance margin rules are the difference between the market value (100 per- must be approved by the Securities and Exchange cent) and the maximum loan value of collateral as Commission. Effective Jan. 31, 1986, the SEC apprescribed by the Board. Regulation T was adopted proved new maintenance margin rules, permitting effective Oct. 15, 1934; Regulation U, effective May margins to be the price of the option plus 15 percent 1, 1936; Regulation G, effective Mar. 11, 1968; and of the market value of the stock underlying the option. Regulation X, effective Nov. 1, 1971. 2. From Oct. 1, 1934, to Oct. 31, 1937, the re- On Jan. 1, 1977, the Board of Governors for the quirement was the margin "customarily required" by first time established in Regulation T the initial mar- the brokers and dealers. gin required for writing options on securities, setting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 247 16. Principal Assets and Liabilities and Number of Insured Commercial Banks, by Class of Bank, June 30, 1986 and 19851 Asset and liability items shown in millions of dollars Member banks Nonmember Item Total banks Total National State June 30, 1986 Loans and investments 1,847,784 1,362,285 1,088,052 274,233 485,499 Gross loans 1,429,545 1,086,417 869,696 216,721 343,128 Net loans 1,415,173 1,076,351 861,926 214,426 338,822 Investments 418,239 275,868 218,356 57,512 142,371 U.S. Treasury and federal agency securities 253,205 161,648 131,632 30,016 91,557 Other 165,034 114,220 86,724 27,496 50,814 Cash assets 220,219 170,583 134,379 36,205 49,636 Deposits, total 1,805,885 1,298,430 1,048,265 250,166 507,454 Interbank 63,279 56,234 39,356 16,878 7,045 Other transaction 539,334 402,206 318,165 84,041 137,127 Other nontransaction 1,343,692 934,080 770,128 163,952 409,611 Equity capital 173,666 127,109 98,472 28,637 46,557 Number of banks 14,186 5,954 4,866 1,088 8,232 June 30, 1985 Loans and investments 1,698,882 1,237,788 987,793 249,995 461,094 Gross loans 1,313,609 990,950 791,578 199,373 322,659 Net loans 1,296,823 979,587 782,744 196,843 317,236 Investments 385,273 246,837 196,215 50,622 138,436 U.S. Treasury and federal agency securities 252,375 158,099 127,427 30,672 94,276 Other 132,899 88,738 68,788 19,950 44,160 Cash assets, total 203,479 158,215 121,805 36,409 45,264 Deposits 1,656,573 1,179,123 954,143 224,980 477,450 Interbank 56,252 50,598 35,210 15,388 5,654 Other demand 463,744 340,487 268,786 71,701 123,257 Other time and savings 1,252,395 864,651 715,332 149,319 387,744 Equity capital 160,101 117,454 91,721 25,733 42,648 Number of banks 14,367 5,979 4,910 1,069 8,388 1. All insured commercial banks in the United States. Details may not add to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 Tables Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—Year-End 1918-X6, and Month-End I9861 Millions of dollars Factors supplying reserve tunas Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Held Other Gold ing cur- Period Bought r u e n p d u e r r - Loans Float2 ot A h l e l r3 R Fe e d se e r r v a e l Total stock5 c ri e g r h ti t f s - r o en u c t- y Total out- chase assets4 icate standright agree- ac- ing6 ment count 1918 239 239 0 1,766 199 294 2,498 2,873 1,795 1919 300 300 0 2,215 201 575 3,292 2,707 1,707 1920 287 287 0 2,687 119 262 3,355 2,639 1,709 1921 , 234 234 0 1,144 40 146 1,563 3,373 1,842 1922 436 436 0 618 78 273 1,405 3,642 1,958 1923 134 80 14 723 27 355 1,238 3,957 2,009 1924 540 536 4 320 52 390 1,302 4,212 2,025 1925 375 367 643 63 378 1,459 4,112 1,977 1926 315 312 3 637 45 384 1,381 4,205 1,991 1927 617 560 57 582 63 393 1,655 4,092 2,006 1928 228 197 31 1,056 24 500 1,809 3,854 2,012 1929 511 488 23 632 34 405 1,583 3,997 2,022 1930 739 686 43 251 21 372 1,373 4,306 2,027 1931 817 775 42 638 20 378 1,853 4,173 2,035 1932 1,855 1,851 4 235 14 41 2,145 4,226 2,204 1933 2,437 2,435 2 98 15 137 2,688 4,036 2,303 1934 2,430 2,430 0 7 5 21 2,463 8,238 2,511 1935 2,431 2,430 1 5 12 38 2,486 10,125 2,476 1936 2,430 2,430 0 3 39 28 2,500 11,258 2,532 1937 2,564 2,564 0 10 19 19 2,612 12,760 2,637 1938 2,564 2,564 0 4 17 16 2,601 14,512 2,798 1939 2,484 2,484 0 7 91 11 2,593 17,644 2,963 1940 2,184 2,184 0 3 2,274 21,995 3,087 1941 2,254 2,254 0 3 94 10 2,361 22,737 3,247 1942 6,189 6,189 0 6 471 14 6,679 22,726 3,648 1943 11,543 11,543 0 5 681 10 12,239 21,938 4,094 1944 18,846 18,846 0 80 815 4 19,745 20,619 4,131 1945 24,252 24,262 0 249 578 2 15,091 20,065 4,339 1946 23,350 23,350 0 163 580 1 24,093 20,529 4,562 1947 22,559 22,559 0 85 535 1 23,181 22,754 4,562 1948 23,333 23,333 0 223 541 1 24,097 24,244 4,589 1949 18,885 18,885 0 78 534 2 19,499 24,427 4,598 1950 20,778 20,725 53 67 1,368 3 22,216 22,706 4,636 1951 23,801 23,605 196 19 1,184 5 25,009 22,695 4,709 1952 24,697 24,034 663 156 967 4 25,825 23,187 4,812 1953 25,916 25,318 598 28 935 2 26,880 22,030 4,894 1954 24,932 24,888 44 143 1 25,885 21,713 4,985 1955 24,785 24,391 394 108 1,585 29 26,507 21,690 5,008 1956 24,915 24,610 305 50 1,665 70 26,699 21,949 5,066 1957 24,238 23,719 519 55 1,424 66 25,784 22,781 5,146 1958 26,347 26,252 95 64 1,296 49 27,755 20,534 5,234 1959 26,648 26,607 41 458 1,590 75 28,771 19,456 5,311 1960 27,384 26,984 400 33 1,847 74 29,338 17,767 5,398 1961 28,881 30,478 159 130 2,300 51 31,362 16,889 5,585 1962 30,820 28,722 342 38 2,903 110 33,871 L 978 5,567 1963 33,593 33,582 11 63 2,600 162 36,418 15,513 5,578 1964 37,044 36,506 538 186 2,606 94 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 249 17.—Continued Factors absorbing reserve funds Deposits, other than reserves, with Other Member bank Cur- Trea- Federal Reserve Banks Other Re- Federal reserves8 rency sury Federal quired Reserve in cash Reserve clear- lia- With Curcir- hold- Trea- For- ac- ing bilities Federal rency Re- Exc t u io la n - ings7 sury eign utner counts4 a b n a c l e - s and Reserve and quired10 cess10 capital4 Banks coin9 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 3,029 121 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 2,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 3,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 2,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 2,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 2,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 2,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 2,193 799 793 485 256 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 2,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 2,287 977 862 446 495 0 0 15,915 0 14,457 1,458 28,952 2,272 393 508 314 607 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 1,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 1,312 821 767 750 106 0 0 16,568 0 15,550 1,018 27,741 1,293 668 895 565 714 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

250 Tables 17. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—Year-End 1918-86, and Month-End 1986'—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank creditoutstanding Spe- U.S.Treasuryand cial Treafederal agency securities11 draw- sury Held Other Gold ing cur- Period Bought r u e n p d u e r r - Loans Float2 ot A h l e l r3 R F e e s d e er r a v l e Total stock5 c r e i r g t h i t f s - r o e u n t c - y Total out- chase assets4 icate standright12 agree- ac- ing6 ment count 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 o 52,031 11,982 6,784 1968 52,937 52,937 0 186 3,443 58 0 56 624 10 367 6 795 1969 57,154 57,1543 0 183 3,440 64 2,743 64,584 10,367 6,852 o 1970 62,142 62,142 335 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 7710 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 9,230153,136 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 15,302210,598 11,090 4,718 17,075 1986 221,459 205,454 16,005 1,565 1,261 0 17,475 241,760 11,084 5,018 17,567 1986 Jan 187,842 184,132 3,710 827 663 0 15,814205,146 11,090 4,718 17,103 Feb 184,723 184,723 0 661 -212 0 15,301 200,473 11,090 4,718 17,154 Mar. ...184,807 184,807 0 818 560 0 15,635201,820 11,090 4,718 17,207 Apr. ...191,454 182,499 8,955 954 851 0 17,235210,494 11,090 4,718 17,252 May 190,129 190,129 0 850 132 0 15,326206,437 11,085 4,818 17,296 June 191,986 191,986 0 952 283 0 15,800209,021 11,084 4,818 17,330 July ....191,583 191,583 0 737 831 0 16,515 209,666 11,084 4,818 17,353 Aug. ...193,984 193,984 0 913 261 0 16,547211,705 11,084 5,018 17,394 Sept. ...200,607 192,484 8,123 879 849 0 17,023 219,358 11,084 5,018 17,438 Oct 197,949 197,949 0 806 441 0 16,797215,993 11,084 5,018 17,477 Nov. ...204,470 202,705 1,765 557 748 0 15,898221,673 11,084 5,018 17,517 Dec. ...221,459 205,454 16,005 1,565 1,261 0 17,475 241,760 11,084 5,018 17,567 1. For a description of figures and discussion of 6. Includes currency and coin (other than gold) their significance, see Banking and Monetary Statis- issued directly by the Treasury. The largest compotics, 1941-1970 (Board of Governors of the Federal nents are fractional and dollar coins. For details see Reserve System, 1976), pp. 507-23. "Currency and Coin in Circulation," Treasury Bul- 2. Beginning with 1960, figures reflect a minor letin. change in concept; see Federal Reserve Bulletin, vol. 7. Coin and paper currency held by the Treasury, 47 (February 1961), p. 164. as well as any gold in excess of the gold certificates 3. Principally acceptances and, until Aug. 21, 1959, issued to the Reserve Bank. industrial loans, authority for which expired on that date. 8. Beginning in November 1979, includes reserves 4. For the period before Apr. 16, 1969, includes of member banks, Edge corporations, and U.S. agenthe total of Federal Reserve capital paid in, surplus, cies and branches of foreign banks. Beginning on Nov. other capital accounts, and other liabilities and ac- 13, 1980, includes reserves of all depository institucrued dividends, less the sum of bank premises and tions. other assets, and was reported as "Other Federal Re- 9. Between Dec. 1, 1959, and Nov. 23, 1960, part serve accounts"; thereafter, "Other Federal Reserve was allowed as reserves; thereafter all was allowed. assets" and "Other Federal Reserve liabilities and 10. Estimated through 1958. Before 1929 data were capital" are shown separately. available only on call dates (in 1920 and 1922 the call 5. For the period before Jan. 30, 1934, includes dates were Dec. 29). Beginning on Sept. 12, 1968, gold held in Federal Reserve Banks and in circulation. the amount is based on close-of-business figures for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 251 Factors absorbing reserve funds Deposits, other than reserves, with Other Member bank Cur- Trea- Federa Reserve Banks Other Re- Federal reserves8 rency sury Federal quired Reserve in cash Reserve clear- lia- With Curc t u io la n - h in o g ld s7 - T s r u e r a y - F ei o g r n - Other co a u c n - ts4 abn in ac g le-s bi a li n t d ies R Fe e d se e r r v a e l re a n nd cy qu R ir e e - d10 ce E ss x 1 - 0'13 capital5 Banks coin9 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 9813 72,497 317 2,542 251 1,41914 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 2,113 418 1,27514 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,10315 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 0 111 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. 211,995 447 7,588 287 917 0 1,812 6,088 46,295 n.a. n.a. n.a. 190,430 565 16,228 256 477 0 1,164 6,622 22,316 n.a. n.a. n.a. 191,033 604 5,026 277 436 0 1,226 6,735 28,098 n.a. n.a. n.a. 193,209 617 3,280 274 511 0 1,542 6,162 29,240 n.a. n.a. n.a. 194,503 638 11,550 326 441 0 1,590 6,680 27,826 n.a. n.a. n.a. 197,812 631 3,083 254 417 0 1,582 6,110 29,747 n.a. n.a. n.a. 199,281 601 3,143 354 450 0 1,593 6,484 30,347 n.a. n.a. n.a. 200,552 532 3,983 233 688 0 1,631 6,658 28,644 n.a. n.a. n.a. 201,778 497 1,106 227 461 0 1,169 6,652 32,901 n.a. n.a. n.a. 200,630 492 7,514 342 663 0 1,681 6,463 35,113 n.a. n.a. n.a. 202,506 485 2,491 303 479 0 1,744 6,342 35,222 n.a. n.a. n.a. 206,878 459 2,529 225 425 0 1,802 6,480 36,494 n.a. n.a. n.a. 211,995 447 7,588 287 917 0 1,812 6,088 46,295 n.a. n.a. n.a. the reserve period two weeks before the report date. the second quarter of 1974. 11. Beginning on Dec. 1, 1966, includes federal 14. For the period before July 1973, includes ceragency obligations held under repurchase agreements tain deposits of domestic nonmember banks and forand beginning on Sept. 29,1971, federal agency issues eign-owned banking institutions held with member bought outright. banks and redeposited in full with Federal Reserve 12. Includes, beginning in 1969, securities loaned— Banks in connection with voluntary participation by fully guaranteed by U.S. government securities pledged nonmember institutions in the Federal Reserve Syswith Federal Reserve Banks—and excludes securities tem program of credit restraint. sold and scheduled to be bought back under matched As of Dec. 12, 1974, the amount of voluntary nonsale-purchase transactions. member bank and foreign-agency and branch deposits 13. Beginning with week ending Nov. 15, 1972, at Federal Reserve Banks that are associated with includes $450 million of reserve deficiencies on which marginal reserves are no longer reported. However, Federal Reserve Banks are allowed to waive penalties two amounts are reported: (1) deposits voluntarily for a transition period in connection with bank ad- held as reserves by agencies and branches of foreign aptation to Regulation J as amended, effective Nov. banks operating in the United States and (2) Euro- 9, 1972. Allowable deficiencies are as follows (begin- dollar liabilities. ning with first statement week of quarter, in millions): 15. Adjusted to include waivers of penalties for 1973—Ql, $279; Q2, $172; Q3, $112; Q4, $84; 1974— reserve deficiencies, in accordance with change in Digitized foQr Fl, R$A67S; EQR2, $58. The transition period ended with Board policy effective Nov. 19, 1975. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 Tables 18. Changes in Number of Banking Offices in the United States, 19861 Commercial banks (including stock savings Mutual banks and nondeposit trust companies) savings Type of office All Member Nonmember banks and change banks Total Na- Non- Non- Total State Insured Insured tional insured insured Banks, Dec. 31, 1985. 15,442 15,068 6,050 4,967 1,083 8,392 6262 358 16 Changes during 1986 New banks 307 304 154 105 49 90 60 3 0 Ceased banking operation -148 -148 -56 -46 -10 -78 -14 0 0 Banks converted into branches -305 -300 -133 -111 -22 -167 0 -3 -2 Other3 10 -4 -49 1 -13 -88 -76 -23 -33 Net change 27 -159 -3 1 -15 -234 -220 -58 -85 Banks, Dec. 31, 1986 . 1,110 8,233 623 359 1 15,208 14,848 5,992 4,882 Branches and additional offices, Dec. 31, 19854... 45,352 43,092 27,595 22,661 4,934 15,409 88 2,219 41 Changes during 1986 De novo 1,226 1,098 646 490 156 448 4 128 0 Banks converted 305 300 133 111 22 167 0 3 2 Discontinued -615 -601 -411 -342 -69 -190 0 -14 0 Sale of branch 0 19 16 -8 24 3 0 -19 0 Other3 4 9 419 307 112 -405 -5 33 -38 Net change 920 825 803 558 245 23 -1 131 -36 Branches and additional offices, Dec. 31, 19864.... 46,272 43,917 28,398 23,219 5,179 15,432 87 2,350 1. Preliminary. Final data will be available in the 3. Includes interclass changes. Annual Statistical Digest, 1986, forthcoming. 4. Excludes banking facilities. 2. As of Dec. 31, 1986, includes 14 noninsured state member banks and 2 noninsured national trust companies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 253 19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1986 Colonial Bank, Montgomery, Alabama, to merge The banking factors and considerations rewith Luverne Bank and Trust Company, Lu- lating to the convenience and needs of the comverne, Alabama munity are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (12/6/85) Norstar Bank of Upstate New York, Albany, The proposed transaction would not be signif- New York, to acquire six branches of The Bank icantly adverse to competition. of New York, New York, New York BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (1/24/86) BANK (1/8/86) Colonial Bank (Applicant) has assets of $102 The proposed transaction would not be signifmillion, and Luverne Bank and Trust Com- icantly adverse to competition. pany (Bank) has assets of $31 million. Ap- BASIS FOR APPROVAL BY THE FEDERAL RESERVE plicant and Bank are not located in the same BANK (3/18/86) market, and the proposal would have no sig- Norstar Bank of Upstate New York (Applinificant effect on competition. cant) has assets of $2.7 billion, and six branches The banking factors and considerations re- of The Bank of New York (Branches) have lating to the convenience and needs of the com- assets of $220 million. Applicant and Branches munity are consistent with approval. are both located in the Syracuse market; however, the Herfindahl-Hirschman index will The Suburban Bank, Richmond, Virginia, to increase only 18 points to 1850, and thus no merge with Virginia Capital Bank, Richmond, adverse competitive factors exist. Virginia The banking factors and considerations re- SUMMARY REPORT BY THE ATTORNEY GENERAL lating to the convenience and needs of the com- (2/6/86) munity are consistent with approval. The proposed transaction would not have a significantly adverse effect on competition. City Bank and Trust Company, Moberly, Missouri, to acquire certain assets and insured de- BASIS FOR APPROVAL BY THE FEDERAL RESERVE posits of Farmers and Merchants Bank of BANK (2/5/86) Huntsville, Huntsville, Missouri The Suburban Bank (Applicant) has assets of $13.2 million, and Virginia Capital Bank has SUMMARY REPORT BY THE ATTORNEY GENERAL assets of $23.4 million. Although Applicant and No report received. Request for report on the Bank compete in the Richmond banking mar- competitive factors was dispensed with, as auket, the proposal would have no significant ef- thorized by the Bank Merger Act, to permit fect on competition. The resulting bank's pro the Federal Reserve System to act immediately forma market share would be only 0.5 percent. to safeguard depositors of Farmers and Mer- The banking factors and considerations re- chants Bank. lating to the convenience and needs of the com- BASIS FOR APPROVAL BY THE FEDERAL RESERVE munity are consistent with approval. BANK (3/31/86) City Bank and Trust Company (Applicant) has Shelby County State Bank, Shelbyville, Illinois, assets of $108.2 million, and Farmers and Merto merge with Windsor State Bank, Windsor, chants Bank of Huntsville (Bank) has assets of Illinois $18.8 million. SUMMARY REPORT BY THE ATTORNEY GENERAL The FDIC has recommended immediate ac- (10/10/86) tion by the Federal Reserve System to prevent The proposed transaction would not have a the probable failure of Bank. significantly adverse effect on competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE American Trust and Savings Bank, Dubuque, BANK (3/4/86) Iowa, to acquire certain assets and liabilities of Shelby County State Bank (Applicant) has as- The National Bank, Dyers ville, Iowa sets of $52.6 million, and Windsor State Bank SUMMARY REPORT BY THE ATTORNEY GENERAL (Bank) has assets of $11.5 million. Applicant No report received. Request for report on and Bank are not in the same banking market. the competitive factors was dispensed with, Thus, no adverse competitive factors exist. as authorized by the Bank Merger Act, to per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 Tables 19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1986—Continued mit the Federal Reserve System to act imme- proposal would have no significant effect on diately to safeguard depositors of The National competition. Bank. The banking factors and considerations relating to the convenience and needs of the com- BASIS FOR APPROVAL BY THE FEDERAL RESERVE munity are consistent with approval. BANK (4/10/86) American Trust and Savings Bank (Applicant) has assets of $246 million, and The National Manufacturers Hanover Trust Company, New Bank (Bank) has assets of $41.6 million. York, New York to acquire certain assets and The Comptroller of the Currency has rec- assume certain liabilities of six branches of Dolommended immediate action by the Federal lar Dry Dock Savings Bank, White Plains, New Reserve System to ensure continuation of Bank's York services. SUMMARY REPORT BY THE ATTORNEY GENERAL (3/28/86) Georgia Railroad Bank & Trust Company, Au- The proposed transaction would not be signifgusta, Georgia, to merge with Bank of Waynes- icantly adverse to competition. boro, Waynesboro, Georgia BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL BANK (5/8/86) (4/16/86) Manufacturers Hanover Trust Company (Ap- The proposed transaction would not be signif- plicant), with assets of $62.3 billion, proposes icantly adverse to competition. to acquire $333 million in assets and assume $354 million in liabilities of six branches of Dol- BASIS FOR APPROVAL BY THE FEDERAL RESERVE lar Dry Dock Savings Bank (Branches). Both BANK (4/22/86) Applicant and Branches are located in the met- Georgia Railroad Bank & Trust Company ropolitan New York banking market. Appli- (Applicant) has assets of $753.6 million, and cant is ranked third in the market, with 8.1 Bank of Waynesboro (Bank) has assets of $43.4 percent of market deposits. On a pro forma million. Applicant and Bank operate in sepabasis, Applicant's market share will increase to rate banking markets. 8.3 percent, and Applicant will remain the third The banking factors and considerations relargest banking organization in the market. lating to the convenience and needs of the com- The banking factors and considerations remunity are consistent with approval. lating to the convenience and needs of the community are consistent with approval. Norstar Bank of Upstate New York, Albany, New York, to assume the assets and liabilities of the Greenwich branch of Chemical Bank, First Community Bank, Inc., Princeton, West New York, New York Virginia, to merge with First Community Bank- SUMMARY REPORT BY THE ATTORNEY GENERAL Castle Rock, Pineville, West Virginia (4/25/86) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signif- (5/2/86) icantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (4/25/86) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Norstar Bank of Upstate New York (Appli- BANK (5/23/86) cant), with assets of $2.7 billion, proposes to First Community Bank, Inc. (Applicant) has assume $11.7 million in assets and $11.6 million assets of $136 million, and First Community in liabilities of the Greenwich branch of Chem- Bank-Castle Rock (Bank) has assets of $56 ical Bank (Bank). Applicant and Bank operate million. Applicant and Bank are not located in in the Glen Falls banking market. On a pro the same market, and the proposal would have forma basis, Applicant will control 12.3 per- no significant effect on competition. cent of the commercial banking deposits in the The banking factors and considerations remarket. The Herfindahl-Hirschman index will lating to the convenience and needs of the comincrease only 47 points. Consummation of the munity are consistent with approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 255 Indiana Southern Bank, Sellersburg, Indiana, Ireland Bank, Malad City, Idaho, to acquire all to acquire United Bank of Indiana, N.A., the assets and liabilities of Downey State Bank, Clarksville, Indiana Downey, Idaho SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (5/2/86) (7/7/86) The proposed transaction would not be signif- No existing competition of significance will be icantly adverse to competition. eliminated by the proposed transaction. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (6/26/86) BANK (8/15/86) Indiana Southern Bank (Applicant) has assets Ireland Bank (Applicant) has assets of $25.2 of $82.4 million, and United Bank of Indiana, million, and Downey State Bank (Bank) has N.A. (Bank), has assets of $38 million. Ap- assets of $18.1 million. The Director of the plicant and Bank operate in the Louisville Idaho Department of Finance has recombanking market, and each controls less than 2 mended immediate action by the Federal Repercent of the commercial banking deposits in serve System to prevent the probable failure the market. Although Applicant, combined with of Bank. other commercial banking deposits controlled The banking factors and considerations reby its parent holding company, would control lating to the convenience and needs of the comslightly more than 30 percent of the market munity are consistent with approval. deposits, thrift institutions offer substantial competition to commercial banks. No significant adverse competitive effects arise from the Norstar Bank of Upstate New York, Albany, transaction. New York, to purchase assets and assume lia- The banking factors and considerations re- bilities of three branches of Citibank (New York lating to the convenience and needs of the com- State), N.A., Buffalo, New York munity are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (9/12/86) The proposed transaction would not have a significantly adverse effect on competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The Bank of New York, New York, New York, BANK (10/1/86) to acquire certain assets and assume certain li- Norstar Bank of Upstate New York (Appliabilities of three branches of The Home Savings cant), with assets of $2.7 billion, proposes to Bank, Brooklyn, New York purchase assets of $1 million and assume lia- SUMMARY REPORT BY THE ATTORNEY GENERAL bilities of $42 million of three branches of (5/2/86) Citibank (New York State), N.A., in the Al- The proposed transaction will not have a sig- bany banking market. Applicant's resulting innificantly adverse effect on competition. crease in market share in the Albany area is BASIS FOR APPROVAL BY THE FEDERAL RESERVE well within Justice Department and Board BANK (7/2/86) guidelines. The Bank of New York (Applicant), with as- The banking factors and considerations resets of $17.2 billion, proposes to acquire assets lating to the convenience and needs of the comof $1.4 million and liabilities of $79 million of munity are consistent with approval. three branches of The Home Savings Bank (Branches). Applicant and Branches operate in the metropolitan New York-New Jersey Security Savings Bank, Mars hall town, Iowa, to banking market. The pro forma market share acquire certain assets and liabilities of The First is 2.4 percent. The proposal would have no National Bank of Prairie City, Prairie City, Iowa significant effect on competition. SUMMARY REPORT BY THE ATTORNEY GENERAL The banking factors and considerations re- No report received. Request for report on the lating to the convenience and needs of the com- competitive factors was dispensed with, as aumunity are consistent with approval. thorized by the Bank Merger Act, to permit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 Tables 19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1986—Continued the Federal Reserve System to act immediately million in assets from the Hialeah branch of to safeguard depositors of The First National Popular Bank of Florida (Bank), with total Bank of Prairie City. banking assets of $71.2 million. Both Applicant and Bank are in the Miami-Fort Lauderdale BASIS FOR APPROVAL BY THE FEDERAL RESERVE banking market. As a result of this acquisition, BANK (7/24/86) Security Savings Bank (Applicant) has assets the Herfindahl-Hirschman index will remain of $163.3 million, and The First National Bank unchanged at 909. Thus, no significant adverse of Prairie City (Bank) has assets of $8.7 mil- competitive effects exist. lion. The banking factors and considerations re- The Comptroller of the Currency has re- lating to the convenience and needs of the comquested immediate action by the Federal Re- munity are consistent with approval. serve System to ensure continuation of Bank's services. Norstar Bank of Upstate New York, Albany, New York, to merge with Seaway National Bank, Watertown, New York Banco de Ponce, Ponce, Puerto Rico, to acquire certain assets and assume certain liabilities of SUMMARY REPORT BY THE ATTORNEY GENERAL (9/12/86) two branches of The East New York Savings The proposed transaction would not have a Bank, New York, New York significantly adverse effect on competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (9/26/86) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not have a BANK (11/14/86) significantly adverse effect on competition. Norstar Bank of Upstate New York (Applicant) has assets of $3.2 billion, and Seaway BASIS FOR APPROVAL BY THE FEDERAL RESERVE National Bank (Bank) has assets of $25.8 mil- BANK (10/10/86) lion. Applicant does not currently operate in Banco de Ponce (Applicant), with assets of $2.3 Bank's market, and no issues are raised with billion, proposes to acquire certain assets and respect to competition. Thus, the proposed assume certain liabilities of two branches of transaction would have no adverse competitive The East New York Savings Bank (Bank), with effects. assets of $1.4 billion. Both Applicant and Bank The banking factors and considerations reare in the metropolitan New York-New Jersey lating to the convenience and needs of the combanking market. As a result of this acquisition, munity are consistent with approval. Applicant's market share of 0.1 percent will remain unchanged. Consummation would re- United Virginia Bank, Richmond, Virginia, to sult in no significant adverse competitive efmerge with People's Bank of Chesapeake, Chesfects. apeake, Virginia The banking factors and considerations relating to the convenience and needs of the com- SUMMARY REPORT BY THE ATTORNEY GENERAL munity are consistent with approval. (10/17/86) The proposed transaction would not have a significantly adverse effect on competition. Imperial Bank of Florida, Coral Gables, Flor- BASIS FOR APPROVAL BY THE FEDERAL RESERVE ida, to acquire certain assets and assume certain BANK (11/3/86) liabilities of the Hialeah branch of Popular Bank United Virginia Bank (Applicant) has assets of of Florida, Miami, Florida $6.9 billion, and People's Bank of Chesapeake SUMMARY REPORT BY THE ATTORNEY GENERAL (Bank) has assets of $80 million. Applicant and (7/25/86) Bank compete in the areas of Norfolk-Ports- The proposed transaction would not have a mouth, Virginia, and Currituck County, North significantly adverse effect on competition. Carolina, with Applicant ranked second and BASIS FOR APPROVAL BY THE FEDERAL RESERVE Bank ranked eighth among 16 banks in the BANK (10/14/86) market. Applicant would remain the second Imperial Bank of Florida (Applicant), with as- largest bank in the market with 16.7 percent sets of $18.0 million, proposes to acquire $12.5 of commercial banking deposits. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 257 The banking factors and considerations re- The banking factors and considerations relating to the convenience and needs of the com- lating to the convenience and needs of the community are consistent with approval. munity are consistent with approval. Security Bank, Marshalltown, Iowa, to pur- First Interstate Bank of California, Los Ange- chase the assets and liabilities o/Hawkeye Bank les, California, to acquire the assets and assume& Trust, Eldora, Iowa the liabilities of First National Bank, Willows, SUMMARY REPORT BY THE ATTORNEY GENERAL California (11/21/86) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signif- No report received. Request for report on the icantly adverse to competition. competitive factors was dispensed with, as au- BASIS FOR APPROVAL BY THE FEDERAL RESERVE thorized by the Bank Merger Act, to permit BANK (12/30/86) the Federal Reserve System to act immediately Security Bank (Applicant) has assets of $188 to safeguard depositors of First National Bank. million, and Hawkeye Bank & Trust (Bank) BASIS FOR APPROVAL BY THE BOARD (11/21/86) has assets of $16.5 million. Applicant and Bank First Interstate Bank of California (Applicant) are not located in the same market, and the has assets of $20.6 billion, and First National proposal would have no significant effect on Bank (Bank) has assets of $65 million. competition. The Comptroller of the Currency has rec- The banking factors and considerations reommended immediate action by the Federal lating to the convenience and needs of the com- Reserve System to ensure continuation of Bank's munity are consistent with approval. Mergers Approved Involving Wholly Owned Subsidiaries of the Same Bank Holding Com- First Virginia Bank-Citizens, Clintwood, Virpany ginia, to merge with Peoples Bank of Pound, Pound, Virginia In each of the following cases, the summary report by the attorney general indicates that SUMMARY REPORT BY THE ATTORNEY GENERAL the transaction would not have a significantly (11/21/86) adverse effect on competition because the pro- The proposed transaction would not be signif- posed merger is essentially a corporate reoricantly adverse to competition. ganization. The Board of Governors, the Fed- BASIS FOR APPROVAL BY THE FEDERAL RESERVE eral Reserve Bank, or the Secretary of the Board BANK (11/28/86) of Governors, whichever approved the appli- First Virginia Bank-Citizens (Applicant) has cation, determined that the competitive effects assets of $28.7 million, and Peoples Bank of of the proposed transaction, the financial and Pound (Bank) has assets of $45.9 million. Ap- managerial resources and the prospects of the plicant and Bank are not located in the same banks concerned, and the convenience and market, and the proposal would have no sig- needs of the community to be served were connificant effect on competition. sistent with approval. Assets Date of Institution1 (millions of approval dollars) Commerce Union Bank, Nashville, Tennessee 1,956 3/7/86 Merger Commerce Union Bank of Humphreys County, Waverly, Tennessee 48 Commerce Union Bank of Rutherford County, Murfreesboro Tennessee 118 Commerce Union Bank of Sumner County, Gallatin, Tennessee 79 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 Tables 19. Mergers, Consolidations, and Acquisitions of Ass^;ts or Assumptions of Liabilities Approved by the Board of Governors.1986—Continued Assets Institution1 (millions of Date of approval dollars) The Toledo Trust Company Three Sea Gate, Toledo, Ohio... 2,184 3/25/86 Merger First Buckeye Bank, N.A., Mansfield, Ohio 833 The Merrill Trust Company, Bangor, Maine. 665 3/31/86 Merger Merrill Bank, N.A., Farmington, Maine 108 The Central Trust Company, Newark, Ohio 367 5/27/86 Merger The Clear Creek Valley Banking Company, Amanda, Ohio .. 15 Security Bank & Trust Company, Southgate, Michigan 1,100 6/19/86 Merger Security Bank & Trust Company of Oakland County, Novi, Michigan 50 State Bank of Carthage, Carthage, Indiana 11 6/23/86 Merger The First National Bank of Mays, Mays, Indiana 9 Ohio Citizens Bank, Toledo, Ohio 773 7/8/86 Merger The Citizens National Bank, Bryan, Ohio. 134 First Source Bank, South Bend, Indiana 827 8/15/86 Merger Community State Bank, North Liberty, Indiana. 19.7 Rocky Mountain State Bank, Salt Lake City, Utah 15 8/29/86 Merger Rocky Mountain State Bank of Bountiful, Bountiful, Utah .. 13 Mercantile Bank & Trust Company, Kansas City, Missouri.. 237 9/25/86 Merger Noland Road Mercantile Bank, Independence, Missouri 138 Mercantile Regional Bank, Kansas City, Missouri 164 Mercantile National Bank of Clay County, Kansas City, Missouri 31 Old Kent Bank of Kalamazoo, Kalamazoo, Michigan 28 10/1/86 Merger The American National Bank in Portage, Portage, Michigan 33 The American National Bank & Trust Company of Michigan, Kalamazoo, Michigan 420 Old Kent Bank-Southwest, Niles, Michigan 258 10/2/86 Merger The American Bank of Niles, N.A., Niles, Michigan. 25 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 259 Assets Institution1 (millions of Date of approval dollars) Norstar Bank, Rochester, New York 1,682 10/10/86 Merger Norstar Bank of Upstate New York, Albany, New York . 1,043 Hawkeye-Capital Bank & Trust Company, Des Moines, Iowa. 107 10/16/86 Merger Hawkeye Bank and Trust of Des Moines, Des Moines, Iowa... 61 Silicon Valley Bank, San Jose, California 101 10/31/86 Merger National Intercity Bank, Santa Clara, California . 54 Commerce Union Bank, Nashville, Tennessee 1,956 11/18/86 Merger Commerce Union Bank of Lawrence County, Lawrenceburg, Tennessee 64 Security Bank of Richmond, Richmond, Michigan. 83 11/25/86 Merger Security Bank Imlay City, Imlay City, Michigan ... 40 First Virginia-Commonwealth, Grafton, Virginia. 37 12/1/86 Merger First Virginia Bank-Surry, Surry, Virginia 17 The Merchants Bank, Kansas City, Missouri. 963 12/15/86 Merger The Bank of Kansas City, Kansas City 114 Westport Bank, Kansas City, Missouri 84 1. Each proposed transaction was to be effected are in chronological order of approval, under the charter of the first-named bank. The entries Mergers Approved Involving a Nonoperating to the acquisition of the surviving bank by the Institution with an Existing Bank holding company, the merger would have no effect on competition. The Board of Gover- The following transactions have no significant nors, the Federal Reserve Bank, or the Seceffect on competition; they merely facilitate retary of the Board of Governors, whichever the acquisition of the voting shares of a bank approved the application, determined that the or banks by a holding company. In such cases proposal would, in itself, have no adverse comthe summary report by the attorney general petitive effects, and that the financial factors indicates that the transaction will merely com- and considerations relating to the convenience bine an existing bank with a nonoperating in- and needs of the community were consistent stitution; in consequence, and without regard with approval. Assets Institution1 (millions of Date of dollars)2 approval Shelbyville Interim Bank 3/4/86 Merger Shelby County State Bank, Shelbyville, Illinois. 50 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 Tables 19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1986—Continued Assets Date of Institution1 (m d i o ll l i l o a n rs s ) 2 of approval B.N.S. Bank, Northbrook, Illinois 3/11/86 Merger Bank of the North Shore, Northbrook, Illinois . 32 The New Waterford Interim Bank, New Waterford, Ohio 3/27/86 Merger The New Waterford Bank, New Waterford, Ohio 46 The Bel Air Bank, Bel Air, Maryland . 4/21/86 Merger Commercial Bank, Bel Air, Maryland . 122 PCB Company, Hurricane, West Virginia 6/5/86 Merger Putnam County Bank, Hurricane, West Virginia. 128 New First Union Bank and Trust Company, Medaryville, Indiana 6/19/86 Merger First Union Bank and Trust Company, Winamac, Indiana 476 FIBC Service Bank III, Howe, Indiana. 8/5/86 Merger State Bank of Lima, Howe, Indiana 31 Central Virginia Bank, Powhatan, Virginia 8/28/86 Merger Community Bank of Powhatan, Powhatan, Virginia. 31 Barbour Interim Bank, Philippi, West Virginia. 9/15/86 Merger Barbour County Bank, Philippi, West Virginia. 36 Beach Bank, Seabrook, New Hampshire 9/26/86 Merger Seabrook Bank & Trust Company, Seabrook, New Hampshire 44 Lake view Interim Bank, Lake view, Michigan. 10/29/86 Merger Bank of Lake view, Lake view, Michigan 50 New Lowell State Bank, Lowell, Michigan. 11/25/86 Merger State Savings Bank, Lowell, Michigan 67 Traders Interim Bank, Spencer, West Virginia . 11/26/86 Merger Trader Bank, Spencer, West Virginia 63 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 261 19. — Continued Assets Date of Institution (millions of dollars)2 approval The Lunenburg County Bank, Kenbridge, Virginia 12/1/86 Merger Community Bank of Lunenburg, Kenbridge, Virginia 24 1. Each proposed transaction was to be effected 2. In each case, the first-named bank is newly orunder the charter of the first-named bank. The entries ganized and not in operation. are in chronological order of approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 The Federal Reserve System Boundaries of Federal Reserve Districts and their Branch Territories Q © 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

264 Directories and Meetings Board of Governors of the Federal Reserve System December 31, 1986 Term expires PAUL A. VOLCKER of New Jersey, Chairman1 January 31, 1992 MANUEL H. JOHNSON of Virginia, Vice Chairman1 January 31, 2000 Vacant January 31, 1988 WAYNE D. ANGELL of Kansas January 31, 1994 EMMETT J. RICE of New York January 31, 1990 MARTHA R. SEGER of Michigan January 31, 1998 H. ROBERT HELLER of California January 31, 1996 OFFICE OF BOARD MEMBERS OFFICE OF EXECUTIVE JOSEPH R. COYNE, Assistant to the DIRECTOR FOR INFORMATION Board RESOURCES MANAGEMENT DONALD J. WINN, Assistant to the ALLEN E. BEUTEL, Executive Director Board STEPHEN R. MALPHRUS, Assistant STEVEN M. ROBERTS, Assistant to the Director Chairman BOB S. MOORE, Special Assistant to the Board OFFICE OF THE SECRETARY WILLIAM W. WILES, Secretary OFFICE OF STAFF DIRECTOR BARBARA R. LOWREY, Associate FOR MONETARY AND Secretary FINANCIAL POLICY JAMES MCAFEE, Associate Secretary DONALD L. KOHN, Deputy Staff Director NORM AND R. V. BERNARD, Special LEGAL DIVISION Assistant to the Board MICHAEL BRADFIELD, General Counsel J. VIRGILMATTINGLY, JR., Deputy General Counsel OFFICE OF STAFF DIRECTOR RICHARD M. ASHTON, Associate FOR MANAGEMENT General Counsel S. DAVID FROST, Staff Director OLIVER IRELAND, Associate General EDWARD T. MULRENIN, Assistant Staff Counsel Director RICKI R. TIGERT, Assistant General CHARLES L. HAMPTON, Senior Counsel Technical Adviser MARYELLEN A. BROWN, Assistant to PORTIA W. THOMPSON, Equal the General Counsel Employment Opportunity Programs Officer DIVISION OF RESEARCH OFFICE OF STAFF DIRECTOR AND STATISTICS FOR FEDERAL RESERVE BANK JAMES L. KICHLINE, Director ACTIVITIES EDWARD C. ETTIN, Deputy Director THEODORE E. ALLISON, Staff Director MICHAEL J. PRELL, Deputy Director 1. The designations as Chairman and Vice Chairman expire on August 6, 1987, and August 4, 1990, respectively, unless the services of these members of the Board shall have terminated Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 265 DIVISION OF RESEARCH DIVISION OF FEDERAL RESERVE AND STATISTICS—Continued BANK OPERATIONS—Continued JARED J. ENZLER, Associate Director CHARLES W. BENNETT, Assistant DAVID E. LINDSEY, Associate Director Director ELEANOR J. STOCKWELL, Associate ANNE M. DEBEER, Assistant Director Director JACK DENNIS, JR., Assistant Director MARTHA BETHEA, Deputy Associate EARL G. HAMILTON, Assistant Director Director JOHN H. PARRISH, Assistant Director THOMAS D. SIMPSON, Deputy Associate FLORENCE M. YOUNG, Adviser Director LAWRENCE SLIFMAN, Deputy Associate Director PETER A. TINSLEY, Deputy Associate Director DIVISION OF BANKING SUSAN J. LEPPER, Assistant Director SUPERVISION AND REGULATION RICHARD D. PORTER, Assistant WILLIAM TAYLOR, Director Director WELFORD S. FARMER, Deputy Director2 MARTHA S. SCANLON, Assistant FREDERICK R. DAHL, Associate Director Director JOYCE ZICKLER, Assistant Director DON E. KLINE, Associate Director LEVON H. GARABEDIAN, Assistant FREDERICK M. STRUBLE, Associate Director (Administration) Director WILLIAM A. RYBACK, Deputy Associate Director STEPHEN C. SCHEMERING, Deputy Associate Director DIVISION OF INTERNATIONAL RICHARD SPILLENKOTHEN, Deputy FINANCE Associate Director EDWIN M. TRUMAN, Director HERBERT A. BIERN, Assistant Director LARRY J. PROMISEL, Senior Associate JOE M. CLEAVER, Assistant Director Director ANTHONY CORNYN, Assistant Director CHARLES J. SIEGMAN, Senior Associate JAMES I. GARNER, Assistant Director Director JAMES D. GOETZINGER, Assistant DAVID H. HOWARD, Deputy Associate Director Director ROBERT F. GEMMILL, Staff Adviser MI D CH ir A e E ct L o r MARTINSON, Assistant D K PE O A T N R E A E R L N D H H B O . . O J A P O D E H A R N M , S S I O I , I N A , , s A s A i s s s s t s i a i s n s t t a t a n D n t i t r D e D c i i t r o r e e r c c t t o o r r L R SI A O D U B N R E E R A Y T M M S . . . H P SU L O O S M S T E A K R N IN , , , S A A e s c s s i u s s i r t s i a t t a n ie n t s t D D C ir r i e r e e c d c t i o t t o r r RALPH W. SMITH, JR., Assistant Officer Director DIVISION OF FEDERAL RESERVE DIVISION OF CONSUMER BANK OPERATIONS AND COMMUNITY AFFAIRS CLYDE H. FARNSWORTH, JR., Director GRIFFITH L. GARWOOD, Director ELLIOTT C. MCENTEE, Associate JERAULD C. KLUCKMAN, Associate Director Director DAVID L. ROBINSON, Associate Director GLENN E. LONEY, Assistant Director C. WILLIAM SCHLEICHER, JR., Associate ELLEN MALAND, Assistant Director Director DOLORES S. SMITH, Assistant Director 2. On loan from the Federal Reserve Bank of Richmond. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 Directories and Meetings Board of Governors of the Federal Reserve System — Continued DIVISION OF PERSONNEL DIVISION OF HARDWARE AND DAVID L. SHANNON, Director SOFTWARE SYSTEMS JOHN R. WEIS, Assistant Director BRUCE M. BEARDSLEY, Director CHARLES W. WOOD, Assistant Director THOMAS C. JUDD, Assistant Director ELIZABETH B. RIGGS, Assistant Director DIVISION OF SUPPORT SERVICES ROBERT J. ZEMEL, Assistant Director ROBERT E. FRAZIER, Director WALTER W. KREIMANN, Associate DIVISION OF APPLICATIONS Director DEVELOPMENT AND GEORGE M. LOPEZ, Assistant Director STATISTICAL SERVICES WILLIAM R. JONES, Director DAY RADEBAUGH, Assistant Director OFFICE OF THE CONTROLLER RICHARD C. STEVENS, Assistant GEORGE E. LIVINGSTON, Controller Director BRENT L. BOWEN, Assistant Controller PATRICIA A. WELCH, Assistant Director Federal Open Market Committee December 31, 1986 Members PAUL A. VOLCKER, Chairman, Board of Governors E. GERALD CORRIGAN, Vice Chairman, elected member by Federal Reserve Bank of New York WAYNE D. ANGELL, Board of Governors ROGER GUFFEY, elected by Federal Reserve Banks of Minneapolis, Kansas City, and San Francisco H. ROBERT HELLER, Board of Governors KAREN N. HORN, elected by Federal Reserve Banks of Cleveland and Chicago MANUEL H. JOHNSON, Board of Governors THOMAS C. MELZER, elected by Federal Reserve Banks of Atlanta, St. Louis, and Dallas FRANK E. MORRIS, elected by Federal Reserve Banks of Boston, Philadelphia, and Richmond EMMETT J. RICE, Board of Governors MARTHA R. SEGER, Board of Governors Alternate Members EDWARD G. BOEHNE, elected by Federal Reserve Banks of Boston, Philadelphia, and Richmond ROBERT H. BOYKIN, elected by Federal Reserve Banks of Atlanta, St. Louis, and Dallas SILAS KEEHN, elected by Federal Reserve Banks of Cleveland and Chicago GARY H. STERN, elected by Federal Reserve Banks of Minneapolis, Kansas City, and San Francisco Digitized for FRASER THOMAS M. TIMLEN, elected by Federal Reserve Bank of New York http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 267 Federal Open Market Committee—Continued Officers NORMAND R. V. BERNARD, RICHARD G. DAVIS, Assistant Secretary Associate Economist MICHAEL BRADFIELD, THOMAS E. DAVIS, General Counsel Associate Economist JAMES H. OLTMAN, DONALD L. KOHN, Deputy General Counsel Associate Economist JAMES L. KICHLINE, DAVID E. LINDSEY, Economist Associate Economist EDWIN M. TRUMAN, ALICIA H. MUNNELL, Economist (International) Associate Economist ANATOL B. BALBACH, MICHAEL J. PRELL, Associate Economist Associate Economist JOHN M. DAVIS, CHARLES J. SIEGMAN, Associate Economist 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 1986, the Federal Open Market of the Federal Open Market Committee Committee held eight regularly scheduled in this REPORT.) meetings (See Record of Policy Actions b'cdcuil \iivisi>ry Council December 31, 1986 Members District 1—ROBERT L. NEWELL, Chairman and Chief Executive Officer, Connecticut National Bank, Hartford, Connecticut District 2—JOHN F. MCGILLICUDDY, Chairman of the Board and Chief Executive Officer, Manufacturers Hanover Trust Company, 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—BENNETT A. BROWN, Chairman and Chief Executive Officer, Citizens and Southern Georgia Corporation and The Citizens and Southern National Bank, Atlanta, Georgia District 7—HAL C. KUEHL, Chairman of the Board and Chief Executive Officer, First Wisconsin National Bank of Milwaukee, Milwaukee, Wisconsin Digitized forD FiRstAriScEt R8 —WILLIAM H. BOWEN, Chairman of the Board and Chief Executive http://fraser.stlouisfed.org/ Officer, First Commercial Bank, N.A., Little Rock, Arkansas Federal Reserve Bank of St. Louis

268 Directories and Meetings Federal Advisory Council—Continued Members—Continued District 9—D. H. ANKENY, JR., Chairman and Chief Executive Officer, First Bank System, Minneapolis, Minnesota District 10—F. PHILLIPS GILTNER, President, First National Bank, Omaha, Nebraska District 11—NAT S. ROGERS, Consultant and Director, First City National Bancorporation of Texas, Inc., Houston, Texas District 12—G. ROBERT TRUEX, JR., Chairman, Rainier Bancorporation and Rainier National Bank, Seattle, Washington Officers ROBERT L. NEWELL, President WILLIAM H. BOWEN, Vice President HERBERT V. PROCHNOW, Secretary WILLIAM J. KORSVIK, Associate Secretary Directors GEORGE A. BUTLER JOHN G. MEDLIN, JR. HAL C. KUEHL Meetings of the Federal Advisory Council sentatives of the banking industry, one were held on February 6-7, May 1-2, from each Federal Reserve District, is re- September 11-12, and November 13-14, quired by law to meet in Washington at 1986. The Board of Governors met with least four times per year and is authorized the council on February 7, May 2, Sep- by the Federal Reserve Act to consult with tember 12, and November 14, 1986. The and advise the Board on all matters within council, which is composed of 12 repre- the jurisdiction of the Board. Consumer Advisory Council December 31, 1986 Members RACHEL G. BRATT, Associate Professor, Department of Urban and Environmental Policy, Tufts University, Medford, Massachusetts EDWIN B. BROOKS, President, Security Federal Savings and Loan Association, Richmond, Virginia JONATHAN A. BROWN, Director, BankWatch, Washington, D.C. MICHAEL S. CASSIDY, Senior Vice President, Chase Manhattan Bank, New York, New York THERESA FAITH CUMMINGS, Social Services Consultant, Springfield, Illinois NEIL J. FOGARTY, Attorney, Hudson County Legal Services, Jersey City, New Jersey STEVEN M. GEARY, Associate General Counsel, Missouri Division of Finance, Jefferson City, Missouri KENNETH A. HALL, President, Great Southern National Bank of Jackson, Jackson, Mississippi STEVEN W. HAMM, Administrator, South Carolina Department of Consumer Affairs, Columbia, South Carolina Digitized for FRASER ROBERT J. HOBBS, Senior Attorney, National Consumer Law Center, Boston, http://fraser.stlouisfed.org/ Massachusetts Federal Reserve Bank of St. Louis

Directories and Meetings 269 Consumer Advisory Council—Continued Members—Continued ROBERT W. JOHNSON, Professor of Management and Director, Credit Research Center, Purdue University, West Lafayette, Indiana JOHN M. KOLESAR, President, Ameritrust Development Bank, Cleveland, Ohio EDWARD N. LANGE, Partner, Davis, Wright, Todd, Riese & Jones, Seattle, Washington ALAN B. LERNER, Senior Executive Vice President, Associates Corporation of North America, Dallas, Texas FRED S. MCCHESNEY, Visiting Fellow of Law and Economics, University of Chicago, Chicago, Illinois 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, Chairman, 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 SANDRA R. PARKER, Chairman, Banking Committee, Richmond United Neighborhoods, Richmond, Virginia JOSEPH L. PERKOWSKI, Chief Executive Officer, Minneapolis Federal Employees Credit Union, Minneapolis, Minnesota BRENDA L. SCHNEIDER, Director of Community Relations, Manufacturers National Bank, Detroit, Michigan JANE SHULL, Director, Institute for the Study of Civic Values, Philadelphia, Pennsylvania TED L. SPURLOCK, Vice President and Director of Credit and Consumer Banking Services, J.C. Penney Company, Inc., Dallas, Texas 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 EDWARD J. WILLIAMS, Senior Vice President, Consumer Banking Group, Harris Trust and Savings Bank, Chicago, Illinois MERVIN WINSTON, Vice President, First Bank System, Inc., Minneapolis, Minnesota MICHAEL ZOROYA, Retail Services Consultant, The May Department Stores, St. Louis, Missouri Officers MARGARET M. MURPHY, Chairman LAWRENCE S. OKINAGA, Vice Chairman The Consumer Advisory Council met with and representatives of consumer and members of the Board of Governors on community interests. It was established March 20-21, June 19-20, and October pursuant to the 1976 amendments to the 8-9, 1986. The council is composed of Equal Credit Opportunity Act to advise academics, state government officials, the Board on consumer financial services, representatives of the financial industry, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 Directories and Meetings Thrift Institutions Advisory Council December 31, 1986 Members ELLIOTT G. CARR, President and Chief Executive Officer, The Cape Cod Five Cents Savings Bank, Orleans, Massachusetts M. TODD COOKE, Vice Chairman, Meritor Financial Group, Philadelphia, Pennsylvania RICHARD H. DEIHL, Chairman of the Board and Chief Executive Officer, Home Savings of America, Los Angeles, California JOHN C. DICUS, President, Capitol Federal Savings and Loan Association, Topeka, Kansas HAROLD W. GREENWOOD, JR., Chairman, President, and Chief Executive Officer, Midwest Federal Savings and Loan Association, Minneapolis, Minnesota JOHN A. HARDIN, Chairman and President, First Federal Savings Bank, Rock Hill, South Carolina JAMIE J. JACKSON, President, Commonwealth Financial Group, Houston, Texas FRANCES LESNIESKI, President, Michigan State University Federal Credit Union, East Lansing, Michigan DONALD F. MCCORMICK, Chairman of the Board, Howard Savings Bank, Livingston, New Jersey HERSCHEL ROSENTHAL, President, Flagler Federal Savings and Loan Association, Miami, Florida GARY L. SIRMON, President, First Federal Savings and Loan Association, Walla Walla, Washington MICHAEL R. WISE, Chairman and Chief Executive Officer, Silverado Banking, Denver, Colorado Officers RICHARD H. DEIHL, President MICHAEL R. WISE, Vice President The members of the Thrift Institutions associations, and savings banks, consults Advisory Council met with the Board of with and advises the Board on issues per- Governors on January 31, May 1, Sep- taining to the thrift industry and on vartember 9, and November 6, 1986. The ious other matters within the Board's council, which is composed of represent- jurisdiction, atives from credit unions, savings and loan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 271 Officers nt Federal Reserve Banks, Branches, and Office* December 31, 19861 BANK, Chairman2 President Vice President Branch, or facility Deputy Chairman First Vice President in charge of Branch BOSTON3 Joseph A. Baute Frank E. Morris George N. Robert W. Hatsopoulos Eisenmenger NEW YORK3 John Brademas E. Gerald Corrigan Clifton R. Thomas M. Timlen Wharton, Jr. Buffalo Mary Ann John T. Keane Lambertsen PHILADELPHIA .. Robert M. Landis Edward G. Boehne Nevius M. Curtis Richard L. Smoot CLEVELAND3 W.H. Knoell Karen N. Horn E. Mandell de William H. Windt Hendricks Cincinnati Owen B. Butler Charles A. Cerino4 Pittsburgh James E. Haas Harold J. Swart4 RICHMOND3 Leroy T. Robert P. Black Canoles, Jr. Jimmie R. Robert A. Monhollon Georgine Baltimore Robert L. Tate Robert D. McTeer4 Charlotte Wallace J. Albert D. Jorgenson Tinkelenberg4 Culpeper John G. Stoides4 ATLANTA John H. Robert P. Forrestal Weitnauer, Jr. Jack Guynn Delmar Harrison Bradley Currey, Jr. Birmingham A.G. Trammell Fred R. Herr Jacksonville E. William James D. Hawkins Nash, Jr. Miami Sue McCourt Cobb Patrick K. Barron Nashville Patsy R. Williams Jeffrey J. Wells New Orleans Sharon A. Perlis Henry H. Bourgaux, Jr. CHICAGO3 Robert J. Day Silas Keehn Marcus Alexis Daniel M. Doyle Detroit Robert E. Brewer Roby L. Sloan4 ST. LOUIS W.L. Hadley Thomas C. Melzer Griffin Joseph P. Garbarini Mary P. Holt Little Rock Sheffield Nelson John F. Breen Louisville William C. James E. Conrad Ballard, Jr. Memphis G. Rives Neblett Paul I. Black, Jr. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 Directories and Meetings BANK, Chairman2 President Vice President Branch, or facility Deputy Chairman First Vice President in charge of Branch MINNEAPOLIS John B. Davis, Jr. Gary H. Stern Michael W. Thomas E. Gainor Wright Helena Marcia S. Anderson Robert F. McNellis KANSAS CITY Irvine O. Roger Guffey Hockaday, Jr. Henry R. Robert G. Czerwinski Lueder Denver James E. Nielson Enis Alldredge, Jr. Oklahoma City Patience S. Latting William G. Evans Omaha Kenneth L. Robert D. Hamilton Morrison DALLAS Robert D. Rogers Robert H. Boykin Bobby R. Inman William H. Wallace James L. Stull El Paso Peyton Yates Joel L. Koonce, Jr. Walter M. J.Z. Rowe4 Houston Mischer, Jr. Ruben M. Garcia Thomas H. Robertson San Antonio Alan C. Furth Robert T. Parry SAN FRANCISCO Fred W. Andrew Carl E. Powell Richard C. Seaver Thomas C. Warren5 Los Angeles Paul E. Bragdon Angelo S. Carella4 Portland Don M. Wheeler E. Ronald Liggett4 Salt Lake City John W. Ellis Gerald R. Kelly4 Seattle 1. A current list of these officers appears each month Oriskany, New York; Columbus, Ohio; Columbia, in the Federal Reserve Bulletin. South Carolina; Charleston, West Virginia; Des 2. The Chairman of a Federal Reserve Bank, by Moines, Iowa; Indianapolis, Indiana; and Milwaustatute, serves as Federal Reserve Agent. kee, Wisconsin. 3. Additional offices of these Banks are located at 4. Senior Vice President. Lewistown, Maine; Windsor Locks, Connecticut; 5. Executive Vice President. Cranford, New Jersey; Jericho, New York; Utica at Conference of Chairmen Robert J. Day as Vice Chairman, and Leroy T. Canoles, Jr., as the other member. The chairmen of the Federal Reserve Banks are organized into the Conference Conference of Presidents of Chairmen that meets to consider matters of common interest and to consult The presidents of the Federal Reserve with and advise the Board of Governors. Banks are organized into the Conference Such meetings, attended also by the dep- of Presidents, which meets periodically to uty chairmen, were held in Washington consider matters of common interest and on June 4-5 and December 3-4, 1986. to consult with and advise the Board of The Executive Committee of the Con- Governors. On October 15, 1985, Edference of Chairmen during 1986 com- ward G. Boehne, President of the Federal prised Robert D. Rogers, Chairman; John Reserve Bank of Philadelphia, was elected H. Weitnauer, Jr., Vice Chairman; and Chairman of the conference for 1986, and Joseph A. Baute, member. Silas Keehn, President of the Federal Re- On December 4, 1986, the Conference serve Bank of Chicago, was elected Vice elected its Executive Committee for 1987, Chairman. Joanna H. Frodin, of the Fednaming Joseph A. Baute as Chairman, eral Reserve Bank of Philadelphia, was ap- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 273 pointed Secretary, and Joan M. DeRycke, Class A directors represent the stockof the Federal Reserve Bank of Chicago, holding member banks in each Federal was appointed Assistant Secretary. Reserve District. Class B and Class C directors represent the public and are cho- Conference of First Vice sen with due, but not exclusive, consid- Presidents eration to the interests of agriculture, commerce, industry, services, labor, and The Conference of First Vice Presidents consumers; they may not be officers, diof the Federal Reserve Banks was orgarectors, or employees of any bank. In adnized in 1969 to meet periodically to condition, Class C directors may not be stocksider operational issues and other matholders of any bank. ters. On October 21, 1985, Richard L. Smoot, First Vice President of the Federal For the election of Class A and Class Reserve Bank of Philadelphia, was elected B directors, the Board of Governors clas- Chairman of the conference for 1986, and sifies the member banks of each Federal Daniel M. Doyle, First Vice President of Reserve District into three groups. Each the Federal Reserve Bank of Chicago, was group, which comprises banks with simelected Vice Chairman. Joanna H. Fro- ilar capitalization, elects one Class A didin, of the Federal Reserve Bank of Philrector and one Class B director. The Board adelphia, was appointed Secretary, and of Governors designates one Class C di- Joan M. DeRycke, of the Federal Rerector as chairman of the board of direcserve Bank of Chicago, was appointed tors and Federal Reserve Agent of each Assistant Secretary. District Bank and appoints another Class C director as deputy chairman. Directors Federal Reserve Branches have either The following list of directors of Federal five or seven directors, a majority of whom Reserve Banks and Branches shows for are appointed by the parent Federal Reeach director the class of directorship, the serve Bank; the others are appointed by principal business affiliation, and the date the Board of Governors. One of the dithe term expires. Each Federal Reserve rectors appointed by the Board is desig- Bank has nine members on its board of nated annually as chairman of the board directors: three Class A and three Class of that Branch in a manner prescribed by B directors, who are elected by the stock- the parent Federal Reserve Bank. holding member banks, and three Class For the name of the chairman and dep- C directors, who are appointed by the uty chairman of the board of directors of Board of Governors of the Federal Re- each Reserve Bank and of the chairman serve System. Directors are chosen with- of each Branch, see the preceding table, out discrimination as to race, creed, color, "Officers of Federal Reserve Banks, sex, or national origin. Branches, and Offices." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 Directories and Meetings Term District 1—BOSTON Dec'fl Class A William S. Edgerly Chairman of the Board and President, State Street Bank and Trust Company, Boston, Massachusetts 1986 Homer B. Ellis, Jr Chairman, Factory Point National Bank, Manchester Center, Vermont 1987 Harry R. Mitiguy President, Howard Bancorp, Burlington, Vermont 1988 Class B Richard M. Oster President and Chief Executive Officer, Cookson America, Inc., Providence, Rhode Island 1986 Ralph Z. Sorenson Chairman, President and Chief Executive Officer, Barry Wright Corporation, Newton Lower Falls, Massachusetts 1987 Matina S. Horner President, Radcliffe College, Cambridge, Massachusetts 1988 Class C Michael J. Harrington Harrington Company, Peabody, Massachusetts 1986 Joseph A. Baute Chairman and Chief Executive Officer, Markem Corporation, Keene, New Hampshire 1987 George N. Hatsopoulos....Chairman of the Board and President, Thermo Electron Corporation, Waltham, Massachusetts 1988 District 2—NEW YORK Class A 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 Lewis T. Preston Chairman of the Board, Morgan Guaranty Trust Company of New York, New York, New York 1988 Class B John R. Opel Chairman of the Board, International Business Machines Corp., Armonk, New York 1986 John F. Welch, Jr Chairman and Chief Executive Officer, General Electric Company, Fairfield, Connecticut 1987 Richard L. Gelb Chairman and Chief Executive Officer, Bristol-Myers Company, New York, Digitized for FRASER New York 1988 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 275 Term expires Class C Dec. 31 Clifton R. Wharton, Jr Chancellor, State University of New York System, Albany, New York 1986 Virginia A. Dwyer Senior Vice President—Finance (Retired), American Telephone and Telegraph Co., New York, New York. 1987 John Brademas President, New York University, New York, New York 1988 BUFFALO BRANCH Appointed by the Federal Reserve Bank Herbert Fort President, The Bath National Bank, Bath, New York 1986 Ross B. Kenzie Chairman and Chief Executive Officer, Goldome FSB, Buffalo, New York 1987 R. Carlos Carballada President and Chief Executive Officer, Central Trust Company, Rochester, New York 1988 Donald I. Wickham President, Tri-Way Farms, Inc., Stanley, New York 1988 Appointed by the Board of Governors Matthew Augustine President and Chief Executive Officer, Eltrex Industries, Inc., Rochester, New York 1986 Joseph Yantomasi Consultant, United Auto Workers, Buffalo, New York 1987 Mary Ann Lambertsen Vice President, Human Resources, Fisher-Price, East Aurora, New York 1988 District 3—PHILADELPHIA Class A 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 Clarence D. McCormick...President, The Farmers and Merchants National Bank, Bridgeton, New Jersey 1988 Class B 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, Digitized for FRASER Pennsylvania 1987 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

276 Directories and Meetings Term expires Nicholas Riso President and Chief Executive Officer, Dec. 31 Giant Food Stores, Inc., Carlisle, Pennsylvania 1988 Class C 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 Nevius M. Curtis Chairman and Chief Executive Officer, Delmarva Power & Light Company, Wilmington, Delaware 1988 District 4—CLEVELAND Class A 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 William A. Stroud Chairman and President, First-Knox National Bank, Mount Vernon, Ohio 1988 Class B 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 Daniel M. Galbreath President, John W. Galbreath & Co., Columbus, Ohio 1988 Class C W.H. Knoell President and Chief Executive Officer, Cyclops Corporation, Pittsburgh, Pennsylvania 1986 E. Mandell de Windt Chairman of the Board (Retired), Eaton Corporation, Cleveland, Ohio 1987 John R. Miller Former President and CEO, The Standard Oil Company, Cleveland, Ohio 1988 CINCINNATI BRANCH Appointed by the Federal Reserve Bank Vernon J. Cole Executive Vice President and Chief Executive Officer, Harlan National Bank, Harlan, Kentucky 1986 Sherrill Cleland President, Marietta College, Marietta, Digitized for FRASER Ohio 1987 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 277 Term expires Jerry L. Kirby Chairman of the Board, President, and Dec. 31 Chief Executive Officer, Citizens Federal Savings & Loan Association, Dayton, Ohio 1987 Robert A. Hodson President and Chief Executive Officer, 1st Security Bank, Hillsboro, Ohio 1988 Appointed by the Board of Governors Owen B. Butler Chairman of the Board (Retired), The Procter & Gamble Company, Cincinnati, Ohio 1986 Don Ross Owner, Dunreath Farm, Lexington, Kentucky 1987 Kate Ireland National Chairman, Frontier Nursing Service, Wendover, Kentucky 1988 PITTSBURGH BRANCH Appointed by the Federal Reserve Bank 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 Former Vice Chairman, Aluminum Company of America, Pittsburgh, Pennsylvania 1987 Lawrence F. Klima President, The First National Bank of Pennsylvania, Erie, Pennsylvania 1988 Appointed by the Board of Governors Karl M. von der Heyden ..Senior Vice President-Finance and Chief Financial Officer, H. J. Heinz Company, Pittsburgh, Pennsylvania 1986 Milton A. Washington President and Chief Executive Officer, Allegheny Housing Rehabilitation Corporation, Pittsburgh, Pennsylvania 1987 James E. Haas President and Chief Operating Officer, National Intergroup, Inc., Pittsburgh, Pennsylvania 1988 District 5—RICHMOND Class A 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, Digitized for FRASER N.A., Charleston, West Virginia 1987 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 Directories and Meetings Term expires K. Donald Menefee Chairman of the Board and Chief Executive Dec. 31 Officer, Madison National Bank, Washington, D.C 1988 Class B 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 Edward H. Covell President, The Covell Company, Easton, Maryland 1988 Class C Leroy T. Canoles, Jr President, Kaufman & Canoles, Norfolk, Virginia 1986 Hanne Merriman President, Garfinckel's, Washington, D.C. .. 1987 Robert A. Georgine President, Building & Construction Trades Department, AFL-CIO, Washington, D.C 1988 BALTIMORE BRANCH Appointed by the Federal Reserve Bank 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 H. Grant Hathaway Chairman of the Board, Equitable Bank, N.A., Baltimore, Maryland 1988 Joseph W. Mosmiller Chairman of the Board, Loyola Federal Savings and Loan Association, Baltimore, Maryland 1988 Appointed by the Board of Governors Robert L. Tate Chairman, Tate Industries, Baltimore, Maryland 1986 Gloria L. Johnson President, Hutzler Brothers Company, Baltimore, Maryland 1987 Thomas R. Shelton President, Resource Management Group, Inc., Salisbury, Maryland 1988 CHARLOTTE BRANCH Appointed by the Federal Reserve Bank John A. Hardin Chairman of the Board and President, First Federal Savings Bank, Rock Hill, South Carolina 1986 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 279 Term expires James M. Culberson, Jr. ..Chairman and President, The First National Dec. 31 Bank of Randolph County, Asheboro, North Carolina 1987 J. Donald Collier Orangeburg, South Carolina 1988 James G. Lindley Chairman, South Carolina National Corporation, and Chairman and President, South Carolina National Bank, Columbia, South Carolina 1988 Appointed by the Board of Governors Wallace J. Jorgenson President, Jefferson-Pilot Communications Company, Charlotte, North Carolina 1986 James E. Bostic, Jr Division General Manager, Convenience Products Division, Georgia-Pacific Corporation, Aiken, South Carolina 1987 G. Alex Bernhardt President, Bernhardt Industries, Inc., Lenoir, North Carolina 1988 District 6—ATLANTA Class A Mary W. Walker Vice Chairman, The National Bank of Walton County, Monroe, Georgia 1986 E. B. Robinson, Jr Chairman and Chief Executive Officer, Deposit Guaranty National Bank and Deposit Guaranty Corporation, Jacksonville, Mississippi 1987 Virgil H. Moore, Jr Chairman and Chief Executive Officer, First Farmers and Merchants National Bank, Columbia, Tennessee 1988 Class B Harold B. Blach, Jr President, Blach's Inc., Birmingham, Alabama 1986 Horatio C. Thompson President, Horatio Thompson Investments, Inc., Baton Rouge, Louisiana 1987 Bernard F. Sliger President, Florida State University, Tallahassee, Florida 1988 Class C 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 John H. Weitnauer, Jr Chairman (Retired), Rich way, Atlanta, Georgia 1988 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 Directories and Meetings Term expires BIRMINGHAM BRANCH Dec. 31 Appointed by the Federal Reserve Bank 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 Judith Thompson Vice Chairman, Thompson Tractor Company, Inc., Birmingham, Alabama .... 1988 Milton A. Wendland Owner-Operator, Autauga Farming Company, Autaugaville, Alabama 1988 Appointed by the Board of Governors Margaret E.M. Tolbert Associate Provost for Research and Development and Director, Carver Research Foundation, Tuskegee University, Tuskegee, Alabama 1986 A.G. Trammell President, Alabama Labor Council, AFL-CIO, Birmingham, Alabama 1987 Roy D. Terry President and Chief Executive Officer, Terry Manufacturing Company, Inc., Roanoke, Alabama 1988 JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank John D. Uible Chairman and Chief Executive Officer, Florida National Banks of Florida, Inc., Jacksonville, Florida 1986 Buell G. Duncan, Jr Chairman, President, and Chief Executive Officer, Sun Bank, N.A., Orlando, Florida 1987 Robert R. Deison President and Chairman of the Board, Andrew Jackson State Savings and Loan Association, Tallahassee, Florida 1988 George W. Gibbs III President, Atlantic Dry Dock Corporation, Jacksonville, Florida 1988 Appointed by the Board of Governors Saundra H. Gray Owner, Gemini Springs Farm, DeBary, Florida 1986 Andrew A. Robinson Dean, College of Education and Human Services, University of North Florida, Jacksonville, Florida 1987 E. William Nash, Jr President, South-Central Operations, The Prudential Insurance Company of America, Jacksonville, Florida 1988 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 281 Term expires MIAMI BRANCH Dec. 31 Appointed by the Federal Reserve Bank 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 William H. Losner President and Chief Executive Officer, The First National Bank of Homestead, Homestead, Florida 1988 Appointed by the Board of Governors 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 Sue McCourt Cobb Attorney, Greenberg, Traurig, Askew, Hoffman, Lipoff, Rosen, and Quentel, P.A., Miami, Florida 1988 NASHVILLE BRANCH Appointed by the Federal Reserve Bank 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 Eugene C. Cheatham President, Advanced Integrated Technology, Inc., Nashville, Tennessee 1988 Shirley A. Zeitlin President, Shirley Zeitlin & Co. Realtors, Nashville, Tennessee 1988 Appointed by the Board of Governors 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 Condon S. Bush President, Bush Brothers & Company, Dandridge, Tennessee 1988 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 Directories and Meetings Term expires NEW ORLEANS BRANCH Dec. 31 Appointed by the Federal Reserve Bank Carl E. Jones, Jr Chairman, President, and Chief Executive Officer, First Alabama Bank of Mobile, N.A., Mobile, Alabama 1986 James G. Boyer Chairman, President, and Chief Executive Officer, Gulf National Bank at Lake Charles, Lake Charles, Louisiana 1987 Alan R. Barton President and Chief Executive Officer, Mississippi Power Company, Gulfport, Mississippi 1988 Robert M. Shofstahl President and Chief Executive Officer, Pelican Homestead and Savings Association, Metairie, Louisiana 1988 Appointed by the Board of Governors Leslie B. Lampton President, Ergon, Inc., Jackson, Mississippi 1986 Caroline K. Theus President, Ingle wood Land and Development Company, Alexandria, Louisiana 1987 Sharon A. Perlis President, Sharon A. Perlis (APLC), Metairie, Louisiana 1988 District 7—CHICAGO Class A O. Jay Tomson Chairman of the Board and Chief Executive Officer, Citizens National Bank of Charles City, Charles City, Iowa 1986 Barry F. Sullivan Chairman of the Board and Chief Executive Officer, First National Bank of Chicago, Chicago, Illinois , 1987 John W. Gabbert President and Chief Executive Officer, First National Bank and Trust Company, LaPorte, Indiana 1988 Class B Leon T. Kendall Chairman of the Board, Mortgage Guaranty Insurance Corporation, Milwaukee, Wisconsin 1986 Edward D. Powers President and Chief Executive Officer, Mueller Company, Decatur, Illinois 1987 Max J. Naylor Farmer, Jefferson, Iowa 1988 Class C Robert J. Day Chairman and Chief Executive Officer, USG Corporation, Chicago, Illinois 1986 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 283 Term expires Marcus Alexis Dean, College of Business Administration, Dec. 31 University of Illinois at Chicago, Chicago, Illinois 1987 Charles S. McNeer Chairman of the Board and Chief Executive Officer, Wisconsin Electric Power Company, Milwaukee, Wisconsin 1988 DETROIT BRANCH Appointed by the Federal Reserve Bank Ronald D. Story Chairman and 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 Donald R. Mandich Chairman and Chief Executive Officer, Comerica Bank-Detroit, Detroit, Michigan 1988 Appointed by the Board of Governors Karl D. Gregory Professor of Economics and Management, School of Economics and Management, Oakland University, Rochester, Michigan.... 1986 Robert E. Brewer Senior Vice President, Accounting, Administration & Financial Services, K mart Corporation, Troy, Michigan 1987 Phyllis E. Peters Director, Professional Standards Review, Touche Ross & Company, Detroit, Michigan 1988 District 8—ST. LOUIS Class A Clarence C. Barksdale Chairman of the Board, Centerre Bancorporation, St. Louis, Missouri 1986 H.L. Hembree III Chairman of the Board and Chief Executive Officer, Arkansas Best Corporation, Fort Smith, Arkansas 1987 Paul K. Reynolds President and Chief Executive Officer, The First National Bank of Pittsfield, Pittsfield, Illinois 1988 Class B Frank A. Jones, Jr President, Dietz Forge Company, Memphis, Tennessee 1986 Jesse M. Shaver President, JMS Corporation, Louisville, Kentucky 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 Directories and Meetings Term expires Robert J. Sweeney President and Chief Executive Officer, Dec. 31 Murphy Oil Corporation, El Dorado, Arkansas 1988 Class C Mary P. Holt President, Clothes Horse, Little Rock, Arkansas 1986 W.L. Hadley Griffin Chairman of the Executive Committee, Brown Group, Inc., St. Louis, Missouri.... 1987 Robert L. Virgil, Jr Dean, School of Business, Washington University, St. Louis, Missouri 1988 LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank William H. Kennedy, Jr. ..Chairman of the Board (Retired), Worthen Banking Corporation, Little Rock, Arkansas 1986 Wilbur P. Gulley, Jr Chairman of the Board, Savers Federal Savings & Loan Association, Little Rock, Arkansas 1987 W. Wayne Hartsfield President and Chief Executive Officer, First National Bank, Searcy, Arkansas 1987 Robert C. Connor, Jr President, Union National Bank of Little Rock, Little Rock, Arkansas 1988 Appointed by the Board of Governors Richard V. Warner Group Vice President, Wood Products Group, Potlatch Corporation, Warren, Arkansas 1986 Sheffield Nelson Attorney, Little Rock, Arkansas 1987 James R. Rodgers Airport Manager, Little Rock Regional Airport, Little Rock, Arkansas 1988 LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Frank B. Hower, Jr Chairman of the Board 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 Allan S. Hanks President, The Anderson National Bank of Lawrenceburg, Lawrenceburg, Kentucky 1988 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 285 Term expires Appointed by the Board of Governors Dec. 31 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 Lois H. Gray Chairman of the Board, James N. Gray Construction Company, Inc., Glasgow, Kentucky 1988 MEMPHIS BRANCH Appointed by the Federal Reserve Bank 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 William H. Brandon, Jr. ..President, First National Bank of Phillips County, Helena, Arkansas 1988 Appointed by the Board of Governors Donald B. Weis President, Tamak Transportation Corporation, West Memphis, Arkansas .... 1986 G. Rives Neblett Neblett and Havens, Attorneys at Law, Shelby, Mississippi 1987 Katherine Hinds Smythe...President, Memorial Park, Inc., Memphis, Tennessee 1988 District 9—MINNEAPOLIS Class A 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 Duane W. Ring President and Chief Executive Officer, Norwest Bank La Crosse, N.A., La Crosse, Wisconsin 1988 Class B Harold F. Zigmund Chairman (Retired), Blandin Paper Company, Grand Rapids, Minnesota 1986 William L. Mathers President, Mathers Land Company, Miles City, Montana 1987 Richard L. Falconer District Staff Manager, Northwestern Bell, Minneapolis, Minnesota 1988 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 Directories and Meetings Term expires Class C Dec. 31 John B. Davis, Jr President Emeritus, Macalester College, St. Paul, Minnesota 1986 Michael W. Wright Chairman, President, and Chief Executive Officer, Super Valu Stores, Inc., Minneapolis, Minnesota 1987 John A. Rollwagen Chairman and Chief Executive Officer, Cray Research Inc., Minneapolis, Minnesota .... 1988 HELENA BRANCH Appointed by the Federal Reserve Bank Dale W. Anderson President and Chief Executive Officer, Norwest Bank Great Falls, N.A., Great Falls, Montana 1986 Seabrook Pates President and General Manager, Midland Implement Company, Inc., Billings, Montana 1986 F. Charles Mercord President and Chief Executive Officer, First Federal Savings Bank of Montana, Kalispell, Montana 1987 Appointed by the Board of Governors Marcia S. Anderson President, Bridger Canyon Stallion Station, Inc., Bozeman, Montana 1986 Warren H. Ross President, Ross 87 Ranch, Inc., Chinook, Montana 1987 District 10—KANSAS CITY Class A Harold L. Gerhart, Jr President and Chief Executive Officer, First National Bank of Newman Grove, Newman Grove, Nebraska 1986 Donald D. Hoffman Chairman of the Board, Central Bank of Denver, Denver, Colorado 1987 Robert L. Hollis Chairman of the Board and Chief Executive Officer, First National Bank & Trust Co., Okmulgee, Oklahoma 1988 Class B Richard D. Harrison Chairman and Chief Executive Officer, Fleming Companies, Inc., Oklahoma City, Oklahoma 1986 Vacancy 1987 Jerry D. Geist Chairman and President, Public Service Company of New Mexico, Albuquerque, New Mexico 1988 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 287 Term expires Class C Dec. 31 Fred 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 Irvine O. Hockaday, Jr. ...President and Chief Executive Officer, Hallmark Cards, Inc., Kansas City, Missouri 1988 DENVER BRANCH Appointed by the Federal Reserve Bank Roger L. Reisher Co-Chairman, FirstBank Holding Company of Colorado, Lakewood, Colorado 1986 Junius F. Baxter Chairman of the Board and Chief Executive Officer, Bank Western Federal Savings Bank, Denver, Colorado 1987 George S. Jenks President and Chief Executive Officer, Sunwest Financial Services, Inc., Albuquerque, New Mexico 1988 W. Richard Scarlett III Chairman and President, The Jackson State Bank, Jackson Hole, Wyoming 1988 Appointed by the Board of Governors 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 Anthony W. Williams Attorney, Williams, Turner, & Holmes, P.C., Grand Junction, Colorado 1988 OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank William O. Alexander President and Chief Executive Officer, Continental Federal Savings & Loan Association, Oklahoma City, Oklahoma... 1986 Marcus R. Tower Tulsa, Oklahoma 1986 William H. Crawford Chairman and Chief Executive Officer, First National Bank and Trust Company, Frederick, Oklahoma 1987 Appointed by the Board of Governors John F. Snodgrass President and Trustee, The Samuel Roberts Noble Foundation, Inc., Ardmore, Oklahoma 1986 Patience S. Latting Oklahoma City, Oklahoma 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

288 Directories and Meetings Term expires OMAHA BRANCH Dec. 31 Appointed by the Federal Reserve Bank Donald J. Murphy Director, Norwest Bank Nebraska, N.A., Omaha, Nebraska 1986 John T. Selzer President, Scottsbluff National Bank and Trust Company, Scottsbluff, Nebraska 1987 Charles H. Thorne Chairman of the Board and Chief Executive Officer, First Federal Savings and Loan Association of Lincoln, Lincoln, Nebraska 1987 Appointed by the Board of Governors Janice D. Stoney Executive Vice President and Chief Operating Officer, Northwestern Bell Telephone Company, Omaha, Nebraska... 1986 Kenneth L. Morrison President, Morrison-Quirk Grain Corporation, Hastings, Nebraska 1987 District 11—DALLAS Class A Miles D. Wilson Chairman of the Board and Chief Executive Officer, The First National Bank of Bellville, Bellville, Texas 1986 Gene Edwards Chairman of the Board, First Amarillo Bancorporation, Inc., Amarillo, Texas 1987 Charles T. Doyle Chairman and Chief Executive Officer, Gulf National Bank, Texas City, Texas 1988 Class B Kent Gilbreath Associate Dean, Hankamer School of Business, Baylor University, Waco, Texas 1986 Robert L. Pfluger Rancher, San Angelo, Texas 1987 Robert Ted Enloe III President, Lomas & Nettleton Financial Corporation, Dallas, Texas 1988 Class C 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 Robert D. Rogers President and Chief Executive Officer, Texas Industries, Inc., Dallas, Texas 1988 EL PASO BRANCH Appointed by the Federal Reserve Bank David L. Stone President, The Portales National Bank, Portales, New Mexico 1986 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 289 Term expires Tony A. Martin Chairman of the Board, First City National Dec. 31 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 Vacancy 1988 Appointed by the Board of Governors John R. 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 Peyton Yates President, Yates Drilling Company, Artesia, New Mexico 1988 HOUSTON BRANCH Appointed by the Federal Reserve Bank Marcella D. Perry Port Commissioner, Port of Houston Authority of Harris County, Houston, Texas 1986 Thomas B. McDade Vice Chairman (Retired), Texas Commerce Bancshares, Inc., Houston, Texas 1987 David E. Sheffield Victoria, Texas 1987 Jeff Austin, Jr President, First National Bank of Jacksonville, Jacksonville, Texas 1988 Appointed by the Board of Governors Walter M. Mischer, Jr President, The Mischer Corporation, Houston, Texas 1986 Andrew L. Jefferson, Jr. ..Attorney, Jefferson, Mims, and Plummer, Houston, Texas 1987 Leo E. Linbeck, Jr Chairman and Chief Executive Officer, Linbeck Construction Corporation, Houston, Texas 1988 SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank 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 Jane Flato Smith Rancher, San Antonio, Texas 1988 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

290 Directories and Meetings Term expires Appointed by the Board of Governors Dec. 31 Lawrence L. Crum Professor of Banking and Finance, The University of Texas at Austin, Austin, Texas 1986 Ruben M. Garcia Chief Executive Officer, Modern Machine Shop, Inc., Laredo, Texas 1987 Robert F. McDermott Chairman of the Board and President, United Services Automobile Association, San Antonio, Texas 1988 District 12—SAN FRANCISCO Class A Rayburn S. Dezember Chairman, Central Pacific Corporation, and American National Bank, Bakersfield, California 1986 Donald J. Gehb President and Chief Executive Officer, Alameda Bancorporation and Alameda First National Bank, Alameda, California 1987 Spencer F. Eccles Chairman, President and Chief Executive Officer, First Security Corporation, Salt Lake City, Utah 1988 Class B John C. Hampton President, Willamina Lumber Company, Portland, Oregon 1986 George H. Weyerhaeuser President and Chief Executive Officer, Weyerhaeuser Company, Tacoma, Washington 1987 Togo W. Tanaka Chairman, Gramercy Enterprises, Inc., Los Angeles, California 1988 Class C Fred W. Andrew President, Apex Orchards, Inc., Bakersfield, California 1986 Alan C. Furth Vice Chairman, Santa Fe Southern Pacific Corporation, and President, Southern Pacific Company, San Francisco, California 1987 Carolyn S. Chambers President and Chief Executive Officer, Chambers Communications Corp., Eugene, Oregon 1988 LOS ANGELES BRANCH Appointed by the Federal Reserve Bank Harvey J. Mitchell President and Chief Executive Officer, Escondido National Bank, Escondido, Digitized for FRASER California 1986 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 291 Term expires Robert R. Dockson Chairman of the Board, CalFed, Inc., and Dec. 31 California Federal Savings and Loan Association, Los Angeles, California 1987 Howard C. McCrady Chairman of the Board, Valley National Bank, Phoenix, Arizona 1988 William L. Tooley Chairman, Tooley & Company, Investment Builders, Los Angeles, California 1988 Appointed by the Board of Governors Lola M. McAlpin-Grant.. .Attorney, Inglewood, California 1986 Richard C. Seaver President, Hydril Company, Los Angeles, California 1987 Thomas R. Brown, Jr Chairman of the Board, Burr-Brown Corporation, Tucson, Arizona 1988 PORTLAND BRANCH Appointed by the Federal Reserve Bank 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 G. Dale Weight Chairman of the Board and Chief Executive Officer, Benjamin Franklin Savings and Loan Association, Portland, Oregon 1987 Herman C. Bradley, Jr President and Chief Executive Officer, Tri-County Banking Company, Junction City, Oregon 1988 Appointed by the Board of Governors Paul E. Bragdon President, Reed College, Portland, Oregon.. 1986 Sandra A. Suran Partner in Charge, Peat, Marwick, Mitchell and Co., Beaverton, Oregon 1987 G. Johnny Parks Former Northwest Regional Director, International Longshoremen's & Warehousemen's Union, Portland, Oregon 1988 SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank Albert C. Gianoli President and Chairman of the Board, First National Bank of Ely, Ely, Nevada 1986 Lela M. Ence , Executive Director, University of Utah Alumni Association, Salt Lake City, Utah 1987 Fred C. Humphreys Chairman and Chief Executive Officer, The Idaho First National Bank and Moore Financial Group, Boise, Idaho 1987 Gerald R. Christensen President, First Federal Savings and Loan Digitized for FRASER Association, Salt Lake City, Utah 1988 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 Directories and Meetings Term expires Appointed by the Board of Governors Dec. 31 Robert N. Pratt President, Moriah Enterprises, Inc., Bountiful, Utah 1986 Don M. Wheeler President, Wheeler Machinery Company, Salt Lake City, Utah 1987 D. N. Rose President and Chief Executive Officer, Mountain Fuel Supply Company, Salt Lake City, Utah 1988 SEATTLE BRANCH Appointed by the Federal Reserve Bank 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 William W. Philip Chairman of the Board and President, Puget Sound National Bank, Tacoma, Washington 1988 Appointed by the Board of Governors Carol A. Nygren Managing Partner, Laventhol & Horwath, Seattle, Washington 1986 John W. Ellis President and Chief Executive Officer, Puget Sound Power & Light Company, Bellevue, Washington 1987 Byron I. Mallott Chief Executive Officer, Sealaska Corporation, Juneau, Alaska 1988 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

295 Index Acceptances, bankers (See Bankers Bank holding companies — acceptances) Continued Adjustable-rate mortgages Capital adequacy guidelines, 80, Amendment to Regulation Z, 161 191-92 Consumer Handbook on Adjustable Examination, inspection, and Rate Mortgages, 161, 167, 172 regulation, 187, 188-91, 206 Agriculture International activities, 189, 200 Farm Credit Act, 184 Legislative recommendations, 177-78 Problem loans, 192 Litigation, 181-86 Seasonal credit program, renewal, 83 Number and assets, 188 American Institute of Certified Public Stock repurchases by, 200 Accountants, 193 Surveillance and monitoring program, Annual Report: Budget Review, 213 190 Anti-Drug Abuse Act of 1986, 202 Bank Holding Company Act (See also Assets and liabilities Regulations: Y) Banks, by class, 247 Amendment to Rules Regarding Board of Governors, 215-20 Delegation of Authority, 80 Federal Reserve Banks, 224-27 Legislative recommendations and Audits (See Examinations, inspections, litigation, 177-86, 200, 206-07 regulation, and audits) Provisions, 188, 196, 198, 201 Automated clearinghouse service, 77, Bank Holding Company Supervision 194, 210, 212 Manual, 191 Automated teller machines, 168 Banking offices, changes in number, 234 Automobile credit, 166 Banking supervision and regulation by Federal Reserve System, 187-204 Balance of payments (See U.S. Bank, new definitions, legislative international transactions) recommendations, 177-78 Bankers acceptances Bank of England, 187, 192 Authority to purchase and to enter Bank of Japan, 15 into repurchase agreements, Bank Merger Act, 197 87-89 Bank mergers and consolidations, Federal Reserve Banks 253-61 Holdings, 213, 222, 224, 226 Bank Secrecy Act, 202 Income, 212, 234-37 Basic financial services, 80, 163, 172 Open market transactions, 228 Board of Governors (See also Federal Repurchase agreements, 87-89, Reserve System) 222, 224, 226, 228 Budget, 213 Bank Export Services Act, 202 Cash, sources, uses, and balance at Bank holding companies (See also end of 1986, 215-20 Regulations: Y) Consumer Advisory Council, 171-72, Activities approved, pending, and 268 denied, 198-202 Delegated authority, 198 Amendment to Regulation Y, 78 Expenses (See Income and expenses) Antitrust action, 181 Financial statements, 215-20 Applications by, processing and Income (See Income and expenses) notice of Board decisions, 193, Interpretations (See Interpretations of 198-202 Regulations) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 Index Board of Governors —Continued Commodity Credit Corporation, 10-11, Legislative recommendations, 61 173-75, 177-80 Communique, newsletter, 164 Litigation, 181-86 Community Affairs Officers, 163-64 Members and officers, 264 Community Affairs Program, 164 Policy actions (See Policy actions) Community Reinvestment Act Pricing of Federal Reserve services Examination under, 163, 164, 165, (See Fees) 171, 172 Publications (See Publications) Comptroller of the Currency Regulations (See Regulations) Conformity with, 192, 195 Regulatory simplification, 205-07 Jurisdiction, 189, 197 Salaries, 231 Reports, orders, and legislative Branch banks recommendations by, 163, Federal Reserve (See Federal Reserve 165-66 Banks) Condition statements of Federal Foreign branches of U.S. banking Reserve Banks, 222, 224-27 organizations, 189, 200-02 Congressional Budget Office, 10 U.S. activities of foreign banks, Construction Loan Disclosures and 189-90 Regulation Z, brochure, 167 Budgets, Federal Reserve Board and Consumer Advisory Council, 171-72, Banks, 213 268 Business credit transactions, proposed Consumer and community affairs, legislation, 174 161-75 Consumer Complaint Control System, 169 Call Reports, 195 Capital accounts Consumer Handbook on Adjustable Banks, by class, 232 Rate Mortgages, 161, 167, 172 Federal Reserve Banks, 222, 224, 226 Credit (See also Loans) Capital adequacy guidelines, 80, 191-92 Equal Credit Opportunity (See Equal Change in Bank Control Act of 1978, Credit Opportunity Act) 78, 197-98 Real estate, 9, 166 Check clearing and collection Seasonal credit program, renewal, 83 Availability of funds, speedup, 165, Securities, 76-77, 202 172, 209 Truth in Lending (See Truth in Fees for Federal Reserve services, Lending Act) 209-14 Credit cards, 173-74 Float (See Float) Credit Practices Rule (See also Legislative recommendations, 180 Regulations: A A) Volume of operations, 244 Update to staff guidelines, 162 Coin and currency services, 211 Currency and coin services, 211 Combined Construction/Permanent Currency and Foreign Transactions Loan Disclosures and Regulation Reporting Act (Bank Secrecy Act), Z, brochure, 167 202 Commercial Bank Examination Manual, 191 Depository institutions Commercial banks (See also Insured Checks (See Check clearing and commercial banks) collection) Banking offices, changes in number, Interest on deposits (See Interest on 252 deposits) Supervision and regulation by Federal Reserve requirements (See Reserve System, 187-204 Regulations: D) Transfers of funds (See Transfers of Reserves and related items, 248-51 funds) Services to (See Fees) ' Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 297 Deposits Examinations, inspections, regulation, Banks, by class, 247 and audits—Continued Checks (See Check clearing and Surveillance and monitoring program, collection) relation to, 190-91 Federal Reserve Banks, 222, 224, System Open Market Account, 212 226, 249, 253 Expenses (See Income and expenses) Interest rates (See Interest on Export trading companies, 189, 202 deposits) Reserve requirements (See Reserve Farm Credit Act, 183, 184 requirements of depository Farm Credit Administration, 166, 167, institutions) 203 Directors, Federal Reserve Banks and Farm Credit System, 22 Branches Federal Advisory Council, 267 Legislative recommendation, 179 Federal agency securities List, 272 Authority to purchase and to enter Discount rates at Federal Reserve into repurchase agreements, Banks (See Interest rates) 87-89, 118, 153 Dividends Federal Reserve Bank holdings, Federal Reserve Banks, 212-13, 234, 214, 222, 224, 226, 230, 248 239, 240 Federal Reserve open market Federal Reserve System, 233 transactions for 1986, 228 Repurchase agreements, 87-89, 222, Earnings of Federal Reserve Banks, 212, 224, 226, 228, 230 234-37, 238-41 Transfer, by Reserve Banks, 211 Economy in 1986, 5-11 Federal Bureau of Investigation, Edge and agreement corporations, training by, 195 187-88, 189, 190, 193, 201, 202 Federal Deposit Insurance Corporation, Educational activities, 193, 195 163, 165-66, 178, 189, 192, 195 Education Foundation of State Bank Provisions involving, and jurisdiction, Supervisors, 193 197 Electronic data processing activities, Federal Financial Institutions examination, 190 Examination Council, 80, 163, 172, Electronic Fund Transfer Act 193, 195 Compliance with, 168 Federal Home Loan Bank Board Economic impact, 168-69 Actions taken, 95, 163, 165-66, 167 Electronic fund transfers (See Transfers Compliance with, 195, 203 of funds and Regulations: E) Publication, 161 Electronic fund transfer systems, policy Federal Home Loan Banks, 17 of reducing risks on large-dollar Federal Home Loan Mortgage transfers, 193 Corporation, 211 Equal Credit Opportunity Act Federal National Mortgage Association, Compliance with, 167-68 211 Regulation B (See Regulations) Federal Open Market Committee Examinations, inspections, regulation, Audit of System Open Market and audits Account, 212 Bank holding companies, 187-91, Litigation, 185 177-78, 188 Meetings, 13, 87 Federal Reserve Banks, 212 Members and officers, 266 International activities, 189 Policy actions, 81, 82, 83, 87-160 Large-dollar electronic fund transfers, Federal Reserve Act 193, 205 Legislative recommendations, 179 Specialized, 190 Provisions, 189, 201, 204, 212 State member banks, 164-65, 188 Federal Reserve Agents, 272 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

298 Index Federal Reserve Banks Federal Reserve System (See also Board Assessments for expenses of Board of of Governors) Governors, 217, 234, 238, 240 Banking supervision and regulation Atlanta Bank, 164 by, 187-204 Bank premises, 179, 213, 222, 224, Budgets, 212-13, 233, 234 226, 232 Consumer affairs (See Consumer and Branches community affairs) Bank premises, 179, 213, 232 Costs of certain services, 193 Directors, 273 Expenses (See Income and expenses) Vice presidents in charge, 271 Foreign currency operations (See Budgets, 213 Foreign currencies) Capital accounts, 223, 224, 226 Income (See Income and expenses) Chairmen and deputy chairmen, 271 Map of Federal Reserve Districts, 262 Coin and currency service, 211 Membership, 204 Condition statement, 222, 224 Pricing of services, 193, 209-12, 234, Dallas Bank, 164 242 Delegated authority, 197, 198 Training, 193, 195 Deposits, 223, 224, 226, 249, 251 Federal Savings and Loan Insurance Directors Corporation, 167, 297 Legislative recommendation, 179 Federal Trade Commission, 167, 168 List, 273 Federal Trade Commission Dividends paid, 213, 234, 239, 241 Improvement Act, unregulated Examination or audit, 212 practices, 171 Expenses (See Income and expenses) Fedwire, 193, 206, 210 Income (See Income and expenses) Fees Interest rates, 81-83, 244 Federal Reserve services to Kansas City Bank, 186 depository institutions Loans and securities, 213, 222, 224, Automated clearinghouse service, 226, 230, 232, 248, 250 210 Minneapolis Bank, 164 Check clearing and collection, 209 New York Bank, 87, 160, 212 Pricing of, 209-12, 234, 242 Officers and employees, number and Proposal to charge for services, 193 salaries, 231 Securities and noncash collection Operations, volume, 244 services, 211 Philadelphia Bank, 164 U.S. Treasury securities, 211 Presidents and first vice presidents, Financial Accounting Standard 15, 187 231, 271 Financial Accounting Standards Board, Pricing of services, 209-12, 234, 242 193 Profit and loss, 236 Financial Institutions Supervisory Act of Richmond Bank, 164 1966, 183, 188 Seasonal credit program, renewal, 83 Financial markets and monetary policy, Training, 193, 195 13-23 Federal Reserve Board (See Board of Float (See also Check clearing and Governors) collection), 77, 209, 210, 212 Federal Reserve Bulletin, 200 Foreign banking and financing (See Federal Reserve notes Regulations: K) Condition statement data, 222-27 Foreign banks, U.S. activities, 189-90 Cost of issuance and redemption, 213, Foreign branches of U.S. banking 217 organizations, 189, 200-02 Interest paid to U.S. Treasury on, Foreign currencies 213, 233 Authorization and directive for Litigation, 185 operations in, and review of Federal Reserve Reform Act of 1977, documents, 87, 90, 92 Digitized for 2F9R8ASER Federal Reserve income on, 234 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 299 Foreign exchange operations, 31 International developments, review of Full Employment and Balanced Growth 1986, 25-31 Act of 1978, 3, 13, 33 International Monetary Fund, 31 International transactions, U.S., 28-30 Interpretations of Regulations Garn-St Germain Depository Margin regulations, 76, 202-04 Institutions Act of 1982, 76, 78, Regulations B, E, and Z, 162 178, 206 Regulation Q, 201, 205 Glass-Steagall Act, 183, 184 Interstate banking, 179-80, 199 Gold certificate accounts of Reserve Interstate Commerce Commission, 167 Banks and gold stock, 222, 224, Investments 226, 248, 250 Banks, by class, 247 Gramm-Rudmann-Hollings legislation, Federal Reserve Banks, 222, 224, 226 5, 10 Foreign, by U.S. banking Guide to Business Credit and the Equal organizations, 201 Credit Opportunity Act, 161, 162 State member banks, 201, 247 Income and expenses Labor market developments, 8 Board of Governors, 215-20 Legislative recommendations Federal Reserve Banks, 212-13, Board of Governors, 173-75, 177-80 234-37, 238-41 Of other agencies with enforcement Federal Reserve System, 213, 233 responsibilities, 175 Reports of Condition and Income, Litigation (Call Reports), 195 Bank holding companies, 181-83 Insured commercial banks (See also Board procedures and regulations, Commercial banks) challenges to, 183-86 Acquisition authority in emergency, Loans (See also Credit) legislative recommendation, Agricultural (See Agriculture) 178-79 Banks, by class, 247 Assets and liabilities, 247 Energy, 192 Banking offices, changes in number, Executive officers of state member 252 banks, 204 Number, by class of bank, 247 Federal Reserve Banks Interest on deposits (See also Interest Holdings and income, 213-14, 222, rates) 224, 226, 230, 234, 236, 248, Dates of removal of rate ceilings on 250 time and savings deposits, 246 Interest rates, 81-85, 244 Regulation Q (See Regulations) To depository institutions, 222, 224, Interest rates (See also Interest on 226, 234, 248, 250 deposits) Volume of operations, 244 Annual percentage rate, 172, 173-74 Real estate, 9, 166 Credit cards, 173-74 Federal Reserve Banks Changes, 81-83, 84-85 Margin credit regulation (See Discount window, new policy, 83 Regulations: G, T, U, and X) Structure of discount rate, 84 Margin requirements, 76, 202-04, 246 Table, 244 Member banks (See also Depository Mortgage loans, 161 institutions and National banks) Internal Revenue Service, 185, 202 Assets, liabilities, and capital International banking activities, 189-90, accounts, 247 200-02, 207 Banking offices, changes in number, International banking facilities, 201 252 International banking operations, 77, Borrowings and loans (See Loans) Digitized for FRA2S0E1R, 2 07 Branches, 200, 201 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

300 Index Member banks —Continued Policy actions Capital adequacy guidelines, 80, Board of Governors 191-92 Discount rates at Federal Reserve Control of, changes in, 197 Banks, 81-85 Membership in Federal Reserve Regulations, 75-79 System, 204 Statements and other actions, 80, Number, 247 161-63, 165, 172 Reserve requirements, 245 Federal Open Market Committee Reserves and related items, 248-51 (See also System Open Market State member banks (See State Account), 87-160 member banks) Presidents and vice presidents of Surveillance and monitoring program, Federal Reserve Banks 190 Conferences, 272 Transfers of funds (See Transfers of List, 271-72 funds) Salaries of presidents, 230 Mergers and consolidations, 197, 198 Prices, 5-8 Monetary Control Act of 1980, 179, 209 Pricing of Federal Reserve services, Monetary policy 209-12, 234, 242 Financial markets relative to, 13-23 Profit and loss, Federal Reserve Banks, Reports to the Congress, 3, 33-72 234 Review of 1986, 3-12 Proposed revisions to Regulation Q, 205 Mortgage loans, 9, 166 Publications Mutual savings banks, 244 Annual Report: Budget Review, 213 Bank Holding Company Supervision National banks (See also Member Manual, 191 banks) '' Combined Construction/Permanent Assets, liabilities, and capital Loan Disclosures and Regulation accounts, 247 Z," 167 Banking offices, changes in number, Commercial Bank Examination 244 Manual, 191 Capital adequacy guidelines, 80, Communique, newsletter, 164 191-92 "Construction Loan Disclosure and Foreign branches, 189, 200, 201 Regulation Z," 167 Number, 247 Consumer Handbook on Adjustable National Credit Union Administration, Rate Mortgages, by Federal 163, 165-66, 195, 203 Reserve Board and Federal Neighborhood Reinvestment Home Loan Bank Board, 161, Corporation, 164 167, 172 Net Settlement Service, 210 Credit Practices Rule, staff Nonbanking activities, 199 guidelines, 162 Nonmember depository institutions Federal Reserve Bulletin, 200 Assets and liabilities, 247 Guide to Business Credit and the Banking offices, changes in number, Equal Credit Opportunity Act, 244 161, 162 Number, 247 Marginable over-the-counter stocks, list, 203 Regulations B, E, and Z, official staff commentaries, 162 Over-the-counter marginable stocks, 203 Regulation Z Interagency Enforcement Policy Guide, 166 Payments mechanism (See also Fees), "Regulation Z: The Right of 209-12 Rescission," 167 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 301 Publications —Continued Regulation Z: Understanding Prepaid "Regulation Z: Understanding Finance Charges, 167 Prepaid Finance Charges," 167 Regulatory Improvement Project, 175, "Securities Credit Transactions 205 Handbook," Federal Reserve Regulatory Policy and Planning Regulatory Service, 203 Committee, 205 Regulatory simplification, 205-07 Report on Formal Enforcement Actions, 189 Repurchase agreements Real estate loans, 9, 166 Authority to purchase and to enter Regulation of banking organizations into, 87-89 (See Banking supervision and Bankers acceptances (See Bankers regulation by Federal Reserve acceptances) System) Federal agency securities (See Federal Regulations (See also Regulatory agency securities) Improvement Project and Rules U.S. Treasury securities (See U.S. Regarding Delegation of Authority) Treasury securities) AA, Unfair or Deceptive Acts or Reserve requirements of depository Practices, 162 institutions B, Equal Credit Opportunity, 162, Regulation D (See Regulations) 165, 167, 174, 175 Table, 245 D, Reserve Requirements of Reserves and related items, 251 Depository Institutions, 75, 76, Right to Financial Privacy Act, 184 201, 205 Rules Regarding Delegation of E, Electronic Fund Transfers, 161, Authority, 79, 198 162, 165, 168-69, 172, 175 F, Securities of State Member Banks, 204 G, Securities Credit by Persons Other Salaries than Banks, Brokers, or Dealers, Board of Governors, 217 76, 202-04 Federal Reserve Banks, 231 J, Collection of Checks and Other Schools, 193, 195 Items and Wire Transfers of Seasonal Credit Program, renewal, 83 Funds, 77, 212 Securities (See also specific types) K, International Banking Operations, Credit, 76, 203, 246 77, 201, 207 Municipal securities dealers, clearing Q, Interest on Deposits, 75, 201, 205 agents, and transfer agents, 190 T, Credit by Brokers and Dealers, Over-the-counter, 203 202-04 Regulation, 202-04 U, Credit by Banks for the Purpose Services by Federal Reserve, 211 of Purchasing or Carrying Margin Securities Act Amendments of 1975, Stocks, 202-04 190 X, Borrowers of Securities Credit, "Securities Credit Transactions 202-04 Handbook," Federal Reserve Y, Bank Holding Companies and Regulatory Service, 203 Change in Bank Control, 78, Securities and Exchange Act of 1934, 181, 191, 199, 206 202-04 Z, Truth in Lending, 78, 161, 162, Securities of state member banks, 204 165, 167, 175 Small Business Administration, 167 Regulation Z: The Right of Rescission, Special drawing rights, 222, 224, 226, brochure, 167 248, 250 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

302 Index State member banks (See also Member Thrift institutions, legislative banks) recommendations and approval of Applications by, 200 acquisitions, 177-79, 198 Assets and liabilities, 188, 247 Training, 193, 195 Banking offices, changes in number, Transfer agents, 190 252 Transfers of funds (See also Fees) Basic financial services, Check clearing and collection (See recommendations, 172 Check clearing and collection) Capital adequacy guidelines, 80, Federal Reserve operations, volume, 191-92 244 Consumer complaints against, 169-71 Large-dollar transfers, policy on Control of, changes, 197 reducing risks, 193, 205 Examinations and inspections, 164, Pricing of Federal Reserve services, 171, 187-91 209-12, 234, 242 Fees (See Fees) Trust activities, examination, 190 Financial disclosures, 204 Truth in Lending Act Foreign branches, 201 Annual percentage rate, 172, 173-74 Interest on deposits (See Interest on Compliance with, 165, 173 deposits) Regulation Z (See Regulations) Loans to executive officers, 204 Truth in Savings, proposed legislation, Membership in Federal Reserve 174 System, 204 Mergers and consolidations (See Bank Uniform Bank Performance Report, 196 mergers and consolidations) U.S. Department of Agriculture, Number, 188, 247 Packers and Stockyards Reserve requirements (See Reserve Administration, 166, 167 requirements of depository U.S. Department of Justice, 181 institutions) U.S. Department of Transportation, Securities of, 204 166, 167, 168 Survey on delayed availability of U.S. Department of the Treasury, 202, funds, 165 212 Stock market credit (See Securities U.S. international transactions, 28-30 credit) U.S. Treasury securities Supervision of banking organizations Authority to buy, to enter into (See Banking supervision and repurchase agreements, and to regulation by Federal Reserve lend, 87-89, 118, 152 System) Bank holdings, by class of bank, 247 System Open Market Account Federal Reserve Banks Audit, 212 Holdings, 213-14, 222, 224, 226, Domestic Open Market Operations, 230, 248, 250 Authorization for, 87, 88-89, Income, 213, 234-37 118-52 Transfers by, 211 Domestic Policy Directive, 87, 89, 93, Open market transactions, 228 103, 110, 119, 130, 138, 145, 153 Repurchase agreements Foreign Currency Directive, 92 Authorization for, 87-89 Foreign Currency Operations, Board policy statement, 80 Authorization for, 87, 90-92 Tables, 222, 224, 226, 228, 230, 248, 250 Thrift Institutions Advisory Council, 270 World Bank, 31 Digitized forF RFRBA lS-lElR,2 00-0587C http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis